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FORMS OF BUSINESS ORGANISATION

Kishore C. Mishra Asst. Prof.

Proprietorship Partnership Co-operatives

Introduction.

There are three types of business organization:


Proprietorship Partnership Corporation

Proprietorship
DEFINITIONS:

A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk. It is also known as individual proprietorship or single entrepreneurship. Any person who carries on a business exclusively on his own account and at his own risk is known as a sole trade. The sole trader manages the business himself, bears all risks alone and gets all profits by virtue of the nature of this form or organization. The individual may run the business alone with the help of his own skill and intelligence or may employ a few employees for that purpose.

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FORMATION: No Formalities or Legal Documentation; May be Implied from Conduct or Actions

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SALIENT FEATURES:

Single Ownership : A sole trading concern is owned by one individual. It is run entirely at his risk of loss. The sole trader provides both capital and management to the business. Common Identity : A sole tradership concern has no separate legal entity independent of the owner. The owner and the business concern are one and the same. The sole trader owns everything the business owns and he owes everything the business owes. Capital : In sole tradership, the capital is employed by the owner himself from his personal resources. He may also borrow money from his friends and relatives, if he cannot depend solely on his personal resources.

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SALIENT FEATURES:

Unlimited Liability : The liability of the proprietor for the debts of the business is unlimited. The creditors have the right to recover their dues even from the personal property of the proprietor in case the business assets are not sufficient to pay their debts. One Man Control : Sole tradership is basically one man show. The sole trader provides management to the business. He takes all the decisions, procures material resources, employs workers and directs and controls the affairs of the enterprise. He is not required to consult anyone else in taking any decision. Though the sole trader may delegate some of this authority to his assistants, but the ultimate authority to manage and control rests with him. Profits and Losses : The surplus arising in the business of the sole trader entirely belong to him and similarly all the business losses and risks are to be borne by him alone.

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ADVANTAGES:

Ease of Formation : The establishment of a sole tradership concern is easier as compared to other forms of organization. A person with a small amount of capital can start the business without undergoing much legal formalities. Procurement of license may be a necessity to deal in particular commodities like drugs, liquor etc. Flexibility : The sole trader is free to change the nature and scope of his business operations, whenever the situation demands. The flexibility is available because the sole trader is the sole owner of the business. Quick Decisions : Sole proprietorship concern facilitates quick decision-making and prompt action. Exclusive control and direction of the proprietor result in increased efficiency, production of quality products and reduction of costs. Since the owner is the Supreme Judge in all matters pertaining to his business, he can take quick decisions and implement them without any delay.

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ADVANTAGES:

Secrecy : It is easy to preserve secrecy in business. The important clues of business developed by the sole trader by his tact, foresight and skill can be kept as a closely guarded secret. In this form, there is also no need to disclose accounts or any other material fact to the public. Personal Touch : A sole trader can maintain personal contacts with his customers. Direct contacts will enable the proprietor to know the nature of his customers and their tastes, like and dislikes. Close personal touch with the customers with enhance the reputation of the firm. Direct Motivation : In this form of business organization, the proprietor gets all the profits and bears all the risks and losses. Thus, there is a direct relationship between effort and reward. This will motivate the owner of the business.

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ADVANTAGES:

Independent Way of Life : Sole proprietorship offers an independent way of life for people who have necessary skills, but do not wish to serve others. This provides an excellent opportunity for self-employment to persons of small means with personal skills. Minimum government Regulations : The sole tradership firm is subject to the minimum control of Government regulations. The sole trader has to comply with income tax, sales tax and labour laws etc. But it is not subject to special legislations as in case of companies and partnership firms. There is no need of registration. Moreover dissolution of the firm is also very easy.

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DISADVANTAGES:

Limited Capital : The financial resources which a sole trader can raise are limited. He can either depend on his personal resources or on his borrowing capacity. The borrowing capacity depends on his assets and credit worthiness. The limitation of financial resources may put hurdles in the expansion of the business. Limited Managerial Skill : All the managerial functions which are essential for the successful operation of a business are performed by the sole trader. Thus, benefits of specialization are not available. Moreover, the individual may not be able to perform all the managerial functions because of limitation of time, energy, skills and imagination. Because of limited scale of operation and financial resources, it may not be feasible to secure the services of experts in various fields like production, purchasing and marketing.

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DISADVANTAGES:

Unlimited Liability : The liability of the sole trader is unlimited in the sense that the business creditors can recover their debts even from the personal assets of the proprietor. The proprietor may be completely ruined in case of failure of his business. This factor puts a ceiling on the growth and expansion of his business.

Uncertainty : There is wide uncertainty about the continuity of the business because the sole trader operates on a small scale and his activities are less diversified. The owner may be compelled to close his business in which he concentrates. Moreover, death and insanity of the proprietor also lead to closure of business. In short, business sinks and swims with the proprietor. Limited Opportunities : Since the scale of operations is relatively small, the sole trader cannot avail the benefits of all business opportunities. Since there is one and the same persons who provides capital and management, the sole trader may not be ready to take various risks which is essential for the growth of any business. Moreover, because of small scale operations, the trader is not able to reap the economies of large scale production, purchasing and marketing.

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SUITABILITY OF FORMATION:
The sole tradership form of organization is highly suitable in the following cases :

Small business requiring modest capital and limited managerial talent as in case of retail stores. In those lines of business where there is a need for greater personal attention to customers as in tailoring, professional services like medicine and law. In those lines of business where the demand of products is often influenced by seasonal trends and fashions. In the production of un-standardized goods like embroidery or artistic things. Where the individual has certain skills with the help of which he wants to earn his livelihood independently. For catering to the demands of local market like perishable products, laundries, grocery stores and confectioneries.

Partnership

As defined by J.L. Hanson, "a partnership is a form of business organization in which two or more persons up to a maximum of twenty join together to undertake some form of business activity". The Indian Partnership Act, I932 defined partnership as "the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all". The Uniform Partnership Act of the USA defines a partnership "as an association of two or more persons to carry on as coowners a business for profit". Based on the above definitions, we can state that partnership is an association of two or more persons who have joined together to share the profits of business carried on by all or any of them acting for all.

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The persons who own the partnership business are individually called 'partners' and collectively known as the 'firm or 'partnership firm'. On an agreed basis, partners contribute to capital and share the responsibility of running the business. However, in some cases one partner may provide the whole or major portion of the capital and others contribute technical and managerial skills with or without some capital.

All such terms and conditions of partnership are usually mentioned in the partnership agreement.

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FORMATION: Written

or
or

Oral Agreement
May be Implied from Conduct or Actions

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SALIENT FEATURES:

Plurality of persons: To form a partnership firm, there should-be at least two persons. The maximum limit on the number of persons is ten for banking business and twenty for other types of business. Contractual relationship: Partnership is created by an agreement between persons called 'partners'. In other words, a person can become a partner only on the basis of a contract. This contract could be oral, written or implied.

Profit sharing: There must be an agreement among the partners to share the profits and losses of the business of the partnership firm. This is one of the basic elements of partnership. If two or more persons jointly own some property and share its income, it is not regarded as partnership.

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SALIENT FEATURES:

Existence of business: The purpose of the agreement among the partners is to do some lawful business and share profits. If the purpose is something other than business, it should not be treated as partnership. For example, if the purpose is to carry some charitable work, it will not be treated as partnership. Principal-agent relationship: The business of the firm may be carried on by all or one or more partners acting for all the partners. Every partner is entitled to take part in the operations of the firm. In dealing with other parties, each partner is entitled to represent the firm and other partners in respect of the business of the firm. All partners are bound by his acts done in the ordinary course of business and in firm's name. In this sense a partner is agent of the firm and the other partners.

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SALIENT FEATURES:

Unlimited liability: In respect of business debts, each partner has unlimited liability. This means that if the assets of the firms are not sufficient to meet the obligations of the firm, the partners have to pay from their private assets. The creditors can even realize the whole of their dues from one of the partners. Thus, all the partners are jointly and severally liable for all business debts and obligations. Good faith and honesty: A partnership agreement rests on good faith among the partners. The partners must be honest to each other and trust each other. They must disclose every information about the business and present true accounts to one another. Restriction on transfer of share: A partner cannot transfer his share to an outsider without the consent of all the other partners.

Classification of Partners

Based on the extent of participation in the functioning of the business,


we can classify partners into: la) active partners, and (b) sleeping partners. a) Active partner: If a partner takes an active part in the management of the business, we call him as active partner. He is also known as a 'working partner'.

b) Sleeping partner: If the partner is not actively associated with the working of the partnership firm, we call him a sleeping partner. A sleeping business partner simply invests his capital. He does not participate in the functioning of the firm. Such a partner is also known as a 'dormant partner'.

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Based on the sharing of profits, partners may be classified into: (a)


nominal partners, and (b) partner in profits.
a) Nominal partner: A partner who just lends his name to the partnership is known as a nominal partner. He neither invests his capital nor participates in the day-today working and management of the firm. Such partners are not entitled to a share of profits, but they are liable to other parties for all the acts of the firm. b) Partner in profits: A partner who shares the profits of the business without being liable for losses is called a partner in profits. As a rule, he will not take any part in the management of the business. This is applicable to a minor who is admitted to the benefits of the firm.

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Based on the behaviour and conduct exhibited, the partners may be


divided into: a) partner by estoppels, and (b) partner by holding out.
a) Partner by estoppels: A person who behaves in the public in such a fashion as to give an impression that he is one of the partners in a partnership firm is called a partner by estoppels. Such partners are not entitled to profits but are fully liable as regards the firms obligations. b) Partners by holding out: If a particular partner of a firm represents that another person is also a partner of the firm, and if such a person does not disclaim the partnership relationship even after coming to know about it, such person is called a 'partner by holding out'. Such partners are not entitled to profits but are liable as regards the obligations of the firm.

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Based on liabilities also, partners may be classified into two categories: (a) limited
partners. and (b) general partners.

a) Limited partner: The liability of such a partner is limited to the extent of the capital contributed by him. He is not entitled to take part in the management of the business, but he can advise the other general members. His acts do not bind the firm. He has right to inspect the books of the firm for his information. Such partners are also called 'special partners'. b) General partner: He is also called 'unlimited partner. His liability is unlimited and he is entitled to participate in the management of the business. Every partner who is not a limited partner is treated as a general partner.

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ADVANTAGES:

Easy formation: Although the formation of a partnership firm is not as easy as the sole proprietorship, but it is much less difficult as compared to a company. Tile partners agree to do business together and draw up and sign the partnership agreement. After that there are no complex government laws regulating the establishment of the partnership.
More capital available: Unlike sole proprietorship, there are two or more partners in partnership firms. So a partnership firm does not have to rely on a single individual as the source or its funds. The added financial strength of the partners increases the borrowing capacity of the firm. Flexibility: Like Sole proprietorship, tlie partnership business is also owned and run by the partners themselves. They can easily appreciate and quickly respond to the changing conditions.

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ADVANTAGES:

Secrecy: In partnership firms, some secrecy can be maintained because there is no obligation to publish accounts of the firm. Keen interest: Since partners are liable to losses and risks of the business, they take keen interest in the affairs of' the business. Protection: Due to the rule of unanimity in fundamental matters, the rights of all partners are fully protected If a partner is dissatisfied with the working of the firn, he can ask for dissolution of the firm and withdraw from the business. Checks ant1 controls over careless decisions: Since the partnership is run on collective basis and all partners participate in major decisions. there is lesser scope for reckless and hasty decisions. Diffusion of risk: The losses of the firm will be shared by all the partners. Hence, the share of loss in the case of each partner will be less than that sustained in sole proprietorship.

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ADVANTAGES:

Checks ant1 controls over careless decisions: Since the partnership is run on collective basis and all partners participate in major decisions. there is lesser scope for reckless and hasty decisions.
More diverse-skills and expertise: The partnership involves more people in decision making because there are more owners. An ideal partnership brings together partners who complement each other, not partners who have the same background and experience. One partner might be a specialist in manufacturing, another in marketing, and the third partner might be an accountant. Combined judgment of all these partners often leads to better decisions than otherwise. Diffusion of risk: The losses of the firm will be shared by all the partners. Hence, the share of loss in the case of each partner will be less than that sustained in sole proprietorship.

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DISADVANTAGES:

Limited capital: Since there is a limit of' maximum partners (20 in non-banking firms and 10 in banking firms), the capital raising capacity of the partnership firms is limited as compared to a joint stock company.

Unlimited liability: The most important drawback of a partnership Sirm is that the liability of the partners is unlimited.
No public confidence: Since the accounts are not published and publicized, the firm may not be able to command confidence of the public. Non-transferability of interest: No partner can transfer his interest in a firm without the consent of other partners.

Co-operatives

The word co-operative means living & working together. A co-operative organization is a voluntary association of persons joining together on equal basis for the fulfillment of their economic & other interest. It is generally formed and registered under the co-operative societies act ,1912. The uniqueness of co-operative lies in its ethical approach-service and sacrifice. Today there are a large number of credit societies, retail stores , building & marketing societies.

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SALIENT FEATURES:

Voluntary Association-A co-op organization is a voluntary association of people belonging to a homogeneous group . People can join on their own interests. Open Membership-There is no limit to the number of members of a co-op organization.
Service Motive-It is established primarily for rendering service to the society. Capital-The capital of the co-op is contributed by its members in the form of shares . One can contribute Rs.10 to the share capital & be a member.

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Return on Capital-The return on capital subscribed by the members is not more than 12% per annum . The surplus of profits is distributed as dividend. Distribution of Surplus- The total surplus earned by a co-op is not distributed among its members.1/4th of its profit is transferred to general reserves.10% is utilized for general welfare. Separate legal entity- Like a company , a co-op also enjoys a separate legal entity. Democratic Functioning- A co-op is managed by a managing committee elected by members on the basis of one member one vote.

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ADVANTAGES:

Easy formation- Being a voluntary association , it is easy to form and it does not require legal formalities. Democratic Functioning- A co-op is managed by a managing committee elected by members on the basis of one member one vote. Limited liabilities- The liability of the members of a co-op is limited to the capital contributed by him. Continuity- In a co-op the members come and go but the organization remains unaffected by the death or insolvency of a member. Mutual benefit association- A co-op is formed as a no profit no loss basis . It promotes feeling of co-operation & mutual help among the members. Government Assistance- A govt. is always prepared to extend number of grants , loans & financial assistance to make them function efficiently . They also get exemptions from income tax u/s 80.

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DISADVANTAGES:

Limited Capital- The co-op cannot raise huge capital because the membership is confined to a particular region & also due to the principle of one man one vote.

Plenty of state regulation- Under the existing Law the co-op is subjected to a no. of regulations from the state & central Govt.
Lack of managerial Talents- Co-op generally suffer from limited managerial talent because they depends on their own members to manage the day to day activities. Misuse of Funds- The Co-op credit society may advance loans to the members without sufficient security may lead to bad debts in future. Differences & Bickering among members- There are often differences & quarrels among the members on petty matters. It affects the autonomy of Co-ops.

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TYPES OF CO-OPERATIVES:
A. CREDIT CO-OPERATIVE-The Rural credit co-op society started in Germany in 19th century . Its main objective was to provide agricultural finance . It consisted of three tier model-base (primary society), middle (central co-op bank), top (apex bank). Ex:- In India for agricultural loan at the top there is NABARD (National Bank for Agricultural & Rural Development), middle there is state co-op and at the bottom there is urban co-op.

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TYPES OF CO-OPERATIVES:
B. CONSUMERS CO-OPERATIVE- It started in 1844 in England . The main objective was to serve members by purchasing & selling consumer goods at a cheaper price. Main features:
*membership is voluntary *One man one vote *capital is contributed by members *managed by elected office bearers of society *Earning profit with service motive

Ex:-Amul , Omfed in Orissa , Mother dairy

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TYPES OF CO-OPERATIVES:
C. PRODUCERS CO-OPERATIVE- It 1st started in France in 19th century . But these co-op could not get popularity as it lacked technical & managerial skills . It had two objectives. Social-safeguarding the interest of poorer section against exploitation by capitalist. Economic-Promoting small producers with better bargaining power.

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ORGANISATION STRUCTURE OF A COOPERATIVE SOCIETY


SHARE HOLDERS

MEMBERS

BOARD OF DIRECTORS

MANAGERS

CO-OPERATIVE EMPLOYEES

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