top of page

Formation of a company | Business Studies | Class 11

The formation of a company is a complex process that involves completion of legal formalities and procedures. There are three steps or stages involved in the formation of a company. They are:

  • Promotion

  • Incorporation

  • Subscription of capital

  • Commencement of business

It should be emphasised that just the first two stages listed above are applicable for private limited companies. In other words, a private company may begin operations as soon as it receives its certificate of formation.


Promotion of company

It involves conceiving a business opportunity and taking the initiative to form a company so that practical shape can be given to exploiting the available business opportunity.

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.

Steps and formalities took by the promoter to form a company.

  • Takes all necessary steps to form a company.

  • Identifies business ideas and opportunities

  • Gives name to the company and mentions the name in moa.

  • Appoints a person who helps ease to form company

  • Prepare necessary documents for incorporation ().


Memorandum of Association (MOA)

It explains the goal and provides details about their partners, such as members, directors, etc. The promoter or any other legal person must refer to four clauses in the MOA:


Name clause

Contains the name of the company for which the company is known for.


Registered office clause

  • Contain information regards the company’s register office

  • Means, location, and state in which the company situated

  • If company is situated in the wrong address as per mention in this clause then companies have to inform roc within 30 days of incorporation.

Objective clause

  • Which puts limitations on the company to work and function within the objectives mentioned in moa.

  • An act done beyond the company’s objective gets declared void and unlawful.

  • For e.g.: x ltd company mentions in its moa objective that company is formed for coaching classes 11,12, but x ltd start selling machinery which is different from the objective mentioned in moa 3rd clause.

  • Result: there is a fine of 10,000 rupees charged to the company for doing that.

Or

The company can change its objective clause by passing ordinary resolutions.


Liabilities clause

  • The liabilities of the member are limited to the extent of the share subscribed.

  • Example: x ltd takes 20 shares each of 5rs, out of which he already paid 3rs, now he has liabilities of 2rs to the company only. The company cannot demand more.

Capital clause

  • The company will specify its maximum authorized issue of shares to raise capital.

  • The company has to issue shares up to that limit mentioned in the capital clause.

Associated clause

  • Associates sign MOA and mention their intentions for the company.

  • In the case of a public business, a minimum of 7 members must sign.

  • Additionally, in the case of a private company, the MOA requires a minimum of two signings.


Article of association (AOA)

  • It contains rules and procedures regarding the internal management of the company.

  • And duly signed by signatories of MOA.

  • The signatories who already signed MOA must sign AOA.


Consent of the proposed director

  • It just contains consent that is taken and agreed upon.

  • Agrees to act in capacity and undertake to buy or sell the shares.

  • As per the rule of the article of association.


Agreement

Another document that needs to be given to the registrar to get the company registered under the act is the agreement that the company wants to make with any person it wants to hire as its managing director or a full-time director or manager.


Statuary declaration

A statuary declaration means an indication that everything mentioned is in a right and incorrect form. And must be signed by CA, CS, or any High Court judge.


Incorporation

There are a few steps taken by the promoter for the incorporation of the company.


Step1: submission of documents

  • Promoter submits MoA, AOA, consent of director, agreement to ROC and statuary declaration is given by ROC.

  • MOA and AOA must be signed and stamped by a witness. In a public company, at least 7 members must sign, while at least 2 members must sign in a private company.

Step2: Charge fee

  • The promoter Submits all documents with some prescribed charge fee.

  • The charge fee depends on the type of company and the current rate.

Step3: issue of incorporation certificate

  • Now issue incorporation of company certificate by roc.

  • The promoter will have to write an application for incorporation and then give it to ROC.

Effect of the certificate of incorporation

  • It is like the birth certificate of the company with the date it was formed.

  • The company can now enter into a valid contract after issuing of the certificate.

  • And where the certificate will issue, the company will be a nationality of that country.

  • The private company can immediately start its business after issuing this certificate.


Note:

  1. Never say ‘company is created’, company is incorporated. This means anything that forms by following rules and laws/acts in a proper procedure called incorporation.

  2. It’s important for the company to be properly incorporated, otherwise, anyone can take advantage wrongfully.

  3. Now, private companies can start their functions with a restriction on the transfer of shares.

  4. There are still some formalities for public companies to follow.


Subscription of capital

A public company has to issue shares and debenture as there is no restriction on the transfer of shares. But, before issuing shares or debentures to the public, company has to undergo some rules and regulations which are made by SEBI and therefore issue a prospectus before issuing shares. There are some steps required to raise funds from the public:


SEBI approval

  • There are important steps before going ahead with raising funds from the public just because of to protect the interest of investors and secure their information.

  • They also overview the prospectus before issue to the general public regarding price and to whom public category they are going to offer.


filling prospectus

Prospectus: The document contains information regarding types of share, there price of each one, and company information by whom share are going to be issued for the offer to buy their share.

The interested person files a prospectus with the application of issued shares and the price money prescribed in the prospectus.

There is some difficulty to issue all shares and debenture to the public, for this problem companies appoint some agent who helps in the easy issue of shares to the public they appoint some banker, brokers, and some underwriter which helps in raising the fund and in return they will get commission or got part of the dividend.


Received application

There must be a received share of more than 90% of the issued share to the public.

Now, the company received applications from interested persons to buy shares. If the company is not able to receive 90% of the issued capital, then, the company has to return all shares (90% also) to the public again that company received in terms of money within 30 days.


Allotment of shares

The company has to allot a number of shares to the public issued if allot shares to the public is excess or less, whosoever, there must be an issue of an allotment letter to allottees within 30 days and adjust their shares, if excess, then return to allottees. Now gives physical shares to their shareholder so then they recognize who their shareholder


Commencement of business

If the above document given by the promoter to the registrar of the company and subscription of capital by public issue is within the guideline of SEBI.

if found satisfactory, then the registrar of the company issue a certificate of commencement of business will be issued, which is just for evidence of the company has the right to do business


Comments


bottom of page