FORMS OF BUSINESS ORGANISATION
Introduction:
A business enterprise is an organization which is engaged in some business or commercial activity.
Every business enterprise is a separate and distinct unit of business.
If one is planning to start a business or is interested in expanding an existing one, an important decision
relates to the choice of the form of organization. The most appropriate form is determined by weighing the
advantages and disadvantages of each type of organization against one’s own requirements.
There are different forms of business organizations from which a choice has to be made:
1. Sole proprietorship
2. Joint Hindu family business
3. Partnership
4. Joint stock Company
5. Cooperative Societies
♦ Sole Proprietorship
A business which is owned, managed and controlled by a single individual, who is the recipient of all
profits and bearer of all risks, is known as sole proprietorship. The term sole proprietorship defines itself
evidently, as sole means only and proprietor refers to owner. Thus, a sole proprietor is one and only owner
of this type of business organisation. It is a popular form of business organisation.
♦ Features of Sole Proprietorship:
• Formation and Closure: Hardly any legal formality is required to start a sole proprietary business.
Closure of the business can also be done easily. Thus, there is ease in formation as well as closure of business.
• Unlimited Liability: The liability of the owner is unlimited. In case of losses and repayment of debt, personal
property of the owner can also be used if the assets of firm are insufficient.
• Sole Risk Bearer and Profit Recipient: In sole proprietorship firm, whole risk is borne by a single individual.
Because of this, he is personally liable for all losses and the sole receiver of profits.
• Control: The sole proprietorship firm is owned, managed and controlled by a single individual. All the decisions
are taken by him solely.
• No Separate Entity: A sole proprietorship firm has no legal identity apart from that of its owner. As a result,
the owner is held responsible for all the activities of business.
• Lack of Business Continuity: Since the owner and the business are same, therefore death, insanity, imprisonment,
physical ailment or bankruptcy of sole trader will affect the continuity of the business.
♦ Merits of Sole Proprietorship
• Quick Decision-making: Sole proprietor enjoys freedom in making business decisions. Thus, he can capitalize
on market opportunities by taking quick decisions.
• Secrecy or Confidentiality of Information: Sole trader is not expected to share his business decisions and secrets
with anybody.
• Direct Incentive: Direct relationship between efforts and reward provide maximum incentive to the sole trader
to work hard.
• Sense of Accomplishment: If a business is successful, it contributes to the satisfaction of the sole proprietor and
creates a sense of accomplishment and confidence, which motivates him to work harder.
• Easy to Form and Close: An important merit of sole proprietorship is the possibility of entering and exiting business
with minimal legal formalities.
♦ Demerits of Sole Proprietorship
• Limited Resources: In such types of business, funds are limited to the owner's personal savings and his borrowing
capacity.
• Limited Life of Business: Illness, death or insolvency of the proprietor affects the business and can lead to its closure.
• Unlimited Liability: Sole trader is personally liable for all the business debts. In case of heavy loss, he may be liable
to sell his personal property also.
• Limited Managerial Ability: Sole trader's managerial ability is limited and due to lack of finance, he cannot afford
to employ experts. He cannot be an expert in all the aspects of a business, therefore certain tasks could not be performed
by him in an optimum manner.
Joint Hindu Family Business
Joint Hindu Family business or Hindu Undivided Family (HUF) business is that form of business organization which
is owned and managed by the members of HUF. It is the oldest form of business organization and can be found only in
India. This type of business is governed by Hindu Law. The business is controlled by the head of the family, who is the
eldest member of family and is called Karta. All members have equal ownership right over the property and they are
known as Co-parceners. Three generations of a family can be members of HUF.
♦ Features of HUF Business:
• Formation: At least two members and an ancestral property is the basic requirement for the formation of Joint Hindu
Family business.
• Liability: The liability of Karta (senior most male co-parcener) is unlimited, but the liability of other members is limited
to the extent of their share.
• Control: The business is controlled by the eldest member of the family known as Karta.
• Continuity: After the death of Karta, the next eldest member takes his position and thus, the business continues.
• Minor Members: Under Joint Hindu Family business, an individual becomes member by taking birth in the family.
Hence, a minor can also be a member of HUF business.
♦ Merits of HUF Business :
• Effective Control: In an HUF business, the Karta has absolute decision-making power. This facilitates quick
and flexible decision-making.
• Continued Business Existence: An HUF business has continued existence. Its existence is not affected by the
death of Karta, as the next eldest member takes up his position.
• Limited Liability: The liability of the co-parceners is limited to the extent of their share in the family business.
• Increased Loyalty and Cooperation: The members of an HUF business are loyal to each other and are willing to
cooperate and work towards a common goal, as all of them belong to the same family.
♦ Demerits of HUF Business:
• Limited Resources: The HUF business depends to mainly on the ancestral property. This creates the problem
of limited capital.
• Unlimited Liability of Karta: In HUF, the liability of the Karta is unlimited. His personal assets can also be used
to discharge the debts of the business. This prevents him from taking bold decisions and limits the growth of the
business. The Karta is also burdened with the task of decision-making and managing the business.
• Dominance of Karta: The Karta has vast powers inthe management of the family business. If the Karta misuses
his powers and tries to dominate the family, then the other co-parceners may protest. This may create conflict in
the family and lead tobusiness disintegration.
• Limited Managerial Skills: A Karta has absolute decision-making power related to all aspects of the business.
However, he cannot be an expert in all the areas of management. If he does not take the help of other co-parceners,
then his unwise decisions will affect the business adversely.Because of these limitations, this form of business
organization is on decline.
Partnership
A partnership is a form of organization in which two or more persons agree to cooperate to advance their mutual
interests in a business venture. This form of organization is an improvement over sole proprietorship as it ensures
greater capital investment, varied professional and managerial skills and sharing of risks.
♦ Definition of partnership:
• According to LH Haney, “Partnership is the relation between persons competent to make contracts who have
agreed to carry on a lawful business in common with a view to private gain".
• According to The Indian Partnership Act, 1932 (Sec 4), “Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all or any of them acting for all.”
♦ Features of Partnership:
• Formation: As per Indian Partnership Act, 1932 a partnership firm can be formed on the basis of an agreement
between the partners. The registration of partnership firm, for its formation, is not compulsory.
• Liability:The liability of all the members of a partnership firm is unlimited. The partners are individually and
collectively liable to pay back the debts of the firm.
• Risk Bearing: The partners bear the risks involved in the business jointly. If a business sustains loss, then
partners share the loss in the same ratio in which they share profits.
• Decision-making and Control: Each partner has a right to participate in management and decision making
of the organisation. The activities of partnership firm are managed through joint efforts of all the partners
and decisions are taken by mutual consent.
• Continuity: Existence of firm is affected by death, retirement, lunacy, madness and insolvency (bankruptcy)
of any of its partner. It suffers from lack of continuity.
• Membership: There must be at least two persons to form a partnership and all such persons must be competent
to contract. Maximum number can be 50 as per Companies Act, 2013.
• Mutual Agency: There must exist a mutual agency relationship among the partners. “Mutual agency relationship
means that each partner is both an agent and principal.
♦ Merits of Partnership:
• Ease of Formation and Closure: It is very easy to form a partnership firm. Only an agreement among the
partners is required to form it. Similarly, it is very easy to close such a firm.
• Balanced Decision-making: In partnership, decisions are taken jointly by partners after consulting each
other. Partners oversee different functions generally in areas of their expertise. Thus, wise and balanced
decisions are likely to be made.
• Sharing of Risks: In partnership, risk gets distributed among partners, which reduces anxiety, burden and
stress on individual partners.
• Secrecy: The partnership firm is not required to publish its accounts and submit its reports. Therefore, the
firm is able to maintain confidentiality of information.
• More Funds: It is possible to raise larger amount of funds through partnership, as each member contributes
to the capital of the firm.
♦ Demerits of Partnership:
• Unlimited Liability: The liability of partners is unlimited and they are liable individually as well as jointly.
• Limited Resources: There is a limit to number of partners in a partnership firm, therefore, capital investment is
also limited.
• Possibility of Conflicts: Decision making authority lies with all the group members. There may be difference in
opinions on certain issues, which may result in dispute.
• Lack of Continuity: Partnership comes to an end with the death, retirement, insolvency or lunacy of any of its
partners. Thus, it lacks continuity.
• Lack of Public Confidence: Partnership firms are not required to publish their financial reports and accounts.
Thus, they lack public confidence.
♦ Types of Partners:
• Active or Working Partner:Such type of partner contributes capital and takes active part in the management of the firm.
• Sleeping or Dormant Partner:Such type of partner contributes capital but does not take active part in the management
of the firm.
• Secret Partner Such partner:Contributes capital and takes active doa part in business. But his association with the firm
is hidden from 1691 the general public.
• Nominal Partner:A nominal partner is one who allows the use of his name and goodwill for the benefit of the firm and
can be BOCH represented as a partner.
• Partner by Estoppel:A partner by estoppel is one who by his So words or conduct gives an impression to others that he
is a partner of the firm.
• Partner by Holding Out: A partner by 'holding out' is one who is actually not a partner, but allows himself to be
represented as one by the other partners.
♦ Comparative View of Different Types of Partners:
♦ Types of Partnership:
Partnership can be classified on the basis of two factors, viz., durationand liability.
On The Basis Of Duration:
• Partnership at Will: The time period or the purpose of this form of partnership is not mentioned at the time of its formation.
It can continue for any length of time, depending upon the will of the partners.
• Particular Partnership: It is a partnership formed for a specific time period or to achieve a specified objective. It is automatically
dissolved on the expiry of the specified period or on the completion of the specific purpose.
♦ On The Basis of Liability:
• General Partnership: In this form of partnership, the liability of all the partners is unlimited. This is the traditional and most
common form of business.
• Limited Partnership: In limited partnership, the liability of at least one partner is unlimited, while other partners enjoy limited
liability. This type of partnership was initially not identified in the Indian Partnership Act of 1932.It gained recognition after the
introduction of new Small Enterprise Policy in 1991. This policy allowed the formation of this partnership so that small entrepreneurs
can raise capital from cautious investors.
• Limited Liability Partnership (LLP): This form of partnership came into existence with the passing of Limited Liability Partnership (LLP)
Act of 2008. It is a corporate form of organization that provides the benefits of limited liability and allows the partners the flexibility of
organizing internal structure as per the mutual agreement between them. The liability of each partner is limited to the capital contributed
by them.
Partnership Deed
The written agreement containing the terms and conditions of the partnership is known as partnership deed. The partnership deed
contains provisions relating to various matters such as.
• Name of firm.
• Nature and location of business.
• Duration of business.
• Investment made by each partner.
• Distribution of profit and loss.
• Duties and obligations of the partners.
• Salaries and withdrawals of the partners.
• Terms governing admission, retirement and expulsion of a partner.
• Interest on capital and interest on drawings.
• Procedure for dissolution of the firm.
• Preparation of accounts and their auditing.
• Method of solving disputes.
♦ Registration of Partnership Firm:
Registration means getting the name of partnership firm registered with the Registrar of Firm of the area in which the place of business
of the firm is situated or proposed to be situated. It is optional for a partnership firm to get registered. However, it should be registered as
it provides a conclusive proof of the existence of the firm.
Also, non-registration renders the following limitations to a partnership firm,
• A partner of an unregistered firm cannot file a suit against the firm or other partners.
• The firm cannot file a suit against third parties.
• The firm cannot file a case against the partners.
Cooperative Societies
cooperative society is a voluntary association of persons, who have joined together for promoting their economic interests. It is necessary
for such societies to be compulsorily registered under Cooperative Societies Act, 1912. To form a cooperative society, consent of ten adult
persons is required. The capital of a society is raised from its members through issue of shares. A distinct legal identity is achieved by the
society through registration.
♦ Definitions of Cooperative Society:
• According to EH Calvert, “Cooperative society is a form of organisation wherein persons voluntarily associate together as human
beings on the basis of equality for the promotion of an economic interest for themselves”.
• According to the Indian Cooperative Societies Act, 1912, “Cooperative organisation is a society which has its objectives for the
promotion of economic interests of its members in accordance with cooperative principles."
♦ Features of Cooperative Society:
• Voluntary Membership: A cooperative society is essentially a voluntary association of persons. There is no compulsion to become
a member of the cooperative society. Any person is free to join and exit any time after serving a notice.
• Legal Status: After registration, a cooperative society becomes a distinct entity independent of its members. Its registration is compulsory
and is You done by the Registrar of Cooperative Societies.
• Limited Liability: The liability of members is e limited to the extent of the amount contributed by them as capital.
• Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. Members have voting
rights to choose the managing committee.
• Service Motive: The primary aim of a cooperative society is to provide service to its members. Its motto is to earn profits for the benefit
of its members. Thus, it lays emphasis on the value of mutual help and welfare.
♦ Merits of Cooperative Society:
• Equality in Voting Status: One Man One Vote principle is applicable in cooperative societies. Irrespective of capital contribution,
each member has only one vote.
• Limited Liability: The liability of every member is limited to the extent of his share in the society's capital. Therefore, the personal
assets of the members cannot be used to repay business debt.
• Stable Existence or Continuity: Cooperative society, being a separate legal entity, is not affected by death, lunacy or bankruptcy
of the members.
• Economy in Operations: The members generally offer honorary services to the society. Thus, it helps in reducing costs. As the
customers or producers themselves are members of society, the risk of bad debt is quite low.
• Support from Government: The society gets support from the government in the form of low taxes, subsidies and low interest
rates on loans.
• Ease of Formation: It is quite easy to form a cooperative society. Any ten adults can join together and form a cooperative society.
The legal formalities are very few, simple and governed by the provisions of Cooperative Societies Act, 1912.
♦ Demerits of Cooperative Society:
• Limited Resources: A cooperative society is formed usually by people with limited means.Also, lesser rate of earnings discourages
members to invest large amounts in the society. Therefore, a cooperative society has limited resources.
• Inefficient Management: A cooperative society cannot afford to employ expert professional managers at high salaries due to limited funds.
• Lack of Secrecy: It is difficult to maintain secrecy about the operations of a cooperative society due to open discussion in the meetings and
disclosure obligation as per Section 7 of the Societies Act.
• Government Control: The day-to-day working of a cooperative society is bound by rigid rules and regulations of the government.
Keeping accounts, regular audits and inspections is essential. Reports have to be submitted to the Registrar. The interference in
functioning affects the freedom of society.
• Differences of Opinion: They arise when personal interests start dominating the welfare motive.Conflicts in view points may lead to
difficulty in decision-making.
♦ Types of Cooperative Society:
• Consumer's Cooperative Society: It is established to protect the interest of consumers. It seeks to eliminate middlemen by establishing
a direct link with the producers. It purchases goods of daily consumption directly from manufacturers or wholesalers in bulk and sells
them to the members at reasonable price. Profits (if any) are distributed among the members on the basis of their capital contribution
or purchases.
• Producer's Cooperative Society: The main aim of this society is to help small producers who cannot easily collect various inputs of
production and face problems in marketing. It purchases raw materials, tools, equipment and other items in large quantity and provide
these to their members at reasonable price and also buy their output for sale. Profits are distributed among the members on the basis of
the contributions to total pool of goods produced and sold. Amul is an example of producer's cooperative society.
• Marketing Cooperative Society: It performs various marketing functions such as transportation, warehousing, packing, grading,
marketing research, etc for the benefit of its members. So The production of different members is pooled together and sold by the
society at a good price. It eliminates middlemen and improves the competitive position of its members. The profits are distributed
among members according to each member's contribution to the pool of output.
• Farmer's Cooperative Society: In such a society, small farmers join together and pool their resources for cultivating their land collectively.
It provides better quality seeds, fertilizers, machineries and other modern techniques for cultivation of crops.
• Credit Cooperative Society: Such society comprises of persons who seek financial help in the form of loans. They provide loans to their members
on easy terms and reasonably low rate of interest, out of the amount collected as capital and deposits made by the members.
• Cooperative Housing Society: The main aim of this type of society is to provide houses to people with limited means/income at reasonable
price and also gives them the option of paying in instalments. It constructs flats or provides plots to members on which the members themselves
can construct the houses as per their choice.
Joint Stock Company
Joint stock company is a voluntary association of persons having separate and distinct legal entity, perpetual succession, common seal, and registered
under the Companies Act, 2013 or any other previous companies act. The shareholders are the owners of the company. The Board of Directors is the
chief managing body elected by shareholders. Its capital is divided into smaller parts called shares, which can be transferred freely from one shareholder
to another (except in private company).
According to Prof. Haney, “Joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares,
the ownership of which is the condition of membership.”
♦ Features of Joint Stock Company:
• Artificial Person: It is an artificial person created by law. It acts as a natural person who can buy or sell properties, enter into contracts, can
lend and borrow money, sue and can be sued in its own name.
• Separate Legal Entity: It acquires a separate legal entity, from the day of its incorporation, which is quite distinct from its members. Its assets
and liabilities are separate from those of its members.
• Formation: The formation is time consuming, expensive and complex process as it involves preparation of several documents and compliance
to several legal requirements. Registration of a company is compulsory under the Companies Act, 2013.
• Perpetual Succession: Its existence is not affected by the entry or exit of the members. It is created by law and the law can only bring it to an
end, by completing a legal procedure called 'winding up’
• Control: The management and control of the affairs of the company is undertaken by the Board of Directors. The Board of Directors are appointed
by voting. The shareholders do not have the right to be involved in the day-to-day running of the business.
• Liability: The liability of the members is limited to the extent of capital contributed by them. In the event when debts of the company exceed its
assets, the members are only liable to the extent of the unpaid amount on shares held by them.
• Common Seal: Being an artificial person, the agreements entered by Board of Directors on behalf of the company are validated by a common seal.
It is equivalent to official signature.
• Risk Bearing: Risk is spread over a large number of shareholders. In the condition of financial difficulties, all shareholders in a company have to
contribute to the extent of their unpaid share in company's capital.
♦ Merits of Joint Stock Company:
• Limited Liability: The shareholders are liable only to the extent of the amount unpaid on the shares held by them.
• Transfer of Interest: Easy transferability of shares increases the attractiveness of shares for investment.
• Perpetual Existence: Existence of a company is not affected by death, insanity, retirement, resignation and insolvency of its members.
• Scope for Expansion: A company can collect huge amount of capital from unlimited number of members, because of limited liability, easy
transferability and chances of high return. Capital can also be attracted from banks or financial institutions. Hence, there is greater scope of expansion.
• Professional Management: A company can afford to pay high salaries to specialists and professionals. As each department is headed by an expert, greater
efficiency is observed in company's operations and decision-making.
♦ Demerits of Joint Stock Company:
• Complexity in Formation: The procedure of formation of a company is very long and complex process and consumes much time and
effort. It is expensive and requires lot of legal formalities to be fulfilled.
• Lack of Secrecy: According to the Companies Act, a public company is required to publish and file its annual accounts and reports.
Therefore, it is very difficult to maintain secrecy in case of public company.
• Impersonal Work Environment: Separation between ownership and control and absence of a direct link between efforts and reward
leads to a lack of personal interest and incentive. Also, it is difficult for the owner and top management to maintain personal contact
with employees, customers and creditors. This creates an impersonal work environment.
• Numerous Regulations: Excessive legal provisions and compulsions affect the functioning of a company. A number of regulations are
imposed on company such as audit, voting, etc by different agencies like Registrar of Companies, SEBI, etc. This reduces freedom of
operations of a company.
• Delay in Decision-making: Companies are managed by the Board of Directors, followed by top, middle and then lower level management.
Due to these channels, approval of various proposals gets delayed. Factors such as red-tapism and bureaucracy do not permit quick decisions
and prompt actions.
• Oligarchic Management: Company is said to be democratically managed, but actually it is managed by few people, comprising the Board
of Directors. Sometimes, they ignore the interest of shareholders and company and work for their personal benefit.
• Conflict in Interest: There are much chances of conflict of interests among the stakeholders of a company. For example, employees may
want higher salaries, consumers want better products, etc.
TYPES OF COMPANIES
♦ Private Company:
According to the Companies Act, 2013, a private company means a companywhich,
• Restricts the right of its members to transfer shares,has minimum 2 members and maximum 200 members, excluding present and past employees.
• Does not invite public to subscribe to its share capital.
• Must have a minimum paid up capital of 1 lakh or such higher amount as may be prescribed from time to time.
♦ Public Company:
According to the Companies Act, 2013, a public company means a company which,
• Has a minimum of 7 members and there is no limit on the maximum number of members.
• Does not restrict the right of its members to transfer its shares.
• Is not prohibited from inviting the general public to subscribe to its shares, debentures or public deposits.
• Has a minimum paid up capital of 5 lakh or such higher capital, as may beprescribed.
• A private company which is subsidiary of a public company is also treated as a public company.
♦ One Person Company (OPC):
According to the Company Act 2013, a One Person Company (OPC) means a company which,
• Has only one person as its member.
• Is the special form of private company.
• Must have atleast one director.
• Only Indian citizen can incorporate an one person company.
• Has to appoint another person as nominee.
• Must have a minimum paid-up capital of 1 lakh. If the paid-up share capital of OPCexceed 50 lakh or its annual turnover exceeds
2 crore, then it will seize to be an OPC.
Formation of a Company
Formation of a company is a complex process involving several legal formalities and procedural decisions. The formation of a company
involves the following stages.
1. Promotion,2. Incorporation,3. Capital Subscription,4. Commencement of Business,
♦ Promotion:
It is the first stage in the formation of a company. It refers to the sum total of activities by which a business enterprise is bought into existence.
It is a process of planning and organising necessary resources so that a profitable concern can come into existence. The person or a group of
persons who perform the work of promotion and form a company is/are known as promoters.
♦ Functions of a promoter:
• Identification of Business Opportunity: The first and foremost function of a promoter is to identify a business idea.
For example, production of a new product or service.
• Feasibility Studies: After identifying a business opportunity, the promoters undertake detailed studies of technical,
financial and economic feasibility of a business.
♦ Technical Feasibility: This feasibility study is undertaken to determine whether it is technically possible to produce the
product or not.
♦ Financial Feasibility: This feasibility study is undertaken to determine whether the promoters would be able to arrange
the necessary finance needed to float the venture.
♦ Economic Feasibility: This feasibility study is undertaken to determine whether it would be profitable to manufacture
the product or not.
• Name Approval: After selecting the name of the company, the promoters submit an application to the Registrar of Companies
for its approval. The proposed name will not be accepted by the Registrar, if-
♦ It resembles the name of an existing company.
♦ It is misleading.
♦ It violates the provisions of 'The Emblem and Names (Prevention of Improper Use) Act, 1950.
In such cases, the proposed name is not accepted but some alternate name may be approved. So, three names, in order of their
priority are given in the application to the Registrar of Companies.
• Fixing up Signatories to the Memorandum of Association: Promoters have to decide about the directors who will be signing the
Memorandum of Association.
• Appointment of Professionals: Promoters appoint merchant bankers, auditors, etc. to assist them in the preparation of necessary
documents, which are required to be submitted with the Registrar of Companies.
• Preparation of Necessary Document: The following documents are to be necessarily prepared by the promoters
♦ Memorandum of Association (MOA): It is the principal document or the charter of the company.
♦ Articles of Association (AOA): They are the rules for the internal management of affairs of a company.
♦ Consent of Proposed Director: A written consent of proposed directors is required for their agreement to act as directors and buy
qualification shares.
♦ Agreement: If a company proposes anybody to appoint him/her as Managing Director/whole time Director/Manager, then such
agreement is to be submitted to the Registrar.
♦ Statutory Declaration: A statutory declaration is to be submitted to the Registrar stating that all legal requirements have been complied with.
• This declaration can be signed by a:
♦ Advocate of High Court or Supreme Court, or
♦ Practicing Chartered Accountant
♦ Person named in the Articles as Director, Manager or Secretary.
• Payment of Fees: The promoter has to pay the necessary fees for registration of the company. The amount of fees depends upon
the authorized capital of the company.
♦ Principle Documents Require To Be Prepared By The Promoter:
Two most important documents required to be prepared by promoters are given below-
♦ Memorandum of Association (MoA):
A Memorandum of Association (MoA) is a legal document which defines the relationship of a company with shareholders. It describes
the company's name, physical address of registered office, names of shareholders and the distribution of shares. It is the most important
document of the company and no company can undertake the activities that are not contained in the MoA. It specifies certain clauses that
are mentioned below.
♦ Name Clause It contains the legal and recognized name of the company which has been approved by the Registrar of Companies.
♦ Registered Office Clause It shows name of the state in which the office of the company will be located. The exact address is not required,
however, it should be given to the Registrar within 30 days of the incorporation of the company.
♦ Objective Clause This clause summarizes the objectives for establishing the company. The objects of the company are classified into the
following sub-clauses
♦ Liability Clause It states the extent to which shareholders of the company are liable to the debt obligations of the company in the event
of the company being wound up.
♦ Capital Clause This clause states the company's authorized share capital, the different categories of shares and the nominal value of the
shares. A company cannot issue share capital in excess of the amount specified in this clause.
♦ Association Clause In this clause, the signatories to the MoA state their intention to be associated with the company and also give their
consent to purchase qualification shares.
♦ Articles of Association (AOA):
The Articles of Association (AOA) is a document that contains the purpose of the company as well as clearly defined duties and responsibilities
of its members. These are the by laws of a company that define the mode and manner in which the company's business is to be carried on.
Companies Act, 2013 prescribes certain tables which can be considered as moderl tables for drafting the articles.
♦ Incorporation:It implies the registration of a company as a body corporate under the Companies Act, 2013. The following steps are taken by
the promoters to get the company incorporated
♦ Capital Subscription:A public company can raise the required funds from the public by means of issue of shares and debentures.ba For
doing the same, it has to issue a prospectus which is an invitation to the public to subscribe to the capital of the company.
♦ Commencement of Business:
To commence business, a public company has to obtain a Certificate of Commencement of business. For this, the following documents have to be
filed with the Registrar of Companies.
♦ A declaration that 90 per cent of the issued amount has been subscribed.
♦ A declaration that all directors have paid in cash in respect of allotment of shares made to them.
♦ A declaration that no money is payable to the applicants, due to company's failure to obtain k permission to deal in securities on a stock exchange.
♦ A statutory declaration that the above requirements have been completed and must be signed by the Director or Secretary of the company.
CHOICE OF FORM OF BUSINESS ORGANISATION:
The important factors determining the choice of organization are listed below:
• Cost and Ease in Setting up the Organisation: Setting up costs are low and the legal requirements are minimal in sole proprietorship and
partnership form of business. Since cooperative societies and companies have to be compulsorily registered, their formation is quite lengthy
and expensive.
• Liability: In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. But in the case of cooperative
societies and companies, the liability of the members is limited. Hence, from the point of view of liability, the company form of organisation
is more suitable.
• Continuity: The continuity of sole proprietorship and partnership firms is affected by death, insolvency or insanity of the owners. However,
such factors do not affect the continuity of business in case of organisations like Joint Hindu Family business, cooperative societies and companies.
In case the business needs a permanent structure, company form is more suitable. For short-term ventures, sole proprietorship or partnership may
be preferred.
• Management Ability: A sole proprietor may find it difficult to have expertise in all functional areas of management. In partnership, different
partners may have different managerial abilities. In a company, expert professionals can be appointed to look after the different aspects of business.
• Capital Considerations: Companies are in a better position to collect large amounts of capital by issuing shares to a large number of investors.
Partnership firms also have the advantage of combined resources of all partners. But the resources of a sole proprietor are limited. Thus, if the scale
of operations is large, company form may be suitable whereas for medium and small sized business, one can opt for partnership or sole proprietorship.
• Degree of Control: If direct control over operations and absolute decision making power is required, sole proprietorship may be preferred. But if the
owners do not mind sharing control and decision-making, partnership or company form of organization can be adopted.
• Nature of Business: If direct personal contact is needed with the customers, such as in the case of a grocery store, sole proprietorship may be more
suitable. For large manufacturing units, where direct personal contact with the customer is not required, the company form of organization may be
adopted. Similarly, in cases where services of a professional nature are required, partnership form is much more suitable.