Marwadi University

Faculty of Liberal study

BBA FM

SUBJECT CODE: 04BF0101

SUBJECT: Business and Management Functions

Unit -1 Introduction
Business Organizations & Structures

QUE: Define Business and Features of Business.

Meaning of Business
 According to L.H, Haney, “Business may be defined as human activities directed
towards providing or acquiring wealth through buying and selling of goods”. This
definition includes activities relating to the production of goods only and omitted
‘services’. But business includes rendering of services also like transportation,
insurance etc.
 According to M.C Naughton, ‘The term business means the exchange of goods, money
or services for mutual benefits ’. This definition gives a narrow scope of business. It
includes exchange of goods and services and not the production aspect of business.

Features of Business

a)There must be an Entrepreneur : To establish a business there must be someone to take

the responsibilities. The person who takes responsibilities to establish a business is known as
entrepreneur. Here, we may call him as ‘Businessman’. The entrepreneur visualizes a business,
combines various factors of production and puts them into an operating state.

b)Business activities are economic activities : Business includes only economic activities.
All those activities relating to the production and distribution of goods and services are
economic activities. Business is carried on to earn a profit. Any activities undertaken without
economic consideration will not form a part of business. So, business covers only economic
activities.

c)There are exchanges of goods and services : Business involves exchange of goods and
services. The goods to be exchanged may be produced either by the businessman himself or by
any other. But the services to be exchanged are generally produced by the businessman
himself. Exchange of goods and services is undertaken with profit motive. Production or
purchasing of goods and services for personal consumption do not constitute business.

d)Earning of Profit is the primary objective : The object of starting a business is to earn
profit. The profit motive is the important element of business. Any activity undertaken without
profit motive is not business. A business tries to earn profits out of the business activities.
Profit is necessary for the continuity of the business.

e)There are Risks and Uncertainties in business : The business involves larger element of
risk and uncertainty. In fact, a businessman tries to foresee the future uncertainty and plan his
business activities accordingly. The factors on which business depends are never certain, so
the business opportunities will also be uncertain

f)Continuity of Transactions : In business, only those transactions are included which have
regularity and continuity. An isolated transaction will not be called business, even if the person
earns profit from that deal. For example, a person builds a house for himself, but later on he
sells it for profit, we will not call it business.

g) Creation of Utility : The goods are provided to the consumer as per their likings and
requirements. Business creates various types of utilities so that consumer may use them. The
utility may be form utility, place, utility, time utility, etc. When raw materials are converted
into finished goods, it creates form utility. The goods are transported from the places of
production to the ultimate consumers; it creates place utility. In the present industrial world,
production is not only for the present but it is undertaken for the future also.
QUE: Classification of Industries

Industry is concerned with the making or manufacturing of goods. It is that constitute of

production which is involved in changing the form of a good at any stage from raw material to
the finished product, e.g. – weaving woollen yarn into cloth. Thus industry imparts ‘form
utility’ to goods. The goods produced may either be used by other enterprises as raw material
for further production or as final products by consumers. When goods are used by other
enterprises for further production, they are known as “producer’s goods”.

1. Primary and Genetic Industry -

 Genetic industry is related to the re-producing and multiplying of concern species
of animals and plant with the object of earning profits from their sale.
 Nurseries, cattle breeding, fish hatcheries, poultry farms are all covered under
genetic industry. The plants are grown and birds and animals are reared and then
sold on profit.
 No doubt, nature, climate and environment play an important part in these
industries but human skill is also important.
2. Extractive Industry –
 The extractive industry is engaged in raising some form of wealth from the soil,
climate, air, water or from beneath the surface of the earth. These industries are
classified into two categories.
 In the first category, workers merely collect goods already existing. Mining, fishing
and hunting is covered in this industry.
 In this category, the goods are to be produced by the application of the human skill i.e.
agriculture and forestry.
 Extractive industries supply basic raw materials that are mostly the products of the soil.
Products of these industries are usually transformed into many useful products by
manufacturing industries.

3. Construction Industries-
 This industry is engaged in the creation of infra-structure for the smooth development
of the economy.
 It is concerned with the construction, erection or fabrication of products. These
industries are engaged in the construction of buildings, roads, dams, bridges and
canals. These industries use the products of other industries such as cement, iron,
bricks, and wood, etc.
 4. Manufacturing Industry-
 This industry is engaged in the conversion of raw materials into semi-finished or
finished goods.
 This industry creates form utility in goods by making them suitable for human use.
 Most of the goods which are used by consumers are produced by manufacturing
industries.
 These industries supply machines, tools and other equipment to other industries as raw
materials by manufacturing industry may be classified as follows-

(a) Analytical Industry-

In this industry, one product is analysed and many products are received as final products. In
the processing of crude oil we will get kerosene, petrol, gas, and diesel, etc.

(b) Processing Industry- In this industry a product passes through various processes to
become a final product. The finished product of one process becomes the raw material of the
receiving process and the final process produces

the finished goods.

(c) Synthetic industry- In this industry many raw materials are brought together in
manufacturing process to make a final product. In manufacturing cement, rocks, gypsum, coal
etc. are required. Soap making, plastics paints are other examples of synthetic industry
 COMMERCE AND ITS COMPONENTS

 Commerce is concerned with the exchange of goods. It includes all those activities
which are related to the transfer of goods from the place of production to the ultimate
consumers.
 Generally, commerce and trade are taken as synonymous words. Whereas trade
involves buying and selling of goods. Commerce has a wide meaning. Commerce
includes trade and aids to trade. Besides trade, it includes all those activities which help
the expansion of trade.
 Even Thomas says, “Commercial occupations deal with the buying and selling of
goods, the exchange of commodities and the distribution of finished products”.

Components of Commerce

Commerce can be classified into two categories

1. Trade and
2. Aids to trade

(a) Trade. Trade is the process of taking goods from the source of production or place of
production to the consumers. The producers cannot come into direct with consumers, so there
should be some channel which will facilitate the transmission of goods from the producers to
the consumers. The channel helps the exchange of goods is called trade.

Trade may be classified as follows:

1. Internal Trade
2. External Trade
3. Wholesale and Retail Trade

(a) Internal Trade or Home Trade : The purchase and sale of goods inside the country is
called internal trade. Goods can be taken to any place but within the boundaries of the country.
Internal trade may be divided as such:

(i) Local Trade : When the demand for products is limited only to a particular place, it is
called local trade. Goods are produced according to the local needs of the consumers. The
producers and the consumer belong to the same place. The goods traded in local markets are
generally goods of daily use and perishable goods. These goods are vegetables, milk, bread
etc.

(ii) Provincial or State Trade : These goods are of a durable nature and are sent throughout
the state or province. The trade is limited to the boundaries of the state. Sometimes
government puts some restrictions on the sale of goods outside of the state. Sometimes,
goods are produced according to the needs, requirements or custom, of a particular
region of state, and then these goods are not required outside the boundaries of the state.

(iii) Inter-State Trade : The trade conducted throughout the country but within the national
boundaries is called inter-state trade. The goods traded are of durable nature and can be
stocked for a longer period. The production of these goods is on a large-scale basis and they
are sent to all parts of the country. Various kinds of textiles, kerosene, petrol, iron, steel etc.
are traded on the inter-state basis.

(b) External Trade or Foreign Trade :When trade takes place between two countries, it is
called foreign trade. Two countries are involved in foreign trade. The hindrances of place,
time, risk, exchange are overcome with the help of various agencies. External trade generally
requires permission from the respective agencies. External trade may be import trade or export
trade. When goods are purchased from, outside countries, it is called import trade.

(c) Wholesale and Retail Trade : In wholesale trade, goods are purchased in large quantities
and are sold to retailers. A wholesaler is link between the producers and the retailers. This
helps the producers in making bulk production and selling in large quantities to wholesalers. A
wholesaler does not come into direct contact with the consumer.
Retail trade involves selling goods to the final consumers. The goods are sold in small
quantities to the consumers.

Hindrances and Aids to Trade.

(a) Hindrance of place (Transport): The goods produced have to be taken to the place of
consumption. With the help of transport facilities, we can create ‘place utility’ in goods. The
place utility helps the producers to increase the production and earn a remunerative price
(b) Hindrance of Persons (Distribution): The producers of goods may not be able to come
into direct contact with the consumers. In present day world, the consumers are in millions and
it is not possible for the producers to know the consumers. A chain of middlemen acts between
the producers and consumers. The middlemen purchase goods from the producers and take
them to the consumers. Both sides are relieved of their worries.
(c) Hindrance of Finance (Banking) :There is always a time lag between the production and
sale of goods. The traders purchase goods from the producers and then sell them to the
consumers. It takes time to collect money after sale. There is a need to finance trade activities.

(d) Hindrance of Time (Warehousing): Goods are purchased in anticipation of demand.

They may also be produced at a time when they are not needed. So, there is a need to store
goods up to the time of sale. The hindrance of time is to overcome with the help of
warehouses. The foreign trade needs the help of warehouses even because there is more time
gap between production and consumption.
(e) Hindrance of knowledge (Advertisement and Salesmanship) : The consumer may not
be aware of the availability of various goods in the market. The absence of information about
goods is a great hindrance in the way of consumers buying them.
(f) Hindrance of Risk (Insurance):There is risk involved in transporting the goods from one
place to another. There can be a risk due to fire or theft. The fear of loss of goods due to any
cause acts as an obstacle in the development of trade. The insurance companies provide a
coverage for all types losses of goods
(g) Hindrance of Information (Communication): The buyers and sellers at wholesale level
and retail level need the services of various agencies, which communicate their messages
among themselves.
 Factors considered for starting a business

Before starting business, following factors must be taken into consideration:

o Availability of raw material: The first and the foremost requirement for starting the business
is the availability of the raw material to be used in specific product being
produced/manufactured by the business. If it is a trading business the articles in which the
business is dealing should be easily available.

o Transportation facilities: The business must satisfy itself about transportation facilities
available for acquiring goods and sending goods. In the absence of proper transportation
facilities the business cannot grow properly. Transport facilities include road, rail, water and
air transport.

o Communication facilities: In case of business there should be constant touch and proper link
between the parties concerned. It means that Postal and Telephone Services must be available
at the place of business. Communication is necessary for placing orders, discussing business
deals, making complaints, payments and suggestions etc.
4. Financing facilities: Finance is said to be the life blood of business. Finance is required for
the commencement, running and growth of business. It means that banking and finance
facilities should be available for smooth running of business.

5. Insurance facilities: Future is always uncertain, so there is always risk of accident, damage,
fire and even death of the businessman itself. Losses caused by these mishappenings swallow
the business itself, so there must be proper facilities of life, fire and accident insurance etc.

6. Warehousing facilities: There is a time gap between manufacture and sale of goods in case of
manufacturing enterprises. There is also time gap between purchase and sale of goods in case
of trading concerns. There must be sufficient warehousing facilities for sale and intact storing
of goods.

7. Marketing of the product: The ultimate end of all the business activities is the sale of
product. There will be no profit if there is no sale. No business can survive without sale.
Therefore, the business must take into consideration the marketing prospects of the product.

In addition to the above factors, certain individual factors such as personal capabilities,
physical construction, situational requirements, financial health, tradition, culture etc. play an
important role for starting business.
 Unit 2: BUSINESS ORGANIZATION

FORMS OF BUSINESS
ORGANISATION

INTRODUCTION

After identifying the business in any field e.g., Insurance, it is necessary then to have a legal
entity to be known in the society. The legal entity can be in any form of a business
organization. The various forms of organization are as follows:
1) Sole proprietorship
2) Partnership
3) Co-operative Society
4) Joint stock company (Private and Public)
These are explained in brief as follows:-
3.1 OBJECTIVES

At the end of this lesson you will be able to know

z Various forms of organization
z Its formation & features
z Merits & Demerits
3.2 SOLE PROPRIETORSHIP
3.2.1 Meaning:

The sole proprietorship is a form of business that is owned, managed and controlled by an
individual. He has to arrange capital for the business and he alone is responsible for its
management. He is therefore, entitled to the profits and has
o bear the loss of business, however, he can take the help of his family members and also
make use of the services of others such as a manager and other employees.

This type of business organisation is also called single ownership or single proprietorship. If
the business primarily consists of trade, the organization is a sole trading organization. Small
factories and shops are often found to be sole proprietorship organisations.

It is the simplest and most easily formed business organization. This is because not much legal
formality is required to establish it. For instance to start a factory the permission of the local
authorities is sufficient. Similarly to start a restaurant, it is only necessary to get the permission
of local health authorities. Or again, to run a grocery store, the proprietor has only to follow
the rules laid down by local administration.
3.3.2 Features of Sole Proprietorship:

The important features of a sole-proprietary organization include the following:

(i) Individual Initiative: One person is the owner in a sole-proprietary form of

organisation.
(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in this form organisation.
If there is a loss he alone has to bear it. Thus the risks of business are borne by the
proprietor himself.
(iii) Management and control: Management and control of this type of organisation is the
responsibility of the sole proprietor. He may, however, employ a manager or other
people for the purpose.
(iv) Minimum government regulations: The government does not interfere with the
working of the sole proprietorship organisation. However, they have to comply with the
general laws and rules laid down by government.
(v) Unlimited liability: The sole proprietor has to bear the losses and is responsible for the
liabilities of the business. If the business assets are not sufficient to meet the liabilities,
he may also have to sell his personal property for that purpose.

(vi) Secrecy: All important decision taken by the owner himself. He keeps all the business
secrets only to himself.

3.3.3 Merits Of Sole Proprietorship:

A sole proprietary organisation has the following advantages:

(i) Easy formation: A sole proprietorship business is easy to form where no legal formality
involved in setting up this type of organization. It is not governed by any specific law. It
is simply required that the business activity should be lawful and should comply with the
rules and regulations laid down by local authorities.
(ii) Better Control: In sole proprietary organisation, all the decisions relating to business
operations are taken by one person, which makes functioning of business simple and
easy. The sole proprietor can also bring about changes in the size and nature of activity.
This gives better control to business.

(iii) Sole beneficiary of profits: The sole proprietor is the only person to whom the profits
belong. There is a direct relation between effort and reward. This motivates him to work
hard and bear the risks of business.

(iv) Benefits of small-scale operations: The sole proprietorship is generally organized for
small-scale business. This helps the proprietor’s family members to be employed in
business. At the same time such a business is also entitled to certain concessions from the
government. For example, small industrial organisations can get electricity and water
supply at concessional rates on a priority basis.

(v) Inexpensive Management: The sole proprietor does not appoint any specialists for
various functions. He personally supervises various activities and can avoid wastage in
the business.
3.3.4 Limitations Of Sole Proprietorship:

A sole proprietor generally suffers from the following limitations:

(i) Limitation of management skills: A sole proprietor may not be able to manage the
business efficiently as he is not likely to have necessary skills regarding all aspects of the
business. This poses difficulties in the growth of business also.

(ii) Limitation of Resources: The sole proprietor of a business is generally at a

disadvantage in raising sufficient capital. His own capital may be limited and his
personal assets may also be insufficient for raising loans against their security. This
reduces the scope of business growth.

(iii) Unlimited liability: The sole proprietor is personally liable for all business obligations.
For payment of business debts, his personal property can also be used if the business
assets are insufficient.

(iv) Lack of continuity: A sole proprietary organisation suffers from lack of continuity. If
the proprietor is ill this may cause temporary closure of business. And if he dies the
business may be permanently closed.

From the above account of the merits and limitations it becomes clear that it is only personal
services like repair work, tailoring etc. small factories, retail shops and professional activities
which can be set up as sole proprietary organisations. In India, this form of organisation is
quite popular and accounts for the largest number of business units.
3.3 PARTNERSHIP
Meaning

Partnership is an association of persons who agree to combine their financial resources and
managerial abilities to run a business and share profits in an agreed ratio. Since the resources
of a sole proprietor to finance, and his capacity to manage a growing business are limited, he
feels the need for a partnership firm. Partnership business, therefore, usually grows out of the
need for expansion of business with more capital, better supervision and control, division of
work and spreading of risks.

The Indian Partnership Act defines partnership as “Partnership” is the relation between
persons who have agreed to share the profits of a business carried on by all or any one of them
acting for all. The persons who have agreed to join in partnership are individually called
“Partners” and collectively a ‘firm’. A partnership firm can be formed with a minimum of two
partners and it can have a maximum of twenty partners.

3.3.1 Features of Partnership:

The features of partnership are as follows:

(i) Existence of an agreement: Partnership is formed on the basis of an agreement between

two or more persons to carry on business. It does not arise out of the operation of law as
in the case of joint Hindu family business. The terms and conditions of partnership are
laid down in a document known as Partnership Deed.
(ii) Engagement in business: A partnership can be formed only on the basis of a business
activity. Its business may include any trade, industry or profession. Thus, a partnership
can engage in any occupation - production and/or distribution of goods and services with
a view to earning profits.
(iii) Sharing of profits and losses: In a partnership firm, partners are entitled to share in the
profits and are also to bear the losses, if any.
(iv) Agency relationship: The partnership business may be carried on by all or any of the
partners acting for all. Thus, each partner is a principal and so can act in his own right.
 At the same time he can act on behalf of other partners as their agent. Thus, every partner
can bind the firm by his acts.
(v) Unlimited Liability: The liability of partners is unlimited as in the case of sole
proprietorship. In case some obligation arises then not only the partnership assets but
also the private property of the partners can be taken for the payment of liabilities of the
firm.
(vi) Common Management: Every partner has a right to take part in the running of the
business. It is not necessary for all partners to participate in the day-to-day activities of
the business but they are entitled to participate. Even if partnership business is run by
some partners, the consent of all other partners is necessary for taking important
decisions.

(vii) Restriction on transferability of share: No partner can transfer his share in partnership
to any other person. He may, however, do so with the consent of all other partners.

(viii) Registration: To form a partnership firm, it is not compulsory to register it. However, if
the partners so decide, it may be registered with the Registrar of Firms. There are
advantages of registration, which are discussed later.
(ix) Duration: The partnership firm continues at the pleasure of the partners. Legally a
partnership comes to an end if any partner dies, retires or becomes insolvent. However,
if the remaining partners agree to work together under the original firm’s name, the firm
will not be dissolved and will continue its business after settling the claim of the
outgoing partner.
3.3.2 Formation and Registration:
Partnership Deed:

Since partnership rests on an agreement among persons, its formation does not involve any
special legal problems. Generally, the partnership agreement is reduced to writing and a
Partnership Deed is prepared. Partnership Deed lays down the terms and conditions of
partnership and the rights, duties and obligations of partners. The following points are
generally covered in the Deed:
(i) The nature of business.
(ii) Name of the firm and the place where its business will be carried on.
(iii) Amount of capital to be contributed by each partner.
(iv) Duties, powers and obligations of all the partners.
(v) Method of preparing accounts and arrangement for audit.

(vi) Whether loans will be accepted from a partner over and above the capital also, if so, at
what rate of interest.
(vii) The amount to be allowed as private drawings by each partner and the interest to be
charged thereon.
(viii) The ratio in which profits are to be shared.
(ix) Whether a partner can be expelled and, if so, the procedure for the same.
(x) Method for the settlement of disputes.

(xi) Circumstances under which the partnership will stand dissolved, and in case of
dissolution, under whose custody the books of accounts will remain.

The Deed has to be stamped and each partner should have a copy of it.
3.3.3 Registration of firm:

Registration of a partnership firm is not compulsory under Indian Partnership Act. In England
registration is compulsory. In India, certain privileges which are allowed to those firms, which
are registered. But an unregistered firm suffers from certain disabilities. These disabilities
make it virtually compulsory for a firm to get registered. A partnership firm may be registered
at any time. That is, at the time of formation or at any time during its existence. A partnership
firm desiring registration applies lo the Registrar of Firms in prescribed form along with the
registration fee. The application should state the following:
(i) Name of the firm.
(ii) The principal place of business of the firm.
(iii) The name of any other place where the firm is to carry on business:
(iv) Date of admission of the partners in the firm.
(v) Names and permanent addresses of the partners.
(vi) Duration of the firm.

The application shall be signed and verified by each partner. Changes in the above particulars
have to be communicated to the Registrar. The Certificate of registration is reliable evidence
and a conclusive proof of the existence of the firm.
3.3.5 Types of Partnership

According to the nature of agreement among partners, there can be three types of partnership
as follows:

(i) Partnership at-will: Such a partnership exists on the will of the partners. That is, it can
be brought to an end whenever any partner gives notice of his intention to do so.

(ii) Particular partnership: A particular partnership is formed for undertaking a particular

venture. It comes to an end automatically with completion of the venture.

(iii) Partnership for a fixed duration: Such partnership is for a fixed period of time say 2
years, 5 years or any other duration.
3.3.6 Types of Partners

The various types of partner found in partnership firms are as follows:

(i) Active Partners: Partners who take active part in the conduct of day-to-day business of
the firm are called active partners. These partners carry on business on behalf of the
other partners.

(ii) Sleeping or dormant partners: Sleeping or dormant partners are those who do not take
active part in the management of the business. Such partners only contribute capital in
the firm and are bound by the activities of other partners. However, they share in the
profits and losses of the business.

(iii) Others: Active and sleeping partners are, as a matter of fact, the full-fledged partners
i.e. they share in profits and losses of the business and are liable for its dues. However,
there are other types of partners also who may be associated with partnership directly or
indirectly. They are not full-fledged partners, such partners may include the following:

(a) Nominal Partners: Nominal partners are those who do not have interest in the
business but lend their name to the firm. They do not make any capital
contribution, and are not entitled to take part in management, but are liable, like
other partners, to
 third parties. Such partners generally have a pecuniary interest (like a share in the
profits) in lending their name to a firm. However in certain cases they may not have
any pecuniary interest in doing so. For example, a reputed industrialist may, without
any profit motive lend his name to a firm run by his family members.
(b) Partners by holding out: If a person by his words or conduct holds out to another
that he is a partner, he will be prevented from denying that he is not a partner. The
person who thus becomes liable to third parties to pay the debts of the firm is known
as a partner by holding out.
3.3.7 Minor admitted into the benefits of partnership

A minor is a person who has not attained the age of 18 years. Since a minor is not capable of
entering into a valid agreement, he cannot become partner of a firm. He may, however, be
admitted to the benefits of an existing partnership.
It is clear from the preceding discussion that partners can be of three categories:
(i) Those who share in the profits and losses of the business and assume liability of the
business debts (like active partners, dormant partners and nominal partners).
(ii) Those who share in profits only (like minor partners) and
(iii) Those who assume liability without sharing in the profits of the business (like partners by
holding out).
3.4.8 Merits of Partnership
A partnership form of organisation offers the following advantages:
(i) Ease in formation: A partnership is very easy to form. All that is required is an agreement
among the partners. Even the expenses to be incurred for registration are-not much.
(ii) Pooling of financial resources: A partnership commands more financial resources
compared to sole proprietorship. This helps in expanding business and earning more
profits. As and when a firm requires more money, more partners can be admitted.
(iii) Pooling of managerial stalls: A partnership facilitates pooling of managerial skills of all
its partners. This leads to greater efficiency in business operations. For instance, in a big
partnership firm, one partner can handle production function, another partner can look
after all marketing activity, still another can attend to legal and personnel problems, and
so on.

(iv) Balanced business decisions: In a partnership firm, decisions are taken unanimously
after considering all the major aspects of a problem. This ensures not only balanced
business decisions but also removes difficulties in the smooth implementation of those
decisions.
(v) Sharing of risks: Unlike sole proprietary organisation, the risks of partnership business
are shared by partners on a predetermined basis. This encourages partners to undertake
risky but profitable business activities.
3.3.9 Limitations of Partnership

A partnership form of organisation suffers from the following major limitations:

(i) Uncertainty of existence: The existence of a partnership firm is very uncertain. The
retirement, death, bankruptcy or lunacy of any partner can put an end to the partnership.
Further, the partnership business can come to a close if any partner demands it.
(ii) Risks of implied authority: It is true that like the sole proprietor each partner has
unlimited liability. But his liability may arise not only from his own acts but also from
the acts and mistakes of co-partners over whom he has no control. This discourages
many persons with money and ability, to join a partnership firm as partner.
(iii) Risks of disharmony: In partnership, since decisions are taken unanimously, it is
essential that all partners reconcile their views for the common good of the organisation.
But there may arise situations when some partners may adopt rigid attitudes and make it
impossible to arrive at a commonly agreed decision. Lack of harmony may paralyse the
business and cause conflict and mutual bickering.

(iv) Difficulty in withdrawal from the firm: Investment in a partnership can be easily made
but cannot be easily
 withdrawn. This is so because the withdrawal of a partner’s share requires the consent of
all other partners.

(v) Lack of institutional confidence: A partnership business does not enjoy much
confidence of banks and financial institutions. It is because the nature of its activities is
not disclosed at public and the agreement among partners is not regulated by any law.
As a result large financial resources cannot be raised by partnership and growth of
business cannot be ensured.

(vi) Difficulties of expansion: It is difficult for a partnership firm to undertake

modernization of expansion of its operations. This is because of its inability to raise
adequate funds for the purpose. Limited membership (restricted to
20) and their limited personal resources do not permit large amounts of capital to
be raised by the partners. Therefore, large-scale business cannot generally be organised
by partnerships.

It is quite obvious from the discussions that the partnership form of organisation is excellent
when the size of business is medium, i.e. neither too small not too large, and when the
partners can work in full co-operation with one another.
3.4 CO-OPERATIVE ORGANISATION
3.4.1 Meaning:

A co-operative form of business organization is different from other forms of organization. It

is a voluntary association of persons for mutual benefit and its aims are accomplished through
self help and collective effort. The main principle underlying a cooperative organization is
mutual help, i.e., each for one and all for each. A minimum of 10 persons are required to form
a co-operative society. To be called a co-operative society
it must be registered with the Registrar of Co-operative Societies under the Co-operative
Societies Act. The capital of a co-operative Society is raised from its members by way of
share capital. It can also obtain additional resources by way of loans from the State and
Central Co-operative Banks.

A Co-operative society has much in common with partnership, yet there are differences
between the two types of organisation. In partnership, mutual benefit is restricted to partners
only, but in a co-operative society it extends to its members as also the public. For example in
a consumer co-operative store or a co-operative credit society, the benefits are available to the
members as well as the general public. Besides, partnership requires the existence of some
business activity whereas a co-operative may be formed whenever individuals have common
needs, which are difficult to fulfill single-handed. Also, registration is optional in the case of
partnership but it is compulsory for a co-operative society.
3.4.2 Type of Co-operative Societies

Co-operative societies may be classified into different categories according to the nature of
activities performed by them. The main types of co-operative societies are:
1. Consumers’ co-operative societies.
2. Producers’ co-operative societies.
3. Co-operative marketing societies.
4. Co-operative credit societies.
5. Co-operative farming societies.
6. Co-operative housing societies.

1. Consumers’ co-operative societies: Consumer’ co-operatives are organised by

consumers to eliminate middlemen and to establish direct relations with the
manufacturers or wholesalers. These societies are formed by consumers to ensure a
steady supply of goods and services of high quality at reasonable prices. It purchases
goods either from the manufacturers or wholesalers for sale at reasonable prices. The
profit if any , is distributed among members as dividend in the ratio of capital
contributed and also bonus in proportion to the purchases made by them.

2. Producers’ co-operative societies: Producers’ co-operative are formed to help the

members in procuring inputs for production of goods or services. These societies
generally provide raw material, tools and equipment and other common facilities to its
 members. This helps them to concentrate their attention on production of goods. The
society provides inputs to the members and takes over their output for sale to outsiders.
The basis for distribution of bonus is the goods delivered for sale by each member.
3. Co-operative marketing societies: Co-operative marketing societies are voluntary
associations of small producers, who find it difficult to individually sell their products at
a profit. The main purpose of such a society is to ensure a steady and favourable market
for the output of its members. The output is pooled together and sold at the best price.
The sale proceeds are distributed in proportion to the contribution of the members to the
pool. Marketing co-operatives eliminate middlemen and ensure honest trading practices
in weighing, measuring and accounting.
4. Co-operative credit societies: Such societies are formed to provide financial help in the
form of loans to members. The funds of these societies consist of share capital
contributed by the members and the deposits made by them and outsiders. The funds are
used in giving loans to needy members on easy terms. Thus, the members are protected
from the exploitation of moneylenders, who charge very high rates of interest. Another
important purpose of credit co-operatives is to encourage the habit of thrift among their
members.
5. Co-operative farming societies: In co-operative farming societies, small farmers join
together and pool their resources for cultivating their land collectively. Their objective is
to achieve economies of large scale farming and maximising agricultural output. Such
societies are particularly important in the case of countries like India, where agriculture
suffers from excessive sub-division and fragmentation of land. Co-operative farming
makes it possible for members to use modem tools and equipments, good seeds,
fertilizer and irrigation facilities in order to achieve higher production.
6. Co-operative housing societies: They are formed to provide residential accommodation to
the members. They undertake the purchase and development of land and/or construction of
houses/flats on the land. Some housing co-operatives provide their members with necessary
loans at low rates of interest to build houses. These societies are gaining popularity in big
cities.
3.4.3 Characteristics of Co-operative Organisation

The following are the main characteristics of cooperative societies:

(i) Voluntary association: In co-operatives, the membership is voluntary. Anybody having a
common interest is free to join a co-operative society. The member can also leave the
society anytime after giving proper notice.
(ii) Equal voting rights: In a co-operative society, the principle of one-man one vote is
adopted. A member has only one vote irrespective of the number of share(s) held by him.
Thus, a co-operative society is run on democratic principles.
(iii) Separate legal entity: A co-operative society is required to be registered under the Co-
operative Societies Act. Registration provides it a separate legal entity. Its existence is quite
different from its members. The death, insolvency or lunacy of a member does not affect its
existence. It can sue and be sued in its own name. It can make agreements as well as
purchase and sell properly in its own name.
(iv) Service motive: A co-operative society is based on the service motive of its members. It’s
main objective is to provide service to the members and not to maximize profits. Earning
profit is the most important objective of other forms of business organisation. It is not so in
the case of co-operatives.
(v) Distribution of surplus: Out of the profits of the co-operative, members are paid dividend
and bonus. The bonus is given according to the volume of business transacted by each
member with the co-operative society. For example, in a consumer co-operative society,
bonus is paid in proportion to the purchases made by members during a year. In producers’
co-operative the valued goods delivered for sale form the basis of distributing bonus.

3.4.4 Merits of Co-operative Organisations

The co-operative form of organisation offers the following advantages:

(i) Easy to form: A co-operative society is voluntary association and may be formed with a
minimum of ten adult members. Its registration is very simple and can be done without
much legal formalities.
(ii) Open membership: Membership in a Co-operative organisation is open to all having a
common interest . A person can become a member at any time he likes and can leave the
society by returning his shares without affecting its continuity.
(iii) Democratic management : A co-operative society is managed in a democratic manner. It
is based on princiiple of one man one vote. All members have equal rights and can have a
voice in its management.
(iv) Limited liability: The liability of the members of a co-operative society is limted to the
extent of capital contributed by them. They don’t have to bear personal liability for the
debts of the society.
(v) Stability: A co-operative society has a separate legal existence. It is not affected by the
death, insolvency, lunacy or permanent incapacity of any of its members. It has a fairly
stable life and continues to exist for a long period.
(vi) Economical operations: The operation of co-operative society is quite economical due to
elimination of middlemen and the voulantarily services provided by its members.
(vii) Government patronage: Government gives all kind of help to co-operatives, such as loans
at lower rates of interest and relief in taxation.
(viii)Other benefits: Certain non-economic benefits are also derived by members through
cooperatives. Credit co-operatives, for instance, promote habits of thrift and producers’ co-
operative encourage joint activity among members.
3.5 COMPANY

The company form of organisation is considered to be most suitable for organising business
activities on a large scale as it does not suffer from the limitations of capital and management of
other forms of organisation. The sole proprietorship, partnership and Co-operative organisation
are not capable of undertaking large scale activity due to lack of adequate capital and limited
managerial abilities. In a company organisation those problems can be easily overcome. It has
the advantage of attracting huge capital from the public due to the limited liability of members.
With adequate capital it can also employ trained and experienced managers to run the business
activities efficiently.

3.5.1 Meaning

A company is defined as a voluntary association of persons having separate legal existence,

perpetual succession and a common seal. As per the definition, there must be a group of persons
who voluntarily agree to form a company. Once formed the company becomes a separate legal
entity with a distinct name of its own. Its existence is not affected by change of members. It must
have a seal to be imprinted on documents whenever required. The capital of a company consists
of transferable shares, and members have limited liability.

3.5.2 Features of a Company

The following are the chief characteristics of the company form of organisation:

(i) Registered body: A company comes into existence only after its registration. For that
purpose, necessary legal formalities have to be completed as prescribed under the
Companies Act.

(ii) Distinct legal entity: A company is regarded as a legal entity separate from its members.
Thus a company can carry on business in its own name, enter into contracts, sue, and be
sued.

(iii) Artificial person: A company is the creation of law and has a distinct entity. It is therefore,
regarded as an artificial person. The business is run in the name of the company. But
because it is an artificial person, its functions are
performed by the elected representatives of members, known as directors.

(iv) Perpetual succession: A company has continuous existence independent of its members.
Death, insolvency, or change of members has no effect on the life of a company. The
common saying in this regard is that members may come, members may go, but the
 company goes on forever. The life of the company can come to an end only through the
prescribed legal procedure.

(v) Common seal: Since a company is an artificial person, it has no physical existence. The
activities of the company are carried through a group of natural persons elected by its
members (called directors). Every company must therefore, have a common seal with its
name engraved on it. Anyone acting on behalf of the company must use the common seal
to bind the company.

(vi) Limited liability: The liability of the members of a company is limited. It is limited to the
extent of capital agreed to be contributed. Beyond that amount, the members cannot be
personally held liable for payment of the company’s debts.

(vii) Transferability of shares: The capital of a company is divided into parts called shares.
Normally the shares of a company are freely transferable by its members. However,
transferability is restricted in the case of private company.

3.5.3 Merits of Company

The most important advantages of a company organisation may be stated as follows:

(i) Collection of huge financial resources: The biggest advantage of a company organisation
is that it has the ability to collect large amounts of funds. This is because a company can
raise capital by issuing shares to a large number of persons. Shares of small value can be
subscribed even by people with small savings. In addition, company can also raise loans
from the public as well as different lending institutions. Availability of necessary funds
makes it possible for a company to undertake business activities on a large scale.

(ii) Limited liability: Another advantage of the company form of organisation is the limited
liability of members. With
the liability of members limited to the value of their shares,
company is able to attract many people to invest in its
shares. It is thus in a position to undertake business
ventures involving risks.

(iii) Free transferability of shares: A company permits its

Notes members to transfer their shares. Free transferability of shares provides liquidity of
the member’s investment. Thus, if a member needs cash he can sell his
shares. Or, he can use the same amount to buy shares of another more
 profitable company. It enables profitable companies also to attract
funds away from the less profitable ones.

(iv) Durability and stability: A company is the only form of organisation

which enjoys continuous existence and stability. The funds invested in a
company by shareholders are not withdrawal until it is wound up. Also
any change in the company’s membership does not affect its life. As a
result of this, a company can undertake projects of long duration and
attract people to invest in the business of the company.

(v) Growth and expansion: With the large resources at its command a
company can organize business on a large scale. Once the business is
started on a large scale it gives the company strength to grow and
expand. This is because of high profits, which accrue from the
economies of large-scale organisation and production.

(vi) Efficient management: Since a company undertakes large-scale

activities, it requires the services of expert professional managers.
Competent managers can be easily hired by a company because it
commands large financial resources. Thus, efficient management is
ensured in a company organisation.

(vii) Public confidence: A company enjoys great confidence and trust of the
general people. Companies have to disclose the results of their activities
and financial position in the annual reports. The reports are available to
the public. It is on the basis of the annual reports and other information
that investment is made in companies.

(viii) Social benefits: Apart from the benefits mentioned above, a company
organisation also offers the following social benefits:
(a) Democratisation of management: In the company form of organisation,
management of business is entrusted to the elected representative of shareholders, that
is the directors. As a result of democratic management the business of company is run
in the best interest of the majority shareholders.

(b) Dispersal of ownership: Since a large number of persons are associated with a
company as members, its ownership is widely held. Thus the benefits of the
company’s operations are distributed among a large section of people.
 (c) Assumption of social responsibilities: Large companies often undertake and
contribute to social welfare activities by making donations to schools and colleges,
developing rural areas, running health-care institutions, and so on.

3.5.4 Limitations of Company Organization

A company organization suffers from the following limitations:

(i) Lengthy and expensive legal procedure: The registration of a company is a long-drawn
process. A number of documents are to be prepared and filled . For preparing documents
experts are to be hired who charge heavy fees. Besides, registration fees have also to be
paid to the Registrar of Companies.

(ii) Excessive government regulations: A company is subject to government regulations at

every stage of its working. A company has to file regular returns and statements of its
activities with the Registrar. There is a penalty for non-compliance of the legal
requirements. Filing returns and reports involving considerable time and money is the
responsibility of a company. All this reduces flexibility in operations.

(iii) Lack of incentive: The company is not managed by shareholders but by directors and
other paid officials. Officials do not have investment in the company and also do not bear
the risks. As such, they may not be as much motivated to safeguard the interests of the
company as the shareholders.

(iv) Delay in decision-making and action: In large companies.

decision making and its implementation happen to be a time consuming process. This is
obviously because individual managers are unable to take decisions on their own.They may have
to consult others which may take a lot of time. Similarly, after decisions are taken, they have to
be communicated to people working at various levels of the organisation. It also delays the
implementation of already delayed decisions.

(v) Conflict of interest: A company is generally characterised by a large organisation with

many groups operating in it. So long as the interests of these groups do not clash with each
other they work for the good of the organisation. But sometimes, individual and group
interests become difficult to reconcile. For instance, the sales manager may be interested in
the quality of products to satisfy customers and increase sales, but the production manager
may be more concerned with maximum production without regard to the product quality.
 In such a situation, the business is bound to suffer in course of time unless there is a
reconciliation of the conflicting view points of the two managers.

(vi) Oligarchic management: The company management may seem to be fully democratic,
but in actual practice, it is the worst form of oligarchy i.e. control by a small group of
persons. People who are once elected as directors of a company adopt various means to get
themselves re-elected over and again. Such individuals often exploit the company for
personal interests instead of working in the interest of shareholders.

(vii) Speculation: In speculation, profit is fought to be made by manipulating prices of shares

without actually holding shares. A company organisation provides scope for speculation in
shares by the directors. Because directors have knowledge of all information about the
functioning of Company, they can use it to their personal advantage. For example, directors
may sell or buy shares knowing that prices will decline or go up because of low or high
profits. As a result of this, innocent shareholders may suffer loss.

(viii) Growth of monopolistic tendencies: A company because of its large size has the tendency
to grow into a monopoly so as to eliminate competetion , controll the market and charge
unreasonable prices to maximise profits. .

(ix) Influencing government decisions: Big companies are generally in a position to influence
government officials to make decision in their favour. This is because such companies have
large financial resources and are in a position to bribe even high officials.

From the preceding discussion it is clear that the company form of organisation is best suited to
those lines of business activity which are to be organised on a large scale, require heavy
investment of capital with limited liability of members. That is why enterprises producing steel,
automobiles, computers and high technology products are generally organised as companies.
 Unit 3: COMPANY
Companies Types: 5 Types of Companies
(A) On the basis of incorporation:
On the basis of incorporation, companies can be classified as:
(i) Chartered companies
(ii) Statutory companies
Registered companies

(i) Chartered companies:

 The crown in exercise of the royal prerogative has power to create a corporation by the
grant of a charter to persons assenting to be incorporated.
 Such companies or corporations are known as chartered companies. Examples of this
type of companies are Bank of England (1694), East India Company (1600).
 The powers and the nature of business of a chartered company are defined by the charter
which incorporates it. After the country attained independence, these types of companies
do not exist in India.
(ii) Statutory companies:
 A company may be incorporated by means of a
 special Act of the Parliament or any state legislature.
 Such companies are called statutory companies, Instances of statutory companies in India
are Reserve Bank of India, the
 Life Insurance Corporation of India, the Food Corporation of India etc. The provisions of
the Companies Act 1956 apply to statutory companies except where the said provisions
are inconsistent with the provisions of the Act creating them.
 Statutory companies are mostly invested with compulsory powers.
(iii) Registered companies:
 Companies registered under the Companies Act 1956, or earlier Companies Acts are
called registered companies.
 Such companies come into existence when they are registered under the Companies Act
and a certificate of incorporation is granted to them by the Registrar.

(B) On the basis of liability:

On the basis of liability the company can be classified into:
(i) Companies limited by shares
(ii) Companies limited by guarantee
(iii) Unlimited companies.
(i) Companies limited by shares:
 When the liability of the members of a company is limited to the amount if any unpaid on
the shares, such a company is known as a company limited by shares.
 In a company limited by shares the liability of the members is limited to the amount if
any unpaid on the shares respectively held by them.
 The liability can be enforced during existence of the company as well as during the
winding up. Where the shares are fully paid up, no further liability rests on them.
(ii) Companies limited by guarantee:
 It is a registered company in which the liability of members is limited to such amounts as
they may respectively undertake by the memorandum to contribute to the assets of the
company in the event of its being wound up.
 In the case of such companies the liability of its members is limited to the amount of
guarantee undertaken by them.
 Clubs, trade associations, research associations and societies for promoting various
objects are various examples of guarantee companies.
(iii) Unlimited companies:
 A company not having a limit on the liability of its members is termed as unlimited
company.
 In case of such a company every member is liable for the debts of the company as in an
ordinary partnership in proportion to his interest in the company.
 Such companies are not popular in India.

(C) On the basis of number of members:

(i) Private company:

A private company means a company which by its articles of association:
(i) Restricts the right to transfer its shares
(ii) Limits the number of its members to fifty (excluding members who are or were in the
employment of the company) and
(iii) Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.
(iv) Where two or more persons hold one or more shares in a company jointly, they are
treated as a single member. There should be at least two persons to form a private company and
the maximum number of members in a private company cannot exceed 50. A private limited
company is required to add the words “Private Ltd” at the end of its name.

(ii) Public company:

 
A public company means a company which is not a private company. There must be at
least seven persons to form a public company.
o It is of the essence of a public company that its articles do not contain provisions
restricting the number of its members or excluding generally the transfer of its
shares to the public or prohibiting any invitation to the public to subscribe for its
shares or debentures.
 Only the shares of a public company are capable of being dealt in on a stock exchange.
(D) According to Domicile:

(i) Foreign company:

It means a company incorporated outside India and having a place of business in India.
According to Section 591 a foreign company is one incorporated outside India:
(a) Which established a place of business within India after the commencement of this Act or (b)
Which had a place of business within India before the commencement of this Act and continues
to have the same at the commencement of this Act.
(ii) Indian Companies:
A company formed and registered in India is known as an Indian Company.

(E) Miscellaneous Category:

(i) Government Company:

It means any company in which not less than 51 percent of the paid up share capital is held by
the Central Govt, and/or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments. The subsidiary of a Government
company is also a Government company.

(iii) Holding and subsidiary companies:

A company is known as the holding company of another company if it has control over another
company. A company is known as subsidiary of another company when control is exercised by
the latter over the former called a subsidiary company. A company is to be deemed to be
subsidiary company of another
(a) If the other:
(a) Controls the composition of its Board of directors or
(b) Exercises or controls more than half of its total voting power where it is an existing company
in respect where of the holders of preference shares issued before the commencement of the Act
have the same voting rights as the holders of equity shares or
(c) In the case of any other company holds more than half in nominal value of its equity share
capital or
(b) If it is a subsidiary of a third company which is subsidiary of the controlling company.

(iii) One man Company:

This is a company in which one man holds practically the whole of the share capital of the
company and in order to meet the statutory requirement of minimum number of members, some
dummy members hold one or two shares each. The dummy members are usually nominees of
principal shareholder.