The Tax PublishersIntroductory Note on Formation and Incorporation of Companies1. Introductory note

The status of the company as a corporation, i.e., a legal person district from its members, is the outstanding legal characteristic which distinguishes the company from other forms of organisation. The fundamental concept must always be kept in view that each company is a distinct legal entity. A registered company has many advantages over unregistered company. Companies Act, 1956 lays down provisions for incorporation/registration of various forms of companies. In different Chapters, hereinafter, procedures relating to formation and registration of various types of companies are discussed. The First Chapter is devoted to explain the major steps involved in formation of a company. A company after incorporation becomes a body corporate with perpetual succession and can use its common seal. The company can be limited with shares or guarantee, or both.

2. Steps to be taken for formation of a company

The initial step for a company to come into force starts with its formation. Promoters are the persons involved in the company's formation. Promoters select the name of the proposed company, provide the frame work of the company, get the basic documents like Memorandum and Articles of Association drafted, manage money for the business, gets the prospectus made and issued and apply for incorporation of a company.

A public limited company having share capital has to undergo the following four steps for incorporation--

(i) Promotion,

(ii) Incorporation,

(iii) Floatation/Capital subscription, and

(iv) Commencement of business.

Whereas a private limited company and a public limited company not having a share capital, are required to pass through only first two above stages.

A private company and a public company not having share capital need not obtain a certificate to commence business by virtue of provisions of section 149 of Companies Act, 1956. These companies can commence their business immediately after obtaining certificate of incorporation from Registrar of Companies.

(i) Promotion

As the term suggests, the dictionary meaning of 'Promotion' is, 'to help make something happen'. The promoters therefore, are persons who perform every such act from conceiving the idea of incorporating a company till obtaining the certificate of incorporation from the Registrar of Companies. It is incumbent upon them to subscribe to the Memorandum and Articles of Association of the company concerned [Circular No. 1/90 C.L-V., dated 5-1-1990]. Moreover, they become the first directors of the proposed company by virtue of the deeming provisions of section 254. They occupy a fiduciary position in relation to their affairs with the company.

They are personally liable for the company. Thus, promoters lay down the very edifice of a proposed company.

(ii) Incorporation

Simply stated, incorporation of a company means registration of the company with the concerned Registrar of Companies. Incorporation confers upon the company the character and status of an artificial legal person which has got a distinct existence from that of members constituting it.

The certificate of incorporation guarantees :

(a) the due compliance with the requirements and pre-requisites of registration, and

(b) the entitlement of company to get itself registered and due registration thereof.

The certificate of incorporation bears a number through which the company will be identified in the office of concerned Registrar of Companies.

(iii) Floatation/Capital subscription

This step is to be skipped in the case of a private company and a public company not having a share capital, for such companies can commence their business just after incorporation. But a public company having share capital has to pass through this phase of formation.

Section 3(1)(iii) lays down that a private company is one which prohibits, among other things, any invitation to the public to subscribe for any shares in or debentures of the company. A public company having a share capital has two options at this stage. It can either go to public for subscription of its shares, etc., or manage money for business itself. If it intends to go to public then it will have to issue a prospectus in strict compliance of the provisions of Companies Act, 1956 [Sections 55 to 68A]. Further, related SEBI guidelines will have to be taken care of. On the other hand, if the company is not going in for public subscription then it will have to file a statement in lieu of prospectus. [Section 149(2)]

Further, section 3(1)(iii), after amendment by Companies (Amendment) Act, 2000, provides that a private company is prohibited from inviting or accepting deposits from persons other than its members, directors or relatives.

(iv) Commencement of business

A private company can commence its business and exercise its borrowing powers just after its incorporation. It does not have to obtain certificate to commence business. Further, a company having no share capital also does not have to obtain certificate to commence business.

However, it is obligatory for a public company to obtain certificate as to commencement of business in order to commence its business and exercise its borrowing powers. [Section 149]

Further, the certificate of commencement of business is conclusive evidence to the effect that the company is entitled to commence its business. [Section 149(3)]

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