Incorporation of a Company: A Comprehensive guide for Entrepreneurs

By Adv Rishabh Kumar

Published on: October 26, 2023 at 16:50 IST

Incorporation grants limited liability to shareholders, protecting their personal assets from business debts and legal liabilities. It establishes the company as a separate legal entity, providing continuity and legal protection, even when there are changes in ownership. Moreover, it allows businesses to attract investments and raise capital more easily through the issuance of shares.

Incorporating a company is an extensive procedure, In this Article, we will be comprehensively discussing guide for entrepreneurs incorporating a company in India.

Who can incorporate a company?

Section 3(1) of the Companies Act, 2013, governs the incorporation of a company in India and outlines who can incorporate a company. According to this section, a company can be incorporated by the following entities or persons:

1. Formation of a Company by the Number of Individuals:
   • A company can be formed for any lawful purpose by a specific number of persons.
   • For a public company, a minimum of seven or more persons is required.
   • For a private company, two or more individuals can establish it.
   • An innovative concept, the One Person Company (OPC), allows a single individual to create a private company. In this case, the person subscribes to the memorandum and complies with the Act’s registration requirements.
2. One Person Company (OPC) Requirements:
   • In the case of an OPC, the memorandum must indicate the name of another person, with their prior written consent, who will become a member of the company in the event of the subscriber’s death or incapacity to contract.
   • The written consent of the nominated person should be filed with the Registrar at the time of incorporation, along with the memorandum and articles of the OPC.
   • The nominated person can withdraw their consent as prescribed by law.
   • The member of an OPC has the flexibility to change the name of the nominated person by providing notice in the prescribed manner.
3. Duty of OPC Members:
   • It is the duty of the OPC member to inform the company of any changes in the name of the nominated person. This must be indicated in the memorandum or by other means, as prescribed.
   • The company is obligated to inform the Registrar of any changes in the name of the nominated person within the stipulated timeframe and in the prescribed manner.
   • Notably, changing the name of the nominated person is not considered an alteration of the memorandum.
4. Types of Companies:
   • Companies formed under Section 3 can be categorized into three types:
     • Companies limited by shares
     • Companies limited by guarantee
     • Unlimited companies
5. Special Provisions for IFSC (International Financial Services Centre) Companies:
   • Companies formed in Specified IFSC areas follow specific guidelines.
   • Specified IFSC private companies can only be established as companies limited by shares.
   • Specified IFSC public companies must also be formed as companies limited by shares.

A guide for entrepreneurs in Starting a Successful Company

Starting a company is a multi-faceted endeavor that involves a blend of strategic planning, legal compliance, financial management, and a deep understanding of your market. It’s essential to be well-prepared and informed to increase your chances of success.

Here are key things to know and consider before embarking on the journey of starting a company:

• Choose the right legal structure for your startup: Choosing an appropriate legal structure is one of the most crucial decisions for any startup.
• Intellectual Property Protection: Developing and protecting intellectual property with proper registration can help startups gain competitive advantage.
• Founders Agreement: It is Most valuable tool to establish the relationship between the founders of a startup
• Employment Contract: Employment contracts are certainly valuable to the employees as it details terms regarding description of job profile, compensation and other associated benefits
• Third Party Agreement: Prior to entering into a third-party agreement and while negotiating the terms, it is advisable to execute a nondisclosure agreement. Clauses related to breach, termination and dispute resolution should be well negotiated and captured in all third-party agreements.
• Investment Structuring: One of the most challenging and time-consuming aspects of operating a startup is to raise capital for working capital requirement and growth
• Compliance Management: There are multiple laws applicable to specific entity structures. The consequences of noncompliance can be levy of punitive fines on the startup.
• Financial Management: Implement sound financial management practices, including accounting, bookkeeping, and cash flow management.
• Market Research: Conduct thorough market research to understand your industry, customer needs, and market trends. Identify your target audience and analyze your competition.
• Business Name: Choose a unique and memorable name for your company. Ensure it’s legally available and doesn’t infringe on trademarks or existing businesses.
• Registration and Permits: Determine the legal requirements for registering your business. This includes obtaining necessary licenses, permits, and complying with local, state, and federal regulations.
• Business Plan and Financial Projections: Create a comprehensive business plan that includes financial projections, startup costs, and funding sources. This is crucial for attracting investors or securing loans.
• Funding: Assess your funding needs and explore financing options. You can use personal savings, seek loans, or attract investors. Consider crowdfunding and grants as well.
• Location: Choose a physical location for your business, whether it’s a physical store, office, or an online presence. Location can impact costs and accessibility.
• Brand and Identity: Create a strong brand identity, including a logo and marketing materials. A compelling brand helps in marketing and building trust.
• Technology and Systems: Invest in the necessary technology and systems for your business, whether it’s for e-commerce, customer relationship management, or inventory management.
• Networking and Support: Build a network of mentors, advisors, and industry contacts. Seek support from local business organizations and chambers of commerce.
• Resilience and Adaptability: Be prepared for challenges and setbacks. Building a successful business often requires adaptability, resilience, and a willingness to learn from failures.

Prerequisites to incorporate a company

Incorporating a company involves several prerequisites and steps to ensure that the business entity is legally established. Here are the key prerequisites for incorporating a company:

1. Minimum Number of Subscribers: According to Section 4(2) of the Companies Act, 2013, a company can be incorporated with a minimum of one subscriber in the case of a One Person Company (OPC), and a minimum of two subscribers in the case of other types of companies like Private Limited or Public Limited. Subscribers are the individuals or entities who subscribe to the company’s Memorandum of Association (MOA) during the incorporation process.
2. Minimum Number of Directors: In accordance with Section 4(2), a company must have a minimum of two directors for a Private Limited or Public Limited company. In the case of an OPC, a single director is sufficient.
3. Unique Name Approval: Before incorporating a company, it’s essential to obtain approval for a unique name for the company. This is typically done through the process of name reservation with the Ministry of Corporate Affairs (MCA). The name should comply with the MCA’s naming guidelines.
4. Registered Office Address: A company must have a registered office address in India. This address is where all official communications and notices from government authorities will be sent. At the time of incorporation, you need to provide the details of the registered office, and it should be capable of receiving official correspondence.
5. Memorandum and Articles of Association (MOA and AOA): Draft the Memorandum of Association (MOA) and Articles of Association (AOA) for the company. These documents outline the company’s objectives, rules, and regulations. They should be prepared and submitted as part of the incorporation documents.
6. Digital Signature Certificate (DSC): At least one director must have a Digital Signature Certificate (DSC) for filing the incorporation documents electronically. This is essential for the digital submission of documents to the Registrar of Companies (RoC).
7. Director Identification Number (DIN): All directors of the company must obtain a Director Identification Number (DIN) by submitting an online application to the MCA. This number is a unique identifier for directors.
8. Filing of Incorporation Documents: Complete the necessary incorporation forms, including SPICe (Simplified Proforma for Incorporating Company Electronically) for private companies, and file these forms with the Registrar of Companies (RoC). The forms should be accompanied by the MOA, AOA, and other required documents.
9. Payment of Registration Fees: Pay the prescribed registration fees based on the authorized capital of the company. This fee can be paid online.
10. Compliance with Statutory Requirements: Ensure that you meet all statutory requirements, including statutory registrations like Goods and Services Tax (GST), Employee Provident Fund (EPF), and Employee State Insurance (ESI) if applicable. Ensure you adhere to various compliance requirements like annual filings, maintaining books of accounts, holding annual general meetings, etc. A corporate lawyer can help you with these ongoing legal requirements.

Document required for registering company with the Registrar of Companies (RoC)

Section 7(1) of the Companies Act, 2013, outlines the process of applying to the Registrar of Companies (RoC) for the registration of a company in India. Below are the steps involved in this process:

Digital Signature Certificate (DSC):

Before initiating the registration process, ensure that at least one director has obtained a Digital Signature Certificate (DSC). The DSC is required for electronically signing the incorporation documents.

Director Identification Number (DIN):

All proposed directors of the company must obtain a Director Identification Number (DIN) by submitting an online application to the Ministry of Corporate Affairs (MCA).

Name Approval:

Choose a unique name for your company and apply for its approval through the MCA’s Name Reservation portal. Ensure that the chosen name complies with the naming guidelines provided by the MCA.

Draft Memorandum and Articles of Association (MOA and AOA):

Prepare the Memorandum of Association (MOA) and Articles of Association (AOA) for your company. These documents outline the objectives, rules, and regulations of the company.

Form Filing – SPICe (Simplified Proforma for Incorporating Company Electronically):

File the SPICe form with the RoC. The SPICe form includes information about the company, its directors, subscribers, and registered office address. Ensure that the form is accurately filled out.

Declaration and Affidavit:

Directors and subscribers to the company should provide a declaration and affidavit confirming compliance with all legal requirements. These documents are typically included as part of the SPICe form.

Registered Office Address Proof:

Submit proof of the registered office address, such as a rental agreement, lease deed, or utility bill, along with the SPICe form.

A Step-By-Step Guide to Company Incorporation in India

Reservation of Company’s Name Under RUN or Spice

The initial step in the company registration process is securing a company name. There are two methods to do so: RUN and Spice. RUN, or Reserve Unique Name, is an online form provided by the Ministry of Corporate Affairs.

It allows applicants to verify the availability of their desired business name and apply for its reservation. When applying, it’s necessary to provide two name options in order of preference. Once the Ministry approves a name, it remains reserved for 20 days, during which the applicant must complete the remaining registration steps.

The Ministry evaluates company names based on three key criteria:

• Uniqueness
• Non-offensiveness
• Absence of any government affiliation

Procuring Digital Signature Certificate

Following the approval and reservation of the company name, the next crucial step is obtaining a Digital Signature Certificate (DSC). This certificate acts as a digital key, containing essential information about the registered signatory. It enables authorized personnel to prove their identity and electronically sign documents, making it mandatory for e-Filing.

To acquire a DSC, applicants need to engage with government-approved agencies, such as IDRBT Certifying Authority, E-mudra, Code Solutions, Safescrypt, Tata Consultancy Service, and National Informatics Center.

Applying for Director Identification Number (DIN)

The Director Identification Number (DIN) is a unique identifier for company directors. It is a prerequisite for filing corporate documents with Form No.-DIR-3. It’s important to note that the application for DIN can be initiated before the name approval process, and there is a fee of Rs 500 associated with it. DIN activation and approval typically take seven days.

Memorandum of Association (MoA)

The Memorandum of Association (MoA) serves as the foundational document of the company, outlining essential information such as the company’s objectives, liabilities, operating state, and more. It is formatted according to the prescribed forms available in Schedule-I, encompassing Tables A, B, C, D, and E, as defined in Section-4(6) of The Companies Act, 2013.

Articles of Association (AoA)

The Articles of Association (AoA) complements the MoA and focuses on the company’s operational aspects, including business procedures, director appointments, and other operational details.

Application for the Incorporation of Company

Once the above documents are prepared and finalized, the application for company registration can be submitted. This process is outlined under Section 7 of the Companies Act 2013.

The application is filed with the Registrar of Companies in the jurisdiction where the company’s address is situated. The application can be made through e-Form SPICe along with SPICe MOA and SPICe AoA.

Upon successful completion of the required procedures, the Registrar of Companies issues a Certificate of Incorporation, confirming the company’s legal existence. This certificate contains critical information, including the Company Identification Number, PAN, and Director Identification Number.

It’s essential to prepare all the necessary documentation, including an Aadhaar card, PAN card, address proof, and digital signature certificate duly attested by the applicants.

Advantages of Incorporation:

Limited Liability: Shareholders of a corporation typically have limited liability, which means their personal assets are protected from the company’s debts and liabilities. This is a significant advantage as it shields individual assets from business-related risks.

Separate Legal Entity: A corporation is a distinct legal entity separate from its shareholders. This legal separation offers greater protection to the business and its owners, ensuring that business debts do not impact personal assets.

Perpetual Existence: A corporation has perpetual existence, meaning it can continue to operate even if shareholders or key management change. This provides stability and continuity for the business.

Raising Capital: Corporations have easier access to external capital through the sale of shares or the issuance of bonds. This makes it more attractive to investors and facilitates expansion and growth.

Transfer of Ownership: Ownership in a corporation can be easily transferred through the sale of shares. This makes it simpler to bring in new investors or change ownership structure.

Tax Advantages: Corporations often enjoy certain tax advantages, such as the ability to deduct business expenses, potentially lower tax rates on corporate profits, and the possibility of tax-deferred benefits like pension plans.

Professional Image: Corporations often project a more professional and credible image, which can be beneficial when dealing with customers, suppliers, and partners.

Disadvantages of Incorporation:

Complexity and Compliance: Incorporating a business involves complex legal and regulatory requirements. It may require additional paperwork, record-keeping, and compliance obligations, which can be time-consuming and costly.

Costs: The process of incorporation can be expensive, including fees for registration, legal and accounting services, and ongoing compliance costs. These costs can be a burden, especially for small businesses.

Double Taxation: In some cases, corporations may be subject to double taxation. Corporate profits are taxed at the corporate level, and then shareholders are taxed on dividends or capital gains when they receive returns on their investments.

Governance and Reporting: Corporations are subject to more stringent governance and reporting requirements, including the need for regular board meetings, financial audits, and disclosure of financial information to the public.

Loss of Control: When a corporation issues shares to outside investors, there is a potential loss of control for the original founders or shareholders. New shareholders may have a say in company decisions.

Regulatory Scrutiny: Corporations are often subject to increased regulatory scrutiny and compliance requirements. This can be burdensome and may require additional legal and accounting resources.

Public Scrutiny: For publicly traded corporations, there is a high level of public scrutiny and reporting obligations, which can impact the company’s reputation and management’s time and resources.

Conclusion

In conclusion, the process of incorporating a company is a pivotal step for entrepreneurs and business owners seeking to establish a legal entity for their ventures. It offers a range of benefits and considerations that have been discussed in detail throughout this article.

To choose the right type of company, you should consider factors such as the scale of your business, the number of owners, your capital requirements, and your long-term goals. Your choice of entity will have implications for ownership, liability, regulatory compliance, and taxation.

Incorporation is a transformative step that can offer significant advantages and growth opportunities while requiring a commitment to compliance and the fulfillment of regulatory obligations. It is a decision that should be made with a clear understanding of the benefits and responsibilities it entails.

It’s advisable to consult with a corporate lawyer or a chartered accountant to help you determine the most appropriate type of company for your specific business needs. Incorporating a company in India can be a complex process, and it’s highly recommended to work with a corporate lawyer who is well-versed in Indian corporate law. They can provide guidance and ensure that you follow all the legal requirements and regulations for your specific business.