Learn About Different Forms of Business Organisations

A business Organisation is an entity that is formed for the purpose of carrying on the commercial enterprise of selling and buying. These organisations operate under legal systems that govern contracts, property rights, and corporate incorporation.

The Business Organisation system is concerned with the management and planning of different activities. This is an accumulation and coordination of the resources such as men, material, money, machine to produce the goods and services, the business organisation works to coordinate and control all these factors of production.

Meaning of Business Organisation

Business organisation is defined as an entity which is structured for the purpose of carrying on the commercial system of enterprise. The organisation is governed under principles and laws governing contract and exchange of goods and services.

Business enterprises generally take one of these three forms:  

• Proprietorship

• Partnership 

• LLP

Proprietorship

In the proprietorship form one person is responsible for the entire operation as his own personal property is entrusted in it. This is usually managed on a day-to-day basis. Majority of the businesses we see around us are of this category. 

Partnership

The second form is Partnership, this needs 2-50 members to pursue the business. Law and accounting firms, brokerage houses and other advertising agencies are of this form. The business id formed by the partners themselves, their share of profit varies with individual investment invested in the partnership.

Limited Liability Partnership

The third form, which is the LLP form, is a very popular form of business for its inherited advantages from the partnership and company form of business. The company is legally separated from the individuals who work here in this organisation. They might be the shareholders or the employees who come in legal contract and thus can be sued and be sued by the company. The big industries and commercial organisations are limited-liability companies. 

Forms of Business Organisation:

There are five forms of Business Organisation

(a) Sole proprietorship,

(b) Joint Hindu family business,

(c) Partnership,

(d) Cooperative societies, and

(e) Joint stock company.

(a) Sole Proprietorship

The simple and common type of business found is this form of business ownership. Sole Proprietorship is a business which is owned and managed by a single individual for his own benefit and gain. The existence of this business depends upon the single owner, the business’s success and profit depends upon the owner. The business comes to an end after the incapacity or death of the owner. All the assets and liability of the firm is the sole responsibility of the owner himself/herself. Even the capital is their personal investment. The profit gained by the owner is accounted for in the owner’s account and so does any loss. It is the owner’s unlimited responsibility for every transaction. 

Advantages of Sole Proprietorship:

• Full Control: The owner has complete control over decision-making, allowing for quick and flexible management without the need for approval from others.

• Easy to Start: It is simple to set up with minimal legal formalities and low registration costs, making it ideal for small businesses.

Disadvantages of Sole Proprietorship:

• Unlimited Liability: The owner is personally liable for all debts and obligations of the business, meaning personal assets can be at risk.

• Limited Resources: The business depends entirely on the owner's skills, time, and capital, which can limit growth and expansion opportunities.

(b) Joint Hindu family business

A Joint Hindu Family Business is a type of business run by a family, where the members share the ownership and profits. It is managed by the Karta, usually the oldest male member, who makes decisions for the business. The other family members, called co-parceners, share in the profits but don’t usually manage the business. The main feature of this business is that it continues even if the Karta passes away, and the next oldest member takes over. The Karta has unlimited responsibility for business debts, but other family members' responsibilities are limited to their share in the business.

Advantages of Joint Hindu Family Business

• Easy Formation and Continuity: The business is automatically formed when a family follows Hindu law, and it continues even after the death of the Karta, as the next eldest male takes over the role of Karta.

• Complete Control by Karta: The Karta has full control over business decisions, making management efficient and quick without the need for consultations with others.

Disadvantages of Joint Hindu Family Business

• Unlimited Liability for Karta: The Karta has unlimited liability, meaning their personal assets can be used to pay off business debts.

• Limited Participation in Management: Other family members (co-parceners) have limited involvement in the business's day-to-day operations, which can lead to lack of innovation or decision-making diversity.

(c) Partnership 

There are two types of partnership:

General Partnership and Limited Partnership. Normally, both the owners invest their money, property and workforce in this business. They both are liable for the business debts. Also, partnerships do not require a formal agreement to start their business. The business agreement can be verbal or even be implied between the two partners. While Limited Liability Partnership or LLP requires a formal agreement between the partners. They also are liable to certify with the state. 

Advantages of Partnership

• Shared Responsibility: In a partnership, responsibilities are shared among partners, which helps in managing the business efficiently and reduces the burden on each individual.

• Access to More Capital: With multiple partners, the business can raise more capital as each partner contributes money, making it easier to expand the business.

Disadvantages of Partnership:

• Unlimited Liability: In a general partnership, partners have unlimited liability, meaning they are personally responsible for the debts of the business, which puts personal assets at risk.

• Risk of Disputes: Differences in opinions, goals, or working styles can lead to conflicts among partners, potentially harming the business.

(d) Cooperative Societies

A Cooperative Society is a type of business organisation where a group of people come together to meet a common economic, social, or cultural goal. In this type of business, the members work together, share profits, and make decisions democratically. The main idea is to help each other rather than focusing on making a profit for just a few people. For example, a group of farmers might form a cooperative to buy seeds, sell their crops, or get better prices.

Advantages of Cooperative Societies

• Democratic Control: Every member has an equal vote in decision-making, regardless of their investment, ensuring fairness and democratic management.

• Mutual Benefits: Cooperative societies aim to serve the needs of their members rather than make profits. Members benefit from lower costs, shared resources, and increased bargaining power.

Disadvantages of Cooperative Societies:

• Limited Capital: Since members contribute small amounts of capital, it can be difficult for cooperatives to raise large sums of money for expansion or development.

• Slow Decision-Making: Democratic decision-making processes can be time-consuming, as every member's opinion may need to be considered, leading to slower business operations.

(e) Joint-stock Company

A Joint Stock Company is a type of business organisation where a group of people come together to form a company by contributing money through shares. Each person owns shares in the company, and their liability is limited to the amount of money they have invested. The company is a separate legal entity from its owners, meaning it can enter into contracts, own property, and be responsible for its debts. The company's ownership is divided into shares, which can be bought or sold. There are two types: Private Limited Companies and Public Limited Companies.

Advantages of a Joint Stock Company

• Limited Liability: Shareholders' liability is limited to the amount they invest in the company. This means their personal assets are protected if the company faces financial difficulties.

• Ability to Raise Capital: A joint stock company can raise large amounts of capital by issuing shares to public or private investors, enabling it to expand and invest in growth opportunities.

Disadvantages of a Joint Stock Company:

• Complex and Expensive to Set Up: Establishing a joint stock company requires legal formalities, documentation, and compliance with government regulations, making it costly and time-consuming.

• Lack of Control for Shareholders: Shareholders have limited influence on day-to-day operations, as decisions are made by the board of directors, potentially causing a disconnect between ownership and management.

History of Business Organisation

The Industrial Revolution laid the groundwork for today's business structures. Manual labour was mainly displaced by machine-based labour during the Industrial Revolution. The industry grew up around factories where the major means of production were machines rather than people. Many people, craftsmen, and family groupings abandoned their homes, small enterprises, and farms in favour of industrial positions that paid for low-skilled labour. Organisations divided duties among workers and built lines of control to arrange employees and executives in order of authority as they became more focused on machines. 

The jobs of individual workers become more specialised and routine. Manufacturers realised that assigning staff to simple, machine-based jobs boosted a company's efficiency and productivity. Workers were taught to be focused and to follow factory work procedures. Charles Babbage (1791–1871), an English mathematician and inventor, was similarly interested in the division of labour in manufacturing. In his analysis of factory organisation, management, planning, and labour, he used scientific and mathematical approaches. Babbage's ideas were compiled into a theory of organisation and administration known as scientific management in the early twentieth century, which had a significant impact on how organisations operated. 

American engineer Frederick Taylor (1856–1915), who grouped the theory into five key components, further expanded the theories of scientific administration. The first principle advocated for a transfer of responsibility from the worker to the manager inside a commercial organisation. Managers, Taylor felt, were responsible for planning and designing all of the work, while workers were responsible for completing given duties. The second premise advocated for the use of scientific methods to increase the efficiency of commodities manufacturing. 

Conclusion

Choosing the right form of a business organisation depends on factors like ownership, liability, management, and the goals of the business. Each form, whether it’s a sole proprietorship, partnership, joint Hindu family business, cooperative, or company, has its own benefits and challenges. Understanding these options can help you make an informed decision about which structure best suits your business needs and long-term vision.