SYNOPSIS- III THE NON CORPORATE SECTOR

. Sole proprietorship
"The one-man control is the best in the world if that man is big enough to manage
everything." –
W.R. Basset.

Historically, it appears that business first started with this form of organization. One of the
oldest, simplest and most commonly used forms of business organization which is owned
financed, controlled and managed by only one person is called as sole proprietorship,
single entrepreneurship or Individual proprietorship.

Characteristics of sole proprietorship:

As 'sole' means single and 'proprietor' means owner, this type of business is one person
show exhibiting following features:
1) Individual ownership: This business is exclusively owned by a single person.
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2) Individual management and control: "What is to be done, how it is to be done, and
when it is to be done‖ - all affairs are managed and controlled by the sole proprietor.
Though, competent people can also be employed for efficient management.
3) Individual financing: All investment is made by the proprietor. Though, if required
he/she has access to loans and debts to procure funds for business.
4) No separate legal entity: Legally, the proprietor and proprietorship are one and the
same business and owner exists together, thus with owner's death, business too dies.
5) Unlimited liability: The proprietor is liable/responsible for all losses arising from
business. In case the business assets are insufficient to pay off liabilities, his/her
personal property can be called upon to pay his business debts.
6) Sole beneficiary: The sole proprietor alone is entitled to all the profits and losses of
business. So he/she puts his/her heart and soul to increase his/her profits.
7) Easy formation and closure: Sole proprietorship is subjected to minimum legal
formalities and regulations both at the time of commencing and/or closing.
8) Limited area of operation: This form of business generally has a limited area of
operation due to:
limited finance availability
limited managerial abilities
Suitability of sole proprietorship form of business
The success or failure of an enterprise depends upon the intelligence, competence and
sensible decision making capacity of the entrepreneur. Before opting for sole
proprietorship, an entrepreneur should carefully compare and evaluate pros and cons of
this form. Basically, this type of form is suitable when:
1. Capital requirement is limited
2. Confidentiality / secrecy is important
3. Market is local
4. Goods are of artistic nature or demands customized approach
5. Quick decision–making is necessary
6. Size of the venture is small.

Legal formalities involved

Sole proprietorship registration procedure
A sole proprietorship does not need to be registered (so yes, 'registration of a sole
proprietorship' is a wrong thing to say) and is therefore an inexpensive manner of
commencing business.
However, in order to start a sole proprietorship an entrepreneur requires certain industry
specific licenses. A few general factors are:
1. Business name: Sole proprietors are under no obligations to select a trade name for
their business. How so ever they are free to do so if they desire to.
2. Service tax registration: Form ST 1 is to be filled for registration if the taxable
services are more than 10 lakh for a financial year.
3. VAT/CST registration: If proprietorship is selling tangible goods within a state then
VAT applies, if it is inter-state then CST applies. The threshold for registration for
VAT varies depending on the city in which entrepreneur commences business but a
CST registration is imperative if he/she affect an inter-state transfer.
4. Others: PAN Card no. of the sole proprietor, bank account no. in the name of sole
proprietorship business, Shops & Establishment License, Employee Provident Fund
Registration or Importer Exporter Code (if in export-import business) as and where
applicable, have to be complied with.
5. Payment of taxes: A sole trader has to ensure his/her business meets the state and
federal taxation requirements. Due to the fact that legally, a sole tradership and a
sole trader are a single entity, the sole trader bears the taxes of the business.

PONDER
 II. Partnership
"TWO HEADS BEING BETTER THAN ONE."
Growing Trend – Partner Up!
TATA wants to make HBO the most sought after premium subscriber – based channel in
India.
Apart from HBO, the company also has two other channels, both HD HBO Hits and HBO
Defined, in partnership with Eros.
WHO SAYS PARTNERSHIP IS RESTRICTED TO INDIVIDUALS ALONE?
Partnership form of organisation has developed due to the inherent limitations of sole
proprietorship i.e.
a) Limited capital
b) Limited managerial ability
c) Limited continuity
In this era of specialization, expansion and diversification,
expecting one man to combat them all is not possible.
Business acumen and wealth seldom meet in one person.
This, desirable combination probably led to the emergence
of Partnership form of business.
Meaning:
A partnership is an association of two or more persons to carry on, as co-owners, a
business and to share its profits and losses.
Thus, two or more persons may form a partnership by making a written or oral agreement
to carry a business jointly and share its proceeds.
To Quote Authors....
"Two or more individuals may form partnership by making written or oral agreement that they
will jointly assume full responsibility for the conduct of business."
— John A. Shubin
"The relationship between persons who agree to carry on a business in common with a view
to
private gain is partnership."
— L.H. Haney
"Partnership is a relationship between persons who have agreed to share the profits of a
business
carried on by all, or any of them acting for all."
— Indian Partnership Act, 1932.
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Characteristics of partnership:
The essential features of partnership are as follows:
1) Two or more persons:
Partnership is the outcome of a contract. Thus:
a) There must be at least 2 persons to enter into contract to form partnership.
b) Minors cannot form a partnership firm as they are incompetent to enter into
contract but can be admitted to the benefits of a running firm.
c) If these people intend to do banking business, the maximum number can be ten
otherwise twenty for the other business.
2) Agreement:
The relation of partnership arises from contract and not from status. Though oral
agreement is even acceptable but in practice written agreement is much more
advisable as disputes can be resolved better with it.
3) Profit sharing:
The objective of the business is to make profits and distribute the same amongst
partners. Any association initiated to do charity work is not partnership.
4) Unlimited liability:
Mostly, the liability of the partners of a firm is unlimited. Their personal properties can
be disposed off to pay the debts of the firm if required. The creditors can claim their
dues from any one of the partner or from all of them, meaning partners are liable:
Individually
Collectively
5) Implied authority:
There is an implied authority that any partner can act on behalf of the firm. The firm
stands bound by the acts of partners.
6) Mutual agency:
The business of partnership can be carried on by all the partners or any one of them
acting for all. Thus, every partner is principal as well as agent of other partners and
of the firm. Thus, (i) Each partner is liable for acts performed by other partners, (ii)
Each partner can bind other partners and the firm by his acts done in the ordinary
course of business.
7) Utmost good faith:
Every partner is supposed to act honestly and give proper accounts to other
partners. Thus, mutual faith and confidence in one another is the main strength of
partnership.
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8) Restriction on transfer of shares:
No partner can sell or transfer his share to anybody else without the consent of the
other partners. By giving a notice for dissolution of the firm, a partner can show
intention to discontinue as partner.
9) Continuity:
A partnership continues up to the time that all partners desire to continue it. Legally,
a firm dissolves on the retirement, death, bankruptcy lunacy, or disability of a
partner if not otherwise provided for in the partnership deed.
Take a Partner when you trust your Partner Case Study
Steve Perlman, the inventor of Web TV, built his first home computer when he was only
fifteen
years old. In 1995, he created a working prototype of the Web TV box.
He and a fried Bruce Leak, started a firm with another friend Phil Goldman and began to sell
Web
TV out of the guest bedroom in Perlman's house.
Perlmann, being something of a mad scientist, buried himself in development and let his
partners
worry about the money. By 1997, Perlman had raised and burned through $ 46 million
developing
Web TV. Luckily, that's when Microsoft's came calling. Joining Microsoft's team netted
Perlman
and his two partners around $ 70 million apiece.
TRUST AND CONFIDENCE ARE THE PILLARS FOR GREAT PARTNERSHIP.
Suitability
The use of better sophisticated production techniques has necessitated more investments.
Complex nature of businesses needs expert managerial hands. Thus, partnership form of a
business is an ideal choice for starting a new venture, if the entrepreneur's–
1) capital and managerial requirements are higher as compared to that of sole
proprietorship,
2) enterprise falls in the category of either being a small or a medium scale enterprise,
3) direct contact with the customers is essential.
Consequences for non–registration of a partnership firm:
Partnership firms in India are governed by the Indian Partnership Act, 1932. While it is
not compulsory to register your partnership firm as there are no penalties for
nonregistration,
it is advisable since the following rights are denied to an unregistered firm:
1) A partner cannot file a suit in any court against the firm or other partners for the
enforcement of any right arising from a contract or right conferred by the
Partnership Act.
2) A right arising from a contract cannot be enforced in any Court by or on behalf of the
firm against any third party.
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3) Further, the firm or any of its partners cannot claim a set off (i.e. mutual adjustment
of debts owned by the disputant parties to one another) or other proceedings in a
dispute with a third party.
Drafting of partnership deed:
Partnership is an agreement between persons to carry on a business, entered into either
orally or in writing. It is always desirable to have a written agreement so as to avoid
misunderstandings and unnecessary litigations in future. When the agreement is in
written form, it is called a 'Partnership Deed'. It must be duly signed by the partners,
stamped and registered. Any alteration in one partnership deed can be made with the
mutual consent of all the partners.
Although it is left to the choice of the partners of the firm to decide themselves as to what
should be mentioned in their partnership deed, yet a partnership deed generally contains
the following:
1. Name of the firm.
2. Nature of the business.
3. Name of partners.
4. Place of the business.
5. Amount of capital to be contributed by each partner.
6. Profit sharing ratio between the partners.
7. Loans and advances from the partners and the rate of interest thereon.
8. Drawings allowed to the partners and the rate of interest thereon.
9. Amount of salary and commission, if any, payable to the partners.
10. Duties, powers and obligations of partners.
11. Maintenance of accounts and arrangement for their audit.
12. Mode of valuation of goodwill in the event of admission, retirement and death of a
partner.
13. Settlement of accounts in the case of dissolution of the firm.
14. Arbitration of case of disputes among the partners.
15. Arrangements in case a partner becomes insolvent.
Registration procedure
A partnership firm can be registered whether at the time of its formation or even
subsequently. Entrepreneur needs to file an application with the Registrar of Firms of the
area in which his/her business is located.
Step: 1
Application for partnership registration should include the following information:
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1) Name of the firm
2) Name of the place where business is carried on
3) Names of any other place where business is carried on
4) Date of partners joining the firm
5) Full name and permanent address of partners.
6) Duration of the firm
Step: 2
Every partner needs to verify and sign the application. Ensure that the following
documents and prescribed fees are enclosed with the registration application.
a) Application for registration in the prescribed form-I.
b) Duly filled specimen of affidavit
c) Certified copy of the partnership deed
d) Proof of ownership of the place of business or the rental/lease agreement thereof
It may be noted here that, the name of the partnership firm should not "contain any words
which may express or imply the approval or patronage of the government except where
the government has given its written consent for the use of such words as part of the
firm's name."
Once the Registrar of Firms is satisfied that the application procedure has been duly
complied with, he/she shall record an entry of the statement in the Registrar of Firms and
issue a Certificate of Registration.

IV. Joint Hindu family / firm (HUFs):

Joint Hindu family or Hindu Undivided Family Business is a unique form of business
organisation prevailing only in India. It is governed by Hindu law and represents a form
which is owned, managed and controlled by the male members of a joint Hindu family.
Meaning of HUFs: The HUFs have been defined under the Hindu law "as a family, which
consists of male lineally descended from a common ancestor and included their wives and
unmarried daughters." The relation of HUFs arises from the status not from legal
contracts. Creating HUFs are the best possible way to save taxes.
Schools of law under HUF: Two schools of law are there in order to create a HUF:
a) Dayabhaga – It is prevalent in West Bengal and Assam. As per this school of law, the
son acquires the right in the family property only after the death of his father.
b) Mitaakshara – It is prevalent in rest of India under which, the son acquires the right
in the family property right from his birth.
There are two conditions for existence of HUFs. They are:
1) Minimum two members must be there in the family.
2) Existence of some ancestral property.
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Characteristics of Hindu undivided family
The main features of HUF are as follows:
1) Creation: It arises by status or operation of Hindu Law.
2) Membership: A male member becomes a member merely by his birth. By adoption,
an outsider can be admitted to its membership but not otherwise.
3) Management: The senior most male member of the family known as 'Karta' manages
the affairs, having unlimited powers. The other male members called 'Coparceners'
have no right to deal with outsiders or inspect accounts.
4) Liability: The liability of Karta is unlimited and that of coparceners is limited to the
extent of their share in property which is jointly held by the family. The self-acquired
property of any member cannot be taken in order to satisfy business liabilities.
5) Right of Accounts: The members other than Karta do not have right to inspect
and/or copy contents of the account books.
6) Minor as member: A male from the time of his birth becomes the member in this
form of enterprise.
7) Dissolution: The HUF continues to operate forever as death of members does not
effect it. As upper links are removed by death, the lower ones are added by birth. So
there is no limit to its membership. But if all members want to mutually dissolve the
firm, they can do so.
8) Implied Authority: Only the Karta has implied authority to bind the HUF by acts
done in the ordinary course of the business of the firm. That's why he alone has
unlimited liability.
Legal formalities involved
Steps involved in creation of HUFs
Entrepreneur who is interested to operate his/her enterprise as an HUF is required to
comply with following requirement.
1) Capital and members: For an HUF to be created the major requirements is the
capital and persons. Capital can be in the form of ancestral property, assets gifted by
relatives and friends, or received by the HUF through a will. The minimum no. of
members required is two.
2) Select a suitable name: The HUF to be created should have proper name.
Entrepreneur should select a proper name for the HUF, ensuring it does not violate
the laws or have any negative impact.
3) Form a Deed: Formation of HUF should be embodied in a deed which provides that
a proper legal deed or agreement is required before creating a HUF, disclosing the
name of Karta, coparceners, address and source of funds in the corpus.
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4) Apply of PAN: Application of PAN (Permanent Account Number) is also an
important step to be undertaken while forming a HUF. After executing the deed, the
Karta is required to obtain a permanent account number PAN for the HUF.
Obtaining PAN is a mandatory requirement as all financial transactions shall carry
PAN.
5) Open a Bank Account: After PAN has been allotted, the Karta is required to open a
Bank a/c in the name of the HUF. It is also advisable to get some stationery printed
for official communication. The HUF is now ready to function. The Karta will have
to invest in tax saving instruments and file tax returns on behalf of the HUF. Only
the money related to the business of HUF shall be invested in such Bank accounts.
Some Interesting Information
1. The daughter after her marriage ceases to be a member of her father's HUF. After
marriage she becomes the member of her husband's HUF.
2. Adopted child can become the member but he cannot become the coparcener.
3. The HUF continues to exist in the hands of the female members after the death of the
male member.
4. A widow cannot be the Karta of the HUF as she is not the coparcener.
5. HUF is a separate entity for income tax purposes under the provisions of Section
2(31) of the Income Tax Act.