India is undoubtedly the land of rising entrepreneurship. The Economic Times reports that more people intend to launch startups, even as fear of failing at such an effort has dropped. But what structure should your new business have? In this post, we’ll describe the company incorporation procedure.
The business structure you choose affects your personal risk, as well as the amount of paperwork you have.
While startups and small businesses are sprouting in India like never before, it is important to consider the flip side of a business. It can be a risky venture — you could be held personally responsible for a business failure.
Incorporation of company not only protects your personal assets in case of bankruptcy or financial difficulties, it offers various other benefits. In this article, we will explain the company incorporation procedure in India.
The 4 steps of incorporation of company
The Ministry of Corporate Affairs has reduced the time it takes to register a company. Now instead of several weeks, it takes only several days. Here are the steps.
- Apply for Director Identification Number (DIN).
- Submit Digital Signature Certificate.
- Register on the MCA Portal.
- Receive Certificate of Incorporation.
Before we explain the four steps required to incorporate, let’s touch quickly on the various company structures you have to choose from.
Understanding the various forms of companies in India
Before you register your company, it is important to understand and choose carefully the correct form of business entity for your business.
If you are the only person who is managing and running the business, you can go ahead with the sole proprietorship. This is the easiest and least costly way to start a business in India.
Although it is not mandatory to register this type of business, you might want to in order to obtain a bank account in the name of your business. You have two choices:
- Register it under the Shop and Establishment Act or
- Do a GST registration if you expect an annual turnover of Rs. 40 lakhs or more (Rs. 20 lakhs for the Northeastern states, J&K, Himachal Pradesh and Uttarakhand).
GST is also recommended for people who sell outside their own state or sell goods or services on the internet (eCommerce).
One-person company (OPC)
OPC is similar to the sole proprietorship, where a single person can start the business. While there is no distinction between the owner and the business in the sole proprietorship, an OPC allows the owner to limit his liabilities. This means your personal belongings and bank accounts are protected from any business loss that might occur.
OPC has fewer compliance requirements than that of a private company. However OPCs must file audited financial statements with the Ministry of Corporate Affairs at the end of each financial year like all types of companies.
Private limited company
Private limited is the most common form of business in India.
93 per cent of companies are registered as a private limited company.
This type of business structure needs at least two shareholders and two directors. If you are a growing startup with big expansion plans, then this is the best choice for you. One big benefit is that it’s easy for a private company to issue shares in lieu of external funding.
Limited Liability Partnership (LLP)
LLP is recommended for consulting services and professional firms. In this form of business, partners have limited liability on an individual basis and a lower compliance burden than that of the private limited company.
However, winding up an LLP is quite tedious as compared to a private limited company.
Now that you understand your options, let us understand the company incorporation procedure in India.
The company incorporation procedure
Here are the steps you’ll need to take to incorporate your business.
1. Apply for Director Identification Number (DIN)
DIN is an eight-digit number, allotted by Ministry of Corporate Affairs (MCA). It is a person-specific unique number. So if you hold the directorship of two companies, you need not have another DIN for the other company.
If you are proposing to become a first director in a new company, then you can apply through the SPICe form (Simplified Proforma for Incorporating Company Electronically). For DIN, you need to submit your proof of identity and the address proof with the form. Read more about how to apply for DIN here.
2. Submit Digital Signature Certificate (DSC)
A DSC is a digital equivalent of a handwritten signature. Just like a driver’s license authorises one to legally drive in a particular country, a DSC authorises the holder to:
- Access business-related information and services on the internet.
- Sign certain documents digitally.
A DSC not only reduces your cost and time of signing hard copies but also authenticates the information details of the holder (especially when you are doing an online business). DSC is also mandatory for several compliance filings of the private limited company on the MCA website. Read more about Digital Signature Certificates here.
There are various licensed Certified Authorities (CA) who are authorised to issue DSC. Therefore, the cost of obtaining the same could vary.
3. Register on the MCA Portal
The Ministry of Corporate Affairs has made the procedure of incorporating a company really simple with the introduction of SPICe Form INC-32.
The usual time of incorporation has been reduced to one to two days with the new SPICe form.
Earlier if a person had to incorporate a company, then he had to apply for various separate procedures one by one. As against this, SPICe is a single form with which you can apply for reservation of name and incorporation of the company.
4. Receive Certificate of Incorporation
Once your company is successfully registered, MCA issues the Certificate of Incorporation with Corporate Identity Number (CIN). This certificate proves your company’s registration with the Registrar of Companies (ROC).
After the successful incorporation of company, a PAN (Permanent Account Number) is also allotted and dispatched to the registered office. TAN number is also provided to the directors for TDS filing.
And this completes the company incorporation procedure. You can now view the details of your incorporated company on MCA website.
Perks of incorporating a business
Although incorporation is easier than it once was, it still requires effort. This leads some people to wonder: why incorporate?
Incorporation protects you
An incorporated company is a separate legal entity that is solely liable for its operations. In the case of bankruptcy, the owner’s personal wealth and assets are safe. The only exception is when the owners/founders have explicitly given their own personal guarantee for any obligation of the company.
It’s easier to raise funding
If you are seeking a loan from banks, you should consider incorporating your business. An incorporated business has more credibility in terms of its business purpose and capital structure. Angel investors and equity funds are also more interested in funding incorporated businesses.
An incorporated company never dies, even if the members/owners cease to exist. The company’s shareholding structure can be easily modified to give effect to the new owner.
By incorporating a company, you ensure its existence even after you’re gone.
An incorporated company has more credibility not just in the eyes of lenders but your customers, vendors and suppliers. It exhibits your commitment and seriousness towards the business.
Reduce risk and increase credibility — incorporate
With the new SPICe Form, the government has made it easier for entrepreneurs to complete the incorporation of company on their own. Just choose the type of business you want to set up, get the DIN and DSC and fill out the SPICe form.
However, at any point of the process, you may seek professional guidance from a CA, CS or any online portal that helps people register their businesses.