Company Registration

Section 3 – Formation of Company of the Companies Act 2013

calendar20 Oct, 2023
timeReading Time: 3 Minutes
Section 3 - Formation of Company of the Companies Act 2013

The Ministry of Corporate Affairs (MCA) and the Offices of Registrar of Companies oversee the administration of the 2013 Companies Act on behalf of the Central Government. The Companies Act, 2013 replaces the 56-year-old Companies Act, 1956 in stages and codifies and updates the legislation governing corporations in India. With the addition of certain important clauses, the new Act seeks to strengthen corporate governance and better regulate the commercial sector. The Companies Act of 2013 is important as it contains the mechanism to establish a company and how to manage its organization and financial management.

Section 3 - Formation of Company of the Companies Act 2013

Section 3 – Formation of Company

  • Section 3(1)

In the clause (1) of the Section 3 of Companies Act 2013[1] it states that, a company can be formed for any legal purposes by:

  • Section 3(1)(a) – when seven or more than seven person come together and form a company that company is called a public company. A public company in simple words is a company which is not a private company. These types of company will have a minimum paid up share capital to start with.
  • Section 3(1)(b) – when two or more than two people decide to form a company, that company will be a private company. A private company is basically a company that issues shares and has shareholders but does not list on the stock exchange.
  • Section 3(1)(c) – when an individual (one person) decides to form a company, that company will be known as a one-person company, which will be a private company. A one-person company will have only one person as the member of the company. The person will subscribe his/her name in the memorandum and will follow all the rule and regulations required legally to register a company.

In a one-person company, the memorandum of the company will also contain a name of other person, who in case of the death of the subscriber or in the event when the subscriber does not have the capacity to enter into contracts, will Act as the new owner of the one-person company. Written permission/consent is to be taken of the other person before adding their name in the memorandum. This written consent has to be also filed with the registrar, at the time when the company is incorporated. The other person can, if he wants, withdraw his consent for which they will have to follow certain specific rules.

The owner of the one-person company can change the name mentioned in the memorandum of the other person if he wants to, by giving notice of the same to the company.  The owner of the one-person company will then have the responsibility of informing the company about the same. This will also include making changes to the memorandum but shall not be deemed as an alteration made in the memorandum of the company. The Registrar should also be informed about the change as well.

  • Section 3(2)

The clause (2) of the Section states that the companies which are formed under Section 3(1) can be a company limited by shares, or a company limited by guarantee, or an unlimited company.

Amendments in Section 3 of Companies Act, 2013

  • Section 3A – Members severally liable in certain cases:

Section 3A was inserted to the Companies Act, 2013 by the Companies (Amendment) Act, of 2017. This Section deals with the circumstance when the required minimum number of members is less than the permitted number set out in Section 3 of  Companies Act. If a company operates for longer than six months while its number of members is less than the statutory limit, and every member in the company is aware if the same, that the company is operating while its number of members has fallen below the statutory limit, then in that case everyone who is a member of the company and has knowledge of that fact is liable. Section 3A is applicable in cases where the number of members falls below seven for public companies and two for private companies, respectively.

Conclusion

Section 3 of Companies Act 2013, discusses the establishment of companies and states that they may be established for any legitimate reason. According to Section – 3 of Companies Act, there are three types of companies based on membership, and this provision stipulates the minimum number of person(s) or member(s) necessary for the formation of a business.

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