The private company as a middle path between a partnership and a public company

What a private company is

Under section 2(68) of the Companies Act, 2013, a private company is one whose articles restrict the right to transfer its shares, limit its members to two hundred (a One Person Company apart) and forbid any invitation to the public to subscribe for its securities; it must also have the minimum paid-up capital that may be prescribed. Joint holders of a share count as one member, and present employees, and former employees who were members while employed and remain members, are left out of the count. Apart from a One Person Company, which under section 2(62) has a single member, it needs at least two members, and it must add the words private limited to its name.

The statement claims that such a company borrows its character from both of the other forms. Testing it means setting the private company against each.

Where it resembles a partnership firm

1. A small, closed circle of owners. A partnership needs at least two partners; section 464 of the Companies Act, 2013 lets the government prescribe the maximum for an association or partnership formed to carry on a business for gain, which cannot exceed 100, and Rule 10 of the Companies (Miscellaneous) Rules, 2014 now sets it at 50. The ceiling does not apply to a Hindu undivided family carrying on a business, or to a firm of professionals governed by special Acts; a larger association must register as a company or be formed under another law, and each member of one that breaks the limit faces a fine of up to one lakh rupees and is personally liable for all liabilities incurred in that business (section 464(1)-(3)). A private company other than a One Person Company likewise starts with two members and stops at two hundred.
2. Ownership that cannot be passed on freely. A partner who wants to leave faces a restriction on transferring ownership; a private company's articles likewise restrict share transfers.
3. Capital raised privately. Neither form draws capital from the general public: the private company is barred from inviting the public to subscribe and need not issue a prospectus, and a partnership's funds are limited to what its small number of partners can contribute.
4. Lighter formalities. A private company may allot shares without waiting for minimum subscription, start business on receiving its certificate of incorporation, manage with two directors instead of three, and skip the index of members. This brings it nearer the easy formation of a partnership.

Where it resembles a public company

1. Incorporation and separate entity. Like any company it is formed under the Companies Act and becomes an artificial person, distinct from its members, able to own property, borrow and sue in its own name.
2. Limited liability. A member's liability stops at the unpaid amount on the shares held. Partners, by contrast, are liable without limit, even from personal assets.
3. Perpetual succession. The company continues while members come and go, and ends only through winding up; a partnership can end with the death, retirement or insolvency of a partner unless the others make a fresh agreement.
4. Board management. Its affairs are run by a board of directors accountable to shareholders, with the same ceiling of fifteen directors as a public company, whereas partners manage jointly and each binds the others as agent.

Critical examination

The statement is a fair description of how a private company works, but not of what it is in law.

Where it holds. A family or a few associates who want to keep control and privacy of ownership, as in a partnership, but also want limited liability and continuity, find the private company the natural choice. It combines the closeness of the first with the legal protection of the second.

Where it overstates. A private company is not half a partnership. In every legal respect it is a company: a separate person, with limited liability, perpetual succession and board management. The partnership-like features are only restrictions written into its articles. If a private company breaks these conditions, it ceases to be private and loses its privileges, and under the proviso to section 2(71) a subsidiary of a company that is not private is deemed a public company for the purposes of the Act, even while its articles still describe it as private. It also carries the burden of company formation, which is longer and costlier than setting up a firm.

Consider three brothers running a sweets business in Jaipur as partners. If they convert it into a private limited company, their homes are no longer at risk for business debts and the business survives any one of them, yet the shares stay within the family. They gain the safety of a company without opening their ownership to outsiders.

Conclusion

The private company sits between the two forms in its size, privacy and restrictions on transfer, which resemble a partnership, while its legal personality, limited liability and continuity are those of a company. It is best seen as a company adapted for small, closely held businesses rather than as a true compromise.