By Akansha Jindal

Chapter 2
Forms of Business Organisation
FORMATION OF COMPANY

Promotion
1. Discovery of a Business idea –
a. The promoter first identifies a business idea which can be profitable, either through new product
or supplying an existing product in a new way.
2. Feasibility studies – A detailed investigation needs to be conducted after identifying a new business idea,
to see whether the idea is technically, economically and financially feasible or not.
a. Technical feasibility – check whether the required technology and raw material is available to
execute the idea or not.
b. Economic feasibility – check whether the idea is profitable in long run or not, otherwise it shall be
abandoned.
c. Financial feasibility – finance is the blood of every business, if promoter finds it difficult to arrange
adequate funds for the outlay of the project, the idea may be abandoned.
3. Name Approval –
a. Appropriate name must be selected which must be registered with the registrar.
b. It shall not resemble any existing business enterprise or show relation with the government.
4. Fixing up signatories to MOA
a. Promoters decide members who will sign the memorandum of association of the proposed
company. They are also known as the first directors.
5. Appointment of professionals
a. Promoter appoints necessary personnel to carry out the legal task and formalities.
6. Preparation of necessary documents
a. promoter prepares necessary documents like MOA, AOA etc. and submit all to the registrar.

Incorporation
1. Introduction –
a. Incorporation refers to the registration of the company under the companies Act, 2013.
b. For registration an application is filed with the RoC of the state within which the company plans
to establish its registered office.
2. The following documents must be submitted with the application –
a. A copy of the registrar‘s letter approving the name of the company.
b. Memorandum of association
c. Articles of association
d. A list of directors with their names, address, occupation and age.
e. Statement of authorized capital.
f. The written consent of the directors to act as directors.
g. Notice of the address of the registered office of the company.
h. A statutory declaration stating that all the formalities related to the formation of the company are
duly completed.
3. Payment of fees –
a. Along with the above documents the required fee for registration has to be paid to the registrar.
4. Registration –
a. If the registrar is satisfied that all the legal formalities have been fulfilled, he will register the
name of the company in his register.

Effect of certificate of incorporation –

a. The Registrar issues a Certificate of Incorporation. This is called the birth certificate of the
company.
b. A company is legally born on the date printed on the certificate of incorporation. With effect from
November 1, 2000, the registrar of companies allots a CIN (Corporate Identity Number) to the
company.
Capital Subscription

1. Private company –
a. It can start raising capital from friends, relatives and private investors after receiving the
certificate of incorporation.

2. Public company –
a. A public company can raise funds from the public by issuing shares and Debentures.
b. For this it has to issue prospectus and undergo various other formalities:

Steps required for raising funds from public –

(a) SEBI Approval
i. SEBI (Security Exchange Board of India) is a regulatory body which controls the capital market of
India to protect the interests of the investors.
ii. The public limited companies must submit all relevant information with SEBI and get its approval
before issuing its securities in the capital market.
(b) Filing of prospectus or statement in lieu of prospectus –
A public company has to prepare a prospectus & invites the general public to buy the shares of the
company.
i. If a public company having a share capital is confident of getting fund privately, it issues a
statement in lieu of prospectus.
ii. The company has to file a copy of prospectus or statement in lieu of prospectus with the registrar.
(c) Appointment of bankers, brokers and underwriters–
i. Bankers are appointed by the company to receive application money.
ii. In case, the company is not sure about minimum subscription of shares by the public, it may
appoint underwriters.
(d) Minimum Subscription –
i. Minimum subscription is the amount which, in the opinion of the board of directors, is sufficient to
provide working capital, preliminary expenses, purchase price of any asset etc.
ii. As per SEBI guidelines, the minimum subscription is 90% of the issued amount.
iii. If the company is unable to do so, then it must return all the money received.
(e) Permission from stock exchange –
i. The company has to make an application to at least one stock exchange on which its shares can be
bought and sold.
(f). Allotment of shares –
i. After receiving the minimum subscription, the company issues the allotment letters to the
allottees and a written letter of allotment is filed with the registrar of companies within 30 days of
allotment.
Important Documents
1. Memorandum of association

2. Articles of association

3. Prospectus

4. Statement in lieu of prospectus

Memorandum of Association
a. It is the document which defines the powers and objectives of the company as well as the scope
of its operations beyond which the company cannot operate.
b. If a company does anything beyond what is mentioned in the memorandum, it will be treated as
illegal.
c. The MOA defines the relationship of the company with the outside world.
d. It is the principal document of the company and is known as the charter or constitution of the
company.
e. No company can be registered without memorandum of association.

Contents/Clauses of Memorandum of Association

1. Name clause –
i. Under this, the name of the company is written.
ii. The name should not be identical to the name of any existing company.
2. Situation clause (registered office clause) –
i. Under this, the name of the state in which the registered office of the company is to be situated is
mentioned.
3. Object clause –
i. Under this, the objective or the purpose, with which the company has been formed, is mentioned.
ii. A company is not allowed to do any business other than the one specialized in this clause.
4. Liabilities clause –
i. Under this clause, the liability of the members is mentioned which is up to the amount of unpaid
share capital held by them.
5. Capital clause –
i. In this clause, the authorized capital of the company is mentioned and no company can raise more
capital than this limit.
6. Association clause (subscription clause) –
i. In this clause, the director (minimum seven in case of public company and minimum two in case of
private company) has to give in writing of their intention to be associated with the company and buy
the qualifying shares.
Articles of Association
a. The articles of association of a company are its by-laws or regulations which govern the
management of its internal affairs.
b. It defines the duties, powers, and authority of the shareholders and the directors of the company.
c. This document is secondary to the memorandum of association.

Clauses of Articles of Association

a. The amount of share capital and the different classes of shares.
b. Rights of each type of shareholders.
c. Procedure for making allotment of shares.
d. Procedure for issuing shares certificates.
e. Procedure for transfer of shares.
f. Procedure for forfeiture of shares.
g. Procedure for re-issue of forfeited shares.
h. Procedure for conducting meetings etc.

The preparation of articles of association is not compulsory for public company limited by shares. It
may adopt ‘TABLE F’ of the companies act in case it is not preparing its own articles of association.

Difference between Memorandum of Association and Articles of Association

Basis Memorandum of Association Articles of Association
1. Objectives MOA defines the objects for AOA are the rules of internal
company is formed. management. They indicate how
the objects of the company are to
be achieved.
2. Position This is the main document of the This is subsidiary document and is
company and subordinate to the subordinate to both MOA and
Companies Act. Companies Act.
3. Relationship MOA defines the relationship of AOA defines the relationship of
the company with outsiders. the company and its members.
4. Validity Acts beyond MOA are invalid and Acts which are beyond articles can
can‘t be ratified even by a be ratified by members, provided
unanimous vote of the members. they don‘t violate MOA.
5. Necessity Every company has to file a MOA. It is not compulsory for public
limited company to file AOA. It
may adopt Table F of Companies
Act 2013.
Prospectus
a. It is a document which can be in the form of notice, circular, advertisement or any other
document inviting deposits from the public or inviting general public to subscribe to the shares or
debentures of a company.
b. The prospectus contains the present position, history of the company and the future prospects of
the company.
c. A public limited company limited by shares, must issue the prospectus if it wants to make an
appeal to the general public to subscribe to shares or debentures.

Statement in lieu of Prospectus

a. A public company which does not want to invite the general public to invest in the company, will
not issue a prospectus. As such, it will file a statement in lieu of prospectus with the registrar of
companies.
b. The statement in lieu of prospectus is prepared on the same lines and contains more or less the
same information contained in the prospectus.
c. It must be signed by all the directors and must be filed with the registrar of companies at least
three days before the allotment of shares or debentures.

Other important terms

Qualification Shares
a. 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.
b. They have to pay for these shares before the company obtains certificate of commencement of
business.
c. These are called qualification shares.

Preliminary Contracts
a. During the promotion of the company, promoters enter into certain contracts with third parties
on behalf of the company.
b. These are called preliminary contracts or pre-incorporation contracts.
c. These are not legally binding on the company.
d. A company after coming into existence may, if it so chooses, decides to enter into fresh contracts
with the same terms and conditions to honour the contracts made by the promoters.
e. Note that it cannot ratify a preliminary contract. A company thus cannot be forced to honour a
preliminary contract.
f. Promoters, however, remain personally liable to third parties for these contracts.

Director Identification Number (DIN)

a. Every individual intending to be appointed as director of a company shall make an application for
allotment of Director Identification Number (DIN) to the Central Government in prescribed form
along with fees.
b. The Central Government shall allot a Director Identification Number to an application within one
month from the receipt of the application.
 c. No individual, who has already been allotted a Director Identification Number, shall apply for,
obtain or possess another Director Identification Number.

Corporate Identification Number (CIN)

a. With effect from November 1, 2000 registrar also allots a CIN to the company from the date when
the company is registered.

NOTE: These are revision notes and are not exhaustive. Please refer to NCERT for detailed explanation.

SOURCES

KVS Study material

Sandeep Garg
NCERT