Business Studies Chapter 2 Forms Of Business Organization

Tips: -

• The company comes from a Latin word 'Companies' which stands for taking food together in a gathering.
• In ancient times businessmen used to discuss all of their business matters while taking their food together.
• In modern times the meaning of company is different. Few people come together and form a company according to law.
• A company is a different entity from its members. In a company, capital comes from several people, thus, it is known as a joint stock company.
• The people who invest in a company are its members.
• A company runs a business as an independent entity, it is responsible for all of its liabilities, that is why a company is considered as an artificial person created by law.

(a) restricts the right of members to transfer its shares;

(b) has a minimum of 2 and a maximum of 50 members, excluding the present and past employees;

(c) does not invite public to subscribe to its share capital; and

(d) must have a minimum paid up capital of Rs.1 lakh or such higher amount which may be prescribed from time-to-time.

(c) has no restriction on transfer of shares; and 
(d) is not prohibited from inviting the public to subscribe to its share

capital or public deposits.

• A private company which is a subsidiary of a public company is also treated as a public company. 

(а) Where business requires limited capital.

(b) Where business requires application of personal skills, diversified managerial talent and moderate risk.

Examples of partnership organizations may include real estate brokers, professional firms etc.

• The sole proprietorship does not involve a lengthy and expensive procedure for its registration.
• There is hardly any problem involved in setting up this type of organization.
• It is not governed by any specific law.

• The liability of a sole proprietorship is not limited to the extent of his share in business.
• The liability of sole proprietor is unlimited.
• The sole proprietor is personally liable for all business obligations. His own funds can be used if the business profits are insufficient to meet the losses of business.

• In the case of HUF, if the business suffers from losses, then losses can be recovered from Karta's personal property.
• The co-partners are responsible to bear the losses upto the extent of their share on profit.
• Losses cannot be recovered from their personal property

• A 'Partner by Holding Out' is a person who is not a partner in a firm but knowingly allows himself/herself to be represented as a partner in a firm. 

• Such a person becomes liable to outside creditors for repayment of any debts which have been extended to the firm on the basis of such representation.

• A company is the creation of law and exists in the eyes of the law only. It is invisible and intangible.
• It exists independent of its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them, it cannot breathe, eat, run, talk and so on.
• It is, therefore, called an artificial person.

• A company's eixstence is not affected on the death of a member, since company has perpetual succession.
• An incorporated company cannot die until it is liquidated.
• Its life is not affected by death or insolvency of shareholders as well as of directors.
• Members may come and go, but the company goes on forever. Even if its all members suddenly die, its continuity is not affected.

• In a co-operative society, the principle of 'one man one vote' is adopted.
• A member has only one vote irrespective of the number of shares held by him.
• Thus, a co-operative society is run on democratic principles.

• The registration of a partnership firm although is not compulsory, there are certain benefits of registration, when it comes to exercising legal rights.
• A partnership firm can be registered at the start of a partnership or at any time later. 
• A partnership firm desiring registration applies to the Registrar of Firms in the prescribed form along with a registration fee.
• The applicant should state the following:

1. Name of the firm.
2. The principal place of business of the firm.
3. The name of any other place where the firm is to carry on business.
4. Date of admission of the partners in the firms.
5. Names and addresses of the partners.
6. Duration of partnership.

• The application must be signed by each partner.
• Changes in the above particulars have to be communicated to the Registrar.
• The certificate of registration is a reliable evidence and a conclusive proof of the existence of the firm.

• Customers require personal touch.
• Market is local.
• Limited capital is required
• Fashion changes very quickly
• Where is risk involved is moderate.

Tips: -

• A co-operative form of business organisation is different from other forms of organisation.
• It is a voluntary association of persons for mutual benefit and its objectives are accomplished through self help and collective effort.
• The main principle undergoing a cooperative organisation is mutual help.
• A minimum of ten people are required to form co-operative society.
• The capital of a co-operative society is raised from its members by way of share capital.
• The main aim of these types of societies is to provide different goods and services at a cheap rate to its members.
• They are also called non-proift organisation.

• Shareholders of a company are liable only to the extent of the face value of shares held by them.
• Their private property cannot be attached to pay the debts of the company.
• Thus the risk is limited and known.

Large financial resources : 

• This form of ownership enables the collection of huge financial resources.
• The capital of a company is divided into shares of smaller denominations, so that people with small means can also buy them.

Continuity : 

• A company enjoys uninterrupted business life.
• As a corporate body, it continues to exist even if all its members die or desert it.

Transferability of shares : 

• A member of a public limited company can freely transfer his shares without the consent of other members.

Difficulty of formation: 

• It is very difficult and expensive to form a company.
• A number of documents have to be prepared and filed with the Registrar of Companies.

Excessive government control : 

• A company is subject to statutory regulations in its day-to-day operations.
• It has to submit periodical reports. Audit and publication of accounts is obligatory.

Lack of motivation and personal touch : 

• There is difference between ownership and management in a larger public company.
• The affairs of the company are managed by the professional and salaried managers who do not have personal involvement and stake in the company.

Oligarchic management : 

• In theory, the management of this type of company is supposed to be democratic, but in practice, company becomes an oligarchy (ruled by a few). 

(a) A partner of an unregistered firm cannot file a suit against the firm or other partners.

(b) The firm cannot file a suit against third parties.

Hence, it is beneficial for partnership firms to get themselves registered.

• The membership of a cooperative society is voluntary.
• A person is free to join a cooperative society as well as to exist the same as per his desire. There can't be any compulsion for him to join or quit a society.
• Membership is open to all, irrespective of their religion, caste and gender.
• The principle of 'one man one vote' governs the cooperative society.

Hence, it is said that cooperative society is the best example of democracy and secularism.

In comparison to cooperative society, a company is an association of persons formed for carrying out business and has a legal status independent of its members. The aim of joint stock company is to maximise profit.

1. Formation : 
For a Joint Hindu Family business, there should be at least two members in the family and ancestral property to be inherited by them. The business does not require any agreement as membership is by birth.

2. Liability : 
The liability of all members except the Karta, is limited to their share of property of the business. The Karta, however, has unlimited liability.

3. Control : 
The control of the family business lies with the Karta. He takes all the decisions and is authorised to manage the business. His decisions are binding on the other members.

4. Continuity : 
The business continues even after the death of the Karta as the next eldest member takes up the position of Karta, leaving the business stable. The business can, however, be terminated with the mutual consent of the members.

5. Minor Members : 
The inclusion of an individual into the business occurs due to birth in a HUF. Hence minors can also be members of the business.

1. Number of members: 
A minimum of two or more persons are required for starting a partnership business. 

2. Sharing of profit : 
Partnership should be carried for profit motive. Partnerships for religious purposes are not included under the Partnership Act.

3. Agency relationship :
Principal-agent relationship is must in the partnership, where each partner acts as an agent of the firm. 

(i) A private company can be formed by only two members whereas seven people are needed to form a public company.

(ii) In a private company, public participation is not permitted and hence no need to issue prospectus for subscribtion to the shares of a private company.

(iii) The minimum paid-up capital for a privtae company is 1 lakh as against 5 lakhs for a public limited company. 

(iv) A private company can start business as soon as it receives the certificate of incorporation from Registrar of Companies. A public company on the other hand has to wait for the receipts of certificate of commencement, before it can start business.

(v) A private company needs to have only two directors as against the minimum of three directors in the case of public company.

(vi) A private company is not required to keep an index of members which is necesgary in the case of a public company.

(vii) There is no restriction values against loan to directors in a private company. Therefore, there is no need to take permission from the government for granting the same as it requires in the case of a public company.

• Prior to the amendments in the Companies Act 1956 in the year 2000, there was a category of companies known as deemed public companies
• Such companies were registered as private companies.
• Thus a private company automatically becomes a public company if:

1. 1. Its share holding pattern involves member of the public.
   2. Its turnover was high enough to warrant public interest.
   3. It employs public money.

Or in other words, a private company becomes a demand public company when:

1. 1. 25% or more of the paid up share capital of the private company was held by a public company. 
   2. The private company holds 25% or more of paid up share capital of public company.
   3. The average annual turnover of the private company for 3 consecutive financial years was Rs. 5 crore.
   4. The private company invited deposits from the public.

• A partnership firm is formed as a result of an agreement between two or more persons to carry on some business and sharing profits.
• Such an agreement may be oral or written.
• However, to avoid disputes in the future it is advisable to put important terms and conditions in writing.
• The written agreement is known as 'Partnership Deed'.

Although not legally compulsory, it is advisable to get the partnership deed registered because of certain legal benefits. 

The merits and limitations of a sole proprietorship firm are as follows :

Merits

• Quick decision making: 
  • A sole proprietor enjoys considerable degree of freedom in making business decisions.
  • Further, the decision making is prompt because there is no need to consult others.
  • This may lead to timely capitalization of market opportunities as and when these arise.
• Confidentiality of information: 
  • A sqle decision making authority enables the proprietor to keep all information related to business operations confidential and maintain secrecy.
  • A sole trader is also not bound by law to publish firms' accounts.
• Direct incentive: 
  • A sole proprietor directjy reaps the benefits of his efforts as he is the sole recipient of all the profit.
  • The need to share profits does not arise as he is the single owner.
  • This provides maximum incentive to the sole trader to work hard.
• Sense of accomplishment: 
  • There is personal satisfaction involved in working for self.
  • The knowledge that one is responsible for the success of the business not just contributes to self satisfaction but also instills in the individual a sense of accomplishment and confidence in one's abilities.
• Ease of formation and closure : 
  • An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities.
  • There is no separate law that governs sole proprietorship.
  • As sole proprietorship is the least regulated form of business, it is easy to start and close the business.

Limitations

• Unlimited Liability: 
  • A great drawback of sole proprietorship is its unlimited liability or high personal risk.
  • The sole proprietor has to bear the entire risk of his business.
  • If the business fails due to errors of judgement or adverse economic conditions, the proprietor has to lose everything.
  • Unlimited liability discourages the expansion of business.
• Limited financial resources: 
  • The financial resources which a proprietary firm can raise are limited to the personal funds and borrowing capacity of the owner.
  • The financial capacity of an individual is usually limited so that business cannot be operated on a size large enough to achieve the economies of scale.
• Uncertain duration: 
  • There is little continuity of operations in a sole proprietorship because the firm is linked with the life of the proprietor.
  • The business may come to a sudden end with the death or physical incapacity of the proprietor.
  • The business sinks and swims with its owner.
• Limited scope for growth : 
  • Due to the limited financial and managerial resources and uncertain duration, the expansion or growth of the firm is restricted. The ease of formation and dissolution may discourage serious though and action resulting in premature death of the business.

Formation and closure

• Hardly any legal formalities are required to start a sole proprietary business though in some cases one may require a license.
• There is no separate law that governs sole proprietorship.
• Closure of the business can also be done easily.
• Thus, there is ease in formation as well as closure of business.

Liability

• Sole proprietors have unlimited liability.
• This implies that the owner is personally responsible for payment of debts in case of the assets of the business are not sufficient to meet all the debts.
• In such situations, owners personal possessions such his home car and other assets could be sold for purpose.

Risk Bearing

• The risk of failure of business has to be born alone by the sole proprietor.
• However if the business is successful, the proprietor enjoys all the benefits.
• He receives the entire profit which becomes a direct reward for his risk bearing.

Control

• The right to run and take decisions with respect to the business lies absolutely with the sole proprietor. He can carry out his plans without any interference from others.

No Separate Entity

• In the eyes of the law no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner.
• As a result the owner is held responsible for all the activities of the business.

Continuity

• Since the owner and business are one and the same entity, the death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.

Merits

• Effective control
  • The Karta has absolute decision making power.
  • This avoids conflicts among members as no one can interfere with his right to decide.
  • This also leads to prompt and flexible decision making.
• Stability in existence
  • The death of the Karta will not affect the business as the next eldest member will then take up the position.
  • Hence operations are not terminated and continuity of business is not threatened.
• Limited liability of members
  • The liability of all the co-partners except the Karta is limited to their share in the business and consequently their risk is well defined and precise.
• Increased loyalty and cooperation
  • Since the business is run by the members of a family, there is a greater sense of loyalty towards each other.
  • Price in the growth of business is linked to the achievements of the: family.
  • This helps in securing better cooperation from all the members.

Limitations

• Limited resources
  • The Joint Hindu Family Business faces the problem of limited capital as it mainly depends on the ancestral property.
  • This limits the scope for expansion of business.
• Unlimited liability of Karta
  • The Karta is burdened not only with the responsibility of decision making and management but also with Unlimited liability.
  • His personal property can be used to satisfy business debts.
• Dominance of Karta
  • The Karta individually manages the business which may at times not be acceptable to other members.
  • This may cause conflicts amongst them and may even lead to break down of the family unit.
• Limited managerial skills
  • Since the Karta cannot he an expert in all areas of management, the business may suffer as a result of his unwise decisions.
  • His inability to decide effectively may even cause financial problems.

• Partnership is a relation between two or more persons who have agreed to coem together to do business and share the profits of the business carried on by all or any one of them acting for all.
• Partnership solves many disadvantages of a sole proprietor firm.
• The factors responsible for choosing this type of organization is as below:-

• Division of Work
  • When work has to be divided among partners according to their aptitude and experience.
• Motivation
  
  • Profits of a partnership business are shared by its partners in a predetermined ratio.
  • Hence, it provides direct motivation to partners to increase the profits of the firm.
• Economy of costs
  • When the entrepreneur wants to reduce the costs of business, they go for partnership as the partners cannot claim remuneration for the work done by them for the business.
  • This results in greater savings in expenses on salaries etc.
• Reduced risk
  • When the business men do not want to bear higher risk individually, they opt for partnership.

Merits of Partnership

• Easy Formation
  • Formation of partnership is easier and no legal formalities are to be observed to establish it.
• Division of Risk
  • In partnership, the risks are to be shared by all the partners.
  • Thus, degree of risk becomes reduced in partnership.
• Business Secrecy
  • The annual accounts and reports of a partnership firm do not require circulation and publicity and, therefore secrecy can be maintained about the business.
• Encouragement of Mutual Trust and Interdependence
  • Each partner is an agent for the others.
  • Therefore, all the partners act with utmost mutual trust.
  • They also develop a sense of interdependence and team spirit.
  • At the same time each partner develops his individuality through his responsibility for others and the firm as a whole.

Limitations of Partnership

• Unlimited Liability
  • The partners, may be personally held liable for the debts of the firm. 
  • Their private property also remains at stake.
  • Due to the dangers associated with unlimited liability, partners are overcautious and play safe.
  • This restricts the growth of the business.
• Instability
  • A partnership firm suffers from the uncertainty of duration because it can be dissolved at the time of death or insolvency of a partner.
  • Sometimes petty quarrels among the partners may also bring the partnership to an end.
  • The discontinuity of the business is not only inconvenient to the consumers and workers but it also a social loss.
• Lack of Public Confidence
  • Since there is no publicity of the working of a partnership through its published periodical accounts and there is absence of legal control over it.
  • The general public may not have full confidence in them.
• Risk of Implied Authority
  • A partner is an agent of the
  • firm. The co-partners can make deals and contracts that would be binding on other partners.
  • Therefore when a partner is negligent or commits a wrong or is doing of fraud, within the scope of his authority other partners are equally liable financially without any limit.
  • Thus the honest and efficient partners may have to pay the penalty for follies of other partners.
• Non-transferability of interest
  • No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners.
  • This makes investment in a partnership firm non-liquid.

Active partners

• The partners who take active part in the partnership are active partners.
• These partners carry on business on behalf of the other partner.

• Sleeping or dormant partners are those who do not take active part in the management of the business.
• Such partners only contribute capital to the firm and are bound by the activities of other partners.
• However they have a share in the profits and losses of the business.

Others

• Active and sleeping partners share profits and losses of the business and are liable for its dues.
• However, there are other types of partners also who may be associated with partnership directly or indirectly.
• They are not full-fledged partners. Such partners are as follows:-
  

• Nominal Partners

  • Nominal partners are those who do not have interest in the business but lend their name to the firm.

  • They do not make any capital contribution and are not entitled to take part in management. They are of two types :

• Partners by holding out
  • If a person by his words or conduct holds out to another that he is a partner. He is called partner by holding out.
  • He will be liable to third parties to pay the debts of the firm.
• Partner by estoppel
  • When a person represents to the outside world by his words or conduct or by lending his name that he is a partner, he becomes liable to third party who advance money or credit to the firm on the basis of such representation.
• Special or Limited Partner
  • He is a partner whose liability is limited to the extent of his capital contributed to the firm.
  • He has no authority to take part in the management of business.
• Partner in Profit only
  • A person who shares in the profit of a firm, but who is not liable for the losses is called 'partner in profit' only.
  • Usually, he has no voice in the management of the firm.

Rights of Partners

1. Every partner has a right to take part in the conduct and management of the firm's business.
2. Every partner has a right to inspect copy, books of accounts and records of the firm.
3. Every partner has the right to an equal share in the profit of the firm, unless otherwise agreed by the partners.
4. Every partner has the right to be indemnified for the expenses incurred and losses sustained by him in the ordinary conduct of the firm's business.
5. Every partner has a right to continue in the firm unless expelled in accordance with the terms of the partnership agreement.
6. Every partner has a right to retire in accordance with the terms of the partnership agreement or with the consent of other partners.

1. Every partner must act diligently and honestly in the discharge of his duties to the maximum advantage of all the partners. 
2. Every partner must act in a just and faithful manner towards each other.
3. Every partner must act within the scope of the authority entrusted to him.
4. Every partner is bound to share the losses of the firm equally unless otherwise agreed.
5. Every partner must indemnify the firm against losses sustained due to his wilful negligence in the ordinary course of business.
6. No partner can transfer or assign his interest in the firm to others without the consent of other partners.
7. Every partner must maintain and render true and correct accounts relating to the firm's business.
8. Every partner should use the firm's property only for the firm's business and interest.
9. No partner can make any secret profit by way of commission on purchases or sales effected on behalf of the firm. If he does so, he will have to surrender the same to the firm. 

• A partnership deed is a written document that contains terms and conditions agreed between the partners who enter together in a partnership venture for profit making.
• Having a partnership deed ensures that potential disputes are avoided by clearly defining the terms of mutual agreement. 

The partnership deed normally has the following contents :

1. Name of the firm.
2. Names and addresses of partners.
3. Nature of business.
4. Place of business.
5. Capital contributed by each partner.
6. Profit sharing ratio.
7. Duties, powers and obligations of all partners.
8. Preparation of accounts and their auditing.
9. Whether interest is payable on capital.
10. Whether interest is charged on drawings.
11. Whether interest is payable on loan provided by partner.
12. Whether salary is payable to partners.
13. Method of solving disputes.
14. Provisions regarding dissolution.

• According to the Partnership Act, 1932, every partnership which can be dissolved at will is known as 'partnership at will'.
• Generally partnerships are at will, unless their duration and purpose is specified.

Partnership for specific purpose

• This partnership is formed for certain predetermined purpose and the partnership is automatically dissolved after the objective is achieved. 

Partnership for specific period

• These partnership are formed for certain predetermined period.
• After the period or in certain cases extended period is over, the partnership is no more.

Ordinary partnership

• All the partnership firms registered under Partnership Act, 1932 are said to be ordinary partnerships.
• If the partnership firm is not registered, it will not be ordinary partnership.

Limited partnership

• The partnership firms, where one or more partners have liability limited to the capital invested by them and the liability of other partners being unlimited is known as limited partnership.
• This partnership is formed on the basis of special agreements.
• Such partnership are not in India.

1. A minimum of two people (as against that of seven in case of a public company) are required to form a private company.
2. A private company may have only two directors whereas public company is required to have at least three directors.
3. It is not required to prepare and file prospectus with the Registrar of Companies.
4. A private company can proceed with the allotment of shares without having raised minimum subscription by way of application money. A public company cannot do so.
5. It can commence business immediately after receiving the certificate of incorporation and it is not necessary to obtain the certificate of commencement of business.
6. It is not necessary to keep an index of membership in a private company while a pubic company must keep such an index.
7. It can issue deferred shares with disproportionate voting rights.
8. A company can grant loans to its directors without the approval of the Government.
9. It is free from the provisions as to general meetings, e.g. service of notice, election of Chairman, proxies, voting and polls.
10. In private company, director can attend the meeting of Board of Directors and can exercise his vote on a matter in which he has an interest.
11. It can appoint any person holding an office or place of profit as directors without passing a special resolution.
12. A private company can refuse to register a transfer or transmission of its shares.
13. It is not required to offer further issue of shares to the existing shareholders on a pro rata basis, i.e., in proportion to their present shareholdings in the first instance. A public company is under legal obligation to do so.

1. They can maintain direct relations with the manufacturers or wholesalers.
2. They can ensure a steady supply of goods and services of high quality at reasonable price.
3. They can help producers in purchase of raw material for production of goods and services.
4. They can help their members sell their goods at a profit.
5. The funds of the society are used in giving loans to needy members on easy terms.
6. Co-operatives also help small farmers to cultivating land collectively.
7. They also help in providing land or flats to their members.

The Merits of co-operative organization are as follows :

Easy to Form: 

• As compared to a joint stock company, it is easy and simple to form a cooperative society.
• The legislative formalities required for its formation are not many.
• It is economical, as the expenses involved in its formation are comparatively less.

Democratic Management

• A cooperative society is managed in a true democratic way.
• All the members have a say in its working.
• They elect a managing committee on the basis of 'one-man-one-vote.'
• This committee looks after the working of the organisation in the general interest of the members.
• It is not controlled by vested interest only.

Limited Liability

• The members' liability remain limited to the extent of capital contributed by them.

Open Membership

• Membership in a co-operative organisation is open to all having a common interest.

State Patronage

• The co-operatives have been adopted by the Government as an instrument of economic policy.
• Therefore, they are assisted in various ways by the Government so as to make them a success.

Scope for Internal Financing 

• Since a cooperative society has to create some compulsory reserves out of its profits, there is enough scope for ploughing back of profits in such organisation.
• This source of internal finance can be utilized for modernization and growth of the co-operatives.

Other benefit

• Certain non-economic benefits are also received by members through co-operatives like credit societies promote habits of thrift.

The Limitations of a co-operative organization are as given below :

Lack of Secrecy

• A co-operative society, being separate legal entity is required to disclose fuller information to its members. Thus, secrets of the business cannot be maintained.

Lack of Motivation

• Since there are restrictions on the rate of dividend, the members of the managing committee do not feel motivated enough to put their best to make the organisation's success.

Limited Size

• Since the principle of co-operation cannot be extended beyond a certain limit, the co-operatives are likely to fail if they choose expansion of their organisation like big joint stock companies.
• Large-scale production or distribution is not suitable for co-operative organization.

Limited Capital

• Co-operatives are usually at a disadvantage in raising capital because of the low rate of return on capital invested by members.

Inefficient Management

• The management is generally inefficient becasue the managing committee consists of part-time and inexperienced people.

Excessive Government Interference 

• The co-operatives are exposed to a considerable degree of regulation by the co-operative department.
• While a certain degree of control is good, too much of it and unwanted interference acts as a deterrent to the voluntary nature of co-operatives and goes against the operational flexibility of the co-operatives and usually affects efficiency of management of the cooperatives.

The different Types of co-operative society are:-

1. Consumers co-operative societies: Consumer co-operatives are organised by consumers to eliminate middle men and to establish good relations with the manufacturers or wholesalers. These co-operatives are formed by consumers to ensure a steady supply of goods and services of high quality at reasonable prices.
2. Producers co-operative societies: Producers co-operatives are formed to help the members in processing inputs for production of goods or services. These societies generally provide raw materials, tools and other facilities to its members.
3. Co-operative marketing societies: Co-operative marketing societies are voluntary associations of small producers, who find it difficult to individually sell their products at a profit. The main purpose of such a society is to ensure a steady and ready market for the output of its members.
4. Co-operative credit societies: Such societies are formed to provide financial help in the form of loan to member. The capital of these societies consist of share capital contributed by the member and the deposits made by them and outsiders.
5. Co-operative farming societies: In co-operative farming societies, small farmers join together and pool their resources for cultivating their land collectively. Their object is to take the benefit of economies of large scale farming and maximizing agricultural output.
6. Co-operative housing societies: They are formed to provide residential accommodation to the members. They undertake the development of land and/or construciton of house/flat on the land.

• A company is defined as a voluntary association of people having separate legal existence, perpetual succession and a common seal.
• The company form of organisation is considered to be most suitable for organising business activities on a large scale.
• Once formed, the company becomes a separate legal entity with a distinct name of its own.

The features of company are as follows :

• Compulsory registration
  • A company has to be registered under the Companies Act, 1956. Without such registrations, no company can come into existence.
• Distinct legal entity
  • A company is regarded as a legal entity separate from its members. Thus, a company carry on business in its own name, enter into contracts buy, sell and hold property, sue and be sued.
• Artificial persons
  • A company is the creation of law and has a distinct entity. It is therefore regarded as an artificial person. The business is run in the name of the company. But because it is an artificial person, its functions are performed by the elected representatives of members, konwn as directors.
• Limited liability 
  • The liability of the members of a company is limited. It is limited to the extent of capital by members contributed. Beyond that amount, the members cannot be personally held liable for payment of the company's debts.
• Transfer of shares
  • The capital of company is divided into parts called shares. Normally the shares of a company are freely transferable by its members. However, transferability is restricted in the case of private company.
• Common seal
  • The company has no physical existence. Every company has a common seal with its name engraved on it. Anyone acting on behalf of the company must use the common seal to bind the company.

Advantages of Company :

• Collection of huge financial resources
  • The biggest advantages of a company organization is that it has the ability to collect large amounts of funds.
  • This is because a company can raise capital by issuing shares to a large number of persons.
  • Shares of small value can be subscribed even by people with small savings.
  • Availability of necessary funds makes it possible for a company to undertake business activities on alarge scale.
• Limited liability
  • Another advantage of the company form of organization is the limited liability of members.
  • With the liability of members limited to the value of their shares, a company is able to attract many people to invest in shares.
  • It is thus in a position to undertake business ventures involving risks.
• Growth and expansion
  • With the large sources at its command, a company can organize business on a large scale, once the business is started on a large scale it gives the company strength to grow and expand.
  • This is because of enough profits which accrue from the economies of large scale organisation and production.
• Efficient management
  • Since a company undertakes large scale activities, it requires the services of expert professional managers.
  • Competent managers can be hired by a company because it commands large financial resources.
  • Thus, efficient management is more easily ensured in a company organisation.
• Public confidence
  • A company enjoys great confidence and trust of the general people.
  • Companies have to disclose the result of their activities and financial position in the annual reports that are avaialble to public. 
  • It is on the basis of the annual reports and other information that investment is made in companies.
• Free transferability of Shares
  • A company permits its members to transfer their shares.
  • This provides liquidity to the member's investment.

Disadvantages of Company:

• Lengthy and expensive legal procedure
  • The registration of a company is a long-drawn process.
  • A number of documents are to be prepared and filed.
  • For preparing documents, experts are to be hired who charge heavy fees.
  • Besides, registration fees have also to be paid to the Registrar of Companies.
• Lack of incentives
  • The company is not managed by shareholder i.e., owners, but by directors and other paid officials.
  • Officials do not have investment in the company and also do not bear the risks.
  • As such, they may not be as much motivated to safeguard the interests of the company as the shareholders.
• Oligarchic management 
  • The company management may seem to be fully democratic, but in actual practice, it is oligarchic i.e. control by a small group of persons.
  • People who are once elected as directors of the company adopt various means to get themselves selected over and again. Such individuals often exploit the company for personal interests rather than working in the interest of shareholders.
• Growth of monopolistic tendencies
  • A company because of its large size has the tendency to grow into monopoly so as to eliminate competition, control the market and charge unreasonable prices to maximize profits.
  • The larger the size of a company, the greater is the possibility of it acquiring monopoly power.
• Speculation
  • In speculation, profits are sought to be made by manipulating price of shares without actually holding shares.
  • A company organisation provides scope for speculation in shares by the directors.
  • Because directors have knowledge of all information about the functioning of the company, they can use it to their personal advantage.
• Excessive government regulations
  • A company is subject to government regulation at every stage of its working.
  • A company has to file regular returns and statements of its activities with the Registrar.

• It is important to choose an appropriate form of organisation because the choice of the form of organisation will determine the authority of the entrepreneur starting the business.
• A business enterprise may take the form of a sole preprietorship, partnership or a joint stock company. 
• The decision to choose a particular form of organisation is very important as after choosing a particular form of organisation, it is very difficult and costly to change form of organisation. Hence, it should be chosen after considerable thought and deliberation.
• For instance, insurance and banking business can be done only by company.
• Size of the business is an important factor for determining the form of an organisation.
• Company is more suitable where operation scale is large.
• Sole tradership and partnership are suitable for relatively small and medium size business.

Other factors which determines the choice of form of ownership are :

1. Capital structure
2. Managerial skills
3. Tax liability
4. Legal formalities etc.

The seleqtion of a suitable form of organisation is generally made after careful consideration of the following factors :

• Nature of business
  • The kind of business activity has a bearing on the form of ownership.
  • If the work requires personal attention such as hair dressing saloons and customised tailoring units, it is generally set up as a sole proprietorship.
  • Units engaged in large scale manufacturing, chain stores are more likely to be companies.
• Degree of control desired
  • A person who desires full and exclusive control over business prefers proprietorship rather than partnership or company because control has to be shared in these cases.
• Degree of risk involved
  • The degree of risk and the willingness of owners to bear it, is an important consideration in the choices of form of organisation.
  • Where the project is risky or where it requires large financial resources.
  • Due to unlimited personal liability the promoter may not like to organise as a proprietorship or a partnership.
• Freedom from government regulations
  • Sole proprietorship and partnership continue to be popular forms of organisation despite the unlimited liability factor associated with them.
  • One of the major reasons for their popularity is the relative freedom they enjoy from government control.
• Durations of business venture
  • Temporary short-term and ad hoc ventures are generally organised as proprietorship or partnership because they are easy to form and dissolve.
  • But where the business interest is permanent or long term the company with its features of perpetual succession is the most appropriate.
• Financial requirements for starting and expanding business
  • Enterprises requiring heavy investment such as the airlines, chemical plants, auto manufacturing units need to be organised and are formed as companies.
  • Similarly, the future requirements of growth and expansion is another relevant factor.

• However, all the above mentioned factors are inter-related and influence each other,
• e.g. financial requirements of a business depend upon the nature of business as well as the scale of operations.
• Similarly, the degree of risk and liability will depend both on the amount invested and the nature of demand for the products of the enterprises.

• After continuous expansion over a period of time a business firm may find it difficult and uneconomical to operate in the existing form of ownership.
• It has to change the form in order to operate successfully with increased size and diversified operations.
  

The main problems of expansion requiring a change in the form of ownership are as follows :

1. Need for larger financial resources,
2. Necessity of internal reorganization
3. Need for expert and specialized management
4. Increase in the risk and the liability of the owners
5. Difficulty of retaining direct control
6. Increased liability for taxation.

• The nature and extent of these problems will depend upon the nature and size of business, the programme of expansion and the existing form of ownership.
• The owners attempt to choose a form of ownership which will help in tackling the problems of expansion and growth in the best possible manner.

The various alternatives available to a business firm are as under :

Existing form Immediate Alternatives

1. Sole Proprietorship Manager vs. Partner Partnership
2. More partners vs. Private company
3. Private company vs. Public Company.

• The choice in each case depends upon a number of factors.

Different alternatives can be evaluated on the basis of the following factors :

Manager vs. Partner

• A sole proprietor whose business is expanding very fast may find it difficult to meet the financial and managerial requirements himself.
• Two courses of action are open to him. He may employ a manager or may take in partners.
• The relative merits and demerits of the two alternatives are described below :

Reorganisation

• • If a manager is employed, no change in the organisational setup of business is required.
  • Only a contract of service has to be made with the selected individual.
  • Taking of partner, on the other hand, requires the preparation of partnership agreement, and even registration of the firm may be desired.

Capital

• • The employment of a manager does not solve the problem of finance.
  • The proprietor himself has to procure additional funds of the business.
  • He does not need however, to share the profits with the manager and can repay the loans out of profits.

Risk and liability

• • If a Manager is employed, the proprietor has to bear all the risks and liability of the business himself.
  • He has to pay interest on loans and salary to the manager.
  • In a partnership, risks are shared and salary need not be paid.

Control by Owners

• • By employing a manager, the proprietor retains effective controls of business.
  • But if he takes a partner he has to share the control with him, unless he takes a sleeping partner who contributes capital but does not take part in management. 

State Regulation and Control

• • Employment of an assistant involves no legal formalities.
  • In partnership also, legal formalities are minimum.
  • There are thus little choice in this respect.

Partnership vs. Private Company

• With futher expansion of business, a sole proprietor is unable to meet the requirements of his business by employing a manager.
• He is then faced with a choice between partnership and private company.
• An expanding partnership firm may also have to decide between more partners and private company.

These two forms of ownership may be compared as under :

Reorganisation

• • No legal formalities are necessary to the formation of partnership.
  • Registration of the firm is not compulsory
  • The incorporation of private company, on the other hand, involves a legal process.

Capital

• • The capital requirements of medium sized business can be met equally well through a partnership and a private company.
  • The maximum number of members of private company (50) is larger then those of a partnership (20 or 10).

Liability

• • In case of a medium-size business of a stable nature, partnership is a better choice as risk is not very high.
  • On the other hand, in case of large firms of a speculative nature, a private company is the best because a limited liability of members is preferable.

Control

• • In a partnership, the original owner has to share the control with partners.
  • In a private company, the owner may be able to retain effective control of business by working as managing director or general manager of the company.
  • In a partnership this can be done by taking a sleeping or inactive partner.

Secrecy

• • A private company has to file its audited accounts with the Registrar of Companies.
  • A partnership firm is not required to do so.
  • There may, therefore, be a greater secrecy of affairs in partnership.

Private Company vs. Public Company

Reorganisation

• • A private company enjoys several exemptions and privileges which are not available to a public company. For example, a private company can commence business immediately after incorporation while a public company must raise the minimum subscription and obtain the certificate of commencement of business

Capital

• • A private company can rise limited financial resources due to a limit on its membership and restrictions on issue of prospectus.
  • A public company can, on the other hand, secure vast amount of financial resources.
  • There is no limit on the number of members in a public company and funds can be raised from investors in different parts of the country and from abroad.

• Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms because of its advantages.

Motivation to work

• As the sole proprietor is solely responsible for the profit/loss of business. Hence, he put hard and sincere efforts to maximise the profit.

Retention of business secret

• Full secrecy is possible only in sole proprietorship as compared to other forms of business ownership.
• The sole proprietor can keep the secrets and spring a surpirse on his competitors every time he makes a business move.

Personal contacts with customers

• A business can propser only when it caters in every way to the tastes and attitudes of its customers and takes prompt corrective action with regard to customer's complaints and suggestions.
• This is possible only in sole proprietorship form of business organisation.

Quick decisions

• The sole proprietorship can take immediate decisions in regard to any matter concerning his business.
• Complete freedom in decision making is also accompanied by freedom in implementing the decision.

Mutual agency

• Partnership is a form of business organisation which is carried on by all or any one acting for all i.e. every partner is both an agent and a principal.
• He is an agent of other partners as he represents them and thereby binds them through his acts.
• He is a principal as he can be bound by the acts of other partners.

Decision making and control

• The partners share amongst themselves the responsibility of decision making and control of day to day activities.
• Decisions are generally taken with consent.
• However, if one partner takes any decision for the betterment of the firm, that is binding on all the partners of the firm.

(b) If the form of organisation is partnership, then both the partners have to bear this loss in their profit sharing ratio or capital ratio, if any.
If no ratio has been decided by the partners in the beginning, then the creditors can recover their debt from the personal property of White and Brown equally.

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