Details about a Private Company Formation

A private limited company is a widely chosen business structure in India. It offers benefits such as limited liability, separate legal identity, and ease of management. This structure is well-suited for businesses aiming for growth and credibility. Selecting the right business structure is important as it affects legal compliance, funding opportunities, and long-term success. Private company formation provides a stable foundation for operations. Understanding the process of private limited company registration in India is an essential first step.  In this blog, you will learn the details about a Private Company formation.

What is a Private Company Formation?

Private company formation in India involves the official registration of a privately owned business under the Companies Act, 2013. This process is regulated by the Ministry of Corporate Affairs (MCA). Once registered, the company gains a separate legal identity, independent of its owners. One of the main advantages is limited liability, which means the personal assets of shareholders remain protected and are not at risk beyond their investment in the company.

Types of Private Limited Companies

Below are the types of Private Limited companies:

1. Company Limited to Shares

This company limits the liability of its members to the amount unpaid on their shares. If the company faces any financial loss, shareholders only pay the remaining amount on the shares they hold. This structure suits businesses that seek funding and want to protect the personal assets of members. It remains the most common type in India.

2. Company Limited to Guarantee

This company suits non-profit organizations, clubs, and associations. Members agree to pay a fixed amount if the company closes with debts. The company does not issue shares. It focuses on promoting social, cultural, or charitable objectives rather than making profits.

3. Unlimited Company

In this structure, there is no limit on member liability. If the company incurs debts or legal obligations, members use their assets to settle them. This type sees limited use because it does not protect owners against financial risk. It remains legally valid but less popular.

4. One Person Company (OPC)

This company has only one member who holds full control. The person must be a resident Indian citizen. The company allows easy entry into formal business with limited liability. It includes a nominee who takes over if the sole member dies or becomes unable to run the business. OPC supports small businesses or solo entrepreneurs.

Key Benefits of Forming a Private Limited Company

The following key benefits of forming a Private Limited company:

1. Limited Liability Protection

A private limited company protects the personal assets of shareholders. If the company faces financial loss or legal disputes, shareholders pay only up to the unpaid amount on their shares. Creditors cannot claim personal property to recover debts.

2. Separate Legal Identity

The company holds a distinct identity under the law. It signs contracts, owns property, files taxes, and handles legal matters under its name. This separation ensures business continuity and legal clarity.

3. Perpetual Succession

The company does not close when members leave, resign, or die. It continues to exist regardless of changes in ownership or management. This feature provides long-term stability to the business.

4. Easier Access to Funding

A private limited company raises capital through the sale of shares. Investors, venture capitalists, and financial institutions prefer this structure due to its transparency and legal standing. It attracts more funding than informal business forms.

5. Enhanced Credibility

Private limited companies follow regulations under the Companies Act, 2013. Banks, suppliers, customers, and investors trust registered companies more than unregistered firms. The certificate of incorporation adds professional value.

6. Tax Benefits

Companies claim deductions for business expenses under the Income Tax Act. Startups receive tax relief under government schemes like Startup India. New companies receive support through lower tax rates and exemptions.

7. Flexible Ownership Transfer

Shareholders transfer ownership without affecting the company’s operations. The Articles of Association outline the transfer rules. The transfer process does not interrupt business activity or require the company to dissolve.

8. No Minimum Capital Requirement

The law does not require a specific capital amount to register a private company. It allows registration with any capital value, making it accessible to small business owners and startups.

9. FDI-Friendly Structure

Private companies in India accept foreign investment under the automatic route. Many sectors allow 100% foreign ownership without extra approvals. This setup encourages global partnerships and business expansion.

10. Fewer Compliance Requirements Than Public Companies

Private companies file essential reports with the Ministry of Corporate Affairs. Unlike public companies, they do not issue public shares or publish financial data in public. This lowers the regulatory burden while maintaining legal protection.

Eligibility Criteria for Private Company Formation

Here are the eligibility criteria for Private Company Formation:

1. Minimum Number of Shareholders

A private company requires at least two shareholders at the time of incorporation. The shareholders may be individuals or corporate entities. The total number of shareholders must not exceed 200, as per Section 2(68) of the Companies Act, 2013.

2. Minimum Number of Directors

A private company must have at least two directors. These directors are responsible for managing the affairs of the company. The Companies Act allows a maximum of 15 directors, and this number may increase with shareholder approval through a special resolution.

3. Resident Director Requirement

At least one director must be a resident of India. A person qualifies as a resident if he or she stays in India for a minimum of 120 days during the previous financial year. This condition ensures that the company has local representation for statutory and regulatory compliance.

4. Age and Citizenship Criteria

Each director must be at least eighteen years old. An Indian citizen or a foreign national can become a director, subject to conditions under Indian company law. One director must reside in India.

5. Registered Office in India

The company must provide the registered office address at the time of incorporation. This office receives all official correspondence and legal notices. The address must include a utility bill (not older than two months), a No Objection Certificate from the owner (if rented), and ownership proof (if self-owned).

6. Unique Company Name

The proposed company name must be distinct and not identical or similar to any existing company, LLP, or trademark. The name must comply with the Companies (Incorporation) Rules, 2014. It must not include any word or expression that requires prior approval from the central government unless such approval is obtained.

7. No Minimum Paid-Up Capital

There is no minimum capital requirement for registering a private limited company. The Companies (Amendment) Act, 2015 removed the mandatory minimum capital rule. The company may start with any amount of paid-up capital that the shareholders decide.

8. Foreign Shareholding Eligibility

Foreign nationals or foreign entities can register a private limited company in India. They may own up to 100% of the shareholding if the business falls under the automatic route for Foreign Direct Investment (FDI). The company must comply with FDI rules and report to the Reserve Bank of India (RBI) using Form FC-GPR after issuing shares.

9. Startup Recognition Conditions (Optional)

If the company wants to apply for recognition under the Startup India scheme, it must meet certain conditions:

• It must register as a Private Limited Company or LLP.
• The company must incorporate on or after April 1, 2016.
• The annual turnover must be less than Rs 100 crore in any financial year.
• The company must work on innovation, development, or improvement of products, services, or processes.

This recognition allows the company to access tax benefits and funding opportunities from the government.

Documents Required for Company Formation

The following documents are required for Company Formation:

1. ID & Address Proof (for Directors & Shareholders)

• Indian Nationals: PAN Card (ID proof) and Aadhaar, Voter ID, Passport, or Driving Licence (Address proof).
• Foreign Nationals: Passport (notarized/apostilled) and Bank Statement or Utility Bill (not older than 2 months).

2. Passport-Size Photo: One recent photo for each director/shareholder
3. A Digital Signature Certificate (DSC) is required for all directors and subscribers.
4. Director Identification Number (DIN)
5. Registered Office Proof: Latest utility bill, rent agreement NOC (if rented), or property papers (if owned).
6. Memorandum of Association (MoA) & Articles of Association (AoA)
7. Declarations & Consent: INC-9 (declaration by directors), DIR-2 (consent to act as a director), and INC-8 (declaration by CA/CS/lawyer).
8. Other Supporting Docs (if applicable)

• Trademark NOC (if using a brand name)
• Govt. approval (for restricted words like “Bank,” and “University”)
• Foreign company docs (if investing)

Procedures for a Private Company Formation in India

Here is a step-by-step process for a Private Company Formation in India:

Step 1: Obtain a Digital Signature Certificate (DSC)

Each proposed director and subscriber must obtain a valid Digital Signature Certificate. DSC is necessary to sign electronic forms on the MCA portal. It ensures identity verification and legal authenticity. A licensed certifying authority issues the DSC. The MCA portal lists authorized service providers.

Step 2: Apply for a Director Identification Number (DIN)

Every individual who wishes to become a director must have a Director Identification Number. DIN is a unique number issued to directors under Section 153 of the Companies Act, 2013. A new applicant may get DIN through the SPICe+ form during company incorporation. If the person is not applying during incorporation, DIN can be obtained through Form DIR-3.

Step 3: Reserve Company Name through SPICe+ Part A

The applicant must choose a unique name that complies with the Companies (Incorporation) Rules, 2014. The proposed name must not match or resemble any existing company, LLP, or registered trademark. The applicant files the name through SPICe+ Part A. MCA allows the submission of up to two names. If the name is accepted, it remains reserved for 20 days.

Step 4: Draft Memorandum and Articles of Association

The company must prepare the Memorandum of Association (MoA) and the Articles of Association (AoA). The MoA outlines the company’s business objectives and scope. The AoA defines the rules for the company’s internal management. These documents must match the format prescribed in Table A to Table F of Schedule I of the Companies Act.

Step 5: Fill SPICe+ Part B and Attach Linked Forms

Once the name is approved, the applicant must fill out SPICe+ Part B. This form contains details such as registered office address, capital structure, and particulars of directors and shareholders. Along with it, the applicant must file linked forms:

• eMoA (INC-33) and eAoA (INC-34)
• AGILE-PRO-S (for GSTIN, EPFO, ESIC, bank account, and Profession Tax)
• INC-9 (declaration by subscribers and directors)

All documents must be digitally signed using DSC. The applicant must attach ID and address proof, proof of registered office, and director declarations.

Step 6: Pay Government Fees and Stamp Duty

After uploading the forms, the applicant must pay the prescribed government fees and stamp duty. The amount depends on the state of registration and the company’s authorized capital. The payment must be made within seven days of SRN (Service Request Number) generation. Non-payment leads to application rejection.

Step 7: Verification and Approval from MCA

Once the forms and fees are submitted, the Registrar of Companies examines the application. If all documents are correct, the Registrar approves the application and issues a Certificate of Incorporation. This certificate contains the Company Identification Number (CIN), PAN, and TAN. These numbers are generated automatically after approval.

Step 8: Open a Bank Account and Fulfil Initial Compliances

After incorporation, the company must open a bank account in the name of the company. The bank usually asks for the Certificate of Incorporation, PAN, and board resolution. The company must also maintain statutory registers, hold board meetings, issue share certificates, and file the first auditor appointment with ROC within 30 days.

Post-Incorporation Compliance

Listed below are the Post-Incorporation Compliance:

1. Hold the First Board Meeting

The company must conduct its first board meeting within 30 days from the date of incorporation. In this meeting, the directors pass resolutions to approve the registered office address, appoint the first statutory auditor, and take note of the company’s incorporation documents. The directors also disclose their interest in other firms.

2. Appoint the First Auditor

The Board of Directors must appoint a statutory auditor within 30 days from the date of incorporation. If the board fails to appoint the auditor, the shareholders appoint one in an extraordinary general meeting within 90 days. The auditor holds office until the conclusion of the first Annual General Meeting (AGM).

3. Issue Share Certificates and Pay Stamp Duty

The company must issue physical or electronic share certificates to all subscribers within 60 days from the date of incorporation. The certificates must include details such as the shareholder’s name, number of shares, and company’s seal. The company must also pay the applicable stamp duty on the share certificates within 30 days, as per the state’s Stamp Act.

4. File Form INC-20A (Commencement of Business)

A company with a share capital must file Form INC-20A within 180 days of incorporation. This form confirms that the company has received the subscription money from shareholders and is ready to start its operations. Without this form, the company cannot commence business or borrow funds.

5. Maintain Statutory Registers and Financial Records

The company must maintain statutory registers such as the register of members, register of directors and key managerial personnel, and register of charges. It must also maintain books of account that give a true and fair view of the financial position. These records must remain at the registered office of the company.

6. Director’s Disclosure of Interest (Form MBP-1)

Each director must submit Form MBP-1 in the first board meeting of every financial year. This form discloses the director’s interest in any other company, partnership firm, or business. Any change in interest must also be reported through a fresh MBP-1.

7. File DIR-3 KYC for Directors

Every director who holds a DIN must submit Form DIR-3 KYC annually before 30th September. The form updates the director’s contact details and verifies their identity. If a director fails to submit this form, the DIN becomes inactive and can be reactivated only after filing with a penalty.

8. File Annual Returns and Financial Statements

The company must file Form AOC-4 to submit audited financial statements within 30 days of the AGM. It must also file Form MGT-7 for the annual return within 60 days of the AGM. These filings are mandatory for every financial year, even if the company has no business activity.

9. Submit Event-Based and Periodic Forms

The company must report certain actions through specific forms:

• PAS-3 for allotment of shares
• BEN-2 for beneficial ownership declaration
• DPT-3 for outstanding loans and deposits (filed annually)
• IEPF-2 for unpaid dividends or unclaimed shares (filed after AGM)

Each of these forms has a separate timeline and must be filed to avoid penalties.

10. Convert Shares to Demat Form (If Applicable)

As per the new MCA rule, every private company (other than small companies) must convert its existing physical shares into electronic (demat) form. The company must complete this process by 30 June 2025. It must also issue new shares only in demat form after this date.

11. Report Foreign Investment (If Applicable)

If a company receives foreign investment, it must file Form FC-GPR with the Reserve Bank of India (RBI) within 30 days from the date of share allotment. The company must also file the annual FLA return before 15th July for every financial year in which it receives FDI.

12. Avoid Penalties through Timely Compliance

Non-compliance with the above requirements leads to penalties, disqualification of directors, or deactivation of DIN. MCA uses e-adjudication to issue notices and collect fines. The company must monitor deadlines regularly to avoid legal action.

Conclusion

Forming a private limited company offers several advantages such as limited liability, organized structure, ease of raising funds, and improved credibility. It provides a reliable platform for sustainable business growth. To fully benefit from these features, it is essential to follow all legal formalities and meet compliance requirements on time. Consulting with legal and financial experts ensures that the company remains legally sound and operates without any regulatory hurdles. If you want to do a Private Company Formation, contact Online Legal India to get assistance from their experts.