DCM1104: Business Organisation Manipal University Jaipur (MUJ)

BACHELOR OF COMMERCE
SEMESTER 1

DCM1104
BUSINESS ORGANISATION

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DCM1104: Business Organisation Manipal University Jaipur (MUJ)

Unit 3
Forms of Business Organization - I
Table of Contents

SL Topic Fig No / Table / SAQ / Page No

No Graph Activity
1 Introduction - -
3
1.1 Objectives: - -
2 Sole Proprietorships - I, 1
2.1 Features of sole proprietorship - -
2.2 Advantages of sole proprietorship - - 4-7
2.3 Disadvantages of sole proprietorship - -
2.4 Appropriateness of sole - -
proprietorship
3 Joint Hindu Family Firm - 2
3.1 Characteristics - -
3.2 Advantages of Joint Hindu Family - -
business 7 – 10
3.3 Disadvantages of Joint Hindu Family - -
business
3.4 Advantages of Joint Hindu Family - -
business
4 Partnership Firm - II, 3
4.1 Characteristics - -
4.2 Advantages of partnership firm - - 11 – 15
4.3 Disadvantages of partnership firm - -
4.4 Appropriateness of partnership firm - -
5 Joint Stock Company - 4 16 – 17
6 Co-operative Organization - 5 17 – 18
7 Types of Companies - 6 19 – 20
8 Summary - - 20
9 Glossary - - 21
10 Terminal Questions - - 21
11 Answers - - 21 - 23

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1. INTRODUCTION
In the last unit you studied the concept of entrepreneurship, its nature and the need for
entrepreneurship.

Some entrepreneurs start the business single-handedly, under individual ownership such as
the grocery store at the corner of your street. Some of the entrepreneurs may like to start
the business along with two or more owners (partners) as the business may require greater
initial investment and size of place etc. You would notice here that the number of owner/s
may decide the form of the organization. Thus, an enterprise with single owner may be called
a ‘sole proprietorship form of organization’, whereas one with two or more partners can be
called ‘a partnership form of organization’. There are other forms as well.

In the present unit you will study the different forms of business organizations. After
studying this unit, you will know about the Sole Proprietorship, Joint Hindu Family Firm,
Partnership firm, Joint Stock Company and Co-operative Organization. The essential features
of forms of organization are explained. By understanding the various forms of business
organizations, you will be able to evaluate what form is best for what size and nature of
business.

1.1 Objectives:
After studying this unit, you will be able to:
❖ Define different forms of business organization
❖ Describe the features of the different forms
❖ Distinguish the different forms of business organization
❖ Select the examples of different forms from the environment

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2. SOLE PROPRIETORSHIP

A sole proprietorship (or one-man business or sole trader or individual proprietorship or

individual entrepreneurship) is a form of business organization in which an individual
introduces his own capital, uses his own skills and intelligence in the management of its
affairs and is entitled to receive all the profits and assumes all the risks of ownership.

2.1 Features of sole proprietorship

The essential features of a sole proprietorship are:

1. The business is owned solely by an individual.

2. The business is controlled by a single person.
3. The individual assumes all the risks to which the business is exposed.
4. The individual’s liability is unlimited, i.e., his personal assets can be used for the
payment of business liabilities.
5. The business has no separate legal entity as distinct from the sole proprietor.
6. No legal formalities are necessary to set up the business as such, but there may be legal
restrictions on a particular type of business. For example, no individual can start or run
a banking or insurance business. If a man wishes to open a photo studio or a book-shop,
he may do so without any legal formalities. But in some cases, a license may be
necessary, e.g., if he wants to start a restaurant, a license from the health department
of the municipal corporation will be required.
7. The individual derives the total benefit as he bears the entire risk.
8. He has almost unlimited freedom of action and decides everything for the business
without fear of any opposition, but of course, at his own risk. The proprietor is his own
master in this form of organization.
9. The employees’ presence makes no difference. He may instead get the help of the
members of his family.

The sole proprietorship is most suitable where capital required is small, risk involved is
relatively not high, nature of business affairs is simple in character and requires quick
decision. Personal contact with the customers has great importance, where special regard

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has to be shown to the taste and fashion of customers. Therefore, the retail shops,
professional firms, household and personal services concerns are mostly started by
individual proprietors.

2.2 Advantages of sole proprietorship

The advantages of sole proprietorship are:

1. Easy formation and dissolution: Easy formation is the biggest advantage of a sole
tradership business. Anyone who wants to start such a business can do so in various
cases without any legal formalities. Similarly, the business can be wound up any time if
the proprietor decides.
2. Better control: The proprietor has full power over his business. He organizes and co-
ordinates the various actions and tricks. Since he has full power, there is always
effective control.
3. Prompt decision making: The sole dealer takes all the decisions by himself. So, the
decision making is fast, and this enables the owner to take care of obtainable
opportunities without delay and provide quick solutions to troubles
4. Flexibility in operations: Solitary possession and direct control makes it achievable
for revolution in operations to be brought as and when necessary.
5. Retention of business secrets: Retention of business secrets is an important advantage
of a sole proprietorship business. The owner is in a situation to retain complete secrecy
regarding his dealing activities

Activity I
Find out a sole proprietor in your locality. Discuss the success story and benefits of his/her
sole proprietorship business.

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2.3 Disadvantages of sole proprietorship

The disadvantages of sole proprietorship are:

1. Unlimited liability: In sole proprietorship, in case the owner is unable to pay some
debts which the business has taken, the same may be payable from the owner’s private
property also. The word ‘unlimited’ means, it is not only the property of the business
which will be used to pay any debt payable to others, the responsibility to pay will
extend to the private property of the owner. This is an important characteristic. This
could be a distinguishing feature when other forms of organization are concerned.
2. Limited financial resources: The capability to increase and have access to funds by
individuals is always inadequate. The insufficiency of investment is the most important
handicap for increasing the size of sole proprietorship.
3. Limited capacity of individual: An individual has limited capacity to organize, manage
and take risks. The bigger the size of the enterprise, the greater the quantity of
resources required.
4. Uncertainty of duration: The continuation of sole tradership dealing is associated with
the existence of the proprietor. Sickness, casualty or collapse of the proprietor brings
an end to the enterprise.

2.4 Appropriateness of sole proprietorship

Sole proprietorship business is suitable where the marketplace is limited, localized and
where consumers confer significance to delicate concentration. This form of organization is
appropriate where the conduct of business is straightforward and requires fast judgment,
where investment required is less and risk is not heavy. It is also considered appropriate for
the manufacturers of merchandise which involves personal expertise e.g., handicrafts,
jewellery, tailoring, haircutting, etc.

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Self-Assessment Questions - 1

1. Sole proprietorship business is commenced by a single person. (True/False)

2. The legal responsibility of a sole dealer is narrow. (True/False)
3. A sole trader manufactures and sells products. (True/False)
4. The private property of a sole proprietor cannot be used to pay the debts of the
business. (True/False)

3. JOINT HINDU FAMILY FIRM

The Joint Hindu Family (JHF) business is a type of business organization initiated only in
India. In this form of business, all the members of an undivided Hindu Family own the
business/ trade and conduct the business dealing together. The associations and dealings of
trade are headed by the leader of the family, who is recognized as the “KARTA”.

A Joint Hindu Family business comes into reality as per the Hindu legacy Laws of India. In a
Joint Hindu Family business only, the male members get a hold or a share in the enterprise.
The membership is restricted to three consecutive generations. As a consequence, an
individual, his sons(s), and his grandson(s) become the members of a Joint Hindu Family by
birth. They are also called “Co-parceners”. The term co-parceners imply that such an
individual has got the right to ask for a detachment and separation of the Joint Hindu Family
business and to have his separate share. A daughter has no right to ask for a partition and is,
hence, not a co-parcener.

3.1 Characteristics

The characteristics of Joint Hindu Family firm are:

1. Legal status: The Joint Hindu Family business is a jointly owned business just like a
jointly owned property. It is governed by Hindu Law. It can penetrate into partnership
agreement with others.

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2. Membership: There is no association or membership other than the members of the

joint family. Within the family also, it is limited only to male members who are co-
parceners by birth.
3. Profit sharing: Each co-parcener has equal allocation to the profits of the business. In
the confrontation of death of any of the co-parceners, his wife can claim share of profit.
4. Management: The management of a joint Hindu family business is in the control of the
head of the family member who is known as the karta. He has the right to manage the
dealing and his way of managing cannot be questioned by the co-parceners.
5. Liability: The accountability and legal responsibility of each member of the Joint Hindu
Family business is not sufficient to the extent of his share in the business however the
liability of the karta is unlimited as, it extends to his private property.
6. Fluctuating share: The share of all co-parceners keeps on fluctuating. This is for the
reason that, every birth of a male child in the family increases the number of co-
parceners and every death of a co- parceners decrease the number.
7. Continued existence: A Joint Hindu Family business continues to survive on the death
of any co-parceners. Even on the death of the karta, it continues to exist as the next
senior-most family member becomes karta. However, a Joint Hindu Family business
can be dissolved any time either through shared agreement between members or by
partition.

3.2 Advantages of Joint Hindu Family business

The advantages of Joint Hindu Family firm are:

1. Assured share in profits: Each co-parcener is guaranteed a split in the profits

irrespective of his involvement in the successively flourishing business. In this way it
safeguards the interests of some members of the family like minors, sick, disabled and
widows.
2. Freedom in managing: The karta enjoys full liberty and free will in conducting the
family business. It enables him to take immediate decisions without a large amount of
intervention.

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3. Sharing of knowledge and experience: A Joint Hindu Family business provides

prospect and chance for the young members of the family to get the gain of
acquaintance and understanding of the elder members and also helps in inculcating
basic value and worth like authority, self- sacrifice, tolerance etc.
4. Unlimited liability of the karta: The accountability of the co-parceners is not
sufficient, except for that of the karta. It makes the karta supervise the business in the
most well-organized and resourceful manner.
5. Continued existence: A Joint Hindu Family business is not affected by the collapse or
casualty of any affiliate together with that of karta. Thus, it can carry on for a long
period of time.

3.3 Disadvantages of Joint Hindu Family business

The disadvantages of Joint Hindu Family Business are:

1. Limited resources: Joint Hindu Family business has usually not sufficient monetary
and administrative resource. As a result, it cannot carry out large, unstable and risky
business.
2. Lack of motivation: There is constantly a lack of enthusiasm and inspiration among
the members to work hard. The reason being that the benefit of hard work does not go
exclusively to any individual person but is shared by all the co-parceners.
3. Scope for misuse of power by the karta: In view of the fact that the karta has complete
autonomy to manage the business, there is scope for him to use it wrongly for his
delicate gains. An unskilled karta can also do impairment to the business.
4. Scope for conflict: In a Joint Hindu Family business the members of three consecutive
generations are concerned. It constantly leads to conflict and clashes between
generations.
5. Instability: The stability of business is until the end of time under stress. It may be due
to an undersized opening within the family and if co-parceners ask for a detachment,
the business is closed.

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3.4 Suitability of Joint Hindu Family business

The success of Joint Hindu Family business is generally dependent upon the competence and
effectiveness of the karta and the reciprocated and shared appreciative involving the co-
parceners. On the other hand, this type of business is losing its position with the steady
decline in the Joint Hindu family system. The main reasons for decline in Joint Hindu family
system are:

• Industrial revolution forced men and women to move out of their family home to earn
the living.
• The nuclear family (a family unit consisting of a mother and a father and their children)
gave immense freedom from the traditions and ways of life.

Self-Assessment Questions - 2

5. Any person can be a member of a Joint Hindu Family business. (True/False)

6. The legal responsibility of Karta is unconstrained. (True/False)
7. A Joint Hindu Family business continues to exist on the decease of co- parceners.
(True/False)
8. A Joint Hindu Family business ceases to exist on the casualty of the Karta.
(True/False)
9. A Joint Hindu Family business comes into continuation by Hindu Law.
(True/False)

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4. PARTNERSHIP FIRM
A partnership firm of an organization is an association of two or more persons who carry on
business together for the purpose of earning profits. Persons from similar surroundings or
persons of different capability and skills may join together to carry on a business. Persons
who have entered into partnership with one another are called individually “Partners” and
collectively “a firm” or “Partnership firm” and the name under which their business is carried
on is called “the firm name” These firms are governed by the Indian Partnership Act, 1932.
[section 4]

Meaning of partnership according to the Partnership Act, 1932, defines ‘Partnership Firm’ as
“the relation between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all.”

Partnership agreement

A partnership agreement is a written agreement between all the partners of a firm. It is

termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and
running the partnership firm. The partnership agreement may be oral or written. It is always
better to insist on a written agreement among partners in order to avoid future
controversies.

The partnership agreement Contains:

• the amount of capital contributed by each partner

• profit or loss sharing ratio
• salary or commission payable to the partner, if any
• duration of business, if any
• name and address of the partners and the firm
• duties and powers of each partner
• nature and place of business; and
• any other terms and conditions to run the business.

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4.1 Characteristics

The characteristics of a partnership firm are:

1. Number of partners: At least two persons are required to establish a partnership

business. The utmost membership limit is 10 in the case of banking business, and 20 in
the case of all other types of businesses.
2. Contractual relationship: The relationship of partnership is created by contract. The
two or more persons who enter into an agreement of partnership must be competent
to enter into a contract. Such an agreement may be oral, written or implied. If the
agreement is in writing it is recognized as a ‘Partnership Deed’.
3. Competence of partners: In view of the fact that individuals have to enter into an
agreement to become partners, they must be knowledgeable enough to do so.
Therefore, minors, lunatics and insolvent persons are incompetent to enter into a valid
contract. However, a minor can be admitted to the benefits of partnership i.e., he can
have a share of the profits.
4. Sharing of profit and loss: The partners can divide the profit into any fraction as
agreed in the contract. In the absence of a contract, they may share it equally.
5. Unlimited liability: The associates have unconstrained liability. They are liable
together and individually for the debts and obligations of the firm. Creditors can lay
claim to the private properties of any individual partner or all the partners together.
The creditors may realize the whole of their dues from one of the partners of the firm.
Certainly, he can get back the money due from other partners. The accountability of a
minor is, though, limited to the extent of his share of the profits, in the case of
termination of a firm.
6. Principal-agent relationship: The dealing in a partnership firm may be carried out by
all the partners or any one of them acting for all. This means that every partner is an
agent when he is acting on behalf of others.
7. Transfer of interest: No partner can sell or transfer his significance or interests in the
firm to anyone without the approval of other partners.

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8. No separate legal existence: Like sole proprietorship, partnership firms also have no
separate legal status. The firm means partners and the partners mean the firm. Law
does not recognize the firm as a detached entity different from the partners.
9. Voluntary registration: Registration of partnership is not necessary. However, given
that registration entitles the firm to numerous benefits, it is considered desirable. For
example, if the partnership firm is registered, any partner can file a case against other
partners to settle the disputes, or a firm can file a suit against outsiders, for settlement
of claims, disagreements, etc.
10. Dissolution of partnership: Termination of partnership implies not only the entire
closure or execution of partnership business, but it also includes any change in the
existing contract among the partners due to an alteration in the number of partners.
For example, if A, B and C are partners in a firm and C retires from the partnership then
the partnership is dissolved.

4.2 Advantages of partnership firm

The advantages of partnership firms are:

1. Easy formation: A partnership firm can be formed without any compulsory legal
formalities and operating expenses. It is not necessary to get the firm registered.
2. Larger resources: Since two or more partners join hands to start partnership business
it may be possible to pool more resources as compared to sole proprietorship. The
partners can contribute more capital, more effort and also more time for the business.
3. Flexibility in operation: There is an elasticity of operation in partnership business due
to an insufficient number of partners. At any time, the partners can decide to change
the size or nature of the business or area of its operation. There is no need to follow
any legal procedure. Only the consent of all the partners is required.
4. Better management: Partners pay more attention to business affairs since there is a
direct relationship between possession, control and profit. They regularly meet to
discuss the affairs of business and can take prompt decisions.
5. Sharing of risk: In partnership, the threat of failure is easier to bear by entity partners
as it is shared by all the partners equally.

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6. Protection of minority interest: Every partner has an equivalent articulation in

decision making. A partner can prevent a decision being taken if it unfavorably affects
his welfare and interests.

4.3 Disadvantages of partnership firm

The disadvantages of partnership firms are:

1. Instability: Every partnership firm has an uncertain life. The casualty, insolvency or
mental illness of any partner brings the firm to an end.
2. Unlimited liability: Since the liability of partners is combined and to an unlimited
extent, any one of the partners can be called upon to pay all the amount overdue and
debts even from his private properties.
3. Lack of harmony: In view of the fact that every partner has equal rights, there is greater
potential of friction and quarrel among the partners. Differences of opinion may lead
to distrust and dissonance which may finally result in disturbances and ultimately end
with closure of the firm.
4. Limited capital: Since there is a limitation on the maximum number of partners, the
resources and investment which can be raised are limited.

Activity II
Find out the examples of partnership firm and discuss the issues related to partnership firms.

4.4 Appropriateness of partnership firm

In a partnership firm, persons from different fields of life having capability, supervisory
talent and expertise join collectively to carry on a business. These increase the directorial
and managerial strength of the organization, the financial and economic resources, the
proficiency and expertise, and condense risk. These types of firms are mainly appropriate
for moderately small businesses such as retail and comprehensive trade, trained services,
medium sized commercial houses and undersized manufacturing units. Commonly it is seen
that various organizations are originally started as partnership firms and later, when it is

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efficiently feasible and economically attractive for the investors, it is transformed into a
company.

Self-Assessment Questions - 3

10. A partnership firm requires at least persons.

11. The partners are liable and for all the debts and obligations of
the firm.
12. Registration of a partnership firm is
13. There exists a relationship between partners.
14. The persons who own the partnership business are individually called
and collectively known as

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5. JOINT STOCK COMPANY

A Joint Stock Company form of business organization is an incorporated voluntary
association of persons to carry on business. Generally, it is given an official status and is
subject to certain legal regulations. It is an alliance of persons who normally give money for
some common purpose. The money contributed is the capital of the company. The persons
who make payments are its members. The ratio of capital to which each member is entitled
is called his share, thus members of a joint stock company are known as shareholders and
the capital of the company is known as share capital. The total share capital is divided into a
number of units known as ‘shares’ Joint stock companies. For example, Tata Iron & Steel Co.
Limited, Hindustan Lever Limited, Reliance Industries Limited, Steel Authority of India
Limited, Ponds India Limited, etc.

The companies are governed by the Indian Companies Act, 1956. According to the Act, a
company means ‘a company formed and registered under this Act or an existing company’.
An existing company means a company formed and registered under any of the previous
Companies Acts. This definition is not exhaustive enough to reveal the basic features of a
company. However, based on the definition given in the previous Companies Act and various
judicial decisions, it can be defined as ‘an artificial person created by law, having a separate
legal entity, with a perpetual succession’.

A joint stock company is appropriate where the level of business is quite large, the area of
operation is extensive, the risk involved is intense and there is a need for vast financial
resources and manpower. It is also preferred when there is a need for professional
management and elasticity of operations. In certain businesses like banking and insurance,
business can only be undertaken by joint stock companies.

Note: You may learn about the characteristics, merits, demerits and other important aspects
of Joint Stock Companies in unit-4.

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Self-Assessment Questions - 4

15. A company has existence.

16. A company enjoys the benefits of operation.
17. A company is managed by .

6. CO-OPERATIVE ORGANIZATION
Any ten personnel can shape a co-operative society. It functions under the Co-operative
Societies Act, 1912 and other State Co-operative Societies Acts. A co-operative society is
completely different from all other forms of organization in terms of its intention. The co-
operatives are created first and foremost to provide services to their members. Normally, it
also provides some service to society.

The Section 4 of the Indian Cooperative Societies Act 1912 defines Cooperative Society as “a
society, which has its objectives for the promotion of economic interests of its members in
accordance with cooperative principles.”

The main objectives of a co-operative society are:

(a) Providing service rather than earning revenue,

(b) The membership is open to all those having a common economic interest. Any
person can become a member irrespective of his/her caste, creed, religion, color,
sex etc.

(c) Self-help in place of dependence.

Types of co-operatives formed

Types of co-operative organization formed are:

(a) Consumer co-operatives: These are shaped to protect the interests of normal
consumers of society by making consumer goods obtainable at reasonable prices.
Kendriya Bhandar in Delhi, Alaka in Bhubaneswar are some of the examples of
consumer co-operatives.

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(b) Producer co-operatives: These societies are set up to profit small producers who
have problems in collecting input and advertising their goods. For example, the
Handloom owners are small producers, of such co-operatives.

(c) Marketing co-operatives: These Marketing co-operatives are created by

producers and manufactures to reduce utilization by the middlemen while
marketing their product. Kashmir Arts, J&K Handicrafts etc., are examples of
marketing co-operatives.

(d) Housing co-operatives: To provide residential houses to the members, housing

cooperative societies are formed generally in urban areas. They are called co-
operative group housing societies.

(e) Credit co-operatives: These societies are shaped to make finance available for
their members. For example, the credit co-operatives are the rural credit societies,
the credit and thrift societies, the urban co-operative banks etc.

These are created by small farmers to work together and thereby divide the benefits of large-
scale farming.

Self-Assessment Questions - 5

18. The members of a co-operative get a fixed rate of dividend from profit.
(True/False)
19. A co-operative society cannot enter into any contract. (True/False)
20. The liability of the members of a co-operative is unlimited. (True/False)
21. A co-operative society need not be registered. (True/False)
22. The members of a co-operative society have ‘one man - one vote’. (True/False)

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7. TYPES OF COMPANIES
There are various types of companies in our country. The formations, legal responsibility,
management and possession of all companies differ from each other. There are different
types of companies based on their possession and nationality. Accordingly, there are three
types of companies based on the public interest. They are:

• Private Limited,
• Public Limited, and
• Government companies.

On the basis of nationality, the two types of companies are:

• Indian companies
• Foreign companies

On the basis of liability, the companies can be classified as:

• Company limited by shares

• Company limited by the guarantee
• Company with unlimited liability

On the basis of control, the companies can be classified as:

• Holding company
• Subsidiary company

On the basis of incorporation or registration, the companies can be classified as:

• Chartered companies
• Statutory companies
• Registered companies

(Note: The detailed discussions about the different types of companies are given in the next
unit.)

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Self-Assessment Questions - 6

23. On the basis of control, the companies can be classified as and subsidiary company.
24. On the basis of Indian and foreign companies can be classified as Indian
and foreign companies.

8. SUMMARY
Sole proprietorship business is suitable where the marketplace is limited, localized and
where consumers give significance to delicate concentration. It is also considered
appropriate for the manufacture of merchandise which involves instruction manual
expertise e.g. handicrafts, jewellery, tailoring, haircutting, etc.

The Joint Hindu Family (JHF) business is a type of the form of business organization initiated
only in India. The success of Joint Hindu Family business is generally dependent upon the
competence and effectiveness of the karta and the reciprocated and shared appreciative
involving the co- parceners.

Each member of such a group is individually known as ‘partner’ and together the members
are known as a ‘partnership firm’. In a partnership firm, persons from unusual walks of life
having capability, supervisory talent and expertise join collectively to carry on a business.

A Joint Stock Company form of business organization is a voluntary association of persons to

carry on business through assistance from financial institutions and government. Normally
it seems that a co-operative society is appropriate for small and medium-sized operations.

There are three types of companies – Private Limited, Public Limited and Government
companies on the basis of possession and two types of companies – Indian and Foreign, on
the basis of nationality.

There are a number of factors to be measured while selecting a suitable form of business
organization. These factors are inter-related and inter- dependent as well.

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9. GLOSSARY
Joint stock company: A company, defined as an artificial person created by law, having
separate legal entity.

A partnership firm: It comes into continuation when two or more persons enter into
contractual conformity as per some governing statutes.

Joint hindu family firm: The members of a Hindu joint family own the business together.
Only the male members of the family up to three succeeding generations become members
by virtue of their birth

Sole proprietorship: It is a form of business organization in which an individual invests his

own capital, uses his own skill and intelligence in the management of its affairs.

Business organization: It is a unit that involves an arrangement to conduct a business.

10. TERMINAL QUESTIONS

1. What are the key advantages of a sole trading business?

2. What are the disadvantages of Joint Hindu Family firm?
3. What are the characteristics of a partnership firm?
4. What is a sole trading firm? What are its features? Discuss in detail.
5. What is meant by Joint Stock Company?

11. ANSWERS
Answers to Self-Assessment Questions
1. True
2. False
3. False
4. False
5. False
6. True
7. True

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8. False
9. True
10. Two
11. Jointly; Severally
12. Voluntary
13. Principal agent
14. Partnership firm
15. Perpetual
16. Large scale
17. Board of directors
18. True
19. False
20. False
21. False
22. True
23. Holding company
24. Nationality

Answers to Terminal Questions

1. Refer to 3.2 – The key advantages are better control, quick decisions etc.
2. Refer to 3.3 – The key disadvantages are limited resources, lack of motivation etc.
3. Refer to 3.4 – A partnership form of organization is one where two or more persons are
allied to conduct a business with a view to earning profit.
4. Refer to 3.2 – A sole proprietorship is a form of business organization in which an
individual introduces his own capital.
5. Refer to 3.5 – A joint stock company is appropriate where the level of business is quite
large.

Mini-case

Converting a Sole Proprietorship into an LLC

Unit 3: Forms of Business Organization – I 22

DCM1104: Business Organisation Manipal University Jaipur (MUJ)

Joe owns a sole proprietorship that operates a retail shop. On the advice of his lawyer, he
decides to convert to an LLC. The proprietorship's only debt is a $100,000 loan from a local
bank for which Joe has personal liability. At the time of the conversion, the bank agrees to
substitute the LLC as the borrower and release Joe from personal liability on the note;
instead, the note would be secured by the LLC's assets. Before the conversion, Joe had
contributed $75,000 to the operation of the retail shop and deducted $150,000 in losses from
its operation because the $100,000 loan was recourse; it provided him with an at-risk basis
of his interest ($75,000).

Question

Analyze the aspects related to conversion of sole proprietorship into Limited Liability
Company.

Hint: Benefits and disadvantages of conversion of sole proprietorship to LLC’s.

Source: www.allbusiness.com/business-planning/.../560576-1.html

Unit 3: Forms of Business Organization – I 23