Forms of Business Organization

Learning outcome-
be able understand and explain different
forms of business organizations
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 Business organization
• A Business organization is a firm which
combines the factors of production (land,
labor, and capital) in a plant for the purpose of
producing goods or services and selling them
at profit.
 Different forms
• Sole proprietorship
• Partnership firm
• Joint stock company
• Joint Hindu family firm
• Cooperative society
 The type of ownership selected depends
upon the following factors :
• Size and nature of the business to be started
• Capital required to start the business and
means to collect the funds.
• Technical Difficulties
• Market Competition
 Sole proprietorship

• Owned by one person

• Owner keeps all the profits
• Relatively unlimited control
• Easy to form
• No separation of owner from manager
• Owner is responsible for all debts/liabilities
 ……….
• Example: Beauty parlor, barbershop, general
store and sweet shop run by a single owner.
 Advantages of Sole Proprietorship:

• Quick decision making

• Confidentiality of information
• Sense of accomplishment
• Ease of formation and closure
 Limitations of a Sole Proprietorship

• Limited Resources
• Life of a Business Concern
• Unlimited Liability
• Limited Managerial Ability
 Partnerships
• Do you have a friend…and a good idea?
 Partnerships
• A partnership is a kind of business where a
formal agreement between two or more
people is made and agreed to be the co-
owners, distribute responsibilities for running
an organization and share the income or
losses that the business generates.
 Examples of Partnership business
• Red Bull and GoPro
• Spotify and Uber
• Levi’s & Pinterest
 Features of partnership firms
• Owned by two or more people
• Share profits equally (unless otherwise agreed
upon)
• Owners share all the risks equally
• Partnership agreement more difficult than a
sole proprietorship
 Partnerships
• General partnership
• Limited partnership
• Limited liability partnership
• Partnership at will
 Kinds of Partners
 Active Partner: Actively takes part in the affairs of
the partnership.

 Sleeping Partner: Contributes capital but doesn’t take

part in the affairs of the partnership.

 Nominal Partner: Nominal partner is partner just for

namesake. He neither contributes to capital nor takes
part in the affairs of business.
 People with good business connections and well placed
people in the society are chosen.
 Partner by Estoppel: A partner by es-toppel is someone who is not
a partner of a firm, but allows others to think that he is a partner,
through his behavior or conduct.

 Partner by Holding out: A partner by holding out is someone

who is not a partner of a firm, but knowingly allows the firm to
project to others that he is a partner of the firm.

 Minor Partner: Minor has a special status in the partnership. A

minor can be admitted for the benefits of the firm. A minor is
entitled to his share of profits of the firm. The liability of a
minor partner is limited to the extent of his contribution of the
capital of the firm.
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 What is a Partnership Deed?
 The written agreement among the partners is called ‘the partnership deed’.
It contains the terms & conditions governing the working of partnership.
 It contains :
 1. Names & Addresses of the firm and partners

 2. Nature of business proposed.

 3. Amount of capital of the partnership and the ratio for contribution by each of the
partners

 4. Duration of business

 5. Their profit sharing ratio (used for sharing losses also)

 6. Procedure for dissolution of firm

 7. The amount of salary or commission payable to any partner

 8. special rights, obligations and liabilities of partner(s) if any.

 Advantages of Partnership:

• Easy Formation
• Large Resources
• Flexibility
• Sharing Risk
• Combination of different skills
 Disadvantages of Partnership:

• Loss of Autonomy
• Conflicts
• Lack of Stability
• Liability
 Joint Stock Company
• Joint Stock Companies are formed and
registered under the Indian Companies Act,
1956.
• The joint stock company is a legal business
owned by the shareholders having limited
liability and managed by an elected “Board of
Directors”. The shares are transferable.
 Features of Joint Stock Company
• A company is created by registering or
incorporating an association of persons under
the Company Act.
• It has a separate legal existence as distinct
from its members.
• Artificial personality enabling it to exercise
certain legal powers.
 ……
• The simplest way to describe a joint stock
company is that it is a business organization
that is owned jointly by all its shareholders. All
the shareholders own a certain amount of
stock in the company, which is represented by
their shares.
 ………..
• Perpetual life and a very stable existence.
• It has a common seal on which its name is
engraved and this seal acts as its signature.
• Liability of shareholders is limited
• Large membership.
• Easy transferability of shares.
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 Kinds of
I. Kinds of companies based onCompanies:
incorporation:
 1. Chartered Company
 2. Statutory Corporation
 3. Registered Company

II. Kinds of companies based on public interest:

 1. Private Limited Company
 2. Public Company

III. Kinds of companies based on liability:

 1. Unlimited Company
 2. Limited Company
 3. Companies limited by guarantee

IV. Kinds of companies based on interest:

 1. Holding Company
 2. Subsidiary Company

V. Kinds of Companies based on nationality:

 1. Foreign Company
 2. Indian Company
Kinds of companies based on incorporation:
 Chartered Company: Created by the Royal Charter of the
state. Charter contains the rights, privileges, powers etc..
Example: British East India Company formed in England
in
1600 to trade with India and East.

 Statutory Corporation: Created by an Act of the

state legislature or parliament. The objective, scope,
powers, responsibilities are clearly defined by the act.
Example: Industrial Development Bank of India
(IDBI), Food Corporation of India (FCI), APSRTC.

 Registered Company: A registered company is one that

is registered under Indian Companies Act, 1956. A
Registered Company may be public limited company,
private limited company, government company, company
limited by guarantee or unlimited company.
Kinds of Companies based on public
interest:
Private Limited Company: According to sec. 3 of
Indian Companies Act, a private company means a
company that has a minimum paid up capital of
one lakh rupees or such higher paid up capital as
may be prescribed, and by its articles
(a) Restricts the right of transfer its shares, if any
(b) Limits the number of its members to fifty
(c) Prohibits any invitation to the public to
subscribe any shares in or debentures of the
company
(d) The name of a private company should
necessarily end with the words ‘private limited’
 Kinds of Companies based on Public
interest:
Public Company: This means a company that
(a) Is not a private company
(b) has a minimum paid up capital of five lakh rupees
or such higher paid up capital, as may be
prescribed.
(c) Can have any number of members but
minimum, there should be seven
members
(d) Can issue the prospectus to raise the
capital
(e) The name of the public company ends with the
word ‘limited (Ltd.)
 Distinction between Public company and Private company:
Points of difference Public Company Private Company
1. Minimum and Minimum 7 Minimum 2
Maximum number of Maximum: Unlimited Maximum: 50
members
2. Transfer of Shares No restrictions Restricted
3. Issue of Prospectus Prospectus can be issued Prohibited from issue of
Prospectus
4. Acceptance of deposits Can Accept Prohibited from accepting
deposits from public.
However, it can accept
deposits from its
members, directors or
their relatives
5. Minimum Paid up Rs. 5 lakh or higher, as Rs. 1 lakh or higher, as
Capital prescribed prescribed
 Kinds of companies based on public interest:
 Government Company: Section 617 of Indian
Companies Act, 1956 defines a government company
as “any company in which not less than 51 percent of
paid- up share capital is held by central government,
or by any state government.
Example: National Thermal Power Corporation (NTPC)
Bharat Heavy Electricals (BHEL)
Hindustan Machine Tools
(HMT) Steel Authority of India
(SAIL)
 Kinds of Companies based on Liability:
 Unlimited Company: An unlimited company is a
company in which the liability of every member is
unlimited. This implies that the personal property of
every member is also liable for the debts of the company.

 Limited Company: A company is said to be limited

liability company where the liability of its member is
limited by the shares respectively held by them.

 Companies Limited by Guarantee: A Company is

said to be limited by guarantee where the liability of the
members is limited to such an amount as they agreed
upon to contribute to the assets of the company in event
of being wound up.
 Kinds of companies based on controlling
interest:
 Holding Company: A Holding company is a
company that controls the composition of the board
of directors of another company or holds more than
half of the nominal value of the equity share capital
of another company.

 Subsidiary Company: A Subsidiary company is

that company that is controlled by the holding
company.
 Examples
• Indian Oil Corporation Ltd.
• Tata Motors Ltd.
• Reliance Industries Ltd.
• State Bank of India
 Advantages
• Huge Capital.
• Share Transferable.
• Democratic
• Permanent Existence.
• It creates huge employment possibilities
 Disadvantages
• Dishonest directors may exploit the
shareholders.
• Large Complexities.
• It is democratic in theory only.
• Delay in Decisions.
• Misuse of internal information.
 Recap Quiz
1
• A business entity owned by a single person is
known as-
• Sole proprietorship
• Partnership business
• Joint stock company
• None of the above
 2
• In sole proprietorship business the liability is—
• A. Limited
• B. Unlimited
 3
• A business organization registered under the
Companies Act 1956 is called as-
• Sole Proprietorship
• Partnership Business
• Joint Stock Company
• None of the above
 4
• A partnership is formed by ___________
• 1 agreement
• 2 relationship among persons
• 3 the direction of government
• 4 friendship
 NEWS
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 Joint Hindu Family
• The Joint Hindu Family (JHF) business is a
form of business organization run
by Hindu Undivided Family (HUF), where in
the family members of three successive
generations own the business jointly. The
head of the family known as karta manages
the business.
• https://www.youtube.com/watch?v=Px_1r8a1
4Xs
 …………..
• The business of Joint Hindu Family is
controlled under the Hindu Law instead of
Partnership Act. The membership in this form
of business organization can be acquired only
by birth or by marriage to a male person who
is already a member of Joint Hindu Family.
 Characteristics of a Joint Hindu Family Business:

• Governed by Hindu Law: There are two

schools of Hindu law:
• (i) Dayabhaga, and
• (ii) Mitakshara.
• Membership by Birth
• Liability-unlimited for karta, limited for others.
 …………..
• Permanent existence
• Minor also a Partner
• Dissolution
 Advantages
• Easy to start
• Efficient management
• Secrecy
• Prompt decision
• Economy
• Freedom regarding selection of business
 Disadvantages of Joint Hindu Family Business

• Limited Membership
• Limited Capital
• Limited Managerial Skill
• Misuse of Power
 1
• The Members in the joint Hindu family are
called ________
• 1 Karta
• 2 Coparceners
• 3 Generations
• 4 Partners
 2
• Only the male members in the family get the
right of inheritance by birth' as ________
• 1 Hindu law
• 2 Mitakshara Law
• 3 Dayabhaga law
• 4 None of these
 3
• In the firm of Hindu Undivided Family, how
one gets the membership?
• 1 By Agreement
• 2 By Birth
• 3 By Investing Capital
• 4 By Managing
 4
• The firm of Hindu Undivided Family is
managed by whom?
• 1 Owner
• 2 Karta
• 3 Manager
• 4 Partner
 Cooperative Society
• It is a voluntary association of persons, whose
motive is the welfare of the members.
 Features of a Cooperative Society

• As it is a voluntary association and

membership is open to all.
• It is compulsory for the co-operative society to
get registration.
• It does not get affected by the entry or exit of
its members.
• There is limited liability of the members of co-
operative society.
 …………
• Managing Committee is formed by electing
members to make decisions.
• The cooperative society works on the principle
of mutual help & welfare.
 Advantages
• 1. Easy to Form
• 2. Open Membership
• 3. Democratic Management
• 4. Limited Liability
• 5. Stability
• 6. Economical Operations
• 7. Low Management Cost
 Disadvantages
• 1. Limited Capital
• 2. Inefficient Management
• 3. Lack of Competition
• 4. Lack of Secrecy
• 5. Weight-age to Personal Gains
 Quiz
1
• In a co-operative society, the principle
followed is:
• One man one vote
• No vote
• Multiple votes
• One share one vote
 2
• Unlimited liability means to pay the liability
the personal property of the owner can be
used-
• A. True
• B. False
 3
• The members of a Co-operative Society have
------- liability.
(a) Limited
• (b) Unlimited
• (c) Joint
• (d) Joint and Several
 Recap Quiz
1
• The structure in which there is separation of
ownership and management as per law is
called
• Company
• All business organizations
• Partnership
• Sole proprietorship
 2
• The karta in Joint Hindu family business has
• No liability for debts
• Unlimited liability
• Joint liability
• Limited liability
 3
• The board of directors of a joint stock
company is elected by
• General public
• Government bodies
• Shareholders
• Employees
 Types of Cooperative Society
• Producer Cooperative: To protect the interest
of small producers, these societies are set up.
The co-operative society members may be
farmers, landowners, owners of the fishing
operations.
• To increase the marketing possibilities and
production efficiency, producers decide to
work together.
 ……….
• Consumer Cooperative: These businesses are
owned and governed by consumers of a
particular area for their mutual benefit.
• Their view is to provide daily necessary
commodities at an optimum price.
 ………..
• Credit Unions: Credit unions are generally
member-owned financial cooperatives. Their
principle is of people helping people.
• They provide credit and financial services to
the members at competitive prices.
• Each and every depositor has the right to
become a member.
• BOD
 ………..
• Marketing Cooperative Society: With an aim
of helping small producers in selling their
products, these societies are established.
• It collects the output of individual members.
Various marketing functions like
transportation, packaging, warehousing etc.
are performed by the cooperative societies to
sell the product at the best possible price.
 …………..
• Housing Cooperative Society: To help people
with limited income to construct houses at
reasonable costs, these societies are
established.
• They construct the houses and give the option
to members to pay in installments to purchase
the house.
 1
• Provision of residential accommodation to
the members at reasonable rates is the
objective of
• Consumer’s cooperative
• Credit cooperative
• Housing cooperative
• Producer’s cooperative
 2
• The Cooperative Societies Act was passed in
…………….
• a) 1911
• b) 1912
• c) 1913
• d) 1914
 PUBLIC SECTOR ENTERPRISES
 A Public sector enterprise or a public enterprise is one
which is owned, managed and controlled by the
Central Government or any State Government or any
Local Authority.
 They are also called as “Public Undertakings” or
“Public Sector Undertakings”.
 The forms of organizing enterprises are as follows:
(a) Departmental Undertakings
(b) Public Corporations
(c) Government Companies
 Departmental Undertakings
 Departmental Undertakings is a public enterprise which is
organized, controlled and financed by the government. For Ex: Post
& Telegraphs, Railways etc.

FEATURES OF DEPARTMENTAL UNDERTKINGS:

1. Formation: Created by government attached to a particular
ministry

2. No Separate Legal Entity: Cannot sue & Cannot be sued

without government’s consent.

3. Management & Control: Managed & Controlled by the

concerned ministry of the government.

4. Finance: Financed by government

5. No Borrowing Power

6. No Authority to use revenue: Revenues are paid into the

Public Corporation:
 Public corporation is an autonomous organization, which is established by
a Special Act of the Center or State Legislature. This Special Act defines its
powers, duties, functions. It is also known as Statutory Corporation. Ex:
LIC, Air India, SBI etc.

FEATURES OF PUBLIC CORPORATION:

 Formation: Created by a special act of central or state legislature

 Separate Legal Entity: Has a separate legal entity.

 Management and Control: Managed by Board of Directors which

is constituted according to the provisions of the Special Act.

 Borrowing Powers: Has the power to borrow funds from govt

 Authority to use Revenue: can use revenue to meet its

expenditure
 Government Company:
 A Government company is a company in which at least 51 %
of the paid up share capital are held by:
(a) Central Government (b) State Government (c) Partly by
central
and partly by one or more state governments
Government Company includes HMT, BHEL etc.

FEATURES OF GOVERNMENT COMPANY:

1 Formation: formed complying with the
provisions of companies
Act of 1956
2. Separate Legal Entity: It has a separate legal
entity
3. Management & Control: Managed by Board of
Directors elected by shareholders
4. Ownership: 51% Ownership by State, Central or both
5. Finance: Funded by government or public
6. Has borrowing Powers
 Forms of Public Enterprises: Features at a Glance
Features Departmental Public Government Company
Undertaking Corporation
1. Formation Executive Order of Statute of Registered under
Govt Parliament or State Companies Act,
Legislature 1956
2. Legal Position An extension to a Separate legal Separate legal entity
govt department entity
3. Finances Budget of the Government Govt provides a minimum
concerned Provides the initial of 51% of capital and the
ministry capital balance is raised from
public

4. Degree of Nil Fairly Good High

Autonomy
5. Power to Manned by govt It can recruit its It can recruit its own staff
recruit staff employees and civil own staff
servants
 Forms of Public Enterprises
Features Departmental Public Government
Undertaking Corporation Company

6. Control Controlled by Government Government

Mechanism the officials of nominates the appoints the
the concerned directors directors
Ministry

7. Power to borrow It can borrow It can borrow It can borrow

subject to from government from government
prior approval and also from and also from
of government public public

8. Flexibility Nil. It has to More flexibility Total flexibility. It

adhere to the in its internal can frame its
rules and operations within own rules and
regulations of the the framework regulation
ministry of the statute
Rationale of Public Enterprises:
 To achieve rapid economic development through
industrial growth.

 To channelize resources in the best possible manner

for economic growth.

 To ensure balanced regional development of industry

and trade.

 To prevent the growth of monopoly and monopolistic

tendencies in the private sector.

 To control the prices of essential consumer goods in the market

to prevent public hardship.

 To secure public welfare and to reduce inequalities in

 1
• Public enterprises are owned by:
• a. Government
• b. Joint Stock Company
• c. Private entrepreneur's
• d. Multinational corporations
 2
• Which of the following is not a form of
organization of public sector enterprises?
• a. Departmental undertaking
• b. Government Company
• c. Statutory corporation
• d. Sole proprietorship
 3
• A government company is a company in which
the paid up capital held by the government is
not less than:
• a. 50 per cent
• b. 51 per cent
• c. 75 per cent
• d. 26 per cent