What is the Company?

 What is the Company?

A company is a legal entity established by a group of individuals to employ in and regulate a business firm. A company may be coordinated in different ways for financial liability and tax purposes, relying upon the corporate law of its administration. The line of a business concern in an enterprise is in, will normally ascertain which business substructure it picks, for instance, a partnership, a corporation or a proprietorship. In such a case, a company may be contemplated as a business kind.

Hence, companies can be classified either on the basis of liability of its core members or on the ground of the total number of members. On the basis of liability of its members, the companies can be categorised into 2 categories :

Companies Limited by Shares: In this scenario, the liability of its members is restricted to the level of the nominal value of shares occupied by them. If a shareholder has paid the complete amount of the shares, there is no liability on his side, whatever may be the debts of the enterprise. He need not pay a single rupee from his private property.

Unlimited Companies: When there is no constraint on the liability of its shareholders, such a company is known as an unlimited company. When the company’s property is insufficient to pay off its arrears (debts), the private property of its shareholders can be used. To put it in other words, the creditors can ask for their dues from its shareholders. Such enterprises are not to be found in India though approved by Section 2 (20) of the Companies Act.

On the basis of the number of shareholders, enterprises can be classified into 3 kinds of companies :

Public Company: A public company is an enterprise which :

Is not a private company

Is a company which is not an ancillary of any of the private company

Private Company: A private company is an enterprise, which by its articles :

Limits the authority to transfer its shares

It must have at least 2 people, apart from the case of one person company.

Restricts the number of its shareholders to 200 (excluding its employees)

One Person Company or OPC: According to Sec.2 (62) of the Companies Act, 2013, ‘company which has only 1 person as a shareholder’. Rule number 3 of the Companies (Incorporation) Rules, 2014 says that :

Only a natural person who is an Indian citizen and an Indian resident can form 1 person company.

It cannot execute non-banking financial investment pursuits.

It is paid-up share capital which is not more than ₹ 50 Lakhs.

Its aggregate annual turnover of 3 years does not cross ₹ 2 Crores.

The formation of a company goes through a number of steps, starting from idea generation to commencing of the business. This whole process can be broken down into 4 major phases or steps, which we will be discussing in the lines below.

The major steps in formation of a company are as follows:

Promotion stage

Registration stage

Incorporation stage

Commencement of Business stage

Let us discuss these steps in detail.

Promotion Stage: Promotion is the first step in the formation of a company. In this phase, the idea of starting a business is converted into reality with the help of promoters of the business idea.

In this stage the ideas are executed. The promotion stage consists of the following steps:

Identify the business opportunity and decide on the type of business that needs to be done.

Perform a feasibility study and determine the economic, technical and legal aspect of executing the business.

Interest shown by promoters towards the business idea and supply of capital and other necessary procedures to start the business.

Registration stage: Registration stage is the second part of the formation process. In this stage, the company gets registered, which brings the company into existence.

A company is said to be in existence, if it is registered as per the Companies Act, 2013. In order to get a company registered, some documents need to be provided to the Registrar of Companies.

There are several steps involved in the registration phase, and are as follows:

Memorandum of Association: A memorandum of association (MoA) must be signed by the founders of the company. A minimum of 7 members are required in case of a public company and 2 in case of a private company. The MoA must be properly registered and stamped.

Article of Association: Article of Association (AoA) is also required to be signed and submitted. All members who previously signed MoA, should also be signing the AoA.

The next step is preparing a list of directors which should be filed with the Registrar of Companies.

Directors of the company should provide a written consent agreeing to be directors, should be filed with the Registrar of Companies (RoC).

The notice of address of the office needs to be filed.

A statutory declaration should be made by any advocate of either the High Court or Supreme Court, or a person of the capacity of Director, Secretary or Managing Director. This declaration shall be filed with the RoC.

Certificate of Incorporation: Certificate of incorporation is issued when the registrar is satisfied with the documents provided. This certificate validates the establishment of the company in the records.

Certificate of commencement of business: Certificate of commencement of business is required for a public company to start doing business, while a private company can start business once it has received the certificate of incorporation.

Public companies receiving the certificate of incorporation can issue prospectus in order to make the public subscribe to the share for raising capital. Once all the minimum number of required shares have been subscribed, a letter should be sent to the registrar along with a bank document stating the receiving of the money.

The registrar will issue a certificate upon finding the provided documents satisfactory. This certificate is known as certificate of commencement of business. The company can start business activities from the date of issue of the certificate and the business shall be done as per rules laid down in the MoA (Memorandum of Association).

This concludes the topic of Steps in Formation of a Company, which is an important concept for the students of Commerce. For more information, stay tuned to BYJU’S.

Other Important Topics in Business Studies

Sole Proprietorship

Characteristics of Cooperative Society

Types of Social Responsibilities