A private limited company is a type of business entity owned by non-governmental organizations or a small number of shareholders or individuals. It is a separate legal entity from its owners and provides limited liability protection to its shareholders. Private limited companies are popular among small and medium-sized enterprises (SMEs) due to their flexibility, limited liability protection, and ease of ownership control.
Types of Private Limited Companies
There are three main types of private limited companies:
- Company Limited by Shares: In this type, the liability of the members is limited to the amount unpaid on their shares as stated in the Memorandum of Association. Shareholders are not liable to pay more than their share capital invested in the company.
- Company Limited by Guarantee: In this type, members’ liability is limited to the amount they undertake to contribute to the assets of the company in the event of its liquidation. Members cannot be held liable for a sum greater than the amount guaranteed in the Memorandum of Association.
- Unlimited Companies: In this type, there is no limit to the liability of the members. Each member’s liability extends to the whole amount of the company’s debts and liabilities.
Requirements to Start a Private Limited Company
- Company Name: Choose an original and legally acceptable name for the company. Ensure that the chosen name meets the naming criteria.
- Shareholders and Directors: A private limited company must have at least two shareholders and directors. The initial shareholders are collectively known as promoters and have complete control over the ownership ratio.
- Registered Office Address: Maintain a registered office where the company keeps its official documents and correspondence. According to Section 12 of the Companies Act of 2013, companies are required to maintain a registered office at all times.
- Obtain Necessary Documents: Obtain essential documents such as the Memorandum of Association (MOA), Articles of Association (AOA), Director Identification Number (DIN) for directors, and Digital Signature Certificate (DSC) for directors.
Advantages of a Private Limited Company
A Private Limited Company, sometimes known as a PLC, is a well-known form of business concept that offers its owners a variety of advantages. The formation of a private limited company has a number of advantages, some of which are listed below:
- The fact that a Private Limited Company shields its owners from legal responsibility is among the most significant benefits offered by this type of business structure. This ensures that the assets of the shareholders are not put in jeopardy in the event that the firm is found to have legal or financial obligations.
- Because it has its own legal personality, a Private Company is able to acquire assets, enter into contracts, bring legal actions in its own name, and be the target of legal actions brought against it.
- A Private Limited Company has its own distinct legal existence; the loss of a shareholder due to death or leave does not have an impact on the ongoing operations of the company, in contrast to the situation with a sole proprietorship or partnership.
- Better access to capital: A Private Limited Company has the ability to quickly raise capital by selling shares to different types of investors. This can help the company extend its operations, invest in new projects, and grow its business all at the same time.
- Credibility: A Private Limited Company is frequently seen as being more credible and professional compared to other business formats, which can assist in attracting superior staff, customers, and investors.
- Tax benefits:Â Private Limited Companies are eligible for a wide range of tax advantages and incentives, including lower tax rates, deductions for business expenses, and exclusions from certain forms of income. Private Limited Companies can also deduct some business expenses from their taxable income.
- Limited compliance requirements: In comparison to public limited companies, private limited companies are required to comply with a lower number of regulatory responsibilities, which can help reduce the administrative burden and costs incurred by the company.
- Control over ownership: Shareholders in a Private Limited firm have control over the ownership of the firm, which means they have the ability to decide who can buy and sell shares of the company.
In general, a Private restricted Company affords its owners a number of advantages, some of which are protection from restricted liability, a distinct legal identity, enhanced access to financial resources, and favourable tax treatment.
Drawbacks Associated with Establishing a Private Limited Company
Private limited companies, while their numerous positive attributes, are not without their share of disadvantages. The formation of a private limited company comes with a number of significant difficulties, including the following:
- Private limited corporations, in contrast to public limited companies, are not permitted to sell shares to the general public, it is significantly more challenging for private limited companies to raise significant amounts of capital.
- Private limited corporations are subject to a range of legal and regulatory obligations, including yearly filings and other reporting obligations. These obligations are designed to ensure that the organisation complies with all applicable laws and regulations. If these legal responsibilities are not met, there is the possibility of incurring fines and other penalties.
- Limited capacity to transfer ownership: As shares in a private limited company cannot be bought or sold at will, it is challenging for existing shareholders to leave the company and challenging for new investors to become involved.
- As directors of a private limited company, directors are held to a higher standard of personal accountability than shareholders are for the business’s debts and obligations.
- Private limited firms may not be able to give the same incentives and benefits to their employees as larger organizations that are publicly traded, it may be more challenging for private limited companies to entice and keep the best employees.
- Lack of transparency: Investors have a more difficult time analysing the performance of private limited firms and the prospects for those companies since private limited companies are not required to provide as much financial information as is required of public limited companies.
In summary, understanding the benefits and drawbacks of working as a Private Limited Company in India calls for carefully balancing its blessings and downsides. This enterprise structure gives widespread blessings inclusive of limited legal responsibility safety and adherence to regulatory requirements, which enhance operational dependability and inspire self belief amongst buyers and financial establishments.
Nevertheless, these benefits are accompanied by way of challenges. The trouble at the variety of shareholders (as much as 2 hundred) and regulations on public percentage trading can complicate efforts to elevate capital wished for enlargement. While the Private Limited Company shape is well-desirable for those prioritizing funding protection and long-time period balance, it necessitates thorough prison and strategic planning to efficaciously cope with its inherent barriers.
