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PRIVATE LIMITED COMPANY

WHAT IS A PRIVATE LIMITED COMPANY

A private limited company is a company which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them. Shares of Private Limited Company cannot be publicly traded.

CHARACTERISTICS OF PRIVATE LIMITED COMPANY

  • Members - To start a company, a minimum number of 2 members are required and a maximum number of 200 members as per the provisions of the Companies Act, 2013.
  • Limited Liability - The liability of each member or shareholders is limited. It means that if a company faces loss under any circumstances then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.
  • Perpetual succession - The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members. This leads to the perpetual succession of the company. The life of the company keeps on existing forever.
  • Index of members - A private company has a privilege over the public company as they don't have to keep an index of its members whereas the public company is required to maintain an index of its members.
  • Number of directors - When it comes to directors a private company needs to have only two directors. With the existence of 2 directors, a private company can come into operations.
  • Paid-up capital - It must have a minimum paid-up capital as may be prescribed from time to time.
  • Prospectus - Prospectus is a detailed statement of the company affairs that is issued by a company for its public. However, in the case of a private limited company, there is no such need to issue a prospectus because this public is not invited to subscribe for the shares of the company.
  • Name-It is mandatory for all the private companies to use the word private limited after its name.

SECTIONS/REGULATIONS/RULES APPLICABLE TO PRIVATE LIMITED COMPANY

  • Section 2(68) of the Companies Act, 2013;
  • Companies Incorporation Rules, 2014;

PRIVATE COMPANY UNDER COMPANIES ACT, 2013

AS PER SECTION 2(68) OF COMPANIES ACT 2013;
A "Private Company" means a company having a minimum paid-up share capital as may be prescribed, and which by its articles :-

  • restricts the right to transfer its shares;
  • except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that
    • persons who are in the employment of the company; and
    • persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
  • prohibits any invitation to the public to subscribe for any securities of the company;

ADVANTAGES OF A PRIVATE COMPANY

  • OWNERSHIP: In a public company, regulation and ownership of shares can be sold to the public on an open market. On the other hand, in a private company, shares can be sold or transferred to other people by the choice of the owner. Shares of such companies are owned by founders, management or a group of private investors. Shares here are not sold in the open market. Thus, there will be a smaller number of shareholders. This means less complexity and confusion in decision making and management.
  • MINIMUM NUMBER OF SHAREHOLDERS: For a private company, a minimum number of required shareholders is 2, whereas, for a public company, you require a minimum of 7 shareholders.
  • LEGAL FORMALITIES: Legal formalities are sometimes very expensive and time-consuming, aren’t they? If you’re planning to start a public company, you better be prepared because there is a long list of legal formalities for forming a public company. Private companies have a comparatively shorter list.
  • MANAGEMENT AND DECISION MAKING: Management and decision making becomes more complex and confusing in public companies as a greater number of shareholders is to be consulted. This complex procedure is eliminated in a private company as the number of shareholders is less.
  • FOCUS OF MANAGEMENT: Managers of Public companies are focused on increasing the value of shares, whereas managers of the private company are more flexible in the short term and long-term business decisions.
 
     
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