Forms of business organisation refers to the types of organisations which differ in terms of ownership and management. The major forms of organisation include proprietorship, partnership, joint Hindu family business, cooperative society and company.
Sole proprietorship refers to a form of organisation where business is owned, managed and controlled by a single individual who bears all the risks and is the only recipient of all the profits. Merits of this form of organisation include quick decision making, direct incentive, personal satisfaction, and ease of formation and closure.
But this form of organisation suffers from limitations of limited resources, unstable life span of business, unlimited liability of sole proprietor and his or her limited managerial ability.
Partnership is defined as an association of two or more persons who agree to carry on a business together and share the profits as well as bear risks collectively. Major advantages of partnership are: ease of formation and closure, benefits of specialisation, greater funds, and reduction of risk.
Major limitations of partnership are unlimited liability, possibility of conflicts, lack of continuity and lack of public confidence. As there are different types of partners such as active, sleeping, secret and nominal partners; so is the case with types of partnerships which can vary from general partnership, limited partnership, partnership at will to particular partnership.
Joint Hindu family business is a business owned and carried on by the members of a Hindu Undivided Family, which is governed by the Hindu law. Karta - the oldest male member of the family - controls the business. The strong points of joint Hindu family business include effective control, stability in existence, limited liability and increased loyalty among family members.
But this form of organisation too suffers from certain limitations such as limited resources, lack of incentives, dominance of the karta and limited managerial ability.
A cooperative society is a voluntary association of persons who get together to protect their economic interests. The major advantages of a cooperative society are equality in voting, members’ limited liability, stable existence, economy in operations, support from government, and ease of formation.
But this form of organisation suffers from weaknesses such as limited resources, inefficiency in management, lack of secrecy, government control, and differences among members in regard to the way society should be managed and organised. Based on their purpose and nature of members, various types of societies that can be formed include: consumers cooperative society, producers cooperative society, marketing cooperative society, farmers cooperative society, credit cooperative society, and cooperative housing society.
A company, on the other hand, may be defined as an artificial person, existing only in the eyes of the law with perpetual succession and having a separate legal identity. While major advantages of a company form of organisation are members’ limited liability, transfer of interest, stable existence, scope for expansion, and professional management; its key limitations are: complexity in formation, lack of secrecy, impersonal work environment, numerous regulations, delay in decision making, oligarchic management, and conflict of interests among different shareholders.
Companies can be of two types - private and public. A private company is one which restricts transfer of shares and does not invite the public to subscribe to its securities. A public company, on the other hand, is allowed to raise its funds by inviting the public to subscribe to its securities. Furthermore, there is a free transferability of securities in the case of a public company.
Choice of form of organisation: Selection of an appropriate form of organisation can be made after taking various factors into consideration. Initial costs, liability, continuity, capital considerations, managerial ability, degree of control and nature of business are the key factors that need to taken into account while deciding about the suitable form of organisation for one’s business.