details of business organizations

1. TYPES OF BUSINESS ORGANISATIONS
Deepanjali
Msc 1st yr

2. TYPES OF BUSINESS ORGANIZATION
1. Sole Proprietorship
2. Partnership
3. Companies

3. SOLE PROPRIETORSHIP
 The word “sole” implies “only”, and
“proprietor” refers to “owner”
 Sole trader is the person who carries
business exclusively by and for himself
 Ownership and management of the business
by a single individual
 Hence, a sole proprietor is the one who is the
only owner of a business

4. FEATURES
 1. Ease of formation
 No legal formalities
 No requirement of registration or payment of fee
 Ease of retiring in case of failure
 2. Liability
 Unlimited liability
 Owner is personally responsible for payment of debts
 3. Sole risk bearer and profit recipient
 Risk of failure of business is borne all alone
 Receives all the business profits which become a direct
reward for his risk bearing

5. FEATURES
 4. Control
 The right to run the business and make all decisions lies
absolutely with the sole proprietor.
 5. No separate entity
 In the eyes of the law, no distinction is made between the sole
trader and his business.
 6. Lack of business continuity
 Death, insanity, imprisonment, physical ailment or bankruptcy of
the sole proprietor will have a direct effect on the business and
may even cause closure of the business.

6. MERITS
 1. Quick decision making
 Enjoys considerable degree of freedom in making business
decisions
 2. Confidentiality of information
 Information is kept confidential
 Not bound to publish firm’s account
 3. Direct incentive
 Directly reaps the benefits
 Maximum incentive to the sole trader to work hard

7. MERITS
 4. Sense of accomplishment
 Personal satisfaction involved in working for oneself
 5. Ease of formation and closure
 Entering into business with minimal legal formalities
 Least regulated form of business

8. LIMITATIONS
 1. Limited resources
 Limited to his/her personal savings and borrowings from others
 2. Limited life of a business concern
 Eyes of the law the proprietorship and the owner are considered
one and the same
 3. Unlimited liability
 4. Limited managerial ability
 Assume the responsibility of varied managerial tasks such as
purchasing, selling, financing, etc.

9. PARTNERSHIP
 According to the Indian Partnership Act, 1932
partnership is
 “the relation between persons who have agreed
to share the profit of the business carried on by
all or any one of them acting for all.”

10. FEATURES
 1. Formation
 Governed by the Indian Partnership Act, 1932
 A legal agreement wherein the terms and conditions
governing are specified
 Points out that the business must be lawful and run
with the motive of profit
 Two people coming together for charitable purposes
will not constitute a partnership
 2. Liability
 Unlimited, Personal assets may be used for repaying
debts

11. FEATURES
 3. Risk bearing
 Share losses in the same ratio
 4. Decision making and control
 Share amongst themselves the responsibility of
decision making and
 Control of day to day activities
 5. Continuity
 Death, retirement, insolvency or insanity of any
partner can bring an end to the business

12. FEATURES
 6. Membership
 Minimum number of members is two
 Maximum number, in case of banking industry is ten
and in case of other businesses it is twenty
 7. Mutual agency
 Business carried on by all or any one of the partners
acting for all

13. MERITS
 1. Ease of formation and closure
 An agreement between the prospective partners
 No compulsion with respect to registration of the firm
 2. Balanced decision making
 Partners can oversee different functions according to their
areas of expertise
 3. More funds
 Capital is contributed by a number of partners
 4. Sharing of risks
 Reduces the anxiety, burden and stress on individual
partners
 5. Secrecy
 Not legally required to publish its accounts and submit its
reports

14. LIMITATIONS
 1. Unlimited liability
 2. Limited resources
 Restriction on the number of partners
 Capital investment is usually not sufficient to support
large scale business operations
 3. Possibility of conflicts
 Difference in opinion on some issues may lead to
disputes
 Decisions of one partner are binding on other partners

15. LIMITATIONS
 4. Lack of public confidence
 A partnership firm is not legally required to publish its
financial reports or make other related information
public
 5. Lack of continuity

16. TYPES OF PARTNERS
 1. Active partners
 Contributes capital
 Participates in the management of the firm
 Shares its profits and losses
 Liable to an unlimited extent to the creditors of the firm
 2. Sleeping or dormant partner
 Do not take part in the day to day activities
 Everything else same as active partners
 3. Secret partner
 Association with the firm is unknown to the general public

17. TYPES OF PARTNERS
 4. Nominal partner
 Allows the use of his/her name by a firm
 Does not contribute to its capital
 Does not take active part in managing the firm
 Does not share its profit or losses
 Liable, like other partners, to the third parties, for the
repayments of the firm’s debts

18. COMPARISON
Type Capital
contribution
Management Share in
profits/losses
Liability
Active Partner Contributes
Capital
Participates in
Management
Share Unlimited
Sleeping
Partner
Contributes
Capital
Doesn’t
Participate in
Management
Share Unlimited
Secret Partner Contributes
Capital
Participates in
Management
Share Unlimited
Nominal
Partner
Doesn't
Contribute
Capital
Doesn’t
Participate in
Management
Doesn’t share Unlimited

19. TYPES OF PARTNERSHIP
 Classification on the basis on duration
1. Partnership at will
 Continues as long as the partners want
 Terminates if one partner gives notice of withdrawal
2. Particular partnership
 Builds for a purpose
 Dissolve as soon as the purpose is finished

20. TYPES OF PARTNERSHIP
 Classification on the basis of liability
1. General Partnership
 Liability of partners is unlimited and joint
 Partners enjoy the right to participate in the management of
the firm
 Registration of the firm is optional
2. Limited Partnership
 The liability of at least one partner is unlimited whereas the
rest may have limited liability
 Limited partners do not enjoy the right of management
 Registration of such partnership is compulsory
 Introduced in India after introduction of new small
enterprise policy 1991

21. PARTNERSHIP DEED
 Formed by an agreement which may be oral or
written
 An agreement duly signed and registered to form
a partnership is called as a partnership deed
 The rights, interest, obligations of partners to
each other are clearly and precisely defined
 Such agreement is very useful in future disputes
 Its not a public agreement, so outsiders don’t
have right to examine but it can be changed at
any time with the consent of all the partners

22. PARTNERSHIP DEED
 Partnership deed includes the following points:
 Name of firm
 Nature of business and location of business
 Duration of business
 Investment made by each partner
 Distribution of profits and losses
 Duties and obligations of the partners
 Salaries and withdrawals of the partners
 Terms governing admission, retirement and expulsion of a
partner
 Interest on capital and interest on drawings
 Procedure for dissolution of the firm
 Preparation of accounts and their auditing
 Method of solving disputes

23. COMPANY
 An artificial person having a separate legal
entity, perpetual succession and a common
seal.

24. JOINT STOCK COMPANY
 An association of persons formed for
carrying out business activities
 Has a legal status independent of its
members
 This company form of organisation is
governed by The Companies Act, 1956

25. FEATURES
1. Artificial person
 Company is a creation of law and exists independent
of its members.
 Company can own property, incur debts, borrow
money, enter into contracts, sue and be sued.
2. Separate legal entity
 Acquires an identity, distinct from it members.
 Assets and liabilities are separate from those of its
owners.
 The law does not recognise the business and owners
to be one and the same.

26. FEATURES
3. Formation
 Formation of a company is a time consuming, expensive
and complicated process.
 Involves compliance with several legal requirements before
it can start functioning.
 Registration of a company is compulsory as provided under
the Indian Companies Act, 1956.
4. Perpetual succession
 Company being a creation of the law, can be brought to an
end only by law.
 Will only cease to exist when a specific procedure for its
closure, called winding up, is completed.

27. FEATURES
5. Control
 Undertaken by the Board of Directors
 The directors hold a position of immense significance as they are
directly accountable to the shareholders for the working of the
company
6. Liability
 Members is limited to the extent of the capital contributed by
them in a company
 Creditors can use only the assets of the company to settle their
claims since it is the company and not the members that owes
the debt
7. Common Seal
 Company’s approval through a common seal
 Common seal is the engraved equivalent of an official signature
8. Risk Bearing
 Borne by all the share holders to the extent of their shares

28. MERITS
1. Limited liability
 Only the assets of the company can be used to settle
the debts, leaving the owner’s personal property free
from any charge.
2. Transfer of interest
 Shares can be easily sold or converted into cash
when required.
3. Perpetual existence
 Not effected by death

29. MERITS
4. Scope for expansion
 Large financial resources
5. Professional management
 Company can afford to pay higher salaries to
specialists and professionals
 Leads to balanced decision making as well as greater
efficiency in the company’s operations

30. LIMITATIONS
1. Complexity in formation
2. Lack of secrecy
3. Impersonal work environment
4. Numerous regulations
5. Delay in decision making
6. Oligarchic management
7. Conflict in interests

31. SHAREHOLDERS
 Features:
 Shares are like partners who have invested in
the company.
 If company gains profit, profit is distributed in the
form of dividends to shareholders
 In case of loss, nothing is taken from
shareholders

32. TYPE OF COMPANIES
 Private company
 Restricts the right of members to transfer its shares
 Has a minimum of 2 and a maximum of 50 members
excluding the present and past employees
 Does not invite public to subscribe to its share
capital
 Must have a minimum paid up capital of Rs.1 lakh or
such higher amount which may be prescribed from
time-to-time
 Necessary for a private company to use the word private
limited after its name

33. TYPE OF COMPANIES
 Public company
 Has a minimum paid-up capital of Rs. 5 lakh or a
higher amount which may be prescribed from
time-to-time
 Has a minimum of 7 members and no limit on
maximum members
 Has no restriction on transfer of shares
 Is not prohibited from inviting the public to
subscribe to its share capital or public deposits

34. LEGAL FORMALITIES
 Public companies has to be publish their
yearly account, maintain statutory books of
account, annual audits.

35. MOA- MEMORANDUM OF ASSOCIATION
 Main document of the company, sets the constitution of the
company
 Defines the objectives, prescribe the name of the company,
its registered office and capital
 Lay down the fundamental conditions upon which alone the
company is allowed to be formed
 When registered gives existence or birth to the company
 Charter of the company
 Governs the relationship of the company with the outside
world
 Determines the extent and power of the company
 All transactions outside its power by the company shall be
null or void or illegal

36. AOA-ARTICLE OF ASSOCIATION
 Forms a link between the members of the company which
binds the members to the company
 Defines the duties, rights, powers and authority of the
shareholders and directors of the company
 Defines the mode and form in which the business of the
company is to be carried out
 Every company is required to file AOA with the registrar at
the time of the registration
 If company doesn’t file its own AOA, table A is attached to
the company that as schedule 1, shall become AOA of
that company
 Table A is model set of 99 article contained in schedule 1
of company act 1956

37. DIFFERENCE BETWEEN AOA AND MOA
Basis of difference MOA AOA
Objective Defines the objective for
which company is formed
Rules of internal
management , indicates
how the objectives are to
be achieved
Position Main document of the
company, subordinate to
the companies act
Subsidiary document ,
subordinate to both MOA
and companies act
Relationship Defines the relationship of
the company with
outsiders
Defines the relationship of
the members and the
company

38. DIFFERENCE BETWEEN AOA MOA
Basis of difference MOA AOA
Validity Acts beyond MOA are
invalid and cannot be
ratified even by a
unanimous vote of the
members
Acts which are beyond
articles can be ratified by
the members provided
they don't violate the
memorandum
Necessity Every company has to file
a MOA
Not necessary for a public
limited company to file
AOA
Alteration Alteration of MOA is quite
difficult
Articles can be altered by
passing a special
resolution by the members

39. PRIVILEGES AGAINST A PUBLIC LIMITED COMPANY
 A private company can be formed by only two
members whereas seven people are needed to form
a public company.
 There is no need to issue a prospectus as public is
not invited to subscribe to the shares of a private
company.
 Allotment of shares can be done without receiving
the minimum subscription.
 A private company can start business as soon as it
receives the certificate of incorporation. The public
company, on the other hand, has to wait for the
receipt of certificate of commencement before it can
start a business.

40. PRIVILEGES AGAINST A PUBLIC LIMITED COMPANY
 A private company needs to have only two directors
as against the minimum of three directors in the
case of a public company.
 A private company is not required to keep an index
of members while the same is necessary in the
case of a public company.
 There is no restriction on the amount of loans to
directors in a private company. Therefore, there is
no need to take permission from the government
for granting the same, as is required in the case of
a public company.

41. TYPES OF BUSINESS ORGANIZATIONS
 To run a business:
 1. Franchise
 2. Group Company / Ownership
 3. Leasing
 4. Management Contract

42. FRANCHISE
 Owners, or "franchisors", sell the rights to their business logo,
name, and model to third party retail outlets, owned by independent,
third party operators, called "franchisees“
 To invest in a franchise, the franchisee must first pay an initial fee for
the rights to the business, training, and the equipment required by
that particular franchise. Once the business begins operating, the
franchisee will generally pay the franchisor an ongoing royalty
payment, either on a monthly, quarterly, or annual basis. This
payment is usually calculated as a percentage of the franchise
operation’s gross sales.
 The franchisee will not have as much control over the business as he
or she would have over their own business model, but may benefit
from investing in an already-established, name brand.

43. LEASING
 A legal document outlining the terms under
which one party agrees to rent property from
another party.
 A lease guarantees the lessee (the renter) use
of an asset and guarantees the lessor (the
property owner) regular payments from the
lessee for a specified number of months or
years.
 Both the lessee and the lessor must uphold the
terms of the contract for the lease to remain
valid.

44. MANAGEMENT CONTRACT
 Firm enters into a contract with one or a few
local manufacturers to get certain
components or goods produced as per its
specifications
 Contract manufacturing, also known as
outsourcing
 Can take three major forms:
1. Production of certain components
2. Assembly of components into final products
3. Complete manufacture of the products

45. ADVANTAGES
1. Goods produced on a large scale without
requiring investment in setting up production
facilities.
2. No investment risk.
3. Products manufactured or assembled at
lower costs.
4. Local manufacturer also gets the
opportunity to get involved with international
business and avail incentives.

46. LIMITATIONS
1. Local firms might not adhere to production
design and quality standards.
2. Local manufacturer in the foreign country
loses his control over the manufacturing
process.
3. The local firm producing under contract
manufacturing is not free to sell the
contracted output as per its will.

47. THANK YOU