legal form of business

8/6/2019 Legal Form of Business

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LEGAL FORM OF

BUSINESS


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FORMS OF BUSINESS

SOLE PROPRIETORSHIP

PARTNERSHIP

CO-OPERATIVE

PRIVATE LIMITED COMPANY

PUBLIC LIMITED COMPANY

JOINT HINDU FAMILY BUSINESS

LIMITED LIABILITY PARTNERSHIP


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Sole Proprietorship

A sole proprietorship is the oldest and the most commonform of business. It is a one-man organisation where asingle individual owns, manages and controls thebusiness. Its main features are :-

Ease of formation is its most important feature because itis not required to go through elaborate legal formalities. Noagreement is to be made and registration of the firm is alsonot essential. However, the owner may be required toobtain a license specific to the line of business from the

local administration.The capital required by the organisation is supplied whollyby the owner himself and he depends largely on his ownsavings and profits of his business.


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Owner has a complete control over all the aspects of his

business and it is he who takes all the decisions though he

may engage the services of a few others to carry out the day-to-day activities.

Owner alone enjoys the benefits or profits of the business

and he alone bears the losses

The firm has no legal existence separate from its owner.The liability of the proprietor is unlimited i.e. it extends

beyond the capital invested in the firm.

Lack of continuity i.e. the existence of a sole proprietorship

business is dependent on the life of the proprietor and illness,death etc. of the owner brings an end to the business. The

continuity of business operation is therefore uncertain.


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Advantages

Ease of formation

Maximum incentive for work

Secrecy of business

Quick decisions and flexibility of operations

Disadvantages

Limited capital

Limited managerial abilityLimited life

Unlimited liability

Hence, this form of organisation is suitable for the businesses

which involve moderate risk, small financial resources, capitalrequirement is small and risk involvement is not heavy likeautomobile repair shops, small bakery shops, tailoring, etc. Itaccounts for the largest number of business concerns in India


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Partnership firm

Partnership is defined as a relation between two or more

persons who have agreed to share the profits of a business

carried on by all of them or any of them acting for all. The

owners of a partnership business are individually known as

the "partners" and collectively as a "firm". Its main featuresare :-

A partnership is easy to form as no cumbersome legal

formalities are involved. Its registration is also not essential.

However, if the firm is not registered, it will be deprived of

certain legal benefits. The Registrar of Firms is responsible

for registering partnership firms.

The minimum number of partners must be two, while the

maximum number can be 10 in case of banking business

and 20 in all other types of business.


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The firm has no separate legal existence of its own i.e.,

the firm and the partners are one and the same in the

eyes of law.

In the absence of any agreement to the contrary, all

partners have a right to participate in the activities of the

business.

Ownership of property usually carries with it the right ofmanagement. Every partner, therefore, has a right to

share in the management of the business firm.

Liability of the partners is unlimited. Legally, the partners

are said to be jointly and severally liable for the liabilitiesof the firm. This means that if the assets and property of

the firm is insufficient to meet the debts of the firm, the

creditors can recover their loans from the personal

property of the individual partners.


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Restrictions are there on the transfer of interest i.e. noneof the partners can transfer his interest in the firm to any

person(except to the existing partners) without theunanimous consent of all other partners.

The firm has a limited span of life i.e. legally, the firmmust be dissolved on the retirement, lunacy, bankruptcy,or death of any partner.

A partnership is formed by an agreement, which may beeither written or oral. When the written agreement is dulystamped and registered, it is known as "PartnershipDeed". Ordinarily, the rights, duties and liabilities ofpartners are laid down in the deed. But in the case where

the deed does not specify the rights and obligations, theprovisions of the THE INDIAN PARTNERSHIP ACT, 1932will apply. The deed, generally contains the followingparticulars:-


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Name of the firm.

Nature of the business to be carried out.

Names of the partners.

The town and the place where business will be carried

on.

The amount of capital to be contributed by each partner.

Loans and advances by partners and the interest

payable on them.

The amount of drawings by each partner and the rate of

interest allowed thereon.

Duties and powers of each partner.

Any other terms and conditions to run the business.


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Advantages

Ease of formation Greater capital and credit resources

Better judgement and more managerial abilities

Disadvantages

Absence of ultimate authority

Liability for the actions of other partners

Limited life

Unlimited liability

Partnership is an appropriate form of ownership for

medium sized business involving limited capital. This mayinclude small scale industries, wholesale and retail trade;small service concerns like transport agencies, real estatebrokers; professional firms like charted accountants,doctors' clinic, attorney or law firms etc.


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Co-operative

Co-operative organisation is a society which has as itsobjectives the promotion of the interests of its members inaccordance with the principles of cooperation. It is avoluntary association of ten or more members residing orworking in the same locality, who join together on the

basis of equality for the fulfillment of their economic orbusiness interest. The basic feature which differentiatesthe co-operatives from other forms of business ownershipis that its primary motive is service to the members ratherthan making profits.

There are different types of cooperatives like consumerco-operatives, producer's co-operatives, marketing co-operatives, housing co-operatives, credit co-operatives,farming co-operatives etc. The aim of all such co-operatives is to promote the welfare of their members. Itsmain features are :-


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It is a voluntary organisation as a member is free to

leave the society and withdraw his capital at any time,after giving a notice.

The minimum number of members is 10, but there is no

limit to the maximum number of members. However, the

members must be residing or working in the same locality.

Registration of a co-operative enterprise is compulsory.

A co-operative society may be registered with the

Registrar of Co-operatives Societies.

After registration a co-operative enterprise becomes a

body corporate independent of its members i.e. aseparate legal entity.


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It is subject to the provisions of the Co-operative

Societies Act, 1912 or State Co-operative Societies Acts.It has to submit annual reports and accounts to the

Registrar of Societies.

The liability of every member is limited to the extent of

his capital contribution. The shares of co-operative society cannot be transferred

but can be returned to the society in case a member

wants to withdraw his membership.

Being a separate legal entity a co-operative enjoyscontinuity of existence which is not affected by death,

insolvency, retirement, etc. of the members.


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Advantages

Greater amount of capital Reasonable price, good quality or better service

Better conditions of service to employees

Continuity of existence

Limited liability Disadvantages

Inability to collect sufficient capital

Inability to provide efficient managerial services

Organizational limitation


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Private Limited Company

Private Limited Company

A private limited company is a voluntary association of not less

than two and not more than fifty members, whose liability is

limited, the transfer of whose shares is limited to its members

and who is not allowed to invite the general public to subscribe

to its shares or debentures. Its main features are :-

It has an independent legal existence. The Indian Companies

Act,1956 contains the provisions regarding the legal formalities

for setting up of a private limited company. Registrars of

Companies (ROC) appointed under the Companies Act

covering the various States and Union Territories are vested

with the primary duty of registering companies floated in the

respective states and the Union Territories.


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It is relatively less cumbersome to organise and operate

it as it has been exempted from many regulations and

restrictions to which a public limited company is subjected

to. Some of them are :-

it need not file a prospectus with the Registrar.

it need not obtain the Certificate for Commencement of

business.

it need not hold the statutory general meeting nor need it

file the statutory report.

restrictions placed on the directors of the public limited

company do not apply to its directors.


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The liability of its members is limited.

The shares allotted to it's members are also not freely

transferable between them. These companies are not

allowed to invite public to subscribe to its shares anddebentures.

It enjoys continuity of existence i.e. it continues to exist

even if all its members die or desert it.

Hence, a private company is preferred by those who wish

to take the advantage of limited liability but at the same

time desire to keep control over the business within a

limited circle and maintain the privacy of their business.


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Advantages

Continuity of existence

Limited liability

Less legal restrictions

Disadvantages

Shares are not freely transferable

Not allowed to invite public to subscribe to its shares

Scope for promotional frauds

Undemocratic control


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Public limited Company

A public limited company is a voluntary association of memberswhich is incorporated and, therefore has a separate legalexistence and the liability of whose members is limited. Its mainfeatures are :-

The company has a separate legal existence apart from itsmembers who compose it.

Its formation, working and its winding up, in fact, all itsactivities are strictly governed by laws, rules and regulations.The Indian Companies Act, 1956 contains the provisionsregarding the legal formalities for setting up of a public limitedcompany. Registrars of Companies (ROC) appointed under theCompanies Act covering the various States and UnionTerritories are vested with the primary duty of registeringcompanies floated in the respective states and the UnionTerritories.


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A company must have a minimum of seven members but

there is no limit as regards the maximum number.

The company collects its capital by the sale of its shares

and those who buy the shares are called the members.The amount so collected is called the share capital.

The shares of a company are freely transferable and that

too without the prior consent of other shareholders or

without subsequent notice to the company.

The liability of a member of a company is limited to the

face value of the shares he owns. Once he has paid the

whole of the face value, he has no obligation to contribute

anything to pay off the creditors of the company.


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The shareholders of a company do not have the right to

participate in the day-to-day management of the business

of a company. This ensures separation of ownership from

management. The power of decision making in a

company is vested in the Board of Directors, and all policy

decisions are taken at the Board level by the majority rule.

This ensures a unity of direction in management.

As a company is an independent legal person, its

existence is not affected by the death, retirement orinsolvency of any of its shareholders.


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Advantages Continuity of existence

Larger amount of capital

Unity of direction

Efficient management Limited liability

Disadvantages

Scope for promotional frauds

Undemocratic control

Scope for directors for personal profit

Subjected to strict regulations


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Joint Hindu Family Business

Joint Hindu Family Business is a distinct type of organisation which isunique to India. Even within India its existence is restricted to only certainparts of the country. In this form of business ownership, all members of aHindu undivided family do business jointly under the control of the headof the family who is known as the 'Karta'. The members of the family areknown as 'Co-parceners'. Thus, the Joint Hindu Family firm is a business

owned by co-parceners of a Hindu undivided estate. Its main features are:-

It comes into existence by the operation of Hindu law and not out ofcontract. The rights and liabilities of co-parceners are determined by thegeneral rules of the Hindu law.

The membership of this form of business is the result of status arisingfrom the birth in the family and its legality is not affected by the minority.Originally, only three successive generations in the male line (grandfather, father and son) constituted the membership of thisorganisation. By the Hindu Succession Act, a female relative of adeceased member or a male relative of such a female member wasmade eligible for a share in the interest of the related member ( called co-parcener) at the time of his death. There is no legal limit to the maximumnumber of members.


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Registration is unnecessary, but the rights of its members to

sue third parties for claims of debt remains unaffected.

It is managed generally by the Karta. He has the authority to

obtain loans against the family property or in other ways. Other

members have no right of management nor to contract loans

binding on the joint-family property.

The manager or the Karta has the last word in the formulation

of all policies and in their execution. He has unquestioned

authority in the conduct of the family business.

The Karta has unlimited liability while the liability of the other

members is limited to the value of their individual interests in

the joint family. The firm enjoys continuity of operations as its existence is not

subject to the death or insolvency of a co-parcener or even of

the Karta himself. Thus, it has a perpetual life like the public

limited company.


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Advantages

Ease of formation

Continuity of operations

Disadvantages

Confined to Joint Hindu families

Relatively limited capital

Limited managerial talents

Unlimited liability of the Karta


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Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a new corporate structurethat combines the flexibility of a partnership and theadvantages of limited liability of a company at a low compliancecost. In other words, it is an alternative corporate businessvehicle that provides the benefits of limited liability of a

company, but allows its members the flexibility of organisingtheir internal management on the basis of a mutually arrivedagreement, as is the case in a partnership firm.

Owing to flexibility in its structure and operation, it would beuseful for small and medium enterprises, in general, and for theenterprises in services sector, in particular. Internationally, LLPs

are the preferred vehicle of business, particularly for serviceindustry or for activities involving professionals.

LLP is governed by the provisions of the Limited LiabilityPartnership Act 2008, the salient features of which are asfollows: -


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The LLP shall be a body corporate and a legal entity separatefrom its partners. Any two or more persons, associated forcarrying on a lawful business with a view to profit, may bysubscribing their names to an incorporation document and filingthe same with the Registrar, form a Limited LiabilityPartnership. The LLP will have perpetual succession.

The mutual rights and duties of partners shall be governed byan agreement between partners or between the LLP and thepartners subject to the provisions of the LLP Act 2008 . The actprovides flexibility to devise the agreement as per their choice.

The LLP will be a separate legal entity, liable to the full extentof its assets, with the liability of the partners being limited totheir agreed contribution in the LLP which may be of tangible orintangible nature or both tangible and intangible in nature. Nopartner would be liable on account of the independent or un-authorized actions of other partners or their misconduct. Theliabilities of the LLP and partners who are found to have actedwith intent to defraud creditors or for any fraudulent purposeshall be unlimited for all or any of the debts or other liabilities ofthe LLP.


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Every LLP shall have at least two partners and shall also have

at least two individuals as Designated Partners, of whom at

least one shall be resident in India. The duties and obligationsof Designated Partners shall be as provided in the law.

The LLP shall be under an obligation to maintain annual

accounts reflecting true and fair view of its state of affairs. A

statement of accounts and solvency shall be filed by every LLP

with the Registrar every year. The accounts of LLPs shall also

be audited, subject to any class of LLPs being exempted from

this requirement by the Central Government.

The Central Government has powers to investigate the affairs

of an LLP, if required, by appointment of competent Inspector

for the purpose.

The compromise or arrangement including merger and

amalgamation of LLPs shall be in accordance with the

provisions of the LLP Act 2008.


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A firm, private company or an unlisted public company isallowed to be converted into LLP in accordance with the

provisions of the Act. Upon such conversion, on and from thedate of certificate of registration issued by the Registrar in thisregard, the effects of the conversion shall be such as arespecified in the LLP Act. On and from the date of registrationspecified in the certificate of registration, all tangible (moveableor immoveable) and intangible property vested in the firm or the

company, all assets, interests, rights, privileges, liabilities,obligations relating to the firm or the company, and the whole ofthe undertaking of the firm or the company, shall be transferredto and shall vest in the LLP without further assurance, act ordeed and the firm or the company, shall be deemed to bedissolved and removed from the records of the Registrar ofFirms or Registrar of Companies, as the case may be.

The winding up of the LLP may be either voluntary or by theTribunal to be established under the Companies Act, 1956. Tillthe Tribunal is established, the power in this regard has beengiven to the High Court.


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The LLP Act 2008 confers powers on the Central

Government to apply provisions of the Companies Act,

1956 as appropriate, by notification with such changes or

modifications as deemed necessary. However, such

notifications shall be laid in draft before each House of

Parliament for a total period of 30 days and shall be

subject to any modification as may be approved by both

Houses.

The Indian Partnership Act, 1932 shall not be applicableto Limited Liability Partnerships.

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