10 Major Mistakes to Avoid When Setting Up a Company in India
Starting a company is an exciting journey full of optimism for success, especially in a thriving market like India. With its numerous options, India has emerged as a leading location for entrepreneurs seeking to expand and grow their enterprises. However, setting up a company in India has obstacles, and navigating the complex legal and operational framework can be difficult for startups. Making mistakes in the initial stages of setting up your company might have major effects and impact your future success.
In this article, we give you the most common mistakes that entrepreneurs commit while setting up a company in India and how to avoid them. Whether you’re a local business owner or a foreign investor, knowing these usual mistakes will help you make better decisions and build a successful company.
The Boom of Startups in India
In recent years, India’s startup ecosystem has expanded substantially, driven by youthful entrepreneurs eager for creativity. According to the Ministry of Corporate Affairs, over 15,000 new companies are registered in India every month. However, only around 20% of them survive, and even fewer achieve remarkable success. While market challenges such as limited growth and profitability frequently contribute to low success rates, many companies fail as a result of mistakes made during the company registration procedure.
While setting up a company may appear to be a simple procedure, it is essential to remember that there are many legal and technical challenges to face. Although the government has made the registration process available online via the MCA 21 platform, common errors during incorporation might result in huge penalties or delays. Seeking expert assistance may appear to be expensive, but in the long term, it can save you from more financial and legal problems.
Common Mistakes to Avoid When Setting Up a Company in India
To ensure your company’s success, let’s look at the most common mistakes that entrepreneurs make throughout the company registration procedure, and then consider how to avoid them.
1. Choosing an Incorrect Company Name
Choosing a unique and appropriate name is one of the most significant aspects of starting your business. The company’s name must be compatible with several rules and regulations, including the Companies Act of 2013, the Trademark Act of 1999, and the Names and Emblems Act of 1950. If your company’s name violates any of these rules, your registration application may be rejected.
Key points to keep in mind while naming your company:
- The name should not be identical or similar to an existing company or LLP.
- It should not infringe on any registered or applied-for trademarks.
- Avoid using names that imply government or international organization affiliation (e.g., WHO, UN).
Conduct a comprehensive search in the public database of trademarks to ensure that your desired name is available and doesn’t conflict with any intellectual property rights.
2. Registering Under the Wrong Company Type
Indian companies can be Public Limited, Private Limited, or One Person Companies (OPC). Each has its own set of laws that govern it. Choosing the incorrect company kind can lead to problems down the road.
Here’s a brief overview:
- Public Limited Companies: Ideal for larger companies looking to generate funds through public shares. There must be at least 7 stockholders and 3 directors.
- Private Limited Companies: Ideal for small, private firms with at least two shareholders and two directors.
- One-Person Companies (OPC): Ideal for small businesses with a single owner, allowing limited liability. However, OPCs must convert to Private Limited Companies if their capital exceeds ₹2 crores.
Choosing the appropriate structure is critical to ensure your company’s growth and compliance with Indian law.
3. Inaccurate Company Description
The Memorandum of Association (MoA) and Articles of Association (AoA) are based on your company’s description. Filling out registration paperwork requires a clear and complete description of your company’s activities, target market, and goals.
An inaccurate or vague description can lead to complications in the future, especially when applying for licenses or expanding your business.
4. Errors in Supporting Documents
Another common mistake made during the Indian company registration process is that the supporting documentation is incorrect or insufficient. To avoid rejection, make sure that all of the required documents are correct and up to date. These usually include
- PAN card and proof of identity for directors
- Proof of the registered office address
- Rent agreement and No Objection Certificate (if applicable)
- e-MoA and e-AoA filed through INC 33 and INC 34
Make sure all documents are signed using Digital Signature Certificates (DSCs) where required.
5. Unnecessary Appointment of Directors
All shareholders don’t need to be appointed as directors. The Board of Directors should be carefully chosen based on experience and expertise, as they will make vital decisions for your company.
Inexperienced or unsuitable directors may struggle with administrative and strategic responsibilities, leading to poor decision-making and operational issues.
6. Failing to Draft a Rental Agreement
If your company runs from a rented premises, always have a signed rental agreement in place. Oral agreements with landlords may result in difficult legal challenges. A formal agreement should be prepared on stamp paper and registered with the sub-registrar’s office.
A rental agreement should specify the rent amount, payment terms, lease duration, and notice time.
7. Not Having a Shareholder’s Agreement
A well-drafted shareholder agreement is vital in preventing shareholder conflicts. The agreement must contain the rights and obligations of each one of its shareholders, share distribution, terms for transfer, dividend rules, and nominee information. If your business does not have an appropriate shareholder agreement, it may become problematic to solve, thus harming it.
8. Ignoring State-Specific Laws
While company registration is regulated by the Union Ministry of Corporate Affairs, certain state-specific laws and post-incorporation compliances apply. For example, Professional Tax Registration is required in some states and must be completed within 30 days of establishment.
Failure to comply with state-specific laws might result in significant penalties. Research and follow the local laws that apply to your business based on its location.
9. Incorrect Office Address
The confusing time for entrepreneurs is when giving the registered office address of their company. Here they get confused between the personal address of the director signing the application and the official address of the headquarters of the company. Always provide valid proof of residence, such as utility bills not older than two months.
10. Not Seeking Professional Help
Many entrepreneurs avoid employing expert advisers because of the apparent cost, yet consequences for noncompliance can be far more expensive. Legal and compliance advisers can help you manage the complex process of establishing your business in India and avoid costly blunders.
Hiring professionals ensures your company meets all legal obligations and achieves long-term success.
Conclusion
Setting up a business in India can be effective, but it is critical to avoid the common mistakes that many entrepreneurs make. From choosing a suitable business name to assuring compliance with local legislation, each stage of the procedure demands careful attention to detail. Seeking professional advice can make all the difference and set your company on the path to success.
By avoiding these key mistakes, you can ensure that setting up your company in India is a smooth and successful experience.
How Sterling Tax Partners Can Help
At Sterling Tax Partners, we specialize in company registration and post-registration compliance services across India. Our team of experienced legal professionals ensures that the incorporation process is handled smoothly and efficiently, allowing you to focus on growing your business.
We offer cost-effective, reliable, and fast services tailored to the unique needs of your business. To avoid costly mistakes and ensure compliance, check out our services on our website.
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