Liabilities & Rights of Promoters


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A promoter of a company cannot be considered as an agent of the company as the company is not in existence during promotion. A promoter is not a trustee of the company. A promoter cannot make any secret profit.

Formation of a Company

The following things are required for the formation of a company.

  • Promoters are required.
  • Objectives of the promoters must be laid down.
  • The names of the promoters must be subscribed to the memorandum of the company.
  • The promoters must comply with the Company Act, 1956.

Private companies and public companies having a share capital can immediately start business after the certificate of registration is issued by the registrar. The incorporation of a company takes approximately 35 days in India. Public companies can offer their shares for sale to the public. The minimum share capital for a public company to be incorporated must be INR 50,000. A private company places certain restrictions on ownership.

For the formation of a company, a company passes through the following three stages −

  • Promotional stage
  • Incorporation stage
  • Commencement of business

Private Company and Public Company

  • The director of a private company may not be specifically qualified. A private company may have only one director who can also be the only shareholder.

  • A public company must have at least 2 directors and 2 shareholders.

  • A private limited company can use its resources to purchase the shares of the company when someone wishes to leave the company.

  • A private company cannot offer any securities of the company to the public.

  • Public companies are able to sell their shares to the public.

To differentiate public companies and private companies, the following factors are taken into consideration −

Minimum Number of Members

A minimum number of 7 members and a minimum number of 2 members are required for a public company and a private company respectively.

Maximum Number of Members

A private company can have 50 members at maximum whereas there is no limit for public companies.

Commencement of Business

A public company needs a Certificate of Commencement for commencement of business whereas, a private company can commence business after the certificate of registration is issued.

Invitation to the Public

A public company can invite the public to buy shares whereas a private company cannot sell its shares to the public.

Transferability of Shares

There is no restriction on a shareholder of a public company to transfer shares. Shareholders of private companies are restricted from transferring shares.

Number of Directors

A private company can have at least 1 director but a public company must have at least 2 directors.

Statutory Meeting

A public company must hold a statutory meeting and file a statutory report with the registrar. There is no such obligation for a private company.

Restrictions on the Appointment of Directors

A director of a public company should file his consent with the registrar. He cannot vote or participate in any discussion on a contract on which he is interested.

Managerial Remuneration

For a public company, the remuneration payable to a manager cannot exceed 11% of net profits. A minimum of INR 50,000 can be paid at the time of inadequacy of profit. Private companies do not face these restrictions.

Further Issue of Capital

A public company must offer further issue of shares to its existing members. A private company on the other hand is free to allot new issue to outsiders.

Name

Private companies are required to have the suffix ‘Private Limited’ at the end of their names. A public company is required to have the suffix ‘Limited’ at the end of its name.



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