Chapter 2 ppt 2

CHAPTER -2
FORMS OF
BUSINESS
ORGANISATIONPrepared by
Harikumar.A, HSST Commerce, VVHSS Thamarakulam,
Alappuzha District

On the basis of
formation,
Business Organisations
can be classified into
Five

SOLE
PROPRIETORSHIP
Sole Proprietorship refers to a form of
business organisation which is
owned, managed and controlled by an
individual.
He is the recipient of all profits and bearer
of all risks.

FEATURES OF
SOLE PROPRIETORSHIP
1. Easy Formation and Closure
2. One man Ownership and Control
3. Sole risk bearer and recipient of profit
4. Unlimited Liability
5. No separate entity
6. Lack of continuity of business

Easy formation and Closure
No legal formalities are
required to start a sole
proprietorship
business.
There is no separate
law that governs Sole
proprietorship.
Closure of the
business can also be
done easily.

One man ownership and
control
The sole proprietor
is the sole owner
and controller of his
business.
He alone makes all
decisions relating
to his business and
carry out his plans.

Sole risk bearer and
recipient of profit
If the business makes
profit, he receives the
entire profit.Since there is only
one owner in sole
proprietorship, the
risk of failure of
business is to be
borne by the sole
proprietor.

Unlimited Liability
Sole proprietors have
unlimited liability.
It means 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.

No Separate Entity
The proprietor and the business are one and
the same.
A sole proprietorship business has no legal
existence separate from its owner.

Lack of continuity of
business
Death , insanity,
imprisonment,
physical ailment,
insolvency of a sole
trader will have direct
effect on the
business and may
even cause closure of
the business.

Merits of
Sole Proprietorship Business

QUICK DECISION MAKING
Enjoys
freedom in
taking
business
decisions

CONFIDENTIALITY OF INFORMATION
Sole trader can
keep all information
related to business
operations
confidential and
maintains secrecy.
He is not bound by
law to publish
accounts of his
business

DIRECT INCENTIVE
Direct relationship between effort and reward
acts as incentive to Sole trader.
There is no need to share profits made by him.

SENSE OF ACCOMPLISHMENT
The knowledge that one is responsible for the
success of the business not only contributes to self
satisfaction but also creates a sense of
accomplishment and confidence in one's abilities

EASY FORMATION AND CLOSURE
It is easy to start and close Sole trading
business as per the wish of the owner

De-Merits of
Sole Proprietorship

LIMITED CAPITAL
An individual can
bring only limited
capital.
Limited capital
means limited
size of business
and thus limited
profit.

LIMITED MANAGERIAL ABILITY
The managerial
ability of proprietor is
limited.
He cannot avail the
services of experts
by employing them
due to limited finance

UNLIMITED LIABILITY
If the business
fails and is
unable to pay off
its debts, the
private property
of the proprietor
will be held
liable.

LIMITED LIFE OF BUSINESS
Death, Insolvency, illness, Imprisonment etc.. of the
proprietor affects the business and can lead to its closure

L.O Wise presentation of this chapter is also available at
SAMAGRA Educational portal - New version
https://samagra.kite.kerala.gov.in

JOINT HINDU FAMILY BUSINESS
●
A business owned and carried on by the members of
the Hindu Undivided Family (HUF).
●
It is governed by the Hindu Succession Act, 1956.
●
The basis of membership in the business is birth in a
particular family
●
The business is controlled by the head of the family
who is the eldest member and is called KARTA.
●
All members have equal ownership right over the
property of an ancestor and they are known as co-
parceners.

FEATURES
OF
JOINT HINDU FAMILY
BUSINESS

There should be at least two members
in the family and ancestral property to be
inherited by them.
The business does not require any
agreement as membership is by birth.

●
The liability of all members except the
karta is limited to their share of co-
parcenery property of the business.
●
The liability of KARTA is unlimited.

●
KARTA controls the HUF business
●
He takes all the decisions and
manages the business. His decisions
are binding on the other members.

●
The business continues even after the death
of the karta as the next eldest member takes
up the position of karta.
●
The business can,however, be terminated
with the mutual consent of the members.

MINOR MEMBERSMINOR MEMBERS
The inclusion of an individual into the business
occurs due to birth in a Hindu Undivided Family.
Hence, minors can also be members of the
business.

Merits of
HINDU UNDIVIDED
FAMILY BUSINESS

EFFECTIVE CONTROL
The karta has absolute decision
making power and no one can
interfere with his right to decide.

CONTINUED BUSINESS EXISTENCE
The death of the karta will not affect the
business.
The next eldest member will then take
up the position to continue the business

LIMITED LIABILITY OF
MEMBERS
The liability of all the co-parceners is
limited to their share in the business,
and consequently their risk is well-
defined and precise.

INCREASED LOYALTY AND
COOPERATION
Since the business is run by the members of a
family, there is a greater sense of loyalty towards
one other. Pride in the growth of business is linked
to the achievements of the family. This helps in
securing better cooperation from all the members.

De-Merits of
HINDU UNDIVIDED
FAMILY BUSINESS

LIMITED RESOURCES
The Joint Hindu
family business faces
the problem of
limited capital as it
depends mainly on
ancestral property.
This limits the
scope for expansion
of business

UNLIMITED LIABILITY OF
KARTA
The karta is burdened not only with
the responsibility of decision
making and management of
business, but also suffers from the
disadvantage of having unlimited
liability.
His personal
property can be used to repay
business debts.

DOMINANCE OF KARTA
The karta individually manages
the business which may at times
not be acceptable to other
members.
This may cause conflict amongst
them and may even lead to break
down of the family unit.

LIMITED MANAGERIAL
SKILLS
Since the karta cannot be an expert in all areas of
management, the business may suffer as a result of his
unwise decisions. His inability to decide effectively may
result into poor profits or even losses for the
organisation.
LOSS

The Indian Partnership Act, 1932
defines the term 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.”

NUMBER OF PARTNERSNUMBER OF PARTNERS
●
The minimum number of persons needed to start a partnership firm
is two.
1
Minimum Members

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.
Maximum Members
As per Rule 10 of The Companies (Miscelleneous) Rules 2014, at
present the maximum number of members can be 50.


Partnership comes into existence through a legal
agreement

The agreement contains the terms and conditions
governing the partnership firm.

The business must be lawful and profit seeking
FORMATIONFORMATION2

●
The partners of a firm have unlimited
liability.
●
The partners are jointly and individually
liable for payment of debts.
3 LIABILITYLIABILITY

●
The partners bear the risks involved in
running a business.
●
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 if the firm incurs losses.
4 RISK BEARINGRISK BEARING

Decisions of partnership firm are
generally taken with mutual
consent. Thus, the activities of a
partnership firm are managed
and controlled through the joint
efforts of all the partners.
DECISION MAKINGDECISION MAKING
AND CONTROLAND CONTROL
5

●
Death, Retirement , Insolvency or
Insanity of any partner can bring an end
to the business.
●
However, the remaining partners may if
they so desire can continue the business
on the basis of a new agreement.
6 CONTINUITYCONTINUITY

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.
MUTUAL AGENCYMUTUAL AGENCY7

EASE OF FORMATION AND
CLOSURE

Partnership firm can be formed easily by an
agreement.

There is no compulsion with respect to registration of
the firm.

Closure of the firm is also easy.

BALANCED DECISION MAKING
Each partner in a firm can concentrate
on his area of expertise besides
handling different activities. It leads to
fewer errors in decision making.

MORE FUNDS
It is possible to raise larger
amount of funds as compared to a
sole proprietor

SHARING OF RISKS
The risks involved in running a
partnership firm are shared by
all the partners.

SECRECY
A partnership firm is not
legally required to publish its
accounts and submit its
reports.

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.

LIMITED RESOURCES
As there is a restriction on the number of
partners, 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.

POSSIBILITY OF CONFLICTS
Difference in opinion on
some issues may lead to
disputes between
partners.

LACK OF CONTINUITY
Partnership comes to an end with
the death, retirement, insolvency or
lunacy of any partner.

LACK OF PUBLIC CONFIDENCE
Partnership firms are not legally required to
publish its financial reports.
So confidence of the public in partnership firms is
generally low.

PARTNERSHIP DEED
The written agreement
which specifies the
terms and conditions
that govern the
partnership is called
the partnership deed

Contents of Partnership Deed
●
Name of firm
●
Nature of business and location of business
●
Duration of business
●
Investment made by each partner
●
Distribution of profits and losses
●
Duties and obligations of the partners

Contents of Partnership Deed
●
Salaries and withdrawals of the partners
●
Terms governing admission, retirement and
expulsion of a partner
●
Interest on capital and interest on drawings
●
Procedure for dissolution of the firm
●
Preparation of accounts and their auditing
●
Method of solving disputes

TYPES OF PARTNERS
1
2
3
4
5
6
ACTIVE PARTNER
SLEEPING PARTNER
SECRET PARTNER
NOMINAL PARTNER
PARTNER BY ESTOPPEL
PARTNER BY HOLDING OUT

ACTIVE PARTNER
●
An active partner is one who contributes capital,
participates in the management of the firm.
●
He shares its profits and losses, and is liable to
an unlimited extent to the creditors of the firm.
●
These partners take actual part in carrying out
business of the firm on behalf of other partners.
●
He is also known as Working partner

SLEEPINGPARTNER
●
Partners who do not take part in the day to day
activities of the business are called sleeping partners.
●
A sleeping partner contributes capital to the firm,
shares its profits and losses, and has unlimited
liability.
●
He is also known as Dormant partner.

SECRETPARTNER
●
A secret partner is one whose association with the
firm is unknown to the general public.
●
He contributes to the capital of the firm, takes part
in the management, shares its profits and losses,
and has unlimited liability towards the creditors.

NOMINALPARTNER
●
A nominal partner is one who allows the use of his/her
name by a firm, but does not contribute to its capital.
●
He/she does not take active part in managing the firm,
does not share its profit or losses but is liable, like
other partners, to the third parties, for the repayments
of the firm’s debts.

PARTNERBYESTOPPEL
●
A person is considered a partner by estoppel if,
through his/her conduct or behaviour, he/she
gives an impression to others that he/she is a
partner of the firm.
●
Such partners are held liable for the debts of the
firm because in the eyes of the third party they are
considered partners, even though they do not
contribute capital or take part in its management.

PARTNERBYHOLDINGOUT
●
A partner by ‘holding out’ is a person who though is
not a partner in a firm but knowingly allows
himself/herself to be represented as a partner in a firm.
●
Such a person becomes liable to outside creditors for
repayment of any debts which have been extended to
the firm on the basis of such representation.
●
In case he is not really a partner , he should
immediately issue a denial, clarifying his position that
he is not a partner in the firm.

28/07/19 84
Partnerships can be classified
on the basis of two factors :
Duration
Liability
TYPES OF PARTNERSHIP

28/07/19 85
On the basis of duration, there can
be two types of partnerships :
●
Partnership at Will
●
Particular Partnership
On the basis of Duration, Partnerships
may be of two types:

28/07/19 86
with limited liability
with unlimited liability
On the basis of Liability,
Partnerships may be of two types :

28/07/19 87
ON THE
BASIS OF
DURATION

28/07/19 88
●
This type of partnership exists at the
will of the partners.
●
It can continue as long as the partners
want and is terminated when any
partner gives a notice of withdrawal
from partnership to the firm.
PARTNERSHIP AT WILL

28/07/19 89
●
Partnership formed for the
accomplishment of a particular project or
an activity to be carried on for a specified
time period is called particular partnership.
●
It dissolves automatically when the
purpose for which it was formed is fulfilled
or when the time duration expires.
PARTICULAR PARTNERSHIP

28/07/19 90
ON THE
BASIS OF
LIABILITY

28/07/19 91
●
In general partnership, the liability of
partners is unlimited and joint.
●
The partners enjoy the right to
participate in the management of the
firm and their acts are binding on each
other as well as on the firm.
●
Registration of the firm is optional.
GENERAL PARTNERSHIP

28/07/19 92
●
In limited partnership, the liability of at
least one partner is unlimited and
others have limited liability.
●
The limited partners do not enjoy the
right of management and their acts do
not bind the firm or the other partners.
●
Registration of such partnership is
compulsory.
LIMITED PARTNERSHIP

Co-operative Society
The cooperative society is a voluntary
association of persons, who join together with
the motive of welfare of the members.
They associates to protect the possible
exploitation of middlemen.

Features
of
Co-operative
Society

VOLUNTARY ASSOCIATIONVOLUNTARY ASSOCIATION
Features of Co-operative Society

The membership of a cooperative society is
voluntary.

A person is free to join a cooperative
society, and can also leave.

Membership is open to all, irrespective of
their religion, caste, and gender
11

LEGAL STATUSLEGAL STATUS

Registration of a co-operative society is
compulsory. This accords a separate identity to
the society which is distinct from its members.

Its existence is not affected by the entry or exit
of its members.

The society can enter into contracts and hold
property in its name, sue and be sued by others.
22

LIMITED LIABILITYLIMITED LIABILITY

The liability of the members of a
cooperative society is limited to the
extent of the amount contributed by
them as capital.
33

CONTROLCONTROL

In a co-operative society, an elected
managing committee will take decisions.

The right to vote gives the members a chance
to choose the members who will constitute the
managing committee and this lends the
cooperative society a democratic character.
44

SERVICE MOTIVESERVICE MOTIVE

The cooperative society emphasis on the
values of mutual help and welfare.

If any surplus is generated as a result of
its operations, it is distributed amongst
the members as dividend in conformity
with the bye-laws of the society
55

Merits of
Co-operative society

Merits of Co-operative society
●
The principle of ‘one man one vote’
governs the cooperative society,
irrespective of the amount of capital
contribution by a member.
1 Eqality in voting rights

●
The liability of members of a
cooperative society is limited to the
extent of their capital contribution.
●
The personal assets of the members
are, therefore, safe from being used to
repay business debts.
2 Limited Liability

●
Death, bankruptcy or insanity of the
members do not affect continuity of a
cooperative society.
●
A society, therefore, operates unaffected
by any change in the membership.
3 Stable Existence

●
The members generally offer honorary services
to the society. As the focus is on elimination of
middlemen, this helps in reducing costs.
●
The customers or producers themselves are
members of the society, and hence the risk of
bad debts is lower.
4 Economy in operations

●
The cooperative society gets
support from the Government in the
form of low taxes, subsidies, and
low interest rates on loans.
5 Support from government

●
The cooperative society can be started with a
minimum of ten members.
●
The registration procedure is simple involving
a few legal formalities.
●
Its formation is governed by the provisions of
Cooperative Societies Act 1912.
6 Easy formation

Limitations of
Co-operative Society

Limitations of Co-operative society
●
Resources of a cooperative society consists of
capital contributions of the members with limited
means.
●
The low rate of dividend offered on investment
also acts as a deterrent in attracting
membership or more capital from the members.
Easy formation1 LIMITED RESOURCES

●
Cooperative societies are unable to attract
and employ expert managers because of
their inability to pay them high salaries.
●
The members are generally not
professionally equipped to handle the
management functions effectively.
Easy formation2 INEFFICIENCY IN MANAGEMENT

●
As a result of open discussions in the
meetings of members as well as
disclosure obligations as per the
Societies Act, it is difficult to maintain
secrecy about the operations of a
cooperative society.
Easy formation3 LACK OF SECRECY

●
cooperative societies have to comply with several
rules and regulations related to auditing of
accounts, submission of accounts, etc.
●
Interference in the functioning of the cooperative
organisation through the control exercised by the
state cooperative departments also negatively
affects its freedom of operation.
Easy formation4 GOVERNMENT CONTROL

●
Internal quarrels arising as a result of
contrary viewpoints may lead to difficulties
in decision making.
●
Personal interests may start to dominate the
welfare motive if personal gain is given
preference by certain members.
Easy formation5 DIFFERENCES OF OPINION

Types
of
Co-operative
Societies

On the basis of nature of operations,
Co-operative societies can be classified into :
1 Consumers Co-operative societies
Producers Co-operative societies
Marketing Co-operative societies
Farmers Co-operative societies
Credit Co-operative societies
Co-operative housing societies
2
3
4
5
6

Consumers Co-operative Societies

●
The consumer cooperative societies are
formed to protect the interests of consumers.
●
The society purchases goods in bulk directly
from the wholesalers and sells goods to the
members at reasonable prices, thereby
eliminating the middlemen.
●
Profits, if any, are distributed on the basis of
either their capital contributions to the society
or purchases made by individual members.
Consumers Co-operative Societies

Producers Co-operative Societies

●
These societies are set up to protect the interest of
small producers.
●
The members comprise of producers desirous of
procuring inputs for production of goods to meet the
demands of consumers.
●
Society supplies raw materials, equipment and other
inputs to the members and also buys their output for
sale.
●
Profits among the members are generally distributed
on the basis of their contributions to the total pool of
goods produced or sold by the society.
Producers Co-operative Societies

Marketing Co-operative Societies

●
Such societies are established to help small producers
in selling their products.
●
The members consist of producers who wish to obtain
reasonable prices for their output.
●
The society aims to eliminate middlemen and provides
a favourable market for the products.
●
It pools the output of individual members and performs
marketing functions like transportation, warehousing,
packaging, etc., to sell the output at the best possible
price.
●
Profits are distributed according to each member’s
contribution to the pool of output.
Marketing Co-operative Societies

Farmers Co-operative Societies

●
These societies are established to protect the interests
of farmers by providing better inputs at a reasonable
cost.
●
The members comprise farmers who wish to jointly take
up farming activities.
●
The aim is to gain the benefits of large scale farming and
increase the productivity. Such societies provide better
quality seeds, fertilisers, machinery and other modern
techniques for use in the cultivation of crops.
●
This helps not only in improving the yield and returns to
the farmers, but also solves the problems associated
with the farming on fragmented land holdings.
Farmers Co-operative Societies

●
Credit cooperative societies are established for
providing easy credit on reasonable terms to the
members.
●
The members comprise of persons who seek
financial help in the form of loans.
●
The aim of such societies is to protect the
members from the exploitation of lenders who
charge high rates of interest on loans.
●
Such societies provide loans to members out of
the amounts collected as capital and deposits from
the members and charge low rates of interest.
Credit Co-operative Societies

Co-operative Housing Societies

●
Cooperative housing societies are established to help
people with limited income to construct houses at
reasonable costs.
●
The members of these societies consist of people
who are desirous of procuring residential
accommodation at lower costs.
●
The aim is to solve the housing problems of the
members by constructing houses and giving the
option of paying in instalments.
●
These societies construct flats or provide plots to
members on which the members themselves can
construct the houses as per their choice.
Co-operative Housing Societies

●
A company is an association of persons
formed for carrying out business
activities.
●
It has a legal status independent of its
members.
●
The company form of organisation is
governed by The Companies Act, 2013.
JOINT STOCK COMPANYJOINT STOCK COMPANY

FeaturesFeatures
ofof
Joint Stock CompanyJoint Stock Company

A company is a creation of law and
exists independent of its members.
Like natural persons, a company can
own property, borrow money, enter
into contracts, sue and be sued but it
cannot breathe, eat, run, talk and so
on. So it is called an artificial person.
ARTIFICIAL PERSONARTIFICIAL PERSON11

●
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.
SEPARATE LEGAL ENTITYSEPARATE LEGAL ENTITY22

●
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.
FORMATIONFORMATION33

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.
PERPETUAL SUCCESSIONPERPETUAL SUCCESSION44

●
The management and control of the
company is undertaken by the Board of
Directors, which appoints the top
management officials for running the
business.
●
The directors 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.
CONTROLCONTROL55

●
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.
CONTINUITYCONTINUITY66

●
A company may or may not have a common
seal.
●
If a company has a common seal, it must be
affixed to the documents such as
agreements of a company.
●
If a company does not have a common seal
then the person signing the document should
be authorised by a board’s resolutions.
COMMON SEALCOMMON SEAL77

●
The risk of losses in a company is borne
by all the share holders.
●
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.
RISK BEARINGRISK BEARING88

Merits ofMerits of
Joint Stock CompanyJoint Stock Company

Limited LiabilityLimited Liability
The shareholders are liable to the extent
of the amount unpaid on the shares held
by them.
Only the assets of the company can be
used to settle the debts, leaving the
owner’s personal property free from any
charge.
1

Transfer of InterestTransfer of Interest
Transfer of ownership is easy
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.
2

Perpetual ExistencePerpetual 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.
3

Scope for ExpansionScope for Expansion
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.
4

Professional ManagementProfessional 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.
5

Limitations
of
Joint Stock Company

Complexity in FormationComplexity in Formation
The formation of a company
requires greater time, effort and
extensive knowledge of legal
requirements and the procedures
involved.
1

Lack of SecrecyLack of Secrecy
The Companies Act requires each public
company to provide a lot of information to
the registrar of companies. Such information
is available to the general public also. So it is
difficult to maintain complete secrecy about
the operations of company.
2

Impersonal WorkImpersonal Work
environmentenvironment
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 makes it difficult
for the owners and top management to
maintain personal contact with the
employees, customers and creditors
3

Numerous regulationsNumerous regulations
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.
4

Delay in decision makingDelay in decision making
Companies are 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.
5

Oligarchic ManagementOligarchic Management
The shareholders are spread all over
the country and a very small percentage
attend the general meetings. The Board
of Directors enjoy considerable freedom
in exercising their power which they
sometimes use even contrary to the
interests of the shareholders. This leads
to rule by a few.
6

Conflict in interestsConflict 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. It often becomes
difficult to satisfy such diverse interests.
7

Types of CompaniesTypes of Companies

COMPANY
PRIVATE COMPANY PUBLIC COMPANY

Private CompanyPrivate Company
A private company means a company
which:
(a) restricts the right of members to transfer its
shares;
(b) has a minimum of 2 and a maximum of 200
members
(c) does not invite public to subscribe to its
securities
It is necessary for a private company to use the word
private limited after its name.

Privilages of aPrivilages of a
Private companyPrivate company
againstagainst
Public companyPublic company

1. A private company can be formed by only 2
members whereas 7 people are needed to
form a public company.
2. There is no need to issue a prospectus as
public is not invited to subscribe to the shares
of a private company.
3. 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.
PRIVILAGES OF PRIVATE COMPANY

4. A private company needs to have only
two directors as against the minimum of
three directors in the case of a public
company. However the maximum number
of directors for both types of companies
is fifteen.
5. A private company is not required to
keep an index of members while the
same is necessary in the case of a public
company.
PRIVILAGES OF PRIVATE COMPANY

Public CompanyPublic Company
●
As per The Companies Act, a public
company is one which:
(a) has a minimum of 7 members and no limit on
maximum members;
(b) has no restriction on transfer of securities;
and
(c) is not prohibited from inviting the public to
subscribe to its securities.
Pubic company should use the word Public limited
after its name.

Difference between
Private Company
and
Public Company

BasisBasis
PublicPublic
CompanyCompany
PrivatePrivate
CompanyCompany
MembersMembers
Minimum - 7
Maximum - Unlimited
Minimum – 2
Maximum - 200
Minimum number ofMinimum number of
DirectorsDirectors 3 2
Index of membersIndex of members Compulsory Not compulsory
Transfer of SharesTransfer of Shares No restriction Restriction on transfer
Invitation to public toInvitation to public to
subscribe to sharessubscribe to shares
Can invite public to
subscribe to its shares
Cannot invite public to
subscribe its shares

Choice of
form of
business
organisation

Cost and ease in setting up the
organisation
●
In case of Sole Proprietorship and Partnership,
there is less legal formalities for starting business.
●
Co-operative societies and Companies have to
be compulsorily registered. Formation of
company involves a lengthy and expensive legal
procedure.
Therefore, Sole proprietorship is the preferred
form as it involves least expenditure.

Liability
●
In case of Sole Proprietorship and
Partnership, liability of owners is unlimited.
●
In Co-operative societies and Companies,
liability is limited.
From the point of view of investors,
Company form of organisation is more
suitable.

Continuity
●
Continuity of Sole Proprietorship and
Partnership is affected by Death, Insolvency
or Insanity of owners.
●
Such factors does not affect the business in
case of Joint Hindu Family business, Co-
operative societies and Companies.
So Company form of organisation is
suitable to ensure continuity.

Management Ability
●
If an organisations operations are
complex in nature and require
professional management,
Company form of organisation is
a better alternative.

Capital Considerations
●
If the scale of operations is large,
Company form of organisation is
suitable but for medium and small
sized business, Partnership or Sole
proprietorship business is suitable.

Degree of control
●
If direct control over operations and
absolute decision making power is
required, Sole Proprietorship may be
preferred.
●
But if the owners like to share control and
decision making, Partnership or Company
form of organisation is preferred.

Nature of business
●
If direct personal contact is needed
with customers, Sole proprietorship
may be more suitable.
●
For large manufacturing units, where
direct personal contact with
customers is not required, Company
form of organisation is suitable.

Prepared by
HARIKUMAR.A
HSST COMMERCE
V.V.HIGHER SECONDARY SCHOOL
THAMARAKULAM
ALAPPUZHA DISTRICT

Projects/Assignments from this chapter
Divide students into 5 teams to work on the following:
(a) To study the profiles of any five neighbourhood grocery/stationery store.
(b) To conduct a study into the functioning of a Joint Hindu family businesses.
(c) To enquire into the profile of five partnerships firms.
(d) To study the ideology and working of cooperative societies in the area.
(e) To study the profiles of any five companies (inclusive of both private and
public companies)

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