Unit 2: Forms of Commercial

Organizations
Meaning, features, merits and limitations of the following
forms:
• Sole Proprietorship
• Joint Hindu Family Business

• Partnership – Partnership Deed (Main Clauses), Types of

Partners, Registration, & effects of non-registration
Co-operative Societies

• Private and Public Sector

• Multinational Enterprises: Meaning and Features

 Forms of commercial organization
• A commercial organization is simply a business
where the investors and employees share in the
primary objective of making a profit. The
company engages in some form
of commercial activity, such as selling products or
services, in exchange for payment.
• There are two forms of commercial organization.
They are:-
(1) Private Sector
(2) Public Sector
1) Private sector: Private sector is owned,
managed and controlled by private individuals
either individually or collectively. The following
are the forms of private sectors:-
• Sole Proprietorship
• Joint Hindu Family Business
• Partnership – Partnership Deed (Main
Clauses), Types of Partners, Registration, &
effects of non-registration Co-operative
Societies
• Multinational Enterprises
2) Public sector:

Is owned, managed and controlled by government. It is

also known as Government Enterprise. It existed due to
some of the limitation of private Sector. It has its own
rules and regulations. Following are the forms of Public
Sector:-

(i) Departmental Undertaking: These are run by the

government departments. The concerned minister is the
head of each department, such as Indian railway, Post
and Telegraph Department.
(ii) Public Corporation: These are autonomous (self
controlled) bodies established under special
legislative acts, for example:- Reserve Bank of India,
Life Insurance Corporation of India. These
corporations are formed for providing services to
the public & are managed efficiently by the board
of directors nominated by the government.

(iii) Government Companies: A government

company is one in which at least 51% of its paid up
capital is held either by the State Government or
Central Government or by both State and Central
Government, for example:- Bharat Heavy Electricals
Limited (BHEL), Indian Oil Corporation.
 Sole Proprietorship
A business owned , managed & controlled by a
single individual is known as a sole proprietorship.
It is also known as sole trader .
DEFINITION According to J.L. Hansen “ Sole trader
is a type of business unit where one person is
solely responsible for providing the capital , for
bearing the risk of the organization & for the
management of business .”
FEATURES
1. Single ownership : The sole proprietorship firm is
owned by a single individual only . All the capital is
supplied by the single individual from his own wealth .
2. Individual risk bearing : In sole proprietorship firm
whole risk is borne by a single individual only.
3. Quick Decision Making: no need to consult anyone.
4. Unlimited Liability: responsible for all debts, losses.
5. One man control : The proprietor of sole owner of the
firm has full control over it .
No legal formalities are required to start & manage the
business . Only a license is necessary in certain type of
business . The proprietor enjoy freedom of operation.
MERITS / ADVANTAGES
1. Easy to form & dissolve : A sole proprietorship
organisation is easy to form . No legal formalities
are involved in setting up this type of business .
He can close the business whenever without any
legal formality.
2. Quick Decision-making : A sole trader is not
required to consult anyone while taking
decision. Hence, he can take the decision on the
spot.
3.Secracy: can be maintained
4. Independent control: freedom of action
DEMERITS / DISADVANTAGES
1. Limited resources : In sole proprietorship firm finance is
supplied by the proprietor himself from his wealth or from
borrowings . These funds are not sufficient for large scale
business.
2. Unlimited Liability : In sole proprietorship firm the
proprietor is personally liable for all the debts of the
business
3. They often lack security or permanence

CONCLUSION Sole proprietorship is suitable form of business

for small scale enterprises . It is suitable for enterprises which
require personal attention and limited capital such as local
grocery shops , small bakery shops , tailoring shops , doctor
clinic etc.
 Joint Hindu Family Business
• HUF or Hindu Undivided Family is defined under the
Hindu Law as a family that consists of all persons lineally
descended from a common ancestor, including wives and
unmarried daughters. There have to be a minimum of
two people to constitute a family.
• Since the HUF is a separate entity, it can earn income
from all the above except income from salary.
• All income that arises on the investment of the HUF's
funds and utilization of its assets is regarded as income
and is separately assessed and taxed.
• HUF can be partitioned.
• This is actually a division of property where the share of
each member is determined.
TAX
• Though the HUF is taxed as separate entity,
the tax slab which is applicable to an
individual is applicable here too.
• All the income tax slabs and deductions and
exemptions available to individuals are also
available to the HUF.
Partnership – Partnership Deed (Main
Clauses),
• what is partnership ?
• "Partnership is the relation between two or more
persons who have agreed to share the profits as
well as loss of a business carried on by all or any
of them acting for all".
• Persons who have agreed into partnership with
one another are called individually ‘PARTNERS’
and the name under which their business is
carried on is called the In case of partnership firm
carrying on a banking business no. of partners 10
In case of partnership firm carrying on any other
business no. of partners 20
Types of Partner:
1. Active Partner:
1. Contributes in capital.
2. Participate in management.
3. Shares profits & losses.
4. Unlimited liability towards the creditors
2. Secret Partner
1. He is secret to world.
2. May or may not contribute in capital.
3. Does not take part in management.
4. Unlimited liability towards the creditors.
3. Nominal Partner:
1. He allows himself /herself to be represented
as a partner in a firm.
2. Does not contribute in a capital.
3. Does not take part in management.
4. Does not shares profits & losses.
5. Unlimited liability towards the outside
creditors.
4. Partner by estoppel or holding out:
• If a person, by his words or conduct, holds out
to another that he is a partner, he will be
stopped from denying that he is not a partner.
The person who thus becomes liable to third
parties to pay the debts of the firm is known
as a holding out partner.
• Usually this arises, when the outgoing partner
fails to give notice about his retirement
5. Minor as a partner:
At the time of creation of a firm a minor (i.e., a person
who has not attained the age of 18 years) cannot be one
of the parties to the contract. But under section 30 of the
Indian Partnership Act, 1932, a minor ‘can be admitted to
the benefits of partnership’, with the consent of all
partners. A minor partner is entitled to his share of profits
and to have access to the accounts of the firm for
purposes of inspection and copy.
6.Partner in profits only:
When a partner agrees with the others that he would
only share the profits of the firm and would not be liable
for its losses, he is in own as partner in profits only.
 Features of Partnership Firms:
• More Persons: As against proprietorship, there should be at
least two persons subject to a maximum of ten persons for
banking business and twenty for non-banking business to
form a partnership firm.
• Profit and Loss Sharing: There is an agreement among the
partners to share the profits and losses
• Contractual Relationship: Partnership is formed by an
agreement among the partners.
• Existence of Lawful Business: Partnership is formed to carry
on some lawful business and share its profits or losses. If the
purpose is to carry some charitable works, for example, it is
not regarded as partnership.
• Utmost Good Faith and Honesty: A partnership business
solely rests on utmost good faith and trust among the
partners.
• Unlimited Liability: Like proprietorship, each partner has
unlimited liability in the firm. This means that if the assets of
the partnership firm fall short to meet the firm’s obligations,
the partners’ private assets will also be used for the purpose.
• Restrictions on Transfer of Share: No partner can transfer his
share to any outside person without seeking the consent of all
other partners.
• Principal-Agent Relationship: The partnership firm may be
carried on by all partners or any of them acting for all. While
dealing with firm’s transactions, each partner is entitled to
represent the firm and other partners. In this way, a partner is
an agent of the firm and of the other partners.
 Advantages of Partnership Firms:
1. Easy Formation: Partnership is a contractual agreement between the partners to run
an enterprise. Hence, it is relatively ease to form. Legal formalities associated with
formation are minimal. Though, the registration of a partnership is desirable, but not
obligatory.
2. More Capital Available: sole proprietorship suffers from the limitation of limited
funds. Partnership overcomes this problem, to a great extent, because now there are
more than one person who provide funds to the enterprise. It also increases the
borrowing capacity of the firm.
3. Combined Talent, Judgment and Skill: All the partners are involved in decision
making. Usually, partners are pooled from different specialized areas to complement
each other. Thus, the old maxim of “two heads being better than one” aptly applies to
partnership.
4. Diffusion of Risk: You have just seen that the entire losses are borne by the sole
proprietor only but in case of partnership, the losses of the firm are shared by all the
partners as per their agreed profit-sharing ratios.
5. Flexibility: Like proprietorship, the partnership business is also flexible. The partners
can easily appreciate and quickly react to the changing conditions.
6. Tax Advantage: Taxation rates applicable to partnership are lower than proprietorship
and company forms of business ownership.
 Dis-advantages of Partnership Firms:
1. Unlimited Liability: In partnership firm, the liability of
partners is unlimited. Just as in proprietorship, the partners’
personal assets may be at risk if the business cannot pay its
debts.
2. Divided Authority: Each partner can discharge his
responsibilities in his concerned individual area. Disagreements
between the partners over enterprise matters have destroyed
many a partnership.
3. Lack of Continuity: Death or withdrawal of one partner
causes the partnership to come to an end. So, there remains
uncertainty in continuity of partnership.
4. Risk of Implied Authority: At times, an incompetent partner
may lend the firm into difficulties by taking wrong decisions.
Risk involved in decisions taken by one partner is to be borne
by other partners also.
• Partnership Deed:
The document containing the agreement in writing
amongst partners is called Partnership Deed. Thus,
partnership deed is a written agreement between
two or more persons for managing the affairs of a
partnership firm. The partnership Deed is to be duly
stamped as per the Indian Stamp Act, and duly
signed by all the partners.
Contents:
1. Name and address of a firm.
2. Nature of business.
3. Date of commencement of partnership.
4. Name, description and adddresses of partner.
5. Amount of capital to be contributed by a
partners.
6. Ratio in which profits or losses are to be shared by
a partners.
7. Partner is to be paid a salary, commission etc.
then how much?
8. Rules to be followed in case of admission,
retirement or death of a partner.
9. Interest on capital and interest on drawing.
10. Procedure for maintaining accounts and getting
them audited. The date on which accounts shall be
closed every year.
11. Method of solving disputes.
12. Procedure for dissolution of the firm.
 Other possible inclusions in
partnership deed
• Rate of interest, if any, on capital and drawings
• Allocation of work among partners
• Mode of valuation of goodwill
• Procedure for maintaining accounts and
getting them audited.
• Loans and advances by partners and rate of
interest payable on them.
 Creation of partnership Firms
Registration of a partnership firm means entering of
a firm's name in the Register of Firm kept with the
Registrar.
1. Fill The form.
2. Deposits of registration fees with Registrar of
Firms.
3. After approval will make an entry in the register
of firm.
4. And will issue a certificate of registration, and
this is a proof of existence of a firm.
limitations of a Non-Registered firm:
They can't file a suit against any third party for the
recovery of claims. Partner of unregistered firm
can't file a suit against the firm or any other
partner.
Procedure of Registration
Submission of applicant in prescribed form (signed
by all partners) to the Registrar of Firms.
It contain the following particulars: Name of the
firm Location of the firm Name of other places
where the firm carries on business Date of
admission of partners in the firm Names and
permanent addresses of the partner. Duration of
partnership
 Multinational Enterprises: Meaning and Features
• Meaning of Multinational Companies (MNCs):
A multinational company is one which is incorporated in one
country (called the home country); but whose operations
extend beyond the home country and which carries on
business in other countries (called the host countries) in
addition to the home country.
• It must be emphasized that the headquarters of a
multinational company are located in the home country.
Neil H. Jacoby defines a multinational company as follows:
• “A multinational corporation owns and manages business in
two or more countries.”

A multinational corporation is known by various names such

as: global enterprise, international enterprise, world
enterprise, transnational corporation etc.
Features of Multinational Corporations (MNCs):
Following are the salient features of MNCs:
(i) Huge Assets and Turnover:
Because of operations on a global basis, MNCs have huge physical and
financial assets. This also results in huge turnover (sales) of MNCs. In fact, in
terms of assets and turnover, many MNCs are bigger than national economies
of several countries.
(ii) International Operations Through a Network of Branches:
MNCs have production and marketing operations in several countries;
operating through a network of branches, subsidiaries and affiliates in host
countries.
(iii) Unity of Control:
MNCs are characterized by unity of control. MNCs control business activities
of their branches in foreign countries through head office located in the home
country. Managements of branches operate within the policy framework of
the parent corporation.
(iv) Mighty Economic Power:
MNCs are powerful economic entities. They keep on adding to their economic
power through constant mergers and acquisitions of companies, in host
countries.
(v) Advanced and Sophisticated Technology:
Generally, a MNC has at its command advanced and
sophisticated technology. It employs capital intensive technology
in manufacturing and marketing.
(vi) Professional Management:
A MNC employs professionally trained managers to handle huge
funds, advanced technology and international business
operations.
(vii)Aggressive Advertising and Marketing:
MNCs spend huge sums of money on advertising and marketing
to secure international business. This is, perhaps, the biggest
strategy of success of MNCs. Because of this strategy, they are
able to sell whatever products/services, they produce/generate.
(viii) Better Quality of Products:
A MNC has to compete on the world level. It, therefore, has to
pay special attention to the quality of its products.
Advantages of MNCs from the Viewpoint of Host Country:
(i) Employment Generation:
MNCs create large scale employment opportunities in host countries. This is a
big advantage of MNCs for countries; where there is a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
MNCs bring in much needed capital for the rapid development of developing
countries. In fact, with the entry of MNCs, inflow of foreign capital is
automatic.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are in a position to
properly utilise idle physical and human resources of the host country. This
results in an increase in the National Income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In
fact, MNCs are a vehicle for transference of technical development from one
country to another. Because of MNCs poor host countries also begin to
develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a
lot of research in management. In a way, they help to professionalize
management along latest lines of management theory and practice. This leads
to managerial development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition in the host countries. Local monopolies
of host countries either start improving their products or reduce their prices.
Thus MNCs put an end to exploitative practices of local monopolists. As a
matter of fact, MNCs compel domestic companies to improve their efficiency
and quality.
In India, many Indian companies acquired ISO-9000 quality certificates, due to
fear of competition posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the
standard of living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through
their international dealings, MNCs promote international brotherhood and
culture; and pave way for world peace and prosperity.
Advantages from the Viewpoint of the Home Country:
Some of the advantages of the MNCs from the
viewpoint of the home country are:
(i) MNCs usually get raw-materials and labour supplies
from host countries at lower prices; specially when host
countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in
host countries; and increase their profits. They usually
have good earnings by way of dividends earned from
operations in host countries.
(iii) Through operating in many countries and providing
quality services, MNCs add to their international goodwill
on which they can capitalize, in the long-run.
Limitations of MNCs from the Viewpoint of Host Country:
(i) Danger for Domestic Industries:
MNCs, because of their vast economic power, pose a danger to domestic
industries; which are still in the process of development. Thus MNCs give a
setback to the economic growth of host countries.
(ii) Repatriation of Profits: (sending profits to their country). MNCs earn huge
profits. Repatriation of profits by MNCs adversely affects the foreign exchange
reserves of the host country; which means that a large amount of foreign
exchange goes out of the host country.
(iii) Exploitation of People, in a Systematic Manner: MNCs join hands with big
business houses of host country and emerge as powerful monopolies. This leads
to concentration of economic power only in a few hands.
(iv) Danger to Independence: Initially MNCs help the Government of the host
country, in a number of ways; and then gradually start interfering in the political
affairs of the host country.
(v) Disregard of the National Interests of the Host Country: MNCs invest in
most profitable sectors; and disregard the national goals and priorities of the
host country. They do not care for the development of backward regions; and
never care to solve chronic problems of the host country .
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses
for a long while, in the hope of earning huge profits-once they have
ended local competition and achieved monopoly. This may be the
dirties strategy of MNCs to wipe off local competitors from the host
country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly.
They cause rapid depletion of some of the non-renewable natural
resources of the host country. In this way, MNCs cause a permanent
damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alien culture in host country to sell their
products. They make people forget about their own cultural heritage. In
India, e.g. MNCs have created a taste for synthetic food, soft drinks etc.
This promotion of foreign culture by MNCs is injurious to the health of
people also.
Limitations from the Viewpoint of the Home Country:
(i)There may be loss of employment in the home country, due
to spreading manufacturing and marketing operations in
other countries.

(ii) MNCs face severe problems of managing cultural diversity.

This might distract managements’ attention from main
business issues, causing loss to the home country.

(iii) MNCs may face severe competition from bigger MNCs in

international markets. Their attention and finances might be
more devoted to wasteful counter and competitive
advertising; resulting in higher marketing costs and lesser
profits for the home country.