Choice of Organization

8/3/2019 Choice of Organization

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choice of organization

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Prof. Vanita Joshi, SOM, SIMS, Indore


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choice of organization

Contents

Part A- SOLEPROPEREITORSHIP

Part B- PARTNERSHIPPart C- JOINT STOCK COMPANY

Part D- CO-OPERATIVES

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Part- A

SOLE PROPRIETORSHIP

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Sole proprietorship is a business enterprise exclusivelyowned, managed and controlled by a single personwith all authority, responsibility and risk.

This individual has a right to all of the profits and

bears all of the liability for the debts andobligations of the business.

To establish a sole proprietorship , a person merelyneeds to obtain whatever local & state licenses are

necessary to begin operations.eg:- grocery stores in your city, restaurants in yourcity, stationary shops etc.

Sole Proprietorship

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Characteristics of SoleProprietorshipSingle ownership

No sharing of profit & losses

Low capitalOne-man control

Unlimited liability

Almost no legal formalities

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Advantages of SoleProprietorship

EASE OF FORMATION : Less formality &fewer restrictions are associated with a soleproprietorship firm.

SOLE OWNERSHIP OF PROFIT : Theproprietor is not required to share profitswith anyone.

DECISION MAKING & CONTROL VESTEDIN ONE OWNER : No co-owners or partners

must be consulted in running the operation.66


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FLEXIBILITY: Management is able to respondquickly to business needs in the form of day today management decisions as governed byvarious laws & good sense.

RELATIVE FREEDOM FROM GOVERNMENTALCONTROL : Except for requiring necessary

licenses , very little governmental interferenceoccurs in the operation.

FREEDOM FROM CORPORATE BUSINESSTAXES : Proprietors are taxed as individualtaxpayers and not as businesses.

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Disadvantages of SoleProprietorship

UNLIMITED LIABILITY: The individual proprietor ispersonally responsible for all business debts.

LACK OF CONTINUITY : the enterprise may beterminated if the owner becomes ill or dies.

LESS AVAILABLE CAPITAL : Proprietorships haveless available capital than other types of businessorganizations

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RELATIVE DIFFICULTY OBTAININGLONG-TERM FINANCING : Because the

enterprise rests exclusively on oneperson, it often has difficulty raising long-term capital.

RELATIVELY LIMITED VIEWPOINT ANDEXPERIENCE : The operation depends on

one person , and this individuals ability ,training , and expertise will limit itsdirection and scope.

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Part-BPARTNERSHIP

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Partnership

A partnership is a type of business entity in whichpartners (owners) share with each other the profitsor losses of the business

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Contd..

Partnership is a legal relation between twoor more persons to share the profits &losses of the business carried on by all or

any of them acting for all

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Characteristics ofPartnership Two or more members Partnership agreement Lawful business

Competence of partners Sharing of profits Unlimited liability Voluntary registration

No separate legal existence Restriction on transfer of interest Continuity of business

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Types of Partners

Active partner

The partners who actively participate in the day-to-dayoperations of the business are known as active partners.They contribute capital and are also entitled to share theprofits of the business. They also share the losses that the

business faces.

Sleeping or dormant partner

Those partners who do not participate in the day-to-dayactivities of the partnership firm are known as dormant orsleeping partners. They only contribute capital and sharethe profits or bear the losses, if any.

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Contd..Nominal partner

These partners only allow the firm to use their name as apartner. They do not have any real interest in the business ofthe firm. They do not invest any capital, or share profits andalso do not take part in the business of the firm. However, theydo remain liable to third parties for the acts of the firm.

Minor as a partner

In special cases a minor can be admitted as partner withcertain conditions. A minor can only share the profit of thebusiness. In case of loss his liability is limited to the extent of

his capital contribution for the business.

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Section 4 of Indian partnershipAct, 1932

Partnership is the relation between personswho have agreed to share the profit of a

business carried on by all or any of them actingfor all.

The persons who have entered into partnershipwith one another are Individually calledPartners and collectively a Firm

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Characteristics of Partnership

1. Association of two or more persons : Partnership isan association of two or more persons agreeing tocarry on business & share profit or loss.

2. Agreement : The partnership comes in existence byan agreement, either written or implied & not bythe status or process of law as in joint familybusiness.

3. Carrying on a business: Agreement should be forthe purpose of carrying on a business.

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4. Profit-Sharing: The agreement between thepartners must be to share the profits . It is

not essential that all the partners mustshare the losses also. There may be aprovision in the partnership deed that aparticular partner or partners shall not bear

losses.

5. Business can be carried on by all or any of

the partner acting for all: The business ofpartnership can be carried on by all or anyone of the partners acting as agent of theother partners.

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Rights of Partners

Every partner has a right to take part in themanagement of the business.

Every partner has a right to be consulted about theaffairs of the partnership business.

Every partner has a right to inspect the books ofaccount and have a copy of the same.

Every partner has a right to share the profits (losses)

with others in the agreed ratio.

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A partner has the right not to allow theadmission of a new partner.

On proper notice, a partner has the rightto retire from the firm.

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Duties of Partners

To devote time & attention to the businessof the partnership.

To carry on the business diligently & with

the greatest common advantage.To hold & use the property of the firm onlyfor the firm.

To act within the authority.To make good the loss that may have beencaused by his willful neglect or breach of

trust. 2121


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Partnership Deed

Description of the Partners: Name &address of the partners.

Description of the firm:Name & address of

the firm.

Nature of the business

Commencement of the business: Date ofcommencement of partnership.

Capital contribution: The amount ofcapital to be contributed by each partner.

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Interest on Capital: If interest on capital is to

be allowed on capital.Interest on Drawings: If interest is tocharged on drawings.

Profit-sharing ratio: Ratio in which profits orlosses are to be shared by the partners.

Goodwill: The manner in which goodwill ofthe firm will be valued in then case of its

reconstitution.

Accounting Period: The date on whichaccounts shall be closed every year.

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Rights & duties of partners

Duration of Partnership:The period for whichpartnership is established. If it is at will, thenotice that will be required if any partner

wishes to retire.

Settlement of accounts in Case of Dissolution

of firm: The manner in which accounts shallbe settled when the firm is dissolved.

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Advantages of Partnership

Easy to form

Availability of large resources

Better decisions

Flexibility in operations

Sharing risks

Protection of interest of each partner

Benefits of specialization

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Disadvantages ofPartnershipUnlimited liability

Uncertain life

Lack of harmonyLimited capital

No transferability of shares

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Businesses suitable forPartnership legal structure

A partnership firm is suitable in case of business where theinitial capital requirement is medium i.e. it is neither too largenor too small. Business like retail and wholesale trade or smallmanufacturing units can be successfully started by partners.

In a partnership firm persons having different ability,managerial talent, skill and expertise join together. So it ismost suitable for construction business, legal firms etc. whereeach partner contributes the best as per his specialization andexperience.

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Joint stock company

Part-C

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Joint Stock Company

A Joint Stock Company is a voluntaryassociation of persons for profit, whosecapital is divided into transferable shares

and ownership is required membership.

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FEATURES

Artificial Person

Created by Law

Fixed Capital

Limited Liability

Perpetual SuccessionDemocratic Management

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TYPES OF COMPANIES

On the basis of

Incorporation

On the basis of

Liability

On the basis ofOwnership

Charted

Statutory

Registered

Unlimited

Limited

-By Shares-ByGuarantee

Public

Private

Government

Holding

Subsidiary

Foreign

Collaboration & 3131


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ADVANTAGES

Permanent Existence

Limited liability

Availability of Large Capital

Transferability of Shares

Tax Relief

Diffused risk

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DISADVANTAGES

Excessive Legal Formalities

Speculation in Shares

Fraud by PromotersLack of Secrecy

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Joint Stock Company(private &public companies)Joint stock company is a voluntary association

of individuals for profit, having a capital divided intotransferable shares, the ownership of which is thecondition of membership.

The Indian Companies Act 1956 defines a companyas an artificial person created by law , having aseparate legal entity, with perpetual succession and a

common seal.

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Difference between private& public company

Can be formed byat least two

members havingminimum paid-upcapital of not lessthan rupees 1

lakh.The total

membership of

these companiescan not exceed 50.

A minimum 7

members arerequired with theminimum paid-upcapital of ruprrs5

lakhs.There is no

restriction onmaximum

number of

Private company Public company

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Characteristics of JointStock CompanyLegal formation

Artificial person

Separate legal entity

Common seal

Perpetual existence

Limited liability

Democratic management

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Advantages of Joint StockCompanyLarge financial resources

Limited liability

Professional managementLarge scale production

Research and development

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Disadvantages of JointStock CompanyDifficult to form

Excessive government control

Delay in policy formation

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FORMATION


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FORMATIONThe formation of a company, right from the origin ofidea to establish a company goes through four

different stages.

Stage-I Promotion

1. Discovery of a business idea

2. Investigation and Verification

3. Assembling

4. Financing the Proposition

Stage-II Incorporation

1. Preparation of MOA and AOA

2. Filing of necessary documents for registration

3. Issue of Certificate of Incorporation

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Stage-III Raising of capital

1.Issue of prospectus

2. Filing of Prospectus with the Registrar

3. Allotment of Shares

4. Issue of Share Certificates

Stage-IV Commencement of business

1.Submission of necessary documents toRegistrar of Company.

2.Issue of Certificate of Commencementof Business.

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B i S it bl f J i t


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Businesses Suitable for JointStock Legal Structure

A joint stock company form of business organization is found tobe suitable where the volume of business is large and hugefinancial resources are needed.

Since members of a joint stock company have limited liability itis possible to raise capital from the public without much

difficulty. This form of organization is also suitable forbusinesses which involve heavy risks.

Again, for business activities which require public support andconfidence, joint stock form is preferred as it has a separatelegal status.

Certain types of businesses, like production of pharmaceuticals,machine manufacturing, information technology, iron and steel,aluminum, fertilizers, cement, etc., are generally organized inthe form of joint stock company.

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CO-OPERATIVE Societies

Part-D

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Co-operative Societies

Cooperative is an association of persons usuallyof limited means, who have voluntarily joinedtogether to achieve a common economic endthrough the formation of a democratically

controlled business organization.A cooperative may also be defined as abusiness owned and controlled equally by thepeople who use its services or by the people

who work there. Cooperative enterprises arethe focus of study in the field of cooperativeeconomics.

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Contd..

Co-operatives are association of personsunited voluntary to meet their commoneconomic, social and cultural needs andaspirations through a jointly-owned and

democratically controlled enterprise.

It is a business organization owned and

operated by a group of individuals for theirmutual benefit.

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Features of Co-operativeSocieties

Open Membership

Voluntary Association

Democratic Management

Service Motive

Separate Legal Entity

Self-Help Through MutualCooperation

Reserve Fund

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OBJECTIVES


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OBJECTIVES

Render service rather than makingprofit

Mutual helpinstead of competition

Self help instead of dependence

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Types of Co operative


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Types of Co-operativeSocieties

Consumers Cooperatives

This is an organization of consumers. It isformed by consumers in order to protecttheir own interest, its aim is to eliminate

intermediaries from the distribution channel.

Producers Cooperatives

It is an organization of workers formed to

produce commodities. These are classified as

i)Raw Material producing Co-Op

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Credit Cooperatives

These societies are formed to providefinancial support to the members. Thesociety accepts deposits from membersand grants them loans at reasonablerates of interest in times of need.

Housing Cooperatives

These societies are formed to provide

residential houses to members. They4848


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Building Cooperatives

Members of a building cooperative poolresources to build housing, normally using ahigh proportion of their own labor. When thebuilding is finished, each member is the sole

owner of a homestead, and the cooperativemay be dissolved.

Agricultural Cooperatives

These societies are formed by smallfarmers to work jointly and thereby enjoy thebenefits of large-scale farming.

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Marketing Cooperatives

These societies are formed by smallproducers and manufacturers who find it

difficult to sell their products individually.

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formationA Co-operative Society can be formed as per the provisions ofthe Co-operative Societies Act, 1912.

At least ten persons having the capacity to enter into acontract with common economic objectives, like farming,weaving, consuming, etc. can form a Co-operative Society.

A joint application along with the bye-laws of the society

containing the details about the society and its members, hasto be submitted to the Registrar of Co-operative Societies ofthe concerned state.

After scrutiny of the application and the byelaws, theregistrar issues a Certificate of Registration.

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Requirements for Registration:

1. Application with the signature of allmembers

2. Bye-laws of the society containing:

(a) Name, address and aims and objectivesof the society;

(b) Names, addresses and occupations of

members;

(c) Mode of admitting new members;

(d) Share capital and its division.5252

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Advantages of Co-operativesocietyEasy formation

Open membership

Democratic control

Limited liability

Elimination of middlemens profit

Self assistence

Stable life

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Di d t f C


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Disadvantages of Co-operative societyLimited capital

Problems in management

Lack of motivation

Lack of co-operation

Dependence on government

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Documents

Choice of Organization