Incorporation of Company and Limited Liability Partnership in India

Incorporation of a company

Incorporation of a company in India is governed by the Companies Act. For registration and incorporation, an application has to be filed with the ROC. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.

Private Company

A private company can be formed with minimum 2 (two) shareholders and with a minimum paid-up capital, as may be prescribed, and by its Memorandum and Articles of Association. Further, a private company:

1. Restricts the rights to transfer its shares, if any;
2. Limits the number of its members to 200 (two hundred), not including:

(a) Persons who are in the employment of the company; and

(b) Persons  who,  having  been  formerly  in  the  employment  of  the company,   were   members   of   the   company   while   in   that employment and have continued to be a members after the employment had ceased; and

3. Prohibits any invitation to the public to subscribe for any securities, of the company; and
4. Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Formation of a Private Limited Company

A private company can be formed either by:

1. Incorporation of a new company for doing a new business, or
2. Conversion of the existing business of partnership firm, limited liability partnership or society into a company.

Public Company

A public company can be formed with minimum 7 (seven) shareholders and with a minimum paid-up capital, as may be prescribed. 

Memorandum of Association

An important step in the formation of a company is to prepare a document called Memorandum of Association (MOA). It is the constitution of the company and   it   contains   the   fundamental   conditions   on   which   the   company   is incorporated. The MOA contains the name, the State in which the registered office  is  to  be  situated,  main  objects  of  the  company  to  be  pursued  by  the company on its incorporation and objects incidental or ancillary to the attainment of the main objects, liability of the members and the authorised share capital of the company. The main purpose of the memorandum is to state the scope of activities and powers of the company.

Articles of Association

The Articles of Association (AOA) of a company contain rules, regulation and by-laws for the general management of the company.

The AOA are subordinate to the MOA. Therefore, the AOA should not contain any regulation, which is contrary to the provisions of the MOA or the Companies Act.  The  AOA  are  binding  on  the  members  in  relation  to  the company as well as on the company in its relation to members.

Procedure for Incorporation of Company in India

Preliminary Steps

Obtain Digital Signature Certificate

The proposed directors of the company (to be incorporated) have to apply for Digital Signature Certificate (DSC) for online signing of e- Forms.

Incorporation-related Activities

Step I: Approval of Name

The  name  of  a  corporation  is  the  symbol  of  its  personal  existence.  Any suitable  name  may  be  selected  for  registration,  subject  to  the  following guidelines:

Apply to the ROC by using the simplified proforma for incorporating company electronically plus (SPICe+) facility provided by the Ministry of Corporate Affairs (MCA).

The names should include, as far as possible, activity as per the main objects of the proposed company.

The names should not too closely resemble with the name of any other registered company.

The  official  guidelines  issued  by  the  Central  Government  should  be followed  while  selecting  the  names.  Besides, the names so selected should not violate the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950.

The validity of the name approval is for 20 (twenty) days within which the company should file the MOA and the AOA (Step II).

Step II: Memorandum and Articles of Association (MOA and AOA)

Drafting of MOA and AOA – Charter documents.

Step III: Filing of additional e-Forms

The company is required to file the following e-forms on the MCA’s online portal for filing of forms in order to incorporate a company:

In order to simplify the incorporation process, the MCA has recently introduced SPICe+ webform INC-32 for incorporation of a company. In addition to company incorporation, the SPICe+ webform INC-32 also consolidates the applications to be filed for obtaining Director Identification Number (DIN), permanent account number (PAN) and tax deducted at source (TDS). Additionally, the MCA has introduced webform AGILE-PRO which consolidates applications for obtaining Employees’ Provident Fund Organisation (EPFO) registration, Employees’ State Insurance Corporation (ESIC) registration, Profession Tax registration and Goods and Service Tax Identification Number (GSTIN) and opening of bank account for the proposed company. Along with SPICe+ webform INC-32 and webform AGILE-PRO, an applicant is also required to file webforms INC-33 and INC-34 to file MOA and AOA, respectively, of the proposed company.

Certificate of Incorporation

The ROC will give the certificate of incorporation in form INC-11 after the above documents duly stamped and signed are presented along with the requisite registration fee, which is scaled according to the authorised share capital of the company, as stated in the MOA.

Certificate of incorporation is the birth certificate of the company and is proof of its existence.

Issue of Share Capital

After obtaining registration, the company will require funds to carry on its business. The company will at first issue shares to the subscribers to its MOA and then to other members of the company. The issued capital must not exceed the authorised share capital of the company. In case of a private company, the capital is to be raised by way of private arrangement, whereas a public company can raise funds from the public or by way of private arrangement.

Limited Liability Partnerships in India

Introduction

The Limited Liability Partnership (“LLP”) Act, 2008 (“LLP Act”) has been enacted by the Government to facilitate formation of LLPs in India. The LLP Act came into force with effect from March 31, 2009 and the LLP Rules, 2009 came into force with effect from April 01, 2009.

The LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. In a LLP, no partner would be liable on account of the independent or unauthorised actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.

A LLP shall have at least 2 (two) partners and shall also have at least 2 (two) individuals as designated partners, of whom at least 1 (one) shall be resident in India, that is, a LLP can be formed even without Indian citizens. All that the LLP Act requires is that at least 1 (one) designated partner must be resident in India, meaning a person who has stayed in India for a minimum period of 182 (one hundred and eighty two) days during the immediately preceding 1 (one) year.

A LLP has to maintain annual accounts reflecting true and fair view of its state of affairs. A statement of accounts and solvency in Form 8 shall be filed by every LLP with the ROC every year within a period of 30 (thirty) days from the end of 6 (six) months of the financial year to which the statement of account and solvency relates. The accounts of LLPs shall also be audited, subject to any class of LLP being exempted from this requirement by the Central Government. An LLP has to file an annual return in Form 11 with the ROC within 60 (sixty) days of closure of its financial year

The  death  or  insolvency  of  the  partners  does  not  affect  the  continued existence of the LLP. Any change in the partners does not affect the existence, rights or liabilities of the LLP.

Extent of Liability of Partners of LLP

By far, the most important change that the LLP Act seeks to bring about is the change in the extent of liability of the partners of a LLP.

Under the scheme of the LLP Act, for the purposes of business of the LLP, the agency relationship exists between the LLP and its partners, but this relationship does not travel to other partners, so that every partner of LLP is, for the purposes of its business, an agent of the LLP but not of the other partners.

An obligation of the LLP, whether contractual or otherwise, is solely the obligation of the LLP, and for such an obligation, a partner, other than the wrongdoing partner(s), cannot be made personally liable. Such an obligation would have to be met out of the property of the LLP alone. This agency relationship is, however, subject to the authority of the partner to act for the LLP in doing a particular act such that where there is no such authority, the LLP is not bound by the act of the partner if the person with whom the partner is dealing knows that the partner has no authority or does not believe the person to be a partner of the LLP. The LLP Act is, however, not in any way intended to operate as a restriction or limitation upon the extent of liability of the partners doing the wrongful act. In other words, the partners doing a wrongful act would, under the normal provisions of civil law, be personally liable. Since the agency relationship does not traverse so as to bind the other partners, there is no “joint and several” liability.

Winding up of an LLP

The  grounds  for  “winding  up”  are  analogous  to  the  winding  up  of  a company and may be either voluntary or by an order of the National Company Law   Tribunal   (the   Tribunal).   Besides   the   obvious   grounds   of   financial insolvency, decision of the LLP to be wound up, continuance for more than

6 (six) months with less than 2 (two) partners, acting against the sovereignty, integrity or security of India or public order, failure to file statement of accounts and solvency or annual returns for any 5 (five) consecutive financial years, the power to wind up an LLP, on the ground that “it is just and equitable” to do so, is vested with the Tribunal.

Conversion into LLP

A significant feature of the LLP Act is that it permits conversion of existing (a)  partnership  firm,  (b)  private  limited  company,  and  (c)  unlisted  public company into LLP. The procedure for such conversion is provided for in the Second, Third and Fourth Schedules, respectively, to the LLP Act. “Conversion,” for  the purposes  of  the LLP Act,  means  the transfer  of the property, assets, interests, rights, privileges, liabilities, obligations and the undertaking of a firm or an eligible company to LLP. For any conversion to take place, the LLP must be, at that time, the mirror image of the firm or the company sought to be converted. In other words, all the partners (of the firm) or shareholders (of the eligible company), as the case may be, should at the time of conversion, become partners of the LLP. Upon conversion, all the assets and liabilities of the predecessor firm or company would stand transferred to and vested in the LLP. Such conversion shall have the effect of dissolution of the predecessor firm or company, as the case may be.

An LLP, thus, offers an attractive alternative to the existing partnership firms and joint venture companies that are operating in India since it assures limited liability and yet provides organizational flexibility, less onerous compliances and limited disclosure requirements.