Big picture
Before starting a business, an entrepreneur must decide who will own it and how. This decision affects how much capital can be raised, who bears losses, who controls the business, and how long it lasts.
The main forms are the sole proprietorship, the Joint Hindu Family business, the partnership, the cooperative society and the company. Each has features, merits and limitations, and exam questions often describe a business and ask which form it is or which form suits it.
Learning goals
Explain the features, merits and limitations of each form of business organisation.
Explain the types of partners and partnerships, registration and the partnership deed.
Explain the types of cooperative societies.
Distinguish private companies, public companies and one person companies.
Explain the stages and key documents in forming a company.
Explain the factors in choosing a form of organisation.
Core ideas
1. Sole proprietorship
A business owned, managed and controlled by one person, who receives all the profit and bears all the risk.
Features: formation and closure are easy (few legal formalities); unlimited liability (personal assets can be used to pay business debts); sole risk bearer and profit recipient; full control; no separate legal entity; lack of business continuity (affected by death, illness or insanity of the owner).
Merits | Limitations |
|---|---|
Quick decision-making | Limited resources (owner's savings and borrowing) |
Confidentiality of information | Limited life of the business |
Direct incentive (all profit goes to the owner) | Unlimited liability discourages risk-taking |
Sense of accomplishment | Limited managerial ability |
Ease of formation and closure |
Suitable for: small businesses with limited capital, such as a grocery store, beauty parlour or tailoring shop.
2. Joint Hindu Family (JHF) business
A business owned and carried on by members of a Hindu Undivided Family, governed by the Hindu Succession Act, 1956. Membership is by birth in the family; the members are called co-parceners (now including daughters), and the eldest member, the karta, manages the business.
Features: formation needs at least two members and ancestral property; the karta has unlimited liability, while co-parceners have limited liability to their share in the property; the karta has full control; it continues after the karta's death (the next eldest becomes karta); and minors become members by birth.
Merits | Limitations |
|---|---|
Effective control by the karta | Limited resources (ancestral property) |
Continued business existence | Unlimited liability of the karta |
Limited liability of members (except karta) | Dominance of the karta; others may resent it |
Increased loyalty and cooperation | Limited managerial skills of one person |
3. Partnership
The Indian Partnership Act, 1932 defines partnership as "the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all".
Features: formed by agreement; unlimited liability of partners (jointly and individually); risk bearing shared; decision-making and control shared; continuity is limited (death, retirement or insolvency of a partner may end it); minimum 2 members and maximum 50 (as prescribed under the Companies Act, 2013); mutual agency (each partner is an agent and a principal).
Merits | Limitations |
|---|---|
Ease of formation and closure | Unlimited liability |
Balanced decision-making (partners pool skills) | Limited resources (number of partners is capped) |
More funds than a sole proprietorship | Possibility of conflicts between partners |
Sharing of risks | Lack of continuity |
Secrecy (accounts need not be published) | Lack of public confidence (no published accounts) |
Types of partners
Type | Capital contribution | Takes part in management | Shares profit | Liability |
|---|---|---|---|---|
Active partner | Yes | Yes | Yes | Unlimited |
Sleeping (dormant) partner | Yes | No | Yes | Unlimited |
Secret partner | Yes | Yes, but association not known to the public | Yes | Unlimited |
Nominal partner | No | No | No | Unlimited (lends name to the firm) |
Partner by estoppel | No | No | No | Unlimited, because by words or conduct he gives others the impression that he is a partner |
Partner by holding out | No | No | No | Unlimited, because he is declared a partner and doesn't deny it once he knows |
Minor as a partner: a minor cannot be a full partner, but with the consent of all partners can be admitted to the benefits of the firm, with liability limited to his share of capital and profits. On becoming a major, he must decide within six months whether to become a full partner.
Types of partnership
On the basis of duration: partnership at will (continues as long as partners want; ends by notice) and particular partnership (for a specific venture or period).
On the basis of liability: general partnership (all partners have unlimited liability) and limited liability partnership (LLP), a separate legal entity under the LLP Act, 2008, where partners' liability is limited to their agreed contribution, combining partnership flexibility with limited liability.
Partnership deed: the written agreement covering the firm's name, nature and location of business, duration, capital contributions, profit-sharing ratio, interest on capital and drawings, salaries, duties of partners, rules for admission, retirement and dissolution, and the method of settling disputes.
Registration with the Registrar of Firms is optional in India, but an unregistered firm suffers disabilities: a partner can't sue the firm or other partners, and the firm can't sue third parties to enforce its rights, though third parties can sue it.
4. Cooperative society
A voluntary association of persons who join together to safeguard their common economic interests, registered under the Cooperative Societies Act, 1912 (or state laws).
Features: voluntary membership (anyone can join or leave); registration is compulsory; it is a separate legal entity; limited liability to the capital contributed; control by an elected managing committee on the principle of one member, one vote; service motive (not profit).
Merits | Limitations |
|---|---|
Equality in voting status | Limited resources (members are usually of limited means) |
Limited liability | Inefficiency in management (honorary management) |
Stable existence (not affected by members leaving) | Lack of secrecy |
Economy in operations | Government control and interference |
Support from government (low taxes, subsidies) | Differences of opinion among members |
Ease of formation (minimum 10 adult members) |
Types of cooperative societies
Type | Purpose | Example |
|---|---|---|
Consumers' cooperative | Buy goods in bulk and sell to members at reasonable prices, eliminating middlemen | Kendriya Bhandar |
Producers' cooperative | Provide inputs (raw materials, tools) to small producers | Handloom weavers' societies |
Marketing cooperative | Pool output of small producers and sell it at better prices | Amul (milk) |
Farmers' cooperative | Provide seeds, fertilisers and equipment, and promote better farming | IFFCO |
Credit cooperative | Give loans to members at low interest | Urban cooperative banks |
Cooperative housing society | Help members build or buy houses at reasonable cost | Housing societies in cities |
5. Company
A company is an association of persons formed for carrying on business, registered under the Companies Act, 2013. It is an artificial person with a separate legal entity, perpetual succession, a common seal (now optional) and limited liability of its members.
Features: artificial person created by law; separate legal entity (can own property and sue in its own name); formation is time-consuming and needs legal compliance; perpetual succession (unaffected by the death or exit of members); control by an elected board of directors; limited liability; transferability of shares (for public companies); risk borne by shareholders.
Merits | Limitations |
|---|---|
Limited liability | Complexity in formation |
Transfer of interest is easy (public company) | Lack of secrecy (accounts must be published) |
Perpetual existence | Impersonal work environment |
Scope for expansion (large capital from many investors) | Numerous regulations |
Professional management | Delay in decision-making |
Oligarchic management (a few directors control) | |
Conflict in interests between shareholders, directors and others |
Types of companies
Basis | Private company | Public company |
|---|---|---|
Members | Minimum 2, maximum 200 | Minimum 7, no maximum |
Directors | Minimum 2 | Minimum 3 |
Transfer of shares | Restricted by its articles | Freely transferable |
Invitation to the public | Cannot invite the public to subscribe to shares | Can invite the public through a prospectus |
Name | Must end with "Private Limited" | Must end with "Limited" |
A one person company (OPC) is a company with only one member (who must be a natural person and an Indian citizen and resident), with limited liability, a separate legal entity and perpetual succession. It must name a nominee who becomes the member if the owner dies. It combines the control of a sole proprietorship with the benefits of a company.
6. Formation of a company
Stage | What happens |
|---|---|
Promotion | The promoter identifies a business opportunity, conducts feasibility studies (technical, financial, economic), decides the name and gets it approved, fixes the signatories to the Memorandum, appoints professionals, and prepares the documents |
Incorporation | Documents are filed with the Registrar of Companies (ROC); when satisfied, the ROC issues the Certificate of Incorporation, the company's "birth certificate" |
Capital subscription (public company) | The company raises capital through a prospectus, appointment of bankers and brokers, minimum subscription, and allotment of shares |
Commencement of business | The company starts business after meeting the requirements of the Act |
Key documents
Document | Meaning |
|---|---|
Memorandum of Association (MoA) | The company's charter: it defines the objects and scope of the company. Its clauses are the name, registered office, objects, liability, capital and association clauses. Acts beyond the MoA (ultra vires) are void |
Articles of Association (AoA) | The rules for the internal management of the company; they are subordinate to the MoA |
Prospectus | A document issued by a public company to invite the public to subscribe to its securities |
7. Choice of form of business organisation
Factor | Points to consider |
|---|---|
Cost and ease of setting up | Sole proprietorship is cheapest and simplest; a company is the most costly and complex |
Liability | Sole proprietors and partners have unlimited liability; companies and cooperatives limited |
Continuity | Companies and cooperatives have stable existence; sole proprietorships and partnerships less so |
Management ability | A company can hire professional managers |
Capital considerations | Large capital needs favour a company |
Degree of control | A sole proprietorship gives full control; a company separates ownership and control |
Nature of business | Direct personal contact suits sole proprietorship; large-scale operations suit a company |
A reliable approach to case-based questions
Count the owners and check the law: one person (sole proprietorship or OPC), family by birth (JHF), 2–50 by agreement (partnership), voluntary with service motive (cooperative), registered with separate entity (company).
For a partner, check three things: capital, management, and whether the public knows.
For a cooperative, identify the purpose: buying goods (consumers'), selling output (marketing), loans (credit), inputs to producers (producers').
For a company, check member limits and whether it can invite the public.
Connections that matter
Evolution and fundamentals of business introduced the decision of choosing a form of ownership.
Sources of business finance depend on the form: only companies can issue shares and debentures.
Class 12 accountancy covers partnership and company accounts in detail.
Common mistakes
Saying all partners have limited liability. Only LLP partners and a minor admitted to benefits have limited liability.
Saying membership of a JHF is by agreement. It is by birth.
Confusing a sleeping partner with a nominal partner. A sleeping partner contributes capital and shares profit; a nominal partner only lends their name.
Saying registration of a partnership is compulsory. It is optional in India, though advisable.
Saying a private company can invite the public to buy its shares.
Revision checklist
I can explain the features, merits and limitations of each form.
I can identify the types of partners and partnerships and explain registration and the deed.
I can identify the types of cooperative societies.
I can distinguish private, public and one person companies.
I can explain the stages of company formation and the MoA, AoA and prospectus.
I can explain the factors in choosing a form.