An Introduction
In a legal world, it is best for a company to get registered after its incorporation. In a way, Incorporation and Registration go hand in hand as an unregistered business cannot claim many benefits like taxable claims. The company cannot even file a suit against any third parties.
Formation and Incorporation of Company
We see an unregistered company faces many disadvantages, thus companies get registered under The Companies Act 2013 or any other recognized statutory act.
To register and incorporate a company, an application needs to be filed with the Registrar of Companies. The application is to be accompanied by the names of the members, memorandum of association and articles of association and other important documents. These are also required to be filed with the Registrar of Companies (ROC) of the state in which the company is proposed to be incorporated.
The Mentioned Documents are to be filed with the Application for Registration and Incorporation:
Memorandum of Association (MOA)
Articles of Association (AOA)
The agreement, where the company agrees to enter into any appointment of managing or full-time director.
A copy of the letter where the ROC intimates the availability of time
The documents that mandate the payment of registration and filling of the fees
The documents that mention the directorship and location of the office of the company
A declaration that the company has already complied with all the rules of the Companies Act.
When all these requirements have been complied, the Registrar of Companies (ROC) registers the company and issues a certificate of incorporation in regards to the company that brings the company into existence in the eyes of law, as a legal entity in India. This makes the company bound to all Indian laws and regulations as are applicable to other domestic companies.
Stages of Formation of a Company
There are a few leading steps in the formation of a company. The steps are as follows:
Step 1 – Promotion of a Company
The most important step is the forming of a company, here the promoter talks about the ideas and further business-building process.
Step 2 – Registration of A Company
This is the legal part of the formation process as there is a lot of data, paperwork, relation with people, memorandums, declarations that must be involved.
Step 3 – Certificate of Incorporation
After all the legal formalities, the company need to start functioning, and this validity is provided in this stage
Step 4 – Certificate of Commencement of Business
After receiving the certificate of incorporation, they can now start their own business.
This summation of the formation of a company is a quick version of reality. However, this is the view of how a company is formed.
Promoters
“A promoter is the one, who undertakes to form a company with reference to a given object and sets it going and takes the necessary steps to accomplish that purpose,” Said by Justice C.J. Cokburn. A promoter devises an idea setting up a business in a given place. He performs various formalities which are required for starting a company. A promoter may be an individual, firm, association of persons (AOP) or a company. A corporate’s promoter is a firm or person who does the preliminary work (initial work) in relation to the formation of a company. This includes its promotion, incorporation and inviting people to invest money in the company, at the time of its formation. An investment banker, a stock promoter or an underwriter may, wholly or in part, perform the task of a promoter. Promoters generally guarantee a duty of utmost good faith, to not fraud any investors and disclose all facts about the company's business.
Types of Promoters
There are importantly three types of Promoters, which are mentioned: -
Occasional Promoters
These promoters are not engaged in the promotion work on a regular basis. They take up the promotion of companies and once it is complete, they resume their original profession.
Entrepreneur Promoters
They act as both promoters and entrepreneurs. They develop the idea of a new business unit, do the base work to build it and may subsequently become a part of the management.
Financial Promoters
Financial institutions, like investment banks or industrial banks, might take up the promotion of a company to find investment opportunities.
Promoter Activity
A promoter is the main creator of the business, Discovery of a business idea, Detailed Investigation, Assembling the factors of Promotion, entering into preliminary contracts are the duties of a promoter. A promoter starts a business from scratch.
As in the first stage of company promotion, a promoter formulates new ideas and makes an assessment of the capability of a particular aspect of the business be it technical feasibility or financial feasibility. In a detailed investigation, he investigates the profitability and prospects of the growth of the proposed activity. Here, he may seek the help of specialists such as lawyers or accountants. If the business is promising, he undertakes the risk of forming the business, he takes steps to arrange various factors of production like the land, labour or capital. The promoter also may enter into legal contracts with third parties for the registration of a company. Even the promoter has to select a distinct, non-identical and specific name for the company.
Thus we see how the promoters are important for the company.
FAQs on Registration and Incorporation of Companies
1. What are the main stages involved in the formation of a company as per the Companies Act, 2013?
The formation of a company in India typically involves three key stages:
- Promotion: This is the first stage, involving the conception of the business idea and taking all necessary steps to form the company. The individuals who perform these functions are called promoters.
- Incorporation or Registration: This is the legal process of registering the company with the Registrar of Companies (RoC). It involves filing essential documents like the Memorandum and Articles of Association and results in the company becoming a separate legal entity.
- Commencement of Business: After incorporation, a public company must obtain a Certificate of Commencement of Business before it can legally start its operations and borrow funds.
2. What is the significance of the Certificate of Incorporation for a company?
The Certificate of Incorporation is a legal document issued by the Registrar of Companies that serves as conclusive evidence of a company's existence. Its significance lies in the fact that from the date mentioned on the certificate, the company is officially born as a separate legal entity, distinct from its members. It gains perpetual succession, and the liability of its members becomes limited. This certificate is often referred to as the company's 'birth certificate'.
3. How does the Memorandum of Association (MoA) differ from the Articles of Association (AoA)?
The MoA and AoA are two crucial documents for incorporation, but they serve different purposes:
- Scope: The Memorandum of Association (MoA) defines the company's objectives and its relationship with the outside world. The Articles of Association (AoA) define the rules and regulations for the company's internal management.
- Hierarchy: The MoA is the primary, supreme document. The AoA is subordinate to the MoA and the Companies Act. Any clause in the AoA that contradicts the MoA is considered void.
- Alteration: Altering the MoA is a more complex process requiring special resolutions and often central government approval, whereas the AoA can be altered more easily by passing a special resolution.
4. Why is the Memorandum of Association (MoA) often called the 'charter' of a company?
The Memorandum of Association (MoA) is called the 'charter' because it defines the company's constitution and the scope of its powers. It lays down the fundamental conditions upon which the company is allowed to be incorporated. Just as a charter defines the boundaries and rights of a city or institution, the MoA defines the boundaries within which the company can operate. Any action taken by the company beyond the scope defined in its MoA (specifically the 'Object Clause') is considered ultra vires, meaning 'beyond the powers', and is legally void and cannot be ratified even by the shareholders.
5. What key documents are required to be filed with the Registrar for the incorporation of a company?
For the incorporation of a company under the Companies Act, 2013, the following key documents must be filed with the Registrar of Companies (RoC):
- The Memorandum of Association (MoA), duly signed by all subscribers.
- The Articles of Association (AoA), also duly signed.
- A declaration by a professional (like an advocate, chartered accountant, etc.) stating that all legal requirements for registration have been met.
- An affidavit from each subscriber and first director, confirming they are not convicted of any offence.
- The address for correspondence until the registered office is established.
- Complete particulars of the first directors and subscribers.
6. How does incorporating a company provide 'limited liability' to its owners, and what does this mean in a real-world scenario?
Incorporating a company creates a separate legal entity, which means the company itself is responsible for its debts and obligations. Limited liability means the financial responsibility of the owners (shareholders) is restricted to the amount they have invested or guaranteed to the company. In a real-world scenario, if an incorporated company fails and has large debts, creditors can only claim the company's assets. They cannot sue the shareholders to recover the debt from their personal assets like their house, car, or personal savings. This protection is a major advantage over sole proprietorships or partnerships, where owners have unlimited liability.
7. What is the practical difference between 'incorporation' and 'commencement of business'?
While both are stages in company formation, they mark different milestones. Incorporation is the act of legally creating the company, making it a distinct legal entity. This is confirmed by the issuance of the Certificate of Incorporation. However, for a public company, incorporation alone does not grant the right to start business activities. Commencement of Business is the subsequent stage where a public company, after fulfilling further requirements (like filing a declaration of paid-up share capital), gets the legal approval to start its operations and borrow money. This approval is confirmed by the Certificate of Commencement of Business. A private company can, however, start its business immediately after incorporation.
8. What is the role of a 'promoter' in a company's formation, and are they the same as a director?
A promoter is the individual or group that conceives the business idea and undertakes the necessary steps to form a company. Their role includes conducting feasibility studies, preparing documents, appointing first directors, and financing the preliminary expenses. A promoter and a director are not necessarily the same. A promoter's work is largely finished once the company is formed, while a director is appointed to manage the company's day-to-day affairs after incorporation. Although a promoter can later become a director, their initial roles are distinct; the promoter brings the company into existence, while the director manages its ongoing operations.
9. On what grounds can the Registrar of Companies (RoC) reject a proposed name for a new company?
The Registrar of Companies (RoC) can reject a proposed name for a company on several grounds to prevent public confusion and misuse. The primary grounds for rejection include:
- The name is identical to or too closely resembles the name of an existing registered company.
- The name is undesirable in the opinion of the Central Government. For example, it is offensive or misleading.
- The name suggests a connection with a government body, patronage of a national hero, or an international organisation (e.g., 'Presidential', 'National', 'WHO') without official approval.
- The name violates the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950.
