In the last decade or so, the entrepreneurship bug has bitten the country’s youth and now, more and more people are starting their own business in India. Further, the success stories of some startups have really encouraged the Indian youth to think beyond 9-5 job and do something big in business circle.
Presently more than 42,000 startups are in the country and slowly and gradually, India is becoming global hub for startups.
Various Options for company incorporation in India
Traditionally, proprietorships and partnerships firm were the most preferred mode of company incorporation in India and even today, the older generation in India favours the same. However, as the business grows, people look for other options of company incorporation in India like Private Limited Companies, Public limited companies and Limited Liability Partnerships.
Also, instead of proprietorship firm, nowadays better option for sole owner company is One Person Company or OPC.
Every business entity has its own pros and cons and choosing a right business entity is a strategic decision and should be paid proper attention to in today’s day and age.
In this write up, we would be discussing in detail about pros and cons of Private limited Company Registration in India.
What is private limited company?
Private limited Company are those entities in which liability of members are limited and shares of the companies are privately held by promoters and his family and friends. It means that private limited company cannot issue shares to general public. It is owned by limited number of members i.e uptp 50 members. Here, members’ liability is limited to number of shares held by them and not unlimited liability. They are governed by rules and regulations of Ministry of Corporate Affairs MCA and Companies Act, 2013.
What are the benefits of Private Limited Company Registration?
Benefits of a private limited company registration in India are as under:
- Limited liability of members
When any unforeseen financial crisis occurs and the company is about to close, shareholders are liable only up to the number of shares held by them. They are not require to give their personal assets like home, properties or savings, In partnership, partners are personally liable for debts, in case business fails to repay its Debt; partners have to sell their personal assets. However, in case of Private Limited Company, the only amount invested by shareholder will get lost in case of winding up of company due to financial crisis. This is one of the reasons why it is preferred mode of company incorporation in India.
2. Start-up Company Registration in India
It is suitable in registration under Start-up India Scheme of government of India which allows new startups to avail number of benefits.
3. Access to Equity funding
Private limited companies can easily get equity funding from Angel investors, venture capitalist and private investors in exchange of shares of the company. This is another reason for popularity of private limited company over other entities like LLPs and Partnership firms.
4. Lower Tax Rate
Private Limited companies are taxed at Lower rate of 22%/25% plus surcharge and education cess.as compared to LLP and Partnership Firms which are taxed at 30% plus surcharge and education cess.
5. Suitable for subsidiary company registration in India
It is suitable form of entity for foreign companies which want to hold majority shares in Indian company. Foreign companies prefer to opt for subsidiary company registration in India out of various options available since it is tax efficient and have many advantages.
6. Borrowing capacity
Compare to any other forms of business, a private limited company has more option to borrow funds on debt, as private companies can borrow fund not only by way of loan from bank, but also by way of issuing debentures and convertible debentures.
7. Easy to do changes
Since the entire process is online. It is quite easy to make changes in private limited company like change of address, change of objects, Easy to Add and Remove Directors and Shareholders etc.
8. Brand and Reputation
It has Brand or Reputation as compared to Proprietorship or Partnership Firms.
9. Greater credibility
Since Private limited companies are subject to yearly audits and required to file numerous numbers of documents with registrar of companies, so lot of information about their structure, operation and financial remains in public domain. Information about authorised capital of the company, names of directors, registered office etc. are easily available. This information makes business more credible than other forms of business.
10. Better governance
Since private limited companies are governed by Ministry of Corporate Affairs (MCA) and is regulated by companies’ Act 2013, so, they are required to follow procedures and norms to comply with rules and regulations prescribed which create more values to owners.
11. Online Registration for entire India
Private limited company registration can be done for entire India sitting at comfort of home. This is the biggest advantage.
Thus, all the aforesaid reasons make the Private Limited Company Registration as the most popular and preferable mode of company incorporation in India.
Shortcomings or Disadvantages of Private Limited Company Registration
Private limited company registration has following shortcomings or disadvantages:
- Compliance costs of Private limited company are more as compared to LLPs or Partnership firms. This is one of the reasons for small companies not to opt for this option of company formation in India since they don’t want to bear excessive cost of compliance.
- Winding up or closure of private limited company is complex procedure especially when company has huge assests and has accumulated profits and losses
Thus, it may be seen that private limited company registration also has some disadvantages; however, since the number of benefits far exceeds the shortcomings or disadvantages, therefore, this is preferred mode of company registration in India.
Location of Private Limited Company
Location of business depends upon the nature of business of company and its long term vision. Local businesses prefer to register private limited company at local areas. Company’s dealing in manufacturing business looks for location where manpower, labour and raw materials are easily available. Also, they prefer industrial areas whether within the city or outside the city.
Advantages of Private Limited Company Registration in Delhi
There are many advantages of private limited company registration in Delhi, namely:
- It is the capital of our country and also the commercial capital of our country.
- It is the centre of attraction for many IT business, telecom business, hotels, tours, media, banking and tourism.
- Delhi is the home of many multinational companies. Every year thousands of new start-ups are setup and many companies are registered.
- Delhi is also center of attraction for foreign business. Many foreign businesses are also registered in Delhi.
- It has largest service sector after manufacturing also it has 5 largest factory complexes and 29 industrial estates.
- It has close proximity to Reserve Bank of India, Department of Industrial Planning, Ministry of Commerce and Finance, Foreign Investment Policy and Promotion Board etc.
All the aforesaid factors make Delhi an attractive destination for business set up in India. One should definitely opt for Private Limited Company Registration in Delhi since Delhi already has that industrial and economical environment which will help business to grow and expand rapidly
Pre-requisites for Private Limited Company Incorporation in India
Following are the pre-requisites for private limited company incorporation in India:
- Members and Directors: As per companies act 2013, private company should have minimum 2 members, and can have maximum up to 200 members. Company must have minimum 2 directors and maximum 15 directors. At least one of the directors must be citizen of India and resident of India. All directors should hold DIN issued by MCA.
- Name of the Company: The name of Private limited company should be unique and should not match with name of any other company registered in India for this entity needs to send at least 2-3 proposed names of company they wish to register to Registrar of Companies (ROC) and any one name at discretion of ROC will be approved.
There are three requirements for naming the company which company needs to fulfil:-
- Main name
- Mention of ‘Private limited company’ at the end
- Mention of activity that will be carried out by the company.
3. Registered office address: – There should be local office address in India as registered office. Registered office of the company is where all the documents are kept and company’s main affairs are being conducted. Once the company is registered, it requires filing its permanent address of registered office to registrar of company.
4. Amount of Capital required for company incorporation:-
There is no minimum capital prescribed for company incorporation in India. Therefore, Indian shareholders and Directors can register a private limited company with very less capital say Rs 50,000. However, it is advisable to register Indian subsidiary company with sufficient capital.
This is because share subscription money brought in Indian subsidiary by parent company is considered as FDI in India and RBI compliance needs to be done for such FDI received. This is time consuming and costly since it involves fees of professionals. Therefore, if there is no sufficient capital, Indian company will have to issue additional shares to parent company for receiving capital in form of share subscription money which will again involve time and cost.
Steps Involved in Company Registration in India
Following steps are involved in Company Registration in India:
There are 4 steps involved in company incorporation in India. Further, once company is registered, additional 5 steps need to be completed.
Step-1- Obtain Digital Signature Certificates (DSC) of all Directors, shareholders and authorized representatives
Step-2- Obtain Name approval letter of Indian Company.
Step-3– Apply for final company registration by drafting charter documents like MOA, AOA and applying for Director Identification number of Directors.
Step-4– Finally, getting Certificate of Incorporation of company.
Post Company incorporation in India, following additional compliances need to be done:
Step-5– Bank Account needs to be opened in bank whose name already provided at time of incorporation.
Step 6- In case of subsidiary company registration in India, in case foreign funding received from landlocked countries with India like China, Pakistan, Bangladesh, Sri Lanka etc or in cases where prior approval of government/ RBI is required; application shall be filed with FIPP.
Step-6– GST registration needs to be applied.
Step-7– Import Export License needs to be taken if there is export/import of goods or services.
Step-8 Certificate of commencement of business needs to be applied.
Step-9– In case of company incorporation in the form of wholly owned subsidiary, RBI compliance/Intimation of FDI received in India to RBI shall be done by filing prescribed forms.
Step-10 – First Board Meeting of the company needs to be held and auditors need to be appointed within 30 days of commencement of business.
Compliances to be done by every Private limited company
Post Company Registration in India, every company has to do following compliances. These compliance need to be done irrespective of turnover or sales or receipt of the company. Therefore, even if sales or turnover or receipts are NIL still all these compliance need to be done:
- Filing of Income Tax Return of the company on annual basis.
- Filing of GST returns of the company on monthly/quarterly basis.
- Filing of TDS returns of the company on quarterly basis.
- Commencement of business (within 180 days)
Companies should obtain its commencement of business certificate within 180 days of incorporating a company. If co. fails to obtain commencement of business certificate, then there is penalty of Rs. 50,000 for the company and Rs.1000 per day for the directors for each day of default.
5. Auditor appointment (within 30 days)
Statutory auditor must be appointed within 30 days of incorporation by every Indian registered companies. In case company fails to appoint the auditor within 30 days then company will not be allowed to start the operation, and also there will be a penalty of Rs. 300 per month.
6. Form AOC-4
Every private limited company registered in India must file MCA form AOC-4 on or before 30th November. Form AOC 4 is used to file the financial statements for each financial year with the Registrar of Companies (ROC). In case there is failure to file AOC-4 by the company it will penalise by Rs. 200 per day of default or delay.
7. Form MGT-7
Every private limited company registered in India must file MCA form MGT-7 on or before 31st December. MGT 7 is used for filing Annual return. In case company fails to file MGT-7 it will be penalise by Rs. 200 per day of default or delay.
8. DIN eKYC
Every director of company must have DIN. And must be filed for the DIN eKYC or DIR-3 eKYC . every director of company must provide personal mobile number or personal email address in DIR-3 eKYC. In case director fails to file DIN eKYC there will be penalty of Rs. 500.
9. Hold Annual General Meeting
The private limited company which is incorporated in India and regulated by companies act 2013 must hold annual general meeting once a year. Every private limited company must hold annual general meeting within 6 months of closing of financial year.
10. Director’s Report
As per Section 134 of companies act director’s report will be prepared and all the information required by Section 134 of company act will be included in director’s report.
11. Other event-based compliances
There is other some other compliance as well, which needs to be complied other than annual filings when any event occurs in the company.
Specific instances of such events are as follow:-
- If there is change in the authorised capital or the paid- up capital of the company.
- If company allots new shares to its shareholders or transfers new shares.
- giving loans to directors
- giving loans to other companies
- If managing director or whole- time director is appointed by the company and makes payment to them.
- When a bank account is opened or closed, or there is a change in the signatories of a bank account.
- if there is an appointment or change of the statutory auditors of the company
When all the above events occurs in the company, it is necessary for the company to file different forms with the registrar within given period of time. If company fails to do this then company will be panelise with the additional fees.
The company will also have to pay penalty if company fails to comply with the annual filing. Thus company shall always have to comply with the compliance within the specific period of time.
If company fails to comply with the rules and regulations of the company act, 2013, then the members and directors involved in the default shall be punishable upto the period till the time such default is continued.