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This chapter explains the process of forming a company, including the stages of promotion, incorporation, and subscription of capital. It covers the role of promoters, the contents of the Memorandum and Articles of Association, and the steps for issuing a prospectus and allotment of shares. The chapter also discusses the distinction between a private company and a public company, along with the legal requirements under the Companies Act. These notes summarise key concepts from Chapter 7 of the NCERT textbook Business Studies for effective revision. You can also download the free PDF for quick reference.
Contents
- 1 Introduction
- 2 Concept of Promotion
- 3 Role of a Promoter
- 4 Incorporation of a Company
- 5 Contents of Memorandum of Association
- 6 Articles of Association
- 7 Subscription of Capital
- 8 Private and Public Companies
- 9 Important Definitions in NCERT Notes Class 11 Business Studies Chapter 7: Formation of a Company
- 10 FAQs
Explore Notes of Class 11: Business Studies
Introduction
The formation of a company is a complex activity involving the completion of several legal formalities and procedures. The process of formation includes three main stages: promotion, incorporation and commencement of business. Formation of a company requires a group of persons associated for a common objective. A company comes into existence only when it is registered under the Companies Act.
- Examples: Entrepreneurs identifying business opportunities and forming a company to manufacture and sell products.
- Key stages: Promotion (idea and feasibility), incorporation (legal registration), and capital subscription (raising funds).
Concept of Promotion
Promotion is the first stage in the formation of a company. It involves the investigation of a business idea and its feasibility. A promoter is a person who takes the initiative to form a company. The promoter conceives the idea, makes preliminary investigations, and assembles the necessary resources. Understand the role of the promoter, who plays an important role in the concept of promotion.
- Promoter: A Person who undertakes to form a company and completes preliminary formalities.
- Functions: Identification of business opportunity, analysis of feasibility, selection of men, machinery and site, arrangement of finance.
- Duties: Full disclosure of information, not to make secret profits, and to act in good faith.
- Remuneration: Can be paid through shares, a lump sum, or commission.
Role of a Promoter
The promoter plays a crucial role in the formation of a company. He is neither a trustee nor an agent of the company but occupies a fiduciary position. The promoter must act in the best interest of the company and disclose all material facts.
- Fiduciary position: Acts for the benefit of the company, must not profit at its expense.
- Liabilities: Liable for misrepresentation in the prospectus, non-disclosure of profits, and breach of duty.
Incorporation of a Company
Incorporation is the second stage in the formation of a company. It is the legal process by which the company comes into existence. The company is registered with the Registrar of Companies (ROC). The documents required for incorporation include the Memorandum of Association, Articles of Association, and a declaration of compliance. These are the documents required during the incorporation of a company.
- Memorandum of Association: Fundamental document stating the company’s name, registered office, objects, liability, and capital.
- Clauses in MOA: Name clause, registered office clause, objects clause (main, ancillary, other), liability clause, capital clause.
- Articles of Association: Rules for internal management, subordinate to MOA.
- Declaration: By advocates or directors confirming compliance with requirements.
- Certificate of Incorporation: Issued by the ROC, conclusive evidence of legal existence.
Also Read: NCERT CBSE Class 10 Chapter 3 Economics Notes
Contents of Memorandum of Association
The Memorandum of Association (MOA) is the charter of the company. It defines the scope of activities and the relationship with outsiders. Any act beyond the MOA is ultra vires and void. Here are the types of clauses found in the contents of the memorandum of association:
- Name Clause: Must include ‘Limited’ or ‘Private Limited’; not undesirable or misleading.
- Registered Office Clause: State in which office is situated; exact address within 30 days.
- Objects Clause: Main objects, ancillary objects, other objects; limits powers of the company.
- Liability Clause: Liability of members limited by shares or guarantee.
- Capital Clause: Authorised capital and division into shares.
Articles of Association
The Articles of Association (AOA) contain rules regarding internal management, such as board meetings, voting rights, dividends, and winding up. It must be signed by subscribers and registered. Understand more a bout the content, relation to MOA and alteration.
- Contents: Rights of shareholders, proceedings of meetings, accounts and audit, dividends, borrowing powers.
- Relation to MOA: AOA is subordinate; cannot override MOA.
- Alteration: Can be altered by special resolution, subject to the MOA and law.
Subscription of Capital
After incorporation, the company raises capital by issuing shares. This stage involves filing the prospectus and receiving applications for shares. Allotment of shares can be made only after the minimum subscription is received. Look at some of the important terms of subscription of capital:
- Prospectus: A Document inviting the public to subscribe to shares; it must contain all material information.
- Minimum Subscription: Stated in prospectus; usually 90% of issue; if not achieved, funds refunded.
- Application and Allotment: Application money received, shares allotted, excess refunded or adjusted.
- SEBI Guidelines: Ensure fair allotment, no oversubscription beyond limits, and complete disclosures.
Private and Public Companies
A private company restricts the transfer of shares, limits members to 50, and prohibits public invitation for shares. A public company has no such restrictions and can invite the public for subscriptions. Here is the common difference between the private and public companies:
- Private Company: Minimum 2 members, restricts share transfer, no public invitation.
- Public Company: Minimum 7 members, free transfer, can issue a prospectus to the public.
- Advantages of Private: Less regulation, privacy, and quicker decisions.
Important Definitions in NCERT Notes Class 11 Business Studies Chapter 7: Formation of a Company
This section lists key terms for clarity and revision:
- Promoter: A Person who assembles resources and completes preliminary formalities for company formation.
- Memorandum of Association: Charter of the company defining its objects and scope.
- Articles of Association: Rules for internal management of the company.
- Prospectus: Invitation to the public to subscribe to shares or debentures.
- Certificate of Incorporation: Legal birth certificate of the company.
- Ultra Vires: Acts beyond the powers stated in the MOA.
Explore Solutions of Class 11: Business Studies
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FAQs
The promoter identifies business opportunities, conducts feasibility studies, arranges finance and resources, and completes preliminary formalities.
The Memorandum of Association defines the company’s objectives and scope, and anything beyond it is invalid.
Private companies restrict share transfer, max 50 members, and no public invitation, whereas Public companies allow Free transfer, min 7 members, and can invite the public.
Prospectuses are documents inviting public subscription to shares, containing details like the company’s objects, capital, and risks.
Usually, 90% of the total issues is the minimum subscription requirement. If this requirement is not met, the applications are refunded.
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