HOW TO INCORPORATE A BUSINESS

Introduction 

The term corporation comes from the Latin corpus, which means body. A corporation is a body--it is a legal person in the eyes of the law. It can bring lawsuits, can buy and sell property, contract, be taxed, and even commit crimes. It's the most notable feature: a corporation protects its owners from personal liability for corporate debts and obligations--within limits. The corporation is considered an artificially created legal entity that exists separate and apart from those individuals who created it and carried on its operations.

Incorporation of Business/Company

Incorporating gives you the benefit of limiting your liability and making your business easier to transfer to others. Limiting your assets will protect your home and other belongings from being seized as collateral. Depending on the type of company you've started and your long-term goals for it, incorporating might be right for you, or it may be superfluous. Being incorporated enables you to:

• Legitimize the business.
• Limit your liability.
• Take your company public.
• Issue stock options to employees.
• Transfer ownership of shares among members of the corporation.
• Have your corporation outlive you.
• Raise investment capital.

Why Incorporation?

It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation. Remember, aside from tax reasons, the most common motivation for incurring the cost of setting up a corporation is the recognition that the shareholder is not legally liable for the actions of the corporation. This is because the corporation has its separate existence wholly apart from those who run it. 

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• Unlimited Lifespan

Unlike proprietorship and partnership, the life of the corporation is not dependent upon the life of an individual or individuals. It can continue indefinitely until it achieves its objective, merges with another business or announces bankruptcy.

• Transferability of Shares 

In the corporations, all of the individual owner's rights and privileges are represented by the shares of stock they hold. So, it is very easy to divest this ownership by simply parting with the shares. But the process of divesting one of his own can be cumbersome and costly in proprietorship and partnership.

• Ability to Raise Investment Capital

It is usually much easier to attract new investors into a corporate entity because of limited liability and easy share transfer mechanism.

The incorporation process begins with the conceptualization of the idea, to incorporating a legal entity and finally commencing the business activities.

The first step in incorporating a business in India is, choose what kind of business entity you want to register.

There are several types of business entities in India.

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1. Proprietorship
2. Partnership Firm
3. Limited Liability Partnership
4. Company

Compared to the other forms of business setups, LLPs are more advantageous than the rest of the above. One of the biggest advantages is, it is less complex than running a company, gives most benefits of companies, has a more formal existence like a company and protects the personal assets of partners from the business liabilities.

Company is one of the different types of business entities in India.

The Companies Act, 2013 governs the procedures for incorporating a company in India. Incorporating a company is a preferred form of business because it has several advantages such as limited liability and perpetual succession, to name a few. Many people interchangeably use the terms "company", "business", "firm" etc. But when it comes to incorporating, each of these is considered different entities. It is a common misunderstanding that any business can be called a Company. A business can be called a Company in India only if it is incorporated under the provisions of the Companies Act, 2013.

Procedure for Incorporating a Company 

One can incorporate a company either as a public limited or private limited. Though both the processes are almost identical, incorporating a public company requires a bit more formality. The difference between the two categories of companies is that private limited companies can commence business activities immediately after receiving the Certificate of Incorporation. However, a public company has to undertake the Capital Subscription to raise capital from the public (Initial Public Offering). A public company has to issue a prospectus inviting the public to purchase the company's shares and must also meet the minimum requirements for the subscription before it can receive the Certificate of Commencement of Business.

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Steps for incorporation of a company

• Promotion
• Incorporation
• Capital Subscription
• Commencement of Business
  
  

1. Promotion 

The first step in the incorporation of a company is promotion. Promoters are those persons who initially conceive the idea of setting up a company. They have a vital role to play since they have to weigh the idea and have to take the necessary steps to realize the idea and to give a practical connotation to the business plan – Such as feasibility of the business idea, setting up the business facility and company registration.

2. Incorporation

In the next step, the following documents are needed. 

• Memorandum of Association (e-MOA)
• Articles of Association (e-AOA)
• Directors Consent Form (Form DIR – 2)
• Affidavit and declaration by the first subscribers and directors of the company (Form INC – 9)
• Company registration forms (SPICe-32)
• Payment of incorporation fees

When the above-mentioned documents are ready, the promoters submit the documents along with the application for incorporation with the Registrar of Companies (ROC) in the State where the registered office of the company would be situated. After all, the documents are examined by the ROC, and it is checked that all the statutory requirements for the formation of the company have been met, once the Registrar is satisfied with the compliance of all the formalities, the Certificate of Incorporation will be issued, signifying the birth of the company. A CIN (Corporate Identity Number) will be allotted to the company.

The Certificate of Incorporation is the legal proof and evidence of the birth of the company. The company can validate contracts and agreements to carry forward its business activities. Once the Certificate of Incorporation is received, a private limited company can start its business. Still, a public limited company has to go through the process of capital raising before commencing business.

3. Capital Subscription

The third stage requires a public company to raise funds from the public for the capital of the company. A public company raises capital funds by issuing shares and debentures of the company to the public. For raising capital, the following steps need to be taken. 

• According to the guidelines issued by SEBI(Securities and Exchange Board of India), a public company has to disclose certain information before SEBI to ensure a certain level of investor security before it can raise funds from the public.

• Filing of prospectus so that the public has a clear picture of the motives, objectives and vision of the company they are going to invest. The prospectus is a kind of advertisement for the company. A copy of the prospectus is also needed to be filed with the RoC at the time of registration.

• There needs to be a minimum subscription of the issued capital by the public. The Companies Act clears that 90% of the issue needs to be subscribed by the public; otherwise, the share cannot be allotted. This has been done with a clear objective to ensure the company does not have a lack of capital while commencing business.

• The company must apply to any one of the National Stock Exchanges to list the company's shares and to deal with the company's shares and debentures. Within ten weeks of the closure of the capital subscription list, the stock exchange will have to approve. If the approval is not secured, the allotment becomes void, and the company will have to return the money to the public.

• The shares are allotted to the applicant once the application money is received. After that, the applicant receives a letter of allotment after successful allotment.

4.  Commencement of Business 

A private limited company can commence business after getting the Corporate Identification Number. Still, a public company to commence its business must procure a Certificate for Commencement of Business. For that end, a public company needs to apply to the Roc with the following documents. 

• A declaration regarding the minimum subscription clause has been met.
• A declaration that all the shares have been properly allotted.
• A declaration that the excess application money has been returned to the applicants.
• A declaration that the directors of the company have subscribed to the shares in cash.

Suppose the Registrar of Companies is satisfied that all the documents are genuine. In that case, he will issue the Certificate for Commencement of Business, and the public company can start its business activities.

Conclusion

To sum up things, it can be said that though the corporation of business/company is a lengthy and complex procedure, it is always a better option to incorporate a business. Incorporation has its share of disadvantages also like periodic meetings of directors, filing of documents after a certain time. Still, the advantages are far more noteworthy. That is why in today's world, 80% of the startups are incorporating themselves so that their hard work for years does not get dissolved for some rational reasons.