What Is A Private Limited Company? A Complete Guide

By Indeed Editorial Team

Published 8 November 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

According to the Companies Act, 2013, a private limited company is a company whose article of association restricts the transferability of shares and prevents the public from subscribing to them. This is a distinct feature that differentiates private limited companies from other types of public companies. With the rapid business growth across the country, there is a demand to learn more about the distinct business entities in India and their legal terms and conditions. In this article, we discuss what is a private limited company, explore the various types of private limited companies and learn how to start one.

What is a private limited company?

Consider the following information to answer " What is a private limited company?":

Section 2 (68) of The Companies Act, 2013 defines a private limited company as a separate entity that is held privately and provides limited liability. It does not freely transfer its shares to the public like other public companies. In a private limited company, all business profits and liabilities belong to the company itself and stakeholders may not be responsible for debts incurred by the company.

Related: Product Based Vs. Service Based: What's The Difference?

Types of private limited companies

Here are some different types of private limited companies:

Private limited company by shares

A private company limited by shares is limited in capital based on the numbers of shareholders who are owed money on their shares. For these companies, the liability of shareholders is limited by the MOA (memorandum of Association) to the number of their shares or the amount which remains unpaid. The shareholders are not liable to pay more than their share capital invested in the company.

Private limited company by guarantee

In a private limited company limited by guarantee, the liability of the individual shareholder is limited to the amount he guarantees in the MOA. Therefore, they can be liable only up to the amount that they have guaranteed. In addition, they may invoke this guarantee only in case the company is permanently shut down.

Unlimited companies

An unlimited company is a separate legal entity. Unlimited corporations are businesses that have no restrictions on the liability of their members. Each member's liability may extend over the entire company's debts. It means members' personal assets can pay off debts incurred by the company.

Who can set up and run a private limited company?

A private limited company can have a minimum of two directors and a maximum of fifteen directors. In addition, at least two shareholders can have a legal distribution of shares of a private limited company. A total number of two hundred shareholders is acceptable.

Similarly, it requires at least two directors to manage a private limited company. They can be shareholders of the company. According to Section 2 (clause 68) of The Companies Act, 2013, any private limited company may have paid-up capital of 1 lakh rupees minimum or higher, which is specified by the government.

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Essential documents required for setting up a private limited company

Private limited companies require the following documents to set up:

  • Memorandum of association: It talks about the purpose of setting up a business, the nature of business, the objective of a company and the capital clause. It is a corporate document, which is also called a charter of the company and defines a company's relationships with shareholders and specifies the company's goals.

  • Article of association: This document talks about the internal operating system of the company. It explains the managing process, duties and responsibilities of each member, dividend policy, shareholder meetings and appointment of directors.

  • Certificate of incorporation: It is the certificate or license that the directors receive after submitting all required documents for registration. It is the primary document of authentication of the company and the Registrar of Companies(ROC) issues this document in India.

  • Other documents: Other documents include ID proof (PAN card, Aadhaar card), address proof (ration card, voter id), rental agreement, NOC from the property owner and a copy of the sale deed for the owned property for all directors and shareholders of the company.

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How to register a private limited company?

Here is a step-by-step breakdown of the entire registration process:

  1. Apply for a digital signature certificate. It is a digital equivalent of a physical signature and is a requirement for all directors and shareholders. Only authorised personnel can use such signatures.

  2. Apply for a director identification number(DIN). The Ministry of Corporate Affairs allots this 8 digit number to the person who wants to be the director of the company. It is a unique digital identity assigned to a director linked with the person's corporate endeavours, information and services on the internet.

  3. Check for availability of the company name. Before registering your company, check if the name you want for the company is available for registration. You can check it on the website of the Ministry of Corporate Affairs (MCA) state business filing agency portal.

  4. Provide the required documents to the ROC. Once you get the approval for your company's name, you can send all required documents to the registrar of companies (ROC). The ROC issues a certificate of incorporation and sends you a physical copy of the same.

  5. File the MOA and AOA. The next step is to file a memorandum of association (MOA) and an article of association (AOA). This is mandatory to register a private limited company.

  6. Issue a PAN and TAN. Issue a permanent account number (PAN) and a tax deduction and collection account number (TAN) with the formation of the company. Note that the process for acquiring PAN and TAN numbers for private limited companies requires registration for GST and provident fund as well.

  7. Open a bank account. This is the final step of the registration process. Open a bank account with the company's name to carry out all the major transactions of the company.

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Advantages of private limited companies

A private limited company offers the following advantages:

Opportunity for acquiring foreign investment

Foreign investors trust private limited companies more because of strict compliances, data availability on the site and the fact that they follow the ROC norms. In addition, a foreign entrepreneur can become a director of a private limited company, provided there is at least one director living in India. This makes foreign investors keener to invest in private limited companies rather than any other type of business entity.

Separate legal entity

Private limited companies are separate and independent and changes or replacements in shareholders or directors do not affect them. Any private limited company is established under a legal constitution. It means even if all members of the company leave or the company goes bankrupt, it still exists according to the law.

Can own properties

A private limited company can own any type of movable or immovable property. Assets and liabilities of the company are typically the responsibility of the company. In case of dissolution of the company, its liabilities are discharged in a specified sequence to the creditors, which reduces the individual liability of the shareholders.

Greater borrowing capacity

A private limited company can enjoy multiple avenues for borrowing funds. Banking and financial institutions often prefer to offer financial assistance to private limited companies. They have greater confidence in this type of business entity because of the transparency, compliance and partial data availability on government websites.

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Tax compliances and financial reports for a private limited company

Income tax filing

There are two different categories a private limited company falls under for income tax filing purposes—domestic and foreign. Each company files income tax returns and pays tax on the profits it makes within a given financial year. You can file the tax returns online once the income tax department of India issues a due date. It is important to note that online tax return filing requires a digital signature at the time of uploading.

Related: What Is Annual Income? And How To Calculate Your Income

Annual ROC filing

ROC annual filing is a record of audited financial statements and annual returns by the private limited company to ROC (Register of Companies). Under Sections 129 and 137 of The Companies Act, 2013, every company requires filing financial statements and submitting annual returns under Section 92. You may file both the records between 30 days to 60 days from the conclusion of the annual general meeting.

Balance sheet and profit-and-loss statement

A private limited company maintains a balance sheet and profit & loss statement to determine if the company has enough assets to meet the financial obligations. A balance sheet is a record of what the company owes and owns at a specific period. The purpose of a balance sheet is to calculate a company's net worth and provide an insight into the company's financial status.

The profit & loss statement is an income statement that includes the revenues, costs and expenses incurred during a specific time. This statement provides information about a company's ability to turn a profit by increasing revenue and reducing costs.

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