BUSINESS FROMS OF BUSINESS ORGANISATIONS

 INTRODUCTION
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 organisation because Business activities cannot be performed in
isolation. They have to be organised in an appropriate form. While starting a business or expanding an
existing one, an important decision relates to the choice of the form of organisation. The most appropriate
form is determined by weighing the merits and limitations of each type of organisation against one's own
requirements.

 SOLE PROPRIETORSHIP
The term 'sole' implies 'only' and 'proprietor' refers to 'owner'. Hence, a sole proprietor is the one who is
the only owner of a business. Sole proprietorship refers to a form of business organisation which is owned,
managed and controlled by an individual who is the recipient of all profits and bearer of all risks. It is the
oldest and the simplest form of business organisation.

 Features of Sole Proprietorship

1. Formation and Closure: Sole formalities proprietorship are required is very to easy start
to it start (though as no in some cases, one may require a license, like in case of Chemist).

o There is no separate law that governs sole proprietorship.

o It can easily be dissolved (or closed) when the sole trader is interested. So, there is
ease in formation as well as closure of business.
2. Liability: The liability of the owner (i.e., sole proprietor) is unlimited. It means that the
owner is personally liable for payment of debts if assets of the business are not sufficient
to meet all the debts. In other words, his personal property may be sold to pay business
debts in case the debts exceed the assets of the firm.
3. Sole Risk Bearer and Profit Recipient: Sole proprietor is the sole owner who is
responsible for all the business affairs.
o Any risk of failure of business is borne all alone by him.
o Similarly, if the business is successful, he receives all the business profits which
becomes a direct reward for his risk bearing.
 4. No Separate Entity: A sole proprietorship has no legal existence, i.e. in the eyes of the
law, no distinction is made between the firm and the proprietor. As a result, owner is held
responsible for all the activities of the business.
5. Lack of Business Continuity: As owner and business are one and the same entity, death,
physical ailment or insolvency of the proprietor has a direct and detrimental effect on the
business. It may even lead to closure of the business.
 Merits of Sole Proprietorship
1. Quick Decision Making: Sole proprietor enjoys complete freedom in taking the
decisions.
o It facilitates quick decision-making as there is no need to consult others. He takes
all major or minor decisions.
o Timely decisions help him to take advantage of market opportunities as and when
they arise.
2. Confidentiality of Information: The maintenance of full secrecy is very important for
the success of a business. As proprietor has the sole decision making authority, it enables
him to retain all information related to business operations confidential. Sole trader is also
not bound by law to publish firm's accounts.
3. Direct Incentive: The proprietor enjoys all the profits of the business as there is no one
else to share earnings of the business. Direct relationship between efforts and reward
encourages him to work hard and earn more.
4. Sense of Accomplishment: Sole proprietorship provides personal satisfaction to people
who want to be self employed. As the proprietor is himself responsible for the success of
business, it not only provides him satisfaction but also creates a sense of accomplishment
and confidence.
5. Ease of Formation and Closure: Sole proprietorship can be easily started or dissolved at
any time with minimum legal formalities. No separate law governs sole proprietorship. So,
it can be started or closed down easily at the will of the proprietor.
 Limitations of Sole Proprietorship
1. Limited Resources: Limitations of Sole Proprietorship The resources of the proprietor
are limited to his personal savings and borrowings.
o The borrowing capacity is also limited as banks and other lending institutions may
hesitate to extend long-term loan to a sole proprietor.
o Due to lack of resources, sole proprietorship is generally of small size with low
growth rate.
2. Unlimited Liability: The proprietor has unlimited liability, i.e. he is liable for all the debts
of business.
o If business fails or debts exceed the business assets, then creditors can recover
their dues not only from the business assets, but also from the personal assets of
the proprietor.
o This fear of unlimited liability adversely affects the innovation and expansion of
business as a wrong decision can create serious financial burden on the owner.
3. Limited life of a Business Concern: In the eyes of the law, owner and business are
considered one and the same. So, Sole Proprietorship does not enjoy continuity of life.
Illness, death, insolvency affects the business.
 HINDU UNDIVIDED FAMILY BUSINESS
 The Hindu undivided family business or Joint Hindu Family Business is a unique form of
business organisation, which is found only in India. It is governed by the provisions of the
Hindu Law (The Hindu Succession Act, 1956). It is one of the oldest forms of business
organisation in the country
 It refers to a form of organisation wherein the business is owned and carried on by the
members of the Hindu Undivided Family (HUF).
 The basis of membership in the business is birth in a particular family and three
successive generations can be members in the business.
 The business is managed and controlled by the eldest male member of the family known
as 'Karta' or 'Manager'. The decisions of the karta are binding on all the members.
 All members have equal ownership right over the property of an ancestor and they are
known as co-parceners.
 There are two systems of inheritance under the Hindu Law:
 Dayabhaga System: This system prevails in West Bengal and Assam only. Under this
system, both male and female members of the family are allowed to be co-parceners.
The right in the joint family property is acquired only after death of the father.
 Mitakashara System: This system prevails all over India except West Bengal and
Assam. Under this system, only the male members are allowed to be со-parceners in
the business. The right in the joint family property is acquired by birth.
 Features of Hindu Undivided Family
1. Formation: For formation of Hindu undivided family business, there should be at least
two members in the family and ancestral property must be inherited by them. There is no
need for any agreement between the family members as membership arises by virtue of
birth. It is governed by the Hindu Succession Act, 1956.
2. Liability: The liability of all members (except karta) is limited to the extent of their shares
in the co-parcenery property of the business. However, the karta has unlimited liability,
i.e. his self-acquired property can also be attached for paying the debts of the business.
3. Control: The control of the family business lies with the karta. He is authorised to
manage the business. Hе takes all the decisions and his decisions are binding on the other
members.
4. Continuity: This form of business is not affected by the death of the members. In the
case of death of karta, the next eldest male person in the family becomes the karta,
leaving the business stable. However, the business can be terminated with the mutual
consent of the members.
5. Continuity: This form of business is not affected by the death of the members. In the
case of death of karta, the next eldest male person in the family becomes the karta,
leaving the business stable. However, the business can be terminated with the mutual
consent of the members.
6. Minor Members: Minors can also be members of the business as inclusion of an
individual into the business occurs due to birth in the Family.
 Merits of Hindu Undivided Family
1. Effective control: The karta has absolute decision making power. This avoids conflicts
among members as no one can interfere with his right to decide. This also leads to
prompt and flexible decision making.
2. Continued business existence: The death of the karta will not affect the business as the
next eldest member will then take up the position. Hence, operations are not terminated
and continuity of business is not threatened.
 3. Limited liability of members: The liability of all the co-parceners except the karta is
limited to their share in the business, and consequently their risk is well-defined and
precise.
4. Increased loyalty and cooperation: Since the business is run by the members of a
family, there is a greater sense of loyalty towards one other. Pride in the growth of
business is linked to the achievements of the family. This helps in securing better
cooperation from all the members.
 Limitations of Hindu Undivided Family
1. Limited resources: The joint Hindu family business faces the problem of limited capital
as it depends mainly on ancestral property. This limits the scope for expansion of
business.
2. Unlimited liability of Karta: The karta is burdened not only with the responsibility of
decision making and management of business, but also suffers from the disadvantage of
having unlimited liability. His personal property can be used to repay business debts.
3. Dominance of karta: The karta individually manages the business which may at times
not be acceptable to other members. This may cause conflict amongst them and may
even lead to break down of the family unit.
4. Limited managerial skills: Since the karta cannot be an expert in all areas of
management, the business may suffer as a result of his unwise decisions. His inability to
decide effectively may result into poor profits or even losses for the organisation.
 PARTNERSHIP
 The limitations of Sole Proprietorship and Hindu Undivided Family business gave birth to
partnership.
 Lack of finance and managerial capabilities under sole pro - prietorship paved the way for
partnership as a viable option.
 Partnership serves as an answer to the needs of greater capital investment, varied skills and
sharing of risks.
 According to Indian Partnership Act, 1932, Partnership is the relation between persons who
have agreed to share the profit/ loss of the business carried on by all or any one of them
acting for all.
 Features of Partnership
1. Formation: Partnership is governed by the Indian Partnership Act, 1932. It comes into
existence through a Legal agreement among the partners, in which terms and conditions
governing the relationship, sharing of profits and losses and the manner of conducting the
business are specified.
2. Liability: The partners of a firm have unlimited liability, i.e. their personal assets may be
used to pay off debts of the business in case of insufficiency of business assets. Further, the
partners are 'jointly' and 'individually' liable for payment of debts.
o Jointly, all the partners are responsible for the debts and they contribute in
proportion to their share in business and as such are liable to that extent.
o Individually, each partner can be held responsible to repay the debts of the
business. However, sucha partner has the right to recover the proportionate
contribution from other partners.
3. Risk Bearing: The partners bear the risks involved in running a business as a team. The
reward for risk bearing comes in the form of profits, which are shared by the partners in an
agreed ratio. However, in the event of losses, they also share the losses in the same ratio.
4. Decision-Making and Control: In a partnership firm, partners share amongst
themselves the responsibility of decision-making and control of day-to-day activities. Decisions
are generally taken with mutual consent. Thus, the activities are managed through the joint
efforts of all the partners.
 5. Membership: There should be minimum of 2 persons to form a partnership firm. Section 464
of the Companies Act, 2013 provides that number of persons in any partnership shall not exceed 100
subject to the limit prescribed in Rules. Rule 10 of the Companies (Miscellaneous) Rules, 2014 provides
that no partnership shall be formed, consisting of more than 50 persons. So, limit as of now is 50
partners.
6. Mutual Agency: According to Indian Partnership Act, 1932, partnership business is
carried on by all or any one of the partners acting for all It means, every partner acts in the
capacity of an 'agent' as well as a 'principal'.
o As an agent, he represents other partners and thereby binds them through his acts.
o As a principal, he is bound by the acts of other partners.
 Merits of Partnership
1. Ease of formation and closure: A partnership firm can be easily formed and dissolved.
It comes into existence through an agreement between the partners and they can start a
lawful business even without registration.
2. Balanced Decision-Making: Two heads are always better than one. The specialised
knowledge, skills and experience of different partners are available to the firm. The
partners can oversee different functions according to their areas of expertise. It not only
reduces the burden of work but also leads to more balanced decisions.
3. More Funds: In partnership firm, capital is contributed by a number of partners. As a
result, the business has got large resources as compared to sole proprietorship and firm
can undertake additional operations when needed.
4. Sharing of Risks: Business risks are shared by all the partners under the principle of
unlimited liability. This reduces the anxiety, burden and stress on individual partners.
5. Secrecу: A partnership firm can easily keep its secrets as it is not required to publish its
accounts. Partners are not likely to leak out the secrets as their own future is linked with
the success of the firm.
 Limitations of Partnership
1. Unlimited Liability: The liability of the partners is unlimited, jointly as well as
individually.
o Partners are liable to pay off business debts from their personal property if the
business assets are not sufficient to meet its debts.
o It is a drawback for those partners who have greater personal wealth as they will
have to repay the entire debt in case the other partners are unable to do so.
2. Limited Resources: A partnership firm cannot raise huge financial resources to support
large scale business operations due to legal ceiling on number of partners. As a result,
partnership firms face problems in expansion and growth beyond a certain size.
3. Possibility of Conflicts: In a partnership firm, every partner enjoys the right to
participate in the affairs of the firm.
o Any difference in opinion on some issues may lead to disputes between the
partners. Decisions of one partner are binding on others.
o Any wrong decision by one partner may result in financial ruin of all other
partners.
o Further, if a partner desires to leave the firm, then it will lead to termination of
partnership as there is restriction on transfer of ownership.
4. Lack of Continuity: The life of a partnership firm is highly uncertain and unstable. It can
come to an end by agreement, insolvency, death or insanity of any of the partners However,
the remaining partners can enter into a fresh agreement and continue to run the business.
5. Lack of Public Confidence: As the partnership firm is not legally required to publish its
accounts, public is not aware of its true financial status. As a result, the partnership firm
enjoys less confidence of the public.
 Types of Partners
1. Active or Working Partner: An active partner is one who contributes capital, participates
in the management of the firm, shares its profits and losses and bears an unlimited liability
for the debts of the firm. Such partners take active part in carrying out business of the
firm.
2. Sleeping or Dormant Partner: A sleeping partner is one whd does not take part in the
day-to-day activities of the business. Such partner, of course contributes capital, bears
unlimited liability, both jointly as well as individually, but does not participate in the
management affairs.
3. Secret Partner: A secret partner is one whose association with the firm is unknown to the
general public Except this distinct feature, he is like the rest of the partners. He
contributes capital, take part in the management, shares its profits and losses and has
unlimited liabilițy towards the creditors.
4. Nominal Partner: name A nominal partner is one who allows the use of his name and
goodwill for the benefit of the firm and can be represented as a partner. He does not
invest capital, does not share profits and does not take part in the management of
business. However, he bears unlimited liability for the debts of the firm.
5. Partner by Estoppel: A partner by estoppel is one who by his words or conduct gives an
impression to others that he is a partner of the firm Such partners are held liable for the
debts of the firm as they are considered partners in the eyes of the third party, even
though they do not contribute capital or take part in its management.
6. Partner by Holding out: A partner by holding out is one who is represented as a partner
and he does not deny such impression, despite becoming aware of that fact. Such a
person becomes liable for the debts of the firm to outsiders who have sold goods on credit
or lent money to the firm on the basis of such representation.
 Partnership firms can be classified in two ways
1. On the basis of Duration, i.e. on the basis of length or period of existence of partnership.
2. On the basis of Liabilitv, i.e. on the basis of extent of liability of Partners.
 Classification on the basis of Duration:
1. Partnership at Will: The life of this type of partnership depends upon the will of partners.
The partnership can be dissolved at the desire of any partner on giving a notice. This type
of partnership is not for a fixed period or for during a particular fixed venture.
2. Particular Partnership: It is one which is formed to accomplish a particular project or to
carry out an activity for a specified period of time. It dissolves automatically at the expiry of
fixed period or completion of project.
 Classification on the basis of Liability:
1. General Partnership: General partnership is one in which liability of every partner is
unlimited and every partner is entitled to take active part in management of the business.
Acts of each partner are binding on each other as well as on the firm.
2. Limited Partnership: Limited partnership is one in which liability of at least one partner is
unlimited, whereas, rest of the partners may have limited liability.
o Such a partnership does not get terminated with the death, lunacy or insolvency of
partners with limited liability.
o The limited partners do not enjoy the right of management and their acts do not
bind the firm or the other partners.
o Registration of such partnership is compulsory.
 Partnership Deed
Partnership comes into existence through an agreement which makes two or more people as
partners in business. This agreement may be verbal or in writing. Even though it is not essential
to have a written agreement, it is advisable to have one as it constitutes an evidence of the
conditions agreed upon. Partnership deed is the written agreement, which specifies the terms
and conditions that govern the partnership.

 The partnership deed generally includes the following aspects:

o Name of the firm
o Nature of business and location of business
o Duration of business
o Investment made by each partner
o Distribution of profits and losses
o Duties and obligations of the partners
o Salaries and withdrawals of the partners
o Interest on capital and interest on drawings
o Procedure for dissolution of the firm
o Preparation of accounts and their auditing
o Method of solving disputes
o Terms governing admission, retirement and expulsion of a partner
 Registration of Partnership Firm
Registration provides conclusive proof of the existence of a partnership firm. It is at the
option for a partnership firm to get registered. However, non-registration deprives the firm from
a number of benefits.
 Consequences of non-registration
o A partner of a unregistered firm cannot be file a suit against the firm or other partners.
o The firm cannot file a suit against third parties.
o The firm cannot file a case against the partners.
In view of these consequences, it is advisable to get the firm registered.

 Procedure for registration

Submission of application in the prescribed form to the Registrar of firms. The application
should be signed by all the partners and should contain the following particulars:
o Name of the firm
o Location of the firm
o Names of other places where the firm carries on business
o The date when each partner joined the firm
o Names and addresses of the partners
o Duration of partnership
 COOPERATIVE SOCIETY
The term 'cooperative' means working together and with others for a common purpose.
Cooperative Society is a voluntary association of persons, who join together with the motive of
welfare of the members.
 It aims to protect and promote economic and social interests. It is an association of
persons, not of capital.
 The cooperative society is compulsorily required to be registered under the Cooperative
Societies Act, 1912.
 A minimum of 10 adult persons are required to form a cooperative society Capital is raised
from its members through issue of shares. The society acquires a distinct legal identity after
its registration.
 Features of Cooperative Society
1. Voluntary Membership: Features of Cooperative Society Membership of a cooperative
society is voluntary. Any person of 18 years and above and having a common interest can
become its member.
o A person is free to join and leave the society whenever he desires so by giving a
notice.
o No one can be forced to join the association or to continue as a member. There is
no bar or discrimination on the basis of religion, caste and gender.
2. Legal Status: Registration of a cooperative society is compulsory After registration, a
cooperative society becomes a legal entity distinct from its members.
o It can own property and make contracts on its own name. It can also sue and be
sued in its own name.
o Being a separate legal entity, it is not affected by entry or exit of its members.
3. Limited Liability: The liability of the members of a cooperative society is limited to the
extent of amount contributed by them as capital. So, the maximum risk of a member is the
subscribed share capital.
4. Control: Such societies are run on a democratic pattern as equality is the essence of a
cooperative society. All members elect a managing committee through 'one-man-one-vote
system. The power to take decisions lies in the hands of the elected managing committee
However, members are allowed to give their suggestions, opinions and problems.
5. Service Motive: The cooperative society is formed with a service motive rather than
maximisation of profits. If any surplus is generated as a result of its operations, it is
distributed amongst the members in the form of dividend.
 Merits of Cooperative Society
1. Equality in Voting Status: The principle of 'one-man-one-vote' governs the cooperative
society. Each member is entitled to equal voting rights irrespective of amount of capital
contribution by a member.
2. Limited Liability: The liability of every member is limited to the extent of capital
contributed by them. Therefore, the risk of financial loss is limited and known. Personal
assets of members are safe and cannot be used to repay business debts. C
3. Stable Existence: Cooperative society is a corporate body and its existence is not affected
by the death, insolvency or insanity of its members. Thus, it enjoys continuity of life over a
long period of time.
4. Economy in Operations: Cooperative society is generally managed by the members
themselves on an honorary basis. As the society aims to eliminate middlemen, it helps in
reducing costs. The members of the society are the customers or producers, which also
reduces the risk of bad debts.
5. Support from Government: As cooperative society is based on democratic pattern, it
enjoys special exemptions, privileges and concessions from the government in the form of
low taxes, subsidies and low interest rates on loans.
6. Ease of Formation: The cooperative society can be easily started with any ten adult
members. The registration involves a few legal formalities. Its formation is governed by the
provisions of Cooperative Societies Act, 1912.
 Limitations of Cooperative Society
1. Limited Resources: A cooperative society faces shortage of resources as it is run by
members, who have limited means. The low rate of dividend on investment also acts as an
obstacle in attracting membership or more capital from the members.
2. Inefficiency in Management: The societies are unable to employ experts because of
their inability to pay them high salaries. The managing committee elected by the members,
are generally not professionally equipped to handle the management functions effectively.
3. Lack of Secrecy: Cooperative society suffers from the lack of secrecy as its affairs are
discussed openly in the meetings (due to disclosure obligations as per the Societies Act (7).
4. Government Control: In return of the privileges offered by the government, cooperative
society is bound by the rules and regulations related to auditing of accounts, submission of
accounts, etc.
o It reduces the flexibility in operations and initiative on the part of management.
o Control exercised by the state cooperative departments also negatively affects its
freedom of operation.
5. Differences of Opinion: There are often internal quarrels due to differences of opinion
and lack of cooperation among the members. It leads to difficulty in decision-making. Some
members attempt to give preference to personal interest at the cost of welfare motive.
 Types of Cooperative Societies
1. Consumers' Cooperative Societies: Consumers' Cooperative Society is formed by
consumers for obtaining good quality products at reasonable prices.
o The society aims to eliminate the middlemen by purchasing goods in bulk directly
from the manufacturers or wholesalers and selling them to the members.
o The profits or surplus, if any, is distributed among the members either on the basis
of their capital contributions or in proportion to their purchases.
2. Producers Cooperative Societies: Producers' Cooperative Society is formed by small
producers, who desire to procure inputs for production of goods in order to meet the
demands of consumers. They are formed to face the competition from large-scale
producers. They are also known as Industrial Cooperative Societies.
 o The society aims to fight against the big capitalists and wants to enhance the
bargaining power of small producers.
o Producers' Cooperatives are of two types:
■ This type of society supplies raw materials, equipment and other inputs to its
member producers so that they can concentrate on production.
■ The second type of society sells the goods produced by its member producers,
o Profits are generally distributed among the members on the basis of their
contributions to the total pool of goods produced or sold by the society.
3. Marketing Cooperative Societies: Marketing Cooperative Society is a voluntary
association of small independent producers who desire to sell their output through one
centralised agency The members consist of producers who wish to obtain reasonable
prices for their output.
o The production of different members is pooled and the society undertakes to sell
these products by eliminating middlemen.
o These societies also perform marketing functions like transportation, warehousing,
packaging, etc., to sell the output at the best possible price.
o Profits are distributed among the members in proportion to their contributions to
the common pool of output.
4. Farmers' Cooperative Societies: Farmers' Cooperative Society is formed by farmers to
jointly take up farming activities in order to gain the benefits of large-scale farming and
higher productivity These societies are established to protect the interests of farmers by
providing better inputs at a reasonable cost. They are also known as Agricultural
Cooperative Society.
o The society provides better quality seeds, fertilizers, machinery and other modern
techniques for use in the cultivation of crops. The aim is to improve the yield and
returns to the farmers.
o Such a society is helpful in consolidating the uneconomic, fragmented and small
holdings of land into viable economic holdings.
5. Credit Cooperative Societies: A Credit Cooperative Society is formed to provide short-
term financial assistance to the members in the form of loans.
o The society aims to protect the members from the exploitation of lenders who
charge high rates of interest on loans.
o The society provides loans to members out of the amounts collected as capital and
deposits and charge low rates of interest.
6. Cooperative Housing Societies: Cooperative Housing Societies: A Cooperative Housing
Society is formed by those people who are desirous of procuring residential
accommodation at lower costs. Such societies help people with limited income to
construct houses at reasonable costs.
o The society aims to solve the housing problems of the members and giving the
option of paying in installments.
o The society either constructs the flats or provides plots to the members on which
they can construct houses on their own.
 JOINT STOCK COMPANY
Joint Stock Company is considered to be the most suitable form of organisation for
operating business activities on a large scale.
A company is an association of persons formed for carrying out business activities and has a
legal status independent of its members.
 Features of Joint Stock Company
1. Artificial Person: Since a company is created by law, it is an artificial person, having no
body, no soul and no conscience, Le it cannot breathe, eat, run or talk. But, like a natural
person, a company can own property, incur debts, borrow money, enter into contracts, sue and
be sued. It can conduct a lawful business and enter into contract with others.
2. Separate Legal Entity: On incorporation, a company acquires a separate legal existence in
the eyes of law. The assets and liabilities of the company are separate from those of its owners.
3. Formation: The formation of a company is a time consuming, expensive and complicated
process. It involves preparation of several documents and compliance with several legal
requirements before it can start functioning. Registration of company is compulsory under the
Indian Companies Act.
4. Perpetual Succession:
o Company has a permanent or perpetual existence, i.e. its existence is not affected by
death, insolvency, coming or going of the members. As company is a creation of the
law, it can be brought to an end only by law It will cease to exist only when specific
procedure of winding up is followed.
o It is rightly said, "Members may go, members may come, but the company remains
forever".
5. Control: The ownership and the management (control) are in two different hands.
o Shareholders are the owners, but the company is managed by its Board of Directors,
which appoints the top management officials for running the business.
o Directors are the legal representatives and are directly accountable to the
shareholders for the working of the company.
o Shareholders do not have the right to be involved in the day-to-day running of the
business.
6. Liability: The liability of the members is limited to the extent of the capital contributed by
them in a company.
o In case the company incurs huge liabilities, then the shareholders can be asked to
contribute the unpaid balance of their shares.
o Creditors can settle their claims against the assets of the company and shareholders
cannot be asked to pay the company's debts.
o Example for Clarification, Suppose, Shyam is a shareholder in a company holding 500
shares of 10 each, on which he has already paid 7 per share. In the event of losses or
company's failure to pay debts, Shyam is liable to pay only 1,500 (ie. the unpaid
amount of 3 on 500 shares).
7. Common Seal: As company is an artificial person, it acts through its Board of Directors,
who use Common Seal (sometimes referred to as 'Corporate Seal' or 'Company Seal') of the
company as signature of the company. Any document, on which Common Seal is affixed and is
duly signed by the authorized official of the company becomes binding on the company.A
company may or may not have a common seal.
o If a company has a common seal, it must be affixed to the documents such as
agreements of a company.
o If a company does not have a common seal, then the person signing
 8. Risk Bearing: In a company, the risk of losses is borne by all the shareholders. In the
event of financial crisis, all the shareholders have to contribute to the debts to the
extent of their capital contribution. Hence, risk of loss gets spread over a large number
of shareholders.
9. Transfer of Shares: The shareholders enjoy a right to transfer their shares to other
persons in the open market or at the stock exchange, at the price prevailing in the
market at that time.
 Merits of Joint Stock Company
1. Limited Liability: The liability of the shareholders of a company is limited to the
extent of amount unpaid on the shares held by them.
o The personal assets of a member are safe and free from any charge as debts of
the company can be settled only from the assets of the company.
o It reduces the degree of risk borne by an investor.
2. Transfer of Interest: The shares of a public company are freely transferable. A
shareholder can dispose off his shares at any time when the market conditions are
favourable or he is in need of money. The ease of transfer of ownership avoids
blockage of investment and makes the company a favourable avenue for investment
purposes.
3. Perpetual Existence: A joint stock company enjoys perpetual existence. Change in its
ownership and management does not affect its continuity, i.e. its existence is not
affected by death, retirement, insolvency or insanity of its members. It can be
liquidated only as per the provisions of the Companies Act.
4. Scope for Expansion: As compared to other forms of organisation, a company has
large financial resources.
o Moreover, capital can be attracted from the public as well as through loans
from banks and financial institutions.
o The investors are inclined to invest in shares of the company because of limited
liability, transferable ownership and possibility of high returns. So, there is
greater scope for expansion.
5. Professional Management: A company can employ specialists and professionals in
different areas of business.
o The large-scale of operations facilitate division of work. As a result, each
department deals with a particular activity and is headed by an expert.
o As management of the company is in the hands of specialised and experienced
personnel, it results in balanced and rational decisions.
 Limitations of Joint Stock Company
1. Complexity in Formation: Drawbacks Limitations of Joint Stock Company As
compared to other form of organisations, formation of a company is more complex as
it requires greater time, effort, procedures and extensive knowledge of legal
requirements.
2. Lack of Secrecy: According to Companies Act, each public company has to provide
information from time-to-time to the office of the registrar of companies. Such
information is available to the general public also. As a result, it is difficult to maintain
complete secrecy about the operations of company.
3. Impersonal Work Environment: Separation of ownership and management leads to
a situation in which there is no direct relationship between efforts and rewards.
o There is lack of effort as well as personal involvement on the part of the officers
of a company.
o Moreover, large size of the company makes it difficult for the owners and the
management to maintain personal contact with the employees, customers and
creditors.
4. Numerous Regulations: The functioning of a company is subject to large number of
legal formalities.
o The company is burdened with numerous restrictions with respect to audit,
voting, filing of reports, preparation of documents and obtaining certificates
from various Agencies.
o All this process is very time consuming and expensive and reduces the freedom
of operations.
5. Delay in Decision Making: In company form of organisation, decision-taking is a time
consuming process. All important decisions are taken either by the Board of Directors
or are referred to general meeting. It causes not only delays in taking decisions but also
in acting upon them. Many opportunities are lost because of delay in decision-making.
6. Oligarchic Management: In theory, management of a company appears to be
democratic as directors are the elected representatives of shareholders.
o However, in reality, management of the company is the worst example of
oligarchy, i.e. rule by a few.
o Shareholders of a company are scattered and disunited. They do not take much
interest in company meetings.
o Therefore, directors enjoy considerable freedom in exercising their power which
they sometimes use against the interests of shareholders.
o In such a situation, dissatisfied shareholders have no option but to sell their
shares and exit the company and directors virtually enjoy the rights to take all
major decisions.
7. Conflict in Interests: There may be conflict of interest amongst various stakeholders
of a company. For example, employees may be interested in higher salaries, consumers
may desire better quality products at lower prices and shareholders may ask for. higher
dividends These demands pose problems as it is very difficult to satisfy such diverse
interests.
 TYPES OF COMPANIES

 On the basis of ownership, a company can be of three types

1. One Person Company (OPC):

o According to Section 2(62) of the Companies Act. 2013. One Person Company means a
company which has only one person as a member.
o It is a company incorporated as a private company which has only one member.
o OPC avails all the benefits of a private limited company, such as separate legal entity,
protecting personal assets from business liability and perpetual succession.
 Characteristics of OPC
 Only a natural person who is an Indian citizen and resident in India:
 Shall be eligible to incorporate a One Person Company,
 Shall be a nominee for the sole member of a One Person Company The
term 'resident in India' means a person who has stayed in India for a
period of not less than one hundred and eighty two days during the
immediately preceding one calendar year.
 No person shall be eligible to incorporate more than one OPC or become
nominee in more than one such company.
 If any person who is already having a one-person company become the member
of another One Person Company by nomination then with in a period of one
hundred and eighty days he has to select one and exist from other company.
 No minor shall become member or nominee of the One Person Company.
 Such Company cannot be incorporated or converted into a company under
Section 8 of the Act.
 Such Company cannot do financial investment in any other corporation also.
 No such company can convert voluntarily into any kind of company unless two
years have expired from the date of incorporation of One Person Company,
except threshold limit (paid up share capital) is increased beyond fifty lakh
rupees or its average annual turnover during the relevant period exceeds two
crore rupees.
 The words "One Person Company" shall be mentioned in brackets below the
name of such company, wherever its name is printed, affixed or engraved.
2. Public Company: A public company means a company, which is not a private company.
According to Indian Company Act, a public company is one which:
o Has a minimum of 7 members and no limit on maximum members.
o Has no restriction on transfer of shares.
o Is not prohibited from inviting subscription from general public.
A private company which is a subsidiary of a public company is also treated as a public
company.
 3. Private Company: A Private Company as per Section 2(68) of Indian Companies Act, 2013 is
one which by its Article of Assosiation:
o Restricts the right of its members to transfer shares.
o It has minimum of 2 and a maximum of 200 members excluding past or present
employees of the company, who are members of the company.
o Prohibits any invitation to the general public to subscribe for its shares.
It is necessary for a private company to use the word Private Limited. If a private company
contravenes any of the aforesaid provisions, it ceases to be a private company and loses all
the exemptions and privileges to which it is entitled.

 Privileges of Private Company over Public Company

1. A private company can be started with just two members, whereas, a public company
requires at least seven members.
2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a
private company.
3. It can allot shares without receiving the minimum subscription.
4. A private company can start its work just after getting a certificate of incorporation.
5. It can work with just two directors as compared to three directors under public company.
6. A private company is not required to keep an index of members, while the same is necessary
in case of public company.
7. A Private Company can lend money or give guarantee or security to its directors without the
prior approval of Government, whereas, a public company needs prior approval.
 FORMATION OF A JOINT STOCK COMPANY
1. Formation of a company is not a simple process like in case of sole proprietorship or
partnership. It is a complex and lengthy process, which involves a number of legal formalities
and procedures.
2. The formation of a company involves the following stages:
a. Promotion b. Incorporation c. Capital Subscription
 PROMOTION OF A COMPANY
1. Promotion is the first stage in the formation of a company. It includes the steps like
identification of a business opportunity, analysts of its prospects and taking steps to implement it
for the formation of a company.
2. The person who performs all the tasks during the promotion stage is known as Promoter'.
3. The 'promoter' conceives the business idea and takes all initiatives to form a company.
4. The promoter can be an individual, a group of persons or an institution.
 Functions of a Promoter (Steps in Promotion):
1. Identification of Business Opportunity: The process of formation of a company begins
when promoter identifies a business opportunity or an idea. The idea may be with respect to
setting up of a new business or expansion of the existing unit or merger of two business units
The promoter also undertakes preliminary analysis of the idea in terms of profitability,risk
involved, resources required, etc. After conceiving the idea, the promoter proceeds to
explore the feasibility of the business in view.
2. Feasibility Studies: • It may not be feasible or profitable to convert all identified business
opportunities into real projects. So, before investing the money in the idea, various factors
like expected demand of the product, extent of competition, availability of various physical,
financial and human resources and their associated costs, etc. are estimated in order to
investigate all aspects of the intended business. Depending upon the nature of project and
with the help of specialists like engineers, CAs, etc., the following feasibility studies may be
undertaken:
o Technical Feasibility: Sometimes, the business idea is favourable, but technically it
may not be possible to implement the idea. It may be due to non availability of
required technology, raw materials and other inputs. The project would remain
technically unfeasible until technology or other inputs are made available from
alternative sources.
o Financial Feasibility: Every business activity requires funds. If the funds required for
the project is so large that it cannot be arranged within the available means, then the
project is said to be financial unfeasible. For example, project of developing
 townships may be very lucrative, but if it is not possible to arrange the required
funds, then the project lacks financial feasibility.
o Economic Feasibility : Sometimes a project is abandoned just because it might not be
very profitable. Generally businessmen prefer to carry on with the ideas which are
profitable.

3. Name Approval: The promoters have to select a name for the company and get it approved
from the Registrar of companies. It has to be ensured that the name selected for the
company does not match with the name of any other company. For this, three names are
given to the registrar in order of preference Registrar approves the name if the proposed
name is not identical to name of any other existing company and is not misleading.
4. Fixing up Signatories to the Memorandum of Association:
o The promoters have to decide about the people who will be signing the
Memorandum of Association of the proposed company. Usually, the people who sign
the memorandum (known as signatories) are also the first Directors of the Company.
o The written consent of signatories to act as directors and to buy qualification shares is
also taken.
o The Memorandum must be signed by at least 7 persons in case of a public company
and by 2 persons in case of a private company.
5. Appointment of Professionals: The promoters appoint professionals such as mercantil
bankers auditors, etc. to assist in preparation and submission of necessary documents to the
Registrar of Companies.
6. Preparation of Necessary Documents: The promoter takes up steps to prepare legal
documents (Memorandum of Association Articles of Association Consent of Directors, etc.) as
they have to be submitted to the Registrar for getting the company registered.
 IMPORTANT DOCUMENTS REQUIRED
The important documents required to be submitted to the Registrar are:
1. Memorandum of Association
2. Articles of Association
3. Consent of Proposed Directors
4. Agreement
5. Statutory Declaration
 Memorandum of Association (MOA)
Memorandum of Association (MOA) is the principal document of the company. It has been
described as the 'Charter of the Company' as it contains the powers and objectives of the company,
defines the scope of its operations and its relations with the investors and outside world. The
company has to work within the limits laid down in the Memorandum. The Memorandum of a
company should be formulated in accordance with the respective forms as mentioned in the Tables
A, B, C, D & E under Schedule 1 of the Companies Act.
 Contents of Memorandum of Association
1. Name Clause: This clause contains the name of the company with which the company will
be known. Reliance Industries.
2. Registered Office Clause: This clause contains the name of the state, in which the
registered office of the company is proposed to be situated.
3. Objects Clause: It defines the purpose for which the company is formed. A company cannot
conduct any business not authorised by its object clause. The object clause is further divided
into two sub-clauses.
o The Main Objects
o Other Objects
4. Liability Clause: This clause states that the liability of the members of the company is
limited to the amount unpaid on the shares owned by them.
For example, if a shareholder has purchased 500 shares of 10 each and has already paid 7
per share, then his liability is limited to 3 per share Thus, in event of losses or company's
failure to pay debts, the shareholder is liable to pay only 1,500 (ie the unpaid amount of 3 on
500 shares).
5. Capital Clause: This clause specifies the maximum capital (known as authorised capital),
which the company will be authorised to raise through the issue of shares.
For example, the authorised share capital of the company may be 2 crores, divided into 20
lakh shares of 10 each.
6. Associations Clause: In this clause, the signatories to the Memorandum of Association
state their intention to be associated with the company and also give their consent to
purchase qualification shares. The Memorandum of Association must be signed by at least 7
persons in case of a public company and by 2 persons in case of a private company.
 Articles of Association:
o The Articles of Association is the second important document, which contains the rules and
regulations for the internal management of the company.
o It is subsidiary to the Memorandum of Association and hence cannot include any powers
prohibited or excluded by the Memorandum.
  Consent of Proposed Directors: In addition to Memorandum and Articles of Association, a
written consent of proposed directors is required to confirm that they agree to act in that capacity
and undertake to buy and pay for qualification shares.
 Agreement: If the company proposes to enter into an agreement with any individual for
appointing him as Managing Director/Whole time Director/Manager, then such agreement is also to
be submitted to the Registrar.
 Statutory Declaration: A statutory declaration is to be submitted to the Registrar stating that all
the legal requirements of the Companies Act in regard to incorporation have been complied with.
This statement has to be signed by any of the following:
o Advocate of High Court or Supreme Court; or
o Chartered Accountant/Company Secretary in full time practice; or
o Person named in the articles as a Director; or
o Manager or Secretary of the company.
 Payment of Fee: Along with the above documents, necessary filing fees and registration fees has
to be paid for the registration of the company. The amount of fees depends on the authorised share
capital of the company.
 INCORPORATION OF THE COMPANY

Incorporation means registration of the company under the Companies Act, 2013 or any previous
Company Law. This is the second stage in the formation of the company. After the registrar approves
the name, the promoter can proceed with the following steps for the incorporation of the Company:
 Filing of Documents: Promoters make an application to the Registrar for the incorporation of the
company. The application must be accompanied with following documents:
o Memorandum of Association
o Articles of Association
o Written Consent
o Agreement
o Copy of the registrar's letter
o Stautory Declaration
o Notice of the exact address of the registered office
 Payment of Fees: Along with the above documents, necessary filing fees and registration fees at
the prescribed rates are also to be paid.
 Certificate of Incorporation: The Registrar scrutinises all the documents and if he is satisfied
about the completion of formalities for registration, he issues a Certificate of Incorporation The
moment the certificate is issued, the company comes into existence.
 CAPITAL SUBSCRIPTION
 SEBI Approval: SEBI (Securities and Exchange Board of India) is the regulatory authority in the
securities market to protect the interest of investors. If the company proposes to raise capital from
public by issue of shares or debentures, then a draft prospectus has to be submitted to SEBI.
 Filing of Prospectus: Prospectus is a document inviting deposits or offers from the public for the
subscription or purchase of shares or debentures of the company.
 Appointment of Bankers, Brokers and Underwriters: Raising funds from the public is a
complex task. So, in order to ease the process, experts in different fields are appointed.
 Minimum Subscription: Before commencing the business, every public limited company must
raise minimum subscription in order to avoid shortage of funds. As per the Guidelines of Securities
and Exchange Board of India (SEBI), a company must receive a minimum of 90% subscription against
the entire issue before making any allotment of shares to the public.
  Application to Stock Exchange: A public company must get itself listed or quoted in a stock
exchange before it starts selling the securities to the public.
 Allotment of Shares: After getting the name listed in the stock exchange, the company makes
allotment of shares as per guidelines of SEBI.
 CHOICE OF FORM OF BUSINESS ORGANISATION
 Cost and Ease in setting up the Organisation: The first and foremost consideration in
selecting the form of organisation is the ease and cost with which it can be formed
o Sole proprietorship is very easy to start with minimum costs and legal requirements.
o Partnership also has the advantage of lower cost and less legal formalities due to limited
scale of operations.
o Cooperative societies and companies to be compulsorily registered Formation of a company
is a complex task and involves lengthy and expensive legal procedure.
 Liability: Every business creates certain liabilities for the owner of the business undertaking.
o In sole proprietorship and partnership, the owner/partners have unlimited liability, i.e.
their personal property can be used to pay off business debts.
o In Hindu undivided family business, only the karta has unlimited liability.
o However, in case of cooperative society and company, the members have limited liability,
i.e. their personal property cannot be used for business debts.
 Continuity: An ideal form of organisation should ensure the continuity of the business Hindu
undivided family business, cooperative societies and companies enjoy continued or perpetual
existence, whereas, continuity of sole proprietorship and partnership is affected by death,
insolvency or insanity of the owners.
 Management Ability: The nature of operations and the need for professionalised management
affect the choice of the form of organisation.
o A sole proprietor may find it difficult to have expertise in all functional areas of
management.
o Under partnership, cooperative society and company, division of work is possible, which
allows the members to specialise in specific areas, leading to better decision- making.
However, there may be conflicts because of differences of opinion.
 Capital Considerations: Finance is the basic requirement of any business operation. An
entrepreneur must consider the total amount of capital required for the business he wants to
start.
o If the capital needed is small and owner can manage with his own resources, then sole
proprietorship is appropriate. Partnership firms also have the advantage of combined
resources of all partners.
o However, if large amount of capital is needed, then company form is preferred as
companies are in a better position to collect large amounts of capital by issuing shares to a
large number of investors.
 Degree of Control: The choice of form of organisation also depends on degree of control desired.
If the owner wants to exercise direct personal control over the business, then sole proprietorship
may be preferred. However, if the owners are ready to share control and decision-making, then
partnership or company form can be adopted. The company has an added advantage that there is
complete separation of ownership and management and professionals are appointed to
independently manage the affairs of a company.