Starting a company can be a thrilling process, and the startup industry has grown tremendously in India in recent years. However, it is essential to have a complete understanding of the challenges and mistakes involved in the process, particularly while registering a private limited company online. The Ministry of Corporate Affairs estimates that around 15,000 new startups are developed every month in the Indian market. Still, only 20% of them persist, and a meager 0.001% manage to make it big over the years. Therefore, it is crucial to understand the common mistakes that entrepreneurs should avoid when registering their private limited company online.
1. Choosing an Incorrect Company Name Selecting a catchy and unique name for your new business is undoubtedly challenging. However, it is crucial to ensure that your business name is not similar to another existing business name. This can cause several legal problems in the future, resulting in a costly rebranding process. To avoid this mistake, it is advisable to check that no other business is using the chosen name before submitting the registration form. Entrepreneurs should conduct a thorough search of the Registrar of Companies (RoC) database and the Ministry of Corporate Affairs website to ensure that the chosen name is not similar to any existing name. The name chosen should also not violate any legal provisions, such as the Indian Trademarks Act, 1999, or the Companies Act, 2013.
2. Selecting an Incorrect Company Structure Choosing the correct company structure is essential when registering a new business. Each business structure has unique benefits and drawbacks, including sole proprietorship, partnerships, limited liability partnerships, public limited companies, and private limited companies. It is important to understand the legal restrictions and opportunities that come with each structure. For instance, a private limited company has fewer legal restrictions as compared to a public limited company, which offers a wide range of opportunities for owners to raise cash through shares. The entrepreneurs should conduct a thorough analysis of the business requirements, the long-term goals of the company, and the legal framework before deciding on the company structure.
3. Providing Incorrect Information providing incorrect or invalid information while filling out the application form for company incorporation can lead to the rejection of the registration application. The information provided should include the business name, main object and registered office address, of the business. Documents like the Memorandum of Association (MoA), Articles of Association (AoA), business plan, and policy are founded on the appropriate description of the company as decided during its incorporation. Therefore, entrepreneurs should be careful while providing information and ensure that it is accurate and complete.
4. Adding Too Many Directors it is not necessary for all shareholders to be appointed as directors of the company. Assigning different duties to directors and shareholders can help in the smooth functioning of the company. The board of directors has a vital role in decision-making, which requires knowledge, experience, and expertise. It is advisable for business owners to separate the ownership and the executive roles of the company. Therefore, entrepreneurs should appoint directors based on their skills and expertise, and not just because they are shareholders of the company.
5. Founders/Shareholder Agreement All shareholders of the company must draft, agree upon, and sign the shareholder’s agreement, which is one of the most significant documents. The agreement contains details like share allocation, share capital, terms of investment, provision regarding the transfer of shares, dividend declaration, dividend distribution, inheritance of ownership, nominee details, etc. It is advisable to draft the shareholder’s agreement while incorporating the company to avoid disputes between shareholders becoming extremely challenging to resolve in the absence of such a written agreement.
The founders or shareholders agreement is a crucial document that outlines the rights, responsibilities, and obligations of each shareholder in the company. It sets the tone for the company’s future operations and can prevent disputes from arising among shareholders. The agreement should specify the percentage of ownership each shareholder holds, the type of shares they have, and the voting rights associated with them.
The shareholder agreement should also cover the transfer of shares. It should specify the process and conditions for selling or transferring shares, including pre-emption rights, which give existing shareholders the right to buy new shares before they are offered to the public.
Dividend distribution is another critical aspect covered by the shareholder agreement. It should specify the percentage of profits to be distributed as dividends and the process of declaring and paying dividends to shareholders.
In the event of a shareholder’s death or incapacity, the shareholder agreement should specify the procedure for transferring their shares to their heirs or nominees. This ensures that the company’s ownership structure remains stable and prevents any unwanted transfer of shares.
In conclusion, the shareholder agreement is a critical document that should not be overlooked when registering a private limited company online. It helps prevent conflicts among shareholders, ensures clarity on ownership and voting rights, and provides a framework for dividend distribution and share transfer. By drafting and agreeing upon the shareholder agreement during the incorporation process, entrepreneurs can avoid disputes in the future and focus on growing their business.