4. The major forms of business organizations
In reality, the forms of business organizations are those legal forms according to which business is organized and run.
We can say that there are three major forms of business organizations: sole/single proprietorship, partnership and corporation. These forms of business organizations are classified according to the ownership. Consider each of them.
4.1. Sole/single proprietorship
It is natural to start with a sole/single proprietorship, because it is considered to
be the oldest and simplest form of business organizations.
By definition, a sole/single proprietorship is 1) an unincorporated business
owned by one person; 2) a form of business organization in which a single individual owns and manages the business, takes the profits and bears the losses.
When we speak of a proprietor, we always refer to the owner of a business. The word “proprietor” comes from the Latin word “proprietas” meaning “property”. Accordingly, we can say that a business is a kind of property.
A sole proprietor can run the business directly or can hire others to run it, but ultimately it is the sole proprietor’s decisions that determine the firm’s destiny. Typically, a sole proprietor performs most of the major functions, such as overall manager, sales manager and finance manager.
The example of a sole/single proprietorship:
Tom runs a grocery shop in the local market. He buys goods from the wholesale market and sells it to the customers as per their requirement. By doing so, he earns some profit. He started his business two years ago. Today, he is running his business successfully, earning a good profit, and is able to pay back the borrowed money. He has also employed two persons to help him in the shop. Tom says that he is the owner of a sole proprietor concern.
So, you can say that Tom is running a sole proprietorship business, and is known as a sole proprietor or a sole trader.
You probably have contact with many sole proprietorships every day without realizing it – owners of corner grocery stores, repair shops, dry cleaners, and so on. Many doctors, lawyers and accountants are sole proprietors (or sole traders).
4.2. Partnership
By a partnership is understood 1) a voluntary association of two or more persons to carry on, as co-owners, a business for profit; 2) an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit.
The persons, who form a partnership, are individually known as partners and collectively – a firm or partnership firm.
The example of a partnership:
A textile factory is going to be started in the nearby area where Bill is carrying on his business. As a businessman, he is now in a jubilant mood. He is thinking that once the textile factory is set up, he will get more customers; the sales will increase and he will earn more profit. But, for all these, he will have to expand his business, and for this he needs more money.
The major problem is how to arrange the additional funds. He has the option of getting loans from the banks. But the fear of loss comes to his mind again and again. He does not want to take that risk. Another option is that he may join hands with some other person. By doing so, more resources can be raised, work can be shared, and business can be run in a better way. The risk of loss will also be shared.
One day, Bill joins hand with Jack to start a big grocery shop. Here both Bill and Jack are partners who are running the partnership firm jointly. In fact, for all terms and conditions of their working, they have to sit together to decide about all aspects. There must be an agreement between them. When the agreement is in writing, it is termed as partnership deed (or deed of partnership).
Types of partnerships
There are two basic types of partnerships:
General partnership is a type of partnership in which each partner is fully active in the firm with a voice in its management. Each partner is an agent of the other partner or partners with full authority to act for the firm within the scope of its business activities.
Limited partnership is a special type of partnership in which the partners are not equal. One partner is called the general partner. This person (or persons) assumes all of the management duties and has full responsibilities for the debts of the limited partnership. The other partners are “limited” because all they do is contribute money or property. They have no voice in the partnership’s management. The advantage to the limited partners is that they have no liability for the losses beyond what they initially invest. The disadvantage, of course, is that they have no say in how the business is run.
In addition, partnerships can also be classified into a partnership for a fixed term (it is formed for a certain period of time, such as for 10 years) and a partnership at will (it is one without a definite period of existence and which can at any time be terminated by any of the partners).