Business management notes

FORMS OF BUSINESS ORGANISATION
Have you ever thought who brings the required capital, takes the responsibility of arranging
other resources, puts them into action, and coordinates and controls the activities to earn
the desired profits? If you look around, you will find that a small grocery shop is owned
and run by a single individual who performs all these activities. But, in big businesses, it
may not be possible for a single person to perform all these activities. So in such cases two
or more persons join hands to finance and manage the business properly and share its
profit as per their agreement. Thus, business organisations may be owned and managed
by a single individual or group of individuals who may form a partnership firm or a joint
stock company. Such arrangement of ownership and management is termed as a form of
business organisation. A business organisation usually takes the following forms in India:
(1) Sole proprietorship
(2) Partnership
(3) Joint Hindu Family
(4) Cooperative Society
(5) Joint Stock Company

SOLE PROPRIETORSHIP

Definition of Sole Proprietorship
J.L. Hanson: “A type of business unit where one person is solely responsible for
providing the capital and bearing the risk of the enterprise, and for the management
of the business.”
Thus, ‘Sole Proprietorship’ from of business organisation refers to a business
enterprise exclusively owned, managed and controlled by a single person
with all authority, responsibility and risk.
Now you can workout certain characteristics of sole proprietorship form of business
organisation.
CHARACTERISTICS OF SOLE PROPRIETORSHIP FORM OF BUSINESS
ORGANISATION
(a) Single Ownership: The sole proprietorship form of business organisation has a single
owner who himself/herself starts the business by bringing together all the resources.
(b) No Separation of Ownership and Management: The owner himself/herself manages
the business as per his/her own skill and intelligence. There is no separation of ownership
and management as is the case with company form of business organisation.

(c) Less Legal Formalities: The formation and operation of a sole proprietorship form
of business organisation does not involve any legal formalities. Thus, its formation is
quite easy and simple.
(d) No Separate Entity: The business unit does not have an entity separate from the
owner. The businessman and the business enterprise are one and the same, and the
businessman is responsible for everything that happens in his business unit.
(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the
same time, the entire loss is also borne by him. No other person is there to share the
profits and losses of the business. He alone bears the risks and reaps the profits.
(f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if
his business assets are not enough to pay the business liabilities, his personal property
can also be utilised to pay off the liabilities of the business.
(g) One-man Control: The controlling power of the sole proprietorship business always
remains with the owner. He/she runs the business as per his/her own will.

MERITS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION
(a) Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship
form of business organisation. No legal formalities are required to be observed. Similarly,
the business can be wind up any time if the proprietor so decides.
(b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the
affairs of the sole proprietary organisation. So he/she can take quick decisions on the
various issues relating to business and accordingly prompt action can be taken.
(c) Direct Motivation: In sole proprietorship form of business organisations. the entire
profit of the business goes to the owner. This motivates the proprietor to work hard
and run the business efficiently.
(d) Flexibility in Operation: It is very easy to effect changes as per the requirements of
the business. The expansion or curtailment of business activities does not require many
formalities as in the case of other forms of business organisation.
(e) Maintenance of Business Secrets: The business secrets are known only to the
proprietor. He is not required to disclose any information to others unless and until he
himself so decides. He is also not bound to publish his business accounts.
(f) Personal Touch: Since the proprietor himself handles everything relating to business,
it is easy to maintain a good personal contact with the customers and employees. By
knowing the likes, dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly, as the employees are few and work directly under
the proprietor, it helps in maintaining a harmonious relationship with them, and run the
business smoothly.

LIMITATIONS OF SOLE PROPRIETORSHIP FORM OF BUSINESS
ORGANISATION
(a) Limited Resources: The resources of a sole proprietor are always limited. Being
the single owner it is not always possible to arrange sufficient funds from his own
sources. Again borrowing funds from friends and relatives or from banks has its own
implications. So, the proprietor has a limited capacity to raise funds for his business.
(b) Lack of Continuity: The continuity of the business is linked with the life of the
proprietor. Illness, death or insolvency of the proprietor can lead to closure of the
business. Thus, the continuity of business is uncertain.
(c) Unlimited Liability: You have already learnt that there is no separate entity of the
business from its owner. In the eyes of law the proprietor and the business are one and
the same. So personal properties of the owner can also be used to meet the business
obligations and debts.
(d) Not Suitable for Large Scale Operations : Since the resources and the managerial
ability is limited, sole proprietorship form of business organisation is not suitable for
large-scale business.
(e) Limited Managerial Expertise: A sole proprietorship from of business organisation
always suffers from lack of managerial expertise. A single person may not be an expert
in all fields like, purchasing, selling, financing etc. Again, because of limited financial
resources, and the size of the business it is also not possible to engage the professional
managers in sole proprietorship form of business organisations.

FORMATION OF SOLE PROPRIETORSHIP FORM OF BUSINESS
ORGANISATION
It is very simple to establish a sole proprietary concern. Any person who is willing to start
a business and has the necessary resources can set up this form of business organisation.
To start and operate the business in this form, practically does not require any legal formalities
to be fulfilled. In some cases like restaurant, chemist shop etc. however, permission from
the competent authority is required to be obtained before starting the business. Similarly,
setting up a factory may involve taking permission from the local authority. But, formation
of business unit as such does not involve any complexities.