How to Register a Company in India - Step by Step Guide for Startups
Every Startup or business in India needs registration in order to begin operation. There are a few official procedures that one must follow in order to execute the business idea. For any type of company, the Company Registration has to be done under the Ministry of Corporate Affairs. This does not mean that one will have to physically go and get the Company Registration done by the ministry. The ministry has made the procedures online a few years back. Therefore, it does not require to visit the corporate office.
While forming any form of business entity, the first and the foremost step is to create a detailed business plan. The business plan must include the cost-benefit analysis, risks involved, investment details, and future plans of the business. Business plans are mere ideas with proper understanding and reasoning. To execute such ideas, one will have to proceed with registration of business ideas. One should be very sure about the type of business organization one wants to choose and the one that is best suitable for that business idea.
The Companies (Incorporation) Rules, 2014 clearly states the steps essential for incorporation of the different form of companies, which are more or less same for all three forms of companies, with little difference here and there. Here are the basic steps that are more or less the same for all kinds of companies:
Application for name availability: A name of any business entity must be unique and also descriptive of the goods and services provided by the business. The name provides the distinction of the business from others competing in the market. The application for name approval has to be filed in accordance with the guidelines as scrutinized by the authorities in Form SPICe 32. The complete proposed name with suffixes like OPC, Private Limited, Private Limited or Public Limited (as the case may be) should be submitted at the time of approval only. The application for reservation of names must be supported with the proof of signature in terms of rules, copy of the central governments approval, proof of relation and NOC form persons involved, approval from the concerned regulator, NOC from the other associates if they are using or were using the name in the last five years, and Board resolution of the promoter body.
In case the proposed names are based on registered trademark and the application is pending for Trademark registration, then the approval from the owner of the trademark or the applicant must be attached with it. Once it becomes certain that the name is available with the Registrar of Companies, the name is then approved. A new web-based application called RUN (Reserve Unique Name) has simplified the process of companyâ€™s name approval. Introduced by the Ministry of Corporate Affairs, it has made the process of reserving a name for a new company or for changing the name of an existing company speedy and easy. The facility can be availed only by a registered member through the ministryâ€™s online portal.
Obtaining a Digital Signature Certificate: Since all the registration process is done online, it is essential to get the Digital Signature Certificate (DSC). This certificate serves as a proof of identity of an individual that can be presented electronically for the purpose of ; one's identity, access information and sign documents digitally. There are different types of DSC:
Class 2: It is a verified identity of the person through a pre-verified database.
Class 3: This identity is used as a proof to present himself or herself in front of the Registration Authority.
It is important that at least one of the directors obtain DSC.
Charter documents: The next in the process is to create documents of Memorandum of Association (MOA) and Articles of Association (AOA).
Memorandum of Association: The root document consists of all basic details of the company that are required at the time of its incorporation. It acts as a constitution for the company that lists the powers and objectives of the company and the relationships between the company and the outsider. At no point in time, it can be amended.
Articles of Association: This document consists of rules and regulations that are designed by the company. It consists of details regarding the bye-laws governing the companyâ€™s internal affairs, management, and conduct. Although it acts as a subordinate to MOA, it can be amended retrospectively.
In case of a public limited company, it is important that both the documents are signed by each subscriber. In case the subscriber is illiterate, a thumb impression or a mark can do well.
Obtaining Director Identification Number (DIN): DIN is issued by the Ministry of Corporate Affairs to the directors of the company. The proposed director will have to fill the SPICe Form to avail DIN. The details of name and address proof of the Director has to be submitted here. In case the company already exists, Form DIR 3 has to be filled.
There are mainly three types of companies;One person company,a public limited and private limited. The word limited is used at the end of every company name.
One Person Company:
In 2013, when the new Companies Act was introduced, the concept of One Person Company (OPC) was also introduced in India. This enabled the entrepreneurs to start a venture in company form of business if they are capable of doing so except the non-banking financial institutions. It encourages self-employment within the ambit of Indiaâ€™s legal system. There can be only one member in an OPC. Only a natural person who is a resident of India in the preceding calendar year (who has stayed in India for a minimum of 182 days) can form an OPC. The member of the OPC cannot incorporate more than one OPC.
Here are a few advantages faced by one person company:
Separate legal entity: The OPC enjoys the status of a separate legal entity from its promoters. Therefore, the entrepreneur is capable of doing what he/she wants.
Easy funding: It is easier for OPC to raise funds through venture capital, financial institution or angel funding. One may even choose to raise funds by converting into a private limited company.
Limited liability: The liability of the OPC is limited to the extent of the share held by the individual. Therefore, it enables the individual to take more risk in business. More opportunities are provided without affecting or suffering a loss of personal assets.
Benefits of being a small scale industry: Benefits can be availed by achieving a lower rate of interest on loans, easy funding from banks without a security deposit, etc. All these benefits help to establish a business in its initial years.
Taxation benefits: Unlike proprietorship, as per the Income Tax Law, any remuneration paid to the director of an OPC will be allowed as deduction.
Increased trust: Company form of business allows an increased trust and prestige than the other forms of business.
Receive interest on late payment: Under the Enterprises Development Act, 2006, an OPC can avail benefits because it is newly start-up, micro, small or medium. It is entitled to receive interest that is three times the bank rate.
Compliance requirement: The compliance requirements are lesser in comparison to the private company.
Private Limited Company:
A private limited company is a company where a small business can be privately held. The governance and registration of private limited companies come under the ambit of the Companies Act of 1956. Over a period of time, several changes and amendments introduced in the Act by the Central government, all the changes have been incorporated to form a new Act that was named as the Companies Act of 2013. It mandates the used of the word private limited after the named of the company. While there is a requirement of minimum two members to start a private limited company, the maximum can be 200 shareholders. At least one director must be a resident of India, who has stayed in India for more than 182 days in the previous calendar year.
The liability of the members is limited to the extent of the shares held by them. However, there are no chances of a takeover. This is because shares cannot be traded publically. The company has perpetual succession as it continues to exist even in case of death or insolvency of a partner. The minimum paid-up capital required to begin a private limited company is INR 1 lakh. It shall not begin operations unless 90% of the amount is received from the shares issued by them.
Here are a few advantages of choosing a private limited company form of business:
The shareholders will be liable to pay for companyâ€™s liability only to the extent of the contributions made by them.
The company is held responsible for management of its assets and liabilities, debtors and creditors. The creditors cannot proceed to the shareholders to recover the money.
Even though Pvt. Ltd. company registration comes with a lot of compliance requirements, raising capital through equity and expansion is easy. It is preferred by the entrepreneurs.
Anyone can check the trustworthiness of a company through the Ministry of Corporate Affairs. This makes it more trusted form of business organization.
Until the company is legally dissolved, it enjoys an uninterrupted existence, irrespective of the changes n the membership.
Public Limited Company:
A legal designation given to a Limited Liability Company where the public company grants limited liability to its owners and management is a public limited company. The governance and registration of such companies are done under the Companies Act, 2013. However, the legal compliances of a public limited company are much more stringent when compared to the private limited company. The shares are offered to the public that is easily transferable to any person through initial public offerings or stock exchange markets. It is for this reason that although there is a minimum requirement of 3 directors to form a business entity, there is no maximum limit set for the number of members in a public limited company. Moreover, members have limited liability. The company owns and acquires property in its own name and no shareholder can claim the property as long as the company is running operations. The minimum authorized capital requirement prescribed for this form of business is INR 5 lakhs.
Here are a few advantages of choosing a public limited company form of business:
Protected owner liability: Since the company is a separate legal entity, the owners feel protected in case anything goes wrong. The liability of a director is limited to the shareholding. This is particularly important for business prone to safety risks.
Separate ownerâ€™s entity: The business remains unharmed and the operations remain unchanged as long as the trading is done.
Tax efficient: Since the introduction of Goods and Services Tax, it is more efficient to run a public limited company. It becomes mandatory if the profits and turnover exceed the threshold level.
Professional business format: In India, where many businesses run without having a legal status, adding the suffix ltd. co. adds to the reputation. This may give sales a boost.
Structuring equity: Different shares issued to different shareholders helps to re-structure offerings with greater flexibility than being a sole trader. It thus becomes easier to raise more funds for business.
Limited Liability Partnership:
The Ministry of Corporate Affairs also governs the working of another form of business which is named as a Limited Liability Partnership (LLP). The concept is legally sanctioned by the Limited Liability Act of 2008 that defines it as; an alternative corporate business form such that it gives a combined benefit of a limited liability of a company and flexibility of a partnership. Although a partnership form of business is not governed by the Ministry of Corporate Affairs, this form is governed. Each partner is liable for their own acts and is liable to the extent only to their agreed contribution in the LLP. In the recent past, this form of business has been gaining popularity as it consists of elements of a â€˜corporate structure' as well as a â€˜partnership structure'.
Easy to form: One of the main benefits of LLP is that the process of forming an LLP is easy and not time-consuming like that of a company.
Liability: As mentioned above, the partners have limited liability which means they are not liable to pay the debts of the company from their personal assets. No partner can be held responsible for the conduct of other partners.
Perpetual succession: According to the provisions of the Act, the LLP will not be winded up in case of death, retirement or insolvency of a partner. The life of the LLP is not affected by the same.
Easy transferability of ownership: The transfer of ownership is easy, as it is easy to admit or leave a partner. There are no restrictions upon joining and leaving of partners in LLP.
Taxation: The rate of taxation is less than that of a company. Moreover, the tax is levied on the LLP and the partners would be exempted from the tax. The Income tax returns must be signed and verified by the partner or partners as the case may be.
No compulsory audit required: Every business has to appoint an auditor in order to keep a check of internal management and accounts. The audits are not mandatory except for the exceptions mentioned above.
An LLP is organized and operates on the basis of the agreement.
Flexibility is provided in this form of the business model without imposing detailed legal and procedural requirements.
The LLP enables professional or technical expertise such that financial risk-taking capacity of the firm is handled in an efficient manner.
Raising of funds and utilizing them depends upon the will of the partners.
Which form of business to choose?
India is a land of opportunities. These opportunities can be well harassed if the business runs without any legal problems. According to Section 3 of Companies Act, 1956, a company is a legal entity formed by a group of individuals who aspire to engage in and operate a business enterprise lawfully. A company may be recognized in various ways for the purpose of filling tax and financial liability purposes. In India, there are about 7 lakh registered companies, and every company has to be registered under the Ministry of Corporate Affairs by the Registrar of companies of the State. The choice to which form of business shall be best suitable depends upon:
The goods and services one is dealing in.
The expected annual turnover of the company. This is important because an OPC will have to be converted into a Private Limited Company if the annual turnover crosses INR 2 crores.
Citizenship of the Director: For the private limited company, at least one director must be a resident of India, who has stayed in India for more than 182 days in the previous calendar year. A minor, foreign citizen, non-resident, or any person incapacitated by contract are not eligible to form an OPC.
It is important to study each form of business and consider all the advantages it has.
Legal Compliances: A public limited company shall have more stringent compliances than a private limited company. This is because public money is invested in a public limited company.
Extendable Funding option: A public limited company has flexible funding options. Raising capital is easier through public offerings and stock exchange markets. However, the public limited company would also have to pay dividends and interests to its investors.
It is best to take a wise decision considering all these aspects. One may also refer to a professional help if there is a need to do so.