The formation of the company involves various stages starting from the discovery of business idea to commencement of business. They are as follows :

(1) Promotion

(1) Incorporation


(1) Raising of capital

(1) Commencement of business.

How to Guide

1. Promotion

Promotion is the first stage in the formation of a company. It involves the conception of the business idea, detailed investigation about the feasibility of the idea and assembly of resources needed for the purpose.

Prof. C. W. Gerstenberg defines promotion as “discovery of business opportunities and subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits therefrom.”


A company may be promoted either by converting an existing firm into a company or by starting a new company altogether to take up a new line of business.

Stages of Promotion:

Promotion of a company involves the following five stages.

(A) Discovery of idea:


The first stage of the company promotion is the discovery of business idea by a person or group of persons known as promoters. The promoters discover the idea by analysing the .various opportunities as regards profitability, risks involved, rate of return on investment, capital required, availability of labour etc.

(B) Preliminary investigation:

After discovering the idea, the promoters will have to for ‘swot’ analysis of the project (strength weakness opportunities & threat). He has to find out the viability and the marketability of the products or services. He also makes a rough estimate regarding the sources of finance, materials and labour and the cost benefit analysis.

(C) Detailed investigation:


After preliminary investigation, if the promoters are satisfied about the practicability of formation of a company to exploit the opportunity, then the detailed investigation is made regarding the location, size of the unit, plant and machinery, building, raw-materials, labour, water sources, power, capital requirement, demand and supply, prices of the product, profit etc. in more detailed manner.

(D) Assembling:

Assembling does not mean physical mobilisation of factors of production like materials, machineries and properties, it involves more contracts with the suppliers of materials, plant and machinery and other properties. In this stage, key managerial posts including technical experts are filled up. The promoters also enter into negotiation with different authorities to obtain necessary licence, permits and clearance.

(F) Financing:


The entire exercise of the promoters shall be futile unless the promoters are sure of arranging the necessary finance for meeting the requirement of tangible property, intangible property and sufficient cash balance for operating activities. The promoters approach banks and financial institutions, underwriting houses, wealthy friends etc. and convince them about the prospects of the proposed company. The number and types of shares and debentures to be floated is also decided. On the whole the promoters are now confident of getting the required capital for the company.


Since the company is an artificial person, it is required that someone must conceive the idea and take the initiative in forming the company. The person who takes the necessary steps to carry out the process of formation of a company is called a promoter. A promoter may be an individual, partnership firm, association of persons or a company. The persons who help in their professional capacity (solicitor, accountant, engineer, value, etc.) in the promotion of a company are not promoters. But such persons are also regarded as promoters if they act over and above’ their professional capacity (for example, accountant arranging for finance alongwith the promoter). The term ‘promoter’ has not been defined in the Companies Act. The following are some of the judicial definitions of a promoter.

The foregoing discussion reveals the following characteristics of a promoter:


(i) The promoter may be an individual, a firm, an association of persons or a company.

(ii) He conceives the idea of forming a company to exploit some business opportunities.

(iii) He makes a detailed analysis of the commercial viability of the proposition.

(iv) He brings together the men, material, machinery, managerial ability to form the company.

(v) He prepares the relevant documents with the help of experts for the registration of the company.

(vi) He arranges the necessary finance.

He arranges people who agree to be the signatories to the Memorandum of Association.

2. Incorporation

Incorporation of company is the second stage of the company formation which is effected by registration with the Registrar of Companies. Prior to registration of a company, it is required to obtain approval of the proposed name of the company from the Registrar of Companies. In this connection, a set of three names in order of priority are suggested in the application in Form-IA along with a fee of Rs. 500. If the Registrar intimates that the proposed name(s) are not objectionable, the proposed company may adopt any name.

After obtaining the approval for the proposed name, the application for registration accompanied by the following documents and particulars must be filed with the Registrar of Companies of the state in which the registered office of the company is to be situated. Registration fees and filing fees at the prescribed rate are to be deposited for the propose of registration with the following documents.

i. Memorandum of Association, duly stamped, signed by the subscribers and witnesses.

ii. Articles of Association properly stamped, duly signed by the signatories to the Memorandum of Association.

iii. List of Directors, with their names, addresses, occupation, age.

iv. The written consent of the directors to act as director.

v. The written undertaking by the directors to take the necessary qualifying shares.

vi. A statutory declaration by an advocate of High Court or Supreme Court or an Attorney of High Court or by a Secretary or Chartered Accountant that all the requirement of the Companies Act relating to the registration of the company have been complied with.

vii. Intimation of address of registered office (can be filed within 30 days after • incorporation).

The Registrar scrutinizes all the documents and if he finds them in order, he will enter the name of the company in the Register of Companies and issue a certificate which is known as “CERTIFICATE OF INCORPORATION”. The date mentioned in the certificate is the date from which the company becomes a separate legal entity with a perpetual succession and common seal.

3. Raising of Capital (Capital Subscription)

A private company and a public company without share capital can commence business immediately after getting the certificate of incorporation. A private company is not permitted to invite the public to subscribe to its share capital.

Therefore, a private company and a public company without share capital arrange the capital from private sources such as friends, relatives etc. But a public company with share capital raises its capital by inviting the public through issue of prospectus.

However, it is not compulsory for a public company to issue prospectus. A public company which can arrange its capital without inviting the public (through of underwriters etc.) shall have to file a ‘Statement in lieu of Prospectus’ with the Registrar of Companies. If the public issue of shares and debentures exceeds a particular limit, then the company must obtain permission of the Securities and Exchange Board of India (SEBI). The company can invite the public to subscribe to its share capital only after obtaining the permission from SEBI (if required) and filing with the Registrar of Companies a copy of the prospectus for registration.

4. Commencement of Business:

A public company having a share capital and issuing a prospectus will have to file the following documents with the Registrar of Companies to secure the ‘Certificate of Commencement of Business’.

The declaration that the shares payable in cash have been allotted upto the amount of minimum subscription.

The declaration that every director has paid in cash the application and allotment money on the shares in the same proportion as others.

The declaration that no money is liable to become refundable to the applicant by reasons of failure to apply for or to obtain the permission for shares or debentures to be dealt in on any recognised stock exchange.

The statutory declaration by the Secretary or one of the directors that all the requirements have been duly complied.

The Registrar will scrutinise the documents and if he is satisfied, then he will issue the certificate of commencement of business. After getting this certificate the public company is entitled to commence business from the date of issue of the certificate. The public company which has not issued a prospectus can submit the declaration immediately after the statement in lieu of prospectus is filed and other conditions have been fulfilled.