A form of an organization influences the enterprise’s success thus, an entrepreneur has to select the best one from the types discussed below in detail.
Every business entity needs to select an appropriate legal structure or framework to work in. This legal structure determines the extent of ownership and responsibility of proprietor(s). A proper form of the organization strongly influences the enterprise’s success and prospects. Once selected, changing the ‘form’ is quite a complex, time-consuming and costly affair.
Business enterprises may be broadly classified under three categories.
- Private sector enterprises – Sole Proprietorship, Partnership, Joint Stock Company, Hindu Undivided Family Business, Co-Operative Society.
- Public sector enterprises- Departmental Undertakings, Statutory Corporation, Public Corporations
- Joint sector
Sole Proprietorship
“The one-man control is the best in the world if that man is big enough to manage everything.”
‘Sole’ means single, and ‘Proprietor’ means the owner. Sole Proprietorship is one of the oldest and simplest forms of business organization owned, managed, and controlled by only one person. The person alone gets the finance available and becomes the sole beneficiary of the profits earned by the business; at the same time is responsible for bearing the losses of the business.
Sole Proprietorship is easy to form as well as easy to close as it requires very few legal formalities and regulations to open /or close the business. The success or failure of an enterprise depends upon the intelligence and competence of the entrepreneur. The finance required for this type of business is also very limited. Therefore, one can start easily with less amount. The market for a sole proprietorship is local. Therefore, If you are planning to start a small business with less capital investment, then this form of business is the best one.
Partnership
A partnership is an association of two or more persons coming together to carry on a business and to share the profits and losses of the business. A partnership can be formed by making a written or oral agreement to carry a business jointly and share its proceedings.
For starting a partnership firm, at least 2 persons are required. Minors cannot form a partnership firm. A written agreement is more advisable than comparing to an oral agreement. The agreement between the partners is called Partnership Deed. Partnership Deed includes all the details about Business and Partners.
The main objective of this type of business is to earn profit and share among the partners, but if the firm occurs losses, then the personal properties can be used to pay the debts. As compared to sole Proprietorship, capital and managerial requirements are higher.
It is not compulsory to register your partnership firm as there are no penalties for non-registration, but it is advisable to get it registered, or else a partner cannot file a suit in any court against the firm or partner. If the firm is not registered, then the firm or the partners cannot claim a set-off (Adjustment of profits and debts) as well. Therefore it is advisory to get the partnership firm registered.
Joint Stock Company
A company means an association of a person formed for a common objective where capital is divided into an equal value called ‘shares’. A company is created by law, and according to law, it is an artificial human being and can be put to an end by the law itself.
A company is called an artificial human being because it can buy, sell and own property, sue others, and be sued by others. A company has an independent status, and it is different from its members. To form a company, at least 2 members should be there for a private company, and in the case of a public company, at least 7 members are required.
A company has to determine all its actions in the documents like Memorandum of Association and Articles of Association. Any work done beyond what is stated in these documents can lead to the closing down of the process of the company.
A Private Company uses ‘Pvt. Ltd’ at the end of its name, and A Public Company uses ‘Ltd.’ The minimum paid-up capital required by a Private Company is One Lakh Rupees, and for a Public Company, it is Five Lakh Rupees. A Private Company prohibits an invitation to the public to subscribe for any shares or debentures of the company, but in the case of a Public Company, it can invite the public to subscribe for shares or debentures.
Joint Hindu Undivided Family Business (HUF)
A joint Hindu family or Hindu Undivided Family Business is a unique form of business organization prevailing only in India. It is governed by Hindu law and represents a form that is owned, managed, and controlled by the male members of a joint Hindu family.
Creating HUFs is the best possible way to save taxes. The formation of HUFs requires at least 2 members must be there in the family, and there should be some existence of ancestral property. A male member becomes a member automatically by his birth. The senior-most male member of the family, known as ‘Karta,’ manages the affairs, having unlimited powers. The other male members are called ‘Coparceners’. Members other than Karta do not have the right to inspect the books of accounts. The HUF continues to operate forever as the death of members does not affect it.
Co-operative Organizations
A Co-operative organization works with the principle of each for all and all for each. The word ‘co-operation’ stands for the idea of living together and working together. A Co-operative is a form of organization wherein persons voluntarily come together with a motive to help each and not to earn profit.
Service is the main motive of this form of organization. The capital which is taken by its members is in the form of share capital. In India, the activities of co-operative societies are regulated by the Co-operative Societies Act and the State Co-operative Societies Acts. Members are entitled to get fixed dividends from the organization.
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