by The process of forming a company involves multiple stages—registration, capital subscription, and commencement of business—each of which has distinct legal and operational implications.
1. Effects of Registration
Registration refers to the formal process by which a company is recognized as a legal entity under the Companies Act, 2013 (India). The company becomes a separate legal entity distinct from its members, with its own rights, obligations, and responsibilities.
Effects of Registration:
- Legal Entity:
Upon registration, the company gains the status of a separate legal entity. This means that the company can own property, sue or be sued, and enter into contracts in its own name, independent of its members or shareholders.
- Limited Liability:
Shareholders or members of the company enjoy limited liability. In case of company debts, their personal assets are not at risk, and they are only liable for the unpaid amount on their shares.
- Perpetual Succession:
The company enjoys perpetual succession, meaning it continues to exist even if the members or shareholders change, or in case of death, bankruptcy, or insolvency of members.
- Rights and Privileges:
The company has the ability to issue shares, borrow funds, enter into agreements, and other business activities, which are vital for conducting operations.
- Compliance with Law:
The company becomes bound by the provisions of the Companies Act and other applicable laws. It is required to maintain records, hold annual meetings, and file returns with the Registrar of Companies (RoC).
2. Capital Subscription
Capital subscription refers to the process by which the company raises funds from its shareholders or the public to finance its operations. This can be done through the sale of shares or debentures, depending on the type of company.
Effects of Capital Subscription:
- Capital Formation:
The company is able to raise the capital needed for its operations, expansion, and business activities. The money collected through capital subscription is used to purchase assets, pay for operational expenses, and generate business income.
- Ownership and Control:
Shareholders who subscribe to the company’s capital acquire ownership interests in the company. The number of shares held determines their influence on the company’s decision-making processes, such as voting at annual general meetings (AGMs).
- Liability of Shareholders:
Once the capital is subscribed, shareholders are liable to pay the amount for which they have subscribed. However, their liability is limited to the unpaid portion of their shares. In the case of a public limited company, the shares are often freely transferable.
- Share Capital and Legal Compliance:
The subscription of capital forms the share capital of the company, and the company is required to comply with regulations regarding the issuance, allotment, and distribution of shares. It must also ensure the appropriate accounting and financial disclosures.
3. Commencement of Business
The commencement of business is a crucial step that marks the actual start of a company’s operations. This process usually happens after the company has completed the registration and capital subscription stages.
Effects of Commencement of Business:
- Legal Capacity to Operate:
Upon commencement, the company gains the full legal ability to engage in business activities. It can now start operations such as entering contracts, providing services, or selling goods.
- Trading and Revenue Generation:
The company can now engage in commercial transactions such as purchasing and selling goods, hiring employees, and offering products or services. It can also generate revenue, which will be used to cover expenses, pay taxes, and provide profits to shareholders.
- Tax Obligations:
Once business commences, the company becomes subject to various tax liabilities. It must comply with tax laws, including registering for GST, income tax, and corporate tax. It is also required to maintain proper financial records, submit annual returns, and undergo audits.
- Operational Activities:
Commencement of business allows the company to engage in day-to-day operations. This includes manufacturing, marketing, research, and development, and other activities that are vital to the company’s business.
- Legal and Financial Responsibilities:
From this point onwards, the company is responsible for managing its legal and financial matters, such as fulfilling contracts, paying its debts, ensuring compliance with regulatory authorities, and protecting its assets.
