If you are a business person in India, have you ever wondered about are different types of private limited companies that operate in India? Yes, there are three different private limited company types. And in this guide, you will get a closer look at what are and further understand those types in detail. There are three primary types of private limited companies in India:
- Company Limited by Shares
- Company Limited by Guarantee
- Unlimited Company
Each of these types is unique, serving a different purpose and catering to diverse business needs. Let’s now understand each of them better!
Company Limited by Shares
In a Company Limited by Shares, the liability of members (shareholders) is restricted to the amount unpaid on the shares they own. For example, if you own shares worth 1000 INR and you’ve already paid 900 INR, your liability is limited to the remaining 100 INR.
This company type is the most common and popular among entrepreneurs due to its clear-cut liability limits. It encourages investors to join the company without the fear of unlimited personal liability. Moreover, these companies tend to have a relatively stable capital structure, as shares can’t be withdrawn, ensuring long-term sustainability.
An essential aspect of a Company Limited by Shares is that it can’t invite the public to subscribe to its shares or debentures. It restricts the transferability of its shares. Therefore, if you or anyone in your knowledge is planning to start this type of business, you must let them know about the limitations it can have.
Company Limited by Guarantee
Let’s now discuss the second private limited company type, which is a Company Limited by Guarantee. In this type of business, the liability of owners is limited to the amount they have agreed to contribute to the company’s assets if it’s wound up.
You’ll commonly find this type of company in non-profit organizations, clubs, or societies where the goal is not profit generation but the promotion of art, science, sports, or charitable objectives. Owners don’t receive dividends or profits; instead, all profits are reinvested back into the company to further its aims and objectives.
Remember that these companies may or may not have a share capital. If they do, the liability of members is the amount unpaid on shares plus the amount they’ve guaranteed to contribute.
Unlimited Companies
Now let’s understand the third private limited company type which is “Unlimited Companies”. As the name implies, the members of these companies have unlimited liability. This means if the company runs into financial trouble. The members are personally liable for covering its debts, which can exceed the amount they initially invested.
Unlimited Companies are rare, primarily due to the risk they pose to the members. They’re often established for specific projects or purposes and dissolved afterward. However, one advantage they hold is that they have fewer disclosure requirements compared to the other types of private limited companies.
Despite the unlimited liability, members have the benefit of sharing profits without much restriction. Furthermore, the capital can be given back to members without a formal winding up.
Summing Up Different Form Of Private Limited Companies in India
When considering setting up a private limited company in India, it’s important to evaluate the different types. Whether it’s a Company Limited by Shares, a Company Limited by Guarantee, or an Unlimited Company. Each serves its purpose and comes with its unique advantages and challenges. Understanding these can help you make the right decision for your business venture.
