A business is an activity that is carried on with an intention of earning profits. It has different operations involved like production, marketing & finance. The finance function is the mostportant function and greatly affected by the forms of organization. The basic formsbusiness organizations are:
- Proprietary firms.
- Partnership firms &
- Joint stock companies.
The proprietary firm is the firm in which only one person is the owner, who is called as « proprietor ». He is the direct person of profits & losses. He has the right to take the decisions individually. The following are the pros & cons:
- Proprietary firms are the most easiest & economical form of business to form and operate.
- The proprietor can be act as Manager and he has right of freedom to take decisions.
- This is very suitable where the size of business is small and.
- A proprietary firm does not require submitting more number of documents to the government.
- A proprietary firm does not have any legal status.
- The proprietor may not be capable to invest further, when the business is in downfall or complex stages.
- These are unlimited liability firms & the proprietor’s property will always be at stake, if the liability is more than assets.
- The proprietor needs to pay higher taxes, as he is the direct person, who is enjoying the profits.
- Transferring of business is not easy.
The firm, in which the partners are more than 2 and less than 20 with an official written down document called « Partnership deed » or « Partnership agreement » is called as partnershipfirm. It is a contract and relationship between the partners. They will decide the percentage of investment, profit share and will also include the same in the agreement. The advantages and disadvantages are:
- Partnership firms are easy and economical to operate and form.
- As the numbers of partners are more, the capacity of the business to handle more complex business is better, when compared to proprietary firms.
- The tax structure is at a flat rate of 35% and the following are the assumptions, while calculating the tax:
a) Interest paid to partners on the amount invested in the company. But the rate of interest should not exceed 12% per annum.
b) Remuneration paid to the partners in the form of salary, bonus, commission etc. However, the partners should be working partners, i.e., the person who is involved in day-to-day activities. Section 44AA of Income tax Act, 1961 says that the remuneration paid is depended and decided on the basis of its « Book Profits ». Also, the same differs from a professional firm to a business firm.
- Nominal government regulations.
- The partnership firm does not have any legal status.
- The retirement or death of a partner leads to dissolution of the partnership firm.
- Decision making to improve the capacity of business or to raise funds is limited and time taking.
- Partnership firm is an unlimited liability organization. Incase of losses, all the partners are liable to clear off the debts.
- Transfer of ownership is not easy.
Joint stock Company:
The company, which has more number of partners, i.e., shareholders, is called as Joint Stock Company. This form of organization raises its funds by issuing shares that carry a denomination value called as « Face Value » or « Nominal value ». Each individual can participate in the capital requirement of the organization by purchasing the shares. He can exercise his rights through voting. The features of a Joint stock company are:
ü The joint stock companies will gain legal ship by registering with Companies Act, 1956, that regulates the operations of joint stock companies in India. As a legal entity, the company can enter into any agreement, purchase or sell assets, etc.
ü These are limited liability organizations. Shareholders are not responsible and their assets will not be on stake, in case of liabilities are more of the company.
ü Even though the shareholders are owners, they will not participate in day-to-day activities of the company.
ü It is an artificial legal person & allowed to sue or to be sued. It can also participate in any agreement, if necessary.
Following are the advantages and disadvantages:
- Possibilities of raising funds, as the number of contributing persons are more.
- As the company is a legal entity, shareholders assets will not be on stake.
- Transfer of ownership is easier, when compared to proprietary and partnership firms. (In case of private limited company, the shares are not easily transferable.)
- The company needs to go through more number of legal and procedural formalities, as it is going to act as a legal entity.
- Double taxation is another disadvantage. The company needs to pay tax for the profits earned & again the individual will be taxed for the income.