Companies in India can become “dormant companies” if they are inactive or have no significant business operations for a predetermined amount of time. This status allows companies to maintain their legal existence while reducing compliance requirements and regulatory obligations. The idea of a dormant company, the standards for designating a company as dormant, the benefits of maintaining a dormant company, the compliance requirements, and the procedure for obtaining dormant company status in India are all covered in this article.
When a company ceases its business operations or goes dormant for a certain period, it can be classified as a dormant company. A dormant company allows businesses to keep their legal structure intact without engaging in commercial activities. By obtaining dormant status, companies can minimize their compliance requirements and focus on reactivating their operations correctly.
A dormant company is a legal term that describes an inactive company with no significant accounting transactions during a specific period. The Companies Act of 2013 provides guidelines for identifying and maintaining the dormant status of a company in India. This status benefits companies temporarily engaged in business activities but wishing to retain their legal entity.
To classify a company as dormant, it must fulfill certain criteria set forth by the Companies Act of 2013. These criteria include:
A company can be dormant if it has not conducted business operations or transactions for two consecutive financial years. This means the company should not have generated any income or incurred expenses during this period.
A dormant company should not have made significant accounting transactions, such as sales, purchases, investments, loans, or payments. However, a few specific transactions are allowed, including payment of fees to regulatory authorities or maintaining the company’s registered office.
Obtaining the status of a dormant company offers several advantages, including:
To obtain the dormant company status in India, the following steps need to be followed:
The company’s directors must prepare an application in the prescribed format, declaring the intent to obtain dormant status. The application should include details such as the reasons for seeking dormancy and the expected duration of inactivity.
The directors should convene a board meeting and pass a resolution approving the application for dormant status. The board resolution should be duly signed and documented per the Companies Act 2013.
Once the application and board resolution are prepared, they must be filed with the ROC. The necessary supporting documents and fees should accompany the application. Upon successful verification, the ROC will grant the dormant status to the company.
Q1. What is the meaning of a dormant company?
A: A dormant company is a company that is inactive or has no significant business operations for a specific period. It retains its legal existence while minimizing compliance requirements.
Q2. Can a dormant company have bank accounts?
A: A dormant company can have bank accounts to maintain its assets or pay regulatory authorities fees. However, it should not engage in significant financial transactions.
Q3. Is it mandatory for dormant companies to file annual returns?
A: Dormant companies must file annual returns with the Registrar of Companies (ROC) within the prescribed timelines. This helps maintain compliance and provides updates on the company’s shareholders and directors.
Q4. Can a dormant company be converted into an active company?
A: Yes, a dormant company can be revived and converted into an active one when it resumes its business operations. This involves filing an application with the ROC and fulfilling the requirements.
Q5. What are the penalties for noncompliance by a dormant company?
A: Noncompliance by a dormant company can lead to penalties and legal consequences. It is vital to fulfill the compliance requirements, such as filing annual returns and maintaining financial statements, to avoid penalties or legal issues.
Q6. How long can a company maintain its dormant status in India?
A: A company can maintain its dormant status indefinitely if it continues to fulfill the criteria set forth by the Companies Act of 2013. No specific time limit is imposed on the dormant status’s duration.
Q7. Can a dormant company change its registered office address?
A: Yes, a dormant company may modify the address of its registered office by following the required steps and submitting the required paperwork to the Registrar of Companies (ROC). To ensure compliance, the company should update the information on its registered office.
Q8. Can a dormant company hold board meetings?
A: Yes, a dormant company can hold board meetings to comply with legal requirements, make decisions related to its dormant status, or any other essential matters. However, it should avoid engaging in significant business activities.
Q9. Are dormant companies exempted from paying taxes in India?
A: Dormant companies are still subject to certain tax obligations in India. Even though they may have reduced compliance requirements, they must fulfill their tax responsibilities, such as filing income tax returns and paying applicable taxes or fees.
Q10. Can a dormant company engage in passive income generation?
A: While a dormant company should not actively engage in business activities, it may generate passive income, such as rental income from owned properties or interest income from investments. However, ensuring that such income does not breach the criteria for maintaining the dormant status is vital.
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