oone of the first executive decisions you’ll make for your new business is choosing the type of...
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Forms of Business Ownership
Forms of Business Ownership Which is the right one for your business?
One of the first executive decisions you’ll make for your new business is choosing the type of legal organization that’s best for you. The choice you make is important because it will determine what your business can and cannot do, what will happen if someone sues you, and how both you and your business are taxed.
There are basically four ways to organize a business. Listed from the simplest to sophisticated, they are:
Sole Proprietorship Partnership Corporation Limited Liability Company
Proprietorship
√ Is a business with one owner and the most common type of organization.
√ Is not separate from the owner, but merely a different name with which the owner represents to the public. The owner and the business are inseparable.
√ Is more affordable since no legal documents need to be filed in most cases. All you have to do is get a business license and start operations.
Merits DemeritsSimple Form of Organization
Limited Resources
Owner’s Freedom to Take Decisions
Limited Ability
High Secrecy Unlimited Liability
Tax Advantage Limited Life of Enterprise Form
Easy Dissolution
Important Terms
No separate legal entity
Unlimited liability
√ Has two or more owners. The details of the arrangement between the partners are outlined in a written document called a partnership agreement.
√ Is not a separate legal entity from its owners. However, the partnership can hold property and incur debt in its name.
√ Has the same advantages and disadvantages as the sole proprietorship but with an additional drawback. A partner can be held liable for the acts of the other partners, increasing personal liability.
Partnership
Merits Demerits Easy Formation Unlimited Liability
More Capital Available
Divided Authority
Combined Talent, Judgment and Skill
Lack of Continuity
Diffusion of Risk Risk of Implied Authority
FlexibilityTax Advantage
Partnership deed
Mutual agency
Sleeping partner
Partner by estoppels or holding out
Nominal or ostensible partner
Utmost Good Faith and Honesty
Important Terms
Hindu Undivided Family
The oldest form of business organisation found India. It is the business carried on by the members of the Hindu undivided Family.
The business is controlled by the eldest member of the family and is called “KARTA”
Features of HUFMembership by birth – All the members
have equal ownership right over the ancestral property.
No maximum Limit
Liability – the Karta has unlimited liability
Sno. Merits Demerits1. Effective control – The
business is controlled by the head of the family.
Limited Resources- Business depends mainly on ancestral property
2. Limited liability of the members – Liability of members is according to their share in the property
Limited managerial skills- Karta cannot be expert in all the areas of management.
3. Increased by loyalty and cooperation
Unlimited liability of Karta
HUF
Cooperative societies
What does cooperative mean? Working together and with others for a common purpose.
Definition of Cooperative Societies It is a society which has its objectives for the
promotion of economic interests of its members in accordance with cooperative principles
Features of Cooperative Voluntary membership- Membership is
open to all. Any person can join and leave with prior notice.
Legal Status- Registration is compulsory. Therefore, it is a separate legal entity
Democratic control
Secularism
Service motive
Important Terms
Separate legal existence Continuity of existence Economies of scale Voluntary associations Equal voting rights Open Membership Lack of Secrecy Perpetual Existence State Assistance
Cooperative Society Sno. Merits Demerits 1. Ease of Formation Limited resources – These
societies have limited capital from its members.
2. Equality in voting status- ‘One member one vote’
Inefficiency in management-Management consists of part time and inexperienced people
3. Support from government-They provide all kind of support to cooperative societies.
Lack of Secrecy –Discussions are openly discussed and accounts are published.
4. Limited Liability –Liability of members is limited to the extent of the amount contributed by them.
Differences in opinions- conflicts may rise due to different opinions which might delay in decision making.
Joint Stock Company It is the largest form if business organisation. It is an
association of persons formed for carrying business activities and had legal status of its members .
‘A company is an association of many persons who contribute money and employ it in some trade or business, and who share the profit and loss arising thereof’ – Lord Lindley
Features of Joint stock company Incorporated Association – company must be
registered under the companies act, 1956.Separate legal Entity- comapny is a legak
enity from its shareholders, directors and promoters.
Limited liability- liability of the members is limited to the face value of the shares held by them but they are not personallly liable to the debts.
Transferability of shares
Sno. Merits Demerits1. Limited Liability-
Liability of shareholders is only up to the face value held by them
Complexity in formation
2. Transfer of interest- shares of public limited company can be converted into cash by selling them in open market
Impersonal work environment
3. Perpetual Existence-being a separate, existence of company is not affected by death ,retirement.
Delay in decision making
4. Scope for expansion Oligarchic Management
Basis Private Company Public Company
Membership Minimum 2, Maximum 50
Minimum 7, Maximum no limits
Number of Directors At least 2 At least 3
Restriction on Appointment of Directors
No need for directors to file anything
Directors must file a consent to act as directors or sign MOA or enter into a contract for qualification
Transfer of shares Restricts No restriction
Public Subscription Can not invite general public
Invites general public
Special privileges Available- not filing prospectus, commencing business after incorporation itself and before minimum subscription, etc.
Not available
Important TermsSeparate legal existencePerpetual successionContinuity of existenceEfficient managementEconomies of scaleCommon sealEconomic oligarchy
Examples
Quiz
TIME
1. Credit Unions are an example of a ___________________.
A.Cooperative B.Franchise C.Partnership
2. When a corporate owner dies, the corporation ceases to exit.
A.True B.False C.Only if he/she is not married
4. Being incorporated provides limited liabilty for its owners.
A.True B.False C.If they are of legal age