There are mainly three forms of business organisation which are as follows: 1. Sole Proprietorship 2. Partnership 3. Joint Stock Company.
While starting a business one has to choose one out of these different forms.
Form # 1. Sole Proprietorship:
One man business or sole proprietorship is the oldest form of business organisation from ownership point of view. In this type of business an individual introduces his own capital, uses his own skill and efficiency; solely manages the affairs of the business and is himself responsible for the results of its operations.
In simple words, this type of business is completely owned and controlled by one person. Though it is the oldest form, still it is the most common form of business organisation even today. All that a person has to do is to decide the type of business one wants to do and arrange for the necessary amount of capital.
This type of business has no separate legal entity and the total reward and risk is to be fully assumed by the owner himself. His liability is also unlimited.
Thus the following features of a sole proprietorship emerge from the above discussion:
(i) It is owned by one individual.
(ii) It is managed and controlled by one person.
(iii) The liability of owner is unlimited.
(iv) The owner has to fully bear the risk.
(v) There is not much government regulation to interfere.
One man business is considered to be the best because of the following advantages:
I. Easy Formation:
There are no legal formalities to be performed for the formation of this type of business. Any person can decide to form one man business and start without the interference of anybody else. Thus, it is the easiest of all types of ownership form of organisations.
II. Full Control:
The proprietor has the exclusive right of managing and controlling the affairs of the business. There is no problem of consulting any partner or anybody else. His decisions regarding his business are final. He can avail of any opportunities and meet crisis as he deems fit.
III. Personal Relation with Customers and Employees:
As a sole trader business is generally small in size, the owner is in a position to be in close touch with his customers and his employees and cater to their needs and tasks, individual attention to customers results in their increased satisfaction and thus results in increased sales and more profits.
The main object of business is to earn maximum profits. In proprietary business there is a direct relationship between effort and reward. This serves as a powerful incentive because the proprietor knows that the entire reward of his efforts will go to him. He therefore works harder to earn extra profits.
V. Personal Goodwill:
A sole proprietor can build a grand goodwill on the basis of his personal resources.
VI. Quick Decisions:
For efficient operation of a business sometimes situations arise whereby a businessman has to take prompt decisions to take advantage of certain opportunities. This is an added advantage of one man business where there cannot be delay in taking decision for want of consulting anybody else.
As secrecy is very important for the success of a business, the sole proprietor is in a special position to take full advantage of being a single person to maintain his business secrets.
VIII. No Government Regulation:
Unlike companies, there is no interference and regulation of the government regarding sole tradership. Of course, he has to comply with tax laws, labour laws etc. but there is no special Act dealing with sole tradership.
Of course the advantages explain as to why one man business is the best in the world, but no man is big enough to control everything.
However, it has the following disadvantages:
I. Limited Financial Resources:
Being an individual, his financial resources are limited to meet the needs of the growing business. As he can depend only on his savings the size of the business remains small and it takes quite long for him to expand the size of the business.
II. Limited Managerial Ability:
The managerial skill of the single owner is also limited as there is no one who can sincerely advise him on his business problems. Today business is full of complications and one man finds it quite difficult to meet the problems because of the limited managerial skill of an individual.
III. Unlimited Liability:
The sole proprietor has to bear the entire financial burden and risk of the business. As his liability is unlimited not only the assets of business, but also his private property and estate can be used for discharging the liabilities of business. This also works as a disincentive to expand his business.
IV. Uncertainty of Duration:
The sole tradership form of business comes to an end with the death or insolvency of the owner. Thus, this type of business can abruptly come to an end.
From the above we can conclude that one man business suits in the following types of businesses:
(i) Where limited amount of capital is needed.
(ii) Where risk is not heavy.
(iii) Where business is not complicated so that one person can conveniently manage.
(iv) Where personal attention should be given to customers.
Form # 2. Partnership:
The partnership business is very often an outgrowth of sole tradership concerns. In the same way, private limited companies are generally formed out of partnership concerns. A partnership is 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.
Some of the basic features of partnership are as follows:
i. In order to form a business firm, there must be at least two persons, but not more than 20.
ii. Partnership is the result of a contract between the partners.
iii. Profits or losses in a partnership are to be shared equally by all the partners unless stated otherwise.
iv. Each partner can participate in the management of the business except sleeping partners.
Advantages of Partnership in Comparison to Sole Proprietorship:
However, partnership enjoys the following advantages as compared to sole tradership.
I. Larger Financial Resources:
The combined resources or savings of many individuals would be certainly larger than the limited capital of the sole proprietor.
II. In case of death of a sole trader, his business comes to an end. But in the case of partnership, the death, insolvency or accident of any one of the partners, the business continues.
III. Being a small business, a sole trader is quite ineffective in exerting nay controlling influence both as a buyer and as a seller.
IV. Division of Labour:
Benefits of specialisation may be derived by a partnership firm by distributing work among the partners in such a way that each of the partner may specialise in one of the functions like production, purchasing, marketing, finance etc. But this is not possible in sole tradership.
V. Better Managerial Ability:
Partnership gets the benefit of combined managerial ability of a number of partners. Such managerial ability is quite limited in sole proprietorship business.
Thus it will be seen that most of the advantages and limitations of sole tradership are overcome by a partnership firm.
Form # 3. Joint Stock Company:
Joint stock company form of business organisation is the most popular form of which has helped modern industries by providing enormous capital to the industry. The fundamental principle of a joint stock organisation is that the capital is contributed by a large number of people, known as shareholders who have very restricted powers and have hardly any say in the managerial affairs of the business.
A company has been defined by C.J. Marshall as “A corporation is an artificial being, invisible and existing only in contemplation of law. Being a mere creation of law it possesses only the properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.” The above definition makes it clear that the individuality of the company is different from its constituents and the company exists in the eyes of law as a separate entity.
However, the following are the distinctive characteristics of a joint stock company:
I. Distinct Entity:
A company is not a natural person. It is an artificial person which exists only in the eyes of law. Being a creation of law, it has a distinct legal entity. Its entity is different from the persons who are its members. A company is created with a purpose of enabling a group of persons to conduct some activity in some more convenient way than would have been possible by retaining their identity as individuals. A shareholder who is its partner, being a distinct person can sue a company and be sued by the company.
II. Limited Liability:
The liability of the members of a joint stock company is limited to the nominal value of their shareholdings. In other words, unlike partnership and sole-tradership, the private estates of the shareholders are not liable towards the debts of the Company. Therefore, whereas a shareholder stands to lose the amount invested in the shares of a company, he cannot be called upon to pay anything from his private property in order to help the company in its financial crisis.
III. Perpetual Succession:
The existence of the company is not affected by death of any or all of its members. Members may transfer their shares but the company continues in the same name. It is well said that members may come and members may go, but the company goes for ever. As the company is brought into existence by law, it is law alone that will bring the life of the company into an end.
IV. Command Seal:
As a company is an artificial person, it cannot sign on any documents. Common seal with the name of the company engraved on it is used as a substitute for its signatures. The law requires every company to have a seal of its own. The fact that the seal of the company should not be misused by anyone, the directors who work as agents of the company are required to sign along-with the seal of the company.
V. Transfer of Shares:
The shares which are the constituents of the share capital of the company are freely transferable. A shareholder can anytime sell his shares in the open market without the consent of anyone.
VI. Divorce between Ownership and Management:
As a company is a distinct legal entity from that of shareholders, the shareholders cannot bind the company by their acts. The management of the company is entrusted to an elective body known as Board of Directors.
The main advantages of the company form of organisation are clear from the above discussion of the characteristics.
However, a list of advantages is given below:
i. Large Financial Resources:
A company can have unlimited number of shareholders. These shareholders contribute huge amount of funds towards the capital of the company. This is an outstanding advantage of the company that it allows the vast amount of capital flown into it that would have otherwise little chance of being used. As shares of the company are of small value, a person with small resources can become a member of a company by purchasing only as many shares as capacity permits.
ii. Transfer of Shares:
Shares in a company are conveniently transferable without having to obtain anybody’s consent. The shares of the companies are dealt with at stock exchanges and immediate buyers and shares of all shares easily available here. Thus stock exchanges provide an added attraction to invest in shares.
iii. Diffused Risk:
The risk of loss in a company is spread over a large number of investors each of whom will share only a small portion of the loss if any. This advantage is from the point of view of the individual shareholder.
iv. Democratic Management:
The Board of Directors is an elective body to which the management of the company is entrusted. The law provides for democratic norms for the election of the directors and the functioning of the company.
v. Limited Liability:
This is an added advantage to the shareholders. The liability of the shareholders is limited, a person who buys shares in a company cannot be called upon to pay more than the nominal value of shares. This puts a limit to the risk that the members of the company are subjected to.
vi. Greater Efficiency:
As professional managers can be employed by companies, greater efficiency of management is possible.
vii. Stale Existence:
The company enjoys a perpetual existence and it is not affected by the death, retirement or insolvency of any or all the members of the company.
viii. Aid in National Development:
The company form of organisation assists in the development and progress of industries of the nation by stimulating enterprise making available large capital for industries.
ix. Tax Benefit:
The Income Tax also provides for many tax benefits to joint stock company. This chief advantage is that the rate of income tax is on a flat rate and not on a slab system.