Important Questions for CBSE Class 11 Business Studies Chapter 7 – Formation of a Company

Formation of a Company Class 11 Important Questions for Business Studies Chapter 7

Business study  introduced in Class 11 and continues through Class 12 as a Commerce subject. If students study this subject, they will become knowledgeable in the field of management and other business disciplines. Formation of a company is the seventh chapter of the Class 11  syllabus, and it teaches what all goes into the formation of a company. This chapter covers concepts such as important stages in the formation of a company, steps involved in each stage of company formation, documents to be submitted to the registrar of companies, the need for a certificate of incorporation and certificate to commence business, and so on. This chapter carries significant weightage in the Business Studies syllabus. Students can easily access Chapter 7 of  Class 11 Business Studies Important Questions and more from the Extramarks website.

For a theoretical subject such as Business Studies, it becomes important for the students to review all the chapters thoroughly. Keeping that in mind, we have created them from different sources such as the NCERT Textbook, NCERT Exemplar, other reference books, past year exam papers, and so on. Our Business Studies faculty experts have curated step-by-step solutions to help students better comprehend the topics after much research. Students may register with Extramarks and get access to Business Studies Class 11 Chapter 7 Important Questions.

Along with Class 11 Business Studies Chapter 7 Important Questions, there is so much that the Extramarks website has to offer. Students can easily find materials like NCERT Solutions, CBSE revision notes, past year question papers, NCERT books, and more on the Extramarks website.

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CBSE Class 11 Business Studies Important Questions
Sr No. Chapters Chapters Name
1 Chapter 1 Business, Trade and Commerce
2 Chapter 2 Forms of Business Organisation
3 Chapter 3 Private, Public and Global Enterprises
4 Chapter 4 Business Services
5 Chapter 5 Emerging Modes of Business
6 Chapter 6 Social Responsibilities of Business and Business Ethics
7 Chapter 7 Formation of a Company
8 Chapter 8 Sources of Business Finance
9 Chapter 9 Small Business
10 Chapter 10 Internal Trade
11 Chapter 11 International Business

Business Studies Class 11 Chapter 7 Questions and Answers

A team of Extramarks Business Studies experts has developed an entire list of Important Questions in Class 11 Business Studies Chapter 7, taking references from numerous primary and secondary sources. These questions include a wide variety of topics, such as essential stages in the formation of a company, steps involved in each stage of company formation, documents to be submitted to the registrar of companies, the need for a certificate of incorporation and certificate to commence business and so on. These questions and their solutions help students better comprehend the formation of a company.

Given below are a few Important Questions from Class 11 Business Studies Chapter 7, along with their solutions:

Q1. At which stage does a company’s formation interact with SEBI?

Answer. A corporation must communicate with the Securities and Exchange Board of India (SEBI) during the capital subscription stage. The contact is necessary since the company is currently trying to obtain funds from the public by issuing shares and debentures. Before issuing shares or moving forward with capital subscription, SEBI clearance is required since the company must follow guidelines established by SEBI for issuing such shares.

Q2. Experts who help promoters in the promotion of a company are also called promoters. True or False?

Answer. False. A promoter has the idea for starting a business and takes the necessary steps to make it materialise. Conversely, experts who help promoters advertise a company are not referred to as promoters. They are only there to support the sponsors.

Q3. The following categories of promoters exist:

  • Entrepreneur Promoter: An entrepreneur is a person who comes up with the concept for a new company and makes all the effort to get it off the ground. He still runs and oversees the company he has promoted. Entrepreneurs support small businesses like sole proprietorships and partnerships. He takes on the risk and is proactive in promoting the business.
  • Professional Promoter: These promoters are experts in promoting start-up businesses. Experts frequently endorse large-scale businesses. These professionals have the abilities and expertise required for advancement. They present a company as a continuing concern before offering to sell it, transfer control of the company’s management, or both.
  • Financial Promoters: These promoters list new firms when the securities market is advantageous. Due to their background in the financial industry, banks and other financial institutions also carry out the task of promotion. Investment bankers become active in the promotion sector when the securities market can accommodate the fresh issuance of equity shares. In India, industrial concerns are fostered through the Industrial Development Bank of India and other financial organisations.
  • Occasional Promoters: Instead of doing so frequently, some promoters only do so occasionally. After marketing a company, they return to their primary employment because promotion is not their primary responsibility. For instance, a technical specialist or engineer may encourage a firm to utilise a patent or idea he has developed financially. Even after the firm has been incorporated, they continue to oversee its affairs.
  • Government: In modern times, the government has taken the lead in the promotion. For instance, the Indian government has built several fundamental, strategic, and defence industries to hasten the nation’s economic growth. Large-scale businesses in industries including iron and steel, coal, shipping, fertilisers, electronics, engineering, insurance, tourism, and hotels have benefited from its promotion.

Q4. Name the stages in the formation of a Company.

Answer.  Major steps in the formation of a company are as follows:

  • Promotion: This phase focuses on developing and implementing ideas as a business.
  • Incorporation: Application for and receipt of a certificate of incorporation is the first step in this process, doing business as a legal person in the eyes of the law.
  • Capital subscription: At this stage, money is raised by selling bonds and stocks to the general public.
  • Beginning of business: At this point, all procedures are finished, and the business is officially launched.

Q5. Discuss the stages in the formation of a company?

Answer. A company is formed when it is registered or incorporated with the state’s registrar of corporations in the state where its registered office will be situated.

The stages of a company’s formation are as follows:


  • Promotion of a company refers to performing all required actions to establish a company in accordance with the Act’s provisions. Someone first comes up with the concept for the possible business.
  • Promoters are the people who carry out the duty of promotion. An individual, a partner, a business, an association, or a syndicate can all be promoters.
  • He performs the following role:
  • Recognising a business opportunity
  • Possibility analysis
  • Approval of a name
  • Putting together the Signatories of the Memorandum of Association.
  • The appointment of experts
  • Preparing the required paperwork


  • The promoters choose whether to incorporate a public company or a private corporation based on the company’s objectives, the scope of operations, required money, etc.
  • The Registrar of Companies where the firm’s business office will be located shall receive the application for registration of a company.
  • The start of a company’s legal existence is the date listed on the Certificate of Incorporation.
  • It acquires legal status and eternal succession on that day. It obtains the capacity to sign contracts that are enforceable by law.
  • The indisputable evidence of a company’s legal establishment is the Certificate of Incorporation.

Beginning of a Business

  • After receiving the Certificate of Incorporation from the Registrar of Companies, a public or private company without share capital may start operating immediately.
  • If a business wants to raise money from the public, SEBI approval is necessary. Businesses must send a copy of the prospectus or a statement to the Registrar of Companies. There is employment of bankers, brokers, underwriters, and other experts.
  • Businesses must contact the stock exchange if they want to deal in shares or debentures.
  • The business must also submit documentation to the registrar proving the location of its registered office.

Q6. ‘Statement instead of Prospectus’ What does it mean?

Answer. Statement instead of Prospectus: Public companies with a share capital may occasionally elect not to solicit funding from the public because they may be confident they can secure the funding privately. In this situation, it will need to submit a “Statement instead of a Prospectus” to the registrar. According to the “Schedule III” information of the Companies Act, a “Statement in place of a Prospectus” is written. It provides details that are comparable to those in a prospectus.

Businesses must submit a copy of it to the registrar at least three days before the allocation of the shares, and each of the directors must duly sign this copy. A private corporation must, however, submit either a “Statement in the Lie of Prospectus” or a “Prospectus” to the registrar. Each director’s date and signature must be on the “Statement instead of Prospectus.” There shouldn’t be any false or deceptive statements in it. Untrue information in a statement instead of a prospectus is subject to the provisions addressing the penalty for releasing a false prospectus. A private corporation is not allowed to solicit money. Hence it is not necessary to submit a prospectus or a statement instead of a prospectus.

Q7. List the documents required for the incorporation of a company.

Answer. The following documents are required for incorporation registration:

  • Memorandum of Association: The properly stamped, signed, and witnessed Memorandum of Association. A minimum of seven members must sign it in the event of a public business. However, two members’ signatures are necessary for a private business.
  • Articles of Association: The Articles of Association should be officially stamped and attested, just as the Memorandum. This document, which outlines the potential methods for achieving the goals of the MOA, is equally crucial for the organisation.
  • Director’s Approval: Written consent of the prospective directors to serve as directors and an agreement to acquire the Qualifying Shares. Also required is the consent of the proposed Managing Director, Manager, or whole-time director.
  • List of Directors: The people who have consented to serve as directors are included, along with their names, residences, and other pertinent information.
  • Registrar’s Letter: A duplicate of the registrar’s letter authorising the business’s name.
  • Statutory Declaration: A statutory declaration confirming the fulfilment of all registration criteria. It must be correctly signed.
  • Documentary Evidence: Proof in writing that the registration costs have been paid.
  • Prospectus: Prospectus is also required if a corporation plans to raise money from the public.

Q8. What is meant by the term ‘Promotion’. Discuss the legal position of promoters concerning a company promoted by them.

Answer. Promotion is the first stage in a company’s establishment. Taking the required actions to incorporate a business by the provisions of the Company Act, 2013 is referred to as “promotion of the company.” Promoters are the people who carry out the duty of promotion. An individual, a partner, a business, an association, or a syndicate can all be promoters.

Regarding a business they have promoted, promoters are in the following legal positions:

  • The people forming the company, or the “promoters,” are neither its trustees nor its agents. Promoters are the ones who have the first company concept.
  • If any profits were gained through the contracts he signed on behalf of the business, he represents; they must be disclosed.
  • They oversee creating the necessary paperwork for a company’s establishment.
  • Promoters are eligible for nomination as the company’s first directors.
  • They aren’t permitted to get an unreported profit while marketing a business.
  • In exchange for their services, a company may decide to grant them shares.

Q9. Describe how a company is formed.

Answer. A company must go through several legal formalities and processes throughout its complex formation. Three steps make up the creation process for a company: promotion, incorporation, and subscription. In contrast to limited public corporations, private businesses cannot solicit money from the public, and they are not required to publish a prospectus to fulfil the formalities.

Q10. What is a prospectus? Is it necessary for every company to file a prospectus?

Answer. A prospectus is a company’s invitation to the public outlining the possibility of subscribing to or purchasing shares and debentures issued by the company. Initial Public Offering, or IPO, is a method of acquiring money from the public. However, as private corporations are prohibited from issuing IPOs, there is no need to file a prospectus in the case of a private company. If raising cash from the public is the goal, a prospectus can be necessary. Private businesses are exempt from submitting prospectuses.

Q11. What is a “Memorandum of Association”? Briefly explain its clauses.

Answer. A company’s primary document, the Memorandum of Association, outlines the organisation’s goals. The Memorandum is a document that outlines the company’s bylaws and any rights or privileges it may have. The following clauses are among those included in the Memorandum of Association:

The MOA’s clauses are:

  • Name Clause: The name of the business that has already received approval from the Registrar of Companies is included in this section.
  • Registered Office Clause: The intended location of the company’s registered office is specified, along with the state. Although it is not necessary to submit a precise address, the registrar must receive it within thirty days of the company’s creation.
  • Object’s Clause: This details the motivation for the company’s founding. A company is not allowed by law to do any activity unrelated to the goals outlined in this section.
  • Liability Clause: By this provision, the members’ liability is limited to the outstanding debt on the shares they possess.
  • Capital Clause: The maximum amount of capital that the company may raise via the issuing of shares is determined by this provision. The permissible share capital of the new company is specified, as well as how many shares would have a set face value.
  • Subscription Clause: The MOA’s sixth and final clause, the subscription provision, requires the subscribers to express their desire to incorporate the business and accept the number of shares specified in the Memorandum.

Q12. What is the meaning of “Certification of Incorporation”?

Answer. A company becomes a legal entity on the date printed on the Certificate of Incorporation. After the incorporation certificate is final, a firm can enter legal contracts. It serves as proof of a company’s legitimacy and the accuracy of its incorporation.

After receiving a certificate of incorporation, a business acquires legal status. A private company can begin operations immediately and obtain money from friends, family, or other arrangements. Still, a public corporation must go through two other processes to finalize its establishment.

The above-stated section of Important Questions Class 11 Business Studies Chapter 7 is a list of Important Questions which covers the entire chapter.

Benefits of Solving Business Studies Class 11 Chapter 7 Important Questions

As mentioned earlier, a theoretical subject like Business Studies demands continuous reading and revision. The basics of Class 11 prepare a student for Class 12 board examinations. Class 11 students are advised to go through Extramarks Important Questions Class 11 Business Studies Chapter 7.  The list of important questions can make this subject easy to understand as the answers are written in an easy-to-understand manner and give detailed information to the students.  Some of the benefits of solving class 11 business studies chapter 7 important questions are as follows:

  • Important Questions Class 11 Business Studies Chapter 7 covers the concepts of the entire chapter- Formation of a Company.
  • Students can completely rely upon these important questions as they are prepared to adhere to the guidelines laid by CBSE.
  • These important questions are prepared by following the CBSE exam pattern. Going through these will help students prepare for exams too because most of the questions from NCERT books are picked by the CBSE board.

Extramarks provides comprehensive learning solutions for students from Class 1 to Class 12. We have abundant resources available on our website along with essential questions and solutions. Students can click on the links given below to access some of these resources:

Q.1 What is the minimum period and time that can be extended upto in case of issue of Inter-corporate deposits

A. 7 days, 1 year

B. 10 days, 2 years

C. 12 days , 5 years

D. 1 months, 6 years


7 days, 1 year

Q.2 Based on ownership into how many classes can funds be classified

A. Two classes

B. Three classes

C. Four classes

D. Five classes


Two classes

Q.3 Nitu Wears a garment manufacturing company has received large orders due to fast approaching Diwali festival. The company is in need of funds for increased operations. Advice the company, on the various sources of finance it can tap to raise the required funds.


Nitu Wears needs finance for short duration to meet the pending orders, hence it should tap the short term sources of finance for this purpose.

The various short term sources of finance are described as under:

i. Trade Credit Refers to the credit extended by one trader to another for the purchase of goods and services. It helps a trader to purchase goods without making immediate payment. It is generally granted for a period ranging between 3 to 6 months. This form of finance is a readily available. It does not create any charge on the assets of the purchasing company.

ii.Banks Banks extend short term loans to firms in different ways- cash credits, overdrafts, term loans, discounting of bills. Repayment of loans may be in lump sum or in installments. The borrower needs to provide some security to avail such loans. This source of fund can be available timely and is flexible, funds can be borrowed as and when needed in the required amount.

iii.Commercial Paper (CP) This is an unsecured promissory note issued by a firm to raise funds for a period varying between 9 days to 1 year. Large amounts can be raised. It is a cheaper source of finance than bank credit. Maturing CP can be repaid by purchasing new CP, thus it is continuous source of funds. It does not create any charge on the assets of a company.

iv.Factoring This involves services – discounting of bills of clients and providing information on credit worthiness of prospective clients. In discounting of bills, the bills of exchange received from sale of goods or services are encashed before maturity from a bank or a factor, at a certain discount. The factor may or may not bear bad debts of the client. It is a cheaper source of finance than bank credit and does not create any charge on borrower’s assets.

Q.4 Explain the different types of Debentures issues allowed in India. Is there any limitation of this source of fund


The different types of debentures allowed in India are:

i. Secured and Unsecured: Secured debentures are such which create a charge on the assets of the company, thereby mortgaging the assets of the company.

Unsecured debentures on the other hand do not carry any charge or security on the assets.

ii. Registered and Bearer: Registered debentures are those which are recorded in the register of debenture holders maintained by the company. These can be transferred only through a regular instrument of transfer.

Debentures which are transferable by mere delivery are called bearer debentures.

iii. Convertible and Non-Convertible: Convertible debentures are those debentures that can be converted into equity shares after the expiry of a specified period.

Non-convertible debentures are those which cannot be converted into equity shares.

iv. First and Second: Debentures that are repaid before other debentures are repaid are known as first debentures.

Second debentures are those which are paid after the first debentures have been paid back.

Debentures have certain demerits, which are as follows:

i. They are a burden on the earnings of the issuing company due to the fixed interest required to be paid on them.

ii. Company has to make provision for repayment of debentures on the specified date, even in case of inadequate profits.

iii. The borrowing capacity of the company reduces after a debenture issue, due to the payment obligations and charge on assets.

Q.5 It is crucial for business firms to have an ideal capital structure i.e. an adequate mix of borrowed capital and owners capital. The finance manager needs to be efficient to prepare an effective financial plan and consider all financial management decisions so that the objective of maximisation of shareholders wealth is achieved. It is important to keep in mind that excess of owners fund may impact the earnings of the firm while excess of borrowing can affect the credibility as well as increase the financial risk of the firm. It is important for firms to understand the distinction between owners fund and borrowed funds.
How are owners funds different from borrowed funds Explain.


Difference between owners funds and borrowed funds

Basis Owners Funds Borrowed Funds
Meaning Involves funds contributed by owner of the business Involves funds being taken on credit from outsiders
Risk Involves high business risk as not secured Debts of company are secured
Control There is dilution of control among the shareholders or owners of company. There is no dilution of control
Reward Dividend is received Interest is received
Priority Dividends are paid after payment of interest on borrowed funds Payment of interest is made before payment of dividend












Q.6 A-One is a family-owned private limited company. It makes a range of bags for children, using batch production and operates in a competitive market. Like many other businesses, A-One needs finance for a number of reasons. The Finance Director has been looking at some financial data. An extract is shown here. Some of the directors brought forward the plan of expanding into the womens bag market and want to see whether A-Ones performance is improving.

2016 2017
Revenue 400 480
Gross Profit 240 320
Profit 120 120
Non-Current Liabilities 100 200







Explain the concept highlighted here. Why do you think A-One needs money


The concept highlighted here is Business Finance. Business require funds to carry out its various activities. This is known as business finance. A business can only function if adequate funds are made available to it. These business requirements can be categorized as: Fixed capital requirements and Working Capital Requirements

A business needs finance:

I.When an entrepreneur makes a decision to start a business

II. For purchase of plant and machinery, furniture, and other fixed assets

For day-to-day operations such as purchase raw materials, pay salaries to employees, etc.

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FAQs (Frequently Asked Questions)

1. Where can we access the Important Questions Class 11 Business Studies Chapter 7?

Using the Extramarks website, you can obtain Important Questions Class 11 Business Studies Chapter 7. These solutions offer meticulously prepared , concise, point-by-point, and error-free answers based on the most recent CBSE curriculum  and exam pattern . Access to these solutions is provided online. Students can learn how to write practical answers for the exam by studying from Extramarks NCERT Solutions and excel in their exams. 

2. Describe the steps involved in a company's formation.

 The first step in establishing a company is promotion, which incorporates a concept or a business strategy and its implementation to build a company, as mentioned in Important Questions Class 11 Business Studies Chapter 7. The application for and receipt of the certificate of incorporation constitute the second stage, which is known as incorporation. The third step, Issuing Shares & Debentures, involves capital raising and the public issuance of stocks and debentures. The company can start doing business after completing the fourth and final stage, the Commencement of Business.