Formation of a Company

Forming a joint stock company is a longer and more formal process than starting a sole proprietorship or a partnership, because a company only comes into being through registration under the Companies Act, 2013. The process is traditionally studied in four stages.

Stage 1: Promotion. Promotion is the stage at which the idea for a new business is first conceived and developed into a concrete proposal. The persons who take this initiative are called promoters. A promoter's work typically includes identifying a promising business opportunity, carrying out a feasibility study to check whether the idea is technically possible and financially viable, arranging for the necessary finance, land, technical know-how and key managerial personnel, and getting the various documents ready that will be needed for incorporation.

Stage 2: Incorporation. Incorporation is the legal step that actually brings the company into existence as a separate legal person. The promoters file the required documents — chiefly the Memorandum of Association, the Articles of Association, a declaration of compliance, and details of the proposed directors — with the Registrar of Companies (ROC) of the State in which the registered office is to be situated. If the Registrar is satisfied that all the legal requirements have been met, the company is entered on the register and the Registrar issues a Certificate of Incorporation. This certificate is conclusive evidence that all the requirements of the Act relating to registration have been complied with, and it fixes the exact date on which the company's separate legal existence begins.

Stage 3: Capital Subscription. A private company can generally start operating soon after incorporation, since it raises its capital privately. A public company, however, usually still needs to raise capital from the investing public. To do this it issues a prospectus — an invitation to the public to subscribe for its shares or debentures — stating the objects of the company, the terms of the issue, the risk factors, and other information an investor needs to make an informed decision. Once the minimum subscription stated in the prospectus is received, the company allots shares to the applicants. …