When starting a business, entrepreneurs have a range of options for the type of business entity they can establish. The decision on the type of entity can depend on factors such as the investment amount, the no. of members involved, liability considerations, etc. In recent times, private limited companies have gained prominence over public limited companies due to several advantages. Businessmen find private limited companies appealing due to these advantages, influencing their choice of business structure.
The Ministry of Corporate Affairs has made significant changes to the process of incorporating private limited companies. Through the introduction of the Companies (Registration Office and Fees) Amendment Rules, 2018, the MCA has eliminated fee charges at various stages of incorporation. This has expedited the entire incorporation process, although stamp duty is still applicable. The concept of “zero fees” has been implemented for all companies with authorised capital up to INR 10 Lakhs, further encouraging entrepreneurship. In this blog, we shall see the benefits of private limited company over public limited companies.
Understanding Concept of Private Company and Public Company
Before going into the benefits of private limited company over public limited companies, let us understand about these corporations first.
What is a Private Company in India?
A Private Limited Company in India is defined under Section 2(68) of the Companies Act, 2013. It is characterised by specific features as outlined in its articles of association:
1. Restrictions on Share Transfer: A private limited company registration restricts the transfer of its shares. This means that shares cannot be freely bought or sold, and the company often has a say in approving any share transfers.
2. Maximum Membership: A private limited company can have a maximum of 200 members, except in the case of a One Person Company (OPC), which can have a single member. Joint shareholding by two members is considered as a single membership.
3. Minimum Paid-up Share Capital: A private limited company is required to have a minimum paid-up share capital of INR 1 lakh.
4. Exclusion of Certain Individuals: Individuals employed by the company and those who were members while in its employment but continued as members after leaving the employment are not considered part of the 200-member limit.
What are Public Limited Companies in India?
Let us now see the concept of public companies before we go into the benefits of private limited company over public limited companies A Public Limited Company can be defined as:
1. Definition: A public company registration is one which is not a private company and it also has a minimum paid up share capital of Rs. 5 lakhs.
2. Subsidiary Company: Even if the articles of a company classify it as a private company, but if it is a subsidiary of a non-private company, it is considered a public company under the Companies Act, 2013.
These distinctions are important to consider before we see what are the benefits of private limited company over public limited companies.
What Are the Advantages of Private Limited Company Over Public Limited Companies?
There are many benefits of private limited company over public limited companies. These benefits include:
1. Minimum Number of Members
One of the major benefits of private limited company over public limited companies is that private companies require a minimum of two members for formation, whereas public limited companies need at least seven members.
2. Easy Incorporation
Private limited companies now enjoy simplified registration procedures and reduced fees, making incorporation easier. Public companies, on the other hand, face more complex processes and compliance requirements.
3. Quorum in Annual General Meeting
Private limited companies require a minimum of two members to be present at annual general meetings, while public companies need at least five members.
4. No Certificate of Commencement of Business Required
Private limited companies can commence business activities immediately after incorporation, without the need for a commencement certificate. Public limited companies must obtain this certificate before commencing operations.
5. Less Complicated Share Allotment
Private companies can allocate shares through private arrangements with members, simplifying the process. Public companies, which involve the general public, must adhere to more complex compliance requirements, such as issuing a prospectus.
6. No Requirement for Statutory Meeting or Statutory Report
Private companies are exempt from holding statutory meetings and filing statutory reports, which are mandatory for public companies.
7. No Undesirable Shareholders
Private companies can enforce stricter regulations on share transfers to prevent undesirable individuals from becoming shareholders. Public companies allow freely transferable shares.
8. Control and Management
Private companies provide greater control to their owners, with members having influence but owners retaining major control. Public companies distribute power according to shareholding, involving the general public in decision-making.
9. Loan to Directors
Private companies can lend to directors without requiring central government approval, whereas public companies need approval when extending loans or providing guarantees/security to their directors.
10. No Restriction on Remuneration
Private companies have more flexibility in remunerating directors and managerial staff and can appoint individuals to offices of profit without extensive approvals and compliance. Public companies face more regulatory constraints in this regard.
11. Managing Director
Public companies have limitations on the number of companies a managing director can serve and term duration. Private limited companies do not face these restrictions for their managing directors.
Final Thoughts
There are many benefits of private limited company over public limited companies providing flexibility and autonomy to their owners. With fewer regulatory requirements, simplified procedures, and greater control, private companies can swiftly initiate business activities and manage their operations according to their needs. They can protect their ownership structure, allocate shares with ease, and make decisions without the extensive involvement of the general public. Additionally, private companies enjoy more freedom in remunerating their directors and staff, and they can lend to directors without central government approvals.Another set of benefits of private limited company over public limited companies is that while public limited companies serve essential purposes and provide opportunities for widespread investment, the distinct benefits of private companies cater to the specific preferences and objectives of businesses and entrepreneurs. Ultimately, the choice between private and public status depends on the strategic goals, ownership structure, and regulatory considerations of the organisation, and both forms play crucial roles in the broader system of corporate governance and commerce.
