Public Limited Company - Features, Advantages and Process
A public limited company is a legal designation of a limited liability company. This means that the public company grants limited liability to the owners and management. It offers shares to the public and has limited liability. The shares can be acquired by anyone though initial public offerings or through stock market trade. Such offerings are beneficial in raising capital for the company. The rules and regulations are most stringent as compared to the Private Limited Company. This is because the funds invested in the company also belong to the public.
Some of the distinctive features of a public limited company are:
The public limited company is preferred as it has a separate legal entity under the Companies Act, 2013. Such form of business has a wide legal capacity to own property and incur debts. This is because the member of the company, both shareholders and the directors, have no liability to the creditors of the company.
Shares offered by a public limited company are easily transferable to any other person, such that it merely requires filing and signing of share transfer form to transfer the shares.
A company by law is a juristic person such that it can acquire or own, enjoy or alienate, property in its own name. this makes sure that the shareholders cannot claim the property as long as the company is running operations.
The minimum requirement for opening a public limited company are:
Minimum seven shareholders of the company are required to form a company.
Minimum 3 directors are required to form this business entity. At least one director must be a resident of India. It is important to note here that shareholders and directors can be the same.
Although no minimum authorized share capital requirement prescribed is INR 5 lakhs. It is one of the basic requirement to start any business.
Name of the company must be a unique one. Before going ahead with the process, the company needs to check company name availability to ensure that the proposed name selected does not contain any word as prohibited under the Companies Act, 2013.
Director Identification Number for all the directors and Digital Signature Certificate for two directors is essential.
Steps essential for starting a public limited company:
The first and the foremost step in forming any business entity is to create a detailed business plan and analyze its cost-benefit. Further, one can proceed for the registration of that business, depending upon the choice of the type of business organization best suitable for that business idea. According to the Companies (Incorporation) Rules, 2014,
Here are the steps essential for incorporation of the public limited company:
Application for name availability: To begin any business, the most important step is to select a name that describes the goods or services provided by the business aptly and yet it is unique. The name shall bring distinction to the business such that it stands out in the market. Further, when the business is being registered, it becomes essential that it is in accordance with the guidelines laid by the Authorities. Therefore, the application for name approval made to the authorities is scrutinized as per the rules. The complete proposed name with suffixes like private limited or public limited should be submitted at the time of approval only. The objective of the proposed company will be submitted through this application 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.
The next step is to get the two charter documents; Memorandum of Association and Article of Association for the proposed company drafted and printed.
Memorandum of Association is the root document of the company as it consists of all the basic details about the company required for the incorporation of the company. It sets out the constitution of the company as the information provided in it details the powers and objectives of the company. It defines the relationship between the company and the outsider. It cannot be amended retrospectively.
In contrast to this, Article of Association is a document that consists of the rules and regulations that are designed by the company. It comprises of bye-laws governing the company's internal affairs, management, and conduct. The relationship between the company and its members and also between the members in the company are regulated by Article of Association. It acts as a subordinate to the memorandum. It can be amended retrospectively.
It must comply with the provisions of Section 4 and 5 of the Companies Act 2013 and rules are given thereof.
Application for incorporation of Company: The application for registration of a public limited company is filled by the Registrar of the registered office lying in the jurisdiction of a company. A fee is paid along with it. Memorandum and Articles of Association are signed by each subscriber. An affidavit from each subscriber and director is attached stating that he or she is not convicted of any offense related to the promotion, formation, and management of any company. It must also ensure that he or she has not been found guilty of any fraud or breach of duty to any other company. The declaration is given by the professionals, may be an advocate, chartered accountant, cost accountant, such that he or she is involved in the formation of the company. Here address for correspondence till the Registered office is established is important to mention.
Appointment of directors: First directors of the company shall be mentioned with all the particulars in the Articles of Association. This includes; their names, surnames, the Director Identification Number, residential address, and nationality. The director must mention his or her interest in other firms or corporate bodies along with his consent to act as a director.
Issuance of Certificate of Incorporation: Once all the basic documents are filed and submitted, the Registrar will issue Certificate of Incorporation once he is satisfied with the documents. The certificate shall bear a Corporate Identity Number (CIN). The number is distinctively identified for the company and is included in the certificate.
Verification of registered office: After the incorporation, a company shall have its registered office within 15 days of it. This is important so that the company is capable of receiving and acknowledging all communications and notices that are addressed to it. The registered document of the title of the registered office with the name of the company on it has to be submitted. The proof of evidence of any utility service such as; telephone connection, gas, electricity, and water connection has to be submitted. The proof must consist of the address of the premises in the name of the owner, however, it should not be older than 2 months.
Signing of Memorandum and Articles of Association: It should be signed by each subscriber. Further, it must mention the details of his or her name, address, description, and occupation. In case, a subscriber is illiterate a thumb impression or mark is affixed.
Tax Registrations: Make application to Income Tax Department regarding the arrangement of Permanent Account Number (PAN) and Tax Deduction and Collection Account Number. GST registration is also mandatory.
Post incorporation it is important to appoint first Auditors in the board meeting within 30 days of incorporation of the company. A common seal is engraved with the name of the company on it such that it is adopted at the first meeting of the board of Directors. The minutes of the meetings must be recorded within 30 days of the conclusion of the meeting.
Fines and Penalties for Non-compliance:
For the purpose of protecting the rights of the stakeholders, the legal basis for various corporate governance norms is essential. Violation of norms defined in the Companies Act, 2013 are offenses subjected to penalties. All entities associated with this law must comply with it and companies shall comply voluntarily. The law provides details of what exactly constitutes an offense and penalties have been provided thereof.
Hough the law states the procedure to be followed for penalties, it also encourages public companies to comply with the rules and regulations through self-regulation. It defines the rights of the stakeholders and means of redressal in case of dispute. The State has the responsibility of ineffective implementation and administration of offenses.
Commonly faced defaults of the public limited company include:
Defaults of technical nature: the penalty is charged after giving the reasonable opportunity to be heard.
Defaults in filing documents: This has been increasingly witnessed. The Registrar of Companies is enabled to make special orders in regard to bookkeeping. Non-compliance with these orders will lead to actions that may be in the form of punishment for directors as decided by the civil court.
Defaults regarding financial information and particulars.
Fraudulent conduct: penalties are offered depending upon the intention of conducting the fraud.
At present, the process of prosecution for offenses faces many delays. All lapses are tried under the Trial Court as criminal offenses. Violations are procedural in nature. The delayed processing of complaints leads to administrative burden and higher cost on the economy. For this purpose, the law has categorized offenses as:
Offenses calling for the imposition of monetary fines only.
Offenses calling for imprisonment with or without fine.
In case the company chooses to publish information regarding a conviction for criminal breaches under the Companies Act through the annual report, provisions have been made in this regard. However, such disclosures must be made within one year and must not be repeated.
Reasons for choosing a public limited company:
The compliances for incorporation and post incorporation are most stringent for a public limited company. The Companies Act, 2013 has further made the penalties against the offenses and defaults rather strict. Despite this, a person may choose to form a public limited company form of organization because:
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.
Having a public limited company will not only protect the owner's rights but it makes the ownership more flexible. One must remember, registering as a public limited company would mean the provision of dividends, shares, rights, and opportunities for restructuring. The investment made through these opportunities is safer not only for owners but also for investors. However, in order to avoid penalties, one must prefer to take professional help, right at the time of incorporation of the company.
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