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Incorporate Now:
Before entering the discussion of incorporation of companies and its procedures, it is pertinent to understand about the evolution of business. A business started as a sole proprietorship flourishes and grows. To sustain the growth momentum the business needs further capital investment which the sole proprietor cannot contribute because of his limited resources.
Also he cannot undertake enormous risks beyond his capacity. At this stage he invites his friends and known associates to become partnership in his business. These persons are willing to contribute investment, involve themselves in day to day running of business and also to assume its risks. They have professional expertise in that business or have resources to bring investments. The business is further growing and the momentum if sustained at this stage, then it requires enormous amount of equity investment and debt. Banks and institutional investors are generally averse to lend loans or invest in equity in business of sole-proprietor or partnership. Because of the inherent nature of individuals to assume risk. Also, ownership and management is not separate. Even though the liability of the partners is joint and several and also can be extended to their personal property, because of the slow moving process of civil laws in judicial courts, banks are reluctant to broad exposure to non-company form of business.
With above background about the evolution of business, now the question an entrepreneur pose what is the solution for the resource crunch and how the growth momentum can be sustained by bringing the resources and broadening the risk base, so that individuals are not unduly exposed to risk which is inherent in any business and also the gains are shared by all the participants in an equitable manner.
So an existing business or a new business can register as a company or corporation as per the company laws of the respective country. This company is treated as a separate entity under the eyes of the law. It is a separate form of existence and the law treats it as a separate distinct entity. This principle was enunciated in the landmark judgment in the case of Salomon Vs Salomon Co. Ltd by the British court. Procedure for incorporation:
A minimum of 7 persons in the case of public limited companies and a minimum of 2 persons in the case of private limited companies come forward to start a company and contribute the initial contribution. They subscribe to Memorandum of Association and Article of Association.
Memorandum of Association contains the following:
Name Clause:
Name of the company which signifies its unique status is mentioned in this clause which should not be same or similar to the existing companys name.
Situation clause: The place of incorporation of the company is decided and is registered in that place. This clause has wider implication under the income tax laws. Some countries offer income tax benefits if companies are incorporated in their place like Mauritius, Cayman Island, and Bermudas etc.
Objects Clause:
What is the main objects of the company the line f business and also objects incidental and ancillary to the attainment of the main objects of the company.
Capital Clause:
The authorized capital and nominal capital of the company divided in to number of equity shares of the company and nominal value per share
Articles of Association:
It is for internal management and day to day management of the company.
1. Powers of directors 2. Delegation of powers 3. Recruitment 4. opening of bank accounts 5. capital expenditure 6. conduct of board meetings 7. conduct of annual general meetings 8. notices to meetings 9. power to borrow loans 10. power to invest surplus funds
If the company is incorporated as a private limited company, then the private limited company is forbidden to issue shares to public.
In case the company is incorporated as public limited company, then the public limited company can float its shares to public.
Incorporate now:
This is the most important issue. When to take the company to incorporation mode and when to take the company public. It depends the growth prospects of the particular business and requirements of investment. This has assumed significance in recent times particularly for technology companies.
A technical persons starts business with finance from angel investor, incubator or venture capital companies. They provide management, technical expertise and guidance and also provide seed capital. The main promoter is usually a technically qualified person who has a vision of developing a product in software or electronics domain or in dotcom domain and the venture capital investor is confident of its market potential. The rate of interest or return at the initial stages is kept low because of the gestation period. The motivation or incentive for the investor is that when the business is incorporated eventually and when it is listed the promoters get a huge gain. This concept is best illustrated by the following companies:
1. Google 2. Hotmail 3. Infosys 4. Air Deccan 5. Rediff mail 6. several dotcom ventures
Incorporation gives a certain amount of legal responsibility to the promoters and management of the company to abide by the company law and corporate governance procedures. Technical superiority of the promoters, business and products, integrity and honesty of promoters, transparency of the company are rewarded with handsome gains by the market. The true form of capitalism and its ideology is practiced in the stock market. It rewards merit and excellence. It rewards more for excellence with transparency and honesty. It also punishes mediocrity and non-ethical behavior of incorporated entities.
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