MST531: Forms of Organization

Lecture 4
The Four Types of Firms
Sole Proprietorship

Partnership

Cooperative Society

Company
 Sole Proprietorship
 Business is owned and run by a
single person. This person is
called Proprietor or owner
 Advantages
 Minimal Regulation; so, easy to create
 Complete control in one hand, so
decision making is simpler and
quicker
 Sole Proprietorship
 Disadvantages
 From Legal and Tax point of view, it has
Unlimited personal liability as Proprietorship
firm has same status as its owner
 All business income is taxed as the personal
income
 Equity capital limited to owner’s wealth
 Can not float shares, has limited capital, thus
difficult to expand the business
 Transfer of ownership is difficult
 Partnership
 Similar to a sole proprietorship, but
with two or more owners
 All partners are personally liable for
all of the firm’s risks and reap the
rewards
 Governed by ‘Indian Partnership Act,
1932’ through Partnership Deed
 Partnership Firm is distinct legal and
tax entity. Partners can take salaries
 Partnership…
 Partners have unlimited liability
 In India, presently, tax rate applicable
to Partnership firm stands at 30%
 A lender can require partners to repay
all of the firm’s outstanding debts
 The partnership ends with the death or
withdrawal of any single partner
 Partnership
 Limited liability Partnership (LLP)
 Partnership firm wherein liability of
Partners is limited to their investment
 Among all partners, at least one of
the partners be an Indian Resident
 Interest that LLP can pay on
investment made by partners is
limited to maximum of 12% of total
income
Limited Partnership
General Partners
 Have the same rights and liability as partners
in a “regular” partnership
 Partnership ceases to exist on death or
withdrawal

Limited Partners
- Have limited liability and cannot lose more than
their initial investment
- Have no management authority and cannot
legally be involved in the managerial decision
making for the business
- Partnership doesn’t dissolve on death or
withdrawal
 Cooperative Society
 A society which has its objective the
promotion of economic interests of
its members in accordance with
cooperative principles
 Key Features:
a. Minimum 10 members, no max limit
b. Members are its owners
 Cooperative Society…
Key Features:
c. Managing Committee elected on “one
member, one vote” takes decisions
d. Dividend payable on capital
contributed by members is subject to
a ceiling of 9%
e. Surplus distributed as Bonus
 Cooperative Society…

Advantages:
a. Can be formed easily
b. Limited liability of members
c. Governmental grants and financial
assistances provided
 Cooperative Society…

Disadvantages:
a. Usually can’t employ outside talent
b. Members not motivated to pour more
capital because of ‘one member, one
vote” principle
c. Influential members often exploit for
personal gains
 Company
 A distinct legally defined, artificial
being, separate from its owners, the
shareholders
 It has legal powers to enter into contracts,
own assets, borrow money, sue and be
sued in its name
 The company is solely responsible for its
own obligations. Its owners are not liable
for any obligation that it enters into
 Company: Formation
1. Name must be approved by the
Registrar of Companies (ROC) of the
state of its Registered Office
2. MOA (defines Constitution, Objectives
and Scope) and AOA (specifies rules
& regulations of internal governance)
need conform to Indian Companies
Act, 1956 (amended in 2013) and be
approved by the ROC
 Company: Key Features

 Liability of shareholders limited to the

share capital subscribed to by them
 Double taxation system:
 Company pays tax on profits
 Shareholders are liable to pay tax on
dividends received (presently not in
India), Instead, company pays tax on
dividends distributed
 Company: Key Features
 may be Public Limited Company or
Private Limited Company
 Private Limited Company:
Must have at least 2 members but
number can not exceed 200
Minimum paid up capital of Rs 1 lac
Restrictions on transfer of shares
Can’t invite general public to
subscribe shares
Need to add ‘Private Limited’ in end
 Company: Key Features
Public Limited Company:
 Must have at least 7 members and no
upper limit
 Minimum paid up capital of Rs 5 lacs
 Permits free transfer of shares
 Can invite general public to subscribe
shares
 Most appropriate form of business
except when business is small
Need to add ‘Limited’ in end
 Company: Ownership
Represented by shares or stock. Owner is called
-Shareholder
-Stockholder
-Equity Holder
 Sum of all ownership value is called equity
 There is no limit to the number of
shareholders, and thus the amount of funds
a company can raise by selling stock
 Owner is entitled to dividend payments
 Company: Identification
 Certain letters are used after its name
 Inc. stands for a Company in USA
 PLC for a Public Company in UK
 LTD for a Private Company in UK
 AG (Aktiengesellschaft) for a Public
Company in Germany
 GmbH (Gesellschaft mit beschränkter
Haftun) for a Private Company in Germany
Company: Identification
 Certain letters are used after its
name
 SA (Société Anonyme) in France
 S.p.A (Società per azioni) in Italy
 AB (Aktiebolag) in Sweden, and
 NV (Naamloze vennootschap) in the
Netherlands for Private Company
Thank you

Prof. Narinder Verma

School of Business Management and Liberal Arts
Shoolini University
Village Bajhol, Solan (H.P)

+91 9816080528
narinderverma@shooliniuniversity.com