Steps in Formation of a Company

The formation of a company in India is a meticulous process governed by the Companies Act, 2013, which outlines the rules, regulations, and procedures. This law provides the legal framework for the establishment of different types of companies such as private, public, one-person companies, etc. The formation process can be divided into several stages, each of which requires compliance with specific legal formalities.

Promotion Stage:

Promotion is the first stage in the formation of a company, where the idea of starting a company takes shape, and the necessary actions are initiated by the promoters.

Who is a Promoter?

Promoter is a person or a group of persons who conceive the idea of forming a company and take the necessary steps to incorporate it. They are responsible for:

• Identifying Business Opportunities: Promoters identify the potential opportunities for starting a new business and devise strategies for utilizing those opportunities.
• Feasibility Study: This involves the evaluation of the commercial, financial, and technical viability of the proposed company. The promoter assesses whether the business idea will succeed.
• Business Plan Preparation: The promoter prepares a detailed business plan, outlining the company’s objectives, strategies, resources, and funding needs.
• Arrangement of Capital: The promoter identifies the potential sources of capital, whether through personal savings, loans, or investor funding.
• Appointment of Directors: The promoter nominates the directors who will oversee the company’s operations after incorporation.
• Legal Compliances: The promoter is responsible for ensuring that all necessary legal formalities, such as obtaining licenses, are completed.

Selection of Company Name:

The next significant step in company formation is selecting an appropriate name for the company. This is governed by the guidelines of the Ministry of Corporate Affairs (MCA).

• Reserve Unique Name (RUN):

The promoter must submit an application for reserving the company’s name through the MCA’s online service, known as the Reserve Unique Name (RUN) facility. The proposed name should not be identical or similar to any existing company name or trademark.

• Name Approval:

Once the application is submitted, the Registrar of Companies (RoC) will either approve or reject the name within a few working days. If approved, the name is reserved for 20 days during which time the company must proceed with the next steps.

Preparation of Documents:

Once the company’s name is approved, the next step involves preparing and submitting the following key documents:

Memorandum of Association (MoA)

Memorandum of Association outlines the company’s constitution and defines its relationship with the outside world. It contains essential clauses such as:

• Name Clause: States the company’s registered name.
• Registered Office Clause: Specifies the location of the company’s registered office.
• Object Clause: Defines the objectives for which the company is being formed.
• Liability Clause: Indicates the extent of the liability of the members.
• Capital Clause: Mentions the authorized capital of the company.

Articles of Association (AoA)

Articles of Association detail the internal management of the company, including rules related to the conduct of business, rights and responsibilities of directors, and procedures for meetings and resolutions.

Application for Incorporation:

Once the MoA and AoA are prepared, the promoter must file the Incorporation Application (Form SPICe+). This is the most crucial stage in the formation process, as it involves the actual registration of the company with the Registrar of Companies (RoC).

Required Documents for Incorporation:

• MoA and AoA: Duly signed by the promoters and subscribers.
• Declaration of Compliance: A declaration signed by the promoters, affirming that all legal requirements of company formation have been complied with.
• Identity Proofs of Directors and Subscribers: PAN, passport, Aadhar card, or other acceptable ID proofs.
• Address Proof: Utility bills or other documents for the company’s registered office.
• Digital Signature Certificate (DSC): The directors must obtain DSCs, which are used to sign documents electronically.
• Director Identification Number (DIN): Every proposed director must have a DIN, which can be applied for during the incorporation process.

Filing SPICe+ (Simplified Proforma for Incorporating Company Electronically):

SPICe+ is a comprehensive online form provided by the MCA for the incorporation of companies. The form integrates multiple services including PAN, TAN, EPFO, ESIC, and bank account opening.

Payment of Fees:

At the time of filing the incorporation documents, the promoter must pay the necessary government fees. These fees vary depending on the authorized capital of the company and the type of company being registered. For instance:

• For a Private Limited Company, the fees are based on the share capital.
• For a One Person Company (OPC), the fees are typically lower.

Certificate of Incorporation (COI):

Once all the documents and forms are submitted, and the prescribed fees are paid, the RoC reviews the application. If the RoC finds the documents in order, it issues the Certificate of Incorporation (COI). The COI is conclusive evidence that the company has been legally registered and is a recognized entity under Indian law.

The Certificate of Incorporation contains:

• The company’s name.
• The CIN (Company Identification Number).
• The date of incorporation.
• The name of the RoC who issued the certificate.

Post-Incorporation Formalities:

Even after the company is registered, several formalities must be completed to ensure the smooth operation of the company:

• Opening a Bank Account: The company needs to open a bank account in its name, which will be used for all financial transactions.

• Registered Office Address: The company must ensure that it has a registered office within 30 days of incorporation and submit the address to the RoC.
• Issuance of Share Certificates: The company must issue share certificates to the subscribers within two months of incorporation.
• Statutory Books: The company must maintain statutory books such as a register of members, a register of directors, minutes of meetings, and other records required by law.
• Compliance with Tax and Regulatory Requirements: The company needs to register for GST, Professional Tax, and any other applicable taxes. It must also file its annual returns and financial statements with the RoC.

Commencement of Business:

Once the above formalities are completed, the company can start its business operations. However, for companies incorporated with share capital, a Declaration for Commencement of Business must be filed within 180 days of incorporation. This declaration affirms that the subscribers have paid for the shares they agreed to take and is mandatory for the company to begin its business activities.