The form of business organisation started developing, along with the development and expansion of trade, commerce and industry.
This development took place in order to cope up with the rising demands of more goods and services, demanding more capital and continued human efforts as well as specialised management skills.
Thus, the organisation developed from sole tradership to giant organisations like Joint Stock Company, corporations and cooperative undertakings.
The newer forms of business organisation can satisfy all the demands of growing national economy and they can systematically look after the ever expanding and elaborate modern industrial and commercial activities.
Organisation is a mechanism or a basic framework enabling persons to work together effectively and efficiently and assist to achieve the set goals through integrated group efforts.
On the basis of ownership, business organisations are classified into three categories:- 1. Private Enterprise 2. Joint or Mixed Sector 3. Public Enterprise.
Some of the private sector business organisations are:- 1. Sole Proprietorship 2. Partnership 3. Joint Stock Company 4. Joint Hindu Family Business.
Some of the public sector business organisations include:- 1. Public Corporations 2. Municipal Corporations.
Forms of Business Organisation: Private, Joint and Public Enterprise
Forms of Business Organisation – Private Enterprise, Joint or Mixed Sector and Public Enterprise
On the basis of ownership, we can classify different business entities into three parts, i.e.,:
1. Private enterprise
2. Joint or Mixed Sector
3. Public enterprise.
Let us discuss them in detail:
Form # 1. Private Enterprise:
These organizations are also called non-government enterprises because these are neither established nor controlled by the government. These are managed and controlled by the nongovernment persons. Under this category, we include sole proprietorship, Hindu-undivided family, partnerships, cooperative society and joint stock companies which are further divided as private company and public company. Let’s have brief discussion on these forms of business organizations.
i. Sole Proprietorship:
As the name signifies, it is a form of business organization which is managed and controlled by a single person to whom we call ‘sole trader’. He is the person who invests the capital, responsible for running the business, enjoys the fruits of profit and also bears the loss and he himself is the owner and manager of the business.
Various scholars have defined sole trader-ship in their own way and a few have been quoted here. According to Louis Henny “The individual proprietorship form of business organization is an organization at the head of which stands an individual as the one who is responsible, who directs its operation and who alone runs the risk of failure”. Kimbal and Kimbal define as “The individual proprietor is the supreme judge of all matters pertaining to his business, subject only to general laws of the land and to such special legislation as may affect his particular business”. James Stephensen says “A sole trader is a person who carries on business exclusively by and for himself”.
On the basis of above definitions, we can conclude that sole trader-ship is that form of business where a single person invests capital, establishes, directs and manages single-handedly to bear all kinds of profits and losses. So, the business which is run by a single person is known as ‘sole trade’ and the person who runs it called as ‘sole trader’. He is also known as individual entrepreneur, individual owner, individual organizer and sole proprietor.
Special Features of Sole Trade:
It is that kind of business which is easy to form and dissolve because it is free from all legal bindings to begin and to wind up. But the liability in this kind of business is unlimited where you are responsible to pay your debts even out of your personal property.
There is no distinction between business and businessman and he is free for any occupation. It is suitable in such conditions where area of operation is limited, lesser amount of capital is needed and where somebody wants to attain personal achievement or satisfaction. An entrepreneur, on one hand, enjoys direct relationships with the employees and consumers and on the other hand, enjoys the complete control on the business.
But in certain conditions when you are not able to turn up on a particular day, you may bear loss due to absence and if the owner dies then it is difficult for others to continue because there are certain secrets which are only known to the owner. One person may have only limited managerial and investment ability so when it comes to enhance the business there is always a problem with a single person. Therefore, this kind of business has its own advantages and disadvantages.
As the business progresses, the sole trader-ship form of business organization becomes small. This is simply because to produce at large scale, invest in a huge manner, to be efficient enough to control larger sort of operation, seems very difficult for a single person. In the growing business the need for more and more capital, limited managerial skill of an entrepreneur, ever increasing risk and limited goodwill are some of the constraints of sole trader-ship which necessitated the need for partnership.
Necessity is the mother of invention seems to be the true saying in case of evolution of partnership, means to remove the maladies of sole trader-ship, partnership form was evolved. In India, this form of business is directed and controlled through Partnership Act, 1932.
In the simple words, if two or more persons run a business, it together is known as ‘partnership’. According to Prof. Henny “The relation existing between persons competent to make contracts who agree to carry on a lawful business in common with a view to private gain”.
According to Indian Partnership Act, 1932 (Sec. 4) “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.”
On the basis of above definitions, it can be concluded that partnership is an agreement between two or more persons who will share profit and loss on the predetermined basis of a specific business and this business either is carried out by all of them or by any one of them on behalf of others.
It is important to mention here that as per Section 6 of Indian Partnership Act, if 1932 that if two or more persons possess a common property and share profits, they cannot be treated as partners. In that circumstances, these people are called co-owners. In partnership, individual members are called partners and collectively their business is known as ‘firm’ under whose name they run their partnership business.
iii. Joint Stock Company:
The world could witness two bigger evolutions. One of them was advent of industrial revolution and another was large-scale production. And due to these changes the whole structure of the world changed in terms of trade, industry, politics and at social levels. At earlier times, the structure of markets used to be locals and nationals but now these markets are shaping up into global markets.
The people are exposed to diversified media and are able to access any part of the world either physically or in form of products. They have been catered by huge variety of products of different flavour, design and colour. It has enhanced the demand pattern of the consumers and to cater to this kind of demand of the consumers, the marketers realized a different production style which demanded huge amount of capital which was not possible to deliver for the sole trader-ship and partnership.
So, there was a strong feeling of an institution which could meet the growing demand of the people. Therefore, this situation gave birth to a new form of business organization which was named as Joint Stock Company.
These kinds of joint stock companies first evolved in Italy. In 17th and 18th centuries, these kinds of companies were established in England under Imperial Charter Act. But due to excessive speculative activities this form was banned in England in 1720 under Bubbles Act. But with the passage of time, this form was again passed by the parliament of England in 1844.
The present form of joint stock companies are the contribution of the Englishmen in India. In 1600 A.D., the first English Company known as the East India Company was established in India by the permission of Royal Charter, then in 1670 Hundson Bay Company was formed and in 1694, Bank of England was incorporated. There used to be unlimited liability of the shareholders in these kinds of companies till 1855.
It was after 1855 where the principle of limited liability was accepted and in 1857 Joint Stock Companies Act was passed in India. Then there were so many amendments in Indian Companies Act. In 1913, new companies act was formed in India but it was also amended so many times and finally the Indian Companies Act 1956 came into existence which is still in operation, although it has also been amended for many times but these are known as revolutionary amendments.
Meaning of Company:
Section 3 of the Companies Act, 1956 defines the word ‘company’ as a company formed and registered under the Act or an existing company formed and registered under any of the previous laws. This definition does not bring out the meaning and nature of the company into a clear prospective. The vast majority of companies in India are with limited liability by shares.
Therefore, it is desirable to define the term company keeping in mind these types of companies. Various scholars from time to time have contributed to build upon a good definition of the company. The major contributories were Lord Lindley, L.C.B. Gower, Hanney, Justice James and Justice Marshall, etc.
As per the combined efforts of these authors, the company is defined as under:
“The company is an artificial person created by law, having separate legal entity, perpetual succession, limited liability and a common seal”. This definition is more comprehensive in defining the exact nature of the company.
It is yet another form of business organization in private sector. Before knowing joint Hindu family business, we must know something about joint Hindu family. Joint Hindu Family means the family which is joint, the family which is undivided and all the members live together. In other words, all the members of a family live and work together. Therefore, we can say that a business is run by a Hindu un-divided family and controlled by the senior most member of the family.
“When all the members of joint Hindu family carry a business under the control of Karta or Mukhiya of that family, such business is known as Joint Hindu Family Business”. This type of business can only be found in India. This type of business is directed under ‘Hindu Law’.
On the basis of this law, this kind of organization is divided into two parts:
It is implemented in Bengal, Assam and some parts of South India. Under this pattern, father becomes the full-fledged owner of the property in his lifetime and he manages all affairs related to property and business. As per this law, the property can be divided among brothers only, the sons cannot demand property from their father.
In rest of India, mitakshara is in practice. In this case, the senior most member owns the property and manages every function. The son becomes the owner of the property just by his birth. Karta with the help of all family members runs the business. Karta does not possess any right to sell the property of the family.
Management of Joint Hindu Family Business:
Joint Hindu Family business is run by the senior most family member. He takes care of all kinds of accounts and he enters into a contract with the other party. In the troublesome hours, he can pledge the prosperity of the family. He cannot be held responsible for the loss but if he does intentionally, he is held responsible. This business is recognized by the Indian Income Tax Act.
Two requirements are mandatory as per this law to be recognized as Joint Hindu Family Business-
(a) There should be a common property, and
(b) There should be at least two members who can demand the division of the property.
(i) Control by Hindu Law- This business is controlled and directed by the Hindu Law. Its rights and duties are specified in this law.
(ii) Membership- No endeavour is required to be the member of this business. By birth a family member obtains the membership.
(iii) Stability- The death of a member does not have any effect on this business as it continues even after death of a particular member.
(iv) Liability- Except ‘Karta’ the liability of all the members remain limited and up to their share.
(v) Minor Member- As one gets membership by birth so even a minor remains the member of this sort of organization.
(vi) Registration- As per law, registration of this business is not mandatory. Therefore, it is free from all legal hassles.
(vii) Restriction on membership of females- Only male members can obtain the membership of this business, females are barred from being members in this case.
v. Cooperative Organization:
In the chain of private sector organization yet another form of business organization exists named as cooperative organization. Although it is one of the oldest kind of organization yet it has gained popularity recently in India. It has evolved through two words Co + operation meaning thereby to work together. It is that kind of organization where men associate themselves voluntarily for a particular task for their financial well-being and development.
According to H. Klivert – “Cooperative is a form of organization wherein persons voluntarily associate together as human beings on a basis of equality for the promotion of the economic interest of themselves”.
According to Prof. Saligman “Cooperation in its technical sense means abandonment of competition in distribution and production and elimination of middleman of all kinds”.
M.L. Darling defines cooperation that it is something more than a system. It is a spirit which appeals to the heart and mind. It is a religion applied to business. It is a gospel of self-sufficiency and service.
So, on the basis of above discussion, we can conclude that it is a kind of organization where people associate themselves voluntarily on the basis of equal resources to promote their financial and economic interests and to render maximum social service and help to the society.
(i) Voluntary Organization:
This organization depends upon the will of the members where there is no place for any deception and ill-will. No undue influence is used, one can be the member at his or her will and also can leave on the same ground.
(ii) Equal Right:
In this kind of organization the principle of one man one vote applies. Any member can possess number of shares but when it comes to voting he can only use one vote. Therefore, on the basis of number of shares, there is no exploitation.
Although it is a voluntary organization but for the control of the state on such organization, its registration is compulsory. In India the registration is performed under Cooperative Act, 1912.
(iv) Democratic Management:
It is run by the elected members whose nominations are done in the annual general meeting on the basis of election. It works on the principle of interest for all by cooperative efforts.
(v) Cash Transactions:
In this kind of organization generally transactions take place on the basis of cash. Therefore, loss of money or bad debts is not the kinds problems associated with this business.
(vi) Open Membership:
It is another feature of cooperative organization that anybody could be the member irrespective of his or her religion, caste, creed and sex, etc. Its membership is open for all.
(vii) Elimination of Middlemen:
The main motto of this sort of organization is to eliminate the middlemen and competition so that the major benefits should reach to common masses.
(viii) Division of Profit:
The profit earned in a financial year is not divided on the basis of proportion of capital invested by the members but it is distributed in the form of dividend to all the members of the organization.
So, these are the major business organization forms existing in the private sector. Now let us discuss the joint or mixed sector.
Form # 2. Joint or Mixed Sector:
The business enterprises which are neither private nor public or the organizations which are established by both government and the private entrepreneurs are called joint sector or mixed organizations. The capital is invested not only by the government but also by the private hands and that may be through inviting money from the public in the form of shares or debentures.
The main feature of this kind of organization is that both government sector and private sector work together for the development of the economy. Maruti-Suzuki India Ltd. is the hottest example of the mixed sector where Maruti represents the government of India and Suzuki is a private Japanese company. Haryana Detergents, Dharuhera is the another example of Private- Public enterprise.
Form # 3. Public Enterprises:
When the government owns, controls and directs any business entity, it is known as public or government enterprise. Public enterprise should not be confused with public company which falls in the category of private sector. The government enterprises are also known as state enterprises. Prior to independence, the government of India used to look after only few departments like postage and telegram, rail transport and radio, etc.
But seeing the scenario of poverty, unequal distribution of wealth and the problem of unemployment led the government to think to adopt socialistic pattern of society. Therefore, the government of India announced its industrial policy in 1956 where it was decided that some industries should be kept by the government so as to provide basic infrastructural facilities to the private sector and to keep the social welfare industry intact in the hands of the government.
To attain the socialistic pattern of society, the government thought and planned that for the better development, basic industries and the industries, where huge investment is required, should be kept under the government control.
Meaning of State Enterprise:
According to Prof. Roy Chaudhary “State enterprise in business denotes an undertaking which is controlled and operated by the government as its sole owner”.
According to the Encyclopedia of Britannica, “The term public enterprise usually refers to government ownership and active operation of agencies engaged in supplying the public with goods and services which alternatively might be supplied by private enterprise operations, the same as private, are financed wholly or largely by receipts from sale of goods and services”.
So, on the basis of above definitions, it can be concluded that public enterprise is a kind of business organization which is either owned by the government or managed by the government or both the functions are performed by the state.
(i) Departmental undertaking
(ii) Public corporation
(iii) Joint stock company
(iv) Public trust
(i) Departmental Undertaking:
It is that kind of organization which is fully owned by the government and it is run by any of the departments of the state. Because it is directed by a department that is why it is known as ‘Departmental undertaking’. For example, postage or telegram and Indian Railways are such organizations of the central government.
These kinds of organizations are privileged in a manner that without the prior permission of the government, nobody can sue to these departments. These are directly controlled by the parliament and their budget is also approved by the parliament only.
(ii) Public Corporation:
The public corporation is a body with a separate existence which can sue and be sued and is responsible for its own finances. Public corporation is clothed with the power of the government but possesses the flexibility and initiative of private enterprise. These are established with the special act of parliament.
General Insurance Corporation (GIC), Life Insurance Corporation (LIC) and Indian Oil Corporation (IOC) are some of the examples of these kinds of establishments. These are run and managed by the board of directors. These organizations are exempted from the budgetary regulations unlike the departmental organizations.
(iii) State Enterprises Managed Like a Company:
It is one of the important organizations of the government. It is also called ‘Government Company’. According to Indian Companies Act 1956, “Government company means any company in which not less than 51 % of the paid up capital is held by the central government or by the state government and includes a company which is a subsidiary of a government company”.
The government has formed separate principles to run these companies. Their accounts, ledgers, audit and budgets are directed through special principles and rules. Steel Authority of India Limited (SAIL), National Fertilizers Limited (NFL), Gas Authority of India Limited (GAIL) are some of the examples of the government companies.
(iv) Public Trust:
Public trust is also one of the form of government business organizations. Initially, these were meant to control the parts of Kerala and Madras ports but later on they were also applied to develop certain areas. Improvement Trust, Investment Trust and Municipal Improvement Trust are some of the examples.
Forms of Business Organisation – With Examples, Merits and Demerits
To start a business enterprise the most important thing required is the capital. If the capital is provided to a single individual, it is known as single ownership, if the capital is supplied to two or more person it refers to partnership organization. If the capital is provided to many person in the form of shares to an institute with legal entity it is called Joint Stock Company.
There are various forms of industrial organization; Industrial ownership can be classified as:
i. Public Corporations
ii. Municipal Corporations
i. Sole Proprietorship
iii. Joint Stock Company
iv. Co-operative Organization
Form # 1. Public Sector:
The public sector is usually composed of organizations that are owned and operated by the government. The public sector is that portion of society controlled by national, state and local governments. The public sector includes such services as the military, police, public transit and care of public roads, public education, along with healthcare etc.
Aims and Objectives of Public Sector:
(a) To provide basic infrastructure facilities for the growth of economy.
(b) To promote rapid economic development.
(c) To undertake economic activity strategically important for the growth of the country which it led to private initiative would distort the national objective.
(d) To have balanced regional development and even dispersal of economic activity throughout the country.
(e) To avoid concentration of economic power in a low hand.
(f) To create employment opportunities on an increasing scale.
(g) To earn foreign in order to export commodities not available in the country e.g. petroleum oil, sophisticated weapons, systems etc.
(h) To look after well-being and welfare to public.
(i) To minimize exploitation of workers and consumers.
Merits of Public Sector:
(a) Public sector helps in the growth of those industries which require huge amounts of capital and which cannot flourish under the private sector.
(b) 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.
(c) Due to the absence of project motive in the public sector consumers are benefited by greater, better and cheaper products.
(d) Public enterprise prevents the concentration of wealth in the hands of a few makes the way of equitable distribution of wealth among different sections of community.
(e) Public enterprise encourages industrial growth of under-developed regions in the country.
(f) Profits earned by public sector may be used for the general welfare of the community.
(g) Public sectors offers equitable employment opportunities to all, there are no discrimination as may be in a private sector.
(h) Capital, raw material, fuel, power and transport are easily made available to them.
Demerits of Public Sector:
(a) Public sector rarely attains the efficiency of private enterprise, wastage and inefficiency can seldom be reduced to a minimum.
(b) Due to heavy administrative expense state enterprises are mostly run in a loss leading to additional burden of taxation on the people.
(c) There is too much interference by the government and politicians in the internal affair of the public enterprise. As a result inefficiency increases.
(d) Delay in decision is a very common, phenomenon in public enterprise.
(e) Incompetent person may occupy very high level.
(f) Workers (unlike in private concern) shrink work.
A public enterprise is an organization; which is owned by public authorities including central, state or local authorities. The government-owned corporations are termed as Public Sector Undertakings (PSUs) in India. In a PSU majority (51 % or more) of the paid up share capital is held by central government or by any state government or partly by the central governments and partly by one or more state governments.
A public sector Undertaking is one that is:
1. Owned by the state.
2. Manage by the state.
3. Owned and Managed by the state.
Organization of Public Sector:
a. Ministry of Railway and Finance etc.
b. Departmental Undertaking such as; Defense, Post and Telegraph, Defense production unit etc.
c. Statutory Corporation such as; LIC, AIR India, IFC, RBI, ONGC and NTC etc.
d. Central Board such as; Bhakra Nangal, Hira Kund and Nagarjun Sagar dam etc.
e. Government Companies such as; Ashok Hotels, ITI, HMT and Hindustan shipyard etc.
f. The water supply and electricity supply etc.
The urban local government which works for the development of any Metropolitan City with a population of more than one million is known as the Municipal Corporation. The Municipal Corporation consists of a committee which includes a Mayor with Councilor’s.
These businesses are run by local government authorities, which might be free to the user and financed by local taxes, (e.g, street lighting, schools, local library, rubbish collection). Its sources of income are taxes on water, houses, markets, entertainment and vehicles paid by residents of the town and grants from the state government.
If these businesses make a loss, usually a government subsidy is provided. However, to reduce the burden on taxpayers, many municipal enterprises are being privatised.
Functions of Municipal Corporation:
The Municipal Corporation looks after providing the essential services to the people of that district/area which includes:
(a) Discretionary Functions:
Construction of public parks, gardens, libraries, museums, theatres and stadiums, public housing, planting of trees on road sides and elsewhere, provision of relief to destitute and disabled persons, civil reception of VIPs, registration of marriages, organisation and management of fairs and exhibitions.
(b) Obligatory Functions:
Supply of wholesome water and construction and maintenance of water works, supply of electricity, road transport services, construction, maintenance, naming and numbering of public streets, lighting, watering and cleaning public streets, etc.
Form # 2. Private Sectors:
The private sector is that part of the economy, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state. The private sector is usually composed of organizations that are privately owned and not part of the government.
These usually includes corporations (both profit and non-profit), partnerships, and charities. So, the private sector is the part of a country’s economic system that is run by individuals and companies, rather than the government. Most private sector organizations are run with the intention of making profit.
Retail stores, Credit unions, and Local businesses will operate in the private sector.
a. Private sector serves personnel interest and is a non-government sector. Profit (rather than service) is the main objective.
b. Private sector constitutes mainly consumer goods industries where profit possibilities are high.
c. Private sector does not take risky ventures or those having low profit margin.
d. Private enterprise are run by businessmen, capital is collected from the private partners.
a. The magnitude of profit incurred is high.
b. The efficiency of the private enterprise is high.
c. Minimum wastage of materials and labour.
d. Decision making is very prompt.
e. There is no interference in the internal affairs by the politician and government.
f. Competent people occupy high level.
Demerits of Private Sectors:
a. There is exploitation motive, the worker and the consumer may not receive fair deal.
b. There is dearth of capital to expand the business.
c. Private enterprise leads to concentration of wealth to the hands of few.
d. Private enterprises lead to unbalanced growth of industries.
Sole Proprietorships the firm where the ownership and management of business are in control of one individual, who is called proprietor. Proprietor is directly liable for the losses or debts of the firm as well as for the profits earned by the firm. In proprietary firm the entire capital is provided by the owner of the firm. Proprietary firms need not to fulfill legal formalities to start up the business except in few cases.
Printing Press, Auto repair shop, Wood working plant, Grocery store, Stationery store, Vegetable store and Sweets shop etc
Advantages of Sole Proprietorship:
(a) Easy Formation:
Proprietary firm is easiest and economic form to create and operate as it can be started by any person without any legal formalities.
(b) Better Control:
As the owner is the single person so he has full control over his business. His total authority over his business gives him the power to plan, organize, co-ordinate the various activities.
(c) Quick Decision Making:
Being the only owner of the business the sole trader evaluates all the opportunities available and finds the solution to problems which makes decision making quick.
(d) Flexibility in Operations:
Ownership of one man makes it possible to bring flexibility in the operations of the business.
(e) Creation of Employment:
Proprietor firm facilitates self-employment and also employment for many others. It promotes entrepreneurial skill among the individuals.
(f) No Legal Formalities Required:
A proprietary firm is not required to comply with all the legal and procedural formality.
Disadvantages of Sole Proprietorship:
(a) Unlimited Liability:
In such firms the liability of the owner is unlimited as the owner takes more risk to earn more profits and increase the volume of his business by supplying his personal assets to the business.
(b) Limited Financial Resources:
Being the single owner of the business, the availability of funds from various sources is limited.
(c) No Legal Status:
The existence of business is due to the existence of sole proprietor. Death or insolvency of the sole proprietor brings an end to the business.
(d) Limited Capacity of Individual:
An individual has limited knowledge, set of skills due to which his capacity to undertake responsibilities, his capacity to take quick decisions and bear risks are also limited.
(e) Transfer of Business:
Transferring of business is not easy in the case of proprietary firm.
(f) Higher Taxes:
As the sole proprietor is the direct person enjoying the profits thus he needs to pay higher taxes.
A partnership firm is an organization which is formed with two or more persons to run a business with a view to earn profit. Each member of such a group is known as partner and collectively known as partnership firm. Many businesses are structured as general partnerships. General partners share both the benefits and obligations of the business. These firms are governed by the Indian Partnership Act, 1932.
Examples – Google (Larry Page and Sergey Brin), Twitter, EBay, Facebook, Skype, Retail Trade organizations, Real Estate, Law Firms, Medical clinics, Small engineering firms, advertising, marketing and Graphic design businesses etc.
The minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business.
(a) Be faithful to each other.
(b) Give true accounts and full information.
(c) Co-operate and accommodate each other. Types of Partners
(a) Active or Managing Partners:
They take part in the management of activities and formulation of policies. Some tines they get salaries in addition to the normal profits as partakers.
(b) Sleeping or Silent Partners:
They do not take active part in the business. They simply get their share of profit from the firm according to their investment. But they are liable fare all the company debts.
(c) Nominal Partners:
They lend their name to enhance company’s repetition. They do not invest money and do not take any active part in the management but enjoy a small predefined share of the profit. They are not liable for company debts.
(a) Easy Formation:
Registration is not compulsory in the case of Partnership firm. It can be formed without any legal formality and expenses. Thus they are simple and economical to form and operate.
(b) Larger Financial Resources:
Due the more number of members the partnership firm has larger resources for the business operations as compared to sole proprietorship.
(c) Better Management:
Business of a partnership firm is very well managed by all the partners as they take interest in the daily affairs of business because of the ownership, profit and control.
(d) Sharing of Risk:
In partnership every partner bears the risks individually as it is easier compared to sole proprietorship.
Disadvantages of Partnership:
A partnership firm does not exist for an indefinite period of time. The death, insolvency or lunacy of a partner may lead to dissolution of the partnership firm.
(b) Unlimited Liability:
Liability of every partner in a partnership firm is unlimited as any of the partners may be called upon to pay all the debts even from its personal properties. A single wrong decision by one partner can lead other partners in heavy losses and liabilities.
(c) Limited Capital:
Due to the restriction on the maximum number of members, a limited amount of capital can be raised.
(d) Exist for Limited Period:
The partnership may have a limited life; it may end upon the withdrawal or death of a partner. And does not have a separate legal entity status.
(e) Difficulty in Transfer of Ownership:
In a partnership firm it is not easy to transfer ownership. Consent of every partner is required in order to transfer ownership.
In a partnership, there can be a maximum of 20 people. Because of this limit, the amount of capital that can be generated is limited. Also, because of the unlimited liability of partnerships, the partners may be discouraged from taking huge risks and further expanding their business. To overcome these problems joint stock company (a public or a private company) may be formed.
A joint stock company is a voluntary association of persons to carry on the business. It is an association of persons who contribute money which is called capital for some common purpose. These persons are members of the company. The proportion of capital to which each member is entitled is his share and every member holding such share is called shareholders and the capital of the company is known as share capital.
Engineering concerns, Fertilizers companies, Pharmaceuticals, Cement, FMCG (Hindustan Uni-lever Limited) and Steel companies (Tata Iron and Steel Co., the Steel Authority of India Limited) etc.
“An artificial person created by law, having separate legal entity from its owner with perpetual succession and a common seal.”
– The Companies Act 1956
Advantages of Joint Stock Company:
(a) Limited Liability:
Liability of members of Joint Stock Company is limited to the extent of shares held by them. Hence shareholders assets will not be on stake. This feature attracts large number of investors to invest in the company.
(b) Perpetual Existence:
A company is an artificial legal person created by law which has its own independent legal status. Its existence is not affected by the death or insolvency of its members.
(c) Large Scale Operation:
The capacity of the corporate organizations to raise the funds is comparatively high which provide capital for large scale operations; hence opens the scope for expansion.
(d) Funds Raising:
It is easy to raise a large amount of funds as the numbers of persons contributing to the capital are more.
(e) Social Benefit:
It offers employment to a large number of people. It facilitates promotion of various ancillary industries. It also donates money for education, community service.
Disadvantages of Joint Stock Company:
(a) Formation is Not Easy:
To act as a legal entity a company has to fulfill various legal and procedural formalities making it a complicated process.
(b) Double Taxation:
This is the biggest disadvantage which the company faces. Firstly, company needs to pay tax for the earned profits and again the shareholders are taxed for the earned income.
(c) Control by Board of Directors:
After electing directors of the company which manage the business for the company the shareholders become ignorant of their responsibilities. This may be due to lack of interest and lack of proper and timely information.
(d) Excessive Government Control:
A company has to comply with provisions of several acts, non-compliance of which can cause a company heavy penalty. This affects the smooth functioning of a company.
(e) Delay in Policy Decisions:
All the legal and procedural formalities which are required to fulfill before making policies of the company delay the policy decisions.
(f) Speculation and Manipulation:
As the shares of a joint stock company are easily transferable thus the shares are purchased and sold in the stock exchanges on the value or price of a share based on the expected dividend and the reputation of the company.
Types of Joint Stock Company:
1. Private Limited Company and
2. Public Limited Company
A private limited company needs to have a minimum paid up share capital of Rs. 1 lakh or any higher amount as may be prescribed. Private Limited Companies can operate through just one director but minimum number of shareholders is 2 and maximum number is 50. Private limited company cannot approach general public for subscription to the shares or debentures of the company.
The funds required by the company are collected through the private circulation only i.e. directors, relatives and its shareholders. The shareholders are restricted on transfer of their shares to general public. Liability of every shareholder in a private limited company is unlimited. A private limited company cannot trade its shares on the stock market.
Special Characteristics of Private Limited Companies:
According to the Companies Act, a Private Company has the following characteristics:
i. These companies can be formed by at least two individuals having minimum paid-up capital of not less than Rs 1 lakh.
ii. As per the Companies Act, 1956 the total membership of these companies cannot exceed 50.
iii. The shares allotted to its members are also not freely transferable between them.
iv. These companies are not allowed to raise money from the public through open invitation.
v. Restricts invitation to public for subscriptions towards shares or debentures.
vi. They are required to use “Private Limited” after their names. Examples: Combined Marketing Services Private Limited, Publishers and Distributors Private Limited etc
In a Public Limited Company minimum number of shareholders is 7 and there is no limit on maximum number of shareholders. Minimum two numbers of directors are required to form a public limited company. It can freely approach public in general to subscribe for its shares or debentures.
The shareholders of the Public Limited Company can freely transfer their shares to any other person. A public limited company needs to have a minimum paid-up share capital of lakhs or more as may be prescribed. Every shareholder of public limited company has limited liability. They are only liable to the unpaid amount.
1. A minimum of seven members are required to form a public limited company.
2. It must have minimum paid-up capital of lakhs.
3. There is no restriction on maximum number of members.
4. The shares allotted to the members are freely transferable.
5. These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits.
6. These companies are required to write either ‘public limited’ or ‘limited’ after their names.
Companies like Infosys, TISCO, L&T, Hindustan lever, Reliance Hyundai Motors India Limited and Dabur India Limited, etc are all public limited companies.
It is a form of private ownership which features of large partnership as well as some features of corporation. The main aim of the co-operative is to eliminate profit and to provide goods and services to the members of the co-operative at cost. Members pay fee or buy shares of the co-operative and profits are particularly redistributed to them.
Since each members has only one vote (unlike to joint stock company) this avoids the concentration of control in a few hands. In a co-operative there are shareholders, a board of directors, and the elected officers similar to the cooperation.
There are periodic meetings of shareholders also. A special law deals with the formation and taxation of co-operatives. Co-operative organization 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 co-operative is that of cooperation and self-help.
1. Producers Co-Operative Society:
They manage their own business right from production up to retail sales their eliminating the middle area. They are their own bosses and they are their own employees. They put in hand works and learn how to work in team spirit.
Haryana Handloom, Milk and Dairy products Co-operative Society in villages.
2. Consumers Co-Operative Society:
In this form of co-operative consumers living in a particular area come together, open a stock, buy goods directly from the manufactures and sell it at wholesale late to its members.
Gujarat Co-operative Milk Marketing Federation (GCMMF), Gujarat.
3. Housing Co-Operative Society:
In this form of Co-operative, employees of an organisation come together, buys large plots of land at a cheap rate, convert them into sites, and help its members to build their own houses.
B.E.L., Employees Housing Co-operative Society.
4. Co-Operative Banks:
In this form of co-operative members of the general public come together, contribute capital and start a bank. The bank accepts fixed deposits, extends loan facilities and encourages entrepreneurship among its members.
District Co-operative Bank.
Advantages of Co-operative Enterprises
(a) Daily necessities of life can be made available at lower rates.
(b) Overheads are reduced as members of the co-operative may render honorary service.
(c) It promotes cooperation, mutual assistance, idea of self-help.
(d) The chance of large stock-holding (hoarding) and black marketing are eliminated.
(e) No one person can make huge profit.
(f) Common man is benefited by co-operatives.
(g) Monetary help can be secured from the government.
(h) Goods required can be directly purchased from the manufacturer and therefore can be sold at lower rates.
Disadvantages of Co-operative Enterprises
a. Since the members of the co-operative manage the whole show. They may not be competent enough to make it a good success.
b. Conflict may arise among the members or the issue of sharing responsibility and enjoying authorities.
c. Members who are in position may try to take personal advantage.
d. Members being in the service may not be able to devote necessary attention and adequate time for supervising the work of the co-operative enterprise.