Forms of Business Organisation

Ownership is a legal concept that bestows certain rights and liabilities upon the owners. The rights and liabilities vary according to the form of ownership. Forms of Business ownership are legal forms in which a business enterprise may be organized and operated.

A private business Firm may be owned by one person or by a group of persons. When it is owned by one person, it may be sole proprietorship or one person company. A group of persons may collectively own and operate a business in the form of Joint Hindu Family firm, partnership firm, joint stock company and cooperative society. There are, therefore, several forms of private business ownership as described below:

1 Sole Proprietorship

2 One Person Company (OPC)

3 Joint Hindu Family Business

4 Partnership

5 Limited Liability Partnership (LLP)

6 Private Company

7 Public Company

8 Cooperative Society

Sole proprietorship, joint Hindu family firm and partnership are non-corporate forms while others are corporate entities.

Sole Proprietorship

Sole proprietorship or individual proprietorship is a form of business ownership under which a single person supplies the capital, uses his own skill, receives all the profits and bears all risks of business. He may borrow money and may employ workers but he alone owns and controls the business. According to Wheeler, “the sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and risks all of his property in the success or failure of the enterprise.” The sole proprietor is not only the exclusive owner of the business, but also its founder and controller. Sole proprietorship is the simplest and the oldest form of business ownership.

Salient Features
The essential characteristics of sole proprietorship form of ownership are as follows:

(i) Single Ownership: The sole proprietorship is the sole owner of the firm. He fully owns the business.

(ii) One-man Control: In a sole proprietorship the owner himself acts as the manger and controller of the enterprise. A sole proprietor carries on business exclusively by and for himself.

(iii) No Separate Legal Entity of the Firm: A sole proprietorship firm has no legal existence separate form its owner. The proprietor owns everything the firm owns and he owns everything the firm owns. No distinction is made between the assets and liabilities of the owner and those of the firm. The proprietor and the firm are one and the same in the eyes of law.

(iv) Undivided Risk: The profits and loss of the sole proprietorship belong exclusively to the proprietor. He gains all and risks all. Nobody shares his profits or losses.

(v) Unlimited Liability: The liability of the sole proprietor extends beyond the capital invested in the firm. His private property may be attached in case the firm fails to meet the claims of its creditors.

(vi) Full Freedom from Government Control: Sole proprietorship is free from legal formalities and regulations.

Merits of Sole Proprietorship

Sole proprietorship has the following advantages:

1. Ease of Formation: Sole proprietorship is easiest to form as no legal formalities are required for starting it. No agreement is to be made and registration of the firm is not essential. However, a formal licence may be required from the municipal corporation or Health Department in some cases, e.g., liquor, drugs, etc. Similarly, a sole proprietorship can be dissolved easily without any legal formalities. Thus, little time and expense is involved in the formation and dissolution of a sole proprietorship.

2.Direct Motivation: The proprietor has sole claim on profits and is not required to share them with others. There is direct relationship between effort and reward so that the proprietor is motivated to give his best effort to the firm.

3.Flexibility in Operations: The sole proprietorship is the simplest to operate. The proprietor can easily change the nature and strategy of his business.

4.Absolute Control: The sole proprietor has complete control on the affairs of his firm. He is free to prepare any plans and to execute them without interference from any quarter. Freedom of centralised direction and personal control makes for uniformity of action and coordination of operations.

5.Quick Decisions: Sole proprietor is his own boss and need not consult others with regard to business decisions. Therefore, he can take action with maximum of speed and minimum of friction. Quick decision and prompt actions enables the proprietor to take full advantage of the opportunities which may arise in business from time to time.

6.Business Secrecy: a sole proprietor can keep his affairs to himself. There is no body to share his business secrets and no reports are to be published.

7.Personal Touch: A sole proprietor can keep intimate personal contacts with his customers and employees. Personal attention to customers results high sales and goodwill of the firm. Personal contacts with employees help in improving their motivation and efficiency. If the proprietor has adequate resources, his credit standing will be high.

8.Minimum Government Regulations: The proprietary concern is subject to minimum control by the Government. The proprietor has not to render reports to the government and there is no interference in the day-today affairs of business. Under the Income Tax Act, a sole proprietor must get his\her accounts duly audited in case annual sales turnover or gross receipts exceed Rs 40 lakh in case of business and Rs 10 lakh in case of profession.

9.Social Utility: In addition to its economic benefits, sole proprietorship is socially desirable on the following grounds:

(a) Independent Living: Sole proprietorship provides an independent and honourable way of life to those who want to be their own boss and take pride in ownership and control of their own business.

(b) Diffusion of Economic Power: Sole proprietorship helps in reducing concentration of economic power in a few hands through wider distribution of business ownership. It also promotes decentralisation of industry.

(c) Development of Personality: Sole proprietorship provides opportunity for the development of personal and social virtues like self-reliance, initiative, responsibility, independent judgement, etc. These virtues develop in the sole proprietor because he has to face all challenges and problems of business single handed.

Demerits of Sole Proprietorship

Sole proprietorship suffers from the following limitations:

(i) Unlimited Liability: A great drawback of sole proprietorship is its unlimited liability or high personal risk. The sole proprietor has to bear the entire risk of his business. If the business fails due to errors of judgement or adverse economic conditions, the proprietor has to lose everything. Unlimited liability discourages the expansions of business.

(ii) Limited Financial Resources: The financial resources which a proprietary firm can raise are limited to the personal funds and borrowing capacity of the owner. The financial capacity of an individual is usually limited so that business cannot be operated on a size enough to achieve the economies of scale.

(iii) Unbalanced Management: The sole proprietor who is the sole judge of his business cannot be an expert in all the areas of purchasing, production, marketing, financing, etc. He has to handle a wide range of managerial and operational problems and, therefore, it is usually not possible to employ trained professional managers. As a result, benefits of specialisation and expertise are not available.

(iv) Uncertain Duration: There is little continuity of operations in a sole proprietorship because the firm is linked with the life of the proprietor. The business may come to a sudden end with the death or physical incapacity of the proprietor. The business sinks and swims with its owner.

(v) Limited Scope for Growth: Due to limited financial and managerial resources and uncertain duration, the expansion or growth of the firm is restricted. The ease of formation and dissolution may encourage serious thought and action resulting in premature death of the business.

Suitability and Survival

Thus, the one-man control is the best in the world, if that one man is big enough to manage everything. But such a person does not exist. Due to its unique characteristics, the proprietorship organisation is particularly suitable to the following types of business:

1 Where the risk involved is moderate, e.g., automobile repair shops.
2 Where small financial and managerial resources are required, e.g., a retail shop, a small bakery, etc.
3 Where personal attention to individual tastes and preferences of customers is necessary, e.g., tailoring, and beauty parlours, cosmetics dealers.
4 Where expert personal skills and prompt decisions are essential, e.g., stock brokers and doctors, lawyers and other professional services.
5 Where demand is temporary, seasonal and local, e.g., laundry, vegetable and fruit sellers, etc.
6 Where fashions change quickly, e.g., art goods, hair dressing saloons, etc.

Sole proprietorship has its own area of operations and continues to exist despite the growth of joint stock enterprise. It accounts for the largest number of business concerns in India.

One Person Company (OPC)

The Companies Act, 2013 allows the formation of one person company. As the name suggests, a one person company has only one shareholder. The company’s name will carry a suffix ‘OPC’. The process of setting up an OPC is the same as that for a private limited company. Since the company is owned by a single person, he must nominate someone to take charge of it in case of his death or disability. The nominee must give his consent in writing which has to be filed with the Registrar or Companies.
An OPC is exempt from certain procedural formalities, such as conducting annual general meetings, general meetings, extraordinary general meetings. No provisions have been prescribed on holding board meetings if there is only one director, but two meetings need to be organised every year if there is more than one director. Any resolution passed by the solo member must be communicated to the company and entered in the minutes book. There is, however, no relief from t he provisions of audits, financial statements and accounts, which are applicable to private companies.

Features of OPC

The concept of ‘one person company’ has the following characteristics:

(a) OPC may be registered as a private company with one member.

(b) The owner safeguards in case of death\disability of the sole owner are provided.\

(c) OPC will have a corporate entity of its own.

(d) The owner of an OPC shall be liable only to the extent of its capital. If the activities are carried out in a mala fide manner the liability of the owner extents to his personal property.

(e) An OPC may be managed by the owner or his representative.

(f) An OPC will get its annual accounts audited and file a copy of the same with the Registrar of Companies.

(g) A minimum share capital may be prescribed for an OPC.

(h) Every OPC shall have at least one director.

(i) The one person shall have to indicate the name of the person who in the event of the subccriner;s death, disability, etc. becomes the member of the company.

Merits of OPC

(i) OPC will enable small entrepreneurs and professionals, e.g., chartered accountants, lawyers, doctors, etc. to avail the benefits of companies.

(ii) The procedure for forming the OPC is very simple.

(iii) Running an OPC is easy as it does not require compliance with many legal formalities.

(iv) As the risk is limited to the value of shares held by one person, small entrepreneurs have not to fear litigation and attachment of personal assets.

(v) There is no need to share business information with any other person, therefore, business secrecy is ensured.

(vi) The motivation and commitment of the owner are high due to absence of profit sharing.

(vii) Quick decisions can be taken due to complete control by the owner. There is freedom of action.

(viii) OPC would provide the start up entrepreneurs and professionals the much needed flexibility in setting up business without losing control.

Demerits of OPC

(i) The life of OPC is uncertain and instable.

(ii) The concept of OPC makes mockery of the corporate concept because company means more than one person.

(iii) A company should operate as a democratic institution with discussion and decision by voting. But in an OPC there is no democracy.
(iv) An OPC has to be incorporated. It has also to comply with some legal formalities.

The concept of OPC has been introduced in a half hearted and incomplete manner. How would OPC work and what be the regulatory provisions concerning their formation and functioning has not been made clear. Hence, the provisions concerning OPC require a re-look and redrafting.

Joint Hindu Family Firm

Joint Hindu Family Firm is a peculiar form of business organisation found in India. In this form all the members of a joint Hindu family do business jointly under the control of the head of the family known as the ‘Karta’.

The joint Hindu family firm comes into existence by the operation of Hindu Law and not out of contract. The firm is jointly owned by the members of the family who have inherited an ancestral property. The members of the family are known as co-parceners. Thus, the joint Hindu family firm is a business owned by co-parceners of a Hindu undivided estate.

There are two schools of Hindu law of India, namely (i) Dayabhaga system of inheritance which, prevails in Bengal and Assam. Technically, joint Hindu family business is not possible under this system. (ii) Mitakshara system which is found in the rest of India. Under this system of inheritance, joint Hindu family consists of all persons including their wives and unmarried daughters lineally descended from a common ancestor. But only those persons constitute the firm who acquire by birth a co-parcenary interest in the joint ancestral property. Such interest belongs to three successive generations in the male line who can inherit an interest in the ancestral property immediately on their birth in the family. Thus, the property inherited by a Hindu from his father, grandfather and great grandfather is regarded as ancestral property. A son, grandson, and great grandson become joint owners of the property by reason of their birth in the family. According to the Hindu Succession Act, 1956, a female relative ( and a male relative claiming through such female relative) of a deceased male co-parcener will have a share int he co-parcenary interest after the death of the co-parcener in question.

The business of a joint Hindu family is managed by the senior-most male member or father. He is known as the Karta or Manager. As the head of the joint family, the Karta has full control over the affairs of the family business and serves as the custodian of the firm’s assets. Other members of the joint family cannot question his judgment, the only remedy available to them is to demand partition of the ancestral property. Family business is considered a part and parcel of the ancestral property and, therefore, the family business is the subject-manner of co-parcenary interest. According to the Hindu Succession (Amendment) Act, 2005 daughters have equal right of inheritance and enjoy the same rights and liabilities in the co-parcenary property as a son.

Features of Joint Hindu Family Firm

The main characteristics of joint Hindu family firm are as follows:

1. Membership by Birth: A person becomes members of the family business as a result of his birth in the family. Every member has an equal share in the family firm irrespective of age.

2. Male and Female Members: Birth sons and daughters have no co-parcenary interest in the family business. Female relatives of a deceased co-parcener can also claim a share in the family property.

3. Management by Karta: The Karta or the head of the family alone has the right to manage the business and other members do not take part in the management of the firm. The Karta has implied authority to raise loans for the family business. Only Karta has the authority to make contracts on behalf of the firm. Other members of the family cannot ask for an account of past profits and losses but they may demand partition of the ancestral property.

4. Fluctuating share: The share of each member in the family property and business keeps on changing. A member’s interest decreases on the birth of a new co-parcener and it increases by the death of an existing co-parcener. There is no restriction on the number of co-parceners.

5. Liability: The liability of the Karta is unlimited and it extends to all that he owns as his private or separate property. But the liability of all other members of the joint Hindu family is limited to the value of their individual interests in the joint ancestral property.

6. Continued Existence: The death or insolvency of a co-parcener or even that of the Karta does not effect the existence of the joint Hindu family firm. The firm can be dissolved through mutual agreement among all the co-parceners.

7. Minor Members: A person born in the family automatically becomes member in a joint Jindu family firm.

8.Governed by Hindu Law: The rights and duties of members of a joint Hindu family firm are governed by the Hindu Succession Act, 1956.

9. Registration Not Necessary: It is not compulsory to get a joint Hindu family firm registered.

Merits of Joint Hindu Family Firm

(i) Easy Formation: A joint Hindu family firm comes into existence by operation of law. No legal formalities are required to establish it.

(ii) Equitable Distribution: Every co-parcener is assured of a share in the profits of the family business irrespective of his contribution to the success of the firm. Weak members of the family, i.e., children, widows, sick or invalid members are well protected against contingencies.

(iii) Sharing of Knowledge and Experience: Younger members of the family get the benefit of the knowledge and experience of elder members. Such sharing of knowledge and experience enables the younger members to acquire necessary expertise easily and quickly.

(iv) Freedom of Action: The Karta enjoys full freedom of action as he can run the business without interference by other members of the family. This promotes quick decisions and prompt action. Centralised management by Karta also results in unity of direction and business secrecy. There is no need fro registration of the firm.

(v) Limited Liability: All co-parceners except the Karta enjoy the benefit of limited liability. Unlimited liability of the Karta inspires him to make his best effort for the success of the family business.

(vi) Mutual Cooperation: The benefits of specialisation can be obtained by dividing the total work among the co-parceners in accordance with their individual knowledge and capability.

(vii) Inculcation of Finer Values of Life: Members of a joint Hindu family work unitedly for the overall welfare of the family as a whole. Therefore, they learn the qualities of sacrifice, discipline, duty, etc. Even minors are equal members.

(viii) Secrecy: The secrets of the business remain confined to the Karta.

(ix) Stability: A joint Hindu family firm enjoys continuity of operations as its existence is not subject to the death or insolvency of a co-parcener.

(x) Creditworthiness: A joint Hindu family firm enjoys greater credit worthiness than a sole proprietorship.

Demerits of Joint Hindu Family Firm

1. Limited Resources: The financial and managerial resources of the firm are limited. The capital and borrowing of the family is limited and the karta alone cannot be equally expert in all areas of business. There is, therefore, little scope for the growth and diversification of the business.

2. Lack of Motivation: as the profits of the firm are shared by all co-parceners irrespective of their contributions, there is no incentive to work hard. There exists no direct relationship between efforts and reward. The right to share in the income of business irrespective of efforts made induces laziness on the part of members.

3. Scope for Misuse: The Karta has unchallenged authority to manage the business. He may misuse this freedom for his personal benefit or gains. This is an important cause of the disintegration of joint Hindu family firm.

4. Unfair to Co-parceners: Since the Karta has an exclusive control over the management of the business, other co-parceners get no opportunity to exercise initiative and judgement.

5. Fear of Disintegration: Disputes and quarrels among the Co-parceners on controversial matters may lead to break up of the family business.

Partnership Firm

As a business grows beyond the capacity of sole proprietorship and joint Hindu family firm, it becomes necessary to form a partnership. Partnership thus grew out of the limitations of one-man business in terms of limited financial resources, limited managerial ability and concentrated risk. In a way, it is an extension of sole proprietorship. Generally, when a proprietor finds it difficult to handle the problems of expansion, he takes a partner. Partnership represents the second stage in the evolution of ownership forms. A partnership is an association of two or more individuals who agree to carry on a business together for the purpose of sharing profits. According to Section 4 of the Partnership Act, 1932 partnership is “the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” In the words of Prof. Haney, “Partnership is the relation existing between persons, competent to make contracts, who have agreed to carry on a lawful business in common with a view to private gain.” Persons who enter into partnership are known individually as ‘Partners’ and collectively as ‘firm’. The name in which the partnership business is carried on is called ‘firm’ name.

The partners enter into an agreement to lay down the terms and conditions of partnership. This agreement is known as the ‘Partnership Deed’. The partners contribute capital and they share managerial responsibility and profits/losses as per the agreement.

Essential Characteristics or Tests of Partnership

Following are the essential features of a partnership firm:

1. Two or More Persons: At least two persons are required to constitute a partnership. The partnership Act does not lay down maximum limit on the number of partners. But the Companies Act, 2013 lays down that any partnership or association of more than 50 persons is illegal unless registered as a joint stock company.

2. Contractual Relationship: A partnership is a contractual relationship arising out of an agreement among the partners. Since partnership is the outcome of a contract, persons who are incompetent to enter into a contract, e.g., minors, lunatics, insolvents, etc. cannot become partners. The partnership agreement may be oral, written or implied but it is always desirable to make an agreement in writing. The partnership agreement must satisfy all the requirements of a valid contract.

3. Lawful Business: The agreement between partners must be to carry on some lawful business. Joint owners of a property do not form a partnership without carrying on a lawful business. An agreement to carry on an illegal activity cannot be called partnership.

4. Sharing of Profits: The agreement must provide for the sharing of profits and losses of the partnership business. A charitable or educational institution is not a partnership as no sharing of profits is involved. However, sharing of profits is only prima facie and not a conclusive proof of partnership. Employees and creditors who share profits of the firm cannot be called partners unless there is an agreement of partnership with them.

5. Implied Agency: Each and every partner is considered to be an agent of the firm as well as that of other partners. Unless otherwise agreed, every partner is entitled to take part in the management of the firm and to represent the firm and other partners in dealing with outsiders. The act done by a partner in good faith and on behalf of the firm may be carried on by all the partners or by any one of them on behalf of all. It is not essential that every partner takes active part in the management of the firm.

6. No Separate Legal Existence: The partnership firm is a voluntary association and it has no separate legal entity of its own. The firm and the partners are one and the same in the eyes of law. Management and control of the firm vests with the partners who are the owners also.

The above mentioned features are the crucial tests for determining the existence of a partnership. In addition to these essential features, partnership has following characteristics:

(a) Unlimited Liability: Every partner is liable jointly and severally for all debts and obligations of the firm. In case the assets of the firm are insufficient to meet claims of firm’s creditors the private property of the partners can be attached to satisfy their claims. The creditors are entitled to realise their entire dues from any one partner. The partner form whose property the dues are recovered as legally entitled to receive rateable contributions from the other partners of the firm.

(b) restriction on Transfer of Interest: None of the partners can transfer his interest in the firm to any person (except to the existing partners) without the unanimous consent of all other partners. The restriction on transfer of interest is based on the principle that a partner being an agent of the firm cannot delegate his authority unilaterally to outsiders.

(c) Utmost Good Faith: A partnership is founded upon mutual trust and confidence among the partners. Each and every partner is supposed to act with honesty and fairness to all partners in the conduct of the business of the firm.

Merits of Partnership

The partnership form of business ownership enjoys the following advantages:

1. Ease of Formation: A partnership is easy to form as no cumbersome legal formalities are involved. An agreement is necessary and the procedure for registration is very simple. Similarly, a partnership can be dissolved easily at any time without undergoing legal formalities. Registration of the firm is not essential and the partnership agreement need not essentially be in writing.

2. Larger Financial Resources: As a number of persons or partners contribute to the capital of the firm, it is possible to collect larger financial resources than is possible in sole proprietorship. Creditworthiness of the firm is also higher because every partner is personally and jointly liable for the debts of the business. There is greater scope for expansion or growth of business. New partners may be admitted to raise further capital.

3. Specialisation and Balanced Approach: The partnership form enables the pooling of abilities and judgment of several persons. Combined abilities and judgment result in more efficient management of the business. Partners with complementary skills may be chosen to avail of the benefits of specialisation. Judicious choice of partners with diversified skills ensures balanced decisions. Partners meet and discuss the problems frequently so that decisions can be taken quickly.

4. Flexibility of Operations: Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its day-to-day operations. The nature can be altered and new partners can be admitted whenever necessary. The agreement can be altered and new partners can be admitted whenever necessary. Partnership is free statutory control by the Government except the general law of the land.

5. Protection of Minority Interest: No basic changes in the rights and obligations of partners can be made without the unanimous consent of all the partners. In case a partner feels dissatisfied, he can easily retire from the firm or he may apply for the dissolution of partnership.

6. Personal Incentive and Supervision: There is no divorce between ownership and management. Partners share in the profits and losses of the firm and there is motivation to improve the efficiency of the business. Personal control by the partners increases the possibility of success. Unlimited liability encourages caution and care on the part of partners. Fear of unlimited liability discourages reckless and hasty action and motivates the partners to put in their best efforts.

7.Capacity for Survival: The survival capacity of the partnership firm is higher than that of proprietorship. The partnership firm can continue after the death or insolvency of a partner if the remaining partners so desire. Risk of loss is is diffused among two or more persons. In case one line of business is not successful, the firm may undertake another line of business to compensate its losses.

8. Better Human and Public Relations:Due to a number of representatives (partners) of the firm, it is possible to develop personal touch with employees, customers, government and the general public. Healthy relations with the public help to enhance the goodwill of the firm and pave the way for steady progress of the business.

9. Business Secrecy:It is not compulsory for a partnership firm to publish and file its accounts and reports. Important secrets of business remain confined to the partners and are unknown to the outside world.

Demerits of Partnership

1. Unlimited Liability: Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapse and dishonesty of other partners.

2. Limited Resources: There is a limit to the maximum number of partners in a firm. Therefore, it is not possible to collect huge financial resources. Borrowing capacity of partners is also limited. a partnership firm may not provide the required technical and administrative skills.

3. Uncertain Life/lack of Continuity:Partnership business suffers from instability. Insolvency, insanity, retirement and death of a partner may cause an abrupt end to the business. Any partner can give a notice for dissolution of partnership.

4. Conflicts: Lack of confidence, unity and harmony among partners may lead to delayed decisions and inefficiency. Chances of conflict are high because every partner has equal right to take part in the management of the firm.

5. Risk of Implied Authority: Every partner is an agent of the firm. A dishonest partner may cause a great loss of the firm. All the partners may suffer due to the negligence or dishonesty of one partner.

6. Lack of Public Confidence: A partnership does not enjoy the trust of the public. The reason for this is that the affairs of a partnership are not given publicity. No reports are published by a partnership concern and it is free from government regulations. Therefore, the general public regards it as a group of persons who have come together to earn easy and quick profits.

7. Blocking of Capital: A partner wanting to withdraw his capital form the firm cannot do so unless the other partners agree to it. He cannot transfer his interest to outsiders without the approval of the other partners. He may, therefore, be deprived of a higher return on his capital outside the partnership.

Thus, the partnership form of business organisation is useful for a medium-sized business. It is the most appropriate form when a business is too big to be run by a sole proprietor but not enough to be incorporated into a company.

Limited Liability Partnership (LLP)

Meaning: According to the LLP Act, 2008, a LLP is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.

Features of LLP

(i) A LLP must be incorporated under the LLP A ct, 2008.

(ii) It is a body corporate having its own separate identity.

(iii) It has perpetual succession. Any change in its partners does not affect existence, rights and liabilities.

(iv) Any individual or body corporate can be partner in a LLP.

(v) Every LLP must have at least two partners. There is no limit on the maximum number of partners.

(vi) Every LLP must have at least two designated partners who are individuals and at least one of them must have a resident in India.

(vii)Every LLP must file with Registrar the Designated Partner Identification Number (DPIN) and other details of designated partners.

(viii)An LLP must maintain proper books of account according to double entry system.

(ix) Every LLP must prepare and file with the Registrar Statement of Account and Solvency each financial year along with an annual return in the prescribed form.

Merits of LLP

(i) An LLP has stable or continuous existence due to its perpetual succession.

(ii) The liability of an LLP and its partners is limited. The liability of the LLP and its partners becomes unlimited in case the firm or its partners carry out business with the intention to defraud the creditors or any other person or for any fraudulent purpose.

(iii) An LLP is a body corporate separate from its partners.

(iv) Not just an individual a body corporate can also be a partner in a LLP.

(v) An LLP can raise more funds as there is no limit on the maximum number of partners and liability is limited. It can attract finance from private equity investors and financing institutions.

(vi) It is easy to form an LLP as few legal formalities are required.

(vii) There is flexibility of operations. The LLP Act, 2008 allows the partners to run the business as per the agreement.

(viii) It is easy to join or leave an LLP. The ownership can be easily transferred as per the terms of the LLP agreement.

(ix) There is no risk of implied agency because individual partners are not agents of one another.

Demerits of LLP

(i) Time and money is involved in the formation and incorporation of a LLP.

(ii) There is less flexibility of operations due to legal formalities and regulations.

(iii) There is lack of business secrecy as an LLP has to file the prescribed documents every year with the Registrar. Moreover, its accounts are open for inspection.

(iv) An LLP cannot raise funds through public issue of shares and debentures.

(v) In certain cases, liability may extend to personal assets of partners.

(vi) An LLP cannot engage in some business such as banking, insurance and telecom.

Private Company

Thus, an LLP is a hybrid form of business organisation combining features of both partnership and joint stock company.

It means a company which has minimum paid up capital of one lakh rupees or such higher capital as may be prescribed and which by its Articles of Association:

(a) restricts the right of its members to transfer shares, if any;

(b) limits the number of its member to 200, excluding members who are or were in the employment of the company;

(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; and

(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relations.

A private company can be formed by two persons. It must add the words ‘private limited’ after its name.

Merits of Private Company

(i) Ease of Formation: Only two persons are needed to form a private company. It can start business immediately after obtaining the Certificate of Incorporation.

(ii) Stability: A private company has a separate legal entity independent of its members. Therefore, it can have continuity of operations.

(iii) Limited Liability: The liability of every member of a private company is restricted to his\her investment in the company.

(iv) Secrecy: A private company is not required to make its accounts open for the public. Therefore, it can maintain business secrets.

(v) Freedom of Operations: A private company enjoys several privileges and exemptions under the Companies Act. Therefore, it can have flexibility of operations.

(vi) Motivation: a private company is generally managed and controlled by its promoters. They have a direct incentive to work hard because they have not to distribute the profits among a large number of shareholders.

Demerits of Private Company

A private company suffers from the following limitations:

1. Limited Capital: A private company is not allowed to issue shares to the general public. Therefore, its share capital is limited.

2. Limited Managerial Skills: When there are only two members the managerial talent at the top level is limited.

3. Restricted Growth: The scope for expansion and growth is narrow due to limited resources.

4. Lack of Goodwill: A private company does not enjoy public confidence as its affairs are not open and public has no stake.

Suitability

A private company is very suitable for organising a medium-sized business involving considerable risk of loss or uncertainly of profit. Wholesale trade, large scale retailing, e.g., departmental stores, chain stores, etc. and transportation services are examples of such business. Private company is also preferred by those who wish to take the advantage of limited liability but at the same time desire to keep control over the business within a limited circle of friends and relatives and want to maintain the privacy of their business. A family can maintain secrecy of business, avoid the risk of unlimited liability and avail of the facility of ease of partnership. Due to the small number of members there can be high degree of privacy and there is comparative freedom from legal requirements. Private company organisation is also appropriate in case of business of a speculative nature, e.g., hire purchase trading, stock-brokers, underwriting firms, etc. Another reason for the popularity of private company organisation is several exemption and privileges granted by law.

Privileges of a Private Company

(i) A private company can be formed by only two members.

(ii) It can start its business soon after incorporation. It is not required to obtain Certificate of Commencement of Business.

(iii) There is no need to issue a prospectus.

(iv) Allotment of shares can be done without receiving the minimum subscription.

(v) it is not necessary to hold a statutory meeting and file a statutory report with the Registrar of Companies.

(vi) There are no restrictions on the appointment, reappointment and remuneration of directors.

(vii) A private company can grant loans to its directors without prior permission of the government.

(viii) A private company is not required to maintain index of its members.

Public Company

According to Prof. Haney, “joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, its ownership of which is the membership.” A public company means a company which:

(a) is not a private company;

(b) has a minimum paid up capital of five lakh rupees or such higher paid up capital, as may be prescribed; and

(c) is a private company which is a subsidiary of a company which is not a private company.

Salient Features of a Company

At least seven persons are required to form a public company. There is no limit on the maximum number of members. Chief Justice John Marshall of U.S.A. defined a company in the famous Dartmouth College case as “an artificial being, invisible, intangible and existing only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence; and the most important of which are immortality and individually.” Thus, a company is an artificial legal person having an independent legal entity.

The distinctive characteristics of a company area s follows:

1. Separate Legal Entity: A company has an existence entirely distinct from and independent of its members. It can own property and enter into contracts in its own name. It can sure in its own name. There can be contracts and suits between a company and the individual members who compose it. The assets and liabilities of the company are not the assets and liabilities of the individual members and vice versa. No member can directly claim any ownership right in the assets of the company.

2. Artificial Legal Person: A company is an artificial person created by law and existing only in contemplation of law. It is intangible and invisible having no body and no soul. It is an artificial person it does not come into existence through natural birth and it does not possess the physical attributes of a natural person. Like a natural person. It has rights and obligations in terms of law. But it cannot do those acts which only a natural person can do, e.g., taking an oath in person, enjoying married life, going to jail, practising profession, etc. A company is not a citizen and it enjoys no franchise or other fundamental rights.

3. Perpetual Succession: A company enjoys continuous or uninterrupted existence and its life is not affected by the death, insolvency, lunacy, etc. of its members or directors. Members may come and go but the company can be dissolved only through the legal process of winding up. It is like a river which retains its identity though the parts composing it continuously change.

4. Limited Liability: Liability of the members of a limited company is limited to the value of the shares subscribed to or to the amount of guarantee given by them. Unlimited companies are an exception rather than the general rule. In a limited company, members cannot be asked to pay anything more than what is due or unpaid on the shares held by them even if the assets of the company are insufficient to satisfy in full the claims of its creditors.

5. Common Seal: A company being a n artificial person cannot sign for itself. Therefore, the law provides the use of common seal as a substitute for its signatures. The common seal with the name of the company engraved on it serves as a token of the company’s approval of documents. Any document bearing the common seal to the company and duty witnessed (signed) by at least two directors is legally binding on the company.

6. Transferability of Shares: The shares of a public limited company are freely transferable. They can be purchased the stock exchange. Every member is free to transfer his shares to anyone without the consent of other members.

7. Separation of Ownership and Management: The number of members in a public company is generally very large so that all of them or most of them cannot take active part in the day-to-day management of the company. Therefore, they elect their representative, known as directors, to manage the company on their behalf. Representative control is thus an important feature of a company.

8. Incorporated Association of Persons: A company is an incorporated or registered association of persons. One person cannot constitute a company under the law. In a public company at least seven persons and in a private company at least two persons are required.

Distinction between Company, Partnership and LLP

Merits of Public Company

1. Limited Liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities and, therefore, contributes to the growth of the company form an ownership.

2. Large Financial Resources: Company form of ownership enables the collection of huge financial resources. The capital of a company is divided into shares of small denominations so that people with small means ca