NCERT Class 11 Business Studies Formation of a Company

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Modern day business requires large amount of money. Also, due to increasing competition and fast changing technological environment, the element of risk is increasing. As a result, the company form of organisation is being preferred by more and more business firms, particularly for setting up medium and large sized organisations. The steps which are required from the time a business idea originates to the time, a company is legally ready to commence business are referred to as stages in the formation of a company. Those who are taking these steps and the associated risks are promoting a company and are called its promoters. The present chapter describes in some details the stages in the formation of a company and also the steps required to be taken in each stage so that a fair idea about these aspects can be made.


As discussed in an earlier chapter on ‘Forms of organisations’, formation of a company is a complex activity involving completion of a lot of legal formalities and procedures. To fully understand the process one can divide the formalities into four distinct stages, which are: (i) P r o m o t i o n ; (ii) Incorporation; (iii) Subscription of capital; and (iv) Commencement of business. It may, however, be noted that these stages are appropriate from the point of view of formation of a public limited company. As far as the private limited companies are concerned only the first two stages mentioned above are appropriate. In other words, a private company can start its business immediately after obtaining the certificate of incorporation. As it is prohibited to raise funds from public, it does not need to issue a prospectus and complete the formality of minimum subscription. A public company, on the other hand, goes through the capital subscription stage and then receives the certificate of commencement. Thus, it has to undergo all the four stages. In the next section, we shall discuss these four stages in the formation of a company in some detail.

7.2.1 Promotion of a Company

Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Thus, it begins with somebody having discovered a potential business opportunity. Any person or a group of persons or even a company may have discovered an opportunity. If such a person or a group of persons or a company proceeds to form a company, then, they are said to be the promoters of the company.


Multiple Choice Questions

1. Minimum number of members to form a private company is

(a) 2 (b) 3

(c) 5 (d) 7

2. Minimum number of members to form a public company is

(a) 5 (b) 7

(c) 12 (d) 21

3. Application for approval of name of a company is to be made to

(a) SEBI (b) Registrar of Companies

(c) Government of India (d) Government of the State in which Company is to be registered

4. A proposed name of Company is considered undesirable if

(a) It is identical with the name (b) It resembles closely with of an existing company the name of an existing company

(c) It is an emblem of Government (d) In case of any of the above of India, United Nations etc.

5. A prospectus is issued by

(a) A private company (b) A public company seeking investment from public

(c) A public enterprise (d) A public company

6. Stages in the formation of a public company are in the following order

(a) Promotion, Commencement (b) Incorporation, Capital of Business, Incorporation, Subscription, Capital Subscription Commencement of Business, Promotion

(c) Promotion, Incorporation, (d) Capital Subscription,

Capital Subscription, Promotion, Incorporation, Commencement of Business Commencement ofBusines 

7. Preliminary Contracts are signed

(a) Before the incorporation (b) After incorporation but before capital subscription

(c) After incorporation but before (d) After commencement of commencement of business business

8. Preliminary Contracts are

(a) binding on the Company (b) binding on the Company, if ratified after incorporation

(c) binding on the (d) not binding on the Company, after incorporation Company

True/False Answer Questions

1. It is necessary to get every company incorporated, whether private or public.

2. Statement in lieu of prospectus can be filed by a public company going for a public issue.

3. A private company can commence business after incorporation.

4. Experts who help promoters in the promotion of a company are also called promoters.

5. A company can ratify preliminary contracts after incorporation.

6. If a company is registered on the basis of fictitious names, its incorporation is invalid.

7. ‘Articles of Association’ is the main document of a company.

8. Every company must file Articles of Association.

9. A provisional contract is signed by promoters before the incorporation of the company.

10. If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members.

Short Answer Questions

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

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

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

4. Explain the term, ‘Minimum Subscription’.

5. Briefly explain the term ‘Return of Allotment’.

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

7. Distinguish between ‘preliminary contracts’ and ‘provisional contracts’.

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.

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

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

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

5. What is the effect of conclusiveness of the ‘Certificates of Incorporation’ and ‘Commencement of Business’?

6. Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission?

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