Plus One Bussiness Studies Chapter Wise Questions and Answers Chapter 7 Formation of a Company

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Kerala Plus One Bussiness Studies Chapter Wise Questions and Answers Chapter 7 Formation of a Company

Plus One Formation of a Company One Mark Questions and Answers

Question 1.
Application for approval of name of a company is to be made to
Answer:
Registrar of companies.

Question 2.
A prospectus is issued by
Answer:
Public company

Question 3.
Preliminary contracts are signed
Answer:
Before the incorporation

Question 4.
At which stage in the formation of a company does it interact with SEBI
Answer:
Capital subscription

Question 5.
The first stage in the formation of a company is __________
Answer:
Promotion

Question 6.
“I undertake to form a new company and carry out all the preliminary work in connection with its establishment” Who am I?
Answer:
Promoter

Question 7.
Preliminary Contracts are signed
1. Before the incorporation
2. After incorporation but before capital subscription
3. After incorporation but before of commencement of business
4. After commencement business
Answer:
1. Before the incorporation

Question 8.
Spot the odd one and state the reason
1. Memorandum of Association
2. Articles of Association
3. Certificate of incorporation
4. Certificate of commencement of business
Answer:
5. Certificate of commencement of business

Question 9.
_____________ is the magnacarta of the company.
Answer:
Memorandum of Association

Question 10.
_____________ is the birth certificate of a company.
Answer:
Certificate of incorporation

Question 11.
The procedure for conducting company meetings, voting, quorum, poll and proxy will be mentioned in the
1. Prospectus
2. Memorandum of Association
3. Articles of Association
Answer:
3. Articles of Association

Question 12.
The provision regarding the internal management of a company will appear in its
Answer:
Articles of Association

Question 13.
Public Companies need __________ to commence the business.
Answer:
Certificate of commencement of business

Question 14.
Directors of a public Ltd. Co. decided to give advertisement in all newspapers for subscribing their shares. Identify the document given below
1. table A
2. memorandum of association
3. prospectus
Answer:
3. Prospectus

Question 15.
This clauses is the form of a declaration, it states that the subscribers express the willingness and agreement to form a company. Name the clause of memorandum of association.
Answer:
Association Clause

Question 16.
This clause specifies the name of the state where the registered office of the Co. is situated. Identify the clause.
Answer:
Situation clause

Question 17.
This clause specifies the name of the company.
Answer:
Name clause

Question 18.
Identify the document in which the following information about a company can be found.

1. Object with which the company is formed.
2. Rules and regulations of internal management
3. Investing deposits from the public
4.  Acknowledgement of debt in a company

Answer:

1. Memorandum of Association
2. Articles of Association
3. Mutual fund
4. Debenture

Question 19.
TABLE A is a model of _________ given in companies Act.
Answer:
Articles of Association

Question 20.
Identify the documents in which following information about a company is found.

1. Authorized capital
2.  Rules and regulation for internal management.
3.  Date of opening and closing of subscription list.

Answer:

1. Memorandum of Associaiton
2. Articles of Association
3. Prospectus

Question 21.
Identify the relevant clauses in the memorandum of association in which the following information can be included.

1. The registered office is in Kerala.
2. Statutory declaration by members
3. Ram Limited
4. The scope of activities of company

Answer:

1. Situation clause
2. Association clause
3. Name clause
4. Object clause

Question 22.
State the odd item in the case of a private limited company.
1. memorandum of association
2. articles of association
3. certificate of incorporation
4. certificate of commencement of business
Answer:
4. Certificate of Commencement of business

Question 23.
Mention the name of the certificates/documents relating to following activities / formalities

1. The certificate issued by the Registrar of companies certifying that the company has come into existence.
2. The document, which contains the various rules and regulations that govern the management of the company.
3. The document that defines the objectives of the company.

Answer:

1. Certificate of Incorporation
2. Articles of Association
3. Memorandum of Association

Question 24.
Name the following documents.

1. The document issued by the company to the public to invite them to subscribe its share capital.
2. The document that binds a member with the company, company with members and members with members.
3. The document that contains rules for internal management of the company.
4. The document that specifies the aims of the company.
5. The document issued by the public company which does not want to issue a prospectus.

Answer:

1. Prospectus
2. Articles of Association
3. Articles of Association
4. Memorandum of Association
5. Statement in lieu of Prospectus

Plus One Formation of a Company Two Mark Questions and Answers

Question 1.
Name the stages in the formation of a company?
Answer:

1. Promotion
2. Incorporation
3. Capital subscription
4. Commencement of business (2)

Question 2.
Name the stages in the formation of a company. (2)
Answer:

1. Promotion
2. Incorporation
3. Commencement of business

Question 3.
What do you mean by promotion? (2)
Answer:
The identification of business opportunities, analysis of its prospects and initiating steps to form a joint stock company is called promotion.

Question 4.
For incorporating a private limited company, Deepthi Pvt. Ltd., the directors submit all relevant documents to the registrar of company except Articles of Association. But the registrar insists that, registration will not be granted without filing Articles of Association. But the directors of Deepthi Pvt. Ltd., argue that the provisions of ‘Table A’ can be adopted in the absence of Articles of Association. Whose argument is correct? Justify your answer. (2)
Answer:
The argument of the Company Registrar is right because filing of Articles of association is compulsory for Pvt. Ltd company by shares.

Question 5.
Arya Ltd. commences its business immediately on getting the certificate of incorporation. The registrar of companies serves a notice to them for remitting a fine of ₹500 for everyday of its operation. Is it legally enforceable? Give your suggestion. (2)
Answer:
Yes. Public Ltd. Company can commence business only after getting the certificate of commencement of business.

Question 6.
It is proposed to conduct a seminar on the topic ‘important documents in the formation of joint stock company’ in your class. You are selected as the leader of one of the groups and are directed to submit a seminar paper for the same. Suggest valuable points that should be included in the paper. (2)
Answer:

1. Memorandum of Association
2. Articles of Association
3. Prospectus

Question 7.
What do you mean by Minimum Subscription? (2)
Answer:
Minimum subscription is the minimum amount of shares that must be subscribed by the public. This amount is stated in the prospectus. A company can allot shares only after receiving minimum subscription.

Question 8.
I lay down the charter or the constitution of the company. I define the object and powers of the company.

1. Identify who am I?
2. Also name my companion who provides rules and regulations for the internal management of the company. (Both are two documents). (2)

Answer:

1. Memorandum of Association
2. Articles of Association

Plus One Formation of a Company Three Mark Questions and Answers

Question 1.
Is it necessary for a public company to get its shares listed on a stock exchange? What happens if a public company fails to get the permission from stock exchange? (3)
Answer:
Yes. A public company must list its shares with at least any one of the stock exchange for the allotment of shares. Therefore, the promoters must apply in a stock exchange for permission to deal in its shares or debentures. If permission is not granted before the expiry of ten weeks from the date of Closure of subscription list, the allotment shall become void and the application money must be returned to the applicants within eight days.

Question 2.
State the difference between certificate of incorporation and certificate of commencement of business. (3)
Answer:
Certificate of Incorporation gives legal status to the company. It is also known as birth certificate of the company. But certificate of commencement of business allows to start the operation.

These two certificates are required by the public limited company, but in case of private limited company only certificate of Incorporation is required to start the operation.

Question 3.
Nisha, Shani and Sheena are promoters of a public company. But they do not want to raise capital by approaching the public. They decide to raise capital by issuing shares to a few persons. Is it possible? If yes, what document is used for raising capital? (3)
Answer:
Yes. They can raise capital by issuing shares to a few persons. For this they can issue Statement in lieu of prospectus.

Plus One Formation of a Company Four Mark Questions and Answers

Question 1.
Identify the documents required for commencing business for the following companies. (4)

1. Athira Pvt. Ltd.
2. Aditya Ltd.

Answer:
1. Athira Pvt. Ltd – A private company must file the following documents for commencing business

• Certificate of incorporation
• Statutory declaration duly verified by one of the directors.

2. Aditya Ltd., a public company, must file the following documents for commencing business.

• Certificate of incorporation
• Certificate of commencement of business
• Prospectus
• Statutory declaration duly verified by one of the directors.

Question 2.
The details of a proposed private company having limited liability is given below. You are required to identify as to which clauses in the Memorandum of Association have to be rightly inserted. (4)
Proposed names:
Mahatma Gandhi Khadi – Company
Premier Mills (P) Ltd.
Kerala Government Khadi Company
Sobha Co-operative Company
Maximum capital which can be collected is 20 lakhs rupees
Nature of shares
Equity shares at Rs. 10/- share

Address:
Pushpa Nivas Kodunganoor (P.O)
Thiruvananthapuram 13
Kerala State
India.

Nature of business:
To produce Khadi clothes through machine To stitch Khadi ready wears Name of the persons who are wishing to form the company
P. Sudarsanan
K. Muraleedharan Nair
S. Renjith
Answer:

1. Name clause
2. Capital clause
3. Situation clause
4. Object clause
5. Association clause

Plus One Formation of a Company Five Mark Questions and Answers

Question 1.
“Promoter would be personally liable for the preliminary contracts, if they are not ratified by the company after incorporation. Analyse the statement. (5)
Answer:
Promotion:
Promotion is the first stage in the formation of a company. The identification of business opportunities, analysis of its prospects and initiating steps to form a joint stock company is called promotion. The person who undertakes to form a company is called promoter.

Functions of a Promoter:

1. Identification of business opportunity:
The first and foremost activity of a promoter is to identify a business opportunity.

2. Feasibility studies:
After identifying a business opportunity, the promoters undertake some feasibility studies to determine the viability and profitability of the proposed activity.

• Technical feasibility – To determine whether the raw materials or technology is easily available
• Financial feasibility – To determine the total estimated cost of the project
• Economic feasibility – To determine the I profitability of the proposed project

3. Name approval:
After selecting the name of company the promoters submit an application to the Registrar of companies for its approval. The selected name is not the same or identical to an existing company.

4. Fixing up signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company.

5. Appointment of professional:
Promoters appoint merchant bankers, auditors etc. to assist them in the preparation of necessary documents.

6. Preparation of necessary documents:
The promoters prepare certain legal documents which are to be submitted to the Registrar of companies. They are

• Memorandum of Association
• Articles of Association,
• Consent of proposed Directors
• Agreement, if any, with proposed managing or whole time director
• Statutory declaration

Position of Promoters:
The promoter is neither an agent nor a trustee of the company. The promoter stands in the fiduciary relationship with the company. He should not make any secret profits out of the dealings. Any, such gains are to be disclosed. The promoter must act honestly, in good faith and in the best interest of the company.

The promoter is personally liable for all the preliminary contracts with the other parties before incorporation. The promoter is also liable for any omission of facts or false statements in the prospectus.

Question 2.
Memorandum of Association is the charter or magna carta of the company. Elucidate the statement. (5)
Answer:
Memorandum of Association:
It is the charter or magnacarta of the company. It defines the objects of the company and provides the framework beyond which the company cannot operate. It lays down the relationship of the company with outside world.

Memorandum of Association must be printed, divided into paragraphs, numbered consecutively. 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.

Contents of Memorandum of Association

1. The name clause:
Under this clause the name of the company is mentioned. A company can select any name subject to the following restrictions.

• The proposed name should not be identical with the name of another company
• A name which can mislead the public
• In case of a public company the name should end with the word ‘Limited’ and in case of a private company the name should end with the word ‘Private Limited’
• The name must not directly or indirectly imply any participation of the Central or State Govt.
• The name must not suggest any connection or patronage of a national hero
• It should not include the word cooperative.

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. It must be informed to the Registrar within thirty days of the incorporation of the company.

3. Objects clause:
This is the most important clause of the memorandum. 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.

4. Liability clause:
It states that the liability of members is limited to the face value of shares held by them or the amount guaranteed to be paid on winding up.

5. Capital clause:
This clause specifies the maximum capital which the company will be authorised to raise through, the issue of shares.

6. Association clause:
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares.

Question 3.
Explain the contents of prospectus. (5)
Answer:
Prospectus:
Prospectus is a document issued by the public companies inviting the public to subscribe for shares or debentures of the company. It contains all information regarding the company’s affairs and its future prospects. A prospectus must be dated and signed by all the directors. A copy of the prospectus must be filed with Registrar before it is issued to public.

Contents of prospectus

1. Name and address of the registered office of the company.
2. Main objects of the company.
3. Classes of shares and debentures.
4. Name, address and occupation of the signatories to the memorandum.
5. Details of the borrowing powers of the company.
6. Name, address and occupation of the directors and managing director.
7. Name and address of the promoters.
8. Minimum subscription.
9. Time of opening and closing of subscription.
10.  The amount payable on application and allotment of each class of shares.
11.  Name of underwriters.
12.  Details of preliminary expenses.
    Companies which do not want to issue a prospectus may submit a statement in lieu of prospectus to the Registrar of Companies. It is a copy of the prospectus but is not issued to the public.

Question 4.
The details of a proposed limited company are given below. You are required to identify them as to which clause of the memorandum of association they have to be inserted. (5)

1. Proposed name: Jnana Construction Company Ltd
2. Maximum Capital: ₹10,00,000
3. Registered office: Kollam
4. Nature of liability: Limited
5. Nature of Business: Construction company
6. Names of promoters: Jnana, Akshara, Pooja, Ajay

Answer:

1. Name clause
2. Capital clause
3. Situation / Domicile clause
4. Liability clause
5. Object clause
6. Association clause

Question 5
A public company can commence business only after getting the certificate of commencement of business. Abhijith, a plus two student wants to know the conditions to be fulfilled to obtain the certificate of commencement of business.
Answer:

Commencement of Business:
A public company can commence business only after getting certificate of commencement of business from the Registrar. The company must file the following documents to obtain the certificate of commencement of business.

1. Declaration that the minimum subscription has been received in cash to allot shares.
2. A declaration that all directors have taken up and paid for their qualification shares
3. A statutory declaration stating that necessary legal formalities have been complied with has to be filed.

The Registrar shall examine these documents. If these are found satisfactory, a ‘Certificate of Commencement of Business’ will be issued. This certificate is conclusive evidence that the company is entitled to do business. With the grant of this certificate the formation of a public company is complete and the company can legally start doing business.
Documents used in the formation of a company

Plus One Formation of a Company Six Mark Questions and Answers

Question 1.
I govern the internal affairs of the company. Explain who am ‘I’? List out my contents.
OR
For the purpose of registering a new company, the promoter requires a document containing the rules and regulations governing its internal affairs. (6)

1. What is that document? Explain.
2. State the contents of this statement.

Answer:
Articles of Association:
The Articles of Association is the second important document of a company. The Articles define the rights, duties and powers of the officers and the Board of directors. It contains the rules regarding internal management of the company. It shows the relationship between the company and its members.

Contents of Articles of Association:

1. The share capital of the company and its division.
2. Rights of each class of shareholders.
3. Details of contracts made with different parties.
4. Procedure for making allotment of shares.
5. Procedure for issuing share certificate.
6. Procedure for transfer and transmission of shares.
7. Procedure for forfeiture and reissue of shares.
8. Procedure for conducting meetings, voting, proxy and poll
9. Procedure for appointing, removal and remuneration of directors.
10. Procedure for declaration of and payment of dividend.
11. Keeping books of account and audit of the company.
12. Procedure regarding alteration of share capital.
13. Procedure regarding winding up of the company.

Table A:
A public limited company may adopt Table A which is a model set of articles given in the Companies Act. Table A is a document containing rules and regulations for the internal management of a company. If a company adopts Table A, there is no need to prepare separate Articles of Association.

Question 2.
Vishnu, a promoter of a public company, approaches you to get information relating to raising of capital from public. As a commerce student mention the document required for inviting the public to purchase or subscribe to its shares and debentures. Explain. (6)
Answer:
Prospectus:
Prospectus is a document issued by the public companies inviting the public to subscribe for shares or debentures of the company. It contains all information regarding the company’s affairs and its future prospects. A prospectus must be dated and signed by all the directors. A copy of the prospectus must be filed with Registrar before it is issued to public.

Contents of prospectus:

1. Name and address of the registered office of the company.
2. Main objects of the company.
3. Classes of shares and debentures.
4. Name, address and occupation of the signatories to the memorandum.
5. Details of the borrowing powers of the company.
6. Name, address and occupation of the directors and managing director.
7. Name and address of the promoters.
8. Minimum subscription.
9. Time of opening and closing of subscription.
10. The amount payable on application and allotment of each class of shares.
11. Name of underwriters.
12. Details of preliminary expenses.

Companies which do not want to issue a prospectus may submit a statement in lieu of prospectus to the Registrar of Companies. It is a copy of the prospectus but is not issued to the public.

Question 3.
It is often said that Memorandum of Association and Articles of Association are the first and second important documents of a company. As a commerce student can you differentiate between these two documents? (6)
Answer:

Memorandum of Association	Articles of Association
It defines the object for which the company is formed	They are rules of internal management of the company. They indicate how the objectives of the company are to be achieved
It is the main document of the company	It is a subsidiary document of the Memorandum of Association
It defines the relationship of the company with outsiders	It defines the relationship of the company with members
Acts beyond the Memorandum of Association are invalid and cannot be ratified.	Acts beyond the Articles of Association can be ratified by the members. But they do not violate memorandum
Filing of Memorandum is compulsory	Filing of Articles is not compulsory for public company
Alteration of Memorandum is very difficult	It can be altered by passing a special resolution

Plus One Formation of a Company Eight Mark Questions and Answers

Question 1.
Explain the steps in the incorporation of a company. (8)
Answer:
Incorporation:
A company comes into existence only when it is registered with the Registrar of Companies. For this purpose the promoter has to take the following steps:
Steps for Incorporation

1. Application for incorporation:
Promoters make an application for the incorporation of the company to the Registrar of companies.

2. Filing of documents:
The following documents must be filed with the Registrar of Companies for incorporation.

• The Memorandum of Association duly stamped, signed and witnessed
• Articles of Association duly stamped, signed and witnessed
• Written consent of the proposed directors
• Agreement, if any, with proposed managing or whole time director
• A copy of the Registrar’s letter approving the name of the company.
• Statutory declaration
• A notice about the exact address of the registered office.
• Documentary evidence of payment of registration fees.

The Registrar verifies the entire document submitted. If he is satisfied then he enters the name of the company in his Register. After the registration, the Registrar issues a Certificate called Certificate of Incorporation. This is called the birth certificate of the company. With effect from November 1, 2000, the Registrar of Companies allots a CIN (Corporate Identity Number) to the Company.

Effect of the Certificate of Incorporation:
Certificate of Incorporation is the conclusive evidence of the legal existence of the company. A private company can commence its business after receiving Certificate of Incorporation. The certificate of incorporation is the birth certificate of the company.

Question 2.
Explain the contents of Memorandum of Association.

Answer:
Memorandum of Association: It is the charter or magnacarta of the company. It defines the objects of the company and provides the framework beyond which the company cannot operate. It lays down the relationship of the company with outside world.

Memorandum of Association must be printed, divided into paragraphs, numbered consecutively. 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.

Contents of Memorandum of Association:

1. The name clause:
Under this clause the name of the company is mentioned. A company can select any name subject to the following restrictions.

• The proposed name should not be identical with the name of another company
• A name which can mislead the public
• In case of a public company the name should end with the word ‘Limited’ and in case of a private company the name should end with the word ‘Private Limited’
• The name must not directly or indirectly imply any participation of the Central or State Govt.
• The name must not suggest any connection or patronage of a national hero
• It should not include the word co operative.

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. It must be informed to the Registrar within thirty days of the incorporation of the company.

3. Objects clause:
This is the most important clause of the memorandum. 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.

4. Liability clause:
It states that the liability of members is limited to the face value of shares held by them or the amount guaranteed to be paid on winding up.

5. Capital clause:
This clause specifies the maximum capital which the company will be authorised to raise through, the issue of shares.

6. Association clause:
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares.

Question 3.
Mr. Hemand, a Gulf returnee, intends to start a business in the form of private limited company. But he lias no clear idea about the business opportunities in Kerala and the formalities to be followed in the formation of company. (8)

1. As a commerce student can you suggest a specialised person who would undertake all activities for the formation of a company?
2. Explain the functions of those specialised persons.

Answer:

Promotion:
Promotion is the first stage in the formation of a company. The identification of business opportunities, analysis of its prospects and initiating steps to form a joint stock company is called promotion. The person who undertakes to form a company is called promoter.

Functions of a Promoter:

1. Identification of business opportunity:
The first and foremost activity of a promoter is to identify a business opportunity.

2. Feasibility studies:
After identifying a business opportunity, the promoters undertake some feasibility studies to determine the viability and profitability of the proposed activity.

• Technical feasibility – To determine whether the raw materials or technology is easily available
• Financial feasibility – To determine the total estimated cost of the project
• Economic feasibility – To determine the I profitability of the proposed project

3. Name approval:
After selecting the name of company the promoters submit an application to the Registrar of companies for its approval. The selected name is not the same or identical to an existing company.

4. Fixing up signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company.

5. Appointment of professional:
Promoters appoint merchant bankers, auditors, etc. to assist them in the preparation of necessary documents.

6. Preparation of necessary documents:
The promoters prepare certain legal documents which are to be submitted to the Registrar of companies. They are

• Memorandum of Association
• Articles of Association,
• Consent of proposed Directors
• Agreement, if any, with proposed managing or whole time director
• Statutory declaration

Position of Promoters:
The promoter is neither an agent nor a trustee of the company. The promoter stands in the fiduciary relationship with the company. He should not make any secret profits out of the dealings. Any, such gains are to be disclosed. The promoter must act honestly, in good faith and in the best interest of the company.

The promoter is personally liable for all the preliminary contracts with the other parties before incorporation. The promoter is also liable for any omission of facts or false statements in the prospectus.