Chapter 2

Forms of Business Organisation

Sole proprietorship
It is basically made up of two words, one is 'sole', which means "one" and the
second is 'proprietor', which means "owner". So, Sole Proprietorship means a
business with a single owner, also known as a sole proprietor.
Sole proprietorship is defined as a form of business organization in which the
business is owned, managed, and controlled by a single person.

Features
1. Formation and Closure of business
This type of business organization is simple to form as no legal formalities are
required to start the business. But, in some cases, a license or certification is
required to carry out the sole proprietor business. Also, registration of business is
not required, as there is no separate law that governs sole proprietorship. The owner
can easily close the business anytime at his own discretion.
2. Unlimited Liability
In a sole proprietorship, the owner has unlimited liability, i.e., the proprietor is
personally responsible to pay all the debts. In other words, if in the business, funds
are not sufficient to pay the debt, then the personal assets of the owner may be used
to pay off all the liabilities.
3. Sole Risk bearer and profit recipient
All the risk of the firm is borne by a single owner only. The single individual is the
sole beneficiary of all the profits. Likewise, if losses occur in the business, then he
alone has to bear all the risks.
4. Control
The sole proprietor is the only owner of the firm and has full control over its
business. All the rights, responsibilities, and decisions are in the hands of the owner
himself. No one can interfere in the business without the permission of the owner.
5. No separate entity
A sole proprietorship business has no separate legal entity from that of its owners,
like in partnership and company. In the eyes of law, there is no distinction between
the owner and his business.
6. Lack of Business Continuity
Since business and owner are one and exist together, so in case of death,
imprisonment, insolvency, or bankruptcy of the sole owner, the business cannot be
continued and has to shut down.
Merits
1. Quick Decision Making
Total Management and control of the firm lies in the hands of the sole proprietor. He
enjoys the freedom of action, and has all the authority to make decisions and run the
business in the way, he/she desires. It leads to quick decision-making as the owner
does not have to consult with others, and can take all minor and major decisions.
2. Confidentiality of Information
To make the business successful, it is essential for the owner to maintain secrecy
within the organization. The sole proprietor does not have to share the information
with others and can keep it confidential, as he/she has the sole decision-making
authority.
3. Ease of Formation and closure
In a sole proprietorship, hardly any legal formalities are required for setting up the
business, except in some cases where a license is required. Also, the owner can close
the business whenever he desires by paying back its debts. Therefore, it is easy to
form and close this type of business organization.
4. Direct Incentive
In this type of business organization, there is a direct relationship between rewards
and efforts. If the proprietor puts extra effort into the business, then the profits
increase and the proprietor get an extra reward for the efforts. Similarly, the owner
gets maximum incentive, if he/she performs better.
5. Sense of accomplishment
In a sole proprietorship, all the work is done by the owner himself. If the business is
successful, it gives a sense of accomplishment in him.

Limitations
1. Limited Resources
It is very difficult to raise capital in a sole proprietorship as a sole proprietor has
limited resources to the extent of his personal assets and borrowings. The credit-
raising capacity of the owner is also limited, which reduces the scope for business
growth.
2. Limited life of a Business concern
The life of a business depends on the sole proprietor only because the law considers
the owner and the business as the same (no separate legal entity). Therefore, if the
proprietor becomes bankrupt or insolvent, or dies, then the business may come to an
end.
3. Unlimited Liability
The sole proprietor has unlimited liability, which means the personal assets of the
owner can be used to pay the debts of the business. This puts a financial burden on
the owner. If the business does not have adequate funds to pay for obligations, the
personal assets of the owner will be used to pay off the debts.
4. Limited managerial ability
The proprietor may lack professional skills and talent. His knowledge is only limited
to his area of study and may not have the necessary skills to face competition to
cope with changes taking place in the environment, like changes in fashion,
technology, etc. It is very difficult to find all the skills in one person.

Joint Hindu Family Business

It is a form of business, which is found only in India, and wherein the business is
owned and carried on by the members of the Hindu Undivided Family (HUF). It is
governed by the Hindu Law (The Hindu Succession Act, 1956).

Features
1. Formation
There should be at least two members and ancestral property must be inherited by
the members for the formation of the Hindu Undivided Family Business. Each
member of the family becomes a member of the business by virtue of birth, and
there is no need for any agreement between the family members.
2. Liability
The liability of all the members except the Karta is limited to the extent of shares in
the co-coparcenary property of the business. However, the Karta has unlimited
liability and his personal properties can be used for paying the debts of the business.
3. Control
Karta controls the entire family business. He has the authority to manage the
business. He takes all the decisions and his decisions are binding on all the co-
parceners.
4. Continuity
HUF is not affected by the death of the members. In the case of the death of the
Karta, the next eldest male member in the family becomes the Karta. However, the
business can be terminated with the mutual consent of the members.
5. Minor Member
Minors can also be members of the business as membership in the business arises by
the virtue of birth.

Cooperative Society
A co-operative society is a voluntary association of persons of moderate means who
unite together to protect & promote their common economic interests.
Features
1. Voluntary membership
An individual is free to join or leave the society according to their will. It works
according to a democratic society, i.e., it is open to all irrespective of their caste
religion and gender.
2. Legal status
As registration of a Cooperative Society is compulsory, it has a separate legal entity
that is distinct from its members. After registration, a cooperative society can hold
property in its name and can enter into contracts, can sue, and be sued by others.
3. Limited Liability
A cooperative society is a convenient form of association in which the liability of
any member is limited to the extent of capital contributed by them.
4. Control
The major decisions of a cooperative society are handled by an elected
managing committee. The members of a cooperative society have the power (voting
rights) to choose the members of the managing committee, which gives rise to the
role of democracy.
5. Service motive
A cooperative society works for the economic welfare of poor or weaker sections of
society. Its main aim is to eliminate middlemen and protect the interest of its
members and society.

Merits
1. Easy to Formation
It is voluntary, so there is no compulsion to any organization person or business
associate to form, and join any cooperative society. A minimum of ten members can
start a cooperative society with a few legal formalities, and there's no limit to the
maximum number of members in a cooperative society.
2. Equality in voting status
Each member in a cooperative society has one vote to elect the member of the
managing committee, as it follows the principle of 'ONE MAN ONE VOTE'. Every
member has an equal voting right, no matter whether they have contributed less or
huge capital to the business.
3. Limited Liability
The risk factor of members is limited to the extent of capital brought by them in the
cooperative society. In case of insolvency or dissolution, the personal assets of the
members are not liable for repayment of debts.
4. Stable existence
As the cooperative society holds the position of a separate legal entity, it is not affected
by the death, retirement, or admission of any member.
5. Economy in operations
Due to elimination of middlemen and voluntary services provided by its members.
6. Support from the Government
As a cooperative society works majorly for the benefit of poor and weaker sections of
the society, it gets great support from the government in the form of
low taxes, subsidies, loans with low rates of interest, etc.

Limitations
1. Limited Resources
Each member brings limited capital and expects a higher return, which is difficult for
a cooperative society to provide at an early stage. Moreover, it is formed for the
welfare of society and its members; therefore, the profit motive is ignored to some
extent.
2. Inefficiency of management
The amount of profit earned by the society is not sufficient to appoint skilled and
experienced members for proper management. Even if any of the members agree to
give honorary services to the cooperative societies, they do not have sufficient
means to handle it well.
3. Lack of Secrecy
Every decision is taken in a meeting with an open discussion, which makes it difficult
to maintain confidentiality about the operations of the business. Besides, a cooperative
society has an obligation to disclose the decisions of the meeting under the Societies
Act (7).
4. Government Control
When a cooperative society grows and develops into a big unit, then the government
would interfere in its operations. The cooperative society has to comply with rules and
regulations related to auditing of accounts, profit, etc., which affects the freedom of
operations.
5. Differences of opinion
As the members of a cooperative society belong to different cultural and social aspects
their thinking varies, which leads to a greater possibility of conflicts. The difference
in personal motive and social motive of the members of the society results in conflicts
among them affecting the overall business.

TYPES OF CO-OPERATIVE SOCIETIES

1. Consumers cooperative Society
It formed to protect the interest of consumers. It seeks to eliminate middleman by
establishing a direct link with the producers. It purchases goods of daily consumption
directly from manufacturer or wholesalers and sells them to the members at reasonable
prices.
2. Producer's Cooperative Society
The main aim is to help small producers who cannot easily collect various items of
production and face some problem in marketing. These societies purchase raw
materials, tools, equipment’s and other items in large quantity and provide these things
to their members at reasonable price.
3. Marketing Cooperative Society
It performs various marketing function such as transportation, warehousing, packing,
grading, marketing research etc. for the benefit of its members. The production of
different members is pooled together and sold by society at good price.
4. Farmer’s Cooperative Society
In such societies, small farmers join together and pool their resources for cultivating
their land collectively. Such societies provide better quality seeds, fertilizers,
machinery and other modern techniques for use in the cultivation of crops. It provides
them opportunity of cultivation on large scale.
5. Credit cooperative Society
It is established for providing easy credit on reasonable terms to members. Such
societies protect the members from exploitation by money lenders. They provide loans
to their members at easy terms and reasonably low rate of interest.
6. Cooperative Housing Society
The main aim is to provide houses to people with limited means/income at reasonable
price. They construct flats or provide plots to members on members themselves can
construct houses as per their choice.

Partnership
Partnership is a voluntary association of two or more persons who agree to carry on
some business jointly and share its profits and losses.
The Indian Partnership Act, 1932 defines partnership as the relation between persons
who have agreed to share the profits of a business carried on by all or any of them
acting for all.

Features
1. Formation
Business is established as per the provisions of partnership Act 1932.
2. Number of partners
Minimum 2 and maximum 50 members [as per the Companies (Miscellaneous) Rules
2014}, or maximum could be 100 (according to Companies Act, 2013).
3. Liability
Partners have unlimited liability. And they are liable individually as well as jointly.
It may prove to be a big drawback for those partners who have greater personal
wealth. They will have to repay the entire debt in case the other partners are unable
to do so.
4. Risk bearing
The partners bear the risks involved in running a business as a team. The partners
share profits & losses in an agreed ratio among them.
5. Decision making & control
Every partner has a right to participate in management & decision making of the
organisations. Decisions are generally taken with mutual consent.
6. Continuity
Firms existence is affected by the death, Lunacy and insolvency of any of its partner.
It suffers from lack of continuity.
7. Mutual Agency
Every partner is an implied agent of the other partners and of the firm. Every partner
is liable for acts performed by other partners on behalf of the firm.

Merits
1. Easy of Formation and Closure
The partnership business, like the sole proprietorship, can be formed immediately and
without any legal stipulations. It is not essential to register. It’s the same in the case
of closure, as it is also an easy task.
2. Balanced Decision Making
Collective decision making is possible in partnership. So they can take better
Decisions regarding their business.
3. More Funds
It is possible to pool more resources when two or more partners work together to
establish a partnership firm. The partners may invest more money, more time, and
more effort into the company.
4. Sharing of risks
Each partner contributes to the firm’s losses in accordance with their agreed-upon
profit-sharing percentages. As a result, the loss share for each partner will be lower
than it would be for a proprietorship.
5. Secrecy
The partnership business not compelled to publish their financial statements or
submit any reports to the government, secrecy regarding their activities can be easily
maintained. This allows it to keep its operations and policies secret.

Limitations
1. Unlimited Liability
The parties’ liability in a partnership business is unlimited. Similar to a sole
proprietorship, if a partnership is unable to pay its debts, the personal assets of the
partners may be in danger. Partners are jointly and separately accountable, and their
liability is unlimited.
2. Limited Resources
The number of partners is restricted, and as a result, the capital they provide is also
limited. There are restrictions on adding partners, so there won’t ever be enough
funds to support a big firm. Partnership businesses thus have difficulties with
business expansion.
3. Possibility of Conflicts
Partnership is run by group of persons wherein decision making authority is shared.
Difference in opinion on some issues may lead to disputes between partners.
4. Lack of Continuity
Partnership is run by group of persons wherein decision making authority is shared.
Difference in opinion on some issues may lead to disputes between partners.
5. Lack of Public Confidence
Public trust in such types of businesses is generally low, as they are not required to
publish their financial reports or make other related information public. As a result,
it is challenging for the public to determine the genuine financial situation of a
partnership business, which lowers public trust in partnerships.

TYPES OF PARTNERS
1. Active partner
An active partner is one who contributes capital, participates in the management of
the firm, shares its profits and losses, and is liable to an unlimited extent to the
creditors of the firm.
2. Sleeping or dormant partner
Partners who do not take part in the day to day activities of the business are called
sleeping partners.
3. Secret Partner
He participates in business secretly without disclosing his association with the firm
to general public. His liability is also unlimited.
4. Nominal partner
A nominal partner is one who allows the use of his/her name by a firm, but does not
contribute to its capital.
5. Partner by Estoppel
He is the one who by his words or conduct gives the impression to others that he is a
partner of the firm whereas actually he is not. His liability is unlimited towards the
third party who has entered into dealing with the firm on the basis of his pretensions.

Minor as partner An individual of age below 18 years can be admitted with mutual
consent of all other partners but legally he is not a partner.
Types of Partnership
Partnership can be categorised on the basis of duration and liability:
Classification on the basis of duration
● Partnership at will: Partnership continues till the partners agree to do so.
● Particular partnership: The partnership formed for a specific task for project or for
a specific period of time. It comes to an end after completion of task or expiry of
time.
Classification on the basis of liability
●General partnership: Partnership where all partners have joint and unlimited
liability
● Limited partnership: Partnership where all partners have limited liability and at
least one partner must have unlimited liability.

Partnership Deed
Partnership is the result of mutual agreement between partners. The agreement may
be oral or written. The written agreement is known as Partnership Deed. Thus, the
document containing terms of agreement in writing among partners is called
partnership deed.
A partnership deed generally has the following components
• Name of the firm
• Location / Address of the firm
• Duration of business
• Investment made by each partner
• Profit sharing ratio of the partners
• Terms relating to salaries, drawing, interest on capital and interest on drawing of
partners
• Duties & obligations of partners
• Terms governing admission, retirement & expulsion of a partner, preparation of
accounts & their auditing
• Method of solving dispute

REGISTRATION OF PARTNERSHIP
Registration of partnership firm means the entering of the firm’s name in the
Register of Firms kept with Registrar. It provides conclusive proof of existence of
partnership firm.
The registration of partnership firms is not compulsory, it is optional. Registration is
not compulsory, it is optional. But it is always beneficial to get the firm registered.
The consequences of non-registration of a firm are as follows:
• A partner of an unregistered firm cannot file suit against the firm or the partner.
• The firm cannot file a suit against a third party.
• The firm cannot file a case against its partner.
Company
The Companies Act, 2013 defines, "A company as an artificial person having a
separate legal entity, perpetual succession and a common seal."

Features
1. Separate Legal Entity
A company has a separate legal existence, which means that it can carry on the
business activities in its own name, and can buy and sell goods, assets, etc., in its
own name. A company can also enter into a contract with outsiders in its own name.
2. Artificial Person
Like a human being, a company does not have a physical body; instead by law, it is
an artificial person. It means that the operations of a company are performed by the
elected representatives of the members, also known as directors.
3. Formation
Company is formed by fulfilling all the legal formalities as stated under Companies
Act, 2013.
4. Perpetual Succession
A company's existence is independent of its members. A company is formed by law
and can only end by law, i.e., the death, incapacity or insolvency of any of the
members of the company does not have any effect on its existence.
5. Control
The directors of the company are responsible for the management and control of
business activities and they do so by appointing professional experts in different
fields.
6. Liability
The liability of the members of a company is limited to the extent of the share
contributed by them in the company.
7. Common Seal
As a company is an artificial legal person, it cannot have a sign on its own/ Hence
common seal acts as the official signature for a company. All the official documents
must have a common seal for legal binding.
8. Risk Bearing
The risk of loss is shared by all the shareholders in proportion to their
investment in the company

Merits
1. Limited Liability
The liability of the members of a company is limited to the extent of the share
contributed by them in the company. If a company faces a loss, the shareholders of
the company do not have to sell off their personal property for repayment.
2. Transfer of Interest
As the shares of a company are transferrable and can be easily bought and sold in
the market, it brings liquidity of investment in the company. The shareholders can
anytime convert their share investment into cash and can use that amount to buy the
shares of another company.
3. Perpetual Existence
It means that a company can be formed by law and can end by law through the
process of winding up only, i.e., the death, insolvency, and incapacity of the
members do not have any effect on the company's existence.
4. Scope for Expansion
A company has more scope for expansion and growth because it has large financial
resources and high profit rates. It means that if a company has retained profits, it can
easily use that amount for its growth and expansion.
5. Professional Management
Every business requires specialized people and experts for better performance and
results. As a company has huge funds at its disposal, it can easily hire experts to
perform various business activities, and can efficiently improve its working and
performance.

Limitations
1. Complexity in Formation
The process of the formation of a company is quite complicated and lengthy. It
requires the completion of various formalities, and various different documents have
to be prepared and submitted. It also requires obtaining different kinds of
permissions.
2. Lack of Secrecy
Every company has to share various information about it with the registrar of
companies, which is made available to the general public also. This compulsion of
sharing information makes it difficult for the company to maintain secrecy about its
operations.
3. Impersonal Work Environment
As a company is managed by hired professionals and experts, instead of its owners,
and the professionals get a salary in return, there is no direct relationship between
the efforts and reward of the business activities.
4. Numerous Regulations
A company has to fulfil a number of formalities at different stages of the business,
and if it fails to meet any of these formalities, it has to bear the penalty. Besides, it
also hinders the secrecy of the company as there is regular interference in the
operations of the business.
5. Delay in Decisions
The important decisions in a company are taken after consulting with different
people or discussing in the board meeting, which is a lengthy process.
6. Oligarchic Management
In reality, the control of a company is in the hands of a few people only, who are
known as the directors of the company. The directors take every decision of the
company and they do so by keeping their personal benefits and interests in their
minds and do not think about the interest of the company and its shareholders.
7. Conflicts in Interests
It is not possible that every group's interest aligns with a decision, which can result
in conflicts of interest between different groups.

Types of Companies
a. Private Company
● A company must have minimum 2 or maximum 200 members.
● Right to transfer shares is restricted.
● Funds cannot be generated from the general public.
● Uses 'Private Limited' after the company name.

b. Public Company
● Free to transfer shares.
● Issue shares to the general public.
● Uses 'Public Limited' after the company name.

Difference between Public and Private Company

Basis Public Company Private Company
Members Minimum: 7 members Minimum: 2
Maximum: Unlimited Maximum: 200
Minimum number 3 2
of directors
Invitation to Public Can invite public for Cannot invite public for
Subscription Subscription
Transfer of shares Can transfer Cannot transfer
Index of Members Compulsory Not compulsory
One Person Company
According to Indian Companies Act 2013 it is possible to form One Person
Company(OPC).An OPC means a company with only one person as its member.
According to section 3(1) of the Indian Companies Act 2013:-
● Only a natural person who is an Indian citizen and resident in India shall be
eligible to incorporate OPC.
● No person shall be eligible to incorporate more than one OPC.
● OPC to compulsory convert itself into public or private company when its capital
Exceeds 50 lakh or its average annual turnover during year exceeds 2 crore.

CHOICE OF FORM OF BUSINESS ORGANISATION

● Cost and ease in setting up the organisation: It is easy to start sole
proprietorship with minimum cost and legal requirements whereas formation of
a company is a complex task with lengthy legal procedure. But partnership has the
advantage of less legal requirements with low cost.
● Liability: In sole proprietorship and partnership, the liability of owner or partners
is unlimited but in cooperative societies and companies, members have limited
liability.
● Continuity: In sole proprietorship and partnership, continuity is affected by death
and insolvency of the owners but cooperative societies, companies and Hindu
undivided family enjoy perpetual existence.
● Management ability: In sole proprietorship, it is difficult that the owner may
have expertise in all functions but in other forms of business, division of work is
possible which leads to better decision making.
● Capital consideration: In case of large scale of operation, company form is more
suitable but in case of small scale of operation, partnership or sole proprietorship can
be chosen.
● Degree of control: If the owner wants all the control in his hand the sole
proprietorship may be preferred but if the owner is ready to share control, then he
can adopt partnership or company form.
● Nature of business: For trading and services, sole proprietorship and
partnership form can be chosen. For manufacturing, a company form of organisation
can be adopted.