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HOW DO I ORGANIZE MY BUSINESS ?

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Forms of Business Ownership

Forms of Business Ownership

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MAJOR FORMS OF BUSINESS OWNERSHIP

SOLE PROPRIETORSHIP

PARTNERSHIP

COMPANY

Forms of OwnershipPercent of Businesses

Corporation20.2%

Partnership7.9%

Sole Proprietorship

71.9%

Source: Statistical Abstract of the United States, 2002, p.471.

Forms of OwnershipPercent of Sales

Corporation86.6%

Partnership8.8%

Sole Proprietorship

4.7%

Source: Statistical Abstract of the United States, 2002, p.471.

Forms of OwnershipPercent of Income

Corporation68.1%

Partnership16.7%

Sole Proprietorship

15.2%

Source: Statistical Abstract of the United States, 2002, p.471.

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FACTORS AFFECTING THE CHOICE OF OWNERSHIP FORM

LIABILITY EXPOSURESTART-UP CAPITAL REQUIREMENTSTAX CONSIDERATIONSCONTROLBUSINESS GOALSCOST & EASE OF

FORMATION

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ADVANTAGES OF THE SOLE PROPRIETORSHIP FORM

SIMPLE TO CREATELEAST COSTLY FORM TO BEGINPROFIT INCENTIVETOTAL DECISION MAKING AUTHORITYNO SPECIAL LEGAL RESTRICTIONSEASY TO DISCONTINUE

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DISADVANTAGES OF THE SOLE PROPRIETORSHIP FORM

UNLIMITED PERSONAL LIABILITY

LIMITED SKILLS AND CAPABILITIES

FEELINGS OF ISOLATION

LIMITED ACCESS TO CAPITAL

LACK OF CONTINUITY

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ADVANTAGES OF THE PARTNERSHIP FORM

EASY TO ESTABLISH

COMPLEMENTARY SKILLS OF PARTNERS

DIVISION OF PROFITS

LARGER POOL OF CAPITAL

ABILITY TO ATTRACT LIMITED NUMBER OF PARTNERS

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ADVANTAGES OF THE PARTNERSHIP FORM

LITTLE GOVERNMENT REGULATION

FLEXIBILITY

TAXATION

ADVANTAGE

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DISADVANTAGES OF THE PARTNERSHIP FORM

UNLIMITED LIABILITY OF AT LEAST ONE PARTNER

CAPITAL ACCUMULATION

DIFFICULTY IN DISPOSING OF PARTNERSHIP INTEREST

LACK OF CONTINUITY

POTENTIAL FOR PERSONALITY AND AUTHORITY CONFLICTS

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HOPE YOU ARE WORKING ON YOUR READING ASSIGNMENTS

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COMPANIES ACT,1956

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NATURE OF A COMPANY

REGISTRATION OF A COMPANY

CHAPTER 15

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ILLEGAL BUSINESS ASSOCIATIONS

SEC 11 OF THE COMPANIES ACT,1956 (p 834) DECLARES THAT

NO PARTNERSHIP OR ASSOCIATION CONSISTING OF MORE THAN 20 PERSONS ( 10 IN THE CASE OF A BANKING BUSINESS) SHALL BE FORMED FOR CARRYING ON ANY BUSINESS FOR PROFIT FOR ITSELF OR ITS MEMBERS, UNLESS REGISTERED AS A COMPANY .

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WHAT IS A COMPANY ? A COMPANY IS AN ARTIFICIAL

PERSON OR A LEGAL ENTITY CREATED BY LAW HAVING THE RIGHT OF OWNING PROPERTY AND MAKING CONTRACTS IN ITS OWN NAME , SUCH AS L & T , TISCO etc.

OTHER EXAMPLES OF LEGAL PERSONS ARE A REGISTERED SOCIETY , SUCH AS BITS , OR A REGISTERED TRADE UNION ,

SUCH AS INTUC .

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COMPANY : A SEPARATE LEGAL PERSON OR ENTITY

COMPANY IS A LEGAL PERSON / ENTITY.

IT HAS A SEPARATE EXISTENCE FROM THE PERSONS WHO COME TOGETHER TO FORM THE COMPANY.

IT HAS FULL CAPACITY TO ENTER INTO TRANSACTIONS IN ITS OWN NAME.

IT CAN SUE & BE SUED IN ITS OWN NAME.

IT OWNS ITS OWN PROPERTY.

IT HAS PERPETUAL SUCCESSION .

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COMPANY : A SEPARATE LEGAL PERSON : Example

The case is dated 1897 (1p723). Solomon was a bootmaker. He sold the assets of his business to a company Solomon & Co Ltd. of which he was virtually the sole shareholder. He continued to trade as a bootmaker in his own name and went bust. His creditors tried to sieze the assets of the business (now owned by Solomon & Co Ltd). The decision of the court was that Solomon & Co Ltd formed a separate legal entity from Mr Solomon. Mr Solomon's debts were not the debts of Solomon & Co. Ltd. The rule is that a properly formed limited liability company is a legal entity in its own right.

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CONCEPT OF INCORPORATION

“… IF ONE WAS TO ISOLATE A SINGLE FACTOR WHICH HAS LED TO THE INCREASE AND IMPORTANCE OF COMPANIES SINCE THE NINETEENTH CENTURY , IT WOULD BE THE RECOGNITION OF THE CONCEPT OF A SEPARATE INDEPENDENT LEGAL ENTITY AND THE RESULTING LIMITATION OF LIABILITY ”

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ADVANTAGES OF THE LIMITED LIABILITY COMPANYLIMITED LIABILITY OF ITS MEMBERS

TRANSFERABLE OWNERSHIP

ABILITY TO CONTINUE INDEFINITELY

SEPARATION OF OWNERSHIP AND MANAGEMENT

ABILITY TO ATTRACT LARGE CAPITAL AND PROFESSIONAL MANAGERS

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DISADVANTAGES OF THE CORPORATION

COST AND TIME OF INCORPORATING

DOUBLE TAXATION

POTENTIAL FOR DIMINISHED MANAGERIAL INCENTIVES

LEGAL REQUIREMENTS AND REGULATORY “RED TAPE”

POTENTIAL LOSS OF CONTROL BY FOUNDER(S)

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THE CORPORATE VEIL

A COMPANY IS RUN BY ITS HIRED PROFESSIONAL MANAGERS AND NOT BY ITS MEMBERS OR OWNERS

THIS CREATES THE PROBLEM OF THE CORPORATE VEIL AROUND THE ACTIONS OF ITS MEMBERS OR OWNERS

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CORPORATE VEILUSE OF CORPORATION AS A FACADE FOR CONTROLLING SHAREHOLDERS’ OTHER FINANCIAL AFFAIRS

FRAUD, OR OTHER INJUSTICE FOR PERSONAL GAIN IN NAME OF COMPANY

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GOODBYE CORPORATE VEIL

UNDER THE COMPANY LAW , COURTS CAN CATCH ALL GROUP COMPANIES AND SIGNIFICANT SHAREHOLDERS, IF REQUIRED.

IF NECESSARY, THE CORPORATE VEIL MAY BE LIFTED AND SHAREHOLDERS , DIRECTORS AND MANAGERS BECOME PERSONALLY LIABLE.

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CORPORATE VEIL“PIERCING CORPORATE VEIL”PERSONAL LIABILITY IMPOSED UPON

MEMBERS OR SHAREHOLDERSCIRCUMSTANCES CONSIDERED :

UNDER CAPITALIZATIONFAILURE TO OBSERVE FORMALITIESNONPAYMENT OF DIVIDENDSSIPHONING OF FUNDS BY

CONTROLLING SHAREHOLDERNONFUNCTIONING OF OTHER

OFFICERS OR DIRECTORS

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REGISTRATION AND INCORPORATION

A COMPANY IS BORN OR INCORPORATED BY REGISTERING THE COMPANY WITH THE REGISTRAR OF COMPANIES AND OBTAINING A CERTIFICATE OF INCORPORATION.

THE CERTIFICATE OF INCORPORATION BRINGS A COMPANY INTO EXISTENCE

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REGISTRATION AND INCORPORATION

REGISTRATION OF A COMPANY IS OBTAINED BY FILING AN APPLICATION WITH THE FOLLOWING DOCUMENTS WITH THE REGISTRAR OF COMPANIES:

1. MEMORANDUM OF

ASSOCIATION

2. ARTICLES OF ASSOCIATION

(IF REQUIRED)

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REGISTRATION AND INCORPORATION

3. A COPY OF THE AGREEMENT WITH THE PERSON WHO WILL BE THE MD OR THE MANAGER OF THE COMPANY

4. A DECLARATION THAT ALL REQUIREMENTS OF THE COMPANIES ACT,1956 HAVE BEEN COMPLIED WITH

IF DOCUMENTS ARE SATISFACTORY, REGISTRAR ISSUES THE CERTIFICATE OF INCORPORATION

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KINDS OF COMPANIES

Pages 829 - 834

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TYPES OF COMPANIES COMPANIES CAN BE CLASSIFIED IN SEVERAL WAYS :

1. LIMITED LIABILITY AND UNLIMITED LIABILITY COMPANIES: THOUGH LIMITED LIABILITY OF A

COMPANY’S MEMBERS IS NORMALLY DESIRED , THERE ARE UNLIMITED LIABILITY COMPANIES FORMED FOR SPECIAL REASONS.

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UNLIMITED LIABILITY COMPANIES

UNLIMITED COMPANIES NEED NOT HAVE SHARE CAPITAL , CAN REDUCE CAPITAL AT WILL ,AND MEMBERS CANNOT BE SUED DIRECTLY FOR THE COMPANY’S DEBTS OR LIABILITIES.

UNLIMITED COMPANIES NEED ARTICLES OF ASSOCITION FOR REGISTRATION.

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LIMITED LIABILITY COMPANIES LIABILITY OF MEMBERS IN A COMPANY

MAY BE LIMITED IN TWO WAYS : 1. LIMITED BY GUARANTEE: SUCH COMPANIES ARE CALLED GUARANTEE COMPANIES. 2. LIMITED BY SHARES : NORMALLY , MAJORITY OF THE COMPANIES LIMIT THE LIABILITY OF

THEIR MEMBERS OR OWNERS BY SHARES.

SUCH COMPANIES ARE CALLED LIMITED COMPANIES.

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LIMITED COMPANIESLIMITED COMPANIES ARE OF TWO

TYPES:2.PUBLIC LIMITED AND PRIVATE

LIMITED COMPANIES : A PUBLIC LIMITED COMPANY IS ONE

WHICH IS ALLOWED TO RAISE ITS CAPITAL FROM THE PUBLIC THROUGH A PUBLIC ISSUE OF SHARES, AND THUS WHOSE OWNERS OR SHAREHOLDERS ARE MEMBERS OF PUBLIC AT LARGE. EXAMPLES: EIL, ABNL ,TISCO, BAJAJ AUTO, SBI, INFOSYS, NTPC etc.

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LIMITED COMPANIES A PRIVATE LIMITED COMPANY IS

RESTRICTED TO A MAXIMUM OF 50 MEMBERS AND IS NOT ALLOWED TO MAKE A PUBLIC ISSUE. ALSO ,

THERE IS A RESTRICTION ON RIGHT OF TRANSFER OF SHARES SO AS TO MAINTAIN A MAXIMUM OF 50 MEMBERS.

EXAMPLE : DCPL , Holtec Consultants Pvt. Ltd.

BOTH GUARANTEE COMPANIES AND PRIVATE COMPANIES MUST HAVE ARTICLES OF ASSOCIATION FOR INCORPORATION.

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LIMITED COMPANIES

CERTIFICATE OF COMMENCEMENT OF BUSINESS : (Sec 149 , pp 727-728)A PRIVATE LIMITED COMPANY CAN

COMMENCE ITS BUSINESS ON INCORPORATION ,

BUT , A PUBLIC LTD CO HAS TO FIRST COMPLETE A PUBLIC ISSUE OF ITS SHARES, AND LIST THEM ON A STOCK EXCHANGE, TO OBTAIN THE CERTIFICATE OF COMMENCEMENT OF BUSINESS FROM THE REGISTRAR.

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KINDS OF COMPANIES3. GOVERNMENT AND NON- GOVERNMENT COMPANIES :A COMPANY IN WHICH CENTRAL

GOVERNMENT OR STATE GOVERNMENTS HOLD 51 % OR MORE OF SHARES IS CALLED A GOVERNMENT COMPANY.

EXAMPLES : SAIL , ONGC , NTPC , BHEL etc.

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4. HOLDING AND SUBSIDIARY COMPANIES

WHEN ONE COMPANY HAS CONTROL OVER ANOTHER COMPANY , THE CONTROLLING COMPANY IS CALLED THE HOLDING COMPANY , AND THE CONTROLLED COMPANY IS CALLED THE SUBSIDIARY COMPANY.

EXAMPLE : MRPL IS THE SUBSIDIARY COMPANY OF ONGC. ONGC HOLDS MORE THAN 80 % OF MRPL’S SHARES AND CONTROLS THE APPOINTMENT OF MAJORITY OF THE DIRECTORS OF MRPL .

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5. FOREIGN AND DOMESTIC COMPANIES

A FOREIGN COMPANY IS ACOMPANY WHICH IS INCORPORATED OUTSIDE INDIA ,BUT WHICH HAS A PLACE OFBUSINESS IN INDIA.

EXAMPLE : MICROSOFT AND INTEL ARE FOREIGN COMPANIESIN INDIA .

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MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

Pages 728-735

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MEMORANDUM OF ASSOCIATION THE FIRST STEP IN THE

FORMATION OF A COMPANY IS TO PREPARE A DOCUMENT CALLED THE MEMORANDUM OF ASSOCIATION.

THE MEMORANDUM OF ASSOCIATION IS THE CONSTITUTION OF THE COMPANY, and defines its structure or organization.

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MEMORANDUM OF ASSOCIATIONTHE MEMORANDUM IS DIVIDED INTO

THE FOLLOWING 5 CLAUSES :1.NAME CLAUSE2.REGISTERED OFFICE CLAUSE3.OBJECT CLAUSE4.LIABILITY CLAUSE , AND5.CAPITAL CLAUSE

THEN IT IS SUBSRIBED BY THE REQUIRED NUMBER OF SUBSCRIBERS.

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MINIMUM CAPITAL FOR A COMPANY

What is the minimum authorised capital for a company?

The minimum authorised capital for Private Limited Company – Rs.1,00,000/-

For Public Limited Company

Rs.5,00,000/-

For the use of some key words as part of name, the minimum authorised capital is given in the table below:

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Required minimum authorised capital For the use of some key words as part of name :1. Corporation  5 Crores 2. International, Globe, Universal, Continental, Inter-Continental, Asiatic, Asia, being the first word of the name 1 Crore 3. If any of the words at (2) above is used within the name (with or without brackets) 50 Lakhs 4. Hidustan, India, Bharat, being the first word of the name 50 Lakhs 5. If any of the words at (4) above is used within the name (with or without brackets) 5 Lakhs 6. Industries/ Udyog  1 Crore 7. Enterprises, Products, Business,

Manufacturing  10 Lakhs

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‘ULTRA VIRES’ RULE

THIS IS A RULE OF LAW . ‘ULTRA VIRES’ MEANS ‘BEYOND THE POWERS OF’.FOR EXAMPLE : TAKING AWAY THE PERSONAL PROPERTY OF SOMEONE FOR NO REASON IS ULTRA VIRES THE GOVERNMENT , i.e. BEYOND THE POWERS OF THE GOVERNMENT.

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‘ ULTRA VIRES ’ RULETHOSE VESTED WITH STATUTORY POWERS ARE ONLY ABLE TO DO THOSE THINGS THAT LAW HAS ALLOWED THEM TO DO BY STATUTE.FOR EXAMPLE, DOING ONLY THOSE THINGS WHICH HAVE BEEN REGISTERED IN THE

‘ OBJECTS CLAUSE ‘ OF THE MEMORANDUM.

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OBJECTS & ULTRA VIRES RULE AN ACT BY A COMPANY OUTSIDE

THE SCOPE DEFINED BY THE OBJECTS CLAUSE IS ULTRA VIRES OR BEYOND THE POWERS OF THE COMPANY.

EXAMPLE : Ashbury Railway Carriage & Wagon Co V Riche , 34 , p 729

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ALTERATION OF MEMORANDUM

FOR ALTERING AN ALREADY REGISTERED MEMORANDUM , THE FOLLOWING PERMISSIONS ARE REQUIRED :

1. NAME CLAUSE – SPECIAL RESOLUTION OF SHAREHOLDERS , AND APPROVAL OF THE CENTRAL GOVERNMENT . (In case of changing an undesirable name, only an ordinary resolution & approval rqd.)

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ALTERATION OF MEMORANDUM

2. REGISTERED OFFICE - SPECIAL RESOLUTION OF SHAREHOLDERS, AND SANCTION OF COMPANY LAW BOARD

( CLB ) .

3. OBJECTS CLAUSE - SPECIAL RESOLUTION OF SHAREHOLDERS .

4 & 5 . LIABILITY AND CAPITAL CLAUSES : SANCTION OF HIGH COURT FOR REDUCTION OF CAPITAL AFTER SPECIAL RESOLUTION IS PASSED .

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ARTICLES OF ASSOCIATION

ARTICLES ARE INTERNAL REGULATIONS AND BY-LAWS.

SCHEDULE 1 OF THE COMPANIES ACT,1956 SETS OUT TABLES OF MODEL FORMS OF ARTICLES FOR DIFFERENT COMPANIES.

TABLE A IS APPLICABLE TO COMPANIES LIMITED BY SHARES,WHICH CAN BE ADOPTED.

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ARTICLES OF ASSOCIATION (AA)

THE AA ARE A CONTRACT BETWEEN THE COMPANY AND ITS MEMBERS THAT THEY SHALL ABIDE BY THE RULES AND REGULATIONS OF INTERNAL MANAGEMENT OF THE COMPANY SPECIFIED IN THE AA. THEY SPECIFY THE RIGHTS AND DUTIES OF THE MEMBERS AND DIRECTORS.THE PROVISIONS OF THE AA MUST NOT BE IN CONFLICT WITH THE PROVISIONS OF THE MA. IN CASE SUCH A CONFLICT ARISES, THE MA WILL PREVAIL.

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ALTERATION OF ARTICLES

A COMPANY CAN ALTER ITS ARTICLES AT ANY TIME WITH THE AUTHORITY OF A SPECIAL RESOLUTION OF ITS SHAREHOLDERS , AND BY FILING AN APPLICATION WITH THE REGISTRAR OF COMPANIES.

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CONSTRUCTIVE NOTICEMEMORANDUM OF ASSOCIATION (MA) AND ARTICLES OF ASSOCIATION OF A COMPANY ARE PUBLIC DOCUMENTS AND CONSTITUTE A CONSTRUCTIVE OR POSITIVE NOTICE TO THE MEMBERS OF THE COMPANY AS WELL AS THE PUBLIC.ANYBODY WHO DEALS WITH THE COMPANY CANNOT TAKE A DEFENCE THAT HE WAS IGNORANT OF THEIR CONTENT AND THE RULES OF THE CORPORATE .

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PROSPECTUS & PROMOTERS

pp 737-743

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PROSPECTUS

ANY DOCUMENT WHICH INVITES OFFERS FROM PUBLIC FOR SUBSCRIPTION OR PURCHASE OF SHARES OR DEBENTURES, OR ANY DEPOSITS FROM PUBLIC IS CALLED A PROSPECTUS.

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ABRIDGED PROSPECTUS

APPLICATION FORMS FOR SHARES OR DEBENTURES CANNOT BE ISSUED UNLESS THEY ARE ACCOMPANIED BY A MEMORANDUM CONTAINING SALIENT FEATURES OF A PROSPECTUS AS PRESCRIBED.

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PROSPECTUS

THE PROSPECTUS MUST BE ISSUED TO THE PUBLIC.THIS MEANS THERE MUST BE SOME PUBLICITY,HOWEVER MODEST.

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CONTENTS OF PROSPECTUS

DETAILS AS TO

SHARES

MANAGERIAL PERSONNEL

MINIMUM SUBSCRIPTION

UNDERWRITING

PRELIMINARY EXPENSE

MATERIAL CONTRACT etc

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PROSPECTUS

CRIMINAL LIABILITY

FOR OMISSIONS

FOR MISREPRESENTATION

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PROMOTERS A PROMOTER IS A PERSON WHO BRINGS ABOUT THE INCORPORATION AND ORGANIZATION OF A COMPANY.

A PERSON WHO ACTS IN A MINISTERIAL CAPACITY IS NOT A PROMOTER.

FIDUCIARY RELATION OF PROMOTER WITH THE COMPANY