Everything you need to know about the forms of business organisation. Most production and distribution activities are carried out by millions of people in different parts of the country by constituting various kinds of organizations.
These organizations are based on some form of ownership. This choice affects a number of managerial and financial issues, including the amount of taxes the entrepreneur would have to pay, whether the entrepreneur may be personally sued for unpaid business bills, and whether the venture will die automatically with the demise of the entrepreneur.
The forms of business organisation are:-
1. Sole Proprietorship 2. Partnership Firm 3. Limited Liability Partnership (LLP) 4. Joint Stock Company 5. One Person Company (OPC) 6. Private Company 7. Public Limited Company 8. Company Form of Organization 9. Co-Operatives.
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Additionally, learn about the advantages and disadvantages of each form of business organisation.
Forms of Business Organisation: 9 Different Forms of Business Organisation
Forms of Business Organisation – Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Joint Stock Company and One Person Company (With Merits and Demerits)
Form # 1. Sole Proprietorship:
Sole proprietorship or individual entrepreneurship is a business concern owned and operated by one person. The sole proprietor is a person who carries on business exclusively by and for himself. He alone contributes the capital and skills and is solely responsible for the results of the enterprise. In fact sole proprietor is the supreme judge of all matters pertaining to his business subject only to the general laws of the land and to such special legislation as may affect his particular business.
The salient features of the proprietorship are as follows:
i. Single ownership
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ii. One man control
iii. Undivided risk
iv. Unlimited liability
v. No separate entity of the business
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vi. No Government regulations.
(a) Simplicity – It is very easy to establish and dissolve a sole proprietorship. No documents are required and no legal, formalities are involved. Any person competent to enter into a contract can start it. However, in some cases, i.e., of a chemist shop, a municipal license has to be obtained. You can start business from your own home.
(b) Quick Decisions – The entrepreneur need not consult anybody in deciding his business affairs. Therefore, he can take on the spot decisions to exploit opportunities from time to time. He is his own boss.
(c) High Secrecy – The proprietor has not to publish his accounts and the business secrets are known to him alone. Maintenance of secrets guards him from competitors.
(d) Direct Motivation – There is a direct relationship between efforts and rewards. Nobody shares the profits of business. Therefore, the entrepreneur has sufficient incentive to work hard.
(e) Personal Touch – The proprietor can maintain personal contacts with his employees and clients. Such contacts help in the growth of the enterprise.
(f) Flexibility – In the absence of Government control, there is complete freedom of action. There is no scope for difference of opinion and no problem of co-ordination.
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(a) Limited Funds – A proprietor can raise limited financial resources. As a result the size of business remains small. There is limited scope for growth and expansion. Economies of scale are not available.
(b) Limited Skills – Proprietorship is a one man show and one man cannot be an expert in all areas (production, marketing, financing, personnel etc.) of business. There is no scope for specialisation and the decisions may not be balanced.
(c) Unlimited Liability – The liability of the proprietor is unlimited. In case of loss his private assets can also be used to pay off creditors. This discourages expansion of the enterprise.
(d) Uncertain Life – The life of proprietorship depends upon the life of the owner. The enterprise may die premature death due to the incapacity or death of the proprietor. The proprietor has a low status and can be lonely.
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When the business of a proprietor expands, he has either to employ a manager or take a partner to handle the problems of capital and management.
The merits and demerits of each alternative are given below:
Employment of Paid Assistant:
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Advantages:
1. Reduction in administrative burden.
2. Division of work.
3. Appointment of specialist.
4. Expert advice and guidance.
5. Complete control-no interference in policies.
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6. Independent decisions and freedom of action.
7. Secrecy.
8. No sharing of profits.
9. Easy to dismiss.
Disadvantages:
1. No incentive to work hard may be careless and inefficient.
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2. Increases risk and liability of the sole proprietor.
3. No financial stake-business at the mercy of the assistant.
4. Danger of disclosure of business secrets.
5. No addition to goodwill.
6. Lack of responsibility.
7. Problem of capital unsolved.
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8. Increased expense.
9. May leave the business and set up competition.
Admission of a partner:
Advantages:
1. Investment of capital.
2. Sharing of managerial responsibilities.
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3. Pooling of knowledge, experience and judgment.
4. Increase in goodwill and connections.
5. Direct relation between effort and reward. Personal incentive and interest.
6. Secrecy ensured.
7. Benefits of specialisation.
8. Sharing of losses and liability.
9. Economy of costs.
Disadvantages:
1. Sharing of control-loss in freedom of action.
2. Division of authority-lack of independent decisions.
3. Increase in liability and risk.
4. Danger of dishonesty and negligence.
5. Possibility of dispute and differences.
6. Sharing of profits.
7. Blocking of individual capital.
8. Difficulty in removing the partner.
9. Lack of stability.
Conclusion:
The choice between paid assistant and partner depends upon requirements of business and preference of the proprietor. In case the proprietor wants to retain complete control of business and he can raise the additional capital himself, he should employ a qualified and experienced assistant to share his managerial responsibilities. But if he wants additional funds as well as managerial assistance, admission of a partner may be better.
Suitability:
The foregoing description reveals that sole proprietorship or one-man control is the best in the world if that man is big enough to manage everything. But such a person does not exist.
Therefore, sole proprietorship is suitable in the following cases:
i. Where small amount of capital is required e.g., sweet shops, bakery, newsstand, etc.
ii. Where quick decisions are very important, e.g., share brokers, bullion dealers, etc.
iii. Where limited risk is involved, e.g., automobile repair shop, confectionery, small retail store, etc.
iv. Where personal attention to individual tastes and fashions of customers is required, e.g., beauty parlour, tailoring shops, lawyers, painters, etc.
v. Where the demand is local, seasonal or temporary, e.g., retail trade, laundry, fruit sellers, etc.
vi. Where fashions change quickly, e.g., artistic furniture, etc.
vii. Where the operation is simple and does not require skilled management.
Thus, sole proprietorship is a common form of organisation in retail trade, professional firms, household and personal services. This form of organization is quite popular in our country. It accounts for the largest number of business establishments in India, in spite of its limitations.
Form # 2. Partnership Firm:
As a business enterprise expands beyond the capacity of a single person, a group of persons have to join hands together and supply the necessary capital and skills. Partnership firm thus grew out of the limitations of one man business. Need to arrange more capital, provide better skills and avail of specialisation led to the growth to partnership form of organisation.
According to Section 4 of the Partnership Act, 1932 partnership is “the relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all”. In other words, a partnership is an agreement among two or more persons to carry on jointly a lawful business and to share the profits arising there from. Persons who enter into such agreement are known individually as ‘partners’ and collectively as ‘firm’.
Characteristics of Partnership:
i. Association of two or more persons — maximum 10 in banking business and 20 in non-banking business
ii. Contractual relationship—written or oral agreement among the partners
iii. Existence of a lawful business
iv. Sharing of profits and losses
v. Mutual agency among partners
vi. No separate legal entity of the firm
vii. Unlimited liability
viii. Restriction on transfer of interest
ix. Utmost good faith.
A partnership firm can be formed through an agreement among two or more persons. The agreement may be oral or in writing. But it is desirable that all terms and conditions of partnership are put in writing so as to avoid any misunderstanding and disputes among the partners. Such a written agreement among partners is known as Partnership Deed. It must be signed by all the partners and should be properly stamped. It can be altered with the mutual consent of all the partners.
A partnership deed usually contains the following details:
i. Name of the firm.
ii. Names and address of all the partners.
iii. Nature of the firm’s business.
iv. Date of the agreement.
v. Principal place of the firm’s business.
vi. Duration of partnership, if any.
vii. Amount of capital contributed by each partner.
viii. The proportion in which the profits and losses are to be shared.
ix. Loans and advances by partners and interest payable on them.
x. Amount of withdrawal allowed to each partner and the rate of interest.
xi. Amount of salary or commission payable to any partner.
xii. The duties, powers and obligations of all the partners.
xiii. Maintenance of accounts and audit.
xiv. Mode of valuation of goodwill on admission, retirement or death of a partner.
xv. Procedure for dissolution of the firm and settlement of accounts.
xvi. Arbitration for settlement of disputes among the partners.
xvii. Arrangements in case a partner becomes insolvent.
xviii. Any other clause(s) which may be found necessary in particular kind of business.
Registration of Firms:
The Partnership Act, 1932 provides for the registration of firms with the Registrar of Firms appointed by the Government. The registration of a partnership firm is not compulsory. But an unregistered firm suffers from certain disabilities. Therefore, registration of a partnership is desirable.
Procedure for Registration:
A partnership firm can be registered at any time by filing a statement in the prescribed form. The form should be duly signed by all the partners. It should be sent to the Registrar of Firms along with the prescribed fee.
The statement should contain the following particulars:
1. Name of the firm.
2. Principal place of its business.
3. Name of other places where the firm is carrying on business.
4. Names in full and permanent addresses of all the partners.
5. Date of commencement of the firm’s business and the dates on which each partner joined the firm.
6. Duration of the firm, if any.
7. Nature of the firm’s business.
On receipt of the statement and the fees, the Registrar makes an entry in the Register of Firms. The firm is considered to be registered when the entry is made. The Registrar issues a Certificate of Registration. Any change in the above particulars must be communicated to the Registrar of Firms within a reasonable period of time so that necessary alterations may be made in the Register of Firms. The register is open for inspection on payment of a nominal fee.
The partnership form of business ownership enjoys the following advantages:
1. Ease of Formation:
A partnership is easy to form as no cumbersome legal formalities are involved. An agreement is necessary and the procedure for registration is very simple. Similarly, a partnership can be dissolved easily at any time without undergoing legal formalities. Registration of the firm is not essential and the partnership agreement need not essentially be in writing.
2. Larger Financial Resources:
As a number of persons or partners contribute to the capital of the firm, it is possible to collect larger financial resources than is possible in sole proprietorship. Creditworthiness of the firm is also higher because every partner is personally and jointly liable for the debts of the business. There is greater scope for expansion or growth of business.
3. Specialisation and Balanced Approach:
The partnership form enables the pooling of abilities and judgment of several persons. Combined abilities and judgment result in more efficient management of the business. Partners with complementary skills may be chosen to avail of the benefits of specialisation. Judicious choice of partners with diversified skills ensures balanced decisions. Partners meet and discuss the problems of business frequently so that decisions can be taken quickly.
4. Flexibility of Operations:
Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its day-to-day operations. The nature and place of business can be changed whenever the partners desire. The agreement can be altered and new partners can be admitted whenever necessary. Partnership is free from statutory control by the Government except the general law of the land.
5. Protection of Minority Interest:
No basic changes in the rights and obligations of partners can be made without the unanimous consent of all the partners. In case a partner feels dissatisfied, he can easily retire from or he may apply for the dissolution of partnership.
6. Personal Incentive and Direct Supervision:
There is no divorce between ownership and management. Partners share in the profits and losses of the firm and there is motivation to improve the efficiency of the business. Personal control by the partners increases the possibility of success. Unlimited liability encourages caution and care on the part of partners. Fear of unlimited liability discourages reckless and hasty action and motivates the partners to put in their best efforts.
7. Capacity for Survival:
The survival capacity of the partnership firm is higher than that of sole proprietorship. The partnership firm can continue after the death or insolvency of a partner if the remaining partners so desire. Risk of loss is diffused among two or more persons. In case one line of business is not successful, the firm may undertake another line of business to compensate its losses.
8. Better Human and Public Relations:
Due to number of representatives (partners) of the firm, it is possible to develop personal touch with employees, customers, government and the general public. Healthy relations with the public help to enhance the goodwill of the firm and pave the way for steady progress of the business.
9. Business Secrecy:
It is not compulsory for a partnership firm to publish and file its accounts and reports. Important secrets of business remain confined to the partners and are unknown to the outside world.
1. Unlimited Liability:
Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapses and dishonesty of other partners. This may curb entrepreneurial spirit as partners may hesitate to venture into new lines of business for fear of losses. Private property of partners is not safe against the risks of business.
2. Limited Resources:
The amount of financial resources in partnership is limited to the contributions made by the partners. The number of partners cannot exceed 10 in banking business and 20 in other types of business. Therefore, partnership form of ownership is not suited to undertake business involving huge investment of capital.
3. Risk of Implied Agency:
The acts of a partner are binding on the firm as well as on other partners. An incompetent or dishonest partner may bring disaster for all due to his acts of commission or omission. That is why the saying is that choosing a business partner is as important as choosing a partner in life.
4. Lack of Harmony:
The success of partnership depends upon mutual understanding and cooperation among the partners. Continued disagreement and bickering among the partners may paralyse the business or may result in its untimely death. Lack of a central authority may affect the efficiency of the firm. Decisions may get delayed.
5. Lack of Continuity:
A partnership comes to an end with the retirement, incapacity, insolvency and death of a partner. The firm may be carried on by the remaining partners by admitting new partners. But it is not always possible to replace a partner enjoying trust and confidence of all. Therefore, the life of a partnership firm is uncertain, though it has longer life than sole proprietorship.
6. Non-Transferability of Interest:
No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners. This makes investment in a partnership firm non-liquid and fixed. An individual’s capital is blocked.
7. Public Distrust:
A partnership firm lacks the confidence of public because it is not subject to detailed rules and regulations. Lack of publicity of its affairs undermines public confidence in the firm.
The foregoing description reveals that partnership form of organisation is appropriate for medium-sized business that requires limited capital, pooling of skills and judgment and moderate risks, like small scale industries, wholesale and retail trade, and small service concerns like transport agencies, real estate brokers, professional firms like chartered accountants, doctor’s clinics or nursing homes, attorneys, etc.
Form # 3. Limited Liability Partnership (LLP):
According to the Limited Liability Partnership Act, 2008, an LLP is a body corporate formed and incorporated under this Act. It is a legal entity separate from that of its members.
(i) An LLP must be registered under the LLP Act 2008.
(ii) It is a body corporate having a separate entity of its own.
(iii) It has perpetual succession. Any change in its members does not affect its existence, rights and liabilities,
(iv) Any individual or a body corporate can be a partner in an LLP.
(v) Every LLP must have at least two partners.
(vi) There must be at least two designated partners and one of them must be a resident in India.
(vii) An LLP must maintain proper books of accounts as per the double entry system.
(viii) An LLP must file with the Registrar a Statement of Account and solvency along with its annual return in the prescribed form.
Merits:
a. An LLP enjoys stability as changes in partners do not affect its existence.
b. The liability of an LLP and its partners in Limited.
c. A body corporate and a foreigner can be partners in an LLP.
d. An LLP can raise, large amount of funds as there is no restriction on the number of members and risk involved is limited.
a. Time and money are involved in the formation and registration of an LLP.
b. There is less flexibility of operations because an LLP has to comply with certain legal formalities.
c. There is lack of business secrecy as an LLP has to file the prescribed documents with the Registrar. Its accounts are open to the public for inspection.
The LLP gives an entrepreneur the twin benefits of limited liability and a flexible internal structure. It is also free from dividend distribution tax and minimum alternate tax.
Form # 4. Joint Stock Company:
With the growing needs of modern business, collection of vast financial and managerial resources became necessary. Proprietorship and partnership forms of ownership failed to meet these needs due to their limitations, e.g., unlimited liability, lack of continuity and limited resources.
The company form of business organisation was evolved to overcome these limitations. Joint stock company has become the dominant form of ownership for large scale enterprises because it enables collection of vast financial and managerial resources with provision for limited liability and continuity of operations.
A joint stock company is an incorporated and voluntary association of individuals with a distinctive name, perpetual succession, limited liability and common seal, and usually having a joint capital divided into transferable shares of a fixed value.
Chief Justice John Marshall of U.S.A defined a company in the famous Dartmouth College case as “an artificial being, invisible, intangible and existing only in contemplation of law; being the mere creature of law it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence; and the most important of which are immortality and individuality.
“Thus, a company is an artificial legal person having an independent legal entity.
Merits of Company Organisation:
The company form of business ownership has become very popular in modern business on account of its several advantages:
1. Limited Liability:
Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities and, therefore, contributes to the growth of the company form of ownership.
2. Large Financial Resources:
Company form of ownership enables the collection of huge financial resources. The capital of a company is divided into shares of small denominations so that people with small means can also buy them. Benefits of limited liability and transferability of shares attract investors. Different types of securities may be issued to attract various types of investors. There is no limit on the number of members in a public company.
3. Continuity:
A company enjoys uninterrupted business life. As a body corporate, it continues to exist even if all its members die or desert it. On account of its stable nature, a company is best suited for such types of business which require long periods of time to mature and develop.
4. Transferability of Shares:
A member of a public limited company can freely transfer his shares without the consent of other members. Shares of public companies are generally listed on a stock exchange so that people can easily buy and sell them. Facility of transfer of shares makes investment in company liquid and encourages investment of public savings into the corporate sector.
5. Professional Management:
Due to its large financial resources and continuity, a company can avail of the services of expert professional managers. Employment of professional managers having managerial skills and little financial stake results in higher efficiency and more adventurous management. Benefits of specialisation and bold management can be secured.
6. Scope for Growth and Expansion:
There is considerable scope for the expansion of business in a company. On account of its vast financial and managerial resources and limited liability, company form has immense potential for growth. With continuous expansion and growth, a company can reap various economies of large scale operations, which help to improve efficiency and reduce costs.
7. Public Confidence:
A public company enjoys the confidence of public because its activities are regulated by the government under the Companies Act. Its affairs are known to public through publication of accounts and reports. It can always keep itself in tune with the needs and aspirations of people through continuous research and development.
8. Diffused Risk:
The risk of loss in a company is spread over a large number of members. Therefore, the risk of an individual investor is reduced.
9. Social Benefits:
The company organisation helps to mobilise savings of the community and invest them in industry. It facilitates the growth of financial institutions and provides employment to a large number of persons. It provides huge revenues to the Government through direct and indirect taxes.
A company suffers from the following limitations:
1. Difficulty of Formation:
It is very difficult and expensive to form a company. A number of documents have to be prepared and filed with the Registrar of Companies. Services of experts are required to prepare these documents. It is very time-consuming and inconvenient to obtain approvals and sanctions from different authorities for the establishment of a company. The time and cost involved in fulfilling legal formalities discourage many people from adopting the company form of ownership. It is also difficult to wind up a company.
2. Excessive Government Control:
A company is subject to elaborate statutory regulations in its day-to-day operations. It has to submit periodical reports. Audit and publication of accounts is obligatory. The objects and capital of the company can be changed only after fulfilling the prescribed legal formalities. These rules and regulations reduce the efficiency and flexibility of operations. A lot of precious time, effort and money have to be spent in complying with the innumerable legal formalities and irksome statutory regulations.
3. Lack of Motivation and Personal Touch:
There is divorce between ownership and management in a large public company. The affairs of the company are managed by the professional and salaried managers who do not have personal involvement and stake in the company. Absentee ownership and impersonal management result in lack of initiative and responsibility. Incentive for hard work and efficiency is low. Personal contact with employees and customers is not possible.
4. Oligarchic Management:
In theory the management of a company is supposed to be democratic but in actual practice company becomes an oligarchy (rule by a few). A company is managed by a small number of people who are able to perpetuate their reign year after year due to lack of interest, information and unity on the part of shareholders. The interests of small and minority shareholders are not well protected. They never get representation on the Board of Directors and feel oppressed.
5. Delay in Decisions:
Too many levels of management in a company result in red-tape and bureaucracy. A lot of time is wasted in calling and holding meetings and in passing resolutions. It becomes difficult to take quick decisions and prompt action with the consequence that business opportunities may be lost.
6. Conflict of Interests:
Company is the only form of business where in a permanent conflict of interests may exist. In proprietorship there is no scope for conflict and in a partnership continuous conflict results in dissolution of the firm. But in a company conflict may continue between shareholders and board of directors or between shareholders and creditors or between management and workers.
7. Frauds in Promotion and Management:
There is a possibility that unscrupulous promoters may float a company to dupe innocent and ignorant investors. They may collect huge sums of money and, later on, misappropriate the money for their personal benefit. The case of South Sea Bubble Company is the leading example of such malpractices by promoters.
Moreover, the directors of a company may manipulate the prices of the company’s shares and debentures on the stock exchange on the basis of inside information and accounting manipulations. This may result in reckless speculation in shares and even a sound company may be put into financial difficulties.
8. Lack of Secrecy:
Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.
9. Social Evils:
Giant companies may give rise to monopolies, concentration of economic power in a few hands, interference in the political system, lack of industrial peace, etc.
Despite its drawbacks, the company form of organisation has become very popular, particularly for large business concerns. This is because its merits far outweigh the demerits. Many of the drawbacks of a company are mainly due to the weaknesses of the people who promote and manage companies and not because of the company system as such. The company organisation has made it possible to accumulate large amounts of capital required for large scale operations.
Due to its unique characteristics, the company form of ownership is ideally suited to the following types of business:
(i) Heavy or basic industries like ship-building, coach-making factory, engineering firms, etc., requiring huge investment of capital.
(ii) Large scale operations are very crucial because of economies of scale, departmental stores, chain stores and enterprises engaged in the construction of bridges, dams, multistoried buildings, etc.
(iii) The line of business involves great uncertainty or heavy risk, e.g., shipping and airline concerns.
(iv) The law makes the company organisation obligatory, e.g., banking business can be run only in the form of company.
(v) The owners of the business want to enjoy limited liability.
Form # 5. One Person Company (OPC):
According to The Companies Act, 2013 of India “One Person Company is a company registered under the proposed Companies Act with just one member and shall have ‘(OPC)’ added in brackets to its name.” The Memorandum of such a company shall indicate the name of the person.
The concept of ‘one person company’ has the following characteristics:
(i) OPC may be registered as a private company with one member.
(ii) Adequate safeguards in case of death/disability of the sole owner are provided.
(iii) OPC will have a corporate entity of its own.
(iv) The owner of an OPC shall be liable only to the extent of its capital. If the activities are carried out in a mala fide manner the liability of the owner extends to his personal property.
(v) An OPC may be managed by the owner or his representative.
(vi) An OPC will get its annual accounts audited and file a copy of the same with the Registrar of Companies.
(vii) A minimum share capital may be prescribed for an OPC.
(viii) Every OPC shall have at least one director.
(ix) The one person shall have to indicate the name of the person who in the event of the subscriber’s death, disability, etc. becomes the members of the company.
Merits:
(i) OPC will enable small entrepreneurs and professionals, e.g., chartered accountants, lawyers, doctors, etc. to avail the benefits of companies,
(ii) The procedure for forming the OPC is very simple.
(iii) Running an OPC is easy as it does not require compliance with many legal formalities.
(iv) As the risk is limited to the value of shares held by one person, small entrepreneurs have not to fear litigation and attachment of personal assets.
(v) There is no need to share business information with any other person, therefore, business secrecy is ensured.
(vi) The motivation and commitment of the owner are high due to absence of profit sharing.
(vii) Quick decisions can be taken due to complete control by the owner. There is freedom of action.
(viii) OPC would provide the start-up entrepreneurs and professionals the much needed flexibility in setting up business without losing control.
(i) The life of OPC is uncertain and instable.
(ii) The concept of OPC makes mockery of the corporate concept because company means more than one person.
(iii) A company should operate as a democratic institution with discussion and decision by voting. But in an OPC there is no democracy.
(iv) An OPC has to be incorporated. It has also to comply with some legal formalities.
The concept of OPC has been introduced in a half-hearted and incomplete manner. How would OPC work and what would be the regulatory provisions concerning their formation and functioning has not been made clear. Hence, the provisions concerning OPC require a re-look and redrafting.
Forms of Business Organisation – Sole Proprietorship, Partnership Firm, Limited Liability Partnership, Private Company and Public Limited Company
Form # 1. Sole Proprietorship:
‘Sole Proprietorship’ form of business organisation refers to a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.
Definition of Sole Proprietorship:
Characteristics of Sole Proprietorship:
i. Single Ownership – The sole proprietorship form of business organisation has a single owner who himself/herself starts the business by bringing together all the resources.
ii. No Separation of Ownership and Management – The owner himself/herself manages the business as per his/her own skill and intelligence.
iii. Less Legal Formalities – The formation and operation of a sole proprietorship form of business organisation does not involve any legal formalities.
iv. No Separate Entity – The businessman and the business enterprise are one and the same, and the businessman is responsible for everything that happens in his business unit.
v. No Sharing of Profit and Loss – The sole proprietor enjoys the profits and losses alone.
vi. Unlimited Liability – The liability of sole proprietor is unlimited.
vii. One-man control- The owner has complete control of operations.
Advantages of Sole Proprietorship:
i. Easy to form and wind up – It is very easy and simple to form a sole proprietorship form of business organisation. No legal formalities are required to be observed. Similarly, the business can be wound up any time if the proprietor so decides.
ii. Quick Decision and Prompt Action – Nobody interferes in the affairs of the sole proprietary organisation. So he/she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken.
iii. Direct Motivation – In sole proprietorship form of business organisations entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently.
iv. Flexibility in Operations – It is very easy to effect changes as per the requirements of the business. The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organisation.
v. Maintenance of Business Secrets – The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts.
vi. Personal Touch – Since the proprietor himself handles everything relating to business, it is easy to maintain a good personal contact with customers and employees.
Limitations of Sole Proprietorship:
i. Limited Resources – The resources of a sole proprietor are always limited. It is not always possible to arrange sufficient funds from personal sources.
ii. Lack of Continuity – The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.
iii. Unlimited Liability – In the eyes of law, the proprietor and the business are one and the same. So personal properties of the owner can also be used to meet the business obligations and debts.
iv. Unsuitable for Large Scale Operations – As the resources and the managerial ability are limited, sole proprietorship form of business organisation is not suitable for large- scale business.
v. Limited Managerial Expertise – A sole proprietorship form of business organisation always suffers from lack of managerial expertise. A single person may not be an expert in all fields like, purchasing, selling, financing etc.
Suitability of Sole Proprietorship:
In short, this is a simple one person firm where, one can use his brand name, apply for payment gateways and be able to issue invoice on his brand name to customers. It is best form for the testing of ideas in the starting stage whether it’s an e-commerce or tech startup, on later stage, one can easily set up another elaborate forms like private limited company or public limited company.
Form # 2. Partnership Firm:
‘Partnership’ is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit. The persons who form a partnership are individually known as partners and collectively a firm or partnership.
Definition of Partnership:
Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all”.
Partnership form of business organisation in India is governed by the Indian Partnership Act 1932. The agreement between the partners may be in oral, written or implied. When the agreement is in writing, it is termed as partnership deed.
However, in the absence of an agreement, the provisions of the Indian Partnership Act 1932 shall apply. Partnership Deed contains the terms and conditions for starting and continuing the partnership firm. It is always better to insist on a written agreement in order to avoid future legal hurdles.
Characteristics of Partnership:
i. Two or More Persons – To form a partnership firm at least two persons are required.
ii. Contractual Relationship – Minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership firm i.e., he can have share in the profits without any obligation for losses.
iii. Sharing Profits and Business – There must be an agreement among the partners to share the profits and losses of the business of the partnership firm. If two or more persons share the income of jointly owned property, it is not regarded as partnership.
iv. Existence of Lawful Business – The business of to be carried on by partners, must be lawful. Any agreement to indulge in smuggling, black marketing or any other lawful activity cannot be called a partnership firm in the eyes of law.
v. Principal Agent Relationship – There must be an agency relationship between the partners. Every partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she acts as an agent of other partners, and at the same time the other partners become the principal.
vi. Unlimited Liability – The partners of the firm have unlimited liability. They are jointly as well as individually liable for the debts and obligations of the firms. If the assets of the firm are insufficient to meet the firm’s liabilities, the personal properties of the partners can also be utilized for this purpose.
vii. Voluntary Registration – The registration of partnership firm is not compulsory. But an unregistered firm suffers from some limitations which make it virtually compulsory to be registered.
i. Easy to Form
ii. Availability of Larger Resources
iii. Better Decisions
v. Sharing of Risks – The losses of the firm are shared by all the partners equally or as per the agreed ratio as decided in the partnership agreement.
vi. Keen Interest – Since partners share the profit and bear the losses, they take keen interest in the affairs of the business.
vii. Benefits of Specialization – Partnership firm enjoys benefits of individual partners, specialisation, for instance, in a partnership firm, providing legal consultancy to people, one partner may deal with civil cases, one in criminal cases, and another in labour cases and so on as per their area of specialization.
viii. Protection of Interest – In partnership form of business organisation, the rights of each partner and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for dissolution of the firm or can withdraw from the partnership.
ix. Secrecy – Business secrets of the firm are only known to the partners.
A partnership firm also suffers from certain limitations:
i. Unlimited Liability – Partners in partnership firm suffer from the problem of unlimited liability. Resultantly, members may end up using personal assets to meet the liabilities of business.
ii. Instability – Every partnership firm has uncertain life. The death, insolvency, incapacity or the retirement of any partner bring the firm to an end. Not only that any dissenting partner can give notice at any time for dissolution of partnership.
iii. Limited Capital – A partnership firm suffers due to limited personal capacity of partners.
iv. Non-transferability of share – The share of interest of any partner cannot be transferred to other partners or to the outsiders.
v. Possibility of Conflicts – At times there is a strong possibility of conflict among partners due to divergent views and interest.
Suitability of Partnership:
Usually persons having different abilities, skill or expertise can join hands to form a partnership firm to carry on the business. Business activities like construction, providing legal services, accounting and financial services etc. can successfully run under this form of business organization.
It is also considered suitable where capital requirement is of a medium size. Thus, businesses like a wholesale trade, professional services, mercantile houses and small manufacturing units can be successfully organized as partnership firms.
Form # 3. Limited Liability Partnership (LLP):
Keeping in view the incapacity of sole proprietor and partnership firms to raise money while facing unlimited liability, a new form of business was introduced through the Limited Liability Partnership Act 2008. This form was primarily created to give flip to small and medium entrepreneurs and professionals who can enjoy the benefits of body corporate while also retaining control over their businesses.
Meaning of LLP:
A Limited Liability Partnership (LLP) means a body corporate registered under the LLP Act 2008, in which some or all partners (depending on the respective jurisdiction of state) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence, as it was the case in case of original form of partnership firms.
This form was introduced in the world by U.S in 1990s in the wake up of fall of real estate and energy prices in Texas. After that, other countries like Poland, Singapore, Canada, China, Germany, Greece and Japan have also felt the need to establish LLPs in their respective countries.
Definition of LLP:
According to Limited liability partnership Act 2008, limited liability partnership means, “a partnership formed and registered under this act”.
LLP agreement means any written agreement between the partners of the LLP or between LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP.
Any two or more persons can form an LLP. Even a limited Company, a foreign Company, a LLP, a foreign LLP or a non-resident can be a partner in LLP. Although, there is no specific mention, a HUF represented by its Karta and a Minor can also be partner in LLP. An Incorporation document (similar to memorandum) and LLP agreement (similar to articles of association) is required to be filed electronically. The Registrar of Companies (ROC) shall register and control LLPs
i. An LLP is a body corporate and legal entity separate from its partners.
ii. It has perpetual succession.
iii. Being the separate legislation (i.e. LLP Act, 2008), the provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners.
iv. Liability of partners is limited to their agreed contribution in the LLP and no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are protected from joint liability created by another partner’s wrongful business decisions or misconduct.
v. LLP has more flexibility and lesser compliance requirements as compared to a company.
vi. Simple registration procedure, no requirement of minimum capital, no restrictions on maximum limit of partners.
vii. It is easy to become a partner or leave the LLP.
viii. It is easier to transfer the ownership in accordance with the terms of the LLP Agreement.
ix. As a juristic legal person, an LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.
x. No restriction on the limit of the remuneration to be paid to the partners unlike in case of companies. However, the remuneration to partners must be authorized by the LLP agreement and it cannot exceed the limit prescribed under the agreement.
xi. The Act also provides for conversion of existing partnership firm, private limited Company and unlisted public Company into an LLP by registering the entity with the Registrar of Companies (ROC).
xii. No exposure to personal assets of the partners except in case of fraud.
i. Any act of the partner without the consent of other partners, can bind the LLP.
ii. Under some cases, liability may extend to personal assets of the partners also.
iii. A LLP is not allowed to raise money from Public.
iv. Due to the hybrid form of the business, it is required to comply with various rules and regulations and legal formalities.
v. It is very difficult to wind up the business in case of exigency as there are lots of legal compliances under Limited Liability Partnership (Winding Up and Dissolution) Rules and it is very lengthy and expensive procedure also.
Limited Liability Partnership has proved to be a boon for small manufacturing sector as well as for service sector firms. Especially for professionals like chartered accountants/ company secretaries and advocates, it has become much easier to be formed as an LLP. Foreign Direct Investment is permitted under the automatic route in LLPs, operating in sectors/ activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.
Form # 4. Private Company:
Section 2 (68) of Companies Amendment Act, 2013 defines a Private Company as follows:
“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles—
i. Restricts the right to transfer its shares;
ii. Except in case of One Person Company, limits the number of its members to two hundred-
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member-
Provided further that:
a. Persons who are in the employment of the company; and
b. Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
iii. Prohibits any invitation to the public to subscribe for any securities of the company.
Benefits of a Private Company:
A private company offers the following benefits:
i. Stability – being a separate legal entity, the existence of a private company is independent of the existence of its members.
ii. Limited liability – the liability of members is limited only to the extent of the unpaid capital on the shares held by them.
iii. Comparative flexibility of operations – a private company enjoys lesser compliance and more privileges as compared with a public company, making it a suitable choice for entrepreneurs.
iv. Improved credibility – due to incorporation, a private company enjoys an improved credibility in doing transactions with various stakeholders.
v. Team building – private company offers stock ownership and ESOP schemes to attract talented pool of workforce for the company.
vi. Expansion – In private companies, scope of expansion is large as fund raising can easily be done by receiving funds from its members, directors. Bank also give high value to private companies and sanction loans accordingly.
Limitation of Private Company:
i. Process and Formalities:
As the registration of the company requires many formalities, one needs assistance from professionals like C.As or C.S, w.r.t. registration and other compliances with the relevant laws.
ii. Limited Availability of Funds:
Due to restrictions on seeking public funding, the prospects of growth and expansion are limited to the personal financing capacities of members of a private company.
iii. Exit Strategy:
Though it is easy for a shareholder to exit from a company, the procedures to wind up a private limited company is complicated and involves cumbersome procedures and substantial liquidation cost.
Form # 5. Public Limited Company:
Public company is a separate legal entity incorporated under companies act, allowing the members to transfer their shares, while having a larger number of shareholder base.
Definition of Public Company:
u/s2 (71) of Companies Act Amendment 2013, public company means a company which:
i. Is not a private company;
ii. Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed –
Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.
Public companies are able to attract large funding through issue of equity, debt and other forms of financing domestically as well as internationally. Due to too much legal constraints and compliances, a public company is not a very suitable form of business especially for small scale businesses and small entrepreneurs.
However once a business is well established in the industry, then riding on the prestige and credibility of the business, at a later stage, a business can unravel the option of being formed as a public company.
Advantages of a Public Limited Company (PLC):
Following are the prominent advantages of having a public limited company:
i. Limited Liability of shareholders – The business is viewed as a separate legal entity. This means that even if a shareholder leaves the PLC or dies, the business can continue.
ii. Ability to raise large amount of capital – Public limited companies are able to raise large sums of money because there is no limit on the maximum number of members.
iii. Transferability of shares – the shares of a PLC can be freely transferable. This provides liquidity for shareholders.
iv. Exit strategy – due to transferability of shares and being widely recognizable in the public domain, a public company magnifies its chances of easily seeking future suitors for the company.
v. Limited liability of shareholders – The liability of shareholders is limited to the extent of unpaid capital on the shares held by them.
vi. Separate legal entity – The public company due to incorporation is distinct legal person different from its shareholders.
Disadvantages of a Public Limited Company:
Despite having several benefits, a public limited company suffers from the following disadvantages:
i. There are many legal formalities and regulatory compliances to be adhered to by a company during the stage of formation as well as carrying of day to day operations.
ii. Ownership and control woes – due to larger shareholder base, at times it’s difficult to take speedy and timely business decisions especially if the shareholders are geographically scattered.
iii. Vulnerable to takeovers – With shares being freely transferable, a potential bidder can secretly stock up the shareholding of the company even from open market, to stage a hostile takeover bid.
iv. Larger possibility of conflicts between management and owners
v. Lack of secrecy – due to open access of books of accounts to public, as well as inspection by the relevant authorities, it is difficult to maintain secrets of business within the confined walls of business.
vi. In order to protect the interest of investors, a public company is required to follow many controls and regulations.
vii. There is a possibility that the original owners can lose control of the public limited company in the issue of a dispute or violation.
viii. Some public limited companies can grow very large. As a result, many can suffer from mismanagement and slow decision making.
ix. Owing to higher degree of transparency and accountability, public companies suffer from slow decision making woes.
Finally it can be concluded that no particular form of business is perfect for organizing a startup. The specific choice of business form inter-alia depends upon combination of various factors like control over the business, ease of doing the business, legal compliances, flexibility, taxation as well as the nature of the business. An entrepreneur should cautiously choose a form of business after considering all the relevant factors.
Choosing Company as a Form of Business:
Keeping in view the impending and ever growing needs of funds for a new as well as growing startup, usually the first preference for establishing a startup is given to a company form of business.
A company form as compared to other forms of business such as LLP, Proprietorship and Partnership firm, can seek larger funding from the while limiting personal liabilities of its members. The transparency and accountability in a corporate form of business ignites the interest of investors to park their funds unlike the other forms of business.
Following are the different forms of relevant body corporate for startups in India:
One person company (OPC) is a new concept in India which was introduced by the Companies Act 2013. Unlike the old Companies act 1956, where minimum two directors and shareholders were required to form a private limited company. In OPC, only a person is required to form a company. Such a person can be both a shareholder as well as the director, while enjoying the benefits of limited liability. Therefore, the name One Person Company.
This initiative opens up plethora of spectacular possibilities for sole proprietors and entrepreneur, who while taking the benefit of Limited liability and corporatization, can run their small businesses without having the need to find a second director or second shareholder.
Characteristics of One Person Company:
i. One Shareholder:
As per the companies Amendment Act 2013, only a natural person who is a resident of India and also a citizen of India can form a one person company. It means that other legal entities like companies or societies or other corporate entities and even Nonresident Indians or Foreign citizens cannot form an OPC. Further the rules also specify that a person can be a shareholder in only one person company at any given time. It simply means an individual cannot have two different one person companies in his name.
A OPC has ‘perpetual succession’, meaning uninterrupted existence until it is legally dissolved. Being a separate legal entity, it is unaffected by the death or any other form of departure of any member and continues to be in existence irrespective of the changes in ownership.
Banks and Financial Institutions prefer to provide funding to a company rather than partnership firms or proprietary concerns. However, a one person company cannot issue different types of equity shares, as it can only be owned by one person at all times.
Ownership of a business can be easily transferred in an OPC by transferring shares. In an OPC, the ownership can be transferred by altering the provision w.r.t. shareholding, directorship and nominee director.
v. Owning Property:
A company being an artificial person, can acquire, own, enjoy and alienate property in its name. The property owned by a company could be machinery, building, intangible assets, land, residential property, factory, etc. Further, the nominee director cannot claim any ownership of the company while serving as a nominee director.
As per the Companies Amendment Act, OPC should have minimum of one director and maximum of fifteen directors on the board of the company. As per the Companies Act, if nothing is mentioned in the incorporation document, it would be assumed the sole shareholder shall also be the sole director in the one person company and which shall be practically the case in most OPCs being incorporated.
As per the relevant rules, OPC is required to nominate a Nominee with his written consent who, in the event of death or inability of the owner of OPC, shall become the owner of the OPC, enjoying all the powers as the original owner did. However such a nominee is also required to fulfill the requirements of being a resident Indian and citizen of India.
Further a person is not allowed to become member and or nominee of more than two OPCs. In case of which he is required to choose within 6 months, which OPC he wishes to continue.
Since nothing has been specified as such by the finance ministry, it is assumed that the rates of taxation applicable for a private limited company shall apply to an OPC. Net profits, which are calculated by deducting all allowable expenses from the turnover of sales, shall be taxable at the rate of thirty percent plus education cess.
One Person Company also gets freedom from complying with many requirements as normally applicable to other private limited companies. Certain sections like Section 96, 98 and sections 100 to 111 are not applicable for a One Person Company.
Some of such privileges are as follows:
a. No requirement to hold annual or extra ordinary general meetings.
b. No requirement of preparing Cash Flow Statement in the annual financial statements.
c. Annual returns can be signed by the Director himself instead of a Company Secretary.
When OPC enters into a contract with the sole owner of the company, who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer contained in a memorandum, are recorded in the minutes of the first meeting of the Board of Directors of the company.
Further, the company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors within a period of fifteen days of the date of approval by the Board.
This clause shall be very much in vogue since the business of the One Person Company may use many assets of the owner and may pay compensation for that. Examples may be rent paid for using property or machinery or Furniture owned by the Owner. It may pay interest on loans taken from the owner. It may pay salaries to the Owner.
Forms of Business Organisation – Sole Proprietorship, General Partnerships, Company Form of Organization and Co-Operatives
Most production and distribution activities are carried out by millions of people in different parts of the country by constituting various kinds of organizations. These organizations are based on some form of ownership. Choosing a legal form of organization—a sole proprietorship, partnership, or corporation—ranks among an entrepreneur’s most vital decisions.
This choice affects a number of managerial and financial issues, including the amount of taxes the entrepreneur would have to pay, whether the entrepreneur may be personally sued for unpaid business bills, and whether the venture will die automatically with the demise of the entrepreneur.
Some common kinds of ownership structures are as follows:
1. Sole Proprietorship:
The simplest way to start up a business on one’s own is to become a sole trader (sometimes known as a sole proprietor). The sole proprietorship, as its name implies, is a business owned and managed by a single individual. The general perception of sole proprietorships is that they are a small and insignificant part of the national as well as global economy.
Advantages:
The following are the advantages of a sole proprietorship business:
i. Freedom:
As the sole proprietor is in total control of operations, he/she can respond quickly to changes, which is an asset in a rapidly changing market situation. The freedom to set the company’s course of action is a major motivational force. Many sole proprietors simply thrive on the feeling of control they have over their personal future and recognition they earn as the owner of the business.
ii. Ease of Formation:
One of the most attractive features of a sole proprietorship is that it is fast and simple to begin. If an entrepreneur wants to operate a business under his/her own name, they simply have to obtain the necessary licences from the Government and begin operations.
iii. Low Start-Up Cost:
In addition to being easy to begin, the sole proprietorship is generally the least expensive form of ownership to establish.
iv. Tax Benefits:
Sole proprietors generally enjoy tax benefits from the State and Central Governments in view of theirs being tiny and small operations. This is because the Government encourages small and tiny entrepreneurs to come up in a large way.
v. Profit Incentive:
One of the major advantages of sole proprietorship is that once the owner pays all of the company’s expenses, he/she can keep the remaining profits. The profit incentive is a powerful one, and profits represent an excellent way of keeping score in the game of the business.
vi. No Special Legal Restrictions:
The sole proprietorship is the least regulated form of business ownership. In a time when the government requests for information seem never ending, this feature has much merit.
vii. Easy to Discontinue:
If the entrepreneur decides to discontinue operations, he can terminate the business quickly, even though he will still be personally liable for any outstanding debts and obligations that the business cannot pay.
Disadvantages:
i. Unlimited Liability:
The major disadvantage of a sole proprietorship is the unlimited liability of the owner, which means that the sole proprietor is personally liable for all of the business’s debts. In a sole proprietorship, the owner is the business. He/she owns all of the business’s assets, and if the business fails, creditors can force the sale of these assets to cover its debts. Failure of a proprietory trader can ruin a sole proprietor financially.
ii. Lack of Continuity:
This is inherent in a sole proprietorship. If the proprietor dies, retires, or becomes incapacitated, the business automatically terminates. Unless a family member or employee can take over, the business could be in jeopardy.
iii. Difficulty of Raising Money, Image of Instability:
If the business is to grow and expand, a sole proprietor generally needs additional financial resources. However, many proprietors have already put all they have in their businesses and have used their personal resources as collateral on existing loans, making it difficult to borrow additional funds.
iv. Limited Skills and Capabilities:
A sole proprietor may not have the wide range of skills that running a successful business requires. Each of us has areas in which our education, training, and work experiences have taught us a great deal; yet there are other areas where our decision-making ability is weak. Many failures occur because owners lack the skills, knowledge, and experience in areas that are vital to business success.
Owners tend to brush aside problems they don’t understand or don’t feel comfortable with in favour of those they can solve more easily. Unfortunately, the problems they set aside seldom solve by themselves. By the time an owner decides to seek help in addressing those problems, it may be too late to save the company.
v. Feeling of Isolation:
Running a business alone allows an entrepreneur maximum flexibility, but it also generates feeling of isolation that there is no one to turn to for help in solving problems or getting feedback on a new idea. Most sole proprietors admit that there are times when they feel the pressure of being alone and being fully and completely responsible for every major business decision.
vi. Suitability:
Sole proprietorship form of organization is suitable when the size of the concern is very small, requires little capital, prefers to control by one person, where risk is more and personal attention is required.
2. General Partnerships:
As defined by the uniform Partnership Act, a partnership is a ‘voluntary association of two or more persons to carry on as co-owners a business for profit’. An association of individuals competent to contract who agree to carry on a lawful business in common with the object of sharing profit is a partnership.
Advantages:
i. Larger Pool of Talent:
In a partnership, more co-owners and their skills contribute to the business and play complementary role to each other in the organization which is missing in the sole trade form of organization.
ii. Larger Pool of Money:
The partnership form of ownership can significantly increase the pool of capital available to a business. Each partner’s assets cumulatively lead to a large pool of capital available for the business, which in turn helps to carry out the business on a large scale compared to sole proprietorship.
iii. Ease of Formation:
Like sole proprietorship form of organization, partnership firms can also easily get established without much legal formalities. However, more formal system prevails on it compared to proprietor concerns.
iv. Possible Tax Benefits:
The partnership itself is not subject to general taxation. It serves as a conduit for the profit or losses it earns or incurs; it is generally not as effective as the corporate form of ownership, which can raise capital by selling shares of ownership to outside investors.
v. Limited Legal Formalities:
Like proprietorship concerns, partnership form of organization is not burdened with red tape. In other words, partnership form of organizations too can come out successfully without much legal formalities.
vi. Division of Profits:
There are no restrictions on how partners may distribute the company’s profits as long as they are consistent with the partnership agreement and do not violate the rights of any partner. The partnership agreement should articulate the nature of each partner’s contribution and proportional share of the profits.
Disadvantages:
i. Unlimited Liability:
At least one member of every partnership must be a general partner. The general partner has unlimited personal liability, even though he or she is often the partner with the least personal resources.
ii. Lack of Continuity:
If one of the partners dies, the continuation of the business gets ridden with complications. Partners’ interest is often non-transferable through inheritance because the remaining partners may not want to be in a partnership with the person who inherits the deceased partner’s interest. Partners can make provisions in the partnership agreement to avoid dissolution due to death, if all parties agree to accept as partners those who inherit the deceased’s interest.
iii. Difficult Ownership Transfer:
Most partnership agreements restrict how a partner can dispose of his share of the business. Often a partner is required to sell his interest to the remaining partners. Even if the original agreement contains such a requirement and clearly delineates how the value of each partner’s ownership will be determined, there is no guarantee that the other partners will have the financial resources to buy the seller’s interest. All these things generally result in difficulties in transferring the ownership from one person to another.
iv. Possibility of Forced Liquidation:
Since conflicts among partners are often difficult to resolve due to differences among them, many partnership firms are forced to dissolve. This is again due to personality clashes and authority differences among the partners.
v. Suitability:
Partnership form of organization is suitable where there is more scope for long duration of the project, not possible for one person to carry out the activities, where more funds and more skills are needed.
3. Company Form of Organization:
A corporation is ‘an artificial being, invisible, intangible, and existing only in contemplation of the law’.
Advantages:
i. Limited Liability:
Because the company is a separate legal entity, it allows investors to limit their liability to the total amount of their investment in the business. This legal protection of personal assets beyond the business is of critical concern to many potential investors. In other words, corporate form of ownership does not protect its owners from being held personally liable for fraudulent or illegal acts.
ii. Continuity:
The corporate form of organization is basically continued indefinitely. The corporation’s existence does not depend on the fate of any single individual. Unlike a proprietorship or partnership in which the death of a member ends the business, a corporation lives beyond the lives of those who gave life to the organization.
iii. Ease of Ownership Transfer:
If the members in a corporation are displeased with the progress of the business, they can freely sell their shares to someone else and leave the organization. Similarly, shareholders can also transfer their shares through inheritance to a new generation of owners. During all of these transfers of ownership, the corporation continues to conduct business as usual.
iv. Ease of Raising Money:
Just because of limited liability, corporations have proved to be the most effective form of ownership for accumulating large amount of capital. Limited only by the number of shares authorized in its charter the corporation can raise money to begin business and expand as opportunity dictates by selling shares of its stock to investors.
v. Diffused Risk:
The sense of loss is spread over a large number of investors and the possibility of hardship on a few persons as in the case of partnership or on an individual as in the case of sole trade is minimized.
vi. Scope for Expansion:
Vast aggregation of capital and ploughing back of company’s own large earnings contribute to the expansion of its business. The company offers an excellent scope for self-generating growth.
Disadvantages:
i. High Legal Start-Up Costs:
To establish corporations it takes a lot of time and also cost. This is just because the owners give birth to an artificial legal entity and gestation period can be prolonged for the novice.
ii. Closely Regulated:
Corporations are subjected to more legal, reporting, and financial requirements than other forms of ownership. Corporate officers must meet more stringent requirements for recording and reporting management decisions and actions.
iii. Extensive Record Keeping:
Corporations are supposed to maintain detailed accounts for every transaction. In fact a huge establishment is needed to maintain the records and accounts and the same will be verified by independent auditors.
iv. Double Taxation:
Since a corporation is a separate legal entity, it must pay taxes on its net income at the state level, and also at local level. Before stakeholders receive a rupee of its net income and dividends, a corporation must pay these taxes at the corporate tax rate.
v. Speculation Encouraged:
The Company form of organization generally encourages reckless speculation on the stock exchange. This is an evil of great magnitude in our country.
vi. Bureaucratic Approach:
The bureaucratic habit of the company officials is to shirk troublesome initiatives because they get no direct benefit from it and often retards growth.
vii. Excessive Regulation by Law:
The state in which a company is located regulates its activities much more closely than those of non-corporate associations. A company and its management have to function well within the law.
viii. Suitability:
Company form of organization is suitable where the organization has to exist for a long period, huge capital is required, professionalism is needed, legal protection is needed, etc.
4. Co-Operatives (Common Ownership):
Co-operatives provide a structure for starting up business in which all the members of the cooperative jointly own, control, and work for the business. They share responsibility equally, make collective decisions on the basis of one person one vote and, in most co-operatives receive equal pay.
The concept of a co-operative enterprise is not a political concept but the idea of co-operative working is supported by the Government. Co-operative or common ownership enterprise can be divided basically into a society or a company.