What are the types of Business Entities Available in India?
The following types of Business entitles are available in India :
Limited Liability Partnership, LLP in India
A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India recently.
- Private Limited Company
- Public Limited Company
- Unlimited Company
- 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:
What is a Private Limited Company?
- Liaison Office
- Representative Office
- Project Office
- Branch Office
- Wholly owned Subsidiary Company
- Joint Venture Company
A Private Limited Company is a company limited by shares in which there can be maximum 50 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.
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.
What are the advantages of a Limited Company?
A limited company has following advantages :
What are the disadvantages of a Limited Company?
- 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.
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.
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.
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 2,250). 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.
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.
What is the procedure in obtaining a name approval for the proposed Company?
An application in Form No. 1A needs to be filed with the Registrar of Companies (ROC) of the state in which the Registered Office of the proposed Company is to be situated.¬ The application is required to be signed by one of the promoters. The details to be state in the said application are as follows:1. Four alternative names for the proposed company. (The name can be coined names from the objects of the proposed company or the names of the directors, etc. but should definitely be indicative of the main object of the company. Justification for the name needs to be specified along with the application)2. Names and addresses of the promoters (Minimum 7 for a public company while 2 for private company).3. Authorized Capital of the proposed company.4. Main objects of the proposed company.5. Names of other group companies. On submitting the application, the ROC scrutinizes the same and sends the approval / objections in about 10 days to the applicant. On fulfilling of the objections a formal letter of name approval is issued.
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.
What are the documents required to be executed for incorporation?
The following documents are required to be executed (signed) before they are submitted to the ROC :
- MOA and AOA - These are required to be executed by the promoters in their own hand in the presence of a witness in quadruplicate stating their full name, father's name, residential address, occupation, number of shares subscribed for, etc.
- Form No. 1 - This is a declaration to be executed on a non-judicial stamp paper of INR 20 by one of the directors of the proposed company or other specified persons such as¬ Attorneys or Advocates, etc. stating that all the requirements of the incorporation have been complied with.
- Form No. 18 - This is a form to be filed by one of the directors of the company informing the ROC the registered office of the proposed company.
- Form No. 29 - This is a consent obtained from all the proposed directors of the proposed company to act as directors of the proposed company. (Not required in case of private company).
- Form No. 32 - This is a form stating the fact of appointment of the proposed directors on the board of directors from the date of incorporation of the proposed company and is signed by one of the proposed directors.
- Name approval letter in original.
- Power of Attorney signed by all the subscribers of MOA authorizing one of the subscribers or any other person to act on their behalf for the purpose of incorporation and accepting the certificate of incorporation.
- Power of Attorney in case of a subscriber who has appointed another person to sign the MOA on his behalf.9. Filing fees as may be applicable.
How is the certificate of incorporation issued?
¬After the documents in FAQ 5 are filed, the ROC calls the attorney on a specific date for scrutiny and making the corrections in the MOA and AOA filed. On complying with the same, the certificate of incorporation is granted to the attorney.
When can the newly formed company start its business operations?
On receipt of the certificate of incorporation, the public company has to complete certain other legal formalities such as a statutory meeting (within 6 months), statutory report, etc. On completion of the said formalities and on filing of the statutory report with the ROC the ROC issues the certification of commencement of business to the company. Thereafter, the Public Company can start the business operations. The Private Company can start its business immediately on incorporation.
How do we comply with the legal formalities when we are not stationed in India?
¬You can give Power of Attorney to a person 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 once, you should be in India within one month of the incorporation of the Company. 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.
What other approvals are required for foreign investor in India?
IT is mandatory for foreign investors to obtain governmental approval for incorporating in India or forming a joint venture in India. In some sectors certain restrictions apply. Proper legal advice must be obtained before incorporating in India to ascertain the eligibility and applicable restrictions.Generally, prior approval is required from the RBI before investing in India. Some categories of businesses are covered under automatic approval process. However, one has to apply for the same.¬ There are some post-incorporation filing formalities after the remittance of capital from overseas to India and on issue of shares.
What are the requirements for issuing¬ Sweat Equity in an India Company?
¬Can an Indian company can issue sweat equity? There are separate rules for sweat equity in a private company in India and a public company in India.
Sweat Equity in a private company in India :
The provisions for issue of Sweat Equity are covered under Section 79A of the Companies Act. It provides that a company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled:
- the issue of sweat equity shares in authorized by a special resolution passed by the company in the general meeting.
- The resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued.
- not less than one year has, at the issue elapsed since the date on which the company was entitled to commence business.
- The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf.
- In view of the above provisions, you can't issue Sweat Equity at the time of incorporation of your Company as one year has not elapsed since the date on which the company was entitled to commence business.
In addition to the above provision, other regulatory provisions are applicable for issuing sweat equity shares for a private company in India.
Sweat Equity in a public company in India :
The aforesaid provisions regarding issuing of Sweat Equity under Section 79A of the Companies Act are applicable to a public company in India.
The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002
What are the requirements for a Foreign company forming a subsidiary in India?
A foreign company planning to form a subsidiary in India, in addition to meeting all requirements of forming a company, is required to seek governmental approval before investing in India. Some approvals are automatic, -RBI Approvals - though application is required for those approvals. Special Permission ‚Äď¬FIPB Approvals¬- could be obtained to invest over and above the regular percentage allowed. See our¬FDI in India Sector wise Guide for more information on various conditions of investing in India.
What are the requirements for a Foreign company opening a branch in India?
Foreign investors are required to seek governmental approval before investing in India. Some approvals are automatic, -RBI Approvals - though application is required for those approvals. Special Permission ‚Äď¬FIPB Approvals - could be obtained to invest over and above the regular percentage allowed.
What are the requirements for a Foreign company forming a joint venture in India?
Foreign investors planning to form a joint venture in India are required to seek governmental approval before investing in India. Some approvals are automatic, -¬RBI Approvals - though application is required for those approvals. Special Permission ‚Äď¬FIPB Approvals - could be obtained to invest over and above the regular percentage allowed.
What are the requirements for an American company planning to establish business in India?
An American or USA company planning to open business in India - subsidiary, branch, or joint venture -¬ should meet all the requirements mentioned here. It is also required to seek governmental approval before investing in India. Some approvals are automatic, -¬RBI Approvals - though application is required for those approvals. Special Permission ‚Äď¬FIPB Approvals - could be obtained to invest over and above the regular percentage allowed.
What are the compliance requirements for Companies in India?
All the companies who are related cyber business are required to comply with the requirements of the law.¬
IT is mandatory to set up corporate compliance programs including cyber law compliance program. If your company does not have the compliance program, then contact us to help you set up one for you.In addition, all the Multinational Companies Doing Business in India and having cyber involvement are required to comply with¬ the corporate and other laws of India including cyber law compliance.
The cyber law mandates all companies to have an information technology security policy. This documents the architecture of the network, the roles and responsibility of employees, security parameters and authorization required for data access, among other things. Other compliances that are required include relate to retention and authentication of electronic records and security of data.
Moreover,¬¬Indian Information Technology Act of 2000¬provides for further personal liabilities. For example, Section 85(1) of the IT Act provides that where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a Company, every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of business of the company as well as the company, shall be guilty of the contravention and shall be liable to be proceeded against and punished accordingly.
All the Indian companies and all foreign companies doing business in India, either directly or indirectly, should comply with this law.¬¬
What are the Requirements for a Private Limited Company?
A Registered Business Name: This must be followed by the word ‚ÄėLimited' or ‚ÄėLtd'. The Companies Registration Office exercises some control over the choice of name, it cannot be identical (or very similar to) the name of an existing company. It won't be considered if it is offensive or illegal and the use of certain words in a company (for example, `Institute', `National') can only be used in certain circumstances. The company name must be displayed in a conspicuous place at every office, or other premises where the company carries out business.¬
- A Registered Office : This need not necessarily be the same address as the business is conducted from. Quite frequently the address used for the registered office is that of the firm's solicitor or accountant. This is the address, through, where all official correspondence will go.¬
- Shareholders : There must be a minimum of two shareholders (also described as `members' or `subscribers'). A private company can have up to fifty shareholders.
- Share Capital : The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Small companies are frequently formed with a nominal share capital of Rs.100.
- Memorandum of Association : The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway a 75 per cent majority of the members of the company can change the objects whenever they like. Nevertheless, it is worth bearing in mind that directors of the company will incur personal liability if the company engages in a type of business which is not authorised by the objects clause. The memorandum must be signed by at least three shareholders.
- Articles of Association : The document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders. Many companies don't bother to draw up their own articles but adopt (sometimes with some modifications) articles set out in the Companies Act.
- Certificate of Incorporation : This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.
- Auditors : Every company must appoint a qualified auditor. The auditor's duty is to report to the treasurer whether or not the books of the company have been properly kept, and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.
- Accounts : The Companies Act lays down strict rules on accounting. Every company must maintain a set of records, which show the financial position at any one time with reasonable accuracy. The accounts comprise a profit and loss account and balance sheet with the auditors' and directors' reports appended. A new company's accounting reference period begins on its incorporation and runs until the following 31st March - unless the company notifies the registrar of companies otherwise. Within ten months of the end of an accounting reference period, an audited set of accounts must be laid before the shareholders at a general meeting and a set delivered to the registrar of companies.
- Registers, etc. : In addition to the accounts books, companies are required to have: a register of members and share ledger; a register of directors and secretaries; a register of share transfers; a register of charges; a register of debenture holders; a book can be purchased to hold all of the above. This will be provided automatically if you buy a running concern.
- Company Seal : All companies must have an engraved seal. This must be impressed on share certificates and must be used whenever the company has to execute a deed.