FORMS OF BUSINESS

ORGANISATION
Sole proprietorship

Is a form of business organization where a single individual owns and operates the business. The owner
is solely responsible for providing the capital, managing the business, and bearing all the risks associated
with it [1].

Features of Sole Proprietorship:

1. Formation and Closure: Starting a sole proprietorship requires minimal legal formalities, and the
closure of the business can also be done easily.
2. Unlimited Liability: The owner has unlimited liability, meaning that they are personally
responsible for all the debts and obligations of the business.
3. Limited Resources: The resources of a sole proprietor are limited to their personal savings and
borrowings from others.
4. Limited Life: The life of a sole proprietorship is dependent on the life of the owner. If the owner
dies or becomes incapacitated, the business may cease to exist.
5. Control: The owner has complete control over the business and can make all the decisions
without any interference from others.

Merits of Sole Proprietorship:

1. Easy Formation: Sole proprietorship can be started with minimal legal formalities and at a low
cost.
2. Direct Incentive: The owner directly reaps the benefits of their efforts and is the sole recipient of
all the profits.
3. Flexibility: The owner has the flexibility to make quick decisions and adapt to changing market
conditions.
4. Confidentiality: The proprietor can keep business operations confidential and is not required to
publish the firm's accounts.

Limitations of Sole Proprietorship:

1. Unlimited Liability: The owner is personally liable for all the debts and obligations of the
business, which can put their personal assets at risk.
2. Limited Resources: Sole proprietors may face difficulty in raising capital as they are limited to
their personal savings and borrowings.
3. Limited Managerial Ability: The owner may have limited expertise in various areas of business
management, which can affect decision-making and overall business performance.
 4. Limited Life: The business is dependent on the life of the owner, and any disruption or incapacity
of the owner can lead to the closure of the business.

Overall, sole proprietorship is suitable for small-scale businesses where personalized services are
required. It offers ease of formation, direct incentive, and flexibility, but it also has limitations such as
unlimited liability and limited resources [1].

Partnership

Is a form of business organization where two or more individuals come together to carry on a lawful
business with a view to making a profit [1].

Features of Partnership:

1. Formation: Partnership is governed by the Indian Partnership Act, 1932. It can be formed through
an agreement, which can be oral or written.
2. Number of Partners: A partnership must have a minimum of two partners, and the maximum
number of partners can be 100, subject to the number prescribed by the government [3].
3. Mutual Agency: Each partner acts as both an agent and a principal. They can bind the other
partners through their actions, and they can also be bound by the actions of other partners [3].
4. Unlimited Liability: Partners have unlimited liability, meaning they are personally liable for the
debts and obligations of the partnership. Their personal assets can be used to repay the debts [4].
5. Sharing of Profits and Losses: The partners share the profits and losses of the business according
to the agreed-upon ratio mentioned in the partnership deed [7].

Merits of Partnership:

1. Ease of Formation: Partnership can be formed easily with minimal legal formalities and at a low
cost.
2. Balanced Decision Making: Partners can bring different skills, knowledge, and expertise to the
business, leading to more balanced decision-making.
3. More Funds: Partnership allows for the pooling of resources and capital from multiple partners,
enabling the business to raise more funds compared to a sole proprietorship [6].
4. Sharing of Risks: The risks and burdens of the business are shared among the partners, reducing
the individual burden and stress [6].

Limitations of Partnership:

1. Unlimited Liability: Partners have unlimited personal liability, which means their personal assets
can be at risk in case of business losses or debts [4].
2. Possibility of Conflicts: Differences in opinions and decision-making can lead to conflicts among
partners, potentially affecting the smooth functioning of the business [4].
3. Lack of Continuity: Partnership comes to an end with the death, retirement, insolvency, or lunacy
of any partner, which may result in a lack of continuity [4].
4. Lack of Public Confidence: Partnership firms are not legally required to publish their financial
reports, which can make it difficult for the public to assess the true financial status of the firm
Types of Partners:

1. Active Partner: An active partner is one who contributes capital, participates in the management
of the firm, shares its profits and losses, and has unlimited liability towards the creditors of the
firm [2].
2. Sleeping or Dormant Partner: Sleeping partners do not take part in the day-to-day activities of the
business but contribute capital to the firm, share its profits and losses, and have unlimited liability
[2].
3. Secret Partner: A secret partner is one whose association with the firm is unknown to the general
public. They contribute capital, participate in the management, share profits and losses, and have
unlimited liability towards the creditors [2].
4. Nominal Partner: A nominal partner allows the use of their name in the partnership but does not
contribute capital or participate in the management. They share profits and losses and have
unlimited liability [2].
5. Partner by Estoppel: A partner by estoppel is a person who, though not a partner in a firm, allows
themselves to be represented as a partner. They become liable to outside creditors for repayment
of any debts extended to the firm based on such representation [4].

Registration

refers to the process of officially recording or enrolling a business or organization with the relevant
government authority. It is a legal requirement in many jurisdictions and provides the business with legal
recognition and certain rights and privileges.

The purpose of registration is to establish the existence of the business or organization as a separate legal
entity, separate from its owners or members. It helps in creating a public record of the business, ensuring
transparency and accountability. Registration also provides legal protection to the business name,
trademarks, and intellectual property.

The process of registration typically involves submitting an application to the appropriate government
authority, along with the required documents and fees. The authority then reviews the application and, if
all requirements are met, issues a certificate of registration. This certificate serves as proof of the
business's legal existence and allows it to operate within the legal framework.

Registration offers several benefits to businesses, such as:

1. Legal Recognition: Registration establishes the business as a separate legal entity, providing it
with legal rights and obligations.
2. Limited Liability: Registered businesses often enjoy limited liability, protecting the personal
assets of the owners or shareholders.
3. Brand Protection: Registration helps protect the business name, trademarks, and intellectual
property from unauthorized use.
4. Access to Legal Remedies: Registered businesses have the ability to file lawsuits, enforce
contracts, and protect their rights in a court of law.
 5. Credibility and Trust: Registration enhances the credibility and trustworthiness of the business in
the eyes of customers, suppliers, and financial institutions.

Cooperative Society:

A cooperative society is a voluntary association of individuals who come together to meet their common
economic, social, and cultural needs and aspirations. It is based on the principles of self-help, mutual
cooperation, and democratic control [1].

Features of Cooperative Society:

1. Voluntary Association: Members join the cooperative society voluntarily and have the freedom to
leave the society if they wish.
2. Democratic Control: Cooperative societies operate on the principle of "one member, one vote,"
ensuring equal participation and decision-making power for all members.
3. Limited Liability: Members' liability is limited to the extent of their capital contribution,
protecting their personal assets.
4. Service Motive: Cooperative societies aim to provide services and benefits to their members
rather than maximizing profits.
5. Distribution of Surplus: Surplus generated by the cooperative society is distributed among the
members based on their participation or patronage.

Merits of Cooperative Society:

1. Equality in Voting: Each member has equal voting rights, ensuring democratic decision-making.
2. Limited Liability: Members' personal assets are protected as their liability is limited to their
capital contribution.
3. Stable Existence: Cooperative societies have a perpetual existence, unaffected by changes in
membership.
4. Economy in Operations: Members often offer honorary services, reducing operational costs.
5. Support from Government: Cooperative societies receive support and incentives from the
government.

Limitations of Cooperative Society:

1. Limited Resources: Cooperative societies may face challenges in raising sufficient capital due to
the limited financial capacity of members.
2. Inefficiency in Management: Decision-making and management may be affected by the lack of
professional expertise and experience.
3. Lack of Secrecy: Cooperative societies are required to maintain transparency, which may limit
the confidentiality of business operations.
4. Government Control: Cooperative societies are subject to government regulations and control,
which may restrict their autonomy.
 5. Differences Among Members: Conflicts and differences of opinion among members can hinder
the smooth functioning of the society.

Types of Cooperative Society:

1. Consumers Cooperative Society: This type of cooperative society is formed to protect the
interests of consumers. The members are consumers who come together to obtain good quality
products at reasonable prices. The society eliminates middlemen by purchasing goods directly
from wholesalers and distributing them to members. Profits, if any, are distributed based on
capital contributions or individual purchases [1].
2. Producers Cooperative Society: Producers cooperative societies are established to protect the
interests of small producers. The members are producers who join together to procure inputs for
production and enhance their bargaining power. The society supplies raw materials, equipment,
and other inputs to members and buys their output for sale. Profits are generally distributed based
on contributions to the total pool of goods produced or sold [1].
3. Marketing Cooperative Society: Marketing cooperative societies aim to help small producers in
selling their products. The members consist of producers who want to obtain reasonable prices for
their output. The society eliminates middlemen and directly markets the products produced by its
members. This helps in reducing costs and ensuring fair prices for the producers [1].
4. Credit Cooperative Society: Credit cooperative societies provide easy credit on reasonable terms
to their members. The members are individuals who seek financial assistance in the form of
loans. These societies use the capital and deposits collected from members to provide loans at
low-interest rates, protecting members from exploitative lenders [1].
5. Farmers Cooperative Society: Farmers cooperative societies are specifically formed to cater to
the needs of farmers. They provide various services to farmers, such as the supply of agricultural
inputs, machinery, and technical assistance. These societies help in improving the yield and
returns for farmers and solving problems associated with fragmented land holdings [4].
6. Cooperative Housing Society: Cooperative housing societies are established to help people with
limited income in constructing houses at reasonable costs. The members of these societies are
individuals who want affordable residential accommodation. The society constructs flats or
provides plots to members, allowing them to pay in installments [4].

Joint Stock Company:

A joint stock company is a form of business organization where the capital is divided into shares, and the
liability of the shareholders is limited to the extent of their shareholding. It is governed by the Companies
Act and has a separate legal entity from its shareholders [1].

Features of Joint Stock Company:

1. Artificial Person: A joint stock company is considered an artificial person as it has a separate
legal entity from its shareholders.
2. Limited Liability: The liability of shareholders is limited to the amount unpaid on their shares,
protecting their personal assets.
 3. Perpetual Existence: A company has a perpetual existence, unaffected by the death or retirement
of its members.
4. Transferability of Shares: Shares of a joint stock company can be freely transferred from one
shareholder to another, providing liquidity to the investment.
5. Separate Management: The company is managed by a board of directors elected by the
shareholders, who make decisions on behalf of the company.

Merits of Joint Stock Company:

1. Limited Liability: Shareholders have limited liability, reducing their personal risk.
2. Large Capital Base: Joint stock companies can raise large amounts of capital by issuing shares to
the public, enabling them to undertake large-scale projects.
3. Professional Management: Companies can attract skilled professionals to manage their
operations, leading to efficient decision-making and expertise in various areas.
4. Transferability of Shares: Shareholders can easily buy or sell their shares, providing liquidity to
their investment.
5. Perpetual Existence: The company continues to exist even if shareholders change, ensuring
stability and continuity.

Limitations of Joint Stock Company:

1. Complex Legal Formalities: The formation and operation of a joint stock company involve
complex legal procedures and compliance requirements.
2. Lack of Control: Shareholders have limited control over the day-to-day operations of the
company, as management is entrusted to the board of directors.
3. Separation of Ownership and Control: Shareholders may not have direct control over the
company's affairs, leading to potential conflicts of interest.
4. Lack of Secrecy: Companies are required to disclose financial information, reducing the
confidentiality of business operations.
5. Government Regulations: Joint stock companies are subject to government regulations and
oversight, which may restrict their autonomy.

Types of companies

Private Company: A private company is a type of company that restricts the right of its members to
transfer shares and does not invite the public to subscribe to its securities. It is suitable for small
businesses and offers advantages such as limited liability, ease of formation, and flexibility in
management [1].

Public Company: A public company is a type of company that is not a private company. It has a
minimum of 7 members and no limit on the maximum number of members. It has no restrictions on the
transfer of securities and is allowed to invite the public to subscribe to its securities. There is free
transferability of securities in the case of a public company [5].
The choice of form of business organization is influenced by various factors. These factors include:

1. Cost and ease of formation: The initial cost and legal formalities involved in setting up the
organization vary among different forms of business organizations. Sole proprietorship and
partnership have minimal legal formalities and lower costs, while cooperative societies and
companies require compulsory registration and involve greater legal formalities and costs [3].
2. Liability: The extent of liability borne by the owners/partners is another factor to consider. Sole
proprietorship and partnership firms have unlimited liability, meaning the owners/partners are
personally liable for the debts and obligations of the business. In contrast, cooperative societies
and companies have limited liability, where the liability is restricted to the extent of the
company's assets [3].
3. Continuity: The continuity of the business is affected by events such as the death, insolvency, or
insanity of the owners/partners. Sole proprietorship and partnership firms are more susceptible to
disruptions in continuity, while joint Hindu family business, cooperative societies, and companies
offer more stability and continuity [3].
4. Managerial skills: The expertise and specialization required in managing the business can
influence the choice of form of organization. Sole proprietors may face challenges in having
expertise in all functional areas of management, while partnership and company structures allow
for division of work and specialization. The complexity of operations and the need for
professionalized management can also impact the choice of form of organization [3].
5. Capital considerations: Companies have the advantage of being able to raise large amounts of
capital by issuing shares to a large number of investors. This makes the company form of
organization more suitable for businesses that require significant capital investment [6].

These factors, along with others such as availability of capital, regulations, flexibility, and specific
requirements of the business, need to be carefully considered when making a decision about the form of
business organization [5].

1. What are the advantages and limitations of partnership as a form of business organization?
2. How does a cooperative society differ from a partnership firm in terms of benefits and
limitations?
3. What factors should be considered when deciding on the appropriate form of business
organization?

FORMATION OF A COMPANY
The functions of a promoter in the formation of a company include:

1. Identifying a business opportunity: Promoters are responsible for identifying a potential

business opportunity that can be converted into a profitable venture [1].
2. Conducting feasibility studies: Promoters undertake detailed feasibility studies to assess
the technical and economic viability of the business idea. These studies analyze various
 aspects of the project, such as technical feasibility, availability of resources, and potential
profitability [1][4].
3. Assembling resources: Promoters bring together the necessary resources, including
capital, human resources, materials, and machinery, to establish and operate the
company [1].
4. Preparing necessary documents: Promoters prepare the required documents for the
registration of the company, such as the Memorandum of Association, Articles of
Association, consent of proposed directors, agreement with proposed managing or
whole-time director, and statutory declaration [1][3].
5. Obtaining approval for the company's name: Promoters seek approval from the Registrar
of Companies for the chosen name of the company [1][3].
6. Fixing signatories to the Memorandum of Association: Promoters determine the
individuals who will sign the Memorandum of Association, which outlines the company's
objectives, powers, and scope of activities [1][3].
7. Appointing professionals: Promoters may engage professionals, such as lawyers,
accountants, or consultants, to assist them in the formation process and ensure
compliance with legal requirements [1][3].

The documents required to be submitted for the formation of a company, as mentioned in the
document, include:
1. Memorandum of Association: The Memorandum of Association is a crucial document
that defines the objectives and scope of activities of the company. It contains clauses
such as the name clause and registered office clause [2].

Name Clause: The name clause in the Memorandum of Association contains the name of
the company by which it will be known. This name has to be approved by the Registrar
of Companies [7]..

Registered Office Clause: The registered office clause in the Memorandum of

Association specifies the state in which the registered office of the company is proposed
to be situated [7]. The exact address of the registered office is not required at the time of
incorporation, but it needs to be notified to the Registrar within a specified period [2].

Object Clause:. It outlines the main objects of the company and any other objects that
are necessary or incidental to achieving the main objects [3]. The object clause restricts
the company from engaging in activities that are beyond the scope of the stated
objects [3].

Liability Clause: The liability clause in the Memorandum of Association limits the liability
of the company's members. In the case of a company limited by shares, the liability of
the members is limited to the amount unpaid on the shares held by them [1

Capital Clause: The capital clause in the Memorandum of Association specifies the
authorized share capital of the company and the division of shares. It states the
 maximum amount of capital that the company is authorized to raise through the
issuance of shares [4]..

2. Articles of Association: The Articles of Association contain the rules and regulations for
the internal management of the company. It specifies the rights, duties, and powers of
the company's members and directors [2].
3. Consent of Proposed Directors: A written consent of each person named as a director is
required, confirming their agreement to act in that capacity and undertake to buy and
pay for qualification shares [4].
4. Agreement: If the company proposes to enter into an agreement with any individual for
appointment as its Managing Director, whole-time Director, or Manager, this agreement
needs to be submitted to the Registrar [4].
5. Statutory Declaration: A declaration stating that all the legal requirements pertaining to
registration have been complied with is required to be submitted to the Registrar [4].

These documents are essential for the registration and formation of a company, as they provide
the necessary information about the company's objectives, management, and compliance with
legal requirements