GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

FORMS OF BUSINESS ORGANISATION:

SYLLABUS TOPICS
1. JOINT HINDU FAMILY BUSINESS
2. SOLE PROPRIETORSHIP
3. PARTNERSHIP
4. COOPERATIVE SOCIETIES
5. JOINT STOCK COMPANY
6. FORMATION OF A COMPANY

JOINT HINDU FAMILY BUSINESS:

 Refers to a form of business organisation wherein the business is owned and carried on by
the members of the Hindu Undivided Family
 This form of business is found only in India
 One of the oldest forms of business organisation in the country.
 Governed by the provisions of Hindu Law (The Hindu Succession Act, 1956)

BASIC ELEMENTS

 The basis of membership in the business is birth in a particular family.

 Three successive generations can be members in the business.
 Business is controlled by the head of the family – who is the eldest member – called as
karta.
 All members have equal ownership right over the property of an ancestors.
 Members are called co-parceners.
 At least 2 members must be in the family
 There must be some inherited ancestral property

SYSTEMS OF JOINT HINDU FAMILY BUSINESS:

There are two systems which govern membership in the family business,

1. Dayabhaga system:
a. This system prevails in West Bengal
b. Allows both male and female members of the family to be co-parceners.
2. Mitakshara System:
a. Prevails all over India except West Bengal
b. Allows only male members as co-parceners in the business.

FEATURES OF JOINT HINDU FAMILY BUSINESS:

 Formation:
There should be at least two members in the family
some ancestral property to be inherited by them.
membership is by birth
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

does not require any agreement

governed by the Hindu Succession Act, 1956
 Liability:
liability of karta is unlimited - liability of all other members except karta is limited to
their share of co-parcenary property of the business.

 Control:
Control of the business lies with the karta - Karta takes all the decisions and is
authorised to manage the business - Karta’s decisions are binding on the other
members.
 Continuity:
Business continues even after the death of the karta - the next eldest member takes up
the position of Karta, leaving the business stable Business can be terminated with the
mutual consent of the members.

 Minor Members:
The inclusion of an individual in to the business occurs duet to birth in a HUF - Hence,
minors can also be members of the business.

MERITS OF JOINT HINDU FAMILY BUSINESS:

1. Easy formation:
For forming HUF business, there should be atleast 2 members with inherited ancestral
property. Inheritance is based on the birth of members, there is no need for any
agreement between these members.
2. Effective Control:
As the HUG business is controlled by Karta, the head of the family, there are no conflicts
among the members. Which leads to quick and timely decision.
3. Stable Existence
Death of Karta does not affect the business as the next eldest member takes over the
position of the karta.
4. Limited Liability of members
5. Increased Loyalty & Cooperation:
they feel proud at the growth of their family business and of being involved in the
business.

DEMERITS OF JOINT HINDU FAMILY BUSINESS

1. Limited Resources: less scope for expansion and growth of business.

2. Unlimited Liability of Karta: Karta’s personal property can be used to pay the business
debts.
3. Dominance of Karta: Decisions of Karta may not be acceptable to other members
sometimes and a conflict may develop. It may lead to break down of the family and the
business.
4. Limited Managerial Skills: Karta cannot be an expert in all the areas of management. He
may take poor decisions, leading to less profits or even losses for the business.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

Joint Hindu Family Business is not very common form of Organisation due to the diminishing number
of Joint Hindu Families in the country.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

COOPERATIVE SOCIETY

MEANING OF COOPERATIVE SOCIETY:

Cooperative society is a form of organization wherein persons associate together voluntarily on

equal basis to further their common interests.

To protect the interests of the weaker sections of the society, the concept of cooperation emerged
which has motto,

- Each for all and all for each

- Self-help through mutual aid.

DEFINITION OF COOPERATIVE SOCIETY

According to the Cooperative Societies Act, 1912,

Cooperative organisation is a society which has its objectives for the promotion of economic
interests of its members in accordance with cooperative principles.

FEATURES OF COOPERATIVE SOCIETY:

1. Voluntary Membership
 Group member may or may not join in the society formed
 Member has the option to leave the society by serving an appropriate notice
 Membership is open to all irrespective of their caste, religion, gender or political affiliation.
2. Formation
 Cooperative society can be started with a minimum of ten members
 Registration is necessary
 Governed by the provisions of Cooperative Societies Act, 1912.
3. Separate Legal Entity
 Cooperative society has separate legal entity distinct from its members.
 Registration of the society under the Cooperative Societies Act is necessary, which gives it a
status of distinct identity.
 The society can hold property, enter into contracts, hold property, sue others and can be
sued by others in its own name.
 Entry or exit of members does not affect the continuity.
4. Limited Liability
 Liability of the members is limited to the extent of capital contributed by them.
5. Management & Control
 Ultimate control lies with the members.
 Members make decisions on the principle ‘one man, one vote’.
 Members select their representatives/board of directors/managing committee for managing
day to day affairs.
6. Service Motive
 Formed with a service motive
 For mutual welfare but not for maximisation of profits.
 Earning profit is a secondary motive.
7. Distribution of Surplus:
 Any surplus as a result of business operation, is distributed among members as dividend
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

TYPES OF COOOPERATIVE SOCIETY:

1. Consumers’ Cooperative Society:
 To protect the interests of the consumers
 To ensure steady supply of essential consumer products of standard quality at fair prices
 Eliminating the middlemen by linking themselves directly with the producers resulting in
low costs and profits
2. Producers’ Cooperative Society
 To protect the interest of small producers of a particular location
 To fight against the competitiveness of large producers/capitalists by helping the
members for - Capital - Equipment - Raw materials - Marketing etc.
 Enhance the bargaining power of the small producers.
3. Marketing Cooperative Society
 To help small producers in selling their products.
 Members consist of producers who wish to obtain reasonable prices for their output.
 Aims to eliminate middlemen
 improve competitive position of members by securing favourable market for products.
 Performs marketing function like transportation, warehousing, packaging to sell the
output at the best possible price.
4. Farmers’ Cooperative Society
 To protect the interests of the farmers who wish to jointly take up farming activities.
 Aim is to gain the benefit of large scale farming and increase productivity
 providing better inputs like seeds, fertilisers and machinery at reasonable cost.
 Helps in improving the yield and solving problems of farming in fragmented
landholdings.
5. Credit Cooperative Society
 To protect the members from exploitation of lenders who charge high rates of interest
on loans.
 For providing easy credit/loans at low rate of interest with minimum formalities to its
members
 Provide loans out of the amounts collected as capital and deposits from the members
6. Housing Cooperative Society
 To help people with limited income to construct houses at reasonable costs.
 Helps in solving the problems of members who have limited resources for housing
 By constructing houses and giving the option of paying back in instalments.
 Construct houses/flats or provide plots to members.
MERITS OF COOPERATIVE SOCIETY:
1. Ease of formation:
2. Equality in voting rights
3. Limited liability
4. Stable existence
5. Economy in operations
6. Support from government

LIMITATIONS OF COOPERATIVE SOCIETY:

1. Limited Resources
2. Inefficiency of Management
3. Lack of Secrecy
4. Government Control
5. Difference of opinion.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

SOLE PROPRIETORSHIP
MEANING:
SOLE means Only - PROPRIETORSHIP means Ownership
Only one person who owns, finances and manages the business and he is called Sole Proprietor.
Sole Trading is the simplest and most popular form of organisation.
Sole Proprietor ship is suitable for small scale business firms

DEFINITION:
According to J.L.HANSEN, “Sole Trade is a type of business unit where a person is solely responsible
for providing the capital, for bearing the risk of the enterprise and for the management of business.
According to PARTERSON and PIOWMAN. “A sole proprietorship is a business unit whose
ownership and management are vested in one person. The individual assumes all risks of loss or
failure of the enterprise and receives all profits from its successful operation.”

FEATURES OF SOLE PROPRIETORSHIP:

1) Single Ownership
 Sole Proprietorship business is owned by a single individual.
 Proprietor is responsible for bearing risk and for management of the business.
2) Easy Formation & Closure
 An individual with Small amount can start the business as Sole Trading
 No legal formality in forming the firm.
 In the same way, Sole Proprietorship may be dissolved easily with out any legal formalities.
3) Sole Risk bearer & profit recipient
 The Proprietor bears all the risk involved in the business.
 If business is successful the Proprietor enjoys all the benefits & rewards of the business.
4) Unlimited Liability
 Proprietor’s liability is unlimited.
 He is personally responsible for paying business debts, in case the debts cannot be paid by
the business.
5) No separate Legal Entity
 The business and the Proprietor are one and the same.
 There is no separate legal entity of the business.
 No difference between the proprietor and his business, from legal point of view.
6) Management and Control
 Sole Proprietorship is a one-man show.
 Proprietor alone performs all functions of management.
 The owner takes all the business decisions.
7) Capital
 Capital is provided exclusively by the Sole Proprietor
 Any money borrowed from others for investment will be treated as debts/loans.
8) Lack of Business Continuity
 Continuity of the Sole Proprietorship depends on the Sole Proprietor.
 ceases to exist, in case of - Death - Insanity – Insolvency -Imprisonment, etc.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

MERITS/ADVANTAGES OF SOLE PROPRIETORSHIP:

1. Easy Formation and Closure

2. Quick Decision Making
3. Secrecy and Confidentiality of Information
4. Direct Incentive of Profit
5. Sense of Accomplishment and Achievement
6. Flexibility of Operations

DEMERITS/LIMITATIONS OF SOLE PROPRIETORSHIP:

1. Limited Financial Resources

2. Unlimited Liability
3. Uncertain/Limited Life of the Business Enterprise
4. Limited managerial ability
5. Limited Scope for expansion
6. Non-availability of Economies of Scale

EXAMPLES FOR SOLE PROPRIETORSHIP FORM OF BUSINESS

• Sole Trading Form of Business is suitable for:

• Small Shops & Boutiques
• Artisans & Musicians
• Independent Contractors
• Home/Healthcare
• Restaurants & Catering Services…etc…
• Some of the most recognized names in business actually began as sole proprietorships.
Although you wouldn't know it to look at them now, these companies were birthed with a
single person at the helm of a small business.
• ebay: The eBay concept was launched by Pierre Omidyar. Using his personal webpage, he
started a sole proprietorship with a prototype called Auction Web in 1995. In a short period
of time, the company was incorporated and the name changed to eBay. eBay went public in
1998- but just three years earlier, it was a small, sole proprietorship.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

MEANING OF ‘PARTNERSHIP’…

 An association of two or more persons to carry on, as co-owners, a business and to share its
profits and losses.

 The persons who own the business are individually called partners and collectively called
partnership firm.

DEFINITION OF ‘PARTNERSHIP’…

 L.H. Haney: “The relationship between persons who agree to carry on a business in
common with a view to private gain”.

 Indian Contract Act: “Partnership is the relation which subsists between persons who have
agreed to combine their property, labour or skill in some business and to share the profits
therefrom between them.”

FEATURES OF PARTNERSHIP…

1. FORMATION
- Governed by Partnership Act, 1932.
- Comes into existence through a Legal Agreement.
 terms & conditions
 Relationship among the partners
 Sharing of profits & losses
 Manner of conducting the business
- Must be a Lawful Business.
- People Together for Charitable purposes – Not Partnership.
2. LIABILITY
- Partners have UNLIMITED Liability.
- Personal assets may be used for repaying debts.
- Partners are jointly and severally liable for payment of debts.
- Jointly responsible, contribute to their proportion of share in the business.
- Individually too, each partner can be held responsible for repaying the debts of the business.
(In such cases partner can recover such amount from other partners.)
3. RISK BEARING
- Partners bear the risk.
- Reward in the form of Profit.
- Agreed Ratio for Profit/Loss Sharing.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

4. DECISION MAKING & CONTROL

 Partners share responsibility of
 Decision Making
 Control
- Decisions taken with mutual consent.
- Activities are managed through joint effort of all partners.

5. CONTINUITY
 Lack of continuity
 Business comes to an END, in the event of
 Death
 Retirement
 Insolvency
 Insanity
 Remaining Partners may continue business, but with a new Agreement.
6. MEMBERSHIP
- Minimum number of partners – Two (2)
- Maximum number of partners:
 Banking Business: Ten (10)
 Other Businesses: Twenty (20)
7. MUTUAL AGENCY
 Business Carried on by all (or)
 Any one partner acting for all.
 Every partner is both an Agent and a Principal

MERITS…
1) Ease of Formation & Closure
 Easily formed by entering into a partnership agreement
 No compulsion for registration
 Closure also easy
2) Balanced Decision Making
 Partners function acc. to there area of expertise
 Balanced Decisions due to reduced burden
3) Sharing of Risks
 Risk is shared by all partners
 Reduces anxiety, burden and stress on individual partners.
4) More Funds
 Capital is contributed by a number of partners.
 Larger amount of capital compared to sole proprietorship.
5) Secrecy
Not legally required to publish its accounts and submit reports, hence confidentiality of information
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

DEMERITS…
1) Unlimited Liability
 Partners liable to repay debts even from their personal resources.
 Liability of partners is both joint and several, may prove a drawback for wealthier partners.
2) Limited Resources
 Restriction on number of partners.
 Hence, capital investment is usually not sufficient to support large scale business operations.
 As a result, firms face problems in expansion beyond a certain size.
3) Possibility of Conflicts
 Run by a group of persons & Decision making authority is shared.
 Decision of one partner is binding on other partners.
 Difference in opinion may lead to disputes.
4) Lack of Continuity
 Partnership comes to an end with death, retirement, insolvency or lunacy of any partner.
 New Agreement is necessary if partners desire to continue to run the business.
5) Lack of Public Confidence
 No legal requirement to publish financial reports to public, hence public cannot ascertain the
true financial status of the firm, hence confidence of the public is generally LOW.

TYPES OF PARTNERS…
1. Active Partner:
A partner who takes active participation in the management and daily business activities.
2. Sleeping / Dormant Partner
A partner who does not take active participation in the business activity.
3. Secret Partner
A partner Whose association with the firm is unknown to general public.
4. Nominal Partner
A person who just allows the use of his/her name by a partnership firm.
5. Partner by Estoppel/Holding Out
A person Through his/her own initiative/conduct/behaviour, gives an impression to others that
he/she is a partner of the firm.
Types of Partners…
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

MINOR AS A PARTNER…
 Minor cannot become a partner of any firm as a MINOR is incompetent to enter into valid
contract with others.
 Minor can be admitted to the benefits of a partnership by mutual consent of all other
partners.
 Liability will be LIMITED to the extent of capital contributed by him.
 Not eligible to take active participation in the management.

MINOR AS A PARTNER…
 Can only share profits, cannot be asked to bear the losses.
 Minor can inspect the accounts of the firm.
 On attaining Majority, within 6 months he/she must decide whether to continue as a full-
fledged partner or not and publish a paper notification, failing which he/she will be
considered as a full-fledged partner by default.

TYPES OF PARTNERSHIPS…

PARTNERS2.HIPS ON THE BASIS OF DURATION

1. Partnership at Will
 Exists at the will of the partners.
 Continues as long as partners want.
 Terminates when any partner gives notice of withdrawal from the partnership.
2. Particular Partnership
 Formed for the accomplishment of any particular project/activity to be carried on for a
specific time period.
 Dissolves automatically when the purpose for which it was formed is fulfilled or when the
time duration expires.
PARTNERSHIPS ON THE BASIS OF LIABILITY
1. General Partnership
 Liability Unlimited
 right to participate in management
 acts are binding on each other as well as on the firm
 Registration of the firm is Optional
 existence of the firm is affected by death, retirement, insolvency or lunacy of partners.
2. Limited Partnership
 Unlimited liability for at least one Partner – rest may have limited.
 Partners do not enjoy the right to participate in management
 acts do not bind on each other nor on the firm
 Registration of the firm is COMPULSORY.
 firm does not get terminated by death, retirement, insolvency or lunacy of partners.

PARTNERSHIP DEED…
The Written Agreement which specifies the terms and conditions that govern partnership is called
the Partnership Deed.

PARTNERSHIP DEED CONTENTS…

 Name of the Firm
 Nature, Location and Duration of the Business.
 Investment made by each partner.
 Distribution of Profits and Losses.
 Duties and obligations of partners.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

 Salaries and withdrawals of partners.

 Terms governing admission, retirement & expulsion of partners
 Interest on capital & drawings.
 Procedure for dissolution of the firm.
 Preparation of accounts and their auditing.
 Method of Solving Disputes.

REGISTRATION OF PARTNERSHIP FIRMS…

 Entering of the Firm’s Name along with prescribed particulars in the REGISTER OF FIRMS
kept with the Registrar of Firms in the State in which Firm is situated.
 It is conclusive proof of the existence of partnership.
 REGISTRATION of the Firm is OPTIONAL.
 Registration can be done at the time of formation or any time during its existence.
Consequences of non-registration of Firm:
 A partner of an unregistered firm cannot file a suit against the firm or other partners.
 The firm cannot file suit against third parties.
 The firm cannot file case against the partners.
 In view of above consequence, it is advisable to get the firm registered.
Procedure for Registration:
 Submission of Application Form to Registrar of Firms with all particulars.
 Name of the Partnership Firm
 Location of the Firm,
 Place of Business,
 Date when each partner joined,
 Names & Addresses of Partners,
 Duration of Partnership
 Application shall be signed by all the partners.
 deposit of Fees required
 After approval, Registrar will make an entry in the Register and issue a Certificate of
Registration.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

JOINT STOCK COMPANY

 A company is an association of persons formed for carrying out business activities and has
a legal status independent of its members.

 The capital of the company is divided into smaller parts called “shares”

 Joint Stock Company can be described as an artificial person created by law with a separate
legal identity, perpetual succession and a common seal.

 The shareholders are the owners of the company while the Board of Directors is the chief
managing body elected by the shareholders.

 Owners exercise indirect control over the business.

 Shares can be transferred from one shareholder to another person.

DEFINITION OF A COMPANY

According to Prof.L.H.Haney,

Joint Stock Company is a voluntary association of individuals for profit, having a capital
divided into transferable shares, the ownership of which is the condition of membership.

JOINT STOCK COMPANIES IN INDIA

 The Company form of business organisation is governed by The Companies Act, 1956.

 Three types of companies are found in India

 PRIVATE COMPANY

 PUBLIC COMPANY

 ONE PERSON COMPANY

FEATURES OF A COMPANY
1. Artificial Person
 Company is an artificial person created by law i.e., as per The Companies Act, 1956.
 After registration – gets status of an artificial person
 Exists independent of its shareholders/members
 Has all legal rights like a real person for business activities
2. Separate Legal Entity
 Has a separate legal entity
 Can hold property on its name,
 enter into agreement with others,
 can sue others &can be sued by others
3. Formation
 The Process of Formation of a company is time consuming, expensive and complicated.
 Involves preparation of several documents
 Compliance with several legal requirement
 Registration is compulsory as per Indian Companies Act,1956
4. Perpetual Succession
 Company can exist on a continuous basis
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

 It is a creation of law - can be brought to an end only by law – by procedure “winding-up”

 not affected by – Death, Retirement, Resignation, Insolvency or Insanity of Members.
 Members may come and go, company continues to exist.
 Common Seal
5. Artificial person
 Conducts business through Board of Directors
 Company has a common seal – affixed on important documents as a token of company’s
approval.
6. Limited Liability
 Liability of shareholders limited to the extent of shares subscribed by them
7. Transferability of Shares
 Shares are transferable freely except private companies.
 Companies may put restriction on transfer of shares in specific situation as per Companies
Act, 1956.
 Ex: Time during which shares may not be transferred.
8. Management and Control
 Ultimate authority of Management and control lies with Shareholders.
 Shareholders are large in number, hence cannot participate directly in the management
process.
 They elect directors who manage the affairs of the company on behalf of the shareholders.
9. Risk-Bearing
 Risk is spread very widely among the numerous Shareholders.
 Liability of shareholders is limited to the extent of issue price of shares subscribed.

TYPES OF COMPANIES
1) One – Person Company
2) Private Company
3) Public Company

1. ONE – PERSON COMPANY

 Formed and Operated by a single person
 Limited Liability
 Section 2(62) of the Companies Act, 2013 defines One-Person Company as “a company with only
one person as its member.
 Acc. to Rule 3(1) of the Companies (Misc) Rules, 2014:
 Only a natural person – Indian Citizen – Resident in India – can form one-person company
 One person can form only 1 one-person company.
 Cannot be formed for charitable purpose.
 Cannot carry out non-banking financial investment activities including investments in securities
etc.
 Paid up capital should not be more than 50 Lakhs.
 Average annual turnover should not exceed 2 Crore.
 The Words “One-Person Company” shall be mentioned in brackets below the name of the
company.
2. PRIVATE COMPANY
 Number of shareholders is atleast 2 and up to 200.
 Restriction on transfer of shares
 Cannot invite the general public through any means to subscribe its shares.
 Necessary to affix ‘private limited’ after its name to distinguish it from a public company.
 If a private company contravenes any of the above provisions, it can be treated as a public
company and loses the privileges of a private company.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

 Privileges of a Private Company:

 May be formed with minimum 2 members as against 7 members for public company.
 No need for issuing prospectus for subscribing shares, as general public is not invited to
subscribe shares.
 Allotment of shares may be done without receiving the minimum subscription of shares.
 May start business as soon as the certificate of incorporation is received.
 Minimum number of directors is just 2.
 Not required to maintain an index of its shareholders.
 No restriction on the amount of loans that may be given to the Directors.
3. PUBLIC COMPANY
 Public company is one which is not a Private Company
 Requirement of minimum 7 members
 No restriction on maximum number of shareholders.
 No restriction on transfer of shares
 Not prohibited to invite general public for subscribing to its shares.
 A private company which is a subsidiary of a public company is also treated as a public
company and does not have privileges.
 Public company is one which is not a Private Company
 Requirement of minimum 7 members
 No restriction on maximum number of shareholders.
 No restriction on transfer of shares
 Not prohibited to invite general public for subscribing to its shares.
 A private company which is a subsidiary of a public company is also treated as a public
company and does not have privileges.
Differences between a public and private company

MERITS OF A COMPANY
1. Vast Financial Resources
2. Limited Liability
3. Easy Transferability of shares
4. Perpetual Succession
5. Ample cope for expansion
6. Public Confidence
LIMITATIONS OF A COMPANY
1. Complex formation
2. Legal Regulations
3. Lack of Secrecy of Information
4. Delay in Decision making
5. Oligarchic management
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

FORMATION OF A COMPANY
 Since a company is an artificial person, it has to be formed according to legal provisions.
 formation of a company is governed by the legal provisions as per the Companies Act, 2013.
Stages in FORMATION OF A COMPANY
1. Promotion Stage
2. Incorporation Stage
3. Capital Subscription Stage
4. Commencement of Business Stage
Stages in FORMATION OF A COMPANY
 These 4 stages are relevant to forming a public limited company
 For forming a private ltd. Company, only the first two stages and a part of the 3 stage are
rd

relevant
 Private Limited Co. can commence business immediately after incorporation & receiving
money from the shareholders and hence 4 stage irrelevant
th

 Also, Private Limited Co. cannot invite the general public for subscribing to its shares,
therefore, a part of 3 stage is not relevant.
rd

1. PROMOTION STAGE
 Promotion is the first stage in the formation of a company.
 It involves the promoters conceiving the idea of promoting a company and the type of
activities that it tends to undertake.
 A Promoter may be- An individual - group of individuals - A company -or group of companies
PROMOTIONAL ACTIVITIES
1. Identification of business opportunity and the type of business to be undertaken
2. Undertaking Feasibility Study to determine technical, economic and legal viability of the
project.
3. Deciding the name of the company to be formed and getting the Name Approval from the
Registrar of Companies.
4. Obtaining consent of signatories of documents to be submitted to ROC (Public-7
signatories, Private-2 signatories)
5. Obtaining Consent of the person who will act as First Directors (2 in case of Private, 3 in
case of Public)
6. Selecting professionals who will prepare various relevant documents required for
registration ex: Memorandum of Association, Articles of Association etc.
7. Selecting the first auditors of the company.
8. Getting the relevant documents prepared.
2. INCORPORATION STAGE
1. Filing Registration Application with ROC along with relevant documents:
 Memorandum of Association,
 Articles of Association
 Written consent of proposed Directors
 Certificate of approval of company’s name,
 Agreement with Managing Director
 Declaration that all legal requirements are completed
 Documentary evidence of paying registration Fees.
2. Scrutiny of application and documents by the ROC.
3. Registering the company by the ROC if all requirements are fulfilled and entering the
name of the company in the Register.
4. Issue of Certificate of Incorporation by the ROC
5. On issue of the Certificate of Incorporation, the company comes into existence as an
artificial person.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

3. CAPITAL SUBSCRIPTION STAGE

 After Incorporation, the company proceeds to get money through allotment of share capital
to members.
 Initially, shares are allotted to persons who are signatories to documents and have agreed to
subscribe to the prescribed number of shares.
 After this, a private company may start its business.
 But a Public Company is required to get the Certificate of Commencement of Business from
the concerned ROC.
STEPS FOR RAISING FUNDS:
1.FILING OF PROSPECTUS:
 Prospectus is the invitation to the public to apply for shares and debentures of the
company or to make deposits in the company.
 Investors make up their minds about investment in a company primarily on the basis of the
information contained in this document.
 All significant information must be fully disclosed and should not be any mis- statement.
2.SEBI APPROVAL:
 SEBI has issued some guidelines for disclosure of the information and investor protection.

 Before going ahead to raise the fund it has to disclose all the relevant information as per
the guide lines and take approval from SEBI
3.APPOINTING
Issue Managers: Merchant Banker or financial institution / intermediary which can carry out the
activities connected with issue management which is registered with SEBI
“Registrar to an issue” means any person carrying on the activities in relation to
an issue including collecting application forms from investors, keeping a record of applications
and money received from investors or paid to the seller of securities, assisting in determining
the basis of allotment of securities
Underwriters undertake to buy the shares if these are not subscribed by the public. They receive
a commission for underwriting. Appointment of underwriter is not mandatory.
Bankers receive the Application money of the company.
Brokers try to sell the shares by distribution forms and encouraging public to apply for the share.
4. INVITING GENERAL PUBLIC FOR SUBSCRIPTION
 It is not necessary for a public company to offer its shares to public; it has only eligibility for
public issue but not compulsion.
 When a public company issues its shares to the public, it is called a publicly-held company.
 When a public company does not issue its shares to the public, it is called a closely-held
company.
5. MINIMUM SUBSCRIPTION:
 In order to prevent companies from commencing business with inadequate resources ,it has
been provided that the company must receive applications for a certain minimum numbers
of shares before going ahead with the allotment of the shares.
 According to the Companies Act it is called minimum subscription.
 The limit of minimum subscription is 90% of the size of the issue.
6. ALLOTMENT OF SHARES
On receiving the minimum prescribed subscription, allotting the shares in consultation with
the concerned stock exchange where the shares are to be listed for trading.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

4. COMMENCEMENT OF BUSINESS STAGE

 If the amount of minimum subscription is raised through new issues of shares, a public company
applies to the Registrar of Companies for the issue of certificate of commencement of business.
 A declaration that shares subscribed and allotted up to the minimum subscription mentioned in
the Prospectus.
 A declaration that every director paid on his shares in the same proportion as others.
 Documents Required:
 A declaration that the shares to be subscribed on cash basis have been allotted.
 A declaration that all the Directors have paid in cash for the Shares subscribed by them.
 A declaration signed by a Director or the Secretary of the Company, that the above requirements
are complied with.
 Registrar will scrutinize and if all requirements are fulfilled, he issues “Certificate Of
Commencement Of Business’.

DOCUMENTS USED IN COMPANY FORMATION

1. MEMORANDUM OF ASSOCIATION:
 Its defines objects and powers of a company and its relationship with the outside world.
 No company can be registered without its own MOA.
 No company can undertake activities that are not contained in Memorandum of Association
Importance of Memorandum of Association
 Basis for Company Incorporation
 Defining Scope of Operations
 Basis of External Relationship
 Defining Liability of Owners
 Providing Background Information
Clauses of memorandum of association:
i. Name clause
 Contains Name of the Company
 Name should not be identical or similar to an existing company
 Should not convey any connection/link with a Govt. Department/local authority.
 “Limited” and “Private Limited” should be specified in Name as required.
 Should not be objectionable under the provisions of Emblems and Names (Prevention of
Improper Use) Act, 1950
ii. Domicile Clause
 Registered Office Clause
 Contains information about the State in which the Registered Office of the Company is to be
located.
 Significance of this clause is that the Concerned Registrar of companies and legal jurisdiction
of courts are determined on the basis of the Domicile Clause.
iii. Objects Clause
 The objects for which the company is formed.
 Acc. To Companies Act, 1956, Objects be divided into
- Main objects
- other objects
 objects must not be against provisions of the Companies Act and against the Public Policy
 Objects should not be illegal, immoral or fraudulent.
 Since Alteration of MOA is difficult, companies specify their objects clause in a wider way
than their immediate business
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

iv. Liability clause

 Specifies the liability of members of the company.
 Company Limited by Shares: liability of the members is limited to the extent of issue
price of the shares held by them. If the shares are not fully paid, liability of members is
limited to the extent of unpaid amount.
 Company Limited by Guarantee: liability of members is limited to the extent of amount
of guarantee given by them.
 Unlimited Company: no need for mentioning Liability clause in the MOA.
v. Capital clause
 Capital clause states the total share capital of the company – Authorized Share Capital.
 Company cannot issue more share capital than the authorized share capital.
 Number of shares & face value of each share specified.
vi. Subscription clause
 Subscription clause contains names, addresses and signatures of signatories to the MOA.

2. ARTICLES OF ASSOCIATION:
 AOA contains the rules regarding the internal management of the company.
 It should not contradict with Memorandum Of Association.
 Company can adopt model set of Articles given in the Table-A of the Companies Act which is
the rules and regulation for the internal management of a company.
 AOA contains the rules regarding the internal management of the company. It should not
contradict with Memorandum Of Association.
 Companies can adopt model set of Articles given in the Tables-A to E of the Companies Act
 AOA must be printed, divided into paragraphs, consecutively numbered and signed by all
signatories to the MOA in the presence of atleast 2 witnesses.
Contents of ARTICLES OF ASSOCIATION:
1. Matters Relating to Shareholders;
 Types, number and denominations of shares
 Respective rights of different shares.
 Methods of making issue of share capital.
 Procedure for making calls and allotment of shares.
 Procedure for issue of share certificates & share warrants.
 Alteration of share capital
 Voting powers of shareholders
 Procedure for forfeiture, reissue, transfer and surrender of shares.
 Procedure regarding company meetings
 Amount of minimum subscription.
2. Matters relating to Directors:
 Rules regarding appointment, reappointment, remuneration, removal, qualification,
disqualification etc, of Directors.
 Procedure for retirement and removal of Directors
 Rules regarding borrowing powers of Directors
 Rules regarding conducting meetings of Directors.
 Rights and Liabilities of Directors.
 Rules for fixation of minimum and maximum number of directors.
3. Other Matters:
 Rules regarding keeping of books of accounts.
 Procedure for audit of company accounts.
GRADE-11 BUSINESS STUDIES UNIT-2 - FORMS OF BUSINESS ORGANISATION

 Borrowing funds from public and rate of interest thereon.

 Rules regarding use and custody of common seal.
 Procedure for winding up of the company.
 Rules regarding keeping of books of accounts.
 Procedure for audit of company accounts.
 Borrowing funds from public and rate of interest thereon.
 Rules regarding use and custody of common seal.
 Procedure for winding up of the company.

3. CERTIFICATE OF INCORPORATION
 Certificate of Incorporation is a certificate which is issued by the concerned ROC confirming that
the Company has been duly incorporated.
 Concerned ROC is one whose office is located in the State where the company has proposed to
locate its Registered Office.

4. CERTIFICATE OF COMMENCEMENT OF BUSINESS

 Certificate of Commencement of Business is a certificate which provides Conclusive proof that
the company is entitled to commence its business.
 This certificate is issued by the ROC after he is satisfied that the company has fulfilled all
requirements for commencing its business.