Forms of business organisation

The financial decisions of a firm are significantly influenced by the legal form of its organisation, the regulatory framework governing it, the tax laws applicable to it, and the features of the financial system in which it operates. To illustrate this point some examples are given below:

 a) A private limited company cannot raise equity capital by issuing shares to the general public.

 b) a company in which foreign share 

holding is 100% may not be allowed to undertake certain activities.

 c) the tax rate for a cooperative society is lower than that of a public limited company.

d) Financial institutions generally go by a debt equity norm of 1.5 to 1.0.

Forms of business organisation

The choice of the form of organisation is very important as it has a bearing on

  I) The manner in which risk is shared between owners and creditors, 

  II) The ability of the entity to raise finances,

III) the extent of control exercisable by the owners,

 IV) the nature of regulatory framework applicable to the entity

  V) the tax burden for the entity and the owners.

The importance forms of business organisation are - sole proprietorship, partnership, cooperative society, private company and public company. Let's see this forms of business organisation in detailed:- 

1. Sole proprietorship:

A sole proprietorship concern is a business owned by a single person. From a legal point of view, the proprietorship concern has no separate status apart from its owner. The proprietor enjoys the rewards and assumes the risk of running the business. He realises all the profits, Bears all the losses, an include all the liabilities of the business.

The advantages of the sole proprietorship form of business are: It can be set up easily and inexpensively as there is no formal requirement for incorporation. It is subject to few governmental regulation. There is no firm tax.

The limitation of the sole proprietorship form of business are: the life of the proprietorship concern is limited to the life of the owner. The personal liability of the owner is unlimited. The ability of the firm to raise funds is severely constrained, this limits its growth.

2. Partnership:

A partnership firm is a business owned by two or more persons. It may be viewed as an extension of the sole proprietorship form. The partners bear the risk and reap the rewards of the business. 

Generally,  a partnership comes into being with the execution of a partnership agreement, referred to commonly as the partnership deed. This specifies, inter alia, the capital contributions, shares, rights, duties and obligations of the partners. In India, partnerships are governed by the Indian partnership Act, 1932. This legislation regulate the relationship between the partners inter se as well as between the partners and the parties dealing with the partnership firm.

The advantages of the partnership form of business organisation are: it can be like a proprietorship concern sector with relative ease and economy. It is relatively free from governmental regulations. It can benefits on the varied experience and expertise of the partners

Delimitation of the partnership form of business are: the life of a partnership form is rather limited. Withdrawal or death of any of the partners made result in The dissolution of the partnership firm. Possible conflict among the partners is a potential threat to the business. The personal liability of the partners is unlimited. Why the partnership firm can raise more fun than a proprietorship concern, its ability to raise funds is also limited.

3. Cooperative society:

A cooperative society may be defined as "a society which has its objective the promotion of economic interest of its members in accordance with cooperative principles".

The key features of a cooperative organisations are as follows:

i) why there's no maximum limit for membership, a minimum of 10 members are required to form a cooperative society. The members of a cooperative society are its owners.

ii) are cooperative societies required to be registered with the Registrar of Cooperative Societies.

iii) the management of a cooperative society is vested in the hands of the managing committee elected by members on the principle of "one member, one vote".

iv) the dividend payable on the capital contributed by members is subject to a ceiling of 9%. The surplus left after the dividend payment is distributed in the form of bonus which is linked to the volume of business done by members with the society.

The advantages of a Cooperative organisation are as follows: it can be formed easily. The liability of the members is limited. Grants and financial assistance are provided by the government to Cooperative organisations.

The disadvantages of a Cooperative organisation are as follows: Cooperative cannot employ outside talent. Members do not have an incentive to provide capital because the dividend rate is low and the principle of "one member, one vote" is followed. Often, influential members exploit the cooperative society for personal gains.

4. Private company:

The corporate form of business organisation, whether it is a private company or a public company has two salient features:

Distinct legal personality: a company is a distinct legal entity separate from its owners, shareholders. Hence a company, unlike a proprietorship form or a partnership concern, can own assets, Incur liabilities, enter into contracts, sue and be sued in its name. As a natural corollary to this, the shareholders, even though they own the company, cannot be held liable for the actions of the company.

Limited liability: the liability of the shareholders of a company is limited to the share capital subscribed to by them. This means that if a shareholder subscribes 200 shares which are offered at rupees 10 Per share, his liability is limited to rupees 1000. Once this amount is fully paid, he has no father obligation. This is in sharp contrast to the unlimited personal liability of the property in a proprietorship firm or the partners in a partnership concern.

A private company is a corporate body that can be formed by just two person subscribing to its share capital. Distinctive features are: the number of shareholders cannot exceed 50. Public cannot be invited to subscribe to its capital. The members right to transfer shares is somewhat restricted.

The advantages of the private company form of organisation are: the liability of the shareholders is limited. Under the companies Act, the Regulation and control of private companies is not very extensive. The promoters, by being selective in choosing the members can hope to enjoy an challenge control over the firm

The disadvantages of the private company form of organisations are: the burden of taxation is rather high. First, the tax rate on the company's income is high, second the dividend declared by the firm is subject to for the taxation in the hands of the members. The shares of a private company are not free negotiable. The ability of the firm to raise capital is limited.

5. Public company: 

A public company is a corporate body that has a minimum of seven members. A public company unlike a private company does not limit the number of its members and invite the public to subscribe to its capital and permits free transfer of shares.

The advantages of a public company form of organisation are considerable: the company has theoretically and unlimited life. The ownership of the company represented by equity shares is easily transferable. The liability of shareholders is limited to the capital subscribe to by them. The firm can raise substantial funds. 

The disadvantages associated with the public company form of business are: setting up of public company is somewhat involved. An elaborate procedure has to be gone through before a public company comes into existence. The income of a public companies effectively double taxed. It is first treated as the income of the company and tax is imposed there on. Then the dividend paid by the company out of its post-tax profits are treated as taxable income in the hands of shareholders. The affairs of a public company are subject to sale a comprehensive regulation under the companies Act.

On the whole, the public company form of organisation is the most appropriate from the point of view of value maximization except, of course, when the business is small.