This blog explains the top 10 common mistakes to avoid during Company Registration process. An understanding of all these mistakes and the ways to overcome them will boost the chances of your company getting registered without any hindrance.
In the past few years, India has seen a consistent boom in the Start-up industry driven by the enthusiastic aspirations of young Indian entrepreneurs. Estimates from the Ministry of Corporate Affairs suggest that every month around 15,000 new start-ups emerge and land in the Indian market to try their fate. However, only 20% of them actually survive, and a meagre 0.001% manage to make it big over the years. While the limited scope of operations, profit-earning, growth, and expansion might be the major causes for such low success rates, certain common mistakes made by start-up owners also can potentially have serious consequences.
Registering a company is a complex and layered process, which involves several legal technicalities at almost every stage. This makes it immensely difficult for owners to completely comply with the entire procedure themselves. Even if they attempt to do so, they are bound to make mistakes owing to their inexperience, lack of knowledge, and expertise in the task. Therefore, it becomes extremely important for company owners to have a thorough knowledge and understanding of the entire procedure of registration so that they can start their business activities without any hindrances. The common mistakes often made by owners during registration have been listed below.
The first and most significant task prior to establishing your startup company is to decide on a new and unique name for the purpose of Company Registration. Several laws, regulations, and conventions govern the naming of a company, but the most relevant ones are the Companies Act, 2013, Trademark Act, 1999, and the names and Emblems Act, 1950. Besides, certain provisions mentioned in the Company Incorporation Rules, 2014 also lays down specific guidelines for the same, here are the principles that govern the name of a company.
Section 4 of the Companies Act, 2013 lays down the basic guiding principles for naming a company. According to the act, the name of the company cannot be the same, similar, or deceptively identical to the name of an existing company or LLP. Furthermore, the name of the company should not be such that its use constitutes an offence, under any law or is undesirable in the opinion of the Central Government. Rule 8 of the Companies Incorporation Rules 2014 contains the list of such undesirable names, along with a list of words that require the approval of the Central Government, prior to being used in a company’s name.
As far as the Trademark Act is concerned, you must ensure that the name of your company, its brand, logo, or any other intellectual property is not the same as an existing, applied or registered trademark. The objective of trademark registration is to protect the intellectual property of the owner from misuse by other brands. Hence, it is highly recommended that you must ensure that the name of your company does not infringe on the intellectual property rights of existing brands. A Public search in the government database of trademarks is advisable.
Section 3 of the Names and Emblems Act, 1950 restricts owners from using names or words contained in the names that show any patronage of the Government of India. For instance, the names and emblems of national and international organizations, viz. The UN and its agencies, WHO, WTO, World Bank, IMF, World Meteorological Organisation, Government of India, The President, Governor, and similar offices, shall not be eligible to be used in the name of a company.
Companies can be registered with three legal statuses, a public limited, a private limited, or an OPC. Usually, startups that have bagged huge funding to carry out large-scale business operations, with future aspirations for growth and expansion, register themselves as Public or Private Limited companies. Public Limited companies require a minimum of 7 shareholders and 3 directors to register their business. This makes them comparatively larger than private limited companies, which only require a minimum of 2 shareholders and 2 directors to begin business operations. There is no minimum or maximum capital requirement, which makes it easier for small companies to begin as public or private limited, and then grow rapidly.
Another important difference is that a public limited company has the flexibility of selling its shares to the general public, thereby sharing the burden of ownership with many. Contrary to this, a private limited company issues limited shares that it can only sell to its investors and promoters.
Person Companies (OPC) have a single owner, who also carries the responsibilities of the director and the manager of the company. It guarantees limited liability to the owner and operates as a separate legal entity. However, when its share capital exceeds 2 Crores (It was Rs. 50 Lakhs prior to 1st April 2022), it shall be mandatorily converted to a Private Limited Company. Therefore, the legal status of an OPC is apt for small business owners, looking to limit their liabilities but reluctant to relinquish control of the business.
The description of a company is required to be mentioned in the application form for company incorporation. It must contain the business name, the activity it is involved in, the current location, the unique brand, the target customer, and most importantly, the objective of the business. The appropriate description of the company as decided during its incorporation becomes the foundation for important documents like the MoA, the AoA, the business plan, and policy. It will help you plan the future growth and expansion of the company after its incorporation.
After filling out the details of the company in PART B of the online SPICe+ application form, the necessary supporting documents need to be attached with it. The application and the documents must be signed/attested using the DSC of the applicant. The necessary supporting documents that are filed with the incorporation application to the ROC includes the PAN, proof of identity, and proof of registered address of the applicant director, along with the proof of registered office address. If the office premises is rented the rent agreement and No Objection Certificate from the owner is required. On the other hand, if the office space is owned by the company owner, the property documents and a No Objection Certificate from the company owner is required. The e-MoA and the e-AoA of the company, filed through the INC 33 and INC 34 forms are also significant documents that need to be submitted with the application.
It is not necessary that all the shareholders of a company be appointed as its directors. The board of directors of a company must be a robust team comprising shareholders, market analysts, legal professionals, industry experts, etc. The BoD has a variety of vital decisions to make for which it requires knowledge, experience, and expertise. Such skills might not be present in all the shareholders of the company.
Moreover, the director of the company is burdened with the responsibility of managing the entire administration system of the business. The tiniest of mistakes made by him can cause chaos in the company, and in some cases lead it to its ruins. Therefore, it is always advisable for a business owner to separate the ownership and the executive of the company, and, to appoint the Board of Directors and the Director of the company with utmost wisdom and intricacy.
Business owners often neglect the need to draft a written rental agreement with their landlords, and agree upon the terms of tenancy orally. This often lands them in trouble when disputes arise, as only a written and registered agreement is admissible in a court of law.
The agreement must be drafted on a stamp paper, and notarized by a notary. For its registration, an application must be submitted at the sub-registrar’s office of the State Government. The details required to be mentioned includes the name and address of the company, the amount of rent to be paid, the duration of rent to be paid (annual/ monthly), the duration of the lease, whether it is subject to renewal, notice period, facilities provided, etc.
Shareholder’s agreement is one of the most significant documents to be drafted, agreed upon, and signed by all shareholders of the company. It contains the names and addresses of the shareholders, details like shares issuance, shares allotment, share capital, lock-in period, terms of investment, provisions regarding the transfer of shares, dividend declaration, dividend distribution, inheritance of ownership, nominee details, etc. In the absence of such a written agreement, disputes between shareholders can become extremely challenging to resolve. Hence, it is advisable for start-up owners to draft the Shareholder’s document while incorporating the company.
The registration of a company is the authoritative responsibility of the Union Ministry of Corporate Affairs, there are certain post-incorporation compliances that have also been mandated by different state governments. These laws may not be uniform across all states, but wherever applicable, results in the imposition of hefty penalties for non-compliance.
The best example of state-specific compliance is the Professional Tax Registration in India. Professional tax registration is a mandatory compliance for companies, required to be met within 30 days from the date of its incorporation. It is levied and collected by certain state governments. The tax is charged on the professions of the company’s directors, owners, and employees, and is deductible from their incomes/salaries. In India, the provision is applicable only in Karnataka, Punjab, Uttar Pradesh, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, Jharkhand, and Sikkim.
Applicants often get confused while filling out the address section of the application. The form asks for two separate kinds of addresses, the personal address of the director of the company who shall sign the application, and the address of the main office/ headquarters of the company, from where all major business activities shall be executed. The address details must be backed by proof of residence, not more than 2 months old. Only electricity, water, and telephone bills are valid as the proof of address for the application.
Most startup owners are either unaware of the necessary compliances they must meet before commencing their businesses, or avoid doing so due to the high professional cost involved. However, they often fail to realize that the penalties imposed for non-compliance are way more costly compared to the amount charged by professionals. Additionally, if legal proceedings are initiated against your business, it might lead to its closure. Hence, to avoid such serious consequences for your business, we recommend that you hire professionals and seek compliance services from them. You may also avail of our services at SetIndiaBiz, where we specialize in providing company registration and post-registration compliance services to all sorts and sizes of businesses.
As a small business startup, non-compliance with the above-listed legal mandates may result in hefty penalties levied by the government. Spending huge sums of money on penalties is bound to adversely impact the growth prospects of your business. Hence, it is highly recommended that you comply with all the legal requirements within the prescribed time limit so that you can avoid facing issues in the future. You must seek professional assistance from legal experts, wherever necessary.