The Companies Act, 2013 serves as the principal legislation governing the formation, functioning, and regulation of companies in India. Among its various provisions, Section 3 holds a foundational place, as it prescribes the legal framework for the formation of a company. It sets out the minimum number of persons required, the types of companies that may be established, and the requirement that such formation must be for a lawful purpose.

In simple terms, every law has a beginning, and in corporate law, that beginning is Section 3 of the Companies Act, 2013. As it specifies:

How a company can be formed,

The minimum number of persons required, and

The types of companies that may be established under the Act.

Think of three friends sitting in a café with a big idea – they want to launch a startup. If they continue as just partners, they share unlimited risks. But if they decide to form a company, the law gives their business a new life. It becomes a separate legal entity – something that exists in the eyes of law, apart from the people who created it.

That legal recognition comes from Section 3.

Without Section 3, there would be no private companies, no public companies, no One Person Companies (OPC), and certainly no corporate giants we see today.

Why is Section 3 so Important?

Section 3 is the starting point from which an association of persons transforms into a recognized corporate entity.

It Recognizes and permits the formation of companies.
It explains that a company must be formed for a lawful purpose only.
It prescribes the minimum number of people needed to form a Company.
It recognizes different structures like Private Company, Public Company, and OPC.

Formation vs Incorporation: Overview of Section 3 and Section 7

Section 3 (“Formation of company”) states that a company may be formed for any lawful purpose by the prescribed minimum number of persons by subscribing their names to the memorandum and complying with the Act. In short, Section 3 answers who can form a company and for what purpose, While the detailed procedure of incorporation is then set out in Section 7.

In short:

Section 3 (Formation of Company) tells us who can come together to form a company and for what purpose.

Section 7 (Incorporation of Company) prescribes how the company is actually registered and comes into legal existence.

Basis	Formation (Section-3)	Incorporation (Section-7)
Meaning	The stage where people come together to agree on creating a company. It involves the decision, agreement, and initial compliance to establish a company.	The legal process through which a company becomes a registered entity under law and is recognized as a separate legal person.
Governed by	Section 3 of the Companies Act, 2013 (Formation of a company for a lawful purpose, by required number of persons).	Section 7 of the Companies Act, 2013 (Procedure of incorporation, filing documents, ROC registration).
Focus	Who can form a company and for what lawful purpose.	How a company gets legally registered and comes into existence.
Stage	The conceptual/legal beginning of a company.	The formal birth certificate of a company.
Outcome	Recognition that such a company can be formed.	Grant of Certificate of Incorporation by the Registrar, giving the company a separate legal identity.

The Philosophy Behind Section 3

Section 3 carries the philosophy of Company formation. Before we dive into bare legal text, it is important to understand why the law allows companies to exist and what problem Section 3 solves.

From Individuals to Institutions

In ancient trade, businesses were mostly run by individuals or families. A merchant owned goods, bore risks, and passed everything to his heirs. But as trade grew, this model became unsustainable. People needed a structure where:

Risk could be shared,
Capital could be pooled,
The business could survive even if the owner died.

This need gave rise to the concept of the company. Section 3 read with Section 7 captures this transition in India – it allows individuals to form and incorporate a Company.

The Two Pillars of Section 3: Lawful Purpose & Association

Section 3 rests on two simple but strong pillars:

Lawful Purpose
A company cannot be formed for anything illegal.
Example: A company to smuggle arms or trade in banned substances will never get approval.
This ensures that the privilege of incorporation is used only for legitimate economic or social activities.
Association of Persons
Companies are born from an agreement among people who subscribe to the Memorandum of Association (MoA).
This “association” distinguishes a company from a sole trader who runs business alone.

Formation of Corporate Personality

The law recognizes the company as a separate legal person once formed. This principle was famously established in Salomon v. Salomon & Co. Ltd. (1897), [1]where the House of Lords held that a company is distinct from its shareholders.

Section 3 and Section 7 of the Companies Act, 2013 echoes this principle. The subscribers give birth to a company, but once the Company is incorporated or we can say born by following the procedure laid down under Section 7 of the Act, it lives on its own.

Section 3 and Entrepreneurship in India

Why do thousands of entrepreneurs every year choose to form companies instead of running sole proprietorships?

Because Section 3 gives them the shield of limited liability.

Because it grants a structure that is recognized globally.

In a country like India, where startups and family businesses thrive, Section 3 read with Section 7 is not just law – it is a tool of empowerment.

Table: Philosophy of Section 3 in Simple View

Concept	Meaning under Section 3	Why it Matters
Lawful Purpose	Company must be formed only for legal objects	Prevents misuse of incorporation
Association of Persons	Subscribers come together to sign MoA	Ensures collective foundation
Separate Legal Entity	Company exists independently of members	Protects members & encourages investment
Limited Liability	Members’ liability restricted to their shares/guarantee	Reduces risk for entrepreneurs
Perpetual Succession	Company continues despite death/exit of members	Ensures business continuity

2. Bare Act Text of Section 3 (with Amendments)[2]

To understand Section 3 properly, we must first look at its Bare Act text and then break it into simple language.

Bare Act Text of Section 3[3]

Section 3(1) – Formation of Company

A company may be formed for any lawful purpose by—

seven or more persons, where the company to be formed is to be a public company;
two or more persons, where the company to be formed is to be a private company; or
one person, where the company to be formed is to be a One Person Company,
by subscribing their names 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 (Nominee), 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:

Section 3(2) – Types of Companies
A company formed under sub section (1) this Act may be either—
(a) a company limited by shares, or
(b) a company limited by guarantee, or
(c) an unlimited company.

Simplified Interpretation

A company can only be formed for a lawful purpose. Illegal or fraudulent objects are not allowed.

Minimum number of persons required depends on the type of company:

Public Company → 7 or more persons
Private Company → 2 or more persons
One Person Company (OPC) → Only 1 person

The first members (called subscribers) must sign the Memorandum of Association (MoA).

After signing, complying with the requirements of this Act in respect of registration i.e. filing with the Registrar of Companies (RoC) with required documents and details, the company gets its Certificate of Incorporation.

On the basis of liability, the company may be of three kinds:
Limited by shares
Limited by guarantee
Unlimited

Amendments & Changes in Section 3

Since the Companies Act, 2013 came into force, Section 3 has undergone important updates:

Introduction of One Person Company (OPC) –

A revolutionary concept for single entrepreneurs. Earlier under the Companies Act, 1956, at least 2 persons were required to form a private company. The 2013 Act reduced it to 1 person for OPC.

Amendments in OPC Rules (2021) –
Earlier, OPC was restricted only to resident Indians with certain turnover limits.
After amendment (effective April 2021), even Non-Resident Indians (NRIs) can form an OPC in India.
The earlier cap of ₹2 crore paid-up share capital / ₹20 crore turnover for conversion into a private/public company was removed.

Private Company Limit –

Section 2(68) linked with Section 3 clarifies that a private company can have a maximum of 200 members (excluding employees).

Table: Bare Requirements under Section 3

Type of Company	Minimum Members Required	Maximum Members Allowed	Special Notes
Public Company	7	Unlimited	Must add “Limited” at the end of its name
Private Company	2	200	Must add “Private Limited” in its name
One Person Company (OPC)	1	1	Can be formed by resident/NRI individuals; Nominee required
Company Limited by Shares	As above	As above	Members’ liability limited to unpaid share value
Company Limited by Guarantee	As above	As above	Members’ liability limited to guarantee amount
Unlimited Company	As above	As above	Members’ liability is unlimited

Section 3A. Members Severally Liable in Certain Cases

Bare Act Text of Section 3A

If at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

Simplified Interpretation

If at any time the number of members of a company falls below the minimum required persons as specified under Section 3: –

Public company below 7 or

Private company below 2

And the company continues to carry on business for more than six months in that state, every member who was a member during that time and was aware of the fact shall be personally and severally liable for the payment of the whole debts of the company contracted during that time.

What this means:

Section 3 tells you how to form a company (who and how many).

Section 3A tells you what happens if, after formation, the company fails to maintain the minimum members required by Section 3.

If the shortfall continues more than 6 months, and members knew about it, those members may lose limited liability protection for debts incurred during that period — i.e., they become personally liable.

In short: don’t run a company short of required members for over 6 months — creditors protected by this rule.

Short examples:

Private Company Example: Two partners form a Private Ltd. One partner dies; the remaining partner continues running the business alone for 9 months without adding a member. After month 6, debts are contracted. The remaining partner (if aware of the shortfall) can be held personally liable for debts contracted after that 6-month mark.
Public Company Example: A public company with 7 members loses 3 directors/members and continues business for 8 months with 4 members. Those members — if they knew the facts — can be held severally liable for debts incurred in that 6+ month window.

Purpose of Section 3A — plain points

Protects creditors and third parties who transact with a company in good faith.
Discourages companies from operating in a shrunken membership state (which signals weak corporate capacity).
Ensures corporate form is not abused for fraud or negligence.

Table — Section 3 vs Section 3A (A quick comparison)

Aspect	Section 3	Section 3A
Primary focus	Lays down minimum number of persons required to form a company	Imposes liability if minimum membership is not maintained post-incorporation
Minimum members	Public 7 / Private 2 / OPC 1	Same thresholds enforced
Timing	At incorporation	After incorporation (if shortfall persists)
Objective	Ensures company is formed with adequate membership	Ensures compliance with membership norms
Grace period	N/A	6 months
Consequence	Company cannot be formed	Members personally & severally liable for debts contracted during the breach period (if aware)

Practical note for founders and company secretaries

As soon as a membership shortfall happens, act fast: appoint/add members or convert structure (where permissible). Don’t let the clock pass 6 months.
Maintain clear board minutes, resignation/appointment records and proof of attempts to restore membership — these help show lack of “knowledge” or due diligence if liability is later alleged.
Watch OPC → Pvt conversions and family-company member movements carefully; sudden resignations can trigger Section 3A exposure.

4. Types of Companies may be formed under Section 3

Section 3(1) of the Companies Act, 2013 provides that a company may be formed for any lawful purpose by:

Seven or more persons – Public Company
Two or more persons – Private Company
One person – One Person Company (OPC)

Let’s understand each in detail:

Public Company

A Public Company is formed by 7 or more persons, with no limit on maximum members. Public Company can invite the public to buy shares and has fewer ownership restrictions compared to a private company.

Key Features:

Minimum 7 members required.
Minimum 3 directors.
No restriction on transfer of shares.
Can invite the public to subscribe to its securities.
Name must end with “Limited”.

Example: Reliance Industries Limited, Tata Motors Limited.

Example of a Public Company (Ltd)

Case: A group of 10 businesspeople want to set up a manufacturing unit for electric vehicles.

What they do:

They incorporate a Public Limited Company with 10 members (minimum required is 7).

They plan to later raise money from the public by issuing shares.

Result:

Their company name ends with “Limited”.

They can raise funds from the stock market in the future.

No restriction on the maximum number of members.

Public Companies are suitable for large-scale ventures and businesses looking to raise capital from the general public.

Private Company

A Private Company is formed by 2 or more persons, but it cannot exceed 200 members (excluding employees). It is usually a closely-held company, suitable for family businesses and startups. Ownership is restricted, and shares cannot be freely traded outside the group.

Key Features:

Minimum 2 members required.
Minimum 2 directors.
Restriction on transfer of shares (cannot be freely traded).
Cannot invite the public to subscribe to shares.

Name must end with “Private Limited”.

Example: Flipkart Internet Private Limited, Infosys BPM Private Limited.

Example of a Private Company (Pvt Ltd)

Case: Priya and Aman are cousins who want to start a clothing brand.
What they do:

They register a Private Limited Company under Section 3 with themselves as two members and two directors.

They decide on a shareholding ratio: Priya (60%) and Aman (40%).

Result:
They can now invite up to 200 shareholders in the future.
Their company name ends with “Private Limited”.
Their liability is limited only to the unpaid value of shares.

Private Ltd is the most popular structure for startups and family-owned businesses, offering credibility and investment opportunities.

One Person Company (OPC)

An OPC allows a single individual to incorporate a company. Introduced for the first time under the Companies Act, 2013, it is a hybrid of sole proprietorship and company, giving limited liability to one person.

Key Features:

Minimum 1 member (individual).

Only 1 director (can be the sole member).
A nominee must be appointed, who will take over in case of death/incapacity of the sole member.
Cannot invite the public to invest.

Name must end with “(OPC) Private Limited”.

Example: A freelance software developer forming “Rohan Technologies (OPC) Pvt Ltd”.

Example of a One Person Company (OPC)

Case: Rohan is a young software developer. He wants to launch a small IT consulting business but doesn’t want unlimited liability like in a proprietorship.
What he does: Rohan registers an OPC under Section 3.

He becomes the sole member and director.

He nominates his sister as the nominee, who will take over in case of his death/incapacity.

Result:
The business becomes a separate legal entity.
Rohan enjoys limited liability.
He can raise funds, open a company bank account, and sign contracts in the company’s name.

OPC is perfect for small entrepreneurs and freelancers who want corporate recognition but don’t have partners.

Table: Practical Examples at a Glance

Type of Company	Minimum Members	Example Case	Key Benefit
One Person Company (OPC)	1	Rohan launches IT consultancy alone	Limited liability for solo entrepreneurs
Private Company	2	Priya & Aman start a clothing brand	Credibility + max 200 members
Public Company	7	10 members form EV manufacturing company	Unlimited members + ability to raise funds from public

Why These Examples Matter

They show how Section 3 operates in daily business life.

They prove that the law is not abstract – it is the first step for every entrepreneur, from a single freelancer to a giant corporate house.

They highlight the flexibility of Indian company law – from OPCs for solo founders to Public Ltd companies for large corporations.

5. Types of Companies Recognized under Section 3 on the basis of Liability

Section 3(2) of the Companies Act, 2013 clearly states that a company can be incorporated as:

Company Limited by Shares
Company Limited by Guarantee
Unlimited Company

Let’s understand each of them in detail.

Company Limited by Shares

This is the most common type of company in India.

Here, the liability of members is restricted to the unpaid value of their shares.

If a shareholder has fully paid for the shares, he cannot be asked to contribute more.

Example:
If Ramesh holds 1,000 shares of ₹10 each and has paid ₹8 per share, his liability is limited to the remaining ₹2 per share (₹2,000).

Practical Use:

All private limited companies and most public limited companies in India are limited by shares.

Startups prefer this structure because it is investor-friendly.

Company Limited by Guarantee

Here, members’ liability is limited not by shares, but by a fixed guarantee amount they agree to contribute in case the company winds up.

These companies may or may not have share capital.

Mostly used for non-profit activities, research institutions, clubs, and NGOs.

Example:
A company formed to promote art and culture may be registered as a company limited by guarantee. Its members guarantee, say ₹50,000 each, in case of winding up.

Practical Use:

Non-Profit Organisations (NPOs), Section 8 Companies often use this model.

Unlimited Company

In this type, there is no limit on members’ liability.

Members may have to contribute from their personal assets to meet company debts.

Very few businesses prefer this model because it defeats the biggest advantage of incorporation — limited liability.

Example:
If an unlimited company incurs debts of ₹10 crore, members may be required to pool personal wealth to cover the entire shortfall.

Practical Use:

Rare in practice; used in special cases where maximum credibility and financial backing need to be demonstrated to lenders or regulators.

Table: Types of Companies under Section 3

Type	Basis of Liability	Example Usage	Member Risk
Company Limited by Shares	Liability limited to unpaid share value	Pvt Ltd, Public Ltd, Startups	Very Low
Company Limited by Guarantee	Liability limited to pre-agreed guarantee amount	NGOs, Clubs, Non-profits	Low
Unlimited Company	No limit – personal assets can be used	Rare, niche cases	Very High

Why These Types Matter?

They provide flexibility — entrepreneurs, NGOs, and corporates can all choose a structure that fits their needs.

They balance between risk protection (limited liability) and credibility with creditors.

They form the legal backbone of how companies operate in India.

6. Key Features of Section 3 of the Companies Act, 2013

Section 3 is the foundation stone of company law in India. It is the very starting point in the birth of a company. Any person who wishes to incorporate a company must first satisfy the requirements of Section 3, and only thereafter proceed with the incorporation process under Section 7.

The key features of Section 3 are as follows:

Minimum Number of Members

The Act clearly prescribes the minimum number of persons required to form a company:

One Person Company (OPC): 1 member
Private Limited Company: 2 members
Public Limited Company: 7 members

This requirement is not arbitrary; it has a purpose:

An OPC allows an individual to start a company alone.
A Private Company ensures that at least two people agree to work together.
A Public Company represents a larger association, needing at least 7 members.

Example:
If Ananya wants to open a boutique alone, she can form an OPC. But if Ananya and her friend Meera want to run it together, they need a Private Ltd company. And if they want to bring in 20 investors, they may register it as a Public Ltd company.

Why It Matters:
The minimum number of members ensures that companies remain true to their intended character — individual venture, small-scale private business, or large public corporation.

Lawful Purpose Only

A company can be formed only for lawful objects.

Any purpose that is illegal, immoral, or against public policy makes the incorporation void.

Example:

Registering a company for “online gaming” is valid (if permitted by state laws).

But registering a company for “illegal betting and gambling” is not permitted.

Why It Matters:
This feature keeps the corporate shield from being used for fraud, money laundering, or crime. It ensures business ethics and public trust.

Liability of Members

One of the biggest attractions of forming a company is the limitation of liability.
Section 3 allows three forms of liability:
Company Limited by Shares
Members’ liability = only the unpaid value on their shares.
Most common type in India (e.g., Reliance Industries Ltd).
Company Limited by Guarantee
Members agree to contribute a fixed amount only at winding up.
Often used for non-profit organisations, NGOs, societies.
Unlimited Liability Company
Rare in practice.
Members are personally liable for debts.

Example:

If you buy 100 shares of ₹10 each and pay ₹800, your liability is only ₹200 more if the company calls for it.
In a guarantee company, if you guarantee ₹1,000, you pay only that much at winding up.

Why It Matters:
It gives entrepreneurs confidence to take risks, knowing their personal assets are protected (unless they commit fraud).

Subscription to Memorandum of Association (MoA)

Section 3 requires every company to be registered with a Memorandum of Association (MoA).
The MoA is the constitution of the company. It defines:
The name of the company
The registered office state
The objects (business activities)
Liability of members
Capital structure
Subscribers (who sign the MoA)

Example:
If your MoA says your company will do “textile manufacturing,” you cannot suddenly start “banking services.” For that, you need to alter your MoA.

Why It Matters:
MoA sets the legal boundary within which the company must operate. It protects investors and creditors by showing them the exact scope of the company’s business.

Table: Key Features of Section 3

Feature	Explanation	Example	Why It Matters
Minimum Members	1 (OPC), 2 (Private), 7 (Public)	Ananya forms OPC	Defines type of company
Lawful Purpose	Only legal objects allowed	No company for smuggling	Prevents misuse
Liability	Limited by shares, guarantee, unlimited	Shareholder owes unpaid share value	Protects personal assets
MoA Requirement	MoA = constitution of company	Textile firm cannot do banking	Sets legal boundary
Member Limits	Pvt: max 200, Public: unlimited	Startup grows → convert to Public	Distinguishes scale

7. Conclusion

Sections 3 and 3A are two sides of the same coin:

Section 3: Creates and defines a company, ensuring lawful objectives, limited liability, and corporate personality.

Section 3A: Protects stakeholders by enforcing continuous compliance with membership rules, holding members accountable when limits are breached.

Together, they balance freedom and responsibility, forming the backbone of India’s corporate law.

For entrepreneurs, these sections are guiding stars — helping them start, run, and grow companies legally and safely. For professionals and regulators, they provide a framework of accountability that protects society, creditors, and investors.

Ultimately, understanding and adhering to Sections 3 and 3A is not optional — it is the foundation of trust, legality, and sustainable business growth in India’s corporate ecosystem.

[1] https://www.drishtijudiciary.com/landmark-judgement/company-law/salomon-v-saloman-&-company-ltd-1895-95-all-er-rep-33

[2] https://ca2013.com/formation-of-company/

[3] https://ca2013.com/formation-of-company/

Written by Mahboob Gaddi and Farman Ahmad | Founders, Lawgical Search