This article is written by Vanshika Jaiswal from Galgotias University, Noida. The article gives an outline about the concept of a private limited company. Private companies have the upper hand over public companies with respect to investment in long-term strategies, keeping the values of their shares and financial figures discreet, freedom, and flexibility of operations. This article also talks about the registration and pros and cons of the private company.
Private Limited Company
A private limited liability company is a privately owned business entity. In this case, the liability arrangement is that of a limited partnership, in which a shareholder’s liability is limited to the number of shares they own.
There is a need for familiarity with different business registration types, such as sole proprietorship, limited liability company, and private limited company, in light of the booming startup ecosystem across the country and the increasing number of people looking to start their own businesses.
In legal terms, Section 2 (68) of the Companies Act, 2013 defines a private company as “A Company having a minimum paid-up share capital as may be prescribed, and which by its articles, I restricts the right to transfer its shares; (ii) except in the case of a one-person company, limits the number of its members to two hundred; and I prohibits any invitation to the public to subscribe for any of the company’s securities.”
Characteristics of a Private Limited Company
- Membership: As with any other corporation, a minimum of two shareholders is required to establish a limited liability company. As it remains a small organisation, however, the maximum number of members is capped at 200. Additionally, two directors are required to run the company.
- Limited liability structure: In a private limited liability corporation, the liability of each member or shareholder is limited. Therefore, even in the event of a loss, the shareholders are obligated to liquidate their own assets for repayment. However, the shareholders’ personal and individual assets are not at risk.
- Separate legal entity: This is a distinct legal entity that continues in perpetuity. In other words, the company continues to exist in the eyes of the law even if all of its members die or if it becomes insolvent or bankrupt. The company’s existence will be unaffected by the deaths of its shareholders or members unless dissolved by resolution.
- Minimum paid up capital: A private limited liability company is required to have and maintain a minimum paid-up capital of Rs. 1 lakh. As prescribed by MCA on occasion, it could be increased.
Who can establish and manage a limited liability company?
A private limited company must have at least two and no more than fifteen directors. Additionally, at least two shareholders can legally distribute shares of a limited liability company. Acceptable is a total of two hundred shareholders.
Similarly, at least two directors are required to manage a private limited company. They can become company shareholders. Section 2 (clause 68) of The Companies Act, 2013 specifies that a private limited company’s paid-up capital must be at least 1 lakh rupees or more.
Prerequisites for forming a Private Limited Company
Every type of business has its own set of incorporation requirements. The prerequisites for registration are as follows:
- Directors and members: As stated previously, a private limited company must have a minimum of two and a maximum of 200 members in order to be legally registered. This is a legal requirement mandated by the 2013 Companies Act.
The directors must satisfy the following requirements:
- Each director must have a DIN, which is a director identification number issued by the Ministry of Corporate Affairs.
- One of the directors must be a resident of India, meaning he or she must have spent at least 182 days in India in the preceding calendar year.
- Name of the business: Choosing the company’s name or searching for a business name is frequently a technical endeavour. When choosing a name, a limited liability company must take into account three factors:
- Main name
- Activity to be performed
Mentioning “Private Limited Company” at the end is must but there is no guarantee that the business owner’s desired name will be available, as no two businesses can have the same name. At the time of registration, every company is required to submit five to six names for approval to the Registrar of Company (ROC). In addition, the submitted names should not be too similar to those of other businesses.
- Registered office location: After the company has been registered, the registered office’s permanent address must be filed with the company’s registrar. The company’s registered office is where the company’s principal business is conducted and where all of the company’s documents are kept.
- Obtaining additional documents: Every company must obtain a digital signature certificate for the electronic submission of documents, which is used to verify the authenticity of the documents. In addition, certifications by professionals (secretary, chartered accountant, cost accountant, etc.) employed by a business for a variety of tasks are required.
Advantages of Private Limited Companies
- Limited liability: The members of a private limited company have no risk of losing their personal assets due to the company’s limited liability. In the event of a business failure, the shareholders are required to sell their assets for payment.
- Fewer shareholders: In contrast to a public company, which must have seven shareholders, a private limited company can be formed with only two shareholders.
- Ownership: As the company’s shares are owned by investors, founders, and management, the company’s shareholders are free to transfer and sell their shares.
- Uninterrupted existence: As mentioned previously, the company remains a legal entity until it is formally dissolved, and it continues to exist even if a member dies or leaves.
Disadvantages of Private Limited Companies
One of the disadvantages of a Pvt ltd company is the compliance formalities required for dissolution. It frequently becomes excessively complicated and time-consuming.
List of Documents Required for Private limited company
The documents required for a private limited company are:
- ID proof: PAN card and passport of Indian and foreign directors, respectively
- Address proofs: Ration card or Aadhar card or driver’s licence or voter ID
- Residence proofs: Bank statement or electricity bill of the premise
- Notarized rental agreement
- NOC from the property owner
- A copy of the sale deed or property deed (for an owned property)
How to register a Private Limited Company?
- After finalising the company’s name, proceed with the steps below:
- Apply for DSC (Digital Signature Certificate);
- Apply for the DIN (Director Identification Number);
- Apply for the name availability;
- File the EMOA (Memorandum of Association) and EAOA (Article of Association) to register the private limited company;
- Apply for the company’s PAN and TAN.
- Certificate of Incorporation will be issued by the Registrar of Companies with the PAN and TAN.
- Open a current bank account on the company name
Tax compliances and financial reports for a private limited company
- Income tax filing: For purposes of filing income tax returns, a limited liability company falls into two distinct categories: domestic and foreign. Each business must file income tax returns and pay tax on the profits it earns during a given fiscal year. Once the Indian income tax department issues a due date, you can file your tax returns online. It is essential to note that online tax returns must be uploaded with a digital signature.
- ROC annual filing: It is a record of audited financial statements and annual returns submitted by a private limited company to ROC (Register of Companies). Under Sections 129 and 137 of the 2013 Companies Act, all companies are required to file financial statements and submit annual returns. Both records may be filed between 30 and 60 days after the conclusion of the annual general meeting.
- Balance sheet and profit-and-loss statement: A private limited company keeps a balance sheet and profit & loss statement to determine if it has sufficient assets to meet its financial obligations. A balance sheet is a record of the company’s liabilities and assets as of a specific date. The purpose of a balance sheet is to compute a company’s net worth and provide an overview of its financial health. The profit and loss statement is a statement of income that details the revenues, costs, and expenses incurred during a specific time period. This statement describes a company’s ability to generate a profit by increasing revenue and decreasing expenses.
Conclusion
If you are prepared to establish your own limited liability company. It is recommended to consult with the right individuals and make the best decision for growth and expand your company legally in the market with investment in long-term strategies, keeping the values of their shares, freedom and flexibility of operations.