Unit 2- SOLE PROPRIETORSHIP/SOLE TRADE

MEANING:

Sole proprietorship refers to that form of business organization which is owned by a

single individual, who is solely responsible for its management and receives all profits and
losses.

Sole trade is the oldest form of business organization. It should noted that a sole trader
can take the help of other persons in his business, appoint employees but the final
responsibility lies on the sole trader alone.

Features of sole proprietor ship

• Formation and closure:

In the setting up, functioning and dissolution of a sole proprietorship business no
legal formalities are necessary. However, a few legal restrictions may be there in
setting up a particular type of business. For example to open a chemist shop, the
sole proprietor must have a license from the government.
• Liability:
The liability of the sole proprietor is unlimited. This means that, in case the
sole proprietor fails to pay for the business obligations and debts arising out of
business activities, his personal property can be used to meet those liabilities.
• Sole risk bearer and profit recipient:
The sole proprietor receives all the business profits at the same time the risk
of failure of business is borne all alone by him.
• Control:
The owner has full control over his business. He plans, organizes, and
coordinates the various activities. Since he has all authority, there is always
effective control.
• No separate entity:
The proprietor and business enterprises are one and the same in the eyes of
law. There is no difference between the business assets and private assets of the
sole proprietor. The business ceases to exist in the absence of the owner.
• Lack of business continuity:
The stability and continuity of the firm depend upon the capacity, competence
and the life span of the proprietor.
Merits of sole proprietorship

• Quick decision making:

As sole trader takes all decisions himself the decision making becomes quick,
which enables the owner to take care of available opportunities immediately and
provide immediate solutions to problems.
• Confidentiality of information:
Another important advantage of sole proprietorship business is that the owner
is in a position to maintain absolute secrecy regarding his business activities.
• Direct incentive:
A sole proprietor directly reaps the benefits of his efforts as he is the sole recipient
of all the profit. This provides maximum incentive to him to work hard.
• Sense of accomplishment:
The knowledge that one is responsible for the success of the business not only
contributes to self satisfaction but also instills in the individual a sense of
accomplishment.
• Ease of formation and closure:
It is easy to start and close the business as per the wish of the owner. Anybody
wishing to start a sole trader ship business can do so in many cases without any
legal formalities.

Limitations of sole proprietorship

• Limited resources:
The ability to raise and borrow money by one individual is always limited. The
inadequacy of finance is a major handicap for the growth of sole proprietorship.
• Limited life of business concern:
The life of the sole proprietorship business is linked with the life of the proprietor.
Illness, death or insanity of the owner brings an end to the business.
• Unlimited liability:
In sole proprietorship, the liability of business is recovered from the personal
assets of the owner. It restricts the sole trader to take more risk and increases the
volume of his business
.
• Limited managerial ability:
An individual has limited knowledge and skill. In sole proprietorship, all the
activities like purchase, sale, production , marketing , finance etc. have to be
performed by the trader himself and generally no single individual can so capable
 as to perform all these activities successfully. Thus the decision making may not
be balanced in all the cases.

Conclusion-

Thus , we can make a conclusion that a sole trade business is not the best in the world
because every person has a limit to his abilities.

Qn: “ One man control is the best in the world, if that man is big enough to manage
everything himself” -Comment. (merits and demerits and conclusion)

HINDU UNDIVIDED FAMILY BUSINESS

Meaning: When a business enterprise is run by the members of the Hindu Undivided
Family and they run the business as a family business, it is called Joint Hindu Family
Business. It is governed by Hindu law. The basis of membership in the business is birth in
a particular family. The membership is limited up to three successive generations. Thus,
an individual, his son(s) and his grand son(s) become the members of the Joint Hindu
Family business. They are also called ‘co-parceners’. The term co-parceners simplies that
such an individual has got the right to ask for a partition of the joint Hindu Family business
and to have his separate share. A daughter has no right to ask for a partition and is
therefore not a co-parcener.

The affairs of business are managed by the head of the family, who is the eldest
member, and is called ‘’KARTA’’ .

There are two systems which govern membership in the family business viz.,
Dayabhaga and Mitakshara systems.

Dayabbhaga system prevails in west Bengal and allows both the male and female
members of the family to be co-parceners.
Mitakshara system prevails all over India except West Bengal and allows only the male
members to be co-parceners in the business.

Features:

• Formation: To form a Joint Hindu family business, there should be minimum two
members in the family and ancestral property to be inherited by them. Registration
is not needed.
• Liability: The liability of all members of the joint Hindu family business is limited to
the extent of their shares in the property. But the liability of Karta is unlimited.
• Control: The management and control of family business lies with Karta, who is
the senior most male member of the family. He takes all the decisions. He is not
supposed to consult other family members. His decisions are binding on the other
members.
• Continuity: A Joint Hindu Family business continues to exist on the death of any
co-parcener. Even on the death of the Karta, it continues to exist as the next senior
most family member becomes Karta. However, a Joint Hindu Family business can
be dissolved any time either through mutual agreement between members or by
partition.
• Minor member: A person becomes member by virtue of his birth in the Hindu
Undivided Family. Thus, minors can also be members of the family.

PARTNERSHIP
Meaning:

According to Indian Partnership Act 1932, partnership is the relation between persons
who have agreed to share the profits of a business carried on by all or any of them
acting for all.

Persons who entered into partnership are individually called ‘’ partners’’ and collectively
called ‘Firm’.

Features of partnership

• Formation: Partnership business is governed by Indian Partnership Act 1932. It

comes into existence through an agreement. The agreement may be oral or written.
Written partnership agreement is known as “partnership deed”. It must be noted
that the business must be lawful and run with the motive of profit.
 • Liability: The partners have unlimited liability. They are liable jointly and severally
for the debts and obligations of the firm. Creditors may lay claim on the personal
properties of any individual partner or all the partners jointly. Even a single partner
may be called upon to pay the debts of the firm. However such a partner can get
back the money due from other partners.
• Sharing of profit or loss: The partners can share profit or losses in any ratio as
agreed. In the absence of an agreement, they share it equally.
• Decision making and control: The responsibility of decision making and control
of the day to day activities are shared amongst the partners. Decisions are
generally taken with mutual consent.
• Continuity: Death, retirement, insanity or insolvency of any partner can bring an
end to the partnership business. Thus partnership business lacks continuity.
• Membership: A minimum of two persons are required to start a partnership
business. Maximum membership limit is 10 in case of banking business and 20
incase of all other types of business.
• Mutual agency: The Business in a partnership firm may be carried on by all the
partners or any one of them acting for all. This means that every partner is an agent
when he is acting on behalf of others and he is a principal when others act on his
behalf. It is therefore essential that there should be mutual trust and faith among
the partners.

Merits of partnership

• Ease of formation and closure: There is no complicated legal procedure to start

partnership. It does not take much expenditure to start partnership. It can be started
very easily. Closure of the firm is also an easy task.
• Balanced Decision making: The decisions are taken jointly by consulting each
other. There fore the partnership is able to take balanced decisions.
• More funds: Partnership has more capital resources as compared to sole trade. It
can even get larger amount of loans from other institutions on easy terms
• Sharing of Risks: In partnership risk of loss is easier to bear by individual partners
as it is shared by all the partners.
• Secrecy: Partnership does not have to get its accounts published. Therefore,
partnership is able to maintain secrecy in its functioning.

Limitations of partnership firm

• Unlimited liability: As the liability of partners is joint and several to an unlimited

extent, any one of the partners can be called upon to pay all the debts even from
his personal properties. Further, as every partner has a right to take part in the
management of the firm, any wrong decision by a single person may lead to heavy
liabilities for others.
• Limited resources: As there is a restriction on the maximum number of partners,
the capital which can be raised is limited.
 • Possibility of conflicts: Since every partner has equal right, there are greater
possibilities of friction and quarrel among the partners. Differences of opinion may
lead to mistrust which may ultimately result in closure of the firm.
• Lack of continuity: A partnership firm does not continue to exist indefinitely. The
death, insolvency or lunacy of a partner may bring about an unexpected end to
partnership.
• Lack of public confidence: The confidence of the public in partnership firms is
generally low. This is because a partnership firm is not legally required to publish
its financial reports. Therefore it is difficult for any member of the public to
ascertain the true financial status of a partnership firm.

Types of partnership
Classification on the basis of Duration

1. Partnership at will: When a partnership is made for an indefinite period, with

a view to establish a business, it is called “Partnership at will”. This type of
partnership is terminated when any partner gives a notice of withdrawal from
partnership to the firm.
2. Particular partnership: When a partnership is formed for the accomplishment
of a particular project or an activity to be carried on for a specified time period,
it is called ‘’Particular partnership”. It dissolves automatically when the purpose
for which it was formed is fulfilled or when the time duration expires.

Classification on the basis of liability

1. General partnership:It is one where

• The liability of the partners is unlimited and joint.
• Partners have the right to participate in the management of the firm.
• Registration is optional.
• The existence of the firm is affected by death, lunacy, insolvency or
retirement of a partner.
2. Limited partnership: It is one where-
• The liability of at least one partner is unlimited and the rest may have limited
liability.
• Death, lunacy or insolvency of the limited partners does not affect the
continuity of the firm.
• Registration of the partnership is compulsory.
• The limited partners do not enjoy the right of management.

TYPES OF PARTNERS
 1. Active partners: Those partners who take active participation in the administration
of the firm are called ‘active partners’. Besides, they invest money in the firm and
have share in its profit and loss. They have unlimited liability.
2. Sleeping or dormant partners: Those partners who do not take active
participation in the administration but invest money, have share in profit and loss
and have unlimited liabilities, are called sleeping partners.
3. Secret partner: A secret partner is one whose association with the firm is unknown
to the general public. Except this, he is like the rest of the partners. He contributes
capital to the firm, shares its profit and losses, takes part in the management and
has unlimited liability.
4. Nominal partner: Some persons only give their name and goodwill to a
partnership. They neither contribute capital nor share the profits. They are only
name sake partners. These partners are called Nominal partners. But they are
liable to third parties like other partners.
5. Partner by Estoppel: If a person through his conduct or behavior gives an
impression to others that he is a partner of the firm, then such person is called
partner by estoppel. Even though such partners do not contribute capital or take
part in its management, they are held liable for the debts of the firm.
6. Partner by holding out: If a partnership firm shows to public about a particular
person as its partner, and that person does not deny this fact though he is not a
partner in reality, he becomes liable to third parties who deal with the firm on the
impression that he is a partner. Such a partner is called Partner by holding out.

PARTNERSHIP DEED

Meaning: The written agreement which specifies the terms and conditions that govern the
partnership is called ‘Partnership deed’.

Contents of Partnership Deed:

• Name and address of the firm

• Nature of firm’s business
• Duration of business
• Contribution of capital by partners and interest on capital if any.
• Profit sharing ratio of the partners
• Rights, duties and liabilities of partners
• Commission and salary of partners
• Drawings and interest on it.
• Terms governing admission and retirement of a partner
• Procedure for dissolution of the firm
• Audit of books of accounts
• Methods of solving disputes among the partners.

REGISTRATION OF PARTNERSHIP FIRM

Entering the firm’s name in the register of firms kept with the Registrar of firms is called
registration of partnership.

Registration of firms is not compulsory. It is only optional.

Consequences of Non registration of a firm

• A partner of an unregistered firm cannot file suit against the firm or other partners
• The firm cannot file suit against third parties; and
• The firm cannot file a case against the partners.
Procedure for registration of partnership firm

1. Submission of an application in the prescribed proforma signed by all the partners

to the Registrar of firms. It contains the following details:
• Name of the firm
• Location of the firm
• Name of Other places of business
• Date of admission of partners in firm
• Names and addresses of partners
• Duration of partnership
2. Deposit of required fee with the Registrar of firms
3. The Registrar after approval will make an entry in the register of firms and will
subsequently issue a certificate of registration.

CO-OPERATIVE SOCIETIES
MEANING:

The cooperative society is a voluntary association of persons, who join together with the
motive of welfare of the members.

The cooperative society is compulsorily required to be registered under the cooperative

societies Act 1912. Any ten persons can form a cooperative society. It raises capital by
way of issuing shares. The main objectives of cooperative society are:

• Rendering service rather than earning profits

• Mutual help instead of competition
• Self-help in place of dependence.

Features of cooperative societies

 • Voluntary membership: It is a voluntary association of persons, which means that
no individual can be compelled to be a member of a cooperative society. Persons
having common interest can join as members as and when they desire and they
are also free to leave the organization. No member can transfer his share to another
person. He can get back his capital after leaving the membership. The minimum
membership required to form a cooperative society is 10 and the maximum number
is unlimited.
• Legal status: Registration of a society under the cooperative Societies Act is a
must. Once it is registered, it becomes a body corporate and enjoys certain
privileges. Some of the privileges are:
➢ It has its own common seal
➢ It can own property in its name
➢ It can enter into contract with others
➢ It can sue other in court of law.
• Limited liability: The liability of the members is limited to the extent of capital
contributed by them.
• Control: In a cooperative society, the controlling job is performed by an elected
Managing committee. The managing committee is elected by the members on the
basis of one man one vote in the general meeting.
• Service motive: The primary objective of any cooperative organization is to render
services to its members in particular and to the society in general.

Merits of cooperative society

• Ease of formation: Formation of cooperative society is easy as compared to Joint

Stock Company. Any 10 persons can voluntarily form an association and get
themselves registered with Registrar of Cooperative societies. T does not require
any expensive and legal procedure.
• Limited liability: The liability of members of the cooperative society is limited to
the extent of capital contributed by them.
• Equality in voting status: In a cooperative society each member has one vote
irrespective of the amount of capital contributed by a member.
• Stable existence: A Cooperative society does not cease to exist in case of death,
or insolvency or resignation of a member. It has thus a fairly stable life.
• Support from government: Cooperative societies get a lot of patronage in the
form of exemptions and concessions in taxes and financial assistance from the
state governments which no other organization gets.
• Economy in operations: Generally, the administrative expenses of cooperative
societies are very little because members offer administrative services without any
remuneration.
Limitations:

• Limited resources: The amount of capital that a cooperative society can generate
is limited because of the membership remaining confined to a locality or region or
a particular section of people.
 • Inefficiency in Management: The management committee of cooperative society
is elected by the members. Generally, these members do not possess adequate
managerial abilities and experience. Cooperative societies are unable to employ
expert managers because of their inability to pay high salaries.
• Lack of secrecy: Maintenance of business secrecy is one of the important factors
for the success of enterprise which the cooperatives always lack. Cooperative
societies have to send their annual reports and accounts to the Registrar of
cooperative societies. In this way secrets of business become public.
• Government control: Interference in the functioning of the cooperative
organization through the control exercised by the government negatively affects its
freedom of operation.
• Differences of opinion: Internal quarrels among the members of the cooperative
society as a result of contrary view points may lead to difficulties in decision making.
TYPES OF COOPERATIVE SOCIETIES

1. Consumer cooperative societies:

• These are formed by consumers desirous of obtaining quality goods at
reasonable prices.
• The society aims at protecting interest of the consumers by eliminating the
middlemen.
• It purchases goods in bulk from the wholesalers and sells to members.
• Profits of the society are distributed on the basis of capital contribution of
purchase made by individual members.
2. Producer’s cooperative societies:
• These are formed by small producers desirous of procuring inputs for
production of goods.
• The society aims at enhancing the bargaining power of small producers.
• It supplies, raw materials, equipment and other inputs to the members and
buy their output for sale
• Profits of the society are distributed among the members on the basis of
their contributions to the total pool of goods produced.
3. Marketing cooperative societies:
• These are formed by producers desirous of selling the products at a
reasonable price.
• The society aims at eliminating the middlemen and improves the
competitive position of its members.
• It pools the output of individual members and performs marketing functions
like transportation, warehousing etc. to sell the output at the best possible
price.
• Profits are distributed according to each member’s contribution to the pool
of output.
4. Farmer’s cooperative societies:
• These are formed by farmers who wish to jointly take up farming activities.
• The society aims to gain the benefits of large scale farming and increase the
productivity.
 •The society provide better quality seeds, fertilizers, machinery and other
modern techniques for use in the cultivation of crops.
5. Credit cooperative societies:
• These are formed by persons who seek financial help in the form of loans.
• The society aims to protect the members form the exploitation of lenders who
charge high rates of interest on loans.
• The society provides loans to members out of the amounts collected as
capital and deposits from the members and charge low rates of interest.
6. Cooperative housing societies:
• These are formed by people with limited income who are desirous of
procuring residential accommodation at lower costs.
• The society aims to solve the housing problems of the members by
constructing houses and giving the option of paying in installments.

JOINT STOCK COMPANY

Meaning:

It is an association of persons who contribute money for some common purpose. The
money so contributed is the capital of the company. The persons who contribute capital
are its members. The proportion of capital to which each member is entitled is called his
share, therefore members of joint stock company are known as shareholders and the
capital of the company is known as share capital. The total share capital is divided into a
number of units known as ‘shares’.

The companies are governed by the Indian Companies Act 1956. The Act defines a
company as ‘’ an artificial person created by law, having separate entity,with perpetual
succession and a common seal’’.

Features

• Artificial person: A joint stock company is an artificial person in the sense that it
is created by law and does not possess physical attributes of a natural person.
However it has a legal status.
• Separate legal entity: Being an artificial person, a company has an existence
independent of its members. It can own property, enter into contract and conduct
any lawful business in its own name. It can sue and can be sued in the court of law.
A shareholder cannot held responsible for the acts of the company.
 • Formation: The formation of a company is a time consuming, expensive and
complicated process. It comes into existence only when it has been registered after
completing the formalities prescribed under the Indian Companies Act 1956.
• Perpetual existence: A company once formed continues to exist as long as it
fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or
retirement of any of its members.
• Control: Joint stock companies have democratic management and control. Even
though the shareholders are the owners of the company, all of them cannot
participate in the management process. The company is managed by the elected
representatives of shareholders known as ‘Directors’.
• Limited liability: The liability of the members of a joint stock company is limited to
the extent of the amount of shares purchased by them. In other words, in case of
payment of debts by the company, a shareholder is held liable only to the extent of
the unpaid amount of shares held by him.
• Common seal: being an artificial person, a company has a common seal. The
stamp has the name of the company imprinted on it. This acts as an official
signature of the company. Any agreement which does not have the company seal
put on it is not legally binding on the company.

Merits of Joint stock companies

• Limited liabilities: The liability of the shareholders of a company is limited to the

face value of the shares. If the funds of the company are insufficient to satisfy the
claims of the creditors, no member can be called to pay any thing more than the
unpaid amount of the shares held by him.
• Transferability of interest: The shares of a public company can be transferred at
any time. This enable the shareholders to convert their shares into cash incase of
need. Such liquidity of investment stimulates investment in joint stock companies.
• Perpetual existence: A company is an artificial person created by law and
possesses independent legal status. Its existence is not affected by the death,
insolvency etc. of the members. Thus it has perpetual existence.
• Scope for expansion: An important advantage of the company is that it helps
mobilization of large amount of capital. Further capital can be raised from the public
as well as through loans from banks and financial institutions. Thus there is greater
scope for expansion.
• Professional management: Companies, because of complex nature of activities
and operations and large volume of business, requires professional managers at
every level of organization. And because of their financial strength they can afford
to appoint such managers. This leads to efficiency.

Limitations

• Complexity in formation: The formation of a company involves compliance with

a number of legal formalities under the Companies Act and compliance with several
other laws.
 • Lack of secrecy: The affairs of the company become public since several
statements and returns have to be filed with the Registrar. It is not possible for a
company to retain the business secrets since it is managed and controlled by many
people. As business secrets cannot be retained in a company, it adversely affects
the earning capacity of the business.
• Impersonal work environment: The large size of a company makes it difficult for
the owners and top management to maintain personal contact with the employees,
customers and creditors.
• Numerous regulations: The functioning of the company is subject to many legal
provisions and compulsions. This reduces the freedom of operations of the
company and takes away a lot of time, effort and money.
• Delay in decision making: Quick decision can be taken in case of sole trade and
partnership but it takes more time to take decision in a company organization. It is
because of the existence of various levels of management and the calling of
meeting to get a resolution passed for taking a decision. In this way it is possible to
take quick decisions.
• Oligarchic management: In theory the company is democratically managed by
the elected representatives of the shareholders called as directors but actually a
joint stock company a worst example of oligarchy, i.e. rule by a few. Generally
members of the company do not take much interest in the working and meetings of
the company. Thus a small group of directors may misuse their powers and work
against the interest of shareholders.
TYPES OF COMPANIES

• Private company:
A private company means a company which-
➢ Restricts the rights of members to transfer its shares
➢ Limits the number of its members up to 50
➢ Cannot invite the public to subscribe for its shares and debentures
➢ Must have a minimum paid up capital of Rs1 lakh or such higher amount
which may be prescribed from time to time.
It must be noted that a private company must write the word ‘Pvt. Ltd’ with its name,
otherwise that will be considered as a public company.

Privileges of private company

A private limited company has the following privileges as against a public limited company:

• A private company can be formed by only two members whereas seven people are
needed to form a public company
• Need not issue a prospectus as public is not invited to subscribe to the shares of a
private company.
• Allotment of shares can be done without receiving minimum subscription.
• A private company can start their business immediately after its incorporation. The
public company has to wait for the certificate of commencement of business before
can start a business.
 • A private company needs to have only two directors as against minimum three
directors in case of a public company.
• A private company is not required to keep an index of members while the same is
necessary in the case of public company.
Public company:

A public company is one which-

• Has a minimum paid up capital of Rs5 lakhs .

• Has a minimum of 7 members and no limit on maximum members
• Has no restriction on the transfer of shares; and
• Is not prohibited from inviting the public to subscribe to its share capital.

DISTICTION BETWEEN PRIVATE COMPANY AND PUBLIC COMPANY

BASIS PRIVATE COMPANY PUBLIC COMPANY

1. No. of Minimum -2 Minimum – 7

members
Maximum - 200 Maximum – no limit

2. Name It is necessary to add the It is necessary to add the word

word ‘’private limited’’ after ‘’Limited’’ after the name of
the name of the private co. the public company.

3. Minimum
number of
directors 2 3

4. Minimum
paid up
capital Rs 1 lakh Rs5 lakhs

5. Transfer of No restriction on the There is not restriction on the

shares transfer shares transfer of shares.

6. Index of Preparing index of Preparing index of members

members members is not is compulsory.
compulsory

7. Invitation to Cannot invite public for Can invite public for issuing its
public issuing shares and shares and debentures.
debentures
FACTORS TO BE CONSIDERED WHILE STARTING A BUSINESS

• Selection of line of business:

The first thing to be decided by any entrepreneur of a new business is the nature
and type of business to be undertaken. There can be three types of business-
trading, manufacturing and services. The decision will be influenced by the
customer requirements in the market and interest of the entrepreneur.
• Size of the firm:
Size of the firm or scale of its operation is another important decision to be taken
at the start of the business. If the demand for the proposed product is likely to be
good over time, operation at a large scale is to be opted. If the market conditions
are uncertain and risks are high, a small size business is better.
• Choice of form of ownership:
With respect to ownership, the business organization may take the form of a sole
proprietorship, partnership, or a joint stock company. If the risk is small in any
business, then sole proprietorship or partnership form of business is appropriate
because in these types of business, owners have unlimited liabilities. If risk is very
high, then adopting joint stock company form of business is suitable because its
owners have limited liability. Thus while selecting the form of business organization;
various factors are kept in mind.
• Location of business enterprise:
An important factor to be considered at the start of business is the place where the
enterprise will be located. Availability of raw materials and labour; power supply
and services like banking, transportation, communication, warehousing etc. are
important factors while making a choice of location.
• Financing the proposition:
Finance is the life blood of business. Finance is required to purchase fixed assets,
current assets and pay daily expenses. Proper financial planning must be done to
determine (a) the requirement of capital, (b) source from which capital will be raised,
and (c) the best ways of utilizing the capital in the firm.
• Physical facilities:
Availability of physical facilities including machines and equipment, building and
supportive services is another important factor to be considered at the start of the
business.
• Plant layout:
After arranging for machine and other equipment’s, it should be put at proper places
in the factory. Their installation should be in such a manner that they consume least
possible space, material not wasted, labour does face any problem while working
on machine, flows of work continues, maximum utilization of machinery is possible.
• Competent and committed work force:
 Every enterprise needs competent and committed work force to perform
various activities so that physical and financial resources are converted into desired
output. Plan should also be made about how the employees will be trained and
motivated to give their best performance

Formation of a Company

STAGES

The following are the steps involved in the formation of a company:

1. Promotion
2. Incorporation
3. Subscription of capital; and

1. Promotion:
Promotion is the first stage in the formation of a company. Promotion may be defined as
the discovery of business opportunities, and the subsequent organization of funds,
property and managerial ability into a business concern for the purpose of making profits
there from.

Persons who conceive the business idea, decide to form a company, takes necessary
steps for the same, and assume associated risks, are called promoters.

Functions of a Promoter:

(i) Finding out a business opportunity

(ii) Conducting studies
(iii) Getting the name approved.
(iv) Fixing up persons to sign Memorandum of association
(v) Appointment of professionals
(vi) Preparation of necessary documents

Steps in Promotion

a) Approval of company’s name is taken from the Registrar of companies

b) Signatories to Memorandum of Association are fixed
c) Certain professionals are appointed to assist the promoters
d) Documents necessary for registration are prepared.
Necessary Documents:

1. Memorandum of association:
2. Articles of Association
3. Consent of proposed directors
4. Agreement, if any, with proposed managing or whole time director
5. Statutory declaration.

Memorandum of Association

• It defines the objects for which the company is formed.

• This is the main document of the company.
• This defines the relationship of the company with outsiders.
• Every company has to file Memorandum of Association.
• Alteration of Memorandum of Association is difficult

Contents of Memorandum of Association

a) Name clause: Under this clause the name of the company already been approved
by the Registrar of companies will be stated.
b) Registered office clause: In this clause, the name of the state in which the
registered office of the company is to be situated is mentioned.
c) Objects clause : This is the most important clause of Memorandum of Association.
It defines the limits and scope of operation of the company. It defines the powers
of the company and the activities for which its share capital shall be used. The
object clause is divided into two sub clauses viz. (i) main objects (ii) other objects.
d) Liability clause : This clause limits the liability of the members to the amount
unpaid on the shares owned by them.
e) Capital clause : This clause specifies the maximum capital which the company
will be authorized to raise through the issue of shares. The authorized capital of
the proposed company along with its division in to the number of shares having
fixed face value is specified in this clause.
f) Association clause: In this clause, the signatories to the Memorandum of
Association state their intention to be associated with the company and also give
their consent to purchase qualification shares.

Articles of Association

• It contains the rules and regulations relating to the management of the internal
affairs of the company.
• It defines the objectives of the company that are to be achieved.
• This is the subsidiary document of the company.
• Articles define the relationship of the members and the company.
• It is not necessary for the public limited company. A public limited company may
adopt Table A. Table A is a model set of articles given in the Companies Act. If a
 company adopts Table A, there is no need to prepare separate Articles of
Association.
• It can be altered by passing a special resolution.

Difference between Memorandum of Association and Articles of

Association

Basis Memorandum of association Articles of Association

objectives It defines the objects for which It defines the objectives of the
the company is formed. company that are to be
achieved.

Position This is the main document of the This is the subsidiary

company. document of the company.

Relationship This defines the relationship of Articles define the relationship

the company with outsiders. of the members and the
company.

Necessity Every company has to file It is not necessary for the

Memorandum of Association. public limited company.

Alteration Alteration of Memorandum of It can be altered by passing a

Association is difficult. special resolution.

Prospectus:

A prospectus is “any document described or issued as a prospectus including any notice,

circular, advertisement or other document inviting deposits from the public or inviting offers
from the public for the subscription or purchase of any shares or debentures of a body
corporate”.

Reasons for issuing prospectus:

➢ It serves as an invitation to the public to invest in the shares and debentures of the
company.
➢ It acts as an advertisement for inducing the investors to invest in the company.
➢ It serves as an record of the terms and conditions on which shares and debentures
are issued.
➢ It helps to protect the interest of the investors.

2. Incorporation:
 The second stage of the formation of a company is incorporation or registration of
a company. The promoters make an application for the incorporation of the
company. The application is to be filed with the Registrar of Companies of the state
within which they plan to establish the registered office of the company.

The application must be accompanied with the following documents:

➢ The memorandum of association must be duly stamped, signed and witnessed.

➢ The articles of association duly stamped and witnessed.
➢ Written permission of the directors.
➢ Agreement with the managing director/manager.
➢ A copy of the registrar’s letter giving permission for the name.
➢ A declaration that all the legal requirements are followed.
➢ A notice about the exact office of the registered office.
➢ Documents showing the payment of fees.
When the Registrar is satisfied about the completion of formalities for registration, a
Certificate of Incorporation is issued to the company which may be called the birth
certificate of the company.

3. Capital subscription:
A public company can raise the required funds from the public by means of issuing
shares and debentures. The following steps are required for raising funds from the
public.
• SEBI( Securities and Exchange Board of India) approval
• File a copy of prospectus with the Registrar of companies.
• Appointment of brokers, bankers and underwriters etc.
• Ensure that Minimum subscription is received. (The company must receive
applications for a certain minimum number of shares before going ahead with the
allotment of shares. This is called the minimum subscription. The limit of minimum
subscription is 90 percent of size of the issue.)
• Application for listing of company’s securities
• Refund/adjust excess application money received
• Issue allotment letters to successful applicants; and
• File return of allotment with the Registrar of companies.

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