BUSINESS STUDIES
CHAPTER 2: FORMS OF BUSINESS ORGANIZATION
SOLE PROPRIETORSHIP
 Popular form of business organization for small businesses in their initial years of operation.
 Owned, managed and controlled by an individual who is recipient of all profits and bearer of all risks.
 Ex- Beauty parlours, hair saloons, small scale activities.
FEATURES
Formation and closure-
No separate law, no legal formalities,
closure and formation of business can
be done easily.
Liability-
Unlimited, owner is personally
responsible for payment of debts, using
his personal possessions in case assets
of business are not sufficient to meet
the debts.
Sole risk bearer and profit recipient-
Risk of failure is borne by the sole
proprietor alone. If business is
successful, he enjoys the benefits
which is a direct reward for risk taking.
Control-
Right to run the business and make all
decisions lies with the sole proprietor,
he can carry out plans without
interference from others.
No separate entity-
No distinction is made between sole
trader and his business, since business
does not have a separate identity from
owner.
He is held responsible for all activities
of the business.
Lack of business continuity-
Owned and controlled by one person.
Death, insanity, imprisonment,
bankruptcy or physical ailment will
have direct and detrimental effect on
the business.
May cause closure of the business.
MERITS
Quick decision making-
Enjoys considerable degree of freedom
in making firm decisions. Prompt since
there is no need to consult others.
May lead to capitalization of market
opportunities.
Confidentiality of information-
Enables proprietor to keep business
related operations confidential and
maintain secrecy.
Not bound by law to publish firm’s
accounts.
Direct incentive-
Directly reaps benefits of their effort,
since they are the sole recipient of all
profit.
Need to share profit does not arise,
provides maximum incentive to work
hard.
Sense of accomplishment-
Personal satisfaction in working for
oneself, and instils a sense of
accomplishment and confidence in
one’s abilities.
Ease of formation and closure-
No separate law that governs sole
proprietorship, least regulated form of
business. Easy to start and close
business as per wish of owner.
LIMITATIONS
Limited resources-
Limited to their personal savings and
borrowings from others.
Banks and other lending institutions
may hesitate to extend a long term loan
to SP.
Size of business rarely grows much and
generally remains small, hence.
Limited life of business concern-
Owned and controlled by one person.
Death, insanity, imprisonment, physical
ailment or bankruptcy affects business
and can lead to its closure.
Unlimited liability-
If business fails, creditor can recover
their dues from the business assets, and
personal assets of the proprietor.
A poor decision of an unfavourable
circumstance can create serious
financial burden on the owner.
Hence SP is less inclined to take risks
in the form of innovation or expansion.
Limited managerial ability-
It is rare to find an individual who
excels in responsibilities of varied
managerial tasks, like- selling,
purchasing, financing etc.
Decision making may not be balanced
in all the cases. Due to limited
resources, SP may not be able to
employ and retain talented and
ambitious employees.
 JOINT HINDU FAMILY BUSINESS
 One of the oldest forms of business organization, wherein the business is owned and carried on by the
members of the Hindu Undivided Family.
 Governed by Hindu Law.
 Basis of membership- Birth in a particular family, three successive generations.
 Controlled by head of the family called karta.
 All members have equal ownership over ancestral property, they are known as coparceners.

FEATURES MERITS LIMITATIONS

Formation-
Minimum two members and ancestral
property inherited by them.
Governed by Hindu Succession Act,
1956.
Liability-
Liability of members except karta is
limited to heir share of co-parcenary
property.
Karta has unlimited liability.
Control-
Lies with karta, he takes all decisions
which are binding on other members,
and is authorised to manage the
business.
Effective control-
Absolute decision making power with
karta.
This avoids conflicts among members
as no one can interfere with his right to
decide.
Leads to prompt and flexible decision
making.
Continued business existence-
Death of karta doesn’t affect business,
next eldest member takes up the
position.
Operations are not terminated,
continuity of business is not threatened.
Limited liability of members-
Liability of co-parceners is limited to
their share in business, except karta.
Risk is well-defined and precise.
Limited resources-
Faces the problem of limited capital,
since HUF depends mainly on ancestral
property.
Limits scope for expansion of business.
Unlimited liability of karta-
Karta is burdened with responsibility of
decision making and management of
business.
Also suffers from disadvantage of
unlimited liability, since his personal
assets can be used to pay off firm
debts.
Dominance of karta-
Karta individually manages the
business, which may not be acceptable
to other members.
May cause conflict amongst them, and
even lead to break down of family unit.

Continuity- Increased loyalty and cooperation- Limited managerial skills-

Continues even after the death of karta. Pride in growth of business is linked to Business may suffer as a result of
Next eldest member takes up the the achievements of the family. karta’s unwise decisions.
position of karta. Helps in securing better cooperation May result in poor profits or even
Leaves business stable, but can be from all members. losses for the organization.
terminated with the mutual consent of
members.
Minor members-
Inclusion of an individual into the
business occurs due to birth in HUF,
hence minors can also be members of
the business.

PARTNERSHIP

 Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to
share the profit of the business carried on by all or any one of them acting for all.

FEATURES MERITS LIMITATIONS

Formation-
Comes into existence through a legal
agreement.
Terms and conditions governing the
relationship among partners, sharing of
profits and losses and the manner of
conducting business are specified.
Business must be lawful and run with
the motive of profit.
Two people coming together for
charitable purposes does not constitute
a partnership.
Liability-
Partners of a firm have unlimited
liability, personal assets may be used
for repaying debts in case firm assets
are insufficient.
Risk bearing-
Partners bear the risks, and reward
comes in the form of profits which are
shared by the partners in an agreed
ratio.
They also share losses in the same
ratio, when firm incurs losses.
Decision making and control-
Taken with mutual consent. Hence
activities of partnership are managed
through the joint efforts of all the
partners.
Continuity-
Lack of continuity since death,
retirement, insolvency, or insanity of
any partner can bring end to the
business.
Remaining partners can continue the
business if they desire, on the basis of a
new agreement.
Number of partners-
Minimum no. of partners is 2.
According to Companies Rules 2014,
Rule 10 of The Companies 2014, the
maximum no. of members is 50.
Mutual agency-
Partner is an agent of other partners as
he represents them, hence binds them
through his acts.
Also a principal as he can be bound by
acts of other partners.
Ease of formation and closure-
Can be formed easily by putting an
agreement between the partners.
They agree to carry out the business of
the firm and share risks.
No conclusion with respect to
registration of the firm, and closure of
the firm is also an easy task.
Balanced decision making-
Can oversee different functions
according to their areas of expertise.
As an individual isn’t forced to handle
different activities, this reduces burden
of work and leads to fewer errors in
judgements.
More funds-
Capital is contributed by many
partners. Helps to raise larger amount
of funds and undertake additional
operations when needed.
Sharing of risks-
Risks involved in partnership are
shared by all partners.
Reduces anxiety, burden and stress on
individual partners.
Secrecy-
Not legally required to publish its
accounts and submit its reports.
Able to maintain confidentiality of
information.
Unlimited liability-
Liability of partners are joint and
several, personal resources will be
involved in case business assets are not
sufficient to meet the debts.
Those partners who have greater
personal wealth will have to repay the
entire debt in case other partners are
unable to do so.
Limited resources-
Contribution in terms of capital
investment is usually not large enough
to support large scale operations, as
there is restriction in the no. of
partners.
Faces problems in expansion beyond a
certain size.
Possibility of conflicts-
Difference of opinion on some issues
may lead to disputes between partners.
Decisions of one partner are binding on
others.
An unwise decision can lead to
financial ruin for the others.
In case partner leaves the firm,
termination of partnership can take
place as there is restriction on transfer
of ownership.
Lack of continuity-
Comes to an end with death,
retirement, insolvency or lunacy of
partner.
Remaining partners can enter into an
agreement and continue to run the
business.
Lack of public confidence-
Difficult for any member to ascertain
the true finance status of partnership
firm, as they are not legally required to
publish its financial reports.
Confidence of the public in partnership
firms is generally low.
MINOR AS A PARTNER
 Minor is incompetent to enter into a valid contract with others.
 Liability will be limited to the extent of the capital contributed by him.
 Will not be eligible to take an active part in the management of the firm.
 Minor can share only profits, cannot be asked to bear the losses. Can inspect accounts of the firm if he
wishes to.
 Status of minor changes when he attains majority, he has to decide whether he would like to be partner
of the firm.
 Has to give public notice of his decision within six months of attaining majority, if he fails to do so
within the stipulated time, he will be treated as a full fledged partner and will become liable to the
debts of the firm to an unlimited extent.

TYPES OF PARTNERS

 Active partner- One who contributes capital and participates in the management of firm, shares its
profits and losses, and is liable to an unlimited extent to the creditors of the firm.

 Sleeping or dormant partner- Do not take part in day to day activities of the business. Contributes
capital in the firm, shares its profits and losses, and has unlimited liability.

 Secret partner- One whose association with the firm is unknown to the general public. He also
contributes to the capital of the firm, takes part in the management, shares its profits and losses, and has
unlimited liability towards the creditors.

 Nominal partner- One who allows the use of their name by a firm, does not contribute to capital, does
not take active part in managing the firm, does not share its profit or losses, but is liable to the third
parties for the repayments of firm’s debts.

 Partner by estoppel- If through their own initiative, conduct or behaviour, they give an impression to
others that they are a partner of the firm, then such partners are liable for the debts of the firm.
In the eyes of the third party, they are considered partners even though they do not contribute capital or
take part in its management.

 Partner by holding out- Not a partner in the firm, but knowingly allows himself to be represented as a
partner in a firm. Becomes liable to outside creditors for repayment of any debts.
In case he is not really a partner and wants to save himself from such a liability, he should immediately
issue a denial, clarifying his position that he is not a partner in the firm.
If he does not do so, he will be responsible to the third party for any such debts.

CLASSIFICATION ON THE BASIS OF DURATION

 Partnership at will- It can continue as long as the partners want, and is terminated when any partner
gives a notice of withdrawal from partnership to the firm.

 Particular partnership- Formed for the accomplishment of particular project, like construction of a
building or an activity to be carried out for a specific time period.
Dissolves automatically when the purpose for which it was formed is fulfilled, or when time duration
expires.

CLASSIFICATION ON THE BASIS OF LIABILITY

 General Partnership- Liability of partners is both unlimited and joint.
Partners enjoy the right to participate in the management of the firm and their acts are binding on each
other and on the firm.
Registration is optional, existence of the firm is affected by death, lunacy, insolvency or retirement of
their partners.
  Limited Partnership- Liability of atleast one partner is unlimited, and the rest is limited. Such a
partnership does not get terminated with the death, lunacy or insolvency of limited partners.
They do not enjoy the right of management and their acts do not mind the firm or other partnership.
Registration is compulsory.

PARTNERSHIP DEED
 In order to enter in partnership, a clear agreement with respect to the terms, conditions and all aspects
concerning the partners is essential so that there is no misunderstanding later among the partners.
Agreement can be oral or written, but written is more advisable as it constitutes an evidence of the
conditions agreed upon. Written agreement which specifies the terms and conditions that govern the
partnership is called partnership deed.

REGISTRATION
 Means entering of the firm’s name, along with the relevant prescribed particulars in the register of
firms kept with the registrar of firms. Provides a conclusive proof of the existence of a partnership firm.
 Optional for firm to get registered, but if not registered, it is deprived of many benefits.
 A partner of an unregistered firm cannot file a suit against the firm or other partners, third parties.
 According to the Indian Partnership Act 1932, the partners may get the firm registered with the
Registrar of firms, can be done at the time of formation or at any time during its existence.

COOPERATIVE SOCIETY
 Voluntary association of persons who join together with the motive of welfare of members.
 Compulsorily required to be registered under the Cooperative Societies Act, 1912.
 Consent of at least ten members to form CS, capital of society is raised from its members through issue
of shares.
 Acquires a distinct legal identity after its registration.

FEATURES MERITS LIMITATIONS

Voluntary membership-
A person is free to join a CS, and can
also leave anytime as per his desire no
compulsion.
Member is required to serve a notice
before leaving the society.
Membership is open to all irrespective
of their religion, caste and gender.
Equality in voting status-
‘One man one vote’ governs the CS.
Each member is entitled to equal
voting rights, irrespective of amount of
capital contribution by a member.
Limited resources-
Low rate of dividend offered in
investment acts as a deterrent
(discouragement) in attracting
membership or more capital from the
members.

Legal status- Limited liability- Inefficiency in management-

Registration is compulsory, accords a
separate identity to the society which is
distinct from members.
Can enter into contracts and hold
property in its name, sue and be sued
by others.
Not affected by entry or exit of
members.
Limited liability-
Members liability limited to the extent
of amount contributed by them as
capital.
Defines maximum risk that member
can be asked to bear.
Personal assets of members are safe
from being used to repay business
debts, since it is limited to the extent of
their capital contribution.
Stable existence-
Death, bankruptcy, insanity of
members does not affect continuity of
CS.
Unable to attract and employ expert
managers because of their inability to
pay the high salaries.
Members offering honorary services on
voluntary basis are not professionally
equipped to handle management
functions efficiently.
Lack of secrecy-
Difficult to maintain secrecy about
operations of CS, because of open
discussions in the meetings of members
and disclosure obligations, as per
Societies Act (7).
Control-
Decision making power lies with the
elected managing committee.
Right to vote gives members a chance
to choose the members who will
constitute the managing committee.
Lends CS a democratic character.
Service motive-
Dominates its working.
If any surplus is generated as a result of
its operations, it is distributed among
the members as dividend in conformity
with the by-laws of society.
Economy in operations-
Generally offer honorary services to
the society.
Helps in reducing costs, as focus is on
elimination of middlemen.
Customers/producers are members of
CS, hence risk of bad debts is lower.
Support from govt-
Exemplifies the idea of democracy and
finds support from govt in the form of
low tax, subsidies, and low interest
rates on loans.
Govt. control-
CS have to comply with many rules
and regulations relating to auditing of
accounts, submission of accounts, etc.
Interference in functioning of CS
through control exercised by state
cooperative depts. also negatively
affects freedom of operation.
Differences of opinion-
Contrary viewpoints may lead to
internal quarrels, leads to difficulties in
decision making.
Personal interests may start to
dominate welfare motive.
Benefit of other members may take a
backseat if personal gain is given
preference by certain members.

Number of partners- Ease of formation-

Minimum no. of partners is 2. Can be started with min. 10 members.
According to Companies Rules 2014, Registration procedure is simple, few
Rule 10 of The Companies 2014, the legal formalities.
maximum no. of members is 50. Governed by provisions of CSA, 1912.

TYPES OF COOPERATIVE SOCIETIES

 Consumer’s cooperative societies- Formed to protect interests of consumers.
Members comprise of consumers desirous of obtaining good quality products at reasonable prices.
Purchases goods in bulk directly from wholesalers and sells goods to members, eliminating middlemen.
Profits are distributed on the basis of their capital contributions to society, or purchases made by
individual members.

 Producer’s cooperative societies- Formed to protect interest of small producers.

Members comprise of producers desirous of procuring inputs for production of goods to meet the
demands of consumers.
Aims to fight against the big capitalists and enhance the bargaining power of small producers. Supplies
raw materials, equipment and other inputs to the members and also buys their output for sale.
Profits are generally distributed on the basis of their contributions to the total pool of goods produced or
sold by the society.

 Marketing cooperative societies- Formed to help small producers in selling their products.
Consist of producers who wish to obtain reasonable prices for their output.
Aims to eliminate middlemen and improve competitive position of its members by securing a
favourable market for the products.
Pools the output of individual members and performs marketing functions like transportation,
warehousing, packing etc to sell output at the best possible price,
Profits are distributed according to each member’s contribution to the pooled output.

 Farmer’s cooperative societies- Formed to protect interest of farmers by providing better inputs at a
reasonable cost.
Members are farmers who wish to jointly take up farming activities. Aim is to gain the benefits of large
scale farming and increase productivity.
Provides better quality seeds, fertilizers, machinery and other modern techniques for use in the
cultivation of crops.
Helps in improving the yield and returns to farmers, also solves problems associated with farming on
land buildings.
  Credit cooperative societies- Formed for providing easy credit on reasonable terms to the members.
Members are persons who seek financial help in the form of loans.
Aim is to protect members from the exploitation of lenders who charge high rates of interest on loans.
They provide loans to members out of the amounts collected as capital and deposits from the members,
charges low rates of interest.

 Cooperative housing societies- Formed to help people with limited income to construct houses at
reasonable costs.
Members consist of people who are desirous of procuring residential accommodation at lower costs.
Aim is to solve housing problems of members by constructing houses and giving the option of paying in
instalments.
They construct flats or provide plots to members on which members themselves can construct houses as
per their choice.

JOINT STOCK COMPANY

 Company- Association of persons formed for carrying out business activities and has a legal status
independent of its members.
 Can be described as an artificial person having a separate legal entity, perpetual succession and a
common seal. Governed by the Companies Act, 2013.
 Shareholders are the owners of the company while the Board of Directors is the chief managing body
elected by shareholders.
 Capital of company is divided into smaller parts called shares, which can be transferred freely from one
shareholder to another, except in a private company where you cannot sell shares.

FEATURES MERITS LIMITATIONS

Artificial person-
Company is creation of law and exists
independent of its members.
Can own property, incur debts, borrow
money, enter into contracts, sue and be
sued.
Unlike natural person cannot breathe,
eat, run, talk etc, hence called an
artificial person.
Limited liability- Complexity in formation-
Liable to the extent of the amount Requires greater time, effort and
unpaid on the shares held by them. extensive knowledge of legal
Only assets of the company can be requirements and procedures involved.
used to settle debts.
Leaves owner’s personal property free
from any charge.
Reduces degree of risk born by an
investor.

Separate legal entity- Transfer of interest- Lack of secrecy-

From the day of incorporation,
company acquires an identity distinct
from its members.
Assets and liabilities of company are
separate from its owners.
Adds to advantage of investing in a
company as the share of a public
limited company can be sold in the
market.
Can be easily converted into cash in
case the need arises.
Avoids the blockage of investment and
presents company as a favourable
avenue for investment purposes.
Companies Act requires each public
company to provide a lot of
information to the office of registrar of
companies, from time to time.
Information is also available to general
public, hence difficult to maintain
complete secrecy about company
operations.
Formation-
Time consuming, expensive and
complicate process.
Involves preparation of several
documents and compliance with many
legal requirements before functioning.
Companies incorporated under
Companies Act 1956 or any other
company law shall be included in the
list of companies.
Perpetual succession-
Since company is creation of the law, it
can be brought to end by law.
Cease to exist when ‘winding up’, a
specific method for closure, is
completed.
Members may come and go, but
company continues to run.
Control-
Management and control of affairs of
company – Board of Directors
Directors hold a position of immense
significance as they are directly
accountable to the shareholders for the
working of company.
Shareholders do not have right to be
involved in day to day running of the
business.
Liability-
Creditors can use assets of the
company to settle their claims since
company owes the debts, not the
members.
Members can only be asked to
contribute the loss only to the extent of
the unpaid amount of share held by
them.
Perpetual existence-
Company continues to exist even if
members don’t, since it is a separate
entity from the members.
Can be liquidated as per provisions of
Companies Act, 2013 only.
Scope for expansion-
Company has large financial resources.
Capital can be taken from public and
through loans from banks and financial
institutions.
Investor are inclined to invest in shares
because of limited liability, transferable
ownership and possibility of high
returns in a company.
Professional management-
Company can afford to pay higher
salaries to specialists and professionals.
Scale of operations in a company leads
to division of work.
Each department deals with a particular
activity and is headed by an expert.
Leads to balanced decision making and
greater efficiency in company’s
operations.
Impersonal work environment-
Separation of ownership and
management leads to situations in
which there is lack of effort and
personal involvement on officer’s part
of a company.
Large size of company makes it
difficult for the owners and
management to maintain personal
contact with the employees, customers
and creditors.
Numerous regulations-
Company is burdened with many
restrictions with respect to aspects like
audit, voting, filling of reports,
preparation of documents.
Also required to obtain various
certificates from different agencies.
Reduces the freedom of operations of a
company and takes away a lot of time,
effort and money.
Delay in decision making-
Companies are democratically
managed through Board of Directors,
top-middle-lower level managements.
Communication and approval of
various proposals can cause delays in
taking decisions and acting upon them.
Oligarchic management-
Means rule by few.
In company there are BODs and
shareholders who are the owners.
Shareholders have minimal influence
in controlling or running the business,
because shareholders are spread all
over the country.
Very small percent attend the general
meetings.
BOD enjoys considerable amt. of
freedom in using their power, and
ignores the interest of owners.
Owners have no other go but to sell
their shares and exit the company,
leading to rule by few (reference to
shareholders).
Common seal- Conflict in interests-
If company has common seal, it must Employees for example may be
be affixed to the documents such as interested in higher salaries.
agreements of a company.
Consumers desire higher quality
If company does not have a common products at lower prices.
seal then the person signing the
document should be authorized by a Shareholders want higher returns in the
board’s resolutions. form of dividends, and increase in the
intrinsic (essential) value of their
shares.

Pose problems in managing the

company as it becomes hard to satisfy
such diverse interests.
Risk bearing-
Risk borne by all the shareholders.

All shareholders in a company have to

contribute to the debts to the extent of
their shares in the company’s capital.

Risk of loss is spread over a large no.

of shareholders.

TYPES OF COMPANIES

PRIVATE COMPANY
 Restricts the right of members to transfer its shares.
 Has min. 2 and max. 200 members excl- present and past employees.
 Does not invite public to subscribe to its securities.
 Necessary to use the word private limited after its name.

Privileges-
 Private company can be formed by 2 members only, they are the directors.
 Max no. of directors for both types of companies - 15
 No need to issue prospectus (essential disclosure document issued by the company to public while
investing in securities) because public is not invited to subscribe to the shares of private company.
 Allotment of shares can be done without receiving the minimum subscription.
 Private limited company can start business as soon as certificate of incorporation is received.
 Private limited company is not required to keep an index of members.

PUBLIC COMPANY
 Min. 7 members, no limit on max. members.
 No restriction on transfer securities.
 Not prohibited from inviting the public to subscribe to its securities.
 Private company which is subsidiary of public company is treated as public company.

ONE PERSON COMPANY

One Person Company is a company with only one person as a member. That one person will be the shareholder
of the company. It avails all the benefits of a private limited company such as separate legal entity, protecting
personal assets from business liability and perpetual succession.

 With the implementation of The Companies Act, 2013, a single person could constitute a company,
under the One Person Company (OPC) concept.
 The introduction of OPC in the legal system is a move that would encourage corporatisation of micro
businesses and entrepreneurship.
  In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC.
 It had suggested that such an entity may be provided with a simpler legal regime through exemptions
so that the small entrepreneur is not compelled to devote considerable time, energy and resources on
complex legal compliance.

CHARACTERISTICS

(1) Only a natural person who is an Indian citizen and resident in India-
(a) Shall be eligible to incorporate a One Person Company.
(b) Shall be a nominee for the sole member of a One Person Company. Explanation – For the purposes of this
rule, the term “resident in India” means a person who has stayed in India for a period of not less than one
hundred and eighty-two days (182 days) during the immediately preceding one calendar year.

(2) No person shall be eligible to incorporate more than a One Person Company or become nominee in more
than one such company.

(3) Where a natural person, being member in One Person Company in accordance with this rule becomes a
member in another such Company by virtue of his being a nominee in that One Person Company, such person
shall meet the eligibility criteria specified in sub rule (2) within a period of one hundred and eighty days.

(4) No minor shall become member or nominee of the One Person Company or can hold share with beneficial
interest.

(5) Such Company cannot be incorporated or converted into a company under section 8 of the Act.

(6) Such Company cannot carry out Non-Banking Financial Investment activities including investment in
securities of anybody corporates.

(7) No such company can convert voluntarily into any kind of company unless two years have expired from the
date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased beyond
fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.