6 Main Types of Business Ownership | Management

The different types of business ownership are:- 1. Single Ownership (Private Undertaking). 2. Partnership. 3. Joint Stock Company 4. Cooperative Organisation (Or Societies) 5. Public Sector 6. Private Sector.

Type # 1. Single Ownership:

Ownership when applied to an industrial enterprise means title to and possession of the assets of the enterprise, the power to determine the policies of operation, and the right to receive and dispose of the proceeds.

It is called a single ownership when an individual exercises and enjoys these rights in his own interest. A business owned by one man is called single ownership. Single ownership does well for those enterprises which require little capital and lend themselves readily to control by one person.

Examples of enterprises run by single owner are printing press, auto repair shop, wood working plant, a small fabrication shop, etc., Le., retail trades, service industries and small engineering firms. In single ownership, one person contributes the original assets to start the business, maintains and controls business operations, reaps full benefit in terms of profit and is fully liable for all debts associated with the business.

Advantages of Single Ownership:

1. Easy to establish as it does not require to complete any legal formality.

2. Simplicity of organization.

3. The expenses in starting the business are minimal.

4. Owner is free to make all decisions.

5. This type of ownership is simple, easy to operate and extremely flexible.

6. The owner enjoys all the profits, thus,

7. There is a great deal of personal motivation and incentive to succeed.

8. Minimum legal restrictions are associated with this form of ownership.

9. Owner can keep secrecy as regards the raw materials used, method of manufacture, etc.

10. Single ownership associates with it the great ease with which the business can be discontinued.

Disadvantages of Single Ownership:

1. The owner is liable for all obligations and debts of the business.

2. The business may not be successful if the owner has limited money, lacks ability and necessary experience to run the business.

3. Because of relatively unstable nature of the business, it is difficult to raise capital for expanding the business.

4. If the business fails, creditors can take the personal property as well as the business property of the (single) owner to settle their claims. This means single ownership involves unlimited liability for debts and losses.

5. There is limited opportunity for employees as regards monetary rewards (e.g., profit sharing, bonuses, etc.) and promotions.

6. Generally, single ownership firm has limited life, i.e., the firm may cease to exist with the death of the proprietor. This is the cause of unstable nature of the firm (refer 3 above).

Applications of Single Ownership:

Single ownership is suitable:

1. For retail trades, service concerns and small engineering firms which require relatively small capital to start with and to run.

2. For those businesses which do not involve high risks of failure.

3. When the business can be taken care by one person.

Type # 2. Partnership:

A single owner becomes inadequate as the size of the business enterprise grows. He may not be in a position to do away with all the duties and responsibilities of the grown business. At this stage, the individual owner may wish to associate with him more persons who have either capital to invest, or possess special skill and knowledge to make the existing business still more profitable.

Such a combination of individual traders is called Partnership. Partnership may be defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Individuals with common purposes join as partners and they put together their property, ability, skill, knowledge, etc., for the purpose of making profits. In brief, partnership is an association of two or more (up to 20) persons to carry on as co-owners of a business for profit.

Partnerships are based upon a partnership agreement which is generally reduced to writing. It should cover all areas of disagreement among the partners. It should define the authority, rights and duties of each partner. It should specify- how profits and losses will be divided among the partners, etc.

Kinds of Partners:

(i) Active Partners who take active part in the management of the business enterprise.

(ii) Sleeping Partners who do not take any active part in the conduct of the business. Both Active and Sleeping partners are responsible for the debts of the Partnership.

General Duties of Partners:

Partners should:

(i) Be just and faithful to one another.

(ii) Render true accounts and full information about everything that affects any partner.

(iii) Cooperate and accommodate each other.

(iv) Have confidence in each other and better mutual understanding.

(v) Respect the views of one-another.

Types of Partnership:

(i) General Partnership:

Whatever has been discussed above so far pertains to General Partnership; besides that in a general partnership, each partner has full agency powers and may bind the partnership by any act, i.e., each partner may act as though he were an individual proprietor.

General partner­ship differs from single ownership in that the actions of any partner not only affect himself but they affect other partners also. As the partnership grows or personnel changes occur, additional partners can be had with the consent of all old partners.

Advantages of General Partnership:

(i) Large capital is available to the firm.

(a) The firm possesses much better talents, judgment and skills.

(iii) General partnership is easy to form and is relatively inexpensive in terms of organization cost.

(iv) Incentive for success is high.

(v) There is a definite legal status of the firm.

(vi) Partners have full control of the business and possess full rights to all profits.

(vii) Partnership associates tax advantages with it.

(viii) Partnership firms can borrow money quite easily from the banks.

(ix) For all losses, there are more than one person to share them.

Applications of General Partnership:

General Partnership does very well in

Law firms,

Retail trade organisation,

Medical clinics,

Small engineering firms, etc.

Disadvantages of General Partnership:

(i) Each partner has unlimited liability for the debts of the firm,

(ii) Danger of disagreement and distrust among the partners,

(iii) Authority being divided among the partners,

(iv) Partnership lacks permanence and stability; it has limited life. Partnership may dissolve if a partner dies,

(v) Investors and lenders hesitate to provide money because of the lack of stability of a partnership firm, and 

(vi) All partners suffer because of the wrong steps taken by one partner.

(ii) Limited Partnership:

Limited partnership type of ownership overcomes the two main disadvantages [e.g. number (i) and (v) mentioned above] of general partnership. Limited partnership is an association of one or more general partners who manage the business and one or more limited partners whose liability is limited to the capital they have invested in the business.

Limited partners share the profit but they do not participate or interfere with the control or management of the firm. Moreover limited partners have their liabilities limited to the amount of their investment.

Thus, those investors and lenders who used to hesitate investing in the venture can do so without much risk. Limited partnership type of ownership is easy and less costly to form, and personal incentive to succeed is retained. A disadvantage associated with limited partnership is that the limited partner, though he invests in the business, has no voice in the management.

Type # 3. Joint Stock Company:

Joint Stock Company overcomes many of the disadvantages associated with Partnership types of industrial ownership, such as:

(i) Difficulties in raising capital,

(ii) Easy disruption,

(iii) Lack of facility for centralised management, and

(iv) Unlimited liability, etc.

A joint stock company is an Association of individuals, called shareholders, who join together for profit and agree to supply capital divided into shares that are transferable for carrying on a specific business. Death, insolvency, disablement or lunacy of the shareholders does not affect the joint stock company. A joint stock company consists of more than twenty persons for carrying any business other than the banking business.

These persons give a name to the company, mention the purpose for which it is formed, and state the nature and the amount of capital (shares) to be issued, etc., and submit the proposal to the Registrar of Companies. As the registrar issues a certificate in this connection, the company starts operating. The managing body of a joint stock company is Board of Directors elected by the shareholders.

The Board of Directors:

(i) Makes policies;

(ii) Takes decisions; and

(iii) Runs the company efficiently.

The liability of the members (or shareholders) of a joint stock company is limited to that capital only of which they hold the shares. Finance is raised by issuing shares, debentures, bank loans, loans from industrial and finance corporations.

Types of Joint Stock Company:

There are two types of joint stock companies:

(a) Private Limited Company:

(i) The capital is collected from the private partners; some of them may be active while others being sleeping.

(ii) Private limited company restricts the right to transfer shares, avoids public to take up shares or debentures.

(iii) The number of members is between 2 and 50, excluding employee and ex-employee sharehold­ers.

(iv) The company need not file documents such as consent of directors, list of directors, etc., with the Registrar of Joint Stock Companies.

(v) The company need not obtain from the Registrar, a certificate of commencement of business.

(vi) The company need not circulate the Balance Sheet, Profit and Loss Account, etc., among its members; but it should hold its annual general meeting and place such financial statements in the meeting.

(vii) A private company must get its accounts audited.

(viii) A private company has to send a certificate along with the annual return to the Registrar of Joint Stock Companies stating that it does not have shareholders more than fifty excluding the employee and ex-employee shareholders.

Actually, a private joint stock company resembles much with partnership and has the advantage that big capital can be collected, than could be done so in partnership.

(b) Public Limited Company:

(i) In Public limited company, the capital is collected from the public by issuing shares having small face value (Rs. 50,20,10).

(ii) The number of shareholders should not be less than seven, but there is no limit to their maximum number.

(iii) A public limited company has to file with the Registrar of Joint Stock Companies, documents such as consent of the directors, list of directors, director’s contract, etc., along with the memorandum of association and articles of association.

(iv) A public company has to issue a prospectus to the public.

(v) It has to allot shares within 180 days from the date of prospectus.

(vi) It can start only after receiving the certificate to commence business.

(vii) It has to hold a Statutory Meeting and to issue a Statutory Report to all members and also to the Registrar within a certain period.

(viii) There is no restriction on the transfer of shares. (be) Directors of the company are subject to rotation.

(x) The public company must get its account audited every year by registered auditors.

(xi) It has to send financial statements to all members and to the Registrar.

(xii) It has to hold a general meeting every year.

(xiii) The Managing Agent gets a fixed percentage of net profit as remuneration.

Advantages of Joint Stock Companies:

(i) A huge sum of money can be raised.

(ii) It associates limited liability with it.

(iii) Shares are transferable.

(iv) Company’s life is not affected by the life (death) of shareholders.

(v) Services of specialists can be obtained.

(vi) Risk of loss is divided among many shareholders.

(vii) The company associates with it stability, efficiency and flexibility of management.

Disadvantages of Joint Stock Companies:

(i) A good deal of legal formalities is required for the formation of a joint stock company.

(ii) Company is managed by big shareholders only.

(iii) High paid officials manage the whole shows; they cannot have as high interests in the company as the proprietors can have.

(iv) People can commit frauds with the company.

(v) Board of directors and managers who remain familiar with the financial position of the company may sell or purchase shares for their personal profits.

(vi) It is difficult to maintain secrecy as in partnership.

(vii) The team spirit with which partnership works, is lacking in a joint stock company.

(viii) Divided responsibility.

Applications of Joint Stock Companies:

(i) Steel mills,

(ii) Fertiliser factories, and

(iii) Engineering concerns, etc.

Type # 4. Cooperative Organisation (Or Societies):

It is a form of private ownership which contains features of large partnership as well as some features of the corporation. The main aim of the cooperative is to eliminate profit and provide goods and services to the members of the cooperative at cost.

Members pay fees or buy shares of the cooperative, and profits are periodically redistributed to them. Since each member has only one vote (unlike in joint stock companies), this avoids the concen­tration of control in a few hands.

In a cooperative, there are shareholders, a board of directors and the elected officers similar to the corporation. There are periodic meetings of shareholders, also. Special laws deal with the formation and taxation of cooperatives.

Cooperative organisation is a kind of voluntary, democratic ownership formed by some moti­vated individuals for obtaining necessities of everyday life at rates less than those of the market. The principle behind the cooperative is that of cooperation and self-help.

Forms of Cooperative Enterprises:

(i) Consumer’s Cooperatives, in retail trade and services.

(ii) Producer Cooperatives, for group buying and selling such items as dairy products, grain, fruit, etc.

(iii) Cooperative farming for more and good quality yield from the farms.

(iv) Cooperative housing for constructing and providing houses to the members of the association at relatively lesser rates.

(v) Cooperative credit society, to provide loans to the needy individuals.

Advantages of Cooperative Enterprises:

(i) Daily necessities of life can be made available at lower rates.

(ii) It is the democratic form of ownership.

(iii) Overheads are reduced as members of the cooperative may render honorary services.

(iv) It promotes cooperation, mutual assistance and the idea of self-help.

(v) The chances of large stock-holding (hoarding) and black marketing are eliminated.

(vi) No one person can make huge profits.

(vii) Common man is benefited by cooperatives.

(viii) Monetary help can be secured from government.

(ix) Goods required can be purchased directly from the manufacturers and therefore can be sold at less rates.

Disadvantages of Cooperative Enterprises:

(i) Since the members of the cooperative manage the whole show, they may not be competent enough to make it a good success.

(ii) Finance being limited, specialist’s services cannot be taken.

(iii) Conflict may arise among the members on the issue of sharing responsibility and enjoying authorities.

(iv) Members who are in position may try to take personal advantages.

(v) Members being in services may not be able to devote necessary attention and adequate time for supervising the works of the cooperative enterprise.

Type # 5. Public Sector:

Concept of Public Sector:

A public enterprise is one that is:

(1) Owned by the state,

(2) Managed by the state, or

(3) Owned and managed by the state.

The sector of public enterprises is popularly known as the Public Sector. Public enterprises are controlled and operated by the Government either solely or in association with private enterprises. Public enterprises are controlled and operated by the Government to produce and supply goods and services required by the society. Ultimate control of public enterprises remains with the state and the stale runs it with a service motto.

Its sphere embraces all units, irrespective of risks involved and profit expected. There is no dearth of capital in public sector and business expansion is not difficult. Public sector prevents concentration and unbalanced growth of industries.

Public sectors are accountable in terms of their results to Parliament and State Legislature. A public enterprise is seldom as efficient as a private enterprise; wastage and inefficiency can seldom be reduced to a minimum.

Evolution of Public Sector:

The Industrial Revolution gave rise to many bitter social evils. It also gave birth to private capitalism. Consumers and workers were exploited and, therefore, there arose the need of State Intervention in industrial field. The intervention led to evolution of public sector/enterprises. The evolution of public sector in India is recent.

Prior to 1947, there was virtually no public sector barring the field of transport and communication, i.e., Railways, Posts and Telegraphs etc., are being managed by the Central Government since pre-independence period. Since independence, a large number of public enterprises have been established both by Central and State Governments.

The Hindustan Shipyard, The Hindustan Steels, the Hindustan Machine Tools, The Bharat Heavy Electricals, Indian Telephone Industries, Indian Airlines, Life Insurance Corporation are a few examples of public sector.

Objectives of Public Sector:

(1) To provide basic infrastructure facilities for the growth of economy.

(2) To promote rapid economic development.

(3) To undertake economic activity strategically important for the growth of the country, which if left to private initiative would distort the national objective.

(4) To have balanced regional development and even dispersal of economic activity throughout the country.

(5) To avoid concentration of economic power in a few hands.

(6) To create employment opportunities on an increasing scale.

(7) To earn foreign exchange in order to export commodities not available in the country e.g., petro­leum oil, sophisticated weapon systems etc.

(8) To look after well-being and welfare of public.

(9) To minimize exploitation of workers and consumers.

Merits of Public Sector:

(1) Public sector helps in the growth of those industries which require huge amount of capital and which cannot flourish under the private sector.

(2) Public sector helps in the implementation of the economic plans and enables them to reach the target of achievement within a prescribed period by taking initiative in- the establishment of in­dustries of its own accord.

(3) Due to the absence of project motive in the public sector, the consumers are benefitted by greater, better and cheaper products.

(4) Public enterprise prevents the concentration of wealth in the hands of a few and paves the way for equitable distribution of wealth among different sections of community.

(5) Public enterprise encourages industrial growth of under-developed regions in the country.

(6) Profits earned by public sector may be used for the general welfare of the community.

(7) Public sector offers equitable employment opportunities to all; there is no discrimination, as may be in a private sector.

(8) Capital, raw material, fuel, power and transport are easily made available to them.

Demerits of Public Sector:

(1) Public sector can rarely attain the efficiency of a private enterprise; wastage and inefficiency can seldom be reduced to a minimum.

(2) Due to heavy administrative expenses, state enterprises are mostly run at a loss leading to addi­tional burden of taxation on the people.

(3) There is too much interference by the Government and Politicians in the internal affairs of the public enterprises. As a result inefficiency increases.

(4) Delay in decisions is a very common phenomena in public enterprises.

(5) Incompetent persons may occupy high levels.

(6) Workers (unlike in private concerns) shirk work.

Type # 6. Private Sector:

Private sector serves personal interests and is a non-government sector. Profit (rather than service) is the main objective. Private sector constitutes mainly consumer’s goods industries where profit possibilities are high. Private sector does not undertake risky ventures or those having low-profit margin. Private enterprises are run by businessmen, capital is collected from the private partners.

Merits of Private Sector:

(i) The magnitude of profits incurred is high.

(ii) The efficiency of the private enterprise is high,

(iii) Wastage of material and labour is minimum.

(iv) Decision-making is very prompt.

(v) There is no interference in its internal affairs by politicians or Government.

(vi) Competent persons occupy high levels.

Demerits of Private Sector:

(i) There is exploitation motive, the workers and the consumers may not receive fair deal.

(ii) There is dearth of capital to expand the business.

(iii) Private enterprise leads to concentration of wealth in the hands of a few.

(iv) Private enterprises lead to unbalanced growth of industries.