Finalised I & II Unit

7/30/2019 Finalised I & II Unit

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UNIT I

BUSINESS ENVIRONMENT

What is business?

A business can be defined as an organization that provides goods and services to others who

want or need them. When many people think of business careers, they often think of jobs in large

wealthy corporations. Many business-related careers, however, exist in small businesses, non-profit

organizations, government agencies, and educational settings.

NATURE AND SCOPE OF BUSINESS

All of us live in families and depending on the income, we have different standards of living.

We require various types of goods and services to satisfy our needs and wants. Some members in

your family have to work to earn and provide for the needs of the family. Thus, people engage in

different activities which are known as economic activities. In ancient times, people had limited

wants to satisfy. In modern times however, we need a large variety of goods and services to satisfy

our needs and to raise our standard of living. On the one hand the supply of goods and services has

led to various activities. On the other hand, activities of different types are undertaken by people to

earn sufficiently to fulfill their increasing wants. Thus we find large numbers of people engaged in

business, industry, and profession. Such economic and business activities satisfy various needs and

demands for goods and services.

Business may be understood as the organized efforts of enterprise to supply consumers with

goods and services for a profit. Businesses vary in size, as measured by the number of employees or

by sales volume. But, all businesses share the same purpose: to earn profits.The purpose of business goes beyond earning profit. There are:

It is an important institution in society.

Be it for the supply of goods and services

Creation of job opportunities

Offer of better quality of life

Contributing to the economic growth of the country.

Hence, it is understood that the role of business is crucial. Society cannot do without business. It

needs no emphasis that business needs society as much.

HUMAN ACTIVITIES AND BUSINESS

You know that man always keeps himself engaged in some kind of activity to satisfy his

needs and wants. All human activities may be broadly divided into two categories: (i) economic

activities, and (ii) non-economic activities. The works of a farmer, manufacturer, teacher, doctor,


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trader etc. are some examples of economic activities. They are primarily concerned with the

production, distribution and consumption of goods and services. Economic activities are undertaken

to earn ones living and for the production of wealth. Besides economic activities, people also

undertake a number of activities for mental satisfaction. They engage in charitable work, practice

religion, undertake recreational activities and also do many things out of love for others or out of

patriotic feelings. These activities are known as non-economic activities. These activities are

undertaken not for any material reward or gain but for ones happiness, pleasure or satisfaction

which can not be measured in terms of money.

What are the essentials of a successful business?

Business has a wide field and has to face the complicated needs of the society. It starts with

production of goods at one ends with providing goods to the ultimate consumer. Success in business

can be attained on the fulfilment of the following conditions which are termed as requisites of sound

business.

NATURE OF BUSINESS

The nature of business is best understood on the basis of its characteristics or features which are as

follows:

1. Business is an economic activity.

2. It includes the activities of production or purchase and distribution.

3. It deals in goods and services.

4. It implies regularity of transactions.

5. It aims at earning profits through the satisfaction of human wants.

6. It involves risk; it is not certain that adequate profit will be earned.

7. It creates utilities.

8. It serves a social purpose by improving peoples standard of living.

OBJECTIVES OF BUSINESS

Success in business depends on proper formulation of its objectives. Objectives must be clear, and

attainable. Objectives may be divided into two parts -

(i) economic and

(ii) social.

Economic Objectives

Economic objectives of business include earning adequate profit or satisfactory return on

capital invested, survival in the case of competition and growth to maintain progress.


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Social Objectives

Social objectives include providing employment opportunities, supply of quality goods and

services at reasonable price, improving the standard of living and contributing to environmental

protection. It also includes justice to workers in terms of wages, welfare amenities, improved service

conditions and professional growth.

Significance of Business in Modern Society

Business is an integral part of modern society. It is an organised and systematised activity for

profit. It is concerned with activities of people working towards a common goal. The modern society

can not exist without business. The need and importance of business in society can be described as

follows:

1. Improvement in standard of living:

Business helps people in general to improve their standard of living.

2. Proper utilization of resources:

It leads to effective utilization of the scarce resources of society. It provides facility of mass production.

3. Better quality and large variety of goods and services:

It involves production, purchase and sale of goods and services for price. Customer

satisfaction is the backbone of modern business. Services such as supply of water, electricity etc.

may be considered highly significant for the community.

4. Creates utilities:

Business makes goods more useful to satisfy human wants. It adds to products the utilities of

person, time, place, form, knowledge etc. Thus, people are able to satisfy their wants effectively and

economically.

5. Employment opportunities:

It provides employment opportunities to large number of people in society.

6. Workers' welfare

Business organisations these days take care of various welfare activities for workers. They

provide safer and healthier work environment for employees.

Classification of Business Activities

Business activities are undertaken to satisfy human wants by producing goods or rendering

services. We may classify business activities on the basis of functions into two broad categories

(a) Industry and

(b) Commerce.


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Industry is concerned with the production and processing of goods. This type of business

units are called industrial enterprises which produce consumer goods as well as machinery and

equipments. On the other hand, Commerce includes all those activities which are necessary for the

storage and distribution of goods. Such units are called commercial enterprises which include

trading and service activities like transport, banking, insurance and warehousing. Let us examine the

characteristics of industry and commerce.

Industry and its Types

Industry means production of goods for sale by the application of human or mechanical

power. In other words, industry refers to economic activities which are connected with raising,

producing and processing of goods and services.

Characteristics of Industry

The main characteristics of industry are as follows:-

Industry refers to the productive aspect of business.

Production is done by the application of human or mechanical power. It creates form utility to natural or partly processed goods. It is concerned with the production of both producer and consumer goods. Industrial activities are regulated by different laws. It involves continuous operation.

Types of Industries

Industries are divided into two broad categories:

Primary industries

Secondary industries.Primary industries include all those activities which are connected with extraction, producing

and processing of natural resources. These industries may be further sub-divided into two types: (a)

extractive and (b) genetic. Secondary industries are concerned with the materials which have already

been produced at the primary stage. For example, mining of iron ore is a primary industry, but

manufacture of steel is a secondary industry.

a) Extractive Industries

Extractive industries are concerned with the extraction of materials from the earth, sea and

air such as mining, farming, fishing and hunting etc. Products of these industries are used either

directly for consumption such as food grains, fruits and vegetables or as raw materials such as

cotton, sugar-cane, etc.


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b) Genetic Industries

Genetic industries include activities connected with rearing and breeding of animals and

birds and growing plants. Reproduction and multiplication is the main activity in these industries,

such as, agriculture, animal husbandry, dairy, poultry, pisciculture etc. Main products are milk,

wool, butter, cheese, meat, egg, fish, seeds of plants, etc.

Secondary industries may also be of two types: (a) manufacturing, and (b) construction.

a) Manufacturing Industries

Industries engaged in the conversion of raw materials or semi-finished products into finished

product are called manufacturing industries. Cotton is converted onto textiles and iron one is

converted into in these industries. It creates a form utility of the product.

b) Construction Industries

The activities of Construction industries include erection of buildings, bridges, roads,

railways canals etc. Their output do not consists of movable goods. It makes use of the output of

other industries like brick, cement, steel etc.

Characteristics of Commerce

Commerce is the sum total of all the activities connected with the placing of the product

before the ultimate consumer. It provides the necessary link between the producer and the consumer

of goods.

Commerce is defined as activities involving the removal of hindrances in the process of

exchange. Commerce includes all those business activities which are undertaken for the sale or

exchange of goods and services and facilitates their availability for consumption and use - through

trade, transport, banking, insurance, and warehousing. Thus commerce includes trade and auxiliaries

to trade, that is transport, banking, insurance and warehousing.

The main characteristics of commerce are as follows:

(i) Commerce is the sum total of activities which facilitate the availability of goods to

consumers from different producers.

(ii) It aims at ensuring proper distribution of goods.

(iii) It adds different type of utilities to the goods by making goods available at the right time

and the right place to the people who need them.

(iv) It includes trade and auxiliary to trade.

Trade and its types

Trade is an integral part of commerce and refers to sale and transfer of goods. It involves

actual buying and selling of goods. It means exchange of goods and services for cash or credit.

Traders help in directing the flow of goods to the most profitable market. They also bring about


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equitable distribution of goods on a national and international scale. It is because goods are produced

on a large scale and it is difficult for producers to reach individual customers, that trade is said to

remove the hindrance of persons through traders. Goods acquire place utility through trade.

Characteristics of Trade

The main characteristics of trade are as follows:

(i) Trade is regarded as the primary activity in commerce;

(ii) It means exchange of goods and services for price;

(iii) It helps in directing the flow of goods to the most profitable market;

(iv) It helps to equalise the supply of and demand for goods in different markets both national

and international.

Classification of Trade

Trade may be classified into

(i) Home Trade or Internal Trade and(ii)Foreign Trade or External Trade

(i) Home Trade

Home Trade means trade carried on within the boundaries of a country. The primary object

of home trade is to bring about proper distribution of goods within the country. It may be divided

into two types (a) Wholesale Trade and (b) Retail Trade

(a) Wholesale Trade: Wholesale trade involves buying goods from producers and selling them in

small quantities to retailers. The wholesaler generally deals in large quantities of goods of a limited

number of varieties. He serves as a connecting link between the producer and the retail dealer.

(b) Retail Trade: A retail trade consists of selling goods directly to the consumers in small

quantities. A retailer usually purchases goods from wholesalers or manufacturers and deals in a

variety of goods of different manufacturers.

(ii) External Trade

External trade refers to trade between two countries. It implies buying and selling of goods

by traders of two different countries. It creates a very wide market for goods produced in different

countries. External trade involves (a) Export and (b) Import. Export is concerned with the sale of

goods to foreign countries. Import trade relates to the purchasing of goods from other countries.

Inter-relationship between Industry, Trade and Commerce

All the three branches of business are closely related to each other. Each depends upon the

other for the achievement of aims and objectives of business. For example, industry is concerned

with the production of goods and services, trade is related with sale and purchase of products, and

commerce arranges for their distribution. Industry can succeed only if goods are marketed and


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without production of goods, there cannot be commerce and trade. Hence, trade provides necessary

support to industry and commerce. Thus, industry, trade and commerce are inter-dependent and

cannot operate in isolation. Service facilities also provide necessary support to trade.

CHARACTERISTICS OF A SUCCESSFUL BUSINESS

The chief characteristics of a successful business are:

1. Establishment of objective: Establishing objectives is the primary task of the business objectives

determines the aims and goals of the business operation which ultimately helps designing the shape

of future events. The objective should disclose the main and subsidiary objectives of the

organisation.

2. Proper planning: Planning involves complete set of policies, programme and procedure for the

accomplishment of the objectives. Proper planning focuses attention of the objectives of the

enterprise, reduces uncertainties, ensures economy and defines the boundaries within which the

business has to operate.

3. Location and layout: The objectives of the business can be attained fully when it has a proper

location and layout. If the business is not located in a good place, it cannot attract more customers

and thereby the success in business cannot be visualized.

4. Sound distribution and management: A successful business necessitates a sound organisation

and efficient management.

5. Smooth distribution system: A successful business necessitates smooth distribution of the goods

produced otherwise it will involve blockage of capital.

6. Good relationship with employee: A successful business requires the presence of good employer

and employee relationship. In the absence of this business should try to render the following services

to the society.

Supply of qualitative goods: The business should ensure supply of qualitative productscontinuously and without any obstructions. The product so supplied must suit the needs, taste and

financial condition of the people in the society.

Charging fair price: To attract customers and to maintain permanent relationship with thecustomers, the business should charge reasonable and fair price for the product. Charging of fair

price is socially desirable.

Creation of more employment: The business can help the society by creating employmentopportunities. The expansion in the business activities helps the society in a number of ways.

Providing better standard of living: The presence of business creates new markets, newproducts and new uses of the product. This also helps in the reduction of cost of production. People


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in the society are in a better position to get the quality products at a better price and thereby it helps

in increasing the standard of living of the people.

BUSINESS ENVIRONMENT

Environment refers to all external forces, which have a bearing on the functioning of

business. Environment factors are largely if not totally, external and beyond the control of

individual industrial enterprises and their managements. The business environment poses threats to a

firm or offers immense opportunities for potential market exploitation.

TYPES OF ENVIRONMENT

Environment includes such factors as socio-economic, technological, supplier, competitor

and the government. There are two more factors, which exercise considerable influence on business.

They are physical or natural environment and global environment.

Technological Environment

Technology is understood as the systematic application of scientific or other organized

knowledge to practical tasks. Technology changes fast and to keep pace with it, businessmen should

be ever alert to adopt changed technology in their businesses.

Economic Environment

There is close relationship between business and its economic environment. Business obtains

all its needed inputs from the economic environment and it absorbs the output of business units.

Political Environment

It refers to the influence exerted by the three political institutions viz., legislature executive

and the judiciary in shaping, directing, developing and controlling business activities. A stable and

dynamic political environment is indispensable for business growth.

Natural Environment

Business, an economic pursuit of man, continues to be dictated by nature. To what extend

business depends on nature and what is the relationship between the two constitutes an interesting

study.

Global or international Environment

Thanks to liberalization, Indian companies are forces to view business issues from a global

perspective. Business responses and managerial practices must be fine-tuned to survive in the global

environment.

Social and culture Environment

It refers to peoples attitude to work and wealth; role of family, marriage, religion and

education; ethical issues and social responsiveness of business.


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ENVIRONMENTBUSINESS RELATIONS

Business is the product of the technological, political-legal, economic, social cultural,

global and natural factors amidst which it functions. Three features are common to this web of

relationship between business and its environment.

There is symbolic relationship between business and its environment and among the

environmental factors. In other words, business is influenced by its environment and in turn, to

certain degree, it will influence the external forces. Similarly, political-legal environment influences

economic environment and vice versa. The same relationship between other environment factors too.

These environmental forces are dynamic. They keep on changing as years roll by, so does

business.

The third feature is that a particular business firm, by itself, may not be in a position to

change its environment. But along with other firms, business will be in a position to mould the

environment in its favor.

IMPORTANCE OF ENVIRONMENTAL STUDY

The benefits of environmental study are as follows;

Development of broad strategies and long-term policies of the firm.

Development of action plans to deal with technological advancements.

To foresee the impact of socio-economic changes at the national and international levels on

the firms stability.

Analysis of competitors strategies and formulation of effective countermeasures.

To keep oneself dynamic.

Distinction between economic and non-economic activities

Following are the points of distinction between economic and non-economic activities.

S.No Economic Non-economic

1Economic activities are motivated

by economic gain.

Non-economic activities are motivated

by a desire to achieve mental satisfaction

or happiness.

2

Monetary gain is expected from

economic activities.

There is no such satisfaction from non-

economic activities.

3Economic activities lead to

creation of wealth.

Non-economic activities lead to personal

satisfaction

However, a particular kind of activity which is non-economic in one case may be economic

in the other. Cooking by a housewife is non-economic but cooking in a hotel is an economic activity.


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TYPES OF ECONOMIC ACTIVITIES

When a person is regularly engaged in a particular economic activity, it is known as his or

her occupation or vocation. Occupations may be classified into three categories:

(i) Business, (ii) Profession and (iii) Employment (Service).

Business

Activities connected with the production or purchase and sale of goods or services with the

object of earning profit are called business activities. Mining, manufacturing, trade, transportation,

insurance, banking are business activities. Thus business may be defined as an economic activity

involving regular production or purchase and distribution of goods and services with the object of

earning profits.

Profession

Any activity which requires special knowledge and skill to be applied by an individual to

earn a living is known as profession. For example doctors, teachers, lawyers, engineers and

accountants are engaged in profession. Profession involves intellectual activity. It is not a

mechanical or routine operation.

The main characteristics of profession are

(i) Every profession requires special knowledge and training.

(ii) The primary objective is to render service.

(iii) The service cannot be substituted by another individual.

(iv) Every profession is regulated by a professional body. For example the profession of Chartered

Accountants is regulated by the Institute of Chartered Accountants of India.

Employment

When a person works regularly for others and gets wages/salary in return, he is said to be in

employment. Thus factory workers, office assistants and managers are said to be in employment.

Those in employment are called employees. Employment may be in government department or in

private organization. It may be full-time or part-time, permanent or temporary. The main features of

employment are:

ECONOMIC ENVIRONMENT OF BUSINESS

The decision concept which we have been using here is basically that of a firm. We consider

firm as an economic institution in a market system. The market behaviour of the firm reflects the

nature of economic decisions taken by the manager of the firm. Micro economic decision making by

the firm has never the less-to be made within the broader micro-economic environment, Economic

environment of business has reference to the broad characteristics of the economic system in which

the business firm operates.


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The present day economic environment of business is a complex one the business sector has

economic relation with the government, capital market, household sector and abroad sector. These

different sectors together influence the trends, and structure of the economy. The form and

functioning of the economy vary widely. The design-and- structure of any economic system is

conditioned by the socio-political arrangements. Such arrangements have got relevance from the

standpoint of micro-economic decision making. For example, under a democratic set-up, the public

exercise an influence, direct or indirect, through a system of voting, on the nature of decisions taken

by the government. Under dictatorship, one ruler takes the crucial decisions for the entire country.

Under a parliamentary system, most decisions are processed by the Cabinet of Ministers,

whereas under presidential form of government, the President acts as the real manager of the state, it

is he who takes/makes decisions. Similarly, the micro-decision making is more decentralized under a

federal from the government than under a unitary form.

It may be argued that the reference is being made here to political decisions. But it must be

emphasized that the political decisions have got far- reaching economic implications. After all, the

government is the manager of economy. The nature of government ownership, control and

regulation of economic activities of a country provides form and shape to the nature of economic

organization. Under a capitalist from of society, the private sector, induced by the profit motive and

guided by the indication of a free market mechanism, takes the major economic decisions t& invest,

produce and distribute. Under a socialist from of society, such decisions are taken by the public

sector, guided by social welfare motive and central planning. In a communist society, economic

decisions including consumption are taken by the state in the interest of the community as a whole.

In a mixed economy, private, public and joint sectors: a have some say in major decisions for the

functioning of economy. In some mixed socialistic pattern of society like India, we even hear of co-

operative sectors of small individual savers and workers' sector having say in investment and

production decisions of the economy.

All civilized economies, whether capitalist, socialist, communist or mixed, have certain

fundamental economic problems to solve. Despite the recent talk on "Affluent Society", the hard fact

is that in each and every economy, most resources are scarce. Consequently, choices have to be

made by individuals, by business corporations, and by society. It is the social choice and community

preference which give substance to the question of macroeconomic decisions. From the standpoint of

scarcity of resources, the basic economic problem of every economy is that of allocation of resources

and subsequent production. This problem has got many facets: What to produce? How to produce?

For whom to produce? When to produce? Every economy has to decide the qualities and quantities

of goods and services to be produced. It has to decide on the nature of technology and technique of


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production in view of factor endowment. It has to decide the course and pattern of distribution of

goods and services, when those are produced. It has to decide on the timing of production.

Note that same decisions are taken by the individual firm as they are taken by the economy

as a whole. The problems do not end in general, they repeat; one ends, another crops up. The process

of decision-making differs depending on how these problems have solved in different economies this

is what constitutes the functioning of the economy-the nature of economic environment.

Economics is the study of economic problems. Each and every economic problem is a

problem of choice and valuation.' The question of choice arises as and when means (resources) are

adjusted to ends (wants); the adjustment itself constitutes an economic activity.

The purpose of economic activities is to, satisfy maximum possible ends by sacrificing

minimum possible resources. The purpose of .economic activities is so defined because of peculiar

characteristics of both wants and resources.

Human wants have two fundamental characteristics:-

(i) Wants are unlimited. Wants are numerous in number and 'various in forms. In general,

wants are not satiable.

(ii) Wants can be graded in order of intensity. A system of preference can be worked out so

that the less urgent wants can be placed down the scale.

Resources like money, materials and time have also got two fundamental characteristics:-

(i) Resources are limited in supply. In general, we face excess demand for resources, and this

is the reflection of their scarcity.

(ii) Resources have alternative uses. They can be used for more than one purpose. Uses of

resources can also be graded in order of priority.

It may be noted that the want characteristics and resource-characteristics are very much

comparable and contrastable. Unlimited ends and limited means together present the problem of

choice. Choice has to be exercised in selecting the ends to be satisfied; choice has to be exercised in

selecting the uses of means to an end. Graded list of preference for wants and alternative use of

resources together reinforce the question of choice and valuation. Thus an economic problem arises

because of the fundamental characteristics of ends and means that have been stated above. The

essence of the problem is 'scarcity of resources'. Had resources not been scarce, unlimited wants

could have been easily satisfied by using unlimited resources; resource-wastage would not have been

'a concern at all. Since resources at our disposal are limited we are always concerned about the

creation of resources mobilization of resources, allocation of resources and optimum utilization of

resources. Here are the various facets of any economic problem. The concern of Economics is

description and analysis of economic problems faced by individuals, organizations, nations and the


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world. Economics teaches us how to "minimize" the use of resources and how to or' maximize" the

level output there from. This constitutes optimum solution of an economic problem.

Apportionment of productive assets among different uses. The issue of resource allocation

arises as societies seek to balance limited resources (capital, labour, land) against the various and

often unlimited wants of their members. Mechanisms of resource allocation include the price system

in free-market economies and government planning, either in state-run economies or in the public

sectors of mixed economies. The aim is always to allocate resources in such a way as to obtain the

maximum possible output from a given combination of resources.

EFFICIENT ALLOCATION OF RESOURCES

In a business unit, the goal of maximum profit depends on how the resources are allocated

among different projects. Economically speaking by efficient allocation ofresources, we mean the

distribution of available resources in such a way that all resources are fully utilized and there are

increasing returns to scale. In a business organization allocation of resources comes under the

Resource management category.

Everybody knows that the todays world is subject to limited resources while the human

wants are unlimited. So the resources must be allocated effectively not only to earn profits but also

to save mankind from scarcity.

As we know that there are four factors of production; land, labour, capital and entrepreneur.

Hence the resources can also be categorized accordingly:

1. Human resources

2. Investment resources

3. Land resources

Now it depends how resource management strategy is employed to these resources. How the

combination of different resources is put in an organization to have a maximum output level.

For the better understanding of efficient allocation of resources, the concept of marginal

productivityof the resources must be kept in mind that is efficient allocation of resources is there

when the marginal productivities of all the factors of production are the same in each unit of

production at the maximum output level.

Decision making is also important while putting resources in any constructive activity. For

instance, if a manager starts a project he has to carefully make the decisions regarding the staff. He

must compare the costs of the factors that which factor of production is relatively cheaper, which

factor is more productive to the project and also analyze the availability of the resources.


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Time management also plays key role that what combination of resources would complete

the project in lesser time, to achieve goals. The most important step in resource allocation decision is

the resource leveling or rationing to assign available resources in an efficient and economic way.

Resource allocation is used to assign the available resources in an economic way. It is part of

resource management. In project management, resource allocation is the scheduling of activities and

the resources required by those activities while taking into consideration both the resource

availability and the project time.

Strategic planning

In strategic planning, resource allocation is a plan for using available resources, for example

human resources, especially in the near term, to achieve goals for the future. It is the process of

allocating resources among the various projects or business units.

The plan has two parts: Firstly, there is the basic allocation decision and secondly there are

contingency mechanisms. The basic allocation decision is the choice of which items to fund in the

plan, and what level of funding it should receive, and which to leave unfunded: the resources are

allocated to some items, not to others.

There are two contingency mechanisms. There is a priority ranking of items excluded from

the plan, showing which items to fund if more resources should become available; and there is a

priority ranking of some items included in the plan, showing which items should be sacrificed if total

funding must be reduced.

Resource Leveling

The main objective is to smooth resources requirements by shifting slack jobs beyond

periods of peak requirements. Some of the methods essentially replicate what a human scheduler

would do if he had enough time; others make use of unusual devices or procedures designed

especially for the computer. They of course depend for their success on the speed and capabilities of

electronic computers.

Algorithms

Resource allocation may be decided by using computer programs applied to a specific

domain to automatically and dynamically distribute resources to applicants. It may be considered as

a specialized case of automatic scheduling.

Opportunity Cost

The cost of passing up the next best choice when making a decision. For example, if an asset

such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the

asset could have been used for. Opportunity cost analysis is an important part of a company's

decision-making processes, but is not treated as an actual cost in any financial statement.
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It is expressed in relative price, that is, the price of one choice relative to the price of another.

In many cases, the relative price provides better insight into the real cost of a good than does the

monetary price.

APPLICATIONS OF OPPORTUNITY COST

The concept of opportunity cost has a wide range of applications including:

1. Consumer choice2. Production facilities3. Cost of capital4. Time management5. Career choice6. Analysis of comparative advantage

MEASURING BUSINESS SIZE

A business can grow slowly over time by investing money in new machines and buildings.

Quicker ways for a business to grow is to takeover or merge with another one. There are a number of

reasons why a business would choose to grow, such as:

A larger business may be able to make more profit.

Higher pay for the managers if they are able to increase the size of the business.

It can be easier for a larger business to spread risk as it may diversify into different markets.

Economies of scale, these will be discussed in greater detail below.

The size of a business is not measured according to the size of its building, but other factors

such as:

The market share of the business

The level of sales turnover

The number of employees

The value of the business

The value of capital employed

BALANCE OF TRADE

The balance of trade (or net exports, sometimes symbolized asNX) is the difference between

the monetary value ofexports and imports of output in an economy over a certain period. It is the

relationship between a nation's imports and exports. A positive or favorable balance of trade is

known as a trade surplus if it consists of exporting more than is imported; a negative or unfavorable

balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes

divided into a goods and a services balance.

Factors that can affect the balance of trade include:
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1. The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economyvis--vis those in the importing economy;

2. The cost and availability of raw materials, intermediate goods and other inputs;3. Exchange rate movements;4. Multilateral, bilateral and unilateral taxes or restrictions on trade;5. Non-tariff barriers such as environmental, health or safety standards;6. The availability of adequate foreign exchange with which to pay for imports; and7. Prices of goods manufactured at home (influenced by the responsiveness of supply)

TRADE GAP

Trade gap is the difference in value over a period of time of a country's imports and exports

of merchandise, "a nation's balance of trade is favorable when its exports exceed its imports".

BALANCE OF PAYMENTS

The balance of payments (BOP) is the method countries use to monitor all international

monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and

every calendar year. All trades conducted by both the private and public sectors are accounted for in

the BOP in order to determine how much money is going in and out of a country. If a country has

received money, this is known as a credit, and, if a country has paid or given money, the transaction

is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and

liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell

the observer if a country has a deficit or a surplus and from which part of the economy the

discrepancies are stemming.

The Balance of Payments Divided

The BOP is divided into three main categories: the current account, the capital account and

the financial account. Within these three categories are sub-divisions, each of which accounts for a

different type of international monetary transaction.

The Current Account

The current account is used to mark the inflow and outflow of goods and services into a

country. Earnings on investments, both public and private, are also put into the current account.

Within the current account are credits and debits on the trade of merchandise, which includes

goods such as raw materials and manufactured goods that are bought, sold or given away (possibly

in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be

paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from

lawyers or management consulting, for example), and royalties from patents and copyrights. When

combined, goods and services together make up a country's balance of trade (BOT). The BOT is


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typically the biggest bulk of a country's balance of payments as it makes up total imports and

exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a

balance of trade surplus, it exports more than it imports.

Receipts from income-generating assets such as stocks (in the form of dividends) are also

recorded in the current account. The last component of the current account is unilateral transfers.

These are credits that are mostly worker's remittances, which are salaries sent back into the home

country of a national working abroad, as well as foreign aid that is directly received.

The Capital Account

The capital account is where all international capital transfers are recorded. This refers to the

acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-

produced assets, which are needed for production but have not been produced, like a mine used for

the extraction of diamonds.

The capital account is broken down into the monetary flows branching from debt

forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the

transfer of ownership on fixed assets (assets such as equipment used in the production process to

generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and

inheritance taxes, death levies, and, finally, uninsured damage to fixed assets.

The Financial Account

In the financial account, international monetary flows related to investment in business, real

estate, bonds and stocks are documented.

Also included are government-owned assets such as foreign reserves, gold, special drawing

rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct

foreign investment. Assets owned by foreigners, private and official, are also recorded in the

financial account.

PROTECTIONISM

Protectionism is the economic policy of restraining trade between states, through methods

such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations

designed to discourage imports, and prevent foreign take-over of domestic markets and companies.

Simply, the restriction of imports into a country by government measures.

REASONS FOR PROTECTIONISM

Protects businesses from extra competition

Helps new businesses to develop before they face competition

Helps protect jobs Prevents foreign countries dumping lots of cheap imports

Prevents imports of harmful or desirable goods


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TRADE BARRIERS / METHODS OF PROTECTIONISM

1. Tariffs or import duties:These are taxes on imported goods. They raise the price to customers and make them

less attractive.

2. Quotas:These are limits on the quantity of a product that can be imported into a country e.g.

100,000 cars.

3. Regulations:This includes laws and safety guidelines.

FREE TRADE

Trade without any protectionist / trade barriers between countries.

BENEFITS OF FREE TRADE & PROBLEMS OF TRADE BARRIERS

1. Protectionism keeps UK firms away from genuine competition. They may become lazy

and inefficient.

2. Free trade forces UK firms to produce quality goods and services as they face much

foreign competition.

3. If the UK puts up trade barriers then other countries are likely to retaliate.

4. Free trade encourages firms to export and import. This should encourage a greater choice

for consumers and a higher standard of living.

5. Trade barriers increase the cost of trading. For example, a tariff would mean that UK firms

and consumers may have to pay more for imports of raw materials or consumer goods.

BUSINESS ETHICS

Business ethics can be defined as written and unwritten codes of principles and values that

govern decisions and actions within a company. In the business world, the organizations culture sets

standards for determining the difference between good and bad decision making and behavior.

In the most basic terms, a definition for business ethics boils down to knowing the difference

between right and wrong and choosing to do what is right. The phrase 'business ethics' can be used to

describe the actions of individuals within an organization, as well as the organization as a whole.

Moral principles concerning acceptable and unacceptable behavior by business people.

Executives are supposed to maintain a high sense of values and conduct honest and fair practices

with the public.

Business ethics (also known as corporate ethics) is a form of applied ethics or professional

ethics that examines ethical principles and moral or ethical problems that arise in a business

environment. It applies to all aspects of business conduct and is relevant to the conduct of


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Intentional amoral managers exclude ethical issues because they think that general ethical

standards are not appropriate to business.

Unintentional amoral managers do not include ethical concerns because they are inattentive

or insensitive to the moral implications.

Immoral management

Immoral management is synonymous with unethical practices in business. This kind of

management not only ignores concerns, it is actively opposed to ethical behavior.

NEED FOR BUSINESS ETHICS

Ethics corresponds to basic human needs. It is human trait that man desires to be ethical,

not only in his private life but also in his business. These basic ethical need compel the organizations

to be ethically oriented.

Values create credibility with public. A company perceived by the public to be ethically

and socially responsive will be honored and respected. The management has credibility with its

employees precisely because it has credibility with the public.

An ethical attitude helps the management make better decisions, because ethics will force a

management to take various aspects- economic, social, and ethical in making decisions.

Value driven companies are sure to be successful in the long run, though in the short run,

they may lose money.

Ethics is important because the government, law and lawyers cannot do everything to

protect society.

ETHICAL GUIDELINES

Obeying the law: Obedience to the law, preferably both the letter and spirit of the law.

Tell the Truth: To build and maintain long-term, trusting and win-win relationships with

relevant stockholders.

Uphold human dignity: Giving due importance to the element of human dignity and

treating people with respect.

Adhere to the golden rule: Do unto others as you would have othersdo unto you

Allow Room for participation: Soliciting the participation of stakeholders rather than

paternalism. It emphasizes the significance of learning about the needs of stakeholders.

Always Act When You Have Responsibility: Managers have the responsibility of taking

action whenever they have the capacity or adequate resources to do so.

TOOLS FOR ETHICAL MANAGEMENT

Top management commitment: Managers can prove their commitment and dedication for

work and by acting as role models through their own behaviors.


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Codes of Ethics: A formal document that states an organizations primary values and the

ethical rules it expects employees to follow. The code is helpful in maintaining ethical behavior

among employees.

Ethics committees: Appointment of an ethics committee, consisting of internal and

external directors is essential for institutionalizing ethical behavior.

Ethics Audits: Systematic assessment of conformance to organizational ethical policies,

understanding of those policies, and identification of serious deviations requiring remedial action.

Ethics training: Ethical training enables managers to integrate employee behavior in

ethical arena with major organizational goals.

Ethics Hotline: A special telephone line that enables employees to bypass the normal chain

of command in reporting their experiences, expectations and problem. The line is usually handled by

an executive appointed to help resolve the issues that are reported.

INTERNATIONAL BUSINESS ETHICS

While business ethics emerged as a field in the 1970s, international business ethics did not

emerge until the late 1990s, looking back on the international developments of that decade. Many

new practical issues arose out of the international context of business. Theoretical issues such as

cultural relativity of ethical values receive more emphasis in this field. Other, older issues can be

grouped here as well. Issues and subfields include:

1. The search for universal values as a basis for international commercial behaviour.2. Comparison of business ethical traditions in different countries. Also on the basis of their

respective GDP and [Corruption rankings].

3. Comparison of business ethical traditions from various religious perspectives.4. Ethical issues arising out of international business transactions; e.g. bioprospecting and

biopiracy in the pharmaceutical industry; the fair trade movement; transfer pricing.

5. Issues such as globalization and cultural imperialism.6. Varying global standardse.g. the use ofchild labor.7. The way in which multinationals take advantage of international differences, such as

outsourcing production (e.g. clothes) and services (e.g. call centres) to low-wage countries.

8. The permissibility of international commerce with pariah states.SOCIAL RESPONSIBILITY

The idea that businesses should not function amorally, but instead should contribute to the

welfare of their communities. Social responsibility is the obligation of decision-makers to take

actions, which protect and improve the welfare of society as a whole along with their own interests.

Every decision the businessman takes and every action he contemplates have social implications. Be
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it deciding on diversification, expansion, opening of a new branch, and closure of an existing branch

or replacement of men by machines, the society is affected in one way or the other. Whether the

issue is significant or not, the businessman should keep his social obligation in mind before

contemplating any action.

ARGUMENTS FOR SOCIAL RESPONSIBILITY

Business has to respond to the needs and expectations of society.

Improvement of the social environment benefits both society and business.

Social responsibility discourages additional governmental regulation and intervention.

Business has a great deal of power, which should be accompanied by an equal amount of

responsibility.

Internal activities of the enterprise have an impact on the external environment.

The concept of social responsibility protects interests of stockholders.

Social responsibility creates a favorable public image.

Business has the resources to solve some of societys problems.

It is better to prevent social problems through business involvement than to cure them.

CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility is the responsibility for the environment. CSR is about how companies manage the business processes to produce an overall positive

impact on society.


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UNIT II

BUSINESS STRUCTURE AND ORGANIZATION

5.1 BUSINESS ORGANISATION

You have already learnt about the meaning of business and the various types of business

activities like industry, trade, transport, banking, insurance etc. If you observe these business

activities carefully, you will realize that whatever business activity one may take up, he has to bring

together various resources like men, money, materials, machines, technology, etc. to carryout that

activity successfully. Not only that these resources are to be put into action in a systematic manner to

achieve the objectives of business. Let us take the example of a rice mill. First, the owner will have

to acquire a land, construct a building, buy machines and install them, employ labour to work, buy

paddy and then process the paddy to produce rice that will be sold to the customers. Thus, to produce

rice from paddy you need to assemble resources like land, building, machinery, labour etc., and put

these resources together in action in a systematic way. Then only it becomes possible to produce rice

and sell it to the customers, and earn profit. Thus, to carry out any business and achieve its objective

of earning profit it is required to bring together all the resources and put them into action in a

systematic way, and coordinate and control these activities properly. This arrangement is known as

business organization.

FORMS OF BUSINESS ORGANISATION

Have you ever thought who brings the required capital, takes the responsibility of arranging

other resources, puts them into action, and coordinates and controls the activities to earn the desiredprofits? If you look around, you will find that a small grocery shop is owned and run by a single

individual who performs all these activities. But, in big businesses, it may not be possible for a

single person to perform all these activities. So in such cases two or more persons join hands to

finance and manage the business properly and share its profit as per their agreement. Thus, business

organizations may be owned and managed by a single individual or group of individuals who may

form a partnership firm or a joint stock company. Such arrangement of ownership and management

is termed as a form of business organization. A business organization usually takes the following

forms in India:

(1) Sole proprietorship

(2) Partnership

(3) Joint Hindu Family

(4) Cooperative Society


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(5) Joint Stock Company

Definition of Sole Proprietorship

J.L. Hanson: A type of business unit where one person is solely responsible for providing

the capital and bearing the risk of the enterprise, and for the management of the business.

Thus, Sole Proprietorship from of business organization refers to a business enterprise

exclusively owned, managed and controlled by a single person with all authority, responsibility and

risk.

CHARACTERISTICS OF SOLE PROPRIETORSHIP

(a) Single Ownership: The sole proprietorship form of business organization has a single owner

who himself/herself starts the business by bringing together all the resources.

(b) No Separation of Ownership and Management: The owner himself/herself manages the

business as per his/her own skill and intelligence. There is no separation of ownership and

management as is the case with company form of business organization.

(c) Less Legal Formalities: The formation and operation of a sole proprietorship form of business

organization does not involve any legal formalities. Thus, its formation is quite easy and simple.

(d) No Separate Entity: The business unit does not have an entity separate from the owner. The

businessman and the business enterprise are one and the same, and the businessman is responsible

for everything that happens in his business unit.

(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time,

the entire loss is also borne by him. No other person is there to share the profits and losses of the

business. He alone bears the risks and reaps the profits.

(f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his

business assets are not enough to pay the business liabilities, his personal property can also be

utilized to pay off the liabilities of the business.

(g) One-man Control: The controlling power of the sole proprietorship business always remains

with the owner. He/she runs the business as per his/her own will.

MERITS OF SOLE PROPRIETORSHIP

(a) Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship form of

business organization. No legal formalities are required to be observed. Similarly, the business can

be wind up any time if the proprietor so decides.

(b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the

sole proprietary organization. So he/she can take quick decisions on the various issues relating to

business and accordingly prompt action can be taken.


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(c) Direct Motivation: In sole proprietorship form of business organizations. The entire profit of the

business goes to the owner. This motivates the proprietor to work hard and run the business

efficiently.

(d) Flexibility in Operation: It is very easy to effect changes as per the requirements of the

business. The expansion or curtailment of business activities does not require many formalities as in

the case of other forms of business organization.

(e) Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is

not required to disclose any information to others unless and until he himself so decides. He is also

not bound to publish his business accounts.

(f) Personal Touch: Since the proprietor himself handles everything relating to business, it is easy

to maintain a good personal contact with the customers and employees. By knowing the likes,

dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly,

as the employees are few and work directly under the proprietor, it helps in maintaining a

harmonious relationship with them, and run the business smoothly.

LIMITATIONS OF SOLE PROPRIETORSHIP

(a) Limited Resources: The resources of a sole proprietor are always limited. Being the single

owner it is not always possible to arrange sufficient funds from his own sources. Again borrowing

funds from friends and relatives or from banks has its own implications. So, the proprietor has a

limited capacity to raise funds for his business.

(b) Lack of Continuity: The continuity of the business is linked with the life of the proprietor.

Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity

of business is uncertain.

(c) Unlimited Liability: You have already learnt that there is no separate entity of the business from

its owner. In the eyes of law the proprietor and the business are one and the same. So personal

properties of the owner can also be used to meet the business obligations and debts.

(d) Not Suitable for Large Scale Operations: Since the resources and the managerial ability is

limited, sole proprietorship form of business organization is not suitable for large-scale business.

(e) Limited Managerial Expertise: A sole proprietorship from of business organization always

suffers from lack of managerial expertise. A single person may not be an expert in all fields like,

purchasing, selling, financing etc. Again, because of limited financial resources, and the size of the

business it is also not possible to engage the professional managers in sole proprietorship form of

business organizations.


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PARTNERSHIP

Meaning of Partnership

It is basically a relation between two or more persons who join hands to form a business

organisation with the objective of earning profit. The persons who join hands are individually known

as Partner and collectively a Firm. The name under which the business is carried on is called

firm name. Sultan Chand & Co, Ram Lal & Co, Gupta & Co are the names of some partnership

firms.

Section 4 of the Indian Partnership Act, 1932, defines partnership as a relation between

persons who have agreed to share the profits of a business carried on by all or any of them acting for

all.

The partners provide the necessary capital, run the business jointly and share the

responsibility. Actually, when you invite your friends to start such a business, it should be the duty

of all of you to decide (i) the amount of capital to be contributed by each one of you; (ii) who will

manage; (iii) how will the profits and losses be shared. Thus, there must be some agreement between

the partnersbefore they actually start the business. This agreement is termed as Partnership Deed,

which lays down certain terms and conditions for starting and running the partnership firm. This

agreement may be oral or written. Actually, it is always better to insist on a written agreement

among partners in order to avoid future controversies. A partnership firm is governed by the

provisions of the Indian Partnership Act, 1932.

FEATURES OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

After having a brief idea about partnership, let us identify the various features of this form of

business organisation.

i. Two or more Members - You know that the members of the partnership firm are called partners.

But do you know how many persons are required to form a partnership firm? At least two members

are required to start a partnership business. But the number of members should not exceed 10 in case

of banking business and 20 in case of other business. If the number of members exceeds this

maximum limit then that business cannot be termed as partnership business. A new form of business

will be formed, the details of which you will learn in your next lesson.

ii. Agreement: Whenever you think of joining hands with others to start a partnership business, first

of all, there must be an agreement between all of you. This agreement contains

the amount of capital contributed by each partner; profit or loss sharing ratio; salary or commission payable to the partner, if any; duration of business, if any ;


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name and address of the partners and the firm; duties and powers of each partner; nature and place of business; and any other terms and conditions to run the business.

iii. Lawful Business - The partners should always join hands to carry on any kind of lawful

business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in

the eye of the law. Again, doing social or philanthropic work is not termed as partnership business.

iv. Competence of Partners - Since individuals join hands to become the partners, it is necessary

that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent

persons are not eligible to become the partners. However, a minor can be admitted to the benefits of

partnership i.e., he can have a share in the profits only.

v. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the

business amongst the partners in the agreed proportion. In the absence of any agreement for the

profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the

business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000

each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-.

vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also unlimited. That

means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the

partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm has to make

payment of Rs. 25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/-

from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal

properties of the partners.

vii. Voluntary Registration - It is not compulsory that you register your partnership firm. However,

if you dont get your firm registered, you will be deprived of certain benefits, therefore it is

desirable. The effects of non-registration are:

Your firm cannot take any action in a court of law against any other parties for settlement ofclaims.

In case there is any dispute among partners, it is not possible to settle the disputes through acourt of law.

Your firm cannot claim adjustments for amount payable to or receivable from any otherparties.


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viii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also has no

separate legal existence from that of it owners. Partnership firm is just a name for the business as a

whole. The firm means the partners and the partners collectively mean the firm.

ix. Principal Agent Relationship - All the partners of the firm are the joint owners of the business.

They all have an equal right to actively participate in its management. Every partner has a right to

act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts

as an agent of the others and at the same time the others become the principal. So there always exists

a principal agent relationship in every partnership firm.

x. Restriction on Transfer of Interest - No partner can sell or transfer his interest to any one

without the constent of other partners. For example - A, B, and C are three partners. A wants to sell

his share to D as his health does not permit him to work any more. He can not do so until B and C

both agree.

xi. Continuity of Business - A partnership firm comes to an end in the event of death, lunacy or

bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners.

At any time, they may take a decision to end their relationship.

ADVANTAGES OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

Partnership form of business organisation has certain advantages, which are as follows:

a) Easy to form: Like sole proprietorship, the partnership business can be formed easily without any

legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in

writing, is sufficient to create a partnership firm.

b) Availability of large resources - Since two or more partners join hand to start partnership

business it may be possible to pool more resources as compared to sole proprietorship. The partners

can contribute more capital, more effort and also more time for the business.

c) Better decisions - The partners are the owners of the business. Each of them has equal right to

participate in the management of the business. In case of any conflict they can sit together to solve

the problems. Since all partners participate in decision-making, there is less scope for reckless and

hasty decisions.

d) Flexibility in operations - The partnership firm is a flexible organisation. At any time the

partners can decide to change the size or nature of business or area of its operation. There is no need

to follow any legal procedure. Only the consent of all the partners is required.

e) Sharing risks - In a partnership firm all the partners share the business risks. For example, if there

are three partners and the firm suffers a loss of Rs. 12,000 in a particular period, then all partners

may share it and the individual burden will be Rs. 4,000 only.


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f) Protection of interest of each partner - In a partnership firm every partner has an equal say in

decision making. If any decision goes against the interest of any partner he can prevent the decision

from being taken. In extreme cases a dissenting partner may withdraw himself from the business and

can dissolve it.

g) Benefits of specialization - Since all the partners are owners of the business they can actively

participate in every aspect of business as per their specialisation andknowledge. If you want to start

a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in

criminal cases, another in labour cases and so on as per their specialization. Similarly two or more

doctors of different specialization may start a clinic in partnership.

LIMITATIONS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

In spite of all these advantages as discussed above, a partnership firm also suffers from

certain limitations. Let us discuss all these limitations.

a) Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the

firm to an unlimited extent. Thus, they can share the liability among themselves or any one can be

asked to pay all the debts even from his personal properties.

b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to an

end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting

member can also give notice at any time for dissolution of partnership.

c) Lack of Harmony: You know that in partnership firm every partner has an equal right to

participate in the management. Also every partner can place his or her opinion or viewpoint before

the management regarding any matter at any time. Because of this sometimes there is a possibility of

friction and quarrel among the partners. Difference of opinion may lead to closure of the business on

many occasions.

d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is

always limited. It may not be possible to start a very large business in partnership form.

e) No transferability of share: If you are a partner in any firm you cannot transfer your share of

interest to outsiders without the consent of other partners. This creates inconvenience for the partner

who wants to leave the firm or sell part of his share to others.

TYPES OF PARTNERS

In a partnership firm you can find different types of partners. Some may actively participate

in the business while others prefer not to keep themselves engaged actively in the business activities

after contributing the required capital. Also there are certain kinds of partners who neither contribute

capital nor actively participate in the day-to-day business operations. Let us learn more about them.


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a) Active partners - The partners who actively participate in the day-to-day operations of the

business are known as active or working partners. They contribute capital and are also entitled to

share the profits of the business. They are also liable for the debts of the firm.

b) Dormant partners - Those partners who do not participate in the day-to-day activities of the

partnership firm are known as dormant or sleeping partners. They only contribute capital and share

the profits or bear the losses, if any.

c) Nominal partners - These partners only allow the firm to use their name as a partner. They do

not have any real interest in the business of the firm. They do not invest any capital, or share profits

and also do not take part in the conduct of the business of the firm. However, they remain liable to

third parties for the acts of the firm.

d) Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is not eligible to

become a partner. However in special cases a minor can be admitted as partner with certain

conditions. A minor can only share the profit of the business. In case of loss his liability is limited to

the extent of his capital contribution for the business.

e) Partner by estoppel - If a person falsely represents himself as a partner of any firm or behaves in

a way that somebody can have an impression that such person is a partner and on the basis of this

impression transacts with that firm then that person is held liable to the third party. The person who

falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in

Ram Hari & Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider

represents himself as a partner of Ram Hari & Co and transacts with Madhu then Giri will be held

liable for any loss arising to Madhu. Here Giri is partner by estoppel.

f) Partner by holding out - In the above example, if either Ram or Hari declares that Gopal is a

partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to

those parties who suffer losses by transacting with Ram Hari & Co with a belief that Gopal is a

partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known

as partner by holding out.

JOINT STOCK COMPANY

Meaning

A company form of business orgnisation is known as a Joint Stock Company. It is a

voluntary association of persons who generally contribute capital to carry on a particular type 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


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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.

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.

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.


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v. Perpetual existence

A joint stock company continues to exist as long as it fulfils 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.

On the basis of Ownership On the basis of Nationality

i. Private Limitedii. Public Limitediii. Government

i. Indian

ii. Foreign

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


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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:

Basis Private Limited Company Public Limited Company

Membership

Identification

Transferability of

Shares

Capital required

Raising of funds

Minimum - 02

Maximum50

Use a suffix Private

Limited after its name

Restricted

Not less than Rs. 1 lakh

Can not give open

invitation to the public to

subscribe the shares

Minimum - 07

Maximum - no restriction

Use a suffix Limited

after its name

Free

Not less than Rs. 5 lakh

Can raise as much money

as required from public

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.


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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

The main advantages of Joint Stock Company are:

(i) 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 th

Finalised I & II Unit

Documents

Transcript of Finalised I & II Unit