by Tiwari Academy
NCERT Solutions for Class 11 Business Studies Chapter 7 Formation of a Company. Download study material related to chapter 7 in Hindi and English Medium. The separate PDF files for Hindi and English Medium are given below to free download. Answers of long questions and short questions with true false are available to use online only. All the contents on Tiwari Academy is free to use.
11th Business Studies Chapter 7 Formation of a Company.
| Class: 11 | Business Studies |
| Chapter: 7 | Formation of a Company |
| Contents: | NCERT Solutions and Study Material |
Class 11 Business Studies Chapter 7 Solutions
11th B St Chapter 7 True/False Answer Questions
It is necessary to get every company incorporated, whether private or public.
The statement is True.
Statement in lieu of prospectus can be filed by a public company going for a public issue.
The statement is False.
A company can commence business after incorporation.
The statement is False.
Expert who help promoters in the promotion of a company are also called promoters.
The statement is False.
A company can ratify preliminary contracts after incorporation.
The statement is False.
If a company is registered on the basis of fictitious names, its incorporation is invalid.
The statement is False.
“Articles of association” is the main document of a company.
The statement is False.
Every company must file Articles of Association.
The statement is False.
If a company suffers heavy losses and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members.
The statement is False.
11th B St Chapter 7 Short Answer Questions
Name the stages in the formation of a company.
The formation of a company involves the following steps:
(a) Promotion: Taking the initiative to form a company and promoting it.
(b) Incorporation: Formation of the company as a separate legal entity.
(c) Subscription of capital: Raising funds in the form of shares and debentures.
(d) Commencement of business: Completion of the legal formalities and the commencement of business by the company.
List the documents required for the incorporation of a company.
The documents required for the incorporation of a company are:
(a) Memorandum of Association duly stamped, signed and witnessed.
(b) Articles of association.
(c) Written approval of the proposed directors to function as directors and an undertaking to buy the qualification shares.
(d) An agreement naming the proposed managing director or a manager or a full-time director, if any.
(e) A copy of the letter obtained from the registrar concerned approving the company name proposed.
(f) A legal confirmation by the law stating the submission of all documents and requirements for registration.
(g) The exact address of the registered office.
(h) Documentary evidence of payment of the registration fee.
What is a prospectus? Is it necessary for every company to file a prospectus?
A company’s prospectus is a formal legal document designed to provide information and full details about an investment offering for sale to the public. Companies are required to file the documents with the Securities and Exchange Commission. It is a sort of advertisement or an invitation, also known as initial public offering (IPO), from a company to the general public to subscribe or purchase shares or debentures issued by the company. The company can raise the funds it requires for an investment project. In case of a private company, it is not mandatory to file a prospectus because of the restrictions placed on raising funds from public.
Briefly explain the term “Return of Allotment”.
Return of Allotment is a statement submitted to the Registrar which contains the names and addresses of shareholders and the number of shares allotted to each shareholder. Return of allotment, signed by a director or secretary is filed with the Registrar of Companies within 30 days of allotment.
It is not required to be filed when there is a reissue of surrendered shares or Reissue of forfeiture of shares.
At which stage in the formation of a company does it interact with SEBI?
A company interacts with the Securities and Exchange Board of India (SEBI) at the third stage of formation, the stage of capital subscription. At this stage the company needs to raise funds from the general public by offering shares and debentures for subscription. The company is required to follow the prescribed rules and guidelines issued by SEBI in order to protect the investors’ interests. Therefore, it becomes necessary for the company to get SEBI’s approval before proceeding with capital subscription.
11th B St Chapter 7 Long Answer Questions
What is meant by the term “promotion”? Discuss the legal position of promoters with respect to a company promoted by them.
Promotion refers to the entire process by which a company is brought into existence. It starts with the conceptualisation of the birth a company and determination of the purpose for which it is to be formed. The persons who conceive the company and invest the initial funds are known as the promoters of the company. A promoter is one who takes the initiative to form a company with reference to a given idea or project and takes the steps necessary to fulfil this purpose. Promotion is the very first stage in the process of formation of a company. It starts with the idea about a business being converted into a successful business opportunity. The following are the legal liabilities of the promoters towards the company:
(i) The promoters are neither the trustees nor the agents of the company that they are forming. This is because the company does not exist as a legal entity before its incorporation.
(ii) They are not authorized to make any secret profits by making deals on behalf of the company.
(iii) They are legally liable for any false or untrue statement filed in the prospectus of the company.
(iv) The expenses incurred by them cannot be claimed as expenses.
(v) The company may or may not indemnify the promoters for the payments made before its incorporation. The company may choose to allot shares to them in order to compensate for their services.
Explain the steps taken by promoters in the promotion of a company.
A corporate promoter is a firm or person who does the preliminary work incidental to the formation of a company, including its promotion, incorporation, and flotation, and solicits people to invest money in the company, usually when it is being formed. A promoter takes the initiative to form a company with an idea or a project and also takes the steps necessary to form a company.
The following steps are taken by the promoters for the promotion of the company:
(i) Generating a business idea: Initially, a promoter discovers the idea for the formation of a company with a business idea in his mind and goes on to seek a suitable business opportunity.
(ii) Feasibility check: Sometimes a business idea may or may not be feasible enough to be converted into a successful business, therefore all pro’s and con’s are taken into consideration. All feasibility aspects are studied in detail with the help of charted accountants, engineers, accountant, etc; to check if the business taken up is worth it depending on its nature. In this regard, the following studies are made
(a) Technical feasibility: Sometimes the idea may be good enough but not technically feasible. Technical feasibility refers to the technological aspect of a business where technology or raw material required to execute the project is not easily accessible.
(b) Financial feasibility: Setup of a business requires capital to start it operations. The promoters have to assess the cost of implementing the idea. Organisations need to assess the capital required and sources of finance available. In case the cost of the project is huge and the project isn’t feasible financially, then the idea may have to be dropped.
(c) Economic feasibility: In some cases, the project may be technically and financially feasible but the probability of its success may be very low. In such cases, too, the idea will have to be given up.
(iii) Selecting the company’s name: Once all feasibility tests are done and a green signal for company is obtained, the promoters need to select a suitable name for it. An application is submitted to the registrar of companies for the approval of name. This application must contain at least three names in the order of their preference. Sometimes, the name may not be approved or may be inappropriate, therefore a company must submit at least three names out of which most appropriate one will be approved.
(iv) Signing the memorandum of association (MoA): The promoters are required to select the members for signing the MoA. In this regard, the members who generally sign the MoA become the first directors of the company.
(v) Appointing professionals: The promoters are required to appoint professionals such as bankers, brokers, solicitors and underwriters for preparing the documents necessary for the company. The details of the number of shares allotted to each shareholder, along with his or her addresses for correspondence, are submitted to the registrar.
(vi) Preparing all the documents necessary: After the appointment of professionals, the promoters are required to submit the legal documents necessary such as the MoA, articles of association and consent of directors to the registrar of companies.
What is “Memorandum of Association”? Briefly explain its clauses.
A Memorandum of Association (MoA) is a legal document prepared in the formation and registration process of a limited liability company to define its relationship with shareholders. The MoA is accessible to the public and describes the company’s name, physical address of registered office, names of shareholders and the distribution of shares. The MoA and the Articles of Association serve as the constitution of the company. A memorandum of association (MoA) is the most essential document in the formation of a company as it highlights the company’s main objectives and goals. This document must be signed by at least seven members in the case of a public company and by two persons in the case of a private company. The following are the main clauses of the MoA:
- The name clause: This includes the name of the company which has already been approved by the registrar of companies. It is the name by which the company will be known.
- Registered:office clause: This clause mentions the name of the state where the registered office of the company is situated. It is not mandatory to submit the exact address of the registered office at this stage. However, the address needs to be submitted within 30 days of incorporation of the company.
- Objects clause: This is the most important clause in the MoA as it defines the main objective of the company for which it was formed. The company cannot undertake activities that are not stated in the objects clause. The objects clause is divided into the following two sub-clauses.
(i) The main objects: This sub-clause lists the main objects for which the company is formed. Any clause that is essential for the achievement of the main objectives is considered valid even if it is not contained in the sub-clause.
(ii) Other objects: Objects that are not included in the main-objects clause can be included in this sub-clause. If a company wants to initiate a business activity that is mentioned in this clause, it is required to pass either an ordinary resolution or a special resolution to get the consent of the central government. - Liability clause: This clause states the liability of each shareholder according to the amount unpaid by them for the shares they own.
- Capital clause: This clause defines the authorised capital of the company which it can raise through the issue of shares. It also states the division of the number of shares.
- Association clause: This clause contains the statement by the signatories to the MoA giving their approval to be a part of the company. They also give their consent to buy the qualification shares of the company.
Distinguish between Memorandum of Association and Articles of Association
| Basis of difference | Memorandum of Association (MoA) | Articles of Association (AoA) |
|---|---|---|
| Objective | The MoA defines the character of a company and the scope of its activities. | The AoA defines the rules and regulation of the company. |
| Position | It is the main document of a company which is subordinate to the Companies Act. | It is the subsidiary document of a company which is subordinate to both MoA and the Companies Act. |
| Relationship | The MoA establishes the relation between the company and outsiders. | The AoA defines the relation of the company with its members. |
| Alteration | Altering the MoA requires the approval of a statutory authority. | The AOA can be easily altered by passing a resolution. |
| Ratification | Acts beyond MoA cannot be ratified. | Acts beyond the AoA can be ratified by the members if they do not violate the MoA. |
| Necessity | It is a necessary document. | It is a secondary document. |
What is the meaning of Certificate of Incorporation?
A certificate of incorporation is a legal document/license relating to the formation of a company or corporation. It is a license to form a corporation issued by state government or, in some jurisdictions, by non-governmental entity/corporation. A company legally comes into existence or becomes a separate legal entity on the date stated in its certificate of incorporation. The certificate of incorporation acts as an evidence of regularity of the incorporation of the company even if there is any flaw in its registration process. The operations of a company can immediately commence once its certificate of incorporation is issued.
Discuss the stages of formation of a company.
The following are stages of formation of a company:
- Promotion of the company: Promotion refers to the entire process by which a company is brought into existence. It starts with the conceptualisation of the birth a company and determination of the purpose for which it is to be formed. The persons who conceive the company and invest the initial funds are known as the promoters of the company.
- Incorporation of the company: The stage of incorporation consists of applying for and obtaining the certificate of incorporation after which the company becomes a spate legal entity.
- Subscription of capital: Capital Subscription is done in the form of shares and debentures when a company raises funds from general public. An invitation or prospectus is issued, inviting people to subscribe shares of the company.
- Business commencement: After all the basic formalities necessary for incorporation are completed the company can commence the business operations.
