Forms of Business Organisation-Chapter-6 Best CS Executive SBEC Notes.

Forms of Business Organsation

Introduction

The most important forms of business organisation are as follows:

  • Sole Proprietorship
  • HUF Business
  • Partnership
  • Company
  • Statutory Bodies and Corporations
  • Co-Operatives Societies and Trusts
  • Limited Liability Partnership

Sole Proprietorship

Introduction

  • No law to regulate Sole Proprietorship.
  • ‘Sole’ means single and ‘proprietorship’ means ownership.
  • In this form of business, an individual (owner) invests capital to start the business, takes all decisions relating to business, looks after the day to day functioning of the business and finally, is responsible for the profit or loss.
  • It is the business organisation in which a single person owns, manages and controls all the activities of the business.
  • The individual who owns and runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’.
  • Here the sole objective of earning profit.
  • It is the oldest and most common form of business organisation.
  • Thus, sole proprietorship can be defined as “a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk”.

Merits

  1. Single Ownership, 100% risk of owner, can be closed at the will of the owner or upon his death.
  2. No sharing of Profit and Loss
  3. One-man’s Capital: Whole capital is provides by owner either from his personal resources or by borrowing from friends, relatives, banks or other financial institutions.
  4. One-man Control: The owner or proprietor alone takes all the decisions to run the business.
  5. Unlimited Liability: In case of loss, the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.
  6. Less Legal Formalities/Easy to Establish: No legal formality involved in setting up this type of organization.
  7. Inexpensive management: In case of sole proprietorship, scale of business is small. Thus, it is not required to hire specialised management personnel.

Advantages

  1. Easy to Form and Wind up
  2. Direct Motivation because entire profits belong to the sole proprietor alone. Thus, there is a direct link between effort and reward. No sharing of profit.
  3. Quick Decision and Prompt Action as all the decisions are taken by sole proprietor alone.
  4. Better Control: Since the proprietor has all authority with him, it is possible to exercise better control over business.
  5. Maintenance of Business Secrets: Proprietor is no need to disclose any information to others.
  6. Close Personal Relation with the customers and employees.
  7. Flexibility in Operation: The sole proprietor is free to change the nature and scope of business operations as and when required
  8. Encourages Self-employment and jobs, helps in reducing poverty and unemployment in the country.

Disadvantages

  1. Limited Capital/Limitation on Investment
  2. Unlimited Liability
  3. Lack of Continuity: Illness, death or insolvency of the owner brings an end to the business.
  4. Limited Size: Due to limitation of capital, limitation of man power, limitation of time, limitation of knowledge
  5. Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of management and due to limited financial resources it is also not possible to employ a professional manager.

Suitability
Sole proprietorship form of business organisation is suitable:

  • Where the market for the product is small and local.
    • For example, selling grocery items, books, stationery, vegetables, etc.
  • Where customers are given personal attention, according to their personal tastes and preferences.
    • For example, making special type of furniture, designing garments, etc.
  • Where the nature of business is simple.
    • For example, grocery, garments business, telephone booth, etc.
  • Where capital requirement is small and risk involvement is not heavy.
    • For example, vegetables and fruits business, tea stalls etc.
  • Where manual skill is required.
    • For example, making jewellery, haircutting or tailoring.
  • Where customised professional services is provided to the consumers

Procedure for starting Sole Proprietorship
As Sole Proprietor is formed, managed and controlled by one individual, no deed or agreement is required to constitute a Sole Proprietorship.

But to start work in any form of business, registration under all or any of the following Acts may be required:

  1. Shops and Commercial Establishments Act (State specific)
  2. Law relating to Professional Tax (State specific)
  3. Registration under Micro, Small and Medium Enterprises Development Act, 2006.
  4. Registration as a Small Scale Industry (State specific)
  5. GST registration
  6. Intellectual Property laws

Annual Compliances for Sole Proprietorship

  • Filling of Annual Returns with different tax departments
  • Payment of taxes on due dates|
  • Filing of return/information according to applicable state laws

Partnership

According to Section 4 of Partnership Act, 1932,

  • Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
  • Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.

diagram

Characteristics

  1. Number of Partners: Min. 2 persons; Max. 50 persons
  2. Contractual Relationship: Partnership firm is created by contract b/w partners. Such contract may be oral or written.
  3. Partnership Deed: Written agreement b/w partners creating partnership.
  4. Competence of Partners: Only those individuals can become partner who are competent to contract. Thus, minors, lunatics and insolvent persons are not eligible to become partners. But a minor can be admitted to the benefits of partnership.
  5. Sharing of Profit and Loss: The partners can share profit in any ratio as agreed. In the absence of an agreement, they share it equally.
  6. Unlimited Liability: The partners have unlimited liability. They are liable jointly and severally for the debts and obligations of the firm. The liability of a minor is, however, limited to the extent of his share in the profits, in case of dissolution of a firm.
  7. Principal-Agent Relationship/ Mutual Agency: Every partner is the agent as well as principle of all other partners and firm. All partners can take part in the business decisions.
  8. Transfer of Interest: No partner can sell or transfer his interest in the firm to anyone without the consent of other partners.
  9. Legal Status: Partnership firm is not a separate legal entity distinct from the partners.
  10. Voluntary Registration: Registration of partnership is not compulsory.

Advantages of Partnership Firm

  1. Easy to Form: Registration is not compulsory.
  2. Favourable Credit Standing/Rating as compare to sole proprietorship.
  3. Large Capital as compare to sole proprietorship.
  4. Greater management ability as compare to sole proprietorship due involvement of more persons.
  5. Union of Business Ability: Two heads are better than one.
  6. Profit Incentive: Higher the profits, higher will be the partners share.
  7. Advantages of Secrecy: Firm is not required by law to publish its P&L a/c and balance sheet.
  8. Brake on Hasty Decisions: As liability of all partners is unlimited.
  9. Special Protection to Minor: A death or lunacy of a partner may not cause dissolution of the partnership. His minor can be admitted only to the benefits of partners with the consent of other partners.
  10. Ease of Dissolution

Disadvantages of Partnership Firm

  1. Unlimited Liability of Partners
  2. Limited Life of Firm: Can be dissolved easily
  3. Frozen Investment: Withdrawal of the capital is not possible without the consent of other partners.
  4. Possibilities of Disputes among the Partners
  5. Possibility of Misuse of Resources
  6. Loss of Business Opportunities in case of differences among the partners’ opinions
  7. Implied Authority of partners to participate in the business and making all other partners liable

Partnership Deed
The agreement of partnership may be oral but to avoid future disputes it is always advisable to have it in writing. The written document which contains the mutual rights and obligations of partners is known as partnership deed (also called as ‘Partnership Agreement’, ‘Constitution of Partnership’, ‘Articles of Partnership’ etc.).

Note:

  • The deed must be property drafted and stamped according to the provisions of the Indian Stamp Act.
  • The partnership deed is not a public document and therefore binds only third parties so far as they have notice of it.

Contents of Partnership Deed
Partners are free to decide the terms and conditions of Partnership. Generally a partnership deed contains the following covenants:

  1. The firm name and business to be carried on under that name.
  2. Names and addresses of partners.
  3. Nature and scope of business and address(s) of business place(s).
  4. Commencement and duration of partnership.
  5. The capital and the contribution made by each partner.
  6. Provision for further capital and loans by partners to the firm.
  7. Partner’s drawings.
  8. Interest on capital, loans, drawings and current account.
  9. Salaries, commission and remuneration to partners,
  10. Profit (or loss) sharing ratio of partners.
  11. The keeping of proper books of accounts, inspection and audit, Bank Accounts and their operation.
  12. The accounting period and the date on which that accounts are to be prepared.
  13. Rights, powers and duties of the partners.
  14. Whether and in what circumstances, notice of retirement or dissolution can be given by a partner.
  15. Provision that death or retirement of a partner will not bring about dissolution of partnership,
  16. Valuation of goodwill on retirement, death, dissolution etc.
  17. The method of valuation of assets (and liabilities) on retirement or death of any partner.
  18. Provision for expulsion of a partner.
  19. Provision regarding the allocation of business activities to be performed by individual partners
  20. The arbitration clause for the settlement of disputes.

Note:
The terms contained in the partnership deed may be varied with the consent of all the parties, and such consent may be express or implied by a course of dealing.

diagram

Kind of Partners

Actual Partners

  • They are ordinary (normal) partners
  • They invest money and actively participate in the business
  • They share profit and loss in the agreed ratio, and if no ratio is agreed, in the equal ratio
  • They shall give public notice of their retirement from the firm in order to absolve (free) himself from liability for the acts of the other partners done after the retirement.

Sleeping Partners

  • Such partners invest money in the business but don’t participate in the day to day working of business
  • Although sleeping partners are not known to the outsiders but just like normal partners their liability is also unlimited towards outsiders.
  • There act is binding on the firm, every partner is liable for it.
  • Such partners can access the book of accounts of firm just like normal partners.
  • They can retire from the firm without giving any public notice of retirement.

Nominal Partners

  • Such partners neither invest money in the business nor they participate in the day to day working of business
  • They just give their name (goodwill) to the business and take their share of profit
  • Generally they don’t share loss
  • They are known to the outsiders as partners in the firm and are liable to third parties for all the acts of the firm
  • They shall give public notice at the time of being separate from the firm.

Partners in Profits Only

  • Such partners invest money in the business and share profit only
  • They don’t share risk or loss
  • They are liable to the third parties for all acts of the firm, just like other partners.

Sub-Partner

  • Where a partner agrees to share his profits in the firm with a third person, that third person is called a sub-partner.
  • Sub-partner is not the partner of the firm
  • He is partner of a partner
  • As he is not directly associated with the firm,
    • he has no rights or duties towards the firm
    • he does not carry any liability for the debts of the firm
    • he can’t check the accounts of the firm
    • he can’t claim his share in the profit of the firm
    • he cannot bind the firm or other partners by his acts
  • But he has the right to share the profits in property of the firm at the time of winding-up

Partner by Estoppel or Holding Out

  • Holding Out means “to represent”. Strangers, who hold themselves out or represent themselves to be partners in a firm, whereby they induce others to give credit to the partnership are called “Partners by Holding Out”. An active partner who fails to give public notice at the time of retirement is also liable as partner by holding out.
  • In case of “Partnership by Estoppel”, the representation is made by partners about a stranger within his knowledge and hearing and he does not contradict it. He is then held liable as a partner.

Suitability
Most suitable for comparatively small business such as retail and wholesale trade, professional services, medium sized mercantile houses and small manufacturing units.

Procedure for starting Sole Proprietorship
As stated above, Partnership firms in India are governed by the Indian Partnership Act, 1932. While it is not compulsory to register the partnership firm, it is advisable since the following rights are denied to an unregistered firm:

  • A partner cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act
  • A right arising from a contract cannot be enforced in any Court by or on behalf of the firm against any third party
  • Further, the firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts owned by the disputant parties to one another) or other proceedings in a dispute with a third party.

Registration Procedure of a Partnership Firm with the Registrar of Firms
As per section 71 of Indian Partnership Act, states are authorized to make their own regulations with respect to prescribe the fee structure for registration or incorporation of partnership.

A partnership firm can be registered whether at the time of its formation or even subsequently. Application is required to be filed with the Registrar of Firms of the area in which your business is located. Following points shall be noted:

Application for partnership registration should include the following information:

  • Name of the firm,
  • Name of the principle place where business is carried on,
  • Names of any other place where business is carried on,
  • Date of partners joining the firm,
  • Full name and permanent address of partners and
  • Duration of the firm.

The Application should be duly signed by all the partners of the firm or by their duly authorised agents.

Ensure that the following documents and prescribed fees are enclosed with the registration application :

    • Application for Registration in the prescribed Form -1
    • Duly filled Affidavit
    • Certified copy of the duly stamped partnership deed
    • Proof of ownership of the place of business or the rental/lease agreement thereof.
      Name of the partnership firm should not contain any words which may express or imply the approval or patronage of the government except where the government has given its written consent for the use of such words as part of the firm’s name.

Registration of Partnership Firm under Income Ta
It is mandatory for all firms to apply for registration with the Income Tax Department and have a PAN Number. After obtaining a PAN Number, the partnership firm is required to open a Current Account in the name of the partnership firm and to operate all its operations through this bank account.

Annual Compliances for Partnership Firms

  • Intimation of Change in Principal Place/ nature of business / firm name in Form B
  • Intimation of Change in the name (person/limited company and address of the partner) in Form D
  • Intimation of Change in Constitution- Admission/Retirement/Dissolution/ Death of Partner/minor partner in Form E

Hindu Undivided Family (HUF)

Introduction

  • No specific law to regulate HUF (except Hindu laws).
  • This type of business organization is found only in India.
  • All the members of a HUF own the business jointly.
  • Business is managed and controlled by the head of the family, who is known as the “KARTA”.
  • A HUF business comes into existence as per the Hindu Inheritance Laws of India.
  • Only the male members get a share in the business.
  • Members are also called “Co-parceners”.
  • The membership is limited up to three successive generations. (An individual, his sons, and his grandsons) become the members of a HUF by birth.
  • Co-parceners has got the right to ask for a partition of the HUF business and to have his separate share.
  • Now, a daughter has right to ask for a partition. (after 1.9.2005)
  • Position of Karta is “sui generis” i.e. of his own kind or peculiar to himself.
  • Karta has no superior interests in the co-parcenery. If partition takes place he is entitled to take his share only which is equal to the share of the other co-parcener.
  • Position of co-parcener is recognized by law.
  • No stranger can ever be qualified to be a karta, but an adopted son who is the eldest in the family can be qualified.
  • Karta is the custodian of the income and assets of the HUF. He is liable to make good to other family members with their shares of all sums which he has misappropriated or which he spent for purposes other than those in which the joint family was interested.

Characteristics

  1. Legal Status: The HUF business is a jointly owned business just like a jointly owned property. It is governed by Hindu Law. It can enter into partnership agreement with others.
  2. Membership: There is no membership other than the members of the joint family. Inside the family also, it is restricted only to male members who are co-parceners by birth.
  3. Profit Sharing: All co-parceners have equal share in the profits of the business. In the event of death of any of the co-parcener, his wife can claim share of profit.
  4. Management: The management of a HUF business is in the hands of the senior-most family member who is known as the karta. He has the authority to manage the business and his ways of managing cannot be questioned by the co-parceners.
  5. Liability: The liability of each member of the HUF business is limited to the extent of his share in the business. But the liability of the karta is unlimited as, it extends to his personal property.
  6. Fluctuating Share: The individual share of each co-parcener keeps on fluctuating. This is because, every birth of a male child in the family adds to the number of co-parceners and every death of a co-parcener reduces the number.
  7. Continuity: A HUF business continues to exist on the death of any co-parcener. Even on the death of the karta, it continues to exist as the next senior most family member becomes karta. However, a HUF business can be dissolved any time either through mutual agreement between members or by partition

Advantages of Joint Hindu Family Business

  1. Assured Share in Profits: Every co-parcener is assured a share in the profits irrespective of his contribution to the successful running of the business.
  2. Freedom in Managing: The karta enjoys full freedom in conducting the family business. It enables him to take quick decisions without much interference.
  3. Sharing of Knowledge and Experience: A HUF business provides opportunity for the young members of the family to get the benefit of knowledge and experience of the elder members.
  4. Unlimited Liability of the Karta: The liability of the co-parceners is limited, except for that of the karta. This makes the karta to manage the business in the most efficient manner.
  5. Continued Existence: A HUF business is not affected by the insolvency or death of any member including that of karta. Thus, it can continue for a long period of time.

Disadvantages of Joint Hindu Family Business

  1. Limited Resources: HUF business has generally limited financial and managerial resource. Therefore, it can not undertake big and risky business.
  2. Lack of Motivation: There is always a lack of motivation among the members to work hard. It is because the benefit of hard work does not go entirely to any individual member but shared by all the co-parceners.
  3. Scope for Misuse of Power by the Karta: Since the karta has absolute freedom to manage the business, there is scope for him to misuse it for his personal gains. An inefficient karta can also do harm to the business.
  4. Scope for Conflict: In a HUF business the male members of three successive generations are involved. It always leads to conflict between generations.
  5. Instability: The continuity of business is always under threat. It may be due to a small rift within the family and if a co-parcener asks for a partition the business is closed.

Suitability of Joint Hindu Family Business
The success of HUF business is mostly dependent upon the efficiency of the karta and the mutual understanding between the co-parceners. Nevertheless, this type of business is losing its ground with the gradual decline in the HUF system.

Registration Procedure of HUF
Although, HUF is governed by Hindu Succession Act but there is no registration required under the Act.
But, under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return. Therefore, it is required to register HUF under Income Tax Act. For this purpose,

  • Create HUF Deed on stamp paper of requisite duty specifying all details like name of karta, co-parceners , address and source of funds in the corpus.
  • It is recommended that the Deed should be notarised.
  • A declaration is also provided by each member of family where they declare the name of Karta and also state that—
    Karta has the authority of the accounts vested in his hand.
    Karta holds the right to govern all the transactions of the HUF accounts on behalf of the members.
  • Register the HUF with Tax Authorities
  • Obtain PAN/TAN/GST Number
  • Open a current bank account in the name of HUF.

Multi-State Cooperative Societies

Multi-State Cooperative Societies (MSCS) are governed by Multi-State Cooperative Societies Act, 2002 which replaced the earlier Act of 1984.

What is Multi-State Cooperative Society?
Multi-state cooperative society means a society registered or deemed to be registered under this Act and includes a national cooperative society and a Federal cooperative;

Federal cooperative means a federation of cooperative societies registered under this Act and whose membership is available only to a cooperative society or a multi-state cooperative society;

National cooperative society means a multi-state cooperative society specified in the Second Schedule (nearly 21 National cooperative societies are identified);

According to Section 5 of the Act, no multi-state cooperative society shall be registered under this Act, unless,

  • its main objects are to serve the interests of members in more than one state; and
  • its bye-laws provide for social and economic betterment of its members through self-help and mutual aid in accordance with the cooperative principles.

Further, the word “limited” or its equivalent in any Indian language shall be suffixed to the name of every multi-state cooperative society registered under this Act with limited liability.

Multi-state cooperative society shall be a body corporate
According to Section 9, a registered multi-state cooperative society shall be a body corporate by the name under which it is registered having perpetual succession and a common seal, and with power to acquire, hold and dispose of property, both movable and immovable, enter into contract, institute and defend suits and other legal proceedings and to do all things necessary for the purpose for which it is constituted, and shall, by the said name, sue or be sued.

BENEFITS OF MULTI STATE CO-OPERATIVE SOCIETY

  1. MSCS provides loans at reasonable rates of interest to the poor. This benefits them, as they do not have to go to financiers who lend at high interest rates.
  2. MSCS can function pan India as they can start branches in different districts and states.
  3. As regulatory requirements of filing, etc, is minimum, MSCS have low compliance costs.
  4. A Multi State Co-operative Credit Society belongs to its members, who are at the same time the owners and the customers of their Society. This creates a sense of belonging and ownership among the members.

Incorporation of Multi State Co-Operative Society
According to Section 6(1) and Rule 3 of Multi-State Cooperative Societies Rules, 2002, for the purposes of registration of a multi-state cooperative society under this Act, an application shall be made to the Central Registrar in Form 1 and shall be signed by the applicants and be accompanied by

  • 4 copies of the proposed bye-laws of the multi-state cooperative society, duly signed by each of the persons who sign the application for registration;
  • a list of persons who have contributed to the share capital, together with the amount contributed by each of them, and the admission fee paid by them;
  • a certificate from the bank or banks stating the credit balance in favour of the proposed multi-state cooperative society;
  • a scheme showing the details explaining how the working of the multi-state cooperative society will be economically sound and the registration of such multi-state cooperative society will be beneficial for social and economic betterment of its members through self-help and mutual aid in accordance with the cooperative principles;
  • certified copy of the resolution of the promoters which shall specify the name and address of one of the applicants to whom the Central Registrar may address correspondence under the rules before registration and dispatch or hand over registration documents.

According to Section 6(2), the application shall be signed

a

in the case of a multi-state cooperative society of which all the members are individuals,

 
  • by at least 50 persons from each of the state concerned;

b.

in the case of a multi-state cooperative society of which the members are cooperative societies,

 
  •  by duly authorised representatives on behalf of at least 5 such societies as are not registered in the same state; and

c

in the case of a multi-state cooperative society of which another multi-state cooperative society and other cooperative societies are members,

 
  • by duly authorised representatives of each of such societies:
    Provided that not less than 2 of the cooperative societies referred to in this clause, shall be such as are not registered in the same state;

d

in the case of a multi-state cooperative society of which the members are cooperative societies or multi-state cooperative societies and individuals,

 

by at least

  • 50 persons, being individuals, from each of the 2 states or more; and
  • one cooperative society each from two states or more or one multi-state cooperative society

The application shall either be sent by registered post or delivered by hand to the Central Registrar in his Office.

Registration (Section 7)

  1. If the Central Registrar is satisfied
  • that the application complies with the provisions of this Act and the rules;
  • that the proposed multi-state cooperative society satisfies the basic criterion that its objects are to serve the interests of members in more than one state;
  • that its bye-laws provide for social and economic betterment of its members through self-help and mutual aid in accordance with the cooperative principles;
  • that the proposed bye-laws are not contrary to the provision of this Act and the rules,
    he may register the multi-state cooperative society and its bye-laws.
  1. The application for registration shall be disposed of by the Central Registrar within a period of 4 months from the date of receipt thereof by him.
  2. Where the Central Registrar refuses to register a multi-state cooperative society, he shall communicate, within a period of 4 month from the date of receipt of the application for registration, the order of refusal together with the reasons thereof to the applicant or applicants, as the case may be:
    Provided that no order or refusal shall be made unless the applicants have been given a reasonable opportunity of being heard;
  3. Provided further that if the application for registration is not disposed of within a period of four months specified in sub-section (2) or the Central Registrar fails to communicate the order of refusal within that period, the application shall be deemed to have been accepted for registration and the Central Registrar shall issue the registration certificate in accordance with the provisions of this Act and the rules made thereunder.

Registration certificate (Section 8)
Where a multi-state cooperative society is registered under this Act, the Central Registrar shall issue a certificate of registration signed by him, which shall be conclusive evidence that the society therein mentioned is duly registered under this Act, unless it is proved that the registration of the society has been cancelled.

Choosing Form of Business Organisation

Choosing a form of business entity is crucial to a successful organization because it determines the power, control, risk and responsibility of the entrepreneur as well as the division of profits and losses. Being a long-term commitment (as it is difficult to change the form of business or to windup the business), the choice of the form of business should be made after considerable thought and deliberation.

The main types of business entities in India are

  • Sole Proprietorship,
  • Partnership,
  • Hindu Undivided Family (HUF) Business,
  • Limited Liability Partnership (LLP),
  • Co-operative Societies,
  • Company
  • AOP/BOI
  • Trust/Societies

Further, foreign entities may open their Branch Offices in India as per FEMA and Rules, Regulations made thereunder.

We have already discussed characteristics, advantages and disadvantages of various form of business.

Factors governing the decisions for suitable form of organisation

  1. Nature of business activity
    • Sole proprietorship is suitable for small trading businesses, professions, and rendering of personal services like Laundromats, beauty parlours, repair shops, consulting agencies, small retail stores, medicine stores, dentist, accounting concerns, boarding-house, restaurants, specialty ships, jobbing builders, painters, decorators, bakers, confectioners, tailoring shops, small scale shoe repairers and manufacturers, etc.
    • Partnerships are suitable for in all those cases where sole proprietorship is suitable. Further, Partnerships are suitable where the scale of business is moderate like manufacturing activities, finance, trading and real estate industries, hotels and lodging places; trading enterprises, such as wholesale trade, retail houses; small scale manufacturing enterprises, small drug manufacturers, etc.
    • Company form of business is suitable where the scale of business is moderate or large and business require huge finance and where risk and liability is more.
    • LLP form of business is more suitable in case of professional firms where partners have flexibility to operate the business with limited liabilities.
  2. Scale of operations
    • If the scale of operations of business activities is small, sole proprietorship or a One Person Company (OPC) is suitable;
    • If the scale of operations is modest — neither too small nor too large — partnership or limited liability partnership (LLP) is preferable;
    • In case of large scale of operations, the company form is advantageous.
  3. Capital requirements
    • Enterprises requiring heavy investment (like iron and steel plants, large scale infrastructure projects, etc.) should be organised as companies because companies can raise funds by issuing many different types of securities.
    • Enterprises requiring small investment (like retail business stores, personal service enterprises, etc.) can be best organised as sole proprietorships or even as Partnerships.
  4. Managerial Ability
    • It is difficult for a sole proprietor to have expertise in all functional areas of business. Further, the size of the business may not permit engagement of professional management.
    • In other forms of organizations like partnership and company, there is division of work among the partners which allows the partners to specialize in specific areas, leading to better outputs and decision making.
  5. Degree of control and management
    • In case of Sole Proprietorship/Partnership/LLP, control over the business and management is direct.
    • In case of Company, shareholders have no direct controls over the affairs on the company. Company is managed by BOD.
  6. Degree of risk and liability
    • In case of Company/LLP form of businesses liability/risk is limited. Thus personal assets of members/partners are not liable for the debt/loss of business.
    • In case of Sole Proprietorship or partnership liability of Sole Proprietor or partners is unlimited.  
  7. Stability of business
    • Company/LLP form of businesses are more stable due to perpetual succession.
    • In case of Partnership also, there are many partners to look after the business. So, illness of a partner would not affect the business too much. But, death, insolvency, insanity, retirement, admission, expulsion or withdrawal of/ by one of the partners may lead to instability in the business.
    • Sole Proprietorship is the most instable form of business as the business runs in the name of single individual.
  8. Division of profit
    • In case of Sole Proprietorship, complete profit belongs to Sole Proprietor
    • But in case of partnership, LLP and company form of business, profit is shared among the partners/members
  9. Costs, procedure, and government regulation
    • There is no cost of starting Sole Proprietorship or partnership. Further, to start Sole Proprietorship and partnership, no registration under any law is compulsory.
    • In case of LLP and Company, registration is compulsory. There are heavy compliances under LLP Act and Companies Act.
  10. Tax implication
    • In case of Partnership, Company, LLPs or Co-operative societies, there is no minimum income exemption.
    • But in case of Sole Proprietorship, no tax is payable upto Rs. 2,50,000.
      Thus if the expected income is less, it is preferable to go as a Sole Proprietor.  
  1. Geographical mobility of Goods or Services
    • If business wants to deal in local market only, sole proprietor can manage
    • If business wants to deal at national or international level, partnership or company form of business shall be more suitable.
  2. Transferability of ownership
    • In company form of business, transferability of ownership is quite easy by transferring the shares.
    • In partnership, a partner can transfer its share in partnership only after taking the approval of all other partners.
    • In case of sole proprietorship, transferability is not possible in actual sense as sole proprietorship is nothing but the owner itself.
  3. Managerial Needs
    • Every human has some natural limitations (w.r.t to time, ability to manage, intelligence, domestic commitments, social commitments etc.). No one can be perfect in everything. Thus if
      • the scale of operation is small and
      • time devotion is less

even a single person can manage the business.

But if the scale of operation is large with various departments (like accounts section, legal section, sales department, marketing department), Company form of business is more suitable.

  1. Secrecy
    • Secrecy is relatively high in case of Sole Proprietorship as compare to other form of business
  2. Independence (less interference of government or public)
    • Independence is relatively high in case of Sole Proprietorship, Partnership and HUF as compare to Companies and LLPs

It should be noted that

  • All these factors are interdependent; no one exists in isolation
  • Nature of business and Scale of Operations are the most basic ones in the selection of a form of Business. All other factors are dependent upon these 2 factors.

 

Proprietorship

Partnership

LLP

Company

Registration

No formal registration
Required

Registration is
Optional

Has to be registered with the MCA under the LLP Act, 2008

Has to be registered with the MCA under the Companies Act, 2013

Legal Status

Not recognised as a separate entity and owner is personally
responsible for all liabilities

Not recognised as a separate entity & partners are personally
responsible for all liabilities

Is a separate legal
Entity. The partners of the LLP are not personally liable towards the LLP

Is a separate legal Entity. The members of the
company are not personally liable towards the company

Liability

Unlimited liability

Unlimited liability

Limited liability to
the extent of contribution
towards to the LLP

Limited Liability to
the extent of share
capital

Number of

Members

Required

Can only have one person

Minimum of 2

persons required

 

Minimum of 2

persons required

to start a LLP

Minimum 1 in case of OPC,

Minimum 2 in case of Private company, Minimum 7 in case of public company

Transferability

Not transferable

Not transferable

Ownership can be
transferred

Ownership can be
transferred by means of share transfer

Annual
Statutory
Meetings

N/A

Not Required

Not Required

 

Board and General
Meetings should
be conducted
periodically

Annual
Filings

N/A

N/A

Must file Financial Statements and Annual Returns with ROC

Must file Financial Statements and Annual Returns with ROC

Existence or
Survivability

Proprietorship
existence is
dependent on
proprietor

Partnership
existence is
dependent on
Partners. Can be dissolved at will or upon on the death of partner

Existence
not dependent on Partners. Can be Dissolved voluntarily or by order of the NCLT

Existence not dependent on directors or Shareholders. Can be dissolved voluntarily or by order of the NCLT

 

 

 

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