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Published by Enhelion, 2019-11-20 12:23:49

Module 2

Module 2

MODULE 2

FORMS OF BUSINESS ORGANIZATIONS

There are various forms of Business Organizations. In India, they are broadly divided into nine
categories, with some of them being sub-categorized. These categories are –

Sole Proprietorship,
Partnership,
Limited Liability Partnership,
Joint Venture
Corporation,
Non-Profit Organization,
Cooperatives,
Joint Hindu Family Business, and
One-man Company.

Based on the advantages and disadvantages, economic and legal, a person or a group of persons
may choose one of these kinds of business organizations to determine the kind of model they
desire for the functioning of their business. They will be discussed in detail in this paper.

2.1 SOLE PROPRIETORSHIP

Sole Proprietorship is one of the oldest and most famous business structures that is followed by
majority of people1. It is a business structure, or entity, where a single individual forms and owns
a firm2. Although it is excluded from the Companies Act, 1956, and its subsequent amendments,
in the eyes of law, such a firm is no different than its owner, also called the proprietor. This
structure is ideal for those who wish to operate a small or a medium scale firm3. On the other


1 Business Organization, at
<http://www.zeepedia.com/read.php?business_organization_sole_proprietorship_joint_stock_company_combinatio
n_introduction_to_business&b=46&c=3>
2Id.
3 Choosing a form of Business Organization, at <http://business.gov.in/starting_business/location_industry.php>.

hand, it may prove to be very risky if chosen as the structure for a high-risk business, since the
proprietor’s personal assets also run a risk of being used for repaying the debt, etc4. Another
group of persons that might find it suitable is the one that wishes to confine it to a particular
locality.

The key features of this kind of an entity are5 –

Easy formation
Complete responsibility, or unlimited liability
Sole ownership
Profit
Easy management
Easy dissolution

2.1.1 EASY FORMATION

By the virtue of being owned and operated by a single person, a sole proprietorship can easily be
formed, with very few forms to be filed, and almost no legal formalities for setting it up.
Although, there may be some legal restrictions with regard to the kind of activity or business that
the company or the firm operates, setting up a sole proprietorship is hassle free, since it involves
very minimal legal interference.6

2.1.2 COMPLETE RESPONSIBILITY, OR UNLIMITED LIABILITY

The Proprietor is the sole investor in the firm, and therefore, operates the business as his own
personal property. Complete responsibility, or unlimited liability in terms of company law mean
that the proprietor can be held accountable for all the liabilities and debt. This sometimes creates
risk for the proprietor, as his personal assets and savings may be used to cover and repay the
debts that he or she may own.


4 Complete Guide to Corporate Finance: Introduction – Forms of Business Organization, at
<http://www.investopedia.com/walkthrough/corporate-finance/1/forms-business-organizations.aspx>.
5Supra note 1.
6 Forms of Business Organization, at <http://www.cemca.org/braou/subject02/fobtext.htm>.

2.1.3 SOLE OWNERSHIP

The proprietor is the only person who invests in the capital from his personal savings, and if need
be, with the help of loans. Therefore, he or she is the sole owner of the firm, and has the right to
decide for the firm as he wishes.

2.1.4 PROFIT

Along with being accountable for any losses, the proprietor also has a share in the assets of the
company, as well as the profits generated by the firm. The proprietor is the sole beneficiary and
there is a direct flow of profits into his personal savings.

2.1.5 EASY MANAGEMENT

A sole proprietorship comprises of only one person, though he may require some employees. The
proprietor has full control over the management of operations, and may modify it as and when he
deems fit.

2.1.6 EASY DISSOLUTION

Once again, owing to the sole interest and control of the management of the firm, it becomes
easy to dissolve the firm. Also, the life of the firm is limited to the lifetime of its proprietor. A
sole proprietorship ceases to exist with the death of its proprietor.

2.1.7 ADVANTAGES

From the above, it is easy to derive some advantages of sole proprietorship. They are –

It is the easiest and least expensive kind of business organization to set up, and does not
require rigorous legal procedures for its formation.
The proprietor is in complete control of the operations of the firm, without interference
from another person in authority.

There is a direct flow of profits to the owner’s tax returns, whereby he is the sole owner
of such profits.
Dissolution of the firm is the proprietor’s prerogative and does not require consultation
with anyone.
Business secrecy is easier and simple to maintain.
Concentration of economic power is prevented.

2.1.8 DISADVANTAGES

While sole proprietorship has a lot of advantages relating to the owner’s autonomy, it also has a
lot of disadvantages –

The proprietor has unlimited liability, such that he or she is legally responsible for all the
business, as well as personal assets, which might put them at risk.
The resources are limited that make it difficult to raise funds and limit them to the
proprietor’s personal savings or loans.
There is often a difficulty in employing, as all the competitive employees may choose to
work at larger firms.
Business income may not cover employee benefits.
The firm ceases to exist with the death of the owner, and therefore, it lacks perpetuity.

2.1.9 MOST SUITABLE FOR

Looking at the discussion on the advantages and disadvantages of sole proprietorship, it becomes
easy to determine the kinds of businesses it is most suitable for. These are7 –

Where the proprietor wishes to be the sole authority, controller and owner of the
operations or management of the firm.
Where the firm was formed with, and requires small capital.
Where the firm is a small business, and requires quick decision-making, which easier and
effective with limited ownership.
Where direct contact with the customers is of essence.


7Id.

Where there is less demand for work or services.

2.1.10 LEGAL RISKS AND REQUIREMENTS

Formation of a sole proprietorship does not require a lot of legal forms to be filed. The firm does
not take on a separate legal entity, and is considered the same as the proprietor or the owner.
However, this does not preclude the proprietor from using a different business name. The profit
sharing may be allocated as per the proprietor’s directions. No legal document is required to
show how these allocations are made. However, the proprietor is required to pay self-
employment tax in his or her name.

The most important reason sole proprietorships are preferred is the autonomy it provides for the
proprietor. There is no other person or authority that may interfere in or direct the operations of
the business. The proprietor has the right and authority to carry on any business activity they are
willing to, however, they should avoid this structure if they have taken heavy loans, or are
operating such activities that may put their assets and business at risk, and opt for a structure that
would protect them better.

2.2 ONE PERSON COMPANY

A One Person Company is a business structure where a single person is the member of the
company. It is a one shareholder corporate entity, where legal and financial liability is limited to
the company only. The companies act , 2013 has for the first time allowed formation of a
limited liability company by just one person. It is a structure that was introduced as being
parallel to a Sole Proprietorship, but unlike Sole Proprietorship, a One Person Company would
be governed by the Companies Act. For all legal purposes, a One Person Company is treated as a
separate legal entity from its owner, or proprietor, and is treated as a private company. However,
whereas there is a minimum requirement of two members for a private company and one
director atleast. Section 10A talks about insertion of new section. This provision existed under
section 11 which was omitted vide Companies (Amendment) Act, 2015 but after 2018
amendment this section requires filing of declaration by a director of the company having share
capital within 180 days of the incorporation before it commences its business or exercises
borrowing power. Non-Compliance would lead to the invocation of the penalty clause. This

however, does not preclude the company from appointing more than one director, but, there is a
cap of fifteen Directors. An OPC may be registered as limited by shares or limited by guarantee.
Some of the features of a One Person Company are –

Succession
One director and shareholder
Private company
Limited liability
Nominee of the company
Separate entity
2.2.1 SUCCESSION

There is a nominee designated by the member. The nominee who is a citizen and resides in India.
The nominee shall in the event of death of the member become member of the company and will
be responsible for all the working of the company.
2.2.2. ONE DIRECTOR AND SHAREHOLDER

As the name suggests, a One Person Company has only one member or shareholder, who acts as
the default, or the first Director, until another Director or Directors are appointed by the
company.8 Section 164 talks about disqualification of appointment of directors. This provision
did not exist earlier but after 2018 amendment a new clause (i) after clause (h) has been inserted
in this section, whereby a person shall be subject to disqualifications if he exceeds the maximum
number of directorships mentioned under the Act.


8Saran Kumar, Features of One Person Company (OPC), at<http://www.onepersoncompany.in/features-of-
opc.html>.

2.2.3 PRIVATE COMPANY

Under Section 2(68) of the Companies Bill, 2012, a One Person Company would be subjected to
the laws and regulations that are applicable to a private company. For all legal purposes, Section
3 exclusively provides for treating a One Person Company as a private company9.

2.2.4 LIMITED LIABILITY

Like any private company, a One Person Company may choose to be a company Limited by
share, Limited by guarantee, or an unlimited company. Unlike a sole proprietorship where the
proprietor has unlimited liability, the liability here is on the company, and not the proprietor,
which also prevents personal assets of the owner.

2.2.5 NOMINEE OF THE COMPANY

Each One Person Company is required to nominate a person in the Memorandum of the
Company at the time of incorporation as a nominee. The nominee would act as the default and
the ad hoc member10 on the death of the one member. The written consent of this nominee is
therefore required since he or she assumes the position of the single member on his or her death
or incapacity to contract. In the event that the nominee takes over, he or she shall be entitled to
all the rights and liabilities that the sole member was entitled or liable to, including shares and
dividends. This would help in maintaining the perpetuity of the company.

2.2.6 SEPARATE ENTITY

Unlike in a Sole Proprietorship, the company and the owner are two separate legal entities. The
company necessarily requires a separate legal name and identity, under which all the activities


9Supra note 9.
10A. K. Jain, One Person Company – A New Business Ownership Concept, at
<http://anilkumarjainca.blogspot.in/2013/01/one-person-company-new-business.html>.

would be carried out.11 Furthermore, it should not be seen as an extension of a Sole
Proprietorship, but an entirely separate entity altogether.12

2.2.6 ADVANTAGES

From the above, the following can be attributed as being advantages13 of a One Person Company

Limited liability of the owner.
Good for small and medium-scale enterprises.
Increase in flow of foreign funds, as it does away with the requirement of a nominee
shareholder.
Invites investment easily, owing to its limited liability.
Helps making valid contracts with shareholders or directors.
Easiest form of corporate entities to manage filings (ROC).

2.2.7 DISADVANTAGES

Restriction on nationality of the member, which might create a disadvantage for a foreign
company or person to set a One Person Company.
Just like with a Sole Proprietorship, hiring employees may be difficult, because they may
choose larger firms.
The company may not offer some employee benefits.

2.2.8 LEGAL RISKS AND REQUIREMENTS

A One Person Company is recognized by the Statute, and therefore is bound by some legal rules
and regulations. This introduction to the Statute was done with the purpose of providing an
alternate option against the more risky Sole Proprietorship, and moving from an unorganized


11 ‘One Person Company’ approved by the Lok Sabha; What does this mean for Entrepreneurs?, at
<http://yourstory.in/2012/12/one-person-company-approved-by-the-lok-sabha-implications-and-what-it-means-to-
current-and-to-be-entrepreneurs/>.
12N Sundaresh Subramanian, Now, one person can start a business, December 20, 2012, at <http://www.business-
standard.com/article/companies/now-one-person-can-start-a-company-112122000186_1.html>.
13Supra note 13.

sector to an organized sector14. One of the important requirements for incorporation of a
company is the documents, such as the Memorandum and the Articles of Association. A One
Person Company is required to have a Memorandum, which would include the name of the
nominee, while the Articles of Association may not be an elaborate document15. Apart from
these documents, the companies are also required to hold some meetings, which may or may not
be statutory in nature. One Person Companies are exceptions to this rule, that is, they are not
required to hold any Annual General Meetings16 or Extraordinary General Meetings17. However,
they may be required to conduct Board Meetings, based on the number of Directors. If the
company has only one Director, then it is not required to hold a Board Meeting, however, in case
of more than one Director, it would require to hold a Board Meeting twice a year18. Like a
private company, a One Person Company is required to file its financial returns and statements at
the end of the financial year19, however, the financial statement may not include the statement of
cash flow for the business20. According to section 137(3) that talks about the impact of
Failure/Delay in filing of financial statements, company was liable with fine and MD/CFO or
any other authorised director with fine or imprisonment or both but after 2018 amendment ,
Company and MD/CFO or any other authorised director are liable to penalty. The punishment of
imprisonment has been omitted.

2.3 JOINT HINDU FAMILY BUSINESS

A Joint Hindu Family Business is a non-corporate form of business that belongs to the joint
Hindu family. It is a system that is unique to India, where the business is owned by all the
members of the family, also known as the “coparceners”, but is controlled and managed by the


14Id.
15Bizand Legis, OPC – One Person Company, at http://www.slideshare.net/BizandLegis/opc-one-person-company>.
16Supra note 10.
17Supra note 11.
18Id.
19Id.
20Supra note 19.

“Karta”, who is also often the Head of the family, or the Manager. Unlike any other form of
business organization, Joint Hindu Family Business does not require any registration, and is
operated by law, not contracts between the parties. The law that governs this kind of business is
the Hindu Succession Act, 1956. There are only two conditions that need to be satisfied before a
business may become known and operated as a Joint Hindu Family Business –

There should be minimum two members, and
There should be an existing ancestral property.

Apart from being a system unique to India, the following are the features of a Joint Hindu Family
Business –

Joint Ownership
Limited liability of coparceners
Unlimited liability of Karta
Minimum government control
Business secrecy
Flexibility
Quick decision making
Regulated by Hindu laws

2.3.1 JOINT OWNERSHIP

Under the Joint Hindu Family Business, by virtue of their birth, all coparceners of a joint family
are the owners of the business21. These coparceners are the sons and daughters of the family;
daughters-in-law and sons-in-law do not form part of coparcenary. However, while all the
coparceners are equal owners of the business, it is controlled and managed by the Head of the
family, the ‘Karta’22.


21 Joint Hindu Family Business, January 3, 2013, at <http://studycorner.in/index.php/joint-hindu-family-business/>.
22 Joint Hindu Family Business, at <http://business.gov.in/starting_business/joint_hindu.php>,.

2.3.2 LIMITED LIABILITY OF COPARCENERS

The coparceners are the owners of the business, but do not play any role in its management. It is
all dealt by the Karta. Therefore, their liability is also limited, only to the extent of their interest23
or share24 in the business.

2.3.3 UNLIMITED LIABILITY OF KARTA

The Karta is the owner, controller and the manager of the family business. In other words, he is
the sole authority in the family business. Therefore, unlike coparceners, his liability is unlimited,
where he is liable to pay dues out of his personal assets25.

2.3.4 MINIMUM GOVERNMENT CONTROL

The government has a minimal role to play in a Joint Hindu Family Business26. Unlike the other
business organizations, it is not governed by the Securities and Exchange Board of India
(SEBI’s) rules. It is governed by the provisions of the Hindu Succession Act, 1956, which do not
require a lot of legal formalities.

2.3.5 BUSINESS SECRECY

Since the business is operated and managed by the coparceners, and especially the Karta, there is
no scope of disclosure of business secrets to an outsider. Also, a Joint Hindu Family Business is
not required to publish any account details or any other data related to business to a third party27.

2.3.6 FLEXIBILITY

Due to the lack of government and legal interference, the Karta has the flexibility to change or
modify the business operations, as per his wishes or if the circumstances demand so28.


23Id.
24Supra note 24.
25 Features of Joint Hindu Family Business, at <http://www.omtexclasses.com/2010/02/features-of-joint-hindu-
family-business.html>.
26Id.
27Id.

2.3.7 QUICK DECISION MAKING

Karta is the sole authority in a Joint Hindu Family Business. No coparcener can questions his
authority or decision29. This results in quick decision making power of the Karta, since he does
not necessarily require consultation or advice of any other person.

2.3.8 REGULATED BY HINDU LAWS

Unlike other business organizations, a Joint Hindu Family Business is regulated by the Hindu
Laws, especially the Hindu Succession Act, 195630. The Act defines coparcenary and lays down
the rules for formation of coparcenary, succession, etc.

2.3.9 ADVANTAGES

Based on the above discussion, the following are the advantages of a Joint Hindu Family
Business –

The business is stable.
There is no interference from a third party or an outsider.
Credit worthiness of a Joint Family Business is easier to show than that of a Sole
Proprietoship.
There is an ease of formation, since they are mostly formed by the birth of one of the
coparceners.
The business is in perpetuity even if there is a death in the coparcenary.
Since it is a family affair, there is an effective control over the operations of the business.
Effective management, by Karta.
Secrecy maintained in the business.


28Id.
29 Forms of Business Organization, at <http://www.cemca.org/braou/subject02/fobtext.htm>.
30Id.

2.3.10 DISADVANTAGES

The disadvantages of such a business are –

Abuse of freedom or power by the Karta, as no one has the power to question his
decisions
Quarrels in the family may reflect in the duration of the business.
The business is confined to Joint Hindu families, and no outsider can join.
As compared to other business organizations, these businesses have relatively limited
capital.
The Karta has unlimited liability, which means that he alone would be held liable for any
losses made.
Since the Karta is the only Manager, there may be limited managerial skills that the Karta
may possess, as he may not have adequate knowledge about all the work or business
operations.
Limited source of capital.

2.3.11 LEGAL RISKS AND REQUIREMENTS

A Joint Hindu Family Business is formed by the law of succession, and not contracts. It does not
require a lot of legal paperwork or formalities. It does not even require a registration; however,
this does not preclude the coparceners from claiming debts from a third person31. Unlike a Sole
Proprietorship, a Joint Hindu Family Business is perpetual in nature, and does not end with the
death of the Karta or any of the coparceners32. The business is simply inherited by the
coparceners, and the next Head of the family becomes the Karta.


31Supra note 24.
32Id.

2.4 LIMITED LIABILITY PARTNERSHIP

A Limited Liability Partnership (LLP) is a form of business organization that lies somewhere
between a body corporate, and a partnership.33 Due to this, it provides advantageous features of
both the organizations, i.e., flexibility of internal organization and operation like that of a
partnership, and a separate, legal entity that is perpetual in nature, like that of a corporate
body.34They have limited liability in the company which means that personal assets of the
partners are not used for paying debts of the company.

An LLP is formed with a minimum of two partners, who may or may not be individuals, i.e., an
LLP in India may be formed between individuals, companies through nominees35, LLPs, foreign
LLPs, and foreign corporations36. Indian laws allow foreign bodies to incorporate an LLP
registered in India, however, one of the partners must be an Indian resident, “who has stayed in
India for a period of not less than one hundred and eighty two days during the immediately
preceding financial year.”37 An LLP also requires two ‘designated partners’, who necessarily
have to be individuals, such that at least one of them in an Indian. They would be liable for all
the regulatory and legal compliances.38

One of the most essential requirements for an LLP is that it should be incorporated for the
purpose of carrying a lawful and profitable business.39 Therefore, charities or charitable


33http://legalservices.co.in/blogs/entry/Limited-Liability-Partnership-In-India
34Id.
35http://easylawstartyourbusiness.blogspot.in/2012/05/llp-all-you-need-to-know-about-limited.html
36http://smallb.in/%20/plan-new-entrepreneurship%20/forms-business-organisations%20/limited-liability-
partnership-llp%20-0
37http://www.indialawoffices.com/iloPdf/limitedliabilitypartnership_in_india.pdf
38http://easylawstartyourbusiness.blogspot.in/2012/05/llp-all-you-need-to-know-about-limited.html
39Id.

organizations cannot form an LLP.40 Although an LLP may be formed for execution of any kind
of business, it is restricted from operating such business for which there is already a specific
authority established.41

Some of the features of an LLP are –

Hybrid structure
Separate legal and corporate entity
Perpetual in nature
LLP Agreement between partners
No joint liability of partners
Conversion from any organization to LLP.

2.4.1 HYBRID STRUCTURE

A Limited Liability Partnership is unique form of business organization that is neither a Limited
Company nor a Partnership, but shares features of both of these forms of business organization.
An LLP is similar to a limited company in context of its limited liability on the members of the
company, in case of an LLP, its partners. Its perpetual existence and separate identity (both of
which shall be discussed later), are both characteristic to a company.42 Even incorporation of an
LLP is similar to that of a company, such that the documents required for an incorporation of an
LLP, which are Incorporation Document, and LLP Agreement, are the same as a Company’s
Memorandum, and Articles of Association respectively.43 An LLP also shows some of
Partnerships’ characters, such as flexible internal organization of business, and flexibility of


40http://smallb.in/%20/plan-new-entrepreneurship%20/forms-business-organisations%20/limited-liability-
partnership-llp%20-0
41http://easylawstartyourbusiness.blogspot.in/2012/05/llp-all-you-need-to-know-about-limited.html
42Supra note 33.
43http://smallb.in/%20/plan-new-entrepreneurship%20/forms-business-organisations%20/limited-liability-
partnership-llp%20-0

organizing the LLP’s internal structure.44 Therefore, even though an LLP is a hybrid between a
company and a partnership, it is much closer to the former.45

2.4.2 SEPARATE LEGAL AND CORPORATE ENTITY

An LLP forms a separate legal and corporate entity, like that of a limited company’s. This is a
step away from Partnership, where there is no difference between a Partnership and the partners,
however, this feature if an LLP can be attributed to its characteristics similar to that of a
company. Being a separate entity, an LLP can buy assets and hold property in its name. It can
also sue another entity, or be sued in its name.46 This also means that an LLP would be liable to
the full extent of its assets.47 Being a separate entity, it is liable for its contractual obligations and
other liabilities48, and may contract with third parties as well.49

2.4.3 PERPETUAL IN NATURE

Unlike a Partnership, where the firm ceases to exist with the change in partners, an LLP is
perpetual in nature, and is not affected by the death of any of its partners50. One of the reasons
for this is also because an LLP is separate entity51 like a limited company, which is a perpetual
entity. Therefore, whether a partner joins or exits an LLP is irrelevant to its existence.


44Supra note 33.
45Id.
46http://www.nextbigwhat.com/limited-liability-partnership-llp-company-comparison-297/
47http://easylawstartyourbusiness.blogspot.in/2012/05/llp-all-you-need-to-know-about-limited.html
48http://iaccindia.wordpress.com/2010/11/11/limited-liability-partnership-an-emerging-concept-in-india/
49Id.
50Supra note 43.
51Supra note 48.

2.4.4 LLP AGREEMENT BETWEEN PARTNERS

An LLP Agreement is a unique, important document, which, as the name suggests, is a mutual
agreement between partners, which lays downs –

Name of the LLP,
Name of Partners and Designated Partners,
Form of contribution by the Partners,
Profit sharing ratio of each Partner,
Rights and duties of Partners,
Proposed business, and
Rules for governing the LLP.

An LLP Agreement is like Articles of Association of a Company that governs the partners’
mutual rights and duties. It is important that this agreement be as flexible as possible, such that it
is amendable and can be executed before or after the incorporation of an LLP. It may also have
provisions for the transfer of complete or partial shares and profits from one partner to another.52

2.4.5 NO JOINT LIABILITY OF PARTNERS

A Partner is an agent of the LLP, however, he or she is not an agent of a Partner itself. In an
LLP, every partner is bound by the actions and decisions taken by one in the absence of the
other. However, he is not liable for the same. Every partner is liable only to the extent of his or
contribution towards the LLP. This contribution may be in the form of a tangible or intangible
movable or immovable property, money, promissory notes, other benefits. It may also include
other agreements about cash or property, as well as contracts for services that have been
performed, or would be performed.


52http://www.indialawjournal.com/volume2/issue_2/article_by_bhavesh_sukhada.html

2.4.6 CONVERSION FROM ANY ORGANIZATION TO LLP

Any private listed company or a Partnership may convert into an LLP, subject to two
conditions53 –

The conversion would not result in any capital gains to the company itself or its
shareholders
Only small companies whose turnover is not more than Rs. 60 lakhs can convert.

2.4.7 ADVANTAGES OF AN LLP

An LLP has the following advantages –

Limited liability – the LLP being a separate legal entity, is liable for the negligence and
omissions, such that the partners are not individually held liable. The liability is paid off
through the assets of the LLP, and not the partners’ personal assets. Only in an
exceptional case of fraud can the partner be asked to pay from his personal assets. Section
447 talks about Punishment for Fraud and under this the amount of fine was INR
20,00,000/- but after 2018 amendment the amount of fine has been increased to INR
50,00,000/-.
No audit requirement – in an LLP, maintaining an audit is not a mandatory requirement54,
unless each of the partners’ contribution exceeds Rs. 25 lakhs, or the turnover is more
than Rs. 40 lakhs.55
Legal entity – an LLP is a separate legal entity that is enabled to contract with a third
person that can also sue and be sued.
Lesser compliance requirement – an LLP has lesser compliance requirements as
compared to that of a private limited company.56


53Supra note 43.

54Supra note 43.

55Supra note 33.

56http://easylawstartyourbusiness.blogspot.in/2012/04/concept-and-advantages-of-limited.html

Internal flexibility – an LLP is flexible in operating its internal structure and functioning.
Easy Formation – The partners of LLP is not a complicated and time consuming.
Minimum amount of fees for incorporating an LLP is 500 rupees and maximum of 5600
rupees.
Perpetual succession – The life of LLP is not affected by death, retirement, or insolvency
of partner.

2.4.8 DISADVANTAGES

The following are the disadvantages of a company –

Can’t raise money from public
Act of one partner binding – every partner is bound by the actions of a partner taken in
his or her absence. This results in a lack of interest, and the democratic nature that a firm
should operate with.
Liability extendable to personal assets – while a partner at an LLP is safeguarded from
liability extending to his or her personal assets, the same may be extended to such assets
in case he commits fraud.57
Many states restrict the formation of LLP due to various tax benefits and provisions.
Less credibility due to lack of trust of people in the business.
Lack of Recognition

2.4.9 SUITABLE FOR

An LLP is best suited for the following two cases –

Small enterprises
Investment by venture capital


57http://www.nextbigwhat.com/limited-liability-partnership-llp-company-comparison-297/

2.4.10 LIABILITY OF PARTNERS

As mentioned earlier, each partner is an agent of the LLP. They are not, however, agents of each
other. They are therefore, liable only for their own wrongful acts and not of others. One of the
biggest advantages of an LLP is its limited liability, which does not extend to a partner’s
personal assets and is limited to the LLP’s assets. However, this is not an absolute right. A
partner’s assets may be invoked in case of a fraudulent act committed by him.

2.4.11 TAXATION OF AN LLP

At present, the proposed tax on an LLP is 25 per cent.58

At the international level, the tax is levied on the partners, while an LLP is exempt from such tax
paying.59 In India, however, for the purposes of Income Tax returns, an LLP is treated an taxed
as a Partnership firm, such that the partners are exempted, and the tax is levied on the LLP
itself.60 Furthermore, there is no tax on conversion of a Partnership or a Private limited company
to an LLP.61

2.5 JOINT VENTURE

This is the most preferred form of corporate entities for doing business in India. A Joint Venture
is principally a contractual agreement between two or more parties, who may be natural persons,
as well as legal entities.62 They come together for a common commercial purpose, without losing
their individual corporate identity and structure.63 These parties do not necessarily have to be


58Supra note 37.
59Supra note 55.
60Id.
61Id.
62 Introduction of Joint Venture, available at <http://www.helplinelaw.com/docs/main.php3?id=JVLI1>.
63 Joint Ventures in India, available at <http://www.legalindia.in/joint-ventures-in-india>.

domestic. Foreign companies, as well as an NRI or a PIO, can also become partners in a Joint
Venture, and through a joint venture agreement, can invest in an Indian company.64

While forming a Joint Venture, it is important for the members to create a Joint Venture
Agreement that also contains all the rights and obligations of each member, along with defining
their roles in the Venture.65 Each member is entitled to share in the assets, profits, markets,
Intellectual Property and knowledge of, and about the Venture.66

There are no specific requirements for initiating a Joint Venture. However, this holds true only if
both the parties are domestic. If a foreign party wishes to become a party, or a partner, then it
requires prior permission, or approval, from the Government. This can be done in either of the
following two ways67 –

Reserve Bank of India – If a Joint Venture falls under the ambit of ‘Automatic Approval
Route’ then it is necessary for the investors to notify the RBI within 30 days of the
remittance being received.
Foreign Investment Promotion Board – For all other forms of initiation, where the Joint
Venture does not fall within the Automatic Approval Route, the investors need to take
approval of the FIPB, which works under the Finance Ministry.

2.5.1 PURPOSE

Formation of a Joint Venture follows the principle, “two is better than one”, and with the same
agenda, two or more companies for a Venture for the purpose of accruing growth, revenue, etc.68
A Joint Venture is formed for a common purpose, where the parties share all the profits or losses


64Divya Vikram, Joint Ventures – A Legal Analysis, December 15, 2010, available at
<http://www.lawyersclubindia.com/articles/Joint-Ventures-A-Legal-Analysis-3350.asp#.UbmGRdiySSp>.

65V. Niranjan, Characterising a Joint Venture, April 19, 2010, available at
<http://indiacorplaw.blogspot.in/2010/04/characterising-joint-venture.html>.
66Supra note 67.
67 Joint Ventures, available at <http://business.mapsofindia.com/doing-business-in-india/innovation-and-business-in-
india.html>.
68Supra note 67.

that the company makes.69 The enterprise’s purpose determines its type or mode. A Joint Venture
is of two types – Unincorporated Joint Venture, and Incorporated Joint Venture.70

2.5.2 FORMS OF JOINT VENTURE

Joint Ventures in India are of two kinds – Incorporated Joint Ventures, and Unincorporated Joint
Ventures.

2.5.3 INCORPORATED JOINT VENTURE

For the purposes of a Joint Venture, parties in an incorporated form of Joint Venture use an
already established company by acquiring its shares.71 The members of the Joint Venture hold
these shares in proportion to their contribution in the venture. It is because of this feature that an
Incorporated Joint Venture is treated as an incorporated company.72 The company whose shares
are being acquired may either be a public, or a private limited company, where the participants
are the company shareholders, who do not have any rights to the company’s assets. But, they are
entitled to the company profits or dividends, and not the losses.73

In India, all the Incorporated Joint Ventures are domestic companies, which are governed by the
Companies Act, 1956, which also gives it a separate legal entity from its members.74


69Ashwant Venkatram & Fletcher Schmidt, Entering the Indian Marketplace Part 1: The Joint Venture, December
19, 2012, available at <http://indianlawblog.com/2012/12/19/entering-the-indian-marketplace-part-1-the-joint-
venture/>.
70 Types of Joint Ventures, available at <http://www.helplinelaw.com/docs/main.php3?id=JVLI3>.
71 Incorporated Joint Venture, available at <http://www.helplinelaw.com/docs/main.php3?id=JVLI5>.
72V. Niranjan, Characterising a Joint Venture, April 19, 2010, available at
<http://indiacorplaw.blogspot.in/2010/04/characterising-joint-venture.html>.
73Supra note 74.
74Id.

2.5.4 UNINCORPORATED JOINT VENTURE
The other method of forming a Joint Venture is by not incorporating it, and just coming together
under a legally binding contractual agreement, or through a partnership.75 An Unincorporated
Joint Venture is therefore, a “creature of contract”, lacking a separate legal existence76, and
equity capital.77 An Unincorporated Joint Venture is not a perpetual entity, and is formed for a
particular purpose or a limited period.78

A contractual Unincorporated Joint Venture is between two or more parties, where the contract
includes their relationship along with the rights and liabilities of each party. On the other hand,
the Indian Partnership Act, 1932, governs a partnership form of Unincorporated Joint Venture,
and is treated like a Partnership, thus depriving it of its separate legal identity. Such a Joint
Venture may be formed through an agreement that is either express or implied. Registration of an
unincorporated Joint Venture is not a mandatory requirement, even though it may be advised to
register it, as it comes with its own perks that provide certain benefits and exemptions to the
parties under various laws, such as the Right to ask the other party or parties to perform their
contractual obligations.79

2.5.5 LICENSING

Licensing is when a foreign company gives authorization to an Indian company to use its brand
name, and produce a certain product, while charging license fees for “sharing its brand name,
patents or copyrights”. This is done to ensure “an immediate access to the Indian market at a


75 Unincorporated Joint Venture, available at <http://www.helplinelaw.com/docs/main.php3?id=JVLI4>.
76Supra note 75.
77Supra note 78.
78Id.
79Id.

lower price”, however, it has no control over the product’s image, distribution and sales in
India.80
2.5.6 FRANCHISING

Franchising is when a foreign company, or the franchisor, lends its “brand name, goodwill,
technical know-how and expertise”, to a franchisee, which is the Indian company, to conduct its
business here. It is very beneficial for the franchisor, as it not only entitles it to a specific amount
of the turnover, it also ensures a fast and easy entry in the Indian market.81
2.5.7 STRATEGIC CLASSIFICATION OF JOINT VENTURE

Another way of classification of Joint Ventures in India is through the strategy they follow.
2.5.7.1 PRODUCTION JOINT VENTURE

In a Production Joint Venture, the aim is to produce a product jointly, for the purposes of sale to
other parties. It may also be produce for their own use “as an input for their own production
processes”. While this form of Joint Venture provides efficiency to the partners, it allows them to
bring the products in the market at a much cheaper rate.82
It is mostly formed between companies that wish to use the Indian labor and then sell their
products in the domestic, as well as foreign markets.83 While it increases the productive
capacities, it also retains competition in the market at the same level.84


80Supra note 67.
81Id.
82 Strategic Classification of Joint Ventures, available at <http://www.helplinelaw.com/docs/main.php3?id=JVLI6>.
83Id.
84Supra note 68.

2.5.7.2 MARKETING JOINT VENTURE

In this form of Joint Venture, two or more businesses collaborate to jointly sell, distribute, or
promote goods and/or services that they jointly or individually manufacture or offer. It is most
suitable for small businesses that wish to maximize their profits. Furthermore, it is useful in
cases “when the products are imported into the Indian market, or in case of licensing and
franchise arrangements.”85
It is a favorable form of Joint Venture as it maximizes profits, while minimizing comparative
advertising.86
2.5.7.3 BUYING COLLABORATION

In such a collaboration, two or more entities come together to buy the necessary inputs, and gives
access to a stock of goods that otherwise might not be available to the parties individually. It is
useful “in areas where the raw material is either available in India or sourced from countries
where India is traditionally a large buyer”. It is common practice for engineering and mining
companies to take up this form of Joint Venture.87
2.5.8 ADVANTAGES

Some of the advantages of getting into a Joint Venture are –


85Id.
86Id.
87Id.

Resource pooling88, where two or more companies or persons come together to use the
same resources, or resources that haven’t been utilized to their full capacity, towards a
single and a common aim.
Higher dividends89 - as mentioned before, two parties can work better towards gaining
more profits.
No tax laws90
Joint liabilities91 - the risks and liabilities in the enterprise are shared by each of the
members
Venture between a small firm and a large firm is possible. While the smaller can make
use of the other party’s capital, the larger firm benefits from the growth and the
profitability of the new enterprise.92
Access to new markets and distribution networks.
Sharing profits and losses.

2.5.9 DISADVANTAGES

The following are the disadvantages of a Joint Venture –

Inflexible contract between the parties that may be unable to “cope up with the constant
changes in the business environment”.93
Inadequate pre-planning94
Slow technological developments95


88Supra note 67.
89Id.
90Supra note 68.
91 Establishing a Joint Venture in India, May 12, 2011, available at <http://www.india-
briefing.com/news/establishing-joint-venture-india-4833.html/>.
92Supra note 67.
93Id.
94Id.

Lack of trust, where one company may not share its resources and/or trade knowledge
with the other partners.96
Time consuming to build business relationship.
Objective is not clear and communicated to everyone.
Poor integration and cooperation .

2.5.10 JOINT VENTURE AGREEMENT

A Joint Venture Agreement is primarily an agreement that lays down the manner in which each
member or shareholder may transfer or dispose of their shares in the company.97 It is one of the
most important and basic legal documents for the establishment of a Joint Venture98, and
requires certain “approvals/consents/licenses/permissions of appropriate agencies of Government
of India like RBI/SIA etc. within specified period.” In the absence of any of these necessary
requirements at the time of signing the agreement, the enforcement of the agreement becomes
nullified.99

A Joint Venture Agreement also contains provisions relating to the proposed business,
company’s management, issue, transfer and/or disposal of shares, termination process, and post-
termination obligations.100 It should also contain possible modification of the type of Joint
Venture, and should be flexible enough to be modified with the change in time, law, technology
and necessity.101


95Id.
96Id.
97Supra note 68.
98Id.
99Seth Associates, Setting Up A Joint Venture in India, available at
<http://www.sethassociates.com/setting_up_a_joint_venture_in_india.php>.
100Azmul Haque, Joint Ventures in India: Key Structuring and Legal Aspects, available at
<http://www.lawgazette.com.sg/2007-9/regnews.htm>.
101Supra note 67.

2.5.11 TAX LIABILITY OF A JOINT VENTURE

A Joint Venture’s business structure depends heavily on the kind of liability imposed on it, i.e.,
its tax and tortuous liability would determine whether it is a corporation, a partnership, a
company with limited liability, or any other legal structure.102 Apart from this, a Joint Venture is
not significantly affected by any tax laws or incentives.103

Income Tax Act, 1961, governs the taxation of Joint Ventures. If it is an incorporated Joint
Venture, it is treated as a company, and the provisions relating to companies will apply.
However, if it is a partnership form of unincorporated Joint Venture, then it will be treated as a
partnership, and accordingly, it will be taxed as one.104

2.6 PARTNERSHIP

A Partnership is a form of business organization, wherein two or more individuals agree to carry
on a business on the terms and conditions mutually agreed upon, in a Partnership Agreement and
is similar to personal partnership.105 While forming a Partnership, it is required by the partners to
contribute to the Firm, and hence create a pool of resources. This contribution may be of
tangible, as well as intangible assets, such that the resources that might become available to the
partners would provide financial, legal, technical support, etc., depending on the capabilities and
technical education of the partners.106

Section 4 of the Partnership Act, 1932, defines a Partnership as the relation between such
persons, “who have agreed to share the profits of a business carried on by all or any of them
acting for all”. While the individuals are known as “Partners”, collectively they are called a
“Firm”.


102Supra note 68.
103Id.
104Supra note 67.
105http://easylawstartyourbusiness.blogspot.in/2012/07/guide-to-partnership-in-india-from-what.html
106http://easylawstartyourbusiness.blogspot.in/2012/07/guide-to-partnership-in-india-from-what.html

As per the definition, a Partnership is not a legal entity. It is not separate from the partners.
However, for the purposes of taxation, it is considered a legal entity with limited identity.107

There are three minimum requirements to constitute a Partnership –

Agreement – the agreement may be written or oral.
Object to share profits – sharing profits of the intended business must be the object of the
agreement between partners.
Business carried out by all or any of the partners, acting on behalf of all of them.

Features of a Partnership are –

Easy formation
Regulated number of partners
Not a separate legal entity
Unlimited liability
Limited life

2.6.1 EASY FORMATION

The formation of a Partnership is comparatively easy, as it does not necessarily require any
elaborate legal activities. Furthermore, Registration is not an essential requirement. If a Firm
chooses not to register itself, that does not preclude it from registering at a later stage. However,
if a Partnership is registered, then every change in its constitution will have to be registered.108

2.6.2 REGULATED NUMBER OF PARTNERS

The minimum requirement for a Partnership is two persons. In case of a Banking business,
maximum 10 persons are allowed otherwise, the maximum cap is at 20.


107 http://www.taxmann.com/datafolder/Flash/Flashart22-9-09_6.htm
108http://www.ibef.org/download/PublicPrivatePartnership.pdf

2.6.3 LIMITED LIFE

The life of a Partnership is limited to the life or the capacity of its partners to contract. With the
death of a Partner, or the inability to contract, the Partnership is dissolved and ceases to exist.
2.6.4 TAXATION

The Income Tax Act, 1961 governs taxation of Partnership Firms. A Partnership Firm is treated
as a separate entity, and is taxed accordingly, different from the partners. However, there is no
difference between a registered and an unregistered Firm for the purposes of the Act. The Act
gives provisions for assessing a Partnership either as a Firm, or as an Association of Persons.109
At present, Direct Income Tax on a Partnership Firm is applicable at 30 per cent, and education
cess at 3 per cent. There is no double taxation, as the partners are not liable to pay tax on the
dividends or the profits. However, based on the nature of the business carried out, a Firm may be
required to pay Indirect taxes, for example Sales Tax, Service Tax, etc.110
2.6.5 ADVANTAGES OF A PARTNERSHIP

The following are the advantages of a Partnership –
Ease of formation
Tax saving
Greater capital resource than sole proprietorship

2.6.6 DISADVANTAGES OF A PARTNERSHIP

The following are the disadvantages of a Partnership –


109http://business.gov.in/taxation/partnership_provisions.php
110Supra note 106.

Unlimited liability
Not a perpetual entity
No ultimate authority
Liability for actions of other partners
2.6.7 DISSOLUTION OF A PARTNERSHIP FIRM

Dissolution of a Partnership Firm is different from that of the Partnership. Dissolution of the firm
is the termination of the business, or the breakdown of contractual relationship between the
partners, whereas dissolution of partnership is when business continues even after the
termination of the contractual relationship.
Following are the modes of dissolution –
2.6.7.1 DISSOLUTION BY AGREEMENT

With the consent of all the partners, a Firm may be dissolved using a contract.
2.6.7.2 DISSOLUTION BY NOTICE

If the partnership is at will, then the firm may be dissolved by any partner by giving a written
notice of his intention to dissolve. The date of dissolution is the date of the notice.
2.6.7.3 CONTINGENT DISSOLUTION

A Firm can be dissolved contingent to –
Expiry of the fixed term
Completion of the undertaking
A partner’s death
Insolvency of a partner

2.6.7.4 COMPULSORY DISSOLUTION

When all but one partner is adjudged insolvent
When the business becomes unlawful.

2.6.7.5 DISSOLUTION BY COURT

Insanity of a partner
Permanent incapacity of a partner
Misconduct of a partner
Persistent breach of agreement
Transfer of interest
Continuous losses of the business

Types of partners

1. General partners and limited partners
These partners participate in managing the partnership and have liability for
partnership debts. Limited partners invest but do not participate in management.

2. Equity partners and salaried partners
Some partners may be paid as employees, while others have only a share in
ownership.

2.7 COMPANIES

The definition of a Company for the purpose of Indian Law is difficult to find. In a layman’s
words, a company is coming together of persons with contribution in an entity with the purpose
of carrying on a business and making profits. To truly understand a company, we need to look at
its features, and understand what entities constitute companies.

Some of the features of a Company are –

Association of persons
Incorporated association
Separate legal entity
Artificial legal person
Liability
Separate property
Transferability of shares
Common ownership
Perpetual succession
Common seal
Corporate finance
Object clause of business
Publication of accounts

2.7.1 ASSOCIATION OF PERSONS

A company is an association of persons, where at least two members in case of a private
company, and seven in case of a public company, are required to start a company and continue
its operation and management. Earlier, a one person could not form a company, however, with
the new Companies Bill, 2017, a single individual too can form and establish a company. This is
called a ‘One Person Company’, which has already been discussed before.

2.7.2 INCORPORATED ASSOCIATION

A company must be registered or incorporated under the Companies Act111. If it does not have a
‘certification of incorporation’ from the Registrar of Joint Stock Companies, then it becomes an
illegal association.112 Section 12 talks about Registered office of company, earlier the registrar
was not empowered to conduct physical verification of the registered office of the company but


111A. K. Majumdar & Dr. G. K. Kapoor, Company Law 15 Taxmann (2012) p. 8.
112Sameer, 13 Most Important Features of a Company as per Companies Act, 1956 (India), available at
<http://www.publishyourarticles.net/eng/articles/13-most-important-features-of-a-company-as-per-company-act-
1956-india.html>.

after 2018 amendment if the registrar has a reasonable clause to believe that the company is not
carrying on any business or operations, he may cause a physical verification of the registered
office and in case of any default, initiate action for removal of name of the company.
2.7.3 SEPARATE LEGAL ENTITY

A company is treated as an entity that is separate from its members, and has its own Rights and
Duties that it enjoys and is bound by, which are similar to that of a natural person.113 It can own
property, sue and be sued in its name.114 This Right to sue arises when the company or its assets
suffer any loss, which is not the same as the Directors’.115
2.7.4 ARTIFICIAL LEGAL PERSON

Although a company has the Rights similar to those of a natural person, it is not physically a
natural person, and exists only in the eyes of law, for legal purposes. It operates via its Directors,
officers, shareholders, etc., who are its representative, and bind the company by their actions.116
2.7.5 LIABILITY

By virtue of its incorporation, a company may either be a limited liability company, or an
unlimited company. A company with limited liability on its members, as its name suggests,
extends liability only to the extent of payment of its debts.117
2.7.6 SEPARATE PROPERTY

A company being a separate legal entity, can own property in its own name, separate from its
members. The members of a company do not have the Right over this property.118


113Supra note 115.
114Supra note 116.
115Supra note 117.
116Id.
117Id.

2.7.7 COMMON OWNERSHIP

Ownership of the company is based on the number and value of shares that is owned by its
members or shareholders. In a Private company, there is a cap on fifty members, who can be the
owners, however, in a Public company, there is no such cap on the maximum number of
members, therefore, there can be a large number of member, or owners, depending on the
number of shares owned by them.119
2.7.8 PERPETUAL SUCCESSION

A company being an artificial person and a separate legal entity is not affected by the capacity or
life of its members. It continues to be in existence as long as the minimum requirement of
members is met, as well as the maximum requirement in case of a private company.120
2.7.9 COMMON SEAL

A common seal is the company’s official signature that is used by its Directors, the manager, the
secretary, or other authorized officer. Without the common seal on a document, the company
cannot be bound by it, unless otherwise provided in the Companies Act, 1956. Therefore, it acts
as evidence against or towards the document’s authenticity.121
2.7.10 CORPORATE FINANCE

A company can easily raise funds by issuing bonds, debentures, and shares. It can also take loans
from financial institutions for the same. The total share capital is then divided into shares held by


118Id.
119Supra note 116.
120Supra note 122.
121Id.

individual members and institutions122 that allows them to become owners to the extent of the
share.

2.7.11 OBJECT CLAUSE OF BUSINESS

A company can only conduct such business that is stated in the first Memorandum of
Association of the Company. If it wishes to bring any change in the operation of business, then
the object clause needs to be amended.123

2.7.12 PUBLICATION OF ACCOUNTS

Every Joint Stock Company is required to file its Annual Audited Statements at the end of every
financial year with the Registrar of Companies, which is made available for inspection at his or
her office.124

2.7.13 KINDS OF COMPANIES

A company may be of any of the following kind –

Private Company,
Public Company,
Statutory Company,
Registered Company,
Existing Company,
Association not for profit,
Government Company,
Foreign Company,
Holding and Subsidiary Company, and
Investment Company


122Id.
123Id.
124Id.

Private and Public Companies are the two most common types of Companies, and may be
incorporated as –

Limited Liability
Ø Limited by shares,
Ø Limited by guarantee, or
Ø Limited by guarantee as well as shares, or with share capital
Unlimited Liability

2.7.14 PRIVATE COMPANY

A Private Company is one with a minimum paid up capital of Rs. 1 lac, and with limited
members. The minimum number of members or Directors in a Private Company is two, while
the maximum is fifty. Its Articles of Association lay down some important features, such that125

Right of share transfer is restricted,
Maximum number of members is fifty, excluding present employees, and previous
employees who continue to be members,
Invitation to the public for subscription of shares and debentures of the company is
prohibited, and
Invitation and acceptance of deposits from outsiders is prohibited.
2.7.15 PUBLIC COMPANY

A Public Company has a minimum paid up capital of Rs. 5 lac, and has no limit on the maximum
number of its members. A Public Company does not have any of the restrictions mentioned
above in the Private Company’s Articles of Association.126


125Supra note 125.
126Id. at 33.

2.7.16 COMPARING A PRIVATE AND A PUBLIC COMPANY

A Private Company, by virtue of its name, is a company without any participation from the
public. The prospectus, which is supposed to be distributed in order to invite subscription of
shares or and/or debentures to raise their funds, is also allowed only to a Public Company to
distribute. It cannot be issued by a Private Company.127

A Private Company restricts the Right to transfer of shares, such that on the death of a member,
his or her legal heir may inherit such share, however, it cannot be transferred to a person who is
not a member of the Company. In case so happens, the share would come back to the company.
In a Public Company on the other hand, shares are easily transferable.128

The minimum number of members cannot be construed to mean the same as the minimum
number of Directors. For a Private Company, both, minimum number of members and minimum
number of Directors is the same, i.e. two. However, for a Public Company, they are not the same.
The minimum number of members for a Public Company is seven, whereas the minimum
number of Directors is three.129 A cap is made on the Private Company at fifty members, such
that there is less public money involved in the business. This is done so as to limit the public
accountability.130

The time of commencement for both kinds of companies is different. While a Private Company
may commence its business as soon as it gets the Incorporation Certificate, a Public Company
cannot commence its business until it gets the ‘certificate to commence business” from the
Registrar of Companies.131

A Private Company, unlike a Public Company, enjoys exemption from filing of various return
statements with the Registrar of Companies, except a few. It is also barred from accepting


127Id. at 34.
128Id.
129Id. at 35.
130Id. at 36.
131Id.

deposits from the public, whereas a Public Company can accept public deposits. A Private
Company is limited to accept deposits from the shareholders, directors, and their relatives.132

Since a Private Company is restricted from taking public money, a person who wants to start a
business that may be a little risky, should attempt to incorporate a Private Company. It does not
require a lot of paid up capital, as the minimum is Rs. 1 lac, as compared to Rs. 5 lac for a Public
Company, and allows deposits from shareholders, directors and their relatives, thus limiting
accountability in case of a failed business. Also, the maximum number of members required in a
Private Company is fifty, which makes it easier to manage and control. Thus, if a person without
a business background wants to start a company, starting a Private Company would be more
suitable for him or her. If their business grows exponentially, they always have the option of
converting their Private Company into a Public Company. A Private Company may convert into
a Public Company in any of the following cases133 –

1. Conversion by Default – When it violates any of the restrictions mentioned above in its
Articles of Association.

2. Conversion by Operation of Law – When a Private Company accepts deposits from the
public it would be treated as a ‘Deemed Public Company’.

3. Conversion by Choice – A Private Company may choose to become a Public Company,
through the following –
A. Special Resolution to exclude the exemptions from its Articles of Association.
B. Increase in Membership to minimum requirement of seven.
C. Increase in Number of Directors to minimum three, in case it is two.
D. Raising Paid-up Capital to the minimum Rs. 5 lac.
E. Filing Prospectus or Statement in lieu if Prospectus with the Registrar of
Companies, which is a mandatory provision for a Public Company, but the Private
Company was exempted from.

However, it should not be assumed that only a Private Company can convert into a Public
Company. It can also work the other way round. Section 14 (1) says that a Public Company can
convert into a Private Company and after 2018 amendment the power vested with the NCLT to


132Id.
133Id. at 39.

approve the conversion of Public Companies into Private Companies has been transferred to
Central Government. A Public Company can convert into a Private Company with the following
requirements134 –

Special Resolution to authorize the conversion and amend the Articles of Associations to
incorporate the restrictions.
Change in Company Name by adding “Private Limited” or any other acronym for the
same.
Central Government’s Approval for such alterations, which would otherwise render it
ineffective.
Filing Altered Articles with the Registrar within a month of receipt of approval.

2.7.17 STATUTORY COMPANY

A Statutory Company is incorporated through a special legislation passed by the Legislature,
with special types of objects, such as providing public services.135 These Companies are
governed by their own Special Acts, however, this does not mean that they are not governed by
the Companies Act, 1956. Some of the examples of Companies Act in India are – Life Insurance
Corporation Act, Reserve Bank of India Act, Unit Trust of India Act, etc.136

2.7.18 REGISTERED COMPANY

A Registered Company is one which is registered under the Companies Act, 1956, and may
either be a limited liability company, or an unlimited company, and Public or Private.137

2.7.19 LIMITED LIABILITY COMPANY


134Id. at 41.
135 Statutory Company – Meaning and Definition, available at <http://www.corporate-cases.com/2012/01/statutory-
company.html#.Ub9mONjDKSo>.
136Supra note 138, at 41.
137Id.

A Limited Liability Company, contrary to its name, does not provide for limited liability on the
company. The liability in this case is that of the members’ that is limited.138 A Company’s
liability may be limited in the one of the following ways –

2.7.19.1 LIMITED BY SHARES

The liability of the members of a Company Limited by Shares extends only to the extent of
unpaid amount on the shares held by them. This liability is referred through the Memorandum of
Association, and can be enforced at any time during the existence of the company, or during its
winding up. 139

2.7.19.2 LIMITED BY GUARANTEE

The liability of the members of a Company Limited by Guarantee extends only to the amount
undertaken by them to contribute to the company’s assets, in the event of its winding up. Here as
well, the liability is limited by the Memorandum of Association.140

2.7.19.3 LIMITED BY GUARANTEE WITH SHARE CAPITAL

A member’s liability in a Company Limited by Guarantee with share capital extends not only to
the guaranteed amount, but also to the unpaid amount on his or her share.141

2.7.20 UNLIMITED LIABILITY COMPANY

As the name suggests, an Unlimited Liability Company has unlimited liability on its members,
and extends to the whole amount of the debts and liabilities of the Company. The claims here can
only be made against the Company and not its members individually. An Unlimited Liability


138Id. at 42.
139Id. at 41-42.
140Ministry of Corporate Affairs, Government of India, Primers, available at
<http://www.mca.gov.in/Ministry/primers.html>.
141Supra note 143 at 42.

Company may convert to a Limited Liability Company, provided the conversion does not affect
previous liabilities, contracts, etc.
2.7.21 ASSOCIATIONS NOT FOR PROFIT

Associations Not for Profit are such Associations that are formed for the purposes of “promoting
commerce, art, science, religion, charity or any other useful social purpose”. It may or may not
be a registered company, but if it is registered as a Limited Liability Company, then it receives a
license from the Central Government, in case the following conditions are fulfilled – 142

Intention to “form the Company for promoting commerce, art, science, religion, charity,
or any other useful object”;
The Company intends to use its profits for promoting its objects, and prohibits payment
of dividends to the members.
2.7.22 GOVERNMENT COMPANY

A Company in which more than 50 per cent paid-up share capital is held by –
The Central Government,
Any State Government or Governments, or
Central as well as the State Government or Governments.

An entity may become a Government Company only if it is a “company” as per the Companies
Act, 1956. It does not include a corporation.143 A Government Company is essentially the same
as any other Company, with the feature that most of its shares are held by the Government.


142Id. at 43.
143Id. at 45.

2.7.23 FOREIGN COMPANY

A company that has been incorporated outside India with a place of business in India is known as
a Foreign Company. The essential requirement here is ‘place of business in India’. Even if all the
agents of a company incorporated outside India are Indians, if it does not have a place of
business in India, it is not a Foreign Company.144

Indian Courts do not have any jurisdiction over Foreign Companies, except where the cause of
action arises at the place of its office in India. In case more than 50 per cent of the Company’s
paid-up share capital is held by one or more Indian citizens or bodies corporate, then it shall be
treated as a body incorporated in India.145

2.7.24 HOLDING AND SUBSIDIARY COMPANY

‘Holding’ and ‘Subsidiary’ are correlated terms, such that a company is a subsidiary of another
company that is its holding company. A Company is a Subsidiary of another, Holding Company
if146 –

The other Company controls its Board of Directors’ composition,
The other Company holds more than half the equity share capital of the Company in
nominal value, or
The Company is a subsidiary of a Company that in itself is a subsidiary of the Holding
Company.

2.7.25 PUBLIC FINANCIAL INSTITUTIONS


144Id. at 47.
145Id. at 51.
146Id. at 52.

For the purposes of the Companies Act, 1956, the following are regarded as Financial
Institutions147 –

ICICI
IFCI Ltd.
IDBI
UTI
LIC
IDFC Ltd.

The Central Government has the power to specify other institutions as public financial
institutions if148 –

It has been constituted or established under or by any Central Act, or
The Central Government controls or holds more than 50 per cent of the paid-up share
capital.

The Central Government by itself, has specified the following as public financial institutions149 –

Industrial Investment Bank of India
General Insurance Corporation of India
National Insurance Company Limited
New India Assurance Company Limited
Oriental Fire & General Insurance Company Limited
United Fire & General Insurance Company Limited
Power Finance Corporation Limited
National Housing Bank
Small Industries Development Bank of India
Rural Electrification Corporation Limited
Export-Import Bank of India


147Id. at 53
148Id.
149Id.

L&T Infrastructure Development and Finance Corporation Ltd.

2.7.26 UNREGISTERED COMPANY

An Unregistered Company may be an Association, a Company, or a Partnership, that
excludes150-

A Registered Company
A railway company incorporated by an Act of the Parliament, or an Indian Law, or an
Act of the Parliament of the United Kingdom
A Company registered under previous Company Laws.

2.7.27 PRODUCER COMPANY

The objects of a Producer Company are151 –

A Producer Company may carry any of these businesses – “production, harvesting,
procurement, grading, pooling, handling, marketing, selling, export of primary produce of
the Members or import of goods or services for their benefit”,
Processing, including “preserving, drying, distilling, brewing, venting, canning and
packaging of produce”,
“Manufacture, sale or supply of machinery, equipment or consumables” to the Members,
Providing education to its members and the others on the principles of mutual assistance,
Providing technical services, along with “consultancy services, training, research and
development”, and other activities for promoting the Members’ interest,
Power generation, transmission and distribution, land revitalization and water resources,
“their use, conservation and communications relatable to primary produce;
Producers’ insurance or their primary produce,
Promoting techniques of mutual assistance and mutuality,
Members’ welfare measures or facilities,


150Id. at 54.
151Id. at 54-55.

Any ancillary or incidental activity

For the formation of a Producer Company, minimum ten individual members, or two or more
producer institutions, or a combination of the two are required to form a Producer company. It
enjoys liability limited to shares152.

2.8 COOPERATIVE SOCIETIES

Cooperative Societies are State Subjects under the Constitution of India, and are governed either
by the respective State Cooperative Act, or the Multi-State Cooperative Societies Act, 2002.153 It
is
a voluntary agreement between members to share, for the mutual benefit of all parties”.154 It is
defined as an autonomous Association of Persons, who volunteer to come together to meet their
common social, economic and cultural needs, as well as aspirations through a jointly-owned and
democratically controlled enterprise.155 If the Society was established with the objective of
serving members of a particular State, then that State’s Act applies. Similarly, if interests of more
than one State’s members are being served, then the latter Act applies.156

2.8.1 REQUIREMENTS OF A COOPERATIVE SOCIETY

The minimum number of members required to form a Society are ten. An application for
reservation of a letter and name has to be made to the Registration Authority, after which the
members contribute to the share capital and give entrance fees.157


152Id. at 55.
153 Taxation of Cooperative Societies, available at <http://business.gov.in/taxation/co_operative_societies.php>.
154Narayan Ramchandran, Corporate or Cooperate?, August 29, 2010, available at
<http://www.livemint.com/Opinion/TSVonnyNaZafQImHxqrlzO/Corporate-or-cooperate.html>.
155 What is a Cooperative?, available at <http://www.dineshbakshi.com/igcse-business-studies/business-
organisation/revision-notes/887-cooperatives>.
156Id.
157 Cooperative Society Registration, available at <http://www.indiatrademarkregistration.com/cooperative-society-
registration/>.

2.8.2 TYPES OF COOPERATIVE SOCIETIES

The difference types of Cooperative Societies are –
Housing Cooperative
Building Cooperative
Retailers’ Cooperative
Utility Cooperative
Worker Cooperative
Consumers’ Cooperative
Agricultural Cooperative

2.8.3 HOUSING COOPERATIVE

It is a legal entity for ownership of housing such that the residents own shares equivalent to their
equity in the Cooperative’s real estate, or have Rights to membership and occupancy, and
underwrite their housing through rent or subscription.158
2.8.4 BUILDING COOPERATIVE

Members pool resources for building housing, such that each member is the sole owner of a
homestead at the end of completion and the cooperative may be dissolved.159
2.8.5 RETAILERS’ COOPERATIVE

It is an organization that employs on the behalf of its members economies of scale to get
discounts from manufacturer and to pool marketing, such that the members are the businesses


158Supra note 157.
159Id.

owned by individuals, and not the individuals themselves. It is commonly observed in grocery
stores and pharmacies.160

2.8.6 UTILITY COOPERATIVE

It is a public utility, a consumers’ cooperative, owned by the customers, to serve a public welfare
and development function.161

2.8.7 WORKER COOPERATIVE

It is a cooperative that is owned and controlled democratically by the worker owners, and only
the workers own shares. Even though membership is not mandatory, only employees can become
members. Indian Coffee Houses is one such Cooperative that requires mandatory membership.162

2.8.8 CONSUMERS’ COOPERATIVE
It is a business owned by its customers, where the employees can also become members, and
decide on important matters of the Cooperation.163

2.8.9 AGRICULTURAL COOPERATIVE
These Cooperatives are widespread in the rural areas.164

2.8.10 ADVANTAGES OF A COOPERATIVE SOCIETY

The following are the advantages of a Co-operation165 –

It is an organization where the poor collectively solve their problems
It is an institution of mutual help and sharing
It reduces the social disparity by reducing class conflicts


160Id.
161Id.
162Id.
163Id.
164Id.
165Daman Prakash, Roadblocks before Cooperatives, June 11, 2011, available at
<http://www.dineshbakshi.com/igcse-business-studies/business-organisation/revision-notes/887-cooperatives>.

It reduces the bureaucratic evils and follies of political factions
It overcomes the constraints of agricultural development
It creates favorable environment for small, cottage industries
2.8.11 PROBLEMS FACED BY THE COOPERATIVES

Some of the problems faced by the Cooperatives are166 –

Slow Growth – cooperative institutions were treated as government’s administrative
subject, and its interference became an essential element in the institutions’ working. Its
growth wasn’t supervised properly and therefore it turned out to be a State-driven
institution.
Mismanagement and Manipulation – a cooperative is supposed to be a small organization
where the farmers can be the shareholders, and work towards their development. Large
cooperatives therefore, lead to mismanagement. Also, the position of the Vice President
is usually taken up by the richest farmer, with money playing a major role in the
elections.
Lacks of awareness – the people by themselves do not have sufficient knowledge about
cooperatives, and the government is not taking any measures either.

2.8.12 TAXATION OF A COOPERATIVE SOCIETY

A Cooperative Society is treated as an association of persons that is taxable under the Income
Tax Act, 1961.167 The tax is levied only on the Society, and not its members. It is taxed
differently from other Associations of Persons such that, it is chargeable to tax as per rates
prescribed under Part 1, Paragraph B of the First Schedule to the Annual Finance Act.168


166Id.
167Supra note 157.
168Id.

One of the advantages that a Cooperative Society enjoys is concession on tax. Under the Wealth
Tax Act as well, it enjoys exemption to wealth tax, which is payable by other Companies and
Hindu Undivided Families.169

2.9 DRAFT CHECKLISTS – ILLUSTRATIONS & TEMPLATES

ILLUSTRATION 1: MEMORANDUM OF UNDERSTANDING AGREEMENT

Overview

Description of Agreement/Document

Parties to a commercial transaction may often commence negotiations on a plain sheet of paper
prior to agreeing terms. The final agreement, as with non-binding heads of agreement, is based
on the parties’ memorandum setting out their understanding of the proposed transaction. The
memorandum of understanding (MOU) sets out their expectations, understanding and specific
requirements without being legally bound but as a plain language aide-memoire. The parties
usually acknowledge that neither party will be bound until the final agreement is settled and
executed on the given date.

Practical Guidance/Issues List

Parties may wish to consider the following:

MOU provisions are best when short and to the point.
The terms should be expressed in simple but clear and plain English to avoid any dispute
or misunderstanding.
No extensive drafting should be attempted but the MOU should be prepared in a manner
that the document adequately sets out the proposed deal.
A plain and clearly drafted document enables the transaction to be ‘sold’ to third parties,
where relevant, as it should provide a concise and useful explanation or statement of the
main or material terms of the proposed deal.
Even if the MOU will not be binding in its entirety or specifically in relation to the
proposed arrangements, the document should contain some certainty.


169Id.


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