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A sneak peek at Incorporation of Company in India

India has many business structures, but a company has certain aspects, and it needs to get 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 how a business is formally organised and brought into existence. Incorporation of a company means making a company a legal person. In general words, incorporation means giving birth to a company. In other words, Incorporation is the registration of the company. This incorporation of a company makes it a legal entity that separates the 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 get considered as the same person. No formal registration is required in this type of establishment, and the owner is liable to bear all the liabilities.

Partnership

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

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

Limited Liability Partnership

A Limited Liability Partnership gets 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 the partners in an LLP. The partners limit their liability and are responsible only for the share they have agreed upon. It is necessary for a limited liability partnership firm to be registered and have LLP or limited liability partnership in its name. Partners and the LLP are two different identities.

Private Limited Company

In India, a Private Limited Company is a business entity with a separate legal entity. A private limited company gets 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 means a company that is not a private company. A public limited company incorporates a minimum of seven 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 company’s existence.

One-Person Company

One-Person Company gets defined under section 2(62) of the Companies Act, 2013. 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 can be seen as 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 impacts the tax returns. Every business has its registration process and requirements that need to be met. One must be careful while registering the enterprise. A company must audit the books of the company every year.

It is necessary to comply with legal formalities for every business structure as non-compliance might affect the business. Also, investors prefer an enterprise that has complied with the legal formalities. So it is necessary while the business structure, a businessman is well aware of all the compliances of the business.

Besides this, while 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 needs to get fulfilled to start functioning legally.

The incorporation of a company is necessary as it provides a shield from liability. After the incorporation of company, it becomes a legal person. As a legal person, a company has its own identity; this limits the shareholders’ risk. Also, an incorporated company establishes perpetual existence and transfer of ownership rights. Other than this, an incorporated company gets tax benefits and also the ability of a company to manage things up is improved by its incorporation. Chapter 2 of the Companies Act, 2013 deals with the incorporation of the company.

Steps in incorporating of company

Several formalities are to get completed before a company can come into existence. There is a legal process to get followed for the incorporation of the company. The steps necessary for the incorporation of the company are as follows:

  1. Application for approval of name: Initial step or very first step for incorporation of the company is to get the approval of the name 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 gets considered as 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 seven members in the case of a public company and two 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 has 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. But a private company must submit AOA, which is duly signed.
  4. Preparation of other documents: After AOA, other necessary documents are to be prepared by the company’s promoters. The documents are:
    • The consent of the directors of the company
    • The promoters need to 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 get 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 gets filed with the registrar. The declaration gets 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, every document’s registration and filing fees 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 Incorporation of Company

Following are the advantages of incorporation of the company:

  • Incorporation creates a separate 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 means 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 gets 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 get sued by any person. Although a company can sue and get 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 Incorporation of Company

Following are the disadvantages of the Incorporation of 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 have the potential to result in “double taxation. Such tax is first levied on the company’s profits and later 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 had 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: Dissolution of the company is a very long process, and it requires significant time and money to complete the dissolution procedure.
  • Lifting of Corporate veil: A company is a legal person who is different from the members. The corporate veil is a legal concept that separates the personality of a corporation from the personality of the shareholders.

    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 2nd November 2018.

And as per Section 8 of the Companies Act, 2013, the companies with the share capital need to 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 person, 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 different people.

The director does 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 the actions of the company. But, for any illegal act done by the directors in a veil 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 gets considered to be the strongest business structure. A company’s benefits from any other business structure do not have advantages.

FAQs

What is the meaning of incorporation of a company?

The company can sue a person and get sued by any person. Although a company can sue and 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
  • Easier 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

About Author

Anshita Surana, born in the year 1999 in Guwahati, Assam and brought up in Hanumangarh, Rajasthan, where I completed my elementary and secondary education from the CBSE board.

Currently, Pursuing B.B.A.LL.B(H) from K. R. Mangalam University, Gurugram.