MODULE I

PART A

Q1: E-TEXT

Module ID: 1Business organizations and corporate personality: its nature, advantages,
disadvantages and types

Module Overview: The topic of business organizations and corporate personality has become
an important part of the field of business studies. It closely studies the types of business
organizations and advantages and disadvantages of doing business in different business
organizations. The knowledge of this topic is necessary not only for the commerce students,
but also for all those who want to enter into any line of business. In the present module, we
will discuss in detail about the various forms of business organizations that exist in India. The
module primarily is concerned with the regulation of organizations- corporate and
incorporated one, and requires the students to understand the concept of corporate personality.
This way module will help the students who want to work in industry, financial services, and
law-related professions or manage their own business.
Subject Name: Law
Paper Name: Corporate Law
Module ID: 1
Pre-requisites: For understanding the module, basic understanding of business organizations
and related legal concepts is required.
Objectives:

To know about the various forms of

business organizations in India.

To know the meaning, features, merits,

demerits and suitability of Sole
Proprietorship.

To know the meaning, features, merits,

demerits and suitability of HUF.
To know about the advantages and
disadvantages of companies,
partnerships and limited liability
partnerships
What is meant by ‘corporate
personality’?
To develop an understanding of the
core principles of the laws that regulate
business organizations

1
Keywords: business organizations, business law, companies, partnerships, corporate
personality, sole proprietorship, traditional partnership, limited liability partnership

INTRODUCTION
Meaning of business:
An organization or enterprising entity may be engaged in commercial, industrial or
professional activities. A business can be a for-profit entity, such as a publicly-traded
corporation, or a non-profit organization engaged in business activities, such as an
agricultural cooperative.1L.R. Dickson has defined ‘business’ as a form of activity pursued
primarily with the object of earning profit for the benefit of those on whose behalf the activity
is conducted. “Business involves production and/or exchange of goods and services to earn
profits or in a broader sense, to earn a living. Profit is not the sole objective of the business. It
may have other objectives like promotion of welfare of the workers and the general public.
Business activities include production and distribution of goods and services which can
satisfy human wants.2

The term ‘business’ should be used to convey the same meaning as the term ‘trade’ simply
denotes purchase and sale of goods whereas ‘business’ includes all activities from production
to distribution of goods and services. It embraces industry, trade and other activities like
banking, transport, insurance and warehousing which facilitates production and distribution of
goods and services. According to F.C. Hopper, “The whole complex field of commerce and
industry which includes the basic industries, processing and manufacturing industries, and the
network of ancillary services: distribution, banking, insurance transport and so on, which
serve and inter penetrate the world of business as a whole” are called
business activities.3

Learning outcomes
By the end of this module and having completed the essential reading and activities, students
would be able to:

1
<http://www.investopedia.com/terms/b/business.asp >accessed August5, 2014
2
<https://www.classle.net/book/business-and-profession >accessed August5, 2014
3
Ibid

2
Nature of Business:

A business enterprise has the following characteristics:

(i) Dealing in Goods and Services:
The first basic characteristic of a business is that it deals in goods and services.
Goods produced or exchanged may be consumer goods such as bread, rice, cloth,
etc., or capital goods such as machines, tools, etc.

(ii) Production and Exchange:

Every business is concerned with production and exchange of goods and services
for value. Thus, goods produced or purchased for personal consumption (or) for
presenting to others as gifts do not constitute business because there is no sale or
transfer for value involved.

(iii) Regularity and Continuity in Dealings:

One single sale transaction cannot strictly constitute a business. A sale of a
product can be called a business if it is undertaken frequently.

(iv) Uncertainty or Risk:

It is true that the element of risk is present in almost all economic activities. But it
is undoubtedly more significantly present in business activities. 4

(v) Profit Motive:

Everyone engages in business primarily with a view to earn profits and acquire
wealth. Profit motive is also accepted as a desirable objective even for the
Government enterprises engaged in business. In case of government enterprise
profit is termed as surplus.

4
<http://www.ibbusinessandmanagement.com/11-the-nature-of-business-activity.html >accessed on
August6, 2014

3
Functions of Business5 :

Productio Marketing Finance

n Function Function Function

Personnel
Function
To achieve its objectives, a business endeavor performs many functions which may be
broadly grouped under the following headings: Production, Marketing, Finance and
Personnel.
(i) Production Function:
Under this function a business organization transforms its inputs like manpower,
material, machinery, capital, information and energy into particular outputs as
demanded by the society.
(ii) Marketing Function:
This is concerned with distribution of goods and services produced by the
production department. As we all know that in order to make a business
successful how important is marketing, the marketing department guides the
production department in product planning, development and prices of various
products produced by the business, it also promotes the sale of goods through
advertisement and sales promotion.
(iii) Finance Function:
Money is an important factor in any business, thus arrangement of sufficient
capital for the smooth running of business is an important function for a business
organization to undertake. Many important decisions such as sources of finance,
investment of funds in productive ventures, and levels of inventory of various
items are undertaken.
(iv) Personnel Function:
As we know that if you want to make your business successful, then you need to
have people who can help you in making it successful and achieving the business
objectives, hence, this function is concerned with finding suitable employees,
giving them training, fixing their remuneration and motivating them.

PART B

5
<http://www.ibbusinessandmanagement.com/11-the-nature-of-business-activity.html >accessed on
August6, 2014

4
FORMS OF BUSINESSORGANIZATIONS6

A business enterprise may be owned by one person or a group of persons. When it is owned
by one person, it is known as sole proprietorship. Apart from this form of organization, other
forms of business organizations which come under the category of ‘group ownership’ or ‘joint
ownership’7include Joint Hindu Family, Partnership firms, co- operatives and Limited
Liability Partnership Firms. Limited liability partnerships and companies are body corporates
which are incorporated by group of persons interested in running any lawful business for
motive of earning profit. Such persons incorporate the body corporate and transfer their
business to it in order to limit their liability.

SOLE PROPRIETORSHIP

Business which runs under the exclusive ownership and control of an individual is called the
sole proprietorship or single entrepreneurship. Under this form, an individual may run the
business alone with the help of his own skill and intelligence or may employ a few employees
for helping him in conducting the business. It is the simplest and the oldest form of business
organization.

Features of sole proprietorship

(i) This is owned by one man who contributes capital for conducting business.

(ii) He has absolute control over the affairs of the concern. His decision is final.

(iii) The attraction of reaping the entire profits motivates him to put forth the best in
him.

(iv) The liability of the sole proprietor is unlimited and he earns all profits.

(v) A sole proprietary concern is free from Government regulations. No formalities

are to be observed in its formation, management or in its closure.

(vi) It is not a separate entity; consequently the business comes to an end with the
permanent disability or death of the proprietor.

(vii) It has limited capital as only the sole proprietor contributes capital for the
business.

Merits:

(i) No legal formalities are required to complied with in order to start a sole
proprietary business, it is one of the most easy form of business organization to
start, easy to form and dissolve too.
(ii) Under this form of business organization, sole proprietor enjoys the entire profits
and hence is inspired and motivated to give his best of efforts and skills in
running the business.

<http://business.gov.in/starting_business/location_industry.php> accessed August6, 2014

6

<www.b-u.ac.in/sde_book/bcom_bs.pdf >accessed August7,2014

7

5
 (iii) The sole proprietor is free to direct and control the operations of his business.
(iv) Business secrecy is maintained and to face the challenge of competition in the
market, maintenance of business secrecy provides an edge to the firm over its
rival firms.
(v) More prompt and quick decisions can be taken, as being a sole proprietor he
doesn’t need to consult anyone.
(vi) Sole proprietorship offers the scope for flexibility in business operations by
allowing the business to adapt and adjust itself to changing times and situations.
(vii) As the size of a sole proprietary business is small and the owner maintains a
personal touch with the employees and customers, it brings in efficiency and
motivation.
(viii) Government interference in the business activities under this form of business is
least and in the day-to-day running of the business also there is no interference by
the government.

Demerits:

(i) Large units which require enormous capital cannot be started by an individual as
he can contribute only a limited capital in the business.
(ii) Limited Managerial Skill
(iii) As the liability of a sole trader being unlimited, even his private assets are in
danger of being lost in order to meet liabilities of his business.
(iv) Uncertainty of continuity
(v) It’s very difficult to lock maximum advantage under this form of business, as the
financial recourses are limited.

HINDU UNDIVIDED FAMILY:

The Joint Hindu Family firm is a form of business organization in which the family possesses
some inherited property and the ‘Karta’, the head of the family, manages its affairs. It comes
into existence by the operation of Hindu Law and not out of contract between the members or
coparceners. As a result, the Joint Hindu Family Business is a business by co-parceners of a
Hindu undivided estate.8

Features of HUF:

(i) Membership of the family business is the result of status arising from birth in the
family, and hence there is no question of the members being discriminated in
terms of minority and majority on the basis of age.
(ii) Only male persons, and not females, can claim co-parcenary interest in the Hindu
Family business firm.
(iii) The right to manage the business vests in Karta alone (i.e. the Head of the
Family).
(iv) Death or insolvency of a co-parcener or even that of the karta does not affect the
existence of the Joint Hindu Family business.

Merits of Joint Hindu Family:

Hindu Succession Act, 1956

8

6
 (i) Irrespective of the contribution made, every co-parcener in the successful running
of the business gets an equal share of profit.
(ii) Unrestricted freedom is enjoyed by the karta of the family to run the business as
no other co-parceners of the family interferes in the running of the business.
(iii) As different generations of a family works in the same business, the younger
generation gets an advantage and help to develop and acquire expertise without
much difficulty.
(iv) It serves as an insurance cover for maintaining the children, widows, and ailing or
invalid members of the family.

Demerits of Joint Hindu Family:

(i) As all the co-parceners have an equal right to share the profits made out of the
joint business, there is no encouragement to work hard and to earn more and it
makes the members of the family very un-enterprising.
(ii) Initiative and sincerity showed by the younger generation is not used properly as
the karta of the family has unchallengeable authority.
(iii) It has been seen that sometimes the karta of the family misuses his freedom for
his own person benefits and gains.
(iv) There is a fear of disintegration under this form of business organization.

PARTNERSHIP FIRM

Section 4 of the Indian Partnership Act, 1932 defines partnership as “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 entering into partnership agreement are known as ‘partners’ and
collectively as ‘firm’ or ‘partnership firm’. The name in which the businesses carried on is
called ‘firm name’.

Features of a partnership firm

(i) At least two persons are needed to form a partnership. The Partnership Act fixes
no limit on the number of partners to form a partnership whereas the Companies
Act, 1956 fixed some limit, it laid down that any partnership or association of
more than 10 persons in case of banking business and 20 persons in other
business operations as illegal unless registered as a Joint Stock Company 9.
According to the Companies Act 2013, the maximum number of persons/partners
in any association/partnership may be up to such number as may be prescribed
but not exceeding one hundred. This restriction will not apply to an association or
partnership, constituted by professionals like lawyer, chartered accountants,
company secretaries, etc. who are governed by their special laws. Under the
Companies Act, 1956, there was a limit of maximum 20 persons/partners and
there was no exemption granted to the professionals.
(ii) Under this form of business organization agreement forms the basis of a
relationship and not the status as in the case of Joint Hindu Family. There must be
an agreement between two or more persons to enter into partnership.

<http://indiankanoon.org/doc/1353758/ >accessed August11, 2014

9

7
 (iii) Simply holding a property in joint ownership cannot be considered as partnership,
it should be accompanied by certain business activities and the partners must
agree to carry some lawful business.
(iv) There must be an agreement to share the profits and losses of the business of the
partnership firm. However, sharing of profit is not a conclusive proof of
partnership.
(v) Fundamental test to test the existence of a partnership firm is that there must be
an agency relationship between the partners.
(vi) Out of contractual relationship between the partners, all the partners are liable
jointly and severally for all the debts and obligations of the firm.
(vii) Partner himself being an agent of the partnership firm cannot delegate his
proprietary interest to outsider and if he wants to then he cannot do it without the
unanimous consent of the other partners.

Merits of Partnership:

(i) This form of business organization like sole proprietorship is also relatively free
from legal formalities in terms of its formation. Registration of partnership firm is
not mandatory under the Partnership Act, 1932.
(ii) Under this form of business organization, partners can pool larger amount of
capital for the business.
(iii) Better management of the business is ensured as the partnership combines
abilities and skills of two or more persons (partners).
(iv) There is a flexibility in the functioning of the day to day business of the firm , as
partnership business is not regulated by any law in its day to day just as a
company business is regulated by the Company Law.
(v) A partnership firm is able to make decisions without delay because partners can
meet and discuss the business problems more frequently.
(vi) Since the liability of the partners is unlimited, they are more cautious in running
the business.
(vii) No major amendments can be made affecting the basic nature of partnership
without the unanimous consent of all the partners. Thus every partner’s views-
voice carries weight in partnership.

Demerits of Partnership Firm:

(i) The partnership business works steady as long as there is harmony and mutual
understanding among the partners. If there is any occasion when this harmony is
adversely affected that is the beginning of the end of a good partnership.
(ii) There is insecurity with the business after the death, retirement or insolvency of a
partner.
(iii) It fails to inspire public confidence as a partnership business is not subjected to
detailed regulations just as a company business.
(iv) A partnership is even worse than sole proprietorship because a partner is liable to
the extent of his private property not only for his own mistakes and lapses but
also for the mistakes, lapses and even dishonesty of his fellow partner or partners.

8
 (v) As no partner can transfer his interest to an outsider without the unanimous
consent of all the partners, it makes investment in partnership business reluctantly
difficult.

PART C

COMPANY

A company is an incorporated voluntary association of persons in business having joint

capital divided into transferable shares of a fixed value, along with the features of limited
liability, common seal and perpetual succession. 10It may be a public, private, foreign, small,
associate, holding or subsidiary company. Companies may be incorporated with limited
liability of its members or with unlimited liability. Liability of members may be limited by
shares or by guarantee.

Features:

(i) A company is an artificial person created by law to achieve the objectives for
which it is formed. A company exists only in the contemplation of law. It is an
artificial person in the sense that it is created by a process other than natural birth
and does not possess the physical attributes of a natural person.

(ii) This form of business organization has a continuous existence and its life is not
affected by the death, lunacy, insolvency or retirement of its members. Members
may come and go, however, the company continues its operations so long as it
fulfills the requirements of the law under which it has been formed.

Merits of a Company:

This form of business organization has become very popular not only in India but also outside
India mainly for industrial and trading operations of a large scale.
Advantages/merits enjoyed by the company form of organization are follows:

(i) By issuing shares and debentures to the public, a public company can raise large
amount of money.
(ii) Under this form of business organization, shareholders have limited liability for
the shares they hold in the company and their private property is not attachable to
recover the dues of the company. As a consequence, the people who don’t want
to take big risk in the industries they find this kind of business organization really
attractive.
(iii) This form of business organization has a continuous existence and its life is not
affected by the death, lunacy, insolvency or retirement of its members. Members
may come and go, however, the company continues its operations so long as it
fulfills the requirements of the law under which it has been formed.
<http://prezi.com/rk0bq8khmre4/joint-stock-company/ >accessed August11,2014
10

9
 (iv) Transferability of Shares: Shares of a public company are freely transferable
whereas restrictions are placed in case of transfer of shares in case of private
companies.
(v) As we know that a company can raise large amount of capital this allows the
company to take large scale operations.
(vi) Scope for Expansion and Growth is much higher.

Demerits of a Company:

(i) Large number of legal formalities has to be fulfilled by this form of a company,
for which provisions of a Companies Act are to be complied.

(ii) There is a divorce between ownership and management of the company.

(iii) Under this form of business organization it has been seen that though every
shareholder has a right to participate in the Annual General Meeting, but in
practice, companies are managed by a small number of persons who are able to
perpetuate their reign over the company from year to year. This is because of a
number of factors like lack of interest on the part of the shareholders, low literacy
level among the shareholders, and lack of sufficient information about the
working of the company.

CO-OPERATIVE SOCIETY

According to the International Labour Office, a cooperative organization is “an association of

persons, usually of limited means, who have voluntarily joined together to achieve a common
economic end, through the formation of a democratically controlled business organization,
making equitable contributions to the capital required and accepting affair share of risks and
benefits of the undertaking.”11

Characteristics of Co-operative Organization: The cooperative organization, being

different in its rationale and philosophy possesses certain features/characteristics which
maybe briefly explained as follows:

(i) A cooperative organization is established principally with a view to rendering

service to its members in particular and to the society in general. Yet, this does
not mean that such an organization will not work for profit.
(ii) The capital of the co-operative organization is collected from its members in the
form of share capital, but as we know this constitutes only a limited source of
business finance; as a result, major parts of capital is raised either by way of loan
from the Government or by way of grants from the Government.
(iii) Separate Legal Entity
(iv) The management of cooperative organization vests in managing committee
elected by members and it is the general body of the members which lays down
the broad framework of policy within which the managing committee has to
function.

11
<http://www.ilo.org/empent/units/cooperatives/lang--en/index.htm, last assessed September25, 2014

10
Merits:

(i) It is easy to form a cooperative society as it a voluntary association which does

not require long and complicated legal preliminaries, as laid down by the law.
Any 10 adult persons can voluntarily form themselves into an association and get
it registered with the Registrar of Cooperatives.
(ii) The management of cooperative organization vests in a managing committee
elected by members and it is the general body of the members which lays down
the broad framework of policy within which the managing committee has to
function.
(iii) Members in a cooperative organization have limited liability in contributing their
capital share as shareholders have in a company.
(iv) Similar to the company, the co-operative also enjoys a separate legal entity of its
own; independent of the entity of its members who own it. That's why the life of
co-operative organization remains unaffected by the death, insolvency of a
member.

Demerits:

(i) The amount of capital that a co-operative can collect is very limited as of the
membership remains confined to a particular locality or region and also because
of the principle of ‘one man-one vote’.
(ii) In the day to day functioning of the cooperatives State governments subject them
to a variety of regulations which leads to interference and slow growth.
(iii) Day to day affairs are managed by the members only because of which the
organization has to suffer extremely limited managerial talent.
(iv) Lack of secrecy is seen in this form of business organization.
(v) All the above reasons lead to lack of motivation.
(vi) Although co-operatives are formed with great fan fare and with the great ideals of
co-operation and self-help, but soon these higher values of human life disappear
with the passage of time, as all the affairs are managed by the members only
which leads to differences among themselves which marks the beginning of an
end to the co-operative organization.

CORPORATE PERSONALITY
Corporate Personality is the creation of law. Both English and Indian law recognized legal
personality of a corporation.12A corporation has a legal personality of its own and it can sue
and can be sued in its own name. It does not come to end with the death of its individual
members and therefore, has a perpetual existence. However, unlike natural persons, a
corporation can act only through its agents. Law provides procedure for winding up of a
corporate body. Besides, corporations the banks, railways, universities, colleges, church,
temple, hospitals etc. are also conferred legal personality. Union of India and States are also
recognized as legal or juristic persons. 13

Corporations are of two kinds:

12
<http://www.studymode.com/subjects/in-what-circumstances-can-the-separate-corporate-personality-
be-disregarded-page1.html>accessed September25, 2014
13
Art 300 of Constitution of India

11
Corporation Aggregate: This is an association of human beings united for the purpose of
forwarding their certain interest. A limited company is one of the best examples of corporate
aggregate. This kind of a corporation is formed by the members who are in agreement to
contribute to the capital of the company in furtherance of a common object. Thus, their
liability is limited to the extent of their share-holding in the company. The shareholders have
a right to receive dividends from the profits of the company and exercise voting rights in the
general meeting of the company. The principle of corporate personality of a company was
recognized in the case of Saloman v. Saloman& Co14.

Corporation Sole: This kind of a corporation is stated by a single person who is personified
and regarded by law as a legal person, these single person exercises of some office function,
deals in legal capacity and has legal rights and duties towards the same.The object of a
corporation sole is similar to that of a corporation aggregate. 15

PART D

Advantages of Incorporation:

1) Independent Corporate Existence: A corporate person have an independent corporate

existence, it has distinct and legal personality independent of its members.

2) Limited Liability: One of the principal advantages of an incorporated company is the

privilege of limited liability. This is the main feature of registered companies which attracts
investors.

14
[1895 – 99] All ER Rep 33
15
<http://www.legalservicesindia.com/article/article/corporate-personality-173-1.html> accessed
September25, 2014

12
3) Perpetual Succession: An incorporated company has continuous succession that means
the company shall retain its estate and possessions as the same entity with the same privileges
and immunities, notwithstanding any change in its members. Corporate existence of a
company is not affected by the death or insolvency of its members. The death or insolvency
of individual member does not in any way, affect its corporate existence.

In Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd., the court while applying the doctrine of
company's perpetual succession observed that though the whole undertaking of a company
was taken over under an Act which purported to extinguish all rights of action against the
company, neither the company was thereby extinguished nor any body's claim against it 16.

4) Transferability of shares: Section 82 of the Companies Act, 1956, specifically provides

that the shares or other interest of any member in a company shall be movable property,
transferable in the manner provided by the articles of association of the company. Thus, the
member of an incorporated company can dispose of his share by selling them in the open
market and get back the amount so invested. The transferability of shares has two main
advantages, namely, it provides liquidity to investors and at the same time ensures stability of
the company. Similar position regarding the transferability of shares applies in the Companies
Act, 2013.

5) Separate Property: Incorporation helps the property of the company to be clearly

distinguished from that of its members. The property is vested in the company as a body
corporate, and no changes of individual membership affect the title. In case of a company, it
being a legal person is capable of owning, enjoying and disposing of property in its own
name. The company becomes the owner of its capital and assets. The shareholders are not the
several or joint owners of company’s property. 17In R.T. Perumal v. John Deavin18, it has been
observed that a company is a real person in which all its property is vested, and by which it is
controlled, managed and disposed of. Their Lordships further observed that "no member can
claim himself to be the owner of the company's property during its existence or in its winding
up."

6) Corporate Finances: The shares of an incorporated company being transferable, it can

raise maximum capital in minimum possible time. That apart, an incorporated public
company has the privilege of raising its capital by public subscriptions either by way of shares
or debentures.

7) Centralized Management: The shareholders have no direct concern with the management
of the company. They exercise, only a formative control. Thus, the management of the
company is altogether different from its ownership. Independent functioning of managerial
personnel attracts talented professional persons to work for the company in an atmosphere of
independence thus enabling them to achieve highest targets of production and management
leading to company's overall prosperity.

8) Capacity to sue and to be sued: A company being a body corporate can sue and can be
sued in its own name. A criminal complaint can be filed by a company, but the company has
to be represented by a natural person. In TVS Employees Federation v. TVS & Sons Ltd 19 it
was held that the preparation of a video cassette by the workmen of a company showing their
16
(1982) 52 Comp. Out. 238
17
(1955) 1 SCR 876
18
AIR 1960 Mad. 43
19
(1996) 1 WLR 132 (CA)

13
struggle against the company's management and exhibition could be restrained only on
showing that the matter would be defamatory. In R v. Broadcasting Standards Commission,
the court of appeal held that a company can complain under the Broadcasting Act, 1996 about
unwarranted infringement of its privacy. In this case, the complaint was about the secret
filming of transactions in shops by the BBC and the allegation was that this constituted an
infringement of the company’s privacy.20

Disadvantages of Incorporation

1) Far more compliance and regulation to deal with increasing the risk of penalties. 21

2) A company is more complicated and costly to wind up.

3) Directors are personally subject to regulations and can be fined or found guilty of a
criminal offence for failing to comply. Director shall be held personally liable if
he/she acts beyond the provisions of the Companies Act, Memorandum and Articles
of Association as it being ultra vires the company or the directors.
4) Lifting the Corporate veil-Corporate personality is considered to be the most
fundamental principle of Company law. When a company is incorporated it is
considered as a separate entity from its shareholders and directors, for this reason the
concept of lifting of corporate veil has come up. Lifting or piercing the veil is
corporate law’s most widely used doctrine to decide when a shareholder or
shareholders or directors will be held liable for obligations of the corporation. In the

[2000]3 All ER 989

20

21
http://www.accountingweb.co.uk/anyanswers/question/disadvantages-incorporation-including-
practical-issues accessed on September25,2014

14
 case of Salomon v. Salomon & Company 22 passed by the House of Lords in 1897, it
was laid down that a company is a distinct legal person, entirely different from the
members or the shareholders of that company. The courts have come up with some
ground on which veil can be lifted and they are firstly, where fraud is intended to be
prevented, the veil of a corporation is lifted by judicial decisions and the shareholders
are held to be “persons who actually work for the corporation”; secondly, In the case
of group enterprises, the veil may be lifted to look at the economic realities of the
group; thirdly, in order to look at the characteristics of the shareholder, the corporate
veil may be lifted by the courts and lastly, the lifting of the corporate veil has at times
been warranted by the tax legislations also. Courts have struggled for years to
develop and refine their analysis of these claims. However, each new action brings a
different set of facts and circumstances into the equation and a separate determination
must be made as to whether the plaintiff has adduced sufficient evidence of control
and domination, improper purpose, or use and resulting damage. 23

5) Company is not given citizenship rights.

6) In today’s day and age, we see that there is an exponential mushrooming of start-ups
in India. Many of them fail while some of them end up becoming successful ventures.
One of the most important factors to be taken into consideration is the legal entity. In
the foregoing portions of the chapter, we have gone through different forms of
business. Let us try to figure out as to which form would be the most suitable for a
start-up.

A sole proprietorship, perhaps the easiest way of starting a business, is nothing more than
the proprietor itself. It is not an independent legal entity and all its assets are deemed as the
assets of the proprietor. There is no specific registration requirement either, which makes the
process of starting a proprietorship a lot less cumbersome. In case the profile of the
proprietorship triggers the requirements under the Shops & Establishments Act, a specific
registration has to be done. This registration, along with bank statements, often acts as name
and address proof of the proprietorship.
Even in terms of operation, there are no restrictions or continuous compliances as such. Note
that the personal income of the proprietor as well as that of the proprietorship is deemed as
one and no separate tax returns are filed. Clearly, this model is not suited for ventures where
there are two or more founders.

22
[1897] A.C. 22
23
<http://corporatelawreporter.com/2013/06/12/lifting-of-corporate-veil-with-reference-to-leading-
cases/ >accessed September28 ,2014

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A partnership firm is (relatively) more structured and requires registration under the Indian
Partnership Act, 1932. Two to 20 partners come together, decide their contributions, duties,
salaries, etc., sign a partnership deed and register it with the Registrar of Partnerships.
Clearly, there is a cap on the total number of partners. Further, it is important that all partners
are physically present before the Registrar at the time of registration. So, it is not most
suitable if one founder resides in a different city/state.
Once registered, the terms and conditions of the partnership deed will govern how the firm
will operate and the extent to which each partner will be liable. While the partnership firm is
not a separate legal entity, it has a limited identity for the purpose of tax where the firm is
taxed separately from its partners. One of the biggest advantages that a partnership firm has
over its competitor entities is that it is less cumbersome to wind up if the partners so desire.
This is a big factor when the founders are looking to start a venture more as an ‘experiment.’
Further, it can also be converted into a LLP (the benefits of which have been explained
below) by filing requisite forms with the Registrar of Companies (ROC).
For founders looking to raise money, a partnership firm may not the ideal entity type. No
financial investor would take on the liabilities that are associated with being a partner, and
would always ask the co-founders to convert the partnership structure into a LLP or a private
limited company. So, even though it is relatively the most cost effective and easy to manage
entity structure, it is not suited for a startup looking for investors.

A private limited company is perhaps the most sought after entity form that startups (and
most companies in India) use. It is a distinct legal entity, different from its shareholders and
key managers, unlike a partnership firm described in point two above. Incorporating it
requires a minimum of two shareholders and two directors and the shareholders and directors
are not personally liable for the acts of the company but can be fined and/or imprisoned in
their official capacity. Therefore, it is important to understand the role, duties as well as the
liabilities that are associated with being a director. Further, the minimum authorized and
subscribed capital of a private limited company had to be Rs. 1,00,000. For a lot of early stage
startups, this was a hurdle because they have to put in their own money. In addition to Rs.
1,00,000 that had to be transferred in the company’s bank account for share subscription,
there are also costs associated with incorporating the company and paying stamp duty. This
requirement of minimum capital has now been done away with. No company whether public
or private is required to have any capital for incorporation of the company.
A company requires substantial compliances as well. For instance, there have to be quarterly
board meetings, various registers have to be maintained (register of assets, share transfers,
etc.), accounts have to be adopted within six months from the closing of the financial year and
filed with the ROC, etc. In short, laws are drafted in a manner that they keep a check on how

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the company is being managed. Since the manner in which a company has to operate is
streamlined by regulations, it is possible for investors to conduct a due diligence and evaluate
potential risks associated with their investment.
Unlike a sole proprietorship or a partnership firm, in case the co-founders decide to shut shop
because the venture did not work, winding up a company is not easy. It is a completely court
driven process and can take anywhere between one to two years. No founder is happy about
spending (more) money just to wind-up a company, especially since the company is being
wound up because it did not make enough money.
So clearly, if the founders are only experimenting with their idea or don’t want to invest too
much money in the entity but use it towards their business, a private limited company may not
the best option. From an investor’s perspective, a private company is a stable structure
because not only is their investment relatively secure (due to the ongoing monitoring by
regulatory authorities), it also demonstrates the seriousness of founders to do business.

One Person Company is a very recent concept introduced through the new Companies Act,
2013. As the name suggests, the Companies Act allows one shareholder to incorporate a
private limited company with only one director. This gives operational ease and comfort to
proprietors looking to give a more stable and independent structure to their business. Of
course, since OPC is a legally incorporated entity, it has to ensure compliance with the
Companies Act, 2013. However, it has been given some operational freedom. For instance,
OPC does not have to include a cash flow statement in its financials, it is required to hold
only two board meetings in a calendar year (one in each half with more than 90 days gap
between two meetings), etc.
In terms of capital, an OPC, like a private limited company, also requires a minimum
authorized and subscribed capital of Rs. 1,00,000. In case the subscribed capital goes beyond
Rs. 50,00,000 or the turnover exceeds Rs. 2,00,00,000, OPC has to file the requisite forms
with the ROC to get its status converted into a private limited. Winding up of OPC follows
the same process as that of a private limited company. It takes time and can be fairly
expensive.
Based on the above characteristics, OPC is best suited for a single founder who wishes to
launch his/her/its product/service in a more structured manner and get a taste of how to run a
private limited company. However, like a private limited company, it is not meant for a
founder who is still looking to ‘experiment’ with the venture.
One Person Company in other jurisdiction: China introduced One Person Company
in 2005, in which the promoting individual is both the director and the shareholder. Only one
person is allowed to apply for opening a limited company with a minimum capital of 1,00,000
Yuan. The amended law of China allows the owner to pay the investment capital at one time

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which bars him from opening a second company of the same kind. Where as in Pakistan the
amended company law permits one person to form a single-member company by filing with
registrar at the time of incorporation, where a nomination in the prescribed form indicating at
least two individuals to act as nominee director and alternate director. Laws dealing with
same in other countries are in Singapore Company Amendment Act of 2004 deals with it, in
United States, several state permit the formation and operation of single-member Limited
Liability Company.
In most of the countries, the law governing companies enable a single-member
company to have more that one director and grants exemptions to such companies from
holding AGMs, though records and documents are to be maintained.
LLP was introduced and regulated by the Indian government from December 2008
through the Limited Liability Partnership Act, 2008. It is an entity structure that is a fusion of
a private limited company and a partnership firm. Unlike the latter, LLP is a separate legal
entity and limits the liability of its partners. Two designated partners are required to
incorporate a LLP. The incorporation process is similar to that of a private limited company
and OPC and is entirely online. There is also no minimum capital requirement.
In terms of compliance, a LLP does not have obligations similar to that of a company.
There is no requirement to maintain registers, minutes, etc. However, it is required to file its
accounts and annual return with the ROC. Even in terms of taxation, the profit after tax from
a LLP’s operation is reflected in the personal income of partners. Finally, with respect to
winding up, the process is not complex and can be done by filing the requisite forms with the
ROC.
Based on the above, LLP does appear like an ideal entity structure. It gives
operational ease to partners to manage the business and creates a system of accountability
through the mandatory ROC filings. However, conversion of a LLP into a private limited
company is still a grey area. Therefore, if the founders wish to convert their LLP into a
company, they will have to independently incorporate a company and have that company
acquire the LLP.
Thus, as seen above – the start-ups can pick any of the business forms depending upon the
goal that the start-up seeks to achieve.

Summary:

In the module, different types of business organizations, their features, merits and
demerits have been discussed. Incorporated and unincorporated associations and their
distinctions have been discussed. Advantages of a corporate personality and its
disadvantages including the doctrine of lifting the corporate veil have been discussed.

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