The Bootstrapper's Guide To Self-Incorporation

Lawyers at iPleaders show you the step by step process 

Why most entrepreneurs cannot incorporate

Some of the questions that an entrepreneur asks when he first meets a lawyer are - "I want to incorporate my startup. How much will it cost, and how soon can it be done?" The entrepreneur is often not happy with the answer either because he cannot afford the legal fees, or because the lawyer does not sound convinced about any of the following about the process - the steps involved in the process, the fixed costs for each step and the timelines. The lawyer may simply quote a flat fee of around Rs. 15,000 - 20,000, which is typically the market standard, but an entrepreneur (who is in the initial phases of his startup, and most probably bootstrapping) will not be satisfied as the figure is not linked to actual costs, and the entrepreneur cannot see the value addition of the professional by the service provided. A of entrepreneurs know chartered accountants or lawyers through networks within their family and friends, but they find it difficult to use their help because such CAs or lawyers are not typically engaged in incorporation business.

Well, incorporation has not traditionally been a lawyer's (or even a chartered accountant's) job, and does not involve a lawyer's role. In fact, it is so simple that entrepreneurs can do it themselves. Further, we have seen that entrepreneurs take over one month to incorporate their company, even if they have hired a professional (chartered accountant, company secretary or lawyer), when in fact the actual time taken is within 15 to 25 days.

The Bootstrapper's Solution

Therefore, in this post, we briefly present the steps and the charges involved in the incorporation process. It is relevant for an entrepreneur has hired a professional to incorporate his startup, as he can now monitor the lawyer / accountant and ensure that each step is completed within a predefined timeframe. If the entrepreneur wants to minimize costs, he could try to self-incorporate, using the procedure below. A lawyer / CA / CS needs to provide minimal support, i.e. in drafting a portion of the memorandum (and if required, articles) of the company, and in affixing his digital signature to the forms.

For guidance, the steps for incorporation and charges are mentioned in brief below.

Step 1: A Digital Signature Certificate (DSC) for each director of the company.

A digital signature certificate (of Class 2) is required for electronic filing of documents with the Registrar of Companies, through the website of the Ministry of Corporate Affairs. It can be purchased from a licensed authority in India, such as MTNL Trustline, e-Mudhra, etc. The certificate may be either in soft copy format or on a USB drive (e-token). A USB e-token is flexible and can be used on multiple computers. However, it is more expensive than the soft copy version. A soft copy digital signature has to be carefully stored and a backup of it must be taken before moving it from one machine to another (or before formatting). Once deleted, a copy of it is not available and a new certificate will have to be applied for. For example, e-Mudhra digital certificate costs Rs. 650 in soft copy, or Rs. 1050 for e-token (for 1 year validity).

Step 2: Obtain Director Identification Number (DIN) for each director of the company by filing form DIN 1. Standard set of documents is required to be attached to the form - proof of identity, proof of residence (such as Passport, Voter ID Card, Driving License, Ration Card, PAN Card No.), photograph, and a verification.

Step 3: Submission of Form 1A for name approval.

After obtaining the DIN and the DSC for the Directors, Form 1A needs to be submitted on the MCA-21 portal for approval of a name for the company. Six names preferences need to be provided

The company may give upto six preferences for its name. The preferences must be given keeping in mind the Companies Name Availability Rules, 2011 (available here). The key guidelines in the rules are summarized here:

1. The name must not resemble or sound the same as the name of an already registered company.
2. The name of the company should be in consonance with the principal objects of the company and should not be general like “Silk Manufacturing Limited” or vague but should be specific. Form 1A of the MCA also contains instruction with regard to selection of a name for the company.
3. Words suggesting Pan-Indian or International nature of company such as “International”, “India” etc. shall not be allowed if the authorized capital of the corporation is limited to few lakhs and the area of operation is limited to the state.
4. The name of the company should be not be misguiding or offensive to any section of the people, or which is undesirable in the opinion of the Central Government.

We suggest that the full text of the rules is read before the entrepreneur chooses his preferences for the name of his startup.

Step 4: Drafting constitutional documents (Memorandum and Articles), and filing of Form 1 for registration of the company, along with stamped and signed copy of the Memorandum and Articles of Association. Usually, the memorandum is accompanied with the articles (both are executed and filed together as part of the same document, and not separately) as the stamp duty payable under different state legislations is lower in that case.

Given below is a table reflecting stamp duty payable on memorandum and articles of association across major regions of India. The duty must be paid online on the MCA portal itself in these areas, through e-stamping.

Step 5: Submission of particulars of directors, managers and secretary of the company by filing the Form 32 provided by Ministry of Corporate Affairs.

Step 6: Filing of Form 18 (notice of situation of registered office) and Form 32 (notice of situation of the registered office of the company.

Receipt of Certificate of Incorporation: After examining all these documents the Registrar of Companies issue a certificate of incorporation under Section 34 of Companies Act after which a private company becomes entitled to run its business.

The table below summarizes the costs for each step in the incorporation process.

Table of Government costs & Stamp Duty

(2 Directors, Authorized capital of Rs.1 lakh, stamping in Maharashtra)

Do you need assistance of a lawyer / chartered accountant / company secretary at all?

While an entrepreneur can easily fill up the form and file it online, he is likely to need the assistance of a lawyer, Chartered Accountant or Company Secretary for the following purpose:

1. Drafting articles of association and memorandum of association (Step 4 above). An entrepreneur may take the assistance of a lawyer / accountant / company secretary for drafting the memorandum, in particular the objects clause. The objects clause determines the sphere of operation of the company, and the company cannot carry out any activities unless they are clearly listed out in the objects clause. The articles may adopt the default format of the articles, as provided in the Companies Act itself (see Table A of Schedule 1). The entrepreneur may not need to customize them in the initial phase.

2. Certifying documents / filing specific forms: The forms require to be digitally signed by a chartered accountant / company secretary / advocate, which is not cumbersome at all. A professional may charge very nominal amount for this purpose.

Timelines: The Ministry of Corporate Affairs has reduced the time spent for incorporation drastically with e-filing, however, you should keep a time period of 10-25 days, with approximately two to three days allocated to each step. This is because the filing procedures on the MCA site are updated from time to time, and occasionally the site may not work as expected due to technical glitches. Also, if you make a mistake while performing any of the steps, your form may be returned for resubmission within a fixed timeframe, so you should provide for delay on account of that.

Free assistance from the MCA team: In case of doubts, one may call the MCA office on any of the following numbers: North (011-64506000), East (033-23675242/ 033-64506000), South (044-28152455/ 044-64506000), West (022-65161996/ 022-64506000) or write to them at [email protected]. The staff is usually well-informed and very helpful.

By filling the forms and attaching requisite documentation himself, an entrepreneur will be able to take charge and speed up the incorporation process and save costs.

About iPleaders

iPleaders was born out of an idea, and a realization. The realization came while attempting to help a few entrepreneur friends with legal work - there is no proper, insightful and affordable legal service offered to startup companies on the growth track. Law firms largely focus on international and blue-chip clients, and litigators who go to Court do not have a strong grasp of business law. Therefore, startups are unable to hire quality business lawyers. The idea was to find solutions through technology and products (law is so far only a service industry in India). iPleaders has worked on developing resources to make law accessible - through blogging, educational products and interactive softwares. At present, it offers super-cheap incorporation, trademark registration and a diploma course (jointly offered with a top law school in the country, NUJS) that teaches entrepreneurs how they can handle legal issues affecting their business by themselves. iPleaders is launching do-it-yourself kits for entrepreneurs at E-Sparks 2011, in Bangalore, which will simplify various legal processes for them - such as incorporation (LLP / Company), trademark registration, etc.