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CHAPTER 2

FORMS OF BUSINESS

ORGANISATION

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• identify different forms of business organisation;

• explain features, merits and limitations of different forms ofbusiness organisations;

• distinguish between various forms of organisations; and

• discuss the factors determining choice of an appropriate form ofbusiness organisation.

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28 BUSINESS STUDIES

2.1 INTRODUCTION

If one is planning to start a business oris interested in expanding an existingone, an important decision relates tothe choice of the form of organisation.The most appropriate form isdetermined by weighing theadvantages and disadvantages of eachtype of organisation against one’s ownrequirements.

Various forms of businessorganisations from which one canchoose the right one include:

(a) Sole proprietorship,

(b) Joint Hindu family business,

(c) Partnership,

(d) Cooperative societies, and

(e) Joint stock company.Let us start our discussion with

sole proprietorship — the simplest formof business organisation, and thenmove on to analysing more complexforms of organisations.

2.2 SOLE PROPRIETORSHIP

Do you often go in the evenings to buyregisters, pens, chart papers, etc., froma small neighbourhood stationerystore? Well, in all probability in thecourse of your transactions, you haveinteracted with a sole proprietor.

Sole proprietorship is a popularform of business organisation and is

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

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29FORMS OF BUSINESS ORGANISATION

the most suitable form for smallbusinesses, especially in their initialyears of operation. Sole proprietorshiprefers to a form of businessorganisation which is owned, managedand controlled by an individual whois the recipient of all profits and bearerof all risks. This is evident from theterm itself. The word “sole” implies“only”, and “proprietor” refers to“owner”. Hence, a sole proprietor is theone who is the only owner of abusiness.

This form of business is particularlycommon in areas of personalisedservices such as beauty parlours, hairsaloons and small scale activities likerunning a retail shop in a locality.

formation as well as closure ofbusiness.

(ii) Liability: Sole proprietors haveunlimited liability. This implies that theowner is personally responsible forpayment of debts in case the assets ofthe business are not sufficient to meetall the debts. As such the owner’spersonal possessions such as his/herpersonal car and other assets could besold for repaying the debt. Suppose thetotal outside liabilities of XYZ drycleaner, a sole proprietorship firm, areRs. 80,000 at the time of dissolution,but its assets are Rs. 60,000 only. Insuch a situation the proprietor will haveto bring in Rs. 20,000 from herpersonal sources even if she has to sell

Features

Salient characteristics of the soleproprietorship form of organisation areas follows:

(i) Formation and closure: There isno separate law that governs soleproprietorship. Hardly any legalformalities are required to start a soleproprietary business, though in somecases one may require a license.Closure of the business can also bedone easily. Thus, there is ease in

her personal property to repay thefirm’s debts.

(iii) Sole risk bearer and profitrecipient: The risk of failure ofbusiness is borne all alone by the soleproprietor. However, if the business issuccessful, the proprietor enjoys all thebenefits. He receives all the businessprofits which become a direct rewardfor his risk bearing.

(iv) Control: The right to run thebusiness and make all decisions lies

Sole trader is a type of business unit where a person is solely responsible forproviding the capital, for bearing the risk of the enterprise and for themanagement of business.

J.L. Hansen

The individual proprietorship is the form of business organisation at the headof which stands an individual as one who is responsible, who directs itsoperations and who alone runs the risk of failure.

L.H. Haney

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absolutely with the sole proprietor. Hecan carry out his plans without anyinterference from others.

(v) No separate entity: In the eyes ofthe law, no distinction is made betweenthe sole trader and his business, asbusiness does not have an identityseparate from the owner. The owner is,therefore, held responsible for all theactivities of the business.

(vi) Lack of business continuity: Thesale proprietorship business is ownedand controlled by one person, thereforedeath, insanity, imprisonment,physical ailment or bankruptcy of thesole proprietor will have a direct anddetrimental effect on the business andmay even cause closure of the business.

Merits

Sole proprietorship offers manyadvantages. Some of the important onesare as follows:

(i) Quick decision making: A soleproprietor enjoys considerable degreeof freedom in making businessdecisions. Further the decision makingis prompt because there is no need toconsult others. This may lead to timelycapitalisation of market opportunitiesas and when they arise.

(ii) Confidentiality of information:Sole decision making authority enablesthe proprietor to keep all theinformation related to businessoperations confidential and maintain

A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor!

The product that has given the world its best-known taste was born in Atlanta,Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, producedthe syrup for Coca-Cola®, and carried a jug of the new product down the streetto Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placedon sale for five cents a glass as a soda fountain drink. Dr. Pemberton neverrealised the potential of the beverage he created. He gradually sold portions ofhis business to various partners and, just prior to his death in 1888, sold hisremaining interest in Coca-Cola to Asa G. Candler. An Atlantan with greatbusiness acumen, Mr. Candler proceeded to buy additional business rightsand acquire complete control.On May 1, 1889, Asa Candler published a full-page advertisement in The

Atlanta Journal, proclaiming his wholesale and retail drug business as “sole

proprietors of Coca-Cola ... Delicious. Refreshing. Exhilarating.

Invigorating.” Sole ownership, which Mr. Candler did not actually achieveuntil 1891, needed an investment of $ 2,300.

It was only in 1892 that Mr. Candler formed a company called The Coca-ColaCorporation.

Source: Website of Coca Cola company.

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secrecy. A sole trader is also not boundby law to publish firm’s accounts.

(iii) Direct incentive: A soleproprietor directly reaps the benefits ofhis/her efforts as he/she is the solerecipient of all the profit. The need toshare profits does not arise as he/sheis the single owner. This providesmaximum incentive to the sole traderto work hard.

(iv) Sense of accomplishment: Thereis a personal satisfaction involved inworking for oneself. The knowledgethat one is responsible for the successof the business not only contributes toself-satisfaction but also instils in theindividual a sense of accomplishmentand confidence in one’s abilities.

(v) Ease of formation and closure:An important merit of soleproprietorship is the possibility ofentering into business with minimallegal formalities. There is no separatelaw that governs sole proprietorship. Assole proprietorship is the leastregulated form of business, it is easyto start and close the business as perthe wish of the owner.

Limitations

Notwithstanding various advantages,the sole proprietorship form oforganisation is not free fromlimitations. Some of the majorlimitations of sole proprietorship areas follows:

(i) Limited resources: Resources ofa sole proprietor are limited to his/herpersonal savings and borrowings from

others. Banks and other lendinginstitutions may hesitate to extend along term loan to a sole proprietor.Lack of resources is one of the majorreasons why the size of the businessrarely grows much and generallyremains small.

(ii) Limited life of a businessconcern: The sole proprietorshipbusiness is owned and controlled byone person, so death, insanity,imprisonment, physical ailment orbankruptcy of a proprietor affects thebusiness and can lead to its closure.

(iii) Unlimited liability: A majordisadvantage of sole proprietorship isthat the owner has unlimited liability. Ifthe business fails, the creditors canrecover their dues not merely from thebusiness assets, but also from thepersonal assets of the proprietor. Apoor decision or an unfavourablecircumstance can create seriousfinancial burden on the owner. That iswhy a sole proprietor is less inclined totake risks in the form of innovationor expansion.

(iv) Limited managerial ability: Theowner has to assume the responsibilityof varied managerial tasks such aspurchasing, selling, financing, etc. It israre to find an individual who excels inall these areas. Thus decision makingmay not be balanced in all the cases.Also, due to limited resources, soleproprietor may not be able to employand retain talented and ambitiousemployees.

Though sole proprietorship suffersfrom various shortcomings, many

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entrepreneurs opt for this form oforganisation because of its inherentadvantages. It requires less amount ofcapital. It is best suited for businesseswhich are carried out on a small scaleand where customers demandpersonalised services.

2.3 JOINT HINDU FAMILY BUSINESS

Joint Hindu family business is aspecific form of business organisationfound only in India. It is one of theoldest forms of business organisationin the country. It refers to a form oforganisation wherein the business isowned and carried on by the membersof the Hindu Undivided Family (HUF).It is governed by the Hindu Law. Thebasis of membership in the business isbirth in a particular family and three

Features

The following points highlight theessential characteristics of the jointHindu family business.

(i) Formation: For a joint Hindu familybusiness, there should be at least twomembers in the family and ancestralproperty to be inherited by them. Thebusiness does not require anyagreement as membership is by birth.It is governed by the Hindu SuccessionAct, 1956.

(ii) Liability: The liability of allmembers except the karta is limited totheir share of co-parcenery property ofthe business. The karta, however, hasunlimited liability.

(iii) Control: The control of the familybusiness lies with the karta. He takes

successive generations can be membersin the business.

The business is controlled by thehead of the family who is the eldestmember and is called karta. Allmembers have equal ownership rightover the property of an ancestor andthey are known as co-parceners.

all the decisions and is authorised tomanage the business. His decisions arebinding on the other members.

(iv) Continuity: The businesscontinues even after the death of thekarta as the next eldest member takesup the position of karta, leaving thebusiness stable. The business can,

Gender Equality in the Joint Hindu Family a Reality

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

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however, be terminated with themutual consent of the members.

(v) Minor Members: The inclusion ofan individual into the business occursdue to birth in a Hindu UndividedFamily. Hence, minors can also bemembers of the business.

Merits

The advantages of the joint Hindufamily business are as follows:

(i) Effective control: The karta hasabsolute decision making power. Thisavoids conflicts among members as noone can interfere with his right todecide. This also leads to prompt andflexible decision making.

(ii) Continued business existence:The death of the karta will not affectthe business as the next eldest memberwill then take up the position. Hence,operations are not terminated andcontinuity of business is notthreatened.

(iii) Limited liability of members:The liability of all the co-parcenersexcept the karta is limited to their sharein the business, and consequently theirrisk is well-defined and precise.

(iv) Increased loyalty andcooperation: Since the business is runby the members of a family, there is agreater sense of loyalty towards oneother. Pride in the growth of businessis linked to the achievements of thefamily. This helps in securing bettercooperation from all the members.

Limitation

The following are some of thelimitations of a joint Hindu familybusiness.

(i) Limited resources: The joint Hindufamily business faces the problem oflimited capital as it depends mainly onancestral property. This limits thescope for expansion of business.

(ii) Unlimited liability of karta: Thekarta is burdened not only with theresponsibility of decision making andmanagement of business, but alsosuffers from the disadvantage ofhaving unlimited liability. His personalproperty can be used to repay businessdebts.

(iii) Dominance of karta: Thekarta individually manages thebusiness which may at times not beacceptable to other members. Thismay cause conflict amongst them andmay even lead to break down of thefamily unit.

(iv) Limited managerial skills:Since the karta cannot be an expertin all areas of management, thebusiness may suffer as a result of hisunwise decisions. His inability todecide effectively may result intopoor profits or even losses for theorganisation.

The joint Hindu family business ison the decline because of thediminishing number of joint Hindufamilies in the country.

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2.4 PARTNERSHIP

The inherent disadvantage of the soleproprietorship in financing andmanaging an expanding business pavedthe way for partnership as a viable option.Partnership serves as an answer to theneeds of greater capital investment,varied skills and sharing of risks.

must be lawful and run with the motiveof profit. Thus, two people comingtogether for charitable purposes willnot constitute a partnership.

(ii) Liability: The partners of a firmhave unlimited liability. Personal assetsmay be used for repaying debts in casethe business assets are insufficient.

The Indian Partnership Act, 1932defines partnership as “the relationbetween persons who have agreed toshare the profit of the businesscarried on by all or any one of themacting for all.”

Features

Definitions given above point to thefollowing major characteristics ofthe partnership form of businessorganisation.

(i) Formation: The partnership formof business organisation is governed bythe Indian Partnership Act, 1932. Itcomes into existence through a legalagreement wherein the terms andconditions governing the relationshipamong the partners, sharing of profitsand losses and the manner ofconducting the business are specified.It may be pointed out that the business

Further, the partners are jointly andindividually liable for payment of debts.Jointly, all the partners are responsiblefor the debts and they contribute inproportion to their share in businessand as such are liable to that extent.Individually too, each partner can beheld responsible repaying the debts ofthe business. However, such a partnercan later recover from other partnersan amount of money equivalent to theshares in liability defined as per thepartnership agreement.

(iii) Risk bearing: The partners bearthe risks involved in running abusiness as a team. The reward comesin the form of profits which are sharedby the partners in an agreed ratio.However, they also share losses in thesame ratio in the event of the firmincurring losses.

Partnership is the relation between persons competent to make contractswho have agreed to carry on a lawful business in common with a view toprivate gain.

L H Haney

Partnership is the relation which subsists between persons who have agreedto combine their property, labour or skill in some business and to share theprofits therefrom between them.

The Indian Contract Act 1872

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(iv) Decision making and control:The partners share amongst themselvesthe responsibility of decision makingand control of day to day activities.Decisions are generally taken withmutual consent. Thus, the activities ofa partnership firm are managedthrough the joint efforts of all thepartners.

(v) Continuity: Partnership ischaracterised by lack of continuity ofbusiness since the death, retirement,insolvency or insanity of any partnercan bring an end to the business.However, the remaining partners mayif they so desire continue the businesson the basis of a new agreement.

(vi) Number of Partners: Theminimum number of partners neededto start a partnership firm is two.According to section 464 of theCompanies Act 2013, maximumnumber of partners in a partnershipfirm can be 100, subject to the numberprescribed by the government.As per Rule 10 of The Companies(miscelleneous) Rules 2014, at presentthe maximum number of members canbe 50.

(vii) Mutual agency: The definition ofpartnership highlights the fact that itis a business carried on by all or anyone of the partners acting for all. Inother words, every partner is both anagent and a principal. He is an agent ofother partners as he represents themand thereby binds them through hisacts. He is a principal as he too can bebound by the acts of other partners.

Merits

The following points describe theadvantages of a partnership firm.

(i) Ease of formation and closure: Apartnership firm can be formed easilyby putting an agreement between theprospective partners into placewhereby they agree to carryout thebusiness of the firm and share risks.There is no compulsion with respect toregistration of the firm. Closure of thefirm too is an easy task.

(ii) Balanced decision making: Thepartners can oversee differentfunctions according to their areas ofexpertise. Because an individual is notforced to handle different activities, thisnot only reduces the burden of workbut also leads to fewer errors injudgements. As a consequence,decisions are likely to be morebalanced.

(iii) More funds: In a partnership, thecapital is contributed by a number ofpartners. This makes it possible toraise larger amount of funds ascompared to a sole proprietor andundertake additional operations whenneeded.

(iv) Sharing of risks: The risksinvolved in running a partnership firmare shared by all the partners. Thisreduces the anxiety, burden and stresson individual partners.

(v) Secrecy: A partnership firm is notlegally required to publish its accountsand submit its reports. Hence it is ableto maintain confidentiality of informationrelating to its operations.

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Limitations

A partnership firm of businessorganisation suffers from the followinglimitations:

(i) Unlimited liability: Partners areliable to repay debts even from theirpersonal resources in case thebusiness assets are not sufficient tomeet its debts. The liability of partnersis both joint and several which mayprove to be a drawback for thosepartners who have greater personalwealth. They will have to repay theentire debt in case the other partnersare unable to do so.

(ii) Limited resources: There is arestriction on the number of partners,and hence contribution in terms ofcapital investment is usually notsufficient to support large scalebusiness operations. As a result,partnership firms face problems inexpansion beyond a certain size.

(iii) Possibility of conflicts:Partnership is run by a group ofpersons wherein decision makingauthority is shared. Difference inopinion on some issues may lead todisputes between partners. Further,decisions of one partner are binding onother partners. Thus an unwisedecision by some one may result infinancial ruin for all others. In case apartner desires to leave the firm, thiscan result in termination of partnershipas there is a restriction on transfer ofownership.

(iv) Lack of continuity: Partnershipcomes to an end with the death,

retirement, insolvency or lunacy of anypartner. It may result in lack ofcontinuity. However, the remainingpartners can enter into a freshagreement and continue to run thebusiness.

(v) Lack of public confidence: Apartnership firm is not legally requiredto publish its financial reports or makeother related information public. It is,therefore, difficult for any member ofthe public to ascertain the true financialstatus of a partnership firm. As a result,the confidence of the public inpartnership firms is generally low.

2.4.1 Types of Partners

A partnership firm can have differenttypes of partners with different rolesand liabilities. An understanding ofthese types is important for a clearunderstanding of their rights andresponsibilities. These are described asfollows:

(i) Active partner: An active partneris one who contributes capital,participates in the management of thefirm, shares its profits and losses, andis liable to an unlimited extent to thecreditors of the firm. These partnerstake actual part in carrying outbusiness of the firm on behalf of otherpartners.

(ii) Sleeping or dormant partner:Partners who do not take part in theday to day activities of the business arecalled sleeping partners. A sleepingpartner, however, contributes capital tothe firm, shares its profits and losses,and has unlimited liability.

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(iii) Secret partner: A secret partneris one whose association with the firmis unknown to the general public. Otherthan this distinct feature, in all otheraspects he is like the rest of thepartners. He contributes to the capitalof the firm, takes part in themanagement, shares its profits andlosses, and has unlimited liabilitytowards the creditors.

(iv) Nominal partner: A nominalpartner is one who allows the use ofhis/her name by a firm, but does notcontribute to its capital. He/she doesnot take active part in managing thefirm, does not share its profit or lossesbut is liable, like other partners, to thethird parties, for the repayments of thefirm’s debts.

(v) Partner by estoppel: A person isconsidered a partner by estoppel if,through his/her own initiative,conduct or behaviour, he/she gives animpression to others that he/she is apartner of the firm. Such partners areheld liable for the debts of the firmbecause in the eyes of the third partythey are considered partners, eventhough they do not contribute capitalor take part in its management.Suppose Rani is a friend of Seema whois a partner in a software firm —Simplex Solutions. On Seema’srequest, Rani accompanies her to abusiness meeting with MohanSoftwares and actively participates inthe negotiation process for a businessdeal and gives the impression that she

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is also a partner in Simplex Solutions.If credit is extended to SimplexSolutions on the basis of thesenegotiations, Rani would also be liablefor repayment of such debt, as if sheis a partner of the firm.

(vi) Partner by holding out: Apartner by ‘holding out’ is a personwho though is not a partner in a firmbut knowingly allows himself/herselfto be represented as a partner in afirm. Such a person becomes liable tooutside creditors for repayment of anydebts which have been extended to thefirm on the basis of suchrepresentation. In case he is not reallya partner and wants to save himselffrom such a liability, he shouldimmediately issue a denial, clarifyinghis position that he is not a partner inthe firm. If he does not do so, he willbe responsible to the third party forany such debts.

2.4.2 Types of Partnerships

Partnerships can be classified on thebasis of two factors, viz., duration andliability. On the basis of duration, therecan be two types of partnerships :‘partnership at will’ and ‘particularpartnership’. On the basis of liability,the two types of partnership include:one ‘with limited liability’ and the otherone ‘with unlimited liability’. Thesetypes are described in the followingsections.

Classification on the basis ofduration

(i) Partnership at will: This type ofpartnership exists at the will of thepartners. It can continue as long asthe partners want and is terminatedwhen any partner gives a notice ofwithdrawal from partnership to thefirm.

Minor as a Partner

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

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(ii) Particular partnership: Partner-ship formed for the accomplishment ofa particular project say construction ofa building or an activity to be carriedon for a specified time period is calledparticular partnership. It dissolvesautomatically when the purpose forwhich it was formed is fulfilled or whenthe time duration expires.

Classification on the basis ofliability

(i) General Partnership: In generalpartnership, the liability of partnersis unlimited and joint. The partnersenjoy the right to participate in themanagement of the firm and theiracts are binding on each other aswell as on the firm. Registration ofthe firm is optional. The existenceof the firm is affected by the death,lunacy, insolvency or retirement ofthe partners.

(ii) Limited Partnership: In limitedpartnership, the liability of at least onepartner is unlimited whereas the restmay have limited liability. Such a

partnership does not get terminatedwith the death, lunacy or insolvency ofthe limited partners. The limitedpartners do not enjoy the right ofmanagement and their acts do not bindthe firm or the other partners.Registration of such partnership iscompulsory.

This form of partnership was notpermitted in India earlier. Thepermission to form partnership firmswith limited liability has been grantedafter introduction of New SmallEnterprise Policy in 1991. The ideabehind such a move has been to enablethe partnership firms to attract equitycapital from friends and relatives ofsmall scale entrepreneurs who wereearlier reluctant to help, due to theexistence of unlimited liability clausein the partnership form of business.

2.4.3 Partnership Deed

A partnership is a voluntary associationof people who come together forachieving common objectives. In orderto enter into partnership, a clearagreement with respect to the terms,conditions and all aspects concerning

Price Waterhouse Coopers was a Partnership Firm earlier

Price Waterhouse Coopers, one of the world’s top accountancy firms has beencreated in 1998 by the merger of two companies, Price Waterhouse and Coopersand Lybrand — each with historical roots going back some 150 years to the19th century Great Britain. In 1850, Samuel Lowell Price set up his accountingbusiness in London. In 1865, he was joined in partnership by William H.Holyland and Edwin Waterhouse. As the firm grew, qualified members of itsprofessional staff were admitted to the partnership. By the late 1800s, PriceWaterhouse had gained significant recognition as an accounting firm.

Source: Price Waterhouse Coopers archives in Columbia University.

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the partners is essential so that there isno misunderstanding later among thepartners. Such an agreement can beoral or written. Even though it is notessential to have a written agreement, itis advisable to have a written agreementas it constitutes an evidence of theconditions agreed upon. The writtenagreement which specifies the terms andconditions that govern the partnershipis called the partnership deed.

The partnership deed generallyincludes the following aspects:

• Name of firm• Nature of business and location of

business• Duration of business• Investment made by each partner• Distribution of profits and losses• Duties and obligations of the

partners• Salaries and withdrawals of the

partners• Terms governing admission,

retirement and expulsion of apartner

• Interest on capital and interest ondrawings

• Procedure for dissolution of thefirm

• Preparation of accounts and theirauditing

• Method of solving disputes

2.4.4 Registration

Registration of a partnership firmmeans the entering of the firm’s name,along with the relevant prescribed par-ticulars, in the Register of firms keptwith the Registrar of Firms. It providesconclusive proof of the existence of apartnership firm.

It is optional for a partnership firmto get registered. In case a firm doesnot get registered, it is deprived ofmany benefits. The consequences ofnon-registration of a firm are as follows:(a) A partner of an unregistered firm

cannot file a suit against the firmor other partners,

(b) The firm cannot file a suit againstthird parties, and

(c) The firm cannot file a case againstthe partners.

In view of these consequences, it istherefore advisable to get the firmregistered. According to the IndiaPartnership Act 1932, the partners mayget the firm registered with theRegistrar of firms of the state in whichthe firm is situated. The registration canbe at the time of formation or at any timeduring its existence. The procedure forgetting a firm registered is as follows:1. Submission of application in the

prescribed form to the Registrar offirms. The application shouldcontain the following particulars:

• Name of the firm• Location of the firm• Names of other places where the

firm carries on business• The date when each partner joined

the firm• Names and addresses of the

partners• Duration of partnership

This application should be signed byall the partners.

2. Deposit of required fees with theRegistrar of Firms.

3. The Registrar after approval willmake an entry in the register offirms and will subsequently issuea certificate of registration.

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2.5 COOPERATIVE SOCIETY

The word cooperative means workingtogether and with others for a commonpurpose.

The cooperative society is avoluntary association of persons, whojoin together with the motive of welfareof the members. They are driven by theneed to protect their economic interestsin the face of possible exploitation atthe hands of middlemen obsessed withthe desire to earn greater profits.

The cooperative society iscompulsorily required to be registeredunder the Cooperative Societies Act1912. The process of setting up acooperative society is simple enoughand at the most what is required is theconsent of at least ten adult personsto form a society. The capital of asociety is raised from its membersthrough issue of shares. The societyacquires a distinct legal identity afterits registration.

Features

The characteristics of a cooperativesociety are listed below.

(i) Voluntary membership: Themembership of a cooperative societyis voluntary. A person is free to join acooperative society, and can also leave

anytime as per his desire. Therecannot be any compulsion for him tojoin or quit a society. Althoughprocedurally a member is required toserve a notice before leaving thesociety, there is no compulsion toremain a member. Membership is opento all, irrespective of their religion,caste, and gender.

(ii) Legal status: Registration of acooperative society is compulsory. Thisaccords a separate identity to the societywhich is distinct from its members. Thesociety can enter into contracts andhold property in its name, sue and besued by others. As a result of being aseparate legal entity, it is not affectedby the entry or exit of its members.

(iii) Limited liability: The liability ofthe members of a cooperative society islimited to the extent of the amountcontributed by them as capital. Thisdefines the maximum risk that amember can be asked to bear.

(iv) Control: In a cooperative society,the power to take decisions lies in thehands of an elected managing committee.The right to vote gives the members achance to choose the members who willconstitute the managing committee andthis lends the cooperative society ademocratic character.

Cooperative is a form of organisation wherein persons voluntarily associatetogether as human beings on the basis of equality for the promotion of aneconomic interest for themselves.

E. H. Calvert

Cooperative organisation is “a society which has its objectives for the promotionof economic interests of its members in accordance with cooperative principles.

The Indian Cooperative Societies Act 1912

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42 BUSINESS STUDIES

(v) Service motive: The cooperativesociety through its purpose laysemphasis on the values of mutual helpand welfare. Hence, the motive of servicedominates its working. If any surplusis generated as a result of its operations,it is distributed amongst the membersas dividend in conformity with the bye-laws of the society.

Merits

The cooperative society offers manybenefits to its members. Some of theadvantages of the cooperative form oforganisation are as follows.

(i) Equality in voting status: Theprinciple of ‘one man one vote’ governsthe cooperative society. Irrespective ofthe amount of capital contribution bya member, each member is entitled toequal voting rights.

(ii) Limited liability: The liability ofmembers of a cooperative society islimited to the extent of their capitalcontribution. The personal assets of themembers are, therefore, safe from beingused to repay business debts.

(iii) Stable existence: Death,bankruptcy or insanity of the membersdo not affect continuity of a cooperativesociety. A society, therefore, operatesunaffected by any change in themembership.

(iv) Economy in operations: Themembers generally offer honoraryservices to the society. As the focus ison elimination of middlemen, this helpsin reducing costs. The customers orproducers themselves are members of

the society, and hence the risk of baddebts is lower.

(v) Support from government: Thecooperative society exemplifies the ideaof democracy and hence finds supportfrom the Government in the form of lowtaxes, subsidies, and low interest rateson loans.

(vi) Ease of formation: The cooperativesociety can be started with a minimumof ten members. The registrationprocedure is simple involving a few legalformalities. Its formation is governed bythe provisions of Cooperative SocietiesAct 1912.

Limitations

The cooperative form of organisationsuffers from the following limitations:

(i) Limited resources: Resources of acooperative society consists of capitalcontributions of the members withlimited means. The low rate of dividendoffered on investment also acts as adeterrent in attracting membership ormore capital from the members.

(ii) Inefficiency in management:Cooperative societies are unable toattract and employ expert managersbecause of their inability to pay themhigh salaries. The members who offerhonorary services on a voluntary basisare generally not professionallyequipped to handle the managementfunctions effectively.

(iii) Lack of secrecy: As a result ofopen discussions in the meetings ofmembers as well as disclosureobligations as per the Societies Act

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(7), it is difficult to maintain secrecyabout the operations of a cooperativesociety.

(iv) Government control: In return ofthe privileges offered by thegovernment, cooperative societies haveto comply with several rules andregulations related to auditing ofaccounts, submission of accounts, etc.Interference in the functioning of thecooperative organisation through thecontrol exercised by the statecooperative departments also negativelyaffects its freedom of operation.

(v) Differences of opinion: Internalquarrels arising as a result of contraryviewpoints may lead to difficulties indecision making. Personal interestsmay start to dominate the welfaremotive and the benefit of othermembers may take a backseat ifpersonal gain is given preference bycertain members.

2.5.1 Types of CooperativeSocieties

Various types of cooperative societiesbased on the nature of their operationsare described below:

(i) Consumer’s cooperative societies:The consumer cooperative societies areformed to protect the interests ofconsumers. The members comprise ofconsumers desirous of obtaining goodquality products at reasonable prices.The society aims at eliminatingmiddlemen to achieve economy inoperations. It purchases goods in bulkdirectly from the wholesalers and sellsgoods to the members, therebyeliminating the middlemen. Profits, ifany, are distributed on the basis of eithertheir capital contributions to the societyor purchases made by individualmembers.

Amul’s amazing Cooperative ventures!

Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many

illiterate), converts the milk into branded, packaged products, and delivers

goods worth Rs. 6 crore (Rs. 60 million) to over 5,00,000 retail outlets across

the country.

It all started in December 1946 with a group of farmers keen to free themselves

from intermediaries, gain access to markets and thereby ensure maximum

returns for their efforts. Based in the village of Anand, the Khera District Milk

Cooperative Union (better known as Amul) expanded exponentially. It joined

hands with other milk cooperatives, and the Gujarat network now covers 2.12

million farmers, 10,411 village level milk collection centres and fourteen district

level plants (unions). Amul is the common brand for most product categories

produced by various unions: liquid milk, milk powder, butter, ghee, cheese,

cocoa products, sweets, ice-cream and condensed milk. Amul’s sub-brands

include variants such as Amulspray, Amulspree, Amulya and Nutramul.

Source: Adapted from Pankaj Chandra, “Rediff.com”, Business Special, September 2005.

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44 BUSINESS STUDIES

(ii) Producer’s cooperative societies:These societies are set up to protect theinterest of small producers. Themembers comprise of producersdesirous of procuring inputs forproduction of goods to meet thedemands of consumers. The societyaims to fight against the big capitalistsand enhance the bargaining power ofthe small producers. It supplies rawmaterials, equipment and other inputsto the members and also buys theiroutput for sale. Profits among themembers are generally distributed onthe basis of their contributions to thetotal pool of goods produced or soldby the society.

(iii) Marketing cooperative societies:Such societies are established to helpsmall producers in selling their

products. The members consist ofproducers who wish to obtainreasonable prices for their output. Thesociety aims to eliminate middlemenand improve competitive position of itsmembers by securing a favourablemarket for the products. It pools theoutput of individual members andperforms marketing functions liketransportation, warehousing,packaging, etc., to sell the output atthe best possible price. Profits aredistributed according to eachmember’s contribution to the pool ofoutput.

(iv) Farmer’s cooperative societies:These societies are established toprotect the interests of farmers byproviding better inputs at a reasonablecost. The members comprise farmers

Indian Companies in League of FORTUNEGLOBAL Organisations

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who wish to jointly take up farmingactivities. The aim is to gain the benefitsof large scale farming and increase theproductivity. Such societies providebetter quality seeds, fertilisers,machinery and other moderntechniques for use in the cultivation ofcrops. This helps not only in improvingthe yield and returns to the farmers,but also solves the problems associatedwith the farming on fragmented landholdings.

(v) Credit cooperative societies:Credit cooperative societies areestablished for providing easy crediton reasonable terms to the members.The members comprise of persons whoseek financial help in the form of loans.The aim of such societies is to protectthe members from the exploitation oflenders who charge high rates ofinterest on loans. Such societies provideloans to members out of the amountscollected as capital and deposits fromthe members and charge low ratesof interest.

(vi) Cooperative housing societies:Cooperative housing societies areestablished to help people with limitedincome to construct houses atreasonable costs. The members of thesesocieties consist of people who aredesirous of procuring residentialaccommodation at lower costs. The aimis to solve the housing problems of themembers by constructing houses andgiving the option of paying ininstalments. These societies constructflats or provide plots to members onwhich the members themselves canconstruct the houses as per their choice.

2.6 JOINT STOCK COMPANY

A company is an association of personsformed for carrying out business ac-tivities and has a legal status indepen-dent of its members. A company canbe described as an artificial person hav-ing a separate legal entity, perpetualsuccession and a common seal. Thecompany form of organisation is gov-erned by The Companies Act, 2013. Asper section 2(20) of Act 2013, a com-pany means company incorporatedunder this Act or any other previouscompany law.

The shareholders are the owners ofthe company while the Board ofDirectors is the chief managing bodyelected by the shareholders. Usually,the owners exercise an indirect controlover the business. The capital of thecompany is divided into smaller partscalled ‘shares’ which can be transferredfreely from one shareholder to anotherperson (except in a private company).

Features

The definition of a joint stock companyhighlights the following features of acompany.

(i) Artificial person: A company is acreation of law and exists independentof its members. Like natural persons,a company can own property, incurdebts, borrow money, enter intocontracts, sue and be sued but unlikethem it cannot breathe, eat, run, talkand so on. It is, therefore, called anartificial person.

(ii) Separate legal entity: From theday of its incorporation, a companyacquires an identity, distinct from its

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46 BUSINESS STUDIES

members. Its assets and liabilities areseparate from those of its owners. Thelaw does not recognise the businessand owners to be one and the same.

(iii) Formation: The formation of acompany is a time consuming, expensiveand complicated process. It involves thepreparation of several documents and

officials for running the business. Thedirectors hold a position of immensesignificance as they are directlyaccountable to the shareholders for theworking of the company. Theshareholders, however, do not have theright to be involved in the day-to-dayrunning of the business.

compliance with several legalrequirements before it can startfunctioning. Incorporation of companiesis compulsory under The Companies Act2013 or any of the previous companylaw, as state earlier. Such companieswhich are incorporated undercompanies Act 1956 or any company lawshall be included in the list of companies.

(iv) Perpetual succession: A companybeing a creation of the law, can bebrought to an end only by law. It willonly cease to exist when a specificprocedure for its closure, calledwinding up, is completed. Membersmay come and members may go, butthe company continues to exist.

(v) Control: The management andcontrol of the affairs of the company isundertaken by the Board of Directors,which appoints the top management

(vi) Liability: The liability of themembers is limited to the extent of thecapital contributed by them in acompany. The creditors can use only theassets of the company to settle theirclaims since it is the company and notthe members that owes the debt. Themembers can be asked to contribute tothe loss only to the extent of the unpaidamount of share held by them. SupposeAkshay is a shareholder in a companyholding 2,000 shares of Rs.10 each onwhich he has already paid Rs. 7 pershare. His liability in the event of lossesor company’s failure to pay debts canbe only up to Rs. 6,000 — the unpaidamount of his share capital (Rs. 3 pershare on 2,000 shares held in thecompany). Beyond this, he is not liableto pay anything towards the debts orlosses of the company.

Previous Company law means any of the laws specified below:1. Act relating to companies in force before the Indian companies Act, 1866

(10 of 1866).2. The Indian companies Act, 1866 (10 of 1866).3. The Indian companies Act, 1882 (6 of 1882).4. The Indian companies Act, 1913 (6 of 1913).5. The Registration of Transferred Companies Ordinance, 1942 (ordinance

42 of 1942).6. The Companies Act, 1956.

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(vii) Common seal: The companybeing an articial person cannot sign itsname by itself. Therefore, every companyis required to have its own seal whichacts as official signature of the company.Any document which does not carry thecommon seal of the company is not abinding on the company.

(viii) Risk bearing: The risk of lossesin a company is borne by all the shareholders. This is unlike the case of soleproprietorship or partnership firmwhere one or few persons respectivelybear the losses. In the face of financialdifficulties, all shareholders in acompany have to contribute to thedebts to the extent of their shares inthe company’s capital. The risk of lossthus gets spread over a large numberof shareholders.

Merits

The company form of organisationoffers a multitude of advantages, someof which are discussed below.

(i) Limited liability: The shareholdersare liable to the extent of the amountunpaid on the shares held by them.Also, only the assets of the companycan be used to settle the debts, leavingthe owner’s personal property free fromany charge. This reduces the degree ofrisk borne by an investor.

(ii) Transfer of interest: The easeof transfer of ownership adds to theadvantage of investing in a companyas the share of a public limitedcompany can be sold in the marketand as such can be easily converted

into cash in case the need arises.This avoids blockage of investmentand presents the company as afavourable avenue for investmentpurposes.

(iii) Perpetual existence: Existence ofa company is not affected by the death,retirement, resignation, insolvency orinsanity of its members as it has aseparate entity from its members. Acompany will continue to exist even ifall the members die. It can be liquidatedonly as per the provisions of theCompanies Act, 2013.

(iv) Scope for expansion: Ascompared to the sole proprietorshipand partnership forms of organisation,a company has large financialresources. Further, capital can beattracted from the public as well asthrough loans from banks and financialinstitutions. Thus there is greater scopefor expansion. The investors areinclined to invest in shares because ofthe limited liability, transferableownership and possibility of highreturns in a company.

(v) Professional management: Acompany can afford to pay highersalaries to specialists and professionals.It can, therefore, employ people whoare experts in their area ofspecialisations. The scale of operationsin a company leads to division of work.Each department deals with aparticular activity and is headed by anexpert. This leads to balanced decisionmaking as well as greater efficiency inthe company’s operations.

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48 BUSINESS STUDIES

Limitations

The major limitations of a companyform of organisation are as follows:

(i) Complexity in formation: Theformation of a company requiresgreater time, effort and extensiveknowledge of legal requirements andthe procedures involved. As comparedto sole proprietorship and partnershipform of organisations, formation of acompany is more complex.

(iii) Impersonal work environment:Separation of ownership andmanagement leads to situations inwhich there is lack of effort as well aspersonal involvement on the part ofthe officers of a company. The largesize of a company further makes itdifficult for the owners and topmanagement to maintain personalcontact with the employees,customers and creditors.

(ii) Lack of secrecy: The Companies Actrequires each public company to providefrom time-to-time a lot of information tothe office of the registrar of companies.Such information is available to thegeneral public also. It is, therefore,difficult to maintain complete secrecyabout the operations of company.

(iv) Numerous regulations: Thefunctioning of a company is subject tomany legal provisions and compulsions.A company is burdened with numerousrestrictions in respect of aspectsincluding audit, voting, filing of reportsand preparation of documents, and isrequired to obtain various certificates

Pen is mightier than the Sword:The Case of Luxor Writing Instruments Pvt. Ltd.

In the year 1963, a young gentleman armed with the power of hard work andambition, started a new era in the field of writing instruments. At a tenderage of 19, he started a small manual assembly shop in Sadar Bazaar area inDelhi where he manufactured fountain pens under the name Luxor WritingInstruments Pvt. Ltd. (LWIPL).

Being awarded the coveted ‘Number One Writing Instruments Exporter’

award consecutively for three years, LWIPL has been given the exclusiverights of manufacturing and distributing four international brands in India,viz., Pilot, Papermate, Parker and Waterman.

Luxor Writing Instruments Pvt. Ltd. has the largest share of this market ofover 20 percent, with a turnover pushing way beyond the Rs. 150 crore mark.As of today Luxor is a leading manufacturer and exporter of writinginstruments from India. It is currently exporting over 15 percent of theoutput and has four manufacturing facilities in New Delhi and three atMumbai. It employs over 600 people. It is the leader in most segments of themarket, manufacturing and distributing a wide variety of pens for variousapplications and needs.

Source: http://www.luxorparker.com

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from different agencies, viz., registrar,SEBI, etc. This reduces the freedom ofoperations of a company and takes awaya lot of time, effort and money.

(v) Delay in decision making:Companies are democratically managedthrough the Board of Directors which isfollowed by the top management, middlemanagement and lower levelmanagement. Communication as well asapproval of various proposals maycause delays not only in takingdecisions but also in acting upon them.

(vi) Oligarchic management: Intheory, a company is a democraticinstitution wherein the Board ofDirectors are representatives of theshareholders who are the owners. Inpractice, however, in most large sizedorganisations having a multitude ofshareholders; the owners haveminimal influence in terms ofcontrolling or running the business.It is so because the shareholders are

spread all over the country and a very

small percentage attend the generalmeetings. The Board of Directors assuch enjoy considerable freedom inexercising their power which theysometimes use even contrary to theinterests of the shareholders.Dissatisfied shareholders in such asituation have no option but to selltheir shares and exit the company. Asthe directors virtually enjoy the rightsto take all major decisions, it leads torule by a few.

(vii) Conflict in interests: There maybe conflict of interest amongst variousstakeholders of a company. Theemployees, for example, may beinterested in higher salaries, consumersdesire higher quality products at lowerprices, and the shareholders wanthigher returns in the form of dividendsand increase in the intrinsic value oftheir shares. These demands poseproblems in managing the company asit often becomes difficult to satisfy suchdiverse interests.

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50 BUSINESS STUDIES

2.6.1 Types of Companies

A company can be either a private or apublic company. These two types ofcompanies are discussed in detail in thefollowing paragraphs.

Private Company

A private company means a companywhich:(a) restricts the right of members to

transfer its shares;(b) has a minimum of 2 and a maximum

of 200 members, excluding thepresent and past employees;

(c) does not invite public to subscribeto its securities and

It is necessary for a private companyto use the word private limited after itsname. If a private company contravenesany of the aforesaid provisions, it ceasesto be a private company and loses allthe exemptions and privileges to whichit is entitled.The following are some of the privileges

of a private limited company as againsta public limited company:1. A private company can be formed

by only two members whereasseven people are needed to form apublic company.

2. There is no need to issue aprospectus as public is not invitedto subscribe to the shares of aprivate company.

3. Allotment of shares can be donewithout receiving the minimumsubscription. A private limitedcompany can start business assoon as it receives the certificate ofincorporation.

4. A private company needs to haveonly two directors as against theminimum of three directors in thecase of a public company. Howeverthe maximum number of directorsfor both types of companies isfifteen.

5. A private company is not requiredto keep an index of members whilethe same is necessary in the caseof a public company.

Public Company

A public company means a companywhich is not a private company. As perThe Companies Act, a public companyis one which:(a) has a minimum of 7 members and

no limit on maximum members;(b) has no restriction on transfer

securities; and(c) is not prohibited from inviting the

public to subscribe to its securities.However, a private company which is asubsidiary of a public company is alsotreated as a public company.

2.7 CHOICE OF FORM OF BUSINESS

ORGANISATION

After studying various forms of

business organisations, it is evident that

each form has certain advantages as well

as disadvantages. It, therefore, becomes

vital that certain basic considerations are

kept in mind while choosing an

appropriate form of organisation. The

important factors determining the

choice of organisation are listed in Table

2.4 and are discussed as follows:

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(i) Cost and ease in setting up theorganisation: As far as initial

business setting-up costs are

concerned, sole proprietorship is the

most inexpensive way of starting a

business. However, the legal

requirements are minimum and the

scale of operations is small. In case of

partnership also, the advantage of less

legal formalities and lower cost is there

because of limited scale of operations.

Cooperative societies and companies

have to be compulsorily registered.

Formation of a company involves a

lengthy and expensive legal procedure.

From the point of view of initial cost,

therefore, sole proprietorship is the

preferred form as it involves least

expenditure. Company form of

organisation, on the other hand, is

more complex and involves greater

costs.

(ii) Liability: In case of soleproprietorship and partnership firms,the liability of the owners/partners isunlimited. This may call for paying thedebt from personal assets of the owners.In joint Hindu family business, only thekarta has unlimited liability. Incooperative societies and companies,however, liability is limited and creditorscan force payment of their claims onlyto the extent of the company’s assets.Hence, from the point of view ofinvestors, the company form oforganisation is more suitable as the riskinvolved is limited.

(iii) Continuity: The continuity of soleproprietorship and partnership firms isaffected by such events as death,insolvency or insanity of the owners.However, such factors do not affect thecontinuity of business in the case oforganisations like joint Hindu familybusiness, cooperative societies and

Table 2.4 Factors influencing the choice of form of Business Organisation

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companies. In case the business needsa permanent structure, company formis more suitable. For short termventures, proprietorship or partnershipmay be preferred.

(iv) Management ability: A soleproprietor may find it difficult to haveexpertise in all functional areas ofmanagement. In other forms oforganisations like partnership andcompany, there is no such problem.Division of work among the membersin such organisations allows themanagers to specialise in specificareas, leading to better decisionmaking. But this may lead tosituations of conflicts because ofdifferences of opinion amongst people.Further, if the organisation’soperations are complex in nature andrequire professionalised management,company form of organisation is abetter alternative. Proprietorship orpartnership may be suitable, wheresimplicity of operations allow evenpeople with limited skills to run thebusiness. Thus, the nature ofoperations and the need forprofessionalised management affectthe choice of the form of organisation.

(v) Capital considerations: Companiesare in a better position to collect largeamounts of capital by issuing sharesto a large number of investors.Partnership firms also have theadvantage of combined resources of allpartners. But the resources of a soleproprietor are limited. Thus, if thescale of operations is large, company

form may be suitable whereas formedium and small sized business onecan opt for partnership or soleproprietorship. Further, from the pointof view of expansion, a company ismore suitable because of its capabilityto raise more funds and invest inexpansion plans. It is precisely for thispurpose that in our opening caseNeha’s father suggested she shouldconsider switching over to the companyform of organisation.

(vi) Degree of control: If direct controlover operations and absolute decisionmaking power is required,proprietorship may be preferred. Butif the owners do not mind sharingcontrol and decision making,partnership or company form oforganisation can be adopted. Theadded advantage in the case ofcompany form of organisation is thatthere is complete separation ofownership and management and it isprofessionals who are appointed toindependently manage the affairs ofa company.

(vii) Nature of business: If directpersonal contact is needed with thecustomers such as in the case of agrocery store, proprietorship may bemore suitable. For large manufacturingunits, however, when direct personalcontact with the customer is notrequired, the company form oforganisation may be adopted. Similarly,in cases where services of a professionalnature are required, partnership form ismuch more suitable.

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54 BUSINESS STUDIES

Key Terms

Sole proprietorship Partnership Joint Hindu Family

Mutual agency Cooperative Societies Joint Stock Company

Perpetual succession Artificial person Holding company

Co-parceners Incorporation of a Company

SUMMARY

Forms of business organisation refers to the types of organisations whichdiffer in terms of ownership and management. The major forms oforganisation include proprietorship, partnership, joint Hindu familybusiness, cooperative society and company.

Sole proprietorship refers to a form of organisation where business isowned, managed and controlled by a single individual who bears all therisks and is the only recipient of all the profits. Merits of this form oforganisation include quick decision making, direct incentive, personalsatisfaction, and ease of formation and closure. But this form oforganisation suffers from limitations of limited resources, unstable lifespan of business, unlimited liability of sole proprietor and his/her limitedmanagerial ability.

Partnership is defined as an association of two or more persons who agreeto carry on a business together and share the profits as well as bear riskscollectively. Major advantages of partnership are: ease of formation andclosure, benefits of specialisation, greater funds, and reduction of risk. Majorlimitations of partnership are unlimited liability, possibility of conflicts, lackof continuity and lack of public confidence. As there are different types ofpartners such as active, sleeping, secret and nominal partners; so is thecase with types of partnerships which can vary from general partnership,limited partnership, partnership at will to particular partnership.

It would not be out of place tomention here that the factors statedabove are inter-related. Factors likecapital contribution and risk vary withthe size and nature of business, andhence a form of business organisationthat is suitable from the point of viewof the risks for a given business when

run on a small scale might not beappropriate when the same businessis carried on a large scale. It is,therefore, suggested that all the relevantfactors must be taken intoconsideration while making a decisionwith respect to the form of organisationthat should be adopted.

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Joint Hindu family business is a business owned and carried on by themembers of a Hindu Undivided Family, which is governed by the Hindulaw. Karta — the oldest male member of the family — controls the business.The strong points of joint Hindu family business include effective control,stability in existence, limited liability and increased loyalty among familymembers. But this form of organisation too suffers from certain limitationssuch as limited resources, lack of incentives, dominance of the karta andlimited managerial ability.

A cooperative society is a voluntary association of persons who get togetherto protect their economic interests. The major advantages of a cooperativesociety are equality in voting, members’ limited liability, stable existence,economy in operations, support from government, and ease of formation.But this form of organisation suffers from weaknesses such as limitedresources, inefficiency in management, lack of secrecy, government control,and differences among members in regard to the way society should bemanaged and organised. Based on their purpose and nature of members,various types of societies that can be formed include: consumers cooperativesociety, producers cooperative society, marketing cooperative society, farmerscooperative society, credit cooperative society, and cooperative housingsociety.

A company, on the other hand, may be defined as an artificial person,existing only in the eyes of the law with perpetual succession and havinga separate legal identity. While major advantages of a company form oforganisation are members’ limited liability, transfer of interest, stableexistence, scope for expansion, and professional management; its keylimitations are: complexity in formation, lack of secrecy, impersonal workenvironment, numerous regulations, delay in decision making, oligarchicmanagement, and conflict of interests among different shareholders.

Companies can be of two types — private and public. A private company isone which restricts transfer of shares and does not invite the public tosubscribe to its securities. A public company, on the other hand, is allowedto raise its funds by inviting the public to subscribe to its securities.Furthermore, there is a free transferability of securities in the case of apublic company.

Choice of form of organisation: Selection of an appropriate form oforganisation can be made after taking various factors into consideration.Initial costs, liability, continuity, capital considerations, managerial ability,degree of control and nature of business are the key factors that need totaken into account while deciding about the suitable form of organisationfor one’s business.

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56 BUSINESS STUDIES

EXERCISES

Short Answer Questions1. Compare the status of a minor in a Joint Hindu family business with

that in a partnership firm.

2. If registration is optional, why do partnership firms willingly go throughthis legal formality and get themselves registered? Explain.

3. State the important privileges available to a private company.

4. How does a cooperative society exemplify democracy and secularism?Explain.

5. What is meant by ‘partner by estoppel’? Explain.

6. Briefly explain the following terms in brief.(a) Perpetual succession (b) Common seal(c) Karta (d) Artificial person

Long Answer Questions

1. What do you understand by a sole proprietorship firm? Explain its meritsand limitation?

2. Why is partnership considered by some to be a relatively unpopularform of business ownership? Explain the merits and limitations ofpartnership.

3. Why is it important to choose an appropriate form of organisation?Discuss the factors that determine the choice of form of organisation.

4. Discuss the characteristics, merits and limitation of cooperative formof organisation. Also describe briefly different types of cooperativesocieties.

5. Distinguish between a Joint Hindu family business and partnership.

6. Despite limitations of size and resources, many people continue to prefersole proprietorship over other forms of organisation? Why?

Application Questions

1. In which form of organisation is a trade agreement made by one ownerbinding on the others? Give reasons to support your answer.

2. The business assets of an organisation amount to Rs. 50,000 but thedebts that remain unpaid are Rs. 80,000. What course of action canthe creditors take if

(a) The organisation is a sole proprietorship firm

(b) The organisation is a partnership firm with Anthony and Akbar aspartners. Which of the two partners can the creditors approachfor repayment of debt? Explain giving reasons

3. Kiran is a sole proprietor. Over the past decade, her business has grownfrom operating a neighbourhood corner shop selling accessories such

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as artificial jewellery, bags, hair clips and nail art to a retail chain withthree branches in the city. Although she looks after the varied functionsin all the branches, she is wondering whether she should form acompany to better manage the business. She also has plans to openbranches countrywide.

(a) Explain two benefits of remaining a sole proprietor

(b) Explain two benefits of converting to a joint stock company

(c) What role will her decision to go nationwide play in her choice ofform of the organisation?

(d) What legal formalities will she have to undergo to operate businessas a company?

Projects

Divide students into teams to work on the following(a) To study the profiles of any five neighbourhood grocery/stationery

store

(b) To conduct a study into the functioning of a Joint Hindu familybusinesses

(c) To enquire into the profile of five partnerships firms

(d) To study the ideology and working of cooperative societies in thearea

(e) To study the profiles of any five companies (inclusive of both privateand public companies)

Assignments

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

Notes

1. Some of the following aspects can be assigned to the students forundertaking above mentioned studies.

Nature of business, size of the business measured in terms of capitalemployed, number of persons working, or sales turnover, problems faced,Incentive, reason behind choice of a particular form, decision makingpattern, willingness to expand and relevant considerations, Usefulnessof a form, etc.

2. Students teams should be encouraged to submit their findings andconclusions in the form of project reports and multi-media presentations.

3. The specimen partnership deed is available as e-resource in theembedded QR code.

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