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Of all the options of business entities available under the Companies Act, 2013, the option of Private Limited Company has become the most opted one by the entrepreneurs. Primarily, this has happened because of the freedom that has been given to the Private Limited Companies under the Companies Act, 2013. Under the old Companies Act, 1956, the Private Limited Companies had to abide by numerous compliances making it difficult for entrepreneurs to do business.
The provisions of the Companies Act, 2013, are way more relaxed pertaining to the incorporation of a company, compliances to be made during the course of the business, disclosures, statutory meeting, etc. Therefore, more and more start-ups are now taking the route of becoming Private Limited Companies as they have multiple relaxations.
What is a Start-Up?
The Department of Industrial Policy and Promotion has issued a notification dated May 23, 2017, under which an entity shall be considered as a start-up if:
- Private Company has received the incorporation under the Companies Act, 2013, Partnership firm under the Indian Partnership Act, 1932; or an LLP under the Limited Liability Partnership Act, 2008.
- In case the company’s incorporation is for less than 7 years or for a start-up in the biotechnology sector, the date of incorporation does not exceed 10 years.
- Under the Companies Act, its annual turnover in the preceding financial years has not exceeded INR 25 crores.
- The business of the start-up is directed towards enhancement, advancement, and innovation of products/services/processes or if the start-up is a scalable business model that has a very high possibility of wealth and employment generation.
Relaxations that Start-Ups Get Through Private Limited Company Registration
The start-ups have the following relaxations if they register as Private Limited Company:
Introduction of Concept of Zero Fee
Recently, the Ministry of Corporate Affairs (MCA) has brought major changes in the incorporation of private limited companies. With the introduction of Companies (Registration Office and Fees) Amendment Rules, 2018, MCA has removed the fee charges at various stages of incorporation. As a result, the whole process of incorporation has become faster and smoother, even though stamp duty is still levied. The concept of “zero fees” has been implemented for all the companies with authorized capital up to INR 10 Lakhs. Thus, the start-ups have to pay no incorporation fee if the paid-up share capital happens to be below the statutory limit of INR 10 Lakhs.
Relaxed Procedural Norms
The procedural aspects of the working of a Private Limited Company have received the relaxation to a large extent under the new Companies Act 2013. Further, the procedural accepts relating to acceptance of deposits from the members have been relaxed for a time period of 5 years post-incorporation. The requirement of conducting a board meeting for a new Private Limited Company is once in 6 months. However, the gap between two meetings should not be less than 90 days. The annual returns of a Private Limited Company are required to be signed by a Company Secretary. However, in the case where there is no Company Secretary, the signatures of the Director will suffice.
There are multiple tax benefits offered to newly incorporated private companies:
Tax holiday of 3 years in a block of 7 years
The start-ups that have the incorporation post-April 1 2016 can get 100% tax rebate on profits for the time period of 3 years out of a total 7 years. In order to be eligible for this rebate, it is necessary that the annual turnover of the start-up has not exceeded INR 25 crores. This provision was included for start-ups so that in the initial years of their operation, they can get up fulfil their requirements of working capital.
Long term capital gains exempt from tax
Section 54EE of the Income Tax Act, 1961, exempts the start-ups from tax on long-term capital gains made by them if:
- a part of the long-term capital gain is invested in a fund that has been notified by the Central Government; and
- the investment in the fund is made within a period of six months of transferring the asset from which the capital gain is made.
The investment in the long-term asset can be made up to the maximum amount of INR 50 Lakhs. The amount shall remain invested in the fund for a minimum of 3 years. If the amount invested is withdrawn before the time limit of 3 years, the exemption shall cease to exist and it will be revoked in the year in which the investment is withdrawn.
For changes in Shareholding Pattern – Set Off of carrying forward losses and capital gains is permitted
In case any losses are incurred by the start-up, the same shall be allowed to be set off provided:
- All the shareholders who carried voting power on the last day of the year in which loss was incurred, carry the same voting rights on the last day of the year in which the loss has to be carried forward
Relaxation has also been given to startups under Section 79 of the Income Tax Act, which imposed a restriction on holding of 51% of voting rights to remain unchanged. The same can now be changed by the start-ups eligible for claiming the relaxation.
Investments made over the market value exempted from tax
The eligible start-ups have been granted exemption on the tax levied on investments that are above the fair market value. These investments include-
- investments that are made by residential angel investors;
- funds that are not registered as venture capital funds;
- above fair market value investments made by the incubators.
The norms of a private limited company have also been relaxed pertaining to share capital. A private limited company can issue any kind of shares, provided the same is permitted by the articles of association of the company. This means that a private company can issue equity shares with or without differential voting rights, dividend rights or preference shares, as per its requirement.
It is apparent that the government has a relaxed business environment for private limited companies. The current ambience of businesses is encouraging and supportive of private limited companies. Many stringent norms have become lenient and start-ups have got several tax benefits. Furthermore, the incorporation procedure has become easier and the operations/working of private limited companies have also become easier. This is the reason why more and more businessmen are now looking forward to commencing their business in the form of private limited companies.
For more information on relaxations provided to newly incorporated private companies, contact us.