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    Types or Categories of Business


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    Join date : 2012-03-24
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    Types or Categories of Business

    Post  tarek_admin on Tue Apr 03, 2012 8:02 pm

    Sole Proprietorship

    'Sole' means single and 'proprietorship' means ownership. It means only one person or
    an individual becomes the owner of the business. Thus, the business organisation in
    which a single person owns, manages and controls all the activities of the business is
    known as sole proprietorship form of business organisation. The individual who owns
    Business Studiesand runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’

    Definition of Sole Proprietorship:

    We can now define sole proprietorship as–
    A business enterprise exclusively owned, managed and controlled by a single
    person with all authority, responsibility and risk.

    Characteristics of Sole Proprietorship:

    Sole proprietorship form of business organisations have the following characteristics.
    i. Single Ownership: A single individual always owns sole proprietorship form of
    business organization. That individual owns all assets and properties of the business.
    Consequently, he alone bears all the risk of the business.

    ii. No sharing of Profit and Loss : The entire profit arising out of sole proprietor Sole
    Proprietorship ship business goes to the sole proprietor. If there is any loss it is also to be borne
    by the sole proprietor alone. Nobody else shares the profit and loss of the business
    with the sole proprietor.

    iii. One man’s Capital : The capital required by a sole proprietorship form of
    business organisation is totally arranged by the sole proprietor. He provides it
    either from his personal resources or by borrowing from friends, relatives, banks
    or other financial institutions.

    iv. One-man Control: The controlling power in a sole proprietorship business
    always remains with the owner. The owner or proprietor alone takes all the
    decisions to run the business.

    v. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies
    that, in case of loss the business assets along with the personal properties of the
    proprietor shall be used to pay the business liabilities.

    vi. Less Legal Formalities: The formation and operation of a sole proprietorship
    form of business organisation requires almost no legal formalities. It also does not
    require to be registered.

    Advantages of Sole Proprietorship:

    The sole proprietorship form of business is the most simple and common in our country.
    It has the following advantages:

    i. Easy to Form and Wind up: A sole proprietorship form of business is very easy
    to form. With a very small amount of capital you can start the business. There is
    no need to comply with any legal formalities except for those businesses which
    required licence from local authorities or health department of government.

    ii. Direct Motivation: The profits earned belong to the sole proprietor alone and
    he bears the risk of losses as well. Thus, there is a direct link between effort and
    reward. This provides strong motivation for the sole proprietor to work hard.

    iii. Quick Decision and Prompt Action: In a sole proprietorship business the sole
    proprietor is free to take any decision on his own. Since no one else is involved in
    decision making it becomes quick and prompt action can be taken on the basis of
    this decision.

    iv. Better Control: In sole proprietorship business the proprietor has full control
    over each and every activity of the business. He is the planner as well as the
    organiser, who co-ordinates every activity in an efficient manner. Since the
    proprietor has all authority with him, it is possible to exercise better control over

    v. Maintenance of Business Secrets: Business secrecy is an important factor for
    every business. It refers to keeping the future plans, technical competencies,
    business strategies,. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. There is no need to disclose any information to others.

    vi. Close Personal Relation: The sole proprietor is always in a position to maintain
    good personal contact with the customers and employees. Direct contact enables
    the sole proprietor to know the individual likes, dislikes and tastes of the
    customers. Also, it helps in maintaining close and friendly relations with the
    employees and thus, business runs smoothly.

    vii. Flexibility in Operation: A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school
    students. If you want to expand your business you can decide to sell stationery
    items like pen, pencil, register, etc.

    viii. Encourages Self-employment: Sole proprietorship form of business organisation
    leads to creation of employment opportunities for people. Not only is the owner
    self-employed, sometimes he also creates job opportunities for others.

    Limitations of Sole Proprietorship:

    Still there are certain disadvantages too. Let us learn those limitations.
    i. Limited Capital: In sole proprietorship business, it is the owner who arranges
    the required capital of the business. It is often difficult for a single individual to
    raise a huge amount of capital.

    ii. Unlimited Liability: In case the sole proprietor fails to pay the business
    obligations and debts arising out of business activities, his personal properties
    may have to be used to meet those liabilities.

    iii. Lack of Continuity: The existence of sole proprietorship business is linked to
    the life of the proprietor. Illness, death or insolvency of the owner brings an end to
    the business. The continuity of business operation is therefore uncertain.

    iv. Limited Size: It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.

    v. Lack of Managerial Expertise: A sole proprietor may not be an expert in
    every aspect of management. He/she may be an expert in administration,
    planning, etc., but may be poor in marketing. Again, because of limited financial
    resources it is also not possible to employ a professional manager.


    It is basically a relation between two or more persons who join hands to form a business
    organisation with the objective of earning profit. The persons who join hands are
    individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the
    business is carried on is called ‘firm name’.The partners provide the necessary capital, run the business jointly and share the responsibility.

    Defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

    Features of Partnership form of business organization:

    After having a brief idea about partnership, let us identify the various features of this form of
    Business organization.

    i. Two or more Members - You know that the members of the partnership firm are
    called partners. At least two members are required to start a partnership business.
    But the number of members should not exceed 10 in case of banking business and 20
    in case of other business.

    ii. Agreement: This agreement contains the amount of capital contributed by each partner;
    o profit or loss sharing ratio;
    o salary or commission payable to the partner, if any;
    o duration of business, if any ;
    o name and address of the partners and the firm;
    o duties and powers of each partner;
    o nature and place of business; and
    o any other terms and conditions to run the business.

    iii. Lawful Business: The partners should always join hands to carry on any kind of
    lawful business. To indulge in smuggling, black marketing, etc., cannot be called
    partnership business in the eye of the law.

    iv. Competence of Partners: Since individuals join hands to become the partners, it is
    necessary that they must be competent to enter into a partnership contract. Thus,
    minors, lunatics and insolvent persons are not eligible to become the partners.
    However, a minor can be admitted to the benefits of partnership i.e., he can have a
    share in the profits only.

    v. Sharing of Profit - The main objective of every partnership firm is sharing of profits
    of the business amongst the partners in the agreed proportion. In the absence of any
    agreement for the profit sharing, it should be shared equally among the partners.

    vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also
    unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the
    personal properties of the partners, if any, can also be utilized to meet the business

    vii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also
    has no separate legal existence from that of it owners. Partnership firm is just a name
    for the business as a whole.

    viii. Restriction on Transfer of Interest - No partner can sell or transfer his interest to
    anyone without the constant of other partners.

    ix. Continuity of Business - A partnership firm comes to an end in the event of
    death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its
    business at the will of the partners. At any time, they may take a decision to end their

    Advantages of partnership form of business organization:

    Partnership form of business organization has certain advantages, which are as follows

    a) Easy to form: Like sole proprietorship, the partnership business can be formed
    easily without any legal formalities. It is not necessary to get the firm registered.
    A simple agreement, either oral or in writing, is sufficient to create a partnership

    b) Availability of large resources - Since two or more partners join hand to start
    partnership business it may be possible to pool more resources as compared to
    sole proprietorship. The partners can contribute more capital, more effort and also
    more time for the business.

    c) Better decisions - The partners are the owners of the business. Each of them has
    equal right to participate in the management of the business. In case of any conflict
    they can sit together to solve the problems. Since all partners participate in
    decision-making, there is less scope for reckless and hasty decisions.

    d) Flexibility in operations - The partnership firm is a flexible organization. At any time
    the partners can decide to change the size or nature of business or area of its
    operation. There is no need to follow any legal procedure.

    e) Sharing risks - In a partnership firm all the partners share the business risks.

    f) Protection of interest of each partner - In a partnership firm every partner has an
    equal say in decision making. If any decision goes against the interest of any partner
    he can prevent the decision from being taken. In extreme cases a dissenting partner
    may withdraw himself from the business and can dissolve it.

    g) Benefits of specialization - Since all the partners are owners of the business they
    can actively participate in every aspect of business as per their specialization and

    Limitations of Partnership form of Business Organization:

    Inspite of all these advantages as discussed above, a partnership firm also suffers from
    certain limitations. Let us discuss all these limitations.

    a) Unlimited Liability: All the partners are jointly as well as separately liable for the
    debt of the firm to an unlimited extent. Thus, they can share the liability among themselves
    or any one can be asked to pay all the debts even from his personal properties.

    b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It
    comes to an end with the death, insolvency, incapacity or the retirement of any partner.
    Further, any dissenting member can also give notice at any time for dissolution of

    c) Lack of Harmony: You know that in partnership firm every partner has an equal right
    to participate in the management. Also every partner can place his or her opinion or
    viewpoint before the management regarding any matter at any time. Because of this
    sometimes there is a possibility of friction and quarrel among the partners. Difference
    of opinion may lead to closure of the business on many occasions.

    d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to
    be raised is always limited. It may not be possible to start a very large business in
    partnership form.

    e) No transferability of share: If you are a partner in any firm you cannot transfer your
    share of interest to outsiders without the consent of other partners. This creates inconvenience
    for the partner who wants to leave the firm or sell part of his share to

    Joint Stock Company

    A company form of business organization is known as a Joint Stock Company. It is a
    voluntary association of persons who generally contribute capital to carry on a particular
    type of business, which is established by law and can be dissolved only by law. Persons
    who contribute capital become members of the company. This form of business has a legal
    existence separate from its members, which means even if its members die, the company
    remains in existence. This form of business organizations generally requires huge capital
    investment, which is contributed by its members. The total capital of a joint stock company
    is called share capital and it is divided into a number of units called shares. Thus, every
    member has some shares in the business depending upon the amount of capital contributed
    by him. Hence, members are also called shareholders.

    Characteristics of Joint Stock Company:

    You are now familiar with the concept of company as a form of business organization. Let us
    now study its characteristics.

    i. Legal formation: No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956.

    ii. Artificial person: Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person.

    iii. Separate legal entity: Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company

    iv. Common seal: A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the
    company's seal is put and is duly signed by any official of the company, become binding on
    the company.

    v. Perpetual existence: A joint stock company continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members.

    vi. Limited liability: In a joint stock company, the liability of a member is limited to the extent of the value of
    shares held by him.

    vii. Democratic management: Joint stock companies have democratic management and control. That is, even though the
    shareholders are owners of the company, all of them cannot participate in the management
    of the company. Normally, the shareholders elect representatives from among themselves
    known as ‘Directors’ to manage the affairs of the company.

    Advantages of Joint Stock Company:

    The main advantages of Joint Stock Company are -
    (i) Large financial resources: A joint stock company is able to collect a large amount
    of capital through small contributions from a large number of people. In public limited
    company shares can be offered to the general public to raise capital. They can also
    accept deposits from the public and issue debentures to raise funds.

    (ii) Limited Liability: In case of a company, the liability of its members is limited to the
    extent of the value of shares held by them.

    (iii) Professional management: Management of a company is vested in the hands of
    directors, who are elected democratically by the members or shareholders. These
    directors as a group known as Board of Directors ( or simply Board) manage the
    affairs of the company and are accountable to all the members.

    (iv) Large-scale production: Due to the availability of large financial resources and
    technical expertise it is possible for the companies to have large-scale production. It
    enables the company to produce more efficiently and at lower cost.

    (v) Contribution to society: A joint stock company offers employment to a large number
    of people. It facilitates promotion of various ancillary industries, trade and auxiliaries
    to trade. Sometimes it also donates money towards education, health and
    community services.

    (vi) Research and Development: Only in company form of business it is possible to
    invest a lot of money on research and development for improved processes of production,
    new design, better quality products, etc. It also takes care of training and
    development of its employees.

    Limitations of Joint Stock Company:

    In spite of many advantages of the company form of business organization, it also suffers
    from some limitations. Let us note the limitations of Joint Stock Companies.

    (i) Difficult to form: The formation or registration of joint stock company involves a
    complicated procedure. A number of legal documents and formalities have to be
    completed before a company can start its business. It requires the services of
    specialists such as Chartered Accountants, Company Secretaries, etc. Therefore,
    cost of formation of a company is very high.

    (ii) Excessive government control: Joint stock companies are regulated by
    government through Companies Act and other economic legislations. Particularly,
    public limited companies are required to adhere to various legal formalities as
    provided in the Companies Act and other legislations.

    (iii) Delay in policy decisions: Generally policy decisions are taken at the Board
    meetings of the company. Further the company has to fulfill certain procedural
    formalities. These procedures are time consuming and therefore, may delay action
    on the decisions.

    (iv) Concentration of economic power and wealth in few hands: A joint stock
    company is a large-scale business organization having huge resources. Any
    misuse of such power creates unhealthy conditions in the society, having monopoly over a particular business or industry or product; exploitation of workers, consumers and investors.


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