Forms of Business

Organisations CHAP T ER :2

Different forms of business organisation

Sole Proprietorship Joint Hindu Cooperative Joint Stock

Partnership
Family Business Societies Company

SOLE PROPRIETORSHIP
An organisation which is owned, managed and controlled by an individual.

Features of a Sole Proprietorship

Formation Own Control
Unlimited liability No separate entity
Bears all the risks Continues till owner wishes
Individual Profit sharing Closed without any legal formalities

Advantages of a Sole Proprietorship Limitations of a Sole Proprietorship

Quick decision making Limited resources
Confidentiality of information Limited life of a business concern
Direct incentive Unlimited liability
Sense of achievement Limited managerial ability
Personal relationship with stakeholders
Easy formation and closure

PARTNERSHIP
Partnership is an association of two or more individuals who agree to pursue business activity for a common
objective by investing money, sharing risks and profits while working with utmost good faith.

Features of a Partnership Business

Established as per the provisions of Continuity of partnership business depends upon
Partnership Act 1932. the terms agreed up amongst partners at the
Unlimited liability. time of its formation.
All partners share the business risk. Mutual agency.
All decisions are taken with mutual consent. Transferability of shares.
Optional for partnership business to be registered.
 Advantages of a Partnership Business Limitations of a Partnership Business
Ease of formation and closure Unlimited liability
Balanced decision-making Limited resource
Raising more funds Possibility of conflicts
Risk sharing Risk of mutual agency
Secrecy Lack of continuity
Lack of public confidence

TYPES OF PARTNERS
• Active Partner: Partner who contributes capital, shares profits, risks, responsibility and has unlimited
liability and is bound by mutual agency.
• Sleeping or dormant Partner: Partner who contributes capital, share profits, risks, unlimited liability, is
bound by mutual agency but does not take part in day to day activities of business.
• Secret Partner: Partner who contributes capital, shares profits, risks and responsibilities, has unlimited
liability and is bound by mutual agency but his status is unknown to the outsiders.
• Nominal Partner: A partner who does not contribute capital or share business responsibilities or profits but
allows the partnership business to lend his/her name and reputation. He has unlimited liability and is bound
by mutual agency.
• Partner by Estoppel: An individual who is not a partner but projects as a partner to outsiders. He may not
contribute to business but has unlimited liabilities.
• Partner by holding out: An individual who is not a partner but is projected as a part like other partners
of the partnership. He has unlimited liability if he fails to clarify status to outsiders.
• Minor Partner: An individual of age below 18 years who enjoys business benefit by mutual consent of all
partners but he is legally not a partner.

TYPES OF PARTNERSHIP ON THE BASIS OF DURATION

• Partnership at will: Business continues till all partners agree to do so.
• Partnership by purpose: Partnership formed for a specific task or project comes to an end once the task
or the project is completed.
• Partnership by time: Partnership formed for a specific period comes to an end expiry of the time for which
it is formed.

Types of partnership by Liabilities

General Partnership Limited Partnership

 PARTNERSHIP DEED
It is a written agreement, which details all the terms and conditions under which the Partnership business
functions. It generally includes:
• Name of firm
• Nature of business and location of business
• Duration of business
• Investment made by each partner
• Ratio in which profits and losses would be shared
• Duties and obligations of the partner
• Salaries and withdrawals of the partners
• Interest on capital and interest on drawing
• Terms governing admission, retirement and expulsion of a partners
• Preparation of accounts and their auditing
• Procedure for dissolution of the firm

REGISTRATION OF A PARTNERSHIP BUSINESS

It is optional for a partnership business to get registered with the Registrar of Firms of the state in which
firm is situated.

Registration Procedure
• Filing of an application with all details of partnership business, signed by all directors.
• Payment of required fee.
• Once the application is approved, Certificate of Registration is received.

Consequences of Non-Registration
• A partner of an unregistered firm cannot file a suit against the firm or other partners.
• The firm cannot file a suit against third parties, and
• The firm cannot file a case against one or more partners of the firm.

JOINT HINDU FAMILY BUSINESS

An oldest form of business owned and controlled by members of Hindu Undivided Family (HUF) and governed
by Hindu law.
Features of Joint Hindu Family
It is governed by the Hindu Succession Act, 1956.
Karta liability is unlimited.
All business activities controlled by Karta.
The business can be discontinued if all the members mutually agree to do so.
 Advantages of Hindu Undivided Family
Complete control of business with Karta thus effective decision making.
Business continues till all members wish to continue.
Members enjoy liability limited to their share in business property.
All members work with common objective of growth.
Family members have sense of belongingness and loyalty.
Business can be started with inherited property.

Disadvantages of Hindu Undivided Family

Limited managerial ability
In case members do not agree to the leadership, business may come to an end.
Karta has unlimited liability thus his personal property is at risk.
Difference of opinion among members may cause conflict.
Ancestral property being main source of finance, thus limited funds.

COOPERATIVE SOCIETY
An organisation of voluntary people working for a common purpose with an aim to protect economic and
social interests of the members.

Formation of a Cooperative Society

• Minimum ten people can form a cooperative society.
• Cooperative Societies must be registered under the Cooperative Societies Act, 1912.
• Capital is raised amongst the members through issue of shares.

Features of Cooperative Society Types of Cooperative Societies

Voluntary membership Consumers’ cooperative societies
Legal status Producers’ cooperative societies
Limited liability Marketing cooperative societies
Control Farmer's cooperative societies
Service motive Credit cooperative societies
Source of finance Cooperative housing societies

Advantages of Cooperative Society Limitations of Cooperative Society

Equality in voting status Limited resources
Limited liability Inefficiency in management
Societies separate from its members Lack of secrecy
allow continuity of operations Government control
Economy in operations Differences of opinion
Support from government No Motivation
Ease of formation
 JOINT STOCK COMPANY
A form of business organisation established under The Companies Act, 2013 an artificial person with
separate legal identity. The funds for a company are raised by issue of share borrowings.

Features of Joint Stock Company

Artificial person Managed and controlled by Board of Directors.
Separate legal entity Limited liability.
Company is formed by fulfilling legal formalities Common seal
as stated under Companies Act, 2013. Risk bearing
Perpetual succession Transferability of shares

Merits of Joint Stock Company Limitations of Joint Stock Company

Limited liability Complexity in formation
Transfer of interest Lack of secrecy
Perpetual existence Impersonal work environment
Scope for expansion Numerous regulations
Professional management Delay in decision making
Oligarchic management
Conflict in interests

Types of Companies

Private Company Public Company One Person Company

Stages in the formation of a Private Limited Company

Promotion Incorporation

Stages in the formation of a Public Limited Company

Promotion Incorporation Subscription of capital Commencement of business

Important documents in the process of Company formation

Memorandum of Association Consent of Proposed Directors
Articles of Association Agreement
Prospectus Statutory Declaration

Factors affecting the choice of form of Business Organisation

Cost of Formation Regulations
Transfer of ownership Managerial Skills
Liability Flexibility
Continuity