SUMMARY OF FORMS OF BUSINESS ORGANISATION

Sole Proprietorship
It is a form of organization owned, managed and controlled by an individual (also known
as a sole proprietor) who is responsible for bearing all the risk and receiving all the
profit.

Features

1. Formation and closure: It can be established and closed without any legal formalities.

2. Liability: The liability of the sole proprietor is unlimited in this form of business
organization.

3. Sole risk bearer and profit recipient: Being a sole owner, he bears all the risk and
receives all the profits.

4. Control: All the decisions are taken and implemented in the organization by the
owner.

5. No separate entity: Both owner and business are considered as one in the eyes of
the law.

6. Lack of business continuity: Business can be continued till the owner wishes to.

Merits

● Quick decision making: Prompt decision making as all the decisions are to be taken
by the owner.

● Confidentiality of information: Being a sole owner, it is easy to maintain business

secrecy.

● Direct incentive: All the profits are enjoyed by the owner as there is no one to share
profits.

● Sense of accomplishment: Successful business provides satisfaction to the owner

and a sense of achievement.

● Ease of formation and closure: No legal formalities for the formation and closure of
business which makes it easy to start and end the business.

Limitations
● Limited resources: Business can be funded from savings of the owner or money
borrowed from friends, or relatives.

● Limited life of a business concern: Continuity of the business depends on the health
and state of mind of the owner.

● Unlimited liability: In case business fails repayment of debts, his personal assets are
at risk.

● Limited managerial ability.

Joint Hindu Family Business

In this form of business organization, the business is owned and managed by the
members of an undivided Hindu family, with the possibility of three successive
generations as members of the business.

Features

● Formation: A Hindu Undivided Family is formed with at least two members of a family
having ancestral property. It is governed by Hindu Succession Act, 1956.

● Liability: All the members of the family except Karta have limited liability up to their
share in the business property.

● Control: All the activities in the business organization are controlled by Karta.

● Continuity: It can be discontinued if all the members of the family agree to do so.

● Minor members: Membership in the organization is by birth.

Merits

● Effective control: Complete control of business with ‘Karta’ thus effective

decision-making.

● Continued business existence: Business continues till all the members wish to
continue and control is transferred to the next elder member in case of the death of
‘Karta’.

● Limited liability of members: Members of the family enjoy liability limited to their share
in the business party.

● Increased loyalty and cooperation: Family members have a sense of belongingness

and loyalty, hence, all work with a common objective of growth.
Limitation

● Limited resources: Business can be funded mainly from ancestral property, hence
limiting the financial resources.

● Unlimited liability of Karta: The personal property of ‘Karta’ is at risk as he has

unlimited liability.

● Dominance of Karta: Differences of opinion among members and ‘Karta’ may cause
conflict amongst them.

● Limited managerial skills: Karta may not have knowledge and expertise of all the
functions performed in the business

Partnership
As per the Partnership Act 1932, a partnership is a relation between people who agree
to share the profits of a business that is carried on by all or one of them acting for all.

Features

● Formation: Business is established as per the provisions of the Partnership Act 1932.

● Liability: All the partners in the business have unlimited liability.

● Risk bearing: All the risk in the business is shared by all the partners.

● Decision making and control: All the decisions are taken after the consent of all the
partners and each partner shares the responsibility for running the business.

● Continuity: Continuity depends upon the partnership deed among the partners at the
time of its formation.

● Number of partners: Minimum 2 and maximum 50 members [as per the Companies
(Miscellaneous) Rules 2014}

● Mutual agency: Each partner is the owner as well as the agent of the firm and agent
to other partners. Merits

● Ease of formation and closure: Business can be established and closed with the
consent of all the partners as the registration is optional.

● Balanced decision making: All the decisions are taken by consent partners as
partners undertake responsibilities as per their expertise.
● More funds: Funds are provided by all the partners, which increases the scope for
large-scale business operations.

● Sharing of risks: Business risks and responsibilities are shared among all the
partners.

● Secrecy: It is easy to maintain business secrecy as there is no need to submit

financial results. Limitations

● Unlimited liability: Each partner’s liability is extended to their personal property.

● Limited resources: Availability of Finance is limited due to the restriction of several

partners.

● Possibility of conflicts: All the partners may have different opinions which creates
conflict among them.

● Lack of continuity: Any conflict between partners or the death of a partner may bring
business to an end.

● Lack of public confidence: It is difficult for an outsider to ascertain the true financial
position as there is a lack of availability of financial reports.

Types of Partners

● Active partner: A partner who contributes capital, shares profits and losses,
participates in management and has unlimited liability.

● Sleeping or dormant partner: Partner who contributes capital, shares profits and
losses and has unlimited liability but does not participate in management.

● Secret partner: This partner participates in management operations secretly, but does
contribute in profits and losses.

● Nominal partner: Partner who does not contribute capital and does not share profit
and losses but allows partnership business to project him or her as partner.

● Partner by estoppel: An individual who is not a partner but projects himself/herself as

a partner to an outsider and has unlimited liability.

● Partner by holding out: An individual who is not a partner but is projected as a partner
by other partners of the partnership firm and his liability is unlimited.

Types of partnership can be categorised based on duration and liability:

Classification of partnership based on duration

● Particular Partnership: This type of partnership is formed to perform a particular

task over a particular period. This partnership is ended once the task is
completed.
● Partnership at will: This type of partnership depends on the partners until they
are eager to continue.

Classification of partnership based on liability

● Limited Partnership: In this partnership, only one member has unlimited liability
while the rest of the members have limited liability.
● General Partnership: In this type of partnership, all the partners have joint and
unlimited liability.

Partnership Deed
It is defined as a written document where all the terms and conditions related to the
partnership are mentioned. It has the following clauses:

● Name of firm
● Nature of firm
● Duration of partnership
● Duties and obligations of partners
● Valuation of assets
● Interest on capital and interest on drawings
● Profit-loss sharing ratio
● Salaries and withdrawals of the partners.
● Preparation of accounts and their auditing.
● Procedure for dissolution of the firm
● Method of solving disputes.

Registration

In the partnership firm, getting the company registered is optional with the registrar
regarding this form the company was established.

Process of getting registered

● Submitting of application in the prescribed form to the Registrar of Firms.

● Fee deposition with the Registrar.
● Receiving a certificate of registration after the Registrar is satisfied.

Consequences of not getting registered

● If the company is not registered, the partner has no right to file a complaint or sue
any of the partners or the partnership firm.
● The firm cannot sue third parties.
● The firm cannot file a case against one or more partners of the firm

Procedure for getting firm registered

● Submission of application in prescribed form with the Registrar of Firms.

● Fee deposition with the Registrar.

● Receiving a certificate of registration after the Registrar is satisfied