A start up entity could take the shape of an Indian private limited company. Such company has to be incorporated under the aegis of the Companies Act, 2013.
The most important benefits that a private limited company offers are:
(i) a distinct legal entity from that of the shareholders, directors and managers,
(ii) perpetual existence irrespective of the death or change of shareholders, and
(iii) limited liability of the shareholders.
No surprise this is the most popular entity form for startups.
A private company requires at least 2 shareholders and 2 directors. The shareholders have to subscribe to initial shares as undertaken in the Memorandum of Association of the company. In addition, there are incorporation costs and stamp duty.
A company has maximum regulatory compliances compared to other entities. A company is required to maintain statutory registers, hold board and shareholders’ meetings, maintain and compulsory get its accounts audited, make periodical filings with Registrar of Companies and tax authorities and so on.
Yet, it remains the most popular entity because due to statutory requirements, a company is always on its toes in respect of compliances, most of its records are available online. All this comes handy for a potential investor to check compliances, conduct due diligence over its affairs, check its creditworthiness and evaluate existing and contingent and potential risks. This is most preferred vehicle for foreign investors, venture capital and private equity players too.
However, the entrepreneurs should bear in mind that unlike incorporation, winding up a company is not easy. The compliance requirements attach to all the shareholders and directors till a company is wound up. The winding up process is time consuming, not too costly though. If things do not go as planned, no co-promoter wants to take the burden of winding up process.
Thus, entrepreneurs should go into incorporating a company if they are very serious and confident about making their venture successful and have patience to work things out.
About the author :
Bhumesh Verma is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. He can be reached at email@example.com