In order to start a company, it is mandatory to register it under the Companies Act, 2013. While registering a company it is important to find a suitable type of the company as per its business structure.
The topics covered in this article are:
In India, there are various types of companies available under the Companies Act, 2013. The most common ones are:
- One Person Company (OPC): One Person Company is a company which is owned and promoted by only one individual. It is ideal for sole owners who are looking for limited liability. An OPC has to comply with limited ROC and also file regular tax returns. However, taxes are exempted for the first three years of business under Startup India, and they enjoy higher benefits on depreciation, without any tax on dividend distribution.
- Private Limited Company (Pvt. Ltd.): A Private Limited Company is considered as a privately owned and separate legal entity from those who founded it. It includes its own shareholders, stakeholders, and board of directors. Every individual working for the company is considered as an employee. It is ideal for businesses with high annual turnover. Apart from filing tax returns and ROC returns regularly, private limited companies are mandated to undergo an audit. However, taxes are exempted for the first three years of business under Startup India, and they enjoy higher benefits on depreciation.
- Public Limited Company (PLC): A Public Limited Company is considered as a publicly owned and a separate legal entity formed by an association of members or volunteers incorporated under the Company Law. The members’ liability is limited to the shares held by them. A PLC is ideal for those businesses which have a high turnover and want to raise capital from the public, as they enjoy certain exemptions under the law. Apart from filing returns on tax, mandatory audits have to be made on them.
- Others: Cooperative, Unlimited Company, Partnership Firms, Sole Proprietorship, Hindu Undivided Family, etc.
Another type of business is a Limited Liability Partnership (LLP) which does not come under the Act. A Limited Liability Partnership is a single entity formed through a partnership between two separate entities where the liabilities are limited as per the agreement made between the partners. An LLP is a partnership structure which has the features of a company. It is ideal for those businesses which have low investment needs or which are service-oriented. Business tax returns and ROC returns have to be filed by LLP regularly, while enjoying benefit on depreciation.
Before registering a company with the government, it becomes extremely important to choose the right type of business structure for your company. The company type you choose will determine your returns on Income Tax, as most types have different compliances to adhere to.
A private or public limited company is required to file both income tax returns and annual returns, whereas a sole proprietor only has to file returns on income tax. A private or public limited company is required to get its books of account audited annually, including expenditure on tax filing experts, accountants, and auditors. Thus, the need to choose the right kind of business structure according to the business structure becomes important due to the legal compliances which are to be dealt with.
A recognized and legal business type is always preferred by investors over other investor-friendly companies. Investors may be more comfortable while investing in a recognized business with a relevant business idea than a sole proprietorship. Therefore, it is important to ask the following questions before deciding upon the type for your company:
- Number of Owners and Partners?
For a business with only one owner for complete initial investment, a One Person Company is ideal. For a business with more than one owner which seeks other party’s investment, a Private Limited Company or a Limited Liability Partnership is ideal.
- Initial Investment?
For a business willing to spend less on initial investment, a Partnership, Sole Proprietor, or HUF may be ideal. For a business looking for greater initial investment whose recovery is foreseeable, an LLP, OPC, or Private Limited Company is ideal.
- Who will Bear Entire Business Liability?
For a business with high risk to personal assets, where the partners or members are willing to bear the entire liability in case of any default in loans in the profit sharing ratio, a Sole Proprietor, Partnership, or HUF is ideal as they have unlimited liability. For a business where members are willing to bear a limited liability up to the amount of their contribution or the value of their shares, a Private Limited Company, a Public Limited Company, and LLP are ideal as they maintain the clause of limited liability.
- Applicable Income Tax Rate?
The rate of income tax applicable to an HUF and Sole Proprietor is as per the regular slab rates. The business income is added to individual income of the owner in case of a sole proprietorship. The rate of tax applicable to Private Limited company, a Public Limited Company, Partnership, etc. is 30%.
- Investors’ Money?
Investors trust in registered and legal entities over more profitable ones. Businesses like Private Limited Company and LLP are more susceptible to get investments than sole proprietorship.
Once you have decided your company type with the help of an expert, you will have to ensure that the documents required to register your company are available. These include:
- PAN card scanned copy
- Latest bank statement or electricity bill or gas bill or phone bill
- Scanned copy of voter’s ID or Passport
- Registered address’ utility bill
- Rental agreement notarized in English
- Passport sized photograph
The scanned copies of these documents can be sent online so as to begin the registration process.
The following formalities should be borne in mind while registering the business:
- The documents obey shop and establishment acts
- Registration documents of import and export are available from the Director General of Foreign Trade
- Registration documents are available of Software Technology Parks of India (STPI)
- The approval of RBI and FIPB is acquired for foreign investors in India
To register a company in India, Form INC-29 has been introduced by the Ministry of Corporate Affairs (MCA). This form has merged some processes into one process, including approving business name and application of incorporation. Thus, the process of registering a business has been simplified, and now all it requires is seven days to incorporate a business online.
The process of company registration in India is as follows:
Step 1 – Acquire a Digital Signature Certificate (DSC)
An application is to be made for acquiring DSC of directors after logging in to the MCA portal. This process usually takes two days after the submission of documents. Acquiring a DSC will help the company to file returns online because the rules of MCA require a legitimate e-signature of authorized persons so as to ensure the security and authenticity of returns filed.
Step 2 – Acquire a Director Identification Number (DIN)
Here, the business will be required to prepare Form INC-29. The business will have to acquire DIN, name approval, MOA and AOA, registered verification for office, appointment letters, and declaration.
Step 3 – Make New Registration on MCA Portal
Here, the business will have to file Form INC-29 once all the said documents are ready. The forms of company formation will have to be filed after which the Incorporation Certificate can be attained.
Step 4 – Acquire an Incorporation Certificate
Upon receiving the Certificate of Incorporation, a PAN can be acquired for the company along with a new bank account.
Upon following these instructions, a company can be registered in India. However, it is recommended to get an expert opinion before incorporating a company in India.