FORMS OF BUSINESS ORGANIZATIONS

HUF
 THERE ARE DIFFERENT FORMS OF BUSINESS ORGANIZATIONS FROM WHICH A CHOICE HAS TO BE MADE:

1. Sole proprietorship
2. Joint Hindu family business
3. Partnership
4. Joint stock Company
5. Cooperative Societies
JOINT HINDU FAMILY BUSINESS

 Joint Hindu Family business or Hindu Undivided Family (HUF) business is that form of business organization which
is owned and managed by the members of HUF.
 It is the oldest form of business organization and can be found only in India.
 This type of business is governed by Hindu Law.
 The business is controlled by the head of the family, who is the eldest member of family and is called Karta.
 All members have equal ownership right over the property and they are known as Co-parceners.
MERITS AND DEMERITS OF JUF
 Features of Partnership:

 Formation: As per Indian Partnership Act, 1932 a partnership firm can be formed on the basis of an
agreement between the partners. The registration of partnership firm, for its formation, is not compulsory.
 Liability: The liability of all the members of a partnership firm is unlimited. The partners are individually and
collectively liable to pay back the debts of the firm.
 Risk Bearing: The partners bear the risks involved in the business jointly. If a business sustains loss, then
partners share the loss in the same ratio in which they share profits.
 Decision-making and Control: Each partner has a right to participate in management and decision making of
the organisation. The activities of partnership firm are managed through joint efforts of all the partners and
decisions are taken by mutual consent.
 Continuity: Existence of firm is affected by death, retirement, lunacy, madness and insolvency (bankruptcy)
of any of its partner. It suffers from lack of continuity.
 Membership: There must be at least two persons to form a partnership and all such persons must be
competent to contract. Maximum number can be 50 as per Companies Act, 2013.
 Mutual Agency: There must exist a mutual agency relationship among the partners. “Mutual agency
relationship means that each partner is both an agent and principal.
 Types of Partners:

 Active or Working Partner: Such type of partner contributes capital and takes active part in the management of the
firm.
 Sleeping or Dormant Partner: Such type of partner contributes capital but does not take active part in the
management of the firm.
 Secret Partner Such partner: Contributes capital and takes active do a part in business. But his association with the
firm is hidden from the general public.
 Nominal Partner: A nominal partner is one who allows the use of his name and goodwill for the benefit of the firm
and can be BOCH represented as a partner.
 Partner by Estoppel: A partner by estoppel is one who by his So words or conduct gives an impression to others that
he is a partner of the firm.
 Partner by Holding Out: A partner by 'holding out' is one who is actually not a partner, but allows himself to be
represented as one by the other partners
 Type Capital Contribution Management Share in Profits/Losses Liability

Active Partner Contributes capital. Participates in management. Share the profits/losses. Unlimited

Sleeping or Contributes capital. Does not participate in Share the profits/losses. Unlimited
dormant management.

partner

Secret partner Contributes capital. Participates in management. Share the profits/losses. Unlimited

Nominal partner Does not Contribute capital. Does not participate in Generally, does not share the Unlimited
management. profits and losses.

Partner by Estoppel. Does not Contribute capital. Does not participate in Does not share the profits and Unlimited
management. losses.

Partner by Holding Out. Does not Contribute capital. Does not participate in Does not share the profits and Unlimited
management. losses.
 Partnership Deed
Before starting a partnership business, all the partners have to draw up a legal document
called a Partnership Deed of Agreement.
It usually contains the following information:
·         Names of included parties - includes all names of people participating in this contract
·         Commencement of partnership- includes when the partnership should begin. The date
of the contract is assumed as this date, if none is given.
·         Duration of partnership - includes how long the partnership should last. It is
automatically assumed that the death of one of the contracting parties breaks the contract,
unless otherwise stated.
Partnership Deed ·         Business to be done - includes exactly what will be done in this partnership. This
section should be very particular to avoid confusion and loopholes.
·         Name of firm - includes the name of the business entity.
·         Initial investments - includes how much each partner will invest immediately or by
installments.
·         Division of profits and losses - includes what percentages of profits and losses each
partner will receive. If it is not a limited partnership, then there is unlimited liability (each
partner is responsible for all partners' debts, including their own).
·         Ending of the business - includes what happens when the business winds down.
Usually this includes three parts: 1) All assets are turned into cash and divided among the
members in a certain proportion; 2) one partner may purchase the others' shares at their value;
3) all property is divided among the members in their proper proportions.
·         Date of writing - includes simply the date that the contract was written.
COOPERATIVE SOCIETIES

 cooperative society is a voluntary association of persons, who have joined together

for promoting their economic interests.
 It is necessary for such societies to be compulsorily registered under Cooperative
Societies Act, 1912.
 To form a cooperative society, consent of ten adult persons is required.
 The capital of a society is raised from its members through issue of shares.
 A distinct legal identity is achieved by the society through registration
DEFINITIONS OF COOPERATIVE SOCIETY:
ACCORDING TO EH CALVERT, “COOPERATIVE SOCIETY IS A FORM OF ORGANISATION WHEREIN
PERSONS VOLUNTARILY ASSOCIATE TOGETHER AS HUMAN BEINGS ON THE BASIS OF EQUALITY
FOR THE PROMOTION OF AN ECONOMIC INTEREST FOR THEMSELVES”.
 Features of Cooperative Society:

 Voluntary Membership: A cooperative society is essentially a voluntary association of persons. There is no

compulsion to become a member of the cooperative society. Any person is free to join and exit any time
after serving a notice.
 Legal Status: After registration, a cooperative society becomes a distinct entity independent of its members.
Its registration is compulsory and is done by the Registrar of Cooperative Societies.
 Limited Liability: The liability of members is e limited to the extent of the amount contributed by them as
capital.
 Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing
committee. Members have voting rights to choose the managing committee.
 Service Motive: The primary aim of a cooperative society is to provide service to its members. Its motto is to
earn profits for the benefit of its members. Thus, it lays emphasis on the value of mutual help and welfare.
 Merits of Cooperative Society:

 Equality in Voting Status: One Man One Vote principle is applicable in cooperative societies. Irrespective of
capital contribution, each member has only one vote.
 Limited Liability: The liability of every member is limited to the extent of his share in the society's capital.
Therefore, the personal assets of the members cannot be used to repay business debt.
 Stable Existence or Continuity: Cooperative society, being a separate legal entity, is not affected by death,
lunacy or bankruptcy of the members.
 Economy in Operations: The members generally offer honorary services to the society. Thus, it helps in
reducing costs. As the customers or producers themselves are members of society, the risk of bad debt is
quite low.
 Support from Government: The society gets support from the government in the form of low taxes,
subsidies and low interest rates on loans.
 Ease of Formation: It is quite easy to form a cooperative society. Any ten adults can join together and form a
cooperative society. The legal formalities are very few, simple and governed by the provisions of Cooperative
Societies Act, 1912.
 Demerits of Cooperative Society:

 Limited Resources: A cooperative society is formed usually by people with limited means. Also, lesser rate of
earnings discourages members to invest large amounts in the society. Therefore, a cooperative society has
limited resources.
 Inefficient Management: A cooperative society cannot afford to employ expert professional managers at
high salaries due to limited funds.
 Lack of Secrecy: It is difficult to maintain secrecy about the operations of a cooperative society due to open
discussion in the meetings and disclosure obligation as per Section 7 of the Societies Act.
 Government Control: The day-to-day working of a cooperative society is bound by rigid rules and regulations
of the government. Keeping accounts, regular audits and inspections is essential. Reports have to be
submitted to the Registrar. The interference in functioning affects the freedom of society.
 Differences of Opinion: They arise when personal interests start dominating the welfare motive. Conflicts in
view points may lead to difficulty in decision-making
 Types of Cooperative Society:

 Consumer's Cooperative Society: It is established to protect the interest of consumers. It seeks to eliminate middlemen by establishing a
direct link with the producers. It purchases goods of daily consumption directly from manufacturers or wholesalers in bulk and sells them
to the members at reasonable price. Profits (if any) are distributed among the members on the basis of their capital contribution or
purchases.

 Producer's Cooperative Society: The main aim of this society is to help small producers who cannot easily collect various inputs of
production and face problems in marketing. It purchases raw materials, tools, equipment and other items in large quantity and provide
these to their members at reasonable price and also buy their output for sale. Profits are distributed among the members on the basis of
the contributions to total pool of goods produced and sold. Amul is an example of producer's cooperative society.
 Marketing Cooperative Society: It performs various marketing functions such as transportation, warehousing, packing, grading,
marketing research, etc for the benefit of its members. So The production of different members is pooled together and sold by the society
at a good price. It eliminates middlemen and improves the competitive position of its members. The profits are distributed among
members according to each member's contribution to the pool of output.
 Farmer's Cooperative Society: In such a society, small farmers join together and pool their resources for cultivating their land collectively.
It provides better quality seeds, fertilizers, machineries and other modern techniques for cultivation of crops.
 Credit Cooperative Society: Such society comprises of persons who seek financial help in the form of loans. They provide loans to their
members on easy terms and reasonably low rate of interest, out of the amount collected as capital and deposits made by the members.
 Cooperative Housing Society: The main aim of this type of society is to provide houses to people with limited means/income at
reasonable price and also gives them the option of paying in instalments. It constructs flats or provides plots to members on which the
members themselves can construct the houses as per their choice.
The Articles of Association: This contains the rules on how the company will be managed. It states
the rights and duties of directors, the rules on the election of directors and holding an official meeting,
as well as the issuing of shares.
o The Memorandum of Association: This contains very important information about the company
and directors. The official name and addresses of the registered offices of the company must be stated.
The objectives of the company must be given and also the amount of share capital the owners intend to
raise. The number of shares to be bought by each of the directors must also be made clear.
o Certificate of Incorporation: the document issued by the Registrar of Companies that will
allow the Company to start trading.
 Shares cannot be freely sold without the consent of all shareholders.
 The accounts of the company are less secret than that of sole traders and partnerships. Public
information must be provided to the Registrar of Companies.
Capital is still limited as the company cannot sell shares to the public
Certificate of Commencement of Business
A public company with a share capital however can only commence its business when it obtain
a certificate from the Registrar of Companies certifying that it is entitled to commence business.
Public Limited Companies
 
Public limited companies are similar to
private limited companies, but they are able to
sell shares to the public. A private limited
company can be converted into a public
limited company by:
 A statement in the Memorandum of
Association must be made so that it says
this company is a public limited company.
 All accounts must be made public.
 The company has to apply for a listing in
the Stock Exchange.
 A prospectus must be issued to
advertise to customers to buy shares,
and it has to state how the capital raised
from shares will be spent.
   The original owners may lose
control.·         
Public Limited companies are huge
in size and may face management
problems such as slow decision
making and industrial relations
problems.
Franchising
The franchisor is a business with a successful brand name that
recruits franchisees (individual businesses) to sell for them. (e.g.
McDonald, Burger King)
Pros for the franchisor:
 The franchisee has to pay to use the brand name.
 Expansion is much faster because the franchisor does not have to
finance all new outlets.
 The franchisee manages outlets
 All products sold must be bought from the franchisor.
Cons for the franchisor:
 The failure of one franchise could lead to a bad reputation of the
whole business.
 The franchisee keeps the profits.
Note: refer page no 412 for suitability of F. Business
Pros for the franchisee:

• The chance of failure is much reduced due to the well know brand image.

• The franchisor pays for advertising.
• All supplies can be obtained from the franchisor.
• Many business decisions will be made by the franchisor (prices, store layout, products).
• Training for staff and management is provide by the franchisor.
• Banks are more willing to lend to franchisees because of lower risks.

Cons for the franchisee:

• Less independence
• May be unable to make decisions that would suit the local area.
• Licence fee must be paid annually and a percentage of the turnover must be paid.
MULTINATIONAL
COMPANY(MNC)

Businesses which have their operations,

factories and assembly plants in more than
one country are known as Multinational
Business. They are also known as
Transnational businesses.
FACTORS AFFECTING THE LOCATION OF MULTINATIONAL
COMPANIES

1. Political stability

2. Legislation and bureaucracy

3. The potential labour force

4. Financial incentives

5. Market opportunities and good Infrastructure (transportation cost,

communication.)
Advantages of being a Multinational
·        Multinational can set up their business operations in countries where the labour and raw material is cheaper,
which can give them cost advantage in the international market.
·        Multinational have access to many markets which spreads the risk of failure. If any product may not be successful
in a particular market, it might be successful in another.
·        MNCs produce in large quantities thus achieving greater economies of scales.
·        A multinational business is less vulnerable/ exposed to trade barriers. MNCs set up their local operations in
countries where there is potential market for them and get away with import duties and restrictions.
·        MNCs can locate their operations near the potential market which results in lower transportation cost.
Advantages of Multinational to the host country
·        Multinationals create employment.
·        They bring new technology and techniques of production.
·        MNCs usually provide training to their worker which results in better skills for the country’s workforce.
·        Multinational businesses usually produce in large quantities and export to other countries which can result in
valuable foreign exchange for the host country.
·        They pay huge taxes to the government which can be used for the development of the host country.
 The host country economy might grow, and its infrastructure will improve that leads to development of that area.
Disadvantages of Multinational company:
The disadvantages of multinational company are as follows:-
(1) High Profit Low Risk Investment: The multinational company prefer to invest in areas of low risk and high profitability. Issue like social welfare,
national priority etc. have less priority on their agenda. Mostly they invest in consumer goods industry.

(2) Interference in Political Matters:The multinational company from developed countries interfere in the political affairs of developing nations. There are
many cases where multinational company has bribed political leadership for their own economic gains.

(3) Create Artificial Demand: These companies create artificial and unwarranted demand by making extensive use of advertising and sales and promotion
techniques.

(4) Exploitation: These companies are financially very strong and adopt aggressive marketing strategies to sale their products, adopt all means to eliminate
competition and create monopoly.

(5) Technological Problem: Technology they use is capital intensive so sometimes that technology does not fully fit in the needs of developing countries.
Also, multinational company is criticized for transferring outdated technology to developing countries.

(6) Foreign Exchange go outside the Country: The working of multinational company is a burden on the limited resources of developing countries. They
charge high price in the form of commission and royalty paid by local business subsidiary to its parent company. This leads to outflow of foreign exchange.

(7) National Threat: Sometimes outdated technology is used by domestic industries which hamper the quality and price of their products so they cannot
compete with those multinational company. Hence, there is a threat of nationwide opposition to multinational company. Arrival of these companies creates an
atmosphere of uncertainly to the domestic industries.

(8) Impose their Culture: Multinational company impose their culture on developing countries. Along with the products they also indirectly impose the
culture of developed nations. These companies have imposed the culture of fast food and soft drinks onto the developing nations. For examples:- burger and
coke.

(9) Work for Self Interest: Multinational company work toward their own self interest rather than working for the economic development of host country.
They are more interested in marketing of profits at any cost.