Company formation is the process of registering a business as a limited company at Companies House. As a result, the business becomes a distinct legal entity. The process is also referred to as ‘company incorporation’ and ‘company registration’.
When you incorporate a limited company, it becomes an individual ‘person’ in the eyes of the law. Incorporated businesses are completely separate from their owners in terms of finances, liabilities, contractual agreements, and ownership of property and assets.
The law does not view unincorporated businesses like sole traders as distinct legal entities. Therefore, there is no separation between a sole trader business and its owner in terms of finances, assets and liabilities.
Important Stages in the formation of a company
The whole process of company formation can be divided into four stages as given below.
- Promotion of a Company
- Registration of a Company
- Certificate of Incorporation; and
- Commencement of the Business.
1. Promotion of a Company:
A business enterprise does not come into existence on its own. It comes into existence as a result of the efforts of an individual or group of people or an institution. That is, it has to be promoted by some person or persons. The process of business promotion begins with the conceiving of an idea and ends when that idea is translated into action i.e., the establishment of the business enterprise and commencement of its business.
Who is a Promoter in a Company?
A successful promoter is a creator of wealth and an economic prophet. The person who is concerned with the promotion of business enterprise is known as the Promoter. He conceives the idea of starting a business and takes all the measures required for bringing the enterprise into existence.
For example, Dhirubhai Ambani is the promoter of Reliance Industries.
The promoters find out the ways to collect money, investigate business ideas arranges for finance, assembles resources and establishes a going concern.
The company law has not given any legal status to promoters. He stands in a fiduciary position.
Types of Promoters
Promoters are different types such as professional promoters, occasional promoters, promoter companies, financial promoters, entrepreneurs, lawyers and engineers.
2. Registration of a Company
It is registration that brings a company into existence. A company is properly formed only when it is duly registered under the Companies Act.
Procedure of Registration
In order to get the company registered, the important documents required to be filed with the Registrar of Companies are as follows.
1. Memorandum of Association: It is to be signed by a minimum of 7 persons for a public company and by 2 in case of a pvt company. It must be properly stamped.
2. Articles of Association: This document is signed by all those persons who have signed the Memorandum of Association.
3. List of Directors: A list of directors with their names, address and occupation is to be prepared and filed with the Registrar of Companies.
4. Written consent of the Directors: A written consent of the directors that they have agreed to act as directors has to be filed with the Registrar along with a written undertaking to the effect that they will take qualification shares and will pay for them.
5. Notice of the Address of the Registered Office: It is also customary to file the notice of the address of the company’s registered office at the time of incorporation. It is to be given within 30 days after the date of incorporation.
6. Statutory Declaration: A statutory declaration by
- any advocate of the Supreme Court or
- of a High Court, or
- an attorney or pleader entitled to appear before a High Court or
- a practicing chartered accountant in India, who engages in the Company formation or
- by a person indicated in the articles as director, managing director, Secretary or manager of the company, mentioning that the requisites of the Act and the rules there under have been complied with. It is to be filed with the Registrar of Companies.
When the required documents have been filed with the Registrar along with the prescribed fee, the Registrar scrutinizes the documents. If the Registrar is satisfied, the name of the company is entered in the register. Then the Registrar issues a certificate known as Certificate of Incorporation.
3. Certificate of Incorporation
On the registration of Memorandum of Association, Articles of Association and other documents, the Registrar will issue a certificate known as the ‘Certificate of Incorporation‘. The issue of certificate is the evidence of the fact that the company is incorporated and the requirements of the Companies Act have been complied with.
4. Certificate of Commencement of Business
As soon as a private company gets the certification of incorporation, it can can commence its business. A public company can commence its business only after getting the ‘certificate of commencement of business‘. After the company gets the certificate of incorporation, a public company issues a prospectus for inviting the public to subscribe to its share capital. It fixes the minimum subscription. Then it is required to sell the minimum number of shares mentioned in the prospectus.
After completing the sale of the required number of shares, a certificate is sent to the Registrar along with a letter from the bank stating that all the money is received.
The Registrar then scrutinizes the documents. If he is satisfied he issues a certificate known as ‘Certificate of Commencement of Business’. This is the conclusive evidence for the Commencement of Business.