There are plenty of types of companies in India from which you can choose the right one. Still, private limited incorporation is preferred to initiate a business by having sole control over its business.
Online company registration becomes a must for all businesses; it can be done with required documents via visiting the MCA website. The promoters even favoured when medium scale operations are to be covered under the business without any outsider’s intrusion, such as the public at large. A private limited company cannot infuse funds from the public at large via issuance of securities; the necessity to bring a large amount of capital might arise. That investor can fill that requirement. External funds’ necessity provides the impetus for investment from third-parties such as other than co-founders and related parties.
How can a third-party make an investment in a private limited company?
In this blog, we will discuss investment modes in a private limited company, and things that are to be considered before possessing the equity in the private limited company and the process for the transfer of shares held in the duration of online company registration.
Now, let’s see who can possess shares in a private limited company?
After the online company registration with the central government on the ministry of corporate affairs’ online platform, shares of a private limited company can be issued of the following person;
- Individual or HUF.
- Limited liability partnership.
- Association of persons.
- Any other body corporate.
- Body of individuals.
– Minor also can be a shareholder of the company with the help of his/her guardians.
– Partnership firm cannot possess shares in its name as it does not have a separate legal identity from the partners. Nonetheless, partners are jointly allowed to hold shares in the private limited company.
How can one subscribe to shares in a private limited company?
Promoters (a group of persons) can together register a private limited company through the way of subscription MoA (memorandum of association) in the process of online company registration. The MoA’s subscribers will be shareholders of the private limited company.
When a person does not possess any shares through the way of subscription of MoA of the company in the company’s online registration, then another way is to either subscribe shares by transfer of shares or by further issuance by the company.
Things to be pondered upon before investing in a company.
The advent of the business investors can be a requisite step where the company’s business needs external funds, as stated above. Nonetheless, before providing money to the company, investors should know about the advantages and disadvantages of investing in a private limited company.
Possessing the shares in a private limited company becomes beneficial to the holder due to several benefits provided by the nature and the said structure of the business. Investors can focus on certain general factors as given below;
– Grip over the operations.
The investors’ fundamental issue is to extract maximum profit out of the investment made in the company. The profitability and success of the company’s operations are directly linked with the earning of the company. Control over the business can lead the company in the right trajectory. This control would be derived from the ratio of the company’s shareholdings. Not like the funds provided in terms of advances and loans, shareholding will give control over the operations and the company’s decision-making by availing the voting rights for the business to be conducted and transacted at meetings of members. If the investors want to take control over the company’s regular operations, they might also appoint a representative in the board of directors named the nominee director.
– Tax advantages.
Corporate tax will be applied to the private limited company. The company’s business expenses can be deducted under the IT Act, and the companies act 2013. Dividends issued by the company to the shareholders will also be tax-free. Further, you should consult experts when it comes to tax matters.
– Independent management.
Investors are only investing in the company for profit, and they do not want to partake in the company’s day-to-day affairs. The company’s shareholders also do not need to engage in business activities as the duty for the same lies over the company’s board of directors.
– Limited liability regardless of shareholding.
The risk of failure and loss relies on the industry in which the company operates. Even the business plan for the private limited company involves risk, and that’s when certain traits save the investors, such as limited liability on personal assets of investors from the loss incurred in the company as the shareholders’ liability is only limited to the extent of unpaid amount towards subscribed share capital.
– Long-term investment.
Initially, start-ups always come with a risk of resulting in a loss. But relying on business compatibility and nature, the company might offer higher profit in the long-run. The risk scenario cannot be expelled; the investment will be made after the due consideration of the company’s business plan to keep risk at a minimal level.
– Shares’ liquidity.
It can be referred to as how quickly the shares can be converted into cash or sold in the market. In the case of a private limited company, it is very low as the process has to be followed as given in the companies act to do so. Unlike the publicly listed company, private companies’ shares cannot be easily transferred in the open market.
– Easy to convert into a public company.
To attract money from the market, one must convert a private company into a public one. With such conversion and listing of shares of the company, the shares possessed by the investors would increase in proportion to shareholding. Here, a disadvantage for the private limited company of lower liquidity would be settled as the company’s shares would be open for trading in the country’s open market.
– Disinvestment from a private limited company.
Similar to investment in private company through shareholding, disinvestment is also possible. If the investors find that their investment is not beneficial to themselves, they will have the option of disinvestment from the company. Possessed shares can be transferred, although it involves the process as mentioned below;
Transfer of shares in a private limited company;
The companies act, 2013 states limitation on transfer of shares to be included in the AoA to register the private limited company;
– It requires a share transferring deed by presenting all transferor and transferee details with share certificate numbers.
– First preference will be given to existing shareholders of the private company.
– If the existing ones do not want to buy it, it can be offered to outsiders.
– Share transfer deed and application must be presented to the company for its consideration, record and approval.
– Board of directors (BoD) should take the application in the record and accept the said transfer considering the best private company.
– Company’s BoD should inform the acceptance for said transfer of shares from the transferor to the transferee.
– If it is not informed in the stipulated time, then the application will be deemed to be accepted.
The willingness to invest in a private limited company is solely the investors’ decision. A cautious approach should be taken along with experts’ advice.