Choice of a Business Organization – Setting Up of Business Entities and Closure Important Questions

Choice of a Business Organization – Setting Up of Business Entities and Closure Important Questions

Choice of a Business Organization – Setting Up of Business Entities and Closure Important Questions

Question 1.
Choosing a form of business entity is crucial to a successful organization. Comment.
Business organization refers to all necessary arrangements required to conduct a business in an optimized manner. It refers to all those steps that need to be undertaken for establishing and maintaining the relationship between men, material, and machinery to carry on the business efficiently for earning profits

Merits and Demerits of Various business organizations: A business enterprise can be owned and organized in several forms. Each form of organization has its own merits and demerits. The ultimate choice of the form of business depends upon the balancing of the advantages and disadvantages of the various forms of business.

The right choice of the form of the business is very crucial because it determines the power, control, risk, and responsibility of the entrepreneur as well as the division of profits and losses.

Being a long-term commitment, the choice of the form of business should be made after considerable thought and deliberation.

Success and Growth of Business: The selection of a suitable form of business organization is an important entrepreneurial decision because it influences the success and growth of a business – e.g., it determines the division or distribution of profits, the risk associated with business, and so on.

Types of Business Entities: The certain types of business entities in India are Sole Proprietorship, Partnership, Hindu Undivided Family (HUF) Business, Limited Liability Partnership (LLP), Co-operative Societies, Branch Office and Company which may be any kind of company including One Person Company (OPC), Private Limited Company, Public Limited Company,

Guarantee Company, Subsidiary Company, Statutory Company, Insurance Company, or Unlimited Company.
Non-Profit Business Entity: Company formed u/s 8 of the Companies Act, 2013 is a non-profit business entity. There can also be Association of Persons (AOP) and Body of Individuals (BOI), Corporation, Co-operative Society, Trust, etc.

Question 2.
Why would you prefer a Limited Liability Partnership form of organization for setting up a business compared to a Private Limited Company?
One can prefer a Limited Liability Partnership (LLP) form of organization for setting up a business compared to a Private Limited Company for the following reasons:
1. Cost of formation/incorporation: The cost of incorporation of LLP is lower as compared to a private company.

2. Process of incorporation: The process of incorporation of LLP is fast as compared to a private company.

3. Change in internal rules: Internal rules and regulation of LLP’s are governed by the LLP agreement which can be changed easily by making a change in agreement as per the LLP Act, 2008; whereas internal rules and regulation of the companies are governed by the Article of Association which requires special procedure ie. passing of the special resolution in shareholders meeting which is a time-consuming and costly process.

3. Meetings: In the LLP Act, there is no stipulation for meetings of partners either periodically or compulsory at the year-end; whereas every private company must hold AGM every year. Every private company must hold 4 board meetings and the gap between the two meetings should not be more than 3 months. Thus, in LLP business can be conducted without any meeting by the partners of the LLP.

5. Business: In an LLP, each partner has the authority to do so unless expressly prohibited by, the partnership terms; whereas in the case of a company no individual director can conduct the business of the company.

6. Borrowing power: There are no restrictions on the borrowing powers on the LLP; whereas there are restrictions on borrowings power on the companies.

7. Accounts: LLP can choose to maintain the accounts on a cash basis/ accrual basis; whereas private companies have to keep their accounts on an accrual basis.

8. Audit: Audit of LLP is not compulsory if the capital contributed does not exceed ₹ 25 lakh or if the turnover does not exceed t 40 lakhs; whereas audit of a company is compulsory.

9. Appointment of Company Secretary: Appointment of Company Secretary is not provided in the LLP Act, 2008; whereas private companies may be required to appoint Company Secretary if its paid-up capital exceeds the limit prescribed under the Companies Act, 2013.

Question 3.
Distinguish between : Partnership & Company [June 2005 (4 Marks)], [Dec. 2013 (4 Marks)]
Following are the main points of distinction between partnership and company:

Points Partnership Company
Meaning The partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A company means a company formed and registered under the Companies Act, 2013. A company may be a private company or a public company.
Legal status A partnership firm has no separate existence apart from its members. A company is a separate legal entity distinct from its member.
Governing Act The partnership is governed by the Partnership Act, 1932. A company is governed by the Companies Act, 2013.
Minimum membership Minimum two persons are required to form a partnership. A minimum number of the member required to form a company are:

  • For private company: 2
  • For public company: 7
  • For one person company: 1
Maximum membership A partnership with objects of acquisition for gains cannot be formed beyond 50 numbers of partners. [Section 464 read with Rule 10 of the Companies (Miscellaneous) Rules, 2014] The maximum number of member are:

  • For private company: 200
  • For public company: Unlimited
Registration Registration of partnership is not compulsory but the Partnership Act, 1932 had made it indirectly essential to enjoy certain benefits. Registration of the company is compulsory under the Companies Act, 2013.
Capital Minimum capital is not specified. Minimum capital for the private and public companies will be as specified in the rules.
[Prior to the Companies {Amendment) Act, 2015, minimum paid-up capital for private company was ₹ 1,00,000 & for public company was ₹ 5,00,000]
Management All partners have a right to take part in the day-to-day affairs of the firm. The affairs of the company are managed by the Board of Directors. Members cannot take part in day-to-day business.
Mutual agency Every partner is principal as well as an agent of other partners. A member of the company is not an agent of another member or company.
Transfer of interest A partner cannot transfer his interest without the consent of all other partners. A shareholder can freely transfer his share. However, private companies can put restrictions on transfer.
Liability of a member The liability of a partner is unlimited. The liability of a member is limited up to the unpaid amount on share.
Audit It not compulsory for partnership firms to get their accounts compulsorily audited. The company has to get their accounts compulsorily audited as per the provisions of the Companies Act, 2013.

Question 4.
Distinguish between: Company & Club [June 2010 (6 Marks)]
Following are the main points of distinction between Company & Club:

Points Company Club
Meaning “Company” means a company formed and registered under this Act or an existing company as defined in the Companies Act, 2013. A club is an association of persons formed with the object to promote some common beneficial purpose.
Registration Registration of a company is compulsory. Registration of a club is not compulsory.
Profit motive Most of the companies are formed with a view to earning profit. Clubs are formed not to earn profit.
Audit The company has to get their accounts compulsorily audited as per the Companies Act, 2013. Clubs are not required to get their accounts audited.

Question 5.
The requirement of capital affects the choice of business organization. Comment. [June 2019 (4 Marks)]
Capital is one of the most crucial factors affecting the choice of a particular form of ownership organization.
Major Factors: Requirement of capital is closely related to the type of business and scale of operations

Heavy Capital: Enterprises requiring heavy investment (like iron and steel plants, large-scale infrastructure projects, etc.) should be organized as companies. Depending on the capital required, they can be set up as public companies and in some cases, maybe in the form of listed companies by raising money from the public and being listed on the stock exchanges.

Small Investment: Enterprises requiring small investment (like retail business stores, personal service enterprises, etc.) can be best organized as sole proprietorships or even as Partnerships. Apart from the initial capital required to start a business, the future capital requirements – to meet modernization, expansion, and diversification plans – also affect the choice of form of organization.

Sole Proprietorship’s Capital: In a sole proprietorship, the owner may raise additional capital by borrowing, by purchasing on credit, and investing additional amounts himself. Banks and suppliers, however, will look closely at the proprietor’s individual financial resources before sanctioning any loans or advances.

Partnerships Capital: Partnerships can often raise funds with greater ease since the resources and credit of all partners are combined in a single enterprise.

Companies Capital: Companies are usually best able to attract capital because

  • Investors are assured that their liability will be limited
  • Operations are in the public domain in a transparent manner
  • Easily accessible and
  • Ownership can be transferred to other investors.

Setting Up of Business Entities and Closure Questions and Answers

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