Discuss the stages of formation of a company?
Formation of a company is a complex activity involving completion of legal formalities and procedures. The steps required from the time a business idea originates to the time a company is legally ready to commence business are referred to as stages in the formation of a company. There are three distinct stages: Promotion, Incorporation, and Subscription of capital.
Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Persons who conceive the business idea, decide to form a company, take necessary steps for the same, and assume associated risks are called promoters. Certain feasibility studies like technical, financial, and economic are conducted to determine whether the idea can be profitably exploited.
Incorporation is the second stage. Documents like Memorandum of Association and Articles of Association are submitted to the registrar of companies. Upon completion of formalities, the company receives a Certificate of Incorporation.
Capital Subscription is the third stage. This stage is relevant for public companies as they raise funds from the public. A Prospectus is issued and the company must complete the formality of minimum subscription. After fulfilling these requirements, the company receives a Certificate to Commence Business.
There are only two stages in the formation of a private company: promotion and incorporation. A private company is prohibited from raising funds from the public, so it does not need to issue a prospectus or complete the formality of minimum subscription. A public company has to undergo the capital subscription stage to begin operations.
Explanation
The answer covers all three stages of company formation as mentioned in the NCERT textbook. Promotion is explained in detail as the first stage involving promoters and feasibility studies. Incorporation is identified as the second stage involving submission of documents and obtaining the Certificate of Incorporation. Capital Subscription is the third stage involving prospectus and minimum subscription for public companies. The distinction between private and public companies is also highlighted - private companies have only two stages while public companies require all three stages including capital subscription to commence business.
Solution Steps
Step 1: Identify the three stages of company formation from the context - Promotion, Incorporation, and Subscription of capital.
Step 2: Explain Promotion stage with details about promoters and feasibility studies.
Step 3: Explain Incorporation stage with documents and certificate.
Step 4: Explain Capital Subscription stage with prospectus and minimum subscription.
Step 5: Distinguish between private company (2 stages) and public company (3 stages).