Forms of Business Organisations

• Introduction

  • Meaning of Business Organisation
  • Choice of Form depends on factors like nature of business, scale of operations, capital required, liability, and control.

• Sole Proprietorship

  • Meaning
    • Owned, managed, and controlled by a single individual.
  • Features
    • Single ownership
    • No separate legal entity
    • Unlimited liability
    • Sole beneficiary of profits / bearer of losses
    • Lack of business continuity
  • Merits
    • Quick decision making
    • Sense of accomplishment
    • Ease of formation and closure
    • Confidentiality of information
  • Limitations
    • Limited financial resources
    • Limited managerial ability
    • Unlimited liability
    • Short life of the enterprise

• Joint Hindu Family (JHU) Business

  • Meaning
    • Owned by members of an Hindu Undivided Family (HUF) governed by Hindu Law.
  • Key Terms
    • Karta: Head of the family with unlimited liability and control.
    • Coparceners: Other family members with limited liability.
  • Features
    • Formation based on birth in the family
    • Liability: Unlimited for Karta, limited for coparceners
    • Dominance and control by Karta
    • Continued existence despite death of Karta
  • Merits
    • Effective control
    • Continued business existence
    • Limited liability of members
    • Increased loyalty and cooperation
  • Limitations
    • Unlimited liability of Karta
    • Limited financial resources
    • Dominance of Karta
    • Limited managerial skills

• Partnership

  • Meaning
    • Relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all (Partnership Act, 1932).
  • Features
    • Formation: Agreement / Partnership Deed
    • Liability: Joint and several, unlimited liability
    • Risk bearing: Shared among partners
    • Decision making and control through mutual agency
  • Types of Partners
    • Active Partner
    • Sleeping / Dormant Partner
    • Secret Partner
    • Nominal Partner
    • Partner by Estoppel
    • Partner by Holding Out
  • Types of Partnerships
    • Partnership at Will
    • Particular Partnership
    • General Partnership
    • Limited Partnership
  • Merits
    • Ease of formation and closure
    • Balanced decision making
    • More funds available
    • Sharing of risks
  • Limitations
    • Unlimited liability
    • Limited resources
    • Possibility of conflicts
    • Lack of continuity

• Cooperative Society

  • Meaning
    • Voluntary association of persons joined together for mutual benefit on the principle of self-help and help-others (Cooperative Societies Act, 1912).
  • Features
    • Voluntary membership
    • Legal status: Separate legal entity upon registration
    • Limited liability of members
    • Control vested in a managing committee (Democratic control: One man, one vote)
    • Service motive
  • Types of Cooperative Societies
    • Consumers' Cooperative Society
    • Producers' Cooperative Society
    • Marketing Cooperative Society
    • Farmers' Cooperative Society
    • Cooperative Housing Society
    • Cooperative Credit Society
  • Merits
    • Equality in voting status
    • Limited liability
    • Stable existence
    • Economy in operations
    • Support from government
  • Limitations
    • Lack of secrecy
    • Government regulation and control
    • Differences in views / internal conflicts
    • Limited funds

• Joint Stock Company

  • Meaning
    • An artificial person created by law, having a separate legal entity, perpetual succession, and a common seal (Companies Act, 2013).
  • Features
    • Incorporated association
    • Separate legal entity
    • Perpetual succession
    • Limited liability of shareholders
    • Transferability of shares
    • Separation of ownership and management
  • Types of Companies
    • Private Company
      • Minimum 2, maximum 200 members
      • Restriction on transfer of shares
      • Prohibited from public issue of securities
    • Public Company
      • Minimum 7, no maximum limit
      • Free transferability of shares
      • Can invite public subscription
  • Merits
    • Limited liability
    • Transfer of interest / liquidity
    • Perpetual existence
    • Scope for expansion and professional management
  • Limitations
    • Complexity in formation
    • Lack of secrecy
    • Impersonal work environment
    • Numerous legal regulations
    • Conflict of interests

• Choice of Form of Business Organisation (Factors)

  • Cost and ease in setting up the organisation
  • Capital considerations (financial requirements)
  • Nature of operations (scale and type)
  • Degree of control desired by owners
  • Liability risks involved
  • Continuity and stability requirements