The main type of business organisations are Proprietorship, Partnership and Company. Proprietorship is suitable for small businesses where not much capital is required. If any business requires more capital and talent, then partnership is a better option.
The main disadvantage of the Partnership is:
Unlimited Liability of the partners irrespective of their share in the partnership. In simple words it means that in case the firm incurs losses, each partner is jointly and individually is bound to make good this loss. For example A, B and C are three partners. They incur a loss of Rs.500000 over and above their capitals. This means the firm owes Rs.500000 to outsiders. Now, it is the responsibility of the partners to bring in Rs.500000 in the ratio of their profit. But in case a partner is not able to bring in his share, then other partners will have to bring his share also. For example if B and C are not a position to contribute towards losses, then A will have to bring in Rs.500000 from his personal estate, even if he had 1/5 share in partnership.
To counter this shortcoming, company type of business organisation was created. A company is a voluntary organisation of people formed and registered under the Indian Companies Act, 2013 or earlier Companies Acts. In other countries also they have their own Companies Acts. The two main features of a company are:
1. Its members or shareholders have limited liability. It means a shareholder (who has contributed towards the share capital of the company) has limited liability.. Here Limited Liability means that the liability of each shareholder is limited to the extent of unpaid amount on the shares held by him. For example A has bought 10,000 shares of Rs.10 each in ABC Ltd. He has paid Rs.8 per share. It means he still has to pay Rs.20000 to the company (10000 x Rs.2). In case company suffers losses of Rs.500,000
a cannot be called up to pay more than Rs.20000. Such companies which restrict the liability of their shareholders in their Memorandum of Association are called Limited Liability Companies. Such companies are by law required to write the word Limited or Ltd. after their name.
2. Perpetual Succession: After a company is registered under Companies Act, it becomes a Separate Person or entity in the eyes of Law. It is separate from its members or shareholders. The shareholders can freely sell/transfer their shares to anyone (though private limited companies put some restrictions). So if A sells his shares to B or tomorrow B sells his shares to C, it will not affect the company. So shareholders may come or go, the company will remain in existence. Even death or insolvency of shareholders does not affect the company because it is a separate legal entity.