Today we will discuss forms of business organisation. We will provide you with Notes, videos, case studies, CBSE objective questions and many more
Firstly, we want to share with you what are all the topics which we are going to cover in this article. Also, you can watch all the chapters videos on my YouTube channel by clicking here.
Topics Which we will cover today will be in the following ways:-
- Types of business organization
- Sole proprietorship
- Hindu undivided family business
- Co-operative organization
- Joint-stock company
- Case study
Types of forms of business organisation Business Organization
There are three types of business organisations. They are as follows:-
- Private sector enterprise
- Public sector enterprise
- Joint sector enterprise
Private sector enterprise business owned, control and manage by Private individuals. The main motive of an organization is to earn a profit.
There are five organization comes under private sector:-
- Sole proprietorship
- Joint Hindu family business
- Cooperative organization
- Joint-stock company
Public sector enterprise business owned, control and managed by the government. the main motive of this organization is to provide service in the interest of the public.
There are three organization comes under public sector:-
- Departmental undertakings
- Public corporation
- Government company
The joint sector enterprise business owned, control and managed by both government and private individuals.
The sole proprietorship is a business owned, controlled and managed by a single person.
Features of a sole proprietorship are as follows:-
1_ It has single ownership because In this capital/money is invested and managed by a single person.
2_ It is Individual risk-bearing because problem/risk or loss managed by a single individual.
3_ Business ends as soon as the owner dies because it has no separate legal entity.
4_ Lack of business continuity means the business will end when the owner dies.
5_ It has unlimited liability
6_ It has one-man control because Controlled and managed by a single person.
7_ Formation and closure did at any time without a license agreement.
Advantages of Sole Proprietorship are as follows:-
1_ It is easy to form and dissolve.
2_ It gives direct Initiative.
3_ There is no delay in decision making because it has flexibility.
4_ It is the sole beneficiary of profit because all the profit goes to the owner only.
5_ There is no chance of leaking the idea because the sole proprietorship has secrecy.
Disadvantages of Sole Proprietorship are as follows:-
1_ Resources limited to the owner only.
2_ Sole proprietorship has unlimited liability.
3_ Limited managerial skill limited to the owner.
4_ There limited scope of expansion.
5_ Life of the business is very short.
Hindu Undivided Family/Joint Hindu Family Forms of Business Organisation
It is a type of business that managed and controlled by the members of the Hindu family with the directions of the head of the family also called Karta.
Joint Hindu Family business came into existence in 1956 after the implementation of the Hindu Succession Act.
In the Hindu Succession Act of 1956, it cleared that there are two systems to follow in Joint Hindu Family business which is:-
1_ Dayabhaga is a type of Joint Family Business that followed by west Bengal only in which males and females both can be Co-partners.
2_ Mitakshara is also a type of Joint Family Business that follows all over India except West Bengal. In this system, only males allowed to be co-partners.
In 2004, a bill passed to amend the Hindu Succession Act of 1956.
Two major changes occurred in this Act which is:-
- Males and Females give equal rights.
- Mitakshara becomes the same as Dayabhaga i.e., male and female both can be the co-partners.
There are two conditions to follow to start joint Hindu Family business stated as:-
- Two male members are necessary to start the business.
- Existence of ancestral property required.
Features of Joint Hindu Family Business are as follows:-
1_ Newly born baby becomes a member of the business by birth.
2_ Karta is head and will do all the managerial work of the business.
3_ Co-partners can leave the business as soon as they want.
4_ Co-partners can claim their share in the business whenever the business ends.
5_ The liability of Karta unlimited whereas the liability of Co-partners is limited.
6_ Joint Hindu Family Business does not require registration because it is part of the Hindu Succession Act.
7_ It has Perpetual/Continuity.
Partnership Forms of Business Organisation
The partnership is a form of business involve more than two people to conduct business and enjoy profit and bear loss together.
Number of Partners
As per the Company Act,1956 the minimum and the maximum number of partners in Normal Business is 2 and 20 whereas in Banking Business is 2 and 10 respectively.
The Document contains the agreement in writing among Partners known as Partnership Deed. We will discuss briefly the partnership deed soon in this article.
Features, advantages, and disadvantages of partnership
Features of Partnership
1_ There is membership of the maximum number of partners in Normal Business is 2 and 20 whereas in Banking Business is 2 and 10 respectively
2_ Business should be legal according to Law.
3_ Every Liability of partners are unlimited
4_ Act of one partner is binding on the other partners because they have Mutual Agency Relationship between them.
5_ According to the Partnership Act of, 1932 it is beneficial for the partnership business to register itself.
6_ The partnership business will run as long as all the partners agree, the business will only end if all the members disagreed otherwise it will never end.
Advantages of Partnership
1_ Partnership is easy to form.
2_ Larger financial resources collected because as the number of Partners invest jointly in capital
3_ There is Risk Sharing between partners
4_ Partners divide work between themselves and work as per their self capability so there is Division of work means
5_ Business can be handled as per the demand of the Consumers because it has the flexibility
6_ More scope of expansion because financial resources are large
Demerits of partnership
1_ There is Unlimited Liability between partners
2_ There are conflicts between partners due to change in the minds of Partners.
3_ Uncertainty because no one knows what circumstances will come in the future.
4_ There is a risk of mutual understanding between partners because of that it has a risk of mutual agency
Types of partnership firms
Partnership firms are of two types:-
1_ On the basis of Duration
a) Partnership at will:- Running and End depends on the partner’s will.
b) Fixed period Partnership:- End in a specific interval of Time as decided by Partners.
c) Particular Partnership:- Partnership ends after a particular Venture(Project).
2_ On the basis of Liability
a) General Partnership:- All partners enjoy unlimited liability.
b) Limited Partnership:- Only one person has unlimited Liability, others have limited Liability.
Limited partners are also called Special Partners. They have certain rights which are stated as follows-
1_ Can withdraw his Partnership if they are not interested in business.
2_ They cannot participate in the Management of the business.
3_ They can inspect/check the accounts of Partnership Business.
Types of Partners
There are four types of partners:-
- Active partners
- Sleeping partners
- Secret partners
- Nominal partners
Nominal partners are of two types:-
- Partner by estoppel
- Partner by holding out
The Partner by estoppel means a partner who pretends to be the partner of that firm.
The Partner by holding out means a person who knowingly allows himself represented to be the partner of the firm but he is not actually a partner of the firm.
The document containing the agreement written form among partners is called Partnership Deed. It contains the following elements such as:-
- Name of the firm
- Name & Address of the firm
- Details of the business partners like their address, etc
- Nature of business means the type of business you are doing
- Commencement of business means when your business will start
- How much capital contributed by each partner
- What will be Interest on capital
- Rights and duties of partners
Formation of Partnership Firm
As per the Partnership Act 1932, it depends on the partnership firm to register or not but only registered Partnership Firms will get the benefits.
Benefits that Firm does not get for Registration:-
1_ A Partner of an unregistered firm cannot file a case against the partnership firm.
2_ A Partner of an unregistered firm cannot file a case against any other Partner.
3_ An unregistered firm cannot file a case against the outsiders.
4_ The unregistered firm cannot file a case against any of the partners.
Procedure for registration of the partnership firm
The Partnership Firm can get register anytime whenever they want. For Registration, they have to only make a Letter or Application.
The main points they have to mention in the Application are as follows:-
- Name of the Firm
- Head Officer’s Address
- Branch Officer,s Address
- Date of Admission of partners
- Name and Address of Partners
- Nature of firm of business
Registrar has to Check the Application and provide a certificate of registration after verifying the application form. After that Partnership firm comes into existence in front of the people.
Co-operative Organisation Forms of Business Organisation
It is a voluntary association of persons who join together and their main motive to do mutual help. There are different types of cooperative organizations. They are as follows:-
- Consumer’s Co-operative Society
- Co-operative credit society
- Co-operative Marketing Society
- Producer’s Co-operative Society
- Co-operative Farming Society
- Co-operative Housing Society
Features of Co-operative Organisation
1_ It is a Voluntary Association because they do all work without payment that is they do all work for the help of the Society.
2_ The members of the Co-operative Organisation enjoy equal voting rights.
3_ Their main motive of the co-operative organization to help people not to make a profit.
4_ It has a separate legal identity which means that the Co-operative Organisation will always run whether the starting person dies.
5_ It has Distribution of Surplus which means that the person who does more hard work in the Co-operative Organisation will get more profit rather than the person who had done more capital investment.
Advantages of Co-operative Organisation
1_ Co-operative Organisations are easy to be formed because they get the License from the Government easily as they favor the persons of society.
2_ Co-operative Organisation has Limited Liability.
3_ Co-operative Organisation has continuity which means the organization will run lifelong whether the starter person has left for some reason or dies.
4_ Co-operative Organisation has a democratic setup because this follows one person one vote such that all persons have equal voting rights.
5_ Co-operative Organisation enjoys State patronage which means that the government always helps the organization in providing loans with low interest and more time and more money and also they get the raw materials with a low tax or the tax will be totally excluded.
Disadvantages of Co-operative Organisation
1_ Limited capital which means that the person who invests more in the organization may not get more profit.
2_ Co-operative Organisation has Inefficient Management because the members are not properly trained or well educated in their respected fields.
3_ Co-operative Organisation has no motivation because in this the profit does not depend on the invested capital it only depends on the hard work.
4_ Co-operative Organisation has conflicts among the members because of different religions, languages, thinking of the members.
5_ Co-operative Organisation has excessive government control because the government provides various types of help and support to the organization so it also takes control over it.
Types of Co-operative Organisations
1_Consumer’s Co-operative Society:- In this, the consumers form a society of bulk of people for purchasing the same product and they directly contact the producer for buying the product so that they can enjoy the profit, instead of taking one by one from the retailer.
Objectives of Consumer’s Co-operative Society
- Eliminates middlemen
- Cheap price
- High-quality maintained
2_ Producer’s Co-operative Society:- The society formed by the Farmers or small company producers makes a society called Producer’s Co-operative Society.
Objectives of the Producer’s Co-operative Society
a) Supply of the raw materials (input) at cheap price
b) Access to the Latest machines and new technology
3_ Co-operative Marketing Society:-Some producers form the Co-operative marketing society so that they can easily sell their products to the market in which each member equally participates.
4_ Co-operative Credit Society:- This type of Society also called Urban Banks Society. In this Society, different members have to deposit some money regularly from their savings and the money will be given to the needy one member for their business investment. This society is helpful for poor people to get the loan easily because they are not able to get a loan from the Bank.
Objectives of Credit Society
a) Promotes Saving Habit
b) Members get the loans easily at the low-interest rate
c) Protection of the members from the exploitation of moneylenders
5_ Co-operative Housing Society:- In this those people make a group who has no house or roof on their heads they collect money and invest it to make flat and then society will provide these flats to the members-only with the very easy installments.
6_ Co-operative Farming Society/Agricultural Co-operative:- This Society is basically for big Farmers. The big farmers purchase bigger Agricultural land and needed machines, seeds, fertilizers, and irrigation then they contact the small Farmers to work in their fields and after the crop is harvested they give the small farmers 50% of the harvested crop.
Objectives of Farming Society
a) It provides seeds, irrigation, fertilizers, etc. so that small farmers can work on a large scale.
b) Provides social & economic security to Peasants/Farmers
A Company is an association of persons formed to carry out business activity and has separate legal existence from its owner.
There are two types of company they so as follows:-
- Private company
- Public company
Features of the joint-stock company
1_ Separate legal existence
2_ Perpetual successor means continuity which states that the company will continue to run irrespective of the owner, the company will only end if the law or the government says to stop the company.
3_ Common seal which means that companies are multinational so it is not possible for the owner to present everywhere so a common seal is designed to do the sign of the owner like stamp or ink sign to sign the contracts.
4_ Limited liability which means that in case if the company in the debt and the company not in the condition to pay the loan then the authority has to sell the company assets like machinery parts, equipment, etc to pay the loan.
If the loan is not fully paid then they do not have the right to access or sell the private property of the members of the owner of the company because of the limited liability.
5_ Transferability of share which means that if the owner of the company in need of the money then it can sell the shares in the market through which the owner and the company get the needed money.
Advantages of the Joint-stock company
1_ Capital means that if the company is in need of the money then it can sell shares of the company to get the needed money.
2_ Limited liability (same as in the features)
3_ Continuity or the separate legal identity(same as in the features)
4_ Efficient management means that the company has well trained and educated staff members and has good communication skills between the customers so that they can attract the company.
5_ Easy transferability of the shares(same as in the features)
Disadvantages of the Joint-stock Company
1_ Lengthy and legal Procedure and also it’s expensive to issue the license form the government also it takes time.
2_ Delay in Decisions because companies are multinational so if there any problem and the law of the country issues the notice then it is difficult for the owner to get out the company from the criticism and problems of the government and takes much of time to follow the governmental procedures.
3_ Excessive Governmental Control as the government keeps an eye on the company regularly that the company is fulfilling the demands of the consumers and the consumers are getting good quality products from the company.
4_ Oligarchic management means that as the board of directors holds the maximum power so sometimes they misuse their power.
Difference between all types of organization
Formation of Joint-stock company forms of business organisation
Whenever a company or business is started it needs a license agreement whether the company is private or public.
There are four stages to get the license:-
- Capital subscription stage
- Commencement of business
For the Private company, its necessary to do the promotion and incorporation to get the license and this license are called the certificate of incorporation.
But for the public company, it is necessary to complete all the four stages to get the license and they can start their business and this license is called the certificate of commencement.
Stages of Joint-stock company forms of business organization
The steps involved between the starting of the company to the forming of the company are called promotion.
In promotion, we get the idea that which type of company we form and what we have to do for the company and what resources we need for the company and how to manage all the resources.
The promoter is the person who has an idea about the company.
Steps of Promotion
- Identification of the business opportunity(getting the idea of the business)
- Feasibility studies mean giving practical shape to that idea in the form of company improvement.
- Name Approval which decides the name of the company.
- Appointment of Professionals, in this stage the promoters appoint the brokers and underwriters of the company.
- Fixing up signatures to the memorandum(a type of document) of association.
- Preparation of necessary documents
*Note:- First-person to sign the memorandum chosen as the BOD (Board of Director) of the company.
1_ Filling of necessary documents like
a) Memorandum of association
b) Article of association
d) Address of the company
2_ Payment of fees which depends on the capital invested more capital means more fees and vice-versa.
3_ Registration means checking of the above documents
4_ After verification of all the documents the company will get the Certificate of incorporation, through which the company can start their business.
Capital Subscription Stage (only for a public company)
1_ SEBI Approval (Security Exchange Board of India), provides protection to the Investors of the company.
3_ Appointment of Brokers, bankers & underwriters
Bankers have to receive & deposit the money
Brokers have to encourage & helps in the selling of the shares of the company.
Underwriters purchase the remaining shares of the company after some time the company will again purchase those shares from them with extra money when the company gained profit.
4_ Minimum Subscription means the company has to provide an application to ensure or approve that the company which is going to start has no shortage of money.
5_ Application to the stock exchange means Every company has to admit its name in the stock market. The stock market has to verify that the company has good financial support & has to check that the company has no shortage of the money required. After checking the company got listed.
6_ Allotment of Shares:- In this, the company has to tell the name & address of the investors, the number of shares allotted to them & when the money will be given to them.
Commencement of Business (only followed by Public company)
After the formation of the company, there are certain register offices in the cities where we have to go to startup the company.
The registered office wants certain documents prepared to start the company. Three things compulsory to be mentioned in the document which is stated as follows:-
- All the shares given by the company have to be payable in cash.
- All the directors have to give their application in cash.
- The company has to ensure that it has no pending money on anyone.
This declaration document has to be signed by the company secretary and deposited to the registered office.
The registered office has to check all the documents clearly and verify them. If they are found correct then the office can issue the license to the company.
This license also called the “Certificate of Commencement”. After getting this licensing agreement the owner can start the company.
Documentation used in the formation of the Joint-stock company forms of business organisation
Three documents required for the formation of the joint-stock company forms of business organization are:-
- Memorandum of Association
- Article of association
Memorandum of Association
Memorandum of Association (also called principle document or charter or the constitution of Company) in this the Power & objective of the company is decided.
There are certain points to be followed in MOA which are as follows:-
- Name clause
- Situation clause
- Objective clause
- Limited clause
- Capital clause
- Association clause
Name Clause means where the complete name of the company should be written. If at the end of the company Private limited is written means it is a private company but if only limited is written then the company is public means government-controlled.
Situation Or Domicile Clause means where the company has to provide the address of the headquarters (one main headquarter or the main office).
For example, Toyota motors have the main office in japan
Objective Clause is the clause where the company has to certify the aim, primary objective, secondary objective & defines the scope of limitations.
Limited Clause In this clause if only limited liability is there then only business assets are accessible to the government if the company unable to pay the loan but if unlimited liability is there then business and personal both types of assets are in danger if the company was unable to pay the loan.
Capital Clause Is the clause In this, the company has to certify its capital.
Association or Subscription Clause is the clause In this, the Directors of the company have to give the statement that they checked the documents of the company and agree to start the company as soon as possible with all the terms and conditions of the company and in last they have to sign it.
Article of association
So, Article of association is that type of document where the company has to declare its internal affairs like time for the employees to enter and leave the company, salary given to the employees, etc.
3_ Prospectus:- Company has to invite people and convince them to invest in their company shares.
Choice of forms of Business Enterprise
In this, we will discuss what forms of business organization you must choose.
Case Study of Forms of Business Organisation
So, guys, we are finally over with this chapter.
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