Detailed Explanation of Forms Of Business Organization – CA Foundation / CS Executive

Detailed Explanation of Forms Of Business Organization

Business: Business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits.

The term business is derived from the word ‘busy’.

Thus Business means being busy.

Business Organization:  Business organization, an entity formed for the purpose of carrying on commercial enterprise.

Forms of business organisation

Types of Business Organization :

 1. Sole Proprietorship:  – Detailed Explanation of Forms Of Business Organization

This form of business is the oldest and most common form of business organization. Sole Proprietorship can be defined as “a business enterprise exclusively owned, managed and controlled by a single person with all responsibility and risk”

The word “sole” implies  “only” and “proprietor” refers to “owner”

Hence, a sole proprietor is the one who is the only owner of a business.

Characteristics:

Single ownership

No sharing of Profit and Losses

One-man’s Capital

One-man Control

Unlimited Liability

Less Legal Formalities

Advantages:

Easy to form and wind up

There is a direct link between effort and reward (Direct Motivation)

Quick Decision and Prompt Action

Better control because of sole authority

Close personal relationships with customers

Flexibility in operation because the owner can change the nature and scope of business as per his decision

Encourages Self-employment

Disadvantage:

Limited Capital because of sole ownership

Unlimited Liability of owner

Lack of continuity

Limited size

Suitability:

When the market for the product is small.

Where the customer needs personal attention, according to their personal tastes and preference.

Where the nature of the business is simple.

Where the capital requirement is small and the risk involved is not heavy.

Where manual skill is required.

2. Partnership: – Detailed Explanation of Forms Of Business Organization

The Indian Partnership Act, 1932 defines partnership as “the relationship between two or more persons who have agreed to share the profits of the business carried on by all or any of them acting for all.

Characteristics:

Minimum two members are required to start a partnership business.

The relation between partners of a partnership firm is created by contract. The agreement may be verbal, written or implied. The written agreement is known as “Partnership Deed”.

The partners must be competent to the contract.

The partners can share profit and loss in any ratio agreed by them. In the absence of agreement, they share it equally.

The partners have unlimited liability.

A partnership firm may be carried by all or any of them acting for all.

No partner can sell or transfer his interest in the firm without the consent of other partners.

The partnership firm is not distinct from the partners.

Registration of partnership is not compulsory.

Advantages:

Easy to form

Favorable Credit Standing in the eyes of creditors.

Large capital because of the joint efforts of partners.

Greater Managerial Ability

Union of business ability because of mutual consent of each other.

The profits are shared by the partners as per the agreement.

Advantages of secrecy as partners keep the business secrets to themselves.

Ease of dissolution.

Increase in the spirit of co-operation.

Tax advantage.

Disadvantage:

Unlimited liability of partners.

The limited life of the firm.

It is not easy to withdraw the investments.

The possibility of conflicts among the partners.

The possibility of misuse of resources

Loss of business opportunities because of the difference among the partners causes a delay in decision-making.

Divided control and responsibility sometimes create confusion and delay in decision making.

Lack of public confidence due to lack of transparency, publicity, and absence of regulations.

Implied Authority.

Suitability: Such firms are most suitable for a comparatively small business such as retail and wholesale trade, professional services, medium-sized mercantile houses, and small manufacturing units.

 

3. Hindu Undivided Family Business: – Detailed Explanation of Forms Of Business Organization

This business organization found only in India.

The oldest form of business organization in the country.

It refers to a form of organization wherein the business is owned and carried on by the members of the Hindu Undivided Family.

It is governed by the Hindu Law.

Membership in the business is birth in a particular family and three successive generations can be members in the business.

Business is controlled by the head of the family who is the eldest member and is called Karta.

All members have an equal ownership right over the property of ancestor and they are known as co-parceners.

Characteristics:

It is governed by Hindu Law.

No membership other than the membership of the joint family.

All co-parceners have an equal share in the profits of the business.

Management is in the hands of Karta.

Liability of each member is limited to the extent of his share but the liability of Karta is unlimited.

The share of each co-parceners keeps on fluctuating because of birth of male child adds a member and death of co-parceners reduce the number of members.

Hindu Undivided Family Business continues to exist on the death of any co-parceners.

Advantages:

Assured share of profits to all co-parceners.

The Karta enjoys full freedom in conducting the family business.

HUF provides the opportunity for the young members of the family to share knowledge and experience.

The liability of co-parceners is limited except Karta, this makes the Kartato manage the business in the most efficient manner.

It is not affected by the insolvency or death of any member, it can continue for a long period of time.

Disadvantage:

Limited Financial and managerial resources.

Lack of motivation among the members to work hard.

There is scope for Karta to misuse his power for his personal gain.

Always leads to conflict between generations.

The continuity of business is always under threat.

Suitability:

It is suitable where the Karta is efficient and there is a mutual understanding between the co-parceners.

4. Co-operative Society: – Detailed Explanation of Forms Of Business Organization

The co-operation is derived from the Latin word co-operari, where the word ‘co’ means ‘with’ and ‘operari’ means ‘to work’.

Thus co-operation means working together.

It is a voluntary association of persons, who join together with the motive of the welfare of the members.

The co-operative society is compulsorily required to be registered under the Co-operative Societies Act 1912.

It works on the principles of self –help as well as mutual help.

Any ten people can form Co-operative Society.

 

Objectives:

Rendering services rather than earning a profit.

Mutual help instead of competition.

Self-help in place of dependence.

Characteristics:

It is a voluntary association.

It is recognized as a separate legal entity after registration by law.

Democratic management because every member has got equal right over the function of management.

The main objective is service motive,not the profit motive

It utilizes the surplus by partly kept in a separate reserve for the welfare of society and partly distributed among the members.

It sells goods on the basis of cash only.

There is a fixed rate of return.

All the co-operative societies of the country are regulated by the Government through its different rules and regulations framed from time to time.

The capital of the society is raised from its members by way of share capital.

Advantages:

It is very easy to form.

There is an open membership for all the persons.

Every member has equal rights and responsibilities.

Limited liability extends to the capital contributed by the members.

It has perpetual succession; it is not affected due to death, insolvency or lunacy of any member.

It can make goods and services at a low price compared to the market.

The basic aim is mutual help.

It increases social welfare.

It follows the principles of “cash and carries”.

Disadvantage:

The resources are the limited extent to the capital contributed by the members.

Lack of efficient management.

Lack of unity among members.

Lack of motivation to work more.

It does not deal with the credit transaction.

Political interference has badly affected.

Difficult to maintain business secrecy.

Unwanted interference by the departmental personnel.

Suitability:

It is suitable when the purpose of business is to provide service than to earn a profit and to promote common economic interest.

5. Company: – Detailed Explanation of Forms Of Business Organization

Indian Companies Act 2013 defines “a company as an artificial person created by law, having a separate legal entity with perpetual succession and a common seal.”

Characteristics:

A company is an artificial legal person as it is created by law.

A company must be registered under Companies Act 2013 so it is an Incorporated Body.

The capital of the company is divided into Shares.

The share of the company is easily transferable.

It has perpetual existence.

The liability of shareholders is limited.

Advantages:

There is greater permanency in the life of the companies.

Liability of shareholders is limited.

It is very easy to transfer ownership to the interested parties.

The companies divide the share capital into shares of small denominations in order to attract capital from a large number of investors.

The management activities are divided according to functions.

It is a recognized legal entity.

Higher profit due to the availability of large capital.

Benefits of large-scale production

It can undertake big risks

The risk is spread among a large number of shareholders.

The democratic organization, the company is carried on by the elected directors.

Disadvantages:

Formation of a company is complicated, there are many legal formalities.

The company is subject to double taxation.

The shareholders of a company mostly remain unknown to one another, there is no exploitation of shareholders.

The ownership is separated from control.

Promotion of frauds, if the promoters are dishonest and want to exploit the scattered shareholders.

The stock exchange speculation is may be harmful to the interest of the shareholders.

Lack of secrecy.

The impersonal relationship between the employees.

Evils from the social point of view.

Suitability:

A company is suitable where the volume of business is quite large, the area of operation is widespread, the risk involved is heavy and there is a need for huge financial resources and manpower.

 

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