Company Formation and Registration in India
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India is one of the fastest growing economies in the world with plenty of opportunities for business startups. Therefore, many new players are always looking to enter the Indian markets or expand their existing businesses to leverage India’s competitive advantage. Whether it be a foreign company eyeing a business set up in India, or an Indian company looking to expand, The Companies Act, 2013 governs all such entities and makes it necessary for them to register. We at IMC Group cater to all the requirements regarding such company formation in India.
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Indian economy incorporates various businesses that have entirely distinct activities to perform. Here are some of the major Business structures that you will commonly find while analyzing the economic performance of the nation.
This type of business is operated and managed by a single person. There are no such registration formalities and they are recognized by other registrations like sales or service tax registration and therefore it is very famous among small traders and merchants.
- Unlimited liability
Here, the owner and firm are not separate legal entities and therefore, the owner is responsible to pay off everything. This is the reason why sole proprietorship is suited only for small businesses.
- Easy to set up and carry on
Since there are no separate formalities for registering a sole proprietorship business in India, anyone can easily start it without any professional help or prior knowledge. If you are dealing with some specified commodity, you just need a license or permit to sell the same.
This is a business structure in which two or more than than two people handle the business operations following the objectives and terms stated in the Partnership deed. This structure has become a less viable option for people after the introduction of limited liability partnerships where partners are not liable to pay from their personal assets. However, easy and optional registration, low-cost setup, and minimum compliance makes it a good choice for several small scale businesses.
- Unlimited Liability
The partners in the business are liable to pay off all the debts of the firm if it fails to do so. Also, if the partners choose to opt for registering the firm, the process may be very costly. Therefore, if you don’t have a comparatively small business then choosing a general partnership structure is not a good ides.
- Easy to Start
If you do not wish to register your firm then your business can start just after your partnership deed is ready. However, if you wish to register the firm then also the time taken will be less in comparison to the LLP registration process.
- Relatively Inexpensive
Since there are not many minimum compliances associated with General partnership, it is easy to start. The registration process is also very basic and not so lengthy, as in the case of an LLP.
This is an improvement in the general partnership because the partners have limited liability and offer each of the partner protection from misdeeds, negligence, or incompetence of the other partners. It is also considered as a relatively cheaper approach to incorporate features of a Private Limited Company.
- Startup cost
Starting an LLP is comparatively cheaper than setting up a private limited company because there no compliance costs or paid-up capital associated with it.
- Suited to non-scalable businesses
If your business does not require an equity funding then LLP is the most suited option because it incorporates features of both Private limited company and general partnership.
- Tax Advantages
The tax surcharge applicable to companies with profits above 1 crore does not apply to LLPs. Also, the loans given to partners are not taxable.
- Number of Partners
No limit is defined on the number of partners in an LLP.
This is a newly introduced business structure that gives the single business owners entire control over the operations of his/her company and limits his/her liability towards the business. There is no scope of raising an equity capital since the owner of the company is also the director and the only shareholder.
- Suited to solo entrepreneurs
It is made to suit the limited liability requirement of a sole-proprietor. However, after exceeding a certain turnover or profit amount, the OPC needs to get converted into a Private Limited Company.
- Compliance requirements are higher
The owner will have to comply with various requirements of the MCA like conducting a statutory audit, submitting annual and IT returns because there are no such AGMs of an OPC.
- Tax Advantages
There are some industry-specific benefits that an OPC enjoys, just like a Private Limited Company. However, taxes are payable at a flat rate of 30% on profits, MAT applies, as does DDT. But, if you are looking for a business structure with a maximum tax benefit, then LLP is a better option.
This type of business structure is increasingly preferred by startups because it allows outside fundings to be raised easily, limits shareholders’ liability, and gives them permission of offering ESOP for attracting top talents in the organization. Since private limited companies are required to hold board meetings and file an annual return to the MCA, they are seen as more credible organizations as compared to any other mentioned-above.
- Limited Liability
- High start-up cost
- Greater compliance
- Fewer tax advantages
A public limited company has the capacity to offer shares directly to the general public and can also accept foreign direct investments.
For setting up this kind of entity, there must at least be three directors and at least seven shareholders. One of the three directors must be an India resident.
The business must strictly hold statutory meetings along with government approvals for appointing people on the management positions. Shareholders can transfer their shares at ease and their liability is limited to the extent of their capital contributions.
Before commencing with the operations, the company must have a trading certificate and a published prospectus.
- It must hold statutory meetings and also obtain approvals from government before the management appointment procedures.
- Since, a public company incorpotated in India is not authorized for starting business upon the grant of the certificate of incorporation. For getting eligible to commence a business as a corporation in India, it should mandatorily obtain another document known as trading certificate.
- It should publish a prospectus or some statement in lieu of a prospectus before transacting any sort of business.
A Liaison Office can be established with the Government of India’s approval. The basic role of a Liaison Office is very limited and involves promotion of exports/imports, collection of information, and facilitation of technical/financial collaborations.
A Liaison office is not entitled for undertaking any sort of commercial activity directly or indirectly.
Foreign companies who have a plan of executing specific projects in the Indian territory can set up temporary site offices in India where activities only relating to that project can be carried out. The Indian Government has now granted general permission to foreign entities for establishing project offices which are subjected to specified conditions.
Foreign companies that are engaged in trading and manufacturing activities abroad are allowed to set up a Branch Office in Indian Territory for the enlisted purposes:
- Import/Export of goods, rendering consultancy or professional services
- Performing the research work where the parent company is already engaged.
- Promoting financial or technical collaborations between the parent or overseas group company and the Indian companies.
- Representing the Indian parent company and performing as buying or selling agents in India.
- Rendering services in India related to Information Technology and software development.
- Rendering technical nature support to the products that are supplied by the group/ parent companies.
- Foreign shipping or airline company.
A branch office does not have the permission of carrying out the manufacturing activities all by its own but it is permitted to subcontract those activities to any random Indian manufacturer. Branch Offices that are established with the RBI’s approval, may remit profit from outside India of that branch, net of the Indian taxes applicable and subject to the guidelines and Permissions from RBI for setting up branch offices is granted by the RBI itself.
Here are some very crucial questions that every entrepreneur must ask himself before finally making a business structure desicion.
- 1. Number of owners/partners to be engaged in the business
If you are a single person owing the entire initial investment that is elementary to the business, the ideal choice will be a One Person Company. Whereas, if the business you are engaged in has two or more owners and is actively seeking the investment amount from other parties as well, a Limited Liability Partnership (LLP) or a Private Limited Company would be best suited to you, depending upon the scale of operation you wish to choose.
- 2. Initial investment determines your business structure choice greatly
If you want the initial expenditure to be less, a Sole Proprietorship will be a wise choice, and even an HUF or a Partnership would be fine. But, if you have the surity that you will be able to recover the compliance and setup costs, you can anytime opt for opening a One Person Company, a Private Limited Company, or an LLP.
- 3. Willingness of bearing the liability related to the business
Small structures of business like sole proprietorship firms, HUFs, and partnership firms have unlimited liability associated to them. This implies that in case any default happens in loan amounts, the entire money of that loan or liability will be recovered from the partners or members engaged in their profit sharing ratio. There, the risk towards your personal assets is higher in these selected cases.
On the other hand, LLPs and Companies only have a limited liability towards their owners. This indicates that the liability of its members will be restricted only to the amount of contribution they are making or the value of shares every member is holding.
- 4. Tax Rate Applicability to the selected business
The income tax rates that are applicable on a sole proprietorship and an HUF are ordinary slab rates in India. In a sole proprietor’s case, the income of business is the same individual’s other incomes.
However, in the case of any other entity like a partnership or a company, the rate of tax applicable is 30%.
- 5. Investor Funding Plans
Getting outside investments is extremely difficult when your business structure is unregistered. Business entities like Private Limited Companies and LLPs are trusted by investors. Make sure that you are choosing the right structure and try to seek the help from an expert so that you can get registered under required guidance.
- Minimum 2 Directors
- Minimum paid-up capital of Rs. 1,00,000/-
- Digital Signatures for all Directors
- Minimum 2 Shareholders (both directors and shareholders can be the same)
- Proof of Registered Address
- DIN for both Directors
- Consent from subscriber or director
- NOC from the premises owner)
Now, you can understand the company registration process through the following steps.
At least one director must apply for the Digital Signature Certificate (DSC), which is mandatory for filing the company registration documents. Only a few scanned documents and details will be required for completing the procurement process. DSC is compulsory for signing the E-forms relating to incorporation life Form INC-1 and other documents of the company.
Every individual who intends to be appointed as the director of a company shall compulsorily make an application for allotment of DIN in form DIR-3 to the Central Government in such a manner and along with such fees as may be prescribed in the law.
Select, in order of your preference, a few names, not less than four, that indicate the main objectives of the proposed company. Don’t forget to ensure that the name doesn’t resemble the name of any other company that is already registered and also doesn’t go against the provisions of the Emblems and names Act, 1950.
Apply to the concerned ROC for ascertaining the availability of names in INC-1 of General Rules and Forms along with the prescribed fee. If the name you propose is not available then apply for a fresh name on the same application form. MCA has duly prescribed certain rules for the name availability step, so it is advisable to thoroughly check guidelines for the same before actually applying.
After the name approval of the applicant, the ROC will immediately issue a Name availability letter concerning approval for the availability of a name for your proposed company. The name will have validity for a period of sixty days from the date on which the application for the reservation was made. The applicant is eligible to apply for registration of the new company by filing the required forms INC-1, within six months of completion of the name approval.
- After your name is approved, make arrangements for drafting the Memorandum and Articles of Association by the legal practitioners, vetting of the same by ROC, and then printing of the same.
- Then, make arrangements for their stamping with the appropriate stamp duty.
- The main objects of your company must strictly match with the objects shown in e-form INC-1.
- The articles must also be presented in respective forms as prescribed in Tables F, G, H, I, and J in Schedule-1 as applicable to your company.
- Get them signed by at least two subscribers in his own hand with his father’s name, address, occupation, and the number of shares subscribed for along with at least one person witnessing the process.
- Ensure that these documents are dated on a date that falls after the date of stamping.
- The memorandum must be presented in respective forms as prescribed in Tables A, B, C, D, and E in Schedule-1 as applicable to your company.
The following documents are necessarily required to be filed with the ROC for setting up a private limited company:
- Memorandum of Association with a duplicate thereof. (duly stamped)
- Declaration by specified Professional in INC-8
- Residential Proofs
- Verification of the Signatures of all subscribers in Form INC-10
- A copy of the letter of the Registrar of Companies clarifying the availability of the duly proposed name.
- Articles of Association with a duplicate thereof. (duly stamped)
- Affidavit by the subscriber to the Memorandum in Form no. INC-9
- Identity Proofs
- e-Form No. 1, with all the prescribed stamps, for Company incorporation.
- Documents that evidence the payment of prescribed registration and filing fees.
After filing the documents on the MCA online portal, you are required to pay the necessary fees.
After the form is received along with applicable fees, the ROC verifies and scrutinizes all the documents and attachments and suggests necessary changes, if required.
If the registrar is completely satisfied that all the necessary requirements have been complied with by the company, it will register the company and issue a Certificate of Incorporation to the company. The date mentioned in the certificate is the main date of incorporation of your company.
There are distinct rules for sweat equity shares in a public limited and a private limited company in India. Here are the provisions relating to the same.
Section 79A of the Indian Companies Act lays down the provisions for issuing the Sweat Equity shares in India. It states that a company is allowed to issue sweat equity shares of such a class that is already issued by the company on fulfilment of the following conditions:
- The sweat equity issue is authorized through a special resolution passed ion the general meeting conducted by the company.
- The resolution details the specifications like the current market price, number of shares, consideration, if any, and the class(es) of employees or directors to whom such equity shares will be issued.
- Keeping in mind the above provisions, you can understand that issuing Sweat Equity at the time of incorporation of your Company is not possible as one year has not passed since the incorporation date.
- Not less than one year has, at the issue elapsed since the date on which the company was entitled to commence business.
- The company whose equity shares are listed on a stck exchange will be able to issue sweat equity shares in accordance with the regulations laid down by the Securities and Exchange Board of India (SEBI) in this behalf.
In addition to the above rules, some other regulatory rules are applicable for issuing sweat equity shares for a public company incorporated in India which are discussed in the next section.
The aforesaid provisions regarding issuing of Sweat Equity discussed under the Section 79A of the Indian Companies Act are applicable to a public company in the similar way.
Only the sweat equity of a company with shares listed on a recognized stock exchange should be issued in accordance with the Securities and Exchange Board of India Regulations, 2002.
With the second largest global population, India is the third-largest economy of Asia in GDP terms. This statement is enough to clarify the potential Indian markets have for every kind of business operation. Along with this, you can also take benefit of the numerous FTAs and DTAAs that are signed by the government for providing access to major consumer markets that include Australia and China.
The cost of running businesses in India is very low in comparison to other countries that means your net profits will always be higher. Businesses can always expect to gain from the low average salary levels, low electricity costs, and low paid-up capitals.
All companies operating in India are entitled to fabulous economical incentives such as:
- Complete corporate tax exemptions
- Financial grants
- Reimbursement of operation costs
- Accelerated depreciation on the value of all machinery and types of equipment
- Refund of research costs, trading costs, and project investments
Needless to say, operating in India requires an in-depth knowledge of all the statutory and legal aspects. Drafting of documents like Memorandum of Association (MoA) and Articles of Association (AoA) requires an expert level knowledge of the Indian laws and business practices. IMC has over 35 years of experience in this field and can be your partner guide in Company Formation in India.
Our consultancy excels at setting up of LLCs, limited liability partnerships, joint ventures and wholly owned subsidiaries of foreign companies looking to foray into Indian markets. We have the legal expertise and the experience to help you decide which legal entity would be the right choice for you. We can consult you not just on the legal matters but also the subsequent company registration and financial questions.
We provide a one-stop solution to tackle all your requirements right from taking care of the documentation to the ongoing follow up services till your business set up in India is ready to function. Some of our services include:
Our sole aim is to offer all our services under a single umbrella to eliminate the need for companies, especially foreign companies, to coordinate business with different service entities. While helping you with your company registration in India we strive to minimize the regulatory, transaction and other related risks so your business can run smoothly.
We at IMC Group will ensure a seamless process if you are looking for company formation in India. Let us discuss the right legal framework for your type of business based on your objectives so we can structure the right strategy to incorporate your company.
For India company incorporation, just drop your email id and contact number. We will get in touch with you.
What are the different kinds of companies that can be registered in India?
Here are all the various kinds of companies that you can register in India.
- Private Limited Company
- Public Limited Company
- Limited Liability Company
- Unlimited Liability Company
- Non-Profit Organizations
What do MOA and AOA mean?
MOA stands for Memorandum of Association and AOA stands for Articles of Association. Both of these documents are an important source of information for various stakeholders associated with your Company.
MOA tells the objectives, name, registered office address, minimum paid-up capital, the clause regarding limited liability, and share capital of the Company. In brief, it explains the relationship of your Company with the outside operating world.
Whereas, AOA is the document which tells about the internal working of the company. When your AOA is in conjunction with the MOA, it is called the Constitution of your Company.
What do you mean by DSC?
DSC stands for Digital Signature certificate. It is the digital equivalence of your physical documents and other certificates. You are required to file the form electronically with the concerned department for proper approvals. For Private Company Registration purposes, DSC for one of the Directors is mandatorily required.
What is DIN?
DIN is an identification number that is issued to a Director or a prospective Director of a Company by the MCA, Government of India. The concept of DIN was first introduced when Sections 266A and 266G were inserted in the Companies Act.
For obtaining a DIN, one needs to make an online application to the MCA and submit the required documents related to the respective Identity and Address Proof. Once the Ministry is satisfied with these documents, the applicant will get its DIN.
What is a DPIN?
DPIN stands for Designated Partner Identification Number and it is used for identifying a designated partner in an LLP firm. It is equivalent to the DIN issued to a director of a private or public limited company. Both of these identification numbers are issued by the MCA, Government of India.
Is it mandatory for a company to keep its records, documents, minutes, registers, etc. in an electronic format?
Yes, the Management & Administration Rules 2014 says that every Listed Company or a Company that has more than 1000 Shareholders shall maintain necessary Records in electronic format.
What documents are required for registering a partnership firm in India?
You require the following documents while Registering a partnership firm in India.
- Application for Partnership registration
- Original copy of Partnership Deed duly signed by partners
- An affidavit stating the intention of partners that they will work together
- Address proof including lease or rental agreement or an electricity bill;
- Identification Proof including Voter ID card, Aadhar Card, PAN, etc.
What is the number of directors, shareholders, and members in a One Person Company?
The number of directors, shareholders, and members required for starting an OPC in India are as follows
- Members: Minimum and maximum- 1
- Shareholders: Minimum and maximum- 1
- Directors: Minimum 1, maximum 15
The director and shareholder in an OPC can be the same person. Also, appointing one nominee is very important.
What is the number of directors, shareholders, and members in an LLP?
The number of directors and members in an LLP is fixed and has to be adhered to as it is the basic compliance to be followed. The range of number is as follows:
- Members: Minimum 2
- Maximum: not defined
- Directors: no directors
- Shareholders: No shareholders.
Can a Private Limited Company invite the general public for participating in its capital?
A Private Limited Company is not allowed to float shares to the general public. Therefore, it has no requirement at all for issuing any prospectus in the market as the shares are never sold to the general public.
What is a Nidhi Company?
Any company incorporated for cultivating the habit of thrift and saving amongst its members, and that receives deposits from and lends to its members only for their mutual benefit, and which also complies with all such rules as are prescribed by the central government for the regulation purposes of such class of companies.
What are the different options available for dissolving a Private Limited Company?
These are the different options available for winding up a private limited company in India.
- Voluntary winding up
- Winding up by court
- Fast track exit mode
- Winding up in the supervision of the court
Can a foreign national become a director in a private limited company incorporated in India?
Yes, they just need to apply for the DIN from the MCA and then they can become the director of the company.
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