FORMS OF BUSINESS ORGANISATIONS

SOLE PROPRIETORSHIP
 Owned, managed and controlled by an individual who is the recipient of all profits and
bearer of all risks
 Common in areas of personalized services
 Most suitable for small businesses

Features

 Formation and closure –

 Liability –
 Sole risk bearer and profit recipient –
 Control –
 No separate entity –
 Lack of business continuity –

Merits

 Quick decision making –

 Confidentiality of information –
 Direct incentive –
 Sense of accomplishment –
 Ease of formation and closure –

Limitations

 Limited resources –
 Limited life of a business concern –
 Unlimited liability –
 Limited managerial ability –

JOINT HINDU FAMILY BUSINESS

 Owned and carried on by members of Hindu Undivided Family (HUF), governed by Hindu
Law
 Basis of membership is birth
 Controlled by head of family, karta
 Owned by all members, coparceners

Features

 Formation –
 Liability –
 Control –
 Continuity –
 Minor members –
PARTNERSHIP
 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
  Caters to needs of greater capital investment, varied skills and sharing of risks

Features

 Formation –
 Liability –
 Risk of bearing –
 Decision making and control –
 Continuity –
 Number of partners –
 Mutual agency –

Merits

 Ease of formation & closure –

 Balanced decision making –
 More funds –
 Sharing of risks –
 Secrecy

Limitations

 Unlimited liability –
 Limited resources –
 Possibility of conflicts –
 Lack of continuity –
 Lack of public confidence –

Types of partners

Capital Participation in Share in

Type Liability
contribution management profit/loss
Active partner ✔ ✔ ✔ ∞
Sleeping partner ✔ ✘ ✔ ∞
Secret partner ✔ ✔ ✔ ∞
Nominal partner ✘ ✘ ✘ ∞
Partner by estoppel ✘ ✘ ✘ ∞

 Active partners take actual part in carrying out business of the firm.
 Sleeping/dormant partners are similar to active partners but do not take part in business
activities.
 Secret partners are similar to active partners but their association to the firm is unknown to
public.
 Nominal partners allow use of their name by a firm but do not participate otherwise.
 Partners by estoppel give the impression to others that they are partners of the firm
through their behaviour or actions.
 All partners have unlimited liability towards the creditors, regardless.

Types of partnerships
  Based on duration

Partnership at will Particular partnership

Exists at will of partners, continuing for however Exists for accomplishment of a particular project
long as the partners want to be carried out within a specific time period
Terminates when a partner gives notice of Dissolves when purpose of formation is fulfilled,
withdrawal from the partnership or time duration expires

 Based on liability

General partnership Limited partnership

Liability is unlimited and joint
Terminates with death, insolvency, or retirement
of partners
Liability of at least one partner is unlimited while
rest have limited liability
Does not terminate with death, insolvency, or
retirement of partners

Registration is optional Registration is compulsory

Idea of limited partnerships is to attract equity capital from friends and relatives of small-scale
entrepreneurs who were reluctant to help earlier due to the clause of unlimited liability.

Partnership deed

 A written agreement specifying terms and conditions that govern the partnership
 Partnership agreements may be oral or written, though written is advisable as it serves as
physical evidence of conditions agreed upon
 Aspects of partnership deed –
 Name of firm
 Nature and location of business
 Investments by each partner
 Distribution of profits & losses
 Duties and obligations of partners
 Preparation of accounting and auditing
 Method of solving disputes

Registration

 Entering of the firm’s name, along with relevant prescribed particulars in the Register of
firms kept with the Registrar of Firms
 It serves as conclusive proof of existence of firm
 Optional but advisable to register due to its many benefits

Benefits of registration

 Partner can file a suit against firm or other partners

 Firm can file a suit against third parties
 Firm can file a suit against partners
 Procedure for registration

 Submission of application of prescribed form to Registrar of firms which includes

 Name of firm
 Location of firm
 Names of other places firm carries on business
 Date when each partner joined the firm
 Names and addresses of partners
 Duration of partnership
 Deposit of required fees with Registrar of firms
 Upon approving, Registrar makes an entry in register and issues a certificate of
registration

COOPERATIVE SOCIETY
 Voluntary association of persons who join together with the motive of welfare of the
members, to protect economic interest from possible exploitation by middlemen
 Registration is compulsory under Cooperative Societies Act, 1912, providing a distinct legal
identity
 Requires consent of a minimum of ten adults to be formed
 Capital is raised form members through issue of shares

Features

 Voluntary membership –
 Legal status –
 Limited liability –
 Control –
 Service motive –

Merits

 Equality in voting status –

 Limited liability –
 Stable existence –
 Economy in operations –
 Support from government –
 Ease of formation –

Limitations

 Limited resources –
 Inefficiency in management –
 Lack of secrecy –
 Government control –
 Differences of opinion –

Types of cooperative societies

Types Members Aim Action

 Consumers wanting
Consumer
reasonably priced
s
quality products
Bulk purchases of goods directly
Eliminate middlemen from wholesalers and sells them
to consumers

Small producers Fight against big capitalists and Supply raw materials &
Producers wanting to procure enhance bargaining power of small equipment, and buys their
production inputs producers outputs for sale
Small producers Perform marketing functions
Eliminate middlemen and improve
Marketing wanting to sell at like transportation,
competitive position of members
reasonable prices warehousing etc
Farmers wanting Provide better quality seeds,
Increase productivity through large
Farmers better inputs at fertilizers, machinery, and
scale farming
reasonable cost modern techniques
Those seeking Protect against exploitation of Provide loans out of capital,
Credit
financial help lenders charging high interest rates charging low interest rates
Those with limited Solve housing problems by Construct flats or provide plots
Housing income to construct constructing and providing option so that members can construct
houses at lower cost of instalments houses of their choice

JOINT STOCK COMPANY

 An artificial person having a separate legal identity, perpetual succession, and a common
seal
 Governed by Companies Act, 2013
 Shareholders are the owners who elect the Board of Directors, chief managing body
 Capital is divided into shares which are transferable, except in private companies

Features

 Artificial person –
 Separate legal identity –
 Formation –
 Perpetual succession –
 Control –
 Liability –
 Common seal –
 Risk bearing –

Merits

 Limited liability –
 Transfer of interest –
 Perpetual existence –
 Scope for expansion –
 Professional management –

Limitations

 Complexity in formation –
  Lack of secrecy –
 Impersonal work environment –
 Numerous regulations –
 Delay in decision making –
 Oligarchic management –
 Conflict in interests –

Types of companies

Basis Public company Private company

Minimum – 7 Minimum – 2
Members
Maximum – unlimited Maximum – 200
Minimum number of directors 3 2
Index of numbers Compulsory Not compulsory
Transfer of shares No restriction Restriction on transfer
Invitation to public to
Can invite Cannot invite
subscribe to shares

Advantages of private limited company over a public limited company

 Private company can be formed by just 2 members while public company requires 7
 No need to issue a prospectus as public is not invited to subscribe to its shares
 Allotment of shares is possible without minimum subscription
 Private company requires just 2 directors while public company requires 3. Maximum for
both is 15
 Private company is not required to keep an index of members like public company is

A private company is required to use the word private limited after its name. A private company who
is a subsidiary of a public company is treated as a public company.

CHOICE OF FORM OF BUSINESS ORGANIZATION

Factor Most advantageous Least advantageous

Availability of capital Company Sole proprietorship
Cost of formation Sole proprietorship Company
Ease of formation Sole proprietorship Company
Transfer of ownership Company (except private co.) Sole proprietorship
Managerial skills Company Sole proprietorship
Regulations Sole proprietorship Company
Flexibility Sole proprietorship Company
Continuity Company Sole proprietorship
Liability Company Sole proprietorship

STAGES IN FORMATION OF A COMPANY

Promotion

 Feasibility studies are conducted to determine whether a potential business idea can be
profitable exploited.
 If profitable, promoters may decide to form the company
 Promoters are those who conceive the business idea, decide to form a company, take
necessary steps for the same and assume associated risks

Steps in promotion
 Approval of company’s name from Registrar of Companies
 Signatories to Memorandum of Association are fixed
 Certain professionals are appropriated to assist promoters
 Documents necessary for registration are prepared

Necessary documents

 Memorandum of Association
 Articles of Association
 Consent of proposed directors
 Agreement (if any) with proposed managing or whole-time director
 Statutory declaration

Incorporation

 Application by promoters to Registrar of Companies along with necessary documents and

registration fee
 Registrar issues certificate of incorporation after due scrutiny, which serves as conclusive
evidence of legal existence of company

Capital subscription

 Steps for fundraising from public include –

 SEBI approval
 Copy of prospectus with Registrar of Companies
 Appointment of brokers, bankers, and underwriters
 Ensure minimum subscription
 Application for listing of company’s securities
 Refund/adjust excess application money received
 Issue allotment of shares to successful applicants
 File return to allotment with the Registrar of Companies

As per SEBI, minimum subscription has to be 90% of shares to be issued to public. Private company
raising funds from friends/relatives has to file a statement in lieu of prospectus with ROC at least 3
days before allotment of shares and returns of allotment after completion.

Preliminary contracts are contracts signed by promoters with third parties before incorporation of
company. They are not legally binding on the company. Promoters are personally liable.

Provisional contracts are contracts signed after incorporation but before commencement of
business
 Basis of
Memorandum of Association (MoA) Articles of Association (AoA)
difference
They are rules of internal management,
Objectives Defines objects for which company is formed
indicating how the objectives are to be achieved

Main document of company and is subordinate Subsidiary document and is subordinate to both
Position
to Companies Act MoA and Companies Act

Relationship Defines relationship of company with outsiders Defines relationship of members and company

Acts beyond MoA are invalid and cannot be Acts beyond AoA can be ratified, provided they
Validity
ratified even by unanimous voting don’t violate MoA
Not compulsory for public limited company –
Necessity Compulsory
they may adopt Table F of the Act