MBA

Term – 3

Individual Assignment

Legal Aspects of Business

Submitted to

Prof. D.G.Shukla

On 31/03/25

Submitted by

NAME ROLL NUMBER

Mahek Lakhwani 24MBA094

INDEX
1. Introduction
 2. Forms of Business Organizations
o Sole Proprietorship
o Partnership Firm
o Hindu Undivided Family (HUF)
o Co-operative Society
o Company (Private & Public)
3. Comparative Analysis of Company vs. Other Forms
o Legal Status
o Liability of Members
o Continuity and Perpetual Succession
o Management and Decision-Making
o Compliance and Regulatory Framework
o Taxation
o Fundraising and Capital Structure
4. Advantages of Company Form of Business
5. Disadvantages of Company Form of Business
6. APPLICABILITY OF COMPANIES ACT, 2013 – REAL-
WORLD IMPLICATIONS
7. CASE STUDIES AND REAL-WORLD EXAMPLES
8. Conclusion
9. References

1. INTRODUCTION

Purpose of the Report

This report's objective is to help a client determine which type of
business organization is best. In contrast to other business
structures like sole proprietorship, partnerships, Hindu Undivided
Families (HUF), and cooperative societies, it is imperative that a
manager of a partnership firm assist the client in comprehending
the benefits and drawbacks of switching to a company form under
the Companies Act, 2013.

An Overview of Forms for Business Organizations

There are various types of business organizations, and each is

subject to a different set of laws:

Common law rules apply to sole proprietorships.

 Sole Proprietorship: Governed by common law principles.

 Partnership Firm: governed by the 1932 Partnership Act.

• Hindu Undivided Family (HUF): regulated by the 1956

Hindu Succession Act and Hindu law.

• Cooperative Society: governed by the Cooperative

Societies.

 Company: Provides a distinct legal identity and organized

governance under the Companies Act of 2013.
 2. FORMS OF BUSINESS
ORGANIZATIONS

2.1 Sole Proprietorship The most basic type of business is a

sole proprietorship, which is run and owned by just one person.
The owner has complete authority over business operations and
decision-making. It has unlimited liability, which means the owner
is personally responsible for all company debts and obligations,
but it also requires little regulatory compliance. Furthermore, the
company does not have perpetual succession because it ends
when the owner passes away.

Advantages

• Simplicity of Formation and Dissolution: very few legal

requirements.

• Total Control: The owner decides on all business matters on

their own.

• Minimal Compliance: No required audits or statutory filings.

Disadvantages

• Unlimited Liability: In the event that the business experiences

losses, the owner's personal assets could be at risk.

• Limited Capital and Growth Potential: Loans or personal

resources are the only sources of funding.
  Lack of Continuity: The business ceases to exist upon the
proprietor’s death.

Comparison with Company Form

 Liability: A company offers limited liability, protecting

personal assets.

 Growth Potential: Companies can issue shares and attract

investors.

 Regulatory Burden: Companies face higher compliance

requirements than sole proprietorships.

2.2 Partnership Firm A partnership is a business structure

where two or more individuals come together to conduct business
under an agreement known as the partnership deed. Governed by
the Indian Partnership Act, 1932, it allows for shared
responsibilities and profit-sharing. However, like a sole
proprietorship, a partnership does not have a separate legal
entity, and partners have unlimited liability, except in the case of
a Limited Liability Partnership (LLP). Partnerships dissolve upon
the exit or death of a partner unless stated otherwise in the
agreement.

Advantages
  Ease of Formation: Requires a simple partnership
agreement.

 Pooled Resources: More capital and expertise compared to

sole proprietorships.

 Flexibility: Partners can tailor profit-sharing and

responsibilities.

Disadvantages

 Unlimited Liability: Each partner is personally liable for

business debts.

 Potential Disputes: Differences in opinion can lead to

conflicts.

 Limited Scalability: Growth is constrained without external

funding.

Comparison with Company Form

 Liability: Companies limit liability, unlike partnerships

where personal assets are at risk.

 Perpetual Succession: Companies continue beyond the

life of individual members.

 Compliance Requirements: Partnerships have fewer

statutory obligations than companies.
2.3 Hindu Undivided Family (HUF) Members of a joint Hindu
family make up the HUF, a distinctive business structure that is
common in India. Other members (coparceners) have equal rights
to the family property, while the oldest male member, known as
the "Karta," runs the company. An HUF has the advantage of tax
benefits under the Income Tax Act of 1961, but the Karta retains
ultimate decision-making authority and liability is unrestricted.

Advantages

 Tax Benefits: HUFs are taxed separately from individual

members.

 Continuity: Business passes down generations within the

family.

 Centralized Control: The Karta makes all major decisions.

Disadvantages

 Limited Applicability: Only Hindu families can form HUFs.

 Family Dependency: Business success depends on family

relations.

 Restricted Capital Access: External funding is challenging.

Comparison with Company Form

 Legal Identity: HUF is not a distinct legal entity, whereas a

company is.

 Investment Potential: Companies attract investors; HUFs

rely on family wealth.
2.4 Co-operative Society A voluntary organization established
for the mutual benefit of its members is known as a co-operative
society. It is frequently utilized in industries like consumer goods,
housing, and agriculture and is governed by the Co-operative
Societies Act. Cooperative societies ensure democratic decision-
making by adhering to the "one member, one vote" principle.
However, their scalability is constrained by onerous government
regulations and challenges in raising capital.

Advantages

 Democratic Control: One-member-one-vote principle

ensures fairness.

 Government Support: Certain incentives and benefits are

provided.

 Social Welfare Focus: Prioritizes members’ economic well-

being.

Disadvantages

 Slow Decision-Making: Democratic governance can lead

to inefficiencies.

 Limited Fundraising Options: Cannot issue shares like

companies.
  Bureaucratic Hurdles: Subject to government regulations
and red tape.

Comparison with Company Form

 Profit Orientation: Companies prioritize profits, while co-

operatives focus on welfare.

 Capital Access: Companies can issue equity/debt; co-

operatives rely on membership fees.

2.5 Company (Private & Public) A company is a legally created

artificial entity that is registered under the Companies Act of
2013. It benefits from attributes such as perpetual succession,
limited liability, and a distinct legal identity from its shareholders.
Businesses can be divided into two categories: private and public.
Private companies limit the transfer of shares, whereas public
companies are free to issue shares to the general public.

Types of Companies

 Private Limited Company: Restricted share transfer,

limited members.

 Public Limited Company: Can issue shares to the public.

 One-Person Company (OPC): Single-member entity with

limited liability.

Advantages
  Limited Liability: Shareholders are liable only up to their
investment.

 Perpetual Succession: Business continues despite

changes in ownership.

 Access to Capital: Companies can issue

shares/debentures.

 Credibility: Regulatory oversight enhances trust.

Disadvantages

 Compliance Costs: Requires annual filings, audits, and

disclosures.

 Higher Costs: Incorporation and maintenance expenses.

 Reduced Control: Directors manage operations, reducing

shareholder influence.

3.COMPARATIVE ANALYSIS

Features Sole Partners HUF Co- Compa

Proprietors hip operativ ny
hip e
Society
Legal Status No separate No Exists Separate Separat
entity separate as per legal e legal
entity Hindu entity entity
Law

Liability Unlimited Unlimited Unlimite Limited Limited

(except d
LLP)

Perpetual No No Yes Yes Yes

Succession

Decision Quick Shared Karta Democrat Board of

Making among makes ic Director
partners decision s
s

Compliance Low Moderate Low High High

Burden

Taxation Individual Partnershi HUF tax Co- Corpora

tax rate p tax rate rate operative te tax
tax rate rate

Fundraising Limited Limited Limited Moderate High

4. ADVANTAGES OF COMPANY FORM OF BUSINESS

 Limited Liability: Shareholders are only liable to the extent
of their shareholding, protecting personal assets.

 Separate Legal Entity: A company has its own identity,

allowing it to own assets and enter contracts independently.

 Perpetual Succession: The company continues its

existence even if the shareholders change or pass away.

 Better Fundraising Ability: Companies can raise funds

through shares, debentures, and institutional borrowing.

 Enhanced Credibility: Regulatory oversight and statutory

compliance increase transparency and trust among
stakeholders.

5. DISADVANTAGES OF COMPANY FORM OF BUSINESS

 Compliance Requirements: Companies must adhere to
strict reporting and governance norms under the Companies
Act, 2013.

 Cost of Incorporation: Registration and regulatory costs

are higher than other business forms.

 Decision-Making Complexity: Multiple stakeholders and

governance structures make decision-making slower.

 Double Taxation: Profits are taxed at the corporate level,

and dividends are taxed at the shareholder level.
6. APPLICABILITY OF COMPANIES ACT, 2013 – REAL-WORLD
IMPLICATIONS

 Section 2(20) – Definition of a Company Example: When

Flipkart converted from a private limited company to a public
company before Walmart's acquisition, it had to comply with
legal definitions and structural changes under this section.

 Section 3 – Formation of a Company Example: Startups

like Zomato and Paytm registered as private limited
companies initially and later transitioned into public
companies to raise capital through IPOs.

 Section 149 – Composition and Functions of the Board

of Directors Example: Infosys’ corporate governance is
based on Section 149, ensuring independent directors
oversee management.

 Section 185 – Restrictions on Loans to Directors

Example: The IL&FS financial crisis highlighted misuse of
loans to directors, leading to stricter enforcement of this
section.

 Section 248 – Striking Off a Company Example:

Thousands of shell companies were deregistered by the
Indian government under this provision to curb tax evasion
and financial fraud.
 7. CASE STUDIES AND REAL-WORLD EXAMPLES

Case Study 1: Sole Proprietorship – The Story of Dhirubhai

Ambani Dhirubhai Ambani started his entrepreneurial journey as
a sole proprietor with a small textile trading business, which later
became Reliance Industries. While sole proprietorship allowed him
to take quick decisions and grow initially, the need for expansion
led him to incorporate Reliance as a company, enabling large-
scale fundraising and limited liability protection.

Case Study 2: Partnership – Infosys Technologies Infosys

was started as a partnership by Narayana Murthy and his co-
founders in 1981. Initially, partnership allowed them flexibility in
decision-making, but as the company scaled up, they
incorporated it as Infosys Limited. This transition enabled them to
raise capital through an IPO and become a global IT giant.

Case Study 3: Hindu Undivided Family (HUF) – Kirloskar

Group The Kirloskar Group started as an HUF business and
continues to be largely family-managed. HUF structures benefit
from tax advantages and continuity within the family, but
decision-making remains centralized, limiting external capital
infusion.

Case Study 4: Co-operative Society – Amul Amul is one of

India’s most successful co-operative societies. It follows the ‘one
member, one vote’ principle, ensuring democratic management
and profit distribution among dairy farmers. However,
government regulations sometimes limit operational flexibility
compared to private companies.

Case Study 5: Private & Public Company – Tata Group Tata

Sons operates as a private company, managing various publicly
listed companies like Tata Steel, Tata Motors, and TCS. This hybrid
structure allows Tata Sons to maintain control while allowing
public investment in key businesses.
 8. CONCLUSION

Selecting the appropriate business structure is essential for

financial sustainability, regulatory compliance, and operational
effectiveness. The company form of business is appropriate for
large-scale operations because it provides a number of benefits,
including perpetual succession, limited liability, and improved
access to capital. Nonetheless, smaller businesses may be
discouraged by the burden of regulations and double taxation.
Therefore, before choosing a corporate structure, businesses
should carefully consider their long-term objectives.
 9. REFERENCES

1. Companies Act, 2013

2. Indian Partnership Act, 1932

3. Co-operative Societies Act

4. Income Tax Act, 1961

5. Business Law by M.C. Kuchhal

6. Ministry of Corporate Affairs Website