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Human resource management for small businesses

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Human resource management for small businesses

  1. 1. Human Resource Management for Small Businesses As a small business manager, youll 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 dont know how to handle things well. And, its still a big consumer of your time and energy, even if youre adept at handling such things. Thats just how it is. The only way to avoid employee issues is to do everything yourself. Lets look at some of the key issues associated with human resource management to understand what this area of management can involve. Well look at human resource practices, and provide some examples. Well 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, youll need at least a basic staffing plan. The plan should sort out how many employees you expect to hire, the type of employee youre 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 doesnt 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 youre going to keep good employees• training and transition• funding of employees• job descriptions
  2. 2. • organization chart The staffing plan has to provide a vision. In the absence of a vision, its 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, youll 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 youll need to spend a considerable amount of time recruiting. Youll "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 wont 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 Dont take hiring lightly. Make good selections and take care of your employees through effective human resource management actions. To find good employees, youll need to screen them.
  3. 3. Screening Potential Candidates There are many ways to screen potential employees. Lets look at several key ways that reflect good human resource management techniques. First, be selective as to your recruiting grounds. You wouldnt look for a brain surgeon at the bus stop, so dont look for your "right hand man" there either - unless your business has something to do with metro mass transit. Make certain that where youre looking for employees is conducive to finding what youre looking for. A small and aggressive organization shouldnt 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 its 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. Dont 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. 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.• Dont "sell" the company or your organization to them unless and until youre certain that they are a good fit. This is going to sound bizarre, but my advice is dont look at the resume or job application until you are finished with your general questions and discussion, and youre ready to wrap things up. Think of a resume as the human resource management equivalent to a glossy brochure for a car. Dont 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 didnt 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 arent 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. Dont 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. 5. • work location It needs to be made clear at the start what is being offered, and what is expected. If its in writing, then its difficult to have a misunderstanding. The offer letter helps document the contractual relationship between the new employee and the employer. If youre 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 doesnt have to be anything fancy. A page or two for each topic might be just fine. The more robust your organization, the more youll 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 dont want to let them go elsewhere. During an employees 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, youre either
  6. 6. pushing an employee towards the door, or pulling them deeper into the folds of your organization. Assuming that youve 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 cant pull them away from the door, at least dont 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 cant continually provide challenges, opportunities for advancement and other interesting and rewarding opportunities, then youll 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. 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 dont 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, its 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 its clear that their continued employment is contingent upon them being successful in meeting your expectations. Youre 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, youll 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, youre there to meet customer needs and provide for yourself, and your employees should be there to support your efforts.
  8. 8. Laying Off If youre managing things well, and you have a reasonably stable marketplace, there shouldnt 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. Youve invested in your employees, so as a good human resource management policy, you dont 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, youll look like a human resource management yo-yo, and that cant 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 dont 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, youll have to do the job for them. First, make certain that you have gone "all the way through it" to be sure that youre 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. 9. After you have presented your case, theyll 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 isnt working, so I am terminating your employment effective today/immediately/at close of business on Friday", or whatever you believe to be appropriate. Its 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 cant 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 its pros and cons, so consider each alternative carefully before you make a decision with respect to how youll 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. 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. 11. While there are certain processes that are common to any form of business organization, each one of theabove 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 requireadditional (or not all of the below mentioned) registrations, compliance and certifications.Incorporating your companyName approvalThe first step in getting your company registered is the approval of name for the Company. Generally, ittakes 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 whichthe Registered Office of the Company is proposed to be situated. The application is to be signed by one ofthe promoters and must contain the following details:Minimum 2 alternative names for the proposed Company. (The name can be coined names from the objectsof the Company or the names of the directors, etc. but should definitely be indicative of the main object ofthe 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 privateCompany).Main objects of the CompanyOn submitting the application, the ROC scrutinizes the same and sends the approval/objections in about 10days to the applicant.Director Identification Number (DIN)Directors for an Indian company, both Indian and foreigners, must register and get identification numberunder the new requirements. It is called Director Identification Number (DIN). The application needs to befiled online.The form along with the supporting documents (PAN Card & Residence proof duly attested by CA, Notary orGazette 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 SignatureCertificate (DSC). DSC is required for all Directors or authorized representatives of any Company as well asthe 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 Articlescontain the rules and procedures for the routine conduct of the Company. The Memorandum also states theauthorized 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 sharecapital.
  12. 12. Documents Required to be Filed with ROCThe 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 thepresence 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 thedirectors of the Company or other specified persons such as attorneys or advocates stating that all therequirements 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 registeredoffice of the Company.Form No. 29 - This is the consent obtained from all the proposed directors of the Company to act asdirectors 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 dateof 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 anyother person to act on their behalf for the purpose of incorporation and accepting the certificate ofincorporation.Power of Attorney in case of a subscriber who has appointed another person to sign the Memorandum onhis 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 IncorporationAfter the above documents are filed, the ROC calls the attorney on a specified date for scrutiny and makingcorrections, if any in the Memorandum and Articles filed. On complying with the same, the certificate ofincorporation is sent by post to the registered office of the newly registered company.Web resource : mca.gov.inIncome Tax related compliancePermanent Account Number (PAN)After incorporation, the Company must obtain its PAN. For this purpose, an application needs to be filed withthe Income Tax Department in Form 49A with the necessary documents. PAN is mandatory for opening ofBank 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 filedwith the Income Tax Department in Form 49B with necessary documents. TAN is required for depositing ofTDS/TCS.Web resource: incometaxindia.gov.inOther Tax complianceValue Added TaxVAT registration is required for a trading business. This is to be applied for to the local Sales Tax
  13. 13. Department in the prescribed forms along with specified fees and necessary documents. On completion ofthe formalities, a Tax Identification Number (TIN) is granted.Professional taxIt is a tax on profession (including employment). Professional tax is applicable in some states in India andthe rate of tax also varies from State to State.Service TaxService tax is applicable on an entity which is engaged in providing prescribed services. There are morethan 100 services on which service tax is currently applicable. The rate of service tax presently is 10%.Web resource : exciseandservicetax.nic.inLabor LawsThe Shops & Establishment ActThe 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 theemployees. Registration of shop/establishment is mandatory within 30 days of commencement of work.Employees Provident Fund OrganizationProvident fund registration is compulsory if the size of your workforce is 20 or more. The employer isrequired to provide necessary information to the concerned regional Provident Fund Organization (EPFO) inthe 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 providesocial 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 implementedareas:-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 theprescribed form for allotment of Establishment Code Number.MiscellaneousImporter Exporter Code (IEC)IEC Code is mandatory for doing import or export.. Introduction
  14. 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 privatesector by the government or other public bodies in the public sector. A business startedby only one person is called sole proprietorship. The business started by a group ofpersons can be either a Joint Hindu Family or Partnership or Joint Stock Company or aCo-operative form of organization.TOPThus 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 SocietyForms of business organization are legal forms in which a business enterprise may beorganized and operated.These forms of organization refer to such aspects as ownership, risk bearing, control anddistribution of profit. Any one of the above mentioned forms may be adopted forestablishing a business, but usually one form is more suitable than other for a particularenterprise. The choice will depend on various factors like the nature of business, theobjective, the capital required, the scale of operations, state control, legal requirementsand so on.Out of the forms of private ownership listed above the first three forms (1, 2, and 3) maybe 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 canbe started without registration while a corporate form of business cannot be set up withoutregistration under the laws governing their functioning.
  15. 15. Check your progress- 1List out the various forms of business organization. 1. ______________________________ 2. ______________________________ 3. ______________________________ 4. ______________________________ 5. ______________________________Activity- 1Identify the forms of organization of any seven organizations which you are familiar with and listout who heads them. 1. ___________________________ 2. ___________________________ 3. ___________________________ 4. ___________________________
  16. 16. 5. ___________________________ 6. ___________________________ 7. ___________________________Characteristics of an ideal form of organizationBefore we discuss the features, merits and demerits of different forms of organization, let usknow the characteristics of an ideal form of organization. The characteristics of an ideal form oforganization 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. 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 ProprietorshipMeaning: A sole proprietorship or one man’s business is a form of business organization ownedand managed by a single person. He is entitled to receive all the profits and bears all risk ofownership.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. 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. 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 FormFrom the discussion of the advantages and disadvantages of sole proprietorship above, it is clearthat 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. Thisform of organization also suits those individuals who have a strong drive for independent thinkingand highly venturous some in their attitude. Joint Hindu FamilyMeaning
  20. 20. The Joint Hindu Family, also known as Hindu Undivided Family (HUF) is a non-corporate form ofbusiness organization. It is a firm belonging to a Joint Hindu Family. It comes into existence bythe operations of law and not out of contract.In Hindu Law, there are two schools of thought viz Dayabhaga which is applicable in Bengal andAssam, 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, grandfatherand great grandfather, thus three successive generations in male line (son, grandson and greatgrandson ) can simultaneously inherit the ancestral propriety. They are called coparceners ininterest and the senior most member of the Family is called karta. The Hindu succession act1956, 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 themale heirs become members only on the death of the father.FeaturesSome 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 agreementAdvantages
  21. 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.ConclusionThis form of business organization which at one time was popular in India is now losing itspopularity. The main cause for its decline is the gradual dissolution of the Joint Hindu Familysystem, it is being replaced by sole proprietorship or partnership firm.
  22. 22. Partnership Form of OrganizationGenerally when a proprietor finds it’s difficult to handle the problems of expansion, hethinks of taking a partner. In other words, once a business grows beyond the capacity of asole proprietorship and or a Joint Hindu Family, it becomes unarguably necessary to formpartnership. It means that partnership grows out of the limitations of one-man business interms 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 tocarry on business together for the purpose of earning and sharing of profits. However aformal definition is provided by the Partnership Act of 1932.DefinitionSection 4 of the Partnership Act, 1932 defines Partnership as “the relation betweenpersons who have agreed to share the profits of a business carried on by all or any ofthem 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. 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. 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. 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 insize and operations.

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