July 11, 2014

Queries on Incorporation of Company by a E-Commerce StartUp



Dear Mr. Akshay Jain,

I came across your blog on How to start an eCommerce business. It was quite insightful. I am in the process of forming an eCom company - a pvt. ltd. co. - and am looking for some guidance & professional support for the same.
1. There are 7 promoters as of now bringing in different share of equity, and the total funds that we require for the business are Rs. 50-60 lacs. Would it entail having a authorised share capital of Rs. 50-60 lacs, or is there a way we can keep down the authorised share capital and bring in additional funds in another way? What would you propose?

2. Do all the promoters need to be Directors, or can there be lesser directors (say, 4 are directors and 2 are not)? Can the directors be added later? Do the directors need to be stake-holders or can there be part-time directors, who are not stake-holders?

3. Can the authorised capital of a company be increased at a later date? If yes, is there any time boundation for the same? This question is important for us to consider right at this stage, given that we are launching an eCommerce company, and this kind of business relies a lot on issuing Employee Stock Options (ESOS) and Sweat Equity for bringing in & retaining talent.

4. How does the concept of 'Sweat Equity' work? Can it be brought in right at the incorporation stage, or does one need to wait for completion of 1 year of commencement of business to issue sweat equity? Are sweat equity shares part of the total authorised capital, or can they be added to authorised capital at a later date?

5. We are looking at hiring our office for registered office purpose. Should such a rent agreement be in place by the date of filing or can it also be for a future date. Say, we are going to start operations in September. So, can the rent agreement be given now stating the start date of the said agreement to be Sep 01, 2014, or should it be effective on the date of filing itself?

6. We would also need a CST/VAT registration as our annual turnover is likely to cross Rs. 5 lacs within the first 3-5 months. This registrations would be required either in U.P. or in Haryana or in Delhi (the same state as our registered office). We have been told that Service Tax registration is mandatory only after turnover (of services provided) exceeds Rs. 9 lac in year 1, and thereafter, it is mandatory in year 2. Kindly advise if this is correct, or do we need to apply for service tax registration as well. We will be selling manufactured goods only (apparel & imitation jewellery, with no customization). Believe that this is treated as a product sale and not seen as a service, and attracts VAT only. Also, we will be providing free shipping on most sales. Only on low order value, will we be charging additionally for shipping (which is seen as a service). To reach a shipping value of Rs. 9 lac, we would need around 20,000 such orders, which is much more than what we anticipate as total orders for the entire year. So, we presume that service tax registration may not be required. Also, we'll be doing CODs through our logistics partners - would it be treated as a service provided directly by us, or by the logistics providers? Please advise.


Hi Shailesh,

Welcome to and thanks for posting your query on E-commerce start ups. We would be really happy to help you, get your answers below:

1.  The amount of funds brought by the Shareholders will be Share Capital and accordingly you will have to take the Authorized Capital for it. Earlier you could have issued shares on premium and could have kept your Authorized Capital to a minimum level and thus could have saved your Incorporation cost. But due to Finance Bill 2013 a provision has been inserted in Income Tax Act, 1961 and thus the amount of premium received is now taxable under the Act.

You can do one thing, take the amount as loan from Directors and bring the left over capital as Share Capital. But remember that loan can only be given by director and that to from his own sources and no one else (reason being The Companies Acceptance of Deposit Rules, 2014).

2. A private company required a minimum 2 directors and thus there is no condition to make all the shareholders the Director of the Company. Director can be appointed later on and directors can resign from the company as well.

3. Yes it can be increased and there is no time boundation. A resolution has to be passed by shareholders.

4. “sweat equity shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; The relevant provision regarding its issuance are given below:

Section 54 of Companies Act, 2013
(1) Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:—

(a) the issue is authorised by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business; and

(d) where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations madeby the Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

(2) The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

Sweat Equity Shares are part of Authorized Capital.

5. A rent agreement is mandatory and it will be required at the time of filing. The dates of agreement would be as per your Convenience but it should be before Incorporation date.

6. If the Business Model of your E-commerce is such that you will Sell goods directly to customers than the VAT registration is mandatory. Service Tax registration as rightly said by you will have to taken once the receipt crosses 9 lakhs and tax has to be paid after receipt crossed 10 lakhs. If there are no Service Fees taken by the Company than there would be no need of Service Tax registration.
 Secondly regarding Logistic Charges, as per my view it is not taxable on Companies hand as you are not providing Services.
Hope this helps you, feel free to contact further for any query,

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