This article is written by Tanay Khanna, a student of NLUO

What is a Private Limited Company?

A limitedcompany is a type of company that offers limited liability, or legal protection for its members or subscribers. Their liability is restricted to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. However, there are certain restrictions on a private limited company which are specified in the company’s rules and bylaws. In a private limited company, shareholders can neither transfer/sell their shares before offering them to the other shareholders nor can they offer their shares to the general public over any stock exchange.

Advantages of a Private Limited Company

The most prominent advantage of a limited company is that the liabilities of its owner and shareholders are limited. In a proprietorship form of business, the owner’s personal assets can be at risk in the event of insolvency, but this is not the case with a limited company. This is advantageous because unwelcome events like insolvency are not always under the owner’s control; therefore it becomes necessary to protect the personal assets of the businessman in the event of crisis.

A private limited company is considered as a different legal entity/ juristic person established under the Companies Act. It has its presence separate from its chiefs and parts. Private Limited Company status empowers you to be considered more important than a proprietorship/association status does. Working as a private limited company frequently gives suppliers and clients a feeling of trust in a business. Bigger associations specifically will incline toward in managing private limited company than proprietorship/organization associations. It is easy to draw-in quality workforce and attain strategic inspiration of employees by utilizing adaptable and extensive variety of management assignments. Moreover, sole proprietorships and partnerships pay income tax whereas limited companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax deductible costs that can be set-off against a company’s profits.

Another important feature of a private limited company is ‘perpetual succession’. It is a popular phrase that the directors may come and go the members may come and go, but the existence of a company remains forever. A company once incorporated remains alive unless and until it is wound up by following the procurements of Law. The demise, disability or dismissal of any of its members/shareholders does not affect the permanency of the company. Also, there is no compulsion for a Private limited company to start business/trading within any prescribed time period after its incorporation.

Private limited companies are also much easier to sell. Where it is proposed to sell the business as a going concern, all that is required is to transfer the entire shareholding to the purchaser and thus facilitate with the change in management and administration of the company. This will not affect the business activities of the company.

Procedure to incorporate a private limited company

For incorporation of a private limited company there must be at least 2 promoters, who will promote/incorporate the company. They can be individuals or corporate body. Another requirement is that there must be at least two directors. They can only be individual and not a corporate body or partnership firm. Generally in maximum cases directors and promoters are same individuals. Now to apply for the directorship of a company, firstly individuals will have to apply for DIN i.e. Director Identification Number in form DIN 3 along with affidavit of Rs. 10 (this may differ from state to state) as an attachment along with copy of PAN card and address proof which should either be notary attested or self-attested. This form: DIN 3 has to be attested by a professional i.e. CA/CS/CWA who will certify the photograph and that the documents attached are the true copy of the original documents. Then DIN 3 will be applied to the concerned authority.

One of the directors must have digital signature which can be attained by any of the DSC vender i.e. TCS/ Sify/ etc. These venders are known as certifying agencies who are duly recognized by the Controller of Certification Agencies (CCA) under the provisions of IT Act, 2000.

The promoters will have to apply for the name of the company to be approved with the concerned RoC of the State, where the company has to be formed in e-form INC 1 (Rule 9). This has to be done by the payment of Rs. 1000 through Credit Card or Net Banking, describing the capital of the company, state in which the company has to be incorporated and its main objectives. The promoter can apply for 6 names amongst which the RoC will approve only one. In case RoC rejects all the 6 names then the promoters will have two more chances to apply for the name again with the incurred fees while filing Form INC 1.

Once the name is approved, the promoters/directors will have to draft Memorandum of Association [Section 4(6)] and Article of Association [Section 5(6)]. In the MOA, the 5 clauses are mandatory i.e. Name Clause, Main object clause, capital clause (minimum capital required is Rs. 1,00,000) registered office clause and subscribers clause. The MOA shall be in respective form as prescribed in Table A, B, C, D and E of Schedule I to the Companies Act, 2013 as may be applicable.

And in AOA all the rules and By-laws of the company shall be in respective form as prescribed in Table F, G, H, I and J of Schedule I to the Companies Act, 2013 as may be applicable. The names of first directors are compulsory to be given in the AOA.

These MOA and AOA should be followed by the tables of subscribers which has to be signed by subscribers in their own handwriting along with the shares to be subscribed by them and against their name any person who will act as a witness will sign in the witness column. The subscribers will subscribe the shares in the company and will invest the minimum capital i.e. of Rs. 1,00,000. They can contribute by way of cheque or cash when the company gets incorporated and thus shares will be allotted to them.

After the AOA and MOA are drafted, form no. INC 7 will have to be filed with RoC (Rule 12-18) along with the article of association and memorandum of association. Directors will have to avail professional service i.e. from CA/CS/CWA to incorporate the company.A declaration, via Digital Signature, in Form No.INC.8 by an advocate or Practicing professional (CA, CS, CA) who is engaged in incorporation, and a person named in director as Director, Manager or Secretary, has to be attached with form INC 7 stating that all requirements related to incorporation has been complied with and all the document attached therein are genuine.

An affidavit in Form No. INC.9, has to be attached with form INC. 7, from each subscriber and from each person named as first director in the articles stating that he is not convicted of any offence in connection with promotion, formation or management of any company, he is not been found guilty of any fraud or misfeasance or of any breach of duty to any company during preceding five years, and all the documents filed with the Registrar contain correct, complete and true  information to the best of his knowledge and belief.

Form no.INC 7 will have to be filled along with the address for correspondence till its registered office is established, the particulars of every subscribers along with proof of identity, the particulars of first directors along with proof of identity, the particulars of interests of first directors in other firms or bodies corporate along with their consent to act as directors

The applicant will then make the payment of Govt. fees as well as stamp duty fees. If the fees is less than Rs.50,000 then through net banking or credit card and if it is more than Rs.50,000 then it can be paid through challan to be deposited in a bank. The E-forms the will be verified by the RoC at their level. If the E-forms are found to be genuine and gets approved by Roc, Certificate of Incorporation will be generated and will be dispatch online at the email id of the person/entity given in the e-forms.

According to Section 11 of the Act, after the commencement of the business activities of the company the Directors shall have to file a declaration with RoC in Form No. INC.21 (Rule 24) and in consonance with Section 12 a company must  have a registered office within 15 days of Incorporation and it shall file Form No.INC.22 (Rule 25) to verify the same.