Business StudiesISC Class 11 · Joint Stock Company

Formation of a Company: Promotion to Prospectus (ISC Class 11 Business Studies)

Updated 17 October 2026 · Draft, not yet fact-checked

A company is formed in four stages: promotion (the idea is developed and funds and people are arranged), incorporation (registration with the Registrar of Companies with the Memorandum and Articles of Association, giving a certificate of incorporation), capital subscription (for a public company, raising capital from the public through a prospectus or a statement in lieu of prospectus, with minimum subscription and allotment), and commencement of business (meeting the conditions to start business).

Follow the four stages down: MoA and AoA lead to the certificate at incorporation, and only a public company issues a prospectus.

Illustration drawn for QuestionBuddy.

Understand Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus

Stage 1: Promotion. The idea to form a company is conceived and steps are taken to bring it into existence. A *promoter* is a person who takes the initiative: finds the business idea, studies feasibility, decides the name, arranges the Memorandum and Articles, finds directors, auditors and bankers, and arranges the capital. Promoters are not agents or trustees of the company, but they must disclose any secret profit.

Stage 2: Incorporation (registration). Documents are filed with the Registrar of Companies: the Memorandum of Association, Articles of Association, consent and declaration of directors, address of registered office, and fees. If satisfied, the Registrar issues a certificate of incorporation, from which the company is a separate legal entity.

Memorandum of Association (MoA). The company's charter, defining its relationship with the outside world. Clauses: *name* clause, *registered office* clause (state), *objects* clause, *liability* clause (limited), *capital* clause (authorised capital and share division), and *association* clause (subscribers). Acts outside the objects are invalid.

Articles of Association (AoA). The internal rules for management of affairs: rights of shareholders, powers of directors, meetings, voting, dividends, transfer of shares. Subordinate to the MoA and the Act.

Stage 3: Commencement of business. A *private* company can start business after incorporation, subject to the declaration required by law. A *public* company must meet capital and other conditions as the law requires, and raises funds from the public by issuing a prospectus.

Prospectus. Any document inviting the public to subscribe to shares or debentures; it gives details of the company, promoters, capital, objects, risks and use of funds. Statement in lieu of prospectus: filed when a public company does not invite the public (it gets shares privately).

Difference between MoA and AoA. MoA: external, objects; AoA: internal, management rules.

Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus: key facts

Stages: Promotion
Incorporation
Capital subscription
Commencement of business; Order of formation.
MoA clauses: Name
Registered office
Objects
Liability
Capital
Association; Six clauses.
Share capital: Capital raised = Number of shares x Issue price | Face value x number = nominal capital; Used in problems.

How to answer Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus questions

Describe stages in order and match each document to its purpose.

1Name the stage and what happens in it.
2Identify the document: MoA, AoA, prospectus, certificate.
3State its purpose and who it serves.
4Close with the result: legal entity or ability to raise funds.

Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus 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.

Prospectus

Suppose a newly formed public company wants to raise Rs 5 crore by inviting the public to buy shares at Rs 10 each.

What document must it issue and how many shares must it sell at least?

Try it first, then show the solutionSolution

A prospectus must be issued inviting the public.
Shares offered = 5,00,00,000 / 10 = 50,00,000 shares.
Minimum subscription = 90% × 50,00,000 = 45,00,000 shares (Rs 4.5 crore); if less is sold, application money must be refunded.

Answer: A prospectus; offer 50,00,000 shares and sell at least 45,00,000 (Rs 4.5 crore), otherwise refund the application money.

Memory hook: Invite the public: prospectus.

Tricks to remember Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus

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

P-I-C-C
Promotion, Incorporation, Capital subscription, Commencement.
Use it when: Stages.
MoA = outside, AoA = inside
Memorandum faces outsiders; Articles run the house.
Use it when: Documents.
No prospectus, no public
Public cannot be invited without it.
Use it when: Prospectus.

Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus: solved examples

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

Example 1: Documents · 1 mark · MCQBoard level

The internal rules for the management of a company are in its:
(a) Memorandum of Association (b) Articles of Association (c) Prospectus (d) Certificate of incorporation

Try it first, then show the solutionSolution

AoA regulates internal affairs.

Answer: (b) Articles of Association

Example 2: Promoter · 4 marks · Short answerBoard level

Who is a promoter? State any three functions. (4 marks)

Try it first, then show the solutionSolution

A person who takes the initiative to form a company.
Functions: idea and feasibility; preparation of documents; arranging directors and capital.

Answer: A promoter takes the steps to form the company. Functions: finding and studying the business idea, preparing the MoA and AoA, and arranging directors, bankers and capital.

Example 3: MoA clauses · 6 marks · Long answerHarder board level

Explain the six clauses of the Memorandum of Association. (6 marks)

Try it first, then show the solutionSolution

Name clause.
Registered office clause (state).
Objects clause.
Liability clause.
Capital clause.
Association clause.

Answer: Name; registered office state; objects; limited liability of members; authorised capital divided into shares; association clause stating the subscribers' wish to form the company.

Example 4: Difference · 5 marks · Long answerHarder board level

The objects clause of a company's MoA permits it to make textiles only, but its AoA says the directors may start a hotel business. Decide which prevails, state what happens to a hotel contract, and explain the order of authority among the Act, MoA and AoA. (5 marks)

Try it first, then show the solutionSolution

The MoA is superior to the AoA; the AoA cannot go beyond the MoA.
A hotel contract would be outside the objects, so it is invalid (ultra vires) and the company is not bound.
To enter the hotel business the company must first alter the objects clause by following the Act.
Order of authority: the Companies Act, then the MoA, then the AoA.

Answer: The MoA prevails; the hotel contract is ultra vires and invalid unless the objects are altered by the lawful procedure.

Example 5: Capital raising · 5 marks · Long answerHOTS / competency

A public company issues 6,00,000 shares of Rs 10 each at a premium of Rs 4 per share, payable as Rs 5 on application and the balance on allotment. Find the total amount raised, the application money and the allotment money. (5 marks)

Try it first, then show the solutionSolution

Issue price = 10 + 4 = Rs 14.
Total = 6,00,000 x 14 = Rs 84,00,000.
Application = 6,00,000 x 5 = Rs 30,00,000.
Allotment = 84,00,000 - 30,00,000 = Rs 54,00,000 (including the premium).

Answer: Total Rs 84,00,000; application Rs 30,00,000; allotment Rs 54,00,000.

Where students lose marks in Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus

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

Mistake: Swapping MoA and AoA
Similar names.
Wrong working
MoA contains internal management rules
Right working
MoA defines objects; AoA contains internal rules
Do this: Outside vs inside.
Usually costs: 2 marks.
Mistake: Prospectus for private companies
Forgetting restriction.
Wrong working
Private company issues a prospectus
Right working
Private cannot invite the public
Do this: Prospectus is for public companies.
Usually costs: 1 mark.
Mistake: Dating legal existence from commencement
Confusion.
Wrong working
Entity from commencement
Right working
Entity from incorporation
Do this: Certificate of incorporation.
Usually costs: 1-2 marks.

Exam tips

List the stages in order and add the document at each stage.
Use the six-clause list for MoA.
Mention the certificate of incorporation as conclusive evidence of existence.

Practice questions on Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus

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

Q1 · 1 mark · MCQBoard level
A company becomes a legal entity from the date of:
(a) promotion (b) incorporation (c) first meeting (d) first sale
Hint
Certificate.
Answer
(b) incorporation
Q2 · 3 marks · Short answerBoard level
What is a prospectus and when is a statement in lieu of prospectus filed? (3 marks)
Hint
Invitation to the public.
Answer
A prospectus is a document inviting the public to subscribe to shares or debentures. A statement in lieu of prospectus is filed by a public company that does not invite the public to subscribe.
Q3 · 6 marks · Long answerHarder board level
Explain the four stages of formation of a company in brief with the main document or event of each. (6 marks)
Hint
Four stages.
Answer
Promotion: idea and planning by promoters; Incorporation: filing MoA and AoA and getting the certificate of incorporation; Capital subscription: a public company issues a prospectus (or files a statement in lieu of prospectus), receives minimum subscription and allots shares; Commencement of business: the conditions are met and the company starts business.
Q4 · 5 marks · Long answerHarder board level
A company wants to raise Rs 12,00,000. Shares have face value Rs 10 and are issued at Rs 12. Find the number of shares to issue, the premium collected, and if applicants applied for 1,50,000 shares, the oversubscription ratio. (5 marks)
Hint
Shares = 12,00,000 / 12.
Answer
Shares = 1,00,000. Premium = 1,00,000 x 2 = Rs 2,00,000. Applications 1,50,000 shares vs 1,00,000 offered: oversubscribed 1.5 times.
Q5 · 3 marks · Short answerHOTS / competency
The promoters of a company secretly sold their own land to the company at a high price without disclosure. Evaluate this action, using the idea of the promoter's duty to disclose. (3 marks)
Hint
Secret profit.
Answer
Promoters must disclose any profit made from dealing with the company. A secret profit is a breach of duty; the company or shareholders can seek recovery of it.

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.Stages of formation?Show answer
Promotion, incorporation, capital subscription, commencement of business.
2.Document that gives legal existence?Show answer
Certificate of incorporation.
3.MoA contains?Show answer
Objects and the six clauses.
4.AoA contains?Show answer
Internal management rules.
5.Prospectus is for?Show answer
Inviting the public.

Formation of a Company: Promotion, Incorporation, MoA, AoA and Prospectus: frequently asked questions

Who files documents?

The promoters or subscribers.

Can the MoA be changed?

Only by following the Act.

Is a promoter a director?

May be, but not necessarily.

Do private companies have a prospectus?

No.