Mod-38 Lec-47 Forms of Ownership
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Mod-38 Lec-47 Forms of Ownership


Good morning. Welcome to the 47th lecture on Economics,
Management and Entrepreneurship. So long in our previous 46th lectures, we
had discussed various aspects of microeconomics, engineering economy, costing and accounting
and various functions of management and different aspects of managerial functions. Marketing management was the last topic that
we had taken. There are still a few more topics that should
have been considered in management. In particular, we could have devoted 1 or
2 lectures each on quality and productivity, human resource management and project management. Unfortunately the number of lectures is growing
beyond bounds. I wish to keep the total number of lectures
limited to 50. Keeping that in mind, I have decided to devote
today’s lecture and the next 3 lectures on different aspects of forming business, sourcing
capital, and other aspects of entrepreneurship. These 4 lectures today and the next 3 lectures
taken together will be very important for someone who is actually interested to start
a new business in Indian conditions. Today, we shall discuss various forms of ownership
that are legally accepted in India. So that is the topic for today, forms of ownership. There that different forms of ownership that
are legally recognised in India. These are different forms: sole proprietorship,
partnership, joined Hindu family business, co-operatives, private limited company, public
limited company, limited liability partnership, companies within section 25 of Companies Act
1956, and franchise. So these are different forms of ownership
that are recognised by the Indian government and we shall devote some time on each of these
form of ownership. So there are altogether 1 2 3 4 5 6 7 8 and
9. This last 2 you will see that they are covered
under the previous ones but I separately wrote them because they have some distinctive characteristics. Let us study each one separately. Sole proprietorship. As the name indicates, it is a one-person
organisation. A single person can start a business and then
he becomes the proprietor and the form of organisation is the sole proprietorship type
of organisation. Now there are no legal formalities to start
such a business. However, one needs to have licenses from local
authorities such as municipality or panchayat or similar such local organisation to start
the business, to start the line of business. So that is important from the local administration. This license is very important. Now there is no legal existence separate from
its owner because it has no legal formalities excepting for the license. So if anything happens, the owner is liable. In fact it is a case of unlimited liability
of the proprietor. That means if the proprietor takes loan to
run its business, then he is completely liable for paying off the debts. If the business winds up, then the person,
the owner itself, the proprietor himself or herself, is completely liable to pay the debts
in case the company winds up. Naturally since the owner is the main person,
the only person in the business, if he or she dies, the business comes to an end and
this form of business is suitable when the risk is low to medium, requires very little
financial resource and small capital requirement, only for such purposes sole proprietorship
type of business may be appropriate. Then we take up the next form of business,
the partnership type of business. It is basically defined as a relation between
2 or more persons who agree to share the profits of a business carried on by all of them or
any of them acting for all. So that is the definition of partnership. It is basically an agreement among 2 or more
persons and not all of them may be involved actively in running the business on their
behalf. If you want or more may carry out or carry
on the normal activities. The owners of a partnership business are individually
known as partners and collectively the business is called a firm. So this is therefore a partnership firm. Although sometimes loosely we use the word
firm to mean a company. Legally it is a firm only when it is a partnership
type of business. Now this agreement, its registration is also
not essential, that means the agreement need not be registered or the partnership firm
need not be registered. However, if it is desired that such a firm
is registered because there may be certain disputes among the partners in the future;
therefore, in their own interest, they may like to register the firm, then it has to
be done with the registrar of firms. If at all such a registration is made by the
partners, then they will have to register it with the register of firms which is available
in every state. The minimum number of partners is 2 and the
maximum can be either 10 or 20. 10, if it is a business, if it is a banking
business and 20, any other type of business but the minimum can be 2. Maximum can, as I said, 10, can be 10 or 20. Again unless it is registered with the registrar
of firms, it has not separate legal existence and the firms and the partners are the one
and the same in the eyes of law. So if anything, a case is registered against
firm and the case is actually registered against the partners forming the firm. So this is a partnership type of ownership. Now here just as the sole proprietors, in
a sole proprietorship type of organisation, is completely liable for any financial payoff,
similarly partners in a partnership type of organism also have unlimited liability. That means if the firm takes a big loan and
if the firm wind of because of financial insolvency, then the partners have to pay back the debt
from their own personal property, that is unlimited liability. No partner can transfer his or her interest
in a firm to any other person excepting to the existing partners without the unanimous
consent of all partners. So if everybody else agrees, then only a partner
can transfer his interest to another person, else not. Just as continuity is not guaranteed in sole
proprietorship, similarly in a partnership type of organisation, continuity is also not
guaranteed. It has a limited span of life. Legally, it must be dissolved on retirement,
lunacy, bankruptcy, or death of a partner. Therefore, the continuity is not guaranteed. When a partnership is formed by an agreement,
it may be either written or oral and such an agreement as I said need not be registered. If the partners agree to register such an
agreement to form the firm, then this must be duly stamped and registered and is known
as partnership deed and that is done with the register of firms and there the Indian
partnership act 1932, all the clauses will apply and the formalities have to be gone
through. Now partnership type of organisation is appropriate
for medium-sized business that involve not very large amount of capital and this may
include small-scale industries, wholesale and retail trade, small service concerns like
transport agencies, real estate brokers and even professional firms like chartered accountancy
or chartered accountants, doctors clinic, or attorney or law firms. So these are the areas in which partnership
firms are found to be very suitable. Now in India, we have another form of organisation,
that is known as Joint Hindu family Business. This type of organisation is unique to India
because of its historicity. Here what happens, the members of a Hindu
undivided family do business jointly under the control of the head of the family who
is known as Karta and others are known as co-parceners. Now under the Hindu law, such a form of organisation
comes into existence and is recognised by the Hindu law of the country and according
to the various provisions, the rights and liabilities of the co-parceners are determined. Now there is no legal limit to the maximum
number of members. Legally there is not an upper limit, no upper
limit and also registration is not necessary and thus Karta who is the head of the family
and of the business has unlimited liability. While the liability of the other members that
is co-parceners, co-parceners is limited. So Karta has unlimited liability, that means
in case of financial insolvency and dissolution of the business, Karta from his own personal
property has to meet the debt. The firm of course has a perpetual life and
its existence is not subject to the death or insolvency of a co-parcener or even of
the Karta himself. That is because it is an Hindu undivided family,
so if Karta dies, someone else becomes the Karta and others continue to live and therefore
the business is headed by another person who now becomes the Karta and of course other
members of the family act as co-parceners and the family business continues. These are the characteristics of Joint Hindu
Family type of business. Then we come to another form of business and
they are the co-operatives. Cooperative is basically a society, a voluntary
association of 10 or more members. That means a minimum number of members has
to be 10, there can be many more who join together on the basis of equality, that means
every member has got equal rights in the running of the cooperative and it is voluntary. The primary objective of such a business is
service to the members, is to serve members rather than make profits. So that is the primary objective of a cooperative
to provide service to its members and there are different types of co-operatives that
exist in our country: consumer cooperative, producers cooperative, marketing cooperative,
housing cooperatives, credit cooperatives, farmers cooperatives and so on. A member of a cooperative is free to leave
the society whenever he or she wishes and every such cooperative has to register with
the registrar of co-operative societies whose office is available in every state under the
co-operatives societies act 1912 or the state cooperative societies act in every state. So such a form of organisation has to register
itself with the registrar of cooperative society. Every member pays an amount to become a member
and therefore the liability of the member is limited to the extent of his capital contribution
when he became a member. For example, if a person becomes a member
of a cooperative society by paying Rs. 100, then in case of financial insolvency of the
cooperative, the person loses maximum of Rs. 100, the amount that he had paid as capital
contribution, his contribution to become a member of the cooperative. The shares cannot be transferred but can be
returned to the society in case a member wants to withdraw his membership and thus cooperative
enjoys a continuity of its existence, members may come and go but the cooperative continues. So these are different aspects or characteristics
of cooperative societies. Now we come to another form of organisation. It is called Private Limited Company. You will see the word limited is present and
private is present and company of course. Now what it is. A private limited company is basically a voluntary
association of a minimum of 2 members and a maximum of 50 members. So a company will have between 2 to 50 members,
a private limited company. As the name indicates, a member has got limited
liability. Let me tell you that limited liability means
that every member pays an amount to become part owner of the company and in case of insolvency,
the amount that he has given may be forfeited. So the maximum liability of the member is
the amount that he has given as his contribution when the company was formed and it is limited
because he might have given let us say Rs. 10 lac, then his liability is limited to Rs.
10 lac. Here the transfer of shares is limited to
its own members, members of the company. If there are 10 members, a particular member
wishes to transfer his share, then he can do so only to another member not to an outsider. Such a company is not allowed to invite public
subscription for its shares or debentures. You might have seen in different papers companies
asking for public subscription of its shares or debentures, that is not possible for private
limited companies. A company, private limited company cannot
get money from public. It has to get only from its own members as
long as it is less than 50. Now a company such as this has an independent
legal existence. That means it has to register and in fact,
it registers with the registrar of companies. I am sorry there is a mistake, this has to
be registrar of companies. Under the Indian Companies Act 1956, such
a company has to register with the registrar of companies and therefore, it has a legal
existence and it has an independent legal existence. The meaning of independent is that such a
body is an independent entity, such a company is an independent company, independent entity
and is different from its owners or from its members. That means if let us say somebody files a
case against the company, it has to be against the company and not against the members of
the company or the owners of the company. Now it need not file a prospectus with the
registrar of the companies. We will discuss about filing a prospectus. The prospectus basically says what are the
different prospects, what the company wishes to do, what are its opportunities, what are
its plans and programs for the future. This is basically giving a status, both present
and future ambitions of the company. This is normally done if a company wishes
to get money from the public and that is done in a public limited company and not a private
limited company and therefore, a private limited company need not file a prospectus with the
registrar and also need not obtain a certificate to commence business. This is required for a public limited company
as we shall discuss a few minutes later. Although it has to register with the registrar
of companies, it need not file a prospectus with the register of the companies and need
not obtain a certificate to commence business from the registrar of the companies. Now they also do not need to hold statutory
general meeting, nor file any report with the registrar. These are required for public limited companies
because they get, the owners are the public, many from public that the owners therefore,
they have to statutory hold general meeting of its owners or shareholders but it is not
require for private limited companies. Nor the private limited companies need to
file any report to the or with the registrar of companies. Already I have told liability of a member
is limited. Same thing is written here. It enjoys continuity of existence, it means
that a member may die, may withdraw but the company continues. So there is a continuity of its existence. Such a form of organisation is preferred by
those who wish to take advantage of limited liability because everybody, every owner wishes
to have only limited liability to the extent of his contribution while formation of the
company is going on. But at the same time, desires to keep control
over the business within a limited circle and maintain certain amount of privacy of
the business. So these are the 3 reasons why some persons
would like to form a private limited company. One, the liability is limited. Two, the businesses within a limited circle;
therefore, more control can exercised. And three, the company matters can be kept
to, can be kept private. Now we talk of public limited company. Public limited company, it is also a voluntary
association of members. The minimum number of the members is 7. Whereas in a private limited company, it was
2. In a public limited company, it is 7 and with
no maximum limit. In a private limited company, the maximum
limit was 50. In a public limited company, there is no maximum
limit. Like private limited company, it also has
a separate legal existence, separate from its members. All the activities of such a company are strictly
governed by laws, rules and regulations following the Indian Companies Act 1956. Such a company also has to register with the
registrar of companies and here, it collects its capital by the sale
of its shares to the public. That is where the private limited company
cannot access the public. A public limited company on the other hand
can approach the public giving its prospectus and asking the public, general public to buy
its shares and become owners and that is how the capital can be raised for starting a business
and for expanding the business. Now shares of a company are freely traded
or transferable, unlike in the case of private limited company where the transfer takes place
among the members of the company. Here any person can buy anybody else’s, a
company’s share from another share holder. That means the share of the particular company
is freely tradable in the stock market. Liability of the member is limited to the
face value of the shares he or she owns. This is also same as the private limited company. However, since the actual owners of a public
limited company may lie geographically very far from the place where the company is situated,
the actual running of the problem or of the company is done by a board of directors and
different managers. The Board of Directors are actually there
to take long-term strategies and decisions and they are actually implemented by the managers
and like private limited company, such a company also enjoys continuity of its existence. Now we talk about still another form of ownership,
it is Limited Liability Partnership (LLP), Limited Liability Partnership. Now recall that in a partnership type of organisation,
the liability of a partner was unlimited. Now this is a new form of ownership which
is legally started by the government in 2008 by promulgating Limited Liability Partnership
Act or LLP Act 2008. Thus it has a very recent origin. Now what are the features of such a form of
ownership? It combines the flexibility of a partnership
and the advantages of a limited liability company. So limited liability, the main advantage of
a partnership, main disadvantage of a partnership was that the liability is unlimited but here
the liability is limited. This is useful for small and medium enterprises
and for the enterprises in service sector, particularly for activities involving professionals,
this is a good form of partnership, this form of business. It is governed by the Limited Liability Partnership
Act 2008. It is a legal entity separate from its partners. Now this is another advantage. There we said that if a partner expires, then
its, the partnership firm ceases to exist but in this case, it is not so. It is a legal entity separate from its partners. That means it continues and if any legal cases
come, it will be not against the partners but against the business and minimum number
of partners is 2 as is the case for partnership type of organisation and at least 2 individuals
are designated as designated partners. Like partnership, it is incorporated. Unlike partnership it is incorporated with
the registrar of societies. Now normally co-operatives are registered
with the registrar of societies and not partnership but here it is incorporated with the registrar
of societies and it has a perpetual succession because it is a separate legal entity, independent
of its partners. Therefore, it has a perpetual succession unlike
in the case of partnership. But because it is registered with the registrar
of societies, a statement of accounts and solvency shall be filed with the registrar
annually. So every year, such a business organisation
has to submit a statement of its financial accounts and how well it is doing. Solvency means how well it is doing financially. It has to be submitted, this too has to be
submitted to the registrar every year and further accounts of such businesses will also
have to be audited by independent auditors. Further central government has powers to investigate
its affairs and compromising between, whenever there are controversial matters concerning
suppliers or customers or between the partners, or if this has to merge or amalgamate with
some other company or some other business organisation, this has to be done in accordance
with the provisions of the Limited Liability Partnership Act 2008. So this is another form of business organisation. Now a firm, an existing firm or a private
company or an unlisted public company, is also allowed to be converted into an LLP,
this is an advantage given that any firm, cooperative, any partnership firm or a private
company or even a public company which is not listed in trade market, is allowed to
be converted into a limited liability partnership type of business and if an LLP has to be wind
up, it can be done either voluntarily or by a tribunal which is established or which can
be established under the Companies Act 1956. So these are the features of the limited liability
partnership type of firm. Now we take up 2 more forms of business organisation,
strictly speaking they are not, they are little different really. Say for example this particular one is coming
under Companies Act Section 25. So they have some special privileges. That is why I thought I should include it
as a separate form of business. It is also a company but it is a company that
is established for promoting art, science, religion, social cause, sports, education,
research, charity, or any other activities with the sole objective to promote such activities. So this is the promotion of various things:
art, science, religion, social cause, sports, education, research, charity, etc. Profit if any, is used to further the same
objectives. If such a company makes some profit, this
profit will not be distributed as dividends. It will instead be reused to further the very
objectives of promoting anything: art, science, religion, etc. So this is a very important characteristic
of this particular type of company and it has got various privileges and exemptions
granted under the Company Law Section 25. For example, it does not require a minimum
paid-up capital, it does not have to give stamp duty
and provision under Section 25 will be applicable here and such a company need not have the
word limited or private limited appearing in its name. I forgot to tell that in a public limited
company, the word limited must appear and in a private limited company, there are 2
words, private limited must appear. So private limited, these 2 words must appear
in the name of a private limited company, whereas of the word limited must appear in
a public limited company. Whereas a company that is formed under Section
25 may not have either the word limited or the 2 words private limited appearing in its
name. Lastly, we are talking about franchise. A franchise is a privileges or right that
is officially granted to someone to offer specific products or services under explicit
guidelines at a certain geographical location for a declared period of time. That means someone grants certain rights or
privileges to someone else for a specific period of time to operate its products and
services that is specified under certain explicit conditions or guidelines in a particular geographical
location. Now the one that gives this offer is known
as a franchisor and the one that receives the right or the privilege is called a franchisee. So a franchise is basically a long-term co-operative
relationship between a franchisor and one or more franchisees based on an agreement. So basically this is an agreement between
a franchisor and a franchisee in which the franchisor provides a licensed privilege to
a franchisee to do business. And as I said earlier in a particular geographical
location and for a specific period of time. Now the franchisor grants a franchisee, what
sort of rights? The right to use a developed concept including
diverse intellectual property rights such as knowhow, designs, brands, trademarks, patents,
trade secrets, production methods, service methods, marketing methods and the entire
business operation model. So franchisor gives a license with the help
of an agreement to the franchisee many things, its intellectual property rights and various
methods of producing, giving service and marketing and even maintaining sometimes the entire
business operation model for a fee. Naturally the franchisee has to pay an annual
fee to the franchisor. Now this is on the rise because many multinational
companies are setting up franchising or franchises in different parts of India, this has become
a worldwide phenomenon. We in India do not have any franchise-specific
legislation, this should be understood. There is no franchise-specific legislation
in India. But a franchise arrangement is governed by
various statutory enactments and some of them are written down here. A gist of some of the important statutes that
are relevant in the context of franchise formation is this, Indian Contract Act 1872, Intellectual
Property Law governed by Trademarks Act 1999, Copyright Act 1957 and Designs Act 2002. The Trade and Merchandise Marks Act 1958. The MRTP Act, Monopolies and Restrictive Trade
Practices Act 1969, Consumer Protection Act 1986 and the Other Pollution Control and Environment
Related Acts that are applicable to all industries and businesses in our country are also applicable
to franchises. Various countries are now going for legislating
rules for franchises but in India, we still do not have that and therefore, one has to
go through all this. However, it is not mandatory that the agreement
between a franchisor and a franchisee need to be registered. The decision to register or not register,
the agreement, lies with the parties to the agreement. It is not mandatory that they need to register
but if it is registered, then it is easy because later if some controversy arises between the
2 parties, then it can be resolved in a much better fashion, then if it is not registered
at all. So friends today we have discussed various
forms of ownership starting with the sole proprietorship to franchises. In between we talked of partnership firms,
cooperatives, private limited companies, public companies, public limited companies and PPLs. Now an entrepreneur has to naturally be fully
aware of different forms of ownership and there characteristics so as to decide what
form of ownership is the most suitable for him. In our next class, we shall talk about, in
particular, small-scale businesses and how to start a particular form of company. Thank you very much.

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