Different Types of Companies in India

What is Form STK-2, and When is it Used?

Form STK-2 is prescribed under Section 248(2) of the Companies Act, 2013, allowing a company to apply for voluntary strike-off. It is used by companies that are:

• Not carrying on any business for the last two consecutive financial years, or
• Have not sought the status of a dormant company, and
• Do not have any outstanding liabilities.

For example, consider a startup that launched operations but never scaled up. Instead of continuing to maintain compliance (like audits, annual filings, and tax submissions) with no business activity, the founders can choose to file Form STK-2 and officially close the company.

What are the Benefits of Filing STK-2?

Filing Form STK-2 provides several benefits:

• Quick and cost-effective closure compared to liquidation.
• Savings on audits and compliance costs that continue even if the company has no operations.
• Faster process – usually completed within a few months.
• Protection of directors and shareholders from future penalties or liabilities.

This makes STK-2 a practical option for small companies and startups that wish to wind up smoothly.

What are the Eligibility Criteria to File STK-2?

Not every company is eligible to file STK-2. The key criteria are:

• Applicable to Private Limited Companies, One Person Companies (OPC), and Unlisted Public Companies.
• The company should have no pending liabilities and must clear all dues before applying.
• The business must not have carried on any activity for at least two consecutive years.
• Board and special resolutions (approved by at least 75% of shareholders) are mandatory.

Companies that are listed, under inspection, or involved in ongoing litigation are not eligible for strike-off.

What Documents Are Required for STK-2?

The following documents must be attached while filing STK-2:

• Board resolution and special resolution approving strike-off.
• Affidavit by directors (Form STK-4) declaring no pending liabilities.
• Indemnity bond by directors (Form STK-3), ensuring liability coverage.
• The company's latest audited financial statements.
• Directors’ PAN, Aadhaar, and digital signatures (DSC).
• Incorporation documents like Certificate of Incorporation, MoA, and AoA.

How to File the STK-2 Form? Step-by-Step Guide

Here’s a step-by-step guide to filing Form STK-2:

1. Board Approval: Conduct a board meeting and pass a resolution for closure.
2. Shareholder Consent: Obtain a special resolution with 75% shareholder approval.
3. Clear Liabilities: Pay off loans, creditors, and statutory dues.
4. Prepare Documents: Collect Forms STK-2, STK-3, STK-4, audited accounts, MoA, AoA, and ID proofs.
5. Online Filing: File Form STK-2 on the MCA portal along with attachments.
6. Pay Government Fee: ₹10,000 is payable at the time of filing.
7. ROC Review: The Registrar verifies documents and issues a public notice.
8. Strike-Off Approval: Once satisfied, the ROC strikes the company name from the register.

Voluntarily Removing Company Name using Form STK-2

Companies can voluntarily apply for strike-off by:

• Clearing all debts and liabilities.
• Passing a special resolution with the approval of at least 75% members.
• Seeking NOC/approval from regulatory bodies (if the company is under their regulation).

Effect of Removing Name from Register of Companies

Once the company’s name is removed under Section 248:

• The company is dissolved and ceases to exist legally.
• The Certificate of Incorporation is cancelled.
• The company cannot carry on any business operations.

However, directors, managers, and shareholders remain liable for any past dues, fraud, or pending obligations as if the company had not been dissolved.

Closing of Company by Filing Form STK-2

The closure process through STK-2 involves:

• ROC verification of pending liabilities.
• Publication of a public notice inviting objections.
• Striking off the company’s name from the register.
• Publishing the strike-off notification in the Official Gazette.

Once published, the company is considered officially dissolved.

What are the Consequences of Not Filing STK-2?

Failing to close an inactive company can lead to several consequences:

• Director disqualification under the Companies Act.
• Heavy penalties and fines for non-filing of annual returns and financial statements.
• Government-initiated strike-off without the company’s consent.
• Restrictions on starting new companies for disqualified directors.
• Continued obligations for tax filings and ROC compliance despite no business activity.

What Challenges Can You Face While Filing STK-2?

Some common challenges include:

• Delays in obtaining tax or GST clearance.
• Errors in affidavits or indemnity bonds.
• Issues with expired DSCs of directors.
• Non-cooperation from shareholders or directors.
• ROC objections due to mismatched or incomplete details.

What is the Cost Involved in STK-2?

The cost of filing Form STK-2 includes:

• Government fee
• Professional charges
• Notary and affidavit charges
• DSC renewal costs, if applicable

What are Small Companies?

Small companies, as defined by the Companies Act 2013, are private limited businesses with lower annual revenue compared to regular-sized companies. They follow the same registration process as private limited companies but have distinct financial criteria. To be classified as a small company as per the Companies Act, a business must meet the revised thresholds for paid-up capital and turnover.

The significance of small companies in India's economy cannot be overstated. They contribute to profit generation and job creation, making them essential drivers of economic growth. By providing goods and services to local communities and niche markets, small companies help foster inclusive development across the country.

The New Definition of Small Company

A small company is now defined as a non-public entity as per the Companies (Specification of Definition details) Amendment Rules, 2022, effective from 15 September 2022, if it meets the following conditions:

• Small company paid-up capital should not exceed ₹4 Crores, or such higher amount specified, which should not exceed ₹10 Crores.
• Small company turnover limit should not exceed ₹40 Crores, or such higher amount specified, which should not exceed ₹100 Crores.

It is important to note that certain companies are excluded from being classified as small companies, even if they meet the above criteria. These include:

• Public companies
• Holding companies
• Subsidiary companies
• Companies registered under Section 8 (non-profit companies)
• Companies governed by any special act

The 2022 amendment significantly broadened the scope for small companies, enhancing their eligibility for benefits and simplifying compliance requirements, thus fostering growth in the small business sector in India.

Earlier Definition of Small Companies 2021

Prior to the 2022 amendment, the definition of small companies underwent changes in 2021. The thresholds for paid-up capital and turnover were revised as follows:

Comparing Small Company New Definition with Old Definitions

The Companies (Specification of Definition details) Amendment Rules, 2022, have further expanded the scope of small companies by increasing the limits for paid-up share capital and turnover. Here's a comparison of the key changes between the old and new definitions:

The increased thresholds allow more firms to be classified as small companies and avail of the benefits provided under the Companies Act 2013. This expansion is expected to reduce compliance burdens and facilitate ease of doing business for a larger number of small businesses in India.

Benefits of Revised Small Company Definition

Exemption from Preparing Cash Flow Statements

Small companies are not required to include cash flow statements in their financial reports, simplifying their accounting processes.

Simplified Annual Filings

They can prepare and file an abridged annual return, reducing administrative workload.

Fewer Board Meeting Requirements: 

Small companies are mandated to hold only two board meetings per year instead of four, which lessens operational demands.

Impact on Audit Processes

1. Auditors are not required to report on the adequacy of internal financial controls.
2. There is no compulsory rotation of auditors, which can reduce costs and administrative burdens.

Compliance Ease 

A director can sign annual returns in the absence of a company secretary, further streamlining operations.

Reduced Penalties for Non-Compliance: 

This encourages small companies to focus on growth rather than worrying excessively about penalties.

These exemptions and relaxations aim to ease the compliance burden on small companies, allowing them to focus on their core business activities and growth strategies.

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Characteristics of a Small Company in India

Small companies in India have distinct characteristics that set them apart from larger enterprises. Some of the key traits include:

Ownership Structure 

Typically, small companies are privately owned entities, often structured as private limited companies, partnerships, or sole proprietorships. This ownership model allows for greater control and flexibility in decision-making but limits access to larger capital investments.

Simplified Compliance 

One of the key advantages of being classified as a small company is the reduced compliance burden. They benefit from exemptions, such as not needing to prepare cash flow statements, simplified annual filings, and fewer requirements for board meetings—only two are mandated per year. These measures significantly alleviate administrative pressures, allowing owners to focus on core business activities.

Auditing Requirements 

Small companies face less stringent auditing requirements. For instance, they are not obligated to rotate auditors or report on the adequacy of internal financial controls, which reduces costs and simplifies financial oversight.

Limited Resources and Workforce

Small companies generally operate with limited resources and a smaller workforce. They often employ fewer staff members, sometimes relying on a single individual or a small team to manage operations. This can lead to agility in decision-making but may also pose challenges in scaling operations or managing increased demand.

Restricted Market Reach

The market reach of small companies is typically confined to local or regional areas. They often serve niche markets or specific community needs, such as convenience stores in rural areas. This limitation can hinder growth opportunities compared to larger firms with broader market access.

How to Register a Small Company as per the Companies Act 2013?

To register a business online as a small company under the Companies Act 2013, follow these steps:

1. Obtain Digital Signature Certificates (DSCs) for all proposed directors and subscribers
2. Reserve the company name by submitting Part-A of the SPICe+ form
3. File Part-B of the SPICe+ form along with required documents (Memorandum of Association (MOA), Articles of Association (AOA), Professional Declaration, Affidavits, Identity and Address Proofs, and Correspondence Address)
4. Pay prescribed fees and stamp duty for the SPICe+ form, MOA, and AOA
5. Obtain the Certificate of Incorporation from the Registrar of Companies (ROC) upon successful review of submitted documents

Matters to be included in the Board's Report for small companies:

• The web address for the Annual Return (if available)
• Number of Board meetings held during the year
• Directors' Responsibility Statement as per Section 134(5)
• Details of any frauds reported by the auditor under Section 143(12), except those reportable to the Central Government
• Explanations or comments on any qualifications, reservations, or adverse remarks in the auditor's report
• Summary of the company's current affairs and business overview
• Financial summary or highlights
• Material changes in the nature of the business after the financial year-end and their impact on the company's financial position
• Changes in directorship during the year
• Significant legal or regulatory orders affecting the company's going concern status or future operations

Synopsis of MCA Notification on Companies (Specification of Definition details) Amendment Rules 2022

The MCA has issued the Companies (Specification of Definition details) Amendment Rules, 2022, effective from 15 September 2022. The key amendments include:

1. Rule 2 has been amended by substituting a new clause 2(1)(t), which specifies the revised definition of small companies.
2. The thresholds for paid-up capital and turnover have been increased in the definition of a small company under the Companies Act 2013.

These amendments aim to provide relief to a larger number of businesses by classifying them as small companies and offering them various benefits and exemptions under the Companies Act 2013.

Frequently Asked Questions

Guidelines to Follow When Starting Your Business in India

Before diving into the specifics of the company registration process, it's crucial to understand the general guidelines for starting a company in India. These guidelines will help you lay a strong foundation for your business and avoid common pitfalls.

• Conduct thorough market research to validate your business idea and identify your target audience.
• Develop a comprehensive business plan that outlines your objectives, strategies and financial projections.
• Choose a unique and meaningful name for your company that aligns with your brand identity and complies with the naming guidelines set by the Ministry of Corporate Affairs (MCA).
• Determine the optimal business structure for your venture.
• Secure adequate funding through personal savings, investor capital, or business loans
• Seek professional advice from legal experts, chartered accountants, and business mentors to ensure compliance and make informed decisions.

Step 1. Choose Your Business Structure

Selecting the right business structure is a critical decision when starting a company in India. The type of entity you choose will have significant implications for liability, taxation, compliance and overall operations. Here are the most common business structures in India:

1. Sole Proprietorship
   
   • Owned and operated by a single individual
   • Simple to set up and manage
   • No separate legal entity, unlimited personal liability
2. Partnership Firm
   
   • Formed by two or more individuals or entities
   • Governed by the Indian Partnership Act, 1932
   • Partners share profits, losses and management responsibilities
3. Limited Liability Partnership (LLP)
   
   • Combines the benefits of a partnership and a private limited company
   • Partners have limited liability, protecting personal assets
   • Requires a minimum of two partners and compliance with the LLP Act, 2008
4. One Person Company (OPC)
   
   • A private limited company with a single member
   • Suitable for solo entrepreneurs seeking limited liability
   • Easier compliance compared to a private limited company
5. Private Limited Company
   
   • Separate legal entity with limited liability for shareholders
   • Requires a minimum of two shareholders and two directors
   • Stricter compliance requirements under the Companies Act, 2013

When choosing your business structure, consider factors such as liability protection, taxation, compliance requirements, and scalability. For example, a sole proprietorship is the easiest to set up but offers no personal liability protection. On the other hand, a private limited company provides limited liability protection but involves more complex compliance requirements.

Step 2. Required Documents for Company Registration

Before initiating the company registration process, gather the necessary documents to ensure a smooth and efficient incorporation. The following documents are typically required:

1. Proof of identity and address for directors and shareholders (e.g., PAN card, Aadhaar card, passport)
2. Passport-sized photographs of directors and shareholders
3. Proof of registered office address (e.g., rental agreement, utility bills)
4. Digital Signature Certificate (DSC) for directors
5. Director Identification Number (DIN) for proposed directors
6. Memorandum of Association (MoA) and Articles of Association (AoA)
7. Consent letters from proposed directors
8. Affidavit for non-conviction of directors

Having these documents ready will streamline the process of incorporation of the company and minimise delays in the company formation process.

Step 3. Register Your Business

With the necessary documents in hand, you can now proceed with registering your business. The company registration process involves the following steps:

1. Obtain Digital Signature Certificate (DSC) for directors from a certified authority.
2. Apply for Director Identification Number (DIN) for proposed directors through Form DIR-3.
3. Reserve the company name through the RUN (Reserve Unique Name) web service of the MCA.
4. Draft the Memorandum of Association (MoA) and Articles of Association (AoA) defining the company's objectives and rules.
5. File incorporation documents, including Form SPICe (INC-32), MoA, AoA and other necessary documents, with the Registrar of Companies (ROC) along with the prescribed fees.
6. Obtain the Certificate of Incorporation from the ROC upon successful registration.

The entire process of incorporation of a company can be completed online through the MCA portal, making it convenient and efficient for entrepreneurs to start a startup in India.

Step 4. Acquire Required Licenses and Permits

Depending on the nature of your business and the industry you operate in, you may need to obtain specific licenses and permits to legally open a company in India. Some common types of business licenses and registrations include:

• Goods and Services Tax (GST) registration
• Shops and Establishment Act registration
• Professional Tax registration
• Import Export Code (IEC) for import/export businesses
• FSSAI license for food businesses
• Trade License from local municipal authorities
• Industry-specific licenses (e.g., FSSAI for food businesses, IEC for import/export)

Research the specific licenses applicable to your business and ensure timely compliance to avoid legal complications.

Step 5. Procedure for Company Registration in India

To summarise the company registration process, here's a step-by-step procedure for setting up a company in India:

1. Choose a suitable business structure (sole proprietorship, partnership, LLP, OPC, private limited company).
2. Obtain necessary documents for incorporation (identity proofs, registered office proof, DSC, DIN).
   
   • Obtain Class 2 Digital Signature Certificate (DSC) for the proposed directors
   • Apply for Director Identification Number (DIN) through Form DIR-3
3. Apply for name approval through the RUN web service.
   
   • Select and apply for a unique company name through the RUN (Reserve Unique Name) service on the MCA portal.
4. Incorporation Documents
   
   • Draft the Memorandum of Association (MoA) and Articles of Association (AoA)
   • Prepare the consent letters from the proposed directors
   • Obtain the registered office address proof
5. SPICe+ Form
   
   • Fill out the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form
   • Attach the necessary documents (MoA, AoA, director consents, address proof, etc.)
   • Pay the prescribed registration fees based on the authorised capital
6. Obtain the Certificate of Incorporation from the ROC.
   
   • Upon successful filing of the SPICe+ form, the Registrar of Companies (ROC) will issue the Certificate of Incorporation (COI)
   • The COI will mention the Corporate Identity Number (CIN) and the date of incorporation
7. Apply for necessary licenses and registrations (GST, Shops and Establishment, Professional Tax, industry-specific licenses).
8. Open a corporate bank account and secure funding.
9. Commence business operations.

By following this procedure diligently, you can successfully open a company and start a startup in India.

Step 6. Hiring Employees

As your business grows, you may need to hire staff to support your operations. When hiring employees in India, keep the following points in mind:

• Register for Employees' Provident Fund (EPF) and Employees' State Insurance (ESI) if applicable.
• Draft comprehensive employment contracts outlining roles, responsibilities, compensation and benefits.
• Comply with minimum wage laws and other labour regulations.
• Maintain proper records of employee information, attendance, and payroll.
• Ensure a safe and healthy work environment in compliance with occupational safety laws.

Building a strong and motivated team is crucial for the success of your venture as you start a startup in India.

Step 7. Ensure Compliance with Regulations

Compliance with various laws and regulations is an ongoing responsibility when starting a company in India. Some key areas of compliance include:

• Filing annual returns and financial statements with the ROC.
• Maintaining proper books of accounts and audit records.
• Complying with taxation laws, including income tax and GST.
• Adhering to labour laws and employee welfare regulations.
• Obtaining and renewing necessary licenses and permits.
• Ensuring data privacy and protection in accordance with relevant laws.

Regularly review and update your compliance practices to stay ahead of regulatory changes and avoid penalties.

Step 8. Promote Your Business

With your company successfully registered and operational, it's time to focus on promoting your business and attracting customers. Consider the following strategies to effectively market your venture:

• Develop a strong online presence through a professional website and social media channels.
• Leverage digital marketing techniques such as search engine optimisation (SEO), pay-per-click advertising (PPC), and content marketing to reach your target audience.
• Attend industry events, trade shows, and networking sessions to build relationships and showcase your offerings.
• Collaborate with influencers, bloggers, and media outlets to gain exposure and credibility.
• Offer exceptional customer service and seek feedback to continuously improve your products or services.

By consistently promoting your business and delivering value to your customers, you'll establish a strong brand presence and drive growth as you open a company in India.

Conclusion

By understanding the process of incorporation of company and following the guidelines outlined in this comprehensive guide, you can confidently navigate the legal and procedural requirements to open a company and start a startup in India. Remember to seek professional guidance when needed and stay compliant with regulations to ensure the long-term success of your venture.

Frequently Asked Questions