Forms of Business Organization

Sole Proprietorship:

A sole proprietor is the unquestioned king of his venture. He owns it. He con­trols it from the word go. He provides the needed resources and launches the enterprise on his own. He burns up his candle of energies on everything. He brings his skills, knowledge and expertise to the table. He plans every step. He hires people, if additional hands are required. He interacts with customers and does everything possible to please them.

In a sole proprietorship business, there is only ONE owner. There may be em­ployees or helpers assisting and reporting to the owner, but there is only one “head” who administers and runs the show. It is a business enterprise exclu­sively owned, managed and controlled by a single person with all authority, responsibility and risk.

Advantage:

(i) Simplicity: Very easy to establish and dissolve a sole proprietorship, e.g., a shop owner.

(ii) Quick decisions.

(iii) High secrecy: His business secrets are known to him only.

(iv) Personal Touch.

(v) Flexibility: Complete freedom of action.

One Person Company:

It is a creation of the Companies Act, 2013. It has only one shareholder. It is established like any private limited company. Since the company is owned by a single person, he should nominate someone to take charge in case of his death or disability. The nominee must offer his consent in writing which has to be filed with the Registrar of Companies. One-person company is exempted from procedural hurdles such as conducting annual general meetings, general meet­ings or extraordinary general meetings.

The liability of the single shareholder is limited and the personal assets of that person remain protected in case the company fails. Any resolution passed by the company must be recorded in the minute’s book and communicated to the company. One-person company has to follow all other formalities like conducting audit, filing financial statements and proper maintenance of accounts etc. which are applicable to private companies.

Advantages:

1. Entrepreneurs can set up units without any fear of unlimited liability.
2. The liability of the owner is lim­ited
3. Business secrets need not be divulged to any outsider
4. Quick decisions can be taken
5. Profits need not be shared with anyone else
6. Owners can have full grip and control over the business, and
7. Nominees can easily slip into the shoes of owners who suffer death suddenly.

Joint Hindu Family Business:

Joint Hindu Family Business is a distinct type of organisation which is unique to India. Even within India its existence is restricted to only certain parts of the country. In this form of business ownership, all members of a Hindu undivided family do business jointly under the control of the head of the family who is known as the ‘Karta’. The members of the family are known as ‘Co-parceners’. Thus, the Joint Hindu Family firm is a business owned by co-parceners of a Hindu undivided estate.

Its main features are:

1. It comes into existence by the operation of Hindu law and not out of contract. The rights and liabilities of co-parceners are determined by the general rules of the Hindu law.
2. The membership of this form of business is the result of status arising from the birth in the family and its legality is not affected by the minority. Originally, only three successive generations in the male line (grandfa­ther, father and son) constituted the membership of this organisation.

Partnership Firm:

A partnership is an association of two or more individuals who agree to carry on business and share gains collectively. According to Section 4 of the Partner­ship Act, 1932, partnership is “the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all”.

Partnership business is conducted according to certain agreed terms and conditions through a carefully drafted partnership deed. The partnership deed acts as a binding agreement in case of disputes between partners.

Contents of a Partnership Deed:

1. The amount of initial capital contributed by each partner
2. Profit or loss sharing ratio for each partner
3. Salary or commission payable to the partners
4. Duration of business
5. Name and address of the partners and the firm
6. Duties and powers of each partner
7. Nature and place of business
8. Any other terms and conditions to run the business

Limited Liability Partnership (LLP):

LLP, a legal form available world-wide is now introduced in India and is gov­erned by the Limited Liability Partnership Act, 2008, with effect from April 1, 2009 LLP combines the meritorious features of both a company and a partnership business. LLP enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership.

Advantages:

1. It is relatively a more stable form of business than partnership (resignation or death of partner does not impact its existence).
2. The liability of partners is limited.
3. It is a body corporate that is separate from its partners.
4. It is a flexible corporate vehicle that permits corporate dynamism and is not bound by a restrictive framework.
5. LLP can be set up easily. An existing venture can also be converted into the LLP without any problem.
6. It can enhance its resource base quite easily as there is no restriction on the number of members.

Joint Stock Company:

The Companies Act, 1956 defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal. A company, thus, is a voluntary association of individuals formed to carry out some lawful activity. The capital jointly contributed by shareholders (hence the name joint stock company) is divided into transferable shares of fixed denomination. The liability of members is generally limited. A company has an artificial personality of its own which is different from the shareholders. It has a common seal and enjoys perpetual existence.

Private Limited & Public Limited Company:

A private limited company can be formed by at least two individuals having minimum paid-up capital of not less than Rupees 1 lakh. The maximum number of members in a private limited company is 50. It cannot raise money through shares or debentures from the general public through an open invitation. It cannot raise deposits from persons other than its members, directors or their relatives. In a private limited company, the shares are not freely transferable. Invariably, a private company is required to use the name ‘private limited’ in its name.

A minimum of seven members are required to form a public limited company. It must have a minimum paid-up capital of Rs. 5 lakhs. There is no restriction on maximum number of members. The shares allotted to the members are freely transferable. Public limited companies can raise funds from general public through open invitation by selling its shares or accepting fixed deposits. Such companies are required to write either ‘public limited’ or ‘limited’ after their names. The liability of a member of a company is limited to the face value of the shares he owns.

Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company. The shareholders of a company do not have the right to participate in the day- to-day management of the business of a company. This ensures separation of ownership from management.

Co-Operative Organisation:

Co-operative organisation is a society which has as its objectives the promotion of the interests of its members in accordance with the principles of cooperation. It is a voluntary association of ten or more members residing or working in the same locality, who join together on the basis of equality for the fulfillment of their economic or business interest.

The basic feature which differentiates the co-operatives from other forms of business ownership is that its primary motive is service to the members rather than making profits. There are different types of co-operatives like consumer co-operatives, producer’s co-operatives, marketing co-operatives, housing co-operatives, credit co-operatives, farming co-operatives etc. The aim of all such co-operatives is to promote the welfare of their members.

Features are:

1. It is a voluntary organisation as a member is free to leave the society and withdraw his capital at any time, after giving a notice.
2. The minimum number of members is 10, but there is no limit to the maximum number of members. However, the members must be residing or working in the same locality.
3. Registration of a co-operative enterprise is compulsory. A co-operative society may be registered with the Registrar of Co-operative Societies.
4. After registration a co-operative enterprise becomes a body corporate independent of its members i.e. a separate legal entity.
5. It is subject to the provisions of the Co-operative Societies Act, 1912 or State Co-operative Societies Act. It has to submit annual reports and accounts to the Registrar of Societies.
6. The liability of every member is limited to the extent of his capital con­tribution.
7. The shares of co-operative society cannot be transferred but can be returned to the society in case a member wants to withdraw his mem­bership.