All private companies must follow the rules and regulations outlined in the Annual Compliances for Private limited company, as stipulated by the Companies Act of 2013. Despite the complexity and length of the detailed compliances, there are a few minimum standards that must be met. This article provides an in-depth explanation of both of these topics.
Businesses, both established and new, in India must get ready for annual compliances. Many new businesses and startups in India choose to structure themselves as a Annual Compliances for a Private Limited Company, one of the most common types of legal entity, but few of them know what yearly requirements must be met for this type of company.
Companies Act – Annual Compliances for a Private Limited Company
Since the Companies Act was first enacted in 1956, many changes have been made to both the definition and scope of Private Limited Companies. Startups are all the rage now, but setting up and running a private company is challenging due to both practical and legal considerations. Private companies are subject to numerous regulations and reporting requirements as outlined in the Companies Act of 2013.
It can be difficult to keep track of all the requirements for annual compliance on your own; therefore, Private Limited Companies should seek the advice of experts to ensure they are in full compliance with the law and not subject to any fines that could be avoided. Let’s take a look at some examples of the most basic annual compliances for your convenience.
Get the Basics Right
‘Only with the consent of the board of directors of the company, it should undertake any other business activity beyond what is mentioned in the object clause,’ reads the law resolution that was passed when the company was formed (the ‘Memorandum of Association’). As of April 1, 2014, the object clause should include a notification that the company is engaged in activities outside of its primary business. Businesses that don’t follow the rules risk being labelled “ultra-viral,” which could lead to legal trouble and a name change for the company.
Displaying Company Identity
Company letterheads, billheads, letter papers, and all notices and other official publications must include the company’s name, registered office address, and Corporate Identity Number as required by Section 12(3) of the New Act. Failure to include a CIN (Corporate Identity Number) will result in a daily fine of one thousand rupees (about $13) for the company and each officer responsible for the oversight, up until the point where the error is fixed.
Accepting Unsecured Loans
In accordance with the provisions of the Companies Act of 1956, many businesses accept loans from the director’s family or from company members. However, the Acceptance of Deposit Rules 2014 state that the company cannot accept unsecured loans or deposits from the director’s relatives unless the money is a gift and not a loan. Not to mention, even unsecured loans have to be paid back. Companies that accept loans but fail to repay them may be subject to penalties and prosecution under Sections 73–76 of the Companies Act 2013.
Meeting With the Board of Directors
A minimum of 30 days after the company’s formation, the first meeting must take place. Each director of the company must be notified in person or via email at least seven days in advance of the board meeting.
Appointment of an Auditor
Within the first 30 days of operation, a company must have an auditor in place. There is a mandatory requirement for an audit report to be provided by every accountant who prepares financial statements and receives final approval from the auditor. Should you fail to do so, you will face severe consequences.
Reports from the board of directors detailing the company’s activities and financial performance for the year, as required by Section 134 of the Companies Act, must be prepared. Within the first 60 days of operations, the company must also issue a share certificate.
Filing Annual Return
Likewise, within 60 days of the annual general meeting, every company must submit its annual return to the register of the companies in e-form, which can be found at http://www.mca.gov.in/, and which must be digitally signed by at least one of the directors.
To sum up, companies should be aware of the fundamental annual compliances that are to be fulfilled and should take the necessary steps to fulfil all the compliances in order to avoid any unnecessary errors, as the old adage goes, “Prevention is better than cure.”
Creating the memorandum of association, displaying company identity, accepting unsecured loans from relatives only as gifts, holding board meetings, appointing the auditor, drafting a directors’ report, and filing income tax returns are all required by law.