The incorporation of private companies is carried under the Companies Act. The Companies Act has undergone a lot of changes in regards to the registration of a private limited company. Most of the prominent changes were made in the time period between 2014 and 2018.
What is a Private Limited Company?
A Private Limited Company is an entity which is held for privately run small businesses. Under this type of entity, the owner liabilities are restricted to their shares and the number of shareholders is restricted to 50. Shareholders are also refrained from trading the shares publicly under a Private Limited Company.
Advantages and Disadvantages of incorporating a Private Limited Company:
Advantages: The advantages of incorporating a Private Limited Company in India are as follows:
- The risk to personal assets is limited: The liabilities of the shareholders of a private limited company are limited. That basically means that a shareholder will have to pay the company’s liability only up to the extent of the contribution that he/she has made.
- A different legal entity: Legally, a Private Limited Company or PLC is a separate entity from the owner. Thus, the Company will be responsible for its own assets and liabilities, and debtors and creditors. The creditors cannot legally proceed against the owner to recover their invested money.
- Trustworthiness: When a business gets the Private Limited Company tag, its trustworthiness increases manifold. The sole reason behind this is the registration of the company with the Registrar of Companies (ROC) under the Companies Act, 2013. The details of a registered company can be checked through the Ministry of Corporate Affairs (MCA). While the company is formed, the details of all the directors of the company are also furnished. Hence, the company will have a lot of clarity and thus, considered more trustworthy.
- Raising the capital: Entrepreneurs prefer registering their business as a Private Limited Company or PLC as it becomes easier for them to sell equities and raise funds through them. It also helps them to expand the business while restricting the liabilities. However, registering a business as a Private Limited Company requires the business owners to meet some compliances.
- Uninterrupted existence: Companies have the ‘perpetual succession’ feature which allows the uninterrupted existence of the business till the time it is legally dissolved. Since a company is a separate entity, the death or cessation of a member does not affect the functioning of the company. It keeps functioning in spite of a change in membership.
Disadvantages: Although there are a number of advantages of registering a business as a Private Limited Company, there are certain disadvantages that might affect the business in the future, especially, if the setup is a small or micro enterprise. The disadvantages of incorporation of Private Limited Company can be summed as follows:
- Lengthy registration process: The registration process can take as much as 10 to 15 days. It is not a viable option for an unregistered entity like a proprietorship business to register itself as a private limited company as the process consumes a lot of time and money. However, the company can enjoy a plethora of power, rights, and advantages, once the company is registered.
- Ownership division: The biggest disadvantage of registering a company is the fact that the sole ownership is lost. A minimum of two individuals is required to form a Private Limited Company. One acts as the director while the other will be the shareholder. In case a sole entrepreneur wishes to register his/her business as a Private Limited Company, he/she cannot do that himself/herself. Once the sole ownership is lost, the decision making power is also divided. For any major decisions to be taken by the company, the consent of at least two persons would be necessary.
Compliance formalities: There are a number of compliances that are to be met by the company after it is incorporated. These are as follows:
- Board meetings are to be held by the company.
- General meetings are to be held by the company.
- The company has to get its accounts audited.
- The company has to maintain a statutory register and file annual returns with the Ministry of Corporate Affairs every year.
- Irrespective of the type of business, a company has to comply with the tax and labour laws.
- Rise in personal liability: Although the members of the company will be able to enjoy the limited liability, the company will be entirely responsible for its own debt and liability. However, there are certain cases where the personal liability of the members would rise up. For instance, if the name of the company is incorrectly described in an act or a contract, the liability falls on the individuals who are responsible for making the contract or doing the act.
- Winding up of the company: The process of winding up a Private Limited Company is quite complicated if compared to the winding up of an unregistered company. It consumes a lot of time and is costly.
How to form a Private Limited Company (PLC) - Step-By-Step Guide:
Incorporation of a business into a Private Limited Company is a complicated process and involves a lot of compliances that have to be met. A Private Limited Company can be formed in one of the following ways:
- Incorporating a new company in order to start a new business.
- Converting an existing business (either sole proprietary or partnership) into a company.
Discussed below are the steps which have to be followed for forming a Private Limited Company:
- Digital Signature Certificate (DSC) has to be obtained.
- Director Identification Number (DIN) has to be obtained.
- A name has to be selected for the company.
- The availability of the name has to be checked.
- Form SPICe or INC- 32 has to be filled up.
- e-MoA (INC- 33) and e-AoA (INC- 34) have to be filled up.
- Step- 7: An application has to be made for PAN and TAN.
- Digital Signature Certificate (DSC) has to be obtained In order to proceed with the registration process, a Digital Signature Certificate or DSC has to be obtained from a certifying agency which is recognised by the government. The digital signature is required at the time of filing the forms related to company formation. Since the registration process is online, all the forms require a valid digital signature. It is necessary to obtain a Class 2 or Class 3 Digital Signature Certificate or DSC. If the person applying for the incorporation is already pre-verified, his/her identity can be substantiated against the pre-verified database. Such cases of verification will come under Class 2 category of DSC. On the other hand, if the person is not pre-verified, he/she has to appear before a registering authority to authenticate his/her identity. In this case, the person will come under the Class 3 category of DSC.
Director Identification Number (DIN) has to be obtained For a person who wants to be the director of the company, it is mandatory to obtain the Director Identification Number or the DIN. There are 2 methods through which a DIN can be obtained. They are as follows:
- Filing SPICe: A Director Identification Number or DIN is issued to each of the proposed directors at the time of filing form SPICe (or INC- 32). The DIN will be issued to the directors who do not have a DIN. However, the issuance of DIN is limited to 3 directors under this process.
- Filing Form DIN 3: This is an option applicable to companies which are already existent. For filing the DIN 3 form, the proposed director is required to provide his/her basic details along with an identity proof like Aadhaar Card or PAN card and an address proof.
A name has to be selected for the company Naming the company is the mark of its individual existence. The applicant may pick up any suitable name for the company, provided the following points are honoured:
- The company cannot be registered with a name which is undesirable as per the Central Government's opinion.
- The name of the company has to end with the word ‘Limited’ in case the liability of the members are limited.
- The name of the company has to end with ‘Private Limited’ if it is a private company.
- The name which is chosen for the company should not resemble the name of another registered company.
- The name which is chosen for the company should not be identical to the name of another registered company.
The availability of the name has to be checked Once the name has been decided, the applicant has to get the name approved through one of the following options:
- Using Reserve Unique Name (RUN) to incorporate a company: The Reserve Unique Name web service, popularly known as the RUN web service, has been introduced by the Ministry of Corporate Affairs (MCA) for the purpose of incorporating a company. You need a Ministry of Corporate Affairs (MCA) account in order to use the RUN web service. Earlier RUN gave just one chance for applying for a name for incorporation. In case of a rejection, second chances were not available. However, with effect from 23 March 2018, the Ministry has permitted the proposal of two names and one re-submission (RSUB) for reserving a name under RUN. Nevertheless, it is advisable to follow the guidelines minutely while selecting a name in order to avoid rejection of the name.
- Using SPICe (INC- 32) form to incorporate a company: This is a cheaper and relatively better option for the incorporation of a company. Applying through form SPICe or INC- 32 allows the applicant to refill the same form again in case of a rejection. That too for no extra charges. Moreover, if the name is rejected in the second chance as well, the applicant can choose to file the form afresh. Thus, it is a cheaper and more convenient option.
Form SPICe or INC- 32 has to be filled up The form SPICe or INC- 32 has been introduced by the Ministry of Company Affairs as a simple form of incorporating a company electronically. A single application can serve the below-mentioned purposes:
- Applying for the allotment of Director Identification Number or DIN
- Reserving the company’s name
- Incorporating a new company
- Applying for PAN and TAN
- e-MoA (INC- 33) and e-AoA (INC- 34) have to be filled up The e-MoA and e-AoA forms have to be filled up next. e-MoA stands for electronic Memorandum of Association and e-AoA stands for electronic Articles of Association. The e-MoA is responsible for representing the charter of the company. The e-AoA, on the other hand, is responsible for containing the internal rules and regulations of the company. Both the forms are required to be digitally signed by the subscribers to the Memorandum of Association and Articles of Association.
- An application has to be made for PAN and TAN As mentioned earlier, the application for Personal Account Number or PAN and Tax Deduction and Collection Account Number or TAN can also be made through form SPICe (or INC- 32). Under the form SPICe, form 49A is to be filed for PAN, while form 49B is to be filed for TAN. These forms will be generated automatically by the system once the form SPICe is submitted. Once the forms are generated, the applicant has to download them to affix the digital signature and upload the forms on the MCA portal. Upon approval of the registration by Ministry of Corporate Affairs (MCA), a Corporate Identity Number (also known as CIN) will be allocated. This CIN can be tracked on the MCA portal.
What are the documents that are required for filing SPICe (INC- 32)?
For the incorporation of a company, an applicant has to file the following documents with SPICe (INC- 32):
For incorporations where the director and subscriber are Indian Nationals:
- All the subscribers of the company are required to give an affidavit on a stamp paper.
- A proof of office address - preferably a rental agreement.
- Copies of recent utility bills (not more than 2 months old).
- A copy of approval - in case the proposed name of the company includes some word(s) or expression(s) that requires the central government’s approval.
- A trademark registration certificate or trademark application copy - in case the proposed name of the company is based on a registered trademark or is subject to a pending application for registration under the Trade Marks Act.
- No Objection Certificate (NOC) from the owner of the company.
- Proof of address and identity of the subscriber/director without a DIN (if any).
For incorporations where director or subscriber is a foreign national:
- Passport of the subscriber or director.
- An address proof - driving license, bank statement, residence card, etc.
Frequently Asked Questions (FAQs):
- Is it compulsory to have the DIN or DSC for filing the RUN form?
- Do I get a re-submission option whiling filing the RUN form?
- Is it mandatory to attach the documents during the process of reservation of name?
- How many names can be applied for through the RUN form?
- What has to be done if there are more than 3 directors and more than 3 of them do not have their DIN?
No, it is not compulsory to have the DIN or DSC to file the RUN form. Just an account on the MCA portal is required.
Earlier it was not possible. However, with effect from 23 March 2018, the MCA has implemented one re-submission (RSUB) for the RUN web service.
No, it is not mandatory to attach the documents for the process of name reservation.
Earlier only 1 name could be applied. However, with effect from 23 March 2018, the MCA has implemented the proposal of 2 names for the RUN web service.
In case of incorporation of a company with more than 3 directors, where more than 3 persons do not have their DIN, the company has to be incorporated with 3 directors only and the others can be appointed as new directors on a later date post incorporation.