Let me start with the basics.

1. A Corporate Company is registered with the Ministry of Corporate affairs. In India the ministry details can be found at www.mca.gov.in. 
2. A Corporate company is an unique, separate, non living, judicial, taxable and perpetual entity hence the benefits as we share in this article apply
3. We are not covering a “Ltd” company here since that is Professional level governance.

Once you read the article below please give a read to the differences between the Corporate Companies in our article on “Choosing Between an LLP, Pvt Ltd and OPC.”

Liability

Since a Corporate Company is limited in Liability by the amount you Authorize when forming the company (known as Authorized Capital); your debts are hedged by upto that amount incase the business suffers losses due to a non-criminal reason . 

Having the liability capped is a good benefit as it offers protection to the stakeholders in case of failure of the business. The limit of liability is usually up to the unpaid amount on the Authorized capital.

An example:-

If a company were to go bankrupt and the company has Authorized Capital of 2 Lakhs. From the 2 Lakhs the capital that was paid-up was 1 Lakh then the stakeholders are only liable to pay the remaining 1 Lakh of the un-paid authorized capital. 

In a Proprietorship, Partnership or HUF the owners are 100% liable for all business actions with all their personal assets

Another example :- If an accident occurs in the company and there is a liability, the lability of the CC will be limited to their Unpaid authorized capital however for a Proprietorship, Partnership or HUF it would be all their personal assets. 

*The liability of banks and the Directors guarantees on loans are a different topic of conversation.

Negligence and not following compliances or paying taxes are offences the liability of such actions are usually seeped to the Stakeholders ( not shareholders) . Please talk to a Company Secretary and lawyer for more details.

Credibility & Transparency 

Since the Corporate Company has to regularly submit information attested by Chartered Accountants to the Ministry of Corporate Affairs and this information in a way ensures credibility and transparency a Corporate Company is a more professional method of establishing an organization. For the same reason they are more trustworthy compared to a Non Corporate Company

All the important information about the Corporate Company are available with the MCA for anyone to access on the MCA portal. On request with valid reason MCA can share financial data of Corporate Company as well.

Uniqueness

A name is allotted to each Corporate Company and the details of the company are published on the MCA website. Ensuring your uniqueness being maintained towards a larger sum game towards marketing and good will.

Perpetual 

A Corporate Company is a perpetual entity that means the stakeholders might change but the company identity, evaluation and good will goes on. 

Taxation and Permissibility 

A Corporate Company enjoys a lot more ease and benefits from both Income Tax, RBI and various other government bodies. Lower income tax slabs and more…

Better Inheritance Management

With proper drawn documents in a Corporate Company; if a Stakeholders deceases it may not be necessary for the Heir of the deceased may own the stakeholdership 

*(OPC) is not recognised under Income tax

Separate Entity 

Since a Corporate Company is a separate entity it holds a different PAN, registrations etc, the stakeholders are at better convenience towards their personal filings, freedom to independently pursue opportunities, etc  

It always helps keep owners’ personal finances separate from the companies. Allowing a more professional and progressive company format and privacy to the owners

From an accounting perspective as well it’s better since the money lended to the company draws relevant interest with helps you gauge the actual holding of the company since in a Proprietorship you would usually not pay interest to yourself on lending to your own company

It also leads to better asset management, finance management and credit rating control

Transferability

It is extremely easy and flexible to transfer ownership of a Corporate Company. All of them can continue its existence irrespective of changes of ownership or personal.

1. For a LLP you can change the Partners at any time by changing the agreement and of course filing the relevant forms with the MCA
2. For Pvt Ltd you can change the shares easily post a board approval and share transfer process paying the relevant stamp duty. (The MOA and AOA are the baseline for any possibilities but this is an more advance level of discussion)
3. For an OPC things are different since it’s a One Person company but that can be sold or transferred as well using the share transfer process after making relevant changes to the MOA 

Growth Prospects

It’s easier to become a Ltd company (stock Listed company) if you have been working in one of these entities already since your history and records are maintained.

Special Benefits for a Pvt Ltd entity over LLP or OPC

(we will cover more in the differences between the Corporate Company in the Choosing between the Corporate Company Article) 

Off the other forms of entities Pvt Ltd have 

1. Stock options for ESOP, Stock Ownership, dividends etc. Also added benefit for talent pool retention and possible benefits to other contributors 
2. RBI allows Foreign Direct Investment to Pvt Ltd Companies
3. Easier to Raise Capital
4. More deductions
5. Looking for possible Venture Capitalist funding where stake can be valued and parted with to raise funds?. Its not possible in any other form of entity!
6. Clear differentiation of ownership & Direction in Pvt Ltd – The owners (share holders) are different than Directors and they do not have any liability like the Directors may have.

Some of the Cons 

Just mentioning them briefly here

1. Need to file a couple of more filings each year compared to a usual company. Although it’s easier for an OPC or LLP as filings are lesser
2. Need to always have Two partners in LLP and Two Directors in Pvt Ltd. OPC is just one but then their is an turnover limit
3. Directors, Partners cannot take loans from Corporate Companies as it accounts for their income
4. Need to Maintain Board Resolutions and other manageable but necessary prescribed MCA requirements like Displaying CIN, Maintaining Stamps etc
5. Additional Purview of Companies Act

Disclaimer: The article is not legal or financial or administrative advice. It is mere information shared for the readers entertainment and knowledge of possibilities. While we endeavour to ensure that the data / information, on the website, is accurate and correct, on occasions, the concerned parties may alter or modify their information and systems, as the case may be. Plusgrow  recommends that you do not solely rely on the information available on the website and that you always seek professional advice towards any actions. 

We are not going to stress much on the compliance comparative but really wanted to talk about the benefits of choosing between these entities 

Bottom Line :- 

Unless we are running any firm that needs professional/technical expertise ‘partners; to be attesting or signing documents as per law; which is the case for Chartered Accountant firms, Lawyers, Advocates, In some cases Doctors etc who would need to opt for an LLP format we would choose an Pvt Ltd formation for sure due to its recognition and flexibility. Here is why

Lets begin :-

Working Basis:-

• LLP:- Agreement between partners
• Pvt Ltd and (OPC) work on the basis of Memorandum of Association and Articles of Association. 

Ownership:-

• LLP:- Partners
• Pvt Ltd and (OPC) owned by shareholders which can be different from workers, directors etc

Eligibility:-

• LLP:- Minimum Two partners
• Pvt Ltd :- Minimum Two Directors and Two Shareholders
• (OPC) :- Minimum One Directors and One Shareholders, turnover under 2 Crores and capital under 50 Lakhs

Compliance :-

• In Descending order Pvt Ltd, LLP and then OPC.

Liability :-

Liability of negligence etc does not seap in to other partners / directors but as a collective you are responsible if not liable. Fraud or evasion will Pearce through the corporate veil

• For a Pvt Ltd and (OPC) Ownership of stocks are different from the Executioner’s a.k.a Executive Directors in a Pvt Ltd. That gives extreme clarity between investor vs the Doer.  
• For LLP the working partners would always have liability 

Flexibility:- 

FOR A PVT LTD & (OPC) both

• Shares of owners and Dividends for share holders

PVT LTD (ONLY)

• Easier to Raise Capital
• This is the before step to becoming a LTD company
• More tax deductions than others
• Easiest when you are looking for investment since your shares are easily transferable. 
• RBI allows Foreign Direct Investment to Pvt Ltd Companies
• Stock options for employees ESOP, Stock Ownership, dividends etc. Also added benefit for talent pool retention and possible benefits to other contributors 

LLP 

• Partnership agreement is the foundation of this type of the formation so using the agreement lots of flexibility can be achieved

Recognition:-

• PVT Ltd is the most recognised worldwide for just about everything
• LLP is the most popular amongst professional / technical expertise groups
• (OPC) best as a step one when you are working in a small capital of under 50 Lakh and turnover under 2 Crores INR

LAST UPDATE TO INFORMATION : 2020 October

Disclaimer: The article is not legal or financial or administrative advice. It is mere information shared for the readers entertainment and knowledge of possibilities. While we endeavour to ensure that the data / information, on the website, is accurate and correct, on occasions, the concerned parties may alter or modify their information and systems, as the case may be. Plusgrow  recommends that you do not solely rely on the information available on the website and that you always seek professional advice towards any actions. 

At the cost of being repetitive – This article is for investments in shares for holding stake in your own group companies; this is not relevant for trading companies, nor for venture capitalists nor for NBFC’s (CIC are treated differently than NBFC).

So what are these holdings companies called?

Such companies that have core investments in their group of companies and follow a certain criteria are known as Core Investment Companies a.k.a CIC’s.

RBI guides us on this –

Most companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity, i.e., CICs, justifiably deserve a differential treatment in the regulatory prescription applicable to Non-Banking Financial Companies which are non deposit taking and systemically important to this extent.

These companies as per RBI qualify as a CIC when the following directions are followed:-

(i) it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;

(ii) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (i) above;

(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(iv) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the Reserve Bank of India Act, 1934 except investment in

(a) bank deposits,

(b) money market instruments, including money market mutual funds

(c) government securities, and(d) bonds or debentures issued by group companies, granting of loans to group companies and issuing guarantees on behalf of group companies.

Incase you want to read more about our layman interpretation was derived from the following Notification from RBI Master Circular– Regulatory Framework for Core Investment Companies (CICs)

Breaking down the above further…

So what we talk about are CIC’s then there is also Systemically important CIC.What are they?

Till the time you don’t cross 100 Crore total asset you wont be counted as a Systematically Important CIC ( acronym: CIC-ND-SI) and hence you would not need to get registered with RBI. Once you cross the 100 crore mark more regulations and also allowances follow. We don’t discuss those here we just talk about the less than 100 cr CIC”s here

A few things to set the lingo right –

What are Net Assets (as per RBI towards this cause)?

9.(e) “net assets” means total assets excluding –

(i) cash and bank balances;

(ii) investment in money market instruments and money market mutual funds

(iii) advance payments of taxes; and

(iv) deferred tax payment.

What is Total Asset (as per RBI towards this cause) ?

9.(i) “total assets” means the total of all assets appearing on the assets side of the balance sheet.

So now since we are less than 100 Cr total assets and we know the definitions, this is what a Holding company needs to ensure so that they don’t fall under the category of and NBFC and fall under CIC :-

(Side note:- Generically, CIC’s are also NBFC but since they only invest in their group of companies and follow these set prescribed rules as per RBI we don’t “discuss” them as just another NBFC)

These directions shall apply to every CIC, that is to say, a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:-

The 60% equity criteria will determine all your other asset actions. Since that will cap the assets you can purchase keeping in mind that the 90% of net assets rule. So your trademarks, company physical assets all would be needed under 10% of the net assets as defined above.

Registration with RBI needed? Anything else?

Every CIC (read as under 100Cr assets and also as those who become Systematically Important but have been awarded an exemption) is exempted from registration requirement with RBI shall pass a Board Resolution that it will not, in the future, access public funds. However CICs may be required to issue guarantees or take on other contingent liabilities on behalf of their group entities. Before doing so, all CICs must ensure that they can meet the obligation there under, as and when they arise. In particular, CICs which are exempt from registration requirement must be in a position to do so without recourse to public funds in the event the liability devolves, else they shall approach RBI for registration before accessing public funds.

Any special action towards Overseas Investment or Branches?

Yes,  Prior Approval of RBI in cases of Overseas investment by CICs ! Since the core is just investing in your group of companies and no other (major) activity; anything that requires Overseas action needs to be as per master circulars of RBI. Please consult with a Chartered Accountant or FEMA expert on this for any details

When does all of this get information get captured?

Conditions need to be Satisfied as on the date of the last audited balance sheet

LAST UPDATE TO THIS INFORMATION – 2020 October

Written by one of the Team Members so as to share knowledge. This should not be construed as legal advice. Please talk to your CA, CS or Business Lawyer for advice.