Telangana TSBIE TS Inter 1st Year Commerce Study Material 6th Lesson Formation of a Company Textbook Questions and Answers.
TS Inter 1st Year Commerce Study Material Chapter 6 Formation of a Company
Long Answer Questions
Explain the various steps involved in the formation of a company.
A Joint Stock Company requires a number of legal formalities to be compiled with before it is brought into existence. The important steps in the formation of a company are given below:
1) Promotion: Promotion is the first stage in the formation of a company: It involves identification of a business opportunity and taking necessary steps to form a company, so that the practical shape can be given in exploiting the provided business opportunity. Promotion is considered as putting an idea into practice.
2) Incorporation or Registration of a company: Incorporated company is legally registered as per the the Indian Companies Act, 2013 or any latest amendments. Only after registration of the company and after getting certificate of incorporation, a company comes into existence. An Incorporated company gets Corporate Identify Number (CIN) from the registrar.
3) Capital Subscription: A public company is allowed to raise their funds from the public by issuing shares and debentures. But before that, it has to issue a prospectus for the public to subscribe to the capital of the company and undergo various other formalities.
4) Commencement of Business: It refers to a document required under the Company Act before a business can initiate its operations and public company can commence business only after obtaining a “Certificate of Commencement of Business”.
Explain the steps involved in incorporation or registration of a company?
Introduction: A company being an artificial person comes into existence only after its registration with the Registrar of Companies. It is the legal process through which an exterprise obtains recognition as a separate legal entity. A Joint Stock Company, whether private limited or public limited must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this Certificate, the company gets a status of legal entity.
Steps involved in Incorporation: Before getting a company registered, the following number of steps have to be taken up:
1) Application for Approval of name: For registration of a company, an application is to be submitted to the Registrar of Companies of the state and obtain the approval of name. A company may adopt any name which is not prohibited under the Emblems and Names Act, 1950. The Registrar is expected to approve the name within 14 days of the receipt of application. The proposed name must be registered within three months of the approved date.
2) Preparation of Memorandum of Association: It is the constitution of company which describes its objects, scope and the relationship with outside the world. This document must be carefully drafted, stamped and signed by seven members in case of a public company and two members in case of a private company. As per the new amendment of the act one member is enough to sign on Memorandum of Association in case of private company.
3) Preparation of Articles of Association: It is the document which contains rules and regulations relating to the internal management and also the capital structure of the business. A public limited company may not require to file its own Articles of Association, it may adopt model clauses prescribed in Table-A, Schedule-1 of the Act. A private company is required to submit its Articles and duly signed by the signatories.
4) Preparation of other documents: At the time of incorporation of a company the following documents are to be prepared and submitted to the Registrar of Companies.
- Consent of the first directors: Directors should give return consent in form no. 29 to the Registrar of Company.
- The Power of Attorney: Promoters should execute a Power of Attorney in favour of one of the promoters or an advocate who is to carry out the formalities required for registration.
- Notice of Registered Office: When the location of the registered office is finalized, prior to incorporation, the notice of it is to be filled. If not, with in 30 days of its registration it is to be submitted.
- Particulars of Directors: When a company by its Articles appoints any person to act as Director, Manager, Secretary – their particulars have to be filled within 30days along with the Memorandum of Association and Articles of Association of the company.
5. Statutory Declaration: A declaration that all the requirements under the companies Act have been complied within Form no. 1 is to be filled with the Registrar.
6. Payment of Registration fee: In addition to filing with the documents, the prescribed fees has to be paid towards registration of company.
7. Incorporation Certificate: If the Registrar is satisfied with all the statutory requirements stated above are complied with under the Act, issues a certificate called “Certificate of Incorporation”. With the receipt of this certificate, the company gets its recognition as a corporate body.
A private company can start its business as soon as it gets the incorporation certificate. But a public company should wait till it gets certificate of commencement of business to start the business.
What is Promotion? Explain the stages of Promotion.
Meaning of Promotion: Promotion is the first stage in the formation of a company. It involves identification of a business opportunity or idea, analysis of its prospects, gathering the relevant information and taking steps to implement it. Promotion is considered as putting an idea into practice.
Definition: According to L.H. Haney – “Promotion is the process of organizing and planning the finance of a business enterprise under the corporate form.”
Stages of Promotion: There are 4 stages in promotion of a company.
They are 1) Discovery of an idea 2) Detailed investigation 3) Assembling the requirements 4) Financing proposition
1) Discovery of an Idea: The success of business depends on the selection of a business line. The promoter has to form an idea about the type of business, and its prospects. The promoter should analyse the strengths and weaknesses of the proposed idea, and develop the idea with the help of technical experts.
2) Detailed Investigation: At this stage various factors relating to the proposed business are to be studied from the practical point of view. The promoter shall estimate the total demand for the product, and then thinks of arranging finance. He also puts into consideration about the availability of labor machinery, raw material and cost structure of the product.
3) Assembling the Requirements: After making sure that the propostion is practical and profitable, the promoter proceeds to assemble the requirements like appointing directors, selecting the place for company, contacts the suppliers of raw materials, purchasing of machinery etc.
4) Financing Proposition: The promoter decides about the capital structure of the company. In this process, he determines how much share capital will be issued, type of shares and debentures to be issued, and the nature of loans, to be borrowed from financial institutions for a longer period.
Short Answer Questions
What are the functions of a promoter?
Promoter: A promoter is a person who does the necessary preliminary work incidentally to the formation of a company. The first person who control a company’s affairs are its promoters. Promoter may be an individual, a firm, an association of persons, or a company. The promoter take lead for bringing men, money, material and machinery together for establishing an enterprise. When these things have been done, they hand over the control of the company to its directors, who are often the promoters themselves, under a different name.
Promoter performs the following functions:
Functions of a Promoter:
- A promoter conceives an idea for the setting up of a business.
- He / She makes preliminary investigation and ensures the future prospects of business.
- He / She brings together various individuals who agree to associate with him / her and share the business responsibilities.
- He / She prepares various documents and gets the company incorporated.
- Promoter raises the required finances and gets the company going.
- He gets into agreement to acquire and pertain assets for the company.
What are the types of promoters?
A promoter is a person who does the necessary preliminary work incidentally to the formation of a company. The first person who control a company’s affairs are its promoters. Promoter may be an individual, a firm, an association of persons, or a company. The promoter take lead for bringing men, money, material and machinery together for establishing an enterprise. When these things have been done, they hand over the control of the company to its directors, who are often the promoters themselves, under a different name.
Types of Promoters:
- Professional Promoter: They are the promoters, specialized in promotion. It is their whole time occupation.
- Accidental Promoters: They are the promoters who are not specialists in company formation, but promote their own firms as entrepreneurs are known as accidental promoters.
- Financial Promoters: These are the promoters who float new enterprises during favorable conditions in the securities market.
- Technical Promoters: The promoters who promote new enterprises on the basis of their specialized knowledge and training in technical fields are called as technical promoters.
- Institutional Promoters: These are the promoters who provide technical, managerial, and financial assistance for the promotion of a company.
- Entrepreneur Promoters: These promoters are both promoters and entrepreneurs. They conceive the idea of a new business unit, do the ground work to establish it and may subsequently become a part of the management.
Very Short Answer Questions
What do you mean by promotion?
1) The act of putting the ideas from paper to practice is called “Promotion”. Promotion is the first stage in the formation of a company which involves identification of business opportunity or idea, analysis of its prospects, gathering the relevant information and taking steps to implement.
2) According to L.H. Haney “Promotion is the process of organizing and planning the finance of business enterprise under the corporate form”.
Who is Promoter?
- A person who does the necessary preliminary work incidentally to the formation of a company is called “Promoter”.
- Promoter may be an individual, a firm, an association of persons or a company.
- The promoter take lead of bringing men, money, material and machinery together for establishing an enterprise.
Who is Professional Promoter?
- The promoters who are specialized in promotion of a company are called “Professional Promoters”.
- They are specialised in promotion. It is their whole time occupation.
Who is an Entrepreneur Promoter?
- These are the promoters who establish the business and become a part of management in future.
- These promoters are both promoters and entrepreneurs. They conceive the idea of new business unit, do the groundwork to establish it and may subsequently a part of the management.
What is Capital Subscription?
- The minimum capital that a company should subscribe for its commencement of business is called “Capital Subscription”. It is called a “Minimum Subscription”.
- A public company cannot commence business unless the minimum subscription as stated in the prospectus is subscribed.
- If a company does not receive 90% of the issue amount from the public as a subscription within 120 days, it has to be refunded the amount to the applicants within 10 days as per SEBI guidelines.