NCERT Textbook - Formation of a Company | Business Studies (BST) Class 11 - Commerce PDF Download

 Page 1


Part -II
Corporate Organisation, 
Finance and Trade
Chapter 7.indd   151 9/2/2022   2:13:12 PM
2024-25
Page 2


Part -II
Corporate Organisation, 
Finance and Trade
Chapter 7.indd   151 9/2/2022   2:13:12 PM
2024-25
Chapter 7
Formation o F a Company LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
specify the important stages in the formation of a company;
•	
describe the steps involved in each stage of company formation;
•	
specify the documents to be submitted to the registrar of 
companies; and
•	
state the need of certificate of incorporation and certificate to 
commence business.
Chapter 7.indd   152 9/2/2022   2:13:12 PM
2024-25
Page 3


Part -II
Corporate Organisation, 
Finance and Trade
Chapter 7.indd   151 9/2/2022   2:13:12 PM
2024-25
Chapter 7
Formation o F a Company LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
specify the important stages in the formation of a company;
•	
describe the steps involved in each stage of company formation;
•	
specify the documents to be submitted to the registrar of 
companies; and
•	
state the need of certificate of incorporation and certificate to 
commence business.
Chapter 7.indd   152 9/2/2022   2:13:12 PM
2024-25
153 FORMATION OF A COMPANY
7.1 i ntrodu Ction Modern day business requires 
large amount of money. Also, due 
to increasing competition and fast 
changing technological environment, 
the element of risk is increasing. 
As a result, the company form of 
organisation is being preferred by more 
and	 more 	 business	 firms, 	 particularly 	
for setting up medium and large sized 
organisations.
The steps which are required from 
the time a business idea originates to 
the time, a company is legally ready to 
commence business are referred to as 
stages in the formation of a company. 
Those who are taking these steps and 
the associated risks are promoting a 
company and are called its promoters.
The present chapter describes 
in some details the stages in the 
formation of a company and also the 
steps required to be taken in each 
stage so that a fair idea about these 
aspects can be made.  
7.2 Formation o F a Company Formation of a company is a complex 
activity involving completion of legal 
formalities and procedures. To fully 
understand the process one can divide 
the formalities into three distinct 
stages, which are: (i) Promotion; (ii) 
Incorporation and (iii) Subscription 
of capital.
It may, however, be noted that 
these stages are appropriate from 
the point of view of formation of any 
kind of company. Private company as 
against the public limited company 
is prohibited to raise funds from 
public, it does not need to issue a 
prospectus and complete the formality 
of minimum subscription. 
In the next section, we shall 
discuss the stages in the formation of 
a company in detail.
7.2.1 Promotion of a Company
Promotion is the first stage in the 
formation of a company. It involves 
conceiving a business idea and taking 
an initiative to form a company so 
that practical shape can be given 
to exploiting the available business 
opportunity. Thus, it begins with 
somebody having discovered a 
potential business idea. Any person or 
a group of persons or even a company 
Avtar, a brilliant automobile engineer, has recently developed a new carburettor 
in his factory which he is running as a sole proprietor. The new carburettor can 
cut down petrol consumption of a car engine by 40 percent. He is now thinking of 
producing it on a large scale for which he requires a large amount of money. He is 
to evaluate different forms of organisations for doing the business of manufacturing 
and marketing his carburettor. He decides against converting his sole proprietorship 
to partnership as the requirement of funds for the project is large and the product 
being new, there is a lot of risk involved. He is advised to form a company. He wants 
to know about the formalities required for the formation of a company.
Chapter 7.indd   153 9/2/2022   2:13:12 PM
2024-25
Page 4


Part -II
Corporate Organisation, 
Finance and Trade
Chapter 7.indd   151 9/2/2022   2:13:12 PM
2024-25
Chapter 7
Formation o F a Company LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
specify the important stages in the formation of a company;
•	
describe the steps involved in each stage of company formation;
•	
specify the documents to be submitted to the registrar of 
companies; and
•	
state the need of certificate of incorporation and certificate to 
commence business.
Chapter 7.indd   152 9/2/2022   2:13:12 PM
2024-25
153 FORMATION OF A COMPANY
7.1 i ntrodu Ction Modern day business requires 
large amount of money. Also, due 
to increasing competition and fast 
changing technological environment, 
the element of risk is increasing. 
As a result, the company form of 
organisation is being preferred by more 
and	 more 	 business	 firms, 	 particularly 	
for setting up medium and large sized 
organisations.
The steps which are required from 
the time a business idea originates to 
the time, a company is legally ready to 
commence business are referred to as 
stages in the formation of a company. 
Those who are taking these steps and 
the associated risks are promoting a 
company and are called its promoters.
The present chapter describes 
in some details the stages in the 
formation of a company and also the 
steps required to be taken in each 
stage so that a fair idea about these 
aspects can be made.  
7.2 Formation o F a Company Formation of a company is a complex 
activity involving completion of legal 
formalities and procedures. To fully 
understand the process one can divide 
the formalities into three distinct 
stages, which are: (i) Promotion; (ii) 
Incorporation and (iii) Subscription 
of capital.
It may, however, be noted that 
these stages are appropriate from 
the point of view of formation of any 
kind of company. Private company as 
against the public limited company 
is prohibited to raise funds from 
public, it does not need to issue a 
prospectus and complete the formality 
of minimum subscription. 
In the next section, we shall 
discuss the stages in the formation of 
a company in detail.
7.2.1 Promotion of a Company
Promotion is the first stage in the 
formation of a company. It involves 
conceiving a business idea and taking 
an initiative to form a company so 
that practical shape can be given 
to exploiting the available business 
opportunity. Thus, it begins with 
somebody having discovered a 
potential business idea. Any person or 
a group of persons or even a company 
Avtar, a brilliant automobile engineer, has recently developed a new carburettor 
in his factory which he is running as a sole proprietor. The new carburettor can 
cut down petrol consumption of a car engine by 40 percent. He is now thinking of 
producing it on a large scale for which he requires a large amount of money. He is 
to evaluate different forms of organisations for doing the business of manufacturing 
and marketing his carburettor. He decides against converting his sole proprietorship 
to partnership as the requirement of funds for the project is large and the product 
being new, there is a lot of risk involved. He is advised to form a company. He wants 
to know about the formalities required for the formation of a company.
Chapter 7.indd   153 9/2/2022   2:13:12 PM
2024-25
154 BUSINESS  STUDIES
may have discovered an opportunity. 
If such a person or a group of persons 
or a company proceeds to form a 
company, then, they are said to be the 
promoters of the company.
A promoter is said to be the one who 
undertakes to form a company with 
reference to a given project and to set 
it going and who takes the necessary 
steps to accomplish that purpose. 
Thus, apart from conceiving a business 
opportunity the promoters analyse its 
prospects and bring together the men, 
materials, machinery, managerial 
abilities 	 and	 financial 	 resources	 and	
set the organisation going.
As per section 69, a promoter 
means a person 
(a) Who has been named as such in 
a prospectus or is identified by 
the company in the annual return 
referred to in section 92; or
(b) Who has control over the affairs of 
the company, directly or indirectly 
whether as a shareholder, director 
or otherwise; or 
(c) In accordance with whose advice, 
directions or instructions the 
Board of Directors of the company 
is accustomed to act. However, it is 
provided that nothing in this sub-
clause shall apply to a person who 
is acting merely in a professional 
capacity.
After thoroughly examining the 
feasibility of the idea, the promoters 
assemble resources, prepare necessary 
documents, give a name and perform 
various other activities to get a 
company registered and obtain the 
necessary certificate enabling the 
company to commence business. 
Thus, the promoters perform various 
functions to bring a company into 
existence. 
Functions of a Promoter
The important functions of promoters 
may be listed as below:
(i) Identification of business 
opportunity: 	 The	 first 	 and	 foremost 	
activity of a promoter is to identify a 
business opportunity. The opportunity 
may be in respect of producing a new 
product or service or making some 
product available through a different 
channel or any other opportunity 
having an investment potential. Such 
opportunity is then analysed to see 
its technical and economic feasibility.
(ii) Feasibility studies: It may not 
be	 feasible	 or 	 profitable 	 to	 convert	 all	
identified 	 business	 opportunities 	 into	
real projects. The promoters, therefore, 
undertake detailed feasibility studies to 
investigate all aspects of the business 
they intend to start. Depending upon 
the nature of the project, the following 
feasibility studies may be undertaken, 
with the help of the specialists like 
engineers, chartered accountants  
etc., to examine whether the perceived 
business 	 opportunity 	 can 	 be 	 profitably 	
exploited.
( a) 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 easily 
available. For example, in our 
earlier story suppose Avtar needs 
Chapter 7.indd   154 9/2/2022   2:13:12 PM
2024-25
Page 5


Part -II
Corporate Organisation, 
Finance and Trade
Chapter 7.indd   151 9/2/2022   2:13:12 PM
2024-25
Chapter 7
Formation o F a Company LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•	
specify the important stages in the formation of a company;
•	
describe the steps involved in each stage of company formation;
•	
specify the documents to be submitted to the registrar of 
companies; and
•	
state the need of certificate of incorporation and certificate to 
commence business.
Chapter 7.indd   152 9/2/2022   2:13:12 PM
2024-25
153 FORMATION OF A COMPANY
7.1 i ntrodu Ction Modern day business requires 
large amount of money. Also, due 
to increasing competition and fast 
changing technological environment, 
the element of risk is increasing. 
As a result, the company form of 
organisation is being preferred by more 
and	 more 	 business	 firms, 	 particularly 	
for setting up medium and large sized 
organisations.
The steps which are required from 
the time a business idea originates to 
the time, a company is legally ready to 
commence business are referred to as 
stages in the formation of a company. 
Those who are taking these steps and 
the associated risks are promoting a 
company and are called its promoters.
The present chapter describes 
in some details the stages in the 
formation of a company and also the 
steps required to be taken in each 
stage so that a fair idea about these 
aspects can be made.  
7.2 Formation o F a Company Formation of a company is a complex 
activity involving completion of legal 
formalities and procedures. To fully 
understand the process one can divide 
the formalities into three distinct 
stages, which are: (i) Promotion; (ii) 
Incorporation and (iii) Subscription 
of capital.
It may, however, be noted that 
these stages are appropriate from 
the point of view of formation of any 
kind of company. Private company as 
against the public limited company 
is prohibited to raise funds from 
public, it does not need to issue a 
prospectus and complete the formality 
of minimum subscription. 
In the next section, we shall 
discuss the stages in the formation of 
a company in detail.
7.2.1 Promotion of a Company
Promotion is the first stage in the 
formation of a company. It involves 
conceiving a business idea and taking 
an initiative to form a company so 
that practical shape can be given 
to exploiting the available business 
opportunity. Thus, it begins with 
somebody having discovered a 
potential business idea. Any person or 
a group of persons or even a company 
Avtar, a brilliant automobile engineer, has recently developed a new carburettor 
in his factory which he is running as a sole proprietor. The new carburettor can 
cut down petrol consumption of a car engine by 40 percent. He is now thinking of 
producing it on a large scale for which he requires a large amount of money. He is 
to evaluate different forms of organisations for doing the business of manufacturing 
and marketing his carburettor. He decides against converting his sole proprietorship 
to partnership as the requirement of funds for the project is large and the product 
being new, there is a lot of risk involved. He is advised to form a company. He wants 
to know about the formalities required for the formation of a company.
Chapter 7.indd   153 9/2/2022   2:13:12 PM
2024-25
154 BUSINESS  STUDIES
may have discovered an opportunity. 
If such a person or a group of persons 
or a company proceeds to form a 
company, then, they are said to be the 
promoters of the company.
A promoter is said to be the one who 
undertakes to form a company with 
reference to a given project and to set 
it going and who takes the necessary 
steps to accomplish that purpose. 
Thus, apart from conceiving a business 
opportunity the promoters analyse its 
prospects and bring together the men, 
materials, machinery, managerial 
abilities 	 and	 financial 	 resources	 and	
set the organisation going.
As per section 69, a promoter 
means a person 
(a) Who has been named as such in 
a prospectus or is identified by 
the company in the annual return 
referred to in section 92; or
(b) Who has control over the affairs of 
the company, directly or indirectly 
whether as a shareholder, director 
or otherwise; or 
(c) In accordance with whose advice, 
directions or instructions the 
Board of Directors of the company 
is accustomed to act. However, it is 
provided that nothing in this sub-
clause shall apply to a person who 
is acting merely in a professional 
capacity.
After thoroughly examining the 
feasibility of the idea, the promoters 
assemble resources, prepare necessary 
documents, give a name and perform 
various other activities to get a 
company registered and obtain the 
necessary certificate enabling the 
company to commence business. 
Thus, the promoters perform various 
functions to bring a company into 
existence. 
Functions of a Promoter
The important functions of promoters 
may be listed as below:
(i) Identification of business 
opportunity: 	 The	 first 	 and	 foremost 	
activity of a promoter is to identify a 
business opportunity. The opportunity 
may be in respect of producing a new 
product or service or making some 
product available through a different 
channel or any other opportunity 
having an investment potential. Such 
opportunity is then analysed to see 
its technical and economic feasibility.
(ii) Feasibility studies: It may not 
be	 feasible	 or 	 profitable 	 to	 convert	 all	
identified 	 business	 opportunities 	 into	
real projects. The promoters, therefore, 
undertake detailed feasibility studies to 
investigate all aspects of the business 
they intend to start. Depending upon 
the nature of the project, the following 
feasibility studies may be undertaken, 
with the help of the specialists like 
engineers, chartered accountants  
etc., to examine whether the perceived 
business 	 opportunity 	 can 	 be 	 profitably 	
exploited.
( a) 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 easily 
available. For example, in our 
earlier story suppose Avtar needs 
Chapter 7.indd   154 9/2/2022   2:13:12 PM
2024-25
155 FORMATION OF A COMPANY
a particular metal to produce 
the carburettor. If that metal 
is not produced in the country 
and because of poor political 
relations, it can not be imported 
from the country which produces 
it, the project would be technically 
unfeasible until arrangements are 
made to make the metal available 
from alternative sources.
(b) Financial feasibility: Every 
business activity requires funds. 
The promoters have to estimate 
the fund requirements for the 
identified 	 business 	 opportunity.	 If	
the required outlay for the project 
is so large that it cannot easily 
be arranged within the available 
means, the project has to be given 
up. For example, one may think 
that developing townships is very 
lucrative. It may turn out that 
the required funds are in several 
crores of rupees, which cannot be 
arranged 	 by 	 floating 	 a 	 company	 by 	
the promoters. The idea may be 
abandoned because of the lack of 
financial 	feasibility	 of	 the	project. 	
( c) Economic feasibility: Sometimes 
it so happens that a project is 
technically 	 viable 	 and 	 financially 	
feasible but the chance of it being 
profitable is very little. In such 
cases as well, the idea may have to 
be abondoned. Promoters usually 
take the help of experts to conduct 
these studies. It may be noted 
that these experts do not become 
promoters just because they are 
assisting the promoters in these 
studies.
Only when these investigations 
throw up positive results, the 
promoters may decide to actually 
launch a company.
(iii) Name approval: Having decided 
incorporate to a company, the 
promoters have to select a name for 
Name Clause
A name is considered undesirable in the following cases:
 (a) If it is identical with or too closely resembles the name of an existing 
company
 (b) If it is misleading. It is so considered if the name suggests that the company 
is in a particular business or it is an association of a particular type when 
it is not true
 (c) If it is violative of the provisions of ‘The Emblem and Names (Prevention of 
Improper Use) Act 1950, as given in the schedule to this Act. This schedule 
specifies, 	 inter 	 alia,	 the 	 name,	 emblem	 or	 official 	 seal 	 of 	 the	 UNO	 and 	 its	
bodies like WHO, UNESCO etc. Government of India, State Governments, 
President of India or Governer of any State, the Indian National Flag. 
The Act also prohibits use of any name which may suggest patronage of 
Government of India, or any state government or any local authority
Chapter 7.indd   155 9/2/2022   2:13:12 PM
2024-25