What form should your Startup Venture have in India
I. Formation of a Company in India
The law of companies in India is governed by the Indian Companies Act, 2013 (“companies act”) which is a comprehensive legislation, in relation to the erstwhile Companies Act, 1956, and provides for provisions relating to all phases of a company’s life, i.e. incorporation, management, mergers, winding up.
A Registrar of Companies (“RoC”) is appointed under the act for designated regions, who is the nodal authority for affairs related to companies in that particular region.
II. Types of Companies in India
Any person can choose to incorporate either a company with unlimited liability or one with liability limited either by shares or guarantee. An incorporated company may take one of the following three forms:
II.1. Private Company
With restrictions on transfer of shares, and limited number of members a private limited company enjoys greater flexibility, less legal formalities, and the small shareholders body facilitates prompt decisions. A private company must have a minimum of two directors. A private company may be converted into a public company for raising capital from the public, if need arises, by completing certain legal formalities as specified in the companies act.
II.2. Public Company
Public companies are subject to stricter legal formalities. However, the free transferability of the shares of a public company and unlimited membership provides a larger base for raising of capital. Shares of a listed public company can be traded on stock exchange, which may open it to the scrutiny and watch of Securities and Exchange Board of India. A public company must have a minimum of seven members and three directors, Public limited companies must have at least one third of the total number of directors as independent directors out of which one director has to be a woman.
Minimum authorized and paid up share capital requirement of a private and public company: The criteria of having minimum paid up share capital for both private
public company, as stated in the erstwhile Companies Act, 1956, has been omitted in the revised companies act. This is a significant advantage to start-ups with respect to the requirement of maintaining minimum share capital under the Companies Act since inception.
II.3. One Person Company
This concept has been brought by the new companies act and states that one person company is in the nature of a private company which has only one person as its member/director
At the time of incorporation, the memorandum of association must name a nominee for the sole member of an OPC. The minimum number of directors for an OPC is also one, OPC provides the option of limited personal liability of proprietors (as opposed to unlimited liability in sole proprietorship).
Businesses which currently run under the proprietorship model could get converted into OPC's without any difficulty. The questions of consensus or majority opinions do not arise in case of OPCs, and is suitable for small entrepreneurs with low risk taking capacity.
III. Charter documents of a Company
III.1 Memorandum of Association
The MoA sets out the objects for which the company is proposed to be incorporated in the manner provided hereunder
- The first and foremost clause in MoA shall be the name of the proposed company suffixed with the words limited or private limited, as the case may be;
- The state where the registered office of the company shall be situated.
- The third clause contains the main objects for which the company is going to be formed/incorporated.
The MoA binds the area of operation of the company in respect to the objects mentioned therein and any decision or actions taken in contravention of the MoA shall be void. A company cannot run any business contrary to the main objects mentioned in their MoA.
The MoA and AoA of a company can be modified post incorporation in accordance with the applicable provisions of the Companies Act.
III. 2. Articles of Association
The articles of a company contains regulations for the management of the company. This document is confined to the applicability of the provisions of the companies act, on private or public limited company, as the case may be.
IV. Legal formalities for incorporation of a company:
IV.1. Pre-incorporation formalities:
The below mentioned compliances are required to be carried out with regard to setting up of company in India:-
- Obtaining of Director’s Identification Number (“DIN”) and Digital Signature Certificates (“DSC”) for the proposed directors of the company by preparing and filing of all the relevant forms and documents as required under the provisions of the companies act.
- Once the DIN and DSC are ready, the next step is filing of online application for the approval of name of the company, provided the name is not matching or similar with any other existing company.
- On approval of name by the registrar of companies, the drafting of the charter documents of the company needs to be carried out i.e. memorandum (MoU) and articles of association (AoA), which are the basic documents for any company.
Thereafter all the incorporation forms, shall be prepared and filed with the RoC for registration of company for the final step of the incorporation process and obtaining a certificate of incorporation of the company.
IV.2. Post incorporation formalities:
Once the certificate of incorporation has been issued by RoC, the company becomes a separate legal entity in the eyes of laws in India, and requires certain basic registrations to initiate the business which includes filing of application for obtaining a permanent account number and tax deduction account number on the name of the company and any other business specific registrations from the relevant government authorities i.e. Import –Export Code Number in case of company carrying out the business of import and/or export.
Further, every company shall be required to carry out certain compliances, as required under the provisions of the companies act, for their day to day activities which includes holding of first board meeting immediately after incorporation, carrying out the annual general meetings every year, maintaining all the secretarial records at the registered office of the company, maintaining of statutory registers, minutes books etc. of company in compliance with the companies act.