How to Use This Solutions Page
1. Attempt all NCERT questions yourself. 2. Check answers for accuracy — especially the sequence of steps in formation. 3. Memorise the MOA and AOA comparison table.
Key Concepts Recap
- Four stages: Promotion → Incorporation → Capital Subscription → Commencement.
- Promoter: Fiduciary relationship; not an agent (company does not exist yet).
- Certificate of Incorporation: Birth certificate of the company.
- Private company: Starts business after incorporation.
- Public company: Needs Certificate of Commencement.
- MOA: Charter — 6 clauses (Name, Office, Object, Liability, Capital, Subscription).
- AOA: Internal rulebook — subordinate to MOA.
- Prospectus: Public invitation to subscribe. Statement in Lieu = no public invitation.
- Minimum subscription: 90% of issue size.
Intext Questions
Q: Can a private company start business immediately after incorporation?
Q: What is minimum subscription?
Chapter-End Exercise Solutions
Q1: Explain the stages in the formation of a company.
Stage 1 — Promotion: 1. Discovery of a business idea and opportunity. 2. Detailed investigation — feasibility study (technical, financial, economic). 3. Assembling resources — land, machinery, capital, personnel. 4. Preparing preliminary documents — drafting MOA and AOA. 5. Filing necessary documents with the Registrar.
Stage 2 — Incorporation: 1. Obtain DIN (Director Identification Number) for proposed directors. 2. Obtain DSC (Digital Signature Certificate) for electronic filing. 3. Apply for name availability — submit up to 2 names in order of preference. 4. File MOA, AOA, consent of directors, notice of registered office, and declaration of compliance. 5. Pay registration fees. 6. Registrar scrutinises documents and issues the Certificate of Incorporation.
Stage 3 — Capital Subscription (Public company only): 1. File prospectus or statement in lieu of prospectus with the Registrar. 2. Appoint underwriters, brokers, and bankers. 3. Receive applications and ensure minimum subscription (90%). 4. Allot shares and file allotment return within 30 days.
Stage 4 — Commencement of Business (Public company only): 1. File declaration that minimum subscription received. 2. File declaration that directors have paid for qualification shares. 3. File declaration that no application money is pending for refund. 4. Registrar issues the Certificate of Commencement of Business.
Q2: What is a promoter? Discuss the legal position of a promoter.
A promoter is a person who undertakes the preliminary steps to form a company — conceives the business idea, conducts feasibility studies, arranges resources, and prepares the necessary documents.
Legal Position: 1. Not an agent of the company — the company does not exist during promotion, so the promoter cannot be its agent. 2. Fiduciary relationship — the promoter stands in a position of trust and must act in the best interest of the proposed company. 3. Cannot make secret profit — the promoter must disclose any profit made from promotion; secret profits must be returned. 4. Personally liable for pre-incorporation contracts — contracts entered before incorporation are the promoter's personal liability unless the company adopts them after formation. 5. Right to remuneration — unless a contract specifies, the promoter has no legal right to claim remuneration from the company.
Q3: What is a Memorandum of Association? Explain its clauses.
The Memorandum of Association (MOA) is the charter of the company that defines its scope, objectives, and relationship with the outside world. It is the most important document in company formation.
Clauses of MOA:
1. Name Clause — states the name of the company with 'Limited' or 'Private Limited' as suffix. 2. Registered Office Clause — specifies the state where the registered office is located. 3. Object Clause — defines the objects for which the company is formed — main objects and ancillary objects. Any act beyond this clause is ultra vires and void. 4. Liability Clause — states whether the liability of members is limited by shares, limited by guarantee, or unlimited. 5. Capital Clause — mentions the authorised capital of the company and its division into shares of fixed denomination. 6. Subscription Clause — contains the names, addresses, and occupations of subscribers and the number of shares each agrees to take.
Q4: Distinguish between Memorandum of Association and Articles of Association.
| Basis | MOA | AOA |
|---|---|---|
| Nature | Charter — defines company's scope | Rulebook — defines internal management |
| Relationship | Between company and outsiders | Between company and members internally |
| Supremacy | Supreme — AOA cannot override MOA | Subordinate to MOA |
| Alteration | Difficult — special resolution + ROC approval | Easier — special resolution only |
| Ultra vires | Act beyond MOA is void | Act beyond AOA may be ratified |
| Necessity | Mandatory for every company | Not mandatory — can adopt Model Articles |
| Contents | Name, office, objects, liability, capital, subscription | Meetings, voting, directors, dividend, shares |
Q5: What is a prospectus? How is it different from a statement in lieu of prospectus?
A prospectus is a document issued by a public company inviting the public to subscribe to its shares and debentures. It contains material information about the company — financials, management, risk factors, and use of proceeds — to help investors make informed decisions.
A statement in lieu of prospectus is filed when a public company does not wish to invite the public to subscribe (raises capital privately). It contains similar information but is not circulated to the public.
| Basis | Prospectus | Statement in Lieu of Prospectus |
|---|---|---|
| Purpose | Invite public subscription | No public invitation |
| Circulation | Circulated to the public | Filed with Registrar only; not circulated |
| When filed | Before public issue | When raising capital privately |
| Contents | Full disclosure for investors | Similar information for record |
Q6: What is the significance of the Certificate of Incorporation?
The Certificate of Incorporation is issued by the Registrar of Companies after scrutinising the documents filed for incorporation. Its significance:
1. Birth certificate of the company — the company comes into existence on the date mentioned in the certificate. 2. Separate legal entity — the company becomes a body corporate with a separate legal identity from its members. 3. Can own property — the company can acquire, hold, and sell property in its own name. 4. Can sue and be sued — the company has the legal right to file suits and can also be sued. 5. Conclusive evidence — the certificate is conclusive proof that all requirements of the Companies Act have been complied with. 6. Private company can start business — a private company can commence operations immediately after receiving this certificate.
Internal Links
- [Chapter 7 Guide — Formation of a Company](/school/cbse/class/11/business-studies/cbse-formation-of-a-company)
- [All Class 11 Business Studies Solutions](/school/cbse/class/11/business-studies/solutions)
- [Class 11 Business Studies Subject Guide](/school/cbse/class/11/business-studies)