In 2012 I co-founded a private limited company with a few others named One C Media. One of the questions I get asked by start-up founders and wannabe entrepreneurs is what type of business registration to go for.
Most entrepreneurs, especially youngsters want to register a private limited company. A lot of the times this is not because they need a private limited, but because they think it sounds cool to say that your company is so-and-so private limited.
For the uninitiated, in India companies are commonly registered as any one of these: A Private Limited, A Public Limited, A Limited Liability Partnership, A Partnership and as a Sole Proprietorship. An article like this will shine some light into different types and the features of each.
As I mentioned before, One C Media was a Private Limited company. I say ‘was’ because I am no longer an active part of the company and we are working towards making the company dormant.
So why did we register it as a private limited at that time? We opted for private limited registration because we were planning on raising funding. And we did have investors and share holders.
Will I register my next company as a private limited? Not unless I have to.
Operating A Private Limited Company
Let me take you on a tour of the hassles of running a private limited.
I handled all the financial and compliance related operations of the company while I was the CEO. Of course, I always had the help from our accountant and co-founders. This puts me in a position to talk about it with confidence.
However, I am not a chartered accountant and all these are from real life experiences of running the company, not by learning the books. Consult with a practicing chartered accountant before you come to a decision on what suits your requirement.
Registration: A private limited company is expensive to setup. The fees to be paid to the Registrar of Companies (RoC) and your chartered accountant will come anywhere between 20,000 INR to 30,000 INR.
As per the calculator here, registering an LLP with a capital of 10,000 in Kerala has a RoC fees of just 500 INR while for a private limited it is 8,300 INR.
In 2012 registration took about 2 weeks while for a partnership the process is over in just a day. However recently things seem to have sped up with the Make In India initiative. At least in theory.
(Does anyone have an experience with the Make In India’s new policies to share?)
Operational Costs: You have to have a chartered accountant to run a private limited company.
Okay, legally you do not need one, but a startup usually has just the founders as employees. The founders need to focus on building the product and making sure that the company is staying afloat. So hiring someone who knows all the laws and can take care of things as needed is always a good idea.
A chartered accountant comes with a monthly or annual fees. This can be anywhere from 5000 INR to 25,000 INR depending on the accountant.
You could argue that you need a chartered accountant even if you are running a partnership company or an LLP. Which is true to an extent. But the formalities involved with running a private limited companies is so much more that you will end up needing one.
Also you will receive notices from the RoC once in a while and you need someone to assist you with replying to all those notices.
Which brings us to formalities.
Formalities and Compliances: A private limited company is very closely watched by the RoC.
This is because in many cases (as I understand, correct me if I am wrong) a private limited company is the step just prior to being a public limited company. And a public limited company is a big deal because we are dealing with the wealth of the general public here.
Running a private limited is not for the ones who do not like paper work.
You have to conduct a quarterly board meeting and keep a book of minutes. In theory, you have to inform all board members in writing and it’s advised (although not required) to send all board members the notification via registered post with acknowledgement.
This is because if a board member challenges the meeting and raises a formal complaint saying that he was not informed, the meeting along with all the board resolutions will be considered invalid.
In practice, at least while starting up, you know all the board members in person and lot of the decisions are handled over the phone, or via email / Skype and the paperwork is just done for namesake.
Compare this with a partnership where you still make the decisions over phone or in person and there is no paperwork required.
Any changes required and important decisions should be passed by the board as a board resolution and a record of the same kept in the board resolution book. Banks and other agencies will ask you for a copy of the board resolution when you open the account, add or remove authorized signatories and when you close the account.
Not filing taxes is not an option. Not that it is an option for other types of companies, but for a private limited you can expect a notice from RoC when you default it. And tax filings have to be informed to the RoC as well.
You are ALWAYS susceptible to audit so keeping a clean financial track record and keeping records of expenses and receipts is inevitable. Maintaining a petty cash book and issuing a voucher for cash payments is what you will end up doing. Of course, all major expenses are tracked and recorded through other means like a spreadsheet or software.
When directors resign, the resignation has to be filed with the RoC. Our accountant forgot to do it in my case and after two years doing it now will invite a penalty. So technically I am still a director of the company and I still get letters from RoC.
Exiting the Company and closing a bank account also comes with a load of paperwork.
When Should You Opt For A Private Limited Registration?
When you have a product or service that you are trying to scale up and you want to bring in private investors and venture capitalists.
Basically when you are ready to bring in external funding. When they invest you can make them a share holder of the company and issue share certificates. LLP’s, partnerships, and sole proprietorship companies cannot issue shares.
That is the only scenario I know of so far. Can you think of any more scenarios when a private limited company is inevitable?
If you are starting up without a proof of concept, just write an agreement with your co-founder.
More like a gentleman’s agreement. I mean, if you as founders cannot keep your word with each other for the first few months, then you what you need is a better co-founder before you make a company with him.
In most cases you do not need a registered company for the first few months of operation even if you have to open an office and hire a few guys. In the beginning you can just use your bank account or open a individual current account in your name to handle money.
(Most banks offer current accounts to individuals. They might not have it listed on their website, but a call to the bank manager can confirm this.)
Personally I think that unless you need it, you should start up by yourself without a partner at least until there is proof of concept. This is a topic for another discussion. Let me know if you would like to know why I think so.
Keep things simple.
Because you need to focus all your energy and time on the product and customer feedback. Everything else can wait.
And then when you see things picking up, go for an LLP registration or a partnership. Once you have a solid product and want to raise funds to bring in investors, you can convert your company into a private limited at that time.
Like I said before, I am not legally qualified to advice on these matters. These are insights from my personal experiences. If you disagree, or have more to add, please do so for the benefit of current and future readers.
I would love to hear your thoughts and learn from you.