FORMATION OF COMPANY

MS. RENUKA MEHRAASSISTANT PROFESSORGOVERNMENT COLLEGE OF COMMERCE AND BUSINESS ADMINISTRATION,SECTOR- 42CHANDIGARH

INTRODUCTION A business (also known as enterprise or firm) is an

organization engaged in the trade of goods, services, or both to consumers.

Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners.

BASIC FORMS OF OWNERSHIP Sole proprietorship Partnership Joint Stock Company Corporation Cooperative

FORMS OF OWNERSHIP

SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION JOINT STOCK

COMPANY COOPERATIVE

JOINT STOCK COMPANY A company is a business organization. It is an association or collection of individual real

persons and/or other companies, who each provide some form of capital.

This group has a common purpose or focus and an aim of gaining profits.

This group has a common purpose or focus and an aim of gaining profits.

This collection, group or association of persons can be made to exist in law and then a company is itself considered a "legal person".

The name company arose because, at least originally, it represented or was owned by more than one real or legal person.

MEANING AND DEFINITION A company can be defined as an "artificial person",

invisible, intangible, created by or under Law, with a discrete legal entity, perpetual succession and a common seal.

It is not affected by the death, insanity or insolvency of an individual member.

TYPES OF COMPANY A company limited by guarantee A company limited by shares. A company limited by guarantee with a share capital. A limited-liability company. An unlimited company

STAGES IN THE COMMENCEMENT OF BUSINESS OF A COMPANY

Stages in the commencement of business of a Company

For a Private Company and Public Company having no

share capital

Stage 1- PromotionStage 2- Incorporation

For a Public Company having

share capital

Stage 1- PromotionStage 2- Incorporation

Stage 3 – Commencement of Business

STEPS TO FORM A COMPANY

Consult

Select in order of preference at least four names

Apply to the registrar

Get ensured about the availability of name

Get the draft of Memorandum of Association of Articles of Association prepared

Get the draft of Memorandum of Association of Articles of Association vetted

Get the draft of Memorandum of Association of Articles of Association printed

Get the draft of Memorandum of Association of Articles of Association stamped

Get the draft of Memorandum of Association of Articles of Association signed

Ensure that Memorandum and Articles of Association are dated on a date after the date of stamping

Get Form no. 29-

Get Form No. 18

Get the Statutory Declaration

File the following documents

Get the certificate of Incorporation from the Registrar of Companies

FEATURES OF COMPANY:- Separate legal entity; Incorporated body ; Artificial legal person; Perpetual succession; Limited liability; Common seal;

CONTINUE….. Right to own property; Right to sue; Right to enter in to contracts; Flexibility of investment; Separation of control from the ownership.

PROMOTION It starts with the conceptualization of the birth a company and

determination of the purpose for which it is to be formed. The persons who conceive the company and invest the initial

funds are known as the promoters of the company. The promoters enter into preliminary contracts with vendors and

make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital.

THE PROMOTERS HAVE CERTAIN BASIC DUTIES TOWARDS THE COMPANY FORMED :-

He must not make any secret profit out of the promotion of the company.

Secret profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of the profit to the company or its members.

The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members.

He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

A PROMOTER MAY BE REWARDED BY THE COMPANY FOR EFFORTS UNDERTAKEN BY HIM IN FORMING THE COMPANY IN SEVERAL WAYS. THE MORE COMMON ONES ARE :-

The company may to pay some remuneration for the services rendered.

The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members.

The promoter may sell his property for fully paid shares in the company after making full disclosures.

CONTINUE…. The promoter may be given an option to buy further

shares in the company. The promoter may be given commission on shares sold. The articles of the Company may provide for fixed sum

to be paid by the company to him.

INCORPORATION BY REGISTRATION :

The promoters must make a decision regarding the type of company i.e. a public company or a private company or an unlimited company, etc and accordingly prepare the documents for incorporation of the company.

In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

MEMORANDUM OF ASSOCIATION This contains the names and signatures of the subscribers

that wish to form the company and, in the case of a company limited by shares, a commitment by the subscribers to take at least one share each.

A draft template is available on the Companies House website.

CONTINUE…. Is the constitution or charter of the company and

contains the powers of the company. No company can be registered under the Companies Act, 1956 without the memorandum of association.

Under Section 2(28) of the Companies Act, 1956 the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956.

CONTENT OF MEMORANDUM

Contents of Memorandum

Name clause Registered office clause Object clause Liability

clause Capital clause Subscription clause

CONTENTS OF MEMORANDUM :THE MEMORANDUM OF ASSOCIATION OF EVERY COMPANY MUST CONTAIN THE FOLLOWING CLAUSES :-

Name clause Registered office clause Objects clause Liability clause Capital clause Association clause

ARTICLES OF ASSOCIATION The Articles of Association (often referred to as just

‘articles’) is the document which sets out the rules for the running of the company's internal affairs.

The company's articles delivered to the Registrar must be signed by each subscriber in front of a witness who must attest the signature.

In the event that articles are not registered for the new company, model (default) articles will be registered.

THE IMPORTANT ITEMS COVERED BY THE ARTICLES OF ASSOCIATION INCLUDE :-

Powers, duties, rights and liabilities of Directors Powers, duties, rights and liabilities of members Rules for Meetings of the Company Dividends Borrowing powers of the company Calls on shares Transfer & transmission of shares Forfeiture of shares Voting powers of members, etc

DISTINCTION BETWEEN MOA AND AOABasis of Distinction

Moa Aoa

Contents Fundamental conditions Internal rules and regulations

Fundamental/ Subordinate document

It is a fundamental documents Subordinate

Compulsory Must Need not to have

Relationship defined

Between the company and outsiders Between the company and its members

Alteration whether easy or difficult

Cannot be easily altered Articles can be easily altered by passing a special resolution

CONTINUE….Binding effect of Ultra Vires Act

Memorandum is ultra vires and void and it cannot be ratified

Articles may be ratified by shareholder by passing a special resolution

Outsiders’ Remedy in case of ultra vires contracts

Have no remedy Outsiders can enforce the contract agaist the company

REGISTRATION OF THE COMPANY-THE FOLLOWING DOCUMENTS MUST BE FILED IN THIS CONNECTION :-

The MA & AA An agreement, if any, which the company proposes to

enter into with any individual for appointment as its managing director or whole-time director or manager.

A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole - time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto.

CONTINUE…. In addition to the above, in case of a public company, the

following documents must also be filed :- Written consent of directors in Form 29 to agree to act as

directors The complete address of the registered office of the company

in Form 18 Details of the directors, managing director and manager of

the company in Form 32.

CERTIFICATE OF INCORPORATION

Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation of the Company.

This document is the birth certificate of the company and is proof of the existence of the company.

Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court.

COMMENCEMENT OF BUSINESS

A private company or a company having no share capital can commence its business immediately after it has been incorporated.

However, other companies can commence their activities only after they have obtained Certificate of Commencement of Business. For this purpose, the following additional formalities have to be complied with :-

PROSPECTUS After the receipt of certificate of incorporation, if the

promoters of a public limited company wishes to issue shares to the public, he will issue a document called prospectus.

It is an invitation to the public to subscribe to the share capital of the company.

CONTINUE The companies Act, 1956 defines prospectus as any

document described or issued as a prospectus and include any notice, circular, advertisement or other documents inviting deposits from the public or inviting offer from the public for the subscription of shares.

It is circulated among the public in printed pamphlets. It gives all necessary information about the company so that the prospective shareholders may fully understand the objectives and the plans of the company.

OBJECTIVES It informs the company about the formation of a new

company. It serves as a written evidence about the terms and

conditions of issue of shares or debentures of a company. It induces the investors to invest in the shares and

debentures of the company. It describes the nature, extent and future prospectus of

the company. It maintains all authentic records on the issue and make

the directors liable for the misstatement in the prospectus.

CONTENTS:

The prospectus contains the main objectives of the company, the name and addresses of the signatories of the memorandum of association and the number of shares held by them.

The name, addresses and occupation of directors and managing directors.

The number and classes of shares and debentures issued. The qualification share of directors and the interest of

directors for the promotion of company.

CONTINUE The number, description and the document of shares or

debentures which within the two preceding years have been agreed to be issued other than cash.

The name and addresses of the vendors of any property acquired by the company and the amount paid or to be paid.

particulars about the directors, secretaries and the treasures and their remuneration.

The amount for the minimum subscription.

CONTINUE If the company carrying on business, the length of time of

such businesses. The estimated amount of preliminary expenses. Name and address of the auditors, bankers and solicitors

of the company. Time and place where copies of balance sheets, profits and

loss account and the auditors report may be inspected. The auditor's report so submitted must deal with the profit

and loss of the company for each year of five financial years immediately preceding the issue of prospectus.

If any profit or reserve has been capitalized, the particulars of such capitalization will be stated in the prospectus.

SIGNIFICANCE OF PROSPECTUS

Significance of Prospectus

Invitation

Advertisement

Authentic record

Protection

1. IF A COMPANY HAS SHARE CAPITAL AND HAS ISSUED A PROSPECTUS, THEN :-

Shares upto the amount of minimum subcription must be alloted Every director has paid to the company on each of the shares which he

has taken the same amount as the public have paid on such shares

No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognised stock exchange.

A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed

2. IF A COMPANY HAS SHARE CAPITAL BUT HAS NOT ISSUED A PROSPECTUS, THEN :-

It must file a statement in lieu of prospectus with the Registrar of Companies

Every director has paid to the company on each of the shares which he has taken the same amount as the other members have paid on such shares

A statutory declaration in Form 20 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed

Once the above provisions have been complied with, the Registrar of Companies grants "Certificate of Commencement of Business" after which the company can commence its activities.

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