Private Limited Company
Private Limited Company
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Limited Liability
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Attracts Investors
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Taxation
Private Limited Company
A Private Limited Company (Pvt Ltd) is one of the most common types of business structures in India. It is incorporated under the Companies Act, 2013, and governed by the Ministry of Corporate Affairs (MCA). Here’s a detailed breakdown
Key Features
- Minimum Number of Members: A Private Limited Company must have at least 2 shareholders and 2 directors.
- Maximum Number of Members: The maximum number of shareholders is 200.
- Separate Legal Entity: The company is treated as a separate entity from its owners. This means that it can own assets and incur liabilities independently.
- Limited Liability: The shareholders’ liability is limited to the amount of unpaid capital on the shares they hold.
- Perpetual Succession: The company continues to exist even if the ownership changes due to the death or departure of shareholders.
- Shares Cannot Be Publicly Traded: Shares cannot be freely transferred or sold to the general public, maintaining a closer circle of control.
Documents Required for Incorporation
Directors’ Identification Number (DIN) and Digital Signature Certificate (DSC) of all directors.
Memorandum of Association (MOA): Outlines the objectives and business purpose.
Articles of Association (AOA): Governs the company’s internal management.
- Proof of address for the registered office of the company.
- Identity and address proofs of all shareholders and directors.
Compliance Requirements
Registrar of Companies (RoC) Filings: Regular filings, including the annual return and financial statements, are required to be filed with the RoC.
Board Meetings: Must be conducted every quarter.
Annual General Meeting (AGM): Must be held within six months from the end of the financial year.
Statutory Audit: Mandatory audit of financial statements by a certified auditor.
Tax Compliance: The company must file income tax returns and comply with GST (if applicable).
Advantages
Limited Liability: Protects personal assets of shareholders.
Attracts Investors: Being a registered company can attract more investors.
Separate Legal Existence: Offers credibility and makes it easier to secure loans or credit.
Disadvantages
Cost of Incorporation: Higher as compared to sole proprietorship or partnerships.
Compliance Burden: Must comply with numerous legal requirements and formalities.
Types of Private Limited Companies
Limited by Shares: Liability is limited to the amount unpaid on shares.
Limited by Guarantee: Liability is limited to the amount each member agrees to contribute in case of winding up.
Unlimited Company: Members have unlimited liability, though this is very rare.
Process of Incorporation
Apply for DSC & DIN: Obtain a Digital Signature Certificate (DSC) and Directors Identification Number (DIN) for directors.
Name Reservation: File for name approval with the MCA (through the RUN service or SPICe+ form).
Submission of Documents: Submit incorporation forms such as SPICe+, MOA, AOA, along with identity and address proofs.
Certificate of Incorporation: Upon verification, the RoC issues a Certificate of Incorporation, along with the company’s CIN (Corporate Identity Number).
Taxation
- A Private Limited Company is subject to corporate tax. The rate varies depending on the turnover of the company and whether it avails benefits under specific schemes (such as reduced tax rates for MSMEs).
- Companies with turnover up to ₹400 crore are taxed at 25%, while others are taxed at 30% (plus cess and surcharges).
Types of Shares in a Private Limited Company
- Equity Shares: Represent ownership in the company. Shareholders receive dividends and have voting rights in proportion to their shareholding.
- Preference Shares: Preference shareholders receive a fixed dividend before equity shareholders but usually do not have voting rights. In case of liquidation, they are paid before equity shareholders.
- Convertible Preference Shares: These can be converted into equity shares under specific conditions or at a predetermined date.
- Sweat Equity Shares: These are issued to directors or employees for their contribution to the company. It’s a way of rewarding them without an immediate monetary payout.
Funding Options for a Pvt Ltd Company
- Equity Financing: Raising capital by selling shares of the company to investors. This dilutes the ownership of the founders.
- Debt Financing: Borrowing funds through loans or issuing bonds. The company repays the loan with interest, without giving up equity.
- Venture Capital / Private Equity: Attracting venture capitalists or private equity investors in exchange for equity or convertible debt.
- Angel Investors: High-net-worth individuals who invest in startups in exchange for equity.
- Bank Loans: The company can apply for business loans from banks or financial institutions.
- Crowdfunding: Raising small amounts of capital from a large number of people, usually via online platforms.
Taxation for Private Limited Companies
- Corporate Tax Rate: Generally, the corporate tax rate for a Private Limited Company is 25% for companies with turnover up to ₹400 crore. Companies with turnover beyond this limit are taxed at 30%.
- Minimum Alternate Tax (MAT): If the taxable income as per normal provisions is lower than a certain percentage of the book profits, then the company needs to pay MAT at 15%.
- Dividend Distribution Tax (DDT): Abolished as of FY 2020-21. Now, dividends are taxed in the hands of the shareholders as per their applicable slab rate.
Private Limited Company vs Other Structures
- Pvt Ltd vs LLP: A Limited Liability Partnership (LLP) is more suitable for professionals who do not want the complexity of managing shares or complex board structures. Pvt Ltd companies are more attractive for investors but have higher compliance requirements.
- Pvt Ltd vs Sole Proprietorship: A Sole Proprietorship is simpler to run but doesn’t offer limited liability. Pvt Ltd structures are better for growth and scalability.
- Pvt Ltd vs Partnership Firm: While a partnership firm is easier to set up, it doesn’t provide limited liability protection. Pvt Ltd companies are better for larger businesses with higher risk.
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