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Class 11 Commerce

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Formation of a Company

Formation of a Company

Action PlanNotesQuestionsMock-Test
Study Action Plan (Sorted by Difficulty)
Certificate of Incorporation
Accuracy: 33%
Total Attempted3
Total Correct1
Total Incorrect2
Difficulty Level:
High
Memorandum of Association
Accuracy: 33%
Total Attempted3
Total Correct1
Total Incorrect2
Difficulty Level:
High
Articles of Association
Accuracy: 50%
Total Attempted2
Total Correct1
Total Incorrect1
Difficulty Level:
Medium
One Person Company (OPC)
Accuracy: 67%
Total Attempted3
Total Correct2
Total Incorrect1
Difficulty Level:
Medium
Stages in Company Formation
Accuracy: 67%
Total Attempted3
Total Correct2
Total Incorrect1
Difficulty Level:
Medium
Role of Promoters
Accuracy: 100%
Total Attempted2
Total Correct2
Total Incorrect0
Difficulty Level:
Low

Learning Objectives

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Learning Objectives

  • Specify the important stages in the formation of a company.
  • Describe the steps involved in each stage of company formation.
  • Specify the documents to be submitted to the registrar of companies.
  • State the need for a certificate of incorporation and certificate to commence business.

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Revision Notes & Summary

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Chapter 7: Formation of a Company

Learning Objectives

After studying this chapter, you should be able to:
  • Specify the important stages in the formation of a company.
  • Describe the steps involved in each stage of company formation.
  • Specify the documents to be submitted to the registrar of companies.
  • State the need for a certificate of incorporation and certificate to commence business.

Stages in the Formation of a Company

  1. Promotion: This is the first stage where a business idea is conceived and steps are taken to form a company.
    • Steps in Promotion:
      • Approval of the company's name from the Registrar of Companies.
      • Fixing signatories to the Memorandum of Association.
      • Appointment of professionals to assist in document preparation.
      • Preparation of necessary documents:
        • Memorandum of Association
        • Articles of Association
        • Consent of proposed directors
        • Agreement with proposed managing or whole-time director
        • Statutory declaration
  2. Incorporation: An application is made to the Registrar of Companies along with necessary documents and registration fee. The Registrar issues a certificate of incorporation after scrutiny.
    • Certificate of Incorporation: This is conclusive evidence of the legal existence of the company.
  3. Capital Subscription: A public company raising funds from the public must follow these steps:
    • SEBI approval.
    • File a copy of the prospectus with the Registrar of Companies.
    • Appointment of brokers, bankers, and underwriters.
    • Ensure minimum subscription is received (90% of shares to be issued).
    • Application for listing of company's securities.
    • Refund/adjust excess application money received.
    • Issue allotment letters to successful applicants.
    • File return of allotment with the Registrar of Companies (ROC).

Important Documents Required for Incorporation

  • Memorandum of Association: Defines the objectives for which the company is formed.
  • Articles of Association: Rules of internal management of the company.
  • Consent of Proposed Directors: Written consent confirming their agreement to act as directors.
  • Agreement with Proposed Managing Director: If applicable.
  • Statutory Declaration: Affirmation that all legal requirements for registration have been complied with.

Key Terms

  • Promotion: The process of initiating the formation of a company.
  • Prospectus: An invitation to the public to apply for securities of the company.
  • Memorandum of Association: The main document defining the company's objectives.
  • Incorporation: The legal process of forming a company.
  • Articles of Association: Internal rules governing the company.
  • Capital Subscription: The process of raising funds from the public.
  • Commencement of Business: The stage when a company can start its operations.
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Practice Test – MCQs, True/False

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Multiple Choice Questions

A.

It limits the liability of the company to its creditors.

B.

It limits the liability of the members to the amount unpaid on their shares.

C.

It specifies the liability of the directors.

D.

It outlines the company's liability to the government.
Correct Answer: B

Solution:

The Liability Clause limits the liability of the members to the amount unpaid on the shares owned by them.

Chapter Concept:

Memorandum of Association

A.

They are superior to the Memorandum of Association.

B.

They are subordinate to the Memorandum of Association.

C.

They replace the Memorandum of Association.

D.

They are identical to the Memorandum of Association.
Correct Answer: B

Solution:

The Articles of Association are subordinate to the Memorandum of Association and should not contradict it.

Chapter Concept:

Articles of Association

A.

The company can legally commence business operations.

B.

The company becomes a legal entity with perpetual succession.

C.

The company is required to immediately issue shares to the public.

D.

The company is entitled to enter into valid contracts.
Correct Answer: C

Solution:

Receiving a Certificate of Incorporation does not require a company to immediately issue shares to the public. It signifies the legal formation of the company, allowing it to commence business and enter into contracts.

Chapter Concept:

Certificate of Incorporation

A.

A document outlining the internal management rules of a company.

B.

A legal document inviting the public to subscribe to the company's securities.

C.

A certificate issued by the registrar confirming the company's registration.

D.

A report detailing the financial performance of the company.
Correct Answer: B

Solution:

A prospectus is a legal document that invites the public to subscribe to the company's securities, providing essential information to potential investors.

Chapter Concept:

Stages in Company Formation

A.

It serves as a prospectus for potential investors.

B.

It is a legal document that signifies the birth of the company as a legal entity.

C.

It outlines the internal management rules of the company.

D.

It provides a detailed financial plan for the company.
Correct Answer: B

Solution:

The Certificate of Incorporation is a legal document that signifies the birth of the company as a legal entity. It is conclusive evidence of the company's existence and allows it to enter into valid contracts.

Chapter Concept:

Stages in Company Formation

A.

It allows the company to commence business operations.

B.

It signifies the legal birth of the company as an entity.

C.

It provides the company with a unique tax identification number.

D.

It confirms the company's compliance with environmental regulations.
Correct Answer: B

Solution:

The Certificate of Incorporation signifies the legal birth of the company as a separate legal entity, allowing it to enter into contracts and conduct business as per the Companies Act.

Chapter Concept:

Certificate of Incorporation

A.

To outline the internal management rules

B.

To define the objectives and relationship with the external environment

C.

To list the directors of the company

D.

To specify the company's financial statements
Correct Answer: B

Solution:

The Memorandum of Association is a key document that outlines the objectives of the company and its relationship with the external environment.

Chapter Concept:

Memorandum of Association

A.

Promotion

B.

Incorporation

C.

Capital Subscription

D.

Commencement of Business
Correct Answer: C

Solution:

The Capital Subscription stage involves the issuance of a prospectus to invite the public to subscribe to the capital of the company.

Chapter Concept:

Stages in Company Formation

A.

Conducting feasibility studies

B.

Assembling resources

C.

Issuing shares to the public

D.

Completing legal formalities
Correct Answer: C

Solution:

Issuing shares to the public is not a function of a promoter. Promoters focus on conceiving the business idea and preparing the company for incorporation.

Chapter Concept:

Role of Promoters

A.

Articles of Association

B.

Prospectus

C.

Memorandum of Association

D.

Certificate of Incorporation
Correct Answer: C

Solution:

The Memorandum of Association defines the objectives of the company and is crucial for its incorporation.

Chapter Concept:

Stages in Company Formation

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Formation of a Company

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True or False

Correct Answer: False

Solution:

Promoters are not legally entitled to claim the expenses incurred in the promotion of the company. However, the company may choose to reimburse them for the pre-incorporation expenses.

Chapter Concept :

Role of Promoters

Correct Answer: True

Solution:

The Certificate of Incorporation is considered conclusive evidence of the company's legal existence, regardless of any deficiencies in the registration process.

Chapter Concept :

Certificate of Incorporation

Correct Answer: True

Solution:

The Articles of Association are indeed the rules regarding the internal management of a company.

Chapter Concept :

Articles of Association

Correct Answer: False

Solution:

The process of forming a company involves three main stages: Promotion, Incorporation, and Capital Subscription.

Chapter Concept :

Stages in Company Formation

Correct Answer: True

Solution:

The Certificate of Incorporation is indeed issued by the Registrar of Companies and marks the legal formation of a company, allowing it to commence business operations.

Chapter Concept :

Certificate of Incorporation

Correct Answer: False

Solution:

The Articles of Association should not contradict or exceed anything stated in the Memorandum of Association, as they are subsidiary to it.

Chapter Concept :

Articles of Association

Correct Answer: False

Solution:

Promoters hold a fiduciary position and must not make secret profits. Any profit made must be disclosed to the company.

Chapter Concept :

Role of Promoters

Correct Answer: True

Solution:

A One Person Company (OPC) is a company structure that allows a single individual to form a company, providing benefits such as limited liability and separate legal entity status.

Chapter Concept :

One Person Company (OPC)

Correct Answer: False

Solution:

A private company does not need to undergo the Capital Subscription stage to commence business operations.

Chapter Concept :

Stages in Company Formation

Correct Answer: False

Solution:

A company cannot legally undertake activities that are not contained in its Memorandum of Association.

Chapter Concept :

Memorandum of Association

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