1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

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Karnataka 1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

1st PUC Business Studies Formation of a Company Text Book Questions and Answers

Multiple Choice Questions

Question 1.
Minimum number of members to form a private company is
(a) 2
(b) 3
(c) 5
(d) 7
Answer:
(a) 2

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 2.
Minimum number of members to form a public company is
(a) 5
(b) 7
(c) 12
(d) 21
Answer:
(b) 7

Question 3.
Application for approval of name of a company is to be made to
(a) SEBI
(b) Registrar of Companies
(c) Government of India
(d) Government of the State in which Company is to be registered
Answer:
(b) Registrar of Companies

Question 4.
A proposed name of Company is considered undesirable if
(a) It is identical with the name
(b) It resembles closely with of an existing company the name of an existing company
(c) It is an emblem of Government
(d) In case of any of the above of lndia, United Nations etc.
Answer:
(d) In case of any of the above of lndia, United Nations etc.

Question 5.
A prospectus is issued by
(a) A private company
(b) A public company seeking investment from public
(c) A public enterprise
(d) A public company
Answer:
(b) A public company seeking investment from public

Question 6.
Stages in the formation of a public company are in the following order
(a) Promotion, Commencement of Business, Capital Subscription, Incorporation,
(b) Incorporation, Capital Subscription, Promotion
(c) Promotion, Incorporation, Capital Subscription,
(d) Capital Subscription, Promotion, Incorporation,
Answer:
(c) Promotion, Incorporation, Capital Subscription,

Question 7.
Preliminary Contracts are signed
(a) Before the incorporation
(b) After incorporation but before capital subscription
(c) After incorporation but before commencement of business.
(d) After commencement of business
Answer:
(a) Before the incorporation

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 8.
Preliminary Contracts are
(a) binding on the Company
(b) binding on the Company, if ratified after incorporation
(c) binding on the Company, after incorporation
(d) not binding on the Company
Answer:
(d) not binding on the Company

True/False Questions And Answers

  1. It is necessary to get every company incorporated, whether private or public. (True)
  2. Statement in lieu of prospectus can be filed by a public company going for a public issue. (True)
  3. A private company can commence business after incorporation. (True)
  4. Experts who help promoters in the promotion of a company are also called promoters. (False)
  5. A company can ratify preliminary contracts after incorporation. (False)
  6. If a company is registered on the basis of fictitious names, its incorporation is invalid. (False)
  7. ‘Articles of Association’ is the main document of a company. (False)
  8. Every company must file an Article of Association. (False)
  9. A provisional contract is signed by promoters before the incorporation of the company. (False)
  10. If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members. (False)

Short Answer Questions

Question 1.
Name the stages in the formation of a company.
Answer:
A company is created by law. It is incorporated in accordance with the provisions of the Companies Act 1956. But before the incorporation a series of steps or stages are taken which are the followings:
Stages in company formation – A company comes into existence after taking a series of steps. These steps can be broadly grouped under the follow ing four important stages:

  • Promotion:
  • Incorporation or Registration:
  • Capital Subscription; and
  • Commencement of Business.

A company is established when a Certificate of Incorporation is issued by the Registrar of Companies. The last two stages are required for the floatation of the company. The term ‘floatation’ means to get the company going.

This requires completion of The last two stages mentioned above, i.e. raising of capital and obtaining Certificate of Commence Business. A private company can commence its operation immediately after the second stage. But a public company has to undergo all the stages in order to commence its operation.

Question 2.
List the documents required for the incorporation of a company.
Answer:
The documents required for the incorporation of a company are:

  1. The Memorandum of Association duly stamped and witnessed as in the case of the Memorandum.
  2. If company adopts Table A, a statement in lieu of the prospectus is submitted, instead of Articles of Association.
  3. Written consent of the proposed directors to act as directors and an undertaking to purchase qualification shares.
  4. The agreement, if any, with the proposed Managing Director, Manager or whole-time director.
  5. A copy of the Registrar’s letter approving the name of the company
  6. A statutory of declaration affirming that all legal requirements for registration have been complied with.
  7. A notice about the exact address of the registered office (can be submitted within 30 days of incorporation).
  8. Documentary evidence of payment of registration fees.

Question 3.
What is a prospectus? Is it necessary for every company to file a prospectus?
Answer:
Prospectus (Nature) – A public limited company limited by shares must issue a prospectus in order to raise the required funds by means of an issue of shares and debentures to the public. Under Sec. 2(36) of the Companies Act, “Prospectus means any document including any notice, circular, advertisement or other document described or issued as a prospectus that invites deposits or offers for the subscription or purchase of any shares in or debentures of a body corporate.”

It contains a printed summary of the company’s past history (if any), its present position, and its future prospects. Every prospectus must be dated and signed by signatories to the Memorandum of Association. A copy of the prospectus must be filed with the Registrar before it is issued to the public. A copy of the prospectus must be supplied with every application form for shares offered to the public.

The essential elements of a prospectus are as follows:

  • There must be an invitation to the public at large
  • The invitation must be made by or on behalf of the company
  • The invitation must be to subscribe or purchase its shares or debentures or to make deposits.

It is essential for every public company to issue and file a prospectus or statement in lieu of a prospectus before issuing shares or debentures of a body corporate.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 4.
Explain the term,‘Minimum Subscription’.
Answer:
Minimum subscription refers to the minimum amount required by the company for its preliminary functions. It has been provided by the Companies Act, that the company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares in order to prevent companies from commencing business with inadequate resources. This is called the ‘minimum subscription’. The limit of minimum subscription is 90% of the size of the issue.

Question 5.
Briefly explain the term ‘Return of Allotment’.
Answer:
Allotment – After the subscription list is closed and applications are forward by the bankers to the company, the Board of Directions proceed to make allotment. The follow ing conditions must be satisfied :

  • Allotment must not begin earlier than 5 days from the date of issue of prospectus or later than 10 days after the closing of the subscription list.
  • The amount payable on the application must not be less than 5 percent of the face value.
  • The amount of minimum subscription as stated in the prospectus must be received in cash within 120 days from the date of issue.

Whenever a company makes any allotment of shares, it shall file a return of allotment in the prescribed firm within 30 days of allotment of shares.

The return must contain the following particulars:

  • In caseof allotment of shares for cash – The return of allotment shall contain the number and nominal value of shares allotted, the names, addresses and occupations of allottees, the amount paid or due and payable in each share.
  • In case of allotment of shares other than cash – The company must file the verified copies of the contract constituting the title of the allottee to the allotment and contract of sale or contract of service or other consideration in respect of which the allotment was made, with the registrar along with the return of allotment.
  • In case of bonus shares – The return of allotment must state the number and nominal value of shares allotted and the names, addresses and occupations of the allottees.

If the default is made in complying with the provisions as to return of allotment, every officer of the company who is in default shall be punishable with a fine which may extend to Rs. Five thousand for every day during which the default continues.

Question 6.
At Which stage in the formation of a company does it interact with SEBI.
Answer:
A company interacts with SEBI (Securities and Exchange Board of India) in the third stage of formation that is, in the stage of capital subscription. SEBI is the regulatory authority of capital markets in our country which has issued guidelines for the disclosure of information and investor protection.

A company inviting funds from the general public must make adequate disclosure of all relevant information and must no t conceal any material information from the potential investors as per SEBI guidelines. Prior approval from SEBI is, therefore, required before going ahead with raising funds from the public.

SEBI ensures that the proposed issue of securities follows all the guidelines laid down by it, no oversubscription of any issue can be retained, full underwriting of the issue is important, promoters contribution must be 25% in an issue of less than Rs. 100 crore.

Question 7.
Distinguish between ‘preliminary contracts’ and ‘provisional contracts’.
Answer:
Preliminary’ contracts are those contracts which are entered into by the promoters of a company even before it is duly incorporated. Such contracts are entered into by the promoters for acquiring some property or right for a company which is yet to be incorporated. Rules regarding preliminary contracts may briefly be summarized as under:

  • The company is not bound by these contracts as the company is non¬existent before its incorporation and therefore has no capacity to make contracts.
  • The company cannot sue on such contracts the other party on the footing that the company was not in existence to make a valid contract before its incorporation.
  • Such contracts are not ratified by the company as valid ratification required the existence of the principal at the time of making the contract by the agent.
  • The company is neither bound by. nor can bind others by preliminary contracts. It is the promoters who are personally liable for the contracts.

Provisional contracts – In the case of a public limited company, contracts made after incorporation but before obtaining a certificate of commencement of business, know n as provisional contracts.

A provisional contract is not binding on any public company until it obtains a certificate of commencement of business, but on the issue of a certificate of commencement of business, such a contract automatically becomes binding or enforceable without any formality by the company.

In case a company goes into liquidation before it obtains a certificate of commencement of business, such contracts are not enforceable.

Long Answer Questions

Question 1.
What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.
Answer:
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.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 2.
Explain the steps taken by promoters in the promotion of a company.
Answer:
Stages in Promotion – The promotion of a company involves the following stages:
(1) Discovery of Business Idea – The process of promotion begins with the conception of an idea for forming a company. The idea of forming a company arises in the fertile mind of the promoter. The business idea may relate to the commercial use of a new invention or exploitation of an untapped natural resource.

It may involve the setting up of a new business unit or expansion of an existing unit or merging of two business units. At this stage, the promoter makes a preliminary analysis of the idea. There may be several ideas in his mind and he has to decide which is the most feasible and profitable one. The promoter identifies the avenues for profitable investment. A company may fail due to conceived idea if based on false notions.

(2) Detailed Investigation – In order to determine the technical feasibility and economic viability of the business idea, a thorough investigation is required with reference to the extent of demand, degree of competition, estimated costs, sources of supply, amount of finance required, etc.

The detailed investigation must provide satisfactory answers to several questions, e.g. how much quantity of the product can be sold and at what prices?; What will be the costs of production and distribution?; where can the raw materials be obtained from and at what price?; will the plant and machinery be imported?; will the necessary labour skills be available at reasonable wages, and how much finance will be required? Accurate estimates for each one of these questions will have to be made. The services of experts such as engineers, velures, accountants, marketing experts, etc. may be needed to prepare a project report.

(3) Verification – The project report submitted by the investigators must not be accepted without getting it verified by a separate team of impartial experts. Mistakes may creep into the investigators’ report due to error in estimation or on account of prejudice. Therefore, an impartial and critical appraisal of the project report should be made. Once the idea is verified that the idea conceived is feasible and viable, the promoter should take measures to translate the idea into a reality.

(4) Assembling the Resources – Once the business idea is found to be feasible and profitable, the promoter takes steps to give it a concrete shape in the form of a going concern. He must make every effort to assemble the basic requirements. First of all, he secures the cooperation of the people who would be associated as directors or founders. Then he makes contracts with underwriters, bankers, brokers, etc.

for raising the necessary finance. While preparing the financial pian. the promoter has to keep in mind that adequate funds must be raised from appropriate sources. Then the promoter makes contracts for the purchase of land and buildings, plant and machinery, furniture and fixtures, etc. After this, arrangements are made for the installation of machinery, supply of materials, recruitment of staff, etc. The promoter is also required to decide about the capitalisation capital structure, time and mode of capital issue etc.

(5) Incorporation – Incorporation implies the registration of business as a body corporate under the Companies Act. It requires drafting and filling of documents, payment of stamp duty and registration fees, and obtaining the certificate of registration from the Registrar of Companies! After completing all the legal formalities a promoter also applies for a certificate of commencement of business.

Functions/Role of a Promoter – There are no express statutory’ provisions as to the legal position of a promoter, but the judicial decision so far made makes the legal position quite clear. A promoter is not an agent of the company or a trustee of the company but a large number of legal experts have opined that a promoter stands in a fiduciary relation to the company he promotes. Promoters are persons engaged in the formation of a company. They take the initiative of starting a business and bring a business enterprise into existence.

They hunt for business opportunities, conceive new ideas and schemes, and assemble finance and other resources for executing the idea. But for a promoter’s initiative and determination, the enterprise would never see the light of day. Promoters spot the prospects of gain in a business, form a mental pictui of the proposed business, visualise the problems it might face and persuade others to invest money in it. They perform all the preliminary work relating to the establishment of the company as a going concern.

A promoter opens Out opportunities for profitable investments. Therefore, “a successful promoter is a creator of wealth”. A promoter gives birth to a business unit and nourishes it until it stands on its own feet. Therefore, the promoter serves both as a mother and a mid-wife.

Thus, promoters play an indispensable role in business. They perform, the following functions:

  • Conceive a business opportunity or the idea of starting a new business;
  • Conduct a preliminary analysis of the idea to determine its profitability and feasibility;
  • Carry out a detailed investigation in order to determine the nature, scope and requirements of the proposition;
  • Consult various persons and persuade them to join in the proposed business as directors;
  • Appoint brokers, underwriters, solicitors and bankers for the company;
  •  Get the necessary documents prepared and filed for incorporation  of the company;
  • Select an appropriate name of the company;
  • Get the prospectus prepared, issued, and filed; and
  • Enter into preliminary contracts for the purchase of assets.

Thus, a promoter is a person or a group of persons who conceives the idea of the formation of a company, and takes necessary steps for its incorporation, raising of capital, and making it a going concern. Every person connected with the formation of a company cannot be called a promoter. It is a question of fact and decided on the basis of the role played by the person in the promotion of the company.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 3.
What is a ‘Memorandum of Association’? Briefly explain its clauses.
Answer:
Memorandum of Association – Memorandum of Association is the basic and most important document of a company. It is the charter or constitution of the .company. It lays down the objects and powers of the company as well as the scope of operations of the company beyond which it cannot go.

It is the basic document on which alone the company can be incorporated. It is unalterable except in cases, in the mode, and to the extent for which express provision has been made in the Companies Act. It sets out the constitution of the company and as such it is the foundation upon which the structure of the company is built.

The purpose of the memorandum is to enable the shareholders, creditors, and those who deal with a company to know what is its permitted range of enterprise. In fact, it can be considered as the foundation on which the structure of a company is based. Its primary importance lies in the fact that a company cannot undertake such operations which are not mentioned in its memorandum. Contents of Memorandum – The Memorandum of Association contains the following clauses as mentioned under section 13 of Companies Act 1956

(1) The Name Clause – Under this clause, the corporate name of the company is stated. Any suitable name can be chosen by a company subject, however, to the following restrictions:

(a) The word “Limited” or “Private Limited” must be the last word in the name of every public or private company 1 united by shares respectively.

(b) The proposed name should not be too identical or similar to the name of another existing company or firm as such names are undesirable in the opinion of the Central Government.

(c) The proposed name should not convey any connection or link with a government department or local authority. The name should not attract the provisions of the emblems and names.
The name of the company is required to be engraved in the common seal of the company and affixed on several important documents.

(2) The Registered Office Clause – This clause contains the name of the State in which the Registered Office of the company is to be situated. This is required in order to fix the domicile of the company, i.e. place of its registration. Along with the name of the State in which the Registered Office is situated, the address of the Registered Office is also given. It provides the official place to which all communications and notices may be lawfully addressed.

(3) The Objects Clause — This clause can be regarded a* the core of the Memorandum of Association. It sets out the object with which a company is formed. The company is not legally entitled to do any business other than that specified in its Objects Clause. A company state the main objects and incidental or ancillary to the attainment of main objects.

(4) Liability Clause – This clause states that the liability of members is limited to the amount, if any, unpaid on their shares. In the case of companies limited by guarantee. this clause will state the amount which every member undertakes to contribute to the assets of the company in the event of its winding up.

(5) The Capital Clause – Every limited company (whether limited by shares or limited by guarantee), having share capital must state the amount of its share capital with which the company is proposed to be registered and the division thereof into the shares of the fixed denomination. If the capital is divided into preference and equity shares, the number and value of both the shares are to be shown in the clause.

(6) The Association or Subscription Clause – Under this clause, the signatories to the memorandum under their signatures duly attested by a witness “declare association”, that is, they desire to be formed to a company and that they agree to,the purchase of qualification shares if any. Each subscriber must take atleast one share. There must be atleast 7 signatories in case of a public company and at least 2 in the case of a private company. The provision to purchase the qualification shares does not apply in case of companies limited by guarantee or companies with unlimited liability.

Question 4.
Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
Answer:
Difference between Memorandum of Association and Articles of Association:
1st PUC Business Studies Question Bank Chapter 7 Formation of a Company 1

Question 5.
What is the effect of conclusiveness of the ‘Certificates of Incorporation’ and ‘Commencement of Business’?
Answer:
Incorporation of a Company – Incorporation of a company implies its registration as a body corporate under the Companies Act 1956. A company comes into existence only after registration and the issue of a certificate of incorporation. It contains the following stages:

(1) Approval of Name – Before the registration of a company, it is necessary to obtain the approval of the Registrar of Companies regarding the proposed name of the company. For this purpose, an application is sent to the Registrar.
A set of three names are to be suggested in order of priority. The company may adopt any name which is not prohibited and which does not resemble the name of an existing company. The registrar shall send his verification and confirmation as to desirability or availability of name within 7 days of receipt of application.

(2) Filing of Necessary Documents – The next step is to file the following documents with the Registrar of Companies:

  • The Memorandum of Association: Duly signed by at least two persons in case of a private company, and by at least seven persons in case of a public company. Every company is required to file a Memorandum of Association of the company in triplicate.
  • The Articles of Association: If any, duly signed by the subscribers to the Memorandum of Association. If a public company does not file its own Articles of Association, it is deemed to have adopted Table A in Schedule 1 of the Companies Act, which contains model articles.
  • Notice: Of the situation of the registered office of the company. However, the notice of the situation of the registered office may be filed within 30 days.
  • The agreements: If any, which the company proposes to enter into with any individual, firm, or body corporate regarding is management.
  • A list of persons: Who has agreed to act as the directors – containing full name, age, occupation, and permanent address of each. If a separate list is not filed the signatories to the Memorandum of Association are deemed to be the first directors of the company.
  • A written consent: Of each director to act as such with his signature shall be submitted to the Registrar.
  • An undertaking: Signed by each director to take up and pay for the qualification shares, if any. The undertaking is necessary if articles of the company provide so.
  • A copy of the license: Obtained from the Central Government in case the industry is listed in First Schedule to the Industries (Development and Regulation) Act 1957.
  • A statutory declaration: Signed by a director, manager or secretary of the company, or by an advocate of the Supreme Court, or of a High Court or by a practicing chartered accountant stating that all provisions of the Companies Act with regard to incorporation have been duly complied with.

(3) Payment of Fee – Along with the above documents, the company must pay the prescribed filing fees, stamp duty and registration fees. The amount of registration fee varies according to the amount of authorised capital of the company. It may be pointed out that the fees may be paid to the Registrar by cash or by a postal order or by money order, or by demand draft or by cheque or through treasury challan.

(4) Registration – The Registrar of Companies will carefully scrutinize the documents filed by the company. If he is satisfied that all the requirements regarding registration have been duly complied with, he will enter the name of the company in his register.

(5) Certificate of Incorporation-After registration, the Registrar will issue a certificate to the company. This certificate is called the Certificate of Incorporation. It is dated and signed by the Registrar. The company becomes a distinct legal entity’ with perpetual succession and a common seal from the date mentioned in this certificate. The Certificate of Incorporation is conclusive proof of the fact that the company was duly incorporated. The company comes into existence from the date of the certificate and its existence cannot be challenged even if a defect is found in the Certificate of Incorporation.

Commencement of Business – In order to obtain the Certificate of Commencement of Business, a public company must file the following documents with the Registrar of Companies :

  • A copy of the prospectus or statement in lieu of the prospectus.
  • A return of allotment containing the names, addresses of shareholders, and the number of shares allotted to each.
  • A declaration that the directors have taken up and paid for their qualification shares in the same proportion in which members of the public have been required to pay.
  • A declaration that the amount’ of minimum subscription has been received in cash.
  • A declaration that the company has applied for or obtained permission for-its shares to be dealt on a recognised stock exchange.
  • A statutory declaration signed by a director or secretary of the company or from .an advocate stating that the necessary formalities have been duly complied with.

The Registrar will scrutinize the above documents. If he is satisfied that the documents are in order, he will issue a Certificate of Commencement of Business. A public company can start the business from the date mentioned in the certificate.

Certificate of incorporation is conclusive evidence of the birth of the company. Once the certificate of incorporation is issued, the validity of registration cannot be impeached or challenged. This is so even if all the signatures of the subscribers are forged or all the signatories are minors. Lord Cairns stated in 1867 that a certificate of incorporation is not merely a prime facie answer, but conclusive evidence to such obligations. ’

Once the certificate of incorporation is given nothing is to be inquired into as to the regular of the prior proceedings. It is pertinent to note that the certificate is not conclusive evidence of the validity of objects. Even if not objects are illegal, the certificate cannot be cancelled.

Effect and consequences of conclusiveness of certificate of incorporation and commencement of business – Following shall be the effects or consequences of incorporation of the company :

  • The emergence of corporate personality – A new corporate personality or body corporate emerges from the date of incorporation, be company acquires a separate legal existence independent of the members forming it.
  • Definite name of the company contained in the Memorandum of Association.
  • Capacity to exercise all functions within the scope of Memorandum and Articles. It can buy and sell goods and property, open bank account, sue others, and can be sued by others, etc.
  • A binding contract between the company and members.
  • The validity of incorporation and certificate of incorporation cannot be cancelled even for irregularity or forged signatures of subscribers.

After obtaining the certificate of incorporation, certain legal formalities have been complied with by the company in order to get the certificate of commencement of business. Once the certificate issued by the registrar, the company is entitled to commence business. This is certificate shall be conclusive evidence that the company is so entitled.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 6.
Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission?
Answer:
A public company can raise the required funds from the public by means of an issue of shares and debentures. For doing the same, it has to issue a prospectus which is an invitation to the public to subscribe to the capital of the company and undergo various other formalities.

It is necessary for the company to make an application to at least one stock exchange for permission to deal in its shares or debenture by getting its shares listed on the stock exchange.

If a public company going for a public issue fails to apply to the stock exchange for permission to deal in its securities or fails to get such permission before the expiry of ten weeks from the date of closure of subscription list, the allotment of shares done by the company shall become void and all money received from the applicants will have to be returned to them within eight days.

1st PUC Business Studies Formation of a Company Additional Questions and Answers

One Mark Questions

Question 1.
Mention the minimum and a maximum number of members in a private company.
Answer:
Minimum of two members and maximum is fifty.

Question 2.
Mention minimum and a maximum number of members in a public company.
Answer:
Minimum of seven members and maximum is unlimited.

Question 3.
Which type of company issue prospectus?
Answer:
Public Company issue prospectus.

Question 4.
Is it necessary to get the company incorporated?
Answer:
Yes.

Question 5.
At what stage private company a can commence its business.
Answer:
A private company can commence its business after getting an incorporation certificate.

Question 6.
Which is the main document of Joint Stock Company?
Answer:
Memorandum of Association and Article of Association are the main documents of Joint Stock Company.

Question 7.
Name two stages information of the company.
Answer:

  • Promotion
  • Incorporation

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 8.
Mention two certificates required for Joint Stock Company.
Answer:

  • Incorporation certificate
  • Commencement of Business Certificate.

Question 9.
What is an Article of association?
Answer:
Article of the association is the rules regarding internal management of a company.

Question 10.
Mention any one type of Joint Stock Company.
Answer:
Public company is one of the type of Joint Stock Company.

Question 11.
Name the company in which shares are freely transferable.
Answer:
Public company shares are freely transferable.

Question 12.
State the minimum capital required in public companies.
Answer:
Public companies should have a minimum Paid-up capital of Rs. 5,00,000.

Question 13.
State the minimum capital required in private companies.
Answer:
Private companies should have a minimum Paid-up capital of Rs. 1,00,000.

Question 14.
Mention any one function of promoters.
Answer:
Identification of Business Opportunity

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 15.
What are the qualification shares?
Answer:
It refers to the requirement that a member of the board must hold a vested interest in the operation of the enterprise in the form of company stock.

Question 16.
At what stage public company can start its business?
Answer:
After getting the commencement of a business certificate a public company can start its business.

Question 17.
Name the act which governs Joint Stock Companies in India.
Answer:
Company act of 1956.

Question 18.
How many members have to sign the Memorandum of Association in public limited companies?
Answer:
At least 7 members have to sign the Memorandum of Association in public limited companies.

Question 19.
How many members have to sign the Memorandum of Association in private limited companies?
Answer:
At least 2 members have to sign the Memorandum of Association in public limited companies

Two Marks Questions

Question 1.
What is a Joint Stock Company?
Answer:
A joint-stock company can be described as an artificial person having a separate legal entity, perpetual succession and common seal.

Question 2.
Define Joint Stock Company.
Answer:
Indian Company law 1956’s section 3(1) (i) define the company, “Company is the organization which is formed and registered under this law or any previous law”.

Question 3.
What is a prospectus?
Answer:
Registration a public limited company invites the public to subscribe to its shares. This is done by issuing a document called Prospectus.

Question 4.
What is meant by minimum subscription?
Answer:
The company gives the offer to the public to subscribe to its shares, it must ensure that a minimum number of shares must be subscribed by the investors. This is called minimum subscription, which is 90% of the total number of shares offered to the public.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 5.
State two clauses in Memorandum of association.
Answer:

  • Name Clause
  • Capital Clause

Question 6.
State any two features of a private company.
Answer:

  • Limited Liability
  • Perpetual succession

Question 7.
Who is a promoter?
Answer:
A promoter is the one, who undertakes to form a company with reference to a given object and sets it going, and takes the necessary steps to accomplish that purpose.

Question 8.
What is a Memorandum of association?
Answer:
A Memorandum of Association (MOA) is a legal document prepared in the formation and registration process of a limited liability company to define its relationship with shareholders.

Question 9.
State two merits of Joint Stock Company.
Answer:

  1. Expansion of Business
  2. Easy access to credit

Question 10.
Give the meaning of liability clause of Memorandum of association.
Answer:
It contains a financial limit up to which the shareholders are liable to pay off to the outsiders in the event of the company being dissolved or closed down.

Five Marks Questions

Question 1.
What are the characteristic features of a Joint Stock Company?
Answer:
(a) Legal formation:
No single individual or a group of individuals can start a business and call it a joint-stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956.

(b) Artificial person:
Just like an individual, who takes birth, grows, enters into relationships, and dies, a joint-stock company takes birth, grows, enters into relationships, and flies. However, it is called an artificial person as its birth, existence, and death are regulated by law and it does not possess physical attributes like that of a normal person.

(c) Separate legal entity:
Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company

(d) Common seal:
A joint-stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organisation working on behalf of the company. Any document, on which the company’s seal is put and is duly signed by any official of the company, becomes binding on the company.

(e) Perpetual existence:
A joint-stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency, or retirement of any of its members. For example, in the case of a private limited company having four members, if all of them die in an accident the company will not be closed. It. will continue to exist.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 2.
Briefly explain the features of a Private Company?
Answer:

  1. Private Limited Company: These companies can be formed by at least two individuals having minimum paid-up capital of not less than Rupees one lakh.
  2. As per the Companies Act, 1956 the total membership of these companies cannot exceed 50. The shares allotted to its members are also not freely transferable between them.
  3. These companies are not allowed to raise money from the public through open invitation.
  4. They are required to use “Private Limited” after their names.
  5. They can start a business without a business commencement certificate.
  6. Private companies need not have statutory meetings.
  7. Private companies don’t have any investment from the government.

Question 3.
What are the different clauses of the Memorandum of Association?
Answer:

  1. Name Clause: It contains the name by which the company will be established. As you know, the approval of the proposed name is taken in advance from the Registrar of the companies.
  2. Situation Clause: It contains the name of the state in which the registered office of the company is or will be situated. The exact address of the company’s registered office may be communicated within 30 days of its incorporation to the Registrar of Companies.
  3. Objects Clause: It contains a detailed description of the objects and rights of the company, for which it is being established. A company can undertake only those activities which are mentioned in the objects clause of its memorandum.
  4. Liability Clause: It contains a financial limit up to which the shareholders are liable to pay off to the outsiders on the event of the company being dissolved or closed down.
  5. Capital Clause: It contains the proposed authorised capital of the company. It gives the classification of the authorised capital into various types of shares, (like equity and preference shares) with their numbers and nominal value.
  6. Subscription Clause: It contains the name and address of at least seven members in the case of a public limited company and two members in the case of a private limited company, who agree to associate or join hands to get the undertaking registered as a company.

Question 4.
Who is a promoter? Briefly explain the functions of promoters.
Answer:
A promoter conceives an idea for setting-up a particular business at a given place and performs various formalities required for starting a company. A promoter may be an individual, firm, association of persons, or a company.

  1. Identification of Business Opportunity: The first stage in the promotion of a business is the identification of a business opportunity. The promoter visualizes that there are opportunities for a particular type of business and it can be run profitability.
  2. Detailed Investigation: In this stage, various factors relating to the business are studied from a practical point of view. The demand for the product is estimated and the likely business share is determined. After determining the prospective demand, the promoter thinks of arranging finances, labour, raw materials, power, etc.
  3. Approval of Name: It is necessary to get the name of the company approved from the Registrar of Companies. This is done in order to avoid duplication of the name.
  4. Signatories to Memorandum: The promoters decide the names of persons to be the signatories to the memorandum of association. Usually, the first signatories to the memorandum become the first directors of the company.
  5. Appointment of Professionals: The next stage is of raising funds and deciding about various contracts. So, promoters appoint the brokers and underwriters to ensure the availability of capital by the sale of the company’s securities.
  6. Preparing necessary Documents: The promoters take steps to prepare various legal documents of the company which has to be submitted to the Registrar of Companies at the time of incorporation.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 5.
What are the advantages of a Joint Stock Company?
Answer:
1. Large capital resources:
A company can raise a large amount of resources from the general public by issuing shares. Since there is no maximum limit of the number of shareholders in the case of a public company; fresh shares can be issued to meet the financial requirement. Capital can also be obtained by issuing debentures and accepting public deposits.

2. Limited liability:
The liability of the shareholders is limited to the extent of the face value of the shares held by them or the guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company.

3. Transferability of shares:
The shares of the public company are transferable without any restriction. A shareholder can sell his shares at any time to anybody in the stock exchange Therefore, conservative and cautious investors are also attracted to invest in the shares of a public company. This brings liquidity to the investors,

4. Stability of existence:
A joint-stock company enjoys perpetual succession. It continues for a long period of time because it is unaffected by the death, insolvency of the shareholder’s directors. Change of ownership and management also does not affect the continuity of the business.

5. Efficient management:
A company can hire the services of a professional manager for its functional areas because of its financial strength. The directors who look after the management of the company are generally experienced and persons of business acumen Therefore, the management of a company is sure to be efficient.

Question 6.
What are the disadvantages of Joint Stock Companies?
Answer:
1. Difficulty information:
The formation of a joint-stock company is very difficult, time-consuming, and expensive as compared to any other form of organization. Conceiving the very idea and getting it implemented is a very difficult process.

2. Delay in decision-making:
The Board of Directors of the company decides about the policies and strategies of the company. Certain decisions are taken by the shareholders. The meeting of the directors or the shareholders cannot be held at any time as and when required. Thus, the decision-making process is usually delayed.

3. Separation of ownership and management:
The Company is not managed by the shareholders but by the directors who are the elected representatives of the shareholders. The directors and managers may lack the personal initiative and motivation to manage the company efficiently as the shareholders (owners) themselves would.

4. Lack of secrecy:
Each and every business strategy is discussed in the meeting of the Board of Directors. The annual accounts are published and compliance to Government, Tax authorities, etc. are made at regular intervals. Therefore, it is very difficult to maintain business secrecy in a company form of organization in comparison to sole proprietorship and partnership.

5. Speculation in shares:
When profit is earned by manipulating the prices of shares without actually holding the shares, it is considered speculation. A company provides scope for speculation and the directors and managers may derive personal benefit out of this

Ten Marks Questions

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 1.
Briefly explain the steps involved in the Formation Company.
Answer:
The steps in the promotion are:
Stage 1-promotion stage:
1. Discovery of Business Idea:
The process of business promotion begins with the conception of an idea of business opportunity. The idea may come from the non-availability of any product to satisfy the existing need of people or the inability of an existing product to satisfy the changing need of the people or a new invention that can create a new product.

2. Investigation and Verification:
Once the idea has been conceived, a thorough investigation is made to establish the soundness of the proposition, taking into consideration its technical feasibility and commercial viability.

3. Assembling:
Once the promoter is convinced of the feasibility and profitability of the proposition, he takes steps in assembling or making arrangements for all the necessary requirements such as land, building, machinery, tools, capital, etc.

4. Financing the Proposition:
In this stage, financial plans are prepared with respect to the amount of capital required, the nature of capital structure i.e., the proportion of capital to be raised from owners fund and that from borrowing from banks and others, and how and when to raise the share capital from the general public.

Stage 2 – Incorporation:
A company cannot be formed or permitted to run its business without registration. Infect, a company comes into existence only when it is registered with the Registrar of Companies For this purpose the promoter has to take the following steps:
1. Approval of Name:
It has to be ensured that the name selected for the company does not match with the name of any other company. For this, the promoter has to fill in a “Name Availability Form” and submit it to the Registrar of Companies along with necessary fees. The name must include the words(s) ‘Limited’ or ‘Private limited’ at the end. Once it is approved, the promoter can proceed with other formalities for the incorporation of the Company.

2. Filing of Documents:
After getting the name approved the promoter makes an application to the Registrar of Companies of the State in which the Registered Office of the company is to be situated for registration of the company. The application for registration must be accompanied by the following documents.

  • Memorandum of Association (MOA): It defines the objectives of the company and states the range of activities or operations. It must be duly stamped, signed, and witnessed.
  • Articles of Association (AOA). It contains the rules and regulations regarding the internal management of the company. It must be properly stamped duly signed by the signatories to the Memorandum of Association and witnessed.
    • Preliminary contracts
    • Use and custody of the common seal
    • Allotment, calls, and lien on shares
    • Transfer and transmission of shares.
    • Forfeiture and re-issue of shares

Stage 3 – Raising of Capital:
After the company is incorporated, the next stage is to raise the necessary capital. In the case of a private limited company, funds are raised from the members or through arrangements from banks and other sources. In the case of a public limited company, the share capital has to be raised from the public. This involves the following:

  • Preparation of a draft prospectus and get it inspected (vetted) by SEBIto ensure that all information is given in the prospectus fully complies with the guidelines laid down by SEBIin this regard.
  • Filing a copy of the prospectus with the Registrar of Companies.
  • Issue of the prospectus to the public by notifying in a newspaper and inviting the public to apply for shares as prescribed in the prospectus.
  • If the minimum subscription has been received, shares should be allotted to the applicants as per SEBI guidelines, and file a return of allotment with the Registrar of Companies.
  • Listing of shares in a recognised stock exchange so that the shares can be traded there. Preferably, consent of a stock exchange for listing should be obtained before issuing of the prospectus to the public.

Stage 4 – Business Commencement Stage:
In the case of a private limited company, it can immediately start its business as soon as it is registered. However, in the case of the public limited company a certificate, known as ‘certificate of commencement of businesses, must be obtained from the Registrar of Companies before starting its operation.

Question 2.
Explain the Capital Subscription and Its Steps in Detail.
Answer:
After going through the incorporation formalities, the next stage will be to raise funds. A private company and a public company without share capital can start a business immediately. A public company cannot commence business unless a minimum subscription as stated in the prospectus has been subscribed. The amount stated for allotment should be duly received in cash and allotment has been made properly.

Following steps are required to raise funds from the public:
1. SEBI approval:
SEBI (Securities Exchange Board of India) is a regulatory body to control capital markets in India. A public company is required to submit relevant information with the SEBI before issuing securities in the capital market.

2. Filing of the prospectus:
A prospectus or a statement in lieu of prospectus’ has to be filed with the registrar of companies. A prospectus is a document inviting the general public to subscribe to the shares or debentures of the company.

3. Appointment of bankers, brokers, underwriters:
The Bankers are appointed to receive application money from the public. The application money goes to the bank account of the company. The brokers encourage public to subscribe to the shares offered by the company. If the company is not sure of selling a whole lot of shares, it may appoint underwriters. The brokers purchase unsold shares themselves and charge a commission for this service.

4. Minimum subscription:
In order to prevent companies to start a business with inadequate funds, a minimum subscription is fixed. A company must sell a minimum number of shares before starting the next process. This minimum number is called ‘minimum subscription’.

As per the rules of SEBI, a company must receive 90 percent of the issued amount within a period of 120 days from the issue of prospectus. In case the company does not receive the minimum subscription, then it must return the application money within the next 10 days.

5. Application to Stock Exchange:
A company must get itself listed in a stock exchange before selling the securities to the general public. The company must make an application to at least one stock exchange for permission to deal in its stocks. The stock exchange authorities verify the financial soundness and other aspects of the company.

6. Allotment of shares:
After getting the shares listed, the company makes an allotment of shares. A list is prepared giving details about names and addresses of all the shareholders, and the number of shares allotted, etc. The company has to submit a return of allotment with the registrar giving details of shares allotted to each shareholder.

1st PUC Business Studies Question Bank Chapter 7 Formation of a Company

Question 3.
What are the features of a Joint Stock Company?
Answer:
A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership.

  1. An artificial person: The Company enjoys all the rights as a citizen of a country would enjoy. It can own properties, enter into contracts etc.
  2. Legal formation: The formation of a Joint Stock Company is governed by the rules and regulations laid down in the Companies Act, 1956.
  3. Voluntary organization: It is formed by members voluntarily joining the organization and contributing money or money’s worth for the business.
  4. Separate legal entity: The Company has a separate legal existence. The owners are different from the people who manage the business. The management is however headed by owners who are elected directors. The company is separate from the persons who own it. The company cannot be held responsible for any misdeeds of the members.
  5. Perpetual succession: Unlike Sole proprietorship and Partnership, the Company has continuous existence. The continuity of the business is not affected by the death, insolvency, or insanity of any member. “Men may come and men may go, but a company will go until it is wound up.”
  6. Limit to liability: The liability of the members of a company is restricted to the extent of the unpaid value of the shares held by him. The personal asset of a shareholder cannot be used to pay the company’s liabilities.
  7. Large capital: A Joint Stock Company can generate a huge amount of money towards capital because the number of persons contributing towards capital is more in number when compared to the Sole Proprietorship or Partnership organization.
  8. Large scale operation: Since huge amounts are collected as capital, the operation of the business will generally be on a large scale basis.
  9. Transferability of shares: The shares of a Joint Stock Company are easily transferable from one person to another, since it is a Public Limited Company. The shares of a Private Limited Company or Government Company are not transferable.
  10. Common seal: The Company, being an artificial being, cannot affix its signature on the documents on its own. The common seal is used in place of a signature.