Forms of Business Ownership

Forms of Business Ownership Which is the right one for your business?

One of the first executive decisions you’ll make for your new business is choosing the type of legal organization that’s best for you. The choice you make is important because it will determine what your business can and cannot do, what will happen if someone sues you, and how both you and your business are taxed.

There are basically four ways to organize a business. Listed from the simplest to sophisticated, they are:

Sole Proprietorship Partnership Corporation Limited Liability Company

Proprietorship

√ Is a business with one owner and the most common type of organization.

√ Is not separate from the owner, but merely a different name with which the owner represents to the public. The owner and the business are inseparable.

√ Is more affordable since no legal documents need to be filed in most cases. All you have to do is get a business license and start operations.

Merits DemeritsSimple Form of Organization

Limited Resources

Owner’s Freedom to Take Decisions

Limited Ability

High Secrecy Unlimited Liability

Tax Advantage Limited Life of Enterprise Form

Easy Dissolution

Important Terms

No separate legal entity

Unlimited liability

√ Has two or more owners. The details of the arrangement between the partners are outlined in a written document called a partnership agreement.

√ Is not a separate legal entity from its owners. However, the partnership can hold property and incur debt in its name.

√ Has the same advantages and disadvantages as the sole proprietorship but with an additional drawback. A partner can be held liable for the acts of the other partners, increasing personal liability.

Partnership

Merits Demerits Easy Formation Unlimited Liability

More Capital Available

Divided Authority

Combined Talent, Judgment and Skill

Lack of Continuity

Diffusion of Risk Risk of Implied Authority

FlexibilityTax Advantage

Partnership deed

Mutual agency

Sleeping partner

Partner by estoppels or holding out

Nominal or ostensible partner

Utmost Good Faith and Honesty

Important Terms

Hindu Undivided Family

The oldest form of business organisation found India. It is the business carried on by the members of the Hindu undivided Family.

The business is controlled by the eldest member of the family and is called “KARTA”

Features of HUFMembership by birth – All the members

have equal ownership right over the ancestral property.

No maximum Limit

Liability – the Karta has unlimited liability

Sno. Merits Demerits1. Effective control – The

business is controlled by the head of the family.

Limited Resources- Business depends mainly on ancestral property

2. Limited liability of the members – Liability of members is according to their share in the property

Limited managerial skills- Karta cannot be expert in all the areas of management.

3. Increased by loyalty and cooperation

Unlimited liability of Karta

HUF

Cooperative societies

What does cooperative mean? Working together and with others for a common purpose.

Definition of Cooperative Societies It is a society which has its objectives for the

promotion of economic interests of its members in accordance with cooperative principles

Features of Cooperative Voluntary membership- Membership is

open to all. Any person can join and leave with prior notice.

Legal Status- Registration is compulsory. Therefore, it is a separate legal entity

Democratic control

Secularism

Service motive

Important Terms

Separate legal existence Continuity of existence Economies of scale Voluntary associations Equal voting rights Open Membership Lack of Secrecy Perpetual Existence State Assistance

Cooperative Society Sno. Merits Demerits 1. Ease of Formation Limited resources – These

societies have limited capital from its members.

2. Equality in voting status- ‘One member one vote’

Inefficiency in management-Management consists of part time and inexperienced people

3. Support from government-They provide all kind of support to cooperative societies.

Lack of Secrecy –Discussions are openly discussed and accounts are published.

4. Limited Liability –Liability of members is limited to the extent of the amount contributed by them.

Differences in opinions- conflicts may rise due to different opinions which might delay in decision making.

Joint Stock Company It is the largest form if business organisation. It is an

association of persons formed for carrying business activities and had legal status of its members .

‘A company is an association of many persons who contribute money and employ it in some trade or business, and who share the profit and loss arising thereof’ – Lord Lindley

Features of Joint stock company Incorporated Association – company must be

registered under the companies act, 1956.Separate legal Entity- comapny is a legak

enity from its shareholders, directors and promoters.

Limited liability- liability of the members is limited to the face value of the shares held by them but they are not personallly liable to the debts.

Transferability of shares

Sno. Merits Demerits1. Limited Liability-

Liability of shareholders is only up to the face value held by them

Complexity in formation

2. Transfer of interest- shares of public limited company can be converted into cash by selling them in open market

Impersonal work environment

3. Perpetual Existence-being a separate, existence of company is not affected by death ,retirement.

Delay in decision making

4. Scope for expansion Oligarchic Management

 

Basis Private Company Public Company

Membership Minimum 2, Maximum 50

Minimum 7, Maximum no limits

Number of Directors At least 2 At least 3

Restriction on Appointment of Directors

No need for directors to file anything

Directors must file a consent to act as directors or sign MOA or enter into a contract for qualification

Transfer of shares Restricts No restriction

Public Subscription Can not invite general public

Invites general public

Special privileges Available- not filing prospectus, commencing business after incorporation itself and before minimum subscription, etc.

Not available

Important TermsSeparate legal existencePerpetual successionContinuity of existenceEfficient managementEconomies of scaleCommon sealEconomic oligarchy

Examples

Quiz

TIME

1.  Credit Unions are an example of a ___________________.

A.Cooperative B.Franchise C.Partnership

2. When a corporate owner dies, the corporation ceases to exit.

A.True B.False C.Only if he/she is not married

4. Being incorporated provides limited liabilty for its owners.

A.True B.False C.If they are of legal age