Practice: Module II

How this set is built

30 marks in one hour, any 2 of 3 questions of 15 marks, subdivisible 8+7, 10+5 or 5+5+5, with more importance to the practical problems wherever possible.

Question 1 (15 marks, practical)

Three friends intend to start a business in Pune developing and selling a software product for hospitals. They expect to raise money from an angel investor within a year and from a venture fund after that. Turnover in the first year is expected to be Rs. 40 lakh. They ask you (a) which of the three forms of organisation they should choose and why; (b) the procedure for registering the form you recommend; and (c) whether they can be recognised as a start-up, and what recognition would give them.

Answer to 1(a)

Recommend a private limited company, for four reasons drawn from the comparison.

1. Limited liability. In a partnership firm under the 1932 Act the partners' liability is unlimited, personal, joint and several, and the firm has no legal personality. An LLP and a company both give limited liability.

2. The funding market is built around a company. An angel investor and a venture fund invest by subscribing to shares, with rights that assume a share capital, a board and articles. An LLP has contributions and an agreement, and investors dislike it.

3. The section 80-IAC certificate. Paragraph 3 of G.S.R. 127(E) confines the tax holiday certificate to a private limited company or a limited liability partnership. A registered partnership firm is excluded.

4. Employee shares. A company can give employees stock options, which a software business will want and which a firm cannot do.

Against it: a company costs more to form and to run, is audited whatever its turnover, and its filings are public. Those costs are worth paying here because the plan is to raise outside money.

An LLP would be the answer if they intended to fund the business themselves.

Answer to 1(b)

Step 1. Digital signature. A Class 3 Digital Signature Certificate for each proposed director and subscriber.

Step 2. DIN. A Director Identification Number for each proposed director, applied for inside SPICe+ Part B for up to three who do not have one.

Step 3. SPICe+ Part A, the name. Reserve the name, subject to section 4: not identical with or too nearly resembling an existing company or a registered trade mark, and not undesirable. It must end with "Private Limited".

Step 4. SPICe+ Part B, with the capital structure, the registered office and its proof, the subscribers and directors with their particulars and identity proof, and the applications for PAN, TAN, EPFO, ESIC, profession tax, a bank account and, if opted for, GSTIN.