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Decoding the Shares issued in a Private Limited Company

  • March 01, 2022
  • Registrationwala
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A private limited company, known as LTD, is a privately held company. This implies that the business limits owner liability to its shares and limits the number of shareholders to 200. It also restricts shareholders from trading shares publicly.

Shares of Private Limited Company

Shares within a private limited company are issued while taking care of the following factors:

  • The liability of shareholders is limited to their shares. Financial risks are a part of business, but minimizing them and sustaining the business progress is imperative. In an LTD, if the Company were to be closed for any reason, the shareholders would not risk losing their assets.
  • The risk of takeovers is minimized when two shareholders trade shares, as the selling and buying of shares are possible only when both parties have given their consent.

Types of Shares:

Not all shares are equal, for they are divided into the following types:

  • Equity Shares: It is the most common type of share. Equity shares have the voting and other rights inherited in them.
  • Preference Shares: These shares do not have voting rights as Equity shares. However, they have the advantage that these shareholders will be paid out first in case of liquidation of the Company, once all the debts are cleared.
  • Equity Shares with Differential Voting Rights: These shares have greater voting rights and, as such, are usually issued to the CEOs and founders to have greater control over the affairs of the Company.
  • Sweat Equity: Sweat equity is given to deserving employees at no cost. Such shares are only allotted to those who do not already own shares. This means that the employees need not pay for the shares at all.
  • ESOPs: Employee Stock Options are the most common and practical solution to motivate employees of any business. Employers provide this ESOP option instead of work performed. It cannot be provided to freelancers, consultants, promoters, etc.

Issue of Shares

A private limited company can issue shares to its shareholders by way of rights issue or by giving them bonus shares, or it can issue securities through private placements.

Private Placement: The Company issues an offer letter to a group of persons either offering or inviting to subscribe securities that satisfy specific conditions is known as a private placement.

As per rules, such an offer is made to not more than two hundred people in a financial year. Also, the value of such an offer or invitation per person shall be an investment size of not less than rupees twenty thousand.

Rights Issues of Shares: As per the act, where at any time, a Company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to

  • Existing shareholders
  • Employees under a scheme of employee's stock option, subject to a special resolution passed by the Company
  • If it is authorized by a special resolution, any persons, either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer.

A private limited company can issue shares only by the methods mentioned above.

Conclusion

Within a private limited company, shares issued share the Company's responsibility among the members. It further ensures that more people are there to support the infrastructure to give direction to the business entity. In this article, we have provided you with all the details you need to divide the company shares among your partners. 


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