Forms of Business Organizations

Features of a JHFB

Formation: For a joint Hindu family business, there should be at least two members in the family and ancestral property to be inherited by them. The business does not require any agreement as membership is by birth. It is governed by the Hindu Succession Act, 1956 Liability: The liability of all members except the karta is limited to their share of co-parcenery property of the business. The karta, however, has unlimited liability. Control: The control of the family business lies with the karta. He takes all the decisions and is authorized to manage the business. Continuity: The business continues even after the death of the karta as the next eldest member takes up the position of karta, leaving the business stable. The business can, however, be terminated with the mutual consent of the members. Minor Members: The inclusion of an individual into the business occurs due to birth in a Hindu Undivided Family. Hence, minors can also be members of the business.

Who is the chief managing body elected by the shareholders?

Board of directors

Merits of a partnership

Ease of formation and closure: A partnership firm can be formed easily by putting an agreement between the prospective partners into place whereby they agree to carryout the business of the firm and share risks. There is no compulsion with respect to registration of the firm. Closure of the firm too is an easy task. Balanced decision making: The partners can oversee different functions according to their areas of expertise. Because an individual is not forced to handle different activities, this not only reduces the burden of work but also leads to fewer errors in judgements. As a consequence, decisions are likely to be more balanced. More funds: In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed. Sharing of risks: The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners. Secrecy: A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations

Merits of JHFB

Effective control: The karta has absolute decision making power. This avoids conflicts among members as no one can interfere with his right to decide. This also leads to prompt and flexible decision making. Continued business existence: The death of the karta will not affect the business as the next eldest member will then take up the position Limited liability of members: The liability of all the co-parceners except the karta is limited to their share in the business, and consequently their risk is well-defined and precise. Increased loyalty and cooperation: Since the business is run by the members of a family, there is a greater sense of loyalty towards one other. Pride in the growth of business is linked to the achievements of the family. This helps in securing better cooperation from all the members.

Who is the JHFB controlled by

Eldest male member of the family called karta

Limitations of cooperative societies

Limited resources Inefficiency in management Lack of secrecy Government control Differences of opinion

The JHFB is governed by which law

The Hindu Law

Public company

(a) has a minimum paid-up capital of Rs. 5 lakhs or a higher amount which may be prescribed from time-to-time; (b) has a minimum of 7 members and no limit on maximum members; (c) has no restriction on transfer of shares; and (d) is not prohibited from inviting the public to subscribe to its share capital or public deposits.

Privileges of a private limited company

1. A private company can be formed by only two members whereas seven people are needed to form a public company. 2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company. 3. Allotment of shares can be done without receiving the minimum subscription. 4. 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. 5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company. 6. A private company is not required to keep an index of members while the same is necessary in the case of a public company. 7. 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.

What are the minimum number of members required to form a cooperative society?

10

joint-stock company

A company can be described as an artificial person having a separate legal entity, perpetual succession and a common seal.

Sole Proprietorship

A form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks.

The consequences of non-registration of a firm are

A partner of an unregistered firm cannot file a suit against the firm or other partners The firm cannot file a suit against third parties. The firm cannot file a case against the partners.

Types of partners

Active partner: An active partner is one who contributes capital, participates in the management of the firm, shares its profits and losses, and is liable to an unlimited extent to the creditors of the firm. These partners take actual part in carrying out business of the firm on behalf of other partners. Sleeping or dormant partner: Partners who do not take part in the day to day activities of the business are called sleeping partners. A sleeping partner, however, contributes capital to the firm, shares its profits and losses, and has unlimited liability. Secret partner: A secret partner is one whose association with the firm is unknown to the general public. Other than this distinct feature, in all other aspects he is like the rest of the partners. He contributes to the capital of the firm, takes part in the management, shares its profits and losses, and has unlimited liability towards the creditors. Nominal partner: A nominal partner is one who allows the use of his/her name by a firm, but does not contribute to its capital. He/she does not take active part in managing the firm, does not share its profit or losses but is liable, like other partners, to the third parties, for the repayments of the firm's debts. Partner by estoppel: A person is considered a partner by estoppel if, through his/her own initiative, conduct or behaviour, he/she gives an impression to others that he/she is a partner of the firm. Such partners are held liable for the debts of the firm because in the eyes of the third party they are considered partners, even though they do not contribute capital or take part in its management. Partner by holding out: A partner by 'holding out' is a person who though is not a partner in a firm but knowingly allows himself/herself to be represented as a partner in a firm. Such a person becomes liable to outside creditors for repayment of any debts which have been extended to the firm on the basis of such representation. In case he is not really a partner and wants to save himself from such a liability, he should immediately issue a denial, clarifying his position that he is not a partner in the firm. If he does not do so, he will be responsible to the third party for any such debts.

Co parceners

All members have equal ownership right over the property of an ancestor

Features of joint stock company

Artificial person: A company is a creation of law and exists independent of its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, eat, run, talk and so on. It is, therefore, called an artificial person. Separate legal entity: From the day of its incorporation, a company acquires an identity, distinct from its members. Its assets and liabilities are separate from those of its owners. The law does not recognize the business and owners to be one and the same. Formation: The formation of a company is a time consuming, expensive and complicated process. It involves the preparation of several documents and compliance with several legal requirements before it can start functioning. Registration of a company is compulsory as provided under the Indian Companies Act, 1956. Perpetual succession: A company being a creation of the law, can be brought to an end only by law. It will only cease to exist when a specific procedure for its closure, called winding up, is completed. Members may come and members may go, but the company continues to exist. Control: The management and control of the affairs of the company is undertaken by the Board of Directors, which appoints the top management officials for running the business. The directors hold a position of immense significance as they are directly accountable to the shareholders for the working of the company. The shareholders, however, do not have the right to be involved in the day-to-day running of the business. Liability: The liability of the members is limited to the extent of the capital contributed by them in a company. The 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. The members can be asked to contribute to the loss only to the extent of the unpaid amount of share held by them. Common seal: The company being an artificial person acts through its Board of Directors. The Board of Directors enters into an agreement with others by indicating the company's approval through a common seal. The common seal is the engraved equivalent of an official signature. Any agreement which does not have the company seal put on it is not legally binding on the company. Risk bearing: The risk of losses in a company is borne by all the share holders. This is unlike the case of sole proprietorship or partnership firm where one or few persons respectively bear the losses. In the face of financial difficulties, all shareholders in a company have to contribute to the debts to the extent of their shares in the company's capital. The risk of loss thus gets spread over a large number of shareholders.

Types of cooperative societies

Consumer's cooperative societies: The consumer cooperative societies are formed to protect the interests of consumers. The members comprise of consumers desirous of obtaining good quality products at reasonable prices. The society aims at eliminating middlemen to achieve economy in operations. It purchases goods in bulk directly from the wholesalers and sells goods to the members, thereby eliminating the middlemen. Profits, if any, are distributed on the basis of either their capital contributions to the society or purchases made by individual members. Producer's cooperative societies: These societies are set up to protect the interest of small producers. The members comprise of producers desirous of procuring inputs for production of goods to meet the demands of consumers. The society aims to fight against the big capitalists and enhance the bargaining power of the small producers. It supplies raw materials, equipment and other inputs to the members and also buys their output for sale. Profits among the members are generally distributed on the basis of their contributions to the total pool of goods produced or sold by the society. Marketing cooperative societies: Such societies are established to help small producers in selling their products. The members consist of producers who wish to obtain reasonable prices for their output. The society aims to eliminate middlemen and improve competitive position of its members by securing a favourable market for the products. It pools the output of individual members and performs marketing functions like transportation, warehousing, packaging, etc., to sell the output at the best possible price. Profits are distributed according to each member's contribution to the pool of output. Farmer's cooperative societies: These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. The members comprise of farmers who wish to jointly take up farming activities. The aim is to gain the benefits of large scale farming and increase the productivity. Such societies provide better quality seeds, fertilisers, machinery and other modern techniques for use in the cultivation of crops. This helps not only in improving the yield and returns to the farmers, but also solves the problems associated with the farming on fragmented land holdings. Credit cooperative societies: Credit cooperative societies are established for providing easy credit on reasonable terms to the members. The members comprise of persons who seek financial help in the form of loans. The aim of such societies is to protect the members from the exploitation of lenders who charge high rates of interest on loans. Such societies provide loans to members out of the amounts collected as capital and deposits from the members and charge low rates of interest. Cooperative housing societies: Cooperative housing societies are established to help people with limited income to construct houses at reasonable costs. The members of these societies consist of people who are desirous of procuring residential accommodation at lower costs. The aim is to solve the housing problems of the members by constructing houses and giving the option of paying in instalments. These societies construct flats or provide plots to members on which the members themselves can construct the houses as per their choice

The formation of cooperative society is governed by which policy?

Cooperative society act 1912

Important factors in determining the choice of organisation

Cost and ease in setting up the organisation Liability Continuity Management ability Capital considerations Degree of control Nature of business

Two systems of JHFB

Dayabhaga system- prevails in West Bengal male and female members can be coparceners Mitakashara system- prevails all over India except WB only male members can be coparceners

Merits of cooperative societies

Equality in voting status Limited liability Stable existence Economy in operations Support from government Ease of formation

Features of sole proprietorship

Formation and closure: Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. There is no separate law that governs sole proprietorship. Closure of the business can also be done easily. Liability: Sole proprietors have unlimited liability. Sole risk bearer and profit recipient: The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing. Control: He can carry out his plans without any interference from others. No separate entity: In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity. Lack of business continuity: Since the owner and business are one and the same entity, death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.

Features of a partnership

Formation: The partnership form of business organisation is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement wherein the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified. Liability: The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. Further, the partners are jointly and individually liable for payment of debts. Risk bearing: The partners bear the risks involved in running a business as a team. Decision making and control: The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners. Continuity: Partnership is characterized by lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business. However, the remaining partners may if they so desire continue the business on the basis of a new agreement. Membership: The minimum number of members needed to start a partnership firm is two, while the maximum number, in case of banking industry is ten and in case of other businesses it is twenty. Mutual agency: The definition of partnership highlights the fact that it is a business carried on by all or any one of the partners acting for all. In other words, every partner is both an agent and a principal. He is an agent of other partners as he represents them and thereby binds them through his acts. He is a principal as he too can be bound by the acts of other partners.

What does the Indian partnership act of 1932 suggest with respect to registration of partnerships?

Indian Partnership Act 1932, the partners may get the firm registered with the Registrar of firms of the state in which the firm is situated. The registration can be at the time of formation or at any time during its existence. The procedure for getting a firm registered is as follows: 1. Submission of application in the prescribed form to the Registrar of firms. The application should contain the following particulars: • Name of the firm • Location of the firm • Names of other places where the firm carries on business • The date when each partner joined the firm • Names and addresses of the partners • Duration of partnership This application should be signed by all the partners. 2. Deposit of required fees with the Registrar of Firms. 3. The Registrar after approval will make an entry in the register of firms and will subsequently issue a certificate of registration.

Will two people coming together for charitable purposes be a partnership? Why?

It will not be a partnership because they are coming for motives other than profit.

Oldest form of business organization in India

Joint Hindu Family Business

Explain the repayments of loans in a partnership

Jointly, all the partners are responsible for the debts and they contribute in proportion to their share in business and as such are liable to that extent. Individually too, each partner can be held responsible repaying the debts of the business. However, such a partner can later recover from other partners an amount of money equivalent to the shares in liability defined as per the partnership agreement.

limitations of sole proprietorship

Limited Resources Limited life of a business concern Unlimited liability Limited managerial ability

merits of joint stock company

Limited liability Transfer of interest Perpetual existence Scope for expansion Professional management

Limitations of JHFB

Limited resources: The joint Hindu family business faces the problem of limited capital as it depends mainly on ancestral property. This limits the scope for expansion of business. Unlimited liability of karta: The karta is burdened not only with the responsibility of decision making and management of business, but also suffers from the disadvantage of having unlimited liability. His personal property can be used to repay business debts. Dominance of karta: The karta individually manages the business which may at times not be acceptable to other members. This may cause conflict amongst them and may even lead to break down of the family unit. Limited managerial skills: Since the karta cannot be an expert in all areas of management, the business may suffer as a result of his unwise decisions. His inability to decide effectively may result into poor profits or even losses for the organisation.

What does the partnership deed include?

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

Types of Partnerships on the basis of duration

Partnership at will: This type of partnership exists at the will of the partners. It can continue as long as the partners want and is terminated when any partner gives a notice of withdrawal from partnership to the firm. Particular partnership: Partnership formed for the accomplishment of a particular project say construction of a building or an activity to be carried on for a specified time period is called particular partnership. It dissolves automatically when the purpose for which it was formed is fulfilled or when the time duration expires.

Merits of sole proprietorship

Quick decision making Confidentiality of information Direct incentive Sense of accomplishment Ease of formation and closure

registration

Registration of a partnership firm means the entering of the firm's name, along with the relevant prescribed particulars, in the Register of firms kept with the Registrar of Firms. It provides conclusive proof of the existence of a partnership firm.

Which form of business organization is most suitable for small businesses

Sole Proprietorship

Who owns and carries on the JHFB

The Hindu Undivided Family

Partnership

The Indian Partnership Act, 1932 defines partnership as "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."

What are shares

The capital of the company is divided into smaller parts called 'shares' which can be transferred freely from one shareholder to another person (except in a private company).

cooperative societies

The cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members. The cooperative society is compulsorily required to be registered under the Cooperative Societies Act 1912. The process of setting up a cooperative society is simple enough and at the most what is required is the consent of at least ten adult persons to form a society. The capital of a society is raised from its members through issue of shares. The society acquires a distinct legal identity after its registration.

Which policy granted the permit to limited partnership?

The introduction of New Small Enterprise Policy 1991. This helped partnership firms attract equity from friends and relatives who were reluctant to help before because of unlimited liability.

Partnership deed

The written agreement which specifies the terms and conditions that govern the partnership is called the partnership deed.

Limitations of partnership

Unlimited liability: Partners are liable to repay debts even from their personal resources in case the business assets are not sufficient to meet its debts. The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so. Limited resources: There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large scale business operations. As a result, partnership firms face problems in expansion beyond a certain size. Possibility of conflicts: Partnership is run by a group of persons wherein decision making authority is shared. Difference in opinion on some issues may lead to disputes between partners. Further, decisions of one partner are binding on other partners. Thus an unwise decision by some one may result in financial ruin for all others. In case a partner desires to leave the firm, this can result in termination of partnership as there is a restriction on transfer of ownership. Lack of continuity: Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. However the remaining partners can enter into a fresh agreement and continue to run the business. Lack of public confidence: A partnership firm is not legally required to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public in partnership firms is generally low.

Features of cooperative society

Voluntary membership: The membership of a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. Legal status: Registration of a cooperative society is compulsory. This accords a separate identity to the society which is distinct from its members this it not affected by death, lunacy, insolvency. Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital. Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. Service motive: The cooperative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the motive of service dominates its working.

one is planning to start a business or is interested in expanding an existing one, an important decision relates to the

choice of the form of organisation

limitations of a joint stock company

complexity in formation lack of secrecy impersonal work environment numerous regulations delay in decision making oligarchic management conflict in interests

Types of partnerships on the basis of liability

general partnership: liability of partners is unlimited and joint. The partners enjoy the right to participate in the management and their acts are binding on the firm. Registration is optional and it is affected by death, lunacy and insolvency. limited partnerships: one partner has unlimited liability whereas the other partners have limited liability. It does not get affected by death, lunacy and insolvency. The limited partners do not enjoy the right to participate in the management and their acts are not binding on the firm. Registration is compulsory .

What happens to the surplus generated by the society?

it is distributed amongst the members as dividend in conformity with the bye-laws of the society.

Types of companies

private and public companies

A private company which is a subsidiary of a public company is also treated as a _________ company.

public

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. It is necessary for a private company to use the word private limited after its name If a private company contravenes any of the aforesaid provisions, it ceases to be a private company and loses all the exemptions and privileges to which it is entitled.

Various forms of business organizations

sole proprietorship joint Hindu family business partnership cooperative societies joint stock company