Private Companies: Definition, characteristics, merits, and demerits (2024)

Law and You > Corporate Laws > Companies Act, 2013 > Private Companies

A private limited company is a separate legal entity formed under Companies Act, 2013. It is generally formed by small businessmen who want to own a company but keep its affairs private. This type of business entity limits owner liability to their shares. Private limited company is held by few individuals privately having a separate legal entity.

Under the old companies act, that is, Companies Act, 1956 private limited companies enjoyed certain privileges. There were provisions which were expressly not applicable on private limited companies. But the new Act has modified that and quite a few provisions which were applicable only on public limited companies are now applicable even on the private ones.

Section 2 (68) of Company Act, 2013:

“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher 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:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company,

were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

Section 2(68) of Companies Act, 2013 defines private companies. According to that, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This restriction is the basic criterion that differentiates private companies from public companies. From this Section of the Company Act we can obtain following characteristics.

Characteristics of the Private Limited Company:

Limitation on Membership:

Private companies can have a maximum of 200 members and minimum 2 (except for One Person Companies). This number does not include present and former employees who are also members. Moreover, more than two persons who own shares jointly are treated as a single member. Less members means less complexity and confusion in decision making and management.

Paid-Up Capital:

This definition had previously prescribed a minimum paid-up share capital of Rs. 1 lakh for private companies, but an amendment in 2015 removed this requirement. Private companies can now have a minimum paid-up capital of any amount.

Transferability of Shares:

Companies Act, 2013 expressly restricts transfer of shares. This is done to prevent takeover of small businesses by big public limited companies. It can also not purchase its own shares. Private companies cannot freelytransfertheir shares to the public like public companies. Hence shares of private limited companies are not listed on stock exchanges.

Name of Company:

A private company must include the words “Private Limited” or “Pvt. Ltd.” in their names.

Limited Liability:

The liability of each member or shareholders is limited to the amount of shares he holds. He will not be required to pay more than the extent of the face value of share he holds. It means that if a company faces loss under any circ*mstances then its shareholders are liable to sell their own assets for payment. The personal, individual assets of the shareholders are not at risk.

Perpetual Succession:

A company hold ‘perpetual succession’ which means continuity or uninterrupted existence until it is dissolved legally. Thus the life of the company keeps on existing forever. The company keeps on existing in the eyes of law even in the case of death, insolvency, the bankruptcy of any of its members or change in the membership.

Separate Legal Entity:

Unlike sole proprietorship andpartnership a companyenjoys separate legal entity wherein even if the shareholders, directors or members of a company die, the company still continues to stay in existence. It can be taken over by other people who can then continue to run the business. Overall the company has the legal capacity to own property and also incur debts.The members and the shareholders of the company are free from the liability to the creditors for such debts.

Number of Directors:

A private company must have at least two directors, and at least one director in case of an OPC.

Index of Members:

A private company has a privilege over the public company as they don’t have to keep an index of its members whereas the public company is required to maintain an index of its members.

Legal Formalities:

The legal formalities in the formation of private limited companies are less compared to the formation of public limited companies.

Prospectus:

Prospectus is a detailed statement of the company affairs which is issued by a company for its public. The Company Act, 2013 prohibits any invitation to the public to subscribe for any securities of the company. Hence there is no such need to issue a prospectus and hence the stringent provisions of the Act related to the issue of prospectus are not applicable to private companies.

No Deposits from Public:

The Act restricts Private Companies to accept deposits from public in any form. Private Companies can borrow money only from Financial Institutions such as Banks in order to scale their business.

Minimum Subscription:

It is the amount received by the company which is 90% of the shares issued within a certain period of time. If the company is not able to receive 90% of the amount then they cannot commence further business. In the case of a private limited company, shares can be allotted to the public without receiving the minimum subscription.

Other Characteristics:

Privileges of Private Companies

The Companies Act has provided certain privileges and exemptions to Private Limited Companies that other types of companies are not generally entitled to such as:

• No need to prepare a report for annual general meetings.
• Only 2 minimum directors required.
• No need to appoint independent directors.
• They can adopt additional grounds for the disqualification of directors and vacation of their office.
• They can pay greater remuneration to their directors than compared to some other types of companies.

Limitations of Private Companies

• Private company cannot freely transfer shares to the public.
• They find it more difficult than public companies to access external financial support.
• Shareholders have greater risks and liabilities.

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