Private Limited Company Incorporation in India

Merits of a Private Limited Company

• Limited Liability: Shareholders have limited liability, which means their personal assets are protected in the event of business failure. They are only liable for the amount they invested in the company.
• Separate Legal Entity: A private limited company is a separate legal entity from its owners. This means the company can own property, sue or be sued in its own name.
• Continuity of Existence: The company’s existence is not affected by the change in ownership or the death of its shareholders or directors, ensuring continuity.
• Raising Capital: It can be easier to raise capital through the sale of shares to investors, as opposed to sole proprietorships or partnerships.
• Professional Image: Having ‘Pvt Ltd’ at the end of the business name can enhance the perception of the business, potentially leading to more customer trust and business opportunities.
• Ownership and Management Separation: Shareholders (owners) can appoint directors to manage the company, allowing a professional management team to run the business.
• Tax Benefits: Private limited companies often enjoy tax advantages, like lower corporate tax rates and eligibility for certain tax deductions.

Demerits of a Private Limited Company

• Complex Formation and Operation: Setting up and operating a private limited company can be more complex and time-consuming than other business structures, requiring compliance with more regulations and legal requirements.
• Limited Capital Raising Potential: Since shares of a private limited company cannot be offered to the public, there’s a limitation on the amount of capital that can be raised compared to a public limited company.
• Lack of Transparency: Private limited companies are not required to publish their accounts or business activities, which can sometimes lead to a lack of transparency for outsiders.
• Restriction on Share Transfer: Shares in a private limited company cannot be freely transferred or sold to the public. This might hinder the liquidity of an investment in the company.
• Dividend Distribution Tax (DDT): In some jurisdictions, companies might have to pay a dividend distribution tax when they distribute profits to shareholders, affecting the overall profitability.
• Compliance and Regulatory Requirements: Private limited companies face stringent regulatory requirements, including annual filings, board meetings, and financial audits.
• Decision-Making Delays: In a company with multiple directors or shareholders, decision-making can be slower due to the need for agreement or consensus.

An Overview of a Private Limited Company in the aspects of The Companies Act 2013

 
The major legal documents of a Private company are:-

• Memorandum of Association
• Article of Association
• Certificate of Incorporation
• Certificate of Commencement

“In terms of the Companies Act, 2013 ‘company’ means a company incorporated under the Act, or under the previous company law” [Sec. 2(20)].

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“A company may be an incorporated company, a Corporation, or an unincorporated company. An incorporated company is a single and legal (artificial) person distinct from the individuals constituting it. In contrast, an unincorporated company, such as a partnership, is a mere collection or aggregation of individuals. Therefore, unlike a partnership, a company is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it.”

Characteristics/Advantages of a Private Limited Company

Independent corporate existence:  The outstanding feature of a private limited company is its independent corporate existence. It is a distinct legal person existing independent of its members. By incorporation under the Act, the company is vested with a corporate personality distinct from the members who compose it.

Limited Liability Protection: A Pvt Ltd company is a separate legal entity from its owners, which means that the owners are not personally liable for the company’s debts or legal issues. The liability of the shareholders is limited to the amount they have invested in the company. The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organization. Where the subscribers exercise the choice of registering the company with limited liability, the members’ liability becomes limited or restricted to the nominal value of the shares taken by them or the amount guaranteed by them. No member is bound to contribute anything more than the nominal value of the shares held by him.

Limited Number of Shareholders: A Pvt Ltd company can have a minimum of two and a maximum of 200 shareholders. The company can also have a minimum of two Directors.

Minimum Share Capital: Before the introduction of the Companies Act 2013, a minimum authorized and paid-up capital of Rs. 1 lakh was required to incorporate a Private Limited Company (Pvt Ltd) in India. However, after the introduction of the Act, this minimum capital requirement has been removed, making it easier and more affordable for entrepreneurs to start their businesses. Therefore, the law now accurately states that there is no minimum capital requirement to incorporate a Pvt Ltd company under the Companies Act 2013, whereas previously there was a requirement of Rs. 1 lakh.

Perpetual succession: An incorporated company never dies. It is an entity with perpetual succession. Perpetual succession means that the membership of a company may keep changing from time to time, but that does not affect the company’s continuity. The death or insolvency of individual members does not, in any way, affect the company’s corporate existence.

Separate Legal Entity: A Pvt Ltd company is considered a legal entity, which means that it can own property, enter into contracts, and file lawsuits. A company, being a legal person, is capable of owning, enjoying, and disposing of property in its name. The company becomes the owner of its capital and assets. The shareholders are not the several or joint owners of the company’s property. The company is the real person in which all its property is vested and by which it is controlled, managed, and disposed of.

Separate Management: The shareholders of a Pvt Ltd company are not directly involved in the day-to-day management of the company. The company is managed by a board of directors, who are elected by the shareholders.

Restricted Ownership: A Pvt Ltd company has restrictions on the transferability of its shares. The shares cannot be freely traded on the stock exchange, and they can only be sold or transferred with the consent of the other shareholders.

Annual Filing Requirements: A Pvt Ltd company is required to file annual returns and financial statements with the Registrar of Companies in the country where it is incorporated. The various regular forms that need to file with the Registrar of Companies are AOC 4, MGT 7 ( MGT 7A for Small Companies), ADT 1, DPT 3, and DIR 3 KYC.  

Overall, a Pvt Ltd company is a popular business structure for small and medium-sized businesses as it provides limited liability protection to its shareholders, allows for restricted ownership and separate management, and is considered a legal entity.

Is registration of a private limited company mandatory ?

According to Section 464 of the Companies Act, 2013, no association or partnership consisting of more than such number of persons (i.e., not exceeding 50 as per Rule 10 of Companies (Miscellaneous) Rules, 2014) shall be formed to carry on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof unless it is registered as a company under this Act or is formed under any other law for the time being in force:

Registration of a private limited company is indeed mandatory in most jurisdictions, including India. The process of incorporating a business as a private limited company is a legal requirement and not merely a formal or optional step. This is because a private limited company is considered a separate legal entity, distinct from its owners and shareholders.

In India, for instance, the registration process is governed by the Companies Act, 2013. It involves several steps, including obtaining a Digital Signature Certificate (DSC), Director Identification Number (DIN), filing for name approval, and submitting the incorporation forms along with the required documents to the Ministry of Corporate Affairs (MCA). Only after the approval of these forms and issuance of a Certificate of Incorporation can a business legally operate as a private limited company.

Above stated provision shall not apply to

• Hindu undivided family carrying on any business. Or
• professionals governed by special Acts form an association or partnership.

Every member of an association or partnership carrying on business in contravention of the above the law shall be punishable with a fine which may extend to one lakh rupees and shall also be personally liable for all liabilities incurred in such business.

Procedural aspects of Private Limited Company Incorporation

Section 7 of the Companies Act 2013 provides for the procedure to be followed for the incorporation of a company.

I ) Filing of the documents and information with the Registrar: For the registration of the private limited company required the following documents and information to be filed with the Registrar within whose jurisdiction the registered office of the company is proposed to be situated:

a)   the memorandum and articles of the company duly signed by all the subscribers to the memorandum.

b)   a declaration by a person who is engaged in the formation of the company (an advocate, a chartered accountant, a cost accountant, or company secretary in practice) and by a person named in the articles (director, manager or secretary of the company), that all the requirements of this Act and the rules made there under in respect of registration and matters precedent or incidental to it have been complied with.

c)   a declaration from each of the subscribers to the memorandum and persons named as the first directors, if any, in the articles stating that:

i) he is not convicted of any offense in connection with the promotion, formation, or management of any company or.

ii) he has not been found guilty of any fraud or misfeasance or breach of duty to any company under this Act or any previous company law during the last five years.

iii) and that all the documents filed with the Registrar for company registration contain information that is correct, complete, and true to the best of his knowledge and belief.

d)   the address for correspondence till its registered office is established, for which 30 days is allotted after incorporation.

e)   the particulars (names, including surnames or family names, residential address, nationality) of every subscriber to the memorandum along with proof of identity, and in the case of a subscriber being a body corporate, such particulars as may be prescribed.

f)   the particulars (names, including surnames or family names, the Director Identification Number, residential address, nationality) of the persons mentioned in the articles as the first directors of the company and such other particulars including proof of identity as may be prescribed, and

g)   the particulars of the interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate along with their consent to act as directors of the company in such form and manner as may be prescribed.

II)  Issue of certificate of incorporation on registration:  The Registrar, based on documents and information filed, shall register all the documents and information in the register and issue a certificate of incorporation in the prescribed form to the effect that the proposed company is incorporated under this Act.

III) Allotment of corporate identity number (CIN): On and from the date mentioned in the certificate of incorporation, the Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company and which shall also be included in the certificate.

Incorporation Procedure of a Private Limited Company in India

Helping the learner’s to understand the detailed step-by-step incorporation procedures of a Private Limited Company in India with the Ministry of Corporate Affairs ( MCA). Describe the procedures with the help of infographics then that beginners can understand them easily. PEAK Business Consultancy Services is committed to updating and publishing the information for the learner’s community.

Private Limited Company Registration in Kochi, Ernakulam, Kerala

PEAK Business Consultancy Services is one of the leading consultants assisting in registering businesses in Kerala. We assist over 100 entrepreneurs in registering their establishments as Private Limited Companies. Registration of a Private Limited Company is a 100 % online procedure so that consultants can do it anywhere.