This article is written by Sachi Bhiwgade. This article discusses the need, importance, and benefits of incorporating a company and the process of incorporation. The incorporation rules are further discussed in-depth. ‘
It has been published by Rachit Garg.
Over the past few years, India has emerged as one of the fastest-growing economies in the world, as evidenced by the rise of several startups. As per the Reserve Bank of India, India’s GDP is set to grow by 6.8% in 2023. A number of initiatives were also launched by the Ministry of Corporate Affairs (MCA) as part of its Ease of Doing Business wing, including the integration of numerous procedures through the release of the SPICe+ form, which offers a number of benefits for incorporation, and the establishment of a Central Registration Centre for name reservations, which significantly eased the processing of incorporation. All of this has made it easier to incorporate a business as a company in India and reflects the country’s willingness to support businesses and boost the economy.
The MCA is the authority that implements the Companies Act, 2013 (the “Act”), which businesses have to comply with along with the Companies (Incorporation) Rules, 2014 (the “Rules”) to get a company registered in India. The process of incorporation is dealt with by Chapter 2 of the Act, which covers the provisions relating to a company’s incorporation from Sections 3 to 22, read with the Rules. This article gives an overview of the advantages of incorporating a company as a business structure, as well as the legal requirements that must be met at the time of incorporation.
What does ‘incorporation’ mean
In general terms, incorporation is the process of forming a business or company as a legal corporation. Legally, “incorporation” refers to the process of registering a company as per the provisions of the Companies Act, 2013 or any of the prior company laws, read with the Companies Incorporation Rules, 2014.
Further, it is also essential in this context to understand what a company means. Though there are several definitions of a company given by various scholars, there is no strict or technical definition of a company; this was also observed by the Court in the case of In re Stanley (1906). Professor Haney is one such scholar, who provides the most appropriate definition of a company, which effectively explains the concept of a company as well as its characteristics, namely that “a company is an artificial person created by law, having a separate entity, with perpetual succession, and a common seal.”
Once incorporated, a company becomes a separate legal entity with legal characteristics such as perpetual succession, limited liability, having a common seal, and the capacity to sue and be sued.
Need and importance of incorporation of companies
It is not necessary to incorporate a company in order to run a business. Several business structures exist, including sole proprietorships, partnerships, cooperative societies, and joint Hindu family businesses, among others. The most appropriate form of structure for a specific business is determined by evaluating the benefits and drawbacks of various types of organisations against one’s requirements.
Incorporating a company is time-consuming and involves the filing of several documents and the hiring of various officials to operate and run the business. Therefore, if one plans to incorporate a company, its pros and cons should be considered before deciding whether it is the best course of action for your business or whether another alternative should be preferred.
A business might want to incorporate for a number of reasons. However, not getting your business registered may come with a number of downsides, such as not having the ability to sue or getting tax benefits. Below discussed are a few reasons and upsides of incorporating a company.
Separate legal entity
A company is an entity where a group of persons come together for the common purpose of running a business that is separate from its members’ legal status and has an independent existence. Being distinct from the people that run and manage it, such as its promoters, directors, or shareholders, it has its own assets, rights, and obligations. Hence, only the company is responsible for repaying its creditors; the officials or members have no rights over the company’s assets or property. In the event a company is facing legal action in case of default, the officials cannot be sued for the company’s action. Neither is a company obligated to pay off its members’ personal debts.
The concept of a separate legal entity was discussed in the famous case of Salomon v. Salomon (1897), where the House of Lords held that a company is considered to be distinct from its shareholders even in cases where the sole shareholder owns the entire share capital.
Interestingly, the first case even before Salomon in this regard was Kondoli Tea Company Ltd Re. (1886), where W. Comer Petheram, C.J. of the Calcutta High Court, observed that “a company is a separate person, a separate body altogether from the shareholders, and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”
A company is an artificial person because it is created by virtue of law, which is also evident from the provisions of Section 2(20) of the Act. It defines a company as “a company incorporated under this Act (Companies Act 2013) or under any previous company law.”
It is also clear from the fact that a company lacks the characteristics of a natural person and exists only in terms of the law. A company, being an artificial person, however, relies upon the officials to run the business operations.
As an artificial person, a company does not have a set life span and endures irrespective of its members. Regardless, members, directors, officials, etc., may change for many reasons, but the company survives. Consequently, in contrast to sole proprietorships or partnerships, where business may end at the demise of the business owner and the latter may dissolve upon the dissolution of the partnership, a company’s operations are guaranteed to continue after incorporation. Thus, it was very aptly stated in the case of Re Noel Tedman Holding Pty Ltd. (1967) that “members may come and go, but the company remains.”
Easy share transfer
Share transfer allows investors to have flexibility and liquidity as they have the option of selling their shares on the market and reclaiming their investments. This has an impact on the share price, which can alter or increase the company’s value. However, this does not affect the legal structure of the company.
Clause 2 of Section 58 of the Act allows for the free transfer of shares of a public company. However, a private company has certain restrictions with respect to the transfer of shares, but these restrictions solely serve to safeguard the interests of the shareholders. Further, as per Section 44 of the Act, shares in a company are movable property and are transferable as per the articles of the company. Thus, the restriction on the transfer of shares of a private company is subject to the articles of the company.
The company bears its official signature, known as the “common seal,” which is affixed by authorised officials due to the nature of a company being an artificial person. A document that lacks the common seal cannot legally bind the company.
Capacity to sue and be sued
Another important feature and advantage of an incorporated business is its capacity to enter into lawsuits and be sued for any default or violation of the law. It has the right to protect its identity, and all legal actions are pursued under its registered name. This was also observed by the Court in the famous case of Foss v. Harbottle (1843), where the “Proper Plaintiff Rule” was enunciated, which means that for any action, it is the company alone that can bring any legal action for any wrong done to it and not its individual members.
Limited liability means the members of a company will only be liable to a particular extent, e.g., a company limited by shares, guarantee, or unlimited liability. Unlike an incorporated company, in a partnership, the liability of the firm is that of the partners. Thus, the main benefit of such a liability cap is that it makes an investor’s risk and losses more transparent, providing them with an opportunity to exit, thereby minimising their losses.
A company’s incorporation creates a distinction between the company’s assets and those of the members. This principle is clearly illustrated by the Bacha F. Guszdar v. CIT, Bombay (1954) case, where the Supreme Court said, “It is the company that owns the property, not the shareholders.” The Court further stated that, although shareholders have certain rights within the company, they do not acquire any ownership interests in the company’s property.
Easy capital raising
The ability to raise cash through the issuance of shares, which other business structures cannot do, is another benefit of a corporation. By becoming incorporated, a company also gains a reputation as it is seen as being more reliable.
Companies (Incorporation) Rules, 2014 : all you need to know
These Rules specify the process and method in accordance with the requirements of the provisions of the Act. These Rules primarily deal with the procedure, forms, and requisite fees in accordance with the Companies (Registration Offices and Fees) Rules, 2014, related to the incorporation of a company. A brief discussion of these requirements is given below;
SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus: INC 32)
Prior to the introduction of the SPICe+ form, the SPICe, which is the Simplified Proforma for Incorporating Company Electronically, an e-form, was introduced in the year 2016 for facilitating incorporation, including reservation of name, DIN allotment, among other things. The lengthy procedure and plethora of forms available earlier for company incorporation were streamlined by combining several forms into one.
The new SPICe+ form replaced the SPICe form by notification on February 15th, 2020, by the Ministry of Corporate Affairs (‘MCA’) as a part of the ‘Ease of Doing Business’ initiative by the Central Government. Consequently, Rule 38 was also amended, where companies can now avail multiple services as compared to the SPICe from.
Formation of companies
Section 3 of the Act outlines the prerequisites of how a company could be lawfully formed, which include a public company, a private company, and a one-person company. The procedure for documentation and registration required for the incorporation of a company is covered in Section 7. The applicable Rules for the same are discussed below.
Companies other than one person company
Rule 12 talks about the requirement of filing an application for registration of a company along with the SPICe+ form. Further, in relation to Nidhi companies, they must obtain a declaration from Nidhi before commencing the business.
Procedure related to the name of the company
In accordance with Section 12 of the Act, a company has to paint its name, registered office outside each of its offices, CIN number, contact number, and email, among other things. In the case of an online business, Rule 26 mandates that a company publish all the above-mentioned information on its website’s home page.
Rule 8, Rule 8A, and Rule 8B talk about the “undesirable name” of a company; these are names that are strikingly similar to, nearly identical to, or sound very similar to the name of an existing company. It provides detailed specifics about how the two names would be considered the same.
Provisions related to name reservation and change of name as well as the time limit for getting approval for the same is given under Rule 9, where it mentions its procedure and related forms to be submitted along with the application;
|Name reservation||SPICe+ form|
|Name change||RUN (Reserve Unique Name) and, Fee as per the Companies (Registration Offices and Fees) Rules, 2014|
|Extention for name reservation (Rule 9A)||SPICe+ form and Fee|
Rule 18 gives authority to the Registrar of Companies to issue incorporation certification in Form INC 11. It also mentions that the incorporation certificate should contain a company’s permanent account number as assigned by the income tax authority.
Section 3 of the Act provides for subscribing to the memorandum of the company by the requisite number of persons to form a lawful company. Rule 16 further provides that certain information about such subscribers should be filed with the Registrar during incorporation; it provides a long list of documents that are needed.
Registered office and change of registered office
Section 12 of the Act talks about the registered office of a company, which it is required to have within 15 days of incorporation. Verification and physical verification of the company have to be filed under Form INC 22 as per Rule 25 along with the requisite documents.
Clause 5 of Section 12 contains the provision for changing the registered office. It states that the registered office of a company could be changed with the passing of a special resolution by the Board. Rule 28 and 30 outline the process for transferring registered offices within the same state, from one state to another, or within a union territory, respectively. Rule 27 further mandates the filing of Form INC 22 to give notice of a change in registered office.
One person company
INC 2 form is required to be submitted along with the application for registering an OPC company as per Rule 12. Who is qualified to form an OPC, as well as who is and is not eligible to be an OPC member, are covered in Rule 3. Further, this Rule also lists out the activities that an OPC is not permitted to engage in, as well as restricts the incorporation of an OPC or its conversion to a Section 8 company.
Further, Section 4 and Rule 4 provide for the criteria for nominating a person by the subscriber of the OPC’s memorandum, who will then join the OPC as a member if the subscriber dies or when he/she cannot enter into a contract. Rule 4 further has provisions regarding the withdrawal of consent by the nominee, a new nominee, and other additional compliances.
Section 8 Company
A Section 8 company refers to a company formed for charitable purposes, such as promoting art, science, education, etc., for which the Central Government provides it with a license. In other words, a Section 8 company is a “non-profit” company. For incorporating a Section 8 company, an application has to be made in this regard in the SPICe + form along with the requisite fee as per Rule 19.
Memorandum and Articles of Association
A “memorandum of association,” or “MOA,” is the charter of the company; it contains the purpose for which the company is to be formed. Whereas “Articles of Association,” or “AOA,” are the bylaws and regulations governing the internal management of a company. Section 4 and Section 5 of the Act contain the provisions regarding memorandum and articles, respectively.
Rule 13 provides the manner in which the Memorandum and Articles are to be signed; it contains provisions regarding witnesses, particulars of identity, a provision for thumb impressions in case a subscriber is illiterate, the requirement of reading and explaining the content of the MOA to every subscriber, and provisions for a body corporate and a foreign national as subscribers.
The names of the first directors are given in the AOA. These individuals are appointed to the position of directors at the time of formation of a company. Details of the first directors are also required to be submitted to the Registrar as per Clauses (c) and (f) of Section 7. As per Clause C, it is mandated that a declaration be given in respect of the first directors that they are not disqualified to be appointed as directors, the format of which is given in Form INC 9 as per Rule 15.
Further, it is also imperative to obtain the directors’ consent to act as director of the company and as per Rule 17, a particular is to be given on this behalf in Form DIR 12 and fee.
Alteration of Memorandum and Article
Provisions to alter the Memorandum and the Articles are contained in Section 13 and Section 14 of the Act, both of which require a special resolution for approval. Amendments to the articles may vary depending on whether a private company becomes a public company or vice versa. Rule 33 and 33A further provide for the requisite Form that needs to be submitted by a company that intends to alter its articles. The MOA may be modified to reflect a change in the company name, a shift in the registered office, the issuance of a prospectus, etc. As per Rule 29, a company is prohibited from changing its name if it has not submitted annual reports or financial statements as required or if it has failed to pay or repay deposits, debentures, or interest on those obligations that are due. However, this restriction can be lifted if the company submits the necessary documents and pays its debts.
Entrenchment provision in articles
A restrictive provision known as an ‘entrenchment’ needs a supermajority rather than a special majority to alter certain specified AoA provisions. Such provisions, as per Section 5, are made in the AoA at the time of incorporation, along with the SPICe+ form or under Form MGT 14, by an amendment, along with fees as provided under the Registration of Offices and Fees Rules, 2014; the same is provided in Rule 10.
Conversion of a company into another kind
Private Company into OPC
Section 18 of the Act allows the conversion of any class of company into another class, which implies that a private company may convert into an OPC. This section is read in line with Rule 7. As per the Rule, excluding a Section 8 company, a private company can convert into an OPC on the adoption of a special resolution. Further requirements include the filing of Form INC 6, a consent declaration by the directors of the company allowing conversion, a NOC by secured creditors, and other financial documents.
Section 8 company to other company
In line with the requirements of Rules 21, 22, and 23, a Section 8 company may, if it so chooses, convert itself to any other sort of company which is likewise covered under subclause 4(ii) of Section 8 of the Act. However, as mentioned above, it cannot be converted into an OPC.
Rule 21 outlines the criteria for the conversion requirement. To get the conversion approved, a Section 8 company has to get it approved by passing a special resolution, of which a certified copy is submitted with the application in Form INC 18. Further, the notice of the meeting contains particulars such as the company’s incorporation date, its objects as per the MoA, the reason behind changing the structure from a Section 8 company, the main objectives that are being altered, and the rationale behind the same; as well as the filing of Form MGT14, which includes information about the effects the conversion will have on the members.
Additional compliance for Section 8 company’s conversion is discussed in Rule 22. It includes the requirement of filing a notice in Form INC 19 and publishing it in a newspaper and on the company’s website. The notice is also sent to various authorities, including the CIT of Income Tax, IT officer, Charity Commissioner, etc.; proof of notice served; obtaining a NOC from various regulatory authorities, certificate of experts validating that the conditions are in full compliance, and obtaining approval from any particular authority of conversion. Once all requirements have been met and the application has been approved by the Regional Director, the Registrar issues a fresh certificate of incorporation.
Company limited by guarantee to limited by shares
Excluding a Section 8 company, any company limited by guarantee can convert itself into a company limited by shares. The prerequisites of the same are;
- Share capital must be equal to the amount of guarantee.
- Amendment to the MoA and AoA.
- Filing of special resolution in Form MGT 14.
- Filing INC 27 with the revised articles attached.
Following the fulfilment of these requisites, the converting company receives an incorporation certificate.
Unlimited liability company to company limited by shares or guarantee
The procedure to convert an unlimited liability corporation into a limited liability company by virtue of shares or guarantee is outlined in Rule 37. This kind of conversion needs to be authorised by a special resolution at a general meeting, for which an application is submitted using Form INC 27. Following the passing of the special resolution, the company has to publish notice of the conversion in a newspaper and on its website in order to seek objections from interested parties. A list of supporting documents, among other things that need to be submitted along with the applications, includes a copy of the resolution passed, publication in the newspaper; a certified copy of revised MoA and AoA, a declaration by the directors; NOCs. After conversion, it is also essential to follow all the requirements outlined in sub-rule 7.
Frequently Asked Questions (FAQs)
What was the status of incorporation requirement before the introduction of the Rules in 2014?
The Companies (Central Government’s) General Rules and Forms, 1956, and Companies Regulation, 1956, which were supplemental to the Companies Act, 1956, were in place until the introduction of the Rules in 2014.
What is the difference between SPICe and SPICe+ forms?
The primary difference between the SPICe+ and SPICe forms is that the former is an enhanced version of the SPICe form known as an integrated web form offering 10 services from three Central Government Ministries and Departments. In contrast, the latter is an electronic form, replaced by the SPICe+ form on February 15th, 2020.
Is resubmission of SPICe forms allowed?
Yes, SPICe can be resubmitted as per Rule 38 of the Incorporation Rules.
What does an artificial legal person mean in relation to a company?
A company is an artificial legal person, which implies that although it is not a natural person and was created by law, it has rights equivalent to those of natural persons.
Is it mandatory to register a business as a company in India
No, it is not mandatory to register a business as a company in India. There are several other business structures that can be opted for, such as a sole proprietorship, a partnership firm, or a limited liability partnership. One-person companies, which are set up similarly to sole proprietorships but offer the benefits of a private business, are also an alternative.
- The Companies Act, 2013
- The Companies Incorporation Rules, 2014
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