Looking for reasons to form a limited company and convert your private limited company? Check out this complete checklist of requirements to make sure the process goes smoothly!
A private limited company is a business entity in India that two or more shareholders own. Private limited companies have limited liability, meaning that the shareholders’ assets are not at risk if the company fails. Private limited firms must also comply with certain regulations, such as having a minimum paid-up capital and appointing a minimum of two directors.
Reasons to Form a Limited Company
There are several reasons to form a limited company, such as:
- To limit your liability: As a shareholder in a private limited company, your assets are shielded from risk if the company fails.
- To raise capital: Private limited companies are capable of raising capital by issuing shares to investors. This can be valuable if you need cash to grow your business.
- To establish credibility: Forming a private limited company can help you establish credibility with customers and suppliers. This is so because a private limited company is seen as a more formal business entity than a sole proprietorship or partnership.
- To sell shares: If you want to sell shares in your business, you must first convert to a limited company.
Advantages of a Private Limited Firm
There are several benefits to incorporating a private limited company. These include:
- Limited liability: Shareholders’ assets are not at risk if the company fails.
- Compliance with certain regulations: Private limited companies must comply with certain regulations, such as having a minimum paid-up capital and appointing a minimum of two directors.
- Ease of raising capital: Private limited companies can raise capital more easily than sole proprietorships or partnerships.
- Increased credibility: Private limited companies are generally more credible than sole proprietorships or partnerships. This can make it easier to win customers and suppliers.
What Are the Drawbacks of Incorporating a Private Limited Company?
There are some drawbacks to incorporating a private limited company, including:
- Compliance with certain regulations: Private limited companies must comply with certain regulations, which can be costly and time-consuming.
- Double taxation: Private limited companies are subject to corporate income and dividend taxes.
Why Convert to a Private Limited Company?
Numerous explanations justify your wish to convert your private limited company into a public limited company. Perhaps your company has grown, and you want to float it on the stock market or give your shareholders more liquidity.
Basic Requirements for Conversion of a Private Limited Company
Whatever the reason, the process of conversion is relatively straightforward:
- The first step is passing a resolution at a shareholder meeting, which a qualified company secretary must minute.
- After this, you will need to file certain documents with Companies House, including an application for re-registration as a public limited company.
- You will also need to change your articles of association and update your stationery and documentation to reflect your new status.
While there are numerous benefits to converting to a public limited company, there are also some potential drawbacks. One is that you must comply with more stringent corporate governance rules, which can be onerous for smaller businesses.
The aspect of increased costs exists, both in terms of professional fees and the need to appoint more directors. Nevertheless, the practical reasons for forming a limited company far outweigh the disadvantages for many companies.
Checklist of Requirements for Conversion of a Private Limited Company
Here is an accurate and complete checklist of all that is needed for the conversion of a private limited company:
- The company must have a minimum of two shareholders.
- Only natural persons can be shareholders – i.e., real living people, not companies or other legal entities.
- There is no limit for the number of shareholders that a company can have.
- At least one shareholder must be a resident of India.
- Shareholders can be from any nationality.
- Private limited companies must have a minimum paid-up capital of ₹100,000.
- The company must have a registered office in India.
- The company must appoint a minimum of two directors, who can also be shareholders.
- Directors must be natural persons (i.e., real living people, not companies or other legal entities) and must be residents of India.
- Foreign nationals can be directors of a private limited company in India, provided they have the allowance from the Reserve Bank of India (RBI).
- The company must obtain a Director Identification Number (DIN) for each director.
- The company must file various documents with the Registrar of Companies (ROC), including the Memorandum of Association (MoA) and Articles of Association (AoA).
- The company must obtain a Certificate of Incorporation from the ROC.
- Once incorporation is complete, the company must obtain a Permanent Account Number (PAN) and open a corporate bank account.
- The shareholders must subscribe to the MoA and AoA of the company.
- The directors must sign the Incorporation Form incorporating the company.
- After incorporation, a private limited company must obtain various licenses and approvals, depending on its business activities.
- A private limited company must comply with various ongoing filing and disclosure requirements, such as filing annual financial statements, preparing and holding annual general meetings, and maintaining statutory registers.
- A private limited company can convert into another legal entity, such as a public limited company if it meets certain legal requirements.
- A private limited company can voluntarily wind up its operations and get dissolved by following the guidelines laid down in the Companies Act.
Conclusion
The reasons to form a limited company are lucrative enough. The good news is that forming a private limited company in India is a relatively simple and straightforward process. However, several important requirements must be met for the incorporation to succeed. All required documents must be filed with the Registrar of Companies, and the company complies with all ongoing filing and disclosure requirements.
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