A private limited company or famously known as LTD is a privately held company. This implies that the business limits owner liability to its shares and limits number of shareholders to 200. It also restricts shareholders from trading shares publicly.
- The liability of shareholders is limited to their shares. Financial risks are a part of business but to be able to minimize them and sustain the business progress is imperative. In an LTD, if due to any reason the company were to be closed the shareholders would not risk losing their personal assets.
- Risk of takeovers is minimized when two shareholders trade shares as the selling and buying of shares is possible only when both parties have given their consent.
Types of Shares:
The shares divide the value of a Company, which can be of many types such as equity, etc.
- Equity Shares
This 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. This means that the employees need not pay for the shares at all. Such shares are only allotted and only to those who do not already own shares.
Employee Stock Options is the most common and practical solution to provide motivation to employees of any kind of businesses. Employers provide this ESOP option in lieu 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.
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 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 with 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 employees’ stock option, subject to special resolution passed by the Company
- Any persons, if it is authorized by a special resolution, 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.