This article was first published on Linkedin.com on 21 june 2020
Startup companies are booming enormously each passing day in India. Startups in fact play an important role in the country’s economic growth in developing countries like India, especially post-pandemic. They create an innovative platform for aspiring entrepreneurs to create jobs, new products, dreams, and disruption. When you start your idea and transform that idea into a business that starts generating income, you may not know how registering the right type of business entity could actually benefit and change the game for the better. There may also be another hindrance where you are not aware of the legalities of how to form or register a company and the compliance following after incorporating your company. The nitty-gritty details can be confusing and tiresome.
Why does it matter?
Well once you start generating income, it means your idea works and it is very important to be on the right side of the law that would help you grow your business while you protect yourself and your business. If you don’t do that – you let yourself into trouble that may lead to paying a lot of penalties which eventually leads to less income for your business.
The next question is what exactly is a company and what are the options while forming a company in India?
To explain a company – let’s take a human being for example. Now you think of a person, like you and me but doesn’t have a human body to move around and do things according to will. So basically, we can establish a company is a sort of a non-living legal person. Since a person would have life, and a company doesn’t, we can probably change the person title to a business entity.
So a company is basically a legal business entity that will be operated by a group of people called promoters or owners of the company.
The reason for doing this is because it separates its assets and liabilities from the promoters aka owners who manage it and also creates a perpetual existing business because the promoters can transfer their role in the company to another person whenever they want through the transfer of shares.
In summary, a company will be having 3 important factors.
1) Carries limited liability
2) Transferable shares,
3) Has perpetual succession
Limited Liability, Transferable shares and Perpetual Succession
To start a new venture as a solo entrepreneur, you can choose One Person Company. If you are more than 2 or more people, you can choose a Private Limited Company. And if you happen to have more than 200 people, you are required to form a public limited company.
Let’s take a closer look at Private Limited Company today.
A private limited company is a privately held business in which the owner is limited to shares with a minimum of 2 shareholders or promoters. Keep in mind, promoters are the Directors appointed in the company. When we look at the requirements, a private limited company requires a minimum of two 2 members and a maximum of 200. The least paid-up capital to establish this type of company is 1 lakh.
There are several reasons why startups choose a private limited company.
- It forms a Separate Legal Business Entity: A private limited company is a body that exists separately between the owner and distinct from its members and directors.
- Private Limited companies have Perpetual existence: What it means is the company is unaffected by the death of any of its owners or the transfer of its shares. The only time a private company can be forced to close is when the Ministry of Corporate Affairs compliance is not met.
- Private companies have Limited Liability: What this means is when a private limited company is facing any financial crisis with debts, the shareholders will not risk losing their personal assets as a company separates its assets and liabilities from the shareholders.
- Taxation: India may not have the best corporate structure in the world but a private company is the most opted legal entity within India which will be discussed in another article in detail
- You can raise capital through selling shares: In a private limited company, shares can be issued to raise capital for the company although issuance of shares is confined to its existing members of the company with a limit of 200 members whereas in a public limited company shares are issued to the outsiders or the general public.
In conclusion, new companies or startups seeking investments and considering limiting their liabilities would preferably opt for Private Limited Company.
The Ministry of Corporate Act’s governing law gives many advantages outweighing the disadvantages although, considering the costs, the biggest disadvantage is the strict compliance private limited companies require to follow, which can be expensive for startups if they are not planned or informed.
In my next article – I will be sharing a story of moving a Private Limited company to the United States as a C-Corp or an LLC.
Why move your company to the US?
Well, that’s another article to debate – stay tuned but for the moment, stay safe and keep the hustle going!