What went wrong when the king rode under the arch?

It was too low and knocked off his crown

How does the chain of blame unfold in the poem?

Each accused person blames another, ending with the king's own changes

Name the stages in the formation of a company.

Promotion, incorporation and capital subscription (the last stage applies only to a public company).

A promoter is a person who conceives the idea of forming a company and takes the necessary steps to incorporate and float it.

What is the legal position of a promoter?

A promoter is neither an agent nor a trustee of the company; he occupies a fiduciary position, must not make secret profits and is personally liable for preliminary contracts.

What is the Memorandum of Association?

It is the most important document of a company defining its objectives, beyond which the company cannot operate.

List the clauses of the Memorandum of Association.

The name clause, registered office clause, objects clause, liability clause and capital clause.

Distinguish between the Memorandum and Articles of Association.

The memorandum defines the objects and the company's relationship with outsiders, while the articles are the rules of internal management and are subordinate to the memorandum.

What is a prospectus?

A prospectus is an invitation to the public to subscribe to the shares or debentures of a company; it is needed only by a public company, not a private one.

What is the meaning of Certificate of Incorporation?

It is the certificate issued by the Registrar that brings the company into existence as a legal person and is conclusive evidence of its existence.

What is meant by Return of Allotment?

It is a statement of shares allotted that a public company must file with the Registrar within 30 days of allotment.

At which stage does a company interact with SEBI?

At the capital subscription stage, where a public company must obtain SEBI approval before issuing a prospectus to the public.

Formation of a Company

Class 11 Business Studies · Business Studies · Chapter 7

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CBSE Class 11 · Business Studies

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Summary

The formation of a company involves three stages: promotion, incorporation and capital subscription, though a private company — which cannot raise funds from the public — undergoes only the first two stages. Promotion is the conception of a business opportunity and taking steps to give it shape, carried out by a promoter who, under the Companies Act, conceives the idea, conducts technical, financial and economic feasibility studies, gets the name approved by the Registrar of Companies, fixes the signatories to the memorandum, appoints professionals and prepares the necessary documents. Promoters occupy a fiduciary position, are neither agents nor trustees of the company, must not make secret profits and are personally liable for preliminary contracts, which cannot be ratified by the company. The two most important documents are the Memorandum of Association, which defines the objectives through its name, registered office, objects, liability and capital clauses, and the Articles of Association, which contain the rules of internal management and must not contradict the memorandum. On filing these and other documents with the Registrar, a Certificate of Incorporation — the birth certificate of the company and conclusive evidence of its existence — is issued, along with a Corporate Identity Number. A public company then raises capital by obtaining SEBI approval, filing a prospectus, appointing bankers, brokers and underwriters, ensuring minimum subscription (90% of the issue), applying to a stock exchange and allotting shares, filing a Return of Allotment with the Registrar.

Stages in the formation of a companyPromotion and functions of a promoterLegal position of promotersMemorandum of Association and its clausesArticles of AssociationIncorporation and Certificate of IncorporationCapital subscription and SEBI approvalMinimum subscription and allotment of shares

Key terms

Promotion

The first stage in the formation of a company, involving conceiving a business opportunity and taking steps to give it shape.

Promoter

A person who conceives the idea of a company and takes the necessary steps to incorporate and float it, occupying a fiduciary position.

Memorandum of Association

The most important document of a company that defines its objectives through the name, registered office, objects, liability and capital clauses.

Articles of Association

A document containing the rules and regulations for the internal management of a company, subordinate to the memorandum.

Certificate of Incorporation

The certificate issued by the Registrar that marks the birth of a company and is conclusive evidence of its legal existence.

Minimum subscription

The minimum amount, fixed by SEBI at 90% of the issue, that must be subscribed before a company can allot shares.

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The stages in the formation of a company are promotion, incorporation and:

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