FORMATION OF

A COMPANY

COMPANY: Is an Artificial Person created by Law.

Company means an assocoation of many persons
who contribute money or money`s worth to a
common stock and employed for a common
purpose.The common stock so contributed is
denoted in money and is capital of a company.
The person who contribute it or to whom it belongs
are members.
The proportion of capital to which each member is
entitled is his share. Share are always transferable
although the right to transfer is often more or less
restricted.

FORMATION OF
COMPANY

STEPS INVOVED:

Promotion
Incorporation
Raising of Capital
In case of PUBLIC LIMITED COMPANY,
securing a certificate for
commencement of business.

.
1 TIO
O
M
O
R
P
N

INTRODUCTION..
It may be noted that before a company is actually
formed, certain persons, who wish to form a company,
come together with a view to carry on some business.

Such persons have to decide various questions

a)which business they should start
b)They should form a company
c)Which type of company they required
d) What should be the capital of company.

There are various stages in formation of company.

Stages in formation of a company

Promotion of a Company : The promotion of a
company refers to all those steps which are taken
from the time of having an idea of starting a company
to the time of actual starting of the company
business.
Who is a promoter?
1.

People who think of forming a company and take necessary

steps in its formation are known as Promoters or Company
Promoters.

2.

The person who conceives such an idea is called Company

Promoter.

Functions of promoters:
To discover an idea for establishing a company.
To make detailed investigations about the demand for the
product, availability of power, labour, raw material.
To investigate the idea and know whether the formation
of the company is possible and profitable.
To find out suitable persons who are willing to act as first
directors of the company.
To settle the name of company.

 To select bank, legal advisor, auditor, underwriter

for the company.
To submit all the documents
incorporation with the registrar.

required

for

To meet all the preliminary expenses for floating of

a company.
To make contracts with vendors, underwriters, and
managing directors of the company.
To arrange for the loan etc. from various financial
resources.

To make proper arrangement for the office of the

Duties and Obligation of Promoters

The promoters must disclose fully all the material facts regarding
the formation of a company.
The promoters must faithfully disclose all the facts relating to the
property which they want to sell to the company.
The promoters must not make an unfair use their position.
To disclose the liability and pay the secret profits if promoters have
earned.
The prospectus of the company should contain the true statements.

Liability on statutory mistakes or frauds in the property.

Remuneration of Promoters:
He may be paid a certain lump sum.
He may be given shares of the company.
He may be given commission of the shares sold by
the company.
He may be given an option to buy the shares of the
company at par when their market price is higher.
He may sell his own property to the company at
higher price and earn profit.

C
IN

N
2.
O
I
T
A
R
O
P
R
O

IMPORTANT DOCUMENTS BEFORE

APPROACHING THE REGISTRAR : AN INDUSTRIALIST LICENCE IF THE PROPOSED
BUSINESS IS COVERED BY INDUSTRIES ACT 1951.
AN IMPORTANT LICENCE IS REQUIRED IF MACHINERY IS
IMPORTED.
APPROVAL OF
COLLABRATION.

GOVT.

IN

CASE

OF

FOREIGN

APPROVAL OF GOVT. UNDER MONOPOLIES AND

RESTRICTIVE TRADE PRACTICE ACT 1961, IF
NECESSARY

DOCUMENTS NEEDED :

MEMORANDUM OF ASSOCIATION
ARTICLES OF ASSOCIATION
LIST OF THE DIRECTORS
CONSENT LETTER FROM DIRECTORS
STATEMENT OF CAPITAL
STATUTORY DECLARATION

Registration and Incorporation of a

Company:
The second stage for establishment of a
company is to get the company
incorporated or registered.
The promoters have to prepare and file a
number of documents with the registrar.
1-The memorandum of association signed by at least
seven persons
2-The articles of association signed by at least seven
persons.
3-Promoters have to file a prospectus or statement in
lieu of prospectus with the registrar.
4-A list of directors and their willingness to act, duly
signed by each of them.
5-Notice of address at which the registered office of
the company will be situated.

Memorandum of Association
Memorandum of association is the basic
document of a joint stock company.
It is known as the charter of the company.
It sets out limits outside which the company
cannot go.
To enable the shareholders, creditors and all
those who deal with the company.

CLAUSES (CONTENTS) OF
MEMORANDUM OF ASSOCIATION
1.
2.
3.
4.
5.
6.

Name Clause.
Registered Office clause.
Objective Clause.
Liability Clause.
Capital Clause.
Association Clause.

NAME CLAUSE: A company adopts any name but it should not be

identical to the name of the existing company.
The name should not be prohibited one.
The name of the company must end with the word
limited so all the persons dealing with the company
must know that their liability is limited up to the extent
of their of shares.
In the case of private limited company the word private
limited to be used as the last word of the name.

SITUATION CLAUSE : The company is required to state the name of the province in which the
office is situated.
To give the exact address and name of the company where the
company is located.
A person can know through this the jurisdiction of the court under which
the company operates.
It also indicates the place for holding annual meeting of the company.
The creditors, customers, government, know the whereabouts of the
company.
All correspondence is done at the office of the company.

OBJECTIVE CLAUSE : It is the essence of memorandum. it clearly

defines the sphere of the company activities.
It indicates a series of objects for which the
company is established.
HERE THE COMPANY SHOULD MENTION ITS
MAIN OBJECTIVES
SUBSIDARY OBJECTIVES
OTHER OBJECTIVES

LIABILITY CLAUSE : THE EXTENT AND NATURE OF THE LIABILITY

SHARESHOLDERS SHOULD BE STATED LIKE

OF

LIMITED LIABILITY
LIMITED BY GAURANTEE
UNLIMITED

The liability of the members is limited to the extent of the

value of shares purchased by them.
In a case if a shareholder has to pay the unpaid amount
on the share investment, he can be compelled to pay to
the extent of unpaid amount on the shares, nothing
more.

CAPITAL CLAUSE : DIVISION OF CAPITAL INTO

DIFFERENT DOMINATIONS

SHARES

OF

THE EXTENT OF EACH CAPITAL SHOULD BE

SPECIFIED
THE AUTHORISED
MENTIONED

CAPITAL

SHOULD

BE

A COMPANY IS NOT AUTHORISED TO ISSUE

ABOVE AUTHORISED CAPITAL

ASSOCIATION CLAUSE: THIS

CLAUSE
CONTAINS
DELCARATION OF MEMBERS
THE NAMES, ADDRESSESS AND
OCCUPATIONS OF THE SUBSCRIBERS
SHOULD BE MENTIONED
THE SIGNATURES ARE TO
ATTESTED BY PROPER WITNESS

BE

Requirement as to memorandum:

The memorandum of every

company must be:
Printed
Divided into paragraphs numbered
consecutively
Signed by subscribers and witnessed
Dated

Signing of Memorandum:
The memorandum must be:
Be signed by each member
Who shall add his name and surname in full, any former name or
surname in full
His occupation; and
Fathers name; or
In the case of a married woman or widow, her husbands name, in
full
His nationality of origin; and
His usual residential address in full

ARTICLES OF ASSOCIATION
After memorandum of association, Articles
of Association is the most important
document to prepare and present to
registrar for incorporation or registration.
Article of Association explains about the
rules and regulation of a company, it
discusses the internal points and boundaries
that the company cant go beyond that.

Articles of association is a legal document second in

importance to memorandum.

The articles of association are regulations which

governs the internal organization and conduct of the
company.

The articles of association describe powers of the

directors, other officers and shareholders as to voting
etc.

It also describes the mode and form in which changes

in the internal regulations of the company may from
time to time be made.

The articles are subordinate to the memorandum and

they cannot go beyond the scope of the companies
act and memorandum of association.

CONTENTS OF ARTICLES OF
ASSOCIATION
1. Amount of share capital: company calculates
the face value of shares and mentions in the
Article of Association. For example: value of shares
(face value) in a company is $10, if company sells
share for $25, 10 is the face value and 15 is
earning, its also called premium. But if you sell
below face value of $10, its called discount.
2. Transmission: it means transfer according to law,
example: shareholder mentions in Article of
Association that if he/she dies, his shares should be
transferred to son/daughter etc. OR: in case of
bankruptcy, if shareholder loses everything, the
court will decide to sell his/her shares pay creditors.

3-Rights of share holders regarding vote, dividend,

return of capital.
4-Rules regarding the issue of shares and debentures.
(Debenture is a certificate that is issued by a
company when it is in need of money, so investors
buy it for a specific period of time and get interest
after maturity date).
5-Procedure as well as regulations in respect of making
calls on shares. (Making calls: A company issues 1000
shares for $10per share, so people write applications
in order to buy some share & pay an amount of $2 for
application, then company call on those people who
applied to buy shares and ask them to come and pay
& get the shares, that is called Making Calls.
Sometimes companies receive more application
comparing to the number shares issued for market,
company selects that number of applications to sell
the specific number of shares issued for sell, and
rejects the rest, rejected applicants will get their $2
application fee back).

6-Manner of transfer of shares. (means different

method/ways to issue different shares)
7-Rules regarding appointment of directors, managing
directors, agents, secretaries.
8-Number, qualification, remuneration, powers and
liabilities of directors. (Number of directors differs in
public
and
private
companies.
Qualification:
Eligibility of person like age, capability to work,
experience, education, should be free of criminal
charges etc. Remuneration: it is the amount of
money paid to directors since directors are not
employees of company so that is why dont receive
salaries but instead receive a specific percentage
amount from the income of a company, for example
5% of income)
9-Declaration of dividends. (It should be clearly defined
in Article of Association that how dividends should be
distributed among share holders.)

 10-Convening and conduct of meetings with

reference to notice, quorum, poll, proxy,
resolutions. (CONVENING: it clarifies how
participants should be informed for meetings etc.
it is reference to notice for meeting. QUORUM: it
mentions the minimum number of participants in
meetings as some important decisions taken
during meetings so most of members of a
company should be present in a meeting. POLL:
Rules and regulation of voting, vote casting,
polling station etc. PROXY: If a participant cant
attend a meeting, he/she writes a formal letter
introducing someone else to attend meeting on
his/her behave, its called proxy. RESOLUTION:
Any decision which is taken in a meeting.)

11-Forfeiture of shares.
12-Matters relating to account and
audit, (Clarifies how audit should
take place or control accounts)
13-Rules for winding up of the
company.

Comparison between Memorandum

and Articles of Association
Memorandum of Association
It contains conditions upon
which the company is
granted registration.
It contains objects and
powers of the company
It can not be easily altered.
The company has to follow
strict procedure for the
alteration.
It regulates the relationship
of the company with the
outsiders, as the objects and
powers of the company are
made known to the outsiders

Article of Association
These are internal regulations
of the company
It provides the regulation by
which those objects and
powers are to be carried into
effect.
It can be easily altered as
compared to memorandum of
association.
It regulates the internal
management of the
company, as the rules and
regulations contained in it
describe the internal
procedure to be followed by
the company

Prospectus
Definition: A prospectus means any
document
described
or
issued
as
prospectus and includes any notice or
circular, advertisement or other document
inviting deposits from the public or inviting
offers from the public for the subscription
or purchase of any shares in, or
debentures of a body corporate.

Contents of Prospectus
1. Name and registered address of the company.
2. The main objects of the company.
3. Information regarding listing of shares on a recognized stock
exchange.
4. Particulars pertaining to different classes of shares and extent
of interest of holders.
5. The number of shares (if any) fixed by the articles as the
qualification of a director and the remuneration of directors.
6. The date of opening and closing of the issue.
7. The names and addresses of auditors and lead managers.

8. Amount payable on application and allotment of shares.

10.Details regarding debenture.
11.Amount of premium or discounts on shares.
12.Details regarding property purchased or acquired against
issue of shares.
13.Preliminary expenses.
14.The promoters and their background.
15.Benefit paid to any promoters or officer and consideration
thereof.
16. Details regarding contract or appointment of Chief
Executive, Managing Agent, Secretary and every other
material contract.

17. Name and address of legal advisors.

18. Full particulars of nature and extent of the
interest of every director or promoter.
19. Voting rights and rights in respect of
capital and dividend.
20. The authorized, issued, subscribed and
paid up capital of the company.
21. The size of present issue. Out of this, the
shares reserved for preferential allotment to
promoters and other should also be stated.
22. Restrictions imposed upon the members
of the company.
23. Quorum of general meeting.
24. The location of the plant.
25. Information about projects, plant and its
machinery raw material.

LIST OF DIRECTORS : THE LIST OF DIRECTORS WHO HAVE AGREED TO ACT

AS A DIRECTORS SHOULD BE FILED WITH REGISTRAR
THEY SHOULD SUBMIT THEIR
- NAMES
- AGE
- OCCUPATION
- FULL ADDRESSES
IN CASE WHEN THE LIST IS
MEMORANDUM WILL BE DEEMED
DIRECTORS

NOT READY
TO BE THE

CONSENT LETTER OF DIRECTORS : EVERY PERSON WHO IS READY TO ACT AS

DIRECTOR
MUST
GIVE
A
WRITTEN
UNDERTAKING STATING THAT HE IS WILLINGLY
AGREED TO ACT AS A DIRECTORS OF THE
COMPANY
ALONG WITH THE LETTER THEY MUST
SUBSCRIBE THE QUALIFICATION OF SHARES
AS MENTIONED IN ARTICLES OF ASSOCIATION
AND HAVE PAID THE AMOUNT ACCORDINGLY

NAME APPROVAL CERTIFICATE : A COPY OF LETTER FROM THE

REGISTRAR ANNOUNCING THAT
THE NAME OF COMPANY WAS
APPROVED
WITHOUT
ANY
OBJECTION

STATEMENT OF AUTHORISED
CAPITAL : THE COMPANY SHOULD PREPARE
AND SUBMIT A STATEMENT OF
PROPOSED
CAPITAL
WHICH
IS
AUTHORISED TO COLLECT FROM THE
PUBLIC
IT CONTAIN THE NUMBER OF SHARES
AND DEBENTURES AND THE AMOUNT
OF EACH CATEGORY

STATUTORY DECLARATION : A COPY OF STATUTORY DECLARATION

SHOULD BE ENCLOSED STATING TO THAT
ALL
THE
FORMALITIES
HAVE
DULY
COMPILED WITH AS PER THE PROVISIONS
OF COMPANIES ACT.
IT SHOULD BE SIGNED BY AN ADVOCATE OF
HIGH COURT OR THE SUPREME COURT OR
A CHARTED ACCOUNTANT OR A DIRECTOR
OR A SECRETARY OR MANAGER .

RECEIPT OF REGISTRATION FEE : IT IS NECESSARY TO ATTACH THE

RECIPT
OF
THE
REGISTRATION
WHICH IS PAID TO REGISTRAR
OFFICE OF WHICH IT IS CALCULATED
BASIS ON THE AUTHORISED CAPITAL
OF THE COMPANY

ISSUE OF CERTIFICATE OF
INCORPORATION

ISSUE OF CERTIFICATE
AFTER THE RECEIPT OF THE ALL THE
DOCUMENTS , THE REGISTRAR WILL
SCRUTANISE THE DOCUMENTS .
AFTER EVERYTHING IS SATISFIED ,
THE REGISTRAR WIL ISSUE THE
CERTIFICATE OF INCORPORATION
WITH
THIS
CERTIFICATE,
THE
COMPANY GETS ITS RECOGNITION AS
A BODY OF CORPORATE.

A PRIVATE COMPANY CAN START

ITS
OPERATIONS
IMMEDIATELY
AFTER
OBTAINING
THE
CERTIFICATE OF INCORPORATION

t
en

m
e
c
n ess
e
m sin
o
C
.
4
Bu

f
O

4.Comencement Of
Business
A certificate of incorporation is one
which certifies that the company is
incorporated. It is issued by the
registrar of companies. It contains :1.Name of company.
2.Date of its issue.
3.Signature of registrar with seal.