Formation of Company Under Companies Act, 2013: Step-by-Step Process
The formation of a company is a structured process that transforms an initial idea into a legally recognised entity. This process involves multiple stages, ensuring the business complies with the regulations outlined in the Companies Act, 2013. Understanding the stages of formation of a company is crucial for aspiring entrepreneurs, students, and parents guiding them through the basics of business creation.
Below, we explore the process of formation of a company in detail, covering all key steps and the significance of each stage.
Stages of Formation Of Company In Company Law
The entire process of formation of the company can be categorised into four major phases:
Promotion Stage
Registration Stage
Incorporation Stage
Commencement of Business Stage
Let’s break these steps down for better understanding of Procedure For Formation Of Company.
1. Promotion Stage
The promotion stage marks the initial phase in the formation of a company. This is where an idea evolves into an actionable business plan.
Key Steps in the Promotion Stage:
Identifying a Business Opportunity: Evaluate market demands and decide on the type of business to establish.
Feasibility Study: Conduct a thorough analysis of economic, technical, and legal aspects to ensure the viability of the business idea.
Role of Promoters: Promoters play a crucial role in executing the idea by securing the required capital, preparing essential documents, and taking the initial steps to establish the business.
2. Registration Stage
The registration stage is when the company becomes a legally recognised entity under the Companies Act, 2013.
Steps Involved in the Registration Stage:
Memorandum of Association (MoA): Founders must prepare and sign the MoA, which outlines the company’s objectives. Public companies require a minimum of seven signatories, while private companies need at least two.
Articles of Association (AoA): This document defines the internal rules of the company. All MoA signatories must also sign the AoA.
List of Directors: Submit a complete list of the company’s directors to the Registrar of Companies (RoC).
Consent of Directors: Directors must provide written consent to act in their roles, which is then submitted to the RoC.
Registered Office Address: Notify the RoC of the company’s official address.
Statutory Declaration: A declaration by a qualified professional (advocate, secretary, or director) stating that all requirements have been fulfilled must be filed with the RoC.
When all documents are in order, the RoC issues a Certificate of Incorporation, officially bringing the company into existence.
3. Incorporation Stage
The incorporation stage validates the company’s formation through the issuance of a Certificate of Incorporation. This certificate acts as proof that the company is legally established.
Key Points to Note:
A private company can commence business activities immediately after receiving the Certificate of Incorporation.
A public company, however, needs to proceed to the next stage: Commencement of Business.
4. Commencement of Business Stage
The commencement of business stage is critical for public companies, as they require an additional certificate to start operations.
Steps for Commencement:
Issuance of Prospectus: Public companies issue a prospectus inviting the public to subscribe to shares for raising capital.
Minimum Subscription Requirement: The company must ensure the minimum required shares are subscribed to and collect the corresponding funds.
Registrar Verification: Submit proof of subscription and collected funds to the RoC.
Certificate of Commencement of Business: Once satisfied, the RoC issues this certificate, allowing the company to officially begin its operations.
Key Differences in Formation of Private and Public Companies
Conclusion
The formation of a company under the Companies Act, 2013 involves a systematic process, ensuring compliance with legal and financial regulations. By understanding these stages, students and aspiring entrepreneurs can gain valuable insights into starting a business effectively. Whether it’s the promotion stage, the registration stage, or the final step of commencing business, each phase is essential for establishing a successful company.
FAQs on Steps in Formation of a Company
1. What is the formation of a company?
Company formation is the process of legally creating a new business entity. This involves steps such as
- registering the business name
- preparing documents
- complying with local laws
2. What are the 4 types of business formations?
The four main business formations are:
- Sole proprietorship
- Partnership
- Corporation
- Limited liability company (LLC)
3. What is the difference between formation and incorporation?
Formation refers to creating any type of business, while incorporation is a specific process for forming a corporation. Incorporation involves submitting legal documents, such as Articles of Incorporation, and granting the business the rights and duties of a legal person.
4. How do I form my own company?
To form your own company, you must choose a business structure, pick a name, file registration paperwork, and comply with state or national rules. This company formation process ensures your business is legal and ready to operate within regulations and tax laws.
5. What documents are needed for company formation?
Key documents for company formation include:
- Articles of Incorporation or Organization
- Bylaws or operating agreement
- Name reservation proof
- Government identification
6. Why is company formation important?
Company formation gives a business a legal identity, separates personal and company finances, and builds trust with customers. It also helps with tax filing, attracting investors, and protecting owners from certain liabilities through proper business structure selection.
7. What are the steps in the company formation process?
The basic company formation process involves:
- Choosing a business entity type
- Selecting a name
- Submitting required documents
- Paying registration fees
- Gaining approval from authorities
8. Do I need a lawyer for company formation?
While using a lawyer for company formation is not always required, legal advice can be helpful to avoid mistakes in paperwork, contracts, or rules. Many people use online services, but complex businesses benefit from legal guidance during formation.
9. How long does the formation of a company take?
The company formation timeline depends on the business type and region. Commonly, simple businesses may be formed in a few days, while corporations could take longer due to document review. On average, the formation process takes between one and four weeks.
10. What is incorporation in company formation?
Incorporation is the step in company formation where a business becomes a corporation. This involves filing offices' paperwork, creating a separate legal entity, issuing shares, and granting the company specific legal rights under corporate law for liability and taxation purposes.
11. Can I form a company online?
Yes, you can complete company formation online in many locations. Government websites and private services allow you to submit documents and fees electronically, making it faster and more convenient to set up a business and receive registration certificates.
12. Does company formation provide tax benefits?
Proper company formation can offer tax benefits by allowing companies to deduct expenses, choose favorable tax treatments, or reduce personal liability. Each business structure has different tax rules, so it's important to select the formation that matches your financial goals.
