UNIT 8: FORMS OF BUSINESS ORGANIZATION
Learning Objectives
After completing this unit, students will be able to:
- Identify and compare the six major forms of business organizations operating in Nepal:
- Sole Trading Concern
- Partnership Firm
- Joint Stock Company (Private Ltd. and Public Ltd.)
- Public Enterprises
- Cooperative Society
- Multinational Companies (MNCs)
- Explain the meaning, features, advantages, disadvantages, and legal registration procedures of each form in the context of Nepal.
8.1 Overview of Business Ownership Structures in Nepal
A business enterprise can be owned and managed by a single individual, a group of partners, thousands of shareholders, the state, or a cooperative community.
| Form of Organization | Governing Act in Nepal | Ownership & Membership | Liability of Owners | Primary Motive & Examples in Nepal |
|---|---|---|---|---|
| 1. Sole Trading Concern | Private Firm Registration Act, 2014 B.S. | Owned and managed by 1 single individual (Sole Proprietor) | Unlimited Liability (personal property can be attached to pay business debts) | Profit earning; local grocery stores, stationery shops, pharmacies, tailoring houses |
| 2. Partnership Firm | Partnership Act, 2020 B.S. | Owned by two or more partners bound by a Partnership Deed | Unlimited Liability (jointly and severally liable for firm’s debts) | Profit sharing; law firms, audit firms, joint trading concerns |
| 3. Joint Stock Company | Companies Act, 2063 B.S. | Private Ltd. (Pvt. Ltd.): 1 to 101 shareholders; Public Ltd. (Ltd.): Minimum 7 to unlimited shareholders | Limited Liability (limited strictly to the face value of shares subscribed) | Profit & wealth maximization; Pvt. Ltd.: Chaudhary Group units, Pathao Nepal; Public Ltd.: Nabil Bank Ltd., Nepal Telecom Ltd. |
| 4. Public Enterprise | Corporation Act, 2021 B.S., Companies Act, or Special Acts | Owned wholly or majority (>50% share) by the Government of Nepal | Limited to government capital investment | Public welfare with commercial self-reliance; Nepal Electricity Authority (NEA), Nepal Oil Corporation (NOC), Dairy Development Corporation (DDC) |
| 5. Cooperative Society | Cooperative Act, 2074 B.S. | At least 30 members (15 for labour- or skill-based cooperatives; 100 for savings and credit cooperatives in metropolitan and sub-metropolitan cities) sharing a common economic bond | Limited Liability (limited to shares held by each member) | Mutual self-help (“Each for all and all for each”) and service over profit; Public Transport Cooperative, Milk Producers’ Cooperatives, Saving & Credit Cooperatives |
| 6. Multinational Company (MNC) | Foreign Investment and Technology Transfer Act (FITTA), 2075 B.S. & Companies Act | Headquarters in home country with subsidiaries/branches in multiple host countries | Limited Liability | Global market expansion & profit; Unilever Nepal Ltd., Dabur Nepal Pvt. Ltd., Ncell Axiata, Coca-Cola (Bottlers Nepal Ltd.), Standard Chartered Bank Nepal |
8.2 Detailed Study of Each Form of Business Organization
1. Sole Trading Concern
A Sole Trading Concern is the oldest and simplest form of business organization, owned, financed, managed, and controlled by a single individual who receives all profits and bears all risks alone. In Nepal, it is registered with the Department of Commerce, Supplies and Consumer Protection, Department of Cottage and Small Industries, or Local Ward/Municipal Office under the Private Firm Registration Act, 2014 B.S.
- Merits (Advantages): Easy and inexpensive formation and dissolution; quick decision-making without consulting others; complete secrecy of business accounts and formulas; direct personal contact with customers; strong personal incentive since 100% of profit belongs to the proprietor.
- Demerits (Disadvantages): Unlimited liability (if business assets are insufficient to pay creditors, the proprietor’s personal house and land can be sold); limited capital and borrowing capacity; limited managerial skill of one person; uncertain continuity (illness, insolvency, or death of the owner may close the business).
2. Partnership Firm
A Partnership Firm is an association of two or more persons who pool their capital, labor, and skill under a written agreement (Partnership Deed) to carry on a lawful business and share profits and losses in an agreed ratio. In Nepal, it is governed by the Partnership Act, 2020 B.S.
“Partnership is 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.” — Partnership Act
- Merits (Advantages): Larger capital accumulation than sole trading; combined managerial skills and balanced judgment (“two heads are better than one”); sharing of business risks and losses among all partners; flexible operation.
- Demerits (Disadvantages): Unlimited joint and several liability; risk of delay in decisions and internal disputes/distrust among partners; non-transferability of partnership share without unanimous consent; instability upon the death, retirement, or insolvency of a partner.
3. Joint Stock Company
A Joint Stock Company is a voluntary association of individuals formed for profit, having a separate legal entity, perpetual succession, a common seal, and capital divided into transferable units called Shares. The holders of shares are called Shareholders, and their liability is limited to the nominal value of the shares they hold. In Nepal, companies are incorporated at the Office of the Company Registrar under the Companies Act, 2063 B.S.
“A company is an artificial person created by law, having separate entity with a perpetual succession and a common seal.” — Prof. L.H. Haney
Differences Between Private Limited Company and Public Limited Company in Nepal
| Basis of Comparison | Private Limited Company (Pvt. Ltd.) | Public Limited Company (Ltd.) |
|---|---|---|
| 1. Number of Shareholders | Minimum 1 and maximum 101 shareholders (as per amended Companies Act, 2063 B.S.) | Minimum 7 shareholders and no upper limit (maximum unlimited) |
| 2. Invitation to Public (Prospectus) | Strictly prohibited from issuing a Prospectus to invite the general public to buy shares or debentures | Can issue a Prospectus (IPO / FPO) inviting the general public to subscribe to its shares and debentures |
| 3. Transferability of Shares | Transfer of shares is restricted by its Articles of Association | Shares are freely transferable and traded on the Nepal Stock Exchange (NEPSE) |
| 4. Minimum Paid-up Capital | No statutory high floor (as determined by promoters in Memorandum) | Minimum Rs. 1,00,00,000 (Rs. 10 Million) under the Companies Act (higher for banks/insurers as per NRB/NIA) |
| 5. Number of Directors | As specified in the Articles of Association (up to 11 directors) | Minimum 3 to 11 directors, including at least one independent director and female representation |
| 6. Name Suffix | Must write “Private Limited (Pvt. Ltd.)” at the end of its name | Must write “Limited (Ltd.)” at the end of its name |
4. Public Enterprises
Public Enterprises (State-Owned Enterprises) are autonomous commercial or industrial undertakings established, owned (wholly or with more than 50% equity share), and controlled by the Government of Nepal to provide essential public utilities (electricity, water, telecom, petroleum, dairy, aviation) at fair prices while operating on sound commercial principles.
- Examples across Nepal’s 6 Sectors: Industrial: Dairy Development Corporation (DDC), Udayapur Cement Industry; Trading: Nepal Oil Corporation (NOC), Food Management and Trading Company; Service: Nepal Airlines Corporation (NAC); Social: Janak Education Materials Centre (JEMC), Gorkhapatra Corporation; Public Utility: Nepal Electricity Authority (NEA), Nepal Telecom; Financial: National Commercial Bank, Agricultural Development Bank, National Insurance Corporation.
5. Cooperative Society
A Cooperative Society is a voluntary, democratic, autonomous association of people (especially small farmers, artisans, workers, and middle-income citizens) who unite on the principle of equality (one member, one vote) and mutual self-help to promote their common economic, social, and cultural interests without exploitation by middlemen. In Nepal, cooperatives are regulated under the Cooperative Act, 2074 B.S. and follow the seven international Rochdale principles (Open & Voluntary Membership, Democratic Member Control, Member Economic Participation, Autonomy, Education/Training, Cooperation among Cooperatives, and Concern for Community).
6. Multinational Companies (MNCs)
A Multinational Company (MNC)—also called a Transnational Corporation—is a giant corporate enterprise that has its registered headquarters in one country (the Home Country) and operates production plants, assembly units, or marketing subsidiaries across two or more other countries (the Host Countries).
- Features & Role in Nepal: Massive capital and financial strength; advanced technology and Research & Development (R&D); global brand recognition; professional management. In Nepal, MNCs such as Unilever Nepal Ltd., Dabur Nepal Pvt. Ltd., Bottlers Nepal Ltd. (Coca-Cola), Surya Nepal Pvt. Ltd., Asian Paints Nepal, and Standard Chartered Bank Nepal bring Foreign Direct Investment (FDI), transfer modern technology, generate employment, and contribute a substantial share of corporate tax revenue.
Things to Remember (Unit 8 Summary)
- Sole Trading and Partnership have unlimited liability, whereas Joint Stock Companies, Public Enterprises, Cooperatives, and MNCs enjoy limited liability and separate legal entity.
- In Nepal, a Private Limited Company has 1 to 101 shareholders and cannot invite public subscriptions, while a Public Limited Company requires at least 7 shareholders (no maximum limit) and can issue shares to the public via an IPO.
- Cooperative Societies operate on the democratic principle of “One Member, One Vote” regardless of the number of shares held.
Exercises (Unit 8)
A. Very Short Answer Questions (1 Mark Each)
- What is meant by unlimited liability in a Sole Trading Concern?
- What is a Partnership Deed?
- State the minimum and maximum number of shareholders in a Private Limited Company and a Public Limited Company in Nepal.
- Why is a Joint Stock Company called an artificial person created by law?
- Give two examples each of Public Enterprises and Multinational Companies operating in Nepal.
B. Short Answer Questions (4 Marks Each)
- Explain four advantages and four disadvantages of a Sole Trading Concern.
- Differentiate between a Sole Trading Concern and a Partnership Firm.
- What is a Cooperative Society? Explain any four features of a cooperative organization in Nepal.
- Define a Multinational Company (MNC) and state four characteristics of MNCs.
C. Long Analytical Questions (8 Marks Each)
- Define a Joint Stock Company. Explain its main characteristics and differentiate between a Private Limited Company and a Public Limited Company on any six bases.
Worked answers to these exercises are in Unit 8 Solutions.