Formation of a Company
Class 11 Business Studies · Business Studies · Chapter 7
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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.
Extra questions & answers
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The stages in the formation of a company are promotion, incorporation and: