What Type of Business Should I Start – Best Kinds of Companies, want to study about business, students may learn here kinds of companies and business types.
What Type of Business Should I Start – Best Kinds of Companies
The joint stock companies may be classified as follows:
(A) According to Incorporation
The companies may be divided into three categories according to incorporation. 1. Chartered Companies. This type of companies are incorporated under Royal Charter issued by the King or Head of the State. Under the charter, certain exclusive rights and privileges are granted to the company Be undertaking certain commercial activities. If the company violates the rules, the Head of the State can close such companies. Chartered Companies were popular in England in the nineteenth century. The East India Company, the Chartered Bank of India and Australia were incorporated under Royal Charters. These companies are no longer formed in any country.
2. Statutory Companies. These companies are formed under a special act of Parliament or of State Legislature. The objects, powers, rights and responsibilities of these companies are clearly defined in the Act. Generally, companies for public utility services are formed under special statutes These companies may or may not use the word ‘Limited’. These companies are given wide powers under the Acts. The examples of such companies in India are Reserve Bank of India, the Industrial Finance Corporation of India, State Trading Corporation of India, Industrial Development Bank of India etc.
3. Registered Companies. These are the companies formed and registered under the provisions of the Companies Act. Most of the companies in India are registered under the Indian Companies Act, 1958. The method of formation, management and liquidation are given under various clauses of this Act. Registered companies may be limited by shares, limited by guarantee or unlimited companies.
(B) According to Liability
According to liability, the companies may be classified into three categories:
1. Companies Limited by Shares. The companies limited by shares have a share capital. The capital is divided into shares. The shareholders pay share money at one time or by instalments. The shareholders are not liable to pay anything more than the value of the shares held by them, whatever be the liabilities of the company.
2. Companies Limited by Guarantee. These companies are also formed under the Companies Act with a stipulation in the memorandum clause that members are guaranteed to pay a certain amount of money in case of its winding up. The amount which members undertake to pay is called the guarantee money. Sometimes the members are required to buy shares of fixed value and also give a guarantee for more sum in the event of its liquidation.
3. Unlimited Companies. The companies registered without limiting the liability of members to the value of shares are called unlimited companies. The companies are just like Partnership concerns where liability is unlimited. All the members will be liable to meet the liabilities of the company to an unlimited extent. These companies do not exist these days.
(C) According to Transferability of Shares
1. Private Company. A private company can be formed with the association of at least two members but the maximum number of shareholders cannot exceed fifty. It is generally a family affair. lis shareholders are all relatives, friends, or business associates. The disadvantages of partnership firms encourage the formation of private companies. A private company restricts by its articles,
(a) the right of members to transfer their shares,
(b) limits the number of its members to 50 (the past and present employees of the company are not counted for this), and
(c) prohibits any invitation to the public to subscribe to its shares and debentures. A private company may be limited by guarantee. There cannot be a private company with unlimited liability.
Exemptions and Privileges of Private Company
A private company is given certain exemptions and privileges as compared to a public company. Some of the main privileges are as follows:
1. requires at least seven members. A private company can be started with just two members whereas a public company
2. A private company is not required to file a prospectus or a statement in lieu of prospectus with the Registrar of Companies.
3. There is no restriction of minimum subscription as in the case of public company. It can directly allot the shares.
4. The company can start its work just after getting a certificate of incorporation. It is exempted from getting the certificate of commencement.
5. It can work with just two directors.
6. A private company is not required to hold a statutory meeting and filing a statutory report.
7. It is not under legal obligation to offer its issue of shares to the existing shareholders on a pro rata basis as is in the case of a public company.
8. Unless otherwise a higher quorum is provided, the minimum quorum in a general meeting of shareholders is only two members personally present.
9. There is no limit on the remuneration of directors, managers, etc., in a private company. It can be fixed beyond 11 per cent which is a statutory limit for a public company. companies can be done without restrictions.
10. Investment in the same group of companies can be done without restrictions.
Need for Special Privileges to a Private Company
There are certain concessions given by Companies Law to a private limited company. A private company is just a private affair of members and public at large is not involved at all. A резовые сострану саниnot invite public due subscribing to its shares. Even the transfer of shares from one person to another is not allowed. The maximum number of members cannot exceed fifty in any type of company. Considering these restrictions on the private companies, it is clear that these companies are just family businesses.
The shareholders know each other. There is no fear of mismanagement as is possible in public companies due to separation of ownership and management The private companies are generally managed by owners. When the business is controlled and managed by those who have staked their money in it then law should give them freedom to act as they decide. There is no need of putting restrictions on these companies because in most of the cases different homely members and relatives are made shareholders.
There is no need to protect the interests of shareholders. It is just an extension of partnership and the advantage of limited liability is availed. On the other hard, various restrictions on working and management of public companies are necessary because interests of large number of persons are involved. The shareholders are well spread all over the country and they cannot see the working of the company. So there is a need for keeping legal vigil on public companies instead of private companies.
2. Public Companies. Section 3 (1) (iv) of the Indian Companies Act, 1956 says that all companies other than private companies are called public companies. Public Company means that public at large is interested in those companies. The membership of a public company is open to all persons capable of entering into a contract.
A minimum of seven members are required to constitute a public company and to get it registered. There is no restriction on the maximum number of members. Public companies are required to issue a prospectus for inviting people to purchase their shares. A company must allot its shares within 120 days from the issue of its prospectus. A public company can start work only after getting a Certificate of Commencement’ from the ‘Registrar of Companies”. The shareholders are free to sell their shares in the market.
(D) On the basis of Ownership
The companies may be divided into three categories on the basis of ownership:
(1) Government Companies (or Public Sector Companies)
A company owned by central and/or state government is called a government company. Either whole of the capital or majority of the shares are owned by the government. In some cases, private investment is also encouraged but at least 51% shares are held by the government. Management of these companies is under the control of the government. Subsidiary companies of government companies are also covered under government companies.
According to Indian Companies Act, 1956, “Government company means any company in which not less than 51 per cent of the paid-up share capital is held by Central Government or by any nate government or governments or partly by the Central Government and partly by one or more state governments and includes a company which is subsidiary of government company”
Government companies are registered both as public limited and private limited companies but the management remains with the government in both the cases. Government companies enjoy some privileges which are not available to non-government companies. No special statute is required to form government companies.
Government companies enter those fields where private investment is not forthcoming Sometimes, government has to take over sick units in private sector. These companies are also useful where joint ventures are to be taken up. Nationalized industries can also be run by government companies. Some of the examples of government companies in India are: Coal Mines Authority Lad, Steel Authority of India Ltd.
Advantages of Government Companies
1. Flexibility in management. There is a freedom and flexibility in the management of government companies. Companies can organize their working according to the necessity of the situation.
2. Run on commercial lines. Government companies are run on sound business lines. They earn surplus to finance their own expansion plans.
3. Healthy competition. Government companies provide healthy competition to the private sector. Private businessmen will have to be careful in fixing their prices. The consumer is not at the mercy of the private businessmen.
4. Financial autonomy. These companies are dependent on the government only for their initial investment. They can plan their own capital structure. The companies earn profits and these profits can be used for further investments.
5. Helpful in developing neglected sectors. There are certain sectors which are important from the national point of view. Private sector may not be coming forth to invest in such sectors. Government companies can enter all the neglected areas and can help all-round growth.
6. Providing industrial environment. An industrial infrastructure is provided by the government companies. They help the growth of ancillary units.
Disadvantages of Government Companies
1. Slackness in management. The management of government companies is slackened under the garb of public service. These companies are not generally as efficient as units in the private sector.
2. Political interference. There is a lot of political interference in government companies. Every government tries to nominate directors from its own political party and the companies are run on political considerations.
3. Red-tapism. These companies are dependent on the government for taking important policy decisions, Red-tapism in government departments affects the working of these companies.
4. Limited autonomy. Theoretically, these companies are free from government control but in reality they are dependent on various government departments. They have to get permission from government departments regarding loans, capital and managerial appointments.
5. Official domination. Civil servants are appointed on important managerial posts of these companies. They are not capable of running these undertakings on sound business lines.
(ii) Holding Companies
If a company can control the policies of another company through the ownership of its share
or through control over the composition of its Board of Directors, the company is called a Holding Company. A company, the policies of which are controlled, is called a subsidiary company. The holding company has a say in the formulation of policies of the other company.
(iii) Subsidiary Companies
A company is called a subsidiary company when one of the following conditions is fulfilled:
(a) If the formation of Board of Directors is controlled by another company.
(b) The other company controls more than half of the voting rights of this company i.e. company in question.
(c) If it is subsidiary of a company which itself is the subsidiary of another company.
(d) The other company owns more than half of the maximum value of the shares in the company.
A holding company and a subsidiary company are separate companies having separate legal entities.
(E) On the basis of Nationality
incorporated under Indian Companies Act but separate rules are framed for their regulations. These companies may be manufacturing companies, insurance companies, banking companies, etc. (8) Foreign Companies. A foreign company means company incorporated outside India but has a place of business in India through its branches or agencies. Such companies have to furnish some information as required by the Registrar of Companies in India.
MERITS OF COMPANY FORM OF ORGANISATION
The company form of organisation has been successful in almost all countries of the world. This form is suitable where large resources are required and the production has to be carried out on a large scale. The number of joint stock companies has shown a phenomenal increase in the twentieth century. Some of the merits of company form of organisation are discussed below:
1. Accumulation of Large Resources. The main drawback of the sole trade and partnership concerns has been the scarcity of resources. The resources of a sole trader and of partners being limited, these enterprises have always suffered for want of funds. A company can collect large sum of money from large number of shareholders. There is no limit on the number of shareholders in a public company. If need for more funds arise, the number of shareholders can be increased. Joint stock companies are suitable for those businesses where large resources are required.
2. Limited Liability. The liability of members in a company form of organisation is limited to the nominal value of the shares they have acquired. If a person has purchased a share of Rs. 100, his liability is limited to Rs. 100 only. If the share is partly paid, then he can be required to pay only the unpaid value of the share. In no case the total payment will exceed Rs. 100. The limited liability encourages many persons to invest in shares of joint stock companies. Many persons will be reluctant to invest in those enterprises where liability is unlimited.
3. Continuity of Existence. When a company is incorporated, it becomes a separate legal entity. It is an entity with perpetual succession. The members of a company may go on changing from time to time but that does not affect the continuity of a company. The death or insolvency of members does not in any way affect the corporate existence of the company. The continuity of a company is not only in the interests of the members but is also beneficial for the society. The discontinuation of a company may cause wastage of resources and inconvenience to the consumers.
4. Efficient Management. In company form of organisation, ownership is separate from management. It enables the company to appoint expert and qualified persons for managing various business functions. The availability of large-scale resources enables the company to attract talented persons by offering them higher salaries and better career opportunities. The efficient management will help the company to expand and diversify its activities.
5. Economies of Large Scale Production. With the availability of large resources, the company can organize production on a big scale. The increase in scale and size of the business will result in economies in production, purchase, marketing and management, etc. These economies will enable the company to produce goods at a lower cost, thus resulting in more profits. The company will help consumers by providing them with cheaper goods and will also be able to accumulate more resources for further expansion.
6. Transferability of Shares. The shares of a public company are freely transferable. A shareholder can dispone of his shares at any time when the market conditions are favorable or he is in need of money. The company does not return share-money before its winding up but shareholders can easily sell their shares through stock exchange markets. Stock Exchange provides a ready market for the purchase and sale of shares. The facility of transferring shares encourages many persons to invest. This liquidity to the investor and stability to the company. On the other hand, partnership form of organisation does not provide free transferability of shares.
7. Ability to Cope with Changing Business Environments. The present business enterprises operate under uncertain economic and technological environments. Technological changes are taking place every day. The needs of consumers are varied and changing, to cope with the changing economic environment every business is required to invest money on research and developmental programmes Sole trade concern or partnership firms cannot afford to spend money on research work. Joint stock companies can afford to invest money on research projects. It will enable them to cope with changing business conditions.
8. Diffused Risk. In sole trade and in partnership business, the risk is shared by a small number of persons. Further uncertainties discourage them from taking up new ventures for fear of risk. In company form of organisation, the number of contributories, is large, so risk is shared by a large number of persons. The burden to be shared by different individuals becomes insignificant. It enables companies to take up new ventures.
9. Democratic Set-up. The values of shares is generally small. It enables persons with low incomes to purchase the shares of companies. Shareholders come from all walks of life. Every individual has an opportunity to become a shareholder. Secondly, the Board of Directors is elected by the members. So members have a say in deciding the policies of the company. The company form of organisation is democratic both from ownership and management side.
10. Social Benefits. The company form of organisation mobilises scattered savings of the community. These savings can be better used for productive purposes. The companies also enable financial institutions to invest their money by providing them avenues. It also enables the utilisation of natural resources for better productive uses. Large-scale production enjoys a number of economies enabling low cost of production. The society is supplied with enough quantity of goods.
DEMERITS OF COMPANY FORM OF ORGANISATION
The company form of organisation suffers from the following drawbacks
1. Difficulty of Formation. Promotion of a company is not an easy risk. A mumber of stages are involved in company promotion. The suitability of a particular type of business is to be decided first. A number of persons should be ready to associate for getting a company incorporated. A lot of legal formalities are required to be performed at the time of registration. The shares will have to be sold during the particular time. Promotion of a company is both expensive and risky.
2. Separation of Ownership and Management. The ownership and management of a public company is in different hands. The owners te., shareholders play an insignificant role in the working of the company. On the other hand, control is in the hands of those who have no stakes in the company. The management may indulge in speculative business activities. There is no direct relationship between efforts and rewards. The profits of the company belong to shareholders and the Board of Directors are paid only a commission. The management does not take personal interest in the working of the company as is the case in partnership and sole-trade business.
3. Evils of Factory System. The company form of organisation leads to large-scale production. The evils of factory system like insanitation, air pollution, congestion of cities are attributed to joint stock companies. Joint stock companies facilitate formulation of business combinations which ultimately leads to the monopolistic control and exploitation of consumers.
4. Speculation in Shares. The joint stock companies facilitate speculation in the shares at stock exchanges. The prices of shares depend upon both economic and non-economic factors. The speculators try to fluctuate the prices of shares according to their suitability. The stock exchanges will not help the growth of healthy investment when speculative activities are being carried on. The management of joint stock companies also sometimes encourage speculation in shares for their personal gains.
5. Fraudulent Management. The promoters and directors may indulge in fraudulent practices. The management is in the hands of those persons who have not invested much in the company. The Company Law has devised methods to check fraudulent practices but they have not proved enough to check them completely.
6. Lack of Secrecy. The management of companies remains in the hands of many persons. Everything is discussed in the meetings of Board of Directors. The trade secrets cannot be maintained. In case of sole trade and partnership concerns such secrecy is possible because a few persons are involved in management.
7. Delay in Decision-making. In company form of organisation no single individual can make a policy decision. All important decisions are taken either by the Board of Directors or are referred to general house. Decision-taking process is time consuming. If some business opportunity arises and a quick decision is needed, it will not be possible to arrange meetings all of a sudden. So many opportunities may be lost because of a delay in decision-making.
8. Concentration of Economic Power. The company form of organisation has helped concentration of economic power in a few hands. Some persons become directors in a number of companies and try to formulate policies which promote their own interests. The shares of a number of companies are purchased to create subsidiary companies. Interlocking of direction ship and establishment of subsidiary companies have facilitated concentration of economic power in the hands of a few business houses.
9. Excessive State Regulations. A large number of rules and regulations are framed for the working of the companies. The companies will have to follow rules even for their internal working. The government tries to regulate the working of the companies because large public money is involved. The formalities are many and the penalties for their non-compliance are heavy. This often detracts companies from their main objectives for which they have been formed.
