Chapter 2: Forms of Business Organisation

Learning Objectives

• Identify different forms of business organisation.
• Explain features, merits, and limitations of different forms.
• Distinguish between various forms of organisations.
• Discuss factors determining choice of an appropriate form.

Introduction

• Important decision in starting or expanding a business is choosing form of organisation.
• Forms of business organisations:
  • Sole proprietorship
  • Joint Hindu family business
  • Partnership
  • Cooperative societies
  • Joint stock company

Sole Proprietorship

• Owned, managed, and controlled by one individual.
• Popular for small businesses.
• Features:
  • Formation and closure are easy with minimal legal formalities.
  • Unlimited liability: Owner responsible for all debts.
  • Sole risk bearer and profit recipient.
  • Complete control by the owner.
  • No separate legal entity.
  • Lack of continuity.
• Merits:
  • Quick decision making.
  • Secrecy of operations.
  • Direct incentives and personal satisfaction.
  • Ease of formation and closure.
• Limitations:
  • Limited resources and managerial skills.
  • Unlimited liability.
  • Business continuity dependent on the owner.

Joint Hindu Family Business

• Specific to India, governed by Hindu Law.
• Owned and managed by members of a Hindu Undivided Family (HUF).
• Features:
  • Membership by birth.
  • Karta is the head with unlimited liability; others have limited liability.
  • Continuity and control by Karta.
  • Inclusion of minors.
• Merits:
  • Effective control by Karta.
  • Stable existence.
  • Limited liability for members.
• Limitations:
  • Limited resources.
  • Dominance and unlimited liability of Karta.
  • Limited managerial skills.

Partnership

• Two or more people agree to conduct business together.
• Features:
  • Governed by Indian Partnership Act, 1932.
  • Unlimited liability.
  • Shared decision making and risk.
  • Lack of continuity.
  • separate legal entity- can sue and be sued
• Merits:
  • Easy formation.
  • Balanced decision making through specialization.
  • More funds than sole proprietorship.
  • Shared risk.
• Limitations:
  • Unlimited liability.
  • Conflicts may arise.
  • Limited resources.
  • Lack of public confidence.
• Types of Partners: Active, Sleeping, Secret, Nominal, Partner by Estoppel, and Holding Out.

Cooperative Society

• Voluntary association focused on mutual welfare.
• Features:
  • Voluntary membership.
  • Legal status, limited liability.
  • Democratic control through elected managing committee.
  • Service motive.
• Merits:
  • Equality in voting.
  • Stable existence.
  • Support from government.
  • Ease of formation.
• Limitations:
  • Limited resources.
  • Inefficiency in management.
  • Lack of secrecy.
  • Government control and internal conflicts.
• Types of Cooperatives: Consumer, Producer, Marketing, Farmer, Credit, and Housing Societies.

Joint Stock Company

• Association with legal entity and limited liability.
• Features:
  • Artificial person with separate legal entity.
  • Perpetual succession and common seal.
  • Limited liability and risk distribution among shareholders.
• Merits:
  • Limited liability.
  • Transfer of interest.
  • Professional management.
• Limitations:
  • Complex formation.
  • Lack of secrecy.
  • Impersonal work environment.
  • Numerous legal regulations.
  • Oligarchic management.

Summary

• Forms of business organisation vary in terms of ownership and management.
• Each form has its own merits and limitations.
• Important to choose based on factors like cost, liability, and management needs.