Legal Requirements for Establishment

of a New Unit Notes of

Entrepreneurship
Establishing a new business unit is a complex and risky task. Entrepreneurs have to
fulfil various legal formalities for establishment of a new unit. Hence, the
entrepreneur needs to be aware of any regulation that may affect the establishment
of his new unit. Legal formations may be necessary at different stages of the start up.
These formalities differ in relation to the form of enterprise adopted by
the entrepreneur, such as sole proprietorship, partnership firm and company. The
legal requirements also differ in reference to the size of the business unit, such as
small scale, medium scale, or large scale enterprise. Moreover, consumer product
enterprise and industrial product enterprise may attract different legal
formalities. Following legal requirements are fulfilled for the establishment of a new
business unit :

(1) Incorporation and Registration : There found various forms of business

proprietorship in the private sector such as sole-trader, partnership, Joint
Hindu family and company etc. In case of sole-proprietorship, partnership and
Joint Hindu family, registration is not compulsory, while in case of
company, incorporation and registration is essential.

INCORPORATION OF A COMPANY

Company is established through legal procedure and have a separate legal entity
from its owners. Legal procedure of establishment a company is termed as
incorporation. For this purpose, registration of company has to be made with the
Registrar of companies. An entrepreneur is required to submit an application
for registration following documents :

(i) Application form duly filled in and signed by an authorised person.

(ii) Memorandum of Association : The Memorandum of Association, is the charter

of the company. This includes its objectives, its name, the address of its registered
office, the capital which the company is authorised to raise, the nature of liability of
members as well as the names, addresses and agreement of people who agree to
form a company.

(iii) Articles of Association : The other important document is the articles of

association which contains the rules and regulations relating to the internal
management of the company. However, it is not necessary for a public
company limited by shares to file the articles of association. If such public company
does not file Articles of Association, it is deemed to have adopted ‘Table A’ of
schedule I of the Act.

(iv) Written consent of the directors : Written consent of the directors who are
agreed to act in that capacity, duly signed by each director, along gith a written
undertaking by them to take the necessary qualification shares, if any, as provided in
the articles.

(v) A copy of agreement with any individual for appointment as a managing director,
or a whole-time director or manager.

(vi) A statutory declaration stating that all the legal requirements of the Act
precedent to incorporation have been complied.

(vii) A letter of intent under Industries (Development and Regulation) Act, 1951, if the
company s business comes with the purview of this Act.

(viii) Address of registered office of the company. However a company may file
registered address within 30 days of its registration.

(ix) At the time of registration, the prescribed registration fees and filing fee for each
document filed for registration are to be paid to the Registrar’s office. After receiving
these documents, Registrar scrutinise these documents and if he is satisfied that all
the documents are in order, he shall enter the name of the company in the register
of companies and issue a certificate of incorporation.

CAPITAL SUBSCRIPTION

Next step in the registration of a company is to raise capital for the proposed
company. Company obtain the necessary capital by selling shares to the public.
Following procedure is adopted for this purpose :

(i) Permission of public issue from ‘The Securities and Exchange Board of India.
(ii) Agreements with tho underwriters, brokers and share issue managers.

(iii) Filing a copy of prospectus with the Registrar.

(iv) Invite the public to purchase the shares of the company by putting the
prospectus in circulation.

(v) Receiving applications for shares through the company sbanker.

(vi) Formal resolution of allotment, if the subscribed capital is at least equal to

minimum subscription of 90% of capital issue.

(vii) In case, minimum subscription is not received, the entire amount with application
would have to be refunded at the end of 120 days from the circulation of
prospectus.

(viii )Issue of allotment letters and share certificates.

(ix) In case a company having a share capital, but not issuing a ‘prospectus’, filing a
‘Statement in lieu of Prospectus’ with the Registrar at least three days before the first
allotment resolution.

COMMENCEMENT OF BUSINESS

A public company cannot commence business immediately after incorporation

unless it has obtained a certificate of commencement of business from the Registrar.
Following documents have to be filed for this purpose :

(i) Shares payable in cash have been allotted to the extent of the minimum
subscription;
(ii) Every director has paid in cash the application and allotment money on the shares
taken by him;

(iii) No money is liable to be refundable to the applicants for failure to apply or

obtain permission for the shares or debentures to be dealt in on any recognised
stock exchange.

(iv) A statutory declaration duly verified by one of tho directors or the secretary in
the proscribed form that tho above conditions have been complied with has been
filed with the Registrar.

The Registrar will scrutinize those documents and if ho is satisfied, he shall issue a
“certificate of commencement of Business, This certificate is conclusive evidence that
the company can commence its business and use its borrowing powers

(2) Small Unit Registration Certificate : The entrepreneur of a small scale unit
should seek registration of his selected project unit with the Directorate of
industries. This will make the entrepreneur and his unit eligible for availing
Government assistance. A unit is normally registered provisionally first and accorded
permanent registration later.

(3) Registration under the Factories Act : An entrepreneur must registered his
enterprise under the ‘Factories Act, 1948’, before starting the manufacturing
unit. Factories Act contains provisions regarding licencing and registration of
factories, working hours, health, safety and welfare measures, employment of women
and young persons, annual leaves, dangerous operations etc. The Act fixes the
minimum age of persons who can enter a factory for work at 14 years. The Act, lays
down the provisions regarding cleanliness, ventilation, overcrowding, lichting,
explosive gases, dust, fume, fencing of machinery etc.

(4) Import License : If imported raw-material and other equipments are necessary
for the new business enterprise, then he should obtain the import licence from the
export-import controller.

(5) Permission of Finance Ministry : For the agreement Of foreign collaboration, an

entrepreneur must obtain the permission of finance ministry.

(6) No Objection Certificate (NOC) : The unit must obtained all necessary
clearances. For example, NOC from Pollution Control Board is obtained if required.
(7) Industries (Development and Regulation) Act, 1951 : The licencing policy for
industries is determined under this Act. The Act states that the Central Government
may specify the requirements which shall be complied by small scale
industrial undertakings to be regarded as a small scale or an ancillary industry. This
may be done by the Central Government with a view ascertaining which small scale
or ancillary industrial undertaking needs supportive measures, exemptions or
other favourable treatment under this Act to enable them to maintain their viability
and strength.

(8) Foreign Exchange Regulation Act : All foreign collaborations required the
approval of the government and are subject to the regulations under the Foreign
Exchange Regulation Act. All investment by foreign companies in India is permitted
only with the approval of the Reserve Bank of India. The Reserve Bank of India’s
approval is again based on the approval of the investment proposal by the
government.

(9) Registration of Trademark : According to Trade and Merchandise Marks Act,

1958 (India) the mark’ “includes a device, brand, heading, label ticket, name
signature, word, letter or numeral or any combination thereof.” The purpose of
registration of trademark is that the consumer may distinguish the product
of manufacturer/service provider from others and therefore ‘decepti.vely similar’
trademarks are not allowed to be used because they can cause confusion to users.
Once a trademark is registered as per provisions of Trade and Merchandise Marks
Act, 1958 and Trademarks Act, 1999 no one else can use similar trademark on any of
its packing. The trademarks are registered for unlimited period and helps in the
promotion of sales.

(10) Registration under the Sales-tax Authority : An entrepreneur should get

registered his enterprise in the sales-tax department of the state government and
obtain certificate for this purpose. Besides above mentioned legal formalities, an
entrepreneur have to fulfil some other formalities also depending on the nature
of product produced by the new business unit. For example he has to get registered
his unit under the Service Tax Act, Food and Drugs Control Act etc.