Limited liability and Proprietorship are the 2 most popular forms of business organizations in India. The reason why these 2 forms of organizations are so popular is because they are relatively easy to set up and the no. of statutory compliance required to be done by these forms of organizations is relatively less than the statutory compliance applicable to LLP's and Companies.
In one of our previous articles, we explained on how easy it is to start a Proprietorship Firm (Recommended Read: How to start a Proprietorship Firm) and in this article, we would be focusing on How to start a Limited liability Firm in India.
Choosing the Limited liability Name
The partners are free to choose any name as they desire for their limited liability firm subject to the following rules:-
- The names must not be two identical or similar to the name of another existing firm doing similar business to lead to confusion. The reason for this rule being that the reputation or goodwill of a firm may be injured, if a new firm could adopt an allied name.
- The name must not contain words like Crown, Emperor, Empress, Empire or words expressing or implying the sanction, approval or patronage of Govt except when the State Govt signifies its consent in writing to the use of such words as part of the firm name
How to Create Limited liability Deed ?
The document in which the respective rights and obligations of the members of a limited liability is written is called the Limited liability Deed.
A limited liability deed agreement may be written or oral. However, practically oral agreement does not have any value for tax purposes and therefore the limited liability agreement should be written. The following are the essential characteristics of a limited liability deed:-
Name and Address of the firm as well as all the partners
Nature of business to be carried on
Date of Commencement of business
Duration of Limited liability (whether for a fixed period/project)
Capital contribution by each partner
Profit sharing ratio among the partners
The above are the minimum essentials which are required in all limited liability deeds. The partners may also mention any additional clauses. Some examples of additional clauses which may be mentioned in the limited liability deed are mentioned below:-
Interest on Partner's Capital, Partners' Loan, and Interest, if any, to be charged on drawings.
Salaries, Commissions etc, if any, payable to partners
Method of preparing accounts and arrangement for audit
Division of task and responsibility i.e. the duties, powers and obligations of all the partners.
Rules to be followed in case of retirement, death and admission of a partner
The Limited liability Deed created by the partners should be on a stamp paper in accordance with the Indian Stamp Act and each partner should have a copy of the limited liability deed. A Copy of the Limited liability Deed should also be filed with the Registrar of Firms in case the firm is being registered.
How to Register Limited liability deed in India
Limited liabilitys in India are governed by the Indian Limited liability Act, 1932. As per the Limited liability Act, Registration of Limited liability Firms is optional and is entirely at the discretion of the partners. The Partners may or may not register their Limited liability Agreement.
However, in case the limited liability deed is not registered, they may not be able to enjoy the benefits which a registered limited liability firm enjoys.
Registration of Limited liability Firm may be done before starting the business or anytime during the continuance of limited liability. However, where the firm intends to file a case in the court to enforce rights arising from the contract, the registration should be done before filing the case.
The procedure for Registration of Limited liability Firms in India is fairly simple. An application and the prescribed fees are required to be submitted to the Registrar of Firms of the State in which the firm is situated. The following documents are also required to be submitted along with the application:-
- Application for Registration of Limited liability in Form No. 1
- Duly filled specimen of Affidavit
- Certified True Copy of the Limited liability Deed
- Ownership proof of the principal place of business or rental/lease agreement thereof.
The application or statement must be signed by all the partners, or by their agents especially authorized in this behalf. When the registrar is satisfied with the points stated in the limited liability deed, he shall record an entry of the statement in a register called the Register of Firms and issue a Certificate of Registration
The Register of Firms maintained at the office of the Registrar contains complete and up-to-date information about each registered firm. This Register of Firms is open to inspection by any person on payment of the prescribed fees
Any person interested in viewing the details of any firm can request the Registrar of Firms for the same and on payment of the prescribed fees, a copy of all details of with Firm registered with the Registrar would be given to the applicant
It should however be noted that registration with the Registrar of Firms is different from Registration with the Income Tax Dept. It is mandatory for all firms to apply for Registration with the Income Tax Department and have a PAN Card.
After obtaining a PAN Card, the Limited liability Firm would be required to open a Current Account in the name of the Limited liability Firm and operate all its operations through this Bank Account.
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