Formation of a Company

This page contains the NCERT Business Studies class 11 chapter 7 Formation of a Company from Part 2 Corporate Organisation, Finance and Trade. You can find the solutions for the chapter 7 of NCERT class 11 Business Studies, for the Short Answer Questions, Long Answer Questions and Projects/Assignments Questions in this page. So is the case if you are looking for NCERT class 11 Business Studies related topic Formation of a Company question and answers.
Short Answer Questions
1. Name the stages in the formation of a company.
The stages in the formation of a company are:
Capital Subscription.
2. List the documents required for the incorporation of a company.
The documents required for the incorporation of a company are:
Memorandum of Association
Articles of Association
Consent of Proposed Directors
Agreement (if any for appointment of Managing Director, Manager, or whole-time Director)
Statutory Declaration
Receipt of Payment of fee.
3. What is a prospectus? Is it necessary for every company to file a prospectus?
A prospectus is “any document described or issued as a prospectus including any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any securities of, a body corporate.”
No, it is not necessary for every company to file a prospectus. A public company may not invite the public to subscribe to its securities and can raise funds through private arrangements, in which case there is no need to issue a prospectus. Instead, a ‘Statement in Lieu of Prospectus’ is filed.
4. Briefly explain the term ‘Return of Allotment’.
The ‘Return of Allotment’ is a document signed by a director or secretary, filed with the Registrar of Companies within 30 days of allotment, detailing the allocation of shares to successful applicants.
5. At which stage in the formation of a company does it interact with SEBI.
In the formation of a company, it interacts with SEBI during the “Capital Subscription” stage to obtain approval before raising funds from the public.
Long Answer Questions
1. What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.
Promotion refers to the series of activities undertaken to bring a company into existence. It starts with the conception of a business idea and ends with the company’s incorporation. During this stage, promoters identify a business opportunity, conduct a feasibility study, decide on the basic structure, and take the necessary steps to register and incorporate the company.
The legal position of promoters with respect to the company they promote is as follows:
Fiduciary Position: Promoters stand in a fiduciary relationship with the company they promote. This means they owe a duty of utmost good faith towards the company and must not make any secret profit at the expense of the company.
Liability for Preliminary Contracts: During the promotion of the company, promoters may enter into preliminary contracts on behalf of the company. While these contracts aren’t binding on the company, promoters remain personally liable for these contracts to third parties.
Liability for Mis-statements: If the prospectus issued to the public contains any false statements, the promoters can be held liable for any loss suffered by the shareholders as a result.
Non-disclosure: If promoters fail to disclose any benefit or profit they gained during the promotion, the company can either rescind the contract made with them or recover the undisclosed amount.
Liability for Secret Profit: If promoters make any profit secretly in transactions with the company or in matters concerning the company, the company has a right to claim that profit once it comes into existence.
Remuneration: Promoters do not have any legal right to claim remuneration for their efforts in promoting the company unless there’s a contract providing such remuneration or the company subsequently approves it.
In summary, while promoters play a crucial role in bringing a company into existence, they have a significant responsibility towards the company, its members, and potential investors. Their actions are under scrutiny, and they must uphold their fiduciary duty and ensure transparency in all their dealings related to the company.
2. Explain the steps taken by promoters in the promotion of a company.
The following are the steps taken by promoters in the promotion of a company
Identification of Business Opportunity: The very first step in the promotion of a company is the identification of a business opportunity. Promoters assess the viability and potential of a new business idea or venture.
Feasibility Studies: After identifying the business opportunity, promoters conduct various feasibility studies to determine the practicability of the idea. These studies may include technical, financial, and market feasibility.
Decision on Basic Structure: Based on the feasibility studies, promoters decide the basic structure of the company, such as the scale of operation, size of the business, and the nature of the business entity.
Name Approval: Promoters select a suitable name for the company and send it for approval to the Registrar of Companies. This is to ensure that the chosen name is not identical or too similar to an existing company’s name.
Fixing up Signatories to the Memorandum of Association: The promoters decide upon the persons who will sign the Memorandum of Association of the proposed company. These signatories are typically the first shareholders of the company.
Appointment of Professionals: Certain professionals like merchant bankers, auditors, and solicitors are appointed by the promoters to assist in the process of incorporation.
Preparation of Necessary Documents: The promoters prepare essential documents such as the Memorandum of Association and Articles of Association. These documents detail the company’s objectives, rules, and regulations and are essential for its registration.
Filing of Documents for Incorporation: After preparing the required documents, promoters file them with the Registrar of Companies for the incorporation of the company. This process involves submitting various documents such as the Memorandum of Association, Articles of Association, and other necessary declarations and forms.
Preliminary Contracts: During the promotion stage, promoters might enter into preliminary contracts on behalf of the company-to-be. However, it’s essential to note that these are not legally binding on the company.
Incorporation: Once all the documents are in order and the necessary fees are paid, the Registrar issues a Certificate of Incorporation, signifying the birth of the company. This is the final step in the promotion process, after which the company legally comes into existence.
In conclusion, the promotion of a company is a systematic process, starting from the conception of a business idea to its final incorporation. Each step requires diligent planning and execution to ensure the company’s smooth establishment and future operations.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
The Memorandum of Association is a fundamental document in the formation of a company. It defines the constitution, powers, and objects of the company. The Memorandum of Association serves as a blueprint that guides the company in achieving its objectives and lays down its boundaries.
Clauses of the Memorandum of Association
Name Clause: This clause specifies the name of the company. The name must not be identical or too similar to an existing company’s name and should typically end with ‘Limited’ for public companies and ‘Private Limited’ for private companies.
Registered Office Clause: This indicates the state where the registered office of the company is situated. It serves as the official address for all correspondence and legal processes.
Objects Clause: This is a critical clause as it defines the objectives for which the company is formed. It lays down the primary and ancillary purposes of the company. Any activity taken up by the company not in line with its objectives is considered ultra vires (beyond its powers) and is void.
Liability Clause: This clause states the liability of the members of the company. It defines the extent to which a member can be called upon to contribute in case the company winds up. In most companies, this liability is limited to the amount unpaid on the shares held by them.
Capital Clause: This clause mentions the maximum capital that the company is authorized to raise, dividing it into shares of a fixed value. It provides details about the total share capital, types of shares, and their nominal value.
Association and Subscription Clause: This clause contains details of the initial shareholders of the company. It lists the names, addresses, and occupations of the subscribers to the Memorandum who are also the initial shareholders of the company. They also indicate the number of shares they agree to subscribe to.
In essence, the Memorandum of Association is a pivotal document that demarcates the scope of operations of a company, ensuring that it acts within the stipulated boundaries and towards the achievement of its objectives.
4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
The following are the differences between Memorandum of Association and Articles of Association
Basis of Difference
Memorandum of Association
Articles of Association
Defines the objects for which the company is formed.
Rules of internal management of the company. Indicates how the objectives of the company are to be achieved.
This is the main document of the company and is subordinate to the Companies Act.
This is a subsidiary document and is subordinate to both the Memorandum of Association and the Companies Act.
Defines the relationship of the company with outsiders.
Defines the relationship of the members and the company.
Acts beyond the Memorandum of Association are invalid and cannot be ratified even by a unanimous vote of the members.
Acts which are beyond Articles can be ratified by the members, provided they do not violate the Memorandum.
Every company has to file a Memorandum of Association.
It is not compulsory for a public ltd. company to file Articles of Association. It may adopt Table F of The Companies Act, 2013
The Memorandum of Association and the Articles of Association are two cornerstone documents essential for the establishment and functioning of a company. While the Memorandum outlines the company’s relationship with the outside world and its foundational structure, the Articles provide a detailed internal governance mechanism, guiding the company’s operations and administration.
5. What is the meaning of ‘Certificate of Incorporation’?
The Certificate of Incorporation is a significant document issued by the Registrar of Companies, symbolizing the birth of a company. Once the promoters of a company have completed all the required formalities for registration and the Registrar is satisfied with the submission of the application along with the necessary documents, the Certificate of Incorporation is granted to the company. This certificate serves as conclusive evidence of the company’s legal existence.
From the date mentioned on the Certificate of Incorporation, the company comes into legal existence and is recognized as an individual legal entity with perpetual succession. This means that the company is entitled to enter into valid contracts from this date. It is essential to note that regardless of any deficiency or flaw in its registration, once the Certificate of Incorporation is issued, it stands as undeniable evidence of the company’s existence. Even if there are discrepancies in the registration process or if a company is registered with illegal objectives, the certificate’s authenticity and the company’s existence cannot be questioned. The only remedy in such situations is to wind up the company.
To draw an analogy, the Certificate of Incorporation can be likened to the birth certificate of an individual, marking the official beginning of the company’s life.
6. Discuss the stages of formation of a company?
The process of forming a company is elaborate and involves several stages. These stages are sequential and each stage is crucial for the smooth functioning of the company in the future. The stages of company formation, as described in the provided content, are as follows:
Promotion: The first stage, promotion, involves conceiving a business idea and then taking steps to implement this idea. The individuals who undertake this task are known as promoters. During this phase, the feasibility of the business idea is assessed, preliminary contracts are entered into, and necessary capital is arranged.
Incorporation: This is the stage where the company is formally registered. Promoters apply for the incorporation of the company by submitting essential documents to the Registrar of Companies. These documents include the Memorandum of Association, Articles of Association, consent of proposed directors, and evidence of payment of registration fees. Once the Registrar is satisfied with the provided documents, the Certificate of Incorporation is issued, marking the birth of the company.
Capital Subscription: After incorporation, a public company can raise funds from the public by issuing securities. To do this, the company has to obtain approval from SEBI and then issue a prospectus which invites the public to subscribe to the capital of the company. This stage involves various other sub-steps like appointment of bankers, brokers, and underwriters, ensuring minimum subscription is met, applying to stock exchanges, and allotment of shares.
Commencement of Business: Before starting its business operations, both public and private companies must obtain the certificate for the commencement of business. This is obtained from the Registrar of Companies. Only after receiving this certificate can the company commence its business and operational activities.
Throughout these stages, there are several legal formalities and requirements that need to be fulfilled. Each stage ensures that the company is set up correctly and operates within the boundaries of the law, ensuring a strong foundation for its future endeavors.
Find out from the office of the Registrar of Companies, the actual procedure for formation of companies. Does it match with what you have studied. What are the obstacles which companies face in getting themselves registered.
Project Report on the Procedure for Formation of Companies
1. Introduction:
The formation of a company involves a series of stages, starting from its inception as an idea to its actual commencement of business. This project aims to compare the theoretical understanding of the process as learned in class with the practical aspects experienced by companies during the registration process.
2. Objectives of the Study:
To understand the actual procedure for the formation of companies from the Registrar of Companies.
To compare this procedure with the theoretical knowledge acquired in class.
To identify the challenges and obstacles faced by companies during their registration process.
3. Methodology:
A visit was conducted to the office of the Registrar of Companies. Interviews were held with officials, and data was collected regarding the process of company formation.
4. Findings:
4.1 Actual Procedure for Formation of Companies:*
The procedure is almost similar to what we’ve studied with minor differences:
Name Approval: An application is made to reserve a unique name for the company.
Submission of Documents: Essential documents including the Memorandum of Association, Articles of Association, and others are submitted.
Payment of Fees: Depending on the authorized capital of the company, requisite fees are paid.
Verification by the Registrar: The Registrar verifies the submitted documents.
Certificate of Incorporation: Upon successful verification, the Certificate of Incorporation is issued.
Commencement of Business (for public companies): A further certificate for the commencement of business is needed before starting operations.
4.2 Comparison with Classroom Study:
The actual procedure aligns closely with the theoretical knowledge. The basic steps remain the same, although there might be additional documentation or nuances which are more administrative in nature.
4.3 Obstacles faced by Companies:
Name Approval: Often, the desired name is already taken, or it is too generic.
Documentation Errors: Incomplete or incorrect submission of documents leads to delays.
Delay in Verification: Due to a high volume of applications, there might be a backlog at the Registrar’s office.
Frequent Regulatory Changes: Companies have to stay updated with the latest changes in rules and regulations.
Fees and Costs: Sometimes the registration fees, especially for larger companies with high authorized capital, can be significant.
5. Conclusion:
The theoretical understanding provided a solid foundation to grasp the actual process of company formation. While the core steps remain consistent, understanding the practical challenges gives a holistic view of the process. It’s essential for companies to be meticulous during the registration process to avoid delays and ensure a smooth start to their business journey.
6. Recommendations:
Companies should conduct thorough research before selecting a name.
Seeking legal advice or consultation during the registration process can help avoid common pitfalls.
Staying updated with the latest regulatory changes will ensure compliance and smooth registration.