A group of shareholders makes a private limited company. The total capital of the business is made up of their shares. Each individual is responsible for their share in the entity. Hence, the business and the private assets of a private limited company do not intersect. However, the shares can be sold or handed over to other individuals. The number of shares determines the ownership of the shareholder in the company. A private limited company can have a minimum of 2 members and a maximum of 200. This type of company is ideal for early-stage startups and growing businesses.
Different categories of a Private Limited Company
A private Limited Company can be further divided into three categories:
- Limited by Shares: In this type, the capital of the company is divided into shares. The shareholders can issue these shares for a subscription. Here, the liability of the members is limited by the unpaid capital on the subscribed shares.
- Limited by Guarantee: Here, the percentage of ownership in the company depends on the guaranteed amount and not shares. The liability of the members is limited to the amount of guarantee. In the case of a wind-up, the members can contribute to the assets of the company.
- Unlimited Company: As the name suggests, the liability of the members of such members is not limited at all.
- One Person Company: OPC is a type of Private Limited Company that is registered with only one shareholder. It fits the requirements of an individual reluctant to share ownership rights.
Registration Procedure for a Private Limited Company
The process of registering for a private limited company is quite simple. In order to get started with the process, come up with a company name first. This name needs to get approval from the MCA. So, it is advised to also include a few alternative names for the approval. After taking care of this part, follow these steps:
- Apply for Digital signature and Directors Pin DCIN
- Suggest 3 different options for company names to MCA
- After the name approval, file Memorandum of association (MOA) and Articles of Associate (AOA) along with a subscription statement with MCA
- You will receive your incorporation certificate within 20-25 days proving the creation of your private limited company.
- Apply for PAN and TAN. Once you receive these documents, you can submit MOA, AOA, PAN, and the incorporation certificate to open a bank account.
Documents Required for a Private Limited Company
Before starting with the registration process, the applicant must come up with a checklist for the essentials. The groundwork here is to procure these documents and then follow a legal registration process. Let’s take a look at the documents required.
- City name for the company’s registered office
- Address proof of the registered office
- Sale deed and ownership
- MoA and AoA subscriber sheets
- Company PAN card
- Share capital amount and the division of shares
- ID, address proofs, and occupation details of the directors and shareholders
- Contact details and passport size photos of the directors and shareholders
- NOC for making amends in the MoA
- Non-acceptance affidavits
- Rent agreement copy for the office and NOC from the property owner (if applicable)
A private limited company requires at least two directors for the registration and one of the directors must be a resident of India. While applying for registration, the owner must provide an address. It could be temporary until the registration. Amendments for a permanent address can be made later and then sent to the registrar office.
Why do Startups Prefer a Private Limited Company?
One of the major objectives for a startup is growth in a reasonable timeframe. In order to achieve this, the company needs to follow practices catalyzing the process. This could include changing the members or even the management, outsourcing services, and involving in contracts. These proceedings come in easy for a private limited company because it has a legal existence of its own.
Furthermore, any change in the company members does not affect the status of the company. The flexible structure allows for the formal and informal activities that ensure growth.
A private limited company can be easily funded. It offers several options for the same. These include ESOP, private equity, etc. Investors prefer a private company over other organizations because of the ease of external funding. The separate managerial board makes the investment more feasible. Furthermore, the corporate credibility of a private limited company is also favored by banks. If registered under the Startup Scheme of India, a private company can avail of benefits like tax exemptions.
A private limited company is the best option for a startup or even a family-based business.
If we were to round up the advantages of a private limited company, the following would justify the checklist best:
- Limited liability and flexibility
- Better stability
- Bigger capital contribution
- Better expansion chances
- Preferred by investors and banks
- Easy to transfer shares
- No pressure from the stock market
- Can operate in stealth mode
That said, there are certain conditions associated with this company structure that could develop as disadvantages at later stages. The maximum limit on the number of team members for this company type is 200. If the startup needs to expand and accommodate more human resources, the private limited status has to be resolved. Furthermore, it requires an additional ROC compliance, adding to a recurring cost per annum.
A private limited company is a hassle-free option as compared to a public company. The process for registration is simple and not very time-consuming. Moreover, it does not require extensive capital or a huge team to get started. If you are looking to set up any kind of business from scratch, a private limited company is your go-to corporate structure.
So, that’s a wrap on the existence of the private limited companies in India. If you have any doubts regarding any of the above-mentioned sections, let us know in the comments.