Name: Bhavana Surana

Class: 9
Section: E
Roll no.: 11

Business Organizations in India

What do you mean by Business Organizations?
A business is an enterprise which
distributes or provides services where
other members of the community need and
are able and willing to pay for it.

Purpose of Business Organization:

→ People need to work together to accomplish goals.
→ Goals are too large, too complex, too
expensive to be achieved without
cooperation.
→ By working together, people can
produce more & better goods and
services.

Types of Business Organizations:

A business organization can be classified into two types. They are:
✓ Individualistic Institutions (private Business
Organizations)
✓ Government Institutions (Public Business
Organizations)

Types of Business Organizations in India:

1. Sole Proprietorship:
➢ Sole proprietorship is a popular form of
business organization and is the most
suitable form for small businesses, especially
in their initial years of operation.
➢ Sole proprietorship refers to a form of business organization which is
owned, managed, and controlled by an individual who is the recipient of
all profits and bearer of all risks.
➢ The word “sole” implies “only”, and “proprietor” refers to “owner”.
➢ The sole proprietor is the one who is the only owner of a business.

Characteristics:
• Formation and closure: Sole proprietorship is a business structure
without a separate law, requiring minimal legal formalities to start
or close, although a license may be required in some cases. This ease of
formation and closure makes it a popular choice.
• Liability: Sole proprietors have unlimited liability,
meaning they are personally responsible for paying
debts if the business's assets are insufficient. This
means their personal possessions, such as their car,
can be sold to repay the debt.
• Sole risk bearer and profit recipient: The sole
proprietor bears the risk of business failure alone,
but if the business succeeds, they receive all profits as
a direct reward for their risk-taking.
• Control: The sole proprietor holds absolute control
over the business and all decisions, allowing them to execute their
plans without any external interference.
• No separate entity: The law does not differentiate between a sole
trader and their business, as the business's identity is tied to the
owner, who is therefore responsible for all business activities.
• Lack of business continuity: The sale proprietorship business, owned
and controlled by a single individual, can be significantly impacted
by factors such as death, insanity, imprisonment, physical illness, or
bankruptcy, potentially leading to business closure.

Merits/Advantages: Sole proprietorship offers many advantages. Some of

the important ones are as follows:
• Quick decision making: A sole proprietor enjoys significant freedom in
making business decisions, which are prompt and without the need for
external consultation, enabling timely capitalization of market
opportunities as they arise.
• Confidentiality of information: Sole decision making allows
proprietors to maintain confidentiality and secrecy in business
operations, and they are not legally obligated to publish firm
accounts.
• Direct incentive: A sole proprietor directly benefits from their efforts
as they are the sole recipient of all profits,
eliminating the need for sharing profits, thus
providing maximum incentive for hard work.
• Sense of accomplishment: Working for oneself
brings personal satisfaction, as knowing one is
responsible for the business's success instills a
sense of accomplishment and confidence in
one's abilities.
• Ease of formation and closure: Sole proprietorship offers minimal
legal formalities and freedom of starting and closing the business as
per the owner's wishes, as there is no separate law governing this
form of business, making it an attractive option for entrepreneurs.

Limitations/Disadvantages: The sole proprietorship form of organization,

despite its numerous advantages, is not without limitations, including
several major ones:
• Limited resources: A sole proprietor's resources are limited to personal
savings and borrowings, making banks and lending institutions
reluctant to extend long-term loans, leading to a business's size rarely
growing and generally remaining small.
• Limited life of a business concern: A
sole proprietorship business, owned
and controlled by a single
individual, can be affected by
factors such as death, insanity,
imprisonment, physical illness, or
bankruptcy.
• Unlimited liability: Sole proprietorships have unlimited liability,
causing a financial burden on owners. Poor decisions or unfavorable
circumstances may discourage innovation or expansion.
• Limited managerial ability: Sole proprietorship, despite its challenges
like limited resources and difficulty in hiring talented employees, is
 preferred by entrepreneurs for small-scale businesses with
personalized services.

2. Partnership
The Indian Partnership Act, 1932 defines partnership as a relationship
between individuals who agree to share the
profit of a business, addressing the
disadvantages of sole proprietorship in
financing and managing expansion.

Characteristics:
▪ Formation: The Indian Partnership Act, 1932 governs partnership
business organizations, requiring legal agreements governing
relationships, profit sharing, and business conduct. Partnerships must
be lawful and profit-driven, and not for charitable purposes.
▪ Liability: A firm's partners have unlimited liability, with personal
assets used for debt repayment. They are
jointly and individually liable for debts,
contributing proportionally to their share
in the business. Each partner can recover
money equivalent to their shares in
liability.
▪ Risk bearing: Partners in a business share
risks, rewards in profits, and losses in an
agreed ratio, ensuring a balanced
distribution of profits and losses.
▪ Decision making and control: Partners in
a partnership firm share decision-making and daily activities control,
typically with mutual consent, ensuring joint efforts are made to
manage the firm's activities.
▪ Continuity: Partnerships lack business continuity due to partner
death, retirement, insolvency, or insanity, but remaining partners
can continue with a new agreement if desired.
▪ Number of Partners: Partnership firms require two partners, with a
maximum of 100 partners under the Companies Act 2013 and 50
members under the Companies (miscellaneous) Rules 2014.
▪ Mutual agency: Partnership is a business where partners act for all,
acting as agents and principals. Partners represent and bind others
through their acts, while also being bound by the acts of other
partners.

Merits/Advantages:
▪ Ease of formation and closure: Partnership firms can be formed easily
through agreements between partners,
involving business operations and risk
sharing, with no registration or closure
requirements.
▪ Balanced decision making: Partners can
manage various functions based on their
expertise, reducing work burden, and
reducing errors in judgments, resulting in
more balanced decisions.
▪ More funds: A partnership involves multiple partners contributing
capital, enabling larger funds and additional operations compared to
a sole proprietor.
▪ Sharing of risks: Partnership firms share risks, reducing anxiety,
burden, and stress for individual partners by ensuring they are
aware of potential risks.
▪ Secrecy: A partnership firm can maintain confidentiality of
operational information due to its legal exemption from publishing
accounts and reporting reports.

Limitations/Disadvantages:
A partnership firm of business organization suffers from the following
limitations:
▪ Unlimited liability: Partners are responsible for repaying debts from
their personal resources if business assets are insufficient to meet
debts. This joint and several liability may disadvantage those with
greater personal wealth, as they must repay the entire debt if others
can’t.
▪ Limited resources: Partnership firms often face challenges in
expanding beyond a certain size due to limited partner numbers and
insufficient capital investment contributions.
▪ Possibility of conflicts: Partnerships involve shared decision-making
authority, but disagreements can lead to disputes and financial ruin.
Unwise decisions can also result in termination if a partner leaves the
firm due to ownership transfer restrictions.
▪ Lack of continuity: Partnerships end when partners die, retire,
insolvent, causing lack of continuity. Remaining partners can enter
into a fresh agreement to continue business operations.
▪ Lack of public confidence: Partnership firms lack legal obligation to
disclose financial reports, making it challenging for the public to
verify their financial status, resulting in low public confidence in
them.
Types of Partners:
The partnership firm's understanding of partners is crucial for a
successful partnership, as it outlines their roles and responsibilities as
follows:
o Active partner: Active partners contribute capital, participate in
firm management, share profits and losses, and are liable to creditors,
actively participating in business operations on behalf of other
partners.
o Sleeping or dormant partner: Sleeping partners, who do not engage in
daily business activities, contribute
capital, share profits and losses, and
have unlimited liability.
o Secret partner: A secret partner,
whose association with the firm is unknown to the public, contributes
to the firm's capital, participates in management, shares profits and
losses, and has unlimited liability towards creditors.
o Nominal partner: Nominal partners, who use their name but do not
contribute to the firm's capital, are liable for debt repayments to
third parties, like other partners.
o Partner by estoppel: Partners by estoppel are individuals who,
through their initiative or behavior, appear to be a partner of a firm,
holding them liable for its debts in the eyes of a third party.
o Partner by holding out: A 'holding out' partner is someone who,
despite not being a partner in a firm, is represented as such, making
 them liable to outside creditors for debts. To avoid this, they must
denial their role as a partner, or face third-party debts.

There is a table provided below for more accurate understanding.

Capital Share in
Type Management Liability
contribution Profits/losses
Participates in
Active Partner Contributes capital Shares profits/losses Unlimited liability
management
Sleeping or dormant Does not participate
Contributes capital Shares profits/losses Unlimited liability
partner in management
Participates in
Secret partner Contributes capital management, but Shares profits/losses Unlimited liability
secretly
Does not contribute Does not participate Generally, does not
Nominal partner Unlimited liability
capital in management share profits/losses
Does not contribute Does not participate Does not share
Partner by estoppel Unlimited liability
capital in management profits/losses
Partner by holding Does not contribute Does not participate Does not share
Unlimited liability
out capital in management profits/losses