Forms of Business Firms
The stage of economic development and the level of economic activity determine the suitability of a form of business firm. In fact, a particular form of business firm play a dominant role in the economic activities at a particular stage of economic development. In other words, all forms of business firms play their due roles in the economic activities.
The total business activity in the country is carried out in three sectors Viz., private sector, public sector and cooperative sector. Private sector plays major role in capitalist or market economies. Public sector and cooperative sectors play significant roles in communistic or socialistic economic systems.
Private investment, management and control dominate in private sector. The forms of business firms in private sector include: sole proprietorship firms, partnership firms, private limited companies and public limited companies.
The sole proprietor or sole trader is an individual who invests, owns, manages and controls the business. The individual invests his own and/or borrowed capital, manages the business, bears all the risks alone, enjoys all the profits and suffers from all the losses. Thus the sole proprietor is the sole owner, manager, controller, strategist, policy maker, risk-bearer, financier all rolled into one.
Advantages of Sole Proprietorship
The advantages of sole proprietorship form of businesses include: ease facility of formation, quick decision-making prompt, action, establishment of maximum personal contact with customers, confidentiality of business decisions, flexibility, lower costs of management etc.
Disadvantages of Sole Proprietorship
Sole proprietorship form of business suffers from the following disadvantages. They are: limited capital, limited abilities of management, unlimited liability when the business form incurs losses, absence of legal status, absence if specialization and economies of scale due to small size and the like.
The limitations of sole proprietorship firms particularly, availability of limited capital, limited scope for expansion and small size of the business, partnership type of firms have emerged. A partnership is usually formed to combine capital, labour and varied specialized skills and knowledge.
The term partnership is defined by the Indian Partnership Act, 1932 as,
the relation between two or more persons who have agreed to share profits of a business, carried on by all or any of them acting for all.
Features of Partnership forms
The features of partnership include:
1. It is a form of business firm.
2. It is a result of agreement between two or among more than two partners.
3. the object of starting a partnership is sharing of profit among partners.
4. a partner can act simultaneously as principal/owner and an agent of the firm.
5. the essence of partnership is the spirit of cooperation.
6. the minimum number of members of a trading partnership firm is 20 and of a banking partnership firm is 10.
7. The liability of partners is unlimited, joint as well as several. In other words, partners are jointly and individually liable for the payment of complete debts even from their personal assets.
8. Partners are not permitted to sell or transfer their shares to others without the consent of all partners.
Advantages of Partnership firms
The advantages of partnership firms include:
1. High capital raising power of the firm,
2. Higher and varied managerial skills,
3. Easy formation of partnership firm,
4. Simple dissolution,
5. Maintenance of business secrecy and
6. partners do the business continuously without taking much risk as the liability of the partners is unlimited, joint and several.
However, the partnership also suffers from some disadvantages.
Disadvantages of Partnership firms
The disadvantages of partnership firms include:
1. Limitation on capita,
2. Managerial skills of the partners may be limited,
3. Absence of separate legal status and stable life,
4. Dangers of unlimited, joint and several liability,
5. Problems of non-transferable shares of the partners and
6. Absence of public confidence.
Joint Stock Companies
Neither the sole proprietorship firms nor partnership firms can normally mobilize large amount of capital required by large scale industries. Similarly these firms also can’t provide necessary managerial skills for the large business houses. Another major problem of these two forms of business firms is unlimited liability. Added to this, is the emergence of large scale business firms resulting in the formation of Joint stock companies.
A joint stock company “is an incorporated association which is an artificial person (an association of natural persons) created by law having a common seal and perceptual succession.” The joint stock company is a limited company because the liability of the owner/shareholder is limited to the extent of unpaid amount of the face value of the share.
Features of Joint Stock Company
The features of a joint stock company include:
1. Compulsory incorporation,
2. Company is art artificial person,
3. Company has a common seal,
4. Company has perpetual/continuous life,
5. The company can enjoy expert and professional managerial talents and skills due to separation of ownership from management,
6. Company enjoys lower tax liability as it is recognized as an independent legal person,
7. The shareholders of a joint stock company have a privilege of limited liability. Their liability is limited to the extent of unpaid amount of the face value of the share,
8. Wide distribution of risk of loss due to large number of shareholders
9. Easy transferability of shares: Members of the company can transfer their shares easily,
10. The capital of the joint stock is contributed by a large number of members. Thus the joint stock company has a large number of shareholders
11. Capital mobilisation: The features of limited liability, large number of shareholders and easy transferability of shares enables the joint stock company to mobilize huge capital resources.
The joint stock companies are of two types viz., private limited companies and public limited companies.
Private Limited Companies
The features of the private limited company include:
1. Limitation of membership: The minimum number of share holders are two and the maximum number of shareholders are 50,
2. Restriction on transfer of shares: Restrictions are imposed on the sale and transfer of shares. First preference for buying the shares should be given to the existing share holders at a fair price to be determined by the directors in consultation with the company auditors,
3. Prohibition on the public issue of shares: A private company cannot invite the public to subscribe to its shares or debentures through prospectus or any such open market offer
4. Private company cannot issue share warrants.
Public Limited Company
Features of a public limited company include:
1. Number of shareholders. The minimum number of shareholders are seven and the maximum number is unlimited,
2. The shares are freely transferred
3. Public limited company can approach the public by means of prospectus and other open market operations to issue the shares,
4. Public limited company can issue share warrants.
A comparative analysis of public limited company and a private limited company is presented in exhibit.
Public sector firms are organized differently for purposes of management and control.
They are departmental undertakings, statutory corporations, central boards and companies.
1. Departmental undertakings
The departmental form of public enterprises is the oldest form. The characteristics of this form include.
1. Enterprises under this form are run by government department with a minister at its helm. For example, Indian Railways, Defence, Posts etc.
2. They are financed from the treasury.
3. Their day-to-day management is run by the civil servants.
4. They are under the direct supervision of the parliament.
5. The ministry concerned of the department is directly responsible to parliament for the efficient running of the firm.
2. Statutory corporations
A corporation is a body corporate created by a separate law, independently financed and vested with autonomy in managing its activities. For example: Life Insurance Corporation of India, Reserve Bank of India; Industrial Finance Corporation of India, Oil and Natural Gas Commission, Air India, National Textile Corporation etc.
The characteristics of the corporations are:
1. Each public corporation is established separately by a statute with a separate legal
2. They are free from parliamentary control in its day-to-day management. Parliamentary control is limited to the business policies and strategic management
3. These corporations do not have shareholders, but they can raise loans with the approval of the minister arid the consent of the treasury.
4. The employees of these corporations are not civil servants.
3. Central Boards
These are common in river valley projects which involve huge capital investments. These are normally set up with the help of both central government and state government concerned.
According to Section 617 of the Companies Act, 1956, is that in which not less than 51
percent of the paid up share capital is held by the central government, state government(s) or by the central government and state governments jointly. A subsidiary of a government company is also a government company. The characteristics of a government company are:
1. The capital to the extent of 51 per cent and above is held by the government.
2. All or majority of the directors are appointed by the government.
3. It is created under the provisions of the companies act, 1956.
4. Its funds are obtained from the government and private shareholders.
5. It has freedom and functions on commercial lines.
In cooperative forms of business firms, people voluntarily associate together, as human beings, on the basis of equality for the promotion of furtherance of their common economic interests. Cooperative organizations prefer
- service maximization rather than profit maximization,
- joint action instead of keen competition
- self help and self-reliance rather than undue dependence on external bodies and
- development of moral values of their members.
The different types of cooperative firms are: cooperative industrial firms, cooperative retail organizations, cooperative distribution agencies, cooperative banks etc.
Features of Cooperative Sector
The distinctive features of cooperative organizations include:
1. Spirit of cooperation under the motto “each for all and all for each”.
2. United and joint action.
3. Common interest.
4. Economic democracy and democratic management: Individual members are recognised as human beings but not as capitalists. Every member has only one vote irrespective of amount of his investment or the number of shares he holds.
5. Membership is open to all adults without caste or colour or creed.
6. Emphasis is laid on moral values of the members.
7. Dividend hunting element is absent and the fixed rate of return on the capital is assured.
8. Cooperative organisation has to be registered under the separate legislation.
Advantages of Cooperative Sector
The advantages of cooperative organizations include
1. Cooperative organizations help the poor people who do not have other means.
2. It is a judicious compromise between radical communism and extreme capitalism.
3. Capitalism provides for removal of the evils of capitalism.
4. Emphasis on the development of moral values and character.
5. Cooperatives provide the advantage of limited liability to the extent of the face value of the share.
6. Government provides different kinds of help to cooperatives as they are social organizations.
Disadvantages of Cooperative Sector
Despite the advantages, the cooperatives suffer from certain disadvantages. They are:
1. The absence of cooperative spirit among the members is the greatest disadvantage.
2. Cooperatives cannot raise huge financial resources
3. Cooperatives cannot appoint specialized and professional managers due to their poor financial position.
4. Excessive government involvement discourages the voluntary character of the cooperatives.
5. The politics among the members weakens the functioning of cooperatives. Cooperative organizations failed in India due to these disadvantages.
- Forms of Business Firms
- Private Sector
- Sole Proprietorship
- Partnership firms
- Joint Stock Companies
- Public Sector
- Cooperative Sector