6

ESTABLISHMENTOFANEWUNIT

ChapterOutline ______________________________

6.1 Introduction
6.2 Make the Idea Official
6.3 Major forms of Business Organization
6.4 Legal Requirements for Setting up a Sole Proprietor Business
6.5 Legal Requirements for Setting up a Partnership Business
6.6 Legal Requirements for Setting up a Company
6.7 Legal Requirements for Setting up a Limited Liability Partnership

6.1 INTRODUCTION
Anybody with a vision can become an entrepreneur. A person need not
necessarily have a professional degree, big bank balance or even business
experience to start something new. All that he needs is a strong business plan
and the drive to see it sail through.
While a person may want to be an entrepreneur, given that he has a drive to
do so, he may not really know what business to start.
He should ask himself the following questions to figure out the type of
business he should start:
. What are his skills?
6.2 Entrepreneurship Development

· What is his passion?

· Where is his area of expertise?
· What is his financial strength and how much he can afford to spend,
given that the business has the risk of failure?
· What is his capital requirement?
· What is his desired lifestyle?
Once he has answered these questions, he is now ready to be an entrepreneur.
6.2 MAKE THE IDEA OFFICIAL

Once the entrepreneur decides to start his business, he should be clear of

all legal aspects of the business to stay out of troubles over anybody suing
him for anything. The following points help in making his business idea
workable:
1. The form of business: sole proprietorship, partnership, company.
2. Name of the business
3. Registration of business
4. Tax structure of the country
5. Permits and Licenses
6. Bank account
7. Trademarks, copyrights or patents
While entrepreneur can do some of these things himself, for others he
needs to consult a lawyer so that he covers everything that he needs to do
the business.
This chapter discusses the legal requirements for establishing a new unit in
brief.
6.3 MAJOR FORMS OF BUSINESS ORGANIZATION
Business can be started in many forms (For details see chapter 9). The form
of business decides the future of entrepreneur's success. They affect the
following aspects of business:
· Tax liability
· Legal liability
· Cost of formation
· Operational costs
Establishment of a New Unit 6.3

Amongst the many forms, 4 types of business organization are discussed.

These are:
1. Sole Proprietorship
2. Partnership
3. Company
4. Limited Liability Partnership
1. Sole Proprietorship
This is the simplest and most common form of business ownership. It is run
by a single individual for his own benefit. He takes all the decisions with
respect to business operations and maintains secrecy of his accounts. He
has total flexibility of running his business. The business continues till he
can manage it. Once the owner stops the business operations, the business
comes to end.
There is very little regulation for proprietorship business to be established. It
requires only a business license.
2. Partnership
Expansion in sole proprietorship business requires more capital and
managerial skills and also more risk to run the business. Two or more persons
come together, with different business skills and start a business (a person
may lack managerial skills but may have capital or vice versa). This form of
business is called partnership.
Section 4 of The Indian Partnership Act, 1932, defines partnership as "the
relation between persons who have agreed to share the profits of business
carried on by all or any of them acting for all".
"A partnership is a form of business organisation in which two or more
persons up to a maximum of twenty join together to undertake some
form of business activity". —J. L. Hanson
The partnership business may be carried on by all the partners or any of them
acting for all.
The persons who own the partnership business are individually called
'partners' and collectively they are called as ‘firm’ or ‘partnership firm’.
The name under which partnership business is carried on is called ‘Firm
Name’.
Like proprietorship, each partner has unlimited liability in the firm. So, if the
assets of the partnership firm fall short to meet its obligations, the partners'
personal assets can be used for the purpose.
6.4 Entrepreneurship Development

Partnership is relatively ease to form. Very few legal formalities have to be

complied with. Though the registration ofpartnership is desirable, it is not
obligatory.
3. Company
Company is a separate legal entity that works in its own name. Its profits
are, therefore, taxed as "personal income" of the company. Dividends
distributed to the shareholders are personal income of the owners. As per
the Indian Income Tax Act, however, these dividends are exempt from
tax. Liability of shareholders is limited to their share value. They can
freely transfer their shares to anyone else. Their personal assets cannot be
used to pay the business debts.
Establishing a company form of business is costly and requires complex
paperwork.
4. Limited Liability Partnership
Limited Liability Partnership commonly known as LLP, is a combination
of both partnership and private limited company. In India, LLP was intro -
duced in April 2009, through the LLP Act of 2008. LLP is a separate
entity, distinct from its owner. Limited Liability Partnership has become a
preferable form of organization amongst the budding entrepreneurs as it
incorporates the benefits of both partnership and company.
The minimum number required to incorporate an LLP is 2, however, there
is no upper limit. The rights and duties of the designated partners are
governed by the LLP agreement. They are directly responsible for com-
pliance of the provisions of the LLP Act and provisions specified in the
agreement.
LLP has lesser compliance requirements as compared to a company.
Comparative Analysis of Company, Partnership Firm and LLP

Features Company Partnership firm LLP

1. Regist- Compulsory registra- Not compulsory. Unre- Compulsory registra-

ration tion required with the gistered Partnership tion required with the
ROC. Certificate of Firm will not have the ROC
Incorporation is conc- ability to sue
lusive evidence

2. Name Name of a public No guidelines Name ends with “LLP”

company ends with the “Limited Liability
word “limited” and a Partnership”
private company with
the words “private
limited”
Establishment of a New Unit 6.5

3. Capital Private company should Not specified Not specified

Contribution have a minimum paid
up capital of Rs. 1 lakh
and Rs.5 lakhs for a
public company
4. Legal Entity Separate legal entity Not a separate legal Separate legal entity.
Status entity
5. Liability Limited to the extent of Unlimited, can extend to Limited to the extent
unpaid capital personal assets of the of contribution to the
partners LLP
6. No. of share- Minimum of 2. In a 2- 20 partners Minimum of 2. No
holders/ maximum limit
private company, max-
Partners
imumof50 shareholders
7. Foreign Nati- Foreign nationals can be Foreign nationals can- Foreign nationals canbe
onals as share- shareholders. not form partnership partners
holder/Partner firm

8. Taxability The income is taxed at The income is taxed at The income is taxed at
30% + surcharge+cess 30% + surcharge+cess 30% + surcharge+cess

9. Meetings Qua rt e rl y B oard of Not required Not required

Directors meeting,
annual shareholding
meeting is mandatory
10.Annual Annual Accounts and No returns to be filed Annual statement of
Return Annual Return to be with the Registrar of accounts and solvency
filed with ROC Firms &Annual Return has to
be filed with ROC

11.Audit Compulsory, irresp- Compulsory Required, if the contr-

ective of share capital ibution is above Rs.25
and turnover lakhs or if annual turn-
over is above Rs. 40
lakhs

12.Dissolution Veryprocedural. Volun- By agreement of the Less procedural comp-

tary or by Order of partners, insolvency or ared to company.
National Company Law by Court Order Voluntary or by Order
Tribunal of National Company
Law Tribunal

6.4 LEGAL REQUIREMENTS FOR SETTING UP A SOLE

PROPRIETOR BUSINESS
Many businesses in India are operated as sole proprietorship as it is one of
the easiest and simplest forms of business entity to register. A sole
proprietorship structure can be used by a service provider, a manufacturer, a
trader or a merchant.
6.6 Entrepreneurship Development

There is no government regulatory paperwork and compliance. There is no

minimum capital investment requirement and the proprietor has full control
and ownership over his business.
There is no need to register the sole proprietorship business but in order to
receive payments in the name of the business, the sole proprietor has to open
a current account in a bank. For this, he needs proof of existence of the firm,
and the address proof.
The following documents help in providing this proof:
1. Pan card and ID for address proof of proprietor.
2. Business address proof (eg: electricity bill in proprietor's name, or
electricity bill + registered rental agreement, etc.).
3. Two government registration documents confirming name and
address of business (shop establishment license, service tax
registration, GST, etc.).
4. Certificate from a chartered accountant
Sole Proprietorship Registration
There is no formal procedure to register a sole proprietorship, as it is
considered to be an extension of the Proprietor. The sole proprietorship
business can be established only through:
· opening a bank account in the name of the proprietorship firm, or
· obtaining licenses for conducting the business.
To open a bank account for a sole proprietorship firm, RBI's KYC norms
require that any two of the following documents must be submitted to the
Bank:
· Certificate/license issued by the Municipal authorities under Shop &
Establishment Act.
· Sales and income tax returns.
· GST certificate.
· Certificate/registration document issued by Sales Tax/Service Tax/
Professional Tax authorities.
· License issued by the Registering authority like Certificate of Practice
issued by Institute of Chartered Accountants of India, Institute of Cost
Accountants of India, Institute of Company Secretaries of India, Indian
Medical Council, Food and Drug Control Authorities.
Establishment of a New Unit 6.7

· Registration/licensing document issued in the name of the proprietary

concern by the Central Government or State Government Authority/
Department, etc.
· Banks may also accept IEC (Importer Exporter Code) issued to the
proprietary concern by the office of DGFT (Directorate General of
Foreign Trade) as an identity document for opening of the bank account
etc.
· The complete Income Tax return (not just the acknowledgement) in the
name of the sole proprietor where the firm's income is reflected, duly
authenticated/ acknowledged by the Income Tax Authorities.
· Utility bills such as electricity, water, and landline telephone bills in the
name of the proprietary concern.
As any two of the above documents are required to open a bank account in the
name of the Proprietorship firm, the proprietors usually obtain any of the
above license / registration / certificate first to establish the existence of the
proprietorship firm.
Sole Proprietorship Registration through License
As explained above, the existence of a sole proprietorship is established
through licenses or registrations or certificates in the name of the Proprietor.
Based on the type of business, the following are some of the easy registrations
to obtain for establishing a sole proprietorship in India.
1. Proprietor PAN Card
Obtaining PAN card for the Proprietor is the first step in establishing a
proprietorship business. There is no legal distinction between the sole
propeietor and his business. The business is one of his assets like other assets
(car, jewellery, etc.). The creditors, therefore, have a claim on his personal
assets also in the event of non-payment of debt. The sole proprietor usually
has personal assets in the name of his spouse against whom creditors have no
claim.
PAN card of the proprietor is used for:
· opening a current bank account,
· obtaining licenses / registrations / certificates in the name of the sole
proprietorship firm, and
· filing income tax return for the sole proprietorship.
6.8 Entrepreneurship Development

2. Business Involved in Manufacturing or Trading

GST is applicable for goods and products sold in India. Any person involved
in manufacturing or trading must obtain GST Registration for conducting
business irrespective of the type of business entity. Therefore, to start a sole
proprietorship business, the owner of business obtains GST Registration from
the respective State Government and files GST returns as per provisions of
the law.
(1) Shop and Establishment Act
Registration under the Shop and Establishment Act is mandatory for
the business that operates a store or factory or formal place of business.
Shop and establishment license can be obtained to show proof of
existence of Proprietorship business.
Shop and Establishment Act is covered under State legislation and
each state has its own rules and regulations for the same. Thus,
they differ from State to State and have to be followed for the state
in which registration is to be obtained.
Broadly, all shops, hotels, eating houses, restaurants, theatres, place of
public amusement and other commercial establishments etc. are
covered under the Shop and Establishment Act. They have to obtain
registration under the Act.
The objective of the Act is to protect the rights of both employer and
employee related to payment of wages, working hours, terms of
service, wages for holidays, leave policy, work conditions, overtime
work, interval for meals and rest, prohibition for employment of
children, employment of young persons or women, weekly holiday,
dismissal, cleanliness, lighting and ventilation, fire safety and pre-
cautions, accidents, record keeping, etc.
Establishment covered under this Act must apply for registration within
30 days from the date of commencement of establishment, in
prescribed form along with prescribed fees. This Act is governed by
labour department of the State. Registration application is to be
generally submitted to local district labour officer who will issue Shop
and Establishment Act registration certificate on being satisfied with
the details given in the application. Though application procedure
differs from State to State, basic details in the application for
registration are as follows:
. Name and address of the establishment .
Name of the employer
Establishment of a New Unit 6.9

· PAN of establishment
· Address proof
· Sale deed or rent agreement
· Category of establishment
· Number of employees
· Details of employees
· Other relevant details as required (2) MSME
(Micro, Small and Medium Enterprise) MSME
can be:
(i) Manufacturing enterprise; and
(ii) Service enterprise.
They are defined in term of investment in Plant and Machinery/
Equipment as follows:
Micro Small Medium

Manufacturing 25,00,000 Less than Less than

Enterprises 5,00,00,000 10,00,00,000
Service Less than Less than Less than
Enterprises 10,00,000 2,00,00,000 5,00,00,000

MSME Registration is provided to Micro, Small and Medium

sized enterprises under the MSMED (Micro, Small and Medium
Enterprises Development) Act. 2006 to promote small scale
businesses in India. MSME registration can also be used to prove
the existence of a proprietorship business.
Registration Process
The small and medium scale industry owner has to go through the following
procedure to obtain registration under MSMED Act:
1. He has to fill a form which can be done online as well as offline.
2. For registration for more than one industry also, he can do individual
registration.
3. The documents required for the registration are:
· Personal Aadhar number
· Industry name, Address
6.10 Entrepreneurship Development

· Bank account details, and

· Some common information
4. He can provide self-certified certificates.
5. There is no registration fees required for this process.
6. On uploading the application, he gets the registration number.
3. Business Involved in Providing Services
Business involved in providing services is liable to collect and remit service
tax under GST. GST registration can be used to show the existence of a
proprietorship business. However, once service tax registration is obtained,
tax returns are filed by the Proprietorship.
Thus, GST registration, other registrations like shop and establishment act
license or MSME registration can be used by the sole proprietorship to
establish the existence of a proprietorship business.
ESI registration or professional license can also be used for the said
purpose.
These registrations help the sole proprietorship in satisfying the RBI rules for
opening a bank account in the name of Proprietorship and conduct business as
Proprietorship firm.
6.5 LEGALREQUIREMENTS FOR SETTING UPAPARTNERSHIP
BUSINESS
Partnership is easy to set-up with very few statutory requirements as
compared to statutory requirements applicable to companies. Registration
process for the partnership firm involves the following steps:
1. Choose name of the partnership firm: The partners can choose
any name for their partnership firm subject to the following
conditions:
(i) The name must not be identical to the name of another existing
firm doing similar business. This can affect reputation the firm
whose name is copied.
(ii) The name must not contain words that make the firm look
similar to any department of the Government, except when
the State Government gives its consent (in writing) to use
such words as part of the firm name.
2. Make partnership deed: It is the document in which the rights and
obligations of the members of the partnership are written. The
partnership deed contains the following details:
Establishment of a New Unit 6.11

· Name and address of the firm and the partners.

· Nature of business.
· Date of commencement of business.
· Duration of partnership (whether for a fixed period/project).
· Capital contributed by each partner.
· Profit sharing ratio amongst the partners.
3. Additional clauses, if required: Though partnership deed contains
information as described above, partners may also mention additional
clauses, as mentioned below:
· Interest on partner's capital, partners' loan, and interest, to be
charged on drawings.
· Salaries, commissions etc. if any, payable to partners.
· Method of preparing accounts and arrangement for audit.
· Division of task and responsibility, which includes duties, powers
and obligations of the partners.
· The rules to be followed in case of retirement, death and
admission of a partner.
4. Partnership deed to be in proper format: The partnership deed
should be on a stamp paper in accordance with the requirements of the
Indian Stamp Act. A copy of the Partnership Deed should be filed with
the Registrar of Firms if the firm is being registered. Every partner
should also have a copy of the partnership deed.
5. Decide whether or not to register the partnership firm: Partnership
is governed by the Indian Partnership Act, 1932. While the partnership
deed contains the details of the firm, as per the Partnership Act,
registration of partnership firm is not compulsory. It is optional at the
discretion of the partners. Partners may or may not register their
Partnership agreement. However, if the partnership deed is registered,
partners can enjoy the benefits which a registered partnership firm
enjoys (For details, see chapter 9).
Registration can be done before starting the business or anytime
during the period when partnership firm is working.
6. Registration: If the firm decides to register the partnership deed, it
has to follow the procedure for registration.
The firm shall submit an application along with the prescribed
fees to the Registrar of Firms of the State in which the firm is
6.12 Entrepreneurship Development

situated. The application has to be accompanied with the following

documents:
(i) Application for Registration of Partnership.
(ii) Duly filled specimen of Affidavit.
(iii) Certified true copy of the Partnership Deed.
(iv) Ownership proof of the principal place of business or rental/ lease
agreement thereof.
7. Sign the application: The application for registration must be signed
by all the partners, or by their agents authorised to do so on their
behalf.
8. Issue of registration certificate: When the registrar is satisfied
with the details given in the partnership deed, he shall record
the details in the Register of Firms and issue a Certificate of
Registration. The Register of Firms is maintained at the office
of the Registrar which contains complete and latest information
about each registered firm.
This Register of Firms is open to inspection by any person on payment
of the prescribed fees. Any person interested in viewing the details of
any firm can request the Registrar of Firms for the same and get a copy
of all details of the firm.
Despite registration with the Registrar of Firms, the partnership firm
should apply for registration with the Income Tax Department. It is
mandatory to apply for registration with the Income Tax Department
and have a PAN card. After acquiring a PAN Card, the partnership
firm shall open a Current Account in the name of the partnership
firm. All operations of the firm shall operate through this bank
account.
6.6 LEGAL REQUIREMENTS FOR SETTING UP A COMPANY
Setting up a company involves the following stages:
I. Promotion
II. Incorporation
III. Capital Subscription
IV. Commencement
Establishment of a New Unit 6.13

I. Promotion
Meaning
Promotion involves taking preliminary steps for formation of a company. It
begins with conception of an idea to form a company and its detailed
investigation about testing the profitability of the idea. If the idea appears
feasible, it involves assembly of resources, to launch the business enterprise.
Promotion is "discovery of business opportunities and the subsequent
organisation of funds, property and managerial ability into a business concern
for the purpose of making profits therefrom". - C.W. Gerstenberg
Process of Promotion
The process of promotion involves the following steps:
1. Explore the business opportunities: The promoter conceives the idea
to form a company and verifies its feasibility.
2. Assemble resources: If the business idea sounds profitable, the
promoter collects men, material and managerial talent to further the
corporate proceedings.
3. Provide finance: Finance is the life of a corporate enterprise. Purchase
of resources, their conversion into operative ideas and carrying over
proceedings of forming the company requires funds. Promoters arrange
for the necessary funds.
Promotion is, thus, putting an idea into practice.
Elements of Promotion
There are four elements of promotion:
1. Discovery: It means conception of an idea by a person or a group of
persons to visualize the commercial feasibility of:
(i) Floating a new enterprise
(ii) Expanding an existing enterprise
(iii) Combining the existing enterprises
A new enterprise may be floated to exploit a technological opportunity or to
produce new products for consumers. The existing enterprise may be expanded
to avail the economies of scale or to make best use of the prevailing economic
opportunities. The existing enterprises may be combined to reduce the total cost
of products/services or reduce the level of competition.
2. Investigation: The idea conceived should be thoroughly investigated
6.14 Entrepreneurship Development

to test its commercial viability. The investigation should relate to

matters such as plant location, availability of resources (raw materials,
labour etc.), fuel and power, the existing and potential level of
competition, the extent of present and potential demand for the
proposed product, consumers' likes, dislikes, preferences, buying
habits, economic conditions etc. Investigation helps to know whether or
not the new enterprise will be able to recover the capital and operating
costs and offer a return to owners.
3. Assembly: If commercial feasibility of the idea is ensured, promoters
assemble the resources to put the idea into action. Actual selection of
the site, purchase or lease of building, plant and machinery and other
fixtures, tying up with sources of raw material and labour supply
constitute the assembly of business elements that help in converting the
idea into a workable plan.
4. Financing: Funds are required to meet working capital and fixed
capital needs of an enterprise. Promoters estimate capital requirements
and the sources from where funds will be raised. They also decide
about the capital structure, that is, the proportion in which various
sources of funds (shares, debentures etc.) will be raised. Funds have to
be arranged for acquiring tangible property (fixed assets and current
assets) and intangible property [goodwill, patents, promotion expenses
(expenses of investigation, survey etc.)]. Besides, company also
maintain cash in hand to meet the operating expenses and future
contingencises.
Promoter
Promoter is an individual, association, partnership or a company that carries
out the process of promotion. They are the persons who originate the idea of
forming a company, arrange the resources, hold the resources together,
supervise the steps to form the company, get together the subscribers to
memorandum of association, get the memorandum and articles of association
prepared, printed, executed and registered, make arrangements with brokers,
bankers and legal advisors, arrange for underwriters, make preliminary
contracts with sellers, prepare and circulate prospectus etc.
Promoters are not necessarily those engaged in the initial formation of a
company. All those who assist promoters in carrying out the functions of
promoters are also promoters unless they do so in the capacity of professional
experts. An accountant who values the proposed company's assets, for
example, is not a promoter as he only exercises his professional expertise. If
the same accountant arranges with people who will provide funds to the
proposed company, he will be a promoter.
Establishment of a New Unit 6.15

The Securities Exchange Commission of USA defines promoter as a

“person who, acting alone or in conjunction with other persons directly
or indirectly takes the initiative in founding or organising the business
enterprise.”
Promoter is a person “who undertakes to form a company with reference to a
given project, and to set it going, and who takes the necessary steps to
accomplish that purpose.”
According to Sec. 2(69) of the Companies Act, 2013, Promotor means a
person:
(a) who has been named as such in a prospectus or is identified by the
company in the annual return; or
(b) who has control over the affairs of the company, directly or indirectly
whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board
of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity.
Functions of Promoters
Promoters carry out the following functions:
1. They originate the idea of forming a company.
2. They make arrangements with people who have funds to convert the
idea into reality.
3. They seek the guidance of experts and legal advisors to test the
economic and legal feasibility of the proposed project.
4. They get together subscribers to the memorandum.
5. They get the memorandum and articles of associations prepared and
registered.
6. They arrange with bankers, brokers and legal advisors.
7. They appoint first directors.
8. They settle the terms of preliminary contracts with vendors.
9. They arrange with underwriters to secure the issue of share capital.
10. They arrange for preparing, advertising and circulating prospectus and
provide the necessary capital for the proposed company.
11. They acquire the business which the company has to manage.
6.16 Entrepreneurship Development

After performing these functions, the promoters hand over the control of the
company to the directors and their duties come to an end. Thus, the day
directors take over business of a company, the duties of promoters cease to
exist.
In India, promoters are usually the persons who are also the directors of the
company formed. They are the persons who convert their sole proprietary
business into company form of organisation and secure controlling interest in
the management of the company.
Qualities of a Promoter
In order to carry out the process of promotion, promoters should have the
following qualities:
1. Imagination and far-sightedness.
2. Moral conviction to give support to the ideas.
3. Ability to organise resources.
4. Initiative and innovative capabilities.
5. Ability to motivate and induce people to utilise the resources to achieve
the desired purpose.
6. Confidence to transform the idea into action.
7. Persistent and honest with belief in the capability of self and others.
Legal Position of Promoter
Promoter occupies important position in formation of the company. He is in
fiduciary relationship with the proposed company from the day he begins to
form it. It is a relationship of trust, faith and confidence, It means that he is
accountable to the company for all the financial gains earned by him during
the process of its formation. His fiduciary duties include the following:
1. He should not make secret profits out of company's promotion. If
the promoter buys an asset at a price less than the contract price
from the seller and transfers it in company's accounts at a higher
price, he is said to have made secret profits.
2. He should disclose his interest in the contract to the company. Thus, he
can make profits but not secret profits. The disclosure should be made
to an independent board of directors or shareholders.
3. He should not make false statements in the prospectus.
Establishment of a New Unit 6.17

Liability of Promoters
Promoters' liability includes the following:
1. They are liable for making wrong statements in the prospectus.
2. They are liable to persons who subscribe for shares or debentures on
the basis of wrong or untrue information given in the prospectus.
3. They are liable for offence in connection with formation or
management of the company.
4. T h e y a r e l i a b l e f o r m i s a p p l i c a t i o n o f c o m p a n y ' s
p r o p e r t y o r m o n e y. I I . R e g i s t r a t i o n / l n c o r p o r a t i o n M e a n i n g
Registration incorporates a company as an entity, separate and distinct
from owners. It results in formation of legal body corporate. To form a
company, promoters have to get together seven in case of a public limited
company and two in case of a private company to act as signatories to
memorandum of association.
According to Sec. 3 of the Companies Act, 2013, a company may be formed
for any lawful purpose by:
(a) seven or more persons, where the company to be formed is to be a
public company;
(b) two or more persons, where the company to be formed is to be a private
company; or
(c) one person, where the company to be formed is to be One Person
Company that is to say, a private company.
by subscribing their names or his name to memorandum of association and
complying with the rquirements of this Act in respect of registration.
Procedure for Registration
Promoters follow the following steps for registration of a company:
1. Availability of name: They find out availability of name from the
Registrar of Companies.
According to Companies Act, no company shall be registered by a
name which, in the opinion of the Central Government is undesirable.
A name may be deemed to be undesirable by the Central Government if
it is identical with or too nearly resembles a registered trade
6.18 Entrepreneurship Development

mark, or a trade mark which is subject of an application for

registration, of any other person under the Trade Marks.
Name should not resemble the name by which another company is
already registered.
Promoters should make application to the Registrar of Companies of
the State where the company is proposed to be registered as to whether
or not the proposed name is desirable for allotment and also desirable
as per requirements of the Act. On receiving the appli-cation, the
Registrar of Companies shall examine the proposed name and if the
name is not undesirable, intimate the applicant about the approval of
the name, The promoters should register the name of the company
after the date of approval.
2. Preparation of Memorandum of Association (M/A) and Articles of
Association (A/A): They prepare the memorandum of association and
articles of association. The memorandum of association contains the
foundation of the company. It defines the name, objects, capital,
liability of members and the State where the registered office will be
located. Articles of association contains rules and regulations that
govern the company’s internal operations. In case of OPC, name of the
person who shall become members of the company, in the event of
death of the subscriber, shall be stated.
3. Printing and signing of M/A and A/A: The memorandum and
articles of association are printed and signed by the subscribers.
They are also stamped as per provisions of the Stamp Act of the
State where the company is proposed to be incorporated.
The memorandum shall:
(i) be printed,
(ii) be divided into paragraphs numbered consecutively, and
(iii) be signed by each subscriber (who shall add his address, desc-
ription and occupation if any), in the presence of at least one
witness who shall attest the signature and shall likewise add his
address, description and occupation, if any.
4. Filing of other documents: According to Sec. 7(1) of the Act, there
shall be filed with the Registrar within whose jurisdiction the
registered office of a company is proposed to be situated, the
following documents and information for registration, namely:
(a) the memorandum and articles of the company duly signed by all
the subscribers to the memorandum in such manner as may be
prescribed;
Establishment of a New Unit 6.19

(b) a declaration in the prescribed form by an advocate, a charted

accountant, cost accountant or company secretary in practice,
who is engaged in the formation of the company, and by a person
named in the articles as a director, manager or secretary of the
company, that all the requirements of this Act and the rules made
thereunder in respect of registration and matters precedent or
incidental thereto have been complied with;
(c) a declaration from each of the subscribers to the memorandum
and from persons named as the first directors, if any, in the
articles that he is not convicted of any offence in connection with
the promotion, formation or management of any company, or
that he has not been found guilty of any fraud or misfeasance or
of any breach of duty to any company under this Act or any
previous company law during the preceding five years and that
all the documents filed with the Registrar for registration of the
company contain information that is correct and complete and
true to the best of his knowledge and belief;
(d) the address for correspondence till its registered office is
established;
(e) the particulars of name, including surname or family name,
resid-ential address, nationality and such other particulars of
every subscriber to the memorandum along with proof of
identity, as may be prescribed, and in the case of a subscriber
being a body corporate, such particulars as may be prescribed;
(f) the particulars of the persons mentioned in the articles as the first
directors of the company, their names, including surnames or
family names, the Director Identification Number, residential
address, nationality and such other particulars including proof of
identity as may be prescribed; and
(g) the particulars of the interests of the persons mentioned in the
articles as the first directors of the company in other firms or
bodies corporate along with their consent to act as directors of
the company in such form and manner as may be prescribed.
5. Grant of certificate of registration: If the Registrar is satisfied with
respect to the documents filed, payment of registration and filing fees
and conformity to other legal requirements, he will enter the name in
the Register of Companies and issue a 'Certificate of Incorporation'.
With effect from the date mentioned in this certificate, the company
will be incorporated as a body corporate and subscribers to the
memorandum and other members carry out the functions of an
incorporated company.
6.20 Entrepreneurship Development

Conclusive Evidence
The certificate of registration is a conclusive evidence of the fact that all
requirements of the Act with respect to formation of the company have
been complied with. Any irregularity, consequently found to have been
committed before registration but detected after the issue of certificate of
registration shall not be valid. It will not affect the legality of company's
incorporation.
Online Registration of a New Company
Under MCA-21 e-Governance programme of the Ministry of Corporate
Affairs, a company can apply for registration online. This requires the
following steps:
1. Acquire Director Identification Number(DIN)
2. Acquire Digital Signature Certificate(DSC)
3. File an e-Form or New user registration
4. Incorporate the company
1. Acquire Director Identification Number (DIN)
Every individual intending to be appointed as director of a company
shall make an application for allotment of Director Identification
Number to the Central Government in such form and manner and along
with such fees as may be prescribed. One needs to file e-form DIR-3 to
obtain DIN.
The Central Government shall within one month from the receipt of the
application under Sec. 153, allot a Director Identification Number to an
applicant in such manner as may be prescribed.
2. Acquire and Register Digital Signature Certificate (DSC)
In order to ensure security or authenticity of documents filed electronically,
the Information Act, 2000 requires a valid digital signature on the
documents submitted electronically. The digital signature certificate should
be acquired by the company by making an application to the Licensed
Certifying Authority which issues the digital signatures. This is a certifying
authority which has the license to issue DSC under section 4 of the IT Act,
2000.
On receiving an application, the certifying authority will make enquiries as it
may deem fit, and grant the DSC under section 35 of the IT Act. After
obtaining the DSC for the signatories, the proposed company registers the
DSCs on the website of the Ministry of Corporate Affairs.
Establishment of a New Unit 6.21

3. Create Account on MCA Portal - New user registration

The company must have a registered user account on MCA Portal. For
filing any e-Form, for online fee payment, or to avail any paid service
online on MCA portal, the authorised representatives of the proposed
company shall register themselves as a registered user.

4. Get the Approval for the Proposed Name

Before registration, the persons who want to form the company shall find
out the availability of name for the proposed company from the ROC. The
name:
· Should not be similar to the name of any other already existing
company.
· Have the word 'Limited' or 'Private Limited' at the end of its name
depending on whether it is a public or private company.
· Should not be undesirable in the opinion of the Central Government.
The name should be applied by filing Form INC-1.

5. Apply for the Company to be Registered

After the name is approved, an application shall be filed with ROC for
incorporation of the company. The following incorporation forms have to be
filed:
e-Form INC 7: Application for incorporation of a company
e-Form INC 12: Particulars of appointment of directors and key
managerial personnel and any change amongst them
e-Form INC 22: Notice of Situation or change of situation of registered
office.
Once these forms are approved by the Ministry of corporate Affairs, the
applicant will receive an e-mail for the same. The status of the forms will get
changed to 'Approved' and a Corporate Identity Number (CIN) is generated.
Thus, a new company gets formed through the online process.
III. Capital Subscription
Under this stage, capital is raised by the company.
Private company having share capital is prohibited by its Articles, to invite
public to subscribe to its securities. Thus, it need not pass through capital
subscription stage. It can offer securities privately to a selected group of
people through 'private placement'.
6.22 Entrepreneurship Development

Public company with share capital invites public to subscribe to its securities
through issue of prospectus.
SEBI regulates issue of securities to the public through rules and regulations
that regulate the securities market. As per SEBI regulations,2009 (Issue of
Capital and Disclosure Requirements), the following procedure is followed
for raising capital:
· Directors file a copy of prospectus with the Registrar.
· Prospectus is circulated in public to invite them to subscribe to shares of
the company.
· Applications are received from the public to subscribe for shares
through Company's bankers.
· At least 90% subscription must be received (minimum subscription)
within 30 days from the date of issue of prospectus so that Directors can
proceed with allotment.
· Once the formal resolution of allotment is passed:
> allotment letters are posted
> return of allotment is filed with the Registrar
> share certificates are issued in exchange of allotment letters
· If minimum subscription is not received within 30 days from the date
of issue of prospectus or such other period as may be specified by
SEBI, application money shall be refunded to the applicants within
such time and manner as may be prescribed. (Section 39(3) of the
Companies Act)
IV. Commencement of Business
Need to obtain certificate of commencement arises for both public and private
companies, having share capital. Provisions of Section 10A explain the
certificate of commencement.
1. Section 10(A)1: A company incorporated after the commencement of
the Companies (Amendement) Second Ordinance, 2019 and having a
share capital shall not commence any business or excercise any
borrowing powers unless:
(a) a declaration is filed bya director within a period of 180 days of the
date of incorporation of the company in Form INC-20A and
verified by Company Secretary/Chartered Accountant or a Cost
Accountant, in practice with the Registrar that every subscriber to
the memorandum has paid the value of the shares
Establishment of a New Unit 6.23

agreed to be taken by him on the date of making of such

declaration, and
(b) the company has filed with the Registrar a verification of its
registered office as provided in Sec. 12 (2) in Form No. INC-
22.
2. Section 10(A)3: Where no declaration has been filed with the Registrar
under clause (a) of sub-section (1) within a period of 180 days of the
date of incorporation of the company and the Registrar has reasonable
cause to believe that the company is not carrying on any business or
operations, he may initate action for the removal of the name of the
company from register of companies.

Documents for Formation of a Company

Documents to be filed with Registrar of Companies for formation of a
company are:
1. Memorandum of Association
2. Articles of Association
3. Prospectus
1. Memorandum of Association (M/A)
Meaning
It provides foundation to the company. It defines constitution of the
company and lays down its objects, powers and limitations. It contains
objects of company amongst its clauses, and, therefore, defines the scope of
its operations. Not only does it define but also confines the powers of the
company, that is, the limitations on the exercise of its powers. Anything
done by the company beyond what is stated in the ‘object clause’ of M/A
shall be ultra vires and not binding upon it. Shareholders know the areas
where their money will be invested. It also helps the outsiders (creditors,
suppliers etc.) to know the company’s range of activities.
Importance of M/A
M/A serves the following purposes:
1. It enables all those who deal with the company to know its permitted range
of activities. Anything done by the company beyond its powers as
specified by the M/A shall be ultra vires and void.
2. It enables the shareholders and creditors to know the purpose for which
their money will be used. They can, thus, decide whether or not to give
money to the company.
6.24 Entrepreneurship Development

2. Articles of Association (A/A) Meaning

The articles of association are the bye-laws of the company that explain its rules and
regulations and the way its internal affairs will be conducted. they define the
rights/powers of the company and its members and amongst members themselves.
Matters related to administration of a company, such as provisions for making calls,
transfer of shares, appointment, powers and duties of auditors etc. are governed by its
A/A.
A/A is subordinate to M/A. M/A defines the powers of the company and A/A defines
the rules and regulations of the company within the powers conferred upon it by the
M/A. Memorandum defines the scope of operations and Articles defines the rules
framed by the company to achieve the objectives within the limits defined by M/A.
All those who deal with the company assume that the provisions of A/A have been
observed by the officers of the company. They are not bound to enquire into the
regularity of company’s internal proceedings. This is known as the doctrine of indoor
management.
2. Prospectus
Meaning
A public company limited by shares raises money from the public through issue of
prospectus.
Prospectus means any document described or issued as a prospectus and includes any
notice, circular, advertisement or other document inviting deposits from the public or
inviting offers from the public for subscription or purchase of any shares in, or
debentures of, a body corporate.
A prospectus is an invitation to public by means of a document in the form of
advertisment,circular or notice to subscribe for company’s shares or debentures or
accept its deposits.
Importance of Prospectus
A prospectus serves the following purposes :
1. It invites public to subscribe for shares and debentures.
2. It is a document of faith and authenticity about company’s performance.
3. It provides important information about the company such as name, address,
capital structure, management, objects, products etc.
Establishment of a New Unit 6.25

6.7 LEGAL REQUIREMENTS FOR SETTING UP A LIMITED

LIABILITY PARTNERSHIP
A Limited Liability Partnership is incorporated as per the following
procedure:
1. User Registration
· The LLP must register itself on the website of Ministry of Corporate
Affairs. It should fill in the registration form. Fields marked * in the
form are mandatory to be filled in. The LLP has to select a user name
and password.
· Upload digital signature certificate.
· On successful registration, system will give a message that LLP has
been registered successfully.
Digital Signature Certificate
· Partner/Designated partner of LLP/proposed LLP, whose signatures
are to be affixed on the e-forms has to obtain Digital Signature
Certificate (DSC) from any authorized certifying agency.
· Obtaining DSC (Digital Signature Certificate) for all the designated
partners proposed in LLP is necessary because all the documents are
filed online and are required to be digitally signed.
2. Obtain Designated Partners Identification Number (DPIN).
· All designated partners of the proposed LLP shall obtain "Designated
Partner Identification Number (DPIN) / Director Identification Number
(DIN)". This can also be applied on the website of MCA.
· To obtain DPIN/DIN, it has to use the scanned copy of specified
documents namely Adhaar and PAN. The form has to be signed by the
full time director of the company

3. Reservation of name
· Through e-forms available on the LLP Portal, it will open Form-1 for
reservation of name and fill in the details. It will select name of the
proposed LLP. It can give up to 6 choices.
· Any partner or designated partner in the proposed LLP may submit
Form-1. It has to append digital signatures and submit the e-form.
· It has to pay the necessary fee by credit card (master/visa).
· The system will provide the list of similar/closely resembling names of
existing companies/LLPs based on the search criteria filled up.
6.26 Entrepreneurship Development

· Details of minimum two designated partners of the proposed LLP are

required to be filled in the application for reservation of name. One of
them must be a resident of India. Only individuals or nominees on
behalf of the bodies corporate as partners can act as designated
partners.
· The Registrar will approve the name only if the name is not undesirable
or does not resemble the name of any existing partnership, LLP or a
trademark.
4. Incorporation of LLP
· If the name applied for is approved, then this approved and reserved
name shall be filled as the proposed name for LLP.
· Once the name is approved and reserved by the Registrar, it will log on
to the portal and fill up Form-2 "Incorporation Document and
Statement".
· Pay the prescribed registration fee as per Annexure A of the LLP Rules,
2009. This is based on the total monetary value of contribution of
partners in the proposed LLP.
· Statement in the e-form is to be digitally signed by a person named in
the incorporation document as a designated partner having permanent
DPIN and also to be digitally signed by an advocate/company secretary/
chartered accountant/cost accountant in practice and engaged in the
formation of LLP.
· On submission of complete documents, if the Registrar is satisfied about
compliance with relevant provisions of the LLP Act, he will register the
LLP, maximum within 14 days of filing of Form-2. He will issue a
certificate of incorporation in Form-16.
5. Filing of LLP Agreement (Form-3) and Partners' Details
(Form-4)
· LLP agreement governs the mutual rights and duties amongst the
partners and between LLP and its partners. LLP agreement has to be
printed on stamp paper. The value of the stamp paper is different for
every State.
· LLP agreement must be filed online in Form 3 on MCA portal. Form-4
(Notice of Appointment of Partner/ Designated Partner, his consent etc.)
must also be filed.
· Form 3 relates to information with regard to LLP agreement and
changes, if any made therein.
Establishment of a New Unit 6.27

· These forms maybe filed with the prescribed fee simultaneously at the
time of filing Form-2 or within 30 days of the date of incorporation or
within 30 days of such subsequent changes.
Documents required for LLP

Documents of partners
· Pan card
· Address proof
· Residence proof
· Photograph
Documents for LLP
· Proof of the registered address
· DSC (digital signature certificate)

QUESTIONS

1. What are the major forms of business organisations in which an

entreprenur can start a new business?
2. What legal requirements have to be complied with for setting up a sole
proprietor business?
3. Explain the legal requirements for setting up a partnership business.
4. Explain the process of formation of a company.
5. Discuss the provisions of the Companies Act for ‘Incorporation of a
Company’.
6. Explain the procedure for online registration of a new company.
7. Write short notes on the following:
(i) Partnership deed
(ii) Promotion
(iii) Capital subscription