FORMATION OF COMPANY

NOTES
Q:1 EXPLAIN THE STAGES OF INCORPORATION OF COMPANY.
There are four stages in the formation of the company:-
 Promotion
 Incorporation
 Capital subscription
 Commencement of Business
1) Promotion
Promotion stands for all those activities which give existence to business unit.
Promoter is a person
• who conceives the idea of starting of business
• examines the feasibility of idea,
• assemble various resources,
• prepare necessary documents
• perform other activities needed to commence the business
Promoter can be individual, group of persons or institution. Promoter enjoys a fiduciary
position with the company based on trust and faith. He is not entitled to make any secret
profits or get reimbursement for the expenses made by him.
2) Incorporation:-
• Promoters will file an application with the registrar of companies of their respective
states with which they plan to establish the registered office with the following
documents:
 Memorandum of association duly stamped, signed and witnessed by the members.
 Articles of Association duly stamped and witnessed
 The agreement if any with the proposed managing director, manager or whole time
director
 Written consent of the proposed directors to act as directors and an undertaking to
purchase qualification shares
 Copy of Registrar’s letter approving the name of the company
  A Statutory Declaration affirming that all the legal requirements have been compiled
which must be signed by a high court or supreme court advocate or a CA, CS or a
signatory of MOA
 The exact Address of Registered Office.
 Evidence of payment of Registration Fees
After the verification of all the documents the registrar of companies will issue “Certificate of
Commencement of Business”
Effect of certificate of Incorporation:-
 A private company can start operations after receiving certificate of incorporation
• It becomes a Legal Entity with perpetual succession on such date.
• It becomes entitled to enter into valid contracts.
3) CAPITAL SUBSCRIPTION:-
A public company which invites public to subscribe for shares have to go through the following
steps of Capital Subscription:-
• Issue prospectus to the general public and sent it to registrar
• Company receives Minimum subscription amount, (applications should be received for
minimum 90% of size of issue of shares)
• The director passes the proposal for allotment and allotment letter is sent to the
directors.
4) COMMENCEMENT OF BUSINEA public company applies to the Registrar of the companies for
the issue of certificate of Commencement of Business the following declarations:-
 shares payable in cash has been subscribed and allotted upto the minimum subscription
 every director has paid in cash, the application and allotment money on his shares
 No money is payable or liable to become payable to the applicants because of the
failure of the company to obtain permission to deal in securities in a stock exchange
 A statutory declaration that all the requirements have been compiled with which is
signed by a director or secretary of the company.
The registrar after examining the documents will issue a certificate of Commencement of
Business. It is a conclusive evidence that a company is entitled to do business
Q2 EXPALIN THE IMPORTANT DOCUMENTS REQUIRED FOR FORMATION OF COMPANY:-
A promoter prepares 6 documents for the purpose of formation of company:-
 Memorandum of Association
 Articles of Association
 Consent of Proposed Directors
 Agreement
 Statutory declaration
 Payment of Fees
Memorandum of Association
 It is principal document of company also considered as “charter of company”
 It defines power and objectives of company
 It defines scope of operations of company
 Also known as doctrine of outdoor mgt.
 No company can undertake activity which are not mentioned in MOA
The memorandum of association consists of different clauses:-
a) Name clause:-it contains name of company…the company can choose any
name subject to following conditions:-
 Name must end with word ‘limited’ in case of public limited company and “pvt ltd’ in
case of private limited company
 Name should not be similar to name of other company
 Name should not contain word ‘cooperative’
 Name should not convey any connection or link with govt
department
b) Registered office clause
 It contains name of state in which registered office of company is situated
 The registered offc is a place where all imp documents of company are kept
 The exact address of registered office is not required at this stage but it must
be notified to registrar within 30 days of incorporation.
c) Objects clause
 It defines the purpose for which company is formed.
 A company is not legally entitled to undertake an activity which is beyond the
object stated in clause.
It is divided into 2 sub clauses:-
• The main objects:-
1. the main object for which company is formed are listed in sub clause
2. An act which is essential or incidental for attainment of main object of company is
deemed to be valid although it may not be stated in sub clause.
• Other objects
1. Objects not included in main clause.
2. However, if company wishes to undertake business included in sub clause it has to
pass special or ordinary resolution and get central govt approval.
d) Liability clause
 It defines liability of members of company is limited to amount unpaid on
shares owned by them.

e) Capital clause
 It defines the maximum capital which the company will be authorized to raise
through issue of shares
 The authorized capital along with division into no of shares having fixed face
value is specified
 Company cannot issue share capital in excess of specified amt.
f) Association clause
 In this clause signatories to MOA state their intention to be associated with
company and also give their consent to purchase qualification shares
 Moa must be signed by at least 7 in case of public company n 2 in case of pvt
company.

ARTICLES OF ASSOCIATION
1. It contains rules n regulations regarding mgt of internal affairs of company
2. These rules are subsidiary to moa and should not contradict or exceed anything stated
in MOA
3. It defines powers, rights n duties of manager board of director and officer
4. It is also called doctrine of indoor mgt or bylaws of company.
5. A public company may adopt table A which is model set of articles given in companies
act.
6. If company adopts table A there is no need to prepare separate Articles of association.
7. For companies not adopting table A, a copy of articles duly stamped and signed by
signatories of MOA is needed.

WRITTEN CONSENT OF DIRECTOR

  A written consent of each person named as director is required confirming that they
agree to act in that capacity n to buy qualification shares.
Agreement
 The agreement if any which company proposes to enter with any individual for appt
as MD or whole time director or Manager is other document needed to be submitted
to Registrar for getting company registered.
Statutory declaration
 A declaration stating that legal requirements pertaining to registration have been
complied with is to be submitted to Registrar.
 This statement can be signed by advocate of High court or Supreme court or by CA in
full time practice or by a person named in articles as manager or director or secretary
of company
Payment of fees
 Along with above documents necessary fees has to be paid for registration
 The amount of fees depends upon authorized share capital of company.
IMPORTANT TERMS USED IN THE CHAPTER:-
PROMOTION: it refers to the sum total of all activities which are necessary for bringing the
company to existence
Qualification Shares: it refers to those shares which the directors are required to buy ensuring
to have some stake in the proposed company
Minimum Subscription: The company must receive applications for a minimum number of
shares before going ahead with the allotment of shares. This is called minimum subscription.
The limit of minimum subscription is 90% of the size of the issue.
Statement in Lieu of Prospectus: When a public company raises money through private
arrangements, there is no need to issue a prospectus , a “ Statement in Lieu of Prospectus” is
filled with the registrar at least three days before making allotment
Prospectus: A prospectus is any document described or issued as a prospectus including any
notice, circular, advertisement or other document inviting deposits from the public for the
subscription or purchase of any shares.

Difference between Memorandum and Articles of Association

Basis Memorandum Articles
Objectives It defines the objects for They are the rules of
which the company is internal management of
formed. the company. They indicate
how the objectives of the
company are to be
achieved.
Position This is the main document This is a subsidiary
of the company and is document and is
subordinate to the subordinate to both the
companies act MOA and the companies
act.
Relationship MoA defines relationship of Articles define the
the company with outsiders relationship of the
members and the company
Validity Acts beyond memorandum Acts which are beyond
are invalid and cannot be articles can be ratified by
ratified even by a the members, provided
unanimous vote of the they do not violate the
members memorandum
Necessity Every company has to file a It is not compulsory for a
MOA public ltd. company to file
articles. It may adopt Table
A of the companies act
Alteration Alteration of memorandum Articles can be altered by
is quite difficult and in passing a special resolution
many cases approval of by the members
certain statutory authority
is required