Overview of Law Relating to Promotion and Incorporation of Different Types of Companies
Introduction
A company is an association of persons formed and incorporated under the law to carry on business or achieve a lawful purpose. In India, companies are primarily governed by the Companies Act, 2013.
The process of forming a company broadly involves promotion, incorporation, and commencement of business. The law provides different types of companies so that entrepreneurs can select a suitable structure according to their business objectives, ownership, capital requirements, and liability.
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1. Meaning of Company
According to Section 2(20) of the Companies Act, 2013, a company means a company incorporated under the Companies Act, 2013 or under any previous company law.
A company is a separate legal entity from its members. It can own property, enter into contracts, incur debts, and sue or be sued in its own name.
Example
If A, B and C form ABC Private Limited, the company is legally separate from A, B and C. The company’s property belongs to the company and not personally to its shareholders.
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2. Promotion of a Company
Meaning of Promotion
Promotion is the process of discovering a business opportunity, determining its feasibility, organizing the necessary resources, and taking the preliminary steps required for incorporation of a company.
The person who undertakes these activities is generally known as a promoter.
Under Section 2(69) of the Companies Act, 2013, a promoter includes a person:
who has been named as such in a prospectus or identified by the company in the annual return;
who has control over the affairs of the company, directly or indirectly; or
in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act.
A person acting merely in a professional capacity is not treated as a promoter merely because of giving professional advice.
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3. Functions of a Promoter
A promoter generally performs the following functions:
1. Discovery of Business Opportunity
The promoter identifies a suitable business opportunity or project.
2. Feasibility Study
The promoter examines the:
technical feasibility,
financial feasibility,
commercial feasibility, and
legal requirements
of the proposed business.
3. Selection of Type of Company
The promoter decides whether the business should be formed as a:
private company,
public company,
One Person Company,
Section 8 company, etc.
4. Selection of Name
A suitable name is selected for the proposed company, subject to the applicable requirements of the Companies Act and rules.
5. Preparation of Documents
Important documents such as the Memorandum of Association (MOA) and Articles of Association (AOA) are prepared.
6. Appointment of Professionals
Professionals such as chartered accountants, company secretaries and lawyers may assist with incorporation and compliance.
7. Arrangement of Capital
The promoter arranges the required capital and other resources for starting the business.
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4. Incorporation of a Company
Meaning
Incorporation is the legal process through which a company is registered with the Registrar of Companies (ROC) and obtains a certificate of incorporation.
After incorporation, the company becomes a separate legal person.
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Main Steps in Incorporation
Step 1: Obtain Digital Signature
The proposed directors and subscribers who need to digitally sign incorporation documents obtain the required Digital Signature Certificates (DSCs).
Step 2: Obtain Director Identification Number
Persons proposed to become directors must have the required Director Identification Number (DIN). The incorporation system also provides mechanisms for applying for DIN in appropriate cases.
Step 3: Choose and Reserve the Name
The proposed company name is selected and reserved through the prescribed MCA process, subject to legal requirements.
Step 4: Prepare MOA and AOA
The Memorandum of Association defines the company’s fundamental constitution and scope, while the Articles of Association contain rules for the company’s internal management.
Step 5: Filing of Incorporation Documents
The prescribed incorporation forms and supporting documents are filed electronically with the Registrar of Companies.
Step 6: Certificate of Incorporation
If the Registrar is satisfied that the legal requirements have been complied with, the company is registered and a Certificate of Incorporation is issued.
The company then comes into legal existence as a separate entity.
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5. Different Types of Companies
The Companies Act, 2013 recognizes different forms of companies.
A. Private Company
A private company is generally suitable for businesses where ownership and management are kept relatively closely held.
Under Section 2(68), a private company is a company which, by its articles:
restricts the right to transfer its shares;
except in the case of a One Person Company, limits the number of its members to 200; and
prohibits any invitation to the public to subscribe for its securities.
Example
A family-owned manufacturing business may be incorporated as a private limited company.
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B. Public Company
Under Section 2(71), a public company is a company which is not a private company and has the prescribed minimum number of members.
A public company can, subject to applicable securities laws and other requirements, raise capital from the public.
Example
A large company intending to raise capital through a public issue may operate as a public company.
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C. One Person Company (OPC)
Under Section 2(62), a One Person Company means a company which has only one person as a member.
It provides an individual entrepreneur with a corporate structure while allowing a single member to own the company.
Example
An individual entrepreneur who wants to conduct business through a corporate entity may choose an OPC, subject to the applicable eligibility and regulatory requirements.
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D. Section 8 Company
A Section 8 company is formed for promoting charitable or other specified social objectives such as:
education,
social welfare,
science,
sports,
environmental protection,
religion or charity.
Its income and profits are applied towards its objectives rather than being distributed to members as dividends, subject to the Companies Act.
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E. Company Limited by Shares
In a company limited by shares, the liability of members is limited to the amount, if any, unpaid on the shares held by them.
Example:
If a shareholder holds shares of ₹1,00,000 and has already paid ₹80,000, the liability in respect of the unpaid share capital may generally be limited to ₹20,000.
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F. Company Limited by Guarantee
In a company limited by guarantee, members undertake to contribute a specified amount to the assets of the company in the event of its winding up, subject to the terms of the guarantee.
This structure is commonly associated with certain non-profit or membership-based organizations.
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G. Unlimited Company
An unlimited company is one in which the liability of its members is not limited by the company’s articles in the manner applicable to companies limited by shares or guarantee.
Such a structure is less commonly used than limited-liability forms.
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6. Comparison of Major Types of Companies
Type Main Feature Typical Use
Private Company Closely held ownership; restrictions on share transfer Start-ups, family businesses
Public Company Wider membership and ability to raise capital subject to law Large businesses
OPC One member Individual entrepreneurs
Section 8 Company Charitable/non-profit objectives Social and charitable activities
Company Limited by Shares Liability generally limited to unpaid share amount Commercial businesses
Company Limited by Guarantee Liability based on guaranteed contribution Membership/non-profit organizations
Unlimited Company Members’ liability is not limited Special business structures
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7. Importance of Incorporation
Incorporation provides several important legal advantages:
Separate Legal Entity
The company is legally distinct from its members.
Limited Liability
In companies limited by shares or guarantee, members generally enjoy limited liability according to the company’s structure.
Perpetual Succession
The company can continue despite changes in its members or directors.
Capacity to Own Property
A company can own property in its own name.
Capacity to Contract
It can enter into contracts independently of its members.
Legal Proceedings
A company can sue and be sued in its own name.
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Conclusion
The promotion and incorporation of a company are important stages in establishing a business under Indian company law. Promotion involves identifying a business opportunity, conducting feasibility studies, arranging resources and preparing for formation. Incorporation is the formal legal process through which the company is registered with the Registrar of Companies and becomes a separate legal entity.
The Companies Act, 2013 provides different forms of companies, including private companies, public companies, One Person Companies, Section 8 companies, companies limited by shares, companies limited by guarantee, and unlimited companies. The choice of structure depends upon factors such as ownership, liability, capital requirements, business objectives and the intended scale of operations.
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