Choosing the form of business ownership

The entrepreneur faces the problems as how to manage the business activity. He is baffled in creating a choice out of the four main organization types like partnership firm, sole proprietorship and the company form of organizations wherein he can ably make rational co-ordination of the achievement of the objectives through division of functions and labor, choosing efficient allocation of time on machine use with set in hierarchy of responsibility and authority.

Each of these types of organizational forms have merits and demerits. The legal angle is important consideration while assessing the merits and demerits because ownership of an organization from legal angle covering rights, duties, obligation and responsibilities of the owners.

Choosing the form of business ownership

Sole Proprietorship

Sole proprietorship is the single ownership entrepreneurial system. It is owned, managed and represented by an individual.

Sole proprietor is sole and lone decision maker. It is a least cost from of organization to start with, simple to make with no legal hassles or restrictions. It is easier to close down the business at any time at the sweet will of the owner-proprietor.

Despite the above merits, this form of enterprise has certain demerits which should be considered from long-term point of view particularly from the angle of growth and expansion of the business. One drawback is that the owner proprietor carries personal liability for all liabilities arising out from the business.

Despite this, he has limited access to capital and as such not able to attract good skilled and capable persons to manage the business. The organization faces lack of continuity against the threat of death of the owner, or owner being declared bankrupt, or otherwise incapable mentally or physically to manage and carry on the business.

 Partnership Firm

Common rules and nuances to the incorporation of a company.

Partnership is a company of two or more persons agreeing to own jointly and to do a business jointly to make profits. The Indian Partnership Act 1932, governs such organizations in India with reference to the legal obligations of the firm of its partners, debtors, creditors, customer and inter se relationships amongst the partners.

Partnership has been specified in the said act as a relation of two or more persons share their profit of business. Notwithstanding these features of a partnership firm, ownership, responsibility and the process of decision-making is shared by all the partners, instead of being concentrated in one person as in the proprietory system.

The relationship among the partners is contractual, arising from the embodiment of the partnership agreement/deed made within the four corners of the partnership act 1932.

The maximum number of partners in a firm is restricted to ten persons in a banking business or twenty in a trading firm. If the number of partners exceeds these limits, the firm is rendered as illegal partnership unable to enter into contracts, to sue and recover their claims or against a third party in a court of law.

To make adherence to the spirit of law, it is desirable that the partnership firm be registered with the registrar of firms under the Indian partnership act 1932.

A registered firm is more competent as it is equipped with certain legal privileges as against non-registered firms.

The effect of non-registration has been laid down in the act, which contains a partner cannot bring a suit to enforce a right arising from a contract or conversed by this act against the firm or his co-partners. An unregistered firm cannot file a suit or launch other legal proceedings to enforce a right arising from a contract. So, the firm registration obtains more favorable treatment from the lenders of money as registration renders the firm contractually more competent, irrespective of the fact that an unpaid lender has the legal right to sue and unregistered firm.

The obligations and rights of the firm are the obligations and rights of the individual partners. The relationship between partners is of fiduciary character with each partner having a duty of good faith and loyalty towards each other of choosing a right business.

The firm management is carried on as per the partnership deed.

Partnership form of ownership of business organization has its own advantages and disadvantages which should be taken into discussion before taking an option. The main merits of this form of organization are that it is easy to establish by verbal or wittier agreement with lessor legal formalities to be complied with for firm registration, although its registration is not compulsory.

  • Compared to sole ownership, complimentary skills of partners are available to run it successfully.
  • Partners can share business profits as per the terms of agreement between them or as per the conditions of the partnership act.
  • Compared to individual ownership, two or more partnership can pool more capital resources with business activity.
  • Partnership firm have very little stationary compliance to be managed under this act
  • It is flexible form of ownership and can be dissolved by mutual consent of the partners.
  • Partners are not taxed but it is the partnership firm which is taxed.
  • Against the above advantage, the disadvantages should be also considered before taking a decision to choose this form of business organization. These advantages contain:
  • Unlimited liability of partners as in the sole-ownership form of enterprise.
  • Capital resources of partners are limited as that of the individual ownership
  • Disposing or transferring of the interest of partner in the firm is difficult unless all partners agree to dissolve the partnership.
Company form of business enterprise
exemptions and privileges of pvt ltd company

This form of business organization is called as a joint stock company. The drawback in the business organization managed under the partnership firm or sole proprietory form.

A company can be a government company or private limited or public limited company suitably registered and formed under the companies act 1956.

The advantage of company form of organization can be abstracted as under i.e. shareholders are company owners and their liability are limited to the shares they hold in the company.

As against the above merits and demerits of the company form of enterprise are very insignificant. But one should also consider them before taking a final view in the selection of suitable form of business. Firstly, company registration is lengthy, time and money consuming process.

Secondly, company is choosing heavily taxed.

Thirdly, it is subject to complicated legal restrictions and regulatory framework.

Suitable form for new enterprise

In Indian circumstances, small enterprise could be initiated and setup under individuals own ownership which can be converted into partnership firm or a company later on with increase in the business for bettering prospectus.