Forms of Business Organisation

Written and reviewed by Rohit Singh, Computer Science & Commerce faculty at UniDrill (MCA, Osmania University · 6 years teaching). Based on NCERT Business Studies Class XI, Chapter 2.

Who pays when the business fails?

Neha starts a pottery studio at home. If it fails, her own savings and even her house can be used to clear the debts. Now imagine Neha and her cousin start it together, then a hundred investors fund a factory. At some point the debts belong to the business, and not to anyone's home. Every form of business organisation answers the same questions in a different way: who owns it, who is liable, who decides, what happens if an owner dies, and how much money can it raise. This chapter walks up that ladder.

The five forms, and the six questions that sort them

The five forms are sole proprietorship, Joint Hindu Family (HUF) business, partnership, cooperative society and joint stock company. They are listed from the simplest to the most regulated. Whatever the form, examiners compare them on formation, liability, control, continuity, capital and number of members.

Sole proprietorship: one owner, one risk

A sole proprietorship is a business owned, managed and controlled by one individual, who receives all profits and bears all risks. It suits personal services and small shops: a beauty parlour, a hair salon, a corner grocery. Its features follow from one fact: the law sees the owner and the business as the same person.

Joint Hindu Family business: a business you are born into

The Joint Hindu Family business is found only in India. It is owned and run by members of a Hindu Undivided Family, under Hindu Law, and membership comes by birth. Up to three generations can be members. The eldest member is the karta, who manages the business and whose decisions bind the others. The other members are coparceners, who have equal ownership rights over ancestral property.

The Hindu Succession (Amendment) Act, 2005 made a daughter a coparcener by birth and allows the eldest member, male or female, to become karta. Merits include effective control, continued existence and limited liability for coparceners. Limitations include limited resources, the karta's unlimited liability, his or her dominance and limited managerial skills. The form is declining.

Pause and predict: In a Joint Hindu Family business, the karta and a younger coparcener both own a share. The business owes Rs 5 lakh and has no money. Whose personal assets are at risk?

Check your answer: The karta's. His or her liability is unlimited. The coparcener loses at most his or her share in the business.

Partnership: two heads, shared risk

The Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all. The people are called partners, and together they form a firm.

Mutual agency in plain words. When one partner signs a supply contract for the firm, all the others are bound. When others sign, he is bound too. That is why choosing partners you trust matters more than choosing a good location.

Six types of partners. CUET almost always sets this as a table question. The key pattern is that all six carry unlimited liability.

A minor and a partnership. A minor cannot be a partner because he cannot make a binding contract. But with mutual consent he can be admitted to the benefits of the partnership. His liability is limited to the capital he has put in. On reaching adulthood he has six months to give public notice whether he will continue.

Kinds of partnership. The two kinds below are sorted by duration and by liability.

Deed and registration. The partnership deed is the written agreement that sets out the rules: capital, profit ratio, duties, salary, interest and what happens when someone leaves. Registering a general partnership is optional, but not registering has three costs. A partner cannot sue the firm or the other partners, the firm cannot sue outsiders, and the firm cannot sue its partners.

Beyond the textbook. For the exam: a partnership deed is the agreement among partners and registration is optional. In reality: when partners have no written agreement, or the deed is silent on a point, the Partnership Act fills the gap with default rules. The best known default is that profits are shared equally, whatever each partner invested. Why it matters: a case that gives unequal capital but no profit ratio expects equal sharing, not a share in proportion to capital.

Cooperative society: one member, one vote

A cooperative society is a voluntary association of people who join to protect their economic interests through democratic control. It aims at service, not profit. Registration is compulsory under the Cooperative Societies Act of a state or the Multi-State Cooperative Societies Act, 2002.

Six types of cooperative. Each type exists to solve a specific economic problem.

Mini case. Fifty weavers in a district each own a loom but cannot afford yarn in bulk. They form a society that buys the yarn together and supplies it to each member. That is a producer's cooperative. If the same weavers instead pool their finished cloth and sell it in one city showroom, it is a marketing cooperative.

Beyond the textbook. For the exam: a cooperative has the limitation of inefficient management because it cannot afford to pay experts. In reality: many large cooperatives hire professional managers for daily operations, while the elected committee still sets policy and members keep one vote each. Why it matters: the textbook version is the exam answer. The real example shows that democratic control and professional management can co-exist.

Joint stock company: a legal person

A company is an association of persons that is registered under the Companies Act, 2013 and has a legal status independent of its members. The capital is divided into shares, and the shareholders own it. The shareholders elect a Board of Directors, which manages it.

Limited liability worked out. Akshay holds 2,000 shares of Rs 10 each and has paid Rs 7 per share. The unpaid amount is Rs 3 per share, so his maximum liability is 2,000 × 3 = Rs 6,000. Wrong options usually offer Rs 20,000 (the full face value) or Rs 14,000 (the amount already paid).

Beyond the textbook. For the exam: a company is a separate legal entity from its shareholders. In reality: courts can look through that separation, called lifting the corporate veil, when a company is used to commit fraud or to dodge the law. Why it matters: limited liability is a protection for honest business risk, not a licence to misuse the company form.

Private and public company. The Act splits companies into two kinds.

A private company enjoys some privileges: it can be formed with only two members and two directors, it needs no prospectus, and it can start business as soon as it gets its certificate of incorporation.

Pause and predict: A company has 5 shareholders and its Articles bar them from selling shares without the others' consent. Can it call itself a public company?

Check your answer: No. A public company needs at least 7 members and has no restriction on transfer. This company is a private company, and its name must end with Private Limited.

All five forms side by side

Almost every match-the-pair question on this chapter is built from one cell of a table like the one below.

Which form should you choose?

The textbook gives seven factors. Weigh each against your plan.

Mini case. Neha starts as a sole proprietor because her studio is small and customers deal with her directly. When she needs more funds and shared work, she takes her cousin as a partner. If she plans a nationwide chain, she will need much more capital and limited liability, so a company becomes the right form.

Exam traps

60-second revision

Where this chapter connects

• Previous: Business, Trade and Commerce introduces the eight factors for starting a business, of which type and size lead to this chapter.
• Next: Private, Public and Global Enterprises moves from forms of ownership to who owns the enterprise: private, government or global.
• Company in depth: Formation of a Company covers promotion, incorporation and the documents behind the company form introduced here.