A Sneak Peek at the Incorporation of a Company in India

India has many business structures, but a company should always be incorporated per the Companies Act, 2013. The Companies Act, 2013, governs companies in India or any other foreign corporation in India, and the Companies Act, 2013, provides rules and regulations to deal with all aspects of the company.

Incorporation is the formal organisation of a business. The Incorporation of a company denotes the company is a legal entity and separates assets and income of the corporation from its owners and investors.

Types of business structure in India

Sole proprietorship

A sole proprietorship is an enterprise controlled by only one person, and it does not have a legal entity. Thus, the owner and the business are considered to be the same person. No formal registration is required in this type of establishment, and the owner is liable to bear all liabilities.

Partnership

A partnership firm is a firm in which two or more partners work together to earn profits and is governed by the Partnership Act, 1932. As per the Partnership Act, 1932, Section 4, a partnership is a relation between the firm’s partners agreeing to share profits of a business carried on by all or any one of them who acts for all.

Partners generally sign a partnership deed that specifies the investment and the profit-sharing ratios of the partners. All other terms and conditions are specified in the partnership deed. Partners have to bear all the liabilities of the firm, and the liability does not have any limit in the case of the partnership firm.

Limited Liability Partnership

A Limited Liability Partnership (LLP) can be incorporated under the Limited Liability Partnership Act 2008. In a limited liability partnership, a partner is liable for a limited share. The liabilities of the firm do not overburden partners in an LLP. The partners limit their liability and are responsible only for the share they have agreed upon. An LLP firm should be registered and have LLP or limited liability partnership in its name. Partners and LLP are distinct entities.

Private Limited Company

In India, a Private Limited Company is a distinct business entity defined under Section 2(68) of the Companies Act, 2013. According to the law, a private company does not have a right to transfer its shares.

Public Limited Company

According to Section 2(71) Companies Act, 2013 Limit, a public company is a company that is not a private company. A public limited company incorporates a minimum of 7 people and can have unlimited shareholders. A public limited company can be listed on the stock exchange or remain unlisted, and shareholders can freely trade the shares of the public limited company. Retirement, death, or insolvency of any of the shareholders does not affect the existence of the company.

One-Person Company

A one-person company is defined under Section 2(62) of the Companies Act, 2013. A one-person company has only one person as to its member, and Indians can only incorporate the one-person company in India. One-person company is a private limited company with only one person as its member. Unlike other companies, it also has its own identity.

Importance of choosing a right business structure

One must choose the structure of his business carefully as it affects tax returns. Every business has its registration process and requirements that should be satisfied. A person must be careful when registering the enterprise. A company must audit the books of the company every year.

Complying with legal formalities for every business structure is critical as non-compliance may affect the business. Investors prefer an enterprise complying with legal formalities.A businessman should be well aware of all business compliance regulations.

When starting a business, a businessman must know about the pros and cons of the business types he is interested in.

Incorporation of the Company

A company is an artificial or legal entity, but a company can only come into existence after the registration with the Registrar of the Company or its incorporation. The Incorporation of a company is a legal process that is mandatory to start functioning legally.

The incorporation of a company shields the company from liability. After incorporation, the company becomes a legal entity and has a distinct identity from that of the shareholders. This limits the shareholders’ risk. An incorporated company establishes perpetual existence and transfer of ownership rights. An incorporated company also receives tax benefits, and the ability of a company to manage things is improved by its incorporation. Chapter 2 of the Companies Act, 2013, deals with the incorporation of the company.

Steps for incorporating a company

The incorporation of a company requires several formalities to be completed. A legal process is to be followed for incorporating the company. The steps necessary for the incorporation of the company are as follows:

  1. Application for the approval of name: Initial step or very first step for incorporation of the company is to have the name of the company approved from the registrar of the company. The company can adopt any name other than the one prohibited by the Emblems and Names (Prevention and Improper Use Act, 1950). According to the law, the company’s name must be such that it does not resemble or be identical to the company’s name that already exists. The application is sent to the registrar of companies to approve the name within 14 days of the receipt application.
  2. Preparation of Memorandum of Association (MOA): MOA is considered to be the constitution of the company. It describes the objectives and scope of the company along with the relation of the companies with the outside world.
    Memorandum is signed by at least 7 members in the case of a public company and 2 members in a private company.
  3. Prepare Article of Association (AOA): After the memorandum of association, the promoters prepare AOA. AOA is a document that lays the rules and regulations for the company. These rules and regulations are related to the internal management of the company. A public company is not required to prepare AOA, and a public company can adopt the clauses as prescribed in Table 1 of Schedule 1 of the Companies Act, 2013. However, a private company must submit AOA, which is duly signed.
  4. Preparation of other documents: In addition to AOA, the following other documents should be provided by the company’s promoters:
    • The consent of the directors of the company
    • The promoters should execute a power of attorney favouring any director or an advocate who can carry on with the registration formalities.
    • Copies of agreement, MOA, and AOA are prepared and filed at the time of registration.
    • The company is then required to have a registered office, and the details of the registered office should be filed with the registrar. This information is filed within 30 days of the registration of the company or from the date of commencement of business, whichever is earlier.
    • Where the company mentions its directors’ names in the articles, the particulars related to them are submitted with the registrar within 30 days of the registration or appointment of directors.
    • A statutory declaration that all the legal requirements of the registration comply with is filed with the registrar. The declaration is filed by an advocate of the High Court, Supreme Court, an attorney or pleader of the High Court, or a practising chartered accountant.
  5. Payment of fees: At the time of registration, registration and filing fees of every document must be paid at the registrar office. The fees vary with the amount of nominal capital in the case of companies with share capital. For companies with no share capital, the amount varies from the number of members in the company.
  6. Incorporation Certificate: After all the documents are filed with the registrar along with fees and other formalities, the registrar issues a Certificate of Incorporation.

Advantage of Incorporating a Company

Following are the advantages of incorporation of the company:

  • Incorporation creates a distinct legal entity: As per this principle, a company is independent, and it is a separate entity. The company members cannot be held liable for the acts of the company.
  • Perpetual succession: The term perpetual succession denotes continuous existence. According to this principle, a company never dies, even if the members cease to exist. The company can only end when the company is legally wound up.
  • Right to own property: A company can hold the property as it is a separate legal entity in the eyes of the law. The property is in the company’s name, and no member can claim the property.
  • Capacity to sue and be sued: The company can sue a person and be sued by any person. Although a company can sue and be sued in its name, it has to be represented by a natural person.
  • Easy access to capital: Raising capital for a company is easy, as it can issue shares.

Disadvantages of Incorporating a Company

Following are the disadvantages of incorporation a company

  • Cost: The initial cost for incorporation of a company is comparatively more as a fee is paid to file an article of incorporation.
  • Double taxation: Some companies can indulge in double taxation. Such tax is first levied on the company’s profits and subsequently on the dividend paid to the shareholders.
  • Loss of personal ownership: When a company is a stock cooperated, then the control of the company is in the hands of the board of directors of the company. The company’s shareholders elect the company’s board of directors.
  • Endless paperwork: The paperwork of the company never ends. Since its formation, it has to go through a lot of paperwork, from filling up the form with the company’s registrar to maintaining records, tax returns, and meeting its requirements.
  • Difficult in dissolving: The dissolution of the company is a very long process, and it requires considerable time and money to complete the dissolution procedure.
  • Lifting of Corporate veil: A company is a legal entity distinct from the members. The judiciary sometimes uses the lifting of the corporate veil to identify a person who has done something illegal in the company’s name.

Commencement of company

Commencement of a company is a declaration issued by the company’s directors. Only a company needs to issue such a declaration, not any other business structure. Such declaration is filed within 180 days of incorporation of the company.

The declaration states that the subscribers of the company’s memorandum have paid the values of shares agreed by them along with the verification of their registered office address. It is filed only by the company, incorporated after 2 November 2018.

And as per Section 8 of the Companies Act, 2013, companies with the share capital should file Form no. 20A along with the proof of money subscription received by the company.

Conclusion

After the incorporation of the company as a public or private limited company, it becomes a legal entity, and it has all the rights as a legal person has. A company can own property, and it has a different name and a unique identity. The members of the company and the company are two people.

The director conducts the business of the company. The directors seem to be owners of the company but are employees. The board of directors takes decisions on behalf of the company. The actions of the directors are treated as actions of the company. However, in case the directors conduct any illegal act committed under the garb of the company, the courts can take action against such person by lifting the corporate veil principle.

Other than all the structures of the business prevalent in India, a company is the strongest business structure.

FAQs

What is the meaning of incorporation of a company?

The company can sue a person or can be sued by any person. Although a company can sue and be sued in its name, it has to be represented by a natural person.

Which section of the Companies Act deals with the Incorporation of the Company?

Section 7 of the Companies Act deals with the Incorporation of the company.

What are the advantages of the incorporation of the company?

Following are the advantages of incorporation of the company:

  • Incorporation creates a separate legal entity of the company
  • Perpetual succession
  • Right to own property
  • Capacity to sue and be sued
  • Easy access to capital

What are the disadvantages of the incorporation of a company?

Following are the disadvantages of the incorporation of the company:

  • Huge incorporation Cost
  • Double taxation
  • Loss of Personal Ownership
  • Ongoing paperwork
  • Difficult in dissolving
  • Lifting of Corporate veil