BUSINESS ORGANISATION

BBA I sem
 UNIT III

Syllabus -
Forms of Business Organisation. Sole
Proprietorship, Partnership, Joint Stock
Companies & Co-operatives.
FORMS OF BUSINESS ORGANISATION

1) SOLE PROPRIETORSHIP

2) PARTNERSHIP

3) JOINT STOCK COMPANIES

4) CO-OPERATIVES
 1. Sole proprietorship

Meaning-
 It also called by the name sole trading concern.
 It
may be defined as a form of business that is owned,
managed and controlled by an individual.
 He arranges the capital for the business and has the sole
responsibility of managing its affairs.
 Allthe profits and losses of the business are to be borne
by him alone.
A sole proprietorship form of business is the easiest
and the simplest form of business organisation and it
does not involve much legal formalities to be
compiled with.
 Theperson who carries on sole proprietorship is
known as sole proprietor,
 Forexample, to start a small shop or a small factory
or a restaurant- only the permission of the local
authorities is sufficient.
 Definitions
According to J.L Hanson:- “Sole proprietorship is a
type of business unit where one person is responsible
for providing the capital, for bearing the risk of the
enterprise and for the management of the business.”

According to Kimball and Kimball:- “Sole

proprietorship is a form of business where the
individual is the supreme judge of all matters
pertaining to his business.”
 Features/characteristics
i. Single ownership- The business is owned by a single owner. He
provides the necessary capital and also manages it alone.
ii. One man control- The sole proprietor controls all the decisions
with respect to products to be produced, the sources from
where funds will be raised etc. He has the ultimate authority
and responsibility for all the decisions that he takes. He may,
however, appoint a manager to help him in the business.
iii. Risk- The sole proprietor bears the risk of his business alone.
He is the sole owner of the profits of his business and also
shoulders the losses alone.
iv. No legal formalities- No legal formalities are required to start, manage
and dissolve sole proprietorship business. In certain cases, a license is
required to be obtained for starting the business.
v. No separate entity- This form of business does not have any entity
separate from the owner. The proprietor and the business are one and
same.
vi. Unlimited liability- The liability of the proprietor is unlimited. He is
liable for all debts and loans of the business. If the business assets are
insufficient to pay his business debts , his personal assets can be used for
repayment of the debt.
Unlike in joint stock companies where partners or owners are
having limited liabilities which means they are not liable to sell out their
personal assets, all the debts have to be paid by business or company
only.
 SOLE PROPRIETORSHIP
Advantages Disadvantages
1. Formation & Dissolution Very easy to form/dissolve. It can be If he/she dies then so does the business
easily changed into partnership, ltd
company etc.

2. Management & finance Sole traders have full control of how Long working hours are common and holidays are
business is run. Decision making is quick. difficult to arrange due to the commitment needed to
Financial records do not have to be be a successful sole trader.
revealed to the public. Can be difficult to raise all start up finance and as a
result loans are required. They can be expensive on
the business start ups

3. Profit & risk Keeps all profit. Takes all risk. They have unlimited liability. They may
Takes all the risk. lose assets in the event of a debt needing to be paid.
 Suitability of sole proprietorship business
 Where the risk is not extensive ,i.e., automobiles repair shops, etc.
 Where the financial resources required are relatively small; i.e., retail
shop, small bakery, etc.
 Where quick decisions are involved .
 Where personal attention to customers is of prime importance; i.e.,
tailoring shop, beauty parlour, etc.
 Where special attention is to be given to the personal tastes and
preferences of the customers. i.e., job of stock broker, doctor, advocate
etc.
 Wherethe demand of the product is seasonal, local and temporary, i.e.,
vegetable shop, fruit seller, dry cleaning, etc.
 Where fashion changes quickly, i.e., art goods, hair dressing, clothes etc.
 2. Partnership
Meaning -
 When a sole proprietor expands his business, he may find it difficult to provide
the necessary funds and managerial skills beyond his present capacity. He, thus
prefers to convert his business into partnership. Partnership is thus an expansion
of sole proprietary business.
 Two or more persons join together to carry on a business and share its profits and
losses in a given ratio. They jointly contribute capital and managerial skills to run
that business.
 Minimum 2 members and maximum 100 members are required to from
partnership firms.
 They agree to share the capital, management, risk and profits of the business.
 Theterms and conditions on which partners agree to work are contained in an
written agreement known as ‘partnership deed’.
 Definitions

 According to section 4 of Indian partnership Act,

1932:- “Partnership is the relation between persons
who have agreed to share the profits of a business
carried on by all or any of them acting for all.”

 According to Kimball:- “A group of men who have

joined capital or services for the prosecuting of some
enterprise.”
 Features of Partnership
 Membership :- There must be at least two competent persons to form
a partnership. As regards the maximum number of partners in a firm,
section 11 of the companies Act, 1956 provides that the number of
partners in a firm carrying on banking business should not exceed 10
and in any other business 20. But according to new Company’s
Act’2013 the maximum no. of members should not be more than 100 in
case of other than banking business.
If the number of partners exceeds this limit, the
partnership becomes an illegal association and it ceases to be a
partnership if the number gets reduced to one due to any reason.
 Agreement between the partners :- Partnership comes into existence
through an agreement. There is an oral or written agreement amongst
partners to start a business and share its profits or losses.
 Profit sharing ratio :- The agreement to enter into partnership is
generally supported by a partnership deed. The deed specifies the
ratio in which partners agree to share profits and losses of the
partnership firm.
 Unlimited liability :- Partners of the partnership firm have unlimited
liability. They are jointly liable for the debts of the firm. Their
personal assets can be used to pay off firms debts.
 Formation :- Formation of a partnership is governed by the provisions
of the Indian Partnership Act, 1932.
 Control:- The business is controlled by all the partners together.
They are jointly liable for the management and control of the firms
business.
 Secrecy:- Secrecy of accounts is maintained amongst all the partners.
Accounts need not to be disclosed to outsiders.
Registration :- If the firm in not registered in any government office, then it
may result in many consequences like in that case it will not be possible for
any unregistered firm to file a suit against any other firm, third party or other
partners. Due to these consequences, it is advisable to have the firm
registered in the concerned authority.
As per the Indian Partnership Act’1932, the partners can
register with the registrar of the firms of the state in which the firm is
located. The registration can be done at the time of formation or at any time
during its survival. The procedure for registering a firm is as follows:-
The application has to be submitted in the prescribed format to the
registrar of the firms. The application should contain the following
procedures:
 Name of the firm
 Location of the firm
 Name of other places where business is carried on by the firm.
 The date of joining each partner in the firm.
 Name and addresses of the partners.
 Duration of the partnership
 The application should be duly signed by all the partners.
 Deposit of necessary fees with the registrar of the firms.
 The registrar on approval will make entry in the register of the
firms and will subsequently issue a certificate of registration.
 Partnership

Advantages Disadvantages
1.Formation Easy to form. You can start If a partner leaves or a partnership ends a
& immediately, however if business new partnership must be agreed.
Dissolution name is different to that of
partners you must register the
company name.

2. Management & Decision making is shared. Disagreements can easily occur.

finance
Responsibility is shared. If someone dies the business is
Financial details not open to be discontinued.
viewed by public

3. Profit & risk Extra capital available to finance Unlimited liability, each partner is
the responsible for the debts of the business
business Profits must be shared between partners
 Types of partnership firms

 Partnership at will :- This partnership firm is created at the

will of its partners. It does not specify the period for which it is
formed. Any one of the partners can give notice to the firm
that he wants to withdraw from the firm and the firm, thus,
dissolves. Partnership at will, therefore, is formed when the
partners want to form it for any purpose and is dissolved when
the partners want to dissolve it.
 Particular Partnership:- This partnership firm is formed for a
particular period or a particular venture. When that period or
venture comes to an end, the partnership firm automatically
comes to and end.
 Limited partnership:- With at least one or more partners with unlimited
liability, limited partnership is the one where rest of the partners have
limited liability. Their liability is limited to the amount of capital
contributed by them. Their personal assets cannot be used to pay the
firm’s debt. These partners cannot take part in the management of the
firm and cannot be act on behalf of the firm or other partners. They
can, however, inspect the books of account of the firm. He can
withdraw or transfer his interest in the firm any time he wants with the
consent of partners with unlimited liability.
 General partnership:- The liability of each of the partners is unlimited
except that of the minor. Except the share of the minor partner whose
share is limited to that of his capital contribution, personal assets of rest
of the partners can be used to pay off the firm’s debts.
 3. Joint Stock Company
Meaning-
 Joint stock company evolved as a suitable form of business organisation to operate
at large volume of business along with benefits of raising of capital, unlimited
liability and pooling of managerial skills.
 Company is that form of business organisation which is willingly established by
some persons for earning profit under the companies Act. Many persons jointly
invest capital in a company and, therefore it is also called joint stock company.
 Company is a corporate body. It forms after it is registered under the companies
Act, 1956.
 It is voluntary association of members who contribute capital which is divided into
small units known as shares. Members who buys these shares are known as
shareholders and collectively, the capital contributed by them is known as share
capital.
 Huge amount of funds can be collected as members have
limited liability. In the event of losses, the maximum
amount they lose is their capital contribution.
A company enjoys a status, distinct from its members. It
has a name of its own and can enter into contracts in its
own name. It operates through its seal. A seal serves the
purpose of company’s signature.
 It
has a perpetual life. Incoming and outgoing of
members does not affect the existence of a company.
 It is the creation of law and can be dissolved only by law.
 Definitions

 According to section 3 (i) of Indian Companies Act,

1956:- “ Company means a company formed and
registered under this Act or an existing company”.

 According to Prof. Haney:- “A company is an artificial

person, created by law having a separate entity with a
perpetual succession and a common seal”.
 Features/Characteristics

 Incorporated association :- A company comes into existence through legal

compliance with the provisions of company Act. It has to be registered
under the companies Act, 1956.Also, registration provides the status of
domicile to the company.
 Separate legal entity:- A company has a separate legal entity, which is
not affected by changes in the membership. Therefore, being a separate
entity, a company can contract, sue and be used in its corporate name and
capacity.
 Limited liability:- Every shareholder of a company has limited liability. His
liability is limited to the extent of the unpaid value of the shares held by
him. If such shares are fully paid up, he subject to no further liability.
 Capital:- Huge amount of capital can be raised by companies to spread
their operations at a large scale.
 Common seal:- Company is not a natural person, hence it can sign
the documents in the same manner as a natural person would do.
In order to enable the company to sign its documents, it is
provided with a legal arm called ‘common seal’. The common seal
is affixed on all documents by the person authorized to do so who
in turn puts his signature for and on behalf of the company.
 PerpetualSuccession :- A company has a continuous existence
which the existence of a company. Its existence can be
terminated only by law. Thus members may come and go but the
company may go forever.
 Share transferability:- Shares of a public company are freely
transferable. Share holders can transfer their shares whenever
they want and to whosoever they want.
 Merits of a company

 Limited Liability:- All members of the company have limited liability. They are
not accountable for company’s debt except to the extent of unpaid value on
shares. Therefore, the risk is limited and known. Personal property of the
shareholders can not be attached. This encourages the perspective
shareholders to invest in the company.
 Separate legal entity:- Unlike a partnership firm- which has no existence apart
form its members- a company is a distinct legal or juristic person independent
of its members. Under the law, an incorporated company is a distinct entity.
 Stability:- Stability means continuity. The company shall continue to exist
indefinitely till it is wound up in accordance with the provisions of the
companies Act. “Members may come and members may go but the companies
goes on forever.” This feature attracts the investors, who plan their investment
for a longer period.
 Growth and expansion:- company can organise business on large scale. As
there is no shortage of funds, it can be build profits through large scale
production economics. In other words, it offers good scope for self
generating growth. It has good scope for expansion. Growth and expansion
goes side by side. Availability of sufficient finance and managerial ability
ensures expansion and growth.
 Efficient management :- The management of a company vests in the
directors duly elected by the members. A company due to the nature of its
operations requires the service of expert professional managers. Normally,
experienced persons are elected as directors. Thus available skill is utilized
for the benefit of the community.
 Social advantage :- It mobilises the savings of the society and invest in the
company. Though the investment of the savings of the people company
expands the business and provides employment to a large number of
persons.
 Limitations/ demerits of a company
 Formalities and expenses :- The formation of a company is very difficult and
expensive. Various legal formalities are to be fulfilled. A number of documents
are to be prepared and filed with the registrar. All this process is time
consuming and expensive. In other words, this discourages the people from
starting company.
 Excessive government regulations:- A company is subject to government
regulations at every stage of its working. The internal working of the company is
subject to legal restrictions regarding meeting, auditing etc. A company has to
file regular returns and statements of its activities with the registrar of the
companies. At every step, there is a penalty for illegal provisions.
 Lack of personal interest :- The day to day management of a company form of
organisation is vested in the salaried persons or executives who do not have any
personal interest in the company. This may lead to reduced employee motivation
and result in inefficiency.
 Delay in decision making and action :- In large companies, decision making
and its implementation are time consuming process. The most obvious
reason for this being that the individual managers are unable to take
decisions on their own. All important decisions are to be taken by the
directors in their meetings. Further, after the decisions have been taken,
they have to be communicated to people working at various levels of the
organisation. This also delays the implementation of already delayed
decisions.
 Lack of secrecy :- According to companies Act, a public company has to
publish its accounts and deposit many important documents in the office of
the registrar. Anybody can see these documents after paying the prescribed
fee. In such a way nothing can remain a secret so far as the company is
concerned whether it is vey important to keep some information as secret.
This advantage is inherent in the sole traders and partnership business.
 Type of Companies
 The companies may be classified into various types on the following basis-

(A) Classification on the basis of Incorporation

(i) Chartered Companies (ii) Statutory Companies (iii) Registered Companies
(B) Classification on the basis of Liability
(i) Companies limited by shares (ii) Companies limited by guarantee (iii) Unlimited Companies
(C) Classification on the basis of control
(i) Holding companies (ii) Subsidiary companies
(D) Classification on the basis of Ownership
(i) Government companied (ii) Non – government companies (iii) Foreign companies
(E) Classification on the basis of number of members
(i) Private company (ii) Public Company
 Difference between private company and public company
S.No Basis of distinction Private company Public company
1 Minimum Members 2 7
2 Maximum Members 200 (previously it was 50) No limit
3 Shares transferability Shares cannot be transferred Shares are freely transferable
4 Prospectus Cannot issue a prospectus It can invite public to subscribe for
shares or debentures through
prospectus
5 Minimum directors 2 3
6 Commencement of business After obtaining the certificate of After obtaining the certificate of
incorporation Incorporation and certificate of
commencement
7 Use of word ‘Limited’ It is compulsory to use the word Only the word ‘Limited’ is used at
‘private Limited’ at the end of the end of its name
its name
8 Invitation to the public It cannot invite public to It can invite the public to subscribe
subscribe to its shares to its shares.
9 Paid up capital It can be registered with a paid It can be registered with a paid up
up capital of Rs 1 lakh capital of Rs 5 lakh
10 Quorum 2 5
 4. Co-operative Societies

Introduction-
 Cooperation means working collectively.
 Its first objective is social welfare.
 The basic principal of cooperation is inherent in the statement
“Each for all and all for each.”
 Inother words, cooperative organisation is based on the principal
that the small savings of different people should be collected,
through a society to raise funds for purchasing goods in large
quantity.
 It works on the principal to eliminate the middleman.
A co-operative forms of business organisation is a voluntary
association of persons for mutual benefits and it aims are
accomplished through self help and collective effort
A minimum of 10 persons are required to form a co-operative
society. And maximum are unlimited.
 Co-operatives are registered under Co-operative Societies Act,
1912 or state co-operatives Act.
 The capital of a co-operative society is raised from its members by
way of share capital. It can also obtain additional resources by
way of loans from the state and central Co-operative banks.
 Definition
 According to section 4 of The Indian Co-operatives societies
Act, 1912:- “A society which has its objectives – the promotion
of economic interests of its members in accordance with co-
operatives principles.”

 According to Calvert- “A form of organisation wherein persons

voluntarily associate together as human beings on the basis of
equality for the promotion of the economic interests of
themselves.”
 Features/Characteristics
 Voluntary association – A cooperative organisation is totally
based on voluntary membership. Persons having a common
interest can join together to form an association. The members
are also free to leave the association after giving a proper
notice. After leaving membership the members gets back his
capital according to the rules. Another important thing is that no
member can transfer his share to another person.
 Membership – Anybody can join the co-operative society. There
is no limit on the maximum number of members. There is no
restriction on the basis of caste, religion etc.
 Capital – The co-operatives raise funds from members by issuing shares.
However, the amount raised is not sufficient to meet their financial needs.
They supplements their financial resources by raising loans from central and
state co-operative banks. Government also provides grants to co-operative
societies.
 Motive- Unlike other forms of business organisations, the primary objective of
any co-operative society is to provide service to its members by earning fair
profit.
 Democratic management – It is based on democratic system. Each member is
entitled to a single vote. Here, the slogan is ‘one member, one vote’
irrespective of the number of shares held. Hence nobody can behave in an
automatic manner in the management system simply by purchasing more
shares. Members use their voting rights at the time of electing the board of
management.
 Merits
 Easy to form- A minimum of 10 members can voluntarily join together to
form a co-operative society. Very few legal formalities are required for its
registration.
 Open Membership- The membership of a co-operative society is open to
all having a common interest. No body is debarred from joining on the
basis of economic position, caste, colour or creed. A person can become a
member at any time he likes and can leave the society by returning his
shares without affecting its continuity.
 Limited Liability- Like company form of organisation, liability of members
is limited to the extent of his capital contribution in co-operative societies
also. They do not bear personal liability for the debts of the society.
 Separate legal entity- A Co-operative society has a separate legal entity. It is
not affected by the death, insolvency, lunacy or otherwise of any of its
members. It can sue and can be sued in its own name.
 Economical operations- Some of the expenses of management are saved by
the voluntary services of its members and elimination of middleman.
Therefore, the operation of a co=operative society is quite economical.
 Assistance by government- The co-operative societies receive full co-
operation from the government in the form of lower rates of interest,
subsidy, and tax reliefs.
 Tax advantages- A Co-operative society is exempt from income tax and
surcharge on its earnings up to a certain limit. It is also exempt from stamp
duty and registration fee.
 Demerits/ Limitations
 Limited funds- The main disadvantage of this form of organisation is the
shortage of funds. As we know that the members come from local areas,
usually having limited means.
 Excessive government control- Co-operative societies are in control of
government. This interferes the routine working of the society, political
interference also effect the working of this form of organisation.
 Lack of public confidence- Generally the co-operative societies lack
public confidence due to political interference. Many co-operatives are
headed by political personalities.
 Incompetent management- Members normally do not have business
experience. As a consequence, when they become the members of the
board of directors, the society is not conducted efficiently.
 Types of Co-Operative Societies

 Co-operative societies are classified into different

categories like-
1) Consumers’ Co-operative society
2) Producers’ Co-operative society
3) Marketing Co-operative society
4) Credit Co-operative society
5) Farming Co-operative society
6) Housing Co-operative society
 1. Consumers Co-operatives
 These co-operatives are formed by consumers who feel they are
being overcharged by retailers. They make direct purchases
from producers and sell them at reasonable prices to their
members.
 Profits are distributed amongst members in proportion to
capital contributed by them.
 Surplus profits are distributed in the form of bonus in proportion
to purchases made by members.
 Forexample- Apna Bazaar (started by some labors in 1948-
Mumbai) , Kendriya bhandaar, Super Bazaar etc.
 2. Producers Co-operatives

 Theseco-operatives are formed to collect the inputs, producer

outputs and sell them in the local markets. Profits are shared
by the members or reinvested for further growth of these co-
operatives.
 Theseco-operatives procure inputs (raw materials, tools,
equipment's etc.) for their members and sell their outputs in
the market.
 Theyhelp producers in improving the quality of their products
and promote brand loyalty of their consumers.
 For
example- Handloom societies like APPCO, Haryana
handloom etc.
 3. Marketing Co-operatives
 These co-operatives help in selling the produce of their members at
lucrative prices in the market.
 Small producers who generally do not have attractive bargaining capacity
in the market cannot fetch attractive prices for their products. They,
therefore, become members of marketing co-operatives which sell their
products at profitable prices and also provide a number of marketing
facilities like transportation, warehousing, labelling, packaging etc.
 Elimination of middlemen and selling the goods of producers directly to
consumers fetches attractive prices and profits.
 For example- Gujarat cooperative milk society i.e. AMUL, Lizzat paapad,
Indian Coffee house etc.
 4. Credits Co-operatives
 Members, who may be farmers or wage earners, with limited
financial means form these co-operatives.
 Theircapital contribution and deposits by members and
outsiders constitute the financial resources of these co-
operatives.
 Theco-operatives use these resources to provide loans on easy
terms to their members. Members are thus freed from being
charged high rates of interests by other money lenders.
 These co-operatives also promote the habit of savings amongst
their members. They operate in both rural and urban areas.
 These societies sometimes gives loan to the non members also.
 For
example- Rural co-operative banks, Urban co-operative
banks, state co-operative banks etc.
Like- NCDC- National Co-operative Development cooperation
IFFCO- Indian Farmer’s Fertilizers Cooperative limited
KRIBHCO- Krishak Bharti Cooperative limited
NABARD- National Bank for Agriculture and Rural
Development
 5. Farming Co-operatives

 These co-operatives are formed in rural areas where farmers own small pieces
of land because of their division and sub-division.
 Small farmers pool their lands and jointly conduct their agricultural
operations.
 Their objective is scientific organisation of agriculture on large scale so as to
maximise agricultural output and improve the economic position of cultivators.
 Co-operative farming makes it possible for members to use modern tools and
equipment's, goods, seeds, fertiliser and irrigation facilities in order to achieve
higher production.
 These societies play a significant role in getting the members rid of the
drawbacks of small scale farming.
 6. Housing Co-operatives

 In cities where buying land and constructing houses is becoming too

costly to be afforded by middle class families, housing co-operatives
help them in acquiring residential accommodation at reasonable
prices.
 These co-operatives buy land or houses from the municipal authority,
construct houses on them and provide them to their members at
reasonable prices.
 They may also provide land to members who can construct houses on
their own. They provide land or houses on instalments also.
 These societies are gaining popularity in cities these days.
 For example- Army welfare cooperative housing society, etc.
 co-operatives
Advantages Disadvantages

1.Formation Must have a minimum of 10 members. They Can be quite difficult to form, time
register with the REGISTRAR OF consuming and expensive.
FRIENDLY SOCIETIES.

2. Ownership Co-ops mainly exist in the agricultural Conflict may exist between members in the
industry. Equal voting system exists need for business expansion.
regardless of the shares held.
They file an annual financial return
(report)
3. Management & Management of co-ops are inspired by a In some situations finance can be difficult to
finance spirit of democracy and mutual co- raise. This can hinder growth.
operation.

4. Profit & risk Members have limited liability. Profits must be shared amongst members.
Large membership of co-ops make sure There may be reluctance to share profits
that there is high demand for goods with new members.
Risk is quite minimal.
Thankyou