Forms of Business ownerships

1. FORMS OF
BUSINESS
ORGANISA--
TIONS

2. Introduction to Forms of Business Organizations
Professor & Lawyer Puttu Guru Prasad
VIVA VVIT

3. Forms of Business Organization
One of the first
decisions that you
will have to make as a
business owner is
how the business
should be structured.

4. •All businesses must adopt some
•1.Legal Configuration that defines the
•2.Rights and Liabilities
• of participants in the business’s
•3.Ownership,
•4.Control,
•5.Personal Liability,
•6.Life Span, and
•7.Financial or Capital Structure.
Forms of Business Organization

5. •This decision will have long-
term implications, so you may
want to consult with a “Charted
Accountant” and “Advocate
Attorney” to help you select the
form of ownership that is right
for you.
Forms of Business Organization

6. In case a firm is not registered, it
is deprived of many benefits:
A partner of an
unregistered firm
cannot file a suit
against the firm or
other partners.
The firm cannot
file a case against
the partners.
The firm cannot
file a case against
third parties.

7. • In making a choice, you will want to take into account the following:
•Your vision regarding the size and nature of your
business.
•The level of control you wish to have.
•The level of “structure” you are willing to deal
with.
•The business’s vulnerability to lawsuits.
•Tax implications of the different organizational
structures.
•Expected profit (or loss) of the business.
•Whether or not you need to re-invest earnings
into the business.
•Your need for access to cash out of the business
for yourself.
Forms of Business Organization

8. 6 Main Types
of
Business
OWNERSHIPS

9. 2.1 INTRODUCTION
•If one is planning to start a business or is interested in
expanding an existing one, an important decision
relates to the choice of the form of organisation.
•The most appropriate form is determined by weighing
the advantages and disadvantages of each type of
organisation against one’s own requirements.
• Various forms of business organizations from which
one can choose the right one include:
•(a) Sole proprietorship,
•(b) Joint Hindu family business,
•(c) Partnership,
•(d) Cooperative societies, and
•(e) Joint stock company (Public/Private).
•(f) TRUSTS

10. Sole proprietorship refers to
a form of business
organization which is owned,
managed and controlled by
an individual who is the
recipient of all profits and
bearer of all risks.

11. 2.2 SOLE PROPRIETORSHIP
•Let us start our discussion with sole
proprietorship — the simplest form of business
organisation, and then move on to analyzing
more complex forms of organizations.
•Do you often go in the evenings to buy registers,
pens, chart papers, etc., from a small
neighborhood stationery store?
•Well, in all probability in the course of your
transactions, you have interacted with a sole
proprietor.
•Sole proprietorship is a popular form of business
organisation and is the most suitable form for
small businesses, especially in their initial years

12. OPTIONS FOR A SOLE PROPRIETOR

13. • Sole proprietorship refers to a form of
business organisation which is owned,
managed and controlled by an individual
who is the recipient of all profits and bearer
of all risks.
•This is evident from the term itself. The
word “sole” implies “only”, and
“proprietor” refers to “owner”.
•Hence, a sole proprietor is the one who is
the only owner of a business.
•This form of business is particularly
common in areas of personalized services
such as beauty parlors, hair saloons and
2.2 SOLE PROPRIETORSHIP

14. Features of Sole Proprietorship
•Salient characteristics of the sole proprietorship
form of organisation are as follows:
•(i) Formation and closure: Hardly any legal
formalities are required to start a sole proprietary
business, though in some cases one may require a
license. There is no separate law that governs sole
proprietorship. Closure of the business can also be
done easily. Thus, there is ease in formation as well
as closure of business.
•(ii) Liability: Sole proprietors have unlimited
liability. This implies that the owner is personally
responsible for
•(iii) Sole risk bearer and profit recipient: The risk of
failure of business is borne all alone by the sole
proprietor. However, if the business is successful,

15. •(iv) Control: The right to run the business and make all
decisions lies absolutely with the sole proprietor. He
can carry out his plans without any interference from
others.
•(v) No separate entity: In the eyes of the law, no
distinction is made between the sole trader and his
business, as business does not have an identity separate
from the owner. The owner is, therefore, held
responsible for all the activities of the business.
•(vi) Lack of business continuity: Since the owner and
business are one and the same entity, death, insanity,
imprisonment, physical ailment or bankruptcy of the
sole proprietor will have a direct and detrimental effect
on the business and may even cause closure of the
business.
Features of Sole Proprietorship

16. FEATURES
Easy formation
and closure
Lack of
business
continuity
Unlimited
liability Absolute
control
Sole risk bearer
and profit
recipient
No separate
entity

17. Merits of Sole Proprietorship
•Sole proprietorship offers many advantages.
•(i) Quick decision making: A sole proprietor enjoys
considerable degree of freedom in making business
decisions. Further the decision making is prompt
because there is no need to consult others. This may
lead to timely capitalization of market opportunities as
and when they arise.
•(ii) Confidentiality of information: Sole decision
making authority enables the proprietor to keep all the
information related to business operations confidential
and maintain secrecy. A sole trader is also not bound by
law to publish firm’s accounts.
• (iii) Direct incentive: A sole proprietor directly reaps the benefits
of his/her efforts as he/she is the sole recipient of all the profit.
The need to share profits does not arise as he/she is the single

18. •(iv) Sense of accomplishment: There is a
personal satisfaction involved in working for
oneself. The knowledge that one is responsible
for the success of the business not only
contributes to self-satisfaction but also instils in
the individual a sense of accomplishment and
confidence in one’s abilities.
•(v) Ease of formation and closure: An important
merit of sole proprietorship is the possibility of
entering into business with minimal legal
formalities. There is no separate law that
governs sole proprietorship. As sole
proprietorship is the least regulated form of
Merits of Sole Proprietorship

19. MERITS Quick
Sense of
accomplishment
decision
making
Confidentiality
of information
Ease of
formation
and closure
Direct
incentive

21. •Notwithstanding various advantages, the sole
proprietorship form of organisation is not free from
limitations. Some of the major limitations of sole
proprietorship are as follows:
•(i) Limited resources: Resources of a sole proprietor
are limited to his/her personal savings and
borrowings from others. Banks and other lending
institutions may hesitate to extend a long term loan
to a sole proprietor. Lack of resources is one of the
major reasons why the size of the business rarely
grows much and generally remains small.
•(ii) Limited life of a business concern: In the eyes of
the law the proprietorship and the owner are
considered one and the same. Death, insolvency or
Limitations of Sole Proprietorship

22. Limitations of Sole Proprietorship
•(iii) Unlimited liability: A major
disadvantage of sole proprietorship is that
the owner has unlimited liability. If the
business fails, the creditors can recover
their dues not merely from the business
assets, but also from the personal assets of
the proprietor.
•A poor decision or an unfavorable
circumstance can create serious financial
burden on the owners. That is why a sole
proprietor is less inclined to take risks in
the form of innovation or expansion.

23. (iii) Unlimited liability:
• Sole proprietors have unlimited liability. The unlimited liability means that if you're unable to
repay the debts of the business, your creditors can go after whatever you own. So you could lose
any of your possessions that would allow them to recover the amount.
• Reasons behind Unlimited Liability:
1. Owner of Sole Proprietary and his Business, both are same in the eye’s of Law.
2. Sole Proprietary is not all recognized as separate legal entity, that of from the owner.
3. Accounting Equation : Your own Capital + Out side Liability = Assets
4. What ever profits earned by the Sole Proprietary is enjoyed by him, he won’t share his profits
with others.
5. The Owner of Sole Proprietary can purchase the Properties and Assets with the profit earned
from the business and register the Properties or Assets only on his name, but not on the name
of the firm, because law has not recognized the Sole proprietary as a sperate legal entity.
6. So it happens in the Partnership and HUF also, because the Sub-Registrar, register the
properties on the persons names and on the artificial legal persons only, not on the name of
the Sole Proprietor Firm, or not on the name of the Partnership Firm or not on the name of the
HUF Firm.
7. Because of that the creditors can recover their dues not merely from the business assets, but
also from the personal assets of the proprietor.
8. This is the logic behind Unlimited Liability.
9. The Company formation is suitable to escape from the Unlimited Liability, because it is
recognized as separate legal entity in the eye’s of the law.

24. Liability:-An obligation to pay
money to another party Legally
Legal Liability :
His legal liability covers all his possessions.
The Creditors can collect his personal property.
CREDOTOR: - A person to whom money is
owed by a debtor; someone to whom an
obligation exists legally.
DEBITOR:- A person who owes a creditor;
someone who has the obligation of paying a
debt legally.

25. Limited liability means the business owners' liability for debts is restricted to the
amount they put into the business. With unlimited liability, the business owner is
personally responsible for any loss the business makes.

26. •(iv) Limited managerial ability: The owner has to
assume the responsibility of varied managerial
tasks such as purchasing, selling, financing, etc.
It is rare to find an individual who excels in all
these areas. Thus decision making may not be
balanced in all the cases.
•Also, due to limited resources, sole proprietor
may not be able to employ and retain talented
and ambitious employees.
•Though sole proprietorship suffers from various
shortcomings, many entrepreneurs opt for this
form of organisation because of its inherent
advantages.
•It requires less amount of capital. It is best
suited for businesses which are carried out on a
Limitations of Sole Proprietorship

27. LIMITATIONS
Unlimited
liability
Limited life
of a business
concern
Limited
Resources
Limited
managerial
skills

29. Recapitulation
or Summary
of the Topic
Sole
Proprietorship

31. • In making a choice, you will want to take into account the following:
•Your vision regarding the size and nature of your
business.
•The level of control you wish to have.
•The level of “structure” you are willing to deal
with.
•The business’s vulnerability to lawsuits.
•Tax implications of the different organizational
structures.
•Expected profit (or loss) of the business.
•Whether or not you need to re-invest earnings
into the business.
•Your need for access to cash out of the business
for yourself.
Forms of Business Organization

32. Sole proprietorship refers to
a form of business
organization which is owned,
managed and controlled by
an individual who is the
recipient of all profits and
bearer of all risks.

33. FEATURES
Easy formation
and closure
Lack of
business
continuity
Unlimited
liability Absolute
control
Sole risk bearer
and profit
recipient
No separate
entity

34. MERITS Quick
Sense of
accomplishment
decision
making
Confidentiality
of information
Ease of
formation
and closure
Direct
incentive

36. Liability:-An obligation to pay
money to another party Legally
Legal Liability :
His legal liability covers all his possessions.
The Creditors can collect his personal property.
CREDOTOR: - A person to whom money is
owed by a debtor; someone to whom an
obligation exists legally.
DEBITOR:- A person who owes a creditor;
someone who has the obligation of paying a
debt legally.

37. Limited liability means the business owners' liability for debts is restricted to the
amount they put into the business. With unlimited liability, the business owner is
personally responsible for any loss the business makes.

38. LIMITATIONS
Unlimited
liability
Limited life
of a business
concern
Limited
Resources
Limited
managerial
skills

42. Important Topics from Chapter 1, Foundation
of Business and History of Trade and Commerce
1.1 Introduction, 1.7.2 Auxiliaries To Trade,
1.2 Concept of Business, 1.8 Objectives of Business,
1.3 Characteristics of Business
Activities,
1.8.1 Multiple Objectives of
Business,
1.4 Comparison of Business,
Profession And Employment,
1.8.2 Business Risks, Pure &
Speculative, Human Errors
1.5 Classification Of Business Activities, 1.9 Nature of Business Risks,
1.6 Industry 1.9.1 Causes of Business Risks,
1.7 Commerce,
1.7.1 Trade,
1.9.2 Starting A Business —
Basic Factors

44. Professor & Lawyer
Puttu Guru Prasad
B.Com., M.Com., M.Phil., M.B.A., PGDFTM., AP.SET.,
M.Phil., DRMS., L.L.B., ICFAI TMF., DIRM., L.L.M.,
Pre PhD (PhD)from JNTUK.,
“Diploma in Psychology from YALE
University”
MHRDI’s IIC Ambassador
NSS Certified Program Officer, (A.U)
Senior Faculty for Business Studies, Economics, Accounts
Head, Board of Administration & Management Science,
Bhagavad Gita & CLAT Program Coordinator,
Commerce Department, VIVA-VVIT, Nambur,
My Blog: puttuguru.blogspot.in

45. Professor & Lawyer
Puttu Guru Prasad