HOW TO START PRIVATE LIMITED COMPANY IN INDIA
January 20, 2020
Private Limited Companies are those companies which are privately held by the people. They are mostly preferred as a common business organization in India. Shareholders may operate the business themselves, or hire directors to manage the company on their behalf. The main characteristics of a company are as follow:
- Minimum 2 and maximum of 200 members are required in Private Limited Company.
- The Companies Amendment Act, 2015 relaxed the minimum paid-up capital requirement, but it was not made zero paid-up capital.
- It shall have a minimum of two directors.
- Transfer of share can be restricted as per Articles of the company.
- It can take a loan from shareholders, directors and relatives of directors but not from the public. Shares cannot be issued to the public.
- Reduced compliance burden as per company law.
- The words ‘Private Limited’ should be suffix or must come after the name of the company. Many of the restrictive provisions of Companies Act are not applicable to Private Limited Company allowing flexibility and convenience, unlike Public Limited Company.
- Limited Liability:
As the business entity grows, the need for funds grows too. Hence, businesses have to borrow funds. In private limited company, the extent of liability is limited to the amount invested in starting the business. They are not personally liable to pay the debt.
- Access to Funding:
Private limited companies easily accommodate equity funding through venture capitalist, angel investors as they are unlikely to invest in any other structure.
- Debt-taking Capacity:
A private limited company can take funds from Banks, debentures and convertible debentures.
- Greater Credibility:
They have greater credibility as they have to inform about the structure, directors, members, Article and Memorandum of Association and necessary changes to the Ministry of Corporate Affairs. Such information is available on the internet in the public domain making the business entity more credible as compared to partnerships and proprietorships
- Easy Exit:
Private limited companies can be sold or transferred, either partially or in full, to another individual or entity without any disruption to the current business.
More capital can be raised as there is no limit on the number of a shareholder.
- Business startup:
The minimum number of shareholders need to start the business are only2. More capital can be raised as the maximum number of shareholders allowed is 50.
- Continuity of existence:
Business is not affected by the status of the owner. It continues to remain in existence.
- Brand Value:
Company’s brand value will get increased because people come to know about the company very well.
- Tax Advantages:
Private limited companies enjoy tax advantages. These companies pay corporation tax on their taxable profits and tend to be exempt from higher personal income tax rates. It opens the door to more tax-deductible costs and allowances redeemable against profits.
- Managing Shareholder Affairs:
- a) Transfer of Shares: Shares in any form of Company are normally freely transferable. However, in a Private Company, the articles can lay down certain restrictions and also the methodology in which they can be transferred.
- b) Convening General Meetings: A PLC necessarily has to give a notice of 21 clear days for conducting any general meeting, unless all the shareholder’s agreement for a shorter notice. However, in case of a Private Company, the articles can determine the period of notice, which is required for convening a general Notice, as well as the percentage of shareholders to consent for a meeting to be convened at a shorter notice.
- The shares cannot be sold or transferred to anyone else without the agreement of other shareholders.
- In PLC no one is allowed to invite public to subscribe to its shares.
- The Growth may be limited because maximum shareholders in a PLC are only 50.
PRIVATE LIMITED COMPANY – INCORPORATION
Any Company Registration starts with identifying the pre-requisites for incorporation and processing required documents for filing with concerned Registrar of Companies. Pre-requisites for company registration area s follow:
- Shareholders (Members)
Minimum Two Persons required.
Maximum members can exceed up to 200.
Member can be individual, LLP or any registered company
It shall have a minimum of Two Directors.
One of the directors must be Resident in India, i.e., stayed in India not less than 182 in the previous calendar year.
Proposed Directors shall have a Director Identification Number (DIN) issued by the Ministry of Corporate Affairs.
- Company Name
It consists of three parts i.e.
The Name Activity (Signify the industry) Private Limited Company.
The Registrar of Companies shall approve the name of the company.
Minimum Share Capital- the Company shall have Rs 100000.
- Registered Office Address
At the time of registration of Company, temporary address along with the address of any of the directors can be provided. Although, after registration, the company has to file the permanent business address with documentary proof of address, ownership etc.
- Company Objects
Objects of the Private Limited Company refer to proposed business activities. Private Limited Company objects shall be legal and shall not misuse or harm society. The name of the Company shall also signify the main, prerequisite objects. If the name of the Company is not describing a particular object, then the Company can have multifaceted objects. The objects are described under a Clause in Memorandum of Association of the Company.
- Digital Signature Certificate (DSC)
All documents are filed online with Registrar of Companies. Digital Signature Certificate is the ultimate way to verify the authenticity of the document. Hence, all the documents shall be authenticated by using a Digital Signature Certificate of the Director.
- Professional Certification
Services of professionals such as Chartered Account, Company Secretary, Cost Accountant is required to make necessary Certifications and declarations for the incorporation of a Private Limited Company.
A private limited company is the most common form of business entity in India. It is easy to maintain and raise funds, offers limited liability to its members, offers flexibility, easy bank loan accessibility. Following are the steps involved in the incorporation of a private limited company
1. OBTAINING DIRECTOR IDENTIFICATION NUMBER (DIN) & DIGITAL SIGNATURE CERTIFICATE
Documents regarding the same are:
- Identity proof,
- address proof,
- current occupation,
- education qualification,
- verification to be signed by the applicant.
2. APPLYING FOR THE NAME
The promoters should propose one or more suitable name for the company but registrar have to select the name in case some names are identical or similar to registered business entities or trademark
- The name should not be similar or identical to any registered company or trademark.
- The name should not be one prohibited under the ‘Emblems and names Act, 1950’.
- The name of the company must have suffix “Private Limited Company “.
After submission of name, the registrar will review and approve one of the names.It usually takes 3 to 5 working days to approve the name for the company.
3. DRAFTING OF MOA AND AOA
MOA is the Memorandum of Association which covers the important provision of the company’s constitution. AOA contains rules and regulations governing the internal management of the company. It is the binding contract between the members of the company.
For drafting these, subscribers specify the name, occupation, address and sign the subscription pages of the MOA and AOA.
4. FILING FOR INCORPORATION OF PRIVATE LIMITED COMPANY
- After the name approval, promoters should submit the application, prescribed fees and below said following documents to the registrar.
- Declaration from Directors
- Affidavits of the Directors
A declaration states that the requirements of the Act and the rules framed thereunder have been compiled with. This declaration is required to be signed by an advocate of the or Supreme Court or an attorney or a pleader having the right to appear before or a High Court or a Chartered Accountant in whole-time practice in India who is engaged in the formation of a company, or by a person named in the Articles as a Director, Manager or Secretary of the Company.
Besides the aforementioned documents, the company must provide relevant information regarding its registered office within 15 days of registration or during filing of incorporation documents.
5. SUBSCRIBING TO THE PRIVATE LIMITED COMPANY
As per the Companies Act 2013, the subscriber must sign their names and must be subscribed to the shares of the company incorporated. It means each subscriber must have at least one share of the company. Each subscriber should sign the memorandum in the presence of at least one witness and must clearly state the following:
- Personal Description
- No of shares subscribed
- Nature of shares etc.
Likewise, article of association should be signed. Both (Article and Memorandum of association) must be duly signed and stamped.
6. CERTIFICATE OF INCORPORATION OF PRIVATE LIMITED COMPANY
After filing the above-mentioned documents and payment of necessary fees, the certificate for incorporation would be issued by the Registrar of Companies. Upon Incorporation, the company becomes a legal person separate from its incorporators.