Knowledge Center‎ > ‎

Business Formation


Limited Liability Company

Businesses in India are normally formed in the form of a company with limited liability. The Companies Act, 1956, enacted and administered by the Central Government is the applicable law.

A limited liability Company can be set up as any one of the following:
  • Private Limited Company
  • Public Limited Company – Closely held (Unlisted)
  • Public Limited Company – Widely held (Listed)
The following table highlights some of the key features of setting up a Limited Liability company in India:

        Parameters                                              Public Company                                 Private Company
  • Minimum paid-up share capital            Rs.500,000                                        Rs.100,000
  • Shareholding                                         May be closely held or listed             Always closely held
  • Minimum number of shareholders        Seven                                                 Two
  • Minimum number of directors              Three                                                Two
  • Reporting requirements                        Extensive                                           Basic
  • Audit - External audits are compulsory and internal audits are required if the annual revenues are in excess of Rs. 50 million
  • Employment of a whole- time Company Secretary - Compulsory if the capital is in excess of Rs. 50 million
A Private Company is required to have a minimum of two shareholders while a Public Company is required to have a minimum of seven shareholders. The shareholders can be individuals or body corporates, residents or non-residents.

A Private Company is required to have a minimum of two directors while a Public Company is required to have a minimum of three directors. The directors have to be individuals and not body corporates. They can be either residents or non-residents.

Managing a private limited company is much simpler in so far as compliance to various provisions of the Companies Act, 1956 is concerned. Company law provisions are stringent in respect of public limited companies and in particular widely held (listed) companies.

In a Company, it is necessary to ensure optimum capital structure so as to benefit all the stakeholders and also ensure adequate cash flows in the hands of the Company. The capital required for the Company can be raised in various forms such as equity shares, preference shares, borrowings etc. Optimum capital structure can be achieved by judicious mix of these forms of capital keeping in view various factors such as investment in fixed assets, working capital needs, projected revenues, profits, cash flows, dividends, re-investment of profits in the business activities, transfer pricing regulations etc.

For incorporation of a limited liability company, an application for availability of name needs to be made to the Registrar of Companies (“ROC”). Once the name is approved, documents such as Memorandum of Association, Articles of Association etc. duly executed need to be submitted to the ROC. On satisfactory compliance of all the incorporation procedure and payment of prescribed fee, the ROC will issue Certificate of Incorporation evidencing incorporation of the company.

After introduction of “MCA-21”, an e- governance initiative of the Government of India, all documents are now required to be filed online with the Ministry of Company Affairs (which administers the Companies Act) under digital signature of an authorised officer / director of the Company.

Every Company registered in India is required to hold at least one meeting of the Board of Directors each calendar quarter and one Annual General Meeting of shareholders every calendar year. However, the Company can hold additional Board Meetings and General Meetings as and when needed.

The minutes of all meetings need to be duly recorded, maintained and signed by the Chairman of the meeting. These minutes should be preserved permanently.

Every Company registered in India is required to maintain books of Accounts as prescribed in the Company law. External statutory audit is mandatory for all companies in India while internal audit is applicable only for companies having capital and reserves exceeding Rs. 5 Million or average turnover for three years exceeding Rs. 50 million.

The audited financial statements of the Company need to be placed before the shareholders and adopted at their Annual General Meeting every year.

If Company desiring to wrap up its business, it may do so by adopting winding up process in accordance with the provisions of the Companies Act. This is known a voluntary winding up by members of the Company. The Creditors of the Company can also cause the Company to wind up if there is any willful default or inability in repayment of debt. This is known a compulsory winding up which requires order of the appropriate court in India.

The Companies Act, 1956 along with the Rules and Regulations made thereunder can be found at http://www.mca.gov.in/Ministry/acts_bills.html.

Limited Liability Partnerships

Till April 2009, partnerships were formed under the Indian Partnership Act, 1932 with “unlimited” liability. These partnerships are administered by the respective State governments. With a view to allow formation of partnerships with limited liability in line with the international practice, the Central Government has enacted The Limited Liability Partnership Act in the year 2009. Now partnerships can be formed under this Act which is under the administration of Central Government and enjoy the limited liability.

The Limited Liability Act, 2009 along with the Rules made thereunder can be found at http://www.llp.gov.in/.


Other Incorporated Entities

There are few other forms of incorporated entities such as societies etc. but these are not popular amongst the business community.

Un-incorporated Structures

There are several other un-incorporated structures such as partnerships, etc. but available only for domestic investors and generally employed for small businesses.

A foreign investor intending to enter India can set up un-incorporated structures. An unincorporated structure is an entity registered outside India but having a place of business in India. Reserve Bank of India under the Foreign Exchange Management Act, 1999 permits establishes a place of business in India in any one of the following forms:
  • Liaison Office / Representative Office
  • Branch Office
  • Project Office
There are several restrictions in free conduct of business on these un-incorporated and therefore the entrepreneur should carefully evaluate all the parameters before taking a decision.

Foreign Exchange Management Act, 1999 along with Rules and Regulations made thereunder can be found at http://www.rbi.org.in/scripts/Fema.aspx.

For in-depth analysis and topic based articles, browse through our “Publication” section.