This blog talks about the 10 Common Mistakes to Avoid While Registering Your Private Limited Company Online. Knowing these mistakes and how to avoid them can make it easier for your company to get registered smoothly.
In recent years, a lot of new businesses have started in India, especially because many young people are excited about starting their own companies. The government data says that about 15,000 new businesses begin every month, but only 20% of them survive, and very, very few become really successful. This could be because running a business is not easy, and there are many challenges. But, apart from the usual problems, some business owners make mistakes when they’re registering their companies, and these mistakes can cause big issues. So, it’s important to know about these mistakes and how to avoid them to make sure your company gets registered smoothly.
10 Things To Remember During Company Registration
|Pick the right company name.
|Choose the correct type of company.
|File the right documents and details.
|Appoint directors based on your company’s needs.
|Register your Rental Agreement.
|Register the Shareholder’s agreement.
|Use the correct office address.
|Follow local business and registration laws.
|Describe your company accurately.
|Consider getting professional help.
What are the 10 common mistakes companies often make during registration process?
Registering a company is a complex and multifaceted process, which involves numerous legal technicalities at almost every step. This complexity can pose a significant challenge for owners aiming to navigate the procedure independently. Even if they make an effort, their lack of experience, knowledge, and expertise in this domain often leads to errors. Hence, it is crucial for company owners to acquire a comprehensive understanding of the entire registration process to initiate their business operations smoothly. Below are some common mistakes frequently committed by owners during the registration process.
Incorrect Company Names
When establishing your startup, a crucial initial step is selecting a distinctive name for Company Registration. The Companies Act, 2013, Trademark Act, 1999, and Names and Emblems Act, 1950 are key legal frameworks guiding this process. Additionally, the Company Incorporation Rules, 2014 offer specific guidelines.
Section 4 of the Companies Act, 2013 outlines fundamental principles, emphasizing that a company’s name should not mirror an existing one, be similar, or deceptively identical to another. Moreover, it must avoid constituting an offense or being deemed undesirable by the Central Government. Rule 8 of the Companies Incorporation Rules, 2014 lists unacceptable names, including terms requiring prior approval from the Central Government.
Regarding the Trademark Act, it’s crucial to ensure your company’s name, brand, logo, or any intellectual property doesn’t overlap with existing trademarks. Trademark registration safeguards intellectual property from misuse, necessitating a thorough public search in the government’s trademark database.
Under Section 3 of the Names and Emblems Act, 1950, using names or words implying government patronage is restricted. Names associated with national and international organizations, such as the UN, WHO, or the Government of India, are ineligible for use in a company’s name.
Incorrect Company Type
Companies can adopt three legal statuses: public limited, private limited, or OPC (One Person Company). Typically, startups with substantial funding for extensive business operations and ambitions for growth register as either public or private limited companies. Public limited companies require a minimum of 7 shareholders and 3 directors for registration, making them larger entities compared to private limited companies, which only need 2 shareholders and 2 directors to commence operations. The absence of a specific capital requirement facilitates small companies starting as public or private limited and then expanding.
Another key distinction is that public limited companies can sell shares to the general public, distributing ownership widely. In contrast, private limited companies issue limited shares only to investors and promoters.
One Person Companies (OPCs) have a single owner who also serves as the director and manager, ensuring limited liability while operating as a distinct legal entity. However, if an OPC’s share capital exceeds 2 Crores (previously Rs. 50 Lakhs before April 1, 2022), it must be mandatorily converted into a Private Limited Company. Therefore, the OPC legal status suits small business owners aiming to limit liabilities without giving up control.
Incorrect company description
The application form for company incorporation necessitates a comprehensive depiction of the company. This should encompass the business name, the nature of its operations, present location, distinctive brand identity, target customer demographic, and, notably, the business’s core objectives. This detailed company description, finalized during the incorporation process, serves as the cornerstone for crucial documents such as the Memorandum of Association (MoA), Articles of Association (AoA), business plan, and policies. Importantly, this description lays the groundwork for strategic planning, guiding the future growth and expansion endeavors post-incorporation.
Incorrect Supporting Documents
After completing the company details in Section B of the online SPICe+ application form, it’s essential to attach supporting documents, all signed or attested using the Digital Signature Certificate (DSC) of the applicant. The required documents for submission to the Registrar of Companies (ROC) include the PAN, proof of identity, and proof of the registered address of the director. Additionally, proof of the registered office address is crucial. If the office is rented, you’ll need to provide the rent agreement and a No Objection Certificate from the owner. Conversely, if the company owner owns the office space, property documents and a No Objection Certificate from the company owner are necessary. The electronic Memorandum of Association (e-MoA) and electronic Articles of Association (e-AoA), submitted through the INC 33 and INC 34 forms, are also vital documents for inclusion in the application.
Unnecessary appointment of Directors
Not all shareholders in a company need to serve as its directors. An effective board of directors (BoD) should consist of a diverse team, including shareholders, market analysts, legal professionals, and industry experts. The BoD plays a crucial role in making vital decisions for the company, requiring a combination of knowledge, experience, and expertise that may not be found in every shareholder.
The responsibilities of a company director are significant, as they oversee the entire administrative system. Even minor errors on their part can result in chaos and, in extreme cases, lead the company to ruin. Consequently, it is advisable for business owners to separate ownership from the executive functions of the company. Careful consideration and wisdom should be employed in appointing both the Board of Directors and the company director to ensure the company’s success.
Not drafting and registering the written rental agreement
Business proprietors often overlook the necessity of formalizing a written rental agreement with their landlords, opting instead for verbal agreements on tenancy terms. This can lead to complications during disputes, as only a documented and officially registered agreement holds legal weight. To achieve this, the agreement should be prepared on a stamp paper and authenticated by a notary public. The registration process involves submitting an application at the sub-registrar’s office of the State Government. Key details to include in the agreement are the company’s name and address, specified rent amount and payment frequency (monthly or annually), lease duration, potential renewal options, notice period, and outlined facilities.
The absence of founders/Shareholder’s agreement
A shareholder’s agreement stands as a crucially important document that should be carefully crafted, mutually consented to, and signed by all stakeholders within a company. This document encompasses vital information such as the names and addresses of shareholders, specifics about share issuance, share allotment, share capital, the duration of share lock-in, terms related to investment, regulations governing the transfer of shares, procedures for declaring and distributing dividends, protocols for inheritance of ownership, and details about nominated individuals. In the absence of such a formally documented agreement, resolving disputes among shareholders can pose formidable challenges. Therefore, it is strongly recommended that entrepreneurs, especially those establishing startups, prioritize the creation of a comprehensive shareholder’s agreement during the company’s incorporation process.
No thorough information on the local laws.
When a company is set up, the Union Ministry of Corporate Affairs handles its official registration. However, after registration, each state in India may have its own specific rules that companies must follow. Not complying with these rules can lead to significant fines.
One example of a state-specific rule is the requirement for Professional Tax Registration. This needs to be done within 30 days of incorporating the company and is enforced by certain state governments. The tax applies to the professions of the company’s directors, owners, and employees, and is subtracted from their incomes or salaries. This rule is only applicable in certain states, including Karnataka, Punjab, Uttar Pradesh, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, Jharkhand, and Sikkim.
Incorrect Office Address
People often find it confusing when they have to fill in the address section of an application form. The form requires two types of addresses: one is the personal address of the company director who will sign the application, and the other is the address of the main office or headquarters where most business activities will take place. It’s important to provide proof of residence for these addresses, and the proof should not be more than two months old. Only electricity, water, and telephone bills are accepted as valid proof of address for the application.
Not seeking professional help
Many startup owners either don’t know about or ignore the rules they need to follow before starting their businesses. They might skip this because hiring professionals to help with these rules can be expensive. What they don’t realize is that the fines for not following these rules are much more expensive. If legal action is taken against your business, it could even be forced to shut down. So, to avoid these serious problems, it’s recommended to hire professionals who can help you with all the necessary rules. You can also check out our services at companysuggestion; we’re experts in helping businesses get registered and follow all the rules they need to.
As a small business startup, non-compliance with the above- mentioned legal mandates may result in hefty penalties imposed by the government. Incurring significant financial penalties poses a serious threat to the potential growth of your business. Therefore, it is strongly advisable to ensure compliance with all legal requirements within the prescribed time limit so that you can avoid facing issues in the future. You must seek professional guidance from legal experts, wherever necessary.