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 Articles 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:
Formation of a company is a complex activity, involving these stages are as follows:

  1. Promotion Identification of business opportunities, analysis of its prospects and initiating steps to form a company is known as promotion of a company.
  2. Incorporation Registration of company as body corporate under Companies Act, 1956 is known as incorporation.
  3. Subscription of Capital A public company’s raising hinds from the public by means of issue of shares and debentures is known as capital subscription.
  4. Commencement of Business the registrar issues certificate of commencement of business which is a conclusive evidence of completion of formation requirement of a company.

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

  1. The Memorandum of Association duly stamped and witnessed as in case of the Memorandum.
  2. If company adopts Table 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:
A prospectus is ‘any document described or issued as a prospectus including any notice, circular advertisementor other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’.

In other words, it is an invitation to the public to apply for shares or debentures of the company or to make deposits in the company. It is issued by a public company which is seeking to raise the required funds from the public by means of issue of shares and debentures.

It is not necessary for every company to file a prospectus. A statement lieu of prospectus is filed with the Registrar of Companies if the company has adopted Table A of the Companies Act instead of Articles of Association. Private companies are not required to file a prospectus.

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:
Return of Allotment is a statement submitted to the Registrar which contains the names and addresses of shareholders and the number of shares allotted to each shareholder. Return of allotment, signed by a director or secretary is filed with the Registrar of Companies within 30 days of allotment. Return of allotment shows that the company has received the minimum subscription.

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 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 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:

  1. Contracts signed by promoters with third parties before the incorporation of company.
  2. These are not legally binding on the company and cannot be ratified after incorporation.
  3. These contracts are the liabilities of promoters.
  4. Both private and public company have right to undertake these contracts.

Provisional Contracts:

  1. Contracts signed after incorporation but before commencement of business.
  2. These become enforceable only after the company gets the certificate of Commencement of Business.
  3. These contracts are the responsibilities of the company.
  4. They can only be undertaken by public company.

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:
(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 maybe undertaken, with the help of the specialists like engineers, chartered accountants etc., to examine whether the perceived business opportunity can be profitably exploited.

(a) Technical feasibility:
Sometimes an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available. For example, in our earlier story suppose Avtar needs a particular metal to produce the carburettor.

If that metal is not produced in the country and because of poor political relations, it can not be imported from the country which produces it, the project would be technically unfeasible until arrangements are made to make the metal available from alternative sources.

(b) Financial feasibility:
Every business activity requires funds. The promoters have to estimate the fund requirements for the identified business opportunity. If the required outlay for the project is so large that it cannot easily be arranged within the available means, the project has to be given up. For example, one may think that developing townships is very lucrative.

It may turn out that the required funds are in several crores of rupees, which cannot be arranged by floating a company by the promoters. The idea may be abandoned because of the lack of financial feasibility of the project.

(c) Economic feasibility:
Sometimes it so happens that a project is technically viable and financially feasible but the chance of it being profitable is very little. In such cases as well, the idea may have to be abandoned. Promoters usually take the help of experts to conduct these studies.

It maybe noted that these experts do not become promoters just because they are assisting the promoters in these studies. Only when these investigations throw up positive results, the promoters may decide to actually launch a company.

(iii) Name approval:
Having decided to launch a company, the promoters have to select a name for it and submit, an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved if it is not considered undesirable.

It may happen that another company exists with the same name or a very similar name or the preferred name is misleading, say, to suggest that the company is in a particular business when it is not true. In such cases the proposed name is not accepted but some alternate name may be approved.

Therefore, three names, in order of their priority are given in the application to the Registrar of Companies. (Performa Application for availability of names (Form 1 A) is given at the end of the chapter.)

(iv) Fixing up Signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Usually the people signing memorandum are also the first Directors of the Company. Their written consent to act as Directors and to take up the qualification shares in the company is necessary.

(v) Appointment of professionals:
Certain professionals such as mercantile bankers, auditors etc., are appointed by the promoters to assist them in the preparation of necessary documents which are required to be with the Registrar of Companies. The names and addresses of shareholders and the number of shares allotted to each is submitted to the Registrar in a statement called return of allotment.

(vi) Preparation of necessary documents:
The promoter takes up steps to prepare certain legal documents, which have to be submitted under the law, to the Registrar of the Companies for getting the company registered. These documents are Memorandum of Association, Articles of Association and Consent of Directors.

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 is the most important document as it defines the objectives of the company. No company can legally undertake activities that are not contained, in ns Memorandum of Association. As per section 2(56) of The companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.

The Memorandum of Association contains different clauses, which are given as follows:
(i) The name clause:
This clause contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies.

(ii) Registered office clause:
This clause contains the name of the state, in which the registered office of the company is proposed to be situated. The exact address of the registered office is not required at this stage but the same must be notified to the Registrar within thirty days of the incorporation of the company.

(iii) Objects clause:
This is probably the most important clause of the memorandum. It defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause. The object clause is divided into two subclauses, which are:

  1. The main objects: The main objects for which the company is formed are listed in this sub-clause. It must be observed that an act which is either essential or incidental for the attainment of the main objects of the company is deemed to be valid, although it may not have been stated explicitly in the sub-clause.
  2. Other objects: Objects not included in the main objects could be stated in this sub-clause. However, if a company wishes to undertake a business included in this subclause, it has to either pass a special resolution or pass an ordinary resolution and get centred government’s approval for the same.

(iv) Liability clause:
This clause limits the liability of the members to the amount unpaid on the shares owned by them. For example, if a shareholder has purchased 1000 shares of Rs. 10 each and has already paid Rs. 6 per share, his/her liability is limited to Rs. 4 per share. Thus, even in the worst case, he/she may be called upon to pay Rs. 4,000 only.

(v) Capital clause:
This clause specifies the maximum capital which the company will be authorised to raise through the issue of shares. The authorised share capital of the proposed company along with its division into the number of shares haying a fixed face value is specified in this clause.

For example, the authorised share capital of the company may be Rs. 25 with divided into 2.5 lakh shares of Rs. 10 each. The said company cannot issue share capital in excess of the amount mentioned in this clause.

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 img1

Question 5.
What is the effect of collusiveness of the ‘Certificates of Incorporation’ and ‘Commencement of Business’?
Answer:
Effect of the Certificate of Incorporation:
A company is legally born on the date printed on the Certificate of Incorporation It becomes a legal entity with perpetual succession on such date. It becomes entitled to enter into valid contracts. The Certificate of Incorporation is conclusive evidence of the regularity of the incorporation of a company.

Imagine, what would happen to an unsuspecting party with which the company enters into a contract, if it is later found that the incorporation of the company was improper and hence invalid. Therefore, the legal situation is that once a Certificate of incorporation has been issued, the company has become a legal business entity irrespective of any flaw in its registration.

The Certificate of Incorporation is thus conclusive evidence of the legal existence of the company. Some interesting examples showing the impact of the conclusiveness of the Certificate of Incorporation are as under:

  1. Documents for registration were filed on 6th January. Certificate of Incorporation was issued on 8th January. But the date mentioned on the Certificate was 6th January. It was decided that the company was in existence and the contracts signed on 6th January were considered valid.
  2. A person forged the signatures of others on the Memorandum. The Incorporation was still considered valid.

Thus, whatever be the deficiency in the formalities, the Certificate of Incorporation once issued, is a conclusive evidence of the existence of the company. Even when a company gets registered with illegal objects, the birth of the company cannot be questioned. The only remedy available is to wind it up.

Because the Certificate of Incorporation is so crucial, the Registrar has to go very carefully before issuing it. On the issue of Certificate of Incorporation, a private company can immediately commence its business. It can raise necessary funds from friends, relatives or through private arrangement and proceed to start business. A public company, however, has to undergo two more stages in its formation.

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 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 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 minimum and maximum number if members in private company.
Answer:
Minimum of two members and maximum is fifty.

Question 2.
Mention minimum and maximum number of members in 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 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 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 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 Article of association?
Answer:
Article of the association are 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 commencement of 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 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 company, “Company is the organisation which is formed and registered under this law or any previous law”.

Question 3.
What is 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 of minimum subscription?
Answer:
The company gives the offer to the public to subscribe 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 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 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 of credit

Question 10.
Give the meaning of liability clause of Memorandum of association.
Answer:
It contains 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.

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. Ajoint 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, ajoint stock company has its own separate existence independent of its members. It means that ajoint 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, become binding on the company.

(e) Perpetual existence:
A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in 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 rninimum 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 business without 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 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 detailed description o f 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 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 case of public limited company and two members in 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 a individual, firm, association of persons or a company.

  1. Identification of Business Opportunity: The first stage in promotion of a business is the identification of a business opportunity. The promoter visualises 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 sale of company’s securities.
  6. Preparing necessary Documents: The promoters take steps to prepare various legal documents of the company which have 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 Joint Stock Company?
Answer:
1. Large capital resources:
A company can raise large amount of resources from the general public by issuing shares. Since, there is no maximum limit of the number of shareholders ii case of 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 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, the conservative and cautious investors are also attracted to invest in the shares of 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 shareholders directors. Change of ownership and management also does not affect the continuity of the business.

5. Efficient management:
Acompany can hire the services of 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 in formation:
The formation of a joint stock company is very difficult, time consuming and expensive as compared to any other form of organisation. Conceiving the very idea and getting it implemented is 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 as 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 promotion are:
Stage 1-promotion stage:
1. Discovery ofa Business Idea:
The process of business promotion begins with conception of an idea of business opportunity. The idea may come from non-availability of any product to satisfy the existing need of people or 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 lor 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 about the range of activities or operation. 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 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 case of a private limited company, funds are raised from the members or through arrangement from banks and other sources. In 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 given in the prospectus fully complies w ith the guidelines laid down by SEBIin this regard.
  • Filing a copy of the prospectus with the Registrar of Companies.
  • Issue of 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 issue of the prospectus to the public.

Stage 4 – Business Commencement Stage:
In case of a private limited company, it can immediately start its business as soon as it is registered. However, in case of 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 business immediately. A public company cannot commence business unless 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 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 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 the whole lot of shares, it may appoint underwriters. The brokers purchase unsold shares themselves and charge commission for this service.

4. Minimum subscription:
In order to prevent companies to start 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 general public. The company must make application to at- least one stock exchange for a 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 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 iswoundup.”
  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 huge amount of money towards capital, because the number of persons contributing towards capital are more in number when compared to 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.

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