CS Executive · Setting Up of Business, Industrial and Labour Laws

Selection of Business Organization: formula sheet

Full chapter guide

Key formulas

Partnership not created by status: Partnership = contract, not status (Indian Partnership Act, 1932, section 5); Members of an HUF carrying on a family business as such are not partners.
Limit on association size: Section 464(1), Companies Act, 2013: no association or partnership above the prescribed number of persons (prescribed number cannot exceed 100) may carry on business for gain unless registered as a company or formed under another law; Exempt under section 464(2): an HUF carrying on business, and an association or partnership formed by professionals governed by special Acts.
Penalty for breach of section 464: Each member: fine up to ₹1,00,000 and personal liability for all liabilities of the business; Section 464(3).
Liability comparison: Sole proprietor, partner in a firm: unlimited. LLP partner, company member, co-operative member: limited (as per the governing law); Company limited by shares: limited to the unpaid amount on shares.
Core factors checklist: Capital + Liability + Control + Compliance cost + Taxation + Continuity + Ease of formation; Use this seven-point list as your answer skeleton. Add nature of business, credibility and transferability if the facts point to them.
Liability by form: Proprietor/partner in a firm: unlimited | Company: limited to unpaid shares or guarantee | LLP: limited to agreed contribution; State this in plain words. In an LLP, a partner can still be liable for their own wrongful acts or fraud, so do not say liability is absolute in every case.
Independent director appointment (Section 150): Appointment approved by the company in general meeting; explanatory statement must give the justification for choosing the appointee; Relevant when you discuss governance burden of a company. The company must exercise due diligence when selecting from the data bank.
Factors for deciding punishment (Section 446A): Size of company; nature of business; injury to public interest; nature of default; repetition of default; Useful to show that compliance failures in a company carry penalties that courts weigh on these five factors.
Advertisement of prospectus (Section 30): Advertisement must specify objects, liability of members, amount of share capital, signatories and shares subscribed, and capital structure; Shows the disclosure cost of raising public capital through a company.
LLP as a separate entity (Section 3(1), LLP Act, 2008): LLP = body corporate + legal entity separate from its partners; Quote this first when asked about the nature of an LLP.
Perpetual succession (Section 3(2)): LLP has perpetual succession; Existence does not depend on any individual partner.
Change in partners (Section 3(3)): Change in partners ⇒ no effect on existence, rights or liabilities of the LLP; Use this for questions on death, retirement or admission of a partner.
Partner's dealings with the LLP (Section 66): Partner may lend money and transact business with the LLP, with the same rights and obligations as a non-partner; Applies to the loan or other transaction, not to the partner's capital contribution.
Core contrast: Partnership: no separate entity, unlimited liability | LLP: separate entity, limited liability; Use this as the base of any comparison answer.
Section 8 conditions: Objects (commerce, art, science, sports, education, research, social welfare, religion, charity, environment) + profits applied to objects + no dividend; All three conditions must be met. The Central Government grants a licence. The company may omit 'Limited' or 'Private Limited' from its name.
Section 8 alteration rule: Change of memorandum or articles = previous approval of Central Government; Section 8(4)(i). Ordinary companies alter articles by special resolution, but this company needs prior approval.
Section 8 penalty on default: Company: ₹10,00,000 to ₹1,00,00,000; officer in default: ₹25,000 to ₹25,00,000; Section 8(11). Fraud makes officers liable under section 447.
Conversion of public to private: Special resolution + approval of Central Government order; Section 14(1). Without that order the conversion is not valid. File the alteration and order with the Registrar within 15 days under section 14(2).
Lesser penalty (section 446B): Penalty ≤ ½ of stated penalty, max ₹2,00,000 (company) and ₹1,00,000 (officer or other person); Applies to OPC, small company, start-up company and Producer Company.
Section 8 company on winding up: Surplus assets → another Section 8 company with similar objects, or sold and proceeds credited to the IBC Fund; Section 8(9). Members do not take the surplus.
Source of selection: Independent director may be selected from a data bank (Section 150(1)); The word is 'may'. The text does not say the company must choose only from the data bank. It is subject to Section 149(6).
Who maintains the data bank: Body, institute or association notified by the Central Government, with expertise in creating and maintaining such a data bank; It puts the data bank on its website for use by the appointing company.
Content of data bank: Names, addresses and qualifications of persons eligible and willing to act as independent directors; Both eligibility and willingness are needed.
Due diligence: Responsibility lies with the company making the appointment (proviso to Section 150(1)); Not with the data bank body.
Approval: Company in general meeting, as provided in Section 152(2) (Section 150(2)); The explanatory statement must indicate the justification for choosing the appointee.
Creation of data: Data bank creates and maintains data of willing persons in accordance with prescribed rules (Section 150(3)); Manner and procedure of selection may also be prescribed under Section 150(4).
Related rules in Section 149: Term up to 5 consecutive years; max 2 consecutive terms; reappointment by special resolution; 3-year cooling-off (Section 149(10), (11)); Useful to add when a question asks about the appointment as a whole.
Constitution of NCLT: Section 408: Central Government notification; President + Judicial and Technical Members; Number of members is as the Central Government deems necessary.
Constitution of NCLAT: Section 410: Central Government notification; chairperson + Judicial and Technical Members; Hears appeals against NCLT and NFRA orders under the Act, and certain Competition Act, 2002 orders (Section 53A).
Consultation route (Section 412(1)): President of NCLT, and chairperson and Judicial Members of NCLAT: appointed after consultation with the Chief Justice of India; This is consultation, not a Selection Committee recommendation.
Selection Committee route (Section 412(2)): Members of NCLT and Technical Members of NCLAT: appointed on recommendation of Selection Committee; Committee: CJI or nominee (Chairperson); senior Supreme Court Judge or High Court Chief Justice; Secretary, MCA; Secretary, Law and Justice.
Casting vote and Convener: Equality of votes: Chairperson has a casting vote (412(2A)); Secretary, MCA is Convener (412(3)); The Committee decides its own procedure (412(4)).
Validity of appointments: No appointment invalid merely due to a vacancy or defect in constitution of the Committee (412(5)); This protects appointments already made.

Quick revision

Choice of form depends on liability, capital, control, continuity, compliance and tax.
A company is a separate legal person; a sole proprietor and the business are legally the same.
An LLP gives partners limited liability and a separate legal identity.
Section 366: an entity with two or more members may register as a company; fewer than seven members must register as a private company.
Section 366: a company already registered under earlier Companies Acts cannot register again under this section.
Section 366: for an unlimited-liability entity registering as a limited company, assent of not less than three-fourths of members present is needed.
Section 374: secured creditors must consent or give no objection; notice in one English and one vernacular newspaper; affidavit from all members or partners.
Section 375: an unregistered company cannot be wound up voluntarily.
Section 375: deemed inability to pay debts includes an unpaid demand above one lakh rupees for three weeks.
Section 150: an independent director may be selected from the data bank; due diligence lies with the company.
Section 150: the appointment is approved in general meeting, and the explanatory statement must give the justification.
Section 412: the Selection Committee is chaired by the Chief Justice of India or his nominee, who has a casting vote; the MCA Secretary is Convener.

Common mistakes

Calling HUF members partners of the family business. Fix: Remember section 5 of the Partnership Act: partnership comes from contract, not status, so HUF members carrying on a family business as such are not partners.
Saying a partnership firm is a separate legal entity like a company. Fix: A firm under the Partnership Act is not a separate legal person and partners are personally liable. An LLP and a company are separate legal entities.
Listing factors without applying them to the facts Fix: After each factor, add a phrase linking it to the case, such as 'since Ravi needs ₹2 crore, a company suits better'.
Saying a company is always the best form Fix: Remember the cost side: heavier compliance, audit and meetings. For a small, low-risk business, a proprietorship or LLP may fit better.
Treating an LLP as a traditional partnership with no separate legal identity. Fix: Remember section 3(1): an LLP is a body corporate and a separate legal entity.
Saying an LLP is dissolved when a partner dies or retires. Fix: Cite section 3(3): change in partners does not affect the existence, rights or liabilities of the LLP.
Saying a Section 8 company can pay dividend if profits are high. Fix: Remember that section 8(1)(c) requires the intention to prohibit dividend. Profits go back into the objects.
Claiming that a Section 8 company can alter its objects by special resolution alone. Fix: State that section 8(4)(i) needs the previous approval of the Central Government.
Saying the data bank body is responsible for checking independence. Fix: Quote the proviso to Section 150(1): due diligence lies with the company making the appointment.
Writing that the Board alone can appoint an independent director. Fix: Section 150(2) requires approval by the company in general meeting, as provided in Section 152(2). Mention the explanatory statement.

Exam tips

Write short notes in the same order every time: meaning, governing law, creation, legal status, liability.
Quote section 5 of the Partnership Act and section 464 of the Companies Act, 2013 when facts involve an HUF or a large group.
In comparison questions, keep the same points for each form so the answer reads cleanly.
Always finish with a conclusion line; ICSI-style answers are marked for it.
Do not quote section 464 numbers beyond what the Act says: the prescribed number, never above one hundred.
Write an answer in ICSI style: the factor or provision, then the facts, then a clear conclusion.
Use a short comparison table-like list in bullets: one line per form, since tables are slow to draw.
If the question says 'advise', you must end with a named form and reasons. A pure list will lose marks.