Formation Of A Company

Formation Of A Company

Formation of a company is the process of registering a business as a limited company at Company registration House. The company house differs in different countries depending on their laws. The business becomes a distinct legal entity after registration.

When a limited company is incorporated, the law sees it as an individual ‘person’. They become completely separate from their owners in terms of finances, liabilities, contractual agreements, and assets ownership. You can sue the business without suing its owner(s) and vice-versa. This is known as entity concept in accounting, it states that a business organization is separated from its owners. Unincorporated businesses like sole traders can not be seen as distinct legal entities.

In the eyes of the law, unincorporated businesses like sole traders are not viewed as distinct legal entities. Therefore, a sole trader business and its owner are not separated in terms of finances, assets and liability.

The processes involved in the formation of a company is lengthy. For convenience the whole process of formation of a company may be divided into the following stages:
  1. Promotion Stage
  2. Incorporation or Registration Stage
  3. Capital Subscription Stage
  4. Commencement of Business Stage

In the formation of a limited liability company, the following procedures must be followed
  1. The first step is to get a promoter. They are individuals who conceive the idea of the company and undertake to fulfill all legal requirements of the venture.
  2. The following documents will be filed with Registrar companies. they include memorandum and article of Association, prospectus, certification of incorporation, statement of national capital.
  3. The documents are stamped and logged with the registrar of the companies for verification.
  4. When the registrar of companies receives and approves all the necessary documents required, the registrar issues a certificate of incorporation to the business.

The memorandum of association of a business organization contains the external rules of the company. They refer to the objects and power of the company and how it intends to deal and interact with the outside world i.e public. The memorandum of association contains the following:
  1. The name of the company has to end with the word "limited"
  2. The registered office
  3. The object of the company
  4. A declaration that liability is limited
  5. The amount of authorized capital

This document which states the internal regulations of a limited company. It contains the regulations which govern the internal management of the company's affairs. The following particulars are found in the document:
  1. The right and responsibilities of shareholders
  2. The duties and powers of the directors
  3. How directors may be appointed
  4. The right and duties of members as between each other and the company or business
  5. The procedure it will use for accounting and auditing of the company's book, etc
This is a document issued by limited companies inviting the public to subscribe to its shares. The prospectus contains detailed information about the company. It is prepared by only public.


This is a document which gives legal authority to the company to operate a legal personality. It is issued by the registrar of companies after due consultation with various documents submitted.

If the company fails to start business within 12 months after it has been issued of the certificate of incorporation, the registrar may remove a company from the company register, except when it is as a result of delays relating to licensing or other legal requirements, or if the company had valid and reasonable grounds to the satisfaction of the registrar.
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