Forms & Establishment of Business Enterprises in India

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What is Business?

An organization or economic system where goods and services are exchanged for one another or for money.

Every business requires some form of investment and enough customers to whom its output can be sold on a consistent basis in order to make a profit.

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Forms of Business Enterprises

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Advantages of Sole Propreitorship

Easy establishment Dynamism Quick decisions & implementation Maintaining secrecy Managerial independence Personal interest Favourable for small interest Low taxation Other benefits

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Limitations of Sole Propreitorship

Unlimited liability Limited capital Limited capacity Short life span Faulty decisions Unsuitable for big business

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Partnership Firm

Relationship between two or more persons who have agreed to share the profits of a business carried on by all or any of them

acting for all

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Characteristics of Partnership Firm

Agreement based on relation Written / Oral / Implied

Number of Partners 20 in general & 10 in banking business

Unlimited Liability Legal activities Profit motive Life span

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Contents of Partnership Deed Firm’s name & address

Partner’s name, address, age, gender Type of business activities Capital of each partner Ratio of distribution of profit / loss Period & type of firm Details pertaining to entry of partner & retirement Interest on capital & withdrawals Interest on loan from partner Remuneration, salary, commission of active partners Accounting methods & audit arrangement Rights & Duties of partners Arbitration clause Opening & Maintaining bank account Removal of partner Authority to sign important documents on behalf of the firm Provision for dissolution & settlement of accounts

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Types of Partnership

According to

duration

Partnership at will

Term Partnershi

pSpecific

job partnershi

p

According to liability

Unlimited Liability

Limited Partnershi

p

According to

business

Banking Firm

General Firm

According to

registration

Registered Firm

Unregistered Firm

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Types of Partners

Active Partner Sleeping or Dormant Partner Nominal Partner Partner by Estoppel Partner in Profit only Minor as a partner Partner with limited liability

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Merits of Partnership

Easy establishment More efficiency More capital More creditworthiness Maintaining secrecy Right decisions Distribution of risk Contact with customers Dynamism Decentralisation of economic power

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Limitations of Partnership

Unlimited liability Limited duration Absence of ownership transfer Possibility of dispute

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1.Management – Karta2.Membership – By birth, minor is also

member3.Liability – Only Karta has unlimited

liability4.Membership Strength – No limit5.Duration – Continues even after death

of Karta6.Insolvency – Karta & HUF both are

declared insolvents

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Co-Operative Society

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Advantages of Co-Op Society Easy to form – 10 or more members

Open & voluntary membership Democratic management –Exec Committee Limited liability Separate entity – Death, resignation, insolvency Economical – Members give voluntary service Encouragement from Government Economic uplifting of members – No middlemen Social welfare activities – dispensaries, schools Low burden of taxes Training school of co-operation

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Limitations of Co-Op Society Limited Capital – Weak members &

limit on shares

Inefficiency – honorary members

Government interference

Difference of opinions amongst members

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Joint Stock Company

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Characteristics of a Company

Compulsory registration Separate and perpetual existence Voluntary membership Limited liability Transfer of shares Common seal Management by representatives Voting per share

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Chartered Company

Registered Company

No. Of member viewpoint

Private Company Public Company

Deemed Public Company

Liability viewpoint

Limited Liability

Limited by Share Capital

Limited by Share Guarantee

Unlimited Liability

Control viewpoint

Holding Company

Government Company

Subsidiary Company

Registration viewpoint

Indian Company

Foreign Company

Company created under

special law

Types of Companies

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Advantages of Company

Limited Liability High Capital Separate & perpetual existence Easy share transfer Efficient management Democratic management Large scale production Social benefits

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Limitations of Company

Long & expensive incorporation procedure Autocratic management Observance of law – More legal interference Probability of speculation Delay in decision making High administrative expenses Difficulty in keeping secrets High taxation Absence of personal interest

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Points of Difference

Private Company Public Company

Number of Members Minimum 2 & Maximum 50 members

Minimum 7 & maximum unlimited members

Share transfer Restricted Free

Number of Directors Minimum 2 directors Minimum 3 directors

Invitation to subscribe for shares

Not allowed Allowed

Provision for minimum subscription

No provision There is a provision

Name ‘Private Limited’ words are to be added at the end of the name

The word ‘Limited’ is to be added at the end of the name

Beginning of business

Immediately after Certificate of Incorporation

Has to obtain Certificate of Commencement

Articles of Association

Has to prepare AoA Table – A can be accepted

First statutory meeting

No need Compulsory within stipulated time-period

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Stages of Formation of Company1. Promotion

2. Incorporation

3. Commencement of Business

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Step 1: Promotion

Idea

Primary & extensive tests

Mobilising the resources

Making arrangement for finance

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Step 2: Certificate of Incorporation

Memorandum of Association Articles of Association List of Directors Written consent of Directors Acceptance to subscribe for

qualification of shares The address of registered office Statement of observation of law

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Memorandum of Association

1. Name Clause2. Registered Office Clause3. Object Clause4. Liability Clause5. Capital Clause – Authorised & Paid-

Up6. Association Clause

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Step 3: Certificate of Commencement of Business

(Public Company)

Prospectus or statement in lieu of prospectus

Applying to recognised stock exchange

Determining & getting minimum subscription

Approving contracts entered prior to Certificate of Incorporation & Commencement

Declaration of payment of qualification shares

Returning money to share applicants

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Prospectus Main objects No. of qualification shares for

directors Details of Directors Details of Auditors Application & Allotment amount of

shares Details of Underwriting Agreement Information about Primary Expenses Information about Minimum

Subscription Statement about fictitious name

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Limited Liability Partnership Concept is still very new in India

Features of both partnership & company Governed by LLP Act, 2008 Word ‘LLP’ has to be written at the end

of the name LLP Agreement Compulsory registration Foreign nationals can be partners Separate legal entity Perpetual succession LLP has its own common seal

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Determining the Form of Ownership of Business

Type of business Size of business Requirement of capital Degree of risk Need of managerial skill Duration of business Preference of directors Interference of government Tax burden

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Factors to be Taken Into Account While Starting a

Business Market

Location

Financial Requirement

Government Policy

Efficiency – Preference of Promoter

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“Ethics is what you do when no one is looking.”

~ George Bernard Shaw

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Thank You!!!