CBSE Class 11 Business Studies Formation Of Company Worksheet

Very Short Answer Type Questions

Question. When a company is said to be born??
Answer : A company is legally born on the date printed on the Certificate of Incorporation. It becomes a legal entity with perpetual succession on such date. It becomes entitled to enter into valid contracts. The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation of a company

Question. What do you mean by Formation of the company?
Answer : Formation of a company is a complex activity involving completion of legal formalities and procedures. Involves three distinct stages, which are Promotion; Incorporation and Subscription of capital. Private company as against the public limited company is prohibited to raise funds from public, it does not need to issue a prospectus and complete the formality of minimum subscription

Question. Explain Financial feasibility?
Answer : Every business activity requires funds. The promoters have to estimate the fund requirements for the identified business opportunity. If not able to arrange funds, then project needs to be given up

Question. In a private company how many members must sign Memorandum of association?
Answer : For a private company the signatures of two members are sufficient

Short Answer Type Questions

Question. ‘Promoter enjoys a fiduciary position with the company’ Explain?
Answer : 
- Promoters of a company enjoy a fiduciary position with the company, which they must not misuse.
- They can make a profit only if it is disclosed but must not make any secret profits.
- In the event of a non-disclosure, the company can rescind the contract and recover the purchase price paid to the promoters.
- It can also claim damages for the loss suffered due to the non-disclosure of material information.
- Promoters are not legally entitled to claim the expenses incurred in the promotion of the company. However, the company may choose to reimburse them for the pre incorporation expenses.
- The company may also remunerate the promoters for their efforts by paying a lump sum amount or a commission on the purchase price of property purchased through them or on the shares sold.
- The company may also allot them shares or debentures or give them an option to purchase the securities at a future date

Question. Define Promoter?
Answer : According to Section 69, a promoter means a person
(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. However, it is provided that nothing in this subclause shall apply to a person who is acting merely in a professional capacity.

Long Answer Type Questions

Question. Mr. Mohan conceived an idea to start a garment business. He consulted a Company secretary to get the detail. Company secretary helped listing down Mr. Mohan’s function in the process of starting up the business. Explain briefly the function of promoter?
Answer :
1. Identification of business opportunity
- The opportunity may be in respect of producing a new product or service or making some product available through a different channel or any other opportunity having an investment potential.
- Opportunity is then analysed for its technical and economic feasibility.
2. Feasibility studies
- It may not be feasible or profitable to convert all identified business opportunities into real projects. The promoters, therefore, undertake detailed feasibility studies
- the following feasibility studies may be undertaken:
o Technical feasibility: an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available
o Financial feasibility: Every business activity requires funds. The promoters have to estimate the fund requirements for the identified business opportunity. If not able to arrange funds, then project needs to be given up
o Economic feasibility: Project is technically viable and financially feasible but the chance of it being profitable is very little.
3. Name approval
- The promoters have to select a name for it and submit, an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval
- Proposed name is not accepted but some alternate name may be approved.
- Three names in order of their priority are given in the application to the Registrar of Companies
4. Fixing up Signatories to the Memorandum of Association:
- Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company.
- People signing memorandum are also the first Directors of the Company.
- Their written consent to act as Directors and to take up the qualification shares in the company is necessary.
5. Appointment of professionals:
- Certain professionals such as mercantile bankers, auditors etc., are appointed by the promoters to assist them in the preparation of necessary documents which are required to be with the Registrar of Companies
6. Preparation of necessary documents:
- The promoter takes up steps to prepare certain legal documents, which have to be submitted under the law, to the Registrar of the Companies for getting the company registered.
- These documents are Memorandum of Association, Articles of Association and Consent of Directors.

Question. Distinguish between Memorandum of Association and article of association on the basis of objective, position, relationship, validity and necessity?
Answer :

1. ‘Promoter is not a trustee of the company, but he stands in a fiduciary relationship.’ Comment.

2. Smart Ltd. Invited general public to subscribe for its public issue of Rs.10 crores through issue of prospectus. It received applications for Rs. 45 lakhs shares. Can the company proceed with allotment of shares?

3. Merchant Ltd. was issued Certificate of Incorporation by the Registrar on 7th March. However, the date mentioned on the Certificate was 2nd March. The company entered into the contract for purchase of land with ABC Ltd. on 5th March. Now ABC Ltd. is not interested to sell the land as it is getting much higher price from another buyer. Can Merchant Ltd. file a case against ABC Ltd.?

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

5. Distinguish between preliminary contracts and provisional contracts.

6. Trendz industry has raised its entire authorized capital of Rs.10 crores through issue of shares. It is in severe need of funds. Can it issue more share capital to meet the shortage of funds?

7. Is it necessary for a private company to issue a prospectus or statement in lieu of prospectus?

8. What is the role of underwriters in the capital subscription stage of public limited company?

9. Is it necessary for every company to have its own Articles of Association?

10.Who are the first directors of the company?