Section 3 Companies Act: Formation of company

Section 3 of Companies Act: Formation of company

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

Incorporation of Company and Matters Incidental Thereto

1. A company may be formed for any lawful purpose by—

a. seven or more persons, where the company to be formed is to be a public company;

b. two or more persons, where the company to be formed is to be a private company; or

c. one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration:

Provided that: the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles: Provided further that such other person may withdraw his consent in such manner as may be prescribed:

Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed:

Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed:

Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum.

2. A company formed under sub-section (1 ) may be either—

a. a company limited by shares; or

b. a company limited by guarantee; or

c. an unlimited company.

Statutory Defined Terms in this Section: (Click any term for official legal definition)

Company Sec 2(20) Memorandum Sec 2(56) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 3

Section 3 defines the lawful foundation of corporate incorporation in India, specifying the minimum subscriber requirements for public, private, and One Person Companies (OPC), establishing the statutory framework for corporate personality.

Sub-Section (1): One: Sub-section (1) provides that a company may be formed for any lawful purpose by seven or more persons for a public company, two or more persons for a private company, or one person for a One Person Company (OPC), by subscribing their names to a memorandum and complying with registration requirements.
Core Legal Standard: The provision codifies the revolutionary concept of the One Person Company, introducing a natural person nominee requirement under the proviso to sub-section (1) to guarantee uninterrupted corporate succession upon the death or incapacity of the sole member.

Sub-section (2) outlines the three permissible liability structures: companies limited by shares, companies limited by guarantee, and unlimited liability companies.

Key Landmark Precedents:

Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 (HL): The foundational ruling establishing that upon lawful incorporation in accordance with statutory subscriber requirements, a company is at law an entirely distinct legal person from its subscribers and shareholders.
Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964) 6 SCR 885: The Supreme Court affirmed that an incorporated company is a separate legal entity distinct from its individual members, and the veil of incorporation will not be pierced except in clear cases of fraud, tax evasion, or statutory violation.

Legal Commentary:

Section 3 is the gateway to corporate existence. The statutory recognition of One Person Companies under the 2013 Act modernized Indian entrepreneurship by conferring limited liability on sole proprietors without requiring artificial dummy shareholders. The prerequisite of a 'lawful purpose' is strictly enforced by the Registrar of Companies; an incorporation vehicle devised for illicit objects, circular transactions, or benami ownership is void ab initio.

Section 3: Formation of company

Section 3 of Companies Act: Formation of company

Legal Commentary & Landmark Judgments: Section 3