Private Company Concept, Definition and Features

Private Company is a specific type of business entity that offers many benefits, especially to small and medium-sized businesses. Under the Companies Act, 2013, the concept of a private company plays a critical role in India’s corporate structure. Private companies are distinct from public companies and offer a more controlled and flexible environment for conducting business, with less public scrutiny and fewer regulatory obligations.

Definition of a Private Company:

According to Section 2(68) of the Companies Act, 2013, a Private Company is defined as a company that has a minimum paid-up share capital as prescribed, and by its Articles of Association (AOA):

1. Restricts the Right to Transfer its Shares.
2. Limits the number of its Members to 200, excluding current and past employees who are members.
3. Prohibits any invitation to the Public to Subscribe to any Securities of the company.

In essence, a private company is a corporate entity that operates in a closed environment, with ownership typically confined to a select group of individuals such as family members, friends, or business partners. It is characterized by limited shareholder participation and the restriction of public trading in its shares.

Concept of a Private Company:

Private company is ideal for businesses that want to maintain close control over operations and ownership while still benefiting from the advantages of limited liability and separate legal entity status. This business structure is commonly used for small to medium enterprises (SMEs), startups, and closely-held businesses that do not require public investment but still want the formal structure and legal protections of a corporation.

Private companies operate within a more intimate ownership framework. Shareholders in a private company typically have close relationships, and the company’s activities are not subject to the same level of public scrutiny or regulatory oversight as public companies.

Features of a Private Company:

1. Limited Number of Members

One of the key features of a private company is that it limits the number of members to a maximum of 200. This number excludes current employees or former employees who were members during their employment. This feature ensures that ownership remains within a tight-knit group, making it easier to manage and control the company.

2. Restricted Transferability of Shares

Private company restricts the transfer of its shares, as outlined in its Articles of Association (AOA). Unlike public companies, where shares can be freely traded on the stock exchange, a private company’s shares can only be transferred with the consent of existing shareholders. This restriction ensures that ownership remains confined to a select group, preventing outside interference or unwanted investors.

3. No Public Invitation for Subscription

Private company is prohibited from inviting the public to subscribe to its shares or debentures. This means that private companies cannot raise capital by offering shares to the general public, unlike public companies. The company relies on internal sources of funding, such as investments from shareholders or loans, rather than public capital markets.

4. Separate Legal Entity

Private company is a separate legal entity from its owners. This means that the company has its own legal identity and can own property, enter into contracts, sue, and be sued in its own name. This separation between the company and its owners protects the shareholders’ personal assets from being affected by the company’s liabilities.

5. Limited Liability

One of the most significant benefits of forming a private company is the concept of limited liability. Shareholders in a private company are only liable for the amount of unpaid capital on their shares. In case the company faces financial difficulties or insolvency, the personal assets of shareholders are not at risk, providing them with significant financial protection.

6. Less Stringent Regulatory Requirements

Private companies enjoy less stringent regulatory and compliance requirements compared to public companies. For instance, private companies are not required to file their financial statements with the same level of detail as public companies. They are also exempt from several provisions of corporate governance that apply to listed companies, such as the requirement for independent directors or the need for quarterly financial disclosures.

7. Perpetual Succession

Private company has perpetual succession, meaning that it continues to exist irrespective of changes in its ownership or management. The company is not affected by the death, bankruptcy, or incapacity of any shareholder or director. This ensures business continuity, making the company a stable and long-term entity that can survive beyond its original founders.

8. Minimum Number of Members and Directors

Private company must have a minimum of two members and two directors. In the case of a One Person Company (OPC), the company can operate with just one director and one shareholder. However, in a typical private company, there must be at least two individuals involved in its governance. Directors are responsible for managing the company’s affairs and making decisions in the best interests of the company.

9. Articles of Association

The Articles of Association (AOA) play a critical role in a private company, as they outline the company’s internal rules, including the restriction on share transfers and shareholder rights. The AOA provides flexibility to private companies to draft rules that suit their specific needs, as long as they comply with the Companies Act, 2013.

10. No Requirement for Minimum Paid-Up Capital

One of the key amendments introduced in the Companies Act, 2013, is the removal of the requirement for a minimum paid-up capital. Earlier, companies had to meet specific capital requirements to incorporate. Now, private companies can be formed without any minimum paid-up capital, making the incorporation process more accessible for small businesses and startups.

11. Involvement of Promoters

Promoters play a vital role in the formation and incorporation of a private company. Promoters are the individuals who conceive the idea of starting a company, take the initiative to form it, and perform all necessary legal formalities. They draft the Memorandum of Association (MOA) and Articles of Association (AOA), and ensure the company is registered with the Registrar of Companies.

12. Taxation and Dividend Distribution

Private companies are subject to corporate taxation. The company’s profits are taxed at the corporate rate, and any dividend distributed to shareholders is subject to dividend distribution tax. Unlike sole proprietorships and partnerships, where profits are directly taxed in the hands of the owners, a private company is taxed as a separate entity.