CHAPTER-FORMS OF BUSINESS ORGANISATIONS

Introduction:-
The form of business organization should be so strong that it can continue for a long time and
small obstructions should not extinguish it i.e. it may remain static.

The various forms of Business Organisations are:

(a) Sole Proprietorship
(b) Hindu Undivided Family Business
(c) Partnership
(d) Cooperative Society
(e) Joint Stock Company

1. SOLE PROPRIETORSHIP:-
The term ‘sole’ implies ‘only’ and ‘proprietor’ refers to ‘owner’. Hence, a
sole proprietor is the one who is the only owner of a business. Sole proprietorship refers to a form of
business organisation which is owned, managed and controlled by an individual who is the recipient of all
profits and bearer of all risks.
This form of organisation is also known as ‘Sole Trader’, ‘Individual Proprietorship’ or ‘Individual
Entrepreneurship’.
It Is the oldest and the simplest form of business organisation. It is common in areas of personalised
services, such as beauty parlours or small scale activities like running a retail shop in a locality.

Features of Sole Proprietorship:-

The salient characteristics or features of sole proprietorship are:

1. Formation and Closure:-

Sole proprietorship is very easy to start as no legal formalities are
required to start it (though in some cases, one may require a license).
 There is no separate law that governs sole proprietorship.
 It can easily be dissolved (or closed) when the sole trader is interested. So, there is ease in
formation as well as closure of business.

2. Liability:-
The liability of the owner (i.e. sole proprietor) is unlimited. It means that the owner is
personally liable for payment of debts if assets of the business are not sufficient to meet all the debts. In
other words, his personal property may be sold t pay business debts in case the debts exceed the assets
of the firm.

3. Sole Risk Bearer and Profit Recipient:-

Sole proprietor is the sole owner who is responsive for all
business affairs.
 Any risk of failure of business is borne all alone by him.
 Similarly, if the business is successful, he receives all the business profits which become a direct
reward for his risk bearing.

4. Control:-
Sole proprietorship is a one man show, i.e. right to run the business and to make all the
decisions, lies absolutely with the sole proprietor. He can carry out his plans without any interference
from others.

5. No Separate Entity:-
A sole proprietorship has no legal existence, i.e. in the eyes of the law, no distinction is made between
the firm and the proprietor. As a result, owner is help responsible for all the activities of the business.

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 6. Lack of Business Continuity:-
As owner and business are one and the same entity, death, physical
ailment or insolvency of the proprietor has a direct and detrimental effect on the business. It may even
lead to closure of the business.

Merits of Sole Proprietorship:-

The main advantages of sole proprietorship are:

1. Quick Decision Making:-

Sole proprietor enjoys complete freedom in taking the decisions.
 It facilitates quick decsion-making as there is no need to consult others. He takes all major or minor
decisions.
 Timely decisions help him to take advantage of market opportunities as and when they arise.

2. Confidentiality of Information:-
The maintenance of full secrecy is very important for the success
of a business. As proprietor has the sole decision making authority, it enables him to retain all
information related to business operations confidential. Sole trader is also not bound by law to publish
firm’s accounts.

3. Direct Incentive:-
The proprietor enjoys all the profits of the business as there is no one else to share
earnings of the business. Direct relationship between efforts and reward encourages him to work hard
and earn more.

4. Sense of Accomplishment:-
Sole proprietorship provides personal satisfaction to people who want to
be self-employed. As the proprietor is himself responsible for the success of business, it not only
provides him satisfaction but also creates a sense of a accomplishment and confidence.

5. Ease of Formation and Closure:-

Sole proprietorship can be easily started or dissolved at any time
with minimum legal formalities. No separate law governs sole proprietorship. So, it can be started or
closed down easily at the will of the will of the proprietor.

Limitations of Sole Proprietorship:-

Sole proprietorship also suffers from the following limitations:

1. Limited Resources:-
The resources of the proprietor are limited t his personal savings and borrowings.
 The borrowing capacity is also limited as banks and other lendin g institutions may hesitate to
extend long-term loan to a sole proprietor.
 Due to lack of resources, sole proprietorship is generally of small size with low growth rate.

2. Limited life of a Business Concern:-

In the eyes of the law, owner and the business are considered
one and the same. So, sole proprietorship does not enjoy continuity of life. Illness, death or insolvency
of the proprietor affects the business and can lead to its closure.

3. Unlimited Liability:-
The proprietor has unlimited liability, i.e. he is liable for all the debts of business.
 If business fails or debts exceed the business assets, then creditors can recover their dues not only
from the business assets, but also from the personal assets of the proprietor.
 This fear of unlimited liability adversely affects the innovation and expansion of business as a
wrong decision can create serious financial burden on the owner.

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 4. Limited Managerial Ability:-
The proprietor has to assume responsibility of all affairs of business.
 However, managerial ability of the single owner is limited as he cannot posses all the qualities and
not likely to be an expert in all matters of the business.
 Also, due to limited resources, the owner cannot use services of professional and expert people,
which affects the working of his business.
Although sole proprietorship suffers from various shortcomings, still it is chosen by many
entrepreneurs due to its inherent advantages. It is best suited for businesses which are carried out on a
small scale and where customers demand personalised services.

2. Hindu Undivided Family Business:-

The Hindu undivided family business or Joint Hindu Family Business
is a unique form of business organisation, which is found only in India. It is governed by the provisions of
the Hindu Law (The Hindu Succession Act, 1956). It is one of the oldest forms of business organisation in
the country.
It refers to a form of organisation where in the business is owned and carried on by the members of the
Hindu Undivided Family (HUF).
 The basis of membership in the business is birth in a particular family and three successive generations
can be members in the business.
 The business is managed and controlled by the eldest male member of the family known as ‘karta’ or
‘Manager’. The decisions of the karta are binding on all the members.
 All members have equal ownership right over the property of an ancestor and they are known as co-
parceners

There are two systems of inheritance under the Hindu Law:

(i) Dayabhaga System:-

This system prevails in West Bengal only. Under this system, both male and
female members of the family are allowed to be co-parceners.

(ii) Mitakashara System:-

This system prevails all over India except West Bengal. Under this system, only
the male members are allowed to be co-parceners in the business.

Features of Hindu Undivided Family Business:-

The essential characteristics are:

1. Formation:-
For formation of Hindu undivided family business, thee should be at least two members in
the family and ancestral property must be inherited by them. There is no need for any agreement
between the family members as membership arises by virtue of birth. It is governed by the Hindu
Succession Act, 1956.

2. Liability:-
The liability of all members ( except karta) is limited to the extent of their shares in the co-
parcenery property of the business. However, the karta has unlimited liability, i.e. his self-acquired
property can also be attached for paying the debts of the business.

3. Control:-
The control of the family business lies with the karts. He is authorised to manage the business.
He takes all the decisions and his decisions are binding on the other members.

4. Continuity:-
This form of business is not affected by the death of the members. In the case of death of
karta, the next eldest male person in the family becomes the karta, leaving the business stable.
However, the business can be terminated with mutual consent of the members.

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 5. Minor Members:-
Minors can also be members of the business as inclusion of an individual into the
business occurs due to birth in the Family.

Merits of Hindu Undivided Family Business:-

The advantages of the Hindu Undivided Family
Business are as follows:-

1. Effective Control:-
Centralised management in the hand of karta helps in disciplined management.
This avoids conflicts among members as no one can interfere with his right to decide. It also leads to
prompt and flexible decision-making.

2. Continued Business Existence:-

The business enjoys relative stability in existence. Death of the karta
will not affect the business as the next eldest member will then take up the position. Hence, operations
are not terminated and continuity of business is not threatened.

3. Limited Liability of Members:-

The liability of all the co-parceners, except the karta, is limited to
their share in the family property. hence, interests of all members are protected. Unlimited liability of
the karta raises the credit worthiness of the firm.

4. Increased Loyalty and Cooperation:-

As the business is run by the members of a family, there is a
greater sense of loyalty towards one other. There is a direct relation between profits and reputation of
business.
In addition to above merits, Hindu Undivided family business also enjoys the benefits of goodwill,
reputation, name, contacts and status of the ancestors.

Limitations of Hindu undivided Family Business:-

Some of the limitations of Hindu Undivided family
business are:

1. Limited Resources:-
The Hindu Undivided family business faces the problem of limited capital as it
depends mainly on ancestral property. This limits the scope for expansion of business.
The business faces shortage of funds as ancestral properly gets divided with the birth of every male
member and members do not contribute additional funds.

2. Unlimited Liability of karta:-

The karta is not only solely responsibility for decision making and
management of business, but also suffers due to his unlimited liability for the business debts. His
personal property can be used to repay business debts.

3. Dominance of karta:-
The sole control and management of the business is in the hands of the karta.
At times, such a monopoly control is not acceptable to other members. It may cause conflict amongst
them and may even lead to break down of the family unit.

4. Limited Managerial Skills:-

As karta has to perform all the functions of business, he may not be an
expert in all activities of business. His skill is limited and this may adversely affects the functioning of
the business and may result into poor profits or even losses.
In the present scenario, the Hindu Undivided family business is on the decline because of the
diminishing number of Hindu Undivided families in the country.

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 3. Partnership Firm:-
The limitations of Sole Proprietorship and Hindu Undivided Family business gave
birth to partnership.
 Lack of finance and managerial capabilities under sole proprietorship paved the way for partnership as
a viable option.
 Partnership serves as an answer to the needs of greater capital investment, varied skills and sharing of
risks.
In a way, partnership can be termed as an extension of sole proprietorship. It is a form of business
organisation in which two or more persons agree to carry on a lawful business with their personal
resources for the purpose of earning profits. In India, partnership is governed by ‘Indian Partnership Act,
1932.
According to Indian Partnership Act, 1932, Partnership is 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.
In the words of L. H. Haney. “Partnership is the relation between persons competent to make contracts who
have agreed to carry on a lawful business in common with a view to private gain”

Features of Partnership:-
The major characteristics of partnership are:-

1. Formation:-
Partnership is governed by the Indian Partnership Act, 1932. It comes into existence
through a legal agreement among the partners, in which terms and conditions governing the
relationship, sharing of profits and losses and the manner of conducting the business are specified.
It must be noted that the business must be lawful and should be run with the motive of profit. If two
people work together for charitable purposes, then it will not constitute a partnership.

2. Liability:-
The partners of a firm have unlimited liability, i.e. their personal assets may be used to pay off
debts of the business in case of insufficiency of business assets. Further, the partners are ‘jointly’ and
‘individually’ liable for payment of debts.
 Jointly, all the partners are responsible for the debts and they contribute in proportion to their
share in business and as such are liable to that extent.
 Individually, each partner can be held responsible to repay the debts of the business. However, such
a partner has the right to recover the proportionate contribution from other partners.

3. Risk Bearing:-
The partners bear the risks involved in running a business as a team. The reward for risk
bearing comes in the form of profits, which are shared by the partners in an agreed ratio. However, in
the event of losses, they also share the losses in the same ratio.

4. Decision-Making and Control:-

In a partnership firm, partners share amongst themselves the
responsibility of decision – making and control of day-to-day activities. Decisions are generally taken
with mutual consent. Thus, the activities are managed through the joint efforts of all the partners.

5. Continuity:-
Partnership gets automatically dissolved on the death, retirement, insanity or insolvency of
any of is partners. However, if the remaining partners desire to continue, then they may do son on the
basis of a new agreement.

6. Membership:-
The should be minimum of 2 persons to form a partnership firm. Section 464 of the
Companies Act, 2913 provides that number of persons in any partnership shall not exceed 100 subject
to the limit prescribed in Rules. Rule 10 of the Companies (Miscellaneous) Rules, 2014 provides that no
partnership shall be formed, consisting of more than 50 persons. So, limit as of now is 50 partners.

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 7. Mutual Agency:-
According to Indian Partnership Act, 1932, partnership business is carried on by all
or any one of the partners acting for all. It means, every partner acts in the capacity of an ‘agent’ as well
as a ‘principal’.
 As an agent, he represents other partners and thereby binds them through his acts.
 As a principal, he is bound by the accts of other partners.

Merits of Partnership:-
The following points describe the advantages of partnership firm:-

1. Ease of formation and closure:-

A partnership firm can be easily formed and dissolved. It comes into
existence through an agreement between the partners and they can start a lawful business even
without registration.

2. Balanced Decision-Making:-
Two heads are always better than one. The specialised knowledge, skills
and experience of different partners are available to the firm. The partners can oversee different
functions according to their areas of expertise. It not only reduces the burden of work but also leads to
more balanced decisions.

3. More Funds:-
In partnership firm, capital is contributed by a number of partners. As a result, the
business has got large resources as compared to sole proprietorship and firm can undertake additional
operations when needed.

4. Sharing of Risks:-
Business risks are shared by all the partners under the principle of unlimited liability.
This reduces the anxiety, burden and stress on individual partners.

5. Secrecy:-
A partnership firm can easily keep its secrets as it is not required to publish its accounts.
Partners are not likely to leak out the secrets as their own future is linked with the success of the firm.

Limitations of Partnership:-

1. Unlimited Liability:-
The liability of the partners is unlimited, jointly as well as individually.
 Partners are liable to pay of business debts from their personal property if the business assets are
not sufficient to meet its debts.
 It is a drawback for those partners who have greater personal wealth as they will have to repay the
entire debt in case the other partners are unable to do so.

2. Limited Resources:-
A partnership firm cannot raise huge financial resources to support large scale
business operations due to legal ceiling on number of partners. As a result, partnership firms face
problems in expansion and growth beyond a certain size.

3. Possibility of Conflicts:-
In a partnership firm, every partner enjoys the right to participate in the
affairs of the firm.
 Any difference in opinion on some issues may lead to disputes between the partners. Decisions of
one partner are binding on others.
 Any wrong decision by one partner may result in financial ruin of all other partners.
 Further, if a partner desires to leave the firm, then it will lead to termination of partnership as there
is restriction on transfer of ownership.

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 4. Lack of Continuity:-
The life of a partnership firm is highly uncertain and unstable. It can come to an
end by agreement, insolvency, death or insanity of any of the partners.
However, the remaining partners can enter into a fresh agreement and continue to run the business.

5. Lack of Public Confidence:-

As the partnership firm is not legally required to publish its accounts, public is
not aware of its true financial status. As a result, the partnership firm enjoys less confidence of the
public.

Types of Partners:-
The Indian Partnership Act, 1932 makes no distinction among the partners.
However, a partnership firm can have different types of partners with different capabilities, nature of work
and liability. The main types of partners are described as follows:

1. Active or Working Partner:-

An active partner is one who contributes capital, participates in the
management of the firm, shares its profits and losses and bears an unlimited liability for the debts of
the firm. Such partners take active part in carrying out business of the firm.

2. Sleeping or Dormant Partner:-

A sleeping partner is one who does not take part in the day-to –day
activities of the business. Such partner, of course contributes capital, bears unlimited liability, both
jointly as well as individually , but does not participate in the management affairs.

3. Secret Partner:-
A secret partner is one whose association with the firm is unknown to the general
public. Except this distinct feature, he is like the rest of the partners. He contributes capital, takes part
in the management, shares its profits and losses and has unlimited liability towards the creditors.

4. Nominal Partner:-
A nominal partner is one who allows the use of his name and goodwill for the
benefit of the firm and can be represented as a partner. He does not invest capital, does not share
profits and does not take part in the management of business. However, he bears unlimited liability for
the debts of the firm.

5. Partner by Estoppel:-
A partner by estoppel is one who by his words or conduct gives an impression
to others that he is a partner of the firm. Such partners are held liable for the debts of the firm as they
are considered partners in the eyes of the third party, even though they do not contribute capital or
take part in its management.

6. Partner by Holding out:-

A partner by holding out is one who is represented as a partner and he does
not deny such impression, despite becoming aware of that fact. Such a person becomes liable for the
debts of the firm to outsider who have sold goods on credit or lent money to the firm on the basis of
such representation.
In case, such person is not really a partner and wants to save himself from such a liability, then he
should immediately issue a denial, clarifying his position that he is not a partner in the firm. If he does
not do so, he will be responsible to the third party for any such debts.

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 Types of Partnerships:-
Partnership firms can be classified in two ways:
1. On the basis of Duration, i.e. on the basis of length or period of existence of partnership.
2. On the basis of Liability, i.e. on the basis of extent of liability of Partners.
The chart given below gives an outline of these classifications:

TYPES OF PARTNERSHIPS

Classification on the Classification on the

basis of Duration basis of Liability

Partnership Particular General Limited

at will Partnership Partnership Partnership

1. Classification on the basis of Duration:-

(i) Partnership at Will:-

The life of this type of partnership depends upon the will of partners. The
partnership can be dissolved at the desire of any partner on giving a notice. This type of partnership is
not for a fixed period or for during a particular fixed venture.

(ii) Particular Partnership:-

Particular partnership is one which is formed to accomplish a particular
project or to carry out an activity for a specified period of time. It dissolves automatically at the expiry
of fixed period or completion of project. For example, partnership done for construction of a dam or a
road.

2. Classification on the basis of Liability:-

(i) General Partnership:-

General partnership is one in which liability of every partner is unlimited and
every partner is entitled to take active part in management of the business. Acts of each partner are
binding on each other as well as on the firm. Registration of the firm is optional and existence of the
firm is affected by death, insanity, insolvency or retirement of the partners.

(ii) Limited Partnership:-

Limited partnership is one in which liability of at least one partner is
unlimited, whereas, rest of the partners may have limited liability.
 Such a partnership does not get terminated with the death, lunacy or insolvency of partners with
limited liability.
 The limited partners do not enjoy the right of management and their acts do not bind the firm or
the other partners.
 Registration of such partnership is compulsory.

Limited partnership was not permitted in India earlier. However, after introduction of New Small
Enterprise Policy in 1991, such partnership firms have been permitted in order to enable the firms to
attract equity capital from friends and relatives of small-scale entrepreneurs (who were earlier reluctant to
help due to unlimited liability clause in the partnership from of business).

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 Limited Liability Partnership (LLP)

In India, “The Limited Liability Partnership (LLP) Act, 2008” was published in the Official Gazette
of India on January 9, 2009 and has been notified with effect from 31st March 2009.

The first LLP was incorporated in the first week of April 2009.

 At present, there are about 10,000 LLPs formed and registered under the Limited Liability
Partnership Act.
 Being the separate legislation (i.e. LLP Act, 2008), the provisions of Indian Partnership Act,
1932 are not applicable to an LLP and it is regulated by the contractual agreement
between the partners.
 Every Limited Liability Partnership shall use the words “Limited Liability Partnership” or
its acronym “LLP” as the last words of its name.

Partnership Deed:-
Partnership comes into existence through an agreement which is entered into the
partners. This agreement may be verbal or in writing. 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. Partnership deed is the written agreement, which specifies the terms and conditions that govern the
partnership.
The partnership deed generally includes the following aspects:
 Name of firm
 Nature of business and location of business
 Duration of business
 Investment made by each partner
 Distribution of profits and losses
 Duties and obligations of the partners
 Salaries and withdrawals of the partners
 Terms governing admission, retirement and expulsion of a partner
 Interest on capital and interest on drawings
 Procedure for dissolution of the firm
 Preparation of accounts and their auditing
 Method of solving disputes

Registration of Partnership Firm:-

Registration of a partnership firm means the entering of the firm’s
name, along with the relevant prescribed particulars, in the Register of firms kept with the Registrar of
Firms.

Need for Registration:-

Registration provides conclusive proof of the existence of a partnership firm. It is
at the option for a partnership firm to get registered. However, non-registration deprives the firm from a
number of benefits.

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.
(c) The firm cannot file a case against the partners.
In view of these consequences, it is advisable to get the firm registered.

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 According to The Indian Partnership Act, 1932, the partners may get the firm registered with the Registrar
of firms of the state in which the firm is situated. The registration can be at the time of formation or at any
time during its existence.
The procedure for getting a firm registered is as follows:
1. Submission of application in the prescribed form to the Registrar of firms . The application
should be signed by all the partners and should contain the following particulars:
 Name of the firm
 Location of the firm
 Names of other places where the firm carries on business
 The date when each partner joined the firm
 Names and addresses of the partners
 Duration of partnership
2. Deposit of required fees with Registrar of Firms.
3. The Registrar after approval will make an entry in the register of firms and will subsequently issue a
certificate of registration.

Difference Between Partnership and Sole Proprietorship

Basis Partnership Sole Proprietorship

Governing Body It is governed by Indian There is no separate Act,
Partnership Act, 1932. which governs sole
proprietorship.
Registration It is optional but it is desirable There is no need for
that a partnership firm should registration.
be registered.
Number of members Minimum-2; Maximum-50. It is owned and managed by
one person.
Agreement Express or implied agreement No agreement is required.
among the partners is
essential.
Capital contribution Capital is contributed by the Owner contributes the entire
partners. capital.
Sharing of profits/losses Profits and losses are shared The owner earns all the
by the partners in an agreed profits and bears all the
ratio. losses.
Risk Bearing The risks are borne by the The owner bears all the risks
partners jointly and himself.
individually.
Secrecy It is difficult to maintain full There is complete secrecy as it
secrecy as business secrets is a one man show.
are known to all partners.
Management Every partner can take active Full control of management in
part in the management of the hands of the owner as he
business. is the sole judge of his
business.

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 Difference Between Partnership and Hindu Undivided Family Business

Basis Partnership Hindu Family Undivided Business

Governing Body It is governed by Indian It is governed by Hindu Succession
Partnership Act, 1932. Act. 1956.
Number of members Minumum-2 Maximum-50 Minimum -2 Maximum–No limit
Agreement Express or implied agreement It is created by the operation of
among the partners is essential. Hindu Law and no agreement is
needed.
Male/Female A female can be an active A female cannot be an active
partner. member
Liability Liability of all the partners is Except karta , all other members
unlimited. have limited liability.
Profit sharing ratio The profit sharing ratio remains The profit sharing ratio keeps on
fixed unless it is changed with changing due to births and deaths in
the mutual consent of all the the family.
partners.
Position of Minor A minor cannot become a partner Minor becomes a coparcener by his
though he may share the benefits birth in the family.
of a partnership.
Management Every partner can take active The management and control of
part in management of business. business rests only with the karta.
Legal Existence Partnership is dissolved with the It continues to exist even after death
death or insolvency of any of or insolvency of its members
partners. including the karta.

4. Cooperative Society:-
The term ‘cooperative’ means working together and with others for a common purpose. cooperative
society is a voluntary association of persons, who join together with the motive of welfare of the members.
 It aims to protect and promote economic and social interests. It is an association of persons, not of
capital.
 The cooperative society is compulsorily required to be registered under the Cooperative Societies Act,
1912..
 A minimum of 10 adult persons are required to form a cooperative society. Capital is raised from its
members through issue of shares. The society acquires a distinct legal identity after its registration.
Cooperative Societies are based on principles like ‘Each for all and all for each’ and ‘Self-help through
mutual help’.
In the words of E.H. Calvert. “Cooperative is a form of organisation wherein persons Voluntarily associate
together as human beings on the basis of equality for the promotion of an economic interest for
themselves”.
In the words of The Indian Cooperative Societies Act 1912, “Cooperative organisation is a society which has
its objectives for the promotion of economic interests of its members in accordance with cooperative
principles”.

Features of Cooperative Society:-

The main characteristics of cooperative society are as follows:
1. Voluntary Membership:-
Membership of a cooperative society is voluntary. Any person of 18 years
and having a common interest can become its member.
 A person is free to join and leave and leave the society whenever he desires so by giving a notice.
 No one can be forced to join the association or to continue as a member. There is no bar or
discrimination on the basis or religion, caste and gender.

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 2. Legal Status:-
Registration of a Cooperative society is compulsory. After registration, a cooperative
society becomes a legal entity distinct from its members.
 It can own property and make contracts on its own name. It can also sue and be sued in its own
name.
 Being a separate legal entity, it is not affected by entry or exit of its members.

3. Limited Liability:-
The liability of the members of a cooperative society is limited to the extent of amount
contributed by them as capital . So, the maximum risk of member is the subscribed share capital.

4. Control:-
Such societies are run on a democratic pattern as equality is the essence of a cooperative
society. All members elect a managing committee through ‘one-man-one-vote’ system. The power to
take decisions lies in the hands of the elected managing committee. However, members are allowed to
give their suggestions, opinions and problems.

5. Service Motive:-
The cooperative society is formed with a service motive rather than maximisation of
profits. If any surplus is generated as a result of its operations, it is distributed amongst the members in
the form of dividend.

Merits of Cooperative Society:-

Cooperative society offers following advantages:
1. Equality in Voting Status:-
The principle of ‘One-man-one-vote’ governs the cooperative society. Each
member is entitled to equal voting rights irrespective of amount of capital contribution by a member.

2. Limited Liability:-
The liability of every member is limited to the extent of capital contributed by him.
Therefore, the risk of financial loss is limited and known. Personal assets of members are safe and
cannot be used to repay business debts.

3. Stable Existence:-
Cooperative society is a corporate body and its existence is not affected by the
death, insolvency or insanity of its members. Thus, it enjoys continuity of life over a long period of time.

4. Economy in Operations:-
Cooperative society is generally managed by the members themselves on
an honorary basis. As the society aims to eliminate middlemen, it helps in reducing costs. The members
of the society are the customers or producers, which also reduces the risk of bad debts.

5. Support from Government:-

As cooperative society is based on democratic pattern, it enjoys special
exemptions, privileges and concessions from the Government in the form of low taxes, subsidies and
low interest rates on loans.

6. Ease of Formation:-
The cooperative society can be easily started with any ten adult members. The
legal formalities involved in registration are few. Its formation is governed by the provisions of
Cooperative Societies Act, 1912.

Limitations of Cooperative Society:-

The cooperative society suffers from the following limitations:
1. Limited Resources:-
A cooperative society faces shortage of resources as it is run by members, who
have limited means. The low rate of dividend on investment also acts as an obstacle in attracting
membership or more capital from the members.

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 2. Inefficiency in Management:-
The societies are unable to employ experts because of their inability to
pay them high salaries. The managing committee elected by the members, are generally not
professionally equipped to handle the management functions effectively.

3. Lack of Secrecy:-
Cooperative society suffers from the lack of secrecy as its affairs are discussed openly
in the meeting {due to disclosure obligations as per the Societies Act (7)}.They are known to all the
members. Every member is free to inspect any books of the society any time.

4. Government Control:-
In return of the privileges offered by the government, Cooperative society is
bound by rules and regulations related to auditing of accounts, submission of accounts, etc.
 It reduces the flexibility in operations and initiative on the part of management.
 Control exercised by the state cooperative departments also negatively affects its freedom of
operation.

5. Differences of Opinion:-
There are often internal quarrels due to differences of opinion and lack of
cooperation among the members. It leads to difficulty in decision-making. Some members attempt to
give preference to personal interest at the cost of welfare motive.

Types of Cooperative Societies:-

There are various types of cooperative societies, based on the nature of
their operations. They are described below:

1. Consumers’ Cooperative Societies:-

Consumers’ Cooperative Society is formed by consumers for
obtaining good quality products at reasonable prices.
 The society aims to eliminate the middlemen by purchasing goods in bulk directly from the
manufacturers or wholesalers and selling them to the members.
 The profits or surplus, if any, is distributed among the members either on the basis of their capital
contributions or in proportion to their purchases.

2. Producers’ Cooperative Societies:-

Producers’ Cooperative Society is formed by small producers,
who desire to procure inputs for production of goods in order to meet the demands of consumers. They
are formed to face the competition from large-scale producers. They are also known as Industrial
Cooperative Societies.
 The society aims to fight against the big capitalists and wants to enhance the bargaining power of
small producers.
 For this, society supplies raw materials, equipment and other inputs to the members and also buys
their output for sale.
 Profits are generally distributed among the members on the basis of their contributions to the total
pool of goods produced or sold by the society.
These societies are established for the benefit of small producers who find it difficult to collect various
factors of production and also face marketing problems. The purpose is to improve economic
conditions of such small producers by giving them necessary facilities.

3. Marketing Cooperative Societies:-

Marketing Cooperative Society is a voluntary association of small
independent producers who desire to sell their output through one centralised agency. The members
consist of producers who wish to obtain reasonable prices for their output.
 The production of different members is pooled and the society undertakes to sell these products by
eliminating middlemen.
 These societies also perform marketing functions like transportation, warehousing, packaging, etc.,
to sell the output at the best possible price.

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  Profits are distributed among the members in proportion to their contributions to the common
pool of output.

4. Farmers’ Cooperative Societies:-

Farmers’ Cooperative Society is formed by farmers to jointly take
up farming activities in order to gain the benefits of large-scale farming and higher productivity. These
societies are established to protect the interests of farmers by providing better inputs at a reasonable
cost. They are also known as Agricultural Cooperative Society.
 The society provides better quality seeds, fertilisers, machinery and other modern techniques for
use in the cultivation of crops. The aim is to improve the yield and returns to the farmers.
 Such a society is helpful in consolidating the uneconomic, fragmented and small holdings of land
into viable economic holdings.

5. Credit Cooperative Societies:-

A Credit Cooperative Society is formed to provide short-term financial
assistance to the members in the form of loans.
 The society aims to protect the members from the exploitation of lenders who charge high rates of
interest on loans.
 The society provides loans to members out of the amounts collected as capital and deposits and
charge low rates of interest.

6. Cooperative Housing Societies:-

A Cooperative Housing Society is formed by those people who are
desirous of procuring residential accommodation at lower costs. Such societies help people with
limited income to construct houses at reasonable costs
 The society aims to solve the housing problems of the members and giving the option of paying in
installments.
 The society either constructs the flats or provides plots to members on which the members
construct the houses on their own.

5. Joint Stock Company:-

In this modern competitive world, the technological improvements and economic
factors have created the need for large scale organisations. Joint Stock Company is considered to be most
suitable form of organisation for operating business activities on a large scale. A company is an association
of persons formed for carrying out business activities and has a legal status independent of its members.
 It is set up by registration under the Companies Act, 2013 or any previous Company Law.
 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 and they exercise an indirect control over the
business.
 Shareholders elect Board of Directors (BOD) who exercises direct control over the business.
 The capital of the company is divided into smaller parts called ‘shares’ which can be transferred freely
from one shareholder to another person (except in a private company).

Features of Joint Stock Company:-

The main features of Joint Stock Company are:
1. Artificial Person:-
Since a company is created by law, it is an artificial person, having no body, no soul
and no conscience, i.e. it cannot breathe, eat, run or talk . But, like a natural person , a company can own
property, incur debts, borrow money, enter into contracts, sue and be sued. It can conduct a lawful
business and enter into contract with others.

2. Separate Legal Entity:-

On incorporation, a company acquires a separate legal existence in the eyes of
law. The assets and liabilities of the company are separate from those of its owners.

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 3. Formation:-
The formation of a company is a time consuming, expensive and complicated process. It
involves preparation of several documents and compliance with several legal requirements before it
can start functioning. Registration of company is compulsory under the Indian Companies Act.

4. Perpetual Succession:-
Company has a permanent or perpetual existence, i.e. its existence is not
affected by death, insolvency, coming or going of the members. As company is a creation of the law, it
can be brought to an end only by law. It will cease to exist only when specific procedure of winding up
is followed.
It is rightly said, “Members may go, members may come, but the company remains forever”.

5. Control:-
The ownership and the management (control) are in two different hands.
 Shareholders are the owners, but the company is managed by its Board of Directors, which appoints
the top management officials for running the business.
 Directors are the legal representatives and are directly accountable to the shareholders for the
working of the company.
 Shareholders do not have the right to be involved in the day-to-day running of the business.

6. Liability:-
The liability of the members is limited to the extent of the capital contributed by them in a
company.
 In case the company incurs huge liabilities, then the shareholders can be asked to contribute the
unpaid balance of their shares.
 Creditors can settle their claims against the assets of the company and shareholders cannot be
asked to pay the company’s debts.

7. Common Seal:-
A company may or may not have a common seal.
 If a company has a common seal, it must be affixed to the documents such as agreements of a
company.
 If a company does not have a common seal, then the person signing the document should be
authorised by a board’s resolutions.

8. Risk Bearing:-
In a company, the risk of losses is borne by all the shareholders. In the event of financial
crisis, all the shareholders have to contribute to the debts to the extent of their capital contribution.
Hence, risk of loss gets spread over a large number of shareholders.

9. Transfer of Shares:-
The shareholders enjoy a right to transfer their shares to other persons in the open
market or at the stock exchange, at the price prevailing in the market at that time.

Merits of Joint Stock Company

The Joint Stock Company offers the following advantages:

1. Limited Liability:-
The liability of the shareholders of a company is limited to the extent of amount
unpaid on the shares held by them.
 The personal assets of a member are safe and fee from any charge as debts of the company can be
settled only from the assets of the company.
 It reduces the degree of risk borne by an investor.

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 2. Transfer of Interest:-
The shares of a public company are freely transferable. A shareholder can
dispose off his shares at any time when the market conditions are favourable or he is in need of money.
The ease of transfer of ownership avoids blockage of investment and makes the company a favourable
avenue for investment purposes.

3. Perpetual Existence:-
A joint stock company enjoys perpetual existence. Change in its ownership and
management does not affect its continuity, i.e. its existence is not affected by death, retirement,
insolvency or insanity of its members. It can be liquidated only as per the provisions of the Companies
Act.

4. Scope for Expansion:-

As compared to other forms of organisation, a company has large financial
resources.
 Moreover, capital can be attracted from the public as well as through loans from banks and financial
institutions.
 The investors are inclined to invest in shares of the company because of limited liability,
transferable ownership and possibility of high returns. So, there is greater scope for expansion.

5. Professional Management:-
A company can employ specialists and professionals in different areas of
business.
 The large-scale of operations facilitate division of work. As a result, each department deals with a
particular activity and is headed by an expert.
 As management of the company is in the hands of specialised and experienced personnel, it results
in balanced and rational decisions.

Limitations of Joint Stock Company:-

The major limitations of Joint Stock Company are as follows:
1. Complexity in Formation:-
As compared to other form of organisations, formation of a company is
more complex as it requires greater time, effort, procedures and extensive knowledge of legal
requirements.

2. Lack of Secrecy:-
According to Companies Act, each public company has to provide information from
time-to-time to the office of the registrar of companies. Such information is available to the general
public also. As a result, it is difficult to maintain complete secrecy about the operations of company.

3. Impersonal Work Environment:-

Separation of ownership and management leads to a situation in
which there is no direct relationship between efforts and rewards.
 There is lack of effort as well as personal involvement on the part of the officers of a company.
 Moreover, large size of the company makes it difficult of the owners and the management to
maintain personal contact with the employees, customers and creditors.

4. Numerous Regulation :-
The functioning of company is subject to large number of legal formalities.
 The company is burdened with numerous restrictions with respect to audit, voting, filing of reports,
preparation of documents and obtaining certificates from various agencies.
 All this process is very time consuming and expensive and reduces the freedom of operations.

5. Delay in Decision-Making:-
In company form of organisation, decision-taking is a time consuming
process. All important decisions are taken either by the Board of Directors or are referred to general
meeting. It causes not only delays in taking decisions but also in acting upon them. Many opportunities
are lost because of delay in decision-making.

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 6. Oligarchic Management:-
In theory, management of a company appears to be democratic as
directors are the elected representatives of shareholders.
 However, in reality, management of the company is the worst example of oligarchy, i.e. rule by a
few.
 Shareholders of a company are scattered and disunited. They do not take much interest in company
meetings.
 Therefore, directors enjoy considerable freedom in exercising their power which they sometimes
use against the interests of shareholders.
 In such a situation, dissatisfied shareholders have no option but to sell their shares and exit the
company and directors virtually enjoy the rights to take all major decisions.

7. Conflict in Interests:-
There may be conflict of interest amongst various stakeholders of a company. For
example, employees may be interested in higher salaries, consumers may desire better quality products
at lower prices and shareholders may ask for higher dividends. These demands pose problems as it is
very difficult to satisfy such diverse interests.

Difference Between Company and Cooperative Society

Basis Company Cooperative Society
Formation It is formed by registration under the It is formed by getting registered
Companies Act, 2013 or any previous under Cooperative Societies Act,
Company Law. 1912.

Number of Members In a public company, minimum Minimum-10

number is 7 and there is no limit to Maximum- No limit.
maximum number. In a private
company, minimum number of
members is 2 and maximum
(excluding present or past employee)
is 200.

Management Managed and controlled by Board of Managed and controlled by elected

Directors. managing committee.
Motive It aims to earn profit. It aims to render service to its
members.
Government Support No special support provided by the Government provides support in
government the form of low taxes, subsidies, etc.

Transfer of shares Free transfer of shares (in case of It is not permitted.

public company).

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 Difference Between Company and Partnership
Basis Company Partnership
Formation It is formed by registration under the It is formed by signing an
Companies Act, 2013 or any previous agreement by all the partners.
Company Law. Registration is not compulsory.

Number of Members In a public company, minimum Minimum- 2 Maximum-50.

number is 7 and there is no limit to
maximum number. In a private
company, minimum number of
members is 2 and maximum
(excluding present or past employee)
is 200.

Liability Liability of shareholders is limited to Partners have unlimited liability.

the extent of unpaid amount of
capital contributed.

Management Managed and controlled by Board of Managed and controlled by all the
Directors. partners.
Transfer of Interest It is possible by transfer of shares in Partners cannot transfer their
case of public company. interest.

Legal Status It has a separate legal entity. No separate legal entity different
from its partners.
Stability The continuity of company is not Partnership is dissolved with the
affected by death or insolvency of death or insolvency of any of
any members. partners.

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 Comparison of Different Forms of Business Organisations
Hindu
Sole Undivided Cooperative
Basis Partnership Company
Proprietorship Family Society
Business
Formation Easiest formation Easy formation as Easy Compulsory Compulsory
with minimum registration is formation as registration registration
legal formalities. optional. less legal and involves with lengthy
formalities many legal and expensive
and no need formalities. process of
for formation.
registration

Members Only owner. Minimum-2 Minimum-2 Minimum 10 Private

Maximum-50 persons for Maximum No Company:
division of limit. Minimum-2,
property Maximum-200
Maximum- Public
No limit. Company:
Minimum-7,
Maximum-No
limit.
Capital Limited finance. Limited, but more Limited to the Limited Large financial
Contribution than sole amount of contribution resources.
proprietorship. ancestral due to low
property. return on
capital.
Liability Unlimited Unlimited liability Karta has Limited Limited
Each partner is unlimited liability. liability.
individually and liability,
jointly liable while others
have limited
liability.
Control and All business All business All business Elected Decisions are
management decisions are decisions are decisions are managing taken by Board
taken by owner, taken with the taken by committee of Directors,
which leads to consent of all karta. takes appointed by
quick decision partners. decisions. shareholders as
making. there is
separation
between
ownership and
management.

TYPES OF COMPANIES:-
On the basis of ownership , a company can be of three types:
1. One Person Company
2. Private Company
3. Public Company

1. One Person Company (OPC):-

According to Section 2(62) of the Companies Act, 2013, One Person
Company means a company which has only one person as a member.
It is a company incorporated as a private company which has only one member. The aim of introduction of
OPC was to encourage corporatisation of micro businesses and entrepreneurship. In India, in the year
2005, the JJ Irani Expert Committee recommended the formation of OPC. OPC avails all the benefits of a
private limited company, such as separate legal entity, protecting personal assets from business liability
and perpetual succession.

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 Characteristics of OPC

 Only a natural person who is an Indian citizen and resident in India: (a) Shall be eligible to incorporate
a One Person Company; (b) Shall be a nominee for the sole member of a One Person Company.
The term ‘resident in India’ means a person who has stayed in India for a period of not less than one
hundred and eighty two days during the immediately preceding one calendar year.
 No person shall be eligible to incorporate more than one OPC or become nominee in more than one
such company.
 Where a natural person, being member in One Person Company becomes a member in another OPC by
virtue of his being a nominee in that OPC, then such person shall meet the eligibility criteria of being a
member in only one OPC within a period of one hundred and eighty days, i.e., he/she shall withdraw his
membership from either of the OPCs within one hundred and eighty days.
 No minor shall become member or nominee of the One Person Company or can hold share with
beneficial interest.
 Such Company cannot be incorporated or converted into a company under Section 8 of the Act.
 Such Company cannot carry out Non-Banking Financial Investment activities including investment in
securities of anybody corporates.
 No such company can convert voluntarily into any kind f company unless two years have expired from
the date of incorporation of One Person Company, except threshold limit (paid up share capital) is
increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds
two crore rupees.
 The words “One Person Company “ shall be mentioned in brackets below the name of such company,
wherever its name is printed, affixed or engraved.

2. Private Company:-
A private Company is one which by its Articles of Association:
(i) Restricts the right of its members to transfer shares.
(ii) Except in One Person Company, it has minimum of 2 and a maximum of 200 members excluding past or
present employees of the company, who are the members of the company.
(iii) Prohibits any invitation to the general public to subscribe for its shares.
(iv) Must have a minimum paid up capital of ₹ 1 lakh or such higher amount which may be prescribed from
time-to-time.
It is necessary for a private company to use the word ‘Private Limited’ after its name as per Section 2(68) of
the Companies Act, 2013. If a private company contravenes any of the aforesaid provisions, It ceases to be a
private company and loses all the exemptions and privileges to which it is entitled.

3. Public Company:-
A public company means a company, which is not a private company. According to
Indian Company Act, a public company is one which:
(i) Has a minimum paid-up capital of ₹ 5 lakhs or a higher amount which may be prescribed from time-to-
time.
(ii) Has a minimum of 7 members and no limit on maximum members.
(iii) Has no restriction on transfer of shares.
(iv) Is not prohibited from inviting subscription from general public.
A private company which is a subsidiary of a public company is also treated as a public company.

Privileges of Private Company over Public Company:-

A private company is given exemptions or privileges as compared to a public company. Some of the main
privileges are as follows:
1. A private company can be started with just two members, whereas, a public company requires at least
seven members.
2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private
company.
3. It can allot shares without receiving the minimum subscription.
4. A private company can start its work just after getting a certificate of incorporation.
5. It can work with just two directors as compared to three directors under public company.
6. A private company is not required to keep an index of members, while the same is necessary in case of
public company.

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 Difference Between Public Company and Private Company
Basis Public Company Private Company
Numbers of Members It requires minimum of 7 It requires minimum of 2
members and there is no limit members and maximum limit of
for maximum members. members is 200.

Number of Directors It must have at least three It must have at least two
directors. directors.
Minimum paid up capital It must have a minimum paid It must have a minimum paid
up capital of ₹ 5 lakhs. up capital of ₹ 1 lakh.
Index of members It is compulsory to maintain It is not compulsory.
index of members.

Transfer of shares There is no restriction on There is restriction on transfer

transfer of shares. of shares.
Invitation to public to subscribe It can invite public to subscribe It cannot invite public to
to shares for its shares or debentures. subscribe for its shares or
debentures.

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