Advantages and disadvantages of a ‘Company’ over other forms of Business Organisations

Advantages and disadvantages of a ‘Company’ over other forms of Business Organisations

The difference between a company and other forms of business organization is quite overlapping. Businesses have become an integral part of modern political and economic systems and are the dominant force on national and international markets. 

A company is an association of people contributing money or common objectives in some trade or business for profit. Other forms of business may include a sole trader, partnership, franchise, and many more. Each type has unique characteristics and attributes. 

The company form of business organization is more suitable in the case of large-scale production. 

This article shall discuss the advantages and disadvantages of a ‘Company’ over any other form of business organization. 

1. Forms of Business Organizations 

There are following types of business organizations

  1. Company
  2. Sole Proprietorship
  3. Partnership Firms
  4. Limited liability Partnership
  5. Corporations

Now we will discuss the above-mentioned forms of business organization.

1. Company

Section 2(20) of the Companies Act, 2013 defines a company as “a company incorporated under the Companies Act, 2013 or under any previous company law.” 

A company is a voluntary association of a group of persons associated for a common purpose such as business, sports, research, etc. 

The association of persons can be natural or legal or a mixture of both sharing a common end of profit. A Company is a legal person. It is created and dissolved by the process of law. The company may enter into contracts, purchase, and sell the property. The company can sue and be sued by outsiders as well as by its members. A company can be public, private, limited by shares, limited by guarantee, unlimited and one-person company.

2. Sole Proprietorship 

A sole proprietorship is a business with a single proprietor or owner. It is the most basic type of for-profit organization and the least regulated by the government. The owner of a sole proprietorship makes all the decisions about the business and is free to keep all the profits he or she makes from the business. 

However, the owner is also solely liable (responsible) for the debts of the business, meaning that his or her assets are at risk if the business cannot repay its debts.

3. Partnership Firms

When two or more people choose to own and operate a business together, the business is known as a partnership. Partnership firms are governed by The Indian Partnership Act 1932. There are 2 types of partnership.

General partnership, in this all the owners share in the financial profits and losses, and they share the liability for all of the debts. 

Limited partnership, in this one or more of the owners (called the general partners) run the business and have unlimited liability, or are held entirely responsible for the business’s debts. But there may also be limited partners in the business who invest in the business and have only limited personal liability for the business’s debts. 

4. Limited Liability Partnership (LLP)

In Limited Liability Partnership, all the partners have limited liability. In LLP each partner is not responsible or liable for another partner’s misconduct or negligence. 

A limited liability partnership is almost similar to a Limited Liability Company but different from limited partnership or general partnership. LLP is governed by the Limited Liability partnership Act 2008.

5. Corporations

Corporations are organized very differently from proprietorships and partnerships. The ownership of a corporation is represented by shares of stock that can be transferred between owners, or stockholders. 

A corporation is a legal entity, the corporation has designated rights, responsibilities, and privileges. When a corporation borrows money, it does so in its name, instead of the name of its assets founders or any other persons. 

As a result, the liability for the company’s debts is limited. A large corporation can have millions of owners or stockholders.

2. Difference between Company and other forms of Business Organizations

Company Other Business organization
A company requires a specific number of persons, provided by law to be associated legally and to register a company. A business organization is governed by self-employed individuals and the owner and management of the business are in their hands. 
A company is a form of business of any kind, whether it is small or large.A Business Organization works for a common and collective commercial purpose of profit to meet a specific demand in the market.
A company can be public, private, limited by shares, limited by guarantee, unlimited and one-person company.
Different forms of business can be sole traders, partnership firms, joint-stock companies, LLPs, franchises. 
A Company can be a business organization A business organization cannot be a company

3. Advantages of a ‘Company’ over other forms of Business Organizations

These are the advantages of a company over the other forms of business organizations

1. Finance Resources

Resources are the crucial part of a business setup or organization. Managing resources helps companies to work efficiently. Resources are required to meet the desires of business outcomes. Resources can be monetary, raw material, labour, land, or in any other form. 

In a company, capital can be raised by the issue of securities publically and privately in the case of the public and private company respectively. A company can collect a large sum of resources through shares. E.g. there is no maximum limit of no. of shareholders in a public company. Thus in times of need the number of shareholders can be increased.

2. Independent existence

 A company is a separate legal entity independent of its members. The members who compose it. The business to be carried out is in the name of the company, the liabilities are the company’s liabilities. The company can only be created and dissolved by law. A company is capable of owning, enjoying, and disposing of property in its name. The members of the company do not have any direct rights over the company’s property. Thus the claims of the company’s creditors will be against the company’s property.

3. Limited liability

In a company, the liability of the members of a company is limited to the extent of the amount unpaid on the shares held by them. The members of a company are not personally liable for its debts. The liability of each shareholder is limited to the nominal value of the share issued to them at par. In the case of an unlimited company, the liability of the member is enforceable at the time of winding up only.

4. Continuity of existence

A company is a separate legal person and it is independent of the members composing it. A company can be created and dissolved by law only. Since a company can only be dissolved by law thus doesn’t depend on the lifetime of a natural person and possess a continuity of existence. Change in members or insolvency or retirement or even death of any member does not affect the continued existence of a company. A company has perpetual succession. Whereas in the case of a partnership, the death of a partner dissolves the partnership automatically. 

5. Transferability of shares

The capital of a company is divided into small units or denominations called shares. The shares of a company are the property that is legally and freely transferable in the case of a public company. The company provides its members to sell their shares in the market and to get back the investment without having to withdraw the money from the company. The concept of transferability of shares provides stability to the company. In the partnership form of a business organization, a partner cannot transfer his shares unless he has the unanimous consent of all partners.  

6. Democratic structure

A company maintains a democratic structure. The alteration in the memorandum or article of association is done by a special meeting and resolutions, the procedure established by law. The board of directors is elected by the members of the company and the members have the right to decide the policies of the company. 

If the members behind the company are indulging in fraudulent practices then the law intervenes between using the principle of the lifting of the corporate veil.

4. Disadvantages of a ‘Company’ over other forms of business organizations

1. Formation 

The formation of a company requires a lot of planning, paperwork and has to go through different stages before registration. The first stage of promotion is itself expensive and tiring. A prescribed num. of persons is to be associated to make a company.

A number. of documents are to be filed with the registrar of companies of the state in the registered office.and then raising of capital. Then, after incorporating the company, all requirements and compliances are needed to be complied with the as per  the law provided.

2. Lack of privacy

In the case of a company, it is required to publish its capital structure, constitution, accounts, etc. by filing such required documents with the registrar of the companies. The policies, accounts, and workings of the company are to be discussed in the board meetings with all members. Thus leaving no privacy unlike other business organizations e.g. sole traders and partnership firms etc.

3. Long Procedure of decision making

Unlike other business organizations e.g. sole traders and partnerships, a single person cannot make the decisions in the case of a company. Decisions are to be taken either in the board meeting or in the general meetings. The procedure of calling a meeting of the board of directors or members has to be followed as  prescribed by law. 

4. Unlimited liability

In the case of an unlimited company, the liabilities of the members do not have a limit. The members of the company would be personally liable for the debts of the company when the assets are insufficient to meet the conditions of the debt. 

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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