Concept of company formation

What are the type of Business Entities Available in India?

The following types of Business entitles are available in India:
Private Limited Company
Public Limited Company
Unlimited Company
Partnership
Sole Proprietorship
In addition to the above legal entities, the following types of entities are available
for foreign investors/foreign companies doing business in India:
Liaison Office
Representative Office
Project Office
Branch Office
Wholly owned Subsidiary Company
Joint Venture Company


What is a Private Limited Company?
A Private Limited Company is a Company limited by shares in which there can be
maximum 50 shareholders, no invitation can be made to the public for subscription
of shares or debentures, cannot make or accept deposits from Public and there are
restriction on the transfer of shares. The liability of each shareholder is limited to
the extent of the unpaid amount of the shares face value and the premium thereon
in respect of the shares held by him. However, the liability of a Director / Manager
of such a Company can at times be unlimited. The minimum number of
shareholders is 2.


What is a Public Limited Company?
A Public Limited Company is a Company limited by shares in which there is no
restriction on the maximum number of shareholders, transfer of shares and
acceptance of public deposits. The liability of each shareholder is limited to the
extent of the unpaid amount of the shares face value and the premium thereon in
respect of the shares held by him. However, the liability of a Director / Manager of
such a Company can at times be unlimited. The minimum number of shareholders
is 7.

What are the advantages of a Limited Company?
A limited company has following advantages:
Members' (the directors and shareholders) financial liability is limited to the
amount of money they have paid for shares.
The management structure is clearly defined, which makes it easy to
appoint, retire or remove directors.
If extra capital is needed, it can be raised by selling more shares privately.
It is simple to admit more members.
The death, bankruptcy or withdrawal of capital by one member does not
affect the company's ability to trade.
The disposal of the whole or part of the business is easily arranged.
High status.


What are the disadvantages of a Limited Company?
A limited company has following disadvantages:
Requirement to register the company with the registrar of companies and
provide annual returns and audited statement of accounts. All details of the
company are available for public inspection so there can be no secrecy.
There are penalties for failing to make returns.
Can be more expensive to set up.
May need professional help to form.
As a director, you are treated as an employee and must pay tax.
The advantages of limited liability status are increasingly being undermined
by banks, finance house, landlords and suppliers who require personal
guarantees from the directors before they will do business.


What entity is best suited?
The choice of entity depends on circumstance of each case. Private Limited
Company has lesser number of compliances requirements. Therefore, generally
where there is no requirement of raising of finances through a public issue and the
ownership is intended to be closely held by limited number of persons, Private
Limited Company is the best choice.


What is the minimum paid-up capital of a Private Limited Company?
The minimum paid up capital at the time of incorporation of a private limited
company has to be Indian Rupees 1,00,000 (about United States Dollars 2,250).
There is no upper limit on having the authorized capital and the paid up capital. It
can be increased any time, by payment of additional stamp duty and registration
fee.


What is the difference between authorized capital and paid up capital?
The authorized capital is the capital limit authorized by the Registrar of Companies
up to which the shares can be issued to the members / public, as the case may be.
The paid up share capital is the paid portion of the capital subscribed by the
shareholders.


What is the procedure in obtaining a name approval for the proposed
Company?
An application in Form No. 1A needs to be filed with the Registrar of Companies
(ROC) of the state in which the Registered Office of the proposed Company is to
be situated. The application is required to be signed by one of the promoters. The
details to be state in the said application are as follows:1. Four alternative names
for the proposed company. (The name can be coined names from the objects of the
proposed company or the names of the directors, etc. but should definitely be
indicative of the main object of the company. Justification for the name needs to be
specified along with the application)2. Names and addresses of the promoters
(Minimum 7 for a public company while 2 for private company).3. Authorized
Capital of the proposed company.4. Main objects of the proposed company.5.
Names of other group companies. On submitting the application, the ROC
scrutinizes the same and sends the approval / objections in about 10 days to the
applicant. On fulfilling of the objections a formal letter of name approval is issued.


What is the Memorandum of Association (MOA) and the Articles of
Association (AOA) of a company and what is the procedure in their regard?

On receipt of the name approval letter from the ROC the MOA and the AOA are
required to be drafted. The MOA states the main, ancillary / subsidiary and other
objects of the proposed company. The AOA contains the rules and procedures for
the routine conduct of the proposed company. It also states the authorized share
capital of the proposed company and the names of its first / permanent directors.
After the MOA and AOA are required to be stamped.
A stamp duty is required to be paid on the MOA and on the AOA. The stamp duty
depends on the authorized share capital.


What are the documents required to be executed for incorporation?

The following documents are required to be executed (signed) before they are
submitted to the ROC:
1. MOA and AOA - These are required to be executed by the promoters in
their own hand in the presence of a witness in quadruplicate stating their full
name, father's name, residential address, occupation, number of shares
subscribed for, etc.
2. Form No. 1 - This is a declaration to be executed on a non-judicial stamp
paper of INR 20 by one of the directors of the proposed company or other
specified persons such as Attorneys or Advocates, etc. stating that all the
requirements of the incorporation have been complied with.
3. Form No. 18 - This is a form to be filed by one of the directors of the
company informing the ROC the registered office of the proposed company.
4. Form No. 29 - This is a consent obtained from all the proposed directors of
the proposed company to act as directors of the proposed company. (Not
required in case of private company).
5. Form No. 32 - This is a form stating the fact of appointment of the proposed
directors on the board of directors from the date of incorporation of the
proposed company and is signed by one of the proposed directors.
6. Name approval letter in original.
7. Power of Attorney signed by all the subscribers of MOA authorizing one of
the subscribers or any other person to act on their behalf for the purpose of
incorporation and accepting the certificate of incorporation.
8. Power of Attorney in case of a subscriber who has appointed another person
to sign the MOA on his behalf.9. Filing fees as may be applicable.



How is the certificate of incorporation issued?
After the documents in FAQ 5 are filed, the ROC calls the attorney on a specific
date for scrutiny and making the corrections in the MOA and AOA filed. On
complying with the same, the certificate of incorporation is granted to the attorney.

When can the newly formed company start its business operations?
On receipt of the certificate of incorporation, the public company has to complete
certain other legal formalities such as a statutory meeting (within 6 months),
statutory report, etc. On completion of the said formalities and on filing of the
statutory report with the ROC the ROC issues the certification of commencement
of business to the company. Thereafter, the Public Company can start the business
operations. The Private Company can start its business immediately on
incorporation.
How do we comply with the legal formalities when we are not stationed in
India?
You can give Power of Attorney to a person to sign the documents on your behalf.
After the Company is incorporated, you can appoint Alternate Directors, to
function on your behalf while you are not in India. But at least once, you should be
in India within one month of the incorporation of the Company. There can be one
meeting of Board of Directors during your stay in India and all other formalities
including those of appointment of Alternate Directors can be complied with.
What other approvals are required for foreign investor in India?
Generally, prior approval is required from the RBI before investing in India. Some
categories of businesses are covered under automatic approval process. However,
one has to apply for the same. There are some post-incorporation filing formalities
after the remittance of capital from overseas to India and on issue of shares.
What are other formalities before or after incorporation?
Obtaining Permanent Account Number (PAN) from Income Tax Department
Obeying Shop and Establishments Act
Registration for Import Export code from Director General of Foreign Trade
Software Technologies Parks of India registration (STPI) if required
RBI approval for foreign companies investing in India and FIPB approval, if
required.
The directors of an Indian company, both Indian and foreigner directors, are
required to obtain Director Identification Number - DIN and Digital
Signature Certificate - DSC.