Let's start by discussing limited companies. Please understand that limited companies might be either public or private. Both have a restricted liability shield, but they are distinct. A private limited business's shares are not publicly traded, in contrast to the shares of a public corporation, which are exchanged on the stock exchange market. Additionally, there is a cap of 50 shareholders.

What Is a Private Limited Company?

A sort of business entity that can be created and managed by any entrepreneur is a private limited company. It is a distinct legal entity, and the founders of the business are its stockholders. Shares that belong to the company's shareholders make up the ownership of the business. In this sort of corporation, the company must pay corporate taxes on its earnings before distributing the remaining earnings to its shareholders.

The term "limited" in this context denotes that the company's financial liability is constrained to the value of its shares. This indicates that none of the company's debts is personally owed by its owners. They are able to save because the company's debt will never be settled with their personal assets.

Local retailers like a restaurant or shops are a perfect example of a private limited corporation. A major organisation like a network of eateries or retail stores is an illustration of a public company. If you can purchase shares of a limited company, it is a public limited company since public limited firms typically have their shares traded on the market.

Who Runs Limited Companies?

Directors or company officials are the persons in charge of running a private limited company and are in charge of running business. The company's shareholders may hire these individuals or they may be the shareholders themselves. A private limited corporation often includes one or more directors, one of whom is typically the owner of the business. As a result, you have the option to both start and run the business, either alone or with others.

Advantages of Private Limited Companies

You should be aware of the many benefits that come with forming a private limited business before you go ahead and do so. These consist of:

Professional Status:

Compared to a sole proprietorship, a private limited company has a more professional position and is regarded as reliable. This is a result of its transparency. It indicates that the company's financial records, along with information about its managers and directors, are more transparent.

Doing business with other companies:

Large businesses do not feel comfortable doing business with unincorporated entities, to put it simply. You may simply obtain additional business contracts to deal with bigger companies with a private limited company, allowing you to expand both your business and profits.

Protect your business name:

You may safeguard the name of your corporation by incorporating. As a result, no one else may use your company name or any names that are similar to it. Without having to worry about someone else stealing it, you may create a brand with it.

Tax-efficient income:

A private limited business may also allow you to pay yourself taxes effectively. Simply put, when corporate tax has been paid to the government, company owners and directors can pay themselves a wage and receive payment from shareholder dividends.

Limited Liability:

As was already established, in a private limited corporation, the owners are not responsible for paying any outstanding debts. This aids individuals in safeguarding their private property, such as their house and funds. Therefore, the fee would be deducted from the assets of the company and not the owner's personal assets if the firm is sued and must pay a substantial fine.

Raising capital:

You can easily raise money for your firm's expansion through a private limited corporation by selling shares. In essence, you can issue shares in a private limited company in exchange for capital to support the expansion of the business. And the best part is that investors are also covered in case the business falters or runs into problems. This is another reason why many investors prefer private limited companies to sole proprietorships.

Issuing Shares in a Private Limited Company

The initial shareholder decides how many shares a private company can issue when a private limited company is formed. However, there is a minimum criterion set down by the government, which requires that the corporation issue at least one share of the company. The number of shares that may be issued has no upper limit unless the shareholders decide to impose restrictions upon forming the firm.

Therefore, you can select the number of shares you desire while registering a new company. And obviously, this choice would depend on how many stockholders you desire in your business. Additionally, it would be based on your future intention to solicit capital from investors in return for business stock. If you are starting the business on your own, you can initially only issue one share to yourself.

You would own 100% of the corporation with this one share, making you the sole shareholder. On the other hand, if you plan to expand your business with new partners, you might want to issue more shares to yourself or to other people. Even-numbered shares, such as 2, 4, 20, 100, etc., are typically prefered. The percentage of ownership held by each shareholder is then easier to determine. This proportion, therefore, aids in comprehending how much of the company's profits are distributed among each employee.

Types of Shares Issued for a Private Limited Company

In a private limited corporation, there are many different classes of shares, also known as share types, each with a unique set of rights. These consist of:

Ordinary shares:

This is the typical share type with no unique limitations or rights. The company's shareholders have equal rights under each share. In essence, each share entitles the bearer to one vote, which they may use to cast their vote in the company's annual general meeting. They also have the right to receive dividends and a share of any leftover cash or assets if the firm is wound up.

Preference shares:

These shares are not eligible to vote at annual meetings. When dividends are paid out, this class of shares has the entitlement to preferential treatment. In other words, holders of these shares would get dividends from the company's profits before common shareholders. The preference shareholders, however, would receive a set dividend amount. This is excellent news for investors, especially if the business is struggling financially. Nevertheless, the stockholders would lose out if the company's profits rose.

Cumulative Preference shares:

This share has the option to carry over any unpaid dividends from one year to the following year and so on. In other words, if a shareholder doesn't receive a dividend one year, they will receive the lost sum along with the dividend the following year. This implies that the shareholder will eventually receive all of the profits to which they are entitled. Additionally, these shares lack the right to vote in general meetings, exactly like preference shares.

Non-voting shares:

These shares do not have the right to vote at annual meetings, as the name would imply. Family members or firm employees typically receive this portion of a private limited company as remuneration in addition to their salaries. It is a fantastic method because businesses do not want their employees to have the ability to vote on any significant issues affecting the business.

Redeemable shares:

Shares that the corporation has the option to redeem at a later date are referred to as such. The time when they can be purchased may be set earlier or in reaction to a particular event. Directors frequently receive shares of this kind with the understanding that, in the event of their departure from the company, they will be redeemed.

Management shares:

Additional voting rights come with management shares. Having 5 or even 15 votes per share falls under this category. This class of shares is typically distributed to the company's largest owners, enabling them to keep the majority of control and authority over the business.

What’s the Process of Issuing New Shares in a Private Limited Company?

You must abide by certain regulations if you plan to issue shares in a private limited corporation. These consist of:

• Obtaining the consent of the board or a significant shareholder.
• Putting together all the paperwork required for issuances, such as shareholder agreements and share certificates.
• Adhere to local, state, and federal regulations by informing the investor of the risk they are incurring by funding the business.
• Maintaining copies of all the paperwork produced, including the stock certificates.

Rights Attached to Shares

Each share class has its own rights, as was already mentioned. We will merely discuss the rights that come with common shares to keep things simple. The "specified particulars" are the rights that come with ordinary shares in a private limited corporation. The company's articles of organisation and, occasionally, the private shareholders' agreement both refer to these rights.

These are the rights that come with ordinary shares in a private limited company:

Capital distribution rights:

Each share is entitled to receive a dividend from the company's liquidation. In other words, when the firm is wound up, the shareholder has a claim to a share of all the assets and money based on their percentage of ownership.

Dividend rights:

Every share has the right to receive dividends or any other type of distribution from the business. This indicates that a shareholder's fundamental right is to get a share of the company's profits in proportion to each share they own.

Voting rights:

In any matter involving the company, each share has one vote. In the general meetings, this entitles each shareholder to one vote on significant issues for each share they own.

Conclusion:

A private limited corporation could issue shares by passing a board resolution under the 1956 Act, but the 2013 Act prohibits this. A private limited corporation may only issue shares in accordance with the 2013 Act's stipulated procedures.