Understanding Companies Limited by Shares: Key Features and Processes

Introduction

A company limited by shares is one of the most common forms of business structures worldwide. Known for its flexibility and potential to raise capital, this type of company has become a popular choice among entrepreneurs and investors. But what does it mean to be “limited by shares,” and how does this structure work?

In this guide, we’ll decode the company limited by shares meaning, exploring its features, benefits, challenges, and legal framework. Whether you’re an aspiring business owner or an investor looking to understand this structure, the company limited by shares in India guide is your one-stop resource. 

What is a Company Limited by Shares in India?

A company limited by shares is a type of business entity where the liability of its shareholders is limited to the amount unpaid on their shares. This means that if the company faces financial difficulties, shareholders are only responsible for their unpaid share capital and are not personally liable for the company’s debts.

Such companies can either be private or public, allowing them to raise capital through the sale of shares. This structure provides a balance of limited liability protection for owners and operational flexibility for the company.

Key Features of a Company Limited by Shares-

Here are the distinguishing features of a company limited by shares:

1. Shareholders’ liability is confined to the unpaid portion of their shares.
2. The company is treated as a separate entity from its shareholders and directors.
3. The company’s existence is not affected by changes in ownership or management.
4. Capital is raised by issuing shares to investors.
5. In public companies, shares can be freely transferred, whereas in private companies, transfer may be restricted.

Advantages of a Company Limited by Shares in India-

Why choose this structure? Here are some key advantages:

1. Limited Liability Protection: 

Shareholders’ liability is restricted to the unpaid portion of their shares, offering personal asset protection. This ensures that, in the event of financial troubles, shareholders are not personally responsible for the company’s debts, which lowers their financial risk.

2. Capital Raising Potential: 

A company limited by shares can issue various types of shares to raise capital from investors, enabling it to fund business expansion, research and development, or other operational needs. This makes it easier to raise large amounts of money compared to other business structures.

3. Enhanced Credibility and Trust: 

The designation “Limited” or “Ltd.” in the company’s name adds a level of professionalism and trustworthiness. This can attract investors, customers, and business partners, as it signals a formal and legally recognized entity, improving business reputation.

4. Attractive to Investors: 

Investors are often more inclined to invest in companies with limited liability because their financial exposure is minimized. The ability to limit personal financial risk makes this structure particularly appealing to external investors.

5. Perpetual Succession: 

Companies limited by shares have perpetual existence, meaning the company continues to operate regardless of changes in ownership or management. This ensures stability and continuity, which is vital for long-term business success.

Disadvantages of a Company Limited by Shares in India-

Despite its benefits, there are challenges associated with this structure:

1. Compliance Burden: 

Companies limited by shares in India are required to comply with extensive regulatory frameworks under the Companies Act, 2013. This includes mandatory annual filings, regular audits, and adherence to corporate governance standards, which can increase operational costs and administrative workload.

2. Higher Incorporation Costs: 

Compared to other business structures like partnerships or sole proprietorships, incorporating a company limited by shares in India can be more expensive. This includes costs for legal services, documentation, registration, and obtaining necessary certificates like Digital Signature Certificates (DSC) and Director Identification Numbers (DIN).

3. Privacy Concerns: 

As per the Companies Act, financial statements, annual returns, and other business details must be publicly disclosed. This reduces the level of privacy that business owners might prefer, as information about the company’s financials and shareholding structure becomes accessible to the public through the Registrar of Companies (RoC).

4. Slow Decision-Making: 

In large companies, the decision-making process can be slow due to the diverse interests of shareholders. The need to hold annual general meetings (AGMs) and the involvement of multiple stakeholders can delay important business decisions.

5. Taxation and Reporting Requirements: 

Companies limited by shares are subject to corporate tax rates, which may differ from other business types. The mandatory Goods and Services Tax (GST) filings, income tax returns, and audit reports can add to the regulatory burden.

Legal Framework Governing Companies Limited by Shares-

The operations of a company limited by shares are governed by the following legal provisions:

1. Companies Act, 2013 (India): Outlines rules for incorporation, management, and compliance.
2. Articles of Association (AoA): Defines internal rules and procedures.
3. Memorandum of Association (MoA): Specifies the company’s objectives and scope.
4. Registrar of Companies (RoC): Acts as the regulatory authority overseeing compliance.

Types of Companies Limited by Shares

Companies limited by shares can be categorized as follows:

1. Private Company Limited by Shares: Shares are privately held, and transferability is restricted. Ideal for small businesses and startups.
2. Public Company Limited by Shares: Shares can be sold to the public through stock exchanges, making it suitable for large-scale operations.

Process of Incorporating a Company Limited by Shares

Here’s a step-by-step guide to incorporating such a company:

1. Ensure the company name complies with naming guidelines and is unique.
2. Prepare the memorandum and articles of association.
3. Obtain a Digital Signature Certificate (DSC) which is required for the electronic filing of forms.
4. Obtain a unique ID for the company’s directors.
5. Register with the RoC. Submit incorporation forms along with the required documents and fees.
6. Obtain a Certificate of Incorporation. Once approved, this certificate serves as proof of the company’s legal existence.
7. PAN and TAN Registration- Register for tax purposes.

Responsibilities and Liabilities of Shareholders

Shareholders of a company limited by shares have specific responsibilities and liabilities:

1. Shareholders must pay the agreed amount for their shares.
2. Participate in decision-making through voting during general meetings.
3. Entitled to dividends proportional to their shareholding.
4. Limited to the unpaid portion of their shares.
5. Shareholders must adhere to the company’s bylaws and legal requirements.

Conclusion

A company limited by shares is a versatile and attractive business structure, offering limited liability, ease of raising capital, and continuity. While it comes with regulatory obligations, its benefits far outweigh the challenges for businesses aiming to scale and build credibility.

Whether you’re a startup founder or an investor, understanding this structure is crucial to leveraging its potential. With proper guidance and planning, a company limited by shares can be the foundation of a successful and sustainable business.

Registerkaro offers expert assistance in incorporating and managing companies limited by shares. Our professionals ensure compliance with all legal requirements, making the process seamless and hassle-free. Contact us today to get started!

Frequently Asked Questions (FAQs)

1. What is the liability of shareholders in a company limited by shares? 

A: Shareholders’ liability is limited to the unpaid amount on their shares, protecting personal assets from the company’s debts.

2. Can a private company limited by shares sell its shares to the public? 

A: No, private companies cannot offer shares to the public. Only public companies limited by shares can do so.

3. What is the difference between a private and a public company limited by shares?

A: The primary difference lies in share transferability and capital-raising methods. Public companies can sell shares to the public, while private companies have restrictions.

4. Are companies limited by shares required to file annual returns? 

A: Yes, all companies limited by shares must file annual returns and financial statements with the Registrar of Companies.

5. Can a company limited by shares operate indefinitely? 

A: Yes, companies limited by shares have perpetual succession, meaning they continue to exist regardless of changes in ownership or management.