PROCESS OF INCORPORATION

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This article is written by Khizra Khan of 6^th semester of CSJMU, Kanpur, an intern under Legal Vidhiya.

ABSTRACT

As we all know, a company is a legal entity of likeminded people but for the formation of a company a process is followed step-by-step which is also known as Incorporation. So, Incorporation is the most important step in the formation of company. This article provides extensive overview of the process of incorporation and highlights the steps involved in the formation of a company. It will also provide details about the concept of incorporation and its significance in relation to the corporation. It will also affirm the advantages and disadvantages of incorporation.

KEYWORDS

Company, legal entity, incorporation, formation, extensive, advantages, disadvantages.

INTRODUCTION

The word ‘company’ has been defined in Section 2(20) of the Companies Act, 2013. This act states that a company refers to a company formed and registered under this act or any previous acts like The Companies Act, 1956. It also tells that a company is a separate legal entity and is capable of surviving beyond the lives of its members.

The provisions for incorporation of company are laid down under the Companies Act, 2013. So, by Incorporation of a Company we understand that the legal process which is used to form a corporate entity or company. An incorporated company is a separate legal entity which is acknowledged by law. Companies are created all over the world and they can be identified by the use of such terms “Inc.” or “Limited (Ltd)” in their names. It is the legal process by which a corporate entity becomes separate from its owners let’s start with the definition of promoters.

PROMOTER

In the Section 2(69) of the Companies Act, it is stated that a promoter is who gets idea of starting a company and undertakes all the preliminary work necessary for its formation. In other words, promoter of company is a person who does the necessary preliminary work incidental to formation of company.

Promoters hold a fiduciary position.

PROMOTION OF COMPANY

The term ‘promotion’ refers to process by which the idea of forming a company takes a definite shape resulting in its incorporation. It is in fact first stage in formation of company.

FORMATION OF COMPANY

In the Section 3 of the companies act, 2013 the basic details for forming a company are given-

For the formation of a public company minimum 7 members are required who will subscribe their names to the memorandum and register the company for any lawful purpose.
And minimum 2 members are required for the private company.
One person company requires only 1 person for its formation.

WHAT IS INCORPORATION?

Incorporation is the wide term which is used to describe to register business with state so that it becomes a separate legal entity. That company or business entity is owned by the shareholders and it is also managed by board of directors.

It does not require incorporating a company for its operation. For the corporation of a limited liability company a business may also choose the incorporation. Though each type of incorporated entity will have its own separate form depending upon the state the business has been filed in.

INCORPORATION OF COMPANY

Incorporation is a method by which a business is formally organized and is officially brought into existence. This process involves writing up a document generally known as articles of incorporation and enumerating the firm’s shareholders.

Section 7 of The Companies Act, 2013 provides the procedure to be followed for incorporation of company. So, for registering the company with the registrar of companies, the promoter has to include a number of steps as mentioned below:

i. Approval for the proposed name

A company is free to choose any name but it should not closely stimulate the name of an existing company. Hence, the promoter has to get the approval from the registrar for proposed name of company.

ii. Filing of documents

The promoter has to get prepared the following documents and file them with the registrar of companies of state in which the registered office of company is situated.

i. Memorandum of Association: This document which is of fundamental importance defines the scope of activities of company. It should contain the name, the place where the registered office is situated, authorized capital and objects of business. It needs to be printed, duly stamped, signed and witnessed. A minimum of two persons in case of private limited company and seven in the case of public limited company must sign the document.

ii. Articles of Association: This contains the regulations connected with internal management of company. This document must also be duly stamped and signed by the signatories to Memorandum and witnesses.

iii. Original letter of approval: The original letter of approval of name be obtained from the registrar and be filed.

iv. A list of directors: There should a file of the list of directors who have consented to be its directors.

v. Written consent to act as directors: To act as its directors, they have to give their consent in writing. They should also undertake to take the necessary qualification about the shares and pay for them.

vi. Notice of the address of registered office

vii. Statutory declaration: A declaration which is to be filed stating that all the requirements of law relating to registration have been complied with. This declaration must be given by an advocate of Supreme Court or High Court, or by CA who is engaged in formation of company or by a person named in articles as a director or secretary of company.

viii. The registrar will scrutinize all documents and if he finds them in order, he will issue the certificate of incorporation.

This certificate is conclusive evidence of fact that company has been duly registered, a private limited company can commence business on getting the certificate of incorporation but a public company has to take some more steps for getting another certificate known as certificate for commencement of business.

iii. Issue of prospectus

The board of directors wants to approach public for securing capital, should arrange for drafting a prospectus. A prospectus contains all essential points which would induce the investing public to apply for shares in company. A copy of prospectus must be delivered to registrar before issuing to public.

iv. Minimum subscription

A company proceeds to allot shares only if minimum subscription specified in prospectus has been collected in cash.

v. Statement in lieu of prospectus

Where promoters raise the entire capital through private arrangement, there is no need to issue a prospectus. However, a statement in lieu of prospectus, the contents of which are similar to prospectus, must be prepared and filed with registrar at least three days before allotment.

vi. Filing of further documents

The following documents are also to be filed with registrar.

i. A declaration that the minimum subscription stated in prospectus has been collected in cash.

ii. A declaration stating that each director has paid in cash for application and allotment of shares taken up by them.

iii. A declaration that no money has become refundable to applicants because of its failure to obtain permission for shares or debentures to be dealt in on any recognized stock exchange.

iv. A statutory declaration by secretary or one of its directors stating that above requirements has been compiled with.

If registrar is satisfied that these documents are in order, he will issue a certificate entitling company to commence business. It is only on getting this certificate; a public company can start its business.

vii. Certificate of incorporation

The registrar will issue a certificate of incorporation on registration whereby he certifies that the company is incorporated. For date of incorporation mentioned in certificate, the company becomes a legal person separate from its shareholders and secures a perpetual succession. Hence, it is birth certificate of company.

COMMENCEMENT OF BUSINESS

A private company or public company not having share-capital, may commence its business and exercise borrowing powers immediately on receiving certificate of incorporation. But a public company having share capital cannot commences business or exercise borrowing powers immediately after incorporation, unless it has obtained a certificate of commencement of business, generally known as trading certificate from Registrar of Companies. The object is to protect persons against non-fulfillment of obligation by the company which has reached the stage of formation. A public company which has share capital must comply with the requirements of Section 11 in order to get the certificate of commencement of business.

If a company has issued prospectus, it must not commence business or exercise any borrowing power unless-

i. Minimum subscription of five lakh rupees in case of Public Company and one lakh rupees in case of Private Company has been received in respect of shares offered for payment in cash;

ii. Every director has paid to the company on any shares taken or contracted to be taken by him;

iii. No money is refundable to applicants for shares or debentures because they could not be listed in any recognized stock exchange;

iv. A duly verified declaration of compliance of the above conditions signed by the secretary or a director. The declaration has to be filed on a non-judicial stamp paper. [Section 12(12)]

When a public company having share capital has not issued a prospectus inviting the public to subscribe to its shares, the company shall not commence business or exercise any borrowing power unless-

i. A statement in lieu of prospectus, it has filed with the Registrar;

ii. Every director of the company has paid in cash the application and allotment money in respect of the shares taken or contracted to be taken by him;

iii. A duly verified declaration on a non-judicial stamp paper has been file with the Registrar by one of the directors or the secretary in the prescribed form. The secretary in whole time practice has also to file the declaration.

The Registrar of companies on receipt of the aforesaid documents shall examine them and if satisfied, shall issue to the company a certificate to commence business.

If a public company having a share capital commences business or exercises borrowing powers before it obtains the trading certificate, every person who is responsible for doing shall be liable for punishment with fine not exceeding Rs 1000/- per day during the period of default.

Section 11 of the Companies act, 2013 corresponds to Section 149 of the Companies Act, 1956 and seeks to provide that the company having a share capital shall not commence business or exercise any borrowing powers unless a declaration is filed with the Registrar by a director or subscriber that every subscriber to the memorandum has paid the value of share taken by him i.e., minimum five lakh rupees for public company and a minimum of one lakh rupees for a private company and the company has filed with the Registrar the verification of its registered office. If a company has not filed declaration within a period of one hundred and eighty days of the date of incorporation, the Registrar of Companies may remove the name of the company from the register and if he has reasonable cause to believe that the company is not carrying on business or operations.

Where a person has supplied certain goods or rendered some service to the company which has not been issued a trading certificate i.e. the certificate to commence business, then in that case he cannot sue the company for damages or loss sustained by him in the case re Otto Electrical Co., (1906) 2 Ch. 390. (1)

CONCLUSION

We can conclude from the above research on the process of incorporation that it is very important part of a business. This article gives data about the process of incorporation included in the Companies Act, 2013. It also informs about the commencement of business and the documents which are essential to be prepared by the promoters for the incorporation of the companies.

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