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Company formation
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.


  1. Promotion of a Company
  2. Registration of a Company
  3. Certificate of Incorporation; and
  4. 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

  1. any advocate of the Supreme Court or
  2. of a High Court, or
  3. an attorney or pleader entitled to appear before a High Court or
  4. a practicing chartered accountant in India, who engages in the Company formation or
  5. 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.

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FAQs on Company formation - Class 11

1. What is company formation?
Ans. Company formation refers to the process of legally creating a new company or business entity. It involves registering the company with the relevant government authorities, such as the Companies House in the UK, and fulfilling other legal requirements to establish the company as a separate legal entity.
2. What are the steps involved in company formation?
Ans. The steps involved in company formation may vary depending on the jurisdiction, but generally include the following: 1. Choose a business name: Select a unique and meaningful name for the company. 2. Determine the company structure: Decide on the type of company structure, such as a limited liability company (LLC) or a corporation. 3. Prepare necessary documents: Prepare the required documents, such as the articles of incorporation or articles of association, memorandum of association, and other relevant forms. 4. Register the company: Submit the necessary documents and registration fees to the appropriate government authority and complete the registration process. 5. Obtain necessary licenses and permits: Depending on the nature of the business, certain licenses and permits may be required, which should be obtained. 6. Set up a bank account: Open a separate bank account for the company's financial transactions. 7. Comply with ongoing requirements: Fulfill any ongoing compliance requirements, such as filing annual reports, maintaining proper records, and paying taxes.
3. What are the advantages of company formation?
Ans. Company formation offers several advantages, including: 1. Limited liability: Shareholders or owners of a company have limited liability, which means their personal assets are generally protected from company debts and obligations. 2. Separate legal entity: A company is a separate legal entity from its owners, allowing it to enter into contracts, own assets, and sue or be sued in its own name. 3. Perpetual existence: Unlike sole proprietorships or partnerships, companies have perpetual existence, meaning they can continue to exist even if there are changes in ownership or management. 4. Access to funding: Companies have more options to raise capital through the issuance of shares or by obtaining loans from financial institutions. 5. Credibility and trust: A registered company often enjoys more credibility and trust among customers, suppliers, and other stakeholders, which can positively impact business opportunities.
4. What are the different types of company structures that can be formed?
Ans. There are various types of company structures that can be formed, including: 1. Sole proprietorship: A business owned and operated by a single individual. The owner has unlimited liability for the business's debts. 2. Partnership: A business structure where two or more individuals share ownership and responsibilities. Partners have unlimited liability. 3. Limited liability company (LLC): A hybrid structure that combines the benefits of a corporation and a partnership. Owners have limited liability, and the company's income is taxed at the individual level. 4. Corporation: A separate legal entity owned by shareholders. Shareholders have limited liability, and the company's income is taxed separately. 5. Cooperative: A business owned and operated by a group of individuals who work together for their mutual benefit.
5. What are the essential documents required for company formation?
Ans. The essential documents required for company formation may vary depending on the jurisdiction, but commonly include: 1. Articles of incorporation or articles of association: These documents outline the company's purpose, structure, and regulations. 2. Memorandum of association: It contains the company's name, registered office address, and details of the shareholders. 3. Formations or registration forms: These forms are filled out with relevant information about the company, such as its name, address, directors, and shareholders. 4. Shareholder agreements: These agreements outline the rights and responsibilities of the shareholders in the company. 5. Directors' consents: These documents confirm the consent of the appointed directors to act in their respective roles. It is advisable to consult with legal professionals or business service providers in the specific jurisdiction to understand the exact documentation requirements for company formation.
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