Business Organization & systems

BBA 1

Supreet Wahee

Copyright 2004 Pearson Education, Inc.

Slide 6-1

Unit 3

Forms of Business Ownership

Copyright 2004 Pearson Education, Inc.

Slide 6-2

Learning Objectives

Introduction To various Forms Sole Proprietorship Features Merits & demerits Joint Hindu Family Business Partnership Joint Stock Company Co-operative Organization Public Enterprise

Overview

Business

Copyright 2004 Pearson Education, Inc.

Slide 6-4

Forms of Business Ownership

Forms of Business ownership are legal forms in which a business enterprise may be organized & operated . Private Sector-Business forms owned by private Individuals Public Sector Owned by State public Sector Joint Sector Firms owned jointly by private parties & government

Forms Of Private Business Ownership

Sole Proprietorship Joint Hindu Family Firm

Partnership Firm
Joint Stock Company Co-operative Enterprise

Sole Proprietorship/ Individual Proprietorship

Wheeler-The sole proprietorship is that form of business ownership which is owned and controlled by a single individual .He receives all the profits and risks all of his property in the success or failure of the enterprise.

Features
(i)

Single Ownership : This is owned by one man and nobody else contributes capital.

(ii) One Man Control : He has absolute control over the affairs of the concern. His decision is final. Since he need not consult others, he can take quick decision and gain enormously (iii) Own Profit : The attraction of reaping the entire profits motivates him to put forth the best in him. He strives tirelessly for the improvement and expansion of his business. (iv) Unlimited Liability : The liability of the sole proprietor is unlimited. As a result, when his business assets are not adequate for paying the debts, his private properties have to be sold.

v) Absence of Government Regulation : A sole proprietary concern is free from Government regulations. No formalities are to be observed in its formation, management or in its closure. (vi) No Separate Entity : The sole trading concern is not regarded as an entity different from the proprietor. Consequently the business comes to an end with the permanent disability or death of the proprietor. (vii) Limited Capital : Since capital is contributed by only one individual it is bound to be small. Apart from this financial constraint his inability to manage beyond a level also limits its expansion. The size of the business unit therefore tends to be small.

Merits

Easy to Form and Dissolve Direct Motivation Absolute Control Business Secrecy Promptness in Decision-Making Flexibility in Operations Personal Relations Limited Regulations Independent living Development Of Personality

Demerits

Limited Capital Limited Managerial Skill Unlimited Liability Uncertainty of Continuity Inability to Avail of Specialization Hasty Decision

Suitability
(i)

Where the products cannot be standardized and have to be made to order.

(ii) Where the production technology is simple and the capital required as well as the risk associated with it is not heavy. (iii) Where the tastes and fancies of individual customers play an important role in the case of tailoring and hair-dressing. (iv) Where changes in fashion are frequent. (v) Where professional services are to be offered as in the case of painters, photographers, lawyers, doctors etc.

(vi) Where prompt decision and quick action is called for as in the case of speculative business.

(vii) Where Government itself favors individual entrepreneurs and encourages them it set up small scale units in industrial estates or in backward regions.
(viii) For people who love freedom of action and who like to pursue independent way of life. Because they do not want to work under any master; for such people sole proprietorship is ideally suited.

Joint Hindu Family Firm / Hindu Undivided Family

The

Joint Hindu Family firm is a form of business organization in which the family possesses some inherited property and the Karta, the head of the family, manages its affairs. It comes into existence by the operation of Hindu Law and not out of contract between the members or coparceners. If the personal who have co-parcenary interest in the ancestral property carry on business it is a case of Joint Hindu family firm. Thus, the Joint Hindu Family Business is a business by coparceners of a Hindu undivided estate

HUF Features
(i) Status : A person becomes a member of the family business by result of status arising from his birth in the family .Every member has an equal share in the family irrespective of age .. (ii) Male Members : Only male persons, and not females, can claim co-parcenary interest in the Hindu Family business firm. (iii) Karta : The Karta or the head of the family alone has the right to manage the business and other members do not take part in the management of the firm .Only Karta has the authority to make contracts on behalf of the firm .Other members of the family cannot ask for an account of past profits and losses but they may demand partition of the ancestral property (iv) Liability : The liability of all the members of the Joint Hindu Family, except that of the Karta, is limited to the value of their individual interests in the joint property. The liability of the Karta is unlimited and as such extends to all that he owns as his separate and private property.

(v) Fluctuating Share : The share of each members interest

in the family property and business keeps on fluctuating. The members interest increases by death of any existing coparcener and decreases by birth of a new co-parcener. (vi) Continued Existence : The existence of the Joint Hindu Family Business is not affected by the death of a co-parcener or even that of the Karta. (vii) Freedom of Action : The co-parceners do not have a right in the affairs of the family business which is the exclusive domain of the Karta. If the co-parceners are unhappy with the functioning of the Joint Hindu Family business, they ask for its partition along with the division of the property of the family. At the time of such partition of the ancestral property, the co-parceners have no right to ask the Karta for an a of the past profits and losses.

Merits of Joint Hindu Family

(i) Assured share in profits the business. (ii) Freedom to Karta (iii) Co-operative Efforts (iv) Sharing of knowledge and Experience (v) Inclusion of Finer Values of Life. (vi) Limited Liability

Demerits of Joint Hindu Family

(i)
(ii) (iii)

(iv)
(v)

Lack of Motivation Unfair to Co-parceners Scope for Misuse Limited Resources Fear of Disintegration

Suitability
This form of organization is gradually losing grounds to other forms because of the strains on Joint Hindu Family system arising out of growing impact of Industrialization and consequential preference for individual family living.

Meaning of Partnership Firm

Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Meaning of Partners, Firm and Firms Name Persons entering into partnership agreement are known as partners and collectively as firm or partnership firm. The name in which the business is carried on is called firm name. The partners provide the capital and share the responsibility for running the business of the firm on an agreed basis. In some cases, however, one partner provides whole or most of the capital and other contributes technical or managerial skill with or without some portion of capital. The terms and conditions of partnership are usually mentioned in the Partnership Agreement known as the Partnership Deed.

Features
i) Two or More Persons : There must be atleast two persons to form a Partnership. Thus, the maximum limit on the number of partners is ten in case of banking business and 20 in case of other lines of business. (ii) Contractual Relation: There must be an agreement between two or more persons to enter into partnership. Such an agreement may be oral, written or implied. Since partnership is an out-come of a partnership the persons who enter into an agreement of partnership must be competent to enter into contract. (iii) Lawful Business : The partners must agree to carry some lawful business. Mere holding of property in joint ownership cannot be considered as partnership unless it is accompanied by certain business activities and possesses other features of partnership.
(

(iv) Sharing of Profit : There must be an agreement to share the profits and losses of the business of the partnership firm. This is at the very root of bringing the persons together to carry on a business. However, sharing of profit is not a conclusive proof of partnership. Employees or creditors who share profits of the firm cannot be called partners in the absence of any agreement of partnership. (v) Agency Relationship : There must be an agency relationship between the partners. This is the crucial test of the existence of a partnership firm. Every partner is a proprietor as well as an agent of the firm. The business of the firm may be carried on by all or any of them acting for all unless otherwise agreed. Every partner is entitled to take part in management of day-to-day operations of the firm and to represent the firm and other partners in dealing with other parties.

(vi) Unlimited Liability : As a result of contractual relationship between the partners of a firm, all the partners are liable jointly and severally for all debts and obligations of the firm to an unlimited concern. That means if the assets of the firm are not sufficient to meet the obligations of creditors of the firm, the private assets of the partners can be attached to satisfy their claims. The creditors may even realize the whole of their dues from one of the partners. The partner from whose property the dues are recovered is entitled in law to obtain rateable contribution from the other partners of the firm. (vii) Non-Transferability of Interest : A partner cannot transfer his proprietary interest to any person (except those who are already the partners) without the unanimous consent of other partners. The restriction on transfer of interest is based on the principle that the partner himself being an agent of the partnership firm cannot delegate his proprietary interest to outsider.

Kinds of Partnership Firms:

Partnership-at-Will (ii) Particular Partnership (iii) Joint Venture (iv) Limited Partnership
(i)

Kinds of Partnership Firms:

Partnership-at-Will : A partnership is called partnership-at-will when (a) the partnership is formed to carry on business without specifying any period of time, and (b) no provision is made as to when and how the partnership will come to an end. The life of such a partnership continues as long as the partners are willing to continue it as such. It can be dissolved by any partner giving a notice to the firm withdrawing from the partnership or terminating the partnership. (ii) Particular Partnership : A partnership established for a stipulated period or for the completion of a specified venture comes to an automatic end with the expiry of the stipulated period or on the completion of the specified venture, as the case may be.
(i)

(iii) Joint Venture : It is organized for completing a specific task or venture during a specific period. A joint venture is a partnership without the use of a firm name, limited to particular venture in which the persons concerned agree to contribute capital and to share profits or losses. It may involve joint consignment of goods, an underwriting transaction, a speculation in shares, construction of a building, or any similar form of enterprise. (iv) Limited Partnership : In limited partnership, the liability of the partners is limited except that of one or more partners. The partners whose liability is limited to the extent of capital contributed by them are referred as limited partners or special partners. There is no provision for the formation of limited partnership in India. Such a partnership can be found in U.K., U.S.A. and some of the European countries. There must be at least one partner with unlimited liability in case of a limited of the business. He cannot act as an agent of the firm or of the other partners. However, he can assign his interest in the firm to another person with the consent of the partners with unlimited liability

Kinds of Partners
(i) Active or Actual Partner. (ii) Sleeping or Dormant Partner (iii) Nominal Partners (iv) Minor Partners (v) Partner by Estoppel (Vi)Special Partners

Based on extent of participation _ Active Partners _ Sleeping Partners Based on sharing of profit _ Nominal Partners _ Partners in Profits Based on liability _ General Partners _ Limited Partners Based on nature of behavior _ Partners by Estoppel _ Partners by Holding Out

Quick Check
A. Match the followings
AB 1. Active partner (i) Is one who lends his name to the firm 2. Dormant partner (ii) Is one who takes part in day-to-day 3. Nominal partner (iii) Is one who represents as a partner 4. Partner by estoppel (iv) Is one who is below 18 years 5. Minor partner (v) is one who does not take part in day to day business of the firm.

Kinds of Partners
(i) Active or Actual Partner : Partners who take an active part in the conduct of the partnership business are called actual or ostensible partners. They are full-fledged partners in the real sense of the term, such a partner must give public notice of his retirement from the firm in order to free himself from liability for acts after retirement. (ii) Sleeping or Dormant Partner : Sometimes, however, there are persons who merely put in their capital (or even without capital they may become partners) and do not take active part in the conduct of the partnership business. They are known as sleeping or dormant partners. They do share profits and losses (usually less then proportionately), have a voice in management, but their relationship with the firm is not disclosed to the general public. They are liable to the third parties for all acts of the firm just like an undisclosed principal. They are, however, not required to give public notice of their retirement from the firm.

(iii) Partner in Profits Only : A partner who has stipulated with other partners that he will be entitle to a certain share of profits, without being liable for the losses, is known as partner in profits only. As a rule, such a partner has no voice in the management of the business.However, his liability vis--vis third parties will be unlimited because in India we cannot have limited partnership. (iv) Sub-Partner : When a partner agrees to share of profits in a partnership firm with an outsider such an outsider is called a subpartner. Such a sub-partner has no rights against the firm nor he is liable for the debts of the firm. (v) Partner by Estoppel : If a person represents the outside world, by words spoken or written or by his conduct or by lending his name that he is a partner in a certain partnership firm, he is then estopped from denying his being partner, and is liable as a partner in that firm to any one who has on the faith of such representation granted credit to the firm.

Ideal partnership requisites

Good Faith (ii) Common Approach (iii) Written Agreement (iv) Registration (v) Adequate Capital (vi) Skills and Talents (vii) Stability
(i)

Ideal partnership requisites:

(i) Good Faith : The partners should create mutual trust and confidence amongst themselves through honesty of purpose and fair dealings. To achieve this, the partners must be select carefully and the number of partners should, as far as possible, be kept small. Three to five partners are considered to be ideal. (ii) Common Approach : In order to achieve smooth and proper functioning of partnership, it is important to ensure that the persons who are chosen as partner must have common approach to the problems of business. For instance, one partner with an extremely legalistic and technical out look may find it difficult to deal with another partner who is l i b e r a l in his approach. Similarly, a partner with highly venturesome approach cannot deal with another extremely cautious and safety-prone partner.

(iii) Written Agreement : To avoid the possibility of misunderstanding and disputes between the partners, it is advisable that the mutual rights and obligations of the partners be incorporated into a partnership deed. The deed should also include details about capital, sharing of profits, drawing rights, payment of interest on capital to partners, payment of commission or salary, if any to active partners, and so on. (iv) Registration : Immediately after formation of partnership it should be got registered with the Registrar of firms. An unregistered firm suffers form certain disabilities, in as much as it cannot enforce legal remedies against outsiders. A firm can be got registered any time before filling a suit or enforce its rights against third parities in case it is not registered soon after its formations.

(v) Adequate Capital : A partnership firm should be started only if the partners are confident that they will be able to arrange adequate fund for both long-term and short term. As far as possible, long-term funds must be contributed by the partners. Short-term funds may be borrowed from banks and other sources. (vi) Skills and Talents : Every partner is supposed to contribute either in term of capital or in terms of business ability and skill or in terms of widespread resourcefulness and contacts. Every partner must contribute in one form or the other. A balanced partnership firm must have partners who contribute capital and talents. (vii) Stability : The partners strive to impart long life or continuity to the firm. This will be possible only if the firm is earning profits and reinvesting a part of profits into the business. Good faith among the partners is also necessary for the stability of the firm.

Merits of Partnership:
Ease of Formation (ii) Larger Resources (iii) Combined Abilities and Judgment (iv) Flexibility (v) Better Decisions (vi) Cautious Operations (vii) Survival Capacity (viii) Benefits of Specialization
(i)

Merits of Partnership:
Ease of Formation : Like sole proprietorship, the partnership is also relatively free from legal formalities in terms of its formation. (ii) Larger Resources : This form enables the pooling of larger resource than sole proprietorship, for a number of persons (partners) contribute to the capital of the business. Not only this, the credit worthiness, which can also be used for borrowing larger sums of money, is also greater in this form than in the case of sole proprietorship. This enables a partnership firm to undertake operations on a relatively larger scale and thereby reaping the economies of scale. (iii) Combined Abilities and Judgment : In addition to the pooling of capital resources, the partnership combines abilities and skills of two or more persons (partners), and thus ensures better management of the business. Combined abilities and judgment, when properly integrated produces the results which are appreciably greater than the sum total of individual scattered efforts. Moreover benefits of specialized knowledge and division of labour can also be availed by judicious choice of partners possessing different business skills.
(i)

(iv) Flexibility : Since partnership business is not regulated by any law in its day to day just as a company business is regulated by Company Law, it imports flexibility in its operation. It can change its business whenever the partners like. Moreover, it is easier to change the line of business if the firm is not successful in one line of business because of its small scale operations. (v) Quick Decisions : A partnership firm is able to make decisions without delay because partners can meet and discuss the business problems more frequently. But in the case of a joint stock company, a good deal of time is wasted in calling the meeting of the Board of Directors and the shareholders. (vi) Cautious Operations : Since the liability of the partners is unlimited, they are more cautious in running the business. (vii) Survival Capacity : The survival capacity of the partnership firm is greater as compared to the sole tradership concern. The partnership business need not come to an end on the death of a partner if the partnership deed does not provide so. Moreover, a partnership firm can undertake more than one line of business because it has more capital resources and it can compensate its loss in one line by the profit in

(viii) Better Human or Public Relations : Every partner can be made to develop healthy and cordial relations with employees, customers, suppliers and citizens, etc. The fruits of such a relationship may be reflected in higher accomplishments and larger profits for the business. This will also result in enhancing the goodwill of the firm and pave the way towards its steady progress. (ix) Protection of Minority Interest : According to the features of partnership, no major amendments affecting the basic nature of partnership can be made without the unanimous consent of all the partners. Thus every partners views-voice carries weight in partnership

Demerits of Partnership Firm:

(i) (ii) (iii) (iv)

(v)
(vi) (vii)

Lack of Harmony Limited Resources Instability of Business Lack of Public Confidence Unlimited Liability Non-Transferability of Interest Social Losses

Demerits of Partnership Firm:

(i) Lack of Harmony : The partnership business works steady as long as there is harmony and mutual understanding among the partners. If there is any occasion when this harmony is adversely affected that is the beginning of the end of a good partnership. (ii) Limited Resources : Since maximum number of partners cannot exceed 20 in ordinary business and 10 in banking business, the amount of capital resources is limited to the contribution to be made by the partners. As we have observed earlier that the ideal number of partner is three to five, the contribution in terms of capital shrinks further. This is one reason on account of which a partnership form of organization is not suited to undertake a large size business operation requiring huge capital investment.

(iii) Instability of Business : The partnership firm comes to an end with the death, retirement or insolvency of a partner. Not only this, it may also come to grief in the case of dissensions among the partners. Thus the life of a partnership firm is highly uncertain. (iv) Lack of Public Confidence : Since a partnership business is not subjected to detailed regulations just as a company business is, it fails to inspire public confidence. (v) Risk of Implied Authority : A partner having implied authority to bind the firm by his acts of commission and omission, the firm may find itself difficulty in any moment.

(vi) Unlimited Liability : From this stand-point, a partnership is even worse than sole proprietorship because a partner is liable to the extent of his private property not only for his own mistakes and lapses but also for the mistakes, lapses and even dishonesty of his fellow partner or partners. Partners are both jointly and severally liable. This may have more dangerous effect of curbing entrepreneurship because the partners may be afraid of venturing into new areas of business activities for fear of losses. (vii) Non-Transferability of Interest : Since no partner can transfer his interest to an outsider without the unanimous consent of all the partners, it makes investment in partnership business reluctantly shy. (viii) Social Losses : If a partnership firm is dissolved because of lack of harmony among the partners, or the risk of implied authority, or on account of any such reason, it is a definite loss to the society both in terms of supply of goods and services and in terms of source of employment.

Meaning of Joint Stock Company

A company form of business organization is known as a Joint Stock Company. It is a voluntary association of persons who generally contribute capital to carry on a particular of business, which is established by law and can be dissolved only by law. Persons who contribute capital become members of the company. This form of business has a legal existence separate from its members, which means even if its members die, the company remains in existence. This form of business organisations generally requires huge capital investment, which is contributed by its members. The total capital of a joint stock company is called share capital and it is divided into a number of units called shares. Thus, every member has some shares in the business depending upon the amount of capital contributed by him. Hence, members are also called shareholders. The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal. Association consisting of more than ten person formed for carrying on a banking business and any association consisting of more than 20 person formed for the purpose of carrying on any business, is to be known as joint stock company

Characteristics of Joint Stock Company

i. Legal formation No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company comes into existence only when it has been registered after completion of all formalities required by the Indian Companies Act, 1956. Joint Stock Company ii. Artificial person Just like an individual, who takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law and it does not possess physical attributes like that of a normal person. iii. Separate legal entity Being an artificial person, a joint stock company has its own separate existence independent of its members. It means that a joint stock company can own property, enter into contracts and conduct any lawful business in its own name. It can sue and can be sued by others in the court of law. The shareholders are not the owners of the property owned by the company. Also, the shareholders cannot be held responsible for the acts of the company

iv. Common seal A joint stock company has a seal, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organisation working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, become binding on the company. For example, a purchase manager may enter into a contract for buying raw materials from a supplier. Once the contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase manager may leave the company thereafter or may be removed from the job or may have taken a wrong decision, yet for all purposes the contract is valid till a new contract is made or the existing contract expires. v. Perpetual existence A joint stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members. For example, in case of a private limited company having four members, if all of them die in an accident the company will not be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the deceased members.

vi. Limited liability In a joint stock company, the liability of a member is limited to the extent of the value of shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even if there is liquidation of the company, the personal property of the shareholder can not be attached and he will lose only his shares worth Rs. 10,000. vii. Democratic management Joint stock companies have democratic management and control. That is, even though the shareholders are owners of the company, all of them cannot participate in the management of the company. Normally, the shareholders elect representatives from among themselves known as Directors to manage the affairs of the company.

Types of Companies
We find a variety of companies in our county. The formations, liability, management and ownership of all companies differ from each other. Let us classify the different types of companies on the basis of their ownership and nationality. Accordingly, we have three type of companies - Private Limited, Public Limited and Government companies on the basis of ownership and two types of companies - Indian and Foreign, on the basis of nationality

Private Limited Company

These companies can be formed by at least two individuals having minimum paidup capital of not less than Rupees one lakh. As per the Companies Act, 1956 the total membership of these companies cannot exceed 50. The shares allotted to its members are also not freely transferable between them. These companies are not allowed to raise money from the public through open invitation. They are required to use Private Limited after their names. The examples of such companies are Combined Marketing Services Private Limited, Indian Publishers and Distributors Private Limited, Oricom Systems Private Limited, etc.

Public Limited Company

A minimum of seven members are required to form a public limited company. It must have minimum paidup capital of Rs 5 lakhs. There is no restriction on maximum number of members. The shares allotted to the members are freely transferable. These companies can raise funds from general public through open invitations by selling its shares or accepting fixed deposits. These companies are required to write either public limited or limited after their names. Examples of such companies are Hyundai Motors India Limited, Steel Authority of India Limited, Jhandu Pharmaceuticals Limited etc.

Difference between Private Limited and Public Limited Companies

Government Company In these companies the Government (either state or central government or both) holds a majority share capital i.e., not less than 51%. However, companies having less than 51% share holding by the government can also be called Government companies provided control and management lies with the government. Examples of government companies are: Mahanagar Telephone Nigam Limited, Bharat Heavy Electricals Limited.

Indian Company A company having business operations in India and registered under the Indian Companies Act, 1956 is called Indian Company. An Indian company may be formed as a public limited, private limited or government company.
Foreign Company A foreign company is a company formed and registered outside India having business operations in India.

Advantages of Joint Stock Company

Large financial resources A joint stock company is able to collect a large amount of capital through small contributions from a large number of people. In public limited company shares can be offered to the general public to raise capital. They can also accept deposits from the public and issue debentures to raise funds. (ii) Limited Liability In case of a company, the liability of its members is limited to the extent of the value of shares held by them. Private property of members cannot be attached for debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the owners to take more risk. (iii) Professional management Management of a company is vested in the hands of directors, who are elected democratically by the members or shareholders. These directors as a group known as Board of Directors ( or simply Board) manage the affairs of the company and are accountable to all the members. So members elect capable persons having sound financial, legal and business knowledge to the board so that they can manage the company efficiently.
(i)

(iv) Benefits of Large-scale production

Due to the availability of large financial resources and technical expertise it is possible for the companies to have large-scale production. It enables the company to produce more efficiently and at lower cost. (v) Public Confidence From Inception to its winding up all the activities of a company are regulated by the provisions of the companies act .The companies are under legal obligation to their accounts audited by a qualified chartered accountant and publicize their audited accounts ,Directors report ,etc .All this creates and promotes public confidence

Limitations of Joint Stock Company

Difficult & costly Formation The formation or registration of joint stock company involves a complicated procedure. A number of legal documents and formalities have to be completed before a company can start its business. It requires the services of specialists such as Chartered Accountants, Company Secretaries, etc. Therefore, cost of formation of a company is very high. (ii) Excessive government control Joint stock companies are regulated by government through Companies Act and other economic legislations. Particularly, public limited companies are required to adhere to various legal formalities as provided in the Companies Act and other legislations. Non-compliance with these invites heavy penalty. This affects the smooth functioning of the companies. (iii) Delay in policy decisions Generally policy decisions are taken at the Board meetings of the company. Further the company has to fulfill certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions.
(i)

Suitability of Joint Stock Company

A joint stock company form of business organisation is found to be suitable where the volume of business is large and huge financial resources are needed Since members of a joint stock company have limited liability it is possible to raise capital from the public without much difficulty. This form of organisation is also suitable for businesses which involve heavy risks. Again, for business activities which require public support and confidence, joint stock form is preferred as it has a separate legal status.

Certain types of businesses, like production of pharmaceuticals, machine manufacturing, information technology, iron and steel, aluminum, fertilisers, cement, etc., are generally organised in the form of joint stock company.

Joint Stock company

Advantages Large financial resources Professional management Transferability of shares Economies of large scale of production Limited liability(face vale of shares)

Disadvantages Difficult & costly formation Excessive Govt control Fear of fraudulent management Undue delay in decision making Neglect of minority shareholders Lack of secrecy

57

Kinds of Companies
Companies may be classified from different points of view which are briefly described as under: On the Basis of Formation : (i) Statutory Company (ii) Registered Company (iii) Government Company On the Basis of Public Interest : (i) Private Company and (ii) Public Company On the Basis of Liability (i)Companies Limited by (ii) Companies Limited by (iii) Unlimited On the Basis of Control (i) Holding Company(ii) Subsidiary Company On the Basis of Nationality: (i) Indian Company : (ii) Foreign Company On the Basis of Area : (i) National Company (ii) Multi National Company

Cooperatives

The term cooperation is derived from the Latin word co-operari, where the word Co means with and operari mean to work. Thus, the term cooperation means working together. So those who want to work together with some common economic objectives can form a society , which is termed as cooperative society. It is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help and mutual help. The primary objective is to provide support to the members. People come forward as a group, pool their individual resources, utilise them in the best possible manner and derive some common benefits out of it.

Characteristics of cooperative society

Voluntary Association Open Membership Number of Members Registration of the Society/Separate Legal entity State Control Capital Democratic Set Up Service Motive Return on Capital Investment

Types of cooperative societies

a) Consumers Cooperative Societies: These societies are formed to protect the interest of consumers by making available consumer goods of high quality at reasonable price. (b) Producers Cooperative Societies: These societies are formed to protect the interest of small producers and artisans by making available items of their need for production, like raw materials, tools and equipments etc. (c) Marketing Cooperative Societies: To solve the problem of marketing the products, small producers join hand to form marketing cooperative societies. (d) Housing Cooperative Societies: To provide residential houses to the members, housing cooperative societies are formed generally in urban areas. (e) Farming Cooperative Societies: These societies are formed by the small farmers to get the benefit of large-scale farming. (f) Credit Cooperative Societies: These societies are started by persons who are in need of credit. They accept deposits from the members and grant them loans at reasonable rate of interest.

Merits

Easy to form Limited liability Open Membership State Assistance Stable life Tax concessions Social services

Limitations:

Limited Capital Lack of Managerial Expertise Less Motivation Conflict among members Corruption

Suitability Of Cooperative Society

You have already learnt that cooperative society form of business organisations is a voluntary association of person who are not financially strong and cannot stand on their own legs to start and run the business individually. So to solve the common problem or to meet the common requirements this form of business organisation is most suitable. Thus, people can join hands to get the consumer products, to build residential houses, for marketing the products, to provide loans and advances etc. This form of business organisation is generally suitable for small and

medium size business operation.

Formation Of Cooperative Society

A cooperative society can be formed as per the provisions of the Cooperative Societies Act, 1912, or under the Cooperative Societies Acts of the respective states. The various common requirements prescribed for registration of a cooperative society are as follows: (a) There must be at least ten persons having common economic interest and must be capable of entering into contract. For multistate cooperative societies at least 50 individual members from each state should be present. (b) A suitable name should be proposed for the society. (c) The draft bye-laws of the society should be prepared. (d) After completing the above formalities, the society should go for its registration. (e) For registration, application in prescribed form should be made to the Registrar ofCooperative Societies of the state in which the

Co-operative society

According to the Cooperative Society Act,1912,-it may be defined as a voluntary association of ten or more members residing or working in the same locality, carrying on the business not for profit but the purpose of improving their household business economy or for creating facilities of work

Characteristic of Cooperative organizations:

(1) Voluntary Assosiation (2) Equal voting rights (3) Democratic management (4) State control (5) Service motive (6) Corporate status

Classification of cooperative society

(1) Consumer cooperatives (2) Producers cooperatives (3) Marketing cooperatives (4) Housing cooperatives (5) Credit cooperatives ( Aggricultural /nonaggricultural )

(6) Farming cooperatives

Formation of cooperatives

Any 10 persons may submit a joint application for being formed into a cooperative society. The application must contain: (1) Name & address (2) Aims & objects of society (3) Details of share capital (4) Name, add and liabilities of members (5) Two copies of bye laws-rules governing internal functions of society (6)Methods of admission of new members

Cooperative Organizations Disadvantages Advantages

Ease of formation Democratic management Perpetual succession Scope of internal financing State assistance Tax concessions No cap on members/min-10

Limited resources Dependence on external aids Lack of motivation Internal quarrels & rivalries Inefficient management

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(2) Joint sector

(a) Joint stock company (b) Co-operative society

(3) Public sector

- Departmental undertaking (Indian railways, Post & telegraphs, All India radio etc) - Public corporation( ONGC,FCI,LIC,etc) -Public sector undertaking( Govt company (BHEL,HMT,)

Departmental undertaking

CharacteristicsManaged by Govt deptt. Attached to ministry Subject to budget,accounting & audit controls applicable to other Govt activities It is manned by civil servants. Financed by annual appropriations from treasury & revenues are paid into the treasury.

Departmental Undertakings Disadvantages Advantages

Full Govt control Tool for economic & social objectives of the State Accountability to parliament Source of Govt revenue

Excessive bureaucratic control Lack of flexibility Lack of professional management Undesirable political pressure Low efficiency

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Public corporation

Public corporation is only a means and a mechanism for public enterprise .It is an institution or legal person clothed with the power of Govt but possessed of the flexibility of pvt enterprise. It represents compatible State intervention constituting State ownership

minus management by the Government.

Features:

1. Corporate Body: It is an artificial person created by a Special Act of the Legislature. 2. Powers and Functions: It has defined powers and functions which are governed by a Special Act. It has financial independence, and a clear cut jurisdiction over a specific area, industry or commercial activity. 3. Capital Structure: Its capital structure and financial operations are similar to those of a company but its shareholders retain no equity interests, have no power to appoint directors.

4. Quick Decision-making Power 5.Public Monopoly: It may be entrusted with functional responsibility for a public monopoly, e.g. Reserve Bank of India enjoying monopoly of note issue. 6.Internal Management Control: Its free from parliamentary or political control in the internal management. 7. Management: It is vested in a chosen body, viz., Governing Board, representing top men/women of ability, skill, business or technical experience and commanding confidence. 8.Personnel of Public Corporation: Managers and employees are not part of civil service. They are selected on merit. They have their own service conditions. 9.Financial Autonomy: Its income and outlay are not shown in Government budget. Its entire or substantial share capital is subscribed by the Government. Annual grants are subject to the approval or the parliament. It submits its annual report and annual accounts to parliament every year. Its bond issue is guaranteed by the Government. 10.Independent Legal Status

Advantages

It is free from the defects of rigidity and dilatory action and it retains the flexibility and effectiveness of private enterprise. It enjoys internal autonomy, and there is no interference by Government officers. It is the best mechanism through which large public enterprise can be administered.

Disadvantages It has created a difficult problem of autonomy versus public accountability. The operating flexibility cannot be secured at eh cost of public accountability. It is suitable for the big enterprises only It needs special legislation and hence its formation is elaborate and time-consuming. It is a rigid form of organisation as any change in its constitution and powers will require amendment of the Special Act. For trading business or for improving certain areas of business it is not a suitable organisation.

Public Sector Undertaking (PSU)

In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector). The term is used to refer to companies in which the government (either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity. Indian Oil Corporation Limited (IOCL) Oil and Natural Gas Corporation (ONGC) Gas Authority of India Limited (GAIL) Steel Authority of India Limited (SAIL) Bharat Sanchar Nigam Limited (BSNL)

Public Sector Undertaking (PSU)

Bharat Electronics Limited (BEL) Rail India Technical and Economic Services (RITES) Hindustan Aeronautics Limited (HAL) Indian Oil Corporation Limited (IOCL) Oil and Natural Gas Corporation (ONGC) Bharat Heavy Electricals Limited (BHEL) National Thermal Power Corporation (NTPC) Power Finance Corporation Limited (PFC) Steel Authority of India Limited (SAIL) Bharat Sanchar Nigam Limited (BSNL) Bharat Petroleum Corporation Limited (BPCL) Hindustan Petroleum Corporation Limited (HPCL) Gas Authority of India Limited (GAIL) Mangalore Refineries and Petrochemicals Limited ( MRPL ) There are about 260 PSUs all over India.

Emergence of Indian Multinational companies

A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE), is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. The International Labour Organization (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. The first modern multinational corporation is generally thought to be the East India Company. Many corporations have offices, branches or manufacturing plants in different countries from where their original and main headquarters is located. Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization.

Emergence of Indian Multinational companies

The Indian economy has not witnessed a singificant growth after the independence i.e 1947 to till 1990.The G.D.P growth has been between 3-4.5 % . It was due to the adaptation of closed economic policy by the political system in India. Outlook for companies: Earlier Govt companies were formed for the basic purpose of employment generation, profit motive was secondary thing. Domestic & Foreign policies: policies were not in favour of business ideas. Too much restrictions were there like licensing , Govt intervention in production, buerocracy etc. Dependence on aggriculture :

Emergence of Indian Multinational companies

The true economic growth started after the reforms of 1991 i.e Indian economy opted for Liberalisation, Privatisation and Globalisation (L.P.G)

India Inc. is flying high. Not only over the Indian sky. Many Indian firms have slowly and surely embarked on the global path and lead to the emergence of the Indian multinational companies. With each passing day, Indian businesses are acquiring companies abroad, becoming world-popular suppliers and are recruiting staff cutting across nationalities. While an Asian Paints is painting the world red, Tata is rolling out Indicas from Birmingham and Sundram Fasteners nails home the fact that the Indian company is an entity to be reckoned with.

Some instances:

Tata Motors sells its passenger-car Indica in the UK through a marketing alliance with Rover and has acquired a Daewoo Commercial Vehicles unit giving it access to markets in Korea and China. Ranbaxy is the ninth largest generics company in the world. An impressive 76 percent of its revenues come from overseas. Dr Reddy's has 17 plants spread across 11 countries and a turnover of Rs 609.2 crore for the year ended December 2003. The company commands a staggering 30 percent of the 12.8 billion-units global tubes market. Laboratories became the first Asia Pacific pharmaceutical company outside Japan to list on the New York Stock Exchange in 2001. Asian Paints is among the 10 largest decorative paints makers in the world and has manufacturing facilities across 24 countries. Small auto components company Bharat Forge is now the world's second largest forgings maker. It became the world's second largest forgings manufacturer after acquiring Carl Dan Peddinghaus a German forgings company last year. Its workforce includes Japanese, German, American and Chinese people. It has 31 customers across the world and only 31 percent of its turnover comes from India. Essel Propack is the world's largest manufacturers of lamitubes - tubes used to package toothpaste.

Some instances:

About 80 percent of revenues for Tata Consultancy Services comes from outside India. This month, it raised Rs 54.2 billion ($1.17 billion) in Asia's second-biggest tech IPO this year and India's largest IPO ever. Infosys has 25,634 employees including 600 from 33 nationalities other than Indian. It has 30 marketing offices across the world and 26 global software development centres in the US, Canada, Australia, the UK and Japan