Q-2 what are the different forms of business organization?

Discuss merits and

demerits of each of them.
The three main forms of business organisations are:
(i) Sole proprietorship
(ii) Partnership
(iii) Company/Corporate
The detailed understanding of each of the above is elucidated below:
(i) Sole Proprietorship:
In simple terms sole proprietorship means one man business. When a single individual starts a business,
it is called sole proprietorship. He is the whole and sole person running the business. Individual grocery
shops, hawkers, individual consultants, etc. would come under this category. This is one of the oldest and
simplest form of business organization.
The key advantages of this form are:
(a) It can be formed easily as only a single person is involved.
(b) The regulatory compliances required are few when compared to other forms.
(d) Decision making would be faster as it is a one man show.
The major disadvantages of sole proprietorship are:
(a) Business is limited to the life of the individual and continuity of the same would depend on the offspring
or any other person, if interested in taking over it.
(b) Liability of the person is unlimited. This means that if the business incurs losses, then the sole
proprietor will have to make it good through his personal money/assets.
(c) Not suitable for large business projects. Large business projects would not only require huge chunks of
capital, but also need certainty and continuity as they would have large gestation periods. This form will
not be suitable to meet these requirements. In addition unlimited liability would discourage any individual
to make huge investments.
(ii) Partnership:
When a group of individuals get together to start a business, it is called a partnership. All of them may
bring in capital or some may bring in capital and others may manage the affairs. The profits of the business
would be shared amongst the individuals. The terms for starting,runnning,and dissolution of the business
would all be agreed to, at the outset itself. They include the capital contribution, profit sharing, who would
be working and/or sleeping partner, mode of sharing on dissolution and the like. The agreement could be
oral or written and registered. This is form is popular in service oriented organisations, like legal services,
accounting etc.
The advantages of partnership are:
(a) They can be formed easily. Interested people can come together and agree on the terms.
(b) Legal compliances are slightly higher than sole proprietorship but still less complicated than
corporates.
(c) This form enables to bring together capital and competence in a simple manner. A skilled person
without capital and a person having resources and interested in investing in the skill can come together
to start a partnership.
The disadvantages of partnership are:
(a) Life of the business depends on the consensus of the partners. If agreements are oral and are not
written/registered it could cause disputes and dissolution.
(b)General partnership comes with unlimited liability to the partners. Like sole proprietor, the partner(s)
are personally liable to make good the losses incurred in the business and the amounts of defaulting
partner(s). There is however,now provision in the law to form limited liability partnerships.
(c ) Transfer of ownership is cumbersome. Even if agreement exists, calculation for settling the out-going
partners' share and valuation of incoming partners' contribution is laborious.
( d) Not suitable for large capital projects as they need long term sustainability in ownership and huge
capital infusions.
(iii) Corporation:
Corporation can be understood as a legal entity formed and registered under a statue.The initial amount
on formation is contributed by the promoters. The contribution to capital is termed as share. Corporation
will have a name and existence separate from the people involved in forming it. Various other documents
need to be filed at the time of formation.They include:
--Letter conforming availability of name from Registrar of companies.
--The Memorandum of Association which defines the name, location of the entity, main objectives,
capital. and the initial subscribers.
--The Articles of Association, which is the charter that defines the rules which it will follow during its
existence. They are mainly procedures which will be adopted in matters like conduct of meetings, transfer
of shares etc.
The documentation and authority to submit could vary from country to country. However only the main
documentation is mentioned above.
This form of organisation has emerged mainly to address the limitations of the earlier forms of
organisation mentioned above ie., continuity , stability, and capacity to garner large capital.
The advantages of Corporate form of organisation is as under:
(a) The corporate has a separate legal entity. This means that law treats the company as separate from
the people who formed it or who have contributed capital to it. Anything bought in the name of the
company is the property of the company and not of the people who contributed to the captial(share
holders) or running it(directors) or anybody associated with it. Similary any loan taken in the name of the
company is the liability of the company and the shareholders or directors are no way liable if the company
defaults.
(b) Since the company exists as separate person in the eyes of law, its life is not limited to the life of its
members/shareholders.
(c ) Separation of ownership from management: The people who own the capital (share holders) elect a
few to run the company (directors). This helps to bring in key talent and enable effective functioning.
(d) The liability of the shareholders who contribute the capital is limited to the amount of capital
contributed and they are not personally liable for the loans taken by the company.
(e) Transfer of ownership is easy as it involves only transfer of shares.
(f) Due to its stability and size, has the capacity to garner large capital and most suitable to undertake
large projects.
The disadvantages of this type of organisation is as follows:
(a) Forming a company is comparitively more complex than sole proprietorship and partnership
(b) The amount of legal compliances are enormous for a company.
(c ) Shareholders who are the contributors of capital donot interfere in the day-to-day affairs of the
company. Though there are laws, directors find ways to use the company for furtherance of their interests
which can result in lesser/negative wealth creation for shareholders.
Generally the business starts as sole proprietorship which later expands into the higher forms as per need
and scale. With cross country trade, hybrids have also come into existence.