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- Understanding Company Fundamentals in Finance: Learning Finance 003
Understanding Company Fundamentals in Finance: Learning Finance 003
Learn about the different forms of business organization, including proprietary firms, partnerships, and companies. Discover the benefits of a company as a legal entity and how it allows for pooling of funds and capital from investors. Join us in this informative video on finance fundamentals.
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Video Transcript
Hello friends, welcome to video 3 in the series Learning Finance can be fun.
In this video, I am going to deal with certain company fundamentals.
Well, there are 3 different forms of business organization, a proprietary concern, partnership
and company.
In a proprietary firm, there is one individual who owns and runs the enterprise.
In partnership, it is a collective endeavor of a few people.
And in a company, it's a much larger scale.
It allows pooling of funds and capital from a large number of investors.
And therefore, whenever a business grows large, the company form is preferred.
Now, what is this company form?
What is a company?
Company is a legal entity.
That means once the company is created under the appropriate law,
It has its own separate existence from the people who created the entity.
Being a separate legal entity, it can exercise a number of rights to be able to run the business.
For example, it can procure property, it can procure materials, it can engage people,
it can enter into contracts. So being a separate legal entity, it gets all those rights.
But at the same time, it is governed by appropriate law, appropriate legal framework.
There are clearly some advantages of company form as I mentioned earlier.
Company form allows pooling of funds and therefore you can create a large scale of business.
But in addition there are three main advantages. One is about longevity.
Even if the person who created the company and who was the first shareholder of the company,
even if he passes away or she passes away, the company can continue to exist.
This continuity is also helpful in attracting talent to work for the company and
Therefore people are more sure in terms of their own career prospects and growth opportunities
Also, because there is a certain assurance about governance standards
Which are not necessarily guaranteed in a proprietary organization or in a partnership firm
But company considering that it is governed by a set of laws and as we will see down the line if a company
Becomes a publicly listed company then the compliance obligations governance obligations
Even go higher and to that extent
It is possible to scale up as well as attract talent
One important principle behind the company form of business should be well understood
the principle is
Separation of ownership and management. Who are the owners? People who own shares.
Now people who own shares can be broadly of two categories.
One category as in India we call them as promoter shareholders.
People who thought of this business idea and the other shareholders.
The promoter shareholders also be a part of the management through the board of directors
but lot of other shareholders need not be part of the management.
In fact that's not their intention to be part of management yet they contribute capital.
On the other hand, people who are a part of the management need not own shares in the
company and to that extent there is a separation.
There is a bridge between the owners group and the management group through the board
of directors.
The board of directors get a representation based on substantial ownership and to that
extent the promoter shareholders, promoter owners have a significant say in the board
of directors and thus in respect of the management.
it becomes very important to protect the interests of shareholders who have contributed capital
but who are not a part of the management. The purpose of limited liability concept is
to assure those investors who are not a part of the management that in case the business
