A Private Limited Company is among the most preferred choice to incorporate startups in India. However, before incorporating a Private Limited Company, its owners must decide upon certain basic yet necessary elements without which the creation of the company is impossible.
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Key decisions that need to be taken before incorporating a Private Limited Company include its name, address, capital structure, and the ratio of investment among its shareholders. In this blog, we have discussed all such key decisions and their relevance in detail and at great length.
Five Key Decisions to be Made Before Company Registration
Registering a company in India is a complicated legal process whereby a company needs to file a number of applications and undertake a long and exhausting process of documentation. Moreover, one cannot simply begin the process of registration when one wishes to. There are certain key decisions that are required to be taken at the helm of the company, which we will be discussing in detail in the sections below.
What Would be the Name of the Company?
The most crucial component of a company’s identity is its name, which effectively conveys its brand to all its customers. Therefore, the name should be chosen with the utmost care and in accordance with the applicable legal regulations or standards. This makes the process of naming a company an extremely crucial task before a company’s registration.
For this purpose, one of the key decisions that needs to be taken before the registration of a Private Limited Company is its name. Broadly speaking, there are three essential elements that make up a company’s name: the name itself, the business or industrial activity, and the legal structure with which the company has been incorporated.
For instance, the names of all Private Limited Companies end with the words “Private Limited Company” while that of a One Person Company ends as “Private Limited Company (OPC)”. The names of all Public Limited Companies end with the words “Public Limited Company”, while those of Government companies and section 8 companies can end as either “Private Limited Company” or as “Public Limited Company”.
An ideal name of a company should convey its primary business objective for which it has been established. The best way to do so is to mention the nature of the business activity in the name of the company itself. Let us understand this better with the help of an example.
A company randomly named as “XYZ Private Limited” will struggle to convey its brand to its customers, when compared to a company named as “XYZ Footwears Private Limited”. Here, in the latter case, it becomes crystal clear to the customers that the concerned company deals in footwears, whereas in the former case, one may have to be previously acquainted with the business in order to know the industry to which it belongs. In simple words, while it would be easier for the latter company to attract new customers looking for footwear products in the market, the former company will find it immensely difficult to expand its consumer base beyond its existing customers. Therefore, although it is not a legal necessity, it is strongly recommended that the name of your company must contain the nature of its business activity as well.
Moreover, there are also certain legal principles or guidelines mentioned in the Companies Act, the Company Rules, and the Trademark Act, that must be followed while naming your company. To be precise, the name of your company must be unique and original, and must not be identical to the name of an existing company or a registered trademark. Moreover, without the approval of the government, the name of your company must not contain words like “National”, “State”, “Union”, “Central”, etc, that show the patronage of the Government.
What Would be the company’s Registered Office Address?
Before discussing the need to decide a registered location for your business, you must know what a registered location actually is? A registered location is a location that has its address registered with the Central, State, or local government in any form or manner prescribed under law. Every company must have a registered location or address where its main office or principal place of business is situated. Moreover, It is this registered address or location with which a company is registered or incorporated with the appropriate authority.
It must be noted that, while a company can conduct its business activities at multiple locations, it cannot have more than one registered office address. The choice of a registered location for your company falls completely to your discretion. You can choose any location across India to incorporate your company, provided you have your main office located there. The decision over the choice of your registered business location should be based on your analysis of a number of factors, including the need and costs of annual filings, income taxes, and other legal compliances specific to that location.
Since the main office or principal place of business of the company is situated at its registered address, all official correspondences addressed to the company will be sent to this address only. Additionally, the company is also required to keep all of its statutory records and books of account at its main registered office. Therefore, before incorporating a Private Limited Company, it is not only important but necessary to decide upon the registered address of the company.
What Should be the Initial Authorized Capital of the Company?
The capital of a business is the most crucial resource to conduct business operations. Before beginning the process of incorporation, the promoters of the company must decide upon the amount of capital that they should invest into the company, so that it runs smoothly, especially during the initial stages of its establishment. This decided capital is known as the authorized capital of the company.
The authorized capital needed by a company depends upon the needs specific to the company. Such a decision falls under the complete discretion of the company’s shareholders, as no specific law prescribes any minimum limit for establishing a Private Limited Company.
The authorized capital of a company is not only the ideal capital that must be invested in the company, but is also used to determine the government fee and charges for various compliances to be met by the company. Therefore, the choice of authorized capital of a company is regarded as one of the most crucial decisions to be made before establishing a Private Limited Company.
Who Should be the First Directors of the Company?
Since its inception, a private limited company has to maintain the minimum statutory requirement of at least two shareholders and two directors. The choice over who must be the first shareholders and first directors of the company must be made with utmost carefulness, as the two have very different obligations and responsibilities towards the company.
Directors of a company are in charge of overseeing or controlling its management. A Private Limited Company must have at least two directors, extendable up to a maximum limit of fifteen. However, the first directors of a company have a lot more responsibilities than the other subsequent directors. They act as the promoters of the company, file the application for incorporation of the company, and meet all the tax and legal compliances on behalf of the company.
Therefore, selecting a company’s first directors should be done after careful considerations only. This is another important decision that should be made before establishing a Private Limited Company in India.
Capital Sharing Ratio
The capital invested in a company is shared between all its shareholders in the ratio of the shares that each one of them holds in the company. This ratio is known as the Capital sharing ratio and is mutually agreed upon by the company and its shareholders. It is also mentioned in the Shareholder’s agreement and the Memorandum of Association, signed by all the shareholders of the company.
In order to establish a Private Limited Company in India, its shares must be subscribed to by at least two shareholders, who have agreed to invest into the company on a predetermined fixed ratio. Therefore, it is obvious that the decision over the capital sharing ratio between the shareholders must be decided before the incorporation of the company.
Conclusion
We hope that reading this blog has helped you better understand the important choices you must make when forming a Private Limited Company, so that you can choose the legal structure of your company with great ease and confidence. At Setindiabiz, we assist our clients with the formation and incorporation of all types of businesses including Private Limited Companies. Request a callback from our startup consultants to learn more about our company registration services.
