Business Organization

TYPES OF BUSINESS ORGANIZATION

ADVANTAGES AND DISADVANTAGES OF SOLE TRADER:

EASY FORMATION
DIRECT MOTIVATION
FLEXIBILITY
RETENTION OF BUSINESS SECRETS
QUICK DECISION
HIGHER REWARD
EFFECTIVE CONTROL
INCREASE IN SALES
SMOOTH RUNNING OF BUSINESS
INEXPENSIVE MANAGEMENT
HIGHER CREDIT RATING
SELF EMPLOYMENT
DEVELOPMENT OF PERSONALITY
EQUAL DISTRIBUTION OF ECONOMIC WEALTH
EASY DISSOLUTION
DEMERITS :
LIMITED CAPITAL
LIMITED MANAGERIAL ABILITY
UNLIMITED LIABILITY
SHORT LIFE
HASTY DECISIONS
LACK OF SPECIALIZATION
UNECONOMIC SIZE
LACK OF CONSULTATION
UNCERTAINITY
RISK OF ENTIRE LOSS

THE INDIAN PARTERSHIP ACT, 1932

DEFINITION: SEC 4: Partnership is the relations between people who have agreed to share the
profits of a business carried on by all or any of them acting for all.Person who have entered into
partnership with one another are called individually partners and collectively a firm the name
under which their business is carried on is called the firm name.
Features:Association of Two or More Person to create partnership. The maximum numbers
of partners in a firm caring on banking business should not exceed ten and in any other business
twenty ( sec 11 of company act)
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Agreement: partnership is the result of an agreement. The agreement may be express or implied.
Implied agreement may be inferred from the course do dealing or the conduct of the parties.
Partnership agreement must have all the essentials of a valid contract. Section 5 of partnership
acts says the relation of partners arise from contract and not from status.
Business: A partnership can be formed only for the purpose of carrying on a business and not for
any other purpose. Such business must be lawful. Business includes every trade, occupation and
profession. Thus existence of business is essential to partnership. Sec 2(b)
Sharing of profits: The sharing profits are an essential feature of partnership, there must be an
agreement to share profits, which may be to share equally or in any other proportions. The
sharing of profits involves sharing of loss also.
Mutual agency: Another important feature of partnership is the mutual agency. Partnership is
based on law of agency. Each partner acts as an agent as well as principal. A partner is an agent
that he can bind by his acts the other partners. Thus, the law of partnership is an branch of law
agency.
Unlimited liability: each and every partner has unlimited liability for business debts. If the
assets of the partnership are not sufficient to repay all the business debts in full, the private assets
of all the partners can be used for such purpose. Therefore, a partners liability for business debts
is not limited to his contributed capital.
Utmost good faith: The partnership agreement is based on utmost good faith i.e. mutual trust.
The partners must be faithful to one another, they must render true accounts and complete
informations regarding the conducts of the business. No partner can make any secret profit.
Restriction on transfer of interest: No partner can transfer his share to an outsider with out the
prior consent of all the other partners. Transfer of a partners interest even by inheritance is not
possible unless consented to by all the other partners.
RIGHTS OF PARTNERS:

Right to take part in management: S4ec 12(a): partnership business is the common
business of all partners. But if a partner neglects or refuses to perform duties the other
partners have a right to compensation.
Right to be consulted: sec 12 (c): Every partner has an inherent right to be consulted in
all matters of the business, for important matters all partners consent is required and for
other matters. Majority consent is required.
Right to the access to accounts (sec12(d): every partner has a right to have access to
and inspect and copy books of the firm
Right to share profits: (sec 13(b): The partners are entitled to share equally the profit
earned contributes equally to losses.
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Right to interest on capital: (sec13(c): Subject to an agreement every partner has right
to claim interest on capital, to be paid only out of the profits.
Right to interest on advances: (sec 13(d): every partner who makes an advance to the
firm is entitled to receive interest on such advances@ 6% per annum< in the absence of
any agreement.
Right to be indemnified: ( sec 13(e): every partner has right to be indemnified for the
liability incurred or payment made by him in the course of business.
Right use partnership property (sec 15): Every partner has right to use the property of
the firm for the purpose of the business of the firm
Right to an act as agent of firm (sec18): Every partner is an agent of the firm for the
purpose of business of the firm.
Right to act an emergency: (sec 21): every partner too has a right to act in emergency to
protect the firm from incurring any probable loss.
Right to prevent admission of new partners (sec 31(1): Every partner has a right to
introduction of new partner.
No liability before joining (sec31 (2)): a person who is admitted is not liable for any act
of firm before the date of joining.
Right to retire: (sec 32(1): Every partner have right to retire from the firm.
Right not to be expelled. (Sec 33(1): A partner has right to expelled from firm for unjust
reasons.
Right to carry on competing business: Right to carry on competing business outside the
local limits or time period, agreed upon.
Right to sue for dissolution of firm: a partner can sue for dissolution of firm if he feels
there is no harmony or co operation between partners.
Right of out going partners to share in subsequent profit (sec 37): Every partner who
ha retired and his settlement have not been made is entitled to a. share in profits, b.
interest @ 6%p.a.

FORMATION OF COMPANY
DEFINITION OF COMPANY:
The companies Act , 1956 defines the word company as a company formed and registered under
the Act or an existing company formed and registered under any of the previous company
laws.Section 3

Nature of Company
Incorporated Association : A company must be incorporated or registered under the
companies act.
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Artificial Person : A company is created with the sanction of law and certain rights and
obligations.
Separate Legal Entity : Company is distinct from the persons who consititute it.
Case law : Bacha F.Guzdar Vs The Commissioner of Income Tax , Bombay
Limited Liablity : Company limited by shares and the liability of members is limited to
the nominal value of shares.
Transferability of Shares : The shares of the company are transferable in the manner
provided in the Articles of the company Sec 82.In a private company , certain restrictions
are placed on such transfer of shares but the right to transfer is not taken away absolutely.
Perpetual Existence : Members may come and go but the company can go forever.
Common seal : is the official signature of the company.
Seal can be used for the Articles of association,Power of attorney, deed of lease, share
certificates, debentures,debenture trust deed, deed of mortgage, promissory notes ,
negotiable instruments (except cheques)agreement of hypothecation, loan agreements
with banks and financial institutions, contract of employment, guarantees issued by
company and all formal documents and documents executed on stamp papers.

Types of Companies :

Chartered Company Statutory Company company.

Ex East India Company

created by special act of legislature is called as a Statutory
o Ex- SBI and IFCI

Company limited by Shares registered company having the liabilities of its members by
its memorandum of association to the amount, if any unpaid shares respectively held by
them.The company called at any time to pay the amount but not more than the amount remaining
unpaid on his shares called Share Company.
Company limited by Guarantee : one having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake by the memorandum
to contribute to the assets of the company in the event of its being wound up called Guarantee
company.
Company limited by shares as well as guarantee : hybrid form of company which combines
both shares and guarantee.Such company raises initial capital from its shareholders.guarantee
raise from the winding up of the company and the liability to pay up to the nominal amount of
his share.
Unlimited Company: not having any limit on the liability of its members.
Private Company : minimum 2 members

Minimum Paid up capital

Rs.1 Lakh
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Prohibit an invitation to the public

Restrict the rights of its members to transfer shares.
Limit the numbers of its members to fifty.
Certificate of incorporation
Number of directors more without the permission of central government.
Prohibit any invitation or acceptance of deposits from persons other than its members,
directors or their relatives.

Public Company : Amended by the companies Act 2000, Public company means

Its not a private company

Minimum paid up capital Rs.5 lakh
Private company which is a subsidiary of public company from the date of
commencement of the companies Amendment Act , 2000.
Minimum member 7 , and Maximum unlimited.
Shares are freely Transferable
Invite to subscribe share or debentures
Accepts deposits from the public.
Certificate commencement of business from the registrar of companies.
Number of directors morethan 12 then the approval of Central government is necessary.

Formation of Company : Promotion

Registration
Floatation

Promotion : the promoter means who was a party to the preparation of the prospectus ,but does
not include any person by reason of his acting in a professional capacity or persons engaged in
procuring the formation of the company.
Promoter s have been described to be in fiduciary releationship of trust and confidence with the
company.This releationship of trust and confidence requires the promoter to make a full
disclosure of all material facts relating to the formation of the company.He should not make any
secret profit at the expense of the company he promotes, without the knowledge and consent of
the company and if he does so , the compan can compel him to account for it.
Any breach of trust and mis-statements contained in the prospectus then the promoter will be
liable for the original allottee of shares .When there is more than one promoter they are jointly
and severally liable and if one of them is sued and pays damages , he is entitled to claim
contribution from other or others.
Case Law : Lord Carins in Erlanger Vs New Sombrero Phosphate Co

Fiduciary position: They have in their hands the creation and moulding of the company. They
have the power of defining how and when, in what shape and under what supervision the
company shall start into existence and begin to act as a trading corporation.
The business of promotion thus gives a very advantageous position to the promoter in relation to
the proposed company .The courts have therefore fixed him with the responsibility of a fiduciary
agent.The promoter in that situation act to that trustee of the company, and his dealings with it
must be open and fair.If he starts a company for the purposes of buying his property and wants to
draw his payment from the money obtained from shareholders, he must faithfully disclose all
facts releating to the property.
Registration : Sec 12 and 33

Promoters will have to get together at least seven persons in the case of public company,
or twopersons in the case of private company to subscribe to the memorandum of
association.
The purpose of registration of Company :
The Memorandum of the company
The Articles , if any
The agreement, if any which the company proposes to enter into with any individual for
appointment as its managing director or wholetime director or manager.
Section 33 also requires a declaration to be filed with the registrar of companies along
with the Memorandum and Articles.This is known as Statutory declaration of
Compliance.

Certificate of incorporation : This certificate serves the same purpose in the case of a company
which a birth certificate does in the case of natural person and which is issued by the
Registrar of companies after scrutiny of the Memorandum and Articles.
Floatation : When a company has been registered and has received its certificate of
incorporation , it is ready for floatation, that is to say it can go ahead with raising capital
sufficient to commence business and to carry it on satisfactorily.
Memorandum of Association : tells us the objects of the companys formation and the utmost
possible scope of its operations beyond which its actions cannot go.Thus it defines as
well as confines the powers of the company.If anything is done beyond these powers, that
will ultravires of the company and so void.

Name Clause : This states the name of the company.

Object Clause : Defines the objects and indicates the sphere activities of the company.
Liablity Clause : Nature of liability of members .Incase of a company with limited
liability , it must state that liability of members is limited, where it by shares or by
guarantee.
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Association Clause : At the end of the memorandum of every company there is an

association or subscription clause or a declaration of association .

Articles of Association : of a company and its bye laws are regulations which govern the
management of its internal affairs and the conduct of its business.It defines the duties,
rights, powers and authority of the shareholders and the directors in their respective
capacities and of the company and the mode and form in which the business of the
company is to be carried out.

Business of the company

Allotment and forfeiture of shares
Execution or adoption of preliminary agreement
Transfer and transmission of shares
Meetings, proxy, quorum,poll and voting, resolution and meetings.
Number, appointment and power of directors
Accounts and Audit
Keeping of books statutory and others
Increase or reduction of share capital
Dividend Interim and Final

RESPONSIBILITIES OF PROMOTERS AND DIRECTORS .

Management of the affairs of the company is entrusted to Board of Directors who are
elected by the shareholders.Though shareholders are real owners of the company , they
cannot take part directly in its management.However , thereis indirect participation as it
is in the hands of the elected representatives called directors.
They must act bonafide in the interest of the company.They should not make any secret
profits.
They must discharge their duties with care and diligence
They must attend the Board Meetings Regularly
They must perform the duties personally.They can delegate only certain functions as
permitted by articles.
To sign a prospectus and deliver it to the Registrar before its issue to the public.
To see all the moneys received from applicants for shares are kept in a scheduled bank.
Not to allot shares before receiving minimum subscription
To forward a statutory report to all its members at least 21 days before the date of the
meeting.
To hold the meetings at least once in three months.
If a director is interested in a contract, to disclose the nature of his interest.
To call for annual general meeting every year.
To file all statutory returns with prescribed authorities.
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To take steps for filing declaration of solvency in the case of voluntary winding up.

Sole Proprietorship
The person who contributes capital and manages the
business is called as sole trader or sole proprietorship
Definition:
According to P.K Ghosh and Y.K Bhushan , The sole
proprietorship is a form of organization in which an individual
introduces his own capital, uses his own skill and
intelligence, and is entirely responsible for the results of the
operation
Features
One man ownership and control
Capital Contribution
Unlimited Liability
Enjoyment of entire profit
No separate legal entity
No special legislation
Registration
Duration
Simplicity
Local business
Self Employment
Small Capital

Basis of Difference Partnership

Specific Act

Number of Members

The partnership act

firm is governed by
the Indian
partnership act,
1932
Minimum 2
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Sole
Proprietorship
There is no separate
act for sole trader
business

Only one person

Agreement

Registration
Ownership and
control
Management

Capital

Liability
Implied Agency

Division of Profits or
Loss
Decision-making

Survival

maximum 10 for
banking and 20 for
non-banking
business
Agreement is
essential which may
be in oral or writing
Optional
Lies with the
partners
All partners can
participate in the
management
All the partners
contribute capital
Joint and several
liability
Generally every
partner is an implied
agent of the firm
and other partners
Partners share
profits and loss in an
agreed ratio
It may be delayed as
all the partners must
agree to the
important decisions
Its chance is greater

No agreement is
necessary
Need not be
registered
Lies with the sole
proprietor
This business is
managed by one
person
The sole trader
contributes the
entire capital
Unlimited liability
The proprietor may
appoint an agent

The profit or loss is

borne by the sole
trader
It is very quick as
the individual is not
required to consult
others
Its chance is limited

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