Formation, Promotion and Incorporation of Companies

The formation, promotion, and incorporation of companies in India is a structured process governed by the Companies Act, 2013. This process involves multiple stages and various stakeholders, from the initial idea and promotion to the final incorporation and registration of the company.

Introduction to Company Formation:

The formation of a company is the process through which an idea is transformed into a legal entity. This entity, recognized by law, can engage in business activities, own assets, incur liabilities, and enter into contracts. The Companies Act, 2013, classifies companies into various categories, including private companies, public companies, one-person companies, and more. Each type of company has its own formation requirements and legal framework.

The formation process involves three main stages: promotion, incorporation, and commencement of business (if required). Each stage plays a vital role in legally establishing a company and making it operational.

Promotion of a Company:

Promotion is the initial stage in the company formation process. It involves conceiving the business idea, planning its execution, and taking the preliminary steps to bring the company into existence. This stage is driven by the promoters, who take the initiative to set up the company.

Role of Promoters:

Promoters are individuals or groups who come up with the business idea and take steps to give it a legal identity. Their main functions:

• Conceiving the Idea:

Promoters identify a business opportunity and conceptualize the business model.

• Feasibility Analysis:

Before moving forward, promoters conduct market research and feasibility studies to assess the viability of the business.

• Arranging Resources:

Promoters arrange the initial capital, land, equipment, and other resources needed to start the business.

• Drafting Legal Documents:

Promoters draft key documents like the Memorandum of Association (MOA) and Articles of Association (AOA), which are essential for the company’s legal structure.

• Naming the Company:

The name of the company is crucial and must comply with the naming guidelines set by the Ministry of Corporate Affairs (MCA). Promoters need to apply for name approval from the Registrar of Companies (RoC).

• Entering into Preliminary Contracts:

Promoters may enter into contracts on behalf of the proposed company. These contracts, known as pre-incorporation contracts, become legally binding once the company is incorporated.

Types of Promoters:

• Professional Promoters:

Experts in business setup who promote multiple companies.

• Occasional Promoters:

Individuals who promote a company but do not engage in this activity regularly.

• Financial Promoters:

Institutions like banks or venture capitalists who promote companies for financial returns.

Incorporation of a Company:

Incorporation is the process of legally registering the company and giving it a corporate identity. Once a company is incorporated, it becomes a separate legal entity distinct from its promoters and shareholders.

Steps in the Incorporation Process:

1. Digital Signature Certificate (DSC):

The first step in incorporation involves obtaining DSCs for the company’s proposed directors. A DSC is required for electronic filing of documents with the MCA.

2. Director Identification Number (DIN):

Every director must have a DIN, which is a unique identification number. The DIN can be obtained by filing an application with the MCA.

3. Name Approval:

Promoters must apply for name approval through the RUN (Reserve Unique Name) service or SPICe+ form provided by the MCA. The name should be unique and compliant with the Companies Act, 2013.

4. Preparation of MOA and AOA:

MOA and AOA are critical documents that outline the company’s objectives, scope of activities, internal rules, and regulations. The MOA defines the company’s relationship with external stakeholders, while the AOA governs the company’s internal operations.

5. Filing of Incorporation Documents:

The SPICe+ form is used for company incorporation, combining multiple processes such as name approval, DIN allotment, PAN, TAN, GST registration, and more. Promoters must upload the following documents:

• MOA and AOA
• Proof of registered office address
• Identity and address proof of directors and shareholders
• Declaration by the directors and subscribers in the prescribed format

6. Payment of Registration Fees:

The registration fees depend on the company’s authorized share capital. These fees are paid online during the filing process.

7. Issuance of Certificate of Incorporation:

After verifying the documents and information, the RoC issues a Certificate of Incorporation (COI). This certificate contains the company’s Corporate Identity Number (CIN) and marks the company’s official existence.

8. PAN and TAN Allotment:

The company is automatically allotted a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) upon incorporation.

Legal Effects of Incorporation:

Once the Certificate of Incorporation is issued:

• The company becomes a separate legal entity with perpetual succession.
• The company can sue or be sued in its own name.
• Shareholders’ liability is limited to their shareholding.
• The company can own property, enter into contracts, and conduct business independently.

Commencement of Business (for Public Companies):

For public companies, an additional step is required before starting business operations. The company must obtain a certificate for the commencement of business. The process involves:

• Filing a declaration with the RoC confirming that the company has received the subscription money for shares.
• Verifying that the company has complied with the minimum capital requirements.

Once this certificate is obtained, the company can commence business activities.

Important Documents in Company Formation:

Several documents are vital in the company formation process:

• Memorandum of Association (MOA):

It defines the company’s objectives, its scope of activities, and its relationship with the outside world. The MOA includes clauses like Name Clause, Registered Office Clause, Object Clause, Liability Clause, Capital Clause, and Subscription Clause.

• Articles of Association (AOA):

AOA lays down the internal rules and regulations of the company. It covers the company’s management structure, decision-making processes, roles and powers of directors, and more.

• Declaration by Directors and Subscribers:

The directors and subscribers must declare that they have complied with all legal requirements and are not disqualified from acting as directors.

Post-Incorporation Compliance:

After incorporation, the company must comply with several statutory requirements, including:

• Maintaining statutory registers, minutes of meetings, and financial records.
• Filing annual returns and financial statements with the RoC.
• Conducting board meetings and annual general meetings (AGMs) as per legal requirements.
• Adhering to tax laws, including GST, income tax, and other applicable regulations.