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The Companies Act: How to Become a Member of a Company?

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A company comprising its shareholders, employees and other members together own the company. The initial members and shareholders of a company are known as subscribers. As per the Companies Act, 1956, a public company must have at least seven members and a private company must have at least two members.

The Companies Act: Options for Becoming a Member

Here are a few ways of becoming a member of a company:

Membership by Subscription: Under Sec. 41 of the Companies Act, 1956, the subscribers to the Memorandum of a company are believed to have given their approval to become members of the company. Their names are entered in the register of members as members of the company, once the company gets registered under the Companies Act, 1956.

Membership by Beneficial Ownership: As per Sec. 41(3) of the Companies Act, 1956, every person whose name is mentioned as beneficial owner in the records of the depository and owns equity shares of the company is considered member of the company.

Membership by Qualification Shares: Under the provisions of Sec.266 of the Act, a person must sign for undertaking to hold and reimburse for qualification shares of a public company before becoming the director of the company. He thus automatically becomes the member of the company.

Membership by Application and Registration: As per Sec.41 (2) of the Act, a person who gives a written approval to become a member and whose name is mentioned in the register of members is considered a member of the company. The name of a person may be registered through many ways, such as by transfer, succession, application and allotment.

Final Legal Take Away Tip: A subscriber to the Memorandum of a company cannot cancel the contract to hold shares of the company on the ground of false representation of facts by the promoter of the company.

 

Are you Dealing with Bounced or Dishonoured Cheque?

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Lets understand in detail how to deal with Bounced or Dishonoured cheque

What is a Cheque?

As per Section 6 of the Negotiable Instruments Act, 1881 provides that “a Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated Cheque and a Cheque in the electronic form.”

Reasons for Dishonouring a Cheque by a Bank

The principal reasons for dishonoring the cheque are as follows: –

  1. A cheque is not in proper conditions specified in the Negotiable Instrument Act.
  2. A drawer signature’s on cheque differs from specimen signatures recorded with the bank.
  3. A cheque is stale (in circulation for more than 6 months) or postdated.
  4. Amount expressed in words and figures differ.
  5. Cheque mutilated (cut torn part of cheque missing)
  6. Material alternations (change in date, crossing, amount, name of payee etc. on cheque) need confirmation by the drawer.
  7. Over writing or order cheque not properly authorizes.
  8. Do not tally with directions contained in the crossing.

When a Banker is Justified in Refusing Payment

A banker is justified in refusing payment of a customer’s cheque on the happening of any one of the following events.

  1. Notice of the customer to refuse payment of the cheque.
  2. Notice of the customer’s death.
  3. Notice of the customer’s insanity
  4. Notice of the customer’s bankruptcy.
  5. In case of a company, notice of its winding up.
  6. Notice of a court order.
  7. In case of trust accounts receipt of information that the customer contemplates a breach of trust.

Dishonour of Cheque is a Serious Offence

Dishonor of cheques is a criminal offence under section 138 to 142 of the Negotiable Instrument Act, 1881 by an amendment.

  1. In order to make a person liable for Charges/ prosecution, the following criteria/ conditions must met –
  2. The cheque is presented within its validity from its date.
  3. A demand notice is sent by the Payee (person/ company/ entity on name the check is issued) to the drawer (person/ company/ entity issued the check) within 30 days from the Payee’s receiving the dishonor instruction/ report from Bank;
  4. The drawer (person/ company/ entity issued the check) of the cheque not been able to pay the amount mentioned on the check to the person check is issued within 15 days of receipt of the notice;
  5. Complaint is to be made only by the payee or holder in due course;
  6. Cheque which is dishonored must be issued for the discharge/payment of a debt or any other liability, which is legally enforceable. Thus, an action cannot be initiated for the dishonor of a cheque that is given as a gift.
  7. The offence is committed only when the cheque is dishonored and not when it is issued, Example: – At the time of its issuance of the cheque, there is no balance in his account, the drawer commits no offence if, when the payee present the cheque in the bank, he arranges the payment with the bank and the check is honored/ passed/ paid by the bank.

Procedure for Action

  1. Notice should be sent within period of 30 days from the date of the bounce of the check.
  2. For Limited Companies and Partnership concerns, notice should be sent to the Company, the Partners concern and to all the Directors / Partners also.
  3. For proprietary firms, notice should be addressed to the Proprietor only.
  4. Notice should be sent preferably by
    i. Speed Post with Acknowledgement Due (SPAD)
    ii. Registered Post with Acknowledgement Due (RPAD)
    iii. Postal receipt to be kept as the proof of dispatch.
    iv. AD card to be kept along with the notice and Postal receipt.
    v. If AD card does not come back or received without signature or date is not clearly mentioned then delivery confirmation receipt have to receive form the post office.
  5. During the 15 days’ time period to make payment from the party it is advisable to follow up with it to put pressure and if the party would not pay the dues then preparation must begin for filing of the complaint after expiry of 15 days period within 45 days from the date of the receipt of the notice by the Party.
  6. A cheque cannot be presented after a notice has already been sent to the party.
  7. After filing the complaint in the Court, a verification statement is sworn before the Magistrate and original documents are produced in the Court. Then the Court issues Summons against the accused persons named in the complaint. If in case the accused persons do not attend the Court after service of summons, the Court would issue first Bail able Warrant and then Non-bail able Warrant.
  8. Where the accused has been declared absconder and Proclamation has been issued, the Magistrate on being satisfied can order the attachment of the property of the accused, the attached property will vest in the hands of the Government; Complainant can only participate in bidding for the purchase of the said property if Government decides to sell it.Banks Dealing with Dishonour of Cheques of Value Less than “1 crore”(i) Returning time for dishonoured chequesThe dishonored Cheques are required to be returned / dispatched to the customer promptly without delay, in any case within 24 hours of dishonor.

    (ii) Procedure for return/dispatch of dishonoured cheques

    a) The payee branch should return dishonoured cheques presented through clearing houses strictly as per the return discipline prescribed for respective clearing house in terms of Uniform Regulations and Rules for Bankers’ Clearing Houses.

  9. b) The collecting branch on receipt of such dishonoured cheques should dispatch it immediately to the payees / holders within 24 hours of receipt of the instruments.
  10. c) If cheques presented directly to the payee branch across the counter branch should return such dishonoured cheques to the payees/ holders same day/or next day, in case of dishonour due to insufficiency of fund.
  11. d) Cheques dishonoured should be returned along with a memo ofreason for dishonor by bank.(iii) Frequent dishonor for the same account
  12. a) If the dishonour of a cheque of value of less than rupees one crore drawn on a particular account of the drawer on 4 occasions during the financial year for insufficient funds in the account, no fresh cheque book would be issued and branch may close the account after issuing 30 days’.
  13. b) The branch may consider closing current account with the prior and proper notice to the customer. However, in respect of advances accounts such as cash credit account, overdraft account, the need for continuance or otherwise of these credit facilities and the cheque facility relating to these accounts should be reviewed by appropriate authority.
  14. c) If an account is having cheque book facility and ECS mandate is also registered, then the incidents of dishonour will be taken into account both for dishonour of cheque and failed ECS for computing the number of dishonour of cheques/failed ECSs.

Branch may consider for closing the account after serving 30 days’ notice to the customer in the event of subsequent dishonour of cheque/ ECS mandate in the account.

 

Stopped Payment of Cheque: Can a drawer be held liable under S. 138

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A stopped payment is usually requested if the cheque has been declared missing or lost. But many a times the drawer, to escape his debt or liability has used it as an instrument of deception. The 1988 amendment in Section 138 of Negotiable Instruments Act is also silent about Stopped Payment. The present paper reviews various judgments to see how this aspect is covered by the Courts and what tests have been laid down to make a stopped payment order punishable under section 138 of Negotiable Instruments Act and in that case Clause (c) should be interpreted.

Introduction
The contract between the customer and the bank is defined as a debtor- creditor relationship. This contract requires the bank to honor all valid and proper orders of the customer to pay amounts from his account with the bank, for as long as funds remain available in the customer’s account. The customer’s order, however, remains executory and can be rescinded until the bank makes payment. One of the reasons on account of which the banker can refuse to make the payment of a cheque is that the payment has been stopped by the drawer. Upon receipt of a timely stop payment order, the bank ceases to have authority to pay the item.

A customer thus, has a right to give notice to his Bankers to stop payment of a cheque which he has issued. Generally a written notice, signed by the drawer is sufficient to stop the payment. A stopped payment is usually requested if the cheque has been declared missing or lost.

In India, while there is as such no express provision relating to stop payment of cheques. However there are however various judgments regarding this aspect. Indian Courts have covered this facet in Section 138 of Negotiable Instruments Act (hereinafter referred as Act), which is related to dishonour of cheques. The discussion relating to stop payment has assumed importance in view of the amendment to the Negotiable Instruments law by the amendment in 1988. Prior to this amendment, people issued cheques knowing well that the cheque is not going to be honored on presentation, and they tried to create circumstances in which the bank would return the cheque with such endorsements as “stopped payment”, “refer to drawer” or “A/C closed”. These were some of the tricks used by the drawer to escape the penal liability, which was attached to Section 138 of Negotiable Instruments Act.

Under the present theme, the sole question which will be scrutinized in the paper is whether a drawer who stops the payment having insufficient funds in his account can be held liable under Section 138 of the Negotiable Instruments Act? In this regard various judgments of High Courts and the Supreme Court have been reviewed in order to find out a solution to the abovementioned issue.

Views taken by various High Courts
In Abdul Samod v. Satya Narayan Mahavir High Court of Punjab and Haryana thoroughly analyzed section 138 of the Act. Hon’ble Mr. Justice A.P. Chowdhury stated that there are 5 ingredients, which must be fulfilled. These are as follows:
1. The cheque is drawn on a bank for the discharge of a legally enforceable debt or other liability.
2. The cheque has returned by the bank unpaid.
3. The cheque is returned unpaid because the amount available in that account is insufficient for making the payment of the cheques.
4. The payee gives a notice to the drawer claiming the amount within 15 days of the receipt of the information by the Bank and
5. The drawer fails to make payment within 15 days of the receipt of notice.

In this case the respondent filed a complaint with the allegations that the accused (petitioner herein) had, inter alia, issued a cheque dated June 9, 1989, for Rs. 22,000 in connection with an amount which had become due on account of purchase of some raw material by him. The cheque was returned unpaid by the bank with the remarks “Payment stopped by the drawer “. The complainant sent the requisite notice, but the accused failed to make the payment.

The contention of the accused in this case was that the cheque had been returned on account of stop payment instructions and not on insufficiency of funds and thus all the ingredients of the section were not available. It was held that “Parliament in its wisdom has confined the offence referred to in Section 138 only to bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned unpaid on other grounds, the same has not been made an offence”.
Kerela High Court in this regard has held in Calcutta Sanitary waters v. Jacob that in case the payment was counter-manded, then it was without an offence. In the instant case, complaints were filed under Section 138 in respect of two cheques, which the second petitioner had issued as a partner of the first petitioner-firm, in favour of the respondent. The cheques were dishonoured upon presentation. As required, notices were issued to the petitioners. A reply was sent by the second petitioner but the payment was not made.

It was stated by the Hon’ble Justice B.M. Thulasidas that:
“The allegations in the complaints, in my view, do make out a prima facie case against the petitioners. Before filing the complaints, the respondent had taken care to abide by the relevant legal provisions. Indeed, it is not the case of the petitioners that no amount is due to the respondent. The issuance of cheques and their dishonour, followed by notices of demand and failure to pay are not matters which had been challenged. That the payment was countermanded by a stop memo is of no consequence. That hardly affects the right of the respondent to initiate proceedings under the Act. It has the same effect as closing the account as far as he is concerned. The object of the provision cannot be allowed to be defeated by such ingenuous action”.

Similarly, in Mrs. R. Jayalaxmi v. Mrs. Rashida and as per the Punjab and Haryana Court in Mrs. Rama Gupta v. Bakesman’s Home Product Limited Patiala it has been held that if a cheque was returned with an endorsement “refer to drawer” and “payment counter-manded by the drawer” then it was not an offence.

Thus relying on this it was held that when the respondent stopped the payment of the cheques in question, there was no question of facts constituting an offence punishable under section 138 of the Negotiable Instruments Act.
However, it is significant to note what is relevant for the purpose of determining an offence under section 138 of the Negotiable Instruments Act is whether the drawer of the cheque had arranged for payment or had made the payment of the amount covered by the cheque within the period of 15 days prescribed under said section and not the reason for which cheques were dishonored by the Bank.

The above laid proposition has been supported by various High Courts. Kerala High Court in the case of Calcutta Sanitary Wares v. C. T. Jacob , where the court was considering a situation whereby the cheque was initially dishonoured on the basis of a stop-payment memo. The court held that “the object of the provision cannot be allowed to be defeated by such ingenious action”. The court took the view that dishonour pre-supposes non-payment as the funds in question were not forthcoming and that in these circumstances also, the failure to pay the amount within 15 days of the notice of demand would still constitute an offence as any other view would defeat the specific provisions of section 138.

The Punjab and Haryana High Court in the case of M. M. Malik v. Prem Kumar Goyal , has analysed the aforesaid sections and held that the cause of action will be complete when the drawer of the cheque fails to make payment within 15 days of the receipt of the notice contemplated by proviso (b) and that the offence shall be deemed to have been committed only from the date when the notice period expires. The court had construed the endorsement “refer to drawer” as the bankers inability to honour the cheque for want of funds in the account of the drawer and further held that as far as the jurisdiction was concerned, the principle that the ‘debtor has to find the creditor” would apply and that the court within whose jurisdiction the creditor is located will have jurisdiction to entertain the complaint. We are in agreement with these views.

In the Division Bench decision of Bombay High Court in Rakesh Menkumar Porwal v. Narayan Dhondu Joglekar . In the present case one of the issue was regarding the correct manner in which the time- frame as is prescribed in sections 138 and 142 of the Negotiable Instruments Act should be computed. The Hon’ble Court held that:

“A clear reading of section 138…..If, for instance, the closure of an account or the stoppage of payment or any other of the commonplace reasons for dishonour were to be justifiable, then, the Legislature would have set these out in the section as exceptions not constituting an offence. No such intention can be read into section 138, as none exists. The solitary exception made by the Legislature is with regard to the drawer being offered a final opportunity of paying up the amount within 15 days from the receipt of notice which, in other-words, provides a last opportunity to prove one’s bona fides. It is obvious, that having regard to the widespread practice of issuing cheques which are dishonoured and the many ingenious methods of avoiding payment that are practiced, the Legislature has opted for a non-nonsense situation. The possibility has not been overlooked whereby an account any inadvertently be overdrawn or a dishonour may be for technical reasons or where a genuine mistake has occurred and the grace period provided for by the Legislature after service of notice on the drawer is in order to afford an opportunity to the drawer to rectify these. Undoubtedly, even when the dishonour has taken place due to the dishonesty of the depositor, the drawer is still given a last chance to act otherwise. Consequently, the reasons for dishonour even if they be very valid as was sought to be pointed out in this case, should not and cannot be taken into account by a Magistrate when such a complaint is presented”

The above mentioned case-laws supports the preposition that while holding any drawer liable under Section 138, the Court should first see that whether payment was made to the drawee within 15 days of notice or not. The reason for dishonour is immaterial because if the drawer is bonafide then he may within the grace period i.e 15 days.

Views of the Supreme Court
Hon’ble Supreme Court has narrated four key Judgments where the drawer was held liable for Stop payment of cheques. However there is only one judgment which deals with the above laid preposition. In M/s. Electronics Trade & Technology Development Corpn. Ltd., Secunderabad v. M/s. Indian Technologists & Engineers (Electronics) Pvt. Ltd. and another . In this case, a cheque was presented by the complainant on 28-1-1990, through their bankers M/s. Hyderabad Bank for realisation, with the promise by the accused, that the same will be honoured when presented. However, the said cheque was dishonoured with the banker’s endorsement dated 29-11-1990 which stated “(i). refer to drawer, (ii). instructions for stopping payment and (iii). stamped exceeds arrangements.” Appellant filed complaints under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of cheque for insufficiency of funds in the accounts of the accused. It was held by the Hon’ble Supreme Court that:
“It would thus be clear that when a cheque is drawn by a person on an account maintained by him with the banker for payment of any amount of money to another person out of the amount for the discharge of the debt in whole or in part or other liability is returned by the bank with the endorsement like (1) in this case, “I refer to the drawer” (2) “instructions for stoppage of payment” and (3) “stamp exceeds arrangement”, it amounts to dishonour within the meaning of Section 138 of the Act. On issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied”.

The position of Law in this regard has changed dramatically from the 1990’s till date, due to the amendment that has been brought into the section. A close look on the judgments of various High Courts shows that the Courts relied on the presumption that the offence referred to in Section 138 can be made out only on bouncing of a cheque on the ground of inadequate balance in the account concerned. Where the cheque is returned unpaid on other grounds, the same has not been made an offence or where the payment was counter-manded then it was without an offence. Courts during that time seemed to more in favour of the drawer. However, after the recent judgments of the Supreme Court, the burden has now shifted to the drawer and a presumption has to be drawn in favour of the holder of the cheque.

A plain reading of section 138 of the Negotiable Instruments Act makes it clear that the words “either because of the amount standing to the credit of that account is sufficient or that it exceeds the amount …” have been specifically used. It would, therefore, mean that only two contingencies are contemplated and as such, the words “… either …. or” have been used. It is, therefore, clear that the cheque should be dishonoured either for the insufficiency of the amount or, because it exceeds the amount arranged to be paid from that account. No third contingency or eventuality has been contemplated and the specific clear wording of section 138 eliminates any third contingency other than what is mentioned in the section itself. It need not be stated that a cheque can be dishonoured for so many reasons and there may be so many eventualities in which the payee is denied payment by the bank. For example, mentioning the date incorrectly or some corrections not initialled or the difference in between the amount mentioned in figures and words are certain other contingencies in which the cheque will be certainly dishonoured and would be returned as unpaid. It is not in respect of any of these contingencies that the dishonour of a cheque has been made penal under section 138 of the said Act.

CHAPTER XVII was inserted in the Act 1988 with a view to promote the efficacy of banking operations and to ensure credibility in transacting business through cheques. However the chapter is not comprehensive and lacks to cover the various aspects of the commercial transactions especially in view of the emerging ways of payment through the Internet and other electronic means. Section 138 also does not specifically cover the aspects such as where the payment has been stopped by the drawer or where the account has been closed prior to the endorsement of the cheque. These provisions no doubt have served their purpose but they could be more elaborate in solving the dispute rather than relying on the Court judgments which we have seen are quiet contrary at times.

Whatever may be ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may “stopped payment by drawer” or “signature differ” or any other ground, an offence under the section is made out and the drawee has full right to initiate proceedings u/s 482 CrPC. It is also important that the time restriction given in Section 138 (c) also get attracted in case of stop payment when a notice as required by the provision is sent to the drawer.

Conclusion
Section 138 of the Negotiable Instruments Act is a penal provision wherein if a person draws a cheque on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part of any debt or other liability, is returned by the bank unpaid, on the ground either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence. However with regard to “Payment stopped by the drawer” this section does not mention anything specifically.
It is seen that there are manifold reasons for the dishonor of cheques by banks but there is statutory mandate upon the payee under Section 13 (b) of Negotiable Instruments Act for giving a notice demanding the payment of the amount of said cheque, within 15 days from the date of the information as to bouncing of the said cheque from the drawer of the cheque and upon failure to make payment of the amount by the drawer within 15 days, offence under section 138 is deemed to have been committed. Moreover the decision of the Supreme Court in Electronics Trade & Technology Development Corporation Ltd is explicit and has decided all sorts of controversies in relation to bouncing of the cheque due to payment stopped by the drawer. It has expressly held that if on issuance of the notice by the payee or the holder in due course after dishonour, to the drawer demanding payment within 15 days from the date of the receipt of such a notice, if he does not pay the same, the statutory presumption of dishonest intention, subject to any other liability, stands satisfied.

To conclude it can be stated that whatever may be the ground or reason on the basis of which the cheque is dishonoured by a bank, whether it may “stopped payment by drawer” or “signature differ” or any other ground the offence under the section is made out and the drawee has full right to initiate proceedings and while deciding the case the Court should see that whether payment has been made by the drawer within 15 days of notice issued by the drawee after the dishonour of cheque.

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Registration of a Public Limited Company

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Registration of a Private Limited Company

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Legal guidelines required for starting a business in India:

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A) Choose a Legal Business

A person who wishes to start a business is first and foremost required to check and see whether the business which he wishes to start is a lawful business with a lawful object in the eyes of law that is; it is not prohibited under any law that is in force. For example the following business is prohibited:

  • Wagering Business i.e. betting or gambling is prohibited under law.
  • Trade of prohibited items like animal skin.
  • Sale of some animal skin specified under the Wildlife Act is also prohibited.
  1. B) Choose the Type of Business A person is secondly required to decide how he desires to operate his business whether he will be operating as a:
  • proprietorship,
  • firm of partners,
  • A company either limited by shares or with unlimited liability, a public limited or private limited company.
  • Limited Liability Partnership i.e. LLP.

 

  1. Proprietorship Firm: Proprietorship is a business entity that is owned and run by one person i.e. the Proprietor. There is no distinction between the proprietor and proprietorship in the eyes of laws. They are one and the same thing. Proprietorship does not require any registration with any government agency. In fact the PAN card of the Proprietor is used for filing income tax returns of the business i.e. Proprietorship. But the name of the proprietorship can be registered as a trade mark. A bank account can be opened in the business name and all indirect tax registrations can be done in the name of the proprietorship firm also.
  2. Partnership Firm: All partners who have entered partnership agreement are called as partners of the Firm. Under this category, the business is run by the partners. Partners are basically all those people who come together with the intention to carry out a business with the aim to gain profit and share profit and looses in case they are incurred. The partners should be including two or more persons who carry out business on behalf of each other and act for themselves and on behalf of other partners and thus act as agents of each other. These partners contribute to this business and share profits and losses, conduct business in accordance to the partnership agreement entered by them. Partnership Firm can be registered under Indian Partnership Act. A partnership Firm has unlimited liability of the partners.
  3. Private and Public Companies: A company is an association of people who have come together to carry out business with the aim of profit. The special feature about this association is that it has been given a separate and distinct legal identity/personality which makes this entity separate from its members. Company is basically a creation of statute that is Companies Act 1956. Company business is carried out by the Directors. Law has imputed a legal personality to this entity and this fact makes it different from proprietorship or firm. The company is governed by the provisions of Companies Act and not by any agreement as in case of firm. There is no agreement entered by the members of the company amongst themselves to carry out affairs of the company and if there is a contract to conduct affairs then, it is according to a contract with the company which has a legal personality or is a legal entity on its own. It has a personality of its own and members of the company have their individual identity. The affairs of the company are carried out in accordance to the documents of Memorandum of Association and Articles of Association that are filed at the time of formation of the company with Registrar of Companies.

    It is important to understand the concept of shares before understanding entities called limited company or a public limited company. A company requires capital to run the business and this capital which is invested to carry out the said business activities is called the ‘share capital’. This capital of the company is divided into ‘shares’. ‘Shares’ basically means a share in the share capital of the company. The people who hold such shares are called shareholders.

  4. Limited Company: A limited company is a company whereby the liability of the shareholders towards company‘s creditors is limited to the capital that was originally invested by them.
    In practice all companies are limited companies as under this category liability of shareholder is limited as contrast to a company with unlimited liability where liability of the shareholders towards the debts is unlimited. These companies where liability of shareholder is unlimited are generally not much found in the business world due to lack of their economic feasibility.
  5. Private Limited Company: Private Limited Company is a company where shares are held in private hand and transfer of shares is limited to the members or directors of the company and prohibits any invitation /deposits of capital from person other than members, directors of the company. The company is not allowed to invite general public to subscribe to the share or in simple words the general public cannot invest in the company through mode of buying shares. Under the Companies Act 1956, private limited company is a company with a minimum paid up capital of 1 lakh rupee. A public limited company is a company on the other hand with a minimum paid up capital of 5 lakhs rupees where shares can be bought by the general public i.e. general public is invited to subscribe to the shares of said company by issuing a prospectus.
  6. Limited Liability Partnership: A LLP is a business enterprise that is hybrid of both partnership and company. It is an enterprise that consists of partners who conduct the business in accordance to an limited liability agreement with the view to gain profits and at same time LLP has a distinct personality of its own and capable of being sued in the name of LLP.
  1. C) Select The Name Of Business The third legal requirement for starting the business is naming the Business. The name of the Company or firm or proprietorship or LLP should not be prohibited under the Emblems and Names (Prevention of Improper use) Act, 1950 or State Emblem of India (Prohibition of Improper Use) Act, 2005 or any other law that is in force and places restrictions on naming the business respectively. The following are some of the basic requirements that should be kept in mind before naming businesses:
  • A company or a firm should not use State Emblem prescribed under the Schedule of Emblems and Names (Prevention of Improper use) Act, 1950 or anything which gives an impression that the business is run or is under the patronage of the government of India in case it is not so that is, no written consent is made in favor of the respective business.
  • Public Limited Company is required to be added in case of Public limited companies and in case of Private Limited Company the term Private Limited is to be added.
  • The business name should not be same or similar to the trade name of other enterprise running similar or same line of business or should not be giving impression of running on the goodwill of well established business enterprise thereby violating the trade mark law or being accused of passing off under common law.
  • For examples in case of eCommerce business i.e. online shopping, the owners of the said business should not name their business after any brands of goods that are being sold through their website or name the online shopping website after any well known company unless written permission has been taken on that behalf by the respective brand or they could found guilty of offenses under cyber law that is cyber squatting.
  • A person can name his/her company after his own name. In case his organization name is similar to another company’s name then he can continue to run his business under the said name only if the name was used with honest and bonafide intention by him. In case any dispute arises in future then, the person is required to satisfy the test laid by the respective Act prohibiting the same like for instance under the Trade Mark Act 1999.
  • A person can name his company in a manner that indicates the kind of business activity in which he is engaged.
  1. D) Legal Process Upon deciding the form in which the person wishes to operate his business and naming his business, the person may start the process which shall help him to operate the respective form.
  • In case of a firm, the person is required to enter into a partnership agreement with all the terms, conditions mentioned and may choose to register the firm with the Registrar of Firms and in case the firm is a banking firm with more than 10 partners then it is obligatory to register the Firm.
  • In case the person chooses to operate as a company then the respective person generally who is promoter is required to file an application in Form No 1 A along with the Memorandum of Association and Articles of Association with all the necessary details like Name Clause, Registered Office Clause, and Object Clause that are clearly defining line of business, place of activity that is registered office etc and the manner in which the business shall operate as prescribed by the Companies Act 1956 with Registrar of Companies. In case of public limited company, prospectus as prescribed by the Companies Act 1956 is required to be filed.
  • In case of LLP, the person is required to register the incorporation document along with the statement by the Chartered Accountant, Company Secretary or Cost Accountant stating that all the requirements prescribed by the Limited Liability Partnership are complied with as prescribed by the respective Limited Liability Act with the Registrar of Companies where the business is situated.
  1. E) Other Requirements The person is required to thereafter to check whether his business requires any clearances from Government Authorities or licenses from the local licensing Authority to operate like in case of Restaurants, coaching institutions etc.
  • In case of business of Export or Import of goods outside India or to India, a person is mandatorily required to apply for Import-Export number that is IEC to start import or export business.
  • The person who is operating his business as a shop running essential commodities is required to check that commodities bought from wholesalers or sold from his shop are fulfilling the safety standards and are not adulterated and complying with food adulteration prevention acts respectively.
  • In case the person is running factory then it is essential to get environmental clearance from respective Boards under Water and Air Pollution Prevention Acts and install safe disposal of harmful waste by converting it into to less toxic waste as prescribed by the respective Acts.
  • In case of a public limited company, the business of the said company can commence only after the Registrar of Companies issues the certificate of commencement as prescribed by the Companies Act 1956.
  1. F) Memberships The person may choose to register its organization with chamber of commerce or any statutory organization where registration of his business is mandatorily required. The person is also required to check whether the business which he wishes to operate is coming under any Social Security Scheme like Public Liability Insurance, Workmen Compensation Act 1948 (in case the business includes factories mentioned in the Schedule of the respective Acts) where it mandatory to register the organization with the respective government agency. The following are some of the examples:
  • In case of business run by an enterprise consisting of more than 20 employee then it is governed by Employee Provident Fund Act and the person is mandatorily required to register with Employee Provident Fund Organization in the prescribed form for the allotment of establishment code number and provide all the information to respective office as prescribed by the respective Act.
  • In case of business is consisting of running factories or mines, the person who is running the respective factory is required to see that the factory premises or working conditions are fulfilling the health and safety norms as prescribed by the Factories Act or the Mines Act 1952 respectively.
  • The person is also required to check whether its organization is coming under Employment State Insurance Scheme and in case it does, then register its organization with the respective government agency as prescribed by Act and apply and get the ESI number. This scheme is generally for factories that are  non seasonal and are either run by power or are not run by power employing 10 or more employees providing insurance cover in case of accident, injury, occupation disease, etc in the course of  their employment.
  1. G) Tax Registrations The person is there after required to apply to respective government authorities for future taxation purposes. For example in case the business is being operated as a company then it is required to apply in form 49 A for PAN card which is required for filing income tax returns and file Form 49B for TAN that is Tax Deduction Account Number either online through NSDC website or Tax Information Network Centre for deduction of tax at the source so that in future there are no problems in TDS/ other Tax filing. The proprietor of proprietorship can use his personal PAN card number for paying the income tax on the generated income. The directors of the company may apply for Director Identification numbers by applying in form DIN-1 and this is mandatory for those directors who are not citizen of India but are directors of Indian companies.

 

A person running trading business is required to apply for VAT registration to the local Sales Tax department in prescribed forms along with specified fees and necessary document as prescribed by the respective Act in this regard. Tax Identification Number that is TIN is granted on completion of above said formalities. This is essential as it is mandatory to take Value added Tax that is VAT on sale transaction as prescribed by the respective Act. Failure to comply with the above mentioned attracts penal action.

 

  1. H) The person is required to thereafter to get service tax number in case the person feels that revenue that will be generated during the financial year will be more than 10 lakhs though person may apply for it voluntary in case business revenue is less than 10 lakhs. Application for this number is only for those businesses that come under category of services whereby the service tax is to be imposed under the respective Act. The person is therefore required to check with a lawyer or any other authority to see and whether any levies are to be imposed in course of the business. The following are some examples:
  • The person is required to see in case of manufacture of goods to include excise duty on manufacture of goods at the place of manufacture.
  • The person is required in case of restaurants or sale of commodities like cloth; basic utility items etc take Value Added Tax i.e. VAT from the consumers on the sale of the respective commodities.
  1. I) Accommodation Issues: In case the business is being run through an office, it is essential to check whether the office premises can be used for the respective business and this is fulfilling the Rules and Regulation of Master Plan of the city where the office is situated and in case the office premises is acquired through sale deed then, it is essential to get sale deed registered and pay the stamp duty and all other taxes if any in this regard. The following are some of the examples which are required to be kept in mind regarding office premises:
  • Factories releasing toxic waste or dealing with extremely dangerous substances cannot be run close to residential complexes according municipal rules of State.
  • Alcohol selling shops cannot be situated near schools or temples as prescribed under municipal rules of State.
  • Only professional Chartered Accountant or Lawyers or doctors can work from residential colonies and can operates their offices or clinics respectively from residential premises under State municipal Laws.
  1. J) Bank Accounts The person can open bank accounts in banks in the name of proprietorship, company, firm or LLP for transactions of the respective organizations and acquire check books in this regard. The person is required to maintain books of accounts and work according to the guidelines prescribed for the business and pay taxes and conduct affairs of the business with due regard to law of the country or state where the business is established. The person may chose to adopt any official seal of the respective organization as identifying mark of his respective organizations to be used in documents in futures and there after start the business which he wishes to pursue.