In India, one of the most preferred forms of company incorporation is the Private Limited Company. This option is particularly attractive to those who want to have a strong hold over their business without any interference from outsiders. However, Private Limited Companies do not have the ability to raise funds from the public through the issuance of securities. Hence, investors often come to the rescue. In this article, we will discuss how to do pvt ltd company registration and the different aspects to consider while investing and holding equity in a Pvt Ltd company. Additionally, we will share the procedure for the transfer of shares held while online company registration.
Eligibility for Holding shares in Private Limited Company
After online company registration with the Central Government, a Private Limited Company can issue shares. More specifically, with the Ministry of Corporate Affairs. You can do this through the online portal www.mca.gov.in. You can issue shares to any of the following persons: an individual/HUF, a company, a limited liability partnership, any other body corporate, association of persons or body of individuals. A minor can hold shares in a registered Pvt Ltd Company only through their guardian. A Partnership Firm cannot hold shares in its name. Thi is because it does not hold a separate legal identity from the partners. However, the partners can jointly hold shares in a Pvt Ltd company.
Things to keep in mind
- An investor should consider various factors before making an investment in a Pvt Ltd Company. Some of the crucial aspects to be considered are:
- The control over operations
- Tax benefits
- Separation of management
- Limited liability irrespective of shareholding
- Investment for the long term
- Liquidity of shares
- Conversion into a Public Company.
- Investors should note that the taxation in the case of a Pvt Ltd Company is different. Especially from that in the case of Sole Proprietors. While Corporate Tax is applicable to a Pvt Ltd Company, the expenses incurred in connection with the business of the company are allowable as a deduction under the Income Tax Act. They are also allowed as deductions under the Companies Act, 2013.
- The risk of loss or failure of a business depends on the industry in which the company operates. Where the business plan of the registered Private Limited Company involves extreme risk, limited liability will prevent investors’ personal assets from loss made in the company. In a registered Pvt Ltd Company, the liability of any shareholder is limited only to the extent of unpaid amounts towards subscribed share capital. However, the transfer of shares involves a procedure outlined in the Companies Act, resulting in low liquidity of shares.Unlike a Public Listed Company, the shares of a Private Company are not easily transferable in the open market.
- As the company grows, the conversion of a Private Company into a Public Company may become a necessary step as the company may require infusing capital on a large scale from the public. The worth of the company will increase on conversion and listing of shares, thereby providing a great opportunity for investors to earn returns on their investment.
Procedure for Transfer of Shares in a Private Limited Company
When a shareholder in a Private Limited Company decides to transfer their shares, it is important to follow the proper legal procedures set out in the Companies Act. The transfer of shares involves several steps to ensure that the process is done in a transparent and legal manner.
Right of First Refusal
The first step is for the shareholder who wishes to transfer their shares to offer them to the existing shareholders of the company. This is called the right of first refusal. It lets the current shareholders have the opportunity to purchase the shares before the company offers them to a third party. This process ensures that the company’s ownership remains within the existing shareholder group and allows for an equal distribution of shares.
Offer to Third Party
If the existing shareholders decline the offer, the shareholder may proceed to offer the shares to a third party. The Companies Act defines certain individuals as disqualified persons. These persons are not permitted to hold shares in the company. Therefore, the shareholder must ensure that the third party is not one of these individuals when transferring shares.
Update company records
You must make sure to update the company’s records to reflect any change in share ownership. You need to mandatorily do this after finding a buyer. The Register of Members, a legal document containing information about the company’s shareholders, must include the new shareholder’s details.The Register of Members should include the name, address, and other relevant details of the new shareholder.
Issue Share Certificate
The company must also issue new share certificates to the new shareholder. The share certificate is a legal document that confirms the ownership of the shares. It should be signed by the company’s authorized signatories. The certificate must include details such as:
- The name of the shareholder
- The number of shares transferred
- The date of the transfer.
Legal Requirements
It is important to note that the transfer of shares in a Private Limited Company must comply with all legal requirements. You must take all the steps in accordance with the company’s Articles of Association. In some cases, the Articles of Association may include additional provisions relating to the transfer of shares. It is important to ensure that these provisions are followed.
Conclusion
Investing in a Private Limited Company can be a profitable venture for investors. However it is important to consider the various aspects before making a decision. Shareholding in a Private Limited Company offers numerous advantages to the investor. This includes control over operations, tax benefits, limited liability, and the potential for long-term investment. However, the liquidity of shares in a Private Limited Company is low, and transferring shares involves following a specific procedure. It is important to consult with professionals and seek advice before making any investment decision.
