ICom Notes Class XI Principles of Commerce Types of Organization

If you want to view other notes of Commerce Click Here.

Types of Organization

1. Sole Proprietorship
2. Partnership

1. SOLE PROPRIETORSHIP

It is the form of business organization in which an individual introduces his own capital, uses his own skills and intelligence in the management of its affairs and is solely responsible for the result of its operations. He may run the business alone or obtain assistance of employees. It is the easiest to form and is also the simplest in organization. The sole proprietor may borrow or use other people‘s money in doing his business.

The individual proprietor is the supreme judge of all matters pertaining to his business, subject only to the general laws of the land and to such special legislation a may effect his particular business.

ADVANTAGES OF SOLE PROPRIETORSHIP

1. EASY TO START

The formation of sole proprietorship is quite easy than partnership and joint stock company. There are no legal formalities for the starting this business, like agreement, memorandum of association, or articles of associations.

2. EASY TO DISSOLVE

It is easy to dissolve because the sole trader is not required to take permission for the dissolution either from share holder in the general meeting as in the case of joint stock companies or consult all the partners in the case of partnership.

3. FREEDOM OF ACTION

A sole trader has maximum freedom to take decision at his own end. His decision is final he may expand his business by adding new products or can discontinue old ones. He can wind up his business or he can change his business place from one place to another.

4. FREEDOM OF GOVERNMENT CONTROL

He is free from government control to a great extent than any other form of organization. A sole trader is not required to send his periodical balance sheet to the government.

5. OWNERS OF ALL PROFIT

No other organization permits to retain cent percent profit they earn. But in sole proprietorship the sole trader is the master of his business and is entitled to retain the entire profit of the business.

6. LOW TAXES

He has to pay minimum income tax and other taxes than in partnership and Joint Stock Company. In this manner he saves much out of his profit.

7. SECRECY

Secrecy is base of a business and it should not be disclosed. Success of business depends upon secrecy. A sole trader can maintain secrets of his business but it is not possible to keep secret in partnership or Joint Stock Company.

8. LOW COST ORGANIZATION

A sole trader is not required to pay registration fees as paid by stock company and legal fees in the formation of partnership.

9. FULL CONTROL

He has got full control over his planning. Nobody is there to interfere in his business.

10. IMMEDIATE ACTION AND QIUCK DECISION

In business it becomes very essential to take decision on particular times and for that purpose immediate action is required. Sole trader can take immediate action and decision but in partnership and joint stock companies actions cannot be taken without permission of owners and meetings should be called for this purpose. In this way business cannot take proper advantage of time.

11. FLEXIBILITY OF ORGANIZATION

If any change is business is called of the sole proprietor has a right to bring about the change. A good number of giant sized concerns fall on account of their inability to change their policies promptly with a change in situation.

12. SOCIAL DIS-LIABILITIES

From the social point of view

1. Continuity of individual proprietorship ensures that too much wealth does not get concentrated in a few hands.
2. The unlimited liability ensures sufficient responsibilities to the society.
3. It brings into full play the qualities of self confidence, diligence and tact among business people.
4. The growing number of sole proprietorships firms contributes to the commercial development of the country.

13. PERSONAL INCENTIVES

A man in business for him has everything lose if his efforts are not successful to earn profits. This fact makes him willing to devote maximum time, thought and energy to the successful prosecution of the activities of business ha has organized.

14. CREDIT WORTHINESS

Sole proprietor’s liabilities are unlimited as the creditor can even recover his amount from the personal belongings of the trader. Therefore this fact makes a sole proprietor credit worthy.

DISADVANTAGES OF SOLE PROPRIETORSHIP

The sole proprietorship has some disadvantages which are as follows:

1. LIMITED FINANCE

The sole proprietorship can face financial problems. He can depend only his own resources. It is neither safe nor easy for him to borrow large amount of money from banks or other financial institutions.

2. DIFFICULTIES IN MANAGEMENT

Each individual has particular attitude or ability in particular respects. Modern business is full of complications airing especially from the changing nature of market and the various laws that are being enacted. An individual may not be expert in all matters. Therefore sometimes his decision may be unbalances and would lend to the failure of the business.

3. LIMITED SPAN OF SUPERVISION

A sole proprietor however qualified and clever will find it hard to supervise the work of his sub ordinate beyond a certain limit e.g. in ease of large general store owned by single person, it will be difficult for the owner to keep an eye on all the departments and employee and to ensure that the customers are treated nicely. The problems will be more acute if store has its branches in other places.

4. LIMITATION ON SIZE

Because of limitation of finance, managerial skills and span of supervision a sole proprietor has to manger the size of the business up to a certain limit. This deprives the firm of the opportunity of reaping the economic of large scale production.

5. UNLIMITED LIABILITY

He has great risks. It is true that he receives all the profits of the business but likewise he has to face the entire losses. Not only the assets of the business but also his private assets will be used to pay off the firm’s debts and losses. Unlimited liability also discourages the expansion of business.

6. LACK OF CONTINUITY

Any personal problem or illness which is affecting the sole proprietor has direct effect on his business. It ends with the retirement, death or bankrupt of the owner. If the business is rendering useful services to the society the closure of such a business will be social loss. Similarly with the death of the proprietor, the business may pass on to his successors who may not possess the same degree of self-reliance, ability and intelligence.

7. EASE OF FORMATION

The very ease and cheapness of entering business as a proprietor may be disadvantages. Many people go into business with too little capital and training and are dashed by the competition of the business. As a result a number of business failures are proprietorships.

SUITABILITY OF SOLE PROPRIETORSHIP

One man control over the business would be most efficient and profitable. If only that one man has the capability of managing everything indefinitely. Unfortunately such a person does not exist. This form of organization is therefore suitable for the following cases.

• Where the capital required is small and risk is not heavy since merchandise and services of one kind are sold. E.g. magazine and newspaper stand, bakeries teashops, rental libraries etc.
• Where quickness in decision is needed i.e. Bullion dealers, share brokers etc.
• Where services are sold and customer requires personnel attention egg. Patient, lawyers, dentist, cobblers, accountant.
• Where special regard has to be shown to the tastes of the customers egg. Tailoring, restaurant, managing etc.
• Where market is limited eg. Retail trade.

Thus sole proprietorship has its own scope of activities and continuous to exist in spite of development of bigger organizations like partnership and joint stock companies.

2. PARTNERSHIP

It is rare that person combines in himself all that is essential to make him successful businessman. Beside to reap the economies of large scale operation sole proprietor may fail to cope up with demands of expansion. He may possess adequate capital but he may be handicapped by the lack of experience. Skills and managerial ability. Or it may be the other way round. Therefore a combination of two or more or more persons, some having capital and others having skill or experience proves to be beneficial.

According to section 4 of the Indian partnership Act of 1932, partnership is defined as “the relating between persons, who having agreed to share profits of a business carried on by all or any one of them acting for all”

The above definition reveals that:

1. An agreement between partners is necessary.
2. The agreement must be in regard to the sharing of the profit of the business.
3. The business must be carried by all or any one of them acting for all.

The individual who constitute the partnership are called partners and they collectively form the firm. The name in which there business is carried on is called the firm name.

FEATURES OR ELEMENTS OR CHARACTERISTICS OF PARTNERSHIP

Partnership is the result of contract between two or more person who has agreed to carry out on a business with the object of earning profit. The followings are the main features of partnership.

1. AGREEMENT

The most important element without which partnership cannot be formed is the agreement between the partners. It is immaterial whether the agreement is written or oral but its existence is essential. Besides, the agreement must be done in carrying the business and sharing of profit.

2. NUMBERS OF PARTNERS

There must be an association of two or more person to constitute a partnership. The maximum number of partners is 10 for banking business and 20 for general business.

3. BUSINESS PURPOSE

The main idea of partnership is to do business and distribute the share of profit earn during the course of business among the partners. The aim of business must be earring of money.

4. SHARING OF PROFIT

The partners carry out business with the view to earn profit which is distributed among them in agreed ratio. In similar way, if there is a loss all partners are going to bear it.

5. CAPITAL

The partners provide capital from there own pockets but they can also borrow money at their own risk. One can become partner of a firm even without contributing any money towards the business. In that case, his time, energy and intelligence will be regarded as capital for which he will take a share of profit. If the partners devote the maximum amount of his time in business he would also be paid a salary.

6. MUTUAL TRUST, CONFIDENCE AND UTMOST FAITH

All the partners must trust each other. They work in closed cooperation to make the enterprise a success. The partnership agreement is made on utmost trust and faith. The partners must disclose every information and must present true accounts to one another.

7. PRESENCE OF AGENCY

The other most important element of partnership is the presence of agency between partners. Each partner is liable for the act of other partner. It may possible that one partner transact whole business on behalf of other partner with their consents.

8. BUSINESS IN WIDER SENSE

The term business is very wide and it includes every kind of trade. Profession and occupation. Thus the partnership is not confined to a particular kind of trade or profession. Thus partnership has no limitation of duration and it may be formed for a single transaction.

9. UNLIMITED LIABILITIES

Every partner has unlimited liabilities toward the firm’s debt. The creditors can recover debt from the personnel property of the partners.

10. NO SEPARATE LEGAL ENTITY

Generally partnership has no legal status as entity. The assets are used and liabilities are owned by the partners collectively.

11. EFFECTS OF PARTNER’S DEATH

Unless the partnership agreement provides otherwise the death of partner automatically dissolve the partnership business.

12. RESTRICTION ON RETIREMENT OF PARTNERS

The partner cannot retire without the consent of the co-partners.

The partnership organization has following types of partners.

TYPES OF PARTNERSHIP

1. ACTIVE OR WORKING PARTNER

These are those members of partnership who contribute to the capital of the firm and taken the active part in the conduct and administration of the business. He is considered as agent of the firm by other partners.

2. DORMANT OR SLEEPING PARTNER

They contribute to the capital of the firm but do not take any part in management. Their names dose not appears any where as partners but in reality they are partners. They also share profit. They are liable to the third parties on behalf of the firm. He has every right to inspect and copy the books of accounts.

3. NOMINAL PARTNER

He is the one who neither contribute any capital t the firm nor takes any active part in conduct and administration of the business he only lends the use of his name to the firm. He is not entitled to share the profit. He is liable for all acts of firm.

4. QUASI PARTNER

A quasi partner is a retired partner who has left his capitols with the firm as loans. He gets interest on his loan at the rate varying with the profit of the firm.

5. LIMITED PARTNER

The liability of the limited partner is limited to the extend of his investment in the business. Such a partner is not allowed to take part in the management of the firm. In case of falier he cannot lose anything from his private property.

6. MINOR PARTNER

With the consent of all partners a minor person can be admitted to the benefits of the firms only. Such a partner cannot be held liable for the firm’s debts.

7. SELF STYLED PARTNER

Any person who calls himself by his gesture and posture or conduct or by his words of mouth or by written expression to be the partner of the firm is know as self styled partner.

8. SALARIED PARTNER

Generally in professions, it is not seen that some person is admitted as a partner who invested his capital in the business nor has interest in goodwill of the firm such a partner is remunerated in different way.

ADVANTAGES OF PARTNERSHIP

1. LARGE AMOUNT OF CAPITAL

In sole proprietary ship the amount of capital is limited to personal fortune and credit of one individual. In a partnership the capital can easily be raised according to requirements by bringing additional workers.

2. COMBINED JUDGEMENTS AND MANAGERIAL SKILLS

In partnership business there are more than one owner, it is therefore possible to combine the abilities and knowledge of every partner to the best interest of the business. With combine decision and judgment business is greatly benefited and more profit is possibly earned.

3. PERSONAL INTEREST

Since each general partner is responsible not only for his acts but also for the acts of his partners, he shall devote his personal attention and interest to the activities of the firm and this will enable a firm to attain maximum efficiency.

4. HIGH CREDIT STANDING

A partnership has little difficulty in obtaining credit. Especially if the partners have their personal wealth. If there are several partners and one of them has several extensive private means, creditors have little reason to doubt that the debt of partnership will be paid in fall.

5. EASE OF FORMATION

A partnership business is easy to start with as it is free from all legal formalities. It does not suffer the legal handicaps. The business can be easily increased or decreased to the suitable condition.

6. RETAINING OF VALUABLE PERSON/ PROVISION OF NEW BLOOD TO THE BUSINESS

New blood can be infused into the business by admitting new partners. Then the business can utilize the genius of an enterprising young man.

7. CO-ORDINATED DECISION

The decisions which take place in the partner ship are the coordinated decision i.e. the decision which are jointly take by all the partners.

8. LIGHTER RISK

Risk is spread here over several persons who are the partners. All the partners pool together their abilities and their income.

9. UNLIMITED LIABILITIES

Each partner has an unlimited liability towards the firm debt. The creditors can recover the debts from the personal property of the partners.

10. FLEXIBILITY OF THE ORGANIZATION

A partnership organization is extremely mobile, flexible and elastic. The partners are at ease to carry on any legal business.

DISADVANTAGES OF PARTNERSHIP

1. POSSIBILITY OF DISAGREEMENT BETWEEN THE PARTNERS

Two or more men start out together as close friends or as relatives. However they may develop difference over a year that will make for unpleasantness and inability to work together for the best interest of their firm.

2. UNLIMITED LIABILITIES

The greatest disadvantage is that of unlimited liability of the partners. At general partners are liable personally for the partnership debts. Where there are heavy losses the partner having much property will have to sustain the entire loss.

3. DIVIDED CONTROL/ DELAY IN DECISION MAKING

In the partnership more than one person is involved in every decision reached. If partner are not active in the operations it may be necessary to delay the making of an important decision. Therefore divided control leads to delay in decision.

4. FROZEN OR BLOCK INVESTMENT

For an individual who wishes to invest some money in a business, the partnership form may prove to be a poor investment from the view point of liquidity and transferability. It is correct to say that it is easy to invest money but is difficult to withdraw it, because it would mean the termination of business

5. LIMITATION ON SIZE

Since maximum number of partners is 20, it might ne possible that at some time the capital becomes short. If it happens the business has to be converted into a joint stock company. Therefore a big business cannot be started even if they get a chance to expand it, because the capital of 20 people may not be sufficient.

6. NO LEGAL ENTITY

Law does not recognize a partnership as an organization having an entity existence separate from the partners who comprises it.

7. LACK OF SECRECY

Secrecy in business is necessary for its success. It is not possible sometimes in partnership.

PARTNERSHIP DEEDS OR PARTNERSHIP AGREEMENT

It is document in which the term and condition of partnership agreement are written. Hence contract is said to be the essence of partnership business. It can be oral or written. The written document of partnership is known as partnership deeds. Partnership may be formed and condition of the contract put down in black and white. The partner is to be free from future confusions and misunderstandings. Good relation between partners may not continue for a long time.

In future there may be difference of opinion between the partners on some points. The differences may only be removed if the terms and conditions are in the document to avoid future disputes and misunderstanding between partners. A well drawn up partnership deed usually contains the following forms:

1. Name of the firm
2. The nature and object of the business
3. The duration of the business.
4. The names and address of the partners.
5. The amount of capital of the firm and the amount contributed by each partners.
6. The ratio of sharing of profits and losses of the firm
7. The management of the firm.
8. Salaries if any paid to partners.
9. Interest on partners.
10. The rights and duties of the partners.
11. The valuation and treatment of good will in case of dissolution of the firm.
12. Rules and regulation regarding the admission of new partners and expulsion and retirement of an existing partner.
13. Appointment of an arbitrator to settle disputes if any among the partners.
14. The names of banks where firm accounts will be opened.
15. The names of auditor or who will inspect the books of accounts.
16. The names of partners who will sign the important document.
17. The procedure of the dissolution of the firm and settlement of accounts.
18. Any other clause or clauses necessary for future safety for the conveniences of the partner.

The partnership deeds must be signed by all the partners.

RULES APPLICABLE IN THE ABSENCE OF AN AGREEMENT

In the absence of any agreement, the following rules are applicable. These rules are contained in Section 12 to 17 of the Indian Partnership Act as adopted in Pakistan.

1. Every partner has a right to take part in the conduct of the business.
2. In case of any difference arising out in ordinary matter connected with the business, the decision may be taken by a majority of the partners.
3. No change can be made in the nature of the business without the consent of all the partners.
4. Partners have right to see, inspect and copy any of the books of the firm. No remuneration is allowed to any partner.
5. All the partners will share equality in the profits and contribute equally to the losses.
6. Six percent interest is to be paid on the loan advanced by any partner.
7. The partnership firm must indemnify a partner in respect of payment made by the partner to the third party and also any liability incurred by any partner in the ordinary and proper conduct of the business.
8. A partner must indemnify the firm for any loss caused to the firm by his willful neglect in the conduct of the business of the firm.
9. All the property of the firm is to be held and used by the partners exclusively for the purposes of the business. In case a partner carries out any business competing with that of the firm, all profits made by him in that business should be paid to the firm.

REGISTRATION OF PARTNERSHIP FIRM

The partnership act of 1932 has not made registration of the firm compulsory in our country. It is quite optional. It depends upon the willingness of the partners whether the firm has to be registered or not. If they wish they can register their firm with the registrar pof the firms by filing with him a statement containing certain information and depositing requisite registration fees. It is essential that statement must be signed by all the partners and should contain following particulars;

1. The name of the firm,
2. The principal place of the business.
3. The names of the other places were firm may carry out its business.
4. The date on which each partner entered into the firm.
5. The names and permanent addresses of all the partners of the firm.
6. the duration of the firm

Now if the registrar is satisfied with the information provided and he thinks its necessary then he will register the firm. The name of the firm is then recorded in the register maintained for the purpose in the office of the registrar. The partnership act does not make the registration compulsory. However it imposes certain disabilities on the partners of an unregistered firm. If it is not registered, it will not be able to enforce its claim against third party against his follow partners.

DISSOLUTION OR LIQUIDATION

A partnership may be dissolved in any of the following manners.

1. DISSOLUTION BY AGREEMENT

A partnership may be dissolved when the partner is of one opinion to dissolve the firm, or it may be dissolved according to the contracts between the partners.

2. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES

• If a partnership has been formed for a fixed term, then it can be dissolved after the expirer of the term.
• If the partnership has been formed for carrying on one or more venture, then it can be dissolved after completion of that venture or ventures.
• On the death of partner it may be resolved.
• By adjudication of a partner as an insolvent by the court of law.
• A partnership may be dissolved on the insolvency of itself.

3. DISSOLUTION BY NOTICE OF PARTNERSHIP AT-WILL

A partnership at will may be dissolved at any time if any one of the partners gives notice in writing to all the partners of the firm of his intention to dissolve the firm.

4. COMPULSORY DISSOLUTION

• By the adjudication of all the partners or of all but one partners as insolvent.
• By the happening of an event which makes it illegal or unlawful for the business to be carried on.

5. DISSOLUTION BY THE COURT

If any partner brings a suit in the court, the court may dissolve the firm on any on any of the following grounds.

• When a partner becomes of unsound mind.
• When the partner becomes permanently incapable of performing his duties as a partner.
• When the partner becomes guilty of his misconducts in carrying on business.
• If partner willfully commits breach of agreements in the matter of managing the affairs of the firm or his misconducts is such that it is not possible on the part of other partners to carry on business of the firm with him.
• If the partners transfers his entire share to other or his share in the firm have been changed by the court for his debts.
• Where a partnership cannot be carried on except at a loss.
• On any other grounds on which the court thinks just and equitable to wind up the business.