This article has been written by Anjali Yadav pursuing a Diploma in US Corporate Law and Paralegal Studies course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

A company is a legal entity/legal person/artificial person that is created and required to be incorporated under the Companies Act of 2013. It functions under the command of the Board of Directors; whatever decision is to be taken on a day-to-day basis is to be taken by the Board of Directors. It is a separate legal entity from its owners, and it can own property, enter into contracts, and sue and be sued. A company is managed by a board of directors, who are elected by the shareholders. The board of directors is responsible for setting the company’s overall direction and making major decisions, such as approving mergers and acquisitions, issuing new shares, and declaring dividends. 

There are two main types of companies: public companies and private companies. Public companies are companies whose shares are traded on a stock exchange, while private companies are companies whose shares are not traded on a stock exchange. Public companies are subject to more regulations than private companies, and they must file regular reports with the Securities and Exchange Commission (SEC). Private companies are not subject to as many regulations, and they do not have to file regular reports with the SEC.

Companies can be formed for a variety of purposes, such as to manufacture products, provide services, or invest in real estate. Companies can also be formed for charitable purposes. The most common type of company is a for-profit company, which is formed with the goal of making money. Nonprofit companies are formed with the goal of providing a service or pursuing a charitable purpose, and they do not have to pay taxes. Companies can be a valuable tool for entrepreneurs and businesses of all sizes. They can provide a structure for raising capital, managing risk, and expanding into new markets. Companies can also help to protect the personal assets of their owners.

Company formation

In the formation of a company, the promoter of the company plays a greater role. He is the person who searches for potential investors and approaches the registrar of companies for incorporation of the company, which involves various stages. The formation of the company generally involves three stages, i.e., the pre-incorporation stage, the incorporation stage and the post-incorporation stage. This article deals with all three stages, such as its promotion, its process of incorporation, and the benefits of incorporation.

According to Section 3 of the Companies Act of 2013, a company can be of the following types:

Public company

A public company is a company that is owned by the general public. This means that the company’s shares are traded on a stock exchange, and anyone can buy them. Public companies are subject to more regulations than private companies, and they must disclose more information to the public.

There are a few key differences between public and private companies. First, public companies must register with the Securities and Exchange Commission (SEC). This means that they must file regular reports with the SEC, including their financial statements and other important information. Private companies are not required to register with the SEC.

Second, public companies must have a board of directors. The board of directors is responsible for overseeing the company’s management and ensuring that it is operating in the best interests of the shareholders. Private companies do not have to have a board of directors.

Third, public companies must have a public float. This means that a certain percentage of the company’s shares must be held by the public. The public float requirement is designed to ensure that there is a liquid market for the company’s shares. Private companies do not have to have a public float.

Fourth, public companies must disclose more information to the public than private companies. This information includes the company’s financial statements, its board of directors, and its executive compensation. Private companies are not required to disclose as much information to the public.

There are a number of advantages to going public. First, it can provide the company with access to capital. When a company goes public, it can sell its shares to the public and raise money to fund its growth. Second, going public can give the company a higher profile. When a company’s shares are traded on a stock exchange, they become more visible to investors and the general public. Third, going public can provide the company with a better credit rating. When a company is publicly traded, it is more likely to be able to borrow money from banks and other lenders.

Private company

A private company is a company that is not publicly traded. This means that the company’s shares are not listed on a stock exchange and are not available for purchase by the general public. Private companies are typically formed by two or more people who want to own and control the company themselves. There are a number of advantages to forming a private company, including:

• Privacy: Private companies are not required to disclose their financial information to the public. This can be a major advantage for companies that want to keep their financial information confidential.
• Flexibility: Private companies have more flexibility than public companies in terms of how they are managed and operated. This can be an advantage for companies that want to be able to make quick decisions and take risks.
• Tax benefits: Private companies may be eligible for certain tax benefits that are not available to public companies.

However, there are also some disadvantages to forming a private company, including:

• Lack of liquidity: The shares of a private company are not liquid, which means that they cannot be easily sold. This can make it difficult for private companies to raise capital.
• Limited access to capital: Private companies may have limited access to capital as they are not able to tap into the public markets for financing.
• Increased risk: Private companies are not subject to the same level of regulation as public companies. This can increase the risk of fraud and other financial problems.

Overall, there are both advantages and disadvantages to forming a private company. The decision of whether to form a private company or a public company is a complex one that should be made on a case-by-case basis.

One person company

One person company (OPC) is a type of company that is formed by a single person. It is a relatively new type of company in India, having been introduced in 2013. OPCs are subject to the same laws and regulations as other types of companies, but there are some key differences.

One of the main advantages of an OPC is that it is easier to set up and run than a company with multiple shareholders. There is no need to hold a shareholders’ meeting or prepare a shareholders’ agreement. The OPC can be managed by the sole shareholder, who can also be the company’s director.

Another advantage of an OPC is that it is taxed at a lower rate than other types of companies. OPCs are taxed at the same rate as individuals, which is currently 30%. This can be a significant saving for OPCs, as the corporate tax rate is currently 34%.

However, there are also some disadvantages to OPCs. One disadvantage is that the sole shareholder has unlimited liability for the company’s debts. This means that if the company is unable to pay its debts, the sole shareholder can be held personally liable for them.

Another disadvantage of an OPC is that it may be more difficult to raise capital than a company with multiple shareholders. This is because investors may be reluctant to invest in a company that is controlled by a single person.

Overall, OPCs can be a good option for small businesses that are owned and operated by a single person. They are easier to set up and run than other types of companies, and they are taxed at a lower rate. However, sole shareholders should be aware of the risks involved in owning an OPC, such as unlimited liability for the company’s debts.

The companies formed under Section 3 of the Companies Act, 2013 may be either limited by shares, limited by guarantee or unlimited.

In the formation of a company, the promoter of the company plays a greater role. He is the person who searches for potential investors and approaches the registrar of companies for incorporation of the company, which involves various stages. The formation of the company generally involves three stages, i.e., the pre-incorporation stage, the incorporation stage and the post-incorporation stage. This article deals with all three stages, such as its promotion, its process of incorporation, and the benefits of incorporation.

Pre-incorporation stage or promotion

In this stage, the promoter comes in and searches for potential investors to invest in the idea developed by the promoter himself or any other person. Here, the promoters try to ensure the investors invest, after which they can incorporate the company. The term ‘promoter’ is defined under Section 2 (69) of the Companies Act of 2013. A promoter is the one who has been named as such in the prospectus of the company or is identified by the company in the annual return referred to in Section 92, or he has control over the company directly or indirectly, or on whose direction the Board of Directors are accustomed to act.

Other than the investors, the promoter also brings in labour, raw materials, managerial ability, machinery, etc. After deciding to launch the company, the next step for the promoter is to incorporate the company.

Incorporation stage

The Registrar of Companies (ROC) is a regulatory authority that handles the management and filing of companies. Every state has different ROCs and according to the jurisdiction in which you are incorporating the company, the ROC will be allotted.

For incorporation, address proof is needed and MCA also allows for the residential addresses to be the company’s registered addresses. Any address can be used as the company’s registered address and for its verification, the conveyance deed and electricity bill can be used. Once you are incorporated, all your correspondence concerning your filings and any issues will be done with the ROC of that particular jurisdiction.

For incorporation of the company, the simplified pro forma for incorporating the company electronically is the SPICe form. Another identical term for the SPICe form is INC-32 given in the Companies Act of 2013. INC-32 or SPICe, consists of two parts: 

• Part A:- For the company’s naming.
• Part B:- Incorporation (all other details of the company, PAN, TAN, GST, registration, state insurance, bank account details, DIN details).

Prerequisites of incorporation

The prerequisites for the incorporation of a private limited company are as follows:-

• The number of members must lie between 2-200.
• At least two directors and two shareholders are required.
• Each director must possess a Directors Identification Number (DIN)
• PAN card copies of directors/shareholders and passport copies for NRI subscribers are required.

Process of Incorporation

This is the process to incorporate a private limited company in India:

1. Obtain a Digital Signature Certificate (DSC). A DSC (of class 2) is required to file documents electronically with the registrar of companies through the website of the Ministry of Corporate Affairs. It can also be bought from a licenced authority in India, such as e-Mudhra, or CDAC. The certificate can be in the form of a soft copy or on a USB drive(e-token).
2. Obtain a Director Identification Number (DIN) This can be obtained by filing Form DIR3 for each director. Some standard documents are required to be attached to the form, such as proof of identity, proof of residence (e.g., passport, voter ID card, driver’s licence, ration card, PAN card number), a photograph and a verification. But this is applicable only when there are more directors than three, as for up to three directors, the application can be made within the SPICe form itself.
3. Approval of Name For this purpose, the Reserve Unique Name (RUN) service can be used for the reservation of the name. One can directly go for approval of the name in the SPIce form but the RUN service has one advantage as it allows to reserve two names while the SPICe form allows only one name to be reserved. The name should not be similar to any existing company name. And it should not violate any provisions of the Emblems and Names (Prevention of Improper Use) Act of 1950. Later, the name can also be altered according to Section 13 of the Act.
4. e-Memorandum of Association and  e-Article of Association
   1. A Memorandum of Association (MOA) is defined under Section 2(56) of the Companies Act 2013. It is the basis on which the company is built. It defines the constitution, powers and objects of the company.
   2. The Articles of Association (AOA) are defined under Section 2(5) of the Companies Act. It states all the rules and regulations relating to the management of the company.
5. e-MOA must be prepared in Form INC-33 and the e-AOA in Form INC-34 and it should be digitally signed by the subscribers and witnesses. (For one person company, the MOA shall contain the name of the nominee of the OPC and the nomination in Form No. INC-3). The e-MOA and e-AOA should be linked with the SPICe form.
6. PAN and TAN Applications PAN and TAN applications can be made in the SPICe form itself; they will be auto-generated after submission of the INC-32 or SPICe form. A PAN card will be issued by the Income Tax Department.
7. Allotment of Corporate Identification Number (CIN) or Certificate of Incorporation After the filing of Form INC-32, and payment of the fee, the form will be verified by the MCA portal and if all the details and attachments are provided correctly, the company will be allotted a CIN that contains 21 alphanumeric digits, e.g., U00000AP2020PLC123456, which distinguishes it from another company. The number contains 21 alphanumeric digits This means the certificate of incorporation of the company is issued in Form -11. The MCA will send an email containing the PAN, TAN and Certificate of Incorporation.
8. Certificate of Commencement of Business After getting a certificate of incorporation, the second step is to file for a certificate of commencement of business. And after obtaining the Certificate of Commencement of Business, you can start your business (applicable for public companies only). A private company can start its business as soon as it gets a certificate of incorporation.

Time required to register a private limited company

The time required for registration depends from state to state but nowadays registration of a company has become a fast process as all the documents are filed in a single application with MCA. Usually, it takes around 10 days for the whole process, which includes approval of DIN, name, and incorporation.

Advantages of Incorporation

A company is required to be incorporated under the Companies Act of 2013. This can be for various reasons, such as:

1. Separate legal entity- Once the company is incorporated, the owner of the company can differentiate between the properties owned in his capacity and those owned by the company. This means if any problem arises tomorrow, including bankruptcy or creditors coming behind the company, they can only sue the company, not the founder or the promoter of the company. This protects the founder from litigation related to the attachment of property.
2. The right to sue and to be sued- Now the company enters into agreements and signs contracts in its name or on its behalf.  It allows the company to file lawsuits against other parties and to be sued by other parties. This right is essential for the protection of the company’s interests. 

In the past, companies could only sue and be sued in their own name. This meant that the company’s shareholders were personally liable for any judgements against the company. This was a significant risk for shareholders, as they could lose their personal assets if the company was sued and lost. To protect shareholders from this risk, many jurisdictions now allow companies to enter into agreements and sign contracts in their name or on their behalf. This means that the company, rather than its shareholders, is liable for any judgements against the company. This is a significant benefit for shareholders, as it limits their personal liability for the company’s debts.

3. Perpetuity or perpetual succession- A company shall not be due until and unless an application is made for winding up. Even if all the personal assets of the founders are gone, the company will run as usual.
4. Transferability of its shares- As per the Companies Act, the shares of an incorporated company are easily transferable. A shareholder can transfer his share without seeking permission from the Board of Directors because shares are assets of the person.
5. Limited liability- The person investing in the company or shareholders has very limited liability, only to the extent that the person has invested in the company; e.g., if you have invested 1 crore, then at any point in time your liability cannot exceed 1 crore. But in the case of sole proprietorships and partnerships, whatever profit or loss you are making at the end, all liability lies with you.
6. Taxation on a company falls under the lowest regime of 25%, whereas 30% is for partnerships and limited liability partnerships. There are two broad aspects on which a company shall pay taxes:
   1.  On the profits made.
   2. Some taxes are deducted and submitted while the profit is distributed to its shareholders, as the shareholders are entitled to receive the profits made by the companies in dividends in proportion to their shareholding.
7. Employee’s Stock Option Schemes (ESOPs)- This scheme is available only for company structure. If the company wants, it can give its employees the option to subscribe to its shares. The company feels that the employees have added to and given benefits to the company; e.g., when Google was getting listed, most of its employees, including chefs, had ESOPs and at that time they sold their shares and earned crores of dollars. Paytm, an Indian-listed entity, is another example of an ESOP.
8. Raising capital- Even though the registration of companies requires a lot of compliance, entrepreneurs prefer it as it helps them raise capital through equity and expand and limit their liability.
9. Trustworthiness- Companies in India are registered under the Companies Act, 2013 with the Registrar of Companies (ROC) and the details of the company and its directors can be accessed by anyone through the website of the Ministry of Corporate Affairs (MCA). So it can be seen as more trustworthy.

Conclusion

The formation of a company requires many compliances but entrepreneurs prefer this structure for its limited liability nature. They are registered with MCA through its website.

The formation of the company generally involves three stages, i.e., the pre-incorporation stage, the incorporation stage and the post-incorporation stage. Incorporation involves obtaining DSC, DIN, TAN, PAN, approval of name, and a certificate of incorporation.

Incorporation of the company leads to many benefits, like perpetuity, right to Sue and to be sued, limited liability, trustworthiness, raising capital with ease, ESOPs, etc.

References

• https://cleartax.in/s/steps-to-register-private-limited-company
• https://blog.ipleaders.in/all-you-need-to-know-about-incorporation-of-companies/
• https://blog.ipleaders.in/formation-and-incorporation-of-a-company/#:~:text=incorporation%2 0even%20further.-,Certificate%20of%20Incorporation,issuing%20the%20certificate%20of%2 0incorporation%27.