How many shareholders and directors does a private company need?
A private company needs at least two members and two directors; a One Person Company needs one of each. Here is the law, the 200-member cap and what happens if you fall short.
CA Harun Raaj
makeitlegit.in
You are planning a company and the first question is simple. How many people do you need? Two friends can start one. A solo founder may wonder if a partner is compulsory. A family may wonder how many relatives can hold shares.
The Companies Act 2013 answers all of this in a few short provisions. The numbers are not the same for members (the shareholders) and directors (the people who run the company), so read both.
The short answer
For a private company:
- Members (shareholders): at least two, and at most two hundred (s.3(1)(b) and s.2(68), Companies Act 2013).
- Directors: at least two, and at most fifteen unless you pass a special resolution (s.149(1), Companies Act 2013).
For a One Person Company, which is a type of private company:
- Members: one (s.3(1)(c) and s.2(62), Companies Act 2013).
- Directors: at least one (s.149(1)(a), Companies Act 2013).
For a public company the minimum is seven members and three directors (s.3(1)(a) and s.149(1)(a), Companies Act 2013). That is a different route, so this article stays with the private company.
Members: what the law says
Section 3(1) says a company may be formed for any lawful purpose by seven or more persons for a public company, two or more persons for a private company, or one person for a One Person Company, which is "a private company". They form the company by subscribing their names to a memorandum and complying with the registration requirements (s.3(1), Companies Act 2013).
The 200-member ceiling
A private company is defined by its articles. The articles must restrict the right to transfer shares, limit the number of members to two hundred (except in a One Person Company), and prohibit any invitation to the public to subscribe for its securities (s.2(68), Companies Act 2013).
Two details help when you count to 200:
- Where two or more persons hold a share jointly, they are treated as a single member (first proviso, s.2(68), Companies Act 2013).
- People in the company's employment, and former employees who became members while employed and kept their shares after leaving, are not counted (second proviso, s.2(68), Companies Act 2013).
For most start-ups this cap never matters. It matters when you issue shares widely, for example to many employees, friends or small investors. Employees on the first list are outside the count, so employee shareholding rarely pushes you over. Outside investors do count.
The One Person Company
A One Person Company is "a company which has only one person as a member" (s.2(62), Companies Act 2013). It is still a private company, and the 200-member limit does not apply to it (s.2(68)(ii), Companies Act 2013).
The memorandum of a One Person Company must name another person, with that person's prior written consent in the prescribed form. That person becomes the member if the subscriber dies or cannot contract. The consent is filed with the Registrar at the time of incorporation (first proviso, s.3(1), Companies Act 2013). The member may change the nominee later by giving notice in the prescribed manner (third proviso, s.3(1), Companies Act 2013).
The rules on who can form a One Person Company, and when it must convert, sit in the Companies (Incorporation) Rules 2014 and later amendments. Check the current rule text before you rely on it.
Directors: what the law says
Every company must have a Board of Directors made up of individuals. In a private company there must be a minimum of two directors. In a One Person Company the minimum is one. The maximum is fifteen (s.149(1), Companies Act 2013).
You can go beyond fifteen only by passing a special resolution (proviso to s.149(1)(b), Companies Act 2013). A special resolution needs the intention to propose it to be stated in the meeting notice, and the votes in favour must be at least three times the votes against (s.114(2), Companies Act 2013).
The first directors
If the articles do not name the first directors, the subscribers to the memorandum who are individuals are deemed to be the first directors until directors are duly appointed. In a One Person Company, the individual who is the member is deemed to be the first director (s.152(1), Companies Act 2013).
This is why a two-founder company usually has the same two people as members and directors. The roles are separate in law, though. A director runs the company. A member owns shares. A person can be both, and one can exist without the other.
Appointing directors after incorporation
Save where the Act says otherwise, every director is appointed by the company in general meeting (s.152(2), Companies Act 2013). Before the appointment the person must hold a Director Identification Number, the DIN, or such other number as the rules prescribe (s.152(3), Companies Act 2013). The proposed director must furnish the DIN and a declaration that he or she is not disqualified under the Act (s.152(4), Companies Act 2013).
Every individual intending to be a director applies to the Central Government for a DIN, in the prescribed form and with the prescribed fee (s.153, Companies Act 2013). Check the current form and fee on the MCA portal before you file.
The resident director rule
Every company must have at least one director who stays in India for a total of not less than 182 days during the financial year (s.149(3), Companies Act 2013). In a newly incorporated company, this applies proportionately at the end of the financial year in which it is incorporated (proviso to s.149(3), Companies Act 2013).
Rules that do not apply to you
Some board rules sound alarming but do not cover a normal private company:
- The one-third independent director rule applies to "every listed public company" (s.149(4), Companies Act 2013).
- A woman director is required only for "such class or classes of companies as may be prescribed" (second proviso to s.149(1), Companies Act 2013). Rule 3 of the Companies (Appointment and Qualification of Directors) Rules 2014 names every listed company and every other public company with paid-up share capital of ₹100 crore or more or turnover of ₹300 crore or more. A private company is not in that list. Confirm there is no later amendment before you rely on this.
The clock: what happens if you fall short
Members below two
Suppose a private company's membership drops below two, for example one of two shareholders transfers shares to the other. The Act gives a six-month window. After that, trouble starts.
If the company carries on business for more than six months while the number of members is reduced, every person who is a member during the time it carries on business after those six months, and who is aware of the fact, becomes severally liable for the payment of the whole debts of the company contracted during that time. They may be sued for those debts one by one (s.3A, Companies Act 2013). For a private company the trigger is a membership below two (s.3A, Companies Act 2013).
"Severally liable" means each such person can be asked to pay the whole debt, not only a share. This removes the limited liability protection that was the point of the company. Fix the member count well within the six months.
Directors below two
The Act says a private company shall have a minimum of two directors (s.149(1)(a), Companies Act 2013). A vacancy that leaves you at one is a breach of that minimum. Fill it promptly.
A casual vacancy (an unexpected exit before term ends) in the office of a director appointed by the company in general meeting may, subject to the articles, be filled by the Board at a Board meeting, which must then be approved by the members at the immediate next general meeting (s.161(4), Companies Act 2013).
A director may resign by written notice to the company, and the resignation takes effect from the date the company receives the notice or the date stated in it, whichever is later (s.168(1) and (2), Companies Act 2013). So you cannot always stop a resignation. Plan replacements before a director leaves.
Step by step: setting up with the right numbers
- Pick your structure. Two or more founders: private company. One founder: One Person Company (s.3(1), Companies Act 2013).
- Decide who the first directors are. Name them in the articles, or let the individual subscribers be deemed the first directors (s.152(1), Companies Act 2013).
- Get a DIN for each proposed director by applying in the prescribed form (s.153, Companies Act 2013). Check the MCA portal for the current form and fee.
- Check the resident director rule. At least one director must stay in India for 182 days in a financial year (s.149(3), Companies Act 2013).
- File for registration. The documents go to the Registrar of the area of the proposed registered office. They include the memorandum and articles signed by all subscribers, a declaration by a professional engaged in the formation and by a person named in the articles as director, manager or secretary, a declaration from each subscriber and first director, particulars of the first directors and their consent to act (s.7(1), Companies Act 2013).
- Receive the certificate. The Registrar registers the documents and issues a certificate of incorporation, and the company gets a corporate identity number (s.7(2) and (3), Companies Act 2013).
- For a One Person Company, file the nominee's written consent with the incorporation documents (first proviso, s.3(1), Companies Act 2013).
Which e-form carries these filings is set by the MCA portal. Check the current form on the portal before you file.
What not to do
- Do not file loose facts. The incorporation filing carries a declaration that all the information is correct and complete (s.7(1)(c), Companies Act 2013).
- Do not let membership fall to one in a two-member company and carry on trading for more than six months (s.3A, Companies Act 2013).
- Do not issue shares to more than 200 people while remaining a private company (s.2(68)(ii), Companies Act 2013).
- Do not leave the board at one director in a company that is not a One Person Company (s.149(1)(a), Companies Act 2013).
- Do not appoint a director without a DIN (s.152(3), Companies Act 2013).
- Do not assume the public-company rules apply to you. Seven members, three directors and the independent director rule belong to other classes of company (s.3(1)(a), s.149(1)(a) and s.149(4), Companies Act 2013).
What to do now
- Next step: Decide the structure, then list each proposed director with a DIN and one resident director meeting the 182-day rule (s.149(3) and s.152(3), Companies Act 2013).
- Deadline: If you are already running and your members have fallen below two, you have six months of trading before several liability starts for members who know of it (s.3A, Companies Act 2013). Act well inside that window.
- Consequence of missing it: Members who carry on business after the six months, knowing the count is short, become severally liable for the whole debts contracted in that time (s.3A, Companies Act 2013).
Have a CA review your facts before you act or file.
FAQs
Can one person form a private company?
Yes, as a One Person Company. It is a private company with one member, and the memorandum must name a nominee who steps in if the member dies or cannot contract (s.2(62) and first proviso to s.3(1), Companies Act 2013). An ordinary private company needs two persons (s.3(1)(b), Companies Act 2013).
Can the same two people be both the members and the directors?
Yes. The subscribers who are individuals are deemed the first directors unless the articles name others (s.152(1), Companies Act 2013). The two roles stay separate in law.
Does a private company need an independent director or a woman director?
The independent director rule is for listed public companies (s.149(4), Companies Act 2013). A woman director is needed only for prescribed classes of companies (second proviso to s.149(1), Companies Act 2013), and the 2014 rule on that class names listed companies and larger public companies, not private ones (rule 3, Companies (Appointment and Qualification of Directors) Rules 2014). Confirm there is no later amendment.
Can a foreign national be a director of a private company?
The Act sets no nationality requirement in the board provisions cited here, but at least one director must stay in India for 182 days in the financial year (s.149(3), Companies Act 2013). Foreign investment rules sit outside this article. Take advice before you appoint.
How many directors can a private company have?
At most fifteen. More than fifteen needs a special resolution (s.149(1)(b) and its proviso, Companies Act 2013).
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See Also
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