All posts by Kirti Arora

Re-introduction of filing of Declaration before Commencement of Business w.e.f. 2nd November, 2018

There are certain rules and regulations to be followed while establishing any legal venture, it gives an entity a legal identity.  Establishing a business in any country requires diligent acknowledgment and adherence to the prevailing laws. In India, the Ministry of Corporate Affairs (‘the Ministry’) is the primary regulator of the corporate sector and these regulations are continuously modified for better control and governance.

The Ministry vide an ordinance dated 21st February, 2019 (The Companies (Second Amendment) Ordinance, 2019), reintroduced the concept of Commencement of Business. Such a provision originally existed under Section 11 of the Companies Act, 2013, which was later on omitted vide the Companies (Amendment) Act, 2015 to cater ease of doing business for newly incorporated entities.

 

Tracking The Change:

Requirement under the old Act: The provision of obtaining a certificate for commencement of business was applicable only on public Companies (Section 149 of the Companies Act, 1956). Public Companies could commence their business only after obtaining a Certificate of commencement of business from their respective Registrar.

The Companies Act, 2013: On emergence of the Companies Act, 2013 (effective from 1st April, 2014), Section 11 of the Act mandated every newly incorporated company, whether private or public, to file a ‘Declaration’ with the relevant Registrar before it commenced any business. However, this requirement was done away with on 26th May, 2015 when the Ministry brought in the necessary amendments (Companies (Amendment) Act, 2015) aiming to promote ease of doing business. As a result, the provision of filing a declaration before commencement of a business was eliminated.

The Companies (Amendment) Ordinance, 2018: In the current scenario, the Ministry has re-introduced a section for filing of a declaration before commencement of business pursuant to Companies (Amendment) Ordinance, 2018.
 

Citing The Change:

  • As per Section 10A, every Company, incorporated after the date of the ordinance i.e. 2nd November, 2018, is obliged to file a declaration in E-Form 20A with the Registrar of Companies within a period of 180 days from the date of incorporation declaring that the Company has received the entire subscription money from its subscribers to the Memorandum and has filed a Form INC-22 for verification of its registered office.
  • This provision is applicable to all newly incorporated Companies (incorporated after 2nd November, 2018) having a share capital.
  • It is pertinent to note that a Company cannot commence its business or exercise any borrowing power unless a declaration has been filed.
  • After filing a declaration, ROC shall take note of the same although no certificate shall be issued for the same.
  • Companies are mandated to attach a proof that it has received the subscription amount from the subscribers.
    *Companies can attach a copy of bank statement as a proof.
  • In case of failure of filing Form 20A with the ROC, Company shall be liable for penalty of 50,000/- and every officer shall be liable to penalty of Rs. 1,000/- for each day till the default continues subject to maximum amount of Rs. 1,00,000/-.
  • Non-compliance of the Section could be a ground for striking-off the Company under Section 248 of the Companies Act, 2013.

 

Why The Change:

The purpose of re-introducing the old law is to identify the dummy Companies and this shall also assist Ministry in early identification and strike off of defunct Companies.

The provision for making declaration before commencement of business was abolished by the Companies (Amendment) Act, 2015. The aim was to facilitate newly incorporated Companies by easing the norms for incorporating a Company and to promote the corporate form of business organization. Pursuant to this omission, it was noticed that this relaxation was misused by many of the corporate entities, the Companies were formed only for the purpose of circulating money.

Just as one bad fish spoils the entire pond, this was a much needed step on the part of Government to curb such malpractices. Thus, on notice of any such unethical and illegal ventures, the ROC can suo-moto strike off the Companies formed with mala fide intentions.

Comparison Between LLP and Private Limited Company

The most important decision which a start-up needs to take is the choice of business organization, whether to go for a LLP or a Private Company.

Both LLP and Private Limited Company structure offer same benefits such as Limited Liability, Separate Legal Entity, Perpetual Succession, no requirement of minimum contribution etc. Their registration process is also similar. Foreign Direct Investment in case of LLP and Private Limited Company is permitted upto 100% under automatic route in most of the sectors other than those sectors which are restricted. But some of the major differences which must be taken into consideration while choosing the form of business organization are as follows:

 

S. No. Basis of Difference Limited Liability Partnership Private Limited Company
1. Compliance Requirement
  • LLP is required to file only the Annual Return and a Statement of Accounts & Solvency.

 

 

  • LLPs are not required to conduct Board Meeting and Annual General Meeting.
  • Private Limited Company has to comply with number of compliances which includes but not limited to periodic filing of forms and returns, maintaining of statutory registers and records, holding of meetings etc.

 

  • Companies are required to conduct at least 4 Board Meetings in a year and a Annual General Meeting.

 

  • Small Companies (whose paid-up share capital does not exceed Rs. 50 Lakhs) are required to hold at least one Board Meeting in each half of a calendar year
2. Audit
  • LLP is required to get their accounts audited only if their annual turnover exceeds Rs. 40 Lakhs or contribution amount exceeds Rs. 25 Lakhs.
  • All Companies are required to get their accounts audited annually.
3. Taxation
  • LLP is liable to pay income tax at flat 30%.

 

 

 

 

 

 

 

  • Dividend Distribution Tax is not applicable.
  • Company is liable to pay income tax based on their turnover:-

 

Turnover Tax Rate (%)
Upto 250 Crore 25%
More than 250 Crore 30%

 

  • Additional tax liability in the form of Dividend Distribution Tax at the rate of 15% is applicable on company.
4. Winding Up
  • For winding up of Defunct LLP the procedure is less complicated.
  • Winding up of a company is governed by Insolvency and Bankruptcy Code and it is quite elaborated as compared to LLP.
5. Striking-Off

(Companies or LLPs which are inoperative and have no assets & liabilities can go for Strike off)

  • If LLP is not carrying on any business or operation for a period of one year or more, it can make an application to the Registrar of Companies for striking off the name of LLP from the register of LLPs.
  • If company has failed to commence its business within one year of incorporation or is not carrying out any business for preceding 2 financial years and has not sought the status of Dormant Company it can make an application to the Registrar of Companies for striking off a company.

 

The selection of form of business organization depends upon the business rationale, funding requirement, ownership and management control and such other factors.

You can also refer to our other blogs related to LLP and Private Limited Company:

Foreign Direct Investment In LLPs
Limited Liability Partnership (LLP)
Shareholders’ Meeting of a Private Limited Company in India: How Convenient