CA FOUNDATION – BCK CA SREE HARSHA

CHAPTER 1 – BCK INTRODUCTION

PART 1 – VARIOUS FORMS OF BUSINESS ORGANISATIONS

There are mainly 5 different forms of business organisations in India:

SOLE PROPRIETORSHIP:
 It can be regarded as the easiest and the earliest form of business. When an individual makes a
choice to start a business of one’s own, to be one’s own boss sole-proprietorship emerges. (one-
person band)
 It may not have been registered in many cases.
 Individually they are small – but Their collective contribution to GDP, Employment and even
exports is very impactful.
 Fate of the enterprise is linked with the personal wellbeing of the owner – no employee security
or employee welfare.
 All the profits of the enterprise accrue to the sole proprietor and so do the risks of business.
 Features include:
o Autonomy of being one’s own boss (No restrictions)
o Sole provider of capital (so lot of capital cannot be raised)
o Visibility of the owner and personalised services (owner will take care of everything)
o Sole bearer of risks (no sharing in profits as well as loss)
o Unlimited liability (Even personal assets should be attached for business liabilities)
o May not be a going concern (going concern= enduring life of business in the foreseeable
future)
o Succession of ownership will happen through “Will or Testament” of the proprietor or
through inheritance by law. (In case if no Will/Testament exists – inheritance will happen
through Hindu Succession Act, 1956)

HINDU UNDIVIDED FAMILY (HUF) BUSINESS:

 HUF is an entity formed automatically by members of the common ancestry/family including
their wives and daughters. (A HUF cannot be formed by a group of people who do not constitute
a family)
 A HUF enjoys a separate entity status under the Income Tax Act. (However, a HUF cannot earn
income from salary – Because entire family cannot be an employee anywhere)
 Family is formed by marriage. Marriage in most societies is a means to creating progenies
/children. Thus, there is second generation comprising the siblings. Entire family will be called as
HUF.
 HUF includes Buddhist, Jain, Parsi and Sikh families as well. (But not Muslim families)
 Relevant law for distribution of property is Hindu Succession Act, 1956.
 Features of HUF:
o Formed by birth in a Hindu (Buddhist, Jain, Parsi and Sikh) family – No agreement or
incorporation required. (However, if muslim brothers want to start HUF they can’t do it
and they should form only partnership firm)
o Family pool of resources – Hence large capital base.
o Social capital through family involvement – Not financial capital, it is social capital –
because trust among family members will act like a capital for the entity.

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o The family members are the automatic co-owners (called coparceners) by birth – It is a
limitation because with every new born baby – share of the existing people will
decrease.
o Decision making is quick – because usually Karta will take most of the decisions.
o Unlimited liability for the Karta – However coparceners liability is limited to the extent of
their share in the property.
o Doubtful as a going concern (going concern= enduring life of business in the foreseeable
future) – Because many business have not lost beyond 3rd generation. Now a days
nuclear families are being preferred over Joint families.
o Succession of ownership – is through will or testament. In its absence it will be through
Hindu Succession Act, 1956.

PARTNERSHIP
 Partnership implies contractual co-ownership of business. It is a relationship between two or
more persons who agree to share the profits and losses of a business.
 The contract- an agreement enforceable at law - called ‘deed’ is the essence of a partnership –
which may be in verbal or oral form.
 It species the bases of association of the persons in a partnership business e.g. capital
contribution, profit sharing, etc.
 Deed may be registered under partnership act 1932 – however it’s not mandatory.
 Features:
o Agreement is the essence – hence even non family members can take part in it.
o Two or more persons – Maximum is 10 in case of banking and 20 in case of other
businesses.
o Profit sharing and loss sharing exists.
o It can be formed for trade, occupation, profession etc. But it cannot be a Non profit
organisation.
o Mutual agency – All are jointly and severally liable for each other’s acts.
o Unlimited liability on all the partners.
o Since partnership arises out of contract, it also ceases in the same way. A partner may
serve a notice of severance to the firm and the partnership comes to an end.
o Succession of ownership – Ownership is not easily transferable. A new partner can be
admitted only if other partners consent.

LIMITED LIABILITY PARTNERSHIP (LLP)

 It is a kind of partnership with limited liability.
 It has to be mandatorily incorporated /registered under the Limited Liability Partnership Act,
2009 – Ministry of corporate affairs is the regulator for LLPs too in India.
 For the purpose of ensuring compliance of LLPs – few partners will be appointed as “Designated
Partners”
 Features of LLP:
o Limited liability. No personal liability of partner, except in case of fraud.
o Incorporation is mandatory.
o It is a legal entity separate from its partners – So going concern is ensured.
o Minimum 2 and no limit on maximum number of partners.
o ROC is the administrating authority. (Registrar of companies)
o Limited Statutory compliances - not too many like a company.
o Every partner of LLP is only agent of firm - No Mutual agency.

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COMPANY/JOINT STOCK COMPANY

 Company is a body corporate, having an existence independent of all its members.
 It has its distinct name, registered office, identification number etc.
 Different types of companies include:
o Private limited company – Explained below
o Public limited company – Explained below
o One-person company – Just one share holder (But there can be many directors).
o Small company – A type of private limited company - With less turnover and capital –
will have less compliances.
o Dormant company – Company which is incorporated for future business or holding an
asset. A company if it applies for dormant status – compliance and regulatory
requirements will reduce.
o Government company or Public sector undertaking (PSU) – It is a company where more
than 51% of shares are held by one or more governments.
 A company will have MOA – Memorandum of Association and AOA – Articles of Association as
its charter documents.
 For companies preparing financial statements annually, and Auditing their Books of Accounts is
mandatory.
 If company is listed in such case company should provide quarterly results should be provided to
respective stock exchanges in which they are listed.
 Regulator of companies in India is Ministry of Corporate Affairs – and under it a separate body
has been established – Registrar of Companies (ROC)
 When companies are listed on any stock exchange – SEBI regulations will also be applicable.

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FEW POINTS ON BUSINESS OWNERSHIP – IN VARIOUS FORMS OF BUSINESS ORGANISATIONS:

 Business ownership is a bundle of rights: Profits are exclusive right of owners. However, if
there are losses, these have also to be incurred by the owners. Owners have right to manage the
business. However, in certain forms of business ownership can be separated from management.
For example, in a company – shareholders are the owners where as directors are the managers.
 Business may be owned singly or jointly: Owner need not be one single person – it can be
multiple people – which happens in case of partnership, LLP, Company etc
 Business may be organised as a proprietary or a corporate concern: proprietary concern
doesn’t have separate legal status. Whereas corporate concern will have separate legal entity
status. LLP and Company are corporate form of business organisations. They existence continues
irrespective of existence of their owners.

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PART 2 – BCK and Its Overview

Business and commercial knowledge is a universal subject – which is very vast and dynamic. Business
and commerce as comprising an array of activities for the production, distribution and exchange
(buying and selling) of goods and services.

The subject which deals with Business and its related aspects is BCK.

BCK – AND ITS CHARACTERISTICS:

 BCK is Vast: The universe of business is vast. It includes manufacturing, trading and services. For
example: within retail trade - door-to-door direct sellers, street vendors, weekly haats or bazars,
neighbourhood shops, market places, malls, company chain stores and online retail (e-tail) etc.
all comprise retail trade.
 BCK is Eclectic (Multidisciplinary): BCK is eclectic i.e., it derives from various disciplines e.g.
marketing, accounting & finance, operations, human behaviour (psychology, sociology), laws,
economics, ethics etc. Each discipline has a vocabulary of its own and thus contributes toward
BCK vocabulary.
 BCK is Ever Evolving and Expanding: BCK domains are ever evolving and expanding. For
example, information and communications technology has introduced several terms in the
lexicon of BCK e.g. 24X7, B2B, B2C, BPO, chips, etc

BCK – IMPORTANCE FOR CHARTERED ACCOUNTATNS:

The Chartered Accountants shall be able to conduct the audit diligently only when they understand
the nuances of the business whose accounts they prepare or audit. CA should enhance their BQ
(Business Quotient) and be updated with the industry updates always.

CLASSIFICATION OF HUMAN ACTIVITIES:

Human Activities

Economic Non - Economic

(Undertaken for (Self interest,
livelihood, profits) spiritual, hobbies etc)

Business, Profession Charity, Philantraphy

or Employment etc

Note: Agriculture is considered to be Non-Economic activity in India – because most of the

agriculture activity in India is subsistence agriculture. (i.e. for self consumption)

CHARACTERISTICS OF ECONOMIC ACTIVITIES:

 Economic activities are income generating. (Rent, Interest, Profit, Fees etc)
 Economic activities are productive (They create some value – goods/services)
 Even consumption is an economic activity (Consumption represents demand side of economics)
 Savings, Investment and Wealth – are also economic activities.

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TYPES OF ECONOMIC ACTIVITIES

Business Profession Employment

• One’s usual • Requires • Contract of service

occupation of
creating, owning and
actively operating an
economic organisation
• Profits will be the
motive
• Transfer of business to
another person is
possible
licence/Certificate of
practice from an
professional body,
requires skillset and
qualification
• Fees will be the
income
• Professional ethics
should be followed
• Transfering profession
to another person
without qualification
is not possible
between employer
and employee.
• Salary/wages will be
provided in return
• Transfering the
employment is almost
not possible
• Income is more
certain

HOW BUSINESS IS DIFFERENT FROM OTHER ECONOMIC ACTIVITIES

 Business is job creator and not job seeker. Yes, professionals in practice may also generate some
employment but certainly not in numbers that business is capable of generating.
 Provides momentum to economic growth – i.e. for growth of GDP
 Business will usually have entrepreneur to lead it. (However, entrepreneur can be differentiated
from business man theoretically. Entrepreneur is a person who is more innovative, always
looking for new opportunities, with problem solving skills.) – Business man need not have all
qualifications of a good entrepreneur some times.
 Business is investment intensive – it requires investment into various assets and manpower.
 Gestation and uncertainties – Business will have gestation period initially before generating
profits – and business is also subject to uncertainties in its environment.
 Business is Systematic, organised, and efficiency-oriented activity: Coordination among large
number of people is required to make it successful.
 Business should always focus on sustainable development – i.e. not just on short term growth
but also on long term growth. (Business should focus on 3 P’s – Profit, People, Planet)

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