Absolute Beginner Guide.

Well done gsalvadi. Carry-on...

Hari.

... In the eyes of law, a company itself is an "entity" on its own.
It does not have a owner. There is no single owner for a company. If there is no owner of a company, we have some questions.

1. Who are they started the company and put money and their efforts?
They are Promoter of the company.

To have a clear understanding, let us consider a case.
There are three persons A, B and C.

A has Rs10 lack
B has a profitable business idea or a technology
C has nothing but he is a well-wisher both A and C

Now C approached B and suggested him to start a company. B hesitates as he lacks funds to start a business. C asks him to write a business proposal that explains the business concept, profitability etc.,

C takes the proposal to A, who owns fund but does not know how to start a business

C explains and convince A to start a company with B as A has business skill and B has capital. A is happy now and thanked C for his effort. C introduces A to B.

When A and B decides to start a company, they both ask C to stay with them and to guide them in business considering him as well-wisher of the business.C accepts that.

Now, they meet a auditor, a certified charted account and asked him to write deeds to register a company with registrar of companies.

Now the question is, who is the owner? A can not be a owner as he has not business skills. B can not be a owner as he does not have funds to actualize his dreams. C can not be a owner obviously.

Now the auditor ask them to choose two or more people to appoint as directors of the company. If A and B wants to have C as a director of the company, they would consider him. Otherwise not.

Why? The group of directors (more than one person) is called Board of Directors and the board of directors is responsible for the administration of the company. In every matter the board of directors take decisions, they are technically called resolutions. The board must have a meeting and discuss things at the end of the meeting, the board come out with a resolution to do something. That is the official decision of the company.

In our case, if C is appointed as director, then he has every right in decision making as A and B. Ok, we have there people. If there is contradicting opinions arises, what to do? Voting. Majority of directors win. So in our case every decision of C is important to pass a resolution as he may support decision of A or B. Keep the point in mind there is no special privilege to A or B as for that they invest capital or for the reason they run the business. A director is always a director. So C has every power as A and B.

This is fine with administration part. What about money? People run business to make money.

A has done entire investment. B has business skills. Now we do not call B as a "working partner" like one called in partnership-firm. He is giving a concrete position in the company by law. How?

The entire capital pumped by members (in our case it is from A it need not be always the case. more than one people could bring money in different size)
So, the entire capital is divided by a value say, Rs 10. if we divide Rs. 1000000 by 10. We get 100000. Now this one lac is number of shares that lies with the company and Rs.10, by with we divide is the "face value" of the share.

So the company (Sorry we did not name it ) let us use the word company. The company has one lack shares who's face value is Rs 10.

B must get some profit as he has the business skills.
A must get some profit as he finance the business.
C must (may) get some profit as he administer the company.

Now we divide the roles of directors : A becomes Director-Finance (for an example) B becomes Director-Production and C becomes Director-Administration.

So all the three decides to allot shares to each person. Say A get 1000 shares
B get 1000 shares (if they go for 50% -50%) C gets 500 shares. All this allocations is decided by board of directors.

If A and B does not want to allot shares to C, company (board of directors) can fix a salary for C. So a director himself or herself could be a person who does not own any share and could be a salaried employee. Ok. let us assume C too gets 500 shares.(not an employee)

To lead the directors there is a person elected by other members who is called Managing Director. People use to call themselves CEOs. A big-brother syndrome. Our law does not have word CEO. Companies act speaks about Managing Director . Even a Managing Director could be a salaried employee.

If a company goes to open a bank account, the bank manager would ask as his first questions "Get me your MOA". What is MOA?

MOA is memorandum of association, a legal document (mostly a book) which describes everything about a company. MOA includes the exact address where the company is located, who are all the share holder, who are directors and importantly, objective of the company. Primary objective of the company is the section which describes the business activity of the company. A company CAN NOT do any business unless it is included in MAO. Say a banking company can not become a software development company overnight. It is a crime.

Ok. Now what happened to remaining shares that left after allocating shares to A B and C?

What is the difference between Pvt. Ltd. and Public Ltd. companies?

How the share holders get profit of the company appropriate to the number of share they hold?

How and why a company comes out with an IPO?

Let us discuss little by little. I writing this in the midst of burning the midnight oils.

Hope this helps you irfan91. Kindly drop some post if you don't get something

@Hari thanks for your appreciation. Kindly drop some post if you find I miss something or extra-elaborate something.

One thing for sure. If people understand these kind of stuff, they would have avoided some putting their hard-earned money in some IPOs where the company just have a board and vacant land, digging the ground to install pillars

Thanks

gsalvadi hi your explaination is outstanding, the way you are explaing is very good and Iam so happy that Iam understanding the real procedure of Bussiness and company thanks again, but I have one doubt please clerify (if we divide Rs. 1000000 by 10. We get 100000. ) why we have to devide with 10 only why not with other number please explain hope you wont mind, may be this is simple query but please explain...

A face value is a nominal value arbitrarily chosen by the company. There is no hard and fast rule in this regard. Face value must serve as a good denominator.

If the company splits the stock in 1:2 ratio the face value becomes Rs.5 and number shares doubled.

I am happy you come out with questions
(Let us not talk about stock splits at this stage. It may interrupt our discussion)

Hi gsalvadi, Ok it means the face value will be decide by company it self..ok thanks Iam waiting for your next chapter...

Memorandum and Articles of Association is like an horoscope of a company. If one wants to enter into a business deal with a company, he or she use to get a copy of MOA and consult things with a professional, say a charted accountant.

Here we are going to have a look at few things which you may feel little legal in terms, but I hope that would give a clear picture about the setup and business of a company and how it is being monitored by Govt. for the purpose of having transparency to the eyes of public.

A Company is registered as we register our assets. The only difference is, the registrar is called ROC, Registrar of Companies.

Say in our case, A,B and C who are the promoters wants to register the company as a private limited company (we will discuss what is "private limited" later).

The promoters write Memorandum and Articles of Association with a help of a professional and register the company under Companies Act 1956.

First thing they would do is, to register a name. They select some name for their company well before registering the company. ROC verifies and make sure that no other company exist with the same name in the country. This gives a unique identity for the company. There can not be two Infosys Technologies Ltd.

The general convention is (not a rule) first part of the name is selected by promoters eg. Infosys, and second part usually represents the activity, eg.
Technologies.

We just see some key points as they come to my mind.

Authorized Capital This written in MOA at the time of registration. Authorized Capital is the maximum amount of capital the company can have.

In our case, say the promoters register the company with an authorized capital of Rs20 lack. They can have a capital less than 20 lack. But can not have more than 20 lack at any point of time. By the concept of authorized capital Govt. restricts a company in the amount of capital they handle.

What if promoters register with great sum as authorized capital even they may not need such a capital?
Let us not get much into details. Just understand that those kind of activities are prevented by laws. For an example, the registration fee payable is dictated by authorized capital too.

__________________________________________________ ____

Here let me take a pause; I have a feeling that am writing some details
that may not be needed to an understanding. Will it be good to give an outline like the earlier post?

Kindly drop your comments, accordingly I can continue.
Till then, I skip things like paid-up capital, dividends etc.
__________________________________________________ _______

Why a company is called limited?

Because, company itself is an entity as I said earlier. It is like an artificial person in the eyes of law.
A company can borrow loans, a company can buy assets. Say if a company buys a car, the registration book from RTO would say the company as the owner of the car. Not any of the promoters or directors.

People "associate" themselves to the company by some relation.
In our case A, B and C promotes a company. After that, the company appoints them as directors (by means of board of directors). Company itself allot shares to them.

In essence, resolutions passed by board of directors (by majority opinion) is the decision of the company. So a company can always add a person as director, even push out the Managing Director can elect somebody as Managing Director, or even conducts an interview and hire an employee to act as a Managing Director.

Association of A, B and C as share holder to the company could no way interrupt these process. Even the company could push-out A, let him have no chair. Still he will be a share holder of the company and will be enjoying the profits made by the company. Only thing is, he can not take any decision regarding the business.

So a company is limited as the share holders liability is limited to the amount of shares they hold. In case the company borrows from a bank and the company goes bankrupt. The bank can take legal action against the company and take over the assets of the company (including the car).

In this case, even though the idea of taking a loan is decided by the company and signed by the Managing Director, the bank can not go and ask for repayment or can not take any action against the Managing Director as an individual. So a company is limited as people have limited association with it.

Private Limited Company is a company that can not collect funds from public to run the business. Though I have not consulted the recent laws, take it as an example rather than a figure in following cases.

A private limited company is "private" as the maximum number of share holders could be restricted to 50 people ( a private group)

Share holders may not sell their shares to some other people

It may have some restrictions on both number of share holders and number of directors.

The law keeps the share holders as a "private group" so that they may not be able to collect funds from public.

Hope I will get your feedback. Let us switch over to Public Limited companies, IPOs thru exchanges, the primary market and exchange of shares among people thru exchanges, the secondary market where we trade daily.

Thanks

Hope I will get your feedback. Let us switch over to Public Limited companies, IPOs thru exchanges, the primary market and exchange of shares among people thru exchanges, the secondary market where we trade daily.

Thanks[/QUOTE]

Waiting for your next post.....

Every company has a clause "Registered Office", where the companies registered office is located. This is identified as primary address for the company. For every company, it is a must to print the address of registered office in every communication, say letter heads, quotes for business etc., irrespective of the branches it has.

If the company wants to open a new branch, the board must pass a resolution saying so, and must be filed with Govt. (ROC). At any point of time, if the company wishes to change the address of registered office, it can not just shift the office like a other forms of business.

It must give a a notification in newspaper, the ROC would wait for a period, say 2 months, to see if there would be any objection, complaint arises.

Just imagine how could the law keep hold when it comes for closing a company. Such a thing would go under standard procedures. Say the company could have liabilities, could have received advance payments in business etc.,

The object of Companies Act is to make it transparent to the eye of a share holder or a customer, that how the company operates.

Now, our friends, A, B and C have been doing the business successfully for some years. Now the the business has grown. There are other directors have been appointed as the company has expanded its operation and so needs specialized skills for management.

On its success path our company has now got say some 10 directors for 10 distinct departments. Remember the point that the directors could be mere employees. When our imaginary company wants to motivate the employees it allots shares to them under "Employees Stock Option", the section of law that allows allotment of shares among employees. Again I suggest let us not digg into the details as this series could turn more like a course on companies law

What if our company wants to expand its business activity?

Let us not name A, B and C as we earlier did. Because, now there are many directors. We know whether they hold shares or not, collection of such directors which called Board of Directors is suppose to take any decision by majority opinion. So from this point we call them as "Board" (Board of Directors).

And again, we don't know whether A is the managing director yet and, we may not surprise at this point if A, B or C is not even at the Board.

And now, we can understand the fact that the Board of Directors has the supreme power in the organization. If there are many directors who are also share holders of the company (in public limited companies it is expected), there is always a chance for politics of power.

Ok. Let us come to the point.

If our company wants to expand its business activity, the Board must come out with a resolution for such an expansion.

Now let us consider two aspects of a business expansion.

1. Diversified business activity (entering into new fields of commerce)
2. Need of Huge Capital

Let us discuss these in next post, probably tomorrow if not today

Very nice posts, with minimum legal terminology. The narration is very useful for absolute beginners for understanding the basic concept. Keep them coming.

Very Good article for Beginners. Thanks Hari