Incorporation of a Company in India: Compliances & Regulation

This article focuses on the importance of incorporation of a company. The article aims to ponder upon all the important aspects of the incorporation of a company and the effects of it. It also talks about the certificate of incorporation and the importance of it. It also enlists the number of documents required by the company to file with the Registrar of Companies (hereinafter referred as ‘ROC’) for incorporation.
Estimated Reading Time: 8 minutes

Introduction

There are certain steps which are needed to be followed by a company for the incorporation. It also talks about the consideration of a certificate of incorporation as a piece of conclusive evidence in the court of law. It also discusses the advantages and disadvantages of incorporating a certificate of incorporation of a company.

All the business entities in India are either incorporated or unincorporated. It is a document which is needed at the time of formation of a company. The basic distinction between an incorporated and an unincorporated entity is that the incorporated one needs registration with the Ministry of Corporate Affairs to attain corporate existence and the other one does not. It is a state government-issued legal document which is considered as a license to form a company. Section 34 and 35 of the Companies Act, 2013 (hereinafter referred as ‘the Act’) deal with the provisions relating to the requirement of issuance of the certificate of incorporation of the company. The certificate makes the company a separate legal entity in the market and in the eyes of law.[1] It is the document without which the company can never come into existence.

Legal Provisions relating to Incorporation of a Company

The Act bestows various provisions which dealt with the incorporation of a company in entirety. They are divided into certain heads, which are as follows:

Formation of a Company

Section 3 of the Act deals with the formation of a company. It articulates that a company shall be formed with a lawful purpose by seven or more persons when a public company is supposed to be formed; by two or more persons in case of a private company and one person when a one-person company is to be formed.

Memorandum of Association

The Memorandum of Association (hereinafter referred as ‘MOA’) of a company is the foundation of a company and it deals with the functions of the company in totality and hence the existence of such a document is necessary for the formation of a company. Provisions relating to MOA are envisaged under Section 4 of the Act.

Articles of Association

For the formation of a company, the company shall also have Articles of Association (hereinafter referred as ‘AOA’) which acts as bye-laws of the company and governs the internal matters of the company. It also contains the functions of the company while conducting business in its day to day affairs. Section 5(1) and Section 5(2) of the Act iterates about the key provisions regarding the AOA.

Incorporation of a company

The company under Section 7 of the Act shall give certain documents to the Registrar under whose jurisdiction the company is being incorporated. It also provides that the company shall be bestowed with the certificate of incorporation as soon as the formalities relating to the submission of documents are finished by the company and the approval for incorporation has been initiated.[2]

Steps needed to be followed for Incorporation of a company

The Ministry of Corporate Affairs (hereinafter referred as ‘MCA’) has prescribed a set of steps which shall be followed by the company to incorporate the company under the corporate laws of the country. These steps are as follows:

  1. Name of the company: A suitable name for the company must be selected for registration with the ROC and the name shall have a maximum up to six names which shall indicate the main objective of the company. The name of the company shall not resemble from the name of any other already registered company of the ROC. It shall also not violate any laws in relation to emblems and names (Prevention of Improper Use Act, 1950). This shall be done by checking the availability of the proposed name on the portal provided. Then the company needs to apply for the name to the concerned ROC and check the further availability. The prescribed fee and the digital signature of the person concerned shall also be provided. If the name proposed by the company is unavailable, then the company has to file a new application with a new name.   
  2. Filling the prescribed forms: After the name of the company is approved by the concerned ROC, the company shall submit the prescribed forms within sixty days of approval of such name of the company.
  3. Drafting of MOA and AOA of the company: The company shall then look for the drafting of MOA and AOA by the solicitors and shall also arrange for stamping through appropriate stamp duty. Minimum two subscribers shall also sign the MOA and AOA. The signature shall be done under his name and the person’s father’s name, occupation, address and the number of shares subscribed by the person concerned.
  4. Attachment of mandatory document: The company shall the login the portal and fill the Form No. 1 (for declaration of compliance), Form No.18 (for the purpose of notice of situation of registered of the company) and Form No. 32 (for the purpose of determining the particulars of directors, manager or secretary). Along with these forms, the company shall attach the mandatory documents like MOA and AOA.
  5. Obtaining Certificate of Incorporation: After the submitted forms have been processed, the company should obtain Certificate of Incorporation. Additional steps are also needed to be filled and submitted which are envisaged for registration under Part IX Company.[3]

Certificate of Incorporation as a Conclusive Evidence

The Certificate of Incorporation which acts evidence and is issued by the registrar proving thereby the legal existence of a company is considered a shred of conclusive evidence under the Act. It certainly depicts that all the necessary and mandatory steps and submission of documents required therein have been complied with and there are no pending submission or compliances needed to be made. Coming to the part of conclusive evidence, it means that once the certificate of incorporation is issued to a company then no questions or issues related to the validity of registration can be entertained or challenged in the court of law. Even if certain irregularities might come in light or be known after the completion of the process of registration then also the registration of the company cannot be challenged. Section 35 of the Act provides that the said certificate shall be considered as conclusive evidence. Also, if once the certificate has been issued then it remains valid for the whole lifetime of the company and ceases to be valid only when the company ceases its business and winds up.[4] The certificate is also not subject to cancellation by any person in any court or tribunal. But there are certain situations in which a company’s certificate of incorporation can be cancelled by the Registrar. These situations are as follows:

  1. When all the signatures on the MOA are of the minors i.e. the age below eighteen years.
  2. When the signature on the MOA has been done by only one person on behalf of other persons as mentioned in the MOA.
  3. When the signature on the MOA is forged by some other person.
  4. There are also circumstances where the members of the company alter the entire MOA before registration but after obtaining the signatures of the subscribers.

Advantages of Certificate of Incorporation

There are various benefits of obtaining a certificate of incorporation for a company. Some of them are as follows:

Separate Legal Entity

The company which has obtained a certificate of incorporation shall have a separate legal entity of its own and its identity shall be distinct from those of its members. It means that members of the company cannot be held liable for the acts undertaken by the company and vice versa. In the matter of Solomon v. Solomon also the company was made liable and Solomon was exempted from all those acts as it was observed that the company has a distinct identity from its members.

Perpetual Succession

A company after obtaining the certificate of incorporation is granted perpetual succession. It means that the existence of the company continues even if the members of the company have died or are incapable of carrying out business. The members of the company may keep changing but this shall never raise issues regarding the existence of the company. In the matter of Re Noel Tedman Holdings Pty Ltd (1967) Qd R 56, it was observed that the members may come and go but this shall not affect the legal existence of the company.

Capacity to sue and be sued

The certificate of incorporation entitles the company with the right to sue and be sued in the court of law. But such complaints or cases shall be filed by a natural person on behalf of the company and if the same is not being complied then the company’s complaint or case for that matter shall be dismissed as a case by a natural will be dismissed.

Separate Property

The company can also own their own property on its name because of separate legal entity and the same cannot be used for the benefit of the members of the company. The same has been observed by the Hon’ble Supreme Court of India in the matter of Bacha F. Guzdar v. CIT.

Access to capital

It is generally easier for a corporate to raise capital for the company’s business. It is easier as a company to issue its shares for the subscription of public and get money through such subscription. This aids the company to raise money for the growth and development of the company.

Disadvantages of Incorporation of a company

The disadvantages of incorporating a company are as follows:

Double Taxation

Certain companies such as C corporations have to pay double taxation when they are incorporated. They are once taxed on the profits incurred and again on the dividends that are paid to the shareholders.

Expensive

When a company is being incorporated then there is a lot of increase in the expenses of the company. As the company has to pay the amount for all the drafting and compiling of paperwork and also for the fees that are to be paid at the time of registration to the ministries. Then there are expenses relating to the maintenance of the company during incorporation also.

Lack of Personal Ownership

When a company is incorporated then generally the members lose their ownership as the shareholders of the company hold their stake in the company. The shareholders also have the authority to deal and take decisions in the matters of the company hence, no decision can be taken by the members or the promoter solely.

Structure

The company who is supposed to be incorporated shall have a proper structure and the company shall also comply with all the rules that are required by the State in which the company is being incorporated.

Problems in dissolving

When an incorporated company is to be dissolved then it takes a lot of time and money as the procedure mentioned in the legal provisions are meant to be followed.

Paperwork

The company which is incorporated requires a lot of paperwork to be done. The company is required to file all the documents related to tax and the financial statements of the company in the particular annual year.

Conclusion

The article aims to provide all the information related to the certificate of incorporation. The article gives a brief note covering all the legal provisions relating to the company. It also enlists all the documents which are generally required for the registration of a company and thereafter obtaining a certificate of incorporation by the MCA. The advantages and disadvantages that are likely to be faced by the company during the time of the incorporation of a company are also being addressed in the article.


[1] What is Conclusiveness of Certificate of Incorporation, https://trivology.com/what-is-conclusiveness-of-certificate-of-incorporation/

[2] Incorporation of a company, Ministry of Corporate Affairs

[3] Steps To Be Taken To Incorporate A New Company, Ministry of Corporate Affairs, http://www.mca.gov.in/MinistryV2/stepstoformanewcompany.html

[4]What is Conclusiveness of Certificate of Incorporation, https://trivology.com/what-is-conclusiveness-of-certificate-of-incorporation/

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