INTRODUCTION
In the previous unit you learnt
that any activity carried with profit motive is called business and that such
activity may be an industrial activity, a trading activity or a service
activity like banking, insurance, transportation, etc. You have also learnt
that bringing various resources together to set up a business and putting them
to work systematically is termed as business organisation. The person who takes
initiative to set up a business, provides the necessary funds and bears the
risk involved is called the owner of the business. When the business is
organised on small scale, it may be possible for one person to provide the
funds and bear the risk. But when it is large, he may need others to join
hands. Thus, business may be owned
by an individual or a group of persons, when a business is owned and carried on
by one person it is called 'Sole Trader Organisation’. But when it is owned by
a group of persons it may be the form of a partnership firm, a company or a cooperative
society. In this unit you will study in detail the features, classification, merits
and limitations of these different forms of business organisations.
SOLE TRADER
ORGANISATION
The sole trader organisation
(also called proprietorship) is the oldest form of organization and the most
common form of organisation for small business even today. It is the simplest and
easiest to form. What is required is that an individual decides about the type
of business to be started and arranges the necessary capital. Required capital
may be mobilised from his own savings, or may be borrowed from friends and
relatives. The business may be carried either in a portion of his own residence
or in a rented building. The person generally manages the business on his own.
He may also take the help of his family members or employ some persons, if
necessary. He can take the advice from others in running the business, but his
own will be
the
final decision. Thus, the sole trader enjoys full control over the affairs of
the firm. He enjoys a11 the profits earned by the business. So in case of loss,
naturally, he has to bear the full burnt of it.
Thus, we can now
define sole trader organisation as "one man's business in which an individual
produces independently with his own capital, skill and intelligence and is entitled to
receive all the profits and assumes all the risks of ownership". J.L.
Hanson defines it as "a type of business unit where one person is solely
responsible for providing the capital for bearing the risk of the enterprise
and for the management of the business". Under this form of business
organisation, no distinction is made between the business concern and the proprietor.
Likewise, the management rests with the same person
.
Main
Features
Based on the above discussion, we
can list the main features of sole trader organisation as follows.
1. One man ownership: The ownership lies with one
person only. There are no associates or partners. He invests his own money or
borrows from the friends and relatives.
2. No separation of ownership and
management: The owner himself manages the business. Therefore, the separation
of ownership and management which is quite common in big business is not
present in this form of organisation. Since the proprietor himself manages the
business, he exercises a high degree of supervision and control in the working
of his business.
3. No separate entity: The business does
not have an entity separate from the owner. The proprietor and the business
enterprise are one and the same.
4. All profits to proprietor: Since there are no
partners, all the profits are enjoyed by the sole proprietor.
5. Individual risk: All losses in the
business are borne by the proprietor himself.
6. Unlimited liability: The proprietor has an unlimited liability.
This means that in caw of loss even the personal property of the owner can be
utilised for clearing the business obligations and debts.
7. Less 1egal formalities: To set up sole
proprietorship, no legal formalities are required. Of course, there are some
legal restrictions for the setting up of a particular type of business. For
example, an individual cannot start a bank or an insurance company. But one can
start a fruit stall or a
cycle shop without much legal formalities. However, in some cases a licence may
be required. For example, to start a restaurant, you need licence from municipal
corporation.
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Merits and
Limitations
You have learnt about the main
features of the sole trade business. In view of these features this form of
organisation has the following merits and limitations.
Merits
1 Easy formation:
There are no legal formalities to be observed while starting this form of organisation.
Therefore, its formation is very easy and simple. The expenditure involved in
the process of formation is also negligible.
2 Direct
motivation: As you know, all the profits and gains of the business are solely
and exclusively pocketed by The sole proprietor. This motivates the proprietor
to work hard and develop the business to get more and more profits. His
involvement in the business is, therefore, complete and free.
3 Full control:
The proprietor is the monarch of the business he owns. He manages the whole
business and takes all decisions himself. In other words, proprietor exercises
full control over the functioning and working of the business.
4 Quick decision: The proprietor
does not depend on others for decision making. Since there are no partners, he
is not required to consult others. This enables the proprietor to take quick
decisions on numerous matters concerning his business.
5 Flexibility in
operations: Being a small organisation it is easy to bring changes if situation
so demands. In a large sized organisation to bring changes is difficult.
6 Secrecy: Since
the whole business is handled by the proprietor his business secrets are known
to him only. He is not bound to publish his accounts. Therefore, the degree of secrecy
is the highest in this form of organisation.
7 Personal touch:
When the proprietor handles everything relating to the business himself, it is
easy to maintain a personal rapport with the customers. He can easily know
their tastes, likes and dislikes and adjust his operations accordingly.
Similarly, in this form of organisation, employees, if any, work directly under
the proprietor. So, it gives scope for the proprietor to maintain harmonious
relations with the employees.
8 Dissolution
easy: Since there are no co-owners or partners, there is no scope for the difference
of opinion in the case of dissolution of business. The proprietor is free to withdraw
from the business or to sell it at any time he wants. Because of ease in formation
and withdrawal, proprietorship form is often used to test business ideas.
Limitations
1 Limited
resources: The capital and other resources of an individual are always limited.
The sole trader has to mainly
rely on his own money and earnings, or he can borrow, if necessary, from relatives
and friends. Thus, the proprietor has a limited capacity to raise funds. This
makes it difficult to plan any large scale expansion.
2 Limited managerial capability:
In the modern business, knowledge and skills in various fields like production,
finance, marketing, etc., are required. It is not possible for a single
individual to possess expertise in all these areas. So, his decisions may not
be balanced.
3 Not suitable for
large scale operation: Since the resources of the sole trader are limited, it
is suitable only for small business and not for large scale operations.
4 Unlimited liability: You know
that the proprietor has an unlimited liability. In case of a loss, even his
personal property and belongings can be utilised for clearing business obligations.
Therefore, he cannot take much risk and is discouraged from expansion of his
business.
5 Less stability: The continuity
and stability of the business depends solely on one person. When the man dies,
there is a likelihood of c1osure of the business.
6 No check and control: As the
sole trader is the monarch of the business, no outsider can
question him on his acts and
deals. There are no checks and controls on the sole trader.
7 Less scope for
economies of scale: Sole trader usually operates on small scale only. So he can
not enjoy the benefits of large scale production or buying or selling. This may raise the cost of business
operations.
PARTNERSHIP
FORM OF ORGANISATION
You have learnt that the sole
trader organisations have limited financial resources, limited managerial
ability and skills, and unlimited liability. In case of expansion more capital
and more managerial skills are required. At the same time, the risk will also
increase. A sole proprietor may not be able to fulfill all these requirements.
A person who lacks, managerial skills may be having capital. Another person who
is a good manager may not be having sufficient capital. This calls for a
situation where two or more persons come together, pool their capital and
skills, and organise the business. This type of business organisation is called
partnership organisation. It grew essentially because of the limitations and
failure of
the
sole proprietorships.
As defined by J.L. Hanson,
"a partnership is a form of business organisation in which two or more
persons upto a maximum of twenty join together to undertake some form of
business activity".
The Indian Partnership Act, I932
defined partnership as "the relation between persons who have agreed to
share the profits of business carried on by all or any of them acting for
all". The Uniform Partnership Act of the USA defines a partnership
"as an association of two or more persons to carry on as co-owners a
business for profit".
Based on the above definitions,
we can state that partnership is an association of two or more persons who have
joined together to share the profits of business carried on by all or any
of them acting for all. The persons who own the partnership business are
individually called 'partners' and collectively known as the firm or partnership firm. On an agreed basis, partners
contribute to capital and share the responsibility of running the business.
However, in some cases one partner may provide the whole or major portion of
the capital and others contribute technical and managerial skills with or
without some capital. All such terms and conditions of partnership are usually
mentioned in the partnership agreement.
Main
Features
From the above discussion, we can
list the main features of partnership form of organization as follows :
1. Plurality of persons; To form a
partnership firm, there should be at least two persons. The maximum limit on
the number of persons is ten for banking business and twenty for other types of
business.
2. Contractual
relationship: Partnership
is created by an agreement between persons called 'partners'. In other words, a
person can become a partner only on the basis of a contract. This contract
could be oral, written or implied.
3 Profit
sharing: There
must be an agreement among the partners to share the profits and losses of the
business of the partnership firm. This is one of the basic elements of partnership.
If two or more persons jointly own some property and share its income, it is not
regarded as partnership.
4. Existence of
business: The
purpose of the agreement among the partners is to do some lawful business and
share profits. If the purpose is something other than business, it should not
be treated as partnership. For example, if the purpose is to carry some charitable
work, it will not be treated as partnership.
5. Principal-agent relationship: The business of the firm may be carried
on by all or one or more partners acting for all the partners. Every partner is
entitled to take part in the operations of the firm. In dealing with other
parties, each partner is entitled to represent the firm and other partners in
respect of the business of the firm. All partners are bound by his acts done in
the ordinary course of business and in firm's name. In this sense a partner is
agent of the firm and the other partners.
6 Unlimited
liability: In
respect of business debts, each partner has unlimited liability. This means
that if the assets of the firms are not sufficient to meet the obligations of
the firm, the partners have to pay from their private assets. The creditors can
even realise the whole of their dues from one of the partners. Thus, all the
partners are jointly and severally liable for all business debts and
obligations.
7 Good faith and
honesty: A partnership
agreement rests on good faith among the partners. The partners must be honest
to each other and trust each other. They must disclose every information about
the business and present true accounts to one another.
8 Restriction on
transfer of share: A
partner cannot transfer his share to an outsider without the consent of all the
other partners.
Classification of Partners
You have learnt that different partners play
different roles in the operations of the firm. One partner may contribute more
capital while another partner may spend more time in managing it. Depending on
the role played, we can classify the partners into various categories.
Based on the extent
of participation in the
functioning of the business, we can classify partners into: a) active partners,
and (b) sleeping partners.
a) Active
partner: If
a partner takes an active part in the management of the business, we call
him as active partner. He is also known as a 'working partner'.
b) Sleeping
partner: If the
partner is not actively associated with the working of the partnership firm, we
call him a sleeping partner. A sleeping business partner simply invests his
capital. He does not participate in the functioning of the firm. Such a partner
is also known as a 'dormant partner'.
Based on the
sharing of profits, partners
may be classified into: (a) nominal partners, and
(b) partner in profits.
a) Nominal
partner: A partner
who just lends his name to the partnership is known as a nominal partner. He
neither invests his capital nor participates in the day-to-day working and
management of the firm. Such partners are not entitled to a share of profits,
but they are liable to other parties for all the acts of the firm.
b) Partner in profits:
A partner who shares the profits of the business without being liable for
losses is called a partner in profits. As a rule, he will not take any part in
the management of the business. This is applicable to a minor who is admitted
to the benefits of the firm.
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Based on the behaviour and
conduct exhibited, the partners may be divided into:
(a) partner by estoppel, and (b)
partner by holding out.
a) Partner by estoppel: A
person who behaves in the public in such a fashion as to give an impression
that he is one of the partners in a partnership firm is called a partner by
estoppel Such partners are not entitled to profits but are fully liable as
regards the firms obligations.
b) Partners by holding out: If
a particular partner of a firm represents that another person is also a partner
of the firm, and if such a person does not disclaim the partnership relationship
even after coming to know about it, such person is called a 'partner by holding
out'. Such partners are not entitled to profits but are liable as regards the obligations
of the firm.
You should note the difference
between these two types clearly. In the case of a partner by
estoppel, the person's own
behavior and conduct have created a mistaken impression in the third parties
mind that he is a partner of the firm. Whereas in the case of a partner by
holding out, the other partners have represented the person as a partner,
though he is not one, and he does not contradict it. You will learn more about
such partners in a separate course.
Based on liabilities also, partners
may be classified into two categories: (a) limited partners.
and (b) general partners.
a) Limited partner: The liability
of such a partner is limited to the extent of the capital contributed by him.
He is not entitled to take part in the management of the business, but he can
advise the other general members. His acts do not bind the firm. He has right
to inspect the books of the firm for his information. Such partners are also
called 'special partners'.
b) General partner: He is also
called 'unlimited partner'. His liability is unlimited and he is entitled to
participate in the management of the business. Every partner who is not a limited
partner is treated as a general partner.
As you know in partnership the
liability of the partners is unlimited. The limited partners are found only in
limited partnership form of organisation which is found only in some European
countries and the USA. This is not allowed in India.
Partnership Deed
You know that a partnership is
formed by an agreement. Such agreement may be either written or oral. To avoid
misunderstanding and unnecessary litigations, it is always desirable to have a
written agreement. When the written agreement is duly stamped and registered,
it is known as 'Partnership Deed'. After registration, each partner is given a
copy of the partnership deed. A partnership deed generally contains the
following particulars.
1 Name of the firm.
2 Nature of the business to be
carried out.
3 Name of the
partners.
4 The town and place where business
will be carried on.
5, The amount of
capital to be contributed by each partner.
6 The profit and
loss sharing ratio of each partner.
7 Loans and
advances by partners and the interest payable on them.
8 The amount of
drawings by each partner and the rate of interest allowed thereon.
9 The rate of interest on
capital. ,
10 Duties, powers, and
obligations of partners.
11 Remuneration, if any, payable
to the active partner.
12 Maintenance of accounts and
arrangements for audit.
13 Settlement in the case of
dissolution of partnership.
14 The methods of evaluation of
goodwill
on admission
or death or retirement of a partner.
15 The method of revaluation of
assets and liabilities on admission or death or retirement of a partner.
16 The method of retirement of a partner,
and the arrangement for the payment of the dues of a retired or deceased
partner.
17 Arbitration in case of
disputes among partners.
18 Arrangements in case a partner becomes
insolvent.
This is not an exhaustive list.
Any other clauses, as desired by the partners could be included in the
partnership deed. In fact, the Partnership Act defines certain, rights and
duties of a partner. But the provisions of the Act come into operation only
when there is no agreement amongst the partners.
Registration of
the firm: Under
the Indian Partnership Act it is not compulsory to register the firm. But there are certain
limitations for an unregistered firm. So, it is better to register it. Registration
can be done at any time. To register the firm an application with all
particulars about the firm and registration fee have to be sent to the
Registrar of Firms.
Merits and
Limitations
You have learnt about the main
features of
partnership.
This would help you to identify the merits and limitations of this form of
organisation which are as follows.
Merits
1 Easy formation:
Although
the formation of a partnership firm is not as easy as the sole proprietorship but
it is much less difficult as compared to a company. The partners agree to do
business together and draw up and sign the partnership agreement. After that there
are no complex government laws regulating the establishment of the partnership.
2 More capital
available: Unlike
sole proprietorship, there are two or more partners in partnership firms. So a
partnership firm does not have to rely on a single individual as the source or
its funds. The added financial strength of the partners increases the
Borrowing capacity of the firm.
3 More
diverse-skills and expertise: The partnership involves more people in
decision making because there are more owners. An ideal partnership brings
together partners who complement each other, not partners who have the same
background and experience. One partner might be a specialist in manufacturing,
another in marketing, and the third partner might be an accountant Combined
judgment of all these partners often leads to better decisions than otherwise.
4 Flexibility: Like sole
proprietorship, the partnership business is also owned and run by the partners
themselves. They can easily appreciate and quickly respond to the changing
conditions.
5 Secrecy: In partnership
firms, some secrecy can be maintained because there is no obligation to publish
accounts of the firm.
6 Keen interest:
Since
partners are 1iable to losses and risks of the business, they take keen
interest in the affairs of' the
business.
7 Protection: Due to the rule of unanimity in
fundamental matters, the rights of all partners
are fully protected. If a partner
is dissatisfied with the working of the firm, he can ask for dissolution of the
firm and withdraw from the business.
8 Checks and
controls over careless decisions: Since the partnership is run on collective
basis and all partners participate in major decisions. There is lesser scope
for reckless and hasty decisions.
9 Diffusion 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.
Limitations
1 Limited capital: Since there is a
limit of maximum partners (20 in non-banking firms and 10 in banking firms),
the capital raising capacity of the partnership firms is limited as compared to
a joint stock company.
2 Unlimited
liability: The
most important drawback of a partnership firm is that the liability of the
partners is unlimited.
3 No public
confidence: Since
the accounts are not published and publicised, the firm may not be able to
command confidence of the public.
4 Non-transferability of interest:
No partner can transfer his interest in a firm without the consent of other
partners.
5 Uncertainty: The sudden death,
lunacy or insolvency of a partner leads to the dissolution of partnership. This
breeds uncertainty in the continuity of a partnership firm. However, this could
be partly avoided if such matters are specified in the partnership agreement.
6 Conflicts among partners: There
is scope for misunderstanding and conflicts among the partners. This may cause
delays in decision making and may lead even to dissolution of the firm. To some
extent, this problem could be avoided if the partnership agreement is clear and
detailed.
7 Risk of implied
authority: Since each partner acts as an agent of the firm, acts of one partner
would bind the firm and all the remaining partners. A dishonest or incompetent partner
may lend the firm into difficulties and the other partners
may have to pay for it.
Joint
Hindu Family Firm
Joint Hindu Family firm is a
unique form of business organisation prevailing only in India. This is the firm
belonging to Joint Hindu family and governed by the provisions of the Hindu Law.
In Hindu Law there are two
schools:
a) Mitakshara: 1t is applicable
to the whole of India except Bengal and Assam. According to this school, a
Hindu inherits property from his father, grand father, and great grand father.
Thus, three successive generations in the male line (son, grandson, and great grandson)
inherit the ancestral property. They are called coparceners and the senior most
member of the family is called 'Karta'. The Hindu Succession Act, 1956 has
extended the line of coparcenary interest to female relatives of the deceased
coparcener or male relatives claiming through such female relatives.
b) Dayabhaga: It is
applicable in Bengal and Assam. According to this, the male heirs become
members only on the death of the father.
According to Hindu Law, a
business is an inheritable asset. After the death of Hindu, the business will
be jointly owned by all the coparceners. The elder person among the coparceners
becomes the new Karta and manages the business. If any property is inherited from
any other relative, or acquired from personal resources, such property is
regarded as personal property and treated as distinct from ancestral property. Important
features of the Joint Hindu Family Firm are:
1) Business is managed by the
senior member of the family called Karta. Other members do not have the right
to participate in the management of the firm.
2) Other members cannot question
the authority of the Karta. Their only remedy is to get the family dissolved by
mutual agreement.
3) Karta has the
power to borrow funds for the business. The liability of the Karta is unlimited
whereas the other coparceners are liable only to the extent of their share in
the business.
4) If the Karta has
misappropriated the funds of the business, he has to compensate the other
coparceners to the extent of their shares in the joint property.
5) The death of any member of the
family does not dissolve the business or the family.
6) Through mutual agreement the
joint hindu family firm can be dissolved.
You should note the difference
between the joint Hindu family firm and the partnership firm. A joint Hindu
family firm is the result of the operation of the Hindu Law; No formal agreement
is required to convert a business into a joint Hindu family business. The
members of the family automatically become coparceners. Only the Karta can
participate in the management. The liability of the Karta is unlimited but the
liability of the other coparceners is limited to their shares in the business.
The rights, duties and liabilities of coparceners are governed by the
provisions of the Hindu Law; Partnership is the result of an agreement between
the persons who need not be blood relatives. Each partner has the right to participate
in the management of the business. The liability of each partner is unlimited.
The duties, rights and liabilities of the partners are governed by the Indian
Partnership Act, 1932.
2.4 COMPANY FORM
OF ORGANISATION
You have learnt that sole
proprietorships and partnerships have the disadvantages of limited resources,
unlimited liability, limited managerial skills, etc. The life and stability of
these organisations also depend on the life and stability of the proprietors/partners.
Hence, they are not considered suitable for large scale business.
For large scale business, you
require large investment and specialised managerial skills. The element of risk
is also very high. This situation led to the emergence of company form of business
organisation. In case of joint stock company, capital is contributed by not one
or two persons but by a number of persons called shareholders. Thus, it is
possible to raise large amount of capital. A joint stock company is an
association of persons registered under Companies Act for carrying on some
business. It is called an artificial person as it is created by law, with a
distinctive name, a common seal and perpetual succession of members. It can sue
and be sued in its own name. The most widely quoted definition of a company
(called Corporation in USA) is the one given by Chief Justice Marshal.
According to him "a corporation is an artificial being, invisible,
intangible and existing only in contemplation of law. Being the mere creature of
law, it possesses only those properties which the charter of its creation
confers upon it, either expressly or an incidental to its very existence."
Lord Justice Lindley has defined it as "an association of many persons,
who contribute money or money's worth to a common stock and employ it for a
common purpose. The common stock so contributed is denoted in money and is the
capital of the company. The persons who contribute it or to whom it belong are
members. The proportion of capital to which each member is entitled is his
share."
The Indian Companies Act (1956)
defines joint stock company as "a company limited by shares having
a permanent paid up or nominal share capital of fixed amount divided into shares,
also of fixed amount, held and transferable as stock and formed on the
principles of having in its members only the holders of those shares or stocks
and no other persons."
2.4.1 Main
Features
Based on the above definitions,
we can list out the features of the company form of organization as follows :
1 Incorporation: A
company is an incorporated association. It comes into existence only after
registration under the Companies Act.
2 Artificial
person: A company is regarded as an artificial person as it is created by law and
can be effaced only by law. It has no body, no soul, no conscience, still it is
in a position to exist. Like any other person it can own property, conduct a
lawful business, enter into contracts with others, buy, sell and hold property,
all under its own name and its own seal.
3 Separate legal
entity: A company has a distinct entity separate from its members. A
shareholder of a company can enter into contract with the company and can sue
the company and be sued by it. You know that in the case of partnership, every
partner is an agent of the firm and also that of the other partners. But the
shareholder is not the agent of the company or its shareholders. He can not
bind them with his acts.
4 Common seal: As
the company is not a natural person, it cannot sign the documents. It has a
device in the form of common seal on which its name is engraved. This common seal
is a substitute of its signatures. It is affixed on all important legal
documents and contracts. It is used at the direction of the board of directors
and two directors have to sign as witnesses wherever it is affixed on any
document.
5 Perpetual
succession: A joint stock company has a continuous existence. Its life is not affected
by the death, lunacy, insolvency or retirement of its shareholders or directors
Members may come and go, but the company continues its operations until it is
legally dissolved. Thus, a company has perpetual succession irrespective of its
membership. This feature provides stability to this form of organisation.
6 Separation of
ownership and management: The shareholders of a company are widely scattered
throughout the country. For the conduct of the business and its management,
shareholders elect another set of persons known as
directors. The right to manage the company affairs is vested in the directors
who are elected representatives of the shareholders. Thus, ownership is
separated from management.
7 Number of
members: In the case of a public limited company: the minimum number is seven
and there is no maximum limit. In the case of a private limited company, minimum
number is two and the maximum is fifty.
8 Limited
liability: The liability of the members of a company is normally limited by guarantee
or by the shares. Members liability is limited to the amount of shares held. Members
are not personally liable for the debts of the company. So, personal properties
of the members are not liable to be attached for the payment of the company's
debts. For example, the face value of the share of a company is Rs. 10 which
the member has already paid. At the time of winding up of the company, the
member cannot be asked to pay any money. But if the member had paid only Rs.7,
he can at the most be asked to pay the balance of Rs. 3 (face value
Rs.10 minus money paid Rs. 7), and no more.
9 Transferability of
shares: The member of a public limited company enjoys a statutory right to
sell his shares to others without the consent of other shareholders. But for transferring
the shares he has to follow the procedure laid down in the Companies Act. However,
there are restrictions for transferring shares in case of a private limited company.
10 Regidity of
objects: The scope of the business of a company is limited. The type of business
in which the company would participate is mentioned in the 'object clause' of its
Memorandum of Association. The company cannot take up any new business without
changing the object clause. To change the object clause, the co~npanyh as to
comply with the provisions of Lhe
Companies Act,
11 Statutory
regulations: A company is governed by the Companies Act and it has to
follow various provisions of the
Act. It has to submit a number of returns to the
Gopernment. Accounts of a company
must be audited by
a
Chartered Accountant. Thus,
the company ton-n~fo rganisation
has to comply with numerous and varied statutory
requirements.
Having studied the features of a
joint stock company you can easily make out: that the
shareholders are the real owners
of the company, Their liabilityis limited. They can also
transfer their shares to others.
Since the shareholders are very large in number, the company
cannot be managed by all. They
elect a board of directors to manage the company. The
destiny of the company is guided
and directed by the directors. These directors employ
some people to carry on the day-to-day
business of the company.
The company can raise additional
funds by issuing debentures (also called bonds). You will
learn more aboul these aspects in
Units 5 &
6.
2.4.2
Classification of Companies
We can classify companies on the
basis of I) Mode of incorporation, 2) Extent of ltability,
3) Category of shareholders, and
4) Jurisdiction of functioning, Look at Figure 2.3 for the
:lassification of companies.
1 On the basis of
the mode of incorporation, we can classify companies into three
categories :
a) Statutory Company: A company
established by a special Act of the Parliament or
State Legislature is called
'Statutory Company'. Such companies are established in
special cases when it is
necessary to regulate the working of the company for some
specific purposes. Examples of
such corporations are Reserve Bank of India, Life
Insurance Corporation of India,
Air India Corporation, Food Corporation of India,
etc. These are mostly publ~cs
ector enterprises.
Figure 2.3
Classificalio~r
of Companies
Bascd on category Based on the
jurisd~ction
f~~~~o~~~~d~l 1 1 ?~~~h~:'"~"ypc
1 1 of ;harcl~okicr~
1 1 of functioning , 1
Statutory
Company I I I Unl~mitcd
Co~npany
Company Ltd.
by Guarantee
1 71 Fl Co~npany Ltd. hy Shares Company
b) Registered
Company: A coinpany which is incorporated through registration with
the Registrar of Companies
underJhe Companies Act, 1956, is called a 'Registered
Company'. This is also called
'In'corporated Company'. All companies established
under the private sector belong
to this category.
C) Chartered
Company: A company which is incorporated under a special Royal
Charter granted by the Monarch is
called a 'Chartered Company'. It is regulated by
the provisions of that charter.
Examples are: British East India Company, Bank of
England, Hudson's Bay Company,
etc. In India this type of companies does not exist
now because there is no monarchy.
,
Based on the type of liability,
companies may be classified into three categories :
a) Unlimited ~om~aniA~ csom: pany
in which the liability of the members is
unlimited, is called 'Unlimited
Company'. At the time of winding up of the company
shareholders have to pay, if
necessary, from their personal assets to clear the
company's debts. From this point
of view, it is very much like sole proprietorship
.and partnership. However, such
companies are very rare. .
.
b) Companies
Limited by Guarantee: In the case of some compainies, members give
guarantee for the debts of the
company up to a certain limit in addition to the amount
of shares held by them. The
additional amount guaranteed by the members is,
Forms of Business
Organisation I
Basic Concepts
and Forms of
Business
Organlsation
generally, laid down in the
Memorandum of Association. Such companies are not
formed for the purposeof profit.
They are formed to promote art, culture, religion.
trade, sports, etc. Clubs,
Charitable organisations, trade association, etc. come under
this category.
C) Companies Limited by Shares:
In this case the liability of the members is limited
to the amount of the shares held
by them. A shareholder can be called upon to pay
only the unpaid amount of shares
held by him and nothing more. Most of the
companies come under this
category.
3 On the basis of
the ownership, companies may be classified into three categories :
a) Private Limited Company: A
private limited company means a company which by
its article
i) restricts the right to
transfer its shares;
ii) limits the number of its
members to fifty; and
iii) prohibits any invitation to
the public to subscribe for any shares or debentures of
the company.
b) Public Limited
Company: A public limited company is one which is not a private
limited company. A company
having the following characteristics should be called a
public limited company.
i) The right of the shareholder
to transfer his shares is not restricted.
ii) The minimum number of
shareholders is 7 but there is no limit to the maximum
number of members.
iii) It can invite public to
subscribe for its shares and debentures.
The minimum number of inembers in
the case of a private limited cornpany is two and
can be formed more easily as
compared to a public company. It is exempted from
various regulations of the
Companies Act and thus combines the advantages of limited
liability and the facilities of a
partnership organisation. It is considered suitable for a
medium sized business.
C) Government
Company: A company in which not less than 5 1 per cent of the paid
up share capital is held by the
Central Government, or by any State Government or
jointly by Central and/or State
Governments.
4 On the basis of
the jurisdiction of the functioning, we can classify companies into two
categories :
a) National Company: When the
operations of a company are confined within the
boundaries of the country in
which it is registered, such a company is called a
national company.
b) Multinational
Company: When the operations of a company are extended beyond
the boundaries of the country in
which it is registered, such a company is called a
multinational company. It is also
called 'transnational company'.
2.4.3 Merits and
Limitations
The company form of organisation
has been popular and successful in almost all the
countries. This form is suitable
where large resources are required and the 'production has to
be carried out on a large scale.
The number of joint stock companies has shown a
phenomenal increase in the
twentieth century. Let us now discuss the merits and limitations
of the company form of
organisation.
Merits
1 Large capital:
Since company form of organisations are allowed to have a large
number of shareholders, it is
possible to raise capital in large amounts. Whenever new
capital is required, it can issue
shares and debentures. For this reason, only the company
form of organisation is best
suited.
2 Limited
liability: The liability of shareholders, unless and otherwise stated, is
limited
to the face value of the shares
held by them or guarantee given by them. Their private
property is not attachable to
recover the dues of the company. Thus, this form of
organisation is a great attraction
to persons who are not willing to take risk as is
inherent in sole proprietorship
and partnership.
3 Stability of
existence: A company
has a separate legal entity with perpetual succession.
The corporation is not affected
by lunacy or insolvency of a shareholder, director or
officer. The continuity of the
company is desirable in the inte. rest of not only its .
members but.also the society.
4 Economies of
scale: As
companies operate on a large scale, they can take advantage of
large scale buying, selling,
production, etc. As a result of these economies of large scale
operations, companies call
provide goods to consumers at a cheaper price.
5 Scope for
expansion: As
there is no limit to the maximum number of shareholders in a
public limited company, expansion
of business is easy by issuing new shares and
debentures. Companies normally
keep part of their profits as reserve and use them for
expansion.
6 Public
confidence: Companies
are subject to Government controls and regulations.
Their accounts are audited by a
chartered accountant and are to be published. This
creates confidence in the public
about the functioning of the company.
7
Transferability of shares: The shares of the public limited company can be sold
at any
time in the stock exchange. Shareholders
can sell their shares whenever they want.
There is no need to take the
consent of other shareholders. Thus, shareholders can
convert their shares into cash at
any time without much difficulty.
8 Professional
management: You
know that the management of a company is in the
hands of the directors who are
elected by shareholders. Normally, experienced perscins
are elected as directors. You
also know that day-to-day activities are managed by
salaried managers. These managers
are the experts in their respective fields. As
companies have large scale
operations and profits, attracting good professional
managers is easy by paying
attractive salaries. Thus, company form of organisation gets
the services of professionals on
the Board of Directors and in various management
positions.
9 Tax benefits: Companies pay
income tax at flat rates. There is no provision for slab
system in the taxation of
companies. As a result, companies pay lower taxes on higher
incomes compared to other forms
of organisations. Companies also get some tax
concessions if they are
established in backward areas.
10 Risk
diffused: As
the
membership is very large, the business risk is divided among the
several members of the company.
This is an advantage for small investors.
Limitations I
1 Difficulty in
formation: Promotion
of a company is not as simple as proprietorships
and partnerships. A number of
persons known as promoters should be ready to
associate themselves with it for
getting a company incorporated. A lot of legal
formalities are to be performed
at the time of registration. Promotion of a company is
expensive as well as complicated.
2 Lack of
secrecy :
The
management of companies is usually in the hands of many
persons. Everything is discussed
in the meetings of Board of Directors. Therefore,
compared to sole trader and
partnership concerns, maintaining business secrets is
relatively difficult in a company
form of organisation.
3 Delay in
decision making: In
company form of organisation all important decisions
are taken by either the Board of
Directors or shareholders in their meetings. Hence.
decision makilig process is time
consuming. If a quick decision is needed it will be
difficult to arrange meetings all
of a sudden. So, some business opportunities may be
lost because of delay in decision
making.
4 Neglect of
minority interest: The
representatives of the majority group of shareholders
become the members in the Board
of Directors. The shareholders who are in minority
never get representation on the
Board of Directors. As a consequence, the interests of
the minority members may be neglected and
oppressed at the hands of the majority
group.
5 Concentration
of,economic power: The
company form of organisation gives scope for
concentration of economic power
in a few hands. Some persons become directors in a
number of companies and formulate
policies to promote their personal interests. The
shares of a number of other
companies are purchased to create subsidiary companies.
Establishment of
subsidiary companies and interlocking of
directorships have facilitated concentration of economic power in the
hands of a few business houses.
Lack
of personal interest: In sole proprietorship and partnership firms business is
managed by owners themselves. In company form of organization, day-to-day
management is vested with the salaried executives who do not have any personal
interest in the company. This may lead
to reduced employee motivation and result in inefficiency.
More
government restrictions: The company is subject to many restrictions from which
the proprietorships and partnerships are exempted. So, it has to spend considerable time and
effort in complying with the various legal requirements.
Fraudulent
management:
There is a possibility that some unscrupulous promoters may float a bogus
company, issue shares and collect money.
Later on, they can get away with the money by putting the company in
liquidation. It is also possible that the
directors and professional managers may misuse the company resources for their
personal benefit and bring losses to the company.
2.5
COOPERATIVE FORM OF ORGANISATION
Cooperative
organizations are generally started by the poor and the economically weak
sections to promote their common economic interests through business propositions. The basic philosophy of cooperative
organization is self-help and mutual help.
The primary objective of any cooperative organisation is to render
service to its members. In this respect,
it is different from the other three forms of organizations which are primarily
meant for making profits. The important
features of the cooperative organisation are service in place of profit, mutual
help in place of competition, self-help in place of dependence, and moral solidarity
(unity) in place of unethical business practices.
