Setting up a Private Limited Company (PLC) in India

The very first decision which any entrepreneur has to make before commencing a business in India is to choose the best form of business structure which will be the most beneficial for them. Entrepreneurs initiate their business’ with a goal to sell the products and services successfully. However, many Entrepreneurs may initially be nearly clueless about when it comes to forming a business structure. Private Limited Company is the most preferable legal structure for building a scalable business. Entrepreneurs choose to set up a private limited company in India because it allows outside funding to be raised easily, limits the liabilities of its shareholders and empowers them to provide employee stock options to attract top talent.

 

Strengthening the vision of growth for India and enabling the ease of doing business in India, Ahlawat & Associates provides comprehensive assistance to guide you through the best entry and exit strategy for setting up and operating in India.

A private limited company is a company that is privately held by business entities. The liability of the members of a private limited company is limited to the shares owned by them and shares of a private limited company cannot be freely traded. Private Limited Company registration is the most well known legal structure for businesses in India. It is incorporated under the Companies Act, 2013 and governed by the Ministry of Corporate Affairs (MCA).

 

Characteristics of Private Limited Company

 

The private limited company is a preferred business form for a number of reasons, it is a business form that is suited to companies irrespective of the business field in which they are.Below are the main characteristics of the private limited company:

 

1. Number of Member

To start a company, a minimum number of 2 members are needed and a maximum number of 200 members as per the provisions of the Companies Act, 2013.

 

2. Limited Liability

The liability of each member or shareholder is limited. It means that if a company bears loss under any circumstances then its shareholders are liable to sell their assets for payment. The personal/individual assets of the shareholder are not at risk. A Nominee Shareholder is the registered owner of shares within a company. A nominee shareholder arrangement is used to keep the real shareholder’s identity confidential.

 

3. Perpetual succession

The Company continues to exist in the eyes of law even in the case of death, insolvency or bankruptcy of any of its members. This results in the perpetual succession of the company. The life of the company is never-ending.

 

4. Index of members

A private company has a privilege over the public company as it doesn’t have to prepare an index of its members whereas the public company is required to maintain an index of its members. (If membership exceeds 50, a separate index of members is required)

 

5. The number of directors

A private company needs to have only two directors. With 2 directors (with at least 1 director being an Indian resident), a private company can come into operations.

 

6. Authorized capital

A minimum authorized capital of Rs 1 lakh or such a higher amount which may be prescribed from time to time.

 

7. Prospectus

Prospectus is a detailed statement of the company affairs that is issued by a company to its public. However, there is no need to issue a prospectus in the case of a private limited company as the public is not invited to subscribe for the shares of the company.

 

8. Minimum subscription

It is the value received by the company which is 90% of the shares issued within a certain period. If the company is not able to receive 90% of the value then they cannot commence further business. In the case of a private limited company, shares can be allotted to the public without receiving any minimum subscription.

 

9. Name

All private companies must use the word private limited after their name.

Entrepreneurs register a Private Limited Company in India to commence a business that is well regarded by customers, suppliers, bankers and the Government. By setting up a company, an Entrepreneur has the calibre to create a small or large business that can easily raise capital and scale seamlessly to any size. Below is the procedure for setting up a private limited company in India:

 

Name Approval

You are required to provide 2 different name options for your company to MCA, one of which will be selected. Names provided to MCA should be unique and suggestive of the company’s business with the name providing a brief outline of the company’s main objective. (If the proposed name is similar to any existing company’s name then a NOC is required from that company in the form of board resolution and if the proposed name is safeguarded by any Trademark by the proposed company, the details of the same are also required to be submitted.)

 

Applying for DSC & DIN

The directors have to apply for Director Identification Number (DIN) and Digital signature. A digital signature is an online signature utilized for filing and Directors PIN issued by MCA. If the directors have DSC and DPIN, then there is no reason to apply and this step can be skipped.

Documents required:

  • 2 passport size photographs
  • For an Indian National, Pan Card as identity proof and if the director is a foreign national in that case, a passport
  • One address proof (Voter ID, Aadhar Card, Utility Bill etc). In the case of a foreign national living in India, a valid Business Visa will work as proof and if the foreign national is living outside India in that case a Bank Statement, Driving License, Utility bill could work (should not be older than 2 months).

Submit Memorandum of Association (MOA) & Articles of Association (AOA)

Once the name is approved, one is required to draft a Memorandum of Association and Articles of Associate. Both documents are to be filed with MCA with the subscription statement.

In case the individual subscribers are based outside India then the MOA and AOA will be executed outside India and will be notarized in the same country where they are executed.

 

Get the incorporation certificate and other documents drafted

The Ministry of Company Affairs introduced Form SPICe (INC-32). This form is a simplified one for incorporating a company electronically. Incorporation certification is proof that the company has come into existence. It also includes your CIN number. A consent letter (Form DIR-2), disclosure of interest will be drafted of the directors.

For filling incorporation documents following information is required:

  • Authorized capital proposed by the company
  • Proposed paid-up capital and subscribed share capital by each subscriber
  • Details of registered office and other relevant address in India
  • In case the foreign directors do not have a PAN Card, an undertaking is required from them.
  • Details of all the companies in which the proposed directors hold any interest (shareholding, partnership, etc.) or are directors of either Indian or foreign companies.
  • A certified true copy of charter documents of the foreign parent company with the address proof of the parent company and AOA.

Apply for PAN, TAN and Current Bank Account

Apply for PAN and TAN. Both are received in 7 working days. You can submit the Incorporation certificate, MOA, AOA and PAN to a bank to open your current account.

 

Other Document required during the Whole Procedure (Additional Documents)

Registered Office Proof

In addition to providing identity, address and residential address for the Directors, proof must be provided to validate the registered office address of the Company. NOC from Landlord and Proof of evidence of any utility service depicting the address of the premises in the name of the owner or document, which is not older than two months.

  • Advise on Entry Strategy and structuring of Business set up in India
  • Identification and selection of the place of business
  • Incorporation of the Company or Branch or Liaison Office in India
  • Bank account opening and getting Finance
  • Getting approvals at various regulatory bodies/agencies
  • Ongoing compliance with all laws and regulations
  • Accounts and Payroll maintenance
  • Compliance with FEMA/RBI for fund transfers

Incorporation Procedure of a private limited company is governed as per Companies Act 2013 and can be explained through the following steps:

 

    Proposed name for the company:

In order to hold an available name, a series of documentation is to be provided by the applicant such as

  • The main object of the company
  • Up to 6 proposed names in order of preference
  • Details of a minimum of two promoters and
  • Details of the minimum of two directors.

Upon acceptance of the name, it is held for a period of 60 days and a new company can be incorporated with immediate effect on this.

 

    Directors and subscribers:

For a Private Limited Company, a minimum of 2 directors and 2 subscribers are required, whereas, for a Public Limited Company, a minimum of 3 directors and 7 subscribers are required.

 

    Director Identification Numbers (DIN):

It is recommended for all proposed directors to obtain a DIN.

 

    Digital Signature Certificate (DSC):

A DSC is required to validate the documents digitally, which are sent to the Company Registrar (ROC) or other authorities, such as tax authorities.

 

    Memorandum & Article of Association (MOA), (AOA):

These are mandatory legal documents containing crucial information about the company and sets out the company’s necessary working procedure, its rules, and regulations.

 

    Registered Office:

It is mandatory for any company to have a registered office in India from the date of incorporation and it should be publicly accessible for correspondence of documents and notices.

 

    Incorporation:

Post acceptance and approval on all legal documents required to incorporate a company by ROC, a certificate is issued and from thereon, a private company can begin its activities. Whereas, for a Public Company, it is required to obtain a Company Start-up Certificate from ROC as well.

 

    Post Incorporation:

The legal work does not end with the incorporation of the company. Post incorporation a company needs to undertake series of Compliances and Statutory Registrations, such as; Opening of bank accounts, maintaining of books, allotment of shares, IT registration, Import Export Codes, Sales Tax registration, Service Tax registration, Central Excise Registration, and others which A&A provides to its client on a daily basis as an In-house/ General Counsel legal service.

  • Advise on Entry Strategy and structuring of Business set up in India
  • Identification and selection of the place of business
  • Incorporation of the Company or Branch or Liaison Office in India
  • Bank account opening and getting Finance
  • Getting approvals at various regulatory bodies/agencies
  • Ongoing compliance with all laws and regulations
  • Accounts and Payroll maintenance
  • Compliance with FEMA/RBI for fund transfers

A private limited company is the most common form to start a business for an entity intending to gain profit and enjoy the benefits of an incorporated entity. There are several advantages of setting up a private limited company:

1. Separate Legal Entity

An entity is something that has a real existence; a thing with a distinct identity. A company is a legal entity and a juristic person formed under the Indian Companies Act, 2013. A juristic person is a person who is neither a natural person nor a human being but an artificial legal person. Therefore a form of an organization, like a company, has a wide legal capacity and can own property and also incur debts in its name. The members (Shareholders/Directors) of a company are not liable to the creditors of a company for such debts. Hence, it is a legal entity separate from that of its members.

2. Uninterrupted existence

A company has ‘perpetual succession’, i.e. continued or uninterrupted existence until it is legally dissolved. A company, being a separate legal person is not affected by the death, departure, bankruptcy or transfer of shares of any member. It continues to be in existence irrespective of any change in the membership. Perpetual succession is one of the vital characteristics of a private limited company.

3. Limited Liability

Limited Liability means the status of being legally responsible only to a limited amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability company, the liability of the members is limited in respect of the company’s debt. In other words, the liability of the members is limited only to the extent of the face value of shares owned by them. Therefore, where a company is limited by shares, the liability of the members during winding-up is limited to the amount unpaid on their shares.

4. Free & Easy transferability of shares

By definition, a private limited company means privately held and shares of any member of this closely held company are transferable by a shareholder to any other individual in a manner provided by the Article of Association of the company. The transfer is easy as compared to the transfer of an interest in a business that runs as a proprietary concern or a partnership. Filing and signing a share transfer form and handing over it to the buyer of the shares along with a share certificate can easily transfer the shares.

5. Owning Property

A company being a juristic person, can acquire, own, enjoy and alienate property in its name. No shareholder can make any claim upon the company’s property as long as the company is a going concern. The shareholder is not the owner of the property of the company. The company itself is the true owner.

6. Capacity to sue and be sued

To sue means to institute legal proceedings against or to bring a suit in a court of law. Just as one person can bring a legal action in his/her name against another person, a company being an independent legal entity can sue and be sued in its name.

7. Dual Relationship

A company can have a valid and effective contract with any of its members. A person who is in control of a company and can at the same time be in its employment. Thus, a person can be a shareholder, creditor, director and also an employee of the company at the same.

8. Borrowing Capacity

A company enjoys better avenues of borrowing funds. It can issue secured as well as unsecured debentures and can also accept deposits from the public at large. Even banks and other financial institutions prefer to provide large financial assistance to a company rather than partnership firms or proprietary concerns.

9. Raising Funds

It can raise the requisite funds by way of equity, debt and deposits. It can fetch funds from its promoters, directors or their relatives, banks or financial institutions, from members and by issuing various financial instruments. However, before availing any financial facility a company should ensure that it goes along with the Companies Act, 2013 and the rules and ensure compliance with other laws.

Few most frequently asked questions on NRI legal service. Feel free to contact us for any other queries.

Who can be a director in a Private limited company?

Any person above the age of 18 years can be a director in a company. Also, there are no conditions on residency. Hence, NRIs and Foreign Nationals can easily set up and manage a private limited company in India. However, in India incorporation rules require for one Indian national to be a part of the company on the Board of Directors.

What is limited liability protection?

Limited liability is the status of being legally responsible only to a limited amount for the company’s debt. Unlike proprietorships and partnerships, in a private limited company, the liability of the shareholders with respect to the liability of the company is limited. In other words, the liability of the shareholders of a company is limited only to the value of shares owned by them.

Can the private company be incorporated with a residential address?

Yes, Company is required to provide address proof for incorporation. But the Ministry of Corporate Affairs (MCA) permits a residential address to be used as the company’s registered address. Thus any address can be used as a registered address. Once the address is registered for a business purpose under the Shop & Establishment Act of the concerned State, then the place will be treated as a commercial place and an appropriate rate of taxes will be levied on the concerned address.

Can a director of a private limited company also be a salaried person?

Yes, a salaried person can be a director in a private limited, LLP or OPC private limited company. One needs to check their employment agreement if that allows for such provisions. In many cases, the employers are quite comfortable with the fact that their employee is a director in some other company.

Can NRIs/Foreign Nationals become Director in a Private Limited Company?

Yes, NRIs and Foreign Nationals can be Director in a Private Limited Company. They need to obtain a DIN from the Indian ROC. They can also hold a majority of shares in the company. Provided at least one Director on the Board of Directors should be a Resident of India.

Conclusion

Private limited companies entitled to the creation of a shareholders’ agreement to demarcate different interests. In the case where a company is not doing financially well, under the limited liability clause the personal assets of the investors are protected. Since the parent company manages and controls 100% of the shares of its subsidiary, it can maintain strict operational management of the private limited company in India.

In India, a private limited company is the most preferred form of business as it benefits from both good branding as it retains the parent company’s name, while also gaining from the flexibility of being able to diversify into new markets.

    How can we assist you?






    Get in touch with us today

    We can be reached at

    Awards & Accolades