How to form a Company in India? A Brief Concept

To form a company you have to go through lots of legal procedure & formalities, to fully understand the process, it is divided into four different stages.

Many of us having a dream of forming a company, whether it is small, medium or large size. To set up and form a company you have to go through some procedure and formalities. It is somewhat a complex task but this article will definitely help you. This article will focus on forming a company based in India and deals with rules and regulations followed in India.
However, this rules and regulations will slightly vary from country to country, this article will give you an overall basic idea about "How a company is formed?"


A company is distinguished in two types:1. Private Company 2. Public Company



To form a company you have to go through lots of legal procedure & formalities, to fully understand the process, it is divided into four different stages.

(1) Promotion
(2) Incorporation
(3) Subscription of capital 
(4) Commencement of Business

NOTE:- The above four stages is required for Public Ltd Company. However, for Private Ltd Company only first two stages are appropriate. A Private Ltd Company can start its business immediately after getting Certificate of Incorporation but for Public Company it has to go through capital subscription stage and then receive Certificate for the Commencement of Business. So, it is important to distinguish what type of company you are going to start, Private or Public?



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Let's understand this procedure in detail:-


(1) Promotion of a Company: It is the first stage in the formation of a company. Promotion is finding a business opportunity and giving it a practical shape. What type of business you are going to a start whether producing some product or providing some service.  Any person or a group of person or even a company may have discovered an opportunity. If such a person or group of person who finds business opportunity and proceeds to form a company are called promoters of the company.


A promoter is one who finds a business opportunity that is about what type of business he/she is going to start, arranges funds, materials, prepare documents, give name to the business and perform various other activities to get a company registered and obtain the necessary certificate to commence the business.


Functions of Promoter:-

  1. Identify Business Opportunity
  2. Feasibility Study
  3. Technical Study
  4. Financial Study
  5. Economic Study
  6. Selecting a name of the company and get approval from Registrar of Companies of that state in which the registered office of the company is situated. 
  7. Deciding members of the company who will sign Memorandum of Association.
  8. Appointment of Professionals such as Chartered Accountant, Banker, Auditors, Lawyers etc.
  9. To prepare necessary documents.
Documents Required to be submitted:-
  1. Memorandum of Association 
  2. Article of Association
  3. Consent of proposed directors
  4. Agreement 
  5. Statutory declaration
  6. Payment of fee 
(2) Incorporation: After completing the above formalities, the promoters are required to submit an application for the incorporation of the company. The application is filed with the Registrar of the Companies of the state in which you plan to establish the registered office of the company. The application must be accompanied by the above-mentioned documents.
After submission of application along with the mentioned documents, the Registrar will satisfy the documents are in order and all the statutory requirements regarding registration have been complied with. After completion of this legal procedure and formalities, a Certificate of Incorporation is issued to the Company. This Certificate of Incorporation is also known as Birth Certificate of the Company.

Now a Company is legally born and become a legal entity from the date in the Certificate of Incorporation. After the issue of Certificate of Incorporation, a Private Company can immediately start its business by raising funds from friends, family, and other relatives. But a private company cannot issue shares or raise funds through the public. And this is the main difference between Private and Public Company. However, to start a business for a Public Company it has to go through two more stages.


FOR A PUBLIC COMPANY:-


(3) Capital Subscription: A public company can raise funds from the general public by issuing shares, debentures, and bonds. To do so it has to issue a prospectus for the subscription of the share capital of that company. The following steps are required to raise capital through Public:-

  • SEBI Approval (Securities & Exchange Board of India): It has to get approval from the highest regulatory authority in India. It issue guideline for the disclosure of information and investor protection. 
  • Filing of Prospectus: A prospectus is any document such as notice, advertisement, circular or other document inviting deposits from the public or inviting offers from the public. A copy of prospectus must be filed with the registrar. 
  • Appointments of Brokers, Bankers, Underwriters: Raising funds from the public is a complex task, so in order to do this, need various professionals. The banker receives application money, the broker sells shares, and the underwriter writes off unsold shares.
  • Minimum Subscription: According to Companies Act, a minimum subscription is specified to prevent companies from commencing business with inadequate funds. According to this Act, the limit of minimum subscription is 90 % of the size of the issue. If application received for the share is less than 90% of the issue size, then allotment cannot be made and the money received must be returned to applicants
  • Share Allotment: After the subscription of shares, allotment letters are issued to the successful allottees. Any excess money is either returned or adjusted in case of a number of shares allotted is less than the number applied for. 
 (4) Commencement of Business: After the amount raised through new shares fulfills the minimum subscription of the share capital, a Public Company can apply to the Registrar of Companies for the issue of Certificate of Commencement of Business. It has to present the following documents.
  • A declaration showing minimum subscription of shares.
  • A declaration that every director has paid in cash, the application, and allotment money on his shares in the same proportion as others.
  • A declaration that no money is payable or liable to become payable to the applicants because of the failure of the company. 
  • A statutory declaration signed by a director or secretary of the company showing that the above requirements have been complied with.  
All the documents then examined by the Registrar, if these are found satisfactory, a "Certificate of Commencement" of Business will be issued. This Certificate is the evidence of formation of the company and now a company can legally start doing business. It is now a legal entity and formation of Public Company is completed by getting this Certificate.



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