Forms of Business Organisation (Part - 2) CA CPT Notes | EduRev

Business and Commercial Knowledge

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CA CPT : Forms of Business Organisation (Part - 2) CA CPT Notes | EduRev

The document Forms of Business Organisation (Part - 2) CA CPT Notes | EduRev is a part of the CA CPT Course Business and Commercial Knowledge.
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Partnership

Partnership implies contractual co-ownership of business. It is a relationship between two or more persons who agree to share the profits of a business. The business may be carried on by all or by some of the partners (called active partners) for and on behalf of all. The contract- an agreement enforceable at law - called ‘deed’ is the essence of a partnership. It may be verbal or written. It specifies the bases of association of the persons in a partnership business e.g. capital contribution, profit sharing, etc. (See Features #3). The deed may be registered in India under the Indian Partnership Act, 1932.
Features#3: Partnership

FeaturesWhether merit or limitation and how
AgreementMerit. The agreement makes possible co ownership of business by persons who do not share a common ancestry of a family
Two or more personsMerit. Partnership allows raising of funds beyond the resources of an individual / sole proprietor. In fact, even a company, being an artificial persons can be admitted as a partner!
Limitation. There is a cap on the maximum number of persons. It is 10 for a banking firm and 20 for other firms. The reasons for a cap on the maximum
number of persons in partnership or for that matter any other non-corporate association is the difficulty in tracing the owners/ their heirs during such circumstances as insolvency of the firm. Let’s remember, partnership enjoins unlimited liability on the partners.
Profit sharingMerit. For there is risk sharing too. However, whilst profit sharing is an essential feature of partnership, loss sharing is not. Certain partners may be admitted only in the profits of the firm e.g. minor partners.
Business object quite wideMerit. A partnership cannot be formed for non-business purpose. However, the word business here includes every trade, occupation and profession.
For example, many accounting/ auditing and legal firms are organised as partnership firms.
Mutual agencyMerit. Mutual agency – that is one for each other and for all ensures that all the partners work in the common interest and in the interest of the firm.
Limitation. A partner’s misdeeds impact all the partners and the fate of the firm. For example, if a partner in an auditing firm becomes a party to a corporate scam, its impact may be disastrous for the firm.
Unlimited liabilityLimitation. It is a common limitation of proprietary forms of business organisations. In the event of insolvency i.e. Liabilities > Assets, the partners’ personal assets are invoked to make up the deficit. Owing to the mutual agency, the liability of all the partners is both joint and several.
Fate as a going concern (going concern= enduring life of business in the foreseeable future) is uncertainLimitation. Since partnership arises out of contract, it also ceases in the same way. A partner may serve a notice of severance to the firm and the partnership comes to an end. The remaining partners may agree to carry on the business of the firm; however, the severance cost and the loss of momentum makes partnership a vulnerable form of business organisation.
Succession of ownershipLimitation. Ownership is not easily transferable. A new partner can be admitted only if other partners consent.

Limited Liability Partnership (LLP)

Drawing on its name, LLP form of business organisation is the one where the liability of the partners is limited. However, there is much more to this form. It has to be mandatorily incorporated /registered under the Limited Liability Partnership Act, 2009. The Ministry of Corporate Affairs, the apex body of regulation of company form of business organisation in India oversees the governance of the LLP too. For the purposes of compliance with the regulations thus imposed, the LLP Act provides for designated

partners. Upon incorporation, LLP becomes a separate legal entity and has an identity (name and identification number) as well as life of its own much the same way as perpetual succession of a company. The features of mandatory incorporation and separate legal entity of the LLP makes it a hybrid form of business organisation i.e., containing the features of both the corporate form as well as proprietary form of

business organisation. These two features do away with the twin limitations of the traditional partnership, viz., unlimited liability and uncertainty as a going concern (see Features #3).
Features #4: LLP- An Overview

FeaturesComparison with Traditional
Partnersh
ip
Whether merit or limitation
and how
Limited liability. No personal
liability of partner, except in case of fraud.

Unlimited personal liability of each partner for dues of the partnership firm. Personal assets of each partner also liableMerit. This does away with a
major limitation of traditional partnership
Incorporation is mandatoryPartnership is registered under partnership Act. Registration is not mandatory.Merit. The mandatory
registration brings the firm under the regulatory purview of the Ministry of Corporate Affairs. This increases its credibility.
It is a legal entity separate from its partners.Not a legal entity separate from its partners.Merit. This does away with the uncertainty of the firm’s existence as a going concern
Minimum 2 and no limit on
maximum number of partners
Minimum 2 and maximum 20 partnersMerit. The upper limit in the
traditional partnership restricted the scope of business and future expansion plans.
ROC is the administrating
authority.

The registrar of firms (of
respective states) is the
administering authority

Merit. There is body to control that brings credibility in the eyes of stakeholders.
Statutory compliancesNot manyLimitation. Designated partners to ensure the compliances. However, in comparison with the companies, the compliances are fewer and simpler.
Every partner of LLP is only agent of firm

Every partner of firm is agent of firm and also of other partners

Merit. Absence of mutual agency enhances freedom at one hand; and, on the other hand frees the other partners of the burden of  responsibility of the acts of a
partner


Company

Company form of business organisation is the flag bearer of corporate businesses. Company indeed is a body corporate, having an existence independent of all its members. It exists in the contemplation of law, has a distinct name, address (Registered Office) & identification number. The word company literally implies an association of two or more persons. However, as a legal artefact, there can be even a One Person Company (OPC). In fact, the OPC has been the most recently introduced form of business organisation

in India vide The Companies Act, 2013. It is still in an emerging status. Yet it is being hailed as a likely catalyst in unleashing the entrepreneurial spirit in India. Recall that we posited sole proprietorship as the classical hallmark of entrepreneurship; OPC is likely to be its corporate form. In addition, the Companies Act 2013 also provides for the incorporation of a small company in acknowledgment of the role of smallscale enterprises in India. Interestingly, the Act also provides for the incorporation of a dormant company

that may be created for a future project or to hold an asset or intellectual property and has no significant accounting transaction.

We shall, for the purposes of this chapter however restrict to the discussion of private and public companies only to highlight the features of corporate forms of business organisation. We are already aware of the ideas of independent legal existence, limited liability and separation of ownership from management. We have also seen how a corporate status instils credibility and trust among the business associates. Let us

emphasise how the idea of a joint stock company led to mobilisation of a large amount of capital directly from the savers by issuing of shares (a share is a share /portion of the capital of a company) in smaller denomination. In the process, capital market is developed and the ownership of productive assets of an economy is democratised. Albeit, this remains an ideal to aspire, as in practice, the ownership of many public companies in India and other Asian countries is highly concentrated among a few hands/ promoters.

In order to make the system of diffused ownership of the joint stock companies and their management work, an elaborate system of corporate functioning and the regulation of capital market has to be in place. The Companies Act, 2013 focuses on the former; and the Securities & Exchange Board of India Act, 1992 focuses on the latter. A company has to file a Memorandum of Association (MoA) and Article of Association (AoA) along with application for incorporation. The MoA, among other things, spells out the objectives of the company and its business. The AoA focuses on its internal regulation. The company solicits capital contribution by issue of a prospectus. There are elaborate provisions in the Companies Act and the SEBI Act to ensure that the prospectus contains such true and correct information as may enable the public to form an informed judgment on whether or not to invest in a company. A common man can avail the services of investment advisors in this regard. Then there is a requirement of the statutory audit of the accounts of a company and publication of its quarterly results to keep the investors well informed. The

SEBI also oversees the subsequent trading of the company shares and the contract of listing by which the shares of a company are put up for trading on a stock exchange. The listing agreement, among other things, also enjoins upon the companies to carry on business in an ethical, transparent and accountable manner.

Publicly traded / listed companies have to meet stringent criteria of both the Companies Act and the SEBI. This increases the cost of compliance. In contrast, private companies have lesser compliances to meet and have greater flexibility in their internal functioning. The law provides these privileges to the private companies because these are closely held and the owners have greater opportunity to exercise control over the management of these companies (Features # 4). There is little surprise that the Indian corporate sector is numerically dominated by private limited companies. In fact the world over there has been

a distinct trend toward “privatisation” of such public limited companies in view of growing costs of compliance.
Features #5: Private Limited Company vis-à-vis Public Company

Features of Private CompanyFeatures of Public CompanyComparative Assessment
Minimum number of members: 0207Lower number of minimum
members too eases of
formation
Maximum number of members: 200No limitNo upper limit on the
members of public company
puts on its disposal enormous funds.
There are restrictions on transfer of
shares

The shares may be freely tradable
on stock exchange via listing

Listing of the shares of a
public company adds to their
liquidity so that the investors
may encash the shares whenever needed
Minimum number of directors: 0203Not of much consequence.
Smaller board size adds to the internal efficiencies.
Private companies are exempted from constituting such committees of the Board of Directors as Audit Committee, CSR Committee,
Stakeholder Committee and the Nomination and Remuneration
Committee

These committees are to be
mandatorily constituted

More liberal a governance
regimen of private companies
exists because common man’s
money is not on stake in their share capital
It can start business upon
incorporation

A public limited company is
required to obtain Certificate
of Commencement of Business in addition to the Certificate of Incorporation

Fewer formalities add to
the attractiveness of private
limited companies, more so
corporatisation of  proprietary concerns e.g. partnership
firms. Albeit, now there is also an option for the partnership
firms to convert to LLP

Before we close this chapter, let us remind ourselves that the foregoing discussion of the forms of business organisation just deals with their broad, distinct features. The finer details have been left for subsequent papers that you will be studying en route to attaining your CA qualification.

SUMMARY

Business and Commercial Knowledge (BCK) is a vast, eclectic and an ever evolving and ever expanding universe of knowledge. Professionals like Chartered Accountants whose primary arena of work comprises businesses must enhance their awareness of and engagement with the philosophies, lexicon and grammar of BCK. It is foundational to grasping the core. Thus, it is unlikely that one can truly master accounting and

taxation that in popular perception comprise the core of the chartered accountancy without adequate base in BCK.

In this chapter, we have situated business in the wider context of human engagements, more so in the context of a myriad of economic activities. We have seen that business, as an economic activity is distinguishable from employment and profession. It focuses on production not for self-consumption but for markets. It is characterised by investment intensity and employment generation potential. It spurs economic growth via entrepreneurial initiative and creativity. We have also described the meaning of business ownership and the various forms it may take- single or sole and joint; proprietary and corporate. We have seen how unincorporated enterprises, more so sole-proprietorship comprise the informal sector, individually nondescript but collectively an economic force to reckon with. The ownership of such enterprises is fraught with the fallouts of unlimited liability and their status as going concerns with fragility. We also saw how Hindu

Undivided Family businesses comprise a distinct Indian form of business organisation. Although known by Hindu religion, this form of business organisation is also prevalent among Sikhs, Buddhists, Jains and Parsis. Finally, we focused on the growing corporatisation of the economic system. We studied as to how this form necessitated the development of a comprehensive system of incorporation, accounting, audit and

accountability of the corporations toward the various stakeholders.

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