Forms of Business Organization
Different type of forms based on type of ownership
Sole Proprietorship
‘proprietor’ refers to “owner”.
“only”, and Hence sole
propreitor is the one who is the only owner of a business.
Features:
(i)Formation&closure:
There are no legal formalities or
separate law to start or close a S.P business, except in a few businesses (e.g medical, crackers,
govt is required. Hence, a
proprietor can start/close
liquor), where license from the
sole
his
business whenever he wants to.
(ii) Liability :
A sole proprietor has unlimited liability. If the liability of the business becomes more than the business assets, then the sole proprietor has to sell off his personal assets in order to run a business & repay the liability to creditors.
risk
(iii)Sole
bearer and profit recipient
In sole proprietorship, sole proprietor is the sole risk bearer. He
will have
to bear all the losses
individually without anybody’s support. But if the business makes profit, the proprietor gets all the profits.
(iv)Control : In sole proprietorship, the whole business is controlled by a sole proprietor only. All decisions regarding its day to day events & expansion are controlled by him, although, he may appoint managers to supervise the work.
(v) No separate entity : In the eyes
business
of law, sole proprietor & the are not two separate
entities but one. As he is the whole & sole of the business, he becomes responsible for all business liabilities.
(vi) Lack of business continuity : In sole proprietorship, there is lack of
business continuity. If the proprietor dies, becomes
sole sick,
insane or bankrupt, the business closes down as no one else has the legal authority to continue it.
MERITS of SOLE PROPRIETORSHIP
Quick Decision Making
Confidentiality of Information
Direct Incentive
Sense of Accomplishment
Easy formation & closing of business
MERITS
(i) Quick decision making: In
sole proprietorship, only one person manages & controls the
all
business. So, he takes decisions regarding
business
himself without consulting any other person. Therefore, a quick decision is taken.
(ii) Confidentiality of information :
In sole | proprietorship, | as | one |
person | has to take | all | the |
decisions, he need not share the business secrets with anyone else. He is not bound by any law to publish firm’s accounts too, so no secrets are leaked out.
(iii) Direct incentive:
In sole proprietorship, there Is
direct incentive proprietor i.e.
to the sole he gets the
entire profit in return for his individual hard work in business.
(iv) Sense of accomplishment:
As the sole proprietor is working for himself, he gets a sense of achievement. He starts feeling more responsible & becomes satisfied. This also encourages him to accomplish the targets set by him on time.
(v) Easy formation & closing of business:
In sole proprietorship business, the
person who owns the business has the full right to form/close his business according to his wish. He
is not required to do
any legal in some
formalities, although businesses, it might be
required
taking license from government.
Limited Resources
Limited Life of Business
Unlimited Liability
Limited Managerial Skill
LIMITATIONS
(i)Limited
proprietorship,
the resources
resourcesIn sole are
always short, as only one person
invests all
business.
the resources in the The banks hesitate in
giving loans to a sole proprietors as they could wind up the business at any time and may not be in a position to return the money.
(ii) Limited life of business
In sole proprietorship business, there Is a risk of short life. Due to
/any disability,
death of sole the
insolvency, proprietor business
to close down. This is
because in eyes of laws in sole proprietorship, there is no separate entity.
(iii) Unlimited liability
unlimited liability as in
A sole proprietorship has
the
business if liabilities become more than assets, the sole proprietor has to sell off his personal assets.
(iv) Limited managerial ability
In sole proprietorship business, a single person is involved in doing all business activities. One person cannot be good in all fields such as marketing, accounts. Therefore, it is a
liability for him to do all the things & is
not above to take help from other as they may not do it with efficiency.
JOINT HINDU FAMILY BUSINESS
There are two systems of HUF which govern membership in the family business.
FEATURES OF HUF
Formation
Continuity
Liability
Control
Minor
Member
FEATURES OF HUF
MERITS of HUF
Continued business existence
Increase loyalty & co- operation
Effective control
Limited liability of members
MERITS
stops as after the death of Karta, the next eldest
member takes his position.
commercial unit but Its growth is linked with achievement and pride of the family. Therefore all the members work with full loyalty & co-operation.
LIMITATIONS of HUF
Limited resources
Unlimited liability of Karta Dominance of Karta
Limited managerial skills
LIMITATIONS
ancestral property remains the same. Therefore, no scope for expansion and of additional capital.
PARTNERSHIP
Partnership is the relation between persons who have agreed to share the profits of business carried down by all or by anyone of them acting for all.
Features of Partnership
Formation Liability
Risk Bearing
Continuity
Membership
Mutual Agency
Decision Making & Control
Features
(iv) Decision making & control: The control & decision making power is divided among the partners. Important decisions are generally taken with mutual consent. Thus, the activities of partnership firm are managed through joint effort; of all partners. (v) Continuity: The partnership business is affected by death, retirement, insolvency of any partner. But, if the remaining partners want to continue the business, they are allowed to do so by entering into new partnership agreement.
business. The number of partners that can form partnership are Maximum -20 (non-banking business) Maximum – 10 (Banking business) and minimum partners -2
them & binds them through his actions. He is also a principal as
he can be bound by the acts of other partners & he has the
power to take decisions.
MERITS of Partnership
Easy formation & closure
Balanced decision making
Secrecy
Sharing of risk
More funds
MERITS of Partnership
contributed by all partners. This results in the contribution of
more funds as compared to sole proprietorship.
DEMERITS of PARTNERSHIP
Limited resources Unlimited liabilities Possibility of conflicts Lack of public confidence Lack of continuity
DEMERITS
firm is not legally required to disclose its accounting status. As the public is not aware of the real business position, it does not have trust while dealing with the partnership firm.
Active Partner
Nominal
Partner
TYPES OF
PARTNERS
(i)Active Partner
An active partner is one who contributes capital to the business, shares profits & losses be having unlimited liability. They take part in management & in carrying on business on behalf of other partners.
TYPES OF PARTNERS
A partner who does not take part in business activities. A sleeping partner contributes capital, shares profit and losses, and has unlimited liabilities
A partner whose association with the firm is unknown to the general public. A secret partner contributes capital, shares profit and loss, takes part in management actively & he has unlimited liability.
A nominal partner is one who allows to use his name for the firm but does not contribute capital, nor takes part in management, does not share profit and loss but has unlimited liability.
A person is considered to be a partner by estoppel if through his behavior, words or conduct, he gives an impression to others that he is a partner of firm. Such partners are responsible for the debts of the firm because in the eyes of third party, they are considered as partners.
e.g. Mr A is active partner. B is his friend. A wants to take loan from the bank or a financer. B requests the bank/ financer to give loan to A’s business as B is also a partner, or he behaves as if he is a partner when the dealing is going on
(vi) Partner by Holding Out
A partner by holding out is a person who is not a partner actually but knowingly allows himself to be represented as a partner in a firm. Such a person becomes liable to outside creditors for debt. In case, he has to save himself from such liability, he should immediately clarify his position to the third party. The person does not behave as if he is the partner, but does not object when someone calls him partner.
E.g Mr A is active partner, applies for loan from the bank saying that Mr B is a partner. Mr B does not object to this statement.
Both the above partners are liable to pay the debts of
partnership which were lent to the firm, because of MR B.
For explanation purposes
By estoppel- Mr A is active partner. B is his friend. A wants to take loan from the bank or a financer. B requests the bank/ financer to give loan to A’s business as B is also a partner, or he behaves as if he is a partner when the dealing is going on.
By holding out – The person does not behave as if he is the partner, but does not object when someone calls him partner. E.g Mr A is active partner, applies for loan from the bank saying that Mr B is a partner. Mr B does not object to this statement.
Both the above partners are liable to pay the debts of partnership which were lent to the firm, because of MR B.
Minor partner: the partnership act does not permit a minor to become a partner. The minor can be admitted to the benefits of existing firm. contribute to capital, not allowed to participate in the management, does not get any share in the loss, but only in profits. After attaining majority, he has to give public notice, stating if he wants to remain a partner or not. If he does not give such a notice, he shall be deemed to be an active partner, with unlimited liab, share profits as well as losses, participate in mgt
Minor partner:
the partnership act does not permit a minor to become a partner. The minor can be admitted to the benefits of existing firm,
After attaining majority, he has to give public notice, stating if he wants to remain a partner or not. If he does not give such a notice, he shall be deemed to be an active partner, with unlimited liability, share profits as well as losses, participate in mgt
TYPES of PARTNERSHIP
Partnership at Will
Particular Partnership
Duration Liability
General Partnership
Limited Partnership
TYPES OF PARTNERSHIP
1. CLASSIFICATION ON THE BASIS OF DURATION
CLASSIFICATION ON THE BASIS OF LIABILITY
PARTNERSHIP DEED
The document containing terms & conditions of the partnership agreement is called the partnership deed. The common contents of a partnership deed are as follows:
partner.
in case of death of any one or more partners, the firm shall not be dissolved but shall continue to be carried on by and between the surviving partners and legal heirs and/or representatives of the deceased partner, as a continuing concern, on the same terms and conditions as incorporated in this Deed or on such terms and conditions as may be agreed to by and between them from time to time
REGISTRATION OF PARTNERSHIP FIRM
Legally, the registration of partnership firm is not compulsory but then also, partners prefer to get the firm registered. As an unregistered firm bears the following problems.
(i) Partner of an unregistered firm cannot file a suit against the partnership firm or against partners.
PROCEDURE FOR REGISTRATION OF PARTNERSHIP FIRM
A partnership firm can be registered at any time. It can register itself at any time of formation or later or whenever the partners desire to get it registered.
To get the firm registered, the partners have to apply to the registrar in a prescribed manner, along with the registration fees. Following information must be supplied for the registration.
The application firm must be signed by all the partners & the
required fees must be deposited. After this, the registrar will make an entry in the register of firms & will issue a certificate of registration.
CO-OPERATIVE SOCIETY
Co-operative society is a voluntary association of minimum 10 members who join together with the motive of welfare of the members. The co- operative society is compulsorily required to be registered under the co-operative society Act, 1912. The capital of the society is raised from its members through issue of shares.
Voluntary Association Legal Status
Limited Liability Democratic Control Service Motive State Control
Distribution of Surplus
Features of Co-Operative Societies
Features of Co-Operative Societies
common interest is free to join a cooperate society and can also leave the society after giving proper notice.
members and not to maximize the profit. If any profit is generated, it is distributed as dividend among members.
Economy in Operations
Merits of Co- Operative Societies
Ease of Formation
Limited Liability
Stable Existence
Govt.
Support
Equality in voting status
Merits of Co-Operative Societies
Limited resources
Limitations of Co- Operative Societies
Inefficient Managem ent
Lack of Motivation
Lack of Secrecy
Excessive Govt.
Control
Difference of opinion
1. Limited resources- It suffers from shortage of capital as it is usually formed by people with limited means.
Limitations of Co-Operative Societies
which makes it difficult to maintain secrecy.
How can cooperative activities be financed?
Which kind of funds are best? member capital are the lowest risk, safest forms of funding and hence should be the first choice. Shares are long term, and not to be repaid soon. But sometimes not enough.
In such cases, borrowing from non-members, such as banks and suppliers, is a good strategy only when the returns from such borrowing are larger than the cost of borrowing. But a collateral is required.
TYPES OF CO-OPERATIVE SOCIETIES
Consumers Co-operative Society
Producer ‘s Co-operative Society Marketing Co-operative Society
Farmer’s Co-operative Society Credit co-operative Society Co-operative Housing Society
TYPES OF CO-OPERATIVE SOCIETIES
1. Consumers Co-operative Society –
and sells them to the members at reasonable prices. ( Goods are sometimes supplied to non-members, but no share of profit to them)
OP STORES
2. Producer s Co-operative Society –
further sale.
3. Marketing Co-operative Society –
together and sold by society at good price.
4. Farmer’s Co-operative Society –
cooperative) and pool their resources for cultivating their land collectively and maximising output.
societies provide better quality manures, fertilizers, machinery
and other modern techniques for use in the cultivation of crops.
cultivation on large scale (large piece of land)
5. Credit co-operative Society –
Cooperative credit societies have mushroomed across India, mainly floated by employees of a large company to encourage savings habit. For instance, IDBI Bank, itself has an in-house credit co-operative society even as it operates as a bank.
In fact, it was floated when it was operating as a financial institution. co- operative credit societies with reserves and paid-up capital of over Rs 1 lakh have to register with RBI
This society performs important role in the rural areas where the dishonest money lenders have been exploiting simple villagers by charging high rate of interest. The Funds of the society consist of (a) Membership fees, (b) Dispose of shares (c) Deposits from members and non-members (d) Loan from govt. and semi govt
6. Co-operative Housing Society –
people with limited means
houses to income at
reasonable price.
plots to members (on which the members
installments), on themselves can
construct the houses as per their choice.
JOINT STOCK COMPANY
A company can described as an artificial person having separate legal entity & a common seal. The shareholders are the owners of company while the board of directors is the chief managing body elected by the shareholders. The capital of the company is divided into
smaller parts called shares which can be
to
transferred freely from one shareholder another.
FEATURES OF JOINT STOCK COMPANY
FEATURES OF JOINT STOCK COMPANY
Artificial person Formation
Risk bearing
Limited
Liability
MERITS OF JOINT STOCK COMPANY
Transfer of Interest
Perpetual
Existence
Scope for Expansion
Professional Management
MERITS OF JOINT STOCK COMPANY
LIMITATIONS OF JOINT STOCK COMPANY
LIMITATIONS OF JOINT STOCK COMPANY
Numerous regulations Conflict in interst
TYPES OF COMPANY
Private Company
Public Company
Privileges of private company over public company
directors in a private company which is there in a public company.
CHOICE OF FORM OF BUSINESS ORGANISATION
Cost and Ease in Setting up the organization
Capital Consideration
Nature of
Business
Degree of Control Desired
Liability or Degree of Risk
Continuity
Management Ability
CHOICE OF FORM OF BUSINESS ORGANISATION
The following factors are Important for taking decision about form of organization:
very risky can be organized in the form of
sole risky
proprietorship & partnership. Where as the ventures should be done in company form of
is
organization because the liability of shareholders limited.
Factors influencing the choice of
Promotion
FORMATION OF A COMPANY
Incorporation
Capital subscription
Commencement of business.
FORMATION OF A COMPANY
Formation of a company means bringing a company into existence and starting its business. The steps involved in the formation of a company are :-
I. Promotion :-
Promotion means conceiving a business opportunity and taking an initiative to form a company.
II. Incorporation :-
registration
Incorporation means company as body corporate
under
of the the
Indian Companies Act, 1956 and receiving certificate of Incorporation.
III. Capital Subscription :-
A public company can raise funds from the public by issuing shares and Debentures. For this it has to issue prospectus and undergo various other formalities.
IV. COMMENCEMENT OF BUSINESS :- To commence business a public company has to obtain a certificate of Commencement of Business. For this the various documents have to be filled with the registrar of companies.
A private company has to under go only first two steps but a public company has to undergo all the four stages.
I. Promotion (Step in Promotion ):-
.
(c) Economic
feasibility: Check the
profitability of the business. Promoters usually take the help of experts to conduct these studies. It may be noted that these experts do not become promoters just because they are assisting the promoters in these studies
3. Name Approval : After selecting the name of company the promoters submit an application to the Registrar of companies for its approval.
4. Fixing up signatories to the Memorandum of Association :- Promoters have to decide about the
directors who will be signing the memorandum of
Association.
5. Appointment of professionals : - Promoters appoint merchant bankers, auditors etc.
6. Preparation of necessary documents :- The promoters prepare certain legal documents such as memorandum of Association, Articles of Association which have to be submitted to the Registrar of the companies.
Qualification Shares: To ensure that the directors have some stake in the proposed company, the Articles usually have a provision requiring them to buy a certain number of shares. They have to pay for these
obtains Certificate of
shares before the company Commencement of
Business. These are called
Qualification Shares.
Preliminary Contracts: Contracts signed by promoters with third parties before the incorporation of company.
Provisional Contracts: Contracts signed after incorporation but before commencement of business.
II. Incorporation (Steps for Incorporation):-
iv) Consent of proposed director to act as directors and an undertaking to purchase qualification shares.
vi) A copy of the Registrar’s letter approving the name of the company.
3. Payment of fees :- Along with filing of above documents, registration fees has to be deposited which depends on amount of the authorized capital.
III. Capital Subscription (Step required for raising funds from public) :-
IV Commencement of Business:
The following documents are required:
.
3. A declaration that no money is payable or liable to become payable to the applicants because of the failure of the company to either apply for or obtain permission to deal in its securities on a stock
exchange; and (no dues)
4. A statutory declaration that
requirements have been complied
the
with.
above
This
declaration can be signed by a director or secretary of the company.
A public company raising funds privately, which has earlier filed a Statement in lieu of prospectus, has to submit only documents 2 and 4 listed above
The registrar
all the of them
shall examine If he finds all
he
documents. satisfactory, ‘certificate business’.
of commencement Now the company
shall issue a
of can
legally start business.