FORMS OF BUSINESS ORGANIZATION Joseph George Konnully

CONTENTS Sole Proprietorship Partnership Joint Stock Company Co-operative Society Public Sector Enterprises Joint Sector

SOLE PROPRIETORSHIP A sole proprietorship is a business owned and operated by one individual. The shops or stores which you see in your locality — the grocery store, the vegetable store, the sweets shop, the chemist shop, the paanwala, the stationery store, the STD/ISD telephone booths etc. come under sole proprietorship.

Advantages Easy to start No registration No profit sharing Easy decision-making Easy to windup Secrets (information about business techniques) No corporate taxes

Disadvantages Unlimited liability Employee benefits i-e Medical insurance premiums not deductible(taxes) Raising funds Limited Life Loss in absence

Suitability of SP For business where capital required is small and risk involvement is not heavy, this type of firm is suitable. It is also considered suitable for the production of goods which involve manual skill e.g. handicrafts, filigree works, jewellery, tailoring, haircutting,etc

Partnership A Partnership is a legal relationship formed by the agreement between two or more individuals to carry on a business as co-owners. Each member of such a group is individually known as ‘partner’ and collectively the members are known as a ‘partnership firm’. These firms are governed by the Indian Partnership Act, 1932.

Characteristics of PF 1. Number of Partners: Maximum limit is 10 in case of banking business and 20 in case of all other types of business. 2. Contractual Relationship: The agreement in writing is known as a ‘Partnership Deed’. 3. Competence of Partners: Minors and insolvent persons are not eligible.

…Characteristics of PF 4. Sharing of Profit and Loss: In absence of an agreement, they share it equally. 5. Transfer of Interest: No partner can sell or transfer his interest in the firm to anyone without the consent of other partners. 6. Voluntary Registration: Registration of partnership is not compulsory. But since registration entitles the firm to several benefits, it is considered desirable.

Advantages of PF Relatively easy to start The ability to raise funds More skilled persons Loss sharing No Loss in absence

Disadvantages Unlimited liability Profit sharing Conflicts Limited life Transferability is difficult

Suitability of PF Such firms are most suitable for comparatively small business such as retail and wholesale trade, professional services, medium sized mercantile houses and small manufacturing units.

Joint Stock Company a voluntary association of persons to carry on business. Members of a joint stock company are known as shareholders and the capital of the company is known as share capital. The companies are governed by the Indian Companies Act, 1956. Tata Iron & Steel Co. Limited, Hindustan Lever Limited, Reliance Industries Limited, Steel Authority of India Limited, Ponds India Limited etc.

Features of JSC 1. Artificial Person. 2. Separate Legal Entity. 3. Common Seal. 4. Perpetual Existence. 5. Limited Liability. 6. Transferability of Shares. 8. Membership: Minimum membership of two persons and maximum fifty is known as a Private Limited Company. But in case of a Public Limited Company, the minimum is seven and the maximum membership is unlimited.

Advantages of JSC 1. Limited Liability. 2. Continuity of existence. 3. Benefits of large scale operation. 4. Professional Management. 5. Social Benefit.

Disadvantages of JSC 1. Formation is not easy. 2. Control by a Group. 3. Excessive government control. 4. Delay in Policy Decisions.

Suitability of JSC A joint stock company is suitable where the volume of business is quite large, the area of operation is widespread; certain businesses like- Banking and insurance. Manufacturing Industry.

Co-operative Society Any ten persons can form a co-operative society. It functions under the Cooperative Societies Act, 1912 and other State Co-operative Societies Acts. The main objectives of co- operative society are: (a) rendering service rather than earning profit, (b) mutual help instead of competition, and (c) self help in place of dependence.

Classification of co-operatives On the basis of objectives, various types of co-operatives are formed: a. Consumer co-operatives b. Producers co-operatives. c. Marketing co-operatives. d. Housing Co-operatives.

Characteristics of CooS 1. Voluntary association. 2. Membership: Min 10 – Max unlimited. 4. Service Motive. 5. Democratic Set up. 6. Sources of Finances. 7. Return on capital.

Suitability of CooS Generally it seems that a co-operative society is suitable for small and medium size operations. However, the large sized ‘IFFCO’ [Indian Farmers and Fertilisers Cooperative] and the Kaira Co-operative Processing Milk under the brand name ‘AMUL’ are the illustrious exceptions.

Public Sector Organisation –Needs/Objectives Public Sector Enterprises came into existence to curb the monopolistic tendencies of Private capitalists and exploitation of poor labourers To provide infrastructure like Railways, Roads, power, telecom, irrigation. To promote public welfare. To develop backward areas.

Types of Public Sector Organisations Public Sector Organisations are divided into the following forms: Departmental Undertakings Public Corporations Government Companies

Departmental Undertaking Features Formation- created by Govt and attached to particular ministry No separate Legal Entity Management and Control- by concerned ministry Finance- wholly financed by govt No Borrowing powers

Departmental Undertaking Merits Easy to form Easy Financing Secrecy-suitable for defence undertaking Misuse of funds- Govt audit of financial records.

Departmental Undertaking Demerits Lack of Flexibility Lack of Professional management lack of quick decision making lack of Autonomy Guided by political considerations

Public Corporations Features Formation- By Act of Central/State legislature Separate Legal Entity Management and Control- Board of Directors Finance- Wholly financed by Govt. Borrowing powers: It can borrow from public Staffing – No civil servants, governed by contract of service

Public Corporations Merits Operational Autonomy Public Accountability Flexibility of Operations Easy to raise funds by issuing bonds Works with service motto

Public Corporations Demerits Lack of Autonomy in practice Unresponsive to consumer interests Difficulty in changing the act

Government companies Merits: Easy to Form Flexibility of raising Capital Operational Flexibility: No bureacracy,prompt decisions. Facilitates Private Participation Demerits: Lack of Accountability Absence of Real Autonomy lack of Professional skills

Government companies Definition A govt company is a company in which 51% of the paid up share capital is central/state govt. Features: Formation- as per provisions of The companies act,1956. Management and Control- Board of Directors appointed by govt and elected by shareholders Finance: Can raise funds from govt or public

Factors Governing Choice of Form of Business Organisation The choice of the form of business is governed by several interrelated and interdependent factors :- The nature of business is the most important factor. Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organised as proprietary concerns. While, businesses requiring pooling of skills and funds like accounting firms are better organised as partnerships. Manufacturing organisations of large size are more commonly set up as private and public companies.

Factors Governing Choice of Form of Business Organisation Scale of operations i.e. volume of business ( large, medium, small) and size of the market area (local, national, international) served are the key factors. Large scale enterprises catering to national and international markets can be organised more successfully as private or public companies. Small and medium scale firms are generally set up as partnerships and proprietorship. Similarly, where the area of operations is wide spread (national or international), company ownership is appropriate. But if the area of operations is confined to a particular locality, partnership or proprietorship will be a more suitable choice.

Factors Governing Choice of Form of Business Organisation The degree of control desired by the owner(s). A person who desires direct control of business, prefers proprietorship, because a company involves separation of ownership and management. Amount of capital required for the establishment and operation of a business. A partnership may be converted into a company when it grows beyond the capacity and resources of a few persons. The volume of risks and liabilities as well as the willingness of the owners to bear it, is also an important consideration. Comparative tax liability.