Forms of Business Ownership After studying this chapter, the learners will be able to > Appreciate the forms of business ownership » Understand the concepts of proprietary and corporate enterprises > Explain the features, merits and limitations of Sole Proprietorship, Partnership, Cooperative Society and Company > Explain the features, merits and demerits of Limited Liability Partnership (LLP) > Distinguish between various types of business organisations > Make a choice of form of business organisaiton Business ownership represents a bundle of rights that accrue because a person (or a group of persons) has invested capital in it. The rights of ownership are as mentioned below : 1. Exclusive title of the business and right to use business name and assets. None else has this right. | 2. Right to run the business, i.e., operate and manage it on a day-to-day basis, 3. Entitlement to profits of the business. The owners have also to bear the losses of the business, if any. 4. Right to dispose off and transfer the ownership of the business. However, in certain forms of business organisation such as company and cooperative, ‘ownership can be separated from management. In this chapter, we shall study the features, merits, demerits and suitability of different types of organisation. 2.1 FORMS OF BUSINESS OWNERSHIP 2.1.1 Single and Joint Ownership A business may be owned singly (i.e., by one person) or jointly (i., by a group of persons), When it is owned by one person, it is known sole proprietorship. Excepting this form of organisation, all other forms of business organisations come under the category of ‘group 24“(LLP), or in the private sector (i) Sole Proprietorship ) Joint Hindu Family Firm (iii) Partnership Firm (iv) Joint Stock Company f ae (v) Limited Liability Partnership (LLP); an (vi) Co-operative Organisation. 2.1.2 Proprietary and Corporate Enterprises ; ‘ Business entities may be classified into proprietary and corporate enter a prieta enterprises are owned exclusively by the owners. Business does not exist in¢epend of ite owners who have the right to manage and run the enterprise on a day-to-d basis. They can even dispose off or transfer the business to others. But in a corpor business, there is separation of ownership, i.e., a corporate enterprise enjoys a separ legal entity which is not affected by the life of its shareholders or members. Thus, has a perpetual succession. A corporate entity holds property and assets in its nam and the shareholders are not the joint owners of its property and assets. The sharehold have no right to manage and operate the business directly. Further, the liability of shareholders of a corporate entity is generally limited upto the amount of money investe by them in the shares held by them. But in proprietary enterprises, the liability of th owners is unlimited. In the event of closure of the business due to losses, the prope of the owners can be utilised to pay off the debi TABLE 2.1 : Corporate vs. Non-Corporate Entity Corporate Entity Non-Corporate Entity Includes Public Companies, Private Companies, Includes Sole P: Limited Partnerships (LLPs), ete See ena Undivided Family (HUF), and Partnership. Separate legal entity Lack of separate legal entity Limited liabili i ‘ited liability Unlimited liability Separation of ownershi ip from management Owners 2 SS are the managers of the business Life is affected by death or i nee y death or insolvency oflegal formalities while a corporate body can be lau the legal formalities as prescribed under the laws governing th BUSINESS OWNERSHIP] Non-corporate Corporate | Sole, Joint Hindu Partnership Joint'Stock Limited Liability Coloperative Proprietorship “Pani Firm Company Partnership Society Fig. 2.1 Forms of Business Organisation, 2.2 SOLE PROPRIETORSHIP 2.2.1 Definition of Sole Proprientorship According to Haney, “The sole proprietorship is the form of business organisation at the head of which stands an individual who is responsible, who directs its who bears profits and losses of it, A sole proprietor is a person who carries on business exclusively by and for himself it is very easy to start a small business on sole tradership basis because of very few legal formalities. According to Kimball and Kimball, “The individual proprietor t@ the supreme judge of all matters pertaining to his business subject only to general laws of the land to such special legislation as may affect his particular business”. What is Sole Proprietorship ? A sole proprietor is a person who carries on business exclusively by and for himself. He is not only the owner of the capital of the undertaking, but is usually the organiser and manager and takes all the profits or responsibility for losses. — James Stephenson Sole trader business is a type of business unit where one person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business. —J.L. Hansen The sole proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure. — L.H. Haney A sole trader is an individual who directs and bears the risks of a business in which he owns or borrows the capital, rents the land and employs the necessary labour. He manages the business and takes the profits or bears the losses. Sole tradership is the oldest and the simplest form of business ownership and is very suitable for carrying small business operations. i i‘characteristics ¢ “ r Gammon Identity or No Separate Entity: © nad hebe ‘separate legal entity independent of the owne™ Ce ee ePtae and the same. The owner owns everything everything the business owes. — 2. Capital. In sole tradership, his personal resources. He may a institutions if he cannot depend solely : 3. Unlimited Liability. The liability of the propriet« is unlimited. The creditors have the right to recover their ae property of the proprietor in case the business assets are vi Easy Formation. It is very easy to form proprietorship. In oa <4 the case even licence is not required. Peddlers, hawkers, small vendors and shop! eepers ca start business at their own will, provided it is not illegal, and against the public intere: 5. One Person Control. Sole tradership is a one person show. The sole trad provides management to the business. He takes all the decisions, procures mate resources, employs personnel and directs and controls the affairs of the enterprise. is not required to consult anyone else in taking any decision. Though the sole trade} may delegate some of his authority to his assistants, but the ultimate authority to) manage and control rests with him. 6. Profits and Losses. The surplus arising in the business of the sole trade entirely belongs to him and similarly all the business losses and risks are to be borne by him alone. the capital is employed by te ole : Iso borrow money from his fri on his personal resources. tor for the debts of the b dues even from the pe sufficient to cover tl 7. Limited Resources. In case of sole proprietorship the owner is an individual. Resources of an individual are always small and limited as compared to the resources of the group. It also suffers from the limited ability and limited capital of the owner. 2.2.3 Merits of Sole Proprietorship A sole tradership firm enjoys the following benefits : start the business without undergoing much leg, may be necessary to deal in particular commodi 2. Quick Decision-making. Sole tradershi Prompt action as the sole trader has exclusive 8. Secrecy. It is easy to preserve s i ‘ ecrecy i The important clues of business can be kept 4. Flexibility. The sole trader is free to : ands. The flexibility is avail ‘has invested a small amount of al formalities. Procurement of licen ties like drugs, liquor, ete, P facilitates quick decision-making a control over his business, in business in case of sole proprietorshi closely guided secrets by the propri carry out any business as the siti lable because th: i al e sole trader is the sole ownerFORMS OF BUSINESS OWNERSHIP: 2 5. Personal Touch. A sole trader can maintain intimate personal contacts with his customers. Direct contacts will enable the proprietor to know the nature of his customers and their tastes, likes and dislikes. Close personal touch with the customers enhances the reputation of the firm. 6. Direct Incentive. In this form of business organisation, the proprietor takes all the profits and bears all the risks and losses. Thus, there is a direct relationship between effort and reward. This will motivate the owner of the business to work hard to achieve maximum efficiency for the business. 7, Independent Way of Life. Sole proprietorship offers an independent way of life for people who have necessary skills, but do not wish to serve others. This provides an | __ excellent opportunity for selfemployment of persons of small means with professional skills. 8. Low Overheads. The overhead costs of management are less as compared to other forms of business enterprises. Since the sole trader himself manages the business, | he can achieve greater economy in the business operations. 9. Few Government Regulations. The sole tradership concern is subject to the minimum of government regulations. The sole trader has to comply with income tax, | sales tax and labour laws and other general laws of the land. He is not subject to special legislation as in case of companies and partnership firms. 2.2.4 Demerits of Sole Proprietorship Sole tradership suffers from the following drawbacks : 1, Limited Capital. The capital which a sole trader can raise are limited. He can either depend on his personal resources or on his borrowing capacity. The borrowing capacity depends on his assets and creditworthiness. The limitation of financial resources may put hurdles in the expansion of the business. 2. Lack of Managerial Skills. All the managerial functions, which are essential for the successful operation of a business are performed by the sole trader himself, Thus, benefits of specialisation are not available. Moreover, the individual may not be able to perform all the managerial functions because of limitations of time, energy, skills and imagination. Because of small-scale of operations and financial resources, it | may not be feasible to secure the services of experts in various fields like production, purchasing and marketing. 8. Unlimited Liability. The liability of the sole trader is unlimited. The business creditors can even recover their debts from the personal assets of the proprietor. The proprietor may be completely ruined in case of failure of his business. This factor puts a ceiling on the growth and expansion of his business. 4. Uncertain Life of Business. There is a doubt about the continuity of the business because of sole trader operates on a small scale and his activities are less diversified. The owner may be compelled to close his business if he is not successful Moreover, death and insanity of the proprietor also lead to closure of business. 5. Limited Opportunities. Since the scale of operations is relatively small, the Sole trader cannot avail of the benefits of all business opportunities. Since there is one and the same person who provides capital and management, the sole trader may not be ready to take various risks which is essential for the growth of any business, Moreover,‘because of small scale operations, the trader is not able to: scale production, purchasing and marketing. ae From the above account of the merits and See eae only personal services like repair work, atid ef = wietary orga professional activities which can be set up as sole Pa i he oee this form of organisation is quite popular and accounts units because of its advantages. 2.2.5 Survival of Sole Proprietorship Despite its disadvantages, sole tradership form of organisation is very popular, to W.R. Basset, “The one man control is the best in the world if that one m 1 enough to manage everything”. Sole tradership facilitates one man control which to various advantages like simplicity, ease of formation, flexibility, quick decision and personal touch with customers. But it should also be remembered that one control also creates certain limitations particularly relating to finance and manager These limitations keep the scale of business operations very small as com partnership firms and joint stock companies, The sole tradership form of organisation is hight (a) Small business requiring case of retail stores. (®) In those lines of business where there is a need for greater personal attenti to customers as in tailoring, professional services like medicine and legal. (c) In those lines of business where the demand of products is often influenced b seasonal trends and fashions Jy suitable in the following ea modest capital and limited managerial talent ag (d) (e) A 2.3 ONE PERSON COMPANY (OPC) In many countries, law member who subscribes provides for the registan, S, 1992. In India, Companies Act, 0 any, ie. having one member only, ie What is One Person Company? Single person company means i i cous a eee) the capital of which is fully owned “One Person Company (OPC) isa company regi: Just one member and shall have “(OPC)”According to Sec. 8 (1), “One Person Company (OPC) may be formed. eee Gs @ private company, by subscribing his name to its yn and complying with the requir i registration”. It is also he Memorandum of Associ enti consent of such person would be required to be filed with the at the time of incorporation along with the memorandum and Such person can withdraw his consent whenever he likes. Under the Companies (Incorporation) Rules, 2014 : * No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company. Registrar of Companies articles of association. It would be compulsory for an OPC to convert itself into public or private company in certain cases. Where the paid up share capital of an OPC exceeds fifty lakh rupees or its average annual turnover during the releyant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company. 2.3.1 Features of One Person Company One Person Company will have the following features : 1, An OPC may be registered as a private company with one member only. A natural person who an Indian citizen and a resident of India is eligible to incorporate an OPC. 2. An OPC will have a corporate entity of its own. 3. The sole shareholder of an OPC shall be liable only to the extent of its capital. If the activities are carried out in a mala fide manner, the liability of the sole sharcholder would extend to his personal property. 4. Minimum share capital may be prescribed for an OPC by the Government. 5. An OPC may be managed by the sole member or his representative, 6. An OPC shall have to indicate the name of the person who in the event of the subscriber's death, disability etc., would become the member of the company. 7. An OPC will get its annual accounts audited and file a copy of the same with the Registrar of Companies. 8. Adequate safeguards in case of death/disability of the sole shareholder need to be provided. Note: In India, the concept of OPC was mooted by J.J. Irani Committee which suggested that such an entity may be provided with a simple regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters. aedecisions can be taken of action. me 4. OPC would provide the start up entrepreneurs and professionals the flexibility in setting up business without losing control. ; 5. The motivation and commitment of the owner of OPC are high due to profit sharing. 6. There is no need to share business in! business secrecy is ensured. $ 7. Running an OPC is easy as it does not require compliance with many formalities as in the case of other types of companies. formation with any other person; the 2.3.3 Demerits of One Person Company ‘The limitations of one person company are as follows : 1. Because the entire capital is held by a single person, the life of OPC is unce and unstable. 2. Formation of OPC is difficult as its registration requires compliance with man legal formalities. 3. The concept of OPC makes mockery of the corporate concept because ‘company means association of more than one person. 4, A company should operate as a democratic institution with discussion and decision by voting. But in an OPC, there is no democracy as one person takes all the decisions. 2.4 JOINT HINDU FAMILY BUSINESS A ‘A Joint Hindu Family firm comes into existence by operation of law. It is governed by the Hindu law and Hindu customs. If the business set up by a person is carried on by male members of his family after his death, it is called Joint Hindu Family usiness. ___ Joint Hindu Family business refers to a form of organisation wherein the busi is owned and carried on by the members of the Hindu Undivided Family. The basis membership in business is birth in the family. Three successive generations of a fa can be members in the family business. A Joint Hindu Family firm has an entity of its own and its members are mover the ancestral property. 2.4.1 Features of Joint Hindu Family The salient features of Joint Hindu Family business are outlined below : 1. Male Members. The membership of a Joint Hindu Family business consists of _ only the male members. The membership is not created by an agreement but is determined by birth. The membership is restricted to three successive generations. 2. Membership by Birth. A person automatically becomes a member in Joint Hindu Family by taking birth in that family. There is no need for any agreement. 8. Management. The management of such a business vests in the eldest members of the family, called Karta. The Karta, however, may associate other members to assist him in the management of business. 4. Liability. The liability of the Karta is unlimited, ie. even his personal assets can be used for the payment of business dues. The liability of other members is limited to the extent of their share in the property of the family business. 5. Registration. It is not compulsory for Joint Hindu Family Business to get registration certificate as it is governed by the Hindu Law Act. 6. Dissolution of Business. The Joint Hindu Family business comes to an end when all the members notify that they are not members of the Joint Hindu Family. i . In Joint Hindu Family business a child becomes a member by Er satya ees = ciate file ruihontaibochma Enaaieae aa folio i bers of Joint Hindu Family business have the rights to ee ema steeaata can also claim their share in the family property at the time of partition of the family. trl and Badge Ba y Hind The control and management 6f the Jo d Ne te ea. tas, To all oe Mitakshara and Dayabhaga. The rights and duties of its members are also gover * 2 inuity is not affected by the death of a family Oca ce dice tar sHenaens cate b2.4.2 Merits of Joint Hindu Family ‘The merits of Joint Hindu Family business are ° ; 1. Easy Formation. A Joint Hindu Family firm comes © law. No legal formalities are required to set it uP- ae ‘ Ce nee aaa to take all important decisions of 2, Quick Decision-making. The Karta free to tal ree family business. He need not consult the co-parcenary- This eneutes a a $. Continuity. The existence of Joint Hindu Family business does ne ste 7 by the death or capacity of any member of Karta. It is a stable form 0! comes to an end when all the members decide to terminate it. 4. Secrecy. In Joint Hindu Family all the decisions °° taken by Karta and he only knows the business secrets. There are no chances of Jeaking out of business secrets. 5. Limited Liability. In Joint Hindu Family business, is limited to the extent of their shares. It gives them a relief. is unlimited. 6, Freedom of Business. The Joint Hindu Family is free to choose any business like a sole tradership. There is no restriction on the size and type of business. 7. Close Relations with Customers. ‘The Karta can pay personal attention to his customers. This brings him better business. The customers enjoy greater satisfaction. 8. Close Relations with Employees. There is a direct contact between the Karta and his employees, This means better control and motivation of the employees. 9, Protection of Minors. The minors have all the rights of members and theif interest is protected by the Karta. are as follows + nto existence by she liability of all members ‘The liability of the Karta 2.4.3 Demerits of Joint Hindu Family ‘The Joint Hindu Family business suffers from the following limitations : 1. Limited Resources. The Karta has limited scope for raising capital. Her/his own funds may be insufficient for expansion. This reduces the scope for business growth. ere Unlimitea Liability. The Karta s personaly Table for all business obligations. ‘or payment of business debts, his personal property can b ; i d For payment of property can be sold if the business assets 3. Powerful Karta The Karta is all in all in the busin ; : : » business, An may ruin the business since all business decisions are taken by ee i 4, Limited Managerial Skills. The Joint Hindu Family busi ; 1 ; Family business i the senior-most male member, ive., Ke Reset ly business is managed by x, i., Karta, An individual has limited ability to manage: He cannot be an expert in all the areas of busi pees, an event of business. As a result, he cannot take good 2.5 PARTNERSHIP Partnership is an associatio: n of persons who i rec ‘ lati agree to combi i i pan alas eth eer a business and share eae eeel a . According . Haney, “Partnership may be de ion exis between persons who agree to carry on a business in ne oe een : common with a view to priv Beis h s s r . What is Partnership may be defined as the relation between the persons who on a business in common with a view to Private gain. re inn 'y form a partnership by making a written or oral ag that they will jointly assume full responsibility for the conduct of the business”. * —J.A. Shubin Partnership is the relation between two or more persons who have agreed to share the profits of the business carried on by all or any of them acting for all. — The Indian Partnership Act, 1932 2.5.1 Features of Partnership The features of partnership firm are explained below : 1. Number of Members. At least two persons are required to form a partnership. In any partnership, where the number of partners is less than two, the partnership is dissolved. The maximum persmissible number of partners has been prescribed under the Companies Act, 2013. Section 464 of the Act provides that the number of persons in any association/partnership shall not exceed one hundred subject to the limit prescribed in the Rules. In this regard, Rule 10 of the Companies (Miscellaneous) Rules, 2014 provides that no association/ partnership shall be formed, consisting of more than 50 persons. Therefore, the limit as of now is 50 partners. 2. Agreement. There must be an agreement between the partners to form a partnership. This agreement can be oral or written. The document containing the agreement of partners is known as Partnership Deed. 3. Lawful Business. A partnership may undertake any lawful business activity. The partnership can be formed only for the purpose of carrying on business, which is legal. Joint theft or smuggling carried by two or more persons cannot be considered as partnership. 4. Sharing of Profits. There must be an agreement between the partners to share the profits (and losses) of the business. Charitable institutions and hospitals though run jointly are not partnership as there is no sharing of profits. It is also significant that sharing of profits is not a conclusive proof of partnership. Thus, employees or creditors who share profits cannot be called partners in the absence of any agreement of partnership. 5. Agency Relationship. There must be an agency relationship between the Partners. Every partner is the proprietor as well as the agent of the firm. The business _ of the firm may be carried on by all or any of them acting for all. Each partner entitled to take part in management of the business of the firm and to represent Partners in dealings with third parties.ehery 2.5.2 Merits of Partnership ‘The advantages of a partnership firm inclu ‘ Ease A partnership firm can be formed easily by an 3 1. Ease of Formation, & pafy carry out the business of the firm and between the prospective partners ‘There is no fecpuliion ith respect to registration of the firm. 2. More Funds or Capital. In a partnership, the capital is contributed by a num of partners. This makes it possible to raise larger amount of funds as compare sole proprietor and undertake additional operations when desired. 3. Sharing of Risks. The risks involved in running a partnership firm are sf by all the partners. This reduces the anxiety, burden and stress on indi dual partner 4. Balanced Decision-making. The partners can oversee different functi according to their areas of expertise. Because an individual is not forced to hat different activities, this not only reduces the burden of work but also leads to fewer ) errors in judgements. As a consequence, decisions are likely to be more balanced. 5. Pooling of Skills. The partners can provide knowledge and skills in differen areas of business for its better working. 6. Secrecy. A partnership firm is not legally required to publish its accounts and submit its reports. Hence, it is able to maintain confidentiality of information relating: de the following + to its operations. _7, Flexibility in Operations. Partnership firms can make changes in their size, capital etc. without prior permission of government. The partners can take decisions in the firm according to changes taking place in the external environment whenever it is necessary. 8. Scope for Expansion. Compared to sole proprietorship there is more scope for the expansion and growth in a partnership. The partners can arrange larger funds from their own wealth as well as from their borrowings. 2.5.3 Demerits of Partnership A partnership form of organisation suffers from the following limitations : 1. Limited Resources. A partnership firm has a limi ed I ited number of because of which it may not be able to raise as much capital as a company Cate it may not be able to expand its operations beyond a certain limit, hi 2. Unlimited Liability. The liability of all the partners is unlimited. In case 6 losses the partners will not only lose their business property but creditors can over their personal property also to get their accounts settled. 3. Conflicting Interests. Differences betw i f rtners may affect th business. If such differences are not qui red Cit Y ainda : quickly resolved, D i t ly resolved, continuance of partne -