Formation of a Company Class 11 Short Notes

According to the Companies Act 2013, “A company is an artificial person having a separate legal entity, perpetual succession, and a common seal”. Here is the formation of a company class 11 short notes.

There are mainly 2 types of Companies:
1) Private Company
2) Public Company

Formation of a Company

There are four stages in the formation of a company:

• Promotion
• Incorporation
• Subscription of Capital
• Commencement

Promotion of a Company

Promotion is the first stage in the formation of the company. It involves conceiving the business idea and taking the initiative to form a company so that practical shape can be given to exploit the available business opportunity.

Any person or a group of persons or even a company may proceed to form a company which is known as the promotion of a company.

A promoter takes the necessary steps to form a company. According to Section 69 of the Companies Act, 2013, a promoter means a person-

• Who has been named as such in a prospectus
• Who has control over the affairs of the company
• By whose advice, instructions, or direction the board of directors works

Functions of a Promoter

1) Identification of Business Opportunity

The first activity of a promoter is to identify a business opportunity. It can be making a product available through a different channel.

2) Feasibility Studies

It may not be feasible to convert all the business opportunities into real profits. Therefore, the promoters undertake detailed feasibility studies to investigate all the aspects of the business. It includes-

• Technical Feasibility: Sometimes an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not available.
• Financial Feasibility: Every business requires funds hence the promoters have to estimate the funds requirement of the business opportunity. If the required funds are very large or can not be easily arranged, the project has to be given up.
• Economic Feasibility: Sometimes a project is technically viable & financially feasible but the chance of it being profitable is very little then also such projects have to be given up.

3) Name Approval

After deciding to launch a company, the promoter selects a name for the company. An application is submitted for the approval of the name to the registrar of the companies of the state in which the registered office of the company is to be situated.

The purpose name is approved if it is not misleading if it is not identical or closely resembling the name of an existing company.

4) Fixing up Signatories to the Memorandum of Association

This step involves deciding about the members of the first directors of the company who will be signing a memorandum of association.

5) Appointment of Professionals

Certain professionals such as bankers, auditors, etc. are appointed by the promoters to assist them in the preparation of necessary documents.

The name & address of the shareholders and the allotted number of shares are to be submitted to the registrar in the statement called Return of Allotment.

6) Preparation of Necessary Documents

The promoter takes up the steps to prepare certain legal documents which have to be submitted to the registrar of companies for getting the company registered. The documents involved are-

• Memorandum of Association
• Articles of Association
• Consent of Directors

Incorporation

It is the second stage in the formation of a company. The promoter applies with the registrar of the company of the state where the company’s registered office is established.

Along with the application, the following documents are to be attached-

1. Memorandum of Association: MOA is dually stamped and signed by the members along with their complete address, occupation, and the number of shares subscribed by them.
   In the case of a private company, 2 members are required to sign, whereas in the case of a public company, 7 members are required.
2. Articles of Association: AOA is dually stamped and signed by the same people who are signatories of the MOA.
3. Written Consent of Proposed Directors
4. Agreement if any entered into by the company and the individuals proposed to be managing directors and managers of the company.
5. A copy of the registrar’s letters regarding the approval of the name of the company.
6. Statutory Declaration
7. Along with these documents, a notice about the exact address of the registered office
8. Documentary evidence of Payment of registration fees

When the registrar is satisfied with all the formalities of registration, he/she issues a certificate of incorporation to the company which is also known as the Birth Certificate of a Company.

Small Business and Entrepreneurship Class 11 Notes

Subscription of a Capital

A public company can raise funds from the public by way of the issue of securities i.e., shares and debentures, etc.

For this purpose, 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 to raise funds:

1) SEBI Approval (Securities & Exchange Board of India)

SEBI is a regulatory authority in India. It has issued various guidelines for disclosure of information and investor protection.

A company is required to get approval from SEBI before inviting funds from the general public.

2) Filling of Prospectus

A copy of the prospectus or statement in lieu of the prospectus is filled with the registrar of companies. Based on the given information in the document, investors decide to invest in the company.

Therefore it is essential that this document provides all the significant information & must not contain any misleading statement.

3) Appointment of Banker, Broker, and Underwriter

The task of raising funds from the public is very difficult. Bankers of the company receive application money, brokers try to sell the shares whereas an underwriter is also appointed by the company when it is not assured of good public response.

Underwriters, in return for some commission, undertakes to buy shares, in case they are not fully subscribed by the public.

4) Minimum Subscription

It refers to the application of a certain minimum number of shares that a company must receive before going ahead with the allotment of shares.

According to the Companies Act, the minimum subscription should be 90% of the size of the issue. If it is less than 90% the allotment can not be made.

5) Application to the Stock Exchange

The company applies to at least one stock exchange for permission to deal in shares or debentures.

If such permission is not granted before the expiry from the date of closure of the subscription list the allotment shall become void.

Allotment of Shares

The company returns the application money to the person to whom no shares are allotted and successful alloties are given allotment letters.

Return of allotment, signed by directors or secretary is filed with the registrar within 30 days of allotment.

Difference between MOA and AOA