FORMS OF BUSINESS.pptx
- 1. FORMS/TYPES OF BUSINESS BY: Dr. Debajani Palai
- 2. INTRODUCTION OF BUSINESS • There are different forms of business organisation which are discussed in this chapter. These include the following: 1. Sole proprietorship 2. Joint Hindu family business 3. Partnership 4. Joint-stock Company 5. Cooperative Societies
- 3. SOLE PROPRIETORSHIP • Sole Proprietorship is a form of organisation owned, managed and controlled by an individual (also known as a sole proprietor) who is responsible for bearing all the risk and • Features The sole proprietor can establish and close the business without any legal formalities. The liability of the sole proprietor is unlimited. Being the sole owner, the sole proprietor bears all the risk and receives all the profits. All the decisions are taken and implemented in the organisation by the owner. Owners and businesses have no separate entity and are considered one in the eyes of the Even in case of a lack of business continuity, the business can continue until the owner
- 4. ADVANTAGES Prompt decision-making as all the decisions are to be taken by the owner. Being a sole owner, it is easy to maintain business secrecy. The owner enjoys all the profits as there is no one to share profits. A successful business provides satisfaction to the owner and a sense of achievement. No legal formalities are required for a business’s formation and closure, making it easy to start and end the business.
- 5. DISADVANTAGES Due to limited resources, a business can be funded from the owner’s savings or money borrowed from friends or relatives. The business’s continuity depends on the owner’s health and state of mind. If the business fails to repay debts, the sole proprietor’s personal assets are at risk. One person may not possess the ability to manage all the functions.
- 6. JOINT HINDU FAMILY BUSINESS • Joint Hindu Family Business business organisation, the business is owned and managed by the members of an undivided Hindu family, with the possibility of three successive business. • Features The business is formed with at least two members of a Hindu Undivided Family having Succession Act, 1956, governs it. Except for Karta, all the family members have limited liability up to their share in the Karta has the right to control all the activities in the business organisation. The business can be discontinued based on the consent of all the members of the family. Membership in the organisation is by birth.
- 7. ADVANTAGES Karta has complete control of the business, thus effective decision-making is ensured. The business continues till all the members wish to continue, and control is transferred to the next elder member in case of the death of ‘Karta’. Members of the family enjoy liability limited to their share in the business party. All the work is done with the common objective of growth as the family members have a sense of belongingness and loyalty.
- 8. DISADVANTAGES Due to limited financial resources, businesses can be funded mainly from ancestral property. The personal property of ‘Karta’ is at risk as he has unlimited liability. Due to the dominance of Karta, conflict may arise due to differences in opinion among members and ‘Karta’. Karta may not have knowledge and expertise of all the functions performed in the business.
- 9. PARTNERSHIP • As per the partnership Act 1932, the partnership is a relation with people who agreed to share the profits of business that is carried on by all or one of them acting for all. • Features The formation of a business is based on the provisions of the partnership Act 1932. The liability of the partners in this form of organisation is unlimited. All the partners share the risk that occurred in the business. All decisions are made with the consent of all partners, and each partner is responsible for operating the firm. The continuity of the business is determined by the partnership deed signed by the partners at the time the partnership is formed. Minimum 2 and maximum 50 members [as per the Companies (Miscellaneous) Rules 2014}, or maximum could be 100 ( according to Companies Act, 2013). Each partner is the owner and agent of the firm and agent to other partners.
- 10. ADVANTAGES As the registration is voluntary, businesses can be formed and dissolved with the approval of all partners. All decisions are made by consent partners, who take on responsibilities based on their competence. All the partners contribute funds that enhance the scope for large-scale company operations. All the partners bear the risks and responsibilities of the business It is easy to maintain confidential business information as there is no need to submit financial results.
- 11. DISADVANTAGES Each partner has an unlimited liability that is extended to their personal property. Due to the restriction of the number of partners, there is limited availability of finance. Due to differences in opinion, there are high chances of conflicts among partners. Any conflict between partners or the death of a partner may bring the business to an end. Due to a lack of public confidence and availability of financial reports, it is difficult for an outsider to ascertain the true financial position of the business.
- 12. TYPES Secret Partner: This partner contributes to the profit and losses of the firm and participates in managerial activities secretly. Active Partner: This partner has unlimited liability. They also contribute to the capital, share profit and loss, and participate in management. Sleeping or dormant partner: This partner does not participate in the management. They contribute capital and share profit and loss. They also have unlimited liability. Nominal Partner: Partner who does not contribute capital or share profit and loss but permits the partnership firm to portray them as partners. Partner by holding out: An individual who is not a partner but is portrayed as a partner by other partners of the partnership company and has unlimited liability. Partner by estoppel: An individual who is not a partner but projects themselves as partners to an outsider and has unlimited liability. • Minor as a Partner: The partner who is below 18 years of age can be admitted as a partner with the mutual consent of all the partners but, in the eyes of the law, is not a
- 13. COOPERATIVE SOCIETIES • Cooperative Society is an organisation of volunteers working for a mutual goal with the purpose of protecting members’ economic and social interests. It must be registered 1912. • Features Any individual, regardless of caste, gender, or religion, who has a similar interest is free society at any moment. As per the capital contribution, cooperative society members have limited liability. All decision-making authority rests with an elected managing committee chosen by vote principle. A cooperative society has separate identity status distinct from its members, and the also mandatory. The service motive of a cooperative society is to provide mutual help to the team
- 14. ADVANTAGES Each member has equal voting rights and can elect managing committee members. The liability of members is limited to their capital contribution. Cooperative societies continue to exist despite their members’ death, bankruptcy or insanity. A cooperative society does not require legal formalities for its formation. The government provides support to societies in the form of lower taxes, interest rates and subsidies. The members of the social work voluntarily, which helps in reducing costs.
- 15. DISADVANTAGES Societies must adhere to the government’s laws and regulations and submit society audited financial reports. However, such government interference impacts such a society’s freedom of work. Members’ capital contributions are the only funding source, and low dividends hinder members from contributing to society. Volunteer members may lack the required competence and skills, resulting in inefficient operations and management. Maintaining secrecy is difficult as members provide all information about the society’s operations at the meeting. Differences of opinion as a result of individual interest over welfare may lead to conflicts amongst members.
- 16. TYPES Producers cooperative societies: In this type of cooperative society, producers’ interests are protected by societies that provide high-quality, low-cost raw materials and other Farmer’s cooperative societies: These societies are established to provide farmers with better inputs at affordable rates to improve productivity. Consumer cooperative societies: To protect the interests of the consumers, the society provides high-quality products and services at economical rates. Marketing cooperative societies: In these societies, services are provided related to the marketing of the products by small producers. Cooperative housing societies: These societies are formed to construct houses for their members at an economical rate. Credit cooperative societies: Such societies are established to offer financial assistance to their members at reasonable terms.
- 17. JOINT STOCK COMPANIES • The Companies Act, 2013 defines “A company as an artificial person having a separate legal entity, perpetual succession and a common seal.” • Features of a Joint Stock Company A company is established with the law and legal status, yet it does not function like humans and acts as an artificial person. In the name of the corporation, the board of directors conducts all the business activities. A company has its separate legal identity distinct from its owner with the incorporation of a company. The company is established by fulfilling all the legal formalities according to the Companies Act, 2013.
- 18. CONT… A company is created by law and can only be wound up by law. The existence of the company is not affected by the status of members. The Board of Directors control and manage the company’s business affairs. A company has limited liability only to the extent of the capital contribution. A company cannot have its own signature because it is an artificial legal person. As a result, the common seal serves as the firm’s official signature. To be legally binding, all official papers must bear the same seal. All the shareholders of the company bear the risk of loss in proportion to their investment in the company.
- 19. ADVANTAGES All the shareholders have limited liability for their investment in the firm. Hence, there is no risk of losing personal assets. Shares can be converted into cash or can be easily sold in the market. The company’s existence continues and is not affected by the status of the shareholders. Companies can raise public funds and borrow from financial institutions or banks. Professional management as well as specialised individuals are required in large-scale operations.
- 20. DISADVANTAGES The formation of the company is time-consuming and lengthy as the company needs to fulfil the documentation and legal formalities. There is no confidentiality maintained as all the information is disclosed to the public. As professionals and not owners who manage business affairs, there is a lack of personal contact with the customers and employees. Due to numerous rules and regulations, there is no freedom to work, which consumes time, effort and money. There is a delay in decision-making, as the decision needs to follow a set of hierarchies. The decisions may get influenced due to the personal interest of the directors, as the stakeholders have minimum control over running a business. Management finds it challenging to satisfy everyone because many stakeholders have conflicting interests.
- 21. TYPES • Private Company A company must have a minimum of 2 or a maximum of 200 members. Restricted right to transfer shares. Funds cannot be generated from the general public. Uses ‘Private Limited’ after the company name. • Public Company Minimum 7 members with no limit on maximum members. Free to transfer shares. Issue shares to the general public. Uses ‘Public Limited’ after the company name.
- 22. STATUTORY CORPORATIONS • Statutory Corporations are body corporates formed by a special act of parliament or by the central or state legislature. It is fully financed by the government. Its powers, objects, limitations etc. are also decided by the act of the legislature. Examples include Air India, State Bank of India, Life Insurance Corporation of India etc. • It is an artificial person created by law & is a legal entity. Such corporations are managed by the board of directors constituted by the government. A corporation has a right to enter into contracts & can undertake any kind of business under its own name.
- 23. CONT… • A statutory corporation is answerable either to parliament legislature or state assembly whosever creates it. Parliament has no right to interfere in the working of statutory corporations. It can only discuss policy matters & overall performance of corporations. • A statutory corporation enjoys financial autonomy or independence. It is not subject to the budget, accounting & audit controls. After getting the prior permission from the government, it can even borrow money within & outside the country. • A public corporation is able to manage its affairs with independence & flexibility. • Board of directors of statutory corporation consists of business experts & the representatives of various groups such as labor, consumers nominated by the government.
- 24. ADVANTAGES • Efficient staff: The public corporations can have their own rules & regulations regarding remuneration & recruitment of employees. It can provide better facilities & attractive terms of service to staff to secure efficient working from its staff. • Easy to raise capital: As such corporations are fully owned by the government, they can easily raise required capital by floating bonds at a low rate of interest. Since these bonds are safe, the public also feels comfortable in subscribing such bonds.
- 25. DISADVANTAGES • Lack of initiative: Public corporations do not have to face any competition & are not guided by a profit motive. So the employees do not take initiative to increase the profit & reduce loss. The losses of the public corporation are made good by the government. • Rigid structure: The objects & powers of public corporations are defined by the act & these can be amended only by amending the statute or the act. Amending the act is a time-consuming & complicated task. • Clash amongst divergent interests: The government appoints the board of directors & their work is to manage & operate corporations. As there are many members, it is quite possible that their interests may clash. Because of this reason, the smooth functioning of the corporation may be hampered.
- 26. HOLDING & SUBSIDIARY COMPANIES • A holding company is a type of financial organization that owns a controlling interest in other companies, which are called Subsidiaries. • The parent corporation can control the subsidiary's policies and oversee management decisions but doesn't run day-to-day operations. • Holding companies are protected from losses accrued by subsidiaries—so if a subsidiary goes bankrupt, its creditors can't go after the holding company. • A holding company typically exists for the sole purpose of controlling other companies. Holding companies may also own property, such as real estate, patents, trademarks, stocks, and other assets.
- 27. ADVANTAGES OF HOLDING COMPANY • Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors cannot legally pursue the holding company for remuneration. • Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding company, while creating subsidiaries for each of its business lines. For example, one subsidiary may own the parent corporation's brand name and trademarks, while another subsidiary may own its real estate.
- 28. DISADVANTAGES OF HOLDING COMPANY • There are some disadvantages to owning subsidiaries through a holding company. • For investors and creditors, it may be difficult to find an accurate picture of the overall financial health of the holding company. • It is also possible for unethical directors to hide their losses by moving debt among their subsidiaries. • Holding companies can also exploit their subsidiaries, by forcing them to appoint chosen directors or forcing the subsidiaries to buy products from one another at higher-than-market prices. They may also force subsidiaries to sell products to one another at below-market prices.
- 29. SUBSIDIARY COMPANY • In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or holding company. • The parent holds a controlling interest in the subsidiary company, meaning it owns or controls more than half of its stock. In cases where a subsidiary is 100% owned by another company, the subsidiary is referred to as a wholly owned subsidiary.
- 30. ADVANTAGES • A subsidiary is a company that is more than 50% owned by a parent company or holding company. • Subsidiaries are separate and distinct legal entities from their parent companies. • Companies buy or establish a subsidiary to obtain specific synergies or assets, secure tax advantages, and contain or limit losses. • A parent company buys or establishes a subsidiary to obtain specific synergies, such as a more diversified product line or assets in the form of earnings, equipment, or property. • Subsidiaries can be the experimental ground for different organizational structures, manufacturing techniques, and types of products
- 31. DISADVANTAGE • Extra legal and accounting work • Greater bureaucracy • Complex financial statements • Liability for subsidiary's actions, debts
- 32. INTERNATIONAL ORGANIZATIONS • An international organization is one that includes members from more than one nation. Some international organizations are very large, such as corporations. Others are small and dedicated to a specific purpose, such as conservation of a species. Many international organizations are intergovernmental. • Many international organizations are intergovernmental. Intergovernmental organizations arise from multiple governments forming an international organization. There are more than 300 intergovernmental organizations around the world. • The United Nations (UN) is the largest and most familiar intergovernmental organization. In 1945, at the end of World War II, governments wanted to avoid future wars. They formed the UN.
- 33. FEATURES • Ensuring international peace and security. • Encouraging co-operation to resolve economic, political, and cultural problems. • Dispute resolution. • Promotion of human rights and freedoms.
- 34. MULTI-NATIONAL COMPANIES • Multinational Corporations or Multinational Companies are corporate organizations that operate in more than one country other than home country. Multinational Companies (MNCs) have their central head office in the home country and secondary offices, facilities, factories, industries, and other such assets in other countries. • These companies operate worldwide and hence also known as global enterprises. The activities are controlled and operated by the parent company worldwide. Products and services of MNCs are sold around various countries which require global management. • Examples: TCS, Tech Mahindra, Deloitte, Capgemini are some of the examples of MNCs in India.
- 35. FEATURES • High Turnover and Many Assets • MNCs operate on a global scale. Which means they have huge assets in almost all countries in which they operate. Their turnovers can also be incomprehensibly large. For example, Apple has a market capitalization of 1 trillion dollars. This is bigger than the entire economy of Saudi Arabia! • 2. Control • MNCs have unity of control. So while they have many branches in many countries, the main control will remain with the head office in its country of origin. The business operations in the host country have their own management and offices, but the ultimate control will still remain at the head office.
- 36. CONT… • Technological Advantages • As we saw earlier, an MNC has at its disposal huge amounts of wealth and investments. This allows them to use the best technology available to boost their products and their company. Most companies also invest huge money in their Research & Development Department to invent and discover new technological marvels. • 4. Management by Professionals • An MNC is run by very competent and capable individuals. They have suitable managers to take care of their business operations, technology, finances, expansion etc. And they are also able to attract the top talent to their corporations due to their resources and their reputations.