Starting or running a private company comes with its own set of rules that protect both the company and its shareholders. If you’re a business owner or entrepreneur, understanding these rules can save you from costly mistakes and legal headaches down the road.
Here’s a straightforward guide to the most important things you need to know about private companies under the Companies Act, No. 07 of 2007.
1. What Makes a Company “Private”?
A private company has two main legal features:
- No Public Share Sales:
Your company cannot offer shares or securities to the public. Ownership stays private, with a limited circle of shareholders. - Limit on Number of Shareholders:
Your company can have up to 50 shareholders. But here’s a helpful tip: employees or former employees who became shareholders while working at the company do not count towards this limit.
2. What Happens if You Break These Rules?
If your company changes its rules or fails to follow the private company limits:
- Your company will automatically lose its “private” status and become a public company.
- Certain legal protections and privileges you had as a private company will no longer apply.
- Your company’s name may be legally changed to reflect the change in status (for example, removing the “(Pvt) Ltd” from your name).
However, the court can forgive minor breaches if:
- The mistake was unintentional.
- You’ve fixed the problem quickly.
- It’s fair to let your company remain private.
3. Can You Become Private Again?
Yes! If your company adjusts its rules to meet the private company requirements, it can regain private status and update its name accordingly.
4. Do You Have to Keep an Interests Register?
Usually, companies must keep a register showing who owns shares or has interests. But for private companies:
- You can choose not to keep this register if all shareholders agree unanimously.
- If any shareholder later requests it, you must start keeping the register again.
5. Unanimous Shareholder Decisions Can Override Company Rules
If all shareholders agree in writing, their decision overrides what’s written in the company’s articles. This makes it easier to:
- Issue shares
- Pay dividends
- Buy back shares
- Provide financial help for buying shares
- Pay or lend money to directors
- Enter contracts involving directors with personal interests
This flexibility can speed up company decisions—but use it wisely!
6. Important Warning: Be Careful with Company Distributions
If your company pays dividends or other distributions that make it unable to pay its debts (fail the “solvency test”):
- That payment is invalid.
- The company can demand repayment from shareholders who got the money—unless they received it honestly and would be unfairly hurt by repaying it.
- If the company can’t get back all the money, shareholders who agreed to the payment may have to personally repay the company.
- Courts may reduce personal liability if part of the payment was reasonable.
What This Means for You as a Business Owner
- Know your company type: Avoid accidentally losing private company status by keeping your shareholders and share offerings within legal limits.
- Get unanimous shareholder decisions in writing when making major moves—they can simplify processes.
- Always check your company’s solvency before paying dividends or other distributions to avoid personal financial risk.
- Consult professionals: A corporate lawyer or accountant can help you navigate these rules and protect your business and personal interests.
Final Thought: Running a private company has benefits but also clear legal boundaries. Understanding and following these rules helps keep your business on solid ground and prevents unexpected problems.
If you want help reviewing your company’s articles or shareholder agreements, feel free to reach out!
