When starting a business, choosing the right business structure is crucial for its success. One popular option for small to medium-sized enterprises (SMEs) is a Private Limited Company (PLC). A private limited company is a separate legal entity owned and operated by its shareholders, who have limited liability protection for their personal assets in case of business debts or liabilities.
In this article, we will explore what a private limited company is, the process of registering it, its benefits, and its differences from other business structures.
What is a Private Limited Company?
A private limited company is a type of business structure that is incorporated and registered with the Registrar of Companies in India. It is a separate legal entity that is owned and run by its shareholders, who invest in the company’s shares. In a private limited company, the shareholders have limited liability, which means that their personal assets are protected from any business debts or liabilities.
A private limited company is distinct from a public limited company (PLC), which is listed on a stock exchange and open to public investment. The key difference between a private and a public limited company is that in a private limited company, the shares cannot be traded publicly. The number of shareholders in a private limited company is limited to a maximum of 200. A private limited company is run by a board of directors, who are responsible for managing the company and making important business decisions.
How to Register for a Private Limited Company?
The process of registering a private limited company is straightforward but requires certain documents to be filed. Below are the following steps:
- Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN) for the proposed directors of the company.
- Reserve a unique company name through the Ministry of Corporate Affairs (MCA) portal.
- Draft and file the Memorandum of Association (MOA) and Articles of Association (AOA) with the Registrar of Companies (ROC).
- Obtain a Certificate of Incorporation (COI) from the ROC, which serves as proof of company registration.
It is important to note that the registration process may vary depending on the state where the company is being registered.
Private Limited Company Examples
There are many private limited company examples in various industries. Some of the well-known private limited companies in India include Infosys, TATA Consultancy Services, and Wipro.
Advantages of Private Limited Company
There are several advantages of a private limited company over other business structures, such as sole proprietorship, partnership, and public limited company.
- Limited Liability: One of the biggest advantages of a private limited company is limited liability protection. The liability of shareholders is limited to their investment in the company, and their assets are protected in case the company incurs losses or debts.
- Separate Legal Entity: A private limited company is considered a separate legal entity, which means it has its own identity, distinct from its shareholders. The company can own assets, enter into contracts, and sue or be sued in its name.
- Perpetual Existence: Private limited companies have perpetual existence, which means they continue to exist even if the directors or shareholders change. This provides stability to the company, making it a reliable business entity.
- Easy to Raise Funds: Private limited companies can raise funds from a variety of sources, such as bank loans, equity investments, and debentures. Investors and lenders are often more willing to invest in private limited companies because of their limited liability and separate legal entity status.
- Flexible Ownership: Private limited companies can have multiple shareholders, which makes it easy to divide ownership and control among the shareholders. This allows for more flexibility in management and decision-making.
- Tax Benefits: Private limited companies often enjoy tax benefits, such as lower corporate tax rates and the ability to claim certain deductions and exemptions. This can help reduce the company’s tax liability, leading to higher profits and better returns for shareholders.
- Brand Recognition: A private limited company is often viewed as a more professional and reliable business entity than a sole proprietorship or partnership. This can help build brand recognition and customer trust, which is crucial for the long-term success of the company.
What is the difference between a private limited and a public limited company?
The main differences between a private limited company and a public limited company are:
- Ownership: A private limited company is owned and controlled by a small group of shareholders, while a public limited company can have an unlimited number of shareholders.
- Disclosure requirements: Compared to private limited corporations, public limited companies must disclose more information including financial statements, annual reports, and other crucial data, for public limited corporations. There are fewer standards for transparency for private limited companies.
- Trading of shares: Shares of a public limited company can be bought and sold on a stock exchange, whereas shares of a private limited company cannot be sold on a stock exchange.
- Minimum number of directors: A private limited company must have at least two directors, while a public limited company must have at least three directors.
- Name: A private limited company must use the word “Private Limited” at the end of its name, while a public limited company must use the word “Limited” at the end of its name.
Choosing the right business structure is essential for any entrepreneur, and a private limited company offers several advantages over other business structures. With limited liability, perpetual existence, and greater flexibility in ownership and management, a private limited company can provide a stable and reliable business entity. Registering a private limited company involves certain legal requirements and document filings, but the process is straightforward. By understanding the advantages and differences of a private limited company, you can make an informed decision about the right business structure for your company’s success.