Mr Babuji is a businessman having his own business of stationary. He has been in this business for the last 5 years, but he was reluctant to get it registered. During a pandemic, he saw many ups and downs to his business, and he decided to borrow funds from the bank, but he was unable to do so, why? Because his business was not duly incorporated. The bank could not decide the legal status of his business and he failed to obtain the funds from the Bank.
Nobody would like to become Mr Babuji, does anybody?
Let’s understand the meaning and laws of incorporation.
What is Incorporation?
Incorporation of Companies means forming or registering a Company or any organization like a Private Limited, Public Limited Company, a Partnership firm and so on. It is always advisable to register a business as it gives authenticity to the services provided by you under the registered business.
Let’s check the advantages of incorporation:
After incorporation/registration, a Company get legal recognition as an independent entity separate from its owners and shareholder. It helps to limit the liability.
When the company is incorporated, the members and shareholders liability become limited only up to the nominal value of shares held by them. Eg. If I have bought the share of Rs. 100 in ABC Company, I am liable to pay the amount of Rs. 100 only. This is my limited liability, unlike Partnership.
An incorporated company has perpetual existence. In the event of the death of its members/board, a company still exist.
Shares can be easily transferred if the Company is duly incorporated.
Simultaneously, the incorporation also results in some disadvantages, such as you have to strictly follow the legal compliance. Also, you become eligible for the tax liability from day one of the incorporation.
Before starting a business, the owner has to register his business under the law according to the nature of the organization. It can be given as below:
Who is Registering Authority?
Your business has to be registered with a registering authority as given below:
The Public/Private or OPC and LLP’’s registration comes under the Ministry of Corporate Affairs, Government of India.
The Partnership firm’s registration is governed by the Registrar of Firms i.e., RoFs of respective states.
There is no definite authority to register your sole proprietorship however, it can be registered in three ways:
Under Shop and Establishment Act
Get a Udyog Adhar under the Ministry of MSME
Get a GST registration
What are the types of incorporation?
You can incorporate or register your business in the following ways, depending upon the nature of the business:
Private Limited Company
Public Limited Company
Limited Liability Partnership
One Person Company
Section 8 Company
Now, let’s understand define your business/start-up:
Members of the company are those persons who subscribe to the capital of the Company. Eg. Before incorporation, if I bought a share of Rs. 100 in XYZ Company and signed the articles of the Company, I become a member in the XYZ Company. Remember, all members are shareholders, but all shareholders can’t become a member of the Company.
The word “Limited” denotes the constraint of liability involved in your business. That’s why the partnership firm name never ends up with the word “Limited”.
The number of members involved in the Company is the key criterion to define the nature of the Company. In the case of a Private limited company, the members limit is restricted to 7 members hence it is called a Private limited company whereas, in the case of a Public Limited Company, the capital of the company is contributed by the public at large hence we call it Public Limited Company.
The partnership consists of a minimum of 2 partners and a maximum of up to 50 partners that making the partnership liability unlimited. On the other hand, if in this case, members cross the limit of 50, it becomes LLP in which the liability of each partner will be restricted.
The nature of OPC and Sole Proprietorship is the same but when it comes to legal existence, OPC stands different from its owner/founder but the sole proprietor is personally liable for all the profits and losses of his business.
For a start-up, it is always advisable to incorporate themselves as a Private Limited Company. This will enable the start-up to become fund-ready (in a legal sense).
What are the benefits of incorporation?
A surprising fact is, India has the highest number of unregistered businesses in the world with an estimated count of 127 unregistered businesses behind every registered business! Isn’t it surprising? If you look at the advantages of incorporation, you will get to know. They are:
Your business gets an independent legal identity which means you and your business will have a different recognition in the eyes of law.
If you are registering your business as a Private Limited Company or LLP, that will offer limited liability protection to its members.
One of the biggest advantages of registering/incorporating a business is to ease the process of getting funding from different Banks, Financial Institutions, Angels or Venture Capitalists etc.
The incorporation is a process that allows you to establish credibility with your clients and stakeholders. Once incorporated, your company gets branding on the name of incorporation that adds to the credibility and your stakeholders may feel secure about it.
Lastly, registering your business enables you to open the business current account and obtain a good credit line from the bank.
If you are thinking about starting a company, you can register your business as soon as possible. Although, registering a business is critical but if you do so, you will get a lot of benefits from it.
Remember, the nature of incorporation largely depends upon the members involved in your Company hence depending on the nature of business, you may register your company as a private or public limited.
Things to keep in mind before incorporation:
Directors must possess DIN to become eligible to form a Company.
Name check should be performed before finalizing the name of your Company.
Director should not possess any criminal record in his name.
Directors and members KYCs should be up to date.
The Director of any company should not be barred by any law to become a director in the Company.
Find more about Being Vakil