Business Law : Different Forms of Business Organization

Introduction

Here we will discuss different forms of business organization. We will also have a look at advantages and disadvantages of each one of them.

We will cover 5 forms of Business Organization
  1. Sole Proprietorship
  2. Hindu Undivided Family
  3. Partnership Firm
  4. Company
  5. Co-operative society

Sole Proprietorship

This one is the simplest and oldest form of business organization. Tea Vendor, a Kirana Store, Small Shops are example of this type of business organization.

Here individual have exclusive control over business. He may use his own skills and individuals, or may employ few individuals.

Few points about Sole Proprietorship
  • This is owned by ONE man/woman/any gender. but only by One person
  • Absolute control over business
  • Liability of Sole Proprietor is unlimited. You may loose your house for repayment! better go for one person company
  • Individual earns all the profits. :)
  • No government regulations to control the sole proprietorship
  • No need for formal registration or any other boring government process
  • Business comes to end with death or insolvency or incapability of individual, unless Son/Daughter/Someone takes over it.

Good thing about Sole Proprietorship (Merits)

  • No legal formalities
  • Full profit 
  • Relief from boring government processes like registration, auditing etc.
  • Easy to start
  • Secrecy 
  • Offers scope to flexibility so that business can adapt to changes
  • Efficient as owners directly manage the business

Bad things about Sole Proprietorship(Demerits)

  • Unlimited Liability
  • No large capatal
  • Uncertainty for continuity. During Corona pandemic, these business suffered the most. Government also didn't do anything for such business.
 Let's move on to next form of business. i.e Hindu Undivided Family

Hindu Undivided Family

These business form is only available for Hindus. Uniform Civil Code will take this away. Ok Let's discuss what is this.

When some property is inherited to the co-parceners, then Hindu Family business become a business by these co-parceners

Generally such business will be managed by Karta, the head of family. 

Such businesses comes into existence due to operation of Hindu Law. Our ancient system had something of this sort, and our constitution guarantee us religious freedom.

Important features of these business

  • Membership arises out of birth
  • Death or insolvency of member/karta does not affect the membership. Remaining co-parceners will remain the members

Good things about HUF Business (Merits)

  • Equal sharing profit. Actually this point is good and bad also.The lazy one will also get same share
  • Younger generation gets the privilege of acquiring expertise without much difficulty
  • Financial Security of Family and Family members

Bad things about HUF Business (Merits)

  • Equal sharing of Profit. No incentive for hard work.
  • Not a merit based.
  • Karta may misuse his power
 
Next is Partnership Firm. Here are posts about Indian Partnership Act.

Partnership Firm

Partnership is defined as :

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
What are the essential elements of partnership?

  • Association, profit sharing
  • agreement between parties
  • mutual agency. 
  • Minimum 2 members needed to form 
  • Partners should carry lawful business. Dawood and Hakeem Lukka are not partners

You can read more in detail here. Covering all those things here will make this post sad. :(

However we see advantages and disadvantages of partnership firms.

Good things about partnership firms (Merits)

  • Registration is not mandatory
  • Not much of the government regulations in day to day business.
  • Sharing of risk, as there are multiple persons
  • Efficient in decision making, because liability is unlimited. Partners have to be careful.

Bad things about partnership firs (Demerits) 

  • Uncertainty about continuity after death/incapacity/insolvency of partners
  • Unlimited Liability
  • Not transparent.
  • Partner's liability for mistake of other partners.
 
Now let's check the bigger form  i.e Company 
 

Company

Well, we have whole Companies Act, 2013 to deal with this form of business. Here we will discuss what company mean and what are the advantages and disadvantages of Company.

The act doesn't kind of give the definition. It says something like "Company is Company... ". OK. but what is it ?

Company is
  • Incorporated entity
  • It's voluntary association of persons
  • It have joint capital divided into Transferable shares. For example share capital of 10,000,00, with 10000 shares of 100 Rs each divided among members
  • Members of Company have limited liability. (Generally, but there could be company with unlimited liability also)
  • Company have common seal
  • Company have perpetual succession
  • Company could be public/private/small/one person/holding/subsidiary/nidhi and what not. .Refer this for classification of companies
  • Its artificial person

Merits of Company

  • Company can raise large capital for investment
  • Shareholders have limited liability
  • Continuity of company not affected
  • Shares can be transferred with ease, except in case of Private Company 

Demerits/Disadvantages of company

  • Huge legal formalities. Just to register a company you have to submit documents which would run into more pages than bulky novel 
  • There is distinction between ownership and management of company. In many case where Company commits fraud, nobody gets punishment.
  • Few member of the company actually share the power for years.
  • In public companies, you have to show profits to members/shareholder/investor, this puts undue pressure and many a time Companies are involved in malpractices.

Co-Operative Society

Co-Operative organization is
  • Association of persons
  • Usually of limited means (resource)
  • Where Association is voluntary
  • Association purpose is to achieve common economic end
  • Its a democratically controlled organization (In many cases powerful one be the one who actually controls)
  • It have fair share of risk and benefits
  • Management committee is generally constituted from it's members
  • It have separate legal identity like Company
Famous example is AMUL (Anand Milk Union Limited). It benefits normal folks like you and me.

Advantages of Co-operative Society

  • Easy to form
  • Benefits to it's members
  • Members have limited liability
  • Separate legal entity independent of owners
  • Perpetual succession

Demerits/disadvantages

  • Not capable to raise large capital
  • Interference from state government via regulation
  • They are not good with transparency and some co-operative manages their affairs in opaque way.

Conclusion

Do you wonder why we have different forms of business organization? For simple reason, that one size doesn't fit all. Different business have different requirement. Many businesses like Electricity Utilities, Oil Refineries needs huge amount of capital hence Company is most suitable. Small Tea shop doesn't require much capital and even We can start, hence Sole proprietorship is suitable. (Now we have one person company in Company law).

Each of these forms have certain demerits too.





 




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