Forms of Business Organizations Introduction • After identifying the business in any field e.g., Insurance, it is necessary then to have a legal entity to be known in the society. The legal entity can be in any form of a business organization. • The various forms of organization are as follows: • Sole proprietorship • Partnership • Co-operative Society • Joint stock company (Private and Public) • Corporation SOLE PROPRIETORSHIP • The sole proprietorship is a form of business that is owned, managed and controlled by an individual. • He must arrange capital for the business, and he alone is responsible for its management. • He is therefore, entitled to the profits and must bear the loss of business, however, he can take the help of his family members and make use of the services of others such as a manager and other employees. • It is the simplest and most easily formed business organization. This is because not much legal formality is required to establish it. Individual Initiative Risk Bearing Features of Sole Proprietorship Management and control Minimum government regulations Unlimited liability Secrecy Easy formation Better Control Merits of Sole Proprietorship Sole beneficiary of profits Benefits of small-scale operations Inexpensive Management Limitation of management skills Limitations of Sole Proprietorship Limitation of Resources Unlimited liability Lack of continuity PARTNERSHIP • Partnership is an association of persons who agree to combine their financial resources and managerial abilities to run a business and share profits in an agreed ratio. • Since the resources of a sole proprietor to finance, and his capacity to manage a growing business is limited, he feels the need for a partnership firm. • Partnership business, therefore, usually grows out of the need for expansion of business with more capital, better supervision and control, division of work and spreading of risks. • A partnership firm can be formed with a minimum of two partners, and it can have a maximum of twenty partners. Features of Partnership • • • • • • • • • Existence of an agreement Engagement in business Sharing of profits and losses Agency relationship Unlimited Liability Common Management Restriction on transferability of share Registration Duration Formation and Registration STEP 1 CHOOSING THE PARTNERSHIP NAME STEP 2 PREPARE A PARTNERSHIP DEED STEP 3 REGISTER PARTNERSHIP DEED WITH RJSC • Partnership deed lays down the terms and conditions of partnership and the rights, duties and obligations of partners. • The following points are generally covered in the deed: Partnership Deed The nature of business; Name of the firm and the place where its business will be carried on; Amount of capital to be contributed by each partner; Duties, powers and obligations of all the partners; Method of prepari ng accounts and arrangement for audit; Whether loans will be accepted from a partner over and above the capital also, if so, at what rate of interest; The amount to be allowed as private drawings by each partner and the interest to be charged thereon; The ratio in which profits are to be shared; Whether a partner can be expelled and, if so, the procedure for the same; Method for the settlement of disputes. Registration of firm • A Pa r t n e rs h i p F i r m i s fo r m e d u n d e r t h e provision of the Partnership Act 1932. • RJSC (The Registrar of Joint Stock Companies and Firms) is the sole authority to Register Partnership Firm in Bangladesh. • The partnership deed and filled up form should be filed with RJSC. • The application should state the following: (i) Name of the firm. (ii) The principal place of business of the firm. (iii) The name of any other place where the firm is to carry on business: (iv) Date of admission of the partners in the firm. (v) Names and permanent addresses of the partners. (vi) Duration of the firm. Consequences of NonRegistration An unregistered firm suffers from the following serious disabilities: • A partner of an unregistered firm can not file a suit against the firm or any other partner for enforcing his right arising out of the contract. • An unregistered firm cannot file suit against any third party for the recovery of the claims. • Such a firm also cannot file a suit against any partner. Types of Partnership Partnership at-will Particular partnership Partnership for a fixed Types of Partners • Active Partners • Sleeping or dormant partners • Others • Nominal Partners • Partners by holding out Merits of Partnership Ease in formation Pooling of financial resources Pooling of managerial stalls Balanced business decisions Sharing of risks Limitations of Partnership Uncertainty of existence Risks of implied authority Risks of disharmony Difficulty in withdrawal from the firm Lack of institutional confidence Difficulties of expansion CO-OPERATIVE ORGANISATION • It is a voluntary association of persons for mutual benefit and its aims are accomplished through self help and collective effort. • The main principle underlying a cooperative organization is mutual help, i.e., each for one and all for each. • A minimum of 10 persons are required to form a co-operative society. Co-operative Society vs. Partnership In partnership, mutual benefit is restricted to partners only, but in a co-operative society it extends to its members as also the public. Besides, partnership requires the existence of some business activity whereas a cooperative may be formed whenever individuals have common needs, which are difficult to fulfill single-handed. Also, registration is optional in the case of partnership, but it is compulsory for a co-operative society. Type of Co-operative Societies Co-operative societies may be classified into different categories according to the nature of activities performed by them. The main types of co-operative societies are: • Consumers’ co-operative societies. • Producers’ co-operative societies. • Co-operative marketing societies. • Co-operative credit societies. • Co-operative farming societies. • Co-operative housing societies. Voluntary association Equal voting rights Characteristics of Co-operative Organization Separate legal entity Service motive Distribution of surplus Easy to form Open membership Merits of Cooperative Organizations Democratic management Limited liability Stability Economical operations Government patronage Limited capital Inefficient management Limitations of Co-operative Organizations Absence of motivation Differences and factionalism among members Rigid rules and regulations COMPANY • The company form of organization is most suitable for organizing business activities on a large scale as it does not suffer from the limitations of capital and management of other forms of organization. • A company is defined as a voluntary association of persons having separate legal existence, perpetual succession and a common seal. • As per the definition, there must be a group of persons who voluntarily agree to form a company. COMPANY • Once formed the company becomes a separate legal entity with a distinct name of its own. • Its existence is not affected by change of members. • It must have a seal to be imprinted on documents whenever required. The capital of a company consists of transferable shares, and members have limited liability. Public vs. Private Public vs. Private Features of a Company • • • • • • • Registered body Distinct legal entity Artificial person Perpetual succession Common seal Limited liability Transferability of shares Merits of Company • • • • • • • • • • • Collection of huge financial resources Limited liability Free transferability of shares Durability and stability Growth and expansion Efficient management Public confidence Social benefits Democratization of management Dispersal of ownership Assumption of social responsibilities Limitations of Company • • • • • • • • • Lengthy and expensive legal procedure Excessive government regulations Lack of incentive Delay in decision-making and action Conflict of interest Oligarchic management Speculation Growth of monopolistic tendencies Influencing government decisions Corporation A business that is chartered by a state and legally operates apart from its owners. Types of Corporations • C - c o r p o rat i o n : T h e m o st c o m m o n fo r m o f corporation. It protects the entrepreneur from being personally sued for the actions and debts of the corporation. • Subchapter S corporation: A corporation that is taxed like a sole proprietorship or partnership. • Nonprofit corporation: Legal entities that make money for reasons other than the owner’s profit. • Limited Liability Company (LLC): A new form of business ownership that provides limited liability and tax advantages. Advantages of Corporations • It can raise money by issuing shares of stock • It Offers owners limited liability. Owners are liable only up to the amount of their investments. • People can easily enter or leave the business by buying or selling their shares of stock. • The business can hire experts to professionally manage each aspect of the business. Disadvantages of Corporations • Legal assistance is needed to start a corporation. • Start-up is costly. • C o r p o rat i o n s a re s u b j e c t to m o re gove r n m e nt regulations than partnerships or sole proprietorships. • A lot of paperwork is involved in running a corporation. • Income is taxed twice. Alternate approaches to starting a business 1 2 3 Existing businesses already have customers, suppliers, and procedures. Advantages of buying an existing business Seller of the business may be willing to train the new owner. There are existing financial records. Financial arrangements may be easier. Business may be for sale because it is not making a profit. Disadvantages of buying an existing business Problems may be inherited with the purchase of an existing business. Many entrepreneurs may not have the capital needed to purchase an existing business. Family Business • Family business has been as common in the Bangladesh like elsewhere in the world. • A family business can Simply be defined as a one that includes two or more members of a family with financial control of the company. Characteristics of Family Business A group of people belonging to one or more families run one business enterprise. Position in family business is influenced by the relationship the family members enjoy among themselves. Family exercises control over business in the form of ownership or in the form of management of the firm where family members are employed on key positions. Family exercises the influence on the firm's policy direction in the mutual interest of family and business. The succession of family business goes to the next generation. Types of Family Business • Family-owned Business • Family-owned and Managed Business • Family-owned and Led Business Advantages of Family Business • Common values • Strong commitment • Loyalty • Stability • Decreased costs Disadvantages of Family Business • Risk of ownership • Controlling ambiguity • The subtle messages of buy/sell agreement • Inability of the shareholders to cash out of the family business Franchising • The word franchise comes from an old dialect of French and means “privilege” or “freedom.” • Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty Franchise systems A product and trademark franchise is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of dealers or distributors. In a business format franchise, the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance. Steps to Franchising a Business Good work ethic Ability to follow instructions Qualities to Look for in Prospective Franchisees Ability to operate with minimal supervision Team oriented Experience in the industry in which the franchise competes Adequate financial resources and a good credit history Ability to make suggestions without becoming confrontational or upset if the suggestions are not adopted Ability to represent the franchisor in a positive manner Ways Franchisors Can Develop Their Franchisees’ Potential Provide Provide mentoring that supersedes routine training Keep Keep operating manuals up-to-date Keep Keep product, services, and business systems up-to-date Solicit Encourage Maintain Solicit input from franchisees to reinforce their importance in the larger system Encourage franchisees to develop a franchise association Maintain the franchise system’s integrity Advantages of Buying a Franchise • A proven product or service within an established market • An established trademark or business system • Franchisor’s training, technical expertise, and managerial experience • An established marketing network • Franchisor’s ongoing support • Availability of financing • Potential for business growth Disadvantages of Buying a Franchise • Cost of the franchise • Restrictions on creativity • Duration and nature of the commitment • Risk of fraud, misunderstandings, or lack of franchisor commitment • Problems of termination or transfer • Poor performance on the part of other franchisees • Potential for failure Seven Steps in Purchasing a Franchise
