India saw a surge in the number of new companies being registered. There were around 16000 new companies that got them registered in this lockdown period. But a question that all young entrepreneurs encounter is “Why it is so important to register a company and what all goes into getting a company registered?” and before this, a lot of people are not even aware of what company incorporation is.
So in the next 5-minute read, all your questions revolving around company incorporation will be answered. To begin with what is Company incorporation?
Company incorporation is a set of legal formulation and documentation that makes it legal for a company to operate in a country, abiding the rules and regulations. It is a process of registering a company, after completing a set of formalities and documentation.
Before a company can finally be registered and can start working, there is a bunch of legal regulations and steps it has to follow.
Promotion of a company
This is the first stage of company formation. It requires assessing the right opportunity and environment to form a company. A promoter, by definition, is someone who takes the initiative to form a company.
The decision to form a company is constructed around parameters like
- • Identifying a business opportunity. The opportunity may be with respect to a Product that you might want to offer or there is a demand for it in society.
- • Feasibility study. This incorporates the detailed study of technical, financial, and economical feasibility.
- • Find a suitable CA: It’s important to find the Right CA in the initial stage of business formation. CA will help you guide through the financial steps and documentation required to form a company.
Type of Business structure
Business structures vary from a single person organization to a partnership form of enterprise. The structure may differ in the amount of liability the partners are willing to share and also the amount of investment funding the company receives.
So let’s look closer to the different types of company structures available in India.
• One person company (OPC)
It is quite similar to the sole proprietorship form of business but differs in the sense that a company is a sole different identity from its promoters. So the liability and assets of the company are different from that of its promoter. In this case, a promoter is a single person like in the case of a sole proprietorship.OPC has only one member or stakeholder. Also, there is no perpetual succession as in the case of private/public companies. Formation of an OPC has been detailed out in the companies Act 2013.
• Limited liability partnership (LLP)
The liabilities of the partners are limited to contributions agreed upon. There is perpetual succession, unlike general partnership.
• Private limited company (PLC)
It is a business entity that has private ownership. In the eyes of law, a company is a separate entity from its promoters. A private limited company has a minimum number of employees with a caped number of maximum employees.
• Public Limited Company
A form of an organization that is governed by the government, under the companies’ act of 2013
Things to consider before selecting a particular business structure.
• Number of owners/partners/promoters of the company
If a single person owns all the investment the OPC is the right option. If two or more partners are involved then the choice may be between LLP and PLC
• Initial investment
If the initial investment is low the wise choice is a sole proprietorship. Though the risks are high the return is also the same. If the partners are not in favor of unlimited liability and want to take risks equal to the amount of money invested then one should go for LLP.
• Income tax rate or slabs.
PLC or LLP are entitled to the 30% slab of income tax whereas the tax limit for Sole proprietor is a normal slab rate.
After deciding the domain to launch a company, the promoters should decide for a name. A name must be at least 6 characters with Pvt. In the end, if a private limited company. The name of the company should be in line with the guidelines in ‘The Emblem and Names (Prevention of Improper Use) Act 1950’
It is essential to get these documents in place before legally registering a company.
A. Memorandum of association
It is the most important document in the formation procedure of a company. It defines the objectives of a company. No company can legally undertake activities that are not contained in its Memorandum of Association. MOA should specify all the following Claus:-
• The name clause
It is a document stating the name of the company, duly signed by the registrar.
• Registered office clause
This specifies the state in which the office shall operate.
• Objective clause, capital clause and association clause: These documents specify the objective of the company operations, the initial capital investments, and intention to be associated with the company and also give their consent to purchase qualification shares respectively.
B. Article of association
Articles of Association are the rules regarding the internal management of a company. These rules are subsidiary to the Memorandum of Association and hence, should not contradict or exceed anything stated in the Memorandum of Association.
C. Consent of proposed directors
It is a written consent of each person named as a director is required confirming that they agree to act in that capacity and undertake to buy and pay for qualification shares, as mentioned in the Articles of Association
D. Statutory Declaration
A declaration stating that all the legal requirements about registration have been complied with is to be submitted to the Registrar with the above-mentioned documents for getting the company registered under the law.
E. Payment of fee
Along with the above-mentioned documents, a necessary fee has to be paid for the registration of the company.
Assigning the signatory authority for MOA
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Usually, the people signing memorandum are also the first Directors of the Company
Incorporation is the final stage of company formation. After the creation of the above-stated documents, the promoters are required to make an application to the Registrar of Companies of the state within which they plan to establish the registered office of the company. The application should be assisted with the stated documents.
Getting a company incorporated may seem a tedious job, but if you follow the step by step procedure and keep the documentation up-to-date then this won’t take much of your time. One should never skip this as incorporating a company provides the enterprise with a legal entity. It also assists you with the provision of perpetual existence, keeping the company and promoters as two separate entities. Registering a company will also open doors for fruitful investment opportunities along with enhancing the credibility of the business. Incorporation will also protect your assets, providing you with the benefit of anonymity. So don’t wait and look for exits to skip this process of registering your company. Follow the above-stated step by step guide for effortless incorporation of your company.
Here are some bonus tips and things that a person thinking to start a business for the first time should keep in mind:-
• Be mindful of the kind of business you are entering- product type or service type
• Define your target audience. It’s important to focus on one area rather than getting distracted by the idea of serving to all.
• Location is quintessential. Thoughtfully locate your business in an area that’s easily accessible, near the target group and have a future potential.
• Do a deep study on the type of business to enter- Sole proprietor, LLP , Private limited or public limited. This would define the risk, investment and other share of your responsibility.
• Money is important but not enough for a business to start. Along with an investment study, also do some homework on capital, distribution plan, promotions etc.
• Always list down your operating expenses. This will help you keep a track on day to day business expenditure and future capital requirements.
• Governments’ requirements and schemes. Do a detailed study on the company law, legal formalities, if necessary appoint a corporate lawyer and also review the schemes and benefits provided by the government for initial small businesses.