Formation of a Company Class 11 Notes and Solutions

Comprehensive Class 11 Notes on Formation of a Company

Introduction

The formation of a company is a fundamental topic for students learning about business and entrepreneurship. Understanding this process is crucial as it provides valuable insights into the legal and practical steps required to establish a company. Here's a detailed breakdown tailored for Class 11 students.

Stages of Company Formation

The formation of a company involves several stages, each with specific steps and requirements. The primary stages include Promotion, Incorporation, and Capital Subscription.

Promotion of a Company

Promotion is the initial stage in the formation of a company. It involves the conceiving of a business idea and taking the necessary steps to establish a company. Promoters are the individuals or groups who undertake this process.

Roles and Responsibilities of Promoters:

• Identification of Business Opportunity: Finding and analysing potential business ideas.
• Feasibility Studies: Conducting technical, financial, and economic feasibility studies.
• Name Approval: Selecting and obtaining approval for the company's name.
• Signatories to the Memorandum: Deciding the initial members who will sign the Memorandum of Association.
• Appointment of Professionals: Hiring experts like auditors and legal advisors.
• Preparation of Documents: Preparing necessary legal documents for registration.

Incorporation

Incorporation is the process where the company becomes a legal entity. This involves submitting the required documents to the Registrar of Companies and obtaining the Certificate of Incorporation.

Required Documents:

1. Memorandum of Association
2. Articles of Association
3. Consent of Proposed Directors
4. Agreement with Managing/Whole-time Director
5. Statutory Declaration
6. Notice of the Registered Office Address
7. Evidence of Payment of Registration Fees

Importance of Certificate of Incorporation:

The Certificate of Incorporation is conclusive evidence of the company's legal existence and allows it to start business operations.

Capital Subscription

For public companies, the Capital Subscription stage involves raising funds from the public through the issue of securities. The steps include:

1. SEBI Approval: Obtaining approval from the Securities and Exchange Board of India.
2. Filing of Prospectus: Submitting a prospectus to the Registrar of Companies.
3. Appointment of Bankers, Brokers, Underwriters: Engaging professionals for smooth fund-raising.
4. Minimum Subscription: Ensuring a minimum threshold of subscription is met.
5. Application to Stock Exchange: Applying for permission to trade shares on a stock exchange.
6. Allotment of Shares: Issuing shares to successful applicants.

Key Documents in Company Formation

Memorandum of Association

The Memorandum of Association is a critical document that defines the company's objectives and scope of operations. It includes the following clauses:

1. Name Clause: The company's registered name.
2. Registered Office Clause: The state where the company's registered office is located.
3. Objects Clause: The main objectives for which the company is formed.
4. Liability Clause: The liability of the company's members.
5. Capital Clause: The authorised share capital of the company.

Articles of Association

The Articles of Association outline the internal management rules of the company. It should not contradict the Memorandum of Association and covers aspects such as the issuance of shares, voting rights, and the conduct of meetings.

Types of Companies

Private vs Public Companies

• Private Companies: Cannot invite the public to subscribe to shares and have fewer regulatory requirements.
• Public Companies: Can raise capital from the public but must adhere to strict regulatory norms, including SEBI approval and minimum subscription.

One Person Company (OPC)

A One Person Company (OPC) is a company with a single member. It benefits from a simpler legal regime and encourages small entrepreneurs to incorporate their businesses with the advantages of limited liability and a separate legal entity.

Characteristics of OPC:

• Only one person as a member.
• No minor can be a member.
• Cannot carry out Non-Banking Financial Investment activities.

Role of Regulatory Bodies

Securities and Exchange Board of India (SEBI)

SEBI ensures that a public company making a public issue of securities provides adequate information and protects investor interests.

Registrar of Companies

The Registrar is responsible for processing documents and ensuring compliance with the legal prerequisites for company incorporation.

Legal and Administrative Requirements

Director Identification Number (DIN)

A DIN is required for anyone intending to be a director of a company. It is a unique identifier allotted by the Central Government.

Name Approval Process

The proposed company name must be approved by the Registrar of Companies to ensure it is not identical to an existing company and is not misleading.

Contracts in Company Formation

Preliminary Contracts

Contracts made by promoters before the incorporation of the company. These are not legally binding unless the company chooses to enter fresh contracts upon incorporation.

Provisional Contracts

Contracts made after incorporation but before the company starts its business operations.

Conclusion

Understanding the formation of a company is essential for students interested in business. The process is complex and requires compliance with various legal and administrative requirements. These notes cover the crucial stages, required documentation, and the roles of regulatory bodies involved in forming a company.

This structured approach to company formation will provide a solid foundation for comprehending the intricacies of establishing a business entity.

By mastering these concepts, Class 11 students will be better prepared to understand business operations and the necessary legal underpinnings that sustain them.