Forms of Business

Organisation
There are different forms of business organisation which are discussed in this
chapter. These include the following:

1. Sole proprietorship
2. Joint Hindu family business
3. Partnership
4. Joint-stock Company
5. Cooperative Societies

Sole Proprietorship

It is a form of organisation owned, managed and controlled by an individual (also

known as a sole proprietor) who is responsible for bearing all the risk and receiving
all the profit.

Features

 The sole proprietor can establish and close the business without any legal
formalities.
 The liability of the sole proprietor is unlimited.
 Being the sole owner, the sole proprietor bears all the risk and receives all the
profits.
 All the decisions are taken and implemented in the organisation by the owner.
 Owners and businesses have no separate entity and are considered one in the
eyes of the law.
 Even in case of a lack of business continuity, the business can continue until
the owner wants.
Advantages

 Prompt decision-making as all the decisions are to be taken by the owner.

 Being a sole owner, it is easy to maintain business secrecy.
 The owner enjoys all the profits as there is no one to share profits.
 A successful business provides satisfaction to the owner and a sense of
achievement.
 No legal formalities are required for a business’s formation and closure,
making it easy to start and end the business.
Disadvantages

 Due to limited resources, a business can be funded from the owner’s savings
or money borrowed from friends or relatives.
 The business’s continuity depends on the owner’s health and state of mind.
 If the business fails to repay debts, the sole proprietor’s personal assets are at
risk.
 One person may not possess the ability to manage all the functions.

Joint Hindu Family Business

In this form of business organisation, the business is owned and managed by the
members of an undivided Hindu family, with the possibility of three successive
generations as members of the business.

Features

 The business is formed with at least two members of a Hindu Undivided

Family having ancestral property. The Hindu Succession Act, 1956, governs it.
 Except for Karta, all the family members have limited liability up to their share
in the business property.
 Karta has the right to control all the activities in the business organisation.
 The business can be discontinued based on the consent of all the members of
the family.
 Membership in the organisation is by birth.
Advantages

 Karta has complete control of the business, thus effective decision-making is

ensured.
 The business continues till all the members wish to continue, and control is
transferred to the next elder member in case of the death of ‘Karta’.
 Members of the family enjoy liability limited to their share in the business
party.
 All the work is done with the common objective of growth as the family
members have a sense of belongingness and loyalty.
Limitations

 Due to limited financial resources, businesses can be funded mainly from

ancestral property.
 The personal property of ‘Karta’ is at risk as he has unlimited liability.
 Due to the dominance of Karta, conflict may arise due to differences in
opinion among members and ‘Karta’.
 Karta may not have knowledge and expertise of all the functions performed in
the business.

Partnership

As per the partnership Act 1932, the partnership is a relation with people who
agreed to share the profits of business that is carried on by all or one of them acting
for all.

Features

 The formation of a business is based on the provisions of the partnership Act

1932.
 The liability of the partners in this form of organisation is unlimited.
 All the partners share the risk that occurred in the business.
 All decisions are made with the consent of all partners, and each partner is
responsible for operating the firm.
 The continuity of the business is determined by the partnership deed signed
by the partners at the time the partnership is formed.
 Minimum 2 and maximum 50 members [as per the Companies
(Miscellaneous) Rules 2014}, or maximum could be 100 ( according to
Companies Act, 2013).
 Each partner is the owner and agent of the firm and agent to other partners.
Advantages
  As the registration is voluntary, businesses can be formed and dissolved with
the approval of all partners.
 All decisions are made by consent partners, who take on responsibilities
based on their competence.
 All the partners contribute funds that enhance the scope for large-scale
company operations.
 All the partners bear the risks and responsibilities of the business
 It is easy to maintain confidential business information as there is no need to
submit financial results.
Disadvantages

 Each partner has an unlimited liability that is extended to their personal

property.
 Due to the restriction of the number of partners, there is limited availability of
finance.
 Due to differences in opinion, there are high chances of conflicts among
partners.
 Any conflict between partners or the death of a partner may bring the
business to an end.
 Due to a lack of public confidence and availability of financial reports, it is
difficult for an outsider to ascertain the true financial position of the business.
Types of Partners

 Secret Partner: This partner contributes to the profit and losses of the firm
and participates in managerial activities secretly.
 Active Partner: This partner has unlimited liability. They also contribute to
the capital, share profit and loss, and participate in management.
 Sleeping or dormant partner: This partner does not participate in the
management. They contribute capital and share profit and loss. They also
have unlimited liability.
 Nominal Partner: Partner who does not contribute capital or share profit and
loss but permits the partner ship firm to portray them as partners.
 Partner by holding out: An individual who is not a partner but is portrayed
as a partner by other partners of the partnership company and has unlimited
liability.
 Partner by estoppel: An individual who is not a partner but projects
themselves as partners to an outsider and has unlimited liability.

Partner Contribution Of Management Profit/Loss Liability

Capital Sharing

Active Yes Yes Yes Unlimite

d

Sleeping Yes No Yes Unlimite

d

Secret Yes Yes, but Yes Unlimite

secretly d
 Nominal No No Generally Yes Unlimite
d

Partner by No No No Unlimite
Estoppel d

Partner by No No No Unlimite
Holding out d

Minor as a Partner: The partner who is below 18 years of age can be admitted as a
partner with the mutual consent of all the partners but, in the eyes of the law, is not
a partner.

Types of Partnerships

Partnerships are categorised on the basis of liability and duration.

Classification of partnership on the basis of duration

 Particular Partnership: This type of partnership is formed to perform a

particular task over a particular period of time. This partnership is ended once
the task gets completed.
 Partnership at will: This type of partnership depends on the partners until
they are eager to continue.
Classification of partnership on the basis of liability

 Limited Partnership: In this partnership, only one member has unlimited

liability while the rest of the members have limited liability.
 General Partnership: In this type of partnership, all the partners have joint
and unlimited liability.

Partnership Deed

It is defined as a written document where all the terms and conditions related to the
partnership are mentioned. It has the following clauses:

 Name of firm
 Nature of firm
 Duration of partnership
 Duties and obligations of partners
 Valuation of assets
 Interest on capital and interest on drawings
 Profit-loss sharing ratio
 Salaries and withdrawals of the partners.
 Preparation of accounts and their auditing.
 Procedure for dissolution of the firm
 Method of solving disputes.
Registration
In the partnership firm, getting the company registered is optional with the registrar
regarding in this form the company was established.

Process of getting registered

 Submitting of application in the prescribed form to the Registrar of Firms.

 Fee deposition with the Registrar.
 Receiving certificate of registration after the Registrar is satisfied.
Consequences of not getting registered

 If the company is not registered, the partner has no right to file a complaint or
sue any of the partners or the partnership firm.
 The firm cannot sue third parties.
 The firm cannot file a case against one or more partners of the firm

Cooperative Society

An organisation of volunteers working for a mutual goal with the purpose of

protecting members’ economic and social interests. It must be registered under the
Cooperative Societies Act, 1912.

Features

 Any individual, regardless of caste, gender, or religion, who has a similar

interest is free to join or quit a cooperative society at any moment.
 As per the capital contribution, cooperative society members have limited
liability.
 All decision-making authority rests with an elected managing committee
chosen by members under the one-man-one-vote principle.
 A cooperative society has separate identity status distinct from its members,
and the registration of such a society is also mandatory.
 The service motive of a cooperative society is to provide mutual help to the
team members.
Advantages

 Each member has equal voting rights and can elect managing committee
members.
 The liability of members is limited to their capital contribution.
 Cooperative societies continue to exist despite their members’ death,
bankruptcy or insanity.
 A cooperative society does not require legal formalities for its formation.
 The government provides support to societies in the form of lower taxes,
interest rates and subsidies.
 The members of the social work voluntarily, which helps in reducing costs.

Disadvantages

 Societies must adhere to the government’s laws and regulations and submit
society audited financial reports. However, such government interference
impacts such a society’s freedom of work.
 Members’ capital contributions are the only funding source, and low dividends
hinder members from contributing to society.
 Volunteer members may lack the required competence and skills, resulting in
inefficient operations and management.
  Maintaining secrecy is difficult as members provide all information about the
society’s operations at the meeting.
 Differences of opinion as a result of individual interest over welfare may lead
to conflicts amongst members.

Types of Cooperative Societies

 Producers cooperative societies: In this type of cooperative society,

producers’ interests are protected by societies that provide high-quality, low-
cost raw materials and other inputs.
 Farmer’s cooperative societies: These societies are established to provide
farmers with better inputs at affordable rates to improve productivity.
 Consumer cooperative societies: To protect the interests of the
consumers, the society provides high-quality products and services at
economical rates.
 Marketing cooperative societies: In these societies, services are provided
related to the marketing of the products by small producers.
 Cooperative housing societies: These societies are formed to construct
houses for their members at an economical rate.
 Credit cooperative societies: Such societies are established to offer
financial assistance to their members at reasonable terms.

Joint Stock Company

The Companies Act, 2013 defines “A company as an artificial person having a

separate legal entity, perpetual succession and a common seal.”

Features of a Joint Stock Company

 A company is established with the law and legal status, yet it does not
function like humans and acts as an artificial person. In the name of the
corporation, the board of directors conducts all the business activities.
 A company has its separate legal identity distinct from its owner with the
incorporation of a company.
 The company is established by fulfilling all the legal formalities according to
the Companies Act, 2013.
 A company is created by law and can only be wound up by law. The existence
of the company is not affected by the status of members.
 The Board of Directors controls and manages the company’s business affairs.
 A company has limited liability only to the extent of the capital contribution.
 A company cannot have its own signature because it is an artificial legal
person. As a result, the common seal serves as the firm’s official signature. To
be legally binding, all official papers must bear the same seal.
 All the shareholders of the company bear the risk of loss in proportion to their
investment in the company.
Advantages

 All the shareholders have limited liability for their investment in the firm.
Hence, there is no risk of losing personal assets.
 Shares can be converted into cash or can be easily sold in the market.
 The company’s existence continues and is not affected by the status of the
shareholders.
 Companies can raise public funds and borrow from financial institutions or
banks.
  Professional management as well as specialised individuals are required in
large-scale operations.
Disadvantages

 The formation of the company is time-consuming and lengthy as the company

needs to fulfil the documentation and legal formalities.
 There is no confidentiality maintained as all the information is disclosed to the
public.
 As professionals and not owners who manage business affairs, there is a lack
of personal contact with the customers and employees.
 Due to numerous rules and regulations, there is no freedom to work, which
consumes time, effort and money.
 There is a delay in decision-making, as the decision needs to follow a set of
hierarchies.
 The decisions may get influenced due to the personal interest of the directors,
as the stakeholders have minimum control over running a business.
 Management finds it challenging to satisfy everyone because many
stakeholders have conflicting interests.

Types of Companies

Private Company

 A company must have a minimum of 2 or a maximum of 200 members.

 Restricted right to transfer shares.
 Funds cannot be generated from the general public.
 Uses ‘Private Limited’ after the company name.

Public Company

 Minimum 7 members with no limit on maximum members.

 Free to transfer shares.
 Issue shares to the general public.
 Uses ‘Public Limited’ after the company name.
Difference between Public and Private Company

Basis Public Company Private Company

Members Minimum: 7 members Minimum: 2 members

Maximum: 200
Maximum: Unlimited

Minimum number of 3 directors 2 directors

directors

Invitation to Public Can invite public for Cannot invite public for
subscription subscription

Transfer of shares Can transfer Cannot transfer

 Index of Members Compulsory Not compulsory

Choice of Form of Business Organisation

 The owner’s death and insolvency influence sole proprietorship and

partnership continuity, whereas companies, cooperative societies and Hindu
undivided families enjoy eternal existence.
 Partnership and sole proprietor have unlimited liability. On the other hand,
companies and cooperative societies have limited liability.
 Starting a sole proprietorship with minimal expense and legal procedures is
simple. On the other hand, establishing a company is a complex task with
prolonged legal requirements. However, a partnership has the advantage of
fewer legal procedures with lower costs.
 In the case of a small-scale operation, a partnership or sole proprietorship can
be chosen. On the other hand, in the case of large-scale operations, the
company form is more suitable.
 It is difficult for the owner of a sole proprietorship to be knowledgeable in all
operations, but in other forms of businesses, work division is allowed, which
leads to effective decision-making.
 Sole proprietorship and partnership forms of business can be chosen for
trading and services. On the other hand, a company form of organisation can
be suitable for manufacturing.
 If the owner desires complete control, a sole proprietorship may be
preferable, but if the owner is willing to share power, he might choose a
partnership or a company form of organisation.

Introduction to Class 11 Forms of Business

Organization
In Chapter 2 Business Studies Class 11 notes, students will study sole
proprietorship, joint Hindu family, partnership, cooperative society and joint-stock
business. Students will learn about the features, advantages as well as
disadvantages of each form of organisation in these revision notes provided by the
expert professionals of Extramarks. Each of these organisations is contrasted with
the others so that students may see how each form of organisation differs from the
others. The forms of organisations have diverse characteristics and are unique from
one another, and the Business Studies Class 11 Chapter 2 notes have all of the
pertinent information.

Types of Organisations

 Joint Hindu Family: In this form of organisation, members are only allowed
to get membership if they were born in the family. This is a family-owned firm,
with the heirs following in their father’s footsteps. The joint Hindu Family
follows strict values and discipline that cannot be broken. Karta is the name of
the family’s head. Only two people and ancestral property are required for
this form of organisation. The partners’ responsibility is limited solely by their
share amount.
 Sole Proprietorship: In this kind of organisation, the only owner and
beneficiary of all the profits and losses made by the company, as well as the
bearer of all risks, is the sole proprietor or the sole owner of the company. No
distinct rules regulate sole proprietorship, and the owner is personally
 accountable for all of their actions. The owner is entirely accountable for both
ownership and the running of the firm. In this form of organisation, the owner
is not required to communicate with anybody before making a decision. They
are able to maintain business secrecy.
 Partnership: It refers to the relationship between partners who have agreed
to share the company’s profits and losses. The partnership has to be
governed according to The Indian Partnership Act of 1932. The partners of the
company have unlimited liability and are responsible for all decisions made.
Profits are divided among the partners in an agreed-upon ratio. This
Partnership may come to an end due to a lack of continuity or death. Partners
can manage various business functions based on their areas of expertise. All
of the partners contribute to the capital.
 Cooperative Society: This is a voluntary association that looks after the
well-being of its members. This form of organisation monitors the economic
interests of its members in order to avoid exploitation by middlemen. This
society may enter into contracts and can sue and be sued. The liability of
society members is limited to the amount they contribute to the capital. The
principle of one man and one vote is no longer applicable because each
member has equal voting rights.
 Joint Stock Company: This form of organisation is established by the law
and is independent of its members. The company becomes a separate legal
entity, and the law no longer considers the business and its owners to be one.
The company’s establishment is time-consuming, costly and intricate. The
shareholders are accountable for the extent of their unpaid shares.