ch 2 forms of organisation till partnership
Chapter 2
Forms of Business Organisation
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Chapter 2
Forms of Business Organisation
Meaning of Business Organisation
A business organisation or business concern is an enterprise created to achieve business objectives.
It achieves its objectives by engaging in some activities like production or purchase and sale of goods or services.
Business undertakings can be distinguished from one another on the
basis of ownership, management and control.
In India we have the following types of business enterprises.
1. Sole Proprietorship
2. Joint Hindu Family Business
3. Partnership
4. Co-operative Society
5. Joint Stock Company.
1. SOLE PROPRIETORSHIP
Sole proprietorship is the form of business, which is owned, managed and controlled by an individual.
He is solely responsible for providing the capital, for bearing the risk and for the overall management and control of the business.
If the business earns profit, the sole proprietor enjoys all the profit alone and if the business suffers loss, it has to be borne by the sole trader himself
Sole proprietorship is also called single ownership or single proprietorship.
Suitability
Sole trading concerns require lesser amount of capital. It is best suitable for the following types of business:
1 Business which are carried out on small scale with modest capital and limited managerial talent, e.g., local grocery store, stationery shops, medical store, bakeries, small factories etc.
2 Business where customers demand personalized services such as small beauty parlors, hair cutting saloons tailoring unit, internet cafe etc.
Features of Sole trading Concern
1. Single ownership
2. No legal formalities
3. Control
4. No legal entity
5. Unlimited liability
6. No profit sharing
7. Lack of business continuity
1. Single ownership
A sole proprietorship is wholly owned by a single person.
He supplies the entire capital from his own wealth or from borrowed funds.
2. No legal formalities
There is no legal formality to start as well as to close sole trading concern.
Only a license is necessary in certain types of business.
3. Control
A sole proprietor has full control over his business.
He can carry out his plans without consulting with others.
4. No legal entity
A sole proprietorship has no separate legal entity from its owner.
In the eyes of law, there is no distinction between the sole trader and his business.
The assets and liabilities of the business and its owner can’t be
separated.
5. Unlimited liability
The sole proprietor’s liability is unlimited.
If the asset of the business is insufficient to meet its debts, the proprietor is liable to pay off the debts out of his personal property.
6. No profit sharing
The sole proprietor alone is entitled to all the profit and losses of the business.
7. Lack of business continuity
Since the owner and the business are same, death, insanity or bankruptcy of the sole trader will cause closure of the business.
Merits or Advantages of sole proprietorship
1. Easy formation
2. Quick decisions
3. Motivation to work
4. Secrecy
5. Flexibility of operations
6. Self Employment
7.Sense of accomplishment
.
1. Easy formation
An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities.
2. Quick decisions
The sole proprietor is completely free to take decisions without consulting with others.
Quick decision and prompt actions help to improve the efficiency of the business.
3. Motivation to work
The proprietor alone is entitled to receive all the profit of business and he alone has to bear all the losses, there is direct relation between effort and reward.
Therefore, there is an incentive to work hard.
4. Secrecy
Business secrecy is an important factor in every business.
A sole trader can keep his all business information and maintain secrecy. He is not bound by law to publish his accounts of business.
6. Self Employment
It is a means for earning livelihood independently.
5. Flexibility of operations
The small size and simple management structure helps a sole proprietor to adapt easily to changing conditions.
He can reduce his business or increase it according to the changing conditions.
7.Sense of accomplishment
There is a personal satisfaction involved in working oneself.
Demerits or disadvantages of Sole Proprietorship
1. Limited Capital
2. Unlimited Liability
3. Limited Managerial Skill
4. Limited life of a business concern
5.Greater risk.
1. Limited Capital
Resources of a sole trader are limited to his personal savings and borrowings from others.
Banks generally hesitate to give long term loans to a sole trader. It is difficult for him to expand his business.
2. Unlimited Liability
A major disadvantage of a sole trader is that the owner has unlimited liability.
In the case of business losses, if the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities.
3.Limited managerial ability
A sole trader business is a one man show.
He wants to perform various functions like purchase, sales marketing, financing etc.
It is rare to find an individual who excels in all these areas.
Due to limited financial resources, sole trader is not in a position employ talented employees.
4. Limited life of a business concern
In the eyes of the law the proprietorship and the owner are considered one and the same.
Death, insolvency or illness of proprietor affects the business and can lead to its closure.
5.Greater risk.
The sole trader has to bear all the losses of the business.
So the risk to be taken by the proprietor is high.
2.JOINT HINDU FAMILY BUSINESS
It is a special form of business found only in India.
This business is owned and managed by members of the Hindu
Undivided Family (HUF).
This form of business organization is not formed by an agreement or
contract, but comes into existence by the operation Hindu Law.
Joint Hindu Family or Hindu Undivided Family consists of grandparents, parents and sons.
HUF business is managed by the eldest male member known
as 'Karta' whose liability is unlimited.
All members have equal ownership right over the property of
an ancestor .
They are known as co-parceners.
Examples: Haldirams,Tata Sons
Features of Joint Hindu Family Business
1. Formation
2. Liability
3. Control
4. Continuity
5.Minor Members
1. Formation
Minimum two members from the family and their ancestral property is used for business.
It is governed by Hindu Succession Act, 1956
2. Liability
The Liability of all members except the Karta is limited.
Members or coparceners liability is limited to there share in business
3. Control
Karta take all decisions and he control whole business.
Members should obey Karta.
4. Continuity
The death of a member or Karta does not affect the business.
If Karta is died then next eldest member take the position of Karta.
By mutual consent of all members business can be closed .
5. Minor Members
Membership of the Hindu Undivided Family business is automatic
by birth.
All the members have equal ownership right over the ancestral property and they are known as Co-Parceners.
3. PARTNERSHIP
Partnership is an association of two or more persons who agreed to pool together their financial and managerial resources in some business and to share the profit thereof between them.
It is formed when there is a need for greater capital investment, varied
skills and sharing of risk.
Section 4 of The Indian Partnership Act, 1932 defines partnership as “the relation between two or more persons who have agreed to share the profit of a business carried on by all or any one of them acting for all”.
The persons who enter into partnership are individually called 'partners' and collectively a 'firm'.
In India partnerships are regulated by Partnership Act 1932.
Features of Partnership
1. Formation
2. Liability
3. Risk bearing
4. Decision making and control
5. Continuity
6. Membership
7. Mutual agency
1. Formation
The partnership form of business organization is governed by the
Indian Partnership Act, 1932.
The partnership comes into existence with an agreement among
partners.
In a partnership there must be an agreement. The agreement may be oral or written.
The written agreement is known as Partnership Deed.
2. Liability
Partners have Unlimited liability .
If business assets are not sufficient to meet liabilities
,his personal assets may be used for payment .
All partners are responsible for liability of business.
3. Risk bearing
All the risk of loss is shared by the partners as they are sharing profits of the firm.
4. Decision making and control
Partners can take decisions with mutual consent .
All activities are managed jointly.
5. Continuity
A partnership is purely a personal organization and it has no separate legal existence apart from its members, hence it lacks continuity.
Death, insanity etc. of a partner bring an end to the business.
6. Membership
For starting partnership Minimum 2 members needed
Maximum
In case of Banking business – 10
In case of other business – 20
Maximum 20 is extended to 100 by Companies Act 2013
7. Mutual agency
Each partner is both an agent and principal
A partner is an agent of other partners he represent them, other partners are responsible for his activities
He is a principal means. he is responsible for other partners activities
Advantages of Partnership
1. Easy formation and closure
2. Balanced decision making
3. More funds
4. Sharing of risk
5. Secrecy can be maintained
1. Easy formation and closure
Only an Agreement is required to start a partnership business.
Registration is not compulsory.
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2. Balanced decision making
Partners can concentrate there expert areas
It reduce chance for errors
Also reduce work load
3. More funds
Many persons will contribute fund to business.
So large amount of fund will be available .
4. Sharing of risk
In partnership risk are shared by members.
It reduce each partners liability.
5. Secrecy can be maintained
It is not compulsory to publish any business records
Partner can maintain all records in secret .
Limitations of Partnership
1. Unlimited liability
2. Limited resources
3. Possibility of conflicts
4. Lack of continuity
5. Lack of public confidence
1. Unlimited liability
If business assets are not adequate to pay debt personal properties of partners can be taken for payment.
Liability is joint & several.
2. Limited resources
Due to limited number of partners more amount of fund is not available.
3. Possibility of conflicts
Decisions are taken by two or more persons, at that time there arise a chance for conflict or problems
4. Lack of continuity
Death , insolvency and retirement of any partner will leads to shut down the business.
5. Lack of public confidence
Due to non publishing business records the public can’t find accurate financial position.
They have no interest to invest in business .
Type of Partners
1. Active or Working Partner
Contribute capital & Actively participate in management of firm
Share profit and losses also he have unlimited liability
2.Sleeping or Dormant partner
These partner do not participate in day to day activities of business.
He contribute capital , also share profit and losses.
Unlimited liability.
3.Nominal Partner
He allow to use his name in business as a partner
Does not contribute capital not participate in management of business
No profit sharing but liable for debts of business
4. Secret Partner
His partnership with business is unknown to general public.
He contribute capital & share profit and losses.
Also he participate in management.
5.Partner by Estoppel
Due to any behaviour or conduct of person he give an impression to public that he is a partner in business
He does not contribute capital
He is liable for business debts because public believe that he is a partner
6. Partner by holding out
A person may be declared as a partner in a firm by the outsiders and does not deny this even after becoming aware of it.
He is also liable for the debts of the firm and he is not an actual partner
7. Partner in profit only
It is a form of partnership in which the partner is not liable for
business losses and he will get a share in profit
It is made through a separate agreement
But he also responsible for third parties
He invest capital , not participate in management.
Sub partner
Appointing anyone as an Agent of a partner
He will get profit or loss in organisation
Sub partner have no authority and responsibility in business
Minor partner
Minor cannot be admitted to partnership business
But Minor can be admitted for the benefits of partnership with all partners consent
He have a right to get share in profit
No liability for any loss or debt
After attaining majority he can decide whether continue in business or not .He will clarify it within 6 month , if he is not clarified it he become a full fledged partner
Types of Partnerships
On the basis of duration
Partnership at Will
Particular Partnership
On the basis of Liability
General partnership
Limited partnership
1. Classification on the basis of duration
Partnership at Will
Duration of partnership is not specified in the agreement.
It will be continued for an indefinite period.
It can be dissolved at any time as it is decided by all or any of
the partners.
Particular Partnership
Formed for a particular purpose or for a particular period.
Dissolved after the expiry of the time or the completion of the project.
E.g. If a partnership is formed for two years, or for the construction of a house.
2. Classification on the basis of Liability
Limited Partnership
In this partnership only one person liability is unlimited but others
liabilities are Limited
Limited liability partners death , insolvency does not leads to closure of business , They have no right to participate in management of business
There activities are not liable to business but registration is
compulsory
2.General Partnership
In general partnership, the liability of partners is unlimited and joint.
The partners enjoy the right to participate in the management of the
firm.
Registration of the firm is optional. The existence of the firm is affected by the retirement, death or insolvency of the partners.
Partnership Deed
It means a written agreement which include terms and conditions that control the partnership business
Agreement must be in Written or Oral
Written agreement will be an evidence in future if there is any problem comes into partnership
Contents of Partnership Deed
1. Name of the firm
2. Names and addresses of all partners
3. Nature and place of business
4. Date of Commencement of partnership
5. Duration of business
6. Capital contribution by the partners
7. The amount that can be withdrawn by each partner
8. Rules regarding operation of bank accounts
9. Division of profits or losses
10. Interest on capital or drawings, if any
11. Interest on partner’s loan to the firm
12. Salaries, commission, etc. if payable to any partner
13. Details of division of work among the partners
14. Ascertainment of goodwill
On admission, retirement and death of a partner
15. Settlement of accounts
In the event of retirement or death of partners
16. Settlement of accounts
On dissolution of the firm
17. Provisions relating to the maintenance and audit of accounts
18. Provisions for arbitration in the event of disputes
19. Provisions regarding borrowings of the firm
20. Rights, duties and liabilities of partners
Registration of Partnership
Registration of partnership is not compulsory.
But it can be registered with the Registrar of Firms as per the Partnership Act 1932
Procedure for Registration
1. Submit an application in prescribed form with the following details:
a) Name of the firm.
b) Location of the firm.
c) Names of other places where the firm carries on business.
d) The date of joining of each partner.
e) Names and addresses of partners.
f) Duration of partnership.
g) This application should be signed by all the partners.
2. Remitting the fees for registration
Issue of Registration Certificate.
After approval, the Registrar should enter the name of the firm in his register and issuesa certificate of registration
Effects of Non-Registration
1. Cannot sue against third parties
An unregistered firm cannot sue against a third party for the recovery of claims
Cannot sue against its partners
An unregistered firm cannot sue against its partners
A partner cannot enforce his claims
A partner of an unregistered firm cannot enforce his claims against outsiders or against hi co-partners or the firm
