Business Studies Chapter 7 Notes NCERT Class 11th – Formation of a Company

7.1 Introduction

• In today’s business world, running a company requires not only money but also proper planning and legal compliance.
• Businesses face more competition and faster technological changes than before.
• Because of these challenges, many medium and large enterprises prefer the company form of organization, which offers advantages like limited liability, separate legal identity, and access to large capital.
• The process of turning a business idea into a legally recognized company is known as the formation of a company.
• The people who take the responsibility to bring the company into existence by performing legal and administrative work are called promoters.
• In this chapter, we will study the main stages involved in forming a company and the duties performed at each stage.

7.2 Formation of a Company

• Forming a company involves completing various legal and procedural steps.
• These steps are generally divided into three main stages:
  1. Promotion – Initial stage where business idea is developed and preparation for company setup begins.
  2. Incorporation – The legal process of registering the company with the government.
  3. Capital Subscription – Raising funds from the public by issuing shares (mainly for public companies).
• These stages apply to all company types, but private companies enjoy some relaxations:
  • They are not required to issue a prospectus.
  • They do not need to raise a minimum subscription.

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7.2.1 Promotion of a Company

Meaning:

• Promotion is the first step in forming a company. It means developing a business idea and taking the necessary steps to form a company around that idea.

Who is a Promoter?

• A promoter is an individual or group that takes the initiative to form a company.
• According to the Companies Act:
  • A promoter is named in the prospectus or annual return.
  • Controls the company’s operations directly or indirectly.
  • Gives advice or instructions that the Board of Directors generally follows.
• Professionals like lawyers and accountants are not considered promoters if they only provide their services.

Functions of a Promoter:

1. Identifying Business Opportunity
   • Promoters think of a business idea, such as introducing a new product, service, or market.
   • They assess whether the idea is profitable and worth pursuing.
2. Feasibility Studies
   • Promoters take help from experts to examine whether the idea is:
     • Technically feasible – Required technology and raw materials are available.
     • Financially feasible – Funds can be arranged reasonably.
     • Economically feasible – The business has the potential to earn profits.
3. Name Approval
   • Promoters submit three name choices to the Registrar of Companies (ROC).
   • The chosen name should not already exist, must not mislead the public, and should follow legal norms.
4. Fixing Signatories to MOA
   • Promoters decide who will sign the Memorandum of Association (MOA).
   • These signatories become the first directors and must give written consent to act as such.
5. Appointment of Professionals
   • Professionals like chartered accountants, lawyers, and company secretaries are hired to handle legal and financial tasks.
6. Preparation of Necessary Documents
   • Promoters prepare and submit essential documents such as the MOA, Articles of Association (AOA), and director consents.

Documents Required for Registration:

A. Memorandum of Association (MOA)

• This document defines the company’s main objectives and scope of operations.
• It includes:
  • Name Clause
  • Registered Office Clause
  • Objects Clause
  • Liability Clause
  • Capital Clause
• Must be signed by:
  • 7 persons for a public company
  • 2 persons for a private company

B. Articles of Association (AOA)

• It contains rules for the company’s internal management.
• It must not contradict the MOA.

C. Director’s Consent

• Written consent from the proposed directors confirming their willingness to act as directors.

D. Agreements

• Copies of any agreements made with the proposed Managing Director, Manager, or Whole-time Director.

E. Statutory Declaration

• A declaration by a professional or director that all legal requirements for incorporation have been fulfilled.

F. Payment of Fees

• Registration fees must be paid as per the authorized capital.

Position of Promoters:

• Promoters are not agents or trustees of the company.
• They hold a fiduciary position and must not make any secret profits.
• They are personally liable for contracts made before incorporation unless the company re-approves them.

7.2.2 Incorporation

Steps to Incorporate a Company:

1. Submit application with required documents:
   • MOA and AOA
   • Director consents
   • Name approval letter
   • Statutory declaration
   • Registered office address
   • Proof of fee payment
2. The Registrar verifies the documents.
3. If everything is in order, the Registrar issues a Certificate of Incorporation.
4. The company officially comes into existence and is assigned a Corporate Identity Number (CIN).

Preliminary Contracts:

• These are contracts made by promoters before incorporation.
• They are not binding unless the new company enters into fresh agreements after registration.
• Promoters are personally responsible for them.

Legal Status After Incorporation:

• The company becomes a separate legal entity.
• It gets perpetual succession and can enter into valid contracts.
• The Certificate of Incorporation is considered conclusive proof of the company’s existence.

7.2.3 Capital Subscription

This stage applies only to public companies.

Steps to Raise Capital:

1. SEBI Approval
   • Approval from SEBI is needed before issuing shares to the public.
   • Full disclosure of all material information is mandatory.
2. Filing of Prospectus
   • A prospectus is a legal document inviting the public to buy shares.
   • It must be truthful and complete.
3. Appointment of Bankers, Brokers, and Underwriters
   • Bankers manage application money.
   • Brokers promote the sale of shares.
   • Underwriters guarantee that a minimum number of shares will be sold (optional).
4. Minimum Subscription
   • At least 90% of the issued capital must be subscribed.
   • If not, the money collected must be refunded.
5. Application to Stock Exchange
   • The company must apply to a recognized stock exchange for listing.
   • If approval is not received within 10 weeks, allotment is canceled and money refunded.
6. Allotment of Shares
   • Application money is kept in a separate bank account.
   • Excess money is returned or adjusted.
   • A return of allotment is filed with the Registrar within 30 days.

Memorandum of Association vs Articles of Association

Basis	Memorandum of Association	Articles of Association
Purpose	States the company’s objectives	Contains rules for internal management
Position	Primary legal document	Secondary document
Relationship	Between company and outsiders	Between company and its members
Alteration	Difficult to alter	Easier to alter
Filing Requirement	Mandatory for all companies	Optional for public companies

One Person Company (OPC)

Definition:

• An OPC is a type of company that has only one member.
• It is designed to promote entrepreneurship by allowing individuals to form a company easily.

Key Features:

• Only natural persons who are Indian citizens and residents can form or be nominees in an OPC.
• A person can be a member or nominee in only one OPC.
• Minors cannot become members or nominees.
• OPCs cannot be registered as Section 8 companies or conduct NBFC activities.
• Voluntary conversion into other types of companies is not allowed for 2 years unless:
  • Paid-up capital exceeds ₹50 lakh, or
  • Average annual turnover exceeds ₹2 crore.

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Business Studies Chapter 7 Notes NCERT Class 11th – Formation of a Company