ENGINEERING ECONOMICS LECTURE NOTES FORMS OF BUSINESS ORGANSATION

2.1 INTRODUCTION If one is planning to start a business or is interested in expanding an existing one, an important decision relates to the choice of the form of organisation. The most appropriate form is determined by weighing the advantages and disadvantages of each type of organisation against one’s own requirements. Various forms of business organisations from which one can choose the right one include: (a) Sole proprietorship, (b) Joint Hindu family business, (c) Partnership

d) Cooperative societies, and (e) Joint stock company. Let us start our discussion with sole proprietorship — the simplest form of business organisation, and then move on to analysing more complex forms of organisations.

SOLE PROPRIETORSHIP Do you often go in the evenings to buy registers, pens, chart papers, etc., from a small neighbourhood stationery store? Well, in all probability in the course of your transactions, you have interacted with a sole proprietor. Sole proprietorship is a popular form of business organisation and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. This form of business is particularly common in areas of personalised services such as beauty parlours, hair saloons and small scale activities like running a retail shop in a locality

JOINT STOCK COMPANY A company is an association of persons formed for carrying out business activities and has a legal status independent of its members. A company can be described as an artificial person having a separate legal entity, perpetual succession and a common seal. The company form of organisation is governed by The Companies Act, 2013. As per section 2(20) of Act 2013, a company means company incorporated under this Act or any other previous company law. The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders. Usually, the owners exercise an indirect control over the business. The capital of the company is divided into smaller parts called ‘shares’ which can be transferred freely from one shareholder to another person (except in a private company)

PARTNERSHIP The inherent disadvantage of the sole proprietorship in financing and managing an expanding business paved the way for partnership as a viable option. Partnership serves as an answer to the needs of greater capital investment, varied skills and sharing of risks.

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.

Private Company A private company means a company which: (a) restricts the right of members to transfer its shares; (b) has a minimum of 2 and a maximum of 200 members, excluding the present and past employees; (c) does not invite public to subscribe to its securities and It is necessary for a private company to use the word private limited after its name. If a private company contravenes any of the aforesaid provisions, it ceases to be a private company and loses all the exemptions and privileges to which it is entitled. The following are some of the privileges of a private limited company as against a public limited company: 1. A private company can be formed by only two members whereas seven people are needed to form a public company. 2. There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company. 3. Allotment of shares can be done without receiving the minimum subscription. A private limited company can start business as soon as it receives the certificate of incorporation.

4. A private company needs to have only two directors as against the minimum of three directors in the case of a public company. However the maximum number of directors for both types of companies is fifteen. 5. A private company is not required to keep an index of members while the same is necessary in the case of a public company.

Public Company A public company means a company which is not a private company. As per The Companies Act, a public company is one which: (a) has a minimum of 7 members and no limit on maximum members; (b) has no restriction on transfer securities; and (c) is not prohibited from inviting the public to subscribe to its securities. However, a private company which is a subsidiary of a public company is also treated as a public company.