India has seen a surge in the number of new companies registered in the past few years. Even the pandemic could not break the entrepreneurial spirit of the Indian businesses. Since July 2020, the number of new companies registered has been on the rise and the majority of them are private limited companies.
In the financial year 2020, over 122 thousand companies were registered in India. Out of those 122 thousand registered companies, around 120 thousand were private companies. This constant rise in the numbers can be attributed to the startup revolution in India.
Source: Statista
The flagship startup movement by the government, the introduction of GST, and the digitisation of the overall process are some of the major factors contributing to these numbers.
This blog acts as a guide for the uninitiated and helps them understand the different types of private limited companies, how to register a private company, several benefits and drawbacks of registering a private limited company.
What is a Private Limited Company?
As the name suggests, a private limited company, or PVT. LTD, is a private organisation held by its shareholders. The number of shareholders of a privately held organization can range from 2 to 200.
A private limited company provides financial transparency and limited liability to its shareholders who are liable for the shares they hold but are not wholly responsible for the debts incurred by the company. The stocks of a private limited company are not traded on the stock exchanges.
On average, around 10000 private limited companies are registered in India every month. One of the major reasons for these high numbers is the ease of registering a private limited company.
Before we talk about the registration process for a private limited company, let’s look at the different types of private limited companies in India that are governed and regulated by the Ministry of Corporate Affairs (MCA).
Types of Private Limited Companies
Different types of private limited companies are defined based on the varying liabilities for the members and shareholders associated with the organisation. The incorporation and regulation of private limited companies are done as per the Companies Act 2003.
The type of private limited company best suited for you depends upon your business requirements. Listed below are some of the common types of private limited companies:
Limited by shares
The liability of a shareholder or member in a private company limited by shares is proportional to their number of shares. These members are not responsible for the debt incurred by the whole company and are not liable to pay more than the investment made by them in the company.
In simple words, the shareholder’s liability is limited to the paid-up share capital or the remaining unpaid amount. The shareholders are responsible only for the shares they hold and are not wholly responsible for the debts incurred by the company.
Limited by guarantee
A private company limited by guarantee is ideal for organisations with minimal working capital or funds requirements. In such companies, the liability of the members is limited to the liability taken by them in the memorandum of association. Hence, the members of the company cannot be held liable for more than the guarantee undertaken by them in the memorandum of association.
A company limited by guarantee does not have any shareholders and is owned by the guarantors who are liable to pay a small amount in case the company is wound up. Private companies limited by guarantee are ideal for trade associations, clubs, societies, etc. which do not require a lot of working capital.
Unlimited companies
Unlike the above two types of private companies, the liability of the members is unlimited in unlimited companies. Here, a member is wholly responsible for the debt incurred by the company and their assets/liabilities can be used to pay off the company’s debts. It is important to Please note that it does not imply that the company is not a separate legal entity.
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How to Register a Private Limited Company
The ease of setting up a private company in India is one of the primary reasons for the growth of private limited companies.
The first step to register a private limited company is to finalize the name of the company. Once you are done with finalising the name, apply for the below-mentioned items to register a private limited company:
- Digital signature certificate
- Digital identification number
- Name availability
- Registration on Ministry of Corporate Affairs
- Certificate of Incorporation from Registrar of companies
Documents Needed for Private Limited Company Registration
- Identity proof
- Residence proof
- Rental agreement
- No objection certificate from the property owner
- In the case of an owned property, a copy of the property deed is required
Benefits of a Private Limited Company
Lesser risk
Limited liability of a private limited company implies a lesser risk for the shareholders and members. In the event of company failure, shareholders do not have to sell their private assets for payment.
Fewer shareholders
Unlike a public company which requires at least seven shareholders, a private limited company can be easily started with only two shareholders.
Continuous existence
In the event of the demise of a company member, the company continues to be in existence as it is a separate legal entity until it is wound up.
Drawbacks of a Private Limited Company
The only major drawback of a private limited company is the tedious formalities involved in closing the company which can be a cumbersome and laborious affair.
Conclusion
In terms of numbers, private companies always had an upper hand over public companies. Over 93% percent of the companies incorporated in India are private limited companies. The reason for such high numbers is the flexibility and freedom of operations that come along with a private limited company.
“Going private” has become a widely used term in recent times because of the inclination of companies to go private. When it comes to devising long-term strategies and keeping the shares’ worth and financial numbers discreet, a private limited company is the right choice.
