11th Class Business Studies Formation Of A Company

  • question_answer 26)
    What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.


    Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that the available business opportunity can be turned into a real business project. A promoter is said to be the one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. It is the function of promoters to analyze the prospects and bring together the men, materials, machinery, managerial abilities, financial resources and commence the business. Promoters undertake various activities to get a company registered and get it to the position of commencement of business. But they are neither the agents nor the trustees of the company. Legally they cannot be the agent of non existing companies. It means that he is personally liable for the contracts, not legally. Also promoters are not the trustees they supposed to observe good faith in the promotion and must not making secret gains out of the dealings. If there is gain then it must be disclosed. Promoters are not legally entitled to claim the expenses incurred in the promotion of the company but the pre-incorporation expenses may be reimbursed. The company may also remunerate the promoters for their efforts by paying a lump sum amount or a commission on the purchase price of property purchased through them or on the shares sold. Shares or debentures may also be allotted to the promoters or they may be given an option to purchase the securities at a future date.

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