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Formation of Company (Section 3 of the Companies Act, 2013)

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CA Preeti Aggarwal

On October 2, 2025

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Section 3 of the Companies Act, 2013: Formation of Company

Introduction:

When it comes to starting a company in India, Section 3 of the Companies Act, 2013 lays down the foundational rules. It defines how many people are required to form different types of companies, the lawful purposes for which companies may be formed, and also introduces the unique concept of the One Person Company (OPC). Alongside this, Section 3A ensures accountability when minimum membership requirements are not followed.

Who Can Form a Company?

According to Section 3(1), a company can be formed for any lawful purpose by the following:

Public Company: Requires seven or more persons.
Private Company: Requires two or more persons.
One Person Company: Can be formed by just one individual.

All these persons form the company by subscribing their names to the Memorandum of Association (MOA) and complying with the registration requirements of the Act.

One Person Company: A Unique Concept

One of the most notable introductions in the Companies Act, 2013 is the One Person Company (OPC). This allows a single entrepreneur to enjoy the benefit of limited liability while running a company.

Key points about OPC formation:

The memorandum of an OPC must mention the name of a nominee (with prior written consent in Form- INC 3)
This nominee takes over the company if the sole member dies or becomes incapacitated.
The written consent of nominee shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles
The nominee can withdraw consent, and the member can also change the nominee by giving proper notice.
Any such change is intimated to the Registrar but is not considered an alteration of the Memorandum.

This mechanism ensures continuity of the company even after unforeseen circumstances.

Types of Companies That Can Be Formed

Under Section 3(2), a company may be of the following types:

Company Limited by Shares: Liability of members is limited to the unpaid amount on their shares.
Company Limited by Guarantee: Members’ liability is restricted to the amount they guarantee to contribute in case of winding up.
Unlimited Company: Members have unlimited liability.

However, for companies registered in an IFSC (International Financial Services Centre), both public and private companies can only be formed as companies limited by shares.

Section 3A: Liability When Membership Falls Below Minimum

Section 3A ensures that companies cannot continue business indefinitely if their membership falls below the statutory requirement:

Public Company: Minimum 7 members.
Private Company: Minimum 2 members.

If a company continues to run its business with fewer than the minimum members:

And this continues for more than six months,
Then, every member aware of the situation can be held severally liable for the company’s debts during that period (ie after six months)

This means creditors can directly sue such members for recovery, without limiting liability only to the company.

Why These Provisions Matter

Safeguarding Stakeholders: The law ensures that companies are started with a minimum number of persons to avoid misuse of the corporate structure.
Encouraging Entrepreneurship: The OPC framework helps individuals start their businesses without needing partners, making the corporate structure accessible to solo entrepreneurs.
Preventing Abuse: Section 3A ensures that members cannot exploit the corporate form when the minimum membership is not maintained, thereby protecting creditors.