module-i part b

7/29/2019 MODULE-I Part B

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FORMS OF BUSINESSORGANISATION

Kishore Mishra

Asst. Professor


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Proprietorship

Partnership

Co-operatives


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Introduction. There are three types of business organization:

Proprietorship

Partnership

Corporation


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ProprietorshipDEFINITIONS:

A business enterprise exclusively owned, managed and

controlled by a single person with all authority, responsibility and

risk.

It is also known as individual proprietorship or single entrepreneurship.

Any person who carries on a business exclusively on his own accountand at his own risk is known as a sole trade.

The sole trader manages the business himself, bears all risks aloneand gets all profits by virtue of the nature of this form or organization.

The individual may run the business alone with the help of his own skill

and intelligence or may employ a few employees for that purpose.


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FORMATION:

No Formalities or Legal Documentation;

May be Implied from Conduct or Actions


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SALIENT FEATURES:

Single Ownership : A sole trading concern is owned by one individual. It is runentirely at his risk of loss. The sole trader provides both capital and management

to the business.

Common Identity : A sole tradership concern has no separate legal entityindependent of the owner. The owner and the business concern are one and thesame. The sole trader owns everything the business owns and he owes

everything the business owes.

Capital : In sole tradership, the capital is employed by the owner himself from hispersonal resources. He may also borrow money from his friends and relatives, ifhe cannot depend solely on his personal resources.


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SALIENT FEATURES:

Unlimited Liability : The liability of the proprietor for the debts of the business isunlimited. The creditors have the right to recover their dues even from thepersonal property of the proprietor in case the business assets are not sufficient

to pay their debts.

One Man Control : Sole tradership is basically one man show. The sole traderprovides management to the business. He takes all the decisions, procuresmaterial resources, employs workers and directs and controls the affairs of theenterprise. He is not required to consult anyone else in taking any decision.

Though the sole trader may delegate some of this authority to his assistants, butthe ultimate authority to manage and control rests with him.

Profits and Losses : The surplus arising in the business of the sole traderentirely belong to him and similarly all the business losses and risks are to beborne by him alone.


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ADVANTAGES:

Ease of Formation : The establishment of a sole tradership concern is easier ascompared to other forms of organization. A person with a small amount of capitalcan start the business without undergoing much legal formalities. Procurement of

license may be a necessity to deal in particular commodities like drugs, liquor etc.

Flexibility : The sole trader is free to change the nature and scope of hisbusiness operations, whenever the situation demands. The flexibility is availablebecause the sole trader is the sole owner of the business.

Quick Decisions : Sole proprietorship concern facilitates quick decision-makingand prompt action. Exclusive control and direction of the proprietor result inincreased efficiency, production of quality products and reduction of costs. Sincethe owner is the SupremeJudge in all matters pertaining to his business, he cantake quick decisions and implement them without any delay.


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ADVANTAGES:

Secrecy : It is easy to preserve secrecy in business. The important clues ofbusiness developed by the sole trader by his tact, foresight and skill can be kept

as a closely guarded secret. In this form, there is also no need to discloseaccounts or any other material fact to the public.

Personal Touch : A sole trader can maintain personal contacts with hiscustomers. Direct contacts will enable the proprietor to know the nature of hiscustomers and their tastes, like and dislikes. Close personal touch with the

customers with enhance the reputation of the firm.

Direct Motivation : In this form of business organization, the proprietor gets allthe profits and bears all the risks and losses. Thus, there is a direct relationshipbetween effort and reward. This will motivate the owner of the business.


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ADVANTAGES:

Independent Way of Life: Sole proprietorship offers an independent way of lifefor people who have necessary skills, but do not wish to serve others. This

provides an excellent opportunity for self-employment to persons of small meanswith personal skills.

Minimum government Regulations : The sole tradership firm is subject to theminimum control of Government regulations. The sole trader has to comply with

income tax, sales tax and labour laws etc. But it is not subject to speciallegislations as in case of companies and partnership firms. There is no need ofregistration. Moreover dissolution of the firm is also very easy.


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DISADVANTAGES:

Limited Capital : The financial resources which a sole trader can raise arelimited. He can either depend on his personal resources or on his borrowingcapacity. The borrowing capacity depends on his assets and credit worthiness.The limitation of financial resources may put hurdles in the expansion of thebusiness.

Limited Managerial Skill :All the managerial functions which are essential forthe successful operation of a business are performed by the sole trader. Thus,benefits of specialization are not available. Moreover, the individual may not beable to perform all the managerial functions because of limitation of time, energy,skills and imagination. Because of limited scale of operation and financialresources, it may not be feasible to secure the services of experts in variousfields like production, purchasing and marketing.


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DISADVANTAGES:

Unlimited Liability : The liability of the sole trader is unlimited in the sense that thebusiness creditors can recover their debts even from the personal assets of the proprietor.The proprietor may be completely ruined in case of failure of his business. This factor puts a

ceiling on the growth and expansion of his business.

Uncertainty : There is wide uncertainty about the continuity of the business because thesole trader operates on a small scale and his activities are less diversified. The owner maybe compelled to close his business in which he concentrates. Moreover, death and insanityof the proprietor also lead to closure of business. In short, business sinks and swims withthe proprietor.

Limited Opportunities : Since the scale of operations is relatively small, the sole tradercannot avail the benefits of all business opportunities. Since there is one and the samepersons who provides capital and management, the sole trader may not be ready to takevarious risks which is essential for the growth of any business. Moreover, because of smallscale operations, the trader is not able to reap the economies of large scale production,purchasing and marketing.


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SUITABILITY OF FORMATION:

The sole tradership form of organization is highly suitable in thefollowing cases :

Small business requiring modest capital and limited managerial talent as in case ofretail stores.

In those lines of business where there is a need for greater personal attention tocustomers as in tailoring, professional services like medicine and law.

In those lines of business where the demand of products is often influenced byseasonal trends and fashions.

In the production of un-standardized goods like embroidery or artistic things.

Where the individual has certain skills with the help of which he wants to earn hislivelihood independently.

For catering to the demands of local market like perishable products, laundries,grocery stores and confectioneries.


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Partnership As defined by J.L. Hanson, "a partnership is a form of business

organization in which two or more persons up to a maximum oftwenty join together to undertake some form of businessactivity".

The Indian Partnership Act, I932 defined partnership as "therelation between persons who have agreed to share the profitsof business carried on by all or any of them acting for all".

The Uniform Partnership Act of the USA defines a partnership "asan association of two or more persons to carry on as co-owners a business for profit".

Based on the above definitions, we can state that partnership is anassociation of two or more persons who have joined togetherto share the profits of business carried on by all or any of themacting for all.


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The persons who own the partnership business are individuallycalled 'partners' and collectively known as the 'firm or 'partnershipfirm'.

On an agreed basis, partners contribute to capital and share theresponsibility of running the business.

However, in some cases one partner may provide the whole ormajor portion of the capital and others contribute technical andmanagerial skills with or without some capital.

All such terms and conditions of partnership are usually mentionedin the partnership agreement.


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FORMATION:

Written

or Oral Agreement

or May be Implied from Conduct or Actions


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SALIENT FEATURES:

Plurality of persons: To form a partnership firm, there should-be at least twopersons. The maximum limit on the number of persons is ten for banking

business and twenty for other types of business.

Contractual relationship: Partnership is created by an agreement betweenpersons called 'partners'. In other words, a person can become a partner only onthe basis of a contract. This contract could be oral, written or implied.

Profit sharing: There must be an agreement among the partners to share theprofits and losses of the business of the partnership firm. This is one of the basicelements of partnership. If two or more persons jointly own some property andshare its income, it is not regarded as partnership.


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SALIENT FEATURES:

Existence of business: The purpose of the agreement among the partners is todo some lawful business and share profits. If the purpose is something other thanbusiness, it should not be treated as partnership. For example, if the purpose is

to carry some charitable work, it will not be treated as partnership.

Principal-agent relationship: The business of the firm may be carried on by allor one or more partners acting for all the partners. Every partner is entitled totake part in the operations of the firm. In dealing with other parties, each partneris entitled to represent the firm and other partners in respect of the business of

the firm. All partners are bound by his acts done in the ordinary course ofbusiness and in firm's name. In this sense a partner is agent of the firm and theother partners.


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SALIENT FEATURES:

Unlimited liability: In respect of business debts, each partner has unlimitedliability. This means that if the assets of the firms are not sufficient to meet theobligations of the firm, the partners have to pay from their private assets. Thecreditors can even realize the whole of their dues from one of the partners. Thus,all the partners are jointly and severally liable for all business debts andobligations.

Good faith and honesty: Apartnership agreement rests on good faith amongthe partners. The partners must be honest to each other and trust each other.They must disclose every information about the business and present trueaccounts to one another.

Restriction on transfer of share: A partner cannot transfer his share to anoutsider without the consent of all the other partners.


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Classification of Partners

Based on the extent of participation in the functioning of the business,we can classify partners into: la) active partners, and (b) sleeping partners.

a) Active partner: If a partner takes an active part in the management of the

business, we call him as active partner. He is also known as a 'working partner'.

b) Sleeping partner: If the partner is not actively associated with the working of the

partnership firm, we call him a sleeping partner. A sleeping business partner simply

invests his capital. He does not participate in the functioning of the firm. Such a

partner is also known as a 'dormant partner'.


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Based on the sharing of profits, partners may be classified into: (a)nominal partners, and (b) partner in profits.

a) Nominal partner:A partner who just lends his name to the partnership is known

as a nominal partner. He neither invests his capital nor participates in the day-to-

day working and management of the firm. Such partners are not entitled to a shareof profits, but they are liable to other parties for all the acts of the firm.

b) Partner in profits: A partner who shares the profits of the business without

being liable for losses is called a partner in profits. As a rule, he will not take anypart in the management of the business. This is applicable to a minor who is

admitted to the benefits of the firm.


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Based on the behaviour and conduct exhibited, the partners may bedivided into: a) partner by estoppels, and (b) partner by holding out.

a) Partner by estoppels: A person who behaves in the public in such a fashion as

to give an impression that he is one of the partners in a partnership firm is called a

partner by estoppels. Such partners are not entitled to profits but are fully liable asregards the firms obligations.

b) Partners by holding out: If a particular partner of a firm represents that another

person is also a partner of the firm, and if such a person does not disclaim thepartnership relationship even after coming to know about it, such person is called a

'partner by holding out'. Such partners are not entitled to profits but are liable as

regards the obligations of the firm.


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Based on liabilities also, partners may be classified into two categories: (a) limitedpartners. and (b) general partners.

a) Limited partner: The liability of such a partner is limited to the extent of the

capital contributed by him. He is not entitled to take part in the management of the

business, but he can advise the other general members. His acts do not bind thefirm. He has right to inspect the books of the firm for his information. Such partners

are also called 'special partners'.

b) General partner: He is also called 'unlimited partner. His liability is unlimited and

he is entitled to participate in the management of the business. Every partner whois not a limited partner is treated as a general partner.


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ContinuesADVANTAGES:

Easy formation: Although the formation of a partnership firm is not as easy asthe sole proprietorship, but it is much less difficult as compared to a company.Tile partners agree to do business together and draw up and sign the partnershipagreement. After that there are no complex government laws regulating the

establishment of the partnership.

More capital available: Unlike sole proprietorship, there are two or morepartners in partnership firms. So a partnership firm does not have to rely on asingle individual as the source or its funds. The added financial strength of the

partners increases the borrowing capacity of the firm.

Flexibility: Like Sole proprietorship, tlie partnership business is also owned andrun by the partners themselves. They can easily appreciate and quickly respondto the changing conditions.


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ADVANTAGES: Secrecy: In partnership firms, some secrecy can be maintained because there is no

obligation to publish accounts of the firm.

Keen interest: Since partners are liable to losses and risks of the business, they take keeninterest in the affairs of' the business.

Protection: Due to the rule of unanimity in fundamental matters, the rights of all partners arefully protected If a partner is dissatisfied with the working of the firn, he can ask fordissolution of the firm and withdraw from the business.

Checks ant1 controls over careless decisions: Since the partnership is run on collective

basis and all partners participate in major decisions. there is lesser scope for reckless andhasty decisions.

Diffusion of risk: The losses of the firm will be shared by all the partners. Hence, the shareof loss in the case of each partner will be less than that sustained in sole proprietorship.


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ADVANTAGES: Checks and controls over careless decisions: Since the partnership is run on

collective basis and all partners participate in major decisions. there is lesserscope for reckless and hasty decisions.

More diverse-skills and expertise: The partnership involves more people indecision making because there are more owners. An ideal partnership bringstogether partners who complement each other, not partners who have the samebackground and experience. One partner might be a specialist in manufacturing,another in marketing, and the third partner might be an accountant. Combined

judgment of all these partners often leads to better decisions than otherwise.

Diffusion of risk: The losses of the firm will be shared by all the partners.Hence, the share of loss in the case of each partner will be less than thatsustained in sole proprietorship.


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DISADVANTAGES: Limited capital: Since there is a limit of' maximum partners (20 in non-banking

firms and 10 in banking firms), the capital raising capacity of the partnership firms

is limited as compared to a joint stock company.

Unlimited liability: The most important drawback of a partnership Sirm is that

the liability of the partners is unlimited.

No public confidence: Since the accounts are not published and publicized, thefirm may not be able to command confidence of the public.

Non-transferability of interest: No partner can transfer his interest in a firm

without the consent of other partners.


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Co-operatives The word co-operative means living & working together.

A co-operative organization is a voluntary association ofpersons joining together on equal basis for the fulfillment oftheir economic & other interest.

It is generally formed and registered under the co-operative societiesact ,1912.

The uniqueness of co-operative lies in its ethical approach-serviceand sacrifice.

Today there are a large number of credit societies, retail stores ,building & marketing societies.


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SALIENT FEATURES: Voluntary Association-A co-op organization is a voluntary

association of people belonging to a homogeneous group . Peoplecan join on their own interests.

Open Membership-There is no limit to the number of members ofa co-op organization.

Service Motive-It is established primarily for rendering service to

the society.

Capital-The capital of the co-op is contributed by its members inthe form of shares . One can contribute Rs.10 to the share capital &be a member.


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Return on Capital-Thereturn on capital subscribed by the membersis not more than 12% per annum . The surplus of profits is distributedas dividend.

Distribution of Surplus- The total surplus earned by a co-op is notdistributed among its members.1/4th of its profit is transferred togeneral reserves.10% is utilized for general welfare.

Separate legal entity- Like a company , a co-op also enjoys aseparate legal entity.

Democratic Functioning- A co-op is managed by a managingcommittee elected by members on the basis of one member onevote.


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ADVANTAGES:

Easy formation- Being a voluntary association , it is easy to form and it does notrequire legal formalities.

Democratic Functioning- A co-op is managed by a managing committee electedby members on the basis of one member one vote.

Limited liabilities- The liability of the members of a co-op is limited to the capitalcontributed by him.

Continuity- In a co-op the members come and go but the organization remainsunaffected by the death or insolvency of a member.

Mutual benefit association- A co-op is formed as a no profit no loss basis . Itpromotes feeling of co-operation & mutual help among the members.

Government Assistance-A govt. is always prepared to extend number of grants ,loans & financial assistance to make them function efficiently . They also getexemptions from income tax u/s 80.


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DISADVANTAGES:

Limited Capital- The co-op cannot raise huge capital because the membership isconfined to a particular region & also due to the principle ofone man one vote.

Plenty of state regulation- Under the existing Law the co-op is subjected to a no.of regulations from the state & central Govt.

Lack of managerial Talents- Co-op generally suffer from limited managerial talentbecause they depends on their own members to manage the day to day activities.

Misuse of Funds- The Co-op credit society may advance loans to the memberswithout sufficient security may lead to bad debts in future.

Differences & Bickering among members- There are often differences & quarrelsamong the members on petty matters. It affects the autonomy of Co-ops.


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TYPES OF CO-OPERATIVES:

A. CREDIT CO-OPERATIVE-The Rural credit co-op society started in

Germany in 19th

century . Its main objective was to provideagricultural finance . It consisted of three tier model-base (primary

society), middle (central co-op bank), top (apex bank). Ex:- In India

for agricultural loan at the top there is NABARD (National Bank for

Agricultural & Rural Development), middle there is state co-op and at

the bottom there is urban co-op.


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B. CONSUMERS CO-OPERATIVE- It started in 1844 in England . Themain objective was to serve members by purchasing & sellingconsumer goods at a cheaper price.

Main features:*membership is voluntary

*One man one vote*capital is contributed by members

*managed by elected office bearers of society

*Earning profit with service motive

Ex:-Amul , Omfed in Orissa , Mother dairy


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C. PRODUCERS CO-OPERATIVE- It 1st started in France in 19th

century . But these co-op could not get popularity as it lackedtechnical & managerial skills . It had two objectives.

Social-safeguarding the interest of poorer section against exploitation

by capitalist.Economic-Promoting small producers with better bargaining power.


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ORGANISATION STRUCTURE OF A COOPERATIVE SOCIETY

SHARE HOLDERS

MEMBERS

BOARD OF DIRECTORS

MANAGERS

CO OPERATIVE EMPLOYEES

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