Unit-II Entrepreneurial Planning Synopsis-II Corporate Sector

Joint Stock Company

ONCE "ILLEGAL .... TODAY LEGALLY MOST DESIRABLE!!!
Joint stock company organisation was started first in Italy in the thirteenth century. During
seventeenth and eighteenth centuries, joint stock companies were formed in ENGLAND
under ROYAL CHARTER OR ACTS OF PARLIAMENT. The joint stock company form of
organisation got a great set back when "BUBBLES ACT OF 1720" declared promotion of
companies as ILLEGAL by ENGLAND'S PARLIAMENT. It was much later in 1844, that
the company form regained status after passage of THE JOINT STOCK COMPANIES ACT
IN 1844 and LIMITED LIABILITY granted only in 1855. The first Companies Act was
passed in India in 1850 and the principle limited liability was introduced only in 1857. Much
later in 1956, a comprehensive bill was passed and any firm incorporated under this Act was
started to be referred as "COMPANY".

Resources and the life span of both sole proprietorship and partnership form of
organisation stands limited with liabilities being unlimited.
To comply with these growing needs, the demand was on rise for:
1) Capital
2) Managerial talent and skills
3) Limited liability
Thus, joint stock company as a modern form of business organisation emerged to meet the
requirements of large sized business.
Meaning:
In common prevalence, a company means a voluntary association of a person formed for
some common object with capital divisible into units of equal value called 'shares' and
with limited liability. Company is a creation of law that is the birth of this artificial human
being is by law and it can be put to death by law only.
Definitions Well Known
"A joint stock company is a voluntary association of individuals for profit, having a capital
divided into transferable shares, the ownership of which is the condition of membership."
— Prof. L.H. Haney
"A company is an association of many persons who contribute money or money's worth to a
common stock and employ it is some trade or business, and, who share the profit and loss
arising there from."
— James Stephenson
According to section 3 of Indian companies act, 1956, "A company means a company
formed and registered under this act or any previous act."
Thus, a company is an association of persons who contribute money in the shape of shares
and the company gets a legal entity and enjoys a permanent existence.
Characteristics of a Company
A company is distinctive from other forms of organisation because of the following features:
1) Voluntary association
A single person cannot constitute a company. At least two persons, voluntarily, must
join hands to form a private company, while a minimum of seven persons are required for a
public company.
2) Artificial person
A company is created by law. Though, it has no body and no conscience, it still exists
as a person, having a distinct personality of its own. Because like a human being it can buy,
sell and own property, sue others, be sued by others, it’s called as an artificial person.
3) Separate legal entity
A company has an independent status, different from its members. This implies that
a company cannot be held liable for the actions of its members and vice-versa.
Company has a distinct entity separate from its members.
4) Common seal
Being an artificial person, company cannot sign the documents. Hence, it uses a
common seal on which its name is engraved. Putting the common seal on papers, is
equivalent to that of signatures of a human being, making them binding on the company.
5) Limited liability
The liability of the shareholders of a company is normally limited to the amount of
shares held or guarantee given by them.
6) Transferability of shares
No shareholder is forever wedded to the company. Subject to certain conditions, the
shares are freely transferable. The private companies do impose some restrictions on
the transfer of shares.
7) Diffusion of ownership and management
In this form of organisation, entrepreneur should clearly understand there exists
separation of ownership from management. As the shareholders could be scattered across
country here, they give the right to the
directors to manage the company's affairs.
8) Number of members
Private company:
Minimum required members : 2
Maximum members : 50 (excluding employees)
Public company:
Minimum requirement : 7
Maximum number : No limit
9) Limitation of action
The scope of this artificial person is determined by:
a) The Indian Companies Act
b) Memorandum of Association
c) Articles of Association
Any work done beyond what is stated in these documents can lead to winding up of
the process of the company.
10) Winding up
The mode of incorporation and termination (winding up) is both as per the
Companies Act only. It's born out of law and can be liquidated only by law.
Remember A joint stock company has to prepare 1. Memorandum of Association 2.
Articles of Association and 3. Prospectus for Registration these 3 documents are needed
to be submitted to the Registrar’s Office by the Promoters and once everything is found
correct the registrar issues Certificate of Incorporation
A Memorandum of Association (MoA) represents the charter of the company. It is a legal
document prepared during the formation and registration process of a company to define its
relationship with shareholders and it specifies the objectives for which the company has been
formed. The company can undertake only those activities that are mentioned in the
Memorandum of Association. As such, the MoA lays down the boundary beyond which the
actions of the company cannot go
Articles of association form a document that specifies the regulations for a company's operations
and defines the company's purpose. The document lays out how tasks are to be accomplished
within the organization, including the process for appointing directors and the handling of financial
records.
A prospectus is basically a formal and legal document issued by a body corporate
which acts for inviting offers from the public for subscription or purchase of any
securities. Every public company is entitled to issue the prospectus for its shares or
debentures. But, the same is not required for a private company
Choice to be made:
An entrepreneur, under the 'Company' form of organisation has a further choice to
incorporate an enterprise either as either a:
a) Private company or,
b) Public company
A) Private company
A private company:
1) has a minimum of two and a maximum of fifty members excluding its past and
present employees.
2) restricts the right of its members to transfer shares.
3) prohibits an invitation to the public to subscribe for any shares or debentures of the
company, or accept any deposits from persons other than its directors, members or
relatives.
4) has a minimum paid up capital of one lakh rupees (subject to change)
5) uses the word 'Pvt. Ltd.' at the end of its name.
B) Public company
Under Section 3(i) (ii) of the Companies Act, a public company is a company which is
not a private company. By implication, a public company:
1) has minimum seven people to commence with no upper limit to membership
2) does not restrict any transfer of shares
3) invites public to subscribe for its shares, debentures and public deposits.
4) has a minimum paid up capital of five lakh rupees.
5) uses the word 'Ltd.' at the end of its name.
Why private company is more desirable
Inspite of certain restrictions imposed on a private company, it enjoys certain privileges under
the Companies Act. A substantial number of entrepreneurs prefer to form a private company
because of the following important privileges:
1) Only two members are required to form a private company.
2) Only two directors are required to constitute the quorum to validate the proceedings of
the meetings.
3) Such company can file a statement in lieu of prospectus with the Registrar of
Companies.
4) It can commence its business immediately after incorporation. But in a Public Ltd.
Company another certificate needs to obtain i.e. Certificate to Commence the Business.
5) Holding of a statutory meeting or filing of a statutory report is required by a private
Company.
6) A non-member cannot inspect the copies of the profit and loss A/c filed with the
Registrar.
7) Limit on payment of maximum managerial remuneration does not apply to a private
company.
8) Restrictions on appointment and reappointment of managing director do not apply.
9) Maintaining of index of members is not required by a private company.
10) Directors of the private company need not have qualification shares.
The company form of organisation has shown phenomenal increase in almost all countries of
the world in the twentieth century.
Case Study-II
 Quest for Independence effects Form's Selection
William C. Durant, the founder of General Motors, started a variety of entrepreneurial
ventures, primarily in the fields of insurance, real estate and construction. None of them
really took off. Once he hitched a ride to work with a friend, nothing that his friend's new
'buggy' rode smoother than any he had been in. New design in the buggy's springs was the
reason for this. Durant, on learning that the Coldwater Road Cart Company made the
buggies with the improved springs, immediately offered to buy the company for $ 1500. For
this, he had to borrow $ 2000 from Citizen National Bank of Flint and made two sample
buggy carts. Within a week, the buggy was sold, leaving orders for 600 buggy carts and there
was no turning back and the turning point came in 1904, with BUICK MANUFACTURING
COMPANY offering Durant partnership, as they were both in need of fresh source of capital
and the famed selling abilities of Durant But, Durant agreed to come in only if he could have
absolute managerial control and finally took over the BUICK COMPANY.
Suitability
On comparing the advantages and limitations of company form of business, it is suggested
that
an entrepreneur should choose this form provided his/her:
1) Venture is a heavy and basic industry type
2) Large-scale operations are involved
3) Business requires huge funds
4) Enterprise involves heavy risks
5) Enterprise is technologically complex and sophisticated, banking heavily upon experts
and professionals.
To commence a "Company" in India
The idea of forming a company is conceived either by a person or by a group of persons
known as promoters. Our entrepreneurs are basically the promoters as they are the ones who:
a) Conceive the idea.
b) Scan it against the environmental forces to establish its feasibility and viability.
c) Procures the resources essential for its commencement.
d) Ensure the incorporation of the enterprise.
e) Arrange for commencing of the business.
g) Plans out expansion and diversification strategies.
The concept of the company is born in the entrepreneur's mind – they investigate the potential
and take a lead for bringing human resources, money, materials, machinery and methods
together for converting his/her dream into reality.
Legal formalities expected to be complied by the entrepreneur:
A heavy responsibility rests on the entrepreneur in translating his idea into a working reality.
The sphere of activities done during this stage is very wide encompassing:
1. Obtain PAN number from Income Tax Department What is PAN?
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued by the
Income Tax Department.
PAN enables the department to link all transactions of the ―person‖ with the department.
These transactions include tax payments, TDS/TCS credits, returns of income/wealth/
gift/FBT, specified transactions, correspondence, and so on. PAN, thus acts as an
identifier for the ―person‖ with the tax department.
It is mandatory to quote PAN in all documents pertaining to financial transactions.
Who must have PAN?
i) All existing assesses or taxpayers or persons who are required to furnish a return of
income, even on behalf of others, must obtain PAN.
ii) Any person carrying on any business or profession whose total sales, turnover or
gross receipts are or is likely to exceed five lakh rupees in any previous year;
iii) Any person, who intends to enter into financial transaction where quoting PAN is
mandatory, must also obtain PAN.
iv) The Assessing Officer may allot PAN to any person either on his/her own or on a
specific request from such person.
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2. Open a current account
Who can open a current account
i) Any person, competent to contract and satisfactorily introduced to the Bank may
open an account in his/her own name. He/she may not open more than one such
account. Accounts may be opened in the names of two or more persons and may be
made payable to.
ii) Accounts can be opened for sole proprietorship firms, partnership firms, private
limited and public limited companies, Joint Hindu families, trusts, clubs, associates
etc. satisfactorily introduced to the Bank and on fulfilling laid down procedures and
tendering required credentials.
iii) Accounts can be opened by minors of 14 years and above, if able to read and write,
in their sole names.
Basic common documentation
Proof of Identity: PAN Card, Voter Id Card, Passport, Driving License
Proof of Address: Latest Telephone Bill or Electricity Bill
Public or private limited companies
Certificate of incorporation and commencement of business
Memorandum and Articles of Association
Board resolution authorising the opening and operation of the account
PAN or GIR No. or completed Form 60
List of directors with residential addresses
3. Register your company (Pvt. Ltd/Public limited Company)
The following steps are involved in incorporating a private or public company in India
1. Name of the business entity
2. Register for e-filing at MCA (Ministry of Corporate Affairs) portal
3. Apply for Director Identification Number (DIN)
4. Obtain Digital Signature Certificate (DSC)
5. Register DSC at MCA website
6. Apply for approval of the name of the company
7. Formulate Memorandum of Association
8. Formulate Articles of Association
9. Verify, stamp and sign Articles of Association
10. Verify the various forms required for incorporation of the company
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4. Register for service tax
Service tax is, as the name suggests, a tax on Services. It is a tax levied on the transaction
of certain services specified by the Central Government under the Finance Act, 1994.
It is an indirect tax (akin to Excise Duty or Sales Tax), which means that normally, the
service provider pays the tax and recovers the amount from the recipient of taxable
service.
5. Register for VAT/sales tax
Value added tax (VAT)
VAT is a multi-point destination based system of taxation, with tax being levied on
value addition at each stage of transaction in the production/ distribution chain.
 The term 'value addition' implies the increase in value of goods and services at each
stage of production or transfer of goods and services.
VAT is a tax on the final consumption of goods or services and is ultimately borne by
the consumer.
For identification/registration of dealers under VAT, the Tax Payer's Identification
Number (TIN) is used. TIN consists of 11 digit numerals throughout the country. Its first
two characters represent the State Code and the set-up of the next nine characters can vary
in different States.
Sales tax
Sales tax is levied on the sale of a commodity, which is produced or imported and sold for
the first time. If the product is sold subsequently without being processed further, it is
exempted from sales tax.
Sales tax is paid by every dealer on the sale of any goods made by him in the course of
inter-state trade or commerce, despite the fact that no liability to tax is raised on the sale of
goods under the tax laws of the appropriate state.
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Sales tax ID number
A state Sales Tax ID number is essentially a business version of your PAN number, under
which you collect and pay tax for any service or product you sell, which in turn, qualifies
for taxation in your state.
6. Excise duty (If applicable)
What is excise duty? Is it collected by the State Government or the Central Government?
How is it different from sales tax?
Excise duty is a tax on manufacture or production of goods. Excise duty on alcohol,
alcoholic preparations, and narcotic substances is collected by the State Government and is
called "State Excise" duty. The Excise duty on rest of goods is called "Central Excise" duty
and is collected in terms of Section 3 of the Central Excise Act, 1944. Sales Tax is different
from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act
of manufacture or production of goods.
What categories of persons are required to obtain registration with the Central Excise
department?
Subject to specified conditions, generally the following categories of persons are required
to get themselves registered with the central excise department:
i) Every manufacturer of dutiable excisable goods;
ii) First and second stage dealers or importers desiring to issue Cenvatable invoices;
iii) Persons holding bonded warehouses for storing non-duty paid goods;
iv) Persons who obtain excisable goods for availing end-use based exemption.
What is the procedure for obtaining registration?
Apply to the nearest central excise division office in form A.1 along with a self-attested
copy of the PAN issued by the income tax department. After post verification, a regular
registration certificate in form RC is normally issued immediately, as far as possible.
7. Customs duty
Customs Duty is a type of indirect tax levied on goods imported either in or to India, not
both, as well as on goods exported from India. Taxable event is imported into or exported
from India. Import of goods means bringing goods to India from a place outside India.
India includes the territorial waters of India which extend up to 12 nautical miles into the
sea to the coast of India. Export of goods means taking goods out of India to a place
outside India.
8. File entrepreneurship memorandum at DIC (optional)
Although not mandatory, you may file part I of entrepreneurs memorandum to the
district industries centre. This may be necessary for claiming certain incentives / subsidies
and for certain formalities at the state level.
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9. Apply for TAN
TAN or tax deduction and collection account number is a 10 digit alpha numeric number
required to be obtained by all persons who are responsible for deducting or collecting tax.
It is compulsory to quote TAN in TDS/TCS return (including any e-TDS/TCS return), any
TDS/TCS payment challan and TDS/TCS certificates.
Who must apply for TAN?
All those persons who are required to deduct tax at source or collect tax at source on
behalf of Income Tax Department are required to apply for and obtain TAN.
10. Permissions required at the construction stage
These are some permissions which are required to be obtained from the government:
Application for plot/shed, offer letter, payment of earnest money deposit
Allotment of plot/shed, payment of balance occupancy price, taking over possession
thereof
Application for issuance of NOC/SSI registration
Execution of lease agreement
Application for grant of connection for construction water
Application for grant of connection for construction power
Post construction clearances
Building completion/drainage completion/tree plantation certificate
Permission for mortgage
NOC from Pollution Control Board
Final fire clearance
NOC from environment department
Industrial safety permit
Sanction of permanent power
Sanction of permanent water and sewerage connection
11. Employee's Provident Fund (EPF)
Applicable for establishments employing 20 or more persons
and engaged in industry.
12. Employee's State Insurance (ESI) scheme
The Act is applicable to non-seasonal factories employing 10 or
more persons.
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The scheme has been extended to shops, hotels, restaurants, cinemas including preview
theatres, road-motor transport undertakings and newspaper establishments employing 20
or more persons.
Steps involved in starting business in Mumbai
Registration requirements:
No. Procedure Time to complete Cost to complete
Co-operative Organisations
A co-operative is a different form of business enterprise as here, the main motive is not
earning profit but mutual help. It works with the principle of each for all and all for each.
"Co-operation is a form of organisation wherein persons voluntarily associate together as
human
beings on the basis of equality for the promotion of the economic interest of themselves."
— H.C. Calvert
The Indian Co-operative Societies Act, 1912 defines co-operative in section 4 as, "Society
which has its objectives as the promotion of economic interests of its members in
accordance with co-operative principle."
Features
Co-operative is a self-help as well as mutual help system, exhibiting following
characteristics:
1. Voluntary organisation: Co-operative organisation is a voluntary association of
persons desirous of pursuing a common objective. They can come and leave the
organisation at their own will without any coercion or intimidation.
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2. Democratic management: The management of a co-operative organisation is vested
in the hands of the managing committee elected by the members on the basis of 'one
member-one vote'. Democracy is, thus, the keynote of the management of a cooperative
society.
3. Service motive: Rendering services to its members rather than to earn profit as the
primary objective is the feature that distinguishes a cooperative organisation from
the other forms of business. The primary objective of a co-operative society is to
render services to its members rather than to earn profits.
4. Capital and return thereon: The capital is procured from its members in the form of
share capital. A member can subscribe subject to a maximum of 10% of the total
share capital or Rs. 1,000 whichever is higher. Shares cannot be transferred but
surrendered to the organisation. The rate of dividends paid to the members/
shareholders is restricted to 9% as per the Co-operative Societies Act, 1912.
5. Government control: In India, the activities of co-operative societies are regulated by
the Co-operative Societies Act and the State Co-operative Societies Acts. Cooperative
societies are required to submit their annual report and accounts to the
Registrar of Co-operatives.
6. Distribution of surplus: After giving dividends to the members, the surplus of
profits, if any, is distributed among the members on the basis of goods purchased by
each member from the society.
Entrepreneur does not find this form as a very desirable structure to start a new venture
because of his / her:
a) Quest for excellence
b) Drive for independence
c) Tendency to be project champion
d) Strong desire to succeed and earn profit
e) Creative and innovative nature
f) "Must be own boss", attitude.
g) Love for being a 'Leader' in the field.
h) Zeal to capture major market share.
Amazing Similarities!
Ray Kroc, founder of McDonald's, was selling milkshake machines when he was inspired to
turn the McDonald brothers hamburger restaurant into a International operation.
William C. Durant, the founder of General Motors, began his career as a buggy salesman.
King C. Gillette was a traveling salesman when he invented the safety razor.

No form is without merits and limitations. Entrepreneur needs to understand it better that
no form is the best form. Thus, selection of an appropriate form of business orgnisation is
a very difficult decision. With regards to special requirements of the enterprise if any,
mostly the selection of a form is to a great extent affected by:
1) Capital requirement of the enterprise
2) Risk and liability involved
3) Managerial control desired
4) Scale of operations involved
5) Continuity and stability demanded
6) Government regulations involved
7) Tax burden on the entrepreneur/enterprise
8) Nature of business
9) Confidentiality required
10) Flexibility desirable.
No single factor can help to decide the form. Thus, it's a summative effect of the factors to
be taken into consideration before opting the form of business ownership.