Introduction
Registering a private limited company in India is a step for entrepreneurs looking to establish a structured and legally recognised business. This business form offers several advantages, including limited liability protection to its owners and a separate legal status to the business itself. Funds can also be effortlessly raised. The process involves several steps, starting from the stage of obtaining Digital Signature Certificates (DSCs) and Director Identification Numbers (DINs), reserving a company name, and subsequently filing the necessary incorporation documents with the Registrar of Companies (RoC). This guide offers a step-by-step approach to aid you in through this process within the stipulated time, thereby complying with the law and laying the foundation for success for your business.
What is a Private Limited Company
A private limited company is a type of business structure in India which limits the liability of its members to the amount unpaid on their shares. Which means that the personal properties of the shareholders are protected against the debts of the business. It is one of the most commonly adopted company types when it comes to a startup or developing businesses, on account of its flexibility, ease of management, and limited liability protection.
Here are the key features of a Private Limited Company:
- Limited Liability: A shareholder’s liability is limited to the unpaid amount on shares.
- Separate Legal Entity: The company is considered a separate legal entity from its owners, which means it can own assets, enter into contracts, and incur liabilities in its name.
- Ownership: A Private limited company should have a minimum of 2 to a maximum of 200 shareholders; shares cannot be traded publicly.
Private limited companies can be classified based on liability and ownership structure. The key types include:
1. Company Limited by Shares:
- Ownership: Divided among the shareholders depending on the number of shares they hold.
- Liability: Limited to the unpaid amount on the shares subscribed by each shareholder.
- Capital Structure: Capital is raised by the issuance of shares to the shareholders.
- Common Use: Most commonly preferred company form of business establishment for some startups, along with businesses in other sectors.
- Example: A technology company where investors subscribe to shares, and their risk is limited to their unpaid share capital.
2. Company Limited by Guarantee:
- Ownership: The company is owned by its members rather than by shareholders.
- Liabilities: Limited to the amount that each member has agreed to contribute in the event of the winding up of a company.
- Capital Structure: This company does not have an issue of shares, and the funds come mostly from donations, endowments, or subscriptions of the members.
- Common Usage: It is best suited for not-for-profit organisations, societies, clubs, and charitable bodies.
- Example: A social welfare organisation in which members automatically agree to a nominal guarantee amount that may be called up to satisfy any debts incurred by the company on dissolution.
3. Unlimited Company:
- Ownership: It can be set up like a company limited by shares or guarantee.
- Liability: It is a member’s liability in full, whereby their assets can cover the liabilities of an insolvent company.
- Capital Structure: Can raise capital by employing shares or contributions.
- Common Use: Infrequently employed; generally in family businesses or situations where the owners are willing to assume full financial responsibility.
- Example: A tightly held business where all members are prepared to support financial obligations without limit.
Advantages and Disadvantages
Advantages of a Private Limited Company
1. No Minimum Paid-up Capital:
After the amendment to the Companies Act, 2013, there is no requirement for a minimum paid-up capital prescribed for a private limited company. It can be registered with a nominal authorized share capital of just Rs. 1,00,000.
2. Separate Legal Entity:
The private limited company is a separate legal entity which is different to its shareholders. It can own assets, incur liabilities and enter into contracts in its name. Furthermore, the company continues to exist irrespective of changes in ownership or management.
3. Limited Liability for Members:
Members’ liabilities are limited to the unpaid amount on their shares. This means that the members are liable for the company’s debts only to the extent of their shareholding, and their assets are secured from any liability.
4. Ease of Fundraising:
Private limited companies have more avenues for funding compared with sole proprietorships or partnerships. Such investors prefer to invest in private limited companies, given their fairly formal and structured nature.
5. Perpetual Existence:
The financial records and incorporation details of private limited companies are publicly available on the Ministry of Corporate Affairs (MCA) website. This transparency boosts the company’s credibility, making it easier for investors, banks, and clients to verify its legitimacy.
6. Foreign Direct Investment (FDI):
However, a private limited company is allowed to receive 100 per cent Foreign Direct Investment (FDI), which means that foreign persons or foreign companies can invest directly in that company. This will also lead to the company’s growth in its own country and outside the country.
7. Enhanced Credibility:
The financial and incorporation records of the private limited companies are made public in a format by the Ministry of Corporate Affairs (MCA). This boosts the credibility of a company and makes it easier for an investor, bank, or client to verify the company’s legitimacy.
Disadvantages of a Private Limited Company
1. Limited Number of Members:
A private limited company is restricted to a maximum of 200 members, which is significantly lower than a public limited company that can have an unlimited number of shareholders.
2. Restrictions on Share Transfer:
The Articles of Association (AoA) of a private limited company prohibit the free transfer of shares. Therefore, shares of such a company cannot able to be traded on the stock exchanges, thus restricting the liquidity characteristics of its investments.
3. Inability to Issue a Prospectus:
Private limited companies are forbidden from issuing a prospectus to the public to invite investments or subscriptions. This restriction thus means that these companies will not be able to have their shares listed on the stock exchanges.
These are the key advantages and disadvantages of a private limited company. Entrepreneurs should evaluate both aspects carefully before deciding to incorporate one. If you’re unsure whether this structure suits your business needs, a corporate lawyer can provide clarity on legal and financial implications for your situation.
How to register a Private Limited Company
A private limited company registration ensures limited liability and structured ownership. It is one of the most preferred business forms for startups and growing ventures. The process involves legal documentation, approvals, and filings with the Ministry of Corporate Affairs. Planning to start your business with a private limited company structure? Follow this step-by-step guide for company registration.
Step 1: Obtaining Digital Signature Certificates (DSC)
- A Digital Signature Certificate (DSC) is an electronic signature that authenticates the identity of an applicant. Signing electronic documents is mandatory for submissions made on the MCA (Ministry of Corporate Affairs) portal.
- Certifying Authorities: DSCs are issued by authorised bodies like eMudhra, Sify, and Ncode.
- Application Procedure: To apply for a DSC, an applicant fills out an online application form, submits proof of identity and address, and pays the appropriate fee. The DSC is delivered in a matter of days.
Step 2: Obtaining Director Identification Numbers (DIN)
- A Director Identification Number (DIN) is indeed a unique identification number which would be assigned to an individual who aspires to be a director of a company.
- Every director must possess one if they are to be part of the board of the company.
- Application Procedure: Fill Form DIR-3 on the MCA portal along with the required documents (identity proof, address proof, photograph). For processing, a nominal fee is charged.
Step 3: Reserving the Company Name
- Name Selection: As the company name has to obey MCA naming guidelines, it should not be the same as any existing company.
- Name Availability Search: Search for the name availability in the MCA portal to check the availability of the chosen name.
- Filing RUN: File Form RUN for reserving the uniqueness of the company name. You can give up to two names in the application..
Step 4: Drafting Memorandum of Association (MoA) and Articles of Association (AoA)
- MoA and AoA: The Memorandum of Association (MoA) provides for the objectives of the company, while the Articles of Association (AoA) contain rules regarding the internal management of the company.
- Key Clauses: The MoA and AoA would have clauses on the name of the company, the registered office, the object clause, share capital, and the powers of directors.
- Professional Help: Although it is not compulsory, it is better to take professional help for a perfect drafting of the MoA and AoA.
Step 5: Filing Incorporation Documents with the Registrar of Companies (RoC)
- Documents Needed: Place the MoA, AoA, particulars of the director and shareholder, declaration of compliance, and any other relevant documents as required.
- Filing SPICe+: File the Form SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) online at the MCA portal. Attach the relevant documents, together with stamp duty and registration fees.
- Stamp Duty and Fees: Levy the required stamp duties and registration fees as per the incorporation state.
Step 6: Obtaining Certificate of Incorporation
- RoC Processing: The application will be processed and details verified by the RoC after submission of all documents.
- Certificate Issue: Following the RoC’s approval, a Certificate of Incorporation (CoI) alongside a Corporate Identification Number (CIN) is issued by the RoC, which signifies the legal existence of the company.
Step 7: Obtaining PAN, TAN, and Bank Account
- PAN and TAN: Apply for the company’s Permanent Account Number and Tax Deduction and Collection Account Number through the eligible portals.
- Open a current bank account in the name of this company using the Certificate of Incorporation, PAN, and other necessary documents.
Conclusion
In conclusion, Registration of private limited companies in India is a legal process that provides for the issuance of Digital Signatures and Directors’ Identification Numbers, the registration of incorporation documents, and a Certificate of Incorporation. Some of the economic advantages are that the company has limited liability, possesses a separate legal identity, has perpetual existence, and can raise funds easily, including FDI. The business may, however, face restrictions such as share transfer limitations, restrictions on the number of members, and the inability to issue a prospectus. Hence, from an analytical perspective, decision-making can be carried out, weighing the positives and negatives. For business advice, consider Business Consulting Services today.
