FORMS OF

BUSINESS
ORGANISATION
FORMS OF BUSINESS ORGANISATION
• It refers to the types of organisations which differ in terms of ownership
• The major forms of organisation include
• Sole proprietorship
• Partnership
• Joint Hindu family
• A cooperative society
• A company
Sole proprietorship:
• 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

• It is form of business organization which is owned, managed and

controlled by a single individual who also receives all the profits and
bears all the risks of his business.
 Sole proprietorship ( EXAMPLE )

This form of business is

particular common in areas of
personalized service such as
1. Beauty parlours
2. Hair saloons
3. Retail shop in a locality

This Photo by Unknown Author is licensed under CC BY-SA

Features of the sole proprietorship form of
organization
(i) Formation and closure:
Hardly any legal formalities are required to start a sole
proprietary business, though in some cases one may require a
license. There is no separate law that governs sole
proprietorship.
(ii) Liability:
Sole proprietors have unlimited liability. This implies that the
owner is personally responsible for Payment of debts.
Features of the sole proprietorship form of
organization
(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.

(iv)Control:
The right to run the business and make all decisions lies absolutely with the sole
proprietor. He can carry out his plans without any interference from others.

(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.
Features of the sole proprietorship form of
organization

(vi) Lack of business continuity:

Since the owner and business are one and the same entity, death, insanity, imprisonment,
physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental
effect on the business.

(vii)Direct incentive:
A sole proprietor directly reaps/ enjoys the benefits
 Merits of Sole proprietorship

(i)Quick decision making:

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

(ii) Confidentiality of information:

Sole decision-making authority enables the proprietor to keep all the information related to
business operations confidential and maintain secrecy.
Merits of Sole proprietorship
(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. The knowledge that one
is responsible for the success of the business contributes to self-satisfaction.

(v)Ease of formation and closure:

An important merit of sole proprietorship is the possibility of entering into business with
minimal legal formalities.
•
Limitations of Sole proprietorship

(i)Limited resources:
Resources of a sole proprietor are limited to his/her personal savings and borrowings from
others. Banks and other lending institutions may hesitate to extend a long term loan to a
sole proprietor.

(ii)Limited life of a business concern:

In the eyes of the law the proprietorship and the owner are considered one and the same.
Death, insolvency or illness of a proprietor affects the business.
Limitations of Sole proprietorship

(iii) Unlimited liability:

A major disadvantage of 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

(iv) Limited managerial ability:

The owner has to assume the responsibility of varied managerial tasks such as
purchasing, selling, financing, etc. It is rare to find an individual who excels
in all these areas.
Forms of business

JOINT HINDU
UNDIVIDED
FAMILY (HUF)
 HINDU UNDIVIDED FAMILY (HUF)
• Joint Hindu family business is a specific form of business organization found
only in India. It is one of the oldest forms of business organization in the
country.
• It refers to a form of organization wherein the business is owned and carried on
by the members of the Hindu Undivided Family (HUF). It is governed by the
Hindu Law. The basis of membership in the business is birth in a particular
family and three successive generations can be members in the business. The
business is controlled by the head of the family who is the eldest member
and is called karta.
• All members have equal ownership right over the property of an ancestor and
they are known as co-parceners.
Features Hindu undivided family

1. 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

2. 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.

•
Features Hindu undivided family
• Control
The business is controlled by the head of the family who is the eldest member and is called
karta.
. Continuity
The business continues even after the death of the karta . The next eldest member takes up the
position of karta
• Minor members
Minor can also be members of the business
Merits of Hindu undivided family
∙ Effective control:
The karta has absolute decision-making power. This avoids conflicts among members as no
one can interfere with his right to decide. 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. Hence, operations are not terminated and continuity of business is not
threatened.
Merits of Hindu undivided family
• 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.

∙ 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. Pride in the growth of business is linked to the achievements of the
family. This helps in securing better cooperation from all the members.

•
Limitations of a Hindu Undivided family business

∙ 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.

∙ Unlimited liability of karta:

The karta is burdened not only with the responsibility of decision making and management
of business, but also suffers from the disadvantage of having unlimited liability.
Limitations of a Hindu Undivided family business

∙ Dominance of karta:
The karta individually manages the business which may at times not be acceptable to other
members. This may cause conflict amongst them and may even lead to break down of the
family unit.

∙ 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 of Partnership
(i) Formation
It is governed by the Indian partnership act, 1932.it comes into existence
through legal agreement the terms and condition , sharing of profit and
loss , manner of conducting the business are specified
(ii)Liability
The liability of partners is unlimited
Features of Partnership

(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.

(iv)Decision making and control: The partners share amongst themselves

the responsibility of decision making and control of day to day activities.
 Features of Partnership

(v)Continuity:
Partnership is characterized by lack of continuity of business since the death, retirement,
insolvency or insanity of any partner can bring an end to the business.
Features of Partnership
(vii)Number of partners
Minimum number of partners needed to start a partnership firm is two and
maximum number of partners in a partnership firm can be 100
(viii) Mutual agency:
The definition of partnership highlights the fact that it is a business carried
on by all or any one of the partners acting for all.
 Merits partnership firm.
•

(i)Ease of formation and closure:

A partnership firm can be formed easily by putting an agreement between the
prospective partners into place whereby they agree to carryout the business of the firm
and share risks.

(ii) Balanced decision making:

The partners can oversee different functions according to their areas of expertise,
decisions are likely to be more balanced.
 Merits partnership firm.
(iii)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.

(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.
Limitations of partnership

(i)Unlimited liability: Partners are liable to repay debts even from their personal
resources in case the business assets are not sufficient to meet its debts.

(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: Partnership is run by a group of persons wherein decision

making authority is shared. Difference in opinion on some issues may lead to disputes
between partners.
•
Limitations of partnership
(iv)Lackof 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 is not legally required to
publish its financial reports or make other related information public. As a
result, the confidence of the public
Types of Partners

∙ Active partner
∙ Sleeping or dormant partner
∙ Secret partner
∙ Nominal partner
∙ Partner by estoppel
∙ Partner by holding out
 Active partner:

∙ An active partner is one who

contributes capital, participates in the
management of the firm, shares its
profits and losses, and is liable to an
unlimited extent to the creditors of
the firm. These partners take actual
part in carrying out business of the
firm on behalf of other partners.
 SLEEPING PARTNERS

Partners who do not take part

in the day to day activities of
the business are called sleeping
partners. A sleeping partner,
however, contributes capital to
the firm, shares its profits and
losses, and has unlimited
liability.
SECRET PARTNERS

A secret partner is one whose

association with the firm is
unknown to the general public.
Other than this distinct feature, in
all other aspects he is like the rest
of the partners. He contributes to
the capital of the firm, takes part in
the management, shares its profits
and losses, and has unlimited
liability towards the creditors
 A 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. He/she does
not take active part in managing the
firm, does not share its profit or losses
but is liable, like other partners, to the
third parties, for the repayments of the
firm’s debts.
PARTNER BY ESTOPPEL

A person is considered a partner

by estoppel if, through his/her own
initiative, conduct or behavior,
he/she gives an impression to
others that he/she is a partner of
the firm. Such partners are held
liable for the debts of the firm
because in the eyes of the third
party they are considered partners,
even though they do not contribute
capital or take part in its
management.
 Partner by holding out:

A partner by ‘holding out’ is a

person who though is not a partner
in a firm but knowingly allows
himself/herself to be represented as
a partner in a firm. Such a person
becomes liable to outside creditors
for repayment of any debts which
have been extended to the firm on
the basis of such representation.
Classification on the basis of duration

∙ 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.
∙ 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.
 Classification on the basis of liability
•

∙ 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.

∙ 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.
•
Partnership Deed

• Partnership deed is 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 written agreement which specifies the terms and conditions that
govern the partnership is called the partnership deed.
 Content of Partnership deed.

7. Salaries and withdrawals of the partners

1. Name of firm
8. Terms governing admission, retirement and
2. Nature of business and location of
expulsion of a partner
business
9. Interest on capital and interest on drawings
3. Duration of business
10. Procedure for dissolution of the firm
4. Investment made by each partner
11. Preparation of accounts and their auditing
5. Distribution of profits and losses
12. Method of solving disputes
6. Duties and obligations of the partners
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.

• In view of these consequences, it is therefore advisable to get the firm registered.

According to the Indian Partnership Act 1932, the partners may get the firm registered
with the Registrar of firms of the state in which the firm is situated.
COOPERATIVE SOCIETY

• Meaning:

• 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 interests in the face of possible exploitation at the hands of middlemen
obsessed with the desire to earn greater profits.

• The cooperative society is compulsorily required 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.
 Features OF Cooperative Society

∙ 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.

∙ Legal status:
Registration of a cooperative society is compulsory. This accords a separate identity to the
society which is distinct from its members. The society can enter into contracts and hold
property in its name.

∙ 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.
 Features OF Cooperative Society
∙ Control:
In a cooperative society, the power to take decisions lies in the hands of an elected managing
committee. 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.

∙ Service motive:

The cooperative society through its purpose lays emphasis on the values of mutual help and
welfare. Hence, the motive of service dominates its working.
 Merits OF Cooperative Society
•

∙ Equality in voting status: The principle of ‘one man one vote’ governs
the cooperative society. Irrespective of the amount of capital contribution
by a member, each member is entitled to equal voting rights.
•

∙ Limited liability: The liability of members of a cooperative society is

limited to the extent of their capital contribution. The personal assets of
the members are, therefore, safe from being used to repay business debts.
•
 Merits OF Cooperative Society
∙ Stable existence:
Death, bankruptcy or insanity of the members do not affect continuity of a
cooperative society. A society, therefore, operates unaffected by any change in the
membership.

∙ Economy in operations:

The members generally offer honorary services to the society. As the focus is on
elimination of middlemen, this helps in reducing costs. The customers or
producers themselves are members of the society, and hence the risk of bad debts
is lower.
Merits OF Cooperative Society
• Support from government
• The co-operative society finds support from the government in the form of
low taxes, subsidies and low interest rates on loans
• Ease in formation
The registration procedure is simple and the co-operative society can be
started with a minimum number of 10 members
Limitations
The cooperative form of organization suffers from the following limitations:

∙ Limited resources: Resources of a cooperative society consists of capital

contributions of the members with limited means. The low rate of
dividend offered on investment also acts as a deterrent in attracting
membership or more capital from the members.
∙ Inefficiency in management: Cooperative societies are unable to attract
and employ expert managers because of their inability to pay them high
salaries. The members who offer honorary services on a voluntary basis
are generally not professionally equipped to handle the management
functions effectively.
 Limitations
∙ Lack of secrecy: As a result of open discussions in the meetings of
members as well as disclosure obligations as per the Societies Act (7), it is
difficult to maintain secrecy about the operations of a cooperative society.
∙ Government control: In return of the privileges offered by the
government, cooperative societies have to comply with several rules and
regulations related to auditing of accounts, submission of accounts, etc.
∙ Difference of opinion
%
TYPES OF COOPERATIVE SOCIETIES
• 1 Consumer co- operative society
• 2. Producer’s co-operative societies
• 3.Marketing CO – operative society
• 4.Farmer’s cooperative society
• 5.Credit Co-operative society.
1 Consumer co- operative society
• The societies formed to protect the
interest of consumer .
• It is formed to provide the benefits
of essential goods at cheaper rate
for consumer and make the
manufacturer for normal profit.
• The society aims at eliminating
middlemen
2. Producer’s co-operative societies

• The society formed by small producers to

protect their interest
• They supply raw material, equipment and
other input to its members
• The society aims to fight against the big
capitalists and enhance the bargaining
power of small producers
3.Marketing CO – operative society

• This society is formed to help small

producers in selling their products

• . The society aims at eliminating

middlemen

• Performs marketing functions like

transportation , warehousing, packaging
etc
4.Farmer’s cooperative society
• The societies formed to protect the interest
of farmers .

• This society is formed in order to help

the farmers in getting the benefit of large
scale farming and increase the productivity

• Society provides better quality seeds,

fertilizers, machinery and other modern
techniques
5.Credit Co-operative society.
• Credit Co-operative society 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
• Societies provide loans to members out of
the amount collected as capital and
deposits from members
6 co – operative Housing society
• Established to help people with limited
income to construct houses at
reasonable costs .

• The aim of the society is to solve the

housing problem of the members

• The society construct flats or provide

plots to members
Video on Amul success story
JOINT STOCK COMPANY

INTRODUCTION:
The JSC is an important as compared to the sole trading, partnership, cooperative
society. Etc. Here the JSC is created by the artificial person, more number of members
with limited liabilities. Therefore the following are the important concept of the joint
stock company
Meaning of Joint Stock Company:

JSC means, the company which is formed by many members, But According
to the companies Act 1956 , joint stock company refers to , “ It is an
voluntary association of members who come together contribute money or
moneys worth & invest in trade or business & share the profit arising from
the business ,it is an artificial person created by law with common seal “,is
called as the Joint Stock Company
 Features of joint stock company:
1 Artificial person

One of the feature of JSC is artificial person which is created by law .Hence it can own properties, enter into
the contract etc.

2 Separate legal entity

Another important nature of JSC is Separate legal entity because the owners are different from the person
who manages the business. The assets and liabilities are separate from those of its owners The company
cannot be held responsible for any misleading of members

3 Legal Formations

The formation of JSC is done by as per companies Act of 1956 .All the rules and regulation is subjects to the
act .Hence it has to be closed only by following the formalities.

.
 Features of joint stock company
• .

4 Perpetual Successions / Continuous Existence

Unlike the sole trading & partnership firm.. the company as the perpetual existence
because the business is not affected by death , insolvent / insanity of any member .It
is said that , “ men may come , “men may go but the company will be until it is
wound up legally’’

5 Control

The management and control of the affairs of the company is undertaken by the
board of directors , elected by its members
Features of joint stock company
• 6 Liabilities

The liabilities of the member in JSC is limited to the extent of unpaid value of share held by
shareholders, the personal assets of shareholders cannot be use to pay the companies
liabilities.

7 Common seal

The JSC being an artificial person cannot put signature on the document on its own. The
common seal is used as place of signature all the commercial activities.

8 Risk bearing

The risk of losses in a company is borne by all the share holders

Merits of joint stock company
• Limited liabilities

• The liabilities of the member in JSC is limited to the extent of unpaid value
of share held by shareholders, the personal assets of shareholders cannot
be use to pay the companies liabilities.

• Transfer of interest

The members can transfer the share from one person to another person easily . Can be
sold in the market and can be converted into cash
Merits of joint stock company
Perpetual existence

the company as the perpetual existence because the business is not affected
by death , insolvent / insanity of any member .

Scope for expansion

A company is able to collect huge amount of funds. This provides greater

scope for expansion
Merits
• Professional management
The company can avail of the service of expert managers who are
professionally qualified. This lead to balance decision making and greater
efficiency in the company operation
Demerits of joint stock company
• Complexity in formation
• The formation of a company is more complex. It involves time consuming ,
expensive , legal formalities and complicated process .
• Lack of secrecy
It is difficult to maintain complete secrecy about the operation of the
company . This is because each company has to provide a lot of information
to the office of the registrar of companies
Demerits of joint stock company
• Impersonal work environment
The large size of a company makes it difficult for the owners and top
management to maintain personal contact with the employees and
customers
Numerous regulation
The function of a company is subjected to many legal provisions . It has to
obtain various certificate from registrar of companies ,SEBI and government
Demerits of joint stock company
• Delay in decision making
Communication and approval of various proposals may cause delay in taking
decisions
• Conflicts in interests
There may be conflicts of interest amongst various stakeholders of the
company
 Types of company

• Private Company
• ( min 2 and max 200)
• Restricts the rights of its members to transfer share
• Do not invite public to subscribe to its share capital
• Must have a min paid up capital of 1 lakh
• Must use the word ‘pvt ltd’ after its name
Public Company
. ( min 7 max is unlimited)
• Has no restricts on transfer share
• can invite public to subscribe to its share capital
• Must have a min paid up capital of 5 lakh
• Must use the word ‘ltd‘ after its name