Are you planning to be an entrepreneur? Starting a business is exciting and scary but can also be very confusing. There is a lot to plan and consider before you start your own venture. Before you actually start on your own, you need to decide what type of entity it will be. If you want to own the business entirely by yourself, you may register your business as a sole proprietorship. Alternatively, you may also register it as a partnership. But, if you want to separate your personal liability from the company’s liability, then you should go private limited company registration.
The type of business structure you will choose will impact how much will you pay in taxes, amount of paperwork required and the amount of personal liability you will be required to face.
Here in this article, we’ll assist you in understanding the Private Limited Company registration processes and its advantages, in particular, keeping in mind that India now has the third-highest number of startup incubators and accelerators in the world after China and the USA.
Entitling your business with a legal identity is extremely essential. You may also consider consulting a corporate lawyer for the same. Moreover, setting your business up as a Private Limited Company (PLC) is by far the most convenient way to go about it.
What is a Private Limited Company?
Understanding a PLC is a privately held company for small businesses. This type of business entity limits the owner’s liability to the shareholdings, the number of shareholders to 50, and limits shareholders from trading shares publicly.
There are two types of Private Limited Company-
- A private limited company limited by shares- In this type of company the members liability is limited to the amount unpaid on shares held by them.
- A private limited company by guarantee is the one where member’s liability is limited to the amount that they have agreed to undertake at the time of winding up.
Benefits of Private Limited Company
1. Limited risk
The shareholders of a PLC have limited liability meaning that as a shareholder you will be liable to pay for company’s liability only to the extent of the contribution that you have made.
2. Legal Entity
A PLC has a distinct legal entity from you meaning that the Company is responsible for the management of its assets and liabilities, creditors and debtors. However, you are not responsible for the same. Therefore, the creditors cannot proceed against you to recover money.
3. Business Continuity
PLCs enjoy permanent succession because the company is its own legal entity. Shareholders and employees act “as agents of the company”.
4. Raising Funds
Although private limited company registration comes with multiple compliance requirements, it is desired by entrepreneurs as it helps raise capital through equity and at the same time restrict the liability.
Indian Companies are registered under Companies Act with the Registrar of Companies (ROC). Moreover, anyone can check the details of the company as well as all the Directors through Ministry of Corporate Affairs (MCA). Therefore, a PLC system of business is more trustworthy.
6. Tax Advantages
In addition to limited liability, PLCs even enjoy tax advantages. They pay corporation tax on their taxable profits and tend to be exempted from higher personal income tax rates. Forming a company instead of continuing as a sole trader or sole proprietor opens the door to more tax-deductible costs and allowances redeemable against profits.
PLC advantages over Public Company
First, for a Pvt Ltd company, a minimum number of shareholders required is 2, while, for a public company, you require a minimum of 7 shareholders.
Second, a public company is required to disclose its financial reports to the public every quarter of the year, as it affects public investment while a Pvt Ltd company is not subjected to any such compulsion.
Third, management and decision making is more complex and confusing in public companies as more number of shareholders are to be consulted. However, this complex procedure is eliminated in a PLC as the number of shareholders is less.
Fourth, a public company requires a minimum share capital of Rs. 5,00,000 whereas for a PLC, the earlier minimum number of share capital was Rs. 1,00,000, but now there is no such minimum compulsion. Therefore, there is no pressure of fund requirements.
Fifth, confidential information such as executive compensation, legal settlements, and other essential information cannot be kept reserved in public companies. Such information is more secure in a PLC.
Therefore, a PLC is a lot less complicated than a Public Company. Moreover, it is comparatively less expensive and less time-consuming to register a PLC.
However, the principal advantage of a Public Company is that it can raise funds at a larger scale without approaching banks and reducing debt while in a PLC, all the funds are raised by existing members, shareholders, investors and promoters. If a PLC goes public then the risk is also shared among the shareholders. Public companies once registered, get indirect promotions and support through stock exchange websites where their stocks are registered.
How long does it take to register a company?
The complete procedure includes approval of Name, DIN and Incorporation which usually takes around 3 to 4 days approximately.
The approximate time taken is as follows:
- Approval of name through form INC-1 takes 6 to 7 days
- Allotment of DIN through Form-DIR-3 takes 1 to 2 days
- Incorporation of Company through INC-7 and INC-22 takes 7 to 10 days
Therefore, all put together, it takes around 15 to 20 working days.
The following documents are required to be submitted-
- PAN Application
- TAN Registration
- Filing of E-forms with the Registrar of Companies (ROC)
- Director Identification Numbers (2 nos.)
- Digital Signature Certificates (2 nos.)
- Name approval (INC- 1) including one re-submission
- Drafting of Memorandum of Association (MOA) & Articles of Association (AOA)
- Issue of Certificate of Incorporation
- Includes Government Fees & Stamp duty up to Rs. 1 Lakh Authorized Capital
Process for Private Limited Company Registration
Step 1: Obtain Digital Signatures (DSC)
Digital signatures are required to file the forms for company registration. The registration process is online and the forms require a digital signature. DSC is mandatory for all subscribers and witnesses in the memorandum and articles of association. You must obtain the digital signature certificates from government recognized certifying agencies.
The cost of obtaining DSC differs depending upon the certifying agency. You must obtain either Class- 2 or Class- 3 category of DSC. Under Class- 2 category, the identity of a person is verified against a pre-verified database whereas, under Class- 3 category, the person needs to present himself before registering authority to prove their identity.
Step 2: Apply for Director’s Identification Number (DIN)
DIN is a director’s identification number. It needs to be obtained by one who wants to be a Director in a company. One DIN is sufficient to be a Director in any number of companies.
Step 3: Name Approval
To get the name approval, there are 2 options:
Option 1: You can apply for the proposed name through INC- 32 (Incorporating Company) but only one name can be applied to this form. It means you have to be sure of the proposed name and should follow name availability guidelines, existing trademarks to avoid rejection.
Option 2: Before filing INC-32, you may file Form INC-1 in which up to 6 names can be proposed and then you can input the SRN of approved INC-1 into INC-32.
Filing through INC -32 is much faster process than going via the INC-1 route. The whole process including name approval and incorporation takes around 2–3 days.
If the name that you want is a bit difficult to get, because there are companies with similar names, you should file Form INC-1 instead of INC- 32.
Step 4: Form INC-32
Ministry of Company Affairs recently introduced Form INC-32. It is a simplified proforma for incorporating a company electronically. It serves the following purposes with the benefit of a single application:
- Application for allotment of DIN (Director Identification Number)
- Reservation of company name
- Incorporation of a new company
Prior to May 2015, the registration of companies required the filling up of several documents, such as the DIR–3 for acquiring the DIN (Director Identification Number), INC-1 for obtaining a name, INC–7 for registering the company with the Memorandum and Articles of Association, INC–22 for the registered office and finally, Form DIR-12 for the directors. Now, all of these forms have been merged together.
The digital signature of a professional is required to file Form INC-32. The professional must certify that all the information given in the form is correct. The professional can be Chartered Accountant, Company Secretary, Cost Accountant or advocate.
Step 5: INC-33 and INC-34
INC- 33 refers to an electronic Memorandum of Association and INC- 34 is electronic Articles of Association. These forms have been introduced to simplify the process of company registration in India.
Memorandum represents the charter of the company while articles of association contain the internal rules and regulations of the company.
Earlier memorandum of association and articles of association were required to be filed physically. But now these forms are filed online on MCA portal as a linked form with INC-32. Both these forms must be digitally signed by subscribers to the Memorandum and Articles of Association.
Step 6: PAN and TAN Application
Through this single form INC- 32, you can also apply for company’s PAN and TAN by using forms 49A for PAN and 49B for TAN. The system will auto-generate these forms after the submission of INC- 32 form. All you have to do is download it, affix digital signatures and upload both forms on MCA portal.
If all the details in the form are duly filled in along with the required documents, MCA will approve the registration and a CIN (Corporate Identity Number) will be allocated. You can also track this CIN online on MCA portal.
If there are more than 7 Subscribers to MoA (Memorandum of Association) and AoA (Articles of Association) of a PLC the following forms have to be filed.
In case you want to register a One Person Company, here is a comprehensive guide to help you do so.