Global Academy of Technology

(Autonomous Institution Affiliated To Visvesvaraya Technological University, Belagavi)

NBA Accredited CSE,ISE, ECE,EEE,CV, and ME Programs

Course: Engineering Economics and Management

Course Code: 22AML51

UNIT-2: Forms of Business Organisation

 SOLE PROPRIETORSHIP
Meaning:

The sole proprietorship is a form of business that is owned, managed and controlled by an
individual.
He has to arrange capital for the business and he alone is responsible for its management.
He is therefore, entitled to the profits and has to bear the loss of business, however, he can
take the help of his family members and also make use of the services of others such as a
manager and other employees.
This type of business organisation is also called single ownership or single proprietorship.
 If the business primarily consists of trade, the organization is a sole trading organization.
Small factories and shops are often found to be sole proprietorship organisations.
It is the simplest and most easily formed business organization. This is because not much
legal formality is required to establish it.
For instance to start a factory the permission of the local authorities is sufficient.
 Similarly to start a restaurant, it is only necessary to get the permission of local health
authorities. Or again, to run a grocery store, the proprietor has only to follow the rules laid
down by local administration.
Features of Sole Proprietorship:

The important features of a sole-proprietary organization include the following:

(i) Individual Initiative: One person is the owner in a sole proprietary form of
organisation.
(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in this form
organisation. If there is a loss he alone has to bear it. Thus the risks of business
are borne by the proprietor himself.
(iii) Management and control: Management and control of this type of
organisation is the responsibility of the sole proprietor. He may, however, employ
a manager or other people for the purpose.
(iv) Minimum government regulations: The government does not interfere with
the working of the sole proprietorship organisation. However, they have to
comply with the general laws and rules laid down by government.
(v) Unlimited liability: The sole proprietor has to bear the losses and is
responsible for the liabilities of the business. If the business assets are not
sufficient to meet the liabilities, he may also have to sell his personal property
for that purpose.
(vi) Secrecy: All important decision taken by the owner himself. He keeps all the
business secrets only to himself.
Merits Of Sole Proprietorship:
A sole proprietary organisation has the following advantages:
(i) Easy formation: A sole proprietorship business is easy to form where no legal formality
involved in setting up this type of organization. It is not governed by any specific law. It is
simply required that the business activity should be lawful and should comply with the rules
and regulations laid down by local authorities.
(ii) Better Control: In sole proprietary organisation, all the decisions relating to business
operations are taken by one person, which makes functioning of business simple and easy.
The sole proprietor can also bring about changes in the size and nature of activity. This gives
better control to business.
(iii) Sole beneficiary of profits: The sole proprietor is the only person to whom the profits
belong. There is a direct relation between effort and reward. This motivates him to work
hard and bear the risks of business.
(iv) Benefits of small-scale operations: The sole proprietorship is generally organized for
small-scale business. This helps the proprietor’s family members to be employed in
business. At the same time such a business is also entitled to certain concessions from the
government. For example, small industrial organisations can get electricity and water supply
at concessional rates on a priority basis.
(v) Inexpensive Management: The sole proprietor does not appoint any specialists for
various functions. He personally supervises various activities and can avoid wastage in the
business.
Limitations or demerits of Sole Proprietorship:
(i) Limitation of management skills: A sole proprietor may not be
able to manage the business efficiently as he is not likely to have
necessary skills regarding all aspects of the business. This poses
difficulties in the growth of business also.
(ii) Limitation of Resources: The sole proprietor of a business is
generally at a disadvantage in raising sufficient capital. His own
capital may be limited and his personal assets may also be
insufficient for raising loans against their security. This reduces the
scope of business growth.
(iii) Unlimited liability: The sole proprietor is personally liable for all
business obligations. For payment of business debts, his personal
property can also be used if the business assets are insufficient.
(iv) Lack of continuity: A sole proprietary organisation suffers from
lack of continuity. If the proprietor is ill this may cause temporary
closure of business. And if he dies the business may be permanently
closed.
 PARTNERSHIP:

Partnership is an association of persons who agree to combine their financial resources

and managerial abilities to run a business and share profits in an agreed ratio.
Since the resources of a sole proprietor to finance, and his capacity to manage a growing
business is limited, he feels the need for a partnership firm.
Partnership business, therefore, usually grows out of the need for expansion of business
with more capital, better supervision and control, division of work and spreading of risks.
The Indian Partnership Act defines partnership as “Partnership” is the relation between
persons who have agreed to share the profits of a business carried on by all or any one of
them acting for all. The persons who have agreed to join in partnership are individually called
“Partners” and collectively a ‘firm’.
Features of Partnership:
(i) Existence of an agreement: Partnership is formed on the basis of an agreement
between two or more persons to carry on business. It does not arise out of the operation
of law as in the case of joint Hindu family business. The terms and conditions of
partnership are laid down in a document known as Partnership Deed.
(ii) Engagement in business: A partnership can be formed only on the basis of a business
activity. Its business may include any trade, industry or profession. Thus, a partnership
can engage in any occupation – production and/or distribution of goods and services with
a view to earning profits.
(iii) Sharing of profits and losses: In a partnership firm, partners are entitled to share in
the profits and are also to bear the losses, if any.
(iv) Agency relationship: The partnership business may be carried on by all or any of the
partners acting for all. Thus, each partner is a principal and so can act in his own right. At the
same time he can act on behalf of other partners as their agent. Thus, every partner can bind
the firm by his acts.
(v) Unlimited Liability: The liability of partners is unlimited as in the case of sole
proprietorship. In case some obligation arises then not only the partnership assets
but also the private property of the partners can be taken for the payment of liabilities of the
firm.
(vi) Common Management: Every partner has a right to take part in the running of the
business. It is not necessary for all partners to participate in the day-to-day activities
of the business but they are entitled to participate. Even if partnership business is run by
some partners, the consent of all other partners is necessary for taking important decisions.
(vii) Restriction on transferability of share: No partner can transfer his share in partnership
to any other person. He may, however, do so with the consent of all other partners.
(viii) Registration: To form a partnership firm, it is not compulsory to register it. However, if
the partners so decide, it may be registered with the Registrar of Firms. There are advantages
of registration, which are discussed later.
(ix) Duration: The partnership firm continues at the pleasure of the partners. Legally a
partnership comes to an end if any partner dies, retires or becomes insolvent. However,
if the remaining partners agree to work together under the original firm’s name, the firm will
not be dissolved and will continue its business after settling the claim of the outgoing
partner.
Merits of Partnership:
A partnership form of organisation offers the following advantages:
(i) Ease in formation: A partnership is very easy to form. All that is required is an
agreement among the partners. Even the expenses to be incurred for registration
are-not much.
(ii) Pooling of financial resources: A partnership commands more financial
resources compared to sole proprietorship. This helps in expanding business and
earning more profits. As and when a firm requires more money, more partners can
be admitted.
(iii) Pooling of managerial stalls: A partnership facilitates pooling of managerial
skills of all its partners. This leads to greater efficiency in business operations. For
instance, in a big partnership firm, one partner can handle production function,
another partner can look after all marketing activity, still another can attend to legal
and personnel problems, and so on.
(iv) Balanced business decisions: In a partnership firm, decisions are taken
unanimously after considering all the major aspects of a problem. This ensures not
only balanced business decisions but also removes difficulties in the smooth
implementation of those decisions.
(v) Sharing of risks: Unlike sole proprietary organisation, the risks of partnership
business are shared by partners on a predetermined basis. This encourages
partners to undertake risky but profitable business activities.
Limitations of Partnership:
(i) Uncertainty of existence: The existence of a partnership firm is very uncertain. The retirement,
death, bankruptcy or lunacy of any partner can put an end to the partnership. Further, the
partnership business can come to a close if any partner demands it.
(ii) Risks of implied authority: It is true that like the sole proprietor each partner has unlimited
liability. But his liability may arise not only from his own acts but also from the acts and mistakes of
co-partners over whom he has no control. This discourages many persons with money and ability,
to join a partnership firm as partner.
(iii) Risks of disharmony: In partnership, since decisions are taken unanimously, it is essential that
all partners reconcile their views for the common good of the organisation. But there may arise
situations when some partners may adopt rigid attitudes and make it impossible to arrive at a
commonly agreed decision. Lack of harmony may paralyse the business and cause conflict and
mutual bickering.
(iv) Difficulty in withdrawal from the firm: Investment in a partnership can be easily made but
cannot be easily withdrawn. This is so because the withdrawal of a partner’sshare requires the
consent of all other partners.
(v) Lack of institutional confidence: A partnership business does not enjoy much confidence of
banks and financial institutions. It is because the nature of its activities is not disclosed at public
and the agreement among partners is not regulated by any law. As a result large financial
resources cannot be raised by partnership and growth of business cannot be ensured.
(vi) Difficulties of expansion: It is difficult for a partnership firm to undertake modernization of
expansion of its operations. This is because of its inability to raise adequate funds for the purpose.
Limited membership (restricted to 20) and their limited personal resources do not permit large
amounts of capital to be raised by the partners. Therefore, large-scale business cannot generally
be organised by partnerships.
 Joint Stock Company
A joint stock company is an organisation which is owned jointly by all its shareholders.
Here, all the stakeholders have a specific portion of stock owned, usually displayed as a
share.
Each joint stock company share is transferable, and if the company is public, then its shares
are marketed on registered stock exchanges. Private joint stock company shares can be
transferred from one party to another party. However, the transfer is limited by agreement
and family members.
Types of Joint Stock Company
The joint stock company is divided into three different types.
Chartered Company – A firm incorporated by the king or the head of the state is known as
a chartered company.
Bank of England (1694), East India Company (1600), the powers and the nature of
business of a chartered company are defined by the charter which incorporates it. After
the country attained independence, these types of companies do not exist in India.
Statutory Company – A company which is formed by a particular act of parliament is
known as a statutory company. Here, all the power, object, right, and responsibility are all
defined by the act. Reserve Bank of India, the Life Insurance Corporation of India, the
Food Corporation of India.
Registered Company – An organisation that is formed by registering under the law of the
company comes under a registered company. Infosys, Axis Bank, HDFC Bank, L&T
Features of Joint Stock Company
Drawbacks of Joint Stock Company
 MEANING OF PUBLIC ENTERPRISES
As state earlier, the business units owned, managed and controlled by the central, state
or local government are termed as public sector enterprises or public enterprises. These
are also known as public sector undertakings.
A public sector enterprise may be defined as any commercial or industrial undertaking
owned and managed by the government with a view to maximise social welfare and
uphold the public interest.
Public enterprises consist of nationalised private sector enterprises, such as, banks,
Life Insurance Corporation of India and the new enterprises set up by the government
such as Hindustan Machine Tools (HMT), Gas Authority of India (GAIL), State Trading
Corporation (STC) etc.
CHARACTERISTICS OF PUBLIC ENTERPRISES:
(a) Government Ownership and Management : The public enterprises are owned and
managed by the central or state government, or by the local authority. The government may
either wholly own the public enterprises or the ownership may partly be with the
government and partly with the private industrialists and the public. In any case the control,
management and ownership remains primarily with the government. For example, National
Thermal Power Corporation (NTPC) is an industrial organisation established by the Central
Government and part of its share capital is provided by the public.
(b) Financed from Government Funds : The public enterprises get their capital from
Government Funds and the government has to make provision for their capital in its budget.
(c) Public Welfare : Public enterprises are not guided by profit motive. Their major focus is
on providing the service or commodity at reasonable prices. Take the case of Indian Oil
Corporation or GAIL India Limited. They provide petroleum and gas at subsidised prices to
the public.
(d) Public Utility Services : Public sector enterprises concentrate on providing public utility
services like transport, electricity, telecommunication etc.
(e) Public Accountability : Public enterprises are governed by public policies formulated by
the government and are accountable to the legislature.
(f) Excessive Formalities : The government rules and regulations force the public enterprises
to observe excessive formalities in their operations. This makes the task of management very
sensitive and cumbersome.
Comparison between Private sector and Public Sector
 TYPES OF ORGANISATION OF PUBLIC ENTERPRISES

Departmental Undertaking: form of organisation is primarily used for provision of essential

services such as railways, postal services, broadcasting etc. Such organisations function
under the overall control of a ministry of the Government and are financed and controlled in
the same way as any other government department. This form is considered suitable for
activities where the government desires to have control over them in view of the public
interest.
Statutory Corporation (or public corporation): refers to a corporate body created by the
Parliament or State Legislature by a special Act which define its powers, functions and
pattern of management. Statutory corporation is also known as public corporation. Its capital
is wholly provided by the government. Examples of such organisations are Life Insurance
Corporation of India, State Trading Corporation etc.
Government Company: refers to the company in which 51 percent or more of the paid up
capital is held by the government. It is registered under the Companies Act and is fully
governed by the provisions of the Act. Most business units owned and managed by
government fall in this category.
 DEPARTMENTAL UNDERTAKINGS
Departmental undertakings are the oldest among the public enterprises. A departmental
undertaking is organised, managed and financed by the Government.

Features of Departmental Undertakings

The main features of departmental undertakings are as follows:
(a) It is established by the government and its overall control rests
with the minister.
(b) It is a part of the government and is managed like any other
government department.
(c) It is financed through government funds.
(d) It is subject to budgetary, accounting and audit control.
(e) Its policy is laid down by the government and it is accountable to
the legislature.
Merits of Departmental Undertakings:

(a) Fulfillment of Social Objectives: The government has total control over these
undertakings. As such it can fulfill its social and economic objectives.
For example, opening of post offices in far off places, broadcasting and telecasting
programmes, which may lead to the social, economic and intellectual development of the
people are the social objectives that the departmental undertakings try to fulfill.
(b) Responsible to Legislature : Questions may be asked about the working of
departmental undertaking in the parliament and the concerned minister has to satisfy the
public with his replies. As such they cannot take any step, which may harm the interest of
any particular group of public. These undertakings are responsible to the public through
the parliament.
(c) Control Over Economic Activities : It helps the government to exercise control over the
specialised economic activities and can act as instrument of making social and economic
policy.
(d) Contribution to Government Revenue : The surplus, if any, of the departmental
undertakings belong to the government. This leads to increase in government income.
Similarly, if there is deficiency, it is to be met by the government.
(e) Little Scope for Misuse of Funds : Since such undertakings are subject to budgetary
accounting and audit control, the possibilities of misuse of their funds is considerably
reduced.
Limitations of Departmental Undertakings
Departmental undertakings suffer from the following limitations:
(a) The Influence of Bureaucracy : On account of government control, a departmental
undertaking suffers from all the ills of bureaucratic functioning. For instance, government
permission is required for each expenditure, observance of government decisions regarding
appointment and promotion of the employees and so on. Because of these reasons
important decisions get delayed, employees cannot be given instant promotion or
punishment. On account of these reasons some difficulties come in the way of working of
departmental undertakings.
(b) Excessive Parliamentary Control : On account of the Parliamentary control difficulties
come in the way of day-to-day administration. This is also because questions are repeatedly
asked in the parliament about the working of the undertaking.
(c) Lack of Professional Expertise : The administrative officers who manage the affairs of the
departmental undertakings do not generally have the business experience as well as
expertise. Hence, these undertakings are not managed in a professional manner and suffer
from deficiency leading to excessive drainage of public funds.
(d) Lack of Flexibility : Flexibility is necessary for a successful business so that the demand
of the changing times may be fulfilled. But departmental undertakings lack flexibility
because its policies cannot be changed instantly.
(e) Inefficient Functioning : Such organisations suffer from inefficiency on account of
incompetent staff and lack of adequate incentives to improve efficiency of the employees.
STATUTORY CORPORATIONS:
The Statutory Corporation (or Public Corporation) refers to such organisations which are
incorporated under the special Acts of the Parliament/State Legislative Assemblies.
Its management pattern, its powers and functions, the area of activity, rules and
regulations for its employees and its relationship with government departments, etc. are
specified in the concerned Act. Examples of statutory corporations are State Bank of India,
Life Insurance Corporation of India, Industrial Finance Corporation of India, etc. It may be
noted that more than one corporation can also be established under the same Act. State
Electricity Boards and State Financial Corporation fall in this category.
Features of Statutory Corporations:
The main features of Statutory Corporations are as follows:
(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.
(b) It is an autonomous body and is free from government control in respect of its
internal management. However, it is accountable to parliament and state legislature.
(c) It has a separate legal existence. Its capital is wholly provided by the government.
(d) It is managed by Board of Directors, which is composed of individuals who are
trained and experienced in business management. The members of the board of
Directors are nominated by the government.
(e) It is supposed to be self sufficient in financial matters. However, in case of necessity
it may take loan and/or seek assistance from the government.
(f) The employees of these enterprises are recruited as per their own requirement by
following the terms and conditions of recruitment decided by the Board.
Merits of Statutory Corporations:
Statutory Corporation as a form of organisation for public enterprises has certain
advantages that can be summarised as follows:
(a) Expert Management : It has the advantages of both the departmental and private
undertakings. These enterprises are run on business principles under the guidance of
expert and experienced Directors.
(b) Internal Autonomy : Government has no direct interference in the day-to-day
management of these corporations. Decisions can be taken promptly without any
hindrance.
(c) Responsible to Parliament : Statutory organisations are responsible to Parliament. Their
activities are watched by the press and the public. As such they have to maintain a high
level of efficiency and accountability.
(d) Flexibility : As these are independent in matters of management and finance, they
enjoy adequate flexibility in their operation. This helps in ensuring good performance and
operational results.
(e) Promotion of National Interests : Statutory Corporations protect and promote national
interests. The government is authorised to give policy directions to the statutory
corporations under the provisions of the Acts governing them.
(f) Easy to Raise Funds : Being government owned statutory bodies, they can easily get the
required funds by issuing bonds etc.
Limitations of Statutory Corporations
Having studied the merits of statutory corporations we may now look to its limitations
also. The following limitations are observed in statutory corporations.
(a) Government Interference : It is true that the greatest advantage of statutory
corporation is its independence and flexibility, but it is found only on paper. In reality,
there is excessive government interference in most of the matters.
(b) Rigidity : The amendments to their activities and rights can be made only by the
Parliament. This results in several impediments in business of the corporations to
respond to the changing conditions and take bold decisions.
(c) Ignoring Commercial Approach : The statutory corporations usually face little
competition and lack motivation for good performance. Hence, they suffer from
ignorance of commercial principles in managing their affairs.
 GOVERNMENT COMPANIES:
As per the provisions of the Companies Act, a company in which 51% or more of its capital is
held by central and/or state government is regarded as a Government Company.
These companies are registered under Companies Act, 1956 and follow all those rules and
regulations as are applicable to any other registered company.
Features of Government Companies
The main features of Government companies are as follows:
(a) It is registered under the Companies Act, 1956.
(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its own
name.
(c) The annual reports of the government companies are required to be presented in
parliament.
(d) The capital is wholly or partially provided by the government. In case of partially owned
company the capital is provided both by the government and private investors. But in such a
case the central or state government must own at least 51% shares of the company.
(e) It is managed by the Board of Directors. All the Directors or the majority of Directors are
appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its auditors
are Chartered Accountants appointed by the government.
(g) Its employees are not civil servants. It regulates its personnel policies according to its
articles of associations.
Merits of Government Companies
The merits of government company form of organising a public enterprise are as
follows:
(a) Simple Procedure of Establishment : A government company, as compared to
other public enterprises, can be easily formed as there is no need to get a bill
passed by the parliament or state legislature. It can be formed simply by following
the procedure laid down by the Companies Act.
(b) Efficient Working on Business Lines : The government company can be run on
business principles. It is fully independent in financial and administrative matters.
Its Board of Directors usually consists of some professionals and independent
persons of repute.
(c) Efficient Management : As the Annual Report of the government company is
placed before both the houses of Parliament for discussion, its management is
cautious in carrying out its activities and ensures efficiency in managing the
business.
(d) Healthy Competition : These companies usually offer a healthy competition to
private sector and thus, ensure availability of goods and services at reasonable
prices without compromising on the quality.
Limitations of Government Companies
The government companies suffer from the following limitations:
(a) Lack of Initiative : The management of government companies always have the fear of
public accountability. As a result, they lack initiative in taking right decisions at the right
time. Moreover, some directors may not take real interest in business for fear of public
criticism.
(b) Lack of Business Experience : In practice, the management of these companies is
generally put into the hands of administrative service officers who often lack experience in
managing the business organisation on professional lines. So, in most cases, they fail to
achieve the required efficiency levels.
(c) Change in Policies and Management : The policies and management of these
companies generally keep on changing with the change of government. Frequent change of
rules, policies and procedures leads to an unhealthy situation of the business enterprises.
 Thank You!!!
Unit-2 Completed