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Business Organization forms and structures
Dr. Satish Kumar
BUSINESS ORGANIZATION
To carry out any business and achieve its objective of earning profit it is
required to bring together all the resources and put them into action in a
systematic way, and coordinate and control these activities properly. This
arrangement is known as business organization.
BM103 Financial Accounting
CHOICE OF BUSINESS ORGANIZATION DEPANDS ON
Your Vision regarding the size and nature of your business.
The level of control you wish to have.
The level of “structure” you are willing to deal with.
The business’s vulnerability to lawsuits.
Tax implications of the different organizational structures.
Your need for access to cash out of the business for yourself.
BM103 Financial Accounting
BM103 Financial Accounting
FORMS OF BUSINESS ORGANISATION
Sole proprietorship
Partnership
Joint Stock Company
BM103 Financial Accounting
SOLE PROPRIETORSHIP
No Separation of Ownership and Management:
Single Ownership
Less Legal Formalities
No Separate Entity
One-man Control
Unlimited Liability
.
• In Sole proprietorship, the business is carried on by a single individual.•This type of entity is suitable for small businesses. •One person will have the decisive authority and owns all the assets and liabilities of the business owns it. The business is not separate from the Owner who has unlimited liability. Therefore Sole Proprietorship may be the simplest type but it also the riskiest business entity.
FEATURES:
BM103 Financial Accounting
ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIP
ADVANTAGES
Easy to Form and Wind Up Quick Decision and Prompt Action Maintenance of Business Secrets Direct incentive
DISADVANTAGES
Limited resources: Limited managerial ability Unlimited liability Limited life of a business concern.
BM103 Financial Accounting
PARTNERSHIP
‘Partnership’ is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit. Partnership form of business organization in India is governed by the Indian Partnership Act 1932.
FEATURES:
•Two or More Persons
•Contractual Relationship
•Sharing Profits and Business
•Voluntary Registration
•Unlimited Liability
BM103 Financial Accounting
ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP FIRM
ADVANTAGES
Ease of formation and closure Balanced decision making More funds Sharing of risks Benefits of Specialisation
DISADVANTAGES
Unlimited liability Possibility of conflicts Lack of public confidence
BM103 Financial Accounting
JOINT STOCK COMPANY
A company is an association of persons formed for carrying out business activities and has a legal status independent of its members. The company form of organization is governed by The Companies Act, 1956. A company can be described as an artificial person having a separate legal.
FEATURES:
•Artificial person•Separate legal entity•Perpetual succession:•Compulsory registration under The Companies Act, 1956•Limited liability•Capital is divided in to shares•Sharing of profits•The management and control of the affairs of the company is•undertaken by the Board of Directors
BM103 Financial Accounting
ADVANTAGES AND DISADVANTAGES OFJOINT STOCK COMPANYADVANTAGES
Limited liability
Transfer of interest
Perpetual existence
Scope for expansion
Professional management
DISADVANTAGES
Complexity in formation Delay in decision making: Conflict in interests
Comparison of Three Types of Business Entities
Sole Proprietorship Partnership Company
Examples M/s ABC General Store A & company ABC Limited ABC Private Limited
Owner Sole Partners Shareholders
Number of owners/Shareholders
01 Min: 2; Max: 20 Min: 7 Max: No limitMin : 2, Max: 50 in
PVT ltd.
Management Control
Proprietor Partners BOD
Liability Unlimited Unlimited Limited
Legal Registration
No Provision Voluntary Compulsory
Flexibility Maximum Depends on Partners Comparatively less
Source of Equity Funds
Proprietor brings in the funds
Partners bring in the funds
Shareholders bring in the funds.
BM103 Financial Accounting