Commerce Exam > Commerce Notes > Business Studies (BST) Class 11 > Cheat Sheet: Formation of a Company
Cheat Sheet: Formation of a Company
Why do Companies Form? Large capital + Limited liability + Perpetual succession + Increasing competition & risks
Promoter: Person(s) who conceive the idea, take risks, and complete all steps to form the company.
Promoter: Person(s) who conceive the idea, take risks, and complete all steps to form the company.
3 Main Stages of Company Formation
| Stage | Public Company | Private Company |
|---|---|---|
| 1. Promotion | Required | Required |
| 2. Incorporation | Required | Required |
| 3. Capital Subscription | Required (Public issue) | Not required (Private placement) |
Stage 1: Promotion - Functions of Promoter
- Identify business opportunity
- Feasibility studies (Technical, Financial, Economic)
- Name approval from ROC
- Fix signatories to MoA
- Appoint professionals (CA, lawyers, bankers)
- Prepare MoA, AoA & other documents
Position: Fiduciary → Must act honestly. Liable for secret profits.
Stage 2: Incorporation (Registration)
File with Registrar of Companies (ROC) → Get Certificate of Incorporation (Birth Certificate of Company)
| Key Documents | Details |
|---|---|
| Memorandum of Association (MoA) | Name, Office, Objects, Liability, Capital, Association clauses (6 clauses) |
| Articles of Association (AoA) | Internal rules (can adopt Table F) |
| Consent of Directors | Written consent + qualification shares |
| Statutory Declaration | All legal requirements complied (by CA/CS/Advocate) |
| Name Approval Letter + Fee | - |
Min Signatories to MoA: Private → 2 | Public → 7
Effect of Certificate of Incorporation: Company becomes separate legal entity with perpetual succession. Conclusive evidence even if irregularities.
Stage 3: Capital Subscription (Only Public Company)
- SEBI Approval
- File & Issue Prospectus
- Appoint Bankers, Brokers, Underwriters
- Receive Minimum Subscription (90% of issue)
- Apply to Stock Exchange for listing
- Allot shares + File Return of Allotment with ROC
If minimum subscription not received → Refund entire money
Alternative → Private placement (no prospectus needed, file Statement in lieu of Prospectus)
Certificate of Commencement of Business
Required for both Public & Private companies (within 180 days)
Without it → Company cannot start business
One Person Company (OPC) - New Concept (Companies Act 2013)
| Feature | Rule |
|---|---|
| Who can form? | Only natural person, Indian citizen, resident (182 days in India) |
| Min/Max members | 1 member + 1 nominee |
| Only one OPC | Person can form or be nominee in only ONE OPC |
| Minor | Cannot be member/nominee |
| Conversion | Cannot voluntarily convert before 2 years Compulsory if Paid-up > ₹50 lakh OR Turnover > ₹2 crore |
| Benefits | Limited liability + Separate entity + Perpetual succession + Less compliance |
Recall Points
- Birth certificate of company → Certificate of Incorporation
- Document defining objectives → Memorandum of Association
- Internal rules → Articles of Association
- Minimum subscription for public company → 90%
- Only natural Indian citizen resident can form → OPC
- Promoter's position → Fiduciary
- Conclusive evidence of legal existence → Certificate of Incorporation
- Stage not required for private company → Capital Subscription / Prospectus
The document Cheat Sheet: Formation of a Company is a part of the Commerce Course Business Studies (BST) Class 11.
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FAQs on Cheat Sheet: Formation of a Company
| 1. What are the main stages of company formation? |  |
Ans. The main stages of company formation include: Stage 1: Promotion, where the promoter undertakes various functions to establish the company; Stage 2: Incorporation (Registration), which involves officially registering the company with the relevant authorities; and Stage 3: Capital Subscription, applicable only for public companies, where shares are offered to the public and capital is raised.
| 2. What functions does a promoter perform during the promotion stage? | |
Ans. During the promotion stage, a promoter performs several key functions including conducting market research, preparing the company's business plan, arranging for the necessary capital, and filing the required documentation for incorporation. The promoter essentially lays the groundwork for the establishment of the company.
| 3. What is the significance of the Certificate of Commencement of Business? | |
Ans. The Certificate of Commencement of Business is a crucial document for a public company, as it indicates that the company is officially allowed to commence its business activities. This certificate is issued after the company has completed its capital subscription and is essential for ensuring compliance with regulatory requirements before the company can operate.
| 4. What is a One Person Company (OPC) and what are its features? | |
Ans. A One Person Company (OPC) is a new concept introduced under the Companies Act 2013, allowing a single individual to own and operate a company. Key features of an OPC include limited liability for the sole owner, the ability to raise capital through private placement, and simplified compliance requirements compared to traditional companies, making it an attractive option for solo entrepreneurs.
| 5. How does capital subscription work for public companies? | |
Ans. Capital subscription for public companies involves the process of inviting the public to subscribe to shares of the company. This is done through a prospectus, which outlines the details of the shares offered, the rights attached to them, and the purpose of raising funds. The successful capital subscription allows the company to acquire the necessary funds for business operations and growth.
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Apr 18, 2026 Last updated
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