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

Commerce: NCERT Textbook - Formation of a Company Notes | Study Business Studies (BST) Class 11 - Commerce

The document NCERT Textbook - Formation of a Company Notes | Study Business Studies (BST) Class 11 - Commerce is a part of the Commerce Course Business Studies (BST) Class 11.
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 Page 1


160 BUSINESS STUDIES
PART-II
Corporate Organisation,
Finance and Trade
2020-21
Page 2


160 BUSINESS STUDIES
PART-II
Corporate Organisation,
Finance and Trade
2020-21
161 FORMATION OF A COMPANY
CHAPTER 7
FORMATION OF 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.
2020-21
Page 3


160 BUSINESS STUDIES
PART-II
Corporate Organisation,
Finance and Trade
2020-21
161 FORMATION OF A COMPANY
CHAPTER 7
FORMATION OF 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.
2020-21
162 BUSINESS STUDIES
7.1 INTRODUCTION
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 OF 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 may have
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.
2020-21
Page 4


160 BUSINESS STUDIES
PART-II
Corporate Organisation,
Finance and Trade
2020-21
161 FORMATION OF A COMPANY
CHAPTER 7
FORMATION OF 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.
2020-21
162 BUSINESS STUDIES
7.1 INTRODUCTION
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 OF 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 may have
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.
2020-21
163 FORMATION OF A COMPANY
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.
2020-21
Page 5


160 BUSINESS STUDIES
PART-II
Corporate Organisation,
Finance and Trade
2020-21
161 FORMATION OF A COMPANY
CHAPTER 7
FORMATION OF 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.
2020-21
162 BUSINESS STUDIES
7.1 INTRODUCTION
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 OF 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 may have
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.
2020-21
163 FORMATION OF A COMPANY
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.
2020-21
164 BUSINESS STUDIES
It may be so because the required
raw material or technology is not
easily available. For example, in our
earlier story suppose Avtar needs
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.
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
2020-21
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