Forms of Business Organisation

The forms of business ownership: sole proprietorship, Joint Hindu Family business, partnership, cooperative society and the joint stock company, and how to choose between them.

Key ideas

A sole proprietor owns, manages and controls the business alone, takes all the profit and bears unlimited liability.
A Joint Hindu Family business is governed by Hindu law: members join by birth, the Karta manages it, and only the Karta’s liability is unlimited.
A partnership is formed by agreement, usually a written partnership deed; partners share profit and risk, liability is unlimited, and each partner is an agent of the others (mutual agency).
Partners may be active, sleeping, secret or nominal; a partner by estoppel becomes liable by letting outsiders believe he is a partner.
A cooperative society is a voluntary association for mutual help, registered by law, with limited liability and democratic control: one member, one vote.
A company is an artificial person with a separate legal entity, perpetual succession, a common seal and limited liability; a board of directors manages it.
The choice of form depends on the cost and ease of setting up, liability, continuity, capital needed, control and the nature of the business.

Remember

Partners in a firm	at least 2, at most 50 (present rules)
Cooperative society	at least 10 adult members; one member, one vote
Private company	2 to 200 members, at least 2 directors; restricts transfer of shares; cannot invite the public
Public company	at least 7 members, at least 3 directors; shares freely transferable; can invite the public
Kinds of partner	active: invests and manages; sleeping: invests, does not manage; secret: manages, unknown to outsiders; nominal: only lends his name
Shortfall under unlimited liability	debts − business assets, paid from the owner’s personal property
Most a shareholder can lose	shares held × (face value − amount paid up per share)
Partners’ shares of profit	profit × each partner’s ratio ÷ sum of the ratios

Watch out

Saying a sleeping partner has limited liability: in a general partnership every partner’s liability is unlimited.
Writing “one share, one vote” for a cooperative: it is one member, one vote.
Mixing up the limits: a private company has at most 200 members, while a public company needs at least 7.
Thinking a company ends when a member dies: it has perpetual succession.

Worked example

Varun and Sana are partners sharing profits in the ratio 5 : 2. The firm earns a profit of ₹77,000. Find each partner’s share.

Working: 77,000 × 5/7; 77,000 × 2/7

Answer: Varun ₹55,000; Sana ₹22,000