Chapter:- 1
Company Formation
1.What is Company?
Ans:-A company is an artificial person created by law for doing a business. In the words of prof. L.H. Haney “A company is an artificial person created by law having separate entity with perpetual existence and a common seal.”
2. Write the features/characteristics of a company?
Ans:-The three features of a company are as follows:
a. Artificial person:-A company is juristic person created by a law. So it depends upon the natural person for getting its various activities done.
b. Separate legal entity:-It has its own rights and obligation.
c. Limited liability:-The liability of the shareholders in company is limited up to the face value of the shares held by them.
d. Common seal:-A company being as artificial person is not a body like natural persons. Common seal is the official signature of the company.
e. Perpetual existence:-A company has a perpetual existence since its existence is separated from the existence of its shareholders.
3. Mention any five features or characteristics or privileges of a private limited company?
Ans:-The three features of a company are as follows:
a. Formation by a single person:-A private limited company may be formed even by a single person.
b. Commencement of business:-It can start its business immediately after getting certificate of incorporation.
c. No bound to issue prospectus:-A private company is not bounded to publish prospectus while issuing shares for subscription.
d. Allotment before minimum subscription:-It can allot shares even if the minimum subscription is not subscribed.
e. Statutory meeting and report:-It is not necessary to hold statutory meeting or file the statutory report with the Company registrar.
4. Define public limited company.
Ans:- A Public company is a Joint Stock Company which is not a private Company. It has minimum 7 members and maximum no limit. A public limited company uses the word ‘Limited or Ltd’ at the end of its name.
5. Mention any five features of a public limited company?
Ans:-Features of public limited company are as follows:
a. Limited liability:-The liability of the shareholders in company is limited up to the face value of the shares held by them.
b. Perpetual existence:-A company has a perpetual existence since its existence is separated from the existence of its shareholders.
c. Transfer of shares:-In a public company, the shares of a member can easily be transferred without the consent of other members.
d. Separate legal entity:-It has its own rights and obligation.
e. Common seal:-A company being as artificial person is not a body like natural persons. Common seal is the official signature of the company.
6. State any five differences between private company and public company.
Ans:-Three differences between private company and public company are as follows:
| Private company | Public company |
| a) In a Public company, the minimum number of member is 1 and the maximum can be 101. | a) In a Public company, Minimum number of member is seven and the maximum number has no limit. |
| b) The shareholders of a Private company cannot transfer their shares without consent of other shareholders. | b) The shareholders of a Public company can freely transfer their shares. |
| c) Shares are not offered for sale through prospectus. | c) Shares are issued for public subscription
through prospectus. |
| d) A Private company uses the word ‘Private Limited’ at the end of its name. | d) A Public company uses the word ‘Limited’ at the end of its name. |
| e) It can allot shares after the incorporation. | e) It can allot its shares only after receiving the amount of minimum subscription. |
7. What do you mean by Memorandum of Association? Mention any five important contents of memorandum of Association.
Ans:-It is the main document of a company which contains the fundamental rules regarding the constitution and activities of a company. Without MOA, no company can be started or incorporated.
The main four important contents of memorandum of Association are as follows:
a. The name of the company
b. The address of the registered office of the company
c. The objectives of the company
d. The figure of the authorized capital of the company and the figure of the share capital to be issued by the company.
e. Types of shares of the company, the rights and powers inherent in such shares, value of each share and number of shares of different types.
f. Terms of payments of share amounts.
8. What do you mean by Articles of Association? Mention any five its contents.
Ans:-Articles of association is the document of a company that contains detail rules and regulations that govern the operation of a company.
The following are the main contents of Articles of Association of a company.
a. Procedures of convening the general meeting of the company and notice to be given for such meeting
b. Proceedings of general meeting
c. Number of directors, provision of alternate director, if any tenure of directors
d. Power and duties of the board of directors and the managing directors
e. Authority of directors and delegation of authority
f. Lien and share
9. What do you mean by prospectus? Mention any 5 contents to be stated in prospectus.
Ans:-It is an invitation or notice or advertisement to the public to purchase shares or debentures of the company.
The major contents to be stated in prospectus are as follows:
a. The name, address, nature and objectives of the company.
b. Dates of opening and closing of subscription list.
c. Capital structure of the company as authorized, issued, subscribed and paid up capital.
d. Condition of issue of share i.e. par, premium or discount and mode and terms of payment.
e. Projected financial statements for at least three years.
10. Write the meaning of private limited company?
Ans:- Private Limited Company is a Joint Stock Company which is privately held by its Articles of Association. It has minimum 1 members and maximum 101 members. A Private company uses the word ‘Private Limited’ at the end of its name.
11. Give the meaning of share. Mention its types.
Ans:- A part or unit or portion of the capital divided into a certain number is called share. In other words, The capital of a company is divided into a smaller of units. Each unit is called a share. According to the Nepal Company Act, a company can now issue two types of share as:
a. Equity shares
b. Preference shares
12. Define equity share.
Ans:-The shares, which does not carry any preferential or special rights on dividend and refund of capital on liquidation of company, is called equity shares. It is also known as ordinary share or common stock.
13. Define preference share capital.
Ans:-The share, which carries preferential rights on dividend and refund of capital in case of liquidation of company, is called preference share. It is also known as preferred stock.
14. State any five differences between equity share and preference share.
Ans:- The following are three differences between equity shares and preference shares:
| Equity share | Preference share |
| a) The rate of dividend on equity shares is not fixed. | a) The rate of dividend on preference shares is fixed. |
| b) Equity shareholders enjoy voting rights. | b) Preference shareholder do not have voting right to select management team. |
| c) It cannot be convertible. | c) It may be convertible. |
| d) Equity share cannot be redeemed but they can be sold. | d) Preference share can be redeemed. |
| e) It does not carry any preferential rights on dividend and refund of capital on liquidation of company. | e) It carries preferential rights on dividend and refund of capital on liquidation of company. |
15. Give the meaning of share capital.
Ans:-When total capital of a company is divided into shares, then it is called capital. In other words, The capital contributed by shareholders of a company for its business operation is known as share capital. Share capital is also called ownership capital.
16. Give the meaning of Authorized/ Registered/ Maximum/ Nominal capital.
The amount mentioned in the memorandum of association at the time of company registration is called authorized capital .The maximum amount which the company is authorized to raise by issue of shares is called authorized capital. For example: A Company Limited registered with an authorized capital of Rs. 20,00,000 divided into 10,000 Equity shares of Rs. 100 each and 1,00,000 preference share of Rs. 10 each. Then such capital of Rs. 20,00,000 will be the amount of authorized capital of the Company.
17. Give the meaning of Issued capital.
Ans:-It is that part of the authorized share capital which is offered to the public for subscription. The authorized shares capital may be issued whole or a part of it. It is not more than authorized capital but equal or less than authorized capital. In the above example. Out of 10,000 equity shares and 1,00,000 preference shares the company issued 6,000 equity shares @ Rs. 100 each and 80,000 preference shares @ Rs. 10 each. Then total issued capital will be Rs. 14,00,000.
18. Differentiate between issued capital and subscribed capital.
Ans:-following are the differences between issued capital and subscribed capital:
| Basis of difference | Issued capital | Subscribed capital |
| i. Part | Issued capital is the part of authorized capital which is issued by the company for public subscription. | Subscribed capital is the part of issued capital which is subscribed by the public. |
| ii. Condition | Issued capital may not be more than authorized capital. | Subscribed capital may be more or less or equal to the issued capital. |