TYPES OF BUSINESS ORGANISATIONS

Deepanjali

Msc 1st yr

TYPES OF BUSINESS ORGANIZATION

1. Sole Proprietorship

2. Partnership

3. Companies

SOLE PROPRIETORSHIP

The word “sole” implies “only”, and

“proprietor” refers to “owner”

Sole trader is the person who carries

business exclusively by and for himself

Ownership and management of the business

by a single individual

Hence, a sole proprietor is the one who is the

only owner of a business

FEATURES

1. Ease of formation No legal formalities

No requirement of registration or payment of fee

Ease of retiring in case of failure

2. LiabilityUnlimited liability

Owner is personally responsible for payment of debts

3. Sole risk bearer and profit recipient Risk of failure of business is borne all alone

Receives all the business profits which become a direct reward for his risk bearing

FEATURES

4. Control The right to run the business and make all decisions lies

absolutely with the sole proprietor.

5. No separate entity In the eyes of the law, no distinction is made between the sole

trader and his business.

6. Lack of business continuity Death, insanity, imprisonment, physical ailment or bankruptcy of

the sole proprietor will have a direct effect on the business and

may even cause closure of the business.

MERITS

1. Quick decision making Enjoys considerable degree of freedom in making business

decisions

2. Confidentiality of information Information is kept confidential

Not bound to publish firm’s account

3. Direct incentive Directly reaps the benefits

Maximum incentive to the sole trader to work hard

MERITS

4. Sense of accomplishment Personal satisfaction involved in working for oneself

5. Ease of formation and closure Entering into business with minimal legal formalities

Least regulated form of business

LIMITATIONS

1. Limited resources Limited to his/her personal savings and borrowings from others

2. Limited life of a business concern Eyes of the law the proprietorship and the owner are considered

one and the same

3. Unlimited liability

4. Limited managerial ability Assume the responsibility of varied managerial tasks such as

purchasing, selling, financing, etc.

PARTNERSHIP

According to the Indian Partnership Act, 1932

partnership is

“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

1. Formation Governed by the Indian Partnership Act, 1932

A legal agreement wherein the terms and conditions governing are specified

Points out that the business must be lawful and run with the motive of profit

Two people coming together for charitable purposes will not constitute a partnership

2. Liability Unlimited, Personal assets may be used for repaying

debts

FEATURES

3. Risk bearingShare losses in the same ratio

4. Decision making and controlShare amongst themselves the responsibility of

decision making and

Control of day to day activities

5. ContinuityDeath, retirement, insolvency or insanity of any

partner can bring an end to the business

FEATURES

6. MembershipMinimum number of members is two

Maximum number, in case of banking industry is ten

and in case of other businesses it is twenty

7. Mutual agencyBusiness carried on by all or any one of the partners

acting for all

MERITS

1. Ease of formation and closureAn agreement between the prospective partners

No compulsion with respect to registration of the firm

2. Balanced decision making Partners can oversee different functions according to their

areas of expertise

3. More fundsCapital is contributed by a number of partners

4. Sharing of risksReduces the anxiety, burden and stress on individual

partners

5. SecrecyNot legally required to publish its accounts and submit its

reports

LIMITATIONS

1. Unlimited liability

2. Limited resourcesRestriction on the number of partners

Capital investment is usually not sufficient to support

large scale business operations

3. Possibility of conflictsDifference in opinion on some issues may lead to

disputes

Decisions of one partner are binding on other partners

LIMITATIONS

4. Lack of public confidenceA partnership firm is not legally required to publish its

financial reports or make other related information

public

5. Lack of continuity

TYPES OF PARTNERS

1. Active partnersContributes capital

Participates in the management of the firm

Shares its profits and losses

Liable to an unlimited extent to the creditors of the firm

2. Sleeping or dormant partnerDo not take part in the day to day activities

Everything else same as active partners

3. Secret partnerAssociation with the firm is unknown to the general public

TYPES OF PARTNERS

4. Nominal partnerAllows the use of his/her name by a firm

Does not contribute to its capital

Does not take active part in managing the firm

Does not share its profit or losses

Liable, like other partners, to the third parties, for the

repayments of the firm’s debts

COMPARISON

Type Capital

contribution

Management Share in

profits/losses

Liability

Active Partner Contributes

Capital

Participates in

Management

Share Unlimited

Sleeping

Partner

Contributes

Capital

Doesn’t

Participate in

Management

Share Unlimited

Secret Partner Contributes

Capital

Participates in

Management

Share Unlimited

Nominal

Partner

Doesn't

Contribute

Capital

Doesn’t

Participate in

Management

Doesn’t share Unlimited

TYPES OF PARTNERSHIP

Classification on the basis on duration

1. Partnership at will

Continues as long as the partners want

Terminates if one partner gives notice of withdrawal

2. Particular partnership

Builds for a purpose

Dissolve as soon as the purpose is finished

TYPES OF PARTNERSHIP

Classification on the basis of liability1. General Partnership

Liability of partners is unlimited and joint

Partners enjoy the right to participate in the management of the firm

Registration of the firm is optional

2. Limited Partnership The liability of at least one partner is unlimited whereas the

rest may have limited liability

Limited partners do not enjoy the right of management

Registration of such partnership is compulsory

Introduced in India after introduction of new small enterprise policy 1991

PARTNERSHIP DEED

Formed by an agreement which may be oral or written

An agreement duly signed and registered to form a partnership is called as a partnership deed

The rights, interest, obligations of partners to each other are clearly and precisely defined

Such agreement is very useful in future disputes

Its not a public agreement, so outsiders don’t have right to examine but it can be changed at any time with the consent of all the partners

PARTNERSHIP DEED

Partnership deed includes the following points: Name of firm

Nature of business and location of business

Duration of business

Investment made by each partner

Distribution of profits and losses

Duties and obligations of the partners

Salaries and withdrawals of the partners

Terms governing admission, retirement and expulsion of a partner

Interest on capital and interest on drawings

Procedure for dissolution of the firm

Preparation of accounts and their auditing

Method of solving disputes

COMPANY

An artificial person having a separate legal

entity, perpetual succession and a common

seal.

JOINT STOCK COMPANY

An association of persons formed for

carrying out business activities

Has a legal status independent of its

members

This company form of organisation is

governed by The Companies Act, 1956

FEATURES

1. Artificial personCompany is a creation of law and exists independent

of its members.

Company can own property, incur debts, borrow money, enter into contracts, sue and be sued.

2. Separate legal entityAcquires an identity, distinct from it members.

Assets and liabilities are separate from those of its owners.

The law does not recognise the business and owners to be one and the same.

FEATURES

3. Formation Formation of a company is a time consuming, expensive

and complicated process.

Involves compliance with several legal requirements before it can start functioning.

Registration of a company is compulsory as provided under the Indian Companies Act, 1956.

4. Perpetual successionCompany being a creation of the law, can be brought to an

end only by law.

Will only cease to exist when a specific procedure for its closure, called winding up, is completed.

FEATURES

5. Control Undertaken by the Board of Directors

The directors hold a position of immense significance as they are directly accountable to the shareholders for the working of the company

6. Liability Members is limited to the extent of the capital contributed by

them in a company

Creditors can use only the assets of the company to settle their claims since it is the company and not the members that owes the debt

7. Common Seal Company’s approval through a common seal

Common seal is the engraved equivalent of an official signature

8. Risk Bearing Borne by all the share holders to the extent of their shares

MERITS

1. Limited liabilityOnly the assets of the company can be used to settle

the debts, leaving the owner’s personal property free

from any charge.

2. Transfer of interest Shares can be easily sold or converted into cash

when required.

3. Perpetual existence Not effected by death

MERITS

4. Scope for expansion Large financial resources

5. Professional managementCompany can afford to pay higher salaries to

specialists and professionals

Leads to balanced decision making as well as greater

efficiency in the company’s operations

LIMITATIONS

1. Complexity in formation

2. Lack of secrecy

3. Impersonal work environment

4. Numerous regulations

5. Delay in decision making

6. Oligarchic management

7. Conflict in interests

SHAREHOLDERS

Features:

Shares are like partners who have invested in

the company.

If company gains profit, profit is distributed in the

form of dividends to shareholders

In case of loss, nothing is taken from

shareholders

TYPE OF COMPANIES

Private company

Restricts the right of members to transfer its shares

Has a minimum of 2 and a maximum of 50 members

excluding the present and past employees

Does not invite public to subscribe to its share

capital

Must have a minimum paid up capital of Rs.1 lakh or

such higher amount which may be prescribed from

time-to-time

Necessary for a private company to use the word private

limited after its name

TYPE OF COMPANIES

Public company

Has a minimum paid-up capital of Rs. 5 lakh or a

higher amount which may be prescribed from

time-to-time

Has a minimum of 7 members and no limit on

maximum members

Has no restriction on transfer of shares

Is not prohibited from inviting the public to

subscribe to its share capital or public deposits

LEGAL FORMALITIES

Public companies has to be publish their

yearly account, maintain statutory books of

account, annual audits.

MOA- MEMORANDUM OF ASSOCIATION

Main document of the company, sets the constitution of the

company

Defines the objectives, prescribe the name of the company,

its registered office and capital

Lay down the fundamental conditions upon which alone the

company is allowed to be formed

When registered gives existence or birth to the company

Charter of the company

Governs the relationship of the company with the outside

world

Determines the extent and power of the company

All transactions outside its power by the company shall be

null or void or illegal

AOA-ARTICLE OF ASSOCIATION

Forms a link between the members of the company which binds the members to the company

Defines the duties, rights, powers and authority of the shareholders and directors of the company

Defines the mode and form in which the business of the company is to be carried out

Every company is required to file AOA with the registrar at the time of the registration

If company doesn’t file its own AOA, table A is attached to the company that as schedule 1, shall become AOA of that company

Table A is model set of 99 article contained in schedule 1 of company act 1956

DIFFERENCE BETWEEN AOA AND MOA

Basis of difference MOA AOA

Objective Defines the objective for

which company is formed

Rules of internal

management , indicates

how the objectives are to

be achieved

Position Main document of the

company, subordinate to

the companies act

Subsidiary document ,

subordinate to both MOA

and companies act

Relationship Defines the relationship of

the company with

outsiders

Defines the relationship of

the members and the

company

DIFFERENCE BETWEEN AOA MOA

Basis of difference MOA AOA

Validity Acts beyond MOA are

invalid and cannot be

ratified even by a

unanimous vote of the

members

Acts which are beyond

articles can be ratified by

the members provided

they don't violate the

memorandum

Necessity Every company has to file

a MOA

Not necessary for a public

limited company to file

AOA

Alteration Alteration of MOA is quite

difficult

Articles can be altered by

passing a special

resolution by the members

PRIVILEGES AGAINST A PUBLIC LIMITED COMPANY

A private company can be formed by only two members whereas seven people are needed to form a public company.

There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company.

Allotment of shares can be done without receiving the minimum subscription.

A private company can start business as soon as it receives the certificate of incorporation. The public company, on the other hand, has to wait for the receipt of certificate of commencement before it can start a business.

PRIVILEGES AGAINST A PUBLIC LIMITED COMPANY

A private company needs to have only two directors

as against the minimum of three directors in the

case of a public company.

A private company is not required to keep an index

of members while the same is necessary in the

case of a public company.

There is no restriction on the amount of loans to

directors in a private company. Therefore, there is

no need to take permission from the government

for granting the same, as is required in the case of

a public company.

TYPES OF BUSINESS ORGANIZATIONS

To run a business:

1. Franchise

2. Group Company / Ownership

3. Leasing

4. Management Contract

FRANCHISE

Owners, or "franchisors", sell the rights to their business logo,

name, and model to third party retail outlets, owned by independent,

third party operators, called "franchisees“

To invest in a franchise, the franchisee must first pay an initial fee for

the rights to the business, training, and the equipment required by

that particular franchise. Once the business begins operating, the

franchisee will generally pay the franchisor an ongoing royalty

payment, either on a monthly, quarterly, or annual basis. This

payment is usually calculated as a percentage of the franchise

operation’s gross sales.

The franchisee will not have as much control over the business as he

or she would have over their own business model, but may benefit

from investing in an already-established, name brand.

LEASING

A legal document outlining the terms under

which one party agrees to rent property from

another party.

A lease guarantees the lessee (the renter) use

of an asset and guarantees the lessor (the

property owner) regular payments from the

lessee for a specified number of months or

years.

Both the lessee and the lessor must uphold the

terms of the contract for the lease to remain

valid.

MANAGEMENT CONTRACT

Firm enters into a contract with one or a few local manufacturers to get certain components or goods produced as per its specifications

Contract manufacturing, also known as outsourcing

Can take three major forms:

1. Production of certain components

2. Assembly of components into final products

3. Complete manufacture of the products

ADVANTAGES

1. Goods produced on a large scale without requiring investment in setting up production facilities.

2. No investment risk.

3. Products manufactured or assembled at lower costs.

4. Local manufacturer also gets the opportunity to get involved with international business and avail incentives.

LIMITATIONS

1. Local firms might not adhere to production

design and quality standards.

2. Local manufacturer in the foreign country

loses his control over the manufacturing

process.

3. The local firm producing under contract

manufacturing is not free to sell the

contracted output as per its will.

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