Formation of a Company ( 3 Steps You need to Know)

3 steps of formation of a Company are;

1. Promotion.
2. Registration.
3. Floatation

These are explained below;

Promotion

Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. Promotion includes assigning duties and liabilities of promoters.

Duties

The promoters to make a full disclosure of material facts relating to the formation of the company.

He should not make any secret profit at the expense of the company he promotes, without the knowledge and consent of the company and if he does so, the company can compel him to account for it.

Liabilities

For Non-disclosure: In case a promoter fails to make full disclosure at the time the contract was made, the company may either:

• Rescind the contract and recover the purchase price where he sold his own property to the company,
• Recover the profit made, even though rescission is not claimed or is impossible, or
• Claim damages for breach of his fiduciary duty. The measure of damages will be the difference between the market value of the property and the contract price.

Registration

Availability of Name

A company cannot be registered by a name, which in the opinion of the Central Government is undesirable.

Therefore, it is advisable that promoters find out the availability of the proposed name of the company from the Registrar of companies.

Procedure

The promoters will have to get together at least seven person in the case of public company, or two persons in the case of a private company to subscribe to the memorandum of association.

Documents to be Delivered

Section 33 states that the following three documents are required to be presented for the purpose of registration of a company:

• The memorandum of the company;
• The articles, if any;
• The agreement, if any, which the company proposes to, enter into with any individual for appointment as its managing or whole time director or manager.

Consent of Directors

In case of a public company, if the first directors are appointed by the articles then the following must be complied with before the registration of articles with the Registrar of Companies:

• Written consent of those directors to act, signed by themselves, or by an agent duly authorized in writing, and
• An undertaking in writing signed by each such director to take from the company and pay for his qualification shares (if any).

Other Documents are usually delivered along with the aforesaid documents:

• The address of the registered office of the company.
• Particulars regarding directors, manager and secretary, if any.

These two documents are required to be submitted within 30 days of registration of the company:

Certificate of Incorporation/Consequences of Incorporation

This certificate serves the same purpose in the case of a company which a birth certificate does in the case of a natural person.

Floatation

The certificate of incorporation is conclusive evidence that all the requirements of the Companies Act in respect of registration and of matters precedent and incidental thereto have been complied with.

Floatation/Capital Subscription

When a company has been registered and has received its certificate of incorporation, it is ready for “floatation”, i.e., it can go ahead with raising capital sufficient to commence business and to carry it on satisfactorily. Obligatory for every public company to take either of the following two steps:

• Issue a prospectus in case public is to be invited to subscribe to its capital, or
• file a ‘statement in lieu of prospectus’ with the Registrar, in case capital has been arranged privately. It must be done at least 3 days before allotment.

Certificate to Commence Business

Where the company has issued a prospectus it shall not commence business or exercise any borrowing powers unless:

• Minimum subscription
• Where director of the company has paid to the company.
• No money is, or may become, liable to be repaid to the applicants.
• Filed with the Registrar a duly verified declaration by one of the Directors or the secretary.

Where the company has not issued a prospectus, requires that it shall not commence business or exercise its borrowing powers unless:-

• It has filed with the Registrar a statement in lieu of prospectus;
• Every director of the company has paid to the company on each of the shares taken or contracted to be taken by him.
• Filed with the Registrar duly verified declaration by one of the directors or the secretary.