Private Limited company is a small business entity that is held & controlled privately by its members.
Private Limited Company is allowed to have a minimum of 2 Directors and a maximum of 200 shareholders.
Ordinary directors are also referred to as simple director who attend board meeting of a company and participate in the matters put before the board. These directors are neither whole time directors nor managing directors.
According to Sec.2 (54) of the Indian Companies Act “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
A whole-time executive director includes a director in the whole-time employment of the company.
The Board Meeting may be held at a time when a director is, absent for a period of more than three months from the state and in such a situation, an ‘alternate director’ is appointed. The Board of Directors can appoint the additional director in the absence of a director if so authorized by articles or by a resolution passed by the company in general meeting. The alternate director shall work until the original director return or up to the period permitted to the original director.
Any director possessing professional qualifications and do not have any pecuniary interest in the company are called as “professional directors”.
An independent director is a director other than a Managing Director or Whole Time Director or Nominee Director.
The banks and financial institutions which grants loans to a company generally impose a condition as to appointment of their representative on the board of the concerned company. These nominated persons are called as nominee directors.
A Private Limited Company can be incorporated within 7 days, thanks to the recent introduction of SPICe forms. SPICe form allows to complete the entire process of incorporation in through one form. As a result, after incorporation all the incorporation documents, PAN & TAN are received over email. This helps the company to open bank account and start business operations.
Foreign Direct Investments and NRIs can be part of Private Limited Company. A Private Limited Company can be formed with only NRIs as Directors or with Foreign Directors and one or more resident Indian Director. Foreign Direct Investments of up to 100% are allowed in Private Limited Companies in India.
A Private Limited Company is flexible by means of multiple classes of shares (such as preference shares, equity shares, sweat equity and equity shares with differential voting rights). This helps in differentiating the shareholders and also protecting their interests. A Private Limited Company can hold multiple objectives and new objects can be introduced into the business at any given times. This makes the business easily scalable and gives scope of growth.
A Private Limited Company provides significant business advantage to all its stakeholders, customers, employees, partners, vendors or even public at large. Today customers, vendors and investors look for credibility in the businesses they deal with. In case of a private limited company, all the information such as name of the company, date of incorporation, registered office address, status of company, directors of company etc., are made available in a publicly searchable database. This feature makes it easy to authenticate the existence of the business, improving business credibility.
ESOPs stand for Employee Stock Options Plan. An option is a right to purchase stock of a company sometime in the future for a stated price. ESOPs can be offered to Directors, employees or officers of the Private Limited Company. It is a cashless perquisite which focuses on retaining key employees. The scheme of ESOP is required to be approved by shareholders in their General meeting. The scheme of ESOP contains details such as the identified employees to whom ESOP shall be offered, valuation of shares and number of shares.
Private Limited Company can use a Shareholders Agreement to protect the rights of each shareholder against the other and also for setting up the strategic management of the company. This agreement could be used on the introduction of new shareholders or directors, a new financing round, or after restructuring, or simply to rectify the balance of shareholder power as the company grows.
Funding is essential for starting, maintaining, and growing a business. Proprietorship, partnership firms and Limited Liability Partnerships cannot issue shares, and are thereby unable to attract equity funding like a Private Limited Company can. Investors, Venture Capitalists prefer and insist that the startups they would consider should be in the form of Private Limited Company. If you are planning to raise investments in the near future, private limited company is the way to go.
Private Limited Company provides limited liability to its shareholders. This means that in times of financial crisis or loss for a Private Limited Company, only the assets of the company are at risk, and not the promoter’s personal bank accounts and other assets.
Private limited companies offer the best type of exit strategy for all promoters. Only shares of a company can be sold or transferred in part or whole to another entity easily without any hassles, while the business remains a going concern. Therefore, starting a private limited company provides a tremendous edge in planning and executing a business exit plan.
Private limited company allows for Foreign Direct Investment of up to 100% through the automatic route, meaning, any foreign entity or foreign person can invest in a company without any prior government approval. Entities like proprietorship, partnership and limited liability partnership require prior approval from the Government to accept investments from foreign entities. Therefore, if your business has aspirations for going international, then it is best to start a private limited company.
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