With the increasing growth of business and trade, several problems emerge which cannot be solved by traditional businesses. For example, sole proprietorship comes with unlimited liability, as a result of which people opt for partnerships. However, such partnerships can prove to be risky or inadequate to meet the demands of the growing liabilities. To cope up with such problems, private companies offered the best example.
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Definition of Private Company
Private companies are best described in Section 2(68) of the Companies Act, 2013. These companies have restricted their association and transferability of shares. These companies also have granted limited accessibility to the public for subscription. This meaning of private companies differentiates them from public companies.
Moreover, the Section also has restricted the number of members of the company to 200. This rule, however, is not applicable to One Person Companies. Additionally, this restriction also excludes the former employees of the company. Lastly, if two persons jointly own shares, they will be considered as a single unit. The Section previously made it compulsory for private companies to have minimum Rs. 1 lakh paid-up share capital, but such requirements were later scrapped by an amendment in 2005. There is no minimum restriction for paid-up capitals for any private sector companies.
What are the features of Private Companies?
Every private company has unique features that distinguish them from other types. The private limited company characteristics that are different from the key features of a public limited company are:
No minimum requirement of capital.
The company must have a minimum of two employees and a maximum of 200 employees. However, this feature does not stand true for one-person companies.
They cannot freely transfer shares to the public.
The name private limited has to be added to the name of the companies. Pvt ltd meaning adds this definition to the name of the company.
The law grants several privileges to a private limited company.
What are the types of Private Companies?
On the basis of member liabilities, there are three types of private limited companies:
Private limited companies limited by shares- the amount unpaid by the company in terms of shares is the liability of its members.
Private ltd company limited by guarantee: the amount that the members guarantee to pay when the company stops functioning is their liability.
Private businesses with unlimited liability for members, where even personal assets of the members will be considered when the company stops functioning.
According to the private sector examples, a private company can also be a one-person company if the number of members or shareholders is one. Such a provision is added to the New Company Act, 2013.
Additionally, according to the meaning of a private limited company, a small company with restricted turnover amounts and paid-up share capitals can be considered to be a private limited company.
How is a Private Limited Company formed?
If you follow a list of private company examples, you will understand how it is formed.
A company can be started by a minimum of two and a maximum of 200 members. The details of the company have to be submitted to the Registrar of Companies during the application process. The application must also contain a subscribed version of the Memorandum of Association of the company as well as other related documents. The application also requires payment of fees.
If you see the private sector examples, you will find that the memorandum contains the company name (containing the term ‘private limited’), the address of the company’s registered office, the objectives of the company, and the member’s liability description. The memorandum must also contain the complete subscriber’s details. Also, the company has to disclose information about their articles of association, full details of the assigned members, share transferability, and other requirements.
Privileges of Private Companies
According to the private limited company definition, advantages and disadvantages are synonymous with the Pvt ltd meaning. The privileges are:
A minimum of only two directors is required.
There is no requirement for preparing annual general meeting reports, as you would say in several public limited company examples.
The company does not have to appoint independent directors.
According to the private limited company definition, the company can disqualify a director by adopting any additional grounds.
The companies can also pay greater remunerations and salaries to their directors than other companies.
Limitations of Private Companies
The private limited company meaning also comes with certain limitations. These are:
Different private sector examples cannot transfer shares of the company freely to the public.
The Pvt ltd meaning restricts the access of the companies to outside financial support than the public companies.
Shareholders have greater liabilities and risks.
FAQs on Private Companies Under Companies Act 2013
1. What is a private company as defined by the Companies Act, 2013?
A private company, according to Section 2(68) of the Companies Act, 2013, is a type of company that, by its articles of association, has three key restrictions. First, it restricts the right to transfer its shares. Second, it limits the number of its members to a maximum of two hundred (excluding current and former employees who are members). Third, it prohibits any invitation to the public to subscribe for any of its securities.
2. What are the main differences between a private company and a public company?
The primary differences between a private and a public company under the Companies Act, 2013, relate to their structure, fundraising capabilities, and compliance requirements. Key distinctions include:
Number of Members: A private company requires a minimum of 2 members and has a maximum of 200, while a public company needs at least 7 members with no upper limit.
Share Transferability: Shares in a private company are not freely transferable, whereas shares of a public company are.
Public Subscription: A private company cannot invite the public to buy its shares or debentures, which is the primary method for a public company to raise capital.
Company Name: A private company must use the suffix “Private Limited” (Pvt. Ltd.), while a public company uses “Limited” (Ltd.).
3. Is there a minimum paid-up capital requirement for incorporating a private company in India?
No, there is currently no minimum paid-up share capital requirement for incorporating a private company. The initial requirement of ₹1,00,000 was removed by the Companies (Amendment) Act, 2015. While there's no statutory minimum, a company must have adequate capital to fund its business operations and objectives.
4. What are the different types of private companies based on the liability of members?
Under the Companies Act, 2013, private companies can be classified into three types based on the liability of their members:
Company Limited by Shares: This is the most common type, where the liability of a member is limited to the unpaid amount on the shares they hold.
Company Limited by Guarantee: In this type, the liability of members is limited to a specific amount they have guaranteed to contribute to the company's assets in the event of its winding up.
Unlimited Company: As the name suggests, the liability of the members is unlimited. Their personal assets can be used to settle the company's debts if the company's assets are insufficient.
5. Why does the law restrict the transfer of shares in a private company?
The restriction on the free transfer of shares is a fundamental characteristic of a private company designed to maintain control within a small, closely-held group. This ensures that ownership does not pass to unknown or undesirable persons without the consent of the existing members. It preserves the private nature of the company, preventing hostile takeovers and maintaining the stability of its management and ownership structure, which is often composed of family members or trusted partners.
6. What are the key privileges and exemptions that a private company enjoys under the Companies Act, 2013?
Private companies enjoy several privileges and exemptions compared to public companies, which reduces their compliance burden. Key examples include:
Number of Directors: They can start and operate with only a minimum of two directors, compared to three for a public company.
Statutory Meetings: They are not required to hold a statutory meeting or file a statutory report with the Registrar of Companies.
Financial Statements: They are exempt from the requirement of preparing a cash flow statement as part of their financial statements.
Managerial Remuneration: There are fewer restrictions on the overall managerial remuneration that can be paid.
7. How does the '200 members' limit for a private company work in practice?
The maximum limit of 200 members for a private company is a strict rule, but with specific exclusions. When counting the 200 members, current employees and former employees who became members during their employment and continue to be members after their employment has ceased are not included. Furthermore, if two or more people hold shares jointly, they are treated as a single member for the purpose of this count. This rule ensures the company remains a closely-held entity as intended by law.
8. Can a private company accept loans or deposits from the public?
No, a private company is strictly prohibited from inviting or accepting deposits from the public. This is a core part of its definition under Section 2(68). However, a private company can accept loans and deposits from its members, directors, or their relatives, subject to the conditions and limits prescribed under the Companies (Acceptance of Deposits) Rules, 2014. This restriction on public deposits is a key differentiator from a public company.
9. Under what circumstances would a private company need to convert into a public company?
A private company may be required or may choose to convert into a public company in several situations. The most common reasons include:
Raising Capital: If the company wants to raise large-scale funds from the general public through an Initial Public Offering (IPO).
Exceeding Member Limit: If the number of its members exceeds the statutory limit of 200.
Business Growth: As a company grows, converting to a public company can enhance its brand image, credibility, and ability to attract top talent.
Providing Exit to Investors: To provide an easy exit route for early investors (like venture capitalists) by allowing them to sell their shares on the open market.
