This article is written as a basic guide for any one who wish to start a company/business in India. If you want to start & run a business in India, the first step you need to take is to register your business with a name. Now you have a handful of options available for registration. At the initial level, as a startup you can consider the following 4 options.
1) Sole Proprietorship 2) General Partnership 3) Limited Liability Partnership (LLP) and 4) Private Limited Registration (Pvt.Ltd)
Each of these registration entities has its own advantages and disadvantages. You need to analyse these differences yourself and find out which one suits you best.
1) Sole Proprietorship – is the most simple one to execute. You don’t need to formally register a “sole proprietorship” with any government agency in India. To begin business all you need is a current account with any RBI accredited bank and an individual PAN card to submit your tax returns. Depending on the nature of your business you may need to procure additional licenses. For example to import products to India or to export products from India, you need to obtain the general Import Export License (IEC Code). In addition, Indian government has placed restrictions on the import/export of certain goods. In some cases, you may need to apply and get a special import/export license for some goods that fall in a sensitive category. If your business is in the food processing industry, you will have to apply for an FSSAI license. Such license requirements highly depend on the industry you are serving like FSSAI for food, IEC code for import/exports, a different set of licenses for pharmaceutical manufacturers and it varies with industry/law.
My Observations about Sole Proprietorship
It has certain advantages for a beginner in business. You don’t need to invest any money upfront in business registration process. A Private Limited/LLP registration often demands professional help from Chartered Accountants in India. You will have to pay professional fees and government level fees. From my experience you will not able to float a private limited registration below INR 15,000/-. In many cases you will end up spending more than this amount. So if you are just playing around with a new business idea or trying to experiment with your ability in business, I would recommend you to begin with Sole Proprietorship.
However a “sole proprietorship” is applicable only in cases where there is only one founder. This registration is for the “one man army” type people who runs everything on his own initially. If there is more than one founder, you can try the general partnership option to make things easier. Another advantage with these registrations is that it requires no time! You can start doing business immediately after you setup your current account & PAN card.
Major disadvantages of Sole Proprietorship & General Partnership
There is only one serious disadvantage with both of these registration types – “unlimited liability“. In both of these registration types, the liability of the firm/organisation is not limited to the organisation/firm alone! The liability extends to the founders and their personal assets as well. This is a major risk when you are dealing with manufacturing or marketing of sensitive products like processed food, medicines, health supplements, electronics based products etc.If something bad happens to your customer and if he files a suit against you in court, then you are at the risk of loosing your personal assets for your company. If the court orders a compensation in favour of the customer and your company balance sheet is not enough to pay the compensation; then as per law court can order to attach from your personal assets. The reason is your personal assets are not protected against such law suits in a sole proprietorship/general partnership registration. But in a Private Limited/LLP registration, the founders or promoters of the company are protected with limited liability. Promoters/founders don’t need to risk their personal assets for any private limited/llp they promote and actively involve.
The second disadvantage with proprietorship/partnership is credibility. If you are in a position to hire smart employees, or you need to do business with a large corporation or a government organisation, they all prefer a well structured company with a Private Limited registration. A private limited registration improves credibility of an organisation/company and it enables them to do business with any kind of organisation/company in India or abroad. A third drawback is with investments from an investor like a venture capitalist or business loan from a bank. Investors prefer private limited registration as it has a well structured share distribution system. Banks will give more weight to private limited in loan eligibility as it is strictly regulated and audited every year with compulsion.
3) Limited Liability Partnership (LLP) – A limited liability partnership is a new form of corporate structure introduced in India in 2008. An LLP is a combination of the “limited liability” feature of a private limited company and the flexibility of a general partnership. Nowadays most startup founders are confused to choose between an LLP or a private limited company. I recommend you to read this article:-comparison of LLP with general partnership and private limited. This will help you to take a decision. In my opinion, if your goals are not clear or if the founders can’t see a future beyond 2 years for their company; then go for an LLP because dissolving an LLP is much easiercompared to dissolving a private limited entity.Similarly investors and bankers tend to give more weights to private limited registrations than to an LLP. Count your future requirements in terms of investments from a venture capitalist or a loan from bank. Take your decisions based on data available at hand by analyzing your requirements.
4) Private Limited Registration – is the ideal form of registration for any startup/company which is forming with a long term goal, a larger vision or purpose etc. By these terms “long term goal” or a “larger vision“; I just meant the company must have a very good product/service with market demand and the founders must be prepared to run the company even in bad times.It is not very easy to wind up a private limited company. The founders will have to go through a series of government formalities (just like the formalities involved in registering a private limited) to close the registration as well.
If you are confused between which registration entity to choose for your company, here are some guidelines to go for a private limited.
Form a private limited registration in the following cases:-
1) If there are 2 or more founders and you need an organised share holding system with legal validity.
2) If the founders are interested in scaling the business to different markets, different locations, launch branded products, launch different set of products etc.
3) If the founders want to limit the liability of their company to the company and its assets itself.
4) If the founders plan to accept loans or investments in the company.
5) If the founders plan to practice ESOP (Employee Stock Options) and give equity to smart employees.
6) If the founders wish to do business with government organisations and large corporates.
These are the major reasons to form a private limited company and there could be still more reason that I might have missed. Please note me in comments section, if I missed any main point.
Formalities involved in registering a private limited company:-
All the formalities of registering a private limited company is fulfilled through Registrar of Companies (RoC)which comes under the governance of MCA (Ministry of Corporate Affairs)
1. There should be more than one director and the number of directors can go upto a maximum of fifty. However the number shareholders is not limited by rules of any kind.
2. Each of the proposed directors should have a DIN (Directors Identification Number). If any of the directors don’t have a DIN, apply for the same in Ministry of Corporate Affairs (MCA) – DIN Cell. Applying for DIN has a fees of INR 100 + the professional charges of your Chartered Accountant. It will take only 1 day to apply for a DIN and it usually takes 2 to 3 weeks for processing the application in MCA -DIN Cell. You can read more about applying for DIN in the website ofMCA -DIN Cell.
Note:- PAN card is a mandatory document for any Indian who applies for DIN. If a proposed director does not hold a PAN card, he should immediately take one before applying DIN.
3. One of the directors should hold aDigital Signature Certificate (DSC). If no one of the proposed directors have a DSC, then one of them should apply for a DSC. A DSC can also be applied with help of a professional agent like a Chartered Accountant. The fees to obtain DSC may vary from INR 400 to upto INR 3000/- It highly depends on the agents you choose.
4. Applying for a name for your company is the next step. You can submit upto 6 names. There is a rule that your proposed names should not resemble already registered company names in India. You can verify this by checking in the MCA Database. Another important point to note that the company name should reflect the nature of business/industry it is supposed to involve in. I will explain this with an example.I hope you already know that there exists a public limited company named “MindTree Limited” in India. It is a company that serves in IT industry. It came to existence in 1999. However there are 9 other companies in India with primary name as “MindTree”. How was that possible ? The secondary extension makes it possible. Some registered company names with “MindTree” as primary name are like this – MindTree Consulting Pvt.Ltd (approved in 2013 in Jammu Kashmir) , MindTree Marketing Pvt.Ltd (approved in 2002 in Maharashtra), MindTree Communications Pvt.Ltd (approved in 2011 in Delhi).
From this we can generalize that it is possible to have a company name with similar primary names along with a different extension. For example:- No one has registered a company as “MindTree Interiors Pvt.Ltd” yet. So you or I can go ahead and register “MindTree Interiors Pvt.Ltd”. But at the same time some one has already registered “MindTree Consulting Pvt.Ltd”. So you or me can not register that!
The proposed names must be applied online (you can do this with your CA agency). The fees for applying a name is INR 500 + professional charges by your agent.
5) Developing the incorporation documents – Articles of Association (AoA) and Memorandum of Association (MoA). MOA and AOA together forms the constitution of a company. It records many details about a company like its name, registered address, authorized share capital, issued share capital etc. You can read about the differences between MOA and AOA. For each authorized share capital of INR 5 Lakhs, you will have to give a fees of INR 1200 to stamp MOA and AOA. Professional charges of your agent may add up to this.
6) Applying to Registrar of Companies (RoC) – MCA for Certificate of Incorporation – This is the final step in incorporating a company officially in India.This can be done with the help of your CA agent. You need to file 3 forms electronically here – Form 1, Form 18 and Form 32. You can obtain the forms from MCA Website. Based on your authorized share capital, the fees you need to pay to RoC will vary.
A Note on Authorized Share capital:
Authorized share capital is the total capital of a company which can be issued in the form of shares.Authorized share capital of a company has to be defined at the time of incorporating a company. However the company can increase its authorized share capital later through its directors passing a special resolution and filing it to RoC. It is not necessary that a company should issue 100% of its authorized share capital. It can issue only 40% of authorized capital as shares and keep the rest of shares as reserved for future purpose. In India, the minimum authorized share capital is 1,000,00 and it can go any higher from INR 1,000,00 say up to 10 or 100 million INR. Usually people who are incorporating their first company will find it confusing, how much share capital to show. A rule of thumb here is that your authorized share capital should be higher than your initial investments. You must have to take into account investments in near future too. If 2 founders are putting in INR 6,000,00 (say founder A) and 4,000,00 (founder B) – as initial investment in a company, then the authorized share capital of that company should be higher than INR 10,000,00. In usual cases the share distribution will be based on the ratio of initial investments; so founder A will get shares worth INR 6,000,00 and founder B will get shares worth INR 4,000,00. However it is not necessary that shares should be distributed based on investments alone. If 3 people (A,B and C) comes together to form a company on terms that A and B will invest INR 1 million where as C will invest nothing. But A and B will not actively involve in running the company where as C will do the running of business. Here C is not an investor but the company can offer him shares in any ration say 50% share or even more than that. The percentage distribution of shares solely depends upon the negotiation between company founders.
If the authorized share capital is INR 1,000,00 then the fees to be paid at RoC is INR 4000/- For every additional 10,000/- from this base amount, fees will increase at a rate of INR 300/- per INR 10,000 increase in authorized share capital. If the authorized share capital is above INR 5,000,00 then this rate of increase will vary to INR 200/- You can refer with your CA agency to know more about the current rates and standards. In addition to this fees, you will have to pay professional charges to you CA agents.
The certificate of incorporation is a printed document from RoC and will be sent to the registered office address of the incorporated company by a secured mail/courier service.
Once you get the CoI (certificate of incorporation) , you will have to apply the following based on your business requirements.
1) PAN – for your company and is necessary to file your company’s annual/monthly tax returns.
2) TAN (Tax Account Number) – You will have to apply for a TAN if your company is responsible for deducting tax at source.
3) Make a permanent company seal. This permanent company seal must be used to pass AGM resolutions, board meeting resolutions and other such official documents released/entitled by a company.
4) VAT/Commercial Sales Tax Registration (if required). VAT registration is required for companies which involve in the manufacturing and distribution of physical goods to other merchants/shops. For example:- An e-commerce company will have to take VAT registration as they purchase goods from manufacturers and sells them to end consumers. Similarly traders who import goods from other countries like China and sells it in local Indian markets will have to apply VAT. But a service based company say a Hospital or a Hotel or an IT service company doesn’t comes under the VAT system and hence such companies don’t need to apply for VAT.
I have written almost all formalities regarding the registration of a private limited company. In addition, I have covered other forms of business registrations available in India as well. So far I have been involved in forming 3 private limited companies in India. Out of them 1 is dormant and 2 are active. I involve and work in these 2 active companies at present.