Company Formation and Types of Companies in India

Posted on Dec 14, 2024 in Law & Jurisprudence

According to Section 2 (20) of the Company Act 2013, a “Company” means a company incorporated under this Act or any previous Company Law. In general, a company is an artificial person, created by law, that has a separate legal entity, perpetual succession, a common seal, and limited liability. It is a voluntary association of persons who together contribute to the capital of the company to do business. Generally, the capital of a company is divided into small parts known as shares, the ownership of which is transferable subject to certain terms and conditions.

Characteristics of a Company

  • Incorporated Association: A company comes into existence through the operation of law. Therefore, its incorporation under the Companies Act is a must. Without such registration, no company can come into existence.
  • Separate Legal Entity: A company has a separate legal entity, which is not affected by changes in ownership. Therefore, being a separate entity, a company can contract, sue, and be sued in its corporate name and capacity.
  • Artificial Person: A company is an artificial and juristic person that is created by law.
  • Limited Liability: Every shareholder of a company has limited liability. Their liability is limited to the extent of the unpaid value of the shares held by them. If such shares are fully paid up, they are subject to no further liability.
  • Perpetual Existence: The existence of a company is not affected by the death, retirement, or insolvency of its members. That is, the life of a company remains unaffected by the life and the tenure of its members in the company. The life of a company is infinite until it is properly wound up as per the Companies Act.
  • Common Seal: The company is not a natural person and has no physical existence. Hence, it cannot put its signature. Thus, the common seal acts as an official signature of a company that validates the official documents.
  • Management and Ownership: A company is not managed by all members but by their elected representatives called Directors. Thus, management and ownership are different.
  • Transferability of Shares: Shares of a company are freely transferable, except in the case of private companies. The transfer of shares of private companies is regulated by Articles of Association.

Types of Companies

The different types of companies are explained as follows:

  1. Statutory Company: It is a company formed by a special law or statute passed by the Central or State Legislature for a particular type of commercial activity. The objectives, privileges, etc., of the statutory company are laid down by the special Act. Examples are the Reserve Bank of India, the Life Insurance Corporation of India, etc. It cannot use the word ‘limited’ at the end of its name since all such companies are fully owned by the government.
  2. Registered Company: A company registered under the Companies Act, 2013, or under the previous Companies Acts is called a registered or an incorporated company. The formation, functioning, and management of such companies are governed according to the provisions of the Companies Act, 2013. All the existing companies in India, except the statutory companies, are registered companies.
  3. Private Limited Company: A private limited company is one which by its Articles of Association: (a) restricts the right of its members to transfer the shares; (b) limits the maximum number of members to 200 (excluding its past and present employees), and (c) prohibits an invitation to the public to subscribe to its shares or debentures. At least two members are required to form such a company. A private company must use the word ‘Private’ in its name.
  4. Public Limited Company: According to the Indian Companies Act, a public company means a company which is not a private company. Hence, it can be said that a public company is one which: (a) does not restrict the right of its members to transfer their shares freely, (b) does not limit its membership to 200, (c) can invite the public to subscribe to its shares and debentures. A public company requires a minimum of seven members for incorporation. There is no restriction on the maximum number of members.
  5. Government Company: As mentioned in Section 617 of the Companies Act, 1956, any company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or partly by the Central Government and partly by State Government is known as a government company. A subsidiary company of a government company is also called a government company. It is registered under the Indian Companies Act. Bharat Heavy Electricals Ltd, (BHEL), Bharat Electronics Ltd. (BEL), Steel Authority of India Ltd, (SAIL), Oil and Natural Gas Corporation Limited (ONGC Ltd.), etc., are some examples of government companies.

Steps in the Formation of a Company

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

The major steps in the 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 aspects 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

The 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 seven members are required in the case of a public company and two in the 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 the 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 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

A 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

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

Public companies receiving the certificate of incorporation can issue a 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.

Features of a Company

A company is referred to as an association of people who contribute money or money’s worth to a common fund and use it for a purpose. It is an artificial person that exists as a corporate legal entity which is different from its core members or shareholders and has a common authentication utilized for its signature. Hence, it has a few definite characteristic features which categorize it from the other types of an organization.

  • Corporate Body: A company needs to be registered under the Companies Act, 2013. Any other organization incorporated with the Registrar of Companies, and subsequently not registered cannot be considered as a company.
  • Separate Legal Entity: A company exists as a separate legal entity which is different from its shareholders and members. Due to this feature, shareholders can enter into a contract with the company and can also sue the company and be sued by the company.
  • Limited Liability: As the company exists as a separate entity, members of the company are not liable for the debts of the company. The liability of members of a company is limited to the extent of the shares that are held by them or by the extent of the guarantee amount.
  • Transferability of Shares: Shareholders of a public limited company can transfer their shares as per the rules laid down in the articles of association. However, in the case of a private limited company, there might be some restrictions on the transfer of shares.
  • Common Seal: The firm is an artificial entity or a person, and therefore cannot sign its name by itself. It creates the necessity of a common seal that can be used for representing the decisions made on behalf of the company.
  • Perpetual Succession: The company being an artificial person established by law perpetuates to exist regardless of the differences in its membership. In simple words, a company is an artificial person. Therefore, it does not have any restrictions on age. The factors like death, insolvency, retirement, or the insanity of one or all of the members do not impact the company status.
  • Number of Members: As per the Companies Act, 2013, the minimum number of members required to start a public limited company is seven while for a private limited company, it is two. The maximum number of members for a public limited company can be unlimited while it is restricted to 200 for a private limited company.