NCERT Textbook - Formation of a Company Commerce Notes | EduRev

Business Studies (BST) Class 11

Commerce : NCERT Textbook - Formation of a Company Commerce Notes | EduRev

 Page 1


PART-II
Corporate Organisation,
Finance and Trade
© NCERT
not to be republished
Page 2


PART-II
Corporate Organisation,
Finance and Trade
© NCERT
not to be republished
160 BUSINESS STUDIES
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.
© NCERT
not to be republished
Page 3


PART-II
Corporate Organisation,
Finance and Trade
© NCERT
not to be republished
160 BUSINESS STUDIES
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.
© NCERT
not to be republished
161 FORMATION OF A COMPANY
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
As discussed in an earlier chapter on
‘Forms of  organisations’, formation of
a company is a complex activity
involving completion of a lot of legal
formalities and procedures. To fully
understand the process one can
divide the formalities into four distinct
stages, which are: (i) Promotion;
(ii) Incorporation; (iii) Subscription of
capital; and (iv) Commencement of
business.
It may, however, be noted that these
stages are appropriate from the point
of view of formation of a public limited
company. As far as the private limited
companies are concerned only the first
two stages mentioned above are
appropriate. In other words, a private
company can start its business
immediately after obtaining the
certificate of incorporation. As it is
prohibited to raise funds from public,
it does not need to issue a prospectus
and complete the formality of minimum
subscription. A public company, on the
other hand, goes through the capital
subscription stage and then receives
the certificate of commencement. Thus,
it has to undergo all the four stages.
In the next section, we shall discuss
these four stages in the formation of a
company in some detail.
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.
© NCERT
not to be republished
Page 4


PART-II
Corporate Organisation,
Finance and Trade
© NCERT
not to be republished
160 BUSINESS STUDIES
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.
© NCERT
not to be republished
161 FORMATION OF A COMPANY
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
As discussed in an earlier chapter on
‘Forms of  organisations’, formation of
a company is a complex activity
involving completion of a lot of legal
formalities and procedures. To fully
understand the process one can
divide the formalities into four distinct
stages, which are: (i) Promotion;
(ii) Incorporation; (iii) Subscription of
capital; and (iv) Commencement of
business.
It may, however, be noted that these
stages are appropriate from the point
of view of formation of a public limited
company. As far as the private limited
companies are concerned only the first
two stages mentioned above are
appropriate. In other words, a private
company can start its business
immediately after obtaining the
certificate of incorporation. As it is
prohibited to raise funds from public,
it does not need to issue a prospectus
and complete the formality of minimum
subscription. A public company, on the
other hand, goes through the capital
subscription stage and then receives
the certificate of commencement. Thus,
it has to undergo all the four stages.
In the next section, we shall discuss
these four stages in the formation of a
company in some detail.
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.
© NCERT
not to be republished
162 BUSINESS STUDIES
7.2.1 Promotion of a Company
Promotion is the first stage in the
formation of a company. It involves
conceiving a business opportunity 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 opportunity. Any person or
a group of persons or even a company
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.
There is no statutory definition of
a promoter. 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.
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
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
© NCERT
not to be republished
Page 5


PART-II
Corporate Organisation,
Finance and Trade
© NCERT
not to be republished
160 BUSINESS STUDIES
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.
© NCERT
not to be republished
161 FORMATION OF A COMPANY
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
As discussed in an earlier chapter on
‘Forms of  organisations’, formation of
a company is a complex activity
involving completion of a lot of legal
formalities and procedures. To fully
understand the process one can
divide the formalities into four distinct
stages, which are: (i) Promotion;
(ii) Incorporation; (iii) Subscription of
capital; and (iv) Commencement of
business.
It may, however, be noted that these
stages are appropriate from the point
of view of formation of a public limited
company. As far as the private limited
companies are concerned only the first
two stages mentioned above are
appropriate. In other words, a private
company can start its business
immediately after obtaining the
certificate of incorporation. As it is
prohibited to raise funds from public,
it does not need to issue a prospectus
and complete the formality of minimum
subscription. A public company, on the
other hand, goes through the capital
subscription stage and then receives
the certificate of commencement. Thus,
it has to undergo all the four stages.
In the next section, we shall discuss
these four stages in the formation of a
company in some detail.
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.
© NCERT
not to be republished
162 BUSINESS STUDIES
7.2.1 Promotion of a Company
Promotion is the first stage in the
formation of a company. It involves
conceiving a business opportunity 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 opportunity. Any person or
a group of persons or even a company
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.
There is no statutory definition of
a promoter. 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.
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
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
© NCERT
not to be republished
163 FORMATION OF A COMPANY
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
to launch a company, the promoters
have to select a name for it and submit,
an application to the registrar of
companies of the state in which the
registered office of the company is to
be situated, for its approval. The
proposed name may be approved if it
is not considered undesirable. It may
happen that another company exists
with the same name or a very similar
name or the preferred name is
misleading, say, to suggest that the
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
© NCERT
not to be republished
Read More
Offer running on EduRev: Apply code STAYHOME200 to get INR 200 off on our premium plan EduRev Infinity!

Complete Syllabus of Commerce

Dynamic Test

Content Category

Related Searches

Semester Notes

,

NCERT Textbook - Formation of a Company Commerce Notes | EduRev

,

Exam

,

MCQs

,

NCERT Textbook - Formation of a Company Commerce Notes | EduRev

,

Sample Paper

,

video lectures

,

practice quizzes

,

Important questions

,

Previous Year Questions with Solutions

,

Free

,

study material

,

shortcuts and tricks

,

NCERT Textbook - Formation of a Company Commerce Notes | EduRev

,

Extra Questions

,

mock tests for examination

,

past year papers

,

pdf

,

ppt

,

Viva Questions

,

Summary

,

Objective type Questions

;