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 organized 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 Type 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 the large size commonly demand set 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 proprietorships.
- 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.
List of 8 Different Forms of Business Organization
#1. Sole Proprietorship Company
The term ‘sole’ means single and ‘proprietorship’ means ‘ownership’. So, only one person is the owner of the sole proprietorship type of 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 a company form of business organization.
Find below the advantages and disadvantages of Sole Proprietorship:
| 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(OPC) 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 entrepreneurs. One can take the advantage of Limited liability and corporatization but be 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 the number of directors. However, as per the Act, the total number of directors shall not be more than 15.
Find below the advantages and disadvantages of One Person Company:
| Advantages | Disadvantages | ||||
| Organized for proprietorship | Suitable only for small business | ||||
| With compliance | Can not carry NBFC activities | ||||
| Limited liability protection to the owner | Can not be converted into a company under Section 8 of the Act. | ||||
| Legal status and social recognition | 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 loans 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 partner’s 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.
Find below the advantages and disadvantages of LLP:
| Advantages | Disadvantages |
| As many owners as needed | Some states do not allow |
| Much less liability in a partnership | Additional taxes |
| Tax benefits | 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 a partnership and a 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 another private company that is a subsidiary of the other public company.
Find below the advantages and disadvantages of Private Limited Company:
| Advantages | Disadvantages |
| Limited liability | Shares cannot be sold or transferred |
| Continuity of existence | Not allowed to invite public to subscribe to its shares |
| Minimum number of shareholders | |
| 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.
Find below the advantages and disadvantages of Public Limited Company:
| Advantages | Disadvantages |
| Continuity of existence | Scope for promotional frauds |
| A larger amount of capital | Undemocratic controls |
| Unity of direction | Scope for directors for personal profit |
| Efficient management | |
| Limited liability |
#6. Joint Hindu Family Business
In the JHF business, there must be at least two members of the family, and the family should have some ancestral property. It is not created by an agreement but by the 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 questions about his ways of managing. If the coparceners are not satisfied, they can dissolve the HUF status of the family by mutual agreement.
Find below the advantages and disadvantages of HUF:
| Advantages | Disadvantages |
| Assured share in profits | Limited resources |
| Quick decision | Lack of motivation |
| Limited liability of members | Scope of misuse of power |
| Tax benefits | Instability |
#7. 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 a cooperative society.
Section 4 of the Indian Cooperative Societies Act 1912 defines A 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 attains certain characteristics.
Some of the different types of cooperative organizations are Consumers’ cooperative societies, Producer cooperative society, Marketing cooperative society, Housing cooperative societies, Farming cooperative societies, Credit cooperative societies.
Find below the advantages and disadvantages of Forming Cooperatives:
| 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 |
#8. 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 its 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.
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.
Editorial Staff at NextWhatBusiness is a team of Business Consultants having years of experience in small and medium scale businesses.