Forms of enterprise

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FORMS OF BUSINESS ORGANIZATION

Business organisations:

Business organisations A business (also called a company , enterprise or firm ) is a legally recognized organization designed to provide goods and/or services to consumers .

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Objectives of owners and operators of a business Notable exceptions include cooperative enterprises and state-owned enterprises. Businesses can also be formed not-for-profit or be state-owned.

Organizational Forms determined by:

Organizational Forms determined by Owner’s Objectives: Liability, Profit Distribution, Taxation and Capital Structure Dealings with Outside World: Other Owners, Heirs, Employees, Customers and Future Owners of Business Legislative Goals: Special-Purpose Entities to encourage investments, in, for example, Small Businesses or Affordable Housing

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION Three Organizational Forms Sole Proprietorship General Partnership Corporation

Basic forms of ownership:

Basic forms of ownership Sole proprietorship Partnership Corporation Cooperative

Sole proprietorship:

Sole proprietorship A sole proprietorship also known as a sole trader , or simply proprietorship is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business . All profits and all losses accrue to the owner Assets of the business are owned by the proprietor Debts of the business are their debts and they must pay them from their personal resources.

Advantages of sole proprietorships::

Advantages of sole proprietorships: Easy and inexpensive to create 100% of ownership+ profits stay with the owner Complete decision making authority for the owner Income is taxed only at the owner’s personal income tax rate No major reporting requirements exist

Disadvantages of sole proprietorships::

Disadvantages of sole proprietorships: Owner has unlimited liability for all claims against the business-all debts must be paid from the owner’s assets Difficult for the owner to raise debt capital Survival of the business depends upon the owner

Joint Hindu Family:

Joint Hindu Family HUF in taxation law Authorization by Karta Unlimited liabilities for Karta

Partnership:

Partnership A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. Natural person Legal personality Partnerships are often favoured over corporations taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied).

Partnerships:

Partnerships Advantages: Have same advantages as sole proprietorships Shared risk of doing business Shared partner clout with multiple financial statements Shared ideas, expertise, decision making Partners receive pass-through earnings and losses taxed at their personal tax rates

Partnerships (continued):

Partnerships (continued) Disadvantages: Partners are personally liable for all business debts and obligations Individual partners can bind the partnership contractually Partnership dissolution results when a partner leaves or dies (unless otherwise stated in partnership agreement) Partners can be sued individually for the full amount of partnership debt

Types of partnership:

Types of partnership LLP Partnership at will No time bound partnership deed Joint venture

Partnership Agreement:

Partnership Agreement Based on the Indian Partnership Act, it defines the relationship between partners in terms of… business responsibilities profit sharing transfer of interest Buy-sell Agreement : Who is entitled to purchase the departing partner’s share? What events trigger a buyout? What is the price to be paid for the partner’s interest? Key-person life insurance Life insurance policy on principal partner members Use of proceeds upon the partner’s death to buy out partner or keep the business going

Limited liability partnership:

Limited liability partnership Mandatory registration Liability limited to contribution to LLP Foreign nationals can be partners Audit required if contribution is above 25lakh or turnover more than 40lakhs

Limited Liability Company:

Limited Liability Company Advantages: Tax and liability pass through obligations Limited liability Continuity of life Centralized management Free transferability of interests No limits on number of members or status

Limited Liability Company (continued):

Limited Liability Company (continued) Disadvantages: Formation filing fee is obligatory Consensus is difficult if there are many members It is not a separate tax-paying entity Can be obliged to register with the May have foreign ownership rights

Company:

Company A Company is a voluntary association of persons formed for the purpose of doing business, having a distinct name and limited liability . They can be incorporated under the Companies Act (it may be any type of company) Corporations enacted under special enactments ( Even those which are incorporated outside India ) Corporate sole Any other body corporate notified by the central government

Features of a company:

Features of a company A company is considered as a separate legal entity from its members, which can conduct business with all powers to contract. Independent corporate entity (Saloman V. Saloman) It is independent of its members and shareholders

Other features:

Other features Limited Liability ( either by share or guarantee ) It can own property, separate from its members . The property is vested with the company, as it is a body corporate. The income of the members are different from the income of the company ( Income received by the members as dividends cannot be same as that of the company) cont….

Features continued..:

Features continued.. Perpetual succession : Death of the members is not the death of the company until it is wound up As it is a legal entity or a juristic person or artificial person it can sue and be sued The company enjoys rights and liabilities which are not as that of the members of the company

Types of Companies:

Types of Companies Limited Company ( Limited by share or by guarantee) Unlimited company Government Company Foreign Company Private Company Public Company

Limited Company:

Limited Company Limited by Shares- In such companies, the liability is only the amount which remains unpaid on the shares. Limited by Guarantee not having share capital In this type of companies the memorandum of Association limits the members’ liability. It will be based on the undertaking that has been given in MOA for their contribution in case of a winding up. Limited by guarantee having share capital In such cases , the liability would be based on the MOA towards the guaranteed amount and the remaining would be from the unpaid sums of the shares held by the person concerned.

Unlimited Company :

Unlimited Company There is no limit on the liability of the members. The liability in such cases would extend to the whole amount of the company’s debts and liabilities. Here the members cannot be directly sued by the creditors . When the company is wound up, the official liquidator will call upon the members to discharge the liability. The details of the number of members with which the company is registered and the amount of share capital has to be stated in the Articles of Association (AOA).

Government Company:

Government Company When 51% of the paid up share capital is held by the government. The share can be held by the central government or state government . Partly by central and partly by two or more governments. As the legal status of the company does not change by being a government company, there are no special privileges given to them.

Private Company:

Private Company A company which has a minimum of two persons . They have to subscribe to the MOA and AOA It should be have a minimum paid up capital of 1 lakh or more as prescribed by the article . The maximum number of members to be fifty ( it does not include members who are employed in the company, persons who were formerly employed ) The rights to transfer the shares are restricted in the Private companies continued….

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Prohibits any invitation to the public to subscribe It prohibits acceptance of deposits from persons other than its members, directors or their relatives . If two or more are holding one or more shares in a company jointly, they shall for the purpose of this definition, be treated as a single member . As there is no public accountability like a public company, there is no rigorous surveillance.

Exemption and Privileges of a Private company:

Exemption and Privileges of a Private company It can have a minimum of two members . It can commence business immediately after obtaining certificate of incorporation . It need not issue prospectus or statement in lieu of prospectus . It can have a minimum of 2 directors . It need not hold statutory meeting or file statutory report with the ROC.

Public Company:

Public Company Which is not a private company Which has a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital, as may be prescribed Which is a private company and is a not a subsidiary of a company, which is private company. It includes- any company which is a public company with a paid up capital of less than 5 lakh, then it has to enhance its paid up capital as per the statutory requirement

Memorandum of Association:

Memorandum of Association It is the charter of the company It contains the fundamental conditions upon which the company can be incorporated It contains the objects of the company’s formation The company has to act within objects specified in the MOA It defines as well as confines the powers of the company Any thing done beyond the objects specified in the MOA will be ultra vires. Their transactions will be null and void The outsider have to transact looking into the MOA

Conditions of the MOA:

Conditions of the MOA It should be printed Divided into paragraph and numbers consecutively Signed by at least seven persons or two in case of public and private company respectively. The signature should be in the presence of a witness, who will have to attest the signature Members have to take shares and write the number of shares taken with full address

The MOA of the Limited Company:

The MOA of the Limited Company The name of the company with ‘ limited’ as the last word The name of the state where the registered office of the company is to be situated The objects of the company stating the ‘Main objects’ and the ‘other objects’ The declaration about the liability of the members is limited ( limited by shares or guarantee) The amount of the authorized share capital, divided into shares of fixed amounts.

The Compulsory Clauses in MOA :

The Compulsory Clauses in MOA The Name Clause – it decides on the name of the company based on the capital involved The Registered Office Clause- where it has registered its head office and other branch office ( The registered office can be changed with the permission of the ROC) The Object Clause- Main object, ancillary object and the other objects of the company are clearly specified The Liability Clause- What is the liability of its members.. limited by shares or guarantee or unlimited, there can be alteration in the liability clause

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The Capital Clause - The amount of the nominal capital of the company, number of shares in which it is to be divided… alteration of the capital clause etc The Association or Subscription clause- Where the subscribers to the MOA declare that they respectively agree to take the number of the shares in the capital. It has to have the following: a) They have to sign in the presence of two witnesses, who attest the signatures, b) The subscriber to take at least one share. c) After the name the subscriber has to write the number of shares taken

Articles of Association:

Articles of Association It is the companies bye- laws or rules to govern the management of the company for its internal affairs and the conduct of its business . AOA defines the powers of its officers and also establishes a contract between the company and the members and between the members inter se It can be originally framed and altered by the company under previous or existing provisions of law.

AOA :

AOA AOA plays a subsidiary part to the MOA Any thing done beyond the AOA will be considered to be irregular and may be ratified by the shareholders . The content of the AOA may differ from company to company as the Act has not specified any specific provisions

AOA :

AOA Flexibility is allowed to the persons who form the company to adopt the AOA within the requirements of the company law The AOA will have to be conversant with the MOA, as they are contemporaneous documents to be read together. Any ambiguity and uncertainty in one of them may be removed by reference to the other.

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION DEFINITIONS Sole Proprietorship General Partnership Corporation Any Business Owned and Operated by an Individual Two or More Persons Operating a Business for a Profit Legislatively Created and Regulated Governance, Ownership and Financial Structure

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION GOVERNING DOCUMENTS Sole Proprietorship General Partnership Corporation None Required None Required; Most have Agreement specifying Rights, Duties and Obligations Articles of Incorporation create Corporation; Bylaws prescribe its Operation

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION FORMATION Sole Proprietorship General Partnership Corporation No Formalities or Legal Documentation; May be Implied from Conduct or Actions Written or Oral Agreement or May be Implied from Conduct or Actions Filing of Articles of Incorporation with Secretary of State and Payment of Fees

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION NATURE OF OWNERSHIP Sole Proprietorship General Partnership Corporation Wholly Owned by Single Individual For Contribution, Partner receives Proportionate Share of Profits/Losses and Partnership Property Residual Claim on Corporate Equity and Right to Vote for Directors and Essential Governance

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION LIABILITY Sole Proprietorship General Partnership Corporation Sole Proprietor Personally Liable for All Debts and Obligations Partners are Jointly and Severally Liable for all Partnership Obligations, in Contract and in Tort Shareholder’s Liability limited to Extent of Capital Contribution [Limited Liability]

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION TAXATION Sole Proprietorship General Partnership Corporation Not a Taxable Entity; Income (Loss) passes through to Sole Proprietor Partnership not a Taxable Entity; Allocations of Income and Loss allowed within Partnership before Pass-Through Corporation taxed as Separate Entity and Dividends/Capital Gains also Taxed [Double Taxation]

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION MANAGEMENT Sole Proprietorship General Partnership Corporation Sole Proprietor has Complete Management Control All Partners have Equal Rights in Partnership’s Management and Conduct Managed by Board of Directors elected by Shareholders; Board may Delegate Authority to Appointed Officers

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION TRANSFER OWNERSHIP INTERESTS Sole Proprietorship General Partnership Corporation Sole Proprietorship not Transferable; Property and Products are Transferable Limited Right of Transfer subject to Consent by all Partners Freely Transferable through Formal) and Informal (Private Equity) Capital Markets

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION WITHDRAWAL OF OWNER Sole Proprietorship General Partnership Corporation Terminates Sole Proprietorship Partner Death or Withdrawal may Terminate Partnership Corporation has Unlimited Life

FORMS OF BUSINESS ORGANIZATION:

FORMS OF BUSINESS ORGANIZATION SPECIAL PURPOSE ENTITIES Limited Partnership Limited Liability Corporation (LLC) Subchapter “S” Corporation General Partner (Manager with Unlimited Liability) and Limited Partner (Investors with Limited Liability) Hybrid with Corporate Liability Protections and Partnership Tax Treatment Identical to “C” Corporation except Right to Elect Income/Losses Pass-Through

Trusts and Societies:

Trusts and Societies A corporation established for charitable, public, religious purposes or for mutual benefit as recognized by federal and state laws. Advantages: Attractive to corporate donors for business expense deductions Can seek cash and in-kind contributions of equipment, supplies, personnel Can apply for grants from government-private agencies May qualify for tax-exempt status

Trusts and Societies:

Trusts and Societies Disadvantages: Profits cannot be distributed as dividends Corporate money cannot be contributed to political campaigns or for lobbying Entrepreneur gives up proprietary interest in the corporation Upon dissolution, all assets must transfer to another tax-exempt nonprofit organization Substantial profits must come only from related activities It must pay taxes on profits

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