Subject: BUSINESS ORGANISATION AND MARKET DYNAMICS

UNIT 1: FORMS OF BUSINESS ENTITIES: Business-Meaning, Definitions and

Features, Major Forms of Business -Sole Trading concern- Meaning, definition and features -
Partnership Firm -Meaning, Definitions, Features and limitation and Joint Stock Companies –
Meaning, Definitions, Features and Classification-Private Companies – Meaning, Definition,
Features, Privileges, Merits and Limitations-Public Companies – Meaning, Definition,
Features, Merits and Limitations- Distinctions between private and public companies – One
man company-Limited liabilities partnership (LLP)

Introduction:

In Layman terms, business means to get something at low cost and sell it at a higher cost,
meanwhile, the margin produced between that is the profit. Business’s only purpose is profit,
it is driven by it. Business is derived from the word ‘busyness’ meaning engaged in an
activity.

If we were to define business in much finer terms, we can say that “Business is any
occupation which includes all activities which are connected with production or procurement
of goods for sale and adding a profit margin to those costs for further selling it to the
customer for the satisfaction of their needs.”

Most importantly, the business aims at a profit but only through the satisfaction of the needs
of the customers. The business includes every occupation in which people are busy in earning
the income by the means of either producing, purchasing, selling or exchanging goods
or services to fulfil needs of other people with the objective of making a profit.

Business:

Meaning:

Business is an organization comprising people who strive together to achieve common

objectives and goals. It is important for a business organization to have a vision that implies
what it intends to achieve in the future and values that represent the organization’s integrity.

A business organization is a commercial, industrial, or mercantile enterprise, and comprises

the people who constitute it. Business is a legally-recognized organization which provides
goods, services, or both to the consumers.

Definition:

Prof. Owen defines, “A Business is an enterprise engaged in the production and distribution
of goods for sale in the market or rendering of services for a price”

R. L. Dicksee has rightly defined business as, “A form of activity pursued, primarily, with the
object of earning profit for the benefit of those on whose behalf, the activity is conducted.”

According to F. C. Hooper, “The whole complex field of commerce and industry, the basic
industries, processing and manufacturing industries, the network of ancillary services,
 distribution, banking, insurance, transport and so on, which serve and interpenetrate the work
of business as a whole, are business activities.”

Following are the characteristics or features of business

(1) An Economic Activity  A business is an economic activity which includes the purchase
& sale of goods or rendering of services to earn money.
 It is not concerned with the achievement of social and
emotional objectives.
Example: Wholesaler sell goods to the retailers and retailers sell goods
to the customers.

(2) Manufacturing or  Before offering goods to the consumer for consumption it

Procurement of Services and should be manufactured or procured by businesses.
Goods  Business enterprise converts the raw material into finished
goods.
 Organisations also procure finished goods& services from the
producers to meet the needs of the customers in the market.
 Goods can be a Consumer good like sugar, pen, ghee, etc.
capital goods include machinery, furniture, services like
transportation, banking, etc.
Example: Individual retailer buys the toffees from wholesalers in a
specific quantity and sells it to the ultimate consumer.

(3) Exchange or Sale of Goods  Every business activity includes an exchange or transfer of
and Services for the services and goods to earn value.
Satisfaction of Human Needs  Producing goods for the goal of personal consumption is not
included in business activity.
 So, there should be the process of sale or exchange of goods or
services exits among the seller and the buyer.
Example: A lady who bakes pastries and cakes at home and sells it to
the pastry shop is a business activity.

(4) Dealings With Goods and  Every business, rendering either services or goods should deal
Services on a Daily Basis on a daily basis.
 A one-time sale is not considered a business activity.
Example: If a person sells his old car through OLX even at a profit will
not be considered as a business activity. But if he is engaged in
regularly trading of cars at his showroom will be considered as
business activity.

(5) Profit Earning  No business can last for long, without making a profit.
 The purpose to conduct the business is to earn profits and
minimise the cost.
Example: A business house tries to reduce the cost of production and
the cost of raw material to earn high profits.

(6) Uncertainty of Return  The possibility of earning profit or loss is very uncertain and
can’t be anticipated by the entrepreneur.
 Hence, no business can totally do away with risks.
Forms of Business Organisation:

Business organisations can be of different types, depending upon factors like their nature, the
extent of operation, ownership, legalities, terms, financial structure, liabilities, etc. The form
of a business is likely to have long-term impacts on the company. Thus, the members of an
organisation must choose wisely as to which sort of business would be ideal for them.
The primary aspect, based on which forms of business organisations are decided, is its
characteristics. Various factors determining the character of business include:

 Ease of Formation
 Capital or Financial Requirements
 Nature of Liability
 Control
 Stability and Continuity
 Flexibility to Conduct Operations.
 Secrecy
 Legal Aspects

Depending on the factors mentioned above, there can be different forms of business
organisations as mentioned below:

Sole Proprietorship concern:

Do you often go in the evenings to buy registers, pens, chart papers, etc., from a small
neighbourhood stationery store? Well, in all probability in the course of your transactions,
you have interacted with a sole proprietor. Sole proprietorship is a popular form of business
organisation and is the most suitable form for small businesses, especially in their initial
years of operation. Sole proprietorship refers to a form of business organisation which is
owned, managed and controlled by an individual who is the recipient of all profits and bearer
of all risks. This is evident from the term itself. The word “sole” implies “only”, and
“proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a
business. This form of business is particularly common in areas of personalised services such
as beauty parlours, hair saloons and small scale activities like running a retail shop in a
locality.

J.L. Hansen defines Sole proprietorship concern as ‘Sole trader 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.’

L.H. Haney defines Sole proprietorship concern as ‘The individual proprietorship is the form
of business organisation at the head of which stands an individual as one who is responsible,
who directs its operations and who alone runs the risk of failure.’

Features:

Salient characteristics of the sole proprietorship form of organisation are as follows:

(i) Formation and closure: There is no separate law that governs sole proprietorship. Hardly
any legal formalities are required to start a sole proprietary business, though in some cases
one may require a license. Closure of the business can also be done easily. Thus, there is ease
in formation as well as closure of business.

(ii) Liability: Sole proprietors have unlimited liability. This implies that the owner is
personally responsible for payment of debts in case the assets of the business are not
sufficient to meet all the debts. As such the owner’s personal possessions such as his/her
personal car and other assets could be sold for repaying the debt. Suppose the total outside
liabilities of XYZ dry cleaner, a sole proprietorship firm, are Rs. 80,000 at the time of
dissolution, but its assets are Rs. 60,000 only. In such a situation the proprietor will have to
bring in Rs. 20,000 from her personal sources even if she has to sell her personal property to
repay the firm’s debts.

(iii) Sole risk bearer and profit recipient: The risk of failure of business is borne all alone
by the sole proprietor. However, if the business is successful, the proprietor enjoys all the
benefits. He receives all the business profits which become a direct reward for his risk
bearing.

(iv) Control: The right to run the business and make all decisions lies absolutely with the
sole proprietor. He can carry out his plans without any interference from others.

(v) No separate entity: In the eyes of the law, no distinction is made between the sole trader
and his business, as business does not have an identity separate from the owner. The owner
is, therefore, held responsible for all the activities of the business.

(vi) Lack of business continuity: The sale proprietorship business is owned and controlled
by one person, therefore death, insanity, imprisonment, physical ailment or bankruptcy of the
sole proprietor will have a direct and detrimental effect on the business and may even cause
closure of the business.

Merits:

Sole proprietorship offers many advantages. Some of the important ones are as follows:

(i) Quick decision making: A sole proprietor enjoys considerable degree of freedom in
making business decisions. Further the decision making is prompt because there is no need to
consult others. This may lead to timely capitalisation of market opportunities as and when
they arise.

(ii) Confidentiality of information: Sole decision making authority enables the proprietor to
keep all the information related to business operations confidential and maintain secrecy. A
sole trader is also not bound by law to publish firm’s accounts.

(iii) Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she
is the sole recipient of all the profit. The need to share profits does not arise as he/she is the
single owner. This provides maximum incentive to the sole trader to work hard.

(iv) Sense of accomplishment: There is a personal satisfaction involved in working for

oneself. The knowledge that one is responsible for the success of the business not only
contributes to self-satisfaction but also instils in the individual a sense of accomplishment and
confidence in one’s abilities.

(v) Ease of formation and closure: An important merit of sole proprietorship is the
possibility of entering into business with minimal legal formalities. There is no separate law
that governs sole proprietorship. As sole proprietorship is the least regulated form of
business, it is easy to start and close the business as per the wish of the owner.

Limitations

Notwithstanding various advantages, the sole proprietorship form of organisation is not free
from limitations. Some of the major limitations of sole proprietorship are as follows:

(i) Limited resources: Resources of a sole proprietor are limited to his/her personal savings
and borrowings from others. Banks and other lending institutions may hesitate to extend a
long term loan to a sole proprietor. Lack of resources is one of the major reasons why the size
of the business rarely grows much and generally remains small.

(ii) Limited life of a business concern: The sole proprietorship business is owned and
controlled by one person, so death, insanity, imprisonment, physical ailment or bankruptcy of
a proprietor affects the business and can lead to its closure.

(iii) Unlimited liability: A major disadvantage of sole proprietorship is that the owner has
unlimited liability. If the business fails, the creditors can recover their dues not merely from
the business assets, but also from the personal assets of the proprietor. A poor decision or an
unfavourable circumstance can create serious financial burden on the owner. That is why a
sole proprietor is less inclined to take risks in the form of innovation or expansion.

(iv) Limited managerial ability: The owner has to assume the responsibility of varied
managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual
who excels in all these areas. Thus decision making may not be balanced in all the cases.
Also, due to limited resources, sole proprietor may not be able to employ and retain talented
and ambitious employees. Though sole proprietorship suffers
from various shortcomings, many entrepreneurs opt for this form of organisation because of
its inherent advantages. It requires less amount of capital. It is best suited for businesses
which are carried out on a small scale and where customers demand personalised services.

Partnership Firm:

The inherent disadvantage of the sole proprietorship in financing and managing an expanding
business paved the way for partnership as a viable option. Partnership serves as an answer to
the needs of greater capital investment, varied skills and sharing of risks.

The Indian Partnership Act, 1932 defines partnership as “the relation between persons who
have agreed to share the profit of the business carried on by all or any one of them acting for
all.”
L H Haney defines Partnership as ‘‘Partnership is the relation between persons competent to
make contracts who have agreed to carry on a lawful business in common with a view to
private gain.’’

Features:

Definitions given above point to the following major characteristics of the partnership form
of business organisation.

(i) Formation: The partnership form of business organisation is governed by the Indian
Partnership Act, 1932. It comes into existence through a legal agreement wherein the terms
and conditions governing the relationship among the partners, sharing of profits and losses
and the manner of conducting the business are specified. It may be pointed out that the
business must be lawful and run with the motive of profit. Thus, two people coming together
for charitable purposes will not constitute a partnership.

(ii) Liability: The partners of a firm have unlimited liability. Personal assets may be used for
repaying debts in case the business assets are insufficient. Further, the partners are jointly and
individually liable for payment of debts. Jointly, all the partners are responsible for the debts
and they contribute in proportion to their share in business and as such are liable to that
extent. Individually too, each partner can be held responsible repaying the debts of the
business. However, such a partner can later recover from other partners an amount of money
equivalent to the shares in liability defined as per the partnership agreement.

(iii) Risk bearing: The partners bear the risks involved in running a business as a team. The
reward comes in the form 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 incurring losses.

(iv) Decision making and control: The partners share amongst themselves the responsibility
of decision making and control of day to day activities. Decisions are generally taken with
mutual consent. Thus, the activities of a partnership firm are managed through the joint
efforts of all the partners.

(v) Continuity: Partnership is characterised by lack of continuity of business since the death,
retirement, insolvency or insanity of any partner can bring an end to the business. However,
the remaining partners may if they so desire continue the business on the basis of a new
agreement.

(vi) Number of Partners: The minimum number of partners needed to start a partnership
firm is two. According to section 464 of the Companies Act 2013, maximum number of
partners in a partnership firm can be 100, subject to the number prescribed by the
government. As per Rule 10 of The Companies (miscellaneous) Rules 2014, at present the
maximum number of members can be 50.

(vii) Mutual agency: The definition of partnership highlights the fact that it is a business
carried on by all or any one of the partners acting for all. In other words, every partner is both
an agent and a principal. He is an agent of other partners as he represents them and thereby
binds them through his acts. He is a principal as he too can be bound by the acts of other
partners.
Merits

The following points describe the advantages of a partnership firm.

(i) Ease of formation and closure: A partnership firm can be formed easily by putting an
agreement between the prospective partners into place whereby they agree to carry out the
business of the firm and share risks. There is no compulsion with respect to registration of the
firm. Closure of the firm too is an easy task.

(ii) Balanced decision making: The partners can oversee different functions according to
their areas of expertise. Because an individual is not forced to handle different activities, this
not only reduces the burden of work but also leads to fewer errors in judgements. As a
consequence, decisions are likely to be more balanced.

(iii) More funds: In a partnership, the capital is contributed by a number of partners. This
makes it possible to raise larger amount of funds as compared to a sole proprietor and
undertake additional operations when needed.

(iv) Sharing of risks: The risks involved in running a partnership firm are shared by all the
partners. This reduces the anxiety, burden and stress on individual partners.

(v) Secrecy: A partnership firm is not legally required to publish its accounts and submit its
reports. Hence it is able to maintain confidentiality of information relating to its operations.

Limitations

A partnership firm of business organisation suffers from the following limitations:

(i) Unlimited liability: Partners are liable to repay debts even from their personal resources
in case the business assets are not sufficient to meet its debts. The liability of partners is both
joint and several which may prove to be a drawback for those partners who have greater
personal wealth. They will have to repay the entire debt in case the other partners are unable
to do so.

(ii) Limited resources: There is a restriction on the number of partners, and hence
contribution in terms of capital investment is usually not sufficient to support large scale
business operations. As a result, partnership firms face problems in expansion beyond a
certain size.

(iii) Possibility of conflicts: Partnership is run by a group of persons wherein decision

making authority is shared. Difference in opinion on some issues may lead to disputes
between partners. Further, decisions of one partner are binding on other partners. Thus an
unwise decision by some one may result in financial ruin for all others. In case a partner
desires to leave the firm, this can result in termination of partnership as there is a restriction
on transfer of ownership.

(iv) Lack of continuity: Partnership comes to an end with the death, retirement, insolvency
or lunacy of any partner. It may result in lack of continuity. However, the remaining partners
can enter into a fresh agreement and continue to run the business.
(v) Lack of public confidence: A partnership firm is not legally required to publish its
financial reports or make other related information public. It is, therefore, difficult for any
member of the public to ascertain the true financial status of a partnership firm. As a result,
the confidence of the public in partnership firms is generally low.

Joint Stock Companies

A company is an association of persons formed for carrying out business activities and has a
legal status independent of its members. A company can be described as an artificial person
having a separate legal entity, perpetual succession and a common seal. The company form of
organisation is governed by The Companies Act, 2013. As per section 2(20) of Act 2013, a
company means company incorporated under this Act or any other previous company law.

The shareholders are the owners of the company while the Board of Directors is the chief
managing body elected by the shareholders. Usually, the owners exercise an indirect control
over the business. The capital of the company is divided into smaller parts called ‘shares’
which can be transferred freely from one shareholder to another person (except in a private
company).

Features:

The definition of a joint stock company highlights the following features of a company.

(i) Artificial person: A company is a creation of law and exists independent of its members.
Like natural persons, a company can own property, incur debts, borrow money, enter into
contracts, sue and be sued but unlike them it cannot breathe, eat, run, talk and so on. It is,
therefore, called an artificial person.

(ii) Separate legal entity: From the day of its incorporation, a company acquires an identity,
distinct from its members. Its assets and liabilities are separate from those of its owners. The
law does not recognise the business and owners to be one and the same.

(iii) Formation: The formation of a company is a time consuming, expensive and

complicated process. It involves the preparation of several documents and compliance with
several legal requirements before it can start functioning. Incorporation of companies is
compulsory under The Companies Act 2013 or any of the previous company law, as state
earlier. Such companies which are incorporated under companies Act 1956 or any company
law shall be included in the list of companies.

(iv) Perpetual succession: A company being a creation of the law, can be brought to an end
only by law. It will only cease to exist when a specific procedure for its closure, called
winding up, is completed. Members may come and members may go, but the company
continues to exist.

(v) Control: The management and control of the affairs of the company is undertaken by the
Board of Directors, which appoints the top management officials for running the business.
The directors hold a position of immense significance as they are directly accountable to the
shareholders for the working of the company. The shareholders, however, do not have the
right to be involved in the day-to-day running of the business.
(vi) Liability: The liability of the members is limited to the extent of the capital contributed
by them in a company. The creditors can use only the assets of the company to settle their
claims since it is the company and not the members that owes the debt. The members can be
asked to contribute to the loss only to the extent of the unpaid amount of share held by them.
Suppose Akshay is a shareholder in a company holding 2,000 shares of Rs.10 each on which
he has already paid Rs. 7 per share. His liability in the event of losses or company’s failure to
pay debts can be only up to Rs. 6,000 —the unpaid amount of his share capital (Rs. 3 per
share on 2,000 shares held in the company). Beyond this, he is not liable to pay anything
towards the debts or losses of the company.

(vii) Common seal: The company being an artificial person cannot sign its name by itself.
Therefore, every company is required to have its own seal which acts as official signature of
the company. Any document which does not carry the common seal of the company is not a
binding on the company.

(viii) Risk bearing: The risk of losses in a company is borne by all the share holders. This is
unlike the case of sole proprietorship or partnership firm where one or few persons
respectively bear the losses. In the face of financial difficulties, all shareholders in a company
have to contribute to the debts to the extent of their shares in the company’s capital. The risk
of loss thus gets spread over a large number of shareholders.

Merits

The company form of organisation offers a multitude of advantages, some of which are
discussed below.

(i) Limited liability: The shareholders are liable to the extent of the amount unpaid on the
shares held by them. Also, only the assets of the company can be used to settle the debts,
leaving the owner’s personal property free from any charge. This reduces the degree of risk
borne by an investor.

(ii) Transfer of interest: The ease of transfer of ownership adds to the advantage of
investing in a company as the share of a public limited company can be sold in the market
and as such can be easily converted into cash in case the need arises. This avoids blockage of
investment and presents the company as a favourable avenue for investment purposes.

(iii) Perpetual existence: Existence of a company is not affected by the death, retirement,
resignation, insolvency or insanity of its members as it has a separate entity from its
members. A company will continue to exist even if all the members die. It can be liquidated
only as per the provisions of the
Companies Act, 2013.

(iv) Scope for expansion: As compared to the sole proprietorship and partnership forms of
organisation, a company has large financial resources. Further, capital can be attracted from
the public as well as through loans from banks and financial institutions. Thus there is greater
scope for expansion. The investors are inclined to invest in shares because of the limited
liability, transferable ownership and possibility of high returns in a company.
(v) Professional management: A company can afford to pay higher salaries to specialists
and professionals. It can, therefore, employ people who are experts in their area of
specialisations. The scale of operations in a company leads to division of work. Each
department deals with a particular activity and is headed by an expert. This leads to balanced
decision making as well as greater efficiency in the company’s operations.

Limitations

The major limitations of a company form of organisation are as follows:

(i) Complexity in formation: The formation of a company requires greater time, effort and
extensive knowledge of legal requirements and the procedures involved. As compared to sole
proprietorship and partnership form of organisations, formation of a company is more
complex.

(ii) Lack of secrecy: The Companies Act requires each public company to provide from
time-to-time a lot of information to the office of the registrar of companies. Such information
is available to the general public also. It is, therefore, difficult to maintain complete secrecy
about the operations of company.

(iii) Impersonal work environment: Separation of ownership and management leads to

situations in which there is lack of effort as well as personal involvement on the part of the
officers of a company. The large size of a company further makes it difficult for the owners
and top management to maintain personal contact with the employees, customers and
creditors.

(iv) Numerous regulations: The functioning of a company is subject to many legal

provisions and compulsions. A company is burdened with numerous restrictions in respect of
aspects including audit, voting, filing of reports and preparation of documents, and is required
to obtain various certificates from different agencies, viz., registrar, SEBI, etc. This reduces
the freedom of operations of a company and takes away a lot of time, effort and money.

(v) Delay in decision making: Companies are democratically managed through the Board of
Directors which is followed by the top management, middle management and lower level
management. Communication as well as approval of various proposals may cause delays not
only in taking decisions but also in acting upon them.

(vi) Oligarchic management: In theory, a company is a democratic institution wherein the

Board of Directors are representatives of the shareholders who are the owners. In practice,
however, in most large sized organisations having a multitude of shareholders; the owners
have minimal influence in terms of controlling or running the business. It is so because the
shareholders are spread all over the country and a very small percentage attend the general
meetings. The Board of Directors as such enjoy considerable freedom in exercising their
power which they sometimes use even contrary to the interests of the shareholders.
Dissatisfied shareholders in such a situation have no option but to sell their shares and exit
the company. As the directors virtually enjoy the rights to take all major decisions, it leads to
rule by a few.

(vii) Conflict in interests: There may be conflict of interest amongst various stakeholders of
a company. The employees, for example, may be interested in higher salaries, consumers
desire higher quality products at lower prices, and the shareholders want higher returns in the
form of dividends and increase in the intrinsic value of their shares. These demands pose
problems in managing the company as it often becomes difficult to satisfy such diverse
interests.

Classification of Joint Stock Company:

On the basis of mode of incorporation:

1) Chartered Company
2) Statutory Company
3) Registered Company

On the basis of Liability:

1) Limited Company

i) Company limited by shares

- Private Limited company
- Public limited company
- One Person Company

ii) Company limited by guarantee

2) Unlimited Company

On the basis of ownership/control:

1) Holding Company
2) Subsidiary Company
3) Government Company

On the basis of nationality:

1) Indian Company
2) Foreign Company

Other Companies:
1) Small Company
2) Associate Company

1) Chartered company:

A charter is a written grant of authority or rights, stating that the granter formally recognizes
the prerogative of the recipient to exercise the rights.
Chartered company, type of corporation that evolved in the early modern era in Europe. It
enjoyed certain rights and privileges and was bound by certain obligations, under a
special charter granted to it by the sovereign authority of the state, such charter defining and
limiting those rights, privileges, and obligations and the localities in which they were to be
exercised.
2) Statutory Company:
A statutory company definition is defined as a company that is created by a Special Act of the
Parliament. It is a company that provides services of value to the public.
A statutory company is usually created with the intention of serving people rather than the
traditional business goal of creating profits. A few well-known statutory companies include
the following:

 Reserve Bank of India

 State Bank of India
 Industrial Finance Corporation
 Food Corporation of India
 Life Insurance Corporation of India

Although the services of statutory companies vary, they are often created to provide a type of
public service such as insurance, water, gas, and electricity.
Features of Statutory company:

1. It is a Corporate Body

It is an artificial person created by law & is a legal entity. Such corporations are managed by the
board of directors constituted by the government. A corporation has a right to enter contracts &
can undertake any kind of business under its own name.

2. Owned by State

State provides help to such corporations by subscribing to the capital fully or wholly. It is fully
owned by the state.

3. Answerable to the Legislature:

The statutory corporations enjoy freedom in case of internal management and running of the
operations of the corporation, but are answerable to the state or government legislature that
created it.

4. Own Staffing System

Employees are not government servants, even though the government owns & manages a
corporation. They are recruited, remunerated & governed as per the rules laid down by the
corporation.

5. Financial Independence

A statutory corporation enjoys financial autonomy or independence. It is not subject to the

budget, accounting & audit controls. After getting the prior permission from the government, it
can even borrow money within & outside the country. 
3. Registered Company: A company must be registered under the Companies Act. After
registration, the Registrar of Companies issues a certificate of incorporation. After that, the
company becomes a registered company. Broadly there are two types of registered
companies, such as:
4. Limited Company: A limited liability company is a company whose liability of each
member is limited to the face value of the shares held by him and the capital of the company
is divided into a number of shares. This type of company is of two types, viz-private limited
company, and public limited company.
Company limited by Guarantee:
Sec (21) of the companies act 2013, company limited by guarantee‖ means a company having
the liability of its members limited by the memorandum to such amount as the members may
respectively undertake to contribute to the assets of the company in the event of its being
wound up;
Company limited by Shares:
Sec (22) of the companies act 2013, company limited by shares‖ means a company having the
liability of its members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them;
5. Unlimited company
In these companies, the liability of the shareholder is unlimited as in partnership firms. Such
companies are permitted under the Companies Act but are very rarely chosen.
6. Private Limited Company:
Meaning:
A private company is owned by either a small number of shareholders, company members, or
a non-governmental organization, and it does not offer its stocks for sale to the general
public.
A private company, also known as a privately held company or close corporation, is
a business whose shares are not traded in a stock market, as opposed to a public company.
Definition of Private Limited Company:
Sec 2(68) of Companies act 2013, ―private company means a company which by its articles,
—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of
the company while in that employment and have continued to be members after the
employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
Features of a Private limited Company:
Following are the features of a private limited company:

1) Members: To form a private limited company minimum of 2 members and a maximum of

200 members as per the provisions of Companies Act,2013.
2) Limited Liability: The liability of the members is limited to the number of shares held by
them. For example, if the company faces any losses under any circumstances the shareholders
are liable only to the shares held by them. The personal assets owned by the shareholders are
not at risk.
3) Perpetual Succession: The company exists in the eyes of the law even in case of death,
insolvency or bankruptcy of any of its members. This means the life of the company keeps on
existing forever.
4) Register of Members: There is no compulsion for the private limited company to maintain
the register of members as required by a public limited company.
5) Directors Requirement: Required of Directors in the case of a Private Limited company is
only 2. With a minimum of 2 directors, a company can carry on its operations.
6) Prospectus: Prospectus is the detailed statement of the affairs of the company which is
issued for the public. However, in the case of a private limited company, there is no such
need to issue prospectus.
7) Name: The private limited company must use the word “PRIVATE LIMITED
COMPANY” at the end.
Privileges of Private Limited Company:

1. Members:

A private company can be started by two persons only, whereas seven persons are required to
start a public company.

2. Prospectus:

A private company is not required to issue or file a prospectus or statement in lieu of

prospectus with the Registrar of Companies.

3. Directors:
A private company can have only two directors. It is exempted from restrictions relating to

the appointment, reappointment, retirement, and remuneration etc., of managerial personnel.

5. Shares:

A private company can issue deferred shares with disproportionate voting rights. It is not

required to observe restrictions concerning allotment of shares, minimum subscription, right

shares, investment of funds in the same groups of companies, etc.

6. Transfer of shares:

A private company can refuse to register any transfer of shares without any appeal.

7. Quorum:

Two members personally present is sufficient quorum for the general meeting of a private

company.

8. Index of members:

A private company is not required to prepare and maintain any index to the Register of

members.

9. No need to appoint independent directors.

An independent director is a non-executive director of a company who helps the company in
improving corporate credibility and governance standards. He or she does not have any kind
of relationship with the company that may affect the independence of his/ her judgment.

10. Remuneration of director

They can pay greater remuneration to their directors than compared to some other types of
companies.

11. Minimum Subscription:

Allotment of shares can be done without receiving the minimum subscription. A private
limited

company can start business as soon as it receives the certificate of incorporation.

Advantages:
1) Separate legal entity
2) Limited liability
3) Perpetual succession
4) Minimum 2 membership
5) Minimum Subscription not applicable
6) Ownership:
In the case of a public company, the shares owned can be sold to the public in the open
market. However, in the case of Private Limited company shares can be sold or transferred by
the owner as per his wish. Shares of the private limited company are owned by founders,
management and private investors. The shares of a private limited company cannot be sold in
the open market. Thus, a private limited company is owned by a smaller number of
shareholders which enables less complexity and confusion in decision making and
management.
Disadvantages:
1. One of the main disadvantages of a private limited company is that it restricts the transfer
ability of shares by its articles.

2. In a private limited company the number of members in any case cannot exceed 200.

3. Another disadvantage of private limited company is that it cannot issue prospectus to

public.

4. Shares cannot be quoted on the stock exchange.

7. Public Limited Company:

Meaning:

A public company is a corporation wherein the ownership is dispensed to general public

shareholders through the free trade of shares of stock over-the-counter at markets or on
exchanges. 

1. Public companies issue shares via an IPO and trades on a minimum of one stock

exchange.
2. Mostly, private firms go public with an aim to raise capital.

Definition:

Section 2 (71) of Companies Act 2013, public company means a company which:
(a) is not a private company;
Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where such
subsidiary company continues to be a private company in its articles;
Characteristics of Public limited company:

1. Separate Legal Entity:

A Public Company is a legal entity that has separate identity from its shareholders/members.
A company that can own property on its own name.

2. Easy Transferability

This means that a shareholder of public limited company can easily transfer its shares to the
public. There is no restriction on the transferring shares to the public or inviting the public to
subscribe shares to the public.

3. Perpetual Succession

The company can never come to an end. This means that the members/ directors/
shareholders may come and go, but the company never becomes non-existent. Due to the
death or disability, the company never dies. It continues till the company is not closed or
liquidated.

4. Limited Liability

The liability of the shareholders/directors is limited to the extent of the shares owned by
them. The shareholders are not liable personally in case of losses or debts suffered by the
company. 

5. Name

In the name of the public company, the word “LTD” will be prefixed at the end of the name.

6. Directors

In case of public company, the number of directors can be minimum 3.

7. Prospectus

When going for a primary issue, a prospectus is offered to the public. Under section 2(70) of
the Companies Act 2013, a prospectus can be understood as a document which includes a
notice or an invitation to the public to subscribe to the shares of the company.

Hence when the company issues a prospectus to the public, it is invitation to the public to
subscribe to the shares of the company.

8. Borrowing capacity

The attraction point of the public company is that it can borrow from various sources. A
public company can issue Debentures (secured or unsecured) and raise the money. It can
issue shares (equity or preference) to the public. Even banking and other financial institutions
give the loans/ financial aid to the company.

10. Number of Members

The minimum number of members in the public company required is 7 and for maximum
there is no limit.

11. Voluntary Association

It is easy to buy shares in the public company and so it is as easy to exit the public company.  

12. Minimum Subscription

The minimum amount which has to be received on the subscription of shares has to be 90
percent of the shares in the public company. When the company is not able to receive the 90
percent amount then they cannot continue with the business. They are obligated to refund the
entire money.

13. Minimum subscribers
The minimum subscriber to the Memorandum of Association of Public Company has to be 7.
They are the members of the company.

Comparison Between Public Company V/S Private Company

Point of Public Company Private Company

Difference

Use of Suffix Limited can use after the public Private Limited can be used after

company name (Example- ABC the private company name.

Limited). (Example- ABC Private Limited).

Min. Members Minimum 7 members must be Minimum 2 members must be

required to form a public required to form a private company.

company.

Max Members There is no maximum limit of The maximum limit of the member

the member in a public in a private company is 200.

company

Min Directors At least 3 directors are required At least 2 directors are required in a

in a public company. Private company.

Public Public subscription of share is Public subscription of share is not

Subscription of allowed in public companies. allowed in private companies.

Shares

Quorum at AGM 5 members should be present 2 members should be present

personally at AGM. personally at’ AGM.

 Issue of It is their mandate to issue the It is not required in a private

Prospectus prospectus. company.

Shares Share can be transferred freely Transfer of share is restricted in

Transferability in public companies. private companies.

Managerial There is no restriction is Managerial remuneration cannot

Remuneration managerial remuneration. exceed 11% of the Net Profit.

Disclosure of A public company needs to  There is no such obligation for a

Financial Report disclose its financial reports private company to disclose its

quarterly and annually. financial results to the normal

public.

Size Generally, the size of the public Normally the size of a private

company is very huge. company is small in comparison to a

public company. But a private

company also be a big company.

Funding A public company can raise Private companies can raise funds

funds by issuing an IPO in the through private investors.

general public.

Public Limited Company Advantages:

There are also specific features of a public limited company, many of which reinforce one
another, that give it some unique advantages:

1. Raising capital through public issue of shares:

The advantage of being a public limited company is the ability to raise share capital,
particularly where the company is listed on a recognised exchange.

Since it can sell its shares to the public and anyone is able to invest their money, the capital
that can be raised is typically much larger than a private limited company.

It’s also possible that having stock listed on an exchange could attract investment from hedge
funds, mutual funds and other institutional traders.

2. Widening the shareholder base and spreading risk:

Offering shares to the public gives the opportunity to spread the risk of company ownership
among a large number of shareholders. This may allow early investors in the company to sell
some of their own shares at a profit while still retaining a substantial stake in the company.

Obtaining capital from a wide range of investors has some advantages over relying on one or
two “angel investors”, as many private companies will choose to do to facilitate growth.
While an angel investor may provide a large amount of capital and expertise, the founders
may not be comfortable with the level of influence over the company’s direction that the
angel will often expect.

3. Other finance opportunities:

As well as share capital, a public limited company will often find itself in a better position
when looking at other potential sources of finance.

The demands of being a public limited company and maintaining a stock exchange listing, for
example, can help to improve a company’s creditworthiness when issuing corporate debt (and
therefore reduces the return the company needs to offer investors).

Banks and other financial institutions may be more willing to extend finance to a public
limited company, particularly one that is listed. The company could also be in a better
position to negotiate favourable interest rates and repayment terms on loans.

4. Growth and expansion opportunities:

The value of being able to raise finance is in how it can be employed to serve the business.
By having more finance potentially more readily available and on better terms than a private
company, the public limited company can be in an advantaged position to:

 Pursue new projects, new products or new markets

 Make capital expenditure to support and enhance the business
 Make acquisitions (whether in cash or by offering shares to the shareholders of the
target business)
 Fund research and development
 Pay off existing debt (or replace existing debt with new debt on better terms)
 Grow organically

5. Prestigious profile and confidence

Having ‘ltd’ at the end of a company name can add standing and prestige. There is a sense of
status about a public limited company that its private company counterpart may not have,
which can affect how the business is viewed. While often more imagined than real, this
perception of being more established, larger or more powerful can affect the behaviour of
customers, suppliers and employees.

More people are likely to be aware of the company if it is public, particularly if it’s listed on a
stock exchange. In that case, it’s more likely to receive attention from the media and
investment professionals. This is effectively free publicity, meaning more people will
recognise the company and its products or services. Better brand recognition can lead to more
sales. It may also make you more visible to valuable potential business partners.

Credibility and confidence are reinforced by:

 Operating under a stricter legal regime than private companies in many areas
 Higher share capital requirements
 Greater transparency (for example, in the required form of accounts)
 For listed companies, the indirect endorsement of having their shares listed on a
recognised exchange

Again, these factors can affect the behaviour of (potential) shareholders, customers and
business partners.

6. Transferability of shares:

The shares of a public limited company are more easily transferable than those in the private
equivalent, meaning shareholders benefit from liquidity. If shares are quoted on a stock
exchange, shareholders and potential shareholders will generally find it easier to transfer
shares in the company – although the market still relies on willing purchasers and sellers
being available.

The fact the shareholders are less bound to remain with the company can give them comfort –
and may help the company by making people more willing to invest.

Without restrictions on transferability of shares that often apply in private companies, it’s
also easier to deal with situations like a shareholder’s death, allowing shares to be transmitted
in line with the terms of any will.

7. Exit Strategy

Going public can enhance the options for the founders to exit the business at some point in
the future, if they wish to do so. Both higher transferability of shares and the increased
visibility of the business and its performance may increase the chances of bid interest from
potential suitors.

Public Limited Company Disadvantages

There are some important disadvantages of a public limited company, compared to a private
limited company. These public limited company disadvantages include:
1. More regulatory requirements:

To help protect shareholders, the legal and regulatory requirements for a public limited
company are more onerous than for private limited companies. For example, additional
restrictions include listing regulations, SEBI act etc

2. Higher levels of transparency required:

Limited companies, whether public or private, have more of their details in the public
domain, available. But the required level of transparency is much higher for public
companies.

As well as needing to have its accounts audited, public limited companies are generally
unable to file abbreviated accounts, whereas smaller private companies can often do so. The
fuller form of accounts means a public limited company has to disclose more detailed data
about the business and its performance, information which is then available to anyone who
wishes to access it.

The accounts of public limited companies are often scrutinised more by analysts and receive
more media commentary.

3. Ownership and control issues:

With a private limited company, the shareholders will typically be people known to the
directors or founders. A private company will often be selective over who to admit as a
shareholder, ensuring they support the vision and plans for the business.

With a public limited company, it’s much harder to control who is a shareholder of the
company, and who the directors are ultimately accountable to. There is therefore a possibility
that the original owners or directors can lose control of the direction of the company, face
disputes or just spend a lot more time managing shareholder expectations.

Institutional shareholders can wield particularly high levels of influence, often expecting
consultation and adoption of particular policies or standards in return for their investment.

4. More vulnerable to takeovers:

At worst, a company can become vulnerable to a hostile takeover if a majority of

shareholders agree to a bid. With shares being freely transferable, a potential bidder can build
up a shareholding in advance of launching a bid attempt.

5. Emphasis on Share price

Where a public limited company is listed, there can be added pressure imposed by the
market. The company’s share price represents the value of the company as viewed by the
market, and (potential) investors will usually expect a healthy return. As well as dividends
paid from profits, there will be a desire for the share price to increase.

This level of emphasis on the share price, usually not so immediate a demand in a private
company, can cause the directors to focus almost exclusively on short-term results. They may
therefore miss strategic opportunities or threats, thereby not achieving the best for the
business in the long-term.

6. Minimum subscription:

The minimum amount which has to be received on the subscription of shares has to be 90
percent of the shares in the public company. When the company is not able to receive the 90
percent amount then they cannot continue with the business. They are obligated to refund the
entire money.

8. One Person Company

Introduction

The Companies Act, 2013 completely revolutionized corporate laws in India by introducing
several new concepts that did not exist previously. On such game-changer was the introduction of
One Person Company concept. This led to the recognition of a completely new way of starting
businesses that accorded flexibility which a company form of entity can offer, while also
providing the protection of limited liability that sole proprietorship or partnerships lacked.
So, an OPC is effectively a company that has only one shareholder as its member. Only a
natural person who is an Indian citizen and resident in India shall be eligible to act as a
member and nominee of an OPC.

Such companies are generally created when there is only one founder/promoter for the business.
Entrepreneurs whose businesses lie in early stages prefer to create OPCs instead of sole
proprietorship business because of the several advantages that OPCs offer.

In case the paid-up share capital of an OPC exceeds fifty lakh rupees or its average annual
turnover of immediately preceding three consecutive financial years exceeds two crore
rupees, then the OPC has to mandatorily convert itself into private or public company.

Difference between Sole proprietorship and One Person Company.

A sole proprietorship form of business might seem very similar to one-person companies

because they both involve a single person owning the business, but they’re actually exist some
differences between them.

The main difference between the two is the nature of the liabilities they carry. Since an OPC is a
separate legal entity distinguished from its promoter, it has its own assets and liabilities. The
promoter is not personally liable to repay the debts of the company.
On the other hand, sole proprietorships and their proprietors are the same persons. So, the law
allows attachment and sale of promoter’s own assets in case of non-fulfilment of the business’
liabilities.

Definition of OPC

Section 2(62) as per Companies Act 2013

― One Person Company‖ means a company which has only one person as a member;
Features of a One Person Company

Here are some general features of a one-person company:

a. Private company: Section 3(1)(c) of the Companies Act says that a single person
can form a company for any lawful purpose. It further describes OPCs as private
companies.

b. Single-member: OPCs can have only one member or shareholder, unlike other

private companies.

c. Nominee: A unique feature of OPCs that separates it from other kinds of

companies is that the sole member of the company has to mention a nominee
while registering the company.

d. No perpetual succession: Since there is only one member in an OPC, his death

will result in the nominee choosing or rejecting to become its sole member. This
does not happen in other companies as they follow the concept of perpetual
succession.

e. Minimum one director: OPCs need to have minimum one person (the member)
as director. They can have a maximum of 15 directors.

f. No minimum paid-up share capital: Companies Act, 2013 has not prescribed

any amount as minimum paid-up capital for OPCs.

g. Special privileges: OPCs enjoy several privileges and exemptions under the

Companies Act that other kinds of companies do not possess.

One Person Company Advantages/Privileges:

The privileges and exemptions enjoyed by a one person company or its advantages over other
companies are as follows:

1. The financial statement may not include the cash flow statement.
2. Financial assistance can be taken by the member from the OPC for purchase of or
subscribing to its own shares.
3. The annual return shall be signed by the company secretary, or where there is no
company secretary, by the director of the company. In other words it need not be
signed by a company secretary in practice.
 4. Need not hold annual general meeting.
5. Need not prepare a report on Annual General Meeting.
6. The provisions of section 98 and sections 100 to 111 (both inclusive) of Chapter VII
shall not apply to a One Person Company.
7. For any business which is required to be transacted at an annual general meeting or
other general meeting of a company by means of an ordinary or special resolution, it
shall be sufficient if, in case of One Person Company, the resolution is communicated
by the member to the company and entered in the minutes-book required to be
maintained under section 118 and signed and dated by the member and such date shall
be deemed to be the date of the meeting for all the purposes under this Act.
8. Where there is only one director on the Board of Director of a One Person Company
and any business is required to be transacted at the meeting of the Board of Directors
of the company, it shall be sufficient if, in case of such One Person Company, the
resolution by such director is entered in the minutes-book required to be maintained
under section 118 and signed and dated by such director and such date shall be
deemed to be the date of the meeting of the Board of Directors for all purposes under
this Act.
9. Financial statement and Board’s report can be signed only by one director.
10. Need not prepare a statement indicating the manner in which formal annual evaluation
has been made by the Board of its own performance and that of its committees and
individual directors.
11. In case of a One Person Company, Board’s report shall mean only a report containing
explanations or comments by the Board on every qualification, reservation or adverse
remark or disclaimer made by the auditor in his report.
12. File a copy of the financial statements duly adopted by its member, along with all the
documents which are required to be attached to such financial statements, within 180
days from the closure of the financial year.
13. One person company need not to have more than one director on its Board.
14. Need not to appoint Independent directors on its Board.
15. Retirement by rotation is not applicable.
16. Additional grounds for disqualification for appointment as a director may be specified
by way of articles.
17. Restrictive provisions regarding total number of directorships which a person may
hold in a public company do not include directorships held in One Person Company
which are neither holding nor subsidiary company of a public company.
18. Additional grounds for vacation of office of a director may be provided in the
Articles.
19. It is required to hold at least one meeting of the Board of Directors in each half of a
calendar year and the gap between the two meetings should not be less than ninety
days. For an OPC having only 1 director, the provisions of section 173 (Meetings of
board) and section 174 (Quorum for meetings of Board) will not apply.
20. The provisions relating to contract of employment with managing or whole-time
directors does not apply to a One Person Company.

9. Government Company:
Sec 2(45) of Companies Act 2013 ―Government company‖ means any company in which
not less than fifty-one per cent. of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company;

10. Holding Company:

Sec 2(46) of Companies Act 2013 ―holding company‖, in relation to one or more other
companies, means a company of which such companies are subsidiary companies.

Hence, a holding company means a company having one or more subsidiaries.

11. Subsidiary Company:

Sec 2(87) of Companies Act 2013 ―subsidiary company‖ or ―subsidiary‖, in relation to any
other company (that is to say the holding company), means a company in which the holding
company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls
more than one-half of the total share capital either at its own or together with one or more of
its subsidiary companies.

12. Small Company:

Sec 2(85) of Companies Act 2013, small company‘‘ means a company, other than a public
company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees
or such higher amount as may be prescribed which shall not be more than twenty crore
rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

13. Associate Company:

Sec 2(6) of Companies act 2013 - associate company, in relation to another company, means
a company in which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a joint venture
company.

Explanation.—For the purposes of this clause, ―significant influence means control of at

least twenty per cent. of total share capital, or of business decisions under an agreement;

14. Foreign Company:

Sec 2(42) of Companies Act 2013, foreign company means any company or body corporate
incorporated outside India which— (a) has a place of business in India whether by itself or
through an agent, physically or through electronic mode; and (b) conducts any business
activity in India in any other manner.

15. Indian Company:

A Company registered in India is an Indian Company. An Indian Company is the one

registered in India under the Companies Act. Indian Company is treated as resident in India.
It has to pay tax in Indian for its global income.

 A company is said to be resident in India in any previous year, if:

 (i) it is an Indian company; or

 (ii) its place of effective management in that year is in India.

In case the place of effective management (POEM) is located outside India, then the
residential status of such company shall be that of a foreign company.

Limited Liability Partnership:

LLP is an alternative corporate business form that gives the benefits of limited liability of a
company and the flexibility of a partnership. The LLP can continue its existence irrespective
of changes in partners. It is capable of entering into contracts and holding property in its own
name.
The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the
partners is limited to their agreed contribution in the LLP. Further, no partner is liable on
account of the independent or un-authorized actions of other partners, thus individual partners
are shielded from joint liability created by another partner’s wrongful business decisions or
misconduct.

Mutual rights and duties of the partners within a LLP are governed by an agreement between
the partners or between the partners and the LLP as the case may be. The LLP, however, is
not relieved of the liability for its other obligations as a separate entity.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm
structure’ LLP is called a hybrid between a company and a partnership.

The LLP structure is available in countries like United Kingdom, United States of America,
various Gulf countries, Australia and Singapore. On the advice of experts who have studied
LLP legislations in various countries, the LLP Act is broadly based on UK LLP Act 2000 and
Singapore LLP Act 2005. Both these Acts allow creation of LLPs in a body corporate form
i.e. as a separate legal entity, separate from its partners/members.

Structure of LLP:

LLP shall be a body corporate and a legal entity separate from its partners. It will have
perpetual succession.

Advantages:

LLP form is a form of business model which:

(i) is organized and operates on the basis of an agreement.
(ii) provides flexibility without imposing detailed legal and procedural requirements
(iii) enables professional/technical expertise and initiative to combine with financial risk
taking capacity in an innovative and efficient manner

Difference between LLP and Partnership Firm

• Under “traditional partnership firm”, every partner is liable, jointly with all the other
partners and also severally for all acts of the firm done while he is a partner.
• Under LLP structure, liability of the partner is limited to his agreed contribution. Further, no
partner is liable on account of the independent or un-authorized acts of other partners, thus
allowing individual partners to be shielded from joint liability created by another partner’s
wrongful acts or misconduct.

Difference between LLP and companies

• A basic difference between an LLP and a joint stock company lies in that the internal
governance structure of a company is regulated by statute (i.e. Companies Act, 2013)
whereas for an LLP it would be by a contractual agreement between partners.

• The management-ownership divide inherent in a company is not there in a limited liability

partnership.

• LLP will have more flexibility as compared to a company.

• LLP will have lesser compliance requirements as compared to a company.