Company Registration in India: A Comprehensive Guide for Foreign Investors
Company registration in India involves a number of steps, such as choosing the right business structure, reserving a name, obtaining registration certificates, and fulfilling post-registration requirements.
For foreigners, it might be a little complex to understand all the regulations and requirements for business registration in India. Therefore we have created this guide to provide you insights into the various business structures in India. This article also provides a detailed insight into the advantages and disadvantages of each structure, including:
- Sole Proprietorships, Partnerships
- One-Person Companies (OPCs)
- Private Limited Companies
- Limited Liability Partnerships (LLPs)
- Public Limited Companies.
Further, it provides insights into the process involved in incorporating a Private Limited Company and clarifies answers to some questions that every foreign investor may encounter while registering their company in India.
Understanding Business Structures
1. Sole Proprietorship:
It is a form of a business structure that is more friendly for startups having a sole founder and for businesses that operate at a relatively small scale in any market.
These entities are unincorporated entities; thus, they require no complaints to be made before the Ministry of Corporate Affairs (MCA). Though there is no compliance to be made, the proprietor should execute and register a 'Proprietorship Document'. This document grants legal credibility to the business.
The sole proprietor is the sole owner of the profits. However, the proprietor is also personally liable for any loss the business may entail.
2. Partnership
This form of a business structure requires two or more individuals to set up an entity under the Indian Partnership Act 1932 where these individuals agree to be the co-owners of their business by sharing the responsibilities and the income equally amongst themselves.
This form of business structure lays down the rights and duties that would govern the partners/ co-owners and the legal relation that they will exercise with any third party.
Further, in this form of a business structure, the partner is personally liable for all debts against the entity as a whole irrespective of the fact whether the debt was incurred by the organization or one of the individual partners.
3. One Person Company (OPC):
This form of business structure contains a single member who is the director of the company. Also, the nature of the business structure imbibes benefits for both the sole proprietor and the company. As the company only has a single member the Companies Act 2013 mandates that the sole member should appoint a nominee in case of death or incapacity.
OPCs are taxed at the same rate as Private Limited Companies are taxed in India, being subject to the applicability of income tax rates and corporate tax rates.
4. Private Limited Company (PLC):
It is a business organization owned and managed by a group of shareholders with a limited liability of its members. The number of shareholders in a Pvt Limited Company needs to be at least two ranging maximum to 200.
These companies are subject to requirements under the Companies Act 2013, and their business activities need to be reported periodically before the Ministry of Corporate Affairs (MCA) through periodic filings on specified dates for each financial year. Further, as compared to sole property and a partnership the Pvt Ltd Company has a separate legal existence, which means that the death or resignation of any shareholder does not affect the continuity of the business.
The shares of these companies cannot be sold or purchased freely there making it difficult for shareholders to raise substantial capital and undertake big projects for the company. Further, the members of these companies are limited, while a public limited company can have unlimited members.
These companies are taxed based on their revenue which the business may entail, and are subject to corporate income tax and other tax which the government of India may prescribe.
5. Limited Liability Partnership (LLP):
LLP is a famous business structure that inculcates the benefits of both the partnership and the limited liability of the corporation, where the partners are not personally liable for the debts and obligations of the partnership, which means that the personal assets of the partners in case the company enters into any financial trouble.
LLP is taxed as a partnership, which refers to the fact that the business does not pay taxes on its income, which means that the individual partners report their tax returns against their profit and loss.
Normally, LLPs are not suitable for businesses that intend to either raise capital or plan to go public, nor can the LLPs issue any stock which leads them to possess limited access to capital.
6. Public Limited Company (PLC):
Public limited companies (PLCs) provide the ability to raise capital through the issue of stock/shares listed on the stock exchange, notably the national stock exchange and the business stock exchange.
The listed shares can be owned by the public and at the same time can also be sold in the market. As these companies can raise capital through the public the capital of the company can be used to undertake business activities for businesses that operate at a large scale. Further, the liability of the shareholder only extends to the amount of shares that the shareholder owns.
These listed companies listed on a public platform face the heat of regulatory requirements and disclosure requirements of their business before the requisite statutory bodies periodically.
These PLCs need to pay the Corporate Income Tax and other cess charges before the government of India for each financial year, and the taxation rates are calculated under the Income Tax Act.
Why Choose a Private Limited Company?
As a legal entity, these companies have a limited liability for each of its shareholders,
Private Limited Companies (PLCs) are a popular choice for foreign investors due to their blend of limited liability and operational flexibility:
Advantages: PLCs shield personal assets from business liabilities, providing a layer of protection for shareholders. They can raise capital through the issuance of shares, enabling growth and expansion. Additionally, PLCs offer continuity beyond individual shareholders' lifespans, enhancing stability.
Disadvantages: However, PLCs are subject to rigorous compliance requirements, including registration, annual filings, and shareholder meetings. Shareholders must share control and decision-making, potentially leading to conflicts and delays in decision-making processes.
Navigating the Registration Process:
Registering a company in India involves the following steps as prescribed under the Companies Act 2013.
Reserving the Company's Name
The foreign investor intending to register its company in India needs to finalize the name of the company per the nature of the business activity of the company. Further, the name of the company should end with the initials "Pvt Ltd".
Digital Signature Certificate (DSC)
The foreign investor in the company needs to acquire the DSC before the investor intends to become a director of the company.
Director Identification Number (DIN)
Foreign investors intending to become director of a company needs to apply for the DIN before becoming a director of any company. It is an eight-digit unique number that has a lifetime validity.
Preparation of Memorandum of Association and Articles of Association
The foreign investor needs to finalize the charter documents, primarily the MOA, which concerns the principal business activity of the company and the AOA, which concerns the rules and regulations through which the employees of the company will be bound.
Certificate of Incorporation
Once the above-mentioned procedures are completed, the company receives a certificate of incorporation specifying the date of the incorporation and its registered office.
Bank Account Incorporation
Once, the name of the company is approved, the company needs to incorporate its bank account, to undertake the business activities.
Post Registration Compliance Requirements
Once the company is incorporated, as per the Companies Act, 2013 and its allied rules, the company is required to undertake the following: -
1. Official Address: Once incorporated the company needs to finalize its registered office within thirty (30) days of its incorporation. The registered office of the company should be preferably where the company intends to undertake its business activities.
2. Appointment of Auditor: The Companies Act 2013 mandates the appointment of an auditor who audits the company's financial health by examining financial statements every year.
3. Commencement of Annual General Meeting (AGM): Once incorporated, the company needs to commence an Annual General Meeting, within thirty (30) days of its incorporation.
4. Annual Filing Documents: The Companies Act 2013 states that every financial year each company needs to make the MCA aware of its financial statements, which include the balance sheet for that requisite financial year profit and loss statement, and the intimation regarding appointment and resignation of the directors, and other information which the Companies Act prescribes.
5. Income Tax Returns: The company needs to file an income tax return every financial year for the revenue earned during the preceding financial year before the Government of India.
Benefits of Registering a Company in India
The advantages of registering a company in India grants its recognition in the eyes of the law which grants a legal personality, where a company can own profits incur debts, and sue and be sued at the same time.
Once, the company acquires a legal personality it can issue shares, which helps any company to substantiate the nature of its business activity. Further, in case the company is a public limited company it can raise funds through private equity firms, angel investors, and the stock exchange. Thus, once a company is incorporated it can utilize these investments to undertake its business activities.
Frequently Asked Questions (FAQs)
This paragraph clarifies a few questions that every foreign investor may have while they incorporate a company in India
How much does it cost to register a company in India?
The cost to register a company in India varies on the number of directors, the nature of the business activity, and authorized capital.
Can one person register a company in India?
The Companies Act 2013 enables one person to register a company in India, by incorporating a One Person Company (OPC).
What is the difference between Ltd and Pvt Ltd?
Ltd stands for the limited liability of the members in a public company, and Pvt Ltd stands for the limited liability of the members in a private company incorporated under the Companies Act 2013.
What is the paid-up capital for Pvt Ltd?
The Paid Capital refers to the amount that the shareholders have paid to be the owner of their shares.
Can a foreign national be a director of a company in India?
The Companies Act, 2013 enables a foreign national to be a director of a company. However, that foreign national needs to share the board of directors with an Indian national.
Is the physical presence of a person needed for company registration?
The physical presence is not mandatory, the company can also be incorporated online.
How many members are required to start a Private Limited Company?
Companies Act 2013 mandates that the Pvt Ltd company should have at least two members.
Which Form is to be filed for the ITR filing of a Private Limited Company?
Form ITR-6 is required to be filed before the income tax department to file income tax returns for a Pvt Limited Company.
Which form is to be filed for filing the annual returns of a Company?
Companies Act 2013 and its allied rules prescribe that Form AOC-4 and MGT-7 must be filed before the MCA to disclose the annual returns for each financial year.
Conclusion
The foreign investor intending to set up its business in India needs to be mindful of the nature of each unincorporated/ incorporated entity with their nature of business activities stated above. Each entity has its advantages and disadvantages, further, a decision to incorporate a business entity should be made based on the long-term goals of the company the share capital that the foreign investor can invest in India, and the purpose of the business which the foreign investor is interested to pursue.
