Private Limited Company
A Private Limited Company is a business entity held by small group of people. It is registered for pre-defined objects and owned by a group of members called shareholders. Startups and businesses with higher growth aspiration popularly choose Private Company as suitable business structure.
The business entity gets recognised as a Company through its registration under Companies Act of 2013 in India. The governing body is Ministry of Corporate Affairs, widely known as MCA. The definition of Private Company under the Act is provided here to understand its basics. Section 2 (68) of the Act defines a Private Company as under:
A Company having a minimum 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;
(iii) prohibits any invitation to the public to subscribe for any securities of the company
From the basic reading, we understand that a Private Company’s share transfer is restricted with some of the conditions. Further, if its members exceed 200, it stops to be a Private Company. It further inherits the prohibition to invite the public at large to subscribe any securities. In absence of any of these conditions, the company loses its identity as a Private Company.
Why Private Limited Company is preferred by startups?
Private Limited Company is preferred structure by startups because of stability and growth opportunities offered by this structure. Further, it assures separate legal existence from its members. So, it can involve into contracts and legal proceedings in its own name. Moreover, a company’s status is unaffected from any change in members and management.
Separate managerial board i.e. Board of Directors is beneficial for members interested for investment purpose. Where Board works on remuneration, the members receive profit sharing in form of Dividend.
It also offers various funding options in form of private equity, ESOP and more. This makes it more suitable for external funding options. And thus, it is more preferred by VCs, Angel Investors, and other outside funding agencies compared to any other business structures. It also is rather preferred by banks and lending agencies because of the credibility that it holds as a corporate structure.
A private company is eligible to take benefit of registration under Startup India Scheme of Government of India. This scheme avails multiple benefits including tax exemptions for the recognised startups.
Because of these reasons, it is the priority for both family-based businesses and start-ups. Where service-based businesses tend to choose LLP, Pvt Ltd is suitable for productbased and growth-oriented businesses.
The promoters quite often face some myths and dilemmas, while considering Private Limited Company Registration. We have addressed such myths and dilemmas in our blog: Private limited company: Busting the myths