Q.Write a short note on Retained Earning and Trade Credit.
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🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Company Formation Stages
Company Formation Stages — From Idea to Legal Entity
Imagine you want to build a house. You don't just start laying bricks. First, you have a vision, then you get the land, then you get approvals, then you lay the foundation, then you build the walls, and finally you get the occupancy certificate. Each step is necessary and has a specific order.
Forming a company is exactly like that — except the "house" is a legal entity that can own assets, sign contracts, and be sued in its own name. The stages are the mandatory steps you must follow to bring that entity to life.
The Core Idea
A company is not a person. It is a legal fiction — an artificial person created by law. Before it exists, it has no rights, no liabilities, no bank account, no name. The stages of formation are the process by which a group of people (promoters) convince the government to grant this artificial person a birth certificate.
There are four main stages:
- Promotion — The idea and the groundwork
- Incorporation — The legal birth
- Subscription — Raising the initial money
- Commencement of Business — Starting actual operations
Let's walk through each.
Stage 1: Promotion
This is the conception stage. Nothing legal happens yet. A person (or a group) called the promoter identifies a business opportunity, checks its feasibility, and assembles the resources needed.
The promoter does the following:
- Decides the company's name (must be unique and not offensive)
- Decides the registered office address
- Decides the company's Memorandum of Association (MoA) — the constitution that defines what the company can do
- Decides the Articles of Association (AoA) — the internal rules for running the company
- Signs preliminary contracts (like renting an office or hiring a lawyer)
At this stage, the company does not exist yet. Any contract signed by the promoter is personally binding on the promoter, not on the future company. The company can later "adopt" these contracts, but it is not automatically liable.
Stage 2: Incorporation
This is the birth stage. The promoter files documents with the Registrar of Companies (RoC) — the government authority that maintains the register of companies.
The key documents filed are:
- Memorandum of Association (MoA) — signed by the initial subscribers
- Articles of Association (AoA)
- Consent of Directors — each proposed director agrees to act
- Registered Office Proof — address of the company
- Declaration of Compliance — a lawyer or director swears that all legal requirements are met
The RoC examines these documents. If everything is correct, the RoC issues a Certificate of Incorporation. This certificate is the company's birth certificate. From this date, the company is a legal person.
The Certificate of Incorporation is conclusive evidence that the company exists. No court can later question its validity once this certificate is issued.
Stage 3: Subscription (or Capital Subscription)
Now the company exists, but it has no money. It needs to raise capital from investors. This stage is about issuing shares to the public (or to private investors).
For a public company, this involves:
- Issuing a Prospectus — a detailed document inviting the public to buy shares
- Collecting applications and allotting shares
- Getting the shares listed on a stock exchange
For a private company, this stage is simpler — the initial subscribers simply pay for their shares as per the MoA.
A private company cannot invite the general public to subscribe to its shares. It can only raise money from its members (up to 200) or from banks/institutions.
Stage 4: Commencement of Business
This is the final stage — the company actually starts trading. But there is a catch.
For a public company, after incorporation and subscription, it must file a Declaration of Commencement of Business with the RoC. This declaration states that:
- Shares have been allotted to the public …
Both retained earnings and trade credit are important sources through which a business meets its financial needs without borrowing from outsiders in the usual way. …
Retained earnings are undistributed profits ploughed back into the business (an internal, long-term source), while trade credit is credit granted by suppliers allowing deferred payment for goods (an external, short-term source).
Retained Earnings
A company usually does not distribute all its profits as dividend. The part of the net profit that is kept back and reinvested in the business is called retained earnings, ploughing back of profits, or self-financing. It is an internal source of finance. It costs nothing in interest, strengthens the financial position of the firm, and helps it grow and meet contingencies. However, excessive retention may displease shareholders who expect higher dividends.
Trade Credit
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Showing the 12 most recent of 110 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Business risk is not likely to arise due to(a) a) Changes in government policy(b) b) Good Management(c) c) Employee Dishonesty(d) d) Power failure
›Reveal solutionSolution
Correct option: (b) Good Management. Business risk arises from uncertainties that can cause loss or reduced profit; good management is a control that reduces such risk, not a cause of it.
Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Common causes include natural factors, human factors, economic factors and other causes such as changes in government policy, dishonesty of employees and mechanical or power failures. Each of the other three options represents a genuine source of loss or uncertainty. Good management, on the other …
- CBSE 2026Set MARCH1 markMCQQ.A Government company is any company in which the paid up capital held by the government is not less than.(a) a) 49%(b) b) 51%(c) c) 50%(d) d) 25%
›Reveal solutionSolution
Correct option: (b) 51%. A government company is one in which at least 51% of the paid-up share capital is held by the government, ensuring majority control.
As per the Companies Act, a government company is defined as any company in which not less than 51% of the paid-up share capital is held by the central government, by any state government or governments, or partly by the central government and partly by one or more state governments. Holding 51% or more of the paid-up capital gives the government majority ownership and, therefore, contr …
- CBSE 2026Set MARCH1 markMCQQ.An enterprises must behave as a good citizen is an example of its responsibility towards(a) a) Owners(b) b) Workers(c) c) Consumers(d) d) Community
›Reveal solutionSolution
Correct option: (d) Community. Acting as a good citizen expresses a business's social responsibility towards the community.
A business is accountable to different interest groups: to owners it owes a fair return, to workers fair wages and good working conditions, and to consumers quality goods at fair prices. Towards the community it is expected to behave as a good citizen — by protecting the environment, generating employment, contributing to community development and observing the laws of the land. The ex …
- CBSE 2026Set MARCH1 markMCQQ.Small scale fixed retailers include(a) a) Hawkers(b) b) Peddlers(c) c) Cheap Jacks(d) d) General stores
›Reveal solutionSolution
Correct option: (d) General stores. Among the options, only the general store is a fixed-shop retailer; the rest are itinerant retailers.
Small-scale retailers are broadly classified into itinerant retailers and fixed-shop retailers. Itinerant retailers do not have a fixed place of business and move from one place to another to sell their goods — examples include hawkers, peddlers and cheap jacks. Fixed-shop small retailers, on the other hand, operate from a permanent, though small, establishment; a general store selling everyday household items i …
- CBSE 2026Set MARCH1 markMCQQ.A receipt issued by the shipping company after collecting freight charges(a) a) Shipping receipt(b) b) Bill of Lading(c) c) Cargo Receipt(d) d) Bill of exchange
›Reveal solutionSolution
Correct option: (b) Bill of Lading. It is the shipping company's receipt for goods and freight and a document of title to the goods.
When goods are sent by sea, the shipping company issues a Bill of Lading to the exporter. It acknowledges receipt of the goods on board the ship, records the terms and freight charges, and serves as a document of title, meaning the holder can claim the goods at the destination port. A Bill of Exchange is an instrument used for payment, while 'shipping receipt' and 'cargo receipt' are not the re …
- CBSE 2026Set MARCH1 markQ.Fill in the blank by choosing appropriate answer from those given in the brackets: ( Licensing, Teleshopping, Broker, Prospectus, Working capital, Ship ) The Hull insurance the subject matter is ________
›Reveal solutionSolution
The correct word is Ship. Hull insurance is the branch of marine insurance in which the subject matter insured is the ship itself.
Marine insurance has three main types based on the subject matter insured — hull insurance (the ship or vessel), cargo insurance (the goods carried) and freight insurance (the freight charges). In hull insurance the ship is protected against damage or loss caused by marine perils su …
- CBSE 2026Set MARCH1 markQ.Funds required for day to day operations is known as ________
›Reveal solutionSolution
The correct word is Working capital — the funds needed for a firm's day-to-day operations.
Business finance is needed for two broad purposes: fixed capital, used to acquire long-term assets like land, building and machinery, and working capital, used to finance the day-to-day activities of the business. Working capital covers current requirements such as purchasing raw materials, paying wages and salaries, meeting overheads and holding stock and receivables. Becaus …
- CBSE 2026Set MARCH1 markQ.________ is the process of seeking exclusive rights of the patents for fee
›Reveal solutionSolution
The correct word is Licensing — granting another party the rights to use one's patents/technology for a fee.
Licensing is a contractual arrangement in which one firm (the licensor) grants another firm (the licensee) the right to use its industrial property — such as patents, trademarks, copyrights or technical know-how — in return for an agreed fee or royalty. It is widely used as a low-cost mode of entering international markets, since the licensee bears the investment and the licensor earns income fr …
- CBSE 2026Set MARCH1 markQ.________ helps disabled and elderly people.
›Reveal solutionSolution
The correct word is Teleshopping — home-based shopping through television and telephone that helps disabled and elderly people.
Teleshopping refers to the method of selling in which products are demonstrated on television, and interested viewers place orders over the telephone; the goods are then delivered to their homes. Because customers need not physically visit a market or store, teleshopping is particularly convenient for disabled persons and the elderly, who may find it di …
- CBSE 2026Set MARCH1 markQ.What is Export Trade?
›Reveal solutionSolution
Export trade means selling goods and services produced in one country to buyers in other countries.
Export trade is a component of foreign (external) trade in which goods and services are sold and sent from the home country to customers in other countries. For example, when Indian firms sell tea, textiles or software services to buyers in the USA or Europe, it is export trade for India. It brings foreign exchange int …
- CBSE 2026Set MARCH1 markQ.Which act governs partnership business in India?
›Reveal solutionSolution
Partnership business in India is governed by the Indian Partnership Act, 1932.
A partnership is a form of business organisation in which two or more persons agree to carry on a business and share its profits. In India, partnerships are regulated by the Indian Partnership Act, 1932, which lays down the definition of partnership, the rights and duties of partners, the procedure for registration of a firm, and the conseque …
- CBSE 2026Set MARCH1 markQ.Which certificate is considered as Birth Certificate of a company?
›Reveal solutionSolution
The Certificate of Incorporation is called the birth certificate of a company.
When a company applies for registration and files the required documents, the Registrar of Companies examines them and, if satisfied, issues a Certificate of Incorporation. From the date stated in this certificate, the company comes into existence as a separate legal person capable of entering into contracts, owning property and being sued in its own name. Because the company's legal life be …
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