As new ideas to do business keep emerging, the importance of having the right form of business entity becomes a crucial element prior to initiating any commercial activity.  Indian laws offer a wide and complex variety of vehicles to do business like Sole-proprietorships, Hindu undivided families (HUF), Partnerships, Limited liability partnerships, Private limited companies and Public limited companies.  The choice of your business entity form depends on the volume, scale, complexities and parties involved and one must do a thorough analysis beforehand to determine the choice to be opted for as changing business entity form of an ongoing business at later stages, although doable, can be cumbersome.  It is best to consult a Chartered Accountant firm and discuss your business plans to help arrive at the right decision.

In today’s article, we shall deal briefly with the formational aspects of a Private limited company in India.  A Private limited company is the most common choice for closely held group of individuals who come together to start a business venture.  Private limited companies are also opted for family businesses these days since adoption of a corporate structure to do business is generally helpful in establishing brands, products, services and also generating credibility of the business with financial institutions as well as other corporates/companies in general whom you may deal with on a regular basis.  A Private limited company is also regulated by the government through its regulator – Registrar of Companies (ROC) under the Ministry of Corporate Affairs (MCA).  The regulator assures that the Indian companies are compliant with their business affairs by mandating period and annual reporting as well as audits, thereby enforcing due compliance for benefit of the company’s shareholders, stakeholders, customers, suppliers, employees etc.  So although forming a private limited company to run your business entails statutory reporting, it is considered to be best for all the stakeholders and contracting parties involved.

Let’s briefly look at the steps involved in the formation of a private limited company:

1.    Digital Signatures:  Every shareholder as well as director who are proposed to participate in the business must have a personal digital signature certificate (DSC) prior to initiating any application for formation with the ROC.  The DSC costs typically start with INR 1,000 per applicant with a validity of 2 years, post which it requires renewal at a near to similar cost.  The DSC cost is higher for foreign national applicants and start with INR 2,500 per applicant.

2.    Director Identification Number (DIN):  Every person desiring to be the director on any proposed company must have a valid and active DIN as allotted by the ROC.  In absence of a DIN, the ROC offers application of a new DIN with the application of company formation.  Even foreign nationals willing to become directors on an Indian company warrant applying for a DIN prior to appointment.

3.    Name Reservation:  This is a crucial step in any company formation.  The MCA has predefined certain rules which one has to follow in choosing a company name and a Chartered Accountant firm can best help you in analysing whether the name you opt for will be an acceptable one.

4.    Drafting Charter documents:  You need to lay down the Main objective of the business for which the company is being formed.  Promoters also need to lay out the ancillary or other secondary objectives for which the company is to be formed.  So a precise and detailed description of these objectives needs to be provided in order to allow the Chartered Accountant to draft the Memorandum of Association (MoA).  Also, the promoters need to provide any specific aspects of the management of the company which will be defined in the Articles of Association (AoA) (also referred to as the Bye-laws of a company).  The MoA and AoA together are referred to as the charter documents for a company.  A Chartered Accountant will assist you successfully in getting these charter documents drafted to the proposed company’s requirements.

5.    Declarations by Shareholders & Directors:  The shareholders and directors will need to provide in prescribed ROC formats, undertakings and declarations pursuant to the Company Act rules, which are necessary to establish their eligibility to form a new company.  A Chartered Accountant will draft and provide the same to you for necessary execution.

6.    Application for Incorporation: Once the aforementioned steps are concluded, the Chartered Accountant shall consolidate all supporting documents for the proposed new company, including the aforesaid undertaking/declarations and proofs of place of business of the proposed company, and apply online for incorporation of the proposed company.  The Incorporation application simultaneously allows the company promoters to also apply for the new company’s Permanent Account number (PAN), Tax Deduction Account number (TAN) as well as Goods and Service Tax Identification number (GSTIN).  This saves the time in applying for them separately.

To form a private limited company, you will require a minimum of Two shareholders to come together and Two Directors.  The shareholders and directors can be the same individuals also.  In case you are forming a subsidiary company of your existing company or forming a joint venture company along with some other company and yours, the existing companies can be the shareholders, but the directors have to be individuals only.  A Private limited company can be formed with a bare minimum authorized and paid up capital also and there is no minimum limit the share capital with which a company can be formed.

The entire process as stated above ideally takes three to four weeks to conclude, provided you have supplied all documents as required satisfactorily on time.  The statutory costs payable to government for name reservation and incorporation, typically range between INR 3,000 to INR 4,000 additionally.  In addition to these, you will need to meet the Professional fees for the Chartered Accountant managing your company incorporation.

Overall, the formation of a private limited company, is a simple process albeit it requires substantial documentation, but with the help of a Chartered Accountant, this entire journey becomes simple.

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