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A private limited company is a company that is privately held by business entities. The liability of the members of a private limited company is limited to the shares owned by them and shares of a private limited company cannot be freely traded. Private Limited Company registration is the most well known legal structure for businesses in India. It is incorporated under the Companies Act, 2013 and governed by the Ministry of Corporate Affairs (MCA).
The private limited company is a preferred business form for a number of reasons, it is a business form that is suited to companies irrespective of the business field in which they are.Below are the main characteristics of the private limited company:
To start a company, a minimum number of 2 members are needed and a maximum number of 200 members as per the provisions of the Companies Act, 2013.
The liability of each member or shareholder is limited. It means that if a company bears loss under any circumstances then its shareholders are liable to sell their assets for payment. The personal/individual assets of the shareholder are not at risk. A Nominee Shareholder is the registered owner of shares within a company. A nominee shareholder arrangement is used to keep the real shareholder’s identity confidential.
The Company continues to exist in the eyes of law even in the case of death, insolvency or bankruptcy of any of its members. This results in the perpetual succession of the company. The life of the company is never-ending.
A private company has a privilege over the public company as it doesn’t have to prepare an index of its members whereas the public company is required to maintain an index of its members. (If membership exceeds 50, a separate index of members is required)
A private company needs to have only two directors. With 2 directors (with at least 1 director being an Indian resident), a private company can come into operations.
A minimum authorized capital of Rs 1 lakh or such a higher amount which may be prescribed from time to time.
Prospectus is a detailed statement of the company affairs that is issued by a company to its public. However, there is no need to issue a prospectus in the case of a private limited company as the public is not invited to subscribe for the shares of the company.
It is the value received by the company which is 90% of the shares issued within a certain period. If the company is not able to receive 90% of the value then they cannot commence further business. In the case of a private limited company, shares can be allotted to the public without receiving any minimum subscription.
All private companies must use the word private limited after their name.
You are required to provide 2 different name options for your company to MCA, one of which will be selected.
Names provided to MCA should be unique and suggestive of the company’s business with the name providing a brief outline of the company’s main objective.
(If the proposed name is similar to any existing company’s name then a NOC is required from that company in the form of board resolution and if the proposed name is safeguarded by any Trademark by the proposed company, the details of the same are also required to be submitted.)
The directors have to apply for Director Identification Number (DIN) and Digital signature. A digital signature is an online signature utilized for filing and Directors PIN issued by MCA. If the directors have DSC and DPIN, then there is no reason to apply and this step can be skipped.
Once the name is approved, one is required to draft a Memorandum of Association and Articles of Associate. Both documents are to be filed with MCA with the subscription statement.
In case the individual subscribers are based outside India then the MOA and AOA will be executed outside India and will be notarized in the same country where they are executed.
The Ministry of Company Affairs introduced Form SPICe (INC-32). This form is a simplified one for incorporating a company electronically. Incorporation certification is proof that the company has come into existence. It also includes your CIN number. A consent letter (Form DIR-2), disclosure of interest will be drafted of the directors.
Apply for PAN and TAN. Both are received in 7 working days. You can submit the Incorporation certificate, MOA, AOA and PAN to a bank to open your current account.
Other Document required during the Whole Procedure (Additional Documents)
In addition to providing identity, address and residential address for the Directors, proof must be provided to validate the registered office address of the Company. NOC from Landlord and Proof of evidence of any utility service depicting the address of the premises in the name of the owner or document, which is not older than two months.
A private limited company is the most common form to start a business for an entity intending to gain profit and enjoy the benefits of an incorporated entity. There are several advantages of setting up a private limited company:
An entity is something that has a real existence; a thing with a distinct identity. A company is a legal entity and a juristic person formed under the Indian Companies Act, 2013. A juristic person is a person who is neither a natural person nor a human being but an artificial legal person. Therefore a form of an organization, like a company, has a wide legal capacity and can own property and also incur debts in its name. The members (Shareholders/Directors) of a company are not liable to the creditors of a company for such debts. Hence, it is a legal entity separate from that of its members.
A company has ‘perpetual succession’, i.e. continued or uninterrupted existence until it is legally dissolved. A company, being a separate legal person is not affected by the death, departure, bankruptcy or transfer of shares of any member. It continues to be in existence irrespective of any change in the membership. Perpetual succession is one of the vital characteristics of a private limited company.
Limited Liability means the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability company, the liability of the members is limited in respect of the company’s debt. In other words, the liability of the members is limited only to the extent of the face value of shares owned by them. Therefore, where a company is limited by shares, the liability of the members during winding-up is limited to the amount unpaid on their shares.
By definition, a private limited company means privately held and shares of any member of this closely held company are transferable by a shareholder to any other individual in a manner provided by the Article of Association of the company. The transfer is easy as compared to the transfer of an interest in a business that runs as a proprietary concern or a partnership. Filing and signing a share transfer form and handing over it to the buyer of the shares along with a share certificate can easily transfer the shares.
A company being a juristic person, can acquire, own, enjoy and alienate property in its name. No shareholder can make any claim upon the company’s property as long as the company is a going concern. The shareholder is not the owner of the property of the company. The company itself is the true owner.
To sue means to institute legal proceedings against or to bring a suit in a court of law. Just as one person can bring a legal action in his/her name against another person, a company being an independent legal entity can sue and be sued in its name.
A company can have a valid and effective contract with any of its members. A person who is in control of a company and can at the same time be in its employment. Thus, a person can be a shareholder, creditor, director and also an employee of the company at the same.
A company enjoys better avenues of borrowing funds. It can issue secured as well as unsecured debentures and can also accept deposits from the public at large. Even banks and other financial institutions prefer to provide large financial assistance to a company rather than partnership firms or proprietary concerns.
It can raise the requisite funds by way of equity, debt and deposits. It can fetch funds from its promoters, directors or their relatives, banks or financial institutions, from members and by issuing various financial instruments. However, before availing any financial facility a company should ensure that it goes along with the Companies Act, 2013 and the rules and ensure compliance with other laws.
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