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Formation of Company

Q. Discuss the importance of Memorandum of Association.

Ans: - It is the foundation of a business. It shows the capacity to contract of a company. It is constitution of a company which relates with the outside world. No company is allowed to temper with its contents without the sanction of central government or court of law. Any act of the company outside the scope of activities as laid down in the memorandum is said to be ultra vires and non binding on it.

 Q. What are the documents which are required for the Incorporation of a company?

Ans: - The documents which are required for the Incorporation of a company:

  • Memorandum of Association
  • Articles of Association
  • Consent of proposed directors
  • Agreement
  • Statutory declaration
  • Document evidence of payment evidence fees

 Q. What is the difference between Certificate of Incorporation and Certificate of Commencement?

Ans: - Certificate of Incorporation is the birth certificate of the company. A company is born on the date mentioned on Certificate of Incorporation it becomes a separate legal entity. It can enter into contract with any party. The certificate of commencement of business is an evidence to start the operations of the business. The company can start its functioning after getting certificate of commencement.

 Q. Explain the term "Minimum Subscription”.

Ans: - According to the sections 69(1) of the Companies Act, no allotment shall be made of any share capital of a company offered to the public for subscription, unless the amount stated in the prospectus as the minimum amount has been subscribed. This amount is known as "Minimum Subscription”. According to SEBI guidelines minimum subscription has been fixed at 90% of the entire issue.

 Q. What is the difference between preliminary contracts and provisional contracts?

Ans: - Preliminary contracts are signed by the third parties before the incorporation of the company .Provisional Contracts are signed after incorporation but before commencement of business.




1.       TIME

These are signed before incorporation.

These are signed after the incorporation but before certificate to commence business.

2.       Sign

These are signed by the promoters.

These are signed by the company.

3.       Binding

These are not binding on the company.

These are binding on the company.

 Q. What is Article of Association?

Ans: - Article of Association contains the rules & regulation for the internal management of the company. These rules and regulations are framed to carry the objects of the company as stated in the memorandum of association. Article of association contains the matter related to issue of shares forfeiture, meetings & maintenance of books. The articles are subordinate to Memorandum and prescribe the regulation for the attainment of objects listed in memorandum.

 Q. What is Memorandum of association? Name the clauses of Memorandum of Association.

Ans: - Memorandum of association is the most important document of a company. It contains the fundamental on which a company is incorporated. The company is bound to act according to the objects and powers contained in its Memorandum of association. It also regulates the relationship of the company with the rest of the world

There are six clauses of Memorandum of Association:

  • Name Clause
  • Registered office Clause
  • Object Clause
  • Liability Clause
  • Capital Clause
  • Association Clause

 Q. What are various types of Promoters?

Ans: Promoters may be classified into the following categories:

1.       Professional Promoters

2.       Entrepreneur Promoter

3.       Occasional Promoter

4.       Financial Promoter

5.       Government Promoter

 Q. What do you mean by promotion? What are the functions of promoters?

Ans: - Promotion refers to the process of establishing new business enterprises .It is grabbing a business opportunity & converting it into a new company. Promotion includes the preliminary work incidental to formation of a company.

Following are the steps of promotion:

i.                     Discovery of Idea

ii.                    finding the promoters to launch company

iii.                   Assembling the preposition

iv.                  preparing important Documents

v.                    Formation or getting the company registered.


A promoter performs all the necessary functions for the incorporation of a company. A promoter has a unique legal position in a company. A promoter is not an agent of the company because company is yet to be incorporated. Even then promoter would be liable for the preliminary contracts .A promoter is not allowed to make any secret gains out of the dealings.

The functions of promoters are:

·         Identification of Business Opportunity- The promoters identify an opportunity which can be taken by a business firm

·         Detailed Investigation-Having identified a business opportunity the promoter’s undertake detailed examination to satisfy them regarding profitability of the proposition

·         Ensuring availability of resources- The promoter arrange the procurement of human, resources material machinery and equipment etc. for the company

·         Preparing preliminary Documents- The promoters take steps to prepare the necessary documents required for obtaining the certificate of incorporation and certificate of commencement of business. The documents include:

·         Memorandum of Association

·         Article of Association

·         Prospectus

·         Entering into preliminary contracts -The promoters enter into contracts with different parties before incorporation of company.

·         Naming a company-The promoters have to select a name of the company in such a manner that it is not identical to the name of other company.

 Q. Define a prospectus and state its main clauses.

Ans: - According to Companies act 1956 "A prospectus may be defined as a document that invites deposits or offers from public for the subscription or purchase of any shares or debenture of a body corporate”. The contents of a prospectus should be such that prospective investors can evaluate a company. Usually the following are contents of prospects

  • Company’s name and the address of its registered office
  • The main object of the company
  • The number and classes of the share and the nature of the interest of the shareholders in the property and profits of the company
  • The details of redeemable preference shares to be issued the date and mode of redemption
  • Qualification shares of the directors

 Any provision in the article regarding the remuneration of the directors, managing directors, managers:

  • The names and addresses of the Director, Managing director or manager
  • The minimum subscription
  • The time of opening and closing of the subscription list
  • The amount payable on the application and allotment of each class of share
  • Rights Privileges and restrictions attached to each class of shares
  • Registrar to the issue
  • Underwriters to the issue
  • Bankers to the issue 
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