Various forms of business Organisations

• Sole Proprietorship

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• Joint Hindu Family Business

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• Partnership

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• Co – operative Societies

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• Joint Stock Companies

Sole Proprietorship

• Sole means single and proprietor means owner
• Sole proprietorship means single owner business
• Is a form of organisation which is owned , managed and controlled by an individual who is the recipient of all profits and bearer of all risk

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Features

• Formation and Closure

No legal complications for starting this business in some case only a licence is required

Liability

• Unlimited liability
• If assets are not sufficient to meet debt he will personally responsible for payment
• Eg:- assets of a firm is 50000, total debt 60000, balance 10000 will be paid by the owner

Sole risk bearer and profit recipient

• If business earn more profit he can take it
• But if there is loss / business failure he should bear it also

control

• He will take all decisions and actions
• No chance for outsiders involvement

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No separate Entity

• It means owner and organisation is same
• Sole trader is responsible for all business activities

Lack of business continuity

• Death , insanity , imprisonment and accidents to the sole trader will leads to closure of business

Merits

• Quick Decision Making

He is the whole bearer of risk and profit, so he can take any kind of decisions immediately

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Confidentiality of information

• Sole trader can keep all business records in secret
• No compulsion from anywhere for publishing these business records

Direct Incentive

• Sole proprietor can take all profit and also bear loss
• If he work hard he can increase profit
• No profit sharing

Sense of Accomplishment

• It means personal satisfaction for working oneself
• If business get more profit he can increase his confidence

Easy of Formation And closure

• There is no legal formalities for starting and closing these
• Any time anyone can start it

Limitations

• Limited resource

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• There is a limit to an individual to collect finance
• Banks and other organisations do not provide more amount to sole trader

Limited life of business

• Death , accident , and insolvency of business man leads to closure of business

Unlimited liability

• Owner is responsible for all debts of the firm

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• If the business assets are not adequate to pay its debt he must pay it by sale of his personal properties

Limited managerial ability

• Sole trader can’t use effective experts for business activities because his resources are limited

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Joint Hindu Family Business

• Is a form of business organisation which is owned and controlled by members of Hindu undivided Family [ H U F ]
• It only found in India,
• Membership is based on birth in family ,3 generation can become members
• Business is controlled by karta who is the head of family
• Members are called Co-parceners

System of membership

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• Dayabhaga system

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• Mitakashara System

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�Dayabhaga system �

• It exist only in west Bengal

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• Male and female members can become co-parceners

Mitakashara System

• It exists all over India except west Bengal

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• In this male members can become Coparceners

Features

• Formation

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It require at least 2 members in the family and ancestral property to be inherited by them

[ പൂർവികരുടെ സ്വത്ത് ]

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Controlled by Hindu Succession Act 1956

Liability

• Liability of karta is Unlimited

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• Members or coparceners liability is limited to there share in business

control

• Karta take all decisions & he control whole business

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• Members should obey karta

Continuity

• If karta is died then next eldest member take the position of Karta

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• By mutual consent of all members business can be closed

Minor members

• Minor means individuals below 18

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• By birth minor can become a member

Merits

• Effective Control

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full decision making power vested with karta , No chance for problems

Continued business existence

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• If karta died next eldest member become karta
• Business will continue for long years

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Limited liability of members

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• Coparceners liability is limited to there share in business

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Increased loyalty and cooperation

• HUF is a family business ,so more loyalty towards one another exist

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• Growth of business will leads to high status for family

Limitations

• Limited Resources .

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main source of capital is ancestral property , it will always too low

Unlimited Liability of karta

• KARTA s personal property can be taken for debt payment

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• Also he should have a responsibility to take & manage all activities of business

Dominance of Karta

• Karta takes all decisions
• Member cant approve it all times there is chance for problems

Limited managerial skill

• In HUF all are planned by karta, may he have little knowledge in management

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• So business can’t increase its profit

Partnership

• Indian partnership Act 1932

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• Two or more persons required to start this

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• Partnership is a voluntary association of persons who come together for achieving common objectives

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• An agreement is needed for profit sharing

Meaning

• The relation between two or more persons who have agreed to share the profit of the business carried on by all or any of them acting for all

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• എല്ലാവരും ചേർന്ന് നടത്തുന്ന അല്ലെങ്കിൽ എല്ലാവർക്കും വേണ്ടി ആരെങ്കിലും നടത്തുന്ന ബിസിനസ്സിന്റെ ലാഭം പങ്കിട്ടെടുക്കാൻ യോജിച്ചു തീരുമാനിച്ചവർ തമ്മിലുള്ള ബന്ധം

Features

• Formation

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• an agreement is needed to start partnership, profit and loss sharing and all factors are included in it
• Business must be lawful also
• Agreement for welfare activities cannot be considered as partnership

Liability

• Partners have Unlimited liability
• If business assets are not sufficient to meet liabilities ,his personal assets may be used for payment
• All partners are responsible for liability of business

Risk Bearing

• Profit and loss must be shared

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• Risk also shared in agreed ratio

Decision making & control

• Partners can take decisions with mutual consent

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• All activities are managed jointly

Continuity

• Death , insanity, insolvency of any partner will stop the business

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• Other partners can continue business with a new agreement

Membership

• For starting partnership Minimum 2 members needed

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• Maximum
• In case of Banking business – 10

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• In case of other business - 20

Mutual Agency

• Each partner is both an agent and principal

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• A partner is an agent of other partners he represent them, other partners are responsible for his activities
• He is a principal means. he is responsible for other partners activities

Merits / ഗുണങ്ങൾ

• Easy of formation and Closure

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only an agreement is required to start a partnership business

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Registration is not compulsory

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Balanced Decision making

• Partners can concentrate there expert areas

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• It reduce chance for errors

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• Also reduce work load

More Fund

• Many persons will contribute fund to business

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• So large amount of fund will be available

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• More fund than sole proprietorship

Sharing of risk

• In partnership risk are shared by members

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• It reduce each partners liability

Secrecy

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• Not compulsory to publish any business records

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• Partner can maintain all records in secret

Limitations

• Unlimited Liability

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if business assets are not adequate to pay debt personal properties of partners can be taken for payment

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Liability is joint & several

Limited Resources

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• Due to limited number of partners more amount of fund is not available

Possibility of conflicts

• Decisions are taken by two or more persons, at that time there arise a chance for conflict or problems

Lack of continuity

• Death , insolvency and retirement of any partner will leads to shut down the business

Lack of public confidence

• Due to non publishing business records the public can’t find accurate financial position

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• They have no interest to invest in business

Types of Partners

• Active partner

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• Sleeping or Dormant partner

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• Nominal partner

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• Secret Partner

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• Partner by Estoppel

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• Partner By Holding Out

Active partner

• Contribute capital & Actively participate in management of firm
• Share profit and losses also he have unlimited liability

Sleeping or Dormant partner

• Not participate in day to day activities of business
• He contribute capital , also share profit and losses
• Unlimited liability

Nominal Partner

• He allow to use his name in business as a partner

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• Does not contribute capital not participate in management of business

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• No profit sharing but liable for debts of business

Secret Partner

• His partnership with business is unknown to general public

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• He contribute capital & share profit and losses

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• Also he participate in management

Partner by Estoppel

• Due to any behaviour or conduct of person he give an impression to public that he is a partner in business
• He does not contribute capital
• He is liable for business debts because public believe that he is a partner

Partner By Holding Out

• A person who knowingly allow to be represented as a partner

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• He is liable for business debts

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• If he is not a partner he should clarify it immediately otherwise he is responsible for all business debts

Partner in profit only

• It is a form of partnership in which the partner is not liable for business losses and he will get a share in profit
• It is made through a separate agreement
• But he also responsible for third parties
• He invest capital , not participate in management

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Sub partner

• Appointing anyone as an agent of a partner
• He will get profit or loss in organisation
• Sub partner have no authority and responsibility in business

Minor partner

• Minor cannot be admitted to partnership business
• But Minor can be admitted for the benefits of partnership with all partners consent
• He have a right to get share in profit
• No liability for any loss or debt
• After attaining majority he can decide whether continue in business or not
• He will clarify it within 6 month , if he is not clarified it he become a full fledged partner

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Types of Partnerships

• On the basis of duration

• Partnership at Will
• Particular Partnership

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• On the basis of Liability
• General partnership
• Limited partnership

Partnership at Will

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• It comes at the will or interest of partners , if they are not an interest to continue they can close it by giving a notice to other partners

Particular Partnership

• Partnership for a specific /particular activity

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• If the activity is completed partnership will automatically dissolve

General partnership

• In this partners liability is unlimited &joint
• Partners have a Right to participate in management
• A partner activities are responsible by other partners , registration not compulsory , partners death or insolvency will leads to closure of business

Limited Partnership

• Due to unlimited liability of partners many persons does not come into partnership business

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• In this partnership only one person liability is unlimited but others liabilities are Limited

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• Limited liability partners death , insolvency does not leads to closure of business , They have no right to participate in management of business

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• There activities are not liable to business but registration is compulsory

Partnership Deed

• It means a written agreement which include terms and conditions that control the partnership business

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• Agreement must be in written or Oral

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• Written agreement will be an evidence in future if there is any problem comes into partnership

Partnership Deed includes;

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• Name of the firm
• Nature of business & location of business
• Duration of business
• Contribution of each partners
• Profit & loss sharing
• Admission , retirement etc .. Of partners
• Method of solving disputes Etc....................

Registration

• Register according to Indian Partnership Act 1932
• Registration means including the name of firm into Register of firms Kept by Registrar of firms
• Not compulsory to register partnership business

Consequences of Non Registration

• A partner of an unregistered firm cannot file a case against any firm or other partners

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• Firm cannot file a case against Third party

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• Firm cannot file a case against the partners

Procedure of registration

• Submit prescribed application form to registrar of firm it contain;

name & location of business , name & address of partners , duration etc..... Application should be signed by all partners

• Deposit required fee to registrar of firms
• Registrar will record firm name in register and give a certificate of registration

Cooperative Societies

• Cooperative means working together for a

common purpose

• Cooperative society is a voluntary association of persons who join together for the welfare of members
• Main aim is to avoid exploitation of middleman and improving the economic condition of members
• Registration compulsory under cooperative societies act 1912
• 10 members needed to start a co op society
• By issuing shares to members capital can be raised

Features

• Voluntary Membership

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membership open to all

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Any one can join & leave in a cooperative society at any time he desire

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No compulsion for membership

Legal Status

• Registration compulsory , after registration it become a separate legal entity
• Society can enter into contracts , buy & sell properties , and file cases
• Members entry & exit will not effect the life of cooperative society

Limited Liability

• Limited liability

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• Liability limited to capital contributed by members

control

• Members through election select a managing committee

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• These managing committee will control & direct cooperative society

Service motive

• Cooperative societies concentrate on the welfare of members

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• All profits should be distributed among members

Merits

• Equality in voting status

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One man One vote

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a single individual will get one vote irrespective of capital contributed

Limited liability

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• Liability of members limited to there capital contribution

Stable existence [continuity]

• Death , insolvency and insanity of members will not stop the business

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• Members may come and members may go but cooperative societies can continue for long period

Economy in operation

• Main objective of cooperative society is to eliminate middle man’s

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• By eliminating middleman's operating cost can be reduced

Support from government

• Cooperatives are formed for the welfare of members

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• So govt provide low taxes , subsidies and low rate interest loan etc....

Easy of formation

• 10 members needed for formation

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• Registered under cooperative societies act 1912

Limitations

• Limited resources

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main resource is capital contribution of members

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it is always too low

Inefficiency in management

• Small amount of capital is there , so they can’t employ highly paid managers

Lack of secrecy

• All records should be shown to all members so secrecy can’t be maintained

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• Under Cooperative societies act section [7] disclosure is necessary

Government Control

• Govt provides many facilities to cooperative societies

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• But cooperatives should obey various laws of govt and also auditing of accounts , submission of accounts etc....

Differences in opinion

• More members are there so more opinions will arise

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• Personal interest of members may block the welfare motive of cooperative societies

Types of co operative societies

• Consumers cooperative societies

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• Producers cooperative societies

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• Marketing cooperative societies

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• Farmers cooperative societies

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• Credit cooperative societies

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• Cooperative housing societies

Consumers cooperative societies

• These are formed for protecting the interest of consumers , members are consumers who want good quality product at reasonable price
• There main aim is to eliminate middleman's.
• They Directly purchase from wholesaler and sell it to members

Producers cooperative societies

• These are formed for protecting the interests of small producers
• Members are small producers desire to purchase inputs at low cost
• These societies give materials and equipments to members and also buy there products
• Main aim is to fight against big producers

�Marketing cooperative societies

• These societies are formed for helping small producers for selling there products
• Members are producers who want better price for there products
• These societies collect all products of individuals and sell it for a good price and give profit
• Main aim is to eliminate middlemen

�Farmers cooperative societies

• These are formed for protecting the interest of farmers
• These societies supply quality seeds , fertilisers and machineries for farming
• Members are farmers who like to work jointly for getting benefits of large scale production

Credit cooperative societies

• These are formed for providing easy credit facilities to members
• They are established for protecting members from big interest charging money lenders
• These societies provide loans to members and collect a low rate as interest

Cooperative housing societies

• Formed for helping members for construction of houses
• Members are individuals who are like to construct houses at low cost
• Society will construct houses or give place for house
• Amount can be repayable as instalments

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Joint Stock Company

• Company is an artificial person having separate legal entity , perpetual succession and a common seal
• Registered under companies act 1956
• Owners are called Shareholders
• Share means small parts of capital
• Board of directors are elected from share holders for managing the business

Features

• Artificial Person

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company is a creation of law , it can purchase properties , borrow money , and file cases etc....

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Separate legal entity

• It means owners & business are different

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• Company have it’s own identity

Formation

• Formation is very complicated ,Many documents are needed

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• Also registration compulsory under Indian Companies Act 1956

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Perpetual succession സ്ഥിരമായ നിലനിൽപ്പ്

• Members may come and members may go but it will not effect the life of company

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• Company is created by law so it’s closure can be done only through law

control

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• Shareholders or owners select Board of Directors for controlling the company

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Liability

• Liability limited to the amount contributed by shareholders
• shareholders liable to pay unpaid share amount
• Raju purchased 1000 rupees share in MRF company he paid 600 , if company incurred any loss he liable to pay balance 400

Common seal

• Common seal means official signature of company

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• Seal is necessary in any agreements that are related to company

Risk bearing

• Risk or loss must be shared by all share holders

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Merits

• Limited liability

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share holders are liable for unpaid amount of shares held by them

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Personnel property of shareholders will not take for meeting companies liabilities

Transfer of interest

• Transfer of ownership is very simple
• Share holders of public limited company can easily sale there shares in market

Perpetual existence

• Share holders death , insolvency and resignation will not effect the life of company
• Members may come & go but company exist for long period

Scope for expansion

• Company will get more amount of loan and also public invest large amount

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• Large amount of fund will helps the company to expand the business

Professional management

• Huge resources are there , so company can employ highly professionalised and skilled managers

Limitations

• Complexity in formation

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company formation includes many legal formalities and documents also it is time consuming and expensive

Lack of secrecy

• Company should give all information's to shareholders and registrar of company

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• So company can’t maintain secrecy in information

Impersonal work environment

• Owners have no connection with workers and customers

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• Owners and management are separate in company

Numerous regulations

• Company must fulfil many rules & regulations for it’s smooth running
• Company should audit it’s accounts and obtain many certificates from SEBI, Registrar etc......

Delay in decision making

• Many managemnt level management are there

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• So decision making become very slow

Oligarchic management

• All activities are controlled and managed by board of directors
• Superiority of board of directors is there

Conflict in interests

• Owners need high rate of dividend , employees need high salaries , and customers need quality products company can’t satisfy all of these different things

Types of companies

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• Private Company

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• Public Company

Private Company

• Private company means

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• Restriction on transfer of shares
• Minimum 2 & maximum 50 shareholders
• Does not invite public for subscribing it’s capital
• Minimum 1 lakh paid up capital or any as

prescribed

Must use private limited after companies name

Public Company

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Indian Companies Act 1956 defines A public company means a company which is not a Private company

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• Minimum paid up capital 5 lakh or above
• Minimum 7 members maximum unlimited
• No restriction on transfer of shares
• Can invite public for subscribing it’s share capital and accept public deposits

Rights / privileges of private limited companies

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• Formation only 2 members required but 7 members are needed for public company
• Does not invite Public deposits so no need to issue prospectus
• Allotment of share possible without receiving minimum subscription
• After getting certificate of incorporation private company can start it’s business but public company need certificate of commencement
• Minimum 2 directors needed in private co, but 3 needed in public co
• Private company not compulsory to keep List of members

but public company must have it

• Directors of pvt co have no restriction on loans from bank but directors of public co take permission from govt for taking loans

Choice of form of business organisations

Factors to be considered while selecting a form of business organisation

Cost and easy of formation

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• Sole proprietorship is more

suitable.

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• Company is not suitable

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Liability

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• Company & cooperative society is more suitable because it’s liability is limited

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• Sole proprietorship & partnership is not suitable

continuity

• Company is more suitable because members death , insolvency and insanity will not leads to closure of business

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• Sole proprietorship is not suitable

Management ability

• Company is suitable because they can employ highly paid managers

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• Sole proprietorship is not suitable

capital

• Company is more suitable because company can collect large amount as capital

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• Sole proprietor can’t collect large amount as capital

Degree of control

• If direct control is needed sole proprietorship is suitable

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• Company is not suitable

Nature of business

• For small scale business sole proprietorship is suitable

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• Large scale business need company form of organisation

THE END

Asharudheen M

HSST Commerce, MJHSS Elettil