How Much Paid-Up Capital for Private Limited Company is Necessary?
Most businessmen dream big. However, financial constraints often prevent them from taking full control. Thus, they look for business partners to provide what is required of the investment of their choice.
Entrepreneurs usually pick Private Limited Company as the most logical choice for their business, especially if they’re embarking on limited resources.
Considered as the most fundamental form of business in India, the Private Limited Company requires basic eligibility criteria and documentation.
Formation of a Private Limited Company in India
A Private Limited Company is a distinctly favorable business structure that provides an eternity of business ahead.
In India, nine of 10 companies are registered as a Private Limited Company. These businesses are enjoying perks and incentives under the Companies Act of 2013 with a simplified registration procedure.
More than the simplified registration, India’s Ministry of Corporate Affairs (MCA) also imposes a minimal Paid-Up Capital for Private Limited Company.
As if all the laxities in place are not enough, the MCA also boasts of a government business policy to entice more investors to do business in India.
In fact, one of the top reasons why foreign companies would want to do business in India is the Amended Companies Act of 2015 eliminating minimum paid-up capital requirements to incorporate a Private Limited Company.
What Do Entrepreneurs Say About Starting a Private Limited Company
Entrepreneurs opt to register as Private Limited because it provides flexibility with ownership. This factor allows directors and shareholders to have full control as to how they want to run the company. They could also determine how to divide profits among themselves.
Unlike in bigger companies that have around one hundred directors, the Private Limited Company only requires a minimum of two and a maximum of 15. This makes decision-making not as complicated as how it is in bigger companies.
Relatedly, foreign shareholders are also deemed eligible to become board directors too.
Private Limited Companies also have a leaner roster of shareholders – a maximum of 200 shareholders.
Paid-up Capital for Private Limited Company
Private Limited Companies also have provisions setting the maximum number of shares that could be issued to its shareholders. As such, it is a must to prescribe the company’s authorized capital in the Memorandum of Association during its incorporation.
Authorized capital represents the whole company stake. These stakes come from the shareholders, some of whom could be members of the board of directors forming the Private Limited Company.
Interestingly, the Private Limited Company is also monetizing a fraction of the authorized capital. Monetized shares are called Paid-Up Capital for Private Limited Companies.
Sources of Paid-Up Capital for Private Limited Company
There are actually two conditions in which Private Limited Companies issue shares or stocks:
- Companies issue shares or stocks whenever there is an urgent need to bankroll its operations. It also applies to situations requiring a radical shift in its strategy to prevent the company from incurring further losses.
- Companies also issue shares whenever there is a high demand for their limited number of shares.
Monetized shares or stocks form part of the Private Limited Company’s Paid-Up Capital, which usually comes from two sources:
Par Value of the Shares
– Private Limited Company usually operate using funds from shares that were issued to the shareholders. Par Value, or what is commonly referred to as nominal value, is defined in the company’s MOA during its incorporation, in this case as Private Limited Company.
Premium/Discount Stock Value
– Many Private Limited Companies in India are also able to raise funds by way of issuing discounted prices for its shares or stock. It is also possible to reverse the offer. Instead of discounted prices of shares or stocks, a Private Limited Company could also issue a premium on their par value. To make it simple, discounted shares are those that are offered way below the actual cost. Premium shares are those stocks sold higher than what it actually cost.
Complexities of Paid-up Capital for Private Limited Company
While Paid-Up Capital for Private Limited Companies may seem basic, there are actually more complexities in it.
- There is no provision for the repayment of shares.
- Either common stock paid-up capital or additional stock paid-up capital.
In essence, paid-up capital helps the company to keep debts in check and ensure that they are less dependent on external fund sources. However, the cost of maintaining paid-up capital can be quite stressful, especially if you’re just about to form a company. You would need experts to help you with these daunting tasks.
You can approach an India incorporation agency like 3E Accounting to assist you.
Contact us for more information.