Business Studies XI

Formation of a Company

1. Name the stages in the formation of a company.

Following stages are there:

1. Promotion: This step deals with idea generation and implementing it as a company.

2. Incorporation: This stage consists of applying for the certificate of incorporation and obtaining the same, after the certificate is received a company becomes a valid entity in the books of law.

3. Issuing of shares and debentures: This stage involves raising capital in the form of issuing stocks and debentures to the public.

4. Business commencement: In this stage the formalities are completed and company commences business.

2. What is a prospectus? Is it necessary for every company to file a prospectus?

A prospectus is an invitation from a company to the general public informing about availability to purchase or subscribe shares and debentures issued by the company. IPO also known as Initial Public Offering and is a source of raising of funds from the public. But, in case of a private company, there is no need to file a prospectus as private companies are restricted from issuing IPO. A prospectus can be required if the aim is to generate funds from public. Private companies are not required to file a prospectus.

3. Briefly explain the term ‘Return of Allotment’.

A statement submitted to the Registrar containing names and address of shareholders with the number of shares that are allotted to each of them is called as Return of Allotment. It needs to be signed by the director or a secretary within 30 days of the allotment. It shows that the company has received the minimum necessary subscription.

Long Questions

1. What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.

The process of conceiving or developing an idea of business and taking the initial step towards converting it into a company so that the idea can be converted into a business project is called as promotion and the people who take those initial steps are known as promoters of the company.

A promoter, apart from developing the business idea also needs to analyse the prospects in future and take necessary steps to fulfil the purpose. The promoter needs to arrange labour, machinery and capital. So here are some of the legal liabilities that a promoter has towards the company:

1. A promoter is neither an agent nor a trustee of the company as prior to getting incorporated a company does not exist as a legal entity.

2. Promoters cannot make secret profits by making deals acting on behalf of the organisation or company.

3. The promoters can be held legally liable for any untrue statement that will be filed in the company prospectus.

4. Expenses incurred by promoters during the promotion of the company cannot be claimed.

5. The promoters are not may or may not be considered for payments before a company gets incorporated. Based on company’s discretion they may be allotted shares to compensate for their exemplary services.

2. Explain the steps taken by promoters in the promotion of a company.

A promoter is that person who takes up the initiative of forming a company based on the business idea and takes the necessary steps to ensure the purpose is met. A promoter has the do the following things for promoting the company:

1. Identifying the business opportunity: The first step for a promoter is to identify a business opportunity and then analysing whether it is worth investing in.

2. Checking the feasibility of the idea: The idea that came to mind might not be feasible enough so that it can be translated into a business. For this some detailed study should be done and for this following types of checks should be done:

i. Technical feasibility: In some ideas the technical feasibility may be less, the reason for such can be the technology or the kind of raw material required for executing the project is not easily available. So this part needs to be taken care of.

ii. Financial Feasibility: All the business require initial capital to get started and sustain in the market. Also the promoters need to determine the cost that need to be beared for implementing the idea. Therefore, if there is fund crunch and the project cost is humongous. Plan needs to be changed.

iii. Economic feasibility: In some case the probability of success can be very low in spite of all other factors working in favour, that part also needs to be considered.

3. Choosing company name: As soon as a decision to establish a company is taken, the promoters select a name for it. For getting the approval of the proposed name, application needs to be submitted to registrar of companies of the state. The application should contain three names in order of preference as the possibility of similar name may exist.

4. Choosing members to sign MoA: A promoter needs to choose members who will sign the Memorandum of Association (MoA) and will become the directors of company.

5. Selecting professionals: The promoters should hire professionals who will be preparing the necessary documents for the company, these professionals can be bankers, solicitors, brokers and underwriters.

6. Getting documents ready: After all professionals are appointed, the promoter submits all the prepared documents to the registrar of companies.

3. What is a ‘Memorandum of Association’? Briefly explain its clauses.

One of the most essential document in the formation of a company is Memorandum of Association or MoA. It shows the main objectives of the company and its goals in the long term.

The MoA regulates the incorporated company activities such that it can undertake activities that are mentioned in MoA. The number of persons signing the form varies as per the type of company (seven in case of public company while two members for private). The main clauses of MoA can be as follows

1. Name: It should include the name of the company that has been approved by registrar of companies.

2. Registered Office: The clause mentions address and name of company in which it is situated. Name giving is not mandatory, but it is essential to submit company name within 30 days of its incorporation.

3. Objects clause: Most important clause while filling MoA is it defines the objectives for which a company is raised. Any activity cannot be undertaken that are not stated in objects clause. There are two types of object clause namely, main objects and other objects.

4. Liability clause: This clause is all about liability of each shareholder as per amount invested by them or the shares they own.

5. Capital Clause: It refers to the clause of raising authorised capital by issuing of shares

6. Association clause: It contains the statement by those who sign the MoA and who accept MoA and also the consent of buying qualification shares.

4. What is the meaning of Certificate of Incorporation?

A company becomes a legal entity by the date printed on Certificate of Incorporation. A company can go into valid contracts after the conclusiveness of certificate of incorporation. It acts as an evidence of legal existence of a company and regularity of the incorporation.

A company becomes a legal entity once certificate of Incorporation is issued. A private company can immediately start business and raise funds from relatives, friends or through some arrangement and can start business, while a public company has to undergo two more steps to complete its formation.

Social Responsibilities of a Business (Prev Lesson)
(Next Lesson) Sources of Business Finance
Back to Business Studies XI

No Comments

Post a Reply

error: Content is protected !!