What are the Type of Business Entities in India?

The following types of Business entitles are available in India:

  • Private Limited Company
  • Public Limited Company
  • Unlimited Company
  • Partnership
  • Sole Proprietorship

In addition to the above legal entities, the following types of entities are available for foreign investors/foreign companies doing business in India:

  • Liaison Office
  • Representative Office
  • Project Office
  • Branch Office
  • Wholly owned Subsidiary Company
  • Joint Venture Company

See Types of Business Entities in India for more details.


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What is a Private Limited Company?

A Private Limited Company is a Company limited by shares in which there can be maximum 200 shareholders, no invitation can be made to the public for subscription of shares or debentures, cannot make or accept deposits from Public and there are restriction on the transfer of shares. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 2. For Details see: Private Limited Company in India


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What is a Public Limited Company?

A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 7.


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What are the advantages of a Limited Company?

A limited company has following advantages:

  • Members’ (the directors and shareholders) financial liability is limited to the amount of money they have paid for shares.
  • The management structure is clearly defined, which makes it easy to appoint, retire or remove directors.
  • If extra capital is needed, it can be raised by selling more shares privately.
  • It is simple to admit more members.
  • The death, bankruptcy or withdrawal of capital by one member does not affect the company’s ability to trade.
  • The disposal of the whole or part of the business is easily arranged.
  • High status.

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What are the disadvantages of a Limited Company?

A limited company has following disadvantages:

  • Requirement to register the company with the registrar of companies and provide annual returns and audited statement of accounts. All details of the company are available for public inspection so there can be no secrecy. There are penalties for failing to make returns.
  • Can be more expensive to set up.
  • May need professional help to form.
  • As a director, you are treated as an employee and must pay tax.
  • The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business.

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What entity is best suited?

The choice of entity depends on circumstance of each case. Private Limited Company has lesser number of compliances requirements. Therefore, generally where there is no requirement of raising of finances through a public issue and the ownership is intended to be closely held by limited number of persons, Private Limited Company is the best choice.


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What is the minimum paid-up capital of a Private Limited Company?

The minimum paid up capital at the time of incorporation of a private limited company has to be Indian Rupees 1,00,000 (about United States Dollars 2,000). There is no upper limit on having the authorized capital and the paid up capital. It can be increased any time, by payment of additional stamp duty and registration fee.


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What is the difference between authorized capital and paid up capital?

The authorized capital is the capital limit authorized by the Registrar of Companies up to which the shares can be issued to the members / public, as the case may be. The paid up share capital is the paid portion of the capital subscribed by the shareholders.


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What is the procedure in obtaining a name approval for the proposed Company?

An application for Reservation of proposed name of the company is made to the Ministry of
Corporate Affairs (“MCA”).  The details to be stated in the said application are as follows:

(1) The type of proposed business entity to be selected. (Note: An attorney must be consulted to pick up the right kind of business enetity. See Types of Business Entities in India for more details)

(2) Two alternative names for the proposed company. The proposed names must be unique and should not resemble to the names of existing companies or well known companies or trademarks of others.

(3) Must follow name guidelines and Rules prescribed by MCA while proposing a name of the company.

(4) The proposed names may consist of coined words from the name of promoters or directors but should definitely be indicative of the principal business of the proposed company. Justification for the name needs to be stated along with the application.

(5) The main objects for which the company is to be formed.

After submitting the application, MCA scrutinizes the application for uniqueness of the proposed name and either accepts or rejects the application. If there is no objection or there is objection and reply to objection is satisfactory, name approval letter is issued electronically in about a week. An opportunity of being heard is provided to the applicant before rejecting the Name Reservation Application. .


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What is the Memorandum of Association (MOA) and the Articles of Association (AOA) of a company and what is the procedure in their regard?

On receipt of the name approval letter from the ROC the MOA and the AOA are required to be drafted. The MOA states the main, ancillary / subsidiary and other objects of the proposed company. The AOA contains the rules and procedures for the routine conduct of the proposed company. It also states the authorized share capital of the proposed company and the names of its first / permanent directors. After the MOA and AOA are required to be stamped.
A stamp duty is required to be paid on the MOA and on the AOA. The stamp duty depends on the authorized share capital.


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What are the documents required to be executed for incorporation?

The following documents are required to be executed (signed) by promoter(s) before they are submitted to the ROC:

1. Memorandum of Association (“MOA”) – MOA is like a Charter of a Company. Promoter(s) or its/their Authorized Signatory(s) are required to sign MOA in the presence of one or more witnesses stating their full name, father’s name, residential address, occupation, number of shares subscribed for, etc.

2. Articles of Association (“AOA”) – AOA are byelaws of a company incorporated in India. Promoter(s) or its/their Authorized Signatory(s) are required to sign AOA in the presence of one or more witnesses stating their full name, father’s name, residential address, occupation, etc.

3. Corporate resolutions passed by parent Corporation or LLC to form a new company in India as its subsidiary and the amount of share apital to be inducted in the subsidiary.

4. Authorization executed by all the subscribers to MOA authorizing one of the subscribers or an Attorney to act on their behalf to digitally sign the incorporation documents to be filed with the ROC.

5. Special Power of Attorney in favor of an Attorney for the purpose of incorporation and accepting the certificate of incorporation on ehalf of the parent Corporation or LLC.

6. A Declaration, prescribed under the Companies Act, 2013, by each subscriber/ proposed director to the effect that the subscriber/director is not convicted of any offence in connection with the promotion, formation or management of any company during the preceding five years or of fraud and misfeasance, if any.

7. PAN Undertaking by a proposed director who is foreigner.

8. Form No. DIR 2 – Consent Form by each proposed director to act as director of the company to be formed in India.

7. PAN Undertaking by a proposed director who is foreigner.

8. Form No. DIR 2 – Consent Form by each proposed director to act as director of the company to be formed in India.

9. Filing fees as may be applicable.


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How is the certificate of incorporation issued?

After filing the above mentioned incorporation documents online, the concerned Registrar of Companies (“ROC”) examines all documents. In case the documents are found in order, the concerned ROC issues Certificate of Incorporation (“COI”).

In case, the ROC raises any objections, the applicant or its Attorney is required to resubmit documents after making changes in the MOA and AOA as per the directions of the concerned ROC. On complying with the same, the ROC issues COI and the company gets incorporated with effect from the date of the COI..


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When can the newly formed company start its business operations?

On receipt of the certificate of incorporation, a private limited company can start business right away. However, certain local permits are required in most cases. (See Typical Steps Required to Establish Business in India for more details)

But a public company has to complete certain other legal formalities.


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How do we comply with the legal formalities when we are not stationed in India?

You can give Power of Attorney to an attorney to sign the documents on your behalf. After the Company is incorporated, you can appoint Alternate Directors, to function on your behalf while you are not in India. But at least one director should a resident of India.

There can be one meeting of Board of Directors during your stay in India and all other formalities including those of appointment of Alternate Directors can be complied with.

 


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Can a foreign company incorporate a company in India?

Yes a foriegn company can incorporate a company or corporation or subsidiary in India. You can give Power of Attorney to an attorney to sign the documents on your behalf. After the Company is incorporated, you can appoint Alternate Directors, to function on your behalf while you are not in India. But at least one director should a resident of India.

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