5 COMPANY
The company form of
organisation is considered to be most suitable for organising business
activities on a large scale as it does not suffer from the limitations of
capital and management of other forms of organisation. The sole proprietorship,
partnership and Co-operative organisation are not capable of undertaking large
scale activity due to lack of adequate capital and limited managerial
abilities. In a company organisation those problems can be easily overcome. It
has the advantage of attracting huge capital from the public due to the limited
liability of members. With adequate capital it can also employ trained and
experienced managers to run the business activities efficiently.
3.5.1 Meaning
A company is defined as
a voluntary association of persons having separate legal existence, perpetual
succession and a common seal. As per the definition, there must be a group of
persons who voluntarily agree to form a company. Once formed the company
becomes a separate legal entity with a distinct name of its own. Its existence
is not affected by change of members. It must have a seal to be imprinted on
documents whenever required. The capital of a company consists of transferable
shares, and members have limited liability.
3.5.2 Features of a Company
The following are the
chief characteristics of the company form of organisation:
(i)
Registered body: A company comes into existence only after its
registration. For that purpose, necessary legal formalities have to be completed
as prescribed under the Companies Act.
(ii)
Distinct legal entity: A company is regarded as a legal entity separate from its
members. Thus a company can carry on business in its own name, enter into
contracts, sue, and be sued.
(iii)
Artificial person: A company is the creation of law and has a distinct
entity. It is therefore, regarded as an artificial person. The business is run
in the name of the company. But because it is an artificial person, its
functions are
40 DIPLOMA
IN INSURANCE SERVICES
Forms of Business Organisation
performed by the elected representatives of members, known as
directors.
(iv)
Perpetual succession: A company has continuous existence independent of its
members. Death, insolvency, or change of members has no effect on the life of a
company. The common saying in this regard is that members may come, members may
go, but the company goes on forever. The life of the company can come to an end
only through the prescribed legal procedure.
(v)
Common seal: Since a company is an artificial person, it has no
physical existence. The activities of the company are carried through a group
of natural persons elected by its members (called directors). Every company
must therefore, have a common seal with its name engraved on it. Anyone acting
on behalf of the company must use the common seal to bind the company.
(vi)
Limited liability: The liability of the members of a company is limited. It
is limited to the extent of capital agreed to be contributed. Beyond that
amount, the members cannot be personally held liable for payment of the
company’s debts.
(vii)
Transferability of
shares: The capital of a
company is divided into parts called shares. Normally the shares of a
company are freely transferable by its members. However, transferability is
restricted in the case of private company.
3.5.3 Merits of Company
The
most important advantages of a company organisation may be stated as follows:
(i)
Collection of huge
financial resources: The biggest advantage
of a company organisation is that it has the ability to collect large amounts
of funds. This is because a company can raise capital by issuing shares to a
large number of persons. Shares of small value can be subscribed even by people
with small savings. In addition, company can also raise loans from the public
as well as different lending institutions. Availability of necessary funds
makes it possible for a company to undertake business activities on a large
scale.
(ii)
Limited liability: Another advantage of the company form of organisation is
the limited liability of members. With
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DIPLOMA IN INSURANCE
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Forms of Business
Organisation
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Business Environment
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the
liability of members limited to the value of their shares,
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company is able to
attract many people to invest in its
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shares. It is thus in
a position to undertake business
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ventures involving
risks.
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(iii)
Free transferability of
shares: A company permits its
Notes members to transfer
their shares. Free transferability of shares provides liquidity of the
member’s investment. Thus, if a member needs cash he can sell his shares. Or,
he can use the same amount to buy shares of another more profitable company. It
enables profitable companies also to attract funds away from the less
profitable ones.
(iv)
Durability and
stability: A company is the only
form of organisation which enjoys continuous existence and stability.
The funds invested in a company by shareholders are not withdrawal until it is
wound up. Also any change in the company’s membership does not affect its life.
As a result of this, a company can undertake projects of long duration and
attract people to invest in the business of the company.
(v)
Growth and expansion: With the large resources at its command a company can
organize business on a large scale. Once the business is started on a large
scale it gives the company strength to grow and expand. This is because of high
profits, which accrue from the economies of large-scale organisation and
production.
(vi)
Efficient management: Since a company undertakes large-scale activities, it
requires the services of expert professional managers. Competent managers can
be easily hired by a company because it commands large financial resources.
Thus, efficient management is ensured in a company organisation.
(vii)
Public confidence: A company enjoys great confidence and trust of the
general people. Companies have to disclose the results of their activities and financial
position in the annual reports. The reports are available to the public. It is
on the basis of the annual reports and other information that investment is
made in companies.
(viii)
Social benefits: Apart from the benefits mentioned above, a company organisation
also offers the following social benefits:
42 DIPLOMA
IN INSURANCE SERVICES
Forms of Business Organisation
(a)
Democratisation of
management: In the company form
of organisation, management of business is entrusted to the elected
representative of shareholders, that is the directors. As a result of
democratic management the business of company is run in the best interest of
the majority shareholders.
(b)
Dispersal of ownership:
Since a large number of persons are associated with a
company as members, its ownership is widely held. Thus the benefits of the
company’s operations are distributed among a large section of people.
(c)
Assumption of social
responsibilities: Large companies
often undertake and contribute to social welfare activities by making donations
to schools and colleges, developing rural areas, running health-care
institutions, and so on.
3.5.4 Limitations
of Company Organisation
A company organisation suffers from the following limitations:
(i)
Lengthy and expensive
legal procedure: The registration of
a company is a long-drawn process. A number of documents are to be prepared and
filled . For preparing documents experts are to be hired who charge heavy fees.
Besides, registration fees have also to be paid to the Registrar of Companies.
(ii)
Excessive government
regulations: A company is subject
to government regulations at every stage of its working. A company has to
file regular returns and statements of its activities with the Registrar. There
is a penalty for non-compliance of the legal requirements. Filing returns and
reports involving considerable time and money is the responsibility of a
company. All this reduces flexibility in operations.
(iii)
Lack of incentive: The company is not managed by shareholders but by
directors and other paid officials. Officials do not have investment in the
company and also do not bear the risks. As such, they may not be as much
motivated to safeguard the interests of the company as the shareholders.
(iv) Delay in
decision-making and action: In large companies,
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Business Environment
Notes
DIPLOMA IN INSURANCE
SERVICES 43
Business Environment
Notes
Forms of Business Organisation
decision making and its
implementation happen to be a time consuming process. This is obviously because
individual managers are unable to take decisions on their own.They may have to
consult others which may take a lot of time. Similarly, after decisions are
taken, they have to be communicated to people working at various levels of the
organisation. It also delays the implementation of already delayed decisions.
(v)
Conflict of interest: A company is generally characterised by a large
organisation with many groups operating in it. So long as the interests of
these groups do not clash with each other they work for the good of the
organisation. But sometimes, individual and group interests become difficult to
reconcile. For instance, the sales manager may be interested in the quality of
products to satisfy customers and increase sales, but the production manager
may be more concerned with maximum production without regard to the product
quality. In such a situation, the business is bound to suffer in course of time
unless there is a reconciliation of the conflicting view points of the two
managers.
(vi)
Oligarchic management: The company management may seem to be fully democratic,
but in actual practice, it is the worst form of oligarchy i.e. control by a
small group of persons. People who are once elected as directors of a company
adopt various means to get themselves re-elected over and again. Such
individuals often exploit the company for personal interests instead of working
in the interest of shareholders.
(vii) Speculation: In
speculation, profit is fought to be made by manipulating prices of
shares without actually holding shares. A company organisation provides scope
for speculation in shares by the directors. Because directors have knowledge of
all information about the functioning of Company, they can use it to their
personal advantage. For example, directors may sell or buy shares knowing that
prices will decline or go up because of low or high profits. As a result of
this, innocent shareholders may suffer loss.
44 DIPLOMA
IN INSURANCE SERVICES
Forms of Business Organisation
(viii) Growth of monopolistic tendencies: A company because of its large size has the tendency to
grow into a monopoly so as to eliminate competetion , controll the market and
charge unreasonable prices to maximise profits. .
(ix)
Influencing government
decisions: Big companies are generally
in a position to influence government officials to make decision in their
favour. This is because such companies have large financial resources and are
in a position to bribe even high officials.
From the preceding
discussion it is clear that the company form of organisation is best suited to
those lines of business activity which are to be organised on a large scale,
require heavy investment of capital with limited liability of members. That is
why enterprises producing steel, automobiles, computers and high technology
products are generally organised as companies.
3.6 Limited Liability Partnership (LLP)
Meaning
LLP, a legal form
available world-wide is now introduced in India and is governed by the Limited
Liability Partnership Act 2008, with effect from April 1, 2009..
LLP combines the
advantages of ease of running a Partnership and separate legal entity status
and limited liability aspect of a Company.
3.6.1 Main features of a LLP
I.
LLP is a separate legal
entity separate from its partners, can own assets in its name, sue and be sued.
II.
Unlike corporate
shareholders, the partners have the right to manage the business directly
III.
One partner is not
responsible or liable for another partner’s misconduct or negligence.
IV. Minimum
of 2 partners and no maximum.
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DIPLOMA IN INSURANCE
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Forms of Business
Organisation
V. Should
be ‘for profit’ business.
VI. Perpetual
succession.
VII. The
rights and duties of partners in LLP, will be governed by the agreement between
partners and the partners have the flexibility to devise the agreement as per
their choice. The duties and obligations of Designated Partners shall be as
provided in the law.
VIII.
Liability of the partners is limited to the extent of his contribution in the
LLP. No exposure of personal assets of the partner, except in cases of fraud.
IX. LLP
shall maintain annual accounts. However, audit of the accounts is required only
if the contribution exceeds Rs. 25 lakhs or annual turnover exceeds Rs.40
lakhs.
3.6.2 Merits
a.
Lower cost of formation.
b.
Lesser compliance requirements.
c.
Easy to manage and run.
d.
Easy to wind-up and dissolve.
e.
No requirement of minimum capital contributions.
f.
Partners are not liable for the acts of the other partners.
g.
No minimum alternate tax (as of date).
3.6.3 Demerits
a.
LLP cannot raise money from the public.
b.
Financial Institution
may not lend the large amount the LLP.
3.6.4 Process for incorporating a LLP
The
Registrar of Companies (ROC) is the authority having jurisdiction over the
incorporation.
a.
Decide on the Partners and the Designated Partners.
b.
Obtain Designated
Partner Identification Number (DPIN) and a digital signature certificate.
46 DIPLOMA
IN INSURANCE SERVICES
Forms of Business Organisation
c.
Decide on the name of
the LLP and check whether it is available.
d.
Draft the LLP agreement
e.
File the LLP Agreement,
incorporation documents and obtain the Certificate of Incorporation.
3.6.5 Distinction of Company, partnership firm and LLP
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Features
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Company
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Partnership
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LLP
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firm
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Registration
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Compulsory
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Not
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Compulsory
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registration required
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compulsory.
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registration
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with the ROC.
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Unregistered
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required with
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Certificate of
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Partnership
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the ROC
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Incorporation is
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Firm will not
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conclusive evidence.
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have the ability
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to sue.
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Name
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Name of a public
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No guidelines.
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Name to end
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company to end with
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with “LLP””
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the word “limited”
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Limited
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and a private
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Liability
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company with the
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Partnership”
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words “private
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limited”
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Capital
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Private company
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Not specified
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Not specified
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contribution
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should have a
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minimum paid up
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capital of Rs. 1 lakh
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and Rs.5 lakhs for a
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public company
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Legal entity
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Is a separate legal
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Not a separate
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Is a separate
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status
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entity
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legal entity
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legal entity
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Liability
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Limited to the extent
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Unlimited, can
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Limited to the
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of unpaid capital.
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extend to the
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extent of the
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personal assets
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contribution to
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of the partners
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the LLP.
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No. of
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Minimum of 2. In a
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2- 20 partners
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2. No
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shareholders /
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private company,
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Minimum of
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maximum.
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Partners
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maximum of 50
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shareholders
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Foreign
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Foreign nationals
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Foreign
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Foreign
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Nationals as
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can be shareholders.
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nationals
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nationals can
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shareholder /
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cannot form
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be partners.
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Partner
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partnership
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firm.
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47
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Notes
Forms of Business
Organisation
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Taxability
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The income is taxed
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The income is
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Not yet
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at 30% +
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taxed at 30% +
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notified.
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surcharge+cess
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surcharge+cess
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Meetings
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Quarterly Board of
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Not required
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Not required.
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Directors meeting,
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annual shareholding
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meeting is mandatory
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Annual Return
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Annual Accounts and
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No returns to be
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Annual
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Annual Return to be
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filed with the
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statement of
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filed with ROC
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Registrar of
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accounts and
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Firms
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solvency &
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Annual Return
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has to be filed
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with ROC
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3.6 SUMMARY
CHOICE OF FORM OF ORGANISATION
Having discussed the
characteristics, merits, limitations of the various form of organisation (sole
proprietorship, partnership, co-operative and company organisation) we may
consider how to select most suitable form of organisation for a business
venture. Choice of a suitable form of organisation is important because the
success and growth of a business depends a great deal on it. The form of
organisation determines availability of finance, risk associated with business,
division of profit, owners’ control, Stability and durability of business, and
so on. Since business and entrepreneurial objectives vary, no single form of
organisation can be considered as the best for all kind of business. The
selection of a suitable form of organisation is generally made after careful
consideration of the following factors:
(i)
Scale of operations-manufacturing, trading, service;
(ii)
Scale of
operations-volume of business (small, medium, large) and the market area served
(local, national, international);
(iii)
Financial requirements
for starting and expanding business;
(iv)
Degree of direct control desired by owners;
(v)
Degree of risk and liability;
(vi)
Division of profit;
48 DIPLOMA
IN INSURANCE SERVICES
Forms of Business Organisation
(vii)
Flexibility of operations;
(viii) Stability
of business;
(ix)
Legal procedure.
It needs to be
emphasized that these factors are inter-related and influence each other. For
instance, the financial requirements of a business depend upon the nature of
business as well as the scale of operations. The establishment of an industrial
enterprise on a large scale would need greater outlay of the capital, than a
small enterprise for the same purpose. Similarly, the degree of risk and liability
will depend both on the amount invested and the nature of demand for the
products of the enterprise. Thus, for a small enterprise (say, a workshop or a
grocery shop) the risk will be limited and so will be the owner’s liability,
even if his personal assets may be used to discharge business debts. Control
and sharing of profit are interconnected and both are related to the risk and
liability. If the risk and liability are not heavy, the entrepreneur would not
like to give up control and share profits with others.
3.7 TERMINAL QUESTIONS
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1.
Explain the features of partnership.
2.
Distinguish between Private & Public company.
3.
Write short note on
a)
Co-operative organization
b)
Sole proprietorship
3.8 OBJECTIVE TYPE QUESTIONS
1.
There are ____forms of business organization.( four/five)
2.
Choose the correct option
a.
Limited liability of
the partners in Limited liability Partnership
b.
Shareholders have limited liability
c.
Singe proprietor has unlimited liability.
d.
All the above
MODULE - 1
Business Environment
Notes
DIPLOMA IN INSURANCE
SERVICES 49
Business Environment
Notes
Forms of Business
Organisation
3.
Statement A: A
Partnership deed is basic document in partnership
Statement B: LPP should be registered with the Registrar of
Companies.
a. Only A is true b. Only B is true c. Both are true d. Neither
of two
4.
Choose the wrong option
a.
Maximum partners can be 20 in the partnership firm.
b.
Maximum partners can be unlimited in LLP
c.
Maximum shareholders
are unlimited in private company
d.
Sole proprietorship cannot have the partner.
5.
Choose the correct option
Statement A:
Cooperative organization is a voluntary association.
Statement B: Every member has the equal rights in the
Cooperative organization.
a. Only A is true b. Only B is true c. Both are true d. Neither
of two
6.
Choose the correct option
Statement A: Partnership has legal entity.
Statement B: LPP has no
legal entity.
a. Only A is true b. Only B is true c. Both are true d. Neither
of two
7.
Choose the correct option
Statement A: There
should be minimum Directors 2 in private company.
Statement B: There should be maximum 20 directors in a
partnership firm.
a. Only A is true b. Only B is true c. Both are true d. Neither
of two
8.
Choose the correct option
a. Shares in a company
are transferrable.
50 DIPLOMA
IN INSURANCE SERVICES
Forms of Business Organisation
b.
Shares in LPP are transferable.
c.
Share can be returned to the society
d.
All the above
9.
Choose the correct option
Statement A: The service is the motive of the cooperative
societies.
Statement B: LPP is
also formed to serve society.
a. Only A is true b. Only B is true c. Both are true d. Neither
of two
10.
Choose the wrong option
a.
Minimum 2 and maximum
50 shareholders in private limited company
b.
Minimum 2 and maximum
unlimited shareholders in public limited company
c.
Minimum 2 and maximum unlimited partners in LPP
d.
None of them
3.9 ANSWERS TO INTEXT QUESTIONS
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3.1
1.
The liability of sole proprietor ship firm is unlimited.
2.
Minimum two persons are
required to form a partnership firm.
3.
No, it is not
compulsory but there are certain advantages to get a firm registered.
3.2
1.
The main aim is to serve the members.
2.
Each member has one
vote irrespective of the shares held by him.
