Business – Meaning and Types

Meaning of Business

• The term business refers to an organization or enterprising entity

engaged in commercial, industrial, or professional activities. The
purpose of a business is to organize some sort of economic
production of goods or services. Businesses can be for-profit
entities or non-profit organizations fulfilling a charitable mission
or furthering a social cause. Businesses range in scale and scope
from sole proprietorships to large, international corporations.
• The term business also refers to the efforts and activities
undertaken by individuals to produce and sell goods and services
for profit.
 Definition of Business

• H.Haney: “ Business may be defines as a human activity directed

towards producing or acquiring wealth through buying and selling
of goods”.

• McNoughton: “The term business means the exchange of goods,

money or services for mutual benefit”.

• Peterson and Plowman: “A single isolated transaction of sale

and purchase will not constitute business. Repeated transactions of
sale and purchase alone mean business”.
 Types of Business
Ownership of business takes either of the four popular forms:
• Sole Proprietorship,
• Partnership,
• Limited Liability Partnership (L.L.P)
• Co-operatives and
• Company.
The three financial management decisions not equally relevant in all the four ownership
patterns. Dividend decision, for example, is irrelevant in one person ownership business and in
partnership. Nor investment and financing are so conspicuous in co-operatives of all the four, it
is the limited companies whose management is too complex and all the three decisions are
highly practiced in them. Obviously our focus in this book is on corporate financial
management. Before that, it is useful to take a look at the features of the four forms of
ownership.
1. Sole Proprietorship

• A sole proprietorship is business owned by a single person. It is owned by an

individual just because, it is the simple form of business to start, and least
regulated by the Government. Any individual whether she/he, irrespective of
the place they live can start a sole proprietorship business by just obtaining a
license. We need to remember that license is necessary for those individuals
who wants to run the business on a specific name. That is why every nook
and corner we can see sole proprietorship. Most of the large corporations
started their business as sole proprietorships.
2. Partnership
• A partnership firm is owned by two or more persons. In other words, partnership is an
aggregate between two or more persons to carry a business in common view of showing the
profits or losses of the business. It operates as a collection of sole proprietor owners. A
partnership firm comes into being with the execution of partnership agreement (deed)
prepared as the Partnership Act, 1932. The Partnership Deed specifies:
1. The capital to be contributed by each partner.
2. The ratio in which profits are to be shared.
3. The rate of interest, if any, to be paid on capital before the profits are shared.
4. The rate of interest, if any, charged on partnership drawings.
5. Salaries to be paid to partners.
6. Arrangements for admission of new partner.
7. Procedures to be carried out when a partner retires or dies.
 3. Limited Liability Partnership (LLP)

• LLP is essentially a partnership constituted in corporate form which has a

separate legal identity distinct form its partners.
• It is called LLP because partner's liability is limited (restricted) to the extent
of their individual contributions. LLP is a corporate business vehicle that
enables professional expertise and entrepreneurial initiative to combine and
operate in feasible, innovative and official manner, providing benefits of
limited liability while allowing its members the flexibility for organising
their internal structure as a partnership.
 4. Co-operative Society

• A co-operative society is a commercial enterprise owned by a group of of customers, or

workers, with the objectives of promotion of economic interests of its members, in
accordance with the co-operative principles (Sec. 4 of the Co-operative Societies Act, 1912).
• Features of a co-operative undertaking:
• (1) It is a body corporate being registered and corporate body, it enjoys certain privileges
which are enjoyed by a company.
• (2) It is a voluntary association - the membership of the co-operative society is voluntary.
Any person having a common interest can become the member of a society.
• (3) One member one vote vote irrespective of the number of shares she/he owns.
• (4) Service motive a member has only one As paid it is mainly setup - for rendering service
to its members in a particular field.
 5. The Company Form of Business Ownership

• A company is a form of business ownership set up by a group of shareholders under the

Companies Act, 2013.
• The following are the salient features of a company:
• 1. The company is a distinct legal "person" separate from its owners [equity shareholders).
Since, company has separate legal entity it can enjoy the rights, duties, and privileges of an
actual individual person. For example, it can buy assets, borrow money, enter into contacts,
sue and be used in its name.
• 2. Limited liability: the liability of the shareholders of a company is limited to the face value
of the share capital paid by them. Here limited liability means, in the process of paying
creditors during difficult times the shareholder loses only his/her subscribed capital and not
their personal assets.
 Limited Liability Co-operative
Points of Difference Sole Proprietorship Partnership Limited Company
Partnership (L.L.P) Society
Not compulsory, Compulsory (with
Compulsory (with
Registration Not necessary unregistered firms will Registrar of Necessary
Registrar of Companies)
not have ability to sue Companies)
It should end with the
Name to end with It should end with word “Limited”, for Public
Name No guidelines No guidelines
“LLP” the word “Society” Co. and “Pvt. Ltd” for
Private Co.
Pvt. Co.: Min ₹1 lakh
Capital Not specified Not specified Not specified Not specified
Public Co.: Min ₹5 lakh
Pvt. Co.: Min-2, Max-5;
Members / Min: 2 Min: 2 Min: 2
Single individual Public Co.: Min-7, Max-
Shareholders Max: 20 Max: No limit Max: No limit
No limit
No separate entity from Not a separate legal Is a separate legal Not a separate legal
Legal Status Is a separate legal entity
owner entity entity entity
Unlimited can extend to
Limited to the extent of Limited to paid-up Limited to the extent of
Liability the personal assets of Unlimited of partners
contribution to LLP capital unpaid capital
the owner
Partnership + Personal Partnership + Personal
Tax Liability Personal Income Personal + Society Co-operative
Income Income
Simple and related Just like company Simple and related Lengthy procedure
Dissolution No Procedure
procedure procedure procedure involved
Annual accounts and Annual accounts and
Annual Returns No returns with
No returns No returns with ROC returns to be filed with returns to be filed with
with ROC ROC
ROC ROC