Posted On: August 30, 2023

LEGAL ASPECTS OF SETTING UP A PRIVATE LIMITED COMPANY IN INDIA

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INTRODUCTION
A private limited company is a business entity with limited liability protection, easy transferability of shares and a separate legal status. As defined under Section 2(68) of the Companies Act of 2013 a private limited company is a an entity  having a maximum of 200 members and a minimum paid-up share capital of INR One Lakh (1,00,000/-).Before starting a private limited company, it is essential to understand the legal requirements associated with incorporation of the company. Knowledgentia Consultants which is the best corporate international law firm in India, provides advisory as well as incorporation services for setting up a private limited company.

CHARACTERISTICS OF A PRIVATE LIMITED COMPANY
A Private Limited Company is characterized by a private ownership structure. Members of a Private Limited Company are only responsible for number of shares they own. A prospectus cannot be placed on the open market or used to solicit or accept public deposits. Shares in a private company can’t be freely transferred. Due to the strict compliance requirements, this organization is highly credible and ideal for new businesses. Few legal requirements that need strict compliance and consideration are mentioned as below:-

DIRECTOR AND SHAREHOLDERS
A Private Limited Company can have minimum 2 directors and shareholders and maximum 200 in India. Without a Director Identification Number (DIN), no one can be a director of a company. Additionally, one of the directors must be a resident of India, which entails at least 182 days spent in India during the previous calendar year.

AUTHORIZED CAPITAL
A private limited company should have an authorized capital of at least INR 1 lakh.

STRUCTURE OF LIMITED LIABILITY
In a Private Limited Company, the liability of each shareholder or member is limited to the value of their shares. As a result, shareholders only must sell the assets they own to pay off the debt even if the company suffers a loss. Their personal and individual assets are not included in these assets.

SEPARATE LEGAL EXISTENCE AND PERPETUAL SUCCESSION
A company can sue and be sued in its own name because it has a separate legal existence in the eyes of the law. Company continues to exist even in the event of a member’s death, insolvency, or bankruptcy, In this sense, the Company’s existence is eternal.

PROCEDURE TO SET UP PRIVATE LIMITED COMPANY IN INDIA
 

  1. DIGITAL SIGNATURE CERTIFICATE Obtaining a Digital Certificate (DSC) for the subscribers (shareholders) is the first step. Digital signatures are used for online filing of documents with government authorities. Each subscriber who are listed in MOA and AOA must have a DSC. It must be obtained from certifying organizations with government authorization.
  1. APPLY FOR THE NAME AVAILABILITY OF THE COMPANY

A private limited company must fulfill these criteria while deciding on a name. Its important to choose a unique name available on MCA portal for the company. Search on trademark names should also be carried out to avoid resemblance. We must mention “private limited company” at the end while applying for the name. The applicant has 21 days to submit a request for incorporation using the requested name after MCA confirms that it has been reserved.

  1. APPLY FOR DIN

DIN is an identification number for a director. All the directors need to have a DIN. A digital signature is online signature utilized for filing and Directors PIN issued by MCA.

  1. FILING THE INCORPORATION DOCUMENTS
  • SPICe + Form 32
  • Memorandum of association
  • Articles of association
  1. SPICe+ form 32: This form is used for integrated company incorporation and facilitates the combined application for DIN. The directors of the company are required to get a Director Identification Number (DIN). This form is drafted to give proof that the company has come into existence. Along with this form a consent letter (Form DIR-2) disclosure of interest is also drafted for the directors. Applications for Employees provident fund (EPF) and Employees state insurance along with Company Tax deduction account (TAN) is also filed and Company’s permanent account (PAN) is filed as well.
  2. ELECTRONIC FILING OF MEMORANDUM OF ASSOCIATION (MOA)AND ARTICLES OF ASSOCIATION (AOA): The MOA contains the company’s objective, authorized capital, and the details of shareholders and the AOA outlines the rules and regulations of the company.
  3. REGISTERED OFFICE PROOF: To validate the Company’s registered office address, proof must be provided in addition to the Directors’ identity, address, and residential address. NOC from the landlord and proof of any utility service that shows the address of the property in the owner’s name or a document that is less than two months old.
  4. REGISTRATION WITH THE REGISTRAR OF COMPANIES (ROC): All necessary incorporation documents and fees must be submitted to the ROC following their preparation. A certificate of incorporation from the ROC will signify the formal establishment of a private limited company.
  5. POST REGISTRATION COMPLIANCES: After the incorporation of the company, it is essential that compliances are completed with various statutory obligations. Moreover, it helps companies to make a proper system that defines the roles and duties of directors and shareholders.
  6. INTELLECTUAL PROPERTY RIGHTS (IPR): It is essential to safeguard your company’s intellectual property. Take into consideration submitting trademark applications, acquiring invention patents, and registering copyrights for original works. Protecting your intellectual property can safeguard against competitors’ unauthorized use and provide legal recourse in the case of infringement.

CASE LAWS

  1. SALOMON V SALOMON & CO. LTD, (1897) A.C. 22, [1896] UKHL 1

In this case, it was established for the first time, that Separate Legal Personality (SLP) is the basic tenet on which company law is premised. Establishing the foundation of how a company exists and functions, it is perceived as, perhaps, the most profound and steady rule of corporate jurisprudence. This principle, established in the case of Salomon v Salomon, is still much prevalent and is conventionally celebrated as forming the core of, not only the English company law but of the universal commercial law regime. In 1892, Aaron Salomon’s company was formed with his wife, daughter, four sons, and himself as shareholders. The managing director of the business, Mr. Salomon, sold the business for $39,000 and paid off 10,000 of its debts. For the debentures’ security, Edmund Broderip gave Mr. Salomon a 5000-advance payment. After that, sales went down, and then there was a strike, which caused the business to collapse. Mr. Edmund sued Mr. Salomon because of his position and duty in the company. It was held that a company is a separate entity and distinct from his shareholders. So, Mr. Solomon, the company founder, is protected from personal obligation to creditors because it is separate legal entity from its members.

  1. STATE OF UTTAR PRADESH VS RENUSAGAR POWER CO., (1988) 4 SCC 59

The principle of lifting the corporate veil was brought to light by the case. The court ruled that the corporate veil can be breached and that shareholders can be held liable if the company is established to commit fraud or evade legal requirements. It emphasized the significance of corporate affairs being transparent and honest in the affairs of the company.

CONCLUSION
Incorporating a private limited company requires many specific requirements to be fulfilled such as appointing directors and shareholders, obtaining DIN, TAN, PAN numbers , reserving company name, drafting MOA and AOA, filing necessary forms along with fees. Knowledgentia Consultants which is the best law firm in India, can help us navigate the way out of all legal complexities in an easy and a smooth manner. We are your one-stop solution for all kinds of legal, compliance and supplemental matters concerning private limited companies. In case of any query regarding this matter you may email us at info@knowledgentia.com or visit our website -https://knowledgentia.com/.

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