104 Gargi Palaskar 480 1

104 Gargi Palaskar 480

Class: FYBA

COMMERCE CIA
TOPIC:
Forms and Structure of
Business
 104 Gargi Palaskar 480 2

INDEX
Serial Topic Name Page
No. No.
01 Shareholders 3
a. What is a shareholder? 3

b. Types of Shareholders 3

c. How to Become a Shareholder of a Company? 4

d. Shareholders Duties 5

e. Shareholders Roles 5

f. Shareholders Rights 5

g. Shareholders' Agreement 6

h. Termination of Shareholders' Agreement 6

02 Board of Directors 7
a. What is a BoD? 7

b. General Board Structure 7

c. Appointment of Directors 7

d. Qualification for Directors 8

f. Disqualifications of Directors 8

g. Duties and Responsibilities of BoD 9

h. Remuneration 10

i. Election and Removal of BoD 10

03 Sole Proprietorship and Partnership 11

a. What is Sole Proprietorship? 11

b. What is a Partnership? 11

c. Comparison between Sole Proprietorship and a Partnership Firm 12

04 References 14
 104 Gargi Palaskar 480 3

Shareholders
What is a Shareholder?
A shareholder is an individual or institution (including a corporation) that legally owns one or more
shares of stock in a public or private corporation. A shareholder can be a person, company, or
organisation that holds stock in a given company.
They may be referred to as members of a corporation.
As equity owners, shareholders are subject to capital gains (or losses) and/or dividend payments as
residual claimants on a firm's profits. They collectively constitute the company as a corporate body.
Also called stockholders, they have the right to vote on certain matters with regard to the company
and to be elected to a seat on the board of directors.
Under the Companies Act, 2013, any person can become a member and a person could mean an
individual, body corporate or an association.

Common vs. Preferred Shareholders / Equity vs. Preference Shareholders

Difference between Equity and Preference Shareholders

Basis of difference Equity shareholders Preference shareholders
1 Dividend ESH get the dividend from the PSH gets the preference in getting
remaining income after paying dividends.
dividend to PSH.
2 Repayment of PSH have priority over ESH at ESH are repaid after the payment
capital the time of liquidation of the made to PSH.
company.
3 Rate of dividend Rate varies depending on the Fixed rate of dividend.
earnings of the company.
4 Voting rights ESH enjoy voting rights. PSH have restricted voting rights.
5 Right to ESH have right to participate in PSH don’t have the right to
participate in the management. participate in the company’s
management administration.
6 Bonus shares ESH enjoy bonus shares issued PSH do not enjoy bonus shares.
by company free of cost, out of
reserves.
7 Right shares Existing ESH enjoy preemptive PSH do not enjoy right shares.
rights of getting first preference
to subscribe to new issue of
shares.
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Majority and Minority Shareholders
A single shareholder who owns and controls more than 50% of a company's outstanding shares is
known as a majority shareholder, while those who hold less than 50% of a company’s stock are
classified as minority shareholders.

Acquisition of Membership
1)  By subscribing to the Memorandum: The subscribers to the Memorandum of company are its
members - 7 in case of public company, 2 in case of Private Company and 1 in case of OPC.

2)  By application and allotment of Shares: Any person who wishes to buy company’s shares has
to apply for the same and on acceptance of application by the company, the person is allotted the
shares and becomes shareholder.

3)  By holding Shares in Dematerialised Form: Any person who has shares in his name as
beneficial owner in the records of the Depository is member of company.

4)  By Transfer: Any person who buys shares of a company from an existing member becomes its
registered member after company accepts his transfer request.

5)  By Transmission of Shares: The legal representative/ heir in case of death, official receiver in
case of insolvency and administrator in case of insanity replace the concerned shareholder.

6)  Nominee of One Person Company (OPC): In case of OPC, the nominee whose name is given
in the Memorandum of OPC; becomes its sole owner in the event of the death of the member.

7)  By Acquiescence: If a person is wrongly entered in the Register of Members or holds himself
out as a member or knowingly allows his name to remain on the Register of Members (without
informing the company about the mistake and getting it rectified), is stopped from denying his
membership and is liable as a member like in the event of winding up of company. It is therefore
called Membership by Principle of Estoppel.
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Shareholders’ Duties
There are also duties which shareholders must perform. They are:
1. Shareholders should participate in the general body meetings so that they can see and also can
advise on the matters which require improvement.
2. Shareholders should consult on matters of finance and other topics.
3. Shareholders should be in touch with other members to track progress of the company.

Roles of a Shareholder
Being a shareholder also includes other responsibilities, such as:
1. Brainstorming and deciding the powers they will bestow upon the company’s directors,
including appointing and removing them from office.
2. Deciding the directors’ salary.
3. Making decisions on instances the directors have no power over, including making changes to
the company’s constitution.
4. Checking and making approvals of the financial statements of the company.

Shareholder Rights
Shareholders traditionally enjoy the following rights:
1. Right to inspect the company's books and records, such as company bylaws and minutes of
board meetings.
2. Power to sue the corporation for misdeeds of its directors and/or officers, in the the form of a
class-action lawsuit.
3. Right to vote on key corporate matters, such as recruitment and nomination of directors,
potential mergers or liquidation. Companies Act 2013 recognises voting by the showing of
hands, polling, electronic means or by means of postal ballot.
4. Entitlement to receive dividends along with a claim on assets.
5. Right to attend annual meetings, in person or via conference calls.
6. Right to get copies of financial statements in a quarterly or annual statement.
7. Right to vote on key matters by proxy, through mail-in ballots or online voting platforms, if
they’re unable to attend voting meetings in person.
8. Right to claim a proportionate allocation of proceeds if a company liquidates its assets.
9. Right to transfer ownership allows shareholders to trade their stock on an exchange.
 104 Gargi Palaskar 480 6

Classification of shareholders’ rights

a) Statutory Rights:
Rights given to shareholders by the Companies
Act, 1956. These rights cannot be amended or
taken away from shareholders in any manner.
b) Documentary Rights:
Rights conferred upon by Articles of
Association of a company.
a) Individual Rights:
Rights enjoyed by a shareholder as an
individual (owner) of the company. He can
enforce this right singly. For eg. Right to
receive share certificate, inspect Register of
members, attend general meetings etc.
b) Corporate/ Collective Rights:

c) Other Legal Rights: Rights enjoyed by shareholders jointly or

Rights shareholders enjoys as per the general collectively and not individually. These are

law of the company. rights enforced by the majority usually in the

general meetings. They include right to alter
memorandum or Articles of Association, elect
directors, etc.

Shareholders’ Agreement
A shareholders agreement is a legally binding contract between the shareholders of a company. It
determines the shareholders’ rights, responsibilities, privileges and protections. It is not a legal
requirement to have a shareholders agreement in place. However, it is strongly advised to do so as it
protects the shareholders from any potential conflicts.
Furthermore, a shareholders’ agreement is a private agreement.

Termination of a Shareholders’ Agreement:

A person ceases to be the member of the company when any of the following occurs:
1. Transfer of Shares
2. In the event of Death or Insolvency of a Member.
3. Sale of Shares by the Member in the buy-back offer by the company.
4. Forfeiture of shares by company.
5. Surrender of shares to the company by Member.
6. Exercising of lien over the shares of a Member by the company.
 104 Gargi Palaskar 480 7

Board of Directors

What Is a Board of Directors?

A board of directors is essentially a panel of people who are elected to represent shareholders. The
board is a governing body that typically meets at regular intervals to set policies for corporate
management and oversight.
Every public company is legally required to install a board of directors; nonprofit organisations and
many private companies – while not required to – also name a board of directors.
Under the Companies Act, only an individual can be appointed as a Director; a corporate,
association, firm or other body with artificial legal personality cannot be appointed as a Director.

General Board Structure

The board of directors should be a representation of both management and shareholder interests and
include both internal and external members.
Internal director is a member of the board that is invested in the daily workings of the company and
manages the interests of shareholders, officers, and employees. An external director represents the
opinions and interests of those who function outside of the company and brings an objective,
independent view to goal-setting and settling any company disputes.
The Chief Executive Officer (CEO) often also serves as chairman of the company’s board of
directors.
Committees Under the Board of Directors
10. Audit Committee
11. Nomination and Remuneration Committee.
12. Stakeholders Relationship Committee
13. Risk management Committee

Appointment of Directors
Generally, in a public company or a private company subsidiary of a public company, two-thirds of
the total numbers of Directors are appointed by the shareholders and the remaining one-third is
appointed in accordance with the manner prescribed in Articles failing which, the remaining one-
third of the Directors must be appointed by the shareholders. Nominee Directors can be appointed
by a third party or by the Central Government in case of oppression or mismanagement.
 104 Gargi Palaskar 480 8

Qualifications for Directors

The Companies Act does not prescribe any qualifications for Directors of any company. An Indian
company may, therefore, in its Articles, stipulate qualifications for Directors. The Companies Act
does, however, limit the specified share qualification of Directors which can be prescribed by a
public company or a private company that is a subsidiary of a public company, to be five thousand
rupees (Rs. 5,000/-).
Disqualifications of Directors
Under company law, a director can be disqualified for any of the following reason:
1. He is of an unsound mind and is declared so by the court.
2. He is insolvent.
3. He is in the process of declaring insolvency and his application is pending.
4. He has been convicted by a court of any offence (whether or not involving moral turpitude)
and has been imprisoned for at least six months. However, if a person has been convicted of
any offence and has served a period of seven years or more, he shall not be eligible to be
appointed as a director in any company.
5. If an order has been passed disqualifying him of being appointed as a director by a court or
Tribunal.
6. He has not paid any calls with respect to any shares of the company held by him, whether
alone or jointly with others, and a period of six months has elapsed from the last day fixed
for the payment of the call.
7. He has been convicted of offences dealing with related party transactions at any time during
the last preceding five years.
8. He has failed to acquire a Director Identification Number.
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Duties & Responsibilities of Board of Directors
The duties and responsibilities of the board of directors are as follows
1. Trusteeship: The board of directors act as trustees to the property and welfare of the company.
Hence, the board must use the company’s property for the long-run gain of the company, but not for
their personal use.
2. Formulation of Mission, Objection and Policies: Board of directors must see the long run view
and have long run perspective of the company. The board formulates, reviews and reformulates the
company’s mission, objectives and policies which forms the basis for strategy formulation and
implementation.
3. Designing Organisational Structure: The board designs the structure of the organisation based
on the objectives, policies, environmental factors, degree of competition, role of quality,
expectations of employees etc.
4. Selection of Top Executives: The board should assume the responsibility of screening and
selecting the top executives who can formulate and implement the strategies. Chief executives are
key personnel in the process of strategy implementation.
5. Financial Sanctions: The important financial decisions like sanctioning of finances to various
projects, reserves, distribution of profit to shareholders and repayment of loans and advances etc.,
are taken by the board. Further, the board reviews the financial performance of the company from
time to time and reformulates the financial policies.
6. Feed forward and Feedback: The board has to obtain information from the external
environmental factors and feed that information forward to various key points in the company in
order to prevent possible hurdles and mistakes in the process of achieving organisational goals.
Further, the board also obtains the information from internal sources of the organisation, and feeds
it forward to prevent possible failures in decision-making by the top level executives.
The board also feeds the information back to the executives regarding their failures in decision-
making with a view to avoid the recurrence of such mistakes. Thus, feedback of information helps
the board to check and control the activities as board has the ultimate responsibility for the success
of the company.
7. Link between the Company and External Environment: The board acts a vital and continuous
link between the company and external environment like government, other companies, social and
economic institutions etc.
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Remuneration of Directors:
The managerial personnel of the company viz. the Directors, Managing Directors etc. hold the
managerial position and this entitles them to get managerial remuneration. It may be in the form of
monthly payment like salary, specified percentage of net profits or commission and sitting fees for
attending Board meetings or Committee meetings. At the same time there is no automatic
entitlement of remuneration of director.
The Act states that total managerial remuneration payable by a public company to its Directors,
Managing Director etc. should not exceed 11% of net profit in a financial year. This excludes sitting
fees paid or to be paid for meeting.
Sitting Fees: The director is given fees to attend Board or Committee meeting which may be up to
one lakh rupees.

Election and Removal Methods of Board Members

While members of the board of directors are elected by shareholders, which individuals are
nominated is decided by a nomination committee.
Breaking foundational rules can lead to the expulsion of a director; for example, engaging in a
transaction that is a conflict of interest, or striking a deal with a third party to influence a board
vote.
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Sole Proprietorship
A sole proprietorship is one of the oldest forms of business establishment that places an individual
at the command of business. It is a form of business organisation in which an individual introduces
his own capital, uses his own skill and intelligence in the management of its affairs and is solely
responsible for the results of its operations. He will bear the profits as well as be accountable for the
losses arising from the business. There is no distinction between assets and liabilities of a business
and that of its owner in a sole proprietorship.
It is a popular type of business to set up, with minimum documentation and ease of formation. It
also helps to avoid double taxation.
An individual who owns a sole proprietorship, and he is known as a sole proprietor. The individual
may run the business alone or may obtain the assistance of employees.

Partnership
A partnership is a type of business that is formed by a group of two or more individuals. It is a
voluntary association of persons who have come together to carry on business with the vision to
earn profits.
In such a business, the members mutually agree to bear the profits and losses. The profit of the
business is shared between the members. Consequently, the losses are also distributed among the
members.
The members involved in the Partnership are known individually as partners or agents of the firm,
while they are collectively known as a firm. A partner in the firm will be liable for the actions of the
other members of the firm.
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COMPARISON BETWEEN A SOLE PROPRIETORSHIP AND PARTNERSHIP FIRM

Basis Sole Proprietorship Partnership Firm

1 Membership Sole proprietorship is owned by Partnership is owned by two or
one and only one person. more persons subject to the limit
of ten in banking business and
fifty in case of other business.
2 Formation Sole proprietorship can be Partnership is formed through an
formed easily as it is the agreement which may be oral or
outcome of a single person’s in writing. A legal partnership
decision without any legal business is governed by rules or
administrative approval. regulations indicated under the
Companies Act 2013.
3 Registration Sole proprietorship needs no Registration is required by law in
registration except some case of partnership.
compliance.
4 Regulating law There is no specific statutory Partnership is governed by the
law to govern the functioning of rules contained under the Indian
sole proprietor business. Partnership Act, 1932.
5 Capital Sole-proprietorship has a There is more scope for raising a
limited financial capability, and larger amount of capital in
hence, the scope for raising partnership as there is more than
capital is naturally minimal. one person.
6 Management Sole proprietorship is self- Every partner has the right to
managed, one and few take active part in managing the
employees may support him. affairs of the business. Each
However, the decision of the partner also enjoys the authority
proprietor is final and binding. to bind the firm and other
partners for his acts in the
ordinary course of business.
7 Risk The risk of the sole proprietor is The risk connected with the
greater than that of partnership partnership business is
form business. comparatively less as it is shared
by all the partners.
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Basis Sole Proprietorship
8 Duration Sole proprietorship business
comes to an end with the death,
insolvency incapacity of the
proprietor. Thus, there is
uncertainty of duration of sole-
proprietorship.
9 Quickness in decision- The decision of the sole-
making proprietor is prompt as he need
not consult anyone.
10 Secrecy of affairs A sole-proprietor need not share Maintenance of absolute secrecy
his business secrets with
anybody.
13
Partnership Firm
Duration of partnership
continues as long as the partners’
desire. Even though legally it
comes to an end on the death,
insolvency or retirement of any
of the partners, the business shall
continue with the remaining
partners.
Decision-making in partnership
is corporately delayed as the
partners arrive at decision after
the consultation with one another
is not possible in a partnership as
business secrets are accessible to
more than one partner.
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REFERENCES

Shareholders:
https://www.investopedia.com/terms/s/shareholder.asp
https://smallbusiness.chron.com/become-shareholder-company-21562.html
https://corporatefinanceinstitute.com/resources/knowledge/finance/shareholder/
https://byjus.com/commerce/how-to-become-a-shareholder/
https://www.legalwiz.in/blog/who-can-become-a-shareholder-in-a-company
https://www.investopedia.com/investing/know-your-shareholder-rights/
https://www.cfainstitute.org/en/advocacy/issues/shareholder-rights
https://blog.ipleaders.in/shareholders-rights-duties/
https://www.bms.co.in/what-are-the-rights-of-shareholders/
https://linkilaw.com/legal-documents/shareholders-agreements/
https://linkilaw.com/startup-advice-tips/vested-shares/
https://www.nytimes.com/2020/04/22/arts/design/nyc-skyscrapers-virtual-tour-virus.html
Board of Directors:
https://www.investopedia.com/terms/b/boardofdirectors.asp
https://corporatefinanceinstitute.com/resources/careers/jobs/board-of-directors/
https://taxguru.in/company-law/remuneration-directors.html
http://www.legalservicesindia.com/article/185/Remuneration-of-Directors.html
https://cleartax.in/s/disqualification-of-directors
https://www.mondaq.com/india/directors-and-officers/151848/appointment-of-directors-process-
qualifications-disqualifications
https://accountlearning.com/roles-duties-responsibilities-of-board-of-directors/
https://www.dynamictutorialsandservices.org/2016/04/membership-in-company-acquisition-
and.html
Comparison between Sole Proprietorship and Partnership
https://byjus.com/commerce/difference-between-sole-proprietorship-and-partnership/
https://www.economicsdiscussion.net/difference-between/difference-between-sole-proprietorship-
and-partnership/31824
https://www.wallstreetmojo.com/sole-proprietorship-vs-partnership/