Formation Of A Business | Long Questions | Business Studies | 1st Year / Class 11 – Commerce | AHSEC (Assam)

Formation Of A Business | Long Questions | Business Studies | 1st Year / Class 11 – Commerce | AHSEC (Assam)

Q. Briefly explain the problems of International business. (5marks) (2015)

-> The major problems faced are as follow:-

1. Different currencies- Every country has its own currency. So the importer has to make payment in the currency of the exporter’s country.

2. Legal Formalities- International business is subject to a large number of legal formalities and restrictions.

3. Distance Barriers- Due to large distance between countries, it is difficult to establish for traders to understand the terms and conditions of the contract.

4. Language Barrier- Due to different languages in different countries, it becomes difficult for traders to understand the terms and conditions of the contract.

5. Difference in laws- International business transactions are subject to laws, rules and regulations of multiple countries. International business transactions are subject to laws, rules and regulations of multiple countries.

6. Information Gap- It is difficult to obtain accurate information about foreign markets and about the financial position of foreign merchants.

Q. Discuss the steps involved in promotion of a company. (8marks) (2016)

-> There are four stages in the formation of a company:

1) Promotion- Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Following are the steps of promotion:-

a) Discovery of ideas.

b) Finding the promoters to launch the company.

c) Assembling the preposition.

d) Preparing important documents.

e) Formation or getting the company registered.

2) Incorporation- Incorporation of a company means the registration of a company as a corporate body under the provisions of Companies Act’ 2013. A Company comes into existence from the date of incorporation. 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. These may be briefly mentioned again:-

1. The memorandum of Association duly stamped, signed and witnessed. In case of a public company, at least seven members must sign it. A private statement in lieu of the prospectus is submitted, instead of an Article of Association.

2. The Articles of Association duly stamped and witnessed as in case of the Memorandum. However, as stated earlier, a public company may adopt Table A, which is a model set of Articles, given in the Companies Act. In that case a statement in lieu of the prospectus is submitted, instead of Articles of Association.

3. Written consent of the prospectus directors to act as directors and an undertaking to purchase qualification shares.

4. A copy of the Registrar’s letter approving the name of the company.

3) Capital Subscription- A public company can raise the required funds from the public by means of issue of shares and debentures.  The following steps are required for raising funds from the public:-

    a) SEBI Approval.

    b) Filing of Prospectus.

    c) Appointment of Bankers, Brokers, Underwriters.

    d) Minimum Subscription.

    e) Application to Stock Exchange.

    f) Allotment of Shares.

4) Commencement of Business- If the amount of minimum subscription is raised through new issue of shares, a public company applies to the Registrar of Companies for issue of certificate of commencement of business. The following documents are required:

  i) A declaration about meeting minimum subscription requirements.

 ii) A declaration regarding the application and allotment money paid by the directors as same as others.

iii) A declaration that no money is payable to the applicants because of the failure of the company.

iv) A statutory declaration that the above particulars are followed.

 v) The registrar shall examine the documents if these are found satisfactory a certificate of commencement of business will be issued.

Q. What is Memorandum of Association? State the contents of Memorandum of Association.   (2+6=8) (2016/2019)

-> Memorandum of association is the most important document of a company. It contains the fundamentals 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:-

A) Name Clause- This clause contains the name of the company which has already been approved by the Registrar of Companies. Under this clause the corporate name of the company is stated with the name “limited” or “Private Limited” as the last word in this name. This name should not be identical with the name of any registered company. 

B) Registered office clause- This clause contains the name of the state in which the registered office of the company is proposed to be situated.

C) Objects Clause- This clause must contain the main object of the company and the other objects related to it for the completion of the main object. The company is not entitled to carry any of the business which is not mentioned in the object clause.

D) Liability Clause- This clause limits the liability of the members to the amount unpaid on the shares owned by them.

E) Capital Clause- This Clause shows the amount of share capital which the company is going to be registered and its division. 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.

F) 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.

Q. Name the documents necessary for the incorporation of a company. (5marks) (2018)

-> The documents which are required for the incorporation of a company:-

1) Memorandum of Association.

2) Articles of Association.

3) Consent of proposed directors.

4) Agreement if any, with the proposed managing or whole time director.

5) Statutory declaration.

Q. State the factors affecting the choice of source of fund. (8marks) (2018)

-> The factors that affect the choice of source of finance are briefly discussed below:

(i) Cost:

There are two types of cost viz., the cost of procurement of funds and the cost of utilizing the funds. Both these costs should be taken into account while deciding about the source of funds that will be used by an organization.

(ii) Financial strength and stability of operations:

The financial strength of a business is also a key determinant. In the choice of source of funds, the business should be in a sound financial position so as to be able to repay the principal amount and interest on the borrowed amount.

(iii) Form of organization and legal status:

The form of business organization and status influences the choice of a source for raising money. Sole proprietorship and partnership firms can’t raise funds by the issue of shares or debentures, whereas Joint Stock Companies prefer issue shares and debentures to raise funds. A partnership firm, for example, cannot raise money by the issue of equity shares as these can be issued only by a joint-stock company.

(iv) Purpose and time period:

A business should plan according to the time period for which the funds are required. A short-term need, for example, can be met through borrowing funds at a low rate of interest through trade credit, commercial paper, etc. For long term finance, sources such as the issue of shares and debentures are more appropriate.

(v) Risk profile:

Businesses should evaluate each of the sources of finance in terms of the risk involved. Owners’ fund securities (equity, retained earnings) involve no risk whereas borrowed fund securities are risky securities. For example, there is the least risk in equity as the share capital has to be repaid only at the time of winding up and dividends need not be paid if no profits are available. Accordingly, the business should choose the source of finance.

(vi) Tax benefits:

Various sources may also be weighed in terms of their tax benefits. Interest on debentures, loans are deducted from the profits of the company before calculating corporation tax, whereas dividend paid to equity shareholders is not deducted from the total income. For example, while the dividend on preference shares is not tax-deductible, interest paid on debentures and loans is tax-deductible and may, therefore, be preferred by organizations seeking tax advantage.

(vii) Control:

A particular source of funds may affect the control and power of the owners on the management of a firm. Voting rights of equity shareholders enable them to have control over the business, whereas borrowed capital securities do not dilute the control of management over the business. The issue of equity shares may mean the deletion of the control.

Q. Define ‘Articles of Association’. Write the difference between ‘Memorandum of Association’ and ‘Articles of Association’. (8marks) (2019)

-> It is a document containing all the rules and regulations that govern the company. AOA may or may not be registered. The AOA provides the regulations by which those objectives and powers are to be conveyed into impact. Any provision, as opposed to a memorandum of association, is invalid.

The difference between Memorandum of Association and Articles of Association is given here:-

Memorandum of AssociationArticles of Association
It is a document that contains all the fundamental data which are required for the company incorporation.It is a document containing all the rules and regulations that govern the company.
MOA must be registered at the time of incorporation.AOA may or may not be registered.
A MOA contains six clauses.The AOA can be drafted according to the decision of the company.
The MOA contains the objectives and powers of the company.The AOA provides the regulations by which those objectives and powers are to be conveyed into impact.
The MOA is the dominant instrument and controls articles.Any provision, as opposed to a memorandum of association, is invalid.
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