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Business Studies Solution for Class 11 Commerce Business Studies Chapter 7 - Formation of a Company

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NCERT Textbook Solutions are considered extremely helpful when preparing for your CBSE Class 11 Business Studies exams. TopperLearning study resources infuse profound knowledge, and our Textbook Solutions compiled by our subject experts are no different. Here you will find all the answers to the NCERT textbook questions of Chapter 7 - Formation of a Company.

All our solutions for Chapter 7 - Formation of a Company are prepared considering the latest CBSE syllabus, and they are amended from time to time. Our free NCERT Textbook Solutions for CBSE Class 11 Business Studies will strengthen your fundamentals in this chapter and can help you to score more marks in the examination. Refer to our Textbook Solutions any time, while doing your homework or while preparing for the exam.

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Business Studies Solution for Class 11 Commerce Business Studies Chapter 7 - Formation of a Company Page/Excercise 178

Solution MCQ 1

Minimum number of members to form a private company is 2 (two).

According to the Indian Companies Act, 1956, a private company can be formed with a minimum of two members signing the Memorandum of Association.

Solution MCQ 2

Minimum number of members to form a public company is 7 (seven).

According to the Indian Companies Act, 1956, a public company can be formed with a minimum of seven members signing the Memorandum of Association.

Solution MCQ 3

Application of approval of the name of a company is to be made to the Registrar of Companies.

When the promoters decide to form a company, it is necessary to choose a name and then propose it by submitting an application to the Registrar of Companies located in the same state.

Solution MCQ 4

A proposed name of a company is undesirable in case of any of the above.

A proposed name of a company is undesirable if it is identical or closely resembles with the existing company name or is identical to an emblem of the Government of India. Hence, it is necessary for an applicant to provide three names in order of their priority to get the approval of any alternative name.

Solution MCQ 5

A prospectus is issued by a public company seeking investment from public.

Only a public company is required to issue a prospectus for obtaining the certificate of commencement because it needs to raise funds from the public through the issue of shares and debentures. On the other hand, a private company is not required to issue a prospectus for obtaining the certificate of commencement as it does not invite the public to raise funds.

Solution MCQ 6

Stages in the formation of a public company are Promotion, Incorporation, Capital subscription, Commencement of business. 

  1. Promotion includes people (promoters) with similar ideas who come together and decide to form a company. They examine the available business opportunities and take necessary steps for the formation of business.
  2. Incorporation is the second stage. Promoters apply to the Registrar of Companies with the necessary documents and fees to receive the certificate of incorporation.
  3. Capital subscription is when a public company raises funds from the public through the issue of shares and debentures. This process involves various steps such as obtaining SEBI approval and filing a copy of prospectus with the Registrar of Companies.
  4. Commencement of Business is the final stage in the formation of a company. A public company applies to the Registrar of Companies for the certificate of commencement of business. 

Solution MCQ 7

Preliminary Contracts are signed before the incorporation of the firm. 

While promoting the company, promoters enter into a contract with third parties on behalf of the company. This is known as preliminary contract or pre-incorporation contract.

Business Studies Solution for Class 11 Commerce Business Studies Chapter 7 - Formation of a Company Page/Excercise 179

Solution MCQ 8

Preliminary Contracts are not binding on the company.

Before the incorporation of the company, the contracts signed by the promoters with third parties are not binding on the company. This is because a company cannot authorise a preliminary contract. However, after coming into existence, the company can choose to enter into fresh contracts with the same parties with the same terms and conditions of the contracts made by the promoters.

Solution TF 1

The statement is True. It is necessary to get every company incorporated, whether private or public. This is because it gives them a legal identity for business operation. According to Companies Act, 1956, a company can come into existence only when it receives the certificate of incorporation.

Solution TF 2

The statement is True. A prospectus refers to a document which invites the public to purchase shares or debentures of a company. Therefore, a public company is entitled to file a prospectus or statement in lieu of prospectus to raise funds from the public.  

Solution TF 3

The statement is True. A private company can commence business after incorporation because it can raise funds from friends and relatives to start the business. 

Solution TF 4

The statement is False. The term promoter refers to an individual/set of people who identify, explore and reveal an idea crucial for the formation of business. Experts only provide assistance to promoters in the promotion of a company.

Solution TF 5

The statement is False. The company cannot ratify preliminary contracts after incorporation. This is because the contract is not made between the company and the third party. It is only between the promoters and the third party before incorporation. Thus, a company cannot be forced to honour this contract. 

Solution TF 6

The statement is False. If a company is registered on the basis of fictitious names, its incorporation is not considered invalid. This is because the issue of the certificate of incorporation will become conclusive evidence of the existence of the company.  

Solution TF 7

The statement is False. The main document of a company is the 'Memorandum of Association' rather than the 'Articles of Association'. This is because Articles of Association rules are subsidiary to Memorandum of Association rules. Rules of Articles of Association should not disagree with those of Memorandum of Association.

Solution TF 8

The statement is False. It is not necessary for every company to file Articles of Association. However, a company may adopt Table A of the Companies Act which contains the rules and regulations for internal operation of the company. 

Solution TF 9

The statement is False. A provisional contract is signed after the incorporation of a company. However, this contract becomes eligible only after obtaining the certificate of commencement of business. 

Solution TF 10

This statement is False. The private assets of the members cannot be used to repay the debt of the company because liabilities have to be cleared only by using company's assets.

Solution SAQ 1

Stages in the formation of a public company are Promotion, Incorporation, Capital subscription, Commencement of business. 

  1. Promotion: It includes people (promoters) with similar ideas who come together and decide to form a company. They examine the available business opportunities and take necessary steps for the formation of business.
  2. Incorporation: Promoters apply to the Registrar of Companies with the necessary documents and fees to receive the certificate of incorporation.
  3. Capital subscription: After incorporation, a public company raises funds from the public through the issue of shares and debentures. This process involves various steps to raise funds such as obtaining SEBI approval and filing a copy of prospectus with the Registrar of Companies.
  4. Commencement of business: This is the final stage in the formation of a company. A public company applies to the Registrar of Companies for the certificate of commencement of business. 

Solution SAQ 2

Documents required for the incorporation of a company:

  1. Memorandum of Association duly signed, stamped and witnessed. This document must be signed by seven members for a public company and two members for a private company.
  2. Articles of Association duly stamped and witnessed.  A public company may adopt Table A of the Companies Act, and hence, the statement in lieu of prospectus needs to be submitted.
  3. A document which states the proposed directors will act as directors and undertake to acquire qualification shares.
  4. An agreement with the proposed Managing Director and managers if any.
  5. A copy of a letter certifying the name assigned to the company from the Registrar.
  6. Details of the address of the registered office. A statutory declaration confirms that all the necessary legal documents for registration are adhered to. 

Solution SAQ 3

A prospectus refers to a document which invites the public to purchase the shares or debentures of the company.

No, it is not necessary for every company to file a prospectus. This document is filed only by a public company which raises funds from the public. A private company need not file a prospectus as it raises funds from friends and relatives.

Solution SAQ 4

According to the Companies Act, 1956, 'Minimum Subscription' refers to an act where companies need to receive applications for a certain number of shares before the allotment of shares to members.

The minimum limit required for subscription is 90% of the size of the issue. Hence, if the applications received are less than 90% of the total issue size, then the allotment cannot occur. The company must return the application money to applicants.

Solution SAQ 5

'Return of Allotment' refers to a document which contains the  shareholders' details along with the number of shares allotted to them, the nominal value of each share, the amount payable or paid on each share and shares issued at discount. This document is signed by the director or the secretary and submitted to the Registrar within 30 days of allotment.  

Solution SAQ 6

SEBI represents Securities and Exchange Board of India. Promoters interact with SEBI in the third stage of formation of company, i.e. capital subscription.

During this stage, if a company raises funds from the public through the issue of shares and debentures, then they need SEBI's approval. This approval certifies that the company has disclosed all the relevant information to potential buyers. This is required for a company to protect the interests of investors.

Solution SAQ 7

Preliminary Contracts 

Provisional Contracts 

This contract is signed by promoters with third parties before the incorporation of the company.

This contract is signed after incorporation but before the commencement of business.

This contract is not enforceable as they are non-binding and cannot sue or be sued.

This contract is enforceable only after the commencement of the business.

Promoters are personally liable to the third parties.

Companies are responsible for the contract.

This contract can be made by both public and private companies.

This contract can be made only by a public company.

 

Business Studies Solution for Class 11 Commerce Business Studies Chapter 7 - Formation of a Company Page/Excercise 180

Solution LAQ 1

Promotion refers to the entire process which brings a company into existence. This includes conceiving business opportunities, organisation of funds and properties to form a company. Thus, the initial process of exploiting the available business opportunities occurs. A person or group of people engaged to discover business opportunities to form a company are called promoters. It is the preliminary stage in the formation of a company. Legal position of promoters with respect to a company promoted by them:  

  1. Before a company obtains its certificate of incorporation, it does not have a legal identity. Thus, the promoters are not considered trustees or agents of the company.
  2. Promoters enjoy a fiduciary position with the company. They are forbidden to make any secret profits. However, they can make profit only after disclosure to the company.
  3. Any untrue statements in the prospectus of the company will become a promoter's liability and legally held responsible for the same.
  4. Expenses incurred by promoters during the promotion of the company cannot be claimed by them as they are not legally entitled to claim it.
  5. Shares or debentures can be allotted to promoters by the company or  can be given an option to buy them in the future. 

Solution LAQ 2

A promoter is a person who introduces a practical idea to set up a company and initiates necessary steps. He/she can analyse and forecast the situation of the company, hire human resources and purchase materials, machinery and financial resources.

Steps taken by promoters in the promotion of a company:

  1. Identifying business opportunity: This is the first step taken by the promoter in the promotion of the company. The promoter generates/introduces an idea/business opportunity which can be used to start a company or produce a new product or service or provide products in a different manner or any other opportunity.
  2. Feasibility studies: Although all the identified ideas may appear feasible, a full depth analysis is necessary to have a successful profit-making business. Based on the nature of the project, the following feasibility studies are undertaken by professionals.
    1. Technical: Promoter's may identify good ideas, but it may be difficult to execute as the raw materials or technology are not available. Thus, it is essential to check the availability of sources before execution of the project.
    2. Financial: Finance is necessary for any kind of business activity. The promoters need to estimate the funds required for the business. If the cost exceeds the funds available for the identified business, then the project has to be changed according to the available sources.
    3. Economic: Sometimes, a project can be both technically and financially feasible but may not yield the required result or may not be economically viable. Then again, the identified project will be discarded.

Only when all these three factors give positive results, the promoters will go ahead to invest in the idea.

  1. Company's name approval: After the decision to invest in a business, a name must be selected. Hence, they apply to the registrar of the companies in the state where the registered office is situated. So, the registrar verifies whether the name is similar to some existing company; if not, the name is approved.
  2. Selecting signatories for the MOA and preparing the AOA: The promoters are required to decide the members to sign the MOA and prepare the AOA. So, the members signing the MOA would be considered Directors of the Company and need to give consent to act as Directors and buy the qualification shares.
  3. Appointment of professionals: After the basic formation of the company is the need for appointment of professionals such as bankers, auditors and lawyers. Expertise is required for the preparation of documents to be submitted to the Registrar of Companies.
  4. Preparation of necessary documents: After the selection of professionals, the necessary documents are prepared by professionals and submitted to the Registrar of Companies for registration. 

Solution LAQ 3

Memorandum of Association is a fundamental legal document of the company. It is prepared during the registration and formation process of the company. This document construes the main intention of the company and includes the working pattern, goal and identity of the company, names of shareholders and distribution of shares. It is also called the Constitution of the company. Moreover, a company cannot legally undertake activities not mentioned in the MOA; it needs to stick to activities mentioned in the document.

Clauses mentioned in the MOA:

  1. Name clause: This clause states the name of the company with which it will be recognised and have an identity. The name however needs to be approved by the registrar of the company provided there are no similarities with the name of any other existing company and it should neither mislead nor give an impression that the company has government favour.
  2. Registered office clause: This clause states the name of the state where the Company's registered office is proposed to be located. The exact location needs to be submitted to the Registrar within 30 days of the incorporation of the company.
  3. Objects clause: This is the most important clause of all. It includes the purpose, scope and limits of the company. It states that the company does not have the right to undertake activities not indicated in the memorandum. It has two sub-clauses:
    1. Main objects: It includes the main aim of the establishment of the company. Also, the essential and incidental acts which assist the progress of the company's main aim should be included in the sub-clause.
    2. Other objects: Rest of the clauses not stated in the main object will be included in this clause. If the company hopes to take up an activity under this sub-clause, there is a need for special resolution or passing of an ordinary resolution.
  4. Liability clause: This states the liability of the members of the company which may be limited by shares or by guarantee.
  5. Capital clause: This states the maximum capital which the company needs to raise. It cannot secure capital more than that specified in the clause.
  6. Association clause: This includes the names, addresses and signatures of the first subscribers who agree to associate with the company. They also need to provide consent for purchase of qualification shares.

The MOA needs to be signed by at least seven members in a public company and by at least two members in a private company.

Solution LAQ 4

Basis of Difference 

Memorandum of Association (MOA) 

Articles of Association (AOA) 

Objectives

States the intention for which the company was created

States the rules of internal management of the company

Position

Main document of a company and subordinate to the Companies Act

Subsidiary document of a company - subordinate to both MOA and the Companies Act

Relationship

Relation of the company with outsiders

Relation of the company with its members

Alteration

Difficult to alter, and sometimes requires the approval of a statutory body

Resolution passed by the members to alter

Validity

Acts beyond the MOA are considered invalid

Acts beyond the AOA are valid and can be upheld if it does not violate the MOA

Necessity

Compulsory to be filed

Not compulsory to be filed by a public limited company and can adopt Table A of the Companies Act

 

Solution LAQ 5

A company is established with an objective to fulfil economic and social goals. However, it does not have the authority to do so until it is legally recognised. This legal recognition can be obtained by the company under the Companies Act, 1956.  According to this Act, a company can have legal identity only after obtaining the certificate of incorporation. However, the company's business cannot be initiated unless the certificate of commencement of business is obtained from the registrar. Thus, both certificates are required for the company to start its operation in full fledge.

Effect of the 'Certificates of Incorporation':

  • A company is legally born on the date the certificate of incorporation is issued, i.e. it becomes a legal entity with perpetual succession on such date.
  • Obtain the authority to enter into valid contracts.
  • If any error is found in its registration, it still continues to be legal business irrespective of its flaw.

Thus, this certificate is a conclusive evidence of the legal existence of the company.

Effect of commencement of business:

  • Submission of all the acceptable relevant legal documents to the registrar helps in procuring certificate of commencement of business.
  • This certificate is the proof which entitles to start its business legally.
  • Formation of company is completed after obtaining the certificate of commencement of business.

Thus, this certificate is conclusive evidence that the company is entitled to do business.

Solution LAQ 6

Yes, it is imperative for a public company to get its shares listed on a stock exchange. Listing of the company can be done by registering in a stock exchange by sending an application to it.

Various reasons for a public company to get its share listed on a stock exchange:

  1. It can ask people to invest in the company only through the stock exchange by issuing shares.
  2. It can offer securities in the acquisition of other companies.
  3. It gives market exposure and draws attention of the required lot.
  4. It increases credibility with the public.
  5. It receives additional leverage while obtaining loans from financial institutions.

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 within a stipulated time of 10 weeks from the date of closure of the subscription list, then the share allotment turns void. This forces the firm to return to applicants the funds received within 8 days.

TopperLearning provides step-by-step solutions for each question in each chapter in the NCERT textbook. Access Chapter 7 - Formation of a Company here for free.

Our NCERT Solutions for Class 11 Business Studies are by our subject matter experts. These NCERT Textbook Solutions will help you to revise the whole chapter, and you can increase your knowledge of Business Studies. If you would like to know more, please get in touch with our counsellor today!

Text Book Solutions

CBSE XI Commerce - Business Studies

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