ENGINEERING ECONOMICS AND

ACCOUNTANCY
UNIT-II

Forms of organising Private Sector &

Public Sector Business Enterprises

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 UNIT-II
 Private Sector Business Enterprises:
(i) Sole Proprietorship - Definition, features, merits,
limitations.
 (ii) Partnership - Definition, Partnership Act,
features, types, merits, limitations, suitability.
 (iii) Joint-Stock Company - Definition, Companies
Act, features, types, merits, limitations, suitability.

 Public Sector Business Enterprises: Definition,

features, objectives, merits, problems. 2
 SOLE PROPRIETORSHIP
The sole trader is the simplest, oldest and natural form of
business organization. It is also called sole proprietorship.
‘Sole’ means one. ‘Sole trader’ implies that there is only one
trader who is the owner of the business.
It is a one-man form of organization wherein the trader
assumes all the risk of ownership carrying out the business
with his own capital, skill and intelligence. He is the boss for
himself. He has total operational freedom. He is the owner,
Manager and controller. He has total freedom and flexibility.
Full control lies with him. He can take his own decisions. He
can choose or drop a particular product or business based on
its merits. He need not discuss this with anybody. He is
responsible for himself. This form of organization is popular3
all over the world. Ex: Restaurants, Supermarkets, pan shops,
Features

 It is easy to start a business under this form and also easy to close.
 He introduces his own capital. Sometimes, he may borrow, if necessary.
 He enjoys all the profits and in case of loss, he alone suffers.
 He has unlimited liability which implies that his liability extends to his
personal properties in case of loss.
 He has a high degree of flexibility to shift from one business to the other.
 Business secrets can be guarded well.
 There is no continuity. The business comes to a close with the death, illness
or insanity of the sole trader. Unless, the legal heirs show interest to
continue the business, the business cannot be restored.
 He has total operational freedom. He is the owner, manager and controller.
 He can be directly in touch with the customers.
 He can take decisions very fast and implement them promptly.
 Rates of tax, for example, income tax and so on are comparatively very low.4
Merits

1. Easy to start and easy to close

2. Personal contact with customers directly
3. Prompt decision-making
4. High degree of flexibility
5. Secrecy
6. Low rate of taxation
7. Direct motivation
8. Total Control
9. Minimum interference from the government
10.Transferability
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Limitations

1. Unlimited liability
2. Limited amounts of capital
3. No division of labour
4. Uncertainty
5. Inadequate for growth and expansion
6. Lack of specialization
7. More competition
8. Low bargaining power 6
 PARTNERSHIP
Partnership is an improved form of sole trader in
certain respects. Where there are like-minded persons
with resources, they can come together to do the
business and share the profits/losses of the business in
an agreed ratio. Persons who have entered into such an
agreement are individually called ‘partners’ and
collectively called ‘firm’. The relationship among
partners is called a partnership.
Indian Partnership Act, 1932 defines partnership as the
relationship between two or more persons who agree to
share the profits of the business carried on by all or any
one of them acting for all. 7
Features

1. Relationship
2. Two or more persons
3. There should be a business continuation
4. Agreement
5. Carried on by all or any one of them acting for all
6. Unlimited liability
7. Number of partners
10 partners is case of banking business
20 in case of non-banking business
8. Division of labour 8
9. Personal contact with customers
10.Flexibility
Partnership Act:
The written agreement among the partners is called ‘the partnership deed’.
It contains the terms and conditions governing the working of partnership.
The following are contents of the partnership deed.
1.Names and addresses of the firm and partners
2.Nature of the business proposed
3. Duration
4. Amount of capital of the partnership and the ratio for contribution by
each of the partners.
5. Their profit sharing ratios (this is used for sharing losses also)
6. Rate of interest charged on capital contributed, loans taken from the
partnership and the amounts drawn, if any, by the partners from their
respective capital balances.
7. The amount of salary or commission payable to any partner
8. Procedure to value goodwill of the firm at the time of admission of a
new partner, retirement or death of a partner
9. Allocation of responsibilities of the partners in the firm
10.Procedure for dissolution of the firm
11.Name of the arbitrator to whom the disputes, if any, can be referred to 9
for settlement.
12.Special rights, obligations and liabilities of partner(s), if any
Kinds of Partners:
 1. Active Partner: Active partner takes active part in the affairs of the
partnership. He is also called working partner.
 2. Sleeping Partner: Sleeping partner contributes to capital but does not
take part in the affairs of the partnership.
 3. Nominal Partner: Nominal partner is partner just for namesake. He
neither contributes to capital nor takes part in the affairs of business.
Normally, the nominal partners are those who have good business
connections, and are well placed in the society.
 4. Partner by Estoppels: Estoppels means behavior or conduct. Partner by
estoppels gives an impression to outsiders that he is the partner in the firm. In
fact he neither contributes to capital, nor takes any role in the affairs of the
partnership.
 5. Partner by holding out: If partners declare a particular person (having
social status) as partner and this person does not contradict even after he
comes to know such declaration, he is called a partner by holding out and he
is liable for the claims of third parties. However, the third parties should
prove they entered into contract with the firm in the belief that he is the
partner of the firm. Such a person is called partner by holding out.
 6. Minor Partner: Minor has a special status in the partnership. A minor can 10

be admitted for the benefits of the firm. A minor is entitled to his share of
profits of the firm. The liability of a minor partner is limited to the extent of
 PARTNERSHIP
Advantages:
• 1. Easy to form
• 2. Availability of larger amount of capital
• 3. Division of labour
• 4. Flexibility
• 5. Personal contact with customers
• 6. Quick decisions and prompt action
• 7. The positive impact of unlimited liability
Disadvantages:
• 1. Formation of partnership is difficult
• 2. Unlimited Liability
• 3. Lack of harmony or cohesiveness
• 4. Limited growth 11
• 5. Instability
• 6. Lack of Public confidence
 JOINT STOCK COMPANY
The joint stock company emerges from the limitations of
partnership such as joint and several liabilities, unlimited
liability, limited resources and uncertain duration and so on.
Normally, to take part in a business, it may need large money
and we cannot foretell the fate of business. It is not literally
possible to get into business with little money. Against this
background, it is interesting to study the functioning of a joint
stock company. The main principle of the joint stock company
from is to provide opportunity to take part in business with a
low investment as possible say Rs.1000. Joint Stock Company
has been a boon for investors with moderate funds to invest.
Company Defined
Lord Justice Lindley explained the concept of the joint stock
company form of organization as “an association of many
persons who contribute money or money’s worth to a common 12
stock and employ it for a common purpose”.
 JOINT STOCK COMPANY

 A company means a group of persons associated together for

the attainment of a common end, social or economic.
 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”
 According to Sec. 2(20) of Companies Act, 2013 a
“company” means a company incorporated under this Act or
under any previous company law.
 According to Prof. Haney, “Joint-stock company is a
voluntary association of individuals for profit, having a
capital divided into transferable shares, the ownership of
which is the condition of membership”
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Features
1. Artificial person: The Company has no form or shape. It is
an artificial person created by law. It is intangible, invisible
and existing only, in the eyes of law.
2. Separate legal existence: it has an independence existence, it
separate from its members. It can acquire the assets. It can
borrow for the company. It can sue other if they are in default
in payment of dues, breach of contract with it, if any.
Similarly, outsiders for any claim can sue it.
3. Voluntary association of persons: The Company is an
association of voluntary association of persons who want to
carry on business for profit. To carry on business, they need
capital. So they invest in the share capital of the company.
4. Limited Liability: The shareholders have limited liability
i.e., liability limited to the face value of the shares held by
them.
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5. Capital is divided into shares: The total capital is divided
into a certain number of units. Each unit is called a share.
6. Transferability of shares: In the company form of organization,
the shares can be transferred from one person to the other. A
shareholder of a public company can sell his holding of shares at his
will. However, the shares of a private company cannot be transferred.
7. Common Seal: As the company is an artificial person created by
law has no physical form, it cannot sign its name on a paper; so, it
has a common seal on which its name is engraved. The common seal
should affix every document or contract.
8. Perpetual succession: Members may come and members may
go, but the company continues for ever.
9. Ownership and Management separated: The shareholders are
spread over the length and breadth of the country, and sometimes,
they are from different parts of the world. To facilitate
administration, the shareholders elect some among themselves
directors to a Board, which looks after the management of the
business. The Board recruits the managers and employees at different 15
levels in the management. Thus the management is separated from
the owners.
10.Winding up: Winding up refers to the putting an
end to the company. Because law creates it, only law
can put an end to it. The company is not affected by the
death or insolvency of any of its members.
11.The name of the company ends with “limited”: it
is necessary that the name of the company ends with
limited (Ltd.) to give an indication to the outsiders that
they are dealing with the company with limited liability
and they should be careful about the liability aspect of
their transactions with the company.

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 Advantages
1. Mobilization of larger resources: A joint stock company
provides opportunity for the investors to invest, even small
sums, in the capital of large companies. The facilities rising
of larger resources.
2. Separate legal entity: The Company has separate legal
entity. It is registered under Indian Companies Act, 1956.
3. Limited liability: The shareholder has limited liability in
respect of the shares held by him. In no case, does his
liability exceed more than the face value of the shares
allotted to him.
4. Transferability of shares: The shares can be transferred to
others. However, the private company shares cannot be
transferred.
5. Liquidity of investments: By providing the transferability 17

of shares, shares can be converted into cash.

6. Inculcates the habit of savings and investments: Because
the share face value is very low, this promotes the habit of
saving among the common man and mobilizes the same towards
investments in the company.
7. Democracy in management: the shareholders elect the
directors in a democratic way in the general body meetings.
8. Continued existence: The Company has perpetual
succession. It has no natural end. It continues forever and ever
unless law put an end to it.
9. Growth and Expansion: With large resources and
professional management, the company can earn good returns on
its operations, build good amount of reserves and further
consider the proposals for growth and expansion.

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 Disadvantages
1. Formation of company is a long drawn procedure: Promoting a joint
stock company involves a long drawn procedure. It is expensive and
involves large number of legal formalities.
2. High degree of government interference: The government brings out a
number of rules and regulations governing the internal conduct of the
operations of a company such as meetings, voting, audit and so on, and any
violation of these rules results into statutory lapses, punishable under the
companies act.
3. Inordinate delays in decision-making: As the size of the organization
grows, the number of levels in organization also increases in the name of
specialization. The more the number of levels, the more is the delay in
decision-making.
4. Lack of initiative: In most of the cases, the employees of the company at
different levels show slack in their personal initiative with the result, the
opportunities once missed do not recur and the company loses the revenue.
5. Lack of responsibility and commitment: In some cases, the managers at
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different levels are afraid to take risk and more worried about their jobs
rather than the huge funds invested in the capital of the company and lose
the revenue.
Types of Joint Stock Company

The joint stock company is divided into three different types.

•Chartered Company – A firm incorporated by the king or the

head of the state is known as a chartered company. Ex: Bank of
England, Tata Steels, East India Company, British Broadcasting
Corporation (BBC), etc.
•Statutory Company – A company which is formed by a
particular act of parliament is known as a statutory company.
Here, all the power, object, right, and responsibility are all
defined by the act. Ex: Reserve Bank of India, State Bank of
India, Industrial Finance Corporation etc.
•Registered Company – An organization that is formed by
registering under the law of the company comes under a 20
registered company. Ex: TCS, ITC, Reliance, etc
 PUBLIC SECTOR BUSINESS ENTERPRISES

 Public Sector Enterprises are an essential part of the

Indian economy. These consist of public services and
enterprises that benefit all India’s citizens. The public
sector enterprises are businesses owned and controlled
by the government.
 The government either wholly or partially owns the
enterprises. These enterprises help the government
participate in the economic activities of the
country. The Central or the state governments can
manage public Sector Undertakings. When managed
by the Central government, it is known as the Central
Public Sector undertaking. However, when owned and 21
operated by a state, it is known as the state-level public
Classification of Public Sector Enterprises
In the PSU’s there are three main sectors, which are:
1.Departmental Undertakings: These are organised, financed
and controlled by the government. The department is under the
control of a minister from the Parliament. Some examples of
departmental undertaking are the Indian Railways and Indian
Postal Services.
2.Non-Departmental Undertakings: These are government
companies and subsidiaries of the government. Additionally, these
refer to statutory companies set up under special enactments of
the Parliament and State Legislature. A few examples of non-
departmental undertakings are Oil and Natural Gas Corporation
and Road Transport Corporations.
3.Financial Institutions: These are enterprises like commercial
banks, investment banks and brokerage firms. Examples of
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financial institutions are the State Bank of India and Unit Trust of
India.
Objectives Of Public Sector Enterprises

The main objective of the public sector enterprise is to help for

the benefit of the citizens. However, besides that, there are other
objectives of a public sector enterprise, like:

1.It helps in creating an industrial base in the country.

2.PSU’s help in generating a better quality of employment.

3.They develop the basic foundation in the country.

4.Public Sector Enterprises helps in providing resources to the

government.
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5.They help reduce inequalities and accelerate the country’s
economic growth and development.
Role Of Public Sector Enterprises

The public sector enterprises play a significant role in the upliftment

of the country’s economic conditions. Here are some of how the
public sector enterprises play a role in the economy:
1.Capital Formation: The Public Sector has been one of the biggest
reasons for the generation of capital in the Indian economy. A large
amount of the money generated in the economy is because of the
public sector.
2.Employment Opportunities: The Public Sector has brought about
a significant change in the employment sector of the economy. It
provides the citizens with many employment opportunities in various
sectors of the economy. These opportunities help in the upliftment of
the citizens and the economy.
3.Development of Regions: Public Sector Undertakings majorly
consist of factories and plants that can boost the different regions’
socio-economic development. The inhabitants of the parts benefit
from the establishment of these. 24
4.Provide facilities. They benefit in ways like providing facilities of
electricity, water supply and township.
Problems In The Public Sector Enterprises

While the PSU aims to help in the development of the

country. It is not a sector that doesn’t face problems.
Hence, here are the issues which the Public Sector
Enterprises face:

•Inappropriate and Wrong Investment decisions

•Incorrect Pricing Policies
•Excessive Overhead Costs
•Obsolete Technology
•Overstaffing
•Trade Unions 25

•Lack of Accountability
Reforms In The Public Sector Enterprises

The Indian government has many reforms regarding the Public

Sector. These reforms help develop the public sector as they
bring changes in the industry. Here are some of the reforms of
the Public Sector:
•New Industrial Policy, 1991
•Voluntary Retirement Scheme, 1988
•Administered Price Mechanism
•The Policy of Navratnas: These PSUs are the best in the
economy: they are given autonomy to perform better and
increase efficiency
•The policy of Miniratnas: These are PSUs making profits
continuously for three years
•The policy of Maharatnas: These are PSU’s which should have
been a Navratna, listed on the stock exchange in India, and 26

should have a global presence

END OF UNIT – II

THANK YOU

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