Types of Organization

 1.      Sole proprietorship.

2.      Partnership – Unregistered and registered.

3.      Private limited.

4.      Quasi organizations- Government, semi-government, undertakings, enterprises.

 

 Sole Proprietorship or Individual Entrepreneurship

It is a simple form of business organization in which an individual introduces his own capital, uses his own skill and intelligence in the management of its affairs and is solely responsible for the results of its operations. It is the easiest and the simplest in organization. All that is required is that the individual concerned should decide to carry on some particular business and find the necessary capital. The capital can be from his savings or from borrowings from his friends and relatives. There are no legal formalities required except for a particular type.

Merits

1.      Ease of formation

2.      Direct motivation

3.      Facility of co-ordination

4.      Promptness in decision making

5.      Flexibility in management

6.      Secrecy

7.      Credit standing

8.      Freedom from governmental controls and regulations.

9.      Benefits own.

Limitations

1.      Limited finances

2.      Limited managerial skill

3.      Unlimited liability

4.      Uncertainty of duration

5.      Failure due to other accounts

Features

1.      Single ownership

2.      One man control

3.      Undivided risk and unlimited liability

4.      No government regulation

5.      No separate entity of the firm

(This form is the first stage in the evolution of the organization forms and hence is the oldest among them. It is quite popular for a small scale business)

Social Utility

1.      Promotes independent living

2.      Develops social virtues

3.      A voids concentration of economic power.

Suitable For Firms

1.      Capital involved is small and risk is not huge.

2.      Quickness of decisions is prime

3.      Clients demanding personal attention.

4.      Special regard to be shown to the tastes and fashions of clients.

5.      Ease of closure and reopening as well as for increase and decrease of turnover.

12.5.2 Partnership Firms

Due to the limitations of capital, sharing of enhanced risks and managerial capacity business turnover and variation of business, is limited in the sole proprietorship firms. A wealthy man with less managerial capacity and an excellent manager with less capital, can pair together to start a firm in partnership to achieve the business motto and ripe the benefits jointly as per certain terms of reference. The formation and management of partnership organisations are governed by the provisions of the Indian partnership Act 1932 with amendments there to section 4 of the act defines partnership as, “the relation between persons who have agreed to share profits of a business carried on by all or any of turn acting for all”.

Features

1. Formation :

Needless to say that the strength of members has to be more than one and requires mutual faith, confidence and contract among them. Generally, the partnership agreement is reduced to writing and a partnership deed, laying down the terms and conditions of partnership and the rights, duties and obligation of partners is drafted. However, law does not make it compulsory for any partnership firm to be registered but registration becomes necessary in view of the fact that certain disabilities attach to the firm, if it is unregistered. An unregistered firm cannot file a suit to enforce its rights on outside clients if such rights arise out of a contract or the individual partners cannot file a suit to enforce his or her rights against the firm or against of the rest of the partners. Hence, registration with the registrar of firms may be regarded as a part of the formation.

2. Financing

The capital of partnership firms will be contribution, need not necessarily be in proportion to the profit sharing ratio, by its different partners. Occasionally, a partner is admitted without any capital contribution but for other business considerations.

3. Control

In partnership firm where all the partners are active, control vests with a11 of them as per agreed sharing of control. Silent partners are those who had contributed capital or skills but do not participate in the control and day to day management.

4. Management

As per law every partner has the right to take an active part in the management of the affairs of the firm. Each firm is at liberty to choose a pattern of management according to the agreement among the partners.

5. Duration

The partnership firm continues at the pleasure of the constituent partners and in the event of any partner does retire, becomes in solvent or due to death etc., legally the partnership comes to an end.

Merits

1.      Easy to form

2.      Flexible and changes can be introduced without difficulty.

3.      Participation of several persons pooling their capital, skill, expertise, contacts, services etc., will be beneficial to the firm to progress.

4.      Division of risks and liability.

5.      Credit worthiness of the firm increases due to unlimited liability of partners.

6.      Less tax burden, as being shared by partners.

7.      Mutual faith, trust and goodwill due to co-operation amongst partners.

Demerits

1. Limited resources of finance.

2. Unlimited liability on each of the partners.

3. Individual firms and fancies play a great part in breaking co-operation and coordination and hence unstable.

4. Improper and delayed decisions due to too many players.

Partnership Deed

The following general points shall be covered in the deed.

1.      Nature of business, name of the business and the address of the area of operation.

2.      The amount of capital to be contributed by each of the partner.

3.      Acceptance of loans from partners over and above the contribution and rate of interest.

4.      Duties, powers and obligations of partners.

5.      Method of preparation of accounts and auditing procedures.

6.      Appropriation of profit with specific reference to the following:

a)      Whether interest allowed on capitals and at what rate

b)      Allowance of salary and other perks to a partner or partners.

c) Profit sharing ratio and benefits of re-investment of profit.

7.      Amount to be allowed as private drawings for partner(s) and interest rate, if any.

8.      Method of retirement and mode of recovery of dues of the retired or decreased partner.

9.      Method of valuation of goodwill on admission or death or retirement.

10.  Method of revaluation of assets and liabilities on admission or death or retirement.

11.  Procedure for expulsion, if provided.

12.  Dissolution of partnership circumstances and custody of records.

13.  Arbitration in case of disputes among partners or on firm.

14.  Arrangement in case of partner becomes insolvent.

15.  Specific clauses pertaining to the business and any other points mutually agreed.


Registration Of Firms

Registration, though not mandatory, can take place at any convenient time by filling the form with the following details and submitted to the Registrar of firms along with prescribed fees. Future changes shall be intimated to the registrar.

1)      Name of the firm.

2)      Principal place of business and address of other areas or branch offices, if any.

3)      Full particulars of the partners with address for communication.

4)      Date of joining of each of the partners.

5)      Duration of existence of the firm.

Merits

1.      Ease of formation.

2.      Direct and indirect motivation amongst partners.

3.      Facility of sharing the burden and co-ordination.

4.      Effective decision making.

5.      Flexibility in management.

6.      Partial secrecy.

7.      Higher credit standing

8.      Freedom from governmental controls and regulations.

Limitations

1.      Limited finances

2.      Limited managerial skill

3.      Unlimited liability

4.      Uncertainty of duration

5.      Failure due to other accounts

III. Joint Stock Company

As seen above, in the proprietorship and partnership forms of organizations at the disposal of the owner(s) are placed such huge sums of capital and heavy burden of risk when the size, scope and scale of operations of business increases to many fold. Due to the industrial revolution and fast growth in all fields of business, a new concept of limited liability with more of outside public participation with huge sums of money at the company’s disposal (High capital resources) to undertake any venture needing large capital investment and a long station period for the company to take proper shape, was thought of. Thus, an organization recognized by law, with a distinctive name, a common seal, a common capital comprising transferable shares of fixed value carrying limited

1.      Sole proprietorship.

2.      Partnership – Unregistered and registered.

3.      Private limited.

4.      Quasi organizations- Government, semi-government, undertakings, enterprises.

 

12.5.1 Sole Proprietorship or Individual Entrepreneurship

It is a simple form of business organization in which an individual introduces his own capital, uses his own skill and intelligence in the management of its affairs and is solely responsible for the results of its operations. It is the easiest and the simplest in organization. All that is required is that the individual concerned should decide to carry on some particular business and find the necessary capital. The capital can be from his savings or from borrowings from his friends and relatives. There are no legal formalities required except for a particular type.

Merits

1.      Ease of formation

2.      Direct motivation

3.      Facility of co-ordination

4.      Promptness in decision making

5.      Flexibility in management

6.      Secrecy

7.      Credit standing

8.      Freedom from governmental controls and regulations.

9.      Benefits own.

 

Limitations

1.      Limited finances

2.      Limited managerial skill

3.      Unlimited liability

4.      Uncertainty of duration

5.      Failure due to other accounts

Features

1.      Single ownership

2.      One man control

3.      Undivided risk and unlimited liability

4.      No government regulation

5.      No separate entity of the firm

(This form is the first stage in the evolution of the organization forms and hence is the oldest among them. It is quite popular for a small scale business)

 

Social Utility

1.      Promotes independent living

2.      Develops social virtues

3.      A voids concentration of economic power.

 

Suitable For Firms

1.      Capital involved is small and risk is not huge.

2.      Quickness of decisions is prime

3.      Clients demanding personal attention.

4.      Special regard to be shown to the tastes and fashions of clients.

5.      Ease of closure and reopening as well as for increase and decrease of turnover.

 

12.5.2 Partnership Firms

Due to the limitations of capital, sharing of enhanced risks and managerial capacity business turnover and variation of business, is limited in the sole proprietorship firms. A wealthy man with less managerial capacity and an excellent manager with less capital, can pair together to start a firm in partnership to achieve the business motto and ripe the benefits jointly as per certain terms of reference. The formation and management of partnership organisations are governed by the provisions of the Indian partnership Act 1932 with amendments there to section 4 of the act defines partnership as, “the relation between persons who have agreed to share profits of a business carried on by all or any of turn acting for all”.

 

Features

1. Formation :

Needless to say that the strength of members has to be more than one and requires mutual faith, confidence and contract among them. Generally, the partnership agreement is reduced to writing and a partnership deed, laying down the terms and conditions of partnership and the rights, duties and obligation of partners is drafted. However, law does not make it compulsory for any partnership firm to be registered but registration becomes necessary in view of the fact that certain disabilities attach to the firm, if it is unregistered. An unregistered firm cannot file a suit to enforce its rights on outside clients if such rights arise out of a contract or the individual partners cannot file a suit to enforce his or her rights against the firm or against of the rest of the partners. Hence, registration with the registrar of firms may be regarded as a part of the formation.

 

2. Financing

The capital of partnership firms will be contribution, need not necessarily be in proportion to the profit sharing ratio, by its different partners. Occasionally, a partner is admitted without any capital contribution but for other business considerations.

 

3. Control

In partnership firm where all the partners are active, control vests with a11 of them as per agreed sharing of control. Silent partners are those who had contributed capital or skills but do not participate in the control and day to day management.

 

4. Management

As per law every partner has the right to take an active part in the management of the affairs of the firm. Each firm is at liberty to choose a pattern of management according to the agreement among the partners.

 

5. Duration

The partnership firm continues at the pleasure of the constituent partners and in the event of any partner does retire, becomes in solvent or due to death etc., legally the partnership comes to an end.

 

Merits

1.      Easy to form

2.      Flexible and changes can be introduced without difficulty.

3.      Participation of several persons pooling their capital, skill, expertise, contacts, services etc., will be beneficial to the firm to progress.

4.      Division of risks and liability.

5.      Credit worthiness of the firm increases due to unlimited liability of partners.

6.      Less tax burden, as being shared by partners.

7.      Mutual faith, trust and goodwill due to co-operation amongst partners.

 

Demerits

1. Limited resources of finance.

2. Unlimited liability on each of the partners.

3. Individual firms and fancies play a great part in breaking co-operation and coordination and hence unstable.

4. Improper and delayed decisions due to too many players.

 

Partnership Deed

The following general points shall be covered in the deed.

1.      Nature of business, name of the business and the address of the area of operation.

2.      The amount of capital to be contributed by each of the partner.

3.      Acceptance of loans from partners over and above the contribution and rate of interest.

4.      Duties, powers and obligations of partners.

5.      Method of preparation of accounts and auditing procedures.

6.      Appropriation of profit with specific reference to the following:

a)      Whether interest allowed on capitals and at what rate

b)      Allowance of salary and other perks to a partner or partners.

c) Profit sharing ratio and benefits of re-investment of profit.

7.      Amount to be allowed as private drawings for partner(s) and interest rate, if any.

8.      Method of retirement and mode of recovery of dues of the retired or decreased partner.

9.      Method of valuation of goodwill on admission or death or retirement.

10.  Method of revaluation of assets and liabilities on admission or death or retirement.

11.  Procedure for expulsion, if provided.

12.  Dissolution of partnership circumstances and custody of records.

13.  Arbitration in case of disputes among partners or on firm.

14.  Arrangement in case of partner becomes insolvent.

15.  Specific clauses pertaining to the business and any other points mutually agreed.

 

Registration Of Firms

Registration, though not mandatory, can take place at any convenient time by filling the form with the following details and submitted to the Registrar of firms along with prescribed fees. Future changes shall be intimated to the registrar.

1)      Name of the firm.

2)      Principal place of business and address of other areas or branch offices, if any.

3)      Full particulars of the partners with address for communication.

4)      Date of joining of each of the partners.

5)      Duration of existence of the firm.

 

Merits

1.      Ease of formation.

2.      Direct and indirect motivation amongst partners.

3.      Facility of sharing the burden and co-ordination.

4.      Effective decision making.

5.      Flexibility in management.

6.      Partial secrecy.

7.      Higher credit standing

8.      Freedom from governmental controls and regulations.

 

Limitations

1.      Limited finances

2.      Limited managerial skill

3.      Unlimited liability

4.      Uncertainty of duration

5.      Failure due to other accounts

 

III. Joint Stock Company

As seen above, in the proprietorship and partnership forms of organizations at the disposal of the owner(s) are placed such huge sums of capital and heavy burden of risk when the size, scope and scale of operations of business increases to many fold. Due to the industrial revolution and fast growth in all fields of business, a new concept of limited liability with more of outside public participation with huge sums of money at the company’s disposal (High capital resources) to undertake any venture needing large capital investment and a long station period for the company to take proper shape, was thought of. Thus, an organization recognized by law, with a distinctive name, a common seal, a common capital comprising transferable shares of fixed value carrying limited.

Registration Of Firms

Registration, though not mandatory, can take place at any convenient time by filling the form with the following details and submitted to the Registrar of firms along with prescribed fees. Future changes shall be intimated to the registrar.

1)      Name of the firm.

2)      Principal place of business and address of other areas or branch offices, if any.

3)      Full particulars of the partners with address for communication.

4)      Date of joining of each of the partners.

5)      Duration of existence of the firm.

Merits

  1. Ease of formation.
  2. Direct and indirect motivation amongst partners.
  3. Facility of sharing the burden and co-ordination.
  4. Effective decision making.
  5. Flexibility in management.
  6. Partial secrecy.
  7. Higher credit standing
  8. Freedom from governmental controls and regulations.

Limitations

  1. Limited finances
  2. Limited managerial skill
  3. Unlimited liability
  4. Uncertainty of duration
  5. Failure due to other accounts

 

III. Joint Stock Company

As seen above, in the proprietorship and partnership forms of organizations at the disposal of the owner(s) are placed such huge sums of capital and heavy burden of risk when the size, scope and scale of operations of business increases to many fold. Due to the industrial revolution and fast growth in all fields of business, a new concept of limited liability with more of outside public participation with huge sums of money at the company’s disposal (High capital resources) to undertake any venture needing large capital investment and a long station period for the company to take proper shape, was thought of. Thus, an organization recognized by law, with a distinctive name, a common seal, a common capital comprising transferable shares of fixed value carrying limited liabilities and having perpetual (uninterrupted) succession is known as Joint Stock Company. In brief,

  1. Separable legal entity
  2. Limited liability of members
  3. Perpetual existence
  4. Common seal as substitute for signature.

Formation

Since a company is a corporate body, enjoying a separate entity of its own, can only be setup by following certain procedures laid down by law for this purpose. The whole process can be divided into 1. Promotion and 2. Incorporation.

  1. Promotion is the process of exploration, investigation, market survey process know how, organizing resources etc., with the object of initialize the business.
  2. Incorporation is the legal process through which the separate corporate entity is given recognition by law. For incorporation the following documents are to be filled with the Registrar of Joint Stock Companies with the requisite fees.

1)      The Memorandum Of Association – The charter of company laying down the objects, the capital etc., of the company.

2)      The Articles Of Association - The rules and bye laws governing the internal working (can also adopt a standard form from Companies Act 1956)

3)      Written consent of persons who have agreed to serve as company Directors.

4)      Notice of the Registered Office of the company.

5)      A statutory declaration by the secretary of the proposed company or a solicitor to the effect that all provisions regarding incorporation have been compiled with.

On receipt and scrutiny of these documents the Registrar being satisfied will enter the name of the company in a Register and will issue the certificate of incorporation, a conclusive proof of incorporation according to legal status on the company.

1) The Memorandum of Association: The Company can do only those acts which are spelt in the object clause and any one wish to deal with this company should read the Memorandum. This will contain various clauses such as,

  1. Name clause
  2. Situation clause
  3. Object clause
  4. Liability clause
  5. Capital clause
  6. Association and subscription clause

2) The Articles of Association: Usually the articles contain rules and regulations regarding,

  1. Share capital and variation of rights.
  2. Exercise of lien by the company.
  3. Calls on shares.
  4. Transfer, transmission and surrender of shares.
  5. Conversion of shares into stocks and its re-conversion into shares.
  6. Issue of share warrants and rights of their holders.
  7. Alteration of capital.
  8. Conduct of any proceedings at general meetings of shareholders.
  9. Voting by members.
  10. Powers, rights, remuneration, qualification and duties of directors.
  11. Seal of the company.
  12. Proceedings of board.
  13. Appointment of Manager, Secretary etc.
  14. Dividend reserves and capitalization of profits.
  15. Accounts and Auditing.
  16. Winding up.
  17. Specific clauses pertaining to the company.

3) The Prospectus: This is a notice or invitation or circular or advertisement, offering to public, to arouse interest of the investors to invest in the company shares or debentures. If the company can raise the capital privately then they need only to prepare a statement in lieu of the prospectus.

 Types of Companies

    1. Private Limited Company
    2. Public Limited Company
    3. Statutory Company
    4. Chartered Company

 

  1. Private Limited Company

A Private Limited Company is defined as a company which by its articles,

  1. Limits the number of its members to “50, minimum being 2, excluding those who are its employees or were its employees formerly.
  2. Prohibits an invitation to the public for subscription to its shares and debentures.
  3. Restricts the transfer of its shares.

If any of the above restrictions are violated the company becomes public. Also, if the company has 25% of paid up share captia1 of a public limited company, it will be deemed to be a public limited company (Refer companies amendment act, 1974 section 43-A, sub section l A and l B for further details) Private Limited combines the advantages of limited liability and the facilities of the partnership organization Private Limited Company enjoys lot of concessions and privileges granted by law. Member strength being small can maintain privacy and less government controls.

Suitability of Private Company

  1. Suitable for a business family or group of associates or group of professionals.
  2. Active members act as Directors and receive remunerations besides directors fees, thus business secrecy is maintained. Organizations requiring limited liability but with benefits of a partnership concern.
  1. Suitable for businesses which are risky and do not guarantee a certain and regular return.
  1. Suitable for transportation, providing finances on interest, selling goods on Hire Purchase or installment basis.
  1. For industrial venture concerns opting for many concessions in respect of income tax.
  1. For large scale wholesale or retail organizations.

 

Not Suitable

For medium sized firms engaged in trading goods on whole sale or retail basis, private limited company is not suitable when compared to partnership. Because,

  1. Higher tax being charged on slab basis.
  2. Good will of the firm will be affected by limited liability thus doubts about its credit worthiness among suppliers.
  3. The cost of forming the company and complying with provisions of law are high.

 

  1.  Public Limited Company

Contrary to private limited company with all other features intact, a public limited company does not limit its members to 50 and is not prevented from inviting and accepting subscriptions from public for its shares. It does not pose restrictions on transfer of shares freely.

 

Advantages of Company Form

  1. Limited liability: Shareholders are liable to the extent of the face value holding.
  2. Large financial resources: As the capital is divided into shares of small denominations, even people with small means can purchase and enables collection of huge capital. Benefits of limited liability and easy transferability are added attraction.
  3. Stability: As a corporate body it enjoys uninterrupted business life, even despite all its members desert or die. Thus suited for types of business which require long station periods to develop and mature.
  4. Transferability of shares: A member of a public limited company can freely transfer his shares without the consent of other members. The shares of these companies are generally listed with stock exchanges, thus facilitates buying and selling at will. This facility of transfer makes investment of general public savings into the corporate sector.
  5. Efficient Professional Management: Thanks to its large financial resources and continuity, a company can afford to avail the services of expert professionals and reap the benefits of specialization and bold management practices.
  6. Scope for growth and expansion: Due to enlarged growth and expansion potential, because of large resource availability and limited liability, can reap the economics of large scale operations.
  7.  
  8. Public confidence: Being regulated by government under the· companies act, its affairs are known to public by the publications of accounts and audit statements.
  9. Diffused risk : Since stock base is spread over large members individual risk is reduced.
  10. Social utility: The company form facilitates investments from public financial institutions like L.I.C., U.T.I., etc. The joint stock companies lead to wide distribution or de-centralization of ownership, thereby channelizing the small savings of individuals into the industry.

 

Demerits Of Company Form

A joint stock company suffers from the following limitations:

    1. Formation difficulties: Several documents are to be filled with the Registrar of companies. For this, services of legal and other experts are required. Time consuming and difficulties in obtaining sanctions, permits and other approvals might deprive the initial momentum of an early start of the business.
    1. Government controls: Elaborate statutory regulations in day-to-day operation with submission of various forms will whether the zeal and interest. Auditing and publication of the accounts periodically is obligatory. The capital and objects of the company can be modified after only satisfying the legal formalities. Thereby reduce the flexibility and efficiency of operation. Innumerable legal formality compliances will consume enough time, effort and money.
    1. Lack of motivation and personal involvement: There is a wide gap between the ownership and management, as being managed by professionals who do not have any stake or personal involvement in the company. This result in lack of initiative and responsibility.
    1. Oligarchic Management: Though as per theory the management of a company is supposed to be democratic, but in actual practice the management will lie in the hands of few (oligarchic). Year after year the reign of these few countries.
    1. Delay in decisions: Too many levels of management result in huge paper transaction resulting in red tape and bureaucratic outlook. Good amount of business opportunities are lost due to these delays.
    2. Conflict of interest: In contrast to partnership firms or proprietary firms, in the company form, regular conflict exists between shareholders and the Board of Directors or with creditors as well as with/between various tiers of employees.
    1. Maintenance of Business Secrecy: A company is an open book because under the Companies Act lot of information has to be disclosed and published on its working and future plans.
    1.  Social evil: Formation of Giant Companies may result in monopoly and concentration of economic power, yielding influence of economic and/or political decisions of the Government, leading to corruption.

Suitability

Despite foregoing draw backs, the company form of organization has become more popular, more particularly for following types :

a. Heavy or basic industries like ship-building, coach manufacturing, heavy and light engineering, steel and fertilizer plants etc., requiring huge capital outlay.

b. Large scale operations like,

  1. Enterprises engaged in construction of roads, bridges, tunnels, water supply and sewerage, pollution control and treatment plants etc.
  2. Consultancy organizations catering to the above and other strategic projects.
  3. Departmental stores and chain stores.
  4. Public interest and utility sectors airlines, shipping, bus transport and railways.

 

c. The line of business involving great uncertainty or huge risks.

d. Obligatory as per prevailing law – example Banking industry.