Can you Incorporate a Company for Trading Markets?

Capital market participation in India rose by a record high of 10.4 million in 2020. As trading and investing become more accessible, more and more people are participating in the stock market. With growing participation in Capital Markets, we have been getting this question lately, is it possible to incorporate a company for trading? And if yes, how so?
Let’s weigh our options.

One might think that incorporating a company is beneficial as it allows you to claim expenses, but that could also be done if you are trading in your individual name using ITR-3. So, why are traders keen on incorporating a company for trading in capital markets? These could be some of the possible reasons:

  • Possible Tax Benefits
    • One of the main reasons why traders consider this is because – the companies need to pay tax at a flat rate of 25% (if annual turnover is up to INR. 400 crore in FY 2017-18) instead of the income tax slab rate applicable to individuals.
  • Limited Liability
    • In a company, the liability of members is limited to the number of shares they have subscribed to as against the unlimited liability of an individual or a sole proprietorship/partnership firm.
  • Perpetual Succession
    • A company has perpetual succession, i.e. it is unaffected by changes or even death of any member.

Although, trading income is treated as business income for income tax purposes, they are not required to have the same compliances as businesses from MCA or GST perspective. Here, MCA does not require traders to incorporate a company for trading. Similarly, traders are not required to have GSTIN.

Now, the question is – can a trader have a company for trading?

Yes, you can still open a demat account for trading as Private Limited Company, similar to registering any other company.

But, does it make sense to have company for trading in capital markets?

When a  company is incorporated with the main objective of trading, it comes under the purview of RBI since the  company would be deriving more than 50% revenue from its financial assets, hence such company would have to take an NBFC license.

There are some other points too that come in the picture while going for incorporation of a company:

  • Tax on Dividend income
    • In order to withdraw the profits made by the company, it shall be paid as a dividend to the members which is taxable at slab rates.
  • Cost of incorporation
    • The cost of setting up, maintaining, and winding up upon dissolution of a company is considerable. A company is also required to abide by other general laws and compliances such as GSTIN, PF, etc, and also specific laws applicable to as per the nature of the company.
  • Compliances
    • A registered company has to bear the cost of certain mandatory annual compliances such as, filing of financial statements, filing forms for making changes in the Board, holding board meetings, etc. & a miss in any of these failing which would lead to incurring huge penalties.

So ultimately, it is upon the trader and their trading perspective to call the shots about whether to incorporate a trading company by balancing out the pros and cons ¯\_(ツ)_/¯

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Private Limited Company (PLC) Registration
CS Assisted incorporation of Private Limited Company (PLC) in India.
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Private Limited Company (PLC) Registration
CS Assisted incorporation of Private Limited Company (PLC) in India.
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