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Private Limited Company: Types, Procedure & Advantages

A private limited company is an organization that offers some of the advantages of larger corporations, but with more flexibility and fewer regulations....

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    private limited company

    Overview: Private Limited Company

    A private limited company is a type of company which is privately owned by the private shareholders. It is a type of business entity that offers limited liability and limits the number of shareholders to 50. It is easy to form and provides more flexibility for operations as compared to other forms of business. 

    Private limited company registration is the most preferred choice for most the business people. Private limited companies differ from public limited companies in that they cannot offer shares on the open market.

    Let us move further and learn the details of a private limited company.

    What is a Private Limited Company?

    A private limited company is a business structure that is not public and restricts the transferability of shares, does not offer shares to the public, and limits the number of shareholders to 50.

    There are three types of private limited companies, these are-

    1. Company limited by shares

    In a company limited by shares, the shareholder’s liability is restricted towards the unpaid amount on their shares or as mentioned in the memorandum of Association. In the further course of business, no shareholder is requested to pay more than the unpaid amount. They are only liable for the calls unpaid by them.

    2. Company limited by guarantee

    Company limited by guaranteeis a type of private limited that limits its member’s liability till the amount they will contribute at the time of winding up as already registered in the Memorandum of Association.

    This type of company is often registered as a NOT-FOR-PROFIT organization or for charity purposes. You can read more about companies limited by shares.

    3. Unlimited Liability Company

    A type of corporation where members’ liability is up to the company’s debts and liabilities. Creditors can ask for repayment of their debts even from the shareholders if the company fails to do so.

    You must be wondering why the unlimited company is even regarded as a company despite not having the special features of a company? I.e. SEPARATE LEGAL ENTITY, right?

    The unlimited company even though is called a separate legal entity and thus no shareholder is responsible for others’ behavior and cannot sue them.

    Read More: Limited Liability Company

    Now let’s move on to the features of a private limited company.

    Features of a Private Limited Company

    • Members– Like any other business, a firm must have at least two shareholders in order to be formed. The maximum membership limit is 200 due to the organization’s current size. The company must have at least two directors in order to be governed.
    • Limited liability– The liability of the members depends upon what they’ve agreed to or the number of shares they own and the money unpaid on them. The shareholders/members and the company are separate legal entities.
    • Perpetual succession- The company is formed by law and thus can be dissolved only by law. Thus the company continues to live even if its members die or retire.
    • Name– Private limited companies are required to put limited at their end.
    • Paid-up capital–  Paid-up capital of Rs 1 Lakh is required to form a private limited company.

    Procedure For Registering A Private Limited Company

    Registering any company is a tedious and difficult task. Here are some steps that would help you with the map of registering a company. But still, it’s preferable to communicate the problems with specialized professionals to ease out the task.

    Here’s the procedure for setting up private limited company:

    1. Acquire the Digital signature certificates: Digital signatures are crucial when filing the forms for registering the business. The entire registration procedure is done online, and the forms need to be digitally signed. You must receive digital signature certificates from certified bodies that are recognized by the government.
    2. Acquire the Director Identification Number (DIN): DIN has to be acquired by the individual who wishes to serve as a director in a firm. One DIN is sufficient to serve as a director for any number of businesses.
    3. Select a Name: Choose a name for your business that is distinct, appropriate, and complies with the laws of the nation.
    4. Submit the documentation: File the company’s memorandum of association and articles of association with other necessary documents to the registry.
    5. Obtain Incorporation Certificate: Once the authorities have given their approval for the registration, you’ll receive an incorporation certificate, indicating that your private limited company is legitimately founded.
    6. Open a bank account: After your firm is registered, you need to open a bank account in your company’s name.

    But just for your information these steps look easy when written but get extremely tedious, time-consuming, and confusing. So to get better results OnDemand International is here for your rescue!

    Book a call right now and see how the experts at OnDemand International will make the process feasible, easier and less complex for you plus tailored according to your needs.

    Now, let’s look at some of the advantages and disadvantages of a private limited company.

    Documents Required to Register a Private Limited Company

    You need list of documents to register a private limited company are:

    • Memorandum of association: It discusses the reason for starting a business, the type of business, the purpose of a corporation, and the capital clause.
    • Article of association: The management procedure, obligations of each member, the procedure for paying dividends, shareholder meetings, and hiring of directors are all listed in this document. 
    • Additional documents: A copy of the sale agreement for each director and stakeholder of the firm, as well as ID and address verification, the lease agreement, and the landowner’s NOC, are additional papers that may be required for establishing a private limited company.

    Requirements For Opening a Private Limited Company

    • Company Name: Choose a unique name for your company that complies with the naming guidelines set by the regulatory authority in your jurisdiction. Ensure that the name is not already registered by another entity.
    • Registered Office: You need to have a registered office address for your company where official communications and notices can be sent. This address must be provided during the registration process.
    • Directors: A Private Limited Company must have at least one director. Directors must be individuals above the age of 18 and not disqualified from holding the position by law. They are responsible for managing the company’s affairs and making strategic decisions.
    • Shareholders: Private Limited Companies must have at least one shareholder. Shareholders are the owners of the company and hold shares representing their ownership interest. They are entitled to receive dividends and participate in decision-making through voting rights.
    • Memorandum of Association (MOA) and Articles of Association (AOA): Prepare MOA and AOA, which outline the company’s objectives, rules, and regulations governing its operations. These documents need to be signed by the shareholders and directors.
    • Capital: Determine the authorized share capital of the company and the initial amount of capital to be subscribed by shareholders. The capital can be in the form of cash, assets, or a combination thereof.
    • Company Registration: File the necessary documents with the relevant government authority responsible for company registration in your jurisdiction. This typically involves submitting the MOA, AOA, address proof, identity proof of directors and shareholders, and payment of registration fees.
    • Obtain Certificate of Incorporation: Once the registration process is complete and the documents are verified, the government authority issues a Certificate of Incorporation, officially recognizing the company’s existence.
    • Tax Registration: Register for tax purposes with the appropriate tax authorities. This includes obtaining a Permanent Account Number (PAN) for income tax and registering for Goods and Services Tax (GST) if applicable.
    • Compliance Requirements: Ensure compliance with ongoing regulatory requirements such as filing annual returns, conducting board meetings, maintaining statutory records, and fulfilling tax obligations.
    • Business Bank Account: Open a business bank account in the name of the company to manage financial transactions and funds.
    • Other Licenses and Permits: Depending on the nature of your business activities, you may need to obtain additional licenses, permits, or registrations from relevant regulatory bodies.

    Advantages Of Private Limited Company

    Advantages of a private limited company

    1. Constrained liability

    As compared to a sole proprietorship, private companies are benefitted from constrained liabilities. This means that shareholders and companies are separate legal entities. The shareholders are not called out for the company’s liabilities unless it is a company limited by guarantee.

    This makes it very beneficial for private company shareholders to invest and earn higher returns without worrying about unlimited liabilities.

    2. Simple and limited trade of shares

    Public companies can list their shares on a stock exchange and earn huge funds from the public. This is not the case with private companies as they are restricted from doing so. However, trading in shares is a much simpler process in a private company as compared to that of public companies.

    Trading compliances are less and easier in private companies rather than in public companies.

    3. Continued Existence

    Private companies work on the principle of perpetual succession. That means, continued existence! Even if the shareholders die/quit/retire the company remains to exist.

    A company is born by law and only the law can dissolve it and nobody else. Therefore, private companies enjoy the freedom of perpetual succession, unlike a sole proprietorship.

    4. Tax reductions

    If you are thinking that corporates have to pay a lot of tax then you might be wrong. Because in the case of private companies, there are many ways to reduce tax and take benefit of lower tax schemes or incentives given by the world and respective governments. 

    5. Insulated property

    Private companies on their own can purchase or sell any asset or property. A company in the eyes of the law is a legal personality and can have any assets or liabilities of its own.

    But the thing to note here is that the company’s property or assets can not be owned by any of its investors and the same applies to the company too. None of the shareholder’s property belongs to the company.

    6. Fundraising

    Private limited companies are authorized to fund money in its name to invest in the business. Therefore, private limited companies can fund such money in the form of the private placement, bonus issue, or right issue. It is also easier for private companies to take funds from banks or such funding institutes.

    7. Owning property

    A public company is a legal entity and can acquire properties in its own name. Not just that, it can sue and be sued by any third party as well. The shareholders and company are two different people and the owner of such property is always the company.

    Disadvantages of Private Limited Company

    1. Complex Formation Process: Establishing a Private Limited Company involves a series of formalities and legal procedures, which can be time-consuming and intricate. From registration to documentation, the process demands meticulous attention to detail.

    2. Higher Compliance Requirements: Private Limited Companies are subject to stringent regulatory compliance requirements. These include filing annual reports, conducting board meetings, maintaining statutory records, and adhering to tax obligations. Failure to comply can result in penalties or legal consequences.

    3. Limited Capital Generation: While Private Limited Companies offer limited liability protection to shareholders, raising capital can be challenging. Unlike public companies, they cannot raise funds from the general public through stock offerings. Therefore, the avenues for capital infusion are relatively restricted, which may impede expansion or investment opportunities.

    4. Ownership Restrictions: Private Limited Companies have restrictions on the transfer of shares. Shareholders cannot freely sell or transfer their ownership stakes without the consent of other shareholders or as per the company’s articles of association. This lack of liquidity can deter potential investors and limit exit options for existing shareholders.

    5. Costly Compliance and Maintenance: Maintaining a Private Limited Company entails ongoing costs. From annual audits to compliance fees and professional services, the financial burden of adhering to regulatory standards and corporate governance practices can be substantial, especially for small businesses or startups with limited resources.

    Members Required for Setting Up a Private Limited Company (PLC)

    As per the companies act, the number of members in a private company is restricted to 200 only. However these 200 members are exclusive of,

    • Persons who were in the employment of the company before.
    • Persons who are in the employment
    • Wo are members of the company or joint owners

    How OnDemand International Can Help You Register A Private Company?

    OnDemand International has a group of professionals that are proactive and listen closely to your problems to offer you a tailor-made solution. registering a private company is a tough process and not to forget involves a lot of compliance as well.

    But with the help of our team at OnDemand International you can easily focus on your business while you leave the pressure of business registration at us. We have helped individuals from all across the world to set up companies and ease the process.

    We would love to have your problems solved. Contact us here!

    Conclusion

    A private limited company is a flexible and well-liked corporate structure that offers entrepreneurs limited liability, operational freedom, and expansion potential. This structure is frequently chosen by business owners and SMEs because of its advantages and protections. You can decide whether a private limited company is the best option for your business venture by being aware of the formation procedure, advantages, and operational factors.

    If you would like to set up your private limited company, you can contact our business formation experts at OnDemand International. With years of experience, our experts will assist you in gathering the required documentation and successfully setting yo your business with the relevant authorities.

    FAQ’s

    There are certain prerequisited to fulfilled for registering a private limited company such as:

    • Name: The name of your private limited business must be novel and distinct from any already existing company names.
    • Registered Office: The registered office is the main area where business is conducted and is where all company-related paperwork is kept.
    • Directors: A minimum of 2 director with a cap of fifteen, is necessary for setting up a private limited company. 
    • Capital requirements: A Pvt limited company needs to have a minimum of 1 lakh as required capital.
    • Members: A private limited company can have a maximum of 200 members.

    Ye,s there can only be 50 directors and a maximum of 200 shareholders in a private company.

    Yes, it is very much mandatory to file MOA and AOA while registering a private limited company or any such company in that matter.

    Limited liability protection, independent legal entity status, perpetual existence, the capacity to generate capital via the issuance of shares, and simplicity of ownership transfer are some benefits of a private limited company.

    Opening a private limited company requires a minimum of 2 directors and 2 members.