Reasons why a Private Limited Company is beneficial

Reasons why a Private Limited Company is beneficial

Section 2(20) of Companies Act 2013 defines a ‘company’ as a company incorporated under this Act or under any previous prevailing company law. There are two specimens of companies based on the Companies Act 2013; they are Public Company and Private Company. According to Companies Act 2013 Section 2(68), a private company means a company that holds at least a significant capital of one lakh rupees or higher capital amount the company has invested and which are according to the terms and conditions of the Articles of Association of a company.

According to Companies Act 2013, the Articles of Association have the following terms and conditions:

  • Articles of Association of a private limited company do not allow the company to transfer its shares to anybody who is not a part of the company.
  • They also limit the number of members of a private limited company to two hundred which does not include the employee members whether they are present employees or were past employees of the private limited company at any given point of time.
  • The Articles of Association of a private limited company do not permit any requests to the public to subscribe for any securities owned by the company. No member of a private limited company can under any circumstances transfer his/her shares to any person outside of the company, nor can he/she invite any person to own a share in the company. Any such act for a private limited company is illegal under the Companies Act 2013.

Advantages of a Private Limited Company

The major benefit of a private limited company is that your liability is limited. If you are looking forward to starting any business; it is always beneficial to register the same under a private limited company as in future, if the business faces any losses the liability would be limited considering that the company is different and the owner is different, and you would only be liable for your share in the company.

How much risk is to be taken depends totally on your decision. You can plan accordingly and decide how much money is to be invested as a shareholder in the company. A private company can be formed by two or more persons under the Companies Act 2013 Section 3(1) (b). Thus starting business becomes a very easy task as you do not need to involve more than two people in the formalities to be carried out to register under a private limited company, unlike a public limited company.

A private limited company is exempted from the provisions of having an audit committee constituted by the Board of Directors under Section 177(1) of the Companies Act 2013.

It saves the charges of maintaining an audit committee as well as it helps to keep the crucial matters of the company private and secretive as no outsiders are involved, and the operations of the business can be carried on smoothly without the fear of information leak.

For a private limited company, it is not mandatory to have an independent set of board of directors under Section 149(4) of the Companies Act 2013. The owners of the company themselves can pose to be the directors of the company and take all decisions without consulting anyone else. It is one of the biggest advantages as decision-making becomes easy.

Directorship of a Private Limited Company

The directorship of a private limited company that is either a holding or subsidiary company of a public company will not be included in determining the maximum number of directorships that a person may hold in public companies which are restricted to ten. This is stated under Section 165(1) of the Companies Act 2013.

A private limited company can be granted an exemption from the constitution of a Nomination and Remuneration Committee under the section 178(1) of the Companies Act 2013. The Companies Act, 2013 under the section 178(5), has also exempted a private limited company from the constitution of a Stakeholders Relationship Committee. This is not possible in the case of a public limited company. The exemption saves the charges of maintaining such committees and this money can be invested in the business



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