Steps for incorporating the company and LLP
Nagesh Kumar M
(Querist) 16 February 2010
This query is : Resolved
Dear Sirs,
Please give the steps involved in the formation of a company and LLP.
Raj Kumar Makkad
(Expert) 16 February 2010
Both the Indian promoters and the foreign promoters can form the following business entities: Private Limited Company, Public Limited Company, Limited Liability Partnership, Unlimited Company, Partnership and Sole Proprietorship. The foreign companies also have the options of forming the following type of business entities: Liaison Office/Representative Office, Project Office, Branch Office, and Joint Venture Company. It must be noted that a Joint Venture Company is not a separate type of legal entity; it could be either a Private Limited Company, a Public Limited Company, or an Unlimited Company. Similarly a wholly owned Subsidiary of a foreign company in India could be either a Private Limited Company, a Public Limited Company, an Unlimited Company, or a Branch Office.
For a foreign Investor in India it is very important to choose a right kind of business or corporate entity which best suits its purposes and takes care of liability issues and tax planning issues. Foreign Companies planning to do business in India should pay special attention to Entry Strategies in India for Foreign Investors and corporate structuring to save taxes to the best extent allowed by laws and international tax treaties.
It is also mandatory for foreign investors or foreign shareholders, both individuals and corporate shareholders, to seek Government Approvals for Investing in India In some special cases Foreign Investment Promotion Board, FIPB Approval for Foreign Investment in India is required. In other cases Reserve Bank of India, RBI Approvals for Foreign Investment in India is required. The sectors where RBI Approval for foreign investors is available under automatic route can be found at FDI in India Sector wise Guide.
There are various steps required to establish a business in India, before and after incorporation, as mentioned hereinafter. See also the Procedure for Formation of Company in India.
A Company in India can have foreign directors provided some conditions are fulfilled. The directors of an Indian company, both Indian and foreigner directors, are required to obtain Director Identification Number - DIN and Digital Signature Certificate - DSC
There are some restrictions regarding issuing sweat equity for a company incorporated in India.
Also see Annual Corporate Filings in India for corporate maintenance requirements in India.
Private Limited Company A private company is a company which has the following characteristics:
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shareholders’ right to transfer shares is restricted;
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the number of shareholders is limited to fifty; and
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an invitation to the public to subscribe to any shares or debentures is prohibited.
A Private Limited Company is the most popular form of business entity used for Foreign Investors in India, including USA investors in India. It takes some time to incorporate in India as there are various steps required in forming a private limited company in India. There are various steps required to establish a business in India, before and after incorporation, as mentioned hereinafter.
Public Limited Company
A public company is defined as a company which is not a private company. The following conditions apply only to a public company:
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It must have at least seven shareholders.
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A public company is not authorized to start business upon the grant of the certificate of incorporation. In order to be eligible to commence business as a corporation, it must obtain another document called "trading certificate".
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It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting business.
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A public company is required to have at least three directors.
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It must hold statutory meetings and obtain government approval for the appointment of the management.
There are several other provisions contained in the Companies Act 1956 which are applicable only to public companies and should be consulted.
Limited Liability Partnership (LLP)
A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India recently. (Limited Liability Partnership (LLP) Act of 2008).
LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.
This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
Limited Liability Partnership (LLP)
A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India recently. (Limited Liability Partnership (LLP) Act of 2008).
LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.
This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
The salient features of the LLP Act of 2008 are as follows:-
(i) The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.
(ii) The proposed Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.
(iii) While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.
(iv) LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike a ordinary partnership firm where the maximum number of partners can not exceed 20.
(iv) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.
(v) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.
(vii) While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.
A V Vishal
(Expert) 16 February 2010
Persons desirous of forming a company must adhere to the step by step procedure as discussed below:
Select the type of the company you want to incorporate viz. is the proposed company is a private or a public limited.
Selection of name for the proposed company.
Apply for Directors Identification Number and Digital Signatures.
Drafting of Memorandum and Articles of Association.
Stamping, digitally signing and e-filing of Form 1, 18 & 32 with the Registrar.
Payment of Fees.
Obtaining Certificate of Incorporation.
Preparation and filing of prospectus /Statement in lieu of Prospectus (in case of public companies) for obtaining the certificate of commencement of business.
Some important points before undertaking the incorporation:
Six names are required to be selected in order of preference after taking notes of numerous clarifications, circulars and rules made by the Ministry of Company Affairs (DCA), etc. In case key word is required, significance of each key word should be given in the e-Form 1A.
The promoters are required to make an application to the concerned Registrar of Companies be submitted electronically to the Ministry of Company Affairs on the portal of MCA in Form 1A digitally signed by any one promoter or managing director or director or manager or secretary of the company alongwith the required fee of Rs. 500 only for ascertaining whether the selected name is available for adoption by the promoters of the proposed company.
After receipt of completed application in e-Form 1A, the Registrar shall intimate whether the proposed name is available for adoption or not. The confirmation of the name made available by the Registrar shall be valid for a period of six months from the date of letter issued in these regards. In case, if the promoters fails to submit all the required documents for incorporation within that period, then they are required to submit another application for revalidation of name with fresh filing fee of Rs. 500 only.
Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA)
Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match with the objects shown in e-Form 1A. These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advise of the experts and the other object clause should be drafted in a very broader sense.
The fees payable to the Registrar at the time of registration of a new company varies according to the authorised capital of a company proposed to be registered as per Schedule X to the Act. Fees can be calculated at the MCA portal using fees calculator.
Next step for the promoters is to file the following documents with the Registrar for incorporation of the company. The following documents shall be submitted to the Registrar alongwith the adequate filing fees as applicable for registration of the company electronically on line basis within a period of six months from the date of intimation of availability of name:—
(i) Memorandum of Association, duly signed by the subscribers and witnessed, showing the number of shares against their names electronically attached in PDF file. It should also be properly stamped as per the stamp duty applicable in the State, where the registered office of the company is to be situated.
(ii) Articles of Association should also be duly signed by the subscribers and witnessed, showing the number of shares against their names electronically. It should also be properly stamped according to the authorised share capital.
(iii) Declaration in e-Form 1 by an advocate or company secretary or chartered accountant engaged in whole time practice in India or by a person named in the Articles as a director, manager or secretary of the company, that all the requirements of the Companies Act, 1956 and the rules made thereunder have been complied with in respect of registration.
(iv) Power of Attorney for should be furnished by all the subscribers in favour of any one subscriber or any other person authorising him to file these documents and to with the Registrar and to obtain certificate of incorporation. The power of attorney should be given on Non-Judicial stamp paper of appropriate value and shall be submitted to the Registrar.
(v) Form 18 is to be filed with the Registrar electronically with the digital signatures in regard to location of the registered office.
(vi) Form 32 is required to be filed with the Registrar electronically for filing particulars of directors. The personal details should match with the information provided in the DIN.
Form 1 has to be submitted with following attachments:
(1) Memorandum of Association (MoA) and Article of Association (AoA) of the company [Not required for a company licensed under section 25]
(2) Annexure containing details of subscribers.
(3) Power of Attorney/Authority letter given by the subscribers / promoters / directors to the professional i.e. advocate or attorney or pleader or CS or CA (in whole-time practice) for formation of a company.
Certificate of Incorporation:
On the satisfaction of the Registrar that the requirements specified under the companies act have been complied with by the company, he shall issue a Certificate of Incorporation, normally within 7 days of the receipt of documents.
A Private limited company and a company not having share capital may commence its business activities from the date of its incorporation. However, a Public Limited Company having share capital is also required to obtain a separate certificate of commencement of business.
A V Vishal
(Expert) 16 February 2010
A LLP can be incorporated with a minimum of atleast two partners who can be Individuals or Body Corporate through their nominees. Further for incorporating an LLP, of the total number no. of partners, atleast two shall be Designated Partners, of which atleast one must be an Indian Resident.
Parameters for deciding the Partners and Designated Partners:
Atleast Two Partners; Individuals or Body Corporate through individual nominees.
Minimum of Two Individuals as Designated Partners, of total no. of Partners.
Atleast One Designated Partner to be Resident Indian.
A person Resident in India means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one year. (Explanation to Section-7())
Designated Partner means a partner who is designated as such in the incorporation documents or who become a designated partner by and in accordance with the Limited Liability Partnership Agreement
Designated Partner Identification Number (DPIN): Section 7 (6) of LLP Act 2008, provides that every Designated Partner to obtain a DPIN from the Central Government.
DPIN is an eight digit numeric number allotted by the Central Government in order to identify a particular partner and can be obtained by making an online application in eForm 7 to Central Government and submitting the physical application along with necessary identity and Address proof of the person applying with prescribed fees.
Digital Signature Certificate: As all the documents and forms required for incorporating an LLP in India to be filed electronically and under the signatures of Designated Partners, thus atleast one Designated Partner to obtain the digital signature certificates from government recognized DSA. The signatures shall also be required for signing and filing of all relevant forms and documents to be filed, annually or event based after incorporation of the LLP, asking for approvals or as intimation.
Likewise the manual signatures, digital signature certificates are individual specific and no partner needs to obtain more than one.
The next step is to decide the name for the proposed LLP to be incorporated, anyone intending to incorporate an LLP has to evaluate his proposed name under the prescribed parameters and make an application in Form 1of Rule 18(5) of the Limited Liability Partnership Act 2008, for reservation of the desired name.
The name of the limited liability partnership shall not be similar or identical with Company or LLP already registered in India and it should not contains words prohibited under the Emblems and Names (Prevention of improper use) Act, 1950 or which are also not Undesirable in the opinion of Central Government or which satisfies the conditions prescribed under rule 18(2). For more information check Name Availability Guidelines.
In case any Body Corporate is partner, copy of Board resolution authorizing the incorporation of LLP shall be attached
The next pertinent step is drafting of Limited Liability Partnership Agreement governing the mutual rights and duties among the partners and among the LLP and its partners.
The basic contents of Agreement are:
Name of LLP
Name of Partners & Designated Partners
Form of contribution
Profit Sharing ratio
Rights & Duties of Partners
Proposed Business
Rules for governing the LLP
In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable
It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to field in eform 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the formation of LLP, it is always beneficial to have the LLP Agreement drafted and executed before the incorporation of the LLP.
Next is the filing of Incorporation documents, consent of Partners and declaration electronically through the medium of e-forms prescribed with the Registrar of LLP for incorporation of the LLP on payment of prescribed fees based on the total monetary value of contribution of partners in the proposed LLP.
eForm 2: Incorporation Document
This is an informative document setting down the details of LLP, its Partners including designated partners along with their amount of contribution and consent for forming a Limited Liability Partnership to carry on a lawful business with profit motive along with declaration stating that all the requirements of Limited Liability Partnership Act, 2008 regarding incorporation of LLP in India have been complied with.
eForm 3: Details of LLP Agreement
This form provides for the necessary information in respect to the LLP Agreement entered into between the partners.
eForm 4: Consent of Partners Consent of each partner to become a partner of Limited Liability Partnership along with their address and identity proof to be filed with the Registrar of Companies.
Subscription Sheet: Just like in case of Company formation, the partners are required to subscribe their names along with signatures to the subscription sheet, which shall be witnessed by any chartered Accountant/Company Secretary/Advocate in practice.
After the Registrar is satisfied that all the formalities with respect to the incorporation has been complied , he will issue a Certificate of Incorporation as to formation of the LLP within maximum of 14 days from date of filing of documents . The Certificate of Incorporation issued shall be the conclusive evidence of formation of the LLP.
Nagesh Kumar M
(Querist) 17 February 2010
Dear Makkad Sir, Vishal Sir,
Thanks a lot for your inputs.
Kumar Thadhani
(Expert) 17 February 2010
kUDOS TO EXPERTS LIKE MR.MAKKAD & MR.VISHAL for replying to qery in details.
