WHAT IS COMPANY AND OTHER FORMS OF BUSINESS ORGANIZATIONS

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This article is written by Khizra Khan of 6^th semester of CSJMU, Kanpur, an intern under Legal Vidhiya.

ABSTRACT

Nowadays, business matters have become more complex, so they cannot be discussed on family gatherings or festive. So, a corporate body i.e. Company have been formed. In this research article, we will read about the Company and other forms of business organization. It contemplates an understanding of Company with respect to corporate body and illegal association. This article encloses various facets meaning, characteristics, features of company and under which act of Parliament of India it is authorized. There are several different types of business organizations that we may choose while setting up our business. It also encompasses information about the different forms of business organizations, features, and the factors governing the decisions for suitable forms of organization.

KEYWORDS

Complex, Company, Characteristics, Features, Authorized, Business Organizations, Factors

INTRODUCTION

Business plays a vital role at the global level. In today’s highly advanced society, businesses have given rise to different business organizations which have widened the scope of employment opportunities. A company is a group of persons which is formed for the purpose of earning profit. It is a separate legal entity and is registered as an artificial person under Companies Act. A company is authorized under The Companies Act, 2013, an act of Parliament of India. On the other hand, an organization which is involve in some commercial activities with an aim to earn profit is generally known to be a Business Organization. There are different forms of business organizations that relate to how the business is established, owned, and operated. There are mainly four different forms of Business Organizations which include proprietorship, partnership, Joint Hindu family business, cooperative society.

COMPANY

Derivation

The word “company” is a derivative of a Latin word “Companis”, which is made up of two words ‘Com’ and ‘panis’. ‘Com’ means together and ‘panis’ means bread. Originally the word ‘Company’ implicated, a group of persons who come to ate together.

Definition

The Companies Act, 2013

Section 2(20) – “A Company means a company formed and registered under this act or any previous law”

The definitions given by some famous scholars are given below:

Chief Justice Marshall

“A Corporation is an artificial being, invisible, intangible, existing only in contemplation of the law”

Professor Haney

“A Company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.”

With the help of these definitions we have a clear view about the meaning of company in terms of its features.

In India, The Companies Bill, 2011 was passed by Lok Sabha on 18^th December, 2012 and by Rajya Sabha on 8^th August, 2013. The Companies Act receives the assent of President of India on 29^th august, 2013 and came into force with effect from 30^th August, 2013. In ‘The Companies Act, 2013’ there are 470 Sections, 29 Chapters and 7 Schedules.

In Trustees of Darmouth College V Woodward (1819) case, The Court defined Company “as a person, artificial, invisible, intangible and existing only in the eyes of law. Being a basic creation of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as accident to its very existence.”

Hence, in order to understand the meaning of a Company, it is important to look at the distinctive features that explain the dimensions of Company.

Characteristic Features

Incorporated associations of persons
A company is an incorporated or registered association of persons and no single individual can form a company.
A minimum of 7 persons can form a public company and a minimum of 2 persons are required to form a private company. Its registration is essential.
Artificial person by law
It is another important characteristic of company that it is an artificial person created by law because its birth is not a natural birth.
It is considered as a legal person who can enter into contracts, can own properties, sue and can be sued by others.
Separate Legal entity
A company acquires a separate legal entity after it is incorporated which is distinct from its members.
As a result, a company can enter into a contract, buy property in its own name, borrow or lend money, etc. Likewise other, can also file suit against a company. In other words, a company can do all such acts which a natural person would do in course of his business.

CASE: SALMON V SALMON AND COMPANY LIMITED

The verdict in this case is an important illustration of separate legal entity of company. Salmon was a trader in shoes who formed a company named Salmon and Salmon Company Limited of which he, his wife, daughter and his four son members. He sold his business to company for € 30,000 in consideration of which company allotted him € 20,000 worth of shares and € 10,000 worth of debentures. The company later wound up because of financial loss. At the time of winding up, assets of company amounted € 6,000, whereas its liabilities € 10,000 of debentures and € 7,000 unsecured creditors. The creditors put claim that since Salmon and Salmon and company, were same entity so unsecured creditors get priority over debenture holder. It was held that Salmon and Salmon and company were two separate entities and debenture holders have priority in payment.

Perpetual Succession
It is another important characteristic of company. Its existence is not dependant on that of its shareholders or directors. The shareholders or directors might change, but company goes on.
Death, insolvency or lunacy of its members has no effect on existence of company. This means that the members in company may come and go, but the company goes on.
Common seal
A company is an artificial person so it cannot put its signature on documents i.e. under law every company must have a common seal with its name engraved upon it. A common seal is the symbol of company’s identity and is as good as signature. When it puts its seal on document, the company becomes bound by the contents of the documents.
As per The Companies (Amendment) Act, 2015, now for a company to have seal is not mandatory.
Limited Liability
The liability is limited for the shareholders of the company. In case of financial loss to company, the liability of shareholders is limited to amount unpaid on their shares and their personal property cannot be used to pay company.
Example- If a person buys 1000 shares of company at Rs. 10 per share, then his/her liability is limited to Rs. 10,000 and he/she cannot be asked to pay more than that in case of company suffers loss.
Number of members
In case of a private company, the minimum number of members required is 2 and the number of members is 200. (as per Companies Act, 2013)
In public company, the minimum number of members required is 7 and the maximum number of members is indefinite and unspecified.
Separation of ownership and management
A company is deemed to be an artificial person and imaginary person and as such, it cannot manage its own affairs. The share holders are too many in numbers and scattered far wide, which makes it impossible for company affairs to be controlled by them. Besides, the objective of share holders is to make a profit, not to run the company’s business.
So, the company is administered and managed by representatives called the Directors who are appointed by the share holders. So, there is separation of ownership and management in a company.
Limitation of action
A company cannot go beyond power and objectives stated in its memorandum of association. No company can cross this limitation of action and engage itself in an activity which is not listed in its memorandum.
A company cannot of its own will start a new business or change its field of activity and do something which does not conform to its objective.
Transferability of shares
The shares or debentures or other interest of any member in a company shall be a movable property transferrable in the manner provide by the articles of the company.
So each shareholder can freely transfer his or her shares but in some specific situations, the company may impose restrictions on the transfer of shares.
Termination of existence
Like a company is born by an act of law, so it may also be terminated by law.
Company is not a citizen

A company is a legal person or entity, but under Article 19 of Indian Constitution, it is not a citizen and it has no Fundamental Rights like a citizen.

As all companies of India is controlled by the Ministry of Corporate Affairs. But during pandemic 2013 companies act has been amended by the Ministry of Corporate Affairs by 2020 act and a provision 2(1)(e) has been inserted. This provision explains that a company is forced to disclose their research activity to CSR separately in its annual report which is included in board report. Thus, this amendment made by MCA help in company management and also helps company in crucial time.

BUSINESS ORGANIZATIONS

Business Organizations states in what way businesses are structured and how their structure helps them to meet their goals. Generally, businesses are planned to focus on generating profit.

Every business entity adopts some forms of business organization to carry out business activities. There are various forms of business organizations listed below:

Sole proprietorship
Joint Hindu family business
Partnership
Cooperative societies

For a better understanding of business organizations, they are described below:

Sole Proprietorship

Here, ‘Sole’ states ‘one’ and ‘Proprietor’ states ‘owner’. When a single individual own, manage and control a business, it is said to be Sole Proprietorship Organization. So, we can say that a single owner is responsible for the management and control of this business.

Features

The important features of sole proprietorship organization are mentioned below:

Single ownership: This firm is owned by a single individual only. All capital is supplied by single individual from his own wealth or from borrowed fund.
Formation and closure: It has no separate law that governs sole proprietorship. And has no legal formalities are required to start and close sole proprietorship. Thus, there is no difficulty in formation as well as closure of business.
Liability: Sole proprietors have unlimited liability. In case of any losses in business, the proprietor has to sell personal property to repay firm’s debt.
Control: The right to run the business and make all decisions is absolutely in the hand of the sole proprietor. He can carry out his/her plans without any interference from others.
No separate entity: In the eyes of law, there is no difference between the owner and his business and the business doesn’t have a separate identity from the owner. Business and the owner exist together.

Joint Hindu Family Business

Joint Hindu family business is a particular form of business organization found only in India. It the oldest form of business organization in the country.

This kind of business is not governed by Industrial or Company Act but it is governed by the Hindu succession Act, which exists in Hindu Law.

The Joint Hindu family business is controlled by head of the family, who is the eldest member and is known as Karta. All the members who have equal ownership right over the property of an ancestor and they are known as co-parceners.

Features

The following are the essential characteristics of the joint Hindu family business.

Formation: In the formation of the Joint Hindu family business, at least two members in the family must be there and the ancestral property to be inherited by them. The business does not require any agreement as membership is by birth and is governed by Hindu Succession Act, 1956.
Liability: The liability of all members except the Karta is limited up to their share in the business. However, Karta liability is unlimited so his personal assets can also be used for paying back the debts of the business.
Control: The family business is managed and controlled by the most senior member of the family who is known as Karta.
Continuity: The business continues even after Karta as the next eldest member of family takes up that position. The business can, nevertheless, be terminated with the mutual consent of the members.
Minor members: The admittance of an individual into business occurs due to birth in a Hindu Undivided family. Hence, minors can also be members of the family business.

Partnership

Partnership is the formal management of two or more persons who agrees to jointly pursue a business. The partners pool their managerial and financial resources for the purpose. It serves as an answer to the needs of greater capital investment, varied skills and sharing of risks.

Features

The following features of partnership are:

Formation: The partnership firm of business organization is governed by the Indian Partnership Act, 1932. It comes into existence by legal agreement wherein the conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business specified. It is important that the business must be lawful and run with the motive of profit.
Liability: There is unlimited liability for the partners in the firm. Further, the partners are individually and collectively liable to pay back the debts of firm. So at the time of losses, if firm assets are not sufficient to pay debts, then each partner have to pay debts from their personal property.
Risk bearing: The partners bear the risks involved in running a business as a team. The reward comes in the forms of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio in the event of the firm sustaining losses.
Decision making: All the partners are allowed to manage and control partnership firms. Generally, decisions are taken with mutual consent. Thus, the activities of partnership firm are managed through the joint efforts of all partners.
Number of partners: The minimum number of partners to form a partnership firm is two and as per Section 464 of Companies Act, 2013, the maximum number of partners required is 100. Now, at present as per Rule 10 of Companies Act 2014, the maximum number of partners prescribed by government is 50.

Cooperative Society

The expression ‘Cooperative’ means working together with others for a common purpose.

It is a voluntary association of persons ho joint together for mutual help. It is compulsory to register the cooperative society under Cooperative Societies Act 1912.

Features

Voluntary membership: The membership of cooperative societies is voluntary in nature. A person is free to join a cooperative society as per his/her interest. Hence, the membership is open to all members irrespective of their caste, creed and religion.
Legal status: It is compulsory for a society to get registered. After registration, the cooperative society gets a legal status and can hold property, can sue and can be sued.
Limited liability: The liability of members of cooperative society is limited to the extent of contributed by them as capital.
Service motive: The main motive of cooperative society is to provide service and not to earn profit.
Equal voting rights: It work on the principle of “one man- one vote”. It means that a person having different number of shares will get one voting right only.

CONCLUSION

We can conclude that Company is a suitable form for heavy and basic industries, large-scale operations, business which requires huge funds and involves heavy risks. It is important to know the basis of business organization as it is the foundation on which a company is established.

REFERENCES

BOOKS