Professional Documents
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Chapter 3 (BOM)
Chapter 3 (BOM)
Chapter 3 (BOM)
• The type of the structure one chooses will have long-term implications, as the rights
& liabilities vary according to the form of ownership.
• Forms of business ownership are legal forms in which a business enterprise may be
organized & operated.
• Factors affecting the size & nature of business-
1. The decision the size and nature of your business depends on following factors-
2. The level of control you wish to have.
3. The level of “structure” you are willing to deal with.
4. The business’s vulnerability to lawsuits.
5. Tax implications of the different ownership structures.
6. Expected profit (or loss) of the business.
7. Whether or not you need to re-invest earnings into the business.
8. Your need for access to cash out of the business for yourself.
SOLE PROPRIETORSHIP
• Has no separate legal entity from its owner.
• Owned by one person.
• Proprietor is personally liable for his debts or liabilities.
• Manages, looks after & controls business himself.
• Less Govt Intervention & lesser compliance.
• Doesn’t require any legal recognition & attendant formalities.
William R. Basset opines that “The one-man control is the best in the world if
that man is big enough to manage everything”.
FEATURES OF SOLE PROPRIETORSHIP
Liability
Control
No separate entity
High Secrecy
Tax Advantage
Easy Dissolution
DISADVANTAGES OF SOLE
PROPRIETORSHIP
Limited Resources
Limited Ability
Unlimited liability
ONE PERSON COMPANY (OPC)
• Introduced by J.J. IRANI Committee in 2005
• Section 2(62) of Companies Act defines a one-person company as “a company that has only one person as to
its member. Furthermore, members of a company are nothing but subscribers to its memorandum of
association, or its shareholders”.
• An OPC is effectively a company that has only one shareholder as its member.
• The advantages of an OPC can only be obtained by those INDIANs who are naturally born and also resident of
India.
• A person cannot form more than 5 OPC's.
• OPC is exempt from certain procedural formalities such as conducting annual general meetings, general
meetings, extraordinary general meetings.
• There is no provision on holding board meetings if there is only one director but 2 meetings need to be
organized every year if there is more than one director.
• Any resolution passed by the sole member must be communicated to the company & entered in the minutes
book.
• There is, however, no relief from the provisions of audits, financial statements & accounts which are applicable
to private company.
• An OPC is incorporated as a private limited company, where there is only one member & prohibits inviting
general public for subscription of the securities of the company.
FEATURES OF OPC
Private Company
Single Member
Nominee
No Perpetual Succession
Common Seal
Status of minor
Quick Decisions
Secrecy
High Motivation
Flexibility
Easy funding
Members
Business Activities
Uncertain Life
No Democracy
Formation
Liability
Control
Continuity
Minority
ADVANTAGES OF HUF
Stability
Management
Liability
Membership
Credit Worthiness
LIMITATIONS OF HUF
Limitations of Management
Sharing of Profits
Unlimited Liability
Continuity
Number of Members
Implied Agency
ADVANTAGES OF PARTNERSHIP
Ease of Formation
Flexibility in Operations
Business Secrecy
DEMERITS OF PARTNERSHIP
Lack of Spontaneity
Unlimited Liability
Conflicts
Limited Resources
LIMITED LIABILITY PARTNERSHIP
• Limited Liability Partnership, popularly known as LLP combines the advantages of both the
Company and Partnership into a single form of organization.
• Liability Partnership (LLP) is a new corporate form that enables professional knowledge and
entrepreneurial skill to combine, organize and operate in an innovative and proficient manner.
• By incorporating an LLP, its members can avail the benefit of limited liability and the flexibility of
organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a
partnership firm.
• The Parliament of India passed the Limited Liability Partnership (LLP) Act in 2008 to govern LLP
businesses in India.
• According to Section 2, an LLP is a partnership registered under the Act.
• Further, an LLP agreement means a written agreement either between an LLP’s partners or between
the LLP itself and its partners.
• The law defines it as, “a corporate business vehicle that enables professional expertise &
entrepreneurial initiative to continue & operate in flexible, innovative & efficient manner providing
benefits of limited liability while allowing its members the flexibility for organizing their internal
structure as a partnership”.
• A limited partnership unlike general partnership is a corporate form of business organization. The
liabilities are limited to each partner according to their agreed contribution to the business. The
personal property of a partner cannot be attached to pay back the firms debts.
CHARACTERISTICS OF LLP
REGULATING ACT
MANAGEMENT OF BUSINESS
NUMBER OF PARTNERS
AUDIT OF ACCOUNTS
CHARACTERISTICS OF LLP
PARTNERS
CAPITAL CONTRIBUTION
DESIGNATED PARTNERS
DESIGNATED PARTNER
IDENTIFICATION NUMBER
(DPIN)
ADVANTAGES OF LLP
Formation Process
Continuous Existence
Flexibility
DISADVANTAGES OF LLP
• 1. An LLP cannot raise funds from public by issuing shares &
debentures.
• 2. Any act of the partner without the other may bind the LLP.
• 3. Under some cases, liability may extend to personal assets of
partners.
• 4. No separation of Management from owners.
• 5. LLP might not be a choice due to certain extraneous reasons.
JOINT STOCK COMPANY
• A joint stock company is a voluntary association of persons to carry on the business.
• It is an association of persons who contribute money which is called capital for some common
purpose.
• The proportion of capital to which each member is entitled is his share and every member
holding such share is called shareholders and the capital of the company is known as share
capital.
• The Companies Act 1956 defines a joint stock company as “an artificial person created by law,
having separate legal entity from its owner with perpetual succession and a common seal”.
• Shareholders of joint stock company have limited liability i.e. liability limited by guarantee or
shares. Shares of such company are easily transferable.
• Professor Haney defines it as “a voluntary association of persons for profit, having the capital
divided into some transferable shares, and the ownership of such shares is the condition of
membership of the company.”
• Justice Lindley defines a company as “A company is an association of many persons who
contribute money or money’s worth to a common stock & employ it for a common purpose”.
FEATURES OF COMPANY
Legal Formation
Artificial Person
Common Seal
Perpetual Existence
Limited Liability
Transferability of Shares
ADVANTAGES OF JOINT STOCK
COMPANY
Huge Financial Resources
Limited Liability
Continuity
Transferability of Shares
Diffusion of Risk
Efficient Management
DISADVANTAGES OF JOINT STOCK COMPANY
Difficult Formation
Lacks Flexibility
No business secrecy
Delay in decision
Oligarchic Management
COOPERATIVE SOCIETY
• According to Cooperative societies Act, 1912, Cooperative
organization is a “a society which has its objectives as promotion of
the interests of its members in accordance with the principle of
cooperation”. In other words, a society is a voluntary association of
persons who join together with the motive of welfare of the members.
• In the words of H.C. Calvert, a cooperative society is “a form of
organization wherein persons voluntarily associate together as
human beings on the basis of equality for the promotion of economic
interests of themselves”.
FEATURES OF COOPERATIVES
Registration
Voluntary Membership
Democratic Management
Service Motive
Limited Liability
Finance
Open Membership
Democratic Management
Limited Liability
Low Prices
Mutual Help
DISADVANTAGES OF COOPERATIVES
Limitation of Capital
State Control
Inefficient Management
Lack of Motivation