Business Organisation Pakka Notes

7/28/2019 Business Organisation Pakka Notes

1/35

Business OrganisationUnit I

Business is an economic activity, which is related with continuous and regular production and distribution of goods andservices for satisfying human wants.

Definition of Business :A business may be defined as an institution organized and operated to provide goods and services to thesociety with the objective of earning profit. L.R. Dickson has defined business as a form of activitypursued primarily with the object of earning profit for the benefit of those on whose behalf the activityis conducted.

Meaning of Profession :A Profession may be defined as an occupation which involves the rendering of personal services of aspecialized nature, based on professional knowledge, education and training such as services renderedby physicians, lawyers, auditors. e t c .

Distinction Between Business and Profession :Establishment : A business enterprise comes into existence when an entrepreneur takes a decision tocarry on production and/or exchange of goods and services in order to earn profits by satisfying the

needs of the customers. On the other hand, the professional firm is established by the decision of aprofessional (lawyer, chartered accountant, architect, etc) who holds the membership and the certificateof a practice of a professional body.Nature of Operations : A business is engaged in the production and distribution of goods and servicesto satisfy human needs. The practice of profession involves rendering of personalized services of aspecialized nature to the clients.Motive : The motivating force behind a business is to earn profits by producing and distributing goodsand services to satisfy the needs of the society. But a professional is expected to emphasize the servicemotive and sense of mission to a greater extent than a businessman.Qualifications : No qualification is prescribed by any authority for a business man. In case ofprofession, specialized knowledge and training are compulsory.

Investment : Almost every business needs some capital. The amount of capital required varies frombusiness to business and it also depends upon the scale of operations. A professional has also to investsome money to establish an office for rendering professional services.Reward : A business man earns profit, a professional earns fee and an employee earns salary.Transferability of Interest : Transfer of ownership is possible in case of business by following theprescribed formalities. It is not possible to transfer ownership interest in case of a profession oremployment.

Nature of Business : A business enterprise has the following characteristics/features :Dealing in Goods and Services : The first basic characteristic of a business is that it deals in goodsand services. Goods produced or exchanged may be consumer goods such as bread, rice, cloth, etc., or

capital goods such as machines, tools, etc.,Production and Exchange: Every business is concerned with production and exchange of goods andservices for value (prices).Regularity and Continuity in Dealings : Risk involves the possibility of loss or what may be calleduncertainty of return on investment made in the business due to a variety of factors over which thebusiness enterprise has practically no control.Profit Motive : Human-beings are engaged in business primarily with a view to earn profits andacquire wealth.


2/35

Scope of Business: The scope of business is very wide. It includes a large number of activities whichmay be classified under two broad categories, namely, Industry and Commerce. These products of anindustry may fall under any one of the following three categories:(a) Consumers Goods : Goods used by final consumers are called consumers goods. Example ofconsumer goods , Television, Radio, Scooter, Motor Car, etc. come under this category.(b) Capital Goods : Goods used in the production of other goods are described as produces goods.

Steel produced by steel plant is used for fabrication into a variety of products such as motor cars,scooters, rail Locomotive engines, ships, surgical instruments, blades, etc. Similarly machine tools andmachinery used for manufacturing other products also come under this heading. These are also calledcapital goods.Primary Industries : The following are some of the of primary industries :(a) Extractive Industries : They extract or draw our their products from natural sources such as earth,sea, air. The products of such industries are generally used by manufacturing and constructionindustries for producing finished goods.(b) Genetic Industries : Genetic means parentage or heredity. Genetic industries are engaged inbreeding plants, and animals for their use in further reproduction. For breeding plants, the seeds andnursery are typical examples of genetic industries.Secondary Industries : The following are the elements of secondary industries :(a) Manufacturing Industries : These are engaged in producing goods through the creation of what isknown as form utility Such industries are engaged in the conversion or transformation of rawmaterials or semi finished products into finished products.(i) Analytical : The basic material is analyzed and separated into a number of products. Oil refining isan example of analytical industry. The crude oil is extracted from beneath the earth and is processedand separated into petrol, diesel, kerosene, gasoline, lubricating oil, etc.(ii) Synthetic : Two or more materials are mixed together in the manufacturing operations to obtainsome new products. Products like soap, cement, cosmetics are derived from this industry.(iii) Processing : In this case, raw materials are processed through a series of manufacturing operationsmaking use of analytical and synthetic methods. Textiles, sugar and steel are examples of this category.(iv) Assembly Line: In assembly line industry, the finished product can be produced only after variouscomponents have been made and then brought together for final assembly to be converted into finishedproducts. Production of automobiles, watches, televisions, etc., are the typical examples of the industry.(b) Construction Industries : They are concerned with the making of constructing of buildings,bridges, dams, roads, canals, etc. These industries use the products of manufacturing industries such asIron and Steel, Cement, Lime, Mortar etc., and also the products of extractive industry such as stone,marble, etc.

Commerce:(varthagam) is the sum total of those processes which are engaged in the removal of thehindrances of persons (trade), place (transport and insurance) and time (warehousing) in the exchange(banking) of commodities.Hindrances of persons: Buyers and sellers of goods are not always situated at the same place so thatcontact between them is hindered by distance. Commerce helps to remove this hindrance betweenpersons by means of trade.Hindrances of exchange: With money as the medium of exchange, payment for goods and services ismade possible through institutions such as the banks. Banks as a part of commerce, act to remove thehindrance of exchange.Hindrances of place: The goods may be produced at one place and the demand for them may be thegreatest at a different place, because they are not produced there. This barrier of distance is removedcommerce through the different means of transport and good are carried from one place to another.Hindrances of Time: Ware house remove the hindrances of time by balancing the time lag between


3/35

production and consumption. Insurance comes into play even where goods are stored in warehousesand removes the risk of loss or damage through theft or fire.Hindrances of Information: Lack of information about the products and the company is a greathindrance in the way of consumers buying them. Advertising and salesmanship help to remove thehindrances of the lack of information.

Trade(vanigam) : The term trade refers to the sale, transfer or exchange of goods and services andconstitutes the central activity around which the ancillary functions like Banking, Transportation,Insurance, Packaging, Warehousing and Advertising cluster. Trade may be classified into two broadcategories as follows:Internal or Domestic Trade: It consists of buying and selling of goods within the boundaries of acountry .International or Foreign Trade: It refers to the exchange of goods and services between two or morecountries. International trade involves the use of foreign currency ( called foreign exchange) ensuringthe payment of the price of the exported goods and services to the domestic exporters in domesticcurrency, and for making payment of the price of the imported goods and services to the foreignexporter in that countrys national currency (foreign exchange).Internal and Foreign Trade can be further classified in to wholesale and retail trade.Wholesale Trade: relates to purchase of goods in large quantities from producers and their resales toretailers in small lots.Retail Trade: Retailers assembles at a convenient place various types of products from numeroussources and supplies in small quantities to consumers.

Relationship between Trade, Industry and Commerce:They are inseparable. All of them are parts of the whole business system. Industry and commerce areclosely related to each other. Industry cannot exist without commerce and commerce cannot existwithout industry. Because every producer has to find his market for his products tosell. But theproducer has no directconnection with the buyers or consumers. Hence, industry needs commerce. Commerce is concerned with the sale, transfer or exchange of goods and services. Hence commerceneeds industry for the production of goods and services. Commerce makes the necessary arrangementfor linking between producers and ultimate consumers. It includes all those activities that are involvedin buying, selling, transporting, banking, warehousing of goods, and insurance for safeguarding thegoods. Trade includes sale, transfer or exchange of goods. It does not include other functions of commercelike transportation, insurance, banking, warehousing, etc. If there were notrade, the producers wouldhave to findcustomers for their products. Therefore without trade there would be little need forcommerce. Similarly trade without aids to trade is meaningless and they exist for trade. In conclusion, we can say that industry, trade and commerce are inter-related with each other.Industry is concerned with production of goods and services and commerce arranges its sales; but theactual operation of sales is in the hands of trade. So they cannot work independently.

Business Organization: is the art or science of building up a systematical whole by a number of parts,just as the human frame is built up by heart, liver, brain, legs etc. It is a combination of necessarybeings, materials, tools, equipment, working space brought together in a systematic and effectivecorrelation(interdependence) to accomplish some desired object.

Functions of Business : In order to achieve its objectives, a business enterprise performs manyfunctions which may be broadly grouped under the following headings: Production, Marketing,


4/35

Finance and Personnel. In big business organizations, there are separate departments to look after thesefunctional areas. It may be noted that these functions are inter- dependent and inter-related. Forinstance, production department depends upon marketing department to sell its output and marketingdepartments depends upon production department for the products of required quality to satisfy itscustomers.Production Function: It is concerned with the transformation of inputs like manpower, materials,

machinery, capital, information and energy into specified outputs as demanded by the society. Theproduction department is entrusted with so many activities such as production planning , qualitycontrol, procurement of materials and storage of materials.Marketing Function: It is concerned with distribution of goods and services produced by theproduction department. It can perform this function efficiently only if it is able to satisfy the needs ofthe customers. For this purpose, the marketing department guides the production department in productplanning and development. It fixes the prices of various products produced by the business. It promotesthe sale of goods through advertisement and sales promotion devices such as distribution of samplesand novelty items, holding contests, organizing displays and exhibitions, etc.Finance Function : It deals with arrangement of sufficient capital for the smooth running of business.It also tries to ensure that there is proper utilization of resources. It takes many important decisionssuch as sources of finance, investment of funds in productive ventures, and levels of inventory ofvarious items.Personnel Function : This function is concerned with finding suitable employees, giving themtraining, fixing their remuneration and motivating them. The quality of human resource working in theenterprise is a critical factor in the achievement of business objectives. Therefore it is necessary that thework force is highly motivated and satisfied with the terms and conditions of service offered by theenterprise.


5/35

UNIT IIForms of Business Organizations: Four main forms of business oraganisation are Soleproprietorship, partnership, joint stock company and cooperative undertaking.

Factors Determining Choice of Organization :(i) Nature of Business Activity : Initially the entrepreneur has to decide about the kind ofbusiness activity he is going to undertake, namely, trading activity, manufacturing activity, service

activity etc. and then decide in favour of a particular form of organization. A trading activityproposed to be undertaken on a small scale can be done through sole proprietorship. The samewill be the case if he wants to render service as a hair, dresser, as a tailor, or a jeweler. But if hewants to undertake a manufacturing business, then he will have to think of either partnership orcompany form of organization.(ii) Expected Volume of Business : If the goods to be produced and sold are going to be on alarge scale, then a company form of organisation would be suitable. But if the volume of businessproposed to be handled is small then a sole proprietorship or partnership form of organisation willdo.(iii) Area of Operation : In case a widespread area is proposed to be covered through thebusiness operation, a company form is better suited than any other form. But if the area ofoperation is confined to a particular locality or small person, sole proprietary or partnership form oforganisation will be adequate.

(iv) Degree of Control Desired : If a businessman aims at having a direct control over hisbusiness operations, the preferable form would be sole proprietorship, but if he is not interested indirect control and is instead interested in a large size of operation, it would be preferable to go infor a company form or co-operative form of organisation.(v) Initial Finance Required : If the finance required to start the business is quite huge, thenthere is no choice except to start it in the form of a company organisation. But if the initial financeproposed to be invested is small then a sole proprietary form or a partnership form of organisationwould be suitable.(vi) Liability : If the entrepreneur is not deterred by unlimited liability if the business runs intolosses, then he would not mind starting the business as a sole proprietary one. But in case of hishesitation to shoulder the entire risk single-handedly or bear the unlimited liability, he would liketo go in for either partnership or company form of organisation.(vii) Continuity of Business : If the entrepreneur wishes the business to continue indefinitely, he

would decide to start it in the form of company or co-operative organisation. But if he is notinterested in its long life, he may start as a sole proprietary business or as a partnership business.(viii) Government Regulation : If the entrepreneur wishes to remain independent of too muchGovernment control and regulations to business, he would prefer sole proprietorship orpartnership. Business undertaken through company and co-operative form of organizations aresubjected to a lot of Government control and regulations through the Companies Act and the Co-operative Societies Act.(ix) Tax Burden : There is a single (or flat) rate of tax on corporate profits which is quite high. Therate of tax remains the same irrespective of the volume of corporate profits. But sole traders andpartnership firms are subjected to a progressive rate of income tax, i.e., the rate of tax goes onincreasing with the increase in the volume of profits. That means the income tax payable will belower in cases of lower slabs of income of sole traders and partnership firms.

Sole Proprietorship: A business that run under the exclusive ownership and control ofanindividual is called sole proprietorshipSingle Ownership : This is owned by one man and nobody else contributes capital.Own Control : He has absolute control over the affairs of the concern. His decision is final. Sincehe need not consult others, he can take quick decision and gain enormouslyOwn 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.Unlimited Liability : The liability of the sole proprietor is unlimited. As a result, when his businessassets are not adequate for paying the debts, his private properties have to be sold.Absence of Government Regulation : A sole proprietory concern is free from Government


6/35

regulations. No formalities are to be observed in its formation, management or in its closure.No Separate Entity : The sole trading concern is not regarded as an entity different from theproprietor. Consequently the business comes to an end with the permanent disability ordeath of the proprietor.Limited Capital : Since capital is contributed by only one individual it is bound to be small. Apartfrom this financial constraint his inability to manage beyond a level also impedes its expansion.

The size of the business unit therefore tends to be small.

Advantages :(i) Easy to Form and Dissolve : Since no legal formalities need to perform to start a sole proprietarybusiness, it is most easy to start a business as a sole proprietary concern. It is equally convenient todissolve a sole proprietorship concern.(ii) Direct Motivation : In this form, there is a direct relationship between rewards and efforts. Thesole proprietor enjoys the entire profits and hence is inspired, induced and motivated to give his best ofefforts and skills in running the business.(iii) Absolute Control : The proprietor is free to prepare any plans and policies and execute them forthe success of his business without any interference or clash of interest from any quarter. He is free todirect and control the operations of his business.(iv) Business Secrecy : To face the challenge of competition in the market, maintenance of business

secrecy provides and edge to the firm over its rival firms. The degree of retention of business secrecy isthe highest in this form of organization.(v) Promptness in Decision-Making : A sole proprietor being a single owner is not required to consultanyone while taking decisions. This enables him to take prompt and quick decisions taking advantageof the opportunities which may arise in business from time to time.(vi) Flexibility in Operations : If the situation demands changes in strategy, the same can be easilybrought about to meet the changed situation without causing least of unsought consequences. Soleproprietorship offers the scope for flexibility in business operations by allowing the business to adaptand adjust itself to changing times and situations.(vii) Personal Relations : Normally, the size of a sole proprietary business being small, the ownermaintains a personal touch with his employees and customers. Personal attention to customers results

in increased sales and individual attention to employees brings in efficiency and motivation on the partof employees there by reducing the cost of production.(viii) Credit Standing : Since a sole proprietor is liable to pay the debts of the business out of hisprivate property and investment as well, the credit worthiness or standing of the sole property concernis greatly enhanced. The creditors, therefore, do not hesitate to lend to a sole proprietor.(ix) Limited Regulations : The business activities of a sole proprietor are least regulated by law andthe Government. No doubt, a sole proprietary business has to comply with labour laws and tax laws,there is no other interference in the day-to-day running of the business from the Government. Similarly,there is no Government regulation in respect of formation and dissolution of its business.(x) Independence : This form of organization offers a way of life for acquiring honourable living tothose persons who do not want to serve others and take pride in ownership and control of their

business. The sole proprietor being his own master and manager derives greatest possible satisfactionin terms of having created or rendered worth while commodity or service.(xi) Development : Since a sole proprietor has to face all kinds of problems and challenges singlehanded, the qualities of initiative, self-reliance and responsibilities get developed in him, there by,enabling him to enjoy a respectful life in the society full of warmth and social contacts.

Disadvantages :(i) Limited Capital : Since the capital is contributed by one individual only, business operations havenecessarily to be on a limited scale.


7/35

(ii) Limited Managerial Skill : Whoever may be a person his resourcefulness and businessmanagement will be less effective beyond a certain stage. Further, since he has to keep his fingers oneverything and has to work under severe stress, he likely to take wrong-decisions. Thus, these twofactors, namely limited availability of capital and limited managerial ability do not allow the businessunit to expand.(iii) Unlimited Liability : The liability of a sole trader being unlimited, even his private assets are in

danger of being lost.(iv) Uncertainty of Continuity : Since the success of the sole trading concern hinges on the personalqualities of the proprietor, any prolonged illness or permanent disability or death brings the business toa standstill.(v) Inability to Avail of Specialization : Since the business unit is small and the financial resourceslimited experts in different fields cannot be employed to secure maximum advantage. He alone has tohandle production, marketing, correspondence, etc. It is common knowledge that one cannot be anexpert in all these varied fields of business activities, as a result, efficiency suffers.(vi) Hasty Decision: Though quick decision is a definite advantage, sometimes the decisiontaken in a hurry is likely to spell ruin to the business.

Partnership:Meaning : Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation betweenpersons who have agreed to share the profits of a business carried on by all or any of them acting forall. Persons entering into partnership agreement are known as partners and collectively as firm orpartnership 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 anagreed basis. In some cases, however, one partner provides whole or most of the capital and othercontributes technical or managerial skill with or without some portion of capital. The terms andconditions of partnership are usually mentioned in the Partnership Agreement known as the PartnershipDeed.

Characteristics : The essential features of a partnership firm are discussed below:-(i) Two or More Persons : There must be atleast two persons to form a Partnership. The partnershipAct fixes no maximum limit on the number of partners of a partnership firm. But the Companies Act,1956 lays down that any partnership or association of more than 10 persons in case of banking businessand 20 persons in other business operations as illegal unless registered as a Joint Stock Company. Thus,the maximum limit on the number of partners is ten in case of banking business and 20 in case of otherlines of business.(ii) Contractual Relation : The relation of partnership is created by contract and not by status as incase of Joint Hindu Family. There must be an agreement between two or more persons to enter intopartnership. Such an agreement may be oral, written or implied. Since partnership is an out-come of apartnership the persons who enter into an agreement of partnership must be competent to enter intocontract. Minors, lunatics, insolvent and other persons incompetent to enter into a valid contract cannotenter into a partnership agreement.(iii) Lawful Business : The partners must agree to carry some lawful business. Mere holding ofproperty in joint ownership cannot be considered as partnership unless it is accompanied by certainbusiness 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 ofthe 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 shareprofits 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


8/35

crucial test of the existence of a partnership firm. Every partner is a proprietor as well as an agent of thefirm. The business of the firm may be carried on by all or any of them acting for all unless otherwiseagreed. Every partner is entitled to take part in management of day-to-day operations of the firm and torepresent 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 thepartners 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 realizethe whole of their dues from one of the partners. The partner from whose property the dues arerecovered 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. Therestriction on transfer of interest is based on the principle that the partner himself being an agent of thepartnership firm cannot delegate his proprietary interest to outsider.

Kinds of Partnership Firms: Partnership firms can be classified as below :(i) Partnership-at-Will : A partnership is called partnership-at-will when (a) the partnership is formedto carry on business without specifying any period of time, and (b)no provision is made as to when andhow the partnership will come to an end. The life of such a partnership continues as long as the partnersare willing to continue it as such. It can be dissolved by any partner giving a notice to the firmwithdrawing from the partnership or terminating the partnership.(ii) Particular Partnership : A partnership established for a stipulated period or for the completion ofa specified venture comes to an automatic end with the expiry of the stipulated period or on thecompletion of the specified venture, as the case may be.(iii) Joint Venture : It is organized for completing a specific task or venture during a specific period. Ajoint venture is a partnership without the use of a firm name, limited to particular venture in which thepersons concerned agree to contribute capital and to share profits or losses. It may involve jointconsignment 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 ofone or more partners. The partners whose liability is limited to the extent of capital contributed by themare referred as limited partners or special partners. There is no provision for the formation of limitedpartnership in India. Such a partnership can be found in U.K., U.S.A. and some of the Europeancountries. 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 thefirm to another person with the consent of the partners with unlimited liability.

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


9/35

from the firm.(iii) Partner in Profits Only : A partner who has stipulated with other partners that he will be entitle toa certain share of profits, without being liable for the losses, is known as partner in profits only. As arule, such a partner has no voice in the management of the business. However, his liability vis--visthird 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 sub-partner. Such a sub-partner has no rights against the firm nor he is liable forthe debts of the firm.(v) Partner by Estoppel : If a person represents the outside world, by words spoken or written or byhis conduct or by lending his name that he is a partner in a certain partnership firm, he is then estoppedfrom denying his being partner, and is liable as a partner in that firm to any one who has on the faith ofsuch representation granted credit to the firm.Advantages of Partnership:(i) Ease of Formation : Like sole proprietorship, the partnership is also relatively free fromlegal formalities in terms of its formation.(ii) Larger Resources : This form enables the pooling of larger resource than sole proprietorship, for anumber of persons (partners) contribute to the capital of the business. Not only this, the creditworthiness, which can also be used for borrowing larger sums of money, is also greater in this formthan in the case of sole proprietorship. This enables a partnership firm to undertake operations on arelatively larger scale and thereby reaping the economies of scale.(iii) Combined Abilities and Judgment : In addition to the pooling of capital resources, thepartnership combines abilities and skills of two or more persons (partners), and thus ensures bettermanagement of the business. Combined abilities and judgment, when properly integrated produces theresults which are appreciably greater than the sum total of individual scattered efforts. Moreoverbenefits of specialized knowledge and division of labour can also be availed by judicious choice ofpartners possessing different business skills.(iv) Flexibility : Since partnership business is not regulated by any law in its day to day just as acompany business is regulated by Company Law, it imports flexibility in its operation. It can change itsbusiness whenever the partners like. Moreover, it is easier to change the line of business if the firm isnot 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 canmeet and discuss the business problems more frequently. But in the case of a joint stock company, agood 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 inrunning the business.(vii) Survival Capacity : The survival capacity of the partnership firm is greater as compared to thesole tradership concern. The partnership business need not come to an end on the death of a partner ifthe partnership deed does not provide so. Moreover, a partnership firm can undertake more than oneline of business because it has more capital resources and it can compensate its loss in one line by theprofit in other lines of business.(viii) Better Human or Public Relations : Every partner can be made to develop healthy and cordialrelations with employees, customers, suppliers and citizens, etc. The fruits of such a relationship maybe reflected in higher accomplishments and larger profits for the business. This will also result inenhancing 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 amendmentsaffecting 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.

Disadvantages of Partnership Firm:


10/35

(i) Lack of Harmony : The partnership business works steady as long as there is harmony and mutualunderstanding among the partners. If there is any occasion when this harmony is adversely affected thatis the beginning of the end of a good partnership.(ii) Limited Resources : Since maximum number of partners cannot exceed 20 in ordinary businessand 10 in banking business, the amount of capital resources is limited to the contribution to be made bythe 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 partnershipform of organization is not suited to undertake a large size business operation requiring huge capitalinvestment.(iii) Instability of Business : The partnership firm comes to an end with the death, retirement orinsolvency of a partner. Not only this, it may also come to grief in the case of dissensions among thepartners. Thus the life of a partnership firm is highly uncertain.(iv) Lack of Public Confidence : Since a partnership business is not subjected to detailed regulationsjust 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 ofcommission 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 proprietorshipbecause a partner is liable to the extent of his private property not only for his own mistakes and lapsesbut also for the mistakes, lapses and even dishonesty of his fellow partner or partners. Partners are bothjointly and severally liable. This may have more dangerous effect of curbing entrepreneurship becausethe 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 withoutthe 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 bothin terms of supply of goods and services and in terms of source of employment.

Partnership Deed: Though a partnership agreement need not necessarily be in writing, yet to avoidfuture misunderstanding and mutual bickering. It is desirable to have a written agreement. Such awritten agreement setting out all the terms and conditions of partnership is known as partnership Deed.A carefully drafted partnership Deed helps in bringing out differences which may develop amongpartners and in ensuring smooth running of the partnership business. It should be properly stamped andregistered. The usual contents are;(i) Name of the firm(ii) Nature of the proposed business to be carried on by the partnership.(iii) Duration of the partnership business whether is to be run for a fixed period of Time or whether it isto be dissolved after completing a particular venture.(iv) The capital to be contributed by each partner. It must be remembered that capital Contribution isnot necessary to become a partner for, one can contribute his organizing power business acumen,managerial skill etc. instead of capital.(v) The amount that can be withdrawn from the firm by each partner.(vi) The ratio in which the profits or losses are to be shared. (If the profit sharing ratio is not specifiedin the Deed, all the partners must share the profits and bear the losses equally)(vii) Whether any interest is to be allowed on capital and if so, the rate of interest.(viii) Rate of interest on drawings, if any.(ix) Whether loans can be accepted from the partners and if so the rate of interestPayable thereon.(x) Amount of salary or commission payable to partners for their services. (Unless this is specificallyprovided, no partner is entitled to any salary)


11/35

(xi) Maintenance and audit.(xii) Matters relating to admission of a new partner.(xiii) Matters relating to retirement of a partner. The arrangement to be made for paying out the amountdue to a retired or deceased partner must also be stated.(xiv) Method of valuing goodwill on the admission death or retirement of a partner.(xv) Distribution of managerial responsibilities. The work that is entrusted to each partner is better

stated in the deed itself.(xvi) Procedure for dissolution of the firm and the mode of settlement of as thereafter.(xvii) Arbitration in case of disputes among partners. The deed should provide the method for settlingdisputes or difference of opinion. This clause will avoid costly litigations.

Registration of Firms: The Indian partnership Act does not make registration of a partnershipcompulsory. But the disabilities of non-registration virtually make it compulsory.Procedure for Registration: A statement should be prepared stating the following particulars.( i) Name of the firm(ii) The principal place of business(iii) Name of other places where also the firm carries on business.(iv) Name and addresses of all the partners.(v) The date on which each partner joined the firm.(vi) The duration of the firm. This statement, signed by all the partners should send to the Register offirm along with the necessary registration fee of Rs.3. Any change in the above particulars must becommunicated to the Register within 14 days of such alteration.

Rights of a Partner:

Right of the partner to take part in the day-to-day management of the firm.Right to be consulted and heard while taking any decision regarding the business.Right of access to books of accounts and call for the copy of the same.Right to share the profits equally or as agreed upon by the partners.Right to get interest on capital contributed by the partners to the firm.Right to avail interest on advances paid by the partners for business purpose.Right to be indemnified in respect of payment made or liabilities incurred or for protecting the firmfrom losses.Right to the use of partnership property exclusively for partnership business only not himself.Right as agent of the firm and implied authority to bind the firm for any act done in carrying thebusiness.Right to prevent admission of new partners/expulsion of existing partners.Right to continue unless and otherwise he himself cease to become partner.Right to retire with the consent of other partners and according to the terms-and conditions of deed.Right of outgoing partner/legal heirs of deceased partner.

Duties of a Partner:To carry on the business to the greatest common advantage:

Every partner is bound to carry on the business of the firm to the greatest common advantage. In otherwords, the partner must use his knowledge and skill in the conduct of business to secure maximumbenefits for the firm.To be just and faithful to each other:Every partner must be just and faithful to other partners of thefirm. Every partner must observe utmost good faith and fairness towards other partners in businessactivity.


12/35

To render true accounts:Every partner must render true and proper accounts I his co-partners. Eachand every entry in the books must be supported by vouchers and di explanations if demanded by otherpartners.To provide full information:Every partner must provide full information of activities affecting thefirm to the other co-partners. No information should be concealed, kept secret.To attend diligently to his duties:Every partner is bound to attend diligently to duties in the conduct of

the business of the firm.To work without remuneration:A partner is not entitled to receive any kind remuneration for takingpart in the conduct of the business. But in practice, the working partners are generally paidremuneration as per agreement, so also commission in some case.To indemnify for loss caused by fraud or willful neglect:If any loss is caused to the firm because of apartner's willful neglect in the conduct of the business or fraud commit by him against a third partythen such partner must indemnify the firm for the loss.To hold and use partnership property exclusively for the firm:The partners must hold and use thepartnership property exclusively for the purpose of business of the firm not for their personal benefit.To account for personal profits:If a partner derives any personal profit from partnership transactionsor from the use of the property of the firm or business connection the firm or the firm's name, he mustaccount for such profit and pay it to the firm.Not to carry on any competing business:A partner must not carry on competing business to that ofthe firm. If he carries on and earns any profit then he must account for the profit made and pay it to thefirm.To share losses:It is the duty of the partners to bear the losses of the firm. ' partners share the lossesequally when there is no agreement or as per their profit share ratio.To act within authority:Every partner is bound to act within the scope of authority. If he exceeds hisauthority and the firm suffers from any loss, he shall have compensate the firm for such loss.Duty to be liable jointly and severally:Every partner is jointly and individual liable to the third partiesfor all acts of the firm done while he is a partner.Duty not to assign his interest:A partner cannot assign or transfer his partner interest to an outsider soas to make him the partner of the firm without the consent of other partners. However, he can assign hisshare of the profit and his share in the assets the firm where the assignee shall not be entitled tointerfere in the conduct of the business

Hindu Undivided Family : The Joint Hindu Family firm is a form of business organization in whichthe family possesses some inherited property and the Karta, the head of the family, manages itsaffairs.Characteristics or features :(i) Status : The membership of the family business is the result of status arising from birth in thefamily, and hence there is no question of the members being discriminated in terms of minority andmajority on the basis of age.(ii) Male Members : Only male persons, and not females, can claim co-parcenary interest in the HinduFamily business firm.(iii) Karta : The right to manage the business vests in Karta alone (i.e. the Head of the Family). He hasthe implied authority to obtain loans through mortgage, etc. for the purpose of the business. Othermembers have neither any right to manage the affairs of the business nor any right to take loans onmortgage for the purpose of business.(iv) Liability : The liability of all the members of the Joint Hindu Family, except that of the Karta, islimited to the value of their individual interests in the joint property. The liability of the Karta isunlimited 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


13/35

on fluctuating. The members interest increases by death of any existing co- parcener and decreases bybirth of a new co-parcener.(vi) Continued Existence : The existence of the Joint Hindu Family Business is not affected by thedeath or insolvency 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 businesswhich 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 thefamily. At the time of such partition of the ancestral property, the co-parceners have no right to ask theKarta for an a of the past profits and losses.

Advantages of Joint Hindu Family :(i) Assured of Share in Profits : Every co-parcener gets a share in the profits of the businessirrespective of his contribution to the successful running of the business. In this way every co-parceneris assured of a share in the profits of the business.(ii) Freedom to Karta : The Karta of the family has unrestricted freedom in the sense that he can thebusiness without interference by other coparceners. This facilitates quick decision making in thebusiness.(iii) Co-operative Efforts : To take advantage of the capabilities and resourcefulness of the co-parceners, the duties of the business are divided among the members in accordance with their capacityand ability.(iv) Sharing of knowledge and Experience : It provides an opportunity for younger members to getthe benefit of knowledge and experience of elder members of the family. This helps the youngermembers to develop and acquire expertise without much difficulty.(v) Inclusion of Finer Values of Life : Every member of the family gets an opportunity forparticipation in the business and the qualities of sacrifice, duty and discipline become embedded inthem. A Joint Hindu Family Business can succeed only when such qualities are displayed by Karta andin turn they are emulated and appreciated by other members of the family.(vi) Insurance against Contingencies : It serves as an insurance cover for maintaining the children,widows, ailing or invalid members of the family.(vii) Limited Liability : It has limited liability of all the co-parceners except that of karta.

Disadvantages of Joint Hindu Family :(i) Lack of Motivation : There is no encouragement to work hard and to earn more because memberswho work hard do not get the direct benefits of their efforts. Further the right to share in income orprofits of business irrespective of the efforts put in makes the members of the family lazy andunenterprising.(ii) Unfair to Co-parceners : Since Karta has the unchallengeable authority to manage the business,the initiative and sincerity of the younger members may not find scope and opportunity for use.(iii) Scope for Misuse : Since Karta has full freedom in carrying on the business, he may misuse thisfreedom for his personal benefits and gains. This is one reason why most of the Joint Hindu FamilyBusiness firms are giving way to other forms of organizations.(iv) Limited Resources : Because of the limited capacity of the firm in terms of having members,investing capital and borrowing loans, the Joint Hindu Firm has milted resources at its disposal forinvestment in business.


14/35

UNIT IIIJoint Stock Company: A company is an incorporated voluntary association of persons in businesshaving joint capital divided into transferable shares of a fixed value, along with the features of limited

liability, common seal and perpetual succession. Chief Justice Marshal defined a company, in theDartmouth College case, as person, artificial, invisible, intangible and existing only in the eyes of law.Being a creation of law, it possesses only those properties which the charter of its creation confers on iteither, expressly or as incidental to its very existence; among the most important of which areimmortality and individuality.

Characteristics:(i) Artificial Legal Person : A joint stock company is an artificial person created by law to achieve theobjectives for which it is formed. A company exists only in the contemplation of law. It is a fiction oflaw but it cannot be called fictitious as it exists. It is an artificial person in the sense that it is created bya process other than natural birth and does not possess the physical attributes of a natural person. It isinvisible, intangible, immortal (law alone can dissolve it), and exists only in the eyes of law. It has nobody, no soul, no conscience, neither it is subject to imbecilities of the body.A company is an incorporated association of persons under the Companies Act, 1956. The CompaniesAct recognizes it as a person. Like a natural person, it has rights and obligations in terms of law.However, it cannot do those things which a natural person can do such as taking oath in person,appearing in a law court in person, practicing a profession like law or medicine, enjoying married life,etc. Although a company is a legal person having nationality and domicile, it is not a citizen and hencecannot claim the protection of those fundamental rights which are expressly guaranteed to citizens suchas right of franchise. However, the company has the right to challenge a law if the law happens toviolate fundamental rights of citizens.(ii) Distinct Legal Entity : A company is a legal person having a juristic personality entirely distinctfrom and independent of the individual persons who are its members (owners). It has the right to ownand transfer the title to property in any way it likes. No member can either individually or jointly claimany ownership right in the assets of the company during its existence or its winding up. It can sue andbe sued in its own name by its members as well as outsiders similarly, creditors of the company arecreditors of the corporate body and they cannot directly proceed against the members personally.(iii) Perpetual Succession : A joint stock company has a continuous existence and its life is notaffected by the death, lunacy, insolvency or retirement of its members or directors. Members may comeand go, but the company continues its operations so long as it fulfils the requirements of the law underwhich it has been formed. Thus, a company has a perpetual succession irrespective of its membership.(iv) Common Seal : A company being an artificial person cannot sign documents for itself whereas anatural person can do. The law has, therefore, provided for the use of a common seal, with the name ofthe company engraved on it, as substitute for its signatures. Any document bearing the common seal ofthe company and duly witnessed (signed) by at least two directors will be legally binding on thecompany.(v) Limited Liability : Liability of the members of a limited company is limited to the value of theshares subscribed to or the amount of guarantee given by them. Members cannot be asked to payanything more than what is due or unpaid on the shares of the company held by them even though theassets of the company are not sufficient to satisfy fully the claims of creditors of the company in theevent of its winding up. Thus, by virtue of this characteristic the personal property of a shareholdercannot be attached for the debts of the company if he holds a fully paid up share.(vi) Transferability of Shares : Members of a public limited company are free to transfer the shares


15/35

held by them to any one else. Shares can be sold and purchased through the stock exchange.(vii) Separation of Ownership and Management : Ordinarily, the number of shareholders, who arethe owners of the company, is fairly large and hence all of them or most of them cannot participate inthe day-to-day management of the company. The law, therefore,provides for the Board of Directors,elected by members (owners) in the general body meeting of the company, to govern the affairs of thecompany. It may, however, be noted that a company possesses the above mentioned characteristics or

features by virtue of its incorporation or registration under the Companies Act. Although a partnershipfirm-an alternative to the company form of organization- may also be got registered under the IndianPartnership Act. 1932, yet it does not posses any of these characteristics.

Kinds of Companies :On the Basis of Formation :(i) Statutory Company : A company which is created by a special Act of the Parliament or Assemblyof any State is called as statutory company. This is done only in special cases where it is necessary toregulate the working of the company for some specific purposes. The State Bank of India, ReserveBank of India, Life Insurance Corporation, Unit Trust of India etc., are examples. Statutory companiesare governed by the Acts creating them. They are not required to have any memorandum of associationor articles of association. Changes in their structure are possible only by amendments in the Actscreating them. The annual report on the working of such statutory company is required to be placed onthe tables of Parliament or Assembly. It cannot be regarded as a department of the Government.(ii) Registered Company : A company registered under the Companies Act, 1956 is called as aregistered company. These are governed by the above Act and subject to the rules of memorandum ofassociation and articles of association of their own. The annual report on the working of such statutorycompany is required to be placed on the tables of members of the company at the time of annualgeneral meeting.(iii) Government Company : Government Company means any company in which not less than 51percent of the paid-up share capital is held by the Central Government and or by any state Governmentor State Governments. The auditor of a Government company is appointed by the central Governmenton the advice of the Comptroller and Auditor-General of India. The audit report is to be placed beforethe parliament. A Government company has an independent legal entity and cannot be identified withthe Government.On the Basis of Public Interest :(i) Private Company : A private company is a very suitable form for carrying on the business offamily and small concerns it is registered under the Companies Act, 1956. According to Section 3 ofthe Companies (Amendment) Act, 2000 a private company is one which has the following features.(a) The minimum paid up capital is Rs. 1,00,000(b) The minimum number of members is two(c) The maximum number of members is fifty(d) It is prohibited from issue of shares to the public(e) It is prohibited from transfer of sharesSuch a company must use the word Private as part of its name.(ii) Public Company : It is suitable form of company for carrying on the business at large scaleinvolving huge amount of capital. According to Section 3 of the Companies (Amendment) Act, 2000 aprivate company is one which has the following features.(a) The minimum paid up capital is Rs. 5,00,000(b) The minimum number of members is seven(c) The maximum number of members is unlimitedSuch a company must use the word Ltd as part of its name.On the Basis of Liability : On the basis of liability of members the companies Act makes provision for


16/35

the registration of these types of companies namely:(i)Companies Limited by Shares : A company having the liability of its members limited by thememorandum to the value of shares held by them is called a company limited by shares. If a memberhas paid the entire value of the share, he does not owe any further liability to the company and in casehe has partly paid the value of share, the liability of such member (s) is limited to the value of theunpaid amount of the shares held by him. Most of the Companies in India belong to this category.

(ii) Companies Limited by Guarantee : such a company is defined as a company having the liabilityof its members limited by its memorandum, to such amount as the members may respectivelyundertake to contribute to the assets of the company in the event of its being wound up. The amountguaranteed by each member cannot be demanded until the company is wound up. Hence it is in thenature of a Reserve Capital. Such companies may or may not have share capital. They are generallyformed without share capital for non-trading purposes, such as the promotion of art, science, culture,sports, etc. The Articles of Association of such a company must state the number of members withwhich the company is to be registered.(iii) Unlimited Companies : A company having no limit on the liability of its members is an unlimitedcompany. The liability of members in this type of companies, being unlimited, may extend to thepersonal property of the members. In this respect, it resembles partnership. But it is different from thepartnership in the sense that the creditors of such a company cannot sue members directly. They canonly resort to the winding up of the company on default. The reason for this is that the company enjoysa separate legal entity distinct from that of its members (owners), whereas a partnership firm does notenjoy such a separate entity. It is to be remembered here as well that the liability of a member isenforceable only at the time of winding up of the company. A member continues to be liable for oneyear, after he ceases to be a member provided the existing members are unable to satisfy thecontributions required to be made by them.On the Basis of Control : On the basis of control over the company, the companies may be classifiedas under :(i) Holding Company : Where one company controls the management of another company, thecontrolling company is called Holding Company. For example if company A hold more than 51% ofpaid up share capital of company B, the company A is called as holding company. To be legal, it is arisein the following circumstances .(a) Where the majority of directors are directors of the holding company(b) Where not less than 51% of paid up share capital is held by holding company(c) Where a company is subsidiary company of a holding company.(ii) Subsidiary Company : Where one company controls the management of another company suchcompany so controlled is called as subsidiary company. For example if company A hold more than 51%of paid up share capital of company B, the company B is called as subsidiary company.On the Basis of Nationality:(i) Indian Company : A company registered in India having place of business in India is called asIndian company. It may be private company or public company. It may be noted that where, all theshare holders of a company are foreign citizens, a company shall be called as Indian company if it isregistered in India.(ii) Foreign Company : It means a company incorporated out side India and having place of businessis called as foreign company. The term place of business does not mean agency business in India. Itmay be noted that where, all the share holders of a company are Indian citizens, a company shall becalled as foreign company if it is registered out side India.On the Basis of Area :(i) National Company: Such companies confine their operations within the boundaries of the countryin which they are registered.(ii) Multi National Company: Such companies which extend the areas of their operations beyond the


17/35

country in which they are registered.

Distinction between Public and Private Company :(i) Minimum Number of Members: The minimum number of members required for a privatecompany is two, while it is seven for a public company.

(ii) Maximum Number of Members: A private company cannot have more than fifty members.However while counting the maximum number, the present as well the past employee- members shouldbe excluded. In the case of a public company, maximum membership is unlimited.(iii) Issue of Prospectus: A private company cannot issue a prospectus inviting the public to subscribefor its share or debentures. But a public company is entitled to do it. Further it has to life a copy of itsprospectus or a statement in lieu of prospectus with the Registrar before proceeding to allot shares.(iv) Commencement of Business: A private company can commence business on getting thecertificate of incorporation. But a public limited company has to take some more steps like issuing aprospectus, filing a copy of it with the Registrar, securing minimum subscriptions etc. In short, itcannot start its operations till it gets the certificate of commencement of business from the Registrar.(v) Addition of Words to the Name: The words private limited are appended to the name of a privatecompany while the word limited alone is added to the name of a public company.(vi) Transferability of Shares: A private company, by its articles, restricts the right to transfer itsshares whereas the shares of a public company are freely transferable.(vii) Statutory Meeting: Public company has to file with the registrar a statutory report and hold astatutory meeting not later than six months and not earlier than one month from the date on which it isentitled to commence business. But a private company is not required to do so.(viii) Number of Directors: A private company is required to have at least two directors while a publiccompany should have a minimum of three directors.(ix) Written Consent by Directors: In the case of a public company, every director should file withthe registrar his written consent to act as a director and to take up the qualification shares. But thedirector of a private company is not required to do so.(x) Interest of Directors in Contracts: Every director of a public company who is interested in acontract has to disclose the nature of his interest therein at the Board meeting which discusses it.Further, he should neither participate in the discussion nor vote on it. These restrictions do not apply toa private company.(xi) Appointment of Directors: A separate resolution for the appointment of each director is requiredfor a public company whereas two or more directors can be appointed on block by a single resolution inthe case of a private company.(xii) Issue of Share Warrants : public limited company, if authorized by its articles, can issue sharewarrants in respect of its fully paid-up shares but a private company cannot issue them.(xiii) Kinds of Shares : A public company can issue only equity and preference shares but a privatecompany can issue any class of shares. (Example deferred shares can also be issued.)(xiv) Maximum Number of Directorship : A person cannot hold directorship in more than 20 publiccompanies while one can act as a director in any number of private companies.(xv) Restrictions on Managerial Remuneration : A public limited company cannot pay more than11% of its net profits by way of managerial remuneration. Further, it has to get the approval of theCentral Government for raising such remuneration. But these restrictions do not apply to a privatecompany which is free to spend any amount on its management.

Advantages of a Company :(i) Large Financial Resources : The joint stock company can raise large amount of money or capitalby issuing shares and debentures to the public. The capital of the company is issuing shares and


18/35

debentures to the public. The capital of the company is divided into shares of small denominations ofRs.20, Rs50, or Rs.100 which attract person for investment with small income. The ease with which theinvestor can transfer his share holding is another attraction for the investors to raise vast funds toundertake its business activities from a position of strength.(ii) Limited Liability : The liability of shareholders of a company is limited to the face value of theshares held by them. Their private property is not attachable to recover the dues of the company. Thus,

this form of organization is a great attraction to persons who are not willing to take risk as is inherent inother forms of organization such as sole proprietorship and partnership as they do not possess thefeatures of limited liability.(iii) Continuity : A company being an artificial person created by law and enjoying a distinct andseparate personality of its own is not affected by the entry and exit of its members. It continues to be inexistence even if all the persons who promoted it leave or desert it or give up their membership. Henceas a body corporate, it enjoys perpetual existence. Being a stable form of organization it is suited forsuch business activities which require long period to establish and consolidate.(iv) Transferability of Shares : The right of the shareholders of public companies to transfer the sharesheld by them imparts liquidity to the investments and thereby encourages investment of funds in thecompany. The existence of stock exchange and continuity of operations in it facilitate further thetransferability of shares especially in respect of those which are listed on the stock exchange.(v) Benefits of Large Scale Operation : A company is in a position to raise large amount of capitaland thereby undertake large scale operations. The largeness of the operations results in the economiesin production, purchase, selling, management, advertising, etc. This in turn, leads to increase efficiencyand the consequent reduction in the cost of production.(vi) Professional Management : The largeness of the financial resources and the requirements ofbusiness operations prompt a company to hire the services of professional managers, both on the Boardof Directors and in various management positions. The professional managers by applying theirmanagerial skill and talent help the company to achieve greater heights of efficiency and competitivestrength in relation to the rival firms.(vii) Public Confidence : From inception to its winding up all the activities of a company are regulatedby the provisions of the Companies Act. The companies are under legal obligation to get their accountsaudited by a qualified Chartered Accountant and publicise their audited accounts, Directors Report,etc. All this creates and promotes public confidence.(viii) Scope for Expansion and Growth : The company form is conducive to the expansion ofbusiness operations and is also responsible for the growth of giant-size enterprises which operate notonly within the country but also in a number of foreign countries. Two limiting factors viz., limitedfinancial resources and unlimited liability are conspicuous by their absence in the case of companyform of organization as a result of which the company form enjoys greater potentialities of growth overother forms of organization.(ix) Social Benefits : The company form of organization is an effective medium, of mobilizing thescattered savings of the community and investing them in different commercial and industrialenterprises. It is also indirectly helping the growth of financial institutions like banks, insurancecompanies etc., by providing avenues for the investment of their funds into shares and debentures. Itoffers employment to many people both skilled and unskilled. Further, it produces larges amount ofrevenue to the Government both through direct and indirect taxes.(x) Tax Benefit : The tax burden varies considerably between a corporate form and a non- corporateform under the Income Tax Act. Companies being legal persons are taxed as district bodies on theirincome in addition to tax paid by shareholders at the time of dividend distribution. Whatever be the sizeof income, companies pay a uniform rate of tax. On the other hand, proprietorships or partnershipshave no entity apart from the entity of the owners thereof.


19/35

Disadvantages of a Company:(i) Difficult and Costly Formation : The formation of a company requires fulfillment of a number oflegal formalities. For this purpose provisions of the Companies Act are to be complied with and largeamounts have to be spent in order to fulfill the preliminaries. In addition, it is time consuming as wellfor a number of sanctions and approvals are to be obtained from different authorities before a companygets going. These difficulties in terms of fulfilling legal formalities, time required to complete them and

the money needed to undertake all these formalities at times discourage people from going in for thisform of organization.(ii) Lack of Personal Touch: There is a divorce between ownership and management of the joint stockcompany. The affairs of the company are managed by the professional managers. This may beresponsible for lack of personal involvement and stake which characterize sole proprietary andpartnership forms of business organization.(iii) Oligarchic Management: The management of a company which is supposed to be conducted asper desires of the shareholders or owner turns out to be a plaything of a few individuals. In theory,every shareholder has a right to participate in the Annual General Meeting and other meetings of thecompany and to exercise his right to elect directors, to appoint auditors and participate in other matters.But in practice, companies are managed by a small number of persons who are able to perpetuate theirreign over the company from year to year. This is because of a number of factors like lack of interest onthe part of the shareholders, low literacy level among the shareholders, and lack of sufficientinformation about the working of the company.

Formation of Company: The stages in the formation of a company are Promotion,Incorporation,raising of capital and commencement of business.

PROMOTION :Promotion of a business simply refers to all those activities that are required to beundertaken to establish a new business unit for manufacturing or distribution of any product or provideany service to the people. It starts with conceiving an idea of business or discover an opportunity fordoing a business, assess its feasibility and then take the necessary steps to launch the business unit.This involves ascertaining as to whether all the basic requirements such as land, building, raw material,machine, equipments etc. are available or not. If they are available one can assemble them, arrange thenecessary funds and set up the business unit to give shape to the initial idea of establishing thebusiness. The whole process is called business promotion and the person who does it is called thepromoter.Promoter: A promoter can be defined as a person or group of persons who conceive the idea of settingup a new business, assess its feasibility and take necessary steps to arrange the basic requirements andestablish a business unit say, a Company and put into operation.

Characteristics or Features of a Promoter

Promoter conceives an idea for setting up a business.

He makes preliminary investigations and censures about the future prospects of the business.

He bring together various persons who agree to associate with him and share business responsibilities.

He prepares various documents and gets the company incorporated.

He raises the enquired finances and gets the company going.

TYPES OF PROMOTERS


20/35

(a) Professional Promoters: These promoters are specialists in promoting new business ventures.They do it on a whole time basis as their occupation or profession. They initiate all the steps inestablishing new enterprises and find out the persons who can finance it. After completing all theformalities they pass on the management to their owners or shareholders and then move to another newventure.(b) Financial Promoters: These promoters float companies only during favorable conditions in the

securities market. They have the financial capacity and look forward to opportunities for newinvestment.(c) Technical Promoters: These promoters are technical experts in different fields. They make use oftheir specialised knowledge, experience and training in promoting new business. They generally chargefees for their services.(d) Entrepreneurial Promoters: They are the people who conceive new ideas of business, takenecessary steps to set up the business unit to give it a shape and ultimately control and manage it. Mostpromoters in India (like Tata, Birla, Ambanies) fall in this category.(e) Specialised Institutions: There are certain financial institutions which provide financial assistanceand guidance in launching new ventures and often collaborate with new entrepreneurs to promote newbusiness. They also provide management and technical expertise to the existing enterprises.(f) Government: Both the central and state governments also act as promoters in most cases where thenew business is floated either in public sector or joint sector which involve huge amount of capital andrisk. HMT, ONGC, SAIL, BHEL are glaring examples of units set up by the government.

STAGES IN PROMOTION OF A COMPANY(1) Discovery of a Business Idea The process of business promotion begins with conception of an ideaof business opportunity. The idea may come from non-availability of any product to satisfy the existingneed of people or inability of an existing product to satisfy the changing need of the people or a newinvention that can create a new product. For example, during early 1940s there was no Walkman.The marketing executive of an electronic company found people busy in hearing music holding a bigradio on their shoulders while travelling. This particular scene perturbed the marketing executive andhe thought how nice would it be if the radio could be reduced to a very small size which can be kept inpocket and a wire be connected to the ear. This idea gave birth to the new product Walkman.(2) Investigation and Verification Once the idea has been conceived, a thorough investigation is madeto establish the soundness of the proposition, taking into consideration its technical feasibility andcommercial viability. As in the case of Walkman if there was no technology by which the size of theradio could be reduced to small size or no technology to transmit the sound from the radio to the earthrough earphone, the proposition of producing the Walkman would have been impossible. Similarly,if technology is available but the cost involved in making a Walkman would be so high that nocustomer could be able to purchase it; or the demand is too limited and the return on investment is low,the idea is not considered as commercially viable.All these investigations on technical feasibility, commercial viability and profitability are presented in areport called project report or feasibility report. This feasibility report is the primary or basicdocument that helps in procuring licenses and arrange the necessary finance from financial institutionsand other investors.(3) Assembling Once the promoter is convinced of the feasibility and profitability of the proposition,he takes steps in assembling or making arrangements for all the necessary requirements such as land,building, machinery, tools, capital, etc. Decision is also to be made regarding size, location and layoutetc. for the plant, and make contracts with suppliers for raw materials, enter into agreement with thedealers to purchase equipments, make agreement with bankers to finance and take initial steps for thesetting up of a Company.(4) Financing the Proposition At this stage, financial plans are prepared with respect to the amount of


21/35

capital required, the nature of capital structure i.e., the proportion of capital to be raised from ownersfund and that from borrowing from banks and others, and how and when to raise the share capital fromthe general public. Agreements are made with merchant bankers, underwriters and stock brokers whoare to assist the capital issue and so on.

INCORPORATION A company can not be formed or permitted to run its business without

registration. Infact, a company comes into existence only when it is registered with the Registrar ofCompanies. For this purpose the promoter has to take the following steps:(a) Approval of Name It has to be ensured that the name selected for the company does not match withthe name of any other company. For this, the promoter has to fill in a Name Availability Form andsubmit it to the Registrar of Companies along with necessary fees. The name must includethe words(s) Limited or Private limited at the end. Once it is approved, the promoter can proceedwith other formalities for the incorporation of the Company.(b) Filing of DocumentsAfter getting the name approved the promoter makes an application to the Registrar of Companies ofthe State in which the Registered Office of the company is to be situated for registration of thecompany.Memorandum of Association (MOA): It defines the objectives of the company and Business Studiesstates about the range of activities or operation. It must be duly stamped, signed and witnessed.(ii) Articles of Association (AOA). It contains the rules and regulations regarding the internalmanagement of the company. It must be properly stamped, duly signed by the signatories to theMemorandum of Association and witnessed.(iii) A list of persons who have agreed to become Directors with their addresses etc.(iv) Written consent of the proposed Directors to act in that capacity, duly signed by each Director.(v) The notice about the exact address of the Registered Office of the company. It may, however, befiled within 30 days of incorporation or registration.(vi) A copy of the name approval letter received from the Registrar of Companies.(vii) A statutory declaration that all the legal requirements of the Companies Act in regard toincorporation have been complied with.(c) Payment of Filing and Registration Fees Along with the above documents, necessary filing fees andregistration fees at the prescribed rates are also to be paid.The Registrar will scrutinise all the documents and if he finds them in order, he will issue a Certificateof Incorporation. The moment the certificate is issued, the company comes into existence. So thiscertificate may be called as the Birth Certificate of a Joint Stock Company.

MEMORANDUM OF ASSOCIATION (MOA) The Memorandum of Association is the principaldocument in the formation of a company. It is called the charter of the company. It contains thefundamental conditions upon which the company is allowed to be incorporated or registered. It definesthe limitations of the powers of the company. The purpose of memorandum is to enable theshareholders, creditors and those who deal with the company to know what is its permitted range ofactivities or operations. It defines the relationship of the company with the outside world.The Memorandum of Association usually contains the following six clauses:(a) Name Clause: It contains the name by which the company will be established. As you know, theapproval of the proposed name is taken in advance from the Registrar of the companies.(b) Situation Clause: It contains the name of the state in which the registered office of the company isor will be situated. The exact address of the companys registered office may be communicated within30 days of its incorporation to the Registrar of Companies.(c) Objects Clause: It contains detailed description of the objects and rights of the company, for whichit is being established. A company can undertake only those activities which are mentioned in the


22/35

objects clause of its memorandum.(d) Liability Clause: It contains financial limit upto which the shareholders are liable to pay off to theoutsiders on the event of the company being dissolved or closed down.(e) Capital Clause: It contains the proposed authorised capital of the company. It gives theclassification of the authorised capital into various types of shares, (like equity and preference shares)with their numbers and nominal value. A company is not allowed to raise more capital than the amount

mentioned as its authorised capital. However, the company is permitted to alter this clause as per theguidelines prescribed by the companies Act.(f) Subscription Clause: It contains the name and address of at least seven members in case of publiclimited company and two members in case of a private limited company, who agree to associate or joinhands to get the undertaking registered as a company. It contains a declaration by persons who aredesirous of being formed into and agree to subscribe to the number of shares mentioned against theirnames.ARTICLES OF ASSOCIATION (AOA) The Articles of Association of a company contains thevarious rules and regulations for the day to day management of the company. These rules are alsocalled the bye-laws. It covers various rights and powers of its members, duties of the management andthe manner in which they can be changed. It defines the relationship between the company and itsmembers and also among the members themselves. The rules given in the AOA must be in conformitywith the Memorandum of Association. Articles of Association of a company generally contain rules andregulations with regard to the following matters:Powers, duties, rights and liabilities of Directors

1.Powers, duties, rights and liabilities of members2.Rules for Meetings of the Company3.Dividends4.Borrowing powers of the company5.Calls on shares6.Transfer & transmission of shares7.Forfeiture of shares8.Voting powers of members, etc

RAISING CAPITAL OR SUBSCRIPTION OF CAPITALIn case of a private limited company, funds are raised from the members or through arrangementfrom banks and other sources. In case of a public limited company the share capital has to be raisedfrom the public.(a) Preparation of a draft prospectus and get it inspected (vetted) by SEBI to ensure that all informationgiven in the prospectus fully complies with the guidelines laid down by SEBI in this regard.(b) Filing a copy of the prospectus with the Registrar of Companies.(c) Issue of prospectus to the public by notifying in a newspaper and inviting the public to apply forshares as prescribed in the prospectus.(d) If the minimum subscription has been received, shares should be allotted to the applicants as perSEBI guidelines and file a return of allotment with the Registrar of Companies.

(e) Listing of shares in a recognised stock exchange so that the shares can be traded there. Preferably,consent of a stock exchange for listing should be obtained before issue of the prospectus to the public.

Meaning and definition of prospectus and the various contents of a prospectus.

After the receipt of certificate of incorporation, if the promoters of a public limited company wishes toissue shares to the public, he will issue a document called prospectus. It is an invitation to the public tosubscribe to the share capital of the company. The companies Act, 1956 defines prospectus as anydocument described or issued as a prospectus and include any notice, circular, advertisement or otherdocuments inviting deposits from the public or inviting offer from the public for the subscription of


23/35

shares. It is circulated among the public in printed pamphlets. It gives all necessary information aboutthe company so that the prospective shareholders may fully understand the objectives and the plans ofthe company.

Objectives:

It informs the company about the formation of a new company.

It serves as a written evidence about the terms and conditions of issue of shares or debentures of a

company.

It induces the investors to invest in the shares and debentures of the company.

It describes the nature, extent and future prospectus of the company.

It maintains all authentic records on the issue and make the directors liable for the misstatement in the

prospectus.

Contents:

The prospectus contains the main objectives of the company, the name and addresses of the

signatories of the memorandum of association and the number of shares held by them.

The name, addresses and occupation of directors and managing directors.

The number and classes of shares and debentures issued.

The qualification share of directors and the interest of directors for the promotion of company.

The number, description and the document of shares or debentures which within the two preceding

years have been agreed to be issed other than cash.

The name and addresses of the vendors of any property acquired by the company and the amount paid

or to be paid.

particulars about the directors, secretaries and the treasures and their remuneration.

The amount for the minimum subscription.If the company carrying on business, the length of time of such businesses.

The estimated amount of preliminary expenses.

Name and address of the auditors, bankers and solicitors of the company.

Time and place where copies of balance sheets, profits and loss account and the auditors report may

be inspected.

The auditor's report so submitted must deal with the profit and loss of the company for each year of

five financial years immediately preceding the issue of prospectus.

If any profit or reserve has been capitalized, the particulars of such capitalization will be stated in the

prospectus.

A statement in lieu of prospectus.According to the companies' ordinance if a public company is notissuing a prospectus on its formation, it then must file a statement in lieu of prospectus with theregistrar of the companies. A statement n lieu of prospectus is defined as:

A statement in lieu of the prospectus contains the information as described below:-1- Name of the company


24/35

2- Statement of capital3- Description of the business4- Names, addresses, and occupation of directors5- Estimated initial expenses6- Names of vendors and details of property7- Material contracts

8- Director's interest9- Minimum subscription

COMMENCEMENT OF BUSINESSIn case of a private limited company, it can immediately start its business as soon as it is registered.However, in case of public limited company a certificate, known as certificate of commencement ofbusiness, must be obtained from the Registrar of Companies before starting its operation. For thispurpose it has to file a statement with the following declarations to the Registrar of Companies.(a) That a prospectus has been filed with the Registrar of Companies.(b) That the shares have been allotted upto the amount of the minimum subscription.(c) That the Directors have taken up or purchased the minimum number of shares requiredto qualify themselves to be Director.(d) That no money is liable to become refundable to the applicants by reason of failure to obtainpermission for shares to be traded in a recognised stock exchange.(e) A

Business Organisation Pakka Notes

Documents

Transcript of Business Organisation Pakka Notes