Forms of Business Ownerships: To initiate any entrepreneurial activity, an entrepreneur has to select a form of business ownership. In other words, one of the first decisions that an entrepreneur has to take as owner is, how the enterprise should be structured or through which form of ownership it would operate? The forms of businesses are associated with ownership which determines the authority and responsibility of the owners. In practical, the forms of business ownerships are those legal forms according to which an enterprise/business is organised and run. Hence, the legal form of business ownership is called the form of business ownership.
The other parties recognise an enterprise and its existence through its form. Choosing the appropriate form for any entrepreneurial activity is very crucial as the success of enterprise depend on the selection of form of business ownership. The form of business ownership defines the rights and liabilities of entrepreneur(s), control, life span, and financial structure, etc.Forms of Business Ownerships
The above description indicates that an enterprise are often run through various forms/modes. Some businesses are operated and managed by a single person and some by many people. Beside this, some businesses are run in private sector, while others are in the public (government) sector, and some are in joint (public and private). Under entrepreneurship, an entrepreneur can run his enterprise in following forms:
i) Sole Proprietorship or Sole Trade
ii) Joint Hindu Family Business/Firm
iii) Partnership Firm
iv) Limited Liability Partnership (LLP)
v) Joint Stock Company (Public and Private)
vi) One Person Company
vii) Cooperative Society/Enterprises
Sole trade, Joint Hindu closed corporation , and partnership firm are often categorised as non-corporate et al. (LLP, Joint Stock Company, One Person Company, and cooperative enterprise) are often categorised as corporate forms of ownerships. The basic difference between these two categories is legal formalities. Non- corporate form of business may be started without any legal formalities while corporate forms of business ownerships can be started and run only after completing legal formalities as prescribed under the governing laws of respective sorts of business ownerships.
Sole Proprietorship is one among the only , oldest and least expensive forms of business ownership within the world of entrepreneurship. Most of this day sorts of business ownerships are the developed sorts of sole proprietorship. It is also known as sole trade, individual business or single entrepreneurship. This is very fashionable sort of business in India. Due to various features provided by this form of business ownership, it is regarded as best form of business ownership.
Sole trade business is established by one individual. He invests the required amount in the business, manages the business himself, bears all business risks alone and gets all the profits. Due to these unique features, William R. Basset said that “The one man control is that the best within the world if that one man is large enough to manage everything”. The owner of the business is understood as Sole Trader. This individual entrepreneur is fully liable for all business debts and liabilities. Examples of this form of business ownership are kirana stores, local restaurant, and home-based businesses, etc. In this form of business, entrepreneur has unlimited liberty to run his business. Entrepreneur may select any type of business without meeting any legal formalities except those in which license may be required from the government bodies like health department, the municipal authority, or some other bodies.
Features of Sole Proprietorship
Following are the main features or characteristics of the only trade sort of business ownership:
i) Sole trader is the only owner of all the assets and resources of business. ii) Sole trade business is one man show as owner has to take all the decisions.
iii) The liability of the owner is unlimited and if the debts of the business are not met from the assets of the business, his personal property can be utilized for this purpose.
iv) The profitsof the business totally belong to owner and losses are borne by owner only. v) Single entrepreneur can select any trade as per his choice.
vi) All the information pertaining to business rests only with business entrepreneur.
vii) There is no separate identity of business and owner in this form, both are the one.
Benefits of Sole Proprietorship
Sole trade business provides some special advantage and due to these advantages this form of business is very popular:
i) It is very easy to start as there is no need to complete any legal formalities except those cases where license is must. Example, to start medical store, it is necessary to get license form health department. ii) Quick decision making is another advantage of this form of business as one man manages all the business activity.
iii) Sole trader is free to change his business at any point of time as he is the only owner of business.
iv) No outsider can get the secret information of the business like profits, losses, customers and assets, etc. as every information rests with the owner only.
v) Direct motivation is there in this form of business as owner solely takes all the profits and bears all the losses and risks. vi) Sole trader can maintain personal relations with customers to know more about their tastes, like and dislikes etc.
vii) It provides training to run medium and large scale business to individual owners viii) It can be started with minimum investment.
Disadvantages of Sole Proprietorship
Along with the above advantages sole trade business suffers from following disadvantages:
i) The biggest disadvantage of this form of business is unlimited liability. Owner’s personal property can also be utilized to meet the debts of the business. ii) Due to individual ownership, limited capital and sources are available for business.
iii) Limited managerial support is available for this form of business as one man can never have all the managerial skills.
iv) Stability of business is always questionable as owner can close his business at any point of time. Moreover, death of owner also results in closure of the enterprise.
v) Sometimes business suffers from losses due to individual and hasty decisions.
vi) It suits only for few businesses like shops, restaurants, and small businesses etc.
Joint Hindu Family Business/Firm
A business enterprise which is run by the group of people belonging to the same family is known as Joint Hindu Family Business. This form of business is operated according to Hindu Law, where all the family members including unmarried daughters and wives are the members of the business. In simple terms, Joint Hindu closed corporation is that sort of business which is carried by all the members of Joint Hindu Family under the control of Mukhiya (Head of the family). Mukhiya or Manager is known as Karta and members are known as Co-parceners. This form of business ownership is based on the two facts:
1) Coparcenary: It means common ownership within the ancestral property. As per Coparcenary, an individual have a right in the family property and can ask for his/her share. This individual is known as Coparcener.
2) Common Property: consistent with Hindu Law, Joint Hindu Family possesses a standard property which is employed for the welfare of all the members of the family. Common property includes; ancestral property, property created through ancestral property and personal property treated as family property.
According to Hindu Law there are two community controlling Hindu families; Mitakshara and Dayabhag. Mitakshara is popular within the country except Assam, Bengal and a few parts of Orissa. Under this community, with the birth, a son gets rights within the ancestral property. Dayabhag community exists in Assam, Bengal, and some parts of the Orissa. Under this community, a son gets rights in the ancestral property only after the death of the father.
Characteristics of Joint Hindu Family Business
Following are the characteristics of Joint Hindu Family Business:
i) Joint Hindu Family Business is operated according to Hindu Law.
ii) This form of business is controlled and managed by Karta.
iii) The liability of all the members (coparceners) except Karta is limited up to the individual’s interest in the ancestral property. The liability of the Karta is unlimited. iv) This form of business is easy to start as there is no need of any registration.
v) Shares of the family members may increase or decrease with the birth of new member or death of existing member.
vi) this is often more permanent sort of business than sole trade as there’s not effect of any death on the business.
To overcome the limitations of older forms of business ownerships like lack of capital, limited skills, etc., a new form of business is available i.e. partnership form of business ownership. Partnership form of business ownership is that form in which two or more than two individuals willingly join together and start some lawful entrepreneurial activity. A partnership firm is an association of two or more persons who run business together for the objective of profit earning.
According to section 4 of the Indian Partnership Act, 1932, “Partnership is that the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” supported this definition it are often said that partnership could also be a quite agreement between two or quite two persons to run the business and divide the profits of the business. These persons are known as partners and their group is called firm and the name under which they run their business is known as name of the firm.
Features of Partnership Firm
Following are the characteristics/features of the partnership which is governed under the Indian Partnership Act, 1932:
i) To establish a business under partnership form, there is a need of two or more than two persons. The Partnership Act does not fix any limit on the number of partners but as per Companies Act the number of partners cannot be more than ten in banking business and twenty in any other business. If the number of partners reduces below two and more than ten or twenty, than business is declared illegal.
ii) The existence of partnership firm comes from contract between members and not from status. It is important to have a contract between partners to be a legal firm. The agreement/contract between partners is known as Partnership Deed. iii) There must be an agreement between partners to share profit or loss as profit is the main motive of business.
iv) Each partner is responsible collectively or individually for all the liabilities of partnership. Hence, in partnership sort of business ownership, liability of the partners is unlimited.
v) It is very easy to form a partnership firm as there is no legal binding on registration of firm. Agreement may be oral or written. If partners want to register their firm, the procedure is very simple. vi) This form of business is flexible in nature, if partner want to change their business, it can be changed. vii) Due to unlimited liability, partners put their whole heated efforts to run their business.
viii) Due to limited number of partners, partnership firm may not raise much capital as other forms like companies can generate.
ix) In partnership, a partner cannot transfer his interest/share in the firm to outsiders without the consent of all partners.
Limited Liability Partnership (LLP)
Limited Liability Partnership, popularly referred to as LLP, is world recognised sort of business ownership. this type of ownership was introduced in India by an Act i.e. indebtedness Partnership Act, 2008 which was notified on 31st March, 2009.This sort of business ownership combines the benefits of both partnership and company form of business . LLP sort of business enables entrepreneurs to mix professional knowledge and entrepreneurial skills. LLP is an alternate to the normal partnership which contains the restrictions of unlimited liability and limited managerial skills, etc. this type of business ownership enables professional knowledge and skill to mix , organise, and operate entrepreneurial activity in an efficient manner.
Characteristics of indebtedness Partnership
Following are the features of indebtedness Partnership (LLP):
i) LLP is governed by the indebtedness Partnership Act, 2008. Provisions of Partnership firm aren’t applicable to indebtedness Partnership sort of business.
ii) LLP may be a separate legal entity. it’s a man-made person being invisible, intangible having no body, mind, and soul. It exists within the eyes of law.
iii) As per LLP Act, 2008, there should be a minimum of two partners to start out entrepreneurial activity. there’s no maximum limit on the quantity of partners. If at any point of your time , number of members reduces below two and LLP carries its business operation quite six months, the partner who carries the business quite six months shall be personally responsible for the liability of LLP for those obligations of LLP incurred during that period. iv) it’s perpetual succession. Any change in its partners shall not affect its existence like ordinary partnership firm. this type of business is more almost like company sort of business.
v) The liability of partners in LLP is restricted up to the capital contribution of the partners.
vi) LLP shall have a minimum of two Designated Partners who are individuals and one among them shall be a resident of India. just in case of an LLP during which all partners are body corporate, a minimum of two nominees of such bodies shall act as Designated Partners. vii) LLP is made to hold out business or profession with a motive of profit earning and partners are liberal to manage the business directly, unlike shareholders.
viii) Provisions of Companies Act on National Company Law Tribunal, Designated Partner number (DPIN), and Registrar of Companies are made applicable to indebtedness Partnership. Central govt. may further notify the provisions of Companies Act to any LLP.
ix) In LLP, Designated Partner number is mandatory for Designated Partner of LLPs.
x) Formation of LLP is straightforward as compared to companies but not as easy as just in case of sole trade and partnership.
xi) LLP Act 2008 provides flexibility to the LLP to manage and operate its business. Partner can decide the operations and ways of business. xii) In LLP, it’s easy to hitch or leave LLP and partners can transfer the ownership consistent with the provisions and terms of LLP agreement. xiii) LLP can attract finance from private equity investors and financial institutions etc.
xiv) Numbers of statutory compliances in LLP are limited as compared to company sort of business.
Joint Stock Company
To remove the restrictions of above discussed sort of business ownerships, entrepreneurs have the choice of company sort of business . consistent with H.L. Haney, “A joint stock company could also be a voluntary association of individuals for profits, having a capital divided into transferable shares, the ownership of which is that the condition of ownership.” Company sort of business ownership is that the group of individuals which is incorporated under the businesses Act 1956. many of us jointly invest capital during a company; therefore it’s called Joint Stock Company. The capital of company is split into transferable shares, which suggests share are often bought and sold. Liability of members is restricted . Company may be a separate legal entity and its business is run through harbor seal . Existence of company is continuous or perpetual and break away its members. In simple words, shares of company are transferrable and lifetime of company isn’t suffering from the entry and exit of its shareholders.
Characteristics of a Joint Stock Company
Following are the foremost features of company kind of business ownership:
i) a corporation is an incorporated or registered association/group of persons. Minimum seven persons required to make a Public Company while minimum two persons can form a personal Company.
ii) a corporation is understood as artificial person because it is made by law.
iii) a corporation may be a separate legal entity and it’s free from its shareholders. It can purchase property in its name and may enter into agreements.
iv) it’s a perpetual succession. Existence of company isn’t suffering from the lifetime of its member which is why it’s said that member may come and go but company goes on forever.
v) thanks to separate legal entity, liability of its shareholders is restricted to the par value of the shares subscribed by the shareholder.
vi) Company is a man-made person so because it cannot put its signature. Companies Act provides the proper to use a standard seal. harbor seal could also be a special seal bearing the name of the company and is remains within the possession of its Secretary.
vii) to form any document legal, it’s compulsory to possess the harbor seal along side the signatures of atleast two directors.
viii) Actions or activities of a corporation are determined through two main documents i.e. Memorandum of Association and Article of Association. Company cannot transcend these two documents.
ix) a corporation can raise huge amount of capital by issuing shares and debentures within the market.
x) thanks to huge capital, a corporation also can utilize the services of experts like specialised managers and Company Secretary, etc. xi) Unlike sole trade and partnership firm, risk is split into number of shareholders.
xii) The formation of a corporation could be a tough and dear task. such a lot of formalities ar needed to complete before begin of business. xiii) Since a corporation is associate incorporated/ registered body, it’s to follow several provisions and rules of various Acts. xiv) Company variety of concern is incredibly widespread and appropriate specially for giant scale businesses.
xv) finishing up of the corporate is additionally terribly tough and a really extended procedure has got to be followed to land up the corporate.
Types of Company
Companies ar divided into following 2 categories:
A) Private Company: in keeping with Sec. 3(1) (iii) of the businesses Act, 1956, a personal company suggests that a corporation that through its Article of Association:
a. Restricts its members to transfer its shares;
b. Puts limit on range of members i.e. minimum 2 and most 50;
c. Restricts public to subscribe its shares and debentures;
d. Minimum paid capital of 1 100000 rupees (amount is subject to vary from time to time);
e. the other restriction obligatory by govt. time to time through Company Act.
B) Public Company: in keeping with Sec. 3(1)(iv) of the businesses Act, 1956, “Public Company suggests that a corporation that isn’t non-public.” It suggests that a corporation which:
a. doesn’t prohibit its members to transfer its shares;
b. doesn’t place limit on most range of its members;
c. invitations public to subscribe its shares and debentures;
d. Minimum paid capital of 5 lakhs rupees (amount of capital is subject to vary from time to time);
e. the other restriction obligatory by govt. time to time through Company Act.
One Person Company (OPC)
The idea of 1 Person Company (OPC) is provided within the provisions of recent Company Act, 2013. this kind of business possession provides the advantages of company variety of business to a private additionally. OPC could be a company within which a private holds the complete of the share capital with alternative members. As per provision of section 2(62) of the company Act, 2013 “one person company suggests that an organization that has only one person as member.” One Person Company ar typically shaped by solely a natural one that is associate Bharatn subject and resident of India.
Characteristics of a One Person Company
Following are the features of a one Person Company:
i) OPC is associate incorporated entity and it’s going to be registered with one person.
ii) The liability of the only real shareowner shall be restricted up to capital contribution unless business isn’t run in jugal bone fide manner.
iii) One Person Company is managed by the owner or his representative. iv) There ought to be atleast one director of OPC.
v) OPC can meet all the statutory necessities as prescribed in firms Act.
vi) It provides opportunities to little entrepreneurs and skilled like charted accountants, lawyers, doctors, etc. to get pleasure from the benefits of company kind of business.
vii) in conjunction with company entity, it provides blessings like fast higher cognitive process and business secrecy, etc.
viii) because of one man management, lifetime of OPC is unsure.
ix) It suits to skilled activities and little businesses.
Cooperative enterprises could be a voluntary association of cluster of persons UN agency have joined along to push their common interest. the fundamental distinction between Cooperative enterprise and alternative sorts of businesses is that in conjunction with business principles, it follows the principle of serving members of the enterprise. Cooperative enterprise is made and registered beneath Cooperative Societies Act, 1912 or beneath the involved State Cooperative Societies Acts. It works beneath the locution “one for all and every one for one.” samples of this kind of business possession ar agriculture cooperatives, selling cooperatives, and shopper cooperatives, etc.
Features of Cooperative Enterprise
i) it’s a voluntary association of persons happiness to consistent cluster.
ii) Membership of cooperative enterprise is receptive all and there’s no limitation on the quantity of members.
iii) It works for the common interest of all the members of the cooperative enterprise. iv) The prime motive of the cooperative firm is service of members.
v) Members of the cooperative contribute capital inside the kind of shares. vi) it is a separate legal entity and has perpetual life and is not littered with the entry and exit of members.
vii) Cooperative firm’s profit is distributed among its members inside the kind of dividend. viii) Members of the cooperative perform the social control tasks in democratic manner.
ix) Liability of its members is restricted to the capital contribution.
x) Most of the finance is contributed by state or central govt. to cooperative enterprises.
xi) Cooperative enterprise gets exemption from tax on their earnings.