BBA 102 BCA 104 Business Organization System - 1

CONTENTS
Unit Contents Page No.
Nature of Business
1.0 Introduction
1.1 Unit Objectives
1.2 Concept of Business
1.2.1 Meaning, Definition,
1.2.2 Nature and Scope
1.3 Characteristics of Business
1 1.4 Business as an Economic Activity. 11-27
1.5 Objectives of Business
1.6 Structure of Business (Classification of Business Activities)
1.7 Requisites for Success in Modern Business.
1.8 Traits of a Successful Businessman
1.9. Summary
1.10 Questions and Exercise
1.11 Task
Evolution of Business
2.0 Introduction
2.1 Unit Objectives
2.2 Beginning and development of Commerce and Industry
2.3 Industrial Revolution,
2 28-40
2.4 Beginning and growth of Indian Business
2.5 Industrialization in India.
2.6 Summary
2.8. Task
Forms of Business Ownership

3.0 Introduction
3.1 Unit Objectives
3.2 Introduction to various forms of Ownership
3.3 Factors affecting choices of an ideal form of ownership
3.4 Features Merits and Demerits of various forms of Ownership
3.4.1 Sole Proprietorships
3 3.4.2 Joint Hindu Family Business: 41-76
3.4.3 Partnership
3.4.4 Joint Stock Company
3.4.5 Co-Operative Society
3.5 Public Enterprises
3.6 Summary
3.8 Task
Unit Contents Page No.
Formation of a Company
4.0 Introduction
4.1 Unit Objectives
4.2 Stages in formation and incorporation of a company
4.2.1 Promotion
4.2.2 Incorporation and registration
4.2.3 Capital Subscription
4 4.2.4 Commencement of Business 77-89
4.3 Documents of a Company
4.3.1 Memorandum of Association
4.3.2 Articles of Association
4.3.3 Prospectus.
4.4. Summary
4.6 Task
Establishment of Business Enterprise
5.0 Introduction
5.1 Unit Objectives
5.2 Factors to be considered while starting a new business enterprise
5.3 Small and Medium Enterprises: Meaning Characteristics and Objectives
5 5.4 Role of Support Organization 90-99
5.4.1 Trade Associations
5.4.2 Chambers of Commerce.
5.5 Summary
5.7 Task
ORGANIZATION OF TRADE
6.0 Introduction
6.1 Unit Objectives
6.2 Channels of Distribution – Meaning, Functions and types.
6.3 Internal Trade
6.3.1 Wholesale
6.3.2 Retail
6.4 External Trade –
6.4.1 Import
6.4.2 Export.
6.5 Role and importance of support services to Business
6 6.5.1 Transport 100-130
6.5.2 Insurance
6.5.3 Warehousing
6.5.4 Banking and Finance
6.5.5 Advertisement
6.5.6 Trade Promotion Organizations
6.6 Business Combinations – Mergers and Acquisitions
6.7 Franchising.
6.8 Business Process Outsourcing.
6.9 Multinationals – Concept and role of MNCs
6.10 Summary
6.12 Task
Business Organization
System
UNIT - 1 NATURE OF BUSINESS

NOTES
1.0 INTRODUCTION
Business means all those human activities which are related to the
production and distribution of goods and services with the object of earning
profit. The industrial revolution of the 18th century increased the scale of
production, division of labor, specialization and standardization of goods.
Business has increased the comforts of life of the people by mass production and
distribution of goods. This chapter aims at explaining the basic of business as
regard its definition, scope, characteristics and essential requirements for success
of business in this modern era.
1.1 UNIT OBJECTIVES
• To define and evaluate the concepts of business and appreciate the variety
of possible meanings.
• To understand the wide scope of business activity.
• To understand the economic nature of business, and difference between
economic and non-economic activities.
• To identify essentials for a successful business.
1.2 CONCEPT OF BUSINESS
Business means a state of being busy; business includes economic activities

which satisfy the human wants. These activities can either be manufacturing or
selling goods or rendering of services. All activities carried out to supply goods
and services, activities adding utilities to production, satisfying human needs and
earning profit are called business. The main aim of today’s business is to satisfy
consumer needs and thus people occupy a central place around whom, by whom
and for whom business is run.
Business is a broad term and covers a wide range of activities, it includes
trade, commerce and industry and may be owned by few persons privately or by
public at large Business cannot be said to be a purely economic organization as
it is connected with social and environmental aspect of the society, it promotes
Nature of Business 11
Business Organization innovation and improvement in production processes and thus enriches the life
System of the people by providing better and better goods and services to them
NOTES 1.2.1 Meaning and Definition

Human beings are continuously engaged in some activity or the other to
satisfy their unlimited wants. Business is an activity which is related with regular
production of goods and services to satisfy human wants. It’s an organization or
economic system where goods and services are exchanged for one another or for
money.
The term business has been defined by various experts in following way
1) Bayard O wheeler: “business is an institution organized and operated
to provide goods and services to society under the incentive of private
gain”
2) L.H, Haney, “Business may be defined as human activities directed
towards providing or acquiring wealth through buying and selling of
goods”.
3) Louis E. Boone and L. Kurtz said, “Business consists of all profit
seeking activities and enterprises that provides goods and services
necessary to an economic system.”
4) Skinner and Ivancevich said, “Business is the exchange of goods,
services or money for mutual benefit or profit.”
5) According to James Stephenson, “Economic activities performed for
earning profits are termed as the business."
From the above definitions, it is clear that business is the economic activity
of individuals and organizations aimed to earn profit through the production and
distribution of goods and services.
Generally, there are two concepts of business

• Traditional Concept
The traditional concept explains that the purpose of business is to earn
profit through production and marketing of products. Products may be
different types. For example physical goods, services, ideas and
information etc. The main motto of business is to maximize ‘profit
only’ as per traditional concept.
• Modern Concept
Consumer satisfaction is the central point of the modern concept of
business. Profit can be earned by maintaining social responsibility. It
strives to include every aspect of human civilization. It views the
modern business as a socio-economic institution which is always
responsible towards the society.
12 Nature of Business
1.2.2 Nature and Scope of business Business Organization
System
The term business is very wide. It covers all the activities related to
production and distribution of goods and services from the place of productions
to the final consumers with an aim to earn profit. The business activities can be NOTES
grouped under two heads. These Business Activities are also known as business
components which actually define the scope of business.
The two heads are
1) Industry
2) Commerce.
A) Industry
The word “Industry” refers to that part of business activities which is related
with the extraction, production, processing or fabrication of products. The
products which are raised, produced or processed by an industry may either be
used by the ultimate consumer or by another concern for further production. The
output of the industry which is consumed by the final consumers is named as
‘consumer good’ e.g. clothes. If the output is used for further production of wealth
it is called producers’ or capital goods. In case the goods produced by an industry
are further processed into finished products by another concern they are called
as intermediate goods. i.e. Plastic.
On the basis of activity; industry is further classified into following
types as under
1) Extractive Industry
Extractive industries are those industries which extract or raise some
form of wealth from above or beneath the surface of the earth. i.e. from
soil, air, water etc. e.g. Mining, fisheries forestry, agriculture,
pisciculture lumbering etc.
2) Genetic Industries
These industries are engaged in meeting the basic needs of human
being. They are also called as primary industries. These industries
include, reproducing and multiplying certain species of animals and
plants and selling them in the market for profit i.e. Cattle breeding
farms, poultry farms, plant nurseries, saplings etc.
3) Constructive Industries
Constructive industries as the name signifies are engaged in the
construction of building, canals, bridges, dams, roads etc. These
industries differ from other industries in two ways;
(1) Their products are constructed and fabricated on sites; these
require engineering and architectural skills.
Business Organization (2) The products of these industries cannot be taken to the market
System for sale.
4) Manufacturing Industries
NOTES
Manufacturing industries are those which are concerned with
converting raw material or semi-finished products into finished
products. They create ‘form utility’ in goods and make them suitable
for human use. The raw material of this industry is usually the finished
product of extractive industry. e.g. Iron and steel industry, sugar
industry, cotton textiles etc.
5) Service Industries
Service industries are usually engaged in the manufacturing of
intangible goods which cannot be seen or touched by naked eye. i.e.,
goods which do not have any physical form. These services cannot be
stored for future consumption; however, these intangible goods also
have utility for consumer (i.e., these goods have want-satisfying
attributes). Examples of service industries could include: banking and
financial institutions, advertising agencies, transportation and
communication companies, insurance companies, hotels and
restaurants and so on. The service of professionals such as doctors,
lawyers are also examples of service industries
B) Commerce
Commerce is the second branch of business. It is a very important
component of business and is concerned with the buying and selling of goods. It
includes all the activities which are connected with the exchange of goods from
the place of production to the ultimate consumers. Commerce includes all those
activities which facilitate trade. According to James Stephenson. “Commerce
embraces all those processes which help to break the barrier between producers
and consumers. It is the sum total of those processes which are engaged in
removal of hindrance of person, place and time in exchange of commodities”
The whole range of commerce activities are classified as under
1) Trade
Trade is an important organ of commerce. The process of buying and
selling of goods is called Trade. It is the exchange of goods and
services among buyers and sellers in which both the parties are
benefited. Trade is classified into two types.
(a) Internal Trade
it is the home trade and consists of buying and selling of goods
within a country. Internal trade may be - Wholesale Trade. And
Retail Trade
The process of purchase of goods in huge quantity from Business Organization
producers and their resale to retailers is known as wholesale trade. System
The retailer then further sells these goods to the final consumers.
Retail Trade involves the sale the goods and services to the NOTES
consumers in small quantities. It is the link between the
wholesalers and consumers.
(b) External Trade

The purchase and sale of goods between two or more countries
is called external trade or international trade. There are three main
aspects of external Trade -Import Trade, Export Trade and
Entrepot or re-export trade
When goods are bought from other countries it is import trade
and when goods are sold to other countries it is export trade.
Entrepot or re-export trade involves the import of foreign goods
with a view to re-exporting them and making a profit in the
process.
2) Aid to Trade
The activities which help in the purchase of goods and services; help
in exchange of goods and services are called aids to trade. They include
all ancillary services like bank, insurance, transport, warehousing etc.
The important of these services are as follows:-
a) Banking
Banks play a vital role in financing the different trade activities.
They provide financial facility to the traders. They also support
the buyers and sellers of goods in receiving and making
payments, both at the national and worldwide level. The credit
facility in the form of cash credit, overdrafts and loans is provided
to the traders.
b) Insurance
Insurance is very essential aid to trade. It provides protection
against the risk of damage of goods due to fire, flood, earthquake
or other causes. The insurance companies make good the loss of
commodities due to fire floods etc to the traders on payment of
insurance premiums. Insurance thus helps in the expansion
of trade.
c) Transport
Transport facilities help traders in carrying goods from the places
of production to the place of actual users. Due to this goods can
be transferred all over the country and also in foreign countries,
leading to increase in trade transactions. e.g. Railways, ships,
airlines etc.
Business Organization d) Warehousing
System
Warehousing plays a significant role in the storage of goods.
Nowadays most of the goods are produce in anticipation of
NOTES demand. They are to be stored in safe places and released as and
when demanded in the market. Thus Warehousing helps in
overcoming the barrier of time and creates time utility.
e) Advertisement
Advertisements play a vital role in increasing the sale of goods.
Advertisement regarding the product through newspapers,
magazines, radio and television has greatly helped the consumers
in choosing the goods of their taste. The consumers come to know
about the quality and price of the goods and selects the product
that suits them.
f) Agents
There are middlemen (wholesaler, retailers and brokers) who act
as agent between the producers and the consumer. They bring the
seller and buyer of goods together and help them in completing
the transaction of goods. These agents act for commission and
have greatly helped in the distribution of goods from the
producers to the consumers Thus we see, Industry, trade and aids
to trade are closely related to each other. As such, they affect and
are, in turn, affected by each other. Each component of business
has to depend upon the other for the realization of its objectives.
Industry is concerned with the production of goods and services
while commerce helps in the distribution of these products.
Commerce helps in understanding of the market situation, which
it gets through ‘marketing research’. Thus Trade, industry, and
commerce are closely related to each other.
System
1.3 CHARACTERISTICS OF BUSINESS
NOTES
Every business activity involves risk and uncertainty to some extent. Hence,
some of the essential characteristics of business are as follow:
a) Social Institution
Though business is an economic activity, it is now well recognized as
a social institution. Society is a corner stone of business sand therefore
without society it cannot survive.
b) Deals in Goods and Services

People in business are engaged in production and distribution of goods
and services. The goods may be consumer good like bread, butter,
milk, tea, etc. or capital goods like plant, machinery, equipment, etc.
The services may be in the form of transportation, banking, insurance,
warehousing, advertising and so on.
c) Production and exchange

If a person produces or buys a product for self consumption or for
gifting it to another, he is not engaged in business. But when he
produces or buys goods to sell it to somebody, he is engaged in
business. Thus, in business the goods and services produced or
purchased must be exchanged for money or for goods (under barter
system) between the buyers and sellers. Without sale or exchange of
goods the activities cannot be treated as business.
d) Regularity of transactions
The production or buying and selling activities must be carried out on
a regular basis. It must continuously and regularly produce and sell
goods and services to customers. One time dealing cannot be termed
as a business.
e) Requires Investment
Every business activity requires some amount of investment in terms
of land, labor or capital. These resources are utilized to produce a
variety of goods and services for distribution and consumption.
f) Profit motive
Profit is an essence of business. Business activities are performed with
the primary objective of earning profit. Without profit it is not possible
to survive for a long period. Earning of profit is also required to grow
and expand the business. It is true that, without profit no one can take
Business Organization risk of business; however maximization of profit should not be the
System only aim of business.
g) Element of Risk and Uncertainty

NOTES
Business is a place of risk. The risk of loss is always present in every
business activity. The businessman who invests in various resources
expects a fair amount of return. But, in spite of his/her best effort, the
reward he/she gets is always uncertain. The business normally aims at
earning profit, Sometimes he/she enjoys profits but at times suffers
heavy losses. This happens because the future is unpredictable and there
is no certainty that the business activity will always result in profit.
h) Customer Satisfaction
Every business activity is centered on customer service and their
satisfaction. No business can exist over a long period of time without
satisfying the needs and wants of the customers.
1.4 BUSINESS AS AN ECONOMIC ACTIVITY.
Every human being performs different types of activities to gain his/her

wants and desires. Many of these wants and desires are inherent, as they are
biological compulsions and instincts for their survival whereas other types of
wants and desires are boundless and provide full satisfaction. So, all human
beings must perform different types of activities for their survival and
satisfaction. All the activities that the human beings perform can broadly be
classified into the following two activities:
a) Economic Activities
The activities through which the human beings can earn income and
generate wealth are known as economic activities. They are basically concerned
with production and distribution of goods and services which are used to satisfy
human wants/needs. There are three essential features of economic activities:
• Objective of economic gain
• Creation of utilities through provision of goods and services and
• Satisfaction of other people's needs
b) Non-economic Activities
The human activities which are carried out to satisfy social, psychological
and emotional needs are called non-economic activities. These activities are
performed for personal satisfaction and are inspired by pleasure, affection, love,
charity and other similar sentiments. Such activities are not concerned with
18 Nature of Business earning money.
Differences between Economic and Non-Economic activities Business Organization
System
NOTES
1.5 OBJECTIVES OF BUSINESS
Goals and objectives are the ends towards which actions or operations are
directed. Business objectives are the result one hope to achieve and maintain as
he runs and grows his business. Having a comprehensive list of business
objectives creates the guidelines that become the foundation for business
planning. An objective denotes a goal for the achievement of which efforts are
directed. Every business has its sets of objectives. The objectives of the business
are covered under the following categories.
A) Economic objectives
The following are the Economic Objectives of a business:
1) Profitability
Every business is started for earning profit because profit is the acid
test of every business, maintaining profitability means making sure
that revenue stays ahead of the costs of doing business. A profit is a
reward of risk and a common measure of its performance and
efficiency
2) Production of goods.
Earning of profit can be made when exchange of goods takes place;
so every business has the objective of production of goods.
Business Organization 3) Productivity
System
Employee training, equipment maintenance and new equipment
purchases all go into company productivity. Your objective should be
NOTES to provide all of the resources your employees need to remain as
productive as possible.
4) Creation of customers
Keeping your customers happy should be a primary objective of your
organization. The primary aim of business is to effect sale for the
product produced. This can be made possible through creation of
customers by satisfying their needs.
5) Research and Development

A business cannot afford to be static. Research and development or
innovation improves your company’s capabilities for serving the
market and its interests. A basic market research may go a long way
in helping the business attain its financial, market and reputational
objectives
B) Human Objectives
Human objectives require careful consideration and well-being of
shareholders, consumers and employees. The following are the human objectives
of the business:
1) Welfare Facilities
The business should render welfare to its employees. This may lead
to increase in the loyalties of the workers towards the business.
2) Customer Service
Good customer service helps to retain clients and generate repeated
revenue. The consumer should be supplied with qualitative products
so that they will feel satisfied. Keeping customers happy should be the
primary objective of the organization.
3) Increasing Return on Investment

Increased return on investment shows how quickly your business
returns profit on the money or capital that interested parties have
invested in it. The business should have the objective of providing
enough satisfaction to the shareholders. They should feel that their
money is not misused by management.
C) Social Objectives
Business is considered to be a social institution which operates in the
society. Thus business has certain social responsibilities and is required to
undertake those activities which are essential for the betterment of the society.
The following are some Social Objectives of the business Business Organization
System
1) Supply of goods and services
The basic obligation of the business towards the society is to ensure NOTES
continuous supply of goods and services at right quality and reasonable
price .If the business fails to complete this objective it will be driven
out of the society.
2) Public Interest
The business should help the government in formulating the policies
of socialistic pattern of society. It should render service to the
community and contribute to its welfare
3) Employment opportunities
One of the important objective of the business is to provide adequate
employment opportunity to the members of the society. This is very
important in developing countries, where unemployment is a serious
economic problem
D) National Objectives
The business enterprise contributes substantially for the upliftment of the
nation. The business should have the objective of being helpful to the
government. The business is the main contribution of funds to the government.
The followings are the national objectives of the business
1) Achieving Business Globalization
Businesses should grow its market share not only within the country’s
borders, but also across the globe. One can measure globalization by
identifying the amount or number of exports it makes.
2) Protection of national interest

It is expected that business should function in the national interest and
in accordance with the policies framed by the government. The
business should aim at improving the economic position of the society.
3) Growth opportunities
The business should help in providing skilled personnel for the
country, by providing opportunities to acquire and develop new
abilities and skill.
System
1.6 STRUCTURE OF BUSINESS (CLASSIFICATION OF
NOTES BUSINESS ACTIVITIES)
Sectors of Economy: Primary, Secondary, Tertiary,

Quaternary and Quinary
Human activities which generate income are known as economic activities.
Economic activities are broadly grouped into primary, secondary, and tertiary
activities. Higher services under tertiary activities are again classified into
quaternary and quinary activities.
Primary activities
Primary activities are directly dependent on environment as these refer to
utilization of earth’s resources such as land, water, vegetation, building materials
and minerals. It thus includes, hunting and gathering fruits and roots, pastoral
activities, fishing, forestry, agriculture, mining and quarrying. People engaged
in primary activities are called red-collar workers due to the outdoor nature of
their work.
Secondary activities
Secondary activities add value to natural resources by transforming raw
materials into valuable products. Secondary activities, therefore, are concerned
with manufacturing, processing and construction (infrastructure) industries.
People engaged in secondary activities are called blue collar workers.
Tertiary activities
Tertiary activities include both production and exchange. The production
involves the provision of services that are consumed. Exchange, involves trade,
transport and communication facilities that are used to overcome distance.
Tertiary jobs = White collar jobs.
Quaternary activities
Quaternary activities are specialized tertiary activities in the ‘Knowledge
Sector’ which demands a separate classification. There has been a very high
growth in demand for and consumption of information based services from
mutual fund managers to tax consultants, software developers and statisticians.
Personnel working in office buildings, elementary schools and university
classrooms, hospitals and doctors’ offices, theatres, accounting and brokerage
firms all belong to this category of services. Like some of the tertiary functions,
quaternary activities can also be outsourced. They are not tied to resources,
affected by the environment, or necessarily localized by market.
Quinary activities Business Organization
System
Quinary activities are services that focus on the creation, re-arrangement
and interpretation of new and existing ideas; data interpretation and the use and
evaluation of new technologies. Often referred to as ‘gold collar’ professions, NOTES
they represent another subdivision of the tertiary sector representing special and
highly paid skills of senior business executives, government officials, research
scientists, financial and legal consultants, etc. Their importance in the structure
of advanced economies far outweighs their numbers. The highest level of
decision makers or policy makers performs quinary activities. Quinary = Gold
collar professions.
1.7 REQUISITES FOR SUCCESS IN MODERN BUSINESS.
Modern business has become complex and complicated. The improvements

in technology and changing consumer preferences are creating more challenges
for the businessman. All aspects of an enterprise, i.e., production, financing,
organization and marketing should be properly arranged and co-ordinated to
make a business successful. A business has to co-ordinate various factors of
production for achieving a given objective. All factors are equally important for
making the business a success. Various departments should work in co-ordination
with each other and organizational and financial planning should by properly
determine.
The businessman has to take certain line of action to make his business a
success. They are
1. Objectives
For the success of any business organization, determination of its
objective is very essential. It should be clearly described and also be
realistic. One must know as to what is to be done. Only after deciding
the objective, the ways and the means will be determined to achieve
the objectives. Each activity of the organization should be directed
towards the achievement of its objectives.
2. Planning
Planning involves forecasting and laying down the course of action. It
involves planning for both present and future. In planning for the
future, an effort is made to estimate the future uncertainties and
determine the possible course of action for the coming period. Thus,
planning also helps the management to prepare itself for facing the
uncertainties of tomorrow. It enables the firm to run smoothly and
thereby reduces the risk of loss. Thus, it is considered as the essence
of business.
Business Organization 3. Sound Organization
System
Sound organization is very essential for the success of any business.
It is a medium for exercising effective control and management of any
NOTES business. Organization is an arrangement by which tasks are assigned
to employees so that their individual efforts contribute effectively to
the achievement of clearly defined purposes. The duties and
responsibilities of all persons are defined and they should know what
they are to do. An effective organization system is essential for the
success of a business. A suitable internal organization should be
developed. No work should be left unassigned. The supervisors and
subordinates should know their roles in the business.
4. Location and layout

Favorable location and suitable size have a great bearing on the success
of any business concern. The plant should be located at a place where
all factors of production are available at lowest costs. Raw materials,
labor, power and markets for the finished products should be available
near the place of location.
After deciding about location, a decision is made about layout of the
plant. The setting up of the machinery and equipment should be
systematic so that the flow of production should be smooth and
uninterrupted. Proper layout will enable the economical use of
available space. Proper location and layout of the business are
necessary for the success of a business.
5. Research
Research is necessary for the organization in order to improve the
methods and techniques of production, quality of the products and also
to introduce new products. It enables the businessman to meet the
changing needs of customers demand and also competition among the
producers. One can compete with changing business world only
through research programmes. Thus, research activities are necessary
for the success of an enterprise.
6. Dynamic leadership
The success of an enterprise will depend upon the efficiency of its
management. The task of management is to plan, organize, co-ordinate
and direct various activities for achieving business objectives. This
will be possible only if the leadership is dynamic. The head managing
the enterprise should have foresight, initiative, courage and aptitude
for a change.
7. Adequate Finance Business Organization
System
Finance is the lifeblood of the organization. Inadequate finance may
lead to losses in the firm. Hence, arrangements should be made to meet
the short-term and long-term requirements of the organization. Flow NOTES
of funds and employment of funds should be planned well in advance.
Source of capital must be properly taken into consideration & it must
be flexible
8. Efficient Management
In order to achieve its objectives, effective and efficient management
is essential. No firm can achieve success unless it has an efficient
management. It is possible only when the managers are competent in
performing their duty. More effective the management more the
success of business.
9. Effective Distribution System

The goods produced have value only when they are made available to
the consumers. The object of producing goods itself is to distribute it
for value. Therefore, in every business organization it is essential to
have effective distribution system. Management should decide about
the channels of distribution. Whether to sell directly to consumers or
to sell through wholesalers? It should be decided after taking into
consideration various aspects of goods.
10. Maintenance of Better Employee relationship

Cordial employee-employer relationship is very essential for the
successful operation of the business concern. Employees are to be
rewarded, well treated and also provided with all amenities to ensure
job satisfaction. This will definitely boost up the employee morale and
ensure their cooperation.
11. Marketing System

The marketing aspects of a business are more important than even
production. There is no use of producing a thing if it cannot be sold.
Marketing management is essential for earning profits.
12. Employee Morale

Employee morale will also help to do the work efficiently. It
encourages the employee to work properly and make conscious efforts
towards their work.
13. Motivated and skilled Employees

All business plans and policies are executed by employees. The
success of any business largely depends upon the ability and
Business Organization willingness of employees to perform organizational activities. When
System employees are motivated and skilled they can perform the
organizational activities effectively and efficiently
NOTES
1.8 TRAITS OF A SUCCESSFUL BUSINESSMAN
Presently the development of science and technology in every walk of life

has made modern business a complex one. Successful business people have many
traits in common with one another. Here are a few traits of a successful
entrepreneur.
1. Discipline
2. Confidence
3. Open Minded
4. Self-Starter
5. Competitive
6. Creativity
7. Determination
8. Strong people skills
9. Strong work ethic
10. Passion
11. technical skill
12. Courteous
13. Innovative
14. Leadership Qualities
1.9 SUMMARY
This unit highlights the meaning, nature and scope of business; it helps to
understand the objectives and characteristics of a business. L.F.Urwick has rightly
said “Earning of profit cannot be the objective of a business any more than eating
is the objective of living”. The unit also explains the structure of business and its
classification into various sectors .The unit also explains the essential of a
successful business and traits of a successful entrepreneur.
System
1.10 QUESTIONS AND EXERCISE
NOTES
Q1) Meaning and scope of business,
Q2) Difference between economic and non-economic activity
Q3) Structure of Business and its classification into various sectors
Q4) Essential factors for a successful business.
1.11 TASK
Students can undertake a small field exercises (it can be their own
organization, if in job/business) wherein they are required to collect information
related to the nature of the organization, structure, constitution, objectives,
goals etc.
*****
System
UNIT - 2 EvOLUTION OF BUSINESS

NOTES
2.0 INTRODUCTION
Evolution is a slow process of change from one form or level to a better or

higher one, or that brings into being a superior or new order. Evolution does not
occur in a straight, steady progression. Evolution of business means its origin,
growth, and continuous development with expansion in various sectors that
contribute and run economies.
The business evolution went through many progressive stages or so called
developmental steps. In each stage of progress, it evolved itself and got more
mature than its previous state. It is evident that, at every step of evolution; it
expanded its scale of operations and also widened its modes of communication.
It is continuously evolving since then.
2.1 UNIT OBJECTIVES
After going through this unit you will be able to:

• Understand the evolution of business
• Study the various stages of evolution in commerce and industry.
• Study the industrial revolution
• Understand the beginning and growth of Indian Business
• Study Industrialization in India.
2.2 BEGINNING AND DEVELOPMENT OF COMMERCE

AND INDUSTRY
The word business technically means a state of being busy. Every person is
engaged in some kind of occupation, the primary aim of all these persons is to
earn their livelihood while doing some work.
The Evolution of Business can be studied by dividing it into two parts:
1. Evolution of Industry
2. Evolution of Commerce
28 Evolution of Business
(1) Evolution of Industry Business Organization
System
Industry is concerned with the production of goods and services. There was
a time in the history of mankind when there were no industrial activities. Our
primitive ancestors consumed what they produced. Hunting was the first stage NOTES
in the evolution of man. The needs of man were limited only to food, clothing,
and shelter. This was an economy of self-reliance.
Gradually man entered in pastoral stage under which he started
domesticating animals for milk, meat and skin. He lived near the banks of lakes
and rivers because of availability of grass and water. Later, man entered the
agriculture stage where he began cultivating land to grow food grains. The
economy of the household remained self-sufficient.
The evolution of industry can be traced from handicraft stage where goods
were manufactured for local people.
(a) Handicraft Stage

People came to know that they are skillful in producing a few
commodities. Hence, under handicraft stage artisans living in a village,
produced products for the local people and got in exchange what they
needed. At this stage, artisan used simple hand tools and manual skill
for producing the goods. Machines were not used. The organization
of work was quite simple and there was no division of labor. The
money as a medium of exchange helped the expansion in industry and
trade. Modern means of transport were not available
(b) Guild System

The second stage was the development of guilds. A guild may be
defined as an organized group of artisans or traders. In the middle age
(up to 15th century) working people organized themselves into Guilds.
These Guilds were – Merchant Guilds and Artisan Guilds. The
merchant guilds were associations of traders. Artisans engaged in the
same line formed artisan or craft guilds. The guilds were able to help
the growth of industries development. It protected the interests of its
members and also provided opportunities and training. The members
were expected to maintain proper standard of quality and
workmanship. Reasonable profitability was ensured to the craftsman.
(c) The Domestic System

With the fall in guild system, a new system developed which was
known as Domestic System. With the increase in population, the
demand for goods increased considerably. The artisans were not able
to procure huge quantities of raw materials. They were also unable to
purchase latest tools because of their limited resources. Thus a new
class of entrepreneurs came into existence these merchants who had
to market goods in different places saw that the production was Evolution of Business 29
Business Organization according to the needs of the market. Initially they entered into contract
System with artisans, later with increase in demand they bought raw material
and supplied to the artisans who worked in their homes. Then further
NOTES various artisans were given raw material and supervised under one
roof through agents or personally. These places of work came to be
known as manufactories.
(d) The Industrial Revolution

The term ‘Industrial Revolution’ is used to describe a series of changes
in the British industry during the later part of the 18th century and the
earlier part of 19th century. A number of inventions took place in
England, which changed the entire technique of production.
The word ‘revolution’ means a fundamental change. In this sense, the
industrial revolution was a change in (a) industrial method- from
handwork to work done by machines driven by power, and (b)
industrial organization- from work at home to work at factories. The
consequences of the industrial revolution were mass production,
mechanization, standardization, the growth of capitalism,
specialization and improvement in the standard of living.
(e) Present Stage

The present age has been termed as an era of large-scale production.
The golden age of innovation The 20thcentury has seen evolution in
technology. Today’s modern era with industrialization, use of
technology, computerization, modernization robotizing is the most
developed stage of industries. With automation, industrial work can
be done faster and better. All complicated jobs are done with the help
of machines.
The computer system helps to analyze various results. There are huge
number of industries producing large number of goods to meet large
amount of needs and wants by providing many jobs and salaries.
(2) Evolution of Commerce

Commerce includes all those activities, which are concerned with the
distribution of goods and services. It includes purchase and sale of every kind
and also the various services like transport, banking, insurance, warehousing,
etc. which facilitate trade. It provides a link between producer and consumer.
Commerce has been expanding along with the development of society. It
has passed through a number of stages to reach the present level. The standard
of living is directly influenced by the degree of development of commerce.
Following are the stages in the evolution of commerce:
a) The Hunting Stage Business Organization
System
This was the first stage in the evolution of man. The needs of the man
were limited only to food, clothing and shelter. He depended upon
nature for food. The animal flesh, fish, fruits, roots and berries were NOTES
his main sources of food. His main activity was hunting and fishing.
The life in this age was nomadic. People used to live in groups to
protect themselves from animals. There was no division of labor and
food articles collected by men were shared by all. This was an
economy of self-reliance and no dependence on others. There was no
question of exchange of goods so commerce was non-existent in
this stage.
b) Pastoral Stage
The uncertainties in depending upon hunting, made man start rearing
animals. They reared animals for food and their skin was used as
clothes. Man moved in tribes in search of new pastures, lakes and
rivers where he used to settle as long as his requirements of water and
grass were met. There was no division of labor and people used to
depend upon their own means of livelihood. There was hardly any
exchange of goods among people. In the absence of exchange there
was no commerce at this stage too.
c) Agricultural Stage
Man developed the art of cultivation of land and started living in a
fixed place. They started settling down at places where water was
available. People started sowing seeds and rearing cattle on the land
which they shared in common. All production was for the use of whole
tribe and they were self-sufficient in meeting their requirement. There
was a shift from hunting to agriculture. This marked the beginning of
the growth of collective living which led to the emergence of
communities and villages.
d) Barter Economy Stage

Barter System involves exchange of goods and services for other goods
and services. This marked the beginning of the true form of business
activities. Commerce made its beginning and barter (exchange of
goods for goods) began to be practiced. Means of communication were
either absent or wholly primitive and trade was non-existent. The
barter economy laid foundation for increase in the other commercial
activities like trading, division of labor, employment of slaves to get
the work done etc.
Evolution of Business 31
Business Organization e) Money Economy Stage: (The Rise of Trade)
System
The barter economy however, had its own drawbacks. The drawbacks
were:
NOTES
i) Absence of double co-incidence of wants:
ii) Lack of common measure of value:
iii) Lack of storage facilities:
iv) Lack of sub-division:
The difficulties of barter system compelled people to find out some
common medium for exchange. Several commodities like shells,
cattle, oxen, precious stones, metals etc. have been used for money
from time to time. Still later various metals were converted into coins
of definite size and weight. So the introduction of money led to the
growth of commerce.
f) Town Economy Stage

The development of a common medium of exchange led to the
increase in the trading activities. People started producing goods for
sale. Gradually the traders started selling at particular places, which
later on became marketplaces or trade centers. This led to the growth
of towns and cities. Trade began between traders of different towns
and cities.
g) National Economy
The introduction of money followed by several other improvements
of commercial activities (transportation, banking, insurance, etc.)
greatly helped to develop commerce and trade. The division of work
and specialization helped producers to concentrate on few products
only. They started producing goods not only for the local markets but
also for national markets. Prices began to be fixed regularly and credit
began to be allowed, merchant guilds were organized to provide
security to traders. The specialization in different fields helped the
growth of industry and commerce. The development of transport
increased the trade manifold. All these developments were responsible
for developing commerce at a national level.
h) World Economy: (International Trade Stage)

The discovery of trade routes between 15th, 16th and 17th centuries
brought various countries nearer to each other. The element of
specialization extended to different countries. They started exporting
those products, which they could produce easily and would import
those things in which they were deficit or could not produce cheaply.
In this way, trade extended to world markets in which good were
bought and sold between two countries. This was known as Business Organization
international trade. The industrial revolution brought a drastic change System
in industrial method and industrial organization, which increased the
scale of production immensely and changed the scope of trade. Several NOTES
middlemen began to operate between the producers and the consumers.
Specialized institution like banks, transport companies, insurance
companies and warehousing were set up to help the trader. All these
factors facilitated the development of worldwide trade and commerce.
This was the globalization of business.
By the 20th century, trading and shopping expanded from small shops
and outdoor markets to supermarkets, discount stores, and shopping
malls. Sailing ships were replaced by steamships, then by railroad and
finally by planes and large cargo vessels. The creation of organizations
such as the World Trade Organization was done to help control
commerce and to promote free trade and remove any barriers to trade.
Types of commerce today

While trade between countries is still the main force of commerce, it's done
differently now - it's much faster thanks to advances in technology. Ecommerce
is probably the newest and most innovative type of commerce. It involves online
commercial trading between businesses and consumers. Ecommerce can be
broken down into a number of subtypes, including business-to-business and
business-to-consumer.
Another type of commerce is Mobile commerce or M-commerce. It
encompasses any commerce that is done through mobile devices such as smart
phones or tablets. M-commerce is sometimes called the next form of e-
commerce. M-Commerce is driven by the Wireless Application Protocol
technology that helps users access the internet securely
Then there's P-Commerce, which can either stand for P interest Commerce
(buying/selling using the P interest website) or Participatory Commerce. The
second type is the more noteworthy. It's a new concept where consumers can
participate in the funding, design and selection of products. Crowd sourcing is a
type of P-Commerce that is becoming more and more popular.
Thus development of commerce is a gradual removal of hindrance in the
flow of goods from the producers to the consumers. It has evolved over the
centuries from a simple trade of goods or services to the complex buying, selling,
and trading that occurs online every day.
2.3. INDUSTRIAL REVOLUTION
The era known as the Industrial Revolution was a period in which

fundamental changes occurred in agriculture, textile and metal manufacture, Evolution of Business 33
Business Organization transportation, economic policies and the social structure in England. This period
System is appropriately labeled “revolution,” for it thoroughly destroyed the old manner
of doing things. The changes that occurred during this period (1760-1850),
NOTES occurred gradually. It was the process of change from an agrarian and handicraft
economy to one dominated by industry and machine manufacturing. This process
began in Britain in the 18th century and from there spread to other parts of the
world.
The main features involved in the Industrial Revolution were technological,
socioeconomic, and cultural. The technological changes included the following:
(1) The use of new basic materials, chiefly iron and steel,
(2) The use of new energy sources, including both fuels and motive power,
such as coal, the steam engine, electricity, petroleum, and the internal-
combustion engine,
(3) The invention of new machines, such as the spinning jenny and the
power loom that permitted increased production with a smaller
expenditure of human energy,
(4) A new organization of work known as the factory system, which
entailed increased division of labor and specialization of function,
(5) Important developments in transportation and communication,
including the steam locomotive, steamship, automobile, airplane,
telegraph, and radio, and
(6) The increasing application of science to industry. These technological
changes made possible a tremendously increased use of natural
resources and the mass production of manufactured goods.
The most important of the changes that brought about the Industrial
Revolution were (1) the invention of machines to do the work of hand tools; (2)
the use of steam, and later of other kinds of power, in place of the muscles of
human beings and of animals; and (3) the adoption of the factory system.
While industrialization brought about an increased volume and variety of
manufactured goods and an improved standard of living for some, it also resulted
in often grim employment and living conditions for the poor and working classes.
2.4 BEGINNING AND GROWTH OF INDIAN BUSINESS
Evolution of business means its origin, growth, and continuous development

with expansion in various sectors that contribute and run economies. The business
evolution went through many progressive stages or so called developmental
steps. In each stage of progress, it evolved itself and got more mature than its
previous state. It is evident that, at every step of evolution; it expanded its scale
of operations and also widened its modes of communication. It is continuously
34 Evolution of Business evolving since then.
The Indian civilization was not only agriculture based but there was also Business Organization
flourishing trade and commerce both inside and outside the country. It had System
contributed immensely to the world of business in different fields. Indian business
was unique, innovative, dynamic and qualitatively superior to many other NOTES
countries of that time.
Indian business used to be mostly need based, with least focus on profit in
its initial days.
With passage of time, it went through several transformations due to
changes in customs and practice and patronage by different rulers. Business
heritage can be studied in 3 different phases - Ancient, Medieval and Modern.
I. Ancient Period (up to 750AD)

The archaeological discoveries at Harappa and Mohenjo Daro points out to
the fact that the people of India had a very advanced civilization from the times
around 5000 BC. Harappan relics indicate the importance of industrial products
and the nature of trade in the area. The economy of the country was dependent
upon agriculture, fishing and trading. The Indus seals authenticate the role of
commercial consignments. Western coast of India has been a scene of great
maritime and commercial activity. India had flourishing trade with Babylonia,
Egypt, Greece and Rome in 6th century BC. Finest quality of cotton and cloth
was prepared by Indian weavers and artisans and exported to other countries
during the ancient period. Hand spun and handmade Indian muslin was the pride
of India. The guild system was also in practice in India even in the early days to
protect the interest of traders, artisans and producers. Guilds were the association
of businessmen having common objectives.
II. Medieval Period (750 to 1757AD)

After about 750 AD, India both in north and south was divided into many
independent kingdoms. So there was a considerable growth in the size and
number of towns. Trade and commerce continued both within and outside the
country. Various sea routes were discovered during this period. During the
Mughal period, a number of trade routes existed. The network of these trade
routes indicates the extent to which places in the deep interior were involved in
inter-regional exchange of commodities. Indian traders were expert in both
domestic and foreign trade. During the Moghul rule, Indians were using an
indigenous financial instrument called ‘Hundi’, which is similar to the modern
day Negotiable Instruments. A number of industries of considerable importance
developed during the medieval period. The most important ones were textiles,
metal work, stone work, sugar, indigo and paper.
III. Modern Period

India was under British rule almost for a period of 200 years in the modern
period. British viewed India with its vast land and large population as a supplier
of raw materials as well as a market for British industrial production. This
Business Organization ushered the application of modern technologies in India to facilitate the colonial
System rule. The first railway line in India was constructed between Bombay to Thane
in 1853.This mode of communication opened new frontiers for business at distant
NOTES locations. Movement of people and goods fostered the growth of every business.
Industrial Revolution occurred in Great Britain during the second half of
the18th century, India entered into machine-based mass production yet
simultaneously it also inherited all the drawbacks of a large-scale economy. The
national economy was shattered; the artisans of India were left with no option
but to turn to factories as workers
Modern Industries in India

The Swadeshi movement, which began in 1905, gave a boost to Indian
industries. Modern industries like iron and steel, cement, chemicals, automobiles,
shipbuilding, sugar and textiles mills were started in India during the first quarter
of 20th century. J.R.D. Tata established the first Iron and Steel Industry in 1911
at Jamshedpur. There was growth of trade and various auxiliaries to trade like
banking, insurance, warehousing, communication etc. Different forms of business
organization like sole proprietorship, partnership and co-operative
Societies were established. The Government formulated five-year plans for
overall economic growth of the country. A number of large scale industries like
iron and steel, chemicals, fertilizers, oil and natural gas, petro-chemicals, cement,
automobile, etc. have been set up both in private and public sectors.
Knowledge Based Economy

The last phase of growth in India came from a growing information
technology industry and service industry. India became a hub for information
technology and a knowledge-based economy. It was the major recipient of the
outsourced call centers, medical billing centers and other business administration
and insurance related services. India’s economy is now supported by its own
expertise in information technology, larger capital market, improving
infrastructure and growing middle class with increasing disposable income.
To make India’s economic growth more sustainable, India needs to speed
up privatization of government owned businesses, improve financial and legal
systems to protect investment and modernize its infrastructure. It also requires
to introduce business friendly tax reforms, upgrade labor laws to the international
level and eliminate bureaucracy.
India’s Contributions to the World of Business

The modern day mantras of business have their origin in the past practices
of India. Some of the major contributions are:
i. The Numeral and Decimal System Business Organization
System
• Indians were the first to express the nine numerals together with a zero
sign and place notation. The Great Indian mathematician Aryabhatta’s
(5th century A.D) text clearly implies knowledge of these symbols. NOTES
• Indians understood the importance of positive and negative quantities,
evolved system of extracting square and cube roots and could solve
quadratic type of equations.
• Rigveda gives names of fractions such as ardha (½) and tripada (¾).
Maitrayi Samhita mentions Pada, as ¼, Sapha as 1/8, Kushta as 1/12 and
Kala as 1/16. Sulva Sutras use the terms ‘amsa’ and ‘bhoga’ for fractions.
• Aryabhatta calculated the value of pie ( 3 .146 and the length of the solar
year to 365.3586805 days. Both these are remarkably close to modern
estimates.
ii. Joint Hindu Family Business System

Business, if done in an organized way, with different individuals doing
different things in a systematic manner, gives beneficial results. A unique feature
of the ancient Indian social life has been the Joint Hindu Family System wherein
all the members of the family used to live together; they were a well-knit social
unit and also carried on trade and business under the guidance and supervision
of the oldest member of the family (the Karta).This was the Joint Hindu Family
Business System
iii. Division of Labour

Division of labour means work should be distributed among individuals on
the basis of specialization. the Rigvedic society, comprised of four Varnas,
namely Brahmanas, Kshatriyas, Vaishyas and Sudras. This classification was
based on worldly occupation of people and not on birth. The teachers were called
brahmanas, rulers and administrators were called kshatriyas, farmers, merchants
and bankers were called vaishyas and artisans and labourers were called the
sudras. The varna system could be referred to as the earliest evidence of division
of labour.
iv. Hundis
The hundis (like bills of exchange) were used for safe transfer of money
without carrying actual cash from one place to another and to raise short term
credit repayable at another place. They facilitated trade through convenient
transfer of money.
v. Customer Relation
The latest concern of modern business today is how to create and retain
customers.
This system was available in India since the ancient time. Products were
produced keeping in mind who is going to use it. In other words, mostly products Evolution of Business 37
Business Organization were customized. Marketing was relationship based. There was a close tie
System between the manufacturer, the middleman and the user. Thus, buyers were
assured of the product as well as its future maintenance.
NOTES
vi. Emphasis on Quality
Indians had always given emphasis to quality over quantity. Indian artisans
used to produce goods of best quality and paid individual attention to the
products. For example, the ancient Indian tribes used to produce the best variety
of steel, Hand spun and handmade Indian muslin was the pride of India. Colors
used by Indian dyers were of enduring nature. The famous chikan embroidery
work, the appliqué work, brass work, carpet work, Patachitra Paintings, silver
filigree work and many others are examples of the quality items produced by
Indian artisans. All this contributed a great deal in influencing the system of
business and trade to bring it to the modern times.
2.5 INDUSTRIALIZATION IN INDIA.
Industrialization in India can well be marked under two heads viz., Pre-
British Period and the Evolution of Modern Industry.
Pre-British period: India was famous for her handicrafts right from
PreBritish times. During the Mughal Period, India had a considerable variety of
arts and handicrafts. India was also famous for jewellery of exquisite quality
which were made out of gold and silver and also those which were made out of
copper, brass and bell-metal. Many urban centres were famous in those days for
carving work in ivory, wood, stone and marble.
Evolution of Modern Industry: The emergence of modern industrial
enterprises can be traced back to the end of the 18th century
• The abolition of the monopoly of the East India Company in 1833
provided a big opportunity for the English merchants to develop trade
and industry in India. Foreign capital and enterprise flowed into
plantations and monopolistic industries such as jute and railways. The
foundation for the development of large scale industries was thus laid.
• India registered a substantial progress in various industrial fields during
1922 and 1939. Considerable progress was recorded in industrial
production and the total number of factories increased.
• During the Second World War period, India stood as a major supply base
of war materials for the Middle Eastern and South Eastern theatres of
war. Thus, some new important industries started production during the
war period. These include manufacture of transport equipment,
chemicals, metals and mechanical industries like diesel engine and
pumps.
• It was on 7th April 1948 that the Resolution on Industrial Policy was Business Organization
adopted by the Government, A new feature of the year was the starting System
of new industries for the manufacture of automatic looms, aluminum
powder, etc.
NOTES
• In September 1951, the State Financial Corporation Act was passed to
enable State Governments to set up their own Industrial Financial
Corporation to assist: medium and small scale industries. The Parliament
also passed the Tariff Commission Act to enquire into the claim for
protection of Indian industries by establishing a Statutory Tariff
Commission
• In October 1952 the Industries (Development and Regulation) Act was
passed for regulating industries as a corollary to planned development.
• In July 1961, a Joint Consultive Board on Industry and Labour was set
up to deal with the question relating to nationalization and related
problems.
• In 1977 when the Janata Government came into power they announced
a new industrial policy. Their main emphasis was on the employment
generation so Special attention was given to small scale sector. The policy
also called for an agency called district industry centre.
• In 1980, the industrial policy was reviewed by the new Government and
this policy 1ays emphasis on the relative growth of different sectors,
large, small and tiny. Modernization was considered necessary for small
and tiny sectors. The policy gave all encouragements to export oriented
industries and for encouraging foreign investment in high technology
areas.
• The industrial policy of 1980 was revised by the industrial policy of 1991.
The major objectives of the new industrial policy (now in existence)was
to build on the infrastructure already made; to correct the distortions that
may have crept in, maintain a sustainable growth in productivity and to
provide gainful employment and to attain international competitiveness.
2.6 SUMMARY
The economic development of a country is measured by the development

of commerce and industry. India has a rich heritage in trade and commerce, the
development of business activities in India has been going on with the changes
in civilization. There was a time when there was no commerce at all and now its
development has brought the whole world together. There have been different
stages through which the development of trade and industry has passed.
System
NOTES
Q1) Explain the evolution of commerce
Q2) What do you mean by Evolution of industry? Explain the various
stages in its evolution.
Q3) Elaborate on the growth of Indian business.
Q4) Explain industrial revolution and the changes that took place during
the revolution.
Q5) Discuss Industrialization in India.
2.8. TASK
Interview a successful ecommerce entrepreneur and find out various aspects

to be considered to help you build a profitable ecommerce business.
*****
System
UNIT - 3
FORMS OF BUSINESS OWNERSHIP
NOTES
Introduction to various forms – Factors affecting choices of an ideal form

of ownership, features Merits and Demerits of Sole Proprietorship – Joint Hindu
Family Business – Partnership – Joint Stock Company – Co-operative
Organization, Public Enterprises.
3.0 INTRODUCTION
We have studied in the first lesson about business; its significance and
classification of business activities. It brings together various resources like men,
money, materials, machines, technology, etc. and also puts them into action in a
systematic manner to achieve the objectives of business. Business activities are
carried out by individuals in an organized form, having different patterns of
ownership and management. A single individual may own the business or a
number of individuals may come together to own the business jointly. So, based
on ownership, we have different forms of business organization like a proprietary
concern, a partnership firm or a company. Business firms owned by private
individuals fall in the private sector, while firms owned by the state are
categorized as public sector. In this lesson, you will learn about the various forms
of business organization, their features, merits and demerits.
To carry out any business and achieve its objective, it is required to bring
together all the resources and put them into action in a systematic way, coordinate
and control these activities properly. This arrangement is known as business
organization.
3.1 UNIT OBJECTIVES
After studying this unit, you will be able to

• Explain the concept of business organization.
• Understand the meaning and characteristics of Sole Proprietorship, Joint
Hindu Family Business, Partnership, Joint Stock Company and
Cooperative Societies.
• Identify the merits and limitations of these forms of business
organizations.
Forms of
• Understand the concept of a public enterprise. Business Ownership 41
System
3.2 INTRODUCTION TO VARIOUS FORMS OF OWNERSHIP
NOTES
One of the first decisions that you will have to make as a business owner is
how the company should be structured. This decision will have long-term
implications. Each form will have its own pros and cons depending upon the
government regulations, tax policies and the law applicable in that land. The
generic forms of business ownership are as follows-
Sole Proprietorship
Sole proprietorships are the most common form of business structure. A
Sole Proprietorship is one individual in business alone. This business is simple
to form and operate and enjoys greater flexibility of management, fewer legal
controls and fewer taxes. However, the business owner is personally liable for
all debts incurred by the business.
Partnerships
In a Partnership, two or more people share ownership of a single business.
They agree to contribute money, labor or skill to a business. Like proprietorships,
the law does not distinguish between the business and its owners. Each partner
is personally and equally liable for debts of the partnership. Formal terms of the
partnership are usually contained in a written partnership agreement. Partnership
can be further classified into General, Limited Partnership, Limited Liability
Partnership, Limited Liability Limited Partnership (LLLP)
Corporation
A Corporation is a more complex business structure. A corporation has
certain rights, privileges, and liabilities beyond those of an individual. The
corporate structure distinguishes the business entity from its owner and can
reduce liability. However, it is considered more complicated to run a corporation
because of tax, accounting, record keeping and paperwork requirements.
A Cooperative Business is an autonomous association of persons united
voluntarily to meet their common economic, social, and cultural needs and
aspirations through a jointly-owned and democratically-controlled enterprise.
Based on the nature of activities performed, co-operatives can be categorized as:
a. Consumers’ Co-operative Societies.
b. Producers’ Co-operative Societies.
c. Marketing Co-operatives.
d. Housing Co-operatives.
e. Co-operative Credit Societies.
Forms of
42 Business Ownership f. Co-operative Farming Societies.
System
3.3 FACTORS AFFECTING CHOICES OF AN IDEAL FORM
OF OWNERSHIP NOTES
The selection of a suitable form of ownership organization is an important

entrepreneurial decision because it influences the success and growth of a
business — e.g. it determines the decision of profits and the risk associated with
business.
The following Factors affect the choices of an ideal form of ownership
1. Ease in formation
2. Nature of business activity
3. Scale of operations
4. Capital requirements
5. Degree of control and management
6. Degree of risk and liability
7. Stability of business
8. Flexibility of administration
9. Division of profit
10. Costs, procedure and government regulation
11. Tax liability
12. Geographical mobility
13. Scope of expansion
3.4 FEATURES MERITS AND DEMERITS OF VARIOUS

FORMS OF OWNERSHIP
A business can be organized in one of several ways. The form its owners
choose will affect the company’s and owner’s legal liability and income tax
treatment. Here are the most common options and their major defining
characteristics.
3.4.1 Sole Proprietorships

Sole proprietorship is the simplest and oldest form of business organization.
This form of organization is owned by one person. He works as a financer,
manager, employer, decision maker. In case of profit, he enjoys the whole profit Forms of
Business Ownership 43
Business Organization and in case of loss he bears the whole loss. He sows, reaps, and harvests the
System output of this effort. In simple words we can say that it is a one man company.
This form is the most popular form in India due to the distinct advantages it
NOTES offers. William R. Basset opines that “The one-man control is the best in the
world if that man is big enough to manage everything”. Some of its examples
are Retailers, Corner shop, Bakery, Hardware Store, Shoe Store, Doctor's
clinic etc.
The main features of proprietorship form of business are as follows
1. Simple form of organization
2. Ease of formation
3. Control
4. One man ownership
5. No separate business entity
6. No separation between ownership and management
7. Unlimited liability
8. All profits or losses to the proprietor
9. Minimum legal formalities
10. Easy dissolution
The advantages that proprietorship form of business offers are

1. Simple form of organization
2. Easy formation
3. Owner’s freedom to take decisions
4. Flexibility of operations
5. Direct and exclusive control
6. Direct motivation and incentive to work
7. Personal touch with customers
8. High secrecy
9. Minimum government regulations
10. Tax advantage
11. Easy dissolution
Proprietorship form of ownership suffers from following disadvantages.

1. Limited resources
2. Limited managerial ability
Forms of
44 Business Ownership 3. Limited skills
4. Limited life of enterprise form Business Organization
System
5. Limited scope for growth.
NOTES
7. Cater to local markets only
8. Uncertainty of continuity
9. No economies of scale
Sole proprietorship business has its own merits and limitations as discussed
above. In spite of its limitations it is suitable in the following cases:
• Where the market for the product is small & local. For example, selling
grocery items, books, stationery, vegetables etc.
• Where customers are given personal attention, according to their personal
tastes and preferences. For example, making special type of furniture,
designing garments etc.
• Where the nature of business is simple. For example, grocery, garments
business, telephone booth etc.
• Where capital requirement is small and risk involvement is not heavy.
For example vegetables and fruits business, tea stalls etc.
• Where manual skill is required. For example, making jewelry, haircutting
or tailoring, cycle or motorcycle repair shop etc.
3.4.2 Joint Hindu Family Business

The Joint Hindu Family Business is a distinct form of organization peculiar
to India. The business of Joint Hindu Family is controlled under the Hindu Law.
It does not have any separate and distinct legal entity from that of its members.
The membership in this form of business organization can be acquired only by
birth or by marriage to a male person who is already a member of Joint Hindu
Family.
The business of the Joint Hindu Family is controlled and managed by one
person who is called ‘Karta’. The Karta works in consultation with other
members of the family but ultimately he has the final say. The liability of Karta
is unlimited while the liability of other members is limited to their shares in the
business. This interest in inheritance is called coparcenary interest and the
members of the Joint Hindu Family are called coparceners.
There are two schools of Hindu Law- one is Dayabhaga which is prevalent
in Bengal and Assam and the other is Mitakshara prevalent in the rest of the
country. Dayabhaga exists in Bengal and Assam only. It differs from Mistakshara
School in many respects. The right to Hindu joint family property under
Dayabhaga is not by birth but only on the death of the father. The system of
devolution of property is by inheritance. Succession opens to a son only after the
death of the father. A Dayabhga father is competent to make a testamentary
Forms of
disposition of the whole of property. A son has got no right to object to it. A son Business Ownership 45
Business Organization cannot claim partition during the lifetime of his father; as when the father is alive
System the sons do not have coparcenary rights but acquire it on the death of the father.
A widow has a right to succeed to husband’s share and enforce partition if there
NOTES are no male descendants
According to Mitakshara law, the property of a Joint Hindu Family is
inherited by a Hindu from his father, grandfather and great grandfather and it is
called ancestral property. Thus, three successive generations in the male line (son,
grandson and great grandson) can simultaneously inherit the ancestral property.
In the group of coparceners, however, the female members of the Joint Hindu
Family are not included. The Mitakshara system is very Conservative and thus
among the two the Dayabhaga is more likely to last in modern times with the
growth of individualism, individual enterprise and economic compulsions.
Features of a Joint Hindu Family Business

1. Governed by Hindu Law
2. Management by Karta
3. Membership by Birth
4. Limited Liability of coparceners
5. Unlimited Liability of Karta
5. Existence not affected by death, lunacy or insolvency of any member
of the family
6. Implied Authority of Karta
7. Minor also a Partner
8. Dissolution only at the will of all the members of the family
Advantages of Joint Hindu Family Business

1. Easy to start
2. Centralized and efficient management
3. Maintenance of secrecy
4. Prompt decision
5. Economy maintained by the karta
6. Credit facilities
7. Natural love between members
8. Freedom regarding selection of business
9. Sharing of knowledge and experience
10. Limited liability
11. No maximum limit to membership
Forms of
12. Group effort and cooperation
46 Business Ownership
Disadvantages of Joint Hindu Family Business Business Organization
System
1. Membership Limited to the members of family only
2. Limited Sources of Capital
NOTES
3. Limited Managerial Skill
4. Unlimited Liability of the Karta
5. Misuse of Power by Karta
6. Lack of Motivation as no direct relation between efforts and rewards
7. Short life of business as coparceners can demand partition.
Joint Hindu Family Business Losing Popularity

The main cause for its decline is the gradual breaking of the joint family
system itself. The present day trends of industrialization and westernization are
giving way to individual/nuclear family system.
3.4.3 Partnership
Sole proprietorship suffers from limited resources, hasty decisions and
temporary existence etc. As remedy, partnership emerged as a form of business
organization. The Indian Partnership Act, 1932, Section 4, defined partnership
as “the relation between persons who have agreed to share the profits of business
carried on by all or any of them acting for all”.
According to J. L. Hanson, “A partnership is a form of business organization
in which two or more persons up to a maximum of twenty join together to
undertake some form of business activity”.
Thus we can define partnership as an association of two or more persons
who have agreed to share the profits and losses of a business which they run
together. This business may be carried on by all or anyone of them acting for all.
The persons who own the partnership business are individually called ‘partners’
and collectively they are called as ‘firm’ or ‘partnership firm’. The name under
which partnership business is carried on is called ‘Firm Name’.
Features of Partnership
The essential features and characteristics of a partnership are:
1. Agreement
The partnership arises out of an agreement between two or more
persons. Registration of a partnership firm is not compulsory under
the Act. The only document or even an oral agreement among partners
required is the ‘Partnership Deed’ to bring the partnership into
existence.
Forms of
Business Organization 2. Profit and Loss Sharing
System
There is an agreement among the partners to share the profits earned
and losses incurred in partnership business.
NOTES
3. Contractual Relationship
Partnership is formed by an agreement-oral or written-among the
partners.
4. Utmost Good Faith and Honesty

A partnership business solely rests on utmost good faith and trust
among the partners.
5. Lawful business
Partnership is formed to carry on some lawful business and share its
profits or losses.
6. Membership
There must be at least two persons to form a partnership. The
maximum number is 20. But in case of banking business the
maximum is 10 members.
The liability of every partner is unlimited, joint and several. This
means that if the assets of the partnership firm fall short to meet the
firm’s obligations, the partners’ private assets will also be used for the
purpose.
8. Principal-agent relationship
Every partner is an agent of the firm. He can act on behalf of the firm.
He is responsible for his own acts and also for the acts done on behalf
of the other partners. In this way, a partner is an agent of the firm and
of the other partners.
9. Collective management
The firm and the partners are one. When a contract is made in the name
of the firm all the partners are responsible for it individually and
collectively.
10. Non-transferability of shares

A partner cannot transfer his share of interest to others without the
consent of the other partners
Forms of
Advantages of Partnership Business Organization
System
The following are the advantages of partnership business:
1. Easy to form
NOTES
2. Access to more capital
3. Skill and talent
4. Division of labor
5. Contact with customers
6. Borrowing capacity
7. Incentive to work hard
8. Expansion of business
9. Wise decisions
10. Co-operation between partners
11. Flexibility
12. Economy in operation
13. Division of risks
14. Maintenance of secrets
15. Incidence of tax: Compared with company form of organization the
tax payable on the incomes of the partners will be less.
Disadvantages of Partnership
The following are the disadvantages of a partnership firm:
1. Division of responsibility
In a partnership the management is divided. As such responsibilities
are also divided. Every partner might try to shift the burden on to the
shoulders of others; finally none takes the responsibility properly.
2. Delay in decisions
3. Lack of continuity
4. No transferability of share
5. Lack of secrecy
7. Joint and several liability
8. Internal conflicts
9. Misuse of assets
10. Lack of public confidence Forms of
Business Organization 3.4.3.1 The Limited Liability Partnership
System
The Limited Liability Partnership form of business organization was
introduced in India by way of Limited Liability Partnership Act, 2008 (LLP Act
NOTES 2008) which came into effect by way of notification dated 31st March 2009. The
Limited Liability Partnership (LLP) is viewed as an alternative corporate business
vehicle that provides the benefits of limited liability but allows its members the
flexibility of organizing their internal structure as a partnership; based on a
mutually arrived agreement. A LLP combines the advantages of both the
Company and Partnership into a single form of organization.
General Partnerships, Limited Partnerships (LP) and Limited Liability
Partnerships (LLP)
A partnership is a structure appropriate to use if one is not going to be the
sole owner of the new business.
In a general partnership, all partners are personally liable for business debts,
any partner can be held totally responsible for the business and any partner can
make decisions that affect the whole business.
In a limited partnership, one partner is responsible for decision-making and
can be held personally liable for business debts. The other partner merely invests
in the business. Although the general structure of limited partnerships can vary,
each individual is liable only to the extent of their invested capital.
LLPs are most commonly used by professionals such as doctors and
lawyers. The LLP structure protects each partner's personal assets and each
partner from debts or liability incurred by the other partners. Different states have
varying regulations regarding these establishments of which business owners
must take note.
Comparison between Limited Liability Partnership and
Traditional Partnership
Forms of
System
NOTES
Forms of
System
NOTES
Forms of
System
NOTES
Forms of
System
NOTES
3.4.4 Joint Stock Company

The joint stock company is an association of person having a separate legal
existence, perpetual succession, common seal, common capital etc. The joint
stock company divides its capital into a large number of parts, where each part
of capital is called a ‘share’. The person who holds the share is called shareholder
of the company. The company is managed by the board of directors who are the
representative of shareholders. The members of the board are elected by the
shareholders.
According to L.H. Haney, “A joint stock company is a voluntary association
of individuals for profit, having the capital divided into transferable shares, the
ownership of which is the condition of membership. Again a company is an
artificial person created by law having a separate legal entity with a perpetual
succession and a common seal."
Thus we can say that a joint stock company is an incorporated voluntary
organization, an artificial person having a separate legal existence, perpetual
succession, common seal, its capital is divided into number of small units called
shares, and is managed by professionals called board of directors who are the
representatives of the share holders.
Forms of
On The Basis Of Incorporation Business Organization
System
A joint stock company formed on the basis of incorporation can be classified
below:
NOTES
1. Chartered Company
A company which is incorporated under Royal Charter issued by the
king or Head of the state is known as Chartered Company. Under this
charter, certain exclusive rights and privilege are granted to the
company for undertaking certain commercial activities. The Bank of
England, the East India Company, The charter bank of Australia are
some of the examples of the chartered company. These companies are
no longer formed in any country.
2. Registered Company
A company which is established by registering under the office of the
Company Registrar, Company Act 1956 is known as Registered
Company. Every activity and formation is governed by the provisions
of the Company Act. Himal Cement Company, Bhirkuti Paper and
Pulp Limited etc. are some examples of the registered company.
Recently the companies Act has changed and now we follow the Indian
Companies Act 2013.
3. Statutory Company
A Company formed under an Act of Parliament or State Legislature is
called a Statutory Company/ Corporation. The special enactment
contains its constitution, powers and scope of its activities. Change in
its structure is possible only by a legislative amendment. Such
companies are usually formed to carry on the work of some special
public importance and for which the undertaking requires
extraordinary powers, sanctions and privileges. A major objective for
incorporating statutory corporations is to serve public interest.
Example –of statutory corporation are Life Insurance Corporation,
Unit Trust of India, Employees State Insurance Corporation, Oil and
Natural Gas Corporation to name a few.
On The Basis Of Liability

According to the liability, the companies are classified into three groups:
1. Limited Liability
Under this type of company, the liability of shareholders is limited to
the extent of the value of shares held or the amount guaranteed by
them. Hence, the shareholder is not responsible for paying beyond the
face value of shares. This type of company is the most common in
actual practice. Forms of
Business Organization 2. Unlimited Liability
System
The Company which is registered without limiting the liability of
shareholders to the value of shares is called unlimited liability
NOTES company. In this company, the liability of the shareholders is unlimited
like the partner in Partnership Company. The shareholder's personal
properties can be used to meet the obligations.
3. Limited Liability by Guarantee

The Company where a shareholder is limited to pay a specific amount
as a guarantee at the time of winding up is called a limited liability by
guarantee. The guarantee amount is specified in Memorandum of
Association. They may or may not have share capital. It gives the
written guarantee that members will pay up to a certain fixed amount
in the event of the liquidation of the company. This type of company
promotes art, literature, sports, education and other non-business
activities.
On The Basis Of Number Of Members

1. Private Limited Company
According to Section 2, Clause 68 of Companies Act 2013. “Private
Company” means a company having a minimum paid-up share capital
of one lakh rupees or such higher paid-up share capital as may be
prescribed, and which by its articles-
• Restricts the right to transfer its shares;
• Has minimum of only 2 members (and maximum of 200), as per
the provisions of the Companies Act 2013.
Prohibits any invitation to the public to subscribe for any shares or
debentures. A private company must use the words ‘Private Limited’
(Pvt. Ltd.) in its name.
2. Public Limited Company

According to Section 2(71) of Company Act, 2013 “public company”
means a company which—
(a) Is not a private company;
(b) Has a minimum paid-up share capital of five lakh rupees or such
higher paid-up capital, as may be prescribed
The minimum number for formation is seven but there is no restriction
on the maximum number. It must issue the prospectus for inviting
people to purchase their shares. It must have a certificate of
commencement and certificate of incorporation before starting its
business. The shareholders are free to sell their shares in the market. A
Forms of
public limited company must use the words 'Limited' (Ltd.) in its name.
Differences between a Public Limited Company and a Private Limited Business Organization
Company System
NOTES
On The Basis Of Ownership

1) Government Company
A government company is a company in which not less than 51% of
the paid-up share is held by the Central or State Government or partly
by both central and state governments. Since the government has the
majority of the shares, whole of the management of the company is
taken over by the government authority. National Thermal Power
Corporation (NTPC), Oil and Natural Gas Corporation (ONGC), Steel
Authority of India Limited (SAIL), Bharat Heavy Electricals Limited
(BHEL), Indian Oil Corporation Limited (IOCL),Coal India Limited
(CIL) are some example of the government companies.
2) Non-government Company
The Company is owned, managed and controlled by the private sector.
It needs to follow some legal formalities for registration of the
company. The government does not interfere in the regular managerial
activities. The accounts of Non- Government companies are audited Forms of
Business Organization by a private practicing auditor at the discretion of the Board of
System Directors.
NOTES Characteristics of Joint Stock Company

1) An artificial person
A joint stock company is an artificial person which is created by the
law. It has no physical shape as a natural person but has almost all the
rights of a natural person. It can sue others and can be sued.
2) Perpetual existence
A joint stock company is established by the law and the law brings it
to an end. Shareholders may transfer their share and a new person may
come in its place but this does not affect the existence of the company.
3) Limited liability
The liability of the shareholder is limited to the extent of the value of
shares held or the amount guaranteed by them.
4) Common seal
A joint stock company is an artificial person. It cannot sign any
contract in its name. Therefore, all the documents and contract papers
require the affixing of the seal. Any document with the common seal
and signature of the designated official on it is considered as authentic.
5) Democratic management
A joint stock company is a democratic organization. The important
decisions are taken by following the principles of democracy in the
annual general meeting and in the board of directors meeting.
6) Transferability of shares
The shares of the joint stock company can be transferable from one
person to another without prior permission of the company
management. Members are free to transfer their shares.
7) Capital is divided into shares

A joint stock company divides its capital into a large number of parts
with value where each part of capital is called a share. These shares
are purchased by the general public as well as the promoters of the
company.
8) Publication of financial statements

A joint stock company should publish the audited financial statements
Forms of yearly in a renowned national newspaper. These statements help to
58 Business Ownership provide information to general public and other stakeholders.
9) Separate legal entity Business Organization
System
A joint stock company is an artificial person, created by law, thus it
has a separate legal entity apart from its members. It can own assets,
property, enter into contracts, sue or can be sued by anyone in the court NOTES
by the law. Its shareholders cannot be held liable for any conduct of
the company.
Merits of Joint Stock Company

1. Huge Capital
2. Perpetual Existence
3. Limited Liability
4. Transfer Of Shares
5. Democratic Management
6. Scope Of Expansion And Growth
7. Public Faith
8. Stability
9. Large Scale Operation
10. Social Importance
Demerits of Joint Stock Company

1. Difficult legal formalities
2. Costly Formation
3. Lack of secrecy
4. Delay in decision making
5. Speculation of share
6. Management of oligarchy
7. Conflict of interest
8. Neglect the minority
9. Bureaucratic approach
3.4.5 A Co-Operative Society

A Co-operative society is a voluntary association started with the aim of
service to its members. It is a form of business where individuals belonging to
the same class join hands for the promotion of their common goals. These are
generally formed by the weaker section people in the society. It reflects their
desire to stand on their own feet and to further their common economic and social
interest. The co-operative society is established with a fundamental objective of
Forms of
organizing and rendering service for the organization and its members and not
Business Organization for profit making. The philosophy behind the formation of co-operative society
System is “all for each and each for all”.
The meaning of cooperative can be understood better with the help of some
NOTES definitions.
• Section 4, of the Indian Co-operative Societies Act, 1912 defines a
cooperative “as a society which has its objective, the promotion of
economic interest of its members in accordance with co-operative
principles”.
• According to Calvert, a Co-operative denotes a form of organization
wherein persons voluntarily associate together as human beings on the
basis of equality for the promotion of economic interests of themselves.
• Dr. H.N. Kunzen defines co-operatives as “Co-operative is self-help as
well as mutual help. It is a joint enterprise of those who are not financially
strong and cannot stand on their legs and therefore come together not
with a view to get profits but to overcome disability arising out of the
want of adequate financial resources”.
• According to International Labour Organization, “Co-operative
organization is an association of persons, usually of limited means, who
have voluntarily joined together to achieve a common economic
objective and through the formation of a democratically controlled
business organization, making equitable contributions to capital required
and accepting a fair share of risks and benefits of the undertaking”.
A co-operative society is formed with the following broad

objectives.
1) To render service to its members instead of making profits.
2) To encourages a state of mutual help in the place of competition.
3) To assures a state of self-help in the place of dependence.
4) To develops a state of moral solidarity in the place of unfair business
activities.
Advantages of Cooperative Form of Business

A cooperative organization usually commands the follow¬ing advantages:
1. Voluntary organization
2. Ease of formation
3. Democracy
4. Equitable distribution of surplus
5. Limited liability
6. Stable existence
Forms of 7. Each for all and all for each
8. Government support Business Organization
System
9. Elimination of middlemen
10. Low taxes
NOTES
11. Rural credit
12. Role in agricultural progress
13. Own sources of finance
14. Encourages thrift
15. Fair price and good quality
16. Social benefit
17. Cost saving
18. Avoidance of wastes
19. Fiscal concessions
20. Economy
21. Development of human value
22. Consumer protection
Disadvantages of Cooperative Form of Business

Though enjoying so many advantages, the cooperative form of organization
like all other forms has certain limitations .The following are some of the
disadvantages of Cooperative societies.
1. Limited funds
2. Over reliance on government funds
3. Benefit to rural rich
4. Inadequate rural credit
5. Lack of managerial skills
6. Government regulation
7. Misuse of funds
8. Inefficiencies leading to losses
9. Lack of secrecy
10. Conflicts among members
11. Limited scope
12. Lack of accountability
13. Lack of motivation
14. Low public confidence Forms of
Business Organization 15. Internal rivalries
System
16. Personal gain
Common interest gradually recedes in the background and individual
NOTES
interest takes its place.
17. High cost

They cannot enjoy economies of scale and reduce cost; secondly due
to lack of managerial expertise they cannot introduce mod¬ern
methods of cost reduction and cost control.
Thus we can summarize that; this form of business organization must be
encouraged as advantages far outweigh disadvan¬tages. The abuses of the co-
operative societies can be removed if all members act sincerely and with a true
spirit of cooperation
3.5 PUBLIC ENTERPRISES
3.5.1 Meaning, Definition and Characteristics of Public

Enterprises.
The public enterprises came into existence as a result of the expanding scope
of public administration. The advent of the concept of welfare state after the
Second World War and the increasing developmental initiative undertaken by
Government across the world, the system of public enterprises was developed.
The government sells goods and services to the common people through the
means of a state owned enterprise system which incorporates the characteristics
of both public and private enterprises. For e.g. the railway facility for transport,
developed, managed and run by the government.
The government operates in the areas which are of basic or strategic
importance and also the areas that require huge investments beyond the scope of
private enterprises. The public enterprises in India have been on a steady rise
since their big show in the Third Five Year Plan and have engaged themselves in
a number of economic activities like advancing loans, regulating trade and
commerce, heavy machine manufacturing, chemical drugs and fertilizers, oil
drilling etc. e.g. The Steel Authority of India, Hindustan Aeronautics Limited,
National Thermal Power Corporation etc.
Public enterprises as a form of business organization have attained a great
deal of significance in recent times. The government owned enterprises are also
called Public Enterprises (PEs). Strictly speaking the term public enterprise, as
a business entity, refers to any industrial or commercial undertaking which is
Forms of
62 Business Ownership owned and managed by the central, state or local government and of which the
output is marketed i.e. not supplied free. Thus public enterprises include Business Organization
manufacturing, trading as well as service organizations which are essentially System
business undertakings. The objectives of public enterprises in India are laid down
in conformity with the objectives of the development plans. They are accountable NOTES
to the government and the parliament or state legislatures regarding the
fulfillment of their objectives.
Public enterprises consist of nationalized private organizations as well as
new enterprises promoted under government ownership and control. Life
Insurance Corporation, Indian Airlines Corporation, Coal India Ltd. etc. are
examples of public enterprises established by nationalizing private organizations.
HindustanMachine Tools, Hindustan Antibiotics
Ltd., Chittaranjan Locomotive Works, etc., are examples of public
enterprises promoted by government.
According to A. H. Hansen, a public enterprise denotes “state ownership
and operation of industrial, agricultural, financial and commercial undertakings”.
According to N. N. Malaya, “Public enterprises are autonomous or semi-
autonomous corporations and companies established, owned and controlled by
the state and engaged in industrial and commercial undertakings”.
Difference between a Public Enterprise and a Private Enterprise

• The term public enterprise denotes a form of business organization owned
and managed by the state government or any other public authority. So
it is an undertaking owned and controlled by the local or state or central
government. The whole or most of the investment is made by the
government.
Private enterprises refer to industrial and commercial organizations which
are set up under individual or group ownership within the general
framework of regulatory laws and rules of the government. These include
manufacturing and commercial companies, medium and small firms
organized as proprietary and partnership concerns.
• Public enterprises are governed by public policies framed by government
and aimed at maximizing social welfare and upholding public interest.
Private enterprises are primarily motivated by private profit. Private
enterprises are free to set their objectives and to undertake any business
activity except those which are illegal. However, private enterprises are
also regulated by government controls of different kinds
Objectives
It is clear from the reasons which prompted the growth of public enterprises,
that the principal objectives of these undertakings are many. Few objectives are
outlined below:
I) To achieve rapid economic development through industrial growth in
Forms of
accordance with the development plans. Business Ownership 63
Business Organization 2) To channelize resources in the best possible manners for economic
System growth.
3) To secure public welfare and to reduce inequalities in the distribution
NOTES of income and wealth.
4) To ensure balanced regional development of industry and trade.
5) To prevent the growth of monopoly and concentration of economic
power in a few private hands.
6) To control the prices of essential consumer goods in the market to
prevent public hardship.
7) To mobilize public savings through financial institutions to meet the
demands of public and private enterprises in accordance with planned
priorities.
8) To provide satisfactory employment conditions to the personnel as
model employers.
Characteristics
The chief characteristics of public enterprises are:
1. Autonomous or semi-autonomous organization
Public enterprise is an autonomous or semi-autonomous organization
because some enterprises work under the direct control of the
government and some organizations are established under statutes and
Companies Act.
2. State control
The public enterprises are financed, owned and managed by the
government may be a central or state government.
3. Rendering service
The primary objective of the establishment of public enterprises is to
serve the public at large by supplying the essential goods at a
reasonable price and creating employment opportunities.
4. Useful to various sectors

The state enterprises serve all section of people in the community.
5. Monopoly Enterprises
In some specific cases private sectors are not allowed and as such the
public enterprises enjoy monopoly in operation. The state enterprises
enjoy monopoly in Railways, Post and Telegraph.
Forms of 6. A direct channel for use of foreign money

Sometimes the government receives foreign assistance from Business Organization
industrially advanced countries for the development of industries. System
These advances received are spent through public enterprises.
NOTES
7. Public accountability
The state enterprises are liable to the general public for their
performances because they are responsible for the nation.
8. Agent for implementing government plans

The public enterprises run as per the directive of the government and
as such the economic policies and plans of the government are
implemented through public enterprises.
9. Financial Independence
Though investment in government undertaking is done by the
government, public enterprises are financially independent for
arranging finance for day-to-day operation.
Features of Public Enterprises

1) Public enterprises are owned and managed by the government or
agencies set up by the government.
2) The whole or major part of the capital required for the public
enterprises is provided by government.
3) A public enterprise can be organized as a departmental undertaking or
as a statutory corporation or as a government company.
4) These are governed by public policies laid down by the government
in the public interest and are not entirely guided by profit motive.
5) Their objectives are laid down in conformity with the development
plans. They are accountable to the Parliament or state legislature for
their performance and fulfillment of objectives.
3.5.2. Forms of Organization of Public Undertakings

Suitable forms of organization for running state enterprises are required to
increase the efficiency of the concern. Excessive dependence on government or
finances for running state enterprises would increase government interference in
the day to day working. Thus these enterprises should be run on business lines
and necessary autonomy should be allowed to them.
Following forms of organization are generally used for state enterprises.
A. Departmental Undertakings
Departmental form of organization of managing state enterprises is the
oldest form of organization. In this form, the enterprise works as a part of Forms of
government department. The finances are provided by the government and Business Ownership 65
Business Organization management is in the hands of civil servants. The Minister of the department is
System the ultimate in-charge of the enterprise. For example, the Indian Railways are
managed by the Ministry of Railways. Post and Telegraph services are run as a
NOTES department, in the Ministry of Communication.
The enterprise is subjected to legislative security. Departmental
management is suitable for public utility services and strategic industries. In
India, railways, post and telegraph are working as government departments. In
the same way, strategic industries like defence and atomic power are under
government. This type of enterprise is financed through annual budget
ap¬propriates made by legislatures and its revenues are paid into the treasury.
Departmental enterprises are subject to budget accounting and auditing con¬trols
applicable to all govt. departments.
Characteristics
(i) The undertakings are wholly dependent on government for finances.
State treasury provides finances and surplus money (profits) is
deposited in treasury.
(ii) The management is in the hands of the government. The enterprise is
managed and controlled by the civil servants of the department.
(iii) The budget of the department is passed by the Parliament and/or by
the state legislature.
(iv) The accounting and audit control applicable to other government
departments are applicable to state enterprises also.
(v) The department enjoys legal immunity. Governmental sanction is
necessary for suing the undertakings.
Advantages
(i) Useful for Specific Industries
Departmental form of organization is necessary for public utility
services. The motive of these industries is not to earn profits but to
provide services at cheap rates. Strategic industries like defense and
atomic power can be better managed under government departments.
(ii) Help in Implementing Government Policies

Government policies and programmes are better implemented by the
enterprises under direct government control.
(iii) Complete Government Control

Departmental undertakings are completely under government control.
These undertakings are associated with one of the government
departments. Government can regulate their working in a proper way.
Forms of
(iv) Legislative Control Business Organization
System
These undertakings are under the control of legislatures. Government
is answerable to the legislature for the working of departmental
undertakings. Legislative control acts as a check on these undertakings. NOTES
(v) Source of Income for Government

These undertakings are run on commercial lines. They earn profits like
private enterprises. They provide finances to the government for
initiating other social and development activities.
(vi) Secrecy
Department undertakings can maintain secrecy in their workings.
Secrecy is especially necessary for undertakings like defence.
(vii) Useful for Developing Enterprises

Departmental form of organization is necessary for those undertakings
which are in a developing stage. They are suitable for enterprises
where gestation period is long.
(ix) Complete Accountability
The accountabil¬ity of departmental undertakings to Parliament is
complete, their management being under the Min¬istry concerned, or
it assures the maximum degree of control by politically responsible
officials.
(x) Absolute Govt. Control

It provides a means of securing absolute govt. control.
(xi) Instrument of Social Policy

The state can make use of these undertakings as instruments of its
economic and social policy.
(xii) Direct Criticism in Parliament

From the public point of view the departmental organization has an
advantage that if anything goes wrong or if the public is dissatisfied
with the working of an undertaking the matter can be immediately
raised in Parliament.
Disadvantages
(i) Excessive Government Interference
There is excessive government interference in departmental
organization. These undertakings are not given freedom to decide their
own policies.
Forms of
Business Organization (ii) Shortage of Competent Staff
System
Departmental undertakings are like administrative departments. Civil
servants are given control of these undertakings; who are not suitable
NOTES for running commercial organizations.
(iii) Centralization of Powers

All policies are decided at the ministerial level. The powers are
centralized at the higher level. It adversely affects the efficiency of the
concerns.
(iv) Red Tapism

There is delay in taking important decisions. Red tapism is prevalent
as in other government departments. Commercial organizations cannot
afford delay in taking decisions.
(v) Inefficiency
Losses in departmental undertakings are not taken seriously. They are
run as government departments and not as commercial undertakings.
(vi) No Business-Like Functioning:
Control by legislature makes it subject to political changes and
consequently it becomes difficult to formulate long-range business
plans. Moreover, officials are afraid of taking initiative and risks for
fear of being criticized in the Parliament.
(vii) Political Influence

The departmentally managed undertakings are under the control of
ministers and the political parties. The poli¬cies suffer from instability
because of the uncer¬tainty attached to the tenure of political parties
and ministers.
(ix) Delay in Decision-Making

Govt. officials who are asked to manage public undertakings
gen¬erally lack business acumen. They are used to working under a
rigid system of set rules. This causes delay in decision-making which
is harmful for busi¬ness enterprise.
(x) Inflexibility
The departmental organization fails to provide flexibility which is
essential for effec¬tive business operations.
B) Public Corporation
Forms of A public or statutory corporation is created by a special Act which defines

68 Business Ownership its powers, functions, privileges and prescribes the pattern of manage¬ment.
There are three important features of this corporation. In the first place, it is an Business Organization
autonomous body corporate and is administered by a board of directors in which System
various interests are represented. The board formulates policies which are
executed by a chairman or a director general in its day-today administration. NOTES
Secondly, since it is to a large extent, free from direct parliamentary control it
can operate like a true business concern. Thirdly, it is financially self-supporting;
it is usually set up with a capital fund and is allowed to use its earnings. However,
when the govt. has to provide capital to these corpora¬tions, parliamentary
control is exercised over them, otherwise they are free from parliamentary
control. Examples of such corporations are the Indian Air¬lines Corporation,
Life Insurance Corporation (LIC), Oil and Natural Gas Commission (ONGC),
Food Corporation of India (FCI), Central Warehousing Corporation, Industrial
Finance Corporation of India (IFCI) etc
Thus we can say that, a public corporation is clothed with the powers of the
government but possess the flexibility and initiative of a private enterprise. Public
Corporation is a continuation of public ownership, public accountability and
business management for public ends.
Features of public corpo¬ration

1. It is owned by the State.
2. It is created by a special law defining its objectives, powers and
privileges and prescribing the form of management and its relationship
with govt. departments.
3. It is a body corporate and can sue and be sued, enter into contracts and
acquire property in its own name.
4. Apart for appropriations to provide capi¬tal or to cover losses, it is
usually independently financed; it obtains funds by borrowing either
from the govt. or in some cases, from the public and through revenues
derived from the sale of goods and services and has the authority to
use and re¬use its revenue.
5. It is ordinarily not subject to the budget, ac¬counting and audit laws
and procedures applica¬ble to govt. departments.
Characteristics
(i) Separate Legal Entity
A public corporation is created by a separate legislative act. It is a
separate legal entity. It can sue or be sued without any government
approval.
(ii) Government Investment

Forms of
These corporations are financed by the government. In some cases
Business Organization private capital may also be associated, but at least 51% of the shares
System are held by the government.
(iii) Financial Autonomy

NOTES
Corporations are not dependent on the state exchequer for its day-to-
day financial requirements. Legislatures do not pass their budgets.
They can also raise loans separately.
(iv) Government Appointed Management

The management of the corporation is appointed by the Government.
Generally a board is nominated to manage these undertakings.
(v) Service Motive

The motive of public corporations is to provide service to the public
at a reasonable price.
(vi) Independent Recruitment of Employees

These corporations recruit their own employees. They can appoint
capable persons to manage the corporations on commercial lines.
(vii) No Government Interference
Public corporations are free from government interference. They
execute their independent policies. They do not depend upon
government departments for determining their policies.
Advantages of Public Corporation

1. Quick Decision Making Power
Ability to make quick decisions not only on routine matters but also
on important questions of policy is an es¬sential condition for success
of business manage¬ment, which is available with a public
corporation.
2. Internal Autonomy
It enjoys complete in¬ternal autonomy and is free from parliamentary
or political control in the internal and routine man¬agement. They can
set their own goals and can decide their own line of action
3. Best Management
Management is vested in a chosen body, Governing Board representing
top men of ability, skill, and business experience. It is a form of
management combining of what is best in management and what is
best in public service.
Forms of
4. Financial Independence Business Organization
System
Corporation has defined powers and functions which are governed by
a special Act. It has financial independence and a clear-cut jurisdiction
over a specific area, indus¬try or commercial activity. NOTES
5. Independent Legal Status

Corporation is a legal person. It can sue or be sued in the Court. It is
its own master, answerable fully as any other in¬dividual or company.
It is a public authority for public purpose.
6. Employment of Competent Persons

These corporations utilize the services of competent persons. All
important positions are given to capable persons.
7. Flexibility
A public corporation has flex¬ibility of operation, accountability to
the Parliament but no bureaucracy. For the success of a business
enterprise, flexibility is the essential prerequisite, which is available
in public corporation.
8. Free from Government Interference

Public corporations are free from government interference. They are
not dependent on government departments. Various policies are
decided independently. Management is free to manage these
undertakings.
9. Run on Business Lines

These undertakings are run on commercial lines. They also earn profits
like private concerns. It helps these undertakings to finance their
schemes and undertake expansion plans.
10. Accountability
These undertakings are accountable to the legislature for their
performance; otherwise they are criticized in the Parliament or state
legislature.
11. Service to Society

Public corporations provide goods and services to the people at
reasonable prices. Though they also earn profits, their primary aim is
to offer public service and promote public welfare.
Forms of
Business Organization Disadvantages of Public Corporation
System
1. Limited Autonomy
Though public corporations enjoy internal autonomy, still
NOTES
government’s interference is there. All important policies are decided
with government approval. So, limited autonomy is exercised by these
corporations.
2. Difficulty in making Changes

It is a rigid form of organization as any change in its constitution and
powers will require amendment of the special act.
3. Time Consuming
It needs special legisla¬tion and hence its formation is elaborate and
time-consuming.
4. Not suitable for every type of enterprise

It is suitable for the management of very big enterprises only. It is not
a suitable organization for trading business.
5. Misuse of Financial Autonomy

Financial autonomy of the corporation is sometimes misused by the
management. Public money may be wasted on unnecessary projects.
6. Government Control
Though these corporations are autonomous bodies, still there are many
controls exercised by the government. Public Accounts Committee and
Auditor and Comptroller General of India exercise control on these
corporations
Evaluation
The public corporation strikes a middle course between the departmentally-
run undertakings on one side and the privately owned and managed corporate
bodies on the other. It represents an at¬tempt to combine some of the desirable
features of both of them and to secure the best of both the worlds. Herbert
Morrison has observed that it is a combination of public accountability and
manage¬ment for public ends.
C. Government Company Organization

A company owned by central and/or state government is called a
government company. Either whole of the capital or majority of the shares are
owned by the government. In some cases, private investment is also encouraged
but at least 51% shares are held by the government. Management of these
companies is under the control of the government. Subsidiary companies of
Forms of
Business Ownership government companies are also covered under government companies.
72
According to Indian Companies Act, 2013 “Government company means Business Organization
any company in which not less than 51 per cent of the paid up share capital is System
held by the central government or by any state government or governments or
partly by the central government and partly by one or more state governments NOTES
and includes a company which is a subsidiary of a government company.”
Government companies are registered both as public limited and private
limited companies but the management remains with the government in both the
cases. Government companies enjoy some privileges which are not available to
non-government companies. No special statute is required to form government
companies. Nationalized industries can also be run up by government companies.
Some of the examples of government companies in India are Coal Mines
Authority Ltd., Steel Authority of India Ltd., The Hindustan Machine Tools Ltd.,
Heavy Electricals Ltd, Indian Refineries Ltd, Hindustan Shipyard Ltd. Indian
Oil Corporation, The Fertilizer Corporation of India, National Coal Development
Corporation Ltd. etc
Features of Government Company

1. It has most of the features of a private lim¬ited company.
2. The whole of the capital stock or 51%. or over of it, is owned by the
Government.
3. All the directors or a majority of them, are appointed by the
Government, depending upon the extent to which private capital is
participating in the enterprise.
4. It is a body corporate created under a gen¬eral law viz., the Companies
Act.
5. It can sue and be sued, enter into contract, and acquire property in its
own name.
6. Unlike the public corporation, it is created by an executive decision
of the Govt. without Par-liaments specific approval. Its Articles of
Association, though confirms to an Act, are drawn and revisable by
the government.
7. Its funds are obtained from the Govt. and in some cases, from private
shareholders and from revenues derived from the sale of its goods and
services.
8. It is generally exempt from the personnel, budget, accounting and audit
laws and procedures applicable to govt. departments.
Advantages
(i) Flexibility in management
There is opera¬tional and functional freedom and flexibility in the
management of government companies. Companies can organize their Forms of
working according to the requirement of the situation. Business Ownership 73
Business Organization (ii) Easy formation
System
The setting up of an en¬terprise takes no time. It is very simple to form
a company, as the Arti¬cles of govt. companies are not rigid like the
NOTES provisions of the Acts creating public corporations.
(iii) Run on commercial lines

Government companies are run on sound business lines. They earn
surplus, which finances their own expansion plans.
(iv) Healthy competition

Government companies provide healthy competition to the private
sector. Private businessmen will have to be careful in fixing their
prices.
(v) Financial autonomy

These companies are dependent on the government only for their initial
investments. They can plan their own capital structure. The companies
earn profits and these profits can be used for further investments.
(vi) Helpful in developing the neglected sectors

Private sector may not be coming forth to invest in certain sectors
which are important from the national point of view. Thus Government
companies can enter all the neglected areas and can help in all-round
growth of the economy
(vii) Providing industrial environment

An industrial infrastructure is provided by the government companies.
Thus they help the growth of ancillary units.
(viii) The Company form may be adopted for three reasons

(a) When the govt. may have to take over an existing enterprise in
an emergency.
(b) Where the state wishes to launch an en¬terprise in association
with private for¬eign capital
or
(c) Where govt. wishes to start an enterprise with a view to
transforming it to a private management.
Forms of
Disadvantages Business Organization
System
(i) Slackness in management
The management of government companies is slackened under the
NOTES
garb of public service. These companies are not generally as efficient
as units in the private sector.
(ii) Political interference

There is a lot of political interference in government companies. Every
government tries to nominate directors from its own political party and
the companies are run on political considerations.
(iii) Red tapism

These companies are dependent on the government for taking
important policy decisions. Red-tapism in government departments
affects the working of these companies.
(iv) Limited autonomy

Theoretically, these companies are free from government control but
in reality they have to get permission from government departments
regarding loans, capital and managerial appointments.
(v) Official domination

Civil servants appointed on important managerial posts of these
companies are many a time not capable of running these undertakings
on sound business lines
(vi) Single Shareholder

In the case of a govt. company, the govt. is the only shareholder and
the judgment of a single shareholder is bound to be inferior.
3.6 SUMMARY
In this unit you have learned about the various forms of business Ownership,
Factors affecting choices of an ideal form of ownership, their features Merits and
Demerits. The unit also explained the difference between a traditional partnership
and a Limited Liability Partnership, difference between private and public
company. It also focused on Public Enterprises, its objectives, features and the
forms of organizations of Public Undertakings
Forms of
System
NOTES
Q1) Explain in details the various Factors affecting the choice of an ideal
form of ownership.
Q2) Explain Sole Trading concern with its advantages and disadvantages
Q3) What do you mean by a Joint Stock Company? Highlight its features.
Q4) Explain the importance of a Public Enterprise. What are the different
Forms of Organizations of Public Undertakings?
3.8 TASK
a) Study in detail the contents of a partnership agreement.

b) Study the constitution of a government company and understand the
difference between a Joint Stock company and a public enterprise.
*****
Forms of
System
UNIT - 4 FORMATION OF A COMPANy

NOTES
4.0 INTRODUCTION
Moving from the Companies Act 1956 to the Companies Act 2013 is like
shifting from your old house to a new one. In the old house, where you have
stayed for years, everything would have found its own place – the shoes, the
clothes, umbrella, first aid, brooms and whatever else you need in your
household. Your legs can find their own way, even in pitch dark of night. As you
move into the new house, first, there is a huge process of “getting used to” –
which is anyway usual for any such shifting.
Companies Act 1956 was an Act of the Parliament of India, enacted in 1956,
which enabled companies to be formed by registration, set out the responsibilities
of companies, their directors and secretaries and also provides for the procedures
for its winding.
The Companies Act 2013 is an Act of the Parliament of India on Indian
company law which regulates incorporation of a company, responsibilities of a
company, directors, dissolution of a company. The 2013 Act is divided into 29
chapters containing 470 sections as against 658 Sections in the Companies Act,
1956 and has 7 schedules. The Act came into force on 12 September 2013 with
few changes like; earlier in private companies maximum number of members
was 50 and now it will be 200. A total of another 184 sections came into force
from 1 April 2014.The unit also discusses the important documents of the
company viz. Memorandum, Article and the Prospectus.
4.1 UNIT OBJECTIVES
• To understand the Companies Act 2013

• To study the stages in the formation of the company
• To study the important documents of the company
4.2 STAGES IN FORMATION AND INCORPORATION OF A

COMPANY
Section 2(20) of the 2013 Act defines the term “company” to mean “a company
Formation
incorporated under the Companies Act 2013 or any previous company law.” of a Company 77
Business Organization “A company is an association of many persons who contribute money or
System money’s worth to a common stock and employs it in some trade or business and
who share the profit and loss arising there from. The common stock so
NOTES contributed is denoted in money and is the capital of the company. The persons
who contributed to it or created it, or to whom it belongs, are members. The
proportion of capital to which each member is entitled is his “share”. The shares
are always transferable although the right to transfer them may be restricted”.
(Lord Justice Lindley)
The formation of a company is an elaborate process. It consists of four
stages:
(1) Promotion
(2) Incorporation
(3) Capital subscription
(4) Ccommencement of business
4.2.1 Promotion Of A Business

Promotion is the first stage in the formation of a company. The person who
takes a lead in the formation of a company by undertaking the work of promotion
is called 'promoter'. The promoter may take the help of some other experts or
specialists (associates). Collectively, they are known as 'Promoters'. Promotion
includes all preliminary activities by the promoters in establishing the business
enterprise.
In particular, it consists of the following five stages

(i) Discovery of idea (i.e. Business opportunity)
(ii) Investigation of the idea
(iii) Assembling
(iv) Provision of finance
(v) Presentation of the proposition.
The promoters first get the idea of exploiting commercial possibility of
starting a new business or expanding the scope of an existing business. In order
to ascertain whether the proposed project is commercially, financially, technical
and managerial ssound, the promoters conduct detailed investigation about
manual, material and managerial resources, the condition of the market, transport
facilities, probable location and site, etc. and prepare a project report.
The promoters then bring together or assemble the various factors of
production such as Land, buildings, machinery, labor, etc. They enter into
preliminary contracts for purchasing property and assets, if necessary also with
brokers, solicitors and auditors. They also prepare a financial plan taking into
Formation consideration the fixed and working capital requirements for the proposed
78 of a Company
company. The plan considers source of raising finance such as shares, debentures Business Organization
public deposits and loans. System
Finally, the promoters contact persons who are prepared to be founder

members and agree to associate themselves into a company. Thereafter, the NOTES
promoters make necessary arrangements for drafting various documents such as
the memorandum of association, articles of association, prospectus, written
consent of directors, statutory declaration, etc. The promoters present the entire
business proposition to the founder members through these documents for their
consideration and approval.
4.2.2 Incorporation And Registration

The INC 29: Section 4, 7, 12, 152 and 153 of Companies Act 2013 deals
with how to incorporate a company. The new Companies (Amendment) Act,
2015 bring some new provisions relating to the incorporation of a company.
The Companies Act, 2013 provides for the kind of companies that can be
promoted and registered under the Act. Formation of Company, Section 3(1) of
the Companies Act 2013 states that a company may be formed for any lawful
purpose by (a) seven or more persons, where the company to be formed is to be
a public company; (b) two or more persons, where the company to be formed is
to be a private company; or (c) one person, where the company to be formed is
to be One Person Company that is to say, a private company can subscribe its
names or his name to a memorandum and can comply with the requirements of
this Act in respect of registration. A company formed under Section 3(1) may be
either (a) a company limited by shares; or (b) a company limited by guarantee;
or (c) an unlimited company.
The term 'Incorporation of company' means getting the association (i.e.
Proposed Company) registered under the prevailing Companies Act or a special
Act of Parliament, as the case may be. When the association is registered, it can
be called a 'company'. Such a company then becomes a legal entity or a body
corporate having separate existence independent of its members.
The promoters have to take the following steps for getting the company
Incorporated:
(1) To decide the state wherein the registered office of the company is to
be situated.
(2) To get the name of the company confirmed for the Registrar of
Companies.
(3) To get the Memorandum of Aassociation and the Articles of
Aassociation prepared and printed.
(4) To file an application in the prescribed form with the Registrar of
Ccompanies for registration of the company. This form must be
accompanied by
Formation
of a Company 79
Business Organization (i) the Memorandum
System
(ii) the Articles
(iii) the list of directors and their consent to act as directors and take
NOTES up the qualification shares and
(iv) the statutory declaration That All legal informalities have been
complied with.
The promoters have to pay the necessary stamp duty, filing fees and
registration fees along with the application. The registrar will then
scrutinise the documents and, if they are in order, will issue the
certificate of Incorporationn. The company comes into existence from
the date of Incorporation. A private company at this stage can
immediately commence its business.
4.2.3 Capital Subscription

The company makes all the arrangements to raise the capital. The
arrangements include:
(1) Holding the first board meeting to approve the appointments of
secretary, bankers, brokers, solicitors, etc. and to approve the draft
prospectus.
(2) Complying with the guidelines laid down by the Securities and
Exchange Board of India with regard to the issue of share capital.
(3) Listing of shares on the Stock Exchange
(4) Filing of prospectus with the registrar
(5) Issue of prospectus to the public
(6) Receipt of share application forms along with application money
(7) Ensuring receipt of minimum subscription
(8) Allotment of shares
(9) Filing of return of allotment
(10) Issue of share certificates
4.2.4 Commencement Of Business

A public company cannot commence its business till it gets the Certificate
To Commence Business. For this purpose, the following documents are to be
filled with the Registrar:
(1) A declaration that the Prospectus or Statement in lieu of Prospectus
has been filled with the Registrar.
(2) A statement that minimum subscription has been collected and the
shares are allotted.
Formation
80 of a Company (3) A statement that every Director has paid for the qualification shares.
(4) A statement that the permission of a recognized Stock Exchange for Business Organization
listing of shares is obtained. System
(5) A declaration that the above requirements have been duly complied
with. NOTES
The Registrar examines the documents filed and, if they are in order, issues
the 'Certificate to Commence Business'. A public company can commence
business from the date of this certificate.
4.3 DOCUMENTS OF A COMPANY
Some of the most important documents issued by a company are as follows:

1. Memorandum of Association
2. Articles of Association
3. Prospectus.
4.3.1 Memorandum Of Association
Definition of Memorandum
According to Sec. 2 (28) of the Companies Act,2013 “Memorandum means
the Memorandum of Association of a company as originally framed or as altered
from time to time in pursuance of any previous companies law or of this act.”
Lord Cairns in the leading case of Ashbury Railway Carriage Co. V. Riche
observed that “The Memorandum of Association of a company is its charter and
defines the limitation of the powers of a company.” “The memorandum contains
the fundamental conditions upon which alone the company is allowed to be
incorporated.”
According to Lord Macmillan, “The purpose of the memorandum is to
enable the shareholders, creditors and those who deal with the company, to know
what the permitted range of enterprise is.”
According to Lord Salborne, “The memorandum of association is an
important and unalterable (excluding a few conditions) charter. The company is
incorporated only for such objects which are given in the Memorandum.”
Contents /Clauses of Memorandum:
The memorandum of association of every company must contain the
following clauses :-
1. Name clause
The first clause of Memorandum of Association requires a company
to state its name. The company being a legal person must have a name
Formation
to establish its identity. The name of the company is mentioned in the of a Company 81
Business Organization name clause. A public limited company must end with the word
System 'Limited' and a private limited company must end with the words
'Private Limited'. The company cannot have a name which in the
NOTES opinion of the Central Government is undesirable. A name which is
identical with or nearly resembles the name of another company in
existence will not be allowed. A company cannot use a name which is
prohibited under the Names and Emblems (Prevention of Misuse Act,
1950 or use a name suggestive of connection to government or State
patronage).
2. Domicile clause
The state in which the registered office of company is to be situated is
mentioned in this clause. This is required in order to fix the domicile
of the company, that is, the place of its registration. Notice in form no
18 must be given to the Registrar of Companies within 30 days of the
date of incorporation of the company. Similarly, any change in the
registered office must also be intimated in form no 18 to the Registrar
of Companies within 30 days. The registered office of the company is
the official address of the company where the statutory books and
records must normally be kept. Every company must affix or paint its
name and address of its registered office on the outside of the every
office or place at which its activities are carried out. The name must
be written in one of the local languages and in English.
3. Object Clause
This is the most important clause in the memorandum because it not
only shows the object for which the company is formed but also
determines the extent of the powers which the company can exercise
in order to achieve the object or objects. Stating the objects of the
company in the Memorandum of Association is not a mere legal
technicality but is a necessity of great practical importance. The
company cannot carry on any activity which is not authorized by its
memorandum of association. This clause must specify:-
1. Main objects of the company to be pursued by the company on
its incorporation
2. Objects incidental or ancillary to the attainment of the main
objects
3. Other objects of the company not included in (i) and (ii) above.
In case of the companies other than trading corporations whose
objects are not confined to one state, the states to whose territories
the objects of the company extend must be specified.
Formation
82 of a Company
4. Liability Clause Business Organization
System
This clause of Memorandum of Association has to state the nature of
liability that the members incur. In case of a company limited by
shares, the members are liable only to the amount unpaid on the shares NOTES
taken by them. In the case of company limited by guarantee the
members are liable to the amount undertaken to be contributed by them
to the assets of the company in the event of its winding up. A
declaration that the liability of the members is unlimited in case of the
unlimited companies must be given. The effect of this clause is that in
a company limited by shares, no member can be called upon to pay
more than the uncalled amount on his shares. If his shares are already
fully paid up, he has no liability towards the company.
5. Capital Clause
Every limited company having a share capital must state the amount
of its share capital with which the company is proposed to be registered
and the division thereof into shares of a fixed denomination, in this
clause. This capital is described as “registered”, “authorized” or
“nominal” capital and the stamp duty is payable on this amount. There
is no legal limit to the amount of share capital. The amount of
authorized capital should be sufficiently high so that further issue of
shares may easily be done to finance the expanding business. An
unlimited company having a share capital is not required to have the
capital clauses in its Memorandum of Association.
6. Association or Subscription Clause

Under this clause we have the “declaration of association”, which is
made by the signatories of the Memorandum of Association under their
signatures duly attested by witness, that they desire to be formed into
a company and that they agree to the purchase of qualification shares
placed against their respective name if any.
The Memorandum of Association of a company should be divided into
paragraphs, numbered consecutively and printed. The memorandum
shall be such in one of the forms in Table B, C, D, and E in Schedule
I of the Act. At least seven persons in the case of a public company
and at least two in the case of a private company must subscribe to the
memorandum.
Features of Memorandum:
1. An unalterable charter of the company
Until the year 1890, it was regarded as an unalterable charter of the
company. That, however, led to a number of difficulties in the working
of the companies. Consequently, a provision had to be made in the Act Formation
of a Company 83
Business Organization itself for altering it in certain cases. Except for this provision the
System Memorandum of Association is still regarded as an unalterable charter.
Section 16 of the Companies Act recognizes this unalterable character
NOTES of this document.
2. Base of incorporation
In order to get the company incorporated, Memorandum of Association
is to be filed with the Registrar of Companies. It is signed by at least
seven persons in case of public company and signed by two persons
in case of a private company.
3. Determines the area of operation of the company

It lays down the activities to be undertaken by the company. Any action
outside the scope of Memorandum of Association will be void.
4. Defines the relationship of company with the outsiders

It defines the relationship of company with the outsiders. Its purpose
is to enable the shareholders and creditors and those who deal with the
company to know what are the permitted range of the enterprise and
its powers.
Alteration of Memorandum
Section 16 of the Act provides that a company shall not alter the conditions
contained in its memorandum except in the case, in the manner and to the extent
provided in the Act. The intention of the Legislature is to prevent too easy an
alteration of the conditions contained in the Memorandum of Association.
4.3.2 Articles Of Association

An extremely significant subsidiary to the Memorandum of Association is
the Article of Association (AOA) which constitutes all the empowering laws,
norms, rules and regulations for the management to control the internal affairs
of a company. The Articles of Association contain the rules and regulations of
the internal management of the company. The AOA is nothing but a contract
between the company and its members and also between the members themselves
that they shall abide by the rules and regulations of internal management of the
company specified in the AOA. It specifies the rights and duties of the members
and directors. Normally, every company has its own Article. However, if a
company does not have its own AOA, the model Article of Association specified
in Schedule I - Table A will apply. However, a private company must have its
own AOA.
The important items covered by the Article of Association include:-
1. Different classes of shares and their rights
Formation 2. Procedure for issue of share certificate
84 of a Company
3. Lien on shares Business Organization
System
4. The time lag in between the calls on shares
5. Conversion of shares into stock
NOTES
6. Payment of commission on shares and debentures to underwriters
7. Payment of dividends and creation of reserves
8. Use of common seal of the company
9. Powers, duties, rights and liabilities of Director.
10. Powers, duties, rights and liabilities of members
11. Director’s rights regarding holding meetings, delegation of authority,
voting and interest conflict.
12. Capitalization of profits
13. Removal and appointment of the board members
14. Record of all decisions taken by the directors
15. Company’s right to issuing shares
16. Different share classes, certificates and transfers.
17. Addresses the dividends and other distribution rules for the members.
18. Borrowing powers of the company
19. Calls on shares
20. Transfer and transmission of shares
21. Forfeiture of shares.
22. Voting powers of members
23. Arbitration provision, if any
24. Winding up, etc
Alteration of articles of association

The AOA is amendable by way of deleting, adding, modifying, altering,
substituting or by any other way. To make amendments in the Article of
Association, in case of a private limited company an agreement has to be signed
following the rules set in the Article of Association, with the consent of all the
members. For public limited companies, a special resolution has to be passed
followed by filing the MGT-14 form with the Registrar and submitting a signed
copy of amended Article of Association.
The articles must be printed, divided into paragraphs and numbered
consequently and must be signed by each subscriber to the Memorandum of
Association, who shall add his address, description and occupation in presence
of at least one witness who must attest the signature and likewise add his address, Formation
description and occupation. The articles of association of the company when of a Company 85
Business Organization registered bind the company and the members thereof to the same extent as if it
System was signed by the company and by each member. Just like the MOA, AOA should
be printed and must be issued to the public including shareholders and
NOTES prospective investors.
The AOA is a binding contract that governs the obligations and ordinary
rights of an individual’s membership in a company. No clause of the AOA can
violate the clauses in the MOA. While having a MOA is mandatory for any
limited company, having the AOA is not a legal binding for all.
Conclusion
The AOA is a vital document for a company. It holds almost equal
importance as the Memorandum of Association. Though unlike the MOA, the
AOA can be easily amended; if a company wishes not to allow amendments
easily (or not at all) then an entrenchment can also be passed for the same.
4.3.3 Prospectus
Section 2(70) of the Companies Act, 2013 defines a prospectus as “A
prospectus means any document described or issued as a prospectus and includes
any notices, circular, advertisement or other documents inviting deposit from the
public or documents inviting offer from the public for the subscription of shares
or debentures in a company.” A prospectus also includes shelf prospectus and
red herring prospectus. A prospectus is not merely an advertisement.
A document shall be called a prospectus if it satisfies two things
1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
Contents of a prospectus
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers,
underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the
prescribed time.
5. A statement by the board of directors about the separate bank account
where all monies received out of shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert’s opinion if
any.
8. The authority for the issue and the details of the resolution passed
Formation therefore.
86 of a Company
9. Procedure and time schedule for allotment and issue of securities. Business Organization
System
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
NOTES
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of
shares otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
16. Particulars relation to management perception of risk factors specific
to the project, gestation period of the project, extent of progress made
in the project and deadlines for completion of the project.
Various Categories of Prospectus

1. Statement in lieu of Prospectus
A private company, which does not raise its capital by public issue,
need not issue a prospectus. In such a case a statement in lieu of
prospectus must be filed with the Registrar 3 days before the allotment
of shares or debentures is made. It should be dated and signed by each
director or proposed director and should contain the same particulars
as are required in case of prospectus proper.
2. Deemed Prospectus
Section 25 of the companies Act, 2013 provides that all documents
containing offer of shares or debentures for sale shall be included
within the definition of the term prospectus and shall be deemed as
prospectus by implication of law.
Unless the contrary is proved an allotment of or an agreement to allot
shares or debentures shall be deemed to have been made with a view
to the shares or debentures being offered for sale to the public if it is
shown
a. That the offer of the shares or debentures of or any of them for
sale to the public was made within 6 month after the allotment
or agreement to allot; or
b. That at the date when the offer was made the whole consideration
to be received by the company in respect of the shares or
debentures had not been received by it.
All enactments and rules of law as to the contents of prospectus shall
apply to deemed prospectus.
Formation
of a Company 87
Business Organization 3. Abridged Prospectus [Sec. 2(1)]
System
Abridged prospectus means a memorandum containing such salient
features of a prospectus as may be specified by the SEBI by making
NOTES regulations in this behalf. No form of application for the purchase of
any of the securities of a company shall be issued unless such form is
accompanied by an abridged prospectus. A copy of the prospectus
shall, on a request being made by any person before the closing of the
subscription list and the offer, be furnished to him.
Legal requirement regarding issue of prospectus: (Sec. 26 of the
Companies Act, 2013)
The Companies Act has defined some legal requirements about the
issue and registration of a prospectus. The issue of the prospectus
would be deemed to be legal only if the following requirements
are met.
1. Issue after the incorporation
As a rule, the prospectus of a company can only be issued after
its incorporation. A prospectus issued by, or on behalf of a
company, or in relation to an intended company, shall be dated,
and that date shall be taken as the date of publication of the
prospectus.
2. Registration of prospectus
it is mandatory to get the prospectus registered with the Registrar
of Companies before it is issued to the public. The procedure of
getting the prospectus registered is as under:
a) A copy of the prospectus, duly signed by every person who is
named therein as a director or a proposed director of the company
must be filed with Registrar of Companies before the prospectus
is issued to the public.
b) The following document must be attached thereto:
i) Consent to the issue of the prospectus required under any
person as an expert confirming his written consent to the
issue thereof, and that he has not withdrawn his consent as
aforesaid appears in the prospectus.
ii) Copies of all contracts entered into with respect to the
appointment of the managing director, directors and other
officers of the company must also be filed with Registrar.
iii) If the auditor or accountant of the company has made any
adjustments in the company’s account, the said adjustments
and the reasons thereof must be filed with the documents.
(iv) There must be a copy of the application which is to be filled
Formation for the issue of the company’s shares and debentures
88 of a Company attached with the prospectus.
(v) The prospectus must have the written consent of all the Business Organization
persons who have been named as auditors, solicitors, System
bankers, brokers, etc.
3. Every prospectus must have, on the face of it, a statement that: NOTES
i) A copy of the prospectus has been delivered to the Registrar for
registration.
ii) Specifies that any documents required to be endorsed by this
section have been delivered to the Registrar.
4. A copy of the prospectus must be filed with the Registrar of
Companies.
5. According to the Section 26, no prospectus shall be issued more than
ninety days after the date on which a copy thereof is delivered for
registration.
If a prospectus issued in contravention of the above stated provisions, then
the company and every person who is a party to the issue of the prospectus shall
be punishable.
4.4. SUMMARY
In this unit we learn about the various stages in the formation of a company.
The detail formalities required to be complied with, in each of the stages. We
understand the important documents of a company with their in detail meaning,
importance and content.
4.5 QUESTIONS AND EXERCISE.
Q1) Explain the stages in the formation of a Joint Stock company.

Q2) ‘Memorandum of Association is the constitution of the company’
Elaborate
Q3) Highlight the need and importance of article of association
Q4) what do you mean by ‘Prospectus’. Explain in details the contents of
a prospectus.
4.6 TASK
Collect a copy of article of association and prospectus of any joint stock

company and study its contents in detail.
***** Formation
of a Company 89
System
NOTES
UNIT - 5
ESTABLISHMENT OF BUSINESS ENTERPRISE
5.0 INTRODUCTION
The establishment of any business enterprise needs a lot of research,

paperwork and legal formalities to be done. This unit aims to explain the various
factors to be considered while starting a new business establishment. It also
throws light on characteristics of small and medium enterprises and role of
support organizations for the promotion of business.
5.1 UNIT OBJECTIVES
1. To understand the factors to be considered while launching a new

business.
2. To understand the characteristics of Small and Medium Enterprises
(SMEs)
3. To explain the importance of SMEs to the local economy
4. To appreciate the role of Chamber of Commerce and Trade
Associations in promoting industry and commerce
5.2 FACTORS TO BE CONSIDERED WHILE STARTING A

NEW BUSINESS ENTERPRISE
The development of a business is not a matter of seconds, it will involve a

lot of time that is spent with hard work. Following are some important factors
you need to consider while starting a business of your own.
1) Identification of Business Opportunity

Opportunity identification and selection are like comer stones of
business enterprise. Better the former, better is the latter. Identification
and selection of a suitable business opportunity serves as the saying
Establishment of ‘well begun is half done. It may include-
90 Business Enterprise
(a) Determination of objectives Business Organization
System
The first step is to determine, define clearly the objectives and
goals to be accomplished. Once goals are known, all efforts and
activities can be directed to achieve them NOTES
(b) Discovery of an idea

No business can develop in the absence of a great idea. A great
and practical idea is the only thing on which the development of
your business will depend. You need to have a unique and
innovative idea that stands out and offer something different
(whether it is a concept, price or service) from the others.
2) Market Assessment
Once you have an idea, you need to determine if it's viable. To figure
out if you should go ahead with your business idea, you need to ask
questions like these:
• Is the market saturated?
• Does the market want what you're offering?
• What are your competitors doing?
• Can you reach your target audience?
Once you're sure of your business idea, dig in a little deeper. You may
need information that'll help you develop a unique business proposition
that'll give you a competitive advantage.
3) Suppliers
At the time of starting a business, a number of decisions are to be taken
with regard to purchase of material parts, equipments, machinery, real
estate etc. Sound decision regarding the determination of the suppliers
term of credit, trade discount etc are needed for efficient conduct of
business.
4) Technology
It is always better to invest in the best technology at the time of startup
itself. Technology would include plant & machinery as well as latest
office equipment. One should not exclude the software required to
monitor the business. A technologically advanced business is expected
to perform much better in the long run.
5) Location
Deciding an optimum location for the business is a strategic and an
important one. A good location goes a long way in making the business
successful. The location needs to be carefully chosen. You can save Establishment of
out on taxes, water and electricity costs if you are located in some Business Enterprise 91
Business Organization areas. The raw materials can be easily sourced, the manpower would
System be easily available and you can save out on transportation costs in case
of certain locations. Setting up a business in certain location could lead
NOTES to subsidy and rebates from the Government
6) Human Resource
Any business requires efficient manpower to succeed. The staff needs
to be carefully chosen since they are the ones who could make or break
the business. The business needs to be set up in a location where there
is sufficient availability of manpower both skilled as well as unskilled
7) Finance
Another important factor that should be considered, involves the
funding of your business. You need to properly identify the sources
through which you will be able to get the funding for your business.
After identifying the initial costs required for starting the business; the
financing pattern needs to be decided. The financing pattern will be
mainly by way of capital introduction by the owner and borrowed
funds.
8) Competition
Before entering new business, information about market competition
needs to be found out. In case a product is a monopoly then the
competition will not matter. Otherwise the success of the business will
depend upon the demand and supply gap. You need to know what your
competitors are doing and what are their strategies? With this
knowledge, you will be able to formulate appropriate strategies for
your company.
9) Laws, Rules & Regulation

Setting up a new business would require compliance with various laws
& regulations. Each country is governed by separate laws and
regulations which require that any new business be registered with
certain authorities and meets certain compliance. Non-Compliance
with the statute could lead to huge fines and penalty and hamper the
success of the new business.
10) An effective business plan

Writing a business plan can help you determine if your idea is feasible
and provides direction. With a business plan, you will be able to know
every next step that should be taken.
All the above factors are important to start a successful business.
Establishment of Compromising any of these factors could hamper the growth. Starting a business
92 Business Enterprise these days is very challenging and an all-round knowledge of various factors is
required to run a business successfully. It is important to make a Project Report Business Organization
on the basis of the above factors before starting a new business. Considering the System
above important factors will help one to eliminate the risks and obstacles that
she/he will face in her/his entrepreneurial journey. When starting your own NOTES
business, You need to work out how your business can be distinctive and offer a
point of difference compared to the competition. You need to find something to
offer which will ensure you build up a loyal customer base and customers come
to you over others.
5.3 SMALL AND MEDIUM ENTERPRISES
Small and Medium Enterprises (SME) sector has emerged as a highly

vibrant and dynamic sector of the Indian economy over the last six decades.
SMEs not only play crucial role in providing large employment opportunities at
comparatively lower capital cost than large industries but also help in
industrialization of rural & backward areas, thereby, reducing regional
imbalances, assuring more equitable distribution of national income and wealth.
SMEs are complementary to large industries as ancillary units and this sector
contributes enormously to the socio-economic development of the country. SMEs
also play a significant role in Nation’s development through its high contribution
in domestic production, significant export earnings, low investment requirements,
operational flexibility, location wise mobility, low intensive imports, capacities
to develop appropriate indigenous technology, import substitution, contribution
towards defence production, technology oriented industries, competitiveness in
domestic and export markets thereby generating new entrepreneurs by providing
knowledge, training and skill development .
Government of India was notified by its MSMED Act (Micro, Small &
Medium Enterprises Development) in 2006 to address policy issues affecting
SMEs as well as the coverage and investment ceiling of the sector. The Act seeks
to facilitate the development of these enterprises as also enhancing their
competitiveness. It provides the first-ever legal framework for recognition of the
concept of "enterprise" which comprises both manufacturing and service entities.
It defines medium enterprises for the first time and seeks to integrate the three
tiers of these enterprises, namely, micro, small and medium. The enterprises can
take any form - proprietorship, company, cooperative, association of persons,
Hindu Undivided Family, partnership etc. SMEs are identified to provide special
investment assistance and handholding as they contribute significantly to the
employment, production and export in the country.
Establishment of
Business Enterprise 93
Business Organization Definition of MSMEs in India
System
(As Per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006)
NOTES
Amendments proposed in 2015

The need for change in definition has been raised by the various
stakeholders from time to time. The MSME related Parliamentary Standing
Committee on Industry had taken up this issue and in its 245th Report had
recommended that considering the inflation and dynamic market situation, the
definition of MSME as provided in the MSMED Act may be revised every five
years. Further, in its 258th Report, it had recommended that "if needed, the Act
should be amended to make definition flexible". Ministry of MSME has
accordingly decided in November 2014 for an amendment to the MSMED Act,
2006 to double the investment limits of micro and small enterprises and triple
the investment limits of medium scale enterprises. Accordingly the following
changes were made-
Establishment of
94 Business Enterprise
System
NOTES
Amendments proposed on February 7, 2018.

The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has
approved changes in the basis of classifying Micro, Small and Medium
enterprises from ‘investment in plant & machinery/equipment’ to ‘annual
turnover’. This will encourage ease of doing business and align the enterprises
to the new tax regime revolving around GST (Goods & Services Tax). There will
be no distinction between manufacturing and service unit henceforth.
Section 7 of the Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 was accordingly amended to define units producing goods
and rendering services in terms of annual turnover as follows:
• A micro enterprise will be defined as a unit where the annual turnover
does not exceed five crore rupees;
• A small enterprise will be defined as a unit where the annual turnover is
more than five crore rupees but does not exceed Rs 75 crore;
• A medium enterprise will be defined as a unit where the annual turnover
is more than seventy five crore rupees but does not exceed Rs 250 crore.
• Additionally, the Central Government may, by notification, vary turnover
limits, which shall not exceed thrice the limits specified in Section 7 of
the MSMED Act.
The change in the norms of classification will enhance the ease of doing
business, the consequent growth and will pave the way for increased direct and
indirect employment in the MSME sector of the country.
Characteristics of Small-Scale Industries

1. Ownership.
Ownership of small scale unit is with one individual in sole- Establishment of
proprietorship or it can be with a few individuals in partnership. Business Enterprise 95
Business Organization 2. Management and control.
System
These units are managed in a personalized fashion. The owner is
activity involved in all the decisions concerning business.
NOTES
3. Area of operation.
The area of operation of small units is generally localized catering to
the local or regional demand.
4. Gestation period.
Gestation period of small scale unit is less as compared to large scale unit.
5. Flexibility.
Small scale units as compared to large scale units are more flexible to
adopt changes like new method of production, introduction of new
products etc.
6. Resources.
Small scale units use local or indigenous resources and as such can be
located anywhere subject to the availability of these resources like
labor and raw materials.
7. Dispersal of units.
Small scale units use local resources and can be dispersed over a wide
territory. Thereby promoting a balanced regional development
8. Lack of a strong position to negotiate.

The area of operation of small units is small, similarly small production
thus weak bargaining power and lack of economies of scale.
9. A close relationship with the local community.

Due to direct contact between management and customers, a good
public relation is maintained.
10. Difficulties in obtaining capital.

Ownership of small scale unit is with a sole trader or with a few
individuals in partnership. Thus limited capital raising capacity.
Objectives of Small Scale Industries

The objectives of small scale industries are
1. To create more employment opportunities with less investment.
2. To remove economic backwardness of rural and less developed regions
of the economy.
Establishment of
96 Business Enterprise 3. To reduce regional imbalances.
4. To mobilize and ensure optimum utilization of unexploited resources Business Organization
of the country. System
5. To improve standard of living of people.

NOTES
6. To ensure equitable distribution of income and wealth.
7. To solve unemployment problem.
8. To attain self-reliance.
9. To adopt latest technology aimed at producing better quality products
at lower costs.
5.4 ROLE OF SUPPORT ORGANIZATION
Support organizations are unique forums, in which players from the same
industry or sector meet to discuss issues of common interest, find common
solutions and further their common commercial and professional interests. These
organizations play an important role in modern economies. They undertake
activities and functions which cannot be pursued efficiently by single firms on
their own but are better suited for a collective effort. These activities, aims to
promote and safeguard the interest of trade and industry. They have a major
responsibility in promoting compliance to law and develop a strong competition
culture in the country
5.4.1 Trade Associations

Trade Associations are voluntary unions of business units formed to
promote and protect the common interest through collective efforts.
A trade association, also known as an industry trade group, business
association or industry body, is an organization founded and funded by businesses
that operate in a specific industry. Trade associations have a crucial role to play
in promoting best practice, helping companies become more competitive and
formulating effective public policy and delivery. They have tremendous potential
to act as a co-ordinated voice of business when talking to government and great
value in terms of quickly disseminating messages about government policy to
their members. Trade Associations identify the effects of policy measures on their
sector and act as an additional resource in ensuring that government action
achieves its desired purpose.
Many Trade Associations have a complaints process and can effectively
help resolve the problems, acting as a mediator between the customer and the
member organization if necessary. Trade Associations facilitate the opportunity
for members to network with their peers at conferences, exhibitions, trade shows,
networking events and fundraisers, as well as provide continuing education
opportunities for its members. Trade Associations are seen as the voice of their Establishment of
Business Organization sector and able to represent all their members at every level. They provide a
System collaborative environment for like-minded professionals.
Other benefits of joining an industry or trade association include
NOTES
• Access to specific knowledge about the industry
• Building an industry-specific network
• Increasing one’s reputation in industry
• Gaining access to trade group discounts in purchasing
Few examples of trade associations are- All India Food Processors’
Association (AIFPA), All India glass Manufacturers’ Federation (AIGMF), All
India Granites and Stone Association(AIGSA), All India Rice Exporters
Association, All India Printing Ink Manufacturer’s Association (AIPIMA)
5.4.2 Chambers of Commerce

Chamber of commerce is voluntary, nonprofit association of people engaged
in trade, commerce and industry. Its members usually include merchants,
industrialist, bankers, financers and brokers. It focuses on local community and
on local businesses. They are formed on a regional basis to foster growth and
development of business in their respective regions. Overall, a chamber is an
association of business leaders that allows mutual promotion and protection of
interests of their businesses, whether it be a small restaurant or a bookstore. These
are frequently seen in individual towns and communities, but there are also state
and national chapters that can be accessed.
A good chamber of commerce helps businesses bind together and come up
with ways to better market their products and services. They form a collective to
address important concerns and issues for the business community of their region.
The main difference between the chamber of commerce and trade
association is that the trade association is confined to a particular trade or
industry, while the chamber of commerce covers different trade, commerce and
industry of a region- the region may be locality, country etc.
As a business, joining a chamber of commerce can be a good choice for a
number of reasons:
• Increased exposure
• Networking opportunities
• Better understanding of business community concerns
• More credibility
• Increased marketing potential
• Stronger voice in local decision-making
Federation of Indian Chambers of Commerce and Industry (FICCI)-
Establishment of It is an association of business organizations in India, established in 1927.

98 Business Enterprise It is a non-government, not-for-profit organization. FICCI draws its membership
from the corporate sector, both private and public, including SMEs and MNCs. Business Organization
The chamber has an indirect membership of over 2,500,000 companies from System
various regional chambers of commerce. It is headquartered in the national capital
New Delhi and has presence in 12 states in India and 8 countries across the world. NOTES
FICCI has undertaken policy initiatives to address issues such as opportunities
for women entrepreneurs, smuggling and piracy, energy conservation, and
business arbitration. To address bilateral issues and to promote foreign trade and
investment, FICCI has formed joint business councils with counterpart
associations in countries throughout the world.
5.5 SUMMARY
In this unit you have learned about the factors to be considered before
starting a new business, the definition and features of micro, small and medium
enterprise with the various amendments done from time to time. The unit also
discusses the role of support organizations like trade associations and chamber
of commerce for the promotion of industry and commerce.
Q1) Highlight the factors to be considered for starting a new enterprise

Q2) Explain the characteristics and objectives of a small scale industry
Q3) Explain the role of trade association and chamber of commerce as
support organizations
Q4) Elabrate on ‘small scale industry is a vehicle for the economic growth
of the country’
5.7 TASK
Visit the chamber of commerce in your city and collect information about
the activities undertaken by it for the promotion of trade and industry in the
region.
*****
Establishment of
System
UNIT - 6 ORGANIZATION OF TRADE

NOTES
6.0 INTRODUCTION
In this unit the students will study trade and its organization; which will
include the various channels of distribution along with their types and
determinants for selecting a particular channel. The unit also focuses on internal
and external trade and its types. It explains franchising, mergers and acquisition,
business process outsourcing and the concept of multinational company.
6.1 UNIT OBJECTIVES
1) To understand the meaning of channel of distribution

2) To appreciate the importance of different channels of distribution
3) To differentiate between internal and external trade and their types
4) To understand the significance of various support services for business
5) To study franchising as a way of doing business
6) To understand the concept of mergers and acquisitions
6.2 CHANNELS OF DISTRIBUTION – MEANING,

FUNCTIONS AND TYPES.
Introduction and Meaning

The goods are produced at one place but the customers are scattered over a
wide geographical area, it is very difficult for a producer to distribute his products
all over the country. Therefore, he takes the help of some intermediaries to
distribute his goods. For example, Maruti cars are manufactured at Gurgaon but
are available all over the country with the help of intermediaries. Channels of
distribution bring economy of effort. They help to cover a vast geographical area
and also bring efficiency in distribution including transportation and
warehousing.
Organization
100 of Trade
Thus we can say that Business Organization
System
• A distribution channel is the network of individuals and organizations
involved in getting a product or service from the producer to the
customer. Distribution channels are also known as marketing channels NOTES
or marketing distribution channels.
• The path through which goods and services travel from the vendor to the
consumer or payments for those products travel from the consumer to
the vendor. A distribution channel can be as short as a direct transaction
from the vendor to the consumer, or may include several interconnected
intermediaries along the way such as wholesalers, distributors, agents
and retailers
• Channel of distribution refers to those people, institutions or merchants
who help in the distribution of goods and services.
• Philips Kotler defines channel of distribution as “a set of independent
organizations involved in the process of making a product or service
available for use or consumption”.
• W.J. Stanton defines the channel of distribution as “the route taken by
the title to the goods as they move from the producer to the ultimate
consumer or industrial users.”
• According to McCarthy- “Any sequence of institutions from the producer
to the consumer including one or any number of middlemen is called the
channel of distribution.”
Functions of Distribution Channels

Following are the main functions performed by the distribution channels:
1. Sorting
Middlemen obtain the supplies of goods from various suppliers and
sort them out into similar groups on the basis of size, quality etc.
2. Accumulation
In order to ensure a continuous supply of goods, middlemen maintain
a large volume of stock.
3. Allocation
It involves packing of the sorted goods into small marketable lots like
1Kg, 500 gms, 250 gms etc.
4. Assorting
Middlemen obtain a variety of goods from different manufacturers and
provide them to the customers in the combination desired by them.
For example, rice from Dehradun & Punjab.
Organization
of Trade 101
Business Organization 5. Product Promotion
System
Sales promotional activities are mostly performed by the producer but
sometimes middlemen also participate in these activities like special
NOTES displays, discounts etc.
6. Negotiation
Middlemen negotiate the price, quality, guarantee and other related
matters about a product with the producer as well as customer.
7. Risk Taking
Middlemen have to bear the risk of distribution like risk from damage
or spoilage of goods etc. when the goods are transported from one
place to another or when they are stored in the godowns.
Types of Distribution Channels

Broadly, Channels of distribution are of two types viz.
(1) Direct Channel
(2) Indirect Channel.
1. Direct Channel or Zero Level Channels

When the producer or the manufacturer directly sells the goods to the
customers without involving any middlemen, it is known as direct channel or
zero level channel. It is the simplest and the shortest mode of distribution. Selling
through post, internet or door to door selling etc. are the examples of this channel.
For example, Mc Donalds, Bata, Mail order etc.
Methods of Direct Channel are:
(a) Door to door selling
(b) Internet selling
(c) Mail order selling
(d) Company owned retail outlets
(e) Telemarketing
2. Indirect Channels
When a manufacturer or a producer employs one or more middlemen to
distribute goods, it is known as indirect channel.
Following are the main forms of indirect channels:
(a) Manufacturer-Retailer-Consumer (One Level Channel):
This channel involves the use of one middleman i.e. retailer who in
Organization turn sells them to the ultimate customers. It is usually adopted for
102 of Trade
speciality goods. For example Tata sells its cars through company Business Organization
approved retailers. System
Manufacturer→ Retailer→ Consumer

NOTES
(b) Manufacturer-Wholesaler-Retailer-Customer (Two level channels)
Under this channel, wholesaler and retailer act as a link between the
manufacturer and the customer. This is the most commonly used
channel for distributing goods like soap, rice, wheat, clothes etc.
Manufacturer→ Wholesaler→ Retailer→ Customer
(c) Manufacturer-Agent-Wholesaler-Retailer-Consumer (Three level

channels)
This level comprises of three middlemen i.e. agent, wholesaler and the
retailer. The manufacturers supply the goods to their agents who in
turn supply them to wholesalers and retailers. This level is usually used
when a manufacturer deal in limited products and yet wants to cover
a wide market.
Manufacturer → Agent → Wholesaler → Retailer → Consumer
Organization
of Trade 103
Business Organization Factors Determining Choice of Channels of Distribution
System
Following are the main factors which help in determining the channels of
distribution:
NOTES
1. Product Related Factors
(a) Nature of Product
In case of industrial goods like CT scan machine, short channels like
zero level channel or first level channel should be preferred because
they are usually technical, expensive, made to order and purchased by
few buyers. Consumer goods Iike LCD, refrigerator can be distributed
through long channels as they are less expensive, not technical and
frequently purchased.
(b) Perishable and Non- Perishable Products

Perishable products like fruits or vegetables are distributed through
short channels while non perishable products like soaps, oils, sugar,
salt etc. require longer channels.
(c) Unit value

In case of products having low unit value such as groceries, long
channels are preferred while those with high unit value such as
diamond jewellery short channels are used.
(d) Technical nature of Product

Short channels are preferred for technically complex goods like
industrial or engineering products like machinery, generators like
torches while non complex or simple ones can be distributed through
long channels.
(e) After sale services

The product requiring after sale services must be sold by the producer
directly or through authorized dealers.
2. Company Consideration
(a) Financial Strength
The companies having huge funds at their disposal go for direct
distribution. Those without such funds go for indirect channels.
(b) Desire of Control

Short channels are used if management wants greater control on the
channel members otherwise a company can go in for longer channels.
Organization
104 of Trade
(c) Custom of business Business Organization
System
In some industry the channels of distribution depends upon the custom
of business
NOTES
3. Competitive Factors
Policies and channels selected by the competitors also affect the choice of
channels. A company has to decide whether to adopt the same channel as that of
its competitor or choose another one.
4. Market Factors
(a) Size of Market
If the number of customers is small like in case of industrial goods,
short channels are preferred while if the number of customers is high
as in case of convenience goods, long channels are used.
(b) Geographical Concentration

Generally, long channels are used if the consumers are widely spread
while if they are concentrated in a small place, short channels can be
used.
(c) Quantity Purchase

Long channels are used in case the size of order is small while in case
of large orders, direct channel may be used.
(d) Customer’s Habit

Customers habit must be considered in determining the channel of
distribution. Therefore desire for credit and services must be given due
consideration before determining channel of distribution.
5. Environmental Factor
Economic factors such as economic conditions and legal regulations also
play a vital role in selecting channels of distribution. For example, in a depressed
economy, generally shorter channels are selected for distribution.
6. Other consideration
a) Suitability
The channel which is more suitable and convenient is more preferred
than other channels.
b) Flexibility
The channel which is more flexible is generally used.
Organization
of Trade 105
Business Organization c) Efficiency
System
Efficiency of a channel of distribution is also an important factor.
Therefore the channel which increases sales and decreases cost of sales
NOTES is always preferred.
d) Society’s attitude
The channel of distribution should be used after considering the
attitude of the society. If the consumer wants to avoid the services of
middlemen, the producer should prefer to sell directly to consumers
6.3 INTERNAL TRADE
Goods produced in a country may be sold within the country or outside the
country. When buying and selling of goods and services takes place within the
geographical boundaries of a country, it is referred to as internal trade. It may
take place between buyers and sellers in the same locality, village, town or city;
or may be in different states, but definitely within the same country.
Internal trade is also called domestic trade or home trade. In home trade, a
single currency is used as means of exchange. The importance of domestic trade
in a country is that it facilitates exchange of goods within the country. By
allowing different types of goods and services to reach all parts of the country it
helps improve the standard of living of the residents of the country as well as
increases the employment rate of the country.
Features of Internal Trade

(a) The buying and selling of goods takes place within the boundaries of
the same country.
(b) Payment for goods and services is made in the currency of the home
country.
(c) It involves transactions between the producers, consumers and the
middlemen.
(d) It consists of a distribution network of middlemen and agencies
engaged in exchange of goods and services.
Types of Internal Trade

1. Retail trade
2. Wholesale trade
Generally we buy goods for our daily use from the local shopkeepers. These
Organization shopkeepers buy goods in bulk and sell them to us as per our requirement. They
106 of Trade generally buy goods in large quantity either from the producers directly or from
any other shops that sell goods in bulk. Thus, we find that some shopkeepers buy Business Organization
goods in bulk and sell to others in bulk while other buy in bulk and sell in small System
quantities as per the requirement of the customers. Thus, on the basis of volume
of goods traded we can classify internal trade as: NOTES
1. Wholesale trade and
2. Retail trade.
6.3.1 Wholesale Trade

Wholesale trade refers to buying of goods in large quantity from producers
or manufacturer for sale to other traders or buyers in small quantities. Those who
are engaged in wholesale trade are called wholesalers. They act as a link between
the manufacturers or producers and the small traders. Generally they specialize
and deal in one or a few products.
Characteristics of wholesale trade

Following are the characteristics of wholesale trade:
(a) The wholesaler generally deals in one or few variety of items. He is a
specialist trader in a particular line e.g., machinery, textiles, medicines
etc.
(b) Wholesalers buy goods from the manufacturers and producers in bulk
and sell them to the retailers and sometimes to consumers directly.
(c) Wholesale trade requires a large amount of capital to be invested. This
is because purchases are made in bulk, advances are given to
manufacturers and the goods are generally sold on credit. Besides it
also requires large storage space.
(d) Generally people who engage in wholesale trading of similar goods
have their business premises located in the same area for the
convenience of the retailers. For example, wholesale grain market,
wholesale paper market etc. These are wholesale markets dealing in
one particular product.
(e) Besides selling, wholesale traders are also involved in some other
activities like packaging, grading, advertising, market research etc.
6.3.2 Retail Trade

Retail trade refers to buying goods from the manufacturers or wholesalers
and selling the same to the ultimate consumers. The retail trader generally deals
in a variety of goods. Those who are engaged in retail trade are called retailers.
Retail trade is the re-sale (sale without transformation) of new and used goods
to the general public, for personal or household consumption or utilization.
Retailing is the last link in the chain of distribution of goods and services.
Organization
of Trade 107
Business Organization Characteristics of Retail Trade
System
Following are the characteristics of retail trade
(a) Retail trade generally involves dealing in a variety of items.
NOTES
(b) A retailer makes purchases from producers or wholesalers in bulk and
sells to the consumers in small quantity.
(c) Generally retail trade involves buying on credit from wholesalers and
selling for cash to consumers.
(d) A retailer has indirect relation with the manufacturer (through
wholesalers) but a direct link with the consumers.
Functions of the Retailer

1. The retailer sells in small quantities to the consumers; he buys from
the wholesalers and breaks the goods into unit to sell to the consumer.
2. The retailer sells at convenient locations and hours.
3. Retailers’ stock varieties of goods, they sell all kinds of items at the
same time, thereby providing consumers an opportunity to get
whatever s/he needs.
4. Retailers render door to door services
5. They can also sell on credits to the consumer due to the personal
business relationship that exist between them
6. They give advice to the consumers in making choices
7. They deliver goods to customers on request
8. Retailers give feedback to the wholesalers and producers
9. They provide after sales service to consumer
10. They maintain close relationship with consumer.
6.4 EXTERNAL TRADE
External trade or international trade is a business activity where goods are

exchanged between the citizen of two or more countries irrespective of source
of production, capital, technology and location of final users. Generally
international business is carried out in the form of import and exports. The
national objective of every country in the world is to increase the export of
surplus manufactured goods or surplus natural resources and import those which
are not manufactured by it. Export promotion helps the country to boost her
exports and solve the problem of balance of payment.
Organization
108 of Trade
Types of External Trade Business Organization
System
1. Import
2. Export.
NOTES
3. Entreport
6.4.1 Import
It is a type of trading where the goods having deficiency to fulfill existing
demand are imported or bought from other countries. Government helps the
businessman by various schemes to produce goods which have to be imported
so that the country can achieve self-sufficiency and have lesser pressure on
balance of payment in the world trade
6.4.2 Export
It is a business transaction where goods are sold to foreign consumers. The
exchanges of goods or services take place along the international borders. This
type of trade allows for a greater competition and more competitive pricing in
the market. Government promotes the traders to export more, as export activity
helps the country to earn foreign currency.
6.4.3 Entreport
it is also known as re-export trade. It refers to purchase of goods from one
country and selling them to another country.
6.5 ROLE AND IMPORTANCE OF SUPPORT SERVICES TO

BUSINESS
Trade or exchange of goods involves several difficulties, which are removed

by auxiliaries known as aids to trade. It refers to all those support services, which Organization
directly or indirectly facilitates smooth exchange of goods and services. Support of Trade 109
Business Organization services include Transport, Insurance, Warehousing, Banking, Advertising,
System Salesmanship, Trade promotion organizations in a country and Global
organizations for international trade. We will study a few of them here.
NOTES
6.5.1 Transport
Transportation is among the most important economic activities for a
business. By moving goods from locations where they are produced to locations
where they are demanded, transportation provides the essential service of linking
a company to its suppliers and customers. It is an essential activity supporting
the economic utilities of place and time. Place utility infers that customers have
product available where they demand it. Time utility suggests that customers
have access to product when they demand it. Transportation is known to be the
movement of people, goods and animals from one place to another. Modes of
transport include air, rail, road, water, cable, pipeline and space. If the
development of transportation was not made, market would be limited to local
areas and production would be limited to meet local needs only.
The benefits of transport can be studied under the following categories.
A. Economic Benefits/Functions:
1. Extensive Market
Transport helps in the assembly of raw materials and distribution of
finished goods. It makes it possible to move goods from the place of
production to the place where they are to be consumed. Development
of the efficient means of transport has brought together the whole
world into the one big market.
2. Mobility of Labor and Capital

An efficient network of transport services encourages the movement
of people from one place to another. Mobility of labor and capital
increases with the development of transport.
3. Specialization and Division of Labor

Movement of goods and people from one place to another leads to
specialization and division of labor which results in minimum wastage
of resources and reduction in the cost of production. Thus Transport
helps each region and country to make optimum and efficient use of
its national resources.
4. Economies of Large Scale Production

Transport has helped the development of large scale industries.
Transport has made possible the various economies of large scale
production which tend to reduce unit cost of production and help the
Organization economy.
110 of Trade
5. Stability in Prices Business Organization
System
Goods can be transported to places where there is scarcity and the
prices high from places where there is surplus and prices low. Such
movement of goods helps in maintaining uniform prices throughout NOTES
the country.
6. Benefits to Consumers
The consumers can enjoy the goods, which cannot be produced at their
place, by transporting such goods from other distant places.
7. Employment Opportunities and Increase in the National Income

The various means of transport provide employment to millions of
people throughout the world. Thus, transport contributes substantially
to the national income of the nations.
8. Discouragement to Monopoly
The commodities can be quickly transported from one place to another;
local producers cannot charge prices at their own will. This
discourages monopoly and encourages competition.
9. Industrial Development
Transport facilitates helps the growth of industries by making available
various factors of production. It would not have been possible to make
such rapid industrial development without efficient means of transport.
10. Increase in National Wealth

Transport helps in increasing the national wealth of a country by
facilitating agriculture, industry, trade and commerce.
B. Social Benefits/Functions
Transport has substantially influenced the life of the people.
1. Discovery of New Lands
Transport has helped the discovery of new lands and the growth of
cities and urban areas.
2. Diffusion of population
It reduces the concentration of population in the area of production.
People can reach from distant places if there is an adequate and
efficient system of transport.
3. High Standard of Living

Transport helps in the increase of production thereby raising the
Organization
standard of living of the people.
of Trade 111
Business Organization 4. Mutual Understanding
System
Transportation helps the people of different regions to come in contact
with each other which encourages exchange of ideas and culture and
NOTES promotes co-operation, understanding the cordial relations, amongst
the people of the world.
5. Ability to Face Natural Calamities

Transport enables the society to face natural calamities such as famine,
earthquake, drought, floods, etc. In such emergencies, commodities
can quickly be transported to the places of mishap.
C. Political Benefits/Functions
1. National Unity, Integration and Peace
A vast country like India cannot be held together without efficient
means of transport. Transport helps in maintaining internal peace and
national unity of a country. It brings about national integration.
2. National Defence
Transport is essential for strengthening the national defence of a
country. Through improved means of transport, the defence personnel,
material and equipment can be moved rapidly to the border areas.
3. Source of Revenue
Transport helps in increasing the national wealth and income of a
country. It is also a source of revenue to the Government.
4. Modes of transport
A mode of transport is referred to a combination of networks,
infrastructures, vehicles and operations. These include walking, road
transport system, rail, ship transport and modern aviation. Different
modes of transportation have emerged over time.
Important modes of transportation are listed below.

1. Land Transport
a) Road transport
b) Railway transport
2. Water transport
3. Air transport
4. Pipeline transport
Organization
112 of Trade
1. Land Transport Business Organization
System
a) Road transport: road transport exist in all parts of the world, this
involves the use of motor vehicles (cars, lorries, buses, bicycles,
and trucks). Road transport when compared with other modes of NOTES
transportation is more flexible. It is relatively cheaper and faster.
Road transport has a high capacity of carrying goods over short
distances. Maintenance is one of the major disadvantages of this
mode of transport.
Other modes of road transportation include

• Animal-powered transport
Which is mostly referred to as beast of burden. It is the oldest
means of transportation; this usually involves the use of animals
for the transportation of people and goods. Example of such
animals used for transporting humans and goods include camel,
horse, donkey, elephant etc.
• Human powered transport

This is another form of transport, where people, goods or both
are transported from one place to another using human muscle-
power, in the form of walking, running and swimming.
Human-powered transport remains popular for reasons of cost-
saving, physical exercise, leisure and environment. It is
sometimes the only type available, especially in underdeveloped
or inaccessible regions.
b) Railway transport
Railways were developed during the period of industrial
revolution in the 19th century, these were partly for political
reasons and partly for economic reasons. The major advantage
of railway transport includes provision of reliable services. It has
ability of conveying heavy and bulky goods; it is also very cheap,
safe and comfortable for passengers over a long distance.
2. Water transport
Water transport is very important because it is the cheapest way of
transporting bulky goods over a long distance. In the world, there are
two major types of water transport namely: Inland water transport and
ocean water transport.
Inland water transport is the system of transport through all navigable
rivers, lakes and manmade canals. Many large rivers in different parts
of the world are used by ships and barges for transportation; the main
rivers where inland water transport are important are the Rhine and
Dambe in Europe, the Zaire in Africa, the Nile in Africa, the
Mississippi in USA etc. Whereas ocean waterways carry a lot of the Organization
of Trade 113
Business Organization world’s trade, majority of the bulky goods, materials and passengers
System pass through ocean waterways from one country to another at the
cheapest cost.
NOTES
3. Air transport
Air transport is the fastest means of transport; it was introduced in
1903 but developed into full means of transporting people and goods
in 1930s. This mode of transportation can be used for both domestic
and international flights. It is the costliest mean of transport.
a. Spaceflight is a means of transport that moves out of Earth's
atmosphere into outer space by means of a spacecraft. While large
amounts of research have gone into technology, it is not
commonly used except to put satellites into orbit, and conduct
scientific experiments.
4. Pipeline transport
This system of transportation involves the use of hollow pipes in the
transportation of water, crude oil, (petroleum) and gas. This mode of
transportation is safer than using tankers or trailers in the transportation
of these liquids.
6.5.2 Insurance
Life is full uncertainties. One does not knows what is going to happen in
the next moment. This element of unknown situation always hounds around the
mind of a person and keeps him worried to think as to what will happen in future
in case of any mis happening. Among a number of worries the main and very
important is economic uncertainty of himself or his family. Insurance help the
person to transfer this loss due to uncertainty to an insurance company in return
for a small consideration, known as a premium. Insurance helps people have
peace of mind when life’s unexpected events happen. Function of insurance is
to spread the loss caused by a particular risk over a number of persons, who are
exposed to it and who agree to insure themselves against the risk.
The functions of insurance can be studied into two parts;
1. Primary Functions, and,
2. Secondary Functions.
Primary Functions of Insurance

1. Insurance provides certainty
Insurance provides certainty of payment at the uncertainty of loss.
Insurance removes all uncertainties and the assured is given certainty
of payment of loss. The insurer charges the premium for providing the
said certainty.
Organization
114 of Trade
2. Insurance provides protection Business Organization
System
The main function of the insurance is to provide protection against the
probable chances of loss. The insurance guarantees the payment of
loss and thus protects the assured from sufferings. NOTES
3. Risk-Sharing
The risk is uncertain, and therefore, the loss arising from the risk is
also uncertain. When risk takes place, the loss is shared by all the
persons who are exposed to the risk.
Secondary Functions of Insurance

Besides the above primary functions, the insurance works for the following
functions:
1. Prevention of loss
The insurance joins hands with those institutions which are engaged
in preventing the losses of the society. The insurance assists financially
to the health organization, fire brigade, educational institutions and
other organizations which are engaged in preventing the losses of the
masses from death or damage.
2. It Provides Capital
The insurance provides capital to the society. The accumulated funds
are invested in the productive channel.
3. It Improves Efficiency
The insurance eliminates worries and miseries of losses due to death
and destruction of property. It frees the person’s mind from worries of
losses. Thus a person can concentrate on productive and better
achievement,
4. It helps in Economic Progress

The insurance by protecting the society from huge losses of damage,
destruction and death, provides an initiative to work hard for the
betterment of the masses. The property, the valuable assets, the man,
the machine and the society cannot lose much at a disaster due to the
insurance cover.
3) Other Functions
(i) Insurance is a tool used for saving and investments
By purchasing any Insurance Policy it becomes compulsion by the
purchaser to make payment of the insurance policy. It assumes a
compulsory way of savings; it also provides opportunity to avail
Organization
Income tax exemption for the amount paid as insurance premium.
of Trade 115
Business Organization Some prudent people take up insurance as good investment option
System also. Such savings help growth in national economy.
(ii) It is one of the source to earn Foreign Exchange

NOTES
The business of insurance has crossed the national borders. While
traveling by Air one needs aviation insurance. While on board at sea
whether humans or cargo it needs marine insurance. In simple words
insurance has become an international business and is necessary also.
It is a good source of earning foreign exchange for any country.
(iii) Risk Free Trade

Insurance promotes export insurance, which makes the foreign trade
risk free with the help of different types of polices under marine
insurance cover.
6.5.3 Warehousing
There is a time gap between production and consumption. In other words,
goods, which are produced at one time, are not consumed at the same time.
Hence, it becomes necessary to make arrangements for storage or warehousing.
Agricultural commodities like wheat and rice are seasonal in nature, but are
consumed throughout the year; on the other hand, goods such as umbrellas and
woolen clothes are produced throughout the year but are demanded only during
particular seasons. Therefore, goods need to be stored in warehouses till they are
demanded. Warehouse creates time utility by supplying the goods at the right
time to the consumer.
6.5.4 Banking and finance

There is usually a time gap between production or purchase and sale of
goods. It takes time to collect money after sale of goods on credit. During this
period, businessmen need finance to carry on their business activities.
Banks and other financial institutions provide funds and credit to
businessmen. Production and distri¬bution of goods and services on a large scale
requires a huge amount of money at low rates of interest. Banks facilitate large
scale and efficient business operations by pro¬viding cash and security. Banks
also provide safe, quick and economical means for remittance of money from
one place to another. Banks provide funds in various forms e.g. loan, overdraft,
cash credit, discounting of bills, etc.
6.5.5 Advertising
Advertising brings goods and services to the knowledge of prospective
buyers. It helps to highlight the distinctive features and utility of different
products. With the help of such knowledge, consumers can obtain better value
Organization for their money. Marketing research helps to know and understand the
116 of Trade
requirements of consumers. The media used to advertise products are Radio, Business Organization
Newspapers, Magazines, TV, Internet, etc. System
6.5.6 Trade Promotion Organizations in a Country NOTES

They attend to difficulties of promotion and development of trade at the
national level. These are the organizations established by the business community
to protect and promote their interest. They play promotional and developmental
role for members. They do market research work, act as a clearing house of
information, put their grievances before the government, make representations
and help the business community in many ways. The examples include Chambers
of Commerce, Export Promotion Councils, Indian Institute of Packaging etc.
6.6 BUSINESS COMBINATIONS – MERGERS AND

ACQUISITIONS
In 21st century businesses are the game of growth. Every business want the
optimum market share (growth) over their competitors, so companies are trying
to get optimum growth by using the most common shortcut i.e. Merger and
Acquisition (M&A). Mergers and acquisitions (M&A) are defined as
consolidation of companies. Differentiating the two terms, Mergers is the
combination of two companies to form one, while Acquisitions is one company
taken over by the other. M&A is one of the major aspects of corporate finance
world. The reasoning behind M&A generally given is that two separate
companies together create more value compared to being on an individual stand.
With the objective of wealth maximization, companies keep evaluating different
opportunities through the route of merger or acquisition. There is always synergy
value created by the joining or merger of two companies.
Mergers and Acquisitions are often uttered in the same breath and used as
though they were synonymous, the terms merger and acquisition mean slightly
different things.
A merger occurs when two separate entities (usually of comparable size)
combine forces to create a new, joint organization in which theoretically, both
are equal partners. For example, both Daimler-Benz and Chrysler ceased to exist
when the two firms merged, and a new company, DaimlerChrysler, was created.
An acquisition refers to the purchase of one entity by another (usually, a
smaller firm by a larger one). In a simple acquisition, the acquiring company
obtains the majority stake in the acquired firm, which does not change its name
or legal structure. Acquisitions, sometimes called takeovers generally carry a
more negative connotation than mergers, especially if the target firm shows
resistance to being bought. For this reason, many acquiring companies refer to
an acquisition as a merger even when technically it is not. Organization
of Trade 117
Business Organization Legally speaking, a merger requires two companies to consolidate into a
System new entity with a new ownership and management structure. An acquisition takes
place when one company takes over all of the operational management decisions
NOTES of another.
Reasons for Mergers and Acquisitions

• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader market access
• Strategic realignment and technological change
• Tax considerations
• Diversification of risk
Stages involved in any M&A

Phase 1 Pre-acquisition review
This includes self assessment of the acquiring company with regards
to the need for M&A, ascertain the valuation (undervalued is the key)
and chalk out the growth plan through the target.
Phase 2 Search and screen targets

This would include searching for the possible apt takeover candidates.
This process is mainly to scan for a good strategic fit for the acquiring
company.
Phase 3:Investigate and valuation of the target

Once the appropriate company is shortlisted through primary
screening, detailed analysis of the target company has to be done. This
is also referred to as due diligence.
Phase 4: Acquire the target through negotiations

Once the target company is selected, the next step is to start
negotiations to come to consensus for a negotiated merger or a bear
hug. This brings both the companies to agree mutually to the deal for
the long term working of the M&A.
Phase 5: Post merger integration

If all the above steps fall in place, there is a formal announcement of
the agreement of merger by both the participating companies.
Organization
118 of Trade
Types of mergers Business Organization
System
The following are the types of mergers
1. Horizontal mergers
NOTES
It refers to two firms operating in same industry or producing ideal
products combining together. For e.g., in the banking industry in India,
acquisition of Times Bank by HDFC Bank, Bank of Madura by ICICI
Bank, Nedungadi Bank by Punjab National Bank etc. In consumer
electronics, acquisition of Electrolux’s Indian operations by Videocon
International Ltd., in BPO sector, acquisition of Daksh by IBM,
Spectramind by Wipro etc. The main objectives of horizontal mergers
are to benefit from economies of scale, reduce competition, achieve
monopoly status and control the market.
2. vertical merger
A vertical merger can happen in two ways. One is when a firm acquires
another firm which produces raw materials used by it. For e.g., a tyre
manufacturer acquires a rubber manufacturer, a car manufacturer
acquires a steel company; a textile company acquires a cotton yarn
manufacturer etc.
Another form of vertical merger happens when a firm acquires another
firm which would help it get closer to the customer. For e.g., a
consumer durable manufacturer acquiring a consumer durable dealer,
an FMCG company acquiring an advertising company or a retailing
outlet etc.
3. Conglomerate merger
It refers to the combination of two firms operating in industries
unrelated to each other. In this case, the business of the target company
is entirely different from those of the acquiring company. For e.g., a
watch manufacturer acquiring a cement manufacturer, a steel
manufacturer acquiring a software company etc. These kinds of
mergers offer opportunities for businesses to venture into other areas
of the industry, reduce risk and provide access to resources and markets
unavailable previously
4. Concentric merger
It refers to combination of two or more firms which are related to each
other in terms of customer groups, functions or technology. For eg.,
combination of a computer system manufacturer with a UPS
manufacturer.
Organization
of Trade 119
Business Organization Advantages and disadvantages of Mergers and Acquisition (M&A)
System
The advantage and disadvantages of merger and acquisition depends upon
the new companies short term and long term strategies and efforts.
NOTES
Advantages: Following are the some advantages
• The most common reason for firms to enter into merger and acquisition
is to merge their powers and control over the markets.
• Another advantage is Synergy that is the magic power that allows for
increased value efficiencies of the new entity and it takes the shape of
returns enrichment and cost savings.
• Economies of scale are formed by sharing the resources and services.
Union of two firm's leads in overall cost reduction giving a competitive
advantage.
• Decrease of risk using innovative techniques of managing financial risk.
• To become competitive, firms have to be at the peak of technological
developments and their dealing applications. By M&A of a small
business with unique technologies, a large company will retain or grow
a competitive edge.
• The biggest advantage is tax benefits. Financial advantages might
instigate mergers and corporations can make use of the tax shields,
increase monetary leverage and utilize alternative tax benefits.
Disadvantages: Following are the some difficulties encountered with a merger-

• Loss of experienced workers apart from workers in leadership positions.
• As a result of M&A, employees of the small merging firm may require
exhaustive re-skilling.
• Company may face major difficulties due to internal competition that
may occur among the staff of the united companies. There can be a risk
of getting surplus employees in some departments.
• Merging two firms that are doing similar activities may mean duplication
and over capability within the company that may need retrenchments.
• There is a risk of uncertainty with respect to the approval of the merger
by proper assurances.
Mergers and Acquisitions Case Study
Case Study 1
Sun Pharmaceuticals acquires Ranbaxy
This is a classic example of a share swap deal. As per the deal, Ranbaxy
shareholders will get four shares of Sun Pharma for every five shares held by
them, leading to 16.4% dilution in the equity capital of Sun Pharma (total equity
value is USD3.2bn and the deal size is USD4bn (valuing Ranbaxy at 2.2 times
Organization last 12 months sales).
120 of Trade
Reason for the acquisition Business Organization
System
This is a good acquisition for Sun Pharma as it will help the company to
fill in its therapeutic gaps in the US, get better access to emerging markets and
also strengthen its presence in the domestic market. Sun Pharma will also become NOTES
the number one generic company in the dermatology space. (Currently in the
third position in US) through this merger.
Objectives of the M&A
• Sun Pharma enters into newer markets by filling in the gaps in the
offerings of the company, through the acquired company
• Boosting of products offering of Sun Pharma creating more visibility and
market share in the industry
• Turnaround of a distressed business from the perspective of Ranbaxy
This acquisition although will take time to consolidate, it should in due
course start showing results through overall growth depicted in Sun Pharma’s
top-line and bottom-line reporting.
Case Study 2
CMC merges with TCS
This is an example where there is a merger in the same industry (horizontal).
It was done to consolidate the IT businesses. The objective of this merger, as
indicated by the management of CMC, (Computer Maintenance Corporation)
was that the amalgamation will enable TCS to consolidate CMC’s operations
into a single company with rationalized structure, enhanced reach, greater
financial strength and flexibility. Further it also indicated that, it will aid in
achieving economies of scale, more focused operational efforts, standardization
and simplification of business processes and productivity improvements.
Conclusion
M&A’s are considered as important change agents and are a critical
component of any business strategy. The known fact is that with businesses
evolving; only the most innovative and nimble can survive. That is why; it is an
important strategic call for a business to opt for any arrangements of M&A. Once
through the process, on a lighter note M&A is like an arranged marriage, partners
will take time to understand, mingle, but will end up giving positive results most
of the times.
Examples of Mergers and Acquisitions in India

• Acquisition of Corus Group by Tata Steel in the year 2006.
• Acquisition of Myntra by Flipkart in the year 2014.
• The merger of Fortis Healthcare India and Fortis Healthcare International.
• Acquisition of Ranbaxy Laboratories by Sun Pharmaceuticals.
Organization
• Acquisition of Negma Laboratories by Wockhardt of Trade 121
System
6.7 FRANCHISE
NOTES
You might have seen some restaurants, card and gift shops, readymade
garments shops that carry the same brand name/trademark and have almost the
same decoration. They sell the same products, yet they are not chain
stores/multiple shops. This is because they are not controlled and managed by a
single owner. You may be wondering how these different shops are able to use
the same brand name, sell the same product etc. even though they are not under
the same management. Moreover, these shops are run independently by different
people in different localities. This is made possible through a retail arrangement
called ‘Franchise’.
Franchise is a form of retailing wherein two parties enter into an agreement
in which one party authorizes the other to sell or produce and sell specified goods
and services. The party that develops a product/service or is the owner of an
expertise is called the ‘Franchiser’. The other party, is called the ‘Franchisee’.
The franchisee is an independent business unit that buys the right to sell the
product/service of the franchiser in exchange of the specified amount of money.
The franchisee functions as a retailer. Franchising has gained popularity in our
country, especially in the past decade. There are many businesses like fast-food
joints and restaurants (e.g., McDonalds), gifts and greeting cards shops
(Hallmark, Archies), readymade garments (Benetton, Petals), computer education
(NIIT, Aptech) that have grown nation-wide and are flourishing with the help of
franchise arrangements.
Features of Franchise
(a) It is based on an agreement between the franchiser and the franchisee,
wherein they enter into a commercial relationship, generally for a
specific period of time.
(b) Under this agreement, the franchisee gets the right to use a particular
brand name, process or product owned by the franchiser, for the
purpose of retailing, in return of a fee.
(c) The fee is generally paid partly as an initial payment at the time of
entering into the contract and partly on regular payments monthly,
quarterly or annually. This regular payment may be paid by the
franchisee as a percentage of his sales volume or profit or a fixed
amount agreed upon in the contract.
(d) The franchisee may also be required to invest money in arranging a
large space in prime locations, in furnishing it and in procuring stock
for the outlet. In most cases all franchise outlets are required to
Organization maintain uniform pre-determined decoration, method of serving
122 of Trade customers, type of products etc.
(e) Franchise as a system of retailing is suitable for brands that have Business Organization
earned a name for themselves in the market. Only then can a franchisee System
benefit from using that name over a new brand.
(f) The franchiser is very cautious while choosing franchisees for his NOTES
goods or services. Only competent persons with requisite
entrepreneurial skills and commitment to quality/customer-
satisfaction, in addition to a sound financial position will be able to
run this business successfully. A franchisee who fails may bring
disrepute to the brand and also hamper the franchiser’s future business
prospects.
Merits of Franchise
(a) The Franchiser can expand his business without investing additional
capital. The franchisee invests this money and also pays fee to
franchiser in return of the right to use the brand name, products etc.
which is called as royalty.
(b) The Franchisee can capitalize on the goodwill of the existing brand of
the franchiser.
(c) The customer gets assurance of standardized goods and services both
in terms of quality and price. With the network of franchisees, the
product and service becomes widely available to consumers.
Limitations of Franchise
(a) The Franchiser does not have close control over the activities of the
franchisee. The franchisee’s poor performance in dealing with
customers may bring a bad name to the brand due to which the
franchiser’s business may be adversely affected.
(b) If the franchisee is not able to make adequate profit out of the franchise
business, the franchise fee may become a burden for him.
(c) If consumers have complaints regarding the product/service, he may
face a problem about whom to go to, the franchiser or the franchisee.
Each may blame the other for the problem and not take on the
responsibility of redressal of the grievance.
6.8 BUSINESS PROCESS OUTSOURCING.
The world is changing. Although the Internet is making it a smaller, more

well-connected place, there are still many forces that can shape the success of
your business. Coming up with novel, innovative process management
techniques can take your business from good to great. One service, business
process outsourcing (BPO) can enable just such a change if enacted in a careful, Organization
of Trade 123
Business Organization contentious way and with a quality vendor. Business process outsourcing (BPO)
System is the contracting of a specific business task, such as payroll, human resources
(HR) or accounting, to a third-party service provider. Usually, BPO is
NOTES implemented as a cost-saving measure for tasks that a company requires but does
not depend upon to maintain their position in the marketplace. Business process
outsourcing (BPO) is the contracting of non-primary business activities and
functions to a third-party provider. BPO services include payroll, human
resources (HR), accounting and customer/call center relations.
BPO is also known as Information Technology Enabled Services (ITES).
Often the business processes are information technology-based, and are referred
to as ITES-BPO, where ITES stands for Information Technology Enabled
Service.
Knowledge process outsourcing (KPO) and legal process outsourcing
(LPO) are some of the sub-segments of business process outsourcing industry.
Pros and cons of BPO

The major advantage of a BPO is money saved and more time to focus on
the core business.
Other benefits includ
• Speed and efficiencies of outsourced business processes are enhanced
• Organizations using BPO get access to the latest technology
• Freedom and flexibility to choose the most relevant services for the
company's operations
• Quick and accurate reporting
• Save on resources related to staffing and training
Disadvantages of business processes outsourcing include

• Data privacy breaches
• Underestimating running costs of services
• Overdependence on service providers
• Communication issues that delay project completion
Conclusion
There are both pros and cons to creating an outsourcing process for your
business. The obvious pros are that it saves your time and effort, which saves
your money. By outsourcing work, it allows you to concentrate on important
business aspects and be more productive and grow your business faster. One of
the biggest cons is that you leave yourself exposed if you don't do the work
yourself. There are chances that the person you're outsourcing to decides to move
away, or take your ideas and give them to other businesses you're competing
Organization against.
124 of Trade
There are a lot of benefits to business process outsourcing, just make sure Business Organization
you keep an eye on how it does not come back to hurt you. System
NOTES
6.9 MULTINATIONALS – CONCEPT AND ROLE OF MNC’s
A multinational company is one which is incorporated in one country (called

the home country); but whose operations extend beyond the home country and
which carries on business in other countries (called the host countries) in addition
to the home country. A multinational corporation can also be referred to as a
multinational enterprise (MNE), a transnational enterprise (TNE), a transnational
corporation (TNC). The headquarters of a multinational company are located in
the home country.
Neil H. Jacoby defines a multinational company as follows

“A multinational corporation owns and manages business in two or more
countries.”
Some popular examples of multinationals are given below
Features of Multinational Corporations (MNCs)

(i) Huge Assets and Turnover
The operations of MNC are on a global basis, MNCs have huge
physical and financial assets. This results in huge turnover (sales)
of MNCs.
(ii) International Operations through a Network of Branches

MNCs have production and marketing operations in several countries,
they operate through a network of branches, subsidiaries and affiliates
in host countries.
(iii) Unity of Control

MNCs control business activities of their branches in foreign countries
through head office located in the home country. Managements of Organization
of Trade 125
Business Organization branches operate within the policy framework of the parent
System corporation.
(iv) Mighty Economic Power

NOTES
MNCs are powerful economic entities. They keep on adding to their
economic power through constant mergers and acquisitions of
companies.
(v) Advanced and Sophisticated Technology

A MNC generally, employs advanced and sophisticated technology. It
employs capital intensive technology in manufacturing and marketing.
(vi) Professional Management

A MNC employs professionally trained managers to handle huge
funds, advanced technology and international business operations.
(vii) Aggressive Advertising and Marketing

MNCs spend huge sums of money on advertising and marketing to
secure international business. Because of this strategy, they are able
to sell whatever products/services, they produce/generate.
(viii) Better Quality of Products

A MNC competes on international level. Thus special attention to the
quality of its products is given
Advantages of MNCs from the Viewpoint of Host Country

(i) Employment Generation
MNCs create large scale employment in the host countries.
(ii) Automatic Inflow of Foreign Capital

The entry of MNCs automatically generates the inflow of foreign
capital. Thus MNCs bring in much needed capital for the rapid
development of developing countries.
(iii) Proper Use of Idle Resources

MNCs properly utilize idle physical and human resources of the host
country, by using their advanced technical knowledge. This results in
an increase in the National Income of the host country.
(iv) Improvement in Balance of Payment

MNCs help the host countries to increase their exports, thereby
improving upon its Balance of Payment position.
Organization
126 of Trade
(vi) Technical Development Business Organization
System
MNCs are a vehicle for transference of technical development from
one country to another.
NOTES
(vii) Managerial Development
MNCs professionalize management along latest lines of management
theory and practice. This leads to managerial development in host
countries.
(viii) End of Local Monopolies

The entry of MNCs lead to competition in the host countries, this
compels domestic companies to improve their efficiency and quality.
In India, many Indian companies acquired ISO-9000 quality
certificates, due to fear of competition posed by MNCs.
(ix) Improvement in Standard of Living
MNCs help to improve the standard of living of people of host
countries, by providing good quality products and services.
(x) Promotion of international brotherhood and culture

Through their international dealings, MNCs promote international
brotherhood and culture. This paves way for world peace and
prosperity.
Limitations of MNCs from the Viewpoint of Host Country

(i) Danger for Domestic Industries
Domestic industries which are still in the process of development
cannot face challenges posed by MNCs, which results in their winding
up. Thus MNCs give a setback to the economic growth of host
countries.
(ii) Repatriation of Profits: (sending profits to their country)

Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country. A large amount of foreign
exchange goes out of the host country.
(iii) No Benefit to Poor People

MNCs generally produce luxury products and not essential items
.Therefore; poor people of host countries do not get any benefit, out
of MNCs.
(iv) Danger to Independence

Initially MNCs help the Government of the host country, in a number Organization
of Trade 127
Business Organization of ways and later it starts interfering in the political affairs of that
System country. Thus the independence of the host country is threatened in
the long-run.
NOTES
(v) Disregard of the National Interests of the Host Country
MNCs invest in profitable sectors; and are not bothered about the
national goals and priorities of the host country. They never care to
solve chronic problems of the host country like unemployment and
poverty.
(vi) Misuse of Mighty Status

MNCs are powerful economic entities. They can afford to bear current
losses, in the hope of earning huge profits in future. Thus they try to
wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources

MNCs cause rapid depletion of some of the non-renewable natural
resources, as they tend to use the natural resources of the host country
carelessly. Thereby, causing a permanent damage to the economic
development of the host country.
(viii) Selfish Promotion of Alien Culture

MNCs tend to promote alien culture in host country to sell their
products. They make people forget about their own cultural heritage.
This promotion of foreign culture by MNCs is injurious to the health
of local people.
(ix) Exploitation of People, in a Systematic Manner

MNCs join hands with big business houses of host country and emerge
as powerful monopolies. This leads to concentration of economic
power only in a few hands.
Advantages from the Viewpoint of the Home Country

(i) MNCs usually get raw-materials and labor supplies from host
countries at lower prices; specially when host countries are backward
or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries
and increase their profits. They usually have good earnings by way of
dividends earned from operations in host countries.
(iii) Through operating in many countries and providing quality services,
MNCs add to their international goodwill on which they can capitalize,
in the long-run.
Organization
128 of Trade
Limitations from the Viewpoint of the Home Country Business Organization
System
(i) There may be loss of employment in the home country, due to
spreading manufacturing and marketing operations in other countries.
NOTES
(ii) MNCs face severe problems of managing cultural diversity. This might
distract managements’ attention from main business issues, causing
loss to the home country.
(iii) MNCs may face severe competition from bigger MNCs in
international markets. Their attention and finances might be more
devoted to wasteful counter and competitive advertising; resulting in
higher marketing costs and lesser profits for the home country
6.10 SUMMARY
In this unit, the students have learned about the importance and type of
channels that a business can employ for distribution of its product and services.
Internal and external trade along with various services which help in promotion
of businesses. Students have also gained understanding about franchising as a
form of business organization, importance of mergers and acquisitions, MNCs
and concept of a BPO.
Q1) Explain the importance of channels of distribution

Q2) What do you mean by external trade? Explain types of external trade.
Q3) Elaborate on ‘importance of mergers and acquisitions’ with reference
to its advantages.
Q4) Explain ‘franchising’ as a form of business organization
Q5) Discuss the advantages and disadvantages of an MNC.
6.12 TASK
Visit a franchise of any reputed brand/ product and study its operation and
term and condition of the franchise form of business.
*****
Organization
of Trade 129

BBA 102 BCA 104 Business Organization System - 1

Uploaded by

Copyright:

Available Formats

BBA 102 BCA 104 Business Organization System - 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

BBA 102 BCA 104 Business Organization System - 1

Uploaded by

Copyright:

Available Formats

CONTENTS

Unit Contents Page No.

Forms of Business Ownership

UNIT - 1 NATURE OF BUSINESS

1.1 UNIT OBJECTIVES

1.2 CONCEPT OF BUSINESS

Business means a state of being busy; business includes economic activities

NOTES 1.2.1 Meaning and Definition

Generally, there are two concepts of business

(b) External Trade

b) Deals in Goods and Services

c) Production and exchange

g) Element of Risk and Uncertainty

1.4 BUSINESS AS AN ECONOMIC ACTIVITY.

Every human being performs different types of activities to gain his/her

1.5 OBJECTIVES OF BUSINESS

5) Research and Development

3) Increasing Return on Investment

2) Protection of national interest

Sectors of Economy: Primary, Secondary, Tertiary,

1.7 REQUISITES FOR SUCCESS IN MODERN BUSINESS.

Modern business has become complex and complicated. The improvements

4. Location and layout

9. Effective Distribution System

10. Maintenance of Better Employee relationship

11. Marketing System

12. Employee Morale

13. Motivated and skilled Employees

1.8 TRAITS OF A SUCCESSFUL BUSINESSMAN

Presently the development of science and technology in every walk of life

UNIT - 2 EvOLUTION OF BUSINESS

Evolution is a slow process of change from one form or level to a better or

2.1 UNIT OBJECTIVES

After going through this unit you will be able to:

2.2 BEGINNING AND DEVELOPMENT OF COMMERCE

(a) Handicraft Stage

(b) Guild System

(c) The Domestic System

(d) The Industrial Revolution

(e) Present Stage

(2) Evolution of Commerce

d) Barter Economy Stage

f) Town Economy Stage

h) World Economy: (International Trade Stage)

Types of commerce today

2.3. INDUSTRIAL REVOLUTION

The era known as the Industrial Revolution was a period in which

2.4 BEGINNING AND GROWTH OF INDIAN BUSINESS

Evolution of business means its origin, growth, and continuous development

I. Ancient Period (up to 750AD)

II. Medieval Period (750 to 1757AD)

III. Modern Period

Modern Industries in India

Knowledge Based Economy

India’s Contributions to the World of Business

ii. Joint Hindu Family Business System

iii. Division of Labour

2.5 INDUSTRIALIZATION IN INDIA.

The economic development of a country is measured by the development