A Beginner's Guide to Company Formation

This is a guest post by Danyal Naqvi, a practicing Company Secretary

Being a Company Secretary", there are a lot of questions which people often ask regarding the word COMPANY. The most common of them are:

  • Is it really practical for two individuals to form and maintain a private company?
  • How cumbersome and lengthy it would be to incorporate a new company?
  • What advantages a company can provide us with over a sole proprietorship or a partnership firm?
Well, my friends, I would love to answer all these questions at one go, but since I cannot do so in a single article I would like to take up the most important points first and they are:

Forming a CompanyForming a Private Limited Company with a minimum of two individuals and the procedure involved in it :

Let me make this point very clear to you all that in today’s world where everything happens online and in a secure manner, it takes only about 10 to 12 working days to get a new company registered with the Registrar of Companies and an expenditure (Inclusive of all costs) of around Rs.15000 to Rs.16000 to incorporate a company with a minimum authorized share capital of Rs.1 Lac; and above that it is the Company Secretary or a Chartered Accountant who takes care of all the issues at your end and you need not be bothered even a bit regarding the formation of your company as compared to the hardships involved in registering a sole proprietorship or a partnership Well I suppose for any enthusiastic entrepreneur desirous of venturing into the corporate world this expenditure would be nothing considering the added advantages of corporate form of business. Let us now have a brief glance at the requirements of forming a Private Limited Company:

1. Director Identification Number (DIN): This is a unique identification number allotted by the Ministry of Corporate Affairs. Any individual who wants to be a director in a company needs to get DIN allotted to him/her before he can be appointed as such. However it takes only 2 to3 days to get a DIN registered and its cost is a miniscule amount of Rs.100 (usually included in the cost of incorporation).

2. Digital Signature Certificate (DSC): As I have mentioned in my article that all the procedure is now online; one of the Subscriber amongst the two has to get a DSC for the purpose of filing the various forms. It takes only 20 minutes to get a DSC and its cost is also already included in the cost of company formation.

3. A Registered Business Name: You get to chose six names of your preference for submitting it to the registrar (ROC) online and the ROC will then make available the name which has not yet been taken up by others. The name must be followed by the word ‘Private Limited'. The ROC exercises some control over the choice of name, it cannot be identical or very similar to the name of an existing company.

4. A Registered Office: This need not necessarily be the same address as the business is conducted from. This is the address, through, where all official correspondence will go. It can be any place owned or rented from where you intend to carry on your business.

5. Shareholders: There must be a minimum of two shareholders (also described as `members' or `subscribers'). A private company can have up to fifty shareholders.

6. Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. The as stated above you can form a Private Limited Company with a Minimum Capital of Rs.1 Lac contributed by the two subscribers in any ratio.

7. Memorandum of Association: The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway the members of the company can change the objects whenever they like.

8. Articles of Association: This document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders.

9. Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.

10. Auditors: Every company must appoint a qualified auditor. The auditor's duty is to report whether or not the books of accounts the company have been properly kept and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.

This a general outline of the requirements for the formation of a Private Limited Company. Read A Beginner's Guide to Company Formation : Part 2 to understand the Step by step process of company formation in India.

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Related Article :
A Beginner's Guide to Company Formation - Part 2

Share your views...

16 Respones to "A Beginner's Guide to Company Formation"

Nandan Narula said...

Thanks a lot Danyal for sparing some time from your busy schedule and sharing your experience with us. I welcome you to the panel of experts at MONEY MATTERS.

Danyal said...

Well,,Thanks to you Nandan. it was your brave venture into this website which started off from a blog and which is now prompting us to make some contributions towards your hard endeavours.
I just hope that our readers find my article interesting and I am able to contribute something towards this....Thnx

October 9, 2010 at 3:07 AM
azhar said...

Dude Its good... N thnks for sharing this information. Looking fwd For another one.

October 9, 2010 at 6:06 AM
Danyal said...

Thanx Azhar...well i would make sure that i dont keep u waiting for long for my next article...

October 9, 2010 at 9:07 AM
Nona said...

Nice post! Thanks for sharing.

October 9, 2010 at 9:02 PM
Danyal said...

Thnx...Nona..I hope it helps the aspiring entrepreneurs....

October 10, 2010 at 12:43 AM
Nandan Narula said...

@ Azhar & Nona : Thanks a lot for your valuable feedback. Hope to see you again at MONEY MATTERS

niharika said...

Hey Danyal..... good one. Looking forward to the next one.

October 11, 2010 at 7:47 AM
Pratish said...

Hey Nandan,
thnxxx for such valuable informartion

October 12, 2010 at 1:15 AM
Nandan Narula said...

@ Niharika : Danyal will come up with a sequel to the current article soon.

Nandan Narula said...

@ Pratish : Welcome to MONEY MATTERS and thank Danyal, the guest author, for sharing this piece of info with us. Hope to see you at MONEY MATTERS again.

Danyal said...

@Niharika...Thnx a lot..and i'll try my best to come up with my next article as soon as i can.
@Nandan..It is my pleasure to be a part of ur initiative..thnx again..

October 12, 2010 at 11:25 PM
Romeo Das said...

That was really an interesting and informative post. I am doing CS and it was of much help to me. Thanks a lot for sharing :)

Btw, hope you like my post - When love calls

Take care!

October 18, 2010 at 10:35 AM
Nandan Narula said...

Welcome to Money Matters Romeo and thanks a lot for your feedback.

Enterprise Mobility For Better Supply Chain Management said...

people want these kind of usefull information.....and am really looking forward for your next interesting post....

October 19, 2010 at 5:52 AM
Danyal said...

Thnx Romeo Das..I hope that this article helps you in your studies as well as your professional career ahead. And i would be glad to offer you any possible assistance I could.

@Enterprise Mobility For better supply Chain Management...thnx a lot for appreciating the article..and most probably I will come out with my article next week and wont keep my readers waiting for long...

October 19, 2010 at 6:09 AM

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