Submitted by:

Huma Rashid

Formation and Incorporation of Company

Formation of Company: Company formation is the process of registering a business as a distinct legal

entity at Companies House. It is also referred to as ‘company incorporation’ and

‘company registration’. Upon formation, a company becomes a legal individual

with its own rights, responsibilities and liabilities.

Under the provisions of the Companies Ordinance, 1984 a company is a

corporate body with separate legal entity and a perpetual succession and a

company may be formed by persons associating for any lawful purpose by

subscribing their names to the Memorandum of Association and complying with

other requirements for registration of a company under the provisions of the

Ordinance.

Types and Forms of Companies which may be registered in Pakistan:

According to the Companies Ordinance, 1984 there can be three different types

of companies:

A company limited by shares

A company limited by guarantee

An unlimited liability company

In order to getting a company registered or incorporated in Pakistan, it is

important to know about the Securities and Exchange Commission of Pakistan.

SECP is the financial regulatory body in Pakistan that looks after the companies’

registration, regulation and deregistration matters. One of the main purposes of

SECP is to register/incorporate the companies. This task is performed by the

Registration Department, Company Law Division of (SECP). Registration

Department has many filed offices that are known as Company Registration

Offices (CROs) for the purpose of registration/incorporation of different type of

companies.

Company Registration Process in Pakistan:

Following are the steps for registration of a company in Pakistan:

1. Availability of Name:

The first step with regard to incorporation of a company is to seek the availability

of the proposed name for the company from the Registrar. For this purpose, an

application is to be made both online and in offline mode and a fee of Rs.500 for

physical and Rs.200 for online is required to be paid for seeking availability

certificate for each name. It normally takes a period of 3 to 4 days before

confirmation of the name applied for new company registration in Pakistan.

Section 37 of the Ordinance provides that:

• the proposed name should not be inappropriate, deceptive, or designed to

exploit or offend the religious susceptibilities of the people;

• the proposed company name shall not be identical or have close resemblance. It

must be distinguishable from the names of existing companies, and any name

that has already been reserved by the Registrar for registration of a company.

On acceptance of application (for a company’s name reservation), the name is

reserved for a period of 90 days, further extendable up to the same period on

receipt of fresh application. Confirmation of availability or non-availability of

name is instantly sent on the e-mail address (if provided by the company).

Simultaneously, letter is also dispatched on the postal address.

2. Preparation of Documents for registration of a company:

Post receiving the name availability certificate from SECP, the applicants have to

file an application for incorporation. Following Documents must be prepared

before incorporation;

i. Memorandum of Association (MOA)

ii. Article of Association (AOA)

iii. Form -1

Memorandum of Association (MOA):

The memorandum of association of company, often simply called

the memorandum, is one of the most important documents. It has to be filed with

the Registrar of Companies during the process of incorporation of a Company. It

contains the fundamental conditions upon which the company is allowed to

operate. It is the document that governs the relationship between the company

and the outside.

The memorandum of association gives the company's name, names of

its members (shareholders) and number of shares held by them, and location of

its registered office. It also states the company's;

(1) objectives,

(2) amount of authorized share capital,

(3) whether liability of its members is limited by shares or by guaranty, and

(4) what type of contracts the company is allowed to enter into.

The Memorandum of Association;

•Must be printed

•Divided into paragraphs

•Signed by each subscriber (seven or more in case of a public company)

•Add his name, address and description

•Presence of at least one witness who is to attest the signature.

Article of Association (AOA):

The articles of association is a document that specifies the regulations for a

company's operations. The articles of association define the company's purpose

and lays out how tasks are to be accomplished within the organization, including

the process for appointing directors and how financial records will be handled.

Articles of association often identify the manner in which a company will issue

stock shares, pay dividends and audit financial records and power of voting rights.

Form-1:

It is the third document to be made and submitted before incorporation. It

specifies that all the requirements of the Companies’ ordinance 1984 and the

rules made there under for registration of company have been compiled with.

It may be signed and submitted by an advocate of High Court, Chartered

Accountant, cost management accountant, person name in the articles as a

director or officer of the company.

It is optional for Companies limited by shares but it is compulsory for companies

limited by guarantee and companies having unlimited liability.

3. Payment of Registration fees:

After the availability of name and preparation of required documents, the next

step is to submit filing fees and registration fees in the prescribed bank and the

receipt of which is to be submitted along the documents to be submitted for

incorporation. The fee is to be paid accordance to the authorized capital of the

company.

The company who has share capital, there fee is given in sixth schedule as per

authorized capital whereas; the company having no share capital has to pay Rs.

30,000 as registration fee for physical registration and Rs.20, 000 for online

registration.

4. Submission of Documents:

After preparing above mention documents it is important to submit required

documents to registrar. It includes:

i. Memorandum of Association (MOA) and Article of Association (AOA):

Four printed copies of Memorandum and Articles of Association in case of offline

submission and one copy for online submission, duly signed by each subscriber in

the presence of one witness.

ii. Form -1:

Declaration of compliance with the pre-requisites for formation of the company.

iii. Registration/filing fee:

A copy of the original paid Challan in the any branch of MCB Bank Limited or a

Bank Draft/Pay Order drawn in favor of the Securities and Exchange Commission

of Pakistan of the prescribed amount.

Iv. Copy of national identity card or passport, in case of foreigner, of each

subscriber and witness to the memorandum and article of association.

5. Issuance of Certificate of Incorporation:

A certificate of incorporation is a legal document relating to the formation of a

company or corporation. It is a license to form a corporation issued by state

government.

Once all the documents have been submitted to the registrar, he shall examine

the documents and if he satisfied then he register MOA, and AOA and issues

certificate of incorporation to company.

This certificate is considered as the birth certificate of company and the date

given in it is the first day of its existence.

Legal Effects Of Incorporation:

Sec 16 (5) A body corporate…exercising all the functions of an incorporated

company of suing and being sued and having perpetual succession….with power

to hold land.

1. Separate Legal Entity:

The company is a legal person [artificial] having a distinct entity from its

members .

2. Ability to own Property:

A company can own property in its own name.

Macaura Vs Northern Assurance Case:

Fact: M was an owner of a land which produced timber. Sold all the timber to a

company incorporated by him. He took up Insurance for the timber in his own

name. Later the timber was destroyed by fire and Macaura claimed under the

insurance policy.

Result: M had no insurable interest in the timber-belonged to the company, not

M.

3. Ability to incur its liability:

Liability of a company is unlimited Liability of members is limited, depends to the

type of company i.e. limited by shares or limited by guarantee.

4. Ability to sue and be sued:

A company can sue and be sued in its own name any wrong done to the

company, only the company can take action.

5. Perpetual Succession:

A company shall exist until properly wound up or struck off from the register. It‟ s

life span does not depend on the life of its members.

Re Neol Tedman Holdings PTY Ltd Case:

Fact : H & W were the only shareholders and directors of company-died. Left an

infant child.

Held: The personal representative of the deceased members should appoint

directors, so that the new directors could assent the transfer of the shares to the

beneficiary.

6. Certificate of Commencement:

Private Company:

A private company can start its business operation immediately on obtaining

certificate of incorporation.

Public Company:

A public company has some formalities to be observed . A public company has to

receive the certificate of commencement before starting the business. A company

submits the following documents to registrar.

• Prospectus

• Minimum subscription

• Directors shares

It has to issue prospectus. It has to raise minimum subscription and after raising

minimum subscription, it has to apply to the registrar again for issue of certificate

of commencement of business. If the registrar is satisfied he will issue certificate

of commencement of business.

Benefits of Incorporation:

Raising Capital: Incorporation is generally regarded as an indication that the

owners are serious about their business enterprise, and intend to devote time

and resources to the venture for a significant period of time. This factor, as

well as the reporting requirements of incorporation and—in some cases—the

owners' more formidable financial resources—make corporations more

attractive to some lending institutions. In addition, corporations have the

option of raising capital by selling shares in their business to investors.

Stockholders know that if the business they are investing in is a corporation,

their personal assets are safe if the company gets into litigation or debt

trouble.

Ease of Ownership Transfer: Ownership of the company can be transferred

fairly easily by simply selling stock (though some corporations attach

restrictions in this regard).

Tax Advantages: Some businesses enjoy lower tax rates under the

incorporated designation than they would if they operated as a partnership or

sole proprietorship. For instance, business owners can adjust the salaries they

pay themselves in ways that impact on the corporation's profits and,

subsequently, its tax obligations. It can also be easier for a business to invest

in pension plans and other fringe benefits as a corporation because the cost

of these benefits can be counted as tax-deductible business expenses.

Liability: This factor is often cited as far and away the most important

advantage to incorporation. When a company incorporates, "the shareholders,

the owners of a corporation, are liable only up to the amount of money they

contribute to the firm, basically equal to their shares of stock,"

Drawbacks of Incorporation:

Regulatory and Record keeping Requirements: Corporate operations are

governed by local, state, and federal regulations to a greater degree than are

other businesses.

Added Cost of Doing Business: Regulatory and record keeping guidelines

and requirements often make it necessary for corporations to make additional

investments (in accounting staffing, etc.) devoted to seeing that those legal

requirements are met. In addition, there are fees associated with incorporating

that business partnerships and sole proprietorships are not subject to.

Double Taxation: People who are owners of a corporation, and who also

work as an employee of the business, can receive financial compensation in two

different ways. In addition to receiving a salary or wages for work performed, the

owner may also receive a dividend or distribution on the stock that he or she

owns. Any distribution of income to stockholders via dividends is taxable.

This is sometimes called "double taxation" in recognition of the fact that such

income has in reality been taxed twice, first when the corporation paid taxes on

its profits, and secondly when the dividends were distributed.

Separation of Finances: While incorporation provides significant protection

of owners' personal assets from repercussions of business downturns, it also

means that a business owner is not allowed to tap into the corporation's account

for assistance in meeting personal debts.