FORMATION OF COMPANY MS. RENUKA MEHRA ASSISTANT PROFESSOR GOVERNMENT COLLEGE OF COMMERCE AND BUSINESS ADMINISTRATION, SECTOR- 42 CHANDIGARH

INTRODUCTION A business (also known as enterprise or firm) is an organization engaged in the trade of goods, services, or both to consumers. organizationtradegoodsservicesconsumers 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.capitalisteconomiesprivately ownedprofitwealth

B ASIC FORMS OF OWNERSHIP Sole proprietorship Partnership Joint Stock Company Corporation Cooperative

FORMS OF OWNERSHIP SOLE PROPRIETORSHIP PARTNERSHIPCORPORATION JOINT STOCK COMPANY COOPERATIVE

J OINT STOCK C OMPANY A company is a business organization.business organization It is an association or collection of individual real persons and/or other companies, who each provide some form of capital.associationcapital This group has a common purpose or focus and an aim of gaining profits.profits

This group has a common purpose or focus and an aim of gaining profits.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".lawlegal person The name company arose because, at least originally, it represented or was owned by more than one real or legal person.

M EANING 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.legal entityperpetual successioncommon seal It is not affected by the death, insanity or insolvency of an individual member.insolvency

T YPES OF C OMPANY A company limited by guaranteecompany limited by guarantee A company limited by shares.company limited by shares A company limited by guarantee with a share capital. A limited-liability company.limited-liability company An unlimited companyunlimited company

S TAGES 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- Promotion Stage 2- Incorporation For a Public Company having share capital Stage 1- Promotion Stage 2- Incorporation Stage 3 – Commencement of Business

S TEPS TO FORM A COMPANY Consult Select in order of preference at least four names Apply to the registrarGet 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. 18Get the Statutory DeclarationFile the following documents Get the certificate of Incorporation from the Registrar of Companies

F EATURES OF C OMPANY :- Separate legal entity; Incorporated body ; Artificial legal person; Perpetual succession; Limited liability; Common seal;

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

P ROMOTION 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.

T HE 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. T HE 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.

C ONTINUE …. 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.

I NCORPORATION BY R EGISTRATION : 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.

M EMORANDUM OF A SSOCIATION 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.

C ONTINUE …. 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.

C ONTENT OF M EMORANDUM Contents of Memorandum Name clause Registered office clause Object clause Liability clause Capital clause Subscription clause

C ONTENTS OF M EMORANDUM : T HE MEMORANDUM OF ASSOCIATION OF EVERY COMPANY MUST CONTAIN THE FOLLOWING CLAUSES :- Name clause Registered office clause Objects clause Liability clause Capital clause Association clause

A RTICLES OF A SSOCIATION 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.

T HE IMPORTANT ITEMS COVERED BY THE A RTICLES OF A SSOCIATION 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

D ISTINCTION BETWEEN M OA AND A OA Basis of Distinction MoaAoa ContentsFundamental conditionsInternal rules and regulations Fundamental/ Subordinate document It is a fundamental documentsSubordinate CompulsoryMustNeed not to have Relationship defined Between the company and outsidersBetween the company and its members Alteration whether easy or difficult Cannot be easily alteredArticles 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 remedyOutsiders can enforce the contract agaist the company

R EGISTRATION OF THE C OMPANY -T HE 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.

C ONTINUE …. 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.

C ERTIFICATE OF I NCORPORATION 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.

C OMMENCEMENT OF B USINESS 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 :-

P ROSPECTUS 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.

C ONTINUE 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.

O BJECTIVES 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.

C ONTENTS : 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.

C ONTINUE 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.

C ONTINUE 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.

S IGNIFICANCE OF P ROSPECTUS Significance of Prospectus InvitationAdvertisement Authentic record Protection

1. I F 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. I F 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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