This was an interesting question which I received on Quora here. How can I start a company with no capital? We will have a detailed discussion here.
Everyone with a business idea but no capital of its own faces this question. It may be possible to start a small time business without own capital. Most of small and marginal traders, hawkers and other vendors do it all over India. However, creating a formal structure of a company is a different thing.
It is now legally permitted for a company to have no minimum capital requirement. This is true in case of a company limited by shares. However, banks and other financial institution have a requirement of maintaining the minimum debt-equity ratio. Is it enough? No. This is a misguided missile. It forces promoters to adopt some corrupt practices to maintain the debt-equity ratio. The result is huge NPA. Banks never know the correct intention of promoters. Second unfortunate joke, as I mentioned here earlier, Banks took personal guarantees of promoters and most of these private limited companies virtually became unlimited.
We have a beautiful solution to start a limited liability company without any initial capital requirement.
I am talking about a company limited by guarantee not having a share capital.
A company limited by guarantee is not a popular choice among Indian promoters. It is just a public awareness issue. A company limited by guarantee may or may not have share capital. Where such companies opt to have a share capital it is to make available some initial capital for the company in the form of equity. It may also be used for easy calculation of voting power and transfer of holding in the company. However, a company having share capital does not fit in our reply to the question asked here.
A company limited by guarantee without share capital do not require a promoter to contribute any money at the initial stage. All promoters may give their personal guarantee to a limited extent to the company. The extent of such guarantee is limit of the liability.
Just to note, in case of companies limited by shares, such share capital fixed the limit of liability. However, such amount of liability practically paid beforehand. In such, there is no further liability of shareholders to contribute further.
As a promoter/member of a company limited by share, you pay your contribution at the time of start of the company while in a company limited by guarantee you pay your contribution at the end of the company, that too if required.
There is no difference in the formation of a company limited by guarantee not having share capital. Such companies do not require having a share capital and no such payment is required to be made before the commencement of business by these companies. In short, these companies need no initial capital. Members of these companies guarantee of payment at the time of liquidation or winding up, if such payment required. Formation of such companies gives a public understanding that this company is going to start the business with total confidence with borrowed money.
Its promoters/directors of these companies may raise loan and business advances for its working capital. In a good business model, customer advance and security deposit from its distribution network may also be a good source of working capital.
Unfortunately, banks and other lending institution are not fully aware of such companies. They are used to working with companies with share capital.
A private limited company limited by guarantee not having share capital is the best option for service-oriented companies where the capital requirement is limited.
AishMGhrana 