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How to Incorporate a Business
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How to Incorporate a Business:
On registration, the Registrar will issue a certificate of incorporation whereby he certifies that the company is incorporated. From the date of incorporation mentioned in the certificate, the company becomes a legal person separate from its shareholders. Hence it is the birth certificate of the company. The certificate of incorporation prevents the reopening of matter prior to the registration and places the existence of the company as a legal person beyond doubt.
Consequently, even if the seven signatures to a memorandum were written by one person or were all forged, the certificate would be conclusive that the company was duly registered. Similarly, if the signatories were all infants, the certificate would still be conclusive.
A private company may commence its business immediately on incorporation but a public company cannot commence business immediately after incorporation, unless it has obtained a certificate of commencement of business from the Registrar. If the company has a share capital and has issued a prospectus inviting the public to subscribe for its shares or debentures it cannot commence business until
a) Shares payable in cash have been allotted to the extent of the minimum subscription. b) Every director has paid in cash the application and allotment money on the shares taken by him. c) No money is liable to repaid to the applicants for failure to apply or obtain permission for the shares or debentures to be dealt in on any recognized stock exchange. d) A statutory declaration duly verified by one of the directors or the secretary in the prescribed form that the above conditions have been complied with has been filed with the Registrar.
On the above requirements being duly fulfilled, the Registrar shall certify that the company is entitled to commence business. This certificate is conclusive evidence that the company is so entitled. Contacts made by the company before it has obtained the certificate of commencement are provisional only and do not become binding on the company until it has become entitled to commence business. Where a company is wound up before it becomes entitled to commence business, anybody who has supplied goods cannot have any claim against the company. A company is bound to commence business within a year of its incorporation or else it is liable to be wound up by the Court.
Incorporation involves the registration of the company under the companies Act. It is the legal process
through which a company is recognized as a legal entity. A company is said to have been incorporated or registered when it gets the Certificate of Incorporation from the registrar of Joint Stock companies. The following are the documents to be filed with the registrar for this purpose.
1. Memorandum of Association It is the most important document to be filed with the Registrar. It is also known as charter of the company. It contains the name of the company, the place of its registered office, the objects of the company, the liability of the members, the amount of its authorised capital. It must be signed by at least 7 persons, in case of a public limited company and two persons in case of a private company.
2. Articles of Association It is another important document. It contains the rules and regulations regarding the internal management of the company. Public limited company need not necessarily file the Articles of Association.
3. Notice of the situation of the registered office This document gives out the address of the registered office or the place where the registered office is situated.
4. Statement of the nominal capital The authorised capital of the company is stated in this document. A company cannot raise more capital than its authorised capital.
5. List of persons who have consented to act as directors It contains the names and addresses of the persons who have agreed to act as the directors. Thus the first directors are nominated but not elected because there will be no shareholders before incorporation.
6. Consent of the directors in writing to act as such Each director has to give his full name, address, occupation, age, date of birth and nationality and should put his signature declaring that he has given his consent to act as a director of the company.
7. An undertaking in writing by the directors to take up and pay for the qualification shares This is an undertaking signed by the directors stating that they have agreed to purchase and pay for the prescribed qualification shares. A person to be appointed as a director of a public limited company has to take at least one share or the number of shares as prescribed by articles of the company.
8. Statutory declaration This is a declaration by an advocate or a person who is engaged in the formation of the company that all the necessary legal formalities are undertaken.
All the above documents have to be duly filed with the Registrar with proper fees per document and stamp duty, registration fees at the prescribed rate. On receipt of these documents, the registrar will scrutinize them. On being satisfied, he will enter the name of the company in a register maintained for the purpose. After that, he will issue a Certificate of Incorporation. This Certificate is a conclusive proof that the company has been born in the eyes of law. The company gets legal existence from the date given in the certificate.
A private company can commence business from the date of its incorporation. But a public company cannot commence business after its incorporation. It must get another certificate called Certificate of Commencement of Business.
Memorandum of Association
Memorandum of Association is one of the documents which have to be filed with the Registrar of Companies at the time of incorporation of a company. It is a document which sets out the constitution of the company and is really the foundation on which the structure of the company is based. It contains the fundamental conditions upon which alone the company is allowed to be incorporated. A company may pursue only such objects and exercise only such powers as are conferred expressly in the memorandum or by implication there from i.e. such powers as are incidental to the attainment of the objects. A company cannot depart from the provisions contained in its memorandum, however, great the necessity may be. If it does, it would be ultra-vires the company, and therefore wholly void. It defines its relation with the outside world and the scope of its activities. The purpose of the memorandum is to enable shareholders, creditors and those who deal with the company to know the permitted range of the activities of the enterprise.
Doctrine of Ultra-Vires
A company has power to carry out the objects set out in the memorandum and also everything which is reasonably necessary to enable it to carry out those objects. Any activities not expressly or impliedly authorized by the memorandum are ultra-vires to the company. An act is said to be ultra-vires when it is performed which, though legal in itself, is not authorized by the objects clause in the memorandum of association or the statute. Such an act is void and cannot be ratified even by a unanimous resolution of all the share holders.
A. Memorandum of Association The Memorandum of Association is the basic document of the company. It is called the Charter of the company. The superstructure of the company is based on it. It defines the scope of activities of the company. It defines the company relations with outsiders. The company has to work within the limits laid down in the memorandum.
Memorandum of Association is to be drafted into paragraphs, consecutively numbered and printed. It must be signed by at least 7 persons in the case of a Public Limited Company and 2 persons in the case of a Private Limited Company. A memorandum must be carefully drafted.
Memorandum of Association must have the following clauses:
a) Name Clause: This clause contains the name of the company. The name selected should not be similar or identical with that of any existing company. The name of the company should end with the word, limited. If it is a Private company the name should end with the words Private Limited. b) Situation clause: In this clause, the State in which the companys registered office is located should be given. c) Objects clause: It is the most important clause in the Memorandum of Association. Great care should be taken in drawing up this clause. It defines and confines the scope of the operations of the company. The objects of the company must be legal and be very clearly defined. The company can exercise only such powers which are expressly stated in the clause. d) Liability clause: This clause states that the liability of members is limited to the face value of the shares taken up by them. A shareholder is not liable for the debts of the company. His liability is limited to the amount of the shares held by him. e) Capital clause: This clause must state the amount with which the company is registered and the number of shares into which it is divided. f) Association and subscription clause: Under this clause subscriber to the Memorandum express their consent to form a company and sign the agreement to associate for that purpose. This should be signed by not les than seven in the case of a public limited company and two in the case of a private limited company. They must sign it before a witness who must also sign on it.
Importance of Memorandum of Association:
1. A Company cannot be registered without filing this document 2. The limits or boundaries of the Company are determined by the memorandum 3. Informs the object of the business 4. Informs the name, address, and capital of the company 5. The provisions of the document cannot be altered without adopting a special resolution.
Articles of Association:
Articles means the Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act. The Articles of Association are the rules and regulations of a company framed for the purpose of internal management of its affairs. It deals with the rights of the members of the company inter-se. The articles are framed for carrying out the aims and objects of the Memorandum of Association. The articles of association of a company are subordinate to and are controlled by the Memorandum of Association.
In the case of a private company, the Articles must contain provisions which a) Restrict the right to transfer its shares. b) Limit the number of its members to fifty excluding past and present employees of the company. c) Prohibit any invitation to the public to subscribe for any shares in or debentures of the company.
The Articles must be printed and divided into paragraphs, numbered consecutively. The articles must be signed by each subscriber of the memorandum in the presence of at least one witness who will attest the signature and likewise add his address, description and occupation, if any.
Articles of Association
Articles of Association is another important document which is filed with Registrar along with the Memorandum of Association. The article of association is a document containing rules and regulations for the internal management of the company. It describes the regulations for the attainment of the objects mentioned in the Memorandum of the company. They determine the relationship between the company and its members, as well as among the members themselves.
Articles must be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the Memorandum and filed with the Registrar.
A Private company must necessarily file its articles. A Limited company can adopt the rules of Table A, if it does not prepare its articles.
The Articles embody the powers of the Directors and officers of the company and refer to the rights of the shareholders. Mode and form of the company business is also defined in the Articles of Association.
Contents of the Articles
a) Share capital and its sub division into different classes of shares. b) The procedure for making calls on shares, transfer, transmission, forfeiture and surrender of shares. c) Alteration and reduction of capital. d) Appointment, powers, duties, qualifications, remuneration etc of Directors. e) Appointment of Manager, Managing Director, Secretary. f) Declaration of dividend. g) Procedure for conducting different kinds of meetings. h) Maintenance of books of accounts and their audit. i) Share certificates and share warrants. j) Seal of the company. k) Winding up.
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