Unit 5 - FORMATION OF PARTNERSHIP FIRM AND JOINT STOCK COMPANY | Business administration class 11
Unit 5 - FORMATION OF PARTNERSHIP FIRM AND JOINT STOCK COMPANY
Partnership
When business grows beyond the capacity of sole proprietorship, it becomes necessary to involve more
people. Through the above example it’s clear that, when two or more individuals agree to carry out a
business it is termed as “Partnership”. The people involved in running the business together are called
‘Partners’ and collectively called a ‘Firm’ Partnership is a popular form of business for small scale and
medium scale enterprises.
Definition of Partnership –
According to Indian Partnership Act, 1932
Partnership is the relation between two or more persons who have agreed to share the
profits of the business carried on by all or any of them acting for all.
According to L.H. Haney
Partnership may be defined as the relation between the persons who agree to carry on a
business in common with a view to private gain.
Characteristics of Partnership
The features of partnership are as follows —
1. Formation – The partnership form of business is governed by Indian Partnership Act 1932. It comes
into existence through a legal agreement termed as ‘Partnership Deed’. The partnership can be
formed only for carrying on lawful business with profit motive.
2. Liability – The partners of a firm have unlimited liability. They are individually & collectively liable
to pay the debts of the firm. In case of loss if the firm’s assets are not sufficient to pay off the debts
then the partners individual assets can be claimed to recover the debts.
3. Mutual agency – Mutual agency means that every partner is the owner (principal) as well as the
agent of the firm. As an agent he represents other partners & binds them through his act. The
contract signed by one partner is binding on other partners. As a principal (owner) , he is bound by
the acts of the other partners.
4. Members – The minimum number of members to form a partnership firm is 2 and maximum
number is 50 (According to the Companies (Miscellaneous) Rules, 2014, maximum partners in
partnership firm is 50 people).
5. Management & control – The partners share the responsibility of managing the business. Decisions
related to day- to –day business activities are taken with mutual consent
6. Non- transferability of shares – No partners can transfer or sell his shares to any other person
without consent of all the partners. A partner can leave / retire from the firm only after giving due
notice.
7. Continuity – The partnership comes to an end on death, retirement, insanity or insolvency of any
partner. The remaining partners can continue the business under new agreement.
8. Risk bearing – The partners jointly bear the risk involved in running a business. They share the
profits & losses in an agreed ratio & if no ratio is specified in the agreement then profits & losses
are divided equally.
Advantages of Partnership
1. Easy formation – Formation of Partnership business is easy. It doesn’t involve any legal formalities
except a formal agreement. Even registration of partnership firm is not compulsory.
2. More financial Resources – As a number of partners contribute to the capital of the firm, it is
possible to collect larger financial resources. There is a great scope for expansion or growth of
business.
3. Balanced Decision making – The partnership firm enables pooling of abilities which helps in taking
balanced decisions. It also helps in efficient management of business.
4. Business Secrecy - The partnership firms are not bound to publish & file its accounts & reports. So,
the business secrets are confined amongst the partners only.
5. Risk sharing - In a partnership firm the risk is shared by all the partners. The survival capacity of
business is higher than that of sole proprietorship.
Disadvantages of Partnership
1. Unlimited liability – Every partner has an unlimited liability. In case the business assets are
insufficient then the partners have to repay the debts from their personal property or assets.
2. Lack of continuity – The partnership business lacks continuity as death, insolvency, retirement
may affect the existence of the business.
3. Limited Resources – The partnership firms are not suitable for the business which involve huge
capital investments. Limited investments hamper the growth & expansion of the partnership firms.
4. Possibility of conflicts – Lack of mutual understanding & cooperation leads to disagreement
amongst the partners resulting in conflicts. Difference of opinions & disputes can result in
inefficient management of business.
5. Lack of Public confidence – The annual reports of the business are not published so the financial
position of the business is not known to the general public. The Public has less trust & faith in
partnership firm which makes it difficult for the business to get contracts & projects.
Types of Partners
There are different types of partners in a Partnership firm having specific responsibilities–
1. Active Partner – An active partner contributes capital, shares profits & losses, has unlimited liability
and manages business activities.
2. Sleeping or Dormant Partners – A sleeping partner contributes capital, shares profit & losses, has
unlimited liability but does not participate in managing the day to day activities of business
3. Secret Partner – A secret partner contributes capital, shares profit & losses, has an unlimited
liability, participates in business activities but his association with the business is kept secret.
4. Nominal Partner - A Nominal Partner does not contribute capital, has no share in profit or losses,
does not participate in management activities, but has an unlimited liability and allows the firm to
use his name as partner for the goodwill of the firm.
5. Partner by Estoppels – A part by Estoppel is a person who has no partnership in the firm but
represent himself as a partner by his own words or conduct. He does not contribute capital, does
not participate in management activities, does not share profit & losses, but has an unlimited
liability
6. Partner by Holding out – A Partner by Holding out is a person who is actually not a partner but
when introduced by someone as a partner of firm &he/ she does not object even after becoming
aware. He has an unlimited liability and becomes liable to the creditors of the firm.
Types of Partnership Firm Partnership firms can be classified on the basis of
1.Duration
2.Liability
1. Partnership on the basis of Duration
(a) Partnership at will – This type of partnership is formed for an indefinite period. It continues at
the will of the partners till they mutually agree to carry an the business. Any partners can
withdraw his name from the business after giving a notice to the other partner.
(b) Particular Partnership – This type of partnership is formed for the accomplishment of a
specific project or any activity which is time bound. It dissolves after the completion of the
project or when the duration expires.
2. Partnership on the basis of Liability
(a) General Partnership – In this type of partnership the liability of partners is unlimited. All the
partners actively participate in managing the business. The partnership dissolves on the basis
of death, insolvency or retirement of the partners
(b) Limited partnership – In this type of partnership the liability of all the partners except one is
limited. The partners with limited liability do not have the right to take part in the
management of the firm, Death, insolvency of the limited partner does not affect the
existence of partnership firm
Formation of Partnership Firm
A partnership firm can be formed when two or more persons enter into an agreement. The
agreement can be oral or written. There is no compulsion to get the partnership firm registered.
But a firm which is registered and has a written agreement is always preferable and more beneficial
for the firm
PARTNERSHIP DEED
A written agreement between the partners is called ‘Partnership Deed’. This deed specifies the
terms & conditions that the partners have usually agreed amongst themselves to carry out the
business.
Contents of Partnership Deed.
1. Name of the firm
2. Nature of business & location
3. Duration of business
4. Capital contributed by each partner
5. Profit sharing ratio
6. Duties & obligations of the partners
7. Interest on capital & interest on drawings
8. Salaries & withdrawals of partners
9. Terms governing admission, retirement & dissolution
10. Method of solving disputes
11. Preparation of accounts and auditing of accounts
Registration of Partnership Firm
According to Indian Partnership Act 1932, it is not compulsory for a partnership firm to get
itself registered. But a registered firm enjoys more benefits and has more advantage as
compared to non- registered firm.
Registration Procedure -
A partnership firm can be registered at the time of formation or at any time during
the existence of the firm. It requires the partners to file the application duly signed
by all the partners with “Registrar of Firms” along with registration fee. The application
should contain the following informationi) Name of the firm
ii) Location of the firm
iii) Name and permanent address of all the
iv) Date of admission of partners
v) Duration of partnership firm
The Registrar after approval will make an entry in the register of firms and will issue a
“Certificate of Registration”.
Consequences of Non- Registration
Registration provides proof of the existence of a partnership firm. The unregistered firm can
face following problems –
a) A partner of an unregistered firm cannot file a case against the firm or other partners
b) The firm cannot file a case against the partners of the firm.
c) The firm cannot file a case against the third party
Therefore, it is advisable to get the firm registered.
JOINT STOCK COMPANY
A Joint Stock Company is an incorporated & voluntary association of individuals for the
purpose of carrying on some lawful activity. When there is increase in the size & complexity
of business, collection of more financial resources becomes necessary. For this purpose, the
partnership & sole proprietorship forms of organization are not suitable. Joint Stock
Company is considered to be most suitable form of organization for operating business on a
large scale.
The Company’s Act, 1956 defines, “A company is an artificial person having a separate legal
entity, perpetual succession and a common seal”
According to Justice Lindlay “Joint Stock Company is an association of many
persons who contribute money or money’s worth to a common stock & employ it for some
common purpose”.
Features of Joint Stock Company
1. Artificial Person – A Company is an artificial person created by law having a legal
existence which is different from the members of the Company. It is an artificial person
as it is intangible & has no attributes like a human being.
2. Separate legal entity – A company has a separate legal entity, independent from its
members. A Company can carry on the business in its own name, can buy or sell or enter
into contracts, own property in its own name. The member & the business are two
separate entities.
3. Perpetual Succession – A joint Stock Company has a continuous existence as it is created
by law & can be brought to an end by Law. The Company is not affected by death,
insolvency, disputes among shareholders,. The members may change but the Company’s
existence is perpetual.
4. Limited Liability – Liability of the members of a Company is limited to the value of the
shares subscribed by the members. They cannot be asked to pay more than the amount
invested by the shareholders in the Company for Ex – X has purchased 2000sahres of Rs
100 each, the his liability is limited to Rs 2,00,000 only.
5. Common Seal – A Company being an artificial person cannot sign itself. All the acts of
the Company are done by using a common seal as substitute for its signature. All the
documents bearing the common seal and witnessed by least two directors is legally
binding.
6. Control – The shareholders elect a group of people amongst themselves to manage the
day–to–day affairs of the Company. These elected members are called Board of
Directors. These Directors are accountable to the shareholders.
7. Transfer of share – The shares of a Company are freely transferable. They can be
purchased or sold through stock exchange or in the open market.
8. Risk – Bearing -The risk of losses in Joint Stock Company is borne by all the shareholders.
The loss is shared by the shareholders in proportion to their investment in the Company.
Type of Companies
Companies may be classified as
- Private Company
- Public Company
- One Person Company.
Private Company – A Private Company is an entity that is held by private owners. This entity limits
owner’s liability to their ownership stake and restricts the shareholders from trading shares publically.
Private Company is a Company which has following features –
1. It has a minimum of 2 & maximum of 200 members (shareholders) as per Section 2(68)
of Companies Act, 2013.
2. It must use ‘Private Limited’ after the name of the Company. For example, Apex Pvt. Ltd.
3. It does not invite the public for issue of share or subscribe to its deposit
4. It restricts the shareholders to transfer its share.
Private Company is an ideal form of company for those who wish to run a large-scale
business without involving a large number of shareholders.
Public Company – A Public Company is an entity that has permission to issue registered securities
to general public and it is traded on at least one stock exchange.
A Public Company has the following distinctive features –
1. It has a minimum of 7 members & no limit on maximum. members
2. It has no restriction on transfer of shares
3. It has a minimum paid up capital of Rs. 5 lakh.
4. It can invite public to subscribe to its shares, debentures and public deposits.
One Person Company - One Person Company has been one of the new concepts which has been added to
the recent amendment of the Companies Act 2013. Section 2(62) defines One Person Company as a Private
Company with only one share holder.
Features of One Person Company –
- The paid up Capital of the One Person Company can not exceed 50 lakh and annual turn over can not exceed Rs. 2 crore.
- The liability of the owner is limited as One Person Company has a separate entity.
- The minimum number of directors can be 1 and maximum 15.
- The share holder has to mention a nominee while registering the company. The nominee has to give his consent in writing and he/she can not be a member or nominee of any other one person company.
One Person Company are yet not very common in India. To overcome the problems faced by sole
proprietorship, Companies Act 2013 initiated the concept of One Person Company.
Formation of Joint Stock Company
Formation of a Company involves the following stages –
Private Ltd. Company
1. Promotion
2. Incorporation
Public Company
Public Company
1. Promotion
2. Incorporation
3. Subscription of capital
4. Commencement of business
A Private Company has to undergo only 2 stages. It can start its business after obtaining the
‘Certificate of Incorporation but a Public Company has to undergo all the four stages and
after obtaining “Certificate of Commencement of Business”, it can start the business
Promotion –
This is the first stage in formation of a Company. Promotion includes all the steps from
conception of an idea to starting of the Company, till it is formed. The entire process of incorporation
is initiated by a promoter. A promoter can be an individual a group of persons or an institution. The
promoters have an important role in formation of a company.
The functions performed by promoter
during promotion stage are as follows –
1. Identification of Business opportunity –
The promotion stage begins with an idea to set up a business. The promoter has to identify
the business opportunity. It can be to set up a new business or expansion of the existing
business.
2. Feasibility studies – After identifying the business opportunity, the promoter starts
investigating all the aspects of business. Depending on the nature of business the promoter
carries out detailed feasibility studies in technical, financial & economic forms. For this
specialists & experts like CA, Engineers etc. are required. Feasibility studies include –
a) Technical feasibility – This study is undertaken to ensure the availability of the resources &
teche project will not be possible.
b) Financial feasibility – This study is undertaken to estimate the fnology required for the project. If any of the raw material or other inputs are not easily
available then thunds required to carry out
the business idea smoothly. If the finance required is large & cannot be easily arranged then
it’s not feasible to carry on with the business opportunity.
c) Economic feasibility – This study is undertaken to know the profitability of the business
opportunity. After estimating the cost & revenues the promoter has to carry on with the
idea only if the project is economically feasible.
3. Name Approval - After the feasibility studies, it’s time to give name to the Company.
Promoters have to select the name & submit an application to the Registrar of Companies for
approval. The application is filed in the state where the Company plans to have its registered
office.
4. Fixing up signatories to Memorandum of Association - After the name approval, Promoters
have to decide about the members who will be signing the Memorandum of Association.
Usually the signatories become the first Directors of the Company. These Directors also take up
the Qualification shares in the Company.
5. Appointment of Professionals - After fixing the signatories the Promoters have to appoint
professionals like bankers, under-writers, brokers, solicitors, auditors to assist them in preparing
necessary documents to be submitted with Registrar of Companies
6. Preparation of necessary documents– The final step in promotion is to prepare legal
documents of the Company to be submitted with Registrar at the time of incorporation. The
common documents are Memorandum of Association, Articles of Association, Prospectus etc.
Incorporation of the Company.
Incorporation of the Company is the next stage in formation of a Company. The promoter
files an application with the Register of Companies under Co’s Act 1956 and thus obtain
‘Certificate of Incorporation’ The steps in incorporation are as follows –
1. Filing of documents – After the approval of name the following documents have to be
submitted with the Registrar which are duly stamped, signed and witnessed –
- Memorandum of Association ii) Articles of Association
- Consent of proposed directors with name, address,
- Agreement with proposed Managing Director
- Copy of Registrar’s letter approving the name of the Company.
- Name & address of Registered Office
- Statutory declaration stating that all the formalities related to the formation of Company are duly completed.
3. Registration – Once the Registrar is satisfied that all the documents filed are in order and
other statutory requirements have been complied with, he enters the name of the Company in
his register.
4. Certificate of Incorporation – After entering the name of the Company in the register, the
Registrar issues a ‘Certificate of Incorporation’. This certificate implies the birth of the
Company. The Registrar also allots a CIN (Corporate Identity Number) to the Company. From
this date onwards the Company is considered as a separate legal entity and can enter into valid
contracts.
On issue of Certificate of Incorporation, a private Company can immediately commence its
business, but a Public Company has to undergo 2 more stages before commencing its
business.
5.1.3 Capital Subscription
After getting the Certificate of incorporation the Public Company has to raise funds by issuing
shares and debentures to the general public. For this it has to issue a Prospectus and meet
certain formalities. The steps involved in capital subscription are follows –
1. SEBI approval – A Public Company has to take prior approval from SEBI (Securities Exchange
Board of India) to raise funds from Public. Public Ltd. Company must submit all the relevant
information with SEBI before issuing its securities in the capital market.
2. Filing of Prospectus - A Public Company has to prepare another important document called
Prospectus or a Statement in lieu of Prospectus and file it with Registrar of companies. It is a
document which invites public to subscribe for shares or debentures of the Company.
3. Appointment of Professionals - Professionals like Banker, Broker and underwriters are
appointed after filing of Prospectus. Brokers are appointed to sell the shares. Bankers are
appointed to receive & deposit the application money in bank. Underwriters are the persons
who undertake to buy the shares if these are not subscribed by public. They charge commission
for underwriting the shares.
4. Minimum Subscription – A Company can start the allotment of shares only when minimum
number of shares have been subscribed and application money is received. As per Company Act
the minimum subscription should be 90% of the issued capital. For ex A Company plans to issue
10,000 shares of Rs 100 each then it must receive application for minimum 9000 share within
120days of issue of prospectus. If amount is not received then application money must be
returned to the applicants.
5. Application to stock exchange – The Company may apply in any of the recognized stock
exchanges to deal in its shares and debentures. If Company fails to apply to a stock exchange or
fails to get permission within 10 weeks from date of closure of subscription list, the allotment
becomes void.
6. Allotment of share – After getting the name listed and completion of all legal formalities, the
Company allots shares to the applicants and issue allotment letters. The names & address of
shareholders and the number of shares allotted to each is submitted to the Registrar within
30days of allotment in a statement called ‘return ofallotment’
.1.4 Commencement of Business
After issuing the shares and receiving minimum subscription, a Public Company applies to
Registrar for issue of ‘Certificate of Commencement of Business’. The Registrar will examine all
the documents and after satisfaction a ‘Certificate of Commencement’ is issued. After this
certificate a Public Company becomes a legal entity and can start the business activities.
Documents required are –
i) A declaration that share have been subscribed & allotted up[to minimum subscription
ii) A declaration that every Director has paid cash for application & allotment money on his share.
iii)A declaration that no money is pending to pay back to the applicants
iv)A statutory declaration that the above requirements have been complied with. This declaration
has to be signed by a Director or a Secretary of a Company
5.2 IMPORTANT DOCUMENTS USED IN FORMATION OF A COMPANY
1. Memorandum of Association
2. Articles of Association
3. Prospectus
1. Memorandum of Association
Memorandum of Association is a principal document of a company it is considered as a Charter
of company. It defines the powers, objectives, scope of operations of the company and its
relationship with the stakeholders. It provides information to outsiders such as creditors,
suppliers etc. It is also known as. Doctrine of outdoor management. No Company can be
registered without a Memorandum of Association. If the company does any activity that is
beyond the legal power & authority and is not provided for in Memorandum of Association
then it is treated as ultra virus activity.
Contents of Memorandum of Association
The content of Memorandum of Association is in form of different clauses which are as follows –
1. Name clause – It contains the name of the company.
2. Situation clause – It contains the name of the state where Registered office is situated
3. Object clause – It contains the main purpose for which the company is formed, and all
the activities the company may undertake
4. Liability clause – It contains the liability of members which is limited to the amount
unpaid on the shares held by them. For Example - A shareholder is allotted 1000shares
@10 per share. He has paid only Rs 6 per share, then at the time of winding up or losses
of the Company he is liable to pay only Rs 4 per share i.e. 1000 X 4 = 4000 Rs.
5. Capital clause – It contains the authorized capital of the company. It states the par value
of each share & maximum number of shares a company can issue.
6. Association Clause – It contains the declaration by the directors that they are prepared
to be associated with the company as member. It should be signed by all the directors.
2. Articles of Association
Articles of Association contains rules and regulation regarding the management of
company’s internal affairs. It also states the duties, rights, power of the managers and
directors. These are the ‘Bye- laws’ of the company or Doctrine of indoor management. The
articles or provisions should be properly divided in paragraphs, numbered and signed by the
signatory of Memorandum of Association, with one witness. All the Companies prepare
their own Articles of Association, but if it does not want to prepare its own Articles of
Association it can adopt the provisions given in Table ‘A’ of Schedule of Company Act 1956
Contents of Article of Association
1. The amount of share capital and different classes of shares
2. Rights of each class of share holder
3. Procedure for making allotment of shares
4. Procedure for issuing share certificates
5. Procedure for transfer of shares
6. Procedure for forfeiture and reissue
7. Procedure for conducting meetings, voting, quorum, proxy.
8. Procedure for appointment and removal of directors
9. Duties, power, remuneration of directors, managers and officers.
10. Procedure for winding up of company
11. Procedure for declaration and payment of dividend
12. Procedure for regarding maintenance of financial records and their audit
13. Seal of the company.
3. Prospectus
It is an invitation to the general Public to subscribe for shares or debentures. According to
Company Act “A prospectus can be a document, a notice, a circular, or an advertisement,
inviting deposit or offers from public for the subscription orpurchase of any share or
debentures of a body corporate,
The information in prospectus helps the investor to take decision about investing in
the company.
Contents of prospectus
1. Company name and address of Registered office
2. Nature of business
3. Number and class of shares
4. Main objective of the Company and other objectives
5. Name and address of signatories to Memorandum of Association and number of shares
subscribed by each of them.
Questions :-
- Describe the privileges of Private Company over Public Company.
- What are the consequences of non- registration of partnership firm?
- Explain any 2 features of Joint stock company.
- Explain the following - a) Nominal partner b) Partnership at will
- Define a prospectus and write its content
- Distinguish between Memorandum of Association and Articles of Association.
- Explain the procedure for formation of a company.
- Explain 5 merits & 5 demerits of partnership
Reference:-
https://cbseacademic.nic.in/web_material/Curriculum21/publication/srsec/business%20Administration-XI.pdf
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