Tuesday, 11 January 2022

Stages of formation of company

 In modern market, most of the businesses require a fair amount of capital. The primary reason for the high demand of big capital is competiting the market, keep the businesses technically upgraded with the market pace, and hiring top talents for managing and running business efficiently.

The business formation do not only requires fund, but efforts and skills as well. The entrepreneur or the businessman need to have skills to manage the business efficiently, use the recourses optimally,  and make efforts to take the small business to the next level of success.

Formatting a company is complex activity that involves completion of legal formalities and procedures. Here we will understand the process of formation of company. The process can divide in three distinct stages which are as follows:

(1) Promotion

  (2) Incorporation

(3) Subscription of capita.

Promotion of a company

Promotion is initial step for foundation of a company. It is basically the idea of shaping the business idea in a physical form. It is combination of conceiving a business idea and taking first step toward laying the foundation of the company. Basically this step is for giving practical shape to the company by exploiting the available business opportunity.

Mainly a person or a group of person combindly precedes a form of a company, and these are called promoter of company. Following are some points that show the function of a promoter.

  • Discovering the business opportunityThe first and foremost activity of a promoter is to identify the business idea. The exploitation of the opportunity relies on the type of service being preferred for offering.
    • Feasibility of studies: the promoters needs to thoroughly check all the details regarding feasibility of the business idea. The feasibility study of the desired business idea depends on the nature of project. The feasibility study of the business idea may be undertaken with the consultation of the professionals including engineers, chartered accountants and many more as per the business typeWith the help of experts, one can determine how advantageous the business opportunity can beThe entrepreneur or the business owner should first consider studying the feasibility regarding the technical feasibility, the financial feasibility, and economical feasibility, and then only start implementing their business idea after positive result.
    • Name approval: After finalizing the decision regarding incorporation of the business idea, the next step of the promoter is to name their company. There is need for getting the name of the company approved by the registrar. The name of the company should be unique and should not be having the copy right issue, otherwise it might lead to the cancellation of the approval of the name. Misleading name of the company should be avoided. 
    • Fixing up the signatories to the memorandum of association:  Promoter need to take decision about the members who will signing the memorandum of association of the proposed company. Usually the person or the group of person who sign the memorandum, they are also the first directors of company.
    • Appointment of professional:  A business cannot be imagined without employees or we can say professionals. After done with the legal work for the implementation of the business idea, the next step of the directors of the company should be hiring the professionals as per their requirements and budget. For assisting them in preparing and submitting the documents required for the registration of the company.  
    • Preparation of necessary documents: For registering a company, there is need for several document under the registration of company law. So the promoter need to prepare and submit certain documents including memorandum of association, articles of association and consent of directors to the registrar.

Incorporation of company

      The next step in the formation of the company includes the process of incorporation. It is typically the process of bringing a company in existence. This process need to follow all the laws under the registration of company act. After obtain the incorporation certificate, the promoter will be allowed for running the company. Let us discuss the process of incorporation.

    • Submitting documents:  Certain documents are required to submit that includes memorandum of association, articles of association, name of directors, written agreement of directors and statutory declaration.
    • Certificate of registration: After approval of the document, the company owner will receive a certificate and this certificate is the proof of the submitted document verification.
    • Effects of registration: The registration is the evidence that the business have followed all the laws, rules, and regulations under the company act. The certificate is required to make the company come in existence. This certificate by the registrar makes the company to have their own separate legal identity.

Subscription of capital

After getting the certificate of incorporation, private company can start their business. And, now the third stage begins. The third stage is not relevant for the private companies, but one who wishes to open the public company need to go through the third stage as well for forming their public company. It involves:

  • Submit your documents and get the approval from the government body that controls the capital market. For example, stock exchange market (SBI) is regulatory body in India.
  • The public company needs to issue the prospectus or stamen lieu of prospectus and need to get it approved as well. It is basically an invitation issued to general public for subscribing the shares the company. This document needs to be submitted to the registrar.
  • Next step involves taking appointment of bankers, broker and underwriters to get assistance in selling the shares of businesses.
  • The stock exchange authorities verify the financial soundness of the company and other aspect regarding the company. If the authority is satisfied, they will secure the companys name as the stock exchange company.

Commencement of business

This stage iinvolves:

  • The allotment of the share to the public. It is -return of allotment is providing information of name and address of all share holders.
  • The minimum shares as mentioned in the prospectus need to be sold by the company.
  • After subscribing the security and receiving the minimum subscription, the company needs to apply for the issue of the certificate for the commencement of the business.
  • Along with thisthe company needs to submit the documents like declaration of minimum shares, verification document stating that all the directors paid all the money of his share in cash, and other required document.


So this is a complete guide on all the necessary requirement for the formation of the company. I hope, all the stages mentioned in this guide will help in the formation of the business.               



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