FORMS OF BUSINESS ORGANIZATION-

To start a business one has to decide which kind of organization is suitable in order to earn through this economic activity.

 Various forms of business organisations from which one can choose the right one include:

(a) Sole proprietorship,

(b) Joint Hindu family business,

 (c) Partnership,

(d) Cooperative societies, and

 (e) Joint stock company

SOLE PROPRIETORSHIP

Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. This form of business is particularly common in areas of personalised services such as beauty parlours, hair saloons and small scale activities like running a retail shop in a locality.

Salient characteristics of the sole proprietorship form of organisation are as follows:

 

(i) Formation and closure:

 There is no separate law that governs sole proprietorship. Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. Closure of the business can also be done easily.

 (ii) Liability:

 Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt.

 (iii) Sole risk bearer and profit recipient:

 The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing.

 (iv) Control:

 The right to run the business and make all decisions lies Sole trader is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business.

 (v) No separate entity:

 In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business.

 (vi) Lack of business continuity:

 The sale proprietorship business is owned and controlled by one person, therefore death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.

Merits

 Sole proprietorship offers many advantages.

 Some of the important ones are as follows:

 (i) Quick decision making:

A sole proprietor enjoys considerable degree of freedom in making business decisions.

(ii) Confidentiality of information:

 A sole trader is also not bound by law to publish firm’s accounts.

 (iii) Direct incentive:

 A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit.

(iv) Sense of accomplishment:

 There is a personal satisfaction involved in working for oneself.

(v) Ease of formation and closure:

 An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship.

Limitations

Notwithstanding various advantages, the sole proprietorship form of organisation is not free from limitations. Some of the major limitations of sole proprietorship are as follows:

 (i) Limited resources:

 Lack of resources is one of the major reasons why the size of the business rarely grows much and generally remains small.

 (ii) Limited life of a business concern:

The sole proprietorship business is owned and controlled by one person, so death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor affects the business and can lead to its closure.

(iii) Unlimited liability:

If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor.

(iv) Limited managerial ability:

Due to limited resources, sole proprietor may not be able to employ and retain talented and ambitious employees. Though sole proprietorship suffers from various shortcomings, many entrepreneurs opt for this form of organisation because of its inherent advantages. It requires less amount of capital.

 It is best suited for businesses which are carried out on a small scale and where customers demand personalised services.

  JOINT HINDU FAMILY BUSINESS

Joint Hindu family business is a specific form of business organisation found only in India.

a.   It is one of the oldest forms of business organisation in the country.

b.  It refers to a form of organisation wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF).

c. It is governed by the Hindu Law – Hindu Succession Act,1956

 The basis of membership in the business is birth in a particular family

 The following points highlight the essential characteristics of the joint Hindu family business

(i) Formation:

 For a joint Hindu family business, there should be at least two members in the family and ancestral property to be inherited by them.

(ii) Liability:

The liability of all members except the karta is limited to their share of co-parcenery property of the business. The karta, however, has unlimited liability.

 (iii) Control:

The head of the HUF is KARTA who is the eldest in the family.

Earlier only the eldest male of the family could be the Karta but now even females can be the Karta of the HUF  according to the the Hindu Succession (Amendment) Act, 2005

All members have equal ownership right over the property of an ancestor and they are known as co-parceners. All the decisions and is authorised to manage the business. His decisions are binding on the other members.

 (iv) Continuity:

The business continues even after the death of the karta as the next eldest member takes up the position of karta, leaving the business stable. The business can, Gender Equality in the Joint Hindu Family a Reality According to the Hindu Succession (Amendment) Act, 2005, the daughter of a coparcener of a Joint Hindu Family shall, by birth, become a coparcener. At the time of partition of such a ‘Joint Hindu Family’ the coparcenary property shall be equally divided to all the coparceners irrespective of their gender (male or female). The eldest member (male or female) of ‘Joint Hindu Family’ shall become Karta.

HUF can be terminated by the consent of all the members.

 (v) Minor Members:

 The inclusion of an individual into the business occurs due to birth in a Hindu Undivided Family. Hence, minors can also be members of the business.

Merits

 The advantages of the joint Hindu family business are as follows:

(i) Effective control: The karta has absolute decision making power and hence quick decision making is there.

(ii) Continued business existence:

The death of the karta will not affect the business as the next eldest member will then take up the position. Hence, operations are not terminated and continuity of business is not threatened.

 (iii) Limited liability of members: The liability of all the co-parceners except the karta is limited to their share in the business, and consequently their risk is well-defined and precise.

(iv) Increased loyalty and cooperation: Since the business is run by the members of a family, there is a greater sense of loyalty towards one other.

 Limitation

 The following are some of the limitations of a joint Hindu family business.

 (i) Limited resources:

 The joint Hindu family business faces the problem of limited capital as it depends mainly on ancestral property. This limits the scope for expansion of business.

(ii) Unlimited liability of karta:

Other than Karta all other members have a limited liability. His personal property can be used to repay business debts

 (iii) Dominance of karta:

 The karta individually manages the business . This may cause conflict amongst them and may even lead to break down of the family unit.

 (iv) Limited managerial skills:

 Since the karta cannot be an expert in all areas of management, the business may suffer as a result of his unwise decisions.

 PARTNERSHIP

The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.” Features Definitions given above point to the following major characteristics of the partnership form of business organization

 (i) Formation:

The partnership form of business organisation is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement regarding the rights and responsibilities of partners along with their profits and loss sharing ratios.

(ii)  Liability:

Further, the partners are jointly and individually liable for payment of debts. Jointly, all the partners are responsible for the debts and they contribute in proportion to their share in business and as such are liable to that extent

 (iii) Risk bearing: The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. Similarly the profits are also losses are also shared in the same ratio.

 (iv) Decision making and control:

Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners.

 (v) Continuity:

Partnership is characterised by lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business.

(vi) Number of Partners:

The minimum number of partners needed to start a partnership firm is two.

 According to section 464 of the Companies Act 2013, maximum number of partners in a partnership firm can be 100, subject to the number prescribed by the government.

 As per Rule 10 of The Companies (miscelleneous) Rules 2014, at present the maximum number of members can be 50.

(vii) Mutual agency:

 The business of the firm may be carried on by all or one or more partners actlng for all the partners

Merits The following points describe the advantages of a partnership firm.

(i) Ease of formation and closure:

A partnership firm can be formed as well as closed very easily. It requires very less legal formalities

 (ii) Balanced decision making:

 The partners can oversee different functions according to their areas of expertise thus making the decision more reliable.

(iii) More funds:

In a partnership, the capital is contributed by a number of partners thus, the amount collected by the firm is more than that of a sole proprietorship.

 (iv) Sharing of risks:

 The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.

(v) Secrecy:

A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations.

A partnership firm of business organisation suffers from the following limitations:

 (i) Unlimited liability:

The liability of all the partners in the partnership firm is unlimited. This means that his personal assets can also be attached for the payment of the liability of the business.

 (ii) Limited resources:

There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large scale business operations.

(iii) Possibility of conflicts:

 Partners may have different point of view over the terms and working if the business . Thus , there may be conflicts giving rise to instability in the partnership.

(iv) Lack of continuity:

Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity.

(v) Lack of public confidence:

A partnership firm does not share its details with the public in the form of reports to be submitted just like a company. Hence, it is difficult to gain public confidence without the transparency in the books of accounts.

Types of Partners

A partnership firm can have different types of partners with different roles and liabilities. An understanding of these types is important for a clear understanding of their rights and responsibilities. These are described as follows:

Based on the extent of participation on the functioning of the business, we can classify partners into:

a) active partners

 (b) sleeping partners.

a) Active partner:

 If a partner takes an active part in the management of the business, we call him as active partner. He is aIso known as a 'working partner'.

 b) Sleeping partner:

If the partner is not actively associated with the working of the partnership firm, we call him a sleeping partner. A sleeping business partner simply invests his capital. He does not participate in the functioning of the firm. Such a partner is also known as a 'dormant partner'.

 Based on the sharing of profits, partners may be classified into:

 (a) nominal partners, and –

(b) partner in profits.

a) Nominal partner:

A partner who just lends his name to the partnership is known as a nominal partner. He neither invests his capital nor participates in the day-to-day working and management of the firm. Such partners are not entitled to a share of profits, but they are liable to other parties for all the acts of the firm.

b) Partner in profits:

A partner who shares the profits of the business without being liable for losses is called a partner in profits. As a rule, he will not take any part in the management of the business. This is applicable to a minor who is admitted to the benefits of the firm. Based on the behaviour and conduct exhibited, the partners may be divided into:

(a) partner by estoppel, and

(b) partner by holding out.

 a) Partner by estoppel:

A person who behaves in the public in such a fashion as to glve an impression that he is one of the partners in a partnership firm is called a partner by estoppel. Such partners are not entitled to profits but are fully liable as regards the firms obligations.

b) Partners by holding out:

If a particular partner of a firm represents that another person is also a partner of the firm, and if such a person does not disclaim the partnership relationship even after coming to know about it, such person is called a 'partner by holding out'. Such partners are not entitled to profits but are liable as regards the obligations of the firm.

Based on liabilities also, partners may be classified into two categories:

(a) limited partners. And

 (b) general partners.

a) Limited partner:

 The liability of such a partner is limited to the extent of.the capital contributed by him. He is not entitled to take part in the management of the business, but he can advise the other general members. His acts do not bind the firm. He has right to inspect the books of the firm for his information. Such partners'are also called 'special partners'.

 b) General partner:

He is also called 'unlimited partner'. His liability is unlimited and he is entitled to participate in the management of the business. Every partner who is not a limited partner is treated as a general partner.

 Types of Partnerships

 Partnerships can be classified on the basis of two factors, viz., duration and liability. On the basis of duration, there can be two types of partnerships :

‘partnership at will’ and ‘particular partnership’.

On the basis of liability, the two types of partnership include: one ‘with limited liability’ and the other one ‘with unlimited liability’.

These types are described in the following sections. Classification on the basis of duration

(i) Partnership at will:

 This type of partnership exists at the will of the partners. It can continue as long as the partners want and is terminated when any partner gives a notice of withdrawal from partnership to the firm.

 (ii) Particular partnership:

Partnership formed for the accomplishment of a particular project say construction of a building or an activity to be carried on for a specified time period is called particular partnership. It dissolves automatically when the purpose for which it was formed is fulfilled or when the time duration expires.

 Classification on the basis of liability

(i) General Partnership:

 In general partnership, the liability of partners is unlimited and joint. The partners enjoy the right to participate in the management of the firm and their acts are binding on each other as well as on the firm. Registration of the firm is optional. The existence of the firm is affected by the death, lunacy, insolvency or retirement of the partners.

 (ii) Limited Partnership:

In limited partnership, the liability of at least one partner is unlimited whereas the rest may have limited liability. Such a partnership does not get terminated with the death, lunacy or insolvency of the limited partners. The limited partners do not enjoy the right of management and their acts do not bind the firm or the other partners. Registration of such partnership is compulsory. This form of partnership was not permitted in India earlier.

Partnership Deed

 A partnership is a voluntary association of people who come together for achieving common objectives. In order to enter into partnership, a clear agreement with respect to the terms, conditions and all aspects concerning the partners is essential so that there is no misunderstanding later among the partners. Such an agreement can be oral or written.

a. Even though it is not essential to have a written agreement, it is advisable to have a written agreement as it constitutes an evidence of the conditions agreed upon.

b.  The written agreement which specifies the terms and conditions that govern the partnership is called the partnership deed.

 The partnership deed generally includes the following aspects:

• Name of firm

• Nature of business and location of business

• Duration of business

 • Investment made by each partner

 • Distribution of profits and losses

• Duties and obligations of the partners

• Salaries and withdrawals of the partners

 • Terms governing admission, retirement and expulsion of a partner

 • Interest on capital and interest on drawings

• Procedure for dissolution of the firm

• Preparation of accounts and their auditing

• Method of solving disputes

 Registration

Registration of a partnership firm means the entering of the firm’s name, along with the relevant prescribed particulars, in the Register of firms kept with the Registrar of Firms. It provides conclusive proof of the existence of a partnership firm. It is optional for a partnership firm to get registered. In case a firm does not get registered, it is deprived of many benefits.

 The consequences of non-registration of a firm are as follows:

 (a) A partner of an unregistered firm cannot file a suit against the firm or other partners,

(b) The firm cannot file a suit against third parties, and

(c) The firm cannot file a case against the partners. In view of these consequences, it is therefore advisable to get the firm registered.

The procedure for getting a firm registered is as follows:

.

 COOPERATIVE SOCIETY

The word cooperative means working together and with others for a common purpose.

a. The cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members.

b.  They are driven by the need to protect their economic interests in the face of possible exploitation at the hands of middlemen obsessed with the desire to earn greater profits.

c.  The cooperative society is compulsorily required to be registered under the Cooperative Societies Act 1912.

d. The process of setting up a cooperative society is simple enough and at the most what is required is the consent of at least ten adult persons to form a society.

Features The characteristics of a cooperative society are listed below.

 (i) Voluntary membership:

 The membership of a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. There cannot be any compulsion for him to join or quit a society.

(ii) Legal status:

The society can enter into contracts and hold property in its name, sue and be sued by others

 (iii) Limited liability:

The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital. This defines the maximum risk that a member can be asked to bear.

 (iv) Control:

The right to vote gives the members a chance to choose the members who will constitute the managing committee and this lends the cooperative society a democratic character.

 (v) Service motive:

If any surplus is generated as a result of its operations, it is distributed amongst the members as dividend in conformity with the byelaws of the society.

Merits

 The cooperative society offers many benefits to its members. Some of the advantages of the cooperative form of organisation are as follows.

(i) Equality in voting status:

The principle of ‘one man one vote’ governs the cooperative society.

(ii) Limited liability:

 The liability of members of a cooperative society is limited to the extent of their capital contribution

 (iii) Stable existence:

Death, bankruptcy or insanity of the members do not affect continuity of a cooperative society.

 (iv) Economy in operations:

The customers or producers themselves are members of the society, and hence the risk of bad debts is lower.

 (v) Support from government:

 The cooperative society exemplifies the idea of democracy and hence finds support from the Government in the form of low taxes, subsidies, and low interest rates on loans.

(vi) Ease of formation:

The cooperative society can be started with a minimum of ten members. The registration procedure is simple involving a few legal formalities.

Limitations

The cooperative form of organisation suffers from the following limitations:

 (i) Limited resources:

Resources of a cooperative society consists of capital contributions of the members with limited means.

 (ii) Inefficiency in management:

 Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries.

(iii) Lack of secrecy: As a result of open discussions in the meetings of members as well as disclosure obligations as per the Societies Act , it is difficult to maintain secrecy about the operations of a cooperative society.

 (iv) Government control:

Interference in the functioning of the cooperative organisation through the control exercised by the state cooperative departments negatively affects its freedom of operation.

(v) Differences of opinion:

Internal quarrels arising as a result of contrary viewpoints may lead to difficulties in decision making. Personal interests may start to dominate the welfare motive and the benefit of other members may take a backseat if personal gain is given preference by certain members.

  Types of Cooperative Societies

Various types of cooperative societies based on the nature of their operations are described below:

(i) Consumer’s cooperative societies:

 The consumer cooperative societies are formed to protect the interests of consumers. The main aim of these societies is to protect the members from the evils of unfair trade and steep rise in the prices.

 (ii) Producer’s cooperative societies:

 These societies aim at providing financial help to the producers along with technological aids, raw material supply and marketing of products.

(iii) Marketing cooperative societies:

It pools the output of individual members and performs marketing functions like transportation, warehousing, packaging, etc., to sell the output at the best possible price. Profits are distributed according to each member’s contribution to the pool of output.

 (iv) Farmer’s cooperative societies: These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. The aim is to gain the benefits of large scale farming and increase the productivity. Such societies provide better quality seeds, fertilisers, machinery and other modern techniques for use in the cultivation of crops

 (v) Credit cooperative societies: Credit cooperative societies are established for providing easy credit on reasonable terms to the members. The aim of such societies is to protect the members from the exploitation of lenders who charge high rates of interest on loans. Such societies provide loans to members out of the amounts collected as capital and deposits from the members and charge low rates of interest.

 (vi) Cooperative housing societies:

Cooperative housing societies are established to help people with limited income to construct houses at reasonable costs. The aim is to solve the housing problems of the members by constructing houses and giving the option of paying in instalments. These societies construct flats or provide plots to members on which the members themselves can construct the houses as per their choice.

 JOINT STOCK COMPANY

A company is an association of persons formed for carrying out business activities and has a legal status independent of its members.

a. The company form of organisation is governed by The Companies Act, 2013.

b. As per section 2(20) of Act 2013, a company means company incorporated under this Act or any other previous company law.

c. The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders. Usually, the owners exercise an indirect control over the business.

d. The capital of the company is divided into smaller parts called ‘shares’ which can be transferred freely from one shareholder to another person (except in a private company).

Features

The definition of a joint stock company highlights the following features of a company.

 (i) Artificial person:

 Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, eat, run, talk and so on. It is, therefore, called an artificial person.

 (ii) Separate legal entity:

 From the day of its incorporation,Its assets and liabilities are separate from those of its owners. The law does not recognise the business and owners to be one and the same.

 (iii) Formation:

The formation of a company is a time consuming, expensive and complicated process. Incorporation of companies is compulsory under The Companies Act 2013 or any of the previous company law, as state earlier. Such companies which are incorporated under companies Act 1956 or any company law shall be included in the list of companies.

 (iv) Perpetual succession:

 A company being a creation of the law, can be brought to an end only by law. It will only cease to exist when a specific procedure for its closure, called winding up, is completed. Members may come and members may go, but the company continues to exist.

(v) Control:

 The management and control of the affairs of the company is undertaken by the Board of Directors, which appoints the top management

 (vi) Liability:

The liability of the members is limited to the extent of the capital contributed by them in a company.

 (vii) Common seal: A company may or may not have a common seal. If a company has a common seal, it must be affixed to the documents such as agreements of a company. If a company does not have a common seal then the person signing the document should be authorised by a board’s resolutions.

 (viii) Risk bearing: The risk of losses in a company is borne by all the share holders.

Merits

 The company form of organisation offers a multitude of advantages, some of which are discussed below.

 (i) Limited liability:

The shareholders are liable to the extent of the amount unpaid on the shares held by them.

(ii) Transfer of interest:

 The ease of transfer of ownership adds to the advantage of investing in a company as the share of a public limited company can be sold in the market and as such can be easily converted into cash in case the need arises.

 (iii) Perpetual existence:

 Existence of a company is not affected by the death, retirement, resignation, insolvency or insanity of its members as it has a separate entity from its members. A company will continue to exist even if all the members die. It can be liquidated only as per the provisions of the Companies Act, 2013.

 (iv) Scope for expansion:

The investors are inclined to invest in shares because of the limited liability, transferable ownership and possibility of high returns in a company.

(v) Professional management:

A company can afford to pay higher salaries to specialists and professionals. It can, therefore, employ people who are experts in their area of specialisations. The scale of operations in a company leads to division of work.

 Limitations

 The major limitations of a company form of organisation are as follows:

(i) Complexity in formation:

 The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedures involved.

(ii) Lack of secrecy:

A company is required to submit its financial statement to the Registrar of Companies along with publishing the financial statements for the shareholders on their websites. Thus, their financial information is available for everyone.

(iii) Impersonal work environment:

The large size of a company further makes it difficult for the owners and top management to maintain personal contact with the employees, customers and creditors.

(iv) Numerous regulations:

There are numerous regulations which are applicable on companies starting from income tax authorities  to registrar of companies and all other regulatory bodies with whom the companies have to deal with as a part of their statutory duties.

(v) Delay in decision making:

Communication as well as approval of various proposals may cause delays not only in taking decisions but also in acting upon them.

 (vi) Oligarchic management:

The Board of Directors as such enjoy considerable freedom in exercising their power which they sometimes use even contrary to the interests of the shareholders. Dissatisfied shareholders in such a situation have no option but to sell their shares and exit the company. As the directors virtually enjoy the rights to take all major decisions, it leads to rule by a few.

 (vii) Conflict in interests:

 There may be conflict of interest amongst various stakeholders of a company. The employees, for example, may be interested in higher salaries, consumers desire higher quality products at lower prices, and the shareholders want higher returns in the form of dividends and increase in the intrinsic value of their shares.

Types of Companies

 A company can be either a private or a public company.

These two types of companies are discussed in detail in the following paragraphs.

a) Private Limited Company:

 A private limited company means a company which by its article

 i) restricts the right to transfer its shares;

 ii) limits the number of its members to fifty; and

 iii) prohibits any invitation to the public to subscribe for any shares or debentures of the company.

b) Public Limited Company:

A public limited company is one which is not a private limited company. A company having the following characteristics should be called a public limited company.

 i) The right of the shareholder to transfer his shares is not restricted.

 ii) The minimum number of shareholders is 7 but there is no limit to the maximum number of members.

 iii) It can invite public to subscribe for its shares and debentures.  

The following are some of the privileges of a private limited company as against a public limited company:

1. Membership-

Members needed in a Public Company -7

 Members needed in a Public Company -2

2. Prospectus( invitation to subscribe the shares)-

Required in Public company

Not Required in Private Company

3. Minimum Subscription-

Required for public company

Not required for private company

 4. Directors

Public company- 3

Private company- 2

Maximum directors for both- 15

5. Maintenance of Index of members-

Required for public company

Not required for private company

CHOICE OF FORM OF BUSINESS ORGANISATION

It depends upon the following factors-

Factors influencing the choice  of form of Business Organization

	Most Advantageous	Least Advantageous
Cost of formation	Sole Proprietorship	Company
Ease in setting up the organisation	Sole Proprietorship	Company
Liability	Company	Sole Proprietorship
Management ability	Company	Sole Proprietorship
Regulations	Sole Proprietorship	Company
Capital considerations	Company	Sole Proprietorship
Degree of control	Sole Proprietorship	Company