CHAPTER: 2

FORMS OF BUSINESS ORGANISATION

Sole Proprietorship
Sole proprietorship means a business owned, financed and controlled by a
single person who is recipient of all profit and bearer of all risks.

It is SUITABLE IN AREAS OF PERSONALISED SERVICE like beauty parlour, hair

cutting saloons & small scale activities like retail shops.

Features
1. Single ownership: It is wholly owned by one individual.
2. Control: Sole proprietor has full power of decision making.
3. No separate legal entity: Legally there is no difference between
business& businessmen.
4. Unlimited liability: The liability of owner is unlimited. In case the assets
of business are not sufficient to meet its debts, the personal property of
owner can be used for paying debts
5. No legal formalities: Not required to start, manage and dissolve such
business organization.
6. Sole risk bearer and profit recipient: He bears the complete risk and
there is no body to share profit/loss with him.
Merits
1. Easy to start and close: It can be easily started and closed without any
legal formalities.
2. Quick decision making: As sole trader is not required to consult or
inform anybody about his decisions.
3. Sense of accomplishment: There is a sense of personal satisfaction.
4. Unlimited liability: The liability of owner is unlimited. In case the assets
of business are not sufficient to meet its debts, the personal property of
owner can be used for paying debts
5. No legal formalities: are required to start, manage and dissolve such
business organization.
6. Sole risk bearer and profit recipient: He bears the complete risk and
there is no body to share profit/loss with him.
LIMITATIONS
1. Limited financial resources: Funds are limited to the owner’s personal
savings and his borrowing capacity.
2. Limited Managerial ability: Sole trader can’t be good in all aspects of
business and he can’t afford to employ experts also.
3. Unlimited liability: Ofcourse, sole trader compels him to avoid risky and
bold business decisions.
4. Uncertain life: Death, insolvency, lunacy or illness of a proprietor affects
the business and can lead to its closure.
5. Limited scope for expansion:- Due to limited capital and managerial
skills, it cannot expand to a large scale.
SUITABILITY:
Sole tradership is suitable-
• Where the personal attention to customer is required as in tailoring, beauty
parlour.
• Where goods are unstandardized like artistic jewellery.
• Where modest capital and limited managerial skills are required as in case
of retail store
• Business where risk is not extensive i.e. lesser fluctuation in price and
demand i.e. stationery shop.

PARTNERSHIP

Meaning: Partnership is a voluntary association of two or more persons who

agree to carry on some business jointly and share its profits and losses.
FEATURES
1. Two or more persons: There must be at least two persons to form a
partnership. The maximum no. of persons is 10 in banking business and 20
in non-banking business.
2. Agreement: It is an outcome of an agreement among partners which
may be oral or in writing.
3. Lawful business- It can be formed only for the purpose of carrying on
some lawful business.
4. Decision making & control – Every partner has a right to participate in
management & decision making of the organisations.
5. Unlimited liability – Partners have unlimited liability.
6. Mutual Agency – Every partner is an implied agent of the other partners
and of the firm. Every partner is liable for acts performed by other partners
on behalf of the firm.
7. Lack of continuity – Firms existence is affected by the death, Lunacy
and insolvency of any of its partner. It suffers from lack of continuity.
MERITS
1. Ease of formation & closure – It can be easily formed. Only an
agreement among the partners is required.
2. Larger financial resources – There are more funds as capital is
contributed by no. of partners.
3. Balanced Decisions – As decisions are taken jointly by partners after
consulting each other.
4. Sharing of Risks – In it, risk get distributed among partners which
reduces anxiety, burden and stress on individual partner.
5. Secrecy – Secrecy can be easily maintained about business affairs as
they are not required to publish their accounts or to file any report to the
govt.
LIMITATIONS
1. Limited resources – There is a restriction on the number of partners and
hence capital contributed by them is also limited.
2. Unlimited liability- The liability of partners is unlimited and they are
liable individually as well as jointly. It may prove to be a big drawback for
those partners who have greater personal wealth. They will have to repay
the entire debt in case the other partners are unable to do so.
3. Lack of continuity – Partnership comes to an end with the death,
retirement, insolvency or lunacy of any of its partner.
4. Lack of public confidence – Partnership firms are not required to
publish their reports and accounts. Thus they lack public confidence.
TYPES OF PARTNERS
1. General / Active Partner – Such a partner takes active part in the
management of the firm.
2. Sleeping or Dormant Partner – He does not take active part in the
management of the firm. Though he invested money, shares profit & Loss
and unlimited liability.
3. Secret Partner – He participates in business secretly without disclosing
his association with the firm to general public. His liability is also unlimited.
4. Nominal Partner – Such a partner only gives his name and goodwill to
the firm. He neither invests money nor takes profit. But his liability is
unlimited.
5. Partner by Estoppels – He is the one who by his words or conduct gives
impression to the outside world that he is a partners of the firm whereas
actually he is not. His liability is unlimited towards the third party who has
entered into dealing with firm on the basis of his pretensions.
6. Partner by holding out – He is the one who is falsely declared partner
of the firm whereas actually he is not. And even after becoming aware of it,
he-does not deny it. His liability is unlimited towards the party who has deal
with firm on the basis of this declaration.
Minor as a Partner
A minor is a person who has not attained the age of 18 years. Since a minor
is not capable of enlarging into a valid agreement. He cannot become
partner of firm. However, a minor can be admitted to the benefits of an
existing partnership firm with the mutual consent of all other partners. He
cannot be asked to bear the losses. His liability will be limited to the exilent
of the capital contributed by him. He will not be eligible to take an active
part in the management of the firm.

Types of Partnership
A. Classification on the Basics of Duration
Partnership at will- This type of partnership exists at the will of partners.
Particular Partnership-This type of partnership is formed for a specified
June period to accomplish a particular project (consolation of building)
B. Classification on the basis of Liability
General partnership-This liability of partners is limited and joint.
Registration of firm is optional.
Limited Partnership-The liability of at least one partner is unlimited
whereas the other partners may have limited.
Registration of firm is compulsory.

PARTNERSHIP DEED
The written agreement on a stamped paper which specifies the terms and
conditions of partnership is called the partnership deed.

It generally includes the following aspects –

• Name of the firm
• Location / Address of the firm
• Duration of business.
• Investment made by each partner.
• Profit sharing ratio of the partners
• Terms relating to salaries, drawing, interest on capital and interest on
drawing of partners.
• Duties & obligations of partners.
• Terms governing admission, retirement & expulsion of a partner,
preparation on of accounts & their auditing.
• Method of solving dispute

REGISTRATION OF PARTNERSHIP
Registration is not compulsory it is optional. But it is always beneficial to get
the firm registered. The consequences of non-registration of a firm are as
follows:

• A partner of an unregistered firm cannot file suit against the firm or the
partner.

• The firm cannot file a suit against third party.

• The firm cannot file a case against its partner.

Co-operative Society
A co-operative society is a voluntary association of persons of moderate
means who unite together to protect & promote their common economic
interests.

FEATURES
1. Voluntary association: Every one having a common interest is free to
join a co-operative society and can also leave the society after giving proper
notice.
2. Legal status: Its registration is compulsory and it gives it a separate
legal identity.
3. Limited liability: The liability of the member is limited to the extent of
their capital contribution in the society.
4. Democratic control: Management & Control lies with the managing
committee elected by the members by giving vote. Every member has one
vote irrespective of the number of shares held by him.
5. Service motive: The main aim is to serve its members and not to
maximize the profit.
6. Bound by govt.’s rules: They have to be tide by the rules and
regulations framed by govt. for them.
7. Distribution of surplus: The profit is distributed on the basis of volume
of business transacted by a member and not on the basis of capital
contribution of members.
MERITS
1. Excise of formation: It can be started with minimum of 10 members.
Registration is also easy as it requires very few legal formations.
2. Limited Liability: The liability of members is limited to the extent of
their capital contribution.
3. Stable existence: Due to registration it is a separate legal entity and is
not affected by the death, luxury or insolvency of any of its member.
4. Economy in operations: Due to elimination of middlemen and voluntary
services provided by its members.
5. Government Support: Govt. provides support by giving loans at lower
interest rates, subsidies & by charging less taxes.
6. Social utility: It promotes personal liberty, social justice and mutual
cooperation. They help to prevent concentration of economic power in few
hands.
LIMITATIONS
1. Shortage of capital – It suffers from shortage of capital as it is usually
formed by people with limited means.
2. Inefficient management – Co-operative society is managed by elected
members who may not be competent and experienced. Moreover, it can’t
afford to employ expert and experienced people at high salaries.
3. Lack of motivation – Members are not inclined to put their best efforts
as there is no direct link between efforts and reward.
4. Lack of Secrecy – Its affairs are openly discussed in its meeting which
makes it difficult to maintain secrecy.
5. Excessive govt. control – it suffers from excessive rules and regulations
of the govt. It has to get its accounts audited by the auditor and has to
submit a copy of its accounts to registrar.
6. Conflict among members – The members are from different sections of
society with different viewpoints. Sometimes when some members become
rigid, the result is conflict.
TYPES OF CO-OPERATIVE SOCIETIES
1. Consumers co-operative Society – It formed to protect the interest of
consumers.It seeks to eliminate middleman by establishing a direct link with
the producers. It purchases goods of daily consumption directly from
manufacturer or wholesalers and sells them to the members at reasonable
prices.
2. Producer’s Co-operative Society – The main aim is to help small
producers who cannot easily collect various items of production and face
some problem in marketing. These societies purchase raw materials, tools,
equipments and other items in large quantity and provide these things to
their members at reasonable price.
3. Marketing Co-operative Society – It performs various marketing
function such as transportation, warehousing, packing, grading, marketing
research etc. for the benefit of its members. The production of different
members is pooled together and sold by society at good price.
4. Farmer’s Co-operative Society – In such societies, small farmers join
together and pool their resources for cultivating their land collectively. Such
societies provide better quality seeds, fertilizers, machinery and other
modern techniques for use in the cultivation of crops. It provides them
opportunity of cultivation on large scale.
5. Credit co-operative Society – Such societies protect the members from
exploitation by money lenders. They provide loans to their members at easy
terms and reasonably low rate of interest.
6. Co-operative Housing Society – The main aim is to provide houses to
people with limited means/income at reasonable price.
JOINT STOCK COMPANY
Meaning – Joint stock company is a voluntary association of persons for
profit, having a capital divided into transferable shares, the ownership of
which is the condition of membership.

FEATURES
1. Incorporated association – The company must be incorporated or
registered tender the companies Act 1956. Without registration no company
can come into existence.
2. Separate Legal Existence – It is created by law and it is a distinct legal
entity independent of its members. It can own property, enter into contracts,
can file suits in its own name.
3. Perpetual Existence – Death, insolvency and insanity or change of
members as no effect on the life of a company. It can come to an end only
through the prescribed legal procedure.
4. Limited Liability – The liability of every member is limited to the nominal
value of the shares bought by him or to the amt. guaranteed by him.
Transferability of shares – Shares of public Co. are easily transferable. But
there are certain restrictions on transfer of share of private Co. Common
Seal- It is the official signature of the company and it is affixed on all
important documents of company.
5. Separation of ownership and control – Management of company is in
the hands of elected representatives of shareholders known individually as
director and collectively as board of directors.
MERITS
1. Limited Liability – Limited liability of shareholder reduces the degree of
risk borne by him.
2. Transfer of Interest – Easy transferability of shares increases the
attractiveness of shares for investment.
3. Perpetual Existence – Existence of a company is not affected by the
death, insanity,
Insolvency of member or change of membership. Company can be liquidated
only as per the provisions of companies Act.

4. Scope for expansion – A company can collect huge amount of capital

from unlimited no. of members who are ready to invest because of limited
liability, easy transferability and chances of high return.
5. Professional management – A company can afford to employ highly
qualified experts in different areas of business management.
LIMITATIONS
1. Legal formalities – The procedure of formation of Co. is very long, time
consuming, expensive and requires lot of legal formalities to be fulfilled.
2. Lack of secrecy – It is very difficult to maintain secrecy in case of public
company, as company is required to publish and file its annual accounts and
reports.
3. Lack of Motivation – Divorce between ownership and control and
absence of a direct link between efforts and reward lead to lack of personal
interest and incentive.
4. Delay in decision making – Red papism and bureaucracy do not permit
quick decisions and prompt actions. There is little scope for personal
initiative.
5. Oligarchic management – Co. is said to be democratically managed but
actually managed by few people i.e. board of directors. Sometimes they take
decisions keeping in mind their personal interests and benefit, ignoring the
interests of shareholders and Co.

TYPES OF COMPANIES
On the basis of ownership, companies can be divided into two categories –
Private & Public.
Difference between Private Company & Public Co.
Private Co. Public Co.

It has minimum 2 and maximum

It has minimum 7 and maximum unlimited.
50 members.

It cannot invite general public to It invites general public to buy its shares and
buy its shares and debentures. debentures.

There are certain restrictions on

Its shares are freely transferable.
transfer of its shares.

It can commence business after It can commence business after obtaining certificate
incorporation. of commencement of business.
 It has to write Private Ltd. After
It has to write only limited after its name
its name
Ex- Reliance Industries Ltd., Wipro Ltd. , Raymond’s
Ex- Tata Sons, Citi Bank,
Ltd.
Hyundai Motor India.

In its minimum capital required

In its minimum capital required is five lakhs.
is one lakh.
FORMATION OF A COMPANY
Formation of a company means bringing a company into existence and
starting its business. The steps involved in the formation of a company are:

(i) Promotion
(ii) Incorporation
(iii)Capital subscription
(iv) Commencement of business.
A private company has to undergo only first two steps but a public company
has to undergo all the four stages.

1. Promotion:
Promotion means conceiving a business opportunity and taking an initiative
to form a company.

Step in Promotion:
1. Identification of Business Opportunity : The first and foremost
function of a promoter is to identify a business idea e.g. production of new
product or service.
2. Feasibility Studies: After identifying a business opportunity the
promoters undertake detailed studies of technical, Financial, Economic
feasibility of a business.
3. Name Approval: After selecting the name of company the promotors
submit an application to the Registrar of companies for its approval.
4. Fixing up signatories to the Memorandum of
Association: Promotors have to decide about the director who will be
signing the memorandum of Association.
5. Appointment of professional: Promoters appoint merchant bankers,
auditors etc.
6. Preparation of necessary documents: The promoters prepare certain
legal documents such as memorandum of Association, Articles of Association
which have to be submitted to the Registrar of the companies.

2. Incorporation
Incorporation means registration of the company as body corporate under
the companies Act 1956 and receiving certificate of Incorporation.

Steps for Incorporation

1. Application for incorporation: Promoters make an application for the
incorporation of the company to the Registrar of companies.
2. Filing of necessary documents: Promoters files the following
documents:
(i) Memorandum of Association.
(ii) Articles of Association.
(iii) Statement of Authorized Capital
(iv) Consent of proposed director.
(v) Agreement with proposed managing director.
(vi) Statutory declaration.

3. Payment of fees: Along with filing of above documents, registration fee

has to be deposited which depends on amount of the authorized capital.
4. Registration: The Registrar verifies all the document submitted. If he is
satisfied then he enters the name of the company in his Register.
5. Certificate of Incorporation: After entering the name of the company in
the register. The Registrar issues a Certificate of Incorporation. This is called
the birth certificate of the company.

III. Capital Subscription:

A public company can raise funds from the public by issuing shares and
Debentures. For this it has to issue prospectus and undergo various other
formalities:

Step required for raising funds from public:

1. SEBI Approval: SEBI regulates the capital market of India. A public
company is required to take approval from SEBI.
2. Filing of Prospectus: Prospectus means any documents which invites
offers from the public to purchase share and Debenture of the company.
3. Appointment of bankers, brokers, underwriters: Banker of the
company receive the application money. Brokers encourage the public to
apply for the shares, underwriters are the person who undertake to buy the
shares if these are not subscribed by the public. They receive a commission
for underwriting.
4. Minimum subscription: According to the SEBI guide lines minimum
subscription is 90% of the issue amount. If minimum subscription is not
received then the allotment cannot be made and the application money
must be returned to the applicants within 30 days.
5. Application to Stock Exchange: It is necessary for a public company to
list their shares in the stock exchange therefore the promoters apply in stock
exchange to list company shares.
6. Allotment of Shares: Allotment of shares means acceptance of share
applied. Allotment letters are issued to the shareholders. The name and
address of the shareholders submitted to the Registrar.

IV. COMMENCEMENT OF BUSINESS:

To commence business a public company has to obtain a certificate of
commencement of Business. For this the following documents have to be
filled with the registrar of companies.

1. A declaration that 90% of the issued amount has been subscribed.

2. A declaration that all directors have paid in cash in respect of allotment of
shares made to them.
3. A statutory declaration that the above requirements have been completed
and must be signed by the director of company.

Important documents used in the formation of company:

1. Memorandum of Association – It is the principal document of a
company. No company can be registered without a memorandum of
association and that is why it is sometimes called a life giving document.
Contents of Memorandum of Association:
1. Name clauses – This clause contains the name of the company. The
proposed name should not be identicator similar to the name of another
exiting company.
2. Situation clauses – This clause contains the name of the state in which
the registered office of the company is to be situated.
3. Object clause – This clause defines the objective with which the
company is formed. A company is not legally entitled to do any business
other than that specified in the object clause.
4. Liability Clauses – This clause limits the liability of the members to the
amount unpaid on the shares held by them.
5. Capital clause – This clause specifies the maximum capital which the
company will be authorized to raise tough the issue of shares called
authorized capital.

2. Articles of Association:
The articles of Association are the rules for the internal management of the
affairs of a company the articles defines the duties, rights and powers of the
officers and the board of directors.

Contents of the Article:

1. The amount of share capital and different classes of shares.
2. Rights of each class of shareholders.
3. Procedure for making allotment of shares.
4. Procedure for issuing share certificates.
5. Procedure for forfeiture and reissue of forfeited shares.
6. Rules regarding casting of votes and proxy voting
7. Procedure for selection and removal of directors
8. Dividend declaration and payment related rules
9. Procedure for capital readjustment
10. Procedure regarding winding up of the company.

2. Prospectus:
Prospectus means any document which invites deposits from the public to
purchase share or debentures of a company.

Main contents of the Prospectus:

1. Company’s name and the address of its registered office.
2. The main object of the company
3. The number and classes of shares.
4. Qualification shares of the directors
5. The name and addresses of the directors, managing director or manager.
6. The minimum subscription which is 90% of the size of the issue.
7. The time of opening and closing of the subscription list.
8. The amt. payable on the application and allotment of each class of share.
9. Underwriters to the issue.
10. Merchant bankers to the issue.

2. Statement is Lieu of Prospectus:

A public company having a share capital may sometimes decide not to raise
funds from the public because it may be confident of obtaining the required
capital privately. In such case it will have to tile a statement in lieu of
prospectus with the Registrar of companies. It Contains information much
similar to that of a prospectus.

CHOICE OF FORM OF BUSINESS ORGANISATION

The following factors are important for taking decision about form of
organization:

1. Cost and ease in setting up the organization: Sole proprietorship is

least expensive and can be formed without any legal formalities to be
fulfilled. Company is also expensive with lot of legal formalities.
2. Capital consideration: Business requiring less amount of finance prefer
sole proprietorship & partnership form, where as business activities requiring
huge financial resonances prefer company form.
3. Nature of business: If the work requires personal attention such as
tailoring unit, cutting saloon, it is generally setup as a sole proprietorship.
Unit engaged in large scale manufacturing are more likely to be organized in
company form.
4. Degree of control desired: A person who desires full and exclusive
control over business prefers proprietorship rather than partnership or
company because control has to be shared in these cases.
5. Liability or Degree of Risk: Projects which are not very risky can be
organized in the form of sole proprietorship partnership whereas the risky
ventures should be done in company form of organization because the
liability of shareholders is limited.
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