Prepared By Tushar Sir
CHAPTER 2
Forms of Business Organisation
Study Notes — Class XI Business Studies (NCERT)
Learning Objectives
• Identify different forms of business organisation.
• Explain features, merits and limitations of different forms of business organisations.
• Distinguish between various forms of organisations.
• Discuss the factors determining choice of an appropriate form of business organisation.
2.1 Introduction
An important decision while starting or expanding a business relates to the choice of the form of
organisation. The most appropriate form is determined by weighing the advantages and disadvantages of
each type of organisation against one's own requirements.
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Fig 2.1 — The five forms of business organisation
2.2 Sole Proprietorship
Sole proprietorship is a popular form of business organisation and is the most suitable form for small
businesses, especially in their initial years of operation. It refers to a form of business organisation which
is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all
risks. The word “sole” implies “only”, and “proprietor” refers to “owner”. This form of business is
particularly common in areas of personalised services such as beauty parlours, hair saloons and small
scale activities like running a retail shop.
“Sole trader is a type of business unit where a person is solely responsible for providing the capital,
for bearing the risk of the enterprise and for the management of business.” — J.L. Hansen
“The individual proprietorship is the form of business organisation at the head of which stands an
individual as one who is responsible, who directs its operations and who alone runs the risk of
failure.” — L.H. Haney
Features
• Formation and closure: No separate law governs sole proprietorship; hardly any legal
formalities are required to start (though a license may be needed in some cases). Closure is
also easy.
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• Liability: Sole proprietors have unlimited liability — personal assets can be sold to repay
business debts.
• Sole risk bearer and profit recipient: The risk of failure is borne alone; profits are also
enjoyed alone.
• Control: The right to run the business and make all decisions lies absolutely with the sole
proprietor.
• No separate entity: In the eyes of law, no distinction is made between the sole trader and his
business.
• Lack of business continuity: Death, insanity, imprisonment, physical ailment or bankruptcy of
the proprietor affects the business and may cause its closure.
Example: If total outside liabilities of a sole proprietorship firm are Rs. 80,000 at the time of dissolution,
but its assets are only Rs. 60,000, the proprietor must bring in Rs. 20,000 from personal sources, even
selling personal property if necessary, to repay the firm's debts.
Merits
• Quick decision making — no need to consult others.
• Confidentiality of information — not legally bound to publish accounts.
• Direct incentive — sole recipient of all profit.
• Sense of accomplishment — personal satisfaction of working for oneself.
• Ease of formation and closure — least regulated form of business.
Limitations
• Limited resources — restricted to personal savings and borrowings.
• Limited life of business concern — affected by death, insanity, imprisonment etc.
• Unlimited liability — creditors can recover dues from personal assets too.
• Limited managerial ability — one person cannot excel in all functional areas.
Case Study Box: A Refreshing Start — Coca-Cola Owes Its Origin to a Sole Proprietor!
The world-famous drink was born in Atlanta, Georgia, on May 8, 1886, when pharmacist Dr. John Stith
Pemberton produced the syrup for Coca-Cola and sold it as a soda-fountain drink for five cents a glass at
Jacobs' Pharmacy.
Pemberton never realised the potential of his creation. He sold portions of the business to various partners, and
just before his death in 1888 sold his remaining interest to Asa G. Candler.
On May 1, 1889, Candler advertised his business in The Atlanta Journal as “sole proprietors of Coca-Cola”.
Full sole ownership, achieved only in 1891, needed an investment of just $2,300.
It was only in 1892 that Candler formed a company called The Coca-Cola Company — illustrating the classic
progression from sole proprietorship to a larger company form as a business grows.
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(Source: NCERT, Business Studies; corroborated by Coca-Cola Company's official history — coca-
[Link], 2026.)
2.3 Joint Hindu Family Business
2.4 Partnership
The inherent disadvantage of the sole proprietorship in financing and managing an expanding business
paved the way for partnership. The Indian Partnership Act, 1932 defines partnership as “the relation
between persons who have agreed to share the profit of the business carried on by all or any one of them
acting for all.”
“Partnership is the relation between persons competent to make contracts who have agreed to carry on a
lawful business in common with a view to private gain.” — L.H. Haney
“Partnership is the relation which subsists between persons who have agreed to combine their property,
labour or skill in some business and to share the profits therefrom between them.” — The Indian Contract
Act, 1872
Features
• Formation: Governed by the Indian Partnership Act, 1932; comes into existence through a
legal agreement; business must be lawful and run with a profit motive.
• Liability: Partners have unlimited liability — jointly and individually liable for debts.
• Risk bearing: Risks are borne as a team, and profits/losses are shared in an agreed ratio.
• Decision making and control: Shared amongst partners; decisions generally taken with
mutual consent.
• Continuity: Lacks continuity — death, retirement, insolvency or insanity of any partner can
end the business (though remaining partners may continue on a new agreement).
• Number of Partners: Minimum 2; maximum 100 as per Companies Act 2013 (currently
capped at 50 by Rule 10, Companies (Miscellaneous) Rules, 2014).
• Mutual agency: Every partner is both an agent and a principal for the others.
Merits
• Ease of formation and closure.
• Balanced decision making due to division of functions by expertise.
• More funds due to contributions by multiple partners.
• Sharing of risks reduces individual burden.
• Secrecy — not legally required to publish accounts.
Limitations
• Unlimited liability — joint and several.
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• Limited resources due to restriction on number of partners.
• Possibility of conflicts among partners.
• Lack of continuity.
• Lack of public confidence — financial reports need not be published.
2.4.1 Types of Partners
Rani's Example (Partner by Estoppel): Rani is a friend of Seema, a partner in Simplex Solutions. On
Seema's request, Rani accompanies her to a meeting with Mohan Softwares and gives the impression she
too is a partner. If credit is extended on this basis, Rani becomes liable for repayment as if she were a
partner — this is the doctrine of partner by estoppel.
Type Capital Management Share in Profits/Losses Liability
Contribution
Active partner Contributes capital Participates in Shares profits/losses Unlimited
management liability
Sleeping/dormant partner Contributes capital Does not participate Shares profits/losses Unlimited
liability
Secret partner Contributes capital Participates, but secretly Shares profits/losses Unlimited
liability
Nominal partner Does not contribute Does not participate Generally does not share Unlimited
liability
Partner by estoppel Does not contribute Does not participate Does not share Unlimited
liability
Partner by holding out Does not contribute Does not participate Does not share Unlimited
liability
Minor as a Partner
A minor cannot become a full partner (being incompetent to contract) but can be admitted to the benefits of a
partnership with the consent of all other partners. His liability is limited to his capital contribution; he cannot
take an active part in management, and shares only profits, not losses — though he may inspect accounts. On
attaining majority, he must give public notice within six months of whether he wishes to become a full partner;
failing this, he becomes a full-fledged partner with unlimited liability.
2.4.2 Types of Partnerships
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Fig 2.2 — Classification of partnerships by duration and by liability
• Partnership at will: Continues as long as partners want; terminated when any partner gives
notice of withdrawal.
• Particular partnership: Formed for a specific project or time period; dissolves automatically
when the purpose is fulfilled.
• General partnership: Liability is unlimited and joint; registration optional; existence affected
by death/insolvency/retirement.
• Limited partnership: Liability of at least one partner is unlimited, rest may have limited
liability; not terminated by death/insolvency of limited partners; registration compulsory.
(Permitted in India after the New Small Enterprise Policy, 1991.)
2.4.3 Partnership Deed
A written agreement specifying the terms and conditions governing a partnership is called the partnership
deed. Though an oral agreement is legally valid, a written deed is advisable as evidence. It generally
includes:
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• Name and nature of business, location
• Duration of business
• Investment made by each partner
• Distribution of profits and losses
• Duties and obligations of partners
• Salaries and withdrawals of partners
• Terms governing admission, retirement and expulsion of a partner
• Interest on capital and on drawings
• Procedure for dissolution of the firm
• Preparation of accounts and their auditing
• Method of solving disputes
2.4.4 Registration
Registration means entering the firm's name, along with prescribed particulars, in the Register of Firms
kept with the Registrar of Firms. It is optional, but non-registration means:
• A partner of an unregistered firm cannot file a suit against the firm or other partners.
• The firm cannot file a suit against third parties.
• The firm cannot file a case against the partners.
Procedure: (1) Submission of application (with name, location, other places of business, date each partner
joined, names/addresses of partners, and duration) signed by all partners; (2) Deposit of required fees with
the Registrar of Firms; (3) The Registrar, after approval, enters the firm in the register and issues a
certificate of registration.
Case Study Box: Price Waterhouse Coopers Was a Partnership Firm Earlier
PricewaterhouseCoopers (PwC), one of the world's top accountancy firms, was created in 1998 by the merger
of Price Waterhouse and Coopers & Lybrand — each with roots going back some 150 years to 19th-century
Britain.
In 1850, Samuel Lowell Price set up his accounting business in London; in 1865 he was joined in partnership
by William H. Holyland and Edwin Waterhouse. As the firm grew, qualified staff members were progressively
admitted to the partnership, and by the late 1800s Price Waterhouse had gained significant recognition as an
accounting firm.
(Source: NCERT, Business Studies, adapted from Price Waterhouse Coopers archives, Columbia University.)
2.5 Cooperative Society
The word cooperative means working together for a common purpose. A cooperative society is a
voluntary association of persons who join together with the motive of welfare of the members, driven by
the need to protect their economic interests in a democratic way.
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“A cooperative is an autonomous association of persons united voluntarily to meet their common
economic, social and cultural needs, and aspirations through a jointly-owned and democratically-
controlled enterprise.” — International Cooperative Alliance
A cooperative society must be registered under law. In India, single-state cooperatives are governed by
the Cooperative Societies Act of that state, while multi-state cooperatives are governed by the Multi-State
Cooperative Societies Act, 2002 (as amended).
Features
• Voluntary membership — open to all irrespective of religion, caste and gender; free to join or
leave.
• Legal status: Registration compulsory, giving a distinct legal identity separate from members.
• Limited liability — restricted to the amount contributed as capital.
• Control: Power to take decisions lies with an elected managing committee (democratic
character).
• Service motive: Surplus (if any) is distributed as dividend as per the society's bye-laws.
Merits
• Equality in voting status — ‘one man, one vote’ principle.
• Limited liability protects personal assets.
• Stable existence — unaffected by death, bankruptcy or insanity of members.
• Economy in operations — honorary services and elimination of middlemen.
• Support from government — low taxes, subsidies, low-interest loans.
• Ease of formation.
Limitations
• Limited resources and low rate of dividend.
• Inefficiency in management — cannot attract expert/professional managers.
• Lack of secrecy due to disclosure obligations.
• Government control through rules on auditing/accounts.
• Differences of opinion may hamper decision making.
2.5.1 Types of Cooperative Societies
• Consumer's cooperative societies — protect consumers' interest by eliminating middlemen
and providing goods at reasonable prices.
• Producer's cooperative societies — protect small producers by supplying inputs and buying
output.
• Marketing cooperative societies — help small producers sell products at the best price by
pooling output.
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• Farmer's cooperative societies — provide better inputs at reasonable cost for large-scale
farming benefits.
• Credit cooperative societies — provide easy credit at reasonable rates, protecting members
from exploitative lenders.
• Cooperative housing societies — help people construct houses at reasonable cost, often in
instalments.
Case Study Box: Amul's Amazing Cooperative Ventures! (with 2026 update)
As per NCERT: Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many illiterate),
converting it into branded, packaged products delivered worth Rs. 6 crore to over 5,00,000 retail outlets across
the country. It began in December 1946 with farmers keen to free themselves from intermediaries. Based in
Anand, the Khera District Milk Cooperative Union (Amul) expanded into a network covering 2.12 million
farmers, 10,411 village-level milk collection centres and fourteen district-level unions across Gujarat.
Latest web update (2026): The Gujarat Cooperative Milk Marketing Federation (GCMMF) — the world's
largest farmer-owned dairy cooperative — reported that the Amul brand's total turnover crossed ₹1 lakh crore
for FY 2025-26, an 11% rise over the previous year's ₹90,000 crore base, with GCMMF's own sales turnover at
₹73,450 crore. The cooperative now serves around 3.6 million farmer-members and was ranked the world's No.
1 cooperative by the International Cooperative Alliance.
(Sources: NCERT Business Studies, adapted from [Link], 2005; DeshGujarat and Dairy Industries
International, April 2026.)
2.6 Joint Stock Company
A company is an association of persons formed for carrying out business activities and has a legal status
independent of its members — described as an artificial person having a separate legal entity, perpetual
succession and a common seal. The company form is governed by The Companies Act, 2013.
Shareholders are the owners, while the Board of Directors is the chief managing body elected by
shareholders. Capital is divided into smaller parts called ‘shares’, which can be freely transferred (except
in a private company).
Features
• Artificial person: Created by law; can own property, incur debts, sue and be sued, but cannot
breathe, eat, run or talk.
• Separate legal entity: Assets and liabilities are separate from those of its members.
• Formation: Time-consuming, expensive and complicated — requires preparation of
documents and compliance with legal requirements.
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• Perpetual succession: Can end only by law (winding up); members may come and go, but the
company continues.
• Control: Undertaken by the Board of Directors, accountable to shareholders; shareholders
have no right to day-to-day involvement.
• Liability: Limited to the extent of unpaid capital contributed by members.
• Risk bearing: Borne by all shareholders, spreading the risk of loss over a large number of
people.
Example: Akshay holds 2,000 shares of Rs. 10 each, having paid Rs. 7 per share. His liability in case of
losses is limited to Rs. 6,000 (the unpaid Rs. 3 per share on 2,000 shares) — nothing beyond that.
Merits
• Limited liability protects personal property of shareholders.
• Transfer of interest — shares of a public company can be sold easily.
• Perpetual existence — unaffected by death, retirement or insolvency of members.
• Scope for expansion — large financial resources from public, banks and financial institutions.
• Professional management — can afford experts, leading to division of work and efficiency.
Limitations
• Complexity in formation — greater time, effort and legal knowledge required.
• Lack of secrecy — mandatory disclosure to the Registrar of Companies.
• Impersonal work environment due to separation of ownership and management.
• Numerous regulations — audit, voting, filing of reports, certificates from various agencies.
• Delay in decision making due to multiple management layers.
• Oligarchic management — in practice, directors may enjoy considerable freedom, sometimes
against shareholders' interests.
• Conflict in interests among employees, consumers and shareholders.
2.6.1 Types of Companies
Private Company
A private company: (a) restricts the right of members to transfer shares; (b) has a minimum of 2 and a
maximum of 200 members (excluding present/past employees); (c) does not invite the public to subscribe
to its securities. It must use “private limited” after its name.
Privileges of a private company over a public company:
• Can be formed by only two members (public company needs seven).
• No need to issue a prospectus.
• Allotment of shares possible without receiving minimum subscription; can start business right after
incorporation.
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• Needs only two directors (public company needs a minimum of three); maximum for both is fifteen.
• Not required to keep an index of members.
Public Company
A public company is one which is not a private company. As per the Companies Act, it: (a) has a
minimum of 7 members with no maximum limit; (b) has no restriction on transfer of securities; and (c) is
not prohibited from inviting the public to subscribe to its securities. Note: a private company that is a
subsidiary of a public company is also treated as a public company.
Basis Public Company Private Company
Members Minimum – 7; Maximum – unlimited Minimum – 2; Maximum – 200
Minimum number of directors Three Two
Index of members Compulsory Not compulsory
Transfer of shares No restriction Restriction on transfer
Invitation to public to Can invite public to subscribe to Cannot invite public to subscribe to securities
subscribe shares/debentures
2.7 Choice of Form of Business Organisation
Each form of organisation has advantages and disadvantages; certain basic considerations must be kept in
mind while choosing the appropriate form.
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Fig 2.3 — Liability position across the five forms of organisation
Factor Most Advantageous (less) Least Advantageous(more)
Availability of capital Company Sole proprietorship
Cost of formation Sole proprietorship Company
Ease of formation Sole proprietorship Company
Transfer of ownership Company (except private co.) Partnership
Managerial skills Company Sole proprietorship
Regulations Sole proprietorship Company
Flexibility Sole proprietorship Company
Continuity Company Sole proprietorship
Liability Company Sole proprietorship
• Cost and ease in setting up: Sole proprietorship is cheapest and easiest; company formation is
lengthy and expensive.
• Liability: Unlimited for sole proprietorship/partnership (and karta); limited for cooperative
societies and companies.
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• Continuity: Sole proprietorship/partnership affected by death, insolvency, insanity; joint
Hindu family business, cooperative societies and companies are more stable.
• Management ability: Company/partnership allow specialisation and division of work; sole
proprietorship is limited to one person's skill.
• Capital considerations: Companies can raise large capital from the public; partnerships pool
combined resources; sole proprietor resources are limited.
• Degree of control: Sole proprietorship offers absolute control; partnership/company involve
shared or professional control.
• Nature of business: Direct personal contact businesses (e.g., grocery store) suit proprietorship;
large manufacturing suits company form; professional services suit partnership.
All these factors are inter-related — a form suitable at a small scale may not remain appropriate as the
business grows. All relevant factors should be considered together when deciding on the form of
organisation.
Comparative Evaluation of Forms of Organisation
Basis Sole Partnership Joint Hindu Cooperative Company
Proprietorship Family Society
Formation Minimal Optional Less formalities, Registration Registration
formalities, registration, easy no registration compulsory compulsory,
easiest needed lengthy/expensive
Members Only owner Min 2, Max 50 Min 2, no max Min 10, no max Private: 2–200;
Public: 7–unlimited
Capital Limited finance More than sole Ancestral Limited Large financial
proprietorship property resources
Liability Unlimited Unlimited and Karta: unlimited; Limited Limited
joint others: limited
Control Owner takes all Partners decide Karta decides Elected Board of Directors
decisions by consent managing
committee
Continuity Unstable More stable, Stable, continues Stable (separate Stable (separate legal
affected by after karta's death legal status) status)
partners' status