Forms of Business Organisations Notes
Forms of business organizations chapter second for drug store and business management notes…
Business means any activity that keeps a person busy. The business includes all individuals and group activities, directed toward earning money and acquiring wealth through production and exchange of goods / or services. It includes industry as well as commerce.
The main objective of a business is to earn a profit. However, the organization of a business must comply with any of the approved legal forms that give the organization a distinct status and also help to determine its identity.
There are four distinct forms of business organization:-
- Sole proprietorship
- Joint-stock company
- Cooperative society
It’s the simplest form of business organization and is known as a one-man business. In this form,a person is solely responsible for providing capital, for bearing the risk of the enterprise, and also day to day management of the business. For example, a retail pharmacy business individual professional skill is essential. Therefore, this form of business is best suited to a sole proprietor.
FORMS OF BUSINESS ORGANISATIONS
SALIENT FEATURES OF SOLE PROPRIETORSHIP
- The sole proprietor has full authority over the affair of business. He has to act according to his ability.
- The ownership lies with one person only, there is no partnership or associate. The proprietor and the business enterprise are one and the same.
- The proprietor has to arrange the necessary capital and assets which are essential to run its business smoothly.
- The profit earned in the business entirely belongs to the proprietor.
The liability of the sole proprietor is unlimited.
- Comparatively, there is little expenditure involved in managing the enterprise.
- It is most easily formed of all forms of the business organization since no legal formalities are necessary for setting up this type of business.
- The secrecy of business affairs can be maintained.
- The sole proprietor is free to take any decision in regard to all matters concerning his business,
- The sole proprietor is free to change the pattern of management at any time.
- The individual proprietor generally suffers due to a lack of adequate financial resources. As such, he usually finds it difficult to expand his business.
- It is very difficult for a single person to look after every aspect of the business.
- The business ends with the death of the proprietor because his heirs may not be as competent and qualified to run his business after his death.
- The liability for business debts is unlimited.
- There are no checks and controls on the sole proprietor.
FORMS OF BUSINESS ORGANISATIONS
JOINT HINDU FAMILY BUSINESS
According to the Mitakshara School of Hindu law, a son his son, and his son “s son become members of the joint Hindu family with co-owner interests by virtue of being born in the family. A business that belongs to a single Hindu family and conducts it as a family business is called the joint Hindu family business. The management and control of the family business are generally in the hands of the senior-most male member of the family who is known as Karta. No legal formalities are required to convert a business into a joint family business. It automatically becomes so since on the death of the Karta, his legal male heirs inherit it.
SALIENT FEATURES OF JOINT HINDU FAMILY BUSINESS
- Only Karta has the right to manage the family business.
- The liability of all the members of a joint Hindu family is limited, except Karta who has unlimited liability.
- Only the male member of the family can claim the right to be a member of the joint family business.
- The existence of the joint Hindu family business is not affected by the death of a member or even Karta.
- The share increases on the death of any one of the existing co-parcener and decreases by the birth of a new co-parcener.
- Karta has full freedom to run the business.
- The business just like insurance cover for children, widows, disabled and sick members of the family.
- The business can be run smoothly with the help of all the male members of the family.
- All the co-parceners have limited liability except Karta.
- The business has no effect on the insanity or death of any members.
- The resources of the joint family business are limited in comparison to other business organizations.
- Karta has unlimited authority to run the business. The initiative and sincerity of young members of the family have no place.
- Irrespective of their involvement in the business. this makes the members of the family irresponsible and lazy.
The partnership is a relationship between persons who agreed to share profits of a business carried on by all or any of them acting for all. The persons who have entered into partnership are individually known as partners and collectively as a partnership. The business organization runs as a partnership is called a firm.
FORMS OF BUSINESS ORGANISATIONS
SALIENT FEATURES OF PARTNERSHIP
- A partnership is formed on the basis of an agreement between the concerned persons. The agreement may be oral, written,or implied between the persons joining together in the partnership.
- A partner cannot transfer his share to an outsider without the consent of the other partners.
- Any profit made by the partnership must be distributed among the partner in the agreed ratio, usually in proportion to the amount of capital invested by each partner in the firm.
- A partnership is dissolved automatically when the term for which the partnership was entered into expires or when a partner dies or retires.
- If and when a partnership is dissolved, the firm does not, however, necessarily stand dissolved. It depends on the remaining partners whether to continue the firm.
- A partnership is quite easily formed. Any two or more legally competent persons may start a business on a partnership basis after executing an agreement between them which may be oral, written or implied.
- The decision to start a partnership organization is quite prompt.
- Partners may pool their individual resources to collect enough finance for the smooth running of the business and also for expansion as and when required.
- There is the unlimited liability of the partners.
- Any loss incurred by the firm is shared by all the partners it reduces the risk of the business as a whole.
FORMS OF BUSINESS ORGANISATIONS
- It has been seen that in certain cases, it is difficult to maintain mutual understanding and harmony among the partners after the firm has worked for some time.
- A dishonest partner may land the firm in difficulties because his acts would also bind the firm and the remaining partners.
- There is a lack of stability in the business. Death, the element of a partner may result in the dissolution of the partnership.
- A large scale business cannot generally be run on a partnership basis because of the legal ceiling on the number of
- partners and also due to the limited resources of the partners.
- Partners bear unlimited liability for the debts of the firm business creditors.
` KINDS OF PARTNERS
The partners of a firm may be divided into the following types
ACTIVE OR WORKING PARTNER:- HE Bears an unlimited liability for the debts of the firm. Like other partners, an active partner also contributes capital to the firm.
SLEEPING OR INACTIVE PARTNER:- A SLEEPING PARTNER DOES NOT TAKE PART IN THE MANAGEMENT OF THE FIRM BUSINESS. HE, HOWEVER, CONTRIBUTES CAPITAL AND SHARES THE PROFIT/LOSSES OF THE FIRM.
NOMINAL PARTNER:- he only lends his name to the firm as a partner. He, however, neither invest any capital nor claims any share in the profit of the business.
SECRET PARTNER:- a partner who does not want the fact of his being a partner to be known to the outsider, is known as a secret partner.
Minor partner:- a partner below the age of 18 being a minor, does not enjoy the rights of a full-fledged partner in a partnership firm. A minor as a partner is entitled to a share in the profits and property of the firm. On attaining majority, a minor partner has a choice to continue as a partner or not. If he does not give public notice of his choice within six months, he will be treated as having decided to continue as a partner.
Kinds Of Partnership
There are two types of partnership namely
- General partnership
- Limited partnership
GENERAL PARTNERSHIP is a general partnership, the liability of every partner is unlimited. A minor partner is an exception because his liability for the firm obligations is limited to the proportion of his share of profits and the capital.
Limited partnership the unlimited liability of a partner in general partnership discourages investment of large sums in the firm. It is not permitted under Indian law. The main features of such partnership are –
- The limited partnership consists of two classes of partners such as general partners with unlimited liabilities and special or limited partners with their liability limited to their capital contribution.
- A limited partner invests his money in the firm. He could not take part in the management of the business. He is only allowed to inspect the books of the firm for his information.
- The death of a limited partner will not affect the existence of the firm in any way.
- A special partner cannot assign his share to an outsider without the consent of the general partners.
Comparison between sole proprietorship and partnership business
Sole proprietorship business partnership business
JOINT STOCK COMPANY
A joint-stock company is a better method of mobilizing financial resources. A joint-stock company is organized to carry on a business on a large scale business because its capital requirements and risk obligations are too burdensome.