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Formation of a Company Solution PDF Free Download
Chapter 7: Formation of a Company
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.
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.
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NCERT Solutions Class 11 Business Studies Chapter 7 Formation of a Company
1. What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.
The process of conceiving or developing an idea of business and taking the initial step towards converting it into a company so that the idea can be converted into a business project is called as promotion and the people who take those initial steps are known as promoters of the company.
A promoter, apart from developing the business idea also needs to analyse the prospects in future and take necessary steps to fulfil the purpose.
The promoter needs to arrange labour, machinery and capital. So here are some of the legal liabilities that a promoter has towards the company:
1. A promoter is neither an agent nor a trustee of the company as prior to getting incorporated a company does not exist as a legal entity.
2. Promoters cannot make secret profits by making deals acting on behalf of the organisation or company.
3. The promoters can be held legally liable for any untrue statement that will be filed in the company prospectus.
4. Expenses incurred by promoters during the promotion of the company cannot be claimed.
5. The promoters are not may or may not be considered for payments before a company gets incorporated. Based on company’s discretion they may be allotted shares to compensate for their exemplary services.
2. Explain the steps taken by promoters in the promotion of a company.
A promoter is that person who takes up the initiative of forming a company based on the business idea and takes the necessary steps to ensure the purpose is met. A promoter has the do the following things for promoting the company:
1. Identifying the business opportunity: The first step for a promoter is to identify a business opportunity and then analysing whether it is worth investing in.
2. Checking the feasibility of the idea: The idea that came to mind might not be feasible enough so that it can be translated into a business. For this some detailed study should be done and for this following types of checks should be done:
i. Technical feasibility: In some ideas the technical feasibility may be less, the reason for such can be the technology or the kind of raw material required for executing the project is not easily available. So this part needs to be taken care of.
ii. Financial Feasibility: All the business require initial capital to get started and sustain in the market. Also the promoters need to determine the cost that need to be beared for implementing the idea. Therefore, if there is fund crunch and the project cost is humongous. Plan needs to be changed.
iii. Economic feasibility: In some case the probability of success can be very low in spite of all other factors working in favour, that part also needs to be considered.
3. Choosing company name: As soon as a decision to establish a company is taken, the promoters select a name for it.
For getting the approval of the proposed name, application needs to be submitted to registrar of companies of the state. The application should contain three names in order of preference as the possibility of similar name may exist.
4. Choosing members to sign MoA: A promoter needs to choose members who will sign the Memorandum of Association (MoA) and will become the directors of company.
5. Selecting professionals: The promoters should hire professionals who will be preparing the necessary documents for the company, these professionals can be bankers, solicitors, brokers and underwriters.
6. Getting documents ready: After all professionals are appointed, the promoter submits all the prepared documents to the registrar of companies.
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