CHAPTER - 2 FORMS OF BUSINESS ORGANISATIONS

CHAPTER - 2

FORMS OF BUSINESS ORGANISATIONS

            A business enterprises is an organisation which undertakes business activities. Here we are going to collect awareness about different type of business organisation in private sector and public sector. They are

v Sole proprietorship

v Joint Hindu family business

v Partnership

v Co-operative society

v Joint stock company

SOLE PROPRIETORSHIP

A business organisation owned by a single person is called sole proprietorship. It is also known as one man business. Sole trader is the owner of sole proprietorship business. He brings capital for the business.  He uses his own skill and manages the business. Also he get all the profit and suffers all the losses.

Characteristics of Sole proprietorship

            Any individual with good financial and managerial advantage can start this type of business

v Individual ownership

v Personal control

v Individual risk

v Unlimited liability

v No legal restrictions

Advantages of sole proprietorship

v Easy formation : no legal formalities for starting this business, any one can start those who have fund and managerial stability.

v Quick decision : sole trader is the supreme authority so no necessary to ask any others for taking decisions.

v Efficient management : attention control by the owner reduces risk and wastes.

v Business secrecy : a sole trader can easily keep all his informations related to business safely.

v Better personal contacts : it is through the personal and smooth and cordial relationship with customers.

v Flexibility : the sole trader has no necessary to ask about the changes in the running of business.

v Less expensive management  : high salary paid managers are not necessary for managing Sole proprietorship.

v Loan Facilities : due to unlimited liability he will get loans easily.

v Continuity : the business is continuing nature like from the father to the son.

v Prevention of concentration of wealth : it motivates all people to do the business and helps to reduce the concentration of wealth in few business peoples / firms.

Disadvantages of sole proprietorship

v Shortage of capital : the fund required for running the business is brought from his own hand. Banks gives loans on the basis  the financial stability of the owner.so shortage of capital is the problem.

v Risk and unlimited liability : the entire risk and losses of the business are to be borne by the sole trader.

v Lack of management ability : the business runs on the managerial talents of a single person.

v Weak bargaining powers : sole trader cannot make a control in the market in front of large scale business firms.

v Absence of large scale buying and selling : he operates on a small scale basis so he cannot conduct large scale buying and selling.

JOINT HINDU FAMILY BUSINESS

            It is one of the oldest forms of business found in India. It is owned by the individuals of Hindu family and it is controlled by the Mitakshara School of Hindu Law.  The business is managed by the eldest male member known as “ Karta ”. The liability of Karta is unlimited.

Features of Joint Hindu Family Business

v It is created on the basis of Hindu Law and not out of a contract.

v Only male members of Hindu family can become members.

v The membership is obtained only through the birth of particular family conducting business.

v Business undertaken for the benefits of members of the family.

v The liability of members is limited except of Karta

v The capital for the business is from their ancestral properties.

Advantages of Joint Hindu Family Business

v It enjoys greater stability in the running and continuity of business.

v It provides scope for division of labour.

v There is no limit for number of members.

v Enables to take accurate decisions.

v Business secrecy can be maintained easily.

v The members have only limited liability.

v It enjoys better creditworthiness than the sole trading concern.

v It enjoys flexibility in organisation.

v It provides an excellent training ground for the junior members.

Disadvantages of Joint Hindu Family Business

v The resources of Joint Hindu Family are limited than joint stock company.

v The management is in the hands of the Karta who may lack skill, initiative and efficiency.

v There is no direct relationship between reward and effort.

v Disputes may arise among the members in the case of partition of property and closing of business.

v The liability of members is limited so they take little interest in the business activities.

PARTNERSHIP

The partnership business tries to reduce the defects of sole trading and Joint Hindu Family Business.  In a partnership business two or more persons combine their skills, experience and capital. The persons organising partnership business are known as partners.

A partnership is defined as “ the relationship between persons who have agreed to share profits of a business carried on by all or any one of them acting for all ”.

Characteristics of Partnership

v Relation between two or more  : minimum members required for starting this business is 2, maximum 10 in banking and 20 in other business.

v Agreement : it starts based on a oral or written agreement. It is known as Partnership Deed.

v Business : the agreement is to do lawful business and cannot form charitable institution.

v Sharing profits : profit or loss share as per agreement.

v Business is carried on by all or any of them acting for all.

v Unlimited liability : liability of each partner is unlimited.

v No separate legal existence : a firm has no separate existence apart from the partners.

v Utmost Good Faith : partners should disclose all material facts and present true accounts to one another.

v Transfer of Interest : no chance to transfer interest of one partner to another in the firm.

v Implied authority : all partners should follow the laws of organisation.

Types of Partnership

1.      General or Ordinary Partnership : The liability of all partners is unlimited. On the basis of duration it is divided into two type ;

a.     Particular Partnership : partnerships formed for the completion of a particular purpose for a fixed period.

b.     Partnership at Will : in this type the duration of the partnership will not be fixed in advance.

2.     Limited partnership : in limited partnership the liability of the partners is limited. But this type is not allow.ed in India.

Kinds of Partners

1.      Active or Working Partner : A partner who will contribute capital and take active participation in day to day affairs.

2.     Sleeping or Dormant Partner : the partner who does not contribute any active participation in business activities.

3.    Nominal Partner or Ostensible Partner : a person who do not contribute capital towards the organisation but his reputation will be beneficial to the firm.

4.     Partner by Estoppel :  is a person who by his behaviour or words gives an impression to the third parties that he is a partner.

5.    Partner by Holding Out : a person may be represented as a partner to the public by others.

6.    Partner in Profit Only : with a special agreement a person may be admitted to share only profits.

7.     Sub – partner : an outsider appointed by a partner as his agent with a share in the profits.

Minor as a Partner

            Section 30 of the Indian Partnership Act , allows a minor to be admitted as partner . the liability of a minor partner is limited. He  has the following rights ;

v He has the right to share the profits and properties of the firm.

v He can check the accounts of the firm.

v He can sue the partners for the payment of his share of profits.

Partnership Deed

            It is the written agreement by partners. It may be oral or written. It is also known as Articles of Partnership. It may contains the following ;

Ø Name of the firm, address and name of partners.

Ø The term and duration of partnership and its objectives.

Ø The amount of capital contributed.

Ø Profit sharing ratio.

Ø The amount which can be withdrawn by each partner.

Ø Management of the business

Ø Amount of salary paid to partners.

Ø The right and duties of partners.

Ø Preparation of accounts of the firm.

Ø Arrangement for audit

Ø Rate of interest on the capitals.

Ø Details of division of work among partners.

Ø Method of valuation of Goodwill on Admission, retirement an death of a partner.

Ø Provisions regarding admission , death and retirement of a partner.

Ø Settlement of disputes.

Ø Any other important matters.

Advantages of Partnership

Ø Easy of Formation : formation of partnership is easy.

Ø Larger resources : helps to collect more amount of capital through different partners.

Ø Efficient Management : through skilled and experienced two or more persons management of the firm is effective.

Ø Division of labour : division of work is possible between partners.

Ø Prompt and balanced decisions : for taking decisions all are meeting at a time.

Ø Greater Interest : equality in sharing of profit or loss makes them greater interested.

Ø More Credit Facilities : it can obtain more credit facilities from money lenders, financial institutions etc.

Ø Flexibility : easy to change according to the conditions of the society.

Ø Protection of minority interest : each partners get opportunity for expressing their views.

Ø Simple Dissolution : it is easy to dissolve partnership

Ø Maintenance of Business secrets : no necessary to publish their accounts.

Ø  Less Controls : govt. control over partnership is very low.  

CO-OPERATIVE ORGANISATION /

CO-OPERATIVE SOCIETIES

It is an organisation which is working on the basic objective of service than profit . they function under the principle of mutual help.

Characteristics or Principles of  Co-operative Societies

v Voluntary Association : every individual is free to join or not to join in co-operative society.

v Association of persons : individuals join co-operatives as human beings and not as capitalists.

v Unrestricted Membership : any one who is major can become member of co-operative society.

v Equal Voting Rights : one member one vote is the principle of co-operative society and not one share one vote.

v Democratic Management : Each for all and all for each is the principle of management in a co-operative society.

v Service is the Motto : A co-operative is formed to give maximum service to its members.

v Limited Distribution of Surplus : only limited portion of profit is given to the members.

v Cash Trading : business in co-operative society is done on cash own basis.

v Corporate Status and State Control : co-operative society in India are registered under co-operative society Act 1912. On registration it become a body corporate enjoying separate legal entity.

v Liability : liability of a co-operative society is generally limited

Advantages of a co-operative society

v Easy of Formation

v Perpetual succession : not affected by the death or insolvency of members.

v Democratic management : one man one vote helps for democratic management

v Mobilisation of Savings : Small savings are mobilised for constructive purposes.

v Economy of operation :  expense for working co-operative society is minimum

v Saves Members From Exploitation : By giving loans at reasonable interest rate , by providing consumer goods at fair prices.

v State Assistance : exempted from tax, stamp duty and registration fees, etc 

v Social Importance : co-operative society render services without profit motive.

Disadvantages of a Co-operative Society

Ø Inadequate Capital : non availability of capital for large scale operations.

Ø Inefficient Management : they have no financial stability to appoint specialists.

Ø Lack of business secrecy : there will periodical discussions in general body about all facts.

Ø Lack of Motivation : remuneration is very low

Ø Excessive State Control : excessive state control affects successful functioning of co-operatives.

Ø Internal Conflict : local politics adversely affects the smooth functioning of co-operatives .

Types of Co-operative Societies

1.      Co-operative Credit Societies : it gives short term finance at reasonable interest . there are four types of credit societies ;

a.     Rural Banks : provides loans at lower rate to buy seeds, fertilisers, agricultural implements,etc.

b.     Urban banks : formed in district towns for providing facilities to small traders and artisans.

c.     Employees Credit Societies : formed by employees in govt., semi govt. ,banks, etc. to meet financial problems.

d.     Wage Earner’s Societies : formed by workers in and around town areas.

2.     Co-operative Marketing Societies : these are formed for helping farmers, artisans, and small producers for marketing their products .

3.    Co-operative Farming Societies : formed by farmers for maximise production and secure benefits of large scale cultivation.

4.     Consumers Co-operative Societies : formed by low and middle income groups , to ensure supply of consumer goods at fair prices.

5.    Producer co-operative societies : organised by small scale producers and craftsmen that helps them conduct small scale business.

6.    Co-operative housing Societies : to solve housing problems. It includes land societies, finance societies , house building societies and  tenancy co-operative societies.

JOINT STOCK COMPANIES

A company which is formed and registered under the Indian Companies Act 1956 is known as Joint Stock Company.  The peoples who contribute capital for the business is to be considered as members. The portion of capital to which each member is entitled as his share , for that he will get dividend as return .the members are known as Shareholders.

Features of Joint Stock Company

§  Incorporated Association : a Joint Stock Company is registered under the Indian Companies Act 1956.

§  Separate Legal Entity : On incorporation Company will become a Legal person .

§  Common Seal : A common seal is used as a signature of the company.

§  Perpetual succession : company is created on the basis of law, so the law only can put an end to it .

§  Limited Liability : liability of shareholders is limited to the extent of face value of shares held.

§  Separation of ownership and management : shareholders are owners of a company. But the daily activities are controlled by elected representatives of shareholders known as directors.

§  Extensive Membership : in a public company there is no limit for membership

§  Transferability of Shares : shares of a public company are freely transferable.

Advantages of Joint Stock Company

§  Huge capital : it can collect huge amount of capital for its working.

§  Limited liability : liability of members is usually limited.

§  Transfer of Shares : shares are easily transferable in the case of public companies.

§  Diffused Risk : risk of loss is spread over a large number of persons.

§  Continuity of Existence : it has a legal entity separate from the persons.

§  Organised Intelligence : the process of capital formation is implemented with organised intelligence which increases efficiency of directors.

§  Tapping Economic Resources : a joint stock company offers vast scope for turning economic resources to the best use.

§  Greater Scope for Expansion : with the increase of earnings and financial resources and managerial ability helps for the expansion of the company.

§  Democratic Management : the elected members of shareholders are responsible for all activities.

§  Public Confidence : they enjoys greater public confidence than sole trading and other types of organisations.

§  Extensive Membership : Share capital of a company is divided into a large number of shares of small value with no maximum limit to the number of members.

§  Employment Opportunities : it can provide a large number of job opportunities.

Disadvantages of Joint Stock Company

§  Difficulty of formation : the formation of a company is difficult and costly.

§  Inflexibility : the constitution of Joint Stock Company IS RIGID.

§  Impersonality : it difficult to maintain close relation between the management and employees.

§  Fraudulent Management : the company may be used and managed by inefficient promoters and fraudulent directors.

§  Oligarchic Management : actually a company is managed by a few directors ,they may ignore the interests of  shareholders.

§   Delay in decision : for making decisions there must be meeting of all members, that may lead to delay in decision .

§  Lack of motivation : company is managed by directors so there is not as much interest as real owners.

§  Excessive Regulation : management has to  spend its precious time and money in complying with the statutory requirements .

§  No Secrecy of Business : publication of the progress of the company will reveal all secrets .

§  Social ill effects of large companies : companies faces some social evils such as monopoly, pollution, exploitation of labours .

Types of Companies

§  Private Company

§  Public Company.

Private Company

             A private company has been define as a company which by its articles

·     Limits the number of members to 50.

·     Restricts the right to transfer its shares.

·     Prohibits an invitation to public for deposits.

·     Prohibits an invitation to public to subscribe to its shares and debentures.

·     Puts the minimum paid up capital to rupees one lakhs.

 Privileges of  A private Company

·        It can be formed with 2 members.

·        It can commence business after incorporation.

·        It need not obtain minimum subscription to allot shares

·        No necessary to hold statutory meeting.

·        It can issue any kind of shares.

·        Two directors are required for a private company

·        Directors need not retire by rotation

·        It need not keep an index of its members.

·        Only 2 members can make the quorum for a meeting.

Public Company

            A public company means a company which is not a private company. It can have any number of members. Its shares are freely transferable.it has a minimum paid up capital of rupees  5 lakhs.

Deemed Public Company

A private company automatically becomes a public company , if 25% of the paid up capital is held by a public company.         

Choice of Form of Business Enterprise

{ Nature of business running.

{ Finance required for its running.

{ Degree of controlling power desire by a person.

{ Degree of risk involved in a business.

{ Freedom from govt. regulations.

{ Duration of the business Venture.