Introduction and Evaluation to Forms of Business Organization: Concepts

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The compilation of these Forms of Business Organisations Notes makes students exam preparation simpler and organised.

Introduction and Evaluation to Forms of Business Organisations

A business entity is an organization that needs funds, labour, machines, or inputs to provide goods or services to the customers with the transactions through the medium of money or in monetary terms. But such an organization can take many forms. Let us take a look.

For a business owner first and the most important decision is to decide how the business organization should be structured. There are many factors that decide the choice of business structure:

  • Size and nature of the business.
  • Control level
  • The level of “structure”.
  • Willingness to take risks for any legal suits if any.
  • The implication of tax
  • Profit (or loss) of the business.
  • Access to cash.

There are different types and different forms of ownership of a business organization. Let us take a look.

Types of Firms

1. Service Business
Service type firm provides the professional which are skilled in nature, expertise people which have experiences, advice and suggestions and other similar products. For example salons, repair shops, schools, banks, accounting firms, law, etc.

2. Merchandising Business
This type of business buys products in bulk which helps to get the product at low cost at wholesale price and then sells the same at a higher rate or maximum retail price, which are known as buy and sell the business. Thus the profit is generated by purchasing the product at a lower cost and then selling it to the market at the maximum retail price.

3. Manufacturing Business
A manufacturing business buys the product with the intention of using them as materials in making a new product. A manufacturing business is a combination of raw material, labour, and factory overheads in its production process. The manufactured goods will then be sold to the customers.

4. Hybrid Business
Hybrid businesses are companies that may be classified into more than one type of business. Nonetheless, these companies may be classified according to their major business interest.

Business Organization

Forms of Business Organization

These are the basic forms of business organizations. Let us look at some of their features.

1. Sole Proprietorship
A sole proprietorship is a business owned only by one person. It is easy to set up and is the least costly among all forms of ownership. The sole proprietorship form is usually adopted by a small business entity.

Characteristics of Sole Proprietorship:

  • The sole proprietorship form of a business organization is owned and governed by an individual owner.
  • There are no legal formalities involved in the working pattern of a sole proprietor.
  • The business unit does not have an entity separate from the owner.
  • The sole proprietor enjoys the profit & bears the losses alone.
  • Liability is unlimited for the owner.

2. Partnership
Here the business is governed by more than one person who contributes resources to the entity. The partners share the profit on a pre-decided percentage of share of the business among themselves.

Characteristics of Partnership:

  • To form a partnership firm at least two persons are required. The maximum limit on the number of persons is 10 for banking business and 20 for other business.
  • The partnership is done through an agreement among the persons who have agreed to come together for the same purpose. Such persons are bind by contract.
  • There must be an agreement among the partners to share the profits and the losses of the partnership firm.
  • There must be an agency relationship between the partners. Every partner is principal as well as an agent of the firm.

3. Corporation
The business entity and the owner is different and separate in a corporation. The share of stock represents the ownership in a stock corporation. The board of directors controls the activities of the corporation.

Characteristics of Corporation:

  • A company is a separate legal identity. It exists independent of its members. A company can own property, borrow money, enter into contracts, sue & be sued.
  • The formation of the company is a complicated process. Before starting the functioning of the company, preparation of several documents and compliance with several legal requirements is required.
  • As the company is a creation of the law, it can be brought to an end only by law. It will only cease to exist when the winding up of the company is done legally. The company continues to exist even when members come & go.
  • The Board of directors controls and manages the affairs of the company. The directors are accountable to the shareholders for the working of the company.
  • The liability of the members is limited. It is limited to the extent of the capital contributed by them in a company.
  • The Company acts through its Board of Directors, being an artificial person. Through a common seal, the Board of Directors enters into an agreement with others by indicating the company’s approval.

4. Joint Hindu Family Business
This form of business organization is found only in India. All the members of the Hindu Undivided Family manage and control the business with the direction of the head of the family. Governing law of this business is Hindu Law. Karta, who is the eldest member of the family, is the head of HUF (Hindu Undivided Family).

Characteristics of Joint Hindu Family:

  • At least two members of the family should be there to form Joint Hindu Family Business. Membership is by birth, it does not require any agreement.
  • The Karta of HUF has unlimited liability. Members’ (co-parceners) liability is limited to the extent of their share in the property of the business.
  • Karta is the controller of the family business. Management of business lies in the hands of Karta. All decisions of the business are taken by Karta.
  • Even if Karta dies, the business continues. The position of Karta after his death is taken by the next eldest member of the family. However, members with mutual consent can terminate the business.
  • When there is a birth in the HUF, he/she is included in the business. Hence, minors can also be members of the business.

5. Co-operative Society
A cooperative society is a voluntary association of members who come together with the motive of mutual welfare.

Characteristics of Co-operative Societies:

  • As it is a voluntary association, the membership is also voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire.
  • It is compulsory to get a registration of the co-operative society. It is a separate legal identity to the society.
  • The co-operative society is not affected by the entry or exit of its members.
  • There is the limited liability of the members of the co-operative society. Liability is limited to the extent of the amount contributed by members as capital.
  • An elected managing committee has the power to take decisions. Members have the right to vote, by which they elect the members who will constitute the managing committee.
  • The cooperative society works on the principle of mutual help & welfare.

Example:

Question 1:
A person who takes a risk to produce goods and services in search of profit–
a. entrepreneur
b. magistrate
c. profiteer
d. bailiff
Answer:
a. entrepreneur.
When a lone person does business to earn profits it is a proprietorship and he is known as a proprietor or entrepreneur.