Forms of Business Organisation
Ownership is a legal concept that bestows certain rights and liabilities upon the owners. The rights and liabilities vary according to the form of ownership. Forms of business ownership are legal forms in which a business enterprise may be organised and operated.
A private business firm may be owned by one person or by a group of persons. When it is owned by one person, it may be sole proprietorship or one person company. A group of persons may collectively own and operate a business in the form of joint Hindu family firm, partnership firm, joint stock company and cooperative society. There are, therefore, several forms of private business ownership as described below:
1 Sole Proprietorship
2 One Person Company (OPC)
3 Joint Hindu Family Business
5 Limited Liability Partnership (LLP)
6 Private Company
7 Public Company
8 Cooperative Society
Sole proprietorship, joint Hindu family firm and partnership are non-corporate forms while others are corporate entities.
Sole proprietorship or individual proprietorship is a form of business ownership under which a single person supplies the capital, uses his own skill, receives all the profits and bears all risks of business. He may borrow money and may employ workers but he alone owns and controls the business. According to Wheeler, “the sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and risks all of his property in the success or failure of the enterprise.” The sole proprietor is not only the exclusive owner of the business, but also its founder and controller. Sole proprietorship is the simplest and the oldest form of business ownership.
The essential characteristics of sole proprietorship form of ownership are as follows:
(i) Single Ownership: The sole proprietorship is the sole owner of the firm. He fully owns the business.
(ii) One-man Control: In a sole proprietorship the owner himself acts as the manger and controller of the enterprise. A sole proprietor carries on business exclusively by and for himself.
(iii) No Separate Legal Entity of the Firm: A sole proprietorship firm has no legal existence separate form its owner. The proprietor owns everything the firm owns and he owns everything the firm owns. No distinction is made between the assets and liabilities of the owner and those of the firm. The proprietor and the firm are one and the same in the eyes of law.
(iv) Undivided Risk: The profits and loss of the sole proprietorship belong exclusively to the proprietor. He gains all and risks all. Nobody shares his profits or losses.
(v) Unlimited Liability: The liability of the sole proprietor extends beyond the capital invested in the firm. His private property may be attached in case the firm fails to meet the claims of its creditors.
(vi) Full Freedom from Government Control: Sole proprietorship is free from legal formalities and regulations.
Merits of Sole Proprietorship
Sole proprietorship has the following advantages:
1. Ease of Formation: Sole proprietorship is easiest to form as no legal formalities are required for starting it. No agreement is to be made and registration of the firm is not essential. However, a formal licence may be required from the municipal corporation or Health Department in some cases, e.g., liquor, drugs, etc. Similarly, a sole proprietorship can be dissolved easily without any legal formalities. Thus, little time and expense is involved in the formation and dissolution of a sole proprietorship.
2.Direct Motivation: The proprietor has sole claim on profits and is not required to share them with others. There is direct relationship between effort and reward so that the proprietor is motivated to give his best effort to the firm.
3.Flexibility in Operations: The sole proprietorship is the simplest to operate. The proprietor can easily change the nature and strategy of his business.
4.Absolute Control: The sole proprietor has complete control on the affairs of his firm. He is free to prepare any plans and to execute them without interference from any quarter. Freedom of centralised direction and personal control makes for uniformity of action and coordination of operations.
5.Quick Decisions: Sole proprietor is his own boss and need not consult others with regard to business decisions. Therefore, he can take action with maximum of speed and minimum of friction. Quick decision and prompt actions enables the proprietor to take full advantage of the opportunities which may arise in business from time to time.
6.Business Secrecy: a sole proprietor can keep his affairs to himself. There is no body to share his business secrets and no reports are to be published.
7.Personal Touch: A sole proprietor can keep intimate personal contacts with his customers and employees. Personal attention to customers results high sales and goodwill of the firm. Personal contacts with employees help in improving their motivation and efficiency. If the proprietor has adequate resources, his credit standing will be high.
8.Minimum Government Regulations: The proprietary concern is subject to minimum control by the Government. The proprietor has not to render reports to the government and there is no interference in the day-today affairs of business. Under the Income Tax Act, a sole proprietor must get his\her accounts duly audited in case annual sales turnover or gross receipts exceed Rs 40 lakh in case of business and Rs 10 lakh in case of profession.
9.Social Utility: In addition to its economic benefits, sole proprietorship is socially desirable on the following grounds:
(a) Independent Living: Sole proprietorship provides an independent and honourable way of life to those who want to be their own boss and take pride in ownership and control of their own business.
(b) Diffusion of Economic Power: Sole proprietorship helps in reducing concentration of economic power in a few hands through wider distribution of business ownership. It also promotes decentralisation of industry.
(c) Development of Personality: Sole proprietorship provides opportunity for the development of personal and social virtues like self-reliance, initiative, responsibility, independent judgement, etc. These virtues develop in the sole proprietor because he has to face all challenges and problems of business single handed.
Demerits of Sole Proprietorship
Sole proprietorship suffers from the following limitations:
(i) Unlimited Liability: A great drawback of sole proprietorship is its unlimited liability or high personal risk. The sole proprietor has to bear the entire risk of his business. If the business fails due to errors of judgement or adverse economic conditions, the proprietor has to lose everything. Unlimited liability discourages the expansions of business.
(ii) Limited Financial Resources: The financial resources which a proprietary firm can raise are limited to the personal funds and borrowing capacity of the owner. The financial capacity of an individual is usually limited so that business cannot be operated on a size enough to achieve the economies of scale.
(iii) Unbalanced Management: The sole proprietor who is the sole judge of his business cannot be an expert in all the areas of purchasing, production, marketing, financing, etc. He has to handle a wide range of managerial and operational problems and, therefore, it is usually not possible to employ trained professional managers. As a result, benefits of specialisation and expertise are not available.
(iv) Uncertain Duration: There is little continuity of operations in a sole proprietorship because the firm is linked with the life of the proprietor. The business may come to a sudden end with the death or physical incapacity of the proprietor. The business sinks and swims with its owner.
(v) Limited Scope for Growth: Due to limited financial and managerial resources and uncertain duration, the expansion or growth of the firm is restricted. The ease of formation and dissolution may encourage serious thought and action resulting in premature death of the business.
Suitability and Survival
Thus, the one-man control is the best in the world, if that one man is big enough to manage everything. But such a person does not exist. Due to its unique characteristics, the proprietorship organisation is particularly suitable to the following types of business:
1 Where the risk involved is moderate, e.g., automobile repair shops.
2 Where small financial and managerial resources are required, e.g., a retail shop, a small bakery, etc.
3 Where personal attention to individual tastes and preferences of customers is necessary, e.g., tailoring, and beauty parlours, cosmetics dealers.
4 Where expert personal skills and prompt decisions are essential, e.g., stock brokers and doctors, lawyers and other professional services.
5 Where demand is temporary, seasonal and local, e.g., laundry, vegetable and fruit sellers, etc.
6 Where fashions change quickly, e.g., art goods, hair dressing saloons, etc.
Sole proprietorship has its own area of operations and continues to exist despite the growth of joint stock enterprise. It accounts for the largest number of business concerns in India.
One Person Company (OPC)
The Companies Act, 2013 allows the formation of one person company. As the name suggests, a one person company has only one shareholder. The company’s name will carry a suffix ‘OPC’. The process of setting up an OPC is the same as that for a private limited company. Since the company is owned by a single person, he must nominate someone to take charge of it in case of his death or disability. The nominee must give his consent in writing which has to be filed with the Registrar or Companies.
An OPC is exempt from certain procedural formalities, such as conducting annual general meetings, general meetings, extraordinary general meetings. No provisions have been prescribed on holding board meetings if there is only one director, but two meetings need to be organised every year if there is more than one director. Any resolution passed by the solo member must be communicated to the company and entered in the minutes book. There is, however, no relief from t he provisions of audits, financial statements and accounts, which are applicable to private companies.
Features of OPC
The concept of ‘one person company’ has the following characteristics:
(a) OPC may be registered as a private company with one member.
(b) The owner safeguards in case of death\disability of the sole owner are provided.\
(c) OPC will have a corporate entity of its own.
(d) The owner of an OPC shall be liable only to the extent of its capital. If the activities are carried out in a mala fide manner the liability of the owner extents to his personal property.
(e) An OPC may be managed by the owner or his representative.
(f) An OPC will get its annual accounts audited and file a copy of the same with the Registrar of Companies.
(g) A minimum share capital may be prescribed for an OPC.
(h) Every OPC shall have at least one director.
(i) The one person shall have to indicate the name of the person who in the event of the subccriner;s death, disability, etc. becomes the member of the company.
Merits of OPC
(i) OPC will enable small entrepreneurs and professionals, e.g., chartered accountants, lawyers, doctors, etc. to avail the benefits of companies.
(ii) The procedure for forming the OPC is very simple.
(iii) Running an OPC is easy as it does not require compliance with many legal formalities.
(iv) As the risk is limited to the value of shares held by one person, small entrepreneurs have not to fear litigation and attachment of personal assets.
(v) There is no need to share business information with any other person, therefore, business secrecy is ensured.
(vi) The motivation and commitment of the owner are high due to absence of profit sharing.
(vii) Quick decisions can be taken due to complete control by the owner. There is freedom of action.
(viii) OPC would provide the start up entrepreneurs and professionals the much needed flexibility in setting up business without losing control.
Demerits of OPC
(i) The life of OPC is uncertain and instable.
(ii) The concept of OPC makes mockery of the corporate concept because company means more than one person.
(iii) A company should operate as a democratic institution with discussion and decision by voting. But in an OPC there is no democracy.
(iv) An OPC has to be incorporated. It has also to comply with some legal formalities.
The concept of OPC has been introduced in a half hearted and incomplete manner. How would OPC work and what be the regulatory provisions concerning their formation and functioning has not been made clear. Hence, the provisions concerning OPC require a re-look and redrafting.
Joint Hindu Family Firm
Joint Hindu Family Firm is a peculiar form of business organisation found in India. In this form all the members of a joint Hindu family do business jointly under the control of the head of the family known as the ‘Karta’.
The joint Hindu family firm comes into existence by the operation of Hindu Law and not out of contract. The firm is jointly owned by the members of the family who have inherited an ancestral property. The members of the family are known as co-parceners. Thus, the joint Hindu family firm is a business owned by co-parceners of a Hindu undivided estate.
There are two schools of Hindu law of India, namely (i) Dayabhaga system of inheritance which, prevails in Bengal and Assam. Technically, joint Hindu family business is not possible under this system. (ii) Mitakshara system which is found in the rest of India. Under this system of inheritance, joint Hindu family consists of all persons including their wives and unmarried daughters lineally descended from a common ancestor. But only those persons constitute the firm who acquire by birth a co-parcenary interest in the joint ancestral property. Such interest belongs to three successive generations in the male line who can inherit an interest in the ancestral property immediately on their birth in the family. Thus, the property inherited by a Hindu from his father, grandfather and great grandfather is regarded as ancestral property. A son, grandson, and great grandson become joint owners of the property by reason of their birth in the family. According to the Hindu Succession Act, 1956, a female relative ( and a male relative claiming through such female relative) of a deceased male co-parcener will have a share int he co-parcenary interest after the death of the co-parcener in question.
The business of a joint Hindu family is managed by the senior-most male member or father. He is known as the Karta or Manager. As the head of the joint family, the Karta has full control over the affairs of the family business and serves as the custodian of the firm’s assets. Other members of the joint family cannot question his judgment, the only remedy available to them is to demand partition of the ancestral property. Family business is considered a part and parcel of the ancestral property and, therefore, the family business is the subject-manner of co-parcenary interest. According to the Hindu Succession (Amendment) Act, 2005 daughters have equal right of inheritance and enjoy the same rights and liabilities in the co-parcenary property as a son.
Features of Joint Hindu Family Firm
The main characteristics of joint Hindu family firm are as follows:
1. Membership by Birth: A person becomes members of the family business as a result of his birth in the family. Every member has an equal share in the family firm irrespective of age.
2. Male and Female Members: Birth sons and daughters have no co-parcenary interest in the family business. Female relatives of a deceased co-parcener can also claim a share in the family property.
3. Management by Karta: The Karta or the head of the family alone has the right to manage the business and other members do not take part in the management of the firm. The Karta has implied authority to raise loans for the family business. Only Karta has the authority to make contracts on behalf of the firm. Other members of the family cannot ask for an account of past profits and losses but they may demand partition of the ancestral property.
4. Fluctuating share: The share of each member in the family property and business keeps on changing. A member’s interest decreases on the birth of a new co-parcener and it increases by the death of an existing co-parcener. There is no restriction on the number of co-parceners.
5. Liability: The liability of the Karta is unlimited and it extends to all that he owns as his private or separate property. But the liability of all other members of the joint Hindu family is limited to the value of their individual interests in the joint ancestral property.
6. Continued Existence: The death or insolvency of a co-parcener or even that of the Karta does not effect the existence of the joint Hindu family firm. The firm can be dissolved through mutual agreement among all the co-parceners.
7. Minor Members: A person born in the family automatically becomes member in a joint Jindu family firm.
8.Governed by Hindu Law: The rights and duties of members of a joint Hindu family firm are governed by the Hindu Succession Act, 1956.
9. Registration Not Necessary: It is not compulsory to get a joint Hindu family firm registered.
Merits of Joint Hindu Family Firm
(i) Easy Formation: A joint Hindu family firm comes into existence by operation of law. No legal formalities are required to establish it.
(ii) Equitable Distribution: Every co-parcener is assured of a share in the profits of the family business irrespective of his contribution to the success of the firm. Weak members of the family, i.e., children, widows, sick or invalid members are well protected against contingencies.
(iii) Sharing of Knowledge and Experience: Younger members of the family get the benefit of the knowledge and experience of elder members. Such sharing of knowledge and experience enables the younger members to acquire necessary expertise easily and quickly.
(iv) Freedom of Action: The Karta enjoys full freedom of action as he can run the business without interference by other members of the family. This promotes quick decisions and prompt action. Centralised management by Karta also results in unity of direction and business secrecy. There is no need fro registration of the firm.
(v) Limited Liability: All co-parceners except the Karta enjoy the benefit of limited liability. Unlimited liability of the Karta inspires him to make his best effort for the success of the family business.
(vi) Mutual Cooperation: The benefits of specialisation can be obtained by dividing the total work among the co-parceners in accordance with their individual knowledge and capability.
(vii) Inculcation of Finer Values of Life: Members of a joint Hindu family work unitedly for the overall welfare of the family as a whole. Therefore, they learn the qualities of sacrifice, discipline, duty, etc. Even minors are equal members.
(viii) Secrecy: The secrets of the business remain confined to the Karta.
(ix) Stability: A joint Hindu family firm enjoys continuity of operations as its existence is not subject to the death or insolvency of a co-parcener.
(x) Creditworthiness: A joint Hindu family firm enjoys greater credit worthiness than a sole proprietorship.
Demerits of Joint Hindu Family Firm
1. Limited Resources: The financial and managerial resources of the firm are limited. The capital and borrowing of the family is limited and the karta alone cannot be equally expert in all areas of business. There is, therefore, little scope for the growth and diversification of the business.
2. Lack of Motivation: as the profits of the firm are shared by all co-parceners irrespective of their contributions, there is no incentive to work hard. There exists no direct relationship between efforts and reward. The right to share in the income of business irrespective of efforts made induces laziness on the part of members.
3. Scope for Misuse: The Karta has unchallenged authority to manage the business. He may misuse this freedom for his personal benefit or gains. This is an important cause of the disintegration of joint Hindu family firm.
4. Unfair to Co-parceners: Since the Karta has an exclusive control over the management of the business, other co-parceners get no opportunity to exercise initiative and judgement.
5. Fear of Disintegration: Disputes and quarrels among the Co-parceners on controversial matters may lead to break up of the family business.
As a business grows beyond the capacity of sole proprietorship and joint Hindu family firm, it becomes necessary to form a partnership. Partnership thus grew out of the limitations of one-man business in terms of limited financial resources, limited managerial ability and concentrated risk. In a way, it is an extension of sole proprietorship. Generally, when a proprietor finds it difficult to handle the problems of expansion, he takes a partner. Partnership represents the second stage in the evolution of ownership forms. A partnership is an association of two or more individuals who agree to carry on a business together for the purpose of sharing profits. According to Section 4 of the Partnership Act, 1932 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.” In the words of Prof. Haney, “Partnership is the relation existing between persons, competent to make contracts, who have agreed to carry on a lawful business in common with a view to private gain.” Persons who enter into partnership are known individually as ‘Partners’ and collectively as ‘firm’. The name in which the partnership business is carried on is called ‘firm’ name.
The partners enter into an agreement to lay down the terms and conditions of partnership. This agreement is known as the ‘Partnership Deed’. The partners contribute capital and they share managerial responsibility and profits/losses as per the agreement.
Essential Characteristics or Tests of Partnership
Following are the essential features of a partnership firm:
1. Two or More Persons: At least two persons are required to constitute a partnership. The partnership Act does not lay down maximum limit on the number of partners. But the Companies Act, 2013 lays down that any partnership or association of more than 50 persons is illegal unless registered as a joint stock company.
2. Contractual Relationship: A partnership is a contractual relationship arising out of an agreement among the partners. Since partnership is the outcome of a contract, persons who are incompetent to enter into a contract, e.g., minors, lunatics, insolvents, etc. cannot become partners. The partnership agreement may be oral, written or implied but it is always desirable to make an agreement in writing. The partnership agreement must satisfy all the requirements of a valid contract.
3. Lawful Business: The agreement between partners must be to carry on some lawful business. Joint owners of a property do not form a partnership without carrying on a lawful business. An agreement to carry on an illegal activity cannot be called partnership.
4. Sharing of Profits: The agreement must provide for the sharing of profits and losses of the partnership business. A charitable or educational institution is not a partnership as no sharing of profits is involved. However, sharing of profits is only prima facie and not a conclusive proof of partnership. Employees and creditors who share profits of the firm cannot be called partners unless there is an agreement of partnership with them.
5. Implied Agency: Each and every partner is considered to be an agent of the firm as well as that of other partners. Unless otherwise agreed, every partner is entitled to take part in the management of the firm and to represent the firm and other partners in dealing with outsiders. The act done by a partner in good faith and on behalf of the firm may be carried on by all the partners or by any one of them on behalf of all. It is not essential that every partner takes active part in the management of the firm.
6. No Separate Legal Existence: The partnership firm is a voluntary association and it has no separate legal entity of its own. The firm and the partners are one and the same in the eyes of law. Management and control of the firm vests with the partners who are the owners also.
The above mentioned features are the crucial tests for determining the existence of a partnership. In addition to these essential features, partnership has following characteristics:
(a) Unlimited Liability: Every partner is liable jointly and severally for all debts and obligations of the firm. In case the assets of the firm are insufficient to meet claims of firm’s creditors the private property of the partners can be attached to satisfy their claims. The creditors are entitled to realise their entire dues from any one partner. The partner form whose property the dues are recovered as legally entitled to receive rateable contributions from the other partners of the firm.
(b) restriction on Transfer of Interest: None of the partners can transfer his interest in the firm to any person (except to the existing partners) without the unanimous consent of all other partners. The restriction on transfer of interest is based on the principle that a partner being an agent of the firm cannot delegate his authority unilaterally to outsiders.
(c) Utmost Good Faith: A partnership is founded upon mutual trust and confidence among the partners. Each and every partner is supposed to act with honesty and fairness to all partners in the conduct of the business of the firm.
Merits of Partnership
The partnership form of business ownership enjoys the following advantages:
1. Ease of Formation: A partnership is easy to form as no cumbersome legal formalities are involved. An agreement is necessary and the procedure for registration is very simple. Similarly, a partnership can be dissolved easily at any time without undergoing legal formalities. Registration of the firm is not essential and the partnership agreement need not essentially be in writing.
2. Larger Financial Resources: As a number of persons or partners contribute to the capital of the firm, it is possible to collect larger financial resources than is possible in sole proprietorship. Creditworthiness of the firm is also higher because every partner is personally and jointly liable for the debts of the business. There is greater scope for expansion or growth of business. New partners may be admitted to raise further capital.
3. Specialisation and Balanced Approach: The partnership form enables the pooling of abilities and judgment of several persons. Combined abilities and judgment result in more efficient management of the business. Partners with complementary skills may be chosen to avail of the benefits of specialisation. Judicious choice of partners with diversified skills ensures balanced decisions. Partners meet and discuss the problems frequently so that decisions can be taken quickly.
4. Flexibility of Operations: Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its day-to-day operations. The nature can be altered and new partners can be admitted whenever necessary. The agreement can be altered and new partners can be admitted whenever necessary. Partnership is free statutory control by the Government except the general law of the land.
5. Protection of Minority Interest: No basic changes in the rights and obligations of partners can be made without the unanimous consent of all the partners. In case a partner feels dissatisfied, he can easily retire from the firm or he may apply for the dissolution of partnership.
6. Personal Incentive and Supervision: There is no divorce between ownership and management. Partners share in the profits and losses of the firm and there is motivation to improve the efficiency of the business. Personal control by the partners increases the possibility of success. Unlimited liability encourages caution and care on the part of partners. Fear of unlimited liability discourages reckless and hasty action and motivates the partners to put in their best efforts.
7.Capacity for Survival: The survival capacity of the partnership firm is higher than that of proprietorship. The partnership firm can continue after the death or insolvency of a partner if the remaining partners so desire. Risk of loss is is diffused among two or more persons. In case one line of business is not successful, the firm may undertake another line of business to compensate its losses.
8. Better Human and Public Relations:Due to a number of representatives (partners) of the firm, it is possible to develop personal touch with employees, customers, government and the general public. Healthy relations with the public help to enhance the goodwill of the firm and pave the way for steady progress of the business.
9. Business Secrecy:It is not compulsory for a partnership firm to publish and file its accounts and reports. Important secrets of business remain confined to the partners and are unknown to the outside world.
Demerits of Partnership
1. Unlimited Liability: Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapse and dishonesty of other partners.
2. Limited Resources: There is a limit to the maximum number of partners in a firm. Therefore, it is not possible to collect huge financial resources. Borrowing capacity of partners is also limited. a partnership firm may not provide the required technical and administrative skills.
3. Uncertain Life/lack of Continuity:Partnership business suffers from instability. Insolvency, insanity, retirement and death of a partner may cause an abrupt end to the business. Any partner can give a notice for dissolution of partnership.
4. Conflicts: Lack of confidence, unity and harmony among partners may lead to delayed decisions and inefficiency. Chances of conflict are high because every partner has equal right to take part in the management of the firm.
5. Risk of Implied Authority: Every partner is an agent of the firm. A dishonest partner may cause a great loss of the firm. All the partners may suffer due to the negligence or dishonesty of one partner.
6. Lack of Public Confidence: A partnership does not enjoy the trust of the public. The reason for this is that the affairs of a partnership are not given publicity. No reports are published by a partnership concern and it is free from government regulations. Therefore, the general public regards it as a group of persons who have come together to earn easy and quick profits.
7. Blocking of Capital: A partner wanting to withdraw his capital form the firm cannot do so unless the other partners agree to it. He cannot transfer his interest to outsiders without the approval of the other partners. He may, therefore, be deprived of a higher return on his capital outside the partnership.
Thus, the partnership form of business organisation is useful for a medium-sized business. It is the most appropriate form when a business is too big to be run by a sole proprietor but not enough to be incorporated into a company.
Limited Liability Partnership (LLP)
Meaning: According to the LLP Act, 2008, a LLP is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.
Features of LLP
(i) A LLP must be incorporated under the LLP A ct, 2008.
(ii) It is a body corporate having its own separate identity.
(iii) It has perpetual succession. Any change in its partners does not affect existence, rights and liabilities.
(iv) Any individual or body corporate can be partner in a LLP.
(v) Every LLP must have at least two partners. There is no limit on the maximum number of partners.
(vi) Every LLP must have at least two designated partners who are individuals and at least one of them must have a resident in India.
(vii)Every LLP must file with Registrar the Designated Partner Identification Number (DPIN) and other details of designated partners.
(viii)An LLP must maintain proper books of account according to double entry system.
(ix) Every LLP must prepare and file with the Registrar Statement of Account and Solvency each financial year along with an annual return in the prescribed form.
Merits of LLP
(i) An LLP has stable or continuous existence due to its perpetual succession.
(ii) The liability of an LLP and its partners is limited. The liability of the LLP and its partners becomes unlimited in case the firm or its partners carry out business with the intention to defraud the creditors or any other person or for any fraudulent purpose.
(iii) An LLP is a body corporate separate from its partners.
(iv) Not just an individual a body corporate can also be a partner in a LLP.
(v) An LLP can raise more funds as there is no limit on the maximum number of partners and liability is limited. It can attract finance from private equity investors and financing institutions.
(vi) It is easy to form an LLP as few legal formalities are required.
(vii) There is flexibility of operations. The LLP Act, 2008 allows the partners to run the business as per the agreement.
(viii) It is easy to join or leave an LLP. The ownership can be easily transferred as per the terms of the LLP agreement.
(ix) There is no risk of implied agency because individual partners are not agents of one another.
Demerits of LLP
(i) Time and money is involved in the formation and incorporation of a LLP.
(ii) There is less flexibility of operations due to legal formalities and regulations.
(iii) There is lack of business secrecy as an LLP has to file the prescribed documents every year with the Registrar. Moreover, its accounts are open for inspection.
(iv) An LLP cannot raise funds through public issue of shares and debentures.
(v) In certain cases, liability may extend to personal assets of partners.
(vi) An LLP cannot engage in some business such as banking, insurance and telecom.
Thus, an LLP is a hybrid form of business organisation combining features of both partnership and joint stock company.
It means a company which has minimum paid up capital of one lakh rupees or such higher capital as may be prescribed and which by its Articles of Association:
(a) restricts the right of its members to transfer shares, if any;
(b) limits the number of its member to 200, excluding members who are or were in the employment of the company;
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; and
(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relations.
A private company can be formed by two persons. It must add the words ‘private limited’ after its name.
Merits of Private Company
(i) Ease of Formation: Only two persons are needed to form a private company. It can start business immediately after obtaining the Certificate of Incorporation.
(ii) Stability: A private company has a separate legal entity independent of its members. Therefore, it can have continuity of operations.
(iii) Limited Liability: The liability of every member of a private company is restricted to his\her investment in the company.
(iv) Secrecy: A private company is not required to make its accounts open for the public. Therefore, it can maintain business secrets.
(v) Freedom of Operations: A private company enjoys several privileges and exemptions under the Companies Act. Therefore, it can have flexibility of operations.
(vi) Motivation: a private company is generally managed and controlled by its promoters. They have a direct incentive to work hard because they have not to distribute the profits among a large number of shareholders.
Demerits of Private Company
A private company suffers from the following limitations:
1. Limited Capital: A private company is not allowed to issue shares to the general public. Therefore, its share capital is limited.
2. Limited Managerial Skills: When there are only two members the managerial talent at the top level is limited.
3. Restricted Growth: The scope for expansion and growth is narrow due to limited resources.
4. Lack of Goodwill: A private company does not enjoy public confidence as its affairs are not open and public has no stake.
A private company is very suitable for organising a medium-sized business involving considerable risk of loss or uncertainly of profit. Wholesale trade, large scale retailing, e.g., departmental stores, chain stores, etc. and transportation services are examples of such business. Private company is also preferred by those who wish to take the advantage of limited liability but at the same time desire to keep control over the business within a limited circle of friends and relatives and want to maintain the privacy of their business. A family can maintain secrecy of business, avoid the risk of unlimited liability and avail of the facility of ease of partnership. Due to the small number of members there can be high degree of privacy and there is comparative freedom from legal requirements. Private company organisation is also appropriate in case of business of a speculative nature, e.g., hire purchase trading, stock-brokers, underwriting firms, etc. Another reason for the popularity of private company organisation is several exemption and privileges granted by law.
Privileges of a Private Company
(i) A private company can be formed by only two members.
(ii) It can start its business soon after incorporation. It is not required to obtain Certificate of Commencement of Business.
(iii) There is no need to issue a prospectus.
(iv) Allotment of shares can be done without receiving the minimum subscription.
(v) it is not necessary to hold a statutory meeting and file a statutory report with the Registrar of Companies.
(vi) There are no restrictions on the appointment, reappointment and remuneration of directors.
(vii) A private company can grant loans to its directors without prior permission of the government.
(viii) A private company is not required to maintain index of its members.
According to Prof. Haney, “joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, its ownership of which is the membership.” A public company means a company which:
(a) is not a private company;
(b) has a minimum paid up capital of five lakh rupees or such higher paid up capital, as may be prescribed; and
(c) is a private company which is a subsidiary of a company which is not a private company.
Salient Features of a Company
At least seven persons are required to form a public company. There is no limit on the maximum number of members. Chief Justice John Marshall of U.S.A. defined a company in the famous Dartmouth College case as “an artificial being, invisible, intangible and existing only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence; and the most important of which are immortality and individually.” Thus, a company is an artificial legal person having an independent legal entity.
The distinctive characteristics of a company area s follows:
1. Separate Legal Entity: A company has an existence entirely distinct from and independent of its members. It can own property and enter into contracts in its own name. It can sure in its own name. There can be contracts and suits between a company and the individual members who compose it. The assets and liabilities of the company are not the assets and liabilities of the individual members and vice versa. No member can directly claim any ownership right in the assets of the company.
2. Artificial Legal Person: A company is an artificial person created by law and existing only in contemplation of law. It is intangible and invisible having no body and no soul. It is an artificial person it does not come into existence through natural birth and it does not possess the physical attributes of a natural person. Like a natural person. It has rights and obligations in terms of law. But it cannot do those acts which only a natural person can do, e.g., taking an oath in person, enjoying married life, going to jail, practising profession, etc. A company is not a citizen and it enjoys no franchise or other fundamental rights.
3. Perpetual Succession: A company enjoys continuous or uninterrupted existence and its life is not affected by the death, insolvency, lunacy, etc. of its members or directors. Members may come and go but the company can be dissolved only through the legal process of winding up. It is like a river which retains its identity though the parts composing it continuously change.
4. Limited Liability: Liability of the members of a limited company is limited to the value of the shares subscribed to or to the amount of guarantee given by them. Unlimited companies are an exception rather than the general rule. In a limited company, members cannot be asked to pay anything more than what is due or unpaid on the shares held by them even if the assets of the company are insufficient to satisfy in full the claims of its creditors.
5. Common Seal: A company being a n artificial person cannot sign for itself. Therefore, the law provides the use of common seal as a substitute for its signatures. The common seal with the name of the company engraved on it serves as a token of the company’s approval of documents. Any document bearing the common seal to the company and duty witnessed (signed) by at least two directors is legally binding on the company.
6. Transferability of Shares: The shares of a public limited company are freely transferable. They can be purchased the stock exchange. Every member is free to transfer his shares to anyone without the consent of other members.
7. Separation of Ownership and Management: The number of members in a public company is generally very large so that all of them or most of them cannot take active part in the day-to-day management of the company. Therefore, they elect their representative, known as directors, to manage the company on their behalf. Representative control is thus an important feature of a company.
8. Incorporated Association of Persons: A company is an incorporated or registered association of persons. One person cannot constitute a company under the law. In a public company at least seven persons and in a private company at least two persons are required.
Distinction between Company, Partnership and LLP
Merits of Public Company
1. Limited Liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities and, therefore, contributes to the growth of the company form an ownership.
2. Large Financial Resources: Company form of ownership enables the collection of huge financial resources. The capital of a company is divided into shares of small denominations so that people with small means can also buy them. Benefits of limited liability and transferability of shares attract investors.
3. Continuity: A company enjoys uninterrupted business life. As a body corporate, it continuous to exist even if all members die or desert it. On account of its stable nature, a company is best suited for such types of business which require long periods of time to mature of members and develop.
4. Transferability of Shares: A member of a public limited company can freely transfer his shares without the consent of other members. Shares of public companies are generally listed on a stock exchange so that people can easily buy and sell them. Facility of transfer of shares makes investment in companies liquid and encourages investment of public savings into the corporate sector.
5. Professional Management: Due to its large financial resources and continuity, a company can avail of the services of expert professional managers. Employment of professional managers having managerial skills and little financial stake results in higher efficiency and more adventurous management. Benefits of specialisation and bold management can be secured.
6. Scope for Growth and Expansion: There is considerable scope for the expansion of business in a company. On account of its vast financial and managerial resources and limited liability, company form has immense potential for growth. With continuous expansion and growth, a company can reap various economies of large scale operations, which help to improve efficiency and reduce costs.
7. Public Confidence: A public company enjoys the confidence of public because its activities are regulated by the government under the Companies Act. Its affairs are known to public through publication of accounts and reports. It can always keep itself in tune with the needs and aspirations of people through continuous research and development.
8. Diffused Risk: The risk of loss in a company is spread over a large number of members. Therefore, the risk of an individual investors is reduced.
9. Social Benefits: The company organisation helps to mobilise savings of the community and invest them in industry. It facilitates the growth of financial institutions and provides employment to a large number of persons. It provides huge revenues to the Government through direct and indirect taxes. Demerits of Public Company
Demerits of Public Company
1. Difficulty of Formation: It is very difficult and expensive to form a company. A number of documents have to be prepared and filed with the Registrar of Companies. Services of experts are required to prepare these documents. It is very time consuming and inconvenient to obtain approvals and sanctions from different authorities for the establishment of a company. The time and cost involved in fulfilling legal formalities discourage many people from adopting the company form of ownership. It is also difficult to wind up a company.
2. Excessive Government Control: A company is subject to elaborate statuary regulations in its day-to-day operations. It has to submit periodical reports. Audit and publications= of accounts its obligatory. The object and capital of the company can be changed only after fulfilling the prescribed legal formalities. These rules and regulations reduce the efficiency and flexibility of operations. a lot of precious time, effort and money has to be spent in complying with the innumerable legal formalities and irksome statuary regulations.
3. Lack of Motivations and Personal Touch: There is divorce between ownership and management in a large public company. The affairs of the company are managed by the professional and salaried managers who do not have personal involvement and stake in the company. Absentee ownership and impersonal management result in lack of initiative and responsibility. Incentive for hard work and efficiency is low. Personal contact with employees and customers is not possible.
4. Oligarchic Management: In theory the management of a company is supposed to be democratic but in actual practice company becomes an oligarchy (rule by a few). A company is managed by a small number of people who are not able to perpetuate their reign year after year due to lack of interest, information and unity on the part of shareholders. The interests of small and minority shareholders are not well protected. They never get representation on the Board of Directors and feel oppressed.
5. Delay in Decisions: Too many levels of management of a company result in red-tape and bureaucracy. A lot of time is wasted in calling and holding meetings and in passing resolutions. It becomes difficult to take decisions and prompt action with the consequence that business opportunities may be lost.
6. Conflict of Interests: Company is the only form of business wherein a permanent conflict of interests may exist. In proprietorship there is no scope for conflict and in a partnership continuous conflict results in dissolution of the firm. But in a company conflicts may continue between shareholders and board of directors or between shareholders and creditors or between management and workers.
7. Frauds in Promotion and Management: There is a possibility that unscrupulous promoters may float a company to dupe innocent and ignorant investors. They may collect huge sums of money and, later on, misappropriate the money for their personal benefit. The case of South Sea Bubble Company is the leading example of such malpractices by promoters. Moreover, the directors of a company may manipulate the prices of the company’s shares and the debentures on the stock exchange on the basis of inside information and accounting manipulations. This may result in reckless speculation in shares and even a sound company may be put into financial difficulties.
8. Lack of Secrecy: Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.
9. Social Evils: Giant companies may give rise to monopolies, concentration of economic power in a few hands, interference in the political system, lack of industrial peace, etc.
Cooperative organisation grew as a means of protecting the interests of weaker sections of society against exploitation by big business operating for the maximisation of profits. Cooperative is not simply a form of ownership but a movement for the uplift of people with small means. It is said that the cooperative movement began with the setting up of a cooperative society called ‘Rochdale Society of Equitable Pioneers’ in 1884 in England. The basic feature which differentiates the cooperative organisation from other forms of business ownership is that its primary motive is service tot he members rather than making profits.
Characteristics (or principles) of Cooperatives
As a form of ownership, a cooperative society is a voluntary association of persons who join together on the basis of equality for the fulfillment of their economic or business interest. According to the Cooperative Societies Act, 1912, cooperative organisation is “a society which has as its objectives the promotion of the interests of its members in accordance with the principles of cooperation.” The International Labour Office (I.L.O) has defined it as “an association of persons, usually of limited means, who have voluntary joined together to achieve a common economic end, through the formation of a democratically controlled business organisation, making equitable contributions to the capital required and accepting a fair share of risks and benefits of the undertaking.
According to H.C.Calvert,a cooperative society is “a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of economic interests on themselves.”
An analysis of above definitions will reveal the following features of cooperative organisation:
1. Voluntary Association: Cooperative organisation is a voluntary association of persons, in the sense that people can become its members and they can leave it at their own will and without any coercion or intimidation. No one is compelled to become or continue its member. Persons having a common interest and desirous of pursuing a common objective can form themselves into a cooperative.
2. Open Membership: The membership of the cooperative society is open to all irrespective of caste, creed, religion, race, sex, colour, etc. Everybody is given an equal opportunity to become a member. However, membership may be restricted to a homogeneous group in some cases. For instances, a cooperative society of farmers may deny membership to those who are not farmers.
3. Democratic Control: The management of a cooperative society is entrusted to a managing committee elected by members on the basis of ‘one-member-one-vote’ irrespective of the numbers of shares held by any number. The broad policy framework of the society is laid down by the general body of members and the managing committee has to function within the framework.
4. Service Motive: The basic aim of cooperative society is to render service to its members in particular and to the society in general. Service above self is the spirit of cooperation. There is an emphasis on the material and moral uplift of members. However, a cooperative enterprise may make reasonable profits.
5. Compulsory Registration: No association of persons can use the word cooperative in its name without being registered under the Cooperative Societies Act, 1912 or under the Cooperative Societies Act of a State Government.
6. Separate Legal Entity: After registration in a cooperative enterprise becomes a body corporate independent of its members. It is entirely distinct from its members. It can own property and make contracts in its own name. it can sue and be sued in its own name.
7. Finance: The capital of a cooperative enterprise is provided by its members by purchasing shares. One member cannot subscribe to more then 10% of the total share capital or Rs.1000 whichever is higher. Shares are not transferable but they can be surrendered to the organisation. Share capital consists a small part of total funds, the major part of which is raised by way of loans from the government or from the apex cooperative institutions. It may also receive grants and assistance from the government.
8. Equitable Disposal of Surplus: The trading surplus earned by a cooperative society is utilised for several purposes. A fixed rate of dividend not exceeding 10 per cent can be paid on the capital. One-fourth of the profits is to be transferred to general reserves as per the law. A portion of the surplus, not exceeding 10 per cent, may be utilised for the general welfare of the locality in which the society is functioning. The rest of the profits may be distributed among members in the form of bonus. Bonus is given on an agreed basis but not on the basis of the capital contributed by members. The bonus may be paid to the members in the case of a consumers cooperative store, or in proportion to the goods delivered for sale to the society int he case of a producers cooperative.
9. Government Control: The activities of a cooperative society are regulated by the State even though it is voluntary in character. Government conducts periodic inspections of the audited accounts and affairs of the society. a cooperative society has to submit annual reports and accounts to the Registrar of Societies
In brief, the basic principles of cooperative organisation are service in place of profit, cooperative in place of competition, equality in place of majority, self-help in place of dependence and morality in place of unethical business practices.
Distinction between Cooperative Organisation and Company
Both a cooperative organisation and a company are incorporated associations of persons managed by an elected body of representatives. But they differ in the following respects:
(i) Number of Members: The minimum number of persons is 7 in a public company and 2 in a private company. A cooperative requires at least 10 members. The maximum number of members is 50 in a private company and 100 in a cooperative credit society. There is no maximum limit in case of public companies and non-credit cooperative societies.
(ii) Members Liability: The liability of members of a company is generally limited to the face value of shares held or the amount of guarantee given by them though the Companies Act permits unlimited liability companies. The members of a cooperative society can opt for limited liability. But in practice their liability is generally limited.
(iii) Membership: The membership of a cooperative society is open at all times and new members have to pay the same amount per share as old ones have paid. A company, on the other hand, closes the list of members as soon as its capital is fully subscribed. People who want to become members later on have to buy shares at the stock exchange.
(iv) Management and Control: The management of a cooperative society is democratic as each member has one vote and there is no system of proxy. In a company, the number of votes depends upon the number of shares and proxies held by a member. There is little separation between ownership and management in a cooperative society due to limited and local membership.
(v) Distribution of Surplus: The profits of a company are distributed as dividends in proportion to the capital contributed by the members. In a cooperative society a minimum part of surplus must be set aside as a reverse and for the general welfare of the public. The rest is distributed in accordance with the patronage provided by different members after paying dividend up to 10 per cent on capital.
(vi) Share capital: Ina company, one member can buy any number of shares or but an individual cannot buy more than 10 per cent of the total number of shares or shares worth rs.1,000 of a cooperative society. A public company must offer new shares to the existing members while a cooperative society issues new shares generally to increase its membership. The subscription list of a cooperative society is kept open for new members whereas the subscription list of a company is closed after subscriptions. A company is thus capitalistic in nature while a cooperative society is socialistic.
(vii) Transferability of Interest: The shares of a public limited company are freely transferable while the shares of cooperative society cannot be transferred but can be returned to the society in case a member wants to withdraw his membership. A member of a cooperative society can withdraw his capital by giving a notice to the society. A shareholder, on the other hand, cannot demand back his capital from the company until its winding up.
(viii) Basic Objectives: A cooperative society is set up to provide service to its members and surplus is incidental to such service. A company, on the other hand, aims to profits and is mainly an economic institution. Service motive is secondary in a company.
(ix) Coverage: A cooperative society generally draws its membership from a limited local area. The members have common bond in the form of a common occupation or employer or locality. In a company members have so such relationship and are usually drawn from different parts of the country and even from abroad.
(x) Exemptions and Privileges: A cooperative society enjoys exemptions and privileges regarding income tax, stamp duty, etc. This is because the Government seeks to encourage the growth of the cooperative movement. No such exemptions, privileges and assistance is available to a public limited company. A private limited company, however, enjoys a number of exemptions and privileges under the Companies Act.
(xi) Governing Statute: A company is governed by the Companies Act, 1956 while a cooperative organisation is subject to the provisions of the Cooperative Societies Act, 1912 or State Cooperative Societies Acts.
Merits of Cooperatives
Different types of cooperatives offer distinct benefits to their members. However, there are some advantages which are common to all cooperatives. These advantages are given below:
1. Ease of Formation: A cooperative society can be easily organised as it is a voluntary association. Any ten adult persons can voluntarily form themselves into a cooperative and get ii registered with the Registrar of Cooperatives. No complicated and costly legal formalities are involved.
2. Limited liability: The liability of every member is limited to the extent of his capital contribution.
3. Continuity or Stability: Being a separate legal entity,a cooperative organisation enjoys a perpetual existence which is not affected by the death, insolvency, conviction, retirement, etc, of members.
4. Democratic Management: The office-bearers of a cooperative are elected by the members on the basis of ‘one-member-one-vote’. As the membership of a cooperative is generally drawn from a local area, there is continuous and effective interaction between the members and the office-bearers of the society. Meetings are well attended and voting by proxy is not allowed. As such the management of the society is democratic.
5. Low Operating Costs: The administrative expenses of a cooperative society are usually low. Many members provide honorary management services and there is no need for advertising or publicity. Sales, if any, are generally on cash basis so that bad debt losses are eliminated.
6.Internal Financing: Due to compulsory ploughing back of at least 25 per cent of profits and statutory limitation on the rate of dividend, the financial strength of a cooperative is improved. Improved financing can be utilised for the modernisation and growth of the organisation without raising loans at exorbitant rates of interest.
7. Tax Advantage: A cooperative society is exempt from income tax and surcharge on its earnings up to a certain limit. It is also exempt from stamp duty and registration fee
8. Stage Patronage: Government provides financial assistance to cooperatives in the form of loans and and grants. State has adopted a helpful policy towards cooperatives as an instrument of socio-economic development of weaker sections of society.
Demerits of Cooperatives
9. Social Utility: Cooperatives promote mutual cooperation among people and serve as a means of community development. They develop brotherhood and spirit of service among members. They provide education and training in democracy, self-government, self-help and mutual help. Cooperatives societies impart moral and ethical values in daily life. By raising the economic status of weaker sections of society, cooperatives help to avoid anti-social monopolies and inequalities in the distribution of income and wealth. Cooperation is not simply a form a business organisation order. Cooperatives help in improving community life by utilising a part of their surplus for the welfare of local community. There is economic justice due to equitable distribution of surplus.
A cooperative society is subject to the following disadvantages:
1. Incompetent Management: At the primary level, a cooperative society generally cannot afford to employ professional managers. It has to depend on honorary managerial service by members who often lack specialised training and experience in management. Guaranteed market makes management lethargic.
2. Limited Financial Resources: As members are drawn from a particular locality and they usually have limited means, the capital which a cooperative can raise is very limited. Restrictions on dividend and the principle of ‘one-member/one-vote’ is discourage large investment by members. Due to perennial shortage of funds, there is limited scope of expansion and growth.
3. Lack of Motivation: Absence of profit motive and limitation of dividend stiffle incentive and responsibility on the part of managing committee. Paid office-bearers of a cooperative do not feel adequately motivated to make their best efforts for the success of the organisation. In some cases, officials misappropriate funds and commit other frauds for their personal gain and at the cost of the members.
4. Mutual Rivalries: After an enthusiastic and dramatic start, a cooperative society often becomes lifeless and paralysed with the passage of time. The spirit of mutual help and selfless gives way to rift, factionalism and politicking on the part of members. Bickerings and intrigue take place between members over petty issues. Lack of unity and cohesion paves the way for the doom of society.
5. Lack of Secrecy: As a corporate body, a cooperative society is required to submit its reports and accounts with the Registrar of Cooperative Societies. Full disclosure and publicity of affairs makes it very difficult to preserve the secrets of business.
6. Excessive State Regulations: A cooperative society is under detailed control by the Government. Such over-administrated interference reduces the flexibility of day-to-day operations. Time consuming procedures and formalities result in delays in decision-making.
7. Lack of Public Confidence: A cooperative society enjoys little public confidence due to political conduct of office-bearers and domination by a select group of individuals.
Choice of Form of Business Organisation
The foregoing description reveals that the cooperative organisation is suitable for small and medium sized business operations. Limitations of capital and managerial talent, low credit standing, and State control make it inappropriate for large scale business. Cooperative enterprise is particularly suitable in small trading and service organisation with regular demand and without speculation. However, there are a few cooperatives which are very large in size. For instance, Indian Farmers Fertiliser Cooperative (IFFCO) is a large sized enterprise with an investment of more than Rs.250 crore.
The choice of the form of ownership is dictated by several factors as given below:
1. Nature of Business: The nature of business has an important bearing on the choice of the form of ownership. Business providing direct services, e.g., small retailers, hair-dressing saloons, tailors, restaurants, etc. and professional services, e.g., doctors, lawyers, etc. depend for their success upon personal attention to customers and the personal knowledge or skill of the owner and are, therefore, generally organised as proprietor and partnership concerns. Business activities requiring pooling of skills and funds, e.g., wholesale trade, stock brokers, etc. are better organised as partnership. Manufacturing organisations of large size are more commonly set up as private and public companies.
2. Size and Area of Operations: Large scale enterprises catering to national and international markets can be organised more successfully as private or public companies. The reason is that large-sized enterprises require large financial and managerial resources which are beyond the capacity of a single person or a few partners. On the other hand, small and medium scale firms are generally set up as partnership and proprietorship. Small scale enterprises like hair-dressers, bakeries, laundries, workshops, etc. cater to a limited market and require small capital. The risk and liability are not heavy and the management problems can easily be handled by the owner himself. Therefore, the owner likes to be his own master by organising as a sole proprietor. He can maintain face to face relationship with his customers which is important in small service enterprises like painters, decorators, repair shops, beauty parlours, etc. Medium-sized enterprises and professional firms, e.g.,health clinics, chartered accountants, etc. are predominantly partnership concerns. They pool their capital and expertise to operate on a larger scale and to avail of the benefits of specialisation. Large scale enterprise and enterprises involving heavy risks, e.g., engineering firms, departmental stores, five star hotels, etc. are normally organised as companies. These enterprises require huge capital, heavy risks and expert managers. Proprietory and partnership forms are unable to provide these resources. The company form is, therefore, best suited to large scale enterprises. Similarly, where the area of operations is confined to a particular locality, sole proprietorship or partnership will be a more suitable choice.
3. Degree of Control Desired: A person who desired direct control of business prefers proprietorship rather than the company because there is a separation of ownership and management in the latter case. When the owner is not interested in direct personal control but in large scale operation, it would be desirable to adopt the company form of ownership.
4. Amount of Capital Required: The funds required for the establishment and operation of business have an important impact on the choice. Enterprises requiring heavy investment, i..e., iron and steel plants, etc. should be organised as joint stock companies. A partnership has to be converted into a company when it grows beyond the capacity and resources of few persons. Requirements of growth and expansion should also be considered in making the choice. There is maximum scope for expansion in case of a public company. Where the funds required initially are small and scope for expansion is not desired, proprietorship or partnership is a better choice.
5. Degree of Risk Involved: The volume of risk and the willingness of owners to bear it, is an important consideration. A single individual may have large financial resources sufficient for a medium scale enterprise but due to unlimited personal liability he may not like to organise as a proprietor or a partnership. Due to limited liability and a large number of shareholders, there is maximum diffusion of risk in a public company. But an enterprising individual not afraid of unlimited liability may go in for sole proprietorship.
6. Division of Surplus: A sole trader receives all the profits of his business but he also bears all the risks. If a person is ready to bear unlimited personal liability and desires maximum share of profits, proprietorship and partnership are preferable to company form.
7. Duration of Business: Temporary and ad-hoc ventures can be organised as proprietorship and partnerships as they are easy to form and dissolve. But they lack continuity and stability. Enterprises of a permanent nature can be better organised as joint stock companies and cooperatives because they enjoy perpetual succession.
8. Government Regulation and Control: Proprietorship and partnership are subject to little regulation and control by the Government. Companies are cooperatives are, on the other hand, subject to severe restrictions and have to undergo several legal formalities. But this factor is not vary important and it can be helpful in making the choice only when all other factors are unable to indicate a clear-cut choice.
9. Managerial Requirements: Organisational and administrative requirements depend upon the size and nature of business. Small business using simple processes of production and distribution can be managed effectively as proprietorships and partnerships. On the other hand, giant enterprises involving the use of complex techniques and procedures require professional management. such enterprises can be manged efficiently only as joint stock companies. Due to identity of ownerships and management, motivation is very high in proprietorship and partnership. Such motivation is lacking in a company due to separation of ownership form management.
The above analysis indicate that the basic consideration in the choice of a form of ownership is the nature and size of business. All other factors are dependent the basic consideration. The scope and plan of organisation will also vary with the size and nature of business. In a grocery store, the organisation will be simply as few employees will be needed. Thus, the nature and size of business are the key factors in the choice of a form of ownership.