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Home , Limited company, Partnership, Private limited company, Public limited company, Sole proprietorship

Chapter 2

Forms of Organisation

LEARNING OBJECTIVES

After studying this chapter, you should be able to: • identify different forms of business organisation; • explain features, merits and limitations of different forms of business organisations; • distinguish between various forms of organisations; and • discuss the factors determining choice of an appropriate form of business organisation.

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Neha, a bright final year student was waiting for her results to be declared. While at home she decided to put her free time to use. Having an aptitude for painting, she tried her hand at decorating clay pots and bowls with designs. She was excited at the praise showered on her by her friends and acquaintances on her work. She even managed to sell a few pieces of unique hand pottery from her home to people living in and around her colony. Operating from home, she was able to save on rental payments. She gained a lot of popularity by word of mouth publicity as a sole proprietor. She further perfected her skills of painting pottery and created new motifs and designs. All this generated great among her customers and provided a boost to the demand for her products. By the end of summer, she found that she had been able to make a of Rs. 2500 from her paltry investment in colours, pottery and drawing sheets. She felt motivated to take up this work as a career. She has, therefore, decided to set up her own artwork business. She can continue running the business on her own as a sole proprietor, but she needs more money for doing business on a larger scale. Her father has suggested that she should form a with her cousin to meet the need for additional funds and for sharing the responsibilities and risks. Side by side, he is of the opinion that it is possible that the business might grow further and may require the formation of a . She is in a fix as to what form of business organisation she should go in for?

2.1 introduction Let us start our discussion with — the simplest form If one is planning to start a business of business organisation, and then or is interested in expanding an move on to analysing more complex existing one, an important decision forms of organisations. relates to the choice of the form of organisation. The most appropriate 2.2 sole Proprietorship form is determined by weighing the advantages and disadvantages of each Do you often go in the evenings to buy type of organisation against one’s own registers, pens, chart papers, etc., requirements. from a small neighbourhood stationery Various forms of business store? Well, in all probability in the organisations from which one can course of your transactions, you have choose the right one include: interacted with a sole proprietor. Sole proprietorship is a popular (a) Sole proprietorship, form of business organisation and (b) Joint Hindu family business, is the most suitable form for small (c) Partnership, , especially in their initial years of operation. Sole proprietorship (d) societies, and refers to a form of business organisation (e) Joint stock company. which is owned, managed and

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controlled by an individual who is the the owner is personally responsible recipient of all profits and bearer of for payment of in case the assets all risks. This is evident from the term of the business are not sufficient to itself. The word “sole” implies “only”, meet all the debts. As such the owner’s and “proprietor” refers to “owner”. personal possessions such as his/her Hence, a sole proprietor is the one who personal car and other assets could be is the only owner of a business. sold for repaying the . Suppose This form of business is particularly the total outside liabilities of XYZ dry common in areas of personalised cleaner, a sole proprietorship firm, are services such as beauty parlours, hair Rs. 80,000 at the time of dissolution, saloons and small scale activities like but its assets are Rs. 60,000 only. In running a shop in a locality. such a situation the proprietor will

Sole trader is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the of business. J.L. Hansen The individual proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure. L.H. Haney

Features have to bring in Rs. 20,000 from her personal sources even if she has to Salient characteristics of the sole sell her personal property to repay the proprietorship form of organisation firm’s debts. are as follows: (iii) Sole risk bearer and profit There (i) Formation and closure: recipient: The risk of failure of is no separate law that governs sole business is borne all alone by the sole proprietorship. Hardly any legal proprietor. However, if the business formalities are required to start a is successful, the proprietor enjoys sole proprietary business, though all the benefits. He receives all the in some cases one may require a business profits which become a direct license. Closure of the business can reward for his risk bearing. also be done easily. Thus, there is (iv) Control: The right to run the ease in formation as well as closure business and make all decisions lies of business. absolutely with the sole proprietor. He (ii) Liability: Sole proprietors have can carry out his plans without any unlimited liability. This implies that interference from others.

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(v) No separate entity: In the eyes of (i) Quick decision making: A sole the law, no distinction is made between proprietor enjoys considerable degree the sole trader and his business, as of freedom in making business business does not have an identity decisions. Further the decision making separate from the owner. The owner is prompt because there is no need to is, therefore, held responsible for all consult others. This may lead to timely the activities of the business. capitalisation of market opportunities as and when they arise. (vi) Lack of business continuity: The sale proprietorship business is owned (ii) Confidentiality of information: and controlled by one person, therefore Sole decision making authority death, insanity, imprisonment, enables the proprietor to keep all physical ailment or of the the information related to business sole proprietor will have a direct and operations confidential and maintain detrimental effect on the business secrecy. A sole trader is also not bound and may even cause closure of the by law to publish firm’s accounts. business. (iii) Direct incentive: A sole proprietor Merits directly reaps the benefits of his/her Sole proprietorship offers many efforts as he/she is the sole recipient advantages. Some of the important of all the profit. The need to share ones are as follows: profits does not arise as he/she is the

A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor! The product that has given the world its best-known taste was born in Atlanta, Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced the syrup for Coca-Cola®, and carried a jug of the new product down the street to Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed on sale for five cents a glass as a soda fountain drink. Dr. Pemberton never realised the potential of the beverage he created. He gradually sold portions of his business to various partners and, just prior to his death in 1888, sold his remaining interest in Coca-Cola to Asa G. Candler. An Atlantan with great business acumen, Mr. Candler proceeded to buy additional business rights and acquire complete control. On May 1, 1889, Asa Candler published a full-page advertisement in The Atlanta Journal, proclaiming his wholesale and retail drug business as “sole proprietors of Coca-Cola ... Delicious. Refreshing. Exhilarating. Invigorating.” Sole , which Mr. Candler did not actually achieve until 1891, needed an investment of $ 2,300. It was only in 1892 that Mr. Candler formed a company called The Coca-Cola . Source: Website of Coca Cola company.

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single owner. This provides maximum (ii) Limited life of a business incentive to the sole trader to work concern: The sole proprietorship hard. business is owned and controlled by one person, so death, insanity, (iv) Sense of accomplishment: There imprisonment, physical ailment or is a personal satisfaction involved in bankruptcy of a proprietor affects the working for oneself. The knowledge business and can lead to its closure. that one is responsible for the success of the business not only contributes to (iii) Unlimited liability: A major self-satisfaction but also instils in the disadvantage of sole proprietorship is individual a sense of accomplishment that the owner has unlimited liability. and confidence in one’s abilities. If the business fails, the creditors can recover their dues not merely from (v) Ease of formation and closure: An the business assets, but also from the important merit of sole proprietorship is personal assets of the proprietor. A the possibility of entering into business poor decision or an unfavourable with minimal legal formalities. There circumstance can create serious is no separate law that governs sole financial burden on the owner. That is proprietorship. As sole proprietorship why a sole proprietor is less inclined to take risks in the form of is the least regulated form of business, or expansion. it is easy to start and close the business as per the wish of the owner. (iv) Limited managerial ability: The owner has to assume the responsibility Limitations of varied managerial tasks such as purchasing, selling, financing, etc. It is Not with standing various advantages, rare to find an individual who excels in the sole proprietorship form of all these areas. Thus decision making organisation is not free from limitations. may not be balanced in all the cases. Some of the major limitations of sole Also, due to limited resources, sole proprietorship are as follows: proprietor may not be able to employ (i) Limited resources: Resources of and retain talented and ambitious a sole proprietor are limited to his/ employees. her personal savings and borrowings Though sole proprietorship suffers from various shortcomings, many from others. Banks and other lending entrepreneurs opt for this form of institutions may hesitate to extend a organisation because of its inherent long term loan to a sole proprietor. advantages. It requires less amount of Lack of resources is one of the major capital. It is best suited for businesses reasons why the size of the business which are carried out on a small rarely grows much and generally scale and where customers demand remains small. personalised services.

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2.3 Joint Hindu Family Business birth. It is governed by the Hindu Succession Act, 1956. Joint Hindu family business is a specific form of business organisation (ii) Liability: The liability of all found only in . It is one of the members except the karta is limited oldest forms of business organisation to their share of co-parcenery property in the country. It refers to a form of of the business. The karta, however, organisation wherein the business is has unlimited liability. owned and carried on by the members (iii) Control: The control of the family of the Hindu Undivided Family (HUF). business lies with the karta. He takes It is governed by the Hindu Law. The all the decisions and is authorised to basis of membership in the business is manage the business. His decisions birth in a particular family and three successive generations can be members are binding on the other members. in the business. (iv) Continuity: The business The business is controlled by continues even after the death of the head of the family who is the the karta as the next eldest member eldest member and is called karta. All takes up the position of karta, leaving members have equal ownership right the business stable. The business over the property of an ancestor and can, however, be terminated with the they are known as co-parceners. mutual consent of the members.

Gender Equality in the Joint Hindu Family a Reality According to the Hindu Succession (Amendment) Act, 2005, the daughter of a coparcener of a Joint Hindu Family shall, by birth, become a coparcener. At the time of partition of such a ‘Joint Hindu Family’ the coparcenary property shall be equally divided to all the coparceners irrespective of their gender (male or female). The eldest member (male or female) of ‘Joint Hindu Family’ shall become Karta. Married daughter has equal rights in property of a Joint Hindu Family.

Features (v) Minor Members: The inclusion The following points highlight the of an individual into the business essential characteristics of the joint occurs due to birth in a Hindu Hindu family business. Undivided Family. Hence, minors can (i) Formation: For a joint Hindu also be members of the business. family business, there should be at least two members in the family and Merits ancestral property to be inherited by them. The business does not require The advantages of the joint Hindu any agreement as membership is by family business are as follows:

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(i) Effective control: The karta has and management of business, but absolute decision making power. This also suffers from the disadvantage of avoids conflicts among members as having unlimited liability. His personal no one can interfere with his right to property can be used to repay business decide. This also leads to prompt and debts. flexible decision making. (iii) Dominance of karta: The karta (ii) Continued business existence: individually manages the business The death of the karta will not affect which may at times not be acceptable the business as the next eldest to other members. This may cause member will then take up the position. conflict amongst them and may even Hence, operations are not terminated lead to break down of the family unit. and continuity of business is not threatened. (iv) Limited managerial skills: Since the karta cannot be an expert in (iii) of members: The liability of all the co-parceners all areas of management, the business except the karta is limited to their share may suffer as a result of his unwise in the business, and consequently decisions. His inability to decide their risk is well-defined and precise. effectively may result into poor profits or even losses for the organisation. (iv) Increased loyalty and The joint Hindu family business cooperation: Since the business is is on the decline because of the run by the members of a family, there diminishing number of joint Hindu is a greater sense of loyalty towards one other. Pride in the growth of business families in the country. is linked to the achievements of the family. This helps in securing better 2.4 Partnership cooperation from all the members. The inherent disadvantage of the sole proprietorship in financing and Limitation managing an expanding business The following are some of the limitations paved the way for partnership as a of a joint Hindu family business. viable option. Partnership serves as an answer to the needs of greater capital (i) Limited resources: The joint Hindu investment, varied skills and sharing family business faces the problem of of risks. limited capital as it depends mainly The Indian Partnership Act, 1932 on ancestral property. This limits the defines partnership as “the relation scope for expansion of business. between persons who have agreed (ii) Unlimited liability of karta: to share the profit of the business The karta is burdened not only with carried on by all or any one of them the responsibility of decision making acting for all.”

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Features liable to that extent. Individually too, Definitions given above point to the each partner can be held responsible following major characteristics of repaying the debts of the business. the partnership form of business However, such a partner can later organisation. recover from other partners an amount (i) Formation: The partnership form of money equivalent to the shares in of business organisation is governed liability defined as per the partnership by the Indian Partnership Act, 1932. agreement.

Partnership is the relation between persons competent to make who have agreed to carry on a lawful business in common with a view to private gain. L H Haney Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business and to share the profits therefrom between them. The Indian Act 1872

It comes into existence through a legal (iii) Risk bearing: The partners agreement wherein the terms and bear the risks involved in running a conditions governing the relationship business as a team. The reward comes among the partners, sharing of in the form of profits which are shared profits and losses and the manner of by the partners in an agreed ratio. conducting the business are specified. However, they also share losses in It may be pointed out that the business the same ratio in the event of the firm must be lawful and run with the motive incurring losses. of profit. Thus, two people coming together for charitable purposes will (iv) Decision making and control: not constitute a partnership. The partners share amongst themselves the responsibility of decision making (ii) Liability: The partners of a firm and control of day to day activities. have unlimited liability. Personal Decisions are generally taken with assets may be used for repaying mutual consent. Thus, the activities debts in case the business assets are of a partnership firm are managed insufficient. Further, the partners through the joint efforts of all the are jointly and individually liable for partners. payment of debts. Jointly, all the partners are responsible for the debts (v) Continuity: Partnership is and they contribute in proportion to characterised by lack of continuity of their share in business and as such are business since the death, retirement,

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or insanity of any partner (ii) Balanced decision making: The can bring an end to the business. partners can oversee different functions However, the remaining partners may according to their areas of expertise. if they so desire continue the business Because an individual is not forced to on the basis of a new agreement. handle different activities, this not only reduces the burden of work but also (vi) Number of Partners: The leads to fewer errors in judgements. As minimum number of partners needed a consequence, decisions are likely to to start a partnership firm is two. be more balanced. According to section 464 of the Act 2013, maximum (iii) More funds: In a partnership, number of partners in a partnership the capital is contributed by a number firm can be 100, subject to the of partners. This makes it possible number prescribed by the government. to raise larger amount of funds as As per Rule 10 of The Companies compared to a sole proprietor and (miscelleneous) Rules 2014, at present undertake additional operations when the maximum number of members needed. can be 50. (iv) Sharing of risks: The risks (vii) Mutual agency: The definition of involved in running a partnership firm partnership highlights the fact that it are shared by all the partners. This is a business carried on by all or any reduces the anxiety, burden and stress one of the partners acting for all. In on individual partners. other words, every partner is both an (v) Secrecy: A partnership firm is not agent and a principal. He is an agent of legally required to publish its accounts other partners as he represents them and submit its reports. Hence it is and thereby binds them through his able to maintain confidentiality of acts. He is a principal as he too can information relating to its operations. be bound by the acts of other partners.

Merits Limitations The following points describe the A partnership firm of business advantages of a partnership firm. organisation suffers from the following limitations: (i) Ease of formation and closure: A partnership firm can be formed easily (i) Unlimited liability: Partners by putting an agreement between are liable to repay debts even from the prospective partners into place their personal resources in case the whereby they agree to carryout the business assets are not sufficient to business of the firm and share risks. meet its debts. The liability of partners There is no compulsion with respect to is both joint and several which may registration of the firm. Closure of the prove to be a drawback for those firm too is an easy task. partners who have greater personal

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wealth. They will have to repay the financial status of a partnership firm. entire debt in case the other partners As a result, the confidence of the public are unable to do so. in partnership firms is generally low.

(ii) Limited resources: There is a 2.4.1 Types of Partners restriction on the number of partners, A partnership firm can have different and hence contribution in terms of types of partners with different roles capital investment is usually not and liabilities. An understanding of sufficient to support large scale these types is important for a clear . As a result, understanding of their rights and partnership firms face problems in responsibilities. These are described expansion beyond a certain size. as follows: (iii) Possibility of conflicts: (i) Active partner: An active partner Partnership is run by a group of is one who contributes capital, persons wherein decision making participates in the management of authority is shared. Difference in the firm, shares its profits and losses, opinion on some issues may lead to and is liable to an unlimited extent disputes between partners. Further, to the creditors of the firm. These decisions of one partner are binding partners take actual part in carrying on other partners. Thus an unwise out business of the firm on behalf of decision by some one may result in other partners. financial ruin for all others. In case (ii) Sleeping or dormant partner: a partner desires to leave the firm, Partners who do not take part in the this can result in termination of day to day activities of the business partnership as there is a restriction are called sleeping partners. A sleeping on transfer of ownership. partner, however, contributes capital (iv) Lack of continuity: Partnership to the firm, shares its profits and comes to an end with the death, losses, and has unlimited liability. retirement, insolvency or lunacy (iii) Secret partner: A secret partner of any partner. It may result in is one whose association with the firm lack of continuity. However, the is unknown to the general public. remaining partners can enter into a Other than this distinct feature, in fresh agreement and continue to run all other aspects he is like the rest of the business. the partners. He contributes to the capital of the firm, takes part in the (v) Lack of public confidence: A management, shares its profits and partnership firm is not legally required losses, and has unlimited liability to publish its financial reports or make towards the creditors. other related information public. It is, therefore, difficult for any member (iv) Nominal partner: A nominal of the public to ascertain the true partner is one who allows the use of

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his/her name by a firm, but does not partners, even though they do not contribute to its capital. He/she does contribute capital or take part in not take active part in managing the its management. Suppose Rani is a firm, does not share its profit or losses friend of Seema who is a partner in a but is liable, like other partners, to the software firm —Simplex Solutions. On third parties, for the repayments of the Seema’s request, Rani accompanies firm’s debts. her to a business meeting with Mohan (v) Partner by estoppel: A person Softwares and actively participates in is considered a partner by estoppel the negotiation process for a business if, through his/her own initiative, deal and gives the impression that conduct or behaviour, he/she gives she is also a partner in Simplex an impression to others that he/ Solutions. If credit is extended to she is a partner of the firm. Such Simplex Solutions on the basis of these partners are held liable for the debts negotiations, Rani would also be liable of the firm because in the eyes of for repayment of such debt, as if she the third party they are considered is a partner of the firm.

Table 2.1 Types of Partners

Capital Share in Type Management Liability contribution profits/losses

Contributes Participates in Shares profits/ Unlimited Active partner capital management losses liability

Sleeping or Does not Contributes Shares profits/ Unlimited dormant participate in capital losses liability partner management

Participates in Contributes Shares profits/ Unlimited Secret partner management, capital losses liability but secretly Does not Does not Generally Nominal Unlimited contribute participate in does not share partner liability capital management profits/losses Does not Does not Partner by Does not share Unlimited contribute participate in estoppel profits/losses liability capital management

Does not Does not Partner by Does not share Unlimited contribute participate in holding out profits/losses liability capital management

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Minor as a Partner Partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them. As such a minor is incompetent to enter into a valid contract with others, he cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners. In such cases, his liability will be limited to the extent of the capital contributed by him and in the firm. He will not be eligible to take an active part in the management of the firm. Thus, a minor can share only the profits and can not be asked to bear the losses. However, he can if he wishes, inspect the accounts of the firm. The status of a minor changes when he attains majority. In fact, on attaining majority, the minor has to decide whether he would like to become a partner in the firm. He has to give a public notice of his decision within six months of attaining majority. If he fails to do so, within the stipulated time, he will be treated as a full-fledged partner and will become liable to the debts of the firm to an unlimited extent, in the same way as other active partners are.

(vi) Partner by holding out: A ‘partnership at will’ and ‘particular partner by ‘holding out’ is a person partnership’. On the basis of liability, who though is not a partner in a firm the two types of partnership include: but knowingly allows himself/herself one ‘with limited liability’ and the other to be represented as a partner in a one ‘with unlimited liability’. These firm. Such a person becomes liable types are described in the following to outside creditors for repayment of sections. any debts which have been extended to the firm on the basis of such Classification on the basis of duration representation. In case he is not really a partner and wants to save (i) Partnership at will: This type of himself from such a liability, he should partnership exists at the will of the immediately issue a denial, clarifying partners. It can continue as long as his position that he is not a partner in the partners want and is terminated the firm. If he does not do so, he will when any partner gives a notice of be responsible to the third party for withdrawal from partnership to the any such debts. firm. (ii) Particular partnership: Partner- 2.4.2 Types of ship formed for the accomplishment of Partnerships can be classified on the a particular project say construction of basis of two factors, viz., duration a building or an activity to be carried and liability. On the basis of duration, on for a specified time period is called there can be two types of partnerships : particular partnership. It dissolves

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automatically when the purpose for This form of partnership was which it was formed is fulfilled or when not permitted in India earlier. The the time duration expires. permission to form partnership firms with limited liability has been granted Classification on the basis of liability after introduction of New Small Enterprise Policy in 1991. The idea (i) : In general behind such a move has been to enable partnership, the liability of partners the partnership firms to attract is unlimited and joint. The partners capital from friends and relatives of enjoy the right to participate in the small scale entrepreneurs who were management of the firm and their earlier reluctant to help, due to the acts are binding on each other as existence of unlimited liability clause well as on the firm. Registration of in the partnership form of business. the firm is optional. The existence of the firm is affected by the death, 2.4.3 Partnership Deed lunacy, insolvency or retirement of A partnership is a the partners. of people who come together for achieving common objectives. In order (ii) : In limited to enter into partnership, a clear partnership, the liability of at least agreement with respect to the terms, one partner is unlimited whereas the conditions and all aspects concerning rest may have limited liability. Such a the partners is essential so that there partnership does not get terminated is no misunderstanding later among with the death, lunacy or insolvency the partners. Such an agreement of the limited partners. The limited can be oral or written. Even though partners do not enjoy the right of it is not essential to have a written management and their acts do not agreement, it is advisable to have a bind the firm or the other partners. written agreement as it constitutes Registration of such partnership is an evidence of the conditions agreed compulsory. upon. The written agreement which

Price Waterhouse Coopers was a Partnership Firm earlier Price Waterhouse Coopers, one of the world’s top accountancy firms has been created in 1998 by the merger of two companies, Price Waterhouse and Coopers and Lybrand — each with historical roots going back some 150 years to the 19th century Great Britain. In 1850, Samuel Lowell Price set up his business in London. In 1865, he was joined in partnership by William H. Holyland and Edwin Waterhouse. As the firm grew, qualified members of its professional staff were admitted to the partnership. By the late 1800s, Price Waterhouse had gained significant recognition as an accounting firm. Source: Price Waterhouse Coopers archives in Columbia University.

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specifies the terms and conditions that (a) A partner of an unregistered firm govern the partnership is called the cannot file a suit against the firm partnership deed. or other partners, The partnership deed generally (b) The firm cannot file a suit against includes the following aspects: third parties, and • Name of firm • Nature of business and location (c) The firm cannot file a case against of business the partners. • Duration of business In view of these consequences, it is • Investment made by each partner therefore advisable to get the firm • Distribution of profits and losses registered. According to the India • Duties and obligations of the Partnership Act 1932, the partners partners may get the firm registered with the • and withdrawals of the Registrar of firms of the state in which partners the firm is situated. The registration • Terms governing admission, can be at the time of formation or at retirement and expulsion of a any time during its existence. The partner procedure for getting a firm registered • Interest on capital and interest is as follows: on drawings 1. Submission of application in the • Procedure for dissolution of the prescribed form to the Registrar of firm firms. The application should con- • Preparation of accounts and their tain the following particulars: auditing • Name of the firm • Method of solving disputes • Location of the firm • Names of other places where the 2.4.4 Registration firm carries on business Registration of a partnership firm • The date when each partner means the entering of the firm’s name, joined the firm along with the relevant prescribed • Names and addresses of the particulars, in the Register of firms partners kept with the Registrar of Firms. • Duration of partnership It provides conclusive proof of the This application should be signed by existence of a partnership firm. all the partners. It is optional for a partnership 2. Deposit of required fees with the firm to get registered. In case a firm Registrar of Firms. does not get registered, it is deprived 3. The Registrar after approval will of many benefits. The consequences make an entry in the register of of non-registration of a firm are as firms and will subsequently issue a follows: certificate of registration.

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Cooperative is a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of an economic interest for themselves. E. H. Calvert Cooperative organisation is “a society which has its objectives for the promotion of economic of its members in accordance with cooperative principles. The Indian Cooperative Societies Act 1912

2.5 Cooperative Society cooperative society, and can also leave anytime as per his desire. There cannot The word cooperative means working be any compulsion for him to join or together and with others for a common quit a society. Although procedurally purpose. a member is required to serve a notice The cooperative society is a before leaving the society, there is voluntary association of persons, who no compulsion to remain a member. join together with the motive of welfare Membership is open to all, irrespective of the members. They are driven by the of their religion, caste, and gender. need to protect their economic interests in the face of possible exploitation at (ii) Legal status: Registration of a the hands of middlemen obsessed with cooperative society is compulsory. the desire to earn greater profits. This accords a separate identity to The cooperative society is the society which is distinct from its compulsorily required to be registered members. The society can enter into under the Cooperative Societies Act contracts and hold property in its 1912. The process of setting up a name, sue and be sued by others. As a cooperative society is simple enough result of being a separate legal entity, and at the most what is required it is not affected by the entry or exit of is the consent of at least ten adult its members. persons to form a society. The capital (iii) Limited liability: The liability of of a society is raised from its members the members of a cooperative society through issue of shares. The society is limited to the extent of the amount acquires a distinct legal identity after contributed by them as capital. This its registration. defines the maximum risk that a member can be asked to bear. Features (iv) Control: In a cooperative society, The characteristics of a cooperative the power to take decisions lies in society are listed below. the hands of an elected managing (i) Voluntary membership: The committee. The right to vote gives membership of a cooperative society the members a chance to choose is voluntary. A person is free to join a the members who will constitute the

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managing committee and this lends services to the society. As the focus the cooperative society a democratic is on elimination of middlemen, this character. helps in reducing costs. The customers or producers themselves are members (v) Service motive: The cooperative of the society, and hence the risk of society through its purpose lays bad debts is lower. emphasis on the values of mutual help and welfare. Hence, the motive of (v) Support from government: The service dominates its working. If any cooperative society exemplifies the idea surplus is generated as a result of its of democracy and hence finds support operations, it is distributed amongst from the Government in the form of the members as in conformity low , subsidies, and low interest with the bye-laws of the society. rates on loans. (vi) Ease of formation: The cooperative Merits society can be started with a minimum The cooperative society offers many of ten members. The registration benefits to its members. Some of the procedure is simple involving a few legal advantages of the cooperative form of formalities. Its formation is governed organisation are as follows. by the provisions of Cooperative Societies Act 1912. (i) Equality in voting status: The principle of ‘one man one vote’ governs Limitations the cooperative society. Irrespective of The cooperative form of organisation the amount of capital contribution by suffers from the following limitations: a member, each member is entitled to equal voting rights. (i) Limited resources: Resources of a cooperative society consists of capital (ii) Limited liability: The liability of contributions of the members with members of a cooperative society is limited means. The low rate of dividend limited to the extent of their capital offered on investment also acts as a contribution. The personal assets of deterrent in attracting membership or the members are, therefore, safe from more capital from the members. being used to repay business debts. (ii) Inefficiency in management: (iii) Stable existence: Death, Cooperative societies are unable to bankruptcy or insanity of the members attract and employ expert managers do not affect continuity of a cooperative because of their inability to pay them society. A society, therefore, operates high salaries. The members who offer unaffected by any change in the honorary services on a voluntary membership. basis are generally not professionally (iv) Economy in operations: The equipped to handle the management members generally offer honorary functions effectively.

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(iii) Lack of secrecy: As a result may take a backseat if personal gain is of open discussions in the meetings given preference by certain members. of members as well as disclosure obligations as per the Societies Act (7), 2.5.1 Types of Cooperative it is difficult to maintain secrecy about Societies the operations of a cooperative society. Various types of cooperative societies (iv) Government control: In based on the nature of their operations return of the privileges offered by the are described below: government, cooperative societies (i) Consumer’s cooperative societies: have to comply with several rules The consumer cooperative societies and regulations related to auditing are formed to protect the interests of of accounts, submission of accounts, consumers. The members comprise etc. Interference in the functioning of consumers desirous of obtaining of the cooperative organisation good quality products at reasonable through the control exercised by prices. The society aims at eliminating the state cooperative departments middlemen to achieve economy in also negatively affects its freedom of operations. It purchases goods in operation. bulk directly from the wholesalers and (v) Differences of opinion: Internal sells goods to the members, thereby quarrels arising as a result of contrary eliminating the middlemen. Profits, viewpoints may lead to difficulties in if any, are distributed on the basis decision making. Personal interests of either their capital contributions may start to dominate the welfare to the society or purchases made by motive and the benefit of other members individual members.

Amul’s amazing Cooperative ventures! Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many illiterate), converts the milk into branded, packaged products, and delivers goods worth Rs. 6 crore (Rs. 60 million) to over 5,00,000 retail outlets across the country. It all started in December 1946 with a group of farmers keen to free themselves from intermediaries, gain access to markets and thereby ensure maximum returns for their efforts. Based in the village of Anand, the Khera District Milk Cooperative Union (better known as Amul) expanded exponentially. It joined hands with other milk , and the Gujarat network now covers 2.12 million farmers, 10,411 village milk collection centres and fourteen district level plants (unions). Amul is the common brand for most product categories produced by various unions: liquid milk, milk powder, butter, ghee, cheese, cocoa products, sweets, ice-cream and condensed milk. Amul’s sub-brands include variants such as Amulspray, Amulspree, Amulya and Nutramul. Source: Adapted from Pankaj Chandra, “Rediff.com”, Business Special, September 2005.

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(ii) Producer’s cooperative societies: society aims to eliminate middlemen These societies are set up to protect and improve competitive position of the interest of small producers. The its members by securing a favourable members comprise of producers market for the products. It pools desirous of procuring inputs for the output of individual members production of goods to meet the and performs marketing functions demands of consumers. The society like transportation, warehousing, aims to fight against the big capitalists packaging, etc., to sell the output and enhance the bargaining power at the best possible price. Profits of the small producers. It supplies are distributed according to each raw materials, equipment and other member’s contribution to the pool of inputs to the members and also buys output. their output for sale. Profits among the members are generally distributed on (iv) Farmer’s cooperative societies: the basis of their contributions to the These societies are established to total pool of goods produced or sold protect the interests of farmers by providing better inputs at a reasonable by the society. cost. The members comprise farmers (iii) Marketing cooperative societies: who wish to jointly take up farming Such societies are established to activities. The aim is to gain the help small producers in selling their benefits of large scale farming and products. The members consist increase the productivity. Such of producers who wish to obtain societies provide better quality seeds, reasonable prices for their output. The fertilisers, machinery and other

Indian Companies in League of FORTUNE GLOBAL Organisations

GLOBAL Rank in Revenue Company rank India (Crores)

Indian Oil Corporation Ltd. 117 2 5,35,793

Reliance Industries Ltd. 106 1 5,80,553

Tata Motors Ltd. 265 5 3,03,227

State Bank of India 236 4 3,30,687

ONGC 160 3 4,36,057

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modern techniques for use in the business activities and has a legal cultivation of crops. This helps not status independent of its members. only in improving the yield and returns A company can be described as an to the farmers, but also solves the artificial person having a separate problems associated with the farming legal entity, perpetual succession and on fragmented land holdings. a common seal. The company form of organisation is governed by The (v) Credit cooperative societies: Companies Act, 2013. As per section Credit cooperative societies are 2(20) of Act 2013, a company means established for providing easy credit company incorporated under this Act on reasonable terms to the members. or any other previous company law. The members comprise of persons who The are the owners seek financial help in the form of loans. of the company while the Board of The aim of such societies is to protect Directors is the chief managing body the members from the exploitation elected by the shareholders. Usually, of lenders who charge high rates of the owners exercise an indirect control interest on loans. Such societies provide over the business. The capital of the loans to members out of the amounts company is divided into smaller parts collected as capital and deposits from called ‘shares’ which can be transferred the members and charge low rates freely from one to another of interest. person (except in a private company). (vi) Cooperative housing societies: Cooperative housing societies are Features established to help people with limited income to construct houses The definition of a joint stock company at reasonable costs. The members of highlights the following features of a these societies consist of people who company. are desirous of procuring residential (i) Artificial person: A company is a accommodation at lower costs. The creation of law and exists independent aim is to solve the housing problems of its members. Like natural persons, of the members by constructing houses a company can own property, incur and giving the option of paying in debts, borrow money, enter into instalments. These societies construct contracts, sue and be sued but unlike flats or provide plots to members on them it cannot breathe, eat, run, talk which the members themselves can and so on. It is, therefore, called an construct the houses as per their artificial person. choice. (ii) Separate legal entity: From the day of its , a company 2.6 Joint Stock Company acquires an identity, distinct from its A company is an association of members. Its assets and liabilities are persons formed for carrying out separate from those of its owners. The

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law does not recognise the business directors hold a position of immense and owners to be one and the same. significance as they are directly accountable to the shareholders for (iii) Formation: The formation of a company is a time consuming, the working of the company. The expensive and complicated process. shareholders, however, do not have the It involves the preparation of several right to be involved in the day-to-day documents and compliance with running of the business.

Previous Company law means any of the laws specified below: 1. Act relating to companies in force before the Indian companies Act, 1866 (10 of 1866). 2. The Indian companies Act, 1866 (10 of 1866). 3. The Indian companies Act, 1882 (6 of 1882). 4. The Indian companies Act, 1913 (6 of 1913). 5. The Registration of Transferred Companies Ordinance, 1942 (ordinance 42 of 1942). 6. The Companies Act, 1956.

several legal requirements before it (vi) Liability: The liability of the can start functioning. Incorporation members is limited to the extent of of companies is compulsory under the capital contributed by them in a The or any of company. The creditors can use only the previous company law, as state the assets of the company to settle their earlier. Such companies which are claims since it is the company and not incorporated under companies Act 1956 or any company law shall be the members that owes the debt. The included in the list of companies. members can be asked to contribute to the loss only to the extent of the (iv) Perpetual succession: A company unpaid amount of share held by them. being a creation of the law, can be Suppose Akshay is a shareholder in a brought to an end only by law. It will only cease to exist when a specific company holding 2,000 shares of Rs.10 procedure for its closure, called each on which he has already paid Rs. winding up, is completed. Members 7 per share. His liability in the event may come and members may go, but of losses or company’s failure to pay the company continues to exist. debts can be only up to Rs. 6,000 — the (v) Control: The management and unpaid amount of his (Rs. control of the affairs of the company is 3 per share on 2,000 shares held in the undertaken by the , company). Beyond this, he is not liable which appoints the top management to pay anything towards the debts or officials for running the business. The losses of the company.

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(vii) Common seal: The company can be sold in the market and as such being an articial person cannot sign can be easily converted into cash its name by itself. Therefore, every in case the need arises. This avoids company is required to have its own blockage of investment and presents seal which acts as official signature the company as a favourable avenue of the company. Any document which for investment purposes. does not carry the common seal of (iii) Perpetual existence: Existence of the company is not a binding on the a company is not affected by the death, company. retirement, resignation, insolvency (viii) Risk bearing: The risk of losses or insanity of its members as it has in a company is borne by all the share a separate entity from its members. holders. This is unlike the case of sole A company will continue to exist proprietorship or partnership firm even if all the members die. It can be where one or few persons respectively liquidated only as per the provisions of the Companies Act, 2013. bear the losses. In the face of financial difficulties, all shareholders in a (iv) Scope for expansion: As company have to contribute to the compared to the sole proprietorship and debts to the extent of their shares in partnership forms of organisation, a the company’s capital. The risk of loss company has large financial resources. thus gets spread over a large number Further, capital can be attracted from of shareholders. the public as well as through loans from banks and financial institutions. Thus Merits there is greater scope for expansion. The investors are inclined to invest in The company form of organisation shares because of the limited liability, offers a multitude of advantages, some transferable ownership and possibility of which are discussed below. of high returns in a company. (i) Limited liability: The shareholders (v) Professional management: are liable to the extent of the amount A company can afford to pay unpaid on the shares held by them. higher salaries to specialists and Also, only the assets of the company professionals. It can, therefore, employ can be used to settle the debts, leaving people who are experts in their area of the owner’s personal property free from specialisations. The scale of operations any charge. This reduces the degree of in a company leads to division of risk borne by an investor. work. Each department deals with a (ii) Transfer of interest: The ease particular activity and is headed by an of transfer of ownership adds to the expert. This leads to balanced decision advantage of investing in a company as making as well as greater efficiency in the share of a public the company’s operations.

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Limitations various certificates from different agencies, viz., registrar, SEBI, etc. This The major limitations of a company form of organisation are as follows: reduces the freedom of operations of a company and takes away a lot of time, (i) Complexity in formation: The effort and money. formation of a company requires greater time, effort and extensive (v) Delay in decision making: knowledge of legal requirements and Companies are democratically managed the procedures involved. As compared through the Board of Directors which to sole proprietorship and partnership is followed by the top management, form of organisations, formation of a middle management and lower level company is more complex. management. Communication as well as approval of various proposals (ii) Lack of secrecy: The Companies may cause delays not only in taking Act requires each decisions but also in acting upon to provide from time-to-time a lot of them. information to the office of the registrar of companies. Such information is (vi) Oligarchic management: In available to the general public also. theory, a company is a democratic It is, therefore, difficult to maintain institution wherein the Board of complete secrecy about the operations Directors are representatives of the of company. shareholders who are the owners. In (iii) Impersonal work environment: practice, however, in most large sized Separation of ownership and organisations having a multitude management leads to situations in of shareholders; the owners have which there is lack of effort as well minimal influence in terms of as personal involvement on the controlling or running the business. part of the officers of a company. It is so because the shareholders are The large size of a company further spread all over the country and a very makes it difficult for the owners small percentage attend the general and top management to maintain meetings. The Board of Directors as personal contact with the employees, such enjoy considerable freedom in customers and creditors. exercising their power which they (iv) Numerous regulations: The sometimes use even contrary to functioning of a company is subject the interests of the shareholders. to many legal provisions and Dissatisfied shareholders in such a compulsions. A company is burdened situation have no option but to sell with numerous restrictions in respect their shares and exit the company. As of aspects including audit, voting, the directors virtually enjoy the rights filing of reports and preparation of to take all major decisions, it leads to documents, and is required to obtain rule by a few.

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(vii) Conflict in interests: There (b) has a minimum of 2 and a maximum may be amongst of 200 members, excluding the various stakeholders of a company. present and past employees; The employees, for example, may (c) does not invite public to subscribe be interested in higher salaries, to its securities and consumers desire higher quality It is necessary for a private company products at lower prices, and the to use the word private limited after its shareholders want higher returns in name. If a private company contravenes the form of and increase any of the aforesaid provisions, it in the intrinsic value of their shares. ceases to be a private company and These demands pose problems in loses all the exemptions and privileges managing the company as it often to which it is entitled. becomes difficult to satisfy such The following are some of the privileges diverse interests. of a as against 2.6.1 Types of Companies a : 1. A private company can be formed A company can be either a private or by only two members whereas a public company. These two types of seven people are needed to form companies are discussed in detail in a public company. the following paragraphs. 2. There is no need to issue a pro- Private Company spectus as public is not invited to subscribe to the shares of a pri- A private company means a company vate company. which: 3. Allotment of shares can be done (a) restricts the right of members to without receiving the minimum transfer its shares; subscription. A private limited

Table 2.3 Difference between a Public Company and Private Company Basis Public company Private company Minimum - 7 Minimum - 2 Members Maximum - unlimited Maximum - 200 Minimum number of Three Two directors Index of members Compulsory Not compulsory Transfer of shares No restriction Restriction on transfer Can invite the public to Cannot invite the public Invitation to public to subscribe to its shares or to subscribe to its subscribe to shares debentures securities

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company can start business as (b) has no restriction on transfer soon as it receives the certificate securities; and of incorporation. (c) is not prohibited from inviting 4. A private company needs to have the public to subscribe to its only two directors as against the securities. minimum of three directors in the However, a private company which is a case of a public company. Howev- subsidiary of a public company is also er the maximum number of direc- treated as a public company. tors for both types of companies is fifteen. 2.7 choice of form of Business 5. A private company is not required Organisation to keep an index of members After studying various forms of business while the same is necessary in the case of a public company. organisations, it is evident that each form has certain advantages as well as Public Company disadvantages. It, therefore, becomes vital that certain basic considerations A public company means a company are kept in mind while choosing an which is not a private company. As per appropriate form of organisation. The The Companies Act, a public company is one which: important factors determining the (a) has a minimum of 7 members and choice of organisation are listed in no limit on maximum members; Table 2.4 and are discussed as follows:

Table 2.4 Factors influencing the choice of form of Business Organisation Form of organisation Factor Most advantageous Least advantageous Availability of capital Company Sole proprietorship Cost of formation Sole proprietorship Company Ease of formation Sole proprietorship Company Transfer of ownership Company (except private company) Partnership Managerial skills Company Sole proprietorship Regulations Sole proprietorship Company Flexibility Sole proprietorship Company Continuity Company Sole proprietorship Liability Company Sole proprietorship

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(i) Cost and ease in setting up the is affected by such events as death, organisation: As far as initial business insolvency or insanity of the owners. setting-up costs are concerned, sole However, such factors do not affect the proprietorship is the most inexpensive continuity of business in the case of way of starting a business. However, organisations like joint Hindu family the legal requirements are minimum business, cooperative societies and and the scale of operations is small. companies. In case the business needs In case of partnership also, the a permanent structure, company advantage of less legal formalities and form is more suitable. For short term ventures, proprietorship or lower cost is there because of limited partnership may be preferred. scale of operations. Cooperative societies and companies have to be (iv) Management ability: A sole compulsorily registered. Formation proprietor may find it difficult to of a company involves a lengthy and have expertise in all functional areas expensive legal procedure. From the of management. In other forms of organisations like partnership and point of view of initial cost, therefore, company, there is no such problem. sole proprietorship is the preferred Division of work among the members form as it involves least expenditure. in such organisations allows the Company form of organisation, on managers to specialise in specific the other hand, is more complex and areas, leading to better decision involves greater costs. making. But this may lead to situations (ii) Liability: In case of sole of conflicts because of differences of proprietorship and partnership firms, opinion amongst people. Further, if the the liability of the owners/partners organisation’s operations are complex is unlimited. This may call for paying in nature and require professionalised the debt from personal assets of management, company form of the owners. In joint Hindu family organisation is a better alternative. business, only the karta has unlimited Proprietorship or partnership may be liability. In cooperative societies and suitable, where simplicity of operations companies, however, liability is limited allow even people with limited skills and creditors can force payment of to run the business. Thus, the their claims only to the extent of the nature of operations and the need for company’s assets. Hence, from the professionalised management affect point of view of investors, the company the choice of the form of organisation. form of organisation is more suitable (v) Capital considerations: Companies as the risk involved is limited. are in a better position to collect (iii) Continuity: The continuity of sole large amounts of capital by issuing proprietorship and partnership firms shares to a large number of investors.

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compulsory,

Company-200 Limited

Maximum

ownership and Public Company- Stable because of formation process Public Company-7 Minimum Private-2 Separation between separate legal status Private lengthy and expensive Registration Large

10

limit least

adults, Elected Limited Limited society committee formalities At of separate legal status Registration greater legal compulsory, Cooperative no maximum i.e., managing representative, Stable because takes decisions takes limit property property, decisions Ancestral Less legal Unlimited karta dies persons for formalities, Karta takes At least two registration, Joint Hindu no maximum easy formation ( Karta ), Limited exemption from Stable business, family business (Other members) division of family continues even if

is

50

joint needed partners raised in optional, decisions, more than partners is that can be case of sole Limited but More stable by status of Minimum-2 but affected Partnership consent of all Partners take Maximum: proprietorship Unlimited and Registration easy formation

Table 2.5 Comparative Evaluation of Forms Organisation Sole as one easiest making Unstable, formation Unlimited decisions, formalities, Only owner business and Minimal legal quick decision proprietorship Limited owner regarded Owner takes all Capital Liability Basis of Members Formation Continuity Control and contribution comparison management

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Partnership firms also have the (vii) Nature of business: If direct advantage of combined resources of personal contact is needed with the all partners. But the resources of a sole customers such as in the case of a proprietor are limited. Thus, if the scale grocery store, proprietorship may be of operations is large, company form more suitable. For large may be suitable whereas for medium units, however, when direct personal and small sized business one can opt for partnership or sole proprietorship. contact with the customer is not required, Further, from the point of view of the company form of organisation may expansion, a company is more suitable be adopted. Similarly, in cases where because of its capability to raise more services of a professional nature are funds and invest in expansion plans. It required, partnership form is much is precisely for this purpose that in our more suitable. opening case Neha’s father suggested It would not be out of place to she should consider switching over to mention here that the factors stated the company form of organisation. above are inter-related. Factors like (vi) Degree of control: If direct capital contribution and risk vary with control over operations and absolute the size and nature of business, and decision making power is required, hence a form of business organisation proprietorship may be preferred. But if that is suitable from the point of view the owners do not mind sharing control and decision making, partnership or of the risks for a given business when company form of organisation can be run on a small scale might not be adopted. The added advantage in the appropriate when the same business is case of company form of organisation carried on a large scale. It is, therefore, is that there is complete separation suggested that all the relevant factors of ownership and management and it must be taken into consideration while is professionals who are appointed to making a decision with respect to the independently manage the affairs of form of organisation that should be a company. adopted.

Key Terms

Sole proprietorship Partnership Joint Hindu Family Mutual agency Cooperative Societies Joint Stock Company Perpetual succession Artificial person Co-parceners Incorporation of a Company

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SUMMARY

Forms of business organisation refers to the types of organisations which differ in terms of ownership and management. The major forms of organisation include proprietorship, partnership, joint Hindu family business, cooperative society and company. Sole proprietorship refers to a form of organisation where business is owned, managed and controlled by a single individual who bears all the risks and is the only recipient of all the profits. Merits of this form of organisation include quick decision making, direct incentive, personal satisfaction, and ease of formation and closure. But this form of organisation suffers from limitations of limited resources, unstable life span of business, unlimited liability of sole proprietor and his/her limited managerial ability. Partnership is defined as an association of two or more persons who agree to carry on a business together and share the profits as well as bear risks collectively. Major advantages of partnership are: ease of formation and closure, benefits of specialisation, greater funds, and reduction of risk. Major limitations of partnership are unlimited liability, possibility of conflicts, lack of continuity and lack of public confidence. As there are different types of partners such as active, sleeping, secret and nominal partners; so is the case with types of partnerships which can vary from general partnership, limited partnership, partnership at will to particular partnership. Joint Hindu family business is a business owned and carried on by the members of a Hindu Undivided Family, which is governed by the Hindu law. Karta — the oldest male member of the family — controls the business. The strong points of joint Hindu family business include effective control, stability in existence, limited liability and increased loyalty among family members. But this form of organisation too suffers from certain limitations such as limited resources, lack of incentives, dominance of the karta and limited managerial ability. A cooperative society is a voluntary association of persons who get together to protect their economic interests. The major advantages of a cooperative society are equality in voting, members’ limited liability, stable existence, economy in operations, support from government, and ease of formation. But this form of organisation suffers from weaknesses such as limited resources, inefficiency in management, lack of secrecy, government control, and differences among members in regard to the way society should be managed and organised. Based on their purpose and nature of members, various types of societies that can be formed include: consumers cooperative society, producers cooperative society, marketing cooperative society, farmers cooperative society, credit cooperative society, and cooperative housing society.

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A company, on the other hand, may be defined as an artificial person, existing only in the eyes of the law with perpetual succession and having a separate legal identity. While major advantages of a company form of organisation are members’ limited liability, transfer of interest, stable existence, scope for expansion, and professional management; its key limitations are: complexity in formation, lack of secrecy, impersonal work environment, numerous regulations, delay in decision making, oligarchic management, and conflict of interests among different shareholders. Companies can be of two types — private and public. A private company is one which restricts transfer of shares and does not invite the public to subscribe to its securities. A public company, on the other hand, is allowed to raise its funds by inviting the public to subscribe to its securities. Furthermore, there is a free transferability of securities in the case of a public company. Choice of form of organisation: Selection of an appropriate form of organisation can be made after taking various factors into consideration. Initial costs, liability, continuity, capital considerations, managerial ability, degree of control and nature of business are the key factors that need to taken into while deciding about the suitable form of organisation for one’s business.

EXERCISES

Short Answer Questions 1. Compare the status of a minor in a Joint Hindu family business with that in a partnership firm. 2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain. 3. State the important privileges available to a private company. 4. How does a cooperative society exemplify democracy and secularism? Explain. 5. What is meant by ‘partner by estoppel’? Explain. 6. Briefly explain the following terms in brief. (a) Perpetual succession (b) Common seal (c) Karta (d) Artificial person

Long Answer Questions 1. What do you understand by a sole proprietorship firm? Explain its merits and limitation?

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2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership. 3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation. 4. Discuss the characteristics, merits and limitation of cooperative form of organisation. Also describe briefly different types of cooperative societies. 5. Distinguish between a Joint Hindu family business and partnership. 6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?

Application Questions 1. In which form of organisation is a agreement made by one owner binding on the others? Give reasons to support your answer. 2. The business assets of an organisation amount to Rs. 50,000 but the debts that remain unpaid are Rs. 80,000. What course of action can the creditors take if (a) The organisation is a sole proprietorship firm (b) The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons 3. Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she is wondering whether she should form a company to better manage the business. She also has plans to open branches countrywide. (a) Explain two benefits of remaining a sole proprietor (b) Explain two benefits of converting to a joint stock company (c) What role will her decision to go nationwide play in her choice of form of the organisation? (d) What legal formalities will she have to undergo to operate business as a company?

Projects Divide students into teams to work on the following (a) To study the profiles of any five neighbourhood grocery/stationery store (b) To conduct a study into the functioning of a Joint Hindu family businesses

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(c) To enquire into the profile of five partnerships firms (d) To study the ideology and working of cooperative societies in the area (e) To study the profiles of any five companies (inclusive of both private and public companies)

Assignments 1. Sonam and Sameer decided to begin a food processing business in District Kangra of Himachal Pradesh. Help them in developing the partnership deed to avoid any dispute in future.

Notes 1. Some of the following aspects can be assigned to the students for undertaking above mentioned studies. 2. Nature of business, size of the business measured in terms of capital employed, number of persons working, or sales turnover, problems faced, Incentive, reason behind choice of a particular form, decision making pattern, willingness to expand and relevant considerations, Usefulness of a form, etc. 3. Students teams should be encouraged to submit their findings and conclusions in the form of project reports and multi-media presentations. 4. The specimen partnership deed is available as e-resource in the embedded QR code.

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