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BU-EDP-Moudule-5

Module-
Module-5::’Various
5::’Various forms of Organization’
Organization’
1. Factors affecting selection of ownership form:-
Nature or type of business
 Sole proprietorship is best
 Requires personal skill and attention
 Partnership is best suited for medium scale business
Financial requirement
 Requires financial resources at starting
 Target at future expansion and also diversification
 For expanding business partnership is the best
Liability
 Every company has to repay its liability to its creditors
 Every entrepreneur liable to creditor at starting of business
 Even in sole proprietorship, the person or company has to clear his
labiality at the time of winding of business
Flexibility
 Sole proprietorship is best for any alterations or decision making
 In partnership business flexibility is very difficult because it is depend up
on the partners
 So it is maximum in sole proprietorship and minimum in partnership
Taxation
 Both sole proprietorship and partnership follows “PROGRESSIVE TAX
SYSTEM (PTS)”
 PTS is defined as tax rate increases with increases of income and
decreases with decrease of income
Control
 Every entrepreneur should has control over his business and also
sacrifice on his returns
 It is possible in sole proprietorship and not easily possible in partnership
because board of directors are existed

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CMR-CBS 1
BU-EDP-Moudule-5
B

Survival or continuity
 Every entrepreneur expects continuity of his business
 Without business the company can’t survive
Business secrets
 Maintaining business secrets in sole proprietorship is very easy and safe
where as in partnership it is difficulty and unsafe
Government rules and regulations
 They are mandatory for running of any company or firm
 Sole proprietorship is very free from all rules and regulations
 Joint company is governed by rules and regulations of government

Various form of ownership


1. Sole proprietorship
2. Partnership
3. Joint stock company
4. Cooperative organisation

I.Sole proprietorship
Definition: - The individual form of business organisation is an organisation at
the head which stands and individual as the one who is responsible, who
directs its operations and he alone runs the risk of failure.

Various features of role proprietorship are as follows:-


Individual ownership
Unlimited liabilities
Free from legal formalities
Limited scope of operation
Personal interest
Freedom to start and to end
Monopoly on profit
Business secrecy

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CMR-CBS 2
BU-EDP-Moudule-5
B

Merits of sole proprietorship


 Registration of firm is very easy
 It does not have any legal formalities
 It is costly at initially
 It has complete control on entire business
 Business secrets is easily preserved
 It has maximum tax benefits
 It achieves both profits and losses equally
Demerits
Limited resources
Lack or funds
Chance of unlimited liability
High risk
Sometimes returns should be sacrificed
Limited managerial ability
Lack of specialisation
Chance of uncertainty
Suitability
It is suitable for following cases
ϖ Where business is on a small scale
ϖ Where capital requirements is very small
ϖ Where promptness of decisions is very important
ϖ Where customers demand personal attention
II. Partnership
Definition: - partnership is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them action for all.
Various features of partnership are as follows
Plurality of persons
Contractual relationship
Existence of business
Profit motive
Principal agent relationship
Unlimited liability
Restriction on transfer of interest
Implied agency

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CMR-CBS 3
BU-EDP-Moudule-5
B

Merits of partnership
ℵ Easy formation
ℵ More financial resources
ℵ Collective decision making
ℵ Sharing of risk
ℵ Flexibility
ℵ Complementary skills
ℵ Credit worthiness
ℵ Business secrecy
Demerits of partnership

ξ Unlimited liability
ξ Uncertain existence
ξ Limited funds
ξ Transfer of shares
Suitability of partnership
Partnership form of business is suitable in the following cases

Where financial requirement is moderate


When business need persons with complementary skill
Where business is to be carried on a medium and large scale
Where collective decisions are required to be taken.

III.Joint stock company


Definition:-A company is an artificial person created by law having a separate
entity with a perpetual succession and a common real.
Various features of joint stock company are as follows:-
An artificial person created by law
Separate legal entity
Perpetual succession
Common seal
Limited liability
Representative management
Right to sue
Transfererability of shares

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CMR-CBS 4
BU-EDP-Moudule-5
B

Merits of Joint Stock Company:-


Limited liability
Diffused risk
More financial resources
Transferability of ownership
Perpetual existence (separate legal for share holders)
Economies of scale (operating to lead our economy)
Professional management (ruling by best professionals)
Capital formation (mobilising of funds)
De Merits of Joint Stock Company:-
Difficulties in formation (promoters has to spend time & money)
Lack of personal interest (everybody feel other partner will do work)
Difficult to maintain business secrets
Delay in decision making and execution
Excessive regulations

Suitability of joint stock company


Joint stock company form of business organisation is suitable in the
following cases:-
When financial requirement is more or business is to be carried on a
very large scale
When project is very risky and promoters are not prepared to bear the
risk
Where due to nature of business professional management is needed.
IV.Cooperative organisation
Definition:-A society which has as its objectives the promotion of the interests
of its members in accordance with the principles of cooperation.
Merits of cooperative organisation:-
Economy in cost (goods directly purchased-no middleman)
Democratic management
Service motive
Government regulations

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CMR-CBS 5
BU-EDP-Moudule-5
B

De Merits of cooperative organisation:-


ϖ Limited financial resources
ϖ Political interference
ϖ Lack of personal interest
ϖ Lack of professional management
Suitability of cooperative organisations:-
Cooperative organisations are suitable in the following cases:-
ℵ Where members individually are not in a position to safeguard their
interests
ℵ Where there is willingness amongst members to come together for the
promotion of their common interests
Legal issues
Registration with director of industries:-
It contains two stages for small scale units, they are
 Provisional registration
 Permanent registration
Registering with SSI Unit
Benefits of registering:-
Credit prescription, interest rate
Excise exemption scheme
Exemption under direct tax laws
Statutory support like reservation and interest delayed
Objectives of registration scheme:-
To serve the purpose of collection of statistics
To create nodal centres at the centre, state and district levels to
promote SSI
Provisional registration certificate (PRC):-
 Given for pre-operative period only
 Obtains facilities for accommodation, land, other approvals etc.
 Obtains various necessary NOCs and clearances from regulatory bodies
such as pollution control board, labour regulations etc.

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CMR-CBS 6
BU-EDP-Moudule-5
B

Permanent registration certificate (PRC):-


Income tax exemption and sales tax exemption as per state govt. Policy
Incentives and concessions in power tariff
Price and purchase preference for goods produced
Licensing
 According to section-11 industries development and regulation act (IDR)
no industry is to be established without a license

According to IDR Act, industrial licence would be required for:-


Establishment of new undertaking
Substantial expansion
Production of a new product
Changing the location of an industrial undertaking
Licensing agencies like:-
Memorandum with Secretariat for industrial assistance (SIA)
Carry on business (COB) Licence
Industrial entrepreneur memorandum (IEM)
Integration of small & large industries
State regulations
Environmental clearance
Regulation of acceptance of loan(accept deposits from public)
Factories Act
Objective: - To ensure healthy and safe working conditions for workers, the act
protects the workers from being subject to undue bodily strain or manual
labour
The main provisions of this act are as follows:-
 Definition of factory
 Health
 Safety of workers
 Welfare of workers
 Duties of the employer

NagendraPrasadMBA CMR-
CMR-CBS 7
BU-EDP-Moudule-5
B

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CMR-CBS 8