Forms of Organization

You can carry on business in a variety of forms to suit your requirements. The most common forms of business organizations are as follows

Sole Proprietary: Under this form, you are the sole owner of your business and you may carry on the business by employing others. This form is suitable for very small businesses and is usually favoured where the transactions are not many. The liability would be unlimited and you would be responsible for settling your dues even by disposing off your personal assets.

Hindu Undivided Families: This is perhaps the earliest form of a corporate business entity known to mankind and is the normal state of the Hindu Society. Under this system, a family headed by a patriarch; usually the eldest male member (called the Karta) holds property jointly and in common with the other members (called coparceners) of the family up to 3 generations below the karta. A single entity is presented to the outside world through the Karta, while the members share the profits within according to their agreements. A child gets an automatic interest in the common property at birth and at each death the share of other members is realigned. Each member of the family is also entitled to hold property in his individual name with his personal skills and need not account for the same to the other coparceners. The entity has a separate legal existence and is distinct from the people who constitute it. There is perpetual succession and births and deaths do not dissolve the entity. The liability is unlimited to the extent of the family’s properties and any member wishing to break his association may demand a partition of the property and start his own family with his share. One has to be necessarily a Hindu by religion with a family to have this form of organization. The term ‘Hindu’ for this purpose would include Jains, Buddhists and Sikhs too.

Partnerships: Any two or more persons who have agreed to share profits and losses of any business to be carried on by them may enter into a deed of partnership for this purpose. The deed may also provide for separate interest on capital invested and salaries to the partners. The partnership form of organization provides a bit of division of labour and skills but otherwise has all the disadvantages of a sole proprietary concern. Under law, each partner is jointly and severally liable for all debts of the firm to an unlimited extent.

Limited Liability Partnerships: The LLPs are corporate partnerships which seek to give the advantages of both traditional partnerships and companies. Any two persons may enter into a partnership by registering under the The Limited Liability Partnership Act, 2006. The LLP provides the flexibility of a regular partnership with the benefit of limited liability for its partners.

Limited Liability Companies: This is by far the most popular form of organisation where the anticipated business is substantially large. Many entrepreneurs also graduate to this form of organization after starting their operations in either of the modes mentioned above.

The Companies are regulated by a central legislation known as the Companies’ Act, 1956 and are broadly classified as Private and Public Companies.

A minimum of 2 shareholders is required to form a Private Company, which should also have 2 Directors. A private company cannot have more than 50 shareholders and is also prohibited from issuing shares or debentures to the general public. Its shares are also not freely transferable and are normally under the control of the Board of Directors.

A public company should have a minimum of 7 shareholders and 3 Directors. Although not mandatory, this kind of company may collect funds from the public by offering shares and can have its shares freely transferable and traded by listing them in a recognized stock exchange.

A company is required to have 2 kinds of documents viz., the Memorandum and the Articles of Association. The Memorandum of Association, among other things lists the name, objects and authorised capital of the company. The Articles on the other hand is a document that lays down the rules of internal management for the company. Both these documents are subservient to the Companies’ Act.

All companies are subject to control by law, which requires them to have their accounts audited and laid before the shareholders in an annual meeting. Normally, management of the company vests with the Board of Directors, while certain decisions require the approval of the shareholders. Usually one share carries one vote and therefore the person holding or controlling 51% of the total issued capital can effectively own the company. An ordinary resolution is one which requires a simple majority among the people present and voting, while a special resolution requires three fourth majority. Under law, all special resolutions are required to be registered with the Registrar of Companies.

A company is permitted to issue 2 kinds of shares viz., Equity shares and Preference Shares. The holders of Preference shares are entitled to receive dividend before the Equity holders. But the dividend on a preference share is limited and the holders of such shares normally do not have voting rights, unless the subject matter of discussion concerns their own interests. Shares can be issued at par value or at a premium, while the first issue of a share cannot be at a discount. Under Indian laws, the share capital once collected is normally non refundable and the shareholders are only entitled to receive dividends and cannot draw freely from the funds of the company. Dividends again can be paid only if the company has earned profits and has paid the full income tax. The Directors are however entitled to draw salaries for their work even in the absence of profits.

Trusts & Societies: Business may also be carried on by creation of trusts and societies. Trusts can be for private benefit of a few members or for public charitable purposes. Persons involved in a similar kind of business or vocation normally form societies to have better bargaining power or marketability. Typical examples are the milk unions among farmers, co-operative societies among nurserymen etc. The society purchases the produce of its members and sells it under a single brand name. The co-operative society is also a corporate entity but unlike the companies, the normal rule here is that irrespective of the number of shares held, a person will have only one vote.