This article is written by Nuthanaganti Tejaswini, pursuing Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho.
This article has been published by Abanti Bose.
Table of Contents
Introduction
Business becomes a part of everyone’s life and it is done in different ways. Everyone’s ultimate goal is to make profits as much as possible and for that one needs to pick the right form of business and suitable steps for achieving goals. If you opt to form a Company form of business then this article will add to your knowledge regarding the key step called Incorporation.
Before going to the incorporation of a company we shall discuss some basic concepts concerning it. First and foremost is what is called a company.
What is known as a company?
A company is a legal entity which is formed by a group of people to run a different kind of business, in other words, it is a voluntary association of persons formed for undertaking some big business activity and each such member will contribute some amount for a common purpose. The money so contributed constitutes the capital of the company. The capital of the company is divided into small units called shares, since members invest their money by purchasing the shares of the company, they are known as shareholders of the company. It is established by the law and can be dissolved by law. The definition of a company is provided by Section 2 (20) of the Companies Act, 2013.
There are different types of companies for instance private companies (Section 2(68) of the Act), public companies (Section 2(71) of the Act), one-person companies (Section 2(62) of the Act), foreign companies, subsidiary companies (Section 2(87), Act), and holding companies, all these types of companies are based on their liability, members, public interest, and control.
What is the incorporation of a company?
The very meaning of incorporation is the inclusion of something as part of a whole, then the incorporation of a company which means constituting a company or any other organization as a legal corporation. It makes a company a legal person. According to legal regulations, there is no mandatory provision or an obligation to incorporate every company that comes into existence, however, just to enjoy certain benefits/advantages it is recommended to incorporate a company. There will be certain name changes of the company if it undergoes incorporation.
Example: ABC Private Limited, XYZ Limited.
Both above-mentioned examples indicate that both companies are incorporated under the legal regulations, but in a different way which means ABC Pvt. Ltd. is incorporated as a private company, whereas XYZ Ltd is incorporated as a public company.
Based on the number of members and the public interest companies are further categorized into i) Private company ii) Public company as stated above.:-
Private company
- Which means a company has a minimum paid-up share capital, and it is prohibited from issuing shares to the public or transferring shares.
- Minimum two persons are required to form this type of company and maximum is fifty persons.
- These companies must write “Private Limited” after their names.
Public company
- According to legal regulations, a company that is not a private company is called a public company.
- Minimum seven persons are required to form a public company and the maximum is unlimited.
- It can offer shares to the general public.
- It must use the word “Limited” as part of its name.
Legal Regulations: The Companies Act, 2013 is an Act of the Parliament of India which regulates the incorporation of a company, responsibilities of a company, dissolution of a company, etc. The first Act enacted to regulate these matters was the Companies Act, 1956, later, it was superseded by the 2013 Act. In addition to the Companies Act, corporations are also subject to other regulations administered by the Ministry of Corporate Affairs (MCA).
Journey of the Companies Act
The first Companies Act was enacted in 1956, so far it has been amended several times. The Companies Act, 1956 remained in force for a long time, later major amendments took place in the year 2000. For the first time, NCLT (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal) were introduced in the year 2002. Later in 2006, Director Identification Number (DIN) and online filing of documents were introduced through the MAC21 project.
Later, based on the J.J. Irani committee, the Companies Act, 2013 was brought forward, it received the assent of the President on 29th August 2013.
Some key highlights of the Companies Act, 2013 were:
-Key Managerial Person,
-Entrenchment clauses,
-Women directors,
-Corporate Social Responsibility,
Further, it was amended in years 2015, 2017, 2019, 2020, and 2021
Latest Amendment: Concerning the incorporation, there is a recent amendment called The Companies (Incorporation) Fifth Amendment Rules, 2021 which deals with the ‘allotment of a new name to the existing company under Section 16(3) of the act’.
Why incorporate a company?
Despite there being no obligation or any mandatory provision to incorporate every company, there are certain benefits to the incorporated company. So, just to enjoy certain legal benefits companies are incorporated.
What are the key features of incorporating a company?
- The incorporation describes the way how a company was legally formed and came into existence.
- Incorporation involves drafting and writing up the Article of Incorporation and also identifying the shareholders.
Benefits of incorporating a company
The following are the advantages of incorporating a company.
- Limited liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities.
Example: if A buys 5 shares in a company ‘XYZ’, each share value is Rs. 1000, then he will be liable only for 5000 and not beyond that.
- Large financial resources: The company form of organisation enables to mobilise huge financial resources because of the principle of limited liabilities and diffusion of ownership. It collects funds in the form of shares of small denominations so that people with small means can also buy them. The benefits of limited liability and the transferability of shares attract investors.
- Continuity of existence: A company is an artificial person created by law and possesses independent legal status. It is not affected by the death, insolvency, etc of its members. Thus, it has perpetual existence.
Example: if A is a promoter or a shareholder of a company ‘XYZ’, now, if A dies then the company ‘XYZ’ will not dissolve and it will be continued by other promoters or shareholders.
- Benefits of large-scale operation: This is the only form of business organisation that can provide capital for large-scale operations. It results in large-scale production consequently leading to an increase in efficiency and reduction in the cost of operation. It further opens the scope for expansion.
- Liquidity: The transferability of shares acts as an added incentive to investors. The shares of a public company can be traded easily in the stock exchange. The public can buy shares when they have money. Prospective investors can invest and convert shares into cash whenever they need money.
- Professional management: Companies, because of their complex nature of activities and a large volume of business, require professional managers at every level of their operation. This leads to efficiency in the management of their business affairs.
- Research and development: A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.
- Tax benefits: Although the companies are required to pay tax at a high rate, in effect, their tax burden is as low as they enjoy many tax exemptions under Income Tax Act.
Disadvantages of incorporating a company
Along with the advantages in incorporating a company, there are some disadvantages too, they are:
- Too many legal formalities: The formation of a company is a time-consuming process and also expensive. Many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in the formation may deprive the business of the momentum of an early start.
- Lack of motivation: The directors and other officers of a company have little personal involvement in the efficient management of a company. The separation between ownership and control and the absence of a direct link between effort and reward may lead to a lack of personal interest and incentive. It is difficult to keep a personal touch with all the customers and employees. As a result, the efficiency of business operations may be low.
- Delay in decisions: Red Tapism and bureaucratic hurdles do not permit quick decisions and prompt action in the company form of organisation. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is a lack of flexibility of operations in a company.
- Excessive Government control: At every stage in the management of a company, there are legal rules and regulations. Several legal provisions have to be followed and reports have to be filed. Such legal interference in day-to-day operations results in a lack of secrecy. A lot of time and money is spent complying with statutory requirements.
- Unhealthy speculation: The shares of a public company are dealt in on a stock exchange. The prices of these shares fluctuate depending upon the financial health, dividends, prospects, and reputation of the company. Directors of a company may indulge in speculation based on inside information for private gain. Company organisation may also lead to concentration of economic power in a few hands.
- Conflict of interests: Company is the only form of business wherein a permanent conflict of interests may exist. In a company, conflicts may continue between shareholders and board of directors or between shareholders and creditors, or between management and workers.
- Lack of secrecy: Under the Companies Act, a company is required to disclose and publish a variety of information on its work. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to the public.
By comparing advantages and disadvantages, disadvantages are not much considerable over the advantages.
What to do to incorporate your company?
Before starting with the incorporation procedure you have to keep some general or basic documents handy so that there will be no last-minute rush.
Some general documents
- Identification proof of all the directors and shareholders (ex: Pan Card, Aadhar Card, Passport, Driving license).
- Address proof of all the directors and shareholders of a company (Ex: Bank account statement, any utility bills, Ration Card).
- Director Identification Number (DIN),
Digital Signature Certificate (DSC) of a director or partner,
Designated partner Identification Number (DPIN) in case of LLP registration.
- Passport size photographs.
- Registered office address proof:
NOC form from the owner of the premises for using that address as a registered office address,
Any utility bill in the name of the owner with his/her signature.
- Form DIR-2 (signed by directors of the company), consent to act as Director.
Steps involved
Get your company’s name approved by the Ministry of Corporate Affairs
First and foremost, select a name of your own will and it should not match with or resemble any other company’s name that is already incorporated, select at least more than one name so if there are any chances for not accepting the name you can go with the backup name, you can check the MCA (Ministry of Corporate Affairs) portal if the name you selected has already existed or not. The name you selected should not violate any provisions of The Emblems and Names (Prevention of Improper Use) Act, 1950. Now the name should be approved by MCA through the SPICe+ (Part A) form, where we have to fill in details of the business viz., type of company, category, subcategory, division, and objects of the company. The objects of the company column cannot be changed later. On the other hand, we can start the process of incorporating simultaneously while applying the name. For this, an amount will be charged, Rs. 1000, if the name does not get approved due to some discrepancy, we can resolve it within that paid amount. Later, you can change the name of your company according to Section 13 of the Act.
Preparation of documents/certificates
Apply for Director Identification Number and Digital Signature Certificate.
Director Identification Number (DIN)
According to Section 266A of the Companies Act if an individual who wants to become a director of a company needs to apply for DIN through e-form DIN-1. It is individual-specific, not company-specific.
Digital signature certificate
It is an electronic format of a signature and the certificate is used as a proof of identity. After 2006, every document prescribed under the Companies Act, 1956 is required to be filed with the use of DSC by the person who is authorised to sign the documents, the certificate must register with MCA. Hence, it is compulsory to obtain DSC before filling e-Form 1A.
Get ready with drafted Memorandum of Association and Articles of Association
Both the MoA and AoA are important and main documents for this process.
| Memorandum of Association (MOA) | Articles of Association(AOA) |
| Section 2(56) of the Companies Act, 2013 defines MoA as a constitution of the company. The company works based on the framework given in the memorandum. MoA must be prepared by all the companies and filed with the registrar. It defines the relationship between the companies and outside the world. It cannot be changed easily. It is subordinate only to the companies act. The company works in the legal provisions of MoA. Any act of the company beyond the scope of the memorandum will become void. | Section 2(5) of the Act defines AoA. The articles contain bye-laws for the day-to-day working of the company as set out in the MoA. Public companies may not have their articles. They can adopt Table-A of Schedule-1 as its articles. It defines the relationship between the company and the members among themselves. It can be altered easily by the special resolution of shareholders. It is subordinate to the memorandum and companies act. If anything is done beyond the scope of the articles will not be void. |
Fill the information in the MCA portal (the exact process you see while filing)
The process of incorporating will start with an e-form which is SPICe+(Part B), where you have to fill in details of the structure of the company, share capital details of the company, address of the company (if you have), if not, you can later inform address details to the registrar of companies (comply Section 12 of the Act), the number of subscribers and directors, their details or DIN (Directors Identification Number) number, and how many shares you are going to subscribe at the time of incorporating. You have to confirm whether you have already paid the stamp duty or not, if not you have to pay it then and there, Rs. 1000 for AoA, Rs.200 for MoA, ands.100 for E-Form. Later, we are required to fill the business PAN and TAN details together and at last, it will have appeared in your incorporation certificate, and you have to fill in your source of income details and upload some utility bills (not older than 2 months), and NOC. Subsequently, a declaration form shall be filled by the subscribers of the company, it should be affixed by a digital signature certificate (DSC).
Later, you have to fill in GST (optional) and professional tax (mandatory), and Employment State Insurance Corporation (ESIC) through the AGILE-PRO-S form in the MCA portal. Photo and authorized signature shall be uploaded and personal phone number and email id shall be confirmed with OTP. Details of the branch office shall be mentioned (if any).
Further, you need to submit your drafted MoA and AoA. After submitting the AGILE-PRO-S form we need to affix the DSC of every subscriber, and professional (who do incorporate). All the e-forms shall be submitted again, along with DSC (Digital Signature Certificate).
On approval of all the forms i.e., SPICe+, AoA, MoA, and AGILE-PRO-S, you will be getting a certificate of incorporation, which means your company is successfully incorporated.
CIN
It is a Corporate Identity Number given to the company which is incorporated whether listed or unlisted, the number contains 21 alphanumeric digits. This CIN is used for tracking all the aspects and details of the company from its incorporation.
Example: U00000AP2020PLC123456
How to read CIN:
- U (1st digit): It tells us the listing status, U defines it as unlisted, if it is L then the company is listed.
- 00000 (2nd-6th digit): Concerned ROC code.
- AP (7th and 8th digit): It tells about the state code, AP- Andhra Pradesh.
- 2020 (9th-12th digit): Year of incorporation.
- PLC (13th-15th digit): PLC- Public Limited Company.
- PTC- Private Limited Company.
- 123456 (16th-21st digit): Registration number.
Commencement of business certificate
Any private limited company may begin its business activities from the date of its incorporation. However, according to Section 149(2A) of the Companies Act, 1956 any Public Limited Company to start its business activities, must obtain a certificate called Commencement of Business.
Earlier incorporating a company is in offline mode where you have to go to the Registrar of Companies anyway, however, now the process is completely online mode from registering the name to getting Certificate of Incorporation.
Conclusion
Hence the incorporation of a company has its pros and cons, however, if you feel incorporating your company is very expensive and time-consuming then you must realise its core advantages. As soon as a company is incorporated it becomes a legal person and it will have its identification, property, and distinct from its members. It describes the way how a company is legally formed and brought into existence and truly depends on the needs of the business.
References
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