Incorporation Stage, Importance, Steps

Incorporation Stage is a crucial phase in the process of forming a company. It marks the legal birth of the company, transforming it from an idea into a separate legal entity. This stage involves complying with various legal formalities, submitting required documents, and receiving the certificate of incorporation, which officially recognizes the company as a distinct entity under the law. In India, the incorporation of companies is governed by the Companies Act, 2013, and the process is administered by the Registrar of Companies (RoC).

Importance of the Incorporation Stage:

The incorporation stage is the most vital step in the process of creating a company. It confers separate legal personality on the business, meaning the company can own property, enter into contracts, sue and be sued, and operate independently of its owners or shareholders. This separation between the company and its owners provides limited liability to shareholders, meaning their personal assets are protected from the company’s debts.

Without incorporation, a business would remain an informal entity with no legal status, and its owners would be personally liable for any obligations incurred by the business. Incorporation, therefore, formalizes the company’s existence and provides a legal framework for its governance and operations.

Steps in the Incorporation Stage:

Incorporating a company involves several legal steps that must be carefully followed to ensure compliance with the Companies Act.

1. Choosing the Type of Company

The first step in incorporation is to determine the type of company that will be formed. Common types of companies in India:

• Private Limited Company: Company with a restricted number of shareholders (up to 200), and shares cannot be freely transferred.
• Public Limited Company: Company that can offer its shares to the public and has no restriction on the number of shareholders.
• One Person Company (OPC): Company with only one shareholder, designed for sole proprietors who want limited liability.

The choice of company type affects the company’s governance structure, regulatory requirements, and ownership flexibility.

2. Choosing a Company Name

Selecting an appropriate name is an essential part of the incorporation process. The name must comply with the naming guidelines provided by the Ministry of Corporate Affairs (MCA). The company’s name should be unique, not identical to or too similar to existing companies, and should not violate any trademarks.

Promoters must file a name reservation request with the RoC, using RUN (Reserve Unique Name) or the SPICe+ form, to ensure the chosen name is available. Once approved, the name is reserved for a specified period during which the incorporation must be completed.

3. Drafting the Memorandum and Articles of Association

Memorandum of Association (MoA) and the Articles of Association (AoA) are critical documents that define the company’s structure, objectives, and internal rules.

• MoA:

This document outlines the company’s name, registered office, objectives, liability of shareholders, and share capital. It essentially defines the company’s scope of activities and its relationship with the outside world.

• AoA:

This document governs the internal management of the company, detailing how the company will be run, including rules for conducting meetings, appointing directors, and managing shares.

Both documents must be drafted carefully and submitted along with the incorporation application.

4. Filing Incorporation Documents with the Registrar

Promoter must file several key documents with the RoC to initiate the formal incorporation of the company. The primary document used for incorporation is the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form. This is an integrated web form that allows the company to apply for incorporation, PAN, TAN, GST registration, and other regulatory approvals in one streamlined process.

Documents required for submission include:

• SPICe+ form: Filled with details of the company, directors, and shareholders.
• MoA and AoA: Signed by all subscribers and witnesses.
• Consent to Act as Director (DIR-2): A declaration signed by each director agreeing to serve on the company’s board.
• Proof of Address: For the registered office of the company.
• Identity Proofs: Of all directors and shareholders, including PAN, passport, and Aadhar card.
• Director Identification Number (DIN): For the proposed directors.

5. Payment of Registration Fees

Promoter must pay the requisite registration fees to the RoC, which are calculated based on the authorized capital of the company. The higher the authorized capital, the higher the registration fee. This fee covers the costs associated with processing the incorporation documents and issuing the certificate of incorporation.

6. Verification and Approval by the Registrar

Once the documents are submitted and fees are paid, the RoC reviews the application. If all documents are in order and comply with the legal requirements, the RoC approves the incorporation and issues the certificate of incorporation. This certificate signifies that the company has been officially registered and has become a separate legal entity.

7. Obtaining the Certificate of Incorporation

Certificate of incorporation is the legal document that confirms the company’s formation. It includes the company’s name, CIN (Corporate Identification Number), and the date of incorporation. Once this certificate is issued, the company is legally recognized and can commence its business operations.

8. Post-Incorporation Formalities

After incorporation, the company must complete certain post-incorporation formalities, such as:

• Opening a Bank Account: In the company’s name.
• Issuing Share Certificates: To the subscribers of the MoA.
• Registering for Taxation: Such as GST and professional tax.
• Appointing Auditors: Within 30 days of incorporation.
• Holding the First Board Meeting: Within 30 days of incorporation.