A STUDY ON BUSINESS ORGANISATION

M.ARAVINDH SURYA
21615
B.COM (HONOURS) ACCA
III RD YEAR
 CHAPTER
INTRODUCTION: -

A business organisation is an entity that was formed to carry out activities to achieve
vision and missions. This form of business is governed by legal systems such as the Property
Act, Contract Act, Incorporation Rules, and National Insurance Act, among others.

The three most prevalent types of business enterprises are sole partnerships,
proprietorships, and limited liability companies (or corporations). In the first type, a single
person owns and supervises the entire operation on a day-to-day basis. The great majority of
businesses are in this situation.

In the case of an LLP, which includes huge legal or accounting companies, advertising
agencies, and brokerage houses, the partnership can include 2 – 20 or more members. This sort
of business is owned by the partners, and they may earn different portions of the profits
depending on their investment or participation.

The firm must be reconstructed as a new partnership when a partner leaves or a new partner
enters. The limited-liability corporation, or company, is the third category, and it refers to
incorporated groupings of people—that is, a group of individuals treated as a legal entity with
powers, property, and obligations separate from those of its members. This type of business is
also legally distinct from its employees, whether they are employees, shareholders, or both; it
can form legal relationships with them, execute contracts with them, and sue and be sued by
them

(a) Sole proprietorship,

(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint s
 Do you often go in the evenings to buy registers, pens, chart papers, etc., from a small
neighborhood stationery store? Well, in all probability in the course of your transactions, you
have interacted with a sole proprietor.
Sole proprietorship is a popular form of business organization and is the most suitable form for
small businesses, especially in their initial years of operation. Sole proprietorship refers to a form
of business organization which is owned, managed and controlled by an individual who is the
recipient of all profits and bearer of all risks. This is evident from the term itself. The word
“sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one
who is the only owner of a business.
This form of business is particularly common in areas of personalized services such as beauty
parlors, hair salons and small-scale activities like running a retail shop in a locality.

FEATURES: -
Salient characteristics of the sole proprietorship form of organization are as follows:
(I) Formation and closure: There are no separate law that governs sole proprietorship. Hardly
any legal formalities are required to start a sole proprietary business, though in some cases one
may require a license. Closure of the business can also be done easily. Thus, there is ease in
formation as well as closure of business.
(ii) Liability: Sole proprietors have unlimited liability. This implies that have to bring in Rs.
20,000 from her personal sources even if she has to sell her personal property to repay the firm’s
debts.
(iii) Sole risk bearer and profit recipient: The risk of failure of business is borne all alone by
the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits.
He receives all the business profits which become a direct reward for his risk bearing.
(iv) Control: The right to run the business and make all decisions lies absolutely with the sole
proprietor. He can carry out his plans without any interference from others.
Rationalized

JOINT HINDU FAMILY BUSINESS: -

Joint Hindu family business is a specific form of business organization found only in India. It is
one of the oldest forms of business organization in the country. It refers to a form of organization
wherein the business is owned and carried on by the members of the Hindu Undivided Family
(HUF). It is governed by the Hindu Law. The basis of membership in the business is birth in a
particular family and three successive generations can be members in the business.
The business is controlled by the head of the family who is the eldest member and is called
karat. All members have equal ownership right over the property of an ancestor and they are
known as co-parceners. birth. It is governed by the Hindu Succession Act, 1956.
(ii) Liability: The liability of all members except the karat is limited to their share of co-
parcener property of the business. The karat, however, has unlimited liability.

(iii) Control: The control of the family business lies with the karat. He takes all the decisions
and is authorized to manage the business. His decisions are binding on the other members.

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

Partnership
The inherent disadvantage of the sole proprietorship in financing and managing an expanding
business paved the way for partnership as a viable option. Partnership serves as an answer to the
needs of greater capital investment, varied skills and sharing of risks.
The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have
agreed to share the profit of the business carried on by all or any one of them acting for all.”

REGISTRATION: -
Registration of a partnership firm means the entering of the firm’s name, along with the relevant
prescribed particulars, in the Register of firms kept with the Registrar of Firms. It provides
conclusive proof of the existence of a partnership firm.
It is optional for a partnership firm to get registered. In case a firm does not get registered, it
is deprived of many benefits. The consequences of non-registration of a firm are as follows:
(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, and
(c) The firm cannot file a case against the partners.
In view of these consequences, it is therefore advisable to get the firm registered. According to
the India Partnership Act 1932, the partners may get the firm registered with the Registrar of
firms of the state in which the firm is situated. The registration can be at the time of formation or
at any time during its existence. The procedure for getting a firm registered is as follows:
1. Submission of application in the prescribed form to the Registrar of firms. The application
should contain the following particulars:
Name of the firm
Location of the firm
Names of other places where the firm carries on business
The date when each partner joined the firm
Names and addresses of the partners
DURATION OF PARTNERSHIP: -

 This application should be signed by all the partners.

 Deposit of required fees with the Registrar of Firms.
 The Registrar after approval will make an entry in the register of firms and will
subsequently issue a certificate of registration.

COOPERATIVE SOCIETY: -
The word cooperative means working together and with others for a common purpose.

The cooperative society is a voluntary association of persons, who join together with the
motive of welfare of the members. They are driven by the need to protect their economic
interests in the face of possible exploitation at the hands of middlemen obsessed with the desire
to earn greater profits.

The cooperative society is compulsorily required to be registered under the Cooperative

Societies Act 1912. The process of setting up a cooperative society is simple enough and at the
most what is required is the consent of at least ten adult persons to form a society. The capital of
a society is raised from its members through issue of shares. The society acquires a distinct legal
identity after its registration

LEARNING OBJECTIVES: -

After studying this chapter, you should be able to:

 Factors to Be Considered While Choosing an organization
 Types of Organizations

LEARNING OBJECTIVES: -
Identify different forms of business organization;
explain features, merits and limitations of different forms of business organizations;
distinguish between various forms of organizations; and
discuss the factors determining choice of an appropriate form of business organization
identify different forms of business organization;
explain features, merits and limitations of different forms of business organizations;
distinguish between various forms of organizations; and
discuss the factors determining choice of an appropriate form of business organization
ADVANTAGES OF PARTNERSHIP ORGANIZATION: -
A partnership organisation has certain advantages as compared to the sole proprietorship
or joint – stock company organisation. We discuss below these advantages:
1. Easy formation: A partnership can be easily formed as no legal formalities are to be
observed to establish it. At the same time, unlike a company, not much of to be observed to
establish it. At the same time, unlike a company, not much of expenses are incurred for its
formation.
2. Flexibility: A partnership organisation is highly flexible as well as mobile. Changes
can be introduced without\lct’1 difficulty. The necessary additional capital can be raised, new
partners be introduced including changes in the, place and object of the firm. Business of the
firm can’ also be expanded or contracted according to the needs.
3. Pooling of resources and skill. Unlike the sole proprietorship, under a partnership,
several persons pool their capital, resources, skill, expertise, experience and services etc. Two or
more persons are always better than one and bi that sense partners strive to work with zeal for the
better. It enables combination of such individuals who may not be in a position to do anything
alone.
4. Division of risks: Under a partnership, the risks of business are divided among the
partners and are not shouldered by one person alone. Thus, it is more useful for business with
large investments.
5. Strong credit position. Unlimited liability of the partners enhances the creditworthiness
of the firm. The credit can be extended to it to the limit of the value of property owned by the
partners, and not confined to the extent of capital contributed by the, partners. Further, it restricts
on the speculative and reckless activities of the partner with, which they always remain vigilant.
6. Less incidence of tax. As compared to joint-stock company, the burden of taxes on a
form or its partners individually is lower.
7. Encouragement of mutual trust, personal element in business: Partners act in
cooperation and thus mutual faith, trust and goodwill are maintained. They maintain personal
relations with each other and take personal care, to promote the business of the firm. This
personal element in business that is not found in a company is highly useful. The existence of
partnerships rests on mutual faith and goodwill and that way it encourages the spirit of
helpfulness and instils the qualities of honesty, sincerity, responsibility, initiative and self-
reliance.
DISADVANTAGES: -
While-the partnership organisation has the above advantages; it has the following serious
limitations which cannot be ignored:
Limited resources. In spite of pooling its of resources by in partners, it is not possible to raise-
huge amount of capital and engage specialists required for modern business or Industrial units.
Partners may be rich but their capacity to contribute capital is limited as compared to the needs
of modem industrial complexes.
 ii. Unlimited liability: One of the serious limitations of a partnership organisation is that the
liability of partners is not limited. The partners like the sole trader unlike the shareholders of a
company, may be personally held liable for the debts incurred by the firm. Their private property
also remains at stake. Moreover, liability is cumulative. Further, a partner may also be called
upon to compensate for the misdeeds and dishonesty of his fellow partners along with his own
acts.

iii. Instability: Theoretically, it may appear that the partnership organisation is more stable than
the sole proprietorship but in practice it is not so. It is often found that a firm’s business comes to
an end on account of petty quarrels among the partners. If a partner is dishonest and short-
tempered, it may become difficult for other partners to carry on business with him.’ Any
misunderstanding may prove ruinous for it. It is also unstable because death, retirement, and
insolvency of a partner may dissolve the partnership. It is quite true that the partnership provides
better means to perpetuate itself “but existence of that ‘self’ at any given time is, more precious.”
iv. Lack of harmony of interest. Unlike a sole proprietorship, it is not possible to maintain
harmony of interests among the partners. There is always the possibility of friction. The partners
may follow a conservative policy to avoid risk of their private property. Their combined
judgement often may not prove useful. If mutual cooperation is lacking, prompt decisions may
also not be possible. There is the possibility of leakage of business secrets and matters which
may’ affect the business adversely.

About 35% of the SSIs in India existed as partnership concerns 6f which; 21% are joint-
family partnerships and 14% partnership concerns. Very often, small entrepreneurs with business
acumen and training are handicapped by lack of capital; or there may be need of a wealthy man
with managerial capacity. Partnership organisations grew essentially out of the failures and
limitations of the sole proprietorship form of organisation. The formation and management of a
partnership organisation is governed by the provisions of the Indian Partnership Act of 1932.
According to it, a “partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or by anyone of them acting for all.” A partnership deed is
essential for this type of organisation. The Partnership Act, 1932 outlines the rights and duties of
a partner. The liability of a partnership is unlimited.

The ownership pattern of small units is given in the above table. As indicated in the table,
61% of the units are single proprietary small – scale industrial units, followed by family
partnerships, i.e., businesses owned by two or more members of the family. Only 14% of these
units are non – family partnerships, where the ownership is held by a small group which does not
constitute a family. Among the small – scale industrialists, there is a strong tendency to keep the
business within the family.
 As a general rule, a nonfamily partnership is restricted to craftsmen pooling their
resources; alternatively, it may be a venture of a group of merchants. An industry – wise analysis
shows that in the printing presses, general engineering and soap industries, 20% of the units fall
in the category of non – family partnerships. In these cases, a large amount of capital investment
is necessary, and the family resources are generally too meagre for such a venture. The capital
resources are increased by converting the industrial unit into a non – family partnership.

DECIDING FACTORS ON ORGANISATION WHILE STARTING A BUSINESS: -

It is worthwhile for the entrepreneur of a new or proposed business to be familiar with the
following factors in making a choice, for a suitable form of ownership:
1. Type of business - service, trade, manufacturing
2. Scope of operations - volume of business and the size of the market area served.
3. Degree of direct control and management desired by the owners.
4. Amount of capital funds required.
5. Size of the risk.
6. Continuity of the concern.,
7. Costs and procedures and relative freedom from government regulation.
8. Adaptability of administration.
9. Comparative tax advantage, etc. An entrepreneur has to weigh these major factors, as
well as others in deciding the form of organisation while starting a business. Many a
times, an enterprise, like a rivet, may be started as a proprietary concern, converted into a
partnership when like-minded people come together, promoted into a joint-stock
company when it grows substantially big. This organizational evolution is an ongoing
process through interaction with the social, political and economic environment. The best
and the bright always stand out as the most outstanding
The best invariably prospers. Prosperity leads .to growth. And growth ultimately shows
up in increased size. So, in a free market economy, the size of the business (enterprise) is a. fair
indicator of excellence. Managing a larger enterprise is without doubt more difficult that running
a small one. And so, it is likely that many small enterprises are more profitable than their larger
counterparts. But this in no way detracts from the achievements of the latter. Big is always better,
by way of its inherent strength, the capacity to bear opted shocks and stresses and simply by the
fact that it has grown so big in a world where roughly everyone has had the same opportunities.