Limited companies are usually identifiable through the ‘Ltd’ abbreviation behind the company’s name. Limited companies are types of incorporations that are allowed under the Companies Act, 2013. These type of companies is recognised in several parts of the world like the UK, Canada, etc.
Limited companies function using capital invested in the company. This capital investment is made by the shareholders of the company, who can also be called members of the company. Upon insolvency, bankruptcy, or liquidation of a company, the personal assets of the shareholders cannot be used to meet the financial burden of the company. This is why the word ‘limited’ is used in the name of the company, it refers to the ‘limited liability’ of the company.
The company is created with a purpose of either conducting business, gaining profit or for charitable intentions. The activities of the company and relationship with its internal and external stakeholders are defined in the Memorandum of Association and Articles of Association.
Here is how a limited company functions:
The liability of the company refers to the financial responsibility that it must meet. A limited company is essentially said to have ‘limited liability’.
Most of the companies that we know today are limited companies, that is, they have limited liability. This is beside the fact that these companies can be private limited, public limited company or one person companies.
Examples of Limited Companies
For instance, in the USA, Google and Facebook are all LLCs. However, in India, they have been set up as private limited companies. Wipro and Infosys are examples of public limited companies. Apart from this, there are unlimited companies and limited liability partnerships. The members of unlimited companies are not protected by the ‘limited liability’ clause.
A limited company can have is liability limited in two ways – by shares or by guarantee. The Companies Act, 2013 recognises both these models of operation. These companies function under the notion that it is a separate legal entity, and is responsible for its own actions. So, just as the company can purchase assets and enter into agreements, it is also responsible to clear its financial debts.
Businesses that function with the objective of making money are usually set up with shares. This is because the shares create a tangible value and also has the prospects of increasing in value. This can be beneficial for the shareholders.
A company limited by guarantee is not based on shares or share capital. This type of business model is most suitable for charitable and non-profit institutions. Here, the owners of the company are not looking to make a profit on their holdings and profits earned by the company through its activities can be reinvested into the company.
The most popular types of companies that have been limited by shares are public and private companies. The main difference between the two arises based on the category of people who can become the shareholders of the company. In a public company, the shares can be held by any member of the public. Whereas, the shares of a private company are held by a close-knit group of private individuals – such as the owner, his/her friends, relatives, etc.
The Companies Act describes this type of company as:
Minimum Capital requirement: Paid up capital of INR 1 Lakh
Minimum no. of members: 2
Maximum no. of members: 200
Minimum no. of Directors: 2
The companies Act restricts the number of members a private limited company can have. Additionally, the transfer of shares is restricted and trading of the shares to the public is prohibited.
Minimum Capital requirement: Paid up capital of INR 5 Lakh
Minimum no. of members: 7
Maximum no. of members: No Limit
Minimum no. of Directors: 3
The shares of the company can be traded freely, and the value of the shares is based on certain market factors. Since the shares can be freely traded, the Act does not restrict the number of members that the company is allowed to have.
Public Limited Company
Private Limited Company
Minimum number of members
Minimum number of directors
Maximum number of members
Minimum capital requirement
Invitation to the public to purchase shares of the company
The quorum required at AGM
Certificate for commencement of business
The term used as a part of the company name
Mandatory Statutory meeting
Minimum no. of members: 1
Minimum no. of Directors: 1
The Companies Act, 2013 allows the incorporation of One Person Companies. This is a type of private limited company that can be incorporated as limited by share or guarantee, or be incorporated as unlimited.