Course: BBA I

Subject : Introduction to Business Organization

Unit: 2

In a simple words a company may be defined as a “ association of persons who contribute money or money’s worth to a common stock and employ it in some trade or business , and who shares the profit or loss there from.

Section 3(1)(i) of the Companies Act, 1956 defines a company as: “a company formed and registered under this Act or an existing Company”.‘Existing Company’ means a company formed and registered under any of the earlier Company Laws.

1 SEPERATE LEGAL ENTITY

2.ARTIFICIAL PERSON

3.PERPETUAL EXISTENCE

4.COMMON SEAL

5.LIMITED LIABILITY

6.CAPACITY TO SUE OR TO BE SUED

7.TRANSFERABILITY OF SHARE

NATURE OF COMPANY

A company is an separate legal entity means it is different from its members. It works as a individual body.

It can make contracts, open a bank account, can sue and be sued by others.

The law has recognised that even if a person holds virtually all the shares, the right and obligations of the company shall be different from its members.

Artificial person A company is a purely a creation of law. It is invisible,

intangible and exists only in the eyes of law.

It has no soul, no body, but has a position to enter or exit into a contract, to appoint a people as its employees

In short it can do every thing just like a natural person.

• Section 34(2) of the act states that an incorporated company has perpetual life.

• The life of the company is not related to the life of the members . Law create the company and law alone can dissolve it.

• The existence of the company is not affected b y death, insolvency, retirement or transfer of share of members.

Limited liability

It means that the liability of a member shall be limited to the value of the share held by him, he cannot be called upon to bear the loss from his personal property.

A company being an artificial person can not work as a natural being.

Therefore, it has to work through its directors, officers and other employees. Common seal used as a official signature of a company.

Transferability of share sec(82)

The share of a company are freely transferable. The shareholder can transfer his share to any person without the consent of other members.

A company cannot impose absolute restrictions on the rights of member to transfer their shares

• When a company incorporated it acquire a separate and independent legal personality. As a legal person it can be sue and be sued in its own name.

Chartered company is an association formed by investors or shareholders

for the purpose of trade, exploration and colonization.. Ex. East India Company

Statutory corporation is a corporation created by statute. Ordinary

companies/corporations owned by a government with or without other

shareholders, or they might be a body without shareholders which is controlled by

national or sub-national government to the (in some cases minimal) extent

provided for in the creating legislation. Ex. RBI

FOOD CORPORATION OF INDIA, NHAI

Registered Companies means all firms that registered under Company

Act , 1956 and existing Companies.

Limited liability company (LLC) is a flexible form of enterprise. An

LLC is not a corporation; it is a legal form of company that provides limited

liability to its owners . LLCs do not need to be organized for profit. Certain types of

businesses that provide professional services requiring a state professional

license, such as legal or medical services.

Unlimited company or private unlimited company is a

hybrid company incorporated either with or without a share capital (and similar to its

limited company counterpart) but where the liability of the members or shareholders

is not limited - that is, its members or shareholders have a joint, several and

unlimited obligation to meet any insufficiency in the assets of the company in the

event of the company's formal liquidation. An unlimited company has the benefit and

status of incorporation same as its limited company counterpart. Ex. Bagai

Investment Company

Holding company is a company or firm that owns other

companies' outstanding stock. The term usually refers to a company that does not

produce goods or services itself; rather, its purpose is to own shares of other

companies. Holding companies allow the reduction of risk for the owners and can

allow the ownership and control of a number of different companies. Ex. Gillete India

Subsidiary,daughter company, or sister company isa company that is completely or partly owned and partly or wholly controlled by another

company that owns more than half of the subsidiary's stock. The subsidiary can be a

company, corporation, or limited liability company. In some cases it is a government or state-

owned enterprise. The controlling entity is called its parent company, or holding company. Ex.

Hindalco subsidiary of Aditya birla group.

• A private company is one which, by its Article of association restricts the right to transfer its share, limits the maximum number of its member to fifty, prohibits any invitation to the public to subscribe for any share or debenture of the company.

• A public company means a company which is not a private company. In other words, a public company, means a company which by its article does not limit the number of its member & does not prohibit any invitation to the public to subscribe for any share or debentures, of the company.

Private Company Public Company

Minimum paid up capital

1 Lac 5 Lacs

Minimum no of members

2 7

Maximum no of members

50 No limit

Minimum no of Directors

2 3

Transfer of Shares

Restricted AOA & requires the prior permission of Board of Directors

Shareholders can transfer shares freely

Private Company Public Company

Public Subscription

AOA prohibits any invitation to public to subscribe to its sharess & debentures

Can invite public to subscribe to its shares & debentures

Acceptance of public Deposits

AOA prohibits acceptance of deposits from public

Can acceptance of deposits from public

Commencement of Business

Immediately after Certificate of Incorporation

Only after getting the Certificate of commencement of Business

Issue of prospectus

Need not prepare or file 'Prospectus' or 'statement in lieu of prospectus' with registrar

Must prepare or file Prospectus with registrar

Private Company Public Company

Statutory meeting Not required to hold

Must hold after one month and before 6 months from date of obtaining the Certificate of commencement of business

Provisions regarding directors

No Central Govt approval for appointing and reappointing of MD or Whole time director

Central Govt approval is must for appointing and reappointing of MD or Whole time director

Managerial remuneration

No restriction on payemnt of remuneration to directors & MD's

Remuneration is fixed at 11 % of net profits

Index of membersNeed not maintain index of members

Must maintain index of members if no of members exceed 50

• Incorporation (Inc.) is the forming of a new corporation (a corporation being a legal entity that iseffectively recognized as a person under the law). The corporation may be a business, a non-profitorganization.

• The process of legally declaring a corporate entity as separate from its owners.

Types of Company

Availability of Name

The Memorandum and Articles of Association duly signed, and stamped.

The agreement, if any with any individual for appointment as its Managing or whole-time director.

Consent(Permission for something to happen or agreement to do something) of directors in Form 29.

Notice of Registered address in Form 18 to be given within 30 days of the date of incorporation.

Particulars of Directors in Form 32.

Payment of Registration Fees.

Power of attorney (मखु्तारी अधिकार), to fulfill variouslegal and other formalities.

Statutory Declaration (statement made under oath) inForm No. 1 that all requirements of the Companies Actand the rules there under have been complied with.

The declaration should be made by either anadvocate(पक्ष का समर्थन करना) of Supreme Court / HighCourt, a practicing Chartered Accountant or a director,or a manager or a secretary named in the Articles of theproposed company. [Section 33 (2)]

According to SEBI(Securities and Exchange Board ofIndia) (Substantial Acquisition and Takeover)Regulations, 1997 the term promoters means:

the person or persons who are in control of the companyor

person or persons named in any offer document (A termused for a document combining a prospectus and aninvestment statement. The document describing featuresof a product and its associated terms and conditions.) aspromoters.

a relative of the promoter within the meaning of Section 6of the Companies Act.

Should be members of HUF (Hindu Undivided Family)only or

Husband or wife or

in case of a corporate body :

i) a subsidiary or a holding company; or

ii)any company in which the promoters hold 10% or more equity capital; or

iii) any body corporate in which a group of individuals or corporate bodies or a combination thereof holds 20% or more of equity capital.

The persons who assume the primaryresponsibility to promotion of a company arecalled Promoters.

One who undertakes to form a company withreference to a given project and to set it goingand who takes the necessary steps toaccomplish that purpose.

A promoter may be a natural person or acompany.

It contains the fundamental rules regarding the constitution of the company.

It lays down how the company is going to be constituted and what work it shall undertake.

It sets out the constitution of the company (CONSTITUTION<===> बनावट).

It is a foundation on which the structure of the company stands.

Its purpose is to enable the shareholders, creditors, and those who deal with the company to know what is the permitted range of its enterprise.

It defines(स्पष्ट करना) as well as confines(सीमा) the power of the company.

• The first step in the formation of the company is to prepare memorandum of association. it is one of the documents which has to be filed with registrar of the companies at the time of incorporation of a company.

• MOA of a company is its character and defines the limitation of the power of the company . MOA contains the fundamental condition upon which the company is allowed to incorporated.

• The purpose of MOA is to enable the Shareholders, creditors and those who deal with the company to know what is permitted range of enterprise.

• It defines the rights and liabilities of the members.• It shows the capital structure of the company• It shows the object of the company• It specifies the state in which the registered office

of the company is situated.• It shows the constitution of the company• It specify the conditions under which the company

has been incorporated.

Name Clause

Registered Office / Situation Clause

Object Clause- main objects and other

objects

Liability Clause- limited by share or

guarantee

Capital Clause.

Association Clause

• A company not to be registered under a name which is undesirable, identical or too nearly resembles(समान) another company. [Section 20]

• It must not be misleading or intended to deceive(िोखा) with reference to its object.

• A similarity of name does not give right to injunction(आदेश), there should be likelihood of deception or confusion.

• The name and address must be printed or affixed outside every office in English and local language.

• Inadvertent(बेखबर) mistake in name can be changed by passing an ordinary(सािारण) resolution and by obtaining written approval of Central Government.

Only the state in which the Registered

Office is situated is mentioned.

Exact address can be filled with RoC

separately in Form 18 within 30 days of

incorporation.

Must divide object clause into two sub-clauses - Main Objects and Other Objects.

It determines the purpose and capacity of the company hence carry great importance.

Acts beyond this ambit are ultra vires and hence void. Even the entire body of shareholders cannot ratify such acts.

Subscribers enjoy unrestricted freedom to choose the objects.

An act or transaction, which may not be illegal, is beyond company's power by not being within the object of the Memorandum.

An act ultra vires the company is incapable of ratification.

Act which is intra vires the company but outside the authority of directors may be ratified by the company in proper form.

The shareholders can ratify an act ultra vires the directors.

Injunction to restrain the company from

doing an ultra vires act.

Personally liability of the directors.

Ultra vires contract are void ab initio.

An ultra vires borrowing does not create a

relationship of a debtor and creditor.

The Memorandum of a company limited by shares or by guarantee shall state that the liability of its members is limited.

Where the liability is limited by shares, a member can be called upon to pay only the unpaid balance on his shares.

In case the company is limited by guarantee the members are liable up to the maximum amount which they have guaranteed.

Where the company is limited by both share and guarantee the liability of members is dual.

Mentions that the liability of the members is limited to the face value of the shares.

In case of guarantee, the amount of guarantee should be mentioned.

Shares must be of fixed value.

Nominal, authorised or registered capital.

Not authorised to issue capital beyond its authorised capital unless the Memorandum is altered.

In case of unlimited company having share capital, the liability is unlimited as against creditors only in case of winding up.

In case of going concern, liability is limited to shares subscribed.

Must be signed by each subscriber in

presence of one witness.

Each subscriber must take at least one share.

A subscriber cannot, after registration of

company, repudiate his liability even on the

ground that he was induced to sign by

misrepresentation.

Articles are by-laws or rules and regulations for the govern the management of its internal affairs and conduct of business.

It also includes regulation contained in Table A of Schedule I.

Deals with the rights of the members inter se.

Articles are subordinate to and controlled by Memorandum.

Unlimited companies, companies limited by

guarantee and private companies must have

their own Articles of Associations.

Must be printed, divided into paragraphs,

numbered consecutively, stamped adequately,

signed by each subscriber to Memorandum and

duly witnessed.

• Rights of different classes of shareholder.• Use of common seal of the company.• Different classes of shares and their right.• Appointment , powers, duties, salary of MD,

manager, and secretary.• Borrowing power of directors.• Voting rights of member .• Board meetings and proceedings.• Winding up company.

Subject to the provisions of the Act and

Memorandum, a company, by special

resolution alter the Articles. [Section 31]

The alteration binds members in the same way

as original Articles.

A company cannot in any manner deprive

itself of the powers to alter its Articles.

Must not exceed the power in the Memorandum.

Must not be inconsistent with the provisions of the Act.

Must not include anything illegal or opposed to public

policy.

Must be bona fide for the benefit of the company.

Must not constitute fraud on minority.

Cannot be altered so as to have retrospective effects.

In case of listed companies approval of Stock Exchange is

required.

• A company prospectus is released by businesses to inform the public andinvestors of the various securities that are available. These documents describeto buyers and participants about mutual funds, bonds, stocks and other formsof investments offered by the company. A prospectus is generally accompaniedby basic performance and financial information about the company.

• "Any document described or issued as a prospectus and includes

• any notice, • circular, • advertisement, or • other document • inviting deposits from the public or • for the subscription or purchase of any shares in, or

debenture of a body corporate." [(Section 2(36)]

An invitation to public.

Invitation be by or on behalf of the company.

Invitation must be to subscribe or purchase.

Must relate to shares / debentures or other

instrument.

Judicial Pronouncements (न्याययक घोषणा)

Promoters are required to prepare a draft prospectus known as statement in Lieu of Prospectus.

A copy of it must be filled with the RoC(Registrar of Companies) at least three days before any allotment of shares is made.

It contains similar particulars as are required for a prospectus.

No minimum subscription is required to be stated.

If the statement contains any misinformation

or omission, the liability, civil and criminal, is

same as in case of Prospectus - Fine up to Rs

10,000.

The process of issuing securities through a

statement in lieu of prospectus is a kind of

private placement.

‘Prospectus’ is the basic document for raising funds from the public.

‘Prospectus’ means any document described or issued as prospectus and includes any Notice, Circular, Advertisement inviting deposits or offers from the public for the subscription or purchasing any shares in , or debentures of the company.

Thus prospectus is a general invitation to the public to subscribe to the capital of the company on the conditions specified in the application from

1. Fundamentals of Business Organization and

Management by Y.K.Bhushan- Sultan Chandpublications

2. Principles & Practices Of Management by L M Prasad – Himalaya Publishing House