Business Establishments - Different forms of ownershipAn entrepreneur having a very good business idea (establishing a large departmental store at your place) requiring an investment of Rs 2 crores can establish it in a number of different ways based on the financial and other resources at his/her disposal.
Sole ProprietoryIf the entrepreneur has all the money needed or if he/she can raise the required money through loans on his/her own, the business can be established as his/her own. The person establishing the business is called the Sole Proprietor. Everything is his/her own. He/She takes all the risk/gain.
If business is required to be wound up on account of losses and if the business assets are not sufficient to clear the business debts, the entrepreneur has to repay the remaining debts by selling off his/her personal assets.
The entrepreneur has to take personal responsibility for the debts of the business. He/she cannot say they are business debts and I am not responsible for them personally. The entrepreneur's liability is unlimited.
PartnershipIf the entrepreneur on his/her own cannot invest the total amount, but a few (say 10) of his/her friends together can raise the capital and loan to the required extent, they can do the business together. In this case all of them together are the owners of the business and together they are called the partnership firm. It is the firm which owns this business. The firm is a collective identity for all of them together.
Even in this case, if the business is wound up and the assets of the business are not sufficient to clear the debts of the firm, each partner has a joint and several responsibility to clear the debts of the firm using his private estate. The responsibility of the partner is joint (i.e. responsibility to clear his proportionate share of the un cleared debts) as well as a several (i.e. responsibility to clear all the unpaid debt of the firm in case the other partners do not have enough private assets to clear their share). This responsibility accrues to a partner irrespective of his share (i.e. a partner with a very minute share say 1% may be needed to take up the total responsibility if so required.
Need for looking at alternate business formsIf the entrepreneur cannot pool up the resources from a few persons and intends to raise the resources from many more persons he/she cannot form a partnership. There is a restriction on the maximum number of members in a firm (20 for normal business and 10 in case of banking business). If entrepreneur intends to collect capital from more than 20 he/she has to look at alternative business forms.
Co-operative SocietyIf the existence of the business itself is beneficial to the prospective customers apart from the fact that it generates profits, it would be possible for the entrepreneur to convince the prospective customers into investing in the business.
Members - Share CapitalSince the entrepreneur cannot raise the investment on his/her own he/she would call for investments in a cooperative society from the prospective customers. Investors in such a form of business are called members of the society. The amount of investment is called their share capital. Even people capable of investing small amounts can become members.
The utility derived from the existence of business would be the primary factor driving the prospective customers into investing, as this form of organisation does not allow for distribution of profits. Profits can only be utilised for improving the services to the investing customers.
An artificial juridical personThe society is an artificial person who owns the business. The society can sue and be sued on its own name. If some one owes money to the business run by the society, it can file a suite in the court of law. In such a case the society becomes the plaintiff and the person who owes money the respondent. If the society owes money to some one that person can move the court asking for justice. In such a case the person becomes the plaintiff and the society the respondent.
Members - Limited LiabilityAll the assets, all the profits earned, etc., belong to the society and all the risks of the business are totally borne by the society. The members of the society are not personally liable for the debts of the organization (society) unless they have given a personal guarantee. The maximum loss to the members investing would be the amount of investment they have made. Thus their liability is said to be limited. Limited to the extent of their share capital.
Bye Laws - Co-operative Societies ActBecause of the involvement of investments of many people, the rules and regulations governing the activities of the society are clearly framed and laid out at the time of formation of the society, which are called the bye laws of the society. The bye laws express what the society can/should do and what it cannot/should not do.
Since there is an involvement of investments of lot of people, the government also takes responsibility to ensure that the operations of the organisation are proper and no one is cheated. For this reason, the society is also governed by the provisions of the Societies Act enacted by the government, within whose frame work it has to work.
SecretarySince a society is an artificial person and has an identity recognized by the court of law it is called an artificial juridical person. Since the society is artificial it has to have some one who takes care of ensuring that every thing being done is as per the bye laws of the society and within the legal frame work. This person is called the "secretary" of the society.
A secretary of the society is in a way a live form of the artificial entity. The society has a seal (which is like the signature) which is to be authenticated (every time it is used) by a relevant person like the secretary.
CompanyThe disadvantage with a society is that the profits of the business cannot be distributed among members in cash. They can only be utilised for the benefit of the members.
The people willing to invest may not always be the ones who would benefit out of the existence of the business. In such cases, they can be motivated into investing only if profits are distributed to them. In such situations, the business organisation can be established in a form that is similar in working to that of a society with no restriction on distributing profits to members. Such a form of organisation is called a "Company".
Share Capital - Share HoldersThe Company form of organisation enables the entrepreneur to raise capital through contributions from many people in small amounts even and establish the business. The investors are called Share holders and their investment is called the share capital.
Distribution of profits - DividendsProfits made by the company can be distributed to the share holders in cash or in any other form. Such distribution of profits is called payment of dividend.
Limited LiabililtyThe business is owned by the company and the company is responsible for all the debts and liabilities. The share holders of the company are not personally liable for the debts of the organization (company ) unless they have given a personal guarantee. The maximum loss to the share holders would be the amount of their share capital. Their liability is said to be limited. Limited to the extent of their share capital.
Artificial Juridical PersonA company is also an artificial juridical entity which owns the business. It can sue and be sued on its own name. It has a seal which acts like its signature.
Memorandum and Articles - Companies ActSince the investment related to many persons is involved all the rules and regulations in relation to the company are put down in a written form. The documents containing such rules/bye-laws are called the memorandum and articles of association of the company.
Since the investments relating to many are involved the government also takes responsibility to ensure that the operations of the organisation are proper and no one is cheated. Every company is also covered by the provisions of the Companies Act, enacted by the government and has to work within the provisions of that act.
Company SecretarySince the company is also an artificial person it also should have some one who takes care of ensuring that every thing being done is as per the memorandum and articles of association of the company and within the legal frame work of the companies Act.
This person is called the "secretary" of the company. Under Sec 383 of the Companies Act, every company with a paid up share capital of Rs 2 crores or more as prescribed by the central government are statutorily required to appoint a whole time company secretary who is a member of the ICSI.
CS - representative/custodian of the body corporateThe major function of the company secretary is to act a custodian to the company. He/She is entrusted with the responsibility of ensuring that the operations are within the purview of the memorandum and articles as well as the companies act. He/she is the custodian of the artificial person, the company.
Though the custodian of a society is also called a secretary, the profession of CS is more related to companies.