ASSIGNMENT 2

BUSINESS LAW

Submitted by
M.P.K SRIHARI
M20202709
Group2
Types of Legal Structures for Business:

1. Sole Proprietorship

2. Partnership

3. Limited Liability Company (LLC)

4. Joint stock company (Private and Public)

Sole Proprietorship

The sole proprietorship is a popular business structure that is best suited to small firms, especially
in their early years of operation. A sole proprietorship is a type of business entity that is owned,
managed, and controlled by a single person who receives all profits and bears all risks.

Features of Sole Proprietorship:

 In a sole-proprietary business, just one individual is the proprietor.

 In this type of business, the proprietor is the single beneficiary of profits. If there is a loss,
he must face it alone. As a result, the proprietor bears all of the commercial risks.

 The sole proprietor is responsible for the management and control of this sort of business.

 The government does not interfere with the operation of a sole proprietorship.

 The owner makes all of the crucial decisions. He keeps all of the company secrets to
himself.

Advantages

 It is the simplest to set up because it does not necessitate the filing of any paperwork, and
the profits go solely to the solitary proprietor. The business is completely under the owner's
control, and he or she controls all of the choices.

 Tax forms are not difficult to fill out.

 Assets are simple to liquidate after the owner's death.

 Disadvantages

 The owner is legally liable indefinitely; • Proprietorships are unable to receive funds from
outside investors.
 Getting a loan is more challenging. Banks are hesitant to give sole proprietorships business
loans.
 When the owner dies away, the business will be liquidated.

Facts: Flipkart and Snapdeal started their business as sole proprietorship companies in India
Partnership

A partnership is a legal entity formed by two or more people who want to do business for a profit.
Partnerships are simple to form and administer, but a complete partnership agreement should
describe each participant's interest, liability, and position within the partnership to safeguard each
partner. Individuals, businesses, schools, governments, and other entities may form a partnership.

Features of Partnership:

 A partnership is created when two or more people agree to work together to carry on a
business. A document called as a Partnership Deed lays out the terms and conditions of a
partnership.

 Partners in a partnership firm are entitled to a share of the earnings and, if necessary, to
suffer the losses.

 The partnership business might be run by all or any of the partners acting on behalf of the
others. As a result, each partner is a principal and can act independently. At the same time,
he can act as an agent on behalf of other partners.

 As in the case of a solo proprietorship, partners' liability is unlimited.

 It is not necessary to register a partnership firm in order to form one. It may, however, be
registered with the Registrar of Firms if the partners agree.
 Advantages of partnerships:

 Using shared resources allows the company to raise additional funds.

 Partnerships are simple to manage because they don't require annual meetings or meeting
minutes. • Each partner shares the company's total profits.

 A proprietorship's flexibility and simplicity are similar.

 Your partners' skills may be complementary.

Disadvantages:

 Each partner is fully liable for any debts and losses.

 It's difficult to sell a business—you'll need to locate a new partner.

 A partnership comes to an end when one of the partners decides to end it.

 If a detailed partnership agreement is not in place, the business may suffer.

 Decision-making is decentralised.

Facts: Hindustan Petroleum, Mahindra and Mahindra, Maruti Suzuki, Renault India are registered
under the 1932 act of Indian Partnership Act.
 Limited Liability Company (LLC)

A limited liability company (LLC) is a legal entity that exists independently of its owners
(members). LLCs bring together some of the best aspects of a partnership with the benefits of a
corporation.
A limited liability company (LLC) is a hybrid business form that combines the legal liability
protection of a corporation with the operational flexibility of a partnership or sole proprietorship.

Features
 Limited Liability Partnership Act 2008 (LLP Act), an LLP is a body corporate, formed and
incorporated under the Act. It is a legal entity separate from its partners.
 Unlike a general partnership firm, a limited liability partnership can continue its existence even
after the retirement, insanity, insolvency or even death of one or more partners. Further, it can
enter into contracts and hold property in its name.
 Just like a corporation or a company, it is a separate legal body. Further, it is completely liable
for its assets. Also, the liability of the partners has certain limitations in their contribution to the
LLP. Hence, the creditors of the LLP are not the creditors of individual partners.
 Another difference between an LLP and a partnership firm is that independent or unauthorized
actions of one partner do not make the other partners liable. All partners are agents of the LLP
and the actions of one partner do not bind the others.
 A private company, firm, or an unlisted public company or a small business can convert into
an LLP in accordance with the provisions of the Act.

Advantages

 The owners have limited liability. The owner's personal assets are protected from
judgments and defaults on company debts.

 Owners can choose how the business pay taxes. It could be a proprietorship, a
partnership or a corporation.

 Most states don't require LLCs to have annual meetings.

  An LLC is not required to have a board of directors.

 The number of shareholders is unlimited.

Disadvantages

 Legal and accounting costs are higher than proprietorships.

 LLCs must file articles of incorporation with the state of domicile.

 Owners must create an operating agreement that defines management authority and
limits to making decisions.

 In some cases, an LLC will cease to exist upon the death of a member, unless otherwise
specified in the operating agreement.

Facts: There are more than one lakh LLP company registrations in India

Joint stock company (Private and Public)

A voluntary union of persons with distinct legal existence, permanent succession, and a common
seal is classified as a company. According to the definition, a corporation must be formed by a
group of people who willingly agree to do so. When a corporation is founded, it becomes a
separate legal entity with its own name. Changes in membership have no effect on its existence.
The corporation form of organisation is seen to be the best for organising large-scale business
activities because it is free of the capital and management constraints that other forms of
organisation have.
FEATURES

 Separate Legal Entity – A joint stock company is an individual legal entity, apart from
the persons involved. It can own assets and can because it is an entity it can sue or can be
sued. Whereas a partnership or a sole proprietor, it has no such legal existence apart from
the person involved in it. So the members of the joint stock company are not liable to the
company and are not dependent on each other for business activities.
 Perpetual – Once a firm is born, it can only be dissolved by the functioning of law. So,
company life is not affected even if its member keeps changing.
 Number of Members – For a public limited company, there can be an unlimited number
of members but minimum being seven. For a private limited company, only two members.
In general, a partnership firm cannot have more than 10 members in one business.
 Limited Liability – In this type of company, the liability of the company’s shareholders is
limited. However, no member can liquidate the personal assets to pay the debts of a firm.
 Transferable share – A company’s shareholder without consulting can transfer his shares
to others. Whereas, in a partnership firm without any approval of other partners, a partner
cannot move his share.
 Incorporation – For a firm to be accepted as an individual legal entity, it has to be
incorporated. So, it is compulsory to register a firm under a joint stock company.

ADVANTAGES
 The huge capital required by modern enterprises would not be possible under other forms
of organisations like sole individual proprietorship and even in partnership. The joint
stock company by its widespread appeal to investors of all classes can raise adequate
resources of capital required by large-scale enterprise.
 Liability of the shareholders of a company is limited to the face value of the shares they
have purchased. It has a stimulating effect on investment. The private property of
shareholder is not attachable to recover the dues of the company.
 The organisation of a company as a separate legal entity gives it a character of
permanence or continuity. As an incorporated body, a company enjoys perpetual
existence.
 Since the company operates on a large scale, it would result in the realisation of
 economies in purchases, management, distribution or selling. These economies would
provide goods to the consumer at a cheaper price.
 As there is no restriction to the maximum number of members in a public company,
expansion of business is easy by issuing new shares and debentures.
 The shareholders of a public company are entitled to transfer the shares held by them to
others. The shares of most joint stock companies are listed on the stock exchange and
hence can be easily sold.
 Company pays lower tax on a higher income. This is because of the reason that the
company pays tax on the flat rates. Similarly, company gets some tax concessions if it
establishes itself in a backward area.

DISADVANTAGES
 Costly and difficult to form : Number of legal formalities must be observed by the
promoters of the company. To observe these legal formalities, promoters have to spend
much time and money.
 Scope for dishonest and unscrupulous management: The directors manage the company
with the help of paid officers. If the directors are dishonest, they may make personal gain
at the expense of the company. They may misuse their power and position.
 Management oligarchy: A few rich persons may secure control over the affairs of the
company. Thus, the management of a joint stock company might become oligarchic in
character.
 Nepotism: Directors and managing agents may appoint their own relatives as the
important officers of the company. Merit may not be given importance.
 Speculation: A few individuals may corner the shares to gain control over the company.
 Lack of interest: The officers of the company do not have incentive to work hard. They
are not usually inclined to take risks. They lack initiative.
CASE STUDY

The principle of separate corporate personality has been firmly established in the common law
since the decision in Salmon vs Salmon Ltd whereby a corporation has a separate legal
personality, rights and obligations totally distinct from those of its shareholders.

Merits of Company

 The biggest advantage of a company organisation is that it has the ability to collect large
amounts of funds.
 Another advantage of the company form of organisation is the limited liability of
members.
 A company is the only form of organisation which enjoys continuous existence and
stability. The funds invested in a company by shareholders are not withdrawal until it is
wound up.
 As the membership is very large, the whole business risk is divided among the several
members of the company. This is an advantage particularly for small investo

Limitations of Company

 The registration of a company is a long-drawn process. A number of documents are to be

prepared and filled.
 A company is subject to government regulations at every stage of its working.

 In large companies, decision making and its implementation happen to be a time

consuming process.
 Compared to proprietorship and partnership, a company has to comply with more
legal requirements. It consumes considerable time and effort.
CASE STUDY
Lee established a corporation in which he served as managing director. In that capacity, he
appointed himself as the company's pilot. He was killed in a plane crash while on business for
the corporation. His widow filed a claim for personal injuries sustained by her husband while
he was working. Because L & Lee's Air Farming Ltd. and L & Lee's Air Farming Ltd. were
the same person, it was contended that no compensation was needed.

JUDGEMENT

1 .L was a separate person from the firm he founded, and he was entitled to remuneration.
2. His widow was awarded benefits under the Workers' Compensation Act.
3. A shareholder of a firm can enter into a contract with that company.
4. For the purposes of workmen's compensation legislation, the directors are not prohibited
from working for the company.