Now a days business requires large amount of money. Also it affects the decision of how to start a company to a larger extent.
Also due to the increasing competition and fast changing technological environment, the element of risk is increasing.
In conclusion, more business firms, particularly for setting up the medium and large-sized organizations choose company formation.
Now lets start our today’s post of company formation.
3 things to start a company
Formation of a company is a complex activity involving the completion of legal formalities and procedures. To fully understand the company formation process one can divide these formalities into three stages:-
(C) Subscription of capital
Promotion of a company
Promotion is the first step in the formation of a company.
It involves conceiving a business idea and taking the initiative to form a company for available business opportunities.
Thus it begins with somebody having discovered a potential business idea. Any person or even a company may have discovered an opportunity.
Promoter is a person or group of persons or a company proceeds to form a company.
As per section 69, a promoter means a person
Promoter plays various important functions in company formation. Therefore you should have an idea of what are they?
In next section, we will be looking some important functions of promoter.
Functions of promoters in starting a company
(1) Identification of Business idea :
The first main thing is to identify an idea and as well as communicating it to others.
A new idea can be producing a new product or service or making a product available through a different channel.
(2) Feasibility studies :
It may not be favourable to convert all your ideas into real opportunities.
For this reason, promoters undertake detailed feasibility studies.
Depending on the nature of the project, the following feasibility studies may be undertaken with the help of specialists.
To examine whether the perceived business opportunity can be profitably exploited and is it good to start a company.
(a) Technical Feasibility – Sometimes an idea may be good but technically not possible to execute.
Expensive raw material or technology to make the product is not available can be the reason.
(b) Financial Feasibility – Every business requires funds.
If the funds are not available in decided time to actually run the project then it will hamper the further process.
For example– One may think that animals like cats and dogs roam around the street freely during late evening and night only, so why not make a small house or farm-like place where they can live freely.
It is a good idea and very humane but it turns out that no one agrees to support the project. Then it is not feasible due to inadequate finance.
(c) Economic Feasibility – Sometimes it so happens that a project is technically viable and financially feasible but the chance of it being profitable is very little.
In such cases as well, the idea may have to be abandoned. Promoters usually take the help of experts to conduct these, studies.
It may be noted that these experts do not become promoters just because they are assisting the promoters in these studies.
Only when these investigations throw up positive results, the promoters may decide for company formation.
(3) Name approval :
The promoters select a name for it and submit, an application to the registrar of companies of the state in which the registered office is to be situated, for its approval.
The proposed name may be approved if it is not considered undesirable.
It may happen that another company exists with the same name .
In such cases, the proposed name is not accepted but some alternate names may be approved. Therefore, three names, in order of their priority are given in the application to the Registrar of Companies.
(4) Fixing up signatories to the Memorandum of Association (MOA) :
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Usually, the people signing memorandum are also the first Directors of the Company.
Their written consent to act as Directors and to take up the qualification shares in the company is necessary.
(5) Appointment of Professionals :
Mercantile bankers, auditors, etc., are appointed by the promoters to assist them in the preparation of necessary documents that are required to be with the Registrar of Companies to start a company. They know very well about the Financial Market and furthermore, they can help with other matters also.
(6) Preparation of necessary documents :
The promoter takes up steps to prepare certain legal documents, which have to be submitted under the law, to the Registrar of the Companies, and to start a company.
These documents are Memorandum of Association, Articles of Association and Consent of Directors.
Registrar of Companies required following documents:-
(A). Memorandum of association :
Memorandum of Association is the most important document as it defines the objectives of the company. The Memorandum of Association contains all the details of company operations.
As per section 2(56) of The Companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act. The Memorandum of Association contains different clauses for company formation:
- The Name Clause
- Registered Office Clause
- Objects Clause
- Liability Clause
- Capital Clause
(B). Aricles of Association :
Articles of Association are the rules regarding the internal management of a company.
These rules are subsidiary to the Memorandum of Association and therefore, should not contradict or exceed anything stated in the memorandum of Association to start a company.
According to section 2(5) of The Companies Act, 2013, ‘articles’ means the article of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law and at the same time applicable for this law also.
The articles of a company shall be in respective forms as specified in Schedule therefore, it may be applicable to such company.
At the same time, companies are free to make their own articles of association which may be contrary to the clauses of Table and in that case articles of association as adopted by the company shall apply.
(c) Consent of proposed directors :
Apart from the Memorandum and Articles of Association, a written consent of each person named as a director is required confirming that they agree to act in that capacity and undertake to buy and pay for qualification shares, as mentioned in the Articles of Association.
(D) Agreement: Company proposes to enter with any individual for appointment as its Managing Director or a whole-time Director or Manager is another document which is submitted to the Registrar for getting the
company registered under the Act.
(E) Statutory Declaration –
A declaration stating that all the legal requirements pertaining to registration have been complied with is to be submitted to the registrar with the above-mentioned documents and after that the company get registered under the law
(F) Receipt of Payment of fee –
Registrar of Companies require necessary fees along with the above-mentioned documents.
For this reason, the amount of such fee shall depend on the authorized share capital of the company and ultimately to start a company.
After completing the aforesaid formalities, promoters make anapplication for the incorporation ofthe company.
The application for registration must be accompanied by certain documents about which we have already discussed in the previous sections and if you want to know about GST, you can visit GST and its cascading effect.
Its worth noting at this stage what are documents that we have discussed so far, to better understanding of how to start a company:-
- The Memorandum of Association duly stamped, signed, and witnessed. In the case of a public company, at least seven members must sign it. For a private company, however, the signatures of two members are sufficient.
The signatories must also give information about their address, occupation, and the number of shares subscribed by them.
- The Articles of Association duly stamped and witnessed as in the case of the Memorandum. However, as stated earlier, a public company may adopt a model set of Articles, in the Companies Act.
- Written consent of the proposed directors to act as directors and an undertaking to purchase qualification shares.
- The agreement, if any, with the proposed Managing Director, Manager, or whole-time director.
- A copy of the Registrar’s letter approving the name of the company.
- A statutory declaration affirming that all legal requirements for registration have been complied with.
- Documentary evidence of payment of registration fees.
The certificate of incorporation also known as the birth certificate of the company. With effect from November 1, 2000, the Registrar of Companies allots a CIN (Corporate Identity Number) to the Company.
Impact of Certificate of Incorporation
A company is legally born on the date printed on the Certificate of incorporation. Consequently it becomes a legal entity with perpetual succession on such a date. It becomes entitled to enter into valid contracts.
The Certificate of incorporation is conclusive evidence of the regularity of the incorporation of a company.
Therefore, the legal situation is that once a Certificate of Incorporation has been issued, the company has become a legal business entity irrespective of any flaw in its registration.
Both private and public companies have 180days to obtain a Certificate of Incorporation. Once the certificate for commencement of business issued by the Registrar of companies it can undertake their business operations.
Capital Subscription in the formation of a company
A public company can raise the required funds from the public by means of the issue of securities (shares and debentures etc.). As a result it has to issue a prospectus which is an invitation to the public to subscribe to the capital of the company and undergo various other formalities.
(A) SEBI approval –
SEBI (Securities and Exchange Board of India) is the regulatory authority in our country and as a result its issued guidelines for the disclosure of information and investor protection.
A public company inviting funds from the general public must make adequate disclosure of all relevant information and thus not conceal any material information from the potential investors.
This is necessary for protecting the interest of the investors.
(B) Filing of Prospectus –
Any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any securities of, a body corporate’ is called Prospectus.
In other words, it is an invitation to the public to apply for securities (shares, debentures, etc.) of the company or to make deposits in the company.
Investors make up their minds on the basis of the information contained in this document.
Therefore, there must be a misstatement in the prospectus and all material significant information must be fully disclosed.
(C) Appointment of Bankers, Auditors, and Underwriters –
Raising funds from the public is a stupendous task.
The bankers of the company receive the share money. As an illustration, the brokers try to sell the shares by distributing the forms and encouraging the public to apply for the shares.
(D) Minimum Subscription –
The introduction of OPC in the legal system is a move that would encourage the corporatization of micro-businesses and entrepreneurship and to start a company. Consequently in India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC.
According to the Companies Act, this is called the ‘minimum subscription’. As per the SEBIGuidelines, the limit of minimum subscription is 90 percent of the size of the issue.
Thus, if applications received for the shares are for an amount less than 90 percent of the issue size, the allotment cannot be made and the application money received must be returned to the applicants.
(E) Application to stock exchange –
An application is made to at least one stock exchange for permission to deal in its shares or debentures.
If such permission is not granted before the expiry of ten weeks from the date of closure of the subscription list, the allotment shall become void, and all money received from the applicants will have to be returned to them within eight days.
(F) Allotment of shares –
In case the number of shares allotted is less than the number applied for, or where no shares are allotted to the applicant, the excess
application money, if any, is to be returned to applicants or adjusted towards allotment money due from them to start a company.
A public company may not invite the public to subscribe to its securities(shares, debentures, etc.). Instead, it can raise the funds through friends, relatives, or some private arrangements as done by a private company. In such cases, there is no need to issue a prospectus.
So that’s its readers for today’s post. I hope you enjoyed and liked my effort to make the process of starting a company a little bit easy.
I understand that this post may not look like an authoritative one but what I wrote here is from the 11th standard Business book and what I learned so far in my BBA.
You can find FinanceBread on other platforms also. Make sure to check those out too.
Facebook – https://www.facebook.com/FinanceBread2020/
Twitter – https://twitter.com/financebread
Pinterest – https://in.pinterest.com/FinanceBread/pins/