FORMS OF BUSINESS ORGANISATIONS - WordPress.com · 2018-05-05 · FORMS OF BUSINESS ORGANISATIONS....

FORMS OF BUSINESS ORGANISATIONS

WHAT IS A BUSINESS ORGANISATION?

The term "business organization" refers to how a business is structured.

It refers to a commercial or industrial enterprise and the people who constitute it.

TYPES OF BUSINESS ORGANISATIONS

• Sole Proprietorship• Partnership Firm• Joint Stock Company 1.) Private Limited 2.) Public Limited• Co-operative Society• Government Sector

Choosing a Form of Business OrganisationThe choice of the form of business is governed by

several interrelated and interdependent factors :-• The nature of business is the most important

factor• Scale of operations i.e. volume of business ( large,

medium, small) and size of the market area (local, national, international)

• The degree of control desired by the owner(s) • Amount of capital required for the establishment

and operation of a business• The volume of risks and liabilities as well as the

willingness of the owners to bear it• Comparative tax liability

SOLE PROPRIETERSHIPWhen the ownership and management of a business are in control of one individual the form of business is called sole proprietorship.

CHARACTERISTICS • The business enterprise is

owned by one single individual (i.e. both profit and risk belong to him)

• Owner is the Manager• Owner is the only source of

Capital• The proprietor and business

enterprise are same in the eyes of the law.

ADVANTAGES OF

SOLE PROPREITORSHIP

• Easy formation• Better Control (Prompt decision making and

Flexibility in Operations)• Subject to fewer regulations• Not subject to corporate income tax• Ownership of all profits

DISADVANTAGES OF SOLE PROPREITORSHIP

• Owner has unlimited liability

• Difficult to raise capital

• Business has a limited life

• Difficult to do business beyond a certain size

APPLICATN OF SOLE PROPREITORSHIP• Example of Sole propreitership are:• Medical shop• TV/Computer repair shop• Bicycle/Automobile showroom• Small engg. Firms etc.

PARTNERSHIP FIRM A Partnership consists of two or more individuals

in business together

According to Indian Partnership Act 1932, Partnership is defined as, “the relation between two or more persons who have agreed to share profit of a business, carried on by all or any of them acting for all.”

CHARACTERISITCS OF PARTNERSHIP• Minimum 2 number of partners and maximum 20

partners• The relation between the partners is created in the

form of a contract. Written contract is called “Partnership Deed”

• The firm means partners, the partners mean the firm

• The profit is divided in any as ratio as agreed• No partner can sell/transfer his interest in the firm

to anyone without the consent of other partners

Formation :

Partnership can be formed either verbally or by written agreement. The written agreement is known as “Partnership Deed”.

The Partnership Deed contains :

Ø The terms and conditions relating to the partnership.

Ø The regulations governing its internal management.

Ø The rights and duties of the partners.

The Partnership Deed should have the following details :

Ø Name of the firm.

Ø Nature of business.

Ø Date of starting partnership.

Ø Duration of partnership.

Ø Rate of interest on capital invested.

Ø Money contributed by each partner.

Ø Allotment of managerial functions among partners.

Ø Share of profit and loses.

Ø Salary allowed to managing partners.

Ø The basis for the inclusion of any new partners.

Ø The amount which can be withdrawn by each partner.

Ø The aim of partnership.

Ø Accounts of the firm and authority.

Ø Provision for arbitration for settling the disputes that may arise in future.

Types of Partners :

Ø General Partners :

All the partners who participating in the working of the firm and are responsible to joint with other partners, for all liabilities, obligations and defects of the firm are the general partners.

Ø Limited Partners :

The liability for debts of the limited partners is limited to the extend of their contributed capital.

Ø Active or Managing Partners :

Active partners are those who take active part in the management and formulation of policies.

Ø Sleeping and Silent Partners :

They do not take any active part in the business. They simply contribute their capital in the business and get their share in the profit of the firm.

Ø Nominal Partners :

T h e y l e n d t h e i r re p u t e d n a m e fo r t h e company’s reputation. They do not invest money and do not take any active part in the management.

Ø Minor Partners :

Minor partners are those whose age is below 18 years and associated with the business. Such partners can be allowed only with the consent of other partners. Their liability is limited to their investment.

ADVANTAGES OF PARTNERSHIP

• Easy Formation • Larger Resources• Sharing Of Risk• Better Management and

Flexibility of Operation• No corporate income tax• Subject to fewer regulations

as compared to companies

DISADVANTAGES OF PARTNERSHIPS

• Unlimited Liability• Limited Life• Difficult to raise capital• Chances of Dispute• Non-Transfer of

Partnership. • Lack of Public

Confidence.

APPLICATN OF PARTNERSHIP

• Example of PARTNERSHIP are:• C.A. Firms• Law firms• Coaching classes• Small factories etc.

Parameter Individual Ownership Partnership

Membership : Individual Owner

Minimum 2 Maximum 50

Formation : No agreement is required

An agreement is required

Capital : Limited Capital Large Capital

Distinction between Individual Ownership and Partnership

Registration : Not Necessary Necessary

Risk : Individual Owner bear risk

Risk spread among partners

Profit : Owner enjoys the profit

Profit is shared among partners

Management : Owner manage the business

It is shared by partners

Secrecy : Owner maintains the secret

Partners may reveal secrets

Decisions : Owner must take decisions

Partners can take decisions

Suitability : Small scale business

Small and Medium scale

Division of labour : Not possible Possible

JOINT STOCK COMPANY A joint stock company is a voluntary

association of people who contribute money to carry on business

Ø Joint Stock CompanyJo int S tock Companies are formed and

registered under the Indian Companies Act, 1956. The joint stock company is a legal business owned by the shareholders having limited liability and managed by an elected “Board of Directors”. The shares are transferable.

Characteristics of Joint Stock Company :

Ø A company is created by registering or incorporating an association of persons under the Company Act.

Ø It has a separate legal existence as distinct from its members.

Ø Artificial personality enabling it to exercise certain legal powers.

Ø Perpetual life and a very stable existence.

Ø It has a common seal on which its name is engraved and this seal acts as its signature.

Ø There is a complete separation of ownership from management.

Ø Liability of shareholders is limited.

Ø Lower tax liability.

Ø Easy transferability of shares.

Ø There is a wide distribution of risk of loss.

Ø Large membership.

Ø Statutory regulations as provided in the Indian Company’s Act, 1956.

Formation of Joint Stock Company :

The entrepreneurs (promoters) of the company prepare the following documents :

Ø Memorandum of Association.

Ø Articles of Association.

Ø A List of persons who have consented to be the Directors of the Company.

Ø A declaration by an advocate to the effect that all the requirements of the Act have been fulfilled.

Ø Name and address of promoters.

Organization Structure :

Share holders

Board of Directors

Auditor Executive Committee Bankers

General Manager

Sales Purchase Accounting Productiondeptt. deptt. deptt. deptt.

Types of Joint Stock Company :

Ø Private Limited Company

Ø Public Limited Company

Private Limited Company :

It can be formed by two or more members. The maximum number of members is limited to 50. The company is registered under the Indian Company’s Act, 1956.

It enjoys a separate legal status, continuity of life, benefits of limited liability. Large capital raising power, business secrecy to certain extend.

Public Limited Company :

The membership is open to general public. The minimum number of persons is 07 and no upper limit.

I t i s s u b j e c t e d t o g r e a t e r c o n t ro l a n d supervision of the government which protect the interest of the shareholders and the members of the public.

Advantages :

Ø Economies of Large Scale.

Ø Limited Liability.

Ø Huge Capital.

Ø Share Transferable.

Ø Economies Administration.

Ø Democratic.

Ø Permanent Existence.

Ø Legal Control.

Ø Risk spread out.

Ø Mobilization of Scarce saving.

Ø Accelerated economic growth of the country is possible through industrialization.

Ø It creates huge employment possibilities.

Disadvantages :

Ø Dishonest directors may exploit the shareholders.

Ø Large Complexities.

Ø It is democratic in theory only.

Ø Delay in Decisions.

Ø Favourisms.

Ø Difficult labour relations.

Ø Lack of initiative and personal interest.

Ø Concentration of economic power and wealth in a few minutes.

Ø Misuse of internal information.

Particulars Private Limited Public Limited

Membership : Open to Private members.

Open to general public.

Limits to membership :

Minimum 2 Maximum 50

Minimum 7 Maximum no limit

Comparison between Private and Public Limited Companies

Election of Directors : Not required Required

Resale of shares : Not possible Possible

Audit of Accounts :

No legal provision Legal provision

Minimum capital :

Min. Paid up share capital of 1 Lack

Min. Paid up share capital of 5 Lack

Name : End with “Private Limited”

End with only “Limited”

Number of Directors : Minimum 2 Minimum 3

Legal control : Less More strict

Remuneration of Directors : Less 11% of net

profits

CO-OPERATIVE SOCIETY

It is a voluntary association of people or business to achieve a an economic goal with a social perspective

CHARECTERISTICS OF CO-OPERATIVE

• Voluntary association• Minimum membership requirement is 10

and there is no maximum limit• Registration of Co-operative is must

under the “Co-operative Societies Act” is a must. After the registration it enjoys certain privileges of a Joint Stock Company

ADVANTAGES OF CO-OPERATIVE• Easy Formation• Limited Liability• Stability• Democratic

Management• State Assistance

DISADVANTAGES OF A CO-OPERATIVE

• Possibility of conflict

• Long decision making process

• Not enough capital

Types of Co-operative Societies :

Ø Producers Co-operative Society.

Ø Consumers Co-operative Society.

Ø Housing Co-operative Society.

Ø Credit Co-operative Society.

Ø Consumers Co-operative Society :

The consumers l iving in a particular area combine together. Each contributes a small capital.

A store is opened in which articles of common use are stocked and sold at reasonable prices. Such stores are found in colleges and schools.

Advantages :

Ø Much capital is not needed.

Ø The management is simple and honorary.

Ø There is legal control and inspection.

Disadvantages :

Ø They offer very little selection for consumers.

Ø The honorary office bearers do not take much pains, they are sometimes dishonest.

Ø Housing Co-operative Society :

These are formed for the purpose of getting plots or constructing house for the needy persons. Government provides great facilities for this purpose.

Ø Credit Co-operative Society :

Its object is to finance the poor cultivators by providing loans at low rate of interest for the development of land, purchase of agricultural machinery, fertilizers etc.

Advantages :

Ø It protects the interest of the weaker section of the community as under :

• Provide better methods and tools of production to small manufacturers and craftsmen.

• Help the farmers in farming and marketing their products efficiently.

• Provide financial assistance at moderate rate of interest.

• Opening of super bazaar types of stores gives relief to the weaker section of the society.

Disadvantages :

Ø Lack of Co-ordination.

Ø Chances of undue advantages.

Ø Favourism.

Ø Limited Capital.

Ø Inefficient Management.

Ø Political influence.

A commercial or Industrial undertaking owned & managed by the Government with a view to maximize social welfare is called as Public Sector Enterprise.

I t has to p lay a key ro le to accompl ish quick industrialization and rising standard of living of the people through developing key and basic industries.

Objectives :

Ø Equitable distribution of wealth and income.

Ø Balanced economic development through dispersal of industrial location.

Ø Adequate employment opportunities.

Ø Speedy agricultural and industrial development without the growth of monopolies.

Ø Self-sufficient of the nation in modern technology.

Types of Public Sector:

Ø Government Departmental Organization

Ø Public Corporation

Ø Govt. Company

Government Departmental Organization:

Ø It is primarily used for provision of essential services such as railways, defense industries, postal services, broadcasting etc.

Ø Such organization function under the control of a minister incharge of the department

Public Corporation:

Ø It is a corporate body created by the parliment or assembly, A specialact defines its power, functions and jurisdiction.

Ø It is wholly owned by the Gov.

Ø Example of such organization are Life Insurance Corporation of Indi, State Transport Corporation etc.

Government Company:

Ø It is a campany in which 51% or more of the share capital is owned by th Gov.

ØMajority of directors of Gov. Company are nominated by Gov.

ØExample of Gov. Companies are BHEL, SAIL, ONGC, HPCL, SBI, etc.

Advantages :

Ø Profits go to the Govt. and are utilized for the benefit of the society.

Ø Purity of supply is guaranteed.

Ø Govt. has ample funds and can borrow more, if needed, in the money market at low rates.

Ø The best talent is attracted towards Govt. service.

Ø Govt. can afford to wait long for an enterprise to yield profit.

Ø Consumer’s interests are properly safeguarded.

Ø Govt. enterprise is subjected to greater control.

Disadvantages :

Ø Govt. officer behaves like a big boss and a respectable citizen receives no courtesy.

Ø Govt. servants do not work hard because here promotion is by seniority and not by merit.

Ø Frequent transfers of Govt. servants are harmful to the success of the enterprise.

Ø The Govt. business is all routine and there is little initiative. So economic progress is slow.

Ø There are no shareholders to question the directors in the annual meeting.

Ø Due to Gov. Control usually important decisions get delayed.

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