Commencement of Business

Meaning. Commencement of Business is the final stage in the formation of a company — the point at which the company becomes legally entitled to actually begin its business activities and to exercise its power to borrow, as opposed to merely existing on the register of companies.

The Current Legal Position. Under Section 10A of the Companies Act, 2013 (introduced by a later amendment to close a gap that existed in the earlier law), every company having a share capital — private or public alike — must, before it commences any business or exercises any borrowing powers, satisfy two conditions:

1. a director of the company must file a declaration with the Registrar of Companies, stating that every subscriber to the Memorandum has actually paid, in full, the value of the shares he agreed to take; and
2. the company must have filed the required verification of its registered office, as called for under Section 12(2).

This declaration must ordinarily be filed within 180 days of the date of incorporation.

Why This Applies to Private Companies Too. Under the older company law, only a public company raising money from the public needed a formal certificate before it could commence business, while a private company was free to start operating the moment it was incorporated. The present law extends the same basic discipline to every company with a share capital, public or private, so that the subscription money genuinely committed by the company's own subscribers is verified to have actually been paid in, before the company starts trading or borrowing on the strength of it.

Consequence of Non-Compliance. If a company fails to file this declaration within the prescribed 180 days, both the company and every officer in default become liable to a penalty. Further, if the Registrar has reasonable cause to believe that the company is not carrying on any business or operations even after this stage, this is one of the grounds on which action can be initiated to remove the company's name from the register altogether.

Exemption. A company incorporated without a share capital is not subject to this requirement, since there is no subscription money from members that needs to be verified.

Incorporation vs Commencement of Business — the key distinction. These two milestones are often confused, but they answer two different questions entirely: