Forms of Business Organization

 

LIMITATIONS :

1. Legal formalities - The procedure of formation of Co. is very long, time consuming, expensive and requires lot of legal formalities to be fulfilled.


2. Lack of secrecy - It is very difficult to maintain secrecy in case of public co, as company is required to publish and file its annual accounts and reports.


3. Lack of Motivation - Divorce between ownership and control and absence of a direct link between efforts and reward lead to lack of personal interest and incentive.


4. Delay in decision making - Red tapism and bureaucracy do not permit quick decisions and prompt actions. There is little scope for personal initiative.


5. Oligarchic management - Co. is said to be democratically managed but actually managed by few people i.e. board of directors. Sometimes they take decisions keeping in mind their personal interests and benefit, ignoring the interests of shareholders and Co.

TYPES OF COMPANIES :

On the basis of ownership, companies can be divided into two categories namely Private & Public.

Private Company	Public Company
It has minimum 2 & maximum 50 member	It has minimum 7 & maximum unlimited members.
It cannot invite general public to buy its shares & debentures	It invites general public to buy its shares & debentures
There are certain restrictions on transfer of its shares.	Its share are freely transferable
It can commence business after incorporation	It can commence business after obtaining certificate of commencement of business
It has to write “Private Ltd” after its name	It has to write only “Limited” after  its name
Minimum capital require is one Lakh.	In it minimum capital required is five lakhs
Example : Tata Sons, Citi Bank, Hyundai Motor India	Example : Reliance Industries Ltd., Wipro Ltd., Raymonds Ltd.

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 Org. - 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 organized 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 organized in the form of sole proprietorship & partnership. Where as the risky ventures should be done in company form of organization because the liability of shareholders is limited.

FORMATION OF A COMPANY :

Formation of a company means bringing a company into existence and starting its business. The steps involved in the formation of a company are :-
Promotion          Incorporation      Capital subscription Commencement of business.
A private company has to under go only first two steps but a public company has to undergo all the four stages.

I. PROMOTION : Promotion means conceiving a business opportunity and taking an initiative to form a company.

l. Step in Promotion :

1. Identification of Business Opportunity: The first and foremost function of a promoter is to identify a business idea e.g. product a new product or service.


2. Feasibility Studies :- After identifying a business opportunity the promoters undertake detailed studies of technical, Financial, Economic feasibility of a business.


3. Name Approval: After selecting the name of company the promoters submit an application to the Registrar of companies for its approval.


4. Fixing up signatories to the Memorandum of Association :- Promoters have to decide about the director who will be signing the memorandum of Association.


5. Appointment of professional : - Promoters appoint merchant bankers, auditors etc.


6. Preparation of necessary documents :- The promoters prepare certain legal documents as memorandum of Association, Articles of Association which have to he submitted to the Registrar of the companies.

II. INCORPORATION :

Incorporation means registration of the company as body corporate under the companies Act 1956 and receivng certificate of Incorporation. Step for Incorporation

1. Application for incorporation :- Promoters make an application for the incorporation of the company to the Register of companies.


2. Filing of necessary documents :- Promoters filling the following documents :-



	Memorandum of Assoication.		Articles of Association.
	Statement of Authorized Capital		Consent of proposed director.
	Agreement with proposed managing director.		Statutory declaration.



3. Payment fees :- Along with filing of above documents, registration fees has to be deposited which depends on amount of the authorised capital.


4. Registration :- The Registrar verifies all the document submitted. If he is satisfied then he enters the name of the company in this Register.


5. Certificate of Incorporation :- After entering the name of the company in the register. The Registrar issues a ‘Certificate of Incorporation’. This is called the birth certificate of the company.

III. Capital Subscription :

A public company can raise funds from the public buy issuing shares and Debentures. For this it has to issue prospectus and undergo various other formalities:-

 

CBSE Business Studies Class XI ( By Mr. Kailash Gururani )
Email Id : [email protected]