There are different business structures. A business structure is how a company or a business is legally represented. To register a business, they need to have a business structure. Before deciding on a business structure, a business owner should consider some factors. Here are the common types of business structures. The business structures include:
- Sole proprietorship: this is a business structure owned by one person.
- Partnership: two or more people own this type of business structure. There are two types of partnerships: general partnerships and limited partnerships.
- Corporation: This Company is independent of the owners.
- Limited liability Company: this is a company where its owners are protected by law. It is a privately held company.
This article will inform you more about a Limited Liability Company or a private limited company.
Private Limited Company
It is a private company for small businesses. In a private limited company, the owners are limited. Owners have liability to their shares. A private limited company only allows a maximum number of 200 shareholders. The shareholders in a private limited company are not allowed to sell their shares to the public.
Characteristics of a private limited company`
- Requires a minimum of two members to start it off. A private limited company can have a maximum of 50 members.
- A private limited company can exist with a minimum of two directors in place. The number of directors can increase as the company starts operating.
- If the founder of the company dies or leaves the company, a private limited company can continue to run without them.
- Shareholders of a private limited company have limited liability. It means that their assets cannot be interfered with if the company incurs losses.
Advantages of a Private Limited Company
Limited liability: This advantage comes with being a private limited company. If the company gets into a loss, the shareholders do not risk losing their assets.
Restricted sale of shares: shareholders in a private limited company are not allowed to sell shares to the public. Only members of the private limited company have the right to have the shares. If a shareholder wants to sell their shares, he sells them to people in the private limited company.
Existence: one advantage of a private limited company is that it will continue to exist even after the founder is not there.
Separate legal entity: this means that a private limited company’s assets and liabilities are separate from those of the shareholders. If someone is to sue a private limited company, the assets and liabilities of the shareholders will not be affected.
Capital: for a private limited company, there is no minimum capital required. You can start the company with whatever capital the business has.
For a private limited company, share transfers are allowed but under conditions.
Share transfer happens when a shareholder wants to transfer shares to another person. In most business structures, shares can be transferred to people in the company and out. For a private limited company, it is different. Shares in a private limited company cannot be transferred to people outside the company. There are some rules and restrictions when it comes to the transfer of shares in a private limited company.
Rules and Regulations on share transfers
For shares to be transferred in a private limited company, the person who wants to transfer the shares should first seek consent. A shareholder should reach out to the members of the private limited company and tell them he wants to transfer the shares. If the members agree to it, the shareholder can transfer the shares to someone else in the company. There has to be a unanimous agreement from all the shareholders.
A shareholder might decide to sell their shares. In this case, the priority to buy the shares will be given to the private limited company shareholders. If the other shareholders do not want to buy the shares, there is an alternative of selling the shares outside the company.
Before a shareholder can transfer shares to family members, he should seek consent from the other members of the private limited company. The shareholder should put in place the pre-emption rights first.
For some private limited companies, they restrict the transfer of shares to people who are not immediate family members. Other companies also restrict the transfer of shares to family members. It is done to protect the shareholder’s family ownership. Other companies allow shareholders to transfer shares only to some family members.
Death of a shareholder
When a shareholder dies, he ceases to be a member of a private limited company. The shares the shareholder had will need to get transferred. In most cases, the shareholder’s shares are transferred to whoever the shareholder has in his will. These people can include the shareholder’s spouse, children, or any other person on the will.
The pre-emption rights can also be put in place while transferring shares of a deceased shareholder. Shareholders who are alive can be given the priority to buy the shares.
Drag and tag along clauses
These two clauses protect shareholders when the company wants to be sold. The drag-along clause protects the majority shareholders in a private limited company. The tag-along clause protects the minority shareholders in the company.
If the majority shareholders are selling the company, the minority shareholders might be required to sell their shares hence they will be dragged along the sale of the company. If the majority shareholders are selling their shares, the minority shareholders can tag along and sell their shares at the same rate the majority shareholders are selling their shares.
Being in a private limited company is good. Its advantages outweigh the disadvantages. If you want to start a company, you should consider starting a private limited company if you have the right members. This article has provided you with information on the rules and regulations on share transfers in a private limited company. The information available through Seed Formations Ltd™ is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by Seed Formations Ltd™ and is not intended to be relied upon by users in making (or refraining from making) any decisions