Chapter -2

Forms of Business Organisations

Unrestricted
The various forms of Business Organisations are:
(a) Sole Proprietorship
(b) (b) Hindu Undivided Family Business
(c) Partnership
(d) Cooperative Society
(e) Joint Stock Company
Sole Proprietorship
The term 'sole' implies 'only' and 'proprietor' refers to 'owner'. Hence, a sole
proprietor is the one who is the only owner of a business.

Sole proprietorship refer to a form of business organisation which is owned, finance,

managed and controlled by an individual who is the recipient of all profits and bearer of
all risks.

This form of organisation is also known as 'Sole Trader', 'Individual Proprietorship' or

'Individual Entrepreneurship'.
It is the oldest and the simplest form of business organisation.
It is common in areas of personalised services, such as beauty parlours or small scale
activities like running a retail shop in a locality.
MERITS
• SECRECY
• QUICK DECISION MAKING
• DIRECT INCENTIVES
• EASE OF FORMATION AND CLOSURE
• SENSE OF ACOMPLISHMENT
• FLEXIBILITY
• PERSONAL TOUCH
DEMERITS
LIMITED SOURCES
UNCERTAIN LIFE OF BUSINESS
UNLIMITED LIABILITY
LIMITED MANAGERIAL ABILITY
WRONG DECISION MAKING SOMETIMES
SURVIVAL OF SOLE PROPRITORSHIP

“THE ONE MAN CONTROL IS THE BEST IN THE WORLD, IF THAT ONE
MAN IS BIG ENOUGH TO MANAGE EVERYTHING.” W.R. BASSET

This form of business has its own merits and demerits.

SUITABILITY OF SOLE
PROPRIETERSHIP
• where greater personal attention is needed
• for catering to the demand of local market like perishable products,
laundries, groceries stores etc.
• where individual has certain skills and wants to earn his livelihood
independently.
• where demand is often influenced by the seasonal trends and
fashions.
• in the production of unstandardised goods like artistic things.
Expansion of Sole Proprietorship
When a sole proprietorship firm expands and grows, it faces the
problem of limited financial and managerial resources. The sole
proprietor as two alternatives to solve this problem:
1. Employ a Paid Assistant: The sole proprietor may appoint one or
more paid assistants if he needs technical or managerial help.

2. Admit one or more Partners: The sole proprietor may admit one or
more partners to provide finance and to share the managerial
responsibilities of the expanding business.
HINDU UNDIVIDED FAMILY BUSINESS
The Hindu undivided family business or Joint Hindu Family Business is a
unique form of business organisation, which is found only in India.

It is governed by the provisions of the Hindu Law (The Hindu

Succession Act, 1956). It is one of the oldest forms of business
organisation in the country.

It refers to a form of organisation wherein the business is owned and

carried on by the members of the Hindu Undivided Family (HUF).
The basis of membership
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 managed and controlled by the eldest male member of the
family known as 'Karta' or 'Manager'. The decisions of the karta are binding
on all the members.

• All members have equal ownership right over the property of an ancestor
and they are known as co-parceners.
There are two systems of inheritance under the Hindu Law:
(i) Dayabhaga System: This system prevails in West Bengal only. Under this
system, both male and female members of the family are allowed, to be
co-parceners. "
Mitakashara System: This system prevails all over India except West Bengal.
Under this system, only the male members are allowed to be co-parceners
in the business.
 Features of Hindu Undivided Family Business
1. Formation: For formation of Hindu undivided family business, there should be at least two members in the
family and ancestral property must be inherited by them. There is no need for any agreement between the
family members as membership arises by virtue of birth. It is governed by the Hindu Succession Act, 1956.

2. Liability: The liability of all members (except karta) is limited to the extent of their shares in the co-parcenery
property of the business. However, the karta has unlimited liability, i.e. his self-acquired property can also be
attached for paying the debts of the business.

3. Control: The control of the family business lies with the karta. He is authorised to manage this business. He takes
all the decisions and his decisions are binding on the other members.

4. Continuity: This form of business is not affected by the death of the members. In the case of death of karta, the
next eldest male person in the family becomes the karta, leaving the business stable. However, the business can be
terminated with the mutual consent of the members.

5. Minor Members: Minors can also be members of the business as inclusion of an individual into the business
occurs due to birth in the Family
Merits of Hindu Undivided Family
Business
1. Effective Control: Centralised management in the hand of karta helps in disciplined management. This avoids
conflicts among members as no one can interfere with his right to decide. It also leads to prompt and flexible
decision-making.

2. Continued Business Existence: The business enjoys relative stability in existence. 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.

3. Limited Liability of Members: The liability of all the co-parceners, except the karta, is limited to their share in the
family property. Hence, interests of all members are protected. Unlimited liability of the karta raises the credit
worthiness of the firm.

4. Increased Loyalty and Cooperation: As the business is run by the members of a family, there is a greater sense of
loyalty towards one other. There is a direct relation between efforts and reward. So, karta and all family members put
their best efforts to increase the profits and reputation of business.

In addition to above merits, Hindu Undivided family business also enjoys the benefits of goodwill, reputation, name,
contacts and status of the ancestors.
 Limitations of Hindu Undivided Family Business
1. Limited Resources: The Hindu Undivided family business faces the problem of limited capital as it depends
mainly on ancestral property. This limits the scope for expansion of business. The business faces shortage of
funds as ancestral property gets divided with the birth of every male member and members do not contribute
additional funds.

2. Unlimited Liability of karta: The karta is not only solely responsibility for decision making and management
of business, but also suffers due to his unlimited liability for the business debts. His personal property can be
used to repay business debts.

3. Dominance of karta: The sole control and management of the business is in the hands of the karta. At times,
such a monopoly control is not acceptable to other members. It may cause conflict amongst them and may
even lead to break down of the family unit.

4. · Limited Managerial Skills: As karta has to perform all the functions of business, he may not be an expert in
all activities of business. His skill is limited and this may adversely affects the functioning of the business and
may result into poor profits or even losses.
In the present scenario, the Hindu Undivided family business is on the decline because of
the diminishing number of Hindu Undivided families in the country.
 PARTNERSHIP
The limitations of Sole Proprietorship and Hindu Undivided Family
business gave birth to partnership.

• Lack of finance and managerial capabilities under sole proprietorship

paved the way for partnership as a viable option.

• Partnership serves as an answer to the needs of greater capital

investment, varied skills and sharing of risks.
 DEFINITIONS OF PARTNERSHIP
Indian Partnership Act, 1932-
Partnership is 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.

Professor L.H.Haney-
Partnership is the relation between persons competent to make contracts who have agreed to carry on a
lawful business in common with a view to private gain".

Kimball and Kimball, "A partnership firm, as .s often called, is a group of men who have joined capital or
services for the prosecution of some enterprise".

In the words of The Indian Contract Act, "Partnership is the relation which subsists between persons
who have agreed to combine their property, labour or skill in some business and to share the profits
there from between them.".
 Features of Partnership
1. Formation: Partnership is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement
among the partners, in which terms and conditions governing the relationship, sharing of profits and losses and the
manner of conducting the business are specified.

2. Lawful Business: It must be noted that the business must be lawful and should be run with the motive of profit. If two people
work together for charitable purposes, then it will not constitute a partnership.

3. Liability: The partners of a firm have unlimited liability, i.e. their personal assets may be used to pay off debts of the business
in case of insufficiency of business assets. Further, the partners are 'jointly' and 'individually' liable for payment of debts.
• Jointly, all the partners are responsible for the debts and they contribute in proportion to their share in business and as such
are liable to that extent.
• Individually, each partner can be held responsible to repay the debts of the business. However, such a partner has the right to
recover the proportionate contribution from other partners.

4. Risk Bearing: The partners bear the risks involved in running a business as a team. The reward for risk bearing comes in the
form of profits, which are shared by the partners in an agreed ratio. However, in the event of losses, they also share the losses in
the same ratio.

5. Decision-Making and Control: In a partnership firm, partners share amongst themselves the responsibility of decision-making
and control of day-to-day activities. Decisions are generally taken with mutual consent. Thus, the activities are managed through
6. Continuity: Partnership gets automatically dissolved on the death, retirement, insanity or insolvency
of any of its partners. However, if the remaining partners desire to continue, then they may do so on
the basis of a new agreement.

7. Membership: There should be minimum of 2 persons to form a partnership firm. Section 464 of the
Companies Act, 2013 provides that number of persons in any partnership shall not exceed 100 subject
to the limit prescribed in Rules. Rule 10 of the Companies (Miscellaneous) Rules, 2014 provides that no
partnership shall be formed, consisting of more than 50 persons. So, limit as of now is 50 partners.

8. Mutual Agency: According to Indian Partnership Act, 1932, partnership business is carried on by all
or any one of the partners acting for all. It means, every partner acts in the capacity of an 'agent' as
well as a 'principal'.
• As an agent, he represents other partners and thereby binds them through his acts.
• As a principal, he is bound by the acts of other partners.
 Merits of Partnership

1.Ease of formation and closure: A partnership firm can be easily formed and dissolved. It comes into
existence through an agreement between the partners and they can start a lawful business even without
registration.

2. Balanced Decision-Making: Two heads are always better than one. The specialised knowledge, skills and
experience of different partners are available to the firm. The partners can oversee different functions
according to their areas of expertise. It not only reduces the burden of work but also leads to more balanced
decisions.

3. More Funds: In partnership firm, capital is contributed by a number of partners. As a result, the business
has got large resources as compared to sole proprietorship and firm can undertake additional operations when
needed.

4. Sharing of Risks: Business risks are shared by all the partners under the principle of unlimited liability. This
reduces the anxiety, burden and stress on individual partners.

5. Secrecy: A partnership firm can easily keep its secrets as it is not required to publish its accounts. Partners
are not likely to leak out the secrets as their own future is linked with the success of the firm.
 Limitations of Partnership
1. Unlimited Liability: The liability of the partners is unlimited, jointly as well as individually. • Partners are liable to pay off business debts
from their personal property if the business assets are not sufficient to meet its debts. • It is a drawback for those partners who have
greater personal wealth as they will have to repay the entire debt in case the other partners are unable to do so.
2. Limited Resources: A partnership firm cannot raise huge financial resources to support large scale business operations due to legal
ceiling on number of partners. As a result, partnership firms face problems in expansion and growth beyond a certain size.

3. Possibility of Conflicts: In a partnership firm, every partner enjoys the right to participate in the affairs of the firm.
• Any difference in opinion on some issues may lead to disputes between the partners. Decisions of one partner are binding on others.
• Any wrong decision by one partner may result in financial ruin of all other partners.
• Further, if a partner desires to leave the firm, then it will lead to termination of partnership as there is restriction on transfer of
ownership.

4. Lack of Continuity: The life of a partnership firm is highly uncertain and unstable. It can come to an end by agreement, insolvency,
death or insanity of any of the partners. However, the remaining partners can enter into a fresh agreement and continue to run the
business.

5. Lack of Public Confidence: As the partnership firm is not legally required to publish its accounts, public is not aware of its true financial
status. As a result, the partnership firm enjoys less confidence of the public.
 Types of Partners
The Indian Partnership Act, 1932 makes no distinction among the partners. However, a partnership firm can have different types of partners with
different capabilities, nature of work and liability. The main types of partners are described as follows:
1. Active or Working Partner: An active partner is one who
• contributes capital,
• participates in the management of the firm,
• shares its profits and losses and bears an unlimited liability for the debts of the firm.
• Such partners take active part in carrying out business of the firm.

2. Sleeping or Dormant Partner: A sleeping partner is one who

• does not take part -in the day-to-day activities of the business.
• of course contributes capital,
• bears unlimited liability, both jointly as well as individually,
• but does not participate in the management affairs.
3. Secret Partner: A secret partner is one
whose association with the firm is unknown to the general public. Except this distinct feature, he is like the rest of the partners.
contributes capital,
takes part in the management,
shares its profits and losses and
has unlimited liability towards the creditors.
4. 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 represented as a partner. He
does not invest capital,
• does not share profits and does not take part in the management of business.
• However, he bears unlimited liability for the debts of the firm.

5. Partner by Estoppel: A partner by estoppel is one

• who by his words or conduct gives an impression to others that he is a partner of the firm.
• Such partners are held liable for the debts of the firm as they are considered partners in the eyes of the third party,
• even though they do not contribute capital or take part in its management.

6. Partner by Holding out: A partner by holding out is one

who is represented as a partner and he does not deny such impression, despite becoming aware of that fact.
Such a person becomes liable for the debts of the firm to outsiders whohave sold goods on credit or lent money to
the firm on the basis such representation.
In case, such person is not really a partner and wants to save' himself from such a liability, then he should immediately
issue a denial, clarifying his position that he is not a partner in the firm. If he does not do so, he will be responsible to
the third party for such debts.
 Types of Partnerships
(i ) Partnership at Will: The life of this type of partnership depends upon the will of partners. The partnership can be dissolved at
the desire of any partner on giving a notice. This type of partnership is not for a fixed period or for during a particular fixed
venture.

(ii) Particular Partnership: Particular partnership is one which is formed to accomplish a particular project or to carry out an activity
for a specified period of time. It dissolves automatically at the expiry of fixed period or completion of project. For example,
partnership done for construction of a dam or a road.

( iii) General Partnership: General partnership is one in which liability of every partner is unlimited and every partner is entitled to
take active part in management of the business. Acts of each partner are binding on each other as well as on the firm. Registration
of the firm is optional and existence of the firm is affected by death, insanity, insolvency or retirement of the partners.

(iv) Limited Partnership: Limited partnership is one in which liability of at least one partner is unlimited, whereas, rest of the
partners may have limited liability.
• Such a partnership does not get terminated with the death, lunacy or insolvency of partners with limited liability.
• The limited partners do not enjoy the right of management and their acts do not bind the firm or the other partners.
• Registration of such partnership is compulsory.
LIMITED LIABILITY PARTNERSHIP
Regulating act –Partnership Act 2008
Separate legal entity
Perpetual Existence
No maximum limit for numbers of members
Designated partners
Limited liability