types of business organization
TRANSCRIPT
SOLE PROPRIETORSHIP
The word “sole” implies “only”, and
“proprietor” refers to “owner”
Sole trader is the person who carries
business exclusively by and for himself
Ownership and management of the business
by a single individual
Hence, a sole proprietor is the one who is the
only owner of a business
FEATURES
1. Ease of formation No legal formalities
No requirement of registration or payment of fee
Ease of retiring in case of failure
2. LiabilityUnlimited liability
Owner is personally responsible for payment of debts
3. Sole risk bearer and profit recipient Risk of failure of business is borne all alone
Receives all the business profits which become a direct reward for his risk bearing
FEATURES
4. Control The right to run the business and make all decisions lies
absolutely with the sole proprietor.
5. No separate entity In the eyes of the law, no distinction is made between the sole
trader and his business.
6. Lack of business continuity Death, insanity, imprisonment, physical ailment or bankruptcy of
the sole proprietor will have a direct effect on the business and
may even cause closure of the business.
MERITS
1. Quick decision making Enjoys considerable degree of freedom in making business
decisions
2. Confidentiality of information Information is kept confidential
Not bound to publish firm’s account
3. Direct incentive Directly reaps the benefits
Maximum incentive to the sole trader to work hard
MERITS
4. Sense of accomplishment Personal satisfaction involved in working for oneself
5. Ease of formation and closure Entering into business with minimal legal formalities
Least regulated form of business
LIMITATIONS
1. Limited resources Limited to his/her personal savings and borrowings from others
2. Limited life of a business concern Eyes of the law the proprietorship and the owner are considered
one and the same
3. Unlimited liability
4. Limited managerial ability Assume the responsibility of varied managerial tasks such as
purchasing, selling, financing, etc.
PARTNERSHIP
According to the Indian Partnership Act, 1932
partnership is
“the relation between persons who have agreed
to share the profit of the business carried on by
all or any one of them acting for all.”
FEATURES
1. Formation Governed by the Indian Partnership Act, 1932
A legal agreement wherein the terms and conditions governing are specified
Points out that the business must be lawful and run with the motive of profit
Two people coming together for charitable purposes will not constitute a partnership
2. Liability Unlimited, Personal assets may be used for repaying
debts
FEATURES
3. Risk bearingShare losses in the same ratio
4. Decision making and controlShare amongst themselves the responsibility of
decision making and
Control of day to day activities
5. ContinuityDeath, retirement, insolvency or insanity of any
partner can bring an end to the business
FEATURES
6. MembershipMinimum number of members is two
Maximum number, in case of banking industry is ten
and in case of other businesses it is twenty
7. Mutual agencyBusiness carried on by all or any one of the partners
acting for all
MERITS
1. Ease of formation and closureAn agreement between the prospective partners
No compulsion with respect to registration of the firm
2. Balanced decision making Partners can oversee different functions according to their
areas of expertise
3. More fundsCapital is contributed by a number of partners
4. Sharing of risksReduces the anxiety, burden and stress on individual
partners
5. SecrecyNot legally required to publish its accounts and submit its
reports
LIMITATIONS
1. Unlimited liability
2. Limited resourcesRestriction on the number of partners
Capital investment is usually not sufficient to support
large scale business operations
3. Possibility of conflictsDifference in opinion on some issues may lead to
disputes
Decisions of one partner are binding on other partners
LIMITATIONS
4. Lack of public confidenceA partnership firm is not legally required to publish its
financial reports or make other related information
public
5. Lack of continuity
TYPES OF PARTNERS
1. Active partnersContributes capital
Participates in the management of the firm
Shares its profits and losses
Liable to an unlimited extent to the creditors of the firm
2. Sleeping or dormant partnerDo not take part in the day to day activities
Everything else same as active partners
3. Secret partnerAssociation with the firm is unknown to the general public
TYPES OF PARTNERS
4. Nominal partnerAllows the use of his/her name by a firm
Does not contribute to its capital
Does not take active part in managing the firm
Does not share its profit or losses
Liable, like other partners, to the third parties, for the
repayments of the firm’s debts
COMPARISON
Type Capital
contribution
Management Share in
profits/losses
Liability
Active Partner Contributes
Capital
Participates in
Management
Share Unlimited
Sleeping
Partner
Contributes
Capital
Doesn’t
Participate in
Management
Share Unlimited
Secret Partner Contributes
Capital
Participates in
Management
Share Unlimited
Nominal
Partner
Doesn't
Contribute
Capital
Doesn’t
Participate in
Management
Doesn’t share Unlimited
TYPES OF PARTNERSHIP
Classification on the basis on duration
1. Partnership at will
Continues as long as the partners want
Terminates if one partner gives notice of withdrawal
2. Particular partnership
Builds for a purpose
Dissolve as soon as the purpose is finished
TYPES OF PARTNERSHIP
Classification on the basis of liability1. General Partnership
Liability of partners is unlimited and joint
Partners enjoy the right to participate in the management of the firm
Registration of the firm is optional
2. Limited Partnership The liability of at least one partner is unlimited whereas the
rest may have limited liability
Limited partners do not enjoy the right of management
Registration of such partnership is compulsory
Introduced in India after introduction of new small enterprise policy 1991
PARTNERSHIP DEED
Formed by an agreement which may be oral or written
An agreement duly signed and registered to form a partnership is called as a partnership deed
The rights, interest, obligations of partners to each other are clearly and precisely defined
Such agreement is very useful in future disputes
Its not a public agreement, so outsiders don’t have right to examine but it can be changed at any time with the consent of all the partners
PARTNERSHIP DEED
Partnership deed includes the following points: 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 a partner
Interest on capital and interest on drawings
Procedure for dissolution of the firm
Preparation of accounts and their auditing
Method of solving disputes
COMPANY
An artificial person having a separate legal
entity, perpetual succession and a common
seal.
JOINT STOCK COMPANY
An association of persons formed for
carrying out business activities
Has a legal status independent of its
members
This company form of organisation is
governed by The Companies Act, 1956
FEATURES
1. Artificial personCompany is a creation of law and exists independent
of its members.
Company can own property, incur debts, borrow money, enter into contracts, sue and be sued.
2. Separate legal entityAcquires an identity, distinct from it members.
Assets and liabilities are separate from those of its owners.
The law does not recognise the business and owners to be one and the same.
FEATURES
3. Formation Formation of a company is a time consuming, expensive
and complicated process.
Involves compliance with several legal requirements before it can start functioning.
Registration of a company is compulsory as provided under the Indian Companies Act, 1956.
4. Perpetual successionCompany being a creation of the law, can be brought to an
end only by law.
Will only cease to exist when a specific procedure for its closure, called winding up, is completed.
FEATURES
5. Control Undertaken by the Board of Directors
The directors hold a position of immense significance as they are directly accountable to the shareholders for the working of the company
6. Liability Members is limited to the extent of the capital contributed by
them in a company
Creditors can use only the assets of the company to settle their claims since it is the company and not the members that owes the debt
7. Common Seal Company’s approval through a common seal
Common seal is the engraved equivalent of an official signature
8. Risk Bearing Borne by all the share holders to the extent of their shares
MERITS
1. Limited liabilityOnly the assets of the company can be used to settle
the debts, leaving the owner’s personal property free
from any charge.
2. Transfer of interest Shares can be easily sold or converted into cash
when required.
3. Perpetual existence Not effected by death
MERITS
4. Scope for expansion Large financial resources
5. Professional managementCompany can afford to pay higher salaries to
specialists and professionals
Leads to balanced decision making as well as greater
efficiency in the company’s operations
LIMITATIONS
1. Complexity in formation
2. Lack of secrecy
3. Impersonal work environment
4. Numerous regulations
5. Delay in decision making
6. Oligarchic management
7. Conflict in interests
SHAREHOLDERS
Features:
Shares are like partners who have invested in
the company.
If company gains profit, profit is distributed in the
form of dividends to shareholders
In case of loss, nothing is taken from
shareholders
TYPE OF COMPANIES
Private company
Restricts the right of members to transfer its shares
Has a minimum of 2 and a maximum of 50 members
excluding the present and past employees
Does not invite public to subscribe to its share
capital
Must have a minimum paid up capital of Rs.1 lakh or
such higher amount which may be prescribed from
time-to-time
Necessary for a private company to use the word private
limited after its name
TYPE OF COMPANIES
Public company
Has a minimum paid-up capital of Rs. 5 lakh or a
higher amount which may be prescribed from
time-to-time
Has a minimum of 7 members and no limit on
maximum members
Has no restriction on transfer of shares
Is not prohibited from inviting the public to
subscribe to its share capital or public deposits
LEGAL FORMALITIES
Public companies has to be publish their
yearly account, maintain statutory books of
account, annual audits.
MOA- MEMORANDUM OF ASSOCIATION
Main document of the company, sets the constitution of the
company
Defines the objectives, prescribe the name of the company,
its registered office and capital
Lay down the fundamental conditions upon which alone the
company is allowed to be formed
When registered gives existence or birth to the company
Charter of the company
Governs the relationship of the company with the outside
world
Determines the extent and power of the company
All transactions outside its power by the company shall be
null or void or illegal
AOA-ARTICLE OF ASSOCIATION
Forms a link between the members of the company which binds the members to the company
Defines the duties, rights, powers and authority of the shareholders and directors of the company
Defines the mode and form in which the business of the company is to be carried out
Every company is required to file AOA with the registrar at the time of the registration
If company doesn’t file its own AOA, table A is attached to the company that as schedule 1, shall become AOA of that company
Table A is model set of 99 article contained in schedule 1 of company act 1956
DIFFERENCE BETWEEN AOA AND MOA
Basis of difference MOA AOA
Objective Defines the objective for
which company is formed
Rules of internal
management , indicates
how the objectives are to
be achieved
Position Main document of the
company, subordinate to
the companies act
Subsidiary document ,
subordinate to both MOA
and companies act
Relationship Defines the relationship of
the company with
outsiders
Defines the relationship of
the members and the
company
DIFFERENCE BETWEEN AOA MOA
Basis of difference MOA AOA
Validity Acts beyond MOA are
invalid and cannot be
ratified even by a
unanimous vote of the
members
Acts which are beyond
articles can be ratified by
the members provided
they don't violate the
memorandum
Necessity Every company has to file
a MOA
Not necessary for a public
limited company to file
AOA
Alteration Alteration of MOA is quite
difficult
Articles can be altered by
passing a special
resolution by the members
PRIVILEGES AGAINST A PUBLIC LIMITED COMPANY
A private company can be formed by only two members whereas seven people are needed to form a public company.
There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company.
Allotment of shares can be done without receiving the minimum subscription.
A private company can start business as soon as it receives the certificate of incorporation. The public company, on the other hand, has to wait for the receipt of certificate of commencement before it can start a business.
PRIVILEGES AGAINST A PUBLIC LIMITED COMPANY
A private company needs to have only two directors
as against the minimum of three directors in the
case of a public company.
A private company is not required to keep an index
of members while the same is necessary in the
case of a public company.
There is no restriction on the amount of loans to
directors in a private company. Therefore, there is
no need to take permission from the government
for granting the same, as is required in the case of
a public company.
TYPES OF BUSINESS ORGANIZATIONS
To run a business:
1. Franchise
2. Group Company / Ownership
3. Leasing
4. Management Contract
FRANCHISE
Owners, or "franchisors", sell the rights to their business logo,
name, and model to third party retail outlets, owned by independent,
third party operators, called "franchisees“
To invest in a franchise, the franchisee must first pay an initial fee for
the rights to the business, training, and the equipment required by
that particular franchise. Once the business begins operating, the
franchisee will generally pay the franchisor an ongoing royalty
payment, either on a monthly, quarterly, or annual basis. This
payment is usually calculated as a percentage of the franchise
operation’s gross sales.
The franchisee will not have as much control over the business as he
or she would have over their own business model, but may benefit
from investing in an already-established, name brand.
LEASING
A legal document outlining the terms under
which one party agrees to rent property from
another party.
A lease guarantees the lessee (the renter) use
of an asset and guarantees the lessor (the
property owner) regular payments from the
lessee for a specified number of months or
years.
Both the lessee and the lessor must uphold the
terms of the contract for the lease to remain
valid.
MANAGEMENT CONTRACT
Firm enters into a contract with one or a few local manufacturers to get certain components or goods produced as per its specifications
Contract manufacturing, also known as outsourcing
Can take three major forms:
1. Production of certain components
2. Assembly of components into final products
3. Complete manufacture of the products
ADVANTAGES
1. Goods produced on a large scale without requiring investment in setting up production facilities.
2. No investment risk.
3. Products manufactured or assembled at lower costs.
4. Local manufacturer also gets the opportunity to get involved with international business and avail incentives.
LIMITATIONS
1. Local firms might not adhere to production
design and quality standards.
2. Local manufacturer in the foreign country
loses his control over the manufacturing
process.
3. The local firm producing under contract
manufacturing is not free to sell the
contracted output as per its will.