Department of Industrial Policy and Promotion (DIPP ) on 26th December 2018, introduced a press note proposing to make certain changes in the existing 2017 policy governing foreign direct investment...
When commencing a business, businessmen have multiple choices as to the kind of business entity that they can form. The Indian Company Law gives options including Private Limited Company, Public Limited Company, LLPs, Sole Proprietorships, etc. A businessman can form an entity as per the amount to be invested, a number of members, the burden of liabilities, etc. Off late, there are several benefits of private companies over public limited companies. Hence, there are various reasons why it has become a top-most choice of businessmen and is being chosen over the option of Public Limited Companies.
Recently, the Ministry of Corporate Affairs (MCA) has brought major changes in the incorporation of private limited companies. With the introduction of Companies (Registration Office and Fees) Amendment Rules, 2018, MCA has removed the fee charges at various stages of incorporation. The whole process of incorporation has become faster and smooth, even though stamp duty is still levied. The concept of “zero fees” has implemented for all companies with authorized capital up to INR 10 Lakhs.
What is a Private Limited Company?
Section 2(68) of the Companies Act, 2013, defines a Private Company. A private company under the Indian Laws means a company which via its articles-
- Puts restrictions on the transfer of its shares; and
- Can have up to a maximum of 200 members (except in the case of a One Person Company).
The minimum paid-up share capital for a private limited company is INR 1 lakh.
If two members of the company hold a share jointly, they will be treated as a single member.
The following shall, however, not be treated as the members of the company:
- individuals in the employment of the company;
- individuals who were members of the company while being in the employment of the company and continued being members once their employment with the company ceased.
What is a Public Limited Companies ?
Section 2(71) of the Companies Act, 2013, defines a public company as:
- A company that is not a private company;
- Has a minimum paid-up share capital of INR 5 lakhs.
If a company is a subsidiary of a company which is not a private company, the subsidiary company shall be deemed to be a public company under the Companies Act, 2013, even if it is a private company according to its articles.
What are the benefits of Private Companies over Public Limited Companies?
The following are the benefits of Private Companies over Public Limited Companies:
Minimum number of members
The minimum number of members required to form a private company is two while for a public company, it is seven.
As the concept of ‘zero fees’ for Private Limited Companies has now been introduced by the Government. This hardly leaves any difference in the costing aspect of incorporation of LLPs and Private Limited Companies. The procedural aspects of incorporation of Private Limited Companies have also been made easier. In the case of Public Companies, more compliances are required to be made and the procedure of incorporation is more complicated as compared to the incorporation of a Private Company.
Quorum in Annual General Meeting
For Private Limited, the minimum number of members required to be present is two while in the case of public companies, it is five.
No certificate of commencement of business required
Once a private limited company has been incorporated, it can begin doing its business activities immediately. There is no requirement to get the certificate of commencement from the relevant authorities. However, the public limited companies are required to get the certificate of commencement of business from the Registrar of Joint Stock Companies. Till the time this certificate is received, a public company cannot begin with its business activities, even if it has been duly incorporated.
Less complicated share allotment
A private limited company arranges its capital by private arrangement from its members. There is no involvement of the general public which is why share allotment in case of private companies is easier and less complicated. In the case of public companies, since the shares are to be allotted to the general public, a lot of compliances have to be done such as the issue of the prospectus. The general public as investors is a more complicated situation since the government is inclined to safeguarding the interest of the investors, in case of public companies.
No requirement of Statutory Meeting or Statutory Report
In a private company, there is no investor from the general public. Due to this reason, private companies are exempted from holding a statutory meeting while in the case of public companies, the same is mandatory. The public companies are also required to file the statutory report while the private companies are not required to do so.
No undesirable shareholders
In a private company, the transfer of shares is strict and subject to certain regulations. On the contrary, in case of public companies, the shares are freely transferable. This way the private limited companies can avoid the membership of individuals considered undesirable by the Board.
Control and Management
In the case of private companies, control and management are in the hands of the actual owners of the company. The members have a say but the major control stays in the hands of the owners. In the case of a public company, power and control are subject to one’s shareholding. Still, all the shareholders have their power and have a say in the control and management of the company. Every shareholder is considered important since there is involvement of the general public as investors in the case of public companies.
Loan to Directors
A private company is allowed to advance a loan to the director of the company without any approval of the central government. This is not the case when it comes to a public company and it requires the approval of the Central Government while lending money or giving guarantee/security to its directors.
No restriction on remuneration
A private company can easily remunerate its directors or staff in the management. It can also appoint anyone to an office of profit. The same is not possible in case of a public company since there are a number of approvals that would have to be taken and compliance that would have to be made if there has to be any appointment to an office of profit or remuneration paid to directors or managerial staff.
For a public company, the managing director, at one point of time cannot act as the managing director for more than two companies. His/her term of office will also be a maximum of 5 years. These restrictions do not apply to manage directors of private limited companies.
Private Companies have now become a very coveted business entity option for entrepreneurs in India. The reason for the same is that there are a lesser number of compliances and regulations as compared to public limited companies. Also, the business can be done more privately in case of private limited companies as opposed to public limited companies, where multiple disclosures have to be made. We hope that the article on the benefits of private companies over public limited companies was beneficial for you.
In case you require more information on private limited companies, public limited companies or any procedural aspect relating the to incorporation of both of these, contact Swarit Advisors.