Business concerns are established with the objective of making
profits. They can be established either by one person or by a group
of persons in the private sector by the government or other public
bodies in the public sector. A business started by only one person is
called sole proprietorship. The business started by a group of
persons can be either a Joint Hindu Family or Partnership or Joint
Stock Company or a Co-operative form of organization.
there are various forms of business organization
Hindu Family Firm
of business organization are legal forms in which a business
enterprise may be organized and operated.
forms of organization refer to such aspects as ownership, risk
bearing, control and distribution of profit. Any one of the above
mentioned forms may be adopted for establishing a business, but
usually one form is more suitable than other for a particular
enterprise. The choice will depend on various factors like the nature
of business, the objective, the capital required, the scale of
operations, state control, legal requirements and so on.
of the forms of private ownership listed above the first three forms
(1, 2, and 3) may be
described as non corporate and the remaining ( 4 and 5 ) as corporate
forms of ownership. The basic difference between these two categories
is that a non-corporate form of business can be started without
registration while a corporate form of business cannot be set up
without registration under the laws governing their functioning.
your progress- 1
out the various forms of business organization.
the forms of organization of any seven organizations which you are
familiar with and list out who heads them.
of an ideal form of organization
we discuss the features, merits and demerits of different forms of
organization, let us know the characteristics of an ideal form of
organization. The characteristics of an ideal form of organization
are found in varying degrees in different forms of organization. The
entrepreneur, while selecting a form of organization for his
business, should consider the following factors.
of Capital: The form of organization should facilitate the raising
of the required amount of capital at a reasonable cost. If the
enterprise requires a large amount of capital, the preconditions for
attracting capital from the public are a) safety of investment b)
fair return on investment and c) transferability of the holding.
of Liability: A business enterprise may be organized on the basis of
either limited or unlimited liability. From the point of view of
risk, limited liability is preferable. It means that the liability
of the owner as regards the debts of the business is limited only to
the amount of capital agreed to be contributed by him. Unlimited
liability means that even the owners’ personal assets will be
liable to be attached for the payment of the business debts.
relationship between Ownership, Control and Management: The
responsibility for management must be in the hands of the owners of
the firm. If the owners have no control on the management, the firm
may not be managed efficiently.
A sole proprietorship or one man’s business is a form of
business organization owned and managed by a single person. He is
entitled to receive all the profits and bears all risk of ownership.
important features of sole proprietorship are:
business is owned and controlled by only one person.
risk is borne by a single person and hence he derives the total
liability of the owner of the business is unlimited. It means that
his personal assets are also liable to be attached for the payment
of the liabilities of the business.
business firm has no separate legal entity apart from that of the
proprietor, and so the business lacks perpetuity.
set up sole proprietorship, no legal formalities are necessary, but
there may be legal restrictions on the setting up of particular type
proprietor has complete freedom of action and he himself takes
decisions relating to his firm.
proprietor may take the help of members of his Family in running the
of formation: As no legal formalities are required to be observed.
As all profits belong to the owner, he will take personal interest
in the business.
of Action: There is none to interfere with his authority. This
freedom promotes initiative and self-reliance.
Decision: No need for consultation or discussion with anybody.
Can adapt to changing needs with comparative ease.
Touch: comes into close contact with customers as he himself manages
the business. This helps him to earn goodwill.
Secrecy: Maintaining business secrets is very important in today’s
Utility: Encourages independent living and prevents concentration of
resources: one man’s ability to gather capital will always be
Liability: Will be discouraged to expand his business even when
there are good prospects for earning more than what he has been
doing for fear of losing his personal property.
of Continuity: uncertain future is another handicap of this type of
business. If the sole proprietor dies, his business may come to an
Economies of Large Scale: As the scale of operations are small, the
owner cannot secure the economies and large scale buying and
selling. This may raise the cost of production.
of Sole Proprietorship Form
the discussion of the advantages and disadvantages of sole
proprietorship above, it is clear that this form of business
organization is most suited where:
amount of capital is small
nature of business is simple in character requiring quick decisions
to be taken
contact with the customer is essential and
size of demand is not very large.
types of conditions are satisfied by various types of small business
such as retail shops, legal or medical or accounting profession,
tailoring, service like dry cleaning or vehicle repair etc. hence
sole proprietor form of organization is mostly suitable for these
lines of businesses. This form of organization also suits those
individuals who have a strong drive for independent thinking and
highly venturous some in their attitude.
Joint Hindu Family, also known as Hindu Undivided Family (HUF) is a
non-corporate form of business organization. It is a firm belonging
to a Joint Hindu Family. It comes into existence by the operations of
law and not out of contract.
In Hindu Law, there are two schools of thought viz
Dayabhaga which is applicable in Bengal and Assam, and Mitakshara
which is applicable in the rest of India. According to Mitakshara
school, the property of the Joint Hindu Family is inherited by a
Hindu Family from his father, grandfather and great grandfather, thus
three successive generations in male line (son, grandson and great
grandson ) can simultaneously inherit the ancestral propriety. They
are called coparceners in interest and the senior most member of the
Family is called karta. The Hindu succession act 1956, has extended
to the line of co-parceners interest to female relatives of the
deceased co-parcener or male relative climbing through such female
relatives. Under the Dayabagha law the male heirs become members only
on the death of the father.
Some of the important features of the Joint Hindu
Family are as follows
The business is generally managed by the
father or some other senior member of the Family he is called the
Karta or the manager.
Except the Karta, no other member of the
family has any right of participation in the management of a Joint
Hindu Family firm
The other members of the family cannot
question the authority of the Karta and their only remedy is to get
the family dissolved by mutual agreement.
If the Karta has misappropriated the funds of
the business, he has to compensate the other co-parceners to the
extent of their share in the Joint property of the family
For managing the business, the Karta has the
power to borrow funds, but the other co-parceners are liable only to
the extent of their share in the business. In other words the
authority is limited.
The death of any member of the family does
not dissolve the business of the family
Dissolution of the Joint Hindu Family can
take place only though mutual agreement
Stability: The existence of the HUF does not
come to an end with the death of any co-parcener, hence there is
Knowledge and experience: There is scope for
younger members of the family to get the benefit of the knowledge
and experience of the elder members of the family.
No Interference: The Karta has full freedom
to take decisions without any interference by any member of the
Maximum Interest: As the Karta’s
liability is unlimited, he takes maximum interest in running the
Specialization: By assigning work to the
members as per their knowledge and experience, the benefits of
specialization and division of work may be secured.
Discipline: The firm provides an opportunity
to its members to develop the virtues of discipline, self-sacrifice
Credit Worthiness: Has more credit worthiness
when compared to that of a sole proprietorship.
No Encouragement: As the benefit of hard work
of some members is shared by all the members of the family, there is
no encouragement to work hard.
Lazy and Inactive: The Karta takes the
responsibility to manage the firm. This may result in the other
members becoming lazy.
Members Initiative: The Karta alone has full
control over the business and the other members cannot interfere
with the management of the firm. This may hamper members initiative.
Duration: The life of the business is
shortened if family quarrels take precedence over business interest.
Abuse of Freedom: There is scope for the
Karta to misuse his full freedom in managing the business for his
This form of business organization which at one
time was popular in India is now losing its popularity. The main
cause for its decline is the gradual dissolution of the Joint Hindu
Family system, it is being replaced by sole proprietorship or
Form of Organization
when a proprietor finds it’s difficult to handle the problems
of expansion, he thinks of taking a partner. In other words, once a
business grows beyond the capacity of a sole proprietorship and or a
Joint Hindu Family, it becomes unarguably necessary to form
partnership. It means that partnership grows out of the limitations
of one-man business in terms of limited financial resources, limited
managerial ability and unlimited risk. Partnership represents the
second stage in the evolution of ownership forms.
simple words, a Partnership is an association of two or more
individuals who agree to carry on business together for the purpose
of earning and sharing of profits. However a formal definition is
provided by the Partnership Act of 1932.
4 of the Partnership Act, 1932 defines Partnership as “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”
procedure of formation: the formation of partnership does not
involve any complicated legal formalities. By an oral or written
agreement, a Partnership can be created. Even the registration of
the agreement is not compulsory.
The capital of a partnership is contributed by the partners but it
is not necessary that all the partners should contribute equally.
Some may become partners without contributing any capital. This
happens when such partners have special skills, abilities or
experience. The partnership firm can also raise additional funds by
borrowing from banks and others.
The control is exercised jointly by all the partners. No major
decision can be taken without consent of all the partners. However,
in some firms, there may partners known as sleeping or dormant
partners who do not take an active part in the conduct of the
Every partner has a right to take part in the management of the
firm. But generally, the partnership Deed may provide that one or
more than one partner will look after the management of the affairs
of the firm. Sometimes the deed may provide for the division of
responsibilities among the different partners depending upon their
of partnership: The duration of the partnership may be fixed or may
not be fixed by the partners. In case duration is fixed, it is
called as “partnership for a fixed term. When the fixed period
is over, the partnership comes to an end.
Liability: The liability of each partner in respect of the firm is
unlimited. It is also joint and several and, therefore any one of
the partner can be asked to clear the firm’s debts in case the
assets of the firm are inadequate for it.
separate legal entity: The partnership firm has no independent legal
existence apart from that of the persons who constitute it.
Partnership is dissolved when any partner dies or retires. Thus it
on transfer of share: A partner cannot transfer his share to an
outsider without the consent of all the other partners.
of formation: partnership can be easily formed without expense and
legal formalities. Even the registration of the firm is not
resources: when compared to sole-proprietorship, the partnership
will have larger resources. Hence, the scale of operations can be
increased if conditions warrant it.
organization of business; as the talent, experience, managerial
ability and power of judgment of two or more persons are combined in
partnership, there is scope for a better organsation of business.
interest in business: as the partners are the owners of the business
and as profit from the business depends on the efficiency with which
they manage, they take as much interest as possible in business.
decisions: as partners meet very often, they take decisions
regarding business policies very promptly. This helps the firm in
taking advantage of changing business conditions.
judgement: as partners possesses different types of talent necessary
for handling the problems of the firm, the decisions taken jointly
by the partners are likely to be balanced.
partnership is free from legal restriction for changing the scope of
its business. The line of business can be changed at any time with
the mutual consent of the partners. No legal formalities are
involved in it.
of risk; the losses of the firm will be shared by all the partners.
Hence, the share of loss in the case of each partner will be less
than that sustained in sole proprietorship.
to minority interest: important matters like change in the nature of
business, unanimity among partners is necessary hence, the minority
interest is protected.
of unlimited liability: the principle of unlimited liability helps
in two ways. First, the partners will be careful in their business
dealings because of the fear of their personal properties becoming
liable under the principle of unlimited liability. Secondly, it
helps the firm in raising loans for the business as the financers
are assured of the realization of loans advanced by them.
risk; as the liability is joint and several, any one of the partners
can be made to pay all the debts of the firm. This affects his share
capital in the business and his personal properties.
of harmony: some frictions, misunderstanding and lack of harmony
among the partners may arise at any time which may ultimately lead
to the dissolution.
resources: because of the legal celing on the maximum number of
partners, there is limit to the amount of capital that can be
to play safe: because of the principle of unlimited liability, the
partners tend to play safe and pursue unduly conservative policies.
legal entity: the partnership has no independent existence apart
from that of the persons constituting it, i.e it is not a legal
the death, retirement or insolvency of a partner leads to the
dissolution of the partnership. Further even any one partner if
dissatisfied with the business, can bring about the dissolution of
partnership. Hence partnership lacks continuity
of public confidence: no legal regulations are followed at the time
of the formation of partnership and also there is no publicity given
to its affairs. Because of these reasons, a partnership may not
enjoy public confidence.
advantages and drawbacks of partnership stated above indicate that
the partnership form tends to be useful for relatively small
business, such as retail trade, mercantile houses of moderate size,
professional services or small scale industries and agency business.
when compared to sole proprietorship partnership is suitable for a
business bigger in size and operations.