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Formation of a new Company – An Overview

company formationThere are two stages in the formation of a private company, promotion and incorporation. A public company has to undergo capital subscription stage and then get certificate of commencement of business, to begin operations.

Promotion: It begins with a potential business idea. Certain feasibility studies e.g. technical, financial and economic, are conducted to determine whether the idea can be profitably exploited. In case, the investigations yield favourable results, promoters may decide to form the company. Persons who conceive the business idea, decide to form a company, take necessary steps for the same, and assume associated risks, are called promoters. Steps involved in Promotion of a new company are:

  1. Approval of company’s name is taken from the Registrar of Companies
  2. Signatories to the Memorandum of Association are fixed
  3. Certain professionals are appropriated to assist the promoters
  4. Documents necessary for registration are prepared

Necessary Documents for the Promotion of a new company are:

  • Memorandum of Association
  • Articles of Association
  • Consent of proposed directors
  • Agreement, if any, with proposed managing or whole time director
  • Statutory declaration

Incorporation: An application is made by promoters to the Registrar of Companies alongwith necessary documents and registration fees. The Registrar, after due scrutiny, issues certificate of incorporation. The registration may be refused only in case of a major defect in the documents. The certificate of incorporation is a conclusive evidence of the legal existence of the company. Even if there has been a major
defect in the incorporation, legal existence of the company can not be rejected.

Capital Subscription: A public company raising funds from the public needs to take following steps for fund raising:

  1. SEBI approval
  2. File a copy of prospectus with the Registrar of Companies
  3. Appointment of brokers, bankers and underwriters etc.
  4. Ensure that minimum subscription is received
  5. Application for listing of company’s securities
  6. Refund/adjust excess application money received
  7. Issue allotment letters to successful applicants; and
  8. File return of allotment with the Registrar of Companies (ROC).

A public company, raising funds, raising funds from friends/relatives (not public) has to file a statement in lieu of prospectus with the ROC at least three days before allotment of shares and returns of allotment after completing the allotment.

Commencement of Business: A public company raising funds from public has to apply to the Registrar of Companies for the certificate of commencement of business alongwith the following documents.

  1. A declaration about meeting minimum subscription requirement
  2. A declaration about details in respect of allotment to directors;
  3. A declaration about no money being payable to applicants; and
  4. A statutory declaration.

A public company raising funds privately has to submit only documents (1) and (2) listed above. The Registrar, upon satisfaction, issues Certificate of Commencement of Business. This certificate is also a conclusive evidence of completion of formation requirements.

Continue reading the process of promoting a new company.

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