LEGAL FORMS OF

ENTREPRENEURIAL ORGANIZATIONS
 Legal structure
• The legal structure is the thing that defines the
activities and decision making process of an
Social Enterprise.
• This can be from members voting rights to
how a board of trustees conduct meeting, to
how generated surplus is invested
• In addition, the structure will define how the
enterprise will need to operate within the law.
 IDENTIFYING LEGAL STRUCTURES

There are four main factors to consider when an

entrepreneur decides on the form of organization :
• Taxes
• Limitation of personal liability
• Ease of transferability and admission of new owners
and
• Investor expectation
• Availability of capital
• The complexity of business formation
 FACTORS AFFECTING THE SELECTION OF AN APPROPRIATE LEGAL STRUCTURE

• Control
• Limitation of liability
• Cost and complexity of formation
• Flexibility and future needs
• Tax implications
• On-going administration
• Continuity of existence
• Transferability of ownership
• Raising capital
 Sole proprietorship
• According to Glos & Baker, “ A sole
proprietorship is a business owned by
one person who is entitled to all of its
profits.
• A sole proprietorship is a business owned
and managed by one individual; the
business and the owner are one and the
same in the eyes of the law.
 CHARECTERISTICES OF SOLE PROPRIETORSHIP
• One man ownership
• Simple to create
• No separate business entity
• No separation between ownership and management
• Unlimited liability
• All profits or losses to the proprietor
• Less formality
• Less capital investment
• Easily transferable
• Freedom of action/ decision making authority
• No special legal restrictions
• Economic risk
• Easy to discontinue
 ADVANTAGES OF SOLE PROPRIETORSHIP
• Simple form of organisation
• Owner’s freedom to take decisions
• High secrecy
• Tax advantage
• No boss
• Total business control
• Easy process
• Least government regulation
• Quick action
• flexibility
• Easy dissolution
 DISADVANTAGES OF SOLE PROPRIETORSHIP
• Limited resources
• Capital limitation
• Limited business skill
• Limited ability
• Unlimited liability
• Limited life expectancy
• Uncertainty of duration
• Limited managerial ability
• Restricted growth
• Unit of responsibility
• Uncertain future
• No legal protection
• Wrong decision
 PARTNERSHIPS
• The Indian partnership act, 1932, section 4,
defined partnership as “the relation between
persons who have agreed to share the profits
of business carried on by all or any of them
acting for all”.
• Partnership is an association of two or more
people who co-own a business for the
purpose of making a profit.
 FEATURES OF PARTNERSHIP
• More persons
• Profit and loss sharing
• Contractual relationship
• Existence of lawful business
• Existence of an agreement
• Registration of firm
• Utmost good faith and honesty
• Unlimited liability
• Restrictions on transfer of share
• Principal-agent relationship
• Implied authority
• Common management
• Continuity
 ADVANTAGES OF PARTNERSHIP
• Easy formation
• More capital available
• Combined talent, judgement and skill
• Diffusion of risk
• Tax advantage
• Division of labour
• Borrowing capacity
• Expansion of business
• Large resources
• Flexibility in operation
• More credit standing
• Division of responsibility
 DISADVANTAGES OF PARTNERSHIP
• Delay in decisions
• Lack of continuity
• No transferability of share
• Lack of secrecy
• Unlimited liability
• Internal conflicts
• Misuse of assets
• Lack of public confidence
• Instability
• Mutual distract
• Burden of implied authority
 Joint stock company
• According to H. L. Haney, “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.” 
• Under section 3(1) of Indian Companies Act, 1956, “A
Joint Stock Company means a company formed and
registered under this Act or an existing company and
existing company means a company formed and
registered under any of the previous company laws”.
 FEATURES OF JOINT STOCK COMPANY
• Artificial person
• Separate legal entity
• Perpetual existence
• Limited liability of shareholders
• Common seal
• Transferability of shares
• Large amount of capital
• Democratic management
• Large membership
• Formation
• Large entity
ADVANTAGES OF JOINT STOCK COMPANY
• Limited liability
• Perpetual existence
• Large scale operation
• Transferability of shares
• Rising of funds
• Economies of large scale production
• Social benefit
• Research and development
• Democratic management
• Large membership
• Public confidence
 DISADVANTAGES OF JOINT STOCK COMPANY
• Formation is not easy
• Double taxation
• Excessive government control
• Delay in policy decisions
• Speculation and manipulation
• Lack of secrecy
• Delay in decisions
• Conflict of interest
• Lack of flexibility
• Lack of contact with customers
• Lack of contact with employees
 KINDS OF COMPANY

1. On the basis of incorporation

 Chartered companies
 Statutory companies
 Registered companies
2. On the basis of liability of its members
 Companies limited by shares
 Companies limited by guarantee
 Unlimited companies
3. On the basis of number of members
 Private company
 Public company
4. On the bases of nationality
 Foreign companies
 Indian companies
5. On the basis of ownership
 Government company
 Holding and subsidiary companies
 One man company
 COMPANIES UNDER SECTION 25

According to section 25(1)(a) and (b) of the

Indian Companies Act, 1956, a section-25
company can be established for promoting
commerce, art, science, religion, charity or any
other useful object, provided the profits, if any,
or other income is applied for promoting only
the objects of the company and no dividend is
paid to its members.
• Legislation: Section-25 companies are registered
under section-25 of the Indian Companies Act, 1956.
• Main instrument: For a section-25 company, the main
instrument is a memorandum and articles of
association (no stamp paper required).
• Trustees: A section-25 company needs a minimum of
three trustees; there is no upper limit to the number
of trustees. The board of management is in the form
of a board of directors or managing committee.
• Registration: The association may be registered as a
company with limited liability, without the addition to
its name of the word “Limited” or the words “Private
Limited”.
 FORMATION PROCEDURE OF SECTION 25 COMPANIES

• Step 1- Form 1A: Name approval

• Step 2- Application to Regional Director
• Step 3- Filling of application copy to the RoC
• Step 4- Publication of notice
• Step 5- Grant of approval
• Step 6- Other incorporation formalities
• Step 7- Registration under section 80G
 DRAWBACKS OR OBLIGATIONS OF SECTION 25 COMPANIES

• A section 25 company has to ensure that its

profits and all other incomes are utilised only for
the purpose of promoting its objects and not for
any other purpose.
• It should also ensure that its profits are not
distributed as dividend among its members.
• Section 25 company cannot alter its objects clause
in its memorandum without seeking the written
approval of central government [sub section (8)].
• Section 25 company is regarded as a ‘company’ within
the meaning of the income tax act, 1961 and as such
its income is taxable according to the applicable rates
similar to those applying to other companies.
• If an existing company obtains a licence under section
25 it has to ensure that its objects are confined to
those mentioned in section 25 itself and if not make
proper alteration to its memorandum and articles.
• Long closing proceedings: The procedure to close is
long and involves compliance of various formalities,
at times it takes 1-2 years to completely wind-up the
company.
 FRANCHISING
• Franchising is a form of business by which the
owner (franchisor) of a product, service or
method obtains distribution through affiliated
dealers (franchisees).
• Franchise is a continuing relationship between
the parent company (called the franchisor)
and an individual business unit (called the
franchisee); under which the parent company
provides a licensed privilege to the business
unit to use its trade mark, in return for a
royalty payment made to the parent company.
 FEATURES OF FRANCHISE
• It is an agreement to sell the products or services of some
owner paying him / her specified fee or commission.
• It does not give franchisee the ownership of the product or
service.
• It is an agreement for a fixed period of time ranging from
five years to thirty five years.
• It is a replication of some successful business format.
• It takes place in case of businesses with a good track record
of profitability.
• It can be terminated before the expiry of franchising period.
• It is a turnkey (complete) operation in which franchiser
dictates most of the operation, from store hours to the
colour of the carpet, for example.
 ADVANTAGES OF FRANCISING

• Access to better talent

• Easy expansion capital
• Minimized growth risk
• A big name can lead to big success
• On-going help and support
• Defined territory
• Greater access to finance
• Long-term commitment
• Better-quality management
• Improved operational quality
• Innovation
 DISADVANTAGES OF FRANCHISING
• Less control over managers
• A weaker core community
• Innovation challenges
• Initial and continuing fees
• Other people’s decisions could sink your
franchise
• You cannot escape hard work
 LEGAL ENVIRONMENT
The legal environment of business is defined as:
the attitude of the government toward business,
the historical development of this attitude;
current trends of public control in taxation,
regulation of commerce and competition;
freedom of contract, antitrust legislation and its
relationship to marketing, mergers and
acquisitions; and labor management relations.
 PATENT
• A patent is a legal monopoly granted for a limited time
to the owner of an invention.
• It empowers the owner of an invention to prevent
others from manufacturing, using, importing or selling
the patented invention.
• Normally a patent remains in force for a period of 14
years from the date of application subject to the
payment of the stipulated renewal fees.
• But the term differs, when it is related to food,
medicine or drug i.e., it is 5 years from the date of
selling of patent or it is 7 years from the date of patent
whichever period is shorter.
Patents Amendment Act, 1999:
The Patents (Amendment) Act, 1999 is the first of three
amendments to the Patents Act of 1970 to bring India’s
patent regime into compliance with the WTO TRIPs
Agreement.
It provides for the filing of applications (date stamping) for
product patents in the areas of drugs, pharmaceuticals, and
agro-chemicals even though such patents were not yet
allowed at the time this Act was passed.
Patents Amendment Act, 2002:
The Patents (Amendment) Act, 2002 is the second of three
amendments to the Patents Act of 1970 to bring India’s
patent regime into compliance with the WTO TRIPs
Agreement. 
This Act was introduced with the new Patent Rules, 2003,
which replaced the earlier Patents Rules, 1972.
 Patent Amendment Act 2005
The main provisions of this amendment act are:
1. Product patent: The act extends product patent
protection in all fields of technology, i.e. drugs, food
and chemicals.
2. Compulsory licensing: This is a trips complaint
provision empowering the governments to check and
control the misuse of patents. In spite of the existence
of a patent, the government can invoke the
compulsory license to make available the patented
product to the people in case of national emergency
for public non-commercial use.
3. Embedded software: The act allows for patenting of
embedded software.
 COPYRIGHT
• Copyright is one of the chief forms of intellectual
property that is afforded protection by the law, the
other three being patents, trademarks, and
industrial designs.
• In its most simplistic formulation, copyright implies
protection against copying of one’s work by another.
• Its chief object is to encourage people to create
original works in different fields like literature, art
and music by rewarding them with the exclusive
right for a limited period of exploit the work for
monetary gain.
• In India, the 1st legislation on copyright was the
Indian copyright act, 1847.
• This act continued to be in force till it was replaced
by Indian copyright right act, 1914.
• The copyright act, 1957, as amended in the years
1984, 1994 and 1999, to accommodate the
obligations under international treaties, governs the
present law relating to copyright.
• Copyrights subsist in:
a) Original literary, musical, dramatic and artistic works.
b) Cinematograph films
c) Sound recordings
 TRADEMARK
• A trademark identifies the brand owner of a
particular product or service.
• The Trade Marks Registry was established in
India in 1940 and presently it administers the
Trade Mark Act, 1999 and the rules there under.
• Trademark registration can be done for the
following:
 Any word, title, symbol, heading, label, name,
signature, numeral or any combination thereof.
 Any Slogan, Base or Punch Line, etc. which are
used to highlight the products and services.
Functions of a Trademark/Brand Name:
• It identifies the goods and services and its origin or
owner
• It advertises the goods and services
• It creates an image for the goods and services
• It stimulates further purchase
• It serves as a badge of loyalty and affiliation
• It may enable a consumer to make a life style or
fashion statement.