The legal procedure by which a corporate organization or a company is formed is called incorporation. The resulting legal entity that keeps the company's assets and earnings distinct from its owners and investors is a corporation.
Almost any country in the world allows for creation of corporations, which are recognized by including phrases like "Inc." or "Corp." in their titles. This procedure formalizes the recognition of a corporate entity as distinct from its owners.
Understanding Business Incorporation: A Guide to Registering Under the Companies Act 2013
The Companies Act 2013 (the "Act") governs business incorporation and the granting of company registration certificates. An Indian company cannot conduct business without the registration certificate issued by the Registrar of Companies (ROC). When the business complies with the Act's requirements, the ROC will provide the registration certificate.
The company founders should use the Ministry of Corporate Affairs ('MCA') website to apply for company registration. On February 23, 2020, the MCA introduced a new form for company incorporation called the SPICe+ form, which applies to all newly incorporated businesses as of February 23, 2020.
How to incorporate a company and what are its benefits?
Now that we know “What is incorporation”, let us look into one of the many benefits of incorporation for an organization or its member companies is:
- Shields the owner's property from the company's liability
- Facilitates the expeditious transfer of ownership to a third party
- A tax rate that is lower than that of personal income
- Enjoys more lenient tax regulations on losses carried forward
- Growth in value through the selling of stocks
Companies are the most widely used legal framework for conducting business operations worldwide. Even though the legal requirements for forming and structuring a corporation vary depending on the jurisdiction, most have a few similarities.
Steps to Incorporate Your Business in India
Several sequential steps are involved in the step-by-step company incorporation process in India. The following is a comprehensive analysis of each step:
Get a Digital Signature Certificate (DSC):
The initial stage is to get Digital Signature Certificates (DSCs) for all prospective company directors. This is essential for the digital signature of documents during the incorporation procedure.
Request a Director Identification Number (DIN):
Directors are required to submit applications for Director Identification Numbers (DINs) to the Ministry of Corporate Affairs (MCA). A DIN is a distinctive identification number necessary for directors to incorporate a company.
Approval of Name:
Select a distinctive name for the organization and apply for name approval through the MCA's RUN (Reserve Unique Name) web service. The proposed name must adhere to the naming guidelines established by the Companies Act 2013.
Drafting of the Memorandum of Association (MoA) and Articles of Association (AoA):
Formulate the Memorandum of Association (MoA) and Articles of Association (AoA), establishing the company's constitution, objectives, and internal regulations. These documents must be produced in accordance with the format outlined in the Companies Act, 2013
Submission of the Business Incorporation Application:
Electronically submit the following documents to the Registrar of Companies (ROC):
- Memorandum of Association (MoA)
- Articles of Association (AoA)
- INC-32 (Simplified Proforma for Electronic Company Incorporation)
- If applicable, submit Form INC-33 (e-MoA) and Form INC-34 (e-AoA).
- Directors and subscribers' declaration
- Proof of address, identity, and pictures of directors and subscribers
Fees for Payment:
As per the Companies (Registration Offices and Fees) Rules, 2014, incorporation fees must be paid online.
Document Verification:
The ROC verifies the submitted documents to ensure that they comply with the Companies Act, 2013 provisions.
Certificate of Incorporation:
The ROC issues Certificates of Incorporation after verifying documents and paying expenses. This certificate conclusively demonstrates the company's formation.
Application of PAN and TAN:
Submit an application for a Permanent Account Number (PAN) and a Tax Deduction and Collection Account Number (TAN) at the Income Tax Department.
Opening a bank account:
Establish a bank account in the organization's name and invest the initial share capital.
GST Registration:
If the company's turnover surpasses the specified threshold, it must register for Goods and Services Tax (GST).
Compliance Requirements:
Fulfill ongoing compliance requirements, such as the appointment of auditors, the conduct of board meetings, the maintenance of statutory registers, and the submission of statutory filings.
Commencement of Business:
The director must submit a declaration of INC-20A to the ROC within 180 days of the company's incorporation. A CA/CS/CMA must verify this declaration in practice to ensure that each subscriber to the MOA has paid the value of the agreed-upon shares on the date of the statement.
Within 30 days of its incorporation, the organization submitted the INC-22 form to the ROC for substantiation of its registered office.
The SPICe+ form, which is the company incorporation form, must be submitted to the ROC by the company originator or promoter to establish the company legally.
The company's incorporation is conducted exclusively online. After the company incorporation form is submitted on the MCA website, the ROC will issue the Certificate of Registration after reviewing the form and documents.
Advantages and disadvantages of being incorporated
Advantages:
Establishment of a Separate Legal Entity: A company with incorporation becomes a separate, autonomous legal entity. Even if one member holds most of the shares, that individual is not personally liable for the company's activities. The case of Salomon v. Salomon & Co. Ltd. (1897) AC 22 established this idea. The bootmaker Solomon sold his sole proprietorship to Solomon Ltd., a recently established corporation.
Perpetual Succession: Incorporated companies have perpetual succession, which means that even if their membership changes, they will still be in operation. The business continues until it is formally wound up in accordance with the Companies 2013 Act's provisions.
Separate Property Ownership: A corporation can own properties in its name as a distinct legal entity, and its members are not entitled to any portion of the company's assets. Members cannot individually claim ownership of the corporation's assets because the corporation is a separate legal entity.
Capacity to Sue and Be Sued: An incorporated company can legally file lawsuits or defend itself under its name. Nonetheless, a natural person must represent you in these judicial processes. Similar to how an individual complaint would be dismissed in the absence of the complainant, failure to comply with this criteria may result in the dismissal of a case.
Disadvantages:
Cost: The initial costs associated with incorporation include filing fees, legal or accounting costs, and the choice to use incorporation services. The total cost also includes ongoing corporation maintenance expenses.
Double Taxation: Some corporate forms, such as C Corporations, may have "double taxation." This happens when the business pays taxes on both its income and the dividends paid to shareholders.
Loss of Personal Control: Individuals may no longer have total authority over stock businesses. The single ownership control is lessened when a board of directors chosen by shareholders assumes governance.
Required Structure: Corporations must follow state laws governing corporate administration, operational procedures, and accounting standards. Strict adherence to these guidelines is required.
Ongoing Paperwork: Companies must provide yearly reports that comprehensively overview their financial situation. Tax reports, accounting records, meeting minutes, and any licenses and permits required are examples of ongoing paperwork.
Lifting of Corporate Veil: According to the legal doctrine of "Separate Identity," a company is a separate legal entity from its members. Nonetheless, there are circumstances in which the court can disregard or lift this corporate veil. This happens when the company's true character is revealed or when it is thought that the corporate form is being abused or mistreated.
FAQs
What does it mean when a company is incorporated?
The legal procedure used to create a corporate entity or a company is known as incorporation. A company that has been incorporated is legally recognized as an independent legal entity. 'Inc' or 'Limited' are examples of terms found in the names of these companies.
Can I run a small business without registering?
Small enterprises in India are allowed to operate without registering, but it is advised to do so to guarantee legal compliance and to receive certain legal and tax benefits of incorporation for small businesses.
What is the difference between corporate and incorporate?
When a company is incorporated, it becomes a recognized legal entity. Companies incorporate to keep their owners' assets and liabilities apart from their businesses. When a company files the required documentation with the state registrar of companies to become a corporation, it is said to be incorporated.
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