Why to form ‘Company’, when there are other Business Structures (for profit) available:
a. Sole Proprietorship (Business Structure for Profit)
b. Partnership (Business Structure for Profit)
c. Limited Liability Partnership (Business Structure for Profit)
The Provisions of Sec 11 prohibits some associations / partnerships / companies from doing two specific types of businesses. Some may prefer to form ‘Company’ business entities. Under some legislation compulsion (like the Companies Act, 1956), some form ‘Company’ business entities.
Let us see what those prohibitions are:
Prohibition of ‘Associations’ and ‘Partnerships’ exceeding certain number
Business of Banking (Sec 11(1))
No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian Law.
Underline a couple of clusters of the words ‘Business of Banking’, ‘consisting of more than ten persons’ – More than ten persons
· No company consisting of more than ten persons,
· No association consisting of more than ten persons or
· No partnership consisting of more than ten persons
Shall be formed for the purpose of carrying on the Business of Banking,
a. unless it is registered as a company under this Act, or
b. unless it is formed as a company in pursuance of some other Indian law.
Any other Business that has for its object the acquisition of gain by the business entity (Sec 11(2)) – More than twenty persons
No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law.
No company consisting of more than twenty persons, shall be formed for the purpose of:
Carrying on any other business that has for its object the acquisition of gain:
a. by the company, or
b. by the individual members thereof,
unless it is registered as a company under this Act, or
unless it is formed as a company in pursuance of some other Indian law.
No association consisting of more than twenty persons, shall be formed for the purpose of:
Carrying on any other business that has for its object the acquisition of gain:
a. by the association, or
b. by the individual members thereof,
unless it is registered as a company under this Act, or
unless it is formed as a company in pursuance of some other Indian law.
No partnership consisting of more than twenty persons, shall be formed for the purpose of:
Carrying on any other business that has for its object the acquisition of gain:
a. by the partnership, or
b. by the individual members thereof,
unless it is registered as a company under this Act, or
unless it is formed as a company in pursuance of some other Indian law.
‘Number of persons ’condition in the above both provisions seem unrealistic in some business environments like ‘Joint Family’ businesses. A Joint Family Business may consist number of persons more than twenty. See what that Act says?
Sec 11(3) This section shall not apply to a joint family as such carrying on a business ; and where a business is carried on by two or more joint families, in computing the number of persons for the purposes of sub-sections (1) and (2), minor members of such families shall be excluded.
‘This section shall not apply to a joint family as such carrying on a business’ underline the expression ‘a joint family’.
It is not saying that this section shall not apply to a business which is carried on by two or more joint families, that is what it says in the following expression ‘where a business is carried on by two or more joint families, in computing the number of persons for the purposes of sub-sections (1) and (2) of Section 11, minor members of such families shall be excluded’.
Joint Family – Business of Banking
A Joint family consisting of more than ten members may carry on business of Banking. Sec 11(1) enables a joint family to do business without any limit on number of members if they are from a joint family. Note here they are from a joint family. That is a Single Joint Family or One Joint Family.
If the members are instead of one joint family, they are from two or more joint families, it seems the subsections (1) and (2) of section 11 may apply. The Section is not specific about this point. Because read following expressions: ‘where a business is carried on by two or more joint families, in computing the number of persons for these purposes, minor members of such families shall be excluded’. Here, underline ‘minor members of such families shall be excluded’. It encourages us to understand that the subsections (1) and (2) of section 11 may apply, where a business is carried on by two or more joint families.
Joint Family – having an object of acquisition of gain
Similar to Business of Banking, in the case of a Joint Family consisting of more than twenty members, it may carry on a Business having an object of acquisition of gain.
If the members are instead of one joint family, they are from two or more joint families, it seems the subsections (1) and (2) of section 11 may apply. The Section is not specific about this point. Because read following expressions: ‘where a business is carried on by two or more joint families, in computing the number of persons for these purposes, minor members of such families shall be excluded’. Here, underline ‘minor members of such families shall be excluded’. It encourages us to understand that the subsections (1) and (2) of section 11 may apply, where a business is carried on by two or more joint families.
If we contravene the prescribed provisions and carry on business? See what the Act says:
1. Every member of a company, association or partnership carrying on business in contravention of this section shall be personally liable for all liabilities incurred in such business. (Sec 11(4))
2. Every person who is a member of a company, association or partnership formed in contravention of this section shall be punishable with fine which may extend to ten thousand rupees. (Sec 11(5))
The consequences are serious. To do certain nature of businesses, adopting a ‘Company’ business structure is mandated by the Act.
It is relevant to refresh about following:
The Indian Partnership Act, 1932 – Maximum number of members
To define and amend the law relating to Partnership, the Indian Partnership Act 1932 was passed. As ‘Partnership’ is a sort of Contract, previous to this Act, it was a part of Indian Contract Act. The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of partnership also.
Basic requirements of contract i.e.
· legally enforceable agreement,
· mutual consent,
· parties competent to contract,
· free consent, lawful object,
· consideration etc.
Apply to partnership contract also.
NUMBER OF PARTNERS - Since partnership is an ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 11 of Companies Act prohibits partnership consisting of more than 20 members, to do any business the object of which is the acquisition of gain, unless it is registered as a company or formed in pursuance of some other law. Similar to partnerships, associations are also prohibited.
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