FORMS OF BUSINESS ORGANISATIONS WHAT IS A BUSINESS ORGANISATION? The term "business organization" refers to how a business is structured. It refers to a commercial or industrial enterprise and the people who constitute it. TYPES OF BUSINESS ORGANISATIONS • Sole Proprietorship • Partnership Firm • Joint Stock Company 1.) Private Limited 2.) Public Limited • Co-operative Society • Government Sector Choosing a Form of Business Organisation The choice of the form of business is governed by several interrelated and interdependent factors :- • The nature of business is the most important factor • Scale of operations i.e. volume of business ( large, medium, small) and size of the market area (local, national, international) • The degree of control desired by the owner(s) • Amount of capital required for the establishment and operation of a business • The volume of risks and liabilities as well as the willingness of the owners to bear it • Comparative tax liability SOLE PROPRIETERSHIP When the ownership and management of a business are in control of one individual the form of business is called sole proprietorship. CHARACTERISTICS • The business enterprise is owned by one single individual (i.e. both profit and risk belong to him) • Owner is the Manager • Owner is the only source of Capital • The proprietor and business enterprise are same in the eyes of the law. ADVANTAGES OF SOLE PROPREITORSHIP • Easy formation • Better Control (Prompt decision making and Flexibility in Operations) • Subject to fewer regulations • Not subject to corporate income tax • Ownership of all profits DISADVANTAGES OF SOLE PROPREITORSHIP • Owner has unlimited liability • Difficult to raise capital • Business has a limited life • Difficult to do business beyond a certain size APPLICATN OF SOLE PROPREITORSHIP • Example of Sole propreitership are: • Medical shop • TV/Computer repair shop • Bicycle/Automobile showroom • Small engg. Firms etc. PARTNERSHIP FIRM A Partnership consists of two or more individuals in business together According to Indian Partnership Act 1932, Partnership is defined as, “the relation between two or more persons who have agreed to share profit of a business, carried on by all or any of them acting for all.” CHARACTERISITCS OF PARTNERSHIP • Minimum 2 number of partners and maximum 20 partners • The relation between the partners is created in the form of a contract. Written contract is called “Partnership Deed” • The firm means partners, the partners mean the firm • The profit is divided in any as ratio as agreed • No partner can sell/transfer his interest in the firm to anyone without the consent of other partners Formation : Partnership can be formed either verbally or by written agreement. The written agreement is known as “Partnership Deed”. The Partnership Deed contains : Ø The terms and conditions relating to the partnership. Ø The regulations governing its internal management. Ø The rights and duties of the partners. The Partnership Deed should have the following details : Ø Name of the firm. Ø Nature of business. Ø Date of starting partnership. Ø Duration of partnership. Ø Rate of interest on capital invested. Ø Money contributed by each partner. Ø Allotment of managerial functions among partners. Ø Share of profit and loses. Ø Salary allowed to managing partners. Ø The basis for the inclusion of any new partners. Ø The amount which can be withdrawn by each partner. Ø The aim of partnership. Ø Accounts of the firm and authority. Ø Provision for arbitration for settling the disputes that may arise in future. Types of Partners : Ø General Partners : All the partners who participating in the working of the firm and are responsible to joint with other partners, for all liabilities, obligations and defects of the firm are the general partners. Ø Limited Partners : The liability for debts of the limited partners is limited to the extend of their contributed capital. Ø Active or Managing Partners : Active partners are those who take active part in the management and formulation of policies. Ø Sleeping and Silent Partners : They do not take any active part in the business. They simply contribute their capital in the business and get their share in the profit of the firm. Ø Nominal Partners : They lend their reputed name for the company’s reputation. They do not invest money and do not take any active part in the management. Ø Minor Partners : Minor partners are those whose age is below 18 years and associated with the business. Such partners can be allowed only with the consent of other partners. Their liability is limited to their investment. ADVANTAGES OF PARTNERSHIP • Easy Formation • Larger Resources • Sharing Of Risk • Better Management and Flexibility of Operation • No corporate income tax • Subject to fewer regulations as compared to companies DISADVANTAGES OF PARTNERSHIPS • Unlimited Liability • Limited Life • Difficult to raise capital • Chances of Dispute • Non-Transfer of Partnership. • Lack of Public Confidence. APPLICATN OF PARTNERSHIP • Example of PARTNERSHIP are: • C.A. Firms • Law firms • Coaching classes • Small factories etc. Distinction between Individual Ownership and Partnership Individual Parameter Partnership Ownership Individual Minimum 2 Membership : Owner Maximum 50 No agreement An agreement is Formation : is required required Capital : Limited Capital Large Capital Registration : Not Necessary Necessary Individual Owner Risk spread Risk : bear risk among partners Owner enjoys Profit is shared Profit : the profit among partners Owner manage It is shared by Management : the business partners Owner maintains Partners may Secrecy : the secret reveal secrets Owner must take Partners can Decisions : decisions take decisions Small scale Small and Suitability : business Medium scale Division of Not possible Possible labour : JOINT STOCK COMPANY A joint stock company is a voluntary association of people who contribute money to carry on business Ø Joint Stock Company Joint Stock Companies are formed and registered under the Indian Companies Act, 1956. The joint stock company is a legal business owned by the shareholders having limited liability and managed by an elected “Board of Directors”. The shares are transferable. Characteristics of Joint Stock Company : Ø A company is created by registering or incorporating an association of persons under the Company Act. Ø It has a separate legal existence as distinct from its members. Ø Artificial personality enabling it to exercise certain legal powers. Ø Perpetual life and a very stable existence. Ø It has a common seal on which its name is engraved and this seal acts as its signature. Ø There is a complete separation of ownership from management. Ø Liability of shareholders is limited. Ø Lower tax liability. Ø Easy transferability of shares. Ø There is a wide distribution of risk of loss. Ø Large membership. Ø Statutory regulations as provided in the Indian Company’s Act, 1956. Formation of Joint Stock Company : The entrepreneurs (promoters) of the company prepare the following documents : Ø Memorandum of Association. Ø Articles of Association. Ø A List of persons who have consented to be the Directors of the Company. Ø A declaration by an advocate to the effect that all the requirements of the Act have been fulfilled. Ø Name and address of promoters. Organization Structure : Share holders Board of Directors Auditor Executive Committee Bankers General Manager Sales Purchase Accounting Production deptt. deptt. deptt. deptt. Types of Joint Stock Company : Ø Private Limited Company Ø Public Limited Company Private Limited Company : It can be formed by two or more members. The maximum number of members is limited to 50. The company is registered under the Indian Company’s Act, 1956. It enjoys a separate legal status, continuity of life, benefits of limited liability. Large capital raising power, business secrecy to certain extend. Public Limited Company : The membership is open to general public. The minimum number of persons is 07 and no upper limit. It is subjected to greater control and supervision of the government which protect the interest of the shareholders and the members of the public. Advantages : Ø Economies of Large Scale. Ø Limited Liability. Ø Huge Capital. Ø Share Transferable. Ø Economies Administration. Ø Democratic. Ø Permanent Existence. Ø Legal Control. Ø Risk spread out. Ø Mobilization of Scarce saving. Ø Accelerated economic growth of the country is possible through industrialization. Ø It creates huge employment possibilities. Disadvantages : Ø Dishonest directors may exploit the shareholders. Ø Large Complexities. Ø It is democratic in theory only. Ø Delay in Decisions. Ø Favourisms. Ø Difficult labour relations. Ø Lack of initiative and personal interest. Ø Concentration of economic power and wealth in a few minutes. Ø Misuse of internal information. Comparison between Private and Public Limited Companies Particulars Private Limited Public Limited Open to Private Open to general Membership : members. public. Minimum 7 Limits to Minimum 2 Maximum no membership : Maximum 50 limit Election of Not required Required Directors : Resale of Not possible Possible shares : Audit of No legal Legal provision Accounts : provision Min. Paid up Min. Paid up Minimum share capital of share capital of capital : 1 Lack 5 Lack End with “Private End with only Name : Limited” “Limited” Number of Minimum 2 Minimum 3 Directors : Legal control : Less More strict Remuneration 11% of net Less of Directors : profits CO-OPERATIVE SOCIETY It is a voluntary association of people