BANK INTERNAL PROMOTION EXAM | TYPES OF BUSINESS ORGANIZATION
It can be started by anyone, at least someone who is capable of entering into a contract. It could be a small stationery store, where, the chances are you are transacting with the proprietor himself or herself. This is a form of sole proprietorship. And it is most suitable for small businesses when they begin their operations. There are some other forms of business which we can be found getting interacted with on a daily basis such as partnership firms (mostly formed by the professionals), Hindu Undivided Family wherein, the members of a family operate the business it could be a company, which is managed by some designated individuals known as Directors.
In this form of business organization, the business is owned, managed, and controlled by one person. And this one person receives all the profits and bears all the risks associated with the business as it is evident from the word sole in the ‘ sole proprietorship’.
This type of business is most common in personalized services. For example: Hair salons, retail shops, and beauty parlors.
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CHARACTERISTICS OF SOLE PROPRIETORSHIP:-
The primary features of a business handled by sole proprietorship are discussed below:
(i) Formation and closure: No law governs the business of proprietorship. Although in some of the cases, one might need a license to open some specific business, other than that there are hardly any legal formalities that are required to open a sole proprietorship.
(ii) Liability: The liability towards the third parties by a sole proprietorship is unlimited in nature. It means that the proprietor will have to pay the business debt with his personal assets when the business assets are not enough to meet all the business debts.
(iii) Sole risk taker and profit recipient: A sole proprietor bears all the risks associated with the business by himself/ herself. So, if the business turns out to be profitable then all the profits are also borne by him.
(iv) Control: Being the sole owner of the business, the proprietor has all the rights to run the business and the way he or she wants to without interference from the outsiders. All this is also related to business lies absolutely on them.
(v) No separate entity: From a legal point of view, there is no distinction made in the sole trader and his or her business. Thus, business and the owner are seen as one person. This way for all the duties of the business, the proprietor was held responsible.
(vi) Lack of business continuity: This kind of business is owned by one person, the business also dies along with the owner. That means on death, imprisonment, physical ailment, insanity or if the proprietor turns bankrupt, it will have a direct impact on the business and could also result in the closure of the business.
HINDU UNDIVIDED BUSINESS (HUF)
Hindu Undivided Family, HUF, is the oldest form of business organization which is only found in India.
It is a kind of business that is owned as well as carried by the family members and is governed by Hindu Law. The membership of HUF is based on birth and the three successive generations can become members of this type of business.
It is controlled by the head of the business who is usually the eldest member of the family and is known as Karta.
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CHARACTERISTICS OF SOLE PROPRIETORSHIP:-
(i) Formation: At least two persons of the family who have inherited the ancestral property are required to form a HUF. This kind of business does not need any e legal agreement because the membership is given by birth. The HUF business is governed by the Hindu Succession Act, of 1956.
(ii) Liability: The Karta of the HUF is unlimited in nature while the liability of all the other members is limited to their share of coparcenary property of the business.
(iii) Control: All the control of the family business remains with Karta of HUF. He is the one who takes all the decisions of the business which are binding on the other members of HUF and it is Karta himself who is authorized to manage it.
(iv) Continuity: The HUF (business) continues even if the Karta dies. The vacant position is then taken over by the next eldest member of the family to keep the business stable. However, through mutual consent of the members, the business can be terminated.
(v) Minor Members: Because the members of the HUF get included in the family business by birth, therefore, minors can also become members of this business.
There are some inherent disadvantages in the sole proprietorship in regard to finance and Management. Those inherent disadvantages can be overcome with the partnership.
The partnership form of business serves higher capital investment, varied skills, and risk sharing.
The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”
CHARACTERISTICS OF SOLE PROPRIETORSHIP:-
(i) Formation: Although a partner can later recover the amount equal to his share in liability as per the partnership deed from the other partners.
A partnership firm is formed by entering into a legal agreement that governs the partners and the other aspects of the business that are required to conduct it such as sharing of profit and loss etc.
(ii) Liability: The partner’s liability is unlimited in nature. Even personal assets could be utilized to pay off the business debt if the business assets are insufficient to pay them. To further explain it, all the partners are jointly as well as individually liable to pay the debts of the company.
(iii) Risk bearing: All the partners of the firm bear the risk and rewards involved in the business together as per the agreed profit and loss ratio.
(iv) Decision making and control: All the decisions of the business article mutually by all the partners. Therefore, joint efforts of all the partners are involved.
(v) Continuity: One of the characteristics of partnership is that if there is any death, retirement, insolvency, or insanity of any partner, it directly leads to termination of the business.
(vi) Number of Partners: Only two individuals are required to start a partnership.
(vii) Mutual agency: As the term partnership means, it is a business that is carried by all (or in some cases carried by one partner acting on behalf of all others). In other words, every partner is a principal and an agent. Agent in the way that he or she represents all the others and therefore, his or her actions are binding on them. The principle in the way that he or she can also be bound by any other partner’s actions.
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Our company has been defined as an association of persons who come together to carry out business activities and attain a legal status that is independent of its members.
It is basically an artificial person which has a separate legal entity, is independent of its owners on members (perpetual succession), and has a common seal as its signature. This form of entity is governed by the Companies Act 2013.
If we talk about the structure of the company then shareholders are the owners of the company (indirect control of the business) who elect some people who are known by the term ‘board of directors. This board of directors is the chief managing body.
CHARACTERISTICS OF COMPANY:-
(i) Artificial person: A company is created through law and keeps existing whether its members live or die. Just like natural persons, the company form of business can own property in its name, owe a debt, enter into a contract with other parties, borrow money, can sue, and be sued but unlike humans, it cannot breathe congress, eat, talk and so on.
(ii) Separate legal entity: When a company is incorporated, it gets an entity that is separate from its members.
(iii) Formation: To form a company is quite a time-consuming, complicated and expensive process that involves preparing so many documents in compliance and several legal requirements before it can begin its operations. Getting a company registered is compulsory under the Companies Act 2013 for any previous company law.
(iv) Perpetual succession: Because the company is created though it can be ended by law by the process of winding up. This way, members kin come and members may go but it continues to exist.
(v) Control: The affairs of the company are controlled and managed by the board of directors who appoint the top management officials to run the business.
(vi) Liability: The company members have limited liability to the extent they have contributed to the capital of the company. Only company assets can be used to settle the claims of creditors. The shareholders can be asked to contribute only to the exchange of the unpaid amount of shares which is held by them to cover the loss.
(vii) Common seal: Because a company is an artificial person, it cannot sign its own name. For this very reason, every company must have its own Seal which acts as a signature of the company. A document that does not carry the common seal can’t hold the company responsible.
(viii) Risk bearing: The company losses are Borne by all the shareholders alike so proprietorship and partnership where only a few persons together bear the risk.
These were the four types of business forms that are used to carry on the business.