Key things to know when incorporating a company

By Tanvi Loond

Incorporation of a company is governed by the provisions laid out in the Companies Act 2013, which defines a company as an association of persons formed for the purpose of doing business.

A company has a separate legal entity distinct from its members who constitute it. In other words, It has its own rights and duties and is endowed with the potential of perpetual succession, that is, once formed, a company will continue until such time as it is wound up. There are several types of companies categorized on the basis of business activity undertaken such as manufacturing company, service company, Non-Banking Financial Company (NBFC), charitable company, government company, one person company, private limited company and public limited company.

A company offers several advantages over other forms of business organizations, such as :

  • A company is a legal entity, distinct and independent of its members
  • Liability of the members is limited to the extent of their capital contribution
  • Members are not liable for any act or omission on the part of the company
  • Company can acquire, own, enjoy and alienate property in its own name. As such the property would be that of the company and no member can make any claim upon it
  • The company can sue and also be sued in its own name
  • The continuity of the company and its functioning is not affected by the death, disability or retirement of any of its members
  • Shares of the company are transferable thus offering liquidity to the investors
  • Profit of the company can be shared by way of dividend
  • Investment in the company’s funds can easily be made by permitting people to subscribe to the company’s shares
  • A company can borrow funds by issue of debentures and can make a valid contract with its members
  • Once a company is incorporated, it can only be dissolved with the provisions of the law
  • In the event of winding up, the company’s assets are distributed to the members in proportion of capital contributed by them
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Disadvantages of a company

  • Unlimited liability : While the members’ liability is limited, the company itself is fully liable for its debts and thus has unlimited liability
  • Compliances : A company structure requires several statutory compliances such as preparation of statutory registers and records, auditing, passing of resolutions, filing of returns with the Registrar of Companies etc
  • Personal lability of directors in certain cases :
  1. When the name of the company has been mis-described in any act or contract, those who have done the act or made the contract shall be personally liable
  2. When in the course of winding up, any business of the company has been carried out to defraud the creditors, persons who are in knowledge of such misconduct shall be personally liable for the debts
  3. Holding and subsidiary companies are required to present accounts and financial position of the group as a whole to its creditors and shareholders
  • Control vs ownership: The control vests with the Board of Directors while the ownership is with the shareholders
  • Winding up: As compared to any other business structure, winding up of a company is a time-consuming and expensive process

In the World Bank‘s “Ease of Doing business index”, India leaped from the 130th to 100th position in 2017. Credit for this goes to various structural reforms including streamlining the process of incorporating a company online. We have listed down the steps for incorporating a company

Step 1 : Reserve a name

An application for reserving the name of the company should be made online using the Ministry of Corporate Affairs (MCA) website’s Reserve Unique Name (RUN) facility which allows you to reserve the proposed name of the company. Upon submission of the name reservation request, the same will be checked for feasibility by the Central Registration Centre (CRC). The outcome of the request will be communicated via email from the CRC. A fee of Rs. 1,000 is payable for each submission, in other words, If the proposed names are rejected, a fresh application has to be made and Rs. 1,000 has to be paid while submitting the application. To avoid rejection of the name applied for, you are advised to be familiar with the Companies (Incorporation) Rules 2014, as amended, and conduct a Name and Trade Mark search.

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Step 2 : Obtaining a Digital Signature Certificate (DSC)

A Digital Signature is used to ensure the security and authenticity of the documents filed electronically. As such, all filings done with MCA require Digital Signatures of the person authorized to sign the documents. Certification Agencies are appointed by the office of the Controller of Certification Agencies (CCA) under the provisions of Information Technology Act, 2000. There are a total of eight Certification Agencies authorized by the CCA to issue DSCs. The details of these Certification Agencies are available on the portal of the Ministry.

Step 3: Application for a Director Identification Number (DIN)

DIN is a unique Identification Number allotted to an individual who is appointed as a director of a company, upon making an application in form DIR-3 pursuant to section 153 & 154 of the Companies Act, 2013.

Any person (not having DIN) proposed to become a first director in a new company shall have to make an application through eForm Simplified Proforma for Incorporating Company Electronically (SPICe). The applicant is required to attach the proof of Identity and address along with the application. DIN would be allocated only after approval of the form.

Step 4 : Submission of eform for incorporation

E-Form 32 under the through Simplified Proforma for Incorporating Company Electronically (SPICe) deals with the single application for

  • reservation of name
  • incorporation of a new company
  • and /or application for allotment of DIN
  • and/or application for PAN and TAN.

This eForm is accompanied by supporting documents including details of Directors & subscribers, Memorandum of Articles and Articles of Association etc. Once the eForm is processed and found complete, company would be registered and Corporate Identification Number (CIN), Permanent Account Number (PAN) and Tax deduction and collection Account Number (TAN) would be allocated. DIN(s) will also be issued to the proposed Director(s) who do not have a valid DIN. Maximum three Directors are allowed for using this integrated form for filing application of allotment of DIN while incorporating a company.

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(The writer is the Founder and CEO, Insta C.A Insta C.A. is an online tax and accounting service for SMEs and startups. For more information contact or follow them at their twitter handle @InstaCA1 )


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