Limitation and Liability of Private Limited Company

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Limitation and Liability of Private Limited Company

The private limited company is a company registered under the Companies Act, 2013. It is owned by non-governmental organisations or a small number of shareholders or members of a company. 

However, the company keep its shares within the organisation without making them available for public trading on stock exchanges such as NSE and BSE. The Companies Act, 2013 allows the creation of different types of companies structures such as LLP, Private Limited Company, and One Individual Company. The company can choose any type based on their specific requirements.

A private limited company has a minimum paid-up capital. Its article of association limits the number of its members (except One Person Company), and restricts the right to transfer shares and any invitation to the public to subscribe to any of their company securities.

What is Limited Liability for a Pvt Ltd Company?

The limited liability in a private limited company protects the personal assets of shareholders during financial trouble or bankruptcy. It is because of many reasons:

• Separate Legal Entity: The company has a distinct identity from its members or shareholders and it is an artificial legal person. It has powers, rights, duties and obligations as prescribed by the law. It can own property in its name, incur debts, borrow money, enter into contracts and can do much more. However, in case of any debt or loss, the members have limited liability and they do not have to pay the debt from their personal assets. 
• Limited Share Capital: The investment shareholders in the company decide on the capital they invest and they are liable to repay for only the amount of the shares subscribed or the guaranteed amount they agreed to pay.
• No Investment of Personal Assets: During the financial loss and debts, the personal assets of shareholders are not at risk. The assets such as personal bank account, home, etc. Only the part of the investment they invest can be at risk.

Characteristics of Private Limited Company

The following are the characteristics of a Pvt Ltd company:

• Must have a minimum of 2 members and a maximum of 200 members.
• Must have a minimum of 2 directors and a maximum number of 15 directors.
• Having a perpetual succession means the company will continue in the eyes of the law in case of insolvency, bankruptcy or death of any member. The life of the company exists forever.
• Must have an authorised share capital of Rs. 1 lakh.
• Must use the words “private limited” after its name.
• Does not have to maintain an index for the members. 
• Issue a prospectus to the public to subscribe to the company share.

Types of Private Limited Company

The types of private limited companies depend on their member’s liabilities, which can be as follows:

Limited by Shares

The Memorandum of Association of this type of company limits the liability of its members to their nominal amount of shares or any unpaid amount. However, the shareholder cannot ask to pay more than his/her share capital invested in the company. 

Limited by Guarantee

In this type of company, the liability of its members is limited to the amount undertaken by each member in the Memorandum of Association. This means that the members are not liable for any amount greater than the guarantee. The guarantee of the members is only called upon in case of winding up of the company. This type of company best suits the clubs, trade associations, and societies that require minimal capital or funds.

Unlimited Liability

In this type of company, the members do not have a limit on their liability. This means the members are responsible for the entire amount of debts and liabilities. So, in case of a company winding up, the members have to pay all the debts by using their personal assets. Even, if the shareholders have unlimited liability, the company is treated as a separate legal entity. And its members cannot be sued individually.

Limitations of Private Limited Company

For medium or large-scale businesses, the private limited company is a good option. One of the advantages of Pvt Ltd company registration is limited liability but it has several disadvantages as well.

1. Complex Registration Process

The complete process of private company registration takes 10 to 15 days on average. It is a difficult process that includes multiple compliances as compared to proprietorship.

2. Compliance Formalities

The company have multiple post-incorporation compliances such as holding the board and general meetings, maintaining statutory registers and filing annual returns with the Ministry of Corporate Affairs each year. Also, the company have to comply with the tax and labour laws.

3. Unlimited Liability for Company

Members of the company only enjoy the benefit of limited liability but the company is fully liable to pay the debts. However, there are some cases in which the directors and members have to pay the debt:

• If in any act or contract, the name of the company is misdescribed, then those included in creating the contract are personally liable for it.
• In case of winding-up, if any fraudulent activity has been carried out to defraud creditors, those who were aware of such conduct are responsible for the company's debts on a personal level.

4. High Taxation

The rates of corporate tax are high in India for limited liability companies. However, this reduces the disposable income of the company and limits the scope of expenses, profit sharing and then reinvestment. The concept of double taxation is also similar where the profits are taxed at the corporate level as the business income and the personal level as the dividend. The high taxation is one part of the tax burden.

5. Strict External Regulations

The private limited companies work within a stringent framework of external regulatory bodies like the Registrar of Companies, Income Tax Department, Central Ministry of Corporate Affairs and respective State Governments. 

However, the authorities span their norms and regulations across multiple parts of the company’s formation and operations. These parts can be corporate governance and management, financial reporting, taxation, labour law compliances and other industry-specific compliances. Adhering to these norms and regulations places a substantial administrative burden on companies that affect their flexibility of management.

Conclusion

Limited liability separates the members from the company and protects their personal assets. Whereas on the other hand, in unlimited liability, the members are liable to pay the debt. Because of this reason, many companies choose Pvt Ltd company registration. Other than the limited liability, the company has many benefits as well, such as a variety of powers, rights, perpetual succession, etc. 

If you also want to start your own company then reach out to Registrationwala to complete the process of company registration. For any query, fill out the form and the team of experts will contact you.

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