CBSE Class 11 Business studies Notes Chapter 2 Forms of Business Organisations
2.1 SOLE PROPRIETORSHIP
SOLE PROPRIETOR
2.8 JOINT STOCK COMPANY
Meaning: A joint stock of company is the largest form of business organisation. It is an association of persons formed for carrying out business activities and has a legal status independent of its members.
FEATURES
(1) Incorporated association: The company must be registered under the Indian companies Act, 2013. without registration, no company can come into existence.
(2) Separate legal entity: A company is a legal entity distinct from its shareholders, directors and promoters. It can carry on business in its own name, enter into contracts, buy, sell and hold property, sue and be sued.
(3) Artificial person: Company is an artificial person created by law. company is called artificial person because it has no mother to give it birth but is only a creation of law.It is an invisible individual having no body and soul.
(4) Limited liability: The liability of the members is limited to the face value of the shares held by them. They are not personally liable to the debts of the company. They could not be called upon to bear losses from his private property.
(5) Perpetual succession: The death, insolvency or retirement of members does not affect the life of the company. Members may come and go, but the company can go forever.
(6) Transfer-ability of shares: The shares of a joint stock company are freely transferable. A shareholders can transfer his shares to any person without the consent of other members.
(7) Common seal: Common seal is the official signature of the company. Being an artificial person, company acts through its Board of Directors and other officers. Company is bound by only those documents which bear its signature.
(8) Risk bearing: The risk of losses in a company is born by all the shareholders since they are the owners of the business.
MERITS
(1) Limited liability: The liability of the members is limited to the face value of the shares held by them. They are not personally liable to the debts of the company. They could not be called upon to bear losses from his private property.
(2) Perpetual succession: The death, insolvency or retirement of members does not affect the life of the company. Members may come and go, but the company can go forever.
(3) Separate legal entity: A company is a legal entity distinct from its shareholders, directors and promoters. It can carry on business in its own name, enter into contracts, buy, sell and hold property, sue and be sued.
(4) Professional management: A company can afford to pay higher salaries to specialists and professionals. It can appoint professional managers(MBAs).
(5) Transfer-ability of shares: The shares of a joint stock company are freely transferable. A shareholders can transfer his shares to any person without the consent of other members.
LIMITATIONS
(1) Complexity in formation: The formation of a company is time consuming, expensive and complicated process. It involves the preparation of several documents and fulfilling several legal requirements. Registration of a company is compulsory under the Indian Companies Act, 2013.
(2) Lack of secrecy: A public is required to provide a lot of information and file reports to the registrar of the company. such information is available to the general public also. so, it is difficult to maintain secrecy about the business.
(3) Numerous regulation: A company has to fulfill many legal provisions and regulations like audit, filing of reports, preparation of documents, etc.
(4) Delay in decision making: Companies are democratically managed through the Board of Directors which is followed by top management, middle management and lower level management. There is a chain command. This leads to delay in decision making.
(5) Conflict in interest: There may be conflict of interest amongst various stakeholders of a company. For the employees may demand higher salaries, consumers desire higher quality products at lower price, etc. Such conflicts create problems in managing the affairs of the company.
2.9 TYPES OF COMPANIES
(1) Private Company
(2) Public Company
(3) One Person Company (OPC)
Meaning: The Indian Company Act, 2013 introduces a new entity a 'one person company' . An one person company means a company with only one person as its member.
RULE
(1) A natural person who is an Indian citizen and resident in India shall be eligible to incorporate one person company.
(2) No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
(3) OPC to compulsory convert itself into public or private company in certain cases. If the share capital of an OPC exceeds Rs.50 lakh or its average annunal turnover exceeds Rs. 2 crore, it shall cease to be entitled to continue as a one person company.
(4) Small Company
Meaning: 'small company' means a company, other than a public company-
(1) Paid - up share capital of which does not exceed Rs. 50 lakh or such higher amount as may be prescribed which shall not be more than Rs. 5 crores;
(2) Turnover of which as per its last statement of profit and loss does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 20 crore.
(5) Dormant company:The Indian companies Act, 2013 states that a company can be classified as dormant when it is formed and registered under this Act for a future project and has no significant accounting transaction. Such a company may apply to the registrar of companies in such manner as may be prescribed for obtaining the status of a dormant company.
(6) Company Limited by Guarantee: It means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertakes to contribute to the assets of the company in the event of its being wound up.
(7) Company Limited by share: It means a company having the liability of its members limited by the memorandum to the amount, if any , unpaid on the shares respectively held by them.
2.10 STAGES IN FORMATION OF A COMPANY
1. Promotion
Promotion means conceiving a business opportunity and taking an initiative to form a company.
Steps in promotion
(1) Identification of business idea/opportunity: Producing a new product or service.
(2) Feasibility studies: The promoters undertakes detailed studies to investigate all aspects of business, with the help of the specialists engineers, C.A etc. If the project is technically, financially and economically viable, the promoter may decide to actually launcha company.
(3) Name Approval: Having decided 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 for its approval.
(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, they are also the first Directors of the company.
(5) Appointment of professionals: Promoters appoint merchant bankers, auditors, etc. to assist them in the preparation of necessary documents to be submitted with the registrar of companies.
(6) Preparation of necessary legal documents: to be submitted to the registrar of the companies for registration of the company. These documents are Memorandum of Association, Articles of Association, etc.
2. Incorporation
Incorporation means registration of the company as a body corporate under the Indian companies Act, 2013 and receiving 'certificate of incorporation'.
Steps in Incorporation
(1) Application for incorporation: Promoters make an application for the incorporation of the company to registrar of companies along with necessary documents.
(2) Filling of necessary documents:
(a) Memorandum of Association
(b) Articles of Association
(c) Statement of Authorized Capital
(d) Written consent of proposed directors
↓ ↓
ONLY OWNER
Meaning: It refers to the forms of business organisation which is owned, managed and controlled by an individual.
FEATURES
(1) Individual ownership: The business is owned by a single individual.
(2) Formation and closure: Hardly any legal formalities are required to start a sole proprietary business.Closer of the business can also be done easily.
(3) Unlimited liability: Sole proprietary have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(4) Sole risk bearer and profit recipient: A sole proprietor bears all types of risks himself. If the business is successful, he is the sole beneficiary of all rewards/profits.
(5) Control: A sole proprietor has full control over his business. He can carry out his plans without any interference from others.
(6) No separate entity: In the eyes of law, there is no difference between the sole trader and his business.
(7) Limited life: Since the owner and business is same, death, insanity or bankruptcy of sole trader will cause closer of the business.
MERITS
(1) Quick decision making: A sole proprietor enjoys full freedom in making business decisions without consulting others.
(2) Ease of formation and closure: Hardly any legal formalities are required to start a sole proprietary business.Closer of the business can also be done easily.
(3) Secrecy: A sole proprietor can keep all business information and maintain secrecy.
(4) direct incentives: A sole proprietor directly gets the benefits of his efforts as he sole recipient of all the profits.
(5) Sense of accomplishment: It the business is successful, it contributes to self-satisfaction of the sole proprietor and create a sense of accomplishment in him.
(6) Flexibility of operations: All decisions are taken by a single person. There are no delays and the business can quickly adapt itself to the changing environment.
LIMITATIONS
(1) Unlimited liability: Sole proprietary have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(2) Limited resources: Resources of a sole proprietor are limited to his/her personal savings and borrowings from others.
(3) Limited life: Since the owner and business is same, death, insanity or bankruptcy of sole trader will cause closer of the business.
(4) Limited managerial ability: The owner has to assume the responsibility of all managerial tasks such as purchasing, selling, financing, etc. Due to limited resources he may not be able to employ talented employees.
2.2 JOINT HINDU FAMILY/ HINDU UNDIVIDED FAMILY
Meaning: It is one of the oldest forms of business organisation found only in India. Business is owned and carried on by the members of the Hindu undivided family/ Joint Hindu family. It is governed by the Hindu Law.
FEATURES
(1) Membership by birth: A child get a right in the property of the Hindu Undivided family with his birth. He becomes automatically a member of the business.
(2) Only male members: Only male members can be the coparcener in the joint Hindu family business. But according to the Hindu act 1956, a woman after the death of her husband can become the coparcener of Family business.
(3) Formation: There should be two members and property to form a Joint Hindu family business. It is not created by an agreement between persons.
(4) Control: The business is controlled by the head of the family, who is the eldest member and is called Karta. He takes all the decisions to manage the business.
(5) Liability: The Karta has unlimited liability. The liability of other members is limited to their share in the property of the business.
(6) Continuity: The business continues even after the death of the Karta as the next eldest member taken up the position of Karta. The business is stable.
(7) Minor Members: Since membership is by birth, minors can also be members of the business.
MERITS
(1) Easy to start: It is easy to start joint Hindu family business because there is no need to complete any legal formalities for its establishment.
(2) Secrecy: Under the joint Hindu family business all the facts remain confined to the karta. Therefore the competing business cannot get any information.
(3) Direct contract with customer: The karta of the joint Hindu family business comes in direct contact with the customer. This helps him in planning for his business.
(4) Quick decision: The Karta of of the joint Hindu family business is free to take business decisions. He does not not need to consult anybody for this purpose. Therefore he can take quick decision which are essential for the success of the business.
(5) Continuity: The business continues even after the death of the Karta as the next eldest member taken up the position of Karta. The business is stable.
LIMITATIONS
(1) Liability: The Karta has unlimited liability. The liability of other members is limited to their share in the property of the business.
(2) Limited managerial skills: It cannot be expected to know all the complexity of business from any person. In join Hindu family business all the decisions have to be taken by the karta. Therefore, sometimes the decisions taken are not favorable to the business.
(3) Limited resources: The resources of the joint Hindu family business are limited. This reduce the power of competition in business. These factors also become a hindrance in the development of business.
2.3 PARTNERSHIP
Meaning: Partnership is that form of business in which two or more persons willingly join and agree to run some lawful business.
FEATURES
(1) Formation: The partnership form of business organisation is governed by the Indian partnership Act,1932. The partnership comes into existence with an agreement (written or oral) among the partners.
(2) Membership: There must be at least two members and maximum 50 partners.
(3) liability: The partners of a firm have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(4) Risk bearing: The partners bear the risks involved in running the business. The reward comes in the form of profit which were shared by them in an agreed ratio.
(5) Decision making and control: Every partner has a right to take part in the management of business. Decisions are generally taken with mutual consent.
(6) Continuity: Partnership comes to an end with the death, retirement, insolvency of any partner. However the remaining partners may continue the business on the basis of new agreement.
(7) Registration: Registration of a partnership firm is nott obligatory. It is optional.
MERITS
(1) Ease of formation and closure: A Partnership firm can be formed easily with 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.
(2) Balanced decision making: Every partner has a right to take part in the management of business. Decisions are generally taken with mutual consent.
(3) More funds: In a partnership, the capital is contributed by a number of partners. This helps in expanding business and earning higher profits.
(4) Sharing of risks: The risks are shared by all the partners. This reduce the burden and stress on individual partner.
(5) Secrecy: A Partnership firms is not legally bound to publish its accounts. so it can maintain confidentiality of information and secrecy.
LIMITATIONS
(1) Unlimited liability: The partners of a firm have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(2) Limited resources: Capital investment by partners is low as there is restriction on the number of partners. The firm cannot expand beyond a certain size.
(3) Possibility of conflicts: Partnership is run by a group of persons where in decision making authority is shared. There is possibility of conflicts among the partners in case of difference in opinion on some issues.
(4) Lack of continuity: Partnership comes to an end with the death, retirement, insolvency of any partner. However the remaining partners may continue the business on the basis of new agreement.
(5) Lack of public confidence: The confidence of the public in partnership firms is generally low because it is not legally required to publish its accounts.
2.4 TYPES OF PARTNERS
2.5 PARTNERSHIP DEED
Partnership is established by an agreement which may be oral or in writing. However, it is always better to have written partnership agreement to avoid any dispute which may rise in future.
The document containing terms of the agreement in writing amongst partners is called partnership deed.
CLAUSE / CONTENTS OF PARTNERSHIP DEED
(1) Name, Nature, Address of the firm.
(2) Names, Description and addresses of the partners.
(3)The amount of capital to be contributed by each partners.
(4) Ratio in which the profits are to be shared.
(5) If the partner is to be pain salary, commission, then how much?
(6)Rules to be followed in case of admission, retirement or death of a partner.
(7) Interest on capital and interest to drawings
(8) Method of solving disputes.
(9) Procedure for dissolution of the firm.
2.6 COOPERATIVE SOCIETIES
Cooperative
↓
Working together and with others for a common purpose
Meaning: It refers to that voluntary association of persons, who join together with the motive of welfare of the members.
FEATURES
(1) Voluntary membership: Any person having a common interest can join a cooperative society and can leave any time by giving a prior notice.
(2) Legal status: Registration of a cooperative society is compulsory. Therefore, it is a separate legal entity from its members. It can hold property in its name and enter into contract. The death, insolvency of a member do not affect its existence.
(3) Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.
(4) Democratic management: business is managed by a managing committee which is elected by members on the principle'one member one vote'.
(5) Service motive: The purpose of a cooperative society is mutual help and welfare. It is formed with the motive of service to tits members, not to earn profits.
MERITS
(1) Ease formation: Any ten adult persons can form a cooperative society. The registration procedure is simple involving a few legal formalities.
(2) Democratic management: business is managed by a managing committee which is elected by members on the principle'one member one vote'.
(3) Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.
(4) Stable existence: it is a separate legal entity from its members. death, insolvency of a member do not affect its existence.
(5) Support from government: Government gives all kind of support to cooperative societies in the form of relief in taxation, subsidies and low interest rates on loans.
LIMITATIONS
(1) Limited resources: Cooperative society are usually at a disadvantage of limited capital from its members.
(2) Lack of secrecy: Affairs of a cooperative society are openly discussed in meetings of members and its accounts are published. so, it is difficult to maintain secrecy about the operations of a cooperative society.
(3) Government control: Cooperative society have to follow several rules and regulations related to auditing of accounts, submission of accounts, etc.
(4) Difference in opinion: Difference and conflicts among members may lead to internal quarrels and difficulties in decision making.
ONLY OWNER
Meaning: It refers to the forms of business organisation which is owned, managed and controlled by an individual.
FEATURES
(1) Individual ownership: The business is owned by a single individual.
(2) Formation and closure: Hardly any legal formalities are required to start a sole proprietary business.Closer of the business can also be done easily.
(3) Unlimited liability: Sole proprietary have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(4) Sole risk bearer and profit recipient: A sole proprietor bears all types of risks himself. If the business is successful, he is the sole beneficiary of all rewards/profits.
(5) Control: A sole proprietor has full control over his business. He can carry out his plans without any interference from others.
(6) No separate entity: In the eyes of law, there is no difference between the sole trader and his business.
(7) Limited life: Since the owner and business is same, death, insanity or bankruptcy of sole trader will cause closer of the business.
MERITS
(1) Quick decision making: A sole proprietor enjoys full freedom in making business decisions without consulting others.
(2) Ease of formation and closure: Hardly any legal formalities are required to start a sole proprietary business.Closer of the business can also be done easily.
(3) Secrecy: A sole proprietor can keep all business information and maintain secrecy.
(4) direct incentives: A sole proprietor directly gets the benefits of his efforts as he sole recipient of all the profits.
(5) Sense of accomplishment: It the business is successful, it contributes to self-satisfaction of the sole proprietor and create a sense of accomplishment in him.
(6) Flexibility of operations: All decisions are taken by a single person. There are no delays and the business can quickly adapt itself to the changing environment.
LIMITATIONS
(1) Unlimited liability: Sole proprietary have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(2) Limited resources: Resources of a sole proprietor are limited to his/her personal savings and borrowings from others.
(3) Limited life: Since the owner and business is same, death, insanity or bankruptcy of sole trader will cause closer of the business.
(4) Limited managerial ability: The owner has to assume the responsibility of all managerial tasks such as purchasing, selling, financing, etc. Due to limited resources he may not be able to employ talented employees.
2.2 JOINT HINDU FAMILY/ HINDU UNDIVIDED FAMILY
Meaning: It is one of the oldest forms of business organisation found only in India. Business is owned and carried on by the members of the Hindu undivided family/ Joint Hindu family. It is governed by the Hindu Law.
FEATURES
(1) Membership by birth: A child get a right in the property of the Hindu Undivided family with his birth. He becomes automatically a member of the business.
(2) Only male members: Only male members can be the coparcener in the joint Hindu family business. But according to the Hindu act 1956, a woman after the death of her husband can become the coparcener of Family business.
(3) Formation: There should be two members and property to form a Joint Hindu family business. It is not created by an agreement between persons.
(4) Control: The business is controlled by the head of the family, who is the eldest member and is called Karta. He takes all the decisions to manage the business.
(5) Liability: The Karta has unlimited liability. The liability of other members is limited to their share in the property of the business.
(6) Continuity: The business continues even after the death of the Karta as the next eldest member taken up the position of Karta. The business is stable.
(7) Minor Members: Since membership is by birth, minors can also be members of the business.
MERITS
(1) Easy to start: It is easy to start joint Hindu family business because there is no need to complete any legal formalities for its establishment.
(2) Secrecy: Under the joint Hindu family business all the facts remain confined to the karta. Therefore the competing business cannot get any information.
(3) Direct contract with customer: The karta of the joint Hindu family business comes in direct contact with the customer. This helps him in planning for his business.
(4) Quick decision: The Karta of of the joint Hindu family business is free to take business decisions. He does not not need to consult anybody for this purpose. Therefore he can take quick decision which are essential for the success of the business.
(5) Continuity: The business continues even after the death of the Karta as the next eldest member taken up the position of Karta. The business is stable.
LIMITATIONS
(1) Liability: The Karta has unlimited liability. The liability of other members is limited to their share in the property of the business.
(2) Limited managerial skills: It cannot be expected to know all the complexity of business from any person. In join Hindu family business all the decisions have to be taken by the karta. Therefore, sometimes the decisions taken are not favorable to the business.
(3) Limited resources: The resources of the joint Hindu family business are limited. This reduce the power of competition in business. These factors also become a hindrance in the development of business.
2.3 PARTNERSHIP
Meaning: Partnership is that form of business in which two or more persons willingly join and agree to run some lawful business.
FEATURES
(1) Formation: The partnership form of business organisation is governed by the Indian partnership Act,1932. The partnership comes into existence with an agreement (written or oral) among the partners.
(2) Membership: There must be at least two members and maximum 50 partners.
(3) liability: The partners of a firm have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(4) Risk bearing: The partners bear the risks involved in running the business. The reward comes in the form of profit which were shared by them in an agreed ratio.
(5) Decision making and control: Every partner has a right to take part in the management of business. Decisions are generally taken with mutual consent.
(6) Continuity: Partnership comes to an end with the death, retirement, insolvency of any partner. However the remaining partners may continue the business on the basis of new agreement.
(7) Registration: Registration of a partnership firm is nott obligatory. It is optional.
MERITS
(1) Ease of formation and closure: A Partnership firm can be formed easily with 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.
(2) Balanced decision making: Every partner has a right to take part in the management of business. Decisions are generally taken with mutual consent.
(3) More funds: In a partnership, the capital is contributed by a number of partners. This helps in expanding business and earning higher profits.
(4) Sharing of risks: The risks are shared by all the partners. This reduce the burden and stress on individual partner.
(5) Secrecy: A Partnership firms is not legally bound to publish its accounts. so it can maintain confidentiality of information and secrecy.
LIMITATIONS
(1) Unlimited liability: The partners of a firm have unlimited liability. If the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
(2) Limited resources: Capital investment by partners is low as there is restriction on the number of partners. The firm cannot expand beyond a certain size.
(3) Possibility of conflicts: Partnership is run by a group of persons where in decision making authority is shared. There is possibility of conflicts among the partners in case of difference in opinion on some issues.
(4) Lack of continuity: Partnership comes to an end with the death, retirement, insolvency of any partner. However the remaining partners may continue the business on the basis of new agreement.
(5) Lack of public confidence: The confidence of the public in partnership firms is generally low because it is not legally required to publish its accounts.
2.4 TYPES OF PARTNERS
2.5 PARTNERSHIP DEED
Partnership is established by an agreement which may be oral or in writing. However, it is always better to have written partnership agreement to avoid any dispute which may rise in future.
The document containing terms of the agreement in writing amongst partners is called partnership deed.
CLAUSE / CONTENTS OF PARTNERSHIP DEED
(1) Name, Nature, Address of the firm.
(2) Names, Description and addresses of the partners.
(3)The amount of capital to be contributed by each partners.
(4) Ratio in which the profits are to be shared.
(5) If the partner is to be pain salary, commission, then how much?
(6)Rules to be followed in case of admission, retirement or death of a partner.
(7) Interest on capital and interest to drawings
(8) Method of solving disputes.
(9) Procedure for dissolution of the firm.
2.6 COOPERATIVE SOCIETIES
Cooperative
↓
Working together and with others for a common purpose
Meaning: It refers to that voluntary association of persons, who join together with the motive of welfare of the members.
FEATURES
(1) Voluntary membership: Any person having a common interest can join a cooperative society and can leave any time by giving a prior notice.
(2) Legal status: Registration of a cooperative society is compulsory. Therefore, it is a separate legal entity from its members. It can hold property in its name and enter into contract. The death, insolvency of a member do not affect its existence.
(3) Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.
(4) Democratic management: business is managed by a managing committee which is elected by members on the principle'one member one vote'.
(5) Service motive: The purpose of a cooperative society is mutual help and welfare. It is formed with the motive of service to tits members, not to earn profits.
MERITS
(1) Ease formation: Any ten adult persons can form a cooperative society. The registration procedure is simple involving a few legal formalities.
(2) Democratic management: business is managed by a managing committee which is elected by members on the principle'one member one vote'.
(3) Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.
(4) Stable existence: it is a separate legal entity from its members. death, insolvency of a member do not affect its existence.
(5) Support from government: Government gives all kind of support to cooperative societies in the form of relief in taxation, subsidies and low interest rates on loans.
LIMITATIONS
(1) Limited resources: Cooperative society are usually at a disadvantage of limited capital from its members.
(2) Lack of secrecy: Affairs of a cooperative society are openly discussed in meetings of members and its accounts are published. so, it is difficult to maintain secrecy about the operations of a cooperative society.
(3) Government control: Cooperative society have to follow several rules and regulations related to auditing of accounts, submission of accounts, etc.
(4) Difference in opinion: Difference and conflicts among members may lead to internal quarrels and difficulties in decision making.
2.7 TYPES OF COOPERATIVE SOCIETIES
2.8 JOINT STOCK COMPANY
Meaning: A joint stock of company is the largest form of business organisation. It is an association of persons formed for carrying out business activities and has a legal status independent of its members.
FEATURES
(1) Incorporated association: The company must be registered under the Indian companies Act, 2013. without registration, no company can come into existence.
(2) Separate legal entity: A company is a legal entity distinct from its shareholders, directors and promoters. It can carry on business in its own name, enter into contracts, buy, sell and hold property, sue and be sued.
(3) Artificial person: Company is an artificial person created by law. company is called artificial person because it has no mother to give it birth but is only a creation of law.It is an invisible individual having no body and soul.
(4) Limited liability: The liability of the members is limited to the face value of the shares held by them. They are not personally liable to the debts of the company. They could not be called upon to bear losses from his private property.
(5) Perpetual succession: The death, insolvency or retirement of members does not affect the life of the company. Members may come and go, but the company can go forever.
(6) Transfer-ability of shares: The shares of a joint stock company are freely transferable. A shareholders can transfer his shares to any person without the consent of other members.
(7) Common seal: Common seal is the official signature of the company. Being an artificial person, company acts through its Board of Directors and other officers. Company is bound by only those documents which bear its signature.
(8) Risk bearing: The risk of losses in a company is born by all the shareholders since they are the owners of the business.
MERITS
(1) Limited liability: The liability of the members is limited to the face value of the shares held by them. They are not personally liable to the debts of the company. They could not be called upon to bear losses from his private property.
(2) Perpetual succession: The death, insolvency or retirement of members does not affect the life of the company. Members may come and go, but the company can go forever.
(3) Separate legal entity: A company is a legal entity distinct from its shareholders, directors and promoters. It can carry on business in its own name, enter into contracts, buy, sell and hold property, sue and be sued.
(4) Professional management: A company can afford to pay higher salaries to specialists and professionals. It can appoint professional managers(MBAs).
(5) Transfer-ability of shares: The shares of a joint stock company are freely transferable. A shareholders can transfer his shares to any person without the consent of other members.
LIMITATIONS
(1) Complexity in formation: The formation of a company is time consuming, expensive and complicated process. It involves the preparation of several documents and fulfilling several legal requirements. Registration of a company is compulsory under the Indian Companies Act, 2013.
(2) Lack of secrecy: A public is required to provide a lot of information and file reports to the registrar of the company. such information is available to the general public also. so, it is difficult to maintain secrecy about the business.
(3) Numerous regulation: A company has to fulfill many legal provisions and regulations like audit, filing of reports, preparation of documents, etc.
(4) Delay in decision making: Companies are democratically managed through the Board of Directors which is followed by top management, middle management and lower level management. There is a chain command. This leads to delay in decision making.
(5) Conflict in interest: There may be conflict of interest amongst various stakeholders of a company. For the employees may demand higher salaries, consumers desire higher quality products at lower price, etc. Such conflicts create problems in managing the affairs of the company.
2.9 TYPES OF COMPANIES
(1) Private Company
(2) Public Company
(3) One Person Company (OPC)
Meaning: The Indian Company Act, 2013 introduces a new entity a 'one person company' . An one person company means a company with only one person as its member.
RULE
(1) A natural person who is an Indian citizen and resident in India shall be eligible to incorporate one person company.
(2) No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company.
(3) OPC to compulsory convert itself into public or private company in certain cases. If the share capital of an OPC exceeds Rs.50 lakh or its average annunal turnover exceeds Rs. 2 crore, it shall cease to be entitled to continue as a one person company.
(4) Small Company
Meaning: 'small company' means a company, other than a public company-
(1) Paid - up share capital of which does not exceed Rs. 50 lakh or such higher amount as may be prescribed which shall not be more than Rs. 5 crores;
(2) Turnover of which as per its last statement of profit and loss does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 20 crore.
(5) Dormant company:The Indian companies Act, 2013 states that a company can be classified as dormant when it is formed and registered under this Act for a future project and has no significant accounting transaction. Such a company may apply to the registrar of companies in such manner as may be prescribed for obtaining the status of a dormant company.
(6) Company Limited by Guarantee: It means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertakes to contribute to the assets of the company in the event of its being wound up.
(7) Company Limited by share: It means a company having the liability of its members limited by the memorandum to the amount, if any , unpaid on the shares respectively held by them.
2.10 STAGES IN FORMATION OF A COMPANY
1. Promotion
Promotion means conceiving a business opportunity and taking an initiative to form a company.
Steps in promotion
(1) Identification of business idea/opportunity: Producing a new product or service.
(2) Feasibility studies: The promoters undertakes detailed studies to investigate all aspects of business, with the help of the specialists engineers, C.A etc. If the project is technically, financially and economically viable, the promoter may decide to actually launcha company.
(3) Name Approval: Having decided 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 for its approval.
(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, they are also the first Directors of the company.
(5) Appointment of professionals: Promoters appoint merchant bankers, auditors, etc. to assist them in the preparation of necessary documents to be submitted with the registrar of companies.
(6) Preparation of necessary legal documents: to be submitted to the registrar of the companies for registration of the company. These documents are Memorandum of Association, Articles of Association, etc.
2. Incorporation
Incorporation means registration of the company as a body corporate under the Indian companies Act, 2013 and receiving 'certificate of incorporation'.
Steps in Incorporation
(1) Application for incorporation: Promoters make an application for the incorporation of the company to registrar of companies along with necessary documents.
(2) Filling of necessary documents:
(a) Memorandum of Association
(b) Articles of Association
(c) Statement of Authorized Capital
(d) Written consent of proposed directors
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