How is a company formed?

How is a company formed?

Image credit: en.wikipedia.org

  We see a lot of famous companies out there like say McDonalds, Google LLC, Apple Inc., etc. But do you know how are companies formed? No problem, you will get to know today. Let's see...

What is company formation?

  Well, the process of forming a company is called as Company Formation. Company Formation is the process of registering a business as company at State Government and Central Government (Ministry Of Corporate Affairs). As a result, the business becomes a distinct legal entity. The process is also referred to as “Company Incorporation” or “Company Registration”. Incorporated business is completely separate from their owners in terms of finances, liabilities, contractual agreements, and ownership of property and assets excluding Sole Proprietorship and Partnership companies.

Why is company formation required?

  But a question may arise that why is company formation required? There are some advantages of incorporating a business. For these advantages Company Formation is needed:

1. The first reason is personal asset protection. This means corporations allow owners to separate and protect their personal assets.
2. Secondly, a company can give additional credibility and name protection to the owner. It can add an instant authority. Businesses which are not distinct legal entities cannot legally do brand-building or marketing where a company formed can help in this. 
3. Thirdly, corporations have a choice of perpetual existence which means that the company can either continue if the ownership of management changes or can end the company if the owner dies or leaves the business.
4. Fourthly, if the owner owns a company, he will be giving taxes for corporation and not for other things which is more beneficial than the regular taxation system.
5. At the fifth place, if there goes a financial loss of the company or extreme profit of the company, the expenses, salaries and income allocation becomes deductible or can be increased.

How is a company formed?

  Forming a company includes the following steps. (Note: The process of company formation changes according to different types of companies. The following steps are just basic steps):

1. Firstly, if the company is a LLP or Limited company, then the company first obtains a Directors' Identification Number (DIN). Soon, the company gets a Digital Signature Certificate (DSC).
2. Then, a name for the company or firm is chosen. This name must not be repeated, i.e., it should not be used by any entity earlier. 
3. Then the availability of the name is checked. This means that, it is confirmed whether the name is used earlier or not.
4. Then in case of Partnership companies, a 'Partnership Agreement' is drafted.
5. Then according to the type of the firm or company, the company or firm gets a Federal Taxpayer Identification Number (EIN).
6. Then some file forms are filled and if required the Memorandum and Articles of Association (MOA and AOA) are drafted.
7. Then the registration fees are paid and the business permits, licences or Corporation Certificates are obtained. 

  This is how a company forms...

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