Limited liability

Limited liability means that the personal financial liability of an investor in a business is limited to the extent of a fixed amount that one has agreed to invest in a company or a limited liability partnership. In other words, the investor is not personally liable for the business debts and liabilities of the Limited Company or Limited Liability Partnership. In the unfortunate event of winding up of the business, the investor's liability is limited to the unpaid amount of agreed contribution by shares or otherwise.

On the contrary, the liability of sole proprietors and partners in general partnership are unlimited and even their personal assets are exposed to pay off the business debts and other business liabilities.

The directors run the day-to-day business of a company and are liable to comply with the various requirements specified under law. In the case of an LLP, the designated partner is responsible for the legal compliances of an LLP. In case of any non-compliance, directors and designated partners are personally held responsible.

Usually in a small company, the shareholders are the Directors and in an LLP, the Partners become designated partners. In their role as a Director or Designated Partner, their liability is unlimited as they are exposed to penal provisions under the law for the non-compliance of respective regulations.

Reasons for incorporating a Limited Liability Company
  • Personal Asset Protection

    Both Companies and LLPs allow owners to separate and protect their personal assets. In a properly structured and managed company, owners will have limited liability for business debts and obligations.

  • Reduces Personal Liability

    Incorporated entity is a separate body from the one or ones who own it. Therefore, when an incorporated entity is sued, there are provisions in the law to protect the owners (shareholders) and mangers (officers and directors) from personal liability. Once you do business with the public or have even one employee, you are wide open to legal liability. An incorporated entity can provide a legal shield between your business life and your personal life.

  • Separate Legal Entity Status

    An incorporated business entity is a separate legal entity from that of its owners and managers. The persons who own and manage the incorporated entity are not directly liable for the acts and deeds of the entity unless there is a violation or misuse of their fiduciary position within the entity. The incorporated entity is capable of owning funds and other properties in its name. The entity will be the owner of all the property vested with it. Being a legal body in the eyes of the law, a Company or LLP can sue in its name and be sued by others.

  • Adds Credibility

    An incorporated entity has greater credibility in the eyes of many customers and lenders than does a sole proprietorship or partnership. When you have taken the step to incorporate your company, it is perceived that you have long-term plans for your business. Because of the added trust, this may increase the likelihood that customers and lenders will be willing to part with their money.

  • Protection of Name

    Registering a business gives protection to the extent that no one else will be permitted to register a business with the same name. However, ultimate protection can only be ensured through Trademark Registration

  • Deductible Expenses

    Business entities are entitled to deduct normal business expenses, including salaries from the revenue before they calculate income for tax purposes

  • Raising Capital

    There is a greater source of capital available to registered Companies and LLPs than to partnerships or proprietorships. Because the incorporated entities are separate from the owners, people tend to be more willing to invest money without accepting liability or responsibility for company business.

  • Transferability of Ownership Or Interest

    The shares of the Company and interest in LLP are considered movable properties and are easily transferable subject to law.

  • Perpetual Duration

    An incorporated business entity continues to live even after the death of its owners.

  • Governance and Disclosure Norms

    In India, Company and LLP form of organizations are governed by respective Laws. A Company and LLP have to follow various regulatory procedures during the course of their operations and are subject to stringent disclosure norms. Good governance and transparent disclosure of operations add value to the business, thus benefiting the true business owners.

What are the advantages of a Limited Company?

A limited company has following advantages:

  • Members' (the directors and shareholders) financial liability is limited to the amount of money they have paid for shares.
  • The management structure is clearly defined, which makes it easy to appoint, retire or remove directors.
  • If extra capital is needed, it can be raised by selling more shares privately. It is simple to admit more members.
  • The death, bankruptcy or withdrawal of capital by one member does not affect the company's ability to trade.
  • The disposal of the whole or part of the business is easily arranged. High status
What are the disadvantages of a Limited Company?

A limited company has following disadvantages

  • Requirement to register the company with the registrar of companies and provide annual returns and audited statement of accounts. All details of the company are available for public inspection so there can be no secrecy. There are penalties for failing to make returns.
  • Can be more expensive to set
  • May need professional help to form.
  • As a director, you are treated as an employee and must pay tax
  • The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business.
Types of Limited Liability Company

In India, we have two types of limited liability company :

1) Private Limited Company
2) Public Limited Company

What is a Private Limited Company?

A Private Limited Company is a Company limited by shares in which there can be maximum 50 shareholders, no invitation can be made to the public for subscription of shares or debentures, cannot make or accept deposits from Public and there are restriction on the transfer of shares. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 2.

A private company is a company which has the following characteristics:

  • shareholders' right to transfer shares is restricted;
  • the number of shareholders is limited to fifty; and
  • 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

What is a Public Limited Company?

A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 7.

A public company is defined as a company which is not a private company. The following conditions apply only to a public company:

  • It must have at least seven shareholders.
  • 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".
  • It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting business.
  • A public company is required to have at least three directors.
  • 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 Liablity Company At a Glance
1 GENERAL
Type of the company Private Limited Liability Company
Common law or civil law Common law
Readymade company available Some Times
Non-English company allowed No
Legislations Companies Act, 1956 and Foreign Management Act, 1999
2 SHARE HOLDERS & DIRECTORS
Minimum number of shareholders or members 2 in case of Private Limited
Minimum number of Directors 2 in case of Private Limited
Director and shareholder can be same person Yes
Corporate Director or individual Director Individual Director
Corporate shareholder or individual shareholder Corporate or Individual or both
3 LOCAL REQUIREMENTS
Local Director required No
Local shareholder required No
Nominee Director No
Nominee shareholder No
Proxy Director No
Proxy shareholder Yes
Registered office required (local) Yes
Registered agent required No
Local or qualified company secretary required Yes in case Capital is Rs. 50 Million
Documents/records/information kept at registered office Yes
Any other reporting requirements Audited Financial Statements, Annual Returns
4 SHARES & CAPITAL REQUIREMENT
Minimum paid-up share capital Rs. 1,00,000
Standard currency of share capital INR
Other permitted currency of capital Not Allowed
Share with or without par value Par Value
Share paid-up in cash or in consideration Cash or inconsideration or both
Registered share or bearer form Not allowed
Share can be issued in different classifications and forms Yes
Stamp duty on transfer of share 0.50 % of value of shares
5 CORPORATE BOOKS & RECORDS
Maintenance of company books and records required Yes
Place of maintenance of company books and records Registered office or any other place within the same city
Preparation of accounts required Yes
Filing of accounts/financial statement required Yes
Filing of annual return required Yes
Register of shareholders required Yes
Location of register of shareholder Registered Office
Register of Directors required Yes
Location of register of Directors Registered Office
6 MEETINGS OF SHAREHOLDERS & DIRECTORS
Place of board meeting Anywhere in the world
Place of share holder meeting Anywhere in India
Meeting through telephone/electronics means Not yet cleared
Minutes books of meeting required Yes
Place of Minutes Books Registered Office
7 CONFIDENTIALITY & PRIVACY
Publicly Accessible of records of Directors Yes
Publicly Accessible of records of shareholders Yes
Publicly Accessible of books of accounts and financial statements Yes
Appearance of name/identity of shareholder and Director in the incorporation documents Yes
Appearance of name/identity of shareholder and Director in the public records Yes
Bank secrecy Not permitted
Legislation regarding confidentiality and privacy No law
Money Laundering legislation Yes
8 TAXATION
Bank Interest Income derived from a bank in offshore jurisdiction taxable Yes
Double taxation treaty access Yes
Capital gain on sale of share in offshore jurisdiction Yes but depends on DTA
Capital gain on real estate owned directly or through company in offshore jurisdiction Yes but depends on DTA
Capital gain on real estate owned directly or through company outside the jurisdiction Yes but depends on DTA
Inheritance tax/estate duty No
Withholding tax on payment of dividend to non-resident Yes
Withholding tax on payment of interest to non-resident Yes
Withholding tax on payment of royalty to non-resident Yes
Anti avoidance/abuse rules Yes
Group taxation allowed No
Any incentives Yes
Deductibility of Losses Yes
Tax exemption of liquidation proceeds No
Corporate tax rate 33.99%
Corporate resident(incorporation/management and control) Yes
Benefit from tax sparing credits) Yes depends on DTA
Filing of Tax return required Yes
Any other Taxes & Duties Custom, Excise, Service Tax, R & D Cess
9 MISCELLANEOUS
Doing business with residents and companies allowed Yes
Restrictions on carrying on any business activities outside offshore jurisdiction No subject to certain condition
Real Estate property can be owned in offshore jurisdiction Yes
Voluntary winding up or winding up through court Both
Time frame for winding up 6 Months to 2 Years
Any exchange control restrictions Yes
Procedure for Registration of a Public Limited Company
  • A Public Limited Company, in addition to the steps followed by a Private Limited Company has to obtain a certificate of Commencement of Business before they can commence the business.

    To obtain Commencement of Business Certificate after incorporation of the company the public company has to:-

    - File a declaration of compliance with the provisions of Section 149(2)(b) of the Act in eForm 20 and attach the statement in lieu of the prospectus(schedule III)

    OR

    - File a declaration of compliance with the provisions of Section 149 (1)(a),(b),(c) of the Act in eForm 19 and attach the prospectus (Schedule II) to it.

Section 149 of the Act, explains the Restrictions on the commencement of Business:-

Where a company having a share capital has issued a prospectus inviting the public to subscribe for its shares, the company shall not commence any business or exercise any borrowing powers, unless -

  • shares held subject to the payment of the whole amount thereof in cash have been allotted to an amount not less in the whole than the minimum subscription;
  • every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares offered for public subscription;
  • no money is, or may become, liable to be repaid to applicants for any shares or debentures which have been offered for public subscription by reason of any failure to apply for, or to obtain, permission for the shares or debentures to be dealt in on any recognized stock exchange.

149(2)(b):- Where a company having a share capital has not issued a prospectus inviting the public to subscribe for its shares the company shall not commence any business or exercise any borrowing powers, unless every director of the company has paid to the company, on each of the shares taken or contracted to be taken by him and for which he is liable to pay in cash, a proportion equal to the proportion payable on application and allotment on the shares payable in cash.

What are the Requirements for incorporation?
  • Shareholders:

    To register a Private Company, there should be a minimum of two shareholders and for Public Company it is seven. The first shareholder should execute the Memorandum and Articles of Association for registering the Company.

  • Directors:

    A Private Company should have a minimum of two directors and a Public Company should have minimum three directors. Only individuals can be designated as directors of a company. Where a new company is registered by two or more existing companies or LLPs, the promoter company or LLP can nominate individuals as directors of the new company. An individual should hold a valid DIN to become a director of a company.

  • Director Identification number:

    Each Director has to seek the unique identification number.

  • Digital Signatures:

    One of the director has to obtain the digital signature

Summary Of Steps and Time Required For Incorporation of Limited Liability Company

No Procedure Time to Complete
1 Obtain director identification number (DIN) 5 working days
2 Obtain digital signature certificate 5 working days
3 Present name of company for approval to the Registrar of Companies (ROC); Get the memorandum and articles of association vetted by the Registrar and printed 5-7 Working days
4 Make an application to the superintendent of Stamps or authorized bank requesting for stamping of the memorandum and articles of association 5-7 working days
5 Present the required documents along with the registration fee to the Registrar of Companies to get the certificate of incorporation 5-10 days
6 Obtain a company seal 3 days
7 Visit an authorized franchise or agent appointed by National Securities Depository Services Limited to obtain a permanent account number 7 days
8 Obtain a tax account number for income taxes deducted at source from the Assessing Office in the Mumbai Income Tax Department 7 days simultaneously with Procedure
Process For Incorporation/Registration of Limited Liability Company

Below are the 4 steps in chronological order for incorporation of company.

  • A. Digital Signature (DSC) :

    It is mandatory to obtain digital signature by any one of the Proposed Director for digitally signing the name approval form and the Company formation documents for filing the documents on line, which are mandatory. For obtaining the digital signature the following documents required along with necessary fees:-

Alternative -1, when the Director is physically present in India
  • Application for DSC
  • One photograph affixed on the DIN Form duly attested by a Chartered Accountant or a Notary Public, in India.
  • Copy of passport (Identity Proof) showing name, father's name, date of birth etc. duly attested by a Chartered Accountant Notary Public, in India.
  • In case Father's name is not mentioned in the passport, some other documents with father name, such as birth certificate, driving license or any other documents mentioning father's name issued by the Government Department will be required.
  • Residence Proof duly attested by Chartered Accountant and Notary public, in India.
  • An Affidavit confirming the arrival to India and physical presence duly notarized by the Notary Public, in India.
  • Copy of passport showing date of entry to India and stamp of immigration authorities at the Indian Airport.
Alternative -2, when the Director is not physically present in India.
  • Application for DSC
  • One photograph (Identity Proof)affixed on the DIN Form duly attested by a Notary Public from the Country where the Director is presently staying
  • Copy of passport showing name, father's name , date of birth etc. attested by a Notary Public from the Country where the Director is presently staying .
  • Residence Proof duly attested by a Notary Public form the Country where the Director is presently staying
  • B. DIRECTOR IDENTIFICATION NUMBER (DIN)

CREATION OF PROVISIONAL DIN

For creating the provisional DIN the following information’s required. (Please note that the provisional DIN is granted by submitting the Form online by incorporating the below mentioned information’s):-

  • Name as per Passport
  • Fathers Name
  • Date of Birth
  • Residential Address with Post Index Number (PIN)
  • Nationality & Citizenship
  • Residence Proof, Identity Proof and passport
  • Email address
REGULARISATION PROVISIONAL DIN

After the creation of provisional DIN, regularization of the same is required as per below:-

Alternative -1, when the Director is physically present in India
  • Form DIN-1 signed by the Director
  • One photograph affixed on the DIN Form duly attested by a Chartered Accountant or a Notary Public, in India.
  • Copy of passport (Identity Proof) showing name, father's name, date of birth etc. duly attested by a Chartered Accountant Notary Public, in India.
  • In case Father’s name is not mentioned in the passport, some other documents with father name, such as birth certificate, driving license or any other documents mentioning father’s name issued by the Government Department will be required.
  • Residence Proof duly attested by Chartered Accountant and Notary public, in India.
  • An Affidavit confirming the arrival to India and physical presence duly notarized by the Notary Public, in India.
  • Proof of stay in India like hotel bill, police registration etc.
  • Copy of passport showing date of entry to India and stamp of immigration authorities at the Indian Airport.
Alternative -2, when the Director is not physically present in India.
  • Form DIN-1 signed by the Director
  • One photograph (Identity Proof)affixed on the DIN Form duly attested by a Notary Public from the Country where the Director is presently staying
  • Copy of passport showing name, father's name , date of birth etc. attested by a Notary Public from the Country where the Director is presently staying
  • Residence Proof duly attested by a Notary Public form the Country where the Director is presently staying
REGISTRATION OF DOCUMENTS

The following are the Information’s required for the formation of Company

  • Approved DIN
  • Complete Address of Registered Office along with Postal Index Number (PIN).
  • Photographs (2 Nos) of the Directors.
  • Proposed main objects of the Company.
  • Memorandum & Articles of Association
  • A necessary filing fee depends upon the proposed share capital of the Company.
  • Embossing on Memorandum & Articles from the State Government after paying required fees.
  • Digital Signature.
Alternative -1, when the Director is physically present in India
  • Copy of passport (Identity Proof) showing name, father's name, date of birth etc. duly attested by a Chartered Accountant Notary Public, in India.
  • In case Father’s name is not mentioned in the passport, some other documents with father name, such as birth certificate, driving license or any other documents mentioning father’s name issued by the Government Department will be required.
  • Residence Proof duly attested by Chartered Accountant and Notary public, in India.
  • An Affidavit confirming the arrival to India and physical presence duly notarized by the Notary Public, in India.
  • Proof of stay in India like hotel bill, police registration etc.
  • Copy of passport showing date of entry to India and stamp of immigration authorities at the Indian Airport.
  • Subscription clause to be filled in own hand writing of the proposed promoter/shareholder
  • Power of Attorney in favor of c consultant for authorizing him to attend before the Registrar of Companies
  • Affidavit duly signed by any one of the director
Alternative -2, when the Director is not physically present in India.
  • Copy of passport showing name, father's name, date of birth etc. attested by a Notary Public from the Country where the Director is presently staying.
  • Residence Proof duly attested by a Notary Public form the Country where the Director is presently staying.
  • Subscription clause to be filled in own hand writing of the proposed promoter/shareholder duly Notarized by a Notary Public form the Country where the Director is presently staying and also attested by the Indian Embassy/Consulate of that country.
  • Power of Attorney in favor of c consultant for authorizing him to attend before the Registrar of Companies duly Notarized by the a Notary Public form the Country where the Director is presently staying and also attested by the Indian Embassy/Consulate of that country.
  • Affidavit duly signed by any one of the director duly notarized by a Notary Public form the Country where the Director is presently staying and also attested by the Indian Embassy/Consulate of that country.
FAQ
What is the minimum paid-up capital of a Private Limited Company?
The minimum paid up capital at the time of incorporation of a private limited company has to be Indian Rupees 1,00,000 (about United States Dollars 2,250). There is no upper limit on having the authorized capital and the paid up capital. It can be increased any time, by payment of additional stamp duty and registration fee.
What is the difference between authorized capital and paid up capital?
The authorized capital is the capital limit authorized by the Registrar of Companies up to which the shares can be issued to the members / public, as the case may be. The paid up share capital is the paid portion of the capital subscribed by the shareholders.

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