ICAI Notes- Forms of Business Organisation- 2 | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

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

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

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

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.