COURSE Bachelor of Business Administration (BBA)

SEMESTER I
SUBJECT CODE 101
SUBJECT NAME Business Organization (Notes)

UNIT 1

PART I

1. Concept of Business

The term business refers to an organization or enterprising entity engaged in commercial,

industrial, or professional activities. The purpose of a business is to organize some sort of
economic production of goods or services. Businesses can be for-profit entities or non-
profit organizations fulfilling a charitable mission or furthering a social cause.
Businesses range in scale and scope from sole proprietorships to large, international
corporations. The term business can also be conceptualized as the efforts and activities
undertaken by individuals to produce and sell goods and services for profit. The concept
begins with an idea and a name, and extensive market research may be required to
determine how feasible it is to turn the idea into a business. There are two concepts of
business:

(A) Traditional concept

(B) Modern concept

(A) Traditional concept of business- Traditional concept states that the objective
of business is to earn profit through manufacture and marketing of products. Here,
any human activity directed towards the acquisition of wealth or earning profit
through the exchange of products was treated to be a business. Products can be-

(i) Goods: They are physical goods. They can be owned. They are tangible and
can be touched. Examples are books, computer, clothes etc.

(ii) Ideas: They are ideas based on knowledge. Examples are environment
protection, human rights, consumer welfare etc.

(iii) Services: They cannot be owned. They are intangible and cannot be
touched. Examples are class lecture, banking service etc.

(iv) Information: They involve data-related activities. Examples are research,

newspapers, internet etc.

(B) Modern concept of business- Modern concept states that business earns profit
through consumers’ satisfaction. Business without consumers is not business. It
develops long term relations with them. Business should earn profit with social
responsibility. It should care about the welfare of society and consumers, working
within the law. Business encompasses all economic activities involving production
and marketing of products to earn profit and wealth through satisfaction of human
needs.

Meaning of Business

Literally speaking, the term ‘business’ means to be ‘busy’ or ‘occupied’. In practice,

business includes certain economic activities in which people are busy or engaged.
Such activities relate to production, distribution, trading or exchange of goods and
services to satisfy the needs of people so as to earn income or profit. Business is all
around us and it is the mainspring of modern life. But very few people understand its
true nature and its role in society. Study of the principles and practices of business
organisation helps in understanding events in their right perspective and in tackling
the problem of satisfying human wants by using available resources.

The main definitions of business have been explained below-

“Business may be defined as human activity directed towards or acquiring wealth

through buying and selling of goods.” – Lewis H. Haney

“Business is a form of activity pursued primarily with the object of earning profit for
the benefit of those on whose behalf the activity is conducted.” – L.R. Dicksee

“Business may be defined as an activity in which different persons exchange

something of value, whether goods or services, for mutual gain or benefit.” – Peterson
and Plowman

“Business is an institution organised and operated to provide goods and services to

society under the incentive of private gain.” – B.O. Wheeler

“Human activity directed towards producing or acquiring wealth through buying and
selling of goods.” – Lewis Henry

So, business mainly consists of:

(i) Creating demand for the products and services before producing and
purchasing the goods.

(ii) Production of the goods and converting the economic resources into goods
and services.

(iii) Continuous research and development in order to improve the quality of

goods and services.

(iv) Activities to ensure that the goods and services not only reach the
consumers but also satisfy them in fulfilling their needs.
2. Nature of Business

A business can be described as an organization or enterprising entity that engages in

professional, commercial or industrial activities. It also includes the efforts and
activities of a person who is producing goods or offering services with the intent to
sell them for profit. A business is an individual or group of individuals that work
together to produce and sell goods and services for a profit. Businesses can either be
run for profit, such as restaurants, supermarkets, etc., or non-profit organisations
developed to serve a social purpose. Non-profit organisations do not earn profits from
their services, as all earned profits are used in achieving social objectives. Following
state the nature of business:

(i) Economic activity- Economic activity includes production, distribution and

consumption. A business is an economic activity because it buys and sells goods
and services with the motive of earning a profit. Moreover, it uses resources such
as raw materials, labour and manufacturing techniques to produce specific goods
and services, fulfilling changing customer needs by buying, selling and exchanging
goods and services.

(ii) Continuity of operations- It is not only important for businesses to produce

and sell goods and services, but also to ensure that it is regular and continuous.
This ensures steady cash flow, increased demand and fulfilment of consumer
needs. Companies require establishing processes that ensure continuity in daily
operations, optimisation and minimal disruption due to unforeseen circumstances.

(iii)Profit Motive- Profit is an indicator of success and failure of business. It is the

difference between income and expenses of the business. The primary goal of a
business is usually to obtain the highest possible level of profit through the
production and sale of goods and services. It is a return on investment. Profit acts
as a driving force behind all business activities.

(iv) Risk and Uncertainties- Risk is defined as the effect of uncertainty arising on
the objectives of the business. Risk is associated with every business. Business is
exposed to two types of risk, Insurable and Non-insurable. Insurable risk is
predictable. Predictable factors are controllable to some extent, such as: taxes,
change in the volume of expected sales, cost of supplies and equipment etc.
Unpredictable factors include: changes in trends and tastes of customers, impact of
the local economy on customer base, competitor actions etc.

(v) Utility- Businesses require producing and selling goods and services that provide
utility to consumers. The types of utilities include:

a) Form utility: The form utility is the value of a product based on the cost
of materials and labour that went into producing it.
 b) Time utility: Time utility refers to companies being able to provide
products and services when consumers have a demand for them.

c) Place utility: Place utility is the value of a product based on how readily
it is available in a specific region.

d) Possession utility: The possession utility is a product’s usefulness based

on its availability and usability. Consumers find utility in a product if they
can use it as soon as they purchase it and if it fulfils their needs as intended.

(vi) Creative and Dynamic- Modern business is creative and dynamic in nature.
Business firm has to come out with creative ideas, approaches and concepts for
production and distribution of goods and services. It means to bring things in fresh,
new and inventive way. One has to be innovative because the business operates
under constantly changing economic, social and technological environment.
Business should also come out with new products to satisfy the growing needs of
the consumers.

(vii) Customer satisfaction- The phase of business has changed from traditional
concept to modern concept. Now a day, business adopts a consumer-oriented
approach. Customer satisfaction is the ultimate aim of all economic activities. The
purpose of the business is to create and retain the customers. The ability to identify
and satisfy the customers is the prime ingredient for the business success.

3. Scope of Business

The main purpose of business is to create a customer. Markets are not creates by God,
nature or economic forces but by business people. The want a business satisfies may
have been felt by the customer before he or she was offered the means of satisfying it.
Like food in a famine, it may have dominated the customer’s life and filled all his
walking moments but it remained a potential want until the action of business people
converted it into effective demand. Only then, is there a customer and a market. The
scope of business can be explained as:

(i) Industry- The word “Industry” refers to that part of business activities
which is apprehensive with the extraction, production 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. If the goods produced by an industry are consumed by the final
customers, these are named as ‘consumer’s goods’ e.g. clothes. If the goods
are used for further production of wealth they are called producer’s 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.

Types of Industries
 On the basis activity industry is further classified into various types are as
under:

a) Extractive Industries- Extractive industries are those industries

which extract, raise or fabricate raw materials from above or beneath
surface of the earth. i.e. Mining, fisheries forestry, agriculture.

b) Genetic Industries- Those industries which are engaged in

reproducing and multiplying certain species of animals and plants and
selling them in the market for profit are named as genetic industries.
i.e. Cattle, breeding farms, poultry farms, plant nurseries.

c) Constructive Industries- Constructive industries as the name

signifies are engaged in the construction of building, canals, brides,
dams, roads etc.

d) Manufacturing Industries- Manufacturing industries are those

which are concerned of converting raw material or semi-finished
products into finished products. E.g. Shoes Company, Textiles Mills.

e) Service Industries- Service industries are usually engaged in the

manufacturing of intangible goods which cannot be seen or touched by
naked eye. The service of professionals such as doctors, lawyers is
examples of service industries.

(ii) Commerce- The second element that comes in the scope of business is
Commerce. 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 to the transfer of goods from the place of production to the ultimate
consumers.

(iii) Trade- 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- The process of buying and selling of goods within

the edge of a country is called internal trade.

i. Wholesale Trade- The process of purchase of goods in

huge quantity from producers and their resale to retailers is
known as wholesale trade. The retailer then further sells these
goods to the final consumers.

ii. Retail Trade- The retailer sale the goods and services to the
ultimate consumers is known as Retail Trade.
 b) External Trade- The purchase and sale of goods between two
countries are called external trade. It is also called foreign trade. There
are two types of external Trade.

i. Import Trade

ii. Export Trade

Aids to Trade

The activities which help in the purchase of goods and services are called aids to
trade. The aids which are compulsory for the development of the trade are as follows:

(i) Transport- The different ways of transport help in carrying goods from the
places of production to centres of utilization e.g. Railways, ships, airlines etc.

(ii) Insurance- Insurance is very essential aid to trade. The risk of damage of
goods due to fire, flood, earthquake or other causes us covered by insurance.

(iii) Warehousing- Warehousing is a kind of storeroom. Nowadays most of the

goods are produce in anticipation of demand. They are stored in safe places
and are released as and when demanded in the market. Warehousing thus helps
in overcoming the barrier of time and creates time utility.

(iv) Banking- The commercial banks play a vital role in financing the different
trade activities. They are funding the traders for stock holding and
transportation of goods. 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.

(v) Advertisement- Selling of goods is the most difficult problem for the
producer. Advertisement regarding the product through newspapers,
magazines, radio and television has greatly helped the consumers in choosing
the goods of their taste. So, advertisements play a vital role in increasing sale
of goods.
4. Concept of Business as a System

Business systems are composed of detailed procedures that business owners can
replicate for consistent, measurable results. Business owners who implement these
systems can free up valuable time to work on their businesses—not in them. A
business system is a group of interdependent elements or tasks that meet a business
objective. We should document every step for each business process or activity.
Business activities consistently produce results. Strategizing how you complete these
tasks can help streamline daily operations. Business activities may include:

a) Lead generation

b) Prospect conversion

c) Invoicing

d) Accounting

e) Bookkeeping

f) Marketing

g) Sales

h) Operations

i) Order fulfilment

j) HR
 k) Training

l) Payroll

Objectives of Business Systems

A business system is a defined set of principles, practices and procedures that are
applied to specific activities to achieve a specific result. Basically, it is about creating
a set of shortcuts that will make sure everything still gets done right. We can create
systems for many areas of businesses. From making sales to building marketing
strategies, even to managing the cleanliness of the workspace, systems can make all
these tasks easier and more efficient. Its objectives include:

(i) To meet the user and customer needs.

(ii) To cut down the operating costs and increase savings.

(iii) To smooth the flow data through various levels of the organisation.

(iv) To speed up the execution of results with the reliable data available in a
system.

(v) To handle data efficiently and provide timely information to the management.
(vi) To establish the most desirable distribution of data, services and equipment’s
throughout the organisation.

(vii) To define a proper method of handling business activities.

(viii) To eliminate duplicated, conflicting and unnecessary services.

Types of Business Systems

Systems are also designed to connect different departments and elements of a business
to work together to achieve business objectives. Effective business systems and
processes provide many benefits to the business, its staff and its customers. There are
five major types of business systems:

(i) Payroll Business System- A payroll system consists of all forms,

procedures, files, equipment’s, personnel, and computer support necessary to
completely process the payment of employees. A payroll system fully handles
all tax deductions, personal deductions, and the update of payroll data related
to each employee. It provides for the actual payment of employees, a record of
that payment, the modification of all payroll records, and the preparation of
payroll reports.
 The payroll system must also generate all tax documents to include pay-
cheques, statements, quarterly reports, and a wide range of state and municipal
employment tax filings. Another payroll responsibility is the accurate
reporting of all personal deductions to include bonds, medical and life
insurance, profit sharing plans, stock options, credit union deductions, and the
garnishing of an employee’s salary by a creditor. These accumulated totals
must be reported accurately to both the recipient of these movies and the
individuals from whose salaries these amounts were deducted. The computer’s
support makes it possible to accurately and promptly process a payroll,
providing the input data are properly handled on a timely basis.

(ii) Personnel Business System- Personnel system describes varied aspects

of an organisation’s work force. The outputs generated by personnel systems
are frequently used in compiling central & state labour power reports.
Personnel systems look at employees over a continuum, from the time they are
hired until they retire or leave the company for other reasons. Personnel
systems keep records of employee performance reviews, pay raises, how their
pay rate compares with other similar employees, and whether they are taking
advantage of company savings and retirement programs.

(iii) Accounts Receivable System- Account receivable systems are monitors

the flow of money. An accounts receivable system monitors the people who
owe money to a business. It provides the means to process all data for credit
cards and other kinds of charge accounts. The files contain the individual
customer data, including names, addresses, financial charges like, payments
received and current charges. The information is issued as monthly statements
of each customer and also provides useful information for management’s use.

(iv) Accounts Payable System- Accounts payable system monitors the

organisation to which money is owed. The file structures and input/output
(I/O) formats are similar as the accounts receivable system. It contains the
accounts of vendors to whom money is owed. Input will have goods and
services received by the company while outputs include issue of payments and
management reports.

(v) Inventory System- Inventory system monitors the status of items held in
an inventory. These systems report on the quantities of goods on hand, as well
as when items should be purchased to replenish stock and what critical items
are needed. Inventory systems are crucial to organisations that maintain large
and costly inventories.

5. Business and Environment Interface

The term “environment” refers to the totality of all the factors which are external to
and beyond the control of individual business enterprises and their managements.
Environment furnishes the macro-context; the business firm is the micro-unit. The
environmental factors are essentially the “givens” within which firms and their
managements must operate. For example, the value system of society, the rules and
regulations laid down by the Government, the monetary policies of the central bank,
the institutional set up of the country, the ideological beliefs of the leaders, the attitude
towards foreign capital and enterprise, etc., all constitute the environment system
within which a business firm operates.

These environmental factors are many in numbers and various in form. Some of these
factors are totally static, some are relatively static and some are very dynamic – they
are changing every now and then. Some of these factors can be conceptualized and
quantified, while other can be only referred to in qualitative terms. Thus, the
environment of business is an extremely complex phenomenon.

Definitions of Business Environment

“Business Environment is the aggregate of all conditions, events and influences that
surround and affect the business.” - Keith Davis

“Business Environment encompasses the climate or set of conditions-economic,

social, political or institutional in which business operations are conducted.” - Prof.
Weimer

“The term Business Environment of a company is defined as the pattern of all external
influences that affect its life and development.” - Andrews

“The total of all things external to firms and industries that affect the function of the
organisation is called business environment.” - Wheeler

Components/ Types of Business Environment

Business and its environment are closely inter-related and mutually interdependent.
Environment has its bearing on business and business has its bearing on environment.
The success of business lies in understanding the environmental changes and adapting
its business policies accordingly. Business Environment is very complicated, dynamic
and multi-dimensional and affects different business institutions in different ways.
Every business faces two types of environments simultaneously:

(i) Internal Environment- All those factors within an organization which

impart strengths or cause weaknesses constitute the internal environment.
These factors can be controlled by business but they are quite important in
shaping the behaviour of people working in it. Hence, managers have to take
internal factors into account while taking actions.

(ii) External Environment- All those factors outside the organization which
provide opportunities or pose a threat to the organization make up the external
environment. These factors are those over which the business organization has
no control. Some types of external environment are:

a) Micro Environment- Micro environment consists of factors in the

company’s immediate environment that affect the performance of the
 company. These include the suppliers, marketing intermediaries,
competitors, customers and the public.
i. Suppliers- Suppliers are important for any business unit.
Suppliers are those who supply the inputs like raw material and
components to the company. Organizations should keep two
things in mind regarding suppliers:

[1] Reliability

[2] Multiple suppliers

ii. Customers or clients- A business exist only because of its

customers. Hence, a major task of a business is to create and
sustain customers. Monitoring the customer’s sensitivity is a
pre-requisite for business success.

iii. Competitors- Competitor means other business units which

are making similar products or a very close substitute of our
product. Competitors play a vital role in running the business
enterprise. Business has to adjust its various activities
according to the behaviour of the competitors.

iv. Market Intermediaries- Every business enterprise may be

assisted by market intermediaries which include agents, brokers
who help the company find customers. It is a link between
company and final consumer. Market intermediaries help the
company to promote, sell and distribute its goods to final
buyers. Examples: Wholesalers, retailers, advertising agencies,
consultancy firms, banks, insurance companies, warehouse,
transport agencies etc.

v. Public- Public is any group that has actual or potential interest

in the business. To achieve this interest, it has its impact on the
business. Public includes users and non-users of the product
like Environmentalists, NGOs, Local Community, Media.

b) Macro environment- A company and the forces operate in a larger

Macro environment that shape opportunities and pose threats to the
company. These factors are generally more uncontrollable than the
micro forces.

i. Economic Environment- Economic environment consists

of economic factors that influence the business in a country. It
is very complex and dynamic in nature that keeps on changing
with the change in policies or political situations. Key
components of economic environment are:
 [1] Economic Conditions of Public

[2] Economic Policies

[3] Economic System

ii. Political-Legal Environment- Political environment

affects different business units significantly. A stable and
dynamic political environment is essential for business growth.
Whenever there is a change in the Government in a democratic
country, it is a sign of change in economic policies.

iii. Legal Environment- Legal environment constitutes the

laws framed by the Government and various legislations passed
in the parliament. The businessman cannot overlook the
legislations because he must perform his business transactions
within the framework of legal environment. Every aspect for
business is regulated by law in India. Government has also
framed legislations which regulate and control the business.

iv. Social & Cultural Environment- Business is an integral

part of society and both influence each other. Influence
exercised by social and cultural factors is known as socio-
cultural environment. These factors include: attitude of people,
family system, caste system, religion, education, marriage,
habits and preferences, languages, urbanization, customs and
traditions, ethics etc.

v. Technological Environment- A systematic application of

scientific knowledge is known as technology. Everyday there
are vast changes in products, services, lifestyles and living
conditions, these changes must be analysed by every business
unit and should adapt these changes.

vi. Demographic Environment- Demographic environment

refers to the study of the features of population i.e. size of
population, growth rate, gender ratio, age composition, income
level, education level, family size, family structure etc. All
these factors affect size of demand, tastes, fashion, liking,
preferences of consumer etc.

vii. Natural or Ecological Environment- It includes

geographical and ecological factors such as natural resources,
weather and climatic conditions, port facilities, topographical
factors such as soil, rivers, rainfall, pollution etc. Every
business unit must look for these factors before choosing the
location for their business.
 viii. International/ Global Environment- International
environment is important for industries directly depending on
import and export. A recession in foreign market or protection
policy by foreign nations may create difficulties for industries
depending on exports. Liberalization of import may help some
industries but may adversely affect other industries.

Relationship between Business and Environment

The environment of a business has a great impact on the functioning of the firm. It
offers opportunities and threats along with limitations and pressures influencing the
structure and functioning of the business. In order to understand the relationship
between an organization and its environment, we will look at the interactions between
them in some primary areas.

(i) Exchanging Information- An organization and its environment

exchange information between themselves. Organizations need information
about the external environment for planning, decision-making and control
purposes. Hence, they analyse the environment’s variables along with studying
their behavior and changes.

Further, the information generated by this analysis helps the organization

handle the problems of uncertainty and complexity of the business
environment. Therefore, firms try to gather information pertaining to market
conditions, economic activity, technological developments, demographic
factors, socio-political changes, competition activities, etc.

(ii) Exchanging Resources- Apart from exchanging information, an

organization and its environment also exchange resources. A firm needs inputs
like finance, manpower, equipment, etc. from its environment. Typically, the
resources required by an organization are categorized into 5 M’s:

a) Men or Manpower

b) Money

c) Method

d) Machine

e) Material

An organization uses these inputs to produce goods or services or both.

Acquisition of these inputs usually requires an interaction between the firm
and the markets. This interaction can be in the form of competition or
 collaboration. Nevertheless, the purpose is to ensure a constant supply of
inputs.

(iii) Exchanging Influence and Power- The third important interaction

between an organization and its environment is the exchange of influence and
power. By now, we understand that the external environment holds
considerable power over a firm due to the following reasons:

a) The business environment is inclusive.

b) It has a command over the resources, information, etc. which the firm
requires.

c) It offers opportunities for growth on one hand and threats and

constraints on the other.

6. Classification of Business Activities

Business activities refer to all those activities that are involved in producing goods or
providing services. Business activities reflect the efficiency of organizations with
respect to the consumption of resources in the production process or the number of
advanced resources, give a representation of financial and economic activities, and
also reveal the potential and internal capabilities of an organization.

(i) Investing Business Activities- Investing activities are in the second part
of the cash flow statements. These are business exercises that are financed
over one year. The acquisition of long-term resources is recorded as the
utilisation of money in this segment. In like manner, the sale of land is
displayed as an earning or source of money. The detailed ‘capital expenditure’
is viewed as investing activity or a movement and can be found in this part of
the cash flow statement.

(ii) Financing Business Activities- The cash flow statements’ last segment
incorporates financing exercises. These incorporate secondary offerings, debt
financing, and initial public offerings. The part likewise records the measure
of money being delivered out for share repurchases, interests, and dividends.
Any business action identified with financing and raising money endeavours is
considered for this part of the cash flow statement.

(iii) Operating Business Activities- The principal part of the income and
cash flow statement is income from working or operating activities. These
exercises incorporate numerous things from the current portion of the balance
sheet and income statement. The income articulation or cash flow statement
puts back specific non-cash things like amortisation and depreciation. Then, at
that point, changes in asset report or balance sheet details, for example,
accounts payable and account receivable, are either added or deducted
depending on their past impact on overall gain or net income.
 NOTE: Business activities can also be classified based on Industry, Commerce
and Trade, as discussed previously.

PART II- FORMS OF OWNERSHIP

The first and foremost question in organizing an industry is that of ownership,
represented by the right of an individual or a group of individuals to acquire legal title
to assets for the purpose of controlling an industrial operation and enjoying the gains
or profits flowing from such activities. Small industrial units are, by and large, started
by persons who value independence and are desirous of obtaining the highest rewards
for their initiative, innovation, technical skills, business acumen and experience.

Each entrepreneur must make policy decisions in all vital areas of business activities
and organise and manage his business affairs on scientific lines. He must decide either
as a manufacturer of some product or as the distributor of the products made by
others. Whatever activity he chooses, he will be confronted with problems and his
ultimate success will depend upon his entrepreneurial ability to solve these problems.
He will have to make a Policy decision about the size of organisation. The chief forms
of an ownership organisation are:

1. Sole Proprietorship

It is a form of business organisation in which an individual invests his own capital,

uses his own skill and intelligence in the management of its- affairs and is solely
responsible for the results of its operation. The individual, with the -assistance of
other workers or by is own labour and capital; may run the industry. This form of
organisation is also known” as individual entrepreneurship - the oldest and the most
sought-after form of enterprise - in the field of small-scale industry, and the easiest
and simplest form of entrepreneurship from the operational point of view.

The industry may be started either in a portion of the entrepreneur’s own house or in
rented premises. There are no legal formalities to be gone through except those
required for a particular type of industry. In this form of ownership, the liability is
unlimited. The small industrialist and the industry are highly interrelated and
integrated. If the industry prospers, the entrepreneur is the sale beneficiary, and vice
versa. Moreover, he enjoys full control over the affairs of the industry and the sale
authority to decide, plan and control the operations of his business.

Features of Sole Proprietorship

Sole Proprietorship in simple words is a one-man business organisation. Furthermore,

a sole proprietor is a natural person (not a legal person/entity) who fully owns and
manages this type of entity. In fact, the business and the man are the same, it does not
have a separate legal entity.
 (i) Lack of Legal Formalities- A sole proprietorship does not have a
separate law to govern it. And so there are not many special rules and
regulations to follow. Furthermore, it does not require incorporation or
registration of any kind. In fact, in most cases, we need only the license to
carry out the desired business.

(ii) Liability- Since there is no separation between the owner and the business,
the personal liability of the owner is also unlimited. So if the business is
unable to meet its own debts or liabilities, it will fall upon the proprietor to pay
them. For instance, he may have to sell all of his personal assets (like his car,
house, other properties etc) to meet the debts or liabilities of the business.

(iii) Risk and Profit- The business owner is the only risk bearer in a sole
proprietorship. Since he is the only one financially invested in the company.
As a result, he must also bear all the risk. In other words, if the business fails
or suffers losses, he will be the one affected.

However, he also enjoys all the profits from the business. He does not have to
share his profits with any other stakeholders since there are none. So he must
bear the full risk in exchange for enjoying full profits.

(iv) No Separate Identity- In legal terms, the business and the owner are one
and the same. No separate legal identity will be bestowed upon the sole
proprietorship. So the owner will be responsible for all the activities and
transactions of the business.

(v) Continuity- As seen above the business and the owner has one identity. So,
a sole proprietorship is entirely dependent on its owner. The death, retirement,
bankruptcy. insanity, imprisonment etc will have an effect on the sole
proprietorship. In such situations, the proprietorship will cease to exist and the
business will come to an end.

Advantages of Sole Proprietorship

(i) A proprietor will have complete control of the entire business. Thus, this will
facilitate quick decisions and freedom to do business.

(ii) Law does not require a proprietorship to publish its financial accounts or any
other such documents to any members of the public. As a result, there is
enough confidentiality which is important in the business world.

(iii) The business owner derives the maximum incentive from the business.
Because he does not have to share any of his profits. So, the work he puts into
the business is completely reciprocated in incentives.
 (iv) Being your own boss is a great sense of satisfaction and achievement.
Moreover, you are answerable only to yourself. Hence it is a great boost to
your self-worth as well.

Disadvantages of Sole Proprietorship

(i) One of the biggest limitations of a sole proprietorship is the unlimited personal
liability of the owner. If the business fails it can wipe out the personal wealth
of the owner as well as affect his future business prospects too.

(ii) Another problem is that a sole proprietor has access to limited capital. The
money he can borrow from his own personal savings may not be enough to
expand the business. Moreover, banks and financial institutions are also wary
of lending to proprietorships.

(iii) The life cycle of a sole proprietorship is undecided and attached to its owner.
An incapacitated owner may have a negative effect on the business, and it may
even lead to the closure of the business. A sole proprietorship cannot carry on
without its proprietor.

(iv) A sole proprietor also has limited managerial ability. He cannot be an expert in
all the fields of the business. Furthermore, limited resources may mean that he
cannot hire competent people to help him out. As a result, the business may
suffer from mismanagement and poor decisions.

2. Joint Hindu Family Business/Firm

A business enterprise which is run by the group of people belonging to the same
family is known as Joint Hindu Family Business. This form of business is operated
according to Hindu Law, where all the family members including unmarried
daughters and wives are the members of the business. In simple terms, Joint Hindu
Family Business is that form of business which is carried by all the members of Joint
Hindu Family under the control of Mukhiya (Head of the family). Mukhiya or
Manager is known as Karta and members are known as Co-parceners. This form of
business ownership is based on the two facts:

(i) Coparcenary: It means common ownership in the ancestral property. As

per Coparcenary, an individual has a right in the family property and can ask
for his/her share. This individual is known as Coparcener.

(ii) Common Property: According to Hindu Law, Joint Hindu Family

possesses a common property which is used for the welfare of all the members
of the family. Common property includes; ancestral property, property created
through ancestral property and personal property treated as family property.

According to Hindu Law there are two community controlling Hindu families;
Mitakshara and Dayabhag. Mitakshara is popular in the country except Assam,
Bengal and Some parts of Orissa. Under this community, with the birth, a son gets
rights in the ancestral property. Dayabhag community exists in Assam, Bengal, and
some parts of the Orissa. Under this community, a son gets rights in the ancestral
property only after the death of the father.

Features of HUF

Joint Hindu Family Business is a form of business, which is found only in India, and
wherein the business is owned and carried on by the members of the Hindu Undivided
Family (HUF). It is governed by the Hindu Law (The Hindu Succession Act, 1956). It
is stated that the law of inheritance creates the Joint Hindu Family Business. The basis
of membership in the business is birth and three successive generations can be
members of the business. The features of a Hindu Undivided Family are as follows:

(i) Formation- There should be at least two members and ancestral property
must be inherited by the members for the formation of the Hindu Undivided
Family Business. Each member of the family becomes a member of the
business by virtue of birth, and there is no need for any agreement between the
family members.

(ii) Liability- The liability of all the members except the Karta is limited to the
extent of shares in the co-coparcenary property of the business. However, the
Karta has unlimited liability and his personal properties can be used for paying
the debts of the business.

(iii) Control- Karta controls the entire family business. He has the authority to
manage the business. He takes all the decisions and his decisions are binding
on all the co-parceners.

(iv) Continuity- HUF is not affected by the death of the members. In the case of
the death of the Karta, the next eldest male member in the family becomes the
Karta. However, the business can be terminated with the mutual consent of the
members.

(v) Minor Member- Minors can also be members of the business as

membership in the business arises by the virtue of birth.

Advantages of the HUF

(i) A Hindu Undivided family is comprised of family members running a

business. Like any other organisation, there is scope for disagreements and
conflicts. But since the Karta has absolute power and takes all decisions by
himself, it will lead to effective management.

(ii) Just like a company, the existence of a HUF is perpetual. The death or
retirement of one member of even the Karta will not affect it, and it will
continue.
 (iii) Since the co-parceners do not have any effective control over the management
of the HUF, and all power lies with the Karta, the liability of the members has
also been limited to only their share of the property. This keeps the balance
between power and responsibility.

(iv) Also since all members of the HUF are relatives and members of the same
family, there is a sense of loyalty and cooperation. The trust among members
is also there and leads to overall cooperation.

Disadvantages of the HUF

(i) No outside members other than family members can be introduced to the HUF.
This makes it very difficult to get additional capital from the market. With
limited capital, the chances of expansion are very low. It limits the scope of
the business.
(ii) While the Karta has all the power he also has the burden of unlimited liability.
This may make him overly cautious and timid in his business dealings. In turn,
the business could suffer. Another factor is that he may even be held
responsible for the actions of other members.

(iii) Also, the absolute dominance of the Karta overall business and financial
decisions make cause conflict among the HUF. His decisions and business
acumen may be questioned by other members, and cause issues within the
HUF.

(iv) Another issue may be that the Karta may not be the most qualified person to
lead the business. The position is given to the senior most family member,
whether he is the most qualified or not is not taken into consideration.

3. Partnership Firm

Partnership organisation grew and gained importance, as an individual is not

competent enough to possess enormous capital and knowledge or competence to
manage everything. With the expansion of business and enlargement of the scale of its
operations it became necessary for a group of persons to join hands together and
supply’ the necessary capital and skills. Often it is found that a person may be having
a huge capital but may not possess the required skill. Individually, none of them can
run a business enterprise-single-handed but together they may be highly successful in
its operations.

Partnership organisation he been adopted to arrange’ more capital, offer: better skill,
control and management to take advantage of high degree of specialization and
division, of labour; and to share the risks. In India, the Indian Partnership Act, 1932,
governs such organi­zations. Section 4 of this Act defines a partnership as “the
relation between persons who have agreed to share profits of a business carried on by
all or any of them acting for all.” Persons who enter into partnership are collectively
known as “firm” but individually known as Persons who enter ‘into partnership are
collectively known’ as “firm” but individually known as “partners.”

Types of Partners

A partnership is an arrangement where parties, known as business partners, agree to

cooperate to advance their mutual interests. The partners in a partnership may be
individuals, businesses, interest-based organizations, schools, governments or
combinations. Not all partners of a firm have the same responsibilities and functions.
There can be various types of partners in a partnership. Let us study the types of
partners and their rights and duties.

(i) Active Partner- As the name suggests he takes active participation in the
business of the firm. He contributes to the capital, has a share in the profit and
also participates in the daily activities of the firm. His liability in the firm will
be unlimited. And he often will act as an agent for the other partners.

(ii) Dormant Partner- Also known as a sleeping partner, he will not

participate in the daily functioning of the business. But he will still have to
make his share of contribution to the capital. In return, he will have a share in
the profits. His liability will also be unlimited.

(iii) Secret Partner- Here the partner’s association with the firm is not public
knowledge. He will not represent the firm to outside agents or parties. Other
than this his participation with respect to capital, profits, management and
liability will be the same as all the other partners.

(iv) Nominal Partner- This partner is only a partner in name. He allows the
firm to use the name of his firm, and the attached goodwill. But he in no way
contributes to the capital and hence has no share in the profits. He does not
involve himself in the firm’s business. But his liability too will be unlimited.

(v) Partner by Estoppel- If a person makes it out to be, through their conduct
or behaviour, that they are partners in a firm and he does not correct them,
then he becomes a partner by estoppel. However, this partner too will have
unlimited liability.

Features of a Partnership Firm

In India, we have a definite law that covers all aspects and functioning of a
partnership, The Indian Partnership Act 1932. The act also defines a partnership as
“the relation between two or more persons who have agreed to share the profits from
a business carried on by either all of them or any of them on behalf of/acting for all.”
The features are:

(i) Formation/Partnership Agreement- A partnership firm is not a

separate legal entity. But according to the act, a firm must be formed via a
 legal agreement between all the partners. So, a contract must be entered into to
form a partnership firm. Its business activity must be lawful, and the motive
should be one of profit. So two people forming an alliance to carry out charity
and/or social work will not constitute this form of organisation. Similarly, a
partnership contract to carry out illegal work, such as smuggling, is void as
well.

(ii) Unlimited Liability- In a unique feature, all partners have unlimited

liability in the business. The partners are all individually and jointly liable for
the firm and the payment of all debts. This means that even personal assets of
a partner can be liquidated to meet the debts of the firm. If the money is
recovered from a single partner, he can, in turn, sue the other partners for their
share of the debt as per the contract of the partnership.

(iii) Continuity- A partnership cannot carry out in perpetuity. The death or

retirement or bankruptcy or insolvency or insanity of a partner will dissolve
the firm. The remaining partners may continue the partnership if they so
choose, but a new contract must be drawn up. Also, the partnership of a father
cannot be inherited by his son. If all the other partners agree, he can be added
on as a new partner.

(iv) Number of Members- As we know that there should be a minimum of

two members. However, the maximum number will vary according to a few
conditions. The Partnership Act itself is silent on this issue, but the Companies
Act, 2013 provides clarity. For a banking business, the number of partners
must not exceed ten. For a business of any other nature, the maximum number
is twenty. If the number of partners increases it will become an illegal entity or
association.

(v) Mutual Agency- In this type of organisation, the business must be carried
out by all the partners together. Or alternatively, it can be carried out by any of
the partners (one or several) acting for all of them or on behalf of all of them.
So this means every partner is an agent as well as the principal of the
partnership. He represents the other partners in some cases so he is their agent.
But in other circumstances, he is bound by the actions of any of the other
partners asking him the principal as well.

Advantages of Partnership Firm

(i) Easy Formation- An agreement can be made oral or printed as an

agreement to enter as a partner and establish a firm.

(ii) Large Resources- Unlike sole proprietor where every contribution is made
by one person, in partnership, partners of the firm can contribute more capital
and other resources as required.
 (iii) Flexibility- The partners can initiate any changes if they think it is required
to meet the desired result or change circumstances.

(iv) Sharing Risk- All loss incurred by the firm is equally distributed amongst
each partner.

(v) Combination of different skills- The partnership firm has the advantage
of knowledge, skill, experience and talents of different partners.

Disadvantages of Partnership Firm

(i) A partnership firm does not exist for an endless period of time due to the fact
that it is inherently unstable. The death, insolvency, or insanity of one of the
partners may result in the dissolution of the partnership.

(ii) Every partner in a partnership firm is subject to unlimited liability, as any of

the partners may be required to pay all of the debts incurred by the partnership
firm, including those incurred through the use of personal property. A single
poor judgement made by one partner might result in significant losses and
obligations for the other partners.

(iii) According to the partnership agreement, each partner has the same rights as
the other. When one or both partners do not agree on something, it is possible
that mistrust and disharmony will develop between them.
(iv) In addition, because of the restriction on the maximum number of members, a
restricted amount of capital can be raised.

(v) In contrast to a Joint Stock Company, a partnership firm does not have a legal
status of its own.

(vi) Transferring ownership in a partnership firm is a complicated process.

Transferring ownership of a business requires the consent of all the partners.

4. Joint Stock Company

The growth of joint-stock companies constitutes an important step in the historical

evolution of forms of ownership of business enterprises. With the enlargement of the
scale of business operations, it became difficult for a sole trader or partnership firm to
cope with the problems of finding more resources and managing for more specialised
management. The development of these companies has taken place almost in all the
countries of the world but the nomenclature differs. There may be technical points of
difference but the basic characteristics are almost the same everywhere.

A company is a voluntary association of persons who contribute to its capital but their
liability remains limited. It carries on business for profit as a legal entity. It can sue
and be sued in its own name. Thus, a corporation is an artificial being, invisible,
intangible, and existing only in the contemplation of law. Being a more creation of
law, it possesses only those properties which the charter of its creation confers upon it,
either expressly or as incidental to its very existence.

A joint-stock company exists as a separate legal entity quite apart from that of the
members comprising the organisation unlike a partnership. In other words, this
company is considered to be a “person”’ in the eyes of law. Also, this company
possesses the right to own and transfer any property. In India, only 3% of the units
exist as joint-stock companies. In a sense, it is an extension of the partnership form; it
is an associa­tion of a number of members which has a legal sanction behind it.
Because of the complicated and cumbersome legal procedures, heavy taxation and the
possibility of’ unscrupulous promote. Securing capital for an undesirable concern this
system has not made any headway in the-small scale industries sector.

Features of a Joint Stock Company

The simplest way to describe a joint stock company is that it is a business

organisation that is owned jointly by all its shareholders. All the shareholders own a
certain amount of stock in the company, which is represented by their shares.
Professor Haney defines it as “a voluntary association of persons for profit, having the
capital divided into some transferable shares, and the ownership of such shares is the
condition of membership of the company.” Studying the features of a joint stock
company will clarify its structure. Its features are:

(i) Artificial Legal Person- A company is a legal entity that has been created
by the statues of law. Like a natural person, it can do certain things, like own
property in its name, enter into a contract, borrow and lend money, sue or be
sued, etc. It has also been granted certain rights by the law which it enjoys
through its board of directors. However, not all laws/rights/duties apply to a
company. It exists only in the law and not in any physical form. So, we call it
an artificial legal person.

(ii) Separate Legal Entity- Unlike a proprietorship or partnership, the legal

identity of a company and its members are separate. As soon as the joint stock
company is incorporated it has its own distinct legal identity. So a member of
the company is not liable for the company. And similarly, the company will
not depend on any of its members for any business activities.

(iii) Incorporation- For a company to be recognized as a separate legal entity

and for it to come into existence, it has to be incorporated. Not registering a
joint stock company is not an option. Without incorporation, a company
simply does not exist.

(iv) Perpetual Succession- The joint stock company is born out of the law, so
the only way for the company to end is by the functioning of law. So the life of
a company is in no way related to the life of its members. Members or
shareholders of a company keep changing, but this does not affect the
company’s life.
 (v) Limited Liability- This is one of the major points of difference between a
company and a sole proprietorship and partnership. The liability of the
shareholders of a company is limited. The personal assets of a member cannot
be liquidated to repay the debts of a company. A shareholder’s liability is
limited to the amount of unpaid share capital. If his shares are fully paid then
he has no liability. The amount of debt has no bearing on this. Only the
company’s assets can be sold off to repay its own debt. The members cannot
be made to pay up.

(vi) Common Seal- A company is an artificial person. So, its day-to-day

functions are conducted by the board of directors. So, when a company enters
any contract or signs an agreement, the approval is indicated via a common
seal. A common seal is engraved seal with the company’s name on it. So, no
document is legally binding on the company until and unless it has a common
seal along with the signatures of the directors.

(vii) Transferability of Shares- In a joint stock company, the ownership is

divided into transferable units known as shares. In case of a public company
the shares can be transferred freely, there are almost no restrictions. And in a
public company, there are some restrictions, but the transfer cannot be
prohibited.

Advantages of a Joint Stock Company

(i) One of the biggest drawing factors of a joint stock company is the limited
liability of its members. their liability is only limited up to the unpaid amount
on their shares. Since their personal wealth is safe, they are encouraged to
invest in joint stock companies.

(ii) The shares of a company are transferable. Also, in the case of a listed public
company they can also be sold in the market and be converted to cash. This
ease of ownership is an added benefit.

(iii) Perpetual succession is another advantage of a joint stock company. The

death/retirement/insanity/etc does affect the life of a company. The only
liquidation under the Companies Act will shut down a company.

(iv) A company hires a board of directors to run all the activities. Very proficient,
talented people are elected to the board and this results in effective and
efficient management. Also, a company usually has large resources and this
allows them to hire the best talent and professionals.

Disadvantages of a Joint Stock Company

(i) One disadvantage of a joint stock company is the complex and lengthy
procedure for its formation. This can take up to several weeks and is a costly
affair as well.
 (ii) According to the Companies Act, 2013 all public companies have to provide
their financial records and other related documents to the registrar. These
documents are then public documents, which any member of the public can
access. This leads to a complete lack of secrecy for the company.

(iii) And even during its day to day functioning a company has to follow a
numerous number of laws, regulations, notifications, etc. It not only takes up
time but also reduces the freedom of a company.

(iv) A company has many stakeholders like the shareholders, the promoters, the
board of directors, the employees. the debenture holders etc. All these
stakeholders look out for their benefit and it often leads to a conflict of
interest.

5. Co-operative Organization

A cooperative society is essentially an association of persons who join together or a

voluntary basis for the furtherance of - their common economic interests. The
International Labour Organisation - (ILO) defines a cooperative as “an association of
persons, usually of limited means, who voluntarily join together to achieve a common
economic end through the formation of an idiomatically controlled business
organisation, making an equitable contribution to the capital required and accepting
fair share of the risks and benefits of the-undertaking.

This type of organisation has not made any appreciable impact on the small-scale
industrial sector of the total small-scale units, only 0.7% are organised as cooperative
societies. These are mainly in which industries as, wooden furniture, and fixtures
utensils, agricultural hand tools and implements, printing, and washing soaps.

Features of Cooperative Organisation

The word ‘co-operation’ stands for the idea of living together and working together.
Cooperation is a form of business organisation the only system of voluntary
organisation suitable for poorer people. It is an organisation wherein persons vol-
untarily associate together as human beings on a basis of equality, for the promotion
of economic interests of themselves. The following are the characteristic features of a
cooperative organisation as a form of business organisation:

(i) Voluntary Association- A cooperative so­ciety is a voluntary association

of persons and not of capital. Any person can join a cooperative soci­ety of his
free will and can leave it at any time. When he leaves, he can withdraw his
capital from the so­ciety. He cannot transfer his share to another person. The
voluntary character of the cooperative as­sociation has two implications:

a) None will be denied the right to become a member.

 b) The cooperative society will not compete anybody to become a
member.

(ii) Spirit of Cooperation- The spirit of coop­eration works under the motto,
‘each for all and all for each.’ This means that every member of a co­operative
organisation shall work in the general interest of the organisation as a whole
and not for his self-interest. Under cooperation, service is of supreme
importance and self-interest is of second­ary importance.

(iii) Democratic Management- An individual member is considered not as a

capitalist but as a human being and under cooperation, economic equality is
fully ensured by a general rule—one man one vote. Whether one contributes
50 rupees or 100 rupees as share capital, all enjoy equal rights and equal
duties. A person having only one share can even become the president of
cooperative society.

(iv) Capital- Capital of a cooperative society is raised from members through

share capital. Coop­eratives are formed by relatively poorer sections of
society; share capital is usually very limited. Since it is a part of govt. policy
to encourage coopera­tives, a cooperative society can increase its capital by
taking loans from the State and Central Coop­erative Banks.

(v) Fixed Return on Capital- In a cooperative organisation, we do not have

the dividend hunting element. In a consumers’ cooperative store, return on
capital is fixed and it is usually not more than 12 p.c. per annum. The surplus
profits are distrib­uted in the form of bonus but it is directly connected with
the number of purchases by the member in one year.

(vi) Cash Sale- In a cooperative organisation “cash and carry system” is a

universal feature. In the absence of adequate capital, grant of credit is not
possible. Cash sales also avoided risk of loss due to bad debts and it could also
encourage the habit of thrift among the members.

(vii) Moral Emphasis- A cooperative organisa­tion generally originates in the

poorer section of population; hence more emphasis is laid on the de­velopment
of moral character of the individual member. The absence of capital is
compensated by honesty, integrity and loyalty. Under cooperation, honesty is
regarded as the best security. Thus co­operation prepares a band of honest and
selfless workers for the good of humanity.

(viii) Corporate Status- A cooperative associa­tion has to be registered under

the separate legisla­tion—Cooperative Societies Act. Every society must have
at least 10 members. Registration is desirable. It gives a separate legal status to
all cooperative organisations—just like a company. It also gives ex­emptions
and privileges under the Act.

Types of Cooperatives
Cooperatives may be formed in all walks of life. Some of them are concerned with the
moral and social uplift of a weak section of the people, while many of them combine
some business activ­ity with service to members. The principal types of business
cooperatives are:

(i) Cooperative Credit Societies- Cooperative Credit Societies are

voluntary associations of peo­ple with moderate means formed with the object
of extending short-term financial accommodation to them and developing the
habit of thrift among them. Germany is the birth place of credit coopera­tion.
Credit cooperation was born in the middle of the 19th century. Rural credit
cooperative societies were started in the villages to solve the problem of
agricultural finance.

The village societies were fed­erated into central cooperative banks and
central cooperative banks federated into the apex of state cooperative banks.
Thus, rural cooperative finance has a federal structure like a pyramid. The
primary society is the base. The central bank in the middle and the apex bank
in the top of the structure. The members of the primary society are villagers. In
the similar manner urban cooperative credit societies were started in India.
These urban coop­erative banks look after the financial needs of arti­sans and
labour population of the towns. These urban cooperative banks are based on
limited li­ability while the village cooperative societies are based on unlimited
liability.

National Bank for Agriculture and Rural De­velopment (NABARD) has been
established with an Authorised Capital of Rs. 500 crores. It will act as an Apex
Agricultural Bank for disbursement of agricultural credit and for
implementation of the programme of integrated rural development. It is jointly
owned by the Central Govt. and the Reserve Bank of India.

(ii) Consumers’ Cooperative Societies- 28 Rochedale Pioneers in

Manchester in UK laid the foundation for the Consumers’ Cooperative
Move­ment in 1844 and paved the way for a peaceful revo­lution. The
Rochedale Pioneers who were mainly weavers, set an example by collective
purchasing and distribution of consumer goods at bazar rates and for cash
price and by declaration of bonus at the end of the year on the purchase made.
Their example has brought a revolution in the purchase and sale of consumer
goods by eliminating profit motive and introducing in its place service motive.
In India, consumers’ cooperatives have re­ceived impetus from the govt,
attempts to check rise in prices of consumer goods.

(iii) Producers’ Cooperatives- It is said that the birth of Producers’

Cooperatives took place in France in the middle of 19th century. But it did not
make satisfactory progress. Producers’ Cooperatives, also known as indus­trial
cooperatives, are voluntary associations of small producers formed with the
object of elimi­nating the capitalist class from the system of in­dustrial
 production. These societies produce goods for meeting the requirements of
consumers. Some­times their production may be sold to outsiders at a profit.

There are two types of producers’ cooperatives. In the first type, producer-
members produce indi­vidually and not as employees of the society. The
society supplies raw materials, chemicals, tools and equipment’s to the
members. The members are sup­posed to sell their individual products to the
society. In the second type of such societies, the member-producers are treated
as employees of the soci­ety and are paid wages for their work.

(iv) Housing Cooperatives- Housing coopera­tives are formed by persons

who are interested in making houses of their own. Such societies are formed
mostly in urban areas. Through these soci­eties persons who want to have their
own houses secure financial assistance.

(v) Cooperative Farming Societies- The coop­erative farming societies are

basically agricultural cooperatives formed for the purpose of achieving the
benefits of large-scale farming and maximizing agricultural output. Such
societies are encouraged in India to overcome the difficulties of subdivision
and fragmentation of holdings in the country.

Advantages of Cooperative Society

(i) A cooperative society is a 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) Membership in a cooperative organisation is open to all people having a

common interest. A person can become a member at any time he likes and can
leave the society at any time by returning his shares, without affecting its
continuity.

(iii) A cooperative society is managed in a democratic manner. It is based on the

principle of ‘one man one vote’. All members have equal rights and can have a
voice in its management.

(iv) The liability of the members of a co-operative society is limited to the extent
of capital contributed by them. They do not have to bear personal liability for
the debts of the society.

(v) 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) The operation of a cooperative society is quite economical due to elimination

of middlemen and the voluntary services provided by its members.
 (vii) Some of the expenses of the management are saved by the voluntary services
rendered by the members. They take active interest in the working of the
society. So, the society is not required to spend large amount on managerial
personnel.

Disadvantages of Cooperative Society

(i) Cooperatives are usually at a disadvantage in raising capital because of the

low rate of return on capital invested by the members.

(ii) The management of a co-operative society is generally inefficient because the

managing committee consists of part-time and inexperienced people. Qualified
managers are not attracted towards a cooperative on account of its limited
capacity to pay adequate remuneration.

(iii) A cooperative society is formed for mutual benefit and the interest of
individual members is not fully satisfied. There is no direct link between effort
and reward. Hence, members are not inclined to put their best efforts in a
co­operative society.

(iv) Once the initial enthusiasm about the co-operative ideal is exhausted,
differences and group conflicts arise among members. Then, it becomes
difficult to get full co-operation from the members. The selfish motives of
members begin to dominate and service motive is sometimes forgotten.

(v) Excessive Government regulation and control over co-operatives affect their
functioning. For example, a co-operative society is required to get its accounts
audited by the auditors of the co-operative department and to submit its
accounts regularly to the Registrar. These regulations and control may
adversely affect the flexibility of operations and the efficiency of management
in a co-operative society.

(vi) Cooperatives, generally, do not face any stiff competition. Markets for their
goods and services are more or less ready and assured. Hence, there is
possibility of slackening of efforts.

(vii) The members of the societies are generally from poor sections of the society.
These persons need credit facilities. On the other hand, private traders extend
credit facilities to the consumers. Though the societies sell goods at lower
prices but absence of credit facilities compel them to go to private traders for
meeting their requirements.

PART III- TYPES OF COMPANIES

Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company formed and
registered under this Act or an existing company”. Section 3(1) (ii) Of the act states that “an
existing company means a company formed and registered under any of the previous
companies’ laws”. This definition does not reveal the distinctive characteristics of a company.

According to Chief Justice Marshall of USA, “A company is a person, artificial, invisible,

intangible, and existing only in the contemplation of the law. Being a mere creature of law, it
possesses only those properties which the character of its creation of its creation confers upon
it either expressly or as incidental to its very existence.”

Another comprehensive and clear definition of a company is given by Lord Justice Lindley,
“A company is meant an association of many persons who contribute money or money’s
worth to a common stock and employ it in some trade or business, and who share the profit
and loss (as the case may be) arising there from. The common stock contributed is denoted in
money and is the capital of the company. The persons who contribute it, or to whom it
belongs, are members. The proportion of capital to which each member is entitled is his
share. Shares are always transferable although the right to transfer them is often more or less
restricted.”

1. Types of Companies

Company forms of businesses have become immensely popular over the years. Their
development has led to the creation of so many new types of companies. Companies
are to be classified on the basis of liabilities, members and on the basis of control. We
can classify all these companies in various categories.

(A)Companies on the Basis of Liabilities

When we look at the liabilities of members, companies can be limited by shares,

limited by guarantee or simply unlimited.

(i) Companies Limited by Shares- Sometimes, shareholders of some

companies might not pay the entire value of their shares in one go. In these
companies, the liabilities of members is limited to the extent of the amount not
paid by them on their shares. This means that in case of winding up, members
will be liable only until they pay the remaining amount of their shares.

(ii) Companies Limited by Guarantee- In some companies, the

memorandum of association mentions amounts of money that some members
guarantee to pay. In case of winding up, they will be liable only to pay only
the amount so guaranteed. The company or its creditors cannot compel them
to pay any more money.

(iii) Unlimited Companies- Unlimited companies have no limits on their

members’ liabilities. Hence, the company can use all personal assets of
shareholders to meet its debts while winding up. Their liabilities will extend to
the company’s entire debt.
(B) Companies on the basis of members

(i) One Person Companies (OPC)- These kinds of companies have only
one member as their sole shareholder. They are separate from sole
proprietorships because OPCs are legal entities distinct from their sole
members. Unlike other companies, OPCs don’t need to have any minimum
share capital.

(ii) Private Companies- Private companies are those whose articles of

association restrict free transferability of shares. In terms of members, private
companies need to have a minimum of 2 and a maximum of 200. These
members include present and former employees who also hold shares.

(iii) Public Companies- In contrast to private companies, public companies

allow their members to freely transfer their shares to others. Secondly, they
need to have a minimum of 7 members, but the maximum number of members
they can have is unlimited.

(C)Companies on the basis of Control or Holding

(i) Holding and Subsidiary Companies- In some cases, a company’s

shares might be held fully or partly by another company. Here, the company
owning these shares becomes the holding or parent company. Likewise, the
company whose shares the parent company owns becomes its subsidiary
company. Holding companies exercise control over their subsidiaries by
dictating the composition of their board of directors. Furthermore, parent
companies also exercise control by owning more than 50% of their subsidiary
companies’ shares.

(ii) Associate Companies- Associate companies are those in which other

companies have significant influence. This “significant influence” amounts to
ownership of at least 20% shares of the associate company. The other
company’s control can exist in terms of the associate company’s business
decisions under an agreement. Associate companies can also exist under joint
venture agreements.

(D)Companies in terms of Access to Capital

(i) Listed Companies- Listed companies have their securities listed on stock
exchanges. This means people can freely buy their securities. Hence, only
public companies can be listed, and not private companies.

(ii) Unlisted Companies- Unlisted companies, on the other hand, do not list
their securities on stock exchanges. Both, public, as well as private companies,
can come under this category.

(E) Other Types of Companies

 (i) Government Companies- Government companies are those in which
more than 50% of share capital is held by either the central government, or by
one or more state government, or jointly by the central government and one or
more state government.

(ii) Foreign Companies- Foreign companies are incorporated outside India.

They also conduct business in India using a place of business either by
themselves or with some other company.

(iii) Charitable Companies (Section 8)- Certain companies have charitable

purposes as their objectives. These companies are called Section 8 companies
because they are registered under Section 8 of Companies Act, 2013.
Charitable companies have the promotion of arts, science, culture, religion,
education, sports, trade, commerce, etc. as their objectives. Since they do not
earn profits, they also do not pay any dividend to their members.

(iv) Dormant Companies- These companies are generally formed for future
projects. They do not have significant accounting transactions and do not have
to carry out all compliances of regular companies.

(v) Nidhi Companies- A Nidhi company functions to promote the habits of

thrift and saving amongst its members. It receives deposits from members and
uses them for their own benefits.

(vi) Public Financial Institutions- Life Insurance Corporation, Unit Trust of

India and other such companies are treated as public financial institutions.
They are essentially government companies that conduct functions of public
financing.

2. Organs of the Company

The Companies Act recognises a limited but nevertheless significant role for the
company’s members. It gives members certain rights and reserves to them certain
important prerogatives to the exclusion of the directors. Beyond the rights
bestowed by the Act additional rights of control are derived from the articles
of association itself. This is the agreement that divides a company’s power between
the directors and the members. It sets out the constitutional framework of the
company.

he members and the directors constitute the organs of the company: they have
constitutional authority to act as the company rather than merely to represent the
company as its agent. However, since a company is an artificial person, it
can only act through an agency of a human person. For this purpose, a company has
two primary organs:
(i) The General Meeting (Shareholders)- The term ‘shareholder’ is used
to denote any person, institution or company that has ownership of at least one
share of a company’s stocks, also referred to as equity. Also known as
stockholders, such entities are partial owners of a company and are entitled to
a share in the profits that the said company generates. These profits are
provided to stockholders by way of dividend distribution, or through an
increase in stock valuation.

Similarly, when the share price of a company drops due to losses suffered by it
each year, shareholders to suffer a loss from their investment. It consequently
leads to a decline in their portfolio value. In this regard, it is crucial to note
that when a company liquidates its assets, common stockholders receive their
proceeds only after bondholders, creditors, and preference stockholders have
received their portion of the profit. Furthermore, in case a company declares
bankruptcy, stockholders also stand a chance of losing their entire investment.

Shareholder Rights

There are a few things that people need to consider when it comes to being a
shareholder. This includes the rights and responsibilities involved with being a
shareholder and the tax implications. According to a corporation’s charter and
bylaws, shareholders traditionally enjoy the following rights:

a) The right to inspect the company’s books and records.

b) The power to sue the corporation for the misdeeds of its directors
and/or officers.

c) The right to vote on key corporate matters, such as naming board

directors and deciding whether or not to green-light potential mergers.
d) The entitlement to receive dividends if the board decides to pay them.

e) The right to attend annual meetings, either in person or via conference

calls.

f) The right to vote on critical matters by proxy, either through mail-in

ballots or online voting platforms if they’re unable to attend voting
meetings in person.

g) The right to claim a proportionate allocation of proceeds if a company

liquidates its assets.

Types of Shareholders

An entity that controls more than 50% of a company’s outstanding shares is

known as a majority shareholder and wields substantial power when it comes
to making key decisions for the company’s operations. Conversely, entities
 with less than 50% ownership of a company’s shares are referred to as
minority stockholders. Shareholders of a company are of two types.

a) Common Shareholders- As their name suggests, they are the

owners of a company’s common stocks. These individuals enjoy voting
rights over matters concerning the company. Furthermore, they can
also exercise the aforementioned rights, including filing class-action
lawsuits against any matter that can harm the organisation.

b) Preferred Shareholders- Preferred stockholders, on the other

hand, enjoy precedence over common stockholders when it comes to a
company’s profit distribution. While they do not hold a right to vote in
matters pertaining to a company’s executive decisions, preferred
stockholders are entitled to fixed dividend rates, even if said
company’s profitability is at stake.

(ii) Board of Directors- A board of directors plays a role in both the daily and
long-term operations and decisions made by an organization. A board serves as
a protective entity for the interests of a company's shareholders, meeting
regularly to discuss ways to increase returns and overall profits. If you're
interested in becoming a shareholder or serving as a member of a corporate
board of directors, it can be helpful to understand how the hierarchy of boards
works.

A board of directors, also known as a “board” or "B of D," is a group of

people elected by a company's shareholders to represent their interests. The
board acts as a governing body for a company or corporation. Their primary
goal is to protect the assets of the shareholders by ensuring an organization's
management acts on their behalf and that they get a good return on their
investment (ROI) in the company. They do this by meeting regularly to create
policies for overall company oversight and management.

Functioning of Board of Directors

The powers and structure of a board of directors vary by organization. A

company's bylaws determine the details of an organization's operations. The
bylaws determine protocols including how frequently the board meets, the
number of members that must be on the board at any given time and election
processes for new members. Here is a breakdown of how the size and electoral
processes of a board of director’s work:

a) Board size- The size of the board of directors depends on the needs
of the company. However, most boards have three to 31 members. An
uneven number is recommended to avoid tie votes. Many analysts
claim that seven is the ideal number of members for a board. No matter
the number, the directors should represent the interests of both the
shareholders and management with external and internal members.
 b) Elections- Company shareholders typically elect members of a board
of directors at an annual shareholders' meeting. Independent outside
directors create a special committee to vote on the nominations. Boards
typically try to stagger director terms to minimize the number of
elections in a year.

c) Dismissal- Many board member contracts include what's known as a

“golden parachute clause” that requires the company to pay the
director a bonus if they have to leave their position. Some boards detail
fitness-to-serve protocols in their bylaws and foundational rules that
can lead to a director's expulsion if broken. These types of infractions
could be things such as:

i. Conducting transactions with the company that are considered a

conflict of interest
ii. Attempting to sway a board vote by making deals with outside
individuals

iii. Making money by utilizing the company's proprietary

information

iv. Abusing directorial powers

Types of Board Members

An effective board should represent both management and shareholder

interests and include members from within and outside the business. They
typically include:

a) Chairperson- Sometimes referred to as a “chairman” or

“president,” the chairperson is the acting head of the board of directors.
While the chairperson sets the direction for the board, all board
members serve as peers, with many companies choosing CEOs as
chairpersons.

b) Vice Chairperson- Sometimes referred to as “vice president,” the

vice chairperson serves in the chairperson's absence. They may work
under the title of “chairperson-elect” if plans call for the member to
serve as the next head of the board.

c) Treasurer- The treasurer handles the company's financial health but

does not take responsibility for day-to-day operations. They typically
manage the annual budget, financial policies, investments and financial
audits.
 d) Secretary- The secretary has the overall responsibility to create and
maintain corporate records and other important corporate documents.
They may keep minutes during board meetings and get in contact with
new investors.

e) Executive Director- The executive director is an inside director

that holds an executive position within the organization. This may be
someone who works as a CEO or in another leading role.

f) Nominee Director- An interest group, creditor or shareholder

appoints the nominee director. Therefore, this role has a continuing
interest in the company that appointed them.

g) Celebrity Director- Celebrity director is a common addition to a

U.S. board. They bring celebrity traits such as credibility, goodwill,
image and influence to enhance public attention.

Types of Boards

All public companies are required to have a board of directors that includes
members from inside and outside the organization. However, many nonprofit
and private organizations elect to run their business this way as well. An
effective board must fit its company's needs. Here are a few different types of
boards:

a) Advisory- An advisory board provides education, perspective and

insight to an organization's decision-maker. Advisory boards also
function under the title of a "council." Members typically work with
other boards, such as a managing or working board, to handle other
areas of the business.

b) Classified- A classified board, also known as a “staggered board of

directors,” has different classes of directors. Each class has a certain
percentage of the total positions. On a staggered board, only one class
is open to election each term. A staggered board can serve as a defense
strategy against hostile takeovers.

c) Collective- In a collective, or “cooperative board,” members work

and vote equally on all points of business. They share a common goal
or purpose and make decisions as a group. Such boards are most
common in small or medium-sized nonprofit organizations.

d) Fundraising- A fundraising board loosely resembles what the

average board of directors looks like. Its primary purpose is usually to
use the influence, resources and connections of its members to benefit
the organization. They may organize events or campaigns to meet their
monetary goals.
 e) Governing- A governing board leads an organization by acting as a
single entity that performs in the best interests of the shareholders.
They provide direction and guidance for the company's owner since
the owner does not sit on the board. They operate at a distance from
the organization, focusing on the company's future and the broad issues
that come with it.

f) Managing or Executive- The members of a managing or

executive board work as a group to manage a company's daily and
long-term operations. They serve in place of a CEO, providing the
company with organization and purpose. Members tend to work
through subcommittees to handle different aspects of the company.

3. Company Meetings

Company meetings are essential components of corporate governance, serving as

platforms where important decisions are made and significant issues are discussed.
They provide a structured environment for shareholders, directors and other
stakeholders to voice their opinions, vote on key matters and ensure that the company
operates in compliance with legal and regulatory frameworks.

Given the diverse nature of company operations, various types of meetings are
necessary to address specific issues and fulfil different functions. This article will
explore the different types of company meetings, their requisites and their
significance in maintaining the health and legality of corporate entities. Meetings in a
corporate context are essential for several reasons:

(i) Decision-Making- Meetings provide a platform for collective decision-

making, where the opinions and votes of shareholders or directors can shape
the future of the company.

(ii) Transparency- Regular meetings ensure that the company’s operations are
transparent and that all stakeholders are informed about the company’s
financial status, strategic plans and any issues that need to be addressed.

(iii) Compliance- Many types of company meetings are required by law, such as
Annual General Meetings (AGMs), ensuring that the company adheres to legal
and regulatory standards.

(iv) Accountability- Meetings hold directors and management accountable to

shareholders and other stakeholders by providing a forum for them to report
on their activities and performance.

(v) Conflict Resolution- Meetings offer a structured environment where

conflicts among stakeholders can be discussed and resolved through dialogue
and voting.
Requisites of a Valid Company Meeting

For a company meeting to be considered valid and legally binding, it must meet
certain requisites. These requisites ensure that the meeting is conducted in a manner
that respects the rights of all participants and adheres to the company’s legal
obligations. Given the critical roles that meetings play, it is essential that they are
conducted in a valid and legal manner, following specific requisites.

(i) Proper Authority- The meeting must be convened by an individual or

body with the proper authority to do so, such as the board of directors, a
committee or a group of shareholders with the requisite power under the
company’s articles of association. If a meeting is called without the
appropriate authority, any decisions made during the meeting may be
invalidated.

(ii) Proper Notice- Proper notice of the meeting must be given to all eligible
participants. This notice should include the date, time, place and agenda of the
meeting. The notice period must comply with the requirements set forth in the
Companies Act, 2013, specifically under Sections 101 and 102. Failure to
provide adequate notice can lead to the meeting’s decisions being challenged
or invalidated.

(iii) Quorum- A quorum is the minimum number of members or shareholders

required to be present for the meeting to proceed. The quorum ensures that the
meeting represents a sufficient portion of the company’s stakeholders. The
specific number required for a quorum will depend on the company’s articles
of association and the type of meeting being held.

(iv) Presiding Officer- A valid meeting must be presided over by a proper

chairman or presiding officer. The chairman is responsible for conducting the
meeting in an orderly manner, ensuring that the agenda is followed and that all
participants have the opportunity to speak. The chairman’s role is important in
maintaining the legality and decorum of the meeting.

(v) Valid Transaction of Business- The business conducted during the

meeting must be within the scope of the agenda provided in the notice. Any
decisions made outside of this agenda may be considered invalid. It is also
essential that the business is transacted in a manner that complies with the
company’s articles of association and relevant laws.

(vi) Preparation of Minutes- Accurate minutes of the meeting must be

prepared, documenting the discussions, decisions and resolutions passed
during the meeting. These minutes serve as an official record and may be used
as evidence in legal proceedings or for future reference. The minutes must be
signed by the chairman or another authorised individual.
Types of Company Meetings

Company meetings are integral to the effective governance and management of

corporate entities. They provide a formal structure for decision-making, transparency
and accountability, ensuring that the company operates within the legal framework
and in the best interests of its stakeholders. Different types of company meetings
serve various purposes and are tailored to the specific needs of the company at
different stages of its operations. Below, we explore the primary types of company
meetings:

(i) Statutory Meeting- A statutory meeting is the first meeting of

shareholders, held by public companies within a specified period after
incorporation. This meeting is essential for discussing the company’s
formation, financial position and the goals of the business. It provides an
opportunity for shareholders to understand the company’s structure and future
plans.

Features of Statutory Meeting

a) Held only once during the company’s lifetime.

b) Provides shareholders with the statutory report detailing share capital,

assets and liabilities.

c) Ensures transparency during the early stages of the company’s

operations.

Importance: The statutory meeting is critical for laying the foundation of

transparency and shareholder involvement in the company’s operations.

(ii) Annual General Meeting (AGM)- The AGM is a mandatory meeting

held by both public and private companies at the end of each financial year. It
serves as a platform for presenting the company’s financial performance,
electing directors, declaring dividends and addressing shareholder concerns.

Features of AGM

a) Mandatory annual event.

b) Discusses financial statements, director appointments and auditor

reports.

c) Provides shareholders with voting rights on key issues.

Importance: The AGM is a cornerstone of corporate governance, ensuring

that shareholders are informed and involved in the company’s key decisions.
(iii) Extraordinary General Meeting (EGM)- An EGM is convened to
address urgent or exceptional issues that cannot wait until the next AGM.
These meetings are usually called for specific purposes such as mergers,
acquisitions or changes to the company’s rules.

Features of EGM

a) Held to discuss urgent issues outside the AGM schedule.

b) Requires specific notice and agenda tailored to the issue at hand.

c) Decisions made are binding on the company.

Importance: EGMs allow companies to respond quickly to significant

events, ensuring that important decisions are made in a timely manner.

(iv) Class Meetings- Class meetings are held for shareholders who hold a
particular class of shares, such as preference shares. These meetings address
issues that specifically affect that class, such as changes in dividend rights or
voting powers.

Features of Class Meetings

a) Exclusive to a particular class of shareholders.

b) Focuses on issues like rights alterations or class-specific decisions.

c) Resolutions passed are only binding on the class concerned.

Importance: Class meetings ensure that the interests of different

shareholder classes are protected and that any changes to their rights are made
with their approval.

(v) Board of Directors Meeting- The board of directors meets regularly to

discuss and decide on the company’s strategic direction, financial performance
and key management issues. These meetings are central to the company’s
governance and operational efficiency.

Features of Board Meetings

a) Regularly scheduled, often monthly or quarterly.

b) Covers strategic planning, financial oversight and policy-making.

c) Decisions made by the board guide the company’s operations.

 Importance: Board meetings are essential for maintaining effective
oversight of the company’s management and ensuring that the company
remains on track to achieve its objectives.

(vi) Committee Meetings- Committee meetings involve smaller groups within

the board, such as the audit committee, compensation committee or risk
management committee. These meetings focus on specific areas of the
company’s operations and provide detailed oversight.

Features of Committee Meetings

a) Specialised focus on areas like finance, compensation or risk.

b) Involves experts and directors with specific knowledge.

c) Reports and recommendations are submitted to the full board for

approval.

Importance: Committee meetings allow for in-depth analysis and oversight

of critical areas, ensuring that the company’s operations are managed
efficiently and effectively.

(vii) Debenture Holders Meeting- Debenture holder meetings are convened

to discuss issues related to debentures, such as repayment schedules,
restructuring or defaults. These meetings are important for maintaining the
trust and confidence of the company’s creditors.

Features of Debenture Holders Meetings

a) Focuses on matters related to debentures and debt instruments.

b) Provides a forum for negotiating terms and resolving disputes.

c) Decisions impact the company’s financial structure and obligations.

Importance: These meetings ensure that the interests of debenture holders

are considered and that any issues related to the company’s debt obligations
are addressed transparently.

(viii) Creditors Meeting- Creditors meetings are typically held during

insolvency or liquidation proceedings to discuss the repayment of debts, asset
distribution and other financial matters. These meetings are vital for ensuring
that creditors receive fair treatment during the liquidation process.

Features of Creditors Meetings

 a) Held in the context of insolvency or liquidation.

b) Focuses on debt repayment, asset allocation and solvency.

c) Creditors vote on proposals related to the company’s financial

restructuring.

Importance: Creditors meetings play an important role in the fair and

orderly resolution of a company’s financial obligations during insolvency.

(ix) Creditors and Contributors Meeting- These meetings are convened

during the voluntary dissolution of a company, involving both creditors and
contributors (shareholders). The discussions focus on the division of assets,
repayment of debts and distribution of any surplus funds.

Features of Creditors and Contributors Meetings

a) Involves both creditors and shareholders in the dissolution process.

b) Discusses asset division, debt repayment and surplus allocation.

c) Ensures transparency and fairness in the liquidation process.

Importance: These meetings ensure that all stakeholders are involved in the
dissolution process and that their interests are protected.

4. Resolutions

The “resolution” is a plan sent to the meeting for discussion and approval. If the
motion is approved by the members present at the meeting unanimously, it is referred
to as a resolution. Three forms of resolutions are available: ordinary resolution,
special resolution and unanimous resolution. There is no concept of special resolution
in board meetings and very few unanimous resolutions are also required. However, all
three are covered in the case of general meetings.

The company is making progress on the basic decisions taken by the company
members. Which means shareholders and directors of the company. Making decisions
for a company is a very crucial process because one wrong decision can harm the
economic progress of the company. To avoid this, the company must follow the rules
and regulations for making decisions. This resolution is a process that helps to make
decisions in the right way.

Resolution is a vital concept that requires many factors for deciding whether any
specific types are required for a particular decision. By passing a resolution, the
company can change its legal statutes, make any alteration in its MOA, or AOA, or
make any appointments, or removal or reappointments for any position in the
company. The decision taken by resolution ensures that the decision is fair,
transparent, legally valid, and binding on the company.

Types of Resolutions

A resolution is a decision taken by the members of a company that includes

shareholders, directors of the company, or any other members who are eligible to vote
for any resolution. When members make decisions on various aspects of the company,
like operations or finances, they make decisions that are important for the economic
progress of the company. The process of passing a resolution starts with creating
proposals for resolution that show why a specific resolution is needed for any specific
company decision. Resolutions are of the following types:

(i) Ordinary Resolution- An ordinary resolution is a resolution where the

votes cast “for” exceed the votes cast “against” it. This is a resolution affirmed
by more than half the motion, present or delegate at the general assembly,
confirmed that they had attended. The vote casting, in favour of the resolution,
should be passed by one of the following modes, i.e. hand display, polling or
electronically.

The member shall be properly informed of the convocation of the conference.

In fact, participants who are not present will not be taken into account. In
general, an ordinary decision must be taken for AGM (Annual General
Meeting) to run ordinary business. Popular enterprise consists of the
following:

a) Adoption of final accounts.

b) Declaration of the dividend.

c) Retirement and appointment of Directors.

d) Retirement and appointment of Auditors and fixing their remuneration.

Following are some actions for which ordinary resolution is required:

a) Accepting deposits from public

b) Appointment of alternate director

c) To fill casual vacancy of official liquidator

d) Removal of Director before expiry of term except Director appointed

by NCLT

e) Ordinary business transacted at Annual General Meeting

 (ii) Special Resolution- Special Resolution (SR) is a Resolution that needs
three times as many votes cast in support of the proposal as votes cast against
it. A minimum of 75% of members should demonstrate a strong favour for the
motion. Many stuff can only be achieved by the organization if a special
resolution is approved at the well-established general meeting. The members
should be duly notified to the general meeting and the communication should
contain the intention of making a resolution as SR specially mentioned.

Following are some actions for which Special Resolution required:

a) For changing registered office of company as per sec 12(5) of

Companies Act,2013

b) For altering Memorandum of association

c) For altering Article of Association including alteration having effect of

conversion of Private company into Public company and vice versa

d) For variation of shareholders right as per section 48(1)

e) For reducing share capital of company

Difference between Ordinary and Special Resolution

BASIS OF
ORDINARY RESOLUTION SPECIAL RESOLUTION
COMPARISON
Meaning If a majority vote is required in the Whether a super-majority vote is
general meeting to put forward the required at the general meeting, it is
proposal, it is considered an ordinary referred to as a special resolution.
resolution.

Consent of A minimum of 51% of members A minimum of 75% of members

members should demonstrate a strong favor for should demonstrate a strong favor
the motion. for the motion.

Registration with Filing a copy for “OR” with ROC Filing a copy of “SR” with ROC.
ROC (only certain cases).

Business Either the ordinary business or a Only a special business.

transacted special business- depends on the need
of the Act.

Meetings are conducted in an organization to make decisions by voting on specific

proposals sent to the meeting. An ordinary resolution is necessary to deal with
business, Ordinary Resolution is sufficient to transact the business, apart from the
ordinary business are Change of company’s name, at the direction of ROC, when the
name registered previously is incorrect or wrong or Rectification of company’s name
as directed by Central Government, remuneration of cost accountant.
 Matters which require Special Resolution are the issue of sweat equity shares,
alteration in the provisions of the memorandum of association, alteration of articles of
association, buy back of shares or securities, variation in the objects of the prospectus,
shifting of registered office of the company and so on.

5. Choice of Form of Organization

The selection of a suitable form of ownership organisation is an important

entrepreneurial decision because it influences the success and growth of a business
e.g., it determines the decision of profits, the risk associated with business, and so on.
As discussed earlier, the different forms of private ownership organisation differ from
each other in respect of division of profit, control, risk, legal formalities, flexibility,
etc.

Therefore, a thoughtful consideration should be given to this problem and only that
form of ownership should be chosen. Since the need for the selection of ownership
organisation arises both initially, while starting a business, and at a later stage for
meeting the needs of growth and expansion, it is desirable to discuss this question at
both these levels. For a new or proposed business, the selection of a suitable form of
ownership organisation is generally governed by the following factors:

(i) Nature of business activity- This is an important factor having a direct

bearing on the choice of a form of ownership. In small trading businesses,
professions, and personal service trades, sole-proprietorship is predominant.
The partnership is suitable in all those cases where sole proprietorship is
suitable, provided the business is to be carried on a slightly bigger scale.
Besides, partnership is also advantageous in case of manufacturing activities
on a modest scale. Manufacturing contains the highest percentage of
companies among all industries. Similarly large chain stores, multiple shops,
super-bazaars, engineering companies are in the form of companies.

(ii) Scale of operations- If the scale of operations of business activities is

small, sole proprietorship is suitable; if this scale of operations is modest
neither too small nor too large partnership is preferable; whereas, in case of
large scale of operations, the company form is advantageous. The scale of
business operations depends upon the size of the market area served, which, in
turn, depends upon the size of demand for goods and services. If the market
area is small, local, sole-proprietorship or partnership is opted. If the demand
originates from a large area, partnership or company may be adopted.

(iii) Capital requirements- Requirement of capital is closely related to the

type of business and scale of operations. Enterprises requiring heavy
investment (like iron and steel plants, medicinal plants, etc.) should be
organised as joint stock companies. Enterprises requiring small investment
(like retail business stores, personal service enterprises, etc.) can be best
organised as sole proprietorships. Partnerships can often raise funds with
greater ease, since the resources and credit of all partners are combined in a
 single enterprise. Companies are usually best able to attract capital because
investors are assured that their liability will be limited.

(iv) Degree of control and management- The degree of control and

management that an entrepreneur desires to have over business affects the
choice of ownership organisation. In sole proprietorship, ownership,
management, and control are completely fused, and therefore, the entrepreneur
has complete control over business. In partnership, management and control of
business is jointly shared by partners. Even then, they are legally accountable
to each other. In a company, however, there is divorce between ownership and
management. The management and control of company business is entrusted
to the elected representatives of shareholders.

(v) Degree of risk and liability- The size of risk and the willingness of
owners to bear it is an important consideration in the selection of a legal form
of ownership organisation. The amount of risk involved in a business depends,
among other, on the nature and size of business. Smaller the size of business,
smaller the amount of risk. In partnership, partners are individually and jointly
responsible for the liabilities of the partnership firm. Companies have a real
advantage, as far as the risk goes, over other forms of ownership. Creditors
can force payment on their claims only to the limit of the company’s assets.

(vi) Stability of business- A stable business is preferred by the owners insofar

as it helps him in attracting suppliers of capital who look for safety of
investment and regular return, and also helps in getting competent workers and
managers who look for security of service and opportunities of advancement.
From this point of view, sole proprietorships are not stable, although no time
limit is placed on them by law. Partnerships are also unstable, since they are
terminated by the death, insolvency, insanity, or withdrawal of one of the
partners. Companies have the most permanent legal structure. The life of the
company is not dependent upon the life of this member. Members may come,
members may go, but the company goes on forever.

(vii) Flexibility of administration- The internal organisation of a sole

proprietary business, for instance, is very simple, and therefore, any change in
its administration can be affected with least inconvenience and loss. The same
is largely true of a partnership business also. In a company organisation,
however, administration is not that flexible because its activities are conducted
on a large scale and they are quite rigidly structured.

(viii) Division of profit- Profit is the guiding force of private business and it has
a tremendous influence on the selection of a particular form of ownership
organisation. An entrepreneur desiring to pocket all the profits of business will
naturally prefer sole proprietorship. In sole proprietorship, the personal
liability is also unlimited. But if he is willing to share the profits partnership is
best. In company organisation, however, the profits (whenever the Board of
Directors decides) are distributed among shareholders in proportion to their
 shareholding, but the liability is also limited. The rate of dividend is generally
quite low.

(ix) Costs, procedure, and government regulation- Different forms of

organisation involve different procedure for establishment, and are governed
by different laws which affect the immediate and long-term functioning of a
business enterprise. From this point of view, sole proprietorships are the
easiest and cheapest to get started. There is no government regulation. What is
necessary is the technical competence and the business acumen of the owner.
Partnerships are also quite simple initiated. Even a written document is not
necessarily a prerequisite, since an oral agreement can be equally effective.
Company form of ownership is more complicated to from. It can be created by
law, dissolved by law, and operate under the complicated provisions of the
law.

6. Stages of Formation of a Company

Modern-day business requires a large amount of funds. The competition and change
in the technological environment are also increasing day by day. As a result, the
company form of organization is being preferred by more and more business firms.
The formation of a company involves several steps, that are required from the time a
business idea originates to the time a firm is legally ready to commence business, also
referred to as stages in the formation of a company. Those who are taking these steps
and the associated risks are promoting a company and are called its promoters.

However, it must be noted that these stages are appropriate from the point of view of
the formation of Public Ltd. Company. As far as the Private Ltd. Companies are
concerned only the first two stages mentioned above are appropriate. A Private Co.
can start its business immediately after obtaining the certificate of incorporation as it
is prohibited to raise funds from the public.

(i) Promotion of a Company- Promotion is the first stage in the formation

of a company. It involves conceiving a business opportunity and taking the
initiative to form a company so that practical shape can be given to exploiting
the available business opportunity. Apart from conceiving business
opportunities the promoters analyse its prospects and bring together the men,
materials, machinery, managerial abilities, and financial resources and set the
organization going. Functions of a Promoter are:

a) Identification of Business Opportunity

b) Feasible Studies

i. Technical Feasibility

ii. Financial Feasibility

 iii. Economic Feasibility

c) Name Approval

d) Fixing up Signatories to the Memorandum of Association

e) Appointment of Professionals

f) Preparation of Necessary Documents

(ii) Documents Required to be Submitted

a) Memorandum of Association- MOA is the most important

document as it defines the objective of the company. No companies
can legally undertake activities that are not contained in the MOA. The
MOA contains different clauses which are given as follows-

i. The Name Clause

ii. Registered Office Clause

iii. Objects Clause

iv. Liability Clause

v. Capital Clause

vi. Association Clause

b) Articles of Association- AOA contains the rules regarding the

internal management of the company. A Public Ltd. Co. may adopt
Table A which is a model set of articles given in the companies act.
Table A is a document containing rules and regulations for the internal
management of a company. If a company adopts Table A, there is no
need to prepare separate Articles of Association.

c) Consent of Proposed Directors- Apart from the MOA and AOA,

written consent of each person named as a director is required
confirming that they agree to act in that capacity and undertake to buy
and pay for qualification shares.

d) Agreement- The agreement, if any, which the company proposes to

enter with any individual.
 e) Statutory Declaration- A declaration stating that all the legal
requirements about registration have been complied with is to be
submitted to the Registrar.

f) Payment of Fees- Along with the above-mentioned documents,

necessary fees have to be paid for the registration of the company.

(iii) Incorporation of a Company- After going through the above

formalities the promotors of the company make an application for the
Incorporation of the company. The application is to be filed with the Registrar
of the Companies of the state within which they plan to establish the registered
office of the company. The application for registration must be accompanied
by the same certain documents about which we have already discussed above.
These may be briefly mentioned again-

a) Memorandum of Association duly stamped, signed, and witnessed.

b) Article of Association duly stamped, signed, and witnessed.

c) Written Consent of the Proposed Directors

d) Agreement, if any, with the proposed Managing Director, Manager,

etc.

e) A copy of the Registrar’s Letter approving the Name of the Company.

f) A Statutory Declaration affirming that all legal requirements of

registration have been submitted.

g) Notice the exact Address of the Registered Office.

h) Documentary evidence of Payment of Fees.

(iv) Effect of the Certificate of Incorporation- A company is legally born

on the date printed on the Certificate of Incorporation. It becomes a legal
entity with perpetual succession on such a date. It becomes entitled to enter
into valid contracts. On the date of issue of Certificate of Incorporation, a
private company can immediately commence its business, it can raise
necessary funds through a private arrangement, and proceed to start a
business. A Public Company, however, has to undergo two more stages in its
formation.

(v) Subscription of the Capital- A Public Company can raise the required
funds from the public using an issue of shares and debentures. For this
purpose, it has to issue a prospectus which is a kind of invitation to the public
to subscribe to the capital of the company and undergo various other
formalities. The following steps are required for raising funds from the public-
 SEBI Approval- Securities and Exchange Board of India which is the
regulatory authority in our country has issued guidelines for the discloser of
information and investor protection. A company inviting funds from the
general public must follow SEBI guidelines of discloser of all the adequate
information.

Filing of Prospectus- Prospectus is a document that includes any notice,

circular, advertisement, or other documents inviting offers from the public for
the subscription. It has to be filed with the Registrar of Companies.

Appointment of Bankers, Brokers, and Underwriters

Minimum Subscription- If Applications received for the shares are for

an amount less than 90 percent of the issue size, the allotment cannot be made.
Application to Stock Exchange- Application is to be made to at least one stock
exchange for permission to deal its shares or debenture.

Allotment of Shares

(vi) Commencement of Business- If the amount of minimum subscription is

raised through the new issue of shares, a public company applies to the
Registrar of Companies for the issue of Certificate of Commencement of
Business. The following documents are required:

a) A declaration that shares payable in cash have been subscribed for and
allotted.

b) A declaration that every director has paid in cash, the application, and
allotment money on his shares.

c) A declaration that no money is payable or liable to become payable to

the applicants.

d) A statutory declaration that the above requirements have been

complied with.

7. Establishment of a Firm

Establishment of a successful business unit begins with choosing a good idea for the
business. This idea may be to produce something new or existing product; to buy and
sell a new or an existing product; or to provide some existing or new service to the
customers. But the question arises as to how would you decide on the product and the
type of business activity you should take up.

While selecting a particular product you have to conduct market and product analysis
from the viewpoint of consumers. The data on consumers’ preference and needs are to
be collected by using various market research techniques. You may survey the local
area to find out the demand for any product. If the existing demand is substantial in
the area and growing then you may consider to select that product. You may also
foresee some new opportunities expected to be arrived in near future due to any
change in social, political and technological activities. The various developmental
activities of the Government also generate other related activities. Following are the
steps involved in enterprise establishment:

(i) Information collection- The first step involved is to decide which

enterprise one wants to set up. This begins with collecting information about
the units already working in that field of concern. This can be done by various
ways such as going through the telephone directories or by visiting the
registrar’s office of the small-scale units. This will enable the prospective
entrepreneur to make an assessment of the present market situation in that
business activity. Based on this information, they can weigh the pros and cons
involved in entering into that business activity.

(ii) Selection of a suitable form of business organisation- On the basis

of ownership and Management, this is one of the important tasks of the
entrepreneur. Once a form of organisation is chosen, it is very difficult to
switch over to another form because it needs the winding up of the existing
organisation and involves a lot of time, effort and money. Therefore, the form
of organisation must be chosen after careful thought and consideration. Sole
Proprietorship, Partnership, Private Limited Company, Public Limited
Company, Cooperative Society and Joint Hindu Family are some of the forms
of business organization.

(iii) Information organization- Having collected information about

enterprise concern, the prospective entrepreneur needs to organize the same in
an orderly and systematic manner to derive the meanings from them. This will
help to make assessment about the minimum requirements to start an
enterprise in a particular business line. Here, one generally undertaken
exercise is to prepare a checklist for ready reference of all required and
available resources in terms of space, fund, training and development, and
manpower requirements. Once this exercise is over, the step involved will be
to prepare a summary of how the checklist will be transformed into the desired
products and services.

(iv) Vocational skills- The next step is to understand the need for upgrading
one’s vocational skills if it is a pre-requisite. There is a need to build on one’s
strengths in order to gain and feel confident of implementing your project of
setting an enterprise. Awareness and training in required subject can remove
structural barriers. Once your clients have set up, updating themselves on the
latest developments in the field should be a continuous process. They can also
hire skilled workers and staff to carry out the major tasks.

(v) Financial requirements- This is particularly important because generally

small entrepreneurs do not have their own funds. Hence, they depend upon
 borrowed funds from family members or relatives or friends or financial
institutions. While planning for finance, the prospective entrepreneur needs to
consider issues like sources, availability, estimation and management of
working capital. One should have the basic knowledge of preparing income
and expenditure statements.

(vi) Market assessment- No business enterprise can be thought of without

market. Enterprise exists, survives and thrives because of market. Production
has no value or meaning if it is not sold /marketed. Therefore, while planning
for establishing a small business enterprise, the prospective entrepreneur needs
to know who will buy his/her product.

(vii) Provision for crisis- The last but not the least step involved in setting up a
business enterprise is the preparedness to manage crisis situations, if any. Yes,
some may not consider it as a necessary step because foreseeing any crisis and
its handling is simply an additional step. Even many may view why to think in
a negative way for the worst which may not happen at all. Admitting that
optimism helps, there is no harm in being prepared for any eventuality, if it
arises. It is always useful to remain prepared for something unexpected in
terms of resources, policies, finances and natural calamities takes place.
Seeking insurance cover is the best way to deal with these situations.