CBSE Class 11 Business Studies Revision Notes Chapter 7 Formation of a Company
Formation of a Company explains the legal process through which a business idea becomes a registered company. For CBSE Class 11 Business Studies 2026–27, this chapter covers promotion, incorporation, capital subscription, promoters and company registration documents.
Formation of a Company explains the stages involved in creating a company under the law. A company does not come into existence only because a business idea is found. It must pass through legal steps such as promotion, incorporation and, in case of a public company, capital subscription.
Use these CBSE Class 11 Business Studies Revision Notes Chapter 7 to revise promoters, feasibility studies, Memorandum of Association, Articles of Association, Certificate of Incorporation, Certificate of Commencement of Business and the process of raising capital.
Key Takeaways
- Formation of a company: It is a legal process involving several formalities and documents.
- Three stages: Promotion, incorporation and capital subscription are the main stages.
- Promoter: A promoter identifies the business opportunity and takes steps to form the company.
- Certificate of Incorporation: It marks the legal birth of the company.
Need help with Formation of a Company?
Access interactive practice, live doubt-solving sessions and complete NCERT-based support on the Extramarks Learning App. Sign Up Free
Access Class 11 Business Studies Chapter 7 Formation of a Company Notes in 30 Minutes
These notes are arranged for 30-minute revision, so you can quickly review the stages of company formation, role of promoter, registration documents and capital subscription process.
The formation of a company has three main stages:
| Stage | Meaning |
| Promotion | Finding a business idea and taking steps to form a company |
| Incorporation | Registering the company under the Companies Act |
| Capital Subscription | Raising funds from the public by a public company |
A private company generally completes its formation after incorporation. A public company must also complete capital subscription formalities before it can raise funds from the public.
Formation of a Company in Class 11 Business Studies Chapter 7 Notes
Formation of a company means completing the legal process required to bring a company into existence.
It starts with a business idea and ends when the company is legally ready to start business.
The process involves:
- identifying a business opportunity
- conducting feasibility studies
- selecting a company name
- preparing documents
- registering with the Registrar of Companies
- receiving the Certificate of Incorporation
- completing capital subscription formalities, where required
Stages in Formation of a Company
The three stages in the formation of a company are promotion, incorporation and capital subscription.
| Stage | Applies To | Main Purpose |
| Promotion | Public and private companies | To create and prepare the business idea |
| Incorporation | Public and private companies | To legally register the company |
| Capital Subscription | Mainly public companies | To raise capital from the public |
Promotion of a Company
Promotion is the first stage in the formation of a company.
It involves discovering a business opportunity and taking the initiative to form a company to use that opportunity.
Promotion includes planning, checking feasibility, assembling resources, preparing documents and completing early formalities.
Promoter Meaning
A promoter is a person who undertakes to form a company with reference to a given project and sets it going.
A promoter may be an individual, a group of people or even a company.
As per the Companies Act, 2013, a promoter includes a person:
| Point | Meaning |
| Named as promoter | Named in the prospectus or identified in the annual return |
| Controls company affairs | Controls company affairs directly or indirectly |
| Guides the Board | Gives advice or directions followed by the Board of Directors |
A person acting only in a professional capacity is not treated as a promoter.
Functions of Promoter
Promoters perform several functions before a company is incorporated.
| Function | Meaning |
| Identification of business opportunity | Finding a product, service or business idea |
| Feasibility studies | Checking whether the idea can become a profitable project |
| Name approval | Applying to the Registrar for name approval |
| Fixing signatories | Selecting people who will sign the Memorandum of Association |
| Appointment of professionals | Appointing auditors, bankers and other experts |
| Preparation of documents | Preparing documents required for company registration |
Identification of Business Opportunity
The first function of a promoter is to identify a business opportunity.
The opportunity may involve a new product, new service, new market, new technology or new distribution method.
After identifying the opportunity, the promoter studies its technical and economic prospects.
Feasibility Studies
Not every business idea can become a successful company.
Promoters conduct feasibility studies to check whether the idea can be converted into a real project.
The three main feasibility studies are:
| Feasibility Study | What It Checks |
| Technical feasibility | Whether raw materials, technology, labour and infrastructure are available |
| Financial feasibility | Whether required capital can be arranged |
| Economic feasibility | Whether the project can earn profit |
Technical Feasibility
Technical feasibility checks whether the project can be carried out with available technology, raw materials, labour and infrastructure.
If required materials or technology are not available, the project may be dropped.
Financial Feasibility
Financial feasibility checks whether the required funds can be arranged.
If the capital requirement is too high and cannot be arranged, the idea may not be taken forward.
Economic Feasibility
Economic feasibility checks whether the project is likely to be profitable.
A project may be technically possible and financially possible, but still not profitable.
Name Approval
The promoter selects a name for the company and applies to the Registrar of Companies for approval.
The proposed name should not be identical to an existing company name, misleading or prohibited under law.
Fixing Signatories to the Memorandum of Association
Promoters decide who will sign the Memorandum of Association.
Usually, the signatories also become the first directors of the company. Their written consent is required.
Appointment of Professionals
Promoters appoint professionals such as auditors, bankers, legal experts and other specialists.
These professionals help prepare and file registration documents.
Preparation of Necessary Documents
Promoters prepare the documents needed for company registration.
The main documents include Memorandum of Association, Articles of Association and consent of directors.
Documents Required for Registration of a Company
A company must submit important documents to the Registrar of Companies for registration.
| Document | Purpose |
| Memorandum of Association | Defines the objectives and scope of the company |
| Articles of Association | Contains rules for internal management |
| Consent of proposed directors | Confirms willingness to act as directors |
| Agreement | Covers agreement with managing director or manager, if any |
| Statutory declaration | Confirms legal requirements have been met |
| Receipt of payment of fee | Shows registration fee has been paid |
Memorandum of Association
Memorandum of Association, or MOA, is the most important document for company registration.
It defines the objectives of the company and the scope within which the company can operate.
A company cannot legally undertake activities that are outside its Memorandum of Association.
Clauses of Memorandum of Association
| Clause | Meaning |
| Name Clause | States the approved name of the company |
| Registered Office Clause | States the state where registered office will be located |
| Objects Clause | States the purpose for which the company is formed |
| Liability Clause | States the liability of members |
| Capital Clause | States the authorised share capital |
| Subscription Clause | States the subscribers’ intention to form the company |
Name Clause
The Name Clause contains the approved name of the company.
The name should not be identical to or closely resemble an existing company name.
Registered Office Clause
The Registered Office Clause states the name of the state where the company’s registered office will be situated.
The exact address may be submitted later within the prescribed time.
Objects Clause
The Objects Clause defines the purpose for which the company is formed.
This is one of the most important clauses because the company cannot go beyond the objects mentioned in it.
Liability Clause
The Liability Clause states the extent of liability of the company’s members.
In a company limited by shares, members are liable only up to the unpaid amount on their shares.
Capital Clause
The Capital Clause states the maximum authorised share capital of the company.
It also mentions the division of capital into shares of fixed value.
Subscription Clause
The Subscription Clause states that the subscribers agree to form the company and take the shares mentioned against their names.
A public company needs at least seven subscribers. A private company needs at least two subscribers.
Articles of Association
Articles of Association, or AOA, contains the rules for internal management of the company.
It explains how the company will run its internal affairs.
The Articles of Association must not contradict the Memorandum of Association.
Matters Covered in Articles of Association
| Matter | Meaning |
| Share capital | Rules about shares and share certificates |
| Allotment of shares | Rules for issuing shares |
| Calls on shares | Rules for demanding unpaid share money |
| Transfer of shares | Rules for transfer and transmission |
| Voting rights | Rules for voting and proxies |
| Meetings | Rules for general and board meetings |
| Directors | Appointment, powers and duties of directors |
| Dividends | Rules for declaring dividends |
| Accounts and audit | Rules for accounts and audit |
| Winding up | Rules related to closure of company |
Difference Between Memorandum of Association and Articles of Association
| Basis | Memorandum of Association | Articles of Association |
| Meaning | Defines company objectives and scope | Defines internal rules of management |
| Nature | Main document | Subsidiary document |
| Relationship | Controls the Articles | Must follow the Memorandum |
| Focus | External relationship and powers | Internal management |
| Importance | Company cannot act beyond it | Company manages affairs through it |
Consent of Proposed Directors
Every person named as a director must give written consent to act as director.
They also agree to take and pay for qualification shares, if required by the Articles of Association.
Agreement
If the company proposes to appoint a Managing Director, whole-time Director or Manager, the agreement must be submitted to the Registrar.
This document shows the terms of appointment.
Statutory Declaration
A statutory declaration states that all legal requirements for company registration have been completed.
It can be signed by an advocate, chartered accountant, cost accountant, company secretary or a person named as director, manager or secretary.
Receipt of Payment of Fee
The company must pay the required registration fee.
The amount depends on the authorised share capital of the company.
Position of Promoters
Promoters occupy a fiduciary position in relation to the company.
This means they must act in good faith and must not misuse their position.
| Rule | Explanation |
| No secret profit | Promoters cannot make hidden gains |
| Disclosure required | Any profit made must be disclosed |
| Liability for non-disclosure | Company can rescind contract and recover money |
| Damages | Company can sue promoters for losses |
| Pre-incorporation expenses | Promoters cannot claim expenses as a legal right |
| Personal liability | Promoters may be liable for preliminary contracts |
Preliminary Contracts
Preliminary contracts are contracts made by promoters before the company is incorporated.
These contracts are also called pre-incorporation contracts.
They are not legally binding on the company because the company does not exist at that time.
The company may enter into a fresh contract after incorporation on the same terms, but it cannot be forced to honour a preliminary contract.
Incorporation of Company
Incorporation is the second stage in the formation of a company.
At this stage, promoters apply to the Registrar of Companies for registration.
The application must include the required documents and fees.
If the Registrar is satisfied that all legal requirements have been completed, the Certificate of Incorporation is issued.
Documents Submitted at Incorporation Stage
| Document | Requirement |
| Memorandum of Association | Signed, stamped and witnessed |
| Articles of Association | Signed, stamped and witnessed |
| Consent of directors | Written consent to act as directors |
| Agreement | Required if there is an agreement with manager or director |
| Name approval letter | Copy of Registrar’s name approval |
| Statutory declaration | Confirms compliance with legal requirements |
| Registered office notice | Exact address or later submission within prescribed time |
| Fee receipt | Proof of payment of registration fee |
Certificate of Incorporation
Certificate of Incorporation is the document issued by the Registrar after registration.
It marks the legal birth of the company.
From the date mentioned on this certificate, the company becomes a separate legal entity with perpetual succession.
Effect of Certificate of Incorporation
| Effect | Meaning |
| Legal birth | Company legally comes into existence |
| Separate legal entity | Company becomes separate from its members |
| Perpetual succession | Company continues despite changes in members |
| Valid contracts | Company can enter into contracts |
| Conclusive evidence | Incorporation cannot be challenged once certificate is issued |
The Certificate of Incorporation is also called the birth certificate of the company.
Corporate Identity Number
After incorporation, the Registrar of Companies allots a Corporate Identity Number, or CIN, to the company.
CIN helps identify the registered company in official records.
Director Identification Number
Every person who wants to be appointed as director must apply for Director Identification Number, or DIN.
No individual can hold more than one DIN.
DIN helps maintain a record of directors across companies.
Certificate of Commencement of Business
Certificate of Commencement of Business allows a company to start its business operations.
Both public and private companies are required to obtain the certificate for commencement of business within 180 days of incorporation.
Once this certificate is issued by the Registrar of Companies, the company can start business operations.
Capital Subscription
Capital subscription is the third stage in the formation of a company.
This stage is mainly required for a public company because it can raise funds from the public through shares and debentures.
A private company cannot invite the public to subscribe to its shares.
Steps in Capital Subscription
A public company must complete several formalities before raising capital from the public.
| Step | Meaning |
| SEBI approval | Approval from Securities and Exchange Board of India |
| Filing of prospectus | Filing prospectus or statement in lieu of prospectus |
| Appointment of bankers, brokers and underwriters | Appointing agencies to support share issue |
| Minimum subscription | Receiving applications for minimum required shares |
| Application to stock exchange | Seeking permission for shares or debentures to be traded |
| Allotment of shares | Distributing shares to applicants |
SEBI Approval
SEBI stands for Securities and Exchange Board of India.
A public company that wants to raise funds from the public must follow SEBI guidelines.
The company must disclose all important information and must not hide any material facts from investors.
Filing of Prospectus
A prospectus is an invitation to the public to subscribe to the shares or debentures of the company.
A copy of the prospectus, or statement in lieu of prospectus, must be filed with the Registrar of Companies.
Appointment of Bankers, Brokers and Underwriters
A company appoints bankers, brokers and underwriters for the public issue.
| Party | Role |
| Bankers | Receive application money |
| Brokers | Distribute application forms and encourage applications |
| Underwriters | Agree to buy shares if the public does not subscribe fully |
Minimum Subscription
Minimum subscription means the minimum number of shares that must be applied for before the company can proceed with allotment.
It protects the company from starting business with insufficient funds.
Application to Stock Exchange
A public company must apply to at least one stock exchange for permission to trade its shares or debentures.
If permission is not obtained within the prescribed time, the allotment becomes invalid.
Allotment of Shares
Allotment of shares means issuing shares to applicants.
The application money is kept in a separate bank account and cannot be used until allotment is completed.
If fewer shares are allotted than applied for, excess application money is returned.
Private Company vs Public Company in Formation
| Basis | Private Company | Public Company |
| Public issue | Cannot raise funds from public | Can raise funds from public |
| Prospectus | Not required | Required for public issue |
| Minimum subscription | Not required | Required |
| Capital subscription stage | Usually not required | Required |
| Number of subscribers to MOA | Minimum 2 | Minimum 7 |
Quick Highlights of Business Studies Class 11 Chapter 7 Notes
| Topic | Quick Revision Point |
| Formation of company | Legal process of creating a company |
| Promotion | First stage of company formation |
| Promoter | Person who takes steps to form a company |
| Feasibility studies | Technical, financial and economic studies |
| Incorporation | Registration of the company |
| MOA | Defines company objectives |
| AOA | Defines internal management rules |
| Certificate of Incorporation | Legal birth certificate of company |
| Capital Subscription | Raising funds from public |
| Minimum Subscription | Minimum share applications required |
| SEBI Approval | Needed before public fund raising |
Important Terms from CBSE Class 11 Business Studies Revision Notes Chapter 7
| Term | Meaning |
| Formation of a Company | Process of legally creating a company |
| Promotion | First stage in which a business idea is developed |
| Promoter | Person who undertakes to form a company |
| Technical feasibility | Study of whether the project can be technically executed |
| Financial feasibility | Study of whether required funds can be arranged |
| Economic feasibility | Study of whether the project will be profitable |
| Memorandum of Association | Document defining company objectives and scope |
| Articles of Association | Document containing internal management rules |
| Certificate of Incorporation | Document marking the legal birth of the company |
| Preliminary contracts | Contracts entered into before incorporation |
| CIN | Corporate Identity Number |
| DIN | Director Identification Number |
| Certificate of Commencement of Business | Certificate allowing business operations to start |
| Prospectus | Invitation to public to subscribe to securities |
| Minimum Subscription | Minimum amount that must be subscribed before allotment |
| Allotment of Shares | Distribution of shares to applicants |
Useful Links for Class 11 Business Studies
| Section | Useful Links |
| Syllabus | CBSE Class 11 Business Studies Syllabus |
| Revision Notes | CBSE Class 11 Business Studies Revision Notes |
| Business Studies Notes | CBSE Class 11 Business Studies Revision Notes Chapter 1 |
| Business Studies Notes | CBSE Class 11 Business Studies Revision Notes Chapter 2 |
| NCERT Solutions | NCERT Solutions Class 11 Business Studies |
| Sample Papers | CBSE Sample Papers for Class 11 Business Studies |
| Important Questions | Important Questions Class 11 Business Studies |
| NCERT Books | NCERT Books for Class 11 Business Studies |
FAQs (Frequently Asked Questions)
The three stages in formation of a company are promotion, incorporation and capital subscription. Promotion starts with the business idea, incorporation gives the company legal existence and capital subscription helps a public company raise funds from the public.
A promoter is a person who takes steps to form a company. The promoter identifies a business opportunity, conducts feasibility studies, gets name approval, fixes signatories, appoints professionals and prepares documents for registration.
MOA defines the objectives and scope of the company. AOA contains the rules for internal management. MOA is the main document, while AOA is subsidiary to it and cannot contradict it.
Certificate of Incorporation is the document issued by the Registrar after company registration. It marks the legal birth of the company and proves that the company has become a separate legal entity.
Capital subscription is the stage where a public company raises funds from the public through shares or debentures. It includes SEBI approval, filing of prospectus, appointment of bankers and brokers, minimum subscription and allotment of shares.