You can form a private limited company for trading in stocks .The Memorandum of Association contains a clause called “Object Clause” which set out the object for which the company has been framed. If its objects includes activity of investing and trading then, such private limited company can invest.

2) you need an NBFC licence 

3) consult a CA 

the primary objective of an LLP cannot be trading, it could be a secondary objective

2) As per RBI guidelines, you need to register as an NBFC if your primary income is through financial activities. This doesn’t apply in the case of individuals.

RBI considers a company's principal business to be financial in nature if more than 50% of its total assets and gross income come from financial activities.

2) This definition ensures that only companies primarily involved in financial operations are registered as NBFCs and fall under RBI's regulatory oversight

1. a private limited company can trade and invest in shares of any public company in India if its Memorandum of Association allows such investing. The Memorandum of Association contains a clause called “Object Clause” which set out the object for which the company has been framed.

a partnership firm can invest in the stock market. However, the partnership firm cannot hold shares in its name. No partnership firm may own shares of any corporation.

2.A company that is incorporated for the purpose of trading in capital markets may need to obtain a Non-Banking Financial Company (NBFC) license from the Reserve Bank of India (RBI). This is because the company would be deriving more than 50% of its revenue from financial assets. 

Limited Liability Partnerships (LLPs) in India can trade on the stock market. The Securities and Exchange Board of India (Sebi) allows LLPs to become members of stock exchanges in India

A company that is incorporated for the purpose of trading in capital markets may need to obtain a Non-Banking Financial Company (NBFC) license from the Reserve Bank of India (RBI). This is because the company would be deriving more than 50% of its revenue from financial assets. 

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Dear Client,

Here is the answers of your questions regarding the incorporation of private limited company or LLP for stock trading;

1) Yes, one is allowed to incorporate a private limited company or LLP and generate 100% of revenue from stock trading. But there are some conditions which one has to follow or avoid while using it.

2) If the company has 50% or more total assets in the form of shares, securities, bonds, etc. and has 50% or more gross income from these financial assets, then it will come under the category of NBFC i.e., Non-Banking Financial Company and it is compulsory to obtain NBFC license from RBI. To get this NBFC license however it is not very easy as there are a lot of regulatory standards that have to be met.

3) It is not always beneficial for you from a tax point of view to incorporate a private limited company or LLP. The company, its profits, will be subjected to the corporate tax rate, the current being 25% for small companies while any dividend paid to shareholders will further be charged for taxes. While it is true that some of these may be applicable to an individual and not to a company or corporation.

4)Yes, it is allowed to deduct the director’s salary while operating a private limited company. However, the salary should be reasonable and should be equivalent to the salary paid in other similar organizations. From the salary income, taxes will be deducted from the side of the director.

5) It is also possible to form an LLP and make profit from stock investing. For tax purposes, LLPs are classified as pass-through entities, and the income is taxed in the hands of the partners. If an LLP does not fall into the above criteria it does not need to hold an NBFC license.

6) If the overall profits from stock investment are less then 50%, NBFC license may not be necessary to be obtained. However, it is proper to keep records/documentation in order to support the recognition of income as business income as opposed to being capital gains.

It is better to turn to a tax consultant or an attorney who would be familiar with rules and provisions of the finance legislation. The decision to incorporate a company or LLP for trading in stocks depends with the kind of stocks one intends to invest in, and level of risk tolerance that one has.

Hope you find this answer satisfactory.

1. Legality of Owning a Pvt Ltd or LLP for Stock Trading

Yes, it is legal to own a Pvt Ltd or LLP that derives 100% of its profits from stock trading. However, the company’s Memorandum of Association (MOA) must include stock trading as one of its objectives.

2. Requirement for NBFC License

If the primary business of the Pvt Ltd or LLP is stock trading and it involves managing funds from multiple investors, it may be classified as a Non-Banking Financial Company (NBFC), which requires an NBFC license from the Reserve Bank of India (RBI). However, if you are only using your own and your brother’s money, it might not require an NBFC license.

3. Tax Efficiency: Pvt Ltd or LLP vs. Individual Account

• 
  Pvt Ltd Company: The corporate tax rate for Pvt Ltd companies is generally lower than the highest individual tax rate. For companies with a turnover of up to INR 400 crore, the tax rate is 25%, and for others, it is 30%. Additionally, companies can claim various business expenses, which can reduce taxable income.
• 
  LLP: LLPs are taxed at a flat rate of 30% plus surcharge and cess as applicable. LLPs also allow for the distribution of profits without additional dividend distribution tax, which can be beneficial.
• 
  Individual Account: Individuals are taxed based on income slabs, which can go up to 42.7% including surcharge. However, individuals can also claim expenses related to trading under ITR-3.

4. Claiming Director’s Salary as Expense

Yes, a Pvt Ltd company can claim the director’s salary as an expense, provided it is reasonable and in line with the company’s financial performance. There are no specific limits on director remuneration for private companies, but it must be approved by the board of directors and comply with the Companies Act, 2013.

5. If the profits from stock investments fall under 50% of the total profit, your company may not require an NBFC license. The Reserve Bank of India (RBI) generally mandates an NBFC license for companies where financial activities constitute more than 50% of the total assets and income. This is known as the 50-50 test.

In your case, if stock trading profits are less than 50% of the total profits, and the financial assets are also less than 50% of the total assets, a Private Limited Company (Pvt Ltd) should be sufficient without needing an NBFC license.

You can form a private limited company for trading in stocks 

if more than 50% of income is from trading, it would need NBFC license.

Yes, if you are doing it privately then you may not have to obtain NBFC licence.

Dear Client,

Section 45(I) of the RBI Act notes that private limited companies can do financial business without an NBFC license provided the company is doing more than 50% of its business in the financial line. But if the company is involved in stock broking and does not involve in lending business or any other financial service then, it could not be categorized as NBFC. Under the Companies Act, 2013 it is legal for the private limited companies to invest in share market with certain regulations such as record-keeping, audit, and following corporate regulations. A tax on the gains made in stock trading may be charged in form capital gains tax. To ensure it is followed we suggest that activities should be well documented and open a corporate Demat account to go through a registered broker.

Hope you find this answer beneficial for resolving the dispute.

1.  As per law, a private limited company can trade and invest in shares of any public company , however there must be an “Object Clause” for the same. 

2. Yes

3. Yes

4. Yes