The formation of a public company is a long and arduous process. First, the company is floated by its promoters, and the process of gathering financial backing begins. The promotion of a company is the very first step in this long process. Let us take a look.
Formation of a Company
Formation of a company involves completion of several legal formalities and procedures. The process of formation of the company can be divided into four stages, viz.,
- Promotion of a company
- Subscription of capital
- Commencement of business.
However, only a public limited company is required to fulfil all these four stages. A private limited company is required to fulfil only the first two stages. In other words, it can start business immediately after obtaining the certificate of incorporation.
Promotion of a Company
It is the first stage in the formation of a company. It begins with a person or a group of persons having thought of or conceived a possible future business opportunity and then taking an initiative to give it a practical shape by way of forming a company. Such a person or a group of persons who proceed to form a company are known as promoters of the company.
Promoters not only conceive a business opportunity but also analyze its prospects and bring together the men, materials, machinery, managerial abilities and financial resources that are necessary for the formation and existence of the company.
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Functions of a Promoter
(i) Identification of Business Opportunity
The promoter first identifies a potential business opportunity. This opportunity may be regarding the production of a new product or service or making a product available through a different channel than before or production of an old product with new updated features or any other such opportunity having an investment potential.
(ii) Feasibility Studies
The promoter after having conceived a business opportunity analyzes the opportunity to see whether it is feasible, technically as well as economically. All identified business opportunities cannot be converted into real projects.
Therefore, the promoters undertake detailed feasibility studies so as to investigate all aspects of the business that they intend to begin with the help of various tools like a study of the market trend, industry trend, market survey, etc. and with the help of specialists like engineers, chartered accountants etc. A venture is only feasible when it passes all the three below mentioned tests.
- Technical feasibility: Sometimes an idea may be good and unique but technically not possible to execute because the required raw material or technology may not be easily available. Every business requires funds.
- Financial feasibility: Sometimes it may not be feasible to arrange a large amount of funds needed for the business in the limited available means. Also, financial institutions may hesitate to grant huge amounts of loan for the new businesses.
- Economical feasibility: A business opportunity may be technically and financially feasible but not economically feasible. It may not be a profitable venture or may not yield enough profits. In such a case, the promoters refrain from starting the business.
(iii) Name Approval
Once the promoters have decided to launch a company next step is to select a name for the company and get it registered with the registrar of companies of the state in which the registered office of the company is to be situated. An application with three names, in the order of their priority, is filed with the registrar to get the name approved.
(iv) Fixing up Signatories to the Memorandum of Association
The promoters decide upon the members who will be signing the Memorandum of Association of the proposed company. Usually the signatories of the memorandum are the first Directors of the Company. However, the written consent of the persons signing the memorandum is required to act as Directors and to take up the qualification shares in the company.
(v) Appointment of Professionals
Promoters are also required to appoint certain professionals. These professionals help them in the preparation of necessary documents that are required to be filed with the Registrar of Companies such as mercantile bankers, auditors, lawyers, etc.
(vi) Preparation of Necessary Documents
The promoters are required to prepare necessary legal documents that have to be submitted to the Registrar of the Companies for getting the company registered. These documents are return of allotment, Memorandum of Association, Articles of Association, consent of Directors and statutory declaration.
Solved Question for You
Q: What is the position of the promoters in a company?
Answer: Promoters perform several activities to get a company registered and make it commence a business. The promoters are neither the agents nor the trustees of the company. They have a personal liability for all the contracts which are entered by them for the company before its incorporation until the same is not ratified by the company later on.
Promoters have a fiduciary position with the company and thus they should make a profit only if it is disclosed and should not make any secret profits. Also, the promoters are not legally entitled to claim the expenses incurred in the promotion of a company.
However, the company may choose to reimburse the pre-incorporation expenses. The company may also allot shares or debentures or give an option to purchase the securities at a future date to the promoters.