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Promotion of a Company, Promoter Functions Class 11 Notes

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Business StudiesCBSE Class 11 · Formation of a Company

Promotion of a Company Class 11: Promoter, Functions, Position and Preliminary Contracts

Updated 17 October 2026 · Fact-checked

A company is formed in three stages: promotion, incorporation and capital subscription (a private company needs only the first two). Promotion begins with the conception of a business opportunity and ends with the organisation set up. A promoter identifies the opportunity, makes feasibility studies, gets the name approved, fixes up the signatories, appoints professionals and prepares the documents. Promoters hold a fiduciary position and are personally liable on preliminary contracts.

Understand Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11)

Stages. (i) Promotion, (ii) incorporation, (iii) capital subscription. A private company cannot invite the public to subscribe, so it has no prospectus and needs only the first two stages.

Promotion. The first stage, beginning with the conception of a business opportunity and followed by analysing its prospects and bringing together people, materials, machinery, managerial ability and finance to set up the organisation.

Promoter. A person named as promoter in a prospectus or in the company's annual return, or one who has control over the company's affairs directly or indirectly, or on whose advice the board is accustomed to act. A person acting only in a professional capacity (a lawyer or accountant who prepares documents) is not a promoter.

Functions of a promoter.
1. Identification of a business opportunity: a new product, service or way of making it available with investment potential.
2. Feasibility studies with experts: technical (can it be done with available raw materials and technology?), financial (can the funds be arranged?), economic (will it be profitable?).
3. Name approval: apply to the Registrar of Companies with three names in order of preference. A name is rejected if it is identical or too similar to an existing company's, is misleading, or violates the Emblems and Names (Prevention of Improper Use) Act, 1950.
4. Fixing up signatories to the Memorandum of Association, usually the first directors, with their written consent to act and to take qualification shares.
5. Appointment of professionals such as bankers and auditors.
6. Preparation of documents: memorandum, articles and consents to be filed with the Registrar.

Position of promoters.

  • Neither agents nor trustees of the company: not agents because the company does not yet exist.
  • A fiduciary position of trust: they may profit only if the profit is disclosed and must not make secret profits. If they do, the company can rescind the contract, recover the money and claim damages.
  • Personally liable for contracts made for the company before incorporation unless the company makes fresh contracts after incorporation.
  • No legal right to claim promotion expenses, though the company may reimburse them, pay a lump sum or commission, or allot shares or debentures.

Preliminary (pre-incorporation) contracts. Contracts made by promoters on behalf of a company not yet formed. They are not binding on the company and it cannot ratify them; after incorporation it may enter into fresh contracts on the same terms. The promoters remain personally liable to the third parties.

Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11): key facts

Stages
  • promotion
  • incorporation
  • capital subscription (public company only)
Private company: first two stages.
Feasibility
  • technical can it be done
  • financial can funds be raised
  • economic will it be profitable
Done with the help of experts.
Promoter functions
  • opportunity
  • feasibility
  • name approval
  • signatories
  • professionals
  • documents
Six functions in this order.
Promoter position
  • not an agent
  • not a trustee
  • fiduciary position
  • no secret profit
  • personally liable on preliminary contracts
No legal right to expenses.

How to answer Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11) questions

To answer a promotion question, place the fact at the right stage and in the right function.

  1. 1Identify whether the fact is about promotion, incorporation or capital subscription.
  2. 2For a person, test whether he acts only in a professional capacity (not a promoter) or controls the formation (promoter).
  3. 3Match each action to one of the six functions: opportunity, feasibility, name, signatories, professionals, documents.
  4. 4For a contract ask when it was made: before incorporation means a preliminary contract, not binding on the company.
  5. 5For secret profit compute the profit as selling price to the company minus the promoter's cost.

Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11) in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

A shop rented before the company exists

Suppose Ira, who is organising a new bakery company, signs a one-year shop lease in her own name before the company is registered. After incorporation the board does not want that shop.

Who must pay the landlord?

Try it first, then show the solutionSolution
  1. The lease is a preliminary contract made before the company existed.
  2. It does not bind the company, so the promoter Ira remains personally liable to the landlord.

Answer: Ira is personally liable; the company may make a fresh contract if it wants the shop.

Memory hook: Before birth, the promoter signs and the promoter pays.

Tricks to remember Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11)

Short memory aids. Say each one aloud once, then use it on a question the same day.

  • O-F-N-S-P-D

    Opportunity, Feasibility, Name, Signatories, Professionals, Documents.

    Use it when: Listing promoter functions.

  • Pre-incorporation means personal

    Before the company exists, the promoter alone is liable.

    Use it when: Preliminary contracts.

  • Disclosed profit only

    A fiduciary may profit only openly.

    Use it when: Position of promoters.

Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11): solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Stage not needed by a private company · 1 mark · MCQBoard level

Which stage of formation is not required for a private company?
(a) Promotion
(b) Incorporation
(c) Capital subscription
(d) Name approval

Try it first, then show the solutionSolution
  1. A private company cannot invite the public to subscribe to its shares.
  2. So it needs no prospectus and no capital subscription stage.

Answer: (c) Capital subscription

Example 2: Who is a promoter · 3 marks · Short answerBoard level

Who is a promoter? Is a lawyer who prepares the company's documents for a fee a promoter? Give reasons. (3 marks)

Try it first, then show the solutionSolution
  1. A promoter conceives the business opportunity and takes the steps to set up the company; he may be named as such in a prospectus or annual return, or have control over its affairs.
  2. A person acting only in a professional capacity, such as a lawyer or accountant, is not a promoter.
  3. So the lawyer is not a promoter.

Answer: No; she acts only in a professional capacity.

Example 3: Secret profit and liability · 4 marks · Short answerHarder board level

Raj, a promoter, signs a contract to buy machinery for a future company for 5,00,000. He also buys land for 20,00,000 and sells it to the company for 26,00,000 without telling the directors. After incorporation the company does not make a fresh contract for the machinery. (4 marks)
(i) Who is liable on the machinery contract? (1)
(ii) Find the secret profit and the company's remedies. (3)

Try it first, then show the solutionSolution
  1. (i) The contract is a preliminary contract, not binding on the company, so Raj is personally liable to the seller.
  2. (ii) Secret profit = 26,00,000 - 20,00,000 = 6,00,000.
  3. The company can rescind the contract, recover the 6,00,000 and claim damages.

Answer: (i) Raj personally. (ii) Secret profit 6,00,000; the company may rescind, recover it and claim damages.

Example 4: Starting a solar business · 5 marks · Case-basedHOTS / competency

Case: Aman wants to form a company for solar water heaters. He finds that the heaters can be made with available components, estimates that 60,00,000 is needed of which he can arrange only 45,00,000, and expects a good profit. He proposes the names Sunrise Heaters Ltd. and Sun Power Ltd., but Sun Power Ltd. is too similar to an existing company's name. (5 marks)
(i) Classify the three statements about feasibility. (3)
(ii) How many names must he submit and in what order? Which name is likely to be rejected and why? (2)

Try it first, then show the solutionSolution
  1. (i) Heaters can be made with available components: technical feasibility. Funds needed 60,00,000 against 45,00,000 arranged, a gap of 15,00,000: financial feasibility is not yet satisfied. Expected good profit: economic feasibility.
  2. (ii) Three names in order of preference. Sun Power Ltd. is likely to be rejected because it is too similar to an existing company's name.

Answer: (i) Technical feasible; financial gap of 15,00,000; economic favourable. (ii) Three names in order of preference; Sun Power Ltd. is too similar.

Example 5: Functions of a promoter · 4 marks · Short answerHarder board level

List the functions of a promoter and explain any three. (4 marks)

Try it first, then show the solutionSolution
  1. Functions: identification of a business opportunity, feasibility studies, name approval, fixing up signatories to the memorandum, appointment of professionals, and preparation of documents.
  2. Feasibility studies: with experts, checking technical, financial and economic feasibility.
  3. Name approval: applying to the Registrar with three names in order of preference.
  4. Fixing up signatories: the first directors, whose written consent to act and to take qualification shares is needed.

Answer: Six functions listed; any three explained as above.

Where students lose marks in Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11)

The slips examiners see most often, and what to write instead.

  • Mistake: Calling a promoter an agent of the company

    Ignoring that the company is not yet born.

    Wrong working

    A promoter is an agent of the company

    Right working

    A promoter is neither an agent nor a trustee; he holds a fiduciary position

    Do this: The company does not exist during promotion.

    Usually costs: 1 mark

  • Mistake: Saying the company is bound by a preliminary contract

    Not separating the promoter from the company.

    Wrong working

    The company must honour the contract signed by the promoter

    Right working

    It is not binding and cannot be ratified; the company may make a fresh contract

    Do this: Promoters stay personally liable.

    Usually costs: 1 to 2 marks

  • Mistake: Submitting one name only

    Submitting one name or no order.

    Wrong working

    Apply with one name

    Right working

    Apply with three names in order of preference

    Do this: Three names, ordered.

    Usually costs: 1 mark

Exam tips

  • State that a private company needs only promotion and incorporation.
  • Write the six promoter functions in the standard order.
  • Show the secret profit as selling price minus cost.
  • Mention that preliminary contracts leave the promoter personally liable.

Practice questions on Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11)

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

  1. Q1 · 1 mark · MCQBoard level

    A promoter is
    (a) an agent of the company
    (b) a trustee of the company
    (c) neither an agent nor a trustee
    (d) an employee of the company

    Hint

    The company does not yet exist.

    Answer

    (c) neither an agent nor a trustee

  2. Q2 · 1 mark · Assertion-reasonHarder board level

    Assertion (A): Promoters are personally liable for contracts made for the company before its incorporation.
    Reason (R): Such contracts do not bind the company unless it makes fresh contracts after incorporation.
    (a) Both A and R are true, and R is the correct explanation of A.
    (b) Both A and R are true, but R is not the correct explanation of A.
    (c) A is true, but R is false.
    (d) A is false, but R is true.

    Hint

    Who can be held to the contract?

    Answer

    (a) Both A and R are true, and R is the correct explanation of A.

  3. Q3 · 3 marks · Short answerHarder board level

    Explain technical, financial and economic feasibility with one example of each for a new bicycle company. (3 marks)

    Hint

    Can it be done, funded, and will it pay?

    Answer

    Technical: whether the bicycles can be made with available raw materials and technology, for example steel frames and tyres are available. Financial: whether the required funds can be arranged, for example the 30,00,000 needed can be raised. Economic: whether the project will be profitable, for example the expected sales cover costs and leave a profit.

  4. Q4 · 4 marks · Short answerHarder board level

    A promoter bought a plot for 14,00,000 and sold it to the new company for 17,50,000 without disclosure. He also claims 2,00,000 as promotion expenses. Find his secret profit, state the company's rights, and say whether he can legally claim the expenses. (4 marks)

    Hint

    Selling price minus cost.

    Answer

    Secret profit = 17,50,000 - 14,00,000 = 3,50,000. The company can rescind the contract, recover 3,50,000 and claim damages. A promoter has no legal right to claim promotion expenses, although the company may choose to reimburse him, pay a lump sum or commission, or allot shares or debentures.

  5. Q5 · 5 marks · Case-basedHOTS / competency

    Case: Meera is the chartered accountant who prepares the memorandum for a proposed company for a fee. Before incorporation, Vikas, who conceived the company, signs a lease of an office with Mr Rao for the future company. After incorporation the board declines to take over the lease. (5 marks)
    (i) Who is the promoter? (1)
    (ii) Is the company bound by the lease? Who is liable to Mr Rao? (2)
    (iii) What can the company do if it still wants the office? (2)

    Hint

    Professional capacity and preliminary contract.

    Answer

    (i) Vikas, who conceived and organised the company; Meera acts only in a professional capacity. (ii) The lease is a preliminary contract, which is not binding on the company; Vikas is personally liable to Mr Rao. (iii) The company can enter into a fresh contract with Mr Rao on the same terms after incorporation.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

  1. 1.Name the three stages of formation.Show answer

    Promotion, incorporation and capital subscription.

  2. 2.How many names are submitted for approval?Show answer

    Three, in order of preference.

  3. 3.Is a promoter an agent?Show answer

    No; he is neither an agent nor a trustee.

  4. 4.What is a secret profit?Show answer

    A profit made by a promoter without disclosure to the company.

  5. 5.Can a company ratify a preliminary contract?Show answer

    No; it may enter into a fresh contract after incorporation.

Promotion of a Company: Promoter, Functions, Position and Preliminary Contracts (CBSE 11): frequently asked questions

What is a fiduciary position?

A position of trust, where the promoter must not misuse his position or make secret profits.

Who signs the Memorandum of Association?

The signatories fixed up by the promoter, usually the first directors.

Is promotion a legal step?

It is the preparatory stage; the company is born only on incorporation.