choice of organization

Prof. Vanita Joshi, SOM, SIMS, Indore

11

choice of organization

Contents Part A- SOLE PROPEREITORSHIP Part B- PARTNERSHIP Part C- JOINT STOCK COMPANY Part D- CO-OPERATIVES
22

Part- A SOLE PROPRIETORSHIP

33

Sole Proprietorship
Sole proprietorship is a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

This individual has a right to all of the profits and bears all of the liability for the debts and obligations of the business. To establish a sole proprietorship , a person merely needs to obtain whatever local & state licenses are necessary to begin operations.
eg:- grocery stores in your city, restaurants in your city, stationary shops etc.
44

55

Characteristics of Sole Proprietorship

Single ownership No sharing of profit & losses Low capital One-man control Unlimited liability Almost no legal formalities

EASE OF FORMATION : Less formality & fewer restrictions are associated with a sole proprietorship firm. SOLE OWNERSHIP OF PROFIT : The proprietor is not required to share profits with anyone. DECISION MAKING & CONTROL VESTED IN ONE OWNER : No co-owners or partners must be consulted in running the operation. 66

Advantages of Sole Proprietorship

FLEXIBILITY : Management is able to respond quickly to business needs in the form of day to day management decisions as governed by various laws & good sense. RELATIVE FREEDOM FROM GOVERNMENTAL CONTROL : Except for requiring necessary licenses , very little governmental interference occurs in the operation. FREEDOM FROM CORPORATE BUSINESS TAXES : Proprietors are taxed as individual taxpayers and not as businesses.

77

Disadvantages of Sole Proprietorship

UNLIMITED LIABILITY : The individual proprietor is personally responsible for all business debts. LACK OF CONTINUITY : the enterprise may be terminated if the owner becomes ill or dies. LESS AVAILABLE CAPITAL : Proprietorships have less available capital than other types of business organizations

88

RELATIVE DIFFICULTY OBTAINING LONG-TERM FINANCING : Because the enterprise rests exclusively on one person, it often has difficulty raising longterm capital. RELATIVELY LIMITED VIEWPOINT AND EXPERIENCE : The operation depends on one person , and this individuals ability , training , and expertise will limit its direction and scope.
99

Part-B PARTNERSHIP

1010

Partnership
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business

1111

Contd..
12 12

Partnership is a legal relation between two or more persons to share the profits & losses of the business carried on by all or any of them acting for all

13 13

Characteristics of Partnership

Two or more members Partnership agreement Lawful business Competence of partners Sharing of profits Unlimited liability Voluntary registration No separate legal existence Restriction on transfer of interest Continuity of business

Types of Partners
14 Active partner

The partners who actively participate in the day-to-day operations of the business are known as active partners. They contribute capital and are also entitled to share the profits of the business. They also share the losses that the business faces. Sleeping or dormant partner Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any.

14

Contd..
Nominal partner
15 These 15

partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the business of the firm. However, they do remain liable to third parties for the acts of the firm. Minor as a partner In special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.

Section 4 of Indian partnership Act, 1932

Partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all. The persons who have entered into partnership with one another are Individually called Partners and collectively a Firm
1616

Characteristics of Partnership
1.

Association of two or more persons : Partnership is an association of two or more persons agreeing to carry on business & share profit or loss. Agreement : The partnership comes in existence by an agreement, either written or implied & not by the status or process of law as in joint family business. Carrying on a business: Agreement should be for the purpose of carrying on a business.

2.

3.

1717

4. Profit-Sharing: The agreement between the partners must be to share the profits . It is not essential that all the partners must share the losses also. There may be a provision in the partnership deed that a particular partner or partners shall not bear losses. 5. Business can be carried on by all or any of the partner acting for all: The business of partnership can be carried on by all or any one of the partners acting as agent of the other partners.
1818

Rights of Partners
Every partner has a right to take part in the management of the business. Every partner has a right to be consulted about the affairs of the partnership business. Every partner has a right to inspect the books of account and have a copy of the same. Every partner has a right to share the profits (losses) with others in the agreed ratio.

1919

A partner has the right not to allow the admission of a new partner. On proper notice, a partner has the right to retire from the firm.

2020

Duties of Partners
To devote time & attention to the business of the partnership. To carry on the business diligently & with the greatest common advantage. To hold & use the property of the firm only for the firm. To act within the authority. To make good the loss that may have been caused by his willful neglect or breach of trust. 2121

Partnership Deed
Description of the Partners: address of the partners. Name &

Description of the firm: Name & address of the firm. Nature of the business Commencement of the business: Date of commencement of partnership. Capital contribution: The amount of capital to be contributed by each partner.
2222

Interest on Capital: If interest on capital is to be allowed on capital. Interest on Drawings: If interest is charged on drawings. to

Profit-sharing ratio: Ratio in which profits or losses are to be shared by the partners. Goodwill: The manner in which goodwill of the firm will be valued in then case of its reconstitution. Accounting Period: The date on accounts shall be closed every year. which
2323

Rights & duties of partners Duration of Partnership: The period for which partnership is established. If it is at will, the notice that will be required if any partner wishes to retire. Settlement of accounts in Case of Dissolution of firm: The manner in which accounts shall be settled when the firm is dissolved.

2424

Advantages of Partnership
25 25

Easy to form Availability of large resources Better decisions Flexibility in operations Sharing risks Protection of interest of each partner Benefits of specialization

26 26

Disadvantages of Partnership
Unlimited liability Uncertain life Lack of harmony Limited capital No transferability of shares

27 27

Businesses suitable for Partnership legal structure

A partnership firm is suitable in case of business where the initial capital requirement is medium i.e. it is neither too large nor too small. Business like retail and wholesale trade or small manufacturing units can be successfully started by partners. In a partnership firm persons having different ability, managerial talent, skill and expertise join together. So it is most suitable for construction business, legal firms etc. where each partner contributes the best as per his specialization and experience.

Part-C

Joint stock company

2828

Joint Stock Company

A Joint Stock Company is a voluntary association of persons for profit, whose capital is divided into transferable shares and ownership is required membership.

2929

FEATURES
Artificial Person Created by Law Fixed Capital Limited Liability Perpetual Succession Democratic Management
3030

TYPES OF COMPANIES

On the basis of Incorporation

On the basis of Ownership On the basis of Liability

Public Private Government Holding Subsidiary

Charted Statutory Registered

Unlimited

Limited -By Shares -By Guarantee

Foreign Collaboratio 3131 n&

ADVANTAGES
Permanent Existence Limited liability Availability of Large Capital Transferability of Shares Tax Relief Diffused risk
3232

DISADVANTAGES
Excessive Legal Formalities Speculation in Shares Fraud by Promoters Lack of Secrecy

3333

34 34

Joint Stock Company (private &public companies)

Joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership. The Indian Companies Act 1956 defines a company as an artificial person created by law , having a separate legal entity, with perpetual succession and a common seal.

35 35

Difference between private & public company

Private company

Public company

Can be formed by at least two members having minimum paid-up capital of not less than rupees 1 lakh. The total membership of these companies

A minimum 7 members are required with the minimum paid-up capital of ruprrs5 lakhs. There is no restriction on maximum number of

36 36

Characteristics of Joint Stock Company

Legal formation Artificial person Separate legal entity Common seal Perpetual existence Limited liability Democratic management

37 37

Advantages of Joint Stock Company

Large financial resources Limited liability Professional management Large scale production Research and development

38 38

Disadvantages of Joint Stock Company

Difficult to form Excessive government control Delay in policy formation

FORMATION
The formation of a company, right from the origin of idea to establish a company goes through four different stages. Stage-I Promotion 1. Discovery of a business idea 2. Investigation and Verification 3. Assembling 4. Financing the Proposition Stage-II Incorporation 1. Preparation of MOA and AOA 2. Filing of necessary documents for registration 3. Issue of Certificate of Incorporation
3939

Stage-III Raising of capital 1.Issue of prospectus 2. Filing of Prospectus with the Registrar 3. Allotment of Shares 4. Issue of Share Certificates Stage-IV Commencement of business 1.Submission of necessary documents to Registrar of Company. 2.Issue of Certificate of Commencement of Business.
4040

Businesses Suitable for Joint Stock Legal Structure

A joint stock company form of business organization is found to be suitable where the volume of business is large and huge financial resources are needed. Since members of a joint stock company have limited liability it is possible to raise capital from the public without much difficulty. This form of organization is also suitable for businesses which involve heavy risks. Again, for business activities which require public support and confidence, joint stock form is preferred as it has a separate legal status. Certain types of businesses, like production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilizers, cement, etc., are generally organized in the form of joint stock company.
4141

Part-D

CO-OPERATIVE Societies

4242

Co-operative Societies
Cooperative is an association of persons usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organization. A cooperative may also be defined as a business owned and controlled equally by the people who use its services or by the people who work there. Cooperative enterprises are the focus of study in the field of cooperative economics.
4343

Contd..
Co-operatives are association of persons united voluntary to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise. It is a business organization owned and operated by a group of individuals for their mutual benefit.
4444

Open Membership

Features of Co-operative Societies

Voluntary Association Democratic Management Service Motive Separate Legal Entity Self-Help Through Mutual Cooperation Reserve Fund
4545

OBJECTIVES
Render service rather than making profit Mutual help instead of competition Self help instead of dependence

4646

Consumers Cooperatives

Types of Co-operative Societies

This is an organization of consumers. It is formed by consumers in order to protect their own interest, its aim is to eliminate intermediaries from the distribution channel. Producers Cooperatives It is an organization of workers formed to produce commodities. These are classified as i)Raw Material producing Co-Op ii) Producers Co-Op
4747

Credit Cooperatives These societies are formed to provide financial support to the members. The society accepts deposits from members and grants them loans at reasonable rates of interest in times of need. Housing Cooperatives These societies are formed to provide residential houses to members. They 4848

Building Cooperatives Members of a building cooperative pool resources to build housing, normally using a high proportion of their own labor. When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved. Agricultural Cooperatives These societies are formed by small farmers to work jointly and thereby enjoy the benefits of large-scale farming.
4949

Marketing Cooperatives These societies are formed by small producers and manufacturers who find it difficult to sell their products individually.

5050

formation
A Co-operative Society can be formed as per the provisions of the Co-operative Societies Act, 1912. At least ten persons having the capacity to enter into a contract with common economic objectives, like farming, weaving, consuming, etc. can form a Co-operative Society. A joint application along with the bye-laws of the society containing the details about the society and its members, has to be submitted to the Registrar of Co-operative Societies of the concerned state. After scrutiny of the application and the byelaws, the registrar issues a Certificate of Registration.

5151

Requirements for Registration: 1. Application members with the signature of all

2. Bye-laws of the society containing: (a) Name, address and aims and objectives of the society; (b) Names, addresses and occupations of members; (c) Mode of admitting new members; (d) Share capital and its division.
5252

53 53

Advantages of Co-operative society

Easy formation Open membership Democratic control Limited liability Elimination of middlemens profit Self assistence Stable life

54 54

Disadvantages of Cooperative society

Limited capital Problems in management Lack of motivation Lack of co-operation Dependence on government

55 55