CHAPTER - 2

FORMS OF BUSINESS ORGANISATION

 Introduction:
Decision relating to the form of organization plays an important role if one has to start a business. The
forms of organization are (i) Sole proprietorship (ii) Partnership (iii) Joint Hindu Family business (iv)
Co-operative society (v) Joint Stock Company.

 Meaning of Sole Proprietorship: It refers to a form of business organization which is owned, managed
and controlled by an individual who is in receipt of all profits and bearer of all risks.
Features:
(i) Easy to form and close: hardly any legal formalities are required to start a sole proprietorship
business. Sometimes license is required. There is no separate law that governs sole proprietorship.
Closure of the business can also be done easily. Thus, there is ease in formation as well as closure of
business
(ii) Liability: the liability of the owner is unlimited. That’s why in case of losses and repayment of debt,
property of the owner can also be used if the assets of the firm are insufficient.
(iii) Sole risk bearer and recipient of profit: in sole proprietorship firm, whole risk is borne by a single
individual as he is personally liable for all losses. Likewise, if the business is successful, he is the sole
receiver of profits as a reward of risk bearing.
(iv) Control: the sole proprietorship is owned, managed and controlled by a single individual. All
decisions are taken by him solely without any interference of others.
(v) No separate entity: a sole proprietorship has no legal identity apart from its owner. As a result,
owner is held responsible for all the activities of business.
(vi) Lack of business continuity: since, the owner and the business are same; death, insanity,
imprisonment, physical ailment or bankruptcy can cause closure of the business.

Merits:
(i) Quick decision making: it facilitates quick decision making as a sole trader is not required to consult
or inform anybody about his decisions. As sole proprietor enjoys freedom in making business decisions,
he can timely capitalize market opportunities.
(ii) Personal satisfaction: when a person is working alone, there is personal satisfaction involved in it.
If a business is successful, it contributes to the satisfaction of the sole proprietor and creates a sense of
accomplishment and confidence.
(iii) Secrecy: sole trader is not expected to share his business decisions and secrets with anybody. This
facilitates the proprietor to keep his business related operations secret or confidential. He is also not
bound by law to publish accounts of firm.
(iv) Direct incentive: direct relationship between efforts and reward provide maximum incentive to the
sole trader to work hard.
(v) Ease of formation and closure: hardly any legal formalities are required to start a sole
proprietorship business. Sometimes license is required. There is no separate law that governs sole
proprietorship. Closure of the business can also be done easily. Thus, there is ease in formation as well
as closure of business
 Demerits:
(i) Limited resources: in such business, funds are limited to the owner’s personal savings and his
borrowing capacity. Banks and other money lending institutions generally hesitate to extend a long term
loan to a sole proprietor. Due to limited resources size of such business rarely grows and generally
remains small.
(ii) Limited life of a business concern: in the eyes of law, owner and business are considered one and
the same. Therefore, illness, death and insolvency of the proprietor affect the business and can lead to its
closure.
(iii) Unlimited liability: sole trader is personally liable for all the debts. In case of heavy loss, he may be
liable to sell his personal property also. Thus, his liability is unlimited.
(iv) Limited managerial ability: sole trader’s managerial ability is limited and he cannot afford to
employ experts. He also assumes all managerial tasks. Therefore, decision making is generally not
balanced.

 Meaning of Joint Hindu Family Business: it is the oldest form of business organization which is
owned and carried on by the member of HUF. Karta, the eldest member of the family controls the
business. This type of business is governed by the Hindu Law. All the members of the family have equal
ownership rights over the property of an ancestor and are called co-parceners. According to the Hindu
Succession (Amendment) Act, 2005, the daughter of a coparcener of a Joint Hindu Family shall, by
birth, become a coparcener. At the time of partition of such a ‘Joint Hindu Family’ the coparcenaries
property shall be equally divided to all the coparceners irrespective of their gender (male or female). The
eldest member (male or female) of ‘Joint Hindu Family’ shall become Karta. Married daughter has equal
rights in property of a Joint Hindu Family. The basis of membership in the business is birth in a
particular family and three successive generations can be members in the business.
Features:
(i) Formation: at least two members and an ancestral property is the basic requirement for formation of
Hindu family business. An individual becomes the member by birth; therefore, no agreement is required.
It is governed by Hindu Succession Act 1956.
(ii) Liability: the liability of Karta is unlimited but the liabilities of other members are limited to the
extent of their share.
(iii) Control: karta has full control over the family business. All business decisions are taken by him
only. However, karta may not be an expert in all the fields but still his decisions are binding on other
members.
(iv) Continuity: after the death of the karta, the next eldest member takes his position and thus, the
business continues. The business can, however, be terminated with the mutual consent of the members.
(v) Minor members: under HUF business, an individual becomes member by taking birth in the family.
Hence, a minor can also be a member of HUF business.
 Meaning of Partnership: Relation between persons to share the profits of the business carried on by all
the partners or any one of the partner acting on behalf of all the other partners.
According to the Indian Partnership Act, 1932” the relation between the persons who have agreed to share
the profit of the business carried on by all or any one of them acting for all.”

Features:
(i) Formation: it is governed by the Indian Partnership Act, 1932. It comes into existence through a
legal agreement wherein the terms and conditions governing the relationship among the partners are
specified. The agreement should be to carry on some business.
 (ii) Liability: the partners of a firm have unlimited liability. Personal assets may be used for repaying
debts in case the business assets are insufficient. Further , the partners are jointly and individually liable
for payment of firm’s debts.
(iii) Risk bearing: the partners bear the risks involved in running a business as a team. The reward
comes in the form of profits which are shared by the partners in an agreed ratio.
(iv) Decision making: decisions are generally taken with mutual consent. Thus, the activities of a
partnership firm are managed through the joint efforts of all the partners.
(v) Continuity: partnership is characterized by lack of continuity since the death, retirement, insolvency
or insanity of any partner can bring an end to the business.
(vi) Membership: the minimum number of partners needed to start a partnership firm is two. According
to section 464 of the Companies Act 2013, maximum number of partners in a partnership firm can be
100, subject to the number prescribed by the government. As per Rule 10 of The Companies
(miscellaneous) Rules 2014, at present the maximum number of members can be 50.
(vii) Mutual agency: every partner is both an agent and a principal. He is an agent of other partners as
he represents them and thereby binds them through his acts. He is a principal as he too can be bound by
the acts of other partners.

Merits:
(i) Easy to start and close: it is very easy to form a partnership firm. Only an agreement among the
partners is required to form it. There is no compulsion with registration. Similarly, it is very easy to close
such firm.
(ii) Proper decision making: in partnership, decisions are taken jointly by partners after consulting
each other. Partners oversee different functions generally in areas of their expertise. Thus, wise and
balanced decisions are likely to be made.
(iii) More funds: there are more funds as capital is contributed by more number of partners. This way
additional operation can be undertaken.
(iv) Secrecy: a partnership firm is not legally bound to publish its accounts. So, it can maintain
confidentiality of information and secrecy.
(v) Sharing of risks: the risks are shared by all the partners. This reduces the anxiety, burden and stress
on individual partner.

Limitations:
(i) Unlimited liability: the liability of partners is unlimited and they are liable individually as well as
jointly. It may prove to be a big drawback for those partners who have greater personal wealth.
(ii) Possibility of conflicts: partnership is run by a group of persons wherein the decision making
authority is shared. There is possibility of conflicts among the partners in case of difference in opinion
on some issues.
(iii) Lack of continuity: partnership comes to an end with the death, retirement, insolvency or lunacy of
any of its partner. Thus, it lacks continuity.
(iv) No public confidence: the confidence of the public in partnership firms is generally low because it
is not legally required to publish its accounts.
(v) Limited Resources: There is a restriction on the number of partners, and hence contribution in terms
of capital investment is usually not sufficient to support large scale business operations.
 Types of partners

1. General / Active Partner - Such a partner contributes capital and takes active part in the management of
the firm. Such partner shares profits and losses of the firm and bears unlimited liability.

2. Sleeping of Dormant Partner - He does not take active part in the management of the firm. Though he
invest money, shares profit & loss and has unlimited liability.

3. Secret Partner - He participates in business secretly without disclosing his association with the firm to
general public. His liability is also unlimited. He also contributes capital, shares profit and losses and
participates in the management of the firm.

4. Nominal Partner - Such a partner only gives his name and goodwill to the firm. He neither invests
money nor takes profit. But his liability is unlimited. He does not take active part in the management of the
firm.

5. Partner by Estoppel - He is the one who by his words or conduct or initiative or behaviour gives an
impression to the outside world that he is a partner of the firm whereas actually he is not. His liability is
unlimited towards the third party who has entered into dealing with firm on the basis of his presentation.

6. Partner by holding out - He is the one who is falsely declared partner of the firm whereas actually he is
not. And even after becoming aware of it, he does not deny it. His liability is unlimited towards the party
who has deal with firm on the basis of this declaration.

Minor as a Partner: Partnership is based on legal contract between two persons who agree to share the
profits or losses of a business carried on by them. As such a minor is incompetent to enter into a valid
contract with others; he cannot become a partner in any firm. However, a minor can be admitted to the
benefits of a partnership firm with the mutual consent of all other partners. In such cases, his liability will be
limited to the extent of the capital contributed by him in the firm. He will not be eligible to take an active
part in the management of the firm. Thus, a minor can share only the profits and cannot be asked to bear the
losses. However, he can if he wishes, inspect the accounts of the firm. The status of minor changes when he
attains majority. In fact, on attaining majority, the minor has to decide whether he would like to become a
partner in the firm. He has to give a public notice of his decision within six months of attaining majority. If
he fails to do so, within the stipulated time, he will be treated as a full-fledged partner and will become liable
to the debts of the firm to an unlimited extent, in the same way as other active partners are.

Types of partnership:

On the basis of duration:

Partnership at will: the life of this type of partnership depends upon the will of partners. The partnership can
be dissolved at the desire of any partner on giving a notice.

Particular partnership: it is the partnership which is formed to accomplish a particular project or to carry out
an activity for a specified period of time. It dissolves automatically at the expiry of fixed period or
completion of project.

On the basis of liability:

General partnership: in this form of partnership the liability of every member is joint and unlimited and
every partner is entitled to take active part in the management of the business.

Limited partnership: it is one in which liability of at least one partner is unlimited, whereas, rest of the
partners may have limited liability. Such a partnership does not get terminated with the death, lunacy or
insolvency of partners with limited liability. The limited partners do not enjoy the right of management and
their acts do no bind the firm or the other partners. Registration of such firm is compulsory.
Partnership deed
It is the written agreement, which specifies the terms and conditions that govern the partnership. It generally
includes name of firm, nature and location of business, duration of business, investment made by each
partner, distribution of profits and losses, duties and obligations of the partners, interest on capital and
drawings, etc.

Registration of partnership firm

It means the entering of the firm’s name, along with the relevant prescribed particulars, in the Register of
firms kept with the Registrar of Firms.

Need for Registration

Registration provides conclusive proof of the existence of a partnership firm. It is at the option for a
partnership firm to get registered. However, non registration deprives the firm from a number of benefits.
Consequences of non registration

A partner of an unregistered firm cannot file a suit against the firm or other partners.
The firm cannot file a suit against third parties.
The firm cannot file a suit against the partners.

Procedure for getting a firm registered:

1. Submission of application in the prescribed form to the Registrar of firms and the application should be
signed by all the partners and should contain name and location of the firm, names of other places where the
firm carries on business, date when each partner joined the firm, names and addresses of the partners and
duration of partnership.
2. Deposition of required registration charges.
3. The registrar after approval will make an entry in the register of firms and will subsequently issue a
certificate of registration.

 Meaning of Cooperative Society: It is a voluntary association of persons formed for protecting the
consumers from middlemen. The cooperative society is compulsorily required to be registered under the
Cooperative Societies Act, 1912. A minimum of 10 adult persons are required to form a cooperative
society. Capital is raised from its members through issue of shares. The society acquires a distinct legal
identity after its registration.

FEATURES
1. Voluntary association - Everyone having a common interest is free to join a cooperate society and can
also leave the society after giving proper notice.
2. Legal status - Its registration is compulsory and it gives it a separate legal identity distinct from its
members. The society can enter into contracts and hold property in its name, sue and be sued by others.
3. Limited liability - The liability of the member is limited to the extent of their capital contribution in the
society.
4. Democratic control - Management and control lies with the managing committee elected by the members
by giving vote. Every member has one vote irrespective of the number of shares held by him.
5. Service motive - The main aim is to serve its members and not to maximize the profit.

MERITS
1. Ease of formation - It can be started with minimum of 10 members. Registration is also easy as it requires
very few legal formalities.
2. Limited liability:- The liability of members is limited to the extent of their capital contribution.
3. Stable Existence - Due to registration it is a separate legal entity and is not affected by the death, Lunacy
or insolvency of any of its member.
4. Economy in operations - Due to elimination of middleman and voluntary services provided by its
members.
5. Government Support - Govt. provides support by giving loans at lower interest rates, subsidies & by
charging less taxes.
6. Social utility: - It promotes personal liberty, social justice and mutual cooperation. They help to prevent
concentration of economic power in few hands.

LIMITATIONS

1. Shortage of capital - It suffers from shortage of capital as it is usually formed by people with limited
means.
2. Inefficient management - Co-operative society is managed by elected members who may not be
competent and experienced. Moreover it cannot afford to employ expert and experienced people at high
salaries.
3. Lack of Secrecy - Its affairs are openly discussed in its meeting which makes it difficult to maintain
secrecy.
4. Excessive govt. control - it suffers from excessive rules and regulations of the govt. It has to get its
accounts audited by the auditor and has to submit a copy of its accounts to registrar.
5. Conflict among members - The members are from different sections of society with different viewpoints.
Sometimes when some members become rigid, the result is conflict.

TYPES OF CO-OPERATIVE SOCIETIES

1. Consumers co-operative Society - It seeks to eliminate middleman by establishing a direct link with the
producers. It purchases goods of daily consumption directly from manufacturer or wholesalers and sells
them to the members at reasonable prices.

2. Producer s Co-operative Society - The main aim is to help small producers who cannot easily collect
various items of production and face some problem in marketing. These societies purchase raw materials,
tools, equipments and other items in large quantity and provide these things to their members at reasonable
price.

3. Marketing Co-operative Society - It performs various marketing function such as transportation,

warehousing, packing, grading, marketing research etc. for the benefit of its members. The production of
different members is pooled together and sold by society at good price.

4. Farmer s Co-operative Society - In such societies, small farmers join together and pool their resources for
cultivating their land collectively. Such societies provide better quality seeds, fertilisers, machinery and
other modern techniques for use in the cultivation of crops. It provides them the opportunity of cultivation
on large scale.

5. Credit co-operative Society - Such societies protect the members from exploitation by money lenders.
They provide loans to their members at easy terms and reasonably low rate of interest.

6. Co-operative Housing Society - The main aim is to provide houses to people with limited means / income
at reasonable price. The members of these societies consist of people who are desirous of procuring
residential accommodation at lower costs.

Joint Stock Company

A company is an association of persons formed for carrying out business activities and has a legal status
independent of its members. A company can be described as an artificial person having a separate legal
entity, perpetual succession and a common seal. The company form of organisation is governed by The
Companies Act, 2013. As per section 2(20) of Act 2013, a company means company incorporated under this
Act or any other previous company law. The shareholders are the owners of the company while the Board of
Directors is the chief managing body elected by the shareholders. Usually, the owners exercise an indirect
control over the business. The capital of the company is divided into smaller parts called ‘shares’ which can
be transferred freely from one shareholder to another person (except in a private company).
Characteristics of Joint Stock Company

1. Formation

The formation of a company is a time consuming, expensive and complicated process. It involves the
preparation of several documents and compliance with several legal requirements before it can start
functioning. Incorporation of companies is compulsory under The Companies Act 2013 or any of the
previous company law, as state earlier. Such companies which are incorporated under companies Act 1956
or any company law shall be included in the list of companies.

2. Artificial person:

A company is an artificial person created by law. It is created by legal process and not by natural birth. Even
though it has no natural personality, it has legal personality. Therefore, it can enter into contracts, sue and
can be sued, own property, appoint employees and borrow money like any other natural person.

3. Common seal:

Since a company is an artificial person having no physical features like a natural person, it cannot sign.
Hence every company by law must have a common seal in which its name is engraved. The common seal
can serve as its signature. The common seal is fixed on all important documents and contracts which is
witnessed by signature of two directors and countersigned by secretary where ever required. The common
seal is kept under the custody of directors.

4. Perpetual succession:

Since every company has separate existence from its members, directors and employees, their death,
insolvency or insanity will not affect its life and existence. Men may come and they may go but a company
remains forever. It can be wound up under the provision of the act.

5. Limited liability:

Usually the liability of members of a company is limited to the extent of uncalled or unpaid shares held by
them. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned
liability.
6. Control:
The management and control of the affairs of the company is under taken by the board of directors that
appoints top management officials for running the business. The board of directors is directly accountable to
the shareholders for working of the company.

7. Separate Legal entity:

From the day of its incorporation, a company acquires an identity, distinct from its officials for running the
business. The directors hold a position of immense significance as they are directly accountable to the
shareholders for the working of the company. The shareholders, however, do not have the right to be
involved in the day-to-day running of the business.

8. Risk bearing:
The risk of losses in a company is borne by all the share holders. This is unlike the case of sole
proprietorship or partnership firm where one or few persons respectively bear the losses. In the face of
financial difficulties, all shareholders in a company have to contribute to the debts to the extent of their
shares in the company’s capital. The risk of loss thus gets spread over a large number of shareholders.
Advantages of joint stock company

1. Limited liability:
Usually the liability of members of a company is limited to the extent of uncalled or unpaid shares held by
them. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned
liability.
2. Perpetual existence:
Death, insolvency or insanity of any member of the company will not affect its life and existence. Men may
come and they may go but a company remains forever. It can be wound up under the provision of the act.
3. Professional management:
The Company appoints experienced, competent and expert to manage the business. Their services lead to
managerial and administrative efficiency and accuracy.
4. Scope for expansion:
A company can collect huge amount of capital from unlimited number of members, who are ready to invest
because of limited liability, easy transferability of shares and chances of high return. Capital can be attracted
from public as well as in the form of loan from banks or financial institutions. Hence, there is greater scope
for expansion.

5. Transfer of interest:

The ease of transfer of ownership adds to the advantage of investing in a company as shares of Joint Stock
Company, especially public companies, are freely transferable. A member who wants to sell his shares can
easily do so in the stock market. This encourages the public and other to invest in shares.

Disadvantages of Joint Stock Company

1. Difficult formation:

Formation of Joint Stock Company is an expensive and time consuming process as a number of legal
formalities have to be undertaken in order to register the company.

2. Lack of secrecy:

This form of organization lacks business secrecy because it is compulsory for the company to publish
accounts and other records.
3. Numerous regulations:
The Company is a subject to excessive government control. It has to follow the numerous provision of the
companies act. This makes working difficult.
4. Delay in decision making:
The Joint Stock Company is completely not free to take all decisions and to implement the decisions. Due to
excessive government control and democratic set up all decisions are taken in meetings and some decisions
require shareholder’s approval. All this leads to delay in decisions.
5. Lack of contact with customer:
A company can’t be in a position to maintain intimate contacts with customers. It cannot be able enter to the
requirements of each and every customer. Then there is no close personal touch which decreases the
competitive strength of the business due to large scale operation.
6. Lack of contact with employees:
The top management may not have contact with their employees. This may cause friction and disputes
amongst the management and the employees with may affect the worker’s and employee’s morale.
7. Conflict of interest:
Many persons are the owners of Joint Stock Company. There can be misunderstanding and jealousy among
them and these cause problems in operation of business and profit making. The employees, for example,
may be interested in, higher salaries, consumers’ desire high quality products at lower prices and the
shareholders want higher returns in the form of dividends and increase in the intrinsic value of their shares.
8. Oligarchic management:
Sometimes the BOD may misappropriate the fund and mislead the shareholders by window dress report. The
directors may even manipulate the trading on the stock exchange. Thus shareholders can be exploited by
corrupt directors. It is so because the shareholders are spread all over the country and a very small
percentage attend the general meetings.

Types of companies
Private company
A private company is a company which, by its Memorandum of Association, limits the number of its
members not exceeding 200 excluding the present and past employees (minimum 2) and prohibits the sales
of its shares to the general public. A private company must use the words ‘private limited (Pvt. Ltd.) in its
name.
Privileges of private company
The following are some of the privileges of a private limited company as against a public limited company:
1. A private company can be formed by only two members whereas seven people are needed to form a
public company.
2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private
company.
3. Allotment of shares can be done without receiving the minimum subscription.
4. A private company can start business as soon as it receives the certificate of incorporation. The public
company, on the other hand, has to wait for the receipt of certificate of commencement before it can start a
business.
5. A private company needs to have only two directors as against the minimum of three directors in the case
of a public company. However the maximum number of directors for both type of companies is 15.
6. A private company is not required to keep an index of members while the same is necessary in the case of
a public company.

Public company
A public company is a company which, by its Memorandum of Association, limits the number of its
members at least 7 and to open the boundary of having the maximum number of shareholders to the fullest.
It doesn’t prohibit the sales of its shares to the general public but rather it allows collecting major capital by
offering shares to the public. The public company is governed by the authorized capital with which is
registered. The shares are transferable. A public company must use the word ‘limited (Ltd.) in its name.
However, a private company which is a subsidiary of a public company is also treated as a public company.
One Person Company
The Indian Companies Act 2013 introduces a new type of entity to the existing list which is known as One
Person Company. In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of
OPC.
As per section 3(1) of the Indian Companies Act, 2013 a one person company means a company with only
one person as its member. That one person will be the shareholder of the company. It avails all the benefits
of a private limited company.

Characteristics
The minimum paid up capital for a one person company is Rupees one lakh. Rule 3(1) provides that only a
natural person who is an Indian citizen and resident in India shall be eligible to incorporate OPC.
No person shall be eligible to incorporate more than one OPC or become nominee in more than one such
company.
No minor shall become member or nominee of the OPC or can hold share with beneficial interest.
Such company cannot be incorporated or converted into a company under section 8 of the Act.
Such company cannot carry out Non-Banking Financial Investment activities including investment in
securities of any body corporate.
No such company can convert voluntarily into any kind of company unless two years have expired from the
date of incorporation of OPC, except threshold limit is increased beyond fifty lakh rupees or its average
annual turnover during the relevant period exceeds two crore rupees.

Formation of a Company

Steps/stages/Procedure of formation of a company

1. Promotion of a company
2. Incorporation or Registration of a company
3. Capital subscription stage
4. Commencement of business

Promotion of Company
As company is an artificial person so it requires someone to conceive an idea of the company and decide
about its form, size, type, etc. Those who make a decision about these aspects are known as promoters.
Promoters may be an individual, firm or company responsible for the promotion of the company.
Different steps of Promotion stage
(1) Identification of business opportunity: The promotion of business starts with the discovery of a new
idea. The idea can come into mind by observing the deficiency of some product in the market. Such
opportunity is then analysed to see its technical and economic possibilities.
(2) Preliminary investigation: The promoter has to investigate that what sort of facilities are available at
the place of establishing company.
(3) Arrange factors of production: After having satisfied himself with the possibility of success of
business being established on the basis of new idea the promoter has to make arrangement of
different factors of production.
(4) Arranging finances: After arranging different factors of production the promoters enters into
different deals with bankers and other financial institutions in order to arrange finance.
(5) Preparing preliminary documents: The promoter has to prepare important documents required for
obtaining certificate of incorporation and commencement of business. The company requires
Memorandum of Association to define its objectives and activities, Articles of Association for its day
to day activities and Prospectus for inviting people to subscribe for its shares and debentures.
(6) Preliminary contracts: These contracts are made by the promoters before the incorporation of the
company with different parties in the interest of the company. A company cannot be forced to
honour a preliminary contract. Promoters, however, remain personally liable to third parties for these
contracts.
(7) Naming of the company: The promoters have to select a name for the proposed company and submit
an application to the registrar of companies of the state in which registered office of the company is
to be situated.
(8) Appointing professionals: Certain professionals are appointed by the promoters to assist them in the
preparation of necessary documents which are required to be submitted with the Registrar of
Companies.
(9) Fixing up signatories to the MoA: Promoters have to decide about the members who will be signing
the MoA of the proposed company. Usually the people signing memorandum are also the first
directors of the company. Their written consent to act as directors and to take up the qualification
shares in the company is necessary.

Incorporation or Registration of Company

(1) Approval of the name: The proposed name of the company must be approved by the Registrar of
Companies.
(2) Filing of documents: The following documents are filed with the Registrar of Companies for
incorporation:
(a) Memorandum of Association
(b) Articles of Association
(c) Notice: As per Section 146 of the Companies Act, notice regarding the situation of the office of
the company must be served.
(d) The agreements: As per the provisions of Section 33 of Indian Companies Act the copy of the
agreement if any which the company proposes to enter into with any individual, firm or company
should be filed.
(e) List of directors: The list of directors with their names, addresses and other details has to be
submitted with the Registrar of Companies.
(f) Written consent of the directors
(g) Statutory declaration: It is necessary for the incorporation of the company that a statutory
declaration signed by a director, manager or secretary of the company or by an advocate of
Supreme Court or by a practicing chartered accountant stating that all provisions of the
Companies Act with regard to incorporation has been duly complied with.
(3) Payment of fee: The Company must pay the prescribed filing and registration fee and stamp duty
while filing the above documents.
(4) Registration: The Registrar of Companies will carefully scrutinize the documents and if satisfied
with the compliance of legal formalities regarding registration, he enters the name of the company in
his register.
(5) Certificate of Registration/incorporation: After the registration, the Registrar of Companies will issue
the certificate of incorporation. It is signed by the Registrar specifying the date of issue.

The Certificate of Incorporation is the conclusive evidence of the legal existence of the company. The
private company can commence its business after issue of certificate of incorporation but a public
company has to receive certificate of commencement.

Capital Subscription
The public company can raise funds from public by issue of shares and debentures. It is required to issue
the prospectus, which is an invitation to the public to subscribe to the capital of the company. The
company has to follow the following steps for raising funds from the public
(1) SEBI Approval
(2) Filing of Prospectus
(3) Appointment of Banker, Brokers and Underwriters etc.
(4) Minimum subscription

Qualification Shares: To ensure that the directors have some stake in the proposed company, the Articles
usually have a provision requiring them to buy a certain number of shares. They have to pay for these
 shares before the company obtains Certificate of Commencement of Business. These are called
Qualification Shares.

Minimum Subscription: It is the minimum amount required by the company for its preliminary
functions. The limit of minimum subscription is 90 percent of the size of the issue. A public company
cannot make allotment of shares unless minimum subscription has been received. This arrangement has
been made in the act to safeguard the interest of shareholders. This provision is not applicable to private
company.

Return of allotment: It is a statement containing the names and addresses of shareholders and the number
of shares allotted to each. It is signed by a director or secretary and is filed with the Registrar of
Companies within 30 days of allotment.

Commencement of business
A private company can commence its business after its incorporation but the public company has to
obtain certificate to commence business after filing the following documents:
1. Prospectus or statement in lieu of prospectus
2. Minimum subscription
3. Qualification shares
4. Return of allotment
5. Declaration
6. Statutory declaration

Memorandum of Association:
1. It defines the objects for which the company is formed.
2. This is the main document of the company.
3. This defines the relationship of the company with outsiders.
4. Every company has to file Memorandum of Association.
5. Alteration of Memorandum of Association is difficult.

· Articles of Association:
1. It defines the ways to achieve the objectives of the company that are to be achieved.
2. This is the subsidiary document of the company.
3. Articles define the relationship of the members and the company.
4. It is not necessary for the public limited company.
5. It can be altered by passing a special resolution.

CHOICE OF FORM OF BUSINESS ORGANISATION

The following factors are Important for taking decision about form of organization.

1. Cost and Ease in Setting up the organisation - Sole proprietorship is least expensive and can be formed
without any legal formalities to be fulfilled. Company is most expensive with lot of legal formalities,
2. Capital Consideration - Business requiring less amount of finance prefer sole proprietorship and
partnership form, where as business activities requiring huge financial resources prefer company form.
3. Nature of Business - If the work requires personal attention such as tailoring unit, hair cutting saloon, it is
generally set up as a sole proprietorship. Units engaged in large scale manufacturing are more likely to be
organised in company form.
4. Degree of Control Desired - A person who desires full and exclusive control over business prefers
proprietorship rather than partnership or Co. because control has to be shared in these cases.
5. Liability or Degree of Risk - Projects which are not very risky can be organised in the form of sole
proprietorship & partnership. Whereas the risky ventures should be done in company form of organization
because the liability of shareholders is limited.
6. Continuity: In case the business needs a permanent structure, company form is more suitable. For short
term ventures partnership or proprietorship may be preferred.
7. Management ability: the nature of operations and the need for professionalized management affect the
choice of form of organization. If the organisation’s operations are complex in nature and require
professional management, company form of organization is better. Proprietorship or partnership may be
suitable where simplicity of operations allow even people with limited skills to run the business.