Company Types, Promotion, Formation and Related Procedures: formula sheet

Key formulas

Effect of registration (Section 9)

Certificate of incorporation date → body corporate + perpetual succession + power to hold property, contract, sue and be sued

The company exists from the date of incorporation mentioned in the certificate, not from the date of application.

Separate legal entity

Company ≠ its members

Company owns its assets and owes its debts. Members are not owners of company property and are not liable for its debts beyond their share liability.

Limited liability

Maximum member liability = unpaid amount on shares held (company limited by shares)

For a company limited by guarantee, liability is limited to the amount undertaken to be contributed on winding up.

Perpetual succession

Change in members (death, insolvency, transfer) → company continues

The company ends only by a legal process such as winding up or removal of its name.

Lifting the veil

Fraud, sham or evasion of law → look at the persons behind the company

An exception. Courts apply it case by case, not as a general rule.

Private company minimums

Members ≥ 2; directors ≥ 2; members ≤ 200 (excluding employees and ex-employees who are members)

Also restricts share transfer and bars public invitation to subscribe.

Public company minimums

Members ≥ 7; directors ≥ 3

A public company is a company that is not a private company.

One person company

Members = 1 (private company) + a nominee

One person company needs at least one director.

Small company limits

Paid-up capital ≤ ₹4 crore and turnover ≤ ₹40 crore

Excludes public companies, holding or subsidiary companies, Section 8 companies and companies under a special Act.

Section 8 conditions (s. 8(1))

Charitable or similar object + profits applied to promote objects + no dividend to members + Central Government licence

Licence may allow registration without 'Limited' or 'Private Limited' in the name.

Section 8 alterations (s. 8(4))

Change in memorandum or articles = previous approval of Central Government

Conversion to another kind of company only after complying with prescribed conditions.

Section 8 default penalty (s. 8(11))

Company: ₹10 lakh to ₹1 crore; directors and officers in default: ₹25,000 to ₹25 lakh

If affairs were conducted fraudulently, every officer in default is liable under section 447.

Lesser penalty (s. 446B)

Penalty ≤ 1/2 of specified penalty, capped at ₹2,00,000 (company) and ₹1,00,000 (officer or other person)

Applies to OPC, small company, start-up company and Producer Company.

Securities a company may issue (s. 23)

Public: public offer, private placement, rights or bonus. Private: rights or bonus, private placement

A private company cannot make a public offer.

Strike off (s. 248(1))

Not commenced business in 1 year, or no business for 2 preceding financial years and no dormant application

Registrar sends notice; 30 days to give representations.

Four stages of promotion

Discovery of idea → Investigation → Assembly of requirements → Financing

Write the stages in this order. Some books name them differently, such as conception, preparation, incorporation and floatation. The content is the same.

Promoter's fiduciary duties

Good faith + full disclosure + no secret profit

These duties are owed to the company, to be exercised in dealings with it, including when selling property to it.

Pre-incorporation contracts

Company not bound before it exists; promoter personally liable unless the contract says otherwise

The company cannot ratify a contract made before its incorporation. It can make a fresh contract after incorporation.

Remuneration of promoter

No right to remuneration unless the articles or a contract with the company provides for it

Common forms are a lump sum, commission, allotment of shares, or a right to buy property at a fixed price. All must be disclosed.

Promoter and director

Promoter = before incorporation; director = Board member after incorporation

A promoter need not be a director, and a director need not be a promoter.

Where to file (Section 7(1))

File with the Registrar having jurisdiction over the proposed registered office

Filing is by the subscribers; documents and information are listed in clauses (a) to (g).

Documents under Section 7(1)

Memorandum and articles + professional/director declaration + subscribers' and first directors' declaration + address for correspondence + subscriber particulars with ID proof + first directors' particulars with DIN + directors' interests in other entities and consent

Remember it as seven items, (a) to (g).

Registration and certificate (Section 7(2))

Registrar registers the documents and issues a certificate of incorporation

The certificate says the proposed company is incorporated under the Act.

CIN (Section 7(3))

CIN is allotted on and from the date mentioned in the certificate

It is a distinct identity for the company and is included in the certificate.

Preservation (Section 7(4))

Keep copies of the documents as originally filed at the registered office till dissolution

The duty continues for the company's whole life.

False information (Section 7(5) and (6))

False particulars or suppression of material information leads to action under Section 447

Under sub-section (6), promoters, first directors and the declaring professionals are each liable if incorporation was obtained by false information or fraud.

Tribunal orders (Section 7(7))

Regulate management / make liability unlimited / remove name from register / wind up / other orders

Only after giving the company a reasonable opportunity of being heard and considering its transactions and obligations.

Inspection of Registrar's documents (Section 399)

Any person may inspect by electronic means on payment of fees, and may require certified copies

A certified true copy is admissible in evidence as of equal validity with the original (Section 399(3)).

Alteration of articles (Section 14)

Special resolution + filing with Registrar within 15 days, with a printed copy of the altered articles

Alteration must be subject to the Act and the memorandum. Once registered, the alteration is valid as if originally in the articles.

Private to public conversion

Special resolution to alter articles (Section 14(1)(a))

If a private company's articles no longer contain the required private-company restrictions, it ceases to be private from the date of alteration.

Public to private conversion

Special resolution + approval by order of the Central Government

Under the second proviso to Section 14(1), such an alteration is not valid unless approved by the Central Government.

Alteration of memorandum (Section 13(1))

Special resolution + the procedure in Section 13, save as provided in Section 61

No alteration has effect until registered (Section 13(10)).

Change of name (Section 13(2))

Special resolution + written approval of the Central Government

No approval is needed if the only change is adding or deleting the word "Private" on conversion. The change is effective only on the fresh certificate of incorporation (Section 13(3)).

Registered office to another State (Section 13(4)-(5))

Special resolution + Central Government approval

The Central Government disposes of the application within 60 days. It may check the consent of creditors or adequate provision for debts.

Change of objects after a prospectus (Section 13(8))

Special resolution + newspaper publication (one English, one vernacular) + website notice with justification + exit opportunity for dissenting shareholders

Applies only if money raised through a prospectus is still unutilised.

Share capital alterations (Section 61(1))

If authorised by articles, alter memorandum in general meeting to: increase authorised capital; consolidate; convert into stock; sub-divide; cancel unissued shares

Cancelling unissued shares is not a reduction of capital (Section 61(2)). Consolidation changing voting percentages needs Tribunal approval.

Noting alterations (Section 15)

Every alteration to be noted in every copy; penalty ₹1,000 per copy issued without it

The company and every officer in default are liable.

Ultra vires vs irregular

Beyond memorandum = void, cannot be ratified. Beyond articles but within memorandum = can be ratified

Use this test first in any problem.

Deemed prospectus on allotment for sale (Section 25)

Allotment or agreement to allot with a view to offer for sale to the public → the offer document is a deemed prospectus

Unless the contrary is proved, it is evidence of such a view if the offer for sale is made within six months of the allotment or agreement, or if the whole consideration had not been received by the company when the offer was made.

Extra contents of a deemed prospectus (Section 25(3))

Usual contents + net amount of consideration received or to be received + time and place where the allotment contract may be inspected

Section 26 applies as if the persons making the offer were persons named in a prospectus as directors of a company.

Signing of a deemed prospectus (Section 25(4))

Company or firm making the offer: signed by two directors, or by not less than one-half of the partners

Applies where the person making the offer is a company or a firm.

Offer for sale by members (Section 28)

Members offer shares in consultation with the Board → the offer document is deemed a prospectus issued by the company

The members must collectively authorise the company to act for them and must reimburse its expenses.

Red herring prospectus (Section 32)

File with Registrar at least three days before the subscription list and offer open

It has the same obligations as a prospectus. Variations must be highlighted in the final prospectus. On closing, the prospectus stating total capital raised, closing price and other missing details is filed with the Registrar and SEBI.

Shelf prospectus (Section 31)

Validity: period not exceeding one year, starting from the opening of the first offer

Filed with the Registrar at the first offer. No further prospectus is needed for second or later offers within the validity period.

Information memorandum (Section 31(2))

File before each second or later offer: new charges, changes in financial position and other prescribed changes

The memorandum with the shelf prospectus is deemed a prospectus. If applicants paid before a change, tell them. If they want to withdraw, refund within fifteen days.

Advertisement of prospectus (Section 30)

Advertisement must specify objects, liability of members, share capital, signatories with shares subscribed, and capital structure

Applies whenever an advertisement of a prospectus is published in any manner.

Inspection of prospectus documents (Section 399(1) proviso)

Documents delivered to the Registrar with a prospectus under Section 26: open to inspection only during the fourteen days beginning with the date of publication of the prospectus

At other times, only with the permission of the Central Government.

Minimum members (section 378C(1))

10 or more producer individuals, OR 2 or more Producer Institutions, OR 10 or more individuals and Producer Institutions combined

Each individual must be a producer. The Act words the third route as "a combination of ten or more individuals and Producer Institutions". Quote it as written and do not simply add individuals and institutions to reach ten.

Registration time limit (section 378C(2))

Registrar registers and issues certificate within 30 days of receiving documents

Applies when he is satisfied all requirements are complied with.

Liability and status (section 378C(3) and (5))

Limited by shares; treated as a private company; no limit on members; never a public company

Liability is limited to the amount unpaid on shares.

Promotion costs (section 378C(4))

Direct promotion and registration costs reimbursable to promoters, subject to approval at first general meeting of Members

Examples: registration, legal fees, printing of memorandum and articles.

Inter-State co-operative conversion (section 378J)

Special resolution of not less than two-thirds of total members; Registrar certifies within 30 days of application

Name must include the words "Producer Company Limited", preceded by an identifying word or expression.

Investment limit (section 378ZL(4))

Investment in other companies ≤ 30% of (paid-up capital + free reserves)

Higher limit possible by special resolution in general meeting and prior Central Government approval.

Quick revision

• A company is a separate legal person from its members, with perpetual succession.
• Know the types of companies by liability: limited by shares, limited by guarantee and unlimited.
• A private company restricts transfer of shares and cannot invite the public to subscribe to its securities.
• The promoter takes the steps to bring a company into existence, so learn the promoter's role and fiduciary position in plain words.
• Under section 7, documents are filed with the Registrar within whose jurisdiction the registered office is proposed to be situated.
• Section 7 requires the memorandum and articles signed by all subscribers and a declaration of compliance by a professional and a named officer.
• On incorporation, the Registrar issues a certificate of incorporation and allots a corporate identity number.
• A company must keep copies of the documents originally filed at its registered office until dissolution.
• False or incorrect particulars, or suppressed material information, make the person liable for action under section 447.
• The Tribunal can regulate management, make members' liability unlimited, remove the name or wind up the company where incorporation was obtained by false information, after giving the company a hearing.
• A prospectus invites the public to subscribe to securities, so learn its purpose and the need for accurate statements.
• A Producer Company needs ten or more individuals who are producers, or two or more Producer Institutions, or a combination of ten or more individuals and Producer Institutions.
• The Registrar registers a Producer Company within thirty days of receiving the documents, and its members' liability is limited to the amount unpaid on shares.
• A Producer Company is treated as a private limited company with no limit on members and can never become a public limited company.
• Producer Company articles must contain the mutual assistance principles, including one member one vote irrespective of shareholding.

Common mistakes

• Saying the company exists from the date of application or from the date the certificate is issued. Fix: Section 9 says the status begins from the date of incorporation mentioned in the certificate of incorporation.
• Listing a common seal as a legal feature of a company. Fix: The words 'and a common seal' were omitted from Section 9 in 2015. Do not list it as an essential feature.
• Saying a private company can invite the public to subscribe to its shares. Fix: Under section 23 a private company can use only rights or bonus issues or private placement. A public offer is for public companies.
• Thinking a Section 8 company can pay dividends if it has profits. Fix: Section 8(1) requires the company to apply its profits to promote its objects and prohibit dividend to members.
• Saying a promoter is an agent or trustee of the company. Fix: Write that the company does not exist before incorporation, so the promoter is neither agent nor trustee. He stands in a fiduciary position.
• Treating a professional adviser such as a lawyer or chartered accountant as a promoter. Fix: Remember that giving advice only in a professional capacity does not make a person a promoter.
• Saying the company exists from the date of filing the documents. Fix: Write that the certificate of incorporation is issued after registration, and the CIN is allotted on and from the date mentioned in it.
• Dropping the professional's declaration or naming only a chartered accountant. Fix: Write advocate, chartered accountant, cost accountant or company secretary in practice, engaged in the formation, plus a person named in the articles as director, manager or secretary.
• Saying an ultra vires act can be ratified by all members. Fix: Ask whether the act is beyond the memorandum's objects. If so, it is void and cannot be ratified.
• Stating that every alteration of the articles needs Central Government approval. Fix: A special resolution is the general rule. Central Government approval is needed only for public-to-private conversion by alteration of articles.

Exam tips

• For a 2-mark MCQ on Section 9, remember the three key words: body corporate, perpetual succession, sue and be sued. 'Common seal' is the usual wrong option.
• In case-based answers, always state the general rule of separate personality first, then test for veil lifting. Marks go for this order.
• If you cite a landmark case on separate personality or veil lifting, give the principle in one line and apply it. Name only cases you are sure of. A wrong name loses more than it gains.
• For distinguish questions, use equal points on both sides and at least four bases. A neat list in sentences earns step marks.
• Do not state that every company has limited liability. A one-line mention of unlimited companies shows precision.
• Learn the comparison table in your head: private vs public on members, directors, share transfer, public offer and prospectus. Write it as short parallel points.
• For Section 8 questions, quote the four conditions from section 8(1) and add the approval rule for alterations, the dividend bar and the penalty range.
• For OPC and small company questions, link the kind to section 446B and show the halving and cap arithmetic step by step.