Different Forms of Business Organization India – Basic Guide

In starting a business in India, choosing the right forms of business organization is important. Each type of organization has its own merits and demerits. The right choice of the forms of business organization is very crucial because it determines the power, control, risk and responsibility of the entrepreneur as well as the division of profits and losses. Being a long term commitment, the choice of the form of business should be made after considerable thought and deliberation.

Although you can change your ownership type at any time, you should decide carefully, experts agree, because the form of business you choose will affect the way you file paperwork, face personal liability, pay taxes and, if necessary, file for bankruptcy protection.

Although you can change your ownership type at any time, you should decide carefully, experts agree, because the form of business you choose will affect the way you file paperwork, face personal liability, pay taxes and, if necessary, file for bankruptcy protection.

Ideal Forms Of Business Organization

In choosing the right forms of business organization for your enterprise, you must consider the characteristics of an ideal form of organization. These are as follows:

  • The formation process should be easy and simple. The formation should not
    involve many legal formalities and it should not be time-consuming.
  •  The form of organization should facilitate the raising of the required amount of capital at a reasonable cost. If the enterprise requires a large amount of capital, the preconditions for attracting capital from the public area) safety of investment b) fair return on investment and c) transferability of the holding.
  • A business enterprise may be organised on the basis of either limited
    or unlimited liability. From the point of view of risk, limited liability is preferable.
  • The responsibility for management must be in the hands of the owners of the firm. The day-to-day operation and management operations should take care of properly.
  • Stability is essential for any business concern. Uninterrupted existence enables the entrepreneur to formulate long‐term plans for the development of the business concern.

How To Choose The Right Forms Of Business Organization

According to the desired parameters, choosing the right forms of business organization is most crucial in starting any business. The choice of the form of business is governed by several interrelated and interdependent factors such as:

  • Nature Of The Business: This is one of the most important factors you should consider in choosing forms of business organization. Businesses providing direct services like tailors, restaurants and professional services like doctors, lawyers are generally organized as proprietary concerns. While businesses requiring pooling of skills and funds like accounting firms are better organized as partnerships. However, the manufacturing organizations of large size commonly demands aset up as private and public companies.
  • Scale Of Operation: Large scale enterprises catering to national and international markets can be organized more successfully as private or public companies. Small and medium scale firms are generally set up as partnerships and proprietorship.
  • Degree Of Control: An individual who desires direct control of business prefers proprietorship because a company involves separation of ownership and management.
  • Capital Requirement: Capital investment plays a major role in choosing the right forms of business organization. However, you can convert a partnership company into a company when it grows beyond the capacity and resources of a few persons.

The volume of risks and liabilities as well as the willingness of the owners to bear it is also an important consideration in choosing the right business entity.

Different Forms Of Business Organization – Advantages & Disadvantages

#1. Sole Proprietorship Company

The term ‘sole’ means single and ‘proprietorship’ means ‘ownership’. So, only one person is the owner of the business organization. This is a specific type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business. The owner himself/herself manages the business as per his/her own skill and intelligence. There is no separation of ownership and management as is the case with company form of business organization. Read More…

Advantages Disadvantages
Easy to form and wind up Limited resources
Quick decision and prompt action Lack of continuity
Direct motivation Unlimited liability
Flexibility in operation Not suitable for large scale operation
Maintenance of business secrets Limited managerial expertise
Personal touch

#2. One Person Company

One person company is a new concept in India and hybrid of  Sole-Proprietor and Company form of business. The concept opens up spectacular possibilities for sole proprietors and entrepreneur. One can take the advantages of Limited liability and corporatization but were held back in doing so because of the requirements of finding a second director or second shareholder. The other important point is that a One Person Company may have only one director. But at the same time, there is no bar on number of directors. However, as per the Act, the total number of directors shall not be more than 15. Read More…

Advantages Disadvantages
Organized for of proprietorship Suitable only for small business
With compliance Can not carry NBFC activities
Limited liability protection to owner Can not be converted into a company under Section 8 of the Act.
Legal status and social recognitiom The basic income tax rate is 30% which may result in a higher tax as compared to the income tax slab rates for an individual Easy to get loan from banks Higher incorporation cost compared to proprietorships Easy to manage Higher compliance cost

#3. Limited Liability Partnership

The Limited Liability Partnership (LLP) is essentially a general partnership in form, with one important difference. Unlike a general partnership, in which individual partners are liable for the partnership’s debts and obligations, an LLP provides each of its individual partners protection against personal liability for certain partnership liabilities. In states that recognize LLPs, a partnership qualifies as an LLP by registering with the appropriate state authority and fulfilling various requirements. Some states require proof that the partnership has obtained adequate liability insurance or has adequate assets to satisfy potential claims. All states require a filing fee for registration. Additionally, it requires that an LLP includes the words Registered Limited Liability Partnership or the abbreviation LLP in its name.

Advantages Disadvantages
As many owners as needed Some states do not allow
Much less liability in partnership Additional taxes
Tax benifits Less business credibility
Great flexibility

#4. Private Limited Company

A private limited company (Pvt Ltd company) is one of the most common forms of business organization. Any individual can carry on business for an entity intending to make a profit and enjoy the benefits of an incorporated entity, particularly limited liability. A private limited company stands between partnership and widely owned public company. In addition, there are several identifying marks of a private limited company. The list includes a name, a number of members, shares, formation, management, directors, and meetings, etc. The maximum number of directors shall have to be mentioned in the Articles of Association. In the grant of privileges and exemptions, the Companies Act has drawn a distinction between an independent private company and other private company which is a subsidiary of the other public company.

Advantages Disadvantages
Limited liability Shares cannot be sold or transferred
Continuity of existance Not allowed to invite public to subscribe to its shares
Minimum number of share holders
More capital
Easy to expand
Brand value

#5. Public Limited Company

A public limited company is a voluntary association of members. Therefore, after incorporation, it has a separate legal existence and the liability of whose members is limited. It must have a minimum of seven members but there is no limit as regards the maximum number. The shares of a company are freely transferable. Additionally, any shareholder can do this without the prior consent of other shareholders or without subsequent notice to the company. The liability of a member of a company is limited to the face value of the shares he owns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company.

Advantages Disadvantages
Continuity of existance Scope for promotional frauds
Larger amount of capital Undemocratic controls
Unity of direction Scope for directors for personal profit
Efficient management
Limited liability

#6. Non-Banking Financial Corporation

NBFC or non-banking financial corporation is a specific type of company that deals with finance. Basically, it offers shadow banking services to their clients without having a banking license. Generally, the Reserve Bank of India (RBI) regulates the working and operations of NBFCs within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act. Read More…

#7. Joint Hindu Family Business

In JHF business, there must be at least two members of the family, and family should have some ancestral property. It is not created by an agreement but by operation of law. The JHF business is a jointly owned business. Hindu Succession Act 1956 governs this type of organization in India. Generally, the senior most member of the family (Karta) manages the business. Other members do not have the right to participate in the management. The Karta has the authority to manage the business as per his own will. Additionally, no one can raise question about his ways of managing. If the coparceners are not satisfied, they can dissolve the HUF status of the family by mutual agreement.

Advantages  Disadvantages
 Assured share in profits  Limited resources
Quick decision Lack of motivation
Limited liability of members Scope of misuse of power
Tax benifits Instaility

#8. Co-operative Organization

The term cooperation means working together. So those who want to work together with some common economic objectives can form a society. Basically, it is termed as a cooperative society. The Section 4 of the Indian Cooperative Societies Act 1912 defines
Cooperative Society as “a society, which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles”. In India, you can register cooperative societies under the Cooperative Societies Act 1912 or under the State Cooperative Societies Act. Basically, you can register the Multi-state Cooperative Societies under the Multi-state Cooperative Societies Act 2002. Once registered, the society becomes a separate legal entity and attain certain characteristics. Some of the different types of co-operative organizations are Consumers’ cooperative societies, Producer’s cooperative society, Marketing cooperative society, Housing cooperative society, Farming cooperative society, Credit cooperative society.

Advantages Disadvantages
Easy to form Limited capital
Limited liability Lack of managerial expertise
Open membership Lack of motivation
State assistance Lack of interest
Tax concession Corruption
Democratic management

Here in this article, we have detailed the 8 forms of business organization in India commonly found. You must understand the advantages and disadvantages of the different forms of business organizations clearly. Basically, it will help you in taking the right decision in terms of forming your own enterprise.

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