Business- Forms
Forms of Business Organisation
There are different forms of business organisation which are discussed in this chapter. These include the following:
Sole proprietorship
Partnership
Joint-stock Company
Cooperative Societies
Sole Proprietorship
It is a form of organisation owned, managed and controlled by an individual (also known as a sole proprietor) who is responsible for bearing all the risk and receiving all the profit.
Features
The sole proprietor can establish and close the business without any legal formalities.
The liability of the sole proprietor is unlimited.
Being the sole owner, the sole proprietor bears all the risk and receives all the profits.
All the decisions are taken and implemented in the organisation by the owner.
Owners and businesses have no separate entity and are considered one in the eyes of the law.
Even in case of a lack of business continuity, the business can continue until the owner wants.
Advantages
Prompt decision-making as all the decisions are to be taken by the owner.
Being a sole owner, it is easy to maintain business secrecy.
The owner enjoys all the profits as there is no one to share profits.
A successful business provides satisfaction to the owner and a sense of achievement.
No legal formalities are required for a business’s formation and closure, making it easy to start and end the business.
Disadvantages
Due to limited resources, a business can be funded from the owner’s savings or money borrowed from friends or relatives.
The business’s continuity depends on the owner’s health and state of mind.
If the business fails to repay debts, the sole proprietor’s personal assets are at risk.
One person may not possess the ability to manage all the functions.
Partnership
As per the partnership Act 1932, the partnership is a relation with people who agreed to share the profits of business that is carried on by all or one of them acting for all.
Features
The formation of a business is based on the provisions of the partnership Act 1932.
The liability of the partners in this form of organisation is unlimited.
All the partners share the risk that occurred in the business.
All decisions are made with the consent of all partners, and each partner is responsible for operating the firm.
The continuity of the business is determined by the partnership deed signed by the partners at the time the partnership is formed.
Minimum 2 and maximum 50 members [as per the Companies (Miscellaneous) Rules 2014}, or maximum could be 100 ( according to Companies Act, 2013).
Each partner is the owner and agent of the firm and agent to other partners.
Advantages
As the registration is voluntary, businesses can be formed and dissolved with the approval of all partners.
All decisions are made by consent partners, who take on responsibilities based on their competence.
All the partners contribute funds that enhance the scope for large-scale company operations.
All the partners bear the risks and responsibilities of the business
It is easy to maintain confidential business information as there is no need to submit financial results.
Disadvantages
Each partner has an unlimited liability that is extended to their personal property.
Due to the restriction of the number of partners, there is limited availability of finance.
Due to differences in opinion, there are high chances of conflicts among partners.
Any conflict between partners or the death of a partner may bring the business to an end.
Due to a lack of public confidence and availability of financial reports, it is difficult for an outsider to ascertain the true financial position of the business.
Types of Partners
Secret Partner: This partner contributes to the profit and losses of the firm and participates in managerial activities secretly.
Active Partner: This partner has unlimited liability. They also contribute to the capital, share profit and loss, and participate in management.
Sleeping or dormant partner: This partner does not participate in the management. They contribute capital and share profit and loss. They also have unlimited liability.
Nominal Partner: Partner who does not contribute capital or share profit and loss but permits the partnership firm to portray them as partners.
Partner by holding out: An individual who is not a partner but is portrayed as a partner by other partners of the partnership company and has unlimited liability.
Partner by estoppel: An individual who is not a partner but projects themselves as partners to an outsider and has unlimited liability.
Minor as a Partner: The partner who is below 18 years of age can be admitted as a partner with the mutual consent of all the partners but, in the eyes of the law, is not a partner.
Types of Partnerships
Partnerships are categorised on the basis of liability and duration.
Classification of partnership on the basis of duration
Particular Partnership: This type of partnership is formed to perform a particular task over a particular period of time. This partnership is ended once the task gets completed.
Partnership at will: This type of partnership depends on the partners until they are eager to continue.
Classification of partnership on the basis of liability
Limited Partnership: In this partnership, only one member has unlimited liability while the rest of the members have limited liability.
General Partnership: In this type of partnership, all the partners have joint and unlimited liability.
Partnership Deed
It is defined as a written document where all the terms and conditions related to the partnership are mentioned. It has the following clauses:
Name of firm
Nature of firm
Duration of partnership
Duties and obligations of partners
Valuation of assets
Interest on capital and interest on drawings
Profit-loss sharing ratio
Salaries and withdrawals of the partners.
Preparation of accounts and their auditing.
Procedure for dissolution of the firm
Method of solving disputes.
Registration
In the partnership firm, getting the company registered is optional with the registrar regarding in this form the company was established.
Process of getting registered
Submitting of application in the prescribed form to the Registrar of Firms.
Fee deposition with the Registrar.
Receiving certificate of registration after the Registrar is satisfied.
Consequences of not getting registered
If the company is not registered, the partner has no right to file a complaint or sue any of the partners or the partnership firm.
The firm cannot sue third parties.
The firm cannot file a case against one or more partners of the firm
Cooperative Society
An organisation of volunteers working for a mutual goal with the purpose of protecting members’ economic and social interests. It must be registered under the Cooperative Societies Act, 1912.
Features
Any individual, regardless of caste, gender, or religion, who has a similar interest is free to join or quit a cooperative society at any moment.
As per the capital contribution, cooperative society members have limited liability.
All decision-making authority rests with an elected managing committee chosen by members under the one-man-one-vote principle.
A cooperative society has separate identity status distinct from its members, and the registration of such a society is also mandatory.
The service motive of a cooperative society is to provide mutual help to the team members.
Advantages
Each member has equal voting rights and can elect managing committee members.
The liability of members is limited to their capital contribution.
Cooperative societies continue to exist despite their members’ death, bankruptcy or insanity.
A cooperative society does not require legal formalities for its formation.
The government provides support to societies in the form of lower taxes, interest rates and subsidies.
The members of the social work voluntarily, which helps in reducing costs.
Disadvantages
Societies must adhere to the government’s laws and regulations and submit society audited financial reports. However, such government interference impacts such a society’s freedom of work.
Members’ capital contributions are the only funding source, and low dividends hinder members from contributing to society.
Volunteer members may lack the required competence and skills, resulting in inefficient operations and management.
Maintaining secrecy is difficult as members provide all information about the society’s operations at the meeting.
Differences of opinion as a result of individual interest over welfare may lead to conflicts amongst members.
Joint Stock Company
The Companies Act, 2013 defines “A company as an artificial person having a separate legal entity, perpetual succession and a common seal.”
Features of a Joint Stock Company
A company is established with the law and legal status, yet it does not function like humans and acts as an artificial person. In the name of the corporation, the board of directors conducts all the business activities.
A company has its separate legal identity distinct from its owner with the incorporation of a company.
The company is established by fulfilling all the legal formalities according to the Companies Act, 2013.
A company is created by law and can only be wound up by law. The existence of the company is not affected by the status of members.
The Board of Directors controls and manages the company’s business affairs.
A company has limited liability only to the extent of the capital contribution.
A company cannot have its own signature because it is an artificial legal person. As a result, the common seal serves as the firm’s official signature. To be legally binding, all official papers must bear the same seal.
All the shareholders of the company bear the risk of loss in proportion to their investment in the company.
Advantages
All the shareholders have limited liability for their investment in the firm. Hence, there is no risk of losing personal assets.
Shares can be converted into cash or can be easily sold in the market.
The company’s existence continues and is not affected by the status of the shareholders.
Companies can raise public funds and borrow from financial institutions or banks.
Professional management as well as specialised individuals are required in large-scale operations.
Disadvantages
The formation of the company is time-consuming and lengthy as the company needs to fulfil the documentation and legal formalities.
There is no confidentiality maintained as all the information is disclosed to the public.
As professionals and not owners who manage business affairs, there is a lack of personal contact with the customers and employees.
Due to numerous rules and regulations, there is no freedom to work, which consumes time, effort and money.
There is a delay in decision-making, as the decision needs to follow a set of hierarchies.
The decisions may get influenced due to the personal interest of the directors, as the stakeholders have minimum control over running a business.
Management finds it challenging to satisfy everyone because many stakeholders have conflicting interests.
Types of Companies
Private Company
A company must have a minimum of 2 or a maximum of 200 members.
Restricted right to transfer shares.
Funds cannot be generated from the general public.
Uses ‘Private Limited’ after the company name.
Public Company
Minimum 7 members with no limit on maximum members.
Free to transfer shares.
Issue shares to the general public.
Uses ‘Public Limited’ after the company name.