CBSE Class 11 Business Studies Chapter 2 Notes: Forms of Business Organisations

Class 11 Business Studies Chapter 2 Notes (Forms of Business Organisations)

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• Subject: Business Studies
• Class: 11th (CBSE)
• Chapter Number: 2
• Chapter Name: Forms of Business Organisations

Table of Content

Sole Proprietorship	Joint Hindu Family Business
Partnerships	Cooperative Society
Joint Stock Company	Comparative Evaluation of Forms of Organisation

Sole Proprietorship

• The word “sole” implies “only” and “proprietor” refers to the “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 the risks.
• This form of business is particularly common in areas of personalized services such as beauty parlours, hair saloons and small scale activities like running a retail shop in a locality.

Features of Sole Proprietorship

Formation and Closure

• There is no separate law that governs sole proprietorship. Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. Closure of the business can also be done easily.
• Thus, there is ease in formation as well as closure of business.

Liability

• Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts.
• As such, the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt.

Sole Risk Bearer and Profit Recipient

• The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits.
• He receives all the business profits, which become a direct reward for his risk bearing.

Control

• The right to run the business and make all decisions lies absolutely with the sole proprietor.
• He can carry out his plans without any interference from others.

No Separate Entity

• In the eyes of the law, no distinction is made between the sole trader and his business, as the business does not have an identity separate from the owner.
• The owner is, therefore, held responsible for all the activities of the business.

Lack of Business Continuity

• The sole proprietorship business is owned and controlled by one person. Therefore, death, insanity, imprisonment, physical ailment, or bankruptcy of the sole proprietor will have a direct effect on the business and may even cause the closure of the business.

Merits of the Sole Proprietorship

Quick Decision Making

• A sole proprietor enjoys a considerable degree of freedom in making business decisions.
• Decision making is prompt because there is no need to consult others. This may lead to timely capitalization of market opportunities as and when they arise.

Confidentiality of Information

• A sole proprietor can keep all business information confidential and maintain secrecy.
• He is not bound by law to publish the accounts of his business.

Direct Incentive

• A sole proprietor directly gets the benefits of his efforts as he is the sole recipient of all the profits.
• The need to share profits does not arise as he is the single owner. This provides maximum incentive and motivation to the sole trader to work hard.

Sense of Accomplishment

• There is a personal satisfaction involved in working for oneself.
• If the business is successful, it contributes to self satisfaction to the sole proprietor and creates a sense of accomplishment in him.

Ease of Formation and Closure

• Sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner. There are no separate laws that govern sole proprietorship.

Demerits of the Sole Proprietorship

Limited Resources

• Resources of a sole proprietor are limited to his/her personal savings and borrowings from others.
• Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the business rarely grows much beyond small.

Limited Life of Business

• The sole proprietorship business is owned and controlled by one person.
• So death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor affects the business and can lead to its closure.

Unlimited Liability

• A major disadvantage of sole proprietorship is that the owner has unlimited liability.
• If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor.
• A poor decision or an unfavourable circumstance can create serious financial burden on the owner.

Limited Managerial Ability

• The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc.
• It is rare to find an individual who excels in all these areas. Thus, decision making may not be balanced in all the cases. Also, due to limited resources, sole proprietor may not be able to employ and retain talented and ambitious employees.

Joint Hindu Family Business

• It is one of the oldest forms of business organization in the country. It refers to a form of organization wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). It is governed by the Hindu Law.
• The basis of membership in the business is birth in a particular family and three successive generations can be a member of the business. The business is controlled by the head of the family which is called “Karta”. All members have equal ownership right over the property of an ancestor and they are known as “co-parceners”.

Features of a Joint Hindu Family Business

Formation

• HUF system is governed by the Hindu Succession Act of 1956. For a Joint Hindu Family business, there should be at least 2 members in the family and ancestral property to be inherited by them.
• The business does not require any agreement as membership is by birth.

Liability

• The liability of the members except the Karta is limited to their share of co-parcenery property of the business. However, the Karta has unlimited liability.

Control

• The control of the family business lies with the Karta. He takes all the decisions and is authorized to manage the business. His decisions are binding on the other members.

Minor Members

• The inclusion of an individual into the business occurs due to birth in a Hindu Undivided Family. Hence, minors can also be members of the business.

Continuity

• The business continues even after the death of the Karta as the next eldest member takes up the position of the Karta, leaving the business stable. However, the business can be terminated with the mutual consent of members.

Merits of Hindu Undivided Family

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.

Continued Business Existence

• The death of Karta will not affect the business as the next eldest member will then take up his position.
• Hence, operations are not terminated and continuity of business is not threatened.

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.

Increased Loyalty and Cooperation

• Since the business is run by the members of the family, there is a greater sense of loyalty towards one another.
• Pride in the growth of the business is linked to the achievements of the family. This helps in securing better cooperation from all the members.

Demerits of Hindu Undivided Family

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 the expansion of business.

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 the breakdown of the family unit.

Unlimited Liability of Karta

• The Karta is burdened not only with the responsibility of decision making and management of the business, but also suffers from the disadvantage of having unlimited liability.
• His personal property can be used to repay business debts.

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 organization.

Partnership

According to the Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”

Features of Partnership

Formulation

• Partnership is the result of an agreement between two or more persons to do business and share its profits and losses.
• The agreement becomes the basis of relationship between the partners. It is not necessary that such agreement is in written form. An oral agreement is equally valid. But in order to avoid disputes, it is preferred that the partners have a written agreement.

Liability

• The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient to pay business debts.
• Further, the partners are jointly and individually liable for payment of the firm’s debts.

Risk Bearing

• The partners bear the risk involved in running a business as a team.
• The reward in the form of profits is shared by the partners in the agreed ratio. However, they also share losses in the same ratio in the event of the firm incurring losses.

Decision Making and Control

• The 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 of a partnership firm are managed through the joint efforts of all the partners.

Continuity

• Partnership is characterized by lack of continuity of business since the death, retirement, insolvency, or insanity of any partner can bring an end to the business.
• However, the remaining partners may, if they so desire, continue the business on the basis of a new agreement.

Number of Partners

• The minimum number of partners needed to start a partnership firm is two, while the maximum number of partners required should not exceed 50.

Mutual Agency

• The business of a partnership concern may be carried on by all the partners or any of them acting for all. This statement has two important implications.
• First, every partner is entitled to participate in the conduct of the affairs of its business.
• Second, there exists a relationship of mutual agency between all the partners. Each partner carrying on the business is the principal as well as the agent for all the other partners.

Merits of a Partnership Firm

Ease of Formation and Closure

• A partnership firm can be formed easily by putting an agreement between two or more persons to carry some lawful business.
• Registration is not compulsory. Closure of the firm too is an easy task.

Balanced Decision Making

• Different partners having expertise in different areas of functions can take correct decisions with the consent of all other partners.
• As a result, decisions are likely to be more balanced.

More Funds

• In a partnership, the capital is contributed by a number of partners.
• This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed.

Sharing of Risks

• The risks involved in running a partnership firm are shared by all the partners.
• This reduces the anxiety, burden and stress on individual partners.

Secrecy

• A partnership firm is not legally required to publish its accounts and submit its reports.
• Hence, it is able to maintain confidentiality of information relating to its operations.

Demerits of a Partnership Firm

Unlimited Liability

• The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient to pay business debts.
• The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so.

Lack of Continuity

• Partnership comes to an end with the death, retirement, or insolvency of any partner. It may result in lack of continuity.
• However, the remaining partners can enter into a new agreement and continue to run the business.

Limited Resources

• There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large-scale business operations.
• As a result, partnership firms face problems in expansion beyond a certain size.

Lack of Public Confidence

• A partnership firm is not legally required to publish its financial reports or make other related information public.
• It is therefore difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public in partnership firms is generally low.

Types of Partners

Type	Capital Contribution	Management	Share in Profits/Losses	Liability
Active Partner	Contributes capital	Participates in management	Shares profits/losses	Unlimited liability
Sleeping or Dormant Partner	Contributes capital	Does not participate in management	Shares profits/losses	Unlimited liability
Secret Partner	Contributes capital	Participates in management, but secretly	Shares profits/losses	Unlimited liability
Nominal Partner	Does not contribute capital	Does not participate in management	Generally does not share profits/losses	Unlimited liability
Partner by Estoppel	Does not contribute capital	Does not participate in management	Does not share profits/losses	Unlimited liability
Partner by Holding Out	Does not contribute capital	Does not participate in management	Does not share profits/losses	Unlimited liability

Definitions of Partners

Type of Partner	Description / Characteristics
Active Partner	An active partner is one who contributes capital, participates in the management of the firm, shares its profits and losses, and is liable to an unlimited extent to the creditors of the firm. These partners take actual part in carrying out the business of the firm on behalf of other partners.
Sleeping Partner	Partners who do not take part in the day-to-day activities of the business are called sleeping partners. However, a sleeping partner contributes capital to the firm, shares its profits and losses, and has unlimited liability.
Secret Partner	A secret partner is one whose association with the firm is unknown to the general public. However, he contributes to the capital of the firm, takes part in the management, shares its profits and losses, and has unlimited liability towards the creditors.
Nominal Partner	A nominal partner allows the use of his/her name by a firm but does not contribute any capital and does not take an active part in managing the firm. He does not share its profits or losses but is liable, like other partners, to third parties for the repayment of the firm’s debts.
Partner by Holding Out	A person who is not a partner in a firm but knowingly allows himself/herself to be represented as a partner in a firm is known as a partner by holding out. Such a person becomes liable to outside creditors for repayment of any debts which have been extended to the firm on the basis of such representation. If he/she is not really a partner and wants to save himself/herself from such liability, he/she should immediately issue a denial, clearly stating that he/she is not a partner in the firm.
Partner by Estoppel	A person is considered a partner by estoppel if, through his/her own initiative, conduct, or behaviour, he/she gives an impression to others that he/she is a partner of the firm. Such partners are held liable for the debts of the firm because, in the eyes of the third party, they are considered partners, even though they do not contribute capital or take part in its management.

Types of Partnership Based on Duration

Partnership at Will	This type of partnership exists at the will of the partners. It can continue as long as the partners want and is terminated when any partner gives a notice of withdrawal from partnership to the firm.
Particular Partnership	Partnership formed for the accomplishment of a particular project like construction of a building or any activity to be carried on for a specified time period is called particular partnership. It dissolves automatically when the purpose for which it was formed is fulfilled or when the time duration expires.

Types of Partnership Based on Liability

General Partnership	The partnership in which the liability of all the partners is unlimited and joint is known as a general partnership. Registration of the partnership firm is optional. In this partnership, all the partners enjoy the right to participate in the management of the firm. The existence of the firm is affected by the death, lunacy, insolvency or retirement of the partners.
Limited Partnership	In a limited partnership, the liability of at least one partner is unlimited whereas the rest may have limited liability. Registration of such partnership is compulsory. The limited partners do not enjoy the right of management and their acts do not bind the firm or the other partners. Such a partnership does not get terminated with the death, lunacy or insolvency of the limited partners.

Partnership Deed

The written agreement which specifies the terms and conditions that govern the partnership is called the partnership deed. Such an agreement can be oral or written. Even though it is not essential to have a written agreement, it is advisable to have a written agreement as it constitutes an evidence of the conditions agreed upon.

The partnership deed generally includes the following aspects:
1	Name of the firm
2	Nature and location of business
3	Duration of business
4	Investment made by each partner
5	Distribution of profits and losses
6	Method of solving disputes
7	Procedure for dissolution of the firm
8	Interest on capital and interest on drawings
9	Salaries and withdrawals of the partners
10	Duties and obligations of the partners

Registration

• Registration of a partnership firm means the entering of the firm's name, along with the relevant prescribed particulars, in the register of firms kept with the registrar of firms.
• Partnership provides conclusive proof of the existence of a partnership firm.
• It is optional for a partnership firm to get registered. However, in case a firm does not get registered, it is deprived of many benefits.

Consequences of non-registration of a 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.

Procedure for Registration of a Partnership Firm

According to the Indian Partnership Act 1932, the partners may get the firm registered with the registrar of firms of the state in which the firm is situated. The registration can be at the time of formation or at any time during its existence.

Submission of Application

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Fee Deposit

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Certificate of Registration

1) Submission of Application

• Submission of application in the prescribed form to the registrar of firms. The application should contain the following particulars:
  • Name of the firm
  • Location of the firm
  • Name of other places where the firm carries on business
  • The date when each partner joined the firm
  • Name and address of the partners
  • Duration of partnership

2) Fee Deposit

• Once the application is provided to the registrar, now the required amount of fees is to be deposited with the registrar of firms.

3) Certificate of Registration

• The registrar after approval will make an entry in the register of firms and will subsequently issue a certificate of registration.

Cooperative Society

• The word cooperative means working together with others for a common purpose. The cooperative society is a voluntary association of persons, who join together with the motive of the welfare of the members.
• They are driven by the need to protect their economic interests in the face of possible exploitation at the hands of middlemen obsessed with the desire to earn greater profits. The cooperative society is compulsory required to be registered under the Cooperative Societies Act 1912.
• There should be at least ten adult members required to form a cooperative society and the capital of a society is raised from its members through issue of shares.

Features of Cooperative Society

Voluntary Membership

• The membership of a cooperative society is voluntary. A person is free to join and can also leave anytime as per his desire.
• Membership in the society is open for all i.e. irrespective of religion, caste, and gender.

Limited Liability

• The liability of the members of a cooperative society is limited to the extent of the amount of capital contributed by them. This defines the maximum risk that a member can be asked to bear.

Legal Status

• Registration in a cooperative society is compulsory. Therefore, it is a separate legal entity distinct from its members.
• The society can enter into contracts and hold property in its name, sue and be sued by others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members.

Control

• The society has a democratic character in the sense that the members have the right to vote to select the members of the managing committee.
• The managing committee manages and controls all the affairs of the society.

Service Motive

• The main motive of the cooperative society is mutual help and welfare of members.
• Any surplus is generated as a result of its operations, it is distributed amongst the members as dividend in conformity with the byelaws of the society.

Merits of a Cooperative Society

Equality in Voting Status

• The principle of “one man one vote” governs the cooperative society.
• Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights.

Stable Existence

• Death, bankruptcy or insanity of the members do not affect the continuity of a cooperative society.
• A society, therefore, operates unaffected by any change in the membership.

Limited Liability

• The liability of the members of a cooperative society is limited to the extent of their capital contribution.
• The personal assets of the members are, therefore, safe from being used to repay business debts.

Economy in Operations

• The members generally offer honorary services to the society.
• This helps in reducing operating costs and makes the working of the cooperative society economical.

Support from Government

• The cooperative society gets support from the government in the form of low taxes, subsidies and low interest rates on loans.
• This support helps the society work more effectively for the benefit of its members.

Ease of Formation

• A cooperative society can be formed easily with minimum legal formalities.
• Any ten adult persons can come together and form a cooperative society by getting it registered.

Demerits of Cooperative Society

Limited Resources

• Resources of a cooperative society consist of capital contributions made by the members with limited means.
• The low rate of dividend offered on investment also acts as a deterrent in attracting membership or more capital from the members.

Inefficiency in Management

• Cooperative societies are unable to attract and employ expert managers because of their inability to pay high salaries.
• The members who offer honorary services may not have the required professional skills to manage the society efficiently.

Lack of Secrecy

• A cooperative society has to disclose information to its members through open discussions in meetings.
• Therefore, it becomes difficult to maintain secrecy about the operations of the society.

Government Control

• Cooperative societies have to comply with several rules and regulations related to auditing, submission of accounts and other administrative matters.
• Excessive government control may reduce the freedom of operation of the society.

Differences of Opinion

• Internal differences may arise among members due to contrary viewpoints.
• Such differences can delay decision making and may affect the smooth functioning of the society.

Types of Cooperative Societies

Consumer’s Cooperative Societies	These societies are formed to protect the interests of consumers. The society aims at eliminating middlemen to achieve economy in operations. Goods are purchased in large quantities from wholesalers or producers and sold to the members, hence eliminating the middlemen. Basically, all the members are consumers who want to get better quality products at a reasonable price. The profit if any is distributed amongst the members in the form of dividends.
Producer’s Cooperative Societies	These societies are set up to protect the interest of small producers. The members of society are producers who are desirous of procuring inputs for the production of goods to meet the demands of consumers. The society supplies raw materials, equipment and other inputs to the members and also buys their output for sale. Profits among the members are generally distributed based on their contributions to goods produced or sold by the society.
Marketing Cooperative Societies	Such societies are established to help small producers in selling their products. The members consist of producers who wish reasonable prices for their output. The main aim of such societies is to eliminate middlemen and to provide a favourable market for the products. The society also performs marketing functions like - transportation, warehousing, packaging etc. It ensures the sale of output at the best price.
Farmer’s Cooperative Societies	These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. The main aim is to gain the benefits of large scale farming and increase the productivity. Such societies provide better quality seeds, fertilizers, machinery and other modern techniques for use in the cultivation of crops. This helps not only in improving the yield and returns of farmers, but also solves the problems associated with the farming on fragmented land holdings.
Credit Cooperative Societies	Credit cooperative societies are established for providing easy credit on reasonable terms to the members. The main aim of such societies is to protect the members from the exploitation of lenders who charge high rates of interest on loans. The members are the persons who seek financial help in the form of loans. Society provides loans out of the amount collected as capital and deposits from the members and charge low rates of interest.
Cooperative Housing Societies	These societies are established to help people with limited income to construct houses at reasonable costs. These societies either construct flats or provide plots to the members at reasonable costs. The main aim is to solve the housing problems of the members by constructing houses and giving the option of paying in installments.

Joint Stock Company

As per The Companies Act 2013, a company is an artificial person having a separate legal entity, perpetual succession and a common seal. The shareholders are the owners of the company while the board of directors is the chief managing body elected by the shareholders.

Features of Joint Stock Company

Artificial Person	A company is a creation of law and exists independent of its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but it cannot breathe, eat, run, talk and so on. Therefore, it is called an artificial person.
Separate Legal Entity	From the date of its incorporation, a company acquires an identity, distinct from its members. Its assets and liabilities are separate from those of its owners. The law does not recognize the business and owners to be one and the same.
Formation	The formation of a company is a time-consuming, expensive and complicated process. It involves the preparation of several documents and compliance with several legal requirements before it can start functioning. Incorporation of companies is compulsory under the Companies Act, 2013 or any of the previous company law, as stated earlier.
Perpetual Succession	The existence of a company is not affected by the coming and going of the members. The company is created by the law, and the law can only bring it to an end. It can be brought to an end only when the entire legal procedure of its closure, called winding up, is completed.
Control	The shareholders are the owners of the company but they do not have the right to be involved in the day-to-day running of the business. The control and management of the business is undertaken by the board of directors, which appoints the top management officials for running the business.
Liability	The liability of the members is limited to the extent of the capital contributed by them in a company. The creditor can use only the assets of the company to settle their claims since it is the company and not the members that owes the debt. The members can be asked to contribute to the loss only to the extent of the unpaid amount of share held by them.
Common Seal	A company may or may not have a common seal. If a company has a common seal, it must be affixed to the documents such as agreements of a company. If a company does not have a common seal then the person signing the document should be authorized by a board’s resolutions.
Risk Bearing	The risk of losses in a company is borne by all the shareholders. This is unlike the case of sole proprietorship or partnership firm where one or few persons respectively bear the losses.

Merits of a Joint Stock Company

Limited Liability	The shareholders are liable to the extent of the amount unpaid on the shares held by them. Also, only the assets of the company can be used to settle the debts which reduces the degree of risk borne by an investor.
Perpetual Existence	Existence of a company is not affected by the death, retirement, resignation, insolvency or insanity of its members as it has a separate entity from its members. A company will continue to exist even if all the members die. It can be liquidated only as per the provisions of the Companies Act, 2013.
Transfer of Interest	The share of the public limited company can be sold in the market and as such can be easily converted into cash in case the need arises. This avoids blockage of investment and presents the company as a favourable avenue for investment purposes.
Professional Management	A company can afford to pay higher salaries to specialists and professionals. It can therefore, employ people who are experts in their area of specialisations. A company has various departments and each department is headed by an expert. This leads to balanced decision-making as well as greater efficiency in companies’ operations.
Scope for Expansion	As company has large financial resources as compared to other forms of business organization. A company can attract capital from the public as well as through loans from banks and financial institutions. Thus, there is greater scope for expansion.

Demerits of a Joint Stock Company

Complexity in Formation	The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedure involved. As compared to sole proprietorship and partnership form of organizations, formation of a company is more complex.
Lack of Secrecy	The Companies Act requires each public company to provide from time to time a lot of information to the office of the registrar of companies. Such information is available to the general public also. It is, therefore, difficult to maintain complete secrecy about the operations of company.
Impersonal Work Environment	Separation of ownership and management leads to situations in which there is a lack of effort as well as personal involvement on the part of the officers of a company. The large size of a company further makes it difficult for the top level management to maintain personal contact with the employees, customers and creditors.
Numerous Regulations	The functioning of a company is subject to many legal provisions and compulsions. A company is burdened with numerous restrictions in respect of aspects including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates from different agencies, viz., registrar, SEBI etc.
Delay in Decision Making	Companies are democratically managed through the Board of Directors which is followed by the top management, middle management and lower level management. Communication as well as approval of various proposals may cause delays not only in taking decisions but also in acting upon them.
Conflict in Interest	Sometimes it becomes very difficult to fulfill the demand of various stakeholders. The management faces lots of problems in coordinating and managing the affairs of the company. For example, the shareholders want a higher dividend, customers want better quality products at lower prices and employees want higher salaries. Hence it becomes very difficult for the company to fulfill all these demands.

Types of Companies

1. Private Company
2. Public Company
3. One Person Company (OPC)

Differences between Private Company and Public Company

Basis	Private Company	Public Company
Members	A private company has a minimum of 2 and a maximum of 200 members.	A public company has a minimum of 7 members and there is no limit on maximum members.
Number of Directors	There must be at least 2 directors in a private company.	There must be 3 directors in a public company.
Index of Members	Maintenance of the index of members is not compulsory for a private company.	Maintenance of the index of members is compulsory for a public company.
Name	The private company must use the word private limited (Pvt. Ltd.) after its name.	The public company must use the word limited (Ltd.) after its name.
Invitation to Public	The private company does not invite the public to subscribe to its securities.	A public company can invite the public to subscribe to its shares or debentures.
Transfer of Shares	Members of a private company are restricted to transfer their shares.	Members of a public company are allowed to transfer their shares.

One Person Company

• With the implementation of The Companies Act, 2013, a single person could constitute, a company, under the One Person Company (OPC) concept. The introduction of OPC in the legal system is a move that would encourage the corporatization of micro businesses and entrepreneurship.
• One Person Company is a company with only one person as a member. That one person will be the shareholder of the company. It 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 One Person Company

1	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.
Note	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.
2	No person shall be eligible to incorporate more than a One Person Company or become nominee in more than one such company.
3	Where a natural person, being member in One Person Company in accordance with this rule becomes a member in another such company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub rule (2) within a period of one hundred and eighty days.
4	No minor shall become member or nominee of the One Person Company or can hold a share with beneficial interest.
5	Such company cannot be incorporated or converted into a company under section 8 of the Act.
6	Such company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporate.
7	No such company can convert voluntarily into any kind of company unless two years have expired from 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.

Comparative Evaluation of Forms of Organisation

Basis	Sole Proprietorship	Partnership	Joint Hindu Family Business	Cooperative Society	Company
Formation	Minimum legal formalities, easiest formation	Registration is optional, easy formation	Less legal formalities, exemption from registration, easy formation	Registration is compulsory, and greater legal formalities	Registration compulsory, lengthy and expensive formation process
Members	Only owner	Minimum - 2 Maximum - 50	At least two persons for division of family property, no maximum limit	At least 10 adults, no maximum limit	Minimum private company - 2 Public company - 7 Maximum private company - 200 Public company - unlimited
Capital Contribution	Limited finance	Limited, but more than what can be raised in the case of a sole proprietorship	Ancestral property	Limited	Large financial resources
Liability	Unlimited	Unlimited and joint	Unlimited, Karta; limited, other members	Limited	Limited
Control and Management	The owner takes all decisions, quick decision making	Partners take decisions, consent of all partners is needed	Karta takes decisions	Elected representative i.e. managing committee takes decisions	Separate between ownership and management
Continuity	Unstable business and owner regarded as one	More stable but affected by the status of partners	The stable business continues even if Karta dies	Stable because of separate legal status	Stable because of separate legal status

Formation of a Company

Formation of a company is a complex activity involving completion of legal formalities and procedures.

Process of Formation of a Company:

1. Promotion
2. Incorporation
3. Subscription of Capital
4. Commencement

Promotion

Particulars	Explanation
Promotion	Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity.
Promoter	Any person or a group of persons or even a company may have to form a company; then it is said to be a promoter of the company. A promoter is the one who undertakes to form a company and takes the necessary steps.
As per Section 69 of the Companies Act, a promoter means a person:
1 Named in Prospectus	Who has been named as such in a prospectus.
2 Control	Who has control over the affairs of the company.
3 Advice or Instructions	In accordance with whose advice or instructions the Board of Directors of the company is assumed to act.

Functions of the Promoters

Function	Explanation
1 Identification of Business Opportunity	The first and foremost activity of a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or making some product available through a different channel.
2 Feasibility	It may not be profitable to convert all identified business opportunities into real projects. Therefore, the promoters undertake detailed feasibility studies to investigate all aspects of the business they intend to start. It includes: a) Technical Feasibility Sometimes an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available. b) Financial Feasibility Every business activity requires funds. Hence, the promoters have to estimate the requirement of funds for the identified business opportunity. If the required outlay for the project is very large and cannot easily be arranged, the project has to be given up. c) Economic Feasibility Sometimes a project is technically viable and financially feasible, but the chance of it being profitable is very little; then such a project also has to be given up.
3 Name Approval	After taking a decision to launch a company, the promoters have to select a name for it and submit an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may not be approved if it is not considered undesirable.
4 Fixing up Signatories to the Memorandum of Association	Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Usually, the people signing the memorandum are also the first directors of the company.
5 Appointment of Professionals	Certain professionals such as mercantile bankers, auditors, etc., are appointed by the promoters to assist them in the preparation of necessary documents. The names and addresses of shareholders and the number of shares allotted to each are submitted to the registrar in a statement called return of allotment.
6 Preparation of Necessary Documents	The promoter takes steps to prepare certain legal documents, which have to be submitted to the registrar of companies for getting the company registered. These documents are Memorandum of Association, Articles of Association and Consent of Directors.

Documents Required to be Submitted

Document / Clause	Explanation
Memorandum of Association	Memorandum of Association is the most important document as it defines the objectives of the company. As per the Companies Act, 2013, “memorandum” means the memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous company law or of this Act. No company can legally undertake activities that are not contained in its Memorandum of Association.
It contains different clauses, which are given as follows:
a Name Clause	This clause contains the name of the company by which the company will be known, which has been approved by the registrar of companies.
b Registered Office Clause	This clause contains the name of the state in which the registered office of the company is proposed to be situated. The exact address of the registered office is not required at this stage, but the same must be notified to the registrar within 30 days of the incorporation of the company.
c Objects Clause	This is probably the most important clause of the memorandum as it defines the purpose for which the company is formed. A company is not legally allowed to undertake an activity which is beyond the objects stated in this clause.
d Liability Clause	This clause limits the liability of the members to the amount unpaid on the shares owned by them.
e Capital Clause	This clause specifies the maximum capital which the company will be authorized to raise through the issue of shares. The authorized share capital of the proposed company, along with its division into the number of shares having a fixed face value, is specified in this clause.
Articles of Association	According to the Companies Act, 2013, “articles” means the articles of association of a company as originally framed or altered from time to time or applied in pursuance of any previous company law or of this Act. Articles of Association are the rules regarding the internal management of a company. These rules are subsidiary to the Memorandum of Association and should not exceed what is stated in the Memorandum of Association.
Consent of Proposed Directors	Apart from the Memorandum and Articles of Association, a written consent of each person named as a director is required, confirming that they agree to act in that capacity and undertake to buy and pay for qualification shares, as mentioned in the Articles of Association.
Agreement	The agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director and manager is required to be submitted to the registrar for getting the company registered under the Act.
Statutory Declaration	A declaration stating that all the legal requirements for registration have been complied with is to be submitted to the registrar with the documents for getting the company registered under the law. This statement can be signed by an Advocate or by a Chartered Accountant (CA) or a Company Secretary (CS) in practice.
Receipt of Payment of Fee	Along with the above-mentioned documents, necessary fees have to be paid for the registration of the company. The amount of such fees shall depend on the authorized share capital of the company.

Incorporation

Particulars	Explanation
Incorporation	After completing the formalities, promoters make an application for the incorporation of the company. The application is to be filed with the Registrar of Companies of the state within which they plan to establish the registered office of the company.
Along with the application, the following documents are to be attached:
1 Memorandum of Association	The Memorandum of Association must be duly stamped and signed by the members. In the case of a public company, at least seven members must sign it, and for a private company, two persons are sufficient. The signatories must give information about their address, occupation and the number of shares subscribed by them.
2 Articles of Association	The Articles of Association must be duly stamped and witnessed, as in the case of the Memorandum.
3 Written Consent of Proposed Directors	Written consent of proposed directors to act as directors and an undertaking to purchase qualification shares.
4 Agreement	The agreement, if any, with the proposed director, manager or whole-time director.
5 Name Approval Letter	A copy of the Registrar's letter approving the name of the company.
6 Statutory Declaration	The statutory declaration states that all legal requirements for registration have been complied with. This must be duly signed.
7 Registered Office Address	A notice about the exact address of the registered office may also be submitted along with these documents.
8 Payment of Registration Fees	Documentary evidence of payment of registration fees.
Certificate of Incorporation	When the Registrar is satisfied with the formalities of registration, he issues a Certificate of Incorporation. It may therefore be called the birth certificate of the company.

Certificate of Incorporation

Certificate of Incorporation is known as the birth certificate of the company. A company is legally born on the date printed on the Certificate of Incorporation. The certificate is considered to be conclusive proof of the legal existence of the company. A private company can commence its business immediately after obtaining this certificate, while a public company is required to undergo two more stages before its formation.

Capital Subscription

A public company can raise the required funds from the public by means of issue of securities (shares and debentures). For this purpose, it has to issue a prospectus, which is an invitation to the public to subscribe to the capital of the company.

Following Steps are Required for Raising Funds from the Public

Step	Explanation
1 SEBI Approval	SEBI (Securities and Exchange Board of India), which is the regulatory authority in our country, has issued guidelines for the disclosure of information and investor protection. A public company inviting funds from the general public must make adequate disclosure of all relevant information and must not conceal any material information from potential investors.
2 Filing of Prospectus	A copy of the prospectus or statement in lieu of prospectus is filed with the Registrar of Companies. On the basis of the information given in the document, an investor decides whether to invest in the company. Therefore, it is essential that this document provides all the relevant information and does not contain any misleading statement.
3 Appointment of Bankers, Brokers and Underwriters	Raising funds from the public is a very difficult task. The application money is to be received by the bankers of the company. The brokers try to sell the shares, whereas an underwriter is also appointed by the company when it is not assured of a good public response. Underwriters, in return for some commission, undertake to buy shares in case they are not fully subscribed by the public.
4 Minimum Subscription	The company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares. According to the Companies Act, this is called the “minimum subscription”. The minimum limit of subscription is 90 percent of the size of the issue. If it is less than 90 percent, the allotment cannot be made.
5 Application to Stock Exchange	An application is made to at least one stock exchange for permission to deal in its shares or debentures. If such permission is not granted before the expiry of ten weeks from the date of closure of the subscription list, the allotment shall become void and all money received from the applicants will have to be returned to them within eight days.
6 Allotment of Shares	Till the time shares are allotted, the application money received should remain in a separate bank account and must not be used by the company. In case the number of shares allotted is less than the number applied for, or where no shares are allotted to the applicant, the excess application money, if any, is to be returned to the applicants or adjusted towards the allotment money due from them.

Commencement of Business

After receiving the minimum subscription through a new issue of shares, a public company makes an application to the Registrar for the issue of a Certificate of Commencement of Business.

Along with the application, the following documents must be filed:

A declaration that the shares have been allotted up to the amount of the minimum subscription. A declaration that every director has paid in cash the application and allotment money on his shares in the same proportion as others. A declaration that no money is liable to become refundable to the applicants. A statutory declaration by a Director or the Secretary of the company stating that the requirements relating to the commencement of business have been duly complied with.

The Registrar will scrutinise all these documents and, if he is satisfied, he issues a Certificate of Commencement of Business. The grant of this certificate completes the process of formation of a public company. The company can start its business activities from the date of issue of the certificate.

The End

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A List of Notes:

Chapter 1  |  Chapter 2  |  Chapter 3  |  Chapter 4  |  Chapter 5  |  Chapter 6  |  Chapter 7 (Coming Soon)  |  Chapter 8  |  Chapter 9  |  Chapter 10