The Companies Act, 2013, provides a comprehensive system to guarantee that newly founded businesses satisfy essential requirements before starting commercial activities as well as legal recognition.
Though the Certificate of Incorporation proves the legal existence of the firm, it by itself does not approve the commencement of commercial activity. To protect stakeholders and promote financial accountability, the Act calls for every corporation established after November 2018 to register a statement. At start of business within 180 days from the date of incorporation. This is relevant for both private and public corporations so that members of the Memorandum of Association have paid their share capital and the company has an officially confirmed registration office.
The business can only start legally upon the filing of such a statement and with the approval of the Registrar of Companies (ROC). Thus, this provision is a regulatory sieve that allows only authentic and properly capitalised companies to commence business activities.
What is a Certificate of Incorporation?
A paper issued by the Registrar of Companies (ROC) following the successful registration of a corporation under the Companies Act is known as a certificate of incorporation. Since it marks the start of an independent legal life for a corporation distinct from its owners or promoters, it is also known as a company’s birth certificate.
The suggested incorporation papers must be lodged with the ROC to get this certificate, including the Memorandum of Association (MOA) and Articles of Association (AOA), director information, proof of the registered office, and other required statutory documents. The ROC issues the Certificate of Incorporation after verification and study of these documents; it has a distinct Corporate Identity Number (CIN). This certificate is important because it confers independent legal identity on the firm.
From the date of registration, the corporation gains property rights, contract-making, lending, and court-based sue or be sued in its own name. It also arranges for perpetual succession, meaning the company will exist independently of ownership or management changes.
The Certificate of Incorporation provides definitive proof of a company’s existence. Even little procedural errors in the registration process cannot make the validity of the certificate doubtful in a court of law. The certificate is required; otherwise, no company can legally exist or conduct business in any way.
Finally, the Certificate of Incorporation is the fundamental legal document creating a firm and enabling it to run operations under the law as a recognised entity.
What is a Certificate of Commencement Of Business?
The Registrar of Companies (ROC) issues a certificate known as a Certificate of Commencement of Business, allowing a company to start operations. Though the Certificate of Incorporation provides a company’s legal existence, the Certificate of Commencement of Business certifies its funding and satisfies initial requirements before trading.
Previously, under the Companies Act, 1956, only public limited companies had to get this certification. Private limited companies were not subject to tax and might start operations upon incorporation. This requirement was reinstated by the Companies Act of 2013, and later amendments in 2019 made it obligatory for all businesses including private limited ones to within 180 days of registration, submit a starting declaration.
In order to receive the certificate, the firm is required to furnish a declaration with the ROC declaring that:
- The MOA subscribers have paid the stipulated share value.
- The firm has confirmed its registered office with the ROC.
- The minimum paid-up share capital required has been received.
An incorporated company cannot legally start operations without obtaining this certificate. Beginning business without authorisation attracts fines for the company as well as its directors, and the ROC can even strike off the name of the company from the register.
Briefly, the Certificate of Commencement of Business is a safeguarding measure that makes only genuine businesses with sufficient financial resources and compliance enter the market.
Difference Between Certificate Of Incorporation and Certificate of Commencement Of Business
In corporate law and the formation of a company, there are certain legal documents that play a significant role in determining the existence, activity, and lawfulness of a business. Of these, the Certificate of Incorporation and the Certificate of Commencement of Business are two significant documents that stand for varying eras in the life of a company.
Though both are mutually connected with the process of company setup and registration, they differ in importance, goal, issues, and consequences. Business owners, investors, and those engaged in corporate development must know these distinctions.
1. Meaning
Upon successful company registration under the Companies Act, the ROC issues a legal certificate known as the Certificate of Incorporation. Many times, it is regarded as a firm’s birth certificate. After being issued, it reflects that the business has lawfully come into existence and is a separate legal entity of its owners. It bestows the corporation with everlasting succession, the authority to hold property, enter into contracts, and sue or be sued in its corporate name.
The Certificate of Commencement of Business, however, is a sequel document issued to some organizational forms, mostly public companies, who need a license to start business operations upon incorporation. The certificate indicates that the company fulfilled preliminary requirements, e.g., a minimum subscription of share capital and filing a statement confirming all shareholders had paid their respective sums. Without this certificate, a firm can legally exist but not carry on commercial activities.
2. Applicability
The provision is to be followed by all companies, whether public or private, one-person companies (OPCs), or others. The Certificate of Incorporation is necessary for a company to exist and conduct business.
Earlier, under the Businesses Act of 1956, this requirement was only for public limited companies. Private limited companies were exempted. But after the Act (with the 2019 amendment), even private companies are now mandated to file a declaration of commencement of business within 180 days of incorporation. As a result of this, as the law has changed, the ambit of applicability has increased.
3. Issuing Authority
The Registrar of Companies (ROC) issues these certificates at various stages.
The Certificate of Incorporation is issued on verification of documents like the Memorandum of Association (MOA), Articles of Association (AOA), and other compliance requirements.
The Certificate of Commencement of Business is issued after meeting additional compliance, including paid-up capital verification, filing of statutory declarations, and minimum subscription confirmation.
4. Issuance Timing
It is issued at the initial stage after registering the company with the ROC. It is the advent of the company’s life.
The Certificate of Commencement of Business is granted when the business has been incorporated, the shareholders have paid for the shares, and all the other requirements have been met. Hence, it is granted in the second phase, before the commencement of the business of the company.
5. Legal Effect
Certificate Of Incorporation:
- Imparts legal status and recognition to the company.
- Constitutes the company as a separate legal entity independent of its founders or shareholders.
- Gives the corporation the right to hold property, contract debts, and make contracts.
- Is conclusive evidence that all legal requirements for incorporation have been complied with, despite any defects in procedure.
Certificate of Beginning of Business:
- Allows the corporation to start commercial or business activities.
- Ensures the financial stability of the company before entering the market.
- Provides protection to investors, creditors, and customers by ensuring proper capitalisation before trade.
6. Compliance Requirements
For Certificate of Incorporation –
- Filing of incorporation papers (MOA, AOA, consent of directors, and evidence of registered office).
- Payment of fees and stamp duty as required.
- Verification of name confirmation and fulfilment of statutory requirements.
For obtaining a Certificate of Commencement of Business –
- file a declaration confirming receipt of the requisite paid-up share capital.
- Verify that all MOA signatories have paid the agreed share amount.
- Present confirmation to the ROC within the specified time limit.
7. Penalty for Default
Without a Certificate of Incorporation, the company has no legal existence. Any action done in its name would be illegal and unenforceable before the courts of law.
Without a Certificate of Commencement of Business, although the company might enjoy legal existence, it is not allowed to carry on its business. If it starts business without this certificate, the company and directors will be subject to penalties, fines, and possible closure under statutory laws.
8. Importance for Stakeholders
Certificate of Incorporation:
- Essential for promoters and directors, as it makes the company’s existence legal.
- Gives assurance to investors and creditors because the company becomes a valid legal entity.
- Essential to open bank accounts, enter into contracts, and fulfil statutory requirements.
Certificate of Commencement of Business:
- Shields investors and creditors by ensuring that the company is backed by real capital.
- Limits fraudulent incorporations wherein companies might exist only on paper, otherwise.
- Gives assurance to stakeholders that the company is ready and authorized to trade in the market.
Conclusion
Although both the Certificate of Commencement of Business and the Certificate of Incorporation are crucial to a firm’s lifespan, they serve distinct purposes.
The legal foundation for the firm is the Certificate of Incorporation, which gives it its unique character and validates its status as an independent legal entity. It is required for the formation of any business.
Together, they design a two-step process that first establishes the legal entity of the business and then verifies its financial capacity to operate. This contrast highlights the need to strike a balance between fostering entrepreneurship and protecting the interests of stakeholders, creditors, and the broader economy.
