Forms of Business Ownership Forms of Business Ownership
Forms of Business Ownership
Forms of Business Ownership Which is the right one for your business? � One of the first executive decisions you’ll make for your new business is choosing the type of legal organization that’s best for you. The choice you make is important because it will determine what your business can and cannot do, what will happen if someone sues you, and how both you and your business are taxed.
There are basically four ways to organize a business. Listed from the simplest to sophisticated, they are: � Sole Proprietorship � Partnership � Corporation � Limited Liability Company
Proprietorship � � � √ Is a business with one owner and the most common type of organization. √ Is not separate from the owner, but merely a different name with which the owner represents to the public. The owner and the business are inseparable. √ Is more affordable since no legal documents need to be filed in most cases. All you have to do is get a business license and start operations.
Merits Simple Form of Organization Owner’s Freedom to Take Decisions High Secrecy Tax Advantage Easy Dissolution Demerits Limited Resources Limited Ability Unlimited Liability Limited Life of Enterprise Form
Important Terms � No separate legal entity � Unlimited liability
Partnership �√ Has two or more owners. The details of the arrangement between the partners are outlined in a written document called a partnership agreement. � √ Is not a separate legal entity from its owners. However, the partnership can hold property and incur debt in its name. � √ Has the same advantages and disadvantages as the sole proprietorship but with an additional drawback. A partner can be held liable for the acts of the other partners, increasing personal liability.
Merits Easy Formation Demerits Unlimited Liability More Capital Available Divided Authority Combined Talent, Judgment and Skill Diffusion of Risk Lack of Continuity Flexibility Tax Advantage Risk of Implied Authority
Important Terms � Partnership � Mutual agency � Sleeping � Partner partner by estoppels or holding out � Nominal � Utmost deed or ostensible partner Good Faith and Honesty
Hindu Undivided Family Ø Ø The oldest form of business organisation found India. It is the business carried on by the members of the Hindu undivided Family. The business is controlled by the eldest member of the family and is called “KARTA”
Features of HUF Ø Membership by birth – All the members have equal ownership right over the ancestral property. Ø No maximum Limit Ø Liability – the Karta has unlimited liability
HUF Sno. Merits Demerits 1. Effective control – The business is controlled by the head of the family. Limited Resources- Business Limited liability of the members – Liability of Limited managerial skills- 2. members is according to their share in the property 3. depends mainly on ancestral property Karta cannot be expert in all the areas of management. Increased by loyalty and Unlimited liability of Karta cooperation
Cooperative societies What does cooperative mean? � Working together and with others for a common purpose. Definition of Cooperative Societies � It is a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles
Features of Cooperative Ø Voluntary membership- Membership is open to all. Any person can join and leave with prior notice. Ø Legal Status- Registration is compulsory. Therefore, it is a separate legal entity Ø Democratic control Ø Secularism Ø Service motive
Important Terms Separate legal existence � Continuity of existence � Economies of scale � Voluntary associations � Equal voting rights � Open Membership � Lack of Secrecy � Perpetual Existence � State Assistance �
Cooperative Society Sno. Merits Demerits 1. Ease of Formation Limited resources – These 2. Equality in voting status- Inefficiency in management‘One member one vote’ 3. Management consists of part time and inexperienced people Support from Lack of Secrecy –Discussions are government-They provide all openly discussed and accounts are kind of support to cooperative societies. 4. societies have limited capital from its members. published. Limited Liability –Liability of Differences in opinionsmembers is limited to the extent of the amount contributed by them. conflicts may rise due to different opinions which might delay in decision making.
Joint Stock Company It is the largest form if business organisation. It is an association of persons formed for carrying business activities and had legal status of its members. ‘A company is an association of many persons who contribute money and employ it in some trade or business, and who share the profit and loss arising thereof’ – Lord Lindley
Features of Joint stock company Ø Incorporated Association – company must be registered under the companies act, 1956. Ø Separate legal Entity- comapny is a legak enity from its shareholders, directors and promoters. Ø Limited liability- liability of the members is limited to the face value of the shares held by them but they are not personallly liable to the debts. Ø Transferability of shares
Sno. Merits Demerits 1. Limited Liability- Liability of Complexity in formation shareholders is only up to the face value held by them 2. Transfer of interest- shares of Impersonal work public limited company can be environment converted into cash by selling them in open market 3. Perpetual Existence-being a Delay in decision making Scope for expansion Oligarchic Management separate, existence of company is not affected by death , retirement. 4.
Basis Private Company Public Company Membership Minimum 2, Maximum 50 Minimum 7, Maximum no limits � of Directors Number At least 2 At least 3 Restriction on Appointment of Directors No need for directors to file anything Directors must file a consent to act as directors or sign MOA or enter into a contract for qualification Transfer of shares Restricts No restriction Public Subscription Can not invite general public Invites general public Special privileges Available- not filing prospectus, commencing business after incorporation itself and before minimum subscription, etc. Not available
Important Terms �Separate legal existence �Perpetual succession �Continuity of existence �Efficient management �Economies of scale �Common seal �Economic oligarchy
Examples
z i u Q E M I T
� 1. Credit Unions are an example of a __________. �A. Cooperative �B. Franchise �C. Partnership
� 2. When a corporate owner dies, the corporation ceases to exit. �A. True �B. False �C. Only if he/she is not married
� 4. Being incorporated provides limited liabilty for its owners. �A. True �B. False �C. If they are of legal age
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