Forms of Business Organisation

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Everything you need to know about the forms of business organisation. After deciding to start a business, an entrepreneur has to choose one of the forms of business organisation.

The merits and demerits of each form of business organisation have to be considered keeping in view, the size and nature of business, amount of capital required and the extent of liability.

Some of the forms of business organisation are:-

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1. Sole Proprietorship 2. Hindu Undivided Family Business 3. Partnership 4. Cooperative Society 5. Joint Stock Company.


Forms of Business Organisation: Sole Proprietorship, Hindu Undivided Family Business, Partnership and Other Forms 

Forms of Business Organisation – With Advantages and Disadvantages

Business activities cannot be performed in isolation. They have to be organised in an appropriate form. ‘Forms of Business Organisation’ are essentially the forms of ownership of business. Ownership involves capital investment, management and sharing of profits. According to L.H. Haney, “The form of Business Organisation should be so strong, that it can continue for a long time and small obstructions should not extinguish it i.e., it may remain static”.

While starting a business or expanding an existing one, an important decision relates to the choice of the form of organisation. The most appropriate form is determined by weighing the merits and limitations of each type of organisation against one’s own requirements.

The various forms of Business Organisations are:

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1. Sole Proprietorship

2. Hindu Undivided Family Business

3. Partnership

4. Cooperative Society

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5. Joint Stock Company

Form # 1. 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 refers to a form of business organisation which is owned, 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 personalized services, such as beauty parlours or small scale activities like running a retail shop in a locality.

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Definitions of Sole Proprietorship:

In the words of J.L. Hansen, “Sole trader is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business”.

In the words of L.H. Haney, “The individual proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure”.

In the words of Kimball and Kimball, “The individual proprietor is the supreme judge of all matters pertaining to his business; subject only to the general of the land and to such special legislation as may affect his particular business”.

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Features of Sole Proprietorship:

The salient characteristics or features of sole proprietorship are:

1. Formation and Closure – Sole proprietorship is very easy to start as no legal formalities are required to start it (though in some cases, one may require a license). There is no separate law that governs sole proprietorship. It can easily be dissolved (or closed) when the sole trader is interested. So, there is ease in formation as well as closure of business.

2. Liability – The liability of the owner (i.e. sole proprietor) is unlimited. It means that the owner is personally liable for payment of debts if assets of the business are not sufficient to meet all the debts. In other words, his personal property may be sold to pay business debts in case the debts exceed the assets of the firm.

3. Sole Risk Bearer and Profit Recipient – Sole proprietor is the sole owner who is responsible for all the business affairs. Any risk of failure of business is borne all alone by him. Similarly, if the business is successful, he receives all the business profits which become a direct reward for his risk bearing.

4. Control – Sole proprietorship is a one man show, i.e. right to run the business and to make all the decisions, lies absolutely with the sole proprietor. He can carry out his plans without any interference from others.

5. No Separate Entity – A sole proprietorship has no legal existence, i.e. in the eyes of the law, no distinction is made between the firm and the proprietor. As a result, owner is held responsible for all the activities of the business.

6. Lack of Business Continuity – As owner and business are one and the same entity, death, physical ailment or insolvency of the proprietor has a direct and detrimental effect on the business. It may even lead to closure of the business.

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 has 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.

If the proprietor can provide for additional capital for expansion, then he may opt for paid assistant to share his managerial responsibilities. However, if the proprietor requires both finance and managerial assistance, then admission of partner is justified.

Form # 2. 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. 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 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.

(ii) 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:

The essential characteristics are:

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 authorized to manage the 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.

For, “karta is the most active member in case of Joint Hindu family business”.

Advantages of Hindu Undivided Family Business:

The advantages of the Hindu Undivided Family Business are as follows:

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.

Disadvantages of Hindu Undivided Family Business:

Some of the limitations of Hindu Undivided family business are:

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.

Form # 3. 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.

In a way, partnership can be termed as an extension of sole proprietorship. It is a form of business organisation in which two or more persons agree to carry on a lawful business with their personal resources for the purpose of earning profits. In India, partnership is governed by Indian Partnership Act, 1932.

According to 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.

Definitions of Partnership:

In the words of 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”.

In the words of Kimball and Kimball, “A partnership firm, as it is 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”.

Advantages of Partnership:

The following points describe the advantages of a partnership firm:

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 specialized 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.

Disadvantages of Partnership:

A partnership firm suffers from the following limitations:

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. Such partner, 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. He 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 who have sold goods on credit or lent money to the firm on the basis of 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 any such debts.

Form # 4. Cooperative Society:

The term ‘cooperative’ means working together and with others for a common purpose. Cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members.

It aims to protect and promote economic and social interests. It is an association of persons, not of capital. The cooperative society is compulsorily required to be registered under the Cooperative Societies Act, 1912. A minimum of 10 adult persons are required to form a cooperative society. Capital is raised from its members through issue of shares. The society acquires a distinct legal identity after its registration.

Cooperative Societies are based on principles like ‘Each for all and all for each’ and ‘Self-help through mutual help’.

Definitions of Cooperative Society:

In the words of E. H. Calvert, “Cooperative 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”.

In the words of The Indian Cooperative Societies Act 1912, “Cooperative organisation is a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles”. In the words, of T.M. Herrick, “Cooperation is the act of persons voluntarily united, for utilizing reciprocally their own forces, resources or both under their mutual management to their common profit”.

Features of Cooperative Society:

The main characteristics of cooperative society are as follows:

1. Voluntary Membership – Membership of a cooperative society is voluntary. Any person of 18 years and having a common interest can become its member. A person is free to join and leave the society whenever he desires so by giving a notice. No one can be forced to join the association or to continue as a member. There is no bar or discrimination on the basis of religion, caste and gender.

2. Legal Status – Registration of a cooperative society is compulsory. After registration, a cooperative society becomes a legal entity distinct from its members. It can own property and make contracts on its own name. It can also sue and be sued in its own name. Being a separate legal entity, it is not affected by entry or exit of its members.

3. Limited Liability – The liability of the members of a cooperative society is limited to the extent of amount contributed by them as capital. So, the maximum risk of a member is the subscribed share capital.

4. Control – Such societies are run on a democratic pattern as equality is the essence of a cooperative society. All members elect a managing committee through ‘one-man-one-vote’ system. The power to take decisions lies in the hands of the elected managing committee. However, members are allowed to give their suggestions, opinions and problems.

5. Service Motive – The cooperative society is formed with a service motive rather than maximization of profits. If any surplus is generated as a result of its operations, it is distributed amongst the members in the form of dividend.

Advantages of Cooperative Society:

Cooperative society offers following advantages:

1. Equality in Voting Status – The principle of ‘one-man-one-vote’ governs the cooperative society. Each member is entitled to equal voting rights irrespective of amount of capital contribution by a member.

2. Limited Liability – The liability of every member is limited to the extent of capital contributed by him. Therefore, the risk of financial loss is limited and known. Personal assets of members are safe and cannot be used to repay business debts.

3. Stable Existence – Cooperative society is a corporate body and its existence is not affected by the death, insolvency or insanity of its members. Thus, it enjoys continuity of life over a long period of time.

4. Economy in Operations – Cooperative society is generally managed by the members themselves on an honorary basis. As the society aims to eliminate middlemen, it helps in reducing costs. The members of the society are the customers or producers, which also reduces the risk of bad debts.

5. Support from Government – As cooperative society is based on democratic pattern, it enjoys special exemptions, privileges and concessions from the Government in the form of low taxes, subsidies and low interest rates on loans.

6. Ease of Formation – The cooperative society can be easily started with any ten adult members. The legal formalities involved in registration are few. Its formation is governed by the provisions of Cooperative Societies Act, 1912.

Disadvantages of Cooperative Society:

The cooperative society suffers from the following limitations:

1. Limited Resources – A cooperative society faces shortage of resources as it is run by members, who have limited means. The low rate of dividend on investment also acts as an obstacle in attracting membership or more capital from the members.

2. Inefficiency in Management – The societies is unable to employ experts because of their inability to pay them high salaries. The managing committee elected by the members, are generally not professionally equipped to handle the management functions effectively.

3. Lack of Secrecy – Cooperative society suffers from the lack of secrecy as its affairs are discussed openly in the meetings {due to disclosure obligations as per the Societies Act (7)1}. They are known to all the members. Every member is free to inspect any books of the society any time.

4. Government Control – In return of the privileges offered by the government, cooperative society is bound by rules and regulations related to auditing of accounts, submission of accounts, etc.

It reduces the flexibility in operations and initiative on the part of management. Control exercised by the state cooperative departments also negatively affects its freedom of operation.

5. Differences of Opinion – There are often internal quarrels due to differences of opinion and lack of cooperation among the members. It leads to difficulty in decision-making. Some members attempt to give preference to personal interest at the cost of welfare motive.

Form # 5. Joint Stock Company:

In this modern competitive world, the technological improvements and economic factors have created the need for large scale organisations. Joint Stock Company is considered to be most suitable form of organisation for operating business activities on a large scale. A company is an association of persons formed for carrying out business activities and has a legal status independent of its members.

It is set up by registration under the Companies Act, 2013 or any previous Company Law. A company can be described as an artificial person having a separate legal entity, perpetual succession and a common seal. The shareholders are the owners of the company and they exercise an indirect control over the business. Shareholders elect Board of Directors (BOD) who exercises direct control over the business. The capital of the company is divided into smaller parts called ‘shares’ which can be transferred freely from one shareholder to another person (except in a private company).

Definitions of Joint Stock Company:

In the words of Prof. L.H. Haney, “Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”.

In the words of Chief Justice Marshall, “A corporation is an artificial being, invisible, intangible and existing only in contemplation of the law”.

Advantages of Joint Stock Company:

The joint stock company offers the following advantages:

1. Limited Liability – The liability of the shareholders of a company is limited to the extent of amount unpaid on the shares held by them. The personal assets of a member are safe and free from any charge as debts of the company can be settled only from the assets of the company. It reduces the degree of risk borne by an investor.

2. Transfer of Interest – The shares of a public company is freely transferable. A shareholder can dispose of his shares at any time when the market conditions are favourable or he is in need of money. The ease of transfer of ownership avoids blockage of investment and makes the company a favourable avenue for investment purposes.

3. Perpetual Existence – A joint stock company enjoys perpetual existence. Change in its ownership and management does not affect its continuity, i.e. its existence is not affected by death, retirement, insolvency or insanity of its members. It can be liquidated only as per the provisions of the Companies Act.

4. Scope for Expansion – As compared to other forms of organisation, a company has large financial resources. Moreover, capital can be attracted from the public as well as through loans from banks and financial institutions. The investors are inclined to invest in shares of the company because of limited liability, transferable ownership and possibility of high returns. So, there is greater scope for expansion.

5. Professional Management – A company can employ specialists and professionals in different areas of business. The large-scale of operations facilitate division of work. As a result, each department deals with a particular activity and is headed by an expert. As management of the company is in the hands of specialized and experienced personnel, it results in balanced and rational decisions.

Disadvantages of Joint Stock Company:

The major limitations of joint stock company are as follows:

1. Complexity in Formation – As compared to other form of organisations, formation of a company is more complex as it requires greater time, effort, procedures and extensive knowledge of legal requirements.

2. Lack of Secrecy – According to Companies Act, each public company has to provide information from time-to-time to the office of the registrar of companies. Such information is available to the general public also. As a result, it is difficult to maintain complete secrecy about the operations of company.

3. Impersonal Work Environment – Separation of ownership and management leads to a situation in which there is no direct relationship between efforts and rewards. There is lack of effort as well as personal involvement on the part of the officers of a company. Moreover, large size of the company makes it difficult for the owners and the management to maintain personal contact with the employees, customers and creditors.

4. Numerous Regulations – The functioning of a company is subject to large number of legal formalities. The company is burdened with numerous restrictions with respect to audit, voting, filing of reports, preparation of documents and obtaining certificates from various agencies. All this process is very time consuming and expensive and reduces the freedom of operations.

5. Delay in Decision-Making – In company form of organisation, decision- taking is a time consuming process. All important decisions are taken either by the Board of Directors or are referred to general meeting. It causes not only delays in taking decisions but also in acting upon them. Many opportunities are lost because of delay in decision-making.

6. Oligarchic Management – In theory, management of a company appears to be democratic as directors are the elected representatives of shareholders.

However, in reality, management the company is the worst example of oligarchy, i.e. rule by a few. Shareholders of a company are scattered and disunited. They do not take much interest in company meetings. Therefore, directors enjoy considerable freedom in exercising their power which they sometimes use against the interests of shareholders. In such a situation, dissatisfied shareholders have no option but to sell their shares and exit the company and directors virtually enjoy the rights to take all major decisions.

7. Conflict in Interests – There may be conflict of interest amongst various stakeholders of a company. For example, employees may be interested in higher salaries, consumers may desire better quality products at lower prices and shareholders may ask for higher dividends. These demands pose problems as it is very difficult to satisfy such diverse interests.


Forms of Business Organisation – Sole Proprietorship, Joint Hindu Family Business, Partnership, Cooperative Societies and Joint Stock Company

After deciding to start a business, an entrepreneur has to choose one of the forms of business organisation. The merits and demerits of each form of business organisation have to be considered keeping in view, the size and nature of business, amount of capital required and the extent of liability.

The simplest form of business organisation is sole-proprietorship. With growth of business and desire for higher returns, entrepreneurs start thinking of other forms of business organisations like Joint Hindu Family, Partnership, Cooperative Societies and Joint Stock Companies.

The various forms of business organisation are as follows:

1. Sole Proprietorship

2. Joint Hindu Family Business

3. Partnership

4. Cooperative Societies

5. Joint Stock Company.

Form # 1. Sole Proprietorship:

‘Sole’ means only and the term ‘proprietor’ means owner. Hence, a sole proprietor is the one who is the only owner of a business. Therefore, sole proprietorship is a form of business organisation which is owned, managed and controlled by a single individual, who receives all the profits and bears all the risks involved in the business.

Definitions:

‘Sole Trade is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of enterprise and for management of business.’ – J. L. Hanson

Sole Proprietorship is suitable for business firms which are carried out on a small scale because it requires less capital and limited managerial skill. This form of business organisation is particularly most suitable for small business enterprises in areas of personalised services like boutiques, hair salons and small scale activities like running a local retail shop. It is the simplest and most popular form of organisation.

There is only one person who owns, finances and manages the business and he is called the sole proprietor. It is a one-man show. He plans, controls, directs, bears the risk i.e. the loss, alone and takes away the entire profit.

Expansion of Sole Proprietorship:

The two main problems that are faced by a sole trader are that of limited financial resources and limited managerial skills. The solution to these problems lies in either employing a paid assistant or by admitting a new partner.

(i) Employ a Paid Assistant:

This solution is suitable when the sole trader is not facing any financial problems but does not have the requisite managerial skills. As he has sufficient funds available, so he can afford to hire someone who is professionally qualified for the job and can manage the business more effectively and efficiently.

(ii) Admit a Partner:

This solution is suitable when the sole trader is facing shortage of funds for growth and expansion but he is an expert in carrying on managerial activities.

Comparative Study of both the Options:

Employ a Paid Assistant:

1. Availability of Capital – No additional capital is available by employing a paid assistant.

2. Share in Profit – There is no share in profit offered to employee. He gets fixed wages and salary.

3. Control – The control remains in the hands of the sole trader.

4. Decision – The decision making power remains in the hand of the proprietor.

5. Removal – It is easy to remove a salaried employee.

6. Division of work – The proprietor can get an expert to share the work.

Admit a Partner:

1. Availability of Capital – Additional capital is invested by a partner when he joins the firm.

2. Share in Profit – The proprietor has to offer a share in profit to his partner.

3. Control – The partner gets an equal right to control the business.

4. Decision – The proprietor will have to take all decisions in consultation with the partner.

5. Removal – It is not that easy to remove a partner.

6. Division of work – The proprietor shares the work with the partner.

After studying both the options, we can say that if the partner has sufficient funds available for growth and expansion then he should go in for paid assistant otherwise it is better to admit a partner.

Form # 2. Joint Hindu Family Business:

It is one of the oldest forms of business organisation. It is governed by the provisions of the Hindu Law (The Hindu Succession Act, 1956). Business firm is owned and carried on by the members of the Hindu Undivided Family (HUF).

The membership in the business is based on the 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 the ‘Karta’ or ‘Mukhiya’. His decisions are binding on all the members. All the members have equal ownership right over the property of their ancestors and they are known as coparceners.

Two conditions must be satisfied for a joint Hindu family business:

1. Minimum two members must be there in the family, and

2. Existence of some ancestral property.

Under the Hindu law there are two systems of inheritance:

(i) Dayabhaga System of Inheritance – This system prevails in West Bengal only. Under this system, both male and female members of the family are allowed to be coparcener.

(ii) Mitakshara System of Inheritance – It prevails all over India except West Bengal. Under this system, only the male members are allowed to be coparcener in the business.

Features of Joint Hindu Family Business:

1. Formation – There should be at least two members in the family and some ancestral property to form a Joint Hindu Family Business. It is governed by provisions of the Hindu Succession Act, 1956.

2. Membership – Membership of the Joint Hindu Family business is by virtue of birth. All members have equal ownership rights over ancestral property and they are called coparcener.

3. Control – The business is controlled by the Karta, who is the head of the family, being the eldest member. He takes all the management decisions.

4. Liability – The Karta has unlimited liability. His assets can be used to pay off business debts. The liability of all other members is limited to their share in the property of the business.

5. Continuity – The business continues even after the death of the Karta as the next eldest member becomes Karta with mutual consent of all the other members.

6. Minor Members – Minors can also be members of the Joint Hindu Family Business as inclusion of an individual into the family business depends on the birth in the family.

Merits of Joint Hindu Family Business:

1. Effective Control – The business is controlled by the Karta who is the head of the family. There are no conflicts among members because no one can interfere. This leads to quick and timely decision.

2. Continued Business Existence – The business enjoys relative stability and continuity. Death of Karta does not affect the business as the next eldest member takes over the position of the Karta.

3. Limited Liability of Members – The liability of all the coparcener except that of the Karta is limited to their share in the property of the business firm.

4. High-degree of Loyalty and Co-operation – As the business is run by the members of a family, they are loyal and they cooperate with each other. They feel proud at the growth of their family business and of being involved in the business.

Demerits of Joint Hindu Family Business:

1. Limited Resources – The Joint Hindu Family Business also faces some resource problems. It has limited capital as its main source is the ancestral property. Members do not contribute additional funds personally. Thus, there is less scope for expansion and growth of business.

2. Unlimited Liability of Karta – The Karta is solely responsible for decision making and management of the business. He has unlimited liability towards the business debts. Thus, his personal property can be used to pay the business debts.

3. Dominance of Karta – The Karta manages the business. He takes all decisions, which may sometimes, not be acceptable to other members. They may differ amongst themselves and a conflict may develop. It may lead to break down of the family and the business.

4. Limited Managerial Skills – Karta cannot be an expert in all the areas of management. He may take poor decisions, leading to poor profits and even losses for the business.

In spite of its merits the Joint Hindu Family Business is not very common form of organisation because of the diminishing number of Joint Hindu Families in the country.

Note- Gender Equality in Joint Hindu Family Business

In December 2004, a bill was passed in the Parliament to amend the Hindu Succession Act. In this Amendment women are given equal rights in Joint Hindu Family Business. This bill was passed to remove the discrimination as contained in Sec-6 of the Hindu Succession Act, 1956 by giving equal rights to daughters as the sons have. Now as per Mitakshara as well as Dayabhaga female can become coparcener like male members of Joint Hindu Family.

Form # 3. Partnership:

Partnership is an association of two or more persons who agree to undertake a business activity. They pool their financial resource and managerial skills for this purpose. It is formed when there is a need for more capital investment, varied skills and risk bearing capabilities. In India partnership firms are governed by Indian Partnership Act, 1932.

According to 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 of them acting for all.”

Definitions:

“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,” – L. H. Haney

“Partnership has two or more members, each of whom is responsible for the partnership each of the partners may bind the others for debts of the partnership.” – William R. Spriegel

Partnership is a very suitable form of business organisation for small and medium sized enterprises. There is mutual trust and complementary skills among partners for wholesale firms, chartered accountancy firms, architects, law firms, restaurants and medium sized manufacturing factories.

Features of Partnership:

1. Formation – This form of business organisation is governed by the Indian Partnership Act, 1932. It comes into existence with a legally binding agreement among the partners. The agreement contains the terms and conditions governing their relationship, profit sharing ratio and the manner of conducting the business.

The business must be lawful and should be run with the motive of earning profit. If two people work together for charitable purposes, then it does not constitute a partnership.

2. Liability of the Partners – The partners have unlimited joint and individual liability. Their private assets may be used to pay off liabilities of the business in case of insufficiency of business assets.

Types of partnership on the basis of liability:

(i) General Partnership, and

(ii) Limited Partnership.

The partners are ‘jointly’ as well as ‘individually’ liable for payment of business debts as follows:

(i) Under General Partnership – the liability of all the partners is unlimited. Their private properties can be attached in case of continuous losses. Each partner can actively take part in the affairs of the business. All partnerships are general in India.

(ii) Under Limited Partnership – the liability of all the partners is limited except one partner whose liability is unlimited. It is now allowed in India as per Limited Liability Act. 2008.

3. Membership of the Firm – There must be at least two members in a partnership firm and maximum as may be prescribed not exceeding 50 members.

4. Risk Bearing – All partners bear the risks involved together as a team. The reward i.e., profits and losses are shared by them in an agreed ratio.

5. Decision Making and Control – Each partner has a right to take part in the management of business. Decisions are collective and generally taken with mutual consent. Thus, the rights of ownership and control are jointly held by all the partners.

6. Continuity of Business – Partnership is automatically dissolved on the death, retirement, insanity or insolvency of any of its partners. However, if the remaining partners wish to continue, then they will have a new agreement.

7. Mutual Agency – According to the Partnership Act, 1932, the business is carried on by all or any of them acting for all. It means, every partner acts in the capacity of an ‘agent’ as well a ‘principal’. The firm is responsible for the acts of partners. 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.

8. Non-Transferability of Share – A partner cannot transfer his share to any other person except with the consent of all other partners.

9. Registration – Registration of a partnership firm is not compulsory. However, partnership firms prefer to be registered, to avoid disputes in future

Partnership Deed:

Partnership is formed through an agreement which is entered into by the partners. This agreement may be oral or in writing but it is always better to have written agreement to avoid any dispute in future.

Partnership deed is a written agreement signed by all partners. It specifies the terms and conditions that will govern partnership business. However, if the partnership deed is silent on any issue, then the provisions of Indian Partnership Act 1932 will apply.

Contents of Partnership Deed:

The partnership deed generally includes the following terms and conditions that govern the partnership:

1. Name and address of the firm, nature of business and date of commencement of partnership.

2. Names and addresses of the partners.

3. The amount of capital to be contributed by each partner.

4. Ratio in which profit or losses are to be shared by the partners.

5. Duration of business.

6. Salaries and drawings of the partners.

7. Terms of admission, retirement of a partner.

8. Interest on capital and drawings.

9. Procedure for dissolution of the firm.

10. Preparation of accounts and their auditing.

11. Method of solving disputes and conflicts.

12. Operation of bank account.

13. Any other important matter.

There is no limit on these terms and conditions.

Registration of a Partnership Firm:

Registration of a partnership firm involves the entry of the firm’s name and other details in the Register of the Firms kept with the Registrar of Firms. It provides conclusive proof of the existence of a partnership firm. The registration of a partnership firm is not obligatory. It is optional.

However, an unregistered firm suffers from following handicaps:

(a) A partner of such a firm cannot file a suit against the firm or any other partner.

(b) An unregistered firm or its partners also cannot file a suit against any third party for the recovery of claims.

(c) An unregistered firm cannot file a suit against any partner.

It is always advisable to get the firm registered even though it is not obligatory. The registration can be done at any time i.e., either at the time of formation or any time during its existence.

Procedure of Registration:

The following procedure is followed:

1. A prescribed application form, signed by all the partners, is submitted to the Registrar of firms.

The application should contain the following information:

(a) Name of the firm

(b) Names and permanent addresses of the partners

(c) Location of the firm

(d) Names of others places where the firm carries on business

(e) Dates of admission of partners in the firm

(f) Duration of partnership

2. Deposit of registration fees with the Registrar of Firms.

3. After approval, Registrar will make an entry in the Register of Firms and will issue a Certificate of Registration, which is a conclusive proof of the existence of the firm in the eyes of law.

Form # 4. Cooperative Society:

Cooperation means working together for a common goal. A cooperative Society is a voluntary association of persons who get together with the motive of mutual welfare of the members. It aims to protect and promote the economic and the social welfare. A minimum 10 adult persons are required to form it. It has to be registered under the Cooperative Societies Act 1912 or any State Cooperative Societies Act and its share capital is contributed by members only.

Definition:

Cooperative organisation is a “society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles.” – The Indian Cooperative Societies Act, 1912

“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.” – E. H. Calvert

Form # 5. Joint Stock Company:

A Joint Stock Company is an association of persons formed for carrying out business on large scale. It has a legal status independent from its members. This form of business organisation is suitable for large scale business. A Joint Stock Company can be described as an artificial person created by law having a separate legal entity, perpetual succession and a common seal. It is compulsory to be registered under The Companies Act, 2013 and is governed by the provision of this Act.

The capital of a company is divided into small parts called ‘shares’ which can be transferred freely from one shareholder to another (except in a private company). The shareholders are the owners of the company and they exercise indirect control over the business through their meetings. They elect Board of Directors which directly controls the management of business. The shareholders get a return on their shares which is called dividend.

Definition:

“A company is an association of many persons who contribute money and employ it in some trade or business, and who share the profit and loss arising thereof. The persons who contribute money are its members.” – Justice Lord Lindley

Privileges of a Private Limited Company:

A private company enjoys certain benefits and exemptions from certain provisions of the Companies Act 2013. The basic reason for granting these exemptions is that private companies do not use public money and their maximum members are two hundred only.

The following are some of the privileges of a private company over a public limited company:

1. Number of Members – A private company can be formed with just two members, while a public company requires at least seven members.

2. Number of Directors – A private company needs to have only two directors as against minimum three in case of a public company.

3. Capital – A private company can be registered with a paid-up capital of Rupees one lakh while a public company has to have a minimum paid-up capital of Rupees five lakh.

4. Prospectus – It is not required to issue a prospectus since public cannot be invited to subscribe to the share capital of a private company.

5. Index of Members – A private company does not keep an index of members while the same is necessary in case of a public company.

6. Remuneration – There is no restriction on managerial remuneration and loans to directors in a private company.


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