Formation of a Company and its Memorandum
/ Company Formation / Registration

Formation of a Company and its Memorandum

The formation of a company goes through several steps, starting from idea generation to commencing the business. However, the first and foremost thing in setting up a business is the preparation of memorandum and articles of association in the company.

A company, being an unnatural person, comes into occurrence only after following a legal procedure. The steps intricated in the formation of a company are:

  • Promotion stage
  • Registration stage
  • Incorporation stage
  • Commencement of business stage

Promotion stage
Promotion is the initial step in the formation of a company. Promotion means looking for new opportunities and subsequently converting them into a business form. The persons who undertake such tasks are known as promoters. A promoter is an individual who does the mandatory preliminary work incidental to the formation of the company. He conceives an idea of forming a company with an objective and set it going. The promotion stage comprises of the following steps:

  1. Recognize the business break and determine the kind of business that needs to be done.
  2. Conduct a practical study and regulate the economic, technical and legal aspects of implementing the occupation.
  3. Attentiveness shown by promoters towards the business idea and supply of capital and other mandatory procedures to start the business.

Registration stage
It is the second part of the formation procedure. In this step, the company gets registered, which brings the company into occurrence. A company is said to be in presence if registered as per the companies act, 2013; for getting a company registered, some certificates need to be provided to the registrar of companies. There are various steps involved in the registration phase and are as follows:

  1. Memorandum of Association- The founders of the company must sign it. A minimum of seven members is required in the case of a public company and two in the case of a private company. The MOA must be appropriately registered and stamped.
  2. Article of Association- It is also needed to be signed and yielded. All members who earlier signed MOA should also be signing the AOA.
  3. The next step is composing a list of directors, which should be filed with the registrar of companies.
  4. Directors of the company should provide a written consent agreeing to the directors, which should be filed with the registrar of companies.
  5. The notice of address of the office is required to be filed.
  6. A lawful declaration should be made by any lawyer of either the High Court or Supreme Court, or a person of the capacity of director, secretary or managing director. This statement shall be filed with the ROC.

Incorporation stage
A certificate of incorporation is provided when the registrar is satisfied with the documents provided. This certificate validates the establishment of the organization in the records.

Commencement of business stage
A certificate of commencement of business is needed for a public company to commence business, while a private company can commence business once it has received the certificate of incorporation.

Memorandum of Association
A memorandum is the most crucial document of the company. No company can be registered without a memorandum. It is a legal statement signed by all initial shareholders agreeing to form the company. It is the charter of the company. It is based on the constitution and defines the scope of the company’s powers for it has been incorporated in this act. It lays down the primary conditions upon which a company is allowed to be incorporated. The memorandum of the company shall state:

  • Name clause
    The first clause states the name of the organization.  The title of the company should not be similar to any existing company. In the case of a public limited company, the word “limited” shall be added as the last word of the name of the company, or in the case of a private limited company, the word “private limited” shall be added as the last word of the name of the company.
  • Registered office clause
    This clause specifies the name of the state in which the company’s registered office is situated. This helps to regulate the jurisdiction of the registrar of companies. The company is required to notify the location of registered office to the registrar of companies in thirty days from the date of incorporation of the company.
  • Object clause
    It is the essential clause of the memorandum of association. It shall include the purpose for which the company is incorporated. The company shall perform its further business only following this clause. The objectives can be further classified into the following three sub-categories:
    • Primary objective- It states the main business of the company.
    • Incidental objective- These are the objectives ancillary to the attainment of the main goals of the company.
    • Other objectives- Any other objectives which the company may pursue and are not covered in the above points.
  • Liability clause
    It states the liability of the members of the company. In the case of an unlimited company, the detriment of the members is unlimited, whereas in the instance of a company limited by shares, the liability of the members is restricted by the amount unpaid on their shares. For a company restricted by guarantee, the liability of the members is bound by the amount each member has agreed to contribute.
  • Capital clause
    This clause details the maximum capital that a company can raise also called the company’s authorized capital. This also explains the break-up of such capital amount into the number of shares of a fixed amount each.

Articles of Association
It is the second most crucial document after the memorandum. It contains the rules and regulations for the internal affairs of the company. These are for the benefits of shareholders as against the memorandum, which is for the use of outsiders.

It has been established that the memorandum contains the fundamental conditions. Within these conditions, the company can frame its own rules and regulations for the management of day to day affairs of the company. The articles of association are the guidelines and procedural laws of the company. According to the articles of association, the directors and other officers are obliged to perform their duties regarding the company’s management. The components of AOA are as follows:

  1. Provisions on the company name
  2. Purpose of the company
  3. Share capital
  4. Organization of the company
  5. Provisions on shareholder meetings

Change in the memorandum of association is a prime exercise through which the company brings about the required flexibility, which is pertinent to its existence and survival as an entity. It is a pre-condition before the company can initiate any drastic change in its ‘shape or structure.’ The memorandum, together with articles of the association, form the constitution of the company. They help the entrepreneurs to run the company proficiently and help in streamlining the business. Thus, the formation of a company in company law includes various major stages for fulfilling the incorporation procedure. Without these stages, the company cannot be established and run.

We assist our clients in dealing with compliances related to company incorporation, business setup, ROC filings, winding up of the company, etc. If you have any questions or would like to know more about the formation of a company and its memorandum, kindly contact us.