Companies Act Section 3

Formation of a Company Under the Companies Act: Section 3

1. Overview of Company Formation

According to Section 3 of the Companies Act, a company can be formed for any lawful purpose. 

The number of individuals required to form a company depends on the type of company being established.
Specifically, the law provides for the formation of:

Public companies

Private companies

One Person Companies (OPC)

Each category of company has its own distinct formation requirements and processes, which must align with the legal framework established under this section of the Act.

2. Types of Companies and Formation Criteria

A. Formation of a Public Company

For the formation of a public company, the law requires that seven or more persons come together. 

These individuals must collectively subscribe to a memorandum of association and comply with all the provisions laid out in the Companies Act for successful registration.

B. Formation of a Private Company

In the case of a private company, the law is more flexible, allowing for the formation with two or more persons. 

Similar to the public company formation process, these individuals must subscribe to a memorandum and meet the relevant registration requirements under the Act.

C. Formation of a One Person Company (OPC)

For a One Person Company (OPC), which is a special type of private company, one individual can form the company. 

This individual must subscribe to a memorandum of association and follow the registration procedures prescribed by the Act. 

An OPC is tailored for individual entrepreneurs who wish to form a private company with a sole member.

3. Special Provisions for One Person Company (OPC)

While the formation of a One Person Company (OPC) follows the same general procedures for company registration, there are special provisions that apply exclusively to OPCs. 

These provisions ensure business continuity and legal safeguards in the event that the sole member is incapacitated or deceased.

A. Nomination Requirement

The memorandum of association for an OPC must include the name of another individual who will become the member of the company if the original subscriber is no longer able to fulfill that role due to death or incapacity. 

This nominated person must provide their prior written consent to take on this responsibility, and this consent must be filed with the Registrar at the time the company is incorporated. 

This measure ensures that there is a pre-determined succession plan for the OPC.

B. Withdrawal and Change of Nominated Person

The nominated person is allowed to withdraw their consent if they choose not to take on the role in the future. 

To do this, they must follow a prescribed procedure as outlined by the Act. 

Likewise, the member of the OPC has the right to change the nominated person. 

If the member decides to appoint someone else as the new nominee, they must provide notice in the prescribed manner to formalize this change.

C. Notification to the Company and Registrar

Once the nominated person has been changed, the member is required to inform the company about the new nomination. 

Subsequently, the company must notify the Registrar about the changes to ensure that the legal records are updated accordingly.

Importantly, any changes to the nominated person’s name will not be considered as an alteration to the memorandum of association. 

This ensures that administrative changes related to the nominee do not require formal alterations to the company’s foundational documents.

4. Types of Companies by Liability Structure

After forming a company under the conditions specified in subsection (1), the company can adopt one of the following liability structures:

A. Company Limited by Shares

A company limited by shares is one in which the liability of its members is limited to the amount unpaid, if any, on the shares they hold. 

This is a common form of company structure, particularly for profit-driven businesses.

B. Company Limited by Guarantee

In a company limited by guarantee, the liability of members is limited to the amount they agree to contribute to the company’s assets in the event of its winding up. 

This type of company is often used for non-profit organizations or charitable purposes.

C. Unlimited Company

An unlimited company has no limit to the liability of its members. 

In the event of the company’s insolvency, members may be required to meet the company’s debts and obligations without any cap. 

This structure is rare due to the significant personal risk it poses to members.