FORMS OF BUSINESS

ORGANIZATION‐I
1. WHAT ARE THE DIFFERENT TYPES OF BUSINESS
ORGANISATIONS?
2. WHAT ARE SOLE TRADERS?
3. WHAT ARE PARTNERSHIPS?
4. WHAT IS A LIMITED COMPANY?
5. WHAT IS A CO-OPERATIVE?
6. WHAT ARE STATE OWNED ENTERPRISES?
7. WHAT ARE THE CHANGING TRENDS IN BUSINESS
OWNERSHIP AND STRUCTURE?
8. WHY HAVE AGRICULTURAL CO-OPS TURNED INTO
PLC’S?
9. WHY DO BUSINESSES CHANGE THEIR LEGAL
STRUCTURE OVER TIME?
 Sole Proprietorship
PARTNERSHIP
PRIVATE LIMITED COMPANY
CO-OPERATIVES
STATE OWNED ENTERPRISES
Hindu Undivided Business
Franchise
Outsourcing
These business structures are going to be compared under the
following headings:
1. Formation
2. Dissolution
3. Ownership
4. Management & finance
5. Profits & risk
A sole proprietorship, also known
as the sole trader or simply a
proprietorship, is a type of
business entity that is owned and
run by one natural person and in
which there is no legal distinction
between the owner and the
business.
Also called individual ownership – a
business owned by one person (a
restaurant, a retail store, a farm etc.)
The owner has unlimited control over the
business and enjoys all the profits
The owner also has unlimited personal
responsibility for the losses and debts
The simplest way to set up a
business – low start-up costs
Less administrative paperwork
Owner in direct control of decision
making
Minimal working capital required
All profits to the owner
Owner fully responsible for all debts and
obligations related to his or her business
Creditor would normally have a right against
all of his or her assets, business or personal
(unlimited liability)
Difificult to raise capital
Lack of continuity in business organization in
the absence of the owner
 This is a one person business run by
the owner with his/her own money.

Advantages Disadvantages
1. Formation & Very easy to form/dissolve. It If he/she dies then so does the business
Dissolution
can be easily changed into
partnership, ltd company etc.

2. Management & Sole traders have full control
finance
of how business is run.
Decision making is quick.
Financial records do not have
to be revealed to the public.
Long working hours are common and
holidays are difficult to arrange due to
the commitment needed to be a
successful sole trader.
Can be difficult to raise all start up
finance and as a result loans are required.
They can be expensive on the business
start ups

3. Profit & risk Keeps all profit. Takes all risk. They have unlimited
Takes all the risk. liability. They may lose assets in the
event of a debt needing to be paid.
A partnership is an agreement in
which two or more persons combine
their resources with a view to making
a profit
A partnership agreement should be
drawn up
The legal document that defines each
person’s rights and responsibilities,
as well as provisions for running the
company, both day-to-day and in the
event that someone dies or the
company dissolves.
According to the Indian Partnership
Act, 1932: “Partnership is the relation
between persons who have agreed to
share the profits of a business
carried on by all or any of them
acting for all.”
The Act also explains that persons who have entered into
partnership with one another are called individually
“partners” and collectively “a firm”.
1. Existence of an agreement:
Partnership is the outcome of an agreement between two
or more persons to carry on business. This agreement may
be oral or in writing. The Partnership Act, 1932 (Section 5)
clearly states that “the relation of partnership arises from
contract and not from status.”
2. Existence of business:
Partnership is formed to carry on a business. As stated
earlier, the Partnership Act, 1932 [Section 2 (6)] states that a
“Business” includes every trade, occupation, and profession.
Business, of course, must be lawful.
3. Sharing of profits:
The purpose of partnership should be to earn profits and to
share it. In the absence of any agreement, the partner
should share profits (and losses as well) in equal
proportions.
Here it is pertinent to quote the Act (Section 6) which talks
of the ‘mode of determining existence of partnership’. It
says that sharing of profits is as essential condition, but not
a conclusive proof, of the existence of partnership between
partners. In the following cases, persons do share profits,
but are not the partners:
(a) By a lender of money to person engaged or about to
engage in any business.
(b) By a servant or agent as remuneration.
(c) By the widow or child of a deceased partner, as annuity
{i.e., fixed periodical payment)
(d) By a previous owner or part-owner of the
business as consideration for the sale of the
goodwill or share thereof, does not of itself make
the receiver a partner with the persons carrying on
the business. Thus, in determining whether a
group of persons is or is not a firm, whether a
person is or is not a partner in a firm, regard shall
be had to the real relation between the parties as
shown by all relevant facts taken together, and not
by profit sharing alone.
4. Agency relationship:
The partnership business may be carried on by all or any of
them acting for all. Thus, the law of partnership is a branch
of the law of Agency. To the outside public, each partner is
a principal, while to the other partners he is an agent. It
must, however, be noted that a partner must function within
the limits of authority conferred on him.
5. Membership:
The minimum number of persons required to constitute a
partnership is two. The Act, however, does not mention the
upper limit. For this a recourse has to be taken to the
Companies Act, 1956 [Section 11 (1) & (2)]. It states that the
maximum number of persons is ten, in case of a banking
business and twenty, in case of any other business.
6. Nature of liability:
The nature of liability of partners is the same as in case of
sole proprietorship. The liability of partners is both individual
and collective. The creditors have a right to recover the
firm’s debts from the private property of one or all partners,
where firm’s assets are insufficient.
7. Combination of ownership and control:
In the eyes of law, the identity of partners is not different
from the identity of partnership firm. As such, the right of
management and control tops with the owners (i.e.,
partners).
8. Non-transferability of interest:
No partner can assign or transfer his partnership share to
any other person so as to make him a partner in the
business without the consent of all other partners.
9. Registration of firm:
Registration of a partnership firm is not
compulsory under the Act. The only document
or even an oral agreement among partners
required is the ‘partnership deed’ to bring the
partnership into existence.
 Is an agreement between 2 or more people to go
into business with a view to making a profit. There
can be no less than 2 members and no more than 20.

Advantages
1.Formation Easy to form. You can start
& immediately, however if
Dissolution business name is different to
that of partners you must
register the company name.
Disadvantages
If a partner leaves or a partnership
ends a new partnership must be
agreed.

2. Management Decision making is shared. Disagreements can easily occur.

& finance Responsibility is shared. If someone dies the business is
Financial details not open to be discontinued.
viewed by public

3. Profit & risk Extra capital available to Unlimited liability, each partner is
finance the responsible for the debts of the
business business
Profits must be shared between
partners
 Ltd companies are regarded as separate legal
entities from the people who own and run them.
The owners are called shareholders and only
gain/lose on the amount they put into the business.

There are two main types of company:

Private limited company (Ltd)
Public limited companies (PLC’s)

The main difference is that shares of PLC’s can be freely bought and
sold on the stock exchange
 Shareholders

Board of
directors

Managers

Marketing Financial Personnel Production

Dept Dept Dept Dept
To form a private limited company you must
1. Have at least two shareholders and one director.
2 Prepare a Memorandum of Association. This is a document for public
use. It details name of company, company objective, the number of
shares of each shareholder. This document is kept in the Companies
Office.
3. Prepare an Articles of Association. This is a document for
shareholders. It details the internal rules of the company, types of
shares issued, how meetings are run, the procedure for electing/
replacing directors.
4. Register with REGISTRAR of COMPANIES in the COMPANIES OFFICE
5. The companies office issues a “birth certificate” called a CERTIFICATE
of INCORPORATION
6. If you register as a public limited company you must obtain a
TRADING CERTIFICATE
7. TRADING CAN NOW COMMENCE
AGM- a meeting held once a year involving directors, shareholders of
a firm discussing events of the previous 12 months & future plans

Board of Directors BOD – this board is responsible for overseeing the

running of a company. These directors are the most senior
managers of a limited company. Directors can be removed by a
majority voting system.

The company chairperson – is a director and is elected by the board

to chair AGM’s . They speak on behalf of the BOD.

The Managing Director MD/Chief Executive Officer CEO

Is in charge of overseeing all aspects of company activities. The CEO
is answerable to the BOD.
Dissolution
Advantages Disadvantages

1. Formation & Companies can continue The legal formalities of

Dissolution to exist even if a forming a company are more
shareholder or director complex, time consuming &
dies expensive than forming other
business structures

2. Ownership Owned by its

shareholders
3. Management & Can raise finance for A lot of paperwork including
finance business start ups or financial audits, reports etc
expansion through selling
of shares.
4. Profit & risk Shareholders have Profits must be shared
limited liability. If
company has a lot of
shareholders risk is
minimal
a coop can be defined as "a jointly owned
enterprise engaging in the production or
distribution of goods or the supplying of services,
operated by its members for their mutual benefit,
typically organized by consumers or farmers."
Cooperative businesses are typically more
economically resilient than many other forms of
enterprise.
1. Voluntary membership:
•This is the first cardinal principle of co-operation. A person
who has a common interest and is prepared to be abide by
the rules of the society has the right to join the society as
and when he wishes to do so, continue in it as long as he
likes, and leave it at his will.
2. Open membership:
Apart from being voluntary in nature, the
membership of a cooperative organization is open
to all irrespective of race, color, creed, caste, or
Gender.

Within that particular group, no distinction can be

made on the basis of race, color, creed, caste, or
gender.

For example, a housing society of teachers of a

particular school or university may be formed and
non-teachers may be denied membership in it. Also,
unlike the practice of a company organization, the
subscription list of the society is not closed after a
fixed period.
The right of membership, however, is not absolute.
This can be denied if it is likely to be prejudicial to
the interests or the existence of the society.

The co-operative society’s managing committee

may also expel any member for similar reasons,
and this will not be considered a breach of the
principle of open membership. Compulsory
3. Finances:
The finances of a co-operative society are
contributed by members through the purchase of
shares. Since co-operatives are generally formed
by the weaker and poorer sections of the society,
their capital collections are inadequate.

Also, there is limit to the maximum shares that a

member can buy in a co-operative society. The
government also lends financial support in the
form of loans from the State and Central Co-
operative Banks.
4. Liability of members:
Like company organization, a co-operative society
may be organized on the basis of either limited or
unlimited liability. The limited liability societies, of
course, are more popular. In the case of limited
liability societies, the word ‘limited’ must be used
as part of the society’s name.
5. Democratic control:
Co-operation is democracy in action. The
business of co-operative society is generally
managed by a committee elected by the
members at annual general meeting. Since
most of the co-operatives operate on a local
scale, the meetings of the members are well
attended, and this puts the managing
committee under a lot of close supervision.
‘One man one vote’ is the basic element of co-
operative democracy. But in a cooperative, one
member may have 10,000 shares and the other
only 1 share, but each would command one vote
only and no proxies would be permitted.
6. Limited interest on capital:
Co-operation recognizes the capital is
useful and necessary for running a
business, but it should be relegated to the
level of a servant, not a master. Co-
operation uses the immense power of
capital to carry on the working of the
society in the interest of its members and
community in general and for this service;
capital is entitled to a limited return, known
as ‘dividend’ in India.
In co-operative laws, a ceiling has been put to
the rate of dividend which could be declared out
of profit for the use of capital and it generally
never exceeds 10%. Many foreign co-operative
movements do not believe in paying anything for
the use of capital.
7. Distribution of surplus:
Unlike profit-oriented enterprises, the surplus (i.
e., profit after limited interest has been paid on
capital) of a co-operative society is not
distributed to the members in the ratio of their
capital contribution or in an agreed ratio. Under
the provisions of the law, at least 25 percent of
the profit must be transferred to the general
reserve. Likewise, a certain percentage (not
exceeding 10) may also be utilized for the
general welfare of the local community.
8
8. Service motive:
A co-operative society is formed with the basic
objective of providing useful service — be it credit,
consumption goods, or input resources — to its
members and the society. In other words, the
objective of a co-operative society should not be
to maximize profits at the cost of others, as is
usually the case with other types of business
enterprises. Also, it does not mean that a co-
operative society should sustain losses.
• 9. Registration and legal status:

• Being voluntary in character, registration of a

cooperative is optional. In India, co-operatives
desiring to be registered may do so under the
Co-operative Societies Act, 1912, or relevant
State Co-operative Societies Acts, as the case
may be.
The minimum essential conditions for getting a
co-operative society registered are:
(i) There must be at least 10 adult persons (i.e.,
persons above the age of 18 years) to form the’
society,
(ii) The application should provide for essential
information, e.g. name and address of the society,
its aims and objects, details of share capital, etc.
(iii) Along with the application must also be
enclosed two copies of the byelaws, i.e., rules and
regulations governing the internal functioning of
the society.
10. Education and training:
Apart from the characteristics, discussed above, a co-
operative society also exhibits the feature of
education and training to its members with the
purpose of developing co-operation into a well-
organized movement.
Co-operation is an idea which is simple in theory,
but difficult in practice. All of us agree that co-
operation is good, useful, and essential, but
when we translate the concept into action,
bottlenecks block our paths, views clash, and
sentiments come in the way.
We have, therefore, to create an urge in people to
cooperate with each other, to train them in the art and
science of co-operation, and generally to mould their
attitude in a way that they are able to take combined
decisions and abide by them.
 A co operative is business owned and run by a group of people,
AND each has a financial interest in its success.
They also have a say on how it is managed
Co-ops mainly exist in the agricultural industry.

Advantages Disadvantages
1.Formation Must have a minimum of 7 Can be quite difficult to form, time
members. They register with the consuming and expensive.
REGISTRAR OF FRIENDLY
SOCIETIES.

2. Ownership Co-ops mainly exist in the Conflict may exist between

agricultural industry. Equal voting members in the need for business
system exists regardless of the expansion.
shares held.
They file an annual financial
return (report)
3. Management Management of co-ops are In some situations finance can be
& finance inspired by a spirit of democracy difficult to raise. This can hinder
and mutual co-operation. growth.

4. Profit & risk Members have limited liability.
Large membership of co-ops
make sure that there is high
demand for goods
Profits must be shared amongst
members.
There may be reluctance to share
profits with new members.
Risk is quite minimal.
A state-owned enterprise (SOE), also called
state-owned company, state-owned entity, state
enterprise, publicly owned corporation,
government business enterprise, government-
owned corporation, commercial government
agency, public sector undertaking, or parastatal,
is a legal entity that undertakes commercial
activities on behalf of an owner, the government.
The legal status of SOEs varies from being a
part of the government to being stock
companies with the state as a regular
stockholder. The defining characteristics of
SOEs are that they have a distinct legal form
and are established to operate in commercial
affairs. While they may also have public policy
objectives, SOEs should be differentiated from
other forms of government agencies or state
entities established to pursue purely
nonfinancial objectives
Government-owned corporations are common
with natural monopolies and infrastructure,
such as railways and telecommunications,
strategic goods and services (mail, weapons),
natural resources and energy, politically
sensitive business, broadcasting, demerit
goods (alcohol), and merit goods (healthcare).
1. It has individual personality, hence it
can sue and can be sued
2. It has the capacity to enter into
business.
3. It generates income.
4. It is funded by the government to enter
into business
 .These are enterprises that are set up,
financed and controlled by the government.

Advantages Disadvantages
1. Formation The government provides Lack of funding which in turn
the share capital and leads to borrowing more from
subsidies. These government, this is especially
companies usually have a true if the business is not
good understanding with making a profit (i.e IARNROD
financial institutions, EIREANN)
(banks)
Management They provide employment
and finance They promote industrial
development, (e.g) IDA,
They provide services of
necessity including, ESB, VHI,
CIE, Bus Eireann, Dublin Bus.
Ownership State owned
Examples ESB, Coillte, An Post, Bus
Eireann
Aer Lingus
The directors of some firms
lack appropriate knowledge in
the companies particular area (i.
e agriculture), this is because
they are appointed through
political contacts
The lack of profit making, (i.e.
Iarnrod Eireann) sometimes
leads to lack of motivation in
workplace
 Sole Trader Partnership Limited Company Co-op

Forma on Easy Easy Paperwork Paperwork

No paperwork No paperwork Registration fee Registration fee

Owners hi p Owned by sole trader Owned by partners Owned by shareholders Owned by members

Ma na gement & Speedy decision Shared decision making Managed by BOD Managed by Board
fina nce making Disagreements possible elected by members. One
Accounts are private Accounts are private BOD elected by member, one vote rule.
Can be difficult to raise Raise finance through new shareholders Accounts submitted to
finance partners Register of Friendly
Societies
Accounts submitted to
Companies Office Raise finance through
grants, loans & issuing of
Raise finance through shares
grants, loans & issuing of
shares

Profits  & ri s k Keeps all the profit Profit shared Profits shared among Profits shares
  Unlimited liability Unlimited liability shareholders Members have limited
Limited liability liability

EXAMPLES SHOPKEEPERS SOLICITORS, DOCTORS, Manchester United Cast-lebar Credit Union

TRADESPEOPLE like DENTISTS. Liverpool FC NCF- Connaught Gold
carpenters, plumbers Tata
a) Rise in the number of firms entering into alliances
b) Rise in the number of SME’s
c) Privatisation of state owned companies
d) Agricultural co-ops turning into PLC’s

a) Rise in the number of firms entering into

alliances
Many firms are now entering into alliances such as joint ventures. This
helps them against larger international firms. They can also share
skills, pool resources to further their growth.
Rise in the number of SME’s
The number of SME’s operating in Ireland is
massively growing year after year. The feature
of an SME is that has sales of €250,000 or less,
it also has employees of 50 or less.

Reasons for the growth of SME’s:

They receive state support in terms of advice, guidance.
The govt encourage SME’s S as this will reduce
unemployment, increase competition etc.
The SME’s are developing in an enterprise
culture here in Ireland
Subcontracting (contracting out) –
Businesses are now spending more time
contracting out jobs such as cleaning,
security, maintenance etc.
Franchising – The renting of a successful
business formula is a common route to
becoming a LARGER company. Royal Enfield,
KFC’s, Reebok, Adidas.. Etc..
d) Privatisation of state owned
companies
This means the selling of some or all of the shares in state –owned company
to private investors. Examples
• Bangalore International Airport
• Bharat Aluminium Company - in 2001, Cochin International Airport
• Delhi Airport, Hindustan Zinc Limited - in 2001
• Hyderabad International Airport
• Maruti Udyog, Mumbai Airport
e) Agricultural co-ops turning into PLC’s
PLC’S are companies that only sell shares on the stock exchange. This makes
it easier to raise much needed finance for future business developments.
In recent years agricultural co-ops have become PLC’s

Example: KERRY GROUP, Israel group.

With the international food industry getting very competitive
Irish agricultural co-ops have become increasingly
competitive.
To be able to spend large sums of money on R & D has enabled
these co-ops to increase their economies of scale.

Existing Problems:
The limit to equity/investors: agricultural co-ops are owned by
farmers. Under the laws governing co-ops there is a limit on
the amount of shares each individual shareholder can have.
As only farmers can hold shares it makes it difficult to raise
finance.
Limit to borrowings: borrowing large sums of money would be
high risk.
Solutions to the problems:
1. set up a PLC company on the stock market
2. Transfer ownership of some of the co-ops business assets to the
PLC.
3. The farmers own the co-op and the co-op has shares on the stock
market
4. When they need finance the sell shares on the stock market.
They always retain a 51% share to keep the majority of the
company.

Examples:
Kerry group, Golden Vale , Israel group
Unlimited Unlimited   Limited liability Limited liability
liability liability
Private Ltd
Sole Partnership Comp / Co-op
trader
Private Ltd PLC Comp.
Comp / Co-op

State owned Private Ltd

Comp. Comp / Co-op

State owned PLC Comp.

Comp.
Businesses change their Business Structure
from Sole Trader to Partnership to Private
Limited Company to a PLC because:

1. It helps them bring in new skills, experience,

resources
2. It reduces risk as the sole trader or the partners
can now enjoy limited liability
3. Helps to raise finance through investors, stock
exchange etc. for future expansion
4. Helps to market the company. Being a limited company
enhances the image of the business. This adds to the
reputation of the company as advertising and
promotions will be more convincing to the intended
customers.
5. Business profit prestige- changing a co-op owned
company to a PLC offers the management and
employees a stronger allegiance to making profit rather
than operating for the goodwill of the local area
farmers etc.