Forms of Business Organisations

Forms of Business Organisations

‘Business’ means any activity that keeps a person busy.

The main aim of doing any business is to earn profit.  However, organization of a business must comply with any of the proved legal forms that gives the organization a distinct status and also helps to determine its identity.

There are four distinct forms of business organizations:-

(i) Sole proprietorship

(ii) Partnership

(iii) Joint stock company

(iv) Cooperative society

SOLE PROPERIETORSHIP

It is the simplest form of business organization and is known as ‘one man business’.  In this form of business organization, one person is solely responsible for providing capital, for bearing the risk of the enterprise and also for day-to-day management of the business.  In retail pharmacy business (chemist shop) individual professional skill is essential.  Therefore, this form of business is best suited to a sole proprietor.  

Salient Features of Sole Proprietorship

1. Sole proprietor has full authority over the affair of business.  He has to act according to his ability and skill.

2. The proprietor has to arrange the necessary capital and assets which are essential to run its business smoothly.

3. The profit earned in the business entirely belongs to the proprietor.  Similarly losses in the business are also to be borne by him.

4. The liability of the sole proprietor is unlimited.

5. No legal formalities are required to start the business, except in certain business.  For example, to start a retail drug store, a licence is needed from the drug administration.

6. The ownership lies with one person only.

Advantages 

1. It is most easily formed of all forms of business organizations.

2. The secrecy of the business affairs can be maintained.

3. The sole proprietor is free  to take any decision in

4. The sole proprietor is able to establish a personal contact with his customers.

5. The sole proprietor is free to change the pattern of management at any time.

6. The capital investment in the business can be increased or decreased at will.

Disadvantages 

1. The individual proprietor generally suffers due to lack of adequate financial resources. 

2. The business ends with the death of the proprietor.

3. It is very difficult for a single person to look after every aspect of the business.

4. The liability for business debts is unlimited.

5. There are no checks and controls on the sole proprietor.

6. The sole proprietor usually run his business only on a small scale.

JOINT HINDU FAMILY BUSINESS

The management and control of the family business is generally in the hands of the seniormost male member of the family who is known as the ‘Karta’.  No legal formalities are required to convert a business into a joint family business. 

Salient Features of Joint Hindu Family Business

1. The membership of the family business is as a result of status arising from birth in the family.

2. Only the male members of the family can claim the right to be the member in the joint Hindu family business firm.

3. Only ‘Karta’ has the right to manage the family business.

4. The liability of all the members of joint Hindu family is limited, except ‘Karta’, who has unlimited liability.

5. The existence of the joint Hindu family business is not affected by the death or insolvency of a member or even Karta.

6. The co-parcener can claim for its share or ask for the partition of the business if they are not satisfied.

Advantages 

1. Karta has full freedom to run the business.

2. Every co-parcener get share in the profits of the business irrespective of his contribution.

3. All the co-parceners have limited except ‘Karta’.

4. The business has no effect of insanity or death of any member.

5. The business can be run smoothly with the help of all the male members of the family.

Disadvantages 

1. Karta has unlimited authority to run the business.  The initiative and sincerity of young members of the family has no place.

2. The resources of the joint family business are limited.

3. The continuity of the joint Hindu family business depends upon the continuity of the joint Hindu family itself.

PARTNERSHIP

The Indian Partnership Act defines partnership as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons who have entered into partnership are individually known as ‘Partners’ and collectively as a ‘Partnership’. The business organization runs as a partnership is called as ‘Firm’.

Salient Features of Partnership 

1. In partnership business organization two or more persons, upto a maximum of twenty (ten in case of a banking firm) join together to share any profit made by the firm. 

2. Partnership is formed on the basis of an agreement between the concerned persons. The document containing the agreement is called the ‘Partnership Deed’.

3. Any profit made by the partnership must be distributed among the partners in the agreed ratio. 

4. A partner cannot transfer his share to an outsider without the consent of the other partner(s).

5. A partnership is dissolved automatically when the term for which the partnership was entered into expires or when a partner dies or retires. 

6. Each partner of the firm has unlimited liability. 

Advantages 

1. Partners may pool their individual resources to collect enough finance for smooth running of the business.

2. Any loss incurred by the firm is shared by all the partners, it reduces risk

3. A partnership firm has a longer existence because it is not dependent on any one person. 

4. The business can be expanded by extending the partnership provided the number of partners does not exceed twenty. 

5. There is an unlimited liability of the partners. 

Disadvantages 

1. In certain cases, it is difficult to maintain mutual understanding and harmony among the partners. 

2. There is a lack of stability in the business. 

3. A partner who wants to withdraw his capital from the firm will not be able to do so unless all the other partners agree to it. 

4. Generally the public does not have much faith in partnership business. 

KINDS OF PARTNERS

Divided into the following types :-

Active or working partner – He takes an active part in the management and bears an unlimited liability for the debts of the firm. 

Sleeping or inactive partner – A sleeping partner does not take any active part in the management. His liability for the debts of the firm is unlimited. 

Nominal partner – he only lends his name to the firm as a partner. He, however, neither invest any capital, not claims any share in the profits of the business. He does not take any part in the management of firm’s business, 

Partner in profit only – he invests his capital only with a view to earn a share in profits of the firm and has no liability as regards to any losses suffered by the firm. 

Secret partner – a partner who does not want the fact of his being a partner to be known to outsiders, is known as a secret partner. His liability for the firm’s debts is unlimited. 

Minor partner – a partner below the age of 18 being a minor, does not enjoy the rights of a full – fledged partner in a partnership firm since, in law, he is not competent to contract. Indian Partnership Act allows a minor to be admitted as a partner provided all the other partners agree to it. A minor as a partner is entitled to a share in the profits and property of the firm. His liability for the firm’s debts is, limited in proportion to his share. 

Partner by estoppels – if an outsider behaves in such a fashion that he is mistaken as partner of the firm by third party, he will be held liable to all those third parties who extend credit to the firm on the assumption of his being a partner. Such a person is known as Partner by Estoppel he cannot deny the liabilities attaching to the position of a partner.

 

KINDS OF PARTNERSHIP

Two types :- 

1. General partnership 

2. Limited partnership 

1. General partnership – The liability of every partner is unlimited. In case, the assets of the firm are not sufficient to pay off its liabilities, even the private property of the partners may be used to meet the undischarged liabilities. A minor partner is an exception, because his liability for the firm’s obligations is limited. Each partner of a general partnership is entitled to participate in the management of the business, unless the partners themselves decide otherwise. 

2. Limited partnership – The unlimited liability of partners in general partnership discourages investment of large sums in the firm. The limited partnership is a way out of this difficulty although it is not permitted under the Indian Law. Main features. 

(i) A limited partnership consists of two classes of partners, namely ‘general partners’ with unlimited liabilities and ‘special’ or ‘limited partners’ with their liability limited to their capital contribution. 

(ii) A limited partner simply invests his money in the firm. Though he is not entitled to take part in the management of the business, he is allowed to inspect the books of the firm for his information. 

(iii) The death, lunacy or bankruptcy of a limited partner will not affect the existence of the firm. 

(iv) A special partner cannot withdraw any part of the capital contributed by him. If he does so, his liability on the portion so withdrawn becomes unlimited. 

(v) A special partner cannot assign his share to an outsider without the consent of the general partners. 

JOINT STOCK COMPANY

A company is governed by the Company Act and it has to follow various provisions of the Act. Hence the company form of organization has to comply with various statutory requirements. The growing needs of modern industry and commerce could not be met by sole proprietorship or partnership. A joint stock company is a better method of mobilizing financial resources. A joint stock company is organized to carry on a business on a large scale because its capital requirements and risk obligations are too burdensome – for a single individual or for a few individuals to bear themselves. 

Salient Features of a Joint Stock Company 

1. A company is an incorporated association. It comes into existence only after registration under the Company Act 1956.

2. The members or shareholders are the owners of the company. The business is run by the boarf of directors elected by members in the general body meeting of the company. 

3. The capital requirement in a business is divided into shares of small denominations so that, would be investors can invest small or large sums of money as they desire. 

4. The shareholder is always free to withdraw from the membership of a company by transferring his shares. 

5. The liability of the members of a joint stock company is limited to the unpaid value of shares held by them. 

6. A company can own, hold and dispose of property in its own name. its shareholders cannot claim to be private or joint owners of that property. 

7. A company profits are taxed at a flat rate against slab rates charged for non-corporate bodies. 

Advantages 

1. A joint stock company is able to collect a large amount of capital. It attracts a wide range of investors by giving them the option to invest small or large sums as they desire. 

2. The liabilities of the members of a company is limited to the nominal value of the shares held by them. 

3. The joint stock company enjoys perpetual succession. Insolvency, insanity or death of its members has no effect on the existence of the company. 

4. The shares of the company can be transferred without any difficulty. The facility of easy convertibility of shares into cash serves as an incentive to the investors. 

5. The management of the company is conducted on democratic principles. The company is managed by directors who are elected by shareholders. 

6. The risk fro each member is reduced because it is diffused and spread over several members of the company. 

7. A company pays income tax at flat rates. This means on higher profits, it will have to bear lower tax-liability as compared to others. 

Disadvantages 

1. The formation of a company is costly and time-consuming process. There are a number of formalities which are required to be complied with. 

2. Directors sometimes misuse their position and serves their own personal ends ignoring the interest of the shareholders. 

3. The company cannot take prompt decisions because of the time-lag between board meeting and the difficulty of getting the requisite quorum. 

4. The persons controlling a company have large financial resources at their disposal. They may attempt to influence the economic and political decisions made by the Government. 

5. The secrecy of the business affairs cannot be maintained. 

KINDS OF COMPANIES

Classified from four different points of view. 

(A) From the point of view of incorporation 

1. Companies incorporated under a special chapter. 

2. Companies established by a special act of parliament. These companies are also called statutory companies e.g. LIC of India, Air India etc. 

3. Companies incorporated under the provisions of Company Act. These companies are also called Registered Companies. 

(B) From the point of view of liability 

1. Companies with unlimited liabilities. 

2. Companies with liability limited by guarantee.

3. Companies with liability limited by shares. 

(C) From the point of view of nationality

1. National companies

2. Multinational 

(D) From the point of view of public interest 

1. Private company 

2. Public company

3. Government company 

1. Private Company – 

A company which is run by a minimum of two members or by maximum of fifty members, does not allow public subscription to its shares and it also restricts the transfer of its share, is called a private company. A private company combines in itself the advantage of limited liability with the facilities of the partnership organization. For this reason, it is preferred by many businessmen. Private company is not as suitable a form of business organization as a partnership, because the firm will have to pay higher income-tax as compared to partnership organization. 

Public company – 

A company can be formed by a minimum of seven persons, having no maximum limit on its members, offers its shares to the public with a view to collect large sums of money to finance its projects and also does not restrict the right of its members to transfer their shares freely. A company is called ‘Public Company’ 

Government Company – 

A company is called a ‘Government Company’ if at least 51 percent of its share capital is held by the Central Government, a State Government or jointly by the Central Government and State Government. 

COOPERATIVE SOCIETY

Cooperative organization is a voluntary association of persons who are financially strong. They come together with an aim not to get profits but to overcome disability arising out of want of adequate financial resources. 

Salient Features of Cooperative Society 

1) A cooperative society is a voluntary organization made by association of persons and not of capital. There is no discrimination as regards the membership of the society. A member can withdraw from society after giving due notice to that effect. 

2) The management of the affairs of society is in the hands of the managing committee which is elected by the members. The broad policies are framed by the members and the management committee is required to perform its duties within its parameter. 

3) The capital of a cooperative society is contributed by its members through purchase of shares. The cooperative society generally lay down a limit to the amount of capital which may be subscribed by an individual member. A cooperative society can also add to their capital resources by loans from the central and state cooperative banks. 

4) The shares of the society cannot be transferred by members to others. In case a member wants to withdraw his capital, he has to return the shares. 

5) A cooperative society conduct business on cash basis and does not allow credit facility. 

6) A cooperative society is required to be registered under the Cooperative Societies Act, 1912. 

7) The surplus at the end of the year is not distributed as dividend among shareholders in the proportion to the share capital invested in the cooperative society. 

Advantages 

1) A cooperative society is a voluntary association that may be formed by any 10 adult persons. Only a few legal formalities are required. 

2) The liability of the members of a cooperative is limited to a certain proportion of their capital contribution in the society. 

3) The life of a cooperative society is not affected by the death, insolvency or conviction of a member. 

4) The management of a cooperative is based on the principle of one-man- one-vote. There is no discrimination on the basis of the number of shares held by members. 

5) There is coordination among members of a cooperative society because they belong to a local area or a particular class or group and are inspired by the idea of cooperation. 

6) The State Government offers many types of assistance, such as, facility of loans at much lower rate of interest. 

7) The membership of cooperative society is open to everybody. There is no debar from joining the society on the basis of economic position, caste, colour or creed. 

Disadvantages – 

1) There is always shortage of capital for a cooperative society, because it generally has poor or lower middle class persons as its members. 

2) A cooperative is managed by a managing committee which generally lacks technical knowledge and experience to run an undertaking. 

3) The affairs of cooperatives are generally so much exposed to the members that it becomes difficult for them to maintain the business secrecy. 

4) There is lack of motivation among the members of the managing committee because the rate of return to the members is limited by law.