CHAPTER 3

FORMS OF BUSINESS ORGANIZATION

3.1 SOLE PROPRIETORSHIP

3.1.1 FEATURES/CHARACTERISTICS OF SOLE PROPRIETORSHIP
3.1.2 ADVANTAGES OF SOLE PROPRIETORSHIP
3.1.3 DISADVANTAGES OF SOLE PROPRIETORSHIP
3.2 ONE PERSON COMPANY (OPC)
3.2.1 FEATURES OF OPC
3.2.2 ADVANTAGES OF ONE PERSON COMPANY (OPC)
3.2.3 DISADVANTAGES OF OPC
3.3 JOINT HINDU FAMILY BUSINESS
3.3.1 FEATURES OF JOINT HINDU FAMILY FIRM
3.3.2 MERITS OF JOINT HINDU FAMILY FIRM
3.3.3 LIMITATIONS OF JOINT HINDU FAMILY FIRM
3.4 PARTNERSHIP FIRM
3.4.1 FEATURES OF PARTNERSHIP FIRM
 TOPICS TO BE COVERED

• 3.4.2 Merits of partnership

• 3.4.3 Demerits of partnership
• 3.5 Limited Liability Partnership (LLP)
• 3.5.1 Characteristics of LLP
• 3.5.2 Merits of LLP
• 3.5.3 Disadvantages of LLP
• 3.6 Joint Stock Company
• 3.6.1 Features of Joint stock company
• 3.6.2 Merits of company
• 3.6.3 Demerits of joint stock company
• 3.7 Private Company
• 3.8 Public company
• 3.9 Cooperative Society
• 3.9.1 Features of cooperative society
• 3.9.2 Advantages of cooperative societies
• 3.9.3 Disadvantages of cooperative societies
• 3.10 Choice of Form of Business Ownership
FACTORS AFFECTING SIZE & NATURE OF BUSINESS

• The type of the structure one chooses will have long-term implications, as the rights
& liabilities vary according to the form of ownership.
• Forms of business ownership are legal forms in which a business enterprise may be
organized & operated.
• Factors affecting the size & nature of business-
1. The decision the size and nature of your business depends on following factors-
2. The level of control you wish to have.
3. The level of “structure” you are willing to deal with.
4. The business’s vulnerability to lawsuits.
5. Tax implications of the different ownership structures.
6. Expected profit (or loss) of the business.
7. Whether or not you need to re-invest earnings into the business.
8. Your need for access to cash out of the business for yourself.
SOLE PROPRIETORSHIP
• Has no separate legal entity from its owner.
• Owned by one person.
• Proprietor is personally liable for his debts or liabilities.
• Manages, looks after & controls business himself.
• Less Govt Intervention & lesser compliance.
• Doesn’t require any legal recognition & attendant formalities.
William R. Basset opines that “The one-man control is the best in the world if
that man is big enough to manage everything”.
FEATURES OF SOLE PROPRIETORSHIP

FORMATION & CLOSURE

Liability

Sole risk bearer & profit recipient

Control

No separate entity

Lack of business continuity

ADVANTAGES OF SOLE
PROPRIETORSHIP

Simple form of organization

Owner’s freedom to take decisions

High Secrecy

Tax Advantage

Easy Dissolution
DISADVANTAGES OF SOLE
PROPRIETORSHIP

Limited Resources

Limited Ability

Limited life of enterprise form

Difficulty in raising money

Unlimited liability
 ONE PERSON COMPANY (OPC)
• Introduced by J.J. IRANI Committee in 2005
• Section 2(62) of Companies Act defines a one-person company as “a company that has only one person as to
its member. Furthermore, members of a company are nothing but subscribers to its memorandum of
association, or its shareholders”.
• An OPC is effectively a company that has only one shareholder as its member.
• The advantages of an OPC can only be obtained by those INDIANs who are naturally born and also resident of
India.
• A person cannot form more than 5 OPC's.
• OPC is exempt from certain procedural formalities such as conducting annual general meetings, general
meetings, extraordinary general meetings.
• There is no provision on holding board meetings if there is only one director but 2 meetings need to be
organized every year if there is more than one director.
• Any resolution passed by the sole member must be communicated to the company & entered in the minutes
book.
• There is, however, no relief from the provisions of audits, financial statements & accounts which are applicable
to private company.
• An OPC is incorporated as a private limited company, where there is only one member & prohibits inviting
general public for subscription of the securities of the company.
FEATURES OF OPC
Private Company

Single Member

Nominee

No Perpetual Succession

Minimum One Director

No minimum paid up share capital

Formation as company ltd. by guarantee & by shares

FEATURES OF OPC…

Requirements for OPC ltd. by shares

Common Seal

Status of minor

Non-banking financial activities

Information to Registrar about contract

ADVANTAGES OF OPC
Beneficial for Professionals

Quick Decisions

Secrecy

High Motivation

Flexibility

Easy funding

More Opportunities, Ltd. Liability

DEMERITS OF OPC

Members

Business Activities

Uncertain Life

No Democracy

Mockery of Corporate Concept

HINDU UNDIVIDED FAMILY (HUF)
• Joint Hindu Family Business or the Hindu Undivided Family (HUF) is a unique
type of business entity governed and dictated by the Hindu Law, which is one of
the several religious laws prevalent in India.
• Oldest forms of business organization in India and is governed by two systems
i.e. the Dayabhaga and the Mitakashara, with Mitakashara being the more
prevalent across India.
• Formation of HUD requires at least two members in the family and ancestral
property to be inherited by them.
• The business does not need any agreement as membership is by birth.
• Head of a joint family business is the eldest member of the family, i.e. the
“karta” who is mainly responsible for the business & the finances.
• The members of the family are known as co-parceners.
• Joint Hindu family firm is a business owned by co-parceners of a Hindu
undivided estate.
FEATURES OF HUF
Membership by Birth

Formation

Liability

Control

Continuity

Minority
ADVANTAGES OF HUF

Stability

Management

Liability

Membership

Credit Worthiness
LIMITATIONS OF HUF

Disproportionate relationship between work

& reward

Limitations of Management

Short life of business

PARTNERSHIP
• The Indian Partnership Act, 1932, Section 4, defined partnership as “the relation
between persons who have agreed to share the profits of business carried on by all or
any of them acting for all”.
• The Uniform Partnership Act of the USA defined a partnership “as an association of two
or more persons to carry on as co-owners a business for profit”.
• According to J. L. Hanson, “a partnership is a form of business organization in which
two or more persons up to a maximum of twenty join together to undertake some form of
business activity”.
• Partnership can be defined as an association of two or more persons who have agreed to
share the profits of a business which they run together. This business may be carried on
by all or anyone of them acting for all.
• The persons who own the partnership business are individually called ‘partners’ and
collectively they are called as ‘firm’ or ‘partnership firm’.
• The name under which partnership business is carried on is called ‘Firm Name’. In a
way, the firm is nothing but an abbreviation for partners.
FEATURES OF PARTNERSHIP
Formation/Partnership Agreement

Sharing of Profits

Unlimited Liability

Continuity

Number of Members

Restriction on transfer of Interest

Implied Agency
ADVANTAGES OF PARTNERSHIP
Ease of Formation

Larger financial resources

Specialization & Balanced Approach

Flexibility in Operations

Greater Capacity for Loans & Expansion

Capacity for Survival

Better Human & Public Relations

Business Secrecy
DEMERITS OF PARTNERSHIP

Lack of Spontaneity

Unlimited Liability

Conflicts

Uncertain life/Lack of Continuity

Limited Resources
LIMITED LIABILITY PARTNERSHIP
• Limited Liability Partnership, popularly known as LLP combines the advantages of both the
Company and Partnership into a single form of organization.
• Liability Partnership (LLP) is a new corporate form that enables professional knowledge and
entrepreneurial skill to combine, organize and operate in an innovative and proficient manner.
• By incorporating an LLP, its members can avail the benefit of limited liability and the flexibility of
organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a
partnership firm.
• The Parliament of India passed the Limited Liability Partnership (LLP) Act in 2008 to govern LLP
businesses in India.
• According to Section 2, an LLP is a partnership registered under the Act.
• Further, an LLP agreement means a written agreement either between an LLP’s partners or between
the LLP itself and its partners.
• The law defines it as, “a corporate business vehicle that enables professional expertise &
entrepreneurial initiative to continue & operate in flexible, innovative & efficient manner providing
benefits of limited liability while allowing its members the flexibility for organizing their internal
structure as a partnership”.
• A limited partnership unlike general partnership is a corporate form of business organization. The
liabilities are limited to each partner according to their agreed contribution to the business. The
personal property of a partner cannot be attached to pay back the firms debts.
CHARACTERISTICS OF LLP
REGULATING ACT

SEPARATE LEGAL ENTITY

MANAGEMENT OF BUSINESS

NUMBER OF PARTNERS

RIGHTS & DUTIES OF PARTNERS

LIMITED LIABILITY OF PARTNERS

AUDIT OF ACCOUNTS
CHARACTERISTICS OF LLP

PARTNERS

CAPITAL CONTRIBUTION

DESIGNATED PARTNERS

DESIGNATED PARTNER
IDENTIFICATION NUMBER
(DPIN)
ADVANTAGES OF LLP

Formation Process

Separate Legal Entity

Liability for repayment

Continuous Existence

Flexibility
 DISADVANTAGES OF LLP
• 1. An LLP cannot raise funds from public by issuing shares &
debentures.
• 2. Any act of the partner without the other may bind the LLP.
• 3. Under some cases, liability may extend to personal assets of
partners.
• 4. No separation of Management from owners.
• 5. LLP might not be a choice due to certain extraneous reasons.
JOINT STOCK COMPANY
• A joint stock company is a voluntary association of persons to carry on the business.
• It is an association of persons who contribute money which is called capital for some common
purpose.
• The proportion of capital to which each member is entitled is his share and every member
holding such share is called shareholders and the capital of the company is known as share
capital.
• The Companies Act 1956 defines a joint stock company as “an artificial person created by law,
having separate legal entity from its owner with perpetual succession and a common seal”.
• Shareholders of joint stock company have limited liability i.e. liability limited by guarantee or
shares. Shares of such company are easily transferable.
• Professor Haney defines it as “a voluntary association of persons for profit, having the capital
divided into some transferable shares, and the ownership of such shares is the condition of
membership of the company.”
• Justice Lindley defines a company as “A company is an association of many persons who
contribute money or money’s worth to a common stock & employ it for a common purpose”.
FEATURES OF COMPANY

Legal Formation

Artificial Person

Separate Legal Entity

Common Seal

Perpetual Existence

Limited Liability

Transferability of Shares
ADVANTAGES OF JOINT STOCK
COMPANY
Huge Financial Resources

Limited Liability

Continuity

Transferability of Shares

Diffusion of Risk

Efficient Management
DISADVANTAGES OF JOINT STOCK COMPANY

Difficult Formation

Lacks Flexibility

No business secrecy

Excessive Govt. Regulation

Delay in decision

Lack of motivation & personal touch

Oligarchic Management
 COOPERATIVE SOCIETY
• According to Cooperative societies Act, 1912, Cooperative
organization is a “a society which has its objectives as promotion of
the interests of its members in accordance with the principle of
cooperation”. In other words, a society is a voluntary association of
persons who join together with the motive of welfare of the members.
• In the words of H.C. Calvert, a cooperative society is “a form of
organization wherein persons voluntarily associate together as
human beings on the basis of equality for the promotion of economic
interests of themselves”.
FEATURES OF COOPERATIVES
Registration

Separate Legal Entity

Voluntary Membership

Democratic Management

Service Motive

Limited Liability

Finance

Equitable Disposal of Surplus

ADVANTAGES OF COOPERATIVES
Easy Formation

Open Membership

Democratic Management

Limited Liability

Stability & Continuity

Low Prices

Mutual Help
DISADVANTAGES OF COOPERATIVES

Limitation of Capital

State Control

Inefficient Management

Absence of Business Secrecy

Lack of Motivation