You are running a successful startup or online business and an acquaintance walks up and asks you if your business is incorporated?You rattle on debating that incorporation of a company requires tons of paperwork and cash and that these outweigh the benefits of incorporation. That isn’t exactly true. This blog is not meant to advocate company incorporation but rather provides a roundup of the basic things every business owner should know if he is considering incorporationor is completely ignorant about it.
Company Incorporation – The Whats and the Whys
Why should I get my company incorporated? What kinds of incorporations exist in India? What are the different kinds of companies?…Wait! What you need to know first is what exactly is business incorporation?Incorporation of a companyis the process of creating a new structure for the business wherein it becomes a legal entity recognized by law. What this means is that it can be treated as a separate entity from the shareholders and founders, because of which the liability of its shareholders is reduced. Incorporation is beneficial for the long term growth and expansion for a business.Under section 12 of the Companies Act, 1956, in India, seven or more (or two or more depending on the type of company) individuals can come together to form an incorporated company for a legal purpose. The company could either be limited by shares, by guarantee or could be an unlimited company.
Benefiting from Incorporation
The incorporation of a company removes personal liabilities from the directors, founders and shareholders. Therefore, their personal assets are not at risk and only the company assets are used to clear debts at times of crises. Incorporated companies are taken more seriously by customers, suppliers and prospective workers. The ownership of the business becomes transferable and the tax liability is also reduced. The company will continue to remain even when the directors and members change. It is also advantageous for those seeking financial assistance from banks and other such financial institutions. While sole traders have to pay income tax, incorporated companies have to pay corporation tax and enjoy a range of tax deductible costs and allowances. As companies can make valid contracts with its directors and shareholders, an individual owning a company can also be an employee/director/shareholder/lessor/supplier/creditor at the same time!
The benefits of incorporation are different for private and public limited companies.Different company categories (public limited, private limited, part IX, section 25 company and producer company) have different procedures for incorporation.
Minimum Requirements for Incorporation
In the case of private limited company, there should be a minimum of two directors and a minimum paid up capital of Rs. 1 lakh. Private limited companies raise capital through private deposits and placement of shares.
For public limited companies, there should at least be seven subscribers, three directors and a minimum paid up capital of Rs. 5 lakhs. Public limited companies raise capital from the public through public deposits and issuing of shares.
Steps for Incorporating a Company
The guidelines of the Ministry of Corporate Affairs, Government of India, enlist the following steps forincorporation of a company:
- Before subscribing for incorporation, a minimum of one and a maximum of six names should be listed in order of preference for the company. The names should be indicative of the company’s objectives. The names should not resemble that of another registered company and should also not violate the provisions of names and emblems as described in the Prevention of Improper Use Act, 1950. The name availability can be checked on the portal at the link http://www.mca.gov.in/DCAPortalWeb/dca/MyMCALogin.do?method=setDefaultProperty&mode=16.
- To ascertain the name availability, applicants should apply to the concerned Registrar of Companies (RoC) by filling the electronic form eForm1. This is done by logging into the portal. A digital signature and fee of Rs. 500/- has to be paid along with the form. If a name is not approved, the applicant has to apply for another name using the same application.
- The applicant has to apply for the registration of the company after the name has been approved. This is to be done by filling forms ‘Declaration of compliance’ (Form-1), ‘Notice of situation of registered office of the company’ (Form-18) and ‘Particulars of the Director’s, Manager or Secretary’ (Form-32) within 60 days on the portal.Mandatory documents have to be uploaded along with these forms. Digital signature and registration fee is required to be paid along with the applications.
- After the forms have been submitted, the applicant has to arrange for drafting of articles of association by the solicitors and the memorandum, and get them vetted by the RoC. These have to be printed and stamped with appropriate stamp duty.
- At least two subscribers need to sign the memorandum and articles in their own hand, providing their fathers’ name, occupation, address and the number of shares subscribed for, and witnessed by at least one person. The memorandum and article should be dated after the stamping date.
- A hard copy of the memorandum and articles is to be sent to the RoC.
- After the application has been processed, applicants have to collect their Certificate of Incorporation from RoC and their Corporate Identity is generated.
Public limited companies have to follow additional steps. They need to obtain the Commencement of Business Certificate after incorporation of the company. For this, they have to file a declaration in eForm 20 with the statement in lieu of the prospectus(schedule III) or file a declaration in eForm 19 with the prospectus (schedule II).
Part IX companies need to fill eForm 1 and then eForm 18, eForm 32, eForm 37 and eForm 39separately or simultaneously.