Forms of Business Organization

The financial decisions of the organizations are greatly affected by the forms of these organizations. There can be mainly three forms of business organizations.

1. Proprietary concerns

2. Partnership concerns

3. Joint stock companies.

Form # 1. Proprietary Concerns:

In this case, only one person is the owner of the business and he is called the proprietor of the business. The proprietor enjoys the profits earned by the organization and he is liable for the losses and liabilities incurred by the organization.

Advantages:

(1) This form of organization is suitable where the size of the business is small and complexities involved in the business are comparatively limited.

However, if the business starts growing in terms of size and complexity of business operations, this form of organization proves to be inadequate.

(2) This form of organization is easy and economical to form and operate.

(3) Not many of the Government regulations are applicable to proprietary concerns.

Disadvantages:

(1) This form of organization does not have any legal status. The proprietary concern exists because of the proprietor. If the proprietor ceases to exist, the proprietary concern ceases to be in existence.

(2) The capacity of the proprietary concern to raise the funds and to cope up with the complex business operations is comparatively limited,

(3) From taxation angle, the income of the proprietary concern is clubbed with the individual income of the proprietor. As such, the effective rate of income tax which the proprietor may be required to pay is likely to be more.

(4) If the proprietor is unable to meet the business liabilities out of the business assets, the personal property of the proprietor is in danger. As such, the liability of the proprietor is always unlimited.

Form # 2. Partnership Concern:

In this case, more than two but less than twenty persons come together and form a partnership concern. Each of these partners is the owner of the business. The relationship among these partners is usually governed by an official written agreement which is identified as “Partnership Deed”.

Advantages:

(1) The partnership concern proves to be a better form of organization where the resources required in the form of funds and/or expertise are more which cannot be brought in by one single person as in case of proprietary consent.

(2) This form of organization also is reasonably easy and economical to form and operate.

(3) The taxation structure as presently applicable to partnership concerns is fairly reasonable. At present, the income of the partnership concerned is taxed at a flat rate of 40%. 

While calculating the taxable income of the partnership concerns, the various payments made by the partnership concerns to partners (viz. salary, bonus, commission, interest on capital etc.) are con­sidered as allowable expenditure, at least partially. However, these payments are taxed in the hands of the individual partners. Similarly share of profit in the partnership concern is not taxable in the hands of partners.

(4) Not many of the Government regulations are applicable to partnership concerns.

Disadvantages:

(1) This form of organisation also does not have any legal status. The partnership concern exists because of its partners. The retirement or death of any of its partners, leads to dissolution of the partnership concern.

(2) The capacity of the partnership concerns to raise funds or cope up with the complex business operations is restricted though it is more than that of two proprietor concerns.

(3) If two partnership concerns are unable to meet the business liabilities out of the business assets, the personal property of two partners is in dan­ger. As such, the liability of the partners is always unlimited.

Form # 3. Joint Stock Companies:

Joint stock companies have emerged as a major form of organization in the recent past. This form of organization can raise a large amount of funds as the resources of a larger number of people can be pooled together. In this case, the total requirement of funds of the organization is split into smaller units, each of such units being called a ‘share”. Each such share carries a denomination value which is called as ‘face value’ or ‘nominal value’.

An individual can participate in the capital requirement of an organization by pur­chasing the shares of the company and he becomes the part owner of the company to the extent of his shareholding in the overall amount of capital of the company. Such shareholders can exercise his ownership rights through the voting rights offered to him. The joint stock companies have two fol­lowing characteristic features.

(1) All the joint stock companies have a legal entity separate from their owners viz. shareholders. They gain legal status by being registered un­der Companies Act, 1956, which governs and regulates two operations of all joint stock companies in India. As legal entities, the joint stock companies can own assets, incurred liabilities, enter into contracts, sue and be sued. Simi­larly, shareholders of the company cannot be held liable for the actions of the company.

(2) Generally all joint stock companies are limited liability organizations and the liability of the members i.e. shareholders is limited to the extent of amount of shares they undertake to purchase. E.g. if Mr. A undertakes to purchase 100 shares of a company of Rs. 100 each, his liability ceases once he pays Rs. 10,000 to the company. His personal property is never in dan­ger despite the losses and liabilities incurred by the company.

(3) Segregation of ownership and management is a typical feature of joint stock companies. In case of the companies, shareholders are the owners. However, due to the large number of shareholders and their wide geographical spread, it may not be possible for the shareholders to exercise their owner­ship rights by participating in the day-do-day affairs of the company.

As such, the shareholders appoint their representatives (viz. directors) to manage the day-to-day affairs of the company. As such, in case of joint stock com­panies, shareholders are the owners while directors/board of directors are the managers.

(4) Transferability of shares is a feature of joint stock companies. A share­holder can transfer his ownership rights in the company by transferring his shares to some other person. In case of public limited companies, Shares are freely transferable and such transfer can be greatly facilitated if the shares are listed on the stock exchange. In case of private limited companies, there may be some restrictions on the transfer of shares.

(5) Being an artificial legal person, the company enjoys a perpetual exist­ence. The company can die only a legal death, after complying with the prescribed legal formalities. There is a very famous case under the compa­nies act, where during the war, all the members of a private company, while in a meeting, were killed by a bomb. But the company survived.

(6) A company is an artificial legal person which does not have a body like a natural person and hence it cannot sign any documents. However, be­ing a legal personality, it is bound only by those documents which bear its signature. Hence, as a substitute to the signature, the law provides for the use of common seal. Any document having the common seal and witnessed by at least two directors is binding on the company legally.

Advantages:

(1) The capacity of the corporate organizations to raise the funds is comparatively high. As the number of persons contributing to the requirement of funds is large, it is possible to raise large amounts of funds.

(2) As the company has a separate legal entity, apart from its owners viz. shareholders the personal property of the shareholders is generally not in danger.

(3) Transferability of shares is a facility available to the shareholders. If the shareholders want to release their investment in shares, they can transfer their shares to any other person. However, it should be remembered that in case of private limited companies, the shares are not freely transferable.

Disadvantages:

(1) The company form of organizations is subjected to elaborate legal and procedural formalities to be completed not only for the purpose of for­mation but also for regular operation. The basic applicable law in this connection is in the form of Companies Act, 1956. However; it should be noted that in case of private limited companies these formalities are less rig­orous in nature.

(2) Double taxation is a typical characteristic feature of the company form of organization. The income of the company is basically taxed in the hands of the company and when the said income is distributed as dividend to the shareholders, it is taxed again in the hands of shareholders.

Types of Companies:

In practical circumstances, there can be three types of limited liability companies in existence.

(a) Private Company.

(b) Public Company.

(c) Deemed Public Company,

(a) Private Company:

In non-technical language, a private company affects the fate of a smaller number of people. As such, Companies Act, 1956 is very liberal towards private companies and private companies are entitled to various privileges/ exemptions from the various provisions of Companies Act, 1956.

A private company is characterised by the following features:

(1) The minimum number of shareholders is 2 and the maximum number is 50.

(2) The private company cannot approach the public in general for subscrib­ing to the shares and/or debentures of the company.

(3) In case of a private company, the shareholders’ right to transfer the shares is restricted. These restrictions usually take two common forms, viz.

(i) That the shares to be transferred should be offered to existing mem­bers on priority basis.

(ii) That the directors will have the power to refuse to register the transfer of shares provided that such power should be exercised by the directors in good faith and in the interest of the company.

(b) Public Company:

In non-technical language, a public company affects the fate of a larger number of people. As such, operations of public companies are subjected to a close control in the form of requirement of compliance with various pro­visions of Companies Act, 1956.

A public company is characterised by the following features:

(1) The minimum number of shareholders is 7 and there is no restric­tion on the maximum number of shareholders.

(2) The public company can approach the public in general for subscribing to the shares and/or debentures of the company.

(3) The shareholders of a public can transfer their shares freely to any other person. As such, shares of only public companies can be listed on the stock exchange.

(c) Deemed Public Company:

This type of company is the outcome of the provisions of Section 43 A of the Companies Act 1956. Technically speaking, this company is a private company, however due to the existence of certain situations, this is assumed to affect the fate of a larger number of people. As such, many privileges/ exemptions which are available to a private company are not available to a deemed public company.

The law specifies four situations under which a pri­vate company is deemed to be a public company:

(1) If 25% or more of the paid-up share capital of a private company is held by one or more public company (companies) or deemed public com­pany (companies), such private company will be deemed to be a public company.

(2) If 25% or more of the paid up share capital of a public company is held by a private company, such private company will be deemed to be a public company.

(3) If the average annual turnover of a private company for the immedi­ate preceding three financial years exceeds Rs. 10 crores, such private com­pany will be deemed to be a public company.(4) If a private company accepts/renews, after an invitation is made by an advertisement, deposits from public (excluding its members, directors or their relatives), such private company will be deemed to be a public com­pany.

---