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A private company, also called a private limited company, is a firm that functions under private ownership. There are other types of companies in India, such as public companies, Dormant Company, One person Company, LLP etc. Studying a private limited company is critical as understanding other types of companies depends on this. Public companies are defined as “those companies that are not private companies” as you can see, to understand what type of company is a public company, we need to study private companies. Let us start by seeing the definition.
What is a private company?
When we talk of a private company, we refer to Section 2 (68) of The Companies Act, 2013. It is stated that a private limited company is based on trading shares on private exchanges; the more prominent public can not access them. They also restrict the right to transfer the shares bought. There is a set limit of a minimum of 2 members or shareholders to register a private company and a maximum of 200 members or shareholders. One point always to remember is that the maximum set limit excludes the present and past employees. For example, a privately owned company has 210 shareholders. You must be thinking that is illegal as per the set limit, but if 10 shareholders are employees of the company who have also bought a share, they will be excluded from the set limit. These employees can be presently working employees or those who have worked in the past. These companies strictly prohibit any invitation to the public to subscribe to any company securities. Always keep in mind that a private limited company’s name ends with ‘private limited’ or ‘PVT LTD’.
Features of private company
You need to understand the basic 5 features of a private company.
- For setting up and registering a private limited company, The Companies Act, 2013 earlier authorised a minimum paid-up capital of 1 lakh rupees. Still, this minimum limit of paid-up capital is omitted now, and there is no minimum requirement for paid-up capital.
- As discussed in the definition, there is a set limit of members. The minimum limit for members is two members, and the maximum limit is two-hundred members.
- Have you ever wondered why stock exchanges don’t list private companies? It is because private companies don’t have the right to transfer their securities and shares to the public.
- All private companies must have “private limited” or “PVT LTD”.
- Due to their private nature, they involve very limited interests by members, and they get to enjoy some exemptions by law which other types of companies don’t want.
Types of Private limited companies
Depending on the liabilities of members, there are three types of a private limited company:
- Limited by shares: for the shares held by a member, their liability is limited to the amount unpaid to the company.
- Limited by guarantee: in case the company wounds up, the liability of members is limited to the amount of money they guarantee to pay.
- Unlimited liability: when the company wounds up, the personal assets of the members can be sold. Here, the liability of members is unlimited.
How is a private limited company formed?
You can form a private limited company by having a minimum of 2 members or a maximum of 200 members. Submit an application to that effect to the Registrar of Companies along with a subscribed copy of their Memorandum of Association and other essential documents and pay the prescribed fees.
The Memorandum should state the name of the company, the address of the registered office, the object and purpose of a company, and the extent of liability of its members. It should also have the details of subscribers to the Memorandum.
The Companies Act of 2013 has prescribed some compliances such as requirements relating to names of private companies, their Articles of Association, details of members, transferability of shares, etc.
Conclusion
Studying a private limited company is essential in business studies to understand the dynamics of companies and their ownership. The ownership of a private company is private, and its shares and securities are not open for trading to public exchanges. There are three types of private companies, and there are some features of private companies that you need to study to better understand the concept of private companies. Private companies also get numerous privileges and exemptions in comparison to other companies. You will also see the interdependence of different companies as you study this topic further.
