FORMS OF BUSINESS

ORGANIZATION
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 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.