Legal Requirements for Establishment of a New Unit
Establishing a new business unit is a complex and risky task. Entrepreneurs have to fulfil various legal formalities for establishment of a new unit. Hence, the entrepreneur needs to be aware of any regulation that may affect the establishment of his new unit. Legal formations may be necessary at different stages of the start up. These formalities differ in relation to the form of enterprise adopted by the entrepreneur, such as sole proprietorship, partnership firm and company. The legal requirements also differ in reference to the size of the business unit, such as small scale, medium scale, or large scale enterprise. Moreover, consumer product enterprise and industrial product enterprise may attract different legal formalities. Following legal requirements are fulfilled for the establishment of a new business unit:
(1) Incorporation and Registration: There found various forms of business proprietorship in the private sector such as sole-trader, partnership, Joint Hindu family and company etc. In case of sole-proprietorship, partnership and Joint Hindu family, registration is not compulsory, while in case of company, incorporation and registration is essential.
INCORPORATION OF A COMPANY
Company is established through legal procedure and have a separate legal entity from its owners. Legal procedure of establishment a company is termed as incorporation. For this purpose, registration of company has to be made with the Registrar of companies. An entrepreneur is required to submit an application for registration following documents:
(i) Application form duly filled in and signed by an authorised person.
(ii) Memorandum of Association: The Memorandum of Association, is the charter of the company. This includes its objectives, its name, the address of its registered office, the capital which the company is authorised to raise, the nature of liability of members as well as the names, addresses and agreement of people who agree to form a company.
(iii) Articles of Association: The other important document is the articles of association which contains the rules and regulations relating to the internal management of the company. However, it is not necessary for a public company limited by shares to file the articles of association. If such public company does not file Articles of Association, it is deemed to have adopted ‘Table A’ of schedule I of the Act.
(iv) Written consent of the directors: Written consent of the directors who are agreed to act in that capacity, duly signed by each director, along with a written undertaking by them to take the necessary qualification shares, if any, as provided in the articles.
(v) A copy of agreement with any individual for appointment as a managing director, or a whole-time director or manager.
(vi) A statutory declaration stating that all the legal requirements of the Act precedent to incorporation have been complied.
(vii) A letter of intent under Industries (Development and Regulation) Act, 1951, if the company s business comes with the purview of this Act.
(viii) Address of registered office of the company. However a company may file registered address within 30 days of its registration.
(ix) At the time of registration, the prescribed registration fees and filing fee for each document filed for registration are to be paid to the Registrar’s office. After receiving these documents, Registrar scrutinize these documents and if he is satisfied that all the documents are in order, he shall enter the name of the company in the register of companies and issue a certificate of incorporation.
CAPITAL SUBSCRIPTION
Next step in the registration of a company is to raise capital for the proposed company. Company obtain the necessary capital by selling shares to the public. Following procedure is adopted for this purpose:
(i) Permission of public issue from ‘The Securities and Exchange Board of India.
(ii) Agreements with the underwriters, brokers and share issue managers.
(iii) Filing a copy of prospectus with the Registrar.
(iv) Invite the public to purchase the shares of the company by putting the prospectus in circulation.
(v) Receiving applications for shares through the company’s banker.
(vi) Formal resolution of allotment, if the subscribed capital is at least equal to minimum subscription of 90% of capital issue.
(vii) In case, minimum subscription is not received, the entire amount with application would have to be refunded at the end of 120 days from the circulation of prospectus.
(viii) Issue of allotment letters and share certificates.
(ix) In case a company having a share capital, but not issuing a ‘prospectus’, filing a ‘Statement in lieu of Prospectus’ with the Registrar at least three days before the first allotment resolution.
COMMENCEMENT OF BUSINESS
A public company cannot commence business immediately after incorporation unless it has obtained a certificate of commencement of business from the Registrar. Following documents have to be filed for this purpose:
(i) Shares payable in cash have been allotted to the extent of the minimum subscription;
(ii) Every director has paid in cash the application and allotment money on the shares taken by him;
(iii) No money is liable to be refundable to the applicants for failure to apply or obtain permission for the shares or debentures to be dealt in on any recognised stock exchange.
(iv) A statutory declaration duly verified by one of the directors or the secretary in the proscribed form that the above conditions have been complied with has been filed with the Registrar.
The Registrar will scrutinize those documents and if the is satisfied, he shall issue a “certificate of commencement of Business, This certificate is conclusive evidence that the company can commence its business and use its borrowing powers
(2) Small Unit Registration Certificate: The entrepreneur of a small scale unit should seek registration of his selected project unit with the Directorate of industries. This will make the entrepreneur and his unit eligible for availing Government assistance. A unit is normally registered provisionally first and accorded permanent registration later.
(3) Registration under the Factories Act: An entrepreneur must registered his enterprise under the ‘Factories Act, 1948’, before starting the manufacturing unit. Factories Act contains provisions regarding licencing and registration of factories, working hours, health, safety and welfare measures, employment of women and young persons, annual leaves, dangerous operations etc. The Act fixes the minimum age of persons who can enter a factory for work at 14 years. The Act, lays down the provisions regarding cleanliness, ventilation, overcrowding, lichting, explosive gases, dust, fume, fencing of machinery etc.
(4) Import License: If imported raw-material and other equipments are necessary for the new business enterprise, then he should obtain the import licence from the export-import controller.
(5) Permission of Finance Ministry: For the agreement of foreign collaboration, an entrepreneur must obtain the permission of finance ministry.
(6) No Objection Certificate (NOC): The unit must obtained all necessary clearances. For example, NOC from Pollution Control Board is obtained if required.
(7) Industries (Development and Regulation) Act, 1951: The licencing policy for industries is determined under this Act. The Act states that the Central Government may specify the requirements which shall be complied by small scale industrial undertakings to be regarded as a small scale or an ancillary industry. This may be done by the Central Government with a view ascertaining which small scale or ancillary industrial undertaking needs supportive measures, exemptions or other favourable treatment under this Act to enable them to maintain their viability and strength.
(8) Foreign Exchange Regulation Act: All foreign collaborations required the approval of the government and are subject to the regulations under the Foreign Exchange Regulation Act. All investment by foreign companies in India is permitted only with the approval of the Reserve Bank of India. The Reserve Bank of India’s approval is again based on the approval of the investment proposal by the government.
(9) Registration of Trademark: According to Trade and Merchandise Marks Act, 1958 (India) the mark’ “includes a device, brand, heading, label ticket, name signature, word, letter or numeral or any combination thereof.” The purpose of registration of trademark is that the consumer may distinguish the product of manufacturer/service provider from others and therefore ‘decepti.vely similar’ trademarks are not allowed to be used because they can cause confusion to users. Once a trademark is registered as per provisions of Trade and Merchandise Marks Act, 1958 and Trademarks Act, 1999 no one else can use similar trademark on any of its packing. The trademarks are registered for unlimited period and helps in the promotion of sales.
(10) Registration under the Sales-tax Authority: An entrepreneur should get registered his enterprise in the sales-tax department of the state government and obtain certificate for this purpose. Besides above mentioned legal formalities, an entrepreneur have to fulfil some other formalities also depending on the nature of product produced by the new business unit. For example he has to get registered his unit under the Service Tax Act, Food and Drugs Control Act etc.
Before setting up a business and raising funds there are some legal requirements one must fulfill.
In order to set up new unit/firm and raise funds the legal requirements are:
(i) Registration of Firm: Before operation, the firm must be registered in order to follow the constitutional requirements.
(ii) Registration of License: Firm requires a licence for operation by the government locally, nationally and internationally.
(iii) Sales Permission: A firm requires permission to sell their goods in the market after they are approved by the government.
(iv) Tax Payments: The firm must pay all levied taxes in order to operate.
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