CHAPTER 2
FORMS OF BUSINESS ORGANISATIONVarious forms of business organisations are:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.
SOLE PROPRIETORSHIP
The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business.
Features:
(i) Formation and closure:
Hardly any legal formalities are required to start or close the business.
(ii) Liability:
Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts, then owner’s personal property will be sold for repaying the debt.
(iii) Sole risk bearer and profit recipient:
The risk of failure of business is borne all alone by the sole proprietor. Also the proprietor enjoys all the benefits/profit
(iv) Control:
All decisions and control lies on the hand of sole proprietor
(v) No separate entity:
In the eyes of the law, no distinction is made between the sole trader and his business.
(vi) Lack of business continuity:
Death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor may cause closure of the business.
Q. What are the Merits and demerits of sole proprietorship?
Ans. Merits:
(i) Quick decision making:
A sole proprietor enjoys considerable degree of freedom in making business decisions.
(ii) Confidentiality of information:
Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy.
(iii) Direct incentive:
A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit.
(iv) Sense of accomplishment:
There is a personal satisfaction involved in working for oneself.
(v) Ease of formation and closure:
There are less legal formalities are required to start or close a business.
Limitations/Demerits:
(i) Limited resources:
Resources of a sole proprietor are limited to his/her personal savings and borrowings from others.
(ii) Limited life of a business concern:
Death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor may cause closure of the business.
(iii) Unlimited liability:
If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor.
(iv) Limited managerial ability:
Sole proprietor may not take balance decision regarding various task. like purchasing and selling.
JOINT HINDU FAMILY BUSINESS
Hindu Undivided Family (HUF)
Joint Hindu family business is a specific form of business organisation found only in India. It is governed by the Hindu Law.
The business is controlled by the head of the family who is the eldest member and is called karta. All members have equal ownership right over the property of an ancestor and they are known as co-parceners.
These are the two systems which governs the family business.
[a] Dayabhaga system: It prevails in West Bengal and allows both the male and female members of the family to be co-parceners.
[b]Mitakashara system: It prevails all over India except West Bengal and allows only the male members to be co-parceners in the business.
Features:
(i) Formation:
There should be at least two members in the family and ancestral property to be inherited by them. It is governed by the Hindu Succession Act, 1956.
(ii) Liability:
The liability of all members except the karta is limited. The karta, however, has unlimited liability.
(iii) Control:
The control of the family business lies with the karta. He takes all the decisions and is authorised to manage the business.
(iv) Continuity:
The business continues even after the death of the karta as the next eldest member takes up the position of karta.
(v) Minor Members:
Minors can also be members of the business.
Merits/advantages:
(i) Effective control:
The karta has absolute decision making power. This avoids conflicts among members.
(ii) Continued business existence:
The death of the karta will not affect the business as the next eldest member will then take up the position.
(iii) Limited liability of members:
The liability of all the co-parceners except the karta is limited to their share in the business.
(iv) Increased loyalty and cooperation:
Since the business is run by the members of a family, there is a greater sense of loyalty towards one other.
Limitation:
(i) Limited resources:
The joint Hindu family business faces the problem of limited capital as it depends mainly on ancestral property.
(ii) Unlimited liability of karta:
The karta is burdened not only with the responsibility of decision making and management of business, but also suffers from the disadvantage of having unlimited liability.
(iii) Dominance of karta:
The karta individually manages the business which may at times not be acceptable to other members.
(iv) Limited managerial skills:
Since the karta cannot be an expert in all areas of management, the business may suffer as a result of his unwise decisions.
PARTNERSHIP
The Indian Partnership Act, 1932 defines partnership as “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.”
(i) Formation:
The partnership form of business organisation is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement wherein the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified.
(ii) Liability:
The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient.
(iii) Risk bearing:
The partners bear the risks involved in running a business as a team. However, they also share losses in the same ratio in the event of the firm incurring losses.
(iv) Decision making and control:
Decisions are generally taken with mutual consent.
(v) Continuity:
Lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business.
(vi) Membership:
The minimum number of members needed to start a partnership firm is two, while the maximum number, in case of banking industry is ten and in case of other businesses it is twenty.
(vii) Mutual agency:
Business carried on by all or any one of the partners acting for all.
Merits/advantages of a partnership firm
(i) Ease of formation and closure:
A partnership firm can be formed easily by putting an agreement between the prospective partners. There is no compulsion with respect to registration of the firm.
(ii) Balanced decision making:
Leads to fewer errors in judgements. As a consequence, decisions are likely to be more balanced.
(iii) More funds:
In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds.
(iv) Sharing of risks:
The risks involved in running a partnership firm are shared by all the partners.
(v) Secrecy:
A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations.
Limitations:
(i) Unlimited liability:
It has unlimited liability. Partners are liable to repay debts even from their personal resources in case the business assets are not sufficient to meet its debts.
(ii) Limited resources:
Partnership firm face problems in expansion beyond a certain size due to less capital.
(iii) Possibility of conflicts:
Difference in opinion on some issues may lead to disputes between partners.
(iv) Lack of continuity:
Lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business.
(v) Lack of public confidence:
The confidence of the public in partnership firms is generally low.
Types of Partners:
(i) Active partner:
An active partner is one who contributes capital, participates in the management of the firm, shares its profits and losses, and has unlimited liability.
(ii) Sleeping or dormant partner:
Partners who do not take part in the day to day activities of the business are called sleeping partners. A sleeping partner, however, contributes capital to the firm, shares its profits and losses, and has unlimited liability.
(iii) Secret partner:
A secret partner is one whose association with the firm is unknown to the general public. He contributes to the capital, takes part in the management, shares its pro
fits and losses, and has unlimited liability.
(v) Partner by estoppel:
A person is considered a partner by estoppel if, through his/her own initiative, conduct or behaviour, he/she gives an impression to others that he/she is a partner of the firm. Such partners are held liable for the debts of the firm
(vi) Partner by holding out:
A partner by ‘holding out’ is a person who though is not a partner in a firm but knowingly allows himself/herself to be represented as a partner in a firm. Such a person becomes liable to outside creditors for repayment of any debts which have been extended to the firm on the basis of such representation.
Types of Partnerships
Classification on the basis of duration
(i) Partnership at will:
This type of partnership exists at the will of the partners. It can continue as long as the partners want and is terminated when any partner gives a notice of withdrawal from partnership to the firm.
(ii) Particular partnership:
Partnership formed for the accomplishment of a particular project say construction of a building or an activity to be carried on for a specified time period is called particular partnership.
Classification on the basis of liability
(i) General Partnership:
In general partnership, the liability of partners is unlimited and joint. The partners enjoy the right to participate in the management of the firm and their acts are binding on each other as well as on the firm. Registration of the firm is optional.
(ii) Limited Partnership:
In limited partnership, the liability of at least one partner is unlimited whereas the rest may have limited liability. Such a partnership does not get terminated with the death, lunacy or insolvency of the limited partners. The limited partners do not enjoy the right of management and their acts do not bind the firm.
Q. What is Partnership Deed?
Ans. In order to enter into partnership, a clear agreement with respect to the terms, conditions and all aspects concerning the partners is essential so that there is no misunderstanding later among the partners. Such an agreement can be oral or written. Even though it is not essential to have a written agreement, it is advisable to have a written agreement as it constitutes an evidence of the conditions agreed upon. The written agreement which specifies the terms and conditions that govern the partnership is called the partnership deed.
CONTENT OF PARTNERSHIP DEED:
1) Name of firm
2) Nature of business and location of business
3) Duration of business
4) Investment made by each partner
5) Distribution of profits and losses
6) Duties and obligations of the partners
7) Salaries and withdrawals of the partners
8) Terms governing admission, retirement and expulsion of a partner
9) Interest on capital and interest on drawings
10) Procedure for dissolution of the firm
11) Preparation of accounts and their auditing
12) Method of solving disputes
REGISTRATION:
The consequences of non-registration of a firm are as follows:
(a) A partner of an unregistered firm cannot file a suit against the firm or other partners,
(b) The firm cannot file a suit against third parties, and
(c) The firm cannot file a case against the partners.
COOPERATIVE SOCIETY
The cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members. The cooperative society is compulsorily required to be registered under the Cooperative Societies Act 1912.
Features:
(i) Voluntary membership:
A person is free to join a cooperative society, and can also leave anytime as per his desire. Membership is open to all, irrespective of their religion, caste, and gender.
(ii) Legal status:
Registration of a cooperative society is compulsory. This accords a separate identity to the society which is distinct from its members.
(iii) Limited liability:
The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.
(iv) Control:
In a cooperative society, the power to take decisions lies in the hands of an elected managing committee.
(v) Service motive:
The surplus is generated as a result of its operations, it is distributed amongst the members as dividend in conformity with the bye-laws of the society.
Merits:
(i) Equality in voting status:
Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights.
(ii) Limited liability:
The liability of members of a cooperative society is limited to the extent of their capital contribution. The personal assets of the members are, therefore, safe from being used to repay business debts.
(iii) Stable existence:
Death, bankruptcy or insanity of the members do not affect continuity of a cooperative society.
(iv) Economy in operations:
The focus is on elimination of middlemen, this helps in reducing costs.
(vi) Ease of formation:
The cooperative society can be started with a minimum of ten
Limitations:
(i) Limited resources:
Resources of a cooperative society consists of capital contributions of the members with limited means.
(ii) Inefficiency in management:
Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries.
(iii) Lack of secrecy:
As a result of open discussions in the meetings of members as well as disclosure obligations as per the Societies Act (7), it is difficult to maintain secrecy about the operations of a cooperative society.
(v) Differences of opinion:
Internal quarrels arising as a result of contrary viewpoints may lead to difficulties in decision making.
JOINT STOCK COMPANY
The company form of organisation is governed by The Companies Act, 1956 [Now companies Act 2013]. 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, the capital of the company is divided into smaller parts called ‘shares’.
Q. Who are the board of directors?
Ans. Board of Directors is the chief managing body elected by the shareholders. They manage the affairs of the company.
Features:
(i) Artificial person:
A company is a artificial person created by. It cannot breathe, eat, run, talk and so on like a common person but can buy assets, borrow money, enter into contract.
(ii) Separate legal entity:
A company has distinct from its member. Its assets and liabilities are separate from those of its owners.
(iii) Perpetual succession: A company being a creation of the law, can be brought to an end only by law. Members may come and members may go, but the company runs forever.
(iv) Liability:
The liability of the members is limited to the extent of the capital contributed by them in a company.
For example: Suppose Akshay is a shareholder in a company holding 2,000 shares of Rs.10 each on which he has already paid Rs. 7 per share. His liability in the event of losses or company’s failure to pay debts can be only up to Rs. 6,000 —
2000 x 10 = 20,000
(-) 2000 x 7 = 14,000
-----------
=6,000
(v) Common seal:
The Common seal is the official signature of the company. Any agreement which does not have the company seal put on it is not legally binding on the company.
(vi) Risk bearing:
The risk of losses in a company is borne by all the share holders.
Merits:
(i) Limited liability:
The liability of the members is limited to the extent of the capital contributed by them in a company.
(ii) Transfer of interest:
Shareholder can sell there share in the market and can be easily converted into cash.
(iii) Perpetual succession:
A company being a creation of the law, can be brought to an end only by law. Members may come and members may go, but the company runs forever.
(iv) Scope for expansion:
As compared to the sole proprietorship and partnership forms of organisation, a company has large financial resources. It can attracted capital from the public as well as through loans from banks and financial institutions.
(v) Professional management:
A company can afford to pay higher salaries to specialists and professionals. It can, therefore, employ people who are experts in their area of specialisations.
Limitations:
(i) Complexity in formation:
The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedures involved.
(ii) Lack of secrecy:
The Companies Act requires each public company to provide from time-to-time a lot of information to the office of the registrar of companies. Such information is available to the general public also.
(iii) Numerous regulations:
The functioning of a company is subject to many legal provisions and compulsions. There are numerous restrictions in respect of aspects
including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates,
(iv) Delay in decision making:
Communication as well as approval of various proposals may cause delays not only in taking decisions but also in acting upon them.
(v) Oligarchic management:
Sometime, Board of Directors use their power of contrary to the interests of the shareholders. Dissatisfied shareholders in such a situation have no option but to sell their shares and exit the company.
(vi)Impersonal work environment:
Separation of ownership and management leads to situations in which there is lack of effort as well as personal involvement on the part of the officers of a company.
Types of Companies [2013]
Private Company:
A private company means a company which:
(a) restricts the right of members to transfer its shares;
(b) has a minimum of 2 and a maximum of 50 members, excluding the present and past employees;
(c) does not invite public to subscribe to its share capital; and
(d) must have a minimum paid up capital of Rs.1 lakh or such higher amount which may be prescribed from time-to-time.
The word "private limited" is use after the name of the company.
Q. What are the privileges enjoyed by Private Company as against Public company?
Ans. The following are some of the privileges of a private limited company as against a public limited company:
1. A private company can be formed by only two members whereas seven people are needed to form a public company.
2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company.
3. Allotment of shares can be done without receiving the minimum subscription.
4. A private company can start business as soon as it receives the certificate of incorporation. The public company, on the other hand, has to wait for the receipt of certificate of commencement before it can start a business.
5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
6. A private company is not required to keep an index of members while the same is necessary in the case of a public company.
7. There is no restriction on the amount of loans to directors in a private company. Therefore, there is no need to take permission from the government for granting the same, as is required in the case of a public company.
Public Company
A public company means a company which is not a private company. As per the Indian Companies Act, a public company is one which:
(a) has a minimum paid-up capital of Rs. 5 lakhs or a higher amount which may be prescribed from time-to-time;
(b) has a minimum of 7 members and no limit on maximum members;
(c) has no restriction on transfer of shares; and
(d) is not prohibited from inviting the public to subscribe to its share capital or public deposits.
The word "public limited" is use after the name of the company.
CHOICE OF FORM OF BUSINESS ORGANISATION
(i) Cost and ease in setting up the organisation.
(ii) Liability.
(iii) Continuity.
(iv) Management ability.
(v) Capital considerations.
(vi) Degree of control.
(vii) Nature of business.
---------------------------------------------------**********-------------------------------------------------
Comments
Post a Comment