CHAPTER - 2

FORMS OF BUSINESS ORGANISATION

Meaning of Business Organisation
A business organization or business concern is an enterprise created to achieve business
objectives. It achieves its objectives by engaging in some activities like production or purchase
and sale of goods or services. Business undertakings can be distinguished from one another on
the basis of ownership, management and control. In India we have the following types of
business enterprises.
1. Sole Proprietorship
2. Joint Hindu Family Business
3. Partnership
4. Co-operative Society
5. Joint Stock Company.
I. SOLE PROPRIETORSHIP
Sole proprietorship is the form of business, which is owned, managed and controlled by an
individual. He is solely responsible for providing the capital, for bearing the risk and for the
overall management and control of the business. If the business earns profit, the sole proprietor
enjoys all the profit alone and if the business suffers loss, it has to be borne by the sole trader
himself. He conducts the business with the help of his family members or employees. Sole
proprietorship is also called single ownership or single proprietorship.
Suitability
Sole trading concerns require lesser amount of capital. It is best suitable for the following types
of business:
1 Business which are carried out on small scale with modest capital and limited managerial
talent, e.g., local grocery store, stationery shops, medical store, bakeries, small factories etc.
2 Business where customers demand personalized services such as small beauty parlors, hair
cutting saloons, tailoring units, internet café etc.
Features of Sole Trading Concern
1. Single ownership
A sole proprietorship is wholly owned by a single person. He supplies the entire capital from his
own wealth or from borrowed funds.
2. No legal formalities
There is no legal formality to start as well as to close sole trading concern. Only a license is
necessary in certain types of business.
3. Control
A sole proprietor has full control over his business. He can carry out his plans without consulting
with others.
4. No legal entity
A sole proprietorship has no separate legal entity from its owner. In the eyes of law, there is no
distinction between the sole trader and his business. The assets and liabilities of the business and
its owner can’t be separated.
5. Unlimited liability
The sole proprietor’s liability is unlimited. If the asset of the business is insufficient to meet its
debts, the proprietor is liable to pay off the debts out of his personal property.
6. No profit sharing
The sole proprietor alone is entitled to all the profit and losses of the business.
7. Lack of business continuity
Since the owner and the business are same, death, insanity or bankruptcy of the sole trader will
cause closure of the business.
Merits or Advantages of sole proprietorship
A sole proprietorship has the following advantages.
1. Easy formation:
An important merit of sole proprietorship is the possibility of entering into business with
minimal legal formalities.
2. Quick decisions
The sole proprietor is completely free to take decisions without consulting with others. Quick
decision and prompt actions help to improve the efficiency of the business.
3. Motivation to work
The proprietor alone is entitled to receive all the profit of business and he alone has to bear all
the losses, there is direct relation between effort and reward. Therefore, there is an incentive to
work hard.
4. Secrecy
Business secrecy is an important factor in every business. A sole trader can keep his all business
information and maintain secrecy. He is not bound by law to publish his accounts of business.
5. Flexibility of operations: The small size and simple management structure helps a sole
proprietor to adapt easily to changing conditions. He can reduce his business or increase it
according to the changing conditions.
7. Economy
Sole proprietorship can be formed with small capital and the least administration expenses.
8. Self-Employment: It is a means for earning livelihood independently.
9. Diffusion of ownership: Under sole trading, business ownership is diffused. The concept of
sole proprietorship business creates large number of units in the economy. There is no danger of
concentration of economic power in a few hands.
10. Development of Personality: Qualities of self-reliance, self-confidence, responsibility and
initiate have full scope for development under sole proprietorship.
Demerits or disadvantages of Sole Proprietorship
The sole proprietorship has the following disadvantages
1. Limited Capital
Resources of a sole trader are limited to his personal savings and borrowings from others. Banks
generally hesitate to give long term loans to a sole trader. It is difficult for him to expand his
business.
2. Unlimited Liability
A major disadvantage of a sole trader is that the owner has unlimited liability. In the case of
business losses, if the business assets are not sufficient to meet all business liabilities, the
proprietor may have to sell his personal property to pay off the liabilities.
3. Limited Managerial Skill
A sole trader business is a one-man show. He wants to perform various functions like purchase,
sales marketing, financing etc. It is rare to find an individual who excels in all these areas. Due to
limited financial resources, sole trader is not in a position employ talented
employees.
4. Uneconomic Size
Due to small size, sole proprietorship can't enjoy the economics of large scale operations like
bulk purchase, division of labour etc.
5. Uncertain life
The existence of sole proprietorship centers on an individual. Death, insolvency or illness of a
proprietor affects the business and can lead to its closure.
Special Notes:-
1. “Too many chefs spoil the soup”. There are several advantages in doing business alone. For
eg. Mr. Salim runs a tea shop in a market place. He is working as the owner, manager and the
labourer of his business. He knew the tastes of his customers and hence he can easily manage his
business successfully.
2. “One-man control is the best in the world, provided that one man is big enough to manage
everything”. The sole proprietorship offers the best promise of motivation, control, self-reliance
and self-confidence. It is the most popular form of business in the world.
II. JOINT HINDU FAMILY BUSINESS
It is a special form of business found only in India. This business is owned and managed by
members of the Hindu Undivided Family (HUF). This form of business organization is not
formed by an agreement or contract, but comes into existence by the operation Hindu Law. Joint
Hindu Family or Hindu Undivided Family consists of grandparents, parents and sons. HUF
business is managed by the eldest male member known as 'Karta' whose liability is unlimited.
All members have equal ownership right over the property of an ancestor .They are known as co-
[Link]: Haldirams,Tata Sons There are two conditions for existence of HUF
Business:
1. Minimum two members must be there in the family
2. Existence of some ancestral property.
There are two systems which govern the membership in the Hindu undivided family business,
viz., Dayabhaga system and [Link] system prevails in West Bengal and
allows both the male and female members of the family to be co-parceners. Mitakasharasystem,
on the other hand, prevails all over India except West Bengal and allows only the male members
to be co-parceners in the business.
Features of Joint Hindu Family Business
1. Membership by birth
Membership of the Hindu Undivided Family business is automatic by birth. All the members
have equal ownership right over the ancestral property and they are known as Co-Parceners.
2. Formation
For a joint Hindu family business, there should be at least two members in the family and
ancestral property to be inherited by them. There is no need for any agreement as membership is
by birth.
3. Control
HUF business is controlled by the eldest male member in the family called Karta. He takes all
the decision alone to manage the business.
4. Minor Members
Since membership is by birth, minors can also be members of the business.
5. Liability
The liability of ‘karta’ is unlimited. But the liability of co-parceners is limited to the extent of
their share in the family property.
6. Continuity
The life of HUF business is not affected by the death of the karta. If Karta died next senior most
male member will be the next karta.
7. No maximum limit on membership
There is no restriction about the number of members in HUF business. It depends upon the birth
or death of members in that family.
Advantages or merits of HUF business
The main advantages of HUF business are the following.
1. Easy Formation
It can be started easily without any legal formalities.
2. Continuity of the business
The death of the Karta never affects the existence of HUF business as the next eldest male
member will be the next karta.
3. Secrecy
Complete secrecy regarding business decisions can be maintained by Karta.
4. Assured share to all members
Every member of a HUF is assured a minimum share of profit, irrespective of their talents,
capacity to work and efficiency.
5. Quick decision
Karta is free to take any decision without consulting others, so quick decision is possible in HUF
business.
6. Division of labour
The principle of division of labour can effectively be applied in HUF business by allotting work
among members according to their abilities and skills.
7. Limited liability of members
Karta’s liability is unlimited in HUF business. But all other co-parceners liability is limited to
their share in the business.
Demerits of HUF Business
HUF business suffers from the following limitations:
1. Limited Capital
Joint Hindu Family business can’t be carried on very large scale, because the capital contributed
by the members of the family is generally insufficient for large scale business.
2. Limited managerial ability
The whole affair of the business is managed by the Karta. He may not be an expert in all areas of
management.
3. No link between responsibility and reward
Karta is responsible for managing the business alone. He bears the entire liability for the debts of
the family business alone. For all these responsibilities he is not paid with any extra amount as
remuneration. He gets his share of profit only as other co-parceners get.
4. Scope for misuse of power
As the karta enjoys full authority over the business; he may misuse the powers for his own
benefits.
III. PARTNERSHIP
Partnership is an association of two or more persons who agreed to pool together their financial
and managerial resources in some business and to share the profit thereof between them. It is
formed when there is a need for greater capital investment, varied skills and sharing of risk.
Section 4 of The Indian Partnership Act, 1932 defines partnership as “the relation between two
or more persons who have agreed to share the profit of a business carried on by all or any one of
them acting for all”. The persons who enter into partnership are individually called 'partners' and
collectively a 'firm'. In India partnerships are regulated by partnership Act 1932.
Features of Partnership
1. Formation
The partnership form of business organization is governed by the Indian Partnership Act,
[Link] partnership comes into existence with an agreement among partners.
2. Agreement
In a partnership there must be an agreement. The agreement may be oral or written. The written
agreement is known as Partnership Deed.
3. Number of partners
There must be at least two persons to form a partnership. The maximum number limit is 100
4. Profit motive
The business carried on by partnership firm must have profit motive. In this way, orphanage,
charitable trust etc. can't become partnership. The partners share the profits in the ratio
mentioned in the partnership deed.
5. No separate legal existence
The partnership firm has no separate legal existence apart from the partners. Firm can't own
property or enter into a contract in its own name. The firm’s name is only a symbol representing
all partners.
6. Restriction on transfer of Interest
No partner can transfer his share in the partnership without the prior consent of all other partners.
7. Unlimited Liability
The partners of a firm have unlimited liability. Partners are individually and collectively
responsible for the entire debts of the firm. Personal assets may be used for repaying debts in
case the business assets are insufficient.
8. Registration
Registration of partnership is not compulsory. It is optional.
9. Decision making and control
The activities of a partnership firm are managed through the joint efforts of all the partners.
10. Lack of continuity
The retirement, death, insolvency etc. of any partner brings the firm to an end. However, the
remaining partners may if they so desire continue the business on the basis of new agreement.
11. Mutual agency
A partner can act simultaneously as a principal as well as an agent of the firm. Each partner is an
agent because he can bind other partners by his acts. Similarly, he can also be bound by the
action of other partners. So he is called a principal.
Partnership Deed
Partnership is the result of mutual agreement between partners. The agreement may be oral or
written. The written agreement is known as Partnership Deed. Thus, the document containing
terms of agreement in writing among partners is called partnership deed. It contains the terms
and conditions relating to partnership and regulations governing the internal management. It
should be signed by all partners and stamped properly.
Contents of Partnership Deed
A partnership deed usually contains the following particulars: -
1. Name of the firm
2. Names and addresses of partners
3. Nature of business
4. Duration of partnership, if any
5. Amount of capital contributed by each partner.
6. Profit sharing ratio.
7. Amount of salary, if any, payable to partners.
8. Rate of interest, if any, on capital and drawings.
9. Amount of withdrawals to be allowed to each partner.
10. Rights, duties, powers and obligations of partners.
11. Procedure for admission and retirement etc. of partners.
12. Procedure for dissolution of the firm and settlement of accounts.
13. Methods of valuation of good will and revaluation of assets and liabilities on admission,
retirement and death of a partner. Any other clauses, on which there is mutual agreement among
partners, can be included in the partnership deed. If partnership deed is silent on some point, the
provisions of the Partnership Act 1932, will apply.
Rules applicable in the absence of Partnership Deed
In the absence of partnership deed or if the deed is silent on any matter, provisions of the
partnership act will automatically apply in the following way:
1. The partners are entitled to share profit and losses equally irrespective of their capital
contribution.
2. The partners are not entitled to get interest on their capitals.
3. No interest will be charged on drawings of the partners.
4. No partner is entitled to get salary or any other remuneration for any extra work done for
the firm.
5. Partners are entitled to get Interest @ 6%p.a on loans granted by partners to the firm.
6. Partner’s capital shall be fluctuating (Fluctuating Capital Method).
Types of Partnership
Partnerships can be classified on the basis of duration and liability. On the basis of duration,
there are two types of partnerships i.e. particular partnership and partnership at will. On the basis
of liability, there are two types of partnership, i.e. general partnership and limited partnership.
1. Classification on the basis of duration
a) Particular partnership
b) Partnership at will
a. Particular Partnership
A particular partnership is one which is formed for a specific time period or for a particular
purpose. It is automatically dissolved on the expiry of the specified period or on the completion
of the specific purpose for which it was formed. Eg: Partnership formed to construct a bridge or
building will automatically get dissolved after the construction of that bridge or building.
[Link] at will
If a partnership is formed without mentioning its duration, it is called partnership at will. It can
continue as long as partners want. It can be dissolved by any partner at any time by giving a
notice of dissolution to other partners.
2. Classification on the basis of liability
a) General Partnership
b) Limited or Special Partnership
a) General Partnership
In general partnership, the liability of partners is unlimited and joint. The partners enjoy the right
to participate in the management of the firm. Registration of the firm is optional. The existence
of the firm is affected by the retirement, death or insolvency of the partners.
b) Limited Partnership
Limited partnership is one in which the liability of at least one partner is unlimited whereas the
other partners may have limited liability. The limited partners do not enjoy the right to
participate in the management of the firm. The registration of limited partnership is compulsory.
Such a partnership does not get terminated with the death of any partner with limited liability.
Types of partners
A partnership firm can have different types of partners with different roles and liabilities.
They are:
1 Active or working partner
A partner who contributes capital and takes active interest in the day to day affairs of the firm is
called active partner. He manages and controls the business and his liability is unlimited.
2 Sleeping or dormant partner
A partner who does not take part in the working of the concern is called a sleeping or dormant
partner. He contributes to the capital of the firm. He is entitled to share the profits of the firm.
His liability is unlimited. He is not known to the public as a partner.
3 Secret Partner
A secret partner is one whose association with the firm is unknown to the general public. He
contribute capital to the firm, takes part in the management, shares its profit and losses and his
liability is unlimited.
4 Nominal or Ostensible Partner
A nominal partner neither contributes capital nor takes any active part, in the management of the
business. He only knowingly allows himself to be represented as a-partner. His reputation may
be benefited to the firm. He is liable to third partners for all debts of the firm. He is also called a
quasi-partner.
5 Partner in profits only
When a partner is admitted in a partnership by a special agreement so that he is entitled to share
in the profits of the firm but not in the losses, he is known as ‘partner by profit only’. He
contributes to the capital of the firm. But he has no right to take part in the activities of the
business. His liability is unlimited.
6 Partner by estoppels
If a partner by his talk or action gives an impression to third parties that he is a partner, then he is
known as partner by estoppels. He is not entitled to share the profit of the firm and does not
participate in the management. Such a partner is liable as a true partner to third parties
.
7 Partner by holding out
When a person is declared as a partner and he does not deny even after becoming aware of it, he
is called a partner by holding out. He becomes liable to those who lent money to the firm on the
basis of such declaration. He does not bring any capital nor does participate in the management
and profits. Partner by Estoppels-In this case he himself gives an impression to others that he is a
partner. Partner by holding out-In this case others give the impression that he is a partner. His
mistake is that he never denies it
MINOR AS A PARTNER
Partnership is based on legal contract between two persons. A minor is a person who has not
attained the age of maturity i.e. not completed 18 years old. As such a minor is incompetent to
enter into a valid contract with others; so minors can’t start a partnership firm. However, a minor
can be admitted to the benefits of an existing partnership firm with the mutual consent of all
other partners. In such a case his liability is limited to the capital contributed by him. He will
not be eligible to take an active part in the management of the firm. He can inspect the
books of accounts of the firm. The status of a minor will change when he attains maturity.
Rights of a minor partner
1. A minor has the right to share profit and property of the business.
2. He can inspect the accounts of the firm
3. A minor can file a suit against the partners for nonpayment of his share in the
property.
Liability of Minor Partner
1) His liability is limited to his share in the business.
Registration of Partnership
Registration of partnership firm means the entering of the firm’s name in the Register of Firms
kept with Registrar. It provides conclusive proof of existence of partnership firm. The
registration of partnership firms is not compulsory, it is optional. However, an unregistered firm
suffers from several draw backs.

Procedure for registration

In order to register a partnership, it must submit an application in the prescribed form along with
prescribed fee to the Registrar of Firms of the state in which the firm is situated. The application
should contain the following particulars: -
1) Name of the firm
2) The principal place of business.
3) Name of other places where the firm carries on business.
4) The date when each partner joined the firm.
5) Names and permanent address of the partners.
6) Duration of partnership, if any.
The application must be signed by all the partners. If the Registrar of Firms satisfied with the
statement he shall make entry the name of the firm in the Register of Firms. After registration
the firm must communicate any change in the above mentioned information to the Registrar.
Consequences of Non Registration
An unregistered firm suffers from the following limitations: -
1. An unregistered firm can't sue third parties for the recovery of debts exceeding Rs. 100.
2. An unregistered firm can't sue its own partners.
3. A partner of an unregistered firm can't sue the third parties or his copartners for the recovery
of his claims. However, a third party is at full liberty to file a suit against any unregistered firm
or against any partner for recovery of bad debts.
Advantage of partnership
A partnership firms enjoys the following advantages:
1. Easy Formation
A partnership firm can be formed easily by putting an agreement between partners. Registration
is not compulsory. Closure of the firm is also simple
2. More Funds
In a partnership, the capital is contributed by a number of partners. This makes it possible to
raise larger amount of capital as compared to sole trading concern.

3. Division of labour
Division of labour is possible in partnership. The work and responsibility can be distributed
among partners according to their ability. For example Anil,Binil and Ciril started a Bakery as
partnership. In a bakery there are various types of activities like purchase, production, sales,
finance [Link] that firm there is three partners, so division of labour is possible. Responsibility of
purchase can be assigned to Mr Anil, production charge can be assigned to Mr. Binil and sales
and finance can be assigned to Mr, Ciril. Division of labour leads to specialization.

4. Balanced decision making

Collective decision making is possible in partnership. So they can take better decisions regarding
their business.

5. Efficient management
In partnership the skill and experience of all partners are brought together. It can secure greater
managerial ability as compared to sole trading concern.

6. Sharing of risk
The risks are shared by all the partners. This reduces the anxiety, burden and stress on individual
partners.

7. Secrecy
A partnership firm is not legally required to publish its accounts and reports. Hence it can
maintain confidentiality of information relating to its operations.

Disadvantages of partnership

1. Unlimited liability
The partners of a firm have unlimited liability. This may restrict them to take risky decisions. It
may badly affect the growth of the business.

2. Non transferability of interest

In partnership there is restriction in case of transfer of ownership. A partner can transfer his share
to a third party only with the consent of all other partners.

3. Limited Resources
There is a restriction on the number of partners in a firm. Therefore, it is not possible to collect
huge financial resources.

4. Lack of public confidence

A partnership firm is not legally required to publish its financial reports. As a result, the
confidence of the public in partnership is generally low.

5. Possibility of conflicts
Partnership is run by group of persons wherein decision making authority is shared. Difference
in opinion on some issues may lead to disputes between partners.

6. Lack of continuity
Partnership comes to an end with the death, retirement, insolvency of any partner. However, the
remaining partners may continue the business on the basis of a new agreement.

JOINT STOCK COMPANY

The Industrial Revolution and introduction modern factory system etc made large scale
production possible. Large scale production required huge capital investment and management
skill. It also involved high degree of risk. The sole proprietorship and partnership form of
business have limitations such as limited managerial skill, shortage of capital and unlimited
liability. These limitations of sole trading concern and partnership paved the way to a new form
of organization called Joint Stock Company.

Meaning
A joint stock company is the largest form of business organization. It is an artificial person
having separate legal existence, perpetual succession and a common seal. Companies are
compulsorily to be registered under the Indian Companies Act, 2013. A company is a voluntary
association of persons formed for some common purpose. It may be formed with the purpose of
carrying on some business for profit or carrying on some charitable activity without profit
motive. Its capital is divided into small parts called shares. The persons who subscribed shares
are known as shareholders. The company is owned by shareholders. It is managed by Board of
Directors, the elected representatives of shareholders. In this way, management and ownership is
practically different. The liability of a shareholder is limited to the face value of shares held by
him, so every public limited co add the word “Ltd” at the end of its name. For
example Reliance Industries Ltd,South Indian Bank Ltd ,Kitex Ltd etc.

Features of a Joint Stock Company

Important feature of a joint stock company are the following:
1. Large members
Minimum number of members to form a Private Ltd. Company is 2 and 7 in case of Public Ltd.
The maximum number of members in a private Ltd company is limited to 200 and in Public
Limited Company it is unlimited.
2. Created by Law
A company is formed by registered under Indian Companies Act [Link] of a company
involves lengthy and complicated procedures.
3. Separate Legal Existence
A company has separate legal existence apart from its members. It can carry on business in its
own name, own property, land and borrow money etc in its own name. It can open bank
accounts, sue and be sued in its own name. A company can legally behave like a human being
but it is actually not a natural person, so it is called an artificial person. It has to depend upon
directors, managers, etc. For getting its works done.

4. Perpetual succession (Permanent life)

Its existence not affected by the death, insolvency or change of ownership through sale of shares
by shareholders. Members may come and go, but the company can go forever. (All the members
of a private Ltd company sitting in a general meeting were killed by a bomb. But it was held that
the company survived. Not even a hydrogen bomb could have destroyed it.)

5. Limited liability
The liability of a shareholder is limited to the extent of the face value of shares held by him. So
the creditors of a company have no right to realize the amount due to them out of the personal
property of the members. (For example, suppose Kannan, a shareholder, holding 1,000 shares of
Rs.10 each on which he has already paid Rs.8 per share. In the event of loss or company failure
to pay debts, his liability can be only up to Rs.2, 000 (i.e.1000 X 2))

6. Transferability of shares
Shares of a public company are freely transferable. Members can transfer their shares without the
consent of other members. Therefore, a person can become a member at any time by purchasing
shares and cease to be a member by selling his shares.

7. Common seal
Common seal is the official signature of a company. Every company has common seal. Every
document of the company must bear this seal, otherwise it is valueless.

8. Separation of ownership and management

The company is owned by shareholders. But it is managed by Board of Directors, the elected
representatives of shareholders. As an artificial person it has to depend upon directors, managers
etc for getting its works done. In this way there is separation of ownership and management.
9. Compulsory Registration
All companies are compulsorily to be registered under the Indian Companies Act, 2013.

Advantages of a Joint Stock Company

A company form of organization enjoys the following advantages:
1. Huge Capital
A company can raise huge capital through issue of shares and debentures because there is no
limit to the maximum number of members in a public company. Thus, there is greater scope for
growth and expansion.

2. Limited Liability
The liability of a shareholder of a company is limited to the face value of shares held by him. His
personal property can't be attached even if the company is unable to meet its creditors claim.
This reduces the degree of risk

3. Transferability of Shares
Shares of a public company are generally listed in stock exchanges so that a member can sell his
share at any time. There is no need to get permission from other members for this. It provides
liquidity to their investment. However, it is restricted in the case of private company.

4. Economies of Large Scale

Huge capital and professional management facilitate large scale operations. Therefore, a
company can fully secure the advantages of large scale production, purchase, marketing etc.

5. Efficient Management
A company can afford to pay higher salaries to professional managers. It will increase the
efficiency of management.

6. Public Confidence
A company enjoys public confidence and good reputation in the business world. It has to
disclose its results and follow all legal regulations. Its activities are subject to scrutiny by
auditors and the government. Therefore, people have trust in a public company.

7. Long term projects: A company is the only form organization with continuous stability. The
funds invested in the company by shareholders are not withdrawal until it is wound up. So
company can undertake long term projects and attract further investments in business.

8. Perpetual Existence
Being a separate legal entity, existence of a company is not affected by death, resignation or
insolvency of a member.

9. Greater Scope for Expansion

Retained earnings and vast financial resources and managerial ability help a company to expand
its business.

Disadvantages of a Joint Stock Company

A company form of organization faces the following disadvantages:

1. Difficulty of formation
Formation of a company is time consuming and expensive process. It involves preparation of
several documents fulfilling several legal formalities. Registration of a company is compulsory
under the Indian Companies Act, 2013.

2. Delay in decision making

Control and management of the company is subject to provisions of Companies Act 2013. There
are certain matters which can be decided only in Board meetings. More important matters require
approval of shareholders in their meeting. This results in unavoidable delay in decision making.
3. Lack of Secrecy
Everything about a company is required to discuss in board meeting. A company is required to
publish its annual accounts and other reports. It is available to the general public also. So trade
secret can't be maintained.

4. Excessive regulation of law

A company is required to file a number of returns and reports with various authorities. It
involves considerable time and money.

5. Lack of flexibility
A company should undertake its business only within the objective already stated in the objective
clause of Memorandum of Association. So it can't divert its business activities according to the
changing conditions without altering its memorandum.

6. Development of monopoly
The joint stock form of organization creates large scale business with a huge capital base. This
might lead to concentration of economic power and monopoly in the economy.

7. Unhealthy Speculation
The directors have all information about the functioning of the company; they can use it for their
personal advantage. For example, the director can easily speculate the price of a share by
knowing the ups and downs in the profit of the company.

Types of Companies
Companies are classified as:
1. Private Company
2. Public Company
3. One Person Company

1. Private Company
A private company means a company by its Articles of Association.
1) Restricts the right to transfer its shares.
2) Limits the number of its members to 200(As per Companies Act, 2013).
3) Prohibits an invitation to the public to subscribe its shares or debentures.
4) Puts the minimum paid up capital to be rupees one lakh.
A private company can be formed with a minimum number of two persons. A private
company must add the ward 'private limited' or (P) Ltd or (Pvt.) Ltd. in its name.
Eg:- Lunar Private Limited or Lunar (P) Ltd.
2. Public Company
A public company is one which is not a private company. In other words, it is a company which
by its Articles of Association.
1) Put no restrictions on the right of its members to transfer their shares.
2) Does not limit the number of members to 200.
3) It is free to make an invitation to the general public to subscribe its shares or debentures.
4) Puts the minimum paid up capital to be rupees five lakh.
Minimum number of shareholders to start a public company is 7. A public company must add the
word limited or Ltd to its name. Eg:- Reliance Industries Ltd., Bajaj Auto Ltd., Federal Bank
Ltd.

Special Privileges of Private Limited Company

A company can be registered as a private company or a public company. When a company is
incorporated as a private company it enjoys certain privileges and exemptions when compared to
a public company. The special privileges enjoyed by a private company are the following.

1. The minimum number of members required to form a private company is only 2

whereas it is 7 in case of public company.
2. A private company can start business immediately after its incorporation.
3. A private company need not issue a prospectus or not required to file with the Register a
statement in lieu of prospectus. It can raise capital privately.
4. It need not hold a statutory meeting or file a statutory report.
5. It can be managed with two directors and they are given the privilege of continuing
the office even after the age of 65.
6. There is no restriction with regard to the remuneration payable to directors.
7. It need not keep the index of its members
8. Only two members can make the quorum for a meeting.
9. It is not required to offer new shares to existing shareholders in proportion to their
share holdings.

3. One Person Company

According to Indian Companies Act 2013 it is possible to form One Person Company (OPC). An OPC
means a company with only one person as its member.

According to section 3(1) of the Indian Companies Act 2013: -

 Only a natural person who is an Indian citizen and resident in India shall be eligible to
incorporate OPC.
 No person shall be eligible to incorporate more than one OPC.
 OPC to compulsory convert itself into public or private company when its capital exceeds 50 lakh
or its average annual turnover during year exceeds 2 crores.

Co-operative organization / Co-operative Societies

A Cooperative society is a voluntary association of persons for the promotion of their common
economic interest. The word co-operation implies joint effort. Through joint efforts, we can
attain greater success than individual effort. For example, in Consumers Cooperative Society
consumers may join together to provide goods at cheaper rates by establishing direct contacts
with producers and thereby eliminating the profits of middlemen. The motto of cooperative
society is “each for all and all for each”. Co-operative form of business organization
fundamentally differs from other business organizations. Their basic objective is service rather
than profit.
Features of Co-operative Societies

1. Voluntary Association
A co-operative society is a voluntary association of persons. Any person having a common
interest can join a cooperative society and can leave any time by giving a prior notice.

2. Compulsory registration
A cooperative society is compulsorily registered under the Cooperative Societies Act, 1912.

3. Number of members
Minimum number of members required to form a cooperative society is 10. Maximum number
of members is unlimited.

4. Limited liability
The liability of the members of a cooperative society is limited to the extent of the amount
contributed by them as capital.

5. Open membership
The membership of a co-operative society is open to all irrespective of cast, creed, religion or
sex. Democratic Control
There is equality of status between members of a cooperative society. Business is managed by a
managing committee which is elected by members on the principle one member one vote.

6. Service motive
It is formed with the motive of service to its members, not to earn profits.

7. Finance
The capital of cooperative society is raised from its members through issue of shares. It can also
raise loans from the banks.

8. Distribution of surplus
In cooperative society, surplus is distributed among members not on the basis of shares held by
them but on the basis of their transactions with the society.
According to the Co-operative Societies Act the following provisions are to be followed for the
disposal of surplus:-
a) Only 9% of the profit distributed as dividends.
b) 25% of profits transferred to reserve fund.
c) 10% of profit to be used for general social welfare activities
d) The rest used to give bonus to members on the basis of share effected by them.

Advantages of cooperative societies

1. Easy formation
Any ten adult persons can form a cooperative society. The registration procedure is simple
involving a few legal formalities.
2. Limited liability
The liability of the members of a cooperative society is limited to the extent of the amount
contributed by them as capital. Their personal properties are safe from being used to repay
business debts.
3. Democratic Management
The principle one man one vote guarantees democratic management.
4. Government assistance
Government gives all kind of support to cooperative societies in the form of relief in taxation,
subsidies and low interest rates on loans.

5. Social importance
A co-operative movement eliminates concentration of wealth in a few and provides employment
to many people.

6. Stable existence
A co-operative society has a separate legal existence from its members. So, its life is not affected
by death, insolvency, bankruptcy etc of a member.

7. Economic upliftment of weaker sections

The Co-operative Societies give financial assistance at lower rates of interest to poor farmers,
artisans etc. They also give marketing facilities by enabling to sell the produce at reasonable
prices. Hence they save the members from being exploited by local money lenders and
merchants.

Disadvantages of a cooperative society

1. Unsuitable for large business

A co-operative society is formed with limited capital contribution from its members. It is not
able to mobilize adequate capital for large scale operations.

2. Inefficient Management
Cooperative society is managed by elected members who may not be competent and
experienced. A Co-operative Society is not in a position to employ expert professional managers
at high salary.

3. Excessive State Regulation

The excessive state regulation and control restrict flexibility and initiative.

4. Lack of Secrecy
The affairs of a co-operative society are openly discussed in meetings of members. Therefore, it
becomes difficult to keep the secrets of business.

5. Absence of Motivation
There is no direct link between effort and reward. Hence members are not willing to put their
maximum efforts.
6. Non transferability of Shares
The shares of a co-operative society are not transferable. A member who wants to quit the
society has to surrender his share to the society in order to get his money back.

Types of Co-operative Societies

On the basis of function they perform, Co-operative Societies are classified as follows:-
1. Consumers Co-operative Society.
2. Producers Co-operative Society
3. Marketing Co-operative Society
4. Co-operative Credit Society.
5. Co-operative Farming Society
6. Co-operative Housing Society.
1. Consumers Co-operative Society.
Consumer’s cooperative societies are established to remove middlemen from
the field of trade. It is formed to ensure steady supply of essential commodities of standard
quality at fair prices. It purchases goods on wholesale basis and sell these goods to members at
cheaper rates than the market price. However, the goods are sold to nonmembers at the market
price. These societies protect lower and middle class people from the exploitation of profit
hungry businessmen. The profits of the society are distributed among members in the ratio of
purchases made by them during the year. Eg Triveni super market

[Link] Co-operative Society.

It is formed to protect the interest of small scale producers. A producers Co-operative Society is
organized by small scale producers to face competition and to increase production. The members
of the society produce goods in their house or at common place. The raw materials, tools,
equipments, money etc. are provided to them by the society. The output is collected by the
society and sold in the market at the wholesale rate. The profit is distributed among the members
in proportion to the goods supplied by each member. Producer’s co-operative societies help
members in obtaining raw materials, in improving quality of products, and in securing the
economics of large scale production. Eg. Haryana Handloom

3. Marketing Co-operative Society

These societies are formed by small producers and manufacturers who find it difficult to sell
their products individually. The society collects the products from the individual members and
takes the responsibility of selling those products in the market. It pools the output of individual
members and performs marketing functions like grading, transportation, warehousing,
packaging, marketing research [Link] sell the output at the best possible price. Profits are
distributed according to ratio of goods supplied by them. Gujarat Co-operative Milk Marketing
Federation that sells AMUL milk products is an example of marketing co-operative society.

4. Co-operative Credit Societies

These societies are formed by poor people to provide financial help and to develop the habit of
savings among members. They help to protect members from exploitation of money lenders who
charge very high interest from borrowers. Credit cooperatives are found in both urban and rural
areas. In rural areas, agricultural credit societies provide loans to members mainly for
agricultural activities. In urban areas, non-agricultural societies or urban banks offer credit
facilities to the members for purchase of row material, tools and household needs. They raise
funds by accepting deposits from the members as well as from the public and grant loans to its
members. Kumaramangalam Service Co-operative Society and Thodupuzha Urban Cooperative
Banks etc are examples of co-operative credit society.

[Link]-operative Farming Society

These are voluntary associations of small farmers who join together to obtain the economies of
large scale farming. In India farmers are economically weak and their land-holdings are small. In
their individual capacity, they are unable to use modern tools, seeds, fertilizers, etc. They pool
together their land and undertake cultivation collectively. It provides better quality seeds,
fertilizers, large scale farming tools like tractors, harvesters etc.

6. Co-operative housing societies

These societies are formed by low and middle income group people in urban areas to have a
house of their own. Housing cooperatives are of different types. Some societies acquire land and
give the plots to the members for constructing their own houses. They also arrange loans from
financial institutions and Government agencies. Other societies themselves construct houses and
allot them to the members who make payment in installments.

Choice of form of business organization

A business firm can be owned and managed in several forms. Choice of form of business is a
very crucial decision because it determines the risks, responsibility, liability and control of the
enterprise and the division of profit or loss. Once a form of business is chosen it is difficult to
change it. Therefore, the form of business enterprise should be selected with due care and
thought. Several factors influence the choice of the form of business enterprise. These factors are
given below: -

1. Nature of business
Business providing direct services eg. small retailers, hair dressing saloons, tailors etc.
professional service, eg. Doctors, lawyer etc. depend for their success upon personal attention.
They are therefore organized as sole trading concern. Business activities requiring pooling of
skills and funds, eg. Wholesale trade, stock broking firms etc are better organized as
partnerships. Manufacturing organizations of large size are more commonly setup as private and
public companies.

2. Degree of Control Desired

A person who desires direct control prefers proprietorship or partnership form of organization. In
case the owner is not interested in direct personal control but in large scale operation, it would be
desirable to adopt the company form of ownership.

3. Degree of risk and liability

An individual not afraid of unlimited liability may go in for sole proprietorship or partnership
firm. But people who prefer safety than return can select company form of organization, where
liability is limited to the face value of shares held by him.

4. Duration of Business
Temporary and ad hoc ventures can be organized as sole proprietorship or partnership as they are
easy to form and dissolve. Enterprises of permanent nature can be better organized as joint stock
companies and co-operative societies because they enjoy perpetual succession.

5. Amount of Capital required

Enterprises requiring heavy investments should be organized as joint stock company. Where the
funds required initially are small and scope for expansion is not desired, sole trading or
partnership is better choice.

6. Government Regulation and Control

Sole trading concerns and partnership are subject to little regulation and control by the
government. Companies and co-operative societies have to undergo several legal formalities.

7. Managerial Requirements
Small business using simple process of production and distribution can be managed effectively
as proprietorships or partnerships. On the other hand, an enterprise involving the use of complex
techniques and procedures requires professional management. Such enterprises can be managed
efficiently as joint stock companies.

8. Size and area of operations

Large scale enterprises catering to national and international markets can be organized more
successfully as joint stock companies. The reason is that large sized enterprises require large
financial and managerial resources which are beyond the capacity of a single person or a few
partners. On the other hand, small and medium scale firms are generally set up as partnership or
proprietorship.

9. Division of Surplus
If a person is ready to bear unlimited personal liability and desires maximum share of profit, the
best choice is sole proprietorship

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