FORMS OF BUSINESS ORGANISATION

CHAPTER:2
PREPARED BY APARNA P
If one is planning to start a business or is interested in
expanding an existing one, an important decision relates
to the choice of the form of organisation.
Various forms of business organisations from which one can
choose the right one include:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.
1.SOlE PROPRIETORSHIP
Sole proprietorship is a popular form of business organisation and is the
most suitable form for small businesses, especially in their initial years of
operation. Sole proprietorship refers to a form of business organisation
which is owned, managed and controlled by an individual who is the
recipient of all profits and bearer of all risks.
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 management 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
TYPES OF PARTNERS

Types of Partners A partnership firm can have different types of

partners with different roles and liabilities. An understanding of these
types is important for a clear understanding of their rights and
responsibilities. These are described as follows:

(i) Active partner: An active partner is one who contributes capital,

participates in the management of the firm, shares its profits and
losses,and is liable to an unlimited extent to the creditors of the firm.
These partners take actual part in carrying out business of the firm on
behalf ofother partners.
(II) SlEEPING OR DORMANT
PARTNER:
(ii) Sleeping or dormant partner: Partners who do not take part in the
day to day activities of the business are called sleeping partners. A
sleeping partner, however, contributes capital to the firm, shares its
profits and losses, and has unlimited liability.
(III) SECRET PARTNER:

(iii) Secret partner: A secret partner is one whose association with the
firm is unknown to the general public. Other than this distinct feature, in
all other aspects he is like the rest of the partners. He contributes to the
capital of the firm, takes part in the management, shares its profits
andlosses, and has unlimited liability towards the creditors.
(Iv) NOMINAl PARTNER:

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

(vi) Partner by holding out: A partner by ‘holding out’ is a person who though is not
a partner in a firm but knowingly allows himself/herself to be represented as a
partner in a firm. Such a person becomes liable to outside creditors for repayment
of any debts which have been extended to the firm on the basis of such
representation. In case he is not really a partner and wants to save himself from such
a liability, he should immediately issue a denial, clarifying his position that he is not a
partner in the firm. If he does not do so, he willbe responsible to the third party for
any such debts.
 COOPERATIvE SOCIETY
The cooperative society is a voluntary association of persons, who join together with
the motive of welfare of the members
The cooperative society is compulsorily required to be registered under the
Cooperative Societies Act 1912.
The process of setting up a cooperative society is simple enough and at the most
what is required is the consent of at least ten adult persons to form a society.
The capital of a society is raised from its members through issue of shares.

1.Indian farmers fertiliser cooperative limited

2.Anyonya cooperative bank limites
3.Karnataka milk federation
4. Kerala cooperative milk marketing federation
 FEATURES
The characteristics of a cooperative society are listed below.
(i) Voluntary membership: The membership of a cooperative society is voluntary. A
person is free to join a cooperative society, and can also leave anytime as per his
desire. There cannot be any compulsion for him to join or quit a society.
Membership is open to all, irrespective of their religion, caste, and gender.

(ii) Legal status: Registration of a cooperative society is compulsory.This accords a

separate identity to the society which is distinct from its members. As a result of being
a separate legal entity, it is not affected by the entry or exit of its members.

(iii) Limited liability: The liability of the members of a cooperative society is limited to
the extent of the amount contributed by them as capital. This defines the maximum
risk that a member can be asked to bear.
(iv) Control: In a cooperative society, the power to take decisions lies in the hands
of an elected managing committee.The right to vote gives the members a chance
to choose the members who will constitute the managing committee and this lends
the cooperative society a democratic character.

(v) Service motive: The cooperative society through its purpose lays emphasis on
the values of mutual help and welfare. Hence, the motive of service dominates its
working. If any surplus is generated as a result of its operations, it is distributed
amongst the members as dividend in conformity with the bye-laws of the society
MERITS

Merits The cooperative society offers many benefits to its members.

Some of theadvantages of the cooperative form of organisation are as
follows.
(i) Equality in voting status: The principle of ‘one man one vote’ governs
the cooperative society. Irrespective of the amount of capital
contribution by a member, each member is entitled to equal voting
rights.
(ii) Limited liability: The liability of members of a cooperative society is
limited to the extent of their capital contribution. The personal assets of
the members are, therefore, safe from being used to repay business
debts.
(iii) Stable existence: Death, bankruptcy or insanity of the members do not affect
continuity of a cooperative society. A society, therefore, operates unaffected by any
change in the membership.

(iv) Support from government: The cooperative society exemplifies the idea of
democracy and hence finds support from the Government in the form of low taxes,
subsidies, and low interest rates on loans.
(vi) Ease of formation: The cooperative society can be started with a minimum of ten
members. The registration procedure is simple involving a few legal formalities. Its
formation is governed by the provisions of Cooperative Societies Act 1912.
 lIMITATIONS
(i) Limited resources: Resources of acooperative society consists of capital
contributions of the members with limited means. The low rate of dividend offered on
investment also acts as a deterrent in attracting membership or more capital from the
members.
(ii) Inefficiency in management:Cooperative societies are unable to attract and
employ expert managers because of their inability to pay them high salaries. The
members who offer honorary services on a voluntary basis are generally not
professionally equipped to handle the management functions effectively
(iii) Lack of secrecy: As a result of open discussions in the meetings of members as well
as disclosure obligations as per the Societies Act (7), it is difficult to maintain secrecy
aboutthe operations of a cooperative society.
(iv) Government control: In return of the privileges offered by the government,
cooperative societies have to comply with several rules and regulations related to
auditing of accounts, submission of accounts, etc. Interference in the functioning of
the cooperative organisation through the control exercised by the state
cooperative departments also negatively affects its freedom of operation.
(v) Differences of opinion: Internal quarrels arising as a result of contrary viewpoints
may lead to difficulties in decision making. Personal interests may start to dominate
the welfare motive and the benefit of other members may take a backseat if
personal gain is given preference by certain members.