BUSINESS STUDIES FORMS OF BUSINESS ORGANISATION

Forms of Business Organisation

Topics covered
Sole Proprietorship
Joint Hindu Family Business
Partnership
Cooperative Society
Joint Stock Company
Factors to be Considered while Choosing Form of Business Organisation

Business Organisation

An entity or enterprise involved in the production, purchase, sale and supply of goods with the motive
of earning profit is called a business organisation. There are two forms of business organisation.

o Public sector enterprises are businesses which are owned, controlled and managed by the
government. These are either partly or wholly owned by the state or central government. Their
objective is social welfare. The various types of public enterprises are

 Departmental undertakings
 Statuary corporations
 Government companies

o Private sector enterprises are owned, controlled and managed by an individual or a group of
individuals with the sole objective of earning profit. The various types of private enterprises are

 Sole proprietorship
 Partnership
 Joint Hindu Family
 Cooperative society
 Joint stock company
 Multinational corporations

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Sole Proprietorship

A sole proprietorship firm is a form of business wherein a single individual owns, manages and
controls the business. Thus, he bears all the losses alone and is not required to share his profits with
anyone else.

Features of Sole Proprietorship

1) Single ownership: Under a sole proprietorship form of business organisation, a single individual
owns, manages and controls the business.
2) Easy formation and closure: Sole proprietary business can easily be started without the
requirement of a licence; however, a licence is required in some cases. It can be easily closed
without any legal formalities.
3) Unlimited liability: A sole proprietor has unlimited liability which means that if creditors are unable
to recover their dues from business assets, then they have the right to recover the same from the
personal assets of the proprietor.
4) Sole risk bearing and profit beneficiary: A sole proprietor bears all the risks and losses of the
business alone. The reward of risks which is profit is also enjoyed by him only.
5) Full control: He has the right to take decisions and plan business without the interference of
outsiders.
6) No separate legal entity: According to law, there is no distinction between a sole proprietorship
firm and an owner.
7) Lack of continuity: A sole proprietor and his business are considered a single entity; thus, factors
such as death, insolvency and illness can lead to a closure of the business.

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Merits of a Sole Proprietorship

1) Fast decision making: Complete control of the business is in the hands of the sole proprietor. Thus,
decisions are made instantly without wasting any time.
2) Confidentiality: The sole proprietor is not legally obligated to publish his records or accounts as
he is the single decision-making authority. Hence, all business information can be kept confidential
and secret.
3) Easy formation and closure: Because there are no specific laws governing the sole proprietorship
firm, no/minimal legal formalities are required in the formation or closure of business.
4) Incentive: The sole proprietor bears all the risks and losses of the business alone. He also directly
gets all the benefits from the efforts he has put into the business.
5) Sense of accomplishment: The sole proprietor works for himself. Thus, when the business
achieves success, it contributes to a sense of accomplishment and increases the confidence of the
owner.
6) Personal touch: The sole proprietor is in direct contact with customers; thus, he can understand
the demands of customers and accordingly he can provide goods to customers.

Demerits of a Sole Proprietorship

1) Limited resources: A sole proprietor is the single owner of the business; thus, he has limited
resources such as his personal assets, wealth and borrowings to be invested in the business. Also, he
faces problems in getting loans from banks.

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2) Unlimited liability: The business is dependent on the owner; thus, he has unlimited liability. If
creditors are unable to recover their dues from business assets, then they have the right to recover
the same from the personal assets of the proprietor.
3) Limited managerial ability: The sole proprietor is responsible for all the tasks of the business which
include buying, selling, financing and planning. However, a single person cannot be best in all
areas. Also, because he has limited resources, he cannot hire experts.
4) Limited life of business: According to law, there is no distinction between the firm and the owner.
Thus, factors such as death, insolvency and illness can lead to a closure of the business.

Joint Hindu Family Business

Joint Hindu Family (JHF) business is governed by the Hindu Succession Act of Hindu law and it is found
only in India. It is owned and carried out by the members of the Hindu Undivided Family (HUF). The head
of the JHF business is called a karta, and the other members of the family are known as co-parceners.
The karta is the senior-most male member of the family. He is the sole person who has the authority to
take decisions with respect to the business.

Conditions for JHF business:

 Presence of two male members in the family

 Presence of some ancestral property

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Features of JHF Business

1) Formation: JHF business is governed by the Hindu Succession Act, 1956, in which no legal
formalities are required. To start the business, at least two male members should be present and
they should have inherited some ancestral property.
2) Liability: The karta in a JHF business has unlimited liability as he is the eldest member of the family
and has the responsibility of making all the decisions for the business. The liability of other members is
limited to their share in the business.
3) Control: The karta has the absolute decision-making authority over the business. It is only the
karta who has the right to enter into a legal contract with others.
4) Continuity: There is continuity in JHF business as after the death of the karta, the next eldest
member of the family becomes a karta and runs the business.
5) Minor members: Minors can also become a member of a JHF business as membership in the
business is by birth.
6) Number of members: The minimum number of members is two, and there is no limit for the
maximum number of members in a JHF business.
7) Registration: Registration is not compulsory for a JHF business as it is governed by Hindu law.

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Merits of a JHF Business

1) Quick decision making: The karta has the power of making all the decisions for the business which
results in prompt decision making.
2) Continuity: There is continuity in a JHF business as after the death of the karta, the next eldest
member of the family becomes a karta and runs the business.
3) Limited liability of members: The liability of all the members of the business except the karta is
limited to their share in the business.
4) Better cooperation: There is better cooperation among family members as they are the owners of the
business and thus put their best in the business leading to growth of the organisation.

Demerits of a JHF Business

1) Limited resources: JHF business has limited resources as it depends on ancestral property. This
leads to limited growth and expansion of the business.
2) Unlimited liability: The karta in a JHF business has unlimited liability. This implies that if business
assets are insufficient to pay business debts, then the personal assets of the karta can be used to do
so.
3) Supremacy of karta: The karta takes all the decisions of the business. This may lead to conflicts
among family members.
4) Limited managerial skills: The karta is responsible for all the tasks of the business, but a single
person cannot be best in all areas. Thus, he cannot perform all the management functions effectively
leading to losses in business.

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Partnership

According to the Indian Contract Act, ‘Partnership is the relation which subsists between persons who
have agreed to combine their property, labour or skill in some business and to share the profits therefrom
between them’.

Features of a Partnership
1) Membership: A partnership firm can be started with minimum two members. A maximum of ten
members are required for the banking industry and a maximum of twenty members are required
for other businesses.
2) Formation: The Indian Partnership Act, 1932, governs the partnership form of organisation. To form
the partnership, there must be an agreement between the partners to run the business and share the
risks and profits of the business.
3) Liability: All the partners have unlimited liability. They are jointly and individually liable for debt
payments.
4) Risk bearing and profit sharing: In a partnership form of organisation, risks and profits are shared
among the partners in an agreed ratio.
5) Control: The decision making power of the business is shared among partners. All the decisions are
taken with mutual consent.
6) Continuity: A partnership lacks continuity as the partnership agreement comes to an end with the
death, retirement, bankruptcy and mental illness of any one of the partners. However, a new
agreement can be created if the rest of the partners want to continue with the business.

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7) Mutual agency: Every partner is both a principal and an agent. Being an agent of other partners, he
binds other partners through his actions, and as a principal, he is bound by the action of other
partners.

Merits of a Partnership
1) Easy formation and closure: Formation of this form is very easy as there is a requirement of only an
agreement between the two prospective partners. Also, it is not mandatory to register the firm. This
helps in closing of the business easily.
2) Effective decision making: It has members with a variety of expertise which are used in the decision-
making process. As all the decisions are taken by the partners together, it results in effective decision
making as compared to other forms of business.
3) Risk sharing: Risks are shared among partners equally, thereby motivating more risk taking to earn
more profit. This also helps reduce concern and distress.
4) Confidentiality: Because a partnership firm is not entitled to publish its records and accounts, it can
maintain business confidentiality and secrecy.
5) More financial resources: A partnership firm is able to manage and raise more funds as capital is
contributed by many partners.
6) Flexibility: There is flexibility in the partnership form of organisation as capital and size of the firm can
be changed without taking the government’s approval.

Demerits of a Partnership
1) Unlimited liability: All the partners have unlimited liability. This implies that if business assets are
insufficient to pay business debts, then the personal assets of partners can be used to do so.
2) Limited resources: The number of partners who can be added to this form is restricted; hence, the
capital investment brought in is low. This possesses a restriction to the firm in terms of expansion
beyond a certain point.
3) Conflicts: All the partners share the authority of decision-making equally in a firm. Thus, owing to their
different backgrounds, there are chances that they may have different opinions on various subjects.
This may lead to a difference of opinions and conflicts among them which may result in the downfall of
the business.

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4) Lack of continuity: There is a lack of continuity in this form as the partnership agreement comes to
an end with the death, retirement, bankruptcy and mental illness of any one of the partners. However,
if the rest of the partners want to continue with the business, they need to create a new agreement.
5) Lack of public confidence: A partnership firm is not entitled to publish its records and accounts.
Thus, the public cannot get a true picture of a company’s financial position, and hence, the public
lacks confidence in partnership firms.
6) Difficulty in transferring shares: It becomes difficult for the partner to transfer shares to other
persons as approval is required from every partner.

Types of Partners
There are six types of partners. Let’s study them in the below table.

Capital Participates in Share in

Type Liability
Contribution Management profits/losses

Active partner Yes Yes Yes Unlimited

Sleeping or dormant
Yes No Yes Unlimited
partner

Secret partner Yes Yes Yes Unlimited

Generally does not

Nominal partner No No Unlimited
share profits/losses

Partner by estoppel No No No Unlimited

Partner by holding
No No No Unlimited
out

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Types of Partnerships

Classification on the basis of duration

Partnership at will Particular partnership

Exists at the will of the partners Formed to accomplish a particular project

Terminated when any partner gives a notice of Dissolved automatically when the project is
withdrawal completed or time duration is expired

Classification on the basis of liability

General partnership Limited partnership

Unlimited and joint liability of partners Liability of at least one partner is unlimited,
whereas the other partners may have limited
liability

Partners enjoy the right to participate in Limited partners do not enjoy the right to
management, and their acts are binding on each participate in management, and their acts are not
other and on the firm binding on other partners and on the firm

Registration is optional Registration is compulsory

Partnership deed
The document containing the terms and conditions of the partnership agreement is called a partnership
deed. A partnership deed contains the following:

 Name of the firm

 Nature 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 drawings
 Procedure for dissolution of the firm
 Preparation of accounts and their auditing
 Method of solving disputes

Registration
Registration for a partnership firm is not necessary. However, firms still voluntarily apply for registration.
This is because it is a definite proof of the firm’s existence. If a firm does not get itself registered, then it
can lose out on many benefits. In addition, some of the serious consequences faced because of non-
registration are

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 Inability to file a suit by the partner of an unregistered firm against another firm.
 Inability to file a suit against a third party for the recovery of claims. However, suits can be filed
against a non-registered firm by a registered firm for their claims.
 Inability to file a suit against any co-partners.

Procedure of registration of firms

Step 1: Application is to be submitted to the Registrar of firms. The application should include
o Name of the firm
o Location of the firm
o Name of other places where the firm carries out business
o Joining date of each partner
o Name and addresses of the partners
o Duration of the partnership
Step 2: Fee is to be deposited to the Registrar of firms.
Step 3: Certificate of registration is issued to the firm after taking approval.

Cooperative Society

The Indian Cooperative Societies Act, 1912, defines a cooperative organisation ‘as a society which has its
objectives for the promotion of economic interests of its members in accordance with the cooperative
principles’. In simpler words, it is an organisation wherein people voluntarily form an association for
mutual help.

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Features of a Cooperative Society

1) Voluntary association: Anyone having a similar/common interest is allowed to join this association
irrespective of their religion, caste or gender. A person can join the society according to his
requirement and may leave it in the same manner.
2) Legal status: Registration of the society is compulsory, thereby giving it a status of a separate legal
identity. It can enter contracts and has the right to sue others or can be sued by others.
3) Limited liability: The liability of the members is limited to the amount of capital invested by them.
4) Democratic and secular control: It follows the principle of ‘one man, one vote’, thereby maintaining
equality among its members. Also, the members of a particular religion cannot dominate the affairs of
the society.
5) Service motive: A cooperative society is a voluntary association of persons who have come together
and work together for the welfare of its members. It focuses on providing service to its members and
not on earning profits.
6) Equal voting rights: The principle of one man, one vote is followed in a cooperative society. This
right is equally provided to all the members irrespective of the amount of money contributed by them.

Merits of a Cooperative Society

1) Ease of formation: It can be formed by at least ten adult persons having common/similar interests. It
can easily be registered with minimal legal formalities.
2) Limited liability: The liability is restricted to the amount of capital contributed by the members in the
society. Personal assets cannot be used to repay business debts.
3) Stable existence: The continuity of the society is not affected by death, insolvency and mental illness
of its members as it is a separate legal identity.
4) Government support: The cooperative society epitomises the idea of democracy. Thus, it finds
support from the government in the form of low tax rate, subsidies and low interest rates on loans.
5) Equal voting rights: The cooperative society follows the principle of one man, one vote. This right is
equally provided to all the members irrespective of the amount of money contributed by them.

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6) Cost reduction: The focus of the cooperative society is minimising cost, and this is done by
eliminating middlemen. The risk of bad debt is also minimised as producers or customers are
themselves members of the society.

Demerits of a Cooperative Society

1) Limited resources: A cooperative society has limited resources as capital is contributed by people
who have limited funds.
2) Inefficient management: The society is managed by its members who are not professional experts
with technical knowledge. Also, inability to pay high salaries prevents members from recruiting
experts.
3) Government control: As these societies receive support from the government, they have to follow
certain government rules and regulations related to auditing of accounts, submission of accounts and
so forth.
4) Differences of opinion: In the society, disputes and conflicts among members take place because
they belong to different sections of society, and sometimes, they have a difference of opinion.
5) Lack of secrecy: Open discussion takes place in the meetings of a cooperative society. Due to which
it becomes difficult to maintain secrecy regarding the operations of a cooperative society.
6) Lack of motivation: Members of a cooperative society do not get any motivation or incentive for
working efficiently as efforts are not equal to the efforts put in by them.

Types of Cooperative Societies

1) Consumer Cooperative Societies protect the interests of consumers by eliminating middlemen.
These societies purchase the product in bulk from wholesalers and sell directly to members at
reasonable rates.
2) Producers Cooperative Societies procure raw materials and other inputs at low costs and supply
them to small producers. These are established to protect the interest of small producers.
3) Marketing Cooperative Societies help small producers who find it difficult to sell their products at
profitable prices. Thus, they collect the output of producers and sell them at the best price possible.
This helps in improving the bargaining power and competitive position of their members.
4) Farmers Cooperative Societies are formed by small farmers to take advantage of large-scale
mechanised farming. They help in providing better and advanced facilities to farmers at low prices.
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5) Credit Cooperative Societies help farmers who cannot arrange for loans or credit. These societies
provide financial help to their members. They protect members from the exploitation of lenders
charging a higher rate of interest.
6) Cooperative Housing Societies provide residential accommodation to their members. They help
people to construct houses at reasonable rates.

Joint Stock Company

Professor Haney defined a joint stock company as a voluntary association of individuals for profit, having
a capital divided into transferable shares, the ownership of which is the condition of membership.

Features of a Joint Stock Company

1) Artificial person: A company is called an artificial person. This is because though it has its legal
identity—rights, liabilities and functions, it is not a human being. Also, it is a person existing in the
eyes of the law but is dependent on the Board of Directors and other members to get its work done.
2) Perpetual succession: A company is not influenced by the death, insolvency or retirement of its
members. A company is created by law; thus, it can only be ended by law. The company ceases to
exist only when the procedure of its closing called ‘winding up’ is completed.
3) Separate legal identity: A company has a separate legal entity different from its members. The
assets and liabilities of a company are different from those of its owners.
4) Formation: Forming a company is a complicated process involving many formalities and paper work.
Registration is also mandatory according to the Indian Companies Act, 1956.
5) Separation of ownership and control: In a company, there is separation of ownership and
management. Shareholders are owners, while the Board of Directors manages the organisation.
These directors appoint the top management officials who in turn are accountable to the shareholders
of the company.
6) Common seal: It is an official signature of the company. Because a company is an artificial entity, it
acts through its Board of Directors and other officials. The document through which the company gets
into an agreement needs to have a common seal; otherwise, it would not be legally binding on the
company.
7) Liability: Members of the company have limited liability. They are liable for the amount of capital
invested by them.
8) Risk bearing: All the shareholders bear the risk of losses in a company. They contribute to the
payment of debts according to their shares in the company’s capital.

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Merits of a Joint Stock Company

1) Limited liability: The liability of members of the company is limited which is restricted to the amount
of capital contributed by the members in the company. Personal assets of members cannot be used to
repay business debts.
2) Transfer of ownership: In case of a public limited company, the shares of the company can easily be
transferred, which makes it a good investment option.
3) Continuity: Death, insolvency or retirement of the company’s members does not affect the continuity
of a company as it is a separate legal identity.
4) Growth and expansion: There is a scope of greater growth and expansion in the company as it has
large financial resources. Also, investors are willing to invest in a company because of its positive
features such as limited liability, transferability of shares and high profits.
5) Efficient management: The management of a company is efficient in the sense that a company hires
efficient people and specialists for job positions to increase the profitability of the company.
6) Public confidence: A company has to legally publish its accounts and records leading to public
confidence in the company.

Demerits of a Joint Stock Company

1) Complicated formation: The formation of the company comprises many lengthy, complex and time-
consuming legal formalities.
2) Lack of secrecy: Because a company is legally required to publish its accounts and records in public,
it becomes difficult for the company to maintain secrecy regarding its operations.
3) Lack of motivation: Ownership and management are separated in the company. This leads to lack of
motivation for managers to perform effectively and efficiently as they do not get any share in the
increased profits.

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4) Many regulations: The company has to go through various regulations and legal formalities such as
auditing, voting, reports filing and obtaining various certificates. This results in wastage of time, effort
and money.
5) Delay in decision making: A proper hierarchical structure is followed in a company starting from the
Board of Directors followed by top management, middle management and lower management. Thus,
decision making and its implementation is delayed as information has to be passed to different
channels.
6) Oligarchic management: A company has a democratic set-up which exists only on paper. This is
because all the decisions of the company are not taken by shareholders (who are spread all over the
country) but are taken by directors keeping the shareholders’ personal interests in mind.
7) Conflict of interest: There may be conflict of interest among the stakeholders of the company. For
example, shareholders demand higher dividends, employees demand higher salaries and debenture
holders demand higher interest.

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Types of Companies

Basis Private Company Public Company

Number of members Minimum: 2 members Minimum: 7 members

Maximum: 50 members Maximum: No limit

Number of directors 2 directors 3 directors

Invitation to general public General public is not invited for General public is invited
subscription subscription

Transfer of shares Restricted Non-restricted

Maintaining index of members No compulsion Mandatory

Minimum paid-up capital Rs 1 lakh Rs 5 lakh

Legal formalities Exempt Present

Name Necessary to use Private Necessary to use Public

Limited after its name Limited after its name

Privileges available to a private company over a public company

 Number of members required: The number of members required for the formation of a private
company is two, while it is seven for a public company.
 Prospectus requirement: A private company does not require to issue a prospectus as the public is
not invited for capital subscription.
 Allotment of shares: Shares can be allotted in a private company even if the minimum subscription
has not been received.
 Number of directors required: A private firm requires at least two directors, but a public company
needs a minimum of three directors.
 Commencement of business: A business can be started by a private company as soon as it
receives its certificate of incorporation. A public company, on the other hand, needs a certificate
of commencement for starting the business.
 Index of members: There is no compulsion to maintain the index of members for the private
company. On the contrary, it is mandatory to maintain an index of members for a public company.
 Issuance of loans to directors: For a private company, loans can be issued to the directors without
prior permission of the government. On the other hand, for a public company, loans can be issued to
the directors only after taking the permission of the government.

Factors to be Considered while Choosing Form of Business Organisation

1) Cost and ease of formation: The most inexpensive way of starting a business is sole proprietorship.
It has minimal legal formalities. For a partnership, the cost of setting up is low along with less legal
formalities because of a limited scale of operations. However, forming a company is an expensive and
lengthy process.
2) Liability: There is unlimited liability in case of sole proprietorship and partnership firms. Under the JHF
business, only the karta has unlimited liability. There is limited liability for the cooperative society and a
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company. Hence, the company form of business organisation is the best as the risk is less for this
form.
3) Continuity: In sole proprietorship, continuity depends on the people and the events which take place
such as death and insolvency. However, the mentioned factors do not affect the continuity of the other
forms of business.
4) Management efficiency: For sole proprietorship, there is a single owner who performs all the
functions of a manager. Hence, he cannot be an expert in all areas. On the other hand, professional
experts are hired in a company.
5) Capital: It is one of the important factors which help in determining the choice of the organisation. A
sole proprietorship form of business requires minimum investment/capital. If one has adequate funds,
then he can opt for a partnership form of business. However, huge financial resources are required for
the company.
6) Control: If one is interested in having the decision-making power in his/her hands, then a sole
proprietorship would be preferred. However, if the owners are interested in sharing control for effective
decision making, then a partnership form of business is better. In a company form of business, owners
have to hire professional experts to manage the affairs of the company. Here, the management is
completely separate from the ownership.
7) Nature of business: The type of business one wants to conduct is the most important factor in
determining the form of business. If one wants to have direct personal contact with customers, then a
sole proprietorship would be the best form. If one is willing to set up a large manufacturing unit, then a
company form of business would be preferred. However, for providing professional services, a
partnership form of business would need to be chosen.

Factors to be Considered while Choosing Form of Business Organisation

Factor Most advantageous Least advantageous

Cost and ease of formation Sole proprietorship Company

Liability Company Sole proprietorship

Continuity Company Sole proprietorship

Management efficiency Company Sole proprietorship

Capital Company Sole proprietorship

Control Complete and independent control required for sole proprietorship

Control can be shared for a partnership or company

Nature of business Business requires personal attention and direct contact for sole
proprietorship

Services of professional nature in a partnership

Services for welfare in a cooperative society

Heavy investment required for a company

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Comparison among forms of organisation

Basis Sole Partnership JHF business Cooperative Company

proprietorship society

Formation Easiest Easy Easy formation - Compulsory Lengthy &

formation - formation - exempted from registration expensive
registration not optional registration formation -
required registration compulsory
registration
Members One owner Minimum - 2 Minimum - 2 Minimum - 10 Pvt. Co. Min - 2
Maximum - 20 adult members adult Public Co. Min - 2
(Banking - 10) Maximum - no members Pvt. Co. Max - 50
limit Maximum - no Public Co. Max -
limit no limit

Capital
Limited Limited but Ancestral Limited Large
more than property
sole
proprietorship
Karta - Unlimited
Liability Unlimited Unlimited Limited - Other Limited Limited
members

Control All decisions Decisions Karta takes all Managing Separation

taken by owner taken by all decisions committee between
partners takes all the ownership and
decisions management

Continuity Unstable More stable Stable Stable Stable

Separate No No Yes Yes Yes

legal
existence

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