CLASS XI –

BUSINESS STUDIES
FORMS OF
BUSINESS
ORGANISATION
Features AND FORMATION OF
COMPANY.
 JOINT STOCK
COMPANY
A company is an association of persons formed for
carrying out business activities and has a legal status
independent of its members.
A company can be described as an artificial person
having a separate legal entity, perpetual succession
and a common seal.
The company form of organisation is governed by The
Companies Act, 2013. As per section 2(20) of Act
2013, a company means company incorporated
under this Act or any other previous company law.
 JOINT STOCK
COMPANY
The shareholders are the owners of the
company while the Board of Directors is
the chief managing body elected by the
shareholders.
Usually, the owners exercise an indirect
control over the business.
The capital of the company is divided into
smaller parts called ‘shares’
JOINT STOCK COMPANY -
FEATURES
1. Artificial person
2. Separate legal entity
3. Formation
4. Perpetual succession
5. Control
6. Liability
7. Risk bearing
JOINT STOCK COMPANY –
FEATURES
1. ARTIFICIAL PERSON
A company is a creation of law and exists
independent of its members. Like natural
persons, a company can own property,
incur debts, borrow money, enter into
contracts, sue and be sued but unlike
them it cannot breathe, eat, run, talk and so
on. It is, therefore, called an artificial
person.
JOINT STOCK COMPANY –
FEATURES
2 . SEPARATE LEGAL ENTITY

From the day of its incorporation, a company

acquires an identity, distinct from its
members. Its assets and liabilities are
separate from those of its owners. The
law does not recognise the business and
owners to be one and the same.
JOINT STOCK COMPANY –
FEATURES
3 . FORMATION
The formation of a company is a time
consuming, expensive and complicated
process. It involves the preparation of
several documents an compliance with
several legal requirements before it can
start functioning.
Incorporation of companies is compulsory
under The Companies Act 2013 or any of
the previous company law.
JOINT STOCK COMPANY –
FEATURES
4. PERPETUAL SUCCESSION
A company being a creation of the law,
can be brought to an end only by law.
It will only cease to exist when a
specific procedure for its closure,
called winding up, is completed
. Members may come and members may
go, but the company continues to
exist.
JOINT STOCK COMPANY –
FEATURES
5. CONTROL
The management and control of the affairs of the
company is undertaken by the Board of
Directors, which appoints the top management
officials for running the business.
The directors hold a position of immense
significance as they are directly accountable to
the shareholders for the working of the
company.
The shareholders, however, do not have the right to
be involved in the day-to-day running of the
business.
JOINT STOCK COMPANY –
FEATURES
6. LIABILITY
The liability of the members is limited to the
extent of the capital contributed by them
in a company. The creditors can use only
the assets of the company to settle their
claims since it is the company and not the
members that owes the debt. The members
can be asked to contribute to the loss
only to the extent of the unpaid amount
of share held by them.
JOINT STOCK COMPANY –
FEATURES
7. RISK BEARING
The risk of losses in a company is borne by all
the share holders.
In the face of financial difficulties, all
shareholders in a company have to
contribute to the debts to the extent of
their shares in the company’s capital.
The risk of loss thus gets spread over a
large number of shareholders.
 TYPES OF
COMPANIES

PUBLIC
COMPANY
PRIVAT
E ONE PERSON
COMPANY
COMPA
NY
TYPES OF COMPANIES
PRIVATE COMPANY
A private company means a company which:
(a) restricts the right of members to transfer its
shares;
(b) has a minimum of 2 and a maximum of 200
members, excluding the present and past
employees;
(c) does not invite public to subscribe to its securities
and
It is necessary for a private company to use the word
private limited after its name.
 TYPES OF COMPANIES
PUBLIC COMPANY
A public company means a company which is not a
private company. As per The Companies Act, a
public company is one which:
(a) has a minimum of 7 members and no limit on
maximum members;
(b) has no restriction on transfer securities; and
(c) is not prohibited from inviting the public to
subscribe to its securities
Note: ASS private company which is a subsidiary of a
public company is also treated as a public
company.
TYPES OF COMPANIES
ONE PERSON COMPANY
One Person Company is a company with only
one person as a member. That one person will
be the shareholder of the company.
It avails all the benefits of a private limited
company such as separate legal entity,
protecting personal assets from business
liability and perpetual succession.
FORMATI
ON OF
COMPANY
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.
PROMOTER
COMPANIES ACT 2013 (SEC 69)
As per section 69, a promoter means a person

(a) Who has been named as such in a

prospectus or is identified by the company
in the annual return referred to in section 92;
or
(b) Who has control over the affairs of the
company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) In accordance with whose advice, directions
or instructions the Board of Directors of
the company is accustomed to act.
However, it is provided that nothing in this sub-
clause shall apply to a person who is acting
merely in a professional capacity.
MEMORANDUM OF
ASSOCIATION (DOCUMENT)

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 its 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.
MEMORANDUM OF
ASSOCIATION (DOCUMENT)

The signatories to the Memorandum of Association

state their intention to be associated with the
company and give their undertaking to subscribe to
the shares mentioned against their names.
The memorandum of a company shall be in respective
forms specified in Tables A, B, C, D and E in Schedule I
as may be applicable to such company.
The Memorandum of Association must be signed by at
least seven persons in case of a public company and
by two persons in case of a private company.
MEMORANDUM OF
ASSOCIATION - CLAUSES
The Memorandum of Association contains different
clauses:
1. Name Clause
2. Registered office clause
3. Object clause
4. Capital clause
5. Liability clause
 MEMORANDUM OF ASSOCIATION
1. 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.
A name is considered undesirable in the following cases:
(a) If it is identical with or too closely resembles the name of an existing company
(b) If it is misleading. It is so considered if the name suggests that the company is
in a particular business or it is an association of a particular type when it is not
true
(c) If it is violative of the provisions of ‘The Emblem and Names (Prevention of
Improper Use) Act 1950, as given in the schedule to this Act. This schedule
specifies, inter alia, the name, emblem or official seal of the UNO and its
bodies like WHO, UNESCO etc. Government of India, State Governments,
President of India or Governer of any State, the Indian National Flag. The Act
also prohibits use of any name which may suggest patronage of Government of
India, or any state government or any local authority
MEMORANDUM OF ASSOCIATION
2. 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.
MEMORANDUM OF ASSOCIATION
3. OBJECT CLAUSE
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 main objects for which the company is formed
are listed in this subclause. 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.
MEMORANDUM OF ASSOCIATION
4. 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 having a fixed face value is
specified in this clause.
For example, the authorised share capital of the
company may be ` 25 lakhs with divided into 2.5
lakh shares of ` 10 each. The said company cannot
issue share capital in excess of the amount
mentioned in this clause.
MEMORANDUM OF ASSOCIATION
5. 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 `10 each and has already paid ` 6 per
share, his/ her liability is limited to ` 4 per share.
Thus, even in the worst case, he/she may be called
upon to pay ` 4, 000 only.
ARTICLES OF
ASSOCIATION (DOCUMENT)

Articles of Association are the rules regarding internal

management of a company. These rules are
subsidiary to the Memorandum of Association and
hence, should not contradict or exceed anything stated in
the Memorandum of Association.
According to section 2(5) of The Companies Act, 2013,
‘articles’ means the article of association of a company
as originally framed or as altered from time to time or
applied in pursuance of any previous company law or of
this Act.
It is not compulsory for a public ltd. company to file
Articles of Association. It may adopt Table F of The
NOTE
Refer to textbook for:

1.ONE PERSON COMPANY

2.Differences between MOA and AOA.

3.Forms used by various companies.

4.Copy of MOA
 FORMATION OF A COMPANY

A. Stages of formation of PRIVATE LTD.

Company:
(i) Promotion;
(ii) Incorporation and

B. Stages of formation of PUBLIC LTD.

Company:
(iii) Promotion;
(iv) Incorporation and
(v) Subscription of capital
STAGE 1 - PROMOTION OF
COMPANY
 Promotion is the first stage in the formation of a
company. It involves conceiving a business idea
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 idea. 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.
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.
PROMOTER
COMPANIES ACT 2013 (SEC 69)
As per section 69, a promoter means a person

(a) Who has been named as such in a

prospectus or is identified by the company
in the annual return referred to in section 92;
or
(b) Who has control over the affairs of the
company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) In accordance with whose advice, directions
or instructions the Board of Directors of
the company is accustomed to act.
However, it is provided that nothing in this sub-
clause shall apply to a person who is acting
merely in a professional capacity.
POSITION OF PROMOTER
They are neither the agents nor the trustees of the company.
They can’t be the agents as the company is yet to be
incorporated. Therefore, they are personally liable for all the
contracts which are entered by them, for the company
before its incorporation, in case the same are not ratified by
the company later on.
They can make a profit only if it is disclosed but must not make
any secret profits.
Promoters are not legally entitled to claim the expenses
incurred in the promotion of the company. However, the
company may choose to reimburse them for the
preincorporation expenses. The company may also
remunerate the promoters for their efforts.The company may
also allot them shares or debentures or give them an option to
purchase the securities at a future date.
FUNCTIONS OF
PROMOTER
1. Identification of business opportunity
2. Feasibility studies (Economic, technical And financial)
3. Name approval
4. Fixing up Signatories to the Memorandum of
Association:
5. Appointment of professionals:
6. Preparation of necessary documents (MOA, AOA,
Consent of proposed directors, Agreement, Statutory
declaration and Receipt of fee)
(Note: After completing the aforesaid formalities,
promoters make an application for the
incorporation of the company)
FUNCTIONS OF PROMOTER
1.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
FUNCTIONS OF PROMOTER
2. FEASIBILITY STUDIES
The following feasibility studies may be undertaken, with
the help of the specialists like engineers, chartered
accountants etc.
(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.
(b) Financial feasibility: Every business activity requires
funds. 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.
(c) Economic feasibility: Sometimes it so happens that a
project is technically viable and financially feasible but
FUNCTIONS OF PROMOTER
3. NAME APPROVAL
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.
Three names, in order of their priority are given in the
application to the Registrar of Companies. (Proforma
INC1 is given at the end of the Book).
FUNCTIONS OF PROMOTER
4. Fixing up signatories to the MOA
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.

QUALIFICATION SHARES
To ensure that the directors have some stake in the proposed company,
the Articles usually have a provision requiring them to buy a certain
number of shares. They have to pay for these shares before the
company obtains Certificate of Commencement of Business. These are
called Qualification Shares.
FUNCTIONS OF PROMOTER
5. 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.
FUNCTIONS OF PROMOTER
6. Preparation of necessary documents
Following documents have to be submitted under the
law, to the Registrar of the Companies for getting the
company registered:
1. MOA – Memorandum of Association
2. AOA – Articles of Association
3. Consent of proposed directors,
4. Agreement,
5. Statutory declaration and
6. Receipt of fee
FUNCTIONS OF PROMOTER
6. Preparation of necessary documents
3. Consent of proposed directors – A written consent of each
person named as a director is required confirming that they
agree to act in that capacity and undertake to buy and pay for
qualification shares, as mentioned in the Articles of Association
4. Agreement - The agreement, if any, which the company proposes
to enter with any individual for appointment as its Managing
Director or a whole time Director
5. Statutory declaration - A declaration stating that all the legal
requirements pertaining to registration have been complied
with is to be submitted to the Registrar with the above mentioned
documents for getting the company registered under the law
6. Receipt of fee - necessary fees has to be paid for the registration of
the company.
STAGE 2 - INCORPORATION
OF COMPANY
After completing the aforesaid formalities,
promoters make an application for the
incorporation of the company. The application is to
be filed with the Registrar of Companies of the
state within which they plan to establish the
registered office of the company. The application
for registration must be accompanied with certain
documents.
MOA, AOA, Consent of proposed directors,
Agreement, Statutory declaration, Copy of
Name Approval and Receipt of fee
STAGE 2 - INCORPORATION
OF COMPANY
The Registrar upon submission of the application along
with the required documents has to be satisfied that the
documents are in order and that all the statutory
requirements regarding the registration have been
complied with, will issue a Certificate of
Incorporation which signify the birth of the company.
However, it is not his duty to carry out a thorough
investigation about the authenticity of the facts
mentioned in the documents..
With effect from November 1, 2000, the Registrar of
Companies allots a CIN (Corporate Identity Number) to
the Company.
STAGE 2 - INCORPORATION OF
COMPANY
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.
Once a Certificate of Incorporation has been issued,
the company has become a legal business entity
irrespective of any flaw in its registration (i.e
whatever be the deficiency in the formalities). The
Certificate of Incorporation is thus conclusive evidence
of the legal existence of the company. Even when a
company gets registered with illegal objects, the birth of
the company cannot be questioned.
STAGE 3 –
CAPITAL SUBSCRIPTION
A public company can raise the required funds from the
public by means of issue of securities (shares and
debentures etc.). The following steps are required for
raising funds from the public:
1. SEBI approval
2. Filing of Prospectus
3. Appointment of Bankers, Brokers and
Underwriters
4. Minimum Subscription
5. Application to Stock Exchange
6. Allotment of shares
CAPITAL SUBSCRIPTION
1. SEBI APPROVAL

SEBI (Securities and Exchange Board of India)

which is the regulatory authority in our country
has issued guidelines for the disclosure of
information and investor protection.
A public company inviting funds from the general
public must make adequate disclosure of all
relevant information and must not conceal any
material information from the potential investors.
CAPITAL SUBSCRIPTION
2. FILING OF PROSPECTUS
A copy of the prospectus or statement in lieu of
prospectus is filed with the Registrar of
Companies.
A prospectus is ‘any document described or issued
as a prospectus including any notice, circular,
advertisement or other document inviting deposits
from the public or inviting offers from the public
for the subscription or purchase of any securities
of, a body corporate’.
In other words, it is an invitation to the public to
apply for securities (shares, debentures etc.) of the
company or to make deposits in the company
CAPITAL SUBSCRIPTION
3. Appointment of bankers, brokers and underwriters
The application money is to be received by the
bankers of the company.
The brokers try to sell the shares by distributing the
forms and encouraging the public to apply for the
shares.
If the company is not reasonably assured of a good
public response to the issue, it may appoint
underwriters to the issue. Underwriters undertake
to buy the shares if these are not subscribed by the
public. Appointment of underwriters is not
necessary
 CAPITAL SUBSCRIPTION
4. MINIMUM SUBSCRIPTION
In order to prevent companies from commencing
business with inadequate resources, it has been
provided that the company must receive
applications for 90 per cent of the size of the issue
before going ahead with the allotment of shares.
This is called the ‘minimum subscription’.
Thus, if applications received for the shares are for
an amount less than 90 per cent of the issue size,
the allotment cannot be made and the application
money received must be returned to the
applicants.
CAPITAL SUBSCRIPTION
5. APPLICATION TO STOCK EXCHANGE
An application is made to at least one stock
exchange for permission to deal in its shares or
debentures.
If such permission is not granted before the
expiry of ten weeks from the date of closure of
subscription list, the allotment shall become
void and all money received from the
applicants will have to be returned to them
within eight days.
 CAPITAL SUBSCRIPTION
6. ALLOTMENT OF SHARES
The excess application money, if any, is to be returned to
applicants or adjusted towards allotment money due from
them.
Allotment letters are issued to the successful allottees. ‘Return
of allotment’, signed by a director or secretary is filed with
the Registrar of Companies within 30 days of allotment.
(NOTE: A public company may not invite public to subscribe
to its securities (shares, debentures etc.). Instead, it can raise
the funds through friends, relatives or some private
arrangements as done by a private company. In such cases,
there is no need to issue a prospectus. A ‘Statement in Lieu
of Prospectus’ is filed with the Registrar at least three days
before making the allotment)