One of the most widely used types of commercial entities in India is the private limited company. Limited liability for members, ease of maintenance, better flexibility when growing, and easier access to bank loans, private equity, etc. are all benefits of private limited companies. This blog post examines the procedures needed to establish a private limited company.
A Private Limited Company must be an association of two or more people for a legitimate purpose in order to be incorporated. If the Registrar registers, the certificate of registration is not conclusive for this reason and pvt company registration itself may be cancelled by the Central Government initiating necessary measures if the purpose, i.e., if any of the objects, is unlawful.
Companies Act, 2013 allows for the incorporation of different types of companies with varying levels of liability for the shareholders and members. Based on the requirements of the business, the promoters can further choose between the following three types of Private Limited Company – in addition to choosing between the entities (LLP, Private Limited Company, One Person Company).
Company Limited by Shares
For a company limited by shares, the liability of the members is limited by the Memorandum of Association to the nominal amount of his/her share or so much which remains unpaid. Therefore, the liability of the shareholder with respect to a Private Limited Company limited by shares is restricted to the paid-up share capital or any amount that remains unpaid. The shareholder cannot be held liable or asked to pay more than his/her share capital invested in the company.
Company Limited by Guarantee
In a Private Limited Company – limited by guarantee, the liability of the members is limited to the amount of liability undertaken by each of the members in the Memorandum of Association. Therefore, the members of a Private Limited Company – Limited by Guarantee cannot held liable for an amount higher the amount of guarantee undertaken by the member in the Memorandum of Association. Further, the guarantee of the members in a Company Limited by Guarantee can be called-for only in the case of winding-up of the Company. When the company is a going concern, the guarantee of the members of a Company Limited by Guarantee cannot be revoked. A private limited company – limited by guarantee is suitable for clubs, trade associations, societies and for entities that require very minimal capital or working capital funds.
Unlimited companies are those types of company that do not have any limit on the liability of its members. The liability of each of the members extends to the whole amount of the company’s debts and liabilities. Therefore, the creditors of an unlimited company have the ability to enforce the debt and liability of the company on the shareholders, if wound-up. Despite NOT giving the shareholders limited liability protection, an unlimited company is still considered to be a separate legal entity. Therefore, the members of an unlimited company cannot be sued individually.
Though there are many types of private limited company, majority of the Private Limited Companies incorporated for business purposes are Private Limited Company – Limited by Shares. This type of entity provides the maximum protection for its members and is most widely accepted.