Incorporation or Registration of Company | Business Studies (BST) Class 11 - Commerce PDF Download

Incorporation or Registration of Company

For a public company, the minimum number of members is seven, while it is two in the case of a private company. The promoter has to gather the required number for subscribing to the Memorandum of Association.

The following are the steps for the incorporation of a company:

1. Application for Availability of Name: A company cannot be registered in the name of an existing company. It also cannot be registered in a name, which is undesirable in the opinion of the Central Government. Therefore, it is necessary for the promoters to find out the availability of the name of the company from the Registrar of Companies. The first step in the formation of a company is the approval of the name by the Registrar of Companies (ROC) in the State/Union Territory in which the company is to be registered. This approval is provided subject to certain conditions. For instance, there should not be an existing company by the same name. Further, the last words in the name are required to be “Private Ltd.” in the case of a private company and “Limited” in the case of a Public Company.

Finalisation of name: The application for approval of name should mention at least four suitable names of the proposed company, in order of preference. The ROC, generally, informs the applicant within seven days from the date of submission of the application, whether or not any of the names applied for is available. Once a name is approved, it is valid for a period of six months, within which time Memorandum of Association and Articles of Association together with miscellaneous documents should be filed. If one is unable to do so, an application may be made for renewal of name, by paying additional fees. After obtaining the name approval, it normally takes approximately two to three weeks to incorporate a company, depending on where the company is registered.

2. Filing of Documents: The following three documents are required to be filed with the Registrar of Companies of the State in which the registered office of the company is to be situated:

• Memorandum of Association,
• Articles of Association, and
• Agreement with the company for the proposed appointment of the managing director, whole-time director or manager.

The above documents (i) and (ii) are required to be signed by the seven persons in the case of the public company and two persons in the case of private company.

3. Payment of Stamp Duty and Filing Fee: The company has to pay the necessary stamp duty and filing fee, according to the authorized share capital of the company.

4. Declaration of Compliance of Act and Rules: A declaration that the requirements of the Act and the rules framed there under have been complied. This declaration is to be signed by an advocate of the Supreme Court or High Court or attorney or a pleader having the right to appear before High Court. Alternatively, this declaration can be signed by a Company Secretary or Chartered Accountant in whole time-practice, who is engaged in the formation of a company or a person named in the articles as a director. This declaration is also to be filed with the Registrar of Companies, where the registered office of the company would be located. - Section 33(2). 

5. Additional Requirement, in Case of a Public Company: The following further requirements are to be complied with:

(i) A list of persons who have consented to act as directors.

(ii) Written consent of the directors to act in that capacity.

(iii) An undertaking by the directors to take up and pay for the qualification shares.

6. Certificate of Incorporation or Registration: If the Registrar is satisfied that the requirements under the Act for the purpose of registration of a company have been complied with, he shall register the company and issue a certification of incorporation, under his hand and seal.

Advantages of Certificate of Incorporation

1. Corporate Existence: After certificate of incorporation, company obtains independent existence. The company enjoys a distinct legal personality. It becomes capable of functioning, independently, as a corporate individual, distinct from its members.

2. Liability: The liability of the members is limited to the extent of the nominal amount of the shares subscribed. In the case of a company limited by guarantee, the liability of the member is limited to the amount guaranteed by him.

The liability of partners in a partnership firm is unlimited. However, the liability of the members in a limited company is limited to the face value of the shares held by him. In case, the face value of a share is Rs. 10 and an individual holds 100 shares, his total liability, at any time, is only Rs. 1,000. If he has already paid, Rs. 400, his balance liability is limited to Rs. 600 only. Even, in the event of winding up of the company and the company does not have sufficient assets to pay the total liabilities, still, the individual member cannot be called upon to pay beyond Rs. 600 as he has already paid Rs. 400. In case, the member has paid the total amount of his liability Rs. 1,000, he has no further liability to the company, at all. The novel idea of limited liability has encouraged the people to invest in a company, with limited liability, unlike in a partnership firm.

3. Transferability of Shares: Shares in a company can be transferred easily, without the consent of other members of the company.

The greatest advantage of company is transferability of shares, unlike in a partnership firm. In a partnership firm, without the consent of the other partners, a partner cannot transfer his share to others. A member can transfer his shareholding, without the consent of the other members, in the manner provided by the Articles Association of the company. However, there are certain restrictions on the transferability of shares, in a private limited company. Certain restrictions can be imposed in a private limited company, but not in a public limited company about the transferability of shares.

4. Perpetual Existence and Succession: A company incorporated never dies. The members of the company change with the transfer of shares. The death or insolvency of the members does not affect the corporate existence of the company. Only on winding up of the company, it ceases to exist.

Prof. Grover in his book on Modern Company Law says that “A company continues to exist even if all the members are dead. During the war, all the members of one private company, while in general meeting, were killed by a bomb. But, the company survived. Not even a hydrogen bomb could destroy it.”

5. Members and the Company: A company enjoys separate legal entity. So, it can enter into contracts with its members and sue them in the ordinary way.

6. Separate Property: Capital of the company is contributed by its members. However, company owns the assets in its name and the members do not have any ownership right on the property of the company.

7. Capacity to Sue and be Sued: A company being a body corporate, it can sue and be sued in its own name.

Effect of Certificate of Incorporation

Once a company is registered, the certificate of incorporation cannot be challenged, though there may be irregularities prior to registration.

A company obtains separate legal existence only after it is registered under the Companies Act. By virtue of this legal existence, the company comes into being as a separate person, distinct from the persons who form it. The company becomes a body corporate, with perpetual succession. Once company is registered, the only method to end it is through the process of winding up. The certificate of incorporation cannot be cancelled by the Registrar of Companies, even if irregular.