Forms of Business Organisation

Meaning A business enterprise is an institutional arrangement to form any business activity. Classification On the basis of ownership business enterprises can broadly be classified into the following categories : Forms of Business Enterprise In case of CORPORATE FORM of private enterprises the identity of the enterprise is separate from that of the owner and in case of NON CORPORATE FORM, the identity of the enterprise is not different from that of its owners. SOLE PROPRIETORSHIP Sole proprietorship means a business owned, financed and controlled by a single person who is recipient of all profits and bearer of all risks. It is suitable in areas of personalised services like beauty parlour, hair cutting saloons and small scale activities like retail shops. FEATURES 1. Single ownership :- It is wholly owned by one individual. 2. Control :- Sole proprietor has full power of decision making. 3. No Separate Legal Entity :- Legally there is no difference between business and businessman. 4. Unlimited Liability :- The liability of owner is unlimited. In case the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts. 5. No legal formalities :- are required to start, manage and dissolve such business organisation. 6. Sole risk bearer and profit recipient :- He bears the complete risk and there is nobody to share profit / loss with him . MERITS 1. Easy to start and close :- It can be easily started and closed without any legal formalities. 2. Quick decision making :- as sole trader is not required to consult or inform anybody about his decisions. 3. Secrecy :- He is not expected to share his business decisions and secrets with anybody. 4. Direct incentive :- Direct relationship between efforts & reward provide incentive to the sole trader to work hard.

5. Personal touch :- The sole trader can maintain personal contacts with his customers and employees. 6. Social Utility :- It provides employment to persons with limited money who are not interested to work under others. It prevents concentration of wealth in few hands. LIMITATIONS 1. Limited financial resources :- funds are limited to the owner s personal savings and his borrowning capacity. 2. Limited Managerial ability :- Sole trader cann t be good in all aspects of business and he cann t afford to employ experts also. 3. Unlimited liability :- of sole trader compels him to avoid risky and bold business decisions. 4. Uncertain life :- Death, insolvency, lunacy or illness of a proprietor affects the business and can lead to its closure. 5. Limited scope for expansion :- Due to limited capital and managerial skills, it cannot expand to a large scale. SUITABILITY : Sole tradership is suitable. * Where the personal attention to customer is required as in tailoring, beauty parlour. * Where goods are unstandardised like artistic jewellery. * Where modest capital & limited managerial skills are required as in case of retail store. JOINT HINDU FAMILY BUSINESS It is owned by the members of undivided joint Hindu family and managed by the eldest member of the family known as KARTA. It is governed by the provisions of Hindu law. The basis of membership is birth in a particular family. FEATURES 1. Formation - for a joint hindu family business there should be atleast two members in the family and some ancestral property to be inherited by them. 2. Membership - is by virtue of birth in the family. 3. Control - In it, control lies with eldest member of family known as Karta . All other members can give only advice.

3. Liability - of Karta is unlimited but of all other members is limited to the extent of their share in property. 4. Continuity - The business is not affected by death or incapacity of Karta as in such cases the next senior male member becomes the Karta. 6. Minor members - A minor can also become full fledged member of Family business. MERITS 1. Effective control - The Karta can promptly take decisions as he has the absolute decision making power. 2. Continued business existence - The death, Lunacy of Karta will not affect the business as next eldest member will then take up the position. 3. Limited liability - The liability of all members except Karta is limited. It gives them a relief. 4. Secrecy - Complete secrecy regarding business decisions can be maintained by Karta. 5. Loyality and co-operation - It helps in securing better co-operation and greater loyality from all the members who run the business. LIMITATIONS 1. Limited capital - There is shortage of capital as it is limited to the ancestral property. 2. Unlimited liability of Karta - It make him less enterprising. 3. Dominance of Karta - Karta manages the business and sometimes he ignores the valueable advice of other members. This may cause conflict among members and may even lead to break down of the family unit. 4. Hasty decisions - As Karta is overburdened with work. So sometimes he takes hasty and unbalanced decisions. 5. Limited managerial skills of Karta also poses a serious problem. The joint Hindu family business is on decline because of the diminishing no. of Joint Hindu families in the country. PARTNERSHIP Meaning : Partnership is a voluntary associations of two or more persons who agree to carry on some business jointly and share its profits and losses. The partnership was evolved to overcome the shortcomings of sole proprietorship and Joint Hindu Family business. FEATURES 1. Two or more persons - There must be atleast two persons to form a partnership. The maximum no. of persons is 10 in banking business and 20 in non banking business. 2. Agreement - It is an outcome of an agreement among partners which may be oral or in writing. 3. Lawful business - It can be formed only for the purpose of carrying on some lawful business.

4. Decision making & control - Every partner has a right to participate in management & decision making of the organisation. 5. Unlimited liability - Partners have unlimited liability. 6. Mutual Agency - Every partner is an implied agent of the other partners and of the firm. Every partner is liable for acts performed by other partners on behalf of the firm. 7. Lack of continuity - firms existence is affected by the death, Lunacy and insolvency of any of its partner. It suffers from lack of continuity. MERITS 1. Ease of formation & closure - It can be easily formed. Only an agreement among the partners is required. 2. Larger financial resources - There are more funds as capital is contributed by no. of partners. 3. Balanced Decisions - as decisions are taken jointly by partners after consulting each other. 4. Sharing of Risks - In it, risk get distributed among partners which reduces anxiety, burden and stress on individual partner. 5. Secrecy - Secrecy can be easily maintained about business affairs as they are not required to publish their accounts or to file any report to the govt. LIMITATIONS 1. Limited resources - There is a restriction on the number of partners and hence capital contributed by them is also limited. 2. Unlimited liability- The liability of partners is unlimited and they are liable individually as well as jointly. It may prove to be a big 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. 3. Lack of continuity - Partnership comes to an end with the death, retirement, insolvency or lunacy of any of its partner. 4. Lack of public confidence - Partnership firms are not required to publish their reports and accounts. Thus they lack public confidence. TYPES OF PARTNERS 1. General / Active Parter - Such a partner takes active part in the management of the firm. 2. Sleeping or Dormant Partner - He does not take active part in the management of the firm. Though he invest money, shares profit & Loss, has unlimited liability.

3. Secret Partner - He participates in business secretly without disclosing his association with the firm to general public. His liability is also unlimited. 4. Nominal Partner - Such a partner only gives his name and goodwill to the firm. He neither invests money nor takes profit. But his liability is unlimited. 5. Partner by Estoppel - He is the one who by his words or conduct gives impression to the outside world that he is a partners of the firm whereas actually he is not. His liability is unlimited towards the third party who has entered into dealing with firm on the basis of his pretention. 6. Partner by holding out - He is the one who is falsely declared partner of the firm wheras actually he is not. And even after becoming aware of it, he does not deny it. His liability is unlimited towards the party who has deal with firm on the basis of this declaration. PARTNERSHIP DEED The written agreement on a stamped paper which specifies the terms and conditions of partnership is called the partnership deed. It generally includes the following aspects - Name of the firm - Location / Address of the firm - Duration of business. - Investment made by each partner. - Profit sharing ratio of the partners. - Terms relating to Salaries, Drawing, Interest on capital and Interest on Drawing of partners. - Duties and obligations of partners. - Terms governing admission, retirement and expulsion of a partner. - Preparation of accounts and their auditing. - Method of solving disputes REGISTRATION OF PARTNERSHIP Registration is not compulsory, it is optional. But it is always beneficial to get the firm registered. The consequences of non-registration of a firm are as follows 1. A partnet of an unregistered firm cannot file suit against the firm or other partner. 2. The firm cannot file a suit against third party.

3. The firm cannot file a case against its partner. CO-OPERATIVE SOCIETY A cooperative society is a voluntary association of persons of moderate means, who unite together to protect and promote their common economic interests. FEATURES 1. Voluntary association - Everyone having a common interest is free to join a cooperate society and can also leave the society after giving proper notice. 2. Legal status - Its registration is compulsary and it gives it a separate legal identity. 3. Limited liability - The liabity of the member is limited to the extend of their capital contribution in the society. 4. Democratic control - Management and control lies with the managing committee elected by the members by giving vote. Every member has one vote irrespective of the number of shares held by him. 5. Service motive - The main aim is to serve its members and not to maximise the profit. 6. State control - They have to abide by the rules and regulation framed by govt. for them. 7. Distribution of surplus - The profit is distributed on the basis of volume of business transacted by a member and not on the basis of capital contribution of member. MERITS 1. Ease of formation - It can be started with minimum of 10 members. Registration is also easy as it requires very few legal formalities. 2. Limited liability :- The liability of members is limited to the extend of their capital contribution. 3. Stable Existence - Due to registration it is a separete legal entity and is not affected by the death, Lunacy or insolvency of any of its member. 4. Economy in operations - Due to elimination of middleman and voluntary services provided by its members. 5. Government Support - Govt. provides support by giving loans at lower interest rates, subsidies & by charging less taxes. 6. Social utility :- It promotes personal liberty, social justice and mutual cooperation. They help to prevent concentration of economic power in few hands. LIMITATIONS 1. Shortage of capital - It suffers from shortage of capital as it is usually formed by people with limited means. 2. Inefficient management - Co-operative society is managed by elected members who may not be competent and experienced. Moreover it cann t afford to employ expert and experienced people at high salaries.

3. Lack of motivation - Members are not inclined to put their best efforts as there is no direct link between efforts and reward. 4. Lack of Secrecy - Its affairs are openly discussed in its meeting which makes it difficult to maintain secrecy. 5. Excesive govt. control - it suffers from excessive rules and regulations of the govt. It has to get its accounts audited by the auditor and has to submit a copy of its accounts to registrar. 6. Conflict among members - The members are from different sections of society with different view points. Sometimes when some members become rigid, the result is conflict.