Introduction to Business Models

By | November 25, 2019
Introduction to Business Models

This article deals with the gradual development of different types of business models according to needs and change in society.

Introduction: Business Models

An organization, trade, enterprise or occupation are conducted by the employers and employees together needs fund, labour, machines, investments, and provision of proper raw materials for proper good and services to be delivered. business is considered to be handled under the circumstances of different structures and different forms of it which are solely owned ownership, partnership, co-operative society and joint-stock company.

So, based on ownership there are different structures which have different characteristics, merits and limitations and steps involved in their formations.

The objective of the study has a focus on the:

  • formation of the business models
  • suitability of organizations
  • characteristics and merits of models
  • and demerits of the same.

Business Activities

  1. Service business

This kind of business focuses on activities where the professionals, expertise people provide services to its clients. They are basically delivery business, corporate firms, law firms, salon, internet services and many more.

  1. Merchandising business

This kind of business is basically a channel business. They buy goods in bulk as wholesale from the manufacturing market and then sell the product in the market as per their retail maximum price.

In such kind of business, profit zone is very high as compared to loss as these businesses make their margin of profit when they buy products in the wholesale format in less price selling on the maximum retail price.

  1. Hybrid Business

These businesses conduct a different kind of business under a banner or brand name. they are heterogeneous in nature and are carried by the established business only. In this, the profit margin fluctuates but it never affects business growth. Hence these businesses are classified under different trade interest.

Business Models

As we have discussed above, that business is of different kinds and are carried under different mechanisms. The business includes activities like trade, enterprises, occupations which need man force, raw materials, technology, and most important consumers.

Whereas to fulfil all the requirements we even need a proper environment to run the business. As we have evolved with time and adapted the environment before we used to have sole proprietorship which had a concept of single owned ownership but in today’s market a solely owned business is not possible as per the companies act, 2013 we need at least two or more person to run a business. A small business-like retail shop can be run under it.

Similarly, here in this paper, we will discuss all the important factors which will help us figure out which type of business model will fit better for the incorporation of our business. Here are the types of business models which we will discuss ahead:

  • Sole Proprietorship:

Sole mean alone or one and proprietorship deals with ownership in conducting business, an enterprise which is owned, controlled and responsibility is under that person.

It’s a kind of business where there is one-person ownership. Herewith one-person ownership I mean that same person will provide capital, hold the risk of liability and will have whole control over the management of the business without the involvement of anybody until that person desires.

For example, X buy goods in wholesale and sells in the market at a retail price. Here the risk of loss and pleasure of profit is with X and it will be managed as per his wish where he has two helpers C and D.

Features:

  1. Solo ownership: here the whole ownership is under one person as the capital invested by that person wholly.
  2. Whole profit and loss: here by the word profit loss it means that the person investing in the business will hold the pleasure for profit earned or will bear the loss accrued wholly by himself.
  3. No Separate Entity: as these kinds of business are not formed by the paperwork or document as per the companies act, 2013. Then there is no requirement of giving an artificial person the perpetual right.
  4. No legal formalities: it can be formed easily or say there is easy entry and exit as no paperwork or legal formalities are involved.
  5. Unlimited liability: here there is not limited liability as it is handled by one person on himself.

 Advantages:

  1. Easy entry and exit: as there no legal formalities involved, so there can be formation easily done without cost.
  2. Cost-efficient: here the person only required to put money as an investment not for legal formalities so these are less in cost when compared with other forms.
  3. Secrecy: as the management of the business is done again solely by that person then there is less chance of internal leaks.
  4. Less rigid: it has a flexible grip in the market as they don’t have to stall their decisions due to difficulty in decision making.
  5. Rapidity regarding decision-making skills: yes, again as this kind of business doesn’t require more than a person for running the business or ownership, so it will have quick decision making.

Disadvantages:

  1. Limited Capital: as there is limited capital involved so accordingly will have less scope.
  2. Lack of continuity: there may be issues in making the decision which may lead to the downfall of the business
  3. Unlimited liability: again, as there is whole capital involved in the business is of one person so the risk will accordingly also come under the same roof.
  • Joint Hindu Family

It’s a traditional kind of business model can be found in India, which is carried out by a Hindu Undivided Family of 3 successive generations.

Here Karta is the head of such business and the ownership shifts to the eldest person of next-generation who are called co-parceners. And any person will be the part of this business who takes birth in that family. Here the decision-making authority is with the Karta where all co-parceners can help in making the decision.

There are two laws involved in dayabhaga and mitakshara, here dayabhaga is applicable to west Bengal and mitakshara to the whole country.

Features:

  1. Establishment: this kind of business does not require any agreement to form they just need an ancestral property and 2 members in a business.
  2. Status: the person to be a member of such a business requires luck, which means a person who takes birth in such a business will be a part.
  3. Shares: in this, the co-parceners have equal shares in profit and loss.
  4. Managerial: the authority of taking the decision lies with the Karta of the family but the co-parceners can help him make the decisions by taking part in the management related issues.

Advantages:

  1. Rapid decision: here the decision is been taken by the Karta who will hold the management under his grip. So, there is a rapid decision-making policy.
  2. Shares: here the shares which will be
  3. Experience: they provide a base to their young members in the family by providing them knowledge and experience from the elder ones and Karta.
  4. Limited to Co-parceners: the liability is limited to the co-parceners as they are equal shareholders.
  5. Continuity: as the head of the HUF is Karta, but it doesn’t mean it dissolves after his death. It gets shifted to the other Karta of the family.

Disadvantages:

  1. Unlimited liability of Karta: As the Karta is the only person who heads the family and takes the most important decisions in the family so risk also lies with him the most.
  2. Biasness: as the person who is holding the power has the ability to do anything. In such situations, he is required to be sharper whereas there are cases of being biased to own will result in downfall.
  3. Lack of effort: as the co-parceners will have lack of interest as the business is carried, handled by the Karta and equal profit zone will make their will and interest fall.
  • Partnership

Partnership according to the partnership act 1932 is when two or more person come together to do business under the compliance of equal distribution of profit and loss carried by them or carried by one on behalf of all. Anyhow it is not required to compulsorily register the company under the act.

Types of partners:

  1. Active partners and sleeping partner based on decision making
  2. A nominal partner is based on profit sharing.
  3. Limited partner base on limited liability.
  4. Partner by estoppel
  5. Partner by holding out.

Characteristics:

  1. Two or more partners: As explained in partnerships act, 1932 there should be 2 or more as required by the law to that business or firm to validly exist. The maximum limit is 10 for other business and 20 for banking business.
  2. Based on contract: here the Partners join together on the basis of the contract relation with competency. Which means any lunatic, minor cant be a part of such organization.
  3. Principal-agent relationship: which means every partner will be formed on the basis of the principal-agent relationship. As the partner when working with the other partner he will be the agent vis-à-vis the other will also be a principal.
  4. Lawful business: every business which is carried by the partners altogether for making a profit. It doesn’t involve smuggling or black market.

Advantages:

  1. Easily established: as it is not required or compulsory for the partners to form a partnership firm after registering under the 1932 act. It doesn’t require any legal formalities for formation.
  2. Availability of large capital: as there are partners involved in it and have equal shares for profit gain, they create their business at large capital accordingly.
  3. Decision making: here all partners have equal opportunity in making the decision as they are formed together with the motive of profit-making of equal shares allotted.
  4. Risk: they have equal risk involved based on their equal shares allotted by law
  5. Secrecy; as these are built altogether by the partners with the motive of making profit maintaining and transparency within which will prevent a leak of information’s valuable to the firm.

 Disadvantages:

  1. Unlimited Liability: The only demerit of partnership is that its liability process is not limited for the partners. In short, the liability even can utilize their personal property at the time of insolvency.
  2. No perpetuity: According to company law 2013, the existence of the company is never questioned, even if any of the board members have retired, died or insolvent. But in the case of a partnership, the existence of a firm will go with its partners.
  3. Non-transferability: the shares of the partners can never be shifted or transferred to the outsiders so if anyone wants to transfer the share he will require the dissolution of the firm.
  • Co-operative society

The word co-operation has come from Latin word co-operari in which co mean with and operari to work. It’s basically where people come together for a reason of welfare of society that is why they are also called society.

As per section 4 of co-operative society 1912 has the objective of having growth in economic interest.

They have different types of co-operative society the basis of housing, farming, producers’, marketing, and credit co-operative society.

 Features:

  1. Own choice: Here the members of the society join together on the basis of own choice voluntarily, so they are free entry and exit.
  2. Open Entry: here there is free and open membership for its members keeping away all castes, creed, sex.
  3. Total no. of members: the total number of members in this is set as 10 is the minimum and maximum it goes till 50. Anyhow co-operative society doesn’t mention any limit to its members.
  4. Registration: there are rules mentioned in state co-operative act, 1912 and multi-co-operative society, 2002 where they mentioned that if the society is formed then it is a separate legal entity, has a common seal, perpetual existence.
  5. Control: it is been controlled under and by the state itself under supervision of state and central, even accounts audited by govt.
  6. Capital flow: they don’t have that much of capital due to the limited number of members. So, they specifically depend on the loan from govt.

 Advantages:

  1. Easy to form: any 10 minimum people are required for registering the society under the registrar and doesn’t require much paperwork for registering.
  2. Limited liability: they have limited liability as they all have a dependency of contribution on the society, they are not in person liable for the debt.
  3. Easy entry: there is no restriction to any caste, creed or sex for getting into a co-operative society, and even can exit when they wish to.
  4. The assistance of govt.: here they have govt involvement in making decisions and auditing the accounts, they even help at a time of need of money or capital.
  5. Tax exemption: here govt, exempts the liability of tax for attracting more members to join the society.

 Disadvantages:

  1. Corruption: it is the most import drawback of our govt section that after having support and profit then also these govt bodies are not only involved in auditing. They even make it as a source of corrupt practice.
  2. Lack of motive: as the members don’t have returns stability this created their lack of interest sometimes in their functions.
  3. Lack of managerial qualifications: as these bodies are not the corporate body so there is very much leakage of information’s and as govt involvement will automatically hamper their decision-making capabilities.
  •  Joint Stock Company

According to companies act, 1956 which was further amended in 2013 Joint-stock companies are a voluntary association of individuals coming together to form a company to make profits from the shares transferred in the company as capital and similarly have equal contribution at the time of loss.

Features and Advantages:

  1. Corporate personality: A company is in itself is an artificial person or separate legal entity of its own company and will stand liable when sued by other body and can also sue.
  2. Perpetual Succession: they are born out of the law, so they will exist till the company is not dissolved in itself and will exist even if any of its board of member has retired, expired, or went bankrupt.
  3. Common Seal: as the company is a separate legal entity so it needs a sign or seal to get recognized as the company’s approval. As day to day, there are many decisions made by the board and resolution are passed such document can’t be passed without the seal of the company.
  4. Limited liability: the shareholders have limited liability here as they have equal rights and if the shares are fully paid then they have no liability.

  Disadvantages:

  1. Lack of secrecy: they can’t maintain secrecy internally as they have to pass a resolution which involves shareholders, and any conflict within will lead to a leak.
  2. Delay in decision making: as they have lack of secrecy it is clear with it that they have a managerial issue not because of unprofessionalism but because of much professionalism. It leads to revolving the discussions but not concluding.
  3. Various laws: as the company follows many rules, regulation and govt. notifications which make their process slower, it actually takes the liberty of the corporation.
  4. Complicated formation: here the company has many paperwork’s and legal formalities to do which lead to utilization of time and money, it raises complexity.

Conclusion 

This paper dealt with different business models which can help us choose the perfect form of business which we want to carry ahead and will also be useful for researchers and students to get knowledge and prosper it in future ideas.

Therefore, above-mentioned modes have introduced us to the corporate and business world. It is been created to show how different components are required to be fulfilled so that the incorporation of business in the coming future will not be an issue.


  1. Concept of Share Capital(Opens in a new browser tab)
  2. Overview of the Companies Act, 2013(Opens in a new browser tab)

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