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