Registered Vs Unregistered Companies in India

In the dynamic landscape of business, the structure and legal standing of a company significantly influence its operations, growth potential, and regulatory obligations. Every business, from a small local shop to a large multinational corporation, operates within a framework defined by laws and regulations. Understanding these formalities is crucial for anyone looking to start or grow a business.

The primary aim of this blog is to elucidate the differences between registered and unregistered companies in India. By exploring their distinct characteristics, legal implications, and operational differences, we aim to provide a comprehensive understanding that will help entrepreneurs and business owners make informed decisions about their business structure.

Importance of Registration

The decision to register a company or operate it informally has far-reaching consequences. Registration offers legal protection, credibility, and access to financial resources, while unregistered businesses enjoy simplicity and minimal compliance requirements. Grasping the significance of these differences is essential for aligning your business strategy with your long-term goals and ensuring compliance with the law.

Definition and Types of Companies in India

Registered Companies

Registered companies are those that have completed the formal process of incorporation as defined by Indian law. These companies have a legal identity separate from their owners and are recognized by regulatory bodies such as the Ministry of Corporate Affairs (MCA) and the Registrar of Companies (ROC).

Registered companies are formally incorporated under the Companies Act 2013 or other relevant laws. They include various types, such as:

• Private Limited Company- A company privately held by a small group of people. They have limited liability, restriction on the transfer of shares, and a minimum of two and a maximum of 200 members.
• Public Limited Company- A company that offers shares to the public and has limited liability. Minimum of seven members with no upper limit, shares freely transferable, mandatory to hold annual general meetings.
• One Person Company (OPC)- A company with only one member. Limited liability, simpler compliance requirements compared to private or public companies, suited for solo entrepreneurs.
• Limited Liability Partnership (LLP)- A partnership in which some or all partners have limited liabilities. Combines the benefits of a partnership with those of a limited company, limited liability for partners, no requirement for minimum capital contribution.

Unregistered Companies

Unregistered companies are those that do not undergo the formal registration process and hence are not recognized as separate legal entities from their owners. These businesses operate based on agreements between parties or through informal understanding and are subject to general business laws rather than specific company laws.

Unregistered companies, on the other hand, do not go through the formal registration process. Common forms include:

• Sole Proprietorship- A business owned and operated by a single individual. Simple to set up and operate, complete control by the owner, unlimited liability, the business income is treated as personal income.
• Partnership (without registration)- A business owned by two or more individuals based on a mutual agreement. Shared control and management, profit-sharing as per agreement, unlimited liability for partners, relatively simple to establish.
• Informal Family Businesses- Small-scale businesses often run by families without formal registration. Operate on trust and family ties, informal management structure, unlimited liability, less regulatory oversight.

Legal Framework

Registered Companies

Governing Laws: Registered companies are governed by specific statutes such as the Companies Act 2013, which outlines the rules for incorporation, management, and dissolution.

Regulatory Bodies: These include the Ministry of Corporate Affairs (MCA), which oversees corporate governance, and the Registrar of Companies (ROC), responsible for maintaining company records and ensuring compliance with legal requirements.

Unregistered Companies

Governing Laws: Unregistered businesses operate under general business laws and contract law, as there is no specific governing body for their regulation.

Regulatory Bodies: They do not have a specific regulatory body but must comply with local regulations, tax laws, and industry-specific guidelines.

By understanding these fundamental differences between registered and unregistered companies in India, business owners and entrepreneurs can make more informed decisions that align with their business goals and regulatory requirements.

 

Process of Registration

Registered Companies

Detailed Steps

• Name Approval: The first step involves selecting a unique name for the company and getting it approved by the Registrar of Companies (ROC). This can be done through the MCA’s online portal.
• Digital Signature Certificate (DSC): Obtaining DSCs for the proposed directors of the company is necessary. This is used for signing electronic documents submitted to the ROC.
• Director Identification Number (DIN): Applying for a DIN is mandatory for anyone intending to become a director in an Indian company. This unique identification number is issued by the MCA.
• Filing Incorporation Documents: Prepare and file the incorporation documents, which include the Memorandum of Association (MOA) and Articles of Association (AOA), with the ROC. Other necessary documents include identity and address proof of directors, proof of registered office address, and the subscription sheet.
• Payment of Fees: Pay the registration fees and stamp duty applicable, which vary depending on the authorized share capital of the company.
• Certificate of Incorporation: Once all documents are verified and approved, the ROC issues a Certificate of Incorporation, officially registering the company as a legal entity.

Time and Cost Involved

Time: The entire process typically takes 15-20 days, assuming all documents are in order and there are no objections.

Cost: Costs can vary widely based on professional fees (for consultants, lawyers), government fees, and stamp duty. On average, the total cost might range from INR 10,000 to INR 30,000 for private limited companies.

Unregistered Companies

Simplicity in Formation : No Formal Registration Required: Setting up an unregistered company is straightforward since it does not require formal registration with the ROC.

Licenses and Permits: While no central registration is needed, businesses must obtain local licenses and permits, such as a shop and establishment license, GST registration, and other industry-specific permits.

Legal Identity and Perpetual Succession

Registered Companies

Separate Legal Entity : A registered company is recognized as a separate legal entity distinct from its owners. This means the company can own property, enter into contracts, sue, and be sued in its own name.

Perpetual Succession : Registered companies enjoy perpetual succession, meaning they continue to exist irrespective of changes in ownership, management, or the demise of shareholders. This provides stability and continuity, essential for long-term business planning.

Unregistered Companies

No Separate Legal Entity : Unregistered companies do not have a distinct legal identity separate from their owners. The business and the owner are considered the same legal entity.

Lack of Perpetual Succession: The continuity of an unregistered business is heavily dependent on the lifespan and involvement of its owners. If an owner dies or withdraws from the business, the business often ceases to exist or faces significant disruptions.

Liability of Owners

Registered Companies

In registered companies such as private limited companies, public limited companies, and LLPs, the liability of the owners (shareholders or partners) is limited to the extent of their investment in the company. This means that in case of any financial loss or legal issues, the personal assets of the owners are protected, and only the assets of the company can be used to settle debts and obligations.

Unregistered Companies

In unregistered businesses like sole proprietorships and unregistered partnerships, the owners have unlimited liability. This means that if the business incurs debt or faces legal actions, the owners’ personal assets (such as their home, car, and savings) can be at risk to cover business liabilities. This exposes owners to significant financial risk.

Compliance and Reporting Requirements

Registered Companies

Registered companies are subject to rigorous compliance and reporting requirements to ensure transparency and accountability. Key compliance obligations include:

• Annual Returns: Filing annual returns with the Registrar of Companies.
• Financial Statements: Preparing and filing audited financial statements annually.
• Board Meetings: Holding regular board meetings and annual general meetings (AGMs).
• Statutory Audits: Conducting annual audits by a certified chartered accountant.
• Other Filings: Periodic filings for changes in the company’s structure, directors, or shareholding.

Higher Transparency and Accountability : The stringent compliance requirements ensure that registered companies maintain a high level of transparency in their operations. This builds trust among investors, creditors, and other stakeholders, facilitating better access to funding and business opportunities.

Unregistered Companies

Unregistered businesses face much simpler compliance obligations. Their primary requirements include:

• Basic Accounting: Maintaining records of income and expenses.
• Tax Filing: Filing income tax returns as applicable under personal or business tax laws.

Lower Transparency: Due to minimal compliance requirements, unregistered companies operate with lower transparency. This can limit their ability to attract investment, enter into large contracts, and gain the trust of potential partners and customers.

 

Funding and Investment Opportunities

Registered Companies

Registered companies have access to a wide range of funding sources that can support growth and expansion:

• Equity Funding: Issuing shares to investors, including private equity and public offerings (for public limited companies).
• Debt Financing: Borrowing from banks and financial institutions, issuing debentures, or bonds.
• Venture Capital: Attracting venture capital funds that invest in high-potential businesses in exchange for equity.
• Angel Investors: Securing funding from angel investors who provide capital for startups in return for ownership equity or convertible debt.

Easier to Attract Investment: The formal structure, legal standing, and transparency of registered companies make them more attractive to investors. Investors are more willing to invest in businesses that are legally recognized, have limited liability, and are subject to regulatory oversight, as these factors reduce investment risks.

Unregistered Companies

Unregistered companies face significant challenges in securing external funding:

• Self-financing: Owners often rely on personal savings or funds from friends and family.
• Small Loans: Obtaining small business loans from local banks or informal lenders, often with higher interest rates and stringent terms.

Challenges in Attracting Large Investments: Due to their lack of formal structure and legal recognition, unregistered companies struggle to attract large-scale investments. Potential investors are wary of the risks associated with unlimited liability and the lack of transparency, making it difficult for these businesses to secure substantial funding.

Credibility and Business Perception

Registered Companies

Registered companies benefit from higher credibility and trustworthiness in the market. The formal registration process, compliance with legal requirements, and regular audits enhance their reputation. This credibility is crucial for:

• Securing Contracts: Larger clients and government agencies often prefer to do business with registered companies.
• Building Partnerships: Establishing strategic partnerships with other businesses and stakeholders.
• Customer Trust: Gaining the confidence of customers who are reassured by the company’s legal standing and accountability.

Preferable for Larger Clients and Contracts: For larger contracts and clients, especially those in the corporate or government sector, registered companies are often a prerequisite. Their formal structure ensures that these entities can fulfill contractual obligations, manage risks, and provide continuity in services.

Unregistered Companies

Unregistered companies are generally perceived as less reliable due to their informal nature, lack of regulatory oversight, and potential financial instability. This perception can limit their business opportunities and market reach.

Suitable for Small-scale, Local Businesses: While unregistered companies may face credibility challenges, they can still thrive as small-scale, local businesses. They are well-suited for:

• Local Markets: Catering to local customers who may prefer personalized services.
• Niche Services: Offering specialized or niche products and services where personal relationships and trust are paramount.
• Cost-Efficiency: Operating with lower overhead costs due to minimal compliance and regulatory requirements. 

Taxation

Registered Companies

Corporate Taxation Rates: Registered companies in India are subject to corporate tax rates, which vary based on the type and size of the company. For example, domestic companies with a turnover up to a certain threshold may benefit from lower tax rates. Additionally, certain types of companies, such as those engaged in specific sectors, may receive tax incentives or exemptions.

Eligibility for Various Deductions and Benefits: Registered companies can avail themselves of various tax deductions and benefits, such as:

• Depreciation: Deductions on the depreciation of assets.
• Research and Development: Deductions or credits for R&D expenses.
• Donations: Deductions for donations made to certain funds and charitable organizations.
• Other Incentives: Sector-specific incentives, startup benefits, and tax holidays.

Unregistered Companies

Taxed as Personal Income of the Owners: Unregistered companies like sole proprietorships and unregistered partnerships do not have separate tax identities. The business income is treated as the personal income of the owners and is taxed according to individual income tax rates.

Limited Tax Benefits: Unregistered businesses have limited access to the tax benefits and deductions available to registered entities. They can claim basic business expenses but miss out on the more significant deductions and incentives that registered companies enjoy.

Dissolution and Winding Up

Registered Companies

Formal Process for Dissolution: The dissolution of a registered company involves a formal and often lengthy process, which ensures all legal obligations are met. This process includes:

• Board Resolution: Approval from the board of directors.
• Shareholder Approval: Consent from the shareholders.
• Notice to ROC: Filing the necessary forms with the Registrar of Companies.
• Liquidation: Appointing a liquidator to settle debts and distribute any remaining assets.

Creditors’ Claims and Legal Obligations: During dissolution, registered companies must settle all outstanding debts and obligations to creditors before any assets are distributed to shareholders. This ensures that creditors’ rights are protected.

Unregistered Companies

Simplified Dissolution: The dissolution process for unregistered companies is more straightforward, often involving just the cessation of business activities and settling any outstanding debts. There is no formal procedure required by law.

Fewer Legal Formalities: Since unregistered companies are not legally recognized entities, there are fewer legal formalities involved in winding up the business. The process primarily focuses on ensuring that all financial obligations are met and that the business is officially closed.

Conclusion

Understanding the differences between registered and unregistered companies in India is crucial for making informed business decisions. Registered companies offer benefits such as limited liability, access to various funding sources, higher credibility, and eligibility for tax deductions. However, they also come with stringent compliance requirements and formal dissolution processes. Unregistered companies, while simpler and more flexible to operate, expose owners to unlimited liability and have limited funding and tax benefit options.

When deciding whether to register a company, consider your business’s long-term goals, the level of risk you are willing to assume, and the regulatory requirements you can manage. The decision will impact your ability to attract investment, manage liabilities, and ensure business continuity.

Given the complexities involved, it is advisable to consult with legal and financial advisors who can provide tailored guidance based on your specific business circumstances and objectives. This is where Avenue Consumer Brands comes in.

Why Choose Avenue Consumer Brands?

Expert Guidance: With extensive experience in the Indian market, we provide end-to-end support, ensuring your business complies with all local regulations and operates smoothly.

Local Expertise: Our deep understanding of India’s business environment, cultural nuances, and market dynamics helps you make informed decisions and avoid common pitfalls.

Strategic Partnerships: We leverage our network of local partners and suppliers to help you establish a robust supply chain and gain competitive advantages.

Comprehensive Services: From market research and site selection to legal compliance and financial management, our services cover every aspect of setting up a manufacturing business in India.

Transform your vision into reality with Avenue Consumer Brands. Let us guide you through the process of setting up a manufacturing business in India, ensuring you capitalize on the immense potential the country offers.

Contact Us Today contact@avenueconsumer.com  to learn more about how we can help you achieve your business goals in India. Together, let’s build a future of growth and success. 

Further Reading and Resources

Ministry of Corporate Affairs (MCA): MCA Website

Income Tax Department: Income Tax Department Website

FAQs 

1. What are the advantages of registering a manufacturing business in India?

Answer: Registering your manufacturing business in India offers several advantages, including limited liability protection, access to various funding sources, eligibility for tax deductions and benefits, and enhanced credibility in the market. Registered companies also benefit from formal dissolution processes, making it easier to wind up the business if needed.

2. What are the key differences between registered and unregistered manufacturing businesses in India?

Answer: Registered manufacturing companies enjoy legal recognition as separate entities, limited liability protection, and access to funding and tax benefits. On the other hand, unregistered businesses have unlimited liability, limited access to funding, and fewer tax benefits. Understanding these differences is crucial for entrepreneurs deciding on the most suitable business structure.

3. What factors should US entrepreneurs consider before starting a manufacturing business in India?

Answer: Before starting a manufacturing business in India, US entrepreneurs should consider factors such as market demand, competition, regulatory requirements, cultural differences, and potential risks. Conducting thorough market research and seeking expert advice can help entrepreneurs make informed decisions and mitigate challenges in entering the Indian market.