Important Keywords: Company Limited by Shares, Company Limited by Shares meaning, Company Limited by Shares example, Limited by Shares, Private Company Limited by Shares, Public Company Limited by Shares, Shareholders liability, Company Limited by Shares under Companies Act 2013.
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Table of Contents
Overview
Starting a business is exciting, but legal terms like "Company Limited by Shares" can sound confusing. Don't worry—we'll make it simple.
A Company Limited by Shares is one of the most popular business structures for startups, small businesses, and growing companies. It offers limited liability protection, meaning your personal assets remain safe if the company faces financial problems.
Let's understand what it means in simple words.
What is Company limited by shares in India?
A Company Limited by Shares is one of the most common types of companies in India. It is a business structure in which the company is owned by its shareholders, and each shareholder's ownership is represented by shares.
According to Section 2(22) of the Companies Act, 2013, a company limited by shares is a company where the liability of its members is limited to the unpaid amount on the shares they hold.
Understanding It in Simple way:
Imagine you and your friends start a company. Instead of everyone owning the business equally, the company is divided into small parts called shares. The number of shares a person owns determines how much of the company they own.
When shareholders buy these shares, they invest money in the company. This money is used to run and grow the business.
The biggest advantage of this type of company is limited liability. This means that if the company suffers losses or cannot pay its debts, the shareholders are generally not required to pay those debts from their personal savings or property. They can only lose the money they invested in the company or any unpaid amount on their shares.+
For example: If you buy shares worth ₹1,00,000 and have paid the full amount, you are generally not liable to pay anything more, even if the company faces huge financial losses. However, if you have paid only ₹70,000 and ₹30,000 is still unpaid on your shares, your maximum liability is limited to that unpaid ₹30,000.
A company limited by shares is also treated as a separate legal entity. This means the company has its own legal identity, separate from its shareholders. It can own property, open bank accounts, enter into contracts, borrow money, hire employees, and sue or be sued in its own name.
To raise funds, the company issues shares to investors. In return, the investors become shareholders and own a part of the company. If the company earns profits, it may distribute a portion of those profits as dividends to its shareholders.
In India, there are two types of companies limited by shares:
- Private Limited Company – Shares cannot be offered to the general public and the company can have up to 200 members.
- Public Limited Company – Shares can be offered to the public through a stock exchange, and there is no limit on the number of shareholders.
Because it offers limited liability, separate legal identity, easy ownership through shares, and the ability to raise capital, this is the most popular company structure in India. Most startups, technology companies, manufacturing businesses, trading firms, and family-owned businesses choose to register as companies limited by shares.
Example:
Suppose Aryan and Neha start a company with a capital of ₹10 lakh. They divide the company into 10,000 shares of ₹100 each.
Aryan buys 7,000 shares, so he owns 70% of the company.
Neha buys 3,000 shares, so she owns 30% of the company.
If the company earns a profit, Aryan and Neha may receive dividends based on the number of shares they own.
If the company later suffers losses or cannot repay its debts, Aryan and Neha are generally not personally responsible for those debts. They can lose only the money they invested in buying their shares (or any unpaid amount on those shares). Their personal assets, such as their house, car, or savings, are generally protected.
Let's Understand with an Example
Imagine a Company Limited by Shares is like a pizza.
- The company is the whole pizza.
- Shares are the slices of the pizza.
- Shareholders are the people who own the slices.
- The more slices (shares) a person owns, the larger their ownership in the company.
If the pizza shop (company) earns money, the owners may receive a share of the profits.
If the pizza shop faces losses, the owners usually lose only the money they invested in buying their slices—not their personal house, car, or savings.
Why do most businesses choose this structure?
Many entrepreneurs choose a company limited by shares because it offers several advantages:
- Limited Liability: Your personal assets are generally protected from business debts.
- Separate Legal Identity: The company exists independently of its shareholders.
- Easy to Raise Capital: The company can issue shares to bring in new investors.
- Better Business Credibility: Customers, banks, and investors often have greater confidence in a registered company.
- Business Continuity: The company continues to exist even if shareholders or directors change.
Private vs. Public company Limited by shares
A company limited by shares can be either Private or Public.
| Private Company | Public Company |
|---|---|
| Shares are owned by a limited number of people. | Shares can be offered to the general public. |
| Shares cannot be traded on a stock exchange. | Shares can be listed and traded on a stock exchange. |
| Easier compliance requirements. | More stringent legal and disclosure requirements. |
| Best for startups, SMEs, and family businesses. | Suitable for large businesses looking to raise funds from the public. |
Advantages of a company limited by shares
A Company Limited by Shares is one of the most popular business structures in India because it protects the owners and makes it easier to grow the business. Here are its major advantages:
1. Limited liability protection
The biggest advantage is limited liability. Shareholders are liable only up to the unpaid amount on the shares they own. If the company suffers losses or is unable to repay its debts, their personal assets, such as their house, car, or savings, are generally protected.
Example: If you invested ₹2 lakh in the company, your maximum financial risk is generally limited to that investment (or any unpaid amount on your shares).
2. Separate legal identity
A company has its own legal identity, separate from its shareholders. This means the company itself can own property, enter into contracts, borrow money, open bank accounts, and sue or be sued in its own name.
3. Easy to raise capital
A company limited by shares can raise money by issuing shares to investors.
- A Private Limited Company can issue shares to its existing shareholders or private investors.
- A Public Limited Company can also raise funds from the general public by issuing shares, subject to applicable laws.
This makes it easier to arrange funds for business expansion.
4. Easy transfer of ownership
Ownership in the company is represented by shares. If a shareholder wants to transfer ownership, they can transfer their shares according to the provisions of the Companies Act, 2013, and the company's Articles of Association.
In a Private Limited Company, the transfer of shares is restricted, while in a Public Limited Company, shares are generally freely transferable.
5. Better Credibility
A registered company enjoys greater trust among customers, banks, suppliers, and investors. This improves the company's reputation and makes it easier to obtain loans, attract investors, and secure business opportunities.
6. Perpetual Succession
A company continues to exist even if a shareholder or director dies, retires, resigns, or transfers their shares. The business can continue without interruption until it is legally dissolved.
7. Better growth
Since ownership is divided` into shares, the company can bring in new investors and raise additional capital whenever needed. This makes it easier for the business to expand, launch new products, or enter new markets.
8. Professional management
The shareholders own the company, while the directors manage its day-to-day operations. This separation allows the company to appoint experienced professionals to run the business efficiently.
Disadvantage of company limited by shares
Although a Company Limited by Shares offers many benefits, it also has some disadvantages that you should know before choosing this business structure.
1. More paperwork
Starting a company is not as simple as opening a shop. You need to complete several legal formalities and submit documents to the Ministry of Corporate Affairs (MCA). Many business owners take help from professionals to complete the registration process.
2. Annual compliance is compulsory
After the company is registered, you cannot simply run the business without any formalities. Every year, the company must file certain forms and financial documents with the government. If you miss the deadlines, you may have to pay penalties.
3. Higher compliance costs
A company has to spend money on annual filings, accounting, auditing, and professional services like Chartered Accountants (CA) or Company Secretaries (CS). These costs continue every year, even if the business is not making a profit.
4. Shares cannot be freely transferred (Private Limited Company)
5. Cannot raise money from the general public (Private Limited Company)
A Private Limited Company cannot invite the general public to buy its shares. It can raise funds only from its existing shareholders or private investors. This may limit its fundraising options compared to a Public Limited Company.
6. More rules to follow
A company must comply with various laws, including company law, tax laws, and other applicable regulations. This makes running a company more regulated than other business structures.
Shareholders' Rights and Responsibilities in a company limited by shares
Rights of Shareholders
1. Right to become a part owner of the company
When you buy shares in a company, you become one of its owners. The more shares you own, the greater your ownership in the company.
2. Right to vote on important decisions
Shareholders have the right to vote on important matters affecting the company. For example, they can vote on:
- Appointment or removal of directors.
- Appointment of auditors.
- Changes to the company's Memorandum of Association (MOA) or Articles of Association (AOA).
- Other important resolutions placed before shareholders.
Generally, the more shares a shareholder owns, the greater their voting power.
3. Right to receive dividends
If the company earns profits and decides to distribute them, shareholders have the right to receive dividends according to the number and class of shares they own.
However, dividends are not guaranteed. They are paid only when the company declares them.
4. Right to receive company information
Shareholders have the right to receive important information about the company, such as:
- Annual Financial Statements.
- Annual Report.
- Notice of General Meetings.
- Details of important resolutions.
This helps shareholders stay informed about the company's performance and decisions.
5. Right to attend general meetings
Shareholders can attend the company's Annual General Meeting (AGM) and other general meetings. They can ask questions, express their opinions, and participate in important discussions.
6. Right to Transfer Shares
A shareholder can transfer their shares according to the provisions of the Companies Act, 2013 and the company's Articles of Association.
In a Private Limited Company, share transfers are subject to certain restrictions.
In a Public Limited Company, shares are generally freely transferable.
7. Right to share in the remaining assets
If the company is legally wound up and all its debts have been paid, shareholders have the right to receive their share of the remaining assets according to their shareholding.
Responsibilities of Shareholders
Owning shares also comes with certain responsibilities.
1. Pay for the shares
Shareholders must pay the amount due on the shares they subscribe to. If any amount remains unpaid, they are liable only up to that unpaid amount.
2. Follow the company's rules
Shareholders should comply with the company's Memorandum of Association (MOA) and Articles of Association (AOA), as these documents govern the company's operations.
3. Vote responsibly
Shareholders should use their voting rights wisely and make decisions that are in the best interest of the company and all its stakeholders.
4. Follow the Law
Shareholders must comply with the applicable provisions of the Companies Act, 2013 and other laws while dealing with their shares or exercising their rights.
5. Support the company's growth
Although shareholders are generally not involved in the day-to-day management of the company, they should make informed decisions, participate in important meetings, and support the company's long-term growth.
Let's Understand with an example
Suppose Aayan and Nitu are shareholders of a company.
- Aayan owns 70% of the company's shares, which means he owns a larger part of the company.
- Nitu owns 30% of the company's shares, which means she owns a smaller part of the company.
Because Aayan owns more shares, he usually has more voting power when the company takes important decisions.
If the company earns a profit and decides to give dividends to shareholders:
- Aayan will receive a larger share of the dividend because he owns more shares.
- Nitu will receive a smaller share because she owns fewer shares.
Both Aayan and Nitu have the right to:
- Attend company meetings.
- Vote on important matters.
- Know about major decisions of the company.
If either Aayan or Nitu wants to sell or transfer their shares to someone else, they must follow the company's rules and the legal requirements under the Companies Act, 2013.
Note: The more shares a person owns, the bigger their ownership, voting power, and share in profits of the company. However, all shareholders have certain rights and must follow the company's rules.
Why should you choose a company limited by shares?
If you are planning to start a business with the aim of earning profits and building something for the long term, a Company Limited by Shares can be a smart choice.
My suggestion is that if you want to create a business that has the potential to grow, attract investors, and operate professionally, this structure provides a strong foundation.
The biggest advantage of this type of company is limited liability protection. This means the company and its owners are treated separately. If the business faces losses, debts, or legal claims, shareholders are generally not required to use their personal assets, such as their savings or property, to pay the company's obligations. Their risk is usually limited to the amount they have invested in the company.
A Company Limited by Shares is suitable for businesses of all sizes and industries. Whether you are starting a small startup, running a growing business, or planning to build a large enterprise, this structure can support your future plans.
Another important benefit is that it allows you to divide ownership into shares. This makes it easier to bring in new investors, raise funds, and expand the business when new opportunities arise.
Compared to running a business as an individual or through a simple partnership, a company provides a more organised structure, greater credibility, and better opportunities for long-term growth.
However, it is important to remember that a company also comes with responsibilities. You need to maintain proper records, complete annual filings, and follow the legal requirements under the Companies Act, 2013.
Conclusion
In this article, we have discussed everything you need to know about a Company Limited by Shares under the Companies Act, 2013. We explained its meaning, key features, legal definition, and how it works in India. We also discussed the rights and responsibilities of shareholders, the advantages and disadvantages of this business structure, and why it is one of the most popular choices for startups, small businesses, and growing companies.
We also covered important topics such as limited liability, share ownership, profit sharing (dividends), raising funds through shares, and how a Company Limited by Shares differs from other business structures. Understanding these concepts is important because they help entrepreneurs choose the right business structure while protecting their personal assets and supporting long-term business growth.
We hope this article has given you a clear understanding of what a Company Limited by Shares is and why many businesses choose this structure. Whether you are an entrepreneur, startup founder, investor, student, or someone interested in company law, this guide can serve as a helpful reference for understanding the basics of a Company Limited by Shares in India.
Disclaimer: The information in this article is for general purposes only and may not fit your personal situation. It is not legal, financial, or professional advice, and you should not rely on it as such. Before making any decisions, consider if this information applies to you and, if needed, get advice from a professional. The information is correct at the time of publication. While we have tried to ensure it is accurate, Finodha.in is not responsible for any loss or damage caused by using this information.
If you have any questions or notice anything missing in this article, you can contact/email me at help@finodha.in. You can also share your queries, and I will update the article to include any missing points, making it a complete guide for everyone.
Disclaimer: The information in this article is for general knowledge purposes only and should not be considered legal, tax, or professional advice.
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Hi, Go On, Tell Us What You Think about the Company Limited by Shares! Did we miss something to explain in this Article? Come on! Tell us what you think about our article in the comment/e-mail section.FAQs: Get answers to all your queries!
Question. Is a limited company limited by shares?
Answer. A company limited by shares is a type of limited company where the liability of shareholders is limited to the unpaid amount on their shares.
Question. Are there limited shares in a company?
Answer. No, shares are not limited, a company limited by shares means the shareholders' liability is limited to the unpaid amount on the shares they own.
Question. Can you change from limited by shares to limited by guarantee?
Answer. No, a company cannot directly change from Limited by shares to Limited by guarantee, it requires following the legal procedure prescribed under the applicable provisions of the Companies Act, 2013.
Question. What are the disadvantages of a company limited by shares?
Answer. The main disadvantages are that it involves more legal formalities, regular filings, and higher costs compared to simpler business structures.
Question. What does a company limited by shares mean?
Question. What is an example of a share in a company?
Answer. A share is a small unit of ownership in a company. When you buy shares, you become a part-owner of that company. The more shares you own, the larger your ownership in the company.
Question. Are private companies limited by shares?
Answer. Yes, most private companies are limited by shares.
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