📘 Chapter 2 – Forms of Business Organisation

Every business needs to choose a form of ownership that suits its nature, size, capital needs, and level of risk. This chapter explains different types of business organisations and how they function.

 

1. Meaning of Business Organisation

A business organisation refers to the legal structure or ownership format under which a business operates. Choosing the right form is important because it affects how decisions are made, how profits are shared, and how risks are borne.

 

2. Types of Business Organisations

There are five main forms of business organisations:

 

A. Sole Proprietorship

A sole proprietorship is a business owned and run by a single individual.

Features:

• Owned and managed by one person

• Easy to start and close

• The owner gets all the profits and bears all the losses

• Unlimited liability, meaning the owner's personal property can be used to pay business debts

• Suitable for small-scale businesses like grocery stores, bakeries, tailoring, etc.

Advantages:

• Full control and quick decision-making

• Simple to start with low capital

• Personal contact with customers

Limitations:

• Limited resources

• Unlimited liability

• Business may stop if the owner falls ill or dies

 

B. Hindu Undivided Family (HUF) Business

This form of business is found only in India. It is owned by members of a Hindu Joint Family and is governed by Hindu Law.

Features:

• The eldest male member is called the Karta, and he manages the business

• Membership is by birth in the family

• Only Hindus can form HUF businesses

• Karta has unlimited liability; others have limited liability

Advantages:

• Continuity even after the death of a member

• Karta has complete control

• It preserves family tradition

Limitations:

• Limited capital

• Karta may make wrong decisions

• Conflicts can arise among family members

 

C. Partnership

A partnership is a business owned by two or more persons who agree to share profits and responsibilities.

Features:

• Formed through an agreement (written or oral)

• Maximum of 20 partners (10 in banking)

• Partners share profits and losses

• Unlimited liability

• Governed by the Indian Partnership Act, 1932

Advantages:

• More capital than sole proprietorship

• Shared responsibilities

• Simple to form

• Diverse skills and expertise of partners

Limitations:

• Risk of disputes between partners

• Unlimited liability for all partners

• Limited life; the firm may dissolve if a partner leaves or dies

 

D. Cooperative Society

A cooperative society is a voluntary association of people who come together for a common purpose like service or mutual help, not just profit.

Features:

• Open to all who are willing to join

• One member = One vote, regardless of capital contributed

• Registered under the Cooperative Societies Act

• Run democratically

• Profits are shared among members

Advantages:

• Easy to form and open to everyone

• Members work for mutual benefit

• Limited liability

• Stable and democratic

Limitations:

• Limited capital

• Poor management if members are not trained

• Less incentive to work hard due to equal voting rights

 

E. Company

A company is a separate legal entity formed under the Companies Act. It is owned by shareholders and managed by a board of directors.

There are two main types of companies:

1. Private Company – Limited number of shareholders, cannot invite public to buy shares.

2. Public Company – Can invite public to buy shares; minimum of 7 members.

Features:

• Separate legal entity from its owners

• Limited liability of shareholders

• Perpetual existence, not affected by death of members

• Ownership and management are separate

Advantages:

• Large capital can be raised from public

• Limited liability reduces risk

• Professional management

• Long-term stability

Limitations:

• Complex legal formalities

• Less personal contact with customers

• Decisions may take longer

• Risk of fraud in large companies

 

3. Choice of Suitable Form of Business

While starting a business, the form of ownership should be chosen based on:

• Nature and size of the business

• Capital needed

• Willingness to take risk

• Need for control or flexibility

• Legal requirements

 

Conclusion

Each form of business organisation has its own advantages and disadvantages. Small businesses may prefer sole proprietorship or partnership, while large businesses benefit from forming companies. The decision depends on the goals, resources, and preferences of the business owner.