F ORMATION OF A C OMPANY As discussed in an earlier chapter on ‘Forms of organisations’, formation of a company is a complex activity involving completion of a lot of legal formalities and procedures. To fully understand the process one can divide the formalities into four distinct stages, which are: (i) P r o m o t i o n ; (ii) Incorporation; (iii) Subscription of capital; and (iv) Commencement of business. It may, however, be noted that these stages are appropriate from the point of view of formation of a public limited company. As far as the private limited companies are concerned only the first two stages mentioned above are appropriate.
In other words, a private company can start its business immediately after obtaining the certificate of incorporation. As it is prohibited to raise funds from public, it does not need to issue a prospectus and complete the formality of minimum subscription. A public company, on the other hand, goes through the capital subscription stage and then receives the certificate of commencement. Thus, it has to undergo all the four stages.
In the next section, we shall discuss these four stages in the formation of a company in some detail. Avtar, a brilliant automobile engineer, has recently developed a new carburettor in his factory which he is running as a sole proprietor. The new carburettor can cut down petrol consumption of a car engine by percent. He is now thinking of producing it on a large scale for which he requires a large amount of money.
He is to evaluate different forms of organisations for doing the business of manufacturing and marketing his carburettor. He decides against converting his sole proprietorship to partnership as the requirement of funds for the project is large and the product being new, there is a lot of risk involved. He is advised to form a company. He wants to know about the formalities required for the formation of a company.
. . Promotion of a Company Promotion is the first stage in the formation of a company. It involves conceiving a business