Law and You > Corporate Laws > Companies Act, 2013 > Private Companies
A private limited company is a separate legal entity formed under Companies Act, 2013. It is generally formed by small businessmen who want to own a company but keep its affairs private. This type of business entity limits owner liability to their shares. Private limited company is held by few individuals privately having a separate legal entity.
Under the old companies act, that is, Companies Act, 1956 private limited companies enjoyed certain privileges. There were provisions which were expressly not applicable on private limited companies. But the new Act has modified that and quite a few provisions which were applicable only on public limited companies are now applicable even on the private ones.
Section 2 (68) of Company Act, 2013:
“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
Section 2(68) of Companies Act, 2013 defines private companies. According to that, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This restriction is the basic criterion that differentiates private companies from public companies. From this Section of the Company Act we can obtain following characteristics.
Characteristics of the Private Limited Company:
Limitation on Membership:
Private companies can have a maximum of 200 members and minimum 2 (except for One Person Companies). This number does not include present and former employees who are also members. Moreover, more than two persons who own shares jointly are treated as a single member. Less members means less complexity and confusion in decision making and management.
Paid-Up Capital:
This definition had previously prescribed a minimum paid-up share capital of Rs. 1 lakh for private companies, but an amendment in 2015 removed this requirement. Private companies can now have a minimum paid-up capital of any amount.
Transferability of Shares:
Companies Act, 2013 expressly restricts transfer of shares. This is done to prevent takeover of small businesses by big public limited companies. It can also not purchase its own shares. Private companies cannot freely transfer their shares to the public like public companies. Hence shares of private limited companies are not listed on stock exchanges.
Name of Company:
A private company must include the words “Private Limited” or “Pvt. Ltd.” in their names.
Limited Liability:
The liability of each member or shareholders is limited to the amount of shares he holds. He will not be required to pay more than the extent of the face value of share he holds. It means that if a company faces loss under any circumstances then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.
Perpetual Succession:
A company hold ‘perpetual succession’ which means continuity or uninterrupted existence until it is dissolved legally. Thus the life of the company keeps on existing forever. The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members or change in the membership.
Separate Legal Entity:
Unlike sole proprietorship and partnership a company enjoys separate legal entity wherein even if the shareholders, directors or members of a company die, the company still continues to stay in existence. It can be taken over by other people who can then continue to run the business. Overall the company has the legal capacity to own property and also incur debts. The members and the shareholders of the company are free from the liability to the creditors for such debts.
Number of Directors:
A private company must have at least two directors, and at least one director in case of an OPC.
Index of Members:
A private company has a privilege over the public company as they don’t have to keep an index of its members whereas the public company is required to maintain an index of its members.
Legal Formalities:
The legal formalities in the formation of private limited companies are less compared to the formation of public limited companies.
Prospectus:
Prospectus is a detailed statement of the company affairs which is issued by a company for its public. The Company Act, 2013 prohibits any invitation to the public to subscribe for any securities of the company. Hence there is no such need to issue a prospectus and hence the stringent provisions of the Act related to the issue of prospectus are not applicable to private companies.
No Deposits from Public:
The Act restricts Private Companies to accept deposits from public in any form. Private Companies can borrow money only from Financial Institutions such as Banks in order to scale their business.
Minimum Subscription:
It is the amount received by the company which is 90% of the shares issued within a certain period of time. If the company is not able to receive 90% of the amount then they cannot commence further business. In the case of a private limited company, shares can be allotted to the public without receiving the minimum subscription.
Special Privileges of a Private Company:
These privileges can be studied as follows:
Special Privileges of All Companies:
The following privileges are available to every private company, including a private company which is subsidiary of a public company or deemed to be a public company
- A private company may be formed with only two persons as member. [Sec.12(1)]
- It may commence allotment of shares even before the minimum subscription is subscribed for or paid (Sec. 69).
- It is not required to either issue a prospectus to the public of file statement in lieu of a prospectus. (Sec 70 (3)]
- Restrictions imposed on public companies regarding further issue of capital do not apply on private companies. [Sec 81 (3)]
- Provisions of Sections 114 and 115 relating to share warrants shall not apply to it. (Sec. 14)
- It need not keep an index of members. (Sec. 115)
- It can commence its business after obtaining a certificate of incorporation. A certificate of commencement of business is not required. [Sec. 149 (7)]
- It need not hold statutory meeting or file a statutory report [Sec. 165 (10)]
- Unless the articles provide for a larger number, only two persons personally present shall form the quorum in case of a private company, while at least five member personally present form the quorum in case of a public company (Sec. 174).
- A director is not required to file consent to act as such with the Registrar. Similarly, the provisions of the Act regarding undertaking to take up qualification shares and pay for them are not applicable to directors of a private companies [Sec. 266 (5) (b)]
- Provisions in Section 284 regarding removal of directors by the company in general meeting shall not apply to a life director appointed by a private company on or before 1st April 1952 [Sec. 284 (1)]
- In case of a private company, poll can be demanded by one member if not more than seven members are present, and by two member if not more than seven member are present. In case of a public company, poll can be demanded by persons having not less than one-tenth of the total voting power in respect of the resolution or holding shares on which an aggregate sum of not less than fifty thousand rupees has been paid-up (Sec. 179).
- It need not have more than two directors, while a public company must have at least three directors (Sec. 252)
Special Privileges to Pure Private Company:
Pure Private Company means one which is not a subsidiary of a public company. An independent private company is one which is not a subsidiary of a public company. The following special privileges and exemptions are available to an independent private company.
- It may give financial assistance for purchase of or subscription for shares in the company itself.
- It need not, like a public company, offer rights shares to the equity shareholders of the company.
- The provisions of Sec. 85 to 90 as to kinds of share capital, new issues of share capital, voting, issue of shares with disproportionate rights, and termination of disproportionately excessive rights, do not apply to an independent private company.
- A transfer or transferee of shares in an independent private company has no right of appeal to the Central Government against refusal by the company to register a transfer of its shares.
- Sections 171 to 186 relating to general meeting are not applicable to an independent private company if it makes its own provisions by the Articles. Some provisions of these Sections are, however made expressly applicable.
- Many provisions relating to directors of a public company are not applicable to an independent private company, e.g.
- it need not have more than 2 directors.
- The provisions relating to the appointment, retirement, reappointment, etc. of directors who are to retire by rotation and the procedure relating, there to are not applicable to it.
- The provisions requiring the giving of 14 days’ notice by new candidates seeking election as directors, as also provisions requiring the Central Government’s sanction for increasing the number of directors by amending the Articles or otherwise beyond the maximum fixed in the Articles, are not applicable to it.
- The provisions relating to the manner of filing up casual vacancies among directors and the duration of the period of office of directors and the requirements that the appointment of directors should be voted on individually and that the consent of each candidate for directorship should be filed with the Registrar, do not apply to it.
- The provisions requiring the holding of a share qualification by directors and fixing the time within which such qualification is to be acquired and filing with the Registrar of a declaration of share qualification by each director are also not applicable to it.
- It may, by its Articles, Provide special disqualifications for appointment of directors.
- It may provide special grounds for vacation of office of a director.
- Sec. 295 prohibiting loans to directors does not apply to it.
- An interested director may participate or vote in Board’s proceedings relating to his concern of interest in any contract of arrangement.
- The restrictions as to the number of companies of which a person may be appointed managing director and the prohibition of such appointment for more than 5 years at a time, do not apply to it
- The provisions prohibiting the subscribing for, or purchasing of, shares or debentures of other companies in the same group do not apply to it.
- The provisions of Section 409 conferring power on the Central Government to present change in the Board of directors of a company where in the opinion of the Central Government such change will be prejudicial to the interest of the company, do not apply to it
Advantages of Private Company:
Disadvantages of Private Company: