Types of Business Organizations

The principal forms of business organisation in India are:

The first two options are generally not preferred as the entity is not a body corporate and liability is unlimited. A limited company incorporated under the Indian Companies Act is the preferred choice.

Companies are usually incorporated with limited liability by shares. They can be classified as private limited or public limited companies.

Two persons can form a private limited company. The maximum number of members in such a company cannot exceed fifty. Such companies are less regulated and enjoy certain privileges under the law as the interest of the public is restricted. Such companies cannot mobilise capital from the public. Under certain conditions, a private limited company may become a deemed public company and all rules applicable to a public company would apply to such companies.

If the initial investment is modest or if the investor can mobilise resources for the project, the company can be incorporated as a private limited company.

A public limited company can be incorporated by seven persons. There is no upper limit on the number of members. A public limited company has no restriction on the transfer of shares. It has to adhere to various stipulations under the law as the public has interest over such companies.

The procedure for incorporating a company, whether private or public is substantially the same. Incorporation documents such as Articles of Association, Memorandum of Association need to be filed before the Registrar of Companies located in various States of the country. These procedures are best handled by a practicing Company Secretary or legal consultants.

All companies are expected to maintain books of accounts on accrual basis to reflect a true and fair view of the state of affairs of the company. Accounts must be audited and adopted in the annual general meeting of the company. Periodic returns must be filed as per the law.

Companies are allowed to pay dividend only out of post tax profits. Providing for depreciation on fixed assets and transfer of a certain amount to reserves is mandatory under the law. A company may draw upon the reserves to declare a dividend, subject to the restrictions in the Act. Dividends are declared in percent terms, namely, as a percentage of the face value of the shares.
 

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