CHAPTER 2
FORMS OF BUSINESS ORGANIZATION
Forms of Business Organisations (Private Sector Undertakings):
Private business enterprises can broadly divided into two, ie; corporate enterprises and non-
corporate enterprises. Joint Stock companies and co-operative organizations form part of corporate
organizations. While non-corporate organizations consist of Sole-proprietorship, Joint Hindu Family
Business and Partnership firms.
I. Sole Proprietorship
It can be said that a “one man business” as he invests the entire capital, bears all the risks, takes all
the advantages and manages the business by himself. It is also called Individual Proprietorship.
Features of Sole Proprietorship Business:
a. Formation and closure is easy – No separate law that governs sole proprietorship.
b. Liability – Unlimited.
c. Sole risk bearer and profit recipient
d. Control – Complete control of business is held with the proprietor himself.
e. No separate entity for the business from the businessman – So that the owner is
held liable for all the activities of the business.
f. Lack of business continuity – Since the business and owner are one and the same
entity, his death, insanity etc. will affect the existence of the business.
Merits of Sole Proprietorship
a. Quick decision making – No need to consult with others.
b. Confidentiality of information – Secrecy can be maintained.
c. Direct incentive - All the profit goes to the proprietor.
d. Sense of accomplishment – Personal satisfaction by working for himself.
e. Ease of formation and closure – Only minimum legal formalities.
Limitations of Sole Proprietorship
a. Limited resources – Capital is limited and the size of business is small.
b. Limited life – As the business has no separate legal entity.
c. Unlimited liability – even the personal properties are attached.
d. Limited managerial ability.
, II. Joint Hindu Family Business (JHF) Hindu Undivided Family
Business ( HUF)
A Joint Hindu Family business refers to a business which is owned by the members of a Joint Hindu
Family. It is the oldest system of business that can be seen only in India, which is governed by the
Hindu Law. The basis of membership in the business is birth in a particular family and three
successive generations can be members in the business.
The business is controlled by the head of the family who is the eldest member and is called ‘Karta’.
All members (male and female) have equal ownership right over the property of an ancestor and
they are known as ‘co-parceners’.
Features of HUF
a. Formation – Minimum two members from the family and their ancestral property is used.
It is governed by Hindu Succession Act, 1956
b. Liability – Limited liability to the members except Karta.
c. Control – Management is vested in the hands of Karta.
d. Continuity – The death of a member or Karta does not affect the business.
e. Minor Members – It is because, membership by birth.
Note: Both male and female members in the family have equal right in the business based on the Hindu
Succession (Amendment) Act 2005.
Merits
a. Effective control – No conflict among members as the decisions are taken by Karta.
b. Continued existence – Even the death of Karta does not affect the existence of business, as the
next eldest member will take up the position.
c. Limited liability – Liability of members except Karta is limited.
d. Increased loyalty and cooperation – The business is treated as a pride to the family.
Limitations
a. Limited resources – It depends mainly on ancestral properties.
b. Unlimited liability of Karta – His personal properties are also liable to meet the debts of the firm.
FORMS OF BUSINESS ORGANIZATION
Forms of Business Organisations (Private Sector Undertakings):
Private business enterprises can broadly divided into two, ie; corporate enterprises and non-
corporate enterprises. Joint Stock companies and co-operative organizations form part of corporate
organizations. While non-corporate organizations consist of Sole-proprietorship, Joint Hindu Family
Business and Partnership firms.
I. Sole Proprietorship
It can be said that a “one man business” as he invests the entire capital, bears all the risks, takes all
the advantages and manages the business by himself. It is also called Individual Proprietorship.
Features of Sole Proprietorship Business:
a. Formation and closure is easy – No separate law that governs sole proprietorship.
b. Liability – Unlimited.
c. Sole risk bearer and profit recipient
d. Control – Complete control of business is held with the proprietor himself.
e. No separate entity for the business from the businessman – So that the owner is
held liable for all the activities of the business.
f. Lack of business continuity – Since the business and owner are one and the same
entity, his death, insanity etc. will affect the existence of the business.
Merits of Sole Proprietorship
a. Quick decision making – No need to consult with others.
b. Confidentiality of information – Secrecy can be maintained.
c. Direct incentive - All the profit goes to the proprietor.
d. Sense of accomplishment – Personal satisfaction by working for himself.
e. Ease of formation and closure – Only minimum legal formalities.
Limitations of Sole Proprietorship
a. Limited resources – Capital is limited and the size of business is small.
b. Limited life – As the business has no separate legal entity.
c. Unlimited liability – even the personal properties are attached.
d. Limited managerial ability.
, II. Joint Hindu Family Business (JHF) Hindu Undivided Family
Business ( HUF)
A Joint Hindu Family business refers to a business which is owned by the members of a Joint Hindu
Family. It is the oldest system of business that can be seen only in India, which is governed by the
Hindu Law. The basis of membership in the business is birth in a particular family and three
successive generations can be members in the business.
The business is controlled by the head of the family who is the eldest member and is called ‘Karta’.
All members (male and female) have equal ownership right over the property of an ancestor and
they are known as ‘co-parceners’.
Features of HUF
a. Formation – Minimum two members from the family and their ancestral property is used.
It is governed by Hindu Succession Act, 1956
b. Liability – Limited liability to the members except Karta.
c. Control – Management is vested in the hands of Karta.
d. Continuity – The death of a member or Karta does not affect the business.
e. Minor Members – It is because, membership by birth.
Note: Both male and female members in the family have equal right in the business based on the Hindu
Succession (Amendment) Act 2005.
Merits
a. Effective control – No conflict among members as the decisions are taken by Karta.
b. Continued existence – Even the death of Karta does not affect the existence of business, as the
next eldest member will take up the position.
c. Limited liability – Liability of members except Karta is limited.
d. Increased loyalty and cooperation – The business is treated as a pride to the family.
Limitations
a. Limited resources – It depends mainly on ancestral properties.
b. Unlimited liability of Karta – His personal properties are also liable to meet the debts of the firm.
