SMILE COACHING CLASSES

CHAPTER- 2
FORMS OF BUSINESS ORGANISATION

COMPANY ORGANISATION:
Prof. Haney – “A company is an artificial person created by law, having separate entity, with a perpetual succession
and common seal.”
Section 2(20) of the Companies Act, 2013 defines a company to mean a company incorporated under this Act or under
any previous company law.
Features of company organisation:

FEATURE EXPLANATION
PREPETUAL Perpetual succession refers to the continuous existence of a company despite changes in
SUCCESSION its membership. The company remains unaffected by the death, insanity, insolvency, or
transfer of shares of its shareholders or directors until it is legally dissolved.
COMMON SEAL A common seal is an official seal used by a company as a substitute for signatures of
authorized representatives to signify the company's assent or approval to documents.
LIMITTED Limited liability means that the shareholders of a company are only liable to the extent of
LIABILITY the amount unpaid on their shares. Their personal assets are protected from the
company’s debts and liabilities.
SEPARATE LEGAL Separate legal entity means that a company is recognized by law as having its own legal
ENTITY identity, separate from its shareholders and directors.This feature allows a company to
own property, enter into contracts, sue, and be sued in its own name.
NO SECRECY No secrecy refers to the requirement for companies to disclose certain information to the
public. Companies are obligated to maintain transparency by providing details about their
operations, financial status, and ownership.
CONTROL AND Shareholders exercise control over company management through electing the board of
MANAGEMENT directors, voting on major decisions.
TRANSFERABILITY Shares can be freely transferred by shareholders, providing liquidity and flexibility.
Investors can easily buy and sell shares, making the company attractive to investors.

Merits and demerits of company organisation

The company is evaluated as follows:
MERITS DEMERITS
1. Limited Liability 1. Complex Formation Process: The process of
2. Perpetual Succession forming a company involves legal formalities,
3. Transferability of Shares documentation, and compliance with regulations.
4. Separate Legal Entity 2. Separation of Ownership and Management:
5. Professional Management: Companies can Shareholders (owners) may not be involved in day-
hire professional managers to run the to-day management, which is handled by
business, leading to better decision-making professional managers.
and efficiency. 3. Lack of Secrecy: Companies are required to
6. Ability to raise capital: Companies can disclose various financial and operational details to
raise substantial amounts of capital by the public.
issuing shares and debentures. 4. Oligarchic Management: In some cases, a small
group of individuals or a dominant shareholder
group may control the company. This can lead to
decisions that favour the controlling group over the
interests of the broader shareholder base.
 5. Delay in Decision-Making: Decision-making in
companies often involves multiple layers of
approval and consultation.

FORMATION OF A COMPANY:
There are 3 stages of company formation:

a. Promotion
Promotion refers to discovery of business opportunity and subsequent organisation of funds and other
managerial and financial resources to start a business.
The person or persons who do this are called “promoters”.
Promoters refers to person who conceives the idea of starting a business, scrutinizes financial and managerial
resources of business.
Functions of a promoter:
1. Identification of business idea:
The promoter discovers the idea of starting a business, expand the existing ones or merger planning.
2. Feasibility studies: It means to check if a project can be done successfully.
a. Technical Feasibility: It involves analysing that whether the technology is available for starting the
project.
b. Economic feasibility: It means analysing the profitability of project.
c. Financial feasibility: It means analysing whether we have the financial resources to start the project.
3. Name approval:
After that, promoters have to deposit 3 names to the Registrar of companies, ensuring that the name
doesn’t match the other company name.
IMPORTANT POINTS WHILE SELECTING THE NAME OF A COMPANY:
The name The name should The name should The name should The name
should not be not include word not be not convey any should end with
identical with “cooperative” objectionable connection with “limited” in case
other company. under Emblems govt. of public
and Names Act, undertaking. company and
1950. private limited
in case of private
company.
4. Fixing up signatories to the memorandum of association:
The promoters then decide who would be the persons to signature the “MEMORANDUM OF
ASSOCIATION”. They are called signatories and are the first directors of the company. In case of public
company, it is signed by 7 and in case of private it is signed by 2.
For promoting confidentiality, the directors also buy shares as per provisions of articles of association, these
are called QUALIFICATION SHARES.
5. Appointment of professional like brokers, underwriters is done.
6. Necessary documents are prepared like Memorandum of association, Articles of association.

MEMORANDUM OF ASSOCIATION
A Memorandum of Association (MOA) is a key legal document required for the incorporation of a company. It
outlines the fundamental conditions under which the company operates and includes essential information about the
company. Here’s a simplified explanation:
Memorandum of Association (MOA)
Purpose: The MOA defines the company’s relationship with the outside world and specifies the scope of its
activities.
Key Components
1. Name Clause:
o Specifies the name of the company, which must be unique and end with "Limited" if it’s a public
company or "Private Limited" if it’s a private company.
2. Registered Office Clause:
 o States the location of the company’s registered office, which determines the jurisdiction of the
company's legal matters.
3. Object Clause:
o Outlines the purpose and range of activities the company intends to engage in. It includes:
▪ Main Objects: The primary activities the company will undertake.
▪ Incidental or Ancillary Objects: Activities that support the main objects.
▪ Other Objects: Additional activities the company may pursue, although this is more
restricted in modern practice.
4. Liability Clause:
o Defines the liability of the company’s members. It states whether liability is limited to the amount
unpaid on their shares or if the company is limited by guarantee.
5. Capital Clause:
o Specifies the company’s authorized share capital, detailing the maximum amount of capital the
company can raise through the issuance of shares and the division of this capital into shares of a
fixed amount.
6. Association or Subscription Clause:
o Includes the names of the initial subscribers (founders) who agree to form the company and take at
least one share each. This clause signifies their intention to be part of the company

ARTICLE OF ASSOCIATION:
Purpose: The AOA provides the guidelines for the company's internal management and day-to-day operations.
Key Components
1. Share Capital:
o Details the types and classes of shares the company can issue, along with the rights attached to each
type of share.
2. General Meetings:
o Specifies the procedures for calling, conducting, and voting at general meetings of shareholders.
3. Board of Directors:
o Outlines the appointment, powers, and responsibilities of directors.
4. Dividends:
o Specifies the policy for declaring and distributing dividends to shareholders.
5. Accounts and Audit:
o Sets out the requirements for maintaining company accounts, financial reporting, and the audit
process.
6. Winding Up:
o Outlines the procedures for winding up the company, including the distribution of assets in case of
liquidation.
7. Miscellaneous Provisions:
o Covers various other rules such as the use of the company seal, indemnity for officers, and
amendment of the AOA.

b. Incorporation of company
It means registration of company. The process is described as follows:
1. FILLING OF DOCUMENTS:
All the necessary documents like MOA, AOA, notice of address registrar approval and consent of
directors are deposited.
2. PAYMENT OF FEES.
3. CERTIFICATE OF INCORPORATION.
After verification, registrar issues COI. As a result, company comes into existence. It also allots CIN to
company.
c. Capital Subscription:
A public company is allowed to issue its shares to public.
1. SEBI APPROVAL: The approval of security and exchange board of India is essential to invite public
applications.
2. SUBMISSION OF PROSPECTUS OR STATEMENT IN LIEU OF PROSPECTUS: Prospectus or its
alternative statement is to be deposited to the SEBI for verification.
A prospectus is a formal document that provides detailed information about a company’s
securities being offered for sale to the public. It is required by law and aims to help potential
investors make informed decisions.
3. APPROVAL OF BANKERS, BANKERS AND UNDERWRITER:
A. Brokers:
Purpose: To market and sell the company's securities to potential investors.
B. Bankers:
Purpose: To receive the application money of shares.
C. Underwriters:
Purpose: To guarantee the sale of securities and assume the risk of unsold shares.They
evaluate risks, purchase any unsold securities, and help set the price and structure of the
offering.
4. MINIMUM SUBSCRIPTION:
The 90% minimum subscription rule requires that a public company must receive applications for at least
90% of the total number of shares offered in its public issue. If this threshold is not met, the company
cannot proceed with the allotment of shares and must refund the application money to the investors.
5. APPLICATION TO STOCK EXCHANGE:
If the company wants to sell its shares to public, it had to take permission from at least one stock
exchange. If the company does not get permission within 10 weeks, then allotment will become void and
all money must be refunded within 80 days.
6. ALLOTMENT OF SHARES:
If application is accepted, shares will be allotted to public.