Business Unit-1

Business organization

Nature of Business:

What is a business?
Ø The term business comes from busyness or the state of being busy-any activity a man is busy about.
Ø Business is an economic activity with the object of earning an income i.e. profit and thereby accumulate wealth. The economic activity must be regular and continuous.
— It involves:-
Ø Production of goods with a view to selling them at profit.
Ø Merely purchase of goods to resell at a profit.
The real object of any business is to create a customer and to ensure repeat sale which is possible only when the customer can get due service and satisfaction in the marketplace where exchange takes place in monetary terms.

Features of business:

1. Production or acquisition of goods
2. Dealing in goods and services.
3. Recurrence of transactions.
4. Profit motive.
5. The element of risk.

Forms of business organization:

1. Sole proprietorship
2. Partnership
3. Joint stock company

1. Sole proprietorship

— Definition :
Ø A sole proprietorship is a business owned and run by an individual. A person who does business for himself is engaged in the operation of a sole proprietorship. Anyone who does business without formally creating a business organization is a sole proprietor.
Ø It is not a separate legal entity like a partnership or a corporation. No legal formalities are necessary to create a sole proprietorship other than appropriate licensing to conduct business and registration of a business name.

Characteristic of a sole proprietorship:

1. Business ownership
2. No legal status of the business.
3. Unlimited liability
4. Taxation liability – owner is liable to pay taxes to income tax department
5. Secrecy
6. Flexibility
7. Risk

Merits and demerits of a sole proprietorship:

— Merits
1. sole benefits
2. Minimal legal formalities
3. Secrecy
4. Personal contact
5. Freedom of action
6. Flexible
— Demerits
1. Lack of enough capital to expand the business.
2. Unlimited liability
3. Poor decision making
4. Lack of continuity

2. Partnership Business.

• Definition :

Ø A legal form of business operation between two or more individuals who share management and profits.
Ø According to J.L Hanson, ‘ a partnership is a form of business organization in which two or more persons up to a maximum of twenty join together to undertake some form of business activity .’

Features of partnership:

1. More person
2. Profit and loss sharing
3. Contractual relationship
4. Existence of lawful business
5. Utmost good faith and honesty
6. Restriction on transfer of share.

Advantages

1. Easy formation
2. More capital available
3. Diffusion of risk
4. Flexibility
5. Tax advantage- tax rate is lower than sole

Disadvantage

1. Unlimited liability
2. Divided authority
3. Lack of continuity
4. Risk of implied authority.

3. Joint stock company

— A joint stock company is a voluntary association of persons to carry on the business. It is an association of persons who contribute money which is called capital for some common purpose. These persons are members of the company. The portion of the capital to which each member is entitled is his share and every member holding such share is called shareholders and the capital of the company is known as share capital.

Characteristics of Joint-stock

1. Artificial person: no physical attributes of the natural person and created by the law.
2. Separate legal entity
3. Perpetual existence: its existence is not affected by the death, insolvency or retirement of its member.
4. Limited liability of shareholders
5. Common seal
6. Transferability of share
7. Large capital

Advantages of Joint Stock

1. Limited liability
2. Perpetual existence
3. Large-scale operation
4. Transferability of shares
5. Raising of funds.

Disadvantages of Joint Stock

1. Formation not easy.

2. Double taxation: company tax and shareholders tax for earned income.
3. Control by board of directors
4. Excessive government control
5. Delay in policy decisions

The End

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