Formation and Incorporation of a Company

Saptaparni Raha
Aug 24, 2022
3 min read

Written by Saptaparni Raha, Lawyer

Introduction:

The formation and incorporation of a company include various stages. It requires a lot of groundwork to bring a company into existence. In this article, we will understand the procedure for the formation and incorporation of a company.

Promotion:

In this stage, the promoter enters the market of potential investors to collect investment for his or someone else's idea. Section 2(69) of the Companies Act defines a promoter as the person named in the prospectus of the company. According to Section 96 of the Act, companies may name their promoter in the annual return.

Functions of Promoters:

Promoters, at the very first stage, identify a potential business opportunity. This opportunity may be any new product or a new service.
Promoters evaluate the idea of the new potential company under the technical and financial feasibility. Technical feasibility signifies that the idea of the company is good, but it's technically difficult to bring it into reality. Budgetary feasibility means that sometimes it may become difficult to arrange a large budget.
After that, promoters intend to keep the name of the company. The promoter goes to the registrar of companies of the jurisdiction where he wants to make the registered head office of the company.
Then promoters decide on the members who are to sign the Memorandum of Association.
Then promoters hire professionals like mercantile bankers, auditors, and lawyers.
After that, they collect all the documents like MOA, AOA, return of allotment, etc., and submit them to the company's registrar.

Duties of the Promoter:

A promoter needs to have a fiduciary relationship with the company, signatories of the memorandum of association, and also future allottees of shares of the company.
Promoters may want to sell, lease or rent any property, but they need to inform the company.
If promoters gain any profit during the promotion, that needs to be disclosed to the company.

Liabilities of the Company:

Promoters are answerable to the company regarding every inquiry.
They are liable under Section 26 of the Act to list down the matters that are to be stated in the prospectus. They are also liable for not complying with the provision in the prospectus. According to Section 63 of the Act, promoters have criminal liability for misstatement in the prospectus.
Promoters may be held liable for all contracts entered upon by them during the pre-incorporation stage of the company.

Registration and Incorporation of the Company:

Registration of a company gives it legal recognition. Section 7 of the Act lays down the requirements to incorporate a company:

Memorandum of association, which is the constitution of the company wherein the signatories in case of a public company have been fixed to a minimum number of 7 and for a private company, a minimum number of 2. This document is duly stamped.
Articles of Association need to file along with the memorandum of association.
A list of directors along with their occupation details and names should be mentioned.
Consent in writing is required from the director and must be submitted before the registrar.
Such documents shall be verified by a recognized Chartered Accountant, a Lawyer, a Company Secretary, etc.

Certificate of Incorporation:

According to Section 35 of the Act, certificates prove the legal existence of the company.
Even if there are formal deficiencies in the documents submitted for the incorporation of the company, once the certificate of incorporation is issued, the certificate becomes conclusive evidence regarding the company's legal existence from the date mentioned in the incorporation certificate.

Conclusion:

We understand now that the incorporation period of a company is the integration of the pre-incorporation period and incorporation period. The pre-incorporation period is the ideal phase for the company.

References:

S. Aditya. (2020). Formation and Incorporation of a Company. retrieved from https://blog.ipleaders.in/formation-and-incorporation-of-a-company/