3 TYPES OF OWNERSHIP IN FOOD SERVICE ORGANISATION

S. Thilagamani

epgp books

 

 

 

 

Objectives:

 

This module will enable the learners to

 

a.  Understand the types of ownership suitable for food service operations

b.  Compile the suitability, merits and demerits of the type of ownership at the different food service outlets

 

Introduction:

 

Choice of a proper form of organisation is crucial for the success of a business enterprise and especially the service industries such as the food service organisations. At the outset, the type of o wnership in which the food service organisation is to be run, choice of the form of business organisation is crucial because it determines the risk, responsibility and control of the food service operator as well as the division of profits. It is a long- term decision because the form of organisation cannot be changed frequently. The right form of organisation can help the enterprise not only through initial success but in later growth too. Therefore the form of ownership organization should be selected after due care and thought.

 

Types of Ownership:

 

Before discussing the choice of the form of ownership, it is necessary to discuss the various forms of organisations and their merits and demerits. From the view point of ownership, there are four main forms from which the choice can be made. These are;

 

1.   Sole proprietorship

2.   Partnership

3.   Joint stock company

4.   Co-operative enterprise

 

Sole proprietorship:

 

Sole proprietorship or individual proprietorship is the simplest and the oldest form of the ownership organisation. It is a business owned and controlled by one person. The individual may borrow money and employee assistants. But she/he alone is responsible for the result of the business. The individual who establishes by own is known as sole proprietor or individual proprietor or sole trader.

 

Salient features:

 

1.   Single ownership

2.   One man control

3.   No separate legal entity of firm

4.   Unlimited liability

5.   Undivided risk

 

Merits

 

1.   Ease of formation

2.   Direct motivation

3.   Independent control

4.   Quick decisions

5.   Business secrecy

6.   Personal touch

7.   Freedom from government control

8.   Flexibility of operation

9.   Social utility

 

Demerits

 

1.  Limited funds

2.  Lack of specializations

3.  Unlimited liability

4.  Uncertain life

5.  Limited scope for expansion

 

PARTNERSHIP FIRM

 

As a food service enterprise expands beyond the capacity of a single person, a group of persons have to join hands together and supply the necessary capital and skills. Partnership frame thus grew out of the limitations of one man business. Needed to arrange more capital, provide better skills and avail of specialization led to the growth of partnership form of the organizations.

 

Characteristics of partnership:

 

1.   Two or more persons-maximum 10 banking business and 20 in non banking business.

2.   Agreement- written or oral.

3.   Lawful business

4.   Sharing of property

5.   Mutual agency among partners

6.   No separate legal entity of the firm.

7.   Unlimited liability

8.   Restriction on transfer of interest

9.   Utmost good faith

 

MERITS

 

1. Ease of formation:

An partnership is easy to form as no cumbersome legal formalities are involved. An agreement is necessary and the procedure for registration is very simple.

 

2. Large financial resources:

As a number of persons or partners contribute to the capital of the firm, it is possible to collect larger financial resources than is possible in sole proprietorship.

 

3. Specialization and balanced approach:

The partnership form enables the pooling of abilities and judgment of several persons. Combine abilities and judgment in more efficient management of the business.

 

4. Flexibility of operations:

 

Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its day to day operations. The nature and place of business can be changed whenever the partners desire.

 

5. Protection of minority interest:

No basic changes in the rights and obligations of partners can be made without the unanimous consent of all the partners.

 

6. Personal incentive and supervision:

There is no divorce between ownership and management. Partners share in the profits and losses of the firm and there is motivation to improve the efficiency of the business.

 

7. Capacity for survival:

The survival capacity of the partnership firm is higher than that of sole proprietorship. The partnership firm can continue after the death or insolvency of a partner if the remaining partners so desire.

 

8. Better human and public relations:

Due to a number of representative (partners) of the firm, it is possible to develop personal touch with employees, customers, government and the general public.

   

9. Business secrecy:

It is not compulsory for a partnership firm to publish and file its accounts and reports. Important secrets of business remain confined to the partners and are unknown to the outside world.

 

DEMERITS

 

1. Unlimited liability:

Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapses and dishonesty of other partners.

 

2. Limited resources:

The amount of financial resources in partnership is limited to the contributions made by the partners.

 

3. Risk of implied agency:

The acts of a partners are binding on the firm as well as on other partnership.

 

4. Lack of harmony:

The success of partnership depends upon mutual understanding and co – operation among the partners.

 

5. Lack of continuity:

The partnership comes to an end with the retirement, in capacity, insolvency and death of a partner.

 

6. Non transferability of interest:

No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners.

 

7. Public distrust:

A partnership firm lacks the confidence of public because it is not subject to detailed rules and regulations. Lack of publicity of its affairs undermines public confidence in the firm.

 

Joint stock company

 

A joint stock company is an incorporated and voluntary association of individuals with a distinctive name, perpetual successions, limited liability and common seal, and usually having a joint capital divided into transferable shares of a fixed value.

 

Salient features of a company:

 

The distinctive characteristics of a company are as follows:

 

1. Separate legal entity:

A company has an existence entirely distinct from and independent of its members. It can own property and enter into contracts in its own name. It can sue and be sued in its own name.

 

2. Artificial legal person:

A company is artificial person created by law and existing only in contemplation of law. It is intangible having no body and no soul.

 

3. Perpetual successions:

A company enjoys continuous uninterrupted existence and its life is not affected by the death, insolvency, lunacy of its members and directors.

 

4. Limited liability:

A liability of the members of the limited company is limited to the value of the shares subscribed to or to the amount of guarantee given by them.

 

6. Common seal:

A company being an artificial person cannot sign for itself. Therefore, the law provides for the use of common seal as substitute for its signature.

 

7. Transferability of shares:

The shares of a public limited company are freely transferable. They can be purchase and sold through the stock exchange. Every member is free to transfer his shares to any one without the consent of other members.

 

8.  Separation of ownership and management:

The number of members in a public company is generally very large so that all of them or most of them cannot take active path in the day-to-day management of the company.

 

9. Incorporated association of persons:

A company is an incorporated or registered association of persons. One person cannot constitute company under the law in a public company, at least 7 persons and in a private company at least 2 persons are required.

 

Private and public company

 

1.   Private company : It is company which by articles of association

 

a) Restricts the right of its members to transfers shares, if any;

b) Limits the number of its members to 50, excluding members who are or were in the employment of the company; and

c)   Prohibits any invitation to the public subscribe for any shares, in, or debentures of, the company.

 

2. Public company: a public company means a company which is not a private company. In other words, a public company is one which

a)  Lays down no restrictions on the transfer of its shares;

b)    Does not limit the maximum number of its members; and

c)  Can invite public for subscribing to its shares and debentures

 

Merits of company organisation

 

The company form of business ownership has become very popular in modern business on account of its several advantages:

 

1. Limited liability:

Share holders of a company or liable only to the extend of the face value of shares held by them.

 

2. Large financial resources:

Company form of ownership enables the collection of huge financial resources.

 

3. Continuity :

A company enjoys uninterrupted business life.

 

4. Transferability of shares :

A member of a public limited company can freely transfer his shares without the consent of other members.

 

5. Professional management:

 

Due to its large financial resources and continuity, a company can avail of the services of expert professional managers.

 

6.   Scope for growth and expansion:

There is considerable scope for the expansion of business in a company.

 

7. Public confidence :

 

A public company enjoys the confidence of public because its activities are regulated by the governme nt under the companies act.

 

8. Defused risk:

 

The risk of loss in a company is spread over a large number of members.

 

9. Social benefits:

The company organization helps to mobilize savings of the community and inverts them in industry.

 

Demerits of company organisation

 

A company suffers from the following limitations:

 

1. Difficulty of formation:

It is difficult and expensive to form a company

 

2. Excessive government control:

A company is subject to elaborate statutory regulations in its day to day operations.

 

3. Lack of motivation and personal touch:

There is divorce between ownership and management in large public company.

 

4. Oligarchic management:

In theory the management of a company is supposed to be democratic but in actual practice company becomes an oligarchy.

 

5. Delay in decision:

 

Too many levels of management in a company result in red-tape and bureaucracy.

 

6. Conflict of interest :

 

Company is the only form of business where in a permanent conflict of interest may exist.

 

7. Frauds in promotion and management:

There is a possibility that unscrupulous promoters may float a company to dupe innocent and ignorant investors.

 

8. Lack of secrecy:

 

Under the company act, a company is required to disclose and publish a variety of information on its working.

 

9. Social evils :

Giant companies may give rise monopolies, concentration of economic power in a few hands, interference in the political system, lack of industrial peace, etc.

 

Choice of form of organisation

 

As explained earlier, a business enterprise can be organised into several forms. Every form of organisations has its own merits and demerits. A busines s man has to keep in view this merits and demerits while selecting an appropriate form of organisation. The choice has to be made both at the time of setting up a new enterprise and at the time of expansion and growth of an existing concern.

 

At the time of launching a new business enterprise, the choice of the form of ownership is dictating by several factors as given below:

 

1. Nature of business- Services, trade, manufacturing.

2. Scale of operations- volume of business and size of the market area

3. Degree of direct control desired by owner.

4. Amount of capital require initially and for expansion.

5.Degree of risk and liability and the willingness of owners to assume personal liability for debuts of business.

6. Division of profits among the owners

7. Length of life desired by the business

8. Relative freedom from government regulations

9. Scope and plan of internal organizations.

10.Comparative tax liability.

The impact of each one of these factors on the choice of a suitable form of ownership is described as follows:

 

1. Nature of food service:

 

The nature of business has an important bearing on the choice of the form of ownership. Business providing direct services, e.g., small retailers hair -dressing saloons, tailors, restaurants, et., and professional services depend for their success upon personal attention to customers and the personal knowledge or skill of the owner therefore, generally organized as proprietary concerns. Business activities requiring pooling of skills and funds, e.g., wholesale trade, accounting firms, tax consultants, stock brokers, etc., are better organized as partnerships. Manufacturing organizations of large size are more commonly set up as a private and public company

 

2. Size and area of operation:

 

Larger scale enterprises catering to national and international markets can be organised more successfully as private or public companies. On the other hand, small and medium scale firms are generally set up as partnership and proprietorship.

 

3. Degree of control desired:

 

A person who desire direct control of business prefers proprietorships rather than the company because there is a separation of ownership and management in the latter case.

 

4. Amount of capital required:

 

The funds required for the establishment and operations of a business have an important impact on the choice. Enterprises requiring heavy investment, i.e., iron and steel plants, etc., should be organized as joint stock companies.

   5. Degree of risk and liability:

 

The volume of risk and the willingness of owners to bear it, is an important considerations. A single individual may have large financial resources sufficient for the medium scale enterprise but due to unlimited personal liability he may not like to organize as a proprietor or a partnership.

 

6. Division of surplus:

 

As solo trader receives all the profit of his business but he also bears all the risks. If a person is ready to bear unlimited personal liability and desires maximum share of profits proprietorship and partnership are preferable to company form of organization.

 

7. Duration of business:

 

Temporarily ad hoc ventures can be organized as proprietorships and partnerships as they are easy to form and dissolve. But they lack continuity and stability. A business requiring a long period for establishment and constitution organized as a corporate body.

 

8. Government regulation and control :

 

Proprietorship and partnerships are subject to little regulation and controlled by the government.

 

9. Managerial requirement:

 

Organizational and administrative requirements depend upon the size and nature of business. Small businesses using sample process of protection and distribution can be managed effectively as proprietorship and partnership. Due to identify of ownership and management, motivation is very high in proprietorship and partnership.

 

10. Flexibility of operation:

 

Flexibility operation is linked with the internal organizational of the business. The internal organization of sole proprietorship and partnership is much more simple and less elaborate than the internal organization of a joint stock company.

 

11. Tax burden

 

A various form of ownership are taxed differently under the Income – tax Act in India. If the expected volume of profit is very high it may be profitable to start a company. A company is taxed at a uniform rate, i.e., the rate of tax remains the same irrespective of the volume of profits, varies in case of partnership and proprietorship. The rate of tax increases with the volume of taxable income.

 

A comparative of different form of ownership on the basis of above factor is given at the end of the chapter. The suitability of different form may be classified as under:

  1. Proprietorship:

Small trading and service enterprises like retailer stores, workshops, bakeries, restaurants, hair- dressing and beauty salons, laundries, tailoring and draper shoppers, dry cleaners and other enterprise requiring small capital, catering to local markets, involving limited risks and the use of personal knowledge and skills

 

  1. Partnership and private company:

Medium sized service and trading concerns, like wholesalers, hotels, transporters, hire-purchase firms, confectionaries, and professionals like attorney, lawyers, charted accounts, consultants, small manufacturing firms requiring simple techniques and process.

  1. Public companies:

Large scale manufacturing and commercial undertaking, like chain store, departmental store requiring heavy investment, specialised talents a complex process of production and distribution.

 

Conclusion

 

The selection of the form of ownership for a food service therefore depends on many criteria and has to be done with utmost care so that the form of ownership is decided for administration and management of the enterprise. As this is a long focussed decision of the type of ownership decides everything further. Deciding the choice of ownership considering the salient features, merits and demerits of each form , the ownership should be decided focussing the short and long term plans of the food service organisation.

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Web references

 

 

Book References

 

  1. William J. Rothwell and H.C. Kazanas, 2006, Planning and Managing Human Resources, 2n d edition, Jaico Publis hing house, Delhi
  2. Aquinas P G, 2009, Human Resource Management Principles and Practice, Vikas Publis hing House Pvt ltd, Ne w Delhi
  3. Durai P, 2010, Human Resource Management, Pearson Publications, New Delhi
  4. Dyche Jill, 2003, The CRM handbook, Pearson Publications, New Delhi