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What are the different forms of BusinessOrganizations?

- There are mainly three different forms of businessorganizations :

- Sole Proprietorship- Partnership- Company

As distinct from the two, a company enjoys aseparate legal status . The ownership here isdivorced from the management.

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The shareholders contribute towards the financesof the company but all of them do not and can notparticipate in the management of the company.The company is managed by a Board of directorselected by the shareholders.

Companies in our country are governed by theCompanies Act 1956.

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Company means, an association of personsformed for the economic gain of itsmembers.

However, in law, any association of personsfor any common object can be registered asa company. The object need not be economicgain of its members, e.g. a company can be

formed for the purposes such as charity,research advancement etc.

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The Companies Act defines a company as acompany formed and registered under thisAct.

Thus, a company exists only in thecontemplation of law. Law creates it and lawcan alone dissolve it.

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Voluntary Association : A company is a voluntaryassociation of persons. It is the personal choice of people and their objective to make profits whichleads them to become the members of the

company.Independent legal entity : A company is a legalentity quite distinct and separate from itsmembers. It can enter into contracts, open a bankaccount in its own name, sue and be sued by itsmembers as well as outsiders.

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Perpetual Existence: A company has perpetualexistence. The mode of incorporation anddissolution of a company and the right of themembers to transfer shares freely, guarantees thecontinuity of the existence of the company quiteindependent of the life of its members. Theexistence of the company can be terminated onlyby law. Thus, members may come and go but thecompany can go on for ever.

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Common Seal: The common seal is the officialsignature of the company. A document not bearingthe common seal of the company will not bebinding on the company. Limited Liability: The liability of the members of acompany is generally limited to the extent of theunpaid value of the shares held by them. Transferability of Shares: The shares of a companyare freely transferable . However, the shares of aprivate company are transferable subject to therestrictions put by the companys articles.

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Corporate Accounting is basically concernedwith accounting relating to corporate bodiesconcentrating on Indian corporations

engaged in manufacturing, trading or serviceactivities.

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Statutory Companies : A company formed by aSpecial Act passed either by Central or StateLegislature is called a Statutory company. Suchcompanies are governed by their respective Acts,

and are not required to have any Memorandum orArticles of Association.Changes in their structure are possible only by

legislative amendments.

These companies are usually formed to carry outspecial public undertaking requiring extraordinarypowers and privilages.

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The object of such companies is not as much toearn profits as to serve people.

Some examples of statutory companies are:Reserve Bank of India, State Bank of India, Industrial

Development Bank of India etc.Government Companies: A company of which notless than 51% of the paid up share capital is held bythe Central government or by the State governmentshall be a Government Company.

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Foreign Companies: A company which isincorporated outside India but which has a place of

business in India, is termed as a foreign company.Registered Companies: Companies formed byregistration under the Companies Act are known asregistered companies. The working of such

companies are regulated by the provisions of theCompanies Act, Memorandum of Association and theArticles of Association.

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Companies limited by shares : It is a companyhaving the liability of its members limited bymemorandum to the amount unpaid, if any, on the

shares respectively held by them.Companies limited by guarantee : Non profitearning organizations are mostly registered with aguarantee capital. They may or may not have a

share capital. A guarantee company is a company inwhich liability of its members is limited bymemorandum to such amounts as the members mayundertake by memorandum to contribute to meet

out the deficiency in the assets of the company inthe event of its being wound up.

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Unlimited Company: A company not having anylimit on the liability of its members is an unlimitedcompany. Members will be held liable for thedeficiency of the assets to the liability of thecompany in proportion to their interest in thecompany. Liability in such a case may extend to the

personal property of the shareholders.These companies though permitted by theCompanies Act are not popular in the country.

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Registered companies can be further classified asprivate and public limited companies.Private Company: A private company means acompany which has a minimum paid up capital of Rs. 1 lakh or such higher capital which may beprescribed in its articles.

- It restricts the right of its members to transfershares.- limits the number of members to fifty.- prohibits any invitation to the general public to

subscribe for its shares or debentures.

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Public Company: A public company means acompany which:

- has a minimum paid up capital of Rs.5 lakhs or suchhigher capital as may be prescribed.- has minimum seven persons for its

registration.- does not restrict the right of its members to

transfer shares.

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1. Minimum Paid-up Capital : A company to beIncorporated as a Private Company must have aminimum paid-up capital of Rs. 1,00,000, whereas aPublic Company must have a minimum paid-upcapital of Rs. 5,00,000.2. Minimum number of members : Minimumnumber of members required to form a private

company is 2, whereas a Public Company requiresatleast 7 members.

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3. Maximum number of members : Maximumnumber of members in a Private Company is

restricted to 50, there is no restriction of maximumnumber of members in a Public Company.4. Transferability of shares : There is completerestriction on the transferability of the shares of aPrivate Company through its Articles of Association ,whereas there is no restriction on thetransferability of the shares of a Public company

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5 . Issue of Prospectus : A Private Company isprohibited from inviting the public for subscription

of its shares, i.e. a Private Company cannot issueProspectus, whereas a Public Company is free toinvite public for subscription i.e., a Public Companycan issue a Prospectus.

6. Number of Directors : A Private Company mayhave 2 directors to manage the affairs of thecompany, whereas a Public Company must haveatleast 3 directors.

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7. Consent of the directors : There is no need togive the consent by the directors of a Private

Company, whereas the Directors of a PublicCompany must have file with the Registrar aconsent to act as Director of the company.8. Qualification shares : The Directors of a Private

Company need not sign an undertaking to acquirethe qualification shares, whereas the Directors of aPublic Company are required to sign an undertakingto acquire the qualification shares of the public

Company .

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7. Consent of the directors : There is no need togive the consent by the directors of a Private

Company, whereas the Directors of a PublicCompany must have file with the Registrar aconsent to act as Director of the company.8. Qualification shares : The Directors of a Private

Company need not sign an undertaking to acquirethe qualification shares, whereas the Directors of aPublic Company are required to sign an undertakingto acquire the qualification shares of the public

Company .

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9. Commencement of Business : A PrivateCompany can commence its business immediately

after its incorporation, whereas a Private Companycannot start its business until a Certificate tocommencement of business is issued to it.10. Shares Warrants : A Private Company cannot

issue Share Warrants against its fully paid shares,Whereas a Private Company can issue ShareWarrants against its fully paid up shares.

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11. Further issue of shares : A Private Companyneed not offer the further issue of shares to its

existing share holders, whereas a Public Companyhas to offer the further issue of shares to itsexisting share holders as right shares. Furtherissue of shares can only be offer to the general

public with the approval of the existing share holders in the general meeting of the share holders only.

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A company may be formed either to take over anexisting business or to carry on a new business.The principal stages for the formation of a companyare:

- Promotion- Incorporation- Commencement of business

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The stage of conceiving an idea and its working upis termed as promotion.The person who is involved in this task is termed aspromoter.The promoter may work up the idea with the helpof his own resources.

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It is the incorporation which brings a company intoexistence as a separate corporate entity.The following steps are taken by promoter in thisconnection:

- Ascertainment of availability of the proposedname of the company: This has to be confirmed fromthe Registrar of Companies. Application has to bemade in prescribed format with prescribed fee.

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- Application for license: In case the industry to berun by the proposed company falls within thecategory of those industries, for the establishment of which license is necessary under the Industries Act,1951, the application should be made to theconcerned ministry of the Central Government.- SEBIs Approval to the draft prospectus: In casethe company proposes to raise capital by issue of shares and debentures to the general public, a draftprospectus has to be submitted to the SEBI.

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- Preparation of the Memorandum of Association:The Memorandum of Association (MoA) is the maindocument of the company, which defines itsconstitution and objects and lays down thefundamental conditions upon which the company isallowed to be formed.* It is rightly known as the charter or the constitutionof the company since it governs the relationship of the company with the outside world.

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The MoA must have the following clauses:- Name Clause: The clause contains the name of the

company.- Situation Clause: This clause contains the name of

the state in which the registered office of thecompany is to be situated.

- Objects Clause: This clause explains the objectivesfor which the company is formed.

- Liability Clause: This clause defines the liability of the members of the company.

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In the case of company limited by shares the MoAmust state that the liability of the member is

limited to the extent of amount, if any unpaidshare is held by him. In case of company limitedby guarantee, it should state the amount whicheach member undertakes to contribute to the

assets of the company in the event of its windingup.

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Capital Clause: This clause states the amount of share capital with which the company is to beregistered and its division of shares.Association Clause: The founding members declarethat they wish to be formed into a company andagree to take shares. The names and addresses of the founding members are listed in one column anda corresponding column will list the number of shares held by them.

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The Articles of Association are the regulationand bye laws for governing the internalaffairs of the company. They may bedescribed as the internal regulations of thecompany governing its management andembodying the powers of the shareholders.

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Prospectus is a document inviting depositsfrom public to subscribe its shares ordebentures.

A private company can issue a prospectusonly for inviting deposits from the public.A public company need not issue aprospectus if its promoters are confident of

obtaining required capital from its privatesources.

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However, it is essential for a public company toissue prospectus if it intends to appeal to the publicfor capital.A prospectus must contain the matters specified inSchedule II to the Companies Act.These matters relate to the objectives of the

company, past history and future prospects,managerial personnel, amount of minimumsubscription etc.

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No material information should be omitted norshould it be false and misleading otherwise thepersons responsible for the issue of prospectus i.e.directors, promoters etc. will be made liable forthe loss suffered by the shareholders.Moreover these persons will be held criminallyliable for publishing any untrue statement in theprospectus.

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Fixation of the underwriters, brokers, solicitors,auditors etc. : The people who will berepresenting a companys interests in differentaspects like brokers, underwriters, auditors,solicitors etc. have to be appointed.Filing the documents and payment of necessaryfees: The promoter should file the followingdocuments with the required fees to the Registrarof Companies of the state in which the registeredoffice of the company is to be situated:

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i) Memorandum of Associationii) Articles of association

iii) A list of directors of the companyiv) If directors are appointed by the articles or namedin the prospectus, their written consent to act asdirectors Requirements as given in points III and IV given

above do not apply to private companies Notice of the address of the registered office

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vi) A statutory declaration by any of the persons thatall the requirements of the law for registration havebeen duly complied with:

An advocate of the Supreme court or High CourtA Chartered Accountant practicing in IndiaAny person who is named in the Articles as a

director, manager or secretary of the company.

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Obtaining certificate of incorporation: On receiptof these documents and the requisite fees, theRegistrar will register the memorandum, articlesand other documents and issue a certificate termedas Certificate of Incorporation. This certificatecontains the name of the company, the date of itsissue, and the signatures of the registrar with hisseal. The date mentioned in the certificate will betaken as the date of birth of the company.

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Commencement of Business: A private companycan commence business soon after its incorporationbut a public company has to obtain anothercertificate which is known as Certificate for Commencement of Business.

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Prospectus issued by a company is an invitation tothe general public to apply for the companysshares.Application for shares is the offer from the public

to purchase shares.The communication of acceptance of this offer byan allotment order notice gives rise to a validcontract between both the parties the companyand the shareholder.

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Allotment of shares is usually done by theresolution of the Board of Directors.In case of over subscription the directors follow theguidelines of the stock exchange in consultationwith the SEBI representative.The companies act do not impose any restrictions

upon the private company to allot its shares.

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Minimum Subscription: The amount fixed asminimum subscription must have been subscribedfor.As per the recent guidelines issued by the centralGovernment, the minimum subscription in case of public companies have been fixed at 90% of theentire issue. Such subscription must be receivedwithin 90 days of the close of the issue.

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Application Money: A sum of at least 5% of thenominal value of shares, must have been receivedin cash by the company as application money. Asper SEBI guidelines the minimum application moneyto be paid shall not be less than 25% of the issueprice.

It may be noted that application money of 5% of nominal value is the statutory minimum. Hence,25% of the issue price shall not be less than thisstatutory minimum.