A private limited company is one whose article of association restrict the transferability of shares and forbid the public from subscribing to them, as defined by the Companies Act of 2013. Private limited companies are set apart from other types of public companies by this distinctive characteristic. With India’s rapid business growth, there is a growing interest in learning more about the various business entities and their legal terms and conditions. In this article, we discuss what is a private limited company, explore the various types of private limited companies and learn how to start one.
What is a private limited company?
Section 2 (68) of The Companies Act, 2013 defines a private limited company as a separate entity that is privately held and provides limited liability. Unlike other publicly traded companies, it does not freely transfer its shares to the public. All business profits and liabilities belong to the company in a private limited company, and stakeholders may not be held liable for the company’s debts.
Types of private limited companies
Here are some different types of private limited companies:
Private limited company by shares
The number of shareholders who are owed money on their shares determines the capital limit of a private company limited by shares. The liability of shareholders in these companies is limited by the MOA (memorandum of Association) to the number of their shares or the amount that remains unpaid. A shareholder’s liability is limited to the amount invested in the company.
Private limited company by guarantee
The individual shareholder’s liability in a private limited company limited by guarantee is limited at the amount he guarantees in the MOA. As a result, they can only be held liable up to the amount they have guaranteed. Furthermore, they may invoke this guarantee only if the company is permanently shut down.
Unlimited companies
An unlimited company is a separate legal entity. Unlimited corporations are companies that have no limitations on their members’ liability. The debts owed by the entire company may be subject to each member’s liability. The debts incurred by the company can be settled using the members’ individual assets.
Who can form and run a private limited company?
The number of directors for a private limited company can range from two to fifteen. Additionally, a private limited company’s shares may be distributed legally to at least two shareholders. A total of 200 shareholders is acceptable.
A private limited company, similarly, requires at least two directors. The company may allow them to become shareholders. Any private limited company may have paid-up capital of 1 lakh rupees minimum or higher, as specified by the government, in accordance with Section 2 (clause 68) of The Companies Act, 2013.
Documents required for forming a private limited company
To establish a private limited company, the following documents are required:
- Memorandum of association: It discusses the reason for starting a business, the nature of the business, the goal of the company, and the capital clause. It is a corporate document, also known as the company charter, that outlines the company’s objectives and defines its relationships with its shareholders.
- Article of association: The internal operating system of the company is discussed in this document. It outlines the management procedure, the duties of each member, the dividend policy, shareholder meetings, and the appointment of directors.
- Certificate of incorporation: This is the license or certificate that the directors receive following the submission of all necessary paperwork for registration. In India, the Registrar of Companies (ROC) issues this document, which is the main document for authenticating the company.
- Other documents: Additional documents for all directors and shareholders of the company include an ID proof (PAN card, Aadhaar card), an address proof (ration card, voter id), a rental agreement, an NOC from the property owner, and a copy of the sale deed for the owned property.
What is the procedure for registering a private limited company?
Here’s a step-by-step guide to the registration process:
Apply for a digital signature certificate. It is a prerequisite for all directors and shareholders and functions as the digital equivalent of a physical signature. Only authorised personnel can use such signatures.
Apply for a director identification number(DIN). This eight-digit number is given to the candidate for company director by the Ministry of Corporate Affairs. It is a unique digital identity assigned to a director that is linked to the person’s corporate endeavors, information, and services on the internet.
Check for availability of the company name. Verify that the company name you want to use is available for registration prior to registering your business. The Ministry of Corporate Affairs (MCA) state business filing agency portal website allows you to check it.
Provide the required documents to the ROC. Once your company’s name has been approved, you can submit all necessary documents to the registrar of companies (ROC). You will receive a physical copy of the certificate of incorporation that the ROC issues.
File the MOA and AOA. Then a memorandum of association (MOA) and an article of association (AOA) must be filed. This is required in order to register a private limited company.
Issue a PAN and TAN. Create a tax deduction and collection account number (TAN) along with a permanent account number (PAN) while forming a company. Keep in mind that private limited companies must register for both GST and provident fund as part of the process to obtain PAN and TAN numbers.
Open a bank account. This is the last step in the registration procedure. Create a bank account in the company’s name to handle all of the business’s major transactions.
The Benefits of Private Limited Companies
A private limited company provides the following benefits:
Foreign investment opportunity
Foreign investors trust private limited companies more because of strict compliances, data availability on the site, and adherence to ROC norms. Additionally, if there is at least one director who resides in India, a foreign businessperson may be elected to the board of directors of a private limited company. Because of this, foreign investors are more motivated to invest in private limited companies than in any other kind of business entity.
Separate legal entity
Private limited companies are separate and independent entities, and changes or replacements in shareholders or directors have no effect on them. A legal constitution governs the formation of any private limited company. It implies that a company continues to exist legally even if all of its members leave or the company files for bankruptcy.
Can own properties
Any type of movable or immovable property can be owned by a private limited company. Typically, the company is accountable for its assets and liabilities. In the event of a company’s dissolution, its debts are paid off to creditors in a predetermined order, lowering the shareholders’ individual liability.
Greater borrowing capacity
There are many options available to private limited companies for borrowing money. Financial institutions frequently favor providing financial support to private limited companies. Because of the transparency, compliance, and limited data availability on governmental websites, they have more faith in this kind of business entity.
Tax compliances and financial reports for a private limited company
Income tax filing
For the purposes of filing income taxes, a private limited company can be classified as either domestic or foreign. Every business submits income tax returns and pays taxes on the profits it generates during a specific fiscal year. When the income tax department of India sets a deadline, you can file your tax returns online. It is significant to note that submitting tax returns online necessitates the uploading of a digital signature.
Annual ROC filing
A private limited company’s ROC (Register of Companies) annual filing is a record of its audited financial statements and annual returns. According to The Companies Act, 2013, Sections 129 and 137, every company is required to file financial statements and submit annual returns in accordance with Section 92. Within 30 to 60 days of the conclusion of the annual general meeting, you may file both of the records.
Balance sheet and profit-and-loss statement
A private limited company keeps track of its assets and financial performance using a balance sheet and profit and loss statement. A balance sheet is a statement of the assets and liabilities of a company at a given time. A balance sheet is used to determine a company’s net worth and to give information about its financial situation.
An income statement that lists the revenues, costs, and expenses incurred over a specific period of time is called a profit and loss statement. This declaration tells us whether a business can make money by raising sales and cutting expenses.
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