The Companies Act of 2013 in India defines company in the Section 2(20) as “a company incorporated under this actor under any previous company law”. This means that any corporation which is incorporated and registered under this Act or under other previous company Act will be called as a company.
A company is considered to be an artificial legal person according to Indian Constitution which have an independent legal entity and a common legal seal for its signatures.
How are company formed?
According to section 3(1) of the Companies Act, 2013, there are three types of companies which can be registered. They are:
- Public Company – When the company is formed by seven or more than seven persons.
- Private Company – When the company is formed by two or more than two persons.
- One Person Company – When the company has only one person as its member and he/she is the only shareholder of that company.
The company formed under this Sub-section can be classified into three types:
- A company limited by shares.
- A company limited by guarantee.
- An unlimited company.
Classification of Companies
On the basis of classification of incorporation, there are two types of companies. They are:
- Statutory Companies – The companies which are constituted by the special act of the Parliament or state legislatures. The companies act, 2013 is not applicable to them. Some of the examples are Life Insurance Corporation, etc.
- Registered Companies – The companies which are incorporated according to the procedure of the Companies Act, 2013 and the Act is applicable to them. Some of the examples are Hindustan Unilever Limited, etc.
Registration and Incorporation
The Section 7 of the Companies Act, 2013 explains to us the “incorporation of company”. The word ‘registration’ and ‘incorporation’ is often confused. The main difference between these two words is that when the company is incorporated, only those assets are taken into account which have been invested but in the registration, even the personal assets will be taken into consideration if the company runs into losses.
Procedure of incorporation of the company
- The company shall have to register itself with the Registrar within its jurisdiction with the following documents and information of registration:
- The memorandum and articles of the company shall be signed by all the members ascertaining the memorandum.
- A declaration shall be prescribed by the Chartered Accountant, Advocate, Cost Accountant or Company Secretary, whoever is involved in the process. This declaration paper shall have a name of a person who may be a director, manager or secretary confirming that the rules made under the registration are complied with.
- The correspondence address will be provided until the registered office is established.
- An affidavit shall be signed by all the members for the promotion, formation and management of the company.
- All members, directors and the other interested person shall provide their names with surnames, Director Identification Number, residential address, nationality and other particulars as may be required including the proof of identity.
- The registrar on receiving the documents and information required for registration, shall issue a certificate of incorporation in the prescribed form and register the company under this Act.
- On the date of issue of certificate of incorporation, the registrar shall allot a separate distinct corporate identity to the company.
- There shall keep a copy of all the documents presented during the incorporation of the company till its dissolution.
- If a member furnishes false information in any matters, of which he/she is aware of, he/she shall be liable for committing fraud under Section 477 of the Companies Act, 2013.
- In any case, if it is proved that the company incorporated has furnished any information falsely, incorrectly or fraudulently, then the promoters, the person named as first directors and person making the declaration shall be held liable for committing fraud under Section 447 of the Companies Act, 2013.
- In the case of fraudulency, the tribunal will be constituted who after giving reasonable opportunity of being heard to the company shall pass such orders which it shall deem to be fit and sufficient. Following orders may be passed by the tribunal:
- Regulation of management of the company and its members.
- Liability of the members.
- Removal of the name of companies from the register of companies.
- Winding up of company.
- As the tribunal deems fit.
Certificate of incorporation
Section 18 of The Companies(Incorporation) Rules, 2014 provides for the issuing of a certificate of incorporation. The Certificate of Incorporation is the ‘birth certificate’ of the company showing its legal name and the date of incorporation. It is issued to all the entities who have registered with the Registrar of Companies. The certificate confirms the company’s existence and other important information like its date of incorporation, registration number, etc.
The Certificate of Incorporation is important for a company because this helps an investor to sell his/her shares. Even when the company applies for loans, this certificate is required.
Advantages of Incorporation
Independent Corporate Existence
A company is said to have an independent corporate existence since its incorporation because it holds a separate legal entity. In law, a company is considered to be an artificial person having similar rights and obligation as a natural person but no physical or natural existence. The property of the company is possessed by it and not by the individual members. All the contracts, entered into or any transactions made, are in the name of the company and not in the name of its members. A company can enter into partnership with other individuals or other companies and can buy any number of shares, debentures of another company. It can also join other companies by ascertaining to their terms and conditions.
One of the most important and essential advantages of incorporation and registration of companies is the limited liability. The term “limited liability” means the condition where the shareholders or the proprietors of the company are legally liable only for the debts which are equal to the nominal value of their shares invested.
According to Section 44 of the Companies Act, 2013, the shares, debentures or any other interests of any member in a company shall be movable as well as transferable in the manner provided by the articles of the company.
The company is considered to be a separate independent legal entity formed by unification certain number of investors having some common business goals. The property or assets owned by the company does not belong to any of the members of the company. No members can claim the property and use it for personal purposes.
Professional management refers to systematic management and administration of the company or the organisation. This helps the company to increase the productivity of the employees, optimum use of resources, reduce costs, accountability of employees and their effective control.
Access to money market
Money markets are those markets that trade in short-term loans between banks and other financial institutions. The participants of the money market is the banks that lend money to one another and to large companies when the companies are running short of company. The companies have a shoulder behind their back on which they can rely on for receiving funds in their need.