CHAPTER-2

Forms Of Business Organization

 INTRODUCTION
The term business organization describes
how businesses are structured and how
their structure helps them meet their
goals.
There are numerous factors like capital
requirements, nature of business, scale of
operation, motives, incentives etc. , which
determine the suitability of a particular
organization to a business.
The various legal forms in which a
particular business can be organized and
managed are called ‘Forms’ of business
organization.
A particular business may be established in
private or public sector. These business can
be established either by single individual or
group of people.
As per there sector and nature of
ownership, different form of business
organization are available, which are as
follow:
1) Sole proprietors
2) Partnership
3) Hindu Undivided Family(HUF)
4) Joint stock company
5) Cooperative society
6) Limited Liability partnership (LLP)
Sole proprietorship
“A business which is owned by an individual and is
not registered as a limited liability company with the
state is known as a sole proprietorship. ”
This popular form of business structure is the easiest
to set up. Sole proprietorships have one owner who
makes all of the business decisions, and there is no
distinction between the business and the owner.
Examples of sole proprietors include small
businesses such as, a local grocery store, a local
clothes store, an artist, freelance writer, IT consultant,
freelance graphic designer, etc.
Characteristic of Sole proprietors
1. Single ownership
2. One-man control
3. No legal entity
4. Unlimited liability
5. No profit-sharing
Advantages:
Total control of the business
No public disclosure required
Easy tax reporting
Low start-up costs
Disadvantages:
Unlimited liability
Limited skills and knowledge
Lack of structure
Difficulty in raising funds
Partnership
A partnership is a kind of business where a
formal agreement between two or more people
is made who agree to be the co-owners,
distribute responsibilities for running an
organization and share the income or losses
that the business generates.
According to J.L.Hauson, “ A partnership is a
for of business or organization in which two or
more person’s up to a maximum of twenty join
together to undertake some form of activity.”
 Partnership Examples:
Few co-branding partnership examples
are listed below:
Spotify and Uber
Levi’s & Pinterest
Maruti Suzuki
Hindustan Petroleum
Characteristics:
Membership
Unlimited liability
Sharing of profit and loss
Lawful business
No transfer of interest without consent
Advantages:
Easy to Start
Flexible Operations
Greater Resources
Reduced Risk Factor
Combined Skills
Disadvantages:
Unlimited liability
Blocking of capital
Lack of public trust
Difficulty in decision making
Mutual differences
Hindu Undivided Family(HUF)
Hindu Undivided Family (HUF) consists
of all persons directly descended from a
common ancestor, and also the wives and
daughters of the male descendants. For
instance, you and your spouse along with
your two children can create an HUF and
get certain relaxation in computation of
taxes.
Characteristics:

Formation of the business

Member’s liability
 Control
Minor Members
Existence of business
Advantages of the HUF
A Hindu
 Undivided family is comprised of family
members running a business. Like any other organisation,
there is scope for disagreements and conflicts. But since
the Karta has absolute power and takes all decisions by
himself.
Just like a company, the existence of a HUF is perpetual.

The death or retirement of one member of even the Karta
will not affect it, and it will continue on.
All power lies with the Karta, the liability of the members

has also been limited to only their share of the property.
This keeps the balance between power and responsibility.
Also since all members of the HUF are relatives and

members of the same family, there is a sense of loyalty and
cooperation. The trust among members is also there and
leads to overall cooperation.
 Disadvantages of the HUF
No outside members other than family members can be
introduced to the HUF. This makes it very difficult to get
additional capital from the market.
While the Karta has all the power he also has the burden
of unlimited liability. This may make him overly cautious
and timid in his business dealings.
Also, the absolute dominance of the Karta overall business
and financial decisions make cause conflict among the
HUF. His decisions and business acumen may be
questioned by other members, and cause issues within the
HUF.
Another issue may be that the Karta may not be the most
qualified person to lead the business. The position is given
to the senior most family member, whether he is the most
qualified or not is not taken into consideration.
Joint stock company
A joint stock company is an organisation which is owned
jointly by all its shareholders. Here, all the stakeholders have a
specific portion of stock owned, usually displayed as a share.
According to prof. Haney, “ joint stock company is a
voluntary association of individuals for profit, having a capital
divided into transferable shares, the ownership of which is the
condition of membership.”

Example of Joint Stock Company

Indian Oil Corporation Ltd.
Tata Motors Ltd.
Reliance Industries Ltd
Characteristics:
 Association of Persons
 Independent Legal Entity
 Limited Liability
 Common Seal
 Perpetual Existence
 Corporate Finance
Disadvantages:
 Difficulty in formation
 Lack of Secrecy
 Delay in Decision Making
 Impersonal Work
Environment
 Conflict in Interests

Advantages:
  Larger Capital
 Limited Liability
 Stability of Existence
 Scope for Expansion
 Transferability of Shares
Classification of joint stock company
On the basis of Incorporation
Chartered companies
Statutory companies
Registered company
On the basis of Liability
Companies Limited by shares
Companies Limited by guarantee
Unlimited Companies
 On the basis of Transferability of
shares
Privet limited company
Public limited company
On the basis of Nationality
Indian company
Foreign company
 On the basis of Incorporation
Registered Company: Any corporation incorporated under the
Companies Act of a particular state or country is called a
registered company.
Examples :Walmart,Toyota
Chartered Company: It is incorporated under the royal
charter duly signed by the king of the state where it is formed.
These companies enjoy special privileges in executing
commercial business operations.
Example: The East India Company
Statutory Company: When the Parliament passes a special act
in a company’s favor, it is called a statutory company. These
companies facilitate public utilities. The act documents
company’s rights, responsibilities, powers, and objectives.
Example: Airport authority of India
 On the basis of Liability
Companies Limited by Shares
Companies limited by shares can be public or private
corporations, however, the liability of shareholders is limited
to the share price only.
If the law finds the company bankrupt, then shareholders
don’t have to worry about covering up the loss of the
company. Such companies end with ‘Pvt. Ltd.’
Companies Limited by Guarantee
Companies limited by guarantee aren’t public entities and
they don’t advertise or issue their shares to the public. They
could be profit-oriented or non-profit organizations.
However, the liability of its members and stakeholders is
limited to the pre-decided percentage of the amount they
have to contribute to cover up the loss. It’s usually a group
of people who establish a company limited by guarantee. 
 Unlimited Companies
Unlimited companies are such organizations
where the liability of stock and share isn’t
limited, in case of liquidation of company or
bankruptcy.
If the company doesn’t pay debt to its creditors,
then shareholders have to cover up the loss. 
 On the basis of transferability of shares

Privet limited company 

The Definition of a private limited company according to
the oxford dictionary is: ‘a type of company, usually small,
that does not issue shares to the public.
Features :
The suffix ‘Pvt. Ltd.’ should be used at the end of company
name.
Maximum number of members can be 50 and minimum is
2(as per companies act 2013)
Not free to transfer their shares.
Cannot invite the public for subscribing its shares
A minimum paid up capital of rupees 1 lac
Required to have Articles of Association, Memorandum of
Association and Certificate of Incorporation.
Public Limited company:
A public limited company is the legal status of
any firm which has offered shares to members
of the general public and in turn owns a limited
amount of its own shares.
A PLCs stock or company share is presented to
the general public and can be purchased or
claimed by any individual, either privately
during the process of the initial public offering
or via trades on the stock exchange market.
 Features:

 The suffix “Limited" is used.

 Minimum paid up capital 5 lac
 No restriction for maximum number of members but it
should be at least 7 members.
 Before starting the business it requires a certificate of
commencement from the Registrar of Companies.
 Shares are open for trading under stock exchange
market
 On the basis of nationality
Indian Company:
It is a company formed and registered under the Companies
Act, 1956. The registered or principal office of the Indian
company, corporation, institution, association or body, in all
cases, should be in India, though it may carry on some
business activities on foreign shores also.
Examples are Patanjali Ayurved Ltd., Dabur India Ltd. and
Himalaya Healthcare Ltd.
Foreign Company:
A foreign company is basically a company which is not a
domestic company, a company registered outside India in any
other foreign country, but conducts business in India via its
agents and branches. The foreign companies working actively
in India are equally bound by the provisions and mandates of
the Companies Act, 1956.
Examples are Nestle India Limited, Hindustan Unilever Ltd.,
Gillette (India) Ltd., etc.
 On the basis of ownership
Government Companies
 A government company is a company in which at least 51% of
the paid up capital has been subscribed bythe government. Ex:
ONGC
Non-government Companies
 If the government does not subscribe a minimum 51% of the
paid up capital, the company will be a non-government
company.
Holding Companies
 A holding company is a company, which holds all, or majority
of the share capital in one or more companies so as to have a
controlling interest in such companies.
Subsidiary Companies
 A company, which operates its business under the control of
another company (i.e holding company), isknown as a
subsidiary company.
Example of Holding and Subsidiary
company
Limited liability partnership
LLP is an alternative corporate business
form that gives the benefits of limited
liability of a company and the flexibility
of a partnership.
Common businesses that become LLPs
are law firms, accounting firms, and
doctor offices because multiple partners
are involved in the business.
Characteristics:

It’s a body corporate and legal entity separate from

its members.
It has at least two designated members
It has a perpetual succession. It continues to exist
even after the founding partners leave the
organisation. All it requires is it to have at least two
partners.
The members have a limited liability limited  to their
agreed contribution in the LLP.
It has the organisational flexibility of a partnership.
Its accounting and filing requirements are similar to
that of a company.
 Advantages:
Separate legal entity:
LLP agreement: 
Flexibility:
Limited liability
Cost-saving
Disadvantages:
Difficult to raise capital
Complexity
Limited life