This article has been written by Aditi Ananya from Chanakya National Law University

Table of Contents

Introduction

The legal procedure by which a corporate organisation or firm is formed is called incorporation. The resulting legal entity that keeps the company’s assets and earnings apart from its owners and investors is a corporation.

Almost each country in the world allows for the creation of corporations, which are recognised by the inclusion of phrases like “Inc.” or “Limited (Ltd.)” in their titles. It is the procedure via which a corporate entity is formally recognised as distinct from its owners.

A business that registers with a state to become a distinct legal entity is referred to as an incorporation. Even in the case of a company with only one member, the corporate entity is often held by shareholders, who may also be subject to board of director oversight.

A company can obtain funds, sell shares, and give up control of a piece of the company more easily after incorporating. To run a business, a firm does not have to be incorporated.

Instead, business owners might choose to run their company as a partnership or as a single proprietorship. When opposed to an incorporated firm, these two legal business structures handle company debt and taxes differently.

The laws pertaining to company incorporation and things incidental thereto are covered by Sections 3 through 22 of the Companies Act, 2013 (henceforth referred to as the Act) read in conjunction with the Companies (Incorporation) Rules, 2014, which are enacted under Chapter II of the Act (henceforth referred to as “the Rules”).

Section 3(1) of the Act states that a company may be formed for any lawful purpose by:

seven or more people if the company is to be a public company;
two or more people if the company is to be a private company; or
one person if the company is to be a One Person Company, that is, a private company, by signing a memorandum and following the Act’s registration requirements.

This is accomplished by signing a memorandum under their names or his name and adhering to the Act’s registration criteria.

(2) A company established pursuant to sub-section (1) may choose to be an unlimited company, a company limited by shares, a company limited by guarantee, or a company limited by shares.

Stages of Formation of a Company

The process of forming a firm involves several key phases. The following are the steps to follow:

Step 1: Promoting a Business

The most crucial stage is company formation, during which the promoter discusses ideas and the subsequent steps in the business-building process.

Step 2: Registering a Business

This is the legal portion of the formation process since it involves a lot of information, documentation, interpersonal relationships, memoranda, and statements.

Step 3: The Incorporation Certificate

Following completion of all legal requirements, the business must begin operations, and this stage provides the necessary legitimacy.

Step 4: Certificate of Business Initiation

They are now able to launch their own company as they have the certificate of incorporation.

Procedure for Incorporation of a Company

Promoters

For the formation of a Company, the foremost steps required is promotion of a Company. For promotion, a specified person is required for this task who is known as Promoters. The person who first plans and brings about the foundation of a company is known as the promoter.

Stated differently, a promoter is an individual who completes the required preparatory work for the establishment of a company. The Promoter’s legal stance is that he has a highly fiduciary role in the Company, but he is neither a trustee nor an agent of the proposed Company.

In this fiduciary role, the promoter is prohibited from profiting from the company he represents, either directly or indirectly.

According to Section 2(69) of the Companies Act, 2013, a promoter is defined as: (a) a person who has been identified as such in a prospectus or by the company in the annual return mentioned in Section 92; or (b) a person who directly or indirectly controls the company’s affairs, whether as a director, shareholder, or in another capacity; or (c) a person in whose direction, advice, or instructions the company’s board of directors is customarily acting.

However, this will not apply to someone who is only operating in their official role.

Preliminary Steps

The promoters must complete the following preparatory actions before submitting an application to incorporate the intended business:

According to Section 4(2), a corporation cannot be incorporated with a name that the Central Government deems undesirable. The name cannot be too similar to, or identical to, the name of a business that is now in operation, incorporated under this Act, or registered under any prior company legislation. In order to find out if the maximum of six names are available in the order of their choice, promoters are thus encouraged to submit an application using Form 1 A.
The digital signature of the applicant recommending the firm must be attached to the form, along with a payment of Rs. 500. The user must submit a new application with a new name if the suggested name is not available.
The Registrar will hold the authorised name for a duration of 20 days following name approval. The applicant has this window of opportunity to apply for the new company’s registration by submitting the necessary paperwork (i.e. Forms 1, 18 and 32).
To assist them in compiling the necessary paperwork, promoters must select chartered accountants, solicitors and other professionals before starting the creation of a business.
Make arrangements for the articles of association and memorandum to be drafted by solicitors, approved by the Registrar of Companies, and printed.
In the presence of at least one witness, the Memorandum and Articles must be signed by a minimum of seven subscribers (two in the case of a private company), together with their address, description, and occupation, if any. It is imperative that the subscribers explicitly state the quantity and type of shares they have purchased for.

Applying to the Registrar of Companies

After the necessary completion of the preparatory work, the promoters must submit an application, to the Registrar of the State where the company’s registered office will be located, along with the necessary documentation and information for registration [Sec. 7(1)]:

The company’s articles and memorandum, both duly signed by each subscriber in accordance with the memorandum’s instructions;
A declaration, in the prescribed form, made by an advocate, chartered accountant, cost accountant, or company secretary in practice, who is involved in the formation of the company, and by a person named in the articles as a director, manager, or secretary of the company, stating that all registration requirements and rules made under this Act have been complied with;
a declaration from each subscriber to the memorandum and from any individuals named as first directors in the articles stating that, in the preceding five years, he has not been found guilty of any crimes pertaining to the creation, promotion, or management of any company, or under any prior company law or this Act, he has not been found guilty of any fraud, misfeasance, or breach of duty to any company, and that all documents filed with the Registrar for the company’s registration contain information that, to the best of his knowledge and belief, is accurate, complete, and true;
the address for correspondence until the company’s registered office is established;
the information pertaining to the people named in the articles as the company’s first directors, including their names, surnames or family names, the Director Identification Number, residential address, nationality, and any other details including identification proof as may be prescribed;
the details of the initial directors’ holdings in other businesses or organisations, as stated in the articles of incorporation, as well as their agreement to serve as directors of the company in any required capacity.
the personal information of each subscriber to the memorandum, including their surname or family name, residential address, nationality, and any other details along with identification proof as may be prescribed.

The Registrar, who will register all the papers and information presented in the register based on the pertinent documents and information filed, will issue a certificate of incorporation in the prescribed form, therefore establishing the proposed company under this Act.

Certificate of Incorporation and its Validity

On the day indicated in the certificate of incorporation, the corporation will receive a Corporate Identity Number from the Registrar. This number, which will be mentioned in the certificate, will act as the company’s distinctive identity.

According to Section 7(6) of the Companies Act, 2013, the promoters, the individuals listed as the company’s first directors, and the persons making the declaration are all subject to liability under Section 447 of the Companies Act if it is later determined that the company was incorporated through the provision of false or incorrect information or representation, the suppression of any material fact or information in any of the documents or declaration filed or made for incorporating such company, or through any fraudulent action.

According to Section 7(7) of the Act, the Tribunal may:

pass such orders as it may think fit for regulation of the management of the company, including changes, if any, in its memorandum and articles, in the public interest or in the interest of the company and its members and creditors;
direct that the members’ liability shall be unlimited;
direct removal of the company’s name from the register of companies; or
issue a directive for the company’s dissolution; or
issue any other directives it sees suitable.

The name under which the business is registered under the Companies Act and the date of creation are confirmed in the certificate of incorporation, a legal document pertaining to the foundation of a company. After the necessary paperwork and information required by the Companies Act is submitted, the Registrar of Companies issues the certificate of incorporation in the format specified.

Commencing on the date specified in the certificate of incorporation, the subscribers to the memorandum and any other individuals who may occasionally join the company shall constitute a body corporate under the name specified in the memorandum, with perpetual succession and a common seal, able to perform all the functions of an incorporated company under this Act, and with the authority to purchase, hold, and dispose of both tangible and intangible property, enter into contracts, and sue and be sued under the said name.

As a result, the following are the effects of the certificate of incorporation:

The firm is incorporated as of the date specified in the certificate.
It bestows upon the business permanent succession, corporate existence, and legal identity.
The Memorandum’s subscribers and any additional individuals who may at some point join the company form a body corporate that is separate from its members and has a perpetual succession with a common seal. The members’ liability is restricted to the amount of unpaid shares that they currently own.
The Memorandum and Articles of Association take on legal force between the company and its members, just as if each member and the company had signed them.

Commencement of the Business (Section 10A)

Before starting any business or using its borrowing capabilities, a company that was established after the Companies (Amendment) Act, 2019 and has share capital must satisfy the following procedural requirements:

Within 180 days of the company’s creation, the director must file a declaration in form INC-20A with the ROC, attesting to each subscriber to the MOA’s payment of the agreed-upon share value on the date of the declaration’s submission, as confirmed by a CA, CS, or CMA in practice.
Within 30 days of its establishment, the business submitted form INC-22 to the ROC to verify its registered office, in accordance with section 12(2) of the Companies Act.

Any incorporated firm with share capital that does not meet the requirements listed above is not allowed to operate or borrow money.

Effects of Registration of a Company

The following are the consequences of registering a business, as stated in Section 9 of the Companies Act of 2013:

The subscribers to the memorandum and all later members of the company are a body corporate as of the date of incorporation.
All of the powers of a company constituted under the Act are exercisable by a registered company. Additionally, the business has the permanent succession ability to purchase, keep, and dispose of any kind of property. It can also use the aforementioned name to contract, sue, and be sued.
In addition, as of the incorporation date, the company is a distinct legal entity from the incorporators. Also, as stated in the Memorandum and Articles of Association, a legally enforceable agreement is formed between the business and its members. The company will always be in existence unless it dissolves or the Registrar removes it from the registry.

Conclusion

In conclusion, the incorporation of a company offers numerous advantages, including limited liability and enhanced credibility. It provides a structured framework for business operations, facilitates easier access to funding, and ensures legal compliance.

However, careful consideration of the specific business goals, regulatory requirements, and ongoing responsibilities is essential in the decision-making process. It’s advisable to seek professional advice and thoroughly plan the incorporation process to maximize the benefits and long-term success of the company.

Furthermore, the choice of legal structure during incorporation significantly impacts aspects such as taxation, governance, and flexibility. Whether opting for a sole proprietorship, partnership, or a more complex corporate structure, aligning the chosen entity with the company’s objectives is paramount. Ongoing compliance with local regulations and continuous adaptation to market dynamics are crucial for sustained growth post-incorporation.

Successful company incorporation is not merely a one-time event but an ongoing commitment to excellence in corporate governance, strategic planning, and adaptability in a dynamic business environment.