Types of Business Licenses in India

What is a Private Limited Company?

A Private Limited Company is a business structure in India registered under the Companies Act, 2013. It is a separate legal entity from its owners, with its own rights and liabilities. Characteristics of private company include limited liability for shareholders, restrictions on share transfers, and a minimum of two members.

Under Section 2(68) of the Companies Act, 2013, a Private Limited Company is defined as a company that restricts the right to transfer its shares, limits the number of members to 200 (excluding employees), and prohibits any invitation to the public to subscribe for its securities.

Characteristics of a Private Limited Company

Characteristics of private companies make it a preferred business structure for growing startups and SMEs in India. A Private Limited Company has several distinct characteristics that define its structure, ownership, and operations. Features of a private limited company such as limited liability, perpetual succession, easier fundraising, and professional image help entrepreneurs scale their business while mitigating risks. Understanding these features of a private limited company is crucial for entrepreneurs considering this business model. These include:

Separate Legal Entity

A Private Limited Company is a separate legal entity from its shareholders. This means the company can enter into contracts, own assets, incur liabilities, and sue or be sued in its own name. The company's existence is independent of its members, providing continuity and perpetual succession.

Limited Liability of Members

One of the biggest advantages of a Private Limited Company is the limited liability protection it offers to its shareholders. The liability of members is limited to the amount of share capital they have subscribed to. Their personal assets are protected in case the company faces losses or legal issues. This reduces the financial risk for shareholders.

Minimum and Maximum Members

A Private Limited Company requires a minimum of two members and can have a maximum of 200 members (excluding employees). These members can be individuals, other companies, or foreign entities. Having multiple shareholders allows for pooling of resources and expertise.

Restriction on Share Transfer

Shares of a Private Limited Company cannot be freely transferred to the public. Any transfer of shares requires the approval of the company's Board of Directors. The right to transfer shares is restricted by the company's Articles of Association, and existing shareholders have the first right to purchase any shares offered for sale. This helps maintain control over ownership.

Minimum Capital Requirement

There is no minimum capital requirement for incorporating a Private Limited Company in India. This makes it easier for startups and small businesses to adopt this structure without significant upfront investment. However, the company's authorized and paid-up capital must be mentioned in its Memorandum of Association.

Perpetual Succession

A Private Limited Company has perpetual succession, which means its existence is not affected by the entry or exit of members. The company continues to operate even if all the original shareholders and directors change over time, providing stability and continuity for the business.

Use of "Private Limited" in Name

A Private Limited Company must use the words "Private Limited" or "Pvt Ltd" at the end of its name. This helps distinguish it from public limited companies and sole proprietorships. The name should not be identical or too similar to any existing company to avoid confusion.

Mandatory Registration

Incorporation of a Private Limited Company is mandatory and must be registered with the Registrar of Companies (ROC). The company comes into existence only upon registration and is given a Certificate of Incorporation. This is different from sole proprietorships and partnerships, which can operate without formal registration.

Statutory Compliance

Private Limited Companies are subject to various statutory compliances under the Companies Act, 2013. These include conducting board meetings, maintaining statutory registers and records, filing annual returns, and appointing auditors. Non-compliance can lead to penalties and legal consequences.

Documents Required to Register a Private Limited Company

1. Director Identification Number (DIN) for each proposed director

2. Digital Signature Certificate (DSC) for each proposed director

3. Proof of identity and address for directors and shareholders

4. Proof of registered office address

5. Memorandum of Association (MOA) and Articles of Association (AOA)

6. Consent letters from directors

7. PAN card of directors and shareholders

8. Passport-size photographs of directors

Process to Register Private Limited Company

Incorporating a Private Limited Company involves obtaining Director Identification Number (DIN), Digital Signature Certificate (DSC), and filing necessary documents required for pvt ltd registration. Seeking professional advice from legal and financial experts can help navigate the registration process smoothly. The process of registering a Private Limited Company involves the following steps:

1. Obtain Director Identification Number (DIN) for each proposed director: Directors must apply for a DIN through the SPICe+ (Simplified Proforma for Incorporating a Company Electronically Plus) form. DIN can also be applied during incorporation.
2. Acquire Digital Signature Certificate (DSC) for each proposed director: All directors and shareholders must obtain a Class 3 Digital Signature Certificate (DSC). The DSC is used to sign forms electronically during the registration process.
3. Select and apply for a unique company name through the RUN (Reserve Unique Name) service: Use the RUN (Reserve Unique Name) service on the MCA portal to propose a unique company name. Ensure compliance with the Companies Act, 2013 and avoid prohibited or identical names.
4. Draft the Memorandum of Association (MOA) and Articles of Association (AOA): Draft key documents, including:

• Memorandum of Association (MoA) – Defines the company’s objectives.
• Articles of Association (AoA) – Details operational rules and regulations. Obtain affidavits, declarations, and consent from directors.

5. File the SPICe+ form along with required documents and payment of fees: Submit the SPICe+ form on the MCA portal with DSC. Attach MoA, AoA, and applications for PAN, TAN, and GST registration (if applicable). Pay the required fees and stamp duty online.
6. Obtain Certificate of Incorporation from ROC upon successful registration: Upon approval, the Certificate of Incorporation is issued by the Registrar of Companies (RoC). This includes the Company Identification Number (CIN), confirming legal status.

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Types of Private Limited Companies

Based on the liability of members, Private Limited Companies can be categorised into three types:

1. Company Limited by Shares: The liability of members is limited to the amount unpaid on their shares. This is the most common type of Private Limited Company.
2. Company Limited by Guarantee: The liability of members is limited to the amount they have agreed to contribute to the company's assets in the event of its winding up.
3. Unlimited Company: Members' liability is unlimited. They are liable for the company's debts and obligations.

Frequently Asked Questions:

Eligibility

• New and existing Micro and Small Enterprises engaged in manufacturing, service, or retail activity, excluding Educational Institutions, Agriculture, Self Help Groups (SHGs), Training Institutions, etc.
• All service sector enterprises under the MSMED Act are eligible for coverage.
• Must be a “First-generation” entrepreneur.

Application procedure for Startups

• Go to https://www.cgtmse.in/Home.
• The homepage will open.
• Click on the “Register” option seen on the homepage.
• Enter your details and click on “Get OTP.”
• After typing in the OTP, the registration will be completed.
• “Login” to the page again. You will have to fill in the required information such as GST details, Bank Account details, and ITR.
• Click on “Submit” to avail the benefits under this scheme.
• Download the financial report, calculate the guarantee, etc, if needed.

Benefits of the Scheme

• The guarantee cover available under the scheme is to the extent of 75 percent of the sanctioned amount of the credit facility.
• Credit or loans in the northeast region, UT of J&K, and UT of Ladakh for credit facilities up to Rs 50 lakh, are covered by an 80 percent guarantee.
• For micro and small businesses operated or owned by women, as well as SC/ST individuals, the guarantee cover stands at 85%.
• For up to 5 lakh micro-enterprise loans, the guarantee cover stands at 85%.
• The credit is without any collateral or third-party guarantees.

The guarantee will commence from the e-date of payment of the guarantee fee. It will run for the agreed term credit tenure in the event of term loans / composite loans and for a period of 5 years in the case of working capital facilities only granted to borrowers or for such period as the Guarantee Trust may specify in this regard.

Frequently Asked Questions

What is an LC (Letter of Credit)?

A Letter of Credit (LC) is a document issued by a bank that guarantees payment to a seller on behalf of a buyer, provided that certain conditions are met. This financial instrument ensures payment security and mitigates risks associated with cross-border transactions. The issuance of an LC involves specific conditions, like the submission of required documents, which the bank reviews before releasing funds. It provides bank guarantees and incurs fees that are essential for its operation.

Examples of Letters of Credit

International Trade Example: A U.S. company wants to buy machinery from an Indian exporter. The U.S. company requests its bank to issue an LC to the Indian exporter. Once the exporter ships the machinery and presents the required documents to their bank, they receive payment from the issuing bank, ensuring trust and mitigating payment risk.

Domestic Transaction Example: A large retail chain uses an LC to purchase inventory from a local supplier. The LC guarantees that the supplier will receive payment as soon as they fulfill the delivery conditions outlined in the agreement.

Basics of a Letter of Credit Transaction

Applicant

The buyer who requests the LC from their bank. They initiate the process by applying for the LC and specifying the terms and conditions of the trade.

Beneficiary

The seller who receives payment through the LC. They must present all required documents correctly to receive payment.

Issuing Bank

The bank that issues the LC on behalf of the applicant. They verify the buyer's creditworthiness and commit to making the payment when conditions are met.

Negotiating Bank

The negotiating bank in LC that examines documents presented by the beneficiary and facilitates payment. They ensure all paperwork matches LC requirements perfectly.

The process begins when the applicant approaches their issuing bank for an LC. The issuing bank then coordinates with the negotiating bank to establish terms and verify documents before releasing any funds.

Importance of Letters of Credit

Secure Payments

They ensure that sellers receive payments without requiring advance payments, reducing risk for both parties involved in the letter of credit.

Facilitate Cross-Border Transactions

LCs simplify complex international transactions by providing a standardised payment mechanism across different countries.

Secure Business Funding

They provide businesses with necessary funding while verifying creditworthiness, helping companies maintain healthy cash flow.

Financial Assurance

LCs offer security when buyers cannot pay, acting as a guarantee backed by reliable banking institutions.

Advantages of Letters of Credit

Ease International Trade: Simplifies complex transactions across borders by providing a structured framework for payment and documentation.

Foster Global Business Connections: Builds trust between trading partners by removing payment uncertainty and providing bank-backed guarantees.

Provide Flexibility: Customisable terms to suit various transaction needs, including payment timing, shipping requirements, and document presentation.

Parties to Documentary Credit

Commercial/Trade Parties: The buyer and seller form the core of the transaction, initiating and completing the trade deal.

Banks: Issuing and advising banks serve as intermediaries ensuring secure payment and proper documentation.

Related Entities: Shipping lines and insurers support the transaction by handling logistics and risk management aspects.

Types of a Letter of Credit

Sight Credit

A Sight Credit allows instant payment upon presenting the correct documents, providing immediate access to funds for sellers. For example, if a businessman needs quick access to cash after shipping goods, they can use this type of credit.

Acceptance Credit/Time Credit

Acceptance or Time Credit involves bills that are accepted upon presentation and paid on specified due dates. This type allows sellers to receive payments after a set period.

Revocable Letter of Credit

A Revocable Letter of Credit can be canceled or modified by the issuing bank without beneficiary consent, which limits its reliability in ensuring secure transactions.

Irrevocable Letter of Credit

An Irrevocable Letter of Credit guarantees payment once certified by the exporter’s bank. This type provides security for international transactions and is often preferred by exporters due to its reliability.

Confirmed Letter of Credit

A Confirmed Letter of Credit involves both issuing and confirming banks. The confirming bank guarantees payment to the beneficiary, holding equal liability as the issuing bank, ensuring that payments will be honored upon proper presentation.

Back-to-Back Letter of Credit

This type involves issuing a second LC based on the security provided by the first LC. It is commonly used to secure payments for suppliers in international trade transactions.

Transferable Letter of Credit

A Transferable Letter of Credit allows the primary beneficiary to transfer credit partially or fully to another beneficiary, typically a supplier. However, once transferred, the second beneficiary cannot transfer it further.

Restricted Letter of Credit

A Restricted Letter of Credit specifies a particular bank responsible for payment, limiting its scope compared to unrestricted LCs. This type is often used when specific banks are preferred due to their reliability.

Revolving Letter of Credit

A Revolving Letter of Credit allows reuse after payments or drawings are made. This flexibility is beneficial for businesses requiring multiple shipments or ongoing transactions under one credit arrangement.

Precautions to be Taken

Verify Bank Reliability: The issuing bank must be reliable and well-known to both parties of the letter of credit. This helps minimise risks and ensures the LC will be honored when presented.

Local Bank Verification: It's essential to advise through an Indian bank and confirm the authenticity of the LC. The local bank can verify the legitimacy of the foreign bank and ensure all documents meet local regulations.

Clarify Financial Terms: Make sure to clearly establish who covers all bank charges and confirm freight payment terms as specified in contract agreements. This prevents disputes and unexpected costs during the transaction process.

Import Export Code

The Import Export Code (IEC) is a mandatory document required for all businesses involved in international trade. This code streamlines customs clearance, enables duty benefits, and ensures regulatory compliance. Through platforms like Razorpay Rize, businesses can obtain their IEC within 6-7 days which makes the process efficient and straightforward.

Frequently Asked Questions