Understanding & Registering a Private Limited Company (UPDATED June 2020)

Most start-ups these days prefer to form a private limited company. This makes it easier for them to raise capital through angel funding and venture capitalists. They also offer employee stock options with a view to retain talent.

Banks and other financial institutions also find it comfortable to lend to private companies than to partnership firms and sole proprietorships. Without funding and talented employees, any company (especially in the services space) cannot expand.

Understanding Private limited company

This is a company which offers limited liability to its members. It also places certain restrictions on ownership. These restrictions are mentioned in the Indian companies Act, it is essential to prevent hostile takeover of business.

The restrictions as prescribed under the Companies Act are mentioned below –

  • Existing shareholders are not allowed to sell / transfer their shares to others without first offering the same to the rest of the shareholders for purchase
  • Shareholders are not allowed to offer their shares to public over the stock exchange without adequately notifying the authorities / exchange
  • Number of shareholders cannot exceed 50 members

Members of Private limited company 

A private limited company should have a minimum of 2 members as directors and shareholders. It can have a maximum of 15 directors and 50 shareholders. The restriction placed on private limited companies is less compared to public limited companies.

In case private limited companies, there is no requirement to disclose the books of accounts to the public. This provides them ample flexibility to focus on long term growth. The number of shareholders is also minimal; hence, it is not as challenging to appease all of them.

Advantages of Private Limited Company

  • Members’ liability is limited: The members’ liability is to the extent of capital contributed during the formation of the private limited company. The personal property will not be included to settle debts in case of bankruptcy or liquidation of assets of the company.
  • Raising equity becomes easy: Most venture capitalist / strategic investors prefer to fund private limited companies. They have a clear demarcation of directors and shareholders. The liability of the members’ is also limited. Private companies have the ability to accommodate equity funding without much structural alterations.
  • Debt access: Banks and financial institutions more comfortable in lending to private limited companies. They also have the option of raising funds by issuing warrants, debentures and other debt instruments.

Documents needed for registration of private limited company

The directors and shareholders have to submit the below mentioned copies –

  • Copy of PAN card
  • Copy of passport (in case of foreign nationals / NRIs)
  • ID and Address Proof (in addition to PAN card)
  • Photo – passport size
  • Specimen Signature

For registration of office, below mentioned documents become necessary –

  • Copy of bank statement/ electricity / gas / telephone bill (latest)
  • Property deed (own property ) or Rental /Lease agreement copy (Notarised)
  • NoC from property owner

The registration of company can be done online, go here for further information. All the above documents have to be filed online. Physical presence is not required at all. If all the documents submitted are in order and depending on the workload of the registrar of companies. The company should be registered in less than 15 days.

The registration process is governed by Ministry of Corporate Affairs. The online registration process is an initiative which was launched as part of “Start-up India” campaign. There are few registration norms which are to be followed as part of the online registration – Digital Signature Certificate, Director Identity Number, E-form filing are mandatory while registering the private limited company. For more details on the process go here. And if you are missing any forms, you can download them here.

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