CBSE Class 11 Business Studies Revision Notes Chapter 7

CBSE Class 11 Business Studies Revision Notes Chapter 7 – Formation of a Company 

Students can gain a thorough understanding of the principles of company formation by referring to the Class 11 Business Studies Chapter 7 Notes. The chapter covers all topics related to the formation of a company, promotion of a company, functions of a promoter, documents required for registration of a company and so on. Business Studies Class 11 Chapter 7 Notes by Extramarks are written by subject-matter experts in accordance with the updated CBSE Syllabus.

Revision Notes for CBSE Class 11 Business Studies Chapter 7 – Free Download

Access Class 11 Business Studies Chapter 7 – Formation of a Company Notes 

Formation of a Company 

The process of forming a company is time-consuming and involves many legal procedures and formalities.

The three important steps in the formation of a company are:

1. Promotion 
2. Incorporation  
3. Subscription of capital

Unlike a public limited company, which cannot raise funds from the public, a private company is not required to either produce a prospectus or complete the formalities of a minimum subscription.

Promoter

According to Section 2(69) of the Companies Act 2013, a promoter is one: 

• who is identified as one by the company in the annual return referred to in section 92 or who has been named as one in a prospectus;
• who controls the company’s operations directly or indirectly, whether as a director, shareholder, or in another capacity; or
• whose orders, recommendations or advice are followed by the Board of Directors of the company; however, nothing in this sub-clause applies to someone who is merely acting in their professional capacity.

Functions of Promoter

1. Identification of a business opportunity – A promoter is entrusted to identify a business opportunity, that could be either in the form of making a product available through a new channel, developing a new product or service, or any other. A promoter also assesses the technical and economic feasibility of such an opportunity. 
2. Feasibility studies – It is not always feasible or profitable to turn all potential business ideas into actual projects. As a result, the promoters are needed to do extensive feasibility assessments.

The following feasibility studies are carried out:

• Technical feasibility: An excellent idea may not be technically feasible to implement as raw materials like material, labour, technology, infrastructure, etc are not readily available. 
• Financial viability: An adequate capital is essential for the smooth running of a business. Therefore, the promoters calculate the capital required to pursue the recognised business idea. If the capital cannot be secured, the project is abandoned.
• Economic feasibility: The project might be technically and financially possible, but it may not be profitable. Therefore, this step focuses on the cost-benefit analysis of the project to find out its viability.

3. Name approval – The promoter chooses a name for the company and is entrusted to apply for the registration in the registrar of companies. 
4. Fixing the Signatories to the Memorandum of Association – The promoters choose the individuals who will sign the proposed company’s memorandum of association. To act as Directors and to purchase the Company’s Qualifying Shares, they must provide their written consent.
5. Appointment of professionals – The promoters select auditors, mercantile bankers and others to assist them in preparing the essential documents needed to be filed with the Registrar of Companies.
6. Preparation of necessary documents – In order for the company to be registered, the promoter takes steps to prepare all of the documents that must be submitted to the Registrar of Companies. Among them are the Memorandum of Association, Articles of Association and Directors’ Consent.

Documents required to be submitted

The following six documents are required to be submitted for registration of a company:

1. Memorandum of Association – It specifies the company’s goals. It is duly signed, stamped and witnessed. For a public company, it is signed by at least seven members. However, in the case of a private company only two members’ signatures are sufficient. No company can legally engage in activities that are not included in its memorandum of association.

Some of the clauses included in the Memorandum of Association are as follows: 

• Name Clause
• Registered Office Clause
• Object’s Clause
• Liability Clause
• Capital Clause
• Subscription Clause 

2. Articles of Association – An organisation’s internal management is governed by its Articles of Association. Nothing in the Memorandum of Association should be in conflict with or superseded by these regulations because they are an addendum to it.
3. Consent of Proposed Directors – In addition to the Memorandum and Articles of Association, everyone nominated as a director must give their written consent by signing and stating that they accept to function as directors and agree to purchase and pay for qualification shares.
4. Agreement – The agreement that the firm signs with its Director or a full-time Director or Manager is required to be submitted to the Registrar for the company to be registered. 
5. Statutory Declaration: This document, which must be submitted to the Registrar with the other documents mentioned above in order for the company to be registered, establishes the fact that all legal requirements for registration have been satisfied.
6. Receipt of Payment of Fee – The necessary fees for the company’s registration must be paid. The number of such fees is determined based on the company’s authorised share capital.

Position of Promoters

• The promoters have a fiduciary relationship with the company, i.e. a relationship based on trust and confidence. 
• The promoters cannot make any hidden gains. They can only make a profit that is publicly revealed. 
• In the event of non-disclosure, the company can cancel the contract and reclaim the money paid to the promoters.
• The company can also sue the promoters for damages or losses incurred because of material information not being disclosed.
• Promoters cannot claim expenses incurred in the company’s promotion. The company, on the other hand, has a legal right to choose to reimburse them for their pre-incorporation costs.

Effect of the Certificate of Incorporation

• The legal existence of the company is marked by the date inscribed on the Certificate of Incorporation.
• On the date inscribed, the company becomes a separate legal entity with perpetual succession. It becomes free to enter legally binding contracts.

Process of Capital Subscription 

Public companies require SEBI clearance to raise funds from the public since a request for approval to trade in shares or debentures is to be made to the stock exchange. A copy of the prospectus or a statement in lieu of the prospectus is received by the Registrar of Companies. 

1. SEBI Approval

The Securities and Exchange Board of India has issued recommendations for information disclosure and investor protection. In order to raise money from the public, a public company must fully disclose all pertinent information to potential investors and must not withhold any material information.

2. Filing of Prospectus

The prospectus includes all notifications, circulars, advertisements and other relevant information that serves as an invitation to public offers. A copy of the prospectus or a statement in lieu of the prospectus is received by the Registrar of Companies.

3. Appointment of Bankers, Brokers and Underwriters

In order to sell the company’s shares, brokers are hired to distribute application forms and encourage others to submit them. In the event that no one orders shares, the underwriters later purchase them. 

4. Minimum Subscription

To prevent enterprises from starting their business with insufficient resources, the company obtains applications for a minimum number of shares before proceeding with the issuance of shares further. This limit of the minimum number of shares is defined as ‘minimum subscription’ under the Companies Act.

5. Application to Stock Exchange

Every company must request permission from at least one stock exchange before trading in its shares or debentures. The allocation loses value if such approval is not obtained within ten weeks of the closing date of the subscription list.

6. Allotment of Shares

The money received for the share application is kept in a separate bank account and not used by the company until its shares are distributed. If the number of shares allocated is less than the number applied for, or if no shares are assigned to the applicant at all, any excess application money is returned.

Business Studies Class 11 Notes Chapter 7 Formation of a Company 

Overview

The Formation/Incorporation of a company involves the registration of a new company under the laws of the land. It is only after the incorporation that the company is considered a separate legal entity and is seen as a person by the law. Chapter 7 Business Studies Class 11 Notes includes all the topics of the chapter for in-depth learning. The notes cover the topics in a precise and easy-to-understand manner, thus making it easier for students to prepare the chapter thoroughly for their exams.

Stages in Formation of a Company

Business Studies Class 11 Notes Chapter 7 discusses all the stages in the formation of a company in detail. Since the formation of a company is a time taking process, the process is divided into many stages. 

• Promotion Stage: It is the first stage of the formation of a company, where activities are designed to promote the business operations of the proposed company. 
• Registration Stage: It is the stage where a company gets registered under the Companies Act.
• Certificate of Incorporation: Following the company’s registration by submitting the necessary paperwork to the registrar, a certificate of incorporation is issued, attesting to the company’s compliance with the Companies Act.
• Certificate of Commencement: A public company additionally requires a Certificate of Commencement to launch its operations, whereas a private company may do so following the issuance of a Certificate of Incorporation. The company is issuing this certificate in order to increase its share capital.

Documents Required in the Formation of a Company

The documents required for the formation of a company are as follows: 

• Memorandum of Association: The memorandum of association is an essential document in the registration process of the company. This record is also known as a memorandum. 
• Articles of Association: This document provides information about the rules and regulations as well as the purpose or goal of the company. This is considered an essential document in the registration process as it specifies how the tasks in the company will be executed.