_edited.png){kind=small}
A Private Limited Company is the most popular business structure in India, preferred by entrepreneurs for its distinct advantages such as limited liability, perpetual succession, and ease of raising capital. This detailed guide aims to explore various aspects of Private Limited Companies in India, from their formation to their benefits and regulatory requirements.
WHAT IS A PRIVATE LIMITED COMPANY?
A Private Limited Company in India is a privately held business entity, which is limited by shares. The liability of the shareholders is limited to the amount of shares held by them. Unlike a Public Company, a Private Limited Company cannot freely transfer its shares to the public and is restricted to a smaller number of shareholders.
KEY CHARACTERISTICS
Limited liability: Shareholders are only liable to the extent of their share capital, which means their personal assets are protected in the event of the company's failure.
Most loved business structure: Private Limited Company is the most loved business structure in India. They are easy to register and almost 93% of the companies in India are registered as Private Limited Companies.
Separate legal entity: A Private Limited Company is considered a separate legal entity from its shareholders, which allows it to enter into contracts, borrow money, sue and be sued in its own name.
Easier to raise capital: A Private Limited Company can raise capital through the sale of shares to the public, which can be more efficient than borrowing money from banks.
Professional management: Private Limited Companies are required to have a board of directors who are responsible for managing the business, which can lead to more professional management and decision-making.
Perpetual succession: A Private Limited Company has perpetual succession which means the company continues to exist even if the shareholders or directors change.
Brand image: A Private Limited Company creates a better brand image and reputation than a sole proprietorship or partnership.
Separation of ownership and management: Shareholders can be different from the management which allows them to focus on their own business while the management runs the company.
Compliance: Private limited companies have to comply with various regulations, which can be beneficial in terms of building a strong reputation and gaining credibility with customers and suppliers.
Taxation: private limited companies are subject to corporate tax which in many cases is less than individual tax.
FORMATION OF A PRIVATE LIMITED COMPANY
Steps to Register a Private Limited Company
Obtain Digital Signature Certificate (DSC): Digital signatures are mandatorily required for the online filing of the forms with the Ministry of Corporate Affairs (MCA).
Acquire Director Identification Number (DIN): Each director must obtain a DIN.
Name Approval: The desired company name must be approved by the Registrar of Companies (RoC).
Incorporation Filing: Submit the important documents along with the Memorandum of Association (MOA) and the Articles of Association (AOA) to the Registrar of Companies (ROC).
Certificate of Incorporation: Upon verification, the ROC issues the Certificate of Incorporation, signifying the formation of the company.
Documentation Required
For Indian Directors and Shareholders
Passport size photo
PAN Card
Aadhaar Card/Driving License/Passport/Voter ID
Latest Bank Statement
In case of foreign Directors and Shareholders:
Passport size photo
Passport (apostilled from Indian Embassy)
Latest Bank Statement or Electricity Bill (apostilled from Indian Embassy)(must have the full name and complete address of the director/shareholder)
For Registered Office Address:
Latest Electricity Bill
Registered Rent Agreement, if the office address is rented
NOC from the owner
ADVANTAGES OF A PRIVATE LIMITED COMPANY
Limited Liability Protection: Shareholders’ liability is limited to the amount they have invested in the company. Benefit: Personal assets of shareholders are protected from the company’s debts and liabilities. Example: If a company faces financial difficulties, shareholders are only liable for their investment and not any additional amount.
Separate Legal Entity: A Private Limited Company is considered a separate legal entity from its owners. Benefit: The company can own property, incur debts, enter into contracts, sue, and be sued independently of its shareholders. Example: The company can own assets such as real estate and equipment in its name, providing a clear distinction between personal and business assets.
Perpetual Succession: The company’s existence is not affected by changes in ownership or management. Benefit: The company continues to operate even if shareholders or directors leave or pass away. Example: The death or resignation of a shareholder does not disrupt the company’s operations or legal standing.
Fundraising Capability: It is easier to raise capital through equity financing. Benefit: Companies can issue shares to raise funds, attracting investors and enabling expansion. Example: A startup can issue shares to venture capitalists or angel investors to secure funding for growth.
Credibility and Trust: Private Limited Companies are seen as more credible and trustworthy compared to unregistered business entities. Benefit: Increased trust from banks, financial institutions, customers, and suppliers. Example: Banks may offer loans more readily to a Private Limited Company, viewing it as a lower risk than a sole proprietorship.
Tax Benefits: Eligible for various tax deductions and benefits under Indian tax laws. Benefit: Potential for significant tax savings. Example: Deductions on business expenses, depreciation of assets, and other tax incentives can reduce overall tax liability.
Ownership and Control: Shareholders can maintain control over the company’s operations through the board of directors. Benefit: Owners can retain decision-making authority while benefiting from outside investment. Example: Founders can issue shares to investors without losing control over the company’s strategic direction.
Ease of Transferability: Shares can be transferred to new owners without affecting the company’s continued existence. Benefit: Simplifies the process of bringing in new investors or changing ownership Example: A shareholder can sell their shares to another individual or entity, allowing for smooth transitions in ownership.
Professional Management: A Private Limited Company can hire professional managers and executives. Benefit: Enables the business to benefit from experienced and skilled management. Example: Hiring a professional CEO or CFO can lead to better strategic decisions and improved business performance.
Brand Recognition and Market Position: Establishing a Private Limited Company enhances the company’s brand and market position. Benefit: Increased customer confidence and marketability. Example: A registered Private Limited Company is often perceived as more stable and reliable, attracting more customers and business opportunities.
DISADVANTAGES OF A PRIVATE LIMITES COMPANY
Compliance Burden: Adherence to numerous regulatory requirements.
Cost of Formation and Maintenance: Higher costs compared to Limited Liability Partnership (LLP).
Limited Share Transferability: Restrictions on transferring shares.
Disclosure Requirements: It is mandatory to file annual returns and financial statements with the ROC.
REGULATORY COMPLIANCES FOR A PRIVATE LIMITED COMPANY
Annual General Meeting (AGM): Must be held every year.
Annual Returns: File annual returns with the ROC.
Financial Statements: Submit audited financial statements.
Income Tax Filings: Annual income tax returns must be filed.
Statutory Registers: Maintain registers such as the Register of Members, Register of Directors, etc.
TAXATION FOR A PRIVATE LIMITED COMPANY
Private Limited Companies are subject to corporate tax rates. As of the latest regulations, the basic corporate tax rate for domestic companies is 22%, plus applicable surcharge and cess. Additionally, new manufacturing companies benefit from a reduced tax rate of 15%, plus surcharge and cess.
CONCULSION
A Private Limited Company is a versatile and advantageous structure for businesses in India, offering protection and growth opportunities. However, it requires careful consideration of the regulatory and compliance requirements. For entrepreneurs seeking to establish a scalable and credible business, understanding the intricacies of a Private Limited Company is crucial.
If you are planning to start a Private Limited Company in India, it is advisable to consult with legal and financial experts to ensure all statutory obligations are met and to make informed decisions throughout the process.
To register your Private Limited Company, click here.
Comments