3 Redeeming Features of Different Forms of Business Organization

This article throws light upon the three redeeming features of different forms of business organization. The features are: 1. Proprietorship 2. Partnership 3. Company.

Business Organization Feature # 1. Proprietorship:

Proprietorship-the oldest form of business organization is owned, controlled and operated by a single individual who decides policies and carries them into effect. In this form of business organization, liability of the proprietor is unlimited in as much as his personal assets may also be seized to meet the financial losses and business obligations.

From legal point of view, the status of a proprietorship form is in no way different from that of its owner.

He is the sole beneficiary of all the surplus and has to bear the business loss alone. The greatest virtue of proprietorship lies in its simplicity. It is easy to establish this form of organization without much cost and legal formalities.

A sole proprietor is not required to pay separate tax on business earnings. Another advantage is that the proprietor need not share control with anyone because in most of the cases he is also the manager. Promptness of decision making process is an added advantage of proprietorship.

However, proprietorship suffers from the drawback of absence of permanence of the organization. The life of the proprietorship concern is contingent upon the life of the owner. Another weakness of proprietorship is unlimited liability.

The proprietor is always haunted by the fear of losing his private property in case of the business failure. As a result, he becomes excessively cautious and instinctively orthodox as a businessman. This may act as a drag on business expansion.

Further, because of limited scale of operations, it may not be always possible to secure the specialised services of experts. Both as a buyer and as a seller, individual proprietorship is ineffective in exerting any controlling influence over the market.

Business Organization Feature # 2. Partnership:

Partnership form of organization is similar to proprietorship except that there is more than one owner. As per Indian Partnership Act, 1932, partnership “is 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.” Thus, partnership is the outcome of an agreement between two or more persons to carry on business so as to earn profit.

The intention to share the profits by running business in common is at the very root of partnership agreement. In case of loss, partners have to share it. Another distinguishing feature of partnership is its unlimited liability. Each partner is liable to an unlimited extent to satisfy the obligations of the firm to outsiders.

Even the personal property of the partners can be attached to satisfy such claims if the assets of the firm are not sufficient. Life of the firm is limited to the life of its partners. The partnership is terminated if one of the partners dies. Furthermore, each partner has the right to act as an agent of all other partners and the firm.

Partnership as a form of business organization has the advantages of convenience of formation with low cost. It is relatively free from governmental regulations. A partnership firm has the benefit of using specialised experiences of its partners.

However, partnership firm has certain limitations, such as impermanence, difficulties of transferring ownership and unlimited liability. Partners must risk even their personal assets to clear business claims. This means that if any partner fails to meet his prorata claims arising out of business failure, the remaining partners must take over the unsatisfied claims, drawing on their personal assets, if necessary.

However, it is possible to limit the liabilities of certain partners by establishing a limited partnership wherein certain partners are designated general partners and others limited partners.

Business Organization Feature # 3. Company:

Unlike proprietorship and partnership, company is an artificial person created by law with perpetual succession and common seal. Thus, a company has a personality of its own in the eyes of law and can conduct a lawful business. In view of its independent entity, existence of a company is in no way affected by the death, or lunacy or insolvency or retirement of its member.

Another redeeming feature of company form of organization is limited liability. Liability of members of the company is limited only to the face value of the shares held by each of them. Separation of ownership and management is another important characteristic of the company. Members are the owners of the company. But they have no right to take part directly in the day-to-day management of the business of the company.

Management of the business is vested in the Board of Directors elected by the members in the general body meeting of the company. A company can be formed as a private company or as a public company.

A private (limited) company is one which can be formed by just two persons but the number of its members cannot exceed 50; no invitation can be issued to public at large to subscribe to its shares or debentures and the right of its members to transfer their shares in the company is restricted.

A Public (limited) company can be formed by seven persons. It does not restrict the rights of its members to transfer their shares, does not limit its membership to fifty and is not prevented from inviting general public to subscribe to its capital.

A company form of business organization has virtues of limited liability, transferability of ownership and permanence of existence. Besides, it has the advantage of accessing to the services of highly qualified persons in different lines of business.

However, the major drawback of the company lies in cost and complications involved in its formation. The compliance formation of a company requires observance of too many legal formalities. Even the internal working of the company is subjected to statutory restrictions regarding meeting, voting, audit, etc. Another limitation of the company is absence of quick decisions and prompts action.

Submitted by : Professor Anju, Category : Financial Management