One of the most important decisions that you make while starting your business, is regarding the type of ownership of the business. Since the burden of the risk as well as the rewards of profitability are suffered and enjoyed, respectively, by the owner, such a decision becomes crucial in determining the scale and level of the business.
Different Kinds Of Ownership In A business
Sole Proprietorship Form Of Ownership
This is a type of business where only one person owns the entire business. He/she has no partners, although he/she does hire employees and labor. Such a person is in full control of the entire organization- complete discretion with respect to decision making, absolutely no sharing of the profits, and the complete burden of the risk on their shoulders.
A sole proprietorship is suitable for people who are inept at team work, who like to have things their own way, who are so well-equipped with financial resources and all-round expertise, that they do not need to depend on anyone else. Sole proprietorships are also suitable in case the business is established on a small-scale, or such that it requires the efforts of only one person.
It also sits well with people who want to avoid troublesome legalities, since it is not mandatory to register propreitorships with the law and neither is there any governing law/act for the same. But a large number of drawbacks associated with this form of business organization make it highly unfeasible at a practical level.
In reality, only small scale businesses are in the nature of sole proprietorships. This is because it is almost impossible for a single person to raise a large capital single-handedly. Though he/she may take loans from friends and banks, it becomes
cumbersome and it is a process most people would like to avoid.
Another problem associated with sole proprietorship is that lack of second opinions can lead to stagnation. Plus, in case of failure, the entire burden will have to be borne by proprietor alone. Another deterrent is that in case of closure of the business, if the business assets are not sufficient to satisfy the claims of the creditors, personal property of the proprietor can be attached to satisfy such claims. This is called unlimited liability, and it puts a lot of courageous and independent people off the concept of sole ownership.
Partnership Form Of Ownership
A business organization with multiple owners is called the partnership firm and the owners are called partners. The partners ought to prepare a Partnership Deed, which is a signatured agreement that details the conditions – pertaining to profit-sharing, risk-sharing, nature of partner’s involvements, etc -although it is not mandatory by law.
Partnership is an improved version of sole proprietorship. The rules of the game remain unaltered, the only change is an increase in the number of players. Partnership is often preferred by business people because it allows pooling in of different resources and skills,that may not be possessed individually by any of the partners.
It allows for synergy and syntheses of resources to result in an amplified outcome. Partnership is also the most natural choice of ownership when the business idea has benn collectively formed and bred. A partnership firm is most suited to the kind of people who have excellent communication and negotiation skills, who are experiences at dealing with people diplomatically as well as amicably, and who are good at team work and team management.
Partnership firms also suffer from the drawnback of unlimited liability, that is, situations of firm dissolution often expose partners’ personal property to threats of confiscation. Most countries have regulatory acts to govern the functioning of Partnerships, but their obedience is not a necessity.
Company Form Of Ownership
Because of the fact that it completely eliminates the drawbacks associated with sole proprietorship as well as partnership, the company form of organization is probably the most popular today. Riding on it’s major feature of divorce between the ownership and management, a company offers the advantages of extremely huge financial potential, efficient management, reduction of risk involved, limited liability, and transparency and goodwill resulting from exposure of business operations to public scrutiny, as required by the law.
Practically speaking, the most useful feature of the company form of organization results from the fact that they have to be registered. This gives business people the ability to slam suits against parties who infringe on their rights, and vice versa. This feature of bringing a matter to court is lacking in partnerships and sole proprietorships and that explains why people are less hesitant to form companies, in comparison.
There can be two types of companies, as per the law – private companies and public companies. The prominent difference between the two is that private companies cannot issue shares and/or debentures to the public while the public companies can. Most people prefer to have public limited companies, because of the greater financial scope that it offers.
Perhaps the only disadvantage associated with the company form of organization is the extremely tiresome procedure of formation and maintenance. Promoters , or the founders of the company, must raise funds that have to be distributed in small units (shares) among the owners who sign the MoU. The shareholders become the owners of the company.
The shareholders meet and collectively designate appointees to the Board of Directors (BoD), headed by the Chief Executive Officer (CEO). It is this board that is now responsible for the management of the company. The shareholders do not participate in anything but the profits (in the form of dividends) thereon.
All this must be precluded with a lenthy registration process with the relevant Companies Act, and appended with consistent audits and public distributions of financial information by the company, as demanded by the law. The company form of organization is an excellent way to distribute risks between a large number of shareholders, even while enjoying considerable levels of profit.
It is no wonder, then, that the perils of red-tapism and bureaucracy notwithstanding, more and more business people are lining up outside the Registrar’s office in the hope of getting themselves registered as companies!