Forms of business organisation

The essentials

An entrepreneur must decide the legal form of the enterprise. The choice affects who owns and controls the business, how much risk the owners bear, how easily capital can be raised and how long the business can continue.

• Sole proprietorship: owned, managed and controlled by one person who takes all the profit and bears all the risk. Easy to start with few formalities. The owner has unlimited liability, and the business has no separate legal identity, so continuity depends on the owner.
• Partnership: two or more persons agree to share the profits of a business carried on by all or any of them acting for all. It is governed by the Indian Partnership Act, 1932. Partners usually have unlimited liability, and each partner is an agent of the firm (mutual agency).
• Joint Hindu family business: run by members of a Hindu undivided family; the eldest member (karta) manages it.
• Cooperative society: a voluntary association of members who join to serve their common interest; follows "one member, one vote".
• Company: an artificial person created by law, governed by the Companies Act, 2013. It has a separate legal entity, limited liability of members and perpetual succession. A private company needs at least 2 members (maximum 200); a public company needs at least 7 members. A one person company has a single member.
• Limited liability partnership (LLP): combines the flexibility of a partnership with limited liability; governed by the LLP Act, 2008.

Key points

• Factors in choosing a form: cost and ease of formation, liability, continuity, capital required, managerial ability needed, degree of control, and legal regulation.
• Small, low-risk ventures often start as sole proprietorships; ventures needing large capital usually choose the company form.

Common mistakes

• Saying a partner has limited liability in an ordinary partnership firm. Liability is unlimited.
• Forgetting that the death of a shareholder does not end a company (perpetual succession).