A company is an artificial person created by law, with a separate legal identity from its owners. Forming a company is a formal legal process regulated by the Companies Act, 2013 in India. Understanding this process is essential for anyone planning to start a corporate business.
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Stages of Company Formation
The formation of a company involves four main stages:
1. Promotion
2. Incorporation
3. Subscription of Capital (for public companies)
4. Commencement of Business
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Stage 1: Promotion
Promotion is the first step. A promoter is a person who conceives the idea of forming a company, takes necessary steps to bring it into existence, and arranges the initial capital.
- Duties of a promoter:
- Identifying the business opportunity
- Preparing the feasibility report
- Arranging preliminary capital
- Getting the company registered
Ravi identifies a profitable opportunity to start an IT solutions company. He discusses the idea with friends, prepares a detailed project report, finds investors, and initiates the registration process. Ravi is acting as the promoter in this scenario.
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Stage 2: Incorporation
Incorporation gives the company its legal existence. The following documents must be filed with the Registrar of Companies (ROC):
- Memorandum of Association (MOA): The constitution of the company, defining its objectives, capital, and scope.
- Articles of Association (AOA): Rules and regulations for internal management.
- Prospectus / Statement in Lieu of Prospectus (for public companies)
- Statutory Declaration (Form INC-8)
- Payment of registration fees
On satisfaction, the ROC issues a Certificate of Incorporation, and the company is born as a legal entity.
Priya files the MOA and AOA of her proposed company "Priya Tech Pvt. Ltd." with the ROC along with the required fees. After verification, she receives the Certificate of Incorporation. Her company now has a legal identity separate from herself.
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Stage 3: Subscription of Capital
This stage applies mainly to public companies that wish to raise funds from the public.
- The company issues a Prospectus inviting the public to subscribe to its shares.
- The company must receive minimum subscription (90% of issued capital within 30 days).
- SEBI (Securities and Exchange Board of India) must approve the prospectus before issue.
ABC Enterprises Ltd. issues a prospectus offering 10 lakh shares at Rs. 50 each. It receives applications for 9.5 lakh shares, which is more than 90% — so minimum subscription is achieved, and the company can proceed to allotment.
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Stage 4: Commencement of Business
- A private company can commence business immediately after incorporation.
- A public company must file a declaration with the ROC (Form INC-20A) confirming receipt of minimum subscription and paid-up share capital.
- On acceptance, the company receives a Certificate of Commencement of Business and can legally start operations.
XYZ Ltd., a public company, receives minimum subscription, pays share capital into its bank account, and files Form INC-20A. After verification, the ROC allows it to start business operations.
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Key Documents
A student is asked which document defines the relationship between a company and the outside world. The answer is the MOA (Memorandum of Association) — it states objectives and scope; the AOA governs internal management; the Prospectus invites public investment; and the Certificates of Incorporation and Commencement are issued by the ROC.
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Key Concepts
- Separate Legal Entity: The company is distinct from its members; shareholders are not personally liable beyond their investment.
- Perpetual Succession: The company continues even if members change or die.
- Limited Liability: Shareholders risk only what they invested.
If "Bright Futures Ltd." has 500 shareholders and one dies, the company continues — this is perpetual succession.
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Common mistakes
- Confusing MOA with AOA — MOA is the constitution (external), AOA is internal rules.
- Thinking private companies need a Certificate of Commencement — they do not.
- Forgetting that minimum subscription is 90%, not 100%.
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Summary
Forming a company involves four sequential stages: Promotion, Incorporation, Capital Subscription, and Commencement. The MOA and AOA are the two critical documents. The Companies Act, 2013 governs all these steps, ensuring transparency and legal protection for investors and stakeholders.