Mandatory Compliances for a Private Limited Company in India

Although Private Limited Company is the most popular form of starting a business, there are various compliances which are required to be followed once your business is incorporated.

Managing the day to day operations of your business along with complying the corporate laws can be little taxing for any entrepreneur. Hence, it is essential to take help of a professional and also understand such legal requirements to ensure timely fulfilment of compliances, without any levy of interest or penalty.

We have elaborated below some of the common compliances which a private limited company has to mandatorily ensure:

Compliance Requirement Description and Timeline
Appointment of Auditor Auditor will be appointed for the 5 (Five) years and form ADT-1 will be filed for 5-year appointment. The first Auditor will be appointed within one month from the date of incorporation of the Company.
Statutory Audit of Accounts Every Company shall prepare its Accounts and get the same audited by a Chartered Accountant at the end of the Financial Year compulsorily. The Auditor shall provide an Audit Report and the Audited Financial Statements for the purpose of filing it with the Registrar.
Filing of Annual Return (Form MGT-7) Every Private Limited Company is required to file its Annual Return within 60 days of holding of Annual General Meeting. Annual Return will be for the period 1st April to 31st March.
Filing of Financial Statements (Form AOC-4) Every Private Limited Company is required to file its Balance Sheet along with statement of Profit and Loss Account and Director Report in this form within 30 days of holding of Annual General Meeting.
Holding Annual General Meeting It is mandatory for every Private Limited Company Company to hold an AGM in every Calendar Year. Companies are required to hold their AGM within a period of six months, from the date of closing of the Financial Year.
Preparation of Directors’ Report Directors’ Report will be prepared with a mention of all the information required under Section 134.

Statutory Audit

The purpose of a statutory audit is the same as the purpose of any other audit – to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions.

  • Appointment of the Statutory Auditors of the Company.
  • Finalise Annual Accounts with the Auditors of the Company

Annual RoC Filings

  • Private Limited Companies are required to file its Annual Accounts and Returns disclosing details of its shareholders, directors etc to the Registrar of Companies. Such compliances are required to be made once in a year.
  • As a part of Annual Filing, the following forms are to be filed with the ROC:
    • Form MGT-7 (Annual Return) : Every Private Limited Company is required to file its Annual Return within 60 days of holding of Annual General Meeting. Annual Return will be for the period 1st April to 31st March.
    • Form AOC-4 (Financial Statements) : Every Private Limited Company is required to file its Balance Sheet along with statement of Profit and Loss Account and Director Report in this form within 30 days of holding of Annual General Meeting.

Annual General Meeting

  • Every Private Limited Company is required to hold a meeting of its shareholders once in every year within a period of six months from the date of closing of the financial year.
  • The primary agenda of an AGM includes approval of financial statements, declaration of dividends, appointment or re-appointment of auditors, appointment and remuneration of directors etc.
  • The Annual General Meeting shall be held during business hours on a day which is not a public holiday and shall take place at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated.

Board Meetings

  • The First meeting of the Board of Directors of a Private Limited Company shall be conducted within 30 days from the date of Incorporation of company.
  • Further, minimum Four Board Meetings shall be held in a calendar year (one meeting in every 3 months). In case of a Private Limited Company which is classified as a “Small Company”, atleast two Board Meetings shall be held in a calendar year (one meeting in every half year)
  • Most of the startups fall within the category of “Small Company”.
  • Minimum 2 directors or 1/3rd of the total number of directors, whichever is greater, are required to be present in meeting of the Board of Directors. The discussions of the meeting need to be drafted and recorded in the form of “Minutes of the Meeting” and maintained at the Registered Office of the Company.
  • Directors should be intimated about the date and purpose of the meeting by giving a notice atleast 7 days in advance from the date of the meeting.

Directors’ Report

Every director has to disclose about his directorship in other companies every year. This shall be done by giving a declaration in writing to the company every year in a specified Directors’ Report format.

Income Tax Compliances

  • Calculation and Quarterly Payment of Advance Tax
  • Filing of Income Tax Returns (Tax will be payable at a flat rate of 30% plus Education Cess)
  • Tax Audit – Mandatory in case sales, turnover or gross receipts of a business exceed Rs. One Crore in the previous year relevant to the assessment year.
  • Filing of Tax Audit Report

Maintenance of Statutory Registers and Records

A Private Limited Company has to maintain various statutory registers and records as required by the Company law such as Register of shares, Register of Members, Register of Directors etc. Besides, Incorporation documents of the company, Resolutions of the meetings of the Board of Directors, Minutes of the Board Meetings and Annual General Meeting etc are also required to be preserved by the Company.

Such records are to be kept at the registered office of the company and shall be open for inspection to its members during business hours. Also, the books of account of every company relating to a period of atleast eight financial years should be preserved and kept in good order.

Other Event Based Filings

Besides Annual Filings, there are various other compliances which need to be done as and when any event takes place in the Company. Instances of such events are:

  • Change in Authorised or Paid up Capital of the Company.
  • Allotment of new shares or transfer of shares
  • Giving Loans to other Companies.
  • Giving Loans to Directors
  • Appointment of Managing or whole time Director and payment of remuneration.
  • Loans to Directors
  • Opening or closing of bank accounts or change in signatories of Bank account.
  • Appointment or change of the Statutory Auditors of the Company.

Different forms are required to be filed with the Registrar for all such events within specified time periods. In case, the same is not done, additional fees or penalty might be levied. Hence, it is necessary that such compliances are met on time.

Non-Compliance

If a Company fails to comply with the rules and regulations of the Companies Act, then the Company and every officer who is in default shall be punishable with fine for the period for which default continues.

If there is delay in any filing, then additional fees is required to be paid, which keeps on increasing as the time period of non-compliance increases. It should be noted that some of the Annual Filing Forms can also be revised but the fees for subsequent revised filing shall be charged, assuming it as a new filing.

VenturEasy will be pleased to help you with mandatory compliances and annual filing for your Private Limited Company. Get in touch with us at [email protected] or sign up at ventureasy.com/Company-Annual-Filing

Incorporation of Foreign Subsidiary in India

India is among the fastest growing economies of the world with plenty of business opportunities which make it a preferred destination for investment form NRIs, Foreign Nationals and Foreign Companies. There are many ways by which foreign investment can be done in India. One of the most successful and sought after ways is Incorporation of Foreign Subsidiary in India.

Meaning – Foreign Subsidiary company:

A subsidiary is a company with voting stock (that is more than 50%) controlled by another company, usually referred to as the parent company or the holding company. In cases where a parent company owns a foreign subsidiary, the subsidiary must follow the laws of the country where it is incorporated and operates. Hence, if a foreign subsidiary is incorporated in India, then it has to follow the applicable laws in India.

How to incorporate a Foreign Subsidiary in India?

Selecting the type of Company-

According to FEMA guidelines, Foreign Direct Investment (FDI) is not allowed in case of Proprietorship, Partnership Firm and One Person Company. Though investment in LLP’s is allowed, but it requires prior approval of the RBI.

Hence, the easiest and fastest way set up a business in India by NRI’s and Foreign Nationals/entities is through incorporation of a Private Limited Company.

Minimum requirements-

  • Capital: There is no minimum capital required to form a Private Limited Company in India.
  • Directors: Minimum two directors are required to incorporate a Private Company in India. Both should be individuals and at-least one of whom should be a resident of India. (A resident of India is a person who has stayed in India for at-least 182 days in the previous year).
  • Shareholders: Companies Act, 2013 requires that a Private Limited Company have a minimum of two shareholders. There is no condition for residential status of shareholders.  Shareholders can be either individuals or entities or a combination of both.

Procedure of Formation of Subsidiary in India:

1. Obtaining DSC and DIN-

The first step towards company incorporation is applying for the DSC (Digital Signature) and DIN (Director’s Identification Number) of the Directors. The primary documents required for obtaining the DIN and DSC are as under:

  • Proof of Identity (PAN for Indian Nationals and Copy of Passport for Foreign Nationals)
  • Copy of Driving License, Bank Statement or any utility bill (not older than two months)
  • Residence permits for foreigners, if residing in India.
  • Passport size photograph

All the above documents for foreign citizens and non-residents should be notarized and consuralized or apostilled by the competent authority, as the case may be.

2. Name Approval:

Selecting a unique and acceptable name for the proposed Company is one of the important steps in the whole Incorporation process. The name should be in consonance with the Object of the Company and should not be identical to existing entities or Undesirable by Law. 

3. Incorporation Application:

This is the final step in the Company Incorporation process. It requires filing of the Memorandum and Articles of Association of the Company digitally along with various other documents duly executed by the proposed directors and shareholders.

List of Incorporation documents to be executed:

  • Subscriber sheet of Articles of Association
  • Subscriber sheet of Memorandum of Association
  • Declaration by Director in form DIR 2
  • Declaration of Director in Form INC 9

Generally, the incorporation documents are required to be self-attested by Indian Nationals. However, in case of Foreign Nationals, the process is as under:

In the documents are signed outside India, then the  same have to be notarized by a Public notary of the residence country and consularized or apostilled by the competent authority, as the case may be.

If the documents are signed in India, then copy of Visa and stamped passport, proving his/her presence in India at the time of signing is required.

If the subscriber is a foreign entity, then the Incorporation documents should be signed by the representative of the foreign entity. An Authorization Letter duly stating the name of the Authorized Person and the number of shares subscribed should be notarized, consularized or apostilled, as the case may be in the home country of the subscriber company.

Once the Incorporation application is approved, the Registrar would issue a Certificate with a Corporate Identification Number (CIN). The PAN and TAN of the Company would also be allotted simultaneously.

Treatment of Share Capital invested by the Holding Company and required compliances:

Foreign Investments in Indian Companies are regulated by FEMA Guidelines and the Reserve Bank of India. Whenever the holding company invests funds in the share capital of the Indian subsidiary, it has to follow RBI guidelines along with compliances under Companies Act 2013.

RBI Compliances:

A two-stage reporting procedure is to be followed when a company is raising funds from a foreign investor:

  • On receipt of funds: The Company has to provide details in an “Advance Reporting Form” to the RBI within 30 days of receiving funds from foreign investor(s).
  • The company has to issue shares within 180 days from the date of receiving funds.
  • On allotment of shares: The company has to report in specified form (FC-GPR) to the RBI, within 30 days from the date of issue of shares along with:

– A Certificate from the Company Secretary certifying that the company has complied with the procedure for issue of shares as laid down under the Foreign Direct Investment (FDI) Scheme, and,

– A certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the foreign investors.

Apart from the above, Annual return on Foreign Liabilities and Assets is required to be submitted reporting all the investments received during the year.

VenturEasy can help you with the Incorporation of Subsidiary in India. Get in touch with us at [email protected]

Difference Between Statutory Audit and Tax Audit

Audit means an examination of books of accounts, statutory records, documents and vouchers conducted with the purpose of establishing the fact that the accounting records presents a true and fair view of the Organization.  It is conducted by a party which is independent of that organization.

There are various kinds of audit being conducted under different laws such as statutory audit, internal audit, cost audit, stock audit etc.

Two of the important kinds of Audit which often create confusion among Business owners are Statutory Audit and Tax Audit.

A statutory audit is an audit, which is made mandatory under The Companies Act 2013. The purpose is to check the truthfulness and fairness of accounting records.

On the Contrary, Tax Audit is defined as an audit of the accounts of the taxpayer for the requirement of Section 44AB of The Income Tax Act, 1961 for assessing the correct income of the Assesee.

Following is a brief comparison between the two kinds of Audit:

Point of difference Statutory audit Tax Audit
Governing Act Section 143 of the Companies Act 2013 Section 44AB The Income Tax Act 1961
Applicability Statutory Audit is applicable to all the Companies registered under Companies Act 2013 and erstwhile Companies Acts. Tax Audit is applicable on all Companies, LLP’s, Partnership Firms as well as Individuals or Professionals whose turnover or Gross Receipts crosses the threshold limit.
Threshold Limit There is no threshold limit of Turnover or Gross Receipt for Statutory Audit. It is compulsory for every company even if the Company has no turnover or had not commenced any business at all.

 

Tax Audit is mandatory for Business Organizations  whose Total sales, turnover or Gross receipt for the year crosses Rs. 1 Crore

Tax Audit is mandatory for Professionals whose Gross Receipts for the year crosses Rs. 50 lakhs

Purpose The purpose of the statutory audit is to ensure reliability, transparency, truthfulness and fairness of the financial statements of the Company. The purpose of Tax audit Is to ensure proper maintenance of books of accounts to truly reflect the taxable income of the assesse and preparation and submission of Tax Audit Report and Income Tax Return.
Due Date Statutory Audit should be completed within 6 months from the close of the Financial Year but before conducting the Annual General Meeting to present the Audited Accounts to the Shareholders. The due date for completing Tax Audit and filing of Tax Audit report with the Income Tax Department for a Financial Year is 30th September of the next year (Assessment Year).
Consequence of Non-compliance Penalty for non-compliance:

 

For The company:

Ranges from Rs. 25,000- Rs. 5,00,000/-

 

For every officer in default:

Imprisonment of upto 1 year

OR

Fine of Rs.10,000 to Rs. 1,00,000

 

Failure of conducting of Audit of Accounts by a Tax payer will attract a penalty of the lower of the two amounts:

·       0.5% of total sales, turnover or gross receipt

·       Rs. 1,50,000

 

 

How to convert Proprietorship to a Private Limited Company

Many small business owners start out as sole proprietors of their firms. Sole proprietorship is the most common and simplest form of business structure. This form of business has its own advantages: easy formation, limited paperwork, small capital requirement, and minimum compliance requirements.

As the business starts spreading its roots, the next logical move would be to expand operations to accommodate large business needs. The experience acquired as a sole proprietor helps the entrepreneur to build a stronger foundation for his business when he chooses to transform it into a Private Limited Company.

 

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convert Proprietorship to a Private Limited Company

Choosing to Register a Private Limited Company

As the revenues increase, many sole proprietors perceive the need to differentiate their personal accounts and tax filings from that of the business. There are several reasons why converting your sole proprietorship into a private limited company is a good idea.

The conversion allows you to enjoy the double benefits of keeping your goodwill and brand value intact while enjoying a legal existence. You are not only exempted from paying any stamp duty, but also from any capital gains tax on the property thus transferred.

Other key benefits include:

  • Business expansion
  • Better financing options
  • Greater public visibility and acceptance
  • Asset protection
  • Managing risks
  • Corporate tax benefits

The conversion process

The first step to converting your sole proprietorship firm into a private limited company is to incorporate a new private limited company.

At the time of the new Private Limited Company, it is appropriate to mention in the Memorandum of Association (MOA) that the company is a “takeover of a sole proprietorship concern.”

After the Company Formation, an agreement needs to be executed between the Company and the Proprietor for the takeover of the assets and liabilities of the proprietorship by the Company. The details of assets, liabilities and the consideration in exchange of such assets need to be specified in the agreement.

The agreement should be executed in a Stamp Paper of requisite value to make it a valid legal document.

As per the Income Tax Act, 1961, capital gains on such transfers are exempted if:

  • All the assets and liabilities of the sole proprietorship, immediately before the conversion, are transferred to the company
  • The proprietor’s shareholding is more than 50% of the total voting rights of the new company for a continuous period of not less than 5 years from the date of succession
  • The proprietor receives shares in the Company only in exchange of the net assets of the business.
  • In case any of these conditions are not complied with, the profits or transfer of assets shall attract capital gains tax.

Once the new private limited company comes into existence, the sole proprietorship can be duly terminated. The bank accounts in the name of the proprietary firm need to be formally closed and a new corporate account is to be opened for the Company.

Any contracts/ leases/ agreements signed by the proprietor need to be re-signed under the name of the newly incorporated company.

All tax and other registrations in the name of the Proprietorship need to be surrendered and new registrations should be obtained in the name of the Private Limited Company.

How to close a private limited company

We come across various instances when small businesses are not able to sustain in this highly competitive era and prefer to get closed down, rather than running on losses. Many a times, startups prefer closing down a Company when the founder’s drop their business idea in view of an alternate lucrative opportunity.

The Companies Act 2013 provides various modes of closing of Companies. One of such ways is declaring the Company as “Defunct” and getting its name struck out from the records of Registrar. This is a hassle free and easy exit mode provided to Companies, which could not commence their business or are not in operations.

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How to Close a Private Limited Company

Eligibility to close down a Company:

  • A company which has failed to commence business within one year of Incorporation.
  • A company which is not carrying on any business or operation for a period of two immediately preceding financial years, and has not made any application for obtaining the status of a dormant company.

Conditions to be fulfilled before making the application:

  • The Company should have Nil assets and liabilities at the time of making the closure application
  • Consent of 75% of the members to be obtained by way of Special Resolution for this purpose.

Procedure:

  • An application should be made to Registrar for removal of name in form STK 2 along with fee of Rupees 5000 and the supporting documents.
  • On receipt of the application, the Registrar issues a notice to be published in the official gazette. The same notice should be placed in the website of the company, if any.
  • Form STK 2 shall be digitally signed by director authorized by the board or a physical copy of the form may be signed and provided as an attachment with the form.
  • The form should be duly certified by a CS, CA or CMA in Practice.

Documents Required:

  • Indemnity bond duly notarized by every director in Form STK 3
  • Statement of accounts containing assets and liabilities of the company made up to a day, not exceeding thirty days before the date of application and certified by a Chartered Accountant;
  • An affidavit in Form STK 4 provided by every director of the company;
  • Copy of Board Resolution authorizing the filing of the Application.
  • A copy of the special resolution accordingly certified by each of the directors of the company or consent of seventy five per cent of the members of the company as on the date of application
  • A statement regarding pending litigations involving the company, (if any)
  • Copy of order of the concerned regulatory authority, if any, approving the filing of the application
  • Copy of relevant order for delisting, if any, from the concerned Stock Exchange (for listed entities)

Note: The indemnity bond and declaration as mentioned above shall be duly notarized/consularised/apostilled (as the case may be) if the director is a foreign National or a non-Resident.

Fraudulent application for removal of name: If the application in this section is made with the intention to fraud creditors or any other person, then all responsible persons shall be held liable for the loss, and be punishable for fraud and may also be prosecuted.

Appeal to Tribunal: If any person is aggrieved by an order made under this section, then he has an option of making an appeal to the tribunal. But the appeal should be made within three years from the date of order.