Formation of a company

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Meaning of formation of the company

A company is an artificial legal person i.e. it is a creation of law. It comes into existence when it is registered by following the procedures laid down by the Companies Act, 2013.
Formation of a Company means registering or incorporating a company with the Registrar of companies in the state where the company’s registered office is to be located.

Based on the minimum number of promoters in formation of a company

Promoters are the persons who undertake the method of formation of a corporation. As per the Companies Act, 2013 (Section 3), depending upon the number of promoters meaning to form a company and other aspects, 3 types of companies can be formed as follows:

    1. Public company ( Minimum 7 Promoters/Persons)
    2. Private company ( Minimum 2 Promoters/Persons)
    3. One Person Company ( Minimum 1 Promoter/Person)

Based on the capital structure & company may be registered as section 3 (2)

a. Company Limited by shares

In this company, capital is collected by issuing shares and therefore the liability of the members is limited to the extent of the unpaid part of the face value of shares bought by them.

b. Company Limited by guarantee

In this company, its members have bound to contribute a particular amount of cash either to the assets of the corporate at the time of completion or towards the value of winding up of the company.

c. Unlimited Liability company

In this company, the liability of its members is unlimited i.e. the members are liable to the whole amount of the company’s debts and liabilities.

Stages in the formation of a company

A. Promotion

B. Incorporation of a company

C. Commencement of Business

The Companies Act, 2013; Section 3(1) has stated the following conditions for the formation of a company :
i) a corporation shall be formed for any lawful purpose.
ii) Minimum 7 promoters needed for a public company, minimum 2 promoters for the personal company and 1 promoter for One Person Company
iii) All the promoters must subscribe their names to the Memorandum of Association.
iv) The promoters must comply with all the provisions of the Companies Act, 2013 concerning the incorporation of a company.

A. Promotion

Promotion of a company means taking all the necessary steps to incorporate a company as per the provisions of the Companies Act, 2013.

Meaning of Promoters:

The Persons who undertake the method of promotion of a corporation are called ‘Promoters’. A promoter is often a private, a partner, a company, an association or a syndicate.

Promoter as a person

1. Who has been named intrinsically during a prospectus or is identified by the corporate within the Annual Return
2. Who has control over the affairs of the corporate, directly or indirectly whether as a shareholder, Director or otherwise
3. Under whose advice, directions or instructions, the Board of Directors is accustomed to act.

However, a person who is assisting the promoter in a professional capacity (e.g. A lawyer, accountant etc.) cannot be called a Promoter.

Role of Promoters

i) Promoters are the ones who come up with the idea of starting a business.
ii) They decide the objects of the business, amount of capital needed, the scale of business operation etc.
iii) They prepare the various documents needed for incorporation of a company like Memorandum
and Articles of Association.
iv) Approach investors for collecting capital for the company.
v) Promoters often nominate themselves as first directors of the company and are first subscribers to Memorandum and Articles of Association.
vi) The promoters can enter into contracts with third parties on behalf of the proposed company. These contracts are called ‘Pre-incorporation contracts’ or ‘Preliminary Contracts’. E.g. Contracts for preparing and printing Memorandum and Articles of Association, hiring office premises, etc.
vii) Promoters have fiduciary duties towards the company they are setting up. They are supposed to act in such a manner to protect and promote the interest of the proposed company. They cannot make any secret profits while promoting a company.

They have to disclose any personal interest they have in a transaction they have entered on behalf of the proposed company.
After incorporation, the corporate compensates the promoters by reimbursing them the expenses incurred by them in the promotion of a company known as preliminary expenses. Immediately after the incorporation of a corporation, the Board of Directors takes charge of the management of the company.

Steps in Promotion of a company

1. Come up with an idea or suggest a business activity

The promoters come up with a commercial activity that they want to undertake. They choose a commercial activity after studying various factors like scope of business, competition within the market, availability of things of production, applicable laws etc. Based on this they prepare a business plan.

2. Prepare Financial Plan

The promoters decide the scale of operation and accordingly prepare the Financial Plan. The Financial plan gives details of the amount of capital needed and from where to raise it.

3. Prepare a draft of the Memorandum of Association and Articles of Association

Promoters prepare the draft of two most important documents viz. the Memorandum of Association and therefore the Articles of Association which is to be submitted alongside the appliance for incorporation of a company to Registrar of Companies.

4. Enter into Preliminary Contracts

On behalf of the proposed company, the promoters may enter into preliminary contracts with third parties. They enter into such contracts so that the company can start its business activity immediately after its incorporation.

5. Appoint First Directors

Promoters need to appoint first directors who will take hold of management of the corporate immediately after incorporation. Promoters often nominate themselves as the first directors of the company.

B.Incorporation of a company

Depending upon the objects of the company, scale of operation, amount of capital needed, etc. the promoters decide whether to form a public company or a private company.

Following steps are undertaken to incorporate a company

i) Obtain Digital Signature Certificate (DSC)

A Digital Signature Certificate is required for persons authorized to sign documents for e-filing. So Promoters and therefore the proposed first directors got to obtain a DSC by applying to the Certified Authority.

ii) Register DSC in the name of the Director with MCA

After obtaining the DSC in the name of the Promoter / Director, the DSC has to be registered with the MCA. MCA maintains the details of every Director including their DIN, personal details, etc.

iii) Obtain Director Identification Number (DIN)

The proposed first directors of the proposed company who don’t have DIN, need to apply for DIN in electronic form SPICe – 32 at the time of incorporation. A person to be appointed as a Director must have a DIN.

iv) Apply for Reservation of Name

The Promoters need to get the proposed name of the corporate-approved by the Central Registration Centre (CRC) by filling form RUN (Reserve Unique Name) alongside the prescribed fees through MCA Portal (www.mca.gov.in).

Promoters may suggest more than one name in the order of their preference. After verifying its database, CRC will give its approval for the proposed name and reserve the name for a period of 20 days from the date of application.

v) Finalize Memorandum of Association and Articles of Association

Two important documents the Memorandum and Articles of Association need to be submitted along with the appliance for incorporation of a corporation. These documents contain legal and technical information related to the objectives of the company and regulations for the operation of the company according to company Law. Hence, the promoters take the assistance of execs like a company Secretary, legal experts, accountants, etc. to finalize the draft Memorandum and Articles of Association.
In case a proposed public company wants to list itself with one or more stock exchanges, Promoters should send a copy of the draft Memorandum of Association and Articles of Association to such stock exchanges for his or her review and suggestions.

vii) Signing, Stamping and Dating of Memorandum and Articles of Association

The Memorandum of Association and Articles of Association must be signed by each subscriber to the Memorandum and shall add his name, description address, occupation, etc. in the presence of a minimum of one witness who shall attest the signatures and likewise sign and add his name, description, address, occupation, etc.
After signing, the Memorandum and Articles of Association need to be stamped as per the Indian Stamp Act, 1899. The stamp tax depends on the authorized share capital of the corporate and varies from state to state. There should be a date on M/A or A/A. It may be a stamping date or any other date after stamping.
Due stamp tax is required to be paid at the time of Incorporation.

Preparing other necessary documents needed for incorporating a company in Formation of a company

1. Consent of Directors 

A list of persons who have agreed to be the first directors along with their written consent should be prepared. Their personal details, DIN, Proof of identity, interest in other firms or companies, etc. should be included in the list. The required written consent should be in the prescribed format as per the Companies Act, 2013.

2. Details of Manager, Secretary

If the Articles of Association names an individual who is going to be the manager, Secretary, etc; particulars
of such persons should also be prepared for filing purposes.

3. Declaration by subscribers to the Memorandum and First Directors

A declaration should be taken from each subscriber to the Memorandum of Association and every person named as First Directors within the Articles of Association that he’s not convicted of any offence about promotion, formation or management of any company and he has not been found guilty of any fraud or dishonesty or breach of any duty to any company during the preceding 5 years. They even have to offer an undertaking that each one of the documents filed with the Registrar of companies is correct, complete and true.

4. Address for communication and notice of Registered office address

At the time of incorporation, if the proposed company has not decided its location of Registered office, the promoters have to give an address for communication. As per the Companies Act, 2013, a company is required to have a Registered office within 30 days of incorporation.

5. Obtain a statutory declaration from

(i) An advocate, practising company Secretary, a cost accountant or chartered accountant who is engaged in the formation of the company, and (ii) A person named within the Articles of Association as a Director, Manager or Secretary stating that all requirements associated with incorporation have been complied with.

6. Filing of application and documents for incorporation of a company

After all the documents are prepared, the promoters have to submit an application to the Registrar of companies within the prescribed form alongside all the required documents and therefore the prescribed fees for incorporation.

Simplified Proforma for Incorporation Company Electronically

Rule 38 of Companies (Incorporation) (Fourth Amendment) Rules has introduced, with effect from 2.10.2016, a simplified integrated process for incorporation of a corporation. Under this, only one form-Form INC-32 (SPICe), must be submitted at the time of incorporation of a corporation. SPICe is to be filed for applying for :

i) Reservation of Name of Company
ii) Incorporation of a new company
iii) DIN for Directors
iv) PAN and TAN for a new company

Along with the SPICe form, e-Memorandum of Association, e-Articles of Association and the prescribed fees and other documents necessary for the incorporation of a company are to be submitted electronically.

Obtaining Certificate of Incorporation

After verifying that all the documents and information submitted to it is proper, the Registrar of Companies will enter the name of the company in the Register of Companies and certifies under his hand that the company is incorporated. Registrar issues the Certificate of Incorporation in the prescribed form.

Contents of Certificate of Incorporation:

i) the name of the company.
ii) date of issue of Certificate of Incorporation.
iii) CIN.
iv) PAN and TAN of the company.
v) Signature of Registrar with the date and his seal

Importance of Certificate of Incorporation

i) Certificate of Incorporation is like the Birth Certificate of the Company as the company comes into existence from the date mentioned in the certificate.
ii) The Company now becomes a legal person distinct from its members.
iii) Company becomes a body corporate having perpetual succession from the date of its incorporation
iv) The company can sue and be sued upon others in its own name

Allotment of Corporate Identity Number (CIN)

At the time of issuing Certificate of Incorporation, the ROC also allots a CIN to the Company which is its unique identity number. CIN is a 21 digit alphanumeric code and is to be quoted in every form and correspondence that the company uses.

C. COMMENCEMENT OF BUSINESS

Public Companies and Private Companies not having a share capital can commence its business activities immediately after it has received the Certificate of Incorporation from the Registrar of companies.

However, Public Companies and Private Companies having share capital and which are incorporated after 2nd November 2018 have to obtain a Certificate of Commencement of business from the Registrar of Companies before they can commence their business activities or exercise borrowing powers.

Steps to obtain Certificate of Commencement of business in Formation of a company

i) Filing of a declaration by Director

A Director of the company has to file with the ROC, a declaration in the prescribed form along with fees. The declaration states that every subscriber of the Memorandum has paid the value of the shares agreed to be taken by them. The contents of the declaration shall be verified by a Company Secretary in practice or a Chartered Accountant or a Cost Accountant in practice.
The declaration should be filed within 180 days from the date of incorporation of a company.

ii) File Verification of Registered Office

The company has to also file verification of its registered office with the ROC.

iii) Obtain license or approval from Sectoral Regulator

Certain companies which propose to conduct banking business, insurance business or proposed to be listed on stock exchanges, require registration from Sectoral Regulators like Reserve Bank of India, Securities and Exchange Board of India, etc. Such companies must submit to ROC the approval obtained from the Sectoral Regulator.

iv) Commencement of business

After filing a declaration in the prescribed form, the ROC then shall issue a Certificate of Commencement of business.
Public and Private companies having share capital can now start their business or start collecting or borrowing money to undertake their business activities.
A Public company issues Prospectus to the public. A Prospectus is an invitation to the public to buy the shares of the company.

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