NCERT Solutions for Class 11 Business Studies Chapter 7: Formation of a Company (NCERT 2026–27)
These Class 11 Business Studies Chapter 7 solutions cover Formation of a Company from the NCERT textbook Business Studies, Part II – Corporate Organisation, Finance and Trade, updated for the 2026–27 session. The chapter explains the three stages in setting up a company — Promotion, Incorporation and Capital Subscription — the role and legal position of promoters, the key documents (Memorandum of Association, Articles of Association, consent of directors), and the importance of the Certificate of Incorporation and the certificate to commence business. Below you get exam-ready answers to every Short and Long Answer question, plus key terms, extra practice, MCQs, Assertion–Reason questions and FAQs.
Class: 11Subject: Business StudiesBook: Business Studies Part IIChapter: 7Topic: Formation of a CompanySession: 2026–27
The modern company form of organisation is preferred for medium and large businesses because they need large amounts of capital and face increasing risk. The steps taken from the time a business idea originates to the time a company is legally ready to commence business are called the stages in the formation of a company. These are grouped into three distinct stages: (i) Promotion — conceiving the business idea, conducting feasibility studies and assembling resources; (ii) Incorporation — registering the company with the Registrar of Companies and obtaining the Certificate of Incorporation, the ‘birth certificate’ of the company; and (iii) Capital Subscription — a public company raising funds from the public by issuing a prospectus, after SEBI approval and other formalities. A private company is formed after only the first two stages, while a public company seeking funds from the public also goes through the capital subscription stage and must obtain the certificate to commence business within 180 days of incorporation.
Key Terms & Concepts
Promotion: the first stage in forming a company — conceiving a business idea, examining its feasibility and taking the initiative to give it practical shape.
Promoter (Section 69): a person who undertakes to form a company with reference to a given project, who is named as such in the prospectus or annual return, has control over the company’s affairs, or on whose advice the Board is accustomed to act (a person acting in a purely professional capacity is not a promoter).
Feasibility studies: detailed investigations — technical feasibility, financial feasibility and economic feasibility — conducted to see whether a business opportunity can be profitably exploited.
Memorandum of Association (MoA): the most important document of a company; it defines the company’s objectives and governs its relationship with outsiders. Its clauses are the Name, Registered Office, Objects, Liability and Capital clauses.
Articles of Association (AoA): the rules for the internal management of a company; subsidiary to the MoA, and must not contradict it. A public company may adopt Table F instead of framing its own.
Incorporation: the registration of the company with the Registrar of Companies, which results in the issue of the Certificate of Incorporation.
Certificate of Incorporation: conclusive evidence of the legal existence of the company — its ‘birth certificate’; the company becomes a legal entity with perpetual succession from the date printed on it. The Registrar also allots a CIN (Corporate Identity Number).
Capital Subscription: the stage in which a public company raises funds from the public — SEBI approval, filing the prospectus, appointing bankers/brokers/underwriters, ensuring minimum subscription, applying to a stock exchange, and allotment of shares.
Prospectus: any document inviting the public to subscribe to the securities (shares/debentures) of a company.
Minimum subscription: the minimum amount that must be subscribed before allotment can be made — as per SEBI guidelines, 90% of the issue size.
Preliminary (pre-incorporation) contracts: contracts made by promoters with third parties before incorporation; not legally binding on the company, which cannot ratify them, though promoters remain personally liable.
Qualification shares & DIN: shares directors must buy to have a stake in the company; every intending director must obtain a Director Identification Number (DIN) from the Central Government.
NCERT Exercises — Full Solutions
All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter Exercises section. Answers are original, written in exam-ready style.
Short Answer Questions
1. Name the stages in the formation of a company.
ANSWERThere are three distinct stages in the formation of a company:(i) Promotion — conceiving the business idea, conducting feasibility studies and taking initial steps to set up the company.(ii) Incorporation — registering the company with the Registrar of Companies and obtaining the Certificate of Incorporation.(iii) Capital Subscription — a public company raising the required funds from the public by issuing a prospectus.A private company is formed after the first two stages, since it is prohibited from raising funds from the public.
2. List the documents required for the incorporation of a company.
ANSWERThe main documents required for incorporation are:1. Memorandum of Association, duly stamped, signed and witnessed (signed by at least seven members for a public company and two for a private company).2. Articles of Association, duly stamped and witnessed (a public company may instead adopt Table F).3. Written consent of the proposed directors to act as directors and an undertaking to take up qualification shares.4. The agreement, if any, with the proposed Managing Director, Manager or whole-time director.5. A copy of the Registrar’s letter approving the name of the company.6. A statutory declaration affirming that all legal requirements for registration have been complied with, duly signed.7. A notice of the exact address of the registered office (may be filed within 30 days of incorporation).8. Documentary evidence of payment of the registration fee.
3. What is a prospectus? Is it necessary for every company to file a prospectus?
ANSWERA 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 short, it is an invitation to the public to subscribe to the shares or debentures of a company.No, it is not necessary for every company to file a prospectus. Only a public company that wishes to raise funds from the general public needs to issue a prospectus. A private company is prohibited from inviting the public to subscribe to its securities, so it does not issue a prospectus. Similarly, a public company that arranges its capital privately (from friends and relatives) does not issue a prospectus but files a statement in lieu of prospectus with the Registrar.
4. Briefly explain the term ‘Return of Allotment’.
ANSWERA ‘Return of Allotment’ is a statement giving the names and addresses of shareholders together with the number of shares allotted to each. After the company allots shares, this return — signed by a director or the secretary — must be filed with the Registrar of Companies within 30 days of allotment. It serves as an official record that shares have been allotted and informs the Registrar about the company’s shareholders.
5. At which stage in the formation of a company does it interact with SEBI.
ANSWERA company interacts with SEBI (Securities and Exchange Board of India) at the Capital Subscription stage. When a public company wants to raise funds from the general public, it must make adequate disclosure of all relevant information and obtain prior approval from SEBI — the regulatory authority for the securities market — before going ahead with raising funds. This step protects the interest of investors.
Long Answer Questions
1. What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.
ANSWERMeaning of Promotion: Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking the initiative to form a company so that practical shape can be given to exploiting an available business opportunity. It begins when a person, a group of persons or even a company discovers a potential business idea, analyses its prospects, conducts feasibility studies, and brings together the men, materials, machinery, managerial abilities and financial resources to set the organisation going. Those who take these steps and bear the associated risks are called promoters.Legal position of promoters: The legal position of a promoter is somewhat peculiar, as explained below:(i) Neither agent nor trustee: A promoter is neither an agent nor a trustee of the company, because the company is not yet in existence when the promoter acts. Hence a promoter cannot be an agent of a non-existent principal.(ii) Personal liability for pre-incorporation contracts: Promoters are personally liable for all contracts entered into by them for the company before its incorporation, if such contracts are not ratified by the company later on. (In fact, the company cannot ratify a preliminary contract.)(iii) Fiduciary position: Promoters enjoy a fiduciary (position of trust and confidence) relationship with the company, which they must not misuse. They may make a profit only if it is disclosed; they must not make any secret profits.(iv) Consequences of non-disclosure: In the event of non-disclosure of a secret profit, the company can rescind the contract and recover the purchase price paid to the promoters, and can also claim damages for any loss suffered due to non-disclosure of material information.(v) No legal right to expenses: Promoters are not legally entitled to claim the expenses incurred in promotion. However, the company may choose to reimburse them for pre-incorporation expenses and may remunerate them by a lump-sum amount, a commission, or by allotting shares/debentures or giving them an option to buy securities later.
2. Explain the steps taken by promoters in the promotion of a company.
ANSWERPromoters perform the following important functions/steps in the promotion of a company:(i) Identification of business opportunity: The first activity of a promoter is to identify a business opportunity — producing a new product or service, making a product available through a different channel, or any opportunity with investment potential — and to analyse its prospects.(ii) Feasibility studies: Since not every opportunity is profitable, promoters conduct detailed feasibility studies with the help of specialists (engineers, chartered accountants etc.): technical feasibility (whether the required raw material/technology is available), financial feasibility (whether the required funds can be arranged), and economic feasibility (whether the project is likely to be profitable). Only when the results are positive do promoters proceed.(iii) Name approval: The promoters select a name for the company and apply to the Registrar of Companies for its approval. Three names in order of priority are submitted; a name is undesirable if it is identical/too similar to an existing company, misleading, or violates the Emblem and Names (Prevention of Improper Use) Act, 1950.(iv) Fixing up signatories to the Memorandum of Association: Promoters decide the members who will sign the MoA. Usually these signatories are also the first directors, whose written consent to act as directors and to take up qualification shares is obtained.(v) Appointment of professionals: Professionals such as merchant bankers and auditors are appointed to assist the promoters in preparing the documents required to be filed with the Registrar.(vi) Preparation of necessary documents: The promoters prepare the legal documents to be submitted to the Registrar for getting the company registered — the Memorandum of Association, the Articles of Association and the Consent of Directors.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
ANSWERThe Memorandum of Association (MoA) is the most important document of a company because it defines the objectives of the company. No company can legally undertake activities that are not contained in its Memorandum. 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. It is signed by at least seven persons in the case of a public company and two persons in the case of a private company.The MoA contains the following clauses:(i) The Name Clause: contains the name of the company, which has already been approved by the Registrar of Companies.(ii) The Registered Office Clause: contains the name of the state in which the registered office of the company is to be situated. The exact address is not required at this stage but must be notified to the Registrar within thirty days of incorporation.(iii) The Objects Clause: probably the most important clause; it defines the purpose for which the company is formed. A company cannot undertake an activity beyond the objects stated here. It lists the main objects, and any act essential or incidental to attaining them is deemed valid.(iv) The Liability Clause: limits the liability of members to the amount unpaid on the shares owned by them. For example, if a member holds 1,000 shares of ₹10 each and has paid ₹6 per share, the liability is limited to ₹4 per share, i.e. ₹4,000 only.(v) The Capital Clause: specifies the maximum (authorised) capital the company is permitted to raise through the issue of shares, along with its division into shares of a fixed face value. The company cannot issue capital in excess of this amount.
4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
ANSWERThe differences between the Memorandum of Association and the Articles of Association are summarised below:
Basis of Difference
Memorandum of Association
Articles of Association
Objectives
Defines the objects for which the company is formed.
Are rules of internal management of the company; they indicate how the objectives are to be achieved.
Position
The main document of the company; subordinate only to the Companies Act.
A subsidiary document, subordinate to both the Memorandum of Association and the Companies Act.
Relationship
Defines the relationship of the company with outsiders.
Defines the relationship of the members with the company.
Validity
Acts beyond the Memorandum are invalid and cannot be ratified even by a unanimous vote of members.
Acts beyond the Articles can be ratified by members, provided they do not violate the Memorandum.
Necessity
Every company must file a Memorandum of Association.
Not compulsory for a public limited company to file Articles; it may adopt Table F of the Companies Act, 2013.
5. What is the meaning of ‘Certificate of Incorporation’?
ANSWERThe Certificate of Incorporation is the document issued by the Registrar of Companies once he is satisfied that all formalities for registration have been completed. It signifies the birth of the company — hence it is often called the ‘birth certificate’ of the company.A company is legally born on the date printed on the Certificate of Incorporation; from that date it becomes a legal entity with perpetual succession and is entitled to enter into valid contracts. The certificate is conclusive evidence of the regularity (legal existence) of the company — once it is issued, the company is a legal business entity irrespective of any flaw in its registration. Even if documents were defective (for example, signatures were forged) or the objects were illegal, the birth of the company cannot be questioned; the only remedy is to wind it up. The Registrar also allots a CIN (Corporate Identity Number) to the company.
6. Discuss the stages of formation of a company?
ANSWERThe formation of a company is a complex activity completed in three distinct stages:1. Promotion: This is the first stage. It begins with the discovery of a potential business idea. The promoters analyse its prospects and conduct feasibility studies — technical, financial and economic — to check whether the idea can be profitably exploited. If the results are favourable, the promoters take the further steps of getting the name approved, fixing the signatories to the Memorandum, appointing professionals and preparing the necessary documents (MoA, AoA and consent of directors).2. Incorporation: After completing the promotional formalities, the promoters apply to the Registrar of Companies (of the state where the registered office will be located) for registration, along with the required documents and registration fee. After due scrutiny, the Registrar issues the Certificate of Incorporation, which is conclusive evidence of the company’s legal existence. A private company can commence business immediately after this stage.3. Capital Subscription: A public company that wishes to raise funds from the public must go through this stage. The steps include obtaining SEBI approval, filing a prospectus (or statement in lieu of prospectus) with the Registrar, appointing bankers, brokers and underwriters, ensuring that the minimum subscription (90% of the issue) is received, applying to a stock exchange for listing, allotting shares and refunding/adjusting excess application money, and filing the return of allotment with the Registrar within 30 days. Both public and private companies must obtain the certificate to commence business within 180 days of incorporation before starting operations.
Project/Assignment
Find out from the office of the Registrar of Companies, the actual procedure for formation of companies. Does it match with what you have studied. What are the obstacles which companies face in getting themselves registered.
ANSWERThis is a project to be done by visiting (or contacting) the office of the Registrar of Companies (ROC) or studying the MCA21 portal (mca.gov.in). A model outline:Actual procedure (broadly matches the textbook): today most steps are online — obtain a Digital Signature Certificate (DSC) and Director Identification Number (DIN), apply for name reservation (RUN/SPICe+ Part A), file the integrated SPICe+ form along with the e-MoA (INC-33) and e-AoA (INC-34), submit declarations and proof of registered office, pay the fee, and receive the Certificate of Incorporation with CIN, PAN and TAN. This corresponds to the Promotion and Incorporation stages studied, though much of the paperwork is now digital.Common obstacles companies face: rejection of the proposed name (identical or undesirable names), errors or mismatches in documents, delays in obtaining DSC/DIN, difficulty providing valid registered-office proof, drafting an accurate objects clause, technical glitches on the portal, and the time/cost of professional help. (Record your own findings from the ROC/MCA portal.)
Extra Practice Questions
Short Answer Type Questions
Q1. Who is a promoter?
ANSWERA promoter is a person who undertakes to form a company with reference to a given project, takes the necessary steps to set it going, and bears the associated risks. As per Section 69, a promoter is a person named as such in the prospectus or annual return, or who controls the company’s affairs, or on whose advice the Board is accustomed to act — excluding anyone acting in a purely professional capacity.
Q2. What are qualification shares?
ANSWERQualification shares are a certain number of shares that the Articles require directors to buy so that they have some stake in the proposed company. Directors must pay for these shares before the company obtains the certificate to commence business.
Q3. What is minimum subscription?
ANSWERMinimum subscription is the minimum number/amount of shares for which applications must be received before a company can proceed with allotment. As per SEBI guidelines it is 90% of the size of the issue. If applications fall short of 90%, allotment cannot be made and the application money must be returned to applicants.
Q4. What is a Director Identification Number (DIN)?
ANSWERA DIN is a unique identification number that every individual intending to be appointed as a director of a company must obtain from the Central Government by application with the prescribed fee. The Central Government allots the DIN within one month; no individual may hold more than one DIN.
Q5. What are preliminary contracts?
ANSWERPreliminary (pre-incorporation) contracts are contracts that promoters enter into with third parties on behalf of the company before it comes into existence. They are not legally binding on the company, and the company cannot ratify them; the promoters remain personally liable to the third parties for these contracts.
Long Answer Type Questions
Q1. Explain the steps involved in the capital subscription stage of forming a company.
ANSWERA public company raising funds from the public goes through the following steps: (i) SEBI approval — prior approval is taken from SEBI after adequate disclosure of relevant information, to protect investors. (ii) Filing of prospectus — a copy of the prospectus (or statement in lieu of prospectus) is filed with the Registrar; it must contain no mis-statement and disclose all material information. (iii) Appointment of bankers, brokers and underwriters — bankers receive the application money, brokers help sell the shares, and underwriters undertake to buy unsubscribed shares for a commission (their appointment is not compulsory). (iv) Minimum subscription — the company must receive applications for at least 90% of the issue before allotment. (v) Application to stock exchange — an application is made to at least one stock exchange for permission to deal in the shares; if not granted within ten weeks, the allotment becomes void. (vi) Allotment of shares — shares are allotted, allotment letters issued, excess money refunded or adjusted, and the return of allotment filed with the Registrar within 30 days. Application money must remain in a separate bank account until allotment.
Q2. ‘The Certificate of Incorporation is conclusive evidence of the legal existence of a company.’ Explain this statement with examples.
ANSWERA company is legally born on the date printed on the Certificate of Incorporation and becomes a legal entity with perpetual succession able to enter into valid contracts. The certificate is conclusive evidence of the regularity of the incorporation — once issued, the company is a legal business entity irrespective of any flaw in its registration. This protects parties who deal with the company. Example 1: where documents for registration were filed on 6th January but the certificate showed the date as 8th January (in the textbook caselet the certificate bore an earlier date), the company was held to be in existence and contracts signed on the certificate’s date were valid. Example 2: even where a person had forged the signatures of others on the Memorandum, the incorporation was still held valid. Thus, whatever the deficiency in the formalities, the Certificate of Incorporation once issued cannot be questioned; even if a company is registered with illegal objects, its birth stands and the only remedy is to wind it up. Because the certificate is so crucial, the Registrar must scrutinise documents carefully before issuing it.
Q3. Describe the documents required to be submitted to the Registrar of Companies for incorporation, explaining the role of each.
ANSWERThe following documents must be submitted to the Registrar: (A) Memorandum of Association — the most important document; it defines the company’s objectives and no activity beyond it is valid; signed by at least seven persons (public) or two (private). (B) Articles of Association — the rules of internal management, subsidiary to the MoA; a public company may instead adopt Table F. (C) Consent of proposed directors — written consent of each person named as director, agreeing to act and to buy and pay for qualification shares. (D) Agreement — any agreement the company proposes to enter into for appointing a Managing Director, whole-time director or Manager. (E) Statutory declaration — a declaration that all legal requirements for registration have been complied with, signed by an advocate, CA, Cost Accountant or Company Secretary engaged in the formation, and by a director/manager/secretary named in the articles. (F) Receipt of payment of fee — proof of the registration fee, the amount of which depends on the authorised share capital. A notice of the exact registered-office address is also filed (within 30 days if not given at incorporation). On scrutiny, the Registrar issues the Certificate of Incorporation.
MCQs & Assertion–Reason
1. How many stages are there in the formation of a company?
(a) One (b) Two (c) Three (d) Four
2. The first stage in the formation of a company is:
(a) Incorporation (b) Promotion (c) Capital Subscription (d) Commencement of business
3. Which document is known as the ‘birth certificate’ of a company?
(a) Memorandum of Association (b) Articles of Association (c) Prospectus (d) Certificate of Incorporation
4. The most important clause of the Memorandum of Association is the:
(a) Name clause (b) Objects clause (c) Liability clause (d) Capital clause
5. The Memorandum of Association of a public company must be signed by at least:
(a) Two persons (b) Five persons (c) Seven persons (d) Ten persons
6. As per SEBI guidelines, the minimum subscription is:
(a) 75% of the issue (b) 80% of the issue (c) 90% of the issue (d) 100% of the issue
7. The document that contains the rules for the internal management of a company is the:
(a) Memorandum of Association (b) Articles of Association (c) Prospectus (d) Statutory declaration
8. A company interacts with SEBI at which stage of formation?
(a) Promotion (b) Incorporation (c) Capital Subscription (d) Winding up
9. Within how many days of incorporation must a company obtain the certificate to commence business?
(a) 30 days (b) 90 days (c) 180 days (d) 365 days
10. With respect to a company before its incorporation, a promoter is:
(a) An agent of the company (b) A trustee of the company (c) Neither an agent nor a trustee (d) A director of the company
For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.
A-R 1. Assertion: A promoter is not an agent of the company before its incorporation.
Reason: A company is not in existence at that time, so a promoter cannot be an agent of a non-existent principal.
A-R 2. Assertion: A company cannot undertake an activity that is not contained in its Memorandum of Association.
Reason: The Memorandum of Association defines the objects for which the company is formed.
A-R 3. Assertion: A private company need not issue a prospectus.
Reason: A private company is prohibited from raising funds from the general public.
A-R 4. Assertion: The Certificate of Incorporation can be challenged if there was a flaw in registration.
Reason: The Certificate of Incorporation is conclusive evidence of the legal existence of the company.
A-R 5. Assertion: Promoters must not make secret profits from the company.
Reason: Promoters enjoy a fiduciary position with the company which they must not misuse.
Answer key: 1-(A), 2-(A), 3-(A), 4-(D), 5-(A).
Exam Tips & Common Mistakes
How to score full marks in this chapter
Remember the three stages (Promotion → Incorporation → Capital Subscription) and which applies to private vs public companies. For long answers, present the functions of promoters and the steps of capital subscription as numbered points with brief explanations. Learn the five clauses of the MoA (Name, Registered Office, Objects, Liability, Capital) and the MoA vs AoA table — both are frequent exam questions. Quote key figures: minimum subscription 90%, MoA signatories 7 (public)/2 (private), return of allotment within 30 days, certificate to commence business within 180 days. Always stress that the Certificate of Incorporation is conclusive evidence of the company’s existence.
Common mistakes to avoid
Confusing the Memorandum of Association (relationship with outsiders, defines objects) with the Articles of Association (internal management).
Saying every company must issue a prospectus — only a public company raising funds from the public does.
Calling a promoter an agent or trustee of the company — a promoter is neither.
Forgetting that a company cannot ratify preliminary contracts, even though it may sign fresh ones.
Mixing up the Certificate of Incorporation (birth of the company) with the certificate to commence business.
Writing the wrong number of MoA signatories or stating the minimum subscription as anything other than 90%.
Frequently Asked Questions
What are the three stages in the formation of a company?
The three stages are Promotion (conceiving the idea and conducting feasibility studies), Incorporation (registering the company and obtaining the Certificate of Incorporation) and Capital Subscription (a public company raising funds from the public by issuing a prospectus). A private company is formed after the first two stages.
What is the difference between the Memorandum and Articles of Association?
The Memorandum of Association defines the company’s objectives and governs its relationship with outsiders; it is the main document, subordinate only to the Companies Act. The Articles of Association are the rules of internal management, subsidiary to the MoA, and govern the relationship between the members and the company.
Why is the Certificate of Incorporation important?
The Certificate of Incorporation is the ‘birth certificate’ of a company. From the date printed on it, the company becomes a legal entity with perpetual succession that can enter into valid contracts. It is conclusive evidence of the company’s legal existence and cannot be questioned even if there was a flaw in registration.
