Chapter-2
Forms of Business Organisations
The term “business" literally mcans to keep oneself busy and a person remains busy to earn or gain something. A businessman remains busy to carn profits through production and exchange of goods and/or services. It includes all kinds of activities of industry, trade and commerce like manufacturing, packaging, warehousing, transporting, selling clc. with the sole aim of carning profits. Business may be run by an individual person or a group of individuals. When the business is handled by a group of persons it is known as business organisation. A business organisation is also known as business undertaking, business firm, business enterprise or business concern. According to Wheeler a business undertaking is “a concern, company, or enterprise which buys anu sells, is owned by one person or a group of persons and is managed under a specific set of operating policies." It is the outcome of the efforts of one or more entrepreneurs who pool their resources and co-ordinate their activities to carry on the business activities.
Characteristics of business organisations
1. The mains aim of any kind of business organisation is to earn profits at least to get back more than the amount originally invested by them in carrying on the business activities.
2. All business organisations are engaged in the production or sale of goods or services for money or money's worth.
3. The business organisations are supposed to carry on the business activities continuously and regularly.
4. All business organisations have the social responsibilities to provide the goods and services to the consumers and other user departments in the form they like, at the places they want, in the quantities the require, at the time they need and at the prices they can afford.
5. All business organisations are exposed to risk of natural calamities, labour problems, bad debits, changes in policies, demand, styles and fashions etc.
On the basis of ownership the various forms of business organisations are given below
A. Private enterprises
(i) Sole proprietorship
(ii) Joint Hindu family firm
(iii) Partnership firm
(iv) Joint stock company
(v) Co-operative societies
B. State enterprises or public enterprises
(i) Departmental organisations
(ii) Public corporations
(iii) Government company
(i) Sole proprietorship
When an individual owns and manages a business organisation it is called sole proprietorship, sole tradership or one men business organisation. In this form of business organisation the enterprise is owned and controlled by a single person. He invests his own or borrowed capital, manages and controls the business himself, bears all the risks of the business all alone and takes himself all the decisions regarding business. According to S.R. Davar, "The sole trader is a person who carries on business of his own i.e. without the assistance of a partner, He brings in his own capital and uses all his labour." Sole proprietorship is the simplest and oldest form of business organisation. Any person who has the aptitude for business and is able to arrange the finance can start the sole proprietorship organisation. He may choose to start any kind of business with or without undergoing the legal formalities. Routine kind of shops may be started without much legal formalities but for starting a wholesale or retail sale drug store various kinds of legal formalities will have to be completed. He may run the business alone with his own skills or may employ skilled/technical persons to run the business. Sole proprietorship organisation is most popular for staning a drug store because it can be started individually with small finance.
Advantages
1. It is simple and easy to start.
2. It can be started even with meager finance from his personal resources or borrowed from his friends and relatives.
3. Capital can be increased or decreased at his will.
4. The owner was the complete control of the business. Therefore, he can take any kind of decision.
5. The secrecy of the business can be maintained.
6. He is free to employ any number of persons and terminate the services of any person according to his will.
7. Since he is the sole recipient of all the profits so he will try to put hard labour to earn maximum profits.
8. The sole proprietor will have intimate contacts with customers. Therefore, he can better understand their tastes, attitudes, habits and can come to known their difficulties, complaints and opinions because he comes in personal contacts with the customers.
9. The overhead cost of management is relatively less since the business is looked after by the proprietor himself, his relatives or by sincere and faithful employees.
10. The sole trader can change the business or wind up the business according to his own will without involving legal fortalties.
11. It encourages self-cmployment therefore most suitable for professionally qualified persons. Hence most of the pharmacists run sole proprietorship drug stores.
Disadvantages
1. Sole trader may not be in a position to expand the business He's ause of limited financial resources.
2. Since he is the sole person to handle all the activities of the business for which he may not have the expertise, for smooth running of business he will have 10 employ or avail the services of experts or professionals.
3. Sole tradership is limited to small business only.
4. There is a limited scope for expansion due to limited capital as well as limited manpower.
5. Being sole person to look after the business, he may not be in a position to spare time for bringing the items to his establishment or for attending the social activities. For such activities he may have to close the shop for certain period of time or lo depend on the suppliers and workers.
6. The business may come to a stand still due to long illness, disability or death of the proprietor unless his heirs or successors 100 have the same capacity and ability to run the business.
Though sole proprietorship or one man business has certain limitations or disadvantages, even then this is the best forın of business organisation in the world provided the proprietor is intelligent enough to handle all the activities of the business himself.
(ii) Joint Hindu family firm
When the property is inherited by a Hindu from his father, grandfather and great-grandfather it is known as ancestral property. Son, grándson and great-grandson become joint owners of the property by reašon of their birth in the family.
When the co-parcenars look after their business it becomes the joint Hindu family business and the firm is known as joint Hindù family firm. Generally in a joint Hindu family firms the senior most male member of the family known as the "Karta" looks after the affairs of the joint Hindu family business.
(iii) Partnership firm
When two or more than two persons join together to contribute money and/or labour or skill and share the profits and losses among themselves are individually known as partners, and collectively known as firm.
According to Indian Partnership Act, 1932 partnership is 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. According to Indian Contract Act, the partnership is defined as the relationship which exists between persons, who have agreed to combine their property, labour or skill in some business and to share the profits thereof between them.
According to Section 11 of the Companies Act, 1956 up to a maximum of twenty persons (ten in case of banking business) can join together to share any profit made by the firm.
The partnership agreement may be oral or written. The written document of partnership is known as "Partnership Deed" which is made in the court of law.
Kinds of partners
The partners of a partnership firm may be of following types :
(a) Active or working partner
(b) Sleeping or inactive partner
(c) Nominal partner.
(d) Partner in profits only
(e) Secret partner
(f) Partner by estoppel
(g) Partner by holding out
(h) Minor as a partner.
(a) Active or working partner
Active or working partner is that partner who takes active part in the management as well as in the day to day functioning of the business. The active partner also contributes capital to the firm.
(b) Sleeping or inactive partner
Some of the persons merely contribute the capital to the firm but do not take any active part in the conduct of business of the firm. Such partners are known as sleeping or inactive partners. They share the profits and losses of the firm and have a voice in the managément but their relationship_with the firm is not disclosed to the public.
(c) Nominal partner
Nominal partner is that partner who neither contributes capital nor takes active part in the conduct of business of the firm but only lends his name and reputation for the benefit of the firm, A nominal partner does not share the profits of the business but he is liable to outsiders for the debts of the firm.
(d) Partner in profits only
Partner in profits only is that partner who contributes money with the idea of getting share in the profits only and does not share the losses of the firm but is fully liable to the creditors of the firm/As a rule such a partner has no voice in the management of the business. The object of having such a partner in the firm is to make use of his money and goodwill.
(e) Secret partner
A secret partner is that partner who does not want to be known as partner of the fitm to the outsiders, though in reality he is a partner. Such a partner can take part in the conduct of business of the firm. However, he is liable to outsiders like amy other partner of the firm.
(h) Minor as a partner
A person below the age of 18 years is considered as minor. According to law a minor is not competent to contract therefore he cannot become a partner in a partnership firm, )however he can be admitted as a partner provided all other partners agree to it. He is entitled to the share in the profits and property of the firm. So long he remains a minor his liabilities remain limited to the extent of his share in the profits and property of the firm.
Kinds of partnership
Partnership is of two types :
(a) General partnership
(b) Limited partnership
(IV) Joint Stock Company
Since the sole proprietorship and partnership forms of business organisation suffer from many limitations Iike limited financial resources, limited managerial ability, doubtful continuity and unlimited liability etc., therefore, taking into consideration all these limitations and changing trends of modern development in the fields of production, transport, communication and contribution, it became necessary to find out a new kind of business organisation which will meet all the requirements of modern development specially the finances required for large scale business. Therefore a form of business organisation capable of mobilising larger amount of capital with the provision of limited liability and efficient management came into existence known as joint stock company.
Joint stock company comes into existence where a number of persons who are unknown to each other join together to contribute and invest their money in a common enterprise. Such investors are known as share holders.
A company is an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is capital of the company. The persons who contribute it or to whom it belongs are members. The proportions of capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted
Advantages
'The joint Hindu family firm has the following advantages :
1. The business remains stable and in existence even due to disability or death of any member of the family.
2. All the members of the family can be absorbed/employed in the organisation. Hence no need to seek employment by the members of the family somewhere else. Even the uneducated or inexperienced members can be absorbed.
3. The business will be well organised and controlled since the members of the family are looking after the business.
4. Secrecy of the business will be maintained as no outsider will interfere in the business.
5. There is no maximum limit of members of the family to be absorbed in the organisation as for other kinds of business organisations if the number of members exceed more than 20 the firm will have to be registered itself with the registrar of companies (Section 11 of the Companies Act, 1956).
6. The profits will be divided among the members of the family only.
Disadvantages
1. Differences may arise if any member of the family starts deceiving other members or does not take interest in the affairs of the business.
2. Quarrels may start on the division of the property.
3. Relatively limited financial resources.
4. Continuity of the firm depends on the continuity of the joint family itself.
(V) Co-operative Societies
The co-operative movement was started with the basic objective of protecting the economic interests of weaker sections of the society. A co-operative organt- sation is a voluntary organisations of persons usually with limited means who join together to achieve a common economic end through mutual and self help. Such co-operative organisations registered under Co-operative Societies Act are called "Co-operative Societies".
The management of the affairs of the society is in the hands of the managing committee which is elected directly by the members of the society. The office bearers of the society include (i) President, (ii) Vice-president, (i) Secretary, (iv) Joint secretary. (v) Treasurer.
Each member can purchase a limited number of shares as laid down in the rules and regulations of the society. The shares of the society cannot be transferred by a member to another person. However, if a member wants to withdraw his capital he has to return the shares to the society.
(B) Public/State Enterprises
Public enterprises are also known as state enterprises. They are owned and controlled by the central government, state government or local government or jointly by these bodies. The public enterprises are financed by the government though in some cases the private investors are also allowed to invest but to a certain extent. The major part of the capital is invested by the government.
Multiple choice questions
1. The oldest form of business organisation is :
(a) Partnership
(b) Hindu joint family
(c) Sole proprietorship
(d) All the above
2. The maximum number of partners allowed in a general business (non- banking business) is :
(a) 10
(b) 20
(c) 50
(d) Unlimited
3. The maximum number of partners allowed in a banking business is :
(a) 10
(b) 20
(c) 40
(d) 50
4. The maximum number of members allowed in a public limited company is :
(a) 10
(b) 20
(c) 50
(d) Unlimited
5. In which of the following forms of business organisations, registration is compulsory :
(a) Partnership firm
(b) Sole proprietorship firm
(c) Joint stock company
(d) All the above
6. The registration of partnership is:
(a) Optional
(b) Compulsory under the Indian Partnership Act, 1932
(c) Compulsory under the Companies Act, 1956
7. The liability of a partner with regard to the debts of a firm is :
(a) Limited
(b) Unlimited
(c) No liability
8. A private limited company can start its business :
(a) On the receipt of certificate of commencement of business
(b) On the receipt of certificate of incorporation
(c) On the receipt of both the above mentioned certificates "
(d) None of the above
9. The maximum number of partners allowed in a general business is _______
(1) Ten
(2) Twenty
(3) Fifty
(4) Hundred
10. If a minor chooses to become a partner on attaining the age of majority he will be liable for the debts of the firm from the date of his _______
(1) Attaining majority
(2) Choice to become partner of the firm
(3) Admission to the benefit of partnership.
11. When atleast 51% shares of a business organisation are in the hands of governments, it is called _______
(1) Public corporation
(2) Government company
(3) Public company
(4) Departmental organisation
12. The senior male member of family in joint Hindu family business is known as
A. Karta
B. Manager
C. Tikayat
D. Dada
13. Partnership business is known as
A. Limited company
B. Firm
C. Company
D. Society
14. Nominal partner
A. Below 18 years
B. No share in investment and profit-loss
C. Partner in profit
D. Sleeping partner
15. Partner by estoppels is
A. Because of behavior of person.
B. Secret partner
C. Minor partner
D.None of the above
16. If a minor chooses to become a partner on attaining age of majority he will be liable for debts of the firm from
A. Date of his admission to the benefit of partnership
B. Date on which he will become 18 years old
C. Date of start of business
D. No liability on him
17. Joint stock.company is governed by
A. Industry Act 1951
B. Company Act 1956
C. Drug and Cosmetic Act 1945
D. All of the above
18. Number of person involved in private company
A. 2-50-
B. 10-200
C. 50-100
D. 25-75
19. Number of person involved in public company
A. 2-50
B. 10-200
C. 50-100
D. Minimum 7 & No upper limit
Answers
1.Sole proprietorship
2.20
3.10
4.Unlimited
5.Joint stock company
6.Optional
7.Unlimited
8.On the receipt of certificate of incorporation
9.Twenty
10. Admission to the benefit of partnership.
11.Government company
12.Karta
13. Firm
14. No share in investment and profit-loss
15.Because of behavior of person.
16. Date of his admission to the benefit of partnership
17.Company Act 1956
18. 2-50
19. Minimum 7 & No upper limit
Fill in the blank with suitable word/words
1. Business includes both ______ and _____.
2. A business organisation run in partnership is called ______.
3. A partnership business, the number of partners should not exceed more than ______.
4. In retail pharmacy business _______ business organisation is best suited.
5. The partnership agreement may be ______ between the person joining together in partnership.
6. A cooperative society is a ______ association may be framed by any ______ adult person.
7. A private limited company should have atleast ______ members and not more than ______ members in its organisation.
Answers
1. Industry, commerce
2. Firm
3.20
4. Sole proprietarship
5. Oral or written
6. Voluntary, ten
7.20, 50
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