Definition of Ownership Structure

Choice of Organisation

Every entrepreneur has to be decide, the nature ownership of his organization which in turn helps to determine the risk, responsibility and control of the entrepreneur as well as the division of profits. The right form of organsiation can help the enterprise not only through initial success but in later growth too. There are four main forms of organization viz., Sole Trader, Partnership, Joint Stock Company and Co-operative Organisation. A brief description of these organsiation are given below.

Sole Properitorship

Sole Proprietorship is the simplest and oldest form of ownership organsiation. It is a business owned and controlled by one person. The individual may borrow money and employ assistants. But he/she alone is responsible for the results of the business. The individual who establishes it is known as sole proprietor or sole trader.

It is suitable in the following cases:

Where small amount of capital is required

Where quick decisions are very important.

Where limited risks are involved

Where personal attention to invidual tastes and fashions of customers is required.

Where the demand is local, seasonal or temporary

Where fashions changes quickly.

Where the operation is simple and does not requires skilled management.

Thus, sole trader is a comman form of organization in retail trade, professional firms, hoursehold and personal services. This form of organsiation is quite popular in our country. It accounts for the largest number of business establishments in India, despite its limitations.

Partnership

It is relationship between person who have agreedto share the profits of a business carried on by all or anyone of them actinag for all. It is an agreement among two or more or more persons to carry on jointly a lawful business and to share the profits arising therefrom. Persons who enter into such agreement are known individually as partners and collectively firm.

A Partnership firm can be formed through an agreement among two or more persons. The agreement may be oral or in writing. Such a written agreement among partners is known as Partnerhip Deed. It must e signed by all the partners and should be properly stamped. It can be altered with the mutual consent of all the partners.

Partnership firms may be registered or un registered. It can be registered with the Registrar of firms appointed by the Government. Registration is not compulsory but helps to get concessions or identity when comparing to unregistered firm.

The partnership form of business ownership enjoys the following advantages:

Ease of formation

Larger financial resources

Flexibility of operations

Specialisation and balanced approach

Protection of minority interest.

Personal incentive and supervision

Capacity for survival

Better human and public relations

Business secrecy could be maintained.

This form of organisation has also certain shortcomings

Unlimited liability

Limited resources

Risk of implied agency

Lack of harmony

Lack of continuity

Public distrust

Non-transferability of interest.

The foregoing limitations reveals that partnership form of organization is appropriate for medium-sized business that requires limited captical, pooling of skills and judgement and moderate risks. Small scale industries, whole sale and retail trade and small service concerns like transport agencies, real estate brokers, professional firms like chartered accountants, doctors etc.

Joint Stock Company

The company form of organization was evolved to overcome the limitations of sole trader and partnership of organsiation. Joint Stock Company has become the dominant form of ownership for large scale enterprises because it enables collection of vast financial and managerial resources with provision for limited liability and continuity of operations.

A Joint Stock Company is an incorporated and voluntary association of individuals with a distinctive name, pepectual succession, limited liability and common seal, and usually having a joint capital dividied into transferable shares of a fixed value. Thus, it is an artificial person created by law. It can act on its name and others also can act to it.

Private Company is a company of organsiation which by its articles of association restricts the rights of its members to transfer shares if any, limts the number of its members to 50 and prohibits any invitation to the public to subscribe share capital.

Public limited company is one which is not a private company. Ie. It can exercise all the three rights given above could not be exercised by the private company.

Private company combines the advantages of both partnership and public sector companies. At the same time, it is free from excessive government regulation and progressive income tax liability.

The company form of ownership is ideally suited to the following type of business:

Heavy or basic industries like ship-building, coach manufacturing which requires huge capital.

Large scale operations like departemental stores, chain stores etc.

The line of business involves great uncertainity or heavy risk

The law makes the company organsation obligatory eg. Banking, insurance etc.

The owners of the business want to enjoy limited liability.

The choice of the form of ownership is dictated by several factors as given below:

Nature of business - Service, trade, manufacturing

Scale of operations – Volume of business

Degree of direct control desired by owners.

Amount of capital required.

Degree of risk and liability and the willingness of owners to assume personal liability for debts of business.

Division of profits among the owners.

Length of life desired by the business.

Relative freedom from government regulations.

Scope and plan of internal organization.

Tax liability factor

These factors are highly inter connected and intertwined. Therefore, an entrepreneur should not consider them in isolation.