Formation of a Company Class 11 Notes: CBSE Business Studies Chapter 7

Formation of Company

Formation of a Company is a time-consuming process that requires the completion of numerous legal formalities and processes,

There are three important steps in this process:

A. Promotion

B. Incorporation

C. Subscription of Capital

• Unlike a public limited company, which is forbidden from raising funds from the public, a private corporation is not required to produce a prospectus or complete the formalities of a minimum subscription.

A. Promotion of Company

• It entails conceptualizing a business idea and taking the initiative to start a company so that the available business opportunity can be put into practice.

Promoter

• The term Promoter is defined in Section 2(69) of the Companies Act 2013 as 

• who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92.

• who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or in accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Functions of Promoter

Functions of Promoter:

1. Identify Business Opportunity: Assess technical, financial, and economic feasibility.

2. Feasibility Studies: Conduct studies to determine viability.

3. Name Approval: Submit three name options to the Registrar of Companies.

4. Fixing Signatories: Decide on the signatories for the Memorandum of Association.

5. Appointment of Professionals: Engage experts like auditors and bankers.

6. Document Preparation: Prepare necessary documents like the Memorandum and Articles of Association.

Documents Required to be Submitted

There are Six documents in total, they are:

• Memorandum of Association

• Articles of Association

• Consent of Proposed Directors

• Agreement with Directors/Managers

• Statutory Declaration

• Receipt of Payment of Fee

2. Articles of Association

• They are the rules that govern a company's internal management.

• These regulations are an addendum to the Memorandum of Association; they should not conflict with or supersede anything in the Memorandum of Association.

• According to Section 2(5) of the Companies Act, 2013, "articles" refers to a company's articles of organization as initially drafted, as amended from time to time, or as implemented by any previous company law or this Act.

3. Consent of Proposed Directors

• In addition to the Memorandum and Articles of Association, everyone nominated as a director must sign a written permission stating that they accept to function in such capacity and agree to purchase and pay for qualification shares.

4. Agreement

• Another document that must be presented to the Registrar for the company to be registered under the Act is the agreement that the firm forms with an individual as a Director or a full-time Director or Manager.

5. Statutory Declaration

• A declaration confirming that all legal conditions for registration have been met must be presented to the Registrar along with the above-mentioned documents for the company to be legally registered.

6. Receipt of Payment of Fee

• The necessary payments for the company's registration must be paid.

• The amount of such fees will be determined by the company's authorized share capital.

Position of Promoter

• A firm's promoters have a fiduciary relationship with the company, which they must not abuse.

• They can only make a profit if it is publicly revealed; they cannot make any hidden gains.

• In the event of non-disclosure, the company has the right to cancel the contract and reclaim the money paid to the promoters.

• It can also sue for damages or losses incurred because of material information not being disclosed.

• Promoters do not have the legal right to claim expenses incurred in the company's promotion. The company, on the other hand, may choose to reimburse them for their pre-incorporation costs.

• The corporation may also pay the promoters a lump sum payment or a commission on the purchase price of property obtained through them or on the shares sold as compensation for their efforts.

• The corporation may also provide them with stock or debentures or allow them to buy the securities later.

B. Incorporation

• The application must be filed with the Registrar of Companies in the state where the company's registered office will be located.

• A registration application must be accompanied by specified papers. They are as follows:

• A duly stamped, signed, and witnessed Memorandum of Association. In the case of a public business, it must be signed by at least seven members. However, two members' signatures are sufficient for a private company.

• As with the Memorandum, the Articles of Association must be legally stamped and witnessed.

• The prospective directors' written approval to serve as directors, as well as an agreement to purchase qualification shares.

• The prospective Managing Director, Manager, or full-time director has reached an agreement if one exists.

• A copy of the letter from the Registrar authorizing the company's name.

• A legislative declaration attesting to the fact that all registration requirements have been met. This document must be properly signed.

• Along with these documents, a notification containing the exact address of the registered office may be submitted.

Effect of the Certificate of Incorporation

• 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. Capital Subscription

• SEBI clearance is required to raise funds from the public. The Registrar of Companies will receive a copy of the prospectus or a statement instead 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.

Process of Capital Subscription:

Steps in Capital Subscription:

1. SEBI Approval: Obtain clearance from SEBI for public funding.

2. Filing of Prospectus: Submit the prospectus or a statement instead of the prospectus to the Registrar.

3. Appointment of Bankers, Brokers, and Underwriters: Engage professionals to manage the public issue.

4. Minimum Subscription: Ensure a minimum subscription level is met to proceed.

5. Application to Stock Exchange: Seek approval to trade shares.

6. Allotment of Shares: Distribute shares, return excess application money, and file the return of allotment with the Registrar.

Important Topics of Class 11 Business Studies Chapter 7 Formation of a Company 

Here’s a table summarising the important topics:

Importance of Revision Notes for Class 11 Business Studies Chapter 7 Formation of a Company

• Summarises Key Points: Condenses important concepts for quick review.

• Saves Time: Provides a fast way to revise before exams.

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Tips for Learning the Class 11 Business Studies Chapter 7 Formation of a Company

1. Focus on core processes with illustrations and examples.

2. Draw and label diagrams for clarity.

3. Create brief summaries of each process.

4. Connect concepts to everyday examples.

5. Solve past exam questions to test understanding.

6. Explain concepts to others to reinforce learning.

7. Revisit material frequently to retain information.

8. Utilise platforms like Vedantu for additional support.

Conclusion

Chapter 7 Formation of a Company, provides a comprehensive overview of the essential steps required to legally establish a company. From the initial promotion and conceptualization of the business idea to the final stages of capital subscription and share allotment, this chapter details the entire process, highlighting the importance of each step. Understanding these stages is crucial for anyone looking to understand the legal foundation upon which companies are built and how they begin their journey in the business world. 

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