Hi All,
We are a small company providing HR solutions. We need some information on the procedure for registering the company & the expenses involved in it.
Do we need to register as a private limited company ? I need more information on this.
Thanks
From India, Bangalore
We are a small company providing HR solutions. We need some information on the procedure for registering the company & the expenses involved in it.
Do we need to register as a private limited company ? I need more information on this.
Thanks
From India, Bangalore
To start with, You need to register as a proprietor ship concern.
upon registering you need to apply for service tax certificate.
PAN is mandatory too.
You have to approach the Registar of companies & furnish the following docs like PAN,Address proof of the copany like rent agreement, ID proof & passport size photographs.
This cost could vary from 1500 to 2500.
Warm Regards,
Chandra Shekar H.S
Principal Consultant
Foxjobs Pvt Ltd
D - 080 40226333
T - 080 40226300 Ext 333
F - 080 40226302
W - www.foxjobsindia.com
From India, Hyderabad
upon registering you need to apply for service tax certificate.
PAN is mandatory too.
You have to approach the Registar of companies & furnish the following docs like PAN,Address proof of the copany like rent agreement, ID proof & passport size photographs.
This cost could vary from 1500 to 2500.
Warm Regards,
Chandra Shekar H.S
Principal Consultant
Foxjobs Pvt Ltd
D - 080 40226333
T - 080 40226300 Ext 333
F - 080 40226302
W - www.foxjobsindia.com
From India, Hyderabad
Hi,
If you are looking into a long term strategy It is recommended to go for a Pvt Ltd company. Company registration will be taking place in the office of the registrar of company. You can contact the nearest office of the registrar of company. The cost is depends upon the capital you are showing in the Memorandum of article. It is a complicated procedure. Better to contact a auditor/legal advisor
If it is a trial based stuff go for the firm registration like partnership or proprietorship etc. It can be done with help of a chrted accountant.
To get a professional outlook, better to go for an Pvt Ltd stuff
anything else
you can get back to me in
Surian :D
From India, Ernakulam
If you are looking into a long term strategy It is recommended to go for a Pvt Ltd company. Company registration will be taking place in the office of the registrar of company. You can contact the nearest office of the registrar of company. The cost is depends upon the capital you are showing in the Memorandum of article. It is a complicated procedure. Better to contact a auditor/legal advisor
If it is a trial based stuff go for the firm registration like partnership or proprietorship etc. It can be done with help of a chrted accountant.
To get a professional outlook, better to go for an Pvt Ltd stuff
anything else
you can get back to me in
Surian :D
From India, Ernakulam
Hi it i not a complex a ppl say. you can get the complete detail at http://www.mca.gov.in/ it is official site where in u get all the information about legal documentaion and cost involved.
you cane even approach a professional CS who will do all this for a price (unfortunaetly they charge more than the actual expenses at ROC).
as you are just a HR consulting company you can have initial capital as 1Lk the minimum allowed for which the fees will be about 4k-5k.
apart from the above few other expenses like name availability and locking about
if u have directors then u need to get the DIN which is free.
and there will few small expenses totaling to 1k-2k
all the above mentioned details are for a PVT Ltd company for a public limited company the process will same with few aditional documentation and price.
Hope this information will be helpful for you.
Regards
akash
www.inspironit.com
you cane even approach a professional CS who will do all this for a price (unfortunaetly they charge more than the actual expenses at ROC).
as you are just a HR consulting company you can have initial capital as 1Lk the minimum allowed for which the fees will be about 4k-5k.
apart from the above few other expenses like name availability and locking about
if u have directors then u need to get the DIN which is free.
and there will few small expenses totaling to 1k-2k
all the above mentioned details are for a PVT Ltd company for a public limited company the process will same with few aditional documentation and price.
Hope this information will be helpful for you.
Regards
akash
www.inspironit.com
another good site is http://www.doingbusiness.org/Explore...x?economyid=89
Regards
Chandramauli
Wits N Skills HRD Consultants
www.witsnskills.com
From India, Ahmadabad
Regards
Chandramauli
Wits N Skills HRD Consultants
www.witsnskills.com
From India, Ahmadabad
i think u can do as a proprietorship or partnership firm.
but if u wanna register as a limited Co then refer site mca.gov.in.
i recently registered my comapny. this site gives u step by step information.
regards,
chaya
From India, Kochi
but if u wanna register as a limited Co then refer site mca.gov.in.
i recently registered my comapny. this site gives u step by step information.
regards,
chaya
From India, Kochi
Dear All,
Posting an article about starting properietorship firms, partnership firms, private limited and public limited company..read it it's a bible for layman.
warm regards,
Umesh Chaudhary
(welcomeumesh@yahoo.com)
When starting a company, once the company idea is decided, and the company is about to start business, the first thing that needs to be done is, the company has to be registered. After the company is registered with the Govt., then it can start business. The process of registering a company is known as incorporation.
Most of the people reading this article are entrepreneurs. They have decided to start their own business. If you are one of them, we strongly suggest that you read the “How to start a company?” article. That article covers all the basics you need to consider and know before you think about starting the business.
“This” article talks about how you should go about the process of turning your business idea into a registered business. It talks about the various kinds of options available and gives you the information that you will require while making these choices.
If you are starting a business, there are different kinds of legal structures among which you can choose your business to be. These are:
A Sole Proprietorship
A Partnership Firm
A Private & Public Limited Company
You could move directly to the kind of legal structure you are interested in if you know what you want. If you are not sure, we suggest you read though all the structures. This will give you a much better idea about what choices you have.
Note: Even though, forming sole proprietorship and partnership firms are not technically referred to as incorporation, we have explained them too in this article for the benefit of everybody.
Understanding Sole Proprietorships
A sole proprietorship is the most common type of business. There are sole proprietorships everywhere. Small grocery stores, STD booths are mostly proprietorship businesses.
A “Sole Proprietorship” business means that there is only ONE owner. There may be employees or helpers hired under the owner, but there is only one “head” who administors and runs the show.
The definition of a Sole Proprietorship is: A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.
The basic advantage of a sole proprietorship is that since you are the only owner, you are free to run the business just the way you want to run it. Also, in a sole proprietorship you get to keep all the profits.
The biggest disadvantage is that there is “unlimited liability” on the “Sole Owner”.
What is the meaning of unlimited liability?
In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the individual. If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma”
This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of money. Raju Sharma's bank accounts, property and even his house may be used to settle the claim.
This is the biggest disadvantage of sole proprietorships. Because of this reason, sole proprietorships are generally started if the business is small and there is “not much risk involved”.
If the concept of unlimited liablity is not clear, dont worry. It shall be cleared when you concider the other kinds of business.
To properly understand the nature of a sole proprietorship, here are a few characteristics of a sole proprietorship explained in detail:
Single Ownership:
A single individual owns the sole proprietorship! That individual owns all the assets and properties of the business. He alone bears all the risk of the business.
No sharing of profit & loss:
The entire profit out of the sole proprietor ship business goes to the sole proprietor. If there is any loss, it is also borne by the sole proprietor alone. Nobody else shares any of the profit and loss of the business.
Low capital:
The capital required by a sole proprietorship is totally arranged by the sole proprietor. He raises the capital either from his personal resources or by borrowing from friends, relatives, banks or financial institutions. Since there is only one person raising capital, very low capital can be raised.
One-man control:
The controlling power in a sole proprietorship business always remains with the owner alone. The owner or proprietor alone takes all the decisions to run the business. He may take decisions though a consultant or some advice, but the final decisions are always in his hand.
Unlimited Liability:
The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.
Almost no legal formalities:
The formation and operation of a sole proprietorship requires almost no legal formalities. However, the owner may be required to obtain a license from the local administration or from the health department of the government, whatever is necessary depending on the nature of the business.
Advantages of Sole Proprietorships
Easy to form and wind up:
A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need for any legal formalities. (Except for those businesses which require a license from local authorities or health department of government etc.) It is also very easy to wind up the business. It is the owners decision to form or wind up the business at any time.
Direct motivation:
The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between the effort and the reward. If he works hard, then there is a possibility of getting more profit and he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.
Quick decisions:
In a sole proprietorship business the sole proprietor alone is responsible for all decisions. He is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of the decision.
Better control:
In sole proprietorship business the proprietor has full control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to exercise better control over business.
Maintenance of business secrets:
Business secrecy is an important factor for every business. It refers to keeping the future plans, business strategies, etc., secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands.
Close personal relation:
The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact helps the sole proprietor to know the individual likes, dislikes and tastes of the customers. It also helps in maintaining close and friendly relations with the employees and thus, the business can run smoothly.
Encourages self-employment:
Sole proprietorship form of business organization leads to creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job opportunities for others. Thus, it helps in reducing poverty and unemployment in our country.
But, just as there are advantages, there are also disadvantages of Sole Proprietorships! You need to understand both the "advantages" and "disadvantages" before making your decision...The disadvantages are discussed next....
Disadvantages of Sole Proprietorships
Limited capital:
In a sole proprietorship business, the owner arranges for the required capital for the business. It is difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business’s growth and expansion. Venture capitalists and banks generally do not lend money to sole proprietorships.
Unlimited liability:
In case the sole proprietor fails to pay the expences arising out of business activities, his personal properties may have to be used to pay for those. This generally discourages the sole proprietor from taking risks. He thinks cautiously while deciding to start or expand the business activities.
Lack of continuity:
The existence of a sole proprietorship business is dependent on the life of the proprietor. Illness, death etc. of the owner brings an end to the business. The continuity of business operation is therefore uncertain.
Limited size:
There is a limit beyond which it becomes difficult for a sole proprietor to expand the business activities. It is not possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
Lack of managerial expertise:
A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be weak in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.
What kind of business is suitable for sole proprietorships?
To give you an idea what kind of business are suitable sole proprietorships, consider the following business. These would be suitable for a sole proprietorships:
Where the market for the product is small & local. For example, selling grocery items, books, stationery, vegetables, etc.
Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc.
Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc.
Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc.
Where manual skill is required. For example, making jewelery, haircutting or tailoring, cycle or motorcycle repair shop, etc.
How to start a sole proprietorship?
A sole proprietorship requires almost no legal formalities. It can start the day you want it to start. One may even open a bank account on the name of your sole proprietorship concern.
In case you wish to have a trade mark, design and use it as your trade mark. One may even register a Trade Mark with the proper authorities.
The only thing you must take care of is that you have the required licenses specific to your line of business. For Example: If you are a doctor you need a license to practice etc. Find out about your line of business and what licenses you may require before setting up.
Understanding Partnership Businesses
When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.
Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.
A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions.
For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.
Before a partnership is formed, a “partnership deed” should be prepared. This partnership deed may be oral or in writing. However it is wise to make sure that the partnership deed is in writing so that future conflicts may be resolved. More about the partnership deed shall be explained ahead.
To understand all the characteristics of a partnership consider the following:
Two or more members:
At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of “banking business” and 20 in case of “other business”. If the number of members exceeds this maximum limit, then that business is not called as a partnership business legally. (All the rules stated in this complete article are for a business in India)
Partnership agreement:
Whenever you think of starting a partnership business, there must be an agreement between all the partners. This agreement must contain-
The amount of initial capital contributed by each partner
Profit or loss sharing ratio for each partner
Salary or commission payable to the partners, if any
Duration of business, if any
Name and address of the partners and the firm
Duties and powers of each partner;
Nature and place of business; and
Any other terms and conditions to run the business
The partnership deed is usually not very hard to prepare through a trusted local lawyer.
Lawful business:
The partners should always carry on any kind of lawful business. To start a business in smuggling, black marketing, etc., is not termed as a partnership business in the eye of the law. Again, doing social work is not termed as a partnership business.
Competence of partners:
Since individuals join hands to become partners, it is necessary that they must be “competent” to enter into a partnership. Thus, minors, lunatics and insolvent people are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.
Sharing of profits:
The main objective of every partnership firm is to make and share the profits of the business. In the absence of any “agreement” for profit sharing, it should be shared “equally” among the partners. Suppose, there are two partners in the business and they earn a profit of Rs.20,000. They may share the profits equally i.e., Rs.10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs.5,000/- and Rs.15,000/-
Unlimited liability:
Just like a sole proprietorship, the liability of partners in a parnership is also unlimited. This means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can be utilized to meet the business liabilities. Suppose, the firm has to make payment of Rs.25,000/- to the suppliers for some goods. The partners are able to arrange for only Rs.19,000/- from the business. The balance amount, of Rs.6,000/- will have to be arranged from the personal properties and assets of the partners.
Voluntary registration:
It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain legal benefits, therefore it is desirable to register. The effects of non-registration are:
Your firm cannot take any action in a court of law against any other parties for settlement of claims.
In case there is any dispute among partners, it is not possible to settle the disputes through a court of law.
Note: Registration is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.
No separate legal existence:
Just like sole proprietorships, partnership firms also have no separate legal existence from its owners. The partnership firm is just a name for the business as a whole. If somone sues the firm, it is as good as someone sueing all the partners.
Restriction on transfer of interest:
No partner can sell or transfer his share or part or parnership of the firm to any one without the consent of the other partners. For example, A, B, and C are three partners.If “A” wants to sell his share to “D” as his health problems prevent him from working, he can not do so until B and C both agree.
Continuity of business:
A partnership firm comes to an end at death, lunacy or bankruptcy of any partner. Even otherwise, it can stop it’s business at the will of the partners. At any time, they may take a decision to end their partnership.
Advantages of Partnerships
Easy to form:
Like sole proprietorships, partnership businesses can be formed easily without any compulsary legal formalities. It is not necessary to get the firm registered. A simple agreement or parnership deed, either oral or in writing, is sufficient to create a partnership.
Note: Registration of the parnership is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.
Availability of large resources:
Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business.
Better decisions:
The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions.
Flexibility in operations:
A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of it’s operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.
Sharing risks:
In a partnership firm all the partners “share” the business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more.
Protection of interest of each partner:
In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the “partnership deed” is required. In absence of the partnership deed, no legal protection is given to the partners.
Benefits of specialization:
Since all the partners are owners of the business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.
Disadvantages of Partnerships
Unlimited liability:
All the partners are jointly liable for the debt of the firm. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners.
Uncertain life:
The partnership firm has no legal existance separate from it’s partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership.
Lack of harmony:
In a partnership firm every partner has an equal right to participate in the management. Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners. Difference of opinion may lead to the end of the parnership and the business.
Limited capital:
Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.
No transferability of share:
If you are a partner in any firm, you cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.
Different types of Partnerships
Depending on the reason behind which a particular partnership is made, partners may be of different types. To understand this better, consider the following:
Active partners:
The partners who actively participate in the day-to-day operations of the business are known as active partners. They contribute capital and are also entitled to share the profits of the business. They also share the losses that the business faces.
Dormant partners:
Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or “sleeping partners”. They only contribute capital and share the profits or bear the losses, if any.
Nominal partners:
These partners “only” allow the firm to use their “name” as a partner. They “do not” have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the business of the firm. However, they do remain liable to third parties for the acts of the firm.
Minor as a partner:
In special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.
Businesses suitable for Partnership legal structure
Having understood the basics of what a partnership business is all about, consider the following guidelines to help you decide whether you should go in for a partnership kind of business.
The following are just some examples of businesses that will be suitable for the partnership legal structure:
A partnership firm is suitable in case of business where the initial capital requirement is medium i.e. it is neither too large nor too small. Business like retail and wholesale trade or small manufacturing units can be successfully started by partners.
In a partnership firm persons having different ability, managerial talent, skill and expertise join together. So it is most suitable for construction business, legal firms etc. where each partner contributes the best as per his specialization and experiance.
How to form “parnership deeds” and start a parnership firm?
As we have explained before, it is not “necessary” to registar a partnership with the Govt. in most states of the country. (In Maharashtra it is almost compulsary. Check the laws in your state to be sure.)
However, if you do not register your partnership, you will not be legaly protected from disputes between partners etc. as we have explained before. So, it is always wise to register your parnership with the Govt.
In any case, even if you choose not to register your partnership, you should still prepare a “Partnership Deed” which will help resolve problems when disputes between partners arise.
The general procedure for registering a partnership firm all over India is quite similar:
You have prepare a “Partnership deed”
Fill in the required form at the “Registrar Of Firms” office near you.
Submit the required form, the “Partnership Deed” and other supporting documents to the “Registrar Of Firms” for approval.
Preparing the “Partnership Deed”
The “Partnership Deed”, as stated above, must contain:
The amount of capital contributed by each partner
Profit or loss sharing ratio
Salary or commission payable to any partner, if any
Duration of business, if any
Name and address of the partners and the firm
Duties and powers of each partner
Nature and place of business; and
Any other terms and conditions to run the business
The partnership deed is usually not very hard to prepare through a local lawyer.
This partnership deed must be made on stamp paper as per the laws of the place of signing. The whole process of drafting the partnership deed can be done through a trusted lawyer. It should cost you around Rs.1000/- to prepare the deed.
After preparation of the deed, it must be signed by all the partners. It must also have signatures of independent witnesses.
The deed is then submitted to the “Registrar Of Firms” along with the registration form and other supporting documents. On approval of these documents by the “Registrar Of Firms” the “Partnership Firm” is established as a legal entity and can start business under the chosen name.
Understanding joint stock companies (Private & Public Limited)
In a partnership, there can be a maximum of 20 people. Because of this limit, the amount of capital that can be generated is limited. Also, because of the unlimited liability of partnerships, the partners may be discouraged from taking huge risks and further expanding their business. To overcome these problems a public or a private company may be formed.
Private and public companies are much better investments because of “Limited liability”. This means that if an investor has invested Rs.1000/- in a particular company, and the company goes bankrupt, the investor only looses the money he has invested. To pay of the debt, the investors property, bank accounts etc. are "not" used.
Because of this limited liability, many investors are interested in investing in these private or public companies. Hence, a large capital can be generated and a huge business can be run.
The major disadvantage of Private and Public companies, is that they have a costly and elaborate process of setting up. They are also closely regulated by the government.
So what are Public or Private companies?
These companies are also know as “joint stock companies”. The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal.
What this means is that, the company “is different” from the investors. The investors put in money and capital is raised. But the company is treated as a virtual person. The company is treated as a person who is different from it’s investors. The company has an identity of it’s own. If some one sues the company, he does not sue the investors, he sues the virtual person that is the company.
To understand the concept of joint stock (private and public limited) companies, consider the following characteristics:
Legal formation:
No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company can come into existence only when it has been registered after completion of all the legal formalities required by the Indian Companies Act, 1956.
Artificial person:
Just like an individual takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as it’s birth, existence and death are regulated by law.
Separate legal entity:
Being an artificial person, a joint stock company has its own separate existence independent of it’s investors. This means that a joint stock company can own property, enter into contracts and conduct any lawful business in it’s “own” name. It can sue and can be sued by others in the court of law. The shareholders are “not” the owners of the property owned by the company. Also, the shareholders cannot be held responsible for any of the acts of the company.
Common seal:
A joint stock company has a “seal”, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, becomes binding on the company.
For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company or may be removed from his job or may have taken a wrong decision, yet, the contract is valid till a new contract is made or the existing contract expires.
Perpetual existence:
A joint stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of it’s investors. For example, in case of a private limited company having four members, if all of them die in an accident, the company will “not” be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the members.
Limited liability:
In a joint stock company, the liability of a member is limited to the amount he has invested. While repaying debts, for example, if a person has invested only Rs.10,000 then only this amount that he has invested can be used for the payment of debts. That is, even if there is liquidation of the company, the personal property of the investor can not be used to pay the debts and he will lose his investment worth Rs.10,000.
Democratic management:
Joint stock companies have democratic management and control. Since in joint stock companies there are thousands and thousands of investors, all of them cannot participate in the affairs of management of the company. Normally, the investors elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company.
The above discription must have given you an idea about public and private limited companies in general. There are some special charecterstics of Public and Private limited companies that must be understood. There are given below.
Special charecerestics of Private Limited Comapnies
These companies can be formed by at least two individuals having minimum paid-up capital of not less than Rupees 1 lakh.
As per the Companies Act, 1956 the total membership of these companies cannot exceed 50.
The shares allotted to it’s members are also not freely transferable between them.
These companies are not allowed to raise money from the pub-lic through open invitation.
They are required to use “Private Limited” after their names.
The examples of such companies are Combined Marketing Services Private Limited, Indian Publishers and Distributors Private Limited etc.
Special charectersetics of Public Lmited Companies
A minimum of seven members are required to form a public limited company.
It must have minimum paid-up capital of Rs 5 lakhs.
There is no restriction on maximum number of members.
The shares allotted to the members are freely transferable.
These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits.
These companies are required to write either ‘public limited’ or ‘limited’ after their names.
Examples of such companies are Hyundai Motors India Limited, Jhandu Pharmaceuticals Limited etc.
Advantages of Joint Stock Companies
Large financial resources:
A joint stock company is able to collect a large amount of capital through contributions from a large number of people. In a public limited company, shares can be offered to the general public to raise capital. The companies can also accept deposits from the public and issue debentures to raise funds.
Limited liability:
In case of a joint stock company, the liability of it's members is limited to the value of shares held by them. Private property of members cannot be confiscated for overcoming the debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the company to take more risks.
Professional management:
Management of a company is in the hands of the directors, who are elected democratically by the members or shareholders. These directors are known as the "Board of Directors". They manage the affairs of the company and are accountable to all the investors. So, the investors elect capable persons who have sound financial, legal and business knowledge to the board so that they can manage the company efficiently.
Large-scale production:
Since there is an availability of large financial resources and technical expertise, it is possible for the companies to have "large-scale" production. This enables the company to produce more efficiently and at a lower cost.
Research and development:
Only in joint stock company form of business, it is possible to invest a lot of money on research and development so that new design, better quality products, etc. can be achieved.
Disadvantages of Joint Stock Companies
Difficult to form:
The formation & registration of joint stock company involves a long and complicated procedure. A number of legal documents and formalities have to be completed before a company can start business. The process of formation requires the services of specialists such as chartered accountants, company secretaries, etc. Becuse of all this, the cost of formation of a company is very high.
Excessive government control:
Joint stock companies are regulated by government through the Companies Act and other economic legislations. Especially, public limited companies are required to complete various legal formalities as provided in the Companies Act and other legislations. Non-compliance with these causes a heavy penalty. This affects the smooth functioning of the companies.
Delay in policy decisions:
Generally policy decisions are taken at the “Board of Directors” meetings of the company. Further, the company has to fulfill certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions.
Businesses suitable for Joint Stock legal structure
A joint stock company form of business organization is found to be suitable where the volume of business is large and huge financial resources are needed.
Since members of a joint stock company have limited liability it is possible to raise capital from the public without much difficulty. This form of organization is also suitable for businesses which involve heavy risks.
Again, for business activities which require public support and confidence, joint stock form is preferred as it has a separate legal status.
Certain types of businesses, like production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilizers, cement, etc., are generally organized in the form of joint stock companys.
How to start a Joint Stock Company? (Procedure for Incorporation)
The basic procedure for incorporation
For a company to be incorporated, it must be registered with the “Registrar Of Companies” (ROC). After the company is registered, it receives a “Certificate Of Incorporation” after which the company becomes a legal entity.
Registration of the company
The following documents must be filed for the registration of the company:
The Memorandum of Association
The Articles Of Association
An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager.
A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole-time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto.
In addition to the above, in case of a public company, the following documents must also be filed:
Written consent of directors in Form 29 to agree to act as directors
The complete address of the registered office of the company in Form 18
Details of the directors, managing director and manager of the company in Form 32.
What is the Memorandum Of Association?
The Memorandum of the company is a compulsory document to be filed by any type of a company. The importance of the memorandum is as follows:
It specifies the basic constitution of the company. It defines the scope and limitations of the company.
Memorandum is considered as a unalterable charter of the company. It is very difficult to alter the memorandum of the company , because it defines certain powers of the company and the company cannot go beyond those powers.
Memorandum becomes a public document as soon as the company gets registered. This is because; it enables shareholders, creditors and those who deal with the company to know what kind of enterprise they are dealing with.
Memorandum forms the outer framework within which the company operates.
What is the articles of association?
The articles of association contains the rules and regulations for the internal administration of the company. It includes bye laws relating to the management of the company.
All the above stated documents have to be sent to the Registrar along with the registration fee, filing fee, stamp duty, as specified. The Registrar, on receipt of the documents, undertakes a scrutiny and if he finds nothing objectionable, issues, under his seal and signature, the “Certificate of Incorporation”
This certificate needs to be collected from the Registrar's office. After obtaining the Certificate of Incorporation the secretary of the company must send the notice of registered address of the company, if it was not sent earlier, within 30 days of registration.
On obtaining the incorporation certificate, a “Private Company” is eligible to transact business. The private company is now incorporated.
A “Public Company”, however cannot transact business unless it obtains a ‘trading certificate'
Public companies, generally wish to transact business by raising capital from the general public. The process of raising capital from the public is carried out in this stage.
For the purpose of raising capital from the public, the company needs to prepare and issue a document known as ‘prospectus’. Public companies that are confident of raising capital on their own need to prepare a document known as ‘statement in lieu of prospectus’.
In this stage, a draft of the prospectus is finalized. Copies of the prospectus are printed. A copy of the prospectus, duly signed by minimum 2 directors and countersigned by the secretary is filed with the ROC.
Thereafter the Prospectus is issued to the public. Advertisement of issue of the prospectus is usually carried out in newspapers. The public need to pay a nominal application fee and subscribe to the capital of the company within a specified period.
There are other steps that also need to be carried out during this phase:
Application to Stock exchange:
An application must be sent to the regional stock exchange for getting the name of the company listed.
Opening of bank account:
The company must open its bank account for receiving of application money.
Appointment of experts:
The company must appoint it’s brokers, solicitors and auditors of the company.
Expert opinion:
An expert’s opinion regarding the bright prospects of the company is usually written in the prospectus. Experts are usually, accountants, values, solicitors etc.
There are certain guidelines given by SEBI (security exchange board of India) regarding listing of the company on Stock exchange and issue of capital. These need to be followed; otherwise SEBI does not let the company be listed.
In response to the invitation given in the form of prospectus, investors decide about taking shares of the company. They fill in the application form attached to the prospectus and send the application as directed with the application money.
The Board of Directors consider the applications received up to the prescribed date. A resolution of allotment of shares needs to be passed. Letters of allotment are sent and after payment of the allotment money by the allot tees, the company proceeds with the formalities relating to obtaining the ‘Trading certificate’ or the ‘Commencement of business certificate’.
These formalities are listed below:
Declaration of minimum subscription:
A declaration stating that minimum shares have been subscribed needs to be sent to the Registrar.
Declaration of directors application money:
A declaration stating that the directors have paid their application and allotment money as required by the qualification shares.
Statutory declaration:
A statutory declaration by one of the directors or company secretary, declaring that the above requirements have been complied with.
If a company does not get permission to be listed on the Stock exchange, then the company is liable to pay back to it’s investors the allotment money and the application money collected from them. After refunding the money, the company needs to file a declaration that all investors have been refunded their money.
The Registrar will examine these documents and if satisfied, will issue under his seal and signature, the ‘Trading certificate’, which is also known as ‘Certificate of commencement of business’. Now the process of incorporation is complete!!
If the company fails to commence business within a year of it’s incorporation, the courts may order for the winding up of the company.
Best of Luck! We hope this guide has been helpful!
From India, Delhi
141Posting an article about starting properietorship firms, partnership firms, private limited and public limited company..read it it's a bible for layman.
warm regards,
Umesh Chaudhary
(welcomeumesh@yahoo.com)
When starting a company, once the company idea is decided, and the company is about to start business, the first thing that needs to be done is, the company has to be registered. After the company is registered with the Govt., then it can start business. The process of registering a company is known as incorporation.
Most of the people reading this article are entrepreneurs. They have decided to start their own business. If you are one of them, we strongly suggest that you read the “How to start a company?” article. That article covers all the basics you need to consider and know before you think about starting the business.
“This” article talks about how you should go about the process of turning your business idea into a registered business. It talks about the various kinds of options available and gives you the information that you will require while making these choices.
If you are starting a business, there are different kinds of legal structures among which you can choose your business to be. These are:
A Sole Proprietorship
A Partnership Firm
A Private & Public Limited Company
You could move directly to the kind of legal structure you are interested in if you know what you want. If you are not sure, we suggest you read though all the structures. This will give you a much better idea about what choices you have.
Note: Even though, forming sole proprietorship and partnership firms are not technically referred to as incorporation, we have explained them too in this article for the benefit of everybody.
Understanding Sole Proprietorships
A sole proprietorship is the most common type of business. There are sole proprietorships everywhere. Small grocery stores, STD booths are mostly proprietorship businesses.
A “Sole Proprietorship” business means that there is only ONE owner. There may be employees or helpers hired under the owner, but there is only one “head” who administors and runs the show.
The definition of a Sole Proprietorship is: A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.
The basic advantage of a sole proprietorship is that since you are the only owner, you are free to run the business just the way you want to run it. Also, in a sole proprietorship you get to keep all the profits.
The biggest disadvantage is that there is “unlimited liability” on the “Sole Owner”.
What is the meaning of unlimited liability?
In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the individual. If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma”
This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of money. Raju Sharma's bank accounts, property and even his house may be used to settle the claim.
This is the biggest disadvantage of sole proprietorships. Because of this reason, sole proprietorships are generally started if the business is small and there is “not much risk involved”.
If the concept of unlimited liablity is not clear, dont worry. It shall be cleared when you concider the other kinds of business.
To properly understand the nature of a sole proprietorship, here are a few characteristics of a sole proprietorship explained in detail:
Single Ownership:
A single individual owns the sole proprietorship! That individual owns all the assets and properties of the business. He alone bears all the risk of the business.
No sharing of profit & loss:
The entire profit out of the sole proprietor ship business goes to the sole proprietor. If there is any loss, it is also borne by the sole proprietor alone. Nobody else shares any of the profit and loss of the business.
Low capital:
The capital required by a sole proprietorship is totally arranged by the sole proprietor. He raises the capital either from his personal resources or by borrowing from friends, relatives, banks or financial institutions. Since there is only one person raising capital, very low capital can be raised.
One-man control:
The controlling power in a sole proprietorship business always remains with the owner alone. The owner or proprietor alone takes all the decisions to run the business. He may take decisions though a consultant or some advice, but the final decisions are always in his hand.
Unlimited Liability:
The liability of the sole proprietor is unlimited. This implies that, in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.
Almost no legal formalities:
The formation and operation of a sole proprietorship requires almost no legal formalities. However, the owner may be required to obtain a license from the local administration or from the health department of the government, whatever is necessary depending on the nature of the business.
Advantages of Sole Proprietorships
Easy to form and wind up:
A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need for any legal formalities. (Except for those businesses which require a license from local authorities or health department of government etc.) It is also very easy to wind up the business. It is the owners decision to form or wind up the business at any time.
Direct motivation:
The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between the effort and the reward. If he works hard, then there is a possibility of getting more profit and he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.
Quick decisions:
In a sole proprietorship business the sole proprietor alone is responsible for all decisions. He is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of the decision.
Better control:
In sole proprietorship business the proprietor has full control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to exercise better control over business.
Maintenance of business secrets:
Business secrecy is an important factor for every business. It refers to keeping the future plans, business strategies, etc., secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands.
Close personal relation:
The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact helps the sole proprietor to know the individual likes, dislikes and tastes of the customers. It also helps in maintaining close and friendly relations with the employees and thus, the business can run smoothly.
Encourages self-employment:
Sole proprietorship form of business organization leads to creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job opportunities for others. Thus, it helps in reducing poverty and unemployment in our country.
But, just as there are advantages, there are also disadvantages of Sole Proprietorships! You need to understand both the "advantages" and "disadvantages" before making your decision...The disadvantages are discussed next....
Disadvantages of Sole Proprietorships
Limited capital:
In a sole proprietorship business, the owner arranges for the required capital for the business. It is difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business’s growth and expansion. Venture capitalists and banks generally do not lend money to sole proprietorships.
Unlimited liability:
In case the sole proprietor fails to pay the expences arising out of business activities, his personal properties may have to be used to pay for those. This generally discourages the sole proprietor from taking risks. He thinks cautiously while deciding to start or expand the business activities.
Lack of continuity:
The existence of a sole proprietorship business is dependent on the life of the proprietor. Illness, death etc. of the owner brings an end to the business. The continuity of business operation is therefore uncertain.
Limited size:
There is a limit beyond which it becomes difficult for a sole proprietor to expand the business activities. It is not possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.
Lack of managerial expertise:
A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be weak in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.
What kind of business is suitable for sole proprietorships?
To give you an idea what kind of business are suitable sole proprietorships, consider the following business. These would be suitable for a sole proprietorships:
Where the market for the product is small & local. For example, selling grocery items, books, stationery, vegetables, etc.
Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc.
Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc.
Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc.
Where manual skill is required. For example, making jewelery, haircutting or tailoring, cycle or motorcycle repair shop, etc.
How to start a sole proprietorship?
A sole proprietorship requires almost no legal formalities. It can start the day you want it to start. One may even open a bank account on the name of your sole proprietorship concern.
In case you wish to have a trade mark, design and use it as your trade mark. One may even register a Trade Mark with the proper authorities.
The only thing you must take care of is that you have the required licenses specific to your line of business. For Example: If you are a doctor you need a license to practice etc. Find out about your line of business and what licenses you may require before setting up.
Understanding Partnership Businesses
When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.
Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.
A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions.
For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.
Before a partnership is formed, a “partnership deed” should be prepared. This partnership deed may be oral or in writing. However it is wise to make sure that the partnership deed is in writing so that future conflicts may be resolved. More about the partnership deed shall be explained ahead.
To understand all the characteristics of a partnership consider the following:
Two or more members:
At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of “banking business” and 20 in case of “other business”. If the number of members exceeds this maximum limit, then that business is not called as a partnership business legally. (All the rules stated in this complete article are for a business in India)
Partnership agreement:
Whenever you think of starting a partnership business, there must be an agreement between all the partners. This agreement must contain-
The amount of initial capital contributed by each partner
Profit or loss sharing ratio for each partner
Salary or commission payable to the partners, if any
Duration of business, if any
Name and address of the partners and the firm
Duties and powers of each partner;
Nature and place of business; and
Any other terms and conditions to run the business
The partnership deed is usually not very hard to prepare through a trusted local lawyer.
Lawful business:
The partners should always carry on any kind of lawful business. To start a business in smuggling, black marketing, etc., is not termed as a partnership business in the eye of the law. Again, doing social work is not termed as a partnership business.
Competence of partners:
Since individuals join hands to become partners, it is necessary that they must be “competent” to enter into a partnership. Thus, minors, lunatics and insolvent people are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.
Sharing of profits:
The main objective of every partnership firm is to make and share the profits of the business. In the absence of any “agreement” for profit sharing, it should be shared “equally” among the partners. Suppose, there are two partners in the business and they earn a profit of Rs.20,000. They may share the profits equally i.e., Rs.10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs.5,000/- and Rs.15,000/-
Unlimited liability:
Just like a sole proprietorship, the liability of partners in a parnership is also unlimited. This means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can be utilized to meet the business liabilities. Suppose, the firm has to make payment of Rs.25,000/- to the suppliers for some goods. The partners are able to arrange for only Rs.19,000/- from the business. The balance amount, of Rs.6,000/- will have to be arranged from the personal properties and assets of the partners.
Voluntary registration:
It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain legal benefits, therefore it is desirable to register. The effects of non-registration are:
Your firm cannot take any action in a court of law against any other parties for settlement of claims.
In case there is any dispute among partners, it is not possible to settle the disputes through a court of law.
Note: Registration is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.
No separate legal existence:
Just like sole proprietorships, partnership firms also have no separate legal existence from its owners. The partnership firm is just a name for the business as a whole. If somone sues the firm, it is as good as someone sueing all the partners.
Restriction on transfer of interest:
No partner can sell or transfer his share or part or parnership of the firm to any one without the consent of the other partners. For example, A, B, and C are three partners.If “A” wants to sell his share to “D” as his health problems prevent him from working, he can not do so until B and C both agree.
Continuity of business:
A partnership firm comes to an end at death, lunacy or bankruptcy of any partner. Even otherwise, it can stop it’s business at the will of the partners. At any time, they may take a decision to end their partnership.
Advantages of Partnerships
Easy to form:
Like sole proprietorships, partnership businesses can be formed easily without any compulsary legal formalities. It is not necessary to get the firm registered. A simple agreement or parnership deed, either oral or in writing, is sufficient to create a partnership.
Note: Registration of the parnership is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.
Availability of large resources:
Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business.
Better decisions:
The partners are the owners of the business. Each of them has equal right to participate in the management of the business. In case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions.
Flexibility in operations:
A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of it’s operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.
Sharing risks:
In a partnership firm all the partners “share” the business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more.
Protection of interest of each partner:
In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the “partnership deed” is required. In absence of the partnership deed, no legal protection is given to the partners.
Benefits of specialization:
Since all the partners are owners of the business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.
Disadvantages of Partnerships
Unlimited liability:
All the partners are jointly liable for the debt of the firm. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners.
Uncertain life:
The partnership firm has no legal existance separate from it’s partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership.
Lack of harmony:
In a partnership firm every partner has an equal right to participate in the management. Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners. Difference of opinion may lead to the end of the parnership and the business.
Limited capital:
Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.
No transferability of share:
If you are a partner in any firm, you cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.
Different types of Partnerships
Depending on the reason behind which a particular partnership is made, partners may be of different types. To understand this better, consider the following:
Active partners:
The partners who actively participate in the day-to-day operations of the business are known as active partners. They contribute capital and are also entitled to share the profits of the business. They also share the losses that the business faces.
Dormant partners:
Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or “sleeping partners”. They only contribute capital and share the profits or bear the losses, if any.
Nominal partners:
These partners “only” allow the firm to use their “name” as a partner. They “do not” have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the business of the firm. However, they do remain liable to third parties for the acts of the firm.
Minor as a partner:
In special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.
Businesses suitable for Partnership legal structure
Having understood the basics of what a partnership business is all about, consider the following guidelines to help you decide whether you should go in for a partnership kind of business.
The following are just some examples of businesses that will be suitable for the partnership legal structure:
A partnership firm is suitable in case of business where the initial capital requirement is medium i.e. it is neither too large nor too small. Business like retail and wholesale trade or small manufacturing units can be successfully started by partners.
In a partnership firm persons having different ability, managerial talent, skill and expertise join together. So it is most suitable for construction business, legal firms etc. where each partner contributes the best as per his specialization and experiance.
How to form “parnership deeds” and start a parnership firm?
As we have explained before, it is not “necessary” to registar a partnership with the Govt. in most states of the country. (In Maharashtra it is almost compulsary. Check the laws in your state to be sure.)
However, if you do not register your partnership, you will not be legaly protected from disputes between partners etc. as we have explained before. So, it is always wise to register your parnership with the Govt.
In any case, even if you choose not to register your partnership, you should still prepare a “Partnership Deed” which will help resolve problems when disputes between partners arise.
The general procedure for registering a partnership firm all over India is quite similar:
You have prepare a “Partnership deed”
Fill in the required form at the “Registrar Of Firms” office near you.
Submit the required form, the “Partnership Deed” and other supporting documents to the “Registrar Of Firms” for approval.
Preparing the “Partnership Deed”
The “Partnership Deed”, as stated above, must contain:
The amount of capital contributed by each partner
Profit or loss sharing ratio
Salary or commission payable to any partner, if any
Duration of business, if any
Name and address of the partners and the firm
Duties and powers of each partner
Nature and place of business; and
Any other terms and conditions to run the business
The partnership deed is usually not very hard to prepare through a local lawyer.
This partnership deed must be made on stamp paper as per the laws of the place of signing. The whole process of drafting the partnership deed can be done through a trusted lawyer. It should cost you around Rs.1000/- to prepare the deed.
After preparation of the deed, it must be signed by all the partners. It must also have signatures of independent witnesses.
The deed is then submitted to the “Registrar Of Firms” along with the registration form and other supporting documents. On approval of these documents by the “Registrar Of Firms” the “Partnership Firm” is established as a legal entity and can start business under the chosen name.
Understanding joint stock companies (Private & Public Limited)
In a partnership, there can be a maximum of 20 people. Because of this limit, the amount of capital that can be generated is limited. Also, because of the unlimited liability of partnerships, the partners may be discouraged from taking huge risks and further expanding their business. To overcome these problems a public or a private company may be formed.
Private and public companies are much better investments because of “Limited liability”. This means that if an investor has invested Rs.1000/- in a particular company, and the company goes bankrupt, the investor only looses the money he has invested. To pay of the debt, the investors property, bank accounts etc. are "not" used.
Because of this limited liability, many investors are interested in investing in these private or public companies. Hence, a large capital can be generated and a huge business can be run.
The major disadvantage of Private and Public companies, is that they have a costly and elaborate process of setting up. They are also closely regulated by the government.
So what are Public or Private companies?
These companies are also know as “joint stock companies”. The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal.
What this means is that, the company “is different” from the investors. The investors put in money and capital is raised. But the company is treated as a virtual person. The company is treated as a person who is different from it’s investors. The company has an identity of it’s own. If some one sues the company, he does not sue the investors, he sues the virtual person that is the company.
To understand the concept of joint stock (private and public limited) companies, consider the following characteristics:
Legal formation:
No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company can come into existence only when it has been registered after completion of all the legal formalities required by the Indian Companies Act, 1956.
Artificial person:
Just like an individual takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as it’s birth, existence and death are regulated by law.
Separate legal entity:
Being an artificial person, a joint stock company has its own separate existence independent of it’s investors. This means that a joint stock company can own property, enter into contracts and conduct any lawful business in it’s “own” name. It can sue and can be sued by others in the court of law. The shareholders are “not” the owners of the property owned by the company. Also, the shareholders cannot be held responsible for any of the acts of the company.
Common seal:
A joint stock company has a “seal”, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, becomes binding on the company.
For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company or may be removed from his job or may have taken a wrong decision, yet, the contract is valid till a new contract is made or the existing contract expires.
Perpetual existence:
A joint stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of it’s investors. For example, in case of a private limited company having four members, if all of them die in an accident, the company will “not” be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the members.
Limited liability:
In a joint stock company, the liability of a member is limited to the amount he has invested. While repaying debts, for example, if a person has invested only Rs.10,000 then only this amount that he has invested can be used for the payment of debts. That is, even if there is liquidation of the company, the personal property of the investor can not be used to pay the debts and he will lose his investment worth Rs.10,000.
Democratic management:
Joint stock companies have democratic management and control. Since in joint stock companies there are thousands and thousands of investors, all of them cannot participate in the affairs of management of the company. Normally, the investors elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company.
The above discription must have given you an idea about public and private limited companies in general. There are some special charecterstics of Public and Private limited companies that must be understood. There are given below.
Special charecerestics of Private Limited Comapnies
These companies can be formed by at least two individuals having minimum paid-up capital of not less than Rupees 1 lakh.
As per the Companies Act, 1956 the total membership of these companies cannot exceed 50.
The shares allotted to it’s members are also not freely transferable between them.
These companies are not allowed to raise money from the pub-lic through open invitation.
They are required to use “Private Limited” after their names.
The examples of such companies are Combined Marketing Services Private Limited, Indian Publishers and Distributors Private Limited etc.
Special charectersetics of Public Lmited Companies
A minimum of seven members are required to form a public limited company.
It must have minimum paid-up capital of Rs 5 lakhs.
There is no restriction on maximum number of members.
The shares allotted to the members are freely transferable.
These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits.
These companies are required to write either ‘public limited’ or ‘limited’ after their names.
Examples of such companies are Hyundai Motors India Limited, Jhandu Pharmaceuticals Limited etc.
Advantages of Joint Stock Companies
Large financial resources:
A joint stock company is able to collect a large amount of capital through contributions from a large number of people. In a public limited company, shares can be offered to the general public to raise capital. The companies can also accept deposits from the public and issue debentures to raise funds.
Limited liability:
In case of a joint stock company, the liability of it's members is limited to the value of shares held by them. Private property of members cannot be confiscated for overcoming the debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the company to take more risks.
Professional management:
Management of a company is in the hands of the directors, who are elected democratically by the members or shareholders. These directors are known as the "Board of Directors". They manage the affairs of the company and are accountable to all the investors. So, the investors elect capable persons who have sound financial, legal and business knowledge to the board so that they can manage the company efficiently.
Large-scale production:
Since there is an availability of large financial resources and technical expertise, it is possible for the companies to have "large-scale" production. This enables the company to produce more efficiently and at a lower cost.
Research and development:
Only in joint stock company form of business, it is possible to invest a lot of money on research and development so that new design, better quality products, etc. can be achieved.
Disadvantages of Joint Stock Companies
Difficult to form:
The formation & registration of joint stock company involves a long and complicated procedure. A number of legal documents and formalities have to be completed before a company can start business. The process of formation requires the services of specialists such as chartered accountants, company secretaries, etc. Becuse of all this, the cost of formation of a company is very high.
Excessive government control:
Joint stock companies are regulated by government through the Companies Act and other economic legislations. Especially, public limited companies are required to complete various legal formalities as provided in the Companies Act and other legislations. Non-compliance with these causes a heavy penalty. This affects the smooth functioning of the companies.
Delay in policy decisions:
Generally policy decisions are taken at the “Board of Directors” meetings of the company. Further, the company has to fulfill certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions.
Businesses suitable for Joint Stock legal structure
A joint stock company form of business organization is found to be suitable where the volume of business is large and huge financial resources are needed.
Since members of a joint stock company have limited liability it is possible to raise capital from the public without much difficulty. This form of organization is also suitable for businesses which involve heavy risks.
Again, for business activities which require public support and confidence, joint stock form is preferred as it has a separate legal status.
Certain types of businesses, like production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilizers, cement, etc., are generally organized in the form of joint stock companys.
How to start a Joint Stock Company? (Procedure for Incorporation)
The basic procedure for incorporation
For a company to be incorporated, it must be registered with the “Registrar Of Companies” (ROC). After the company is registered, it receives a “Certificate Of Incorporation” after which the company becomes a legal entity.
Registration of the company
The following documents must be filed for the registration of the company:
The Memorandum of Association
The Articles Of Association
An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager.
A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole-time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto.
In addition to the above, in case of a public company, the following documents must also be filed:
Written consent of directors in Form 29 to agree to act as directors
The complete address of the registered office of the company in Form 18
Details of the directors, managing director and manager of the company in Form 32.
What is the Memorandum Of Association?
The Memorandum of the company is a compulsory document to be filed by any type of a company. The importance of the memorandum is as follows:
It specifies the basic constitution of the company. It defines the scope and limitations of the company.
Memorandum is considered as a unalterable charter of the company. It is very difficult to alter the memorandum of the company , because it defines certain powers of the company and the company cannot go beyond those powers.
Memorandum becomes a public document as soon as the company gets registered. This is because; it enables shareholders, creditors and those who deal with the company to know what kind of enterprise they are dealing with.
Memorandum forms the outer framework within which the company operates.
What is the articles of association?
The articles of association contains the rules and regulations for the internal administration of the company. It includes bye laws relating to the management of the company.
All the above stated documents have to be sent to the Registrar along with the registration fee, filing fee, stamp duty, as specified. The Registrar, on receipt of the documents, undertakes a scrutiny and if he finds nothing objectionable, issues, under his seal and signature, the “Certificate of Incorporation”
This certificate needs to be collected from the Registrar's office. After obtaining the Certificate of Incorporation the secretary of the company must send the notice of registered address of the company, if it was not sent earlier, within 30 days of registration.
On obtaining the incorporation certificate, a “Private Company” is eligible to transact business. The private company is now incorporated.
A “Public Company”, however cannot transact business unless it obtains a ‘trading certificate'
Public companies, generally wish to transact business by raising capital from the general public. The process of raising capital from the public is carried out in this stage.
For the purpose of raising capital from the public, the company needs to prepare and issue a document known as ‘prospectus’. Public companies that are confident of raising capital on their own need to prepare a document known as ‘statement in lieu of prospectus’.
In this stage, a draft of the prospectus is finalized. Copies of the prospectus are printed. A copy of the prospectus, duly signed by minimum 2 directors and countersigned by the secretary is filed with the ROC.
Thereafter the Prospectus is issued to the public. Advertisement of issue of the prospectus is usually carried out in newspapers. The public need to pay a nominal application fee and subscribe to the capital of the company within a specified period.
There are other steps that also need to be carried out during this phase:
Application to Stock exchange:
An application must be sent to the regional stock exchange for getting the name of the company listed.
Opening of bank account:
The company must open its bank account for receiving of application money.
Appointment of experts:
The company must appoint it’s brokers, solicitors and auditors of the company.
Expert opinion:
An expert’s opinion regarding the bright prospects of the company is usually written in the prospectus. Experts are usually, accountants, values, solicitors etc.
There are certain guidelines given by SEBI (security exchange board of India) regarding listing of the company on Stock exchange and issue of capital. These need to be followed; otherwise SEBI does not let the company be listed.
In response to the invitation given in the form of prospectus, investors decide about taking shares of the company. They fill in the application form attached to the prospectus and send the application as directed with the application money.
The Board of Directors consider the applications received up to the prescribed date. A resolution of allotment of shares needs to be passed. Letters of allotment are sent and after payment of the allotment money by the allot tees, the company proceeds with the formalities relating to obtaining the ‘Trading certificate’ or the ‘Commencement of business certificate’.
These formalities are listed below:
Declaration of minimum subscription:
A declaration stating that minimum shares have been subscribed needs to be sent to the Registrar.
Declaration of directors application money:
A declaration stating that the directors have paid their application and allotment money as required by the qualification shares.
Statutory declaration:
A statutory declaration by one of the directors or company secretary, declaring that the above requirements have been complied with.
If a company does not get permission to be listed on the Stock exchange, then the company is liable to pay back to it’s investors the allotment money and the application money collected from them. After refunding the money, the company needs to file a declaration that all investors have been refunded their money.
The Registrar will examine these documents and if satisfied, will issue under his seal and signature, the ‘Trading certificate’, which is also known as ‘Certificate of commencement of business’. Now the process of incorporation is complete!!
If the company fails to commence business within a year of it’s incorporation, the courts may order for the winding up of the company.
Best of Luck! We hope this guide has been helpful!
From India, Delhi
Hi Friends,
I am very new to IT field. Just one month back i have joinined as a HR in an IT company.Right now we are looking people for our concern.Already we took all the efforts to get the candidates.But still We are unable to meet our requirement.so Please suggest some new idea to meet our requirement.I am waiting for your earliest reply.
Regards
Kavitha.am
From India, Madras
I am very new to IT field. Just one month back i have joinined as a HR in an IT company.Right now we are looking people for our concern.Already we took all the efforts to get the candidates.But still We are unable to meet our requirement.so Please suggest some new idea to meet our requirement.I am waiting for your earliest reply.
Regards
Kavitha.am
From India, Madras
help me for
assignment on:you have been hired by a company that is preparing to send a group
of employee to another country.purpose is to provide these employees
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From India, Ludhiana
assignment on:you have been hired by a company that is preparing to send a group
of employee to another country.purpose is to provide these employees
with the report ,providing information about communicating in these
culture which will help them adjust succeed at their goals.
country: america
From India, Ludhiana
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