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Companies Act 2013 - Private Companies

Last updated date: 23rd May 2024
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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 Companies Act 2013 - Private Companies

Q1. How is a Private Company different from the meaning of a Public Limited Liability Company?

Ans. A private company is so different in several aspects than a public sector company that the Indian law has a different section (Section 2(68)) of the Companies Act, 2013 for the private companies. Unlike public companies, private companies cannot transfer company shares to the public. There is a restriction in the number of members for private companies- a minimum of two members and a maximum of 200 members. The members of the company also have higher liability than the public companies, and private companies can be differentiated based on member liabilities into private companies limited by shares, private companies limited by guarantee, and private companies with unlimited liabilities of the members.

Q2. What are the privileges enjoyed by a Private Company compared to a Public Sector Company?

Ans. A private sector company enjoys several benefits. The company does not have to conduct and prepare an annual meeting report every year. A minimum of only two directors is required to be appointed by the company, and the company might not have to appoint an independent director. The company also has the power to disqualify a director on any grounds. The companies can also decide to pay higher salaries to their director than any public sector company if they find the director to be worthy of the post.

Q3. What are the limitations of a Private Limited Company compared to the Public Sector Company?

Ans. If you look into some of the solved examples of private companies, you will find that these companies face some limitations. The private sector company cannot transfer shares of the company freely to the general public. They also cannot have access to any external support financially as freely as the public sector companies have. The shareholders of a private sector company have higher liabilities and risks than a public sector company. Lastly, the number of members in a private sector company is restricted to 200.