If you're dreaming of starting your company in India, you should feel proud that you've taken another step on your path to success! Once your new company is legally incorporated (and hopefully has exciting plans for operations, building brand recognition, applying for funding, etc.), then you and the other founders will most likely be focused on conducting business as quickly as possible. You might also want to check out the statutory requirements under the Companies Act, 2013, such as the Company Incorporation Form INC-20A that indicates to the Indian government's Registrar of Companies that you have actually received your money for shares of stock in your newly formed company (and that you would like authorization to operate as a business). By law, every newly formed corporation in India must apply to receive an INC-20A form and file it within six months (180 days) from the date of incorporation to legally commence any business activities. A common question arises, however: What if we have already submitted our INC-20A to the government but haven't conducted any other business activities since that time? This blog is devoted exclusively to this scenario, and provides a thorough examination of this issue from both a legal standpoint and from a practical perspective for companies that do not plan to pursue business activities following their INC-20A filing. In addition, the article will provide guidance on how to maintain compliance with ongoing requirements and avoid incurring penalties for remaining inactive after submitting the INC-20A.
Understanding FORM INC-20A: A Brief Overview
Companies must file FORM INC-20A, which includes a statutory declaration in accordance with Section 10A of the Companies Act, 2013, for businesses with share capital. The company must confirm the following in FORM INC-20A:
• All the shares agreed to be subscribed to in the Memorandum of Association have been fully paid for by all subscribers
• The company has confirmed that it has a registered office
• The company is allowed to begin operating or borrowing, if applicable
If a company fails to successfully complete FORM INC-20A, it will not be able to operate commercially or conduct any monetary transactions. This new initiative from the Ministry of Corporate Affairs (MCA) is meant to help reduce the incidence of shell corporations as well as ensure that true business intent exists for corporations established through the incorporation process.
Is It Mandatory to Start Business Immediately After Filing INC-20A?
No.
Under Companies Act of India 2013 there is no requirement under law for companies to operate immediately after submitting their FORM INC-20A. This form confirms that the Company has made itself ready for operating; it does not constitute operating the Company. There may be several reasons Companies might choose not to operate after submitting FORM INC-20A including but not limited to:
• Conducting market research or performing a feasibility analysis
• Delay in securing financing
• Restructuring of strategy
• Obtaining regulatory approvals
• Engaging in internal planning and/or partners aligning themselves
From a legal perspective, there is nothing illegal about filing a FORM INC-20A and then remaining inactive if the company continues to meet its required compliance obligations.
The INC-20A Form Filing Process Explained
To be able to assess compliance even when there isn't any business activity, one must have an understanding of how to file the INC 20A and what steps need to be taken.
Steps to File an INC-20A Form
1.Open a Company Bank Account
A current account must be opened in the name of the Company.
2. Deposit of Share Capital
The subscribed Share Capital is deposited by Shareholders into the Company's bank account.
3. Preparation of Declaration
A Declaration that states that the Company has received Subscription Money is prepared.
4. Certification by a Professional
The Form is certified by a Chartered Accountant, a Cost Accountant or a Company Secretary.
5. Submission on MCA Portal
The Form is then uploaded onto the MCA Portal along with the required attachments.
Businesses will often engage a professional filing service for an INC-20A Form, to guarantee accuracy and to minimize any potential delays in receiving approval for the Form.
Legal Requirement: Filing INC-20A Within 180 Days
According to law, every company must submit FORM INC-20A to the Ministry of Corporate Affairs within 180 days of its incorporation. If FORM INC-20A is not submitted within this period, the following penalties will apply:
(a) A penalty of ₹50000 will be applied to the company
(b) A penalty of ₹1000 per day will be applied to each director until the date of submission of FORM INC-20A, with a maximum penalty of ₹1,00,000
(c) The company may face removal of its name from the register of companies
After FORM INC-20A has been approved by the Ministry of Corporate Affairs, the company will be considered as compliant with the provisions of Section 10A. However, if a company is still inactive after compliance with Section 10A, what can the company do to address this inactivity?
Is it legally permissible for a company to have no activity after filing INC-20A?
The Short Answer
Yes, INC-20A itself does not compel the company to commence its operations immediately but rather confirm that the company is eligible to commence its business (not necessary for the company to carry on active trading).
After filing the INC-20A form, the company will become compliant with the law and have the ability to conduct business, but should it choose not to conduct any business it will still:
a) be considered a legally registered entity,
b) have all directors still responsible for statutory compliance,
c) continue to fulfill all MCA obligations on an ongoing basis.
Thus, a company does not incur any penalty under the Companies Act simply by not conducting any operations after the presentation of the INC-20A form.
Difference Between “Inactive” and “Non-Compliant” Companies
Many business owners confuse inactivity with non-compliance. The two are very different.
Basis
Inactive Company
Non-Compliant Company
INC-20A Filed
Yes
No
Business Activity
Nil or minimal
May or may not exist
Legal Status
Active
At risk
MCA Penalties
As long as INC-20A Filing Service in India has been completed properly and ongoing filings are done, inactivity is not a violation.
Ongoing Compliance Requirements Despite No Activity
The most often ignored component of Corporations is compliance. You must file the following returns regardless of whether or not the Corporation operates, generates revenue, or has expenses:
1.The Annual Filings required by the Registrar of Companies (ROC)
• AOC-4 (Financial Statements)
• MGT-7/MGT-7A (Annual Return)
A Corporation cannot claim to have satisfied any of the above requirements because it has no activity.
2. Filing an Income Tax Return
Every Corporation must file an Income Tax return each year whether it has:
• No Income,
• No Expense, or
• No Transaction
3. Appointment & Reporting of Auditors
The statutory auditor must be appointed and audit reports must be produced by the auditor, even though there are no transactions.
4. Maintenance of Statutory Registers
Register of members and directors, and share capital must be maintained.
Consequences of Ignoring Post-INC-20A Compliances
Non-compliance is what results from inactivity, but inactivity in and of itself isn't deemed as non-compliant. If you fail to meet your annual requirements, you will be subject to:
• Substantial financial fines
• Directors' disqualification
• A designation of “non-compliant” by MCA
• The initiation of a strike-off process by the Registrar of Companies
As a result of this, a company should consult with an experienced advisor and choose a well-structured INC-20A Form Filling Service that will give them additional assistance and guidance on meeting compliance requirements well beyond the submission of the INC-20A.
Common Reasons Why Companies Remain Inactive After INC-20A
Incorporation comes with many pitfalls; for example, most new companies have some type of delay after they've incorporated. A few of the reasons why this might occur include:
1.Market Readiness Issues
Most start-ups wait for
(1) market validation,
(2) product testing and
(3) a customer acquisition plan before they start selling products.
2. Delay in Receiving Funding
Regardless of whether they are already funded by investors through capital subscriptions, start-up companies usually must still wait for
(1) the venture capital/angel funds
(2) strategic investors to close their deals.
3. Regulatory/Licensing Approvals
Most sectors require certain approvals/permits from federal/state/local levels, whether it be
(1) GST registration
(2) FSSAI license
(3) RBI approval
(4) Industry-specific permits.
4. Restructuring of Internals
Almost all new corporations will have to make changes in their: (1) ownership (promoters), (2) Board of Directors, and/or (3) shareholder negotiations.
Is an Inactive Company After INC-20A non-compliant?
No, as long as the statutory requirements of the Company are satisfied, it's fine to operate as if you're still compliant.
Even though a Company may have zero revenues, no transactions and/or have ceased operations, it still has to continue to comply with its statutory obligations.
Annual Minimum Compliance Requirements Include:
• The filing of the company's Financial Statements (the AOC-4)
• The filing of the company's Annual Return (the MGT-7 / MGT-7A)
• The maintenance of statutory Registers of the Company
• The holding of Board meetings
• The filing of the Income Tax Return (even if it's a nil return)
Failure to comply with these may lead to:
• Severe Penalties
• Disqualification of the Directors of the Company
• The Company being regarded as "non-compliant"
Should You Declare the Company as Dormant?
If your business will not operate for the foreseeable future, it may be feasible for you to apply for dormant company status under Section 455.
The advantages of this include:
• Decreased Compliance Obligations
• Less Likelihood of the imposition of penalties.
• Protection of the legal name of your company.
Before assessing the potential for dormant company status, you must have completed the INC-20A form filing process.
Options Available for Inactive Companies
Companies who have had delays in their business activities need to be proactive and choose one of the following options:
1.Apply for Dormant Status
Section 455 allows for:
• To apply for dormant company status
• Removes your burdens on compliance
• Prevents you from being penalized unnecessarily
This option is best for companies that plan on resuming operations at a later date.
2. Continue To Comply Normally
A company may choose to:
• Continue to file their annual form filings
• Maintain compliance as usual
If a company expects to resume business in the near future, it would be beneficial to remain compliant to avoid any disruption to their business activities.
3. "Dissolve" the Company
In the case a company has determined it has no plans to do any future business:
• Apply for a voluntary strike-off of the company
• Stop paying continual compliance-related fees
It is important to seek the assistance of a professional during this process, especially when the process of completing INC-20A Form Filling Service is done.
Risks of Prolonged Inactivity After Filing INC-20A
While inactivity is allowed, prolonged dormancy without compliance can be risky.
Risk 1: Company Marked as Non-Operational
If ROC notices:
The company may be flagged for scrutiny.
Risk 2: Strike-Off by Registrar of Companies
Under Section 248 of the Companies Act:
Filing INC-20A alone does not protect a company from strike-off.
Risk 3: Director Disqualification
Non-compliance for three continuous years can result in:
Strike Off vs. Keeping the Company Inactive
If there is no future business plan, promoters usually face two choices:
1.Keep the company inactive but compliant
2.Apply for voluntary strike-off
Option
Suitable When
Risk Level
Inactive but compliant
Future plans exist
Low
Dormant status
Temporary inactivity
Very Low
Strike off
No future intent
Nil after closure
Professional advisors offering File INC-20A Service in India usually help founders evaluate the best route based on long-term strategy.
Common Myths About INC-20A and Business Activity
Myth 1: Starting a Business Immediately After INC-20A is a Must
Reality: You only have to file for INC-20A; it does not mandate the creation of a corporation.
Myth 2: No Business Activity = No Need for Filings (Therefore)
Reality: You must file annual returns even if your business has no income or activity at all.
Myth 3: Filing of INC-20A Means Completing All Compliance
Reality: Filing is just the beginning of your company's lifecycle of compliance.
Consequences of Ignoring Compliance After INC-20A
Many founders mistakenly assume that once INC-20A Form Filling Service is completed, compliance responsibilities end if no business is done. This assumption can be costly.
Non-compliance may result in:
Thus, compliance discipline remains essential even during dormancy.
Conclusion
Filing Form INC-20A within 180 days of incorporation is a mandatory legal requirement for All new Indian Companies are required by statute to file Form INC-20A with the Registrar of Companies for the purpose of enabling the Registrar to determine whether or not the Company was incorporated on or after 1 April 2004. However, there is no requirement for new Company to commence trading activities immediately after filing Form INC-20A. As long as the Company continues to file its annual returns with the Registrar and to have regular Board Meetings, then it is not breaking any law by remaining inactive after filing Form INC-20A. The failure to trade will not result in a fine against the Company, however, the failure to comply with continuing statutory obligations will result in the Company being fined. Accordingly, Companies must ensure that they not only file Form INC-20A but also remain compliant with their statutory obligations, or, in the alternative, that they are allowed to register as a Dormant Company, thus providing Company an opportunity for continued legal existence as well as continued future flexibility to conduct business as needed.
FAQs
1. Is it mandatory to start business immediately after filing INC-20A?
No, there is no legal requirement to start operations immediately after INC-20A filing.
2. Can ROC penalize a company for not doing business after INC-20A?
No, ROC does not penalize a company solely for inactivity, provided compliances are met.
3. Is INC-20A required for companies without share capital?
No, INC-20A applies only to companies having share capital.
4. Can a company apply for dormant status after INC-20A?
Yes, once INC-20A is filed, a company may apply for dormant status if eligible.
5. What happens if annual filings are missed due to inactivity?
Penalties apply irrespective of business activity.
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