NCERT Solution for Class 11 Business Studies Chapter 7 – Formation of a Company

NCERT Solution for Class 11 Business Studies Chapter 7 – Formation of a Company

NCERT Solutions are an invaluable resource for students preparing for the CBSE Class 11 Business Studies exams. These solutions, curated by subject matter experts, provide comprehensive knowledge and are highly effective for exam preparation. NCERT Solutions for Class 11 Business Studies Chapter 7 – Formation of a Company offer a concise introduction to the fundamental concepts in Business Studies.

Short Answer Questions

Q. 1. Name the stages in the formation of a company.

Ans.

Stages in the Formation of a Company

1. Promotion:

This is the initial stage where the idea of forming a company is conceived. Promoters identify business opportunities, conduct feasibility studies, and take necessary steps to bring the company into existence. They also prepare essential documents like the Memorandum of Association and Articles of Association.

2. Incorporation:

Incorporation is the process of legally registering the company with the Registrar of Companies. This stage involves submitting the required documents, such as the Memorandum of Association, Articles of Association, and other prescribed forms. Once the Registrar approves the application, a Certificate of Incorporation is issued, signifying the birth of the company as a legal entity.

3. Subscription:

In the subscription stage, the company raises capital by inviting the public to subscribe to its shares. A prospectus is issued, providing details about the company, its objectives, and the terms of the share offering. The company must receive the minimum subscription amount to proceed further.

4. Commencement of Business:

After raising the necessary capital, the company obtains the Certificate of Commencement of Business from the Registrar of Companies. This certificate authorizes the company to start its business operations and carry out its activities as per its objectives.

In summary, the stages in the formation of a company are Promotion, Incorporation, Subscription, and Commencement of Business. These stages ensure that the company is legally established and adequately funded to start its operations.

Q. 2. List the documents required for the incorporation of a company.

Ans.

Documents Required for the Incorporation of a Company

1. Memorandum of Association (MoA):

• A document that outlines the company’s objectives, scope of activities, and relationship with shareholders.

2. Articles of Association (AoA):

• A document that contains the rules and regulations governing the internal management of the company.

3. Declaration of Compliance:

• A statement signed by a company director or secretary confirming that all legal requirements for incorporation have been met.

4. Affidavit from Subscribers:

• An affidavit signed by each subscriber to the Memorandum of Association, declaring their intent to subscribe to the company’s shares.

5. Address Proof:

• Proof of the registered office address of the company, such as a rental agreement or utility bill.

6. Director Identification Number (DIN):

• A unique identification number issued to each director of the company.

7. Digital Signature Certificate (DSC):

• An electronic signature used to sign digital documents, required for directors and authorized signatories.

8. Identity and Address Proof of Directors:

• Copies of identity and address proof documents for all directors, such as a passport, Aadhaar card, or driver’s license.

9. Consent to Act as Director:

• A written consent from each director agreeing to act as a director of the company.

In summary, the key documents required for the incorporation of a company include the Memorandum of Association, Articles of Association, Declaration of Compliance, Affidavit from Subscribers, Address Proof, Director Identification Number, Digital Signature Certificate, Identity and Address Proof of Directors, and Consent to Act as Director. These documents ensure that the company is legally established and complies with regulatory requirements.

Q. 3. What is a prospectus? Is it necessary for every company to file a prospectus?

Ans.

Prospectus

Definition: A prospectus is a legal document issued by companies that are offering securities (such as shares or debentures) to the public. It provides detailed information about the company, its financial status, the terms of the offering, and the risks involved, helping potential investors make informed decisions.

Contents of a Prospectus:

1. Company Information: Details about the company’s history, business activities, and management team.
2. Financial Statements: Information about the company’s financial performance and position.
3. Terms of the Offering: Details of the securities being offered, such as the price, number of shares, and the purpose of the issue.
4. Risk Factors: Potential risks associated with the investment.
5. Legal Information: Compliance with relevant laws and regulations.

Filing Requirement:

• It is not necessary for every company to file a prospectus. Only companies that are offering securities to the public are required to issue a prospectus. Private companies and those raising funds through private placements are exempt from this requirement.

In summary, a prospectus is a legal document that provides essential information about a company’s public offering of securities. It is only required for companies making a public offer, while private companies and those using private placements are exempt.

Q. 4. Briefly explain the term ‘Return of Allotment’.

Ans.

Return of Allotment

Definition: The term ‘Return of Allotment’ refers to a document that a company must file with the Registrar of Companies after allotting shares to its shareholders. This document provides details of the shares allotted, including the number of shares, the names of the allottees, and the amount paid for the shares.

Key Aspects:

1. Details of Allottees: Names and addresses of the individuals or entities to whom shares have been allotted.
2. Number of Shares: The quantity of shares allotted to each allottee.
3. Amount Paid: The consideration paid for the shares, whether in cash or other forms of payment.

Filing Requirement:

• Companies are required to file the Return of Allotment with the Registrar of Companies within a specified period, usually 30 days from the date of allotment.

In summary, the Return of Allotment is a mandatory document that records the details of share allotment and must be filed with the Registrar of Companies to comply with legal requirements.

Q. 5. At which stage in the formation of a company does it interact with SEBI.

Ans.

Interaction with SEBI in the Formation of a Company

Stage: The interaction with the Securities and Exchange Board of India (SEBI) occurs during the Subscription stage of the company’s formation. This is when the company is raising capital by offering securities to the public. Companies must comply with SEBI regulations to ensure that the securities offering is transparent and fair to investors. This includes filing the prospectus with SEBI and obtaining the necessary approvals.

Return of Allotment

Definition: The term ‘Return of Allotment’ refers to a document that a company must file with the Registrar of Companies after allotting shares to its shareholders. This document provides details of the shares allotted, including the number of shares, the names of the allottees, and the amount paid for the shares.

Key Aspects:

1. Details of Allottees: Names and addresses of the individuals or entities to whom shares have been allotted.
2. Number of Shares: The quantity of shares allotted to each allottee.
3. Amount Paid: The consideration paid for the shares, whether in cash or other forms of payment.

Filing Requirement:

• Companies are required to file the Return of Allotment with the Registrar of Companies within a specified period, usually 30 days from the date of allotment.

Conclusion:
In summary, the interaction with SEBI takes place during the Subscription stage when the company is raising capital from the public. The Return of Allotment is a mandatory document that records the details of share allotment and must be filed with the Registrar of Companies to comply with legal requirements.

Long Answer Questions

Q. 1. What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.

Ans.

Promotion

Definition:
Promotion refers to the initial stage in the formation of a company where the idea of creating a business entity is conceived and developed. This process is carried out by individuals known as promoters who undertake various activities to bring the company into existence. These activities include identifying business opportunities, conducting feasibility studies, gathering resources, and taking the necessary steps to incorporate the company.

Role of Promoters:
Promoters play a crucial role in the formation of a company. Their responsibilities include:

1. Identifying Business Opportunities: Promoters identify and evaluate potential business opportunities and decide on the type of company to be formed.
2. Feasibility Studies: They conduct market research, financial analysis, and feasibility studies to assess the viability of the business idea.
3. Preparing Essential Documents: Promoters prepare the Memorandum of Association and Articles of Association, which are critical documents for the incorporation of the company.
4. Arranging Capital: They arrange the necessary capital required to establish the company by approaching investors, financial institutions, or other sources of funding.
5. Obtaining Approvals: Promoters obtain the necessary approvals and licenses from regulatory authorities to incorporate the company.
6. Appointing Professionals: They appoint legal advisors, accountants, and other professionals to assist in the incorporation process.

Legal Position of Promoters

Fiduciary Relationship:
Promoters have a fiduciary relationship with the company they promote. This means they are expected to act in the best interest of the company and its future shareholders. They must exercise due care, diligence, and honesty in their dealings to avoid any conflict of interest.

Duties of Promoters:

1. Duty of Disclosure: Promoters must disclose any personal interest or profit they derive from transactions related to the company. They should provide full and accurate information to the company and its prospective shareholders.
2. Duty of Good Faith: Promoters are required to act in good faith and avoid any actions that could harm the interests of the company. They should not exploit their position for personal gain.
3. Duty of Care and Skill: Promoters should exercise due care, skill, and diligence in performing their duties. They should ensure that all actions taken are in the best interest of the company.

Liabilities of Promoters:

1. Misrepresentation: If promoters make false statements or misrepresent facts in the prospectus or other documents, they can be held liable for any resulting losses suffered by investors.
2. Breach of Duty: Promoters can be held accountable for any breach of their fiduciary duties, such as failing to disclose personal interests or acting in bad faith.
3. Contracts Made on Behalf of the Company: Promoters may enter into contracts on behalf of the company before its incorporation. These contracts are known as pre-incorporation contracts. The company, once incorporated, may choose to adopt these contracts. If the company does not adopt them, promoters may be personally liable for fulfilling the terms of these contracts.

Remedies Against Promoters:

1. Rescission of Contract: If promoters have breached their duties or engaged in fraudulent activities, the company can rescind (cancel) contracts entered into with them.
2. Recovery of Secret Profits: The company can claim any secret profits made by promoters as a result of their position.
3. Damages: The company can seek damages from promoters for any losses incurred due to their breach of duties or misrepresentation.

Conclusion:
In conclusion, promotion is the initial stage in the formation of a company, where promoters play a vital role in bringing the company into existence. Promoters have a fiduciary relationship with the company and are expected to act in its best interest with honesty, care, and diligence. They have specific duties and can be held liable for any breach of these duties. The legal position of promoters ensures that they fulfill their responsibilities ethically and transparently, contributing to the successful formation and operation of the company.

Q. 2. Explain the steps taken by promoters in the promotion of a company.

Ans.

Steps Taken by Promoters in the Promotion of a Company

Introduction:
Promotion is the first stage in the formation of a company, where promoters play a pivotal role in bringing the company into existence. Promoters are the individuals or groups who conceive the idea of the business and take the necessary steps to establish the company. The promotion process involves various activities aimed at laying the foundation for the company’s incorporation and subsequent operations.

1. Identifying Business Opportunities:
Promoters begin by identifying potential business opportunities and evaluating their feasibility. They analyze market trends, assess demand and supply gaps, and determine the viability of the business idea. This step involves thorough research and due diligence to ensure that the proposed business has the potential for success.

2. Conducting Feasibility Studies:
Once a business opportunity is identified, promoters conduct detailed feasibility studies to evaluate the technical, financial, and economic aspects of the project. This includes preparing a business plan, estimating capital requirements, forecasting revenue and expenses, and assessing potential risks and challenges.

3. Assembling a Team of Professionals:
Promoters engage a team of professionals, including legal advisors, accountants, and consultants, to assist in the promotion process. These professionals provide expert guidance on various aspects of company formation, such as legal compliance, financial planning, and project execution.

4. Preparing Essential Documents:
Promoters prepare the necessary documents required for the incorporation of the company. The key documents include the Memorandum of Association (MoA) and the Articles of Association (AoA). The MoA outlines the company’s objectives, scope of activities, and relationship with shareholders, while the AoA contains the rules and regulations governing the internal management of the company.

5. Arranging Capital:
Promoters arrange the initial capital required to establish the company. This may involve approaching investors, financial institutions, or venture capitalists to secure funding. Promoters may also contribute their own funds or seek financial support from family and friends.

6. Selecting the Company Name:
Promoters select a unique and appropriate name for the company, ensuring that it complies with legal requirements and does not infringe on any existing trademarks. The proposed name is then submitted to the Registrar of Companies for approval.

7. Filing Incorporation Documents:
Once the necessary documents are prepared and the company name is approved, promoters file the incorporation documents with the Registrar of Companies. This includes submitting the Memorandum of Association, Articles of Association, and other prescribed forms. The Registrar reviews the documents and, if satisfied, issues the Certificate of Incorporation.

8. Appointing Directors and Key Personnel:
Promoters appoint the initial directors and key personnel who will be responsible for managing the company’s operations. They ensure that the appointed individuals have the necessary skills, experience, and qualifications to lead the company effectively.

9. Obtaining Necessary Licenses and Approvals:
Promoters obtain the required licenses and approvals from regulatory authorities to commence business operations. This may include obtaining permits for specific industries, environmental clearances, and compliance with industry-specific regulations.

10. Launching the Business:
After completing the above steps, the company is ready to launch its operations. Promoters ensure that all necessary arrangements are in place, including office space, equipment, and staffing. They also initiate marketing and promotional activities to create awareness about the company’s products or services.

Conclusion:
In conclusion, the promotion of a company involves a series of steps taken by promoters to establish the business. These steps include identifying business opportunities, conducting feasibility studies, assembling a team of professionals, preparing essential documents, arranging capital, selecting the company name, filing incorporation documents, appointing directors and key personnel, obtaining necessary licenses and approvals, and launching the business. The role of promoters is crucial in laying the foundation for the successful formation and operation of the company. By following these steps, promoters ensure that the company is legally established and well-prepared to achieve its business objectives.

Q. 3. What is a ‘Memorandum of Association’? Briefly explain its clauses.

Ans.

Memorandum of Association

Definition:
The Memorandum of Association (MoA) is a fundamental legal document that lays down the constitution of a company. It defines the scope of the company’s activities and its relationship with the external world. The MoA is essential for the incorporation of a company and must be submitted to the Registrar of Companies during the registration process.

Clauses of the Memorandum of Association:
The Memorandum of Association comprises several key clauses that define various aspects of the company. These clauses include:

1. Name Clause:
The Name Clause specifies the name of the company. The name must be unique and comply with the regulations set by the Registrar of Companies. For example, a private limited company’s name must end with “Private Limited” or “Pvt. Ltd.”

2. Registered Office Clause:
The Registered Office Clause states the location of the company’s registered office. This address is where official communications and notices will be sent. The company must maintain its registered office within the jurisdiction of the Registrar with which it is registered.

3. Objects Clause:
The Objects Clause defines the objectives and activities that the company intends to pursue. It outlines the main business activities as well as any ancillary or incidental activities that support the primary objectives. This clause ensures that the company’s actions remain within the defined scope.

4. Liability Clause:
The Liability Clause specifies the extent of liability of the company’s members. In a company limited by shares, the liability of members is limited to the amount unpaid on their shares. In a company limited by guarantee, the liability is limited to the amount members have agreed to contribute in the event of the company’s winding up.

5. Capital Clause:
The Capital Clause states the total amount of capital the company is authorized to raise through the issuance of shares. It includes the division of this capital into shares of a fixed value, such as “Rs. 10 each.”

6. Association Clause:
The Association Clause, also known as the Subscription Clause, contains a declaration by the initial subscribers to the Memorandum of Association. It states that they are desirous of forming the company and agree to take up the shares mentioned against their names.

Conclusion:
In conclusion, the Memorandum of Association is a crucial document that defines the constitution and scope of a company. It comprises several key clauses, including the Name Clause, Registered Office Clause, Objects Clause, Liability Clause, Capital Clause, and Association Clause. These clauses collectively outline the company’s identity, objectives, and the extent of its members’ liabilities. The MoA serves as the foundation of the company’s legal structure and governs its interactions with the external world. By adhering to the provisions of the Memorandum of Association, companies can ensure that their activities remain within the defined legal framework.

Q. 4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’

Ans.

Distinction between Memorandum of Association and Articles of Association

Introduction:
The Memorandum of Association (MoA) and the Articles of Association (AoA) are two fundamental documents required for the incorporation and governance of a company. While both documents are essential, they serve different purposes and have distinct legal implications. Understanding the differences between them is crucial for comprehending the legal framework of a company.

1. Definition:

• Memorandum of Association (MoA): The MoA is a legal document that defines the constitution of the company and specifies the scope of its activities. It outlines the company’s objectives, powers, and relationship with the external world.
• Articles of Association (AoA): The AoA is a legal document that contains the rules and regulations governing the internal management of the company. It outlines the rights, duties, and responsibilities of the company’s members and officers.

2. Purpose:

• MoA: The primary purpose of the MoA is to define the company’s objectives and the scope of its activities. It serves as a charter for the company and ensures that the company’s actions remain within the defined boundaries.
• AoA: The primary purpose of the AoA is to regulate the internal management and administration of the company. It provides a framework for the conduct of meetings, the appointment of directors, and other internal procedures.

3. Content:

• MoA: The MoA contains several key clauses, including the Name Clause, Registered Office Clause, Objects Clause, Liability Clause, Capital Clause, and Association Clause.
• AoA: The AoA includes provisions related to the conduct of general meetings, voting rights, appointment and removal of directors, dividend distribution, and other internal management matters.

4. Legal Status:

• MoA: The MoA is a fundamental document that cannot be easily altered. Any changes to the MoA require approval from the shareholders and, in some cases, the regulatory authorities.
• AoA: The AoA is a flexible document that can be amended by passing a special resolution at a general meeting of the shareholders.

5. Scope:

• MoA: The MoA defines the external boundaries of the company’s operations and specifies the activities the company can undertake. It serves as a public document that informs stakeholders about the company’s objectives and powers.
• AoA: The AoA focuses on the internal management of the company and regulates the relationship between the company’s members and officers. It serves as a private document that provides guidelines for the company’s internal governance.

6. Binding Effect:

• MoA: The MoA is binding on the company, its members, and outsiders. It defines the company’s legal capacity and limits its actions to those specified in the Objects Clause.
• AoA: The AoA is binding on the company and its members. It governs the internal administration and management of the company, ensuring that the company’s operations are conducted in accordance with the prescribed rules.

Conclusion:
In conclusion, the Memorandum of Association and the Articles of Association are two distinct legal documents that serve different purposes in the formation and governance of a company. The MoA defines the company’s constitution, objectives, and external scope of activities, while the AoA outlines the rules and regulations for the internal management and administration of the company. Understanding the differences between these documents is essential for comprehending the legal framework within which a company operates. Together, the MoA and AoA provide a comprehensive foundation for the company’s operations and governance.

Q. 5. What is the meaning of ‘Certificate of Incorporation’?

Ans.

Certificate of Incorporation

Definition:
The Certificate of Incorporation is a legal document issued by the Registrar of Companies that signifies the official formation and registration of a company. It serves as a conclusive piece of evidence that the company has complied with all the statutory requirements for incorporation and is now recognized as a separate legal entity under the Companies Act.

Key Elements:

1. Company Name: The Certificate of Incorporation includes the officially approved name of the company.
2. Registration Number: A unique identification number assigned to the company by the Registrar.
3. Date of Incorporation: The date on which the company is officially registered.
4. Type of Company: The certificate specifies the type of company, such as private limited, public limited, or any other classification.
5. Registered Office Address: The official address of the company’s registered office.

Importance of Certificate of Incorporation:

1. Legal Status: The Certificate of Incorporation provides the company with legal recognition and status. It marks the company’s existence as a separate legal entity, distinct from its owners and promoters.
2. Perpetual Succession: With the issuance of the Certificate of Incorporation, the company acquires perpetual succession, meaning its existence is not affected by changes in ownership or the death of its members.
3. Limited Liability: The certificate ensures that the liability of the company’s shareholders is limited to the amount they have invested in the company. This protection encourages investment and entrepreneurship.
4. Right to Conduct Business: The Certificate of Incorporation grants the company the legal right to commence business operations and enter into contracts.
5. Access to Capital: Incorporated companies can raise capital by issuing shares to the public or private investors, enhancing their ability to grow and expand.

Process of Obtaining Certificate of Incorporation:

1. Preparation of Documents: Promoters prepare and submit essential documents, such as the Memorandum of Association (MoA), Articles of Association (AoA), and other prescribed forms, to the Registrar of Companies.
2. Name Approval: The proposed name of the company is submitted to the Registrar for approval. Once approved, it is included in the incorporation documents.
3. Submission and Verification: The incorporation documents are submitted to the Registrar, who verifies their completeness and compliance with legal requirements.
4. Issuance of Certificate: Upon satisfactory verification, the Registrar issues the Certificate of Incorporation, officially recognizing the company as a legal entity.

Conclusion:
In conclusion, the Certificate of Incorporation is a crucial legal document that signifies the official formation and registration of a company. It provides the company with legal recognition, perpetual succession, limited liability, and the right to conduct business. The process of obtaining the certificate involves preparing and submitting essential documents, obtaining name approval, and undergoing verification by the Registrar of Companies. With the issuance of the Certificate of Incorporation, the company is legally empowered to commence its operations and pursue its business objectives.

Q. 6. Discuss the stages of formation of a company?

Ans.

Stages of Formation of a Company

Introduction:
The formation of a company is a systematic process that involves several stages to legally establish the company and enable it to commence business operations. Understanding these stages is crucial for comprehending how a company evolves from a business idea into a legal entity. The key stages in the formation of a company are Promotion, Incorporation, Subscription, and Commencement of Business.

1. Promotion:
Promotion is the initial stage where the idea of forming a company is conceived and developed by promoters. Promoters are individuals or groups who undertake the following activities to bring the company into existence:

• Identifying Business Opportunities: Analyzing market trends and identifying potential business opportunities.
• Conducting Feasibility Studies: Evaluating the technical, financial, and economic viability of the business idea.
• Assembling a Team of Professionals: Engaging legal advisors, accountants, and consultants to assist in the formation process.
• Preparing Essential Documents: Drafting the Memorandum of Association (MoA) and Articles of Association (AoA).
• Arranging Capital: Securing initial capital from investors or financial institutions.
• Selecting the Company Name: Choosing a unique and appropriate name for the company and obtaining approval from the Registrar of Companies.

2. Incorporation:
Incorporation is the process of legally registering the company with the Registrar of Companies. This stage involves the following steps:

• Filing Incorporation Documents: Submitting the MoA, AoA, and other prescribed forms to the Registrar of Companies.
• Verification and Approval: The Registrar reviews the documents for completeness and compliance with legal requirements.
• Issuance of Certificate of Incorporation: Upon satisfactory verification, the Registrar issues the Certificate of Incorporation, which signifies the official formation of the company as a legal entity.

3. Subscription:
Subscription is the stage where the company raises capital by inviting the public to subscribe to its shares. This process involves:

• Issuing a Prospectus: The company issues a prospectus to provide detailed information about the company and the terms of the share offering.
• Receiving Applications: Potential investors submit applications to purchase shares.
• Allotting Shares: The company allocates shares to the applicants based on the received applications.
• Filing Return of Allotment: The company files the Return of Allotment with the Registrar of Companies, detailing the shares allotted and the names of the allottees.

4. Commencement of Business:
Commencement of Business is the final stage where the company starts its business operations. This stage involves:

• Obtaining Certificate of Commencement of Business: For public companies, obtaining this certificate from the Registrar of Companies is mandatory to begin business activities.
• Launching Operations: The company initiates its business activities, including production, sales, and marketing, as per its objectives outlined in the MoA.

Conclusion:
In conclusion, the formation of a company involves several stages, each with specific activities and legal requirements. The stages include Promotion, where the business idea is conceived and developed; Incorporation, where the company is legally registered; Subscription, where capital is raised from the public; and Commencement of Business, where the company begins its operations. Understanding these stages is essential for grasping the comprehensive process of establishing a company as a legal entity and ensuring its successful operation. By following these steps, promoters and entrepreneurs can lay a strong foundation for the company’s growth and sustainability.