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Steps in the Formation of a Company

Last Updated : 25 May, 2023
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Modern-day business requires a large amount of funds. The competition and change in the technological environment are also increasing day by day. As a result, the company form of organization is being preferred by more and more business firms. The steps which are required from the time a business idea originates to the time a firm is legally ready to commence business are referred to as stages in the formation of a company. Those who are taking these steps and the associated risks are promoting a company and are called its promotors. 

To fully understand the process we will divide the formalities into four distinct stages, which are:

  1. Promotion
  2. Incorporation
  3. Subscription of the Capital
  4. Commencement of Business

However, it must be noted that these stages are appropriate from the point of view of the formation of Public Ltd. Company. As far as the Private Ltd. Companies are concerned only the first two stages mentioned above are appropriate. A Private Co. can start its business immediately after obtaining the certificate of incorporation as it is prohibited to raise funds from the public. 

Now we will see them one by one:

1. Promotion of a Company: 

Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking the initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Apart from conceiving business opportunities the promoters analyze its prospects and bring together the men, materials, machinery, managerial abilities, and financial resources and set the organization going.

Functions of a Promoter: 

1. Identification of Business Opportunity 

2. Feasible Studies

  • Technical Feasibility
  • Financial Feasibility
  • Economic Feasibility

3. Name Approval

4. Fixing up Signatories to the Memorandum of Association

5. Appointment of Professionals

6. Preparation of Necessary Documents

Documents Required to be Submitted:

1. Memorandum of Association: MOA is the most important document as it defines the objective of the company. No companies can legally undertake activities that are not contained in the MOA. The MOA contains different clauses which are given as follows-

  • The Name Clause
  • Registered Office Clause
  • Objects Clause
  • Liability Clause
  • Capital Clause
  • Association Clause

2. Articles of Association: AOA contains the rules regarding the internal management of the company. A Public Ltd. Co. may adopt Table A which is a model set of articles given in the companies act. Table A is a document containing rules and regulations for the internal management of a company. If a company adopts Table A, there is no need to prepare separate Articles of Association.

3. Consent of Proposed Directors: Apart from the MOA and AOA, 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.

4. Agreement: The agreement, if any, which the company proposes to enter with any individual.

5. Statutory Declaration: A declaration stating that all the legal requirements about registration have been complied with is to be submitted to the Registrar. 

6. Payment of Fees: Along with the above-mentioned documents, necessary fees have to be paid for the registration of the company. 

Position of Promotor: 

Promotors are neither the agents nor the trustee of the company as the company is yet to be incorporated. Therefore, they are personally liable for all the contracts which are entered by them, for the company before its incorporation, in case the same is ratified by the company later on.

2. Incorporation of a Company:

After going through the above formalities the promotors of the company make an application for the Incorporation of the company. The application is to be filed with the Registrar of the Companies of the state within which they plan to establish the registered office of the company. The application for registration must be accompanied by the same certain documents about which we have already discussed above. These may be briefly mentioned again-

1. Memorandum of Association duly stamped, signed, and witnessed.

2. Article of Association duly stamped, signed, and witnessed.

3. Written Consent of the Proposed Directors

4. Agreement, if any, with the proposed Managing Director, Manager, etc.

5. A copy of the Registrar’s Letter approving the Name of the Company.

6. A Statutory Declaration affirming that all legal requirements of registration have been submitted.

7. Notice the exact Address of the Registered Office.

8. Documentary evidence of Payment of Fees.

Effect of the Certificate of Incorporation:

A company is legally born on the date printed on the Certificate of Incorporation. It becomes a legal entity with perpetual succession on such a date. It becomes entitled to enter into valid contracts. On the date of issue of Certificate of Incorporation, a private company can immediately commence its business, it can raise necessary funds through a private arrangement, and proceed to start a business. A Public Company, however, has to undergo two more stages in its formation. 

3. Subscription of the Capital:

A Public Company can raise the required funds from the public using an issue of shares and debentures. For this purpose, it has to issue a prospectus which is a kind of invitation to the public to subscribe to the capital of the company and undergo various other formalities. The following steps are required for raising funds from the public-

1. SEBI Approval: Securities and Exchange Board of India which is the regulatory authority in our country has issued guidelines for the discloser of information and investor protection. A company inviting funds from the general public must follow SEBI guidelines of discloser of all the adequate information.

2. Filing of Prospectus: Prospectus is a document that includes any notice, circular, advertisement, or other documents inviting offers from the public for the subscription. It has to be filed with the Registrar of Companies.

3. Appointment of Bankers, Brokers, and Underwriters

4. Minimum Subscription: If Applications received for the shares are for an amount less than 90 percent of the issue size, the allotment cannot be made.

5. Application to Stock Exchange: Application is to be made to at least one stock exchange for permission to deal its shares or debenture.

6. Allotment of Shares

4. Commencement of Business:

If the amount of minimum subscription is raised through the new issue of shares, a public company applies to the Registrar of Companies for the issue of Certificate of Commencement of Business. The following documents are required:

1. A declaration that shares payable in cash have been subscribed for and allotted.

2. A declaration that every director has paid in cash, the application, and allotment money on his shares.

3. A declaration that no money is payable or liable to become payable to the applicants.

4. A statutory declaration that the above requirements have been complied with.

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