A limited company is the most common business structure in India. To incorporate a limited company in India, a company has to be registered in accordance with the prerequisites of the Companies Act, 2013, with the Registrar of Companies (RoC).
The term ‘liability’ refers to the obligation of the owners (guarantors/shareholders) towards meeting the debts of the company. In the case of ‘limited liability’, the personal finances of the owners are protected, and they can’t be held liable beyond their investment in the company.
In a situation that the company is sued for non-payment of bills or is in the process of winding up, the owners will not have to pay any other amount beyond the guarantee they have undertaken, or their unpaid stocks. In case their shares are already fully paid up, they wouldn’t have to pay anything more.
The only risk for owners is that they might lose their amount of guarantee/shares investment. Limited liability is the prime reason that partnership firms (which have unlimited liability) to choose a Limited Liability Partnership structure (LLP), which has a limited liability structure.
A limited company can either be:
Both these types of companies are regulated and governed by the provisions of the Companies Act, 2013. Alternatively, a company can be registered as an unlimited company as well, which will not have the ‘limited liability’ safeguards.
A Limited company uses the word ‘limited’ after their company name, such as ‘XYZ Private Limited’ or ‘XYZ Limited’, depending on whether the company is a private or public company.
The company is considered to be a separate ‘legal person’ in the eyes of the law. This means that the company is held accountable for its own actions, can enter into business agreements, purchase assets and can be held liable for debts.
The critical characteristic of companies limited by shares is that it is owned by shareholders. Shares are issued in proportion to the investment brought in by the founder(s) of the company – this is called the share capital of the company.
For a private limited company, a minimum of two shareholders (owners of the company) and a minimum of two directors (who manages the company) are required to incorporate a company. Typically, the owners elect to become the directors as well.
The profits of the company can be distributed to the shareholders in proportion to the shares held by them. Such profit payments are called dividends.
The structure of the company is most suited for businesses that have been set up to make money. Not only can the shareholders earn from their holdings (in the form of dividends and bonus shares), they can also choose to sell their shares to another. This enables the owners to sell a portion of the company, to other stakeholders, like investors.
The shareholding pattern also enables private companies to become public companies through IPO issue (initial public offering). The shares of public companies can be freely traded.
Typically companies limited by guarantee don’t have a share capital.
The owners of the company don’t intend to make money or run commercial businesses. The profits of such companies are reinvested in the business as a part of the working capital. This key feature makes such companies most suited for charitable or non-profit organisations.
The owners of the company are not shareholders, but they are guarantors of the company. This means that they undertake a fixed nominal amount as a minimum guarantee from their side to be paid against the company’s debts, or during an event of dissolution or winding up.
Companies limited by guarantee have directors, and in most cases, the guarantors choose to become the directors of the company. The voting rights of the company are based on the percentage of the owners’ guarantee.
A company limited by guarantee can choose to have shares; this would constitute the company’s share capital. The issue of shares is undertaken by the owners to boost the initial funding of the organisation. In such a case, the members have a dual liability. Their liability towards the company will not only extend to the amount of guarantee undertaken by them, but also to the amount of their unpaid shares.