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STEPS IN FORMATION OF COMPANY

In the formation of a public limited company having share capital, mainly four stages are involved,
1. Promotion
2. Incorporation
3. Capital subscription
4. Commencement of business
In the case of formation of private company, only the first two stages are involved.
1. Promotion of company
The person or persons who undertake responsibility to bring the company into existence are
called promoters.
The steps which are taken to persuade a number of persons to come together for the achievement of
a common objective through the company from of organization are called promotion.
According to Guthman and Doughall, a promoter is a person who assembles the men, money and
the materials into a going concern.
Steps in company promotion:
1. Discovery of a new idea: The promoter starts out with an idea to start some business either in a
new field which has not been commercially exploited or in some existing lines of manufacture or
business. He makes preliminary investigation to find out whether it is worthwhile to make a
detailed investigation.
2. Detailed investigation: the promoter needs to make a detailed investigation of his idea with the
assistance of many experts. It will help him to know whether the estimated income is adequate to
cover the estimated costs and compensate the owner for the risks and services.
3. Assembling: after a detailed investigation, if the promoter is satisfied with the profitability of
the proposed concern, he starts assembling. Assembling means arranging for patents, a suitable site
for the company, machinery and equipment and making contracts for filling the positions.
4. Financing the proposition: After assembling the proposition, the promoter prepares a
prospectus to present to public and to underwriters to persuade them to finance the proposition.

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Functions of promoters
A. promotion of the company: The most important function of the promoters is the promotion of
the company. They undertake various processes of promotion.
B. Incorporation of the company: Promoters also undertake the function of getting the company
registered. They prepare necessary documents such as M.O.M and A.O.A etc. and submit them to
the registrar and get the company incorporated.
c. Raising capital: In the case of public company limited company having share capital promoters
raise the required capital and obtain business commencement certificate.
D. Nursing the company: promoter also associated with the company and nurses the company
{they work for the growth of the company}.
TYPES OF PROMOTERS
A. Professional Promoters: Are those persons who form the company as their profession when
the company is incorporated, they either get the commission or a fixed amount for the formation of
company.
B. Occasional Promoters: Are those persons who undertake to form a company occasionally and
take forming of a company as their part time job.
C. Entrepreneur promoters: They are both promoters and entrepreneurs. They conceive idea of a
new business unit, do the groundwork to establish it and subsequently become part of the
management.
D. Finance promoter: Some financial institutions, like investment banks or industrial banks, may
take up the promotion of a company with a view to find opportunities for investment.
INCORPORATION
Promoters have to take certain steps for getting the certificate of incorporation. For registration an
application has to be filed with the register of the companies along with the following documents:
The memorandum of association to which at least seven persons have subscribed, their names
and each one of them has taken at least one share. ( in case of private companies at least 2
share)
The articles of association properly stamped and signed by the signatories.
The address of the registered office of the company. ( this is to be delivered in any case within
30 days of incorporation)

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A list of directors with their names, address and occupations. The return containing the
particulars of the director should be filed within 30 days of their appointment.
Consent in writing of the directors to act as directors.
An undertaking by directors to take and pay for qualification shares, if any, this document is
not required in the formation of a private company.
The statutory declaration by an advocate or attorney or a chartered accountant practicing in
India.
At the time of filing this documents with the register companies, they have to pay stamp duty,
registration fees and filing fees. Register will examine these document after company will get
birth certificate.
CAPITAL SUBSCRIPTION
In the capital subscription stage, the company has to make arrangements for obtaining the
necessary capital for the company. For this purpose, immediately after getting the certificate of
incorporation, the company convenes a board meeting to deal with the following business:
1. Appointment or confirmation of the appointment of the secretary if one has already been
appointed by the promoters at the promotion state.
2. Adoption of preliminary contracts.
3. Appointment of bankers, legal advisors, brokers, auditors, etc.
4. Adoption of draft prospectus or statement in lieu of prospectuses.
5. Listing shares on the stock exchange.
6. Adoption of underwriting contracts.
COMMENCEMENT OF BUSINESS
The registrar after receiving the declaration of compliance from the secretary or one of the
directors along with the required filing fees.
If registrar satisfied the declaration, he will issue certificate of commencement of business.
1. The company should get this certificate within one year of its incorporation.
2. if it is fails to secure it within this limit, the court order it to be wound up.

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MEMORANDUM OF ASSOCIATION
The memorandum of association is the most important document of the company. This is a
document which sets out the constitution of a company and as such, its charter. It defines the
companys relations with the outside world, and the scope of its activities. Its purpose is to
enable the shareholders, creditors as well as those who deal with the company to know the
companys permitted range of enterprises.
Meaning:
The purpose of the memorandum is to enable to the shareholder, creditors and those who deal
with the company to know that is its permitted range of enterprises.
IMPORTANCE OF MEMORANDUM OF ASSOCIATION:
1. It is necessary document for the incorporation of the company.
2. It determines the jurisdiction of the company.
3. It states that objectives and powers of the company for the information to the public.
4. It states the authorized capital of the company and its division into shares of fixed amount.
5. It troughs light on the liability of the members of the company.
6. It governs the articles of association.
7. It gives information about company name, address, head office and branch office.
CONTENTS OF MEMORANDUM OF ASSOCIATION
1. Name clause.
The clause contains name of the company.
A.. undesirable name to be avoided. (The name selected should not be similar or identical with
that of any existing company)
B. The name of the company should end with ltd or UN ltd.
C. Prohibition of use of certain names. (They should not use Mahatma Gandhi and pm photos)
D. Special concession for which company is involved to promote art science, religion, culture
and education they may use or may not use ltd or un ltd.

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E.Once Company is registered with the name; the name of the company must be displayed
outside of every office.(Letter heads, notice, invoices, receipts, advertisements etc)

2. Situation clause.
A. This clause states the state in which the registered office of the companys to be situated.
B. The name of the state and city located in registered office of the company.
C. It determines even the nationality of the company, i.e., whether the company is and Indian
company or foreign company.
D. It avoids any unnecessary legal formalities and expenses.
E. It tells about authority powers limit and jurisdiction.
3. Object clause.
The object clause is the most important , it should be specify in unambiguous language the
objects for which the company is formed.
According to companies act 1956 , the object clause contain
A. main objects of the company and objects incidental or ancillary, to the attainment of these
main objects.
4. Liability clause.
This clause states that the liability of members is limited to the face value of shares held by
them. If member already paid some amount on the shares he can be called upon to pay only the
unpaid amount of the shares.
5. Capital clause.
in this clause gives information about total capital, types of shares and face value of shares.
According to companys act 1956 if the company limited by shares they may issue preference
shares and equity shares.
6. Association or subscription clause.
This clause contains a declaration by the subscribers.

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A. share holders they have to state their names, state, full address and numbers of shares taken
by them.
B. the declaration should be signed by at least 7 members In case of public company and by 2
members in case of private company
C. Further the signatures of the subscribers must be witnessed by at least one who gives his
signature, name, full address and occupation.
ARTICALS OF ASSOCIATION
The articles of association are the document it contains the rules and regulations for the internal
management of the company or the day to day administration of the company.
Meaning:
The articles are the internal regulations of the company on the basis of which are internal affairs
are managed. They lay down the powers of the directors, share holders and officers. Articles
must be printed divided into paragraphs, numbered consecutively and signed by each subscriber
to the memorandum and filed with the registrar.
Contents: The following are the contents of the AOA.
1. Share capital and variation of rights.
2. Exercise of lien by the company
3. Calls on shares.
4. Transfer, transmission, forfeiture and surrender of shares.
5. Issues of share warrants.
6. Alteration and reduction of capital.
7. Voting powers of members.
8. Borrowing powers.
9. Proceedings at the board and at the general body meeting.
10. Appointment, powers, duties qualifications, remuneration etc.
11. Appointment of manger, managing director and secretary.

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12. Dividends and reserves.

13. Maintenance of books of accounts and their audit.
14. Company seal.
15. Winding up.
The preparation of articles by a company limited by shares is not compulsory, in case the articles
are not prepared; the company must adopt Table A of the companies act.
Items found in TableA
1. Interpretation of certain terms.
2. Share capital.
3. Lien on shares.
4. Calls on shares.
5. Transfer of shares.
6. Transmission of shares.
7. Forfeiture of shares.
8. Conversion of shares into stock.
9. Share warrants.
10. Alteration and reduction of capital.
11. General meeting and proceedings at general meeting.
12. Votes of members.
13. Board of directors.
14. Proceedings at board meetings.
15. Manager, managing directors and secretary.
16. Company seal.
17. Dividends and reserves

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18. Accounts.
19. Capitalization of profit.
20. Indemnity to officer or agents of the company.
Companies which must have their own articles (section 26)
1. Un ltd companies.
2. Limited by guarantee.
3. Private companies ltd by shares.
PROSPECTUS
After the receipt of the certificate of incorporation if promoter of a public company wishes to
invite the public to subscribe for its shares or debentures, he must prepare and issue a document
knows as prospectus.
The companies act 1956 defines prospectus as A prospectus, notice, circular, advertisement or
other document inviting offers from the public for the subscription or purchase of any shares in
or debentures of a body corporate.
Contents of prospectus
Part 1 of schedule 2
A. General information:
a. Name and address of registered office of the company.
b. Date of opening of the issue.
c. Name and address of auditors and lead managers.
B. Capital structure of the company:
a. Authorized, issued, subscribed and paid up capital.
C. Terms of the present issue:
a. Right of the instrument holders.
b. How to apply availability of forms, prospectus and mode of payment.

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c. Any special tax benefits for company and its shareholders.

D. Particulars of the issue:
a. objects.
b. Project cost.
E. Company, management and project:
a. History and main objects and present business of the company.
b. Subsidiary of the company if any (for financial data to auditors report in part 2)
c. Promoters and their background.
d. Infrastructure facilities for raw material and utilities like water, electricity, etc.
e. The products:
Nature of the products
Approach to marketing and proposed marketing set up.
Export possibilities and export obligations if any.
PART 2 AND SHEDULE 2
A. General information:
a. Consent of directors, auditors, solicitors, advocates, managers to issue, registrar to issue,
bankers to the company, and experts.
b. Expert opinion if any.
c. Procedure and time schedule for allotment and issue of certificates.
B. Financial information:
a. Profit and losses and asset and liabilities of the company previous 3 years.
b. The rate of dividends if any, paid by the company in respect of each clauses of shares.
C. Statutory and other information:
a. Minimum subscription.
b. Underwriting commission and brokerage.

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c. Expenses of the issue giving separately fees payable, advisers, registrars to the issue,
managers to the issue, trustees for the debentures holders.
d. previous public or right issue, if any ( during the last 5 years): date of allotment, date of
refund, date of listing on the stock exchange, closing date.
e. Commission bad brokerage on previous year.
f. Detail of purchase of property.
Filling of prospectus with the registrar: no prospectus shall be issued until a copy of the same
has been delivered to the registrar for registration. Further, it must be issued within 90 days from
the date on which a copy of the prospectus delivered for registration. The prospectus must be
dated and signed by every person who is named there in as a director or by the agent.

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