Formation, Promotion & Registration | Business Studies (BST) Class 11 - Commerce PDF Download

Formation of Company

The whole process of formation of a company is divided into four steps for convenience

1. Promotion of Company
2. Incorporation or Registration of Company
3. Floatation of Company
4. Commencement of Business

             Steps in Formation of Company 

Promotion of Company

Promoter: Promoter is a person who initiates the process of formation of company. He undertakes to form a company with reference to a given project and takes the necessary steps to accomplish the purpose. Promoter assumes responsibility for all the matters relating to the formation of the company.

Fiduciary Position of Promoter

The promoter takes the necessary steps for the registration and floatation of the company. A promoter occupies a fiduciary position [Relationship of trust and confidence] with the company and the persons whom he induces to be the shareholders of the company. On account of this relationship, the promoter has to make a full disclosure of all material facts relating to the formation of the company. A promoter is not forbidden from making a profit in the formation of the company, but the profit is not to be secret.

“A promoter is neither the trustee nor the agent of the company, he promotes.” Reason is neither a company has been formed nor a principal is in existence. In the absence of the principal, an agent cannot represent the principal. Similarly, the beneficiary has not yet born for the trustee to act. Yet, the responsibility of an agent and trustee is placed upon the promoter. Consequently, a promoter must act honestly and must not make money, directly or indirectly, at the expense of the company. He has to account and give to the company, whatever money is secretly received by him.

Remuneration to Promoter: Promoter gets remuneration for the work he does in the form of a lump sum. One of the usual ways of getting remuneration is sale of one’s own property to the company, at an inflated price. He must disclose all the facts relating to the property to an independent and competent Board of Directors. If he sells the property to the company, without making a disclosure, the company may rescind the contract. The promoter may be required to pay back the price he has received from the company. Where rescission is not possible, the promoter may be required to pay damages to the company to the extent of the undisclosed profits. Where remuneration is paid to the promoter, it must be disclosed in the prospectus, if paid within two years preceding the date of issue of prospectus.