This article is written by Dhwani Goyal ,Banasthali Vidyapith University ,during her internship with Le Droit India.
Introduction-
The incorporation of a company refers to the legal process of incorporation through which the legal entity is formed. The word ‘incorporation’ means to make a company legally. An entity has its own separate legal entity i.e. recognized by law. Identification of these entities are simple as few terms like ‘Ltd.’ or ‘Inc’ are used in these entities. These entities are separate from its owner and become a corporate legal entity. A company comes into existence once it is corporate under company’s act. This step is an essential one before
engaging in business transactions. Section 7 of companies act, 2013 refers to the essential documents required for the purposes of incorporation of a company.
Steps for the incorporation of the company-
In order to form a public company 7 or more than seven members are required whereas 2 members are required to form a private company. The steps are mentioned below.
1. Availability of name-
The very first and foremost step to form a company is to choose a name through which it’ll be identified. A company is registered only when it has a name. The name is mentioned in MOA of a company. The public company name should always end with ‘ltd’. wheras the private company name should end with ‘Pvt limited’. The promoters of a company are required to write an application to the registrar of a company of that particular state to check the availability of name. A sum of rupees 500 is required to submit with the application. When all the legal formalities are fulfilled within 3 months the promoters are allowed to adopt the name.
2. Construction of MOA & AOA-
The Memorandum of association is the Constitution of the company and the article of association states the rules which the management has to fulfill. The MOA states the objectives of business, types of business and the field in which the company will do the business. MOA is further divided into five parts-
a) Name clause
b) objective clause
c) liability clause
d) capital clause
e) registered office clause
The AOA of a company creates contact between the company and it’s members. It mentions the rights, duties and liabilities of the members.
AOA is equally binding on all the members and company.
3. Printing, stamping of MOA & AOA-
The promoters get help from the registrar in drafting of MOA & AOA. Above all with promoters who have no knowledge of drafting.
Once all such drafts are checked, then the MOA & AOA can be printed. The Memorandum and articles are divided according and arranged chronically.
In order to be a valid article, it should be signed by every representative or subscriber in the presence of witness.
4. Power of attorney-
To complete the legal and complex documentation procedures of incorporation, the promoter may hire an attorney who will be authorized to act on behalf of the company and its promoters. The attorney will have the ability to make amendments to the memorandum and articles, as well as any other documents submitted with the Registrar.
5. Statutory Declaration-
This statement further declares that ‘All the requirements of the Companies Act and the rules there under have been compiled with respect to all things prior and incidental thereto.’
6. Payment of registration fee-
A predetermined fee must be paid to the Registrar of Companies throughout the incorporation process. It is determined by the nominal capital of the companies that also hold share capital.
7. Certificate-
If the Registrar is totally satisfied that all conditions have been met by the company being founded, he will register it and issue a certificate of incorporation. As a result, the incorporation certificate issued by the Registrar is definitive proof that all Act criteria have been completed.
Advantages of Incorporation-
1. Corporate personality-
An incorporated company is a legally recognized entity that exists independently of its owners and stockholders, as opposed to partnership corporations. According to Section 34(2) of the Companies Act of 1956, from the date of the company’s incorporation, the subscribers to the memorandum and other members shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company, with perpetual succession and a common seat.
2. Limited liability-
According to the Companies Act, a business’s members are exclusively responsible for contributing to its assets and liabilities in the event that the firm is shut down. It complies with Section 34(2) of the Companies Act. Incorporated firms, on the other hand, have no legal obligation for any of their members to contribute more than the face value of any shares they own that are still outstanding.
Disadvantages of Incorporation-
1. Cost-
The initial costs of incorporation include filing fees, prospective legal or accounting expenditures, and the possibility of hiring incorporation services. Ongoing expenses for operating a corporation add to the total cost.
2. Tax-
Certain corporations, such as C Corporations, may experience “double taxation.” This occurs when the company gets taxed on its profits and then again on dividends paid to shareholders.
3. Loss of personal control-
Individuals may lose entire control over a stock firm. Governance transfers to a board of directors elected by shareholders, reducing single ownership power.
Conclusion–
According to the preceding article, the company’s incorporation term is the total of its pre-incorporation and incorporation periods. The pre-incorporation era can be defined as the time when the company’s idea becomes a reality. The promoter, whose name appears in the company’s prospectus, is critical in raising initial capital for the business. The promoter also does a SWOT analysis on the firm to determine its market potential and make it a viable alternative for investors to invest in. The promoter’s duties and liabilities have been thoroughly examined, demonstrating the fiduciary character of the promoter-company relationship.
