Everything you need to know about company formation in India – How to Register a Company in India. A company form of business organization is able to mobilize larger amount of capital that too with a limited liability, large scale operations and specialized management.
A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal. It can gather its capital by issue of shares and debentures and by accepting deposits from public.
Formation of a company is not a simple process like in the case of sole proprietorship or partnership. It is a complex and lengthy process, which involves a number of legal formalities and procedures.
The formation of a company involves the following stages:- 1. Promotion 2. Incorporation 3. Floatation 4. Subscription of Capital 5. Commencement of Business.
Additionally, learn about the factors to be considered by an entrepreneur before starting a business:-
(i) Selection of Line of Business (ii) Size of the Firm (iii) Choice of Form of Ownership (iv) Location of Business Enterprise (v) Financing the Proposition (vi) Physical Facilities (vii) Plant Layout (viii) Competent and Committed Workforce (ix) Tax Planning (x) Launching the Enterprise.
Company Formation in India: How to Register a Company in India (With Procedures)
Company Formation and Registration in India: How to Register a Company in India: Promotion, Incorporation and Commencement of Business
A company does not come into existence on its own.
The formation company involves the following stages:
3. Commencement of Business
A private company has to go through only the first two stages, whereas a public company has to complete all the three stages.
The process of conceiving an idea of starting a company and developing it into a concrete reality through incorporation is called Promotion. It is the primary stage of formation and refers to the sum total of activities of all those who participate in the building of the enterprise up to the organisation of the company and completion of the plan to exploit the ideas.
“The process of organising and planning the finances of a business enterprise under the corporate form is known as Promotion.” – L.H. Haney
“Promotion is the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profit therefrom.” – Gerstenberg
Stages of Promotion:
Promotion involves the following steps:
1. Discovery of Idea:
The idea of starting a business enterprise is conceived by the promoter. The idea conceived should be applicable and feasible. At this stage, the promoter makes a rough estimate of probable incomes and expenditures of the business unit to be started. The idea may be about starting a new business or undertaking an existing enterprise.
The idea may come from an unsatisfied demand, an unexploited resource, a low quality product or a new invention looking forward to commercial use. At the time of discovering the idea of starting the business, he/she makes an assessment about business risks, financial risks, investment risks, technical risks and commercial risks of the venture. This stage of promotion is primarily meant for thinking of an idea to start a company.
2. Preliminary Investigation:
Preliminary investigation constitutes the second important stage of company promotion. At this stage the soundness of the business is explored by the promoter by gauging the underlying demerits of the plan and also ascertaining whether or not the business enterprise is suitable for the consumer. The promoter makes a rough estimate about the cost of the project, estimated sales and estimated income resulting from the business. The viability and profitability of the project is taken into consideration.
3. Detailed Investigation:
Once the promoter gets done with preliminary investigation, he/she goes for detailed investigation of his/her ideas with the help of different experts like engineer, financial experts and market analysis experts. Detailed investigation gives a clear picture about the soundness of the project because at this stage the promoter is in a better position to know the financial requirement, location and size of the unit, demand for the product in the market and the probable price of the product.
The knowledge about the various branches is obtained from the experts. After the detailed investigation is over, the findings are presented in a typewritten report titled as ‘project report’ or ‘feasibility report’. The report is helpful in understanding whether or not the project will fetch good returns on investment and the risks undertaken. It is also useful in getting licenses and finance from governmental agencies.
The report includes the data collected, estimates of costs and revenue, experts’ opinions and recommendations, etc. The report may be cross-checked via one’s own evaluation before going ahead with the floatation of the enterprise.
When all the parameters of starting a company are found positive at the detailed investigation stage, the promoter marches forward to give a concrete shape to the business. At detailed investigation stage, the promoter is satisfied regarding the practicability and profitability of the proposed venture.
Once satisfied with the business prospects, the promoter proceeds towards the next stage called assembling, which means getting the support and consent of some other persons to act as directors or founders, arranging suitable site for the company and arrangement for patents. At this stage all the steps for setting up a company are taken care of. The promoters also have to seek necessary clearance and licenses for business from the government and other agencies.
5. Financing of Proposition:
Finance is the soul of every business unit. After the assembling stage, the promoter approaches bankers, financing institutions, underwriters, prospective investors and creditors to seek help in financing the business enterprise. The promoter also prepares prospectus which is a written invitation to the public to subscribe for the shares.
The promoter also takes necessary steps for incorporating a company and getting certificate of commencement. Incorporation of a company and getting certificate of commencement involves several legal formalities and the promoter has to adhere to them.
Meaning and Definitions of Promoters:
A promoter conceives an idea for setting-up a particular business at a given place and performs various formalities required for starting a company. A promoter may be a person, a business firm, association of persons or a company. The persons who assist the promoter in completing various legal formalities are professional people like Counsels, Solicitors; Accountants, etc. are not called promoters. For example- Lt. Dhirubhai Ambani is the promoter of Reliance Industries Limited.
“A promoter is the one, who undertakes responsibility to form a company with reference to a given object and sets it going and takes the necessary steps to accomplish that purpose.” – Justice C.J. Cokburn
“A promoter is the person conscious of the possibility of transforming an idea into a business capable of yielding a profit; who brings together various persons concerned and who finally, superintendents the various steps necessary to bring the new business into existence.” – Arthur Dewing
“Promoter means a person who originates the scheme of promotion of the company, has the Memorandum and Articles prepared, executed and registered and finds the first directors, settles the terms of preliminary contracts and prospectus (if any) and makes arrangement for advertising and circulating the prospectus and the capital.” – S. Francis Palmer
Types of Promoters:
Promoters can be classified into the following types:
1. Professional Promoters:
Professional promoters consider promotion as their profession and a means of livelihood. They perform the tasks of promotion for multiple business organisations. Promoters can be an individual, a business firm, an association of persons, or a company. They hand over the companies to shareholders when the business starts.
2. Occasional Promoters:
Occasional Promoters rarely promote a business especially when their expertise is utilised by the business. These promoters attempt to promote their specialised knowledge and expertise through the business that is used for profit. For example, an engineer, a lawyer or a technical expert may promote a business to commercially exploit a patent or invention discovered by them.
3. Financial Promoters:
Financial Promoters undertake the job of promoting the company, completing the promotional activities and then financing the promoted company especially during favourable conditions in the financial markets. These promoters attempt to provide financial security and assurance by including promotional activities of the business. Some financial institutions of finance may take up the promotion of a company. They generally take up this work when financial environment is favourable at the time.
4. Technical Promoters:
These promoters take up promotion work on the basis of their sound experience in technical field and knowledge. They, however, charge a fee for their services. Technicians, engineers and consultants fall in this category.
5. Specialised Institutions:
Several specialised institutions such as the Industrial Development Bank of India, National Industrial Development Corporation, etc., provide technical, managerial and financial aid for the promotion of budding/upcoming enterprises. Merchant banking divisions have been set-up by many of these institutions to render service for setting up enterprises.
Ever since India got independence, the State and Central Governments have done a lot of work to encourage promotion of commercial and industrial propositions. It has promoted many enterprises in various fields of economic activity such as foreign trade, machine tools, heavy electrical, etc.
Promoter has a very crucial role to play in the starting up for a company. A successful promoter is a creator of wealth and an economic prophet. Not only he/she taps business opportunities for profitable investment, necessary professional expertise and financial resources are also assembled by him/her. An ideal promoter must possess the skills and deftness needed to deal with the pitfalls and roadblocks encountered during promotion.
To become a successful promoter, a person should have a profound mind, sharp vision, foresight, ability to take initiative, sound knowledge, judgement, dynamism, courage, persistence, salesmanship, integrity, and clarity of mind and self- confidence. Since, these qualities are found in rare persons, good promoters are hard to come across in today’s aggressively competitive corporate world.
A promoter has the following functions to perform in the incorporation of a company:
1. Conceiving the idea of forming a Joint Stock Company.
2. Carrying out preliminary investigations to ascertain the future prospects and financial worth of the proposition.
3. Making a thorough and detailed investigation of the prospects of the business with the help of professional experts. It is done with reference to the sources of supply, nature of demand, extent of competition, capital requirements of the present and future, etc.
4. Verifying whether the counsel, comments or reports made by the experts are free from bias. Consulting other impartial experts to see whether the idea is commercially viable.
5. Getting skilled and proficient people together who would agree to perform the responsibilities of running the company such as the directors and the subscribers to the Memorandum.
6. Preparing a plan setting out the mode of getting the necessary finance.
7. Printing the Memorandum with legal aid, and getting them filed with the Registrar and then arrange for their publication.
8. Entering into contracts pertaining to purchase of company assets, acquiring rights and recruiting employees.
9. Launching the business as a going concern.
A company being an artificial person comes into existence through incorporation. Incorporation means the registration of a company as a body corporate with the Registrar of Companies. It is a constitutional process which allows a company to be acknowledged as a separate legal entity. A company is believed to be incorporated when it receives the certificate of incorporation.
This happens in four stages:
1. Approval of company name.
2. To make appointments.
1. Approval of Company Name:
Prior to registration of a company, it is of prime importance to get approval of the Registrar of Companies about the prospective name of the company and where exactly its headquarters will be located. To fulfill this objective, an application is filed to the Registrar.
2. To Make Appointments:
It is important to appoint underwriters, bankers, solicitors, auditors and signatories on the memorandum of the company.
1. Filing of documents-
(i) Memorandum of Association
(ii) Articles of Association
(iii) A list of directors
2. Statutory Declaration
1. Filing of Documents:
An application for registration of the company is made to the Registrar of Companies. The application should be prepared in the specified form and should be submitted along with other supporting documents.
(i) Memorandum of Association:
It is to be signed by a minimum of 7 persons for a public company, and by 2 persons in case of a private limited company. It must be properly stamped.
(ii) Articles of Association:
This document is signed by all those persons who have signed the Memorandum of Association. It should be properly stamped. A private company must file its own Articles. But a public company may not prepare and file its own Articles of Association. If it does not file its Articles, the model articles as set in Table A of the Companies Act will be applicable.
(iii) A List of Directors:
A list of directors with their names, address and occupation is to be prepared and filed with the Registrar of Companies.
(iv) Written consent of the people who have agreed to be the first directors of the company, along with a written undertaking to accept and pay for the qualification shares, prescribed in the Articles of Association. A company without share capital and a private company need not to file this document.
(v) A copy of the letter received from the Registrar which was given as a proof of approval of the name of the company.
(vi) Notice of address of the registered office of the company. However, this notice may be submitted within 30 days from the date of incorporation.
(vii) The agreement (if any) which the company solicits any individual to enter into for appointment as its managing or full-time director / manager.
2. Statutory Declaration:
A statutory declaration signed by:
(i) Any advocate of the Supreme Court or of a High Court.
(ii) An attorney or pleader entitled to appear before a High Court.
(iii) A practicing chartered accountant in India, who engages in the Company formation.
(iv) A person indicated in the articles as director, managing director, Secretary or manager of the company, mentioning that the requisites of the Act and the rules thereunder have been complied with. It is to be filed with the Registrar of Companies.
1. Payment of Fees
3. Certificate of Incorporation
1. Payment of Fees:
The Company is supposed to pay the submission fee, stamp duty and registration fee along with the above documents. The amount of the fee would have been defined in the Indian Companies Act. The fee is deposited in the Public Account in the Reserve Bank of India.
The Registrar of Companies will thoroughly check the documents submitted by the company. If the legal requirements have been complied with, the Registrar will issue a Certificate of Incorporation. The Registrar allocates a Corporate Identity Number (CIN) to each registered company.
3. Certificate of Incorporation:
On the registration of Memorandum of Association, Articles of Association and other documents, the Registrar will issue a certificate known as the ‘Certificate of Incorporation’. The issue of certificate is the evidence of the fact that the company is incorporated and the requirements of the Companies Act have been complied with.
Starting from the date of incorporation, “the subscribers of the memorandum shall be a corporate body by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company.” A private company can start its business from the date it receives the certificate of incorporation.
The effects of obtaining a Certificate of Incorporation are:
(i) The company turns an incorporated body.
(ii) The certificate of incorporation can be presented in a court of law as a proof of the company’s existence.
(iii) The company becomes a lawful artificial person, and its entity is deemed to be separate from its members which are represented by its seal.
(iv) The company becomes a permanent entity.
(v) After incorporation, the memorandum and articles of the company become binding on itself as well as the members in the same way as if the company and each of its members has signed it individually.
(vi) Any money due to the company as per the memorandum and articles of association is treated as a loan given by the company to that individual/member.
(vii) A private company can commence its business immediately on getting the Certificate of Incorporation.
1. Flotation or capital subscription.
2. Issue of prospectus and acceptance of subscription.
1. Flotation or Capital Subscription:
A private company or a public company not having share capital can start its business immediately on its registration. The capital subscription stage and the commencement of business stage are important only for a public company with a share capital. In case of capital subscription, a company has to complete the following procedures to obtain the necessary capital.
2. Issue of Prospectus and Acceptance of Subscription:
The company issues the prospectus inviting the public to invest in its shares and sends a copy of the prospectus to the Registrar. The applications for the purchase of shares are received by the company’s bankers. If the company has minimum subscription, its Board of Directors passes the formal resolution of allotment and issues the share certificates.
The Board also sends the Return of Allotment to the Registrar. If the subscribed capital is less than minimum subscription or the company does not obtain the minimum subscription within 120 days from the date of closure of the issue, all the money is refunded back to the applicants and no allotment is done.
If a public limited company having a share capital does not issue a prospectus to the public, it has to file with the Registrar ‘statement in lieu of prospectus’ at least three days before the directors pass the allotment resolution. The procedure regarding the posting of allotment letters, filing allotment returns and issuing share certificates is to be followed by such company too.
To get the certificate of commencement, a public company needs to fulfill the provisions of Section 11 of the Companies Act, 2013. If the company has issued a prospectus, the provisions under Section 149(1) need to be carried out to get the certificate of commencement. If no prospectus has been issued, the company needs to fulfill the provisions of Section 149(2).
These are as below:
A public limited company having share capital and issued a prospectus inviting the public to subscribe to its shares cannot commence its business nor use its borrowing powers unless it has fulfilled the following conditions of Section 11 of the Companies Act, 2013.
1. Minimum subscription of five lakh rupees has been received in respect of shares offered for payment in cash.
2. The directors of the company have paid in cash for the application and allotment money on their shares in the same proportion as other shareholders.
3. The company has made a declaration that no money is liable to become refundable to the applicants by reason of failure to apply for or to obtain permission for shares or debentures to be dealt in any stock exchange.
4. One of the directors or the secretary of the company has made a statutory declaration in the prescribed form that the above requirements have been complied with. In case the company has not appointed a secretary, a secretary involved in full- time practice can make such declaration in the prescribed form.
If the public company has not issued a prospectus, then under the provisions of Section 149(2), it must fulfill the conditions given below before receiving the certificate of commencement.
1. Issue a ‘statement in lieu of prospectus.’
2. File a declaration that every director of the company has paid in cash the application and allotment money on his/her shares in the same proportion as others.
3. One of the directors or the secretary of the company has filed a statutory declaration in the prescribed form with the Registrar of Companies that the above requirements have been complied with.
4. When the above conditions have been met, the Registrar of Companies issues the certificate of commencement of business. This certificate is a substantial proof that a company can begin its business and use its borrowing powers.
Company Formation and Registration in India: How to Register a Company in India – 3 Distinct Stages – Promotion, Incorporation and Floatation
The whole process of company formation may be divided into three distinct stages, namely:
Stage # 1. Promotion:
The process of conceiving an idea and developing it into a concrete proposition or project to be accomplished by the incorporation and flotation of a company is called promotion. The person or persons who take the necessary steps to accomplish these objectives is known as a promoter.
The promoter discovers the opportunities to make money, investigates such propositions, assembles and finances them and thereby produces a going concern. A promoter may be an individual, firm, syndicate, association or even a company, as long as it takes all the necessary steps to create, and mould a company and set it going. Thus, the promoters have in their hands the power of defining how, and when, and in what manner, and under what supervision, it shall come into existence and begin to act as a trading company.
This being the case, they stand in a fiduciary position to the company. As a result, the promoters are accountable to the company just like agents or trustees. They must not make secret profits and must disclose all receipts from the company in whatever form. The company, until in the hands of its own Board of Directors, is but the creature of the promoters, unable to consider its own interest or act on its own behalf, the promoters must, therefore, be extra-cautious and always act honestly and in good faith.
Stages in Promotion:
There are four main stages in the promotion of a company.
A brief description of each is given below:
1. Discovery of Idea:
A person conceiving an idea has a boundless enthusiasm for the creation of his own mind. He is partial to it. For example, an inventor is a man of mechanical skill, cleverness, and originality, but he cannot test the work of his invention by determining its economic value. It is for this reason that an inventor is called “an impractical genius.” He has neither “business head” nor the “gift for organising” that the trained promoter possesses.
It is in his interest to turn over his idea to the impartial investigator, the trained promoter, who can weigh the elements of success and failure. Promoter’s preliminary investigation will consist in making a rough estimate of whether or not it will pay or make a detailed investigation. He estimates probable revenues and expenditures, and then compares this estimate with actual figures of going concerns. He may then patent the invention for its commercialisation.
2. Detailed Investigation:
The second stage in promotion is detailed investigation of the idea and the plan or proposition to discover hidden weaknesses of the plan, to determine the amount of funds needed, and to estimate the operating expenses and probable income. When this investigation is completed, the findings are put in a type-written report, giving the data collected, estimates on costs and incomes, and opinions of experts in particular fields, e.g., engineering.
During the course of this investigation, an exhaustive research into important problems shall have to be made. These include the production problem, settled by the engineer or chemist; discovery of demand and the proper method to reach is settled by a market analysis expert; the question of proper patents, settled by an expert lawyer; the problem of the proper location of the plant, taking into consideration such factors as – transport, nearness to raw materials and to markets, satisfactory labour supply and favourable climate, etc., settled in consultation with a management consultant; the question of whether the capitalisation is sufficient or the proposed company is over-capitalised or the reverse, is settled by a financial expert.
In short, what is determined by this detailed investigation is whether the estimated income will be large enough to take care of me estimated operating costs, interest on capital invested, and compensation to owners for risks and services.
After a thorough investigation of the proposition has been made, the promoter decides whether he wants to take the risk of promotion and decides upon a plan of capitalisation. After this, he starts to assemble the proposition. By “assembling” we mean protecting the fundamental idea, securing all the property needed by the enterprise, and making contracts with all the men that are selected to fill the chief managerial positions.
4. Financing the Proposition:
An idea has been conceived, investigated and assembled; now the promoter has what is known as the “proposition”. This proposition is presented to the public and underwriters in the form of a well-organised report known as “the Prospectus” in order to persuade them that the proposition is worthy of their financing.
The prospectus contains a detailed discussion of the whole proposition and is supported by copies of the reports by the various experts consulted during investigation. This process is also called the Capitalisation of the opportunity. This step is composed of two parts, the first being the formation of the company to take over property, and the second being the actual taking over of the property.
The promoters select a few suitable names in order of preference indicating as far as possible the main object of the proposed company. Then they apply to the Registrar of Companies to ascertain as to which of the names selected by them is available for adoption by the company. The application form is supplied by the Registrar’s office and a fee of Rs.10 is payable with the application. After obtaining the approval of a name, the promoters get the Memorandum and Articles of Association drafted and printed and get the same stamped as per the Stamp Act.
Thereafter they file the following documents with the Registrar of Companies of the state in which the registered office of the company is to be situated:
1. The Memorandum of Association to which at least seven persons (two persons in the case of a private company) have subscribed their names and each one of them has taken at least one share.
2. The Articles of Association, similarly signed.
3. A statement of nominal capital, and where it exceeds Rs. one crore, a Certificate from the Controller of Capital Issue permitting the issue of capital.
4. The agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager.
5. A statutory declaration by an advocate, an attorney, or a secretary or a chartered accountant practising in India engaged in the formation of the company, or by a director or any other officer of the company that all requirements of the Act and Rules thereunder in respect of registration have been complied with.
6. A list of directors and their consent to act signed by each.
7. The address of the registered office.
The Registrar will scrutinise the documents, and, when satisfied that everything is in order, will enter the name of the company on the Register of Companies maintained in his office. He will issue a Certificate of Incorporation, which gives the company legal existence from the date given on it.
Memorandum of Association:
The Memorandum of Association is the most important document of the company. It is its charter which contains the fundamental conditions upon which alone the company can be incorporated. It defines the limitations of the powers of the company; the area beyond which the actions of the company cannot go. Its purpose is to enable shareholders and creditors and those who deal with the company to know what its permitted range of enterprise and powers is.
The memorandum of a company limited by shares must contain the following particulars or clauses:
1. The name of the company with the word “Limited” as the last word of its name in the case of a public company, and the words “Private Limited” as the last words of the name in case of a private company.
2. Every company must have a registered office. But it is enough to mention in the memorandum the name of the State in which the registered office is to be situated.
3. The statement of the objects in the memorandum is of supreme importance, as it indicates the sphere of its activities and the extent of its powers. The ‘main’ objects and other ‘objects’ must distinctly and separately be stated in the memorandum.
4. A declaration that the liability of the shareholders is limited to amounts unpaid on their respective shares must be made in the memorandum.
5. The capital clause must contain a statement as to the amount of capital with which it is proposed to register the company, and the division thereof into shares of a certain fixed amount.
6. The subscription clause precedes the names of the signatories to the memorandum and reads something like this – We, the several persons whose names, occupations and addresses are subscribed, are desirous of being formed into a company in pursuance of the Memorandum of Association and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.
Alteration of Memorandum:
Any clause in the memorandum may be altered by following the procedure laid down in the Companies Act:
1. The name of the company may be changed by a special resolution in general meeting and with the approval of the Central Government.
2. A company may, by special resolution and with the sanction of the Company Law Board change – (i) the registered office from one State to another, (ii) the objects clause, if such change is rendered necessary –
(a) To carry on its business more economically and more efficiently;
(b) To attain its main purpose by new or improved means;
(c) To enlarge or change the local area of operations;
(d) To carry on some business which under existing circumstances may advantageously be combined with the business of the company;
(e) To restrict or abandon any of the objects specified in the Memorandum;
(f) To sell or dispose of the whole or any part of the undertaking, or any of the undertakings, of the company; or
(g) To amalgamate with any other company or body of persons.
3. If the articles authorise, a company limited by shares may, by an ordinary resolution in general meeting, alter its share capital so as to – (i) increase it by issue of new shares, (ii) consolidate and divide its capital into shares of large amount, (iii) sub-divide its shares into shares of smaller amount, (iv) convert its fully paid-up shares into stock or reconvert the stock into fully paid-up shares, or (v) cancel shares which have not been taken or promised to be taken at the time of the resolution.
4. If the articles authorise, a company by special resolution confirmed by the court may reduce its share capital in any way and in particular by – (i) reducing or extinguishing the liability of members for uncalled capital, (ii) writing off lost capital, (iii) paying off capital which is in excess of the company’s requirements.
Articles of Association:
The Articles of Association are the regulations or bye-laws which govern the internal management and conduct of the affairs of the company. They embody the powers of the directors and officers and of the shareholders as to voting, etc., the mode and form in which the business of the company is to be carried on and the mode and form in which changes in the internal regulation of the company may be made. The articles are subordinate to the memorandum. The memorandum lays down what is to be done, and the articles state how it is to be done.
The articles being the regulations for the internal management of the company can be altered any time by a Special Resolution, provided that the alteration is made bona fide and in the best interest of the company. If an alteration is unfair or inequitable between the members, the court will, on application, interfere and disallow it. For example, an alteration will be disallowed if it constitutes an oppression or fraud on the minority, or increases the liability of members, or is made for committing a breach of contracts.
Effect of Memorandum and Articles:
The Memorandum and Articles, when registered, bind the company and its members as if they had been signed by each member and contained covenants by members to observe all the provisions of the same. The members are thus bound to the company and the company to the members as members and not in any other capacity; and also members interest.
The memorandum and articles are public documents and a person contracting with the company is presumed to have knowledge of the contents. But he has a right to assume that the provisions of the articles have been observed by the company’s officers. This is known as the “doctrine of indoor management.”
When a company has been incorporated, it is ready for floatation. It has to raise capital sufficient to commence business and carry it on satisfactorily. A private company must obtain the requisite amount of capital from friends and relatives by private arrangement. A public company may also, if its needs are not vast, raise it by private arrangement. In practice, the promoters invariably raise the greater part of the capital from the general public and issue an invitation in the form of a prospectus to the public to subscribe or purchase shares in the company.
Section 2(36) defines a prospectus as “any document described or issued as a prospectus and includes a notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate”.
In short Section 2(36) defines a prospectus as “any document described or issued as a prospectus and includes a notice, circular, advertisement or other document inviting deposits from the public Or inviting offers from the public for the subscription Or purchase of any shares in, or debentures of, a body corporate”. In short, a prospectus is an invitation to the members of the public – anyone who brings his money and applies in due form – to buy shares or debentures of the company.
The object of a prospectus is four-fold:
1. To bring to the notice of the public that a new company has been formed;
2. To convince those who have savings to invest that the proposed company having secured the services of honest and able directors, as also of other factors which make for success, offers the best opportunity for gainful investment;
3. To preserve an authentic record of the terms and allotments on which the public have been invited to buy its shares or debentures; and
4. To secure mat the directors of the company accept responsibility for the statements in the prospectus.
The intending shareholders are entitled to all true disclosures in the prospectus. It may be presented in the rosiest possible invitation, but everything must be stated with strict and scrupulous accuracy. It must not conceal any material fact. For this purpose, the Act requires certain information relating to the directors and their interests in the company, expenses of formation of the company, business and property of the company and matters of interest to investors such as- minimum subscription, amounts payable on application and allotment, etc., to be given in the prospectus.
The prospectus must tell the truth, the whole truth and nothing but the truth, nor must it conceal or keep back what must be told. It must not mislead. But if a prospectus is misleading or fraudulent, because it contains false statements or there are misleading omissions of material facts, any person who applies for shares on the faith of such a false prospectus is entitled to the following remedies –
i. He may rescind the contract, give up the shares and get back his money with interest, getting his name removed from the register of members;
ii. He may claim damages from the company;
iii. He may claim compensation from the persons who authorised the issue of the misleading prospectus.
The directors and other persons who had authorised the issue of the false prospectus are, in addition, criminally liable for untrue statements.
Safeguards for Investors:
The law is jealous for the public. In order to ensure that a company starts business with adequate capital and also to check it from fixing at random an arbitrary amount such as- ten shares as its minimum capital requirement, Mie Act lays down a minimum basis, called the “Minimum Subscription.” This amount must be stated in the prospectus for the information of the prospective buyers of shares. The minimum subscription must be fixed at an amount to be raised by issue on cash basis and sufficient to provide for –
i. The purchase price of any property bought or to be bought out of the proceeds of the issue of shares;
ii. Preliminary expenses and commission payable by the company;
iii. The repayment of sums borrowed to provide for the foregoing;
iv. The working capital.
The amount payable on application must not be less than 5 per cent of the nominal amount of the share, nor must the commission, including underwriting commission, be more than 5 per cent of the issue price. The application money must be deposited in a scheduled bank and no part of it must be utilized before the receipt from the Registrar of Certificate to Commence Business.
In spite of the safeguards provided by the Act, there is always a danger of an ignorant but over-zealous investor being trapped by reckless directors and promoters through subtle and apparently reasoned statements in the prospectus. Very often the investor is ignorant but does not know it, and falls an easy prey to the optimistic and boastful prospectus, whereby the promoters can obtain funds for inefficient investment.
It is therefore necessary for an intending buyer of shares or a lender of money on debentures to carefully study the prospectus before he parts with his money. If he is not in a position to understand the intricacies of the various matters put in the prospectus, he should consult his broker or banker before he allows himself to be lured by promise of quick and easy profits.
The investor should first of all examine the nature of the business and its prospects in the light of factors that make for success, such as- the general business outlook, availability of the various factors of production, transport and marketing facilities and the attitude of the State. In the second place, he should find out all about the people who are at the helm of the enterprise. The success of any enterprise depends upon the quality of this small group of directors and the extent of their interests.
Thirdly, the capital plan of the company should be studied in order to find out whether the capital proposed to be raised is likely to be adequate for the success of the venture. It should be seen whether the shares have been underwritten and what commissions are being paid. The company’s bankers, legal advisers, auditors, brokers and other consultants are a good index of its position. These persons and institutions enjoying good reputation would not ordinarily associate themselves with dubious business.
An intending investor will be supplied with an abridged prospectus along with an application form for shares but a copy of the full prospectus must be supplied on request before the closing of the subscription list. He will apply for a certain number of shares by inserting the number in the blank space for the purpose and by putting his signature. The Board of Directors will then allot the shares to him and enter his name on the register of members.
The Act provides that any person applying for shares in a fictitious name, or otherwise inducing the company to allot any shares to him or any other person is liable to be imprisoned for a period not exceeding 5 years. This provision must be inserted in the prospectus at a prominent place.
1. Allotment of Shares:
The allotment of shares by the Board is in effect an acceptance by the company of the offer to take shares. Like any other acceptance, it must be communicated. Communication is complete as soon as the notice of allotment is posted.
An allotment can be made only after the following conditions have been fulfilled:
i. A prospectus or statement in lieu of prospectus has been filed with the Registrar before making the first allotment.
ii. The minimum subscription, as provided in the prospectus, has been subscribed or applied for, before the first allotment.
iii. The company has received in cash the application money amounting to at least 5 per cent of the nominal value of the share, and the moneys so received have been deposited in a scheduled bank before making any allotment.
2. Irregular Allotment:
If a company without complying with any of the above conditions makes an allotment, the applicant may avoid the allotment within 2 months after the Statutory Meeting, and if the allotment is made after this meeting, then within 2 months of such allotment he can claim the refund of his money even if the company is being wound up. The directors are liable to compensate the company or the allottee for any loss suffered by either through such allotment.
3. Subscription List:
Section 72 of the Act requires that the subscription must be kept open for 5 days after the issue of the prospectus. An applicant cannot withdraw his application until after the expiry of the 5th day after the opening of the subscription list. These provisions are expected to prove of advantage to the investing public as well as to the undertaking.
4. Inability to Allot:
If a company for want of the minimum subscription or for the non- fulfillment of any of the other conditions, is unable to allot any shares within 120 days after the first issue of the prospectus, it must refund without interest all moneys received from the applicants within the next ten days. Thereafter, the directors shall be jointly and severally liable to repay all moneys with interest at 6 per cent per annum.
With effect from June 15, 1988, listing of shares in a public company which issues a prospectus has been made compulsory. Every such company must make an application to one err more recognised stock exchanges before issuing the prospectus. If no application is made or the application has been rejected by the Stock Exchange no allotment of shares can be made.
If it is made, it shall be void. All moneys received must be refunded forthwith and if it is not refunded then the directors shall be personally liable to pay with interest ranging between 4% and 15% according to period of delay in refunding.
Certificate to Commence Business:
The company is now in a position to apply to the Registrar for a grant of the Certificate to Commence Business, which will be issued if all the formalities and legal requirements have been complied with. The Registrar will grant this certificate only if –
i. The Minimum Subscription has been allotted;
ii. The directors have taken up and paid for their qualification chares, as provided in the articles;
iii. The prospectus or the statement in lieu of prospectus has been filed as also a statutory declaration that the aforesaid conditions have been complied with.
A company cannot commence business under “other objects” without obtaining the prior approval of the shareholders by a special resolution passed at a general meeting.
Company Formation and Registration in India: How to Register a Company in India – With Steps, Documents Required and Basic Factors to Consider
Formation of a company is not a simple process like in the case of sole proprietorship or partnership. It is a complex and lengthy process, which involves a number of legal formalities and procedures.
The formation of a company involves the following steps:
3. Subscription of capital
4. Commencement of business.
It must be noted that these four stages are needed for formation of a public limited company. For a private limited company, only the first two stages are needed, i.e., a private company can start its business immediately after obtaining the certificate of incorporation.
Promotion is the first stage in the formation of a company. It includes the steps like identification of a business opportunity, analysis of its prospects and taking steps to implement it for the formation of a company.
In the words of Gerstenberg, “Promotion refers to the discovery of business opportunities and the subsequent organisation of funds, property and managerial ability into a business concern for the purpose of making profit therefrom”.
The person who performs all the task during the promotions stage is known as ‘promoter’. The term ‘promoter’ has not been defined in the Companies Act. Promoter is a person who conceived the idea of starting a business, examines the feasibility of idea, assemble various resources, prepare necessary documents and perform other activities needed to commence the business. Thus, promoter performs various functions to bring a company into existence. These functions are the steps involved in the promotion of a company. It must be noted that the promoter can be a person or a group of persons or a company.
Promoter undertakes various activities to bring a company into existence. However, a promoter is neither an agent nor a trustee of the company. Promoter is not an agent as the company is not yet registered and he is personally liable for all the contracts entered by him (known as preliminary contracts) before Incorporation.
Preliminary contracts are the contract entered into by the promoters with third parties on behalf of the company before its incorporation.
i. Such contracts are not legally binding on the company and company cannot ratify these contracts even after its incorporation as company was not in existence at the time of contract.
ii. Promoters remain personally liable to third parties for these contracts.
iii. However, the company may enter into fresh contracts with the same terms and conditions in order to honor the contracts made by the promoters.
iv. Promoter is not a trustee of the company, but he stands in a fiduciary relationship (i.e., relationship of utmost faith) with the company he is promoting and he should not misuse his position. He should not make any secret profits in the dealings, and if he makes then such profits should be disclosed.
If the promoter does not disclose the secret profits earned by him and company gets to know about it, the company can:
(a) Cancel the contract,
(b) Recover the purchase price paid to the promoters, and
(c) Claim damages for the loss suffered.
v. Promoters are not legally entitled for the expenses incurred in the promotion of the company. However, the company may reimburse such pre-incorporation expenses.
vi. The company may remunerate the promoters by making a lump sum payment or Commission on the basis of property purchased or shares sold).
vii. The company may allot shares or debentures to the promoters or give them an option to purchase the securities at a future date.
The important functions of promoters (or steps involved in promotion) are discussed as follows:
(i) Identification of Business Opportunity:
The process of formation of a company begins when promoter identifies a business opportunity or an idea. The idea maybe with respect to setting up of a new business or expansion of the existing unit or merger of two business units. The promoter also undertakes preliminary analysis of the idea in terms of profitability, risks involved, resources required, etc.
After conceiving the idea, the promoter proceeds to explore the feasibility of the business in view.
It may not be feasible or profitable to convert all identified business opportunities into real projects. So, before investing the money in the idea, detailed feasibility studies are conducted in order to investigate all aspects of the intended business. Depending upon the nature of project and with the help of specialist like engineers, CA etc., the following feasibility studies may be undertaken –
a. Financial Feasibility:
Every business activity requires funds. If the funds required for the project is so large that it cannot be arranged within the available means, then the project is said to be financial infeasible. For example, project of developing townships may be very lucrative, but if it is not possible to arrange the required funds, the project lacks financial feasibility.
b. Technical Feasibility:
Sometimes, the business idea is favorable, but technically it may not be possible to implement the idea. It may be due to non-availability of required technology, raw materials and other inputs. The project would remain technically unfeasible until the technology or other inputs are made available from alternative sources.
c. Economic Feasibility:
Sometimes a project is abundant just because it might not be very profitable. Generally businessman prefers to carry on with the ideas which are profitable.
It must be noted that the experts hired to conduct the feasibility studies do not become promoters just because they are assisting the promoters.
The promoters have to select a name for the company and get it approved from the registrar of companies. It has to be ensured that the name selected for the company does not match with the name of any other company. For this, three names are given to the registrar in order of preference. Registrar approves the name if the proposed name is not identical to name of any other existing company and is not misleading.
(a) The name should neither be identical with nor closely resemble the name of an existing company.
(b) The name should not be misleading, i.e., name should not suggest that the company is in a particular business or it is an association of a particular type when it is not true.
(c) The name should not be objectionable under the provisions of the Emblem and Names (Prevention of Improper Use) Act, 1950.
(d) The name must not include the word ‘Cooperative’.
(e) The name should not convey any connection with the government departmental or local authority.
(f) The name should end with the word ‘Limited’ in case of a public company and with the words ‘Private Limited’ in case of a private company.
The promoters have to decide about the people who will be signing the Memorandum of Association of the proposed company. Usually, the people who sign the memorandum (known as signatories) are also the first Directors of the Company. The written consent of signatories to act as directors and to buy qualification shares is also taken. The memorandum must be signed by at least 7 persons in case of a public company and by two persons in case of a private company.
Promoters often try to convince influential and experience businessman to be the signatories of the proposed company.
In order to ensure that the directors have some stake in the proposed company, the articles usually have a provision, in which directors are required to buy a certain number of shares before the company obtains Certificate of Commencement of Business. Such shares are known as Qualification Shares.
The promoters appoint professionals such as mercantile bankers, auditors, etc., to assistant preparation and submission of necessary documents to the registrar of companies.
The promoter takes up steps to prepare legal documents (Memorandum of Association, Articles of Association, Consent of Directors, etc.) as they have to be submitted to the registrar for getting the company registered.
The important documents required to be submitted to the registrar are:
a. Memorandum of association
b. Articles of association
c. Consent of proposed directors
e. Statutory declaration
Memorandum of association is the principal document of the company. It has been described as the ‘Charter of the Company’ as it contains the powers and objectives of the company, defines the scope of its operations and its relations with the investors and outside world. The company has to work within the limits laid down in the memorandum.
The memorandum of association must contain the following clauses:
This clause contains the name of the company with which the company will be known. This name has already been approved by the registrar of companies.
This clause contains the name of the state in which the registered office of the company is proposed to be situated. The exact address of the registered office is not required at this stage, but it must be notified to the register or within 30 days of the incorporation of the company. This clause is also known as ‘Situation clause or Domicile clause’.
It is the most important clause of the memorandum. It defines the purpose for which the company is formed. A company cannot conduct any business not authorised by its object clause.
The object Clause is further divided into two sub-clauses:
(a) The main objects – This sub-clause list out the main objects for which the company is formed. Any essential or incidental act which is needed to achieve the main object is deemed to be valid, even if it is not employee explicitly stated in the sub-clause.
(b) Other objects – This sub-clause includes those objects which are not included in the main objects. However, to undertake a business included in this sub-clause, the company has to either pass special resolution or pass an ordinary resolution and obtain approval of Central Government.
It must be marked that the object stated in the object clause must not be legal or in conflict with the provisions of the Companies Act.
This clause states that the liability of the members of the company is limited to the amount unpaid on the shares owned by them. For example, if a shareholder has purchased 500 shares of Rs. 10 each and has already paid Rs. 7 per share, then his liability is limited to Rs. 3 per share. Thus, in event of losses or companies failure to pay debts, the shareholders is liable to pay only Rs. 1500 (i.e., the unpaid amount of Rs. 3 on 500 shares.)
This clause specifies the maximum capital (known as authorised capital), which the company will be authorised to raise through the issue of shares. The division of authorised capital into number of shares with their face value is also specified in this clause. For example, the authorised share capital of the company may be Rs. 2 crores, divided into 20 lakh shares of Rs. 10 each.
It must be noted that the company cannot issue share capital in excess of the amount mentioned in this clause.
Authorised capital or “nominal capital” Section 2(8) of the Act. It means such capital as is authorised by the memorandum of association of a company to be the maximum amount of shares capital of the company.
Issued capital is defined in Section 2(50) of the Act. It means such capital as the company issues from time to time for subscription.
Subscribed capital is defined in Section 2(86) of the Act. It means such part of the capital which is for the time being subscribed by the members of a company.
Called up capital is defined in Section 2(15) of the Act. It means such part of the capital, which has been called for payment.
Paid up share capital or ‘share capital paid up’ is defined in Section 2(8) of the Act. It means such aggregate amount of money credited as paid up as is equivalent to the amount received as paid up in respect of shares issued and also includes any amount credited as paid up in respect of shares of the company, but does not include any other amount received in respect of such shares by whatever name called.
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares. The memorandum of association must be signed by at least 7 persons in case of a public company and 2 persons in case of a private company.
The association clause reads as ‘We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of this memorandum of association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.’
The Articles of Association is a document containing the rules and regulations for the internal management of the company. It is subsidiary to the memorandum of association and hence cannot include any powers prohibited or excluded by the memorandum.
A public limited company may either have own articles or may adopt Table F (which contains a model set of articles) given in the Companies Act. For companies not adopting Table F, a copy of the articles of association, stamped and duly signed by signatories to the memorandum is required for registration.
If no articles are registered than Table F will constitute the rules and regulations for the internal management of a public limited company.
In addition to Memorandum and Articles of Association, a written consent of proposed directors is required to confirm that they agree to act in that capacity and undertake to buy and pay for qualification shares.
If the company proposes to enter into an agreement with any individual for appointing him as Managing Director / Whole time director / Manager, then such agreement is also to be submitted to the registrar.
A statutory declaration is to be submitted to the registrar stating that all the legal requirements of the Companies Act in regard to incorporation have been complied with.
This statement has to be signed by any of the following:
i. Advocate of High Court or Supreme Court,
ii. Chartered Accountant/company secretary in full time practice,
iii. Person named in the articles as a Director,
iv. Manager or Secretary of the company.
Along with the above documents, necessary filing fees and registration fee has to be paid for the registration of the company. The amount of fees depends on the authorised share capital of the company.
Incorporation means registration of the company under the Companies Act, 2013 or any previous company law. This is the 2nd stage in the formation of the company.
After the registrar approves the name, the promoter can proceed with the following steps for the incorporation of the company:
Promoters make an application to the registrar for incorporation of the company.
The application must be accompanied with the following documents:
(i) Memorandum of association duly stamped, signed and witnessed. It must also contain information about address, occupation and number of shares subscribed by the signatories.
(ii) Articles of association or statement in lieu of the prospectus (in case of Table F is adopted by public limited company).
(iii) Written consent of the proposed directors to act as directors.
(iv) Agreement (if any) with the proposed Managing Director / Whole time Director / Manager.
(v) Copy of the registrar’s letter approving the company’s name.
(vi) Statutory declaration affirming that all legal requirements for registration have been complied with.
(vii) Notice of the exact address of the registered office. However, it may also be submitted within 30 days of the receipt of the certificate of Incorporation.
Along with the above documents, necessary filing fees and registration fees at the prescribed rates are also to be paid.
The registrar scrutinizes all the documents and if he is satisfied about the completion of formalities for registration, he issues a certificate of incorporation. The moment the certificate is issued, the company comes into existence.
This certificate signifies the birth of the company and is also termed as birth certificate of the company. With effect from November 1, 2000. The registrar of companies also allots a Corporate Identity Number (CIN) to the company.
A company is legally born on the date printed on the Certificate of Incorporation.
It is very important because:
(i) Company gets the status of separate legal entity with perpetual succession.
(ii) Company becomes entitled to enter into valid contract.
(iii) Certificate is a conclusive evidence of the regularity of incorporation of a company (irrespective of any deficiency in its registration). For example, issue of certificate will make the incorporation valid even if a person has forged a signature on the Memorandum or the company is registered with illegal objects.
As certificate of incorporation is so crucial, the registrar should be very careful before issuing it.
A private company can immediately commence its business after obtaining Certificate of Incorporation.
However, a public company has to undergo two more stages:
(a) Capital subscription.
(b) Commencement of business.
It must be marked that in case of a private company, funds are not raised from the public in order to retain its ‘private’ status. Funds are raise either from the members or through borrowing from banks and other sources.
After the company is incorporated, the next stage for the public company is to raise the necessary capital. In order to raise funds, a public company can issue shares and debentures to the public. For this, it has to issue a prospectus.
The steps required for raising funds from the public are as follows:
SEBI (Securities and Exchange Board of India) is the regulatory authority in the securities market to protect the interest of investors. If the company proposes to raise capital from public by issue of shares and debentures, then a draft prospectus has to be submitted to SEBI for its scrutiny to ensure that disclosures made therein are adequate for protection of interest of investors.
Prior approval from SEBI is compulsory before going ahead with raising funds from public.
Prospectus is a document inviting deposits or offers from the public for the subscription or purchase of shares and debentures of the company. A statement in lieu of prospectus is prepared when public company is confident of raising funds from private sources. A copy of prospectus or statement in lieu of prospectus is to be filed with the registrar.
The prospectus or statement in lieu of prospectus should make full disclosure of significant and material information in order to enable the investors to decide whether or not to invest money in the company.
Raising funds from the public is a complex task. So, in order to ease the process, experts in different fields are appointed.
a. Bankers receive and deposit the application money.
b. Brokers distribute the application forms and encourage the public to subscribe the shares.
c. Underwriters are appointed as the company is not sure of receiving minimum subscription of shares by the public. Underwriters undertake to buy the shares if these are not subscribed by the public. They receive a Commission for the same. Appointment of underwriters depends upon the discretion of the company. The process of appointing underwriters to ensure the minimum subscription of capital is known as underwriting.
Before commencing the business, every public limited company must raise minimum subscription in order to avoid shortage of funds.
a. It refers to minimum number of shares that must be subscribed by the investors before a company proceeds with the allotment of shares.
b. According to Section 39(1) of the Companies Act, 2013, minimum subscription is the amount stated in the prospectus as the minimum amount to be subscribed and paid by cheque or other instrument.
If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of 30 days from the date of issue of the prospectus, or such other period as may be specified by the SEBI, the amount so received, shall be returned within such time and manner as may be prescribed. To avoid this risk company generally appoints the underwriters.
A public company must get itself listed or quoted in a stock exchange before it starts selling the securities to the public.
a. For this, company has to make an application in at least one stock exchange to get the permission.
b. If the company does not get permission within 10 weeks from date of closure of subscription list, then the allotment will become void and all money received from the applicants will have to be returned within 80 days.
After getting the name listed in the stock exchange, the company makes allotment of shares as per guidelines of SEBI.
a. Allotment letters are issued to the successful allottees. The company returns the application money to the applicants to whom no shares are allotted.
b. In case of partial allotment (i.e., when shares allotted are less than shares applied), excess application money is either returned or adjusted towards allotment money.
c. A return of allotment containing names, addresses of shareholders and number of shares allotted to each shareholder, signed by a director or secretary is filed with the register or within 30 days of allotment.
After receiving the minimum subscription through new issue of shares, a public company makes an application to the registrar for issue of certificate of commencement of business.
Along with the application, following documents must be filed:
i. A declaration that the shares have been allotted up to the amount of the minimum subscription.
ii. A declaration that every director has paid in cash the application and the allotment money on his shares in the same proportion as others.
iii. A declaration that no money is liable to become refundable to the applicants by reason of failure to obtain permission for shares to be traded in a recognised stock exchange.
iv. A statutory declaration by Director or the Secretary of the company stating that the requirements relating to the commencement of business has been duly compiled with.
It must be remarked that the public company raising funds privately which has earlier filed statement in lieu of prospectus, has to submit documents mentioned in 2 and 4.
The Registrar will scrutinize all these documents and if he is satisfied then he issues a Certificate of Commencement of business. The grant of this certificate completes the process of formation of a public company. The company can start its business activities from the date of issue of the certificate.
The complexities of business have increased manifold. Various human, physical and financial resources are assembled to start a business enterprise. The success of a business depends on the ability of the entrepreneurs to anticipate problems and to solve them. An entrepreneur has to consider various factors before starting a business.
Some of the key factors are as follows:
The first thing to be decided is the nature and type of business activity, which the entrepreneur wants to start.
a. This decision is influenced by the customer requirements in the market, kind of technical knowledge required, interest of the entrepreneur, etc.
b. Entrepreneurs aims to start that branch of industry and commerce, which could generate maximum profits with minimum possible risk.
After selecting the line of business, the entrepreneur has to decide the size of business, i.e., whether to set up large scale or small scale business.
a. It depends on number of factors like availability of finance, competence of the entrepreneur, market conditions, etc.
b. If the entrepreneur expects good demand for the proposed product and he can arrange required capital and other resources, then he may go for large scale business.
c. However, if the market conditions are uncertain and risks are high, then a small size business is preferred.
After deciding the line and size of business, the entrepreneur has to decide the form of business, i.e., whether to set up sole proprietorship, partnership or joint stock company. Each form has its own merits and demerits. This decision depends on several factors such as capital requirements, liability of owners, division of profit, legal formalities.
Another important factor, which the entrepreneur must consider at the start of the business, is to decide the place where the enterprise will be located.
a. Appropriate location influences the cost, profitability and growth of the business. Any wrong decision may cause huge inconvenience to the business or can result in high cost of production.
b. Facilities like availability of raw materials and labour, power supply and services like banking, transportation, communication, warehousing, etc., must be considered before making a choice of location.
Business cannot be started without capital. So, after deciding the location of business, the entrepreneur has to decide the finance (or capital) needed to start as well as to continue the proposed business.
a. Capital is needed for investment in fixed assets (like land, building, machinery etc.), Current assets (like raw materials, book debts etc.) and for meeting day-to-day expenses.
b. Proper financial planning must be done to determine –
(1) Requirement of capital
(2) Sources of raising capital
(3) Best way of utilising capital
Availability of physical facilities including machinery, land and building, raw materials, and other support services is a very important factor to be considered at the start of the business. The nature and quantum of physical facilities depends on the nature and size of business, availability of funds and the process of production.
After determining the requirements of physical facilities, the entrepreneur should draw a layout plan showing the arrangement of these facilities. Layout means the physical arrangement of Machines and equipments needed to manufacture a product.
(viii) Competent and Committed Workforce:
As an individual entrepreneur cannot do everything himself, there is a strong need for competent and committed workforce.
a. The entrepreneur has to decide the number of skilled workers, unskilled workers and managerial staff required to carry on the business activities.
b. Entrepreneur must also decide the ways and means through which workforce will be trained and motivated to give their best performance.
(ix) Tax Planning:
There are number of tax laws in the country, which considerable influence the functioning of modern business. So, the entrepreneur has to consider the tax liability under various tax laws (like VAT, excise duty, service tax, etc.) and its impact on business decisions.
(x) Launching the Enterprise:
After mobilizing the various resources, designing plant layout, selecting location for business and fulfillment of legal formalities, the entrepreneur can go ahead with actual launching of the enterprise. It means starting the production process and initiating the sales promotion campaign.