Forms of Business Organization

 Forms of Business Organization

One of the first decisions that you will have to make as a business owner is how the business should be structured.  All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure.

In making a choice, following should be consider:

• The size and nature of business.
• The level of control.
• The level of “structure”
• Expected profit (or loss) of the business.
• Whether or not need to re-invest earnings into the business.
• Need for access to cash out of the business for yourself.

An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships; Corporations and Limited Liability Company follows. 

Sole Proprietorship

The vast majority of small businesses start out as sole proprietorship.  These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business.  Sole proprietorship own all the assets of the business and the profits generated by it.  They also assume complete responsibility for any of its liabilities or debts.  In the eyes of the law and the public, you are one in the same with the business.

Advantages of a Sole Proprietorship

• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
• Profits from the business flow-through directly to the owner’s personal tax return.
• The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

• Sole proprietors have unlimited liability and are legally responsible for all debts against the business.  Their business and personal assets are at risk.
• May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
• May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
• Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially as an adjustment to income).

Partnerships

In a Partnership, two or more people share ownership of a single business.  Like proprietorships, the law does not distinguish between the business and its owners.  The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed.

Yes, it’s hard to think about a “break-up” when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems.  They also must decide up front how much time and capital each will contribute, etc.

Advantages of a Partnership

• Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
• With more than one owner, the ability to raise funds may be increased.
• The profits from the business flow directly through to the partners’ personal tax return.
• Prospective employees may be attracted to the business if given the incentive to become a partner.
• The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership

• Partners are jointly and individually liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can occur.
• Some employee benefits are not deductible from business income on tax returns.
• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that Should Be Considered:

1. General partnership

Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement.  Equal shares are assumed unless there is a written agreement that states differently.

2. Limited partnership and partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short term projects, or for investing in capital assets.  This form of ownership is not often used for operating retail or service businesses.  Forming a limited partnership is more complex and formal than that of a general partnership.

3. Joint venture

Acts like a general partnership, but is clearly for a limited period of time or a single project.  If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.

Corporations

A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it.  A Corporation can be taxed; it can be sued; it can enter into contractual agreements.  The owners of a corporation are its shareholders.  The shareholders elect a board of directors to oversee the major policies and decisions.  The corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation

• Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
• Generally, shareholders can only be held accountable for their investment in stock of the company.  (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.
• Corporations can raise additional funds through the sale of stock.
• A Corporation may deduct the cost of benefits it provides to officers and employees.
• Can elect S Corporation status if certain requirements are met.  This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation

• The process of incorporation requires more time and money than other forms of organization.
• Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
• Incorporating may result in higher overall taxes.  Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.

Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states.  It is designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.  Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed.  The time limit can be continued if desired by a vote of the members at the time of expiration.  LLC’s must not have more than two of the four characteristics that define corporations:  Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

Characteristics of Business

Business is an economic activity that involves the exchange, purchase, sale or production of goods and services with a motive to earn profits and satisfy the needs of customers. Businesses can be both profit or non-profit organizations that function to gain profits or achieve a social cause respectively.

Characteristics of Business

Following are the characteristics or features of business

(1) An Economic Activity

A business is an economic activity which includes the purchase & sale of goods or rendering of services to earn money.

It is not concerned with the achievement of social and emotional objectives.

Example: Wholesaler sell goods to the retailers and retailers sell goods to the customers.

(2)Manufacturing or Procurement of Services and Goods

Before offering goods to the consumer for consumption it should be manufactured or procured by businesses.

Business enterprise converts the raw material into finished goods.

Organisations also procure finished goods& services from the producers to meet the needs of the customers in the market.

Goods can be a Consumer good like sugar, pen, ghee, etc. capital goods include machinery, furniture, services like transportation, banking, etc.

Example: Individual retailer buys the toffees from wholesalers in a specific quantity and sells it to the ultimate consumer.

(3)Exchange or Sale of Goods and Services for the Satisfaction of Human Needs

Every business activity includes an exchange or transfer of services and goods to earn value.

Producing goods for the goal of personal consumption is not included in business activity.

So, there should be the process of sale or exchange of goods or services exits among the seller and the buyer.

Example: A lady who bakes pastries and cakes at home and sells it to the pastry shop is a business activity.

(4) Dealings With Goods and Services on a Daily Basis

Every business, rendering either services or goods should deal on a daily basis.

A one-time sale is not considered a business activity.

Example: If a person sells his old car through OLX even at a profit will not be considered as a business activity. But if he is engaged in regularly trading of cars at his showroom will be considered as business activity.

(5) Profit Earning

No business can last for long, without making a profit.

The purpose to conduct the business is to earn profits and minimise the cost.

Example: A business house tries to reduce the cost of production and the cost of raw material to earn high profits.

(6) Uncertainty of Return

The possibility of earning profit or loss is very uncertain and can’t be anticipated by the entrepreneur.

Hence, no business can totally do away with risks.

source: https://byjus.com/commerce/concept-and-features-of-business/

OBJECTIVES of BUSINESS

The business objective is a goal, i.e. where the business wants to reach in the future. For example, a business wants to set up its franchise in another state in the next 3 years or it wants to increase its workforce in the coming months.

Business needs objectives, without objectives the business is like a car without headlights driving blind. Objectives of business are the purpose for which the business is established and performed. We can call objectives the cornerstone of every business.

Objectives are needed in every area where performance and results directly affect the survival and prosperity of a business. The right choice of objectives is critical for the success of the business. The objectives of a business can be classified into two main categories, which are

I  Economic objectives

1] Profit Earning

Business is a set of activities undertaken with the prospect of sale for the purpose of earning a profit. Profit is the extra income over the expenses. The main objective of any business is to earn a profit. Just as a plant cannot survive without water, similarly a business cannot sustain without profit.

Profit is necessary for growing and expanding business activities. Profit guarantee a consistent stream of capital for the modernization and augmentation of business activities in the future. Profits likewise show the scale of stability, efficiency, and advancement of the business organization.

2] Market Share / Creation of Customers

In the words of Drucker, “There is only one valid definition of business purpose; to create a customer. “ Profits are not generated out of thin air. They are the result of the hard work of the businessman to satisfy the needs of the customers.

In the long run, the survival of the business completely depends upon the market share captured by the business.  The creation of good and satisfaction of the needs of the customer is a crucial purpose of the business. So to generate profit and demand, the business must supply premium quality and give value for money products.

3] Innovation & Utilization of Resources

Innovation normally means to change processes or creating more effective processes, products and ideas. Nowadays, business is ever-changing and dynamic. To keep up with the growing competition a businessman has to introduce efficient design, latest trends, upgraded machinery, new techniques, etc.

Large corporations invest a humongous amount of capital in their Research & Development department to boost innovation. Whereas, on the parallel lines, utilization of resources is a proper use of workforce, raw material, capital and technology used in the business. A business has limited resources and that’s why its main objective is to put these resources to correct divisions.

4] Increasing Productivity

Productivity is a scale to measure the efficiency of the business activity. It is usually the last objective but just as important because productivity is measured by the output given by the activities. It is the end result of any business activity. Each business must go for more prominent productivity – to guarantee its survival and development. This goal can be accomplished by decreasing wastages and making proficient utilization of machines and supplies, HR, cash and so forth.

II. Social Objectives of Business

According to Dayton Hudson “The business of business is serving society, not just making money.” Business is one of the pillars on which the society stands.  Therefore, it is a part of the society. In fact, it cannot thrive without the resources from the society.  The business earns its income from the sale of products and services to the society. It is mandatory on the part of the business to take care of the social factors. The necessary social objectives of a business are as follows:

1] Providing Goods & Services at Reasonable Prices

Business exists in the first place to satisfy the needs of the society. It’s the first and major social objective of the business. Products and services ought to be of better quality and these ought to be provided at sensible costs. It is additionally the social commitment of business to keep away from misbehaviors like boarding, Black promoting and manipulative advertising.

2] Employment Generation

One of the major problem today’s generation facing is unemployment. Business generates employment. Therefore, it is the social objective of a business to give chances to beneficial employment to individuals of the society. In a nation like India, unemployment has turned into a critical issue.

3] Fair Remuneration to Employees

The business does not run on its own but the people are responsible for the success and failure of the business. The people on the inside of the business are more valuable i.e. employees. They are an asset of the business and make a ground-breaking contribution to the business. They must be given reasonable pay for their work.

Notwithstanding wages and salary, a significant piece of profits ought to be distrib­uted among them in acknowledgment of their commitments. Such sharing of benefits will expand the inspiration and proficiency of employees.

4] Community Service

Business must give back something to the society. As a result, the Library, dispensary, educational foundations and so on which a business can make and help in the advancement of society are created. Business enterprises can build schools, colleges, libraries, hospitals, sports bodies and research institutions. They can help non-government organizations (NGOs) like CRY, Help Age, and others which render services to weaker sections of society.

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Difference between Business, Profession, and Employment

Economic activities are divided into three major categories, namely business, professions and employment.

Business

Business refers to those economic activities, which are connected with the production or purchase & sale of goods or supply of services with the main object of earning a profit. To earn income in the form of profit people engage themselves in business. Examples: fishing, mining, farming, manufacturing, wholesales etc.

Professions

Professions includes those activities, which require special knowledge & skill to be applied by individuals in their occupation. Those engaged in professions are known as professionals. Professionals are generally subjected to guidelines or codes of conduct laid down by professional bodies.

Examples: lawyers are engaged in the legal profession, governed by the bar council of India & chartered accountants belonging to the accounting profession are subject to the regulations of the Institute of chartered accountants of India.

Employment

Getting remunerated in return for the work done for others refers to an employee. Employees are the people who are employed by others. Thus, people who work in factories, offices of banks, insurance companies or government department, etc at various posts are the employees of these organizations. They receive wages & salaries. Examples: working in offices, banks, insurance companies, shops, as a manager, clerk, peon, salesman etc.

Difference between Business, Profession, and Employment

Basis	Business	Profession	Employment
Commencement	Business may commence with the decision of entrepreneur.	The profession may commence on completion of a degree course & by getting a certificate of practice.	Employment commences on joining duty by entering into a service agreement.
Qualification	No minimum qualification required before starting a business.	Prescribed & professional qualification & training required.	Qualification depends on the nature of the job.
Investment	Capital requirement depends on the scale of business.	Limited capital investment is required.	No capital investment is required.
Risk	In business, there is always risk & uncertainty.	In the profession, there is little risk present.	In employment, there is no risk involved.
Transfer of interest	Transfer of interest is possible with some formalities.	Transfer of interest is not possible.	Not possible to transfer the service contract.
Main objective	The main objective of business is to earn a profit.	The main objective of a profession is to provide service.	The main objective of employment is to earn income in the form of salary by satisfying the employer.
Code of conduct	There is no prescribed code of conduct for business.	Code of conduct is prescribed by the professional associations.	The terms & conditions of service contract are applicable to an employee.
Nature of work involved	It involves production, purchase & sale or exchange of goods & services.	It involves the rendering of personalized services of specialized nature.	It involves performing the work as assigned by the employer.

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Accounting Notes

Performance Appraisal part 1

Performance Management is the managerial process that deals with the various dimensions of the performance of the employees which include the identification of the resources to be provided to the employees, evaluation of the employees at regular intervals of time and delivering feedback to them, planning the rewards and incentives, etc.

• Performance Appraisal deals with the evaluation part of performance management.
• It involves the systematic evaluation of an employee with regard to their contribution to the organization. Performance appraisal takes the behaviour, attitude, skillset and knowledge improvement, learning potential and other factors into consideration.
• Performance appraisal is the process of assessment of the job performance of the employees by taking specific metrics into consideration by the supervisors or any other assigned team members.
• It involves the comparison of the performance of an employee with their own performance and with the performance of the other employees over a specific period of time.

Objectives of Performance appraisal

• Helping the organization over promotions, salary increments, incentives, internal job transfers, terminations, improving training modules, etc.
• Providing evaluation feedback to employees, to state what is required from them and what are the areas they need to improve.
• Creating a friendly environment by assessing the difficulties faced by the employees and motivating them.
• To monitor the performance of the employees.

Methods of Performance appraisal

appraiser for every question. The appraiser has to tick the yes box when the given characteristic is found and no box when it is not.

• All the responses are counted, and a final rating is obtained.
• It is a time taking process and not accurate.

8. Essay method: In this method, the appraiser writes about the characteristics of the employee in his own words in the form of an essay.

• With this, the strong and weak points can be easily known.
• But the essay depends on the writing skills of the appraiser. Sometimes, there may be a chance of weak areas getting more highlighted than the strong areas of an employee. This may demotivate the employee.

9. Critical incidents method: In this method, the performance of the employees during critical incidents is taken into consideration.

• All the critical tasks performed by each employee are written and are compared with each other by the appraisal team.
• The rating is done based on the severity of the critical incident.

10. Field review method: In this method, the appraiser takes the help of subordinates and supervisors to rate an employee.

• This method is mostly used during the promotions and increments.
• It is a time-consuming process.

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Performance Appraisal Part 2

Modern methods

The modern methods of performance appraisal are as follows:

1. Management by Objectives(MBO): This method was developed by Peter Drucker. In this method, certain tasks(objectives) based on their job role are given to the employees and a team is assigned to monitor the tasks.

• This will help the organization to know the skill gap of the employees.
• This will help the organization to plan the training modules.
• The setting of objectives to determine the true potential of the employees is a difficult and time-consuming task.

2. 360-degree appraisal: In this method, an employee is appraised by the supervisors, the clients, the subordinates, the customers, including themselves.

• This will help the organization to know about the strong and weak areas of the employees.
• The employees can freely express their views and suggest any changes in the training methods.

3. Assessment centres: In this method, a group of employees are selected and are asked to perform a few tasks individually and a few tasks in teams.

• These tasks are mainly aimed to check the teamwork, leadership qualities and skill set of the employees.
• The tasks are mostly related to their job responsibilities.
• This method is used to decide whether an employee is to be promoted 

4. Behaviourally Anchored Rating Scales (BARS): In this method, all the critical incidents are identified and are divided into different groups based on their departments.

• The employees are rated on their behaviour towards the incidents rather than on the traits.
• This will enable the organization to know the involvement of the employees.

Summary

• Performance appraisal is one of the important processes of performance management that involves assessment of the job performance by taking a few characteristics into consideration.
• In the Ranking method, the employees are ranked based on their performance levels and other characteristics.
• In the Grading method, different grades are given to the employees based on their contribution to the organization.
• In the Paired comparison method, the appraiser compares two employees and marks the better performer. This method is continued until all the employees are compared with one another in this manner.
• In the Forced choice method, the appraiser is given a set of statements and asked to select one statement which defines the employee.
• In the Graphical rating method, the appraiser rates different characteristics of the employees in the form of points like 1, 2, 3, 4, 5, 6, 7 or in the form of excellent or average or bad, etc.
• In the Forced distribution method, the appraiser distributes the employees into five levels like excellent, very good, average, very bad and worst performers.
• In the Checklist method, all the characteristics are given in the question form and two options yes and no is given to the appraiser for every question. The appraiser has to tick the yes box when the given characteristic is found and no box when it is not.
• In the Essay method, the appraiser writes about the characteristics of the employee in his own words in the form of an essay.
• In the Critical incidents method, the performance of the employees during critical incidents is taken into consideration.
• In the Field review method, the appraiser takes the help of subordinates and supervisors to rate an employee.
• In the Management by Objectives(MBO) method, certain tasks(objectives) based on their job role are given to the employees and a team is assigned to monitor the tasks.
• In the 360-degree appraisal, an employee is appraised by the supervisors, the clients, the subordinates, the customers, including themselves.
• In the Assessment centres method, a group of employees are selected and are asked to perform a few tasks individually and a few tasks in teams.
• In the Behaviourally Anchored Rating Scales (BARS) method, all the critical incidents are identified and are divided into different groups based on their departments and the behaviour of the employees towards incidents is rated.

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Job Evaluation

Meaning of Job Evaluation:

Job evaluation is a systematic technique to evaluate the relative worth of an individual job. In other words, it is the process of review, analysis and systematic classification of a job in accordance with its nature, i.e., the varying factors it demands from its workers/operators.

In short, job evaluation assesses all the jobs as per their nature/features in such a manner so that the relative merit of each job may be determined as per their value of work. Needless to say that each and every job factor is assigned a relative weight which contains some points for assessment.

Accordingly, a job contains number of points which depend on its nature and some various factors for its performance/assessment. During the process of job evaluation the job which requires a large number of factors will be given higher rank as compared to a job which requires a small number factors.

It is interesting to note that sometimes two dissimilar jobs contain the same gradation when each of the job bears the same number of points.

Job evaluation helps us to know the correct grade of labour for each individual job relating to training, skill, physical and mental efforts, working conditions, and risk involved while performing a job. It helps the management to ascertain the internal wage and salary structure for various job with a sound basis.

It supplies a rational basis for various wages and salaries for different groups of workers/ employees bearing in mind that these differentials are quite consistent, and equitable and justified. As a result, there will be no dissatisfaction among the employees about their individual earnings.

Methods of Job Evaluation:

The following methods of job evaluations are usually used:

(a) Ranking Method:

As per the requirements, skill, efforts, needed etc., various job are ranked from the lowest to highest, or from highest to lowest. Naturally, job description and analysis of the job should first be computed before introducing the rank for each job. Thereafter, each individual job is valued as compared to other jobs and a rate is given depending on the market basis of the previous one.

(b) Classification/Grading Method:

Under this method, all jobs are grouped under various levels viz., skilled, unskilled, highly skilled, etc. — after considering the nature of work, job description, degree of supervision needed, etc. When the grade is ascertained, each individual job is placed in the appropriate grade. Considering the job, placing the same, pay scale is determined by an expert committee.

(c) Point Rating Method:

Under this method, each job is compared with a common job and points are given for each of the factors as per the relative weightage. Jobs are ranked as per scoring of total points and they are transferred to a number of predetermined grades. Pay scales are fixed for each of the grades. The method is very simple to understand and easy to operate.

Advantages of Job Evaluation:

The advantages of job evaluations are:

(a) It helps to fix proper wages/salaries for the proper job among the workers/employees;

(b) It develops an equitable wage structure and, as such, helps to control cost;

(c) It simplifies wage structure after maintaining uniformity in the rate of wages;

(d) It eliminates anomalies of placement and, as such, labour turnover is minimised;

(e) It facilitates merit rating;

(f) It helps personnel department in promotions, training, placement, transfer etc.;

(g) The workers/employees are satisfied as there is proper placement and right allocation of job;

(h) Employees are satisfied as there is scientific wage structure and incentive payment;

(i) It helps the management to place right person in right places.