An organization or business owned or controlled by only a few people is referred to as a private limited company. Shareholders own it and put their names on it. They are registered for predefined objects. Private companies are typically selected by startups and businesses with high growth aspirations.
Business entities acquire the status of Companies in India by registering under the Companies Act of 2013. Minister for Corporate Affairs (MCA) is the governing body of the company. Private companies are defined in the Private Companies Act. The terms Private Company and Company definition are given below. The Private Company is stated in section 2 (68) of the Act as follows:
Upon incorporation, the Company shall have a minimum paid-up capital as may be required.
(i) restricts the transfer of shares;
(ii) Unless it is a One Person Company, it does not have more than 200 members.
(iii) the company must refrain from offering to the public any securities for subscription
According to our basic reading, it is understood that private companies’ shares are restricted to certain conditions. Further, if the company has more than 200 members, it stops being a private company. Further, it inherits the prohibition on soliciting the public at large to subscribe to securities. When none of these conditions is met, the company loses its personality as a private company.
Definition of ownership in terms of share capital:
Ownership in a company really rests with its shareholders. The share capital is the defining attribute that defines ownership of a limited company. It is the equal pieces of capital of the company. Based on shares owned by the shareholders, the ratio of ownership can be determined.
It is for this reason that investors tend not to choose company-based businesses over their own ventures, as they have a similar structure in terms of shareholding. Through their equity ownership, investors can easily take control of their businesses. Moreover, the shares can also be issued at a premium so as to introduce more capital into the investing process, which makes the process easy and more efficient.
A corporation’s stock is owned by its shareholders, making it more transferable than capital held by other structures, such as limited liability companies. Nonetheless, it is limited as a result of the restrictions outlined in the definition above. When one is interested in leaving a company, they first need to offer the shares to an existing member first, and then allow the shares to be sold to a third party after. As a result of the proposed transfer, the membership of the board of directors needs to approve it good of company. Such restrictions are put in place to maintain the private ownership of the business. Additionally, shareholders can’t sell their stocks publicly or on a stock exchange like publicly traded companies.
The following numbers make up the membership of the association:
In addition to members, a company’s shareholders are also known as shareholders. The minimum membership requirement for a Private Limited Company to be considered a private company in India is two. Individuals or even a company can become members of this corporation. A Private Company has a set number of members. This is provided as a maximum of 200 members. However, one-person companies are excluded.
To determine how many members are in a company, it should be taken into consideration further.
- Two or more persons may hold shares jointly, for this purpose, if they hold each other’s shares jointly.
- Employee Stock Options are a method of issuing stock to employees of a company via an option to purchase shares of stock. They do not count when calculating the earnings per share. All current and former employees of the firm who are still members after their employment ended are included.
The Public is prohibited from subscribing to securities:
Public subscription of securities is not permitted by its definition for Private Companies. For the reasons of raising capital, Public Companies may issue prospectuses. However, Private Companies cannot do this. Private companies cannot invite public subscription via prospectuses.
We discuss the other features, also beneficial as benefits of a Private Limited Company, in a series of articles on this blog
Would you say that startups prefer the flexibility of Private Limited Companies over other business structures?
Private Limited Companies are preferred by startups as a structure because they offer stability and growth opportunities. The company possesses legal independence from its members. So, it is capable of entering into contracts and proceeding in court on its own behalf as a result. In addition, a company’s status remains the same regardless of its members or managers.
Having a separate management board, such as a board of directors, is advantageous for shareholders seeking to invest. In a company where the Board is remunerated, members of the company receive dividends as profit sharing.
It Additionally, ESOP and private equity are viable funding options. It thus makes it better suited to external funding options. It is because of these factors that Venture Capital funders, Angel Investors, and other funding agencies prefer this type of business structure over any other. Furthermore, the most important aspect of the corporate structure is that it has also proven to be quite popular among the banks and lending agencies.
A The Startup India Scheme of Government of India allows private companies to take advantage of registration benefits. Registered startups benefit from a host of tax incentives.
The concept is prioritised by family-based businesses along with start-ups alike for these reasons. Businesses with a service-oriented focus tend to select LLPs, whereas those with a product-focused focus may prefer Pvt Ltds.
Private companies fall into the following categories:
In accordance with liability and capital, private companies are classified into various types. During this article, we will be discussing such in brief.
- In a Private Company, there can be or not be share capital, depending on whether the company has or does not have share capital. Accordingly, the information is provided in the corporate capital provision of the company’s Memorandum of Association.
- The members may be limited or unlimited in their liabilities, depending on their responsibilities. Limited liability companies usually exists in India since they offer limited liability in their constitutions. If shares are held by a company, the members of the company have limited liability, which is limited to unpaid capital on subscription shares. The amount of the liabilities in capital of a company without shareholding is specified in the memorandum of agreement on the constitution of the corporation.
- OP, or one-person company, refers to a company that is only comprised of one person. It consists of only one shareholder and has no employees. If a promoter doesn’t wish to share ownership rights, then this is a good structure for him.