Forms of Business Organization

An organization engaged in some commercial activity or business with the motive of earning profit is known as a business enterprise. If an individual or a group of individuals plans to start a new business or expand its existing business, selecting the right form of business organization is essential for them. There are five different forms of business organization from which one can select the best option for them. These are Sole Proprietorship, Joint Hindu Family Business, Partnership, Cooperative Societies and Joint Stock Companies. For selecting the most appropriate form of business organization, one has to weigh every merit and demerit of each form of an organization against their requirements.

A popular form of business organization in which the business is owned, managed, and controlled by an individual is known as a sole proprietorship. This individual is the recipient of every profit and loss of the business and bears every risk coming to the business. Here, the word sole means only and proprietor means owner; hence, the only owner of the business. Usually, businesses with personalized services like hair salons, beauty parlours, retail shops, etc., run under sole proprietorship. In this form of business, the owner is not separate from the business; hence, no separate legal entity. Besides, the owner does not have to perform any legal formality and can start the business whenever they want.

A form of business organization found only in India in which the business is owned and carried on by the HUF(Hindu Undivided Family) members is known as Joint Hindu Family Business. It is one of the oldest forms of business organization in India. This form is governed by the ‘Hindu Law’. The eldest member and head of the family, also known as “Karta,” controls the business. Membership in this form of business organization is based on the birth in a specific family. The three successive members of the family can be the members of the business. Every member of the business have equal right and ownership over their ancestor’s property, and these members are known as ‘co-parceners.’ The two conditions for the existence of a Joint Hindu Family Business are: there must be some ancestral property, and a minimum of two male members must be in the family.

The most crucial disadvantage of a sole proprietorship is the lack of enough financing in the business, which is resolved in this form of business organization. According to the Indian Partnership Act, 1932, a partnership is a form of business organization in which there is a relation between two or more people with an agreement to share the firm’s profits carried on by every partner or any one of the partners acting for all. It solves the need to acquire greater capital investment, risk-sharing, and a variety of skills in the business, which is not available in Sole Proprietorship and Joint Hindu Family Business. The minimum number of partners required in a partnership firm is two. There are different types of partners and partnerships in this form of business organization.

A voluntary association of people joining together with the main objective of members’ welfare is known as a cooperative society. As the name suggests, people in this form of business organization work together and with other people for the accomplishment of a common purpose. The power to make decisions in a Cooperative Society is in the hands of an elected managing committee. The Cooperative Societies Act, of 1912 states that it is compulsory to register a Cooperative Society. Setting up and forming this form of business organization requires the consent of at-least ten adult people. The capital for the business is raised by its members through the issue of shares. After the registration of the Cooperative Society is complete, it acquires a separate legal identity in the market. There are different types of cooperative societies categorized on the basis of their nature of operations.

An association of different individuals formed to carry out business activities is known as a joint stock company. This form of organization has an independent legal status from its members. Basically, a joint stock company is an artificial individual with a separate legal entity, common seal and perpetual succession. The Joint Stock Company form of organization is governed by the Companies Act, 2013. The shareholders of the company are its owners; however, the Board of Directors is elected by the shareholders and is the chief managing body of the company. Usually, the shareholders or the owners of the company have indirect control over its operations. A company can be either private or a public company.

My Personal Notes