Introduction to Forms of Business Organisation

Every business must be organised in some legal shape before it can start trading. A form of business organisation is the legal structure a business chooses for owning, financing, managing and sharing the profit (and the risk) of the enterprise. The form decides who owns the business, who runs it, how the capital is raised, how much of the profit each owner takes, and — very importantly — who bears the losses if things go wrong.

A person who wants to start a business does not pick a form at random. The choice depends on several practical factors:

• Amount of capital needed — a small shop needs little; a factory needs a great deal.
• Extent of risk and the owner's willingness to bear liability — some forms make the owner personally responsible for every debt; others limit that risk.
• Nature and scale of the activity — local trading versus large-scale manufacturing.
• Need for continuity and stability of the business.
• Degree of control the owner wishes to keep, and the managerial skill available.
• Legal formalities and the cost of forming and running the organisation.

The four forms studied in this chapter are the Sole Proprietorship, the Partnership Firm, the Joint Stock Company and the Co-operative Society. The first three are formed mainly to earn profit for their owners. The co-operative society is different in spirit: it is formed by ordinary people who join hands for mutual help and service, guided by the motto 'Each for all and all for each.' Understanding how these forms resemble and differ from one another — and especially how the co-operative form stands apart — is the purpose of this chapter.