Class 11 Business Studies Notes for Chapter 7 Formation of a Company
Get Class 11 Business Studies Notes, Questions and Practice Papers for Chapter 7 Formation of a Company. Candidates who want to pass Class 11 with a good grade can use this article for Notes, Questions, and Practice Papers.
We have provided access to the Class 11 Business Studies Notes, Important Questions and Practice Paper on Chapter 7 Formation of a Company. You can practise the questions and check your answers using the solutions provided after each question.
Chapter Definitions and Short Notes
Chapter 7 Formation of a Company – Short Notes and Definitions
Formation of a Company
In today’s fast-paced and competitive business environment, establishing a company involves considerable financial resources and faces increasing risks due to technological advancements. The formation of a company is a preferred organisational structure for medium to large businesses.
This process includes several steps, from the initial business idea to the point where the company is legally established and ready to operate. Individuals who undertake these steps and handle the associated risks are known as the company’s promoters. The formation process is divided into stages, each requiring specific actions to ensure the company is set up correctly.
Short Pointers:
- Modern businesses require a significant amount of money and face growing risks from competition and technological changes.
- The company form of organisation is increasingly preferred for medium and large businesses.
- The formation of a company involves steps from the initial idea to legal establishment.
- Promoters are individuals who take the steps and risks to establish the company.
- Understanding the stages of forming a company helps in setting up a business properly.
Stages in the Formation of a Company
The formation of a company is a detailed process that requires the completion of several legal formalities and procedures. This process can be broadly divided into three main stages: Promotion, Incorporation, and Subscription of Capital.
During the Promotion stage, the initial idea is developed and its feasibility is assessed. The incorporation stage involves the legal establishment of the company, including registration and obtaining the necessary licences.
The Subscription of Capital stage is where the company secures its initial funding. It is important to note that private companies, in contrast to public limited companies, are restricted from raising funds publicly, and therefore, they do not have to issue a prospectus or complete minimum subscription formalities.
Short Pointers:
- The formation of a company involves complex legal formalities, divided into three stages: Promotion, Incorporation, and Subscription of Capital.
- Promotion: Developing the business idea and assessing its feasibility.
- Incorporation: Legal establishment of the company, including registration.
- Subscription of Capital: Securing initial funding for the company’s operations.
- Private companies differ from public limited companies in that they cannot raise funds from the public and are exempt from issuing a prospectus or completing minimum subscription requirements.
Promotion of a Company
Promotion is the initial phase in creating a company, centred around identifying a business opportunity and developing it into a viable concept for a new company. This stage includes finding a business idea, assessing its potential, and taking the first steps toward forming a company to exploit this opportunity. Promoters, who can be individuals, a group of people, or an existing company, are responsible for this phase.
They undertake various tasks such as analysing the opportunity, gathering the necessary resources (like manpower, materials, machinery, managerial skills, and finances), and taking legal steps to officially register the company and get it ready to start business operations.
According to Section 69, a promoter is someone named in the company’s prospectus or annual return, has control over the company, or whose advice the company’s directors follow. The role excludes those acting in a professional capacity only.
Short Pointers:
- Promotion is the first step in forming a company, where a business opportunity is identified and developed.
- Promoters can be individuals, groups, or companies that discover and want to exploit a business idea.
- Tasks include analysing the idea’s viability, assembling resources (men, materials, machinery, managerial abilities, and finances), and legally establishing the company.
- Section 69 defines a promoter as someone named in a prospectus or annual return, who controls the company, or whose advice directors follow, excluding professionals.
- The promotion phase ends with the company being officially registered and ready to commence business.
Functions of a Promoter The role of a promoter in the formation of a company is crucial and multifaceted. It begins with identifying a potential business opportunity, which can range from introducing a new product or service to exploring new markets. The promoter assesses the idea’s feasibility technically, financially, and economically to ensure it can be profitably pursued. Short Pointers:
Key functions include conducting detailed feasibility studies with the help of specialists (like engineers and accountants) to evaluate the project’s viability, obtaining official approval for the company name, preparing important legal documents, and arranging for the initial management and capital structure.
The promoter must also appoint professionals like bankers and auditors to assist in the legal and financial setup of the company. Only after these steps are completed does the promoter proceed to officially launch the company.Login to see content
NCERT Solutions
NCERT Solutions for Class 11 Business Studies – Chapter 7 Formation of a Company
Short Answer Questions
- Name the stages in the formation of a company.
Answer: The formation of a company is a process that involves several key stages. Firstly, there is the Promotion stage, where individuals or groups come up with a business idea and take the initial steps towards creating the company. This includes identifying a business opportunity and working on its feasibility. Next is the incorporation stage, where the company is legally established as a separate entity. This involves completing various legal formalities and documentation to officially register the company. Finally, the Subscription of Capital stage occurs, where the company begins to raise funds through issuing shares and debentures to support its operations. Once these stages are completed, the company can commence its business activities.
Mindmap to remember this answer:
- Promotion: Idea conception, Feasibility analysis, Business planning
- Incorporation: Legal documentation, Registration with authorities, Official company formation
- Subscription of Capital: Fundraising through shares, Public or private capital sources, Financial setup for operations
- Commencement: Begin actual business activities, Implement business plans
- List the documents required for the incorporation of a company.
Answer: For the incorporation of a company, several documents are required to legally register and establish the company as a recognized entity. These documents include the Memorandum of Association, which outlines the company’s objectives and structure. The Articles of Association are also needed; these set the rules for the company’s internal management and operations. The proposed directors of the company must provide written consent to act as directors, and they must agree to purchase qualified shares. If applicable, an agreement for appointing a managing director, manager, or full-time director must be submitted. Additionally, the entrepreneur must present a copy of the registrar’s letter that approves the proposed company name. A statutory declaration confirming that all registration requirements have been met must be provided. The exact address of the company’s registered office and evidence of payment for the registration fee are also necessary documents for the incorporation process.
Mindmap to remember this answer:
- Memorandum of Association: Company objectives, Structure details
- Articles of Association: Internal rules, Management guidelines
- Consent of Directors: Written approvals, Share qualifications
- Director/Manager Agreement (if applicable): Specific appointments
- Registrar’s Letter: Name approval
- Statutory Declaration: Compliance confirmation
- Registered Office Address: Location details
- Payment Evidence: Registration fee proof
- What is a prospectus? Is it necessary for every company to file a prospectus?
Answer: A prospectus is essentially an invitation or advertisement issued by a company asking the public to buy shares or debentures it offers. This is often part of what we call an Initial Public Offering (IPO) where a public company raises the funds it needs. However, not every company is required to issue a prospectus. Specifically, private companies are not allowed to raise funds from the public, so they do not need to file a prospectus. Only those companies that intend to raise funds from the public through the issuance of shares or debentures need to prepare and file a prospectus.
Mindmap to remember this answer:
- Prospectus Definition: Invitation or advertisement that asks public to buy shares/debentures
- Purpose: Used in IPOs, Helps public companies raise funds
- Requirement: Necessary for public companies raising public funds, Not required for private companies
- Function: Communicates offer to the public, Details about the investment offered
- Briefly explain the term ‘Return of Allotment’.
Answer: The term ‘Return of Allotment’ refers to a specific document that must be submitted during the promotion stage of forming a company. This document lists the names and addresses of all the shareholders, along with the number of shares each has been allotted. Essentially, the ‘Return of Allotment’ acts as a formal record confirming how the company’s shares have been distributed among the initial shareholders following their issue.
Mindmap to remember this answer:
- Return of Allotment Definition: Document during the promotion stage, Lists shareholders and share distribution
- Purpose: Official record of share allocation, Confirms share distribution to shareholders
- Details Included: Names of shareholders, Addresses of shareholders, Number of shares allotted to each
- At which stage in the formation of a company does it interact with SEBI.
Answer: In the process of forming a company, it interacts with the Securities and Exchange Board of India (SEBI) at the capital subscription stage. This is a crucial phase where the company prepares to raise funds from the general public by issuing shares and debentures. Since this involves public investment, the company must adhere to the rules and guidelines set by SEBI designed to protect investors’ interests. Therefore, obtaining SEBI’s approval is a necessary step before the company can proceed with capital subscriptions and start raising funds through public offerings.
Mindmap to remember this answer:
- Stage of Interaction: Capital Subscription Stage
- Role of SEBI: Regulates public issuance, Protects investors
- Requirement: SEBI approval needed
- Purpose: Ensure compliance with investor protection norms
- Activities Involved: Issuing shares or debentures, Public Fundraising
Long Answer Questions
- What is meant by the term ‘promotion”? Discuss the legal position of promoters with respect to a company promoted by them.
Answer: The term ‘promotion’ in the context of forming a company refers to the initial stage where an idea for a business is conceptualised and developed into a practical project. Promotion involves various activities such as identifying and analysing business opportunities, assembling necessary resources, and taking legal steps to establish the company. Promoters are the individuals or entities who undertake these activities with the intent to form the company.
Legally, promoters have a complex position in relation to the company they are promoting. First, they are not considered trustees or agents of the company since the company does not legally exist until it is incorporated. This means they cannot bind the company or make decisions on its behalf during the promotion stage. Secondly, promoters are prohibited from making any secret profits from their dealings during the promotion of the company. If they do, they must fully disclose these profits to the company and its potential shareholders. Thirdly, promoters are liable for any false statements made in the company’s prospectus. Lastly, promoters cannot claim back expenses incurred during the promotion from the company unless this is agreed upon, although they may be compensated through shares or other means once the company is incorporated.
Mindmap to remember this answer:
- Promotion Defined: First stage of forming a company; conceptualising and developing a business idea.
- Role of Promoters: Identify business opportunities, analyse prospects, and gather resources.
- Legal Status: Not trustees or agents until incorporation. Cannot make secret profits; must disclose any profits. Liable for false statements in the prospectus. You cannot claim expenses unless agreed upon.
- Compensation: May receive shares or other forms of compensation post-incorporation for their efforts in promoting the company.
- Explain the steps taken by promoters in the promotion of a company.
Answer: In the promotion of a company, promoters undertake several critical steps to ensure the successful creation and registration of the company. These steps include:
- Conceiving a Business Idea: Promoters start by identifying a potential business opportunity. This idea is the foundation for the future company.
- Feasibility Studies: The idea’s viability is thoroughly analysed through various feasibility studies:
- Technical Feasibility: Ensures the technical aspects of the idea can be practically implemented.
- Financial Feasibility: Assesses whether the financial resources required are available or achievable.
- Economic Feasibility: Evaluate the likelihood of the business idea being economically successful.
- Selecting a Company Name: A suitable name is chosen for the company, and an application is submitted to the registrar of companies with three preferred names to ensure compliance and uniqueness.
- Signing the Memorandum of Association (MoA): Promoters select and arrange for members to sign the MoA, which includes the first directors of the company.
- Appointing Professionals: To facilitate the registration process, promoters appoint various professionals like bankers, brokers, and solicitors who help in preparing and submitting necessary documents.
- Preparing Necessary Documents: Finally, all required legal documents, including the MoA, Articles of Association, and directors’ consent, are prepared and submitted to the registrar of companies for the company’s registration.
These steps are essential for the legal formation of a company and must be carefully executed to meet all regulatory requirements and ensure the company’s successful launch.
Mindmap to remember this answer:
- Idea Conception: Identify and select a business idea.
- Feasibility Studies: Technical, Financial, Economic
- Name Selection: Choose and register a unique company name.
- MoA Signing: Select members for signing the MoA.
- Professional Appointments: Hire necessary professionals for document preparation.
- Document Preparation: Prepare and submit all required legal documents for registration.
- What is a ‘Memorandum of Association’? Briefly explain its clauses.
Answer: The Memorandum of Association (MoA) is a fundamental document necessary for the formation of a company. It outlines the company’s main objectives and the scope of its operations, ensuring that the company only undertakes activities that are mentioned in the MoA. This document is crucial as it defines the relationship between the company and the outside world.
The main clauses of the MoA include:
- Name Clause: Specifies the company’s name which has been approved by the registrar of companies.
- Registered Office Clause: Indicates the state where the company’s registered office will be located. The exact address needs to be notified within 30 days after incorporation.
- Objects Clause: This is the most critical clause, detailing the main and other objectives of the company. It specifies the activities the company is permitted to undertake.
- Main Objects: Lists primary purposes and activities.
- Other Objects: Covers additional activities that the company might engage in with appropriate resolutions.
- Liability Clause: Defines the liability of members based on the amount unpaid on their shares.
- Capital Clause: Details the authorised capital the company can raise through share issuance and the division of these shares.
- Association Clause: Contains a statement by subscribers to the MoA, expressing their intent to be part of the company and agreeing to buy shares.
These clauses ensure that the company’s operations are well-defined and limited to its registered objectives, protecting both the shareholders’ interests and the public.
Mindmap to remember this answer:
- Name Clause: Company’s approved name.
- Registered Office Clause: State of the registered office.
- Objects Clause: Main objectives, Other permissible activities.
- Liability Clause: Member liabilities.
- Capital Clause: Authorised capital and share division.
- Association Clause: Subscribers’ commitment to the company.
- Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
Answer: The Memorandum of Association and the Articles of Association are both crucial documents in the formation of a company but serve different purposes. The Memorandum of Association is the foundational document of the company. It defines the scope of its operations and states the objectives for which the company is formed. Essentially, it outlines what the company is allowed to do. For example, if a company’s objective is to sell furniture, it cannot legally operate a restaurant.
The Articles of Association, on the other hand, act as a user manual for the company. It contains the rules and regulations for the internal management of the company. The Articles detail how the company’s objectives will be achieved, including the process for appointing directors, the conduct of board meetings, and the handling of the company’s financial records.
Here are some key differences:
- Purpose: The Memorandum specifies the objectives, while the Articles provide the methods.
- Scope: The Memorandum defines the company’s relationship with the outside world, and the Articles govern the internal operations.
- Binding Nature: Acts beyond the scope of the Memorandum are invalid and cannot be ratified, but acts beyond the Articles can be ratified by the shareholders if they don’t contradict the Memorandum.
- Flexibility: The Memorandum is a supreme document that is rigid, whereas the Articles are more flexible and can be amended more easily.
Both documents are necessary for a company’s legal function and dictate how the company is run and what it is authorised to do.
Mindmap to remember this answer:
- Purpose: Memorandum: Defines objectives. Articles: Describes execution.
- Scope: Memorandum: External relations. Articles: Internal management.
- Binding Nature: Memorandum: Strict and overarching. Articles: Flexible, can be modified.
- Legal Impact: Memorandum: Acts beyond it are invalid. Articles: Acts can be ratified unless they violate the Memorandum.
- Necessity: Memorandum: Mandatory for all companies. Articles: Not mandatory if Model Articles are adopted.
- What is the meaning of ‘Certificate of Incorporation’?
Answer: The Certificate of Incorporation is a legal document that marks the birth of a company as a separate legal entity. This certificate is crucial because it confirms that the company meets all legal requirements for existence under the law. The date on this certificate is the official date the company began to exist, not the date when the certificate was physically issued. For example, if a certificate is issued on September 30 but shows a date of September 27, then the company officially exists on September 27.
This certificate is powerful because it validates the company’s formation, even if there are flaws in the registration process. Once this certificate is issued, the company can immediately start doing business. It’s definitive proof that the company exists legally and can engage in legal agreements and business operations as an individual entity.
Mindmap to remember this answer:
- Definition: Legal document marking the company’s official creation.
- Function: Confirms legal compliance and official start date.
- Importance: Allows the company to begin business and legal operations.
- Effect: Conclusive proof of the company’s existence and legality.
- Example: Certificate issued on September 30 for a start date of September 27 means the company exists from September 27.
- Discuss the stages of formation of a company?
Answer: The formation of a company involves several stages that transform an initial business idea into a fully legal entity ready to operate in the market. These stages are crucial to ensure that the company is properly established under the law.
- Promotion: The first stage is promotion, where the initial business idea is identified and developed. This includes analysing the feasibility of the business and planning the necessary resources such as capital, manpower, and materials.
- Incorporation: The second stage is incorporation. In this stage, the company is legally registered with the Registrar of Companies. This involves submitting important documents like the Memorandum of Association and Articles of Association, and once approved, the company receives the Certificate of Incorporation. This certificate is crucial as it marks the legal birth of the company.
- Subscription of Capital: The third stage involves raising capital, usually through the issuance of shares and debentures to the public. This stage is essential for gathering the financial resources needed for the company’s operations.
- Commencement of Business: The final stage is the commencement of business, which can only happen after all previous legal formalities are completed. Once the company has its necessary capital and legal approvals, it can start its business operations.
Each of these stages requires careful planning and compliance with legal standards to ensure the successful establishment of the company.
Mindmap to remember this answer:
- Promotion: Identify business ideas, analyse feasibility, and plan resources.
- Incorporation: Register the company, submit documents, and receive Certificate of Incorporation.
- Subscription of Capital: Raise capital through shares and debentures.
- Commencement of Business: Start operations after completing all legal formalities.
- Key Documents: Memorandum of Association, Articles of Association, Certificate of Incorporation.
Assignment
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.
Answer: From my recent inquiry at the office of the Registrar of Companies, I learned about the actual procedure for the formation of companies, which primarily includes the stages of promotion, incorporation, and capital subscription. These stages closely match the theoretical knowledge provided in our textbook, which details the legal and procedural requirements for company formation.
The primary obstacles faced during the registration process include the complexity of legal formalities, the necessity for thorough documentation, and potential delays in obtaining approvals. For instance, the requirement for a minimum subscription can pose a significant hurdle if the public response to share issuance is insufficient. Furthermore, obtaining approval for the company’s name can be challenging if it closely resembles existing company names or suggests misleading information about the company’s business activities.
Overall, while the actual procedure aligns well with academic teachings, the practical challenges in navigating legal requirements and administrative procedures highlight the complexities involved in registering a company.
Mindmap to remember this answer:
- Stages of Formation: Promotion, Incorporation, and Capital subscription
- Key Documents: Memorandum of Association, Articles of Association, Consent of Directors
- Challenges: Legal complexities, Documentation accuracy, Name approval issues, Minimum subscription hurdles
- Important Concepts: Role of promoters, SEBI regulations, Public vs. Private company differences
- Regulatory Bodies: Registrar of Companies, Securities and Exchange Board of India (SEBI)
MCQ Questions
Chapter 7 Formation of a Company – MCQ Questions
MCQ Questions
- What is the first stage in the formation of a company?
| A) Incorporation | B) Capital Subscription |
| C) Promotion | D) Commencement of Business |
Answer: C) Promotion
- Which of the following is NOT a role of a company promoter?
| A) Identifying and analysing business opportunities | B) Undertaking feasibility studies |
| C) Registering the company with the Registrar of Companies | D) Acting as the legal advisor of the company |
Answer: D) Acting as the legal advisor of the company
- What does the ‘Memorandum of Association’ signify in the context of company formation?
| A) It outlines the internal rules of management within the company. | B) It defines the objectives and powers of the company. |
| C) It is a detailed report of the company’s annual earnings. | D) It acts as the company’s charter regarding public dealings. |
Answer: B) It defines the objectives and powers of the company.
- What is required by a public company before it can start business operations after incorporation?
| A) Approval from SEBI | B) Certificate of Commencement of Business |
| C) Submission of a prospectus | D) Minimum subscription received |
Answer: B) Certificate of Commencement of Business
Answer: B) Capital clause Answer: C) The signatories to the Memorandum of Association Answer: C) To set out the company’s internal management rulesA) Liability clause B) Capital clause C) Objects clause D) Name clause A) The initial shareholders B) The first employees C) The signatories to the Memorandum of Association D) The first investors A) To outline the financial strategies of the company B) To define the relationships of the company with outsiders C) To set out the company’s internal management rules D) To declare the distribution of dividends Login to see content
Short Answer Type Questions
Chapter 7 Formation of a Company – Short Answer Type Questions
- What is the preferred form of organisation for medium and large-sized businesses in a competitive and technologically changing environment?
Answer: In today’s rapidly changing technological landscape and increasing competition, medium and large-sized businesses prefer the company form of organisation. This preference arises due to the higher capital demands and greater risks involved, making the structured format of a company more viable.
Mindmap to remember this answer:
- Environment: Competitive, technologically changing
- Business Size: Medium and large
- Preferred Form: Company
- Reasons: High capital requirement, greater risk
- What are the steps referred to as in the formation of a company from a business idea to legal readiness?
Answer: The steps from conceiving a business idea to achieving legal readiness for commencing business are known as the stages in the formation of a company. These steps ensure that the business is prepared to operate within the legal frameworks.
Mindmap to remember this answer:
- Concept: Business idea
- Goal: Legal readiness
- Terminology: Stages in formation
- Purpose: Ensure legal operation
- Who are considered promoters in the context of a company?List the three distinct stages involved in the formation of a company.
Answer: Promoters are individuals or entities who take the initial steps towards forming a company by identifying a business opportunity, analysing its feasibility, and assembling necessary resources. The three stages in company formation are: (i) Promotion, (ii) Incorporation, and (iii) Subscription of capital.
Mindmap to remember this answer:
- Who: Promoters
- Actions: Identify, analyse, assemble
- Stages: Promotion, Incorporation, Subscription
Answer: A private company is not required to issue a prospectus because it is prohibited from raising funds from the public, hence bypassing the need for a prospectus. The first stage in the formation of a company is promotion. Mindmap to remember this answer: Answer: The role of a promoter involves identifying a business opportunity, analysing its feasibility, and taking the necessary steps to form a company. This includes arranging the necessary resources and completing legal formalities. Mindmap to remember this answer: Answer: Promoters are defined under Section 69 of the Companies Act. They are individuals who have a significant role in forming a company and guiding its initial direction. The foremost function of a promoter is identifying and analysing a potential business opportunity. Mindmap to remember this answer:Login to see content
Case Based Questions
Chapter 7 Formation of a Company – Case Based Questions
Topic: Formation of a Company
Case:
Suman and Ravi are aspiring entrepreneurs who recently graduated from business school. They want to start a new tech company focusing on innovative software solutions for small businesses. They have an idea but are unsure about the steps needed to establish their company. They approached a mentor for advice on forming their company and the role they would play in this process.
- What are the key stages in forming a company that Suman and Ravi should be aware of?
Answer:
Suman and Ravi should be aware of the following key stages in forming a company:- Promotion: Developing the business idea and assessing its feasibility.
- Incorporation: Legal establishment of the company, including registration.
- Subscription of Capital: Securing initial funding for the company’s operations.
- Who are the promoters, and what role will Suman and Ravi play in the formation of their company?
Answer:
Promoters are individuals who take the steps and risks to establish the company. Suman and Ravi, in their role as promoters, will be responsible for analysing the business opportunity, gathering necessary resources (like manpower, materials, machinery, managerial skills, and finances), and taking legal steps to officially register the company and get it ready to start business operations.
Topic: Stages in the Formation of a Company
Case:
Meera is planning to start a boutique clothing line. She has already developed the business idea and assessed its feasibility. Now, she needs to understand the next steps in incorporating her company and securing the initial funding required to launch her business.
- What does the incorporation stage involve, and what documents will Meera need to submit?
Answer:
The incorporation stage involves the legal establishment of the company, including registration. Meera will need to submit the following documents to the Registrar of Companies:- Memorandum of Association (MOA)
- Articles of Association (AOA)
- Consent of Proposed Directors
- Agreement with managing personnel if applicable
- Approval of the company’s name
- Statutory declaration of compliance with registration requirements
- Notice of the registered office’s address
- Proof of registration payment
Explain the subscription of capital stage and how it differs for private companies compared to public limited companies.
Answer:
The subscription of capital stage is where the company secures its initial funding. Private companies are restricted from raising funds publicly and do not have to issue a prospectus or complete minimum subscription formalities. In contrast, public limited companies can raise funds from the public by issuing shares and debentures and must comply with minimum subscription requirements.
subscription requirements. Case:Topic: Incorporation of a Company
Arjun and Priya have completed the promotion stage of their new venture, an eco-friendly product manufacturing company. They are now ready to legally establish their company and want to ensure they follow all necessary legal formalities.
Answer:
The Certificate of Incorporation is essential as it legally establishes Arjun and Priya’s company. It signifies the company’s legal birth and provides it with a Corporate Identity Number (CIN), giving it a unique identity. From the issuance date, the company becomes a legal entity capable of entering into contracts and owning property. This certificate also validates the company’s actions and contracts even if the incorporation process was flawed.
Answer:
The statutory declaration is a critical document in the incorporation process, certifying that all legal requirements for company registration have been met. It must be signed by a professional such as a Chartered Accountant, Company Secretary, or a future director or manager. This declaration ensures that the company complies with all statutory regulations and is prepared for legal operation.Login to see content
Value Based Questions
Chapter 7 Formation of a Company – Value Based Questions
Topic: Formation of a Company
Case:
Rina and Ankit are recent business graduates who want to start a social enterprise focusing on eco-friendly products. They aim to not only make a profit but also contribute to environmental conservation. They need to understand the initial steps in forming their company and the values they should uphold during this process.
- What are the essential steps in the formation of a company that Rina and Ankit should follow?
Answer:
Rina and Ankit should follow these essential steps:- Promotion: Developing the business idea and assessing its feasibility.
- Incorporation: Legal establishment of the company, including registration.
- Subscription of Capital: Securing initial funding for the company’s operations.
- Identify one value that Rina and Ankit are promoting by starting an eco-friendly business.
Answer:
The value promoted by Rina and Ankit is environmental conservation.
Topic: Stages in the Formation of a Company
Case:
Arvind wants to start a non-profit organisation to help underprivileged children get access to education. He understands the importance of following the correct procedures to establish his organisation legally. Arvind is also keen on promoting the value of social responsibility through his work.
- Explain the stages in the formation of a company that Arvind needs to follow.
Answer:
Arvind needs to follow these stages in the formation of his non-profit organisation:- Promotion: Developing the idea and assessing its feasibility.
- Incorporation: Legal establishment of the organisation, including registration.
- Subscription of Capital: Securing initial funding for the organisation’s operations.
- What value does Arvind’s initiative to start a non-profit organisation promote?
Answer:
The value promoted by Arvind’s initiative is social responsibility.
Topic: Incorporation of a Company Case: Case:
Rakesh and Meena are in the process of incorporating their new tech startup. They want to ensure they follow all legal formalities and uphold transparency and integrity in their operations. They are aware of the importance of obtaining a Certificate of Incorporation and want to understand its significance.
Answer:
Rakesh and Meena must complete the following legal formalities:
Answer:
The value promoted by Rakesh and Meena is integrity.Topic: Difference between Memorandum of Association and Articles of Association
Neha is setting up a new educational institution and is drafting the Memorandum of Association (MOA) and Articles of Association (AOA) for her company. She aims to ensure that her institution operates with clarity and proper governance. Neha needs to understand the differences between these two documents and their importance.
Answer:
Answer:
The value promoted by Neha’s effort is transparency.Login to see content
Long Answer Type Questions
Chapter 7 Formation of a Company – Long Answer Type Questions
- Discuss the importance and role of promoters in the formation of a company. Include an analysis of the legal definition of promoters according to section 69, their responsibilities, and the ethical considerations they must adhere to during the promotion stage.
Answer: Promoters play a crucial role in the formation of a company as they conceive the business idea and take the initiative to bring the company into existence. They are the ones who analyse the business prospects, assemble resources like men, materials, and money, and take necessary steps towards the legal formation of the company. According to Section 69 of the Companies Act, promoters can be individuals or companies who have significant control over the company, directly or indirectly. They are responsible for preparing necessary documents, securing name approval, and ensuring all legal formalities are met for the company’s registration. Ethically, promoters are expected to act in the best interests of the company without seeking any secret profits. If they fail to disclose any profit derived from any transaction, the company has the right to rescind the contract and claim damages.
Mindmap to remember this answer:
- Role: Idea conception, resource assembly, initial steps
- Legal Definition: Section 69, control, influence
- Responsibilities: Documents preparation, legal formalities
- Ethics: No secret profits, full disclosure
- Explain the stages involved in the formation of a company. Describe each stage—Promotion, Incorporation, and Subscription of Capital—in detail, highlighting the specific activities and legal formalities required at each stage.
Answer: The formation of a company involves three main stages: Promotion, Incorporation, and Subscription of Capital. During the Promotion stage, the promoters identify a business opportunity, conduct feasibility studies, and prepare for the legal formation of the company. The Incorporation stage follows, where legal documents like the Memorandum of Association and Articles of Association are prepared and filed with the Registrar of Companies along with the application for incorporation. Once the company receives its Certificate of Incorporation, it enters the Subscription of Capital stage, where it can begin to issue shares to the public (if it’s a public company) and secure the necessary funds to commence operations. Each stage requires meticulous planning and adherence to legal formalities to ensure the successful setup of the company.
Mindmap to remember this answer:
- Stages: Promotion, Incorporation, Subscription
- Promotion: Business idea, feasibility studies
- Incorporation: Legal documents, filing, Certificate of Incorporation
- Subscription: Share issues, fund collection
Analyse the functions of a promoter as outlined in the textbook. How do these functions contribute to the successful establishment and registration of a company? Discuss the significance of feasibility studies and the process of obtaining name approval from the Registrar of Companies. Answer: Promoters perform several functions that are crucial to the successful establishment and registration of a company. Their primary function is to identify a viable business opportunity and analyse its feasibility in terms of technical, financial, and economic viability. This includes conducting detailed studies to ensure that the project can be profitably exploited. Additionally, promoters are responsible for obtaining the necessary name approval from the Registrar of Companies, preparing the Memorandum of Association, appointing initial directors, and engaging professionals like accountants and lawyers to handle the legal paperwork. These activities collectively ensure that the business idea is not only feasible but also set up in compliance with legal requirements, paving the way for a successful business operation. Mindmap to remember this answer:Login to see content
Sample Questions Paper
Chapter 7 Formation of a Company – Sample Questions Paper
Sample Question: 1
Time allowed: 2 hours Maximum Marks: 40
General Instructions:
(i) The question paper contains 14 questions.
(ii) All questions are compulsory.
(iii) Section A: Question numbers 1 and 2 are 1 mark source-based questions. Answers should not exceed 10-15 words.
(iv) Section B: Question numbers 3 to 9 are 2 marks questions. These are very short answer type questions. Answers should not exceed 30 words.
(v) Section C: Question numbers 10 to 12 are 4 marks questions. T
(vi) Section D: Question numbers 13 and 14 are 6 marks questions. These are long answer type questions. Answers should not exceed 200 words.
Section A
- Name the document that defines the objectives of a company.
- Who signs the Memorandum of Association for a public company?
Section B
- Define a ‘promoter’ as per the Companies Act, 2013.
- What is meant by ‘serial monogamy’ in the context of marriage forms?
- State two functions of a promoter.
- What is the consequence of the Certificate of Incorporation being conclusive evidence?
- What is meant by ‘minimum subscription’ in the context of a public issue?
- What is the purpose of issuing a prospectus?
- When is appointment of underwriters required while raising funds from public?
Section C
- Differentiate between a Memorandum of Association and Articles of Association on the basis of position and validity.
OR
Discuss any two feasibility studies a promoter needs to undertake before launching a company.
- Briefly explain the steps involved in raising funds from the public through a public issue.
OR
What documents need to be submitted along with the application for incorporation of a company?
Section D
- “Promoters are not legally entitled to claim expenses incurred in the promotion of a company.” In light of this statement, discuss the position and liability of promoters.
OR
Explain the purpose and importance of the following clauses in the Memorandum of Association: (i) Objects clause (ii) Liability clause (iii) Capital clause
- Discuss the various forms of marriage that exist along with the rules governing each form.
OR
Distinguish between formal and informal education. How does education help in transmitting culture?
- Examine the role of political institutions in distribution of power in society. Differentiate between the concepts of power and authority in this context.
Sample Question: 2
Time allowed: 2 hours Maximum Marks: 40
General Instructions:
(i) The question paper contains 14 questions.
(ii) All questions are compulsory.
(iii) Section A Question numbers 1 and 2 are 1 mark source-based questions. Answer to these questions must not exceed 10-15 words.
(iv) Section B Question numbers 3 to 9 are 2 marks questions. These are very short answer type questions. Answer to these questions should not exceed 30 words.
(v) Section C Question numbers 10 to 12 are 4 marks questions. These are short answer type questions. Answer to these questions should not exceed 80 words.
(vi) Section D Question numbers 13 and 14 are 6 marks questions. These are long answer type questions. Answer to these questions should not exceed 200 words.
Section A
- State the meaning of the term ‘Memorandum of Association’ as per the Companies Act, 2013. Or Mention the need for obtaining the certificate of commencement of business for a company.
- What is the purpose of the ‘liability clause’ in the Memorandum of Association?
Section B
- Mention any two functions performed by the promoters of a company.
- Distinguish between a public company and a private company on the basis of the minimum number of members required to form a company.
- What is a prospectus? Why is it an important document for a public company?
- Briefly explain the role of SEBI regarding issue of securities by a public company.
- What is the minimum subscription required for issuing shares to the public as per SEBI guidelines?
- What is meant by ‘underwriting’ an issue of shares or debentures?
- State any two effects of the Certificate of Incorporation issued to a company.
Section C
- Explain any four clauses that are part of the Memorandum of Association of a company. Or Distinguish between Memorandum of Association and Articles of Association on any four basis.
- Explain the meaning of ‘promotion’ as one of the stages in the formation of a company. What are the feasibility studies promoters undertake?
- Describe the steps involved in the process of capital subscription by a public company.
OR
What documents need to be submitted for incorporation of a company? Explain any four of these documents in brief.
Section D
- What is the procedure for incorporating a company under the Companies Act? Explain the various steps involved from the time of promotion till the company actually starts business operations.
OR
‘Promoters are not the agents or trustees of the company but they enjoy a fiduciary position’. Explain the meaning of this statement and the legal position of promoters. - ‘Incorporation is the most crucial stage in the formation of a company’. In the light of this statement, explain the concept of incorporation, documents required and the effect of the certificate of incorporation