Formation of a Company – Class 11 Business Studies Notes (Corporate Organisation, Finance and Trade)
Modern business needs large amounts of capital, advanced technology and careful risk management. To meet these needs, many entrepreneurs use the company form of organisation, which provides a separate legal entity, limited liability and the ability to raise huge funds from the public.
This article explains, in CBSE Class 11 style, the full process of company formation along with important terms, notes and exam-type questions and answers.
Why Companies Are Needed in Modern Business
- Modern enterprises require huge capital which sole proprietors and partnerships usually cannot provide.
- Business risk is high due to competition and rapid technological changes.
- A company can raise funds from many investors by issuing shares and debentures.
- It enjoys separate legal entity, limited liability of shareholders and perpetual succession.
These advantages make corporate organisation suitable for medium and large businesses.
Stages in the Formation of a Company
Formation of a company is a legal process and is usually divided into three stages:
- Promotion
- Incorporation
- Capital Subscription (mainly for public companies)
A private company normally goes through only promotion and incorporation because it cannot raise capital from the general public.
Stage 1 – Promotion of a Company
Promotion is the first stage in the formation of a company. It involves converting a business idea into a concrete plan and taking steps to form a company to exploit that opportunity.
Promoter: Meaning, Role and Legal Position
Promoter – Meaning
A promoter is a person or group of persons who:
- Conceives a business idea and decides to form a company.
- Undertakes to form a company with reference to a project and sets it going.
- Takes necessary steps and bears the initial risks in the formation process.
In law, a promoter may be a person:
- Named as such in a prospectus; or
- Who has control over the affairs of the company; or
- On whose advice or directions the Board is accustomed to act (excluding purely professional advisers).
Legal Position of Promoters
- They are not agents or trustees of the company because the company does not exist during promotion.
- They occupy a fiduciary position, so they must act honestly and disclose all profits.
- They cannot make secret profits; if they do, the company can rescind contracts, recover money or claim damages.
- They are personally liable for preliminary (pre-incorporation) contracts.
- They are not automatically entitled to reimbursement of expenses, but the company may reimburse or remunerate them in various ways.
Functions of Promoters and Feasibility Studies
Key functions of promoters:
- Identification of business opportunity – spotting a profitable idea (new product, new service, new distribution method, etc.).
- Feasibility studies – testing whether the idea can be profitably implemented:
- Technical feasibility – checking availability of required raw materials, technology and equipment.
- Financial feasibility – estimating fund requirements and checking if funds can be raised.
- Economic feasibility – assessing whether the project will be profitable after all costs.
- Name approval – selecting a suitable name and applying to the Registrar of Companies with a few alternatives.
- A name may be rejected if it is identical or too similar to an existing company, is misleading, or violates the Emblems and Names (Prevention of Improper Use) Act, 1950.
- Fixing signatories to the Memorandum – deciding who will sign the Memorandum of Association (MOA) and usually become the first directors; obtaining their written consent and agreement to take qualification shares.
- Appointment of professionals – engaging bankers, auditors, legal experts and other professionals to assist in preparing documents and completing formalities.
- Preparation of key documents – arranging the drafting of:
- Memorandum of Association (MOA)
- Articles of Association (AOA)
- Consent of proposed directors
- Agreement with Managing Director/whole-time director/Manager, if any
- Statutory declaration of compliance
Preliminary and Provisional Contracts
- Preliminary (pre-incorporation) contracts:
- Entered into by promoters on behalf of the company before incorporation.
- Not legally binding on the company and cannot be ratified by it.
- The company may, after incorporation, enter into fresh contracts on the same terms.
- Promoters remain personally liable.
- Provisional contracts:
- Entered into after incorporation but before the certificate of commencement of business.
- Become binding only when the certificate of commencement of business is issued.
Key Legal Documents: Memorandum and Articles
Memorandum of Association (MOA): Clauses and Forms
The MOA is the main document of a company. It defines the objectives and the scope of activities. The company cannot legally undertake activities beyond what is stated in the MOA.
Main clauses:
- Name Clause
- Contains the approved name of the company, ending with “Limited” or “Private Limited” as applicable.
- Registered Office Clause
- States the name of the state in which the registered office will be situated.
- Exact address can be communicated to the Registrar within 30 days of incorporation.
- Objects Clause
- States the main objects of the company and objects incidental or ancillary to the main objects.
- The company cannot go beyond these objects.
- Liability Clause
- Defines the liability of members.
- In a company limited by shares, liability is limited to the unpaid amount on shares held.
- Capital Clause
- States the authorised share capital and its division into number and value of shares (e.g., ₹25 lakhs divided into 2.5 lakh shares of ₹10 each).
- The company cannot issue shares beyond this limit unless the clause is altered as per law.
Signing of MOA
- At least 7 persons must sign the MOA in the case of a public company.
- At least 2 persons must sign in the case of a private company.
Standard Forms of MOA (Schedule I)
- Table A – Company limited by shares
- Table B – Company limited by guarantee and not having share capital
- Table C – Company limited by guarantee and having share capital
- Table D – Unlimited company without share capital
- Table E – Unlimited company with share capital
Articles of Association (AOA): Contents and Forms
The AOA contains rules and regulations for internal management of the company. It is subordinate to both the MOA and the Companies Act.
Important features:
- Regulates internal affairs and administration.
- Must not contradict any provision of the MOA or the Act.
- A company may adopt standard forms or draft its own articles.
Common matters included in AOA:
- Number and value of shares; issue of preference shares; allotment and calls on shares
- Lien on shares; transfer and transmission of shares; nomination; forfeiture of shares
- Alteration of share capital; buy-back; share certificates; dematerialisation
- Voting rights and proxies; rules for general meetings and board meetings
- Appointment, powers and remuneration of directors, including nominee and additional directors
- Issue of debentures and stocks; borrowing powers
- Dividend policy, reserves, accounts and audit
- Winding up; indemnity; capitalisation of reserves
Standard Forms of AOA (Schedule I)
- Table F – Company limited by shares
- Table G – Company limited by guarantee and having share capital
- Table H – Company limited by guarantee and not having share capital
- Table I – Unlimited company and having share capital
- Table J – Unlimited company and not having share capital
A public company may adopt Table F instead of filing its own detailed AOA.
Difference Between Memorandum and Articles of Association
| Basis | Memorandum of Association (MOA) | Articles of Association (AOA) |
|---|---|---|
| Objectives | Defines the objects and scope of the company. | Lays down internal rules to achieve those objects. |
| Position | Main document; subordinate only to the Companies Act. | Subsidiary document; subordinate to MOA and the Act. |
| Relationship | Regulates relationship between company and outsiders. | Regulates relationship between company and its members. |
| Validity of acts | Acts beyond MOA (ultra vires) are void and cannot be ratified. | Acts beyond AOA can be ratified if they do not violate MOA. |
| Necessity | Mandatory for every company. | Public company may adopt Table F instead of filing AOA. |
Incorporation of a Company – Certificate of Incorporation
After promotion, promoters apply to the Registrar of Companies of the state in which the registered office will be located.
Documents Required for Incorporation
- Memorandum of Association (MOA) – duly stamped, signed and witnessed.
- Articles of Association (AOA) – duly stamped and witnessed; or a statement in lieu of prospectus if adopting Table A in older context.
- Consent of proposed directors – written consent to act as directors and to take qualification shares.
- Agreement with Managing Director/Manager/whole-time director, if any.
- Copy of name approval letter from the Registrar.
- Statutory declaration that all legal requirements for registration have been complied with, signed by an authorised professional and a director/manager/secretary.
- Notice of exact address of registered office – can be filed at incorporation or within 30 days of receiving the Certificate of Incorporation.
- Evidence of payment of registration fees – amount depends on authorised capital.
The Registrar verifies that legal requirements are satisfied (without deeply investigating factual details). If satisfied, he issues the Certificate of Incorporation.
Effect of the Certificate of Incorporation
- The company is legally born on the date printed on the certificate.
- It becomes a separate legal entity with perpetual succession and can enter into valid contracts.
- The certificate is conclusive evidence of valid incorporation, even if there were defects or forged signatures in the documents.
- If the company is registered with illegal objects, its existence cannot be challenged; the remedy is to wind it up.
- The company is allotted a Corporate Identity Number (CIN).
Capital Subscription Stage – Public Company
A public company that wants to raise funds from the general public must go through the capital subscription stage in addition to promotion and incorporation.
SEBI Approval and Prospectus
- The company must comply with SEBI (Securities and Exchange Board of India) guidelines on disclosure of information and investor protection.
- It must obtain SEBI’s clearance before inviting the public to subscribe.
- A prospectus is prepared and a copy is filed with the Registrar before issue.
- A prospectus is any document that invites the public to subscribe for or purchase securities or to make deposits.
- There must be no misstatements or concealment of material information in the prospectus.
Appointment of Bankers, Brokers and Underwriters
- Bankers receive application money in a separate bank account.
- Brokers help market the issue, distribute application forms and encourage investors.
- Underwriters (if appointed) agree to buy shares that are not subscribed by the public, in return for an underwriting commission. Appointment of underwriters is optional but useful if the public response is uncertain.
Minimum Subscription, Listing and Allotment of Shares
- Minimum subscription is the minimum amount that must be raised from the public so that the company starts with adequate resources.
- As per SEBI guidelines, minimum subscription must be at least 90% of the issue size.
- If applications are for less than 90% of the issue, the allotment cannot be made and application money must be refunded.
Listing and Allotment
- The company must apply to at least one recognised stock exchange for permission to list its shares or debentures.
- If listing permission is not granted within the prescribed time (e.g., ten weeks from closure of subscription list), the allotment becomes void and money must be refunded within eight days.
- Till allotment, application money remains in a separate bank account and cannot be used by the company.
- If fewer or no shares are allotted to an applicant, excess application money is refunded or adjusted.
- Allotment letters are issued to successful applicants, and a Return of Allotment is filed with the Registrar within 30 days, signed by a director or secretary.
A public company which raises funds privately (from friends and relatives and not from the general public) must file a statement in lieu of prospectus and still file the return of allotment.
Director Identification Number (DIN)
- Any individual intending to be appointed as a director must apply for Director Identification Number (DIN) to the Central Government in the prescribed form with fees.
- The number is allotted within a specified time.
- A person who already has a DIN cannot apply for or hold another DIN.
One Person Company (OPC) – Features for Class 11
The Companies Act, 2013 introduced the concept of One Person Company (OPC) to encourage corporatisation of micro businesses and entrepreneurship.
Meaning
- An OPC is a company with only one person as a member, who is the single shareholder.
- It enjoys benefits similar to a private company, such as separate legal entity, limited liability and perpetual succession.
Key Characteristics of OPC
- Only a natural person who is an Indian citizen and resident in India can:
- Incorporate an OPC; and
- Become the nominee of the sole member.
- A person cannot incorporate more than one OPC or become nominee in more than one OPC.
- If a person becomes member in another OPC by virtue of nomination, eligibility must be regularised within 180 days.
- A minor cannot become member or nominee of an OPC or hold beneficial interest in its shares.
- An OPC cannot be incorporated or converted into a Section 8 (non-profit) company.
- An OPC cannot carry on Non-Banking Financial Investment activities (like investment in securities of body corporates).
- Voluntary conversion into another type of company is not allowed for two years from incorporation, except when:
- Paid-up share capital exceeds ₹50 lakh; or
- Average annual turnover exceeds ₹2 crore.
Important Terms and Quick Revision Points
Important terms:
- Promotion
- Promoter
- Memorandum of Association (MOA)
- Articles of Association (AOA)
- Prospectus
- Incorporation
- Capital Subscription
- Certificate of Incorporation
- Preliminary and Provisional Contracts
- Director Identification Number (DIN)
- One Person Company (OPC)
Chapter at a Glance – Formation of a Company (Summary)
- Three stages in formation of a public company: Promotion, Incorporation, Capital Subscription.
- Promoters: identify business opportunity, conduct feasibility studies, secure name approval, fix signatories, appoint professionals and prepare documents.
- Key documents: MOA, AOA, consent of proposed directors, agreements with key managerial personnel, statutory declaration and registration fee.
- Certificate of Incorporation: conclusive proof of legal existence of the company.
- Capital Subscription: SEBI approval, prospectus, appointment of bankers, brokers and underwriters, minimum subscription (90%), application for stock exchange listing, allotment and filing return of allotment.
- Special concepts: preliminary and provisional contracts, DIN and One Person Company (OPC).
CBSE Style Questions and Answers – Formation of a Company
Very Short Answer Questions (1 Mark)
- Define promotion.
Promotion is the first stage in formation of a company, involving conceiving a business idea and taking steps to form a company to exploit it. - Who is a promoter?
A promoter is a person who undertakes to form a company with reference to a project, sets it going, and takes necessary steps and risks to accomplish that purpose. - Name the three main stages in the formation of a public company.
Promotion, Incorporation and Capital Subscription. - What is a Memorandum of Association?
It is the main document of a company that defines its objectives and scope of activities, beyond which the company cannot act. - What are Articles of Association?
They are internal rules and regulations for the management of a company, subordinate to the MOA and the Companies Act. - Which clause of the MOA states the liability of members?
The Liability Clause. - What is authorised share capital?
It is the maximum capital which a company is authorised to raise by issuing shares, as stated in the capital clause of the MOA. - What is a prospectus?
It is a document inviting the public to subscribe for or purchase any securities of a company, or to make deposits. - What is minimum subscription as per SEBI guidelines?
It is 90% of the size of the issue of shares. - What does the Certificate of Incorporation signify?
It signifies the legal birth of the company and is conclusive evidence of its incorporation. - Expand SEBI.
Securities and Exchange Board of India. - What is DIN?
DIN stands for Director Identification Number, allotted by the Central Government to individuals intending to become company directors. - What is a One Person Company (OPC)?
It is a company with only one person as a member, enjoying benefits like separate legal entity and limited liability. - Who cannot become a member of an OPC?
A minor cannot become a member or nominee of an OPC or hold beneficial interest in its shares. - What is a preliminary contract?
It is a contract entered into by promoters on behalf of the company before incorporation, not legally binding on the company.
Short Answer Questions (2–3 Marks)
- State any two functions of a promoter.
- Identification of a business opportunity and analysis of its potential.
- Conducting feasibility studies (technical, financial and economic) to check viability.
- What is meant by technical and financial feasibility?
- Technical feasibility: whether required raw material, technology and equipment are available.
- Financial feasibility: whether necessary funds can be arranged and the project cost is within capacity.
- State any two conditions under which a proposed company name may be rejected.
- If the name is identical with or too closely resembles the name of an existing company.
- If it is misleading or violates the Emblems and Names (Prevention of Improper Use) Act, 1950.
- Who can sign the statutory declaration at the time of incorporation? (Any two)
- An advocate, chartered accountant, cost accountant or company secretary in practice engaged in the formation.
- A person named in the articles as a director, manager or secretary.
- Give any two effects of the Certificate of Incorporation.
- The company is legally born on the date printed on the certificate.
- The certificate is conclusive evidence of valid incorporation and cannot be challenged in court.
- Distinguish between preliminary and provisional contracts (any two points).
- Preliminary contracts are made before incorporation; provisional contracts are made after incorporation but before commencement of business.
- Preliminary contracts are not binding on the company; provisional contracts become binding when the company receives the certificate of commencement of business.
- State any two characteristics of an OPC.
- Only a natural person who is an Indian citizen and resident in India can form an OPC.
- An OPC cannot be formed by or include a minor as member or nominee.
Short Answer Questions (4 Marks)
- Explain any four functions of promoters.
- Identify a business opportunity and examine its profit potential.
- Conduct technical, financial and economic feasibility studies with the help of experts.
- Get the proposed name approved from the Registrar of Companies.
- Decide signatories to the MOA, obtain consent of first directors and appoint professionals like bankers and auditors.
- Arrange preparation of MOA, AOA, consent of directors, agreements and statutory declaration.
- Explain the main clauses of the Memorandum of Association.
- Name Clause – contains the approved name of the company.
- Registered Office Clause – states the state where the registered office will be situated.
- Objects Clause – defines main and incidental objects of the company.
- Liability Clause – limits the liability of members to the unpaid amount on their shares.
- Capital Clause – specifies authorised share capital and its division into number and value of shares.
- State four differences between MOA and AOA.
- MOA defines the objectives of the company; AOA contains rules for internal management.
- MOA is the main document; AOA is subsidiary.
- MOA controls relationship with outsiders; AOA controls relationship between company and members.
- Acts beyond MOA are void and cannot be ratified; acts beyond AOA can be ratified if not against MOA.
- Briefly explain the contents of Articles of Association (any four).
- Share capital structure, including number and value of shares and issue of preference shares.
- Rules relating to allotment, calls, transfer, transmission, lien, nomination and forfeiture of shares.
- Provisions on voting rights, proxies, conduct of general and board meetings.
- Provisions regarding appointment, powers and remuneration of directors and other key managerial personnel.
- Rules on dividends, reserves, accounts, audit and winding up.
Long Answer Questions (5–6 Marks)
(You can keep these as crisp bullet points for exams.)
- Explain the steps involved in the promotion of a company.
- Identify a profitable business opportunity.
- Conduct feasibility studies – technical, financial and economic.
- Decide to form a company if studies are favourable.
- Get the company’s name approved by the Registrar.
- Fix signatories to the MOA and obtain consent of first directors with agreement to take qualification shares.
- Appoint professionals such as bankers, auditors and lawyers.
- Arrange preparation of MOA, AOA, consent of directors, agreements and statutory declaration.
- Describe the procedure for the incorporation of a company.
- Submit application to the Registrar of Companies along with MOA and AOA duly stamped and signed.
- Attach consent of proposed directors and agreements with Managing Director/Manager/whole-time director, if any.
- Attach the name approval letter from the Registrar.
- File statutory declaration that all incorporation requirements have been fulfilled, signed by authorised persons.
- Give notice of the exact address of the registered office (or submit within 30 days of incorporation).
- Provide proof of payment of registration fees.
- On satisfaction, the Registrar issues the Certificate of Incorporation, and the company comes into legal existence.
- Explain the capital subscription stage in the formation of a public company.
- Obtain SEBI approval and comply with disclosure and investor protection guidelines.
- File a copy of the prospectus with the Registrar and issue it to the public.
- Appoint bankers to receive application money, brokers to distribute application forms and underwriters (if required).
- Ensure minimum subscription of at least 90% of the issue size; otherwise refund application money.
- Apply to at least one stock exchange for listing permission; failure to get permission within specified time makes allotment void and requires refund of money.
- Keep application money in a separate bank account until allotment.
- On successful subscription and listing permission, allot shares, issue allotment letters and file return of allotment with the Registrar.
- Discuss the legal position and remuneration of promoters.
- Promoters are neither agents nor trustees of the company, as the company does not exist during promotion.
- They occupy a fiduciary position and must not make secret profits; they must disclose all profits to the company.
- If they make undisclosed profits, the company can rescind contracts, recover the purchase price or claim damages.
- Promoters are personally liable for preliminary contracts; such contracts are not binding on the company.
- They are not automatically entitled to reimbursement of expenses, but the company may reimburse and remunerate them through lump sum payments, commission on property or shares, or allotment of shares or debentures.
Assertion–Reason Questions
Choose the correct option:
(A) Both A and R are true, and R is the correct explanation of A.
(B) Both A and R are true, but R is not the correct explanation of A.
(C) A is true, but R is false.
(D) A is false, but R is true.
- Assertion (A): A company is said to be legally born on the date printed on the Certificate of Incorporation.
Reason (R): The Certificate of Incorporation is conclusive evidence of the regularity of the company’s registration.
Answer: (A) - Assertion (A): Preliminary contracts are always binding on the company after incorporation.
Reason (R): The company can ratify preliminary contracts since promoters act on its behalf.
Answer: (D) (Both statements are incorrect for CBSE context; preliminary contracts are not binding and cannot be ratified.) - Assertion (A): Acts done beyond the Memorandum of Association are void and cannot be ratified.
Reason (R): The Memorandum of Association defines the objectives and scope of activities of the company.
Answer: (A) - Assertion (A): An OPC can be formed by any person including a foreign national.
Reason (R): OPC is meant to encourage all entrepreneurs irrespective of citizenship or residency.
Answer: (D) - Assertion (A): Minimum subscription is prescribed to prevent companies from starting business with inadequate resources.
Reason (R): As per SEBI guidelines, at least 90% of the issue size must be subscribed.
Answer: (A)
Case-Based / Source-Based Questions
Case Study 1 – Promotion and Feasibility
Avtar, an automobile engineer, has developed a new carburettor that can reduce petrol consumption by 40%. He wants to produce it on a large scale and needs huge funds, so he decides to form a company. However, the special metal required is produced only in a foreign country with which his country has poor political relations, and the project cost is very high.
Questions:
a) Identify the stage of company formation in which Avtar is currently involved.
b) Name and explain the types of feasibility studies that highlight the problems in this case.
c) If these feasibility studies show negative results, what should Avtar do?
Answers:
a) Avtar is in the promotion stage.
b)
- Technical feasibility – because the required metal is not easily available, making the project technically difficult.
- Financial feasibility – because the project needs huge funds which may not be arranged easily.
c) If feasibility studies are negative, Avtar should abandon or modify the project instead of forming a company for an unviable project.
Case Study 2 – Certificate of Incorporation
Documents for registration of X Ltd. were filed on 6 January. The Certificate of Incorporation was issued on 8 January, but the date printed on it is 6 January. X Ltd. entered into a contract on 6 January with a supplier, who later questioned its validity on the ground that the certificate was issued on 8 January.
Questions:
a) From which date is X Ltd. considered to be legally in existence?
b) Is the contract dated 6 January valid? Give reason.
c) What is meant by “conclusive evidence” in relation to the Certificate of Incorporation?
Answers:
a) X Ltd. is considered legally in existence from 6 January, the date printed on the certificate.
b) Yes, the contract is valid because the company is deemed to exist from the date on the certificate.
c) “Conclusive evidence” means that once the certificate is issued, the company’s existence and compliance with incorporation requirements cannot be challenged in a court of law.
Case Study 3 – OPC and Eligibility
Rohan is a 20-year-old Indian student who has stayed in India for more than 182 days in the previous calendar year. He wants to start an online education business as an OPC. His 16-year-old sister wants to become a nominee in the same OPC.
Questions:
a) Is Rohan eligible to incorporate an OPC?
b) Can his 16-year-old sister become a nominee?
c) Can Rohan incorporate two OPCs in his own name?
Answers:
a) Yes, Rohan is eligible because he is a natural person, Indian citizen and resident in India.
b) No, a minor cannot become a member or nominee of an OPC.
c) No, a person cannot incorporate more than one OPC or become nominee in more than one OPC.
Helpful Resources for Class 11 Students
To strengthen your understanding beyond this chapter, you can explore dedicated learning support platforms. GrowInJob is a career platform that believes excellence in any job starts with a strong foundation in school concepts. They have a dedicated Student Zone with chapter notes, important questions and interactive quizzes for different subjects and classes. You can visit their Student Zone here:
https://growinjob.com/category/student-zone/
Always follow the guidance, assignments and updates provided by your school and teachers, as they are closely aligned with CBSE exam requirements. For official circulars, sample papers and curriculum updates, regularly check the CBSE website:
https://www.cbse.gov.in/
