Ch – 2 : Forms of Business Organisation

There are five forms of business enterprises in the private sector. They are: Sole proprietorship, Partnership, Hindu Undivided Family Business, Joint Stock Companies and Co-operative Societies.


A business which is owned, managed and controlled by a single person is known as sole proprietorship. The person who owned this type of business is called sole trader. It is the most common form of business organization.


1. One man ownership and control: The proprietor is the sole owner and master of the business. He is the ultimate controller of the firm.

2. Formation and closure: There are any legal formalities and separate law for governing the activities of the sole trading concern. Closure of the business can also be done easily.

3. Capital contribution: The complete capital is contributed by the sole trader himself.

4. Unlimited liability: The liability of the sole proprietor is not limited to the capital he has invested in the organization. In the case of business losses and if the business assets are not sufficient to meet all its liabilities, the proprietor may have to sell his personal property to pay off business liabilities.

5. No separate entity for the business: It has any legal existence separate from its owner.

6. Profit sharing: Since there is only one owner in sole proprietorship, all surpluses goes to him. Likewise all losses have to be suffered by him alone.

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1. Quick decision making: Sole trader enjoys considerable degree of freedom in making business decisions.

2. Secrecy of information: Sole proprietor enables to keep all the information related to business operations confidential and maintain secrecy.

3. Direct incentive: No sharing of profit provides maximum incentive to the sole trader to work hard.

4. Sense of accomplishment: There is a personal satisfaction involved in working for oneself.

5. Ease of formation and closure: It is easy to start and close the business as per the wish of the owner because there is less legal formalities.


1. Limited resources: Resources of a sole proprietor are limited to his personal savings and borrowings from others.

2. Limited life of business: Death, insolvency or illness of a proprietor affects the business and can lead to its closure.

3. Unlimited liability: If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor.

4. Limited managerial ability: The owner has to posses various managerial skills. But it is rare to find an individual who posses all these talents.

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Partnership is an association of person with the main aim to run a business and share the profits in agreed ratio. “Partnership is the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all”- Indian Partnership Act, 1932, Sec4.

Owners of the partnership business are collectively called a ‘Firm’ and individually called ‘Partners’. The name under which the business is carried on is known as firm name.


1. Formation: The partnership form of business is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement.

2. Sharing of profit or loss: The profit shall be shared among the partners in an agreedbratio, however they also share losses in the same ratio.

3. Existence of business: It is formed only for the purpose of carrying on a lawful business.

4. Mutual agency: The partnership business may be carried on by all or any one of thembacting for all. Thus each partner is principal and so can act in his own right. At the same time he can act on behalf of other partners as their agent.

5. Number of partners; The minimum number of partners for forming a partnership is two. The maximum number is 10 for banking business and 20 for other business.

6. Unlimited liability: The liability of partner is unlimited.

7. Lack of continuity: The death, retirement, insolvency, insanity of any partner can bring an end to the business.

8. Registration: Registration of partnership is not compulsory.

Partnership Deed :

Partnership is the result of mutual agreement. The agreement may be oral or written. It is desirable to have a written agreement. Such written agreement is called a Partnership Deed. It contains the terms and conditions relating to partnership and regulations governing the internal management and organization. It should be signed by all the partners and stamped properly.


1 – Name of the firm

2 – Names and address of partners

3 – Nature of business

4 – Principle place of business

5 – Duration of partnership, if any

6 – Amount of capital contributed by each partners

7 – Profit sharing ratio

8 – Amount of salary, if any, payable to partners

9 – Amount of drawings, if any, permissible for each partners

10 – Rate of interest on capital or drawings, if any

11 – Provisions regarding admission and retirement of partners

12 – Maintenance of books of accounts and audit

13 – Arrangement for settlement of debts

14 – Rights, duties, powers and obligations of all partners

15 – Provision regarding dissolution etc…………


A Joint Hindu Family Business refers to business which is owned by the members of a  Joint Hindu Family. It comes into existence by the operation of Hindu Law. Only male  members are entitled to run the business. The male members of the HUF are called co parceners/co-partners. The eldest member in the family is called Karta. He can conduct,  manage, control and organize the business. 

There are two systems which govern membership in the family business, ie, Dayabhaga  and Mitakshara system. Dayabhaga system prevails in West Bengal and allows both the male  and female members of the family to be co-parceners. Mitakshara system, prevail all over India  except West Bengal and allow only the male members to be co-parceners in the business. 


1. Formation: For JHF business, there should be at least two members in the family and  ancestral property to be inherited by them. The business does not require any  agreement as membership by birth. It is governed by the Hindu Succession Act, 1956. 

2. Liability: The liability of all members except karta is limited to their share of property of business, however the karta has unlimited liability. 

3. Control: The control of the business lies with the karta. 

4. Continuity: The business continues even after the death of the karta as the next eldest member takes up the position of karta. 

5. Minor members: Minors can also be members of the business. 


1. Effective control: The karta has absolute decision making power. This avoids conflicts  among members. 

2. Continuity: The death of the karta will not affect the business. 

3. Limited liability: The liability of all co-parceners except karta is limited. 4. Increased loyalty and cooperation: Business is run by the members of a family; there is a greater sense of loyalty towards one other. 


1. Limited resources: It faces the problem of limited capital as it depends mainly on  ancestral property. 

2. Unlimited liability of karta: Karta’s personal property can be used to repay business  debts. 

3. Dominance of karta: The karta individually manages the business which may at times  not be acceptable to other members. 

4. Limited managerial skill: The karta was not an expert in all areas of management. 


Cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members. Co-operative means to work together. This is a form of organization in which people of common interests come together to work to enhance their monetary benefits.

Co-operative organization is a voluntary association of persons for mutual benefit and

its aims are accomplished through self help and collective effort.
The basis of co-operation is self-help through mutual help and the motto is “each for all and all for each”.
It is generally formed and registered under the Co-operative Societies Act, 1912 and in Kerala, Kerala Co- operative Societies Act, 1969.

The process of setting up a cooperative society is simple and at the most what is required is the consent of at least ten adult persons. The capital of a society is raised from its members through issue of shares. The society acquires a distinct legal identity after its registration.T


1. Voluntary association: Any one can become a member in a co-operative society according to his own free will and he is free to withdraw his membership at any time.

2. Open membership: Membership is open to all irrespective of caste, sex, colour, income or status in the society.

3. Legal status: Registration of a cooperative society is compulsory, therefore society has a separate identity from its members.

4. Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital.

5. Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing committee( in a democratic way, one man one vote)

6. Service motive: It emphasis the value of mutual help and welfare.

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In general company is an association of individuals for common objective. The total capital of a company is known as share capital and it is divided into small units called shares.The person who hold the shares are known as shareholders of the company and they are the real owners of a company. In India companies are formed under Indian Companies Act of 1956.

“A company means a Company formed and registered under this act or existing company”-Indian Companies Act, 1956.

“A company is an artificial person created by law having a separate entity with a perpectual succession and a common seal”- L.H.Haney.

Characteristics/Features of a Company:

1. Separate legal entity: A company has a separate legal existence apart from its members. It can own property, open a bank account, enter contract with members etc…

2. An artificial person: Law has recognized a company as an artificial legal person. As a person, the company can sell and purchase the property belonging to it. A company can sue and be sued like a person.

3. Perpetual succession: A company has continuous existence. Its existence is not affected by the death, insanity, insolvency, transfer of shares by the shareholders.

4. Limited liability: The liability of shareholders is limited to face value of shares held by them.

5. Transferability of shares: Shares of Joint Stock Companies are freely transferable from person to person except in the case of private company.

6. Separation of ownership from management: The Board of Directors are entrusted with the task of management not the shareholders. The BOD is elected by shareholders in democratic way (one share one vote).

7. Common seal: A company is an artificial person created by Law. All documents and certificates issued by such a company must be authenticated by the company seal. Such a common seal is the official signature of a company.

8. Compulsory registration: A company has to be registered under the Companies Act, 1956. It is mandatory.

9. Formation: The formation of a company is time consuming, expensive and complicated process. It involves the preparation of several documents and legal formalities.

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Types of Companies:

A company can be either a private or public company.

Private Company : A private company means a company which:

a – Restricts the right of members to transfer its shares.

b – Have a minimum of 2 and a maximum of 200 members.

c – Does not invite public to subscribe to its share capital; and

d – Have a minimum paid up capital of Rs.1 lakh or such higher amount prescribed from time to time. It is necessary for a private company to use the word private limited after its name.

Public Company : A public company means a company which is not a private company. As per the Indian Companies Act, a public company is one which:

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

b. Has a minimum of 7 members and no limit on maximum members.

c. Has no restriction on transfer of shares and

d. Is not prohibited from inviting the public to subscribe to its shares.

A private company which is a subsidiary of a public company is also treated as public company.

Difference between Private Company and Public Company