Business Organisation and Management

B. com (H) 1st Sem

Module 1

Introduction
If one is planning to start a business or is interested in expanding an existing one, an important
decision relates to the choice of the form of organization. The most appropriate form is
determined by weighing the advantages and disadvantages of each type of organization against
one’s own requirements.

2.1 Types of ownership

Various forms of business organizations from which one can choose the right one include:

(a) Sole proprietorship,

(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company

Sole Proprietorship
A sole proprietorship in India is a form of business entity where a single individual handles the
entire business organization. The individual is the sole recipient of all profits and bearer of all
losses to the business. The liability of the owner is unlimited.

Characteristics/ Features:

(i) Formation and closure: There is no separate law that governs sole proprietorship. Hardly
any legal formalities are required to start a sole proprietorship business, though in some cases,
one may require a license. Closure of the business can also be done easily. Thus, there is ease
in formation as well as closure of business.

(ii) Liability: Sole proprietors have unlimited liability. This implies that have to bring in Rs.
20,000 from her personal sources even if she has to sell her personal property to repay the
firm’s debts.
(iii) Sole risk bearer and profit recipient: The risk of failure of the business is borne alone by
the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits.
He receives all the business profits which become a direct reward for his risk bearing.

(iv) Control: The right to run the business and make all decisions lies absolutely with the sole
proprietor. He can carry out his plans without any interference from others.

(v) No separate entity: In the eyes of the law, no distinction is made between the sole trader
and his business, as business does not have an identity separate from the owner. The owner is,
therefore, held responsible for all the activities of the business.

(vi) Lack of business continuity: The proprietorship business is owned and controlled by one
person; therefore, death, insanity, imprisonment, physical ailment, or bankruptcy of the sole
proprietor will have a direct and detrimental effect on the business and may even cause closure
of the business.

Advantages:

Sole proprietorship offers many advantages. Some of the important ones are as follows

(i) Quick decision making: A sole proprietor enjoys considerable degree of freedom in making
business decisions. Further the decision making is prompt because there is no need to consult
others. This may lead to timely capitalization of market opportunities as and when they arise.

(ii) Confidentiality of information: Sole decision-making authority enables the proprietor to

keep all the information related to business operations confidential and maintain secrecy. A sole
trader is also not bound by law to publish firm’s accounts.

(iii) Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she is
the sole recipient of all the profit. The need to share profits does not arise as he/she is the single
owner. This provides maximum incentive to the sole trader to work hard.

(iv) Sense of accomplishment: There is a personal satisfaction involved in working for oneself.
The knowledge that one is responsible for the success of the business not only contributes to
self-satisfaction but also instils in the individual a sense of accomplishment and confidence in
one’s abilities.

(v) Ease of formation and closure: An important merit of sole proprietorship is the possibility
of entering into business with minimal legal formalities. There is no separate law that governs
sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to
start and close the business as per the wish of the owner.

Disadvantage:

Not with standing various advantages, the sole proprietorship form of organization is not free
from limitations. Some of the major limitations of sole proprietorship are as follows:

(i)Limited resources: Resources of a sole proprietor are limited to his/ her personal savings and
borrowings from others. Banks and other lending institutions may hesitate to extend a long-
term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the
business rarely grows much and generally remains small.

(ii) Limited life of a business concern: The sole proprietorship business is owned and controlled
by one person, so death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor
affects the business and can lead to its closure.

(iii) Unlimited liability: A major disadvantage of sole proprietorship is that the owner has
unlimited liability. If the business fails, the creditors can recover their dues not merely from the
business assets, but also from the personal assets of the proprietor. A poor decision or an
unfavorable circumstance can create serious financial burden on the owner. That is why a sole
proprietor is less inclined to take risks in the form of innovation or expansion.

(iv) Limited managerial ability: The owner has to assume the responsibility of varied
managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who
excels in all these areas. Thus, decision making may not be balanced in all the cases. Also, due
to limited resources, sole proprietor may not be able to employ and retain talented and
ambitious employees.

Partnership firm
A partnership is “the relation between people who have agreed to share the profits of the
business carried on by them or any of them acting for all”. A minimum of two people is required
to start a partnership business. The maximum number of partners is ten. The partners have
unlimited liability and can share profits in any mutually agreed ratio. The registration of a
partnership firm is not compulsory.

Characteristics:

Following are the characteristics of Partnership Firm:

1. Number of Partners: Minimum number of person required to start a partnership firm is two
and maximum limit is 10 in case of banking business and 20 in case of all other types of
business.

2. Contractual relationship: A written agreement known as a partnership deed, which is signed

by all the partners, binds them in a contractual relationship.

3. Voluntary Registration: Registration of partnership firm is not compulsory. Since the

registration provides various benefits to the firm thus it is desirable.

4. Competence of Partners: Every partner must be competent enough to enter into the
partnership agreement. He should not be a minor (in some cases, a minor can be admitted only
for the benefit of the partnership), lunatic, or insolvent.

5. Sharing of Profit and Loss: In partnership firm all the profits and losses are shared by the
partners in any ratio as agreed. If it is not given, then they share it equally.

6. Unlimited Liability: Liability of partners of a partnership firm is unlimited. They are jointly
held liable for the debts and losses of the firm.

7. Legal Status: Partnership firm has no distinct legal status separate from its partners.

8. Transfer of Interest: No partner can transfer its interest in the firm to anybody without the
consent of other partners.

9. Principal - Agent Relationship: This relationship is based on mutual trust and faith among
the partners in the interest of the firm. Business of the firm may be carried on by all the partners
or any one of them acting for all. According to this, every partner is an agent when he is working
on behalf of other partners, and he is the principal when other partners act on his behalf.

Types of Partnership

1. General partnership: A general partnership is a partnership with only general partners.

Each general partner must actively participate in managing the business and any partner
may sign a contract on behalf of the partnership. General partners have unlimited
liability.
2. Limited partnership: A limited partnership includes both general partners and at least
one limited partner. In many cases, there is one general partner who manages the
business and a number of limited partners. A limited partner does not participate in the
 day-to-day management of the partnership and their liability is limited to their
investment in the business.
3. Limited liability partnership: A limited liability partnership, or LLP, is a type of
partnership where owners aren’t held personally responsible for the business’s debts or
other partners’ actions.
➢ LLP act 2008
➢ Registration with ROC
➢ Min-2partnres, Max-no limit
➢ Foreign partners allowed
➢ Perpetual Succession
4. Public-private partnership (PPP): Partnership between an agency of the government
and the private sector in the delivery of goods or services to the public. Areas of public
policy in which public-private partnerships (PPPs) have been implemented include a
wide range of social services, public and environmental and waste-disposal services.
Example: Mumbai MetroFirst MRTS project in India being implemented on Public
Private Partnership (PPP) format. DMRC (Delhi Metro Rail Corporation) prepared the
master plan for Mumbai Metro. The Private party involved was- Reliance Energy Ltd.
Total Project cost- Rs. 2356 crores

Types of partners
1. Active/Managing Partner: An active partner mainly takes part in the day-to-day running
of the business and also takes an active part in the conduct and management of the business
firm. He carries the daily business activities on behalf of other partners. He may act in different
capacities such as manager, advisor, organizer and controller of affairs of the firm. An agent of
all the other partners, in order to run the active partner, can withdraw remuneration from the
firm.
2. Sleeping Partner: A sleeping partner is also known as a “dormant partner”. This partner
does not participate in the day-to-day functioning activities of the partnership firm. A person
who has sufficient money or interest in the firm but cannot devote his time to the business can
act as a sleeping partner in the firm. However, he is bound by all the acts of the other partners.
3. Nominal Partner: A nominal partner does not have any real or significant interest in the
partnership firm. In simple words, he is only lending his name to the firm and does not have a
voice in the management of the firm. On the strength of his name, the firm can promote its
sales in the market or can get more credit from the market.
4. Partner by Estoppel: A partner by estoppel is a partner who displays by his words, actions
or conduct that he is the partner of the firm. In simple words, even though he is not the partner
in the firm but he has represented himself in such a manner which depicts that he has become
a partner by estoppel or partner by holding out. It is pertinent to note that, though he does
contribute in capital or management of the firm but on the basis of his representation in the
firm he is liable for the credits and loans obtained by the firm.
5. Partner in Profits only: This partner of a firm will only share the profits of the firm and
won’t be liable for any losses of the firm. He is not allowed to take part in the management of
the firm. Such kinds of partners are associated with the firm for their goodwill and money.
6. Minor Partner: A minor is a person who has not yet attained the age of majority in the law
of the land. According to section 3 of the Indian Majority Act 1874, a person is deemed to have
attained the age of majority when he attains 18 years of age. However, a minor can also be
appointed to claim the benefits of the partnership.

Joint Hindu Family Business

Joint Hindu family business is a specific form of business organization found only in India. It
is one of the oldest forms of business organization in the country. It refers to a form of
organization wherein the business is owned and carried on by the members of the Hindu
Undivided Family (HUF). It is governed by the Hindu Law. The basis of membership in the
business is birth in a particular family and three successive generations can be members in the
business.
Characteristics:
The following points highlight the essential characteristics of the joint Hindu family business.
(i)Formation: For a joint Hindu family business, there should be at least two members in the
family and ancestral property to be inherited by them. The business does not require any
agreement as membership is by birth. It is governed by the Hindu Succession Act, 1956.
(ii) Liability: The liability of all members except the karta is limited to their share of co-
parcenery property of the business. The karta, however, has unlimited liability.
(iii) Control: The control of the family business lies with the karta. He takes all the decisions
and is authorised to manage the business. His decisions are binding on the other members.
(iv) Continuity: The business continues even after the death of the karta as the next eldest
member takes up the position of karta, leaving the business stable. The business can, however,
be terminated with the mutual consent of the members.
(v) Minor Members: The inclusion of an individual into the business occurs due to birth in a
Hindu Undivided Family. Hence, minors can also be members of the business.
Advantages:
(i)Effective control: The karta has absolute decision-making power. This avoids conflicts
among members as no one can interfere with his right to decide. This also leads to prompt and
flexible decision-making.
(ii) Continued business existence: The death of the karta will not affect the business as the next
eldest member will then take up the position. Hence, operations are not terminated, and
continuity of business is not threatened.
(iii) Limited liability of members: The liability of all the co-parceners except the karta is limited
to their share in the business, and consequently, their risk is well-defined and precise.
(iv) Increased loyalty and cooperation: Since the business is run by the members of a family,
there is a greater sense of loyalty towards one other. Pride in the growth of business is linked
to the achievements of the family. This helps in securing better cooperation from all the
members.
Disadvantages:
The following are some of the limitations of a joint Hindu family business.
(i)Limited resources: The joint Hindu family business faces the problem of limited capital as it
depends mainly on ancestral property. This limits the scope for expansion of business.
(ii) Unlimited liability of karta: The karta is burdened not only with the responsibility of
decision making and management of business, but also suffers from the disadvantage of having
unlimited liability. His personal property can be used to repay business debts.
(iii) Dominance of karta: The karta individually manages the business which may at times not
be acceptable to other members. This may cause conflict amongst them and may even lead to
the breakdown of the family unit.
(iv) Limited managerial skills: Since the karta cannot be an expert in all areas of management,
the business may suffer because of his unwise decisions. His inability to decide effectively may
result into poor profits or even losses for the organisation.

Co-operative Society
The cooperative society is a voluntary association of persons, who join with the motive of
welfare of the members. They are driven by the need to protect their economic interests in the
face of possible exploitation at the hands of middlemen obsessed with the desire to earn greater
profits.
Characteristics:
(i)Voluntary membership: The membership of a cooperative society is voluntary. A person is
free to join a cooperative society and can also leave anytime as per their desire. There cannot
be any compulsion for him to join or quit a society. Although procedurally a member is required
to serve a notice before leaving the society, there is no compulsion to remain a member.
Membership is open to all, irrespective of their religion, caste, and gender.
(ii) Legal status: Registration of a cooperative society is compulsory. This accords a separate
identity to the society which is distinct from its members. The society can enter into contracts
and hold property in its name, sue and be sued by others. As a result of being a separate legal
entity, it is not affected by the entry or exit of its members.
(iii) Limited liability: The liability of the members of a cooperative society is limited to the
extent of the amount contributed by them as capital. This defines the maximum risk that a
member can be asked to bear.
(iv) Control: In a cooperative society, the power to take decisions lies in the hands of an elected
managing committee. The right to vote gives the members a chance to choose the members
who will constitute the managing committee, and this lends the cooperative society a
democratic character.
(v) Service motive: The cooperative society through its purpose lays emphasis on the values of
mutual help and welfare. Hence, the motive of service dominates its working. If any surplus is
generated as a result of its operations, it is distributed amongst the members as dividend in
conformity with the byelaws of the society.
Advantages:
The cooperative society offers many benefits to its members. Some of the advantages of the
cooperative form of organisation are as follows.
(i) Equality in voting status: The principle of ‘one man one vote’ governs the cooperative
society. Irrespective of the amount of capital contribution by a member, each member is
entitled to equal voting rights.
(ii) Limited liability: The liability of members of a cooperative society is limited to the extent
of their capital contribution. The personal assets of the members are, therefore, safe from being
used to repay business debts.
(iii) Stable existence: Death, bankruptcy or insanity of the members do not affect continuity
of a cooperative society. A society, therefore, operates unaffected by any change in the
membership.
(iv) Economy in operations: The members generally offer honorary services to the society.
As the focus is on elimination of middlemen, this helps in reducing costs. The customers or
producers themselves are members of the society, and hence the risk of bad debts is lower.
(v) Support from government: The cooperative society exemplifies the idea of democracy
and hence finds support from the Government in the form of low taxes, subsidies, and low
interest rates on loans.
(vi) Ease of formation: The cooperative society can be started with a minimum of ten
members.
The registration procedure is simple involving a few legal formalities. Its formation is governed
by the provisions of Cooperative Societies Act 1912.
Disadvantages:
The cooperative form of organisation suffers from the following limitations:
(i)Limited resources: Resources of a cooperative society consists of capital contributions of the
members with limited means. The low rate of dividend offered on investment also acts as a
deterrent in attracting membership or more capital from the members.
(ii) Inefficiency in management: Cooperative societies are unable to attract and employ expert
managers because of their inability to pay them high salaries. The members who offer honorary
services on a voluntary basis are generally not professionally equipped to handle the
management functions effectively.

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. A company can be described as an artificial person
having a separate legal entity, perpetual succession and a common seal. The shareholders are
the owners of the company while the Board of Directors is the chief managing body elected by
the shareholders. Usually, the owners exercise an indirect control over the business. The capital
of the company is divided into smaller parts called ‘shares’ which can be transferred freely
from one shareholder to another person.
Characteristics:
(i) Artificial person: A company is a creation of law and exists independent of its members.
Like natural persons, a company can own property, incur debts, borrow money, enter into
contracts, sue and be sued but unlike them it cannot breathe, eat, run, talk and so on. It is,
therefore, called an artificial person.
(ii) Separate legal entity: From the day of its incorporation, a company acquires an identity,
distinct from its members. Its assets and liabilities are separate from those of its owners. The
law does not recognize the business and owners to be one and the same.
(iii) Formation: The formation of a company is a time consuming, expensive and complicated
process. It involves the preparation of several documents and compliance with several legal
requirements before it can start functioning. Incorporation of companies is compulsory under
The Companies Act 2013 or any of the previous company law, as state earlier. Such companies
which are incorporated under companies Act 1956 or any company law shall be included in
the list of companies.
(iv) Perpetual succession: A company being a creation of the law, can be brought to an end
only by law. It will only cease to exist when a specific procedure for its closure, called winding
up, is completed. Members may come and members may go, but the company continues to
exist.
(v) Control: The management and control of the affairs of the company is undertaken by the
Board of Directors, which appoints the top management officials for running the business. The
directors hold a position of immense significance as they are directly accountable to the
shareholders for the working of the company. The shareholders, however, do not have the right
to be involved in the day-to-day running of the business.
Advantages:
The company form of organization offers a multitude of advantages, some of which are
discussed below.
(i) Limited liability: The shareholders are liable to the extent of the amount unpaid on the
shares held by them. Also, only the assets of the company can be used to settle the debts,
leaving the owner’s personal property free from any charge. This reduces the degree of risk
borne by an investor.
ii) Transfer of interest: The ease of transfer of ownership adds to the advantage of investing
in a company as the share of a public limited company can be sold in the market and as such
can be easily converted into cash in case the need arises. This avoids blockage of investment
and presents the company as a favorable avenue for investment purposes.
(iii) Perpetual existence: Existence of a company is not affected by the death, retirement,
resignation, insolvency or insanity of its members as it has a separate entity from its members.
A company will continue to exist even if all the members die. It can be liquidated only as per
the provisions of the Companies Act, 2013.
(iv) Scope for expansion: As compared to the sole proprietorship and partnership forms of
organization, a company has large financial resources. Further, capital can be attracted from
the public as well as through loans from banks and financial institutions. Thus, there is greater
scope for expansion. The investors are inclined to invest in shares because of the limited
liability, transferable ownership and possibility of high returns in a company.
(v) Professional management: A company can afford to pay higher salaries to specialists and
professionals. It can, therefore, employ people who are experts in their area of specializations.
The scale of operations in a company leads to division of work. Each department deals with a
particular activity and is headed by an expert. This leads to balanced decision-making as well
as greater efficiency in the company’s operations.
Disadvantages:
The major limitations of a company form of organization are as follows:
(i)Complexity information: The formation of a company requires greater time, effort and
extensive knowledge of legal requirements and the procedures involved. As compared to sole
proprietorship and partnership form of organizations, formation of a company is more complex.
(ii) Lack of secrecy: The Companies Act requires each public company to provide, from time
to time, a lot of information to the office of the registrar of companies. Such information is
available to the general public also. It is, therefore, difficult to maintain complete secrecy about
the operations of company.
(iii) Impersonal work environment: Separation of ownership and management leads to
situations in which there is lack of effort as well as personal involvement on the part of the
officers of a company. The large size of a company further makes it difficult for the owners
and top management to maintain
personal contact with the employees, customers and creditors.
(iv) Numerous regulations: The functioning of a company is subject to many legal provisions
and compulsions. A company is burdened with numerous restrictions in respect of aspects
including audit, voting, filing of reports and preparation of documents, and is required to obtain
various certificates from different agencies, viz., registrar, SEBI, etc. This reduces the freedom
of operations of a company and takes away a lot of time, effort and money.
(v) Delay in decision making: Companies are democratically managed through the Board of
Directors, which is followed by the top management, middle management, and lower-level
management. Communication, as well as approval of various proposals, may cause delays not
only in making decisions but also in acting upon them.
x(vi) Oligarchic management: In theory, a company is a democratic institution wherein the
Board of Directors is a representative of the shareholders who are the owners. In practice,
however, in most large organizations having a multitude of shareholders, the owners have
minimal influence in terms of controlling or running the business. It is so because the
shareholders are spread all over the country and a very small percentage attend the general
meetings. The Board of Directors, as such, enjoys considerable freedom in exercising its power,
which it sometimes uses even contrary to the interests of the shareholders. Dissatisfied
shareholders in such a situation have no option but to sell their shares and exit the company.
As the directors virtually enjoy the rights to take all major decisions, it leads to rule by a few.
(vii) Conflict of interest: There may be a conflict of interest among various stakeholders of
a company. The employees, for example, may be interested in higher salaries, consumers desire
higher quality products at lower prices, and the shareholders want higher returns in the form of
dividends and an increase in the intrinsic value of their shares. These demands pose problems
in managing the company, as it often becomes difficult to satisfy such diverse interests.