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This thread is dedicated to all the ENTREPRENEURS out there. Here i will explain everything about the system of COMPANIES in India...
TYPES OF BUSINESS ENTITIES
A business entity is an institution engaged in an economic activity, producing, selling and distributing goods/services with an aim of earning profits. Three important types of business entities are:
1. Sole Proprietorship
1. SOLE PROPRIETORSHIP
When an individual takes the initiative to start an activity related to start a trade or commerce for his own economic benefit, it is known as sole proprietorship. A sole proprietor is a single person who owns,
maintains and manages the whole show in the business. All the salaries and other overheads only form a part of the expenses of the sole proprietorship firm. After deducting all the expenses that relate to the business from total receipts of the business, what remains is the profit which may either be reinvested in the firm or could be withdrawn by the proprietor.
Characteristic of a Sole Proprietorship Business
i. Single Ownership
ii. Autonomy in Decision Making - The sole proprietor is the only decision maker and has complete autonomy in decision making.
iii. Quick Decision Making – Since the firm is owned by a single person, the decision making is prompt.
iv. Unlimited Liability – In case of insolvency of the firm, the liability stands unlimited i.e. if the assets of the firm are not enough to pay off the business debts the personal assets of the proprietor are also attached to the firm’s property.
v. Can be winded up without any prior legal notice.
vi. No Separate Legal Entity – In case of sole proprietorship, the owner and the business are considered one and the same i.e. the actions taken by the proprietor are binding upon the firm and vice versa.
An individual i.e. a sole proprietor may not be in a position to cope with the financial and managerial demands of the present business world. As a result, two or more individuals may decide to pool in their financial ad non-financial resources to start and carry on a business. The Indian partnership act defines partnership as, “the partnership between persons who have agreed to share the profits of business carried on by all, or any one of them acting for all.”
Characteristics of a Partnership Business
i. An association of two or more persons.
ii. An agreement entered into by all persons concerned.
iii. Existence of business (and not just an agreement) .
iv. The carrying on of business by all, or any one of them acting for all.
v. Sharing of profits (or losses)of the business. From the point of view, the main thing is that relations among the partners will be governed by mutual agreement. The agreement is known as The Partnership Deed which is to be properly stamped. It should be comprehensive to avoid disputes later on. It is usual therefore, to find the following
clauses in a Partnership business:
i. Name of the firm and the partnership business.
ii. Commencement and duration of business
iii. Amount of capital to be contributed by each partner
iv. Rate of interest to be provided to each partner on his capital
v. Disposal of profits and the ratio in which it would be done
vi. Amount to be allowed to each partner as drawings and the timings of such drawings vii. Whether a partner will be allowed a salary
viii. Any variation in the mutual rights and duties of the partners
ix Method by which goodwill will be calculated
x Procedure by which a partner may retire and the method of payment of his dues
xi Treatment of losses arising out of the insolvency of a partner
xii Preparation of accounts and their audit
The word Company etymologically is a combination of two Latin words ‘Com’ meaning ‘with or together’ and ‘Pains’ meaning ‘bread’. Originally, it referred to a group of persons who took their meals together.
In business terminology, a company “refers to a legal entity formed which has a separate legal entity from its members, and is ordinarily incorporated to undertake commercial business”.
Put in simple words, a company is nothing but a group of persons that have come together and have contributed money for some common purpose and have incorporated themselves into a distinct legal entity in the form of a company for the same purpose. A company is formed and registered under the Companies Act, 1956.
Characteristics of a Company
i. Separate Legal Entity - A company has a legal identity distinct from that of its members. In a court case, Salomon vs. Salomon & Co. Ltd, 1807, the entity of the company has been described as following “A company is a person, artificial, invisible, intangible and existing in the eyes of law”.
ii. Limited Liability – In a company limited by shares, liability of the members is limited to the unpaid value of the shares whereas in a company limited by guarantee, liability of the members is limited to such amount as the members may undertake to contribute to the assets of the company, in the event of it being winded up.
iii. Perpetual Succession – A company’s life does not depend upon the life of its members. Members of a company may come and go, may change from time to time, but that does not affect the continuity of the company.
iv. Separate Property – Since the company has a separate legal entity, it also has a separate property of its own. No member can claim to be the owner of the company’s property till the existence of the company.
v. Transferability of Shares – The shares in a company are freely transferable but subject to certain conditions, such that no shareholder is permanently or necessarily attached to the company.
vi. Common Seal - A company is an artificial person and does not have a physical existence. A common seal is the official signature of the company under which it operates and carries out its activities.
vii. Legal Entity – Since a company is a separate entity, distinguished from its owners, it has the capacity to sue and can be sued in its own name.
viii. Separate Management – A company is owned by its shareholders but the management of a company is in the hands of its managerial force constituted of Board of Directors, employees etc. Thus the management of a company is separate from its owners. The shareholders may or may not constitute a company’s management.
ix One Share-One Vote – The voting principle followed by a company is of the pattern where one share constitutes one vote. If a person holds 100 shares of a company, he has 100 eligible votes in that company.
Types of Companies
1. Public Company
Public Company is a company in which shares are held collectively by the general public rather than a selected few individuals. Minimum number of members in a public company is seven, if members become less than seven, the company is no longer a public company but is rather a private company.
2. Private Company
Private company means a company which by its articles of association,
- Restricts the right of members to transfer its shares
- Limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered.
- Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company.
- If a private company contravenes any of the aforesaid provisions, it ceases to be a private company and loses all the exemptions and privileges which a private company is entitled to. Minimum number of members in a private company is two. A private company does not need a separate certificate from the Registrar of Companies for the commencement of its business.
3. Companies deemed to be Public Limited Company
A private company will be treated as a deemed public limited company under one of the following circumstances:
- Where at least 25% of the paid up share capital of a private company is held by one or more body corporates, the private company shall automatically become a public company on and from the date on which the aforesaid percentage is so held.
- Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs 25 crores, the private company shall be, irrespective of its paid up share capital, deemed a public company.
- Where not less than 25% of the paid up capital of a public limited company is held by the private company, then the private company shall become a public company on and from the date on which the aforesaid percentage is so held.
- Where a private company accepts deposits from public, after an invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such company shall become public company on and from the date when such acceptance or renewal is first made.
4. Limited and Unlimited Companies
Companies may be limited, limited by shares or limited by guarantee.
a) Company limited by shares - In this case, the liability of the members is limited to the amount of uncalled share capital. No member of the company limited by the shares can be called upon to pay more than the face value of shares or so much of it as has remained unpaid. The members of limited companies have no liability in case of fully paid up shares.
b) Company limited by the guarantee - A company limited by guarantee is a registered company having the liability of its members limited by its Memorandum of Association (MoA) to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern.
c) Unlimited Company: The liability of the members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners in a partnership firm.
5. Section 25 Company
Under the Companies Act, 1956, the name of a public limited company must end with the word ‘Limited’ and the name of a private limited company must end with the word ‘Private Limited’. However, under Section 25, the Central Government may allow companies to remove the word “Limited / Private Limited” from the name if any of the following conditions are met by:
- The company is formed for promoting commerce, science, art, religion, charity or other socially useful objectives.
- The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objectives.
6. Holding and Subsidiary Companies
A company shall be deemed to be a subsidiary of another company if:
- That other company controls the composition of its board of directors
- That other company holds more than half (>50%) in face value of its equity share capital.
The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion, to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person.
7. Government Company
A Government Company is the one in which 51% or more is held either by the central government or by the state government or is jointly held by the central and the state government. All the decisions pertaining to its management and operations are taken by the government.
8. Foreign Company
A company that has been incorporated outside India, under the law of some other country, is registered in that country and has set up its business in India is called a Foreign Company
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