Definition and Characteristics of Private Limited Company
In this Post we are going to tell you about Definition and Characteristics of Private Limited Company. Private Limited Company is a business entity in which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the amount of shares respectively held by them. Shares of Private Limited Company cannot be traded in public. All the aspects of Private Limited Company is discussed in the article.
Characteristics of Private Limited Company:
1. Members– To start a company, a minimum number of 2 members are required and a maximum number of 200 members as per the provisions of the Companies Act, 2013.
2. Limited Liability– The liability of each member or shareholders is limited. It means that if a company faces loss under any circumstances then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.
3. Perpetual succession– The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members. This leads to perpetual succession of the company. The life of the company keeps on existing forever.
4. Index of members– A private company has a privilege over the public company as they don’t have to keep an index of its members whereas the public company is required to maintain an index of its members.
5. A number of directors– When it comes to directors a private company needs to have only two directors. With the existence of 2 directors, a private company can come into operations.
6. Paid up capital– It must have a minimum paid-up capital of Rs 1 lakh or such higher amount which may be prescribed from time to time.
7. Prospectus– Prospectus is a detailed statement of the company affairs which is issued by a company for its public. However, in the case of private limited company, there is no such need to issue a prospectus because in this public is not invited to subscribe for the shares of the company.
8. Minimum subscription– It is the amount receive by the company which is 90% of the shares issued within a certain period of time. If the company is not able to receive 90% of the amount then they cannot commence further business. In case of private limited company shares can be allotted to the public without receiving the minimum subscription.
9. Name– It is mandatory for all the private companies to use the word private limited after its name.
Registration requirement for Private Limited Company :
The requirements for private limited company registration are:
1. Members- A minimum number of two and a maximum number of 200 members or shareholders are required as per the companies’ act 2013 before registration of the company.
2. Directors- A minimum number of two directors is required for registering the private limited company. Each of the directors should have DIN i.e. director identification number which is given by the ministry of corporate affairs. One of the directors must be a resident of India which means he/she should have stayed in India for not less than 182 days in a previous calendar year.
3. Name- It is one of the major components for a private limited company. The name of the company contains three parts i.e. the name, the activity and private limited company. It is necessary for all private company to use the word private limited company at the end of its company name. Every company has to send 5-6 names for approval to the registrar of the company and all the names should be unique and expressive. The name for approval should not resemble with any other companies name. So choosing the right company name is an important component is it will stay with the company throughout its life.
4. Registered office address- While going for the registration of the company, the owner should provide the temporary address of the company until it does not get register. However when the company has been registered then its permanent address of its registered office should be suited with the registrar of the company. The Registered office of the company is where companies main affairs are been conducted and where all the documents are placed.
5. Obtaining digital signature certificate- In today’s modern world everything is done online. All documents are submitted electronically and for that, every company must obtain a digital signature certificate which is used to verify the authenticity of the documents. A digital signature is obtained by all the directors which are marked on all the documents by every director.
6. Professional certification- In a company there are many professionals which have required for many purposes. For incorporating a private limited company certification by these professionals are necessary. Various professionals such as company secretary, chartered accountant, cost accountant etc are required to make their certification at the time of company incorporation.
Advantages of Private Limited Company:
1. Ownership- In a public company, regulation and ownership of shares can be sold to the public on an open market. On the other hand, in a private company, shares can be sold or transferred to other people by the choice of the owner. Shares of such company are owned by founders, management or a group of private investors. Shares here are not sold in open market. Thus there will be less number of shareholders. This means less complexity and confusion in decision making and management.
2. Minimum Number of Shareholders- For a private company, a minimum number of required shareholders is 2, whereas, for a public company, you require a minimum of 7 shareholders.
3. Legal Formalities- Legal formalities are sometimes very expensive and time-consuming, aren’t they? If you’re planning to start a public company, you better be prepared because there is a long list of legal formalities for forming a public company. Private companies have comparatively shorter list.
4. Disclosing Information- A public company is required to disclose their financial reports to public every quarter, as it will affect public investment; private companies are not subjected to any such compulsion.
5. Management and Decision Making- Management and decision making becomes more complex and confusing in public companies as more number of shareholders are to be consulted. This complex procedure is eliminated in private company as the number of shareholders is less.
6. Focus Of Management- Managers of Public Company are focused on increasing the value of shares, whereas managers of the private company are more flexible in the short term and long term business decisions.
7. Stock Market Pressure- Private companies are not pressurized by the stock market and you don’t have to worry about shareholder expectations and interference as long as they work within the law. Shareholders in public companies are focused on current earnings and they exert pressure on the company to increase earnings.
8. Long Term Planning- Managers of public companies are pressurized to increase earnings in the short term in order to increase the value of their stock. Private companies can focus on long-term earnings as such pressure is eliminated.
9. Minimum Share Capital- You will be needing a lot of money for a public company. A public company requires minimum share capital of Rs. 5,00,000. For a private company, the earlier minimum number of share capital was Rs. 1,00,000, but now there is no such minimum compulsion. Therefore there is no pressure of fund requirements.
10. Confidential- It is obviously not appropriate, for competitors to know about your business secrets. Confidential information such as executive compensation, legal settlements, and other essential information cannot be kept reserved in public companies. Such information is more secure in a private company.
Therefore, a Private Limited Company is less complicated compared to a Public company. It is comparatively less expensive and less time-consuming.
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Definition and Characteristics of Private Limited Company