Manual On SEZ , FT & WZ , IFTSC - Rajkumar S. Adukia

FORMATION OF BUSINESS ENTERPRISE

The various modes in which an enterprise can be started are as follows:

1)       Proprietorship

2)       Partnership

3)       (a)  Private limited companies

       (b) Public limited companies

4)       HUF

5)       Trusts

6)       Co-operative societies

Distinguishing characteristics of each of the above:

1)       Proprietorship-

a)  It is a single person operation. There is no difference between the owner and the company.

a)       It is the easiest to set

b)       Profit of the company is the owner’s income.

c)       Liability is Unlimited i.e. Losses may have to be made good out of the personal assets of the proprietor

d)       The greatest advantage of such an organization is that it requires minimal of legal documentation.

There is no separate law on sole proprietorships

2)   Partnership

a)       Two or more persons can start a partnership

b)       The maximum number of partners which are permissible in a firm is 20 and in the case of banking firms it is 10

c)       A Partnership deed in writing Paper must be made clearly specifying the name of the partnership firm, the names of the partners, the capital to be contributed by each partner, the profit or loss sharing ratio between partners, the business of the partnership, the duties, rights, powers and obligations of each partner and other relevant details.

d)       It must be signed by all partners and witnessed by independent persons.

e)        The partnership deed must clearly specify the duties and authorities of all partners.

f)          Details of salary and other payments to partners must also be clearly specified in the partnership deed.

g)       It is not compulsory for registration of partnership deeds; however, registration ensures certain legal rights to the firm and its partners.

h)       The advantages of this form of set-up are that two or more people can come together and start a new business. The disadvantages of this set-up are more or less the same as that of a sole proprietorship concern.

i)         The liability of partners in Indian partnerships is joint and several.

j)         There is no minimum capital to be subscribed for a partnership.

k)       A partnership may be dissolved with the consent of all the partners or in accordance with the provisions in the partnership agreement.

Partnerships are governed by Partnership Act, 1932

3)       Companies

a)       Company as a legal person – can borrow, lend, enter into contracts, can sign, can sue and be sued

b)       Has a life beyond the life of the promoters

c)       Can hold assets of its own

d)       Company seal acts as its signature

e)       Comes into existence through a formal and legal “incorporation” process.

f)         Promoters, share holders are called “members”

g)       The liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder.

h)       Memorandum and Articles of Association-The Memorandum of association is the charter of the company and specifies the name of the company, the business and activities it can carry, its address, the capital of the company and details of the persons who have formed the company.

i)          The Articles of association of the company specify the rules and regulations of the company, the rights, duties and liabilities of the members and directors

j)         A memorandum of association and articles of association have to be filed with the Registrar of Companies in order to incorporate a company In India, companies are broadly classified as Public Sector (Government owned) and Private Sector Companies. Private Sector companies may further be classified as Private Limited and Public Limited Companies.

(a)  Private Limited Companies

Private Limited Company means a company formed with the word ‘private’ in its name .A private limited company can be formed with a minimum of 2 members.

The Articles of Association of such companies includes the following restrictions:-

·         articles of association restricts the right to transfer its shares

·         limitation to the number of shareholders to 50 (excluding employees and former employees)

·         prohibition towards invitation to the public to subscribe to shares and debentures

·         shares of private limited companies may not be quoted in the stock exchange

·         The minimum paid up capital for a private company would be Rs. 100,000.

Following are some of the privileges and exemptions of a private limited company:

1)   Minimum number is members are 2 (7 in case of public companies)

2)   Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply.

3)   Restriction contained in Section 81 related to the rights issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company.

4)   Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business.

5)   Provisions of Section 165 relating to statutory meeting and submission of statutory report do not apply.

6)   one (if 7 or fewer members are present) or two members (if more than 7 members are present) present in person at a meeting of the company can demand a poll.

7)   In case of a private company which is not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporate incorporated outside India, no person other than the member of the company concerned, shall be entitled to inspect or obtain the copies of profit and loss account of that company.

8)   Minimum number of directors is only two. (3 in case of a public company)

(b)  Public Limited Companies

Public Limited Company means a company which is not a private limited company. It does not carry the word ‘private’ in its name and also do not have the restrictions as carried out in the private limited companies. Public limited companies are generally large companies with widespread shareholding with shares being quoted in the stock exchange. The minimum paid up capital for a public company would be Rs. 500,000.

Distinction between Company and Partnership

1.   A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law.

2.   Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder.

3.   Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members.

4.   A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be transferred without the permission of the other members, in absence of provision to contrary in articles of association of the company.

5.   In case of partnership, the number of members must not exceed 20 in case of banking business and 10 in other businesses. A Public company may have as many members as it desires subject to a minimum of 7 members. A Private company cannot have more than 50 members.

6.   There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public limited company is seven and two for a private limited company.

7.   In case of a partnership, 100 % consensus is required for any decision. In case of a company, decision of the majority prevails.

8.   On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder the company’ existence does not get terminated and no fresh application for sales tax, income tax numbers need to be done.

Companies are governed by Companies Act, 1956

4)   HUF

This form of organization exists under Hindu law and is governed by the law of succession. The joint Hindu family form is a form of business organisation in which the Family possesses some inherited property. The inheritance of the property is among the male members. The share of ancestral property is inherited by a member from his father, Grandfather and great grandfather.

The important features of the joint Hindu family business are as follows:

(i)   Membership by birth: Membership of the joint Hindu family business is automatic by birth of a male child and is not created by an agreement between persons.

(ii)   Management: The management vests in the Karta, the eldest member of the family. However, the Karta may associate other members of the HUF to assist him.

(iii)  Liability: The Karta has unlimited liability, i.e., even her/his personal assets can be used for payment of business dues but every other coparcener has a limited liability up to his share in the HUF property.

(iv)  There is no restriction on the number of coparceners of the HUF business. However, the membership is restricted to three successive generations.  A male child at the time of birth becomes a coparcener. Thus, an HUF does not restrict membership to minors.

(vi)  Unaffected by death: The HUF business continues even after the death of a coparcener including the Karta. The next senior most surviving male member of the HUF becomes the Karta. However, it may come to an end if all the members notify that they are not members of the joint Hindu family.

5)   Trusts

A Trust is created when a donor attaches a legal obligation to the ownership of certain property based on his confidence placed in and accepted by the donee or trustee, for the benefit of another.

The person who intends to create the trust with regard to certain property for a specified beneficiary and who places his confidence in another for this arrangement is called the Author of the Trust; the person who accepts the confidence is called the Trustee; the person whose benefit the confidence is accepted is called the Beneficiary; the subject matter of the trust is called Trust Property.

The Trustees control the trust’s assets and decide how the income (and capital) of the trust is to be distributed, and ensure that it is in line with the charitable purposes of the trust.

The author of the trust must indicate with reasonable certainty the following: