Course Code: BSL201 Course Title: : LEGAL ASPECTS OF BUSINESS

Course Instructor: Dr. Abhishek Pandey

Academic Task No.: CA 2 Academic Task: Assignment

Date of Allotment: 31-03-20 Date of submission: 15-04-2020

Student’s Roll no: A16 Student’s Reg. no: 11703637
Evaluation Parameters: (Parameters on which student is to be evaluated- To be mentioned by students as
specified at the time of assigning the task by the instructor)

Learning Outcomes: (we get to know a lot about how a company is formulated as per Incorporation rules
mentioned in Companies act

Declaration:

I declare that this Assignment is my individual work. I have not copied it from any other student’s
work or from any other source except where due acknowledgement is made explicitly in the text, nor
has any part been written for me by any other person.

Evaluator’scomments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator’s Signature and Date:

Marks Obtained: Max. Marks: …………………………

Page | 1
 TABLE OF CONTENTS

S.no Contents Page

no.

1 Introduction 3

2 Steps Involved in The Incorporation of The Company Under 4-8

Companies Act,2013

3 Advantages of Incorporation of company 9

4 Disadvantage of Incorporation of company 10

5 Objectives of the Company 11

6 MoA of the Company 12-14

7 Division of the Capital of the Company 15-16

8 Types of Share of the Company 17

9 Conclusion 18

Page | 2
 INTRODUCTION
Business is extremely important to a country’s economy because businesses provide both goods and
services. Businesses do these things much more efficiently than individuals could on their own.
Businesses are the means by which we get most of the goods and services that we, as consumers, want
and need. Businesses are also the means by which many people get their jobs. Businesses create job
opportunities because they need people to produce and sell their goods and services to consumers.
As much as the Businesses are important to the world, in the same manner incorporation of Businesses
as per the rules of the country to which the Business belongs to is very important. A company comes
into existence is generally by a process referred to as incorporation. Once a company has been legally
incorporated, it becomes a distinct entity from those who invest their capital and labour to run the
company.
The most important reason to incorporate your business is to protect yourself from business liabilities.
If you are operating an unincorporated business, its creditors may be able to reach your personal assets.
Assets such as your personal residence and personal bank account can be used to pay business debts
or to satisfy a lawsuit against your business. If you incorporate, business creditors cannot reach your
personal assets, as an incorporated business and its owners are separate entities. Incorporating the
business also provides the business with tax advantage.
In this report, we are going to discuss about the Formulation of “PRASHANT PRIVATE LIMITED”
as per the incorporation rules mentioned in the Indian Companies Act,2013. We will also be discussing
about the objectives of the company, its division of capital and also about the types of share, the
company will be issuing.

Page | 3
 Steps Involved in The Incorporation of The Company Under Companies
Act,2013

➢ Select Name of Person:- Under Section-149(1) (a) of Companies Act, 2013. Select the name
of directors i.e. who will be directors (At least Three Name for Public Company and Two for
Private Company) [Rule-17] (The Companies (Incorporation) Rules, 2014.

For our company we gave two names as our company is a private company out of which we
get the company name as “Prashant Private Limited”.

➢ Apply for Director Identification Number (DIN):- It is a unique identification number

allotted to the existing director of the company or intending to be appointment as director of a
company according to Section-152(3), Section-153 & Section-154 of the Companies Act,
2013.

It is only after the DIN is approved; the incorporation documents can be filed with the Registrar
Form No.-DIR-3. However, the name approval can be obtained prior to approval of DIN. It
takes about 7 days for getting the DIN approved, provided all proper documents are furnished.
Fees to be paid for the allotment of DIN is Rs.500.

Documents to be furnished for getting DIN application are:

· Identity proof: Copy of PAN card is mandatory.
· Address proof: Copy of passport or Voter Id or Ration card or Electricity bill or any other
address proof.
· Passport size photograph (latest) in soft copy (.JPEG format).
· Current occupation.
· Email address of applicant.
· Education qualification and contact number of applicants.
· Verification to be signed by the applicant.

For the DIN number of our company we also submitted all these documents.

➢ Reservation of a company name:- First, the applicants are required to apply for a name in
Form No.INC-1. The fee for seeking a name approval is Rs.1000/- as prescribed and 60 days
are allowed for incorporating the company. The name should not be undesirable means it
should be identical, resembling, restricted or prohibited. A company is identified through the
name it registers. The name of the company is stated in the Memorandum of Association of the
company. The company’s name must end with “Limited” if it’s a ‘public company’ and
“Private Limited” if it’s a ‘private company’.
To check whether the chosen name is available for adoption, the promoters have to write an
application to the Registrar of Companies of the state. If the chosen name is available, then the
registrar allows the company to adopt the name given after completing all the legal formalities.

Page | 4
 Here for getting “Prashant Private Limited” registered we went through the same process and
get our desired company name registered.

➢ Preparation of Memorandum of Association and Articles of Association:- The

memorandum of association (MOA) should be crafted keeping in mind the provisions of
section 4 of The Companies Act, 2013 and objects should not be contrary to those as per Form
No. INC-1. The MoA of a company can be referred to as its constitution or rulebook. The
memorandum states the field in which the company will do business, objectives of the
company, as well as the type of business the company plans to undertake.

Drafting of Memorandum must be done in which:-

· Name of the Company lasts with word “Limited” in case of a public limited or the last words
“Private Limited” in case of a private limited company.
· State in which the registered office of the company is to be situated.
· Object of the company for which it is proposed.
· Liabilities of the members of the company Limited/Unlimited.
· Mention the amount of share capital in case of company having a share capital.
· In case of the One Person Company the name of the person who in the event of death of the
subscriber shall become the member of the company.

According to Section-4(6) of The Companies Act, 2013 MoA shall be in respective form as
prescribed in Table A, B, C, D and E of Schedule-I as may be applicable.

Memorandum of Association (MOA) filing fee (in case of company not having share
capital)
Number of members Fee applicable
Up to 20 members 2,000
More than 20 but up to 200 members 5,000
More than 200 members (If number 5,000 Rupees 10 for every
of members not stated as unlimited in member, after the first 200
AOA

Articles of Association is basically a document that states rules which the internal management
of the company will follow. The article creates a contract between the company and its
members. The article mentions the rights, duties, and liabilities of the members. It is equally
binding on all the members of the company.

In drafting of the AoA of company it shall contain:-

• Regulation for management of the Company.

• It shall also contain such, matter as may be prescribed.

Page | 5
 • May contain the provisions for entrenchment to the effect that specified provision of
the Article may be altered only if condition or procedures as that are more restrictive
than those applicable in the case of a special resolution are met or compiled with.

According to Section-5(6) of The Companies Act, 2013 the Article (AoA) shall be in respective
form provided in Table F, G, H, I and J of Schedule-I as may be applicable to such company.

Fee for filing Articles of association (in case of company having share capital)
Nominal Share Capital Fee
applicable
Less than 1,00,000 Rupees 200
1,00,000 to 4,99,999 Rupees 300
5,00,000 to 24,99,999 Rupees 400
25,00,000 to 99,99,999 Rupees 500
1,00,00,000 or more Rupees 600

For our Company we also have made the MOA and AoA which will be discussed in the latter
part of this report.

➢ Printing, Signing and Stamping, Vetting of Memorandum and Articles:- The Registrar of
Companies often helps promoters to draw up and draft the memorandum and articles of
association. Above all, with promoters who have no previous experience in drafting the
memorandum and articles. Once these have been vetted by the Registrar of Companies, then
the memorandum of association and articles of association can be printed. The memorandum
and articles are consequently divided into paragraphs and arranged chronologically. The
articles have to be individually signed by each subscriber or their representative in the presence
of a witness, otherwise, it will not be valid.

For our company we also went through the same process and get the articles signed by our
subscribers in front of the witnesses for making the articles valid.

➢ Power of Attorney:- To fulfil the legal and complex documentation formalities of

incorporation of a company, the promoter may then employ an attorney who will have the
authority to act on behalf of the company and its promoters. The attorney will have the authority
to make changes in the memorandum and articles and moreover, other documents that have
been filed with the registrar.

Here for our company we have given the power of attorney to the CEO of the company who
will be responsible for taking all the decisions of the company.

➢ Other Documents to be Filed with the Registrar of Companies:-

✓ The First e-Form No.32 – Consent of directors

✓ The Second e-Form No.18 – Notice of Registered Address

Page | 6
 ✓ The Third e-Form No.32. – Particulars of Directors

For our company, we also have to submit all these documents.

➢ Statutory Declaration in e-Form No.1:- This declaration, furthermore, states that ‘All the
requirements of the Companies Act and the rules thereunder have been compiled with respect
of and matters precedent and incidental thereto.’

For our company also we filled the Statutory Declaration to ensure that we have completed all
the requirements of the companies act,2013.

➢ Payment of Registration Fees:- A prescribed fee is to be paid to the Registrar of Companies

during the course of incorporation. It depends on the nominal capital of the companies which
also have share capital.

By a company having an authorized share capital of:-

Nominal Share
Other than OPCs and Small Companies Small Companies
capital
For every 10, For every 10,
Fixed 000 or part Fixed 000 or part
thereof thereof
Up to 1, 00, 000 NA 2,000 N/A
More than
1,00,000 up to 5,000 400 2,000 N/A
5,00,000
More than
5,00,000 up to 5,000 300 2,000 N/A
10,00,000
More than
10,00,000 up to 21,000 300 2,000 200
50,00,000
More than
36,000
50,00,000 up to 100 N/A N/A
1,56,000
1,00,00,000

Similarly, for our company also we paid the prescribed fee to the registrar of companies for
incorporation of our company.

➢ Certificate of Incorporation:- If the Registrar is completely satisfied that all requirements

have been fulfilled by the company that is being incorporated, then he will register the company

Page | 7
 and issue a certificate of incorporation. As a result, the incorporation certificate provided by
the Registrar is definite proof that all requirements of the Act have been met.

Finally, we also get the certificate of incorporation for our company which proves that we have
met all the requirements of the companies act,2013.

❖ A sample image of the “Certificate of incorporation of a company”.

Page | 8
 Advantages of Incorporation of the Company

➢ Corporate Personality:-

An incorporated company is a legally recognised entity that exists separately from its owners and
shareholders, which is different from partnership companies. Section 34(2) of the Companies Act,
1956 states that from the date of the incorporation of the company, the subscribers to the
memorandum and other members shall be a body corporate by the name contained in the
memorandum, capable of exercising all the functions of an incorporated company and having
perpetual succession and a common seat.

➢ Limited Liability:-

The Companies Act provides that in event of a company being shut down, the members of the
company are solely liable to contribute to the assets and liabilities of the company. It is in
accordance with the Companies Act – Section 34(2).

➢ Perpetual Succession:-

As provided by the Companies Act Section 34(2), an incorporated company has the characteristic
of perpetual succession .In spite of any changes in members of the company, the company will be
the same entity with the same privileges, immunities, estate, and possessions. The death or
insolvency of individual members does not affect the incorporated company in any way or form.
The company will continue to exist indefinitely till the company is shut down.

➢ Transferable Shares:-

Section 82 of the companies act states that ‘The shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the articles of the
company.’ This leads to the investment of funds in shares. It is done so that members can members
can encash shares at any given time upon their will.

➢ Flexibility and Autonomy:-

The company has an autonomy and independence to form its own policies and further, implement
them. However, they are subject to the general principles of law, equity and a good conscience.

➢ Capacity to Sue:-

As a separate legal entity, an incorporated company has the right to sue other people in addition
to companies. In turn, it can be sued by other companies and people. However, the managing
directors and other directors are not liable to be sued in the name of the company.

Page | 9
 Disadvantages of ncorporation of the company

➢ Formalities and Expenses:-

Incorporation of a company is a very complex legal process and It involves a considerable

amount of time and money. These elaborate procedures have been established so as to
discourage people from doing business who not serious and passionate about it. Even after the
incorporation of the company, it has to be run and managed very strictly. In accordance with
the legal provisions provided by the Companies Act. The returns and other documents have to
be registered at the Registrar of Companies.

➢ Corporate Disclosure:-

In spite of the extensive legal framework designed to ensure maximum transparency and
disclosure of corporate information, the employees and low-level members of the company
have restricted access to the company information and higher management.

➢ Separation of Control from Ownership:-

Members of small shareholders of a company do not have any effective form of control over
the functions and decisions of the company. This happens because the number of people in the
company is so large that an individual or even a small group of people cannot have a big effect
on the working of the organisation. Thus, the position termed as ‘ownership’ of the company
is just a term that has no real significance. They do not have any active or complete control
over the company’s workings.

➢ Greater Tax Burden in Certain Cases:-

As compared to other types of companies, incorporated companies have to pay a higher tax.
An incorporated company does not get any discounts and any minimum taxable limits. An
incorporated company also has to pay income tax on the whole of its income at a fixed rate
whereas other companies are charged at a gradual or slab rate.

➢ Detailed Winding Up Procedure:-

The Companies Act provides for a detailed and lengthy process to explain the winding up of a
company. This process is a lot more time consuming and expensive as compared to the same
process for other types of companies.

Page | 10
 Objectives of “Prashant Private Limited”

➢ Profitability:- This is one of the most important objectives of our business. We have setup
business to achieve profits for its owner or shareholders. But it does not mean that we should
earn profit in anyway either by hook or crook. We should earn profit by working under rules
and regulations or by following ethical practices only.

➢ Growth:- Another important objective of our business is to achieve growth. The growth
should be in terms of increase in profit, revenue, capacity, number of employees and employee
prosperity, etc.

➢ Stability:- Stability means continuity of business. Our business should achieve stability in
terms of customer satisfaction, creditworthiness, employee satisfaction etc. A stable
organization can easily handle changing dynamics of markets.

➢ Efficiency:- An efficient or aggressive working environment. Our business will always try to
achieve the best in its field. Efficiency is considered in terms of labour productivity, energy
consumption, quality control etc.

➢ Survival:- Our business will have the capability to survive markets jolts or shocks. Our
business will be there with a vision of long-term existence.

➢ Supply of Quality products at Fair Prices:- Our business will ensure that there is a regular
supply of useful products with fair quality and at reasonable prices. Supply of adulterated
goods, inferior quality goods, unusable or harmful products are detrimental to the survival of
business. It must be noted that customer is now more educated and quality conscious and
expects value for his money spent. So, for our company providing quality product will be at
priority.

➢ Avoidance of Unfair Trade Practices:- Business enterprise should not indulge in anti-social
and unfair trade practices like black marketing, hoarding, adulteration, etc. Such practices are
not only illegal but also hamper the image of business community. So, our business
organisation will aim to avoid such undesirable activities.

➢ Generation of Employment Opportunities:- Our business enterprise will create sufficient

employment opportunities without any discrimination as to caste, religion, sex, etc.

Page | 11
 Memorandum of Association

➢ Main document of the company

➢ It defines the objects of the company for which it is established.
➢ It lays down the conditions upon which alone the company allowed to be
formed.
➢ Charter of the constitution of the company
➢ It defines the scope of its activity and also states that anything beyond it is
unauthorised and illegal.
➢ The Memorandum of Association
✓ Must be printed
✓ Divided into paragraphs
✓ Signed by each subscriber
✓ Add his name, address and description
✓ Presence of at lease one witness who is to attest the signature.

➢ Contents of MoA:-
✓ Name of the company
✓ Registered office of the company
✓ Objects of the company
✓ Liability of the members
✓ Details of the capital of the company
✓ Subscription or Association clause

➢ Name Clause
✓ The company is a legal entity. Therefore, it must have its name to establish
its identify.
✓ The name of the company should not be similar, undesirable, or which will
mislead the public. E.g. Indian National flag, name or pictorial
representation of Mahatma Gandhi or Prime Minister of India, etc.
✓ Its use has been, therefore, prohibited by the Government under the
Emblems and Names(prevention of improper use)Act,1950.
✓ The company can change its name by passing a special resolution and
obtaining the approval of central government.

❖ We have registered our company name by abiding all the rules mentioned in the Name clause
of the Memorandum of association.

Page | 12
➢ Registered Office clause
✓ Every company must have a registered office from the day it starts its business or within
30 days of getting the Certificate of Incorporation, whichever is earlier.
✓ Memorandum of Association must state the name of the state in which the
registered office of the company is situated.
✓ This is clause is important as it mentions the residence for the purpose of
the communication with the company.
✓ It determines the jurisdiction of the company and also mentions the place
where all the records of company are maintained.
✓ Where the company wants to change its registered office from one state to
another then it can do so by passing a special resolution as well as by
confirmation of Company Law Board.

❖ The details about the address of company is mentioned in the MOA of company
as per the rules mentioned in the Registered office clause.

➢ Objective clause
✓ The objective clause is considered the most important in the MOA.
• It defines and limits the scope of the company's operations.
• It details the company's scope of activity for the members and explains how the members'
capital will be used.
• It protects shareholders’ funds and ensures the funds will be used for the specific business
purposes for which they were raised and that they won't be risked in other endeavours.

❖ We have mentioned all the objectives of our company that how the capital of the company is
divided and how the capital is going to be utilised for the growth of the company.

➢ Object clause
✓ The object clause explained why the company is establishing. Companies aren't legally
allowed to do any kind of business other than the kind of business that is specifically
stated in this clause. An object clause should contain:

• A list of the main objects the company will be pursuing after it's Incorporated
• Any other objects that aren't included in the main objects or incidental object
• Nothing illegal
• Nothing that's against the public interest

Page | 13
 • Nothing that's against the country's general rule of law

❖ We have mentioned all the objects for which the company is being established, keeping all the
things in mind which are mentioned in the Object clause.

➢ Liability clause
✓ This clause states that the liability of the members is limited to the extent of the shares
subscribed by the member or shareholders if the company is formed with share
capital.
✓ Amount of capital with which the company is to be registered and its division into
shares of a fixed amount must be stated in the MOA of a company.
✓ The capital with the company is registered is called “Authorised capital” or
“Registered capital”.

❖ We have given details about the liability of our company as per the Liability clause of the
Memorandum of association.

➢ Capital clause
✓ The capital clause lists information about the total capital held by the proposed
company. This amount is called the company's authorized capital. Companies aren't
permitted to collect more money than the amount listed under authorized capital. The
way the capital is divided into equity share capital and preference share capital also
needs to be listed in the capital clause. The number of shares the company puts in equity
share capital and preference share capital, alongside their value, needs to be included
in the MOA.

❖ We have given details of the company’s capital as per the Capital clause of the MOA.

➢ Association clause
✓ The association clause explains that any individual signing the bottom of the MOA
wants to be part of the association that's being formed by the memorandum. The MOA
has to be signed by at least seven people or more if it's a public company. It has to be
signed by at least two or more people if it's a private company. The signatures also have
to be affirmed by witnesses. There can be one witness for all of the signatures, but none
of the subscribers can witness the signatures of the others. All subscribers and witnesses
must provide their addresses and occupations in writing.

❖ The MoA was duly signed by the members as per the rules mentioned in the Association clause.

Page | 14
 Division of the share capital of the company

Share Capital means the amount invested by the owners of the company for running the business.
Shareholders are considered as the owners of the Company. As there are more than one shareholder /
owner in a company, the total capital of the company is divided in into small units called ‘Share’ for
ease of distribution and identification.
Different types of share capital of the company:-
➢ Authorised Share Capital
The Authorised Capital is the maximum amount a company can raise from its shareholders
as Share Capital. This amount is referred in Capital Clause of Memorandum of Association
(MOA) of the Company. In case the company is required to raise more capital, the company
can increase the authorised capital by altering its MOA with the approval of its members.
Authorised Capital can be classified into different classes of shares with face value not less
than ₹ 1.00.

➢ Issued Share Capital

Company can allocate a portion of its authorized capital from time to time to the investors and
shareholder and collect capital investment by way of issue of shares. It is not necessary to issue
full amount of authorized capital at a time. Issued Capital is the amount offered by the company
from time to time proposed investors.
Shares can be issued at face value (par value) or at a Premium. Also, the company has to issue
Share Certificates to the shareholders within 60 days of share issue.

➢ Subscribed Share Capital

The total amount of capital that the investors / shareholders are greed to pay is called as
subscribed capital of company. The subscribed capital shall be always equal or less than the
issued capital of the company.

➢ Called up Share Capital

Called-up capital refers to the particular amount of capital which has been called for payment.
The company issuing the shares may call-up the capital partly or fully. If the shares are partly
called, the remaining part is considered to be yet to be called and hence named as partly paid-
up share capital. Once the shareholder pays the remaining amount of share capital, it is
considered to be fully paid up.

➢ Paid up Share Capital

The paid-up capital refers to any amount of money which has been paid-up with respect to the
shares which are being called by the company. The shareholders receive Shares in the company
for the capital payments. Paid-up capital can never be more than the authorized capital of the
company.

Page | 15
 The capital distribution of “Prashant private limited”

Classification of Share Capital Amount-₹

Authorised Capital of Company 10,00,000.00

Issued Capital of Company 4,00,000.00

Subscribed Capital of Company 4,00,000.00

Called up Capital of Company 4,00,000.00

Paid-up Capital of Company 3,00,000.00

➢ Key points in this Table:

✓ Registered Capital is Rs.10 Lakhs
✓ Issued / Subscribed / Called up Capital is Rs.4 Lakhs
✓ Paid Up Capital is Rs.3 Lakhs Only. Company Can issue further shares up to Rs.6 Lakhs

Page | 16
 Shares to be issued by the company

A share is the interest of a shareholder in a definite portion of the capital. Section 2 (46) of the Act
defines a share as, “A share in the share capital of a company and includes stock, except where a
distinction between stock and shares is expressed or implied.

Kinds of shares:-
✓ Preference shares

Preference shares are those shares which enjoy preferential rights both with respect to
dividends and with respect to repayment of capital either during the lifetime or on winding up
of the company. They will have the first charge on the distributable amount of net profits. The
dividend on these shares are desirable in the Articles of the Company. ‘Preference Shares
Capital’ is the sum total of preference shares.

✓ Equity shares

Equity shares mean all shares which are not preference shares. After satisfying the rights of
preference shares, the equity shares shall be entitled to share in the residual amount of
distributable net profits of the company. ‘Equity Shares Capital’ is the sum total of equity
shares.

The dividend on equity shares is not fixed and it will be changing according to the magnitude
of available profit for distribution in the form of dividends. However, equity shareholders have
normal voting rights.

❖ Our company is having 10,00,000 Authorised capital which we have distributed as equity
shares of 7,00,000 and preference share of 3,00,000. The further distribution is in the below
table:-

Equity share 7,00,000 Preference share 3,00,000

Issued Equity share 4,00,000 Issued preference share 3,00,000

Subscribed Equity share 2,80,000 Subscribed preference share 2,50,000

Un-subscribed Equity 1,20,000 Un-subscribed preference share 50,000

share

Page | 17
 Conclusion

The incorporation of the business is the most important thing which is to be done by anyone
who is planning to start a company. Not only incorporation provides the protection for the
owners of the company, but it also provides a number of advantages to the company like
Corporate Personality, Have Easier Access to Capital, Gain Anonymity, Perpetual Existence,
Enhance Your Business’ Credibility etc.

By this report we came to learn a lot about the importance of incorporation for any organisation
either its private or public. We also learned the process for incorporating a company as per the
companies act,2013. For any company to get itself registered as a legal entity have to follow
all those steps mentioned in the procedure of company formation in India as per the company
act,2013.

Also, we get to learn about the basic objectives of a company for which a company is formed.
Basically, most of the companies are having objective of profitability and growth but they also
carry the social responsibilities which are to be performed by the corporates for the welfare of
the society such as generating good amount of employment opportunities so that much number
of people of the society can have job. The company’s social objectives also include providing
good quality products to the customers so that the health of the people could not get affected.

Apart from these we also learned about how the MoA of a company is formed as well as what
are the different clause mentioned in the MoA of a company. We got to know the details
mentioned in each clause of the MoA.

We also learned about the different types of capital available in a company. How the total
capital is divided into different kinds of capital. Not only this but we also learned the different
kinds of share that are issued by a company.

Overall this report provides a good learning experience for everyone and mostly to those who
are looking to start a company of their own. This report will guide them in the formation of
their business.

Page | 18