1. Human Resource Management for
Small Businesses
As a small business manager, you'll always be involved in human resource
management. Good or bad, it will always be there for you to handle.
It can become the single largest consumer of your time and energy if you don't
know how to handle things well. And, it's still a big consumer of your time and
energy, even if you're adept at handling such things.
That's just how it is. The only way to avoid employee issues is to do everything
yourself.
Let's look at some of the key issues associated with human resource management to
understand what this area of management can involve. We'll look at human resource
practices, and provide some examples. We'll also look at tips for how to handle
certain situations.
Human resource management is something that we all must do if we are going to be
successful. The reason is simple; human resources are the most important
assets we have in most small businesses.
Have a Staffing Plan
Before you start to think about hiring, you'll need at least a basic staffing plan. The
plan should sort out how many employees you expect to hire, the type of employee
you're looking for, and what they will be expected to do. The plan should also
address how the employee expenses will be covered.
A staffing plan should be well coordinated with your business plan, and it should
address items of discussion that will likely take place during candidate interviews.
The plan doesn't have to be detailed or lengthy, just something that addresses the
key issues at a satisfactory level so that wise management decisions can be made
based on its content.
Here are the basics of a staffing plan.
• objectives, both near and long term
• characteristics and culture of your employee(s)
• approach to finding new employees
• how you're going to keep good employees
• training and transition
• funding of employees
• job descriptions

2. • organization chart
The staffing plan has to provide a vision. In the absence of a vision, it's easy to go
off course or go nowhere at all. In addition to helping you understand your plans for
growth, a staffing plan is also useful to help communicate to lenders and prospective
employees just what kind of organization you are trying to create and maintain.
Finding Good Employees
An important part of good human resource management is finding the right
employees for the work you are doing. This is where the idea of culturecomes into
play. Your human resources are the most important asset you have, so you want
them to be of high value to your organization, and that means they need to have the
same culture as you and your organization.
In order to get high value employees, you'll have to spend some time finding them.
Here are ways of finding new employees:
• ads in publications (general or trade specific)
• word of mouth by current employees, associates and customers
• co-op program through schools
• campus recruitment activities
• military recruiting activities
• temp to perm hires
• professional recruiters
• government employment services and agencies
If you expect to have regular growth in your business, then you'll need to spend a
considerable amount of time recruiting. You'll "kiss a lot of frogs" before you find
your prince. Finding good employees can be difficult because many of the good ones
are working elsewhere and smart employers won't want to let go of them.
One of my human resource management (and business management) philosophies
goes like this: "I rather be swamped with work, rather than hire the wrong
person." Here are the reasons:
• hiring can be costly
• it consumes a lot of your time
• new employees stress out current employees
• firing employees stresses you
• exiting staff can stress out current employees
Don't take hiring lightly. Make good selections and take care of your
employees through effective human resource management actions. To find good
employees, you'll need to screen them.

3. Screening Potential Candidates
There are many ways to screen potential employees. Let's look at several key ways
that reflect good human resource management techniques.
First, be selective as to your recruiting grounds. You wouldn't look for a brain
surgeon at the bus stop, so don't look for your "right hand man" there either - unless
your business has something to do with metro mass transit.
Make certain that where you're looking for employees is conducive to finding what
you're looking for. A small and aggressive organization shouldn't be looking for
potential recruits from large and clumsy organizations that reward longevity instead
of leadership and reasonable risk taking.
Second, take a look at current employment on the resume or application. Pretend
for a moment that it's your employment and then ask yourself what it tells others.
Ideally, current employment should reflect:
• challenge
• tenacity
• hard work
• useful skills
Third, take a good hard look at employment history as shown on the resume or
application. What does it tell you about the person and their method of operation?
Ideally, employment history should show:
• aiming high
• job advancement
• good judgement
• reasonable risk taking
• accomplishment
• reasonable loyalty
Fourth, only select for formal interviews those individuals that you believe offer the
best chance of meeting your needs as an employee. Interviewing takes time - your
time and the time of others. Don't waste it interviewing everyone that shows an
interest in your job opportunity.
Personnel Interviews
Here is where you can distinguish between "the good, the bad, the ugly, and the
bizarre". Take your time and be comprehensive as well as methodical. There is lots
to learn from a job interview that applies to making a "good hire" as well as being
smarter for the next interviewee.

4. Here are some keys to success:
• Spend lots of time with the applicant during the interview.
• Have more than one person interview the candidate.
• Ask good open ended questions to learn who they are and what they can and
want to do.
• Let them tell you a story about their work, their life and where they think they
are headed; they should be "selling" to you.
• Don't "sell" the company or your organization to them unless and until you're
certain that they are a good fit.
This is going to sound bizarre, but my advice is don't look at the resume or job
application until you are finished with your general questions and discussion, and
you're ready to wrap things up.
Think of a resume as the human resource management equivalent to a glossy
brochure for a car. Don't just read the brochure - look under the hood and take the
thing out for a test drive. Look at resumes near the end of the interview to see if
there is anything in particular that didn't come up in discussion, then focus on that.
Take notes during interviews so you can compare with others that interview the
same candidate. Notes are also useful when trying to sort out among multiple
candidates that all seem to be a good fit.
Steer clear of discussing benefits, relocation, retirement and other items that aren't
at the core of your business. Pay attention to see if your candidate is primarily
interested in these peripheral items, or in the core job opportunity. This will tell you
a lot about what he or she is searching for.
Don't initiate discussion about compensation unless you are ready to hire. If
the topic is brought up by the interviewee, then only ask what your candidate
requires in terms of compensation.
Hiring
Except in the most informal of situations, hiring should always be done with an
offer letter. The letter should spell out all the particulars of the job including:
• compensation
• benefits
• responsibilities
• performance expectations
• probationary period
• reporting requirements
• desired start date

5. • work location
It needs to be made clear at the start what is being offered, and what is expected. If
it's in writing, then it's difficult to have a misunderstanding. The offer letter helps
document the contractual relationship between the new employee and the
employer.
If you're going to be successful at human resource management, expectations for
employees need to be clearly establish at the start. Putting those expectations in
writing is a good way to do just that.
Human Resource Management Guidelines
If your organization is going to be rather large, you might want to put together
guidelines to explain human resource management policies that you intend to follow.
The guidelines should address things like:
• at will employment
• compensation
• perquisites and bonuses
• performance reviews
• lay offs
• terminations
• conflicts of interest
• disciplinary process
• vacation time
• sick time
• family time
• leave of absence
• employee behavior
It doesn't have to be anything fancy. A page or two for each topic might be just fine.
The more robust your organization, the more you'll want to be consistent about
human resource management. Having it in writing will help you do just that.
Retaining Employees
Implementing your small business ideas will require good staff. Once you find them,
you don't want to let them go elsewhere.
During an employee's time with a company, there are a number of forces that act on
him or her that influence behavior. Think of these influences as little nudges. I like to
refer to them as "push" and "pull". In the most simplistic of terms, you're either

6. pushing an employee towards the door, or pulling them deeper into the folds of your
organization.
Assuming that you've made a good hire and you want to keep employees, the trick is
to recognize individual needs of employees and cater to those needs, within reason,
in order to keep pulling them away from the door. Even if you can't pull them away
from the door, at least don't do things to push them out the door.
Many things in life offer us a "push" and a "pull". Some things push us away from
where we are, and other things pull us toward a new place to be. Typically it takes
both a push and a pull to make an employee change jobs.
To retain employees, your human resource management philosophy should be
to eliminate things that push employees out. It should also, within reason,
provide a number of things that keep pulling employees into the organization.
Both approaches should be successful in retaining good employees as they both
counteract the "pulls" from outside organizations.
Recognize of course, that some employees will lose interest and need something
fresh to keep their interest. If you can't continually provide challenges, opportunities
for advancement and other interesting and rewarding opportunities, then you'll have
some employees leave through no fault of your own.
The important thing is to identify your key employees and make certain they are
being treated well. Interact with them on a regular basis to make certain that you
understand what makes them tick, and be aware of concerns they may have about
job satisfaction.
Employee Performance
A traditional approach to human resource management is to conduct annual
employee performance appraisals. Why? Do employees only perform annually? Is
there a performance appraisal season? Do you only lay off or fire employees
annually?
Toss out whatever you learned about employee performance appraisals and consider
the following:
• poor performance needs to be identified and corrected immediately
• good performance needs to be rewarded - anytime it occurs
• performance that gets rewarded will surely be recognized and repeated
• there are many different ways to reward good performers
• poor performers are often your fault
• pay for performance is a great idea
• time delayed bonuses are a great idea
• making performance improvement contracts is a good idea

7. • be aware that "relative deprivation" is at work everywhere across your
organization
• you can change employee status and pay based on performance
The big picture to keep in mind is that your organization functions as a team,
whether you see it that way or not. Everyone will be quietly evaluating employee
performance and comparing that with their pay, perquisites and bonuses to see if
things are just.
The perception of justice helps keep the team operating well. Injustice, real or
perceived, can upset the team at all levels. Your job is to provide for justice, or
prepare for discontentment, mutiny and desertion. Here are two examples:
A high performing employee, who sacrifices personal time and energy to make
certain their end of the operation is efficient and productive, is not recognized for her
contribution to the company effort. Even with higher compensation than most, she
starts to feel deprived relative to othersbecause there are others doing much less
work, getting recognition for their modest contributions, and getting just a little less
pay.
A modest performing employee enjoys "home office" work while other much higher
performing employees, who have already paid their "dues" with plenty of field work,
are still out on the road giving up much personal time with friends and family back
home because they don't go home each night like our modest performer. Even a
work location can be seen as a reward for performance. When apparent rewards
are bestowed on others less deserving, morale can suffer.
In a larger company, some of these issues might be handled by the human resource
management department, but for a small business, it's all on your shoulders. As the
head of human resource management (and everything else), be aware that everyone
has a sense of justice, and injustices are only tolerated for so long.
The best approach to human resource management is to actively seek out potential
sore spots and find a workable solution that is reasonable when viewed from "30,000
feet".
If you have a poor performing employee, you must sit down with them to discuss
your expectations in light of their performance, and then lay out what
improvements you expect to see. Make certain that it's clear that their continued
employment is contingent upon them being successful in meeting your expectations.
You're not in business to provide employment, but your employees are there to be
an asset for your enterprise, so orient your actions and their discipline accordingly. If
you mess around, you'll be messed around with.
A good human resource management policy is "firm and fair" with a good helping
of understanding and compassion for others. Nevertheless, you're there to meet
customer needs and provide for yourself, and your employees should be there to
support your efforts.

8. Laying Off
If you're managing things well, and you have a reasonably stable marketplace, there
shouldn't be much of a need to lay off employees. Your business plan and staffing
plan should be well coordinated such that both help you grow the business in a
steady and well-reasoned manner.
Before laying anyone off, be certain you have exhausted all reasonable
possibilities to avoid doing so. Consider:
• other suitable work
• change of work hours
• different work location
• change of employment status
• different compensation plan
Sit down with them and try to work other angles that can keep them associated with
your business. You've invested in your employees, so as a good human resource
management policy, you don't want to toss away that investment and risk it
going to a competitor by laying off an employee.
Also consider that if you are laying off and rehiring employees, you'll look like a
human resource management yo-yo, and that can't help but undermine employee
confidence in the company position, and send a distress signal to your competitors.
If you have to lay off an employee, just be honest and upfront about the
reasons why, and try to give as much advance notice as possible so they can look
for other work. This is an employee that you would like to take back into the fold, so
don't do anything that would queer that possibility.
On the other hand, if you would rather not have that employee in your organization,
then simply fire them and be done with it.
Firing
Firing someone is never a pleasant activity. It is something you hope you never have
to do. Employees should see that they are a misfit and "fire" themselves voluntarily.
If not, you'll have to do the job for them.
First, make certain that you have gone "all the way through it" to be sure that
you're making the right decision. Often discussion with the poor performing
employee is necessary to be certain you have justification for their dismissal.
Next, sit down with the employee and discuss their performance, your
attempts to change their performance to suit your needs, and explain that their
performance has not met your expectations. Provide examples of unsatisfactory
performance and explain that they are no longer a match for your organization.

9. After you have presented your case, they'll be expecting the axe (and no longer
listening to anything you have to say), so you can then sum it up by saying
something like "this just isn't working, so I am terminating your employment
effective today/immediately/at close of business on Friday", or whatever you believe
to be appropriate.
It's a good human resource management philosophy to give them reasonable
time to get their personal belongings, or make arrangements for them to be sent
to them, and escort them to the door. You need to be fair and respectful, as how
you treat any employee will become known to all others in your employ.
Human Resource Management Alternatives
Okay, so all this talk about employees is a little intimidating. I can't blame you for
thinking that way. Good employees are a wonderful experience. Not-so-good
employees are a pain in the neck, or perhaps a bit lower.
So, what are the alternatives to traditional human resource management? Here are
some to consider:
• contract help
• associates
• temp to perm arrangements
• partners
• going it alone
Each has it's pros and cons, so consider each alternative carefully before you
make a decision with respect to how you'll satisfy your need for human resources
as you implement your small business ideas.
I wish you well on your human resource management mission.
The success of a small business relies on how the entrepreneurs manage and operate
the business. There are a lot of people starting a small business everyday, but because
of the lack of knowledge, they end up with an empty pocket. It is critical that one
must consider how the business should operate. As a business owner, you should have
clear understanding on your business plan and this should include your operational
decisions in order to meet your business goals and objectives.

10. When we say business operation, we are referring to a detailed analysis of how you are
going to provide your products and services in the marketplace. It is important that
you can identify the strength of your business so that you can work it out in the
production stage and be on a competitive edge. In your business plan strategy, you
should clearly state your operational approach. The operation stage relies on the
people. You should create a business structure so that you can easily identify the
people who are qualified to do the job. Always look at the qualifications of your
people because the success of your business operation is in their hands.
A successful business operation also relies on how well you manage your business. You
can’t operate well if there’s a lack of management. There are many challenges
involved in managing a business because this will include the totality of the business,
meaning one must have to check on every aspect of your business.
One of the greatest challenges in managing a business is the financial aspect.
Oftentimes, this is the culprit which causes small businesses to fail. Inadequate
funding can make business operation stop. You must have a good management skill to
save the business with low capital. Business management also includes marketing. This
is one area of business which you should work out because no matter how excellent
your products and services are, you cannot achieve sales if there is no marketing
strategies being implemented. It is the responsibility of the one who manages the
business to create a good marketing strategy as well as deploy people who are capable
of doing these marketing strategies.
The best way to manage and operate a business is by empowering your people to
become leaders. To ensure smooth business management and operations, listen to your
employees and tend to their needs. A good manager should know how to reach out to
the employees. You must always remember that you cannot operate your business well
if there are unresolved conflicts within your employees. Help your people to improve
on their personal careers. You are not only helping them to become better, but you
are also helping your business to become better.
In closing, operating and managing a business is not an easy task. But if you know what
you are doing and you implement some techniques, you can operate and manage your
business more smoothly. Help your business reach its full potential, manage it well and
implement good operational approach. Establish a good relationship with your people,
and together as a team, you can sail your way towards business success.
Starting a new business is not rocket science if one keeps the basic legal requirements in mind. The present
article lists down the main legal formalities required to start a Company form of business in India.
There are many forms in which a business can be organized. Usually, the following models are popular:
• Sole Proprietorship
• Partnership ,including Limited Liability Partnerships called (LLP)
• Company – Public/Private

11. While there are certain processes that are common to any form of business organization, each one of the
above has certain peculiar requirements. This article analyzes the requirements for starting a Company.
These may vary from State to State and may change from time to time. Also a business may require
additional (or not all of the below mentioned) registrations, compliance and certifications.
Incorporating your company
Name approval
The first step in getting your company registered is the approval of name for the Company. Generally, it
takes about seven days to get the approval. The following steps are required for name approval:
You have to file an application in Form No. 1A with the Registrar of Companies (ROC) of the State in which
the Registered Office of the Company is proposed to be situated. The application is to be signed by one of
the promoters and must contain the following details:
Minimum 2 alternative names for the proposed Company. (The name can be coined names from the objects
of the Company or the names of the directors, etc. but should definitely be indicative of the main object of
the Company. Justification for the name needs to be specified along with the application).
Names and address of the members (minimum 7 for a public Company and 2 for a private Company).
Authorized Capital of the Company (Minimum Rs.5 Lac for a public Company and Rs. 1 lac for a private
Company).
Main objects of the Company
On submitting the application, the ROC scrutinizes the same and sends the approval/objections in about 10
days to the applicant.
Director Identification Number (DIN)
Directors for an Indian company, both Indian and foreigners, must register and get identification number
under the new requirements. It is called Director Identification Number (DIN). The application needs to be
filed online.
The form along with the supporting documents (PAN Card & Residence proof duly attested by CA, Notary or
Gazette Officer) is to be sent to the offices designated by respective ROCs.
The fee for obtaining DIN can be deposited online or deposited in banks authorized for this purpose.
Digital Signature Certificate (DSC)
Directors for an Indian company, both Indian and foreigners, are also required to get Digital Signature
Certificate (DSC). DSC is required for all Directors or authorized representatives of any Company as well as
the professionals who will sign ROC forms or documents.
Memorandum and Articles of Association (Memorandum and Articles respectively)
While the Memorandum states the main, ancillary/subsidiary and other objects of the Company, the Articles
contain the rules and procedures for the routine conduct of the Company. The Memorandum also states the
authorized share capital of the Company and the names of its first directors.
Memorandum and Articles also need to be stamped. The stamp duty depends on the authorized share
capital.

12. Documents Required to be Filed with ROC
The following documents are required to be submitted to the ROC :
Memorandum and Articles - These are required to be executed by the promoters in their own hand in the
presence of a witness in quadruplicate stating their full name, father’s name, residential address,
occupation, number of shares subscribed etc.
Form No. 1 - This is a declaration to be executed on a non-judicial Rs 20 stamp paper by one of the
directors of the Company or other specified persons such as attorneys or advocates stating that all the
requirements of the incorporation have been complied with.
Form No. 18 - This is to be filed by one of the directors of the Company informing the ROC of the registered
office of the Company.
Form No. 29 - This is the consent obtained from all the proposed directors of the Company to act as
directors of the Company. (Not required in case of private Company).
Form No. 32 - This states the appointment of the proposed directors on the board of directors from the date
of incorporation of the Company and is signed by one of the proposed directors.
Name approval letter in original.
Power of Attorney signed by all the subscribers to Memorandum authorizing one of the subscribers or any
other person to act on their behalf for the purpose of incorporation and accepting the certificate of
incorporation.
Power of Attorney in case of a subscriber who has appointed another person to sign the Memorandum on
his behalf.
Applicable filing fees.
These documents need to be filed online first and then a physical copy should be submitted to the ROC.
Certificate of Incorporation
After the above documents are filed, the ROC calls the attorney on a specified date for scrutiny and making
corrections, if any in the Memorandum and Articles filed. On complying with the same, the certificate of
incorporation is sent by post to the registered office of the newly registered company.
Web resource : mca.gov.in
Income Tax related compliance
Permanent Account Number (PAN)
After incorporation, the Company must obtain its PAN. For this purpose, an application needs to be filed with
the Income Tax Department in Form 49A with the necessary documents. PAN is mandatory for opening of
Bank Account, filling of Income Tax returns and various other financial transactions.
Tax Deduction Account Number (TAN)
After incorporation, the Company must also obtain a TAN. For this purpose, an application needs to be filed
with the Income Tax Department in Form 49B with necessary documents. TAN is required for depositing of
TDS/TCS.
Web resource: incometaxindia.gov.in
Other Tax compliance
Value Added Tax
VAT registration is required for a trading business. This is to be applied for to the local Sales Tax

13. Department in the prescribed forms along with specified fees and necessary documents. On completion of
the formalities, a Tax Identification Number (TIN) is granted.
Professional tax
It is a tax on profession (including employment). Professional tax is applicable in some states in India and
the rate of tax also varies from State to State.
Service Tax
Service tax is applicable on an entity which is engaged in providing prescribed services. There are more
than 100 services on which service tax is currently applicable. The rate of service tax presently is 10%.
Web resource : exciseandservicetax.nic.in
Labor Laws
The Shops & Establishment Act
The Shops and Establishment Act is a State legislation and, thus, each state has its own rules for the Act.
The objective of this Act is to lay down statutory obligation and rights of employers as well as the
employees. Registration of shop/establishment is mandatory within 30 days of commencement of work.
Employees Provident Fund Organization
Provident fund registration is compulsory if the size of your workforce is 20 or more. The employer is
required to provide necessary information to the concerned regional Provident Fund Organization (EPFO) in
the prescribed form for allotment of Establishment Code Number.
Employees State Insurance Corporation (ESIC)
Employees’ State Insurance Scheme of India is an integrated social security scheme tailored to provide
social protection to workers in the organized sector and their dependents in contingencies such as sickness,
maternity or death and disablement due to an employment related injury or occupational disease.
The ESI Act, (1948) applies to the following categories of factories and establishments in the implemented
areas:-
Non-seasonal factories using power and employing ten (10) or more persons.
Non-seasonal and non-power using factories and establishments employing twenty (20) or more persons.
The employer is required to provide necessary information to the concerned regional ESI department in the
prescribed form for allotment of Establishment Code Number.
Miscellaneous
Importer Exporter Code (IEC)
IEC Code is mandatory for doing import or export.
. Introduction

14. Introduction: Business concerns are established with the objective of making profits.
They can be established either by one person or by a group of persons in the private
sector by the government or other public bodies in the public sector. A business started
by only one person is called sole proprietorship. The business started by a group of
persons can be either a Joint Hindu Family or Partnership or Joint Stock Company or a
Co-operative form of organization.
TOP
Thus there are various forms of business organization
1. Sole Proprietorship
2. Joint Hindu Family Firm
3. Partnership Firm
4. Joint Stock Company
5. Co-operative Society
Forms of business organization are legal forms in which a business enterprise may be
organized and operated.
These forms of organization refer to such aspects as ownership, risk bearing, control and
distribution of profit. Any one of the above mentioned forms may be adopted for
establishing a business, but usually one form is more suitable than other for a particular
enterprise. The choice will depend on various factors like the nature of business, the
objective, the capital required, the scale of operations, state control, legal requirements
and so on.
Out of the forms of private ownership listed above the first three forms (1, 2, and 3) may
be described as non corporate and the remaining ( 4 and 5 ) as corporate forms of ownership.
The basic difference between these two categories is that a non-corporate form of business can
be started without registration while a corporate form of business cannot be set up without
registration under the laws governing their functioning.

15. Check your progress- 1
List out the various forms of business organization.
1. ______________________________
2. ______________________________
3. ______________________________
4. ______________________________
5. ______________________________
Activity- 1
Identify the forms of organization of any seven organizations which you are familiar with and list
out who heads them.
1. ___________________________
2. ___________________________
3. ___________________________
4. ___________________________

16. 5. ___________________________
6. ___________________________
7. ___________________________
Characteristics of an ideal form of organization
Before we discuss the features, merits and demerits of different forms of organization, let us
know the characteristics of an ideal form of organization. The characteristics of an ideal form of
organization are found in varying degrees in different forms of organization. The entrepreneur,
while selecting a form of organization for his business, should consider the following factors.
• Ease of formation: It should be easy to form the organization. The formation should not
involve many legal formalities and it should not be time consuming.
• Adequacy of Capital: The form of organization should facilitate the raising of the required
amount of capital at a reasonable cost. If the enterprise requires a large amount of
capital, the preconditions for attracting capital from the public are a) safety of investment
b) fair return on investment and c) transferability of the holding.
• Limit of Liability: A business enterprise may be organized on the basis of either limited or
unlimited liability. From the point of view of risk, limited liability is preferable. It means that
the liability of the owner as regards the debts of the business is limited only to the amount
of capital agreed to be contributed by him. Unlimited liability means that even the owners’
personal assets will be liable to be attached for the payment of the business debts.

17. • Direct relationship between Ownership, Control and Management: The responsibility for
management must be in the hands of the owners of the firm. If the owners have no
control on the management, the firm may not be managed efficiently.
• Continuity and Stability: Stability is essential for any business concern. Uninterrupted
existence enables the entrepreneur to formulate long-term plans for the development of
the business concern.
• Flexibility of Operations: another ideal characteristic of a good form of organization is
flexibility of operations. Changes may take place either in market conditions or the states’
policy toward industry or in the conditions of supply of various factors of production. The
nature of organization should be such as to be able to adjust itself to the changes without
much difficulty.
Sole Proprietorship
Meaning: A sole proprietorship or one man’s business is a form of business organization owned
and managed by a single person. He is entitled to receive all the profits and bears all risk of
ownership.
Features: The important features of sole proprietorship are:
1. The business is owned and controlled by only one person.
2. The risk is borne by a single person and hence he derives the total benefit.
3. The liability of the owner of the business is unlimited. It means that his personal assets
are also liable to be attached for the payment of the liabilities of the business.

18. 4. The business firm has no separate legal entity apart from that of the proprietor, and so
the business lacks perpetuity.
5. To set up sole proprietorship, no legal formalities are necessary, but there may be legal
restrictions on the setting up of particular type of business.
6. The proprietor has complete freedom of action and he himself takes decisions relating to
his firm.
7. The proprietor may take the help of members of his Family in running the business.
Advantages
1. Ease of formation: As no legal formalities are required to be observed.
2. Motivation: As all profits belong to the owner, he will take personal interest in the
business.
3. Freedom of Action: There is none to interfere with his authority. This freedom promotes
initiative and self-reliance.
4. Quick Decision: No need for consultation or discussion with anybody.
5. Flexibility: Can adapt to changing needs with comparative ease.
6. Personal Touch: comes into close contact with customers as he himself manages the
business. This helps him to earn goodwill.
7. Business Secrecy: Maintaining business secrets is very important in today’s competitive
world.
8. Social Utility: Encourages independent living and prevents concentration of economic
power.
Disadvantages
1. Limited resources: one man’s ability to gather capital will always be limited.
2. Limited Managerial Ability

19. 3. Unlimited Liability: Will be discouraged to expand his business even when there are good
prospects for earning more than what he has been doing for fear of losing his personal
property.
4. Lack of Continuity: uncertain future is another handicap of this type of business. If the
sole proprietor dies, his business may come to an end.
5. No Economies of Large Scale: As the scale of operations are small, the owner cannot
secure the economies and large scale buying and selling. This may raise the cost of
production.
Suitability of Sole Proprietorship Form
From the discussion of the advantages and disadvantages of sole proprietorship above, it is clear
that this form of business organization is most suited where:
1. The amount of capital is small
2. The nature of business is simple in character requiring quick decisions to be taken
3. Direct contact with the customer is essential and
4. The size of demand is not very large.
These types of conditions are satisfied by various types of small business such as retail shops,
legal or medical or accounting profession, tailoring, service like dry cleaning or vehicle repair etc.
hence sole proprietor form of organization is mostly suitable for these lines of businesses. This
form of organization also suits those individuals who have a strong drive for independent thinking
and highly venturous some in their attitude.
Joint Hindu Family
Meaning

20. The Joint Hindu Family, also known as Hindu Undivided Family (HUF) is a non-corporate form of
business organization. It is a firm belonging to a Joint Hindu Family. It comes into existence by
the operations of law and not out of contract.
In Hindu Law, there are two schools of thought viz Dayabhaga which is applicable in Bengal and
Assam, and Mitakshara which is applicable in the rest of India. According to Mitakshara school,
the property of the Joint Hindu Family is inherited by a Hindu Family from his father, grandfather
and great grandfather, thus three successive generations in male line (son, grandson and great
grandson ) can simultaneously inherit the ancestral propriety. They are called coparceners in
interest and the senior most member of the Family is called karta. The Hindu succession act
1956, has extended to the line of co-parceners interest to female relatives of the deceased co-
parcener or male relative climbing through such female relatives. Under the Dayabagha law the
male heirs become members only on the death of the father.
Features
Some of the important features of the Joint Hindu Family are as follows
1. The business is generally managed by the father or some other senior member of the
Family he is called the Karta or the manager.
2. Except the Karta, no other member of the family has any right of participation in the
management of a Joint Hindu Family firm
3. The other members of the family cannot question the authority of the Karta and their only
remedy is to get the family dissolved by mutual agreement.
4. If the Karta has misappropriated the funds of the business, he has to compensate the
other co-parceners to the extent of their share in the Joint property of the family
5. For managing the business, the Karta has the power to borrow funds, but the other co-
parceners are liable only to the extent of their share in the business. In other words the
authority is limited.
6. The death of any member of the family does not dissolve the business of the family
7. Dissolution of the Joint Hindu Family can take place only though mutual agreement
Advantages

21. 1. Stability: The existence of the HUF does not come to an end with the death of any co-
parcener, hence there is stability.
2. Knowledge and experience: There is scope for younger members of the family to get the
benefit of the knowledge and experience of the elder members of the family.
3. No Interference: The Karta has full freedom to take decisions without any interference by
any member of the family.
4. Maximum Interest: As the Karta’s liability is unlimited, he takes maximum interest in
running the business.
5. Specialization: By assigning work to the members as per their knowledge and
experience, the benefits of specialization and division of work may be secured.
6. Discipline: The firm provides an opportunity to its members to develop the virtues of
discipline, self-sacrifice and co-operation.
7. Credit Worthiness: Has more credit worthiness when compared to that of a sole
proprietorship.
Disadvantages
1. No Encouragement: As the benefit of hard work of some members is shared by all the
members of the family, there is no encouragement to work hard.
2. Lazy and Inactive: The Karta takes the responsibility to manage the firm. This may result
in the other members becoming lazy.
3. Members Initiative: The Karta alone has full control over the business and the other
members cannot interfere with the management of the firm. This may hamper members
initiative.
4. Duration: The life of the business is shortened if family quarrels take precedence over
business interest.
5. Abuse of Freedom: There is scope for the Karta to misuse his full freedom in managing
the business for his personal benefit.
Conclusion
This form of business organization which at one time was popular in India is now losing its
popularity. The main cause for its decline is the gradual dissolution of the Joint Hindu Family
system, it is being replaced by sole proprietorship or partnership firm.

22. Partnership Form of Organization
Generally when a proprietor finds it’s difficult to handle the problems of expansion, he
thinks of taking a partner. In other words, once a business grows beyond the capacity of a
sole proprietorship and or a Joint Hindu Family, it becomes unarguably necessary to form
partnership. It means that partnership grows out of the limitations of one-man business in
terms of limited financial resources, limited managerial ability and unlimited risk.
Partnership represents the second stage in the evolution of ownership forms.
In simple words, a Partnership is an association of two or more individuals who agree to
carry on business together for the purpose of earning and sharing of profits. However a
formal definition is provided by the Partnership Act of 1932.
Definition
Section 4 of the Partnership Act, 1932 defines Partnership 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”
Features of Partnership
1. simple procedure of formation: the formation of partnership does not involve any
complicated legal formalities. By an oral or written agreement, a Partnership can
be created. Even the registration of the agreement is not compulsory.
2. Capital: The capital of a partnership is contributed by the partners but it is not
necessary that all the partners should contribute equally. Some may become
partners without contributing any capital. This happens when such partners have
special skills, abilities or experience. The partnership firm can also raise
additional funds by borrowing from banks and others.
3. Control: The control is exercised jointly by all the partners. No major decision can
be taken without consent of all the partners. However, in some firms, there may

23. partners known as sleeping or dormant partners who do not take an active part in
the conduct of the business.
4. Management: Every partner has a right to take part in the management of the
firm. But generally, the partnership Deed may provide that one or more than one
partner will look after the management of the affairs of the firm. Sometimes the
deed may provide for the division of responsibilities among the different partners
depending upon their specialization.
5. Duration of partnership: The duration of the partnership may be fixed or may not
be fixed by the partners. In case duration is fixed, it is called as “partnership for a
fixed term. When the fixed period is over, the partnership comes to an end.
6. Unlimited Liability: The liability of each partner in respect of the firm is
unlimited. It is also joint and several and, therefore any one of the partner can be
asked to clear the firm’s debts in case the assets of the firm are inadequate for it.
7. No separate legal entity: The partnership firm has no independent legal existence
apart from that of the persons who constitute it. Partnership is dissolved when any
partner dies or retires. Thus it lacks continuity.
8. Restriction on transfer of share: A partner cannot transfer his share to an outsider
without the consent of all the other partners.
Advantages
1. ease of formation: partnership can be easily formed without expense and legal
formalities. Even the registration of the firm is not compulsory.
2. large resources: when compared to sole-proprietorship, the partnership will have
larger resources. Hence, the scale of operations can be increased if conditions
warrant it.
3. better organization of business; as the talent, experience, managerial ability and
power of judgment of two or more persons are combined in partnership, there is
scope for a better organsation of business.
4. greater interest in business: as the partners are the owners of the business and as
profit from the business depends on the efficiency with which they manage, they
take as much interest as possible in business.
5. prompt decisions: as partners meet very often, they take decisions regarding
business policies very promptly. This helps the firm in taking advantage of
changing business conditions.

24. 6. balance judgement: as partners possesses different types of talent necessary for
handling the problems of the firm, the decisions taken jointly by the partners are
likely to be balanced.
7. flexibility: partnership is free from legal restriction for changing the scope of its
business. The line of business can be changed at any time with the mutual consent
of the partners. No legal formalities are involved in it.
8. diffusion of risk; the losses of the firm will be shared by all the partners. Hence,
the share of loss in the case of each partner will be less than that sustained in sole
proprietorship.
9. protection to minority interest: important matters like change in the nature of
business, unanimity among partners is necessary hence, the minority interest is
protected.
10. influence of unlimited liability: the principle of unlimited liability helps in two
ways. First, the partners will be careful in their business dealings because of the
fear of their personal properties becoming liable under the principle of unlimited
liability. Secondly, it helps the firm in raising loans for the business as the
financers are assured of the realization of loans advanced by them.
Disadvantages.
1. great risk; as the liability is joint and several, any one of the partners can be made
to pay all the debts of the firm. This affects his share capital in the business and
his personal properties.
2. lack of harmony: some frictions, misunderstanding and lack of harmony among
the partners may arise at any time which may ultimately lead to the dissolution.
3. limited resources: because of the legal celing on the maximum number of
partners, there is limit to the amount of capital that can be raised.
4. tendency to play safe: because of the principle of unlimited liability, the partners
tend to play safe and pursue unduly conservative policies.
5. no legal entity: the partnership has no independent existence apart from that of the
persons constituting it, i.e it is not a legal entity.
6. instability: the death, retirement or insolvency of a partner leads to the dissolution
of the partnership. Further even any one partner if dissatisfied with the business,
can bring about the dissolution of partnership. Hence partnership lacks continuity

25. 7. lack of public confidence: no legal regulations are followed at the time of the
formation of partnership and also there is no publicity given to its affairs. Because
of these reasons, a partnership may not enjoy public confidence.
sustainability: the advantages and drawbacks of partnership stated above indicate that
the partnership form tends to be useful for relatively small business, such as retail
trade, mercantile houses of moderate size, professional services or small scale
industries and agency business.
But when compared to sole proprietorship partnership is suitable for a business bigger in
size and operations.