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Niharika Raghuwanshi : Incorporation of Company

Definition of Company

The company can be said to be a group of persons or an association of persons who agreed to enter into a predetermined risk. It is defined under section2 (20) of companies act 2013 where “company means association incorporated under this act or any other previous company law”.

A company is an association of members who contribute to the joint-stock/Common stock for a common purpose; this stock is denoted as a Capital and the people contributing as the members of the company. it is treated as an independent person, a separate legal entity who can either sue or can be sued in its name as it is treated separately from that of the people working under it, Company is an artificial person as it cannot die, it can enter into a contract or into an agreement through a natural person (through its directors, members, etc.)

Company is classified into two types:-

Public Company– where the minimum number of members can be seven and there is no limit given or decided for the maximum number of people.

Private Company– Where the minimum number of members can be two and maximum capacity can be fifty.

Characteristics of a company

  • A company is an artificial person
  • It is created by law as well as dissolved with the help of the legal provisions
  • It is a separate legal entity
  • The company goes on forever; its life is nowhere related to the owner who formed it or the members working in it.
  • In a public company, there are some restrictions imposed on the transferability of share but in public companies, there are no such restrictions found.
  • Every shareholder is liable to pay company debt to the extent of the amount paid by him in the shares, it is considered as a limited liability which is the responsibility of every shareholder towards the company.

Concept of Lifting the corporate veil

As stated company has its own identity, it has a different personality than its shareholders or anyone associated, But when this corporate personality of a company is used by its members negatively, fraudulently, or illegally for their personal benefit or for any such illegal misconduct.

Then lifting of corporate veil is used by the court or the government for finding the actual guilty of the conduct then they directly attack the shareholders or the directors of the company, with the clarity that they are the one holding the company and they have the knowledge of everything related to it. The concept of a separate legal entity is totally ignored in such cases.

There is a very famous and a landmark case of Daimler Company Ltd. vs. Continental tyre & Rubber co. ltd. where the facts include German citizens who had a German company called as the Daimler company, the main business was of tyres and rubbers, after some time these German citizens incorporate a company in England know as the Continental tyre and rubber company where all the shares of this company were with the German people as they started it and also all the raw material supplied to the company in England used to come from Germany itself.

Case of trade debt was filed for the material provided to them by the Germany based company on the England based company where continental tyres refuse to pay the amount of the debt by saying that it was the situation of world war one and Germany became an alien enemy country for us and on the other hand, Daimler company gave the argument on the basis of the separate legal entity one possesses.

Finally, the court held that the control of the company was in the hands of Germany and hence there was the war going on so it cannot be treated as a separate legal entity, the court used the principle of the lifting of corporate veil in this case.

Steps Involved in the formation of the company: INCORPORATION OF A COMPANY

  1. Promotion (idea to start the business) – it is the very first stage in the formation of the company were thinking of future business opportunities, analyzing them, and taking an initiative to form a company. A person or group of persons who form it are known as Promoters and their work is to bring finance,, man, material to the company.

Functions of promoters:-

  • Identification of business opportunities.
  • Feasibility studies –it is a must as all the planning cannot be converted into the company it is only decided after analysis of all the opportunities whether the ideas came are fit for starting the business or not.
  • Name approval
  • Fixing of signatories to the Memorandum of Association.
  • Appointment of professionals.
  • Preparation of necessary documents.
  1. Incorporation of Company: Incorporation means legal Registration which gives a company its birth or its real existence.

Procedure to be followed for such incorporation is:-

  • Memorandum of Association – signed by the public companies (7 members required), Private companies(2 people required, duly stamped)
  • Article of Association who have signed The Memorandum of Association has to sign the Article of Association also.
  •  A list of All the members with their names, addresses should be prepared and filed with the registrar.
  • The written consent of all the directors is a must.
  • Notice of addresses of the registered office is provided after thirty days of the incorporation of the company.
  • Lastly, a statutory declaration is needed which should be signed by an advocate or Supreme Court or a High Court.
  1. Certificate of Incorporation– After receiving all the documents necessary (MOA, AOA, and all the things) after getting satisfied registrar issues the certificate of incorporation.
  2. Commencement of Business– This is the further step only to be followed in the case of public ltd companies, the private limited companies can start their business after getting the certificate of incorporation.

For the public company it is mandatory:

  • Prospectus for inviting to subscribe the share capital.
  • A minimum number of shares in the prospectus sold.
  • Sale of the required number of shares, certificates sent to the registrar with the letter of the bank. Then finally registrar issues the certificate of commencement of business to the public company.
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