Forms of Business Organisations Class 11 Notes Business Studies Chapter 2 - CBSE
Chapter: 2
What Are Forms Of Business Organisations ?
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Different forms of business organisation
- Sole Proprietorship
- Partnership
- Joint Hindu Family Business
- Cooperative Societies
- Joint Stock Company
Sole Proprietorship
An organisation which is owned, managed and controlled by an individual.
Features of a Sole Proprietorship
- Formation
- Unlimited liability
- Bears all the risks
- Individual Profit sharing
- Own Control
- No separate entity
- Continues till owner wishes
- Closed without any legal formalities
Advantages of a Sole Proprietorship
- Quick decision making
- Confidentiality of information
- Direct incentive
- Sense of achievement
- Personal relationship with stakeholders
- Easy formation and closure
Limitations of a Sole Proprietorship
- Limited resources
- Limited life of a business concern
- Unlimited liability
- Limited managerial ability
Partnership
Partnership is an association of two or more individuals who agree to pursue business activity for a common objective by investing money, sharing risks and profits while working with utmost good faith.
Features of a Partnership Business
- Established as per the provisions of Partnership Act 1932.
- Unlimited liability.
- All partners share the business risk.
- All decisions are taken with mutual consent.
- Continuity of partnership business depends upon the terms agreed up amongst partners at the time of its formation.
- Mutual agency.
- Transferability of shares.
- Optional for partnership business to be registered.
Advantages of a Partnership Business
- Ease of formation and closure
- Balanced decision-making
- Raising more funds
- Risk sharing
- Secrecy
Limitations of a Partnership Business
- Unlimited liability
- Limited resource
- Possibility of conflicts
- Risk of mutual agency
- Lack of continuity
- Lack of public confidence
Types Of Partners
- Active Partner: Partner who contributes capital, shares profits, risks, responsibility and has unlimited liability and is bound by mutual agency.
- Sleeping or dormant Partner: Partner who contributes capital, share profits, risks, unlimited liability, is bound by mutual agency but does not take part in day to day activities of business.
- Secret Partner: Partner who contributes capital, shares profits, risks and responsibilities, has unlimited
liability and is bound by mutual agency but his status is unknown to the outsiders. - Nominal Partner: A partner who does not contribute capital or share business responsibilities or profits but allows the partnership business to lend his/her name and reputation. He has unlimited liability and is bound by mutual agency.
- Partner by Estoppel: An individual who is not a partner but projects as a partner to outsiders. He may not contribute to business but has unlimited liabilities.
- Partner by holding out: An individual who is not a partner but is projected as a part like other partners of the partnership. He has unlimited liability if he fails to clarify status to outsiders.
- Minor Partner: An individual of age below 18 years who enjoys business benefit by mutual consent of all partners but he is legally not a partner.
Types Of Partnership On The Basis Of Duration
- Partnership at will: Business continues till all partners agree to do so.
- Partnership by purpose: Partnership formed for a specific task or project comes to an end once the task or the project is completed.
- Partnership by time: Partnership formed for a specific period comes to an end expiry of the time for which it is formed.
Types of partnership by Liabilities
- General Partnership
- Limited Partnership
Partnership Deed
It is a written agreement, which details all the terms and conditions under which the Partnership business functions. It generally includes:
- Name of firm
- Nature of business and location of business
- Duration of business
- Investment made by each partner
- Ratio in which profits and losses would be shared
- Duties and obligations of the partner
- Salaries and withdrawals of the partners
- Interest on capital and interest on drawing
- Terms governing admission, retirement and expulsion of a partners
- Preparation of accounts and their auditing
- Procedure for dissolution of the firm
Registration Of A Partnership Business
It is optional for a partnership business to get registered with the Registrar of Firms of the state in which firm is situated.
Registration Procedure
- Filing of an application with all details of partnership business, signed by all directors.
- Payment of required fee.
- Once the application is approved, Certificate of Registration is received.
Consequences of Non-Registration
- A partner of an unregistered firm cannot file a suit against the firm or other partners.
- The firm cannot file a suit against third parties, and
- The firm cannot file a case against one or more partners of the firm.
Joint Hindu Family Business
An oldest form of business owned and controlled by members of Hindu Undivided Family (HUF) and governed by Hindu law.
Features of Joint Hindu Family
- It is governed by the Hindu Succession Act, 1956.
- Karta liability is unlimited.
- All business activities controlled by Karta.
- The business can be discontinued if all the members mutually agree to do so.
Advantages of Hindu Undivided Family
- Complete control of business with Karta thus effective decision making.
- Business continues till all members wish to continue.
- Members enjoy liability limited to their share in business property.
- All members work with common objective of growth.
- Family members have sense of belongingness and loyalty.
- Business can be started with inherited property.
Disadvantages of Hindu Undivided Family
- Limited managerial ability
- In case members do not agree to the leadership, business may come to an end.
- Karta has unlimited liability thus his personal property is at risk.
- Difference of opinion among members may cause conflict.
- Ancestral property being main source of finance, thus limited funds.
Cooperative Society
An organisation of voluntary people working for a common purpose with an aim to protect economic and social interests of the members.
Formation of a Cooperative Society
- Minimum ten people can form a cooperative society.
- Cooperative Societies must be registered under the Cooperative Societies Act, 1912.
- Capital is raised amongst the members through issue of shares.
Features of Cooperative Society
- Voluntary membership
- Legal status
- Limited liability
- Control
- Service motive
- Source of finance
Types of Cooperative Societies
- Consumers’ cooperative societies
- Producers’ cooperative societies
- Marketing cooperative societies
- Farmer's cooperative societies
- Credit cooperative societies
- Cooperative housing societies
Advantages of Cooperative Society
- Equality in voting status
- Limited liability
- Societies separate from its members allow continuity of operations
- Economy in operations
- Support from government
- Ease of formation
Limitations of Cooperative Society
- Limited resources
- Inefficiency in management
- Lack of secrecy
- Government control
- Differences of opinion
- No Motivation
Joint Stock Company
A form of business organisation established under The Companies Act, 2013 an artificial person with separate legal identity. The funds for a company are raised by issue of share borrowings.
Features of Joint Stock Company
- Artificial person
- Separate legal entity
- Company is formed by fulfilling legal formalities as stated under Companies Act, 2013.
- Perpetual succession
- Managed and controlled by Board of Directors.
- Limited liability.
- Common seal
- Risk bearing
- Transferability of shares
Merits of Joint Stock Company
- Limited liability
- Transfer of interest
- Perpetual existence
- Scope for expansion
- Professional management
Limitations of Joint Stock Company
- Complexity in formation
- Lack of secrecy
- Impersonal work environment
- Numerous regulations
- Delay in decision making
- Oligarchic management
- Conflict in interests
Types Of Companies
- Private Company
- Public Company
- One Person Company
Stages In The Formation Of A Private Limited Company
- Promotion
- Incorporation
- Subscription of capital
- Commencement of business
Important documents in the process of Company formation
- Memorandum of Association
- Articles of Association
- Prospectus
- Consent of Proposed Directors
- Agreement
- Statutory Declaration
Factors affecting the choice of form of Business Organisation
- Cost of Formation
- Transfer of ownership
- Liability
- Continuity
- Regulations
- Managerial Skills
- Flexibility
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