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What is a Private Limited Company

What is a Private Limited Company?


Private Limited Company is a very old school and is the most accepted legal entity form in India wherein at least two people shall come together, pool the required investment (there is no limit on minimum contribution) and start executing the legitimate business idea that they had conceived. Startups and businesses with higher growth aspiration popularly choose to register their business entity as a Private Limited Company as its a most suitable business structure.

In India, every Private Limited company is registered under the Companies Act 2013 with a Central Government and that’s why irrespective of the State where your Registered Office is located, you can run the business in all over India. A central government body namely Ministry of Corporate Affairs, commonly known as MCA, regulates all the Private Limited Companies in India.

Almost 93 per cent of the companies incorporated in India are registered as Private Limited Companies. Don’t you think there must be some “Better than I thought of” kind of benefits why so many people choose Private Limited Company over so many other types of registrations out there.!

If we go characteristics wise, a Private Limited Company is a registered company which limits the liability of the owner to the contribution made by them i.e. only upto the value of shares held by them, it limits the number of shareholders/members to 200 and it restricts shareholders from trading their shares publicly.

Legally, Private Limited Company is defined as follows - 

A Company having a minimum 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;

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

To put it in simple words, in a Private Limited Company, 

  • you cannot transfer your shares to the public in general neither can you offer its shares to the public at large, unlike in a Public (Limited) Company. 

  • Except in case of One Person Company, where there is only one member the maximum number of members shall be 200 not more than that, else it is no longer identified as a Private Limited Company.

Read our blog to Know more about the difference between a Private limited and Public limited Company

When should you choose a Private limited company?

i. Big Business Idea that can be scaled

ii. Need External Funding

iii. More Than one business partners

iv. When you have a business idea which can be made bigger. To make a business 

bigger, you will need some external help like Loan, Investor Funding, Debt 

Funding etc. In exchange for investment, you will have to sell some shares of your company. Selling Shares of a company is possible only in a Private Limited company.

What are the CONS of having a Private limited company?

There is only 1 major con i.e. adverse point of a Private Limited Company and that is - Higher Compliances

With more power, comes more responsibilities. As any private limited or one person company has more power here you will have some more responsibilities.

    1. Regular ROC filings

    2. Tax Filing

    3. and Audit (when your turnover crosses Rs.1.5 Crore)

But you need not worry, there are more than 18 lakh private limited companies in India and they are running well. 

To manage your regular compliance, LegalDocs is there to help you while you just focus on your business.

Basic Criteria for Registering a Private Limited Company  

1. You need a minimum of two members (there should be at least 2 Directors).
# These members could also be the Director of the company. This way, they can be both Managers and Owners of the company. Thus, it is the most suitable form of entity for a privately held small business entities. 

# Foreign nationals or NRIs can also become a member and/or director of a private limited company but, at least

 one director shall be an Indian National.
# Even corporate entities including LLPs, Other Private Limited Companies, Foreign Corporate entities, Body Corporates, and such other persons can also be a member in a Private Limited Company.

To remember, A natural person (human being) can be both a director and shareholder, while a corporate legal entity can only be a shareholder in a Private Limited Company.

2. You should have some capital (monetary investment) that you would want to invest in your business.

# Basically, CAPITAL is that amount that you will have to invest from your own pocket to start the business.

# This amount shall be from the pocket of the members and NOT from any other external source like bank loans, personal credit from a friend, third person’s investment, etc.

# The expense that you would incur to incorporate the Private Limited Company (Government Fees to register a company) depends on the CAPITAL of your company. More the Capital, more the expense.

3. You need a place from where you will start this business, which will be your Registered Office address.

# If you do not have a separate place of work, even your home could be your Registered Office. It is always better to have some Owned property (residential home) as your Registered Office instead of any Rented place (temporary work space).

# You can have your place of business at a different place and Registered Office at a different place. 

# This place shall be a properly constructed premise where you have electricity supply and/or a phone connection. A ground or roughly built space could not be a Registered Office.

# You can have Registered Office in one state of India and place of business in multiple or all states of India.

# Same as in the case of capital, the expense that you would incur to incorporate a Private Limited Company (Government Fees to register a company) depends on the STATE in which you want to Register your company.

Benefits of Private Limited Company Registration 

When a business is registered as a Private Limited Company, it gives numerous benefits, which you are deprived of while being a Sole Proprietor or a Partnership Firm. The benefits that an Incorporated Private Limited Company reaps are -

# It is considered as a Separate Legal entity which means that it becomes its own legal business structure, separate from the individuals who had found the business;

# It gives you Protected Liability. Let’s put it this way - when you start a business as a proprietorship or a partnership firm, you put extreme efforts and most importantly you invest a lot of money, from every source possible. As the founder and owner, you are responsible not only for the benefits, assets and profits but also for all the debts, liabilities and losses; here, responsible means, personally liable for debts and liabilities.

However, when your business entity is an Incorporated Company, you are responsible only for that amount of money which you personally invested. Your personal assets cannot be used to satisfy the debts and liabilities of the incorporated business entity.

# It gives better ability to bring in external Investment i.e. you can raise capital by offering shares in exchange. If you Incorporate your business as a Public Limited Company, you can even list your company on various Stock Exchanges and thus reach to a wide range of people so as to collect ample amount of required capital. 

# It separates Management from Ownership so eventually, Directors are the managers of the business and its day to day activities. Whereas, Shareholders who are the actual owners,  reaps the benefits of the investment they made into the business.

# Also, when your entity is registered with Central Government, namely MCA, an Incorporate Company has more credibility with potential customers, vendors and employees which is helpful for efficient operations.

# Most importantly, it helps you in expansion. This credibility helps you bring more Venture Capitalists i.e. Big Investors, which helps you expand your business both organically and inorganically.

Thus, Private Limited Company can help you do everything that any established business entity that you idealise or look upto can do..!

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