Decoding the concept of a Private Limited Company

Decoding the concept of a Private Limited Company

While setting up a business, everyone goes through the same dilemma whether to establish the business as a Private Limited Company or as other various types of business structures namelySole Proprietorship, General Partnership, Limited Liability Partnership (LLP), Corporation, Non-profit Corporation, Trust, Joint Venture, Association etc.

Also, entitling your business a legal identity is extremely essential. Moreover, setting your business up as a Private Limited Company (PLC) is by far the most convenient way to go about it. There are numerous types of businesses that can be registered into a Private Limited Company. Apart from this, the liability of the members of a PLC is limited to the number of shares respectively held by them.

The present law guide will assist you in the understanding registration of a PLC in detail and more.

What is a Private Limited Company?

A PLC is a privately held company for small businesses. This type of business entity limits owner’s liability to the shareholdings, the number of shareholders to 50, and limits shareholders from trading shares publicly.  

Benefits of Private Limited Company

1. Limited risk

The shareholders of a PLC have limited liability meaning that as a shareholder you will be liable to pay for company’s liability only to the extent of the contribution that you have made.

2. Legal Entity

A PLC has a distinct legal entity from you meaning that the Company is responsible for the management of its assets and liabilities, creditors and debtors. However, you are not responsible for the same. Therefore, the creditors cannot proceed against you to recover money.

3. Business Continuity

PLCs enjoy permanent succession because the company is its own legal entity. Shareholders and employees act “as agents of the company”.

4. Raising Funds

Although registering of a PLC comes with multiple compliance requirements, it is desired by entrepreneurs as it helps raise capital through equity and at the same time restrict the liability.

5. Trustworthiness

Indian Companies are registered under Companies Act with the Registrar of Companies (ROC). Moreover, anyone can check the details of the company as well as all the Directors through Ministry of Corporate Affairs (MCA). Therefore, a PLC system of business is more trustworthy.

6. Tax Advantages

In addition to limited liability, PLCs even enjoy tax advantages. They pay corporation tax on their taxable profits and tend to be exempted from higher personal income tax rates. Forming a company instead of continuing as a sole trader or sole proprietor opens the door to more tax-deductible costs and allowances redeemable against profits.

PLC advantage over Public Company

First, for a PLC, a minimum number of shareholders required is 2, while, for a public company, you require a minimum of 7 shareholders.

Second, a public company is required to disclose its financial reports to public every quarter of the year, as it affects public investment while a PLC is not subjected to any such compulsion.

Third, management and decision making are more complex and confusing in public companies as more number of shareholders is to be consulted. However, this complex procedure is eliminated in a PLC as the number of shareholders is less.

Fourth, a public company requires minimum share capital of Rs. 5,00,000 whereas for a PLC, the earlier minimum number of share capital was Rs. 1,00,000, but now there is no such minimum compulsion. Therefore, there is no pressure on fund requirements.

Fifth, confidential information such as executive compensation, legal settlements, and other essential information cannot be kept reserved in public companies. Such information is more secure in a PLC.

Therefore, a PLC is a lot less complicated than a Public Company. Moreover, it is comparatively less expensive and less time-consuming to register a PLC.

However, the principal advantage of a Public Company is that it can raise funds at a larger scale without approaching banks and reduce debt while in a PLC, all the funds are raised by existing members, shareholders, investors, and promoters. If a PLC goes public then the risk is also shared among the shareholders. Public companies once registered, get indirect promotions and support through stock exchange websites where their stocks are registered.

How long does it take to register a company?

The complete procedure includes approval of Name, DIN, and Incorporation which usually takes around 3 to 4 days approximately.

The approximate time taken is as follows:

• Approval of name through form INC-1 takes 6 to 7 days
• Allotment of DIN through Form-DIR-3 takes 1 to 2 days
• Incorporation of Company through INC-7 and INC-22 takes 7 to 10 days

Therefore, all put together, it takes around 15 to 20 working days.

The following documents are required to be submitted-

• PAN Application
• TAN Registration
• Filing of E-forms with the Registrar of Companies (ROC)
• Director Identification Numbers (2 nos.)
• Digital Signature Certificates (2 nos.)
• Name approval (INC- 1) including one resubmission
• Drafting of Memorandum of Association (MOA) & Articles of Association (AOA)
• Issue of Certificate of Incorporation
• Includes Government Fees & Stamp duty up to Rs. 1 Lakh Authorized Capital
   

Mandatory compliances for PLC post incorporation

Steps for establishing a PLC

Step 1:  Obtain Digital Signatures (DSC)

Digital signatures are required to file the forms for company registration. The registration process is online and the forms require a digital signature. DSC is mandatory for all subscribers and witnesses in the memorandum and articles of association. You must obtain the digital signature certificates from government recognized certifying agencies. The cost of obtaining DSC differs depending upon the certifying agency. You must obtain either Class- 2 or Class- 3 categories of DSC. Under Class- 2 category, the identity of a person is verified against a pre-verified database whereas, under Class- 3 category, the person needs to present himself before registering authority to prove their identity.

Step 2:  Apply for Director’s Identification Number (DIN)

DIN is a director’s identification number. It needs to be obtained by one who wants to be a Director in a company. One DIN is sufficient to be a Director in any number of companies.

Step 3:  Name Approval

To get the name approval, there are 2 options:

Option 1: You can apply for the proposed name through INC- 32 (Incorporating Company) but only one name can be applied to this form. It means you have to be sure of the proposed name and should follow name availability guidelines, existing trademarks to avoid rejection.

Option 2: Before filing INC-32, you may file Form INC-1 in which up to 6 names can be proposed and then you can input the SRN of approved INC-1 into INC-32.

Filing through INC -32 is much faster process than going via the INC-1 route. The whole process including name approval and incorporation takes around 2-3 days.

If the name that you want is a bit difficult to get, because there are companies with similar names, you should file Form INC-1 instead of INC- 32.

Step 4: Form INC-32

Ministry of Company Affairs recently introduced Form INC-32. It is a simplified proforma for incorporating a company electronically. It serves the following purposes with the benefit of a single application:

• Application for allotment of DIN (Director Identification Number)
• Reservation of company name
• Incorporation of a new company

Prior to May 2015, the registration of companies required the filling up of several documents, such as the DIR–3 for acquiring the DIN (Director Identification Number), INC-1 for obtaining a name, INC–7 for registering the company with the Memorandum and Articles of Association, INC–22 for the registered office and finally, Form DIR-12 for the directors. Now, all of these forms have been merged together.

The digital signature of a professional is required to file Form INC-32. The professional must certify that all the information given in the form is correct. The professional can be Chartered Accountant, Company Secretary, Cost Accountant or advocate.

Step 5: INC-33 and INC-34

INC- 33 refers to an electronic Memorandum of Association and INC- 34 is electronic Articles of Association. These forms have been introduced to simplify the process of company registration in India.

Memorandum represents the charter of the company while articles of association contain the internal rules and regulations of the company.

Earlier memorandum of association and articles of association were required to be filed physically. But now these forms are filed online on MCA portal as a linked form with INC-32. Both these forms must be digitally signed by subscribers to the Memorandum and Articles of Association.

Step 6:  PAN and TAN Application

Through this single form INC- 32, you can also apply for company’s PAN and TAN by using forms 49A for PAN and 49B for TAN. The system will auto-generate these forms after the submission of INC- 32 form. All you have to do is download it, affix digital signatures and upload both forms on MCA portal.

If all the details in the form are duly filled in along with the required documents, MCA will approve the registration and a CIN (Corporate Identity Number) will be allocated. You can also track this CIN online on MCA portal.

If there are more than 7 Subscribers to MoA (Memorandum of Association) and AoA (Articles of Association) of a PLC the following forms have to be filed.

Form	Purpose
DIR- 3	Allotment of  DIN
INC- 1	Name Approval
INC- 7	Incorporation of company
DIR -12	For Director’s details
INC-22	Registered Office