NCERT Solutions for Class 11

Business Studies

Chapter 7 – Formation of a Company

Questions 1-9: True/False Answer Questions

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

Ans: True.
Every company must be incorporated since it can only lawfully begin doing business
after it has been registered with the registrar of companies.

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

public issue.
Ans: False.
A prospectus must be filed with the Registrar of Companies by a public limited
company seeking applications from the general public to subscribe to its shares or
debentures.

3. A private company can commence business after incorporation.

Ans: False.

After incorporation, not every firm is able to begin operations. Only when a private
business is incorporated does it become a legal entity. As a result, only a private firm
may start doing business right away after formation.

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

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Ans: False.
A promoter is a person who comes up with the concept for forming a firm and takes
actions to make it happen. Experts who assist promoters in marketing a firm, on the
other hand, are not called promoters. They are just there to help the promoters.

5. A company can ratify preliminary contracts after incorporation.

Ans: False.

The company's preliminary contracts, often known as pre-incorporation contracts,

are not legally enforceable. A preliminary contract cannot be ratified by a firm.

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

is invalid.
Ans: False.

A company's incorporation is null and void, if it is based on fake names. This is due
to the fact that once a certificate of incorporation is granted, it cannot be challenged.

7. 'Articles of association' is the main document of a company.

Ans: False.
The company's principal document is not the 'Articles of Association.' The
memorandum of association, on the other hand, is a company's most significant
document.

8. Every company must file Articles of Association.

Ans: False.

It is not necessary for every business to submit articles of association (AOA). The
firm may use Table A of the Companies Act instead of AOA.

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9. 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.
Ans: False.

A company's shareholders are responsible only up to the amount of unpaid dividends

on the shares they own.

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

Ans: The different stages in the formation of company are:

● Promotion
● Incorporation

● Subscription of capital
● Commencement of Business

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

Ans: The documents needed for registration for incorporation.

● Memorandum of Association: The Memorandum of Association duly

stamped, signed, and witnessed. In the case of a public business, it must be
signed by at least seven members. For a private business, however, two
members' signatures are sufficient.

● Articles of Association: As with the Memorandum, the Articles of

Association must be legally stamped and witnessed. This is also a very
important document for the company that describes the way through which
the objectives of MOA could be achieved.

● Director’s Approval: The prospective directors' written approval to serve as

directors, as well as an agreement to purchase qualification shares. The
proposed Managing Director, Manager, or whole-time director's agreement,
if any also needed.

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 ● List of Directors: The names, addresses and all the details of the persons who
have agreed to become and work as directors are provided.

● Registrar's Letter: A copy of the Registrar's letter approving the name of the
company.

● Statutory Declaration: A statutory declaration attesting to the fact that all

registration requirements have been met. This must be duly signed.

● Documentary Evidence: Documentary evidence of payment of registration

fees.

● Prospectus: If a company wants to raise money from the public, prospectus

is also needed.

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

Ans: A prospectus is a company's announcement or invitation to the general public
to subscribe for or acquire the company's shares or debentures. The initial public
offering (IPO) is the process through which a public business can raise the money it
requires.
It is not necessary for every company to file a prospectus, as a private business does
not need to submit a prospectus since it is barred from collecting capital from the
public. A prospectus is only necessary for a firm that needs to obtain cash from the
general public by issuing shares or debentures.

13. Briefly explain the term 'Return of Allotment'.

Ans: Return of Allotment is a statement in which the names, addresses, the number
of shares allotted to the shareholders is mentioned. It is signed by a director or
secretary and is filed with the Registrar of Companies(ROC) within 30 days of
allotment. It shows that the company has received the minimum subscription.

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

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Ans: A company interacts with SEBI (Securities and Exchange Board of India) in
the third stage of formation of the company, that is Capital Subscription, as SEBI
clearance is required to raise funds from the public. The company is supposed to
abide by the rules and guidelines provided by SEBI so as to protect the investors'
interests. Thus, it is necessary for the company to get SEBI's approval before
proceeding with capital subscription.

15. What is meant by the term 'Promotion'? Discuss the legal position of
promoters with respect to a company promoted by them.
Ans: Promotion is the preliminary step in the formation of a company. Promotion
of company means taking all the necessary steps to incorporate a company as per the
provision of the Company Act,2013. The persons undertaking the task of promotion
are called Promoters. A promoter can be an individual, a partner, a company, an
association or a syndicate.
The legal position of promoters with respect to a company promoted by them are:

● The promoters are neither the trustees nor the agents of the company that they
are forming. Promoters are the ones who come up with the idea of starting a
business.
● They are expected to disclose profits, if any, made during the contracts
executed by him on behalf of the company he promotes.

● They are responsible for the preparation of various documents needed for the
incorporation of a company
● Promoters can be nominated as first directors of the company.
● They are not supposed to make any secret profit while promoting a company.

● A company may choose to allot shares to them in order to compensate for

their services.

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

Ans: Promoter is a person who undertakes the process of promotion of a company.
And who takes the necessary steps to accomplish that purpose.

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The steps are:

A. Identification of business opportunity

● The opportunity could be in the form of developing a new product or service,
making a product available through a new channel, or any other investment
opportunity.
● The technical and economic feasibility of the opportunity is next assessed.

B. Feasibility studies
● Converting all potential business ideas into actual projects may not be viable
or lucrative. As a result, the promoters do extensive feasibility assessments.
● The feasibility studies listed below may be carried out:

○ Technical feasibility: An excellent idea may be technically impossible

to implement. It could be due to a lack of readily available raw materials
like material, labour, location, infrastructure, or technology.

○ Financial viability: Every company activity necessitates the use of

capital. The promoters must calculate the amount of money needed to
pursue the recognised business idea. If money cannot be secured, the
project must be abandoned.

○ Economic feasibility: The project might be technically and financially

possible, but it may have a slim possibility of being profitable. Hence
this step focuses on the cost-benefit analysis of the company to find out
its future viability.

C. Name approval
● The promoters must choose a name for the company and file an application
for approval to the registrar of companies in the state where the firm's
registered office will be located.

● If the proposed name has been rejected, an alternate name may be accepted.

● In the application to the Registrar of Companies, three names are submitted

in priority order.

D. Fixing up Signatories to the Memorandum of Association:

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 ● The members who will sign the proposed company's Memorandum of
Association must be decided by the promoters.

● Those who sign the memorandum are also the company's first directors.

● Their signed consent to serve as Directors and to purchase the company's

qualification shares is required.

E. Appointment of professionals:
● The promoters select specialists such as mercantile bankers, auditors, and
others to assist them in preparing the essential documents that must be filed
with the Registrar of Companies.

F. Preparation of necessary documents:

● The promoter takes measures to prepare necessary legal documents that must
be submitted to the Registrar of Companies for the company to be registered
under the law.

● The Memorandum of Association, Articles of Association, and Consent of

Directors are the documents required.

17. What is 'Memorandum of Association'? Briefly explain its clauses.

Ans: Memorandum of Association is a primary document of a company as it state
the objectives of the company. The Memorandum is a document which describes the
constitution of the company and its rights or privileges. The Memorandum of
Association contains different clauses, which are:

The clauses of MOA are:

● Name Clause: This section contains the name of the business that has already
been approved by the Registrar of Companies.
● Registered office clause: It specifies the state in which the company's
registered office is proposed to be located. Although an exact address is not
required, it must be provided to the Registrar within thirty days of the
company's formation.

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 ● Object’s clause: This specifies the reason for the company's formation. A
firm is not legally permitted to engage in any action that is not related to the
objectives set forth in this clause.

● Liability clause: This clause restricts the members' liability to the amount
owed on the shares they own.

● Capital clause: This clause establishes the maximum amount of capital that
the company may raise through the issuance of shares. The proposed
company's permitted share capital, as well as its partition into the number of
shares with a fixed face value, is defined.

● Subscription Clause: The subscription provision, which is the sixth and last
clause of the MOA, shall declare the subscribers' intent to incorporate the
company and agree to take shares in the firm based on the number stated in
the Memorandum.

18. Distinguish between 'Memorandum of Association' and 'Articles of

Association.'
Ans: The difference between Memorandum of Association' and 'Articles of
Association is as follows:

Basis of Difference Memorandum of Article of Association

Association
Objectives The purposes for which The company's
the company's internal management is governed
rules are developed are by the articles of
defined in the association. They
Memorandum of describe how the
Association. company's goals will be
met.

Position This is the company's This is a supporting

primary document, and it document that exists
alongside the
Memorandum of

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 is governed by the Association and the
Companies Act. Companies Act.

Relationship The company's Articles clarify the

interaction with outsiders members' and company's
is defined by the connection.
Memorandum of
Association.

Validity Acts that go beyond the Members can ratify acts

Memorandum of that go beyond the
Association are void and Articles as long as they
cannot be ratified by the don't contradict the
members even if they Memorandum.
vote unanimously.

Necessity A Memorandum of Articles of Association

Association is required are not required to be
for every business. filed by a public limited
business. Table F of the
Companies Act of 2013
may be adopted.

19. What is the meaning of ‘Certificate of Incorporation?

Ans: Certificate of Incorporation is like the birth certificate of the company as the
company comes into existence from the date mentioned in the certificate.
The company now become a legal person distinct from its members. It becomes a
corporate body having perpetual succession from the date of its incorporation. 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. The Company can sue and be sued upon others in its
own name.

Effect of the Certificate of Incorporation

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 ● The date inscribed on the Certificate of Incorporation marks the beginning of
a company's legal existence.

● On that date, it becomes a legal entity with eternal succession. It gains the
ability to enter legally binding contracts.

● The Certificate of Incorporation is indisputable documentation of a company's

regular incorporation.

20. Discuss the stages of the formation of a company?

Ans: Formation of a company means registering or incorporating a company with
the Registrar of companies in the state where the company’s registered office is to
be located.
Following are the stages in formation of a company

A. Promotion:
● Promotion of a company means taking all the necessary steps to incorporate a
company as per the provision of the act. It begins with somebody having
discovered a potential business idea.
● The persons undertaking the task of promotion are called Promoters. A
promoter can be an individual, a partner, a company, an association or a
syndicate.
● He fulfils the following function:

○ Identification of business opportunity:

○ Feasibility studies:

○ Name approval:

○ Assembling the Memorandum of Association Signatories:

○ Appointment of professionals:

○ Preparation of necessary documents:

B. Incorporation:

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 ● Depending upon the objects of the company, scale of operation, amount of
capital needed, etc. The promoters decided whether to form a public company
or a private company.

● The application for registration of a company should be presented to the

Registrar of Companies in which the business office of the company is to be
situated.

● The date inscribed on the Certificate of Incorporation marks the beginning of

a company's legal existence.

● On that date, it becomes a legal entity with eternal succession. It gains the
ability to enter legally binding contracts.
● The Certificate of Incorporation is indisputable documentation of a company's
regular incorporation.

C. Commencement of Business:
● A public company and Private Companies not having a share capital can
commence its business activities immediately after it has received the
Certificate of Incorporation from the Registrar of companies.

● SEBI clearance is required to raise funds from the public. The Registrar of
Companies will receive a copy of the prospectus or a statement in lieu of the
prospectus. Bankers, brokers, underwriters, and other professionals are hired.
● A request for approval to trade in shares or debentures must be made to the
stock exchange.

● The company is also required to file verification of its registered office with
the Registrar.

21. Find out from the office of the Registrar of Companies, the actual procedure
for the formation of companies. Does it match with what you have studied?
What are the obstacles which companies face in getting themselves registered?
Ans: The Companies Act of 1956 establishes guidelines for the formation of both
public and private corporations. Yes, it matched with what we have studied in the
book.

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Obstacles while registering a company:
● Name availability, as at least 6 names has to be provided, as the proposed
names could be rejected if that name is already registered.

● Choosing the business type, as private limited, public limited, limited liability
partnership, sole proprietorship, franchise, partnership, etc.
● Ensuring the authenticity and accuracy of data in supporting documents while
registering.

● Deciding about the share structure, class of shares, types of shares etc.

● Framing a well-defined business description.

● Getting the DIN number.

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