Formsofbusinessorganisations 131010063541-phpapp02

FORMS OF BUSINESS ORGANISATIONS

WHAT IS A BUSINESS ORGANISATION?

The term "business organization" refers to how a business is structured.

It refers to a commercial or industrial enterprise and the people who constitute it.

• Activities connected with the production or purchase and sale of goods or services with the objective of earning profit are called Business activities.

• Mining, manufacturing, trade, transportation, insurance, banking are business activities.

• Thus business may be defined as an economic activity involving regular production or purchase and distribution of goods and services with the objective of earning profits.

Business !!!!! What it is?

• to satisfy human needs,

• to earn one’s livelihood,

• to derive mental satisfaction.

Human activities involve efforts under taken

• Non-economic activities are social activities which people undertake to derive personal satisfaction.

Economic activities are undertaken by people to earn one’s living and for production of wealth

• Business is an economic activity. • It includes the activities of production or purchase

and distribution.• It deals in goods and services.• It implies regularity of transactions.• It aims at earning profits through the satisfaction of

human wants.• It involves risk; it is not certain that adequate profit

will be earned.• It creates utilities.

Nature and characteristics of Business

• Improvement in standard of living• Proper utilization of resources• Better quality & large variety of goods• Creates utilities• Employment opportunities• Workers' welfare

Significance of Business in Modern Society

TYPES OF BUSINESS ORGANISATIONS

• Sole Proprietorship• Joint Hindu Family Business• Partnership Firm• Joint Stock Company 1.) Private Limited 2.) Public Limited• Co-operative Society

• Ease of formation• Adequacy of Capital• Limit of Liability• Direct relationship between Ownership,

Control and Management• Continuity and Stability• Flexibility of Operations

Characteristics of an ideal form of organization

Choosing a Form of Business OrganisationThe choice of the form of business is governed by

several interrelated and interdependent factors :-• The nature of business is the most important

factor• Scale of operations i.e. volume of business ( large,

medium, small) and size of the market area (local, national, international)

• The degree of control desired by the owner(s) • Amount of capital required for the establishment

and operation of a business• The volume of risks and liabilities as well as the

willingness of the owners to bear it• Comparative tax liability

SOLE PROPRIETERSHIPWhen the ownership and management of a business are in control of one individual the form of business is called sole proprietorship.

CHARACTERISTICS • The business enterprise is

owned by one single individual (i.e. both profit and risk belong to him)

• Owner is the Manager• Owner is the only source of

Capital• The proprietor and business

enterprise are same in the eyes of the law.

ADVANTAGES OF

SOLE PROPREITORSHIP • Easy formation• Better Control (Prompt decision making and

Flexibility in Operations)• Subject to fewer regulations• Not subject to corporate income tax• Ownership of all profits

DISADVANTAGES OF SOLE PROPREITORSHIP

• Owner has unlimited liability

• Difficult to raise capital

• Business has a limited life

• Difficult to do business beyond a certain size

JOINT HINDU FAMILY BUSINESS• Comes into existence as per

the Hindu Inheritance Act of India

• This form of business found only in India

• All members of the Hindu Undivided Family(HUF) own the business jointly

• The affairs of the business are managed by head of the family called “Karta”. All other members are called “Co-parceners”

• Membership is restricted only to members of the Joint family. No outsider can become the member

• Karta has unlimited liability while all other members have limited liability

• The share of each member keeps on fluctuating

• Business continues to exist upon the death of any member or Karta.

ADVANTAGES OF HUFs• Every co-parsener has an assured

share in profits• The business has continued

existence• Decision making is quick as the

powers are with the Karta• No corporate tax• People use it mostly for tax

benefits these days

DISADVANTAGES OF HUFs

• Absolute power in the hands of Karta.

• Instability• Limited Resources can be

raised• Scope for conflict

PARTNERSHIP FIRM A Partnership consists of two or more

individuals in business together

CHARACTERISITCS OF PARTNERSHIP• Minimum 2 number of partners and maximum 20

partners• The relation between the partners is created in the

form of a contract. Written contract is called “Partnership Deed”

• The firm means partners, the partners mean the firm

• The profit is divided in any as ratio as agreed• No partner can sell/transfer his interest in the firm

to anyone without the consent of other partners

ADVANTAGES OF PARTNERSHIP

• Easy Formation • Larger Resources• Sharing Of Risk• Better Management and

Flexibility of Operation• No corporate income tax• Subject to fewer regulations

as compared to companies

DISADVANTAGES OF PARTNERSHIPS

• Unlimited Liability• Limited Life• Difficult to raise capital• Chances of Dispute

JOINT STOCK COMPANY A joint stock company is a voluntary

association of people who contribute money to carry on business

CHARACTERISTICS OF A CORPORATION• It is considered as a separate legal entity• It comes into formation after all formalities under

the Indian Companies Act 1956 are completed• Management and ownership is completely

separate• Capital is raised through shares which are

transferable

ADVANTAGES OF A CORPORATION• Limited liability of the

shareholders/promoter• Can easily raise capital• Have unlimited life• Ease of transfer of ownership

DISADVANTAGES OF A CORPORATION• Formation is not easy• Excessive Government Regulation• Subject to Corporate Tax and Dividend

Tax (Double Taxation)• Delay in Policy Decisions• Control by a Group

TWO TYPES OF CORPORATIONS1. PRIVATE COMPANY• Closely held by a few people• Minimum 2 and maximum 50

shareholders• Stocks cannot be traded on exchanges

and private equity cannot be raised• Less regulations as compared to Public

Companies

2. PUBLIC COMPANY• Stocks are held by a large

number of people• Minimum 7 shareholders

and no limit for maximum• Can be listed on stock

exchange and can go public

• Have to follow many laws with regards to the board composition and AGM.

CO-OPERATIVE SOCIETY

It is a voluntary association of people or business to achieve a an economic goal with a social perspective

CHARECTERISTICS OF CO-OPERATIVE

• Voluntary association• Minimum membership requirement is 10

and there is no maximum limit• Registration of Co-operative is must

under the “Co-operative Societies Act” is a must. After the registration it enjoys certain privileges of a Joint Stock Company

ADVANTAGES OF CO-OPERATIVE• Easy Formation• Limited Liability• Stability• Democratic

Management• State Assistance

DISADVANTAGES OF A CO-OPERATIVE

• Possibility of conflict

• Long decision making process

• Not enough capital

Not For Profit Businesses

• Many charity-based business organisations are run as ‘not for profit’ operations

• They typically receive donations or funds from groups or government

• Any financial surplus is ploughed back into the business

• The organisation does not aim to generate profits

• These forms refer to such aspects as ownership, risk bearing, control and distribution of profit.

• Any one of the above mentioned forms may be adopted for establishing a business

• usually one form is more suitable than other for a particular enterprise.

• The choice will depend on various factors like the nature of business, objective, capital required, scale of operations, control, legal requirements and so on.

Conclusion

FORMATION OF COMPANIES

FORMATION OF COMPANY

> Definition.

> Stages in formation.

DOCUMENTS OF COMPANIES

> Memorandum of Association (MoA)

> Article of Association (AoA)

> Prospectus of Association

What do you mean by Formation of a

Company? A Company comes into existence when a group of

people come together with a view of forming an association

to exploit the business opportunities by bringing together;

men, material, money and management

STAGES OF FORMATION OF A COMPANY

Promotion Stage

Selection of Name

Incorporation (Registration Stage).

Raising the Share Capital Stage.

1. PROMOTION STAGE INCLUDES

Discovery of Business opportunities.

Detailed Investigation.

Assembling necessary requirements.

Financing of proposition.

2.SELECTING COMPANY NAME

To be identified for legal and business purpose (i.e.

“Ltd” or “Pvt Ltd” ). The name should not be similar to

the existing.

3.INCORPORATION STAGE A company is said to be incorporated when it fulfill the

formalities of registration and obtain “CERTIFICATE OF

INCORPORATION” by submitting the MoA, AoA and written

consent of all the directors.

A public to commence business, should raise the required

capital and obtain the

“CERTIFICATE OF

COMMENCEMENT

OF BUSINESS”

Example for :

CERTIFICATE OF INCORPORTATION of VISWASGOLD INFRASTRUCTURES

Example for :

CERTIFICATE OF

COMMENCEMENT OF

BUSINESS of VISWASGOLD INFRASTRUCTURES

4. RAISING OF SHARE CAPITAL

Entering onto an agreement with underwriters.

Applying to the stock exchange for listing of

shares.

Issue of prospectus inviting public to subscribe.

Allotting shares.

PROMOTERS OF A COMPANY

A promoter is one “ who undertakes to form a

company with reference to a given object and to

set it going who takes the necessary steps to accomplish that

purpose”.

Liability of promoters: Liable to

hand over any secret profit and

any personal interest in dealings.

Liable to untrue statement in the

prospectus.

Remuneration to promoters: If personal skills are involved

in promotion

DOCUMENTS OF COMPANIES

Memorandum of Association(MoA)

Article of Association (AoA)

Prospectus of Association

THE MEMORANDUM OF ASSOCIATION(MoA): The MoA is a document which contains the Fundamental

Rules regarding the constitution and activities of the

company.

It is the charter of the company defines its

raison d’etre ( reason for existence).

It lays down the area of operation of the company.

It also regulates the External Affairs of the company.

CONTENT OF MoA : Sec 13 THE NAME CLAUSE.

THE REGISTER OFFICE CLAUSE.

THE OBJECT CLAUSE.

THE CAPITAL CLAUSE.

THE LIABILITY CLAUSE.

THE ASSOCIATION CLAUSE.

NOTE : The MoA must be signed by at least seven

subscribers in the case of Public Company and

two in the case of Private company.

ARTICLE OF ASSOCIATION(AOA): The AoA contains regulations regarding all matter

concerning the internal affairs of the company

AoA should be printed, divided into paragraphs and

serially numbered.

Alteration of AoA is done by passing a special

resolution.

CONTENT OF AoA: Division of share

Procedure of holding and conducting the meetings.

Voting rights of members and rules regarding methods of

voting

Matters relating to appointment, powers duties,

qualification and remuneration of directors.

Methods to increase or decrease capital.

Rules regarding common seal of the

company.

Terms of appointment ,remuneration,

delegation of authority

Rules relating to issue of share capital.

Declaration of dividend and rules regarding its

payment.

Rules relating to accounts, audit charging of

depreciation and creation of reserves etc.

Methods of securing loans.

Procedure of winding up of a company.

PROSPECTUS :

Prospectus means any document described or issued as

a prospectus inviting deposits from public or inviting offer

from public for the subscription or purchase of any

shares , or debentures of the company.

“CERTIFICATE OF LIEU OF PROSPECTUS” is issued by a

public company,

where the company doesn’t

invite public subscription.

CONTENT OF PROSPECTUS: Date of issue of prospectus.

Name and register office of the company.

Consent of Central Govt. for the present

issue/compliance with the with the SEBI guidelines.

Voting rights ,dividend ,expenses on issue etc.

Name of the stock exchange.

Punishment for fictitious application.

Refund of issue if 90% min. subscription not received.

Names and addresses of leading managers.

Issue of allotment letter or refund within 10 weeks with

interest.

Date of opening and closing of issues.

Credit rating from CRISIL (CREDIT RATING

INFORMATION SERVICES OF INDIA LIMITED)

Terms of Underwriting & Risk Factors.

Capital Structure of the company

Terms and particulars of the issue.

Restriction on transfer and transmission of

shares.

Relative Position of U.S. Proprietorships, Partnerships, & Corporations

7%

20%

73%

7%

88%

5%

13%

15%

72%

Figure 3-1

A. Proprietorships are the most numerous.

B. Corporations produce the most revenue.

C. Proprietorships appear more profitable.

Distribution by total number

Distribution by revenues

Distribution by profits

ProprietorshipsCorporationsPartnerships

Comparison of Proprietorships, Partnerships, & Corporations in Selected Industries

Table 3-1

•Industry •Services 82% 3% 15%•Trade 70% 4% 26%•Construction 77% 3% 20%•Finance 43% 32% 25%•Manufacturing 57% 5% 38%

•Percentage of firms in the industry

Proprietorships

Partnerships

Corporation

continued

Comparison of Proprietorships, Partnerships, & Corporations in Selected Industries (cont’d)

•Industry •Services 14% 14% 72%•Trade 5% 6% 89%•Construction 12% 6% 82%•Finance 2% 10% 88%•Manufacturing >1% 4% 96%

•Percentage of industry’s business receipts

Proprietorships

Partnerships

CorporationTable 3-1

Choosing a Form of Ownership


• There is no one “best” form of ownership.• The best form of ownership depends on an

entrepreneur’s particular situation.• The key to choosing a form of ownership is

understanding how each form’s characteristics affect an entrepreneur’s specific business and personal circumstances.


Factors to Consider

• Tax considerations• Liability exposure• Start-up capital requirements• Control• Managerial ability• Business goals• Management succession plans• Cost of formation

Liability Features of the Basic Forms of Ownership

Sole ProprietorshipSole Proprietorship

Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors

Sole Proprietor’s Personal AssetsSole Proprietor’s Personal Assets


PartnershipPartnership

Claims of Partnership’s CreditorsClaims of Partnership’s Creditors

Partnership’s AssetsPartnership’s AssetsGeneralPartner’sPersonalAssets

GeneralPartner’sPersonalAssets




Limited PartnershipLimited PartnershipClaims of Partnership’s CreditorsClaims of Partnership’s Creditors

Partnership’s AssetsPartnership’s AssetsGeneralPartner’sPersonalAssets


LimitedPartner’sPersonalAssets

LimitedPartner’sPersonalAssets

BarrierBarrier


CorporationCorporationClaims of Corporation’s CreditorsClaims of Corporation’s Creditors

Corporation’s AssetsCorporation’s Assets

Shareholder’sPersonal AssetsShareholder’sPersonal Assets

Shareholder’sPersonal AssetsShareholder’sPersonal Assets

BarrierBarrierBarrierBarrier

THANK YOU

Bibliography

Ahmed, T., 2013. slideshare. [Online] Available at: http://www.slideshare.net/TufailAhmed/mod2-nature-of-business[Accessed 07 March 2014].

Nagpal, A., 2013. slideshare. [Online] Available at: http://www.slideshare.net/aadityanagpal/forms-of-business-organisations-27056960[Accessed 07 March 2014].

Patil, N., 2012. slideshare. [Online] Available at: http://www.slideshare.net/Nitin6992/formation-of-companies[Accessed 07 March 2014].

Shah, S., 2012. slideshare. [Online] Available at: http://www.slideshare.net/bachajee007/sme-chapter-3[Accessed 07 March 2014].

winfrey, t., 2010. slideshare. [Online] Available at: http://www.slideshare.net/tomwinfrey/chapter-3-5008973[Accessed 07 March 2014].

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