Companies Act 2013 Section 3

Companies Act 2013 Section 3 governs the formation and incorporation of companies in India. It lays down the legal foundation for creating a company as a separate legal entity. Understanding this section is crucial for entrepreneurs, directors, and legal professionals to ensure lawful company registration and compliance with statutory requirements.

This section is fundamental to corporate governance and management. It clarifies when a company comes into existence and the legal implications of incorporation. Directors, shareholders, and professionals must grasp this provision to avoid invalid company formation and ensure proper adherence to the law.

Companies Act Section 3 – Exact Provision

This section sets out the minimum number of persons required to form different types of companies. It also mandates subscription to the memorandum of association and compliance with registration procedures. Essentially, it defines the legal birth of a company under Indian law.

• Specifies minimum members for different company types.

• Requires lawful purpose for formation.

• Mandates subscription to memorandum of association.

• Requires compliance with registration formalities.

• Introduces the concept of One Person Company.

Explanation of Companies Act Section 3

Section 3 explains how a company is legally formed and the conditions for its incorporation.

• States minimum number of subscribers for companies with and without share capital.

• Applies to promoters, subscribers, and registration authorities.

• Requires lawful purpose for incorporation.

• Mandates subscribing to memorandum of association.

• Triggers company existence upon registration.

• Permits formation of One Person Company as per prescribed rules.

• Prohibits companies formed for unlawful purposes.

Purpose and Rationale of Companies Act Section 3

This section ensures clarity and legal certainty in company formation. It protects stakeholders by defining who can form a company and under what conditions.

• Strengthens corporate governance by formalizing company creation.

• Protects members and creditors through lawful formation.

• Ensures transparency in company registration.

• Prevents misuse of corporate structure for illegal purposes.

When Companies Act Section 3 Applies

Section 3 applies at the initial stage of company formation and registration.

• Applicable when forming companies with or without share capital.

• Mandatory for One Person Companies as prescribed.

• Must be complied with before company existence.

• Not applicable to unregistered associations or partnerships.

Legal Effect of Companies Act Section 3

This section creates the legal foundation for company existence. It imposes duties on subscribers and registration authorities to comply with formation rules. Non-compliance results in invalid company formation and legal consequences.

• Creates duty to subscribe memorandum and register.

• Company comes into existence only after registration.

• Non-compliance leads to invalid incorporation.

Nature of Compliance or Obligation under Companies Act Section 3

Compliance is mandatory and a one-time obligation at the incorporation stage. Directors and promoters are responsible for ensuring all requirements are met before registration.

• Mandatory compliance before company formation.

• One-time obligation during incorporation.

• Responsibility lies with promoters and directors.

• Impacts internal governance from inception.

Stage of Corporate Action Where Section Applies

Section 3 applies primarily at the incorporation stage of a company.

• During subscription to memorandum of association.

• At application for registration with Registrar of Companies.

• Before commencement of business activities.

• Not applicable post-incorporation except for prescribed amendments.

Penalties and Consequences under Companies Act Section 3

Failure to comply with Section 3 can lead to penalties including invalidation of company formation and legal actions against promoters.

• Invalid company registration if requirements unmet.

• Possible penalties under MCA regulations.

• Legal consequences for unlawful formation.

Example of Companies Act Section 3 in Practical Use

Company X aims to start a business with six members intending to register as a company with share capital. Under Section 3, a minimum of seven members is required. Company X adds one more member, subscribes to the memorandum, and completes registration. This ensures lawful incorporation and compliance with the Act.

• Ensures lawful company formation.

• Prevents invalid registration due to insufficient members.

Historical Background of Companies Act Section 3

Section 3 replaces similar provisions in the Companies Act, 1956, refining company formation rules. It introduces the One Person Company concept and aligns with modern corporate needs.

• Shifted from 1956 Act provisions on company formation.

• Introduced One Person Company concept.

• Enhanced clarity on minimum members and lawful purpose.

Modern Relevance of Companies Act Section 3

In 2026, Section 3 remains vital for digital company registration and compliance via MCA portal. It supports governance reforms and new business models like One Person Companies.

• Enables digital incorporation processes.

• Supports governance and compliance reforms.

• Facilitates ease of doing business.

Related Sections

• Companies Act Section 2 – Definitions relevant to corporate entities.

• Companies Act Section 4 – Memorandum of Association.

• Companies Act Section 7 – Incorporation of company.

• Companies Act Section 8 – Formation of companies with charitable objects.

• Companies Act Section 12 – Registered office of company.

• Companies Act Section 10 – Effect of registration.

Case References under Companies Act Section 3

No landmark case directly interprets this section as of 2026.

Key Facts Summary for Companies Act Section 3

• Section: 3

• Title: Formation of Companies

• Category: Governance, Compliance

• Applies To: Promoters, Subscribers, Registration Authorities

• Compliance Nature: Mandatory, One-time at Incorporation

• Penalties: Invalid incorporation, legal consequences

• Related Filings: Memorandum of Association, Registration Application

Conclusion on Companies Act Section 3

Companies Act Section 3 is foundational for the lawful formation of companies in India. It clearly defines the minimum requirements and procedures for incorporation, ensuring companies are created with a lawful purpose and proper compliance. This clarity protects stakeholders and supports sound corporate governance from the outset.

Understanding and adhering to Section 3 is essential for promoters, directors, and legal professionals. It prevents invalid company formations and promotes transparency in the corporate sector. As business models evolve, this section continues to provide a robust legal framework for company registration and existence.

FAQs on Companies Act Section 3

What is the minimum number of persons required to form a company with share capital?

The minimum number of persons required is seven for a company with share capital, as per Section 3 of the Companies Act 2013.

Can a single person form a company under Section 3?

Yes, a One Person Company can be formed by a single individual as prescribed under Section 3 and related rules.

When does a company come into existence under Section 3?

A company comes into existence only after subscribing to the memorandum and completing registration with the Registrar of Companies.

Is the purpose of the company formation under Section 3 restricted?

Yes, the company must be formed for a lawful purpose in compliance with the Companies Act and other applicable laws.

What happens if the requirements of Section 3 are not met?

Non-compliance can lead to invalid company formation, penalties, and legal consequences for promoters and directors.