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If you are a businessman or else you want to start a business soon,
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and that too by forming a Private Limited Company,
then this video is for you
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In today's video, we will learn
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1. How to make & run a Pvt. Ltd. Company?
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2. What are the Compliances?
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3. What are the Tax Liabilities of a Pvt. Ltd Company?
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4. In which cases you should not form a Pvt. Ltd Company?
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Hey Guys! Welcome to the business basics Ep 5, This is Rishabh Jain and you are watching LLA.
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[ Intro Music ]
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Like the earlier episodes of business basics,
In this episode also we have invited CA. Anoop Bhatia.
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He gives amazing information about Income Tax,
on his YouTube Channel,
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We have mentioned his channel link in the description,
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Along with the timestamps and other useful links that you can check out after the video.
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[ MUSIC ]
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Private, Limited and Company,
let's understand these three words carefully.
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The word PRIVATE represents
that a company is privately owned.
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LIMITED represents that the
liabilities of Shareholders are limited.
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And COMPANY Symbolizes that it is
Regulated under the Companies Act governed by MCA.
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Now you will ask,
what is limited liability?
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Limited liability means the liabilities against your Business of any form like Debt, Business loss, etc.
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Are limited to a shareholder if he is a part of a Pvt. Ltd.
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This means the liability of a shareholder is limited to his shareholding capital.
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We have discussed in our previous episode,
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That is the case of a Partnership or Sole Proprietorship, the liability is unlimited,
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This means the personal assets of a proprietor can also be sold,
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If the assets of the business fail to repay the debts and loans.
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Now you'll ask this limited liability is also there in LLP. then what is the need to form a Pvt. Ltd. Company?
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> ANOOP: Let me illustrate this by using an example,
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You and I want to build a startup by investing Capital of 10 Lakhs each,
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But the execution part will be handled by our two other friends,
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But if we form a Partnership Firm then along with the Capital we have to also provide Labour,
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Instead, if we form a Pvt. Ltd. Company and contribute Capital of 10-10 lakhs each,
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And made our two other friends Directors of the Company, who are tech-savvy,
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Assume if we give them remuneration for work then we will get the shareholder value and they will get remuneration,
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So the major difference that comes between a Private Limited Company and LLP.,
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Is the difference between the ownership and the management.
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In LLP. the one who is the owner of the company is also responsible for managing the work of the company,
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But in the case of a Private Limited Company,
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The owner can be different from the one who is managing the work of the company.
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It depends on us which form of Company is best suited for us.
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[ MUSIC ]
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Now let's understand,
Who is eligible to form a Pvt. Ltd. Company
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if you want to register a Private Limited Company then you need Min 2 Directors and 2 Shareholders,
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What is the difference between a Shareholder and a Director?
Cant both of them be the same?
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They can be the same,
but let's first understand the concept.
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When you form a Pvt. Ltd. Company,
then its shares are issued,
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The people who subscribe the shares of the Company,
are called Shareholders.
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It can also happen that from these Shareholders,
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One is also a Director of the Company,
Who does the operating work of Company
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It's not necessary that the Directors are always amongst from the Shareholder of Company,
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Many times professionals are hired,
to be the Directors of the Company to run it.
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And Shareholders enjoy the profit and growth of Company,
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Whereas Directors enjoys the salary and remuneration from the Company
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It is obvious that in some cases Shareholders are also the Directors of the Company.
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If you want to register a Private Limited Company then you need Min 2 Directors and 2 Shareholders,
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Means you need at least two people, as one can be a
Shareholder of Company as well as a Director.
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>> ANOOP: A foreign resident may become a Shareholder in India subject to the FDI Policy of India,
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Likewise, a foreign resident can become a Director in an Indian Pvt. Ltd. Company,
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Provided there is at least one Director,
who is an Indian Director in Company?
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How you can make a Pvt. Ltd. Company?
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If you are not a CA or CS [ SARCASM ] then assume that it will be impossible for you to form a Pvt. Ltd. Company.
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STEP 1: Apply for DSC
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STEP 2: Apply for DIN
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STEP 3: You have to submit a name
for your Pvt. Ltd. Company,
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Which is not similar to the name of other
Pvt. Ltd Companies present,
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You can submit upto Six names
to MCA for your Company.
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There are a lot of portals available on the web by
which you can check the names of existing Companies
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It is compulsory to add Pvt. Ltd.
as a suffix for a Private Limited Company.
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STEP 4: File the EMoa and EAOA to register.
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These are the two documents that lay down the rules and regulations for the internal management of the company,
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it specifies the duties, rights,
and powers of the management of the company.
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These are uploaded on the official website
of MCA as a Digital Copy.
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You can assume that EMoa And EAOA
are partnership deed of a Company.
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After completion of this process, you will get approval for your Companies name within Two to Six weeks.
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The recent update from MCA specifies that,
When you will apply for the CIN,
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Other documents like PAN, TAN, GST, PF, ESI
will be also generated along with that.
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After completion of this process, you will get
approval for your CIN within Two to Six weeks.
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From which and other documents like PAN, you can open a Current A/c of your Company.
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COMMON TERMS
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Look when you form a Pvt. Ltd. company there is a use of lot complex terms,
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But as a Director an as a Startup Founder
you should aware of few terms that I am going to tell you.
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Assume if you formed a Pvt. Ltd. Company
and formed 10,000 shares of it,
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This means you divided the company into many small parts,
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And so the initial value of these parts
(SHARES) is known as FACE VALUE.
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And listed the face value for each share Rs 10
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So these 10,000 shares will be called
Authorized Shares and when you multiply it by Rs 10
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This means your Companies value is Rs 1,00,000
and this value will be called Authorized Capital.
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Now whatever is your Initial Authorized Capital, you can distribute the shares of that value to your shareholders.
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It is not necessary to distribute
all the shares in the beginning,
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Assume if there are two co-founders,
who wants to take 30 % share each,
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So for that 3,000 shares, they paid 3,000
multiplied by Rs 10 means Rs 30,000 individually
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And contributed to the
60% capital of the Company.
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And acquired three thousand shares of the Company each
, and this share will be called Issued Share.
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And capital against it will be called
Paid Up Capital.
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Now, the rest of the shares are called Unissued Shares
which are 4000 shares.
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After one year an Investor comes
to invest in your Company,
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So from the Unissued share
you want to sell him 10% shares of the Company,
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It is not necessary that the 10% shares that you will give to Investor, You will give at a Face Value of Rs 10.
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You have managed the Company and grow it in one year,
You'll do the Valuation of the Company.
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And assume that on the basis of valuation,
The value of Par Share comes to be Rs 100
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Then the Investor has to subscribe to these shares for Rs 100 each, which Means a Face Value of Rs 10 & Rs 90 Premium.
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Now in some cases, it can happen
you have already sold your all Authorized Shares,
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And then again one Investor comes to Invest In your Company,
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So how you'll issue him shares?
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In this case, you'll have to take approval from Government.
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That is why it is a good practice to keep your shares unissued so that in future you can give them to any Investor.
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Let's understand one more thing,
How a Pvt Ltd. Company is operated?
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Private Limited Company is operated by its Board of Directors.
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In beginning, I have told you that minimum there should be two Directors.
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As the Company grows, More Investors Invest in Company,
They appoint more Directors from their side.
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An AGM is held once a year, and
in urgency, even more, meetings can be held.
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>> ANOOP: The responsibility of the Director is
much more than of a Shareholder
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Because Director is working in Fiduciary capacity
on behalf of the Company,
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If a scam or fraud happens in a company, Then shareholder
is not liable for that but the director of the company...
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So it is important to understand,
What if I am not ready for taking a risk
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Or else I say that,
I don't have enough time for the managerial work,
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Then I am merely just a shareholder.
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My role will come when Company will hold AGM, EGM,
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Then if there will be any resolutions for Company
I will do the Approval,
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As I have the majority shares of Company.
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So a shareholder has the ultimate decision making,
but not the day to decision making.
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You'll ask I am a shareholder of a Company,
What powers do I have?
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You have the power of appointing these Board of Directors according to their T&c.
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It is like the Government Elections,
Where we vote and choose and our Government,
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After which the Government does the decision making according to it for a period of time.
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Then again you get a chance to vote,
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And if had Government given positive results
you can again vote it, or choose a new one.
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If a scam or fraud happens In a Company, Then the shareholder is not liable for that but the Director of the Company.
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INCOME TAX
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Now let's come to a very important topic,
That is Income Tax.
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After all, How much Income Tax will be imposed on Pvt. Ltd. Company?
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Many people have notion that, Income Tax Imposed on Pvt. Ltd. Company is less than from other forms of Company.
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Which is true,
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Because On Private Limited there is a slab of 30%,
but below it 25 % 22% 15%,
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For different sectors and conditions.
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Most of the Companies in today's date
have a Tax Slab of either 25% or less.
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>> ANOOP: Over the period of time Government of India has reduced the tax rates on the Companies,
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And in today's date, If your turnover is up to 400
crores than your Tax Slab is 25% as the company
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The first benefit is that
your Tax rate is reduced by 5%.
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The secondary benefit is that in around year
2019 Government introduced two special sections,
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Which said, If your company is in manufacturing,
We will just impose a 15% Tax on you.
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So see how much big difference it is, almost half.
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And if your Company is not in the manufacturing sector,
It is an existing Company,
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This Manufacturing, Which will receive 15% redemption
will be the new companies,
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And other than this, The companies which are existing in Manufacturing for a long back,
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Those Companies have an option of 22%
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But this doesn't mean that, If you take out the profit from Company you don't have to pay tax on it.
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We have talked in Partnership video,
That in a partnership firm,
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If we take our profit distribution or profit share,
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Then that profit share is Tax Exempted in partner's book,
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Because already Partnership firm
had given 30% Tax on it.
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But in the case of Pvt. Ltd. Company,
If Company had already given 25% Tax,
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Even after that,
If profit share comes in your book,
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Then according to your tax slab,
It will be imposed.
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One more thing to note,
The ones who are Shareholder of the Company,
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Will not receive any kind of remuneration, commission and even salary if they are not working in Company,
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They can only take dividends on share
and enjoy the appreciation value of the share.
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COMPLIANCE S
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The Compliances of a Pvt. Ltd. Company
is more than that of other forms of business entities.
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In this not only you have Income Tax, GST, Labour Laws but also many other norms and compliances of MCA.
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This happens because it is a highly regulated entity,
And all the documents of Pvt. Ltd. Company,
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Like Balance Sheet, MOA, AOA etc,
can be checked by yourself
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By just giving nominal fees,
On the MCA websites or any third party website as well.
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And there you'll get the
bundle of all these documents
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>> ANOOP: if I talk from the view of Income Tax, Then it is compulsory for all forms of business entities,
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A Company requires a Tax Audit
when its turnover exceeds 5 crores.
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So from the view of Tax Audit,
You have care of this point.
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But as a Company
when you are in 25% or 30% Tax Rate,
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Then there is one more MAT Tax liability
and from comparing MAT and Normal Tax,
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Whichever is more
will be payable by the Company.
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OPC & PUBLIC LIMITED
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There two more Companies similar to Pvt. Ltd.,
OPC & PUBLIC LIMITED.
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Now, what are these two?
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There is only one difference between OPC from Pvt. Ltd. that here only one Shareholder and Director is needed.
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Although there should be the nominee of that Director.
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Otherwise, a single person can have complete control over the company which is not true in the case of Pvt. Ltd.
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Now, what is this Public Limited?
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You can identify a Public Ltd. company by its name as there is only Ltd. After the name of Company and no Pvt.
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All the Companies listed on Stock Market
are Public Limited Companies like RIL.
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>> ANOOP: Although the difference between Pvt. Ltd. and Public Ltd.
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In terms of the shareholder that in Pvt. Ltd. Company
min 2 shareholders is required,
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And in Public Limited min 7 Shareholders,
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A public company should have
at least three directors,
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whereas the Private Ltd. company
can have a minimum of 2 directors.
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A shareholder of a Pvt. Ltd. company cannot exchange its shares,
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So does it make difference?
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Assume that I and you
(shareholders) form a Company,
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And by some reason,
We are not able to cooperate with each other,
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There are two main documents
of a Pvt. Ltd. Company AOA and MOA.
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Generally what private Companies do is that,
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From there AOA restrict
the transfer of their shares.
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Now, What is the purpose of restricting?
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I assume, I exit the Company that is 50% shareholder,
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And left another third person with you,
and your both rhythm doesn't match,
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Then how you'll operate the company
with different viewpoints.
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There is the right of pre-emption,
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In which if you want to exit the company,
the other existing shareholder has first right on the shares
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Or else,
If I am giving my shares to a third person,
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Now the company will launch notice,
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Either the existing shareholder buy the shares,
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If not then,
Then only the share will be transferred to other shareholders.
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This process is specifically followed in Pvt. Ltd. Company.
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So, When we don't what to dilute our control
then we form a Pvt. Ltd.
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And, When we want to play it big
then we form a Public Limited Company.
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Along with that in this
there are so many Compliances.
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Before we talk,
Why you should not form Pvt. Ltd Company,
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Let's first talk about an interesting case,
Which was recently in news,
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Zerodha co-founder Nithin Kamath has taken approval for Rs 100 crore salary from his company,
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But not only for himself,
But for his brother and wife also,
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In the board meeting of the company,
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Now, Why he had chosen salary and why not dividend,
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Because it is a privately owned company and he himself is the majority shareholder.
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He clarified this situation through his blog,
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Now I will explain this through numbers,
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When you take money from the company as a dividend or as a salary how much tax will be imposed on you.
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If you want to make money from a Pvt. Ltd.
The company as a dividend,
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Assume that a company made a profit of Rs 100 crore,
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On this profit of Rs 100 crore
a company have to 25% in tax,
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After that rest of Rs 75 crore
can be distributed as dividend,
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And that dividend when it will come
in your books you have to pay 35.8% tax,
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Why?
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Because assume that it is in 30% tax slab,
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After 30% tax slab 15% SAR charge and SAS is imposed on the dividend.
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So if you want to take Rs 100 crores
from the company as a dividend,
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Then you'll get around Rs 49 crore,
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And Rs 51 crore you have to
give as a tax to the government.
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Now if this same amount
as a salary is taken,
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Then in this particular case
taxation will at a rate of 42.7%,
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Because 30% tax and then 37%
with SAR charge and rest of the SAS,
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It becomes 42.7% which means from
Rs 100 crore, You'll give Rs 43 Crore as tax.
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But it is much better than
giving tax in case of dividend.
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WHEN TO MAKE A PVT LTD?
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So the last point,
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In which cases you should make
Pvt. Ltd., And when not.
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If your company is in a risky venture,
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Where you have to take debt,
And a lot of liabilities can be formed,
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High chances of Loss,
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And most importantly if you have
to raise external capital and funding
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Or maybe if you want to create a startup and,
Then sell your stake at a high valuation,
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If this your game,
Then Pvt. Ltd. Company is the best option.
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In which cases a Pvt. Ltd. Company
should not be formed?
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According to the tax viewpoint that cases are,
00:21:09
When your Business is Profitable from day one,
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When there is Low Risk involved,
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When you want to grow it through Organic way,
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When you don't need Debts & Liabilities
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Then in those particular cases,
You should not form a Pvt. Ltd. Company,
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Because in that you don't want
to sell your stake,
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So in that case, If you want to make money or dividend from the company then you will have to big sum in tax.
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You can go with the route of salary
but again tax rate will be comparatively higher.
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I know this is slightly complex,
But if you want to take your business to great heights,
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Then you have to understand these things.
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You can check out the complete interview mine,
00:22:11
With Anoop Sir on Pvt. Ltd. through the Link in Description.
00:22:20
Jai Hind! Jai Bharat!
