Various Forms of Business Organization in India

Various Forms of Business Organization in India

Introduction

Every individual who wants to start a new business has to choose a particular form of business organization and accordingly has to complete the basic requirements of the same. In India, there are various from of business organization is available and one can choose accordingly to its requirement.

In this article I will cover the most used business forms with its advantages and disadvantages.

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Sole Proprietorship

This is the first and easiest form of business which has its identity as of the owner. Under this from, one has to only decide the name of organization and then just get start with it. No separate registration is required for the same. It is the one man show and only a single person operates the whole business and if he wants to increase the partners then he has to choose some other forms of organization.

Merits-

1.      It’s simple to operate and manage this form as 100% control is in one hand

2.      It is a cost-effective system as more legal complications are not involved in it.

3.      Fear of loss of ownership is not there as only one person manages the whole business.

4.      The decision making is very fast as only one person is the decision maker for whole system.

Demerits-

1.      The liability of owner is unlimited

2.      Expansion of business is not so easy as single person has limited capacity

3.      Loans facility options are not much for proprietorship.

4.      Existence of business is limited as business exist till the owner exist.

5.      Limited resources are available in sole proprietorship.

Partnership Firm

This is the second form of business where two or more than two persons make an agreement to do a certain business by making combine investment and sharing the combine liability. For entering into this from of business, a legal document naming “Partnership Deed” is compulsory. This deed contains all terms and conditions upon which business is being carried out. A separate registration of business is necessary for this form of organization.

Merits-

1.      Formation of partnership firm is legal as well as easy

2.      As more than one person is involved so the opportunities and resources are available at large scale.

3.      There is flexibility of operations as number of owners are certain.

4.      Business risk is being shared by more than one person.

5.      Sources of finance is also more than proprietorship.

Demerits-

1.      Liabilities of partners are unlimited with regard to their outside liabilities

2.      Due to involvement of more than one person, there may be conflict of interest between them.

3.      Business may be unstable as business totally depends upon the cooperation between partners.

4.      This form is not feasible for big business structures.

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Limited Liability Partnership (LLP)

Limited Liability Partnership popularly known as LLPs is the advances version of tradition partnership. LLPs are introduced in the Year 2000. It is the registered form of partnership firm. LLPs are considered as independent corporate legal entity in the eyes of law.

Merits-

1.      The major benefit of forming LLPs is that the liability of members are limited to the amount of their capital.

2.      It is the registered form of business so public trust is more with it.

3.      It is considered as separate legal entity.

4.      This form is easy to start as well as easy to wind up.

Demerits-

1.      Raising funds from market is not as easy as Venture capitalist is more interested in investing in companies.

2.      Legal compliance part is lengthy and time consuming

3.      Due to penal provision applicability, it is a costly affair.

Company

This is the biggest, most valued and most trusted form of organization. Company has its own separate legal status. Company can be formed either as private limited or as a public company. Its owners are called as investors and it is being managed by a group of persons named as “Board of Directors”. Memorandum of Association and Article of Association are the base of company which defines the rights, duties and liability of company with regard to its investors, directors and outsiders.

Merits-

1.      Shareholders liability is limited to the extent of their investment.

2.      Transfer of shares from one person to another is a simple task

3.      Company has the perpetual existence i.e., persons may come persons may go but company exist for uncertain period.

4.      Management of company is being done professionally due to separation of ownership and management.

5.      Opportunities of expansion is more available to companies.

6.       Financing options are also available at large scale.

Demerits-

1.      Legal formalities are complex in the companies.

2.      It’s a costly affair to start as well as manage.

3.      Due to separation of ownership and management, there is lack of personal interest in the working.

4.      Process of decision making is slow as a long process need to be followed through board of directors.

5.      Government regulations are more on companies.

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