FORMS OF BUSINESS ORGANISATIONS

Prof. Bijaya Ku. Sundaray

Proprietorship
A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk. It is also known as Sole proprietorship or single entrepreneurship. Any person who carries on a business exclusively on his own account and at his own risk is known as a sole trade. The owner realizes all the profits and assumes responsibility for all losses.

Salient Features
Single Ownership Common Identity Capital Unlimited Liability One Man Control Profits and Losses

Advantages
Easy Formation Flexibility Quick Decisions Secrecy Personal Touch Direct Motivation Independent Way of Life Minimum government Regulations

Disadvantages
Limited Capital Limited Managerial Skill

Unlimited Liability
Uncertainty Limited Opportunities

Suitability of Proprietorship
Small business requiring modest capital and limited managerial talent as in case of retail stores. In those lines of business where there is a need for greater personal attention to customers as in tailoring, professional services like medicine and law. In those lines of business where the demand of products is often influenced by seasonal trends and fashions. In the production of un-standardized goods like embroidery or artistic things. Where the individual has certain skills with the help of which he wants to earn his livelihood independently. For catering to the demands of local market like perishable products, laundries, grocery stores and confectioneries.

Partnership
A partnership is a form of business organization in which two or more persons up to a maximum of twenty join together to undertake some form of business activity. The Indian Partnership Act, I932 defined partnership as "the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all". The Uniform Partnership Act of the USA defines a partnership "as an association of two or more persons to carry on as co-owners a business for profit".

partnership is an association of two or more persons who have joined together to share the profits of business carried on by all or any of them acting for all.

Continues
The persons who own the partnership business are individually called 'partners' and collectively known as the 'firm or 'partnership firm'. On an agreed basis, partners contribute to capital and share the responsibility of running the business. However, in some cases one partner may provide the whole or major portion of the capital and others contribute technical and managerial skills with or without some capital. All such terms and conditions of partnership are usually mentioned in the partnership agreement.

Partnership Agreement
Name of the business or partnership Names of the partners Type of investment of each partner (such as cash, equipment, real estate) and its value Managerial responsibilities of each partner Accounting methods to be used Rights of partners to review and/or audit accounting documents

Continues
Information about how profits will be divided and how losses will be shared Salaries/money to be withdrawn by partners Duration of the partnership Information concerning dissolution of the partnership Distribution of assets upon dissolution Procedure relating to the death of a partner

Salient Features
Plurality of persons Contractual relationship Profit sharing Existence of business Principal-agent relationship Unlimited liability Good faith and honesty Restriction on transfer of share

Classification of Partners
Based on the extent of participation a) Active partner: If a partner takes an active part in the management of the business, we call him as active partner. He is also known as a 'working partner'.

b) Sleeping partner: If the partner is not actively associated with the working of the partnership firm, we call him a sleeping partner. A sleeping business partner simply invests his capital. He does not participate in the functioning of the firm. Such a partner is also known as a 'dormant partner'.

Continues
Based on the sharing of profits a) Nominal partner: A partner who just lends his name to the partnership is known as a nominal partner. He neither invests his capital nor participates in the day-to-day working and management of the firm. Such partners are not entitled to a share of profits, but they are liable to other parties for all the acts of the firm. b) Partner in profits: A partner who shares the profits of the business without being liable for losses is called a partner in profits. As a rule, he will not take any part in the management of the business. This is applicable to a minor who is admitted to the benefits of the firm.

Continues
Based on liabilities a) Limited partner: The liability of such a partner is limited to the extent of the capital contributed by him. He is not entitled to take part in the management of the business, but he can advise the other general members. His acts do not bind the firm. He has right to inspect the books of the firm for his information. Such partners are also called 'special partners'. b) General partner: He is also called 'unlimited partner. His liability is unlimited and he is entitled to participate in the management of the business. Every partner who is not a limited partner is treated as a general partner.

Advantages
Easy formation More capital available Flexibility Secrecy Keen interest Protection Checks and controls over careless decisions More diverse-skills and expertise Diffusion of risk

Disadvantages
Limited capital Unlimited liability No public confidence Non-transferability of interest

Difficulty in disposing of partnership interest

Potential for personality and authority conflicts

Co-operative Organisations
A co-operative organization is a voluntary association of persons joining together on equal basis for the fulfillment of their economic & other interests. It is generally formed and registered under the cooperative societies act ,1912. The uniqueness of co-operative lies in its ethical approach-service and sacrifice.

Salient Features
Voluntary association Open Membership Service Motive Capital Accumulation Return on Capital Distribution of Surplus Separate legal entity Democratic Functioning

Advantages
Easy Formation Democratic Functioning Limited liabilities Continuity Mutual benefit association Government Assistance

Disadvantages
Limited Capital Plenty of state regulation

Lack of managerial Talents

Misuse of Funds Differences & Bickering among members

TYPES OF CO-OPERATIVES
A. CREDIT CO-OPERATIVE-The Rural credit co-op society started in Germany in 19th century . Its main objective was to provide agricultural finance . It consisted of three tier model-base (primary society), middle (central co-op bank), top (apex bank). Ex:- In India for agricultural loan at the top there is NABARD (National Bank for Agricultural & Rural Development), middle there is state co-op and at the bottom there is urban co-op.

Continues
B. CONSUMERS CO-OPERATIVE- It started in 1844 in England . The main objective was to serve members by purchasing & selling consumer goods at a cheaper price. Main features: *membership is voluntary *One man one vote *capital is contributed by members *managed by elected office bearers of society *Earning profit with service motive Ex:-Amul , Omfed in Orissa , Mother dairy

Continues
C. PRODUCERS CO-OPERATIVE- It 1st started in France in 19th century . But these co-op could not get popularity as it lacked technical & managerial skills . It had two objectives. Social-safeguarding the interest of poorer section against exploitation by capitalist. Economic-Promoting small producers with better bargaining power

Statutory Corporation
Statutory Corporation is a corporation created by statute. Their precise nature varies by jurisdiction thus they might be ordinary companies/corporations owned by a government with or without other shareholders, or they might be a body without shareholders which is controlled by national or sub-national government to the (in some cases minimal) extent provided for in the creating legislation.

Statutory corporation are public enterprises into existence by a Special Act of the Parliament. The Act defines its powers and functions, rules and regulations governing its employees and its relationship with government departments.
This is a corporate body created by the legislature with defined powers and functions and is financially independent with a clear control over a specified area or a particular type of commercial activity.

SALIENT FEATURES
The powers, duties and functions of a statutory corporation are prescribed by the statute passed. It is a body corporate and has a separate legal entity and as such can sue and be sued and enter into contracts and acquire and hold property in its own name. It has a perpetual succession and common seal. It is wholly owned by the Government and the entire equity capital is held in the name of the Government. The management of the corporation is vested in the hands of the Directors appointed by the Government. There is no interference by the Government in the day-to-day working of the corporation.

It has independent financial policy. It can raise funds by borrowing from the public and the treasury. It can reinvest its earnings. Thus, it is financially autonomous and can follow the commercial principles in its operations.

Advantages
It is clothed with the powers of the Government and possesses the flexibility and initiative of a private enterprise. It is free from the defects of rigidity and dilatory action inherent in Government administration because it is an autonomous body. A Public corporation can take long term policy decisions within the powers given to it by the Act which created it. It is not affected by the changes in the Government. It can readily finance expansion programmes without undue delay by use of its revenues or borrowings from the public interest. Its accountability to the Parliament ensures that is it managed to serve the public interest.

Disadvantages
Autonomy and flexibility supposed to be enjoyed by a public corporation are only nominal. Ministers, Government officials and political interests often interfere with the internal management of the corporations. The members of the Board of Directors of a corporation are appointed by the Government and they consist of civil servants, politicians, professional people and representatives of other interests. In may cases, they have proved to be misfits as they dont possess the background, training and talent required to manage a corporation. Public corporations generally do not face competition and do not have profit motive due to which their working turns out to be inefficient. The corporations may indulge into anti-social activities. They may charge higher prices from the consumers to cover up their inefficiency because of the monopoly power enjoyed by them. The charter or constitution of a public corporation is rigid and it is very difficult to change it to incorporate new objectives. The statute has to be amended which is a very cumbersome process.

Companies
Any entity engaging in business, such as a proprietorship, partnership, or corporation. Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.

Features
Separate legal entity Incorporated body Artificial legal person Perpetual succession Limited liability Common seal Right to own property Right to sue Right to enter in to contracts Flexibility of investment Separation of control from the ownership

Classification of companies
Chartered Company Statutory Company Unlimited Company Limited Company Limited by Shares Limited by Guarantee Registered company Private Company Public Company Government Company Holding Company Subsidiary Company

Comparison and Choice of structures

Sole Proprietorship Any Business Owned and Operated by an Individual Partnership Two or More Persons Operating a Business for a Profit Corporation Legislatively Created and Regulated Governance, Ownership and Financial Structure

No Formalities or Legal Documentation; May be Implied from Conduct or Actions Government documents are not required

Written or Oral Agreement or May be Implied from Conduct or Actions

Filing of Articles of Incorporation with Secretary of State and Payment of Fees Articles of Incorporation create Corporation; Bylaws prescribe its Operation

Most have Agreement specifying Rights, Duties and Obligations

Continues
Wholly Owned by Single Individual For Contribution, Partner receives Proportionate Share of Profits/Losses and Partnership Property Partners are Jointly and Severally Liable for all Partnership Obligations, in Contract and in Tort Residual Claim on Corporate Equity and Right to Vote for Directors and Essential Governance Shareholders Liability limited to Extent of Capital Contribution [Limited Liability] Corporation taxed as Separate Entity and Dividends/Capital Gains also Taxed [Double Taxation] Managed by Board of Directors elected by Shareholders; Board may Delegate Authority to Appointed Officers

Sole Proprietor Personally Liable for All Debts and Obligations

Not a Taxable Entity; Income Partnership not a Taxable Entity; (Loss) passes through to Allocations of Income and Loss Sole Proprietor allowed within Partnership before Pass-Through Sole Proprietor has Complete Management Control All Partners have Equal Rights in Partnerships Management and Conduct

Continues
Sole Proprietorship not Transferable; Property and Products are Transferable Limited Right of Transfer subject to Consent by all Partners Freely Transferable through Formal (NYSE) and Informal (Private Equity) Capital Markets

Terminates Sole Proprietorship

Partner Death or Withdrawal may Terminate Partnership

Corporation has Unlimited Life