TYPES OF ORGANISATION: Introduction to some

WHAT IS A COMPANY?
It has no strict technical or legal meaning It is an Association of Persons for carrying out Economic activity / Non- Economic Activity. (sec. 25 companies) But, it is used mainly in the context of economic activity. Indian laws to deal with AOPs 1. Partnership Act (based on law of agency), 2. Companies Act 3. limited liability partnership Act DEFINITION: A company means a company formed and registered under this act or an existing company (registered under any previous law). Prof. Haney an artificial person created by law, having separate entity, with perpetual succession and common seal. This legal definition does not help in understanding as to what a company is. So, we turn our attention to its features. FEATURES OF A COMPANY: 1. Incorporated Association (with minimum 2 / 7 members): An association of more than 10 persons in case of banking business and more than 20 persons in case of other commercial activity, if not registered as a company or under any other law, then it is an illegal association [sec. 11] 2. Separate Legal entity: distinct from its members. So, a company can hold property in its own name, defend a case. [CASES:Solomon vrs. Solomon & Co. ltd. , Lee vrs. Lee Air Farming ltd.] 3. Artificial person: acts through natural persons 4. Limited liability: It means the members would nt be liable for the business liability of the company except to the extent of the contracted sum they are supposed to pay. This limit can operate vis--vis three ways i) limited by shares: shareholder would pay only what is payable for the shares he has purchased. ii) limited by guarantee: what he has guaranteed to pay

iii)

guarantee companies having share capital: combination of both above ways

Unlimited liability of members: If membership is reduced below statutory minimum and company carries on business for more than 6 months after such reduction, there would be unlimited liability. In course of winding-up, if the court (now, tribunal) is of the opinion that business was carried on to defraud creditors, members knowingly party to the transaction would be personally liable. [Can a company be a partner in a firm? > Unlimited liability of the company. DCA: Yes, if object clause of the charter of the company permits.] 5. Transferability of shares: The transfer of shares of a company could not be prohibited, but could be restricted. However this restriction is only permissible in private companies. Public company share transfer is free. Sec. 82: shares, debentures or other interest of any member in a company is movable property, transferable in the manner provided in AOA. 6. Perpetual succession: King (the monarch) is dead, long live the king (office of the king). So, even if all shareholders of a company perish, company would survive as shares would be automatically transferred to the legal heirs of the deceased shareholders. 8.Common seal: Official signature of the company. Company signals its assent to a contract through its common seal. Contents: name engraved in legible characters, date of incorporation, place Form: engraven suggests that it is of metal; could be of any shape. Statutory cases of affixing: Power of attorney to execute deeds in / outside India Share certificates (debenture certificate not provided) Share warrant Documents authorising any person outside India to common seal to a deed or other document

TYPES OF COMPANIES
Private Public

Limited / Unlimited

PRIVATE : 3(1)(iii) : means a company which has a minimum paid-up capital of Rs. 1 lakh or such higher amount as may be prescribed , and by its AOA [ not a private agreement ] provides: right to transfer shares is restricted (irrelevant in case the company is a guarantee company without capital , pre-emptive restriction is possible) maximum members = 50 [ employee shareholders (employee directors?), became members while in employment which has ceased but continue to be members , are excluded] [joint holders = 1 member] prohibits invitation to public for subscribing to the shares and debentures of the company prohibits any invitation or acceptance of deposits from persons other that its members, directors or their relatives.[If violated, then it will become a public company]

[Minimum number: 2, Minor cannot be subscriber to MOA, Guardian signing shall be deemed that he has signed in his individual capacity] PUBLIC COMPANY: 3(1)(iv) means a company which is not a private company, has a minimum paid-up capital of Rs. 5 lakhs or such higher sum as may be prescribed, is a private company which is a subsidiary of a company which is not a private company. Except Sec. 25 companies to which minimum paid-up capital requirement is not applicable, companies without share capital are now not possible.
WHO IS A MEMBER?: Sec.41

1. Subscribers to MOA upon registration (takes certain shares, but becomes member immediately after incorporation whereas in case of others, they become members only when their name is entered in Register) 2. any person who agrees in writing + name in register of members (holding shares without name in register cannot be a member- Sant Chemicals (P) Ltd. v. Aviant Chemicals (P) Ltd. (2000) (Bom) [holder of share warrant is not a member] 3. Every company holding equity shares and who is a beneficial owner as per records of the depository shall be deemed to be a member Members v. Shareholders
A person may be a member while he is not a shareholder (though for a limited period).[sale, death, insolvency)

Bearer of share warrant is a shareholder but, his name is struck off from register of members.[Exception: AOA may provide for some limited purpose that the bearer of share warrant is a member] Subscriber to MOA becomes a member immediately after incorporation but becomes shareholder when shares are allotted to him.

Minor can be a member in respect of fully paid shares only provided he acquires the shares by way of transfer or transmission.(DCA) Subsidiary cannot be e member in holding company except in some cases. Firm can be a member in Sec.25 companies only. A foreigner, subject to FEMA, can be a member. Society is not a legal entity, but can be a shareholder. Registered Trade Union can hold shares.

DIFFERENCE BETWEEN PRIVATE AND PUBLIC COMPANY: PRIVATE COMPANY 2 50 2 Restricted Can not issue PUBLIC COMPANY 7 No limit 3 Free Can for shares, debentures, deposits To be filed 3 days before allotment After receiving certificate of commencement Required

1. 2. 3. 4. 5.

Minimum no. of members Max. members Minimum directors Transferability of shares Prospectus lieu

6. Statement in prospectus 7. Commencement business

of Exempted

of After incorporation

8. Statutory meeting statutory report 9. Directors consent

and Not required

10. Appointment of directors 11. Retirement

Not required for Required appointment All by a single resolution Separate resolutions Retirement by rotation not 2/3rd. of directors shall be required rotational directors

12. Increase directors

of To any extent not exceeding no. of shareholders without CG permission 2 members personally 13. Quorum for GM present 13. Managerial remuneration No ceiling

in

no.

If more than 12, CG permission is necessary

5 members personally present 11 % of N.P. to all managerial personnel, individually 5 % to MD /

WTD / Manager 14. Filing of returns Exempted from filing many to be filed returns

STATUTORY COMPANY: Formed under a special statute. (Life Insurance Act of India) REGISTERED COMPANY: under Companies Act, 1956 or an existing company. LIMITED LIABILITY COMPANIES: 1. Limited by shares: to the extent unpaid on shares allotted, can be enforced at any time during the existence and also at the time of liquidation of the company. 2. Limited by Guarantee: undertakes to contribute to the assets of the company at the time of liquidation. 3. Limited by guarantee as well as shares: 1+2 above, Exempted from minimum paid-up capital requirement. UNLIMITED COMPANIES: may have share capital or may not have. The AOA states the no. of members with which the company is to be registered, and the capital, if any. (Not in the MOA)
ASSOCIATIONS NOT FOR PROFIT: sec. 25 companies

C.G. gives the license, may permit not to use the words Limited or Pvt. Ltd. [Intended to form a company for promotion of art, sports, commerce, etc, AND Prohibits payment of dividend] No stamp duty on MOA and AOA Objects can be altered only with previous approval of C.G. Partnership firm can be a member of such company. On dissolution of the firm, membership ceases. GOVERNMENT COMPANIES:
Sec. 617: any company in which not less than 51% of the paid up share capital is held by C.G. / State Govt. (s) / Any combination of these two

[Subsidiary of a Govt. company is a govt. company]

May be a private or public company in essence. FOREIGN COMPANY: A company incorporated outside India but having a place of business in India. [A company having share transfer or share registration office in India, will be held to have a place of business in India] Office, Store house, Godown, etc., are places of business. Mere appointment of an agent in India is not place of business. HOLDING & SUBSIDIARY COMPANY: Sec. 4: A company will be subsidiary of another, if and only if, The other controls the composition of its BOD {By shareholding or contract or provision in the AOA/ MOA of the subsidiary} The other holds more than half of its nominal value of its equity capital {As opposed to market value; not half of paid-up capital} [However, shares held or power exercisable by any person as a nominee of that other company shall be treated as held or exercisable by the said company . Ex. B & C are As subsidiaries. B & C hold more than 50% of equity capital of the company D. D shall be deemed to be a subsidiary of A even though A has not made any direct investment in D, nor B or C singly hold more than 50% equity in D.] It is a subsidiary of a third company which itself is subsidiary to the controlling company

INVESTMENT COMPANIES: If the principal business is acquisition of shares, debentures, stocks or other securities of other companies, it is known as investment company. PRODUCER COMPANIES: Part IXA having 12 chapters (An act within an Act) They are to provide flexibility of corporate form of business entity to overcome the limitations of co-operative societies and at the same time to uphold the co-operative principle of mutual association (members can be only primary producers and/or producer institutions; 10 or more individual primary producers or two or more producer institutions or a combination of 10 or more individuals and producer institutions). Objects of the Producer Companies: contained in Sec. 581B

Status: A private company without the word private. Shall not be a public company. It can be limited by shares only. A producer company can have only equity shares. (Sec.581ZB) The document defining the rules for internal regulation of the company called Articles of Association (AOA) lays down these matters: Sec581G (some important matters) 1. 2. 3. 4. 5. 6. 7. Single vote irrespective of shareholding Voluntary membership and available to all eligible Board will administer, elected by members limited return (AOA to provide max. return on capital) provision for members, employees and others education determination and distribution of withheld price (can be in cash or kind or shares) distribution of patronage bonus (after limited return and transfer to reserve as per sec.581ZI; in the form of cash or shares or both) 8. contribution ILLEGAL ASSOCIATIONS: Not a company, more than 10 members in case of banking business or more than 20 members in case of other business.
Exceptions to illegal association:

Stock exchanges, AOPs not for profit, Single HUF {if more than one HUFs combine , provision applies, minors to be excluded } EFFECTS OF ILLEGAL ASSOCIATION: 1. 2. 3. 4. 5. Every member is personally liable and fine of Rs. 10,000 per member. No contractual capacity, cannot sue or be sued upon. Cannot be wound up Illegality will not be cured even if membership is subsequently reduced A member cannot sue for partition or dissolution. PARTNERSHIP ENTITIES Definition: Relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all created by contract, not by operation of law. Characteristics: 1. Association of two or more persons - does not include `Firm, Company can, if authorized by MOA (Sec. 11 of Companies Act- not more than 10 / 20) 2. Agreement (for a venture, for a period- any time partners can pull out)

3. 4.

5. 6. 7.

- all valid elements of a contract express/implied by contract, not by operation of law (co owners) or by status( HUF). Business (only for business) - legal purpose, profit motive. Sharing of profits (Net profit) - a person may share, but may not be a partner, but, if a person is not sharing , then he is not a partner. A person may not share loss, but must share profit. Mutual Agency - agent & principal An agent of the firm agent of firm while dealing with outside world Relation between partners inter se is that between principals - inter se partners, he is principal.

Formation : No consideration is required for creating partnership. (for agency, no consideration is required), normally in writing (deed) Who can not be partner? - Minor, Alien enemy, Person of unsound mind Parties competent to contract can. But minor can be admitted to the benefit of partnership with consent of all the partners. Partnership Abstract relation, FIRM visible collective body Duration of Partnership 1. Fixed term: After expiry also can continue, it becomes a partnership at will 2. At Will: no mention of duration. 3. Particular partnership Adventure PARTNERSHIP and CO-OWMNERS Co-owners starting business may become partners. Grounds of Difference Partnership Co-owner May or may not arise from 1. Mode of Creation Agreement agreement, may come from status 2. Business Must May not be their 3. Transfer of Interest Can not without consent of all Can partners 4. Maximum Number Limit is there No Limit 5. Authority A partner is an agent Co-owner is not an agent 6. Partition of Property Can not be claimed (In specie) Can claim Dissolution can
COMPANY vrs. PARTNERSHIP FIRM COMPANY 1.Mode of creation Incorporated under statute PARTNERSHIP FIRM Registration is not compulsory (mutual agreement)

2.Membership

Minimum: 2 / 7 Maximum: 50 / unlimited

2 10 banking / 20 other business

3. Legal status 4. Liability of members

Distinct from its members Limited

not separate from its members Unlimited (jointly and severally liable)

5. Transfer of shares

Freely Public Co.; Restricted Consent Private Co. necessary

of

all

partners

is

6. Agency of members

Shareholder is not an agent (his acts Partner is an agent of the firm and dont bind the company) other partners If not otherwise provided in the deed, every partner has a right to participate in mgt. of firm

7. Management

BOD elected by the members

8. Perpetual secession

Yes

Unless otherwise agreed, death, insolvency of partners dissolves the firm

9.Powers

Object clause of MOA, change Mutual consent through right procedure

No Partnership exists in the following cases: 1. Mere lending money and receiving interest varying with profit. 2. Servant/Agent receives remuneration as a share of profit 3. Widow/child of a deceased partner receiving share of profit 4. Person selling his business and share of goodwill and receiving share of profit as consideration for sale. 5. HUF carrying business.

LIMITED LIABILITY PARTNERSHIP

Its a body corporate with perpetual succession distinct from its partners formed with two or more persons for lawful business with profit motive. Change in partners will not impact on existence, rights and liabilities of the partnership. Minimum two partners are required to form it.

It should have at least two designated partners who are individuals and one of them should be resident (stayed for 182 days or more) in India. Nominees of bodies corporate can also be designated partners. Every partner is an agent of the LLP, but not of other partners. It is a hybrid of private company and partnership where the partners manage the entity, not through a BOD. A firm, private company or unlisted public company may convert to LLP. Each partner shall have one vote only. Majority rule prevails. For change of business, unanimous consent is required. In some countries, LLP must have at least one general partner whose liability is unlimited. PE funds take LLP form. The general partner manages and limited partners provide fund.

TRUST
In India, trusts are predominantly used for charitable purpose. MFs use this concept in their overall business. Trust is a legal arrangement in which a person settles (author/settler) a property in favour of a person (trustee) to manage the property for the benefit of somebody (beneficiary). The instrument that binds all of them is called trust deed. Commercial trusts are in infancy in India.

END OF DOC