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.
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.
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 managers (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.
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.
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.
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
Business entities are entitled to deduct normal business expenses, including salaries from the revenue before they calculate income for tax purposes
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.
The shares of the Company and interest in LLP are considered movable properties and are easily transferable. (subject to law)
An incorporated business entity continues to live even after the death of its owners.
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.
A limited company has following advantages:
A limited company has following disadvantages
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:
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:
There are several other provisions contained in the Companies Act 1956 which are applicable only to public companies and should be consulted.
|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|
|Local Director required||No|
|Local shareholder required||No|
|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|
|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|
|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|
|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|
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 -
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.
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.
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.
Each Director has to seek the unique identification number.
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|
Below are the 4 steps in chronological order for incorporation of company.
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:-
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):-
After the creation of provisional DIN, regularization of the same is required as per below:-
The following are the Information’s required for the formation of Company