Unit 2: Forms of Business organizations

INTRODUCTION

Business activities cannot be performed in isolation. They have to organized in an appropriate form. ‘Forms of Business Organization’ are essentially the forms of ownership of business. Ownership involves capital investment, management and sharing of profit

VARIOUS FORM OF BUSINESS ORGANISTIONS FORMS

Sole proprietorship
Joint Hindu Family business
Partnership
Cooperative societies
Joint Stock Company

SOLE PROPRIETORSHIP

Sole proprietorship is a popular form of business organization and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient 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.

FEATURES

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. Thus, there is ease in formation as well as closure of business.
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.
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.
Control: – The right to run the business and make all decisions lies absolutely with the sole proprietor. He can carry out his plane without any interference from other.
No Separate Entity:– A solo proprietorship has no legal existence, i.e. in the eyes of the law, no distinction is made between the firm and the proprietor. As a result, owner is held responsible for all the activities of the business.

VI. Lack of Business Continuity:– As owner and business are one and the same entity, death, physical ailment or insolvency of the proprietor has a direct and detrimental effect on the business. It may even lead to closure of the business.

MERITS

Quick decision making: – A sole Proprietor enjoys considerable degree of freedom in making business decisions. Further the decision making is prompt because there is no need to consult other.
Direct incentive: – A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all profit. The need to share profit does not arise as he/she is the single owner. This provides maximum incentive to the trader to work hard.
Sense of accomplishment: – There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instills in the individual a sense of accomplishment and confidence in one’s abilities.
Ease of formation and closure: – As sole proprietorship is the least regulated form of business as per the wish of the owner.
Confidentiality of Information:– the maintenance of full secrecy is very important for the success of a business. As proprietor has the sole decision making authority, it enables him to retain all information related to business operations confidential. Solo trader is also not bound by law to publish firm’s accounts.

LIMITATION

Limited resources: – Resources of a sole proprietor are limited to his personal savings and borrowings from other. Bank and other lending institutions may hesitate to extend a long term loan to a sole proprietor.
Unlimited liability: – A major disadvantages of a sole proprietorship is that the owner has 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.
Limited life of a business concern: – The sole proprietorship business is owned and controlled by one person.
Limited managerial ability: – The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc.

JOINT HINDU FAMILY BUSINESS

The Hindu undivided family business or Joint Hindu Family business is a unique form of business organization, which is found only in India. It is governed by the provisions of the Hindu Law (the Hindu Succession Act, 1956). It is one of the oldest forms of business organization in the country.

FEATURES

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. The business does not require any agreement as membership is by birth.
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.
Control: – The control of the family business lies with the karta. He takes all the decisions and is authorized to manage the business
Minor Members: – Minor can also be member of the business.
Continuity: – The business continues even after the death of the karta as the next eldest member takes up the position of karta.

MERITS

Effective Control: – The karta has absolute decision making power. This also leads to prompt and flexible decision making.
Continued Business Existence: – The death of the karta will not affect the business as the next eldest member will then take up the position.
Limited Liability of Members: – The liability of all the co-parceners except the karta is limited to their share in the business.
Increased Loyalty And Cooperation: – Since the business run by the members of a family, there is a greater sense of loyalty towards one other. This helps in securing better cooperation from all the members.

LIMITATION

Limited Resources: – The joint Hindu family business faces the problem of limited capital as it depends mainly on ancestral property.
Unlimited Liability of Karta: – The Karta is burdened not only with the responsibility of decision making and management of business.
Dominance of Karta: – The Karta individually manager the business which may at times not be acceptable to other members.
Limited Managerial Skills: – Since the Karta cannot be an except 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”. Partnership serves as an answer to the needs of greater capital investment, varied skills and sharing of risks.

FEATURES

Formation: – The partnership form of business organization is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement wherein the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified.
Liability: – The partners of a firm have unlimited liability, i.e. their Personal assets may be used for repaying debts in case the business assets are insufficient if business assets. Further, the partners are ‘jointly’ and ‘individually’ liable for payment of debts.
Risk Bearing: – The partners bear the risks involved in running a business as a term. The reward comes in the form of profits which are shared by the partners in an agreed ratio.
Decision Making and Control: – The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. Thus, the activities are managed through the joint efforts of all the partners.
Continuity:– Partnership gets automatically dissolved on the death, retirement, insanity or insolvency of any of its partners. However, if the remaining partners desire to continue, they they may do so on the basis of a new agreement.
Membership:– There should be minimum of 2 persons to form a partnership firm. Section 464 of the companies Act, 2013 provides that number of person in any partnership shall not exceed 100 subject to the limit prescribed in Rules. Rule 10 of the companies (Miscellaneous) Rules, 2014 provides that no partnership shall be formed, consisting of more than 50 person. So, limit as of now is 50 partners.
Mutual Agency:– According to Indian Partnership Act, 1932, partnership business is carried on by all or any one of the partners acting for all. It means, every partner acts in the capacity of an ‘ agent’ as well as a ‘principal’.
1. as an agent, he represents other partners and thereby binds them through his acts.
1. As a principal, he is bound by the acts of other partners.

MERITS

Ease of formation and closure:- A partnership firm can be easily formed and dissolved. It comes into existence through an agreement between the partners and they can start a lawful business even without registration.
Balanced Decision Making: – The partners can oversee different function according to their areas of expertise.
More Funds: – In a Partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed.
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.
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 operation.

LIMITATION

Unlimited liability: – The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so.
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 operation. As a result, partnership firm face problem in expansion beyond a certain size.
Possibility of Conflicts:- In a partnership firm, every partner enjoys the right to participate in the affairs of the firm.
1. Any difference in opinion on some issues may lead to disputes between the partners. Decisions of one partner are binding on others.
1. Any wrong decision by one partner may result in financial ruin of all other partners.
1. Further, if a partner desires to leave the firm, then it will lead to termination of partnership as there is restriction on transfer of ownership.
Lack Of public confidence: – A partnership firm is not legally required to publish its financial reports or make other related information public.

V. Lack of Public Confidence:- It is therefore, difficult for any member of public to ascertain the true financial status of a partnership firm.

TYPES OF PARTNERS

Active Partner: – An active partner is one who contributes capital .partnership in the management of the firm, shares its profits and losses, and is liable to an unlimited extent to the creditors of the firm.
Sleeping or Dormant Partner: – Partners who do not take part in the day to day activities of the business are called sleeping partner.
Nominal Partner: – A nominal partner is one who allows the use of his/her name by a firm, but does not contribute to its capital.
Secret Partner: – A secret partner is one whose association with the firm is unknown to the general public.
Partner by Estoppel: – A partner by estoppel is one who by his words by his words or conduct gives an impression to others that he is a partner of the firm.

Partner by Holding out:– A partner by holding out is one who is represented as a partner and he does not deny such impression, despite becoming aware of that fact. Such a person becomes liable for the debts of the firm to outsiders who have sold goods on credit or lent money to the firm on the basis of such representation.

TYPES OF PARTNERSHIPS

Classification on the basis of duration:-

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

Classification on the basis of liability:-

General Partnership: – General partnership is one in which liability of every partner is unlimited and every partner is entitled to take active part in management of the business.
Limited Partnership: – In limited partnership, the liability of at least one partner is unlimited whereas the rest may have limited liability.

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, the partners is essential so that there is no misunderstanding later amount the partner. The written agreement which specifies the terms and conditions that govern the partnership is called the partnership deed.

REGISTRATION: – Registration of a partnership firm means making the partnership legal by getting it registered with the relevant prescribed particulars.

COOPERATIVE SOCIETY

The word cooperative means working together and with others for a common purpose. The cooperative society is compulsorily required to be registered to be registered under the Cooperative Societies Act 1912. 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. The society acquires a distinct legal identity after its registration. The cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members. They are driven by the need to protect their economic interest in the face of possible exploitation at the hand of middle men obsessed with the desire to earn greater profit. For example Amul , Indian farmers fertilizer cooperative limited, Pratibha mahila sahakari bank, ,Indian coffee house

FEATURES:

Legal Status: – Registration of a cooperative society is compulsory. This accords a separate identity to the society which is distinct from its members.
Limited Liability: – The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.
Control: – In a cooperative society, the power to take decisions lies in the hands of an elected managing committee.
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.
Service Motive: – The cooperative society through its purpose lays emphasis on the values of mutual help and welfare.

MERITS

Equality in Voting Status: – The principle of one man one vote governs the cooperative society.
Limited Liability: – The liability of members of a cooperative society is limited to the extent of their capital contribution.
Economy in Operations: – The members generally offer honorary services to the society. The customers or producers themselves are members of the society, and hence the risk of bad debts is lower.
Stable existence: – Death, bankruptcy or insanity of the members does not affect continuity of a cooperative society.
Support from Government: – The cooperative society exemplifies the idea of democracy and hence finds supports from the Government in the form of low taxes, subsidies, and low interest rates on loans.
Ease of Formation :– The cooperative society can be easily started with any ten adult members. The registration involves a few legal formalities. Its formation is governed by the provisions of Cooperative Societies Act, 1912.

LIMITATION

Limited Resources: – Resources of a cooperative society consists of capital contributions of the members with limited means.
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.
Differences of Opinion: – Internal quarrels arising as result of contrary viewpoints may lead to difficulties in decision making.
Government Control: – In return of the privilege offered by the government, cooperative societies have to comply with several rules and regulations related to auditing of account.
Inefficiency in Management: – Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries.

TYPES OF COOPERATIVE SOCIETIES

Consumer’s cooperative Societies: – The consumer cooperative societies are formed to protect the interest of consumers. The members comprise of consumers desirous of obtaining good quality products at reasonable prices.
Producer’s cooperative societies: – These societies are set up to protect the interest of small producers. The member comprise of producers desirous of procuring inputs for production of goods to meet the demands of consumers.
Farmers’ cooperative societies: – These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. Such societies provide better quality seeds, fertilizers, machinery and other modern’s techniques for use in the cultivation of crops.
Credit cooperative Societies: – Credit cooperative societies are established for providing easy credit on reasonable terms to the members.
Marketing cooperative Societies: – Such societies are established to help small producers in selling their products. The members consist of producers who wish to obtain reasonable prices for their output.
Cooperative Housing Societies:– A cooperative housing society is formed by those people who are desirous of procuring residential accommodation at lower costs. Such societies help people with limited income to construct houses at reasonable costs.

JOINT STOCK COMPANY

In this modern competitive world, the technological improvement and economic factors have created the need for large scale organization. Joint Stock Company is considered to be the most suitable form of organization for operating business activities on a large scale. A company is an association of persons formed for carrying out business activities and has a legal status independent of its members.

It is set up by registration under the Companies Act, 2013 or any previous Company Law.
A Company can be described as an artificial person having a separate legal entity, perpetual succession and a common seal.
The shareholders are the owners of the company and they exercise an indirect control over the business.
Shareholder elect Board of Directors (BOD) who exercises direct control over the business.
The capital of the company is divided into smaller parts called ‘shares’ which can be transferred freely from one shareholder to another person (expect in a private company).

FEATURES

Separate Legal Entity: – From the day of its incorporation, a company acquires an identity, distinct from its members. Its assets and liabilities are separate from those of its owners.
Formation: – The formation of a company is a time consuming, expensive and complicated process. It involves the preparation of several document and compliance with several legal requirements before it can start functioning incorporation of companies.
Control: – The management and control of the affairs of the company is undertaken by the board of director, which appoints the top management officials for running the business.
Liability: – The liability of the members is limited to the extent of the capital contributed y them in a company. The creditors can use only the assets of the company to settle their claims since it is the company and not the members that owes the debt.
Artificial Person: – A company is a creation of law and exists independent of its members. 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.
Perpetual Succession:– Company has a permanent or perpetual existence, i.e. its existence is not affected by death, insolvency, coming or going of the members. As company is a creation of the law, it can be brought to an end only by law. It will cease to exist only when specific procedure of winding up is followed. “It is rightly said, “Members may go, members may come, but the company remains forever.”

MERITS

Limited Liability: – The shareholders are liable to the extent of the amount unpaid on the shares held by them.
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 chase in case he need arise.
Scopes of Expansion: – As compared to the sole proprietorship and partnership forms of organization, a company has large financial resources.
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 specializations.
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.

LIMITATION

Complexity in Formation: – The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedures involved.
Numerous Regulations: – The functioning of a company is subject many legal provisions and compulsion.
Lack of Secrecy: – The companies Act required each public company to provide from time to time lot information to the office of the registrar of companies.
Delay in Decision Making: – Company is democratically managed through the Board of Directors, which is followed by the top management, middle management and lower management.
Impersonal work Environment:– Separation of ownership and management leads to a situation in which there is no direct relationship between efforts and rewards.
Oligarchic Management:– In theory, management of a company appears to be democratic as directors are the elected representatives of shareholders.
Conflict in Interests:– There may be conflict of interest amongst various stakeholders of a company. For example, employees may be interested in higher salaries, consumers may desire better quality products at lower prices and shareholders may ask for higher dividends. These demands pose problems as it is very difficult to satisfy such diverse interests.

TYPES OF COMPANIES

One Person Company (OPC):- According to Section 2 (62) of the Companies Act, 2013 One Person Company means a company which has only person as a member.

It is a company incorporated as a private company which has only one member. The aim of introduction of OPC was to encourage corporatization of micro businesses and entrepreneurship.

Characteristics of OPC

Only a natural person who is an Indian citizen ad resident in India
No person shall be eligible to incorporate more than the OPC or becomes nominee in more than one such company.
No minor shall become member or nominee of the One Person Company or can hold share with beneficial interest.
Such Company cannot be incorporated or converted into a company under Section 8 of the Act.
Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporates. II. Private Company:- A private company means a company which: 1.Restricts the right of members to transfer its shares: 2.Has a minimum of 2 and a maximum of 200 members, excluding the present and past employees; 3.Does not invite public to subscribe to its securities.

III. Public Company: – A public company means a company which is not a private company. As per the companies Act, a public company is one which

Has a minimum of 7 members and no limit on maximum members;
Has no restriction on transfer securities;
Is not prohibited firm inviting the public to subscribe to its securities

FORMATION OF A COMPANY:-

Formation of a company means bringing a company into existence and starting its business. Steps involved in the formation of a company are

Promotions:- Promotion means conceiving a business opportunity and taking an initiative to form a company.

Identification of business opportunity:- The first and foremost function of a promoter is to identify a business idea e.g. production of a new product or service.
Feasibility Studies:- After identifying a business opportunity the promoters undertake detailed studies of technical, financial, economic feasibility of business
Name Approval:- After selecting the name of company the promoters submit an application to the registrar of companies for its approval
Fixing up Signatories to the Memorandum of Association:- Promoters have to decide about the director who will be signing the memorandum of association.
Appointment of Professional:- Promoters appoint merchant bankers, auditors etc.

2. Incorporation:- Incorporation means registration of the company as body corporate under the companies Act 1913 and receiving certificate of Incorporation.

Application for in corporation:- Promoters make an application for the incorporation of the company to the registrar of companies.
Payment of Fees:- Along with filing of about document, registration fees has to be deposited which depends on amount of the authorized capital
Certificate of Incorporation:- After entering the name of the company in the register. The registrar issues a Certificate of Incorporation
Registration:- The registrar verifies all the document submitted. If he is satisfied then he enters the name of the company in his Register.
Filling of necessary documents:- Promoters files the following documents:-

Memorandum of Association (basic details)
Articles of Association.(list of rules and regulation)
Statement of Authorized capital
Consent of proposed director
Agreement with proposed managing director
Statutory declaration.

3. Capital Subscription:- A public company can raise funds from the public by issuing shares and debentures. For this has to issue prospectus and undergo various other formalities:-

SEBI Approval:- SEBI regulates the capital market of India. A public company is required to take approval from SEBI.
Appointment of Bankers, Brokers, Underwriters:- Banker of the company receive the application money. Brokers encourage the public to apply for the shares. Underwriters are the person who undertake to buy the shares if these are not subscribed y the public.
Filling of Prospectus:- Prospectus means any documents which invites offers from the public to purchase share and debenture of the company.
Allotment of shares:- Allotment of shares means acceptance of share applied. Allotment letters are issued to the shareholders. The name and address of the shareholders submitted to the Registrar.
Application of Stock Exchange:- It is necessary for a public company to list their shares in the stock exchange therefore the promoters apply in a stock exchange to list company shares.

4. Commencement of Business:- To commence business a public company has to obtain a certificate of commencement of business. For this the following documents have to be filled with the registrar of companies.

A declaration that 90% of the issued amount has been subscribed.
A declaration that all directors have paid in cash in respect of allotment of shares made to them.
A statutory declaration that the above requirements have been completed and much signed by the director of company.

CHOICE OF FORM OF BUSINESS ORGANIZATION:-

After studying various forms of business organization, it is evident that each from has certain advantages as well as disadvantages. It, therefore, becomes vital that certain basic considerations are kept in mind while choosing an appropriate form of organization.

Continuity: – The continuity of sole proprietorship and partnership firms is affected by such events as death, insolvency or insanity of the owners.
Liability: – In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may call for paying the debt from personal assets of the owners.
Cost and ease in setting up the organization: – As far as initial business setting-up costs are concerned, sole proprietorship is the most inexpensive way of starting a business.
Management Ability: – A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organization like partnership and company, there is no such problem.
Nature of business: – If direct personal contact is needed with the customers such as in the case of a grocery store. Proprietorship may be more suitable.

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