Private Company: Meaning MCQs Quiz | Class 10

Private Company: Meaning and Definition under Company Structure

Overview:

A private company is a type of business entity that is privately held and does not offer its shares to the general public. It is a popular form of business organization for small and medium-sized enterprises (SMEs) due to its limited liability and relatively simpler compliance requirements compared to public companies. Understanding its definition and characteristics is crucial for grasping the broader concept of company structure.

Key Characteristics of a Private Company:

• Restriction on Transferability of Shares: The articles of association of a private company restrict the right to transfer its shares. This means shares cannot be freely sold or bought by the public.
• Prohibition on Public Invitation: A private company cannot invite the public to subscribe for any shares in, or debentures of, the company. It cannot accept deposits from persons other than its members, directors, or their relatives.
• Minimum and Maximum Members:
  • Minimum: A private company must have at least two members.
  • Maximum: The maximum number of members is limited to 200, excluding present and past employees who were members during their employment and continue to be members.
• Identification: The name of a private company must end with the words “Private Limited” (e.g., ABC Private Limited).
• Directors: A private company must have a minimum of two directors.
• No Minimum Paid-up Capital: As per the Companies (Amendment) Act, 2015, the requirement for a minimum paid-up capital for both private and public companies has been removed.

Definition under Companies Act, 2013:

Section 2(68) of the Companies Act, 2013 defines a “private company” as a company having a minimum paid-up share capital as may be prescribed, and which by its articles, (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that – (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company.

(Note: The “minimum paid-up share capital as may be prescribed” was later removed by an amendment.)

Distinction with Public Company:

Quick Revision Points:

• Minimum 2 members, maximum 200 (excluding employee-members).
• Cannot invite public for shares/debentures/deposits.
• Shares are not freely transferable.
• Name ends with “Private Limited”.
• Requires a minimum of 2 directors.
• Offers limited liability to its members.
• Governed by the Companies Act, 2013.

Practice Questions:

1. Which of the following is NOT a characteristic of a private company?
   1. Restricted transfer of shares
   2. Minimum 2 directors
   3. Can invite public to subscribe shares
   4. Name ends with “Private Limited”

   Correct Answer: C

2. The maximum number of non-employee members in a private company is:
   1. 7
   2. 50
   3. 200
   4. No limit

   Correct Answer: C

3. A private company is primarily governed by:
   1. Partnership Act
   2. LLP Act
   3. Companies Act, 2013
   4. Income Tax Act

   Correct Answer: C

4. If two individuals jointly hold shares in a private company, how are they counted for the purpose of the maximum member limit?
   1. As two members
   2. As one member
   3. Depends on their capital contribution
   4. Depends on the Articles of Association

   Correct Answer: B

5. The suffix “Private Limited” indicates that:
   1. It is a government company
   2. It cannot have more than 50 shareholders
   3. Its shares are not freely transferable and it cannot invite the public to subscribe
   4. It is a small company with limited operations

   Correct Answer: C