Formation and Structure of Companies and Corporations: A Beginner’s Guide. – Sania S Nagaria.

Formation and Structure of Companies and Corporations: A Beginner’s Guide.

~ By Sania S Nagaria.

Introduction.

The process of launching a business is fascinating as well as challenging including many difficult choices and complex legal issues. Knowing how corporations are established and organized is essential, regardless of whether you are a student starting to study corporate law or an entrepreneur with a game-changing concept. This article aims to simplify these complexities and make them understandable and easy for everyone.

Benjamin Franklin once said, “An investment in knowledge pays the best interest.” He was quite insightful. Setting the foundation for future success may be achieved by devoting some time to studying the fundamentals of company creation and structure.

An overview of the main procedures for starting a company, the many kinds of business structures, and the essential elements of a company’s structure will be given in this beginner’s guide.

What is a Company?

A Company is an artificial person created by law for the purpose of carrying out business. Its is recognized as a different entity from its owner or shareholders and is eligible to enter into contracts, own assets take loans, conduct business, etc. For a company to start its business it must be registered under the Companies Act, 2013. To further understand what a company is let us dive into the difference.

There are a few differences between Companies and other Business.

1. Legal Status: A company is considered as a separate legal entity. That means it can own assets, take debts, sue or can be sued in its own name, unlike sole proprietorship and partnership.
2. Raising Capital: A company can raise capital by issuing shares and debenture while in sole proprietorship and partnership typically rely on personal funds or bank/business loans.
3. Liability– As companies are considered a separate legal entity the liabilities of its owners is limited, i.e., their personal assets will not be used to pay of company debts while liquidating, but in case of other businesses like sole proprietorship the owners are liable to pay debts from their personal assets as well.
4. Continuity– Companies are said to have perpetual existence, i.e., it exists even after the death / change of its owners while business may dissolve on the death / change of its owners.

There are many more differences but the basic and important ones are listed above.

Steps in Formation of a Company.

For the formation of the company the Companies Act, 2013 states certain conditions like:-

1. It should function and be formed for a legal purpose.
2. There must be minimum 7 promoters for public, 2 for private and 1 for one person company.
3. The company must comply with all the provisions of the Companies Act, 2013.
4. The Company must make the 2 important documents, i.e., MOA & AOA. (Memorandum of Association and Article of Association).

Once all the conditions are fulfilled the following stages of the company must be done:-

A). Promotion

B). Incorporation

C). Commencement.

Steps involved in Promotion of the Company are which are done by the promotors of the company are:-

1. Come up with a business plan
2. Prepare the financial plan
3. Draft the MOA & AOA.
4. Enter into contract and Appoint directors.

Steps to Incorporate a company after promotion step is:-

1. Acquire the Certificate of Digital Signature (DSC).
2. Register DSC with MCA under the director’s name.
3. Obtain the DIN, or Director Identification Number.
4. Request a Name Reservation
5. Finish the association’s memorandum and articles of association.
6. Stamping, date, and signing the memorandum and articles of association.
7. Prepare any additional paperwork that is required.
8. Selecting a communication address
9. Obtain a statement required by law
10. Application and documentation for incorporation are filed with the ROC
11. Obtaining an Incorporation Certificate.

The ROC, i.e., the Registrar of the Company also allots the CIN (Corporate Identification Number ) to each company along with the Certificate of Incorporation. It is an alpha numeric code. This Number is very important as it gives a lot of details about the company.

For example, the CIN No. of  Air India is U62100DL 1992GOI048581

The CIN No. of Tata Steel is L27100MH 1907PLC000260.

Now, one must ask how does this code give information to a layman it is just a bunch of numbers and letter but if we try and understand the meaning of it we will understand that, the L or U in start represents Listed (L) or Unlisted (U) Company. The next 5 digits are industry code with is different for different industry company, then the next 2 letters are state code, i.e., in above case MH for Maharashtra, then the nest 4 numbers are the year of incorporation which for Air India is 1992 and for TATA Steels is 1907, then the next 3 letters stand for the type of the company like PLC for Public, PTC for Private, OPC, etc, lastly the last few digits are the companies registration number.

Commencement of Business.

For any company to commence its business it requires the certificate of commencement and not all companies can start their business immediately. Like the companies not having or issuing share capital can immediately commence their business right after they receive the certificate of incorporation but the companies with share capital have to wait for the certificate of commencement to start their business activity.

The Steps to get the Certificate of commencement are:-

1. Director’s declaration filing with ROC
2. The verification of the company’s registered office.
3. Collection of License and approval from RBI, SEBI, etc
4. The issue of Certificate of Commencement by the ROC.

Once we know how a company is formed let’s now see the two most important documents of the company that must be filed with the registrar of the company at the time of the incorporation :-

1. The Memorandum of Association,
2. The Article of Association.

And if a public company is collecting capital from the public in form of share then it must also draft the prospectus along with these two documents.

Memorandum of Association (MOA).

It is a very important document of a company as it states the business of the company. It describes its purpose, activities, business, limitations, powers, etc all that, that the company would undertake. Its is framed at the very start of the company and can be altered according to the business of the company from time to time.

The features of the MOA are :-

1. It is a crucial document that outlines the goals and objectives of the business.
2. It outlines and governs the firm’s interactions with external parties, such as investors, shareholders, and creditors, etc. Based on the Memorandum, it is possible to determine if a company is allowed to engage in a certain activity or transaction.
3. It is created by the promoters and requires the signatures of at least seven people for a public business, two for a private firm, and one for a one-person corporation.
4. It has to include the following clauses:  a) Name; b) Address (Registered Office); c) Objects; d) Liability; e) Capital; f) Association or Subscription Clause.
5. Nothing that would be in conflict with the Companies Act, 2013 requirements should be included.
6. Any action taken by the corporation that deviates from the Memorandum’s authority will be considered “Ultra-Vires,” meaning it will be void.
7. Anyone interested in entering into a contract with the firm is expected to be aware of the contents of the Memorandum of Association since it is a public document.

Article of Association (AOA).

After the MOA, AOA is the second important document that must be filed with the ROC during incorporation. It is considered to be the By-laws of any company. It contains the rules and regulations that govern the management of the company. It outlines the officers’ and Board of Directors’ responsibilities, rights, and powers as well as how the firm will do business.

Rules and regulations pertaining to the governing body’s authority, rights, and responsibilities, the issuance of shares, call on shares, their forfeiture, the process for transferring and transmitting shares and debentures, etc. are often included in the articles of association.

The Contents of AOA are:-

1. The details of the share capital and its types of share a company would issue along with their value.
2. The rights of the shareholders.
3. The procedures relating to shares and management
4. The appointment, income, authority, responsibilities, and other details of the Company’s officers and directors.
5. The provisions pertaining to general meetings of boards, committees, etc.
6. Members’ voting rights, proxy votes, quorum votes, poll results, meeting adjournments, etc.
7. The ability of the Company to borrow money and the conditions of those borrowings. 
8. Provision for the company’s winding up, etc.

Different types of Company:-

It is important to understand the different types of the company like the companies differentiated by its formation, number of members, liability, etc.

According to incorporation:-

1. Statutory Company – These companies are formed and incorporated by a specific act of the parliament and are governed by the provisions of that specific act. Like the public utilities and financial institutes.
2. Registered Company – These companies are registered under the Companies Act, 2013 and are governed by its regulations. This is the most common type of the company.

According to the number of members:-

1. Public Company – The public company require minimum 7 members for its formation and incorporation. It does not have any maximum limit for its members. They have to invite the public if they want it issue share by preparing a prospectus.
2. Private Company – The private company requires minimum 2 members for its formation and incorporation. These also have a maximum limit to its members, i.e., 200. And they cannot invite the public to subscribe the issued shares.
3. One Person Company – As its name implies, ONC is a single-member business. The purpose of this company’s formation was to support new businesses and entrepreneurs.

According to the liability of members:-

1. Company limited by shares – In this type of company the liability on members is only limited to their number of shares.
2. Company limited by guarantee – In this the liability is limited to the provided amount of guarantee they agreed at the time of contract only. This type is often used in NGOs
3. Unlimited Company- The liability of members in this type is unlimited, i.e., their personal assets may also be used to pay off the debts of the company. This type is usually seen in partnership and sole proprietorship.

Other kinds are:-

1. Foreign Company – These companies are usually incorporated outside the company but has their business ongoing in the country. These companies have to comply with the foreign as well as the country’s rules in which their business is conducted and operated.
2. Government company – This is a type of company in which the government has almost half of the shares of the company, i.e., 51%.
3. Associate Company – A company where another business has some influence but not total control. Like they usually hold only 25-45% of the shares of the company.
4. Dormant Company – This type of company is usually formed for future business operations or to hold assets.

Structure of a Company.

After understanding what is a company, how it is formed, its 2 most important documents and its types lets see the components of a company. A company’s structure establishes its hierarchy and the allocation of duties among its constituent parts. In order to guarantee effective governance, transparent lines of power, and efficient administration, this structure is essential. Consequently, the essential elements that usually comprise a firm are :-

1. Shareholders – They are also known as the owners of the company. They Are the ones who buy shares and invest in the capital of the company. They have the voting rights on any and every decision of the company They also have the right to elect the board of direct, to receive dividend and to inspect companies records. The shareholders exercise their rights by attending the annual general meetings and extraordinary general meetings.
2. Board Of Directors:- The firm’s shareholders elect the Board of Directors to oversee and mediate communications between the management and shareholders of the company. They also take part in making high level strategic decisions of the company. They have the right in setting the company’s policies and objectives, appointing and supervising executive officers, ensuring ethical and legal integrity and approving major financial decisions and transactions.
3. Executive officers :- These mainly consist of different types of officers including :-

1. Chief Executive Officer (CEO)
2. Chief Financial Officer (CFO)
3. Chief Operating Officer (COO)
4. Chief Marketing Officer (CMO), And
5. Chief Information Officer (CIO)

4. Management team – The management team has a hierarchy of three levels containing the Top level management, the Middle level management, and the lower level management. The top level management consists of all the above mentioned executive officers. The middle level management includes department heads and managers who follow the orders given by the executive officers that is the top level management. Supervisors and team leaders make up the lower level, and they document and report every daily activity to the middle management.
5. Company Secretary – The role of company secretaries to ensure a compliance with corporate laws and regulations and also has the responsibility to maintain companies records prepare the minutes of boards and shareholders meetings and ensure timely filling of all the legal documents of the company.
6. Employees – Employees’ jobs include carrying out duties assigned to them by middle or lower level management, achieving corporate goals and objectives, and abiding by the organization’s policies and procedures. Three categories of workers exist, specifically:

1. Permanent employees,
2. Temporary employees, and
3. Contractors.
4. Corporate governance – This is a set of procedures, policies, and guidelines that regulate how a business is run. The purpose of copy governance is to guarantee the responsibility, accountability, and transparency of the business.

Conclusion.

Embarking on the journey of forming a company is like setting the cornerstone of a monumental structure. With the right foundation and understanding, what begins as an idea can grow into a thriving enterprise. As Steve Jobs once said, “Great things in business are never done by one person; they’re done by a team of people.”

This article has walked you through the essential elements of company formation and structure, from understanding what a company is and how it differs from other business entities to the crucial steps involved in its creation. We explored the importance of the Memorandum and Articles of Association, documents that act as the company’s DNA, defining its purpose and internal workings.

Recognizing the various types of companies, whether by incorporation, number of members, or liability, helps you choose the best fit for your vision. And understanding the intricate structure of a company—from shareholders to executive officers—ensures that each piece functions harmoniously to achieve collective success.

In the dynamic world of business, knowledge is your most valuable asset. By grasping these fundamentals, you are not just preparing to build a company; you are setting the stage for innovation, growth, and enduring success. Remember, the journey of a thousand miles begins with a single step, and with this knowledge, you are well on your way to creating something extraordinary.

Reference.

Secretarial Practice Book 2019 by Maharashtra State Bureau of Textbook Production and curriculum Research.

Organisation and commerce and management book 2019 by Maharashtra State Bureau of Textbook Production and curriculum Research