Test: Formation of a Company - 1 - Commerce MCQ

Stages in the formation of a public company:
The correct order of stages in the formation of a public company is:
Promotion:
- This is the initial stage where the idea for the formation of the company is conceived.
- Promoters identify the business opportunity and gather the necessary resources and expertise to turn the idea into a viable business venture.
Incorporation:
- Once the promoters have completed the necessary groundwork, they proceed to incorporate the company.
- Incorporation involves registering the company with the relevant regulatory authorities and obtaining a legal status as a separate entity.
Capital Subscription:
- After the incorporation, the company needs to raise capital to finance its operations and growth.
- Capital subscription refers to the process of inviting potential investors to subscribe to shares or securities of the company.
- This is typically done through public offerings, private placements, or a combination of both.
Commencement of Business:
- Once the company has successfully raised the required capital, it can commence its business operations.
- At this stage, the company starts carrying out its core activities, producing goods or providing services to generate revenue.
Therefore, the correct order of stages in the formation of a public company is: Promotion, Incorporation, Capital Subscription, Commencement of Business (Option C).

Minimum number of members to form a public company is 7.
To form a public company, there are certain legal requirements that need to be fulfilled, including the minimum number of members. In most jurisdictions, the minimum number of members required to form a public company is 7. Here is a detailed explanation:
Definition of a public company:
- A public company is a type of business entity that offers its shares to the public and is listed on a stock exchange.
- It allows the general public to invest in the company by purchasing its shares.
Legal requirements for forming a public company:
- The Companies Act or equivalent legislation in each jurisdiction sets out the legal requirements for forming a public company.
- These requirements may vary from country to country, but the minimum number of members is generally consistent.
Reason for the minimum number of members:
- The minimum number of members is set to ensure that there is a sufficient level of governance and decision-making within the company.
- It is believed that a larger number of members will provide a wider range of perspectives and expertise, which is beneficial for the company's operations.
Benefits of having a larger number of members:
- More diverse skills and experience: A larger number of members can bring a diverse range of skills, experience, and knowledge to the company, which can contribute to its success.
- Enhanced decision-making: With more members, there is a greater chance of having different viewpoints and ideas during decision-making processes, leading to more informed and well-rounded decisions.
- Increased accountability: A larger number of members can help ensure that the company's management is held accountable for their actions and decisions.
Conclusion:
- The minimum number of members required to form a public company is 7.
- This requirement is in place to ensure adequate governance, decision-making, and accountability within the company.
- Having a larger number of members can bring a wider range of skills and experience, leading to better decision-making and overall success of the company.

To determine the maximum number of public companies a person can hold directorship in, we need to consider the regulations and guidelines set by regulatory authorities. In this case, the answer is option C: 20. Here's the detailed explanation:
1. Legal regulations: Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States and similar bodies in different countries have certain rules and regulations regarding directorship in public companies.
2. Company Act and corporate governance: Company Acts and corporate governance guidelines often limit the number of directorship positions an individual can hold to ensure effective management and prevent conflicts of interest.
3. Independent directorship: Many companies require a certain number of independent directors on their board. Independent directors are expected to bring unbiased judgment and play a crucial role in corporate decision-making.
4. Time commitment: Serving as a director in a public company requires a significant time commitment. It is crucial for directors to dedicate enough time and attention to their responsibilities. Therefore, limiting the number of directorship positions helps ensure that directors can fulfill their duties effectively.
5. Board diversity: Limiting the number of directorship positions allows for greater board diversity, as it encourages the inclusion of individuals with diverse backgrounds, experiences, and perspectives.
6. Maximum number: While the exact maximum number of directorship positions allowed may vary by country and jurisdiction, option C: 20 is a commonly accepted limit in many regions.
It is important to note that these regulations and guidelines are subject to change over time, and it is always advisable to consult the relevant regulatory authorities for the most up-to-date information.

Explanation:
The correct answer is A: Called-up capital.
Here is a detailed explanation of each option:
1. Called-up capital: This refers to the total amount of capital that shareholders have been required to pay or have agreed to pay on the shares they have subscribed to. It represents the portion of the subscribed capital that has been called up for payment.
2. Subscribed capital: This is the total amount of capital that shareholders have agreed to take, or subscribe to, by purchasing shares in a company. It represents the maximum amount of capital that the company can raise from shareholders.
3. Nominal capital: This is another term for authorized capital or registered capital. It represents the maximum amount of capital that a company is authorized to raise through the issuance of shares. It is usually stated in the company's founding documents.
4. Paid-up capital: This refers to the portion of the called-up capital that has been paid by the shareholders. It represents the actual amount of capital that the shareholders have contributed to the company.
To summarize, called-up capital represents the total amount of capital that shareholders have been required or agreed to pay, while subscribed capital represents the total amount of capital that shareholders have agreed to take. The other options, nominal capital and paid-up capital, refer to different aspects of the capital structure but are not synonymous with called-up capital.

Par value of shares means the face value of the shares:

The par value of shares refers to the nominal or face value of each share of stock issued by a company. It is the value assigned to the shares at the time of their issuance and is typically stated on the stock certificate.

Here are some key points to understand:

• Par value: Par value is a fixed amount assigned to each share of stock by the company. It represents the minimum price at which the shares can be issued.


• Face value: Par value is also known as the face value of the shares. It is the amount that the company guarantees to repay to the shareholders in the event of liquidation.


• Legal significance: Par value has legal significance in some jurisdictions, as it may determine the minimum capital requirement for companies.


• Market value: Par value is different from the market value of shares, which is determined by supply and demand in the stock market. Market value fluctuates based on various factors such as company performance, investor sentiment, and economic conditions.


• Dividend calculation: Par value is relevant for calculating dividends, as dividends are often expressed as a percentage of the par value.

Therefore, the correct answer is B: face. Par value of shares represents the face value or nominal value of the shares issued by a company.

Answer:
The correct answer is B: Prospectus.
A prospectus is a legal document that provides detailed information about a company's offering of shares to the public. It is an essential document that must accompany each form of application for shares offered to the public. Here is a detailed explanation:
Definition:
- A prospectus is a formal document that describes the company, its operations, financials, management, and the terms and conditions of the share offering.
Purpose of a Prospectus:
- The main purpose of a prospectus is to provide potential investors with all the necessary information to make an informed decision about investing in the company's shares.
- It helps investors assess the risks and potential rewards of the investment opportunity.
Contents of a Prospectus:
- The prospectus typically includes the following information:
- Company profile and background
- Description of the business activities
- Financial statements, including balance sheets, income statements, and cash flow statements
- Details of the share offering, including the number of shares, price, and any special conditions
- Information about the management team and key personnel
- Risk factors associated with the investment
- Legal and regulatory disclosures
- Any other relevant information that may impact the investment decision
Legal Requirements:
- The preparation and distribution of a prospectus are subject to legal requirements and regulations to ensure that investors are adequately informed and protected.
- The prospectus must comply with securities laws and regulations set by the regulatory authorities in the jurisdiction where the shares are being offered.
Conclusion:
- In summary, a prospectus is a crucial document that accompanies each form of application for shares offered to the public. It provides investors with detailed information about the company and the share offering, helping them make informed investment decisions.

To determine the minimum paid-up capital required for a private company, we need to refer to the Companies Act, 2013. According to section 2(68) of the Act, a private company is defined as a company which has a minimum paid-up capital of Rs. 1,00,000 or such higher amount as may be prescribed.
Now, let's analyze the options given:
A: 1,00,000 - This option matches the minimum paid-up capital requirement mentioned in the Companies Act, 2013.
B: 5,00,000 - This option exceeds the minimum requirement and is not necessary for a private company.
C: 50,00,000 - This option is significantly higher than the minimum requirement and is not necessary for a private company.
D: none of the above - This option is incorrect since option A meets the minimum paid-up capital requirement.
Therefore, the correct answer is option A: 1,00,000.
Key Points:
- Private companies are governed by the Companies Act, 2013.
- According to the Act, a private company must have a minimum paid-up capital of Rs. 1,00,000.
- Options B and C exceed the minimum requirement and are not necessary for a private company.
- Option D is incorrect since option A meets the minimum paid-up capital requirement.

Preliminary Contracts
Definition: Preliminary contracts are agreements made before a company is incorporated. They are considered preliminary because they are made during the negotiation and planning stages of a business, before it becomes a legally recognized entity.
Binding on the Company:
- Preliminary contracts are generally not binding on the company until it is incorporated. This is because a company does not exist as a separate legal entity until it is formally registered.
- Until incorporation, individuals involved in the negotiation and planning stages of a business may be personally liable for any obligations or liabilities arising from preliminary contracts.
Binding on the Company, if ratified after incorporation:
- Once a company is incorporated, it has the ability to ratify or adopt the preliminary contracts entered into prior to its incorporation.
- Ratification can be done through various means, such as a board resolution or by including the terms of the preliminary contract in a subsequent formal contract.
- If the company chooses to ratify the preliminary contract, it becomes binding on the company and the company assumes all rights and obligations under the contract.
Binding on the Company, after incorporation:
- If a preliminary contract is not ratified or adopted after incorporation, it may not be binding on the company.
- However, it is important to note that the specific circumstances and the terms of the contract itself will determine whether or not it is binding.
- If the contract is deemed to be essential for the company's operations or if there is evidence of an intention to be bound by the contract, it may still be enforceable.
Not binding on the Company:
- In general, preliminary contracts are not binding on the company until they are ratified or adopted after incorporation.
- Without ratification, the company does not assume any rights or obligations under the contract.
In conclusion, preliminary contracts are not binding on the company until they are ratified or adopted after incorporation. The specific circumstances and terms of the contract will determine whether or not it is enforceable. Until incorporation, individuals involved in the negotiation and planning stages of a business may be personally liable for any obligations or liabilities arising from preliminary contracts.

Undesirable Names for a Company

There are several reasons why a proposed name for a company may be considered undesirable:

1. Identical with the name of an existing company

• Reason: Having an identical name can lead to confusion among customers and stakeholders. It can also result in legal issues such as trademark infringement.

2. Resembles closely with the name of an existing company

• Reason: A name that closely resembles an existing company's name can still cause confusion and may create difficulties in distinguishing between the two businesses.

3. An emblem of Government of India, United Nations, etc.

• Reason: The use of emblems or symbols associated with governmental or international organizations can be misleading and may imply an affiliation or endorsement that does not exist.

4. Any of the above reasons

• Reason: If the proposed name falls under any of the above categories, it is considered undesirable and may need to be changed to avoid legal and branding issues.

Conclusion: It is important to carefully choose a company name that is unique, distinct, and does not violate any legal regulations. By avoiding names that are identical or closely resemble existing companies or include emblems of governmental or international organizations, businesses can establish a strong brand identity and minimize potential conflicts.

Obtaining Prior Permission for Changing the Address of Registered Office
To change the address of its registered office, a company needs to obtain prior permission from the central government under certain circumstances. The requirements for obtaining permission vary based on the nature of the address change:
1. Change of Address from One City to Another City:
- Companies need to obtain prior permission from the central government when changing the address of their registered office from one city to another city.
2. Change of Address Within the Same City:
- Companies do not require prior permission from the central government when changing the address of their registered office within the same city.
3. Change of Address from One State to Another:
- Companies need to obtain prior permission from the central government when changing the address of their registered office from one state to another.
4. Change of Address from One Country to Another Country:
- Changing the address of a registered office from one country to another involves international jurisdiction and compliance requirements.
- Companies need to follow the legal procedures of both the current and new countries, including obtaining relevant permissions and complying with the laws and regulations of both jurisdictions.
In conclusion, for an Indian company, prior permission from the central government is required when changing the address of its registered office from one city to another city or from one state to another. However, when changing the address within the same city, permission is not necessary. For changes involving international jurisdictions, companies need to comply with the legal procedures of both the current and new countries.

Powers, rights, remuneration, qualification, and duties of directors are discussed clearly in the Articles of Association.
The Articles of Association is a legal document that outlines the internal rules, regulations, and procedures for the management and operation of a company. It contains important information regarding the powers, rights, remuneration, qualification, and duties of directors. Here is a detailed explanation of each aspect:
1. Powers: The Articles of Association specify the powers of directors, which include decision-making authority, the ability to enter into contracts on behalf of the company, and the power to delegate responsibilities to other officers or employees.
2. Rights: The document also outlines the rights of directors, such as the right to attend and vote at board meetings, the right to access company information and records, and the right to receive remuneration and other benefits.
3. Remuneration: The Articles of Association establish the remuneration structure for directors, including their salaries, bonuses, stock options, and other forms of compensation. It may also define the process for determining and reviewing director remuneration.
4. Qualification: The qualifications required to become a director, such as age, education, experience, and any specific skills or expertise, are typically mentioned in the Articles of Association. This ensures that the directors possess the necessary qualifications to effectively manage the company.
5. Duties: The Articles of Association outline the duties and responsibilities of directors towards the company and its shareholders. This includes acting in the best interest of the company, exercising reasonable care and skill, avoiding conflicts of interest, and maintaining confidentiality.
It is important for directors, shareholders, and other stakeholders to refer to the Articles of Association to understand the powers, rights, remuneration, qualification, and duties of directors, as this document serves as a guiding framework for the governance and management of the company.

Explanation:
The correct answer is C: Preference.
Preference share capital has priority both in repayment of dividend as well as capital. Here is a detailed explanation:
1. Equity:
- Equity refers to the ownership interest in a company.
- Shareholders who hold equity shares have a residual claim on the company's assets and earnings.
- They are entitled to receive dividends after preference shareholders have been paid.
2. Non-Preference:
- Non-preference shares, also known as ordinary shares, are the most common type of shares issued by companies.
- Non-preference shareholders do not have any priority in repayment of dividends or capital.
- They are entitled to receive dividends only after preference shareholders have been paid.
3. Preference:
- Preference shares are a type of share capital that carries certain preferential rights over ordinary shares.
- Preference shareholders have priority in the payment of dividends.
- They are entitled to receive a fixed rate of dividend before any dividend is paid to ordinary shareholders.
- In case of liquidation, preference shareholders have priority in the repayment of capital over ordinary shareholders.
4. All of the above:
- This option is incorrect because not all types of share capital have priority in repayment of dividend as well as capital.
- Only preference share capital has this priority.
In conclusion, preference share capital has priority both in repayment of dividend as well as capital.

To determine the number of days within which the Prospectus must be issued to the public, we need to refer to the relevant regulations or laws governing the issuance of the Prospectus. Generally, the answer depends on the jurisdiction and specific regulations applicable in that jurisdiction. However, I will provide a general answer based on common practices.
Prospectus Issuance:
The Prospectus is a legal document that provides information about an investment opportunity to potential investors. It usually includes details about the company, its financials, the purpose of the investment, risks involved, and other relevant information.
Timeline for Issuance:
The timeline for issuing a Prospectus may vary depending on the jurisdiction and applicable regulations. However, as a general guideline:
- The Prospectus must be issued to the public within a certain number of days from its date.
- The purpose of this requirement is to ensure that potential investors have adequate time to review the information before making an investment decision.
Answer:
Based on the options provided, the correct answer is Option C: 90 days.
It is important to note that this answer is a general guideline and may vary depending on the jurisdiction and specific regulations applicable in that jurisdiction. Therefore, it is always advisable to refer to the relevant laws and regulations to determine the exact timeline for issuing a Prospectus in a specific jurisdiction.

Explanation:
The correct answer is Private company. Here is a detailed explanation:
Private companies are not allowed to give an invitation to the public to subscribe for any shares in or debentures of the company. This means that they cannot publicly offer their shares or debentures for sale to the general public.
Here are some key points to understand:
- Subsidiary company: A subsidiary company is a company that is controlled by another company, known as the parent company. They can issue shares or debentures, but they are still subject to the regulations and restrictions imposed on private companies.
- Statutory Company: A statutory company is a company that is created by an Act of Parliament or other legislative authority. They can issue shares or debentures, but they may have specific rules and regulations regarding the invitation to the public.
- Registered company: A registered company is any company that is registered and incorporated under the Companies Act. They can issue shares or debentures, but they may have specific regulations and restrictions depending on their type (private or public).
In conclusion, only private companies cannot give an invitation to the public to subscribe for any shares in or debentures of the company.

Shares of a Public Limited Company are Freely Transferable

In response to the question, the correct answer is option B: Public ltd. The shares of a public limited company can be freely transferable. Here is a detailed explanation:

Definition of a Public Limited Company

• A public limited company is a type of company that offers shares to the general public and is listed on a stock exchange.


• It is required to have a minimum share capital and fulfill certain legal requirements.


• Public limited companies are regulated by various laws and regulations to protect the interests of shareholders and the general public.

Features of a Public Limited Company

• Shares are freely transferable: The shares of a public limited company can be freely bought and sold in the stock market without any restrictions.


• Listing on stock exchange: Public limited companies are listed on stock exchanges, providing liquidity to their shareholders.


• Minimum share capital: Public limited companies are required to have a minimum share capital as per the legal requirements.


• Disclosure and transparency: Public limited companies are required to disclose financial information and maintain transparency for the benefit of shareholders and the public.


• Separate legal entity: A public limited company has a separate legal entity from its shareholders, which means the company is liable for its own debts and obligations.


• Limited liability: Shareholders of a public limited company have limited liability, meaning their personal assets are protected from the company's debts.

Comparison with other types of companies

• Private limited company: Shares of a private limited company are not freely transferable. They are held by a limited number of shareholders and are not listed on a stock exchange.


• Partnership: Partnerships do not have shares, as they are based on the partnership agreement between the partners. The ownership and transfer of partnership interests are governed by the terms of the partnership agreement.

In conclusion, the shares of a public limited company are freely transferable, which differentiates it from other types of companies such as private limited companies and partnerships.