Suggestion needed for starting a company

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Querist : Anonymous

Querist : Anonymous (Querist)

29 January 2014 Dear All,

Our group of friends want to start a company whose primary businesses would be

- Purchase & Sale of Property
- Development of Property & Sale

We plan to have 50 shareholders who would contribute 50,000 each half yearly for 5 years. Thus taking the company to 2.5 Crore's.

1) Managing Director would either get 10% sweat equity or 10% of Net Profit every year. What is better ??

2) How we should place its authorized capital as ? , should it be 2.5 Cr from the start itself (it would be costly :) )? or we can start with some other amount ? and keep increasing ??. how to consider future expansions if we subscribe all the authorized capital ??

3) should we charge some premium in share allotment to shareholder's ??

Any other suggestions are also most welcome around the same.

Regards

Nikhil Kaushik

Nikhil Kaushik (Expert)
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29 January 2014 1. I would suggest net profit...

2. you can start with a smaller authorized capital base..no point in incurring higher stamp duty to start with, this would leave lower amount of cash in your hand to start with.

3. premium will depend on valuation model..so cannot on this.

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Querist : Anonymous

Querist : Anonymous (Querist)

30 January 2014 Thanks Nikhil 2 points

- how much should be authorized capital to start with, how difficult it is to later increase authorized capital ?

- how to decide on a valuation model ?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Great questions! Starting a company, especially one with property development and a large group of shareholders, requires careful planning. Here's a detailed suggestion addressing your points:

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### 1) **Sweat Equity vs. Percentage of Net Profit for Managing Director**

* **Sweat Equity (10%)**

* Means issuing shares (equity) to the MD for his efforts.
* Gives MD ownership, aligned interests with shareholders.
* But dilutes ownership of existing shareholders.
* Requires compliance with **Companies Act (Section 54 & Rule 8 of Companies (Share Capital & Debentures) Rules, 2014)**.
* Valuation of sweat equity shares is needed.

* **10% of Net Profit**

* Simple profit-sharing arrangement, treated as remuneration/commission.
* Deductible expense for the company.
* No dilution in ownership.
* Easier to implement with clear performance-linked incentives.

**Suggestion:**
If the MD’s contribution is critical and long-term commitment is expected, **sweat equity** aligns interests better. If you want to keep ownership concentrated and simpler, **profit-sharing** is preferable.

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### 2) **Authorized Capital: How Much to Start With?**

* **Start with Lower Authorized Capital**

* You don’t need to start with full Rs. 2.5 Crore authorized capital.
* Start with a smaller amount, say Rs. 50 lakh or Rs. 1 crore.
* This reduces **stamp duty** and **registration fees** at incorporation.
* You can increase authorized capital later via **special resolution** and filing with ROC.
* Increasing authorized capital is straightforward but involves additional cost & compliance.

* **Consider Future Expansion**

* Do not fully issue the entire authorized capital at once.
* Keep some shares unissued (called shares in the authorized capital).
* Issue shares as and when shareholders bring in capital.
* This flexibility helps future fundraising or adding new shareholders.

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### 3) **Charging Premium on Share Allotment**

* **Premium depends on Valuation**

* If company valuation > face value of shares, you can charge premium.
* Premium credited to **Securities Premium Account** (non-distributable but used for certain purposes like issuing bonus shares).
* No premium means shares issued at face value.

* **Valuation Model**

* Valuation can be based on **Asset valuation**, **DCF (Discounted Cash Flow)**, **Comparable market valuation**, or a **professional valuer’s report**.
* For property business, **asset-based valuation** is common.
* Valuation affects taxation, especially if shares are issued at premium.

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### Additional Suggestions

* **Shareholder Agreement**

* Draft a strong shareholder agreement detailing capital calls, voting rights, transfer of shares, exit mechanisms, profit distribution.

* **Capital Calls**

* Instead of fixed half-yearly installments, allow flexibility in calls based on project needs.

* **Board Composition and Governance**

* Define roles, quorum, decision-making processes clearly.

* **Tax Planning**

* Plan structure for optimum tax benefits, including dividend distribution tax, capital gains, etc.

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### Summary Table

| Query | Suggestion |
| ------------------------------ | ------------------------------------------------------------------------ |
| Sweat equity vs profit sharing | Sweat equity for long-term alignment; else profit sharing for simplicity |
| Authorized Capital | Start small (e.g. Rs 50 lakh), increase later |
| Share premium | Charge premium if valuation > face value |
| Valuation method | Asset-based or professional valuation |

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If you want, I can help you draft a **sample shareholder agreement** or outline the steps for **increasing authorized capital** with procedural details. Would that help?

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