This article is written by Parul Kannauje, a 4th-year B.A.LL.B. student at Gitam School of Law, Visakhapatnam, during her internship at LeDroit India.
Scope of the Article
This article will examine how private limited companies have been formed in India under the Companies Act of 2013 and the Companies (Incorporation) Rules of 2014. It will seek to highlight the conceptual and practical steps of implementing this, starting with representations in terms of subscribers, directors, and company name and going through SPICe+, memorandum, articles of association, registrar scrutiny, and the issuance of a certificate of incorporation. The article will also highlight some of the common procedural challenges and issues of practical importance concerning post-incorporation procedures.
Abstract
The private limited company is among the frequently chosen types of business organizations in India because of its combination of limited liability, separate legal personality and closely-held ownership business structure. The main legal provisions regarding incorporation are provided by the Companies Act of 2013 while the Companies (Incorporation) Rules of 2014 set various requirements connected to the process of incorporation. The Ministry of Corporate Affairs has simplified the process of incorporation thanks to its SPICe+ system that combines name reservation and documentation associated with incorporation along with various linked forms and options. This article lists the main steps that must be executed during the process of incorporation, starting with such steps as making the preliminary decisions about the name and registered office, as well as the directors, and ending with the Certificate of incorporation. The article also describes the role of Memorandum and Articles of Association along with the documents that an applicant should gather, the scrutiny performed by the Registrar of Companies, post-incorporation requirements and common mistakes that lead to delays or the necessity of resubmission. The aim of the article is to help people understand better the entire incorporation process.
Keywords: Private Limited Company; Companies Act, 2013; Incorporation; SPICe+; Registrar of Companies; Corporate Compliance.
Introduction
One of the most popular types of corporate legal setup in India is a private limited company. This type of company is preferred by companies having new ventures, family owned businesses, closely held companies, and initiatives where the ownership and management of assets is stressed upon. It also provides the company the advantage of limited liability and enables it to have a distinct legal personality.
As per the laws laid down in the Companies Act of 2013 and the Companies (Incorporation) Rules of 2014, private companies can be set up. Section 3 of the Act makes it clear that private companies can be registered with two or three individuals who sign the memorandum of association.
The process of incorporation refers to the legal procedure through which an organization of people becomes an officially registered corporation. Upon the completion of the incorporation procedure, the company acquires an independent legal identity, which grants it the ability to hold property, sign contracts, take loans and file lawsuits.
The incorporation process has become more digitalized. SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) was created by the Ministry of Corporate Affairs (MCA) to serve as a comprehensive means for incorporating companies. SPICe+ is explained by the MCA as a comprehensive web form created to make incorporation simpler and offer a range of associated services through a seamless filing process.
The SPICe+ form has two parts – Part A, which deals with reserving the name for the company, and Part B, which deals with company incorporation and related matters. Other than the SPICe+ form, connected forms such as e-MOA and e-AOA are required as well.
Although the procedure is simpler, incorporation still refers to a legal process which does not mean that it is just an online registration system. Information that is being provided during the process of incorporation is essential for establishing the legal identity of the company. Thus, the name of the entity, its purposes, the particulars of the subscribers, the registered office, declarations, and documents must be correct.
Source: Section 3 of Companies Act, 2013
Meaning and Important Key Features of Private Limited Company
Clause 68 of Section 2 of the Companies Act, 2013 defines a private company in terms of certain features. The articles of association of a private company should deal with the restriction on transfer of shares of the company, fix the limit of number of members to be a maximum of two hundred, with some exceptions, and prohibit the public offering of any type of securities.
These traits differentiate a private company from a public company. A private company is generally privately held and does not raise funds by soliciting the general public’s investment in its shares. The limitations on the transferability of shares are meant to maintain the company’s private status and to give the currently existing members more control over the identity of the new shareholders.
Separate Legal Personality – The incorporation process ensures that the company operates independently from its shareholders in a legal sense.
This was asserted in the famous case of Salomon v. Salomon, where it was established that an appropriately incorporated limited company is regarded as a legal person that is independent of its shareholders.
This principle has been applied in Indian cases as well, as demonstrated in the case of Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, where it was pointed out that a company is a legal entity that owns his own property distinct from the property of its shareholders.
This distinction is significant regarding the debt of the company being that of the company alone and hence the shareholders are not liable to the creditors of the company.
Limited Liability – A key feature in limited companies is that the liability of members of companies limited by shares is confined to the amount unpaid on the shares held by them.
This feature lessens the risk of personal financial losses of shareholders and is one of the main reasons for choosing incorporation instead of doing business as individuals or through some other unincorporated forms.
Perpetual Succession – The company has continuity even when its membership changes. The reason is that the death, retirement or transfer of shares by any member does not usually cause a company’s dissolution.
This means that the company continues to exist irrespective of changes in ownership or directors, as long as company law allows this.
Closely Held Ownership – Private companies have restrictions that make them especially appropriate for businesses where ownership is expected to stay within a small circle. This gives promoters more control over the company and its major decisions.
Source: Section 2 of the Companies Act, 2013
Legal Frameworks Governing the Incorporation
The regulations and the incorporation of companies can be done under the Companies Act, 2013, and with the help of the Companies (Incorporation) Rules, 2014. There are several important sections that must be noted. These include:
- Section 2(68), which deals with private companies.
- Section 3 that discusses the incorporation of companies.
- Section 4, which explains the Memorandum of Association.
- Section 5 talks about Articles of Association.
- Section 7, which specifies the basic requirements needed for incorporation.
- Section 9 that deals with the effect of registration.
- Section 10 refers to the legal validity of the memorandum and articles.
- Section 12 that describes registered offices.
- Section 149, which mentions the Board of Directors.
Section 7 serves a significant purpose due to the identification of particulars and documents needed to be presented to the Registrar for incorporation purposes. These particulars include the memo and articles, declaration prescribed, particulars of the initial directors and subscribers, and other relevant particulars.
The Companies (Incorporation) Rules of 2014 provide further details regarding the procedural requirements in relation to the companies’ names, applications for incorporation, declaration, and the subscribers, directors, etc.
The electronic process of incorporation is undertaken by the ministry through its online portal. In this regard, the current MCA process is operating in conjunction with V3 framework and the Ministry uses SPICe+ and associated services for incorporation.
Source 1: Section 2 of Companies Act, 2013
Source 2: Section 3 of Companies Act, 2013
Source 3: Section 4 of Companies Act, 2013
Source 4: Section 5 of Companies Act, 2013
Source 5: Section 7 of Companies Act, 2013
Source 6: Section 9 of Companies Act, 2013
Source 7: Section 10 of Companies Act, 2013
Source 8: Section 12 of Companies Act, 2013
Source 9: Section 149 of Companies Act, 2013
Pre-Incorporation Requirements
There are certain preliminary actions that have to be completed by the founders of a company before undertaking the incorporation process.
Choosing Subscribers – The subscribers are individuals willing to incorporate the new company, and their names will be mentioned in the Memorandum. The law requires a private limited company to have at least two subscribers.
The promoters of the company thus have to decide how shares are to be distributed. This means that it is important to note the shares of each subscriber in the documentation.
Appointment of Directors – Generally, a private company must have at least two directors. According to Section 149 of the Companies Act, the minimum requirements for a Board are stated. Candidates’ particulars and any other statutory requirements are to be complied with.
The relevant DIN procedural aspects need to be followed when applicable. The Ministry of Corporate Affairs online incorporation system is designed to handle the DIN-related requirements for those eligible to be appointed as directors.
Digital Signature Certificate – The process of company incorporation is all done in an online way and this entails that the required persons who will accept, sign, or authenticate the documents should have valid Digital Signature Certificates (DSCs).
The DSC serves as the electronic means of authentication in connection with the documents deposited via the MCA portal. Similarly, the directors and other authorized signatories also need to adhere to the requirements of the MCA in terms of user registration and DSC association.
Selection of a Company Name- Selecting a name for a firm is more than just picking one with an attractive commercial value. The suggested name must comply with the provisions of the Companies Act and the Companies (Incorporation) Rules.
It must not be similar or so identical to the name of any existing company. Moreover, it could be unacceptable in case it contradicts with any existing trademark and the principal objectives of the proposed company.
According to the filing regulations of the Ministry of Corporate Affairs, a proposed name could be described as undesirable if it is not in accordance with the main purposes of the proposed company.
Thus, it is essential for the promoters to make a relevant preliminary search before proceeding with applying for name reservation.
Registered Office – A registered office must exist for a company wherever official communications can be received and acknowledged. This is stipulated under Section 12.
Therefore, it is important for the promoters to ensure sufficient evidence of the registered office address. Depending on the situation, documents like ownership documents, utility bills, and no-objection certificates from the owner, may be required.
Determination of Objects – The promoters should specify the types of business operation that the company will engage in. All these will be mentioned in the Memorandum of Association of the company.
The objects should be worded properly. An overly restrictive objects clause may lead to complications if the company decides to expand its operations in future.
Source 1: Section 149 of Companies Act, 2013
Source 2: Section 12 of Companies Act, 2013
Step-by-Step Incorporation Process
Step One — Preparation of Basic Information: In the first place, the founders have to gather all necessary information regarding the company they wish to register. This Usually consists of:
- The business name;
- The registered office address;
- The details of shareholders;
- The information on shares owned by the directors;
- The business objectives;
- The value of authorized and subscribed capital;
- The identity documents of shareholders;
- The proof of residence of shareholders;
- And relevant permissions and declarations.
All of the documents have to be approved by the authorities before submission.
Step Two — Name Reservation through SPICe+ Part A – SPICe+ Part A is used to submit the proposed name.
As per the FAQs regarding incorporation provided by the MCA, Part A consists of details regarding name reservation that can be submitted either singly or concurrently with Part B in case the applicant wants to go ahead with the company formation.
The name shall also meet the legal requirements with regards to naming. Hence the promoters have to check names of the businesses already existing, trademarks, etc. and also ascertain the link between the name and objects of the business.
The approval of the name does not signify, per se, the incorporation of the company as it just gives an idea to the promoters about the place that they can go ahead with the company formation.
Step Three — Filing SPICe+ Part B – Once the suggested name has been approved, the incorporation process started by SPICe Part B begins.
Part B consists of the important incorporation details such as information about the company, registered office, subscribers, directors, capital structure, etc.
According to the MCA, SPICe Part B offers incorporation and related services like allotment of DINs, etc.
As the information becomes part of the official record of incorporation, care should be taken to fill it in correctly.
Step Four — Memorandum of Association – The Memorandum of Association (MOA) has a very important place in Company Law.
It provides the name of the company, the State in which the registered office would be located, its objectives, liability of members, etc.
The objectives clause is very significant in that it determines the reasons for which the company is formed. The promoters must make sure that the objectives are clearly outlined and are consistent with what they intend to do.
Step Five — Articles of Association- Articles of Association (AOA) contain rules and regulations related to the internal operation of the company.
Articles normally deal with issues that relate to shares, calls, share transfer and transmission, holding of meetings, voting, appointment and powers of directors, and other issues regarding corporate administration.
In the case of a private company, the articles must incorporate private features, including restrictions on the operation of certain shares and other statutory requirements.
The guidance on the SPICe+ issued by the MCA prescribes that the e-AOA filing would be done electronically where applicable.
As such, the MOA and AOA are to be understood as substantive legal documents and not general annexes.
Step Six — Linked Forms – Among the associated applications of SPICe+ are e-MOA (INC-33), e-AOA (INC-34), and AGILE-PRO-S for relevant linked filings and services. The integrated system was introduced to simplify the repeated process and speed up the incorporation process. The introduction of the 2020 amendment of the Companies (Incorporation) Rules saw the introduction of SPICe+ and the expansion of the integrated filing method with the help of AGILE-PRO. Each company has its own precise linked services depending upon its situation as well as the legal requirements for its operations.
Step Seven — Declarations and Professional Certification – Section 7 requires prescribed declarations and information to be filed with the Registrar.
These declarations are significant because they confirm compliance with the statutory requirements and the authenticity of the information provided.
Where professional certification is required, the relevant forms must be certified by an authorised practising professional in accordance with the applicable requirements.
The importance of accuracy cannot be overstated. Section 7 provides consequences where false or incorrect information or material suppression is involved in the incorporation process.
Thus, promoters should not treat statutory declarations as routine formalities.
Source: Section 7 of Companies Act, 2013
Step Eight — Payment of Fees and Stamp Duty – Filing fees and stamp duty should be paid as part of the process of incorporation. The stamp duty may vary from State to State depending on the law of each State. Thus, the promoters should ensure that correct calculations and payments of the fees and stamp duty are made.
Step Nine — Scrutiny by the Registrar – Once a submission is made, the concerned authority will consider the application. The MCA has claimed that the submission for name reservation and incorporation comes through the Central Registration Centre where the submissions are reviewed without any human involvement.
In case of any defect or omission, the application would have to be re-submitted as issues can include:
- Inconsistency in subscriber details,
- Poor address proof,
- Lack of logic between the MOA/AOA and the SPICe+ application,
- Issues related to name,
- Missing declaration,
- Missing attachments, or mistakes in the professional certification.
The applicant needs to make the required changes and send in the relevant documents.
This stage shows why it is necessary to prepare well ahead of the time when making the submission, as it is easier to fix the problems beforehand than to keep submitting the application again and again.
Step Ten — Certificate of Incorporation – The process of registering a company starts via the Registrar’s being assured about the adherence to the legal requirements.
According to Chapter 2 of the Companies Act, Section 7, the registrar notes the company’s registration and issues the Certificate of Incorporation. The Corporate Identity Number (CIN) is also allocated to the company at this time.
Section 9 describes the consequences of registration. The by the date mentioned on the certificate, the signatories, and later stakeholders, constitute a corporate body with a right and an obligation of a registered company.
So, the Certificate of Incorporation signifies the legal establishment of the company.
Source: Section 7 of Companies Act, 2013
Documents Generally Required
The specific documentation varies based on the organization and situation of the company being formed. However, the following steps are commonly taken during the incorporation procedure:
- Proof of identity of the subscribers;
- Proof of residence of subscribers;
- Proof of identity and residence of proposed directors;
- Signature Certificates;
- Proof of registered company address;
- Utility bill or any other relevant proof of address of subscribers;
- NOC from the landlord;
- Memorandum of Association;
- Articles of Association;
- Details of shareholders;
- Consent of proposed directors;
- Documents as required by law.
If foreign subscribers or directors are involved, the registration process can become more complicated. MCA provides additional requirements in case the subscriber resides in a foreign country: some documents should be notarized, apostilled, or consularized, depending on the region of residence of the corresponding person or the location of the document issuing.
Legal Significance of the Certificate of Incorporation
The Certificate of Incorporation is significant as this is the official establishment of the company as a corporation.
The principle of the independent corporate personality introduced by incorporation implies that the company is an entity distinct from the founders.
The above principle was illustrated by the Supreme Court in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar. The court held that the company and its owners are two different persons and that the corporation can sue or be sued.
From a practical perspective, it is meaningful. When the company enters a commercial contract, it is the company that enters into an agreement with the partner rather than the partners as individual persons. Even the property of a corporation belongs to the organization rather than to its owners.
Nevertheless, the idea of the separate legal personality does not imply that the corporate structure cannot be used against the law or for committing fraud. The courts may ignore the corporate veil if appropriate.
Post-Incorporation Compliance
The incorporation of a company is only the first step in the legal life of the company, but this is not the end of the responsibilities that must be taken care of.
Registered Address – According to Section 12, a company is under an obligation to have a registered office and to comply with the respective rules pertaining to official communication and verification of the office.
Source: Section 12 of Companies Act, 2013
First Board Meeting – As per Section 173, a company must hold its first Board meeting within the relevant timeframe after incorporation. The first Board meeting is significant for the formal management of the company’s matters, encompassing statutory and administrative issues.
Source: Section 173 of Companies Act, 2013
Appointment of Auditor – The company should follow Section 139 concerning the appointment of its auditor. Adequate bookkeeping and audit arrangements are very important since the company is required to maintain its financial statements and balance sheets from the very beginning of its activities.
Source: Section 139 of Companies Act, 2013
Issue of Share Certificates – The company is obliged to comply with the statutes related to the issuance of share certificates to its shareholders.
Statutory Registrar and Records – The register of company activities and other documentation pertaining to company affairs is mandated by law. Accordingly, the designer should consider the Certificate of Incorporation as the initial step in ongoing compliance rather than the end of the incorporation process.
Common Mistakes During Incorporation
The incorporation process being electronic has minimized the hassle involved in the procedure. But still, errors can cause delays in the working.
Incorrect Name of the Company: The name applied for can be rejected when it is close to a registered company name or conflicts with a trademark or naming requirement.
Inconsistent Information: Any discrepancy in information such as the names, addresses, etc. found in SPICe+, identification documents, and constitutional documents can result in having to resubmit the information.
Missing Registered Office Documents: Mistakes in address proof or incomplete documents can cause additional hold-up.
Poor Drafting of Objects Clause: The objects clause must indicate the business activities in a proper manner. Ambiguities in assents clause could result in issues in future in terms of legality and follow-up activities.
Failure to Execute Necessary Declarations: All necessary declarations and consents must be signed and submitted. Any missing or wrong document shall result in the failure to receive approval.
Misunderstanding incorporation as the Completion of Compliance: Some sponsors are too engrossed in getting the Incorporation Certificate while ignoring the subsequent obligations like Board meetings, Auditor’s appointment, registers maintenance, and business initiation.
Role of Legal and Corporate Professionals
Though incorporating companies is now largely done electronically, the need to consult professionals still exists.
Company Secretaries, Chartered Accountants, Cost Accountants and attorneys can help promoters make sure their incorporation documents adhere to the legal requirements.
Among others, professionals may assist the promoters in suggesting a name for the company and help them handle various documents needed for incorporation, review subscribers’ details and directors’ identities, obtain all necessary declarations and certificates and help them with post-incorporation obligations.
The assistance of professionals becomes especially important when a company has foreign subscribers, unusual or complicated structures of ownership, regulated businesses or when different types of shares are issued.
The goal is not only to get the approval of the Registrar but also to create a document that will build the necessary legal form for the business the promoters are going to operate.
Practical Importance of the SPICe+ System
SPICe+ is an innovation that brings the process of electronic compliance to India. Previously, promoters had to complete a separate series of steps for incorporation and related processes. The new consolidated programme aims to reduce overlaps and streamline the process. According to official information from MCA, SPICe+ is an online document that offers users several services at once and reduces various steps related to starting a business. The online system will allow for validation of data and linking of its incorporation with other related services. Nonetheless, digitalisation does not eliminate the need for legal review. The applicant is still liable for ensuring that the data supplied through the e-forms is accurate and legally sound. Thus, technology has made the process easier, but not removed the legal obligation linked to incorporation.
Conclusion
The SPICe framework implemented by the Ministry of Corporate Affairs has made the process of incorporating a private limited company far simpler under Companies Act 2013. The SPICe process offers seamless procedures related to name availability, incorporation details, constitutional documents, among different areas.
Nonetheless, the term incorporation does not merely apply to the act of registering a company online. Name, subscribers, directors, registered office, purposes, MoA, AoA, and statutory declarations lay down the legal foundation of the company.
The Section 7 of Companies Act 2013 is thus critical, as it details the documentation required for incorporation and specifies the process of obtaining Certificate of Incorporation.
The incorporation has an important legal consequence because of its nature. A company that is incorporated is considered a separate legal entity, which means that it is legally able to own properties, make contracts and handle liabilities as well as become a party to legal proceedings. Thus, the very principles of separate legal personality as confirmed in Salomon and laid in the Indian company legislation reveal the significance of separate personality.
At the same time, this process carries a number of obligations. The starting of new business after registration has a number of continuing obligations, such as requirements concerning registered office, Board meetings, appointment of auditors, maintenance of legal acts, provision of share certificates, compliance with commencing business rules.
SPICe+ system has made the incorporation process easier and more efficient, though the success of incorporation procedure depends on the right usage of information and legal compliance.
A well-prepared incorporation application can reduce the margin of delays, avoid unnecessary resubmissions and align the company’s constitutional structure with its business objectives. In this regard, the incorporation process must be seen as the process of converting a business idea into a legally recognised entity under the Companies Act, 2013.
