Formation of a Company – Complete Guide For Class 11 Business Studies Chapter 7

Our learning resources for “Class 11 Business Studies Chapter 7 – Formation of a Company” are designed to ensure that you grasp this concept with clarity and perfection. Whether you’re studying for an upcoming exam or strengthening your concepts, our engaging animated videos, practice questions and notes offer you the best of integrated learning with interesting explanations and examples. 

Ram and Shyam, running a successful partnership firm in automobile parts, decided to convert their firm into a company after seeing substantial profits. This chapter will guide you through the essentials of forming a company.

What is a Company?

When it comes to understanding business structures, one key concept is the company. So, what exactly is a company?

A company is an association of persons formed for carrying out business activities and has a legal status.

Legal Status: In law, legal status refers to individuals having a particular place in society, relative to the law, determining the laws that affect them.

Every company, whether private or public, must comply with specific legal procedures for its formation. Now, let’s explore the differences between a private and a public company.

Difference between a Private and a Public Company

Private and public companies have distinct characteristics. Let’s break down these differences:

So, those were the primary differences between private and public companies. Next, let’s delve into the formation process of a private company.

Formation Of Companies

Formation of a Private Company

Forming a private company involves two main stages: Promotion and Incorporation. Let’s take a closer look at each stage to understand how a private company is set up.

Formation of a Public Company

Public companies follow a more detailed process involving four stages: Promotion, Incorporation, Capital Subscription, and Commencement of Business. Here’s how it works.

Promoter: The Backbone of Company Formation

When starting a company, a promoter plays a pivotal role. But who exactly is a promoter?

A promoter is a person who conceives an idea to form a company and brings together men, materials, machinery, managerial, and financial resources.

Some famous promoters include Dhirubhai Ambani of Reliance Group, Jamshedji N. Tata, and Ghanshyam Das Birla. Let’s break down the functions of a promoter.

Functions of a Promoter

When it comes to forming a company, promoters undertake several critical functions. Let’s explore these functions:

• Identification of Business Opportunity: The work of a promoter starts with an idea to start a business.
• Feasibility Studies: A detailed investigation to determine if a project is viable.
• Name Approval: Deciding upon a unique and easily remembered name.
• Fixing up Signatories to Memorandum of Association: Appointing reputable businesspeople or professional managers.
• Appointment of Professionals: Hiring brokers, underwriters, solicitors, and bankers.
• Preparation of Necessary Documents: Creating essential documents like the Memorandum of Association and Articles of Association.

Understanding these functions is crucial for anyone looking to start a company. Now, let’s move on to the detailed studies promoters undertake to ensure the feasibility of a business idea.

Feasibility Studies

Before diving into a business venture, conducting feasibility studies is essential. So, what are feasibility studies?

Feasibility Studies involve a detailed investigation to determine if a project is viable or not. The types include:

• Technical Feasibility: Assessing whether the required technology is available.
• Financial Feasibility: Determining if sufficient funds are available.
• Economic Feasibility: Ensuring the project is profitable.

So those were the types of feasibility studies. Next, let’s explore the critical document called the Memorandum of Association.

Memorandum of Association

The Memorandum of Association is a vital document for any company. Let’s understand its significance and contents.

The Memorandum of Association is the charter of the company, defining its objects and powers, and its relationship with outsiders. It contains:

• Name Clause: Contains the name by which the company is known.
• Situation Clause: Specifies the location of the registered office.
• Object Clause: Defines the purpose for which the company is formed.
• Liability Clause: States the liability of the members.
• Capital Clause: Specifies the amount of share capital.
• Association Clause: Indicates the intention of the signatories to form the company.

With a clear understanding of the Memorandum of Association, we now move on to the Articles of Association, another essential document.

Articles of Association

The Articles of Association lay down the rules and regulations for a company. Let’s see what they entail.

The Articles of Association are the bye-laws of the company, containing rules and regulations to run the business. It defines the internal relationship of the company and its members.

Now that we’ve covered the Articles of Association, let’s proceed to the incorporation stage.

Incorporation (Stage 2)

The incorporation stage is crucial for legally registering a company. Let’s go through the steps involved.

Incorporation refers to the registration of the company under the Companies Act 1956. The steps involved include:

• Filing of Necessary Documents: Submitting required documents to the Registrar.
• Payment of Fees: Paying the necessary registration fees.
• Certificate of Incorporation: Receiving the legal document that signifies the company’s formation.

With the company incorporated, the next stage for public companies is capital subscription.

Capital Subscription

For public companies, raising funds is a key step. Here’s how they do it.

For public companies, raising funds involves issuing a Prospectus and inviting the public to subscribe to the company’s capital. Steps include:

• SEBI Approval: Obtaining approval from the Securities and Exchange Board of India.
• Filing of Prospectus: Submitting the prospectus to the Registrar.
• Minimum Subscription: Ensuring a minimum amount of capital is raised.
• Application to Stock Exchange: Listing the company on a stock exchange.
• Allotment of Shares: Distributing shares to subscribers.

After understanding capital subscription, the final step is obtaining the Certificate of Commencement of Business.

Commencement of Business

The last step in forming a company is the commencement of business. Let’s see what this entails.

A company can commence business after receiving a Certificate of Commencement of Business, ensuring all formalities are fulfilled, such as:

• Minimum subscription received: Ensuring enough capital is raised.
• Payment of application and allotment money by directors: Verifying all necessary payments are made.
• Fulfillment of all requirements: Ensuring all legal and procedural requirements are met.

The Registrar examines the authenticity of all the documents and issues a Certificate of Commencement of Business.

Conclusion

The formation of a company involves multiple stages and meticulous planning. Understanding each step, from promotion to commencement of business, is crucial for anyone looking to start a company. This chapter not only provides a theoretical foundation but also practical insights into the formation of a company.