Forms of Business Organisation covers Sole Proprietorship, HUF and Family Business, Partnership, Company, Statutory Bodies and Corporations, Cooperatives, Societies and Trusts, Limited Liability Partnership, One Person Companies (OPCs) & Joint Ventures.
Have you ever thought who brings the required capital, takes the responsibility of arranging other resources, puts them into action, and coordinates and controls the activities to earn the desired profits? If you look around, you will find that a small grocery shop is owned and run by a single individual who performs all these activities. But, in big businesses, it may not be possible for a single person to perform all these activities. So in such cases two or more persons join hands to finance and manage the business properly and share its profit as per their agreement. Thus, business organisations may be owned and managed by a single individual or group of individuals who may form a partnership firm or a joint stock company. Such arrangement of ownership and management is termed as a form of business organisation.
A business organisation usually takes the following forms in India:
(1) Sole proprietorship
(3) Joint Hindu Family
(4) Cooperative Society
(5) Joint Stock Company
Characteristics Of Sole Proprietorship Form Of Business Organisation
Definition of Sole Proprietorship J.L. Hanson: “A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business.” Thus, ‘Sole Proprietorship’ from of business organisation refers to a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.
(i) Single Ownership: The sole proprietorship form of business organisation has a single owner who himself/herself starts the business by bringing together all the resources.
(ii) No Separation of Ownership and Management: The owner himself/herself manages the business as per his/her own skill and intelligence. There is no separation of ownership and management as is the case with company form of business organisation.
(iii) Less Legal Formalities: The formation and operation of a sole proprietorship form of business organisation does not involve any legal formalities. Thus, its formation is quite easy and simple.
(iv) No Separate Entity: The business unit does not have an entity separate from the owner. The businessman and the business enterprise are one and the same, and the businessman is responsible for everything that happens in his business unit.
(v) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time, the entire loss is also borne by him. No other person is there to share the profits and losses of the business. He alone bears the risks and reaps the profits.
(vi) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to pay the business liabilities, his personal property can also be utilised to pay off the liabilities of the business.
(vii) One-man Control: The controlling power of the sole proprietorship business always remains with the owner. He/she runs the business as per his/her own will.
Merits Of Sole Proprietorship Form Of Business Organisation
(i) Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship form of business organisation. No legal formalities are required to be observed. Similarly, the business can be wind up any time if the proprietor so decides.
(ii) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the sole proprietary organisation. So he/she can take quick decisions on the various issues relating to business and accordingly prompt action can be taken.
(iii) Direct Motivation: In sole proprietorship form of business organisations. the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently.
(iv) Flexibility in Operation: It is very easy to effect changes as per the requirements of the business. The expansion or curtailment of business activities does not require many formalities as in the case of other forms of business organisation.
(v) Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. He is also not bound to publish his business accounts.
(vi) Personal Touch: Since the proprietor himself handles everything relating to business, it is easy to maintain a good personal contact with the customers and employees. By knowing the likes, dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly, as the employees are few and work directly under the proprietor, it helps in maintaining a harmonious relationship with them, and run the business smoothly.
Limitations Of Sole Proprietorship Form Of Business Organisation
(i) Limited Resources: The resources of a sole proprietor are always limited. Being the single owner it is not always possible to arrange sufficient funds from his own sources. Again borrowing funds from friends and relatives or from banks has its own implications. So, the proprietor has a limited capacity to raise funds for his business.
(ii) Lack of Continuity: The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.
(iii) Unlimited Liability: You have already learnt that there is no separate entity of the business from its owner. In the eyes of law the proprietor and the business are one and the same. So personal properties of the owner can also be used to meet the business obligations and debts.
(vi) Not Suitable for Large Scale Operations : Since the resources and the managerial ability is limited, sole proprietorship form of business organisation is not suitable for large-scale business.
(v) Limited Managerial Expertise: A sole proprietorship from of business organisation always suffers from lack of managerial expertise. A single person may not be an expert in all fields like, purchasing, selling, financing etc. Again, because of limited financial resources, and the size of the business it is also not possible to engage the professional managers in sole proprietorship form of business organisations.
‘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. The persons who form a partnership are individually known as partners and collectively a firm or partnership firm.
Partnership form of business organisation in India is governed by the Indian Partnership Act, 1932 which defines partnership as “the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all”.
Characteristics Of Partnership Form Of Business Organisation
Based on the definition of partnership as given above, the various characteristics of partnership form of business organisation, can be summarised as follows:
(i) Two or More Persons: To form a partnership firm atleast two persons are required. The maximum limit on the number of persons is ten for banking business and 20 for other businesses. If the number exceeds the above limit, the partnership becomes illegal and the relationship among them cannot be called partnership.
(ii) Contractual Relationship: Partnership is created by an agreement among the persons who have agreed to join hands. Such persons must be competent to 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 firm i.e., he can have share in the profits without any obligation for losses.
(iii) Sharing Profits and Business: There must be an agreement among the partners to share the profits and losses of the business of the partnership firm. If two or more persons share the income of jointly owned property, it is not regarded as partnership.
(iv) Existence of Lawful Business: The business of which the persons have agreed to share the profit must be lawful. Any agreement to indulge in smuggling, black marketing etc. cannot be called partnership business in the eyes of law.
(v) Principal Agent Relationship: There must be an agency relationship between the partners. Every partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she acts as an agent of other partners, and at the same time the other partners become the principal.
(vi) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well as individually liable for the debts and obligations of the firms. If the assets of the firm are insufficient to meet the firm’s liabilities, the personal properties of the partners can also be utilised for this purpose. However, the liability of a minor partner is limited to the extent of his share in the profits.
(vii) Voluntary Registration: The registration of partnership firm is not compulsory. But an unregistered firm suffers from some limitations which makes it virtually compulsory to be registered. Following are the limitations of an unregistered firm.
The firm cannot sue outsiders, although the outsiders can sue it.
In case of any dispute among the partners, it is not possible to settle the dispute through court of law.
The firm cannot claim adjustments for amount payable to, or receivable from, any other parties.
Merits Of Partnership Form Of Business Organisation
(i) Easy to Form: A partnership can be formed easily without many legal formalities. Since it is not compulsory to get the firm registered, a simple agreement, either in oral, writing or implied is sufficient to create a partnership firm.
(ii) Availability of Larger Resources: Since two or more partners join hands to start partnership firm it may be possible to pool more resources as compared to sole proprietorship form of business organisation.
(iii) Better Decisions: In partnership firm each partner has a right to take part in the management of the business. All major decisions are taken in consultation with and with the consent of all partners. Thus, collective wisdom prevails and there is less scope for reckless and hasty decisions.
(iv) Flexibility: The partnership firm is a flexible organisation. At any time the partners can decide to change the size or nature of business or area of its operation after taking the necessary consent of all the partners.
(v) Sharing of Risks: The losses of the firm are shared by all the partners equally or as per the agreed ratio.
(vi) Keen Interest: Since partners share the profit and bear the losses, they take keen interest in the affairs of the business.
(vii) Benefits of Specialisation: All partners actively participate in the business as per their specialisation and knowledge. In a partnership firm providing legal consultancy to people, one partner may deal with civil cases, one in criminal cases, another in labour cases and so on as per their area of specialisation. Similarly two or more doctors of different specialisation may start a clinic in partnership.
(viii) Protection of Interest: In partnership form of business organisation, the rights of each partner and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for dissolution of the firm or can withdraw from the partnership.
(ix) Secrecy: Business secrets of the firm are only known to the partners. It is not required to disclose any information to the outsiders. It is also not mandatory to publish the annual accounts of the firm.
Limitations Of Partnership Form Of Business Organisation
partnership firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that the liability of the partners is unlimited i.e., the partners are personally liable for the debt and obligations of the firm. In other words, their personal property can also be utilised for payment of firm’s liabilities.
(b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity or the retirement of any partner brings the firm to an end. Not only that any dissenting partner can give notice at any time for dissolution of partnership.
(c) Limited Capital: Since the total number of partners cannot exceed 20, the capacity to raise funds remains limited as compared to a joint stock company where there is no limit on the number of share holders.
(d) Non-transferability of share: The share of interest of any partner cannot be transferred to other partners or to the outsiders. So it creates inconvenience for the partner who wants to transfer his share to others fully and partly. The only alternative is dissolution of the firm.
(e) Possibility of Conflicts: 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 friction and quarrel among the partners. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.
Types Of Partners
You have learnt that normally every partner in a firm contributes to its capital, participates in the day-to-day management of firm’s activities, and shares its profits and losses in the agreed ratio. In other words all partners are supposed to be active partners. However, in certain cases there are partners who play a limited role. They may contribute capital and such partners cannot be termed as active partners. Similarly, some persons may simply lend their name to the firm and make no contribution to capital of the firm. Such persons are partners only in name. Thus, depending upon the extent of participation and the sharing of profits, liability etc., partners can be classified into various categories. These are summarised here under.
(A) Based on the extent of participation in the day-to-day management of the firm partners can be classified as ‘Active Partners’ and ‘Sleeping Partners’. The partners who actively participate in the day-to-day operations of the business are known as active partners or working partners. Those partners who do not participate in the day-to-day activities of the business are known as sleeping or dormant partners. Such partners simply contribute capital and share the profits and losses.
(B) Based on sharing of profits, the partners may be classified as ‘Nominal Partners’ and ‘Partners in Profits’. Nominal partners allow the firm to use their name as partner They neither invest any capital nor participate in the day-to-day operations. They are not entitled to share the profits of the firm. However, they are liable to third parties for all the acts of the firm. A person who shares the profits of the business without being liable for the losses is known as partner in profits. This is applicable only to the minors who are admitted to the benefits of the firm and their liability is limited to their capital contribution.
(C) Based on Liability, the partners can be classified as ‘Limited Partners’ and ‘General Partners’. The liability of limited partners is limited to the extent of their capital contribution. This type of partners is found in Limited Partnership firms in some European countries and USA. So far, it is not allowed in India. However, the Limited liability Partnership Act is very much under consideration of the Parliament. The partners having unlimited liability are called as general partners or Partners with unlimited liability. It may be noted that every partner who is not a limited partner is treated as a general partner.
(D) Based on the behaviour and conduct exhibited, there are two more types of partners besides the ones discussed above. These are (a) Partner by Estoppel; and (b) Partner by Holding out. A person who behaves in the public in such a way as to give an impression that he/she is a partner of the firm, is called ‘partner by estoppel’. Such partners are not entitled to share the profits of the firm, but are fully liable if some body suffers because of his/her false representation. Similarly, if a partner or partnership firm declares that a particular person is a partner of their firm, and such a person does not disclaim it, then he/she is known as ‘Partner by Holding out’. Such partners are not entitled to profits but are fully liable as regards the firm’s debts.
formation of partnership firm
Formation Of Partnership Form Of Business Organisation
The following steps are to be taken in order to form a partnership firm:
(1) Minimum two members are required to form a partnership. The maximum limit is ten in banking and 20 in other businesses.
(2) Select the like-minded persons keeping in view the nature and objectives of the business.
(3) There must be an agreement among the partners to carry on the business and share the profits and losses. This agreement must preferably be in writing and duly signed by the all the partners. The agreement, i.e., the partnership deed must contain the following:
(i) Name of the firm
(ii) Nature of the business
(iii) Names and addresses of partners
(iv) Location of business
(v) Duration of partnership, if decided
(vi) Amount of capital to be contributed by each partner
(vii) Profit and loss sharing ratio
(viii) Duties, powers and obligations of partners.
(ix) Salaries and withdrawals of the partners
(x) Preparation of accounts and their auditing.
(xi) Procedure for dissolution of the firm etc.
(xii) Procedure for settlement of disputes
(d) The partners should get their firm registered with the Registrar of Firms of the concerned
state. Although registration is not compulsory, but to avoid the consequences of non-registration, it is advisable to get it registered when it is setup or at any time during its existence. The procedure for registration of a firm is as follows.
(i) The firm will have to apply to the Registrar of Firms of the concerned state in the prescribed form.
(ii) The duly filled in form must be signed by all the partners.
(iii) The filled in form along with prescribed registration fee must be deposited in the office of the Registrar of Firms.
(iv) The Registrar will scrutinise the application, and if he is satisfied that all formalities relating to registration have been duly complied with, he will put the name of the firm in his register and issue the Certificate of Registration.
Hindu Undivided Family
Meaning : The Joint Hindu Family firm is a form of business organization in which the family possesses some inherited property and the ‘Karta’, the head of the family, manages its affairs. It comes into existence by the operation of Hindu Law and not out of contract between the members or coparceners. If the personal who have co-parcenary interest in the ancestral property carry on business it is a case of Joint Hindu family firm. Thus, the Joint Hindu Family Business is a business by co-parceners of a Hindu undivided estate. Following the Hindu Succession Act, 1956, a female relative of a deceased male co-parcener will have a share in the co-parcenary interest after the death of the co-parcener in question. Even a male relative claiming through such female relative (specified as Clause 1 in the Act). Is entitled to get a share of the co-parcenary interest at the time of death of such co-parcener. Such relatives are not included in the list of holders of co-parcenary interest but they are allowed to have some share out of co-parcenary interest as outsiders.
Three generations next to the holder in unbroken male line constitute a co-parcenary, and property inherited by a Hindu from his father, father’s father and father’s grandfather is regarded as ‘ancestral’ A son, grand son and great grand son become joint owners of the property by reason of their birth in the family. The property is managed and held by the senior male member or the father as the Head of the Family, technically known as ‘Karta’. In Hindu law, a family business is taken as a part and parcel of the heritable property, and therefore, the family business becomes the subject matter of co-parcenary interest. The rights and liabilities of co-parceners are determined by the general rules of the Hindu Law. It should be noted that joint family firm with the joint ownership of the inherited business is created by the operation of law and does not arise out of contract between the coparceners.
Features of HUF : The Joint Hindu Family Firm possesses the following characteristics or features :
(i) Status : The membership of the family business is the result of status arising from birth in the family, and hence there is no question of the members being discriminated
in terms of minority and majority on the basis of age.
(ii) Male Members : Only male persons, and not females, can claim co-parcenary interest in the Hindu Family business firm.
(iii) Karta : The right to manage the business vests in Karta alone (i.e. the Head of the Family). He has the implied authority to obtain loans through mortgage, etc. for the purpose of the business. Other members have neither any right to manage the affairs of the business nor any right to take loans on mortgage for the purpose of business.
(iv) Liability : The liability of all the members of the Joint Hindu Family, except that of the Karta, is limited to the value of their individual interests in the joint property. The liability of the Karta is unlimited and as such extends to all that he owns as his separate and private property.
(v) Fluctuating Share : The share of each member’s interest in the family property and business keeps on fluctuating. The member’s interest increases by death of any existing coparcener and decreases by birth of a new co-parcener.
(vi) Continued Existence : The existence of the Joint Hindu Family Business is not affected by the death or insolvency of a co-parcener or even that of the Karta.
(vii) Freedom of Action : The co-parceners do not have a right in the affairs of the family business which is the exclusive domain of the Karta. If the co-parceners are unhappy with the functioning of the Joint Hindu Family business, they ask for its partition along with the division of the property of the family. At the time of such partition of the ancestral property, the co-parceners have no right to ask the Karta for an a of the past profits and losses.
Merits of Joint Hindu Family :
(i) Assured of Share in Profits : Every co-parcener gets a share in the profits of the Business irrespective of his contribution to the successful running of the business. In this way every co-parcener is assured of a share in the profits of the business.
(ii) Freedom to Karta : The Karta of the family has unrestricted freedom in the sense that he can the business without interference by other coparceners. This facilitates quick decision making in the business.
(iii) Co-operative Efforts : To take advantage of the capabilities and resourcefulness of the co-parceners, the duties of the business are divided among the members in accordance with their capacity and ability.
(iv) Sharing of knowledge and Experience : It provides an opportunity for younger members to get the benefit of knowledge and experience of elder members of the family. This helps the younger members to develop and acquire expertise without much difficulty.
(v) Inclusion of Finer Values of Life : Every member of the family gets an opportunity for participation in the business and the qualities of sacrifice, duty and discipline become embedded in them. A Joint Hindu Family Business can succeed only when such qualities are displayed by Karta and in turn they are emulated and appreciated by other members of the family.
(vi) Insurance against Contingencies : It serves as an insurance cover for maintaining the children, widows, ailing or invalid members of the family.
(vii) Limited Liability : It has limited liability of all the co-parceners except that of karta.
Demerits of Joint Hindu Family :
(i) Lack of Motivation : There is no encouragement to work hard and to earn more because members who work hard do not get the direct benefits of their efforts. Further the right to share in income or profits of business irrespective of the efforts put in makes the members of the family lazy and unenterprising.
(ii) Unfair to Co-parceners : Since Karta has the unchallengeable authority to manage the business, the initiative and sincerity of the younger members may not find scope and opportunity for use.
(iii) Scope for Misuse : Since Karta has full freedom in carrying on the business, he may misuse this freedom for his personal benefits and gains. This is one reason why most of the Joint Hindu Family Business firms are giving way to other forms of organizations.
(iv) Limited Resources : Because of the limited capacity of the firm in terms of having members, investing capital and borrowing loans, the Joint Hindu Firm has milted resources at its disposal for investment in business.
(v) Fear of Disintegration : Small family quarrels on controversial matters may lead to the disintegration of this form of business organization.
A cooperative society is an association of individuals who voluntarily pool their resources and carry on the business for their own welfare and not for a profit seeking business. It is democratic form of organization in which the consumers are the owners of the business. From manager to clerk all are the owners of the business and all the management is in their hands. In this organization capitalist is not involved.
Principles of Cooperative Society
1. Voluntary Membership :-
Any person can become the member of the society and can leave it any time.
2. Equal Rights :-
Each member of the society has an equal right to vote and ownership. Each shareholder has one vote.
3. Democracy :-
The principle of democracy is adopted while making the decisions. The decision of the majority is honored.
4. Honesty :-
It is the basic principle of this society. Its members should be honest. Selfish people can not run the business of cooperative society.
5. Mutual Confidence :-
Cooperative society foundation it is laid down on mutual confidence. Members of the society should trust each other and work like a team.
6. Welfare Main Objective :-
Its main objective is to provide goods and services to its members at lower price.
7. Cash Payment :-
Credit team is prohibited and goods are supplied to its members on cash payment.
8. Economy :-
The member of the society should act upon the principle of economy. They should not misuse capital of the society and always keep in view best interest of the society.
9. Distribution of Profit :-
The profit can be distributed among the members according the cooperative act. One fourth (1/4) of the profit can be kept in reserve. Then (10%) of the profit can be used for providing facilities to the members.
10. Self Service :-
All the business activities are conducted by the members themselves. All are the owner and all are the consumers. So self service rule is employed in the organization.
11. Spirit of Love and Cooperation :-
There should be spirit of love, sacrifice and cooperation among the members to achieve the objectives.
Advantages of Co-operative Societies
Easy Formation: -A co-operative society can be formed easily. Minimum ten members required for the registration of co-operative society. Then any adult member can join hands to start co-operative society. Though the registration of a co-operative society is compulsory, the procedure for registration is simple and the fees for registration are nominal.
Democratic Management: -The management of cooperative organisation is democratic in nature. Each member enjoys an equal right to vote. The principle of voting is ‘one member one vote’. Thus each member is involved in decision making
Limited Liability: – The liability of the members of the co – operative society is limited to their shares or to the extent of the unpaid amount of the shares held by them
Stability: -Since a co – operative society enjoys an independent legal status different from its members. It enjoys a stable and continuous life.
Open Membership: -The membership of a co – operative society is voluntary. It is open to all i.e. any person of any caste, creed, religion etc. can become a member by purchasing shares in the society.
Tax Concession: -Since co – operative societies plays an important role in the economic and social development of the country, the government gives many concessions to them which include exemption of payment of income tax upto a certain limit. This helps in increased profitability.
Less Operating Expenses: -The operating expenses of co-operative societies are very little because members offer administrative services without any remuneration. There are no advertisement expenses and no middlemen are involved.
Supply of goods at cheaper Rate: – Co – operatives society makes bulk purchases directly from manufacturer or wholesale trader, so goods are available at cheaper rate. Co – operative, societies main aim is to provide service to members rather than earning profits.
Self financing and charity: -After paying maximum dividend of 15% p.a. on the shares of members and bonus as per their purchases, the surplus profit is utilized for financing growth and development of the organization and also for the charitable and social activities.
Disadvantages of Co-operatives Society :
Lack of Capital: -The members of co-operative society belong to lower and middle income group. Hence they can invest only a limited capital in the co-operative society. Buying more shares does not help members in dictating their terms in the management since the principle of voting is ‘one member one vote’ unlike a company where a company where it is ‘one share one vote’. There is no capital appreciation. A maximum of 15% p.a. is paid on the shares.
Rigid Government Rules and Regulations: -There is strict control and supervision by the state government on the working of co-operative organizations. Registration is compulsory as per the co-operative society act of the concerned state. The concentration of power is in the hands of Registrar. Various statements are required to be sent to the government from time to time. Due to excessive government interference, the spirit of co-operation is lost.
Incompetent Management: -Members constitute Managing committee which is responsible for day to day administration of the society, members may not possess the required skills, abilities, time and experience for managing the affairs efficiently. Members work in an honorary capacity. Therefore they lack motivation.
Lack of Public Confidence: -It is observed that only some particular members become members of the managing committee and they are politically motivated. Co-operative society does not enjoy public confidence as many co-operative societies have failed miserably (unhappily) in achieving their objectives. This is because unnecessary interference by politicians, corrupt government officials in the working of co-operatives.
Lack of Motivation: -The managing committee members work in an honorary capacity. There is no incentive for them to work hard. There is direct effort reward relationship. This may reserve in lack of interest by management in affairs of the co-operative society.
Mutual Disputes: -There are constant conflicts among members as they lack the maturity and experience in handling the affairs of the society. Some members purchases their requirement from other sources rather than from the co-operative society of which, they are members. Moreover, some members try to set concessions and privileges enjoyed by co-operatives for their personal gain. These may result in winding up of the co-operative society.
Limited Scope for Expansion: – Due to limited financial and managerial resources, co-operatives society cannot expand the business beyond certain limit.
A company is a legal entity formed by a group of individuals to engage in and operate a business enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law of its jurisdiction. The line of business the company is in will generally determine which business structure it chooses, for example a partnership, a proprietorship, or a corporation. As such, a company may be regarded as a business type.
According to Prof. L.H. Haney, “Company is an artificial person created by law having separated entity with a perpetual succession and common seal”. According to Justice Lindley a company means association of persons who contribute in shape of money or money’s worth to a common stock and employ it for some specific purpose.
Definition of a Company : Section 2(20) of the companies Act, 2013 defines a company as “a company incorporated under this Act or under any previous company law.” Important previous companies laws are the companies laws passed in 1850, 1866,1882,1913, and 1956.
After passing of the companies Act, 2013, all these acts have been repeated. The definition contained in the Act does not throw any light on the features of a Company. According to Prof. L.H. Haney, “Company is an artificial person created by law having separated entity with a perpetual succession and common seal”. According to Justice Lindley a company means association of persons who contribute in shape of money or money’s worth to a common stock and employ it for some specific purpose.
Two more features division of acapital into transferable shares and limited liability of the members may be added to the definition given by Prof. Haney. Thus, a company may be defined as “an incorporated association which is an artivicial person created by law having a separate entity , with a perpetual succession, a common seal, capital divided into transferable shasres and carrying limited liability”.
Characteristics of a Company
- Voluntary Association:
A company is a voluntary association of two or more persons. A single person cannot constitute a company. At least two persons must join hands to form a private company. While a minimum of seven persons are required to form a public company. The maximum membership of a private company is restricted to fifty, whereas, no upper limit has been laid down for public companies.
A company comes into existence the day it is incorporated/registered. In other words, a company cannot come into being unless it is incorporated and recognised by law. This feature distinguishes a company from partnership which is also a voluntary association of persons but in whose case registration is optional.
- Artificial Person:
In the eyes of law there are two types of persons viz:
(a) Natural persons i.e. human beings and
(b) Artificial persons such as companies, firms, institutions etc.
Legally, a company has got a personality of its own. Like human beings it can buy, own or sell its property. It can sue others for the enforcement of its rights and likewise be sued by others.
- Separate Entity:
The law recognizes the independent status of the company. A company has got an identity of its own which is quite different from its members. This implies that a company cannot be held liable for the actions of its members and vice versa. The distinct entity of a company from its members was upheld in the famous Salomon Vs. Salomon & Co case.
- Perpetual Existence:
A company enjoys a continuous existence. Retirement, death, insolvency and insanity of its members do not affect the continuity of the company. The shares of the company may change millions of hands, but the life of the company remains unaffected. In an accident all the members of a company died but the company continued its operations.
- Common Seal:
A company being an artificial person cannot sign for itself. A seal with the name of the company embossed on it acts as a substitute for the company’s signatures. The company gives its assent to any contract or document by the common seal. A document which does not bear the common seal of the company is not binding on it.
- Transferability of Shares:
The capital of the company is contributed by its members. It is divided into shares of predetermined value. The members of a public company are free to transfer their shares to anyone else without any restriction. The private companies, however, do impose some restrictions on the transfer of shares by their members.
- Limited Liability:
The liability of the members of a company is invariably limited to the extent of the face value of shares held by them. This means that if the assets of a company fall short of its liabilities, the members cannot be asked to contribute anything more than the unpaid amount on the shares held by them. Unlike the partnership firms, the private property of the members cannot be utilized to satisfy the claims of company’s creditors.
- Diffused Ownership:
The ownership of a company is scattered over a large number of persons. According to the provisions of the Companies Act, a private company can have a maximum of fifty members. While, no upper limit is put on the maximum number of members in public companies.
- Separation of Ownership from Management:
Though shareholders of a company are its owners, yet every shareholder, unlike a partner, does not have a right to take an active part in the day to day management of the company. A company is managed by the elected representatives of its members. The elected representatives are individually known as directors and collectively as ‘Board of Directors’.
Advantages and disadvantages of a Company
- Limited Liability
For many people this is the deciding factor.
Starting a new business is often a risky venture: usually people are putting into the business their personal savings and often they are giving up secure employment to start their own firm. It is often important to them to know that their risk is limited to these amounts and that if the business fails they will not be liable beyond the amount of capital they have decided to put in. in this way they can protect their house and other personal assets from being sold to pay the business debts. Without such limited liability, the ultimate risk of business failure is personal bankruptcy.
The limited company will, however, operate subject to the following practical considerations:-
(i) Bank Borrowing
If the company borrows money from a bank, the bank will automatically require the directors of the company to give personal guarantees (i.e. to contract that they will pay back the bank if the company fails to do so). The bank may also require security over the company’s assets (see below: floating charge) and/or the directors’ personal assets (e.g. a mortgage – or second mortgage – on a director’s house).
A landlord may insist that if a small limited company is going to take a lease of premises the directors give personal guarantees, for payment of the rent, or other obligations under the lease.
(iii) Trade suppliers
Some trade suppliers may also require personal guarantees. This tends to happen only with major suppliers of the business, e.g. breweries to pubs/winebars, petrol companies to garages, franchisors to franchisees.
(iv) Liability for insolvent trading
In the vast majority of cases there is no personal liability on the directors or shareholders of a company that fails. In exceptional cases, if a limited company does become insolvent, the people running it can be made personally liable for some or all its debts if they have incurred debts which they knew the company could not pay (fraudulent trading) or, once they knew or ought to have known that the company would become insolvent, they have failed to take steps to minimise the loss to the creditors, by failing to put the company into liquidation or at least stopping the business (wrongful trading). Apart from being made liable for the company’s debts, the directors could incur other penalties, such as a fine (or even imprisonment) for fraudulent trading or being disqualified from acting as a director. See related topic: What legal liabilities could directors incur?
(v) Non-legal pressures to pay creditors
People do not like not paying their debts and creditors do not like not being paid. Sometimes people will personally pay their company’s debts, or some of them, because they do not wish to default, and feel obliged by moral pressures or the unpleasantness of being pursued by creditors.
(vi) The amount of risk
Some types of business involve substantially more financial risk than others. This depends on such factors as the amount of capital involved in setting-up the business, the nature of the trade itself, and how easy it is to reduce the outgoings to match the income.
At one end of the scale a service business which can be run from home, with little or no assistance, without expensive capital equipment and where very little has to be expended before invoicing the client, involves low risk and can probably be safely run as a sole trader/partnership.
On the other hand a manufacturing business which needs premises, expensive machinery, the purchase of raw materials, the employment of staff, etc. all before anything can actually be made, let alone sold, involves high risk and would normally be incorporated.
Registered companies are subject to a different tax structure (corporation tax) from sole traders or partnerships. The choice of structure can make a substantial difference to the amount of tax paid on the same trading profits.
Registering a limited company and the continuing registration requirements are additional formalities which do not apply to sole traders or partners.
The initial formalities are those of setting up the company . The continuing formalities are:-
Keeping the registered information up to date, both at Companies House and on the company’s own registers. (Information to Companies House must be sent on the right official form). Submitting an annual return and accounts. (In some cases accounts must be audited). Holding board and general meetings and keeping minutes.
A sole trader is not involved with any of these. A partnership should have a partnership agreement drawn up (though this is not an absolute legal requirement).
A Limited liability Partnership LLP is a hybrid between a company and a partnership. It has to be registered at Companies House but the formalities are less than for a company.
A registered company has to send information about itself to Companies House, where it is put on public file. Anybody can request a copy of the file and so can look up all the registered details of the company. Information from Companies House is increasingly being made available on-line. The information includes a copy of the annual accounts (though for small companies this need be only a simplified balance sheet) and details of the company’s directors, including share ownerships, other directorships, home addresses, etc. Some people do not like this amount of information being publicly available.
On the other hand, the availability of this information can make it easier for the company to get credit, once it is established, because a search at Companies House can show that the company is of a certain size and appears to be stable and growing.
- The floating charge
A floating charge is a mortgage of (usually) all the company’s assets, both present and future, and on terms that the company may deal with the assets in the ordinary course of business. It is a good way, and in practice the only way, of using the assets of a business other than the premises as security for a loan. A floating charge is usually included in a debenture (perhaps with a conventional mortgage on the premises and other fixed assets) and is usually in favour of a bank.
The floating charge is a factor in the choice of business format because only registered companies can create floating charges. A sole trader or partnership, with exactly the same assets, cannot give this type of mortgage.
So if the business needs to borrow money and the bank (or other lender) wants a charge on all the assets, the business will have to be a registered company.
The bank may have a second reason for wanting the business to be a limited company. It is usual for banks to require directors of small companies to give personal guarantees of any loans to their companies. If the business fails, the bank is better protected if the business is a limited company because only the bank will have a personal guarantee and so access to the owner’s personal assets. If the business is in the format of a sole trader or partnership, all the creditors have access to the owner’s personal assets.
- Name protection
The only system for the registration of names is that for registered companies. If the name is important to the business, its owners may want to obtain registration so as to prevent anybody else registering it and to warn anyone searching the index of companies to avoid similar names.
Even if the business is to be a sole trader or partnership, a company can be registered in the same name and kept dormant indefinitely (provided an annual return and dormant company accounts are registered each year). This will prevent the same name being registered by anybody else and in practice, will tend to inhibit the registration of similar names. See further How do I protect my company name?
One of the advantages of a registered company is that, being a separate legal entity, it keeps going indefinitely, regardless of who owns or directs it. This can be an advantage where ownership or control is going to change.
A sole trader/partnership structure is very flexible provided the ownership and control patterns are simple, i.e. a small number of people owning and contributing to the business in a very straightforward way.
The company structure, with the possibility of creating different classes of shares and having directors who may, but need not be, shareholders, allows much more complex patterns to created.
- Appearance of size
Bigger businesses are nearly always companies and so some small businesses are registered so as to create an impression of size.
- Outside investment
A further advantage of becoming a limited company is that the shareholders do not necessarily have to be directly involved in the running of the company. It is also often the case that it will be easier to acquire further investment for the business if it is a limited company again mainly due to the benefit of limited liability. The company structure is ideal for offering outside investment in the business as appropriate amounts and types of shares can be set up. Investment in a partnership is legally risky as someone who shares the profits of a partnership may be regarded as a partner and may incur unlimited liability for all the debts.
Statutory Bodies and Corporations
Statutory body or authority means a non-constitutional body which is set up by a parliament. Statutory bodies are authorized to pass the law and take the decision on the behalf of state or country. Statutory body has official permission for Legislation i.e process of enacting laws. Cabinet resolution should be passed to establish this body. Example of a statutory body is SEBI i.e. Securities and Exchange Board of India. SEBI is a very important regulatory body for the security market in India. Another example is the National Commission for OBCs. A statutory body does not include the corporations owned by shareholders.
Statutory Body Meaning
Statutory body is an autonomous corporate body. An Act of Parliament or an Act of State Legislatures create a statutory body. The Act also defines the powers, objectives, and functions of the body.
List of some important Statutory Bodies
National Commission for Minorities.
Armed Forces Tribunal.
National Consumer Disputes Redressal Commission.
National Law Commission.
National Commission for Women.
National Human Rights Commission.
National Green Tribunal.
National Commission for Backward Classes.
The essential features of a public corporation are as under:
1.Establishment: – A public corporation is established under a special act of parliament or state Legislature. The act lists out details in respect of powers, privileges and area of activities of the corporation.
2. Autonomy: – It enjoys autonomous powers in respect of expansion and major administrative decisions. However, approval of the government may be required in case of major policy changes.
3. Objective: -It works on profit objective, and as such its activities are commercial in nature.
4. Decision-Making: – There is quick decision making as compared to departmental form, as it does not have to consult government officials in respect of decision-making.
5. Administration: – The Administration is undertaken by Board of Directors nominated by the Government.
6. Answerability: – It is answerable to the Parliament as regards to its activities.
7. Capital Contribution: – Its capital is wholly owned and subscribed by the Government. The public are not the shareholders of this type of organisation as compared to that of Government Company.
8. Borrowing Power: – Although its capital is contributed only by the Government, yet it can borrow funds from the public. This means public can be the lenders or creditors of this type of organisation.
Advantages of statutory corporations are as follows:-
(1)Formation: Formation of Statutory Corporations is easy. It can be easily formed by passing Special Act, either at Legislature Assembly or at Parliament.
(2) Autonomy: Statutory corporations can have its own working pattern. There is no political interference in day to day working of corporation.
(3) Flexibility: Statutory corporations enjoy full flexibility in its operations. It is free to take any decision relating to capital collection. Investment, market, production, recruitment, planning, accounting & the decision once taken can be easily changed.
(4)Capital Raising: Government contributes the capital at large for statutory corporations, but statutory corporations are free to collect capital from general public.
(5) Quick Decisions: Quick decisions are possible because all policy decisions are taken by the Board & board can implement these decisions easily. There is no interference of government in any type of decisions.
(6) Staff Members: Statutory corporations is free to have its own recruitment policy. It can recruit, promote, and transfer any employee / officer as per its requirement.
(7) Economies of Scale: Statutory corporations operates on large scale & enjoy the economies of large scale operations.
(8) Separate Entity: Like joint stock company, statutory corporations enjoys separate legal status.
(9) Self Accounting System: Statutory corporations is free to have its own accounting pattern. It need not follow Budgetary Accounting & Audit Control of government. It is free to prepare its own budget.
(10) Social Welfare: The main object of statutory corporations is to provide necessary services at a lower price. It works for protecting the interest of common people. Hence society at large is benefited.RATIONSSTATUTORY B
Disadvantages of statutory corporations are as follows:-
1) Less autonomy: Compared to departmental folm, public corporations enjoy more autonomy. But, in practice, tlie autonomy of public corporation is closely and systematically controlled by the government even in matters where they are supposed to have freedom. For example, the Food Corporation of India and the Electricity
Boards in various States (these are statutory corporations) are of important to the government and to the public at large. But, the Central and State Governments often find it difficult to allow them the freedom which they are entitled to as per their Acts.
2) Inflexibility: A public corporation is set up by a special Act of legislature. Any change in the objects and powers of the corporation requires an amendment in the Act by the legislature. This tends to make a corporation inflexible and insensitive to changing situations.
3) Clash amongst divergent interests: As you know, the corporations are owned by the government and are managed by a Board of Directors appointed by the govemment.
When the Board of Directors represent different interests there may be clash of interests. This in turn, may hainper the smooth functioning of the corporation.
Sometimes, the directors may abuse their autonomy and authority by indulging in undesirable practices. This would defeat the social objectives of public corporation.
4) Ignores commercial principles: Public corporations do not have to face any competition. They are neither guided by profit motive nor haunted by the fear of loss.
Therefore, there is a possibility of ignoring commercial principles in their working.
This may ultimately lead to inefficiency and losses to the corporation. The losses, thus arising are met by the govemment through subsidies.
5) Excessive public accountabili6: You know that the public corporations work with the service motive rather than profit motive. This public accountability of the corporation sometimes acts as a stumbling block in the operational efficiency of the enterprise and Corporations
CO-OPERATIVES, SOCIETIES AND TRUSTS
There are certain organizations which undertake business activities with the prime objective of providing service to the members. Although some amount of profit is essential to survive in the market, their main intention is not to generate profit and grow. They pool available resources from the members, utilize the same in the best possible manner and the benefits are shared by the members.
The term co-operation is derived from the Latin word co-operari, where the word ‘co’ means ‘with’ and ‘operari’ means ‘to work’. Thus, co-operation means working together. So, those who want to work together with some common economic objective can form a society which is termed as “co-operative society”. It is a voluntary association of persons who work together to promote their economic interest. It works on the principle of selfhelp as well as mutual help. The main objective is to provide support to the members. Nobody joins a cooperative society to earn profit. People come forward as a group, pool their individual resources, utilise them in the best possible manner, and derive some common benefit out of it.
The following are the some of the definitions of cooperative organizations.
- International Labour Organisation: “Cooperative is an association of person usually of limited means,
who have voluntarily joined together to achieve a common economic, end through the formation of a
democratically controlled business organisation, make equitable contribution to the capital required and
accepting a fair share of risks and benefits of the undertaking.”
- Hubert Calvest: “Cooperative is a form of organisation wherein persons voluntary associates together
as human beings on the basis of equality for the promotion of the economic interests of themselves.”
- The Indian Cooperative Societies Act, 1912: Section 4 of this Act defines cooperatives “as a society
which has its objectives the promotion of economic interest, its members in accordance with cooperative
principles. “Cooperative Society is that society which has been registered under the Cooperative Societies
Act, 1912, or under any other law for the time being in force in any state registration of cooperative
- Mr. Talmaki: “Cooperative society is an association of the weak who gather together for a
common economic need and try to lift themselves from weakness into strength through business
The main types of cooperative societies are given below:
- Consumers cooperative societies:
Consumers’ cooperatives are formed by the consumers to obtain their daily requirements at reasonable prices. Such a society buys goods directly from manufacturers and wholesalers to eliminate the profits of middlemen.
These societies protect lower and middle class people from the exploitation of profit hungry businessmen. The profits of the society are distributed among members in the ratio of purchases made by them during the year.
Consumer’s cooperatives or cooperative stores are working mainly in urban areas in India. Super Bazar working under the control of Government is an example of consumers’ cooperative society.
- Producers cooperatives:
Producers or industrial cooperatives are voluntary associations of small producers and artisans who join hands to face competition and increase production. These societies are of two types.
(a) Industrial service cooperatives:
In this type, the producers work independently and sell their industrial output to the cooperative society. The society undertakes to supply raw materials, tools and machinery to the members. The output of members is marketed by the society.
(b) Manufacturing cooperatives:
In this type, producer members are treated as employees of the society and are paid wages for their work. The society provides raw material and equipment to every member.
The members produce goods at a common place or in their houses. The society sells the output in the market and its profits are distributed among the members.
- Marketing Cooperatives:
These are voluntary associations of independent producers who want to sell their output at remunerative prices. The output of different members is pooled and sold through a centralised agency to eliminate middlemen. The sale proceeds are distributed among the members in the ratio of their outputs.
As a central sales agency, the society may also perform important marketing functions such as processing, grading and packaging the output, advertising and exporting products, warehousing and transportation, etc.
Marketing societies are set up generally by farmers, artisans and small producers who find it difficult to face competition in the market and to perform necessary marketing functions individually. The National Agricultural Cooperative Marketing Federation (NAFED) is an example of marketing cooperative in India.
- Cooperative Farming Societies:
These are voluntary associations of small farmers who join together to obtain the economies of large scale farming. In India farmers are economically weak and their land-holdings are small.
In their individual capacity, they are unable to use modern tools, seeds, fertilizers, etc. They pool their lands and do farming collectively with the help of modern technology to maximum agricultural output.
- Housing Cooperatives:
These societies are formed by low and middle income group people in urban areas to have a house of their own. Housing cooperatives are of different types. Some societies acquire land and give the plots to the members for constructing their own houses.
They also arrange loans from financial institutions and Government agencies. Other societies themselves construct houses and allot them to the members who make payment in instalments.
- Credit Cooperatives:
These societies are formed by poor people to provide financial help and to develop the habit of savings among members. They help to protect members from exploitation of money lenders who charge exorbitant interest from borrowers.
Credit cooperatives are found in both urban and rural areas. In rural areas, agricultural credit societies provide loans to members mainly for agricultural activities. In urban areas, non-agricultural societies or urban banks offer credit facilities to the members for household needs.
In India, several national federations of cooperative societies have been formed. National Cooperative Consumers Federation, National Federation of Cooperative Sugar Factories, National Agricultural Cooperative Marketing Federation, National Cooperative Dairy Federation, National Cooperative Housing Federation, All India State Cooperative Banks Federation is some examples.
The features of a cooperative society
1.Voluntary association: Everyone having a common interest is free to join a cooperative society and can also leave the society after giving proper notice.
2.Legal status: Its registration is compulsory and it gives it a separate identity.
3.Limited liability: The liability of the member is limited to the extent of their capital contribution in the society.
4.Democratic control: Management and control lies with the managing committee elected by the members by giving vote. Every member has one vote irrespective of the number of shares held by him.
5.Service motive: The main aim is to serve its members and not to maximize the profit.
6.State control: They have to abide by the rules and regulations framed by government for them.
7.Distribution of surplus: The profit is distributed on the basis of volume of business transacted by a member and not on the basis of capital contribution of members.
Advantages of Co-operatives
The membership of a cooperative society is open to all. Any person with common interest can become a member. The membership fee is kept low so that everyone would be able to join and benefit from cooperative societies. At the same time, any member who wants to leave the society is free to do so. There are no entry or exit barriers.
- Ease of formation
Cooperatives can be formed much easily when compared to a company. Any 10 members who have attained majority can join together for forming a cooperative society by observing simple legal formalities.
A co-operative society is run on the principle of ‘one man one vote‘. It implies that all members have equal rights in managing the affairs of the enterprise. Members with money power cannot dominate the management by buying majority shares.
- Equitable distribution of surplus
The surplus generated by the cooperative societies is distributed in an equitable manner among members. Therefore all the members of the cooperative society are benefited. Further the society is also benefited because a sum not exceeding 10 per cent of the surplus can be utilized for promoting the welfare of the locality in which the cooperative is located.
- Limited liability
The liability of the members in a cooperative society is limited to the extent of their capital contribution. They cannot be personally held liable for the debts of the society.
- Stable existence
A cooperative society enjoys separate legal entity which is distinct from its members. Therefore its continuance is in no way affected by the death, insanity or insolvency of its members. It enjoys perpetual existence.
- Each for all and all for each
Co-operative societies are formed on the basis of self help and mutual help. Therefore members contribute their efforts to promote their common welfare.
- Greater identity of interests
It operates in a limited geographical area and there is greater identity of interest among members. Members would be interacting with each other. They can cooperate and manage the activities of the society in a more effective manner.
- Government support
The government with a view to promote the growth of cooperative societies extends all support to them. It provides loans at cheap interest rates, provides subsidies etc.
- Elimination of middlemen
Cooperatives societies can deal directly with the producers and with the ultimate consumers. Therefore they are not dependent on middlemen and can save the profits enjoyed by the middlemen.
- Low taxes
To promote the co-operative movement and also because of the fact that it is a non-profit enterprise, government provides various exemptions and tax concessions.
- Rural credit
Co-operative societies have contributed significantly in freeing villagers from money lenders. Earlier, money lenders used to charge high rates of interest and the earnings of the villagers were spent on payment on interest alone.
Co-operatives provide loans at cheaper interest rates and have benefited the rural community. After the establishment of co-operatives, the rural people were able to come out of the grip of money lenders.
- Role in agricultural progress
Co-operative societies have aided the government’s efforts to increase agricultural production. They have improved the life of the people in rural areas. They serve as a link between the government and agriculturists. High yielding seeds, fertilizers, etc. are distributed by the government through the cooperatives.
- Own sources of finance
A cooperative society has to transfer at-least one-fourth of its profits to general reserve. Therefore it need not depend on outsider’s funds to meet its future financial requirements. It can utilize the funds available in the general reserve.
- Encourages thrift
Cooperative societies encourage the habit of savings and thrift among their members. They provide loans only for productive purposes and not for wasteful expenditure.
- Fair price and good quality
Co-operative societies buy and sell in bulk quantities directly from the producers or to the consumers. Products are processed and graded before they are sold. Bulk purchases and sales ensure fair prices and good quality.
- Social benefit
Co-operative societies have played an important role in changing social customs and curbing unnecessary expenditure. The profits earned by the co-operatives have been used for providing basic amenities to the society.
Disadvantages of Co-operatives
The following are some of the disadvantages of Cooperative societies.
- Limited funds
Co-operative societies have limited membership and are promoted by the weaker sections. The membership fees collected is low. Therefore the funds available with the co-operatives are limited. The principle of one-man one-vote and limited dividends also reduce the enthusiasm of members. They cannot expand their activities beyond a particular level because of the limited financial resources.
- Over reliance on government funds
Co-operative societies are not able to raise their own resources. Their sources of financing are limited and they depend on government funds. The funding and the amount of funds that would be released by the government are uncertain. Therefore co-operatives are not able to plan their activities in the right manner.
- Imposed by government
In the Western countries, co-operative societies were voluntarily started by the weaker sections. The objective is to improve their economic status and protect themselves from exploitation by businessmen. But in India, the co-operative movement was initiated and established by the government. Wide participation of people is lacking. Therefore the benefit of the co-operatives has still not reached many poorer sections.
- Benefit to rural rich
Co-operatives have benefited the rural rich and not the rural poor. The rich people elect themselves to the managing committee and manage the affairs of the co-operatives for their own benefit.
The agricultural produce of the small farmers is just sufficient to fulfill the needs of their family. They do not have any surplus to market. The rich farmers with vast tracts of land, produce in surplus quantities and the services of co-operatives such as processing, grading, correct weighment and fair prices actually benefit them.
- Inadequate rural credit
Co-operative societies give loans only for productive purposes and not for personal or family expenses. Therefore the rural poor continue to depend on the money lenders for meeting expenses of marriage, medical care, social commitments etc. Co-operatives have not been successful in freeing the rural poor from the clutches of the money lenders.
- Lack of managerial skills
Co-operative societies are managed by the managing committee elected by its members. The members of the managing committee may not have the required qualification, skill or experience. Since it has limited financial resources, its ability to compensate its employees is also limited. Therefore it cannot employ the best talent.
Lack of managerial skills results in inefficient management, poor functioning and difficulty in achieving objectives.
- Government regulation
Co-operative societies are subject to excessive government regulation which affects their autonomy and flexibility. Adhering to various regulations takes up much of the management’s time and effort.
- Misuse of funds
If the members of the managing committee are corrupt they can swindle the funds of the co-operative society. Many cooperative societies have faced financial troubles and closed down because of corruption and misuse of funds.
- Inefficiencies leading to losses
Co-operative societies operate with limited financial resources. Therefore they cannot recruit the best talent, acquire latest technology or adopt modern management practices. They operate in the traditional mold which may not be suitable in the modern business environment and therefore suffer losses.
- Lack of secrecy
Maintenance of business secrets is the key for the competitiveness of any business organization. But business secrets cannot be maintained in cooperatives because all members are aware of the activities of the enterprise. Further, reports and accounts have to be submitted to the Registrar of Co-operative Societies. Therefore information relating to activities, revenues, members etc becomes public knowledge.
- Conflicts among members
Cooperative societies are based on the principles of co-operation and therefore harmony among members is important. But in practice, there might be internal politics, differences of opinions, quarrels etc. among members which may lead to disputes. Such disputes affect the functioning of the co-operative societies.
- Limited scope
Co-operative societies cannot be introduced in all industries. Their scope is limited to only certain areas of enterprise. Since the funds available are limited they cannot undertake large scale operations and is not suitable in industries requiring large investments.
- Lack of accountability
Since the management is taken care of by the managing committee, no individual can be made accountable for in efficient performance. There is a tendency to shift responsibility among the members of the managing committee.
- Lack of motivation
Members lack motivation to put in their whole hearted efforts for the success of the enterprise. It is because there is very little link between effort and reward. Co-operative societies distribute their surplus equitably to all members and not based on the efforts of members. Further there are legal restrictions regarding dividend and bonus that can be distributed to members.
- Low public confidence
Public confidence in the co-operative societies is low. The reason is, in many of the co-operatives there is political interference and domination. The members of the ruling party dictate terms and therefore the purpose for which cooperatives are formed is lost.
Limited liability partnership
Limited liability partnership is a combination of both partnership and corporation. It has the feature of both these forms. As the name suggests partners have limited liability in the company which means that personal assets of the partners are not used for paying off the debts of the company. Nowadays it has become very popular form of business as many entrepreneurs are opting this. There are a number of partners in the firm and hence they are not liable or responsible for others misconduct. Every one is liable for their own acts. All limited liability partnership is governed under the limited liability partnership act of 2008. However in India LLP was introduced in April 2009.
It is a separate legal entity distinct from its owners. It can enter into a contract and acquire property in its name. LLP form is not just prevailing in India. It is also seen in countries like the United Kingdom, Australia etc.
Advantages of Limited liability partnership
- Easy to form- Forming an LLP is an easy process. It is not complicated and time consuming like the process of a company. The minimum amount of fees for incorporating an LLP is Rs 500 and the maximum amount which can be spent is Rs 5600.
- Liability- The partners of the LLP is having limited liability which means partners are not liable to pay the debts of the company from their personal assets. No partner is responsible for any other partner misbehaves or misconduct.
- Perpetual succession- The life of the Limited Liability Partnership is not affected by death, retirement or insolvency of the partner. The LLP will get winded up only as per provisions of the act of 2008.
- Management of the company- All the decisions and various management activities are seen and done by the directors of the company. Shareholders receive very less power as compared to the board of directors.
- Easy transferability of ownership- There is no restriction upon joining and leaving the LLP. It is easy to admit as a partner and to leave the firm or to easily transfer the ownership on others.
- Taxation- Yes, it is the benefit of LLP. Limited liability partnership is exempted from various taxes such as dividend distribution tax and minimum alternative tax. The rate of tax on Limited Liability Partnership is less than as compared to the company.
- No compulsory audit required- Every business has to appoint an auditor for checking the internal management of the company and its accounts. However, in the case of LLP, there is no mandatory audit required. The audit is required only in those cases where the turnover of the company exceeds Rs 40 lakhs and where the contribution exceeds Rs 25 lakhs.
- Not covered all states- Due to various tax benefits and provisions many states restricts the formation of LLP in their states. This leads to a disadvantage as many states don’t allow their entrepreneurs to form this.
- Less credibility- One of the major demerits of Limited Liability Partnership is that many people do not consider this as a credible business. People still trust more on company or partnerships.
- Partners not consulting- Partners of the Limited Liability Partnership don’t consult each other in case of decisions and agreement.
- Transfer of interest- Though interest and ownership can be transferred but it usually takes long procedure. Various formalities are required to comply with the provisions of the act.
- Lack of recognition- As LLP is introduced in India in 2009 only it is not recognized by all. Due to its less recognition, it leads to hindrance in smooth functioning of the firm. People are not likely to form LLP.