Formation of a Company Notes Class 11th Business Studies


1. Business Finance It refers to capital funds and credit funds invested in the business.

According to BO Wheeler, “Finance is that business activity which is concerned with the acquisition and conservation of capital fund in meeting the financial needs and over all objectives of business enterprise.

2. Formation of Company There are two stages in the formation of private company, promotion and incorporation. A public company has to under go capital subscription stage and to the get certificate of commencement of business, to begin operation.

3. Promotion of a Company Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking and initiative to form a company so the particular shape can be given to exploiting the available business opportunity.

4. Functions of a Promoter

(i) Identification of Business Opportunity The foremost activity of a promoter is to identify a first and business opportunity.

(ii) Feasibility Studies The promoters undertake detailed feasibility studies to investigate all aspects of the business they intend to start. There are three types of feasibility

(a) Technical feasibility
(b) Financial feasibility
(c) Economic feasibility

(iii) Name Approval Having decided to launch a company. the promoters have to select a name for it and submit.

(iv) Fixing up Signatories to the Memorandum of association Promoters have to decide about the members who will be signing the memorandum of association of the proposed company.

(v) Appointment of Professionals Certain professionals such as mercantile bankers. auditors etc are appointed by the promoters.

(vi) Preparation of Necessary Documents The promoter takes up steps to prepare certain legal documents. Which have to be submitted under the law

5. Documents Required to be Submitted

(i) Memorandum of Association
(ii) Articles of Association
(iii) Consent of Proposed Directors
(iv) Agreement
(v) Statutory Declaration
(vi) Payment of Fee

6. Position of Promoters Promoters undertake various activities to get a company registered and get it to the position of commencement of business. But they are neither the agents nor the trustee of the company. They can’t be the agents as the company is yet to be incorporated.

7. Incorporation After completing the afore said formalities, promoters make an application for the incorporation of the company. The app cause is to be filed With the registrar of companies of the state within which they plan to establish the registered office of the company.

8. Effect of the Certificate of Incorporation A company is legally born on the date printed on the certificate of incorporation. It becomes a legal entity with perceptual succession on such date.

The certificate of incorporation is a conclusive evidence of the regularity of the incorporation of a company certificate of incorporation has been issued the company has been legal business entity irrespective of any flow in its registration.

9. Capital Subscription A public company can raise the required funds from the public means of Issue of shares and debentures. For doing the same. It has to issue a prospectus which is an invitation to the public to subscribe to the capital of the company.

The following steps are required for raising funds from the public

(i) SEBl approval
(ii) Filling of prospectus
(iii) Appointment of bankers brokers underwriters
(iv) Minimum subscription
(v) Application to stock exchange
(vi) Allotment of shares

10. Conunencement of Business If the amount of minimum subscription is raised through new issue of shares, a public company applies to the registrar of companies for the issue of certificate of commencement of business.

Commencement of business along with the following documents

(i) A declaration about meeting minimum subscription requirement
(ii) A declaration about details in respect of allotment to directors
(iii) A declaration about no money being payable to applicants
(iv) A statutory declaration

A public company raising funds privately has to submit only

(ii) and (iv) listed above

The registrar, upon satisfaction issues certificate of commencement of business. This certificate is also a conclusive evidence of completion of formation requirements.

11. Preliminary Contracts Contracts signed by promoters with third parties before the incorporation of company.

12. Provisional Contracts Contracts signed after incorporation but before commencement of business.

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