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Formation of a Company – Class 11 Business Studies Chapter 7 Notes & NCERT PDF

Class 11Business StudiesChapter 7NCERT book: Business Studies - Class 11

Notes and a simple summary of Chapter 7 of the NCERT Class 11 Business Studies book, with the official chapter PDF, flashcards, an MCQ quiz and an AI tutor for your doubts.

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Chapter 7: Formation of a Company

Introduction

Avtar, an automobile engineer running a sole proprietorship, has developed a carburettor that cuts petrol consumption by 40 percent. Large-scale production needs a lot of money and involves risk, so he rejects partnership and is advised to form a company. What formalities must he complete?

The steps from the birth of a business idea to the point where a company is legally ready to commence business are the stages in the formation of a company. Those who take these steps and risks are its promoters.

Key Concepts

7.2 Stages in Formation of a Company

  • Promotion
  • Incorporation
  • Subscription of capital

    • A private company is prohibited from raising funds from the public, so it does not issue a prospectus or complete minimum subscription — it needs only promotion and incorporation.

    7.2.1 Promotion

    Promotion is the first stage — conceiving a business idea and taking the initiative to form a company. A promoter undertakes to form a company for a project and takes the steps to accomplish it.

    Section 69 — a promoter is a person:

  • (a) named as such in a prospectus or identified in the annual return (section 92); or
  • (b) who has control over the company's affairs directly or indirectly; or
  • (c) on whose advice the Board is accustomed to act — but not a person acting merely in a professional capacity.

    • Functions of a promoter

  • Identification of business opportunity
  • Feasibility studies

    • - Technical feasibility — are raw materials and technology available? (e.g., a special metal for Avtar's carburettor)

    - Financial feasibility — can the required funds be arranged? (e.g., developing townships needing several crores)

    - Economic feasibility — will it be profitable? Experts who help do not become promoters.

  • Name approval — apply to the Registrar of Companies; give three names in order of priority. A name is undesirable if it is identical/too similar to an existing company, misleading, or violates the Emblem and Names (Prevention of Improper Use) Act 1950 (e.g., UNO, WHO, Government of India, Indian National Flag).
  • Fixing signatories to the Memorandum — usually also the first directors; written consent needed.
  • Appointment of professionals — mercantile bankers, auditors, etc.
  • Preparation of necessary documents

    • Documents Required

    A. Memorandum of Association (MoA) — the most important document; defines the company's objectives. Section 2(56) defines it. Clauses:

  • Name clause — approved name
  • Registered office clause — the state; exact address within 30 days of incorporation
  • Objects clause — the most important; activities beyond it are not allowed (essential or incidental acts are valid)
  • Liability clause — limits members' liability to the amount unpaid on shares. Example: 1,000 shares of ₹10 with ₹6 paid → liability ₹4 per share → at most ₹4,000.
  • Capital clause — maximum authorised capital, e.g., ₹25 lakh divided into 2.5 lakh shares of ₹10

    • MoA forms: Tables A–E of Schedule I. It must be signed by at least seven persons (public) or two persons (private).

    B. Articles of Association (AoA) — rules of internal management, subsidiary to the MoA. Section 2(5). Forms: Tables F–J; companies may frame their own.

    C. Consent of proposed directors — to act as directors and buy qualification shares.

    D. Agreement (if any) with the proposed Managing Director, whole-time director or manager.

    E. Statutory declaration — that all legal requirements are complied with; signed by an advocate, CA, cost accountant or company secretary in practice, or a person named as director/manager/secretary.

    F. Receipt of payment of fee — depends on authorised share capital.

    Position of Promoters

  • Neither agents nor trustees of the company (it does not exist yet).
  • Personally liable for pre-incorporation contracts not ratified later.
  • Stand in a fiduciary position — may profit only with disclosure, never secretly; otherwise the company can rescind and claim damages.
  • Not legally entitled to promotion expenses, but the company may reimburse them, pay a lump sum/commission, or allot shares/debentures.

    • Preliminary (pre-incorporation) contracts are not binding on the company; it cannot ratify them but may enter fresh contracts on the same terms. Promoters remain personally liable.

    7.2.2 Incorporation

    Application to the Registrar of the state of the registered office with: MoA (7 signatures public / 2 private), AoA, directors' consent, agreement with MD, Registrar's name-approval letter, statutory declaration, notice of registered office address (or within 30 days), and proof of fees.

    When satisfied, the Registrar issues the Certificate of Incorporation — the birth certificate of the company. Since 1 November 2000, a CIN (Corporate Identity Number) is allotted.

    Effect: the company is born on the date printed on the certificate, gets perpetual succession, can make valid contracts, and the certificate is conclusive evidence of regular incorporation. Book examples:

  • Documents filed 6 January, certificate issued 8 January but dated 6 January → contracts of 6 January valid.
  • Forged signatures on the Memorandum → incorporation still valid.

    • Even a company with illegal objects cannot be challenged — the only remedy is winding up.

    Both public and private companies must obtain the certificate for commencement of business within 180 days of incorporation.

    Director Identification Number (DIN): every intending director applies to the Central Government; allotted within one month; no one may hold two DINs.

    7.2.3 Capital Subscription (public company)

  • SEBI approval
  • Filing of prospectus (or statement in lieu of prospectus) with the Registrar
  • Appointment of bankers, brokers, underwriters (underwriters optional; paid commission)
  • Minimum subscription — 90% of the issue size per SEBI; otherwise money is returned
  • Application to stock exchange — if permission isn't granted within ten weeks of closure, allotment is void and money returned within eight days
  • Allotment of shares — money kept in a separate bank account; excess refunded/adjusted; return of allotment filed within 30 days

    • MoA vs AoA

  • Objectives: MoA defines objects; AoA gives rules of internal management
  • Position: MoA subordinate to the Act; AoA subordinate to both MoA and Act
  • Relationship: MoA — company with outsiders; AoA — members with company
  • Validity: acts beyond MoA are void, cannot be ratified; acts beyond AoA can be ratified if within MoA
  • Necessity: every company must file an MoA; a public company may adopt Table F instead of filing AoA

    • Key-Facts Sheet

  • Stages: promotion → incorporation → capital subscription (private: first two only)
  • MoA signatures: 7 (public), 2 (private)
  • Registered office address: within 30 days
  • CIN from 1 November 2000; DIN within one month
  • Commencement certificate: within 180 days
  • Minimum subscription 90%; stock exchange 10 weeks; refund 8 days; return of allotment 30 days

    • Exam Focus

  • Stages of formation; documents for incorporation
  • Legal position of promoters
  • Clauses of the MoA; MoA vs AoA
  • Certificate of Incorporation and its effect; prospectus and return of allotment

    • Key Terms

  • Promotion (प्रवर्तन)
  • Promoter (प्रवर्तक)
  • Incorporation (समामेलन)
  • Memorandum of Association (पार्षद सीमानियम)
  • Articles of Association (पार्षद अंतर्नियम)
  • Prospectus (प्रविवरण)
  • Certificate of Incorporation (समामेलन प्रमाणपत्र)
  • Capital subscription (पूंजी अभिदान)
  • Minimum subscription (न्यूनतम अभिदान)
  • Qualification shares (योग्यता अंश)
  • Underwriter (अभिगोपक)
  • Preliminary contracts (प्रारंभिक अनुबंध)
  • Return of allotment (आबंटन विवरणी)

    • Common Mistakes

  • Saying promoters are agents or trustees of the company — they are neither.
  • Thinking a company can ratify a preliminary contract — it can only enter a fresh contract.
  • Swapping MoA/AoA signatures or roles, or saying acts beyond the MoA can be ratified.
  • Forgetting that a private company skips the capital subscription stage.

    • 💡 Key Learning Points

    • ✓A company is formed through promotion, incorporation and (for public companies) capital subscription
    • ✓Promoters identify the opportunity, run technical, financial and economic feasibility studies, get the name approved and prepare documents
    • ✓The Memorandum of Association has name, registered office, objects, liability and capital clauses; the Articles govern internal management
    • ✓The Certificate of Incorporation is conclusive evidence of the company's legal existence
    • ✓A public company raising funds needs SEBI approval, a prospectus, minimum subscription of 90%, stock exchange permission and allotment

    👨‍🏫 Teaching Tips

    • →Use Avtar's carburettor story as a running case: move his idea through each stage on a flowchart
    • →Give groups mock ideas and ask them to write a one-line technical, financial and economic feasibility check
    • →Have students propose three company names and test them against the 'undesirable name' rules
    • →Work the liability example (1,000 shares, ₹6 paid of ₹10) and vary the numbers
    • →Build a two-column MoA vs AoA comparison on the board, one basis at a time
    • →Create a timeline card of the numbers: 30 days, 180 days, 90%, 10 weeks, 8 days, 30 days

    📋 Assessment Questions

    1. Can the student name and explain the stages of company formation?
    2. Can they list documents required for incorporation?
    3. Can they explain the clauses of the Memorandum of Association?
    4. Can they distinguish MoA from AoA on at least four bases?
    5. Can they explain the legal position of promoters and the effect of the Certificate of Incorporation?

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    Keep learning

    All chapters in Business Studies - Class 11

    1. 1. Business, Trade and Commerce
    2. 2. Forms of Business Organisation
    3. 3. Private, Public and Global Enterprises
    4. 4. Business Services
    5. 5. Emerging Modes of Business
    6. 6. Social Responsibilities of Business and Business Ethics
    7. 7. Formation of a Company
    8. 8. Sources of Business Finance
    9. 9. MSME and Business Entrepreneurship
    10. 10. Internal Trade
    11. 11. International Business