A private limited company, according to the Companies Act of 2013, is a firm whose articles of organization restrict the transferability of shares and prevent the public from subscribing to them. This is a distinguishing trait that sets private limited firms apart from other forms of public companies.
With India’s tremendous commercial expansion, there is a growing interest in learning more about the various business entities and their legal terms and conditions. In this post, we will define a private limited company, look at the many types of private limited businesses, and learn how to form one.
Consider the following details to answer to understand “What is a private limited company?”:
A private limited company is defined in Section 2 (68) of The Companies Act, 2013 as a separate entity that is privately held and provides limited liability. Unlike other public corporations, it does not freely transfer its shares to the public. In a private limited company, all commercial gains and liabilities belong to the firm, and stockholders may not be held liable for the company’s obligations.
Private Limited Company Characteristics
Now that you understand what a private limited corporation is, the next step is to understand its characteristics:
- Membership: A minimum of two shareholders are necessary to create such a corporation, as with any other. However, because it is still a minor business, the maximum number of members is set at 200. The corporation must also have two directors to function.
- Limited liability structure: The responsibility of each member or shareholder in a private limited corporation is limited. As a result, even in the event of a loss, the shareholders must sell their assets to make up the difference. However, the stockholders’ personal and individual assets are not at stake.
- Separate legal entity: This is a separate legal entity that exists in perpetuity. This means that even if all of the members die or the firm becomes insolvent or bankrupt, the company remains legal. Unless dissolved by resolution, the company’s life will be perpetual, unaffected by the lives of its shareholders or members.
- Minimum Capital Requirement: A private limited corporation is required to have and maintain a minimum paid-up capital of Rs. 1 lakh. It could get higher as MCA prescribes from time to time.
Private Limited Company Types
Here are some examples of private limited companies:
Shared private limited Company
A private business limited by shares has a capital limit determined by the number of shareholders who owe money on their shares. The liability of shareholders in these companies is restricted by the MOA (memorandum of Association) to the number of their shares or the amount that remains unpaid. The stockholders are not obligated to pay more than the amount invested in the company.
Guaranteed private limited Company
Individual shareholders’ liability in a private limited company limited by guarantee is restricted to the amount guaranteed under the Memorandum of Association. As a result, they can only be held accountable for the amount they have guaranteed. Furthermore, they may use this assurance only if the company is permanently closed down.
A limited company is a distinct legal entity. Unlimited corporations are companies that have no limitations on their members’ responsibilities. Each member’s accountability may extend to the debts of the entire organization. It means that members’ assets can be used to pay off the company’s debts.
Features of Private Limited Company
- Limitation of Liability: This is one of the key reasons why companies choose a Private Limited form. This feature restricts members’ responsibility to the number of shares they own. This means that in the event of a financial crisis, the members’ personal assets cannot be taken to pay off any outstanding debts. However, their portion of the aforementioned Company can be utilized to pay off the obligations.
- Separate Legal Status: In the eyes of the law, a Private Limited Company is recognized as a separate legal entity. This implies that it can have its own assets, liabilities, and obligations. A Private Limited Company can buy and sell properties as well as conduct business in its own name. It has the ability to do business and acquire and sell property in its own name. This is in sharp contrast to a Sole Proprietorship, in which the company and its owner are viewed as one.
- Minimum Capital Investment: Previously, there was a minimum paid-up capital requirement of 1 lakh to incorporate a corporation, but this was repealed in a 2015 amendment. There is currently no such need for minimum paid-up capital.
- Directors’ Number: A private business must have at least two directors. A private business can have a maximum of 15 directors. However, if the Company wishes to expand the number of directors above 15, it may do so by calling a General Meeting and enacting a Special Resolution, which requires a majority of more than 75%.
Who can form and manage a Private Limited Company?
A private limited company might have as few as two directors and as many as fifteen. Furthermore, a legitimate distribution of shares in a private limited corporation can be made by at least two shareholders. It is acceptable to have a total of 200 shareholders.
A private limited business, similarly, requires at least two directors. They may be corporate stockholders. According to Section 2 (clause 68) of The Companies Act, 2013, any private limited company must have a paid-up capital of one lakh rupees or more, whichever is greater.
How Can You Set up a Private Limited Company?
Here’s a step-by-step guide to the registration process:
Request a digital signature certificate
It is the digital version of a physical signature, and all directors and stockholders must have one. Such signatures can only be used by authorized personnel.
Request a director identification number (DIN)
The Ministry of Corporate Affairs assigns this 8-digit number to the person who wishes to be the company’s director. It is a one-of-a-kind digital identity assigned to a director that is linked to the person’s corporate activities, information, and services on the internet.
Check to see if the company name is available
Check to see if the name you want for your company is available for registration before registering it. You can look it up on the Ministry of Corporate Affairs (MCA) state company filing agency portal.
Provide the ROC with the necessary papers
Once your company’s name has been approved, you can submit the necessary documents to the Registrar of Company (ROC). The ROC issues an incorporation certificate and provides you with a tangible copy.
Submit the MOA and AOA
The following step is to file a memorandum of association (MOA) and an article of incorporation (AI) (AOA). This is required when forming a private limited corporation.
Create a PAN and TAN
With the foundation of the company, issue a permanent account number (PAN) and a tax deduction and collection account number (TAN). It should be noted that obtaining PAN and TAN numbers for private limited enterprises also necessitates GST and provident fund registration.
Create a Bank Account
This is the last step in the registration procedure. Open a bank account in the name of the company to handle all of the company’s important transactions.
Private Limited Companies Advantages
A private limited business provides the following benefits:
- Possibility of attracting foreign investment: Foreign investors have greater trust in private limited enterprises due to tight compliance, data availability on the site, and adherence to ROC regulations. Furthermore, a foreign entrepreneur can become a director of a private limited business if at least one director is based in India. This makes international investors prefer private limited firms over other types of company entities.
- Legal entity distinct from others: Changes or replacements in shareholders or directors do not affect private limited corporations because they are separate and independent entities. A legal constitution governs the formation of any private limited corporation. It means that even if all of the business’s members leave or the company goes bankrupt, the company still exists under the law.
- Can own property: A private limited company can own any form of property, moveable or immovable. The company’s assets and liabilities are normally its responsibility. In the event of the company’s dissolution, its liabilities are released to creditors in a predetermined order, reducing the individual liability of the shareholders.
- Greater borrowing power: A private limited corporation has several options for borrowing money. Banking and financial organizations frequently prefer to lend to private limited enterprises. Because of the openness, compliance, and partial data availability on government websites, they have more trust in this form of business company.
Tax returns and financial statements for a Private Limited Company
- Income Tax Filings: For income tax reasons, a private limited business falls into one of two categories: domestic and international. Each business files income tax returns and pays taxes on profits earned within a fiscal year. Once the income tax department of India sets a due date, you can file your tax returns online. It is vital to know that while submitting an online tax return, a digital signature is required.
- Annual ROC Submission: The ROC annual filing is a record of the private limited company’s audited financial statements and annual returns to ROC (Register of Companies). Every company is required to file financial statements and submit yearly returns under Sections 129 and 137 of The Companies Act, 2013. Both documents must be filed within 30 days of the conclusion of the annual general meeting.
- Profit and Loss Statement and Balance Sheet: A private limited company keeps a balance sheet and a profit and loss statement to see if it has enough assets to pay its financial obligations. A balance sheet is a record of what a firm owes and owns at a certain point in time. A balance sheet aims to calculate a company’s net worth and offer information about the company’s financial situation.
The profit and loss statement is an income statement that details the revenues, costs, and expenses incurred within a certain period. This phrase describes a company’s ability to earn a profit through increasing revenue and decreasing expenditures.
Private Limited Companies Disadvantages
One downside of a Pvt ltd firm is the compliance processes for closing it down. It frequently becomes overly intricate and time-consuming.
What is the cost of forming a Private Limited (Pvt Ltd) company?
The following are the government registration fees:
- Plan amount (includes the below-mentioned fees) – ₹ 9999*
- DSC – ₹ 2000
- DIN – ₹ 1000
- Professional Fees – ₹ 3799
- Stamp Duty (approx) – ₹ 2000
- Notary Fees – ₹ 500
- Govt Fees (RUN, PAN, TAN) – ₹ 1200
- Goods and Services Tax @ 18% – ₹ 684
Note: Prices shown above are subject to change.
Difference Between a Limited and a Private Limited Company
Ltd signifies a Public Limited Company, whereas Pvt Ltd denotes a Private Limited Company. Only if all of an enterprise’s shares are distributed to private entities is it referred to as a private limited. A Pvt Ltd Company is owned by a group of promoters. On the other hand, shares in an Ltd or Public Limited Company can be purchased by anybody. These businesses are not owned by a small group of promoters, but by the general public.
What is a Private Limited Company | Start-Up Loans?
Start-up loans are often used to pay for research, growth into new markets, marketing initiatives, and/or hiring. All of these activities are necessary for business growth, but not all of them are best funded by a limited company loan.
In fact, limited company loans are best suited for operations that would yield a quick return, such as paid advertising or purchasing inventory.
The advantages include:
- Variable interest rates (depending on the source, the intended use of the funds, the track record of the firm, and whether any security is supplied)
- Quick money (some internet suppliers provide funding within 24-48 hours).
- Business owners’ ability to retain ownership of their company
The Role of a Registered Office Address in Setting Up a Private Limited Company
A private limited company is a popular choice for small businesses and startups looking to establish a legal business entity. With limited liability protection for shareholders and the ability to raise funds through share sales, a private limited company offers several advantages over other types of business structures. However, it also requires compliance with various legal and regulatory requirements, including annual filings and meetings.
At InstaSpaces, we understand that setting up a private limited company can be a complex process. That’s why we offer a range of services to help businesses establish and operate their private limited company successfully. From providing a registered office address and company registration services to helping with compliance and bookkeeping, our team of experts is here to support you every step of the way.
In addition, our company registration services can help you establish a private limited company, LLP, or OPC with ease. Our team of experts can guide you through the entire process, from choosing the right structure to filing the necessary paperwork and obtaining all necessary approvals.
At InstaSpaces, we are committed to providing our clients with the highest level of service and support. Contact us today to learn more about our virtual office, meeting room, coworking, and company registration solutions, and let us help you take your business to the next level.
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