An entrepreneur can select one of the different types of ownership organisations which are provided as follows :
(A) Sole Proprietorship Firm
It is a form of business organization which is owned and controlled by an individual. The individual is the owner and is known as sole proprietor and therefore, all the profits belong to him. Likewise, all the losses are borne by the proprietor. It is the oldest form of business organization. There is no legal formality involved in the formation of a sole proprietorship firm.
All that one needs to do is to have a place to work, decide its name and begin the work. There is no difference in the liability of the firm and that of the owner. Thus, the liability of the sole proprietor is not only personal, it is unlimited too. The most significant Limitation of this form of organization is that its growth potential is limited due to the inability of the individual to provide the large amount of funds needed for its growth.
(B) Partnership Firm
It is a form of business organization which is owned and controlled by two or more persons who jointly contribute to the funds required for the conduct of business. A partnership firm can be formed with minimum of 2 and the maximum of 20 people. Partnership refers to the relation of principal and agent among the partners. Each partner represents the other partners in his dealings with the third parties and acts as their agent. In his capacity as agent, each partner binds the other partners with his commitments or liabilities contracted on their behalf. Partnership for, is the collective name of all the partners.
In India, partnership firms are governed by the Indian Partnership Act, 1932. Under this Act, it is not compulsory to register the partnership firm. There is however, only one formality, i.e. the partners has to decide the terms and conditions on which they agree to conduct their business jointly with other partner/partners. This agreement of partnership is called “partnership deed”. The agreement can be oral or written. It is preferable to have partnership deed in written form. It is prepared on a stamp paper of Rs. 15 and should preferably be attested by a notary public, though it is not a legal requirement. The partnership deed generally covers the following points:
1) Amount of capital to be contributed by each partner.
2) Profit-loss sharing ratio of the partners
3) Division of responsibilities/functions
4) Liability of the partners
5) Payment of interest on loan given by the partner/his or her spouse
6) Arbitration for settlement of any disagreement over interpretation of clauses in the deed of partnership.
7) Settlement mechanism in the event of retirement or death or admission of new partner
(C) Joint stock Company
The entrepreneur(s) can avoid the risk of personal and unlimited liability by selecting joint stock company form of ownership organization. This form of organization provides for limited liability to raise large amount of funds to finance the expansion and growth of the business.
Joint Stock Company is defined as the voluntary association of persons, recognized by law, to carry on a lawful business with a common name, a common seal, common capital divisible into transferable shares, limited liability and perpetual succession. The Companies Act, 1956 (as amended from time to time) provides for the registration of the joint stock companies. Once a voluntary association is registered (incorporated) under own distinctive name different and distinct from the existence of those who promoted it or contributed to its capital funds.
The promoters can register the voluntary association either as private limited company or public limited company. The capital of the company is divided into convenient parts of Rs. 10 each, each part being called a share in the capital. Thus, anyone who wants to contribute to the capital of the company can do so by subscribing to its shares. If it is desired to invest Rs. 5 lakhs in a company, then it would be by subscribing to 50,000 shares of Rs. 10 each. One who contributes to the shares of a company is called the shareholder and is thus the owner of the company to the extent of the shares held by him. The shareholders of the company, being large in numbers, cannot collectively manage the affairs of the company. They are required to elect their representatives to manage the affairs of the company. These representatives are known as directors and collectively, the board of directors.
Private Limited Company
Private limited company can be registered with a minimum of two persons. The maximum number of persons is 50 excluding present and past employees. In case, it is proposed to have private limited company, then at least two persons are required to be the promoters who would contribute to the capital of the company in the form of shares. The promoters cannot invite general public to subscribe to its share capital. They have to mobilize the capital funds from private sources.
The affairs of the company are conducted by a board of directors elected at the annual general meeting which have to be compulsorily held as per the articles of association of the company.
Maximum number of directors permissible is 12 and minimum 2. In the annual general meeting, one share carries one vote. Thus, those who have large number of shares have more voting power and can thus, control the management of the company.
Public Limited Company
A public limited company can be formed with a minimum of seven persons. Whereas in private limited company maximum number of shareholders is 50, there is no such limited on the maximum number of shareholders in the case of public limited company. Thus, a public limited company can have wide shareholding and operate with substantial financial resources. The minimum number of directors is 3 and maximum 12.
A director of a company should not hold more than 20 directorships of public limited companies. He cannot vote in a board meeting when resolutions affecting contracts in which he has interests are passed at the meeting. The Board of Directors elect one of them as managing director. A public limited company is the most appropriate form of business requiring large amount of funds.