Small Business - Management team
Saj
(Querist) 21 September 2009
This query is : Resolved
Could you suggest the best management structure for a small IT partnership company ? The no. of employees cannot exceed 15.
Is it legally required, a formal Director board lead by the Chairman/MD and a senior management team managed by CEO ?
What are the legal documents, the company has to prepare to set the management team (MD appointment letter/contract, CEO contract etc... ?
I would really appreciate your time, if you share different thoughts on management structure and its procedure, suitable for small businesses.riven
A V Vishal
(Expert) 22 September 2009
Saj
In the first place, let us clarify whether the proposed business is a partnership under the Partnership Act, 1932 or a company incorporated under the Companies Act, 1956. Your First para is rather conflicting and contradictory, since, if the business is a partnership, then there can be no directors, the stakeholders in the partnership are called as partners. All the partners can be working partners or even some can be as working partners. The partners designate one among themselves as a Managing partner, who takes the responsibility of day to day management of the business.
However, if you wish to run the business on corporate lines, then you need to incorporate either a Private Limited Company or a Public Limited company, now a days the concept of LLP's has also started in India.
If the business is small, then the most easiest, most viable and quickest way is to form a partnership firm. The time taken for starting a firm and the cost of formation is less than the other types of companies. Moreover, the compliances and filings under various laws is less compared to other kind of companies.
If you decide on the constitution, then further guidance can be given.
Here are the few main points you may consider :
1. Re-organisation. From this point of view, a partnership will have a relative advantage over a private company is so far as it does not call for the compliance of all those legal formalities which are required for the incorporation of a company.
2. Financial Resources. Both partnership and private company seem to be equally matched from the points of view of raising the amount required by a medium scale business. Thought the maximum number of members permitted for a private company (fifty) is larger than that permitted for a partnership (twenty), in actual practice, the number of members even in the case of a private company is usually round twenty. However, for raising additional resource from the money market, a partnership may enjoy netter goodwill and credit worthiness than a private company by value of the fact that the partner's liability is joint and several and unlimited.
3. Liability. Partnership may be a better choice if the scale of business is not large and the business is of a character. If, however, the business of a speculative nature and the demand for its products or services is erratic, the limited liability of members will be a strong point in favour of private company organisation.
4. Control. In a partnership, the original owner has the share to control of the firm's affairs with the other partners each of whom has the right to participate in management directly. In case of a private limited company, the original owner of the business may be able to retain effective control over business by getting himself appointed as the managing director of the company. This can be achieved under a partnership only when the owner takes only sleeping or nominal partners and keeps the control to himself.
5. Management. In a partnership, every partner has a voice in the management of the business of the firm. If, therefore, the number of partners is large an they do not have enough understanding among themselves, the efficiency of management may suffer. Also, since the owners are also the manager, the firm may not undertake activities involving risk with the result that the business may not expand much. On the other hand, in a private limited company, the elected directors are responsible for management and, therefore, decisions can be taken more quickly and boldly then in a partnership.
6. Continuity. Theoretically at least, a partnership is less stable than a private company organisation. But there is a bright side too. If the partners of a firm find some of the fellow partner troublesome and un-co-operative, they can easily dissolve the partnership and re-establishes the firm. However, the winding up of private company will be comparatively costlier n more difficult.
7. Secrecy. Iriven
Saj
(Querist) 22 September 2009
Hi Vishal,
Thank you very much for the response. It really makes sense. I apologize for the confusion in the first paragraph. Let me clarify somemore things, please.
1. Its a company incorporated under the Companies Act, 1956, a Private Limited Company. So there are directors.
2. I understand, from the point 4 (Control) "In case of a private limited company, the original owner of the business may be able to retain effective control over business by getting himself appointed as the managing director of the company." Could you tell me, the legal/company formalities to oppoint someone as a Managing Director ? A 3 year contract is a nice way to do it ? It would be great if you share some documents telling the roles and responsibilities of Managing Director ?
3. Can the Managing director be the CEO of a company ? In my knowledge, the board of directors/Managing Director manages the Senior Management team (SMT), but at the same I have seen people in the role of MD as well as CEO.riven
A V Vishal
(Expert) 22 September 2009
For a Private limited company there are no formalities for appointment as a M D, however if you want to appoint anyone to the post of MD for not more than 3 years, you can file a Form 23 with the resolution of appointment of MD with the terms and period of appointment. Further , you need to file a Form 32 also for change in designation. Your query regarding the M D acting as an CEO can also be held by the same person and there is no bar on the MD being the CEO also.riven
Saj
(Querist) 22 September 2009
Thanks Vishal.riven
