A private limited company is an entity formed privately by a specific group of individuals. In this company, shareholders are prohibited from trading their shares publicly. In contrast to public companies, a private limited company is constrained from issuing a prospectus to extend invitations to the general public for share subscriptions. This business structure is best for small and medium enterprises. In this blog, we shall see the characteristics of private limited company in India.
Definition of a Private Limited Company
Before going into the characteristics of private limited company let us understand its concept. To qualify as a private company, it must possess a minimum paid-up capital as stipulated, and its articles of association must:
1. Restrict the Right to Transfer Shares
The company must impose limitations on the transfer of shares.
2. Limit the Number of Members to 200 (Excluding One Person Company)
With the exception of a One Person Company, the private limited company is mandated to restrict the maximum number of its members to 200.
3. Restrict Any Invitation to the Public for Subscription to Company Securities
The company is prohibited from extending invitations to the public for subscribing to any of its securities.
Features/Characteristics of Private Limited Company in India
The major characteristics of private limited company in India include the following:
1. Members
One of the primary characteristics of private limited company is that the Companies Act mandates that a private limited company must consist of a minimum of two members, with the maximum limit set at 200.
2. Number of Directors
Among the major characteristics of private limited company is that a private limited company has to have a minimum of two directors, and the maximum number of directors allowed is 15.
3. Limited Liability
Private limited companies offer limited liability to their members or shareholders. This implies that in the event of the company facing financial losses, the personal assets of the shareholders remain safeguarded. One of the important characteristics of private limited company is that shareholders are only liable to repay the amount of shares subscribed or the guaranteed amount they have committed to pay.
4. Perpetual Succession
The concept of perpetual succession as one of the key characteristics of private limited company ensures that a private limited company continues to exist legally, irrespective of circumstances such as insolvency, bankruptcy, or the death of any of its members.
5. Authorised and Paid-up Share Capital
The Companies Act stipulates that a private limited company must have an authorised share capital of Rs. 1 lakh. Notably, the amendment to the Act has eliminated the requirement for a minimum paid-up share capital, which previously stood at Rs. 1 lakh. This is one of the most significant characteristics of private limited company in India.
6. Name
One of the distinctive characteristics of private limited company is that the name of a private limited company must include the words ‘private limited’ after its name.
7. Prospectus
Also, among the characteristics of private limited company is that unlike public companies, private limited companies are prohibited from issuing a prospectus. A prospectus is a comprehensive statement disclosing the status of company affairs and is typically used by companies to invite the public to subscribe to their shares.
8. Index of Members
Lastly, among the characteristics of private limited company, these companies are exempt from the requirement to maintain an index of their members as prescribed by the Act. In contrast, public companies are obligated to maintain an index of their members as part of regulatory compliance.
Types of Private Limited Companies
Private limited companies can be classified into different types based on their members’ liabilities. The key types are as follows:
1. Limited by Shares:
- The liability of members in this type of private limited company is restricted to the amount remaining unpaid on the shares they hold.
- Members are accountable only for the unpaid portion of the shares they own, providing a safeguard for their personal assets. This is a common structure where the financial risk to members is limited to their share capital.
2. Limited by Guarantee:
- The liability of members is confined to the predetermined sum of money that they have committed to guarantee in the event of the company being wound up.
- Members agree to contribute a specific amount as a guarantee to cover the company’s debts in case of liquidation. This structure is often found in non-profit organisations or entities where profit distribution is not a primary objective.
3. Unlimited Liability:
- In this scenario, the liability of members is unrestricted, implying that their personal assets can be liquidated to settle the company’s obligations during winding-up.
- Members bear the risk of losing personal assets to meet the company’s liabilities. This structure is less common due to the higher personal risk involved, and it is typically found in smaller enterprises.
Requirements for Registration of Private Limited Company
For private limited company registration in India, specific requirements must be met, ensuring compliance with legal and regulatory standards. The essential requirements include:
1. Members:
- A private limited company must have a minimum of two members or shareholders for registration.
- The number of members cannot exceed 200.
2. Directors:
- The registration necessitates a minimum of two directors.
- All directors must possess a Director Identification Number issued by the Ministry of Corporate Affairs.
- The company must have at least one director who is a resident of India.
3. Name:
- The company must submit its proposed name to ROC for approval.
- The chosen name must be unique and should not resemble the name of any existing registered company. Resemblance may lead to rejection of the registration application.
4. Registered Office Address:
- The company owner must furnish the registered office address or a temporary address during the registration process.
- All official correspondence from the ROC will be directed to the registered office address. If the address is temporary, a permanent registered office must be established within 30 days of incorporation.
5. Digital Signature Certificate:
- As the registration process is entirely online, all directors must obtain a Digital Signature Certificate. This is required for digitally signing the registration form and documents.
6. Professional Certification:
- Professionals such as chartered accountants, company secretaries, or cost accountants must provide their certification during the registration process.
- Professional certification is essential for establishing a private limited company and ensures compliance with regulatory standards.
Process to Register a Private Limited Company
After having seen the characteristics of private limited company, let us now see the registration process of the entity. Establishing a private limited company involves a detailed process. The key steps to register a private limited company are as follows:
Step 1: Obtain Digital Signature Certificate
- All directors, subscribers, and witnesses of the Memorandum of Association and Articles of Association must obtain a DSC.
- The DSC is essential for filing forms on the MCA portal and signing digital documents.
Step 2: Obtain Director Identification Number
- Directors must obtain a unique Director Identification Number necessary for acting as a director in any company.
Step 3: Name Availability
- Use the SPICe+ form to reserve and check the availability of the company name.
- Two proposed names can be entered, and if rejected, a new SPICe+ form with the prescribed fee must be filed.
Step 4: Form SPICe+ INC-32
- Complete and submit Part-B of the SPICe+ form on the MCA portal.
- Services consolidated in SPICe+ include name reservation, DIN allotment, PAN and TAN application, EPFO and ESIC registration, and company bank account opening.
Step 5: e-MOA and e-AOA
- File electronic Memorandum of Association and electronic Articles of Association online with the SPICe+ form.
- Both forms should contain the DSC of the MOA and AOA subscribers.
Step 6: PAN and TAN Application
- Apply for PAN and TAN through the SPICe+ form, which auto-generates these upon submission.
- Certificate of Incorporation is issued with the PAN allotted by the Income Tax Department.
Final Approval and Documentation:
- The Registrar of Companies will issue a Corporate Identity Number upon approving the registration.
- The Certificate of Incorporation is sent to the company’s registered office address.
Documents Required for Private Limited Company Registration:
The documents needed for Private Limited Company Registration are:
- Affidavit from subscribers expressing their willingness to be shareholders.
- Proof of office address.
- NOC from the property owner if the office is on rented/leased property.
- Recent utility bills not older than two months.
- Identity and address proof of all directors.
Final Thoughts
There are many distinctive characteristics of private limited company in India that contribute to its appeal as a preferred business structure. The limitation of liability shields members from personal asset risks, promoting investment confidence. The requisite minimum of two members fosters a manageable organisational structure, while the cap at 200 members balances operational dynamics. Perpetual succession ensures enduring legal existence, irrespective of individual circumstances. The authorisation for different types, such as limited by shares or guarantee, provides flexibility in aligning with diverse business models. With the ability to tailor the company’s structure to specific needs, coupled with limited liability, a Private Limited Company stands as a versatile and secure entity in the business sector.
