Features of Private Companies

These are some features that distinguish private companies from other types of
companies:

i. No minimum capital required: There was a minimum paid-up share

capital requirement of Rs. 1 lakh previously, but that is omitted now.
ii. Minimum 2 and maximum 200 members: A private company can
have a minimum of just two members (but just one is enough if it a One
Person Company), and a maximum of up to 200 members.
iii. Transferability of shares restricted: Private companies cannot
freely transfertheir shares to the public like public companies. This is
why stock exchanges never list private companies.
iv. “Private Limited”: All private companies must include the words
“Private Limited” or “Pvt. Ltd.” in their names.
v. Privileges and exemptions: Since private companies do not freely
transfer their shares and involve limited interest by members, the law has
granted them several exemptions that public companies do not enjoy.

Types of Private Companies

Private companies are of three types depending on their members’ liabilities:

a. Limited by shares: The liability of the members is limited to the

amount unpaid to the company with respect to the shares held by them.
b. Limited by guarantee: Here the members’ liabilities are limited to the
amount of money they guarantee to pay in case the company is wound-
up.
c. Unlimited liability: The liability of members is unlimited in this type of
private companies. Personal assets of members can be attached and sold
when the company is being wound-up.
In terms of the number of members, a private company can also be a One Person
Company. These types of companies have just one member/shareholder as their
promoter. The new Companies Act of 2013 introduced such types of companies.

Further, even small companies that have limited paid-up share capitals and turnover
amounts, as defined under Section 2(85), are treated as private companies under
Indian company law.
Formation of Private Companies
Minimum 2 and maximum of 200 members can come together to form a private
company by submitting an application to that effect to the Registrar of Companies
along with a subscribed copy of their Memorandum of Association and other
required documents after payment of prescribed fees.

The Memorandum must state the name of the company (which should include the
words “Private Limited”), the address of its registered office, its objects and
purposes, and extent of liability of its members. It must also mention the details of
subscribers to the Memorandum.

Apart from this, the Companies Act has also prescribed certain other compliances,
such as requirements relating to names of private companies, their Articles of
Association, details of members, transferability of shares, etc.

Privileges of Private Companies

The Companies Act has provided certain privileges and exemptions to private
companies that public companies do not possess. These privileges accord them
greater freedom in conducting their affairs. Here are some examples of them:

 No need to prepare a report for annual general meetings.

 Only 2 minimum directors required.

 No need to appoint independent directors.

 They can adopt additional grounds for the disqualification of directors

and vacation of their office.

 They can pay greater remuneration to their directors than compared to

some other types of companies.

Limitations of Private Companies

Despite all the advantages they offer, private companies also have the following
limitations:

 Private companies cannot freely transfer shares to the public.

  They find it more difficult than public companies to access
external financial support.

 Shareholders have greater risks and liabilities.

Solved Examples on Private Companies

Question 1: Rajiv owns a garments shop with his two brothers. They decided to
diversify its business by creating a company that will manufacture garments. They
are facing some financial difficulties in this regard.

For example, they collectively have just Rs. 80,000 as capital. Furthermore, they
wish to limit their liabilities because of such financial shortcomings. Can they form
a private company under such conditions?

Answer: Rajiv and his brothers can definitely incorporate a company under such
conditions. Although the Companies Act had previously prescribed a minimum
capital requirement of Rs. 1 lakh, this is now omitted. Considering the second
condition, they can opt for a company limited by shares or guarantee.

Question 2: Briefly describe the process Rajiv and his brothers will have to
undertake to create their company.

Answer: Firstly, they will have to file with the Registrar of Companies an
application form with requisite fees. This form will be accompanied with its
Memorandum and Articles of Association. This Memorandum will contain details
like their company’s name (suffixed with “Pvt. Ltd.”), their objectives, the address
of their office, etc.

After this, the Act also requires them to provide their own personal details to the
Registrar. The company will come into force after the Registrar grants a certificate
of incorporation to them.