What is A Limited Company ?

A limited company is a business owned by a group of people (shareholders) who do not want to have unlimited personal liability for the debts of the business. This is because the company has its own legal identity, separate and distinct from the owners. A limited company can buy assets, borrow money and enter into contracts in its own name. Liability is defined as limited because the maximum that the owners can lose is the money that they have invested in the business. The owners are not personally responsible for the debts of the business so personal assets such as homes and personal bank accounts are safe.

Directors and Shareholders

Companies are managed by directors and owned by shareholders. The share owned by each person will reflect the size of their investment in the company. In the case of small companies the directors and shareholders are usually the same people. In the United Kingdom a company must be registered at the Companies Office. Every year each company has to send the Companies House an annual return and financial statements. This is because the accounts for the limited company have to be audited and made available to the public.

Starting a Company

Companies are either started from scratch or (to avoid the paperwork and red tape involved in setting up a company from scratch) bought “off the shelf”. In order to create a limited company legal formalities have to be completed as stated in the relevant Companies Act. This includes registering with the registrar of companies and completing the memorandum of association and the articles of association.

Memorandum of Association

The Memorandum states the company’s name; location, share capital and what the company can and can’t do (this latter section is contained in an “Objects Clause”).

Articles of Association

Articles of Association can loosely be described as the “rulebook of the company” because they will describe the conduct expected from the directors and govern administrative matters and the calling of meetings.

Certificate of Incorporation

The Certificate of Incorporation often referred to as the “birth certificate” of a company, is issued (in the form of a single sheet of paper) by the Companies House. The Certificate of Incorporation details when the company was formed, the company name and the company number.

Private Limited Companies

A private limited company is a voluntary association of not less than 2 and not more than 50 members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures

A private limited company is owned privately by a small group of people such as a family. A private limited company cannot trade its shares on the stock market. Private limited companies can operate with minimum of  2 director and it must have at least 2 shareholders.

Although private limited companies are usually small in size, they have to produce accounts and send them to registrar of companies annually.

Its main features are :-

It has an independent legal existence. The Indian Companies Act, 1956 contains the provisions regarding the legal formalities for setting up of a private limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

It is relatively less cumbersome to organise and operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to. Some of them are :-

It need not file a prospectus with the Registrar.

It need not obtain the Certificate for Commencement of business.

It need not hold the statutory general meeting nor need it file the statutory report.

Restrictions placed on the directors of the public limited company do not apply to its directors.

The liability of its members is limited.

The shares allotted to it’s members are also not freely transferable between them. These companies are not allowed to invite public to subscribe to its shares and debentures.

It enjoys continuity of existence i.e. it continues to exist even if all its members die or desert it.

Hence, a private company is preferred by those who wish to take the advantage of limited liability but at the same time desire to keep control over the business within a limited circle and maintain the privacy of their business.

Furthermore unlike a sole trader, private limited companies have to pay auditors, hold meetings as stipulated in the Companies Act and share profits between all of the shareholders.

Advantages

Continuity of existence

Limited liability

Less legal restrictions

Disadvantages

Shares are not freely transferable

Not allowed to invite public to subscribe to its shares

Scope for promotional frauds

Undemocratic control

Other advantages includes:

Stakeholders are not typically liable for corporate debts and liabilities.

Less number of compliance requirements.

Ability to issue to ESOPs, sweat equity and other incentives which help attract best of talents.

Easier to raise investments and corporate loans. Investors prefer only Pvt. Ltd. companies. If you do not have one, they may ask you to convert your business to Pvt. Ltd. Co. before releasing investments.

Flexibility to raise investments or loans from NRIs and Foreigners.

High credibility and branding.

Offers transparency at various levels.

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