0 INTRODUCTION
After identifying the
business in any field e.g., Insurance, it is necessary then to have a legal entity
to be known in the society. The legal entity can be in any form of a business
organization. The various forms of organization are as follows:
1)
Sole proprietorship
2)
Partnership
3)
Co-operative Society
4)
Joint stock company (Private and Public)
These are explained in brief as follows:-
3.1 OBJECTIVES
At the end of this lesson you will be able to know
z Various
forms of organization
z Its
formation & features
z Merits
& Demerits
3.2 SOLE PROPRIETORSHIP
3.2.1 Meaning:
The sole proprietorship
is a form of business that is owned, managed and controlled by an individual.
He has to arrange capital for the business and he alone is responsible for its
management. He is therefore, entitled to the profits and has
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to bear the loss of
business, however, he can take the help of his family members and also make use
of the services of others such as a manager and other employees.
This type of business organisation
is also called single ownership or single proprietorship. If the business
primarily consists of trade, the organization is a sole trading organization.
Small factories and shops are often found to be sole proprietorship
organisations.
It is the simplest and
most easily formed business organization. This is because not much legal
formality is required to establish it. For instance to start a factory the
permission of the local authorities is sufficient. Similarly to start a
restaurant, it is only necessary to get the permission of local health
authorities. Or again, to run a grocery store, the proprietor has only to
follow the rules laid down by local administration.
3.3.2 Features of Sole Proprietorship:
The important features
of a sole-proprietary organization include the following:
(i)
Individual Initiative: One person is the owner in a sole-proprietary form of
organisation.
(ii)
Risk Bearing: The proprietor is the sole beneficiary of profits in this
form organisation. If there is a loss he alone has to bear it. Thus the risks
of business are borne by the proprietor himself.
(iii)
Management and control:
Management and control of this type of organisation is
the responsibility of the sole proprietor. He may, however, employ a manager or
other people for the purpose.
(iv)
Minimum government
regulations: The government does not
interfere with the working of the sole proprietorship organisation. However,
they have to comply with the general laws and rules laid down by
government.
(v)
Unlimited liability: The sole proprietor has to bear the losses and is
responsible for the liabilities of the business. If the business assets are not
sufficient to meet the liabilities, he may also have to sell his personal
property for that purpose.
(vi)
Secrecy: All important decision taken by the owner himself. He
keeps all the business secrets only to himself.
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3.3.3 Merits Of Sole Proprietorship:
A sole proprietary organisation has the following advantages:
(i)
Easy formation: A sole proprietorship business is easy to form where no
legal formality involved in setting up this type of organization. It is not
governed by any specific law. It is simply required that the business activity
should be lawful and should comply with the rules and regulations laid down by
local authorities.
(ii)
Better Control: In sole proprietary organisation, all the decisions
relating to business operations are taken by one person, which makes
functioning of business simple and easy. The sole proprietor can also bring
about changes in the size and nature of activity. This gives better control to
business.
(iii)
Sole beneficiary of
profits: The sole proprietor is
the only person to whom the profits belong. There is a direct relation
between effort and reward. This motivates him to work hard and bear the risks
of business.
(iv)
Benefits of small-scale
operations: The sole proprietorship
is generally organized for small-scale business. This helps the proprietor’s
family members to be employed in business. At the same time such a business is
also entitled to certain concessions from the government. For example, small
industrial organisations can get electricity and water supply at concessional
rates on a priority basis.
(v)
Inexpensive Management:
The sole proprietor does not appoint any specialists for
various functions. He personally supervises various activities and can avoid wastage
in the business.
3.3.4 Limitations Of Sole Proprietorship:
A
sole proprietor generally suffers from the following limitations:
(i)
Limitation of
management skills: A sole proprietor may
not be able to manage the business efficiently as he is not likely to have
necessary skills regarding all aspects of the business. This poses difficulties
in the growth of business also.
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(ii)
Limitation of Resources: The sole proprietor of a business is generally at a
disadvantage in raising sufficient capital. His own capital may be limited and
his personal assets may also be insufficient for raising loans against their
security. This reduces the scope of business growth.
(iii)
Unlimited liability: The sole proprietor is personally liable for all business
obligations. For payment of business debts, his personal property can also be
used if the business assets are insufficient.
(iv)
Lack of continuity: A sole proprietary organisation suffers from lack of
continuity. If the proprietor is ill this may cause temporary closure of
business. And if he dies the business may be permanently closed.
From the above account
of the merits and limitations it becomes clear that it is only personal
services like repair work, tailoring etc. small factories, retail shops and
professional activities which can be set up as sole proprietary organisations.
In India, this form of organisation is quite popular and accounts for the
largest number of business units.
3.3 PARTNERSHIP
Meaning
Partnership is an
association of persons who agree to combine their financial resources and
managerial abilities to run a business and share profits in an agreed ratio.
Since the resources of a sole proprietor to finance, and his capacity to manage
a growing business is limited, he feels the need for a partnership firm.
Partnership business, therefore, usually grows out of the need for expansion of
business with more capital, better supervision and control, division of work
and spreading of risks.
The Indian Partnership
Act defines partnership as “Partnership” is the relation between persons who
have agreed to share the profits of a business carried on by all or any one of
them acting for all. The persons who have agreed to join in partnership are
individually called “Partners” and collectively a ‘firm’. A partnership firm
can be formed with a minimum of two partners and it can have a maximum of
twenty partners.
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3.3.1 Features of Partnership:
The features of partnership are as follows:
(i)
Existence of an
agreement: Partnership is formed
on the basis of an agreement between two or more persons to carry on
business. It does not arise out of the operation of law as in the case of joint
Hindu family business. The terms and conditions of partnership are laid down in
a document known as Partnership Deed.
(ii)
Engagement in business:
A partnership can be formed only on the basis of a
business activity. Its business may include any trade, industry or profession.
Thus, a partnership can engage in any occupation - production and/or
distribution of goods and services with a view to earning profits.
(iii)
Sharing of profits and
losses: In a partnership firm,
partners are entitled to share in the profits and are also to bear the
losses, if any.
(iv)
Agency relationship: The partnership business may be carried on by all or any
of the partners acting for all. Thus, each partner is a principal and so can
act in his own right. At the same time he can act on behalf of other partners
as their agent. Thus, every partner can bind the firm by his acts.
(v)
Unlimited Liability: The liability of partners is unlimited as in the case of
sole proprietorship. In case some obligation arises then not only the
partnership assets but also the private property of the partners can be taken
for the payment of liabilities of the firm.
(vi)
Common Management: Every partner has a right to take part in the running of
the business. It is not necessary for all partners to participate in the
day-to-day activities of the business but they are entitled to participate.
Even if partnership business is run by some partners, the consent of all other
partners is necessary for taking important decisions.
(vii)
Restriction on
transferability of share: No partner can transfer
his share in partnership to any other person. He may, however, do so with the
consent of all other partners.
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(viii) Registration: To
form a partnership firm, it is not compulsory to register it. However,
if the partners so decide, it may be registered with the Registrar of Firms.
There are advantages of registration, which are discussed later.
(ix)
Duration: The partnership firm continues at the pleasure of the
partners. Legally a partnership comes to an end if any partner dies, retires or
becomes insolvent. However, if the remaining partners agree to work together
under the original firm’s name, the firm will not be dissolved and will
continue its business after settling the claim of the outgoing partner.
3.3.2 Formation and Registration:
Partnership Deed:
Since partnership rests
on an agreement among persons, its formation does not involve any special legal
problems. Generally, the partnership agreement is reduced to writing and a
Partnership Deed is prepared. Partnership Deed lays down the terms and
conditions of partnership and the rights, duties and obligations of partners.
The following points are generally covered in the Deed:
(i)
The nature of business.
(ii)
Name of the firm and
the place where its business will be carried on.
(iii)
Amount of capital to be contributed by each partner.
(iv)
Duties, powers and obligations of all the partners.
(v)
Method of preparing accounts and arrangement for audit.
(vi)
Whether loans will be
accepted from a partner over and above the capital also, if so, at what rate of
interest.
(vii)
The amount to be
allowed as private drawings by each partner and the interest to be charged
thereon.
(viii) The
ratio in which profits are to be shared.
(ix)
Whether a partner can
be expelled and, if so, the procedure for the same.
(x)
Method for the settlement of disputes.
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(xi)
Circumstances under
which the partnership will stand dissolved, and in case of dissolution, under
whose custody the books of accounts will remain.
The Deed has to be
stamped and each partner should have a copy of it.
3.3.3 Registration of firm:
Registration of a
partnership firm is not compulsory under Indian Partnership Act. In England
registration is compulsory. In India, certain privileges which are allowed to
those firms, which are registered. But an unregistered firm suffers from
certain disabilities. These disabilities make it virtually compulsory for a
firm to get registered. A partnership firm may be registered at any time. That
is, at the time of formation or at any time during its existence. A partnership
firm desiring registration applies lo the Registrar of Firms in prescribed form
along with the registration fee. The application should state the following:
(i)
Name of the firm.
(ii)
The principal place of business of the firm.
(iii)
The name of any other place
where the firm is to carry on business:
(iv)
Date of admission of the partners in the firm.
(v)
Names and permanent addresses of the partners.
(vi)
Duration of the firm.
The application shall
be signed and verified by each partner. Changes in the above particulars have
to be communicated to the Registrar. The Certificate of registration is
reliable evidence and a conclusive proof of the existence of the firm.
3.3.4 Consequences of Non-Registration:
An unregistered firm
suffers from the following serious disabilities:
(i)
A partner of an
unregistered firm can not file a suit against the firm or any other partner for
enforcing his right arising out of the contract;
(ii)
An unregistered firm
cannot file suit against any third party for the recovery of the claims;
(iii)
Such a firm also cannot file a suit against any partner.
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3.3.5 Types of Partnership
According
to the nature of agreement among partners, there can be three types of
partnership as follows:
(i)
Partnership at-will: Such a partnership exists on the will of the partners.
That is, it can be brought to an end whenever any partner gives notice of his
intention to do so.
(ii)
Particular partnership:
A particular partnership is formed for undertaking a
particular venture. It comes to an end automatically with completion of the
venture.
(iii)
Partnership for a fixed
duration: Such partnership is for
a fixed period of time say 2 years, 5 years or any other duration.
3.3.6 Types of Partners
The
various types of partner found in partnership firms are as follows:
(i)
Active Partners: Partners who take active part in the conduct of
day-to-day business of the firm are called active partners. These partners
carry on business on behalf of the other partners.
(ii)
Sleeping or dormant
partners: Sleeping or dormant partners
are those who do not take active part in the management of the business. Such
partners only contribute capital in the firm and are bound by the activities of
other partners. However, they share in the profits and losses of the business.
(iii)
Others: Active and sleeping partners are, as a matter of fact,
the full-fledged partners i.e. they share in profits and losses of the business
and are liable for its dues. However, there are other types of partners also
who may be associated with partnership directly or indirectly. They are not
full-fledged partners, such partners may include the following:
(a)
Nominal Partners: Nominal partners are those who do not have interest in
the business but lend their name to the firm. They do not make any capital
contribution, and are not entitled to take part in management, but are liable,
like other partners, to
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third parties. Such
partners generally have a pecuniary interest (like a share in the profits) in
lending their name to a firm. However in certain cases they may not have any
pecuniary interest in doing so. For example, a reputed industrialist may,
without any profit motive lend his name to a firm run by his family members.
(b)
Partners by holding
out: If a person by his
words or conduct holds out to another that he is a partner, he will be
prevented from denying that he is not a partner. The person who thus becomes
liable to third parties to pay the debts of the firm is known as a partner by
holding out.
3.3.7 Minor
admitted into the benefits of partnership
A minor is a person who
has not attained the age of 18 years. Since a minor is not capable of entering
into a valid agreement, he cannot become partner of a firm. He may, however, be
admitted to the benefits of an existing partnership.
It is clear from the
preceding discussion that partners can be of three categories:
(i)
Those who share in the
profits and losses of the business and assume liability of the business debts
(like active partners, dormant partners and nominal partners).
(ii)
Those who share in profits only (like minor partners) and
(iii)
Those who assume
liability without sharing in the profits of the business (like partners by
holding out).
3.4.8 Merits of Partnership
A
partnership form of organisation offers the following advantages:
(i)
Ease in formation: A partnership is very easy to form. All that is required
is an agreement among the partners. Even the expenses to be incurred for
registration are-not much.
(ii)
Pooling of financial
resources: A partnership commands
more financial resources compared to sole proprietorship. This helps in
expanding business and earning more profits. As and when a firm requires more
money, more partners can be admitted.
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(iii)
Pooling of managerial
stalls: A partnership
facilitates pooling of managerial skills of all its partners. This leads
to greater efficiency in business operations. For instance, in a big
partnership firm, one partner can handle production function, another partner
can look after all marketing activity, still another can attend to legal and
personnel problems, and so on.
(iv)
Balanced business
decisions: In a partnership firm,
decisions are taken unanimously after considering all the major aspects of
a problem. This ensures not only balanced business decisions but also removes
difficulties in the smooth implementation of those decisions.
(v)
Sharing of risks: Unlike sole proprietary organisation, the risks of
partnership business are shared by partners on a predetermined basis. This
encourages partners to undertake risky but profitable business activities.
3.3.9 Limitations of Partnership
A
partnership form of organisation suffers from the following major limitations:
(i)
Uncertainty of
existence: The existence of a
partnership firm is very uncertain. The retirement, death, bankruptcy or
lunacy of any partner can put an end to the partnership. Further, the
partnership business can come to a close if any partner demands it.
(ii)
Risks of implied
authority: It is true that like
the sole proprietor each partner has unlimited liability. But his
liability may arise not only from his own acts but also from the acts and
mistakes of co-partners over whom he has no control. This discourages many
persons with money and ability, to join a partnership firm as partner.
(iii)
Risks of disharmony: In partnership, since decisions are taken unanimously, it
is essential that all partners reconcile their views for the common good of the
organisation. But there may arise situations when some partners may adopt rigid
attitudes and make it impossible to arrive at a commonly agreed decision. Lack
of harmony may paralyse the business and cause conflict and mutual bickering.
(iv)
Difficulty in
withdrawal from the firm: Investment in a partnership
can be easily made but cannot be easily
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withdrawn. This is so because the withdrawal of a partner’s
share requires the consent of all other partners.
(v)
Lack of institutional
confidence: A partnership business
does not enjoy much confidence of banks and financial institutions. It is
because the nature of its activities is not disclosed at public and the
agreement among partners is not regulated by any law. As a result large
financial resources cannot be raised by partnership and growth of business
cannot be ensured.
(vi)
Difficulties of expansion: It is difficult for a
partnership firm to undertake modernization of expansion of its
operations. This is because of its inability to raise adequate funds for the
purpose. Limited membership (restricted to
20)
and their limited personal
resources do not permit large amounts of capital to be raised by the partners.
Therefore, large-scale business cannot generally be organised by partnerships.
It is quite obvious
from the discussions that the partnership form of organisation is excellent
when the size of business is medium, i.e. neither too small not too large, and
when the partners can work in full co-operation with one another,
INTEXT QUESTIONS 3.1
1.
Whether the liability
of sole proprietorship is limited or unlimited?
2.
How many minimum
members are required to form partnership firm?
3.
Is it compulsory to register the partnership firm?
