Business organizations, as known, are the places where the businesses are conducted. What is probably not known is – there can be a varied type of 10 business structures! While the most prevalent six to seven forms of business organizations will be prioritized in this discussion.
Knowing about the business organization is the utmost for a business aspirant student as this is the basic fundamental by which he or she may decide to structure his or her own business. Thus, let us delve into the subject matter and know the various forms of business organizations.
Factors Affecting the Business Forms
Business organizations can be of different types, depending upon factors like their nature, the extent of operation, ownership, legalities, terms, financial structure, liabilities, etc. The form of a business is likely to have long-term impacts on the company. Thus, the members of an organization must choose wisely as to which sort of business would be ideal for them.
The primary aspect, based on which forms of business organizations are decided, is its characteristics. Various factors determining the character of business include:
Ease of Formation
Capital or Financial Requirements
Nature of Liability
Stability and Continuity
Flexibility to Conduct Operations.
The Types of Business Structures
Depending on the factors mentioned above, there can be seven different forms of business organizations. They are as follows:
Hindu Undivided Family
Corporations or Statutory Bodies
LLP (Limited Liability Partnerships)
But if we are to consider the three major forms of business organizations, it would include sole proprietorship, corporations, and partnerships.
The One Who Goes Solo - Sole Proprietorship
The sole proprietorship of a company suggests that the complete ownership of that organization lies with a single person. This is one of the primary forms of business organizations where an individual not only owns the company wholly but also manages it single-handedly. Here, the business organization and the owner are a single entity.
A sole proprietorship is among the simplest forms of business organization, which is why it has minimal or no registration formalities. This is the ideal form of organization for small or medium-scale businesses. The biggest advantage of these business organizations is that the owner gets to access the entire incentive. He is not liable to share the profits with anyone else. However, a huge amount of personal liability can be seen as a setback in these business organizations.
The Bodies Formed by the Parliament of India - Corporations or Statutory Bodies
A statutory body means any such authority or organization which is non-constitutional. Such bodies have been set up by the parliament, and hold power to take decisions on behalf of an entire nation. Some notable examples of statutory bodies in India are:
National Green Tribunal
National Commission for Women
National Human Rights Commission
National Commission for Backward Classes
National Law Commission
Armed Forces Tribunal
On the other hand, corporations are such forms of business organizations that consist of many shareholders. A corporation has the legal authority to act as a single entity. It usually has a board of directors (elected by all the shareholders), led by a president. The board of directors is authorized to make management decisions. To set up this legal form of business organization requires proper paperwork and lawful proceedings.
The Partners Business - Partnerships
If we consider the corporate scenario in India, companies set up on partnership deals are the most popular and basic form of business organization. A partnership is a mutual agreement between two or more parties that agree to carry out a common business. Parties entering into a partnership could include individuals, companies, schools, governments, etc.
This form of business organization has to follow the norms specified under the Indian Partnership Act of 1932. Such entities are known as partnership firms. Here, the partners work towards the common goal of business, which is profit.
Businesses run on charitable or non-profit causes cannot be considered partnership firms. Partnerships happen to be among the 3 main forms of business organizations, and their nature is determined by the types of partners included.
Exists Only in India - HUF or Hindu Undivided Family Business
This is a special form of business entity that is limited only to India. Such forms of business organizations are governed by the Hindu law prevalent in the country. Any member of a Hindu Undivided Family can co-own the business owned by that family. These members will be known as coparceners in the business. The head of a Joint family Business in India is called the ‘Karta’. He usually holds full control of the management and finance of the business.
Sharing the Bread - Companies
“Com” means ‘together’ and “Panies” means ‘bread’. The Indian Companies Act of 2013 defines different types of companies as different forms of business organizations. It is not mandatory for a company to be multinational or operate in different locations. It can be a small-scale business or even a start-up initiative.
As per the Indian Companies Act, a company can either be private or public. Private companies are the ones in which the minimum paid-up share capital has to be Rs.1 lakh. On the other hand, public companies are separate legal entities that must have a paid-up share capital of at least Rs.5 lakh. The shares of these companies can be owned by members of the public.
Common Interest and Benefit Type Business - Co-operative Societies and Trusts
A cooperative society is a type of business organization that combines joint ownership with shared leadership. Such forms of business organizations are common in sectors like healthcare, finance, food, agriculture, and so on. Co-operative societies and trusts work towards the welfare of a section of people.
A Blend of Company and Partnership - Limited Liability Partnerships
This form of business organization is operated by organizations facing troubles of several liabilities in the business. LLP or Limited Liability Partnerships enable partners to hold separate obligations in business. Here, the partners continue to share the profits, just like a regular partnership firm. But unlike regular firms, the partners in LLP can choose the profit-sharing ratio by themselves. In this form of business organization, the minimum number of partners has to be two.