Forms of Business
Organisations

1. Sole Proprietorship

Meaning: Sole proprietorship is a form of business owned, managed and controlled by one individual who receives all profits and bears all risks. The word "sole" means only, and "proprietor" means owner — so there is only one owner. It is the oldest and simplest form of business, seen everywhere around us — the kirana store, the beauty parlour, the tailoring shop, the chai stall.

1.1 Features of Sole Proprietorship

1.2 Merits of Sole Proprietorship

(i) Quick decision making — no need to consult anyone, so opportunities are grabbed instantly. (ii) Confidentiality of information — the owner is not bound to publish accounts, so business secrets stay safe. (iii) Direct incentive — 100% of the profit belongs to the owner, which is the strongest motivation to work hard. (iv) Sense of accomplishment — "I built this myself" gives personal satisfaction and self-confidence. (v) Ease of formation and closure — minimum legal formalities at both ends.

1.3 Limitations of Sole Proprietorship

(i) Limited resources — funds are restricted to personal savings and small borrowings; banks hesitate to give large loans to one individual. (ii) Limited life of the business — the business and the owner are one, so the fate of the business is tied to the fate of the owner. (iii) Unlimited liability — the biggest danger; one big loss can wipe out personal property, which makes the owner avoid risky (but profitable) ventures. (iv) Limited managerial ability — one person cannot be an expert in purchasing, selling, accounting and marketing at the same time, and limited funds make it difficult to hire professionals.

2. Joint Hindu Family (HUF) Business

Meaning: Joint Hindu Family business is a form of organisation found only in India, in which the business is owned and carried on by the members of a Hindu Undivided Family (HUF). It is governed by Hindu Law, not by the Partnership Act. The basis of membership is birth in a particular family — three successive generations can be members simultaneously.

The business is controlled by the head of the family, the eldest member, called the Karta. All other members are called co-parceners, and they get ownership rights by birth in the family.

2.1 Features of Joint Hindu Family Business

2.2 Merits and Limitations

3. Partnership

3.1 Features of Partnership

3.2 Merits of Partnership

(i) Ease of formation and closure — only an agreement is needed; registration is optional. (ii) Balanced decision making — work is divided as per specialisation, so decisions are wiser and burden is shared. (iii) More funds — capital contributed by several partners allows larger scale of operations. (iv) Sharing of risks — losses are distributed, reducing anxiety and stress on each partner. (v) Secrecy — a firm is not legally required to publish its accounts.

3.3 Limitations of Partnership

(i) Unlimited liability — every partner is liable to the full extent, even for acts of other partners. (ii) Limited resources — the ceiling of 50 partners restricts capital compared to a company. (iii) Possibility of conflicts — differences of opinion may lead to disputes, and one wrong decision by a partner harms everyone. (iv) Lack of continuity — the firm may dissolve on death or retirement of a partner. (v) Lack of public confidence — accounts are not published, so outsiders find it hard to judge the true position of the firm.

3.4 Types of Partners (Very Important)

3.5 Types of Partnership

3.6 Partnership Deed

The written agreement containing the terms and conditions of partnership is called the Partnership Deed. Though an oral agreement is equally valid, a written deed avoids future disputes. Its main contents are: name of the firm, nature and location of business, names and addresses of partners, capital contribution of each partner, profit-sharing ratio, interest on capital and drawings, salaries or commission payable to partners, duties and obligations of partners, duration of partnership, method of valuation of goodwill, procedure for dissolution and mode of settlement of disputes.

3.7 Registration of a Partnership Firm

Registration means entering the name of the firm in the Register of Firms with the Registrar of Firms. Under the Indian Partnership Act, 1932, registration is optional, not compulsory. However, an unregistered firm suffers serious consequences, which practically force firms to register.

4. Cooperative Societies

Meaning: The word cooperation means working together. A cooperative society is a voluntary association of persons who join together with the motive of welfare of the members, not profit maximisation. It is compulsorily registered under the Cooperative Societies Act, 1912, which gives it a separate legal identity. The guiding principles are self-help and mutual help — "each for all and all for each".

4.1 Features of Cooperative Societies

4.2 Merits of Cooperative Societies

(i) Equality in voting status — one member one vote, irrespective of capital. (ii) Limited liability of members. (iii) Stable existence — being a separate legal entity, it is unaffected by death or insolvency of members. (iv) Economy in operations — members offer honorary services and middlemen are eliminated, cutting costs. (v) Support from government — low taxes, subsidies and low-interest loans. (vi) Ease of formation — only ten adult members and simple registration.

4.3 Limitations of Cooperative Societies

(i) Limited resources — low dividend rates attract little capital. (ii) Inefficiency in management — societies cannot afford professional managers; honorary members may lack expertise. (iii) Lack of secrecy — affairs are openly discussed in meetings and results are disclosed. (iv) Government control — excessive rules regarding audit, accounts and elections curb freedom. (v) Differences of opinion — internal quarrels and personal interests may override welfare motive.

4.4 Types of Cooperative Societies

5. Joint Stock Company

5.1 Features of a Company

5.2 Merits of a Company

(i) Limited liability — encourages even cautious investors to invest. (ii) Transfer of interest — shares of a public company can be sold in the stock market anytime, giving liquidity. (iii) Perpetual existence — long-term projects are possible because the company never dies. (iv) Scope for expansion — huge capital can be raised from the public and financial institutions. (v) Professional management — the company can afford specialised experts for every function.

5.3 Limitations of a Company

(i) Complexity in formation — lengthy documentation and legal procedures. (ii) Lack of secrecy — the law requires disclosure of accounts and information to the public. (iii) Impersonal work environment — separation of ownership and management; large size weakens the personal touch with employees and customers. (iv) Numerous regulations — audits, reports, filings at every step consume time, effort and money. (v) Delay in decision making — decisions travel through a long chain of meetings and hierarchy. (vi) Oligarchic management — in reality, a small group of directors rules; scattered shareholders rarely attend meetings, so democracy exists only on paper. (vii) Conflict of interests — managers, shareholders, workers and creditors may pull in different directions.

5.4 Private Company vs Public Company

5.5 One Person Company (OPC)

Introduced by the Companies Act, 2013, a One Person Company is a company with only one person as its member. It gives a single entrepreneur the twin benefits of sole proprietorship (full control) and company form (separate legal entity and limited liability). The single member must nominate a nominee who takes over in case of the death or incapacity of the member. The name must end with "(OPC) Private Limited".

6. Formation of a Company

A company comes into existence through well-defined stages. A private company needs the first two stages; a public company additionally needs capital subscription before starting business.

6.1 Stage 1 — Promotion

Promotion means conceiving the business idea and taking the first steps to bring the company into existence. The person who does this is the promoter. Steps involved: (i) identification of business opportunity, (ii) feasibility studies — technical, financial and economic, (iii) approval of the company name from the Registrar of Companies, (iv) fixing up signatories to the Memorandum, (v) appointment of professionals (bankers, auditors, brokers), and (vi) preparation of necessary documents.

6.2 Stage 2 — Incorporation

Incorporation means registration of the company with the Registrar of Companies. The required documents are filed, fees are paid, and if the Registrar is satisfied, he issues the Certificate of Incorporation — the "birth certificate" of the company. From this date the company becomes a separate legal entity. The certificate is conclusive evidence of the regularity of incorporation — its validity cannot be questioned even if some irregularity occurred earlier.

6.3 Stage 3 — Capital Subscription (for Public Companies)

A public company raising funds from the public must: issue a prospectus (an invitation to the public to subscribe to shares), appoint bankers to receive application money, receive minimum subscription, apply to a stock exchange for listing, and then allot shares to applicants.

6.4 Important Documents in Company Formation

Clauses of the Memorandum of Association: (i) Name clause — approved name of the company; (ii) Registered office clause — the state where the registered office is situated; (iii) Objects clause — the most important clause; defines the purposes for which the company is formed; (iv) Liability clause — states that liability of members is limited; (v) Capital clause — the maximum (authorised) capital the company can raise.

7. Choice of Form of Business Organisation

Which vehicle should an entrepreneur pick? The comparison below is the one-look revision chart, followed by the deciding factors.

Factors affecting the choice: (i) Cost and ease of formation — if simplicity is the priority, sole proprietorship wins; (ii) Liability — if risk is high, company form is safer due to limited liability; (iii) Continuity — long-gestation businesses need company form; (iv) Management ability — diverse operations need professional management of a company; (v) Capital requirement — large scale needs a company, small scale suits proprietorship or partnership; (vi) Degree of control — if direct full control is desired, sole proprietorship is best; (vii) Nature of business — personal-contact businesses (salon, tailoring) suit proprietorship; professional services suit partnership; large manufacturing suits company.