Key Notes: Forms of Business Organisation | Business Studies (BST) Class 11 - Commerce PDF Download

Forms of Business Organisation

Sole Proprietorship:

• Formation and closure: Easy to establish and close without legal formalities.
• Liability: Unlimited liability of the owner.
• Sole risk bearer and profit recipient: Owner bears all risks and enjoys all profits.
• Control: Owner makes all decisions and manages the business.
• No separate entity: Owner and business are considered one legally.
• Lack of business continuity: Business continues as long as the owner desires.

Merits:

• Quick decision-making.
• Confidentiality of information.
• Direct incentive for the owner.
• Sense of accomplishment.
• Ease of formation and closure.

Limitations:

• Limited resources.
• Limited business continuity.
• Unlimited liability.
• Limited managerial ability.

Joint Hindu Family Business:

Features:

• Formation: Requires at least two members with ancestral property.
• Liability: Limited liability for family members except Karta.
• Control: Karta manages all activities.
• Continuity: Can be discontinued with family consensus.
• Minor members: Membership by birth.

Merits:

• Effective control.
• Continued business existence.
• Limited liability of members.
• Increased loyalty and cooperation.

Limitations:

• Limited resources.
• Unlimited liability of Karta.
• Dominance of Karta.
• Limited managerial skills.

Partnership:

Features:

• Formation: Governed by the Partnership Act 1932.
• Liability: Partners have unlimited liability.
• Risk bearing: All partners share business risks.
• Decision making and control: Decisions require partner consensus.
• Continuity: Depends on the partnership deed.
• Number of partners: 2 to 50 members.
• Mutual agency: Each partner is an owner and agent of the firm.

Merits:

• Ease of formation and closure.
• Balanced decision making.
• More funds available.
• Sharing of risks.
• Secrecy.

Limitations:

• Unlimited liability.
• Limited resources.
• Possibility of conflicts.
• Lack of continuity.
• Lack of public confidence.

Cooperative Societies:

Features:

• Voluntary membership: Open to individuals with common interests.
• Legal status: Separate legal identity, registration is mandatory.
• Limited liability: Members' liability limited to their capital contribution.
• Control: Elected managing committee.
• Service motive: Focus on mutual help.

Merits:

• Equality in voting status.
• Limited liability.
• Stable existence.
• Economy in operations.
• Government support.
• Ease of formation.

Limitations:

• Limited resources.
• Inefficiency in management.
• Lack of secrecy.
• Government control.
• Differences of opinion.

Joint Stock Company:

Features:

• Artificial person: Separate legal entity.
• Formation: Governed by Companies Act.
• Perpetual succession: Continues regardless of members.
• Control: Managed by Board of Directors.
• Liability: Limited liability for shareholders.
• Common seal: Acts as official signature.
• Risk sharing: Shareholders bear risks.

Merits:

• Limited liability.
• Transferability of shares.
• Perpetual existence.
• Scope for expansion.
• Professional management.

Limitations:

• 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:

• 2 to 200 members.
• Restricted share transfer.
• Cannot raise funds from the public.
• Uses "Private Limited" in the name.

Public Company:

• Minimum 7 members, no maximum limit.
• Free share transfer.
• Can issue shares to the public.
• Uses "Public Limited" in the name.

Choice of Form of Business Organisation:

• Cost and ease in setting up: Sole proprietorship is easy and cost-effective, while a company is complex and costly.
• Liability: Sole proprietorship and partnership have unlimited liability, while companies have limited liability.
• Continuity: Companies and HUF enjoy perpetual existence.
• Management ability: Companies allow division of work among professionals.
• Capital consideration: Companies are suitable for large-scale operations.
• Degree of control: Sole proprietorship allows complete control, while other forms may involve shared control.
• Nature of business: Sole proprietorship and partnership are suitable for trading and services, while manufacturing may opt for a company.