Formation of a Company

Notes on the Formation of a Company

Learning Objectives

By the end of this chapter, students should:

1. Identify stages involved in the formation of a company.
2. Understand the procedures and steps in each stage.
3. Know essential documents for registrar submission.
4. Comprehend the importance of incorporation and business commencement certificates.

Introduction

Formation of a company is a crucial process involving several stages essential for setting up a legal entity capable of conducting business. This chapter breaks down this formation into three main stages: Promotion, Incorporation, and Capital Subscription. Each stage serves to ensure that the company is adequately prepared for its operations and complies with all legal requirements.

1. Promotion of a Company

The promotion stage begins when an individual or group identifies a potential business idea and takes steps to form a company. Here are the major functions involved in the promotion:

1. Identifying Business Opportunity - This involves exploring market potential and deciding on a prospective business idea necessary to meet market demands.
2. Feasibility Studies - After ideation, promoters conduct technical, financial, and market feasibility studies to assess challenges and determine the viability of the idea. Insight from experts may be sought to verify these elements and ensure that the business can be sustainably operated.
3. Name Approval - Promoters must choose a unique name for the company and seek approval from the Registrar of Companies, ensuring it isn't misleading or too similar to existing companies.
4. Preparing Legal Documents - Key documents needed to get the company registered include the Memorandum of Association and Articles of Association, and other consents and declarations. This documentation lays out the company’s rules and operational details.

2. Incorporation

The incorporation stage marks the transition from idea to legally recognized entity. Promoters must submit an application for incorporation to the Registrar of Companies containing essential paperwork:

• Memorandum of Association - Outlines the company's objectives. It's the foundational statement of the company's purpose and limits.
• Articles of Association - Details the internal management rules of the company, defining how it will operate and the relationships between its members.
• Directors’ Consent - Written consent from proposed directors ensuring they agree to act in that capacity.
• Statutory Declaration - Affirming compliance with legal requirements for registration.
• Once these documents are filed and fees paid, the Registrar issues a Certificate of Incorporation, signifying the company's formation.

3. Capital Subscription

For public companies, the capital subscription stage follows incorporation. This stage involves raising funds from public investors by issuing securities. The process consists of several critical steps:

• SEBI Approval - Securing prior approval from the Securities and Exchange Board of India (SEBI) to protect investor interests.
• Filing Prospectus - A detailed document providing information about the company that invites the public to invest.
• Minimum Subscription Requirement - The company must receive applications for at least 90% of the proposed shares before allotment can occur, ensuring adequate funding.
• Allotment of Shares - Once funds are received and minimum subscription met, shares are allotted to investors, followed by filing a return of allotment with the Registrar.

Memorandum of Association vs Articles of Association

• Memorandum of Association: This is the primary document defining the company's purpose and objectives. It outlines:

  • Name and registered office.
  • Objective clauses that describe the nature of business activities.
  • Liability of its members.
  • Share capital of the company.

• Articles of Association: It governs the internal management and procedures of the company. These may include rules for:

  • Appointment of directors.
  • Voting rights.
  • Procedures for meetings.

Importance of Certificates

The Certificate of Incorporation serves as the legal proof of a company’s existence, marking the start date of its operations. Both public and private companies need to secure a Certificate to Commence Business within 180 days of incorporation, allowing them to initiate their business activities.

Conclusion

The formation of a company is a multi-step process that solidifies a business idea into a legal entity. Understanding each stage and the corresponding documentation is essential for aspiring entrepreneurs who want to establish a company successfully.

1. Promotion involves conceiving a business idea and conducting feasibility studies.
2. Incorporation is the act of legally registering the company with required documents.
3. Key documents include the Memorandum of Association and Articles of Association.
4. The Certificate of Incorporation is the legal proof that the company exists.
5. Capital Subscription is crucial for public companies, requiring SEBI approval and minimum subscription limits.
6. Promoters bear personal liability for contracts made before incorporation.
7. The company has to file a prospectus if it invites public investment.
8. At least seven signatures are needed for public companies on the Memorandum.
9. A One Person Company (OPC) allows a single individual to form a company, simplifying processes for small businesses.
10. Qualified Shares are often required for directors to ensure they have a stake in the company.