Ch – 2 : Forms of Business Organisation

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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


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


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


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 100,At present it is limited to 50 by Govt. of India.

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…………

Types of Partners
Depending on the nature of agreement and interest taken in the business, partners are of different
1. Active or Working Partner – A partner who contributes capital and take part in the day to
day affairs of the business is called active partner.

  1. Sleeping or Dormant Partner – He does not play an active part in the business but simply
    contributes capital and shares the profit or loss as the case may be.
  2. Secret Partner – It is one whose association with the firm is unknown to the public. All other
    features are just like an active partner.
  3. Nominal Partner (Ostensible Partner or Quasi Partner) – Such a partner lends his name
    and reputation for the benefit of the firm but neither contribute capital nor take part in
    management as well as no share in profit of the firm . Although he becomes liable to
    outsiders for the debts of the firm.
  4. Partner by Estoppel – If a person acts as a partner of a firm by his words and conduct, he
    can be called as partner by estoppel. Even though he is not an actual partner, he is liable for
    the debts of the firm as he makes himself as a partner in front of the public.
  5. Partner by holding out – Sometimes a person may be declared as a partner in a firm by the
    outsiders and does not deny this even after becoming aware of it. Such a person is known
    as partner by holding out. He is also liable for the debts of the firm though he is not an actual

Minor as a partner
A minor is a person who has not completed 18 years of age. A minor cannot become a partner as
he is not capable to enter into a contract, but he may be admitted as a partner to the benefits of the
firm, with the consent of all the partners. He cannot take active part in management and his liability
is limited to the extent of his share in the capital and profits of the firm. After becoming major he will
be eligible to enjoy all the rights of a partner and his liability becomes unlimited. It should be noted
that a partnership cannot be formed with a minor partner.

Types of Partnership
Partnership may be broadly divided into two, namely General or Ordinary Partnership and Limited

  1. General Partnership – In this type of partnership the liability of all the partners is unlimited
    usually these types of partnership is found in India. On the basis of duration, general
    partnership is divided as follows:
    b. Particular Partnership – It is formed for a particular purpose or for a particular period. E.g.
    If a partnership is formed for two years, or for the construction of a house etc. After the
    expiry of the time or the completion of construction, it will be dissolved.
    c. Partnership at Will – If the duration of a partnership is not specified in the agreement, it is
    called partnership at will. It will be continued for an indefinite period and it can be dissolved
    at any time as it is decided by all or any of the partners.
  2. Special Partnership (Limited Partnership) – In a limited partnership, there are two classes of
    a. General Partners
    b. Special Partners
    There should be at least one general partner whose liability is unlimited and the liability of special
    partners is limited to the extent of their capital contribution. It is not allowed in India but prevails in

3- Joint Hindu Family Business (JHF) Hindu Undivided Family Business ( HUF)
A Joint Hindu Family business refers to a business which is owned by the members of a Joint Hindu
Family. It is the oldest system of business that can be seen only in India, which is governed by the
Hindu Law. The basis of membership in the business is birth in a particular family and three
successive generations can be members in the business.
The business is controlled by the head of the family who is the eldest member and is called ‘Karta’.
All members (male and female) have equal ownership right over the property of an ancestor and
they are known as ‘co-parceners’.

Features of JHF

a. Formation – Minimum two members from the family and their ancestral property is used. It is
governed by Hindu Succession Act, 1956
b. Liability – Limited liability to the members except Karta.

c. Control – Management is vested in the hands of Karta.
d. Continuity – The death of a member or Karta does not affect the business.
e. Minor Members – It is because, membership by birth.
Note: Both male and female members in the family have equal right in the business based on the Hindu
Succession (Amendment) Act 2005.
a. Effective control – No conflict among members as the decisions are taken by Karta.
b. Continued existence – Even the death of Karta does not affect the existence of business, as
the next eldest member will take up the position.
c. Limited liability – Liability of members except Karta is limited.
d. Increased loyalty and cooperation – The business is treated as a pride to the family.
a. Limited resources – It depends mainly on ancestral properties.
b. Unlimited liability of Karta – His personal properties are also liable to meet the debts of the
c. Dominance of Karta – The leadership of Karta may not be acceptable to all the members in
the family, which may results even the breakdown of family.
d. Limited managerial skills – The Karta may not be an expert in all the 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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1. Consumer’s co-operative societies: Aim at ensuring steady supply of consumer  goods and services at reasonable prices to its members. 

2. Producer’s co-operative societies: They purchase raw materials, tools and  equipments and other items of production in large quality and then distribute them  among their produce r member.

3. Co-operative marketing societies: They enable the members to secure fair price for  their products by removing the difficulties in marketing. 

4. Co-operative Credit Societies: They provide financial assistance in the form of direct  loans to the members 

5. Co-operative farming societies: In this farmers pool their land and undertake  cultivation collectively. 

6. Co-operative housing societies: They are formed to provide housing facilities to their  members, either on ownership basis or on rental basis. 


1. Equality in voting right: The principle of one man one vote governs the  cooperative society.  

2. Limited liability: The liability of members is limited to the extent of their capital  contribution.  

3. Stable existence: Death, insolvency or insanity of the members do not affect  continuity of a cooperative society.  

4. Economy in operation: As focus is on elimination of middlemen, this helps in  reducing costs.  

5. Support from government: They find support from government in the form of  low taxes, subsidies, low interest rates on loans…. 


1. Limited resources: Resources of a cooperative society consists of capital  contribution of the members with limited means.  

2. Inefficiency in management: Cooperative societies are unable to attract and  employ expert management because of their inability to pay them higher salaries.  3. Lack of secrecy: It is difficult to maintain secrecy about the operations of a  cooperative society.  

4. Government control: Cooperative societies have to comply with several rules and  regulations related to auditing of accounts, submission of accounts etc. Through  state cooperative department, government exercised control over cooperative  societies.  

5. Difference of opinion: Sometimes personal interests may start to dominate the  welfare motive and the benefit of other members.  


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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Merits of a Company

  1. Limited Liability – The public may be encouraged to invest in the shares of a company
    because of the limited liability.
  2. Transfer of Shares – The investors are attracted to purchase the shares o companies as it
    can be converted into cash at any time.
  3. Perpetual existence – A company will continue to exist even if all the members die. It can
    be liquidated only as per the provisions of Companies Act.
  4. Scope for expansion – Through the issue of shares a company can accumulate a large
    amount of capital. Hence it has greater scope for expansion.
  5. Professional Management – Management of a company constitutes the Board of Directors
    and supported by the salaried managers.


1. Difficulty in formation: The formation of a company requires greater time, efforts,  knowledge of legal formalities…. 

2. Lack of secrecy: Companies information is available to the general public also,  therefore, it is difficult to maintain complete secrecy. 

3. Impersonal work environment: Because of separation of ownership and  management, there is lack of effort as well as personal involvement on the part of the  officers of a company. 

4. Numerous regulations: The functioning of a company is subject to many legal  provisions and compulsions. 

5. Delay in decision making: Communication as well as approval of various proposals  may cause delays not only in taking decisions but also acting upon them.

6. Conflicts of interests: There may be conflicts of interests amongst various  stakeholders of a company.

Types of Companies:

A company can be either a private or public company.

A – 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.

B – 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.

c. One Person Company (OPC) – As per Section 3(1) of Indian Companies Act 2013 enables the
formation of a new entity known as One Person Company. An OPC means a company with
only one person as its member. It enjoys the privilege of limited liability.

Difference between Private Company and Public Company

The selection of a suitable form of organization is made after considering the following  points: 

1. Cost: From the point of view of initial cost, sole proprietorship is the preferred form as  it involves less expenditure. Company form of organization, on the other hand involve  greater cost. 

2. Easy formation: The legal requirements are less in the case of sole proprietorship and  partnership, but registration is compulsory in the case of companies and cooperative  societies, therefore they are more complex. 

3. Liability: In the case of sole proprietorship and partnership the liability of owners are  unlimited. In cooperative societies and companies, the owners liability is limited .  Therefore from the point of view of investors , company and cooperative societies are  more suitable as the risk is less. 

4. Continuity: The death, insolvency and insanity of owners affect the continuity of a sole  proprietorship or partnership, but they are not affected for companies and cooperative  societies. Therefore if a business need long term existence company form is more  suitable. For short term ventures, sole proprietorship and partnership is preferred. 

5. Management ability: If the organizations operations are complex in nature and  require professional management, company form of organization is more suitable. Sole  proprietorship and partnership may be suitable, where simplicity of operation in  business. 

6. Capital: If the scale of operation and chance of expansion is large, company form of  organization is suitable whereas for medium and small business one can opt  partnership or sole proprietorship. 

7. Degree of control: If direct control over operations and decisions is required, sole  proprietorship is preferred. But if the owners do not mind sharing control, partnership  or company form of organizations can be adopted. 

8. Nature of business: For a small trading concern where direct personal contact  needed, sole proprietorship is more suitable. For large manufacturing units, company  form of business may be adopted. In cases where services of a professional nature are  required, partnership form is more suitable.