UNIT II

Concept of Entrepreneurship:
The word “entrepreneur” is derived from the French verb
enterprendre, which means ‘to undertake’. This refers to those
who “undertake” the risk of new enterprises. An enterprise is
created by an entrepreneur. The process of creation is called
“entrepreneurship”.
Entrepreneurship is a process of actions of an entrepreneur
who is a person always in search of something new and
exploits such ideas into gainful opportunities by accepting the
risk and uncertainty with the enterprise.

Characteristics of Entrepreneurship:
Entrepreneurship is characterized by the following
features:
1. Economic and dynamic activity:
Entrepreneurship is an economic activity because it involves
the creation and operation of an enterprise with a view to
creating value or wealth by ensuring optimum utilisation of
scarce resources. Since this value creation activity is
performed continuously in the midst of uncertain business
environment, therefore, entrepreneurship is regarded as a
dynamic force.

2. Related to innovation:
Entrepreneurship involves a continuous search for new ideas.
Entrepreneurship compels an individual to continuously
evaluate the existing modes of business operations so that
more efficient and effective systems can be evolved and
adopted. In other words, entrepreneurship is a continuous
effort for synergy (optimization of performance) in
organizations.
3. Profit potential:
“Profit potential is the likely level of return or compensation
to the entrepreneur for taking on the risk of developing an
idea into an actual business venture.” Without profit
potential, the efforts of entrepreneurs would remain only an
abstract and a theoretical leisure activity.
4. Risk bearing:
The essence of entrepreneurship is the ‘willingness to assume
risk’ arising out of the creation and implementation of new
ideas. New ideas are always tentative and their results may
not be instantaneous and positive.
An entrepreneur has to have patience to see his efforts bear
fruit. In the intervening period (time gap between the
conception and implementation of an idea and its results), an
entrepreneur has to assume risk. If an entrepreneur does not

Benefits of Entrepreneurship :
1. Development of managerial capabilities:
The biggest significance of entrepreneurship lies in the fact that it
helps in identifying and developing managerial capabilities of
entrepreneurs. An entrepreneur studies a problem, identifies its
alternatives, compares the alternatives in terms of cost and benefits
implications, and finally chooses the best alternative.

This exercise helps in sharpening the decision making skills of an

entrepreneur. Besides, these managerial capabilities are used by
entrepreneurs in creating new technologies and products in place of
older technologies and products resulting in higher performance.
2. Creation of organisations:
Entrepreneurship results into creation of organisations when
entrepreneurs assemble and coordinate physical, human and financial
resources and direct them towards achievement of objectives through
managerial skills.

3. Improving standards of living:

By creating productive organisations, entrepreneurship helps in
making a wide variety of goods and services available to the society
which results into higher standards of living for the people.

Possession of luxury cars, computers, mobile phones, rapid growth of

shopping malls, etc. are pointers to the rising living standards of
people, and all this is due to the efforts of entrepreneurs.

4. Means of economic development:

Entrepreneurship involves creation and use of innovative ideas,
maximisation of output from given resources, development of
managerial skills, etc., and all these factors are so essential for the
economic development of a country.

Factors affecting Entrepreneurship:

Entrepreneurship is a complex phenomenon influenced by the
interplay of a wide variety of factors.

Some of the important factors are listed below:

1. Personality Factors:
Personal factors, becoming core competencies of entrepreneurs,
include:

(a) Initiative (does things before being asked for)

(b) Proactive (identification and utilisation of opportunities)

(c) Perseverance (working against all odds to overcome obstacles and

never complacent with success)
(d) Problem-solver (conceives new ideas and achieves innovative
solutions)

(e) Persuasion (to customers and financiers for patronisation of his

business and develops & maintains relationships)

(f) Self-confidence (takes and sticks to his decisions)

(g) Self-critical (learning from his mistakes and experiences of others)

(h) A Planner (collects information, prepares a plan, and monitors

performance)

(i) Risk-taker (the basic quality).

2. Environmental factors:
These factors relate to the conditions in which an entrepreneur has to
work. Environmental factors such as political climate, legal system,
economic and social conditions, market situations, etc. contribute
significantly towards the growth of entrepreneurship. For example,
political stability in a country is absolutely essential for smooth
economic activity.

Frequent political protests, bandhs, strikes, etc. hinder economic

activity and entrepreneurship. Unfair trade practices, irrational
monetary and fiscal policies, etc. are a roadblock to the growth of
entrepreneurship. Higher income levels of people, desire for new
products and sophisticated technology, need for faster means of
transport and communication, etc. are the factors that stimulate
entrepreneurship.

Thus, it is a combination of both personal and environmental factors

that influence entrepreneurship and brings in desired results for the
individual, the organisation and the society.
Types of Entrepreneurs:
Depending upon the level of willingness to create innovative
ideas, there can be the following types of entrepreneurs:
1. Innovative entrepreneurs:
These entrepreneurs have the ability to think newer, better and more
economical ideas of business organisation and management. They are
the business leaders and contributors to the economic development of
a country.

Inventions like the introduction of a small car ‘Nano’ by Ratan Tata,

organised retailing by Kishore Biyani, making mobile phones available
to the common may by Anil Ambani are the works of innovative
entrepreneurs.

2. Imitating entrepreneurs:
These entrepreneurs are people who follow the path shown by
innovative entrepreneurs. They imitate innovative entrepreneurs
because the environment in which they operate is such that it does not
permit them to have creative and innovative ideas on their own.

Such entrepreneurs are found in countries and situations marked with

weak industrial and institutional base which creates difficulties in
initiating innovative ideas.

In our country also, a large number of such entrepreneurs are found in

every field of business activity and they fulfill their need for
achievement by imitating the ideas introduced by innovative
entrepreneurs.

Development of small shopping complexes is the work of imitating

entrepreneurs. All the small car manufacturers now are the imitating
entrepreneurs.

3. Fabian entrepreneurs:
The dictionary meaning of the term ‘fabian’ is ‘a person seeking victory
by delay rather than by a decisive battle’. Fabian entrepreneurs are
those individuals who do not show initiative in visualising and
implementing new ideas and innovations wait for some development
which would motivate them to initiate unless there is an imminent
threat to their very existence.

4. Drone entrepreneurs:
The dictionary meaning of the term ‘drone’ is ‘a person who lives on
the labor of others’. Drone entrepreneurs are those individuals who
are satisfied with the existing mode and speed of business activity and
show no inclination in gaining market leadership. In other words,
drone entrepreneurs are die-hard conservatives and even ready to
suffer the loss of business.

5. Social Entrepreneur:
Social entrepreneurs drive social innovation and transformation in
various fields including education, health, human rights, workers’
rights, environment and enterprise development.

They undertake poverty alleviation objectives with the zeal of an

entrepreneur, business practices and dare to overcome traditional
practices and to innovate. Dr Mohammed Yunus of Bangladesh who
started Gramin Bank is a case of social entrepreneur.

Functions of an Entrepreneur:
The important functions performed by an entrepreneur are
listed below:
1. Innovation:
An entrepreneur is basically an innovator who tries to develop new
technology, products, markets, etc. Innovation may involve doing new
things or doing existing things differently. An entrepreneur uses his
creative faculties to do new things and exploit opportunities in the
market. He does not believe in status quo and is always in search of
change.

2. Assumption of Risk:
An entrepreneur, by definition, is risk taker and not risk shirker. He is
always prepared for assuming losses that may arise on account of new
ideas and projects undertaken by him. This willingness to take risks
allows an entrepreneur to take initiatives in doing new things and
marching ahead in his efforts.
3. Research:
An entrepreneur is a practical dreamer and does a lot of ground-work
before taking a leap in his ventures. In other words, an entrepreneur
finalizes an idea only after considering a variety of options, analyzing
their strengths and weaknesses by applying analytical techniques,
testing their applicability, supplementing them with empirical
findings, and then choosing the best alternative. It is then that he
applies his ideas in practice. The selection of an idea, thus, involves
the application of research methodology by an entrepreneur.

4. Development of Management Skills:

The work of an entrepreneur involves the use of managerial skills
which he develops while planning, organizing, staffing, directing,
controlling and coordinating the activities of business. His managerial
skills get further strengthened when he engages himself in establishing
equilibrium between his organization and its environment.

However, when the size of business grows considerably, an

entrepreneur can employ professional managers for the effective
management of business operations.

5. Overcoming Resistance to Change:

New innovations are generally opposed by people because it makes
them change their existing behavior patterns. An entrepreneur always
first tries new ideas at his level.

It is only after the successful implementation of these ideas that an

entrepreneur makes these ideas available to others for their benefit. In
this manner, an entrepreneur paves the way for the acceptance of his
ideas by others. This is a reflection of his will power, enthusiasm and
energy which helps him in overcoming the society’s resistance to
change.

6. Catalyst of Economic Development:

An entrepreneur plays an important role in accelerating the pace of
economic development of a country by discovering new uses of
available resources and maximizing their utilization.
To better appreciate the concept of an entrepreneur, it is desirable to
distinguish him from an entrepreneur and promoter. Table 4.1
outlines the distinction between an entrepreneur and entrepreneurs,
and Table 4.2 portrays basic points of distinction between an
entrepreneur and promoter.

Some Myths about Entrepreneurship:

Over the years, a few myths about entrepreneurship have developed.
These are as under:

(i) Entrepreneurs, like leaders, are born, not made:

The fact does not hold true for the simple reason that
entrepreneurship is a discipline comprising of models, processes and
case studies.
One can learn about entrepreneurship by studying the discipline.

(ii) Entrepreneurs are academic and socially misfits:

Dhirubai Ambani had no formal education. Bill Gates has been a
School drop-out. Therefore, this description does not apply to
everyone. Education makes an entrepreneur a true entrepreneur. Mr
Anand Mahindra, Mr Kumar Mangalam Birla, for example, is
educated entrepreneurs and that is why they are heroes.

(iii) To be an entrepreneur, one needs money only:

Finance is the life-blood of an enterprise to survive and grow. But for a
good idea whose time has come, money is not a problem.

(iv) To be an entrepreneur, a great idea is the only

ingredient:
A good or great idea shall remain an idea unless there is proper
combination of all the resources including management.

(v) One wants to be an entrepreneur as having no boss is

great fun:
It is not only the boss who is demanding; even an entrepreneur faces
demanding vendors, investors, bankers and above all customers.

An entrepreneur’s life will be much simpler, since he works for

himself. The truth is working for others are simpler than working for
oneself. One thinks 24 hours a day to make his venture successful and
thus, there would be a punishing schedule.

PROCESS OF SETTING UP A BUSINESS

ENTERPRISE
The major steps involved in the process of setting up a new business
enterprise include the following.

1. Identification of business opportunity

2. Generation of business idea
3. Feasibility study
4. Preparation of business plan
5. Launching the enterprise
Step 1: Identification of Business Opportunity
Business opportunity refers to a business idea which can be converted to a
profitable business. The world of business offers a number of business
opportunities, but not many people can identify them. An entrepreneur
should be able to identify such business ideas which can be converted to
profitable business ventures. While choosing an idea to work with, an
entrepreneur has to be very careful about the line of business
(manufacturing, trading or service) as any mistake made in taking such a
decision may prove to be very costly. Moreover, the entrepreneur should
also ensure that there is an adequate market for the product or service that
he wants to offer in the market and that the rate of return on the
investment is sufficient.
Step 2: Generation of Business idea
This stage requires generation of an idea that can be converted into a
business. The idea should be able to yield a reasonable return on investment
i.e. it should be worthwhile for implementation. A business idea may be
discovered from the following sources.
1.Observing Markets: The promoter should study the market to find out
the demand and supply position for various products. He should then
estimate the future demand after taking into account the anticipated
changes in income levels, fashions etc. market surveys can also reveal
competition and price trends. From the data collected through market
surveys, the promoter should try to identify those products and industries
where demand exists and supply needs to be increased.
2.Prospective Consumers: Contacts with prospective consumers can
give an idea of the features that should be built into the product/service. It
is also important to collect data on customer needs and preferences before
choosing the product to be manufactured. A market test of the prototype
product can be conducted before launching the product in the market.
3.Study of Project Profiles: Various publications of public and
government agencies on various projects and industries is an important
source of business ideas. Such project profiles describe in detail the
prevailing market situation and the technical and financial requirements of
different projects. A careful analysis of such details can bring out the most
promising projects which can then be taken up for further evaluation.
4.Developments in Other Nations: An entrepreneur can discover
good business ideas by keeping good knowledge about developments in
advanced nations of the world. Underdeveloped and developing countries
prove to be a good market for those products which are the ‘in things’ in
developed nations. An entrepreneur can also visit foreign markets to explore
the possibility of a foreign collaboration and to discover other types of
business ideas.
5.Trade Fairs and Exhibitions: A visit to national and international
trade fairs and exhibitions can provide information about various products.
It is also a good place to explore possibilities of collaboration and dealership
and gives a fair idea of the existing competition in the market.
While selecting the business idea, the following points need to be
considered.

1. There must be sufficient demand for the proposed product or service.

2. The idea should require such capital, technical know how, raw material
and other inputs which the entrepreneur can arrange for.
3. The idea must ensure a reasonable return on investment.

Role of Creativity and Innovation

Creativity and innovation are two important traits of a successful
entrepreneur. Creativity means the ability to bring something new into
existence. Innovation is the process of doing new things or doing old things
in a new way. Creativity is the process of generating new ideas whereas,
innovation involves translation of ideas into a new business opportunity.
Creative ideas are of no use unless and until they are converted into useful
products or services through innovation.
Stages in Creativity Process
A creative idea evolves through a process consisting of the following stages.
1. Germination: A person with imagination and curiosity germinates
an idea. For instance, Newton’s curiosity about apple falling from the tree
led to the law of gravitation.
2. Preparation: Once the idea is germinated, efforts are directed
towards how to convert the idea into a useful product or service. In case the
idea relates to a new product, information about consumer buying habits,
product design, material requirement etc. may be collected.
3. Incubation: Incubation is a stage of fantasizing and mulling over.
This is the stage when the creative person allows the idea to incubate in his
subconscious mind. The person in his subconscious mind gets enough time to
assimilate information about the idea and ponder over it.
4. Illumination: Illumination occurs when the idea resurfaces in a
catalytic event. Several cycles of preparation and incubation may be
repeated until the idea takes some realistic shape.
5. Verification: An illuminated idea requires verification before it is
accepted as a realistic and useful application. During the verification stage
many ideas may be rejected because they are of little practical relevance.
Invention and Innovation
Though both invention and innovation require a lot of creativity, they are
entirely different processes. Innovation is the discovery of some new
material or method. The resulting idea of an inventor did not exist before.
For example, mathematical calculators and microelectronics were
inventions. Innovation may occur in several forms – introduction of a new
product, a new method of distribution, opening of a new market, locating a
new source of raw material, introduction of a new manufacturing process
that has not yet been tested and commercially exploited etc.
On the other hand, innovation is a new combination of existing knowledge
that results in a useful and commercially viable product. For example,
micro-computer is an innovation made by combining the inventions
mentioned above.
Thus, an inventor produces ideas and adds to the existing knowledge. In
contrast, an innovator implements the ideas to come up with new products
and services to satisfy human wants.
Step 3: Feasibility Study
Feasibility study is a detailed study done by an entrepreneur to ensure that
the project is viable. The feasibility study should contain an analysis of the
following.
a. Technical Aspect
b. Commercial Aspect
c. Financial Aspect
d. Socio-economic Aspect
Technical aspect: The technical feasibility of a project involves a
critical study of the factors such as location, size of the plant, raw materials
and labour, machinery and equipment, infrastructure etc. Here the
entrepreneur should ensure that the location of plant and the site selected
is such that it permits cost-effective operations of business. Also, in
determining the size of the plant, it should be remembered that if the plant
size is smaller than the optimum size, cost of production increases. An
entrepreneur must also examine whether the required raw material,
machinery and equipment and infrastructure is available for carrying out the
operations.
Commercial Aspect: Technical feasibility of a project has no meaning if
the project is not commercially viable. Commercial viability of a project
requires a study of the present and potential demand for firm’s product in
national and international markets. It also requires an analysis of margin of
profit, degree of competition, market stability etc. Sometimes the services
of an expert may be required to find out the commercial viability of the
project.
Financial Aspect: Financial viability of the project can be judged on
factors like total estimated cost of the project, projected cash flow and
profitability, financing of the project with reference to the capital
structure, promoter’s contribution to the total project cost etc.
Socio-economic Aspect: A social cost-benefit analysis should be made
to judge the national viability of the project. Every project entails some
costs to the nation and produces certain benefits. The contribution of the
project to social objectives such as employment generation, development of
infrastructure, development of backward areas, earning foreign exchange,
import substitution etc. is evaluated.
Once the feasibility study is completed, an indepth analytical study of the
project is made to decide selection or rejection of the project. Such an
analysis is known as project appraisal. Once the project is selected, the
findings of the feasibility study are presented in the form of a Project
Report. This project report is needed to get sanction for the project from
the concerned authorities, including financial institutions. The project
report should comprise the following information.
 Name, address and other details of the entrepreneur
 Brief summary of the project
 Inputs for the proposed project like land, building, plant, machinery and
equipment, materials etc.
 Financial aspects like sources of finance, cost of fixed assets, working
capital, assets and liabilities
 Market potential in relation to estimated present and potential demand,
market survey
 Importance of project to national economy

Step 4: Preparation of Business Plan

Business plan is an important document prepared by the entrepreneur that
describes various elements involved in starting a new enterprise. It is often
an integration of functional plans such as marketing, finance, production,
personnel etc. Business plan serves the following objectives:
a. It indicates the actions to be taken to implement the project.
b. It helps the entrepreneur in raising necessary funds.
c. It helps in measuring the progress of the venture at successive stages
d. It informs investors, suppliers, creditors and other stakeholders about
the programme of the entrepreneur.
Contents of a Proposed Business Plan

1. General Introduction- name and address of business and

entrepreneurs, nature of business
2. Description of Venture- products and services to be offered, scale of
business operations, type of technology to be used
3. Organisational Plan- form of ownership (sole proprietorship,
partnership or joint stock company), identification of business partners,
roles and responsibilities of members of the organisation
4. Production Plan- details of manufacturing process, type of plant and
machinery, raw material to be used
5. Marketing Plan- products and services offered, pricing polices,
distribution channels, promotional strategies
6. Financial Plan- fixed and working capital requirements, sources of
capital, cash flow projections, break even analysis
7. Appendix- market research report, price lists from suppliers,
contingency plans

Step 5: Launching the Enterprise

After preparing the business plan, the entrepreneur assembles the necessary
resources to launch the enterprise. He collects the required funds and
acquires land and buildings, plant and machinery, furniture and fixtures,
raw materials, employees etc. Once this is achieved, it is necessary to
ensure that the project is implemented properly and it has smooth and
uninterrupted operation.
FORMS OF BUSINESS ORGANIZATION
Sole Proprietorship
Proprietorship (also called sole trade organisation) is the
oldest form of business ownership in India. In a
proprietorship, the enterprise is owned and controlled by one
person. He is master of his show. He sows, reaps, and harvests
the output of this effort. He manages the business on his own.
If necessary, he may take the help of his family members,
relatives and employ some employees.
Sole proprietorship is the simplest and easiest to form. It does
not require legal recognition and attendant formalities. This
form is the most popular form in India due to the distinct
advantages it offers. William R. Basset opines that “The one-
man control is the best in the world if that man is big enough
to manage everything”.

Main Features:
The main features of proprietorship form of business
can be listed as follows:
1. One Man Ownership:
In proprietorship, only one man is the owner of the
enterprise.
2. No Separate Business Entity:
No distinction is made between the business concern and the
proprietor. Both are one and the same.
3. No Separation between Ownership and
Management:
In proprietorship, management rests with the proprietor
himself/herself. The proprietor is a manager also.
4. Unlimited Liability:
Unlimited liability means that in case the enterprise incurs
losses, the private property of the proprietor can also be
utilized for meeting the business obligations to outside
parties.
5. All Profits or Losses to the Proprietor:
Being the sole owner of the enterprise, the proprietor enjoys
all the profits earned and bears the full brunt of all losses
incurred by the enterprise.
6. Less Formalities:
A proprietorship business can be started without completing
much legal formalities. There are some businesses that too
can be started simply after obtaining necessary manufacturing
licence and permits.

Advantages:
1. Simple Form of Organisation: Proprietorship is the
simplest form of organisation. The entrepreneur can start
his/her enterprise after obtaining license and permits. There
is no need to go through the legal formalities. For starting a
small enterprise, no formal registration is statutorily needed.
2. Owner’s Freedom to Take Decisions:
The owner, i.e. the proprietor is free to make all decisions and
reap all the fruits of his labour. There is no other person who
can interfere or weigh him down.
3. High Secrecy:
Secrecy is another major advantage offered by proprietorship.
This is because the whole business is handled by the
proprietor himself and, as such, the business secrets are
known to him only.
Added to it, the proprietor is not bound to reveal or publish
his accounts. In present day business atmosphere, the less a
competitor knows about one’s business, better off one is.
What the competitors can make is guesstimates only.
4. Tax Advantage:
As compared to other forms of ownership, the proprietorship
form of ownership enjoys certain tax advantages. For
example, a proprietor’s income is taxed only once while
corporate income is, at occasions taxed twice, say, double
taxation.
5. Easy Dissolution:
In proprietorship business, the entrepreneur is all in all. As
there are no co-owners or partners, therefore, there is no
scope for the difference of opinion in the case the
proprietor/entrepreneur-wants to dissolve the business. It is
due to the easy formation and dissolution, proprietorship is
often used to test the business ideas.

Disadvantages:

1. Limited Resources:
A proprietor has limited resources at his/her command. The
proprietor mainly relies on his/her funds and savings and, to
a limited extent, borrowings from relatives and friends. Thus,
the scope for raising funds is highly limited in proprietorship.
This, in turn’ deters the expansion and development of an
enterprise.
2. Limited Ability:
Proprietorship is characterised as one-man show. One man
may be expert in one or two areas, but not in all areas like
production, finance, marketing, personnel, etc. Then, due to
the lack of adequate and relevant knowledge, the decisions
taken by him be imbalanced.
3. Unlimited Liability:
Proprietorship is characterised by unlimited liability also. It
means that in case of loss, the private property of the
proprietor will also be used to clear the business obligations.
Hence, the proprietor avoids taking risk.
4. Limited Life of Enterprise Form:
The life of a proprietary enterprise depends solely upon the
life of the proprietor. When he dies or becomes insolvent or
insane or permanently incapacitated, there is very likelihood
of closure of enterprise. Say, enterprise also dies with its
proprietor.
Joint Hindu Family Firm
Nature and Meaning:
The Joint Hindu Family Firm is the next non-corporate, group
ownership form of family business operative in India. It is
governed by the Hindu Law. In the Hindu Law, there are two
schools: (i) Dayabhaga, which is applicable in Bengal and
Assam; and (ii) Mitakshara, which is applicable in the rest of
India.
The origin of the Joint Hindu Family firm is to be found in the
principles of inheritance under the second school i.e.,
Mitakshara school of Hindu Law. Under this school, the
property of a Joint Hindu Family is inherited by a Hindu from
his father, grandfather, and great grandfather is called
ancestral property.
Thus, three successive generations in the male line (son,
grandson, and great grandson) can simultaneously inherit the
ancestral property. This interest in inheritance is called
coparcenary interest and the members of the Joint Hindu
Family. Hindu Undivided family (HUF) Firm are
called coparceners and the senior most as karta. In
this group of coparceners, however, the female members of
the Joint Hindu Family are not included.
It should be carefully noted here that with the operation of the
Hindu Succession Act, 1956, the female relative of a deceased
coparcener is eligible to receive only some share out of the
coparcenary interests of such a Coparcener.
Table 2.1: Distinction between Partnership and Joint
Hindu Family (HUF) Firm:
 Basis Partnership Joint Hindu Family Business

Mode of creation Through an Operation of law and by birth

agreement

Status of Minor Basically Becomes member by birth

incompetent, but
may be taken in

Rights of Members Right is there Only Karta conducts, but may

unless one invite others, if he so desires
waives such a
right

Accounts Every partner A co-parcener has no such right

can inspect

Liability of Members Every partner Only Karta is liable for the debts of
personally liable, business
including his
personal estate

Membership No restriction Only Hindus, the members of the

about caste, same family
colour or creed

Law on Disputes Agreement will According to Hindu Law

give direction

No. Of Members Maximum limit No maximum limit

is there

Suit by or against Third party can Can’t sue or be sued in the firm’s
Me sue or sued by name
the firm; in some
cases an
 individual
partner can be
sued

Duration May or may not Perpetual succession till the last

have perpetual member of HUF survives
succession

Registration May or may not Does not require registration

get registered

Merits of Joint Hindu Family Firm:

1. Stability:
The existence of the Joint Hindu Family firm does not come to
an end by the death, insanity, or bankruptcy of any
coparcener.
2. Management:
The organisation, management, and control of the business is
vested in the karta of the family. This results in the ‘unity of
command’ and non-interference in the conduct of business.
This non-interference makes quick decisions, prompt action
maintenance of secrecy, etc., possible.
3. Liability:
Except the karta, all other members’ liabilities are limited to
the extent of their share in the ancestral property.
4. Membership:
Unlike partnership, there is no such limit to the membership
of the Joint Hindu Family Firm. However, it is restricted to
the three successive generations in the male line.
5. Credit worthiness:
Compared to the sole proprietor, the credit worthiness of the
family business is definitely more.

Limitations of Joint Hindu Family Firm:

1. Disproportionate relationship between work and
reward:
The relationship between the works and reward is not
positively proportionate. The profit of the family business is
divided among all the members, whereas the Karta is the only
earner.
2. Limitations of management:
Like sole proprietor, the Karta may not be possessing all the
management skills required in the fields of production or
purchasing, marketing, personnel and industrial relations,
financing, and other enterprise functions. These limitations of
management reflect in the efficiency and effectiveness of
business operations.
3. Short life of business:
The life of the family business is shortened if family quarrels
take precedence over business interests.

Suitability of Joint Hindu Family Firm:

(i) Where investment required is moderate
(ii) Where application of personal skill and judgement is
necessary like services.
(iii) Where avoidance of risky business due to unlimited
liability of business is given precedence.
(iv) Normally found in small manufacturing, trading and
services.
Why Losing Popularity?
The main cause for its decline is the gradual breaking of the
joint family system itself. The present day trends of
industrialisation and westernisation are giving way to
individual/nuclear family system.
Partnership Firms
Definition:
The proprietorship form of ownership suffers from certain limitations such as limited
resources, limited skill and unlimited liability. Expansion in business requires more
capital and managerial skills and also involves more risk. A proprietor finds him unable
to fulfill these requirements. This call for more persons come together, with different
edges and start business. For example, a person who lacks managerial skills but may
have capital.
Another person who is a good manager but may not have capital. When these persons
come together, pool their capital and skills and organise a business, it is called
partnership. Partnership grows essentially because of the limitations or disadvantages of
proprietorship.

Definitions of partnership:
The Indian Partnership Act, 1932, Section 4, defined
partnership as “the relation between persons who have agreed
to share the profits of business carried on by all or any of them
acting for all”.
According to J. L. Hanson, “a partnership is a form of business organisation in which
two or more persons up to a maximum of twenty join together to undertake some form
of business activity”. Now, we can define partnership as an association of two or more
persons who have agreed to share the profits of a business which they run together. This
business may be carried on by all or anyone of them acting for all.

The persons who own the partnership business are individually called ‘partners’ and
collectively they are called as ‘firm’ or ‘partnership firm’. The name under which
partnership business is carried on is called ‘Firm Name’. In a way, the firm is nothing
but an abbreviation for partners.

Main Features:
1. Two or more Persons:
As against proprietorship, there should be at least two persons subject to a maximum of
ten persons for banking business and twenty for non-banking business to form a
partnership firm.

2. Profit and Loss Sharing:

There is an agreement among the partners to share the profits earned and losses
incurred in partnership business.
3. Contractual Relationship:
Partnership is formed by an agreement-oral or written-among the partners.

4. Existence of Lawful Business:

Partnership is formed to carry on some lawful business and share its profits or losses. If
the purpose is to carry some charitable works, for example, it is not regarded as
partnership.

5. Utmost Good Faith and Honesty:

A partnership business solely rests on utmost good faith and trust among the partners.

6. Unlimited Liability:
Like proprietorship, each partner has unlimited liability in the firm. This means that if
the assets of the partnership firm fall short to meet the firm’s obligations, the partners’
private assets will also be used for the purpose.

7. Restrictions on Transfer of Share:

No partner can transfer his share to any outside person without seeking the consent of
all other partners.

8. Principal-Agent Relationship:
The partnership firm may be carried on by all partners or any of them acting for all.
While dealing with firm’s transactions, each partner is entitled to represent the firm and
other partners. In this way, a partner is an agent of the firm and of the other partners.

9. No separate legal Existence: the partnership is a voluntary association and

it does not have any separate legal identity the partners and the firm are the one and the
same thing in the eyes of law.

Advantages:

1. Easy Formation:
Partnership is a contractual agreement between the partners to run an enterprise.
Hence, it is relatively ease to form. Legal formalities associated with formation are
minimal. Though, the registration of a partnership is desirable, but not obligatory.

2. More Capital Available:

We have just seen that sole proprietorship suffers from the limitation of limited funds.
Partnership overcomes this problem, to a great extent, because now there are more than
one person who provide funds to the enterprise. It also increases the borrowing capacity
of the firm. Moreover, the lending institutions also perceive less risk in granting credit
to a partnership than to a proprietorship because the risk of loss is spread over a
number of partners rather than only one. .

3. Combined Talent, Judgement and Skill:

As there are more than one owners in partnership, all the partners are involved in
decision making. Usually, partners are pooled from different specialised areas to
complement each other. For example, if there are three partners, one partner might be a
specialist in production, another in finance and the third in marketing. This gives the
firm an advantage of collective expertise for taking better decisions. Thus, the old
maxim of “two heads being better than one” aptly applies to partnership.

4. Diffusion of Risk:
You have just seen that the entire losses are borne by the sole proprietor only but in case
of partnership, the losses of the firm are shared by all the partners as per their agreed
profit-sharing ratios. Thus, the share of loss in case of each partner will be less than that
in case of proprietorship.

5. Flexibility:
Like proprietorship, the partnership business is also flexible. The partners can easily
appreciate and quickly react to the changing conditions. No giant business organisation
can stifle so quick and creative responses to new opportunities.

6. Tax Advantage:
Taxation rates applicable to partnership are lower than proprietorship and company
forms of business ownership.

Disadvantages:
1. Unlimited Liability:
In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the
partners’ personal assets may be at risk if the business cannot pay its debts.

2. Divided Authority:
Sometimes the earlier stated maxim of two heads better than one may turn into “too
many cooks spoil the broth.” Each partner can discharge his responsibilities in his
concerned individual area. But, in case of areas like policy formulation for the whole
enterprise, there are chances for conflicts between the partners. Disagreements between
the partners over enterprise matters have destroyed many a partnership.

3. Lack of Continuity:
Death or withdrawal of one partner causes the partnership to come to an end. So, there
remains uncertainty in continuity of partnership.

4. Risk of Implied Authority:

Each partner is an agent for the partnership business. Hence, the decisions made by him
bind all the partners. At times, an incompetent partner may lend the firm into
difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is
to be borne by other partners also. Choosing a business partner is, therefore, much like
choosing a marriage mate life partner.

5.Non-transferability of interest: No partner can transfer his share in the

firm to outsider without the consent of al the partners. This makes investment in a
partnership firm non-liquid and fixed. An individual’s capital is blocked

6.Risk of implied agency : the act of a partner is binding on the firm as well as
on the other partners. An incompetent or dishonest partner may bring disaster foa al
due to his acts of mission or commission.

Types of partnerships
General Partnership
A general partnership is a partnership with only general partners. Each general partner
takes part in the management of the business and also takes responsibility for the
liabilities of the business. If one partner is sued, all partners are held liable. General
partnerships are the least desirable for this reason.

Partnership at will: is a partnership which is formed to carry on business without specifying

any period of time. It is formed for an indefinite period of time and no provision is made as to
when and how partnership will come to an end. The life of such a partnership continues as long
as the partners are wiling to continue it as such. It can be dissolved when any partner gives 14
days notice.

Particular Partnership: It is a partnership established for a stipulated period of time or for

the completion of a specified venture. It automatically comes to an end with the expiry of the
stipulated period or on the completion of the specified venture, as the case may be.

Limited Partnerships
A limited partnership includes both general partners and limited partners. A limited
partner does not participate in the day-to-day management of the partnership and his/her
liability is limited.

In many cases, the limited partners are merely investors who do not wish to participate in
the partnership other than to provide an investment and to receive a share of the profits.

Limited Liability Partnerships

A limited liability partnership (LLP) is different from a limited partnership or a general

partnership but is closer to a limited liability company (LLC).

In the LLP, all partners have limited liability.

An LLP combines characteristics of partnerships and corporations. As in a corporation,

all partners in an LLP have limited liability, from errors, omissions, negligence,
incompetence, or malpractice committed by other partners or by employees. Of course,
any partners involved in wrongful or negligent acts are still personally liable, but other
partners are protected from liability for those acts.

Joint Ventures as Partnerships

The Small Business Administration lists a joint venture as a type of partnership. A joint venture
is typically a partnership of different businesses formed for a specific purpose (like making a
movie or building a structure) or for a specified time period.

Kinds of Partners
1. Active or managing partner:
A person who takes active interest in the conduct and management of the business of
the firm is known as active or managing partner.

He carries on business on behalf of the other partners. If he wants to retire, he has to

give a public notice of his retirement; otherwise he will continue to be liable for the acts
of the firm.

2. Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the
firm, is bound by the activities of other partners, and shares the profits and losses of the
business. A sleeping partner, unlike an active partner, is not required to give a
public notice of his retirement. As such, he will not be liable to third parties for the
acts done after his retirement.
3. Nominal or ostensible partner:
A nominal partner is one who does not have any real interest in the business but
lends his name to the firm, without any capital contributions, and doesn’t share the
profits of the business. He also does not usually have a voice in the management of the
business of the firm, but he is liable to outsiders as an actual partner. Nominal Partners
are of two types:

a) Partner by Estoppel: when a person represents to the outside world by his

words or conduct or by lending his name that he is a partner, he becomes liable to
third parties who advance money or credit to the firm on the basis of such
representation. He is estopped from denying later on that he is a partner. Such a
partner is called partner by estoppel.
b) Partner by Holding out: if a person is held out by a firm or by its partners
as a partner and the person concerned does not deny the fact inspite of being
aware of such representation, he becomes liable to the third parties who grant
credit to the firm under the impression that he is a partner. However, the
doctrine of holding out does not apply to an insolvent and to the estate or legal
representatives of a deceased partner. Before a person becomes entitled to bring
an action under the doctrine of holding out he must prove that he acted on the
representation while granting credit to the firm.

There are two essential conditions for the principle of holding out : (a) the person to be
held out must have made the representation, by words written or spoken or by conduct,
that he was a partner ; and (6) the other party must prove that he had knowledge of the
representation and acted on it, for instance, gave the credit.

Sleeping vs. Nominal Partners:

It may be clarified that a nominal partner is not the same as a sleeping partner. A
sleeping partner contributes capital shares profits and losses, but is not known to the
outsiders.

A nominal partner, on the contrary, is admitted with the purpose of taking advantage of
his name or reputation. As such, he is known to the outsiders, although he does not
share the profits of the firm nor does he take part in its management. Nonetheless, both
are liable to third parties for the acts of the firm.

4. Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm
and would not be liable for its losses, he is in own as partner in profits only.

5. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering into a
contract, he cannot become a partner. Thus, at the time of creation of a firm a minor
(i.e., a person who has not attained the age of 18 years) cannot be one of the parties to
 the contract. But under section 30 of the Indian Partnership Act, 1932, a
minor ‘can be admitted to the benefits of partnership’, with the consent of
all partners. A minor partner is entitled to his share of profits and to have
access to the accounts of the firm for purposes of inspection and copy.

He, however, cannot file a suit against the partners of the firm for his share of
profit and property as long as he remains with the firm. His liability in the
firm will be limited to the extent of his share in the firm, and his private
property cannot be attached by creditors.

On his attaining majority, he has to decide within six months whether he

will become regular partner of withdraw from partnership. The choice in
either case is to be intimated through a public notice, failing which he will be treated to
have decided to continue as partner, and he becomes personally liable like other
partners for all the debts and obligations of the firm from the date of his admission to its
benefits (and not from the date of his attaining the age of majority). He also becomes
entitled to file a suit against other partners for his share of profit and property.

6.Sub-Partner: where a member of a firm agrees to share the profits derived by

him from the firm with a stranger, there arises a sub partnership between him and the
stranger. Such stranger is to be a sub partner, although he is in no way a partner in
original firm,has no rights against it, nor he is liable for it’s debts.

Partnership distinguished from other Associations

PARTNERSHIP
Partnership, on the other hand, is necessarily
the result of agreement, express or implied.
CO-OWNERSHIP
Coownership is not always the result of agreement.
It may arise by the operation of law or from status,
e.g., coheirs of a property, persons to whom
Property is jointly, given.

Partnership necessarily involves working for Co-ownership does not.

profit
A partner can not do One co-owner
so without the consent of all the partners can, without the consent of the others, transfer his
rights and interest to stranger.
A partner is the agent of the partnership A co owner
to bind the firm has no implied authority to bind the other co-
owners.
Partnership always implies a business Co-ownership can exist without any business, e.g.,
joint ownership of a residential house.

A partner, being an agent of other partners A co-owner has no such lien onthe joint property
has a lien on the partnership property

PARTNERSHIP COMPANY

1 . A company comes into existence after In thecase of partnership registration is not compulsory.
registration under the Companies Act.

2. A partnership can be formed with The minimum number of persons required to form
two persons. a company is seven in the case ofpublic company
and two in the case of a private company.
3. Apartnership carrying on banking business A public company may have any number of members. A
cannot have more than 10 private company cannot have more than 50 members.
members and a partnership carrying on an
y otherbusiness cannot have more
than 20 . A company is regarded by law as a single person separat
4. The partnership is a collection of e from the members, who
Partners. It is not a constitute it. It has a legalpersonality.
legal entity and has no rights and
Obligations separate from its partners.
5. The property of a partnership is the The property of a company belongs to the company. A_sh
joint property of the partners. Each areholder in his individual
partner has_authority to bind capacity cannot bind the company by his acts.
the firm by his acts.
6 . The death or insolvency of a member A company has perpetual succession
does not affect its existence.A partnership
firm, in the absence of a contract to the co
ntrary, comes to
an end when a partner dies or
becomes insolvent.
7. The liability of partners for the debts of th The liability ofthe members of a company is
e firm is always unlimited usually limited.

8. The creditors of a partnership firm are The creditors ofa company are not creditors of
creditors of the individual partners, and a d individual shareholders. A decree obtained against a comp
ecree obtained against a any can be executed only against the company,
 firm can be executed even against the and not against the shareholders.
individual partners

9. A partner of a firm cannot transfer his A shareholder of a company can

interest in the firm to an outsider and mak transfer his shares and thetransferee can become a
e the transferee a member of the company.
partner without the consent of all the
others.

Difference between JHF Business and Partnership

Basis Partnership Joint Hindu Family Business

Mode of creation Through an Operation of law and by birth

agreement

Status of Minor Basically Becomes member by birth

incompetent, but may
be taken in

Rights of Members Right is there unless Only Karta conducts, but may invite others,
one waives such a if he so desires
right

Accounts Every partner can A co-parcener has no such right

inspect

Liability of Members Every partner Only Karta is liable for the debts of
personally liable, business
including his personal
estate

Membership No restriction about Only Hindus, the members of the same

caste, colour or creed family

Law on Disputes Agreement will give According to Hindu Law

direction

No. Of Members Maximum limit is No maximum limit

there
Suit by or against Me Third party can sue or Can’t sue or be sued in the firm’s name
sued by the firm; in
some cases an
individual partner can
be sued

Duration May or may not have Perpetual succession till the last member of
perpetual succession HUF survives

BASIS PARTNERSHIP JOINT STOCK COMPANY

Minimum No. Minimum number of members is Joint Stock Companies, Minimum

of Members two in a Partnership firm number is two in a private company
and seven in a public company.
Maximum In a Partnership firm, maximum In a Joint Stock Company, maximum
No. of number of members is 20 in number of members is 50 in a
Members general business and 10 in banking private company and there is no
firms. maximum limit in public company.
Registration Registration of a Partnership firm Registration of Joint Stock company
is not compulsory is compulsory.
Separate Partnership firms has no separate Joint Stock company has separate
Legal legal existence. Partnership Firm legal existence. It is an artificial
Existence and partners are the same. person created by law.
Legislation Partnership firm is regulated Joint Stock Company is regulated
under the Partnership Act, 1932 under the Companies Act, 1956.
Capital Huge capital for partnership firm There is possibility of securing huge
cannot be secured capital in case of Joint Stock
company.
Liability In a Parternship firm, liability of In a Joint Stock Company, liability of
each partner is unlimited, joint each shareholder is limited.
and several.
Transfer of Transfer of shares is not possible In case of pubic limited companies
Shares without the consent of all the shares can be transferred freely.
partners in a partnership firm.
Management Partnership Firm is managed by In a Joint Stock Company,
the partners themselves, in general management will be in the hands of
elected directors.
Registration May or may not Does not require registration
Audit of Audit of accounts of Partnership Audit of accounts of Joint Stock
accounts firm is not necessary Company is compulsory.

Flexibility The objects of the Partnership firm It is not so easy in case of a Joint
can be changed easily. Stock Company.

Perpetual Partnership firm has no Joint Stock Company has continuous

succession continuous existence. existence.

FORMATION OF PARTNERSHIP
In a contract of partnership all the elements of a valid contract must be present.
There must be:
 free consent
 consideration
 lawful object
 The parties must have capacity tocontract.
 An alien enemy cannot be a partner.
 A minor is not competent to be a partner. A minor can, however, be
admitted tothe benefits of partnershipif all the partners agree to do so.
 A partnership agreement may be oral or it may be_implied or inferred
from the conductof the parties.

Deed of Partnership or Articles of Partnership.

The deed must be stamped according to theprovisions ofthe Stamp Act.
Thereafter, the firm may be registered with the Registrar of
Firms, although registration is notcompulsory. Because of the disabilities suffered
by an unregistered firm, it is advisable to register every firm.
According to S.58 the registration should be made in the form of a Statement s
igned by all the partners andgiving :
(1) the name of the firm;
(2) the principal place of business of the firm;

(3) name of the other place (if any) where the firm carries on bus
iness;
(4) the date on which each partner joined the firm;
(5) the names in full and addresses of the partners;
 (6) the duration of the firm. Furthermore, every change in the names and add
resses of
the partnersor place of business should be notified to the Registrar of Firm
s from time to time.

REGISTRATION OF A FIRM

Effect of Nonregistration of a Firm: Unlike English law registration is optional

under
Indian PartnershipAct, But it becomes indirectly necessary, so that if a firm is not re
gistered, the following consequences willensue :
1. A partner of an unregistered firm cannot file a suit against the firm or any
partner to enforce a right arising from a contract or conferred by the
Partnership Act [S.69(1)] Where A, B, C and Darepartners in an unregistered firm.
D is wrongfully expelled from the firm by the rest of partners. D can not filea suit for
his wrongful_expulsion, the only remedy available to him is to file a suit for the
dissolution of firm.
2. An unregistered firm cannot file a suit against any third party to enforce a
right_arising from acontract. [S. 69(2)]. This clause does not prohibit an unregister
ed firmto enter into contract with thirdparties, the bar is only against taking action
against_third parties. However, the third parties are free to takeaction against
unregistered partnership.
3. An unregistered firm cannot claim a set off above Rs.100 in a suit [S.69(3)].
According to Section 69of the Partnership Act the non-
registration of a firm does not affect the following :
1. The right of a third party to sue the firm or any partner .
2. The right of a partner to sue for dissolution of the firm or for settlement of
accounts_if the firm is_already dissolved or for his share of the assets of
the dissolved firm.
3. The right of an unregistered firm to sue to enforce a right arising otherwise
than out_of contract,e.g., for an injunction against a person wrongfully
using the name of the_firm; or for wrongful_dsdsinfringement of a trade
mark.

Registration Time: An unregistered firm can get itself registered at any time
before it_is actually_dissolved. But in any case it should be registered before fillig
a suit in the court,
otherwise the court will_reject such suit. In order to institute a suit, not only the
firm must_be a registered one, but all the partners suing must also be shown as pa
rtners in the register of firms.
Example: A partnership firm consisting of A, Band C as partners was formed and
it_commenced itsbusiness before getting itself registered. The firm filled a suit aga
inst X fora claim of Rs.5000 for goodssupplied to him and immediately after filling
the suit, the firm_was registered. The court will dismiss the suitbecause the firm wa
s unregistered at the time_of filling the suit.But where a suit is dismissed because of
the nonregistration of a firm or it is withdrawnbefore it is dismissed by the court, the
firm can subsequently get itselfregistered and file thesuit again provided the suit has
not become time barred.

Partnership Deed. The agreement creating partnership may be express or implied,

and
the latter may beconcluded from the conduct or the course of dealings of the parties
or from
the circumstances of the case.But it is in the interest of the partners that the agreeme
nt must
be in writing. The document which containsthis agreement is called Partnership D
eed. It
contains provisions relating to the nature and principal place ofbusiness, the name of t
he firm,
the names and addresses of the partners, the duration of the firm, profitsharing ratio,
interest
on capital and drawings, valuation of goodwill on the death or retirement of a
partner,
management, accounts, arbitration, etc. The Indian Stamp Act, 1889, requires that t
he Deed mustbe stamped.
Who can become a partner
Any person who is competent to contract can enter into partnership agreeme
nt. The position of followingpersons need special consideration :
1. Minor: A minor is not competent to contract, hence he can not enter into p
artnership
contract. However he may be admitted to the benefits of partnership, if
all the partners agree to do so.
2. Alien: An alien enemy can not be partner in an Indian firm.
3. Person of unsound mind: A person of unsound mind, not being comp
etent to contract cannot enter into a partnership contract.
4. Company: A company, if authorised by its articles of association can e
nter into
partnershipbecause it is a person competent to contract in the eyes of law.
 5. Firm: A firm can not enter into partnership contract. If a firm, at all ent
ers into
partnership inthat case, the members become partners in the other firm in
their individual capacity.

Rights and Duties of Partner

Rights of Partners:
Broadly, the provisions of the Act regarding rights, duties
and powers of partners are as under:
(a) Every partner has a right to take part in the conduct and
management of business.

(b) Every partner has a right to be consulted and heard in all matters
affecting the business of the partnership.

(c) Every partner has a right of free access to all records, books and
accounts of the business, and also to examine and copy them.

(d) Every partner is entitled to share the profits equally.

(e) A partner who has contributed more than the agreed share of
capital is entitled to interest at the rate of 6 per cent per annum. But
no interest can be claimed on capital.

(f) A partner is entitled to be indemnified by the firm for all acts done
by him in the course of the partnership business, for all payments
made by him in respect of partnership debts or liabilities and for
expenses and disbursements made in an emergency for protecting the
firm from loss provided he acted as a person of ordinary prudence
would have acted in similar circumstances for his own personal
business.

(g) Every partner is, as a rule, joint owner of the partnership property.
He is entitled to have the partnership property used exclusively for the
purposes of the partnership.

(h) A partner has power to act in an emergency for protecting the firm
from loss, but he must act reasonably.
(i) Every partner is entitled to prevent the introduction of a new
partner into the firm without his consent.

(J) Every partner has a right to retire according to the Deed or with the
consent of the other partners. If the partnership is at will, he can retire
by giving notice to other partners.

(k) Every partner has a right to continue in the partnership.

(l) A retiring partner or the heirs of a deceased partner are entitled to

have a share in the profits earned with the aid of the proportion of
assets belonging to such outgoing partner or interest at six per cent
per annum at the option of the outgoing partner (or his
representative) until the accounts are finally settled.

Duties of Partners:
(a) Every partner is bound to diligently carry on the business of the
firm to the greatest common advantage. Unless the agreement
provides, there is no salary.

(b) Every partner must be just and faithful to the other partners.

(c) A partner is bound to keep and render true, proper, and correct
accounts of the partnership and must permit other partners to inspect
and copy such accounts.

(d) Every partner is bound to indemnify the firm for any loss caused
by his willful neglect or fraud in the conduct of the business.

(e) A partner must not carry on competing business, nor use the
property of the firm for his private purposes. In both cases, he must
hand over to the firm any profit or gain made by him but he must
himself suffer any loss that might have occurred.

(f) Every partner is bound to share the losses equally with the others.

(g) A partner is bound to act within the scope of his authority.

(h) No partner can assign or transfer his partnership interest to any
other person so as to make him a partner in the business.

Cooperative Organisation
A cooperative organisation is an association of persons, usually of
limited means, who have voluntarily joined together to achieve a
common economic end through the formation of a democratically
controlled organisation, making equitable distributions to the capital
required, and accepting a fair share of risk and benefits of the
undertaking.
The word ‘co-operation’ stands for the idea of living together and
working together. Cooperation is a form of business organisation the
only system of voluntary organisation suitable for poorer people. It is
an organisation wherein persons voluntarily associate together as
human beings on a basis of equality, for the promotion of economic in-
terests of themselves.

The cooperative movement has three objectives—Better living, Better

business and Better farming.

A cooperative organisation always prefers

(1) Service instead of profit maximization,

(2) Survival of the weakest instead of survival of the fittest,

(3) Self-help and self-reliance instead of dependence on external

bodies.

(4) Development of moral character of members instead of emphasis

on pure material development.

Characteristics of a Co-operative
Organization
1. Voluntary membership:
This is the first cardinal principle of co-operation. A person who has a
common interest and is prepared to be abide by the rules of the society
has the right to join the society as and when he wishes to do so,
continue in it as long as he likes, and leave it at his will.
On leaving the society, shares are not transferable to other persons,
although they are automatically transmitted to heirs on the death of a
member.

2. Open membership:
Apart from being voluntary in nature, the membership of a co-
operative organisation is open to all irrespective of race, colour, creed,
caste, or gender. Within that particular group, no distinction can be
made on the basis of race, colour, creed, caste, or sex. For example, a
housing society of teachers of a particular school or university may be
formed and non-teachers may be denied membership in it. Also,
unlike the practice of a company organisation, the subscription list of
the society is not closed after a fixed period.

The right of membership, however, is not absolute. This can be denied

if it is likely to be prejudicial to the interests or the existence of the
society. The co-operative society’s managing committee may also expel
any member for similar reasons, and this will not be considered a
breach of the principle of open membership.

3. Finances:
The finances of a co-operative society are contributed by members through
the purchase of shares. Since co-operatives are generally formed by the
weaker and poorer sections of the society, their capital collections are
meagre. Also, there is limit to the maximum shares that a member can buy
in a co-operative society. The government also lends financial support in
the form of loans from the State and Central Co-operative Banks.

4. Liability of members:
Like company organisation, a co-operative society may be organised
on the basis of either limited or unlimited liability. The limited liability
societies, of course, are more popular. In the case of limited liability
societies, the word ‘limited’ must be used as part of the society’s name.

5. Democratic control:
Co-operation is democracy in action. The business of co-operative
society is generally managed by a committee elected by the members
at annual general meeting. Since most of the co-operatives operate on
a local scale, the meetings of the members are well attended, and this
puts the managing committee under a lot of close supervision. ‘One
man one vote’ is the basic element of co-operative democracy. But in
a cooperative, one member may have 10,000 shares and the other only
1 share, but each would command one vote only and no proxies would
be permitted.

It is man that counts and not the money. Further, maximum

shareholding for an individual member may be prescribed
so that none may be able to exercise undue influence by
virtue of his holdings in a cooperative or may resort to
blackmailing by threatening withdrawal of his substantial
holdings.

Again, to strengthen democracy, some issues are not

decided by a bare majority alone, but by two- thirds or three-
fourths majority. Democracy is to be preserved through a regular
system of membership education, frequent meetings of general
membership, managing committee, and sub-committees with which
maximum number of members are to be associated.

6. Limited interest on capital:

Co-operation recognises the capital is useful and necessary for running
a business, but it should be relegated to the level of a servant, not a
master. Co-operation uses the immense power of capital to carry on
the working of the society in the interest of its members and
community in general and for this service; capital is entitled to a
limited return, known as ‘dividend’ in India.

In co-operative laws, a ceiling has been put to the rate of dividend

which could be declared out of profit for the use of capital and it
generally never exceeds 10%. Many foreign co-operative
movements do not believe in paying anything for the use of capital.

7. Distribution of surplus:
Unlike profit-oriented enterprises, the surplus (i.e., profit after limited
interest has been paid on capital) of a co-operative society is not
distributed to the members in the ratio of their capital contribution or
in an agreed ratio. Under the provisions of the law, at least 25 percent
of the profit must be transferred to the general reserve. Likewise, a
certain percentage (not exceeding 10) may also be utilized for the
general welfare of the local community.

8. Service motive:
A co-operative society is formed with the basic objective of providing
useful service — be it credit, consumption goods, or input resources —
to its members and the society. In other words, the objective of a co-
operative society should not be to maximise profits at the cost of
others, as is usually the case with other types of business enterprises.
Also, it does not mean that a co-operative society should sustain
losses.

9. Registration and legal status:

Being voluntary in character, registration of a cooperative is optional.
In India, co-operatives desiring to be registered may do so under the
Co-operative Societies Act, 1912, or relevant State Co-operative
Societies Acts, as the case may be.

The minimum essential conditions for getting a co-operative society

registered are: (i) There must be at least 10 adult persons (i.e., persons
above the age of 18 years) to form the’ society, (ii) The application
should provide for essential information, e.g. name and address of the
society, its aims and objects, details of share capital, etc. (iii) Along
with the application must also be enclosed two copies of the byelaws,
i.e., rules and regulations governing the internal functioning of the
society.

There is a set of model byelaws available with the Registrar which the
promoters of the co-operative society may adopt, (iv) The Registrar
after the scrutiny of the application, which must be duly signed by at
least 10 members, and satisfying himself about the correctness of the
co-operative society may issue a certificate, under his seal and
signature, and the society will now come into existence and acquire
the legal status.

Once the society is registered, it can admit new members and also
issue its shares. It may be pointed out that unlike a company, a co-
operative society can issue shares without a prospectus. But, like a
company, every co-operative society is subjected to a lot of
government supervision — for instance, it has to get its accounts
audited by an auditor from the co-operative department, regularly
submit its accounts to the Registrar, and in some cases (like the co-
operatives of Madhya Pradesh) it has to get the appointment of
managerial personnel approved by the Registrar.

10. Education and training:

Apart from the characteristics, discussed above, a co-operative society
also exhibits the feature of education and training to its members with
the purpose of developing co-operation into a well-organized
movement.

Co-operation is an idea which is simple in theory, but difficult in

practice. All of us agree that co-operation is good, useful, and
essential, but when we translate the concept into action, bottlenecks
block our paths, views clash, and sentiments come in the way.

We have, therefore, to create an urge in people to cooperate with each

other, to train them in the art and science of co-operation, and
generally to mould their attitude in a way that they are able to take
combined decisions and abide by them. Co-operative education,
therefore, is considered to be a basic principle in the absence of which
seeds of co-operative democracy fail to germinate.

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

The principal types of business cooperatives are:

1. Cooperative Credit Societies:
Cooperative Credit Societies are voluntary associations of people with
moderate means formed with the object of extending short-term
financial accommodation to them and developing the habit of thrift
among them.

Germany is the birth place of credit cooperation. Credit cooperation

was born in the middle of the 19th century. Rural credit cooperative
societies were started in the villages to solve the problem of
agricultural finance.

The village societies were federated into central cooperative banks and
central cooperative banks federated into the apex of state cooperative
banks. Thus rural cooperative finance has a federal structure like a
pyramid. The primary society is the base. The central bank in the
middle and the apex bank in the top of the structure. The members of
the primary society are villagers.

In the similar manner urban cooperative credit societies were started

in India. These urban cooperative banks look after the financial needs
of artisans and labour population of the towns. These urban
cooperative banks are based on limited liability while the village
cooperative societies are based on unlimited liability.

National Bank for Agriculture and Rural Development (NABARD) has

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

2. Consumers’ Cooperative Societies:

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

3. Producers’ Cooperatives:
It is said that the birth of Producers’ Cooperatives took place in France
in the middle of 19th century. But it did not make satisfactory
progress.

Producers’ Cooperatives, also known as industrial cooperatives, are

voluntary associations of small producers formed with the object of
eliminating the capitalist class from the system of industrial
production. These societies produce goods for meeting the
requirements of consumers. Sometimes their production may be sold
to outsiders at a profit.

There are two types of producers’ cooperatives. In the first

type, producer-members produce individually and not as
employees of the society. The society supplies raw materials,
chemicals, tools and equipment’s to the members. The
members are supposed to sell their individual products to
the society.

In the second type of such societies, the member-producers

are treated as employees of the society and are paid wages
for their work.

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

5. Cooperative Farming Societies:

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

Advantages:
1. Easy Formation:
Compared to the formation of a company, formation of a cooperative
society is easy. Any ten adult persons can voluntarily form themselves
into an association and get it registered with the Registrar of Co-
operatives. Formation of a cooperative society also does not involve
long and complicated legal formalities.

2. Limited Liability:
Like company form of ownership, the liability of members is limited to
the extent of their capital in the cooperative societies.

3. Perpetual Existence:
A cooperative society has a separate legal entity. Hence, the death,
insolvency, retirement, lunacy, etc., of the members do not affect the
perpetual existence of a cooperative society.

4. Social Service:
The basic philosophy of cooperatives is self-help and mutual help.
Thus, cooperatives foster fellow feeling among their members and
inculcate moral values in them for a better living.

5. Open Membership:
The membership of cooperative societies is open to all irrespective of
caste, colour, creed and economic status. There is no limit on
maximum members.

6. Tax Advantage:
Unlike other three forms of business ownership, a cooperative society
is exempted from income-tax and surcharge on its earnings
up to a certain limit. Besides, it is also exempted from stamp duty
and registration fee.

7. State Assistance:
Government has adopted cooperatives as an effective instrument of
socio-economic change. Hence, the Government offers a number
of grants, loans and financial assistance to the cooperative
societies – to make their working more effective.

8. Democratic Management:
The management of cooperative society is entrusted to the managing
committee duly elected by the members on the basis of ‘one-member
one -vote’ irrespective of the number of shares held by them. The
proxy is not allowed in cooperative societies. Thus, the management in
cooperatives is democratic.

9. Elimination of middlemen
Cooperatives societies can deal directly with the producers and with the
ultimate consumers. Therefore they are not dependent on middlemen and can
save the profits enjoyed by the middlemen.

10.Fair price and good quality

Co-operative societies buy and sell in bulk quantities directly from the
producers or to the consumers. Products are processed and graded before they
are sold. Bulk purchases and sales ensure fair prices and good quality.

Disadvantages:
In spite of its numerous advantages, the cooperative also has some
disadvantages which must be seriously considered before opting for
this form of business ownership.

The important among the disadvantages are:

1. Lack of Secrecy:
A cooperative society has to submit its annual reports and
accounts with the Registrar of Cooperative Societies. Hence,
it becomes quite difficult for it to maintain secrecy of its business
affairs.

2. Lack of Business Acumen:

The member of cooperative societies generally lack business acumen.
When such members become the members of the Board of Directors,
the affairs of the society are expectedly not conducted efficiently.
These also cannot employ the professional managers because it is
neither compatible with their avowed ends nor the limited resources
allow for the same.

3. Lack of Interest:
The paid office-bearers of cooperative societies do not take interest in
the functioning of societies due to the absence of profit motive.
Business success requires sustained efforts over a period of time
which, however, does not exist in many cooperatives. As a result, the
cooperatives become inactive and come to a grinding halt.

4. Corruption:
In a way, lack of profit motive breeds fraud and corruption in
management. This is reflected in misappropriations of funds by the
officials for their personal gains.

5. Lack of Mutual Interest:

The success of a cooperative society depends upon its members’
utmost trust to each other. However, all members are not found
imbued with a spirit of co-operation. Absence of such spirit breeds
mutual rivalries among the members. Influential members tend to
dominate in the society’s affairs.

6.Limited funds
Co-operative societies have limited membership and are promoted by the
weaker sections. The membership fees collected is low. Therefore the
funds available with the co-operatives are limited. The principle of one-man
one-vote and limited dividends also reduce the enthusiasm of members.
They cannot expand their activities beyond a particular level because of the
limited financial resources.

7.Over reliance on government funds

Co-operative societies are not able to raise their own resources. Their sources
of financing are limited and they depend on government funds. The funding
and the amount of funds that would be released by the government are
uncertain. Therefore co-operatives are not able to plan their activities in the
right manner.

8.Government regulation
Co-operative societies are subject to excessive government regulation which
affects their autonomy and flexibility. Adhering to various regulations takes
up much of the management’s time and effort.

9.Inefficiencies leading to losses

Co-operative societies operate with limited financial resources. Therefore
they cannot recruit the best talent, acquire latest technology or adopt modern
management practices. They operate in the traditional mold which may not
be suitable in the modern business environment and therefore suffer losses.
Joint Stock Company
“A Joint Stock Company is a voluntary association of individuals for
profit, having a capital divided into transferable shares, the
ownership of which is the condition of membership.”
Introduction:
With the technological improvements, the scale of operations has
increased. The requirements for finances and managerial resources
have gone up. The traditional forms of organisation such as sole-
proprietorship and partnership could not meet the requirements of
business. The increase in business volumes also brings in more
liabilities. Under these circumstances the company form of
organisation developed as the most suitable alternative.

In this form of organisation a large number of persons known as

shareholders join hands to start a bigger business and the liability of
members is also limited to the extent of shares they have subscribed
to. Joint stock company form of organisation was first started in Italy
in thirteenth century.

In India the first Companies Act was passed in 1850 and the principle
of limited liability was introduced only in 1857. A comprehensive
companies act was passed in 1956 and all undertakings registered
under this act are known as ‘companies’. The companies started under
state or central legislations are called ‘corporations’.

Definitions:
A company is “an association of many persons who contribute money
or money’s worth to a common stock and employ it in some trade or
business, and who share the profit and loss (as the case may be)
arising therefrom.” —James Stephenson

“A Joint Stock Company is a voluntary association of individuals for

profit, having a capital divided into transferable shares, the ownership
of which is the condition of membership.” —Prof. L.H. Haney

“A corporation is an artificial being, invisible, intangible and existing

only in contemplation of the law. Being a mere creation of law, it
possesses only the properties which the charter of its creation confers
upon it either expressly or as incidental to its very existence.” —Chief
justice Marshall

“A company means a company formed an registered under this Act.”

— Section 3 of Indian Companies Act 1956

Analysis of Definitions:
An analysis of above mentioned definitions brings out the
following facts:
1. A company is an artificial person under law.

2. It has separate legal entity than its members.

3. It possesses only those properties which have been conferred on it

by the charter of its creation.

4. It is a voluntary association of persons.

5. It is created to earn profits.

6. It has a capital which is contributed by the members.

7. The capital is divided into small parts known as shares.

8. The persons who own these shares are called members.

9. The shares of a company are easily transferable.

10. The capital of a company is employed for a common purpose.

Types of Companies:
On the basis of ownership the companies can be classified
into following categories:
1. Private Company

2. Public Company

1. Private Company:
According to companies Act, a private company is one which
has the following characteristics:
(i) It has a minimum of two members and a maximum of fifty
members.

(ii) A private company restricts the rights of members to transfer their

shares.

(iii) It prohibits any invitation to the public to subscribe to its shares

and debentures.

(iv) Does not invite general public to invest deposits in the company,

(v) It has a minimum paid up capital of Rs. One lakh.

A private company is an ideal form of organization when a business is

to be expanded at a large scale without involving large number of
shareholding groups.

2. Public Company:
According to Section 31(1)((iv) of the Indian Companies Act, all
companies other than private companies are called public companies.
It is a company in which public at large is interested.

A public company has the following trait:

(i) It is formed with a minimum of seven members.

(ii) It invites general public to subscribe to its shares.

(iii) There is no restriction on the maximum number of members.

(iv) It permits the transfer of shares.

(v) Has minimum paid up capital of Rs. Five lakhs.

(vi) It must allot shares within 120 days from the issue of prospectus.

(vii) Before starting the business it requires a certificate of

commencement from the Registrar of Companies.
Privileges or Benefits of a Private Company:
A private company is given certain exemptions or privileges as
compared to a public company.
Some of the main privileges are as follows:
1. A private company can be started with just two members whereas a public company
required at least seven members.

2. A private company is not required to file a prospectus or a settlement in lieu of

prospectus with the Registrar of Companies.

3. There is no restriction of minimum subscription as in the case of public company. It

can directly allot the shares.

4. The company can start its work just after getting a certificate of incorporation. It is
exempted from the certificate of commencement.

5. It can work with just two directors.

6. A private company is not required to hold a statutory meeting and filing a statutory
report.

7. It is not under legal obligation to offer its issue of shares to the existing shareholders
on a pro rata basis as in the case of a public company.

8. Unless otherwise a higher quorum is provided, the minimum quorum in a general

meeting of shareholders is only two members personally present.

9. There is no limit on the remuneration of directors, managers, etc. in a private

company. It can be fixed beyond 11 percent which is a statutory limit for a public
company.

10. Investment in the same group of companies can be done without restrictions.

Promotion of a Company:
The promotion of every business requires a process to be followed. A number of
formalities have to be completed before a unit can come into existence. The promotion
of a company involves the conceiving of a business opportunity and taking an initiative
to give it a practical shape. A person, a group or even a company may have discovered a
business opportunity.
Limited Liability Partnership
Concept of LLP:
Limited Liability Partnership enterprise, the world wide recognized form of business
organization, has now been introduced in India by enacting the Limited Liability
Partnership Act, 2008. LLP Act was notified on 31.03.2009.

A Limited Liability Partnership, popularly known as LLP combines the advantages of

both the Company and Partnership into a single form of organization. Limited Liability
Partnership (LLP) is a new corporate form that enables professional knowledge and
entrepreneurial skill to combine, organize and operate in an innovative and proficient
manner.

It provides an alternative to the traditional partnership firm with unlimited liability. By

incorporating an LLP, its members can avail the benefit of limited liability and the
flexibility of organizing their internal management on the basis of a mutually-arrived
agreement, as is the case in a partnership firm.

Characteristics of an LLP:
1. LLP is governed by the Limited Liability Partnership Act 2008,
which has come into force with effect from April 1, 2009. The Indian
Partnership Act, 1932 is not applicable to LLP.

2. LLP is a body incorporate and a legal entity separate from its

partners having perpetual succession, can own assets in its name, sue
and be sued.

3. The partners have the right to manage the business directly, unlike
corporate shareholders.

4. One partner is not responsible or liable for another partner’s,

misconduct or negligence.

5. Minimum of 2 partners and no maximum limit.

6. Should be ‘for profit’ business.

7. The rights and duties of partners in an LLP, will be governed by the

agreement between partners and the partners have the flexibility to
devise the agreement as per their choice. The duties and obligations of
Designated Partners shall be as provided in the law. 8. Limited liability
of the partners to the extent of their contributions in the LLP. No
exposure of personal assets of the partner, except in cases of fraud.

9. LLP shall maintain annual accounts. However, audit of the accounts

is required only if the contribution exceeds Rs. 25 lakh or annual
turnover exceeds Rs. 40 lakh. A statement of accounts and solvency
shall be filed by every LLP with the Registrar of Companies (ROC)
every year.

How an LLP is formed?

For forming an LLP, some of the important steps and matters are
given below:

Partner:
There should be at least 2 persons (natural or artificial) to form an
LLP. In case any Body Corporate is a partner, then he will be required
to nominate any person (natural) as its nominee for the purpose of the
LLP. Following entities and/or persons can become a partner in the
LLP:

(a) Company incorporated in and outside India

(b) LLP incorporated in and outside India

(c) Individuals resident in and outside India.

Process of Formulation of LLP:

Capital Contribution:
In case of LLP, there is no concept of any share capital, but every
partner is required to contribute towards the LLP in some manner as
specified in LLP agreement. The said contribution can be tangible,
movable or immovable or intangible property or other benefit to the
limited liability partnership, including money, promissory notes, and
other agreements to contribute cash or property, and contracts for
services performed or to be performed.
In case the contribution is in intangible form, the value of the same
shall be certified by a practising Chartered Accountant or by a
practising Cost Accountant or by approved value from the panel
maintained by the Central Government. The monetary value of
contribution of each partner shall be accounted for and disclosed in
the accounts of the limited liability partnership in the manner as may
be prescribed.

Designated Partners:
Every limited liability partnership shall have at least two
designated partners to do all acts under the law who are
individuals and at least one of them shall be a resident in
India. ‘Designated Partner’ means a partner who is designated as
such in the incorporation documents or who becomes a designated
partner by and in accordance with the LLP Agreement.

In case of a limited liability partnership in which all the partners are

bodies corporate or in which one or more partners are individuals and
bodies corporate, at least two individuals who are partners of such
limited liability partnership or nominees of such bodies corporate
shall act as designated partners.

Designated Partner Identification Number (DPIN):

Every Designated Partner is required to obtain a DPIN from the
Central Government. DPIN is an eight digit numeric number allotted
by the Central Government in order to identify a particular partner
and can be obtained by making an online application in Form 7 to
Central Government and submitting the physical application along
with necessary identity and Address proof of the person applying with
prescribed fees.

However, if an individual already holds a DIN (Director Identification

Number), the same number could be allotted as your DPIN also. For
that the users while submitting Form 7 needs to fill their existing DIN
No. in the application.

It is not necessary to apply Designated Partner Identification Number

every time you are appointed partner in a LLP, once this number is
allotted it would be used in all the LLP’s in which you will be
appointed as partner.

Digital Signature Certificate:

All the forms like e Form 1, e Form 2, e Form 3 etc. which are required
for the purpose of incorporating the LLP are filed electronically
through the medium of Internet. Since all these forms are required to
be signed by the partner of the proposed LLP and as all these forms
are to be filed electronically, it is not possible to sign them manually.
Therefore, for the purpose of signing these forms, at least one of the
Designated Partner of the proposed LLP needs to have a Digital
Signature Certificate (DSC).

The Digital Signature Certificate once obtained will be useful in filing

various forms which are required to be filed during the course of
existence of the LLP with the Registrar of LLP.

LLP Name:
Ideally the name of the LLP should be such which represents the
business or activity intended to be carried on by the LLP. LLP should
not select similar name or prohibited words.

LLP Agreement:
For forming an LLP, there should be agreement between/among the
partners. The said Agreement contains name of LLP, Name of
Partners and Designated Partners, Form of Contribution, Profit
Sharing Ratio, and Rights and Duties of Partners.
 In case no agreement is entered into, the rights and duties as
prescribed under Schedule I to the LLP Act shall be applicable. It is
possible to amend the LLP Agreement but every change made in the
said agreement must be intimated to the Registrar of Companies.

Registered Office:
The Registered office of the LLP is the place where all correspondence
related with the LLP would take place, though the LLP can also
prescribe any other for the same. A registered office is required for
maintaining the statutory records and books of Account of LLP. At the
time of incorporation, it is necessary to submit proof of ownership or
right to use the office as its registered office with the Registrar of LLP.
Difference between/among a Company, Partnership firm and an LLP:

Features Company Partnership firm LLP

Registration Compulsory Not compulsory. Compulsory

registration with the Unregistered registration required
ROC. Certificate of Partnership Firm with the ROC
Incorporation is won’t have the ability
conclusive evidence. to sue.

Name At the end of the No guidelines. Name to end with

name word “limited” “LLP” Limited
of the name of a Liability
public company, and Partnership”
“private limited” with
a private company.

Capital contribution Private company Not specified Not specified

should have a
minimum paid up
capital of lakh and Rs.
5 lakhs for a public
company

Legal entity A separate legal entity Not a separate legal A separate legal
entity entity

Liability Limited to the extent Unlimited, can extend Limited to the

 of unpaid capital. to the personal assets extent of the
of the partners contribution to the
LLP.

No. ofshareholders / Minimum of 2. In a 2- 20 partners Minimum of 2. No

Partners private company, maximum.
maximum of 50
shareholders

Foreign Nationals as Foreign nationals can Foreign nationals Foreign

shareholder / Partner be shareholders. cannot form nationals can be
partnership firm. partners.

Meetings Quarterly Board of Not required Not required.

Directors meeting,
annual shareholding
meeting is
mandatory

Annual Return Annual Accounts and No returns to be filed Annual

Annual Return to be with the Registrar of statement of
filed with ROC Firms accounts and
solvency &
Annual Return
has to be filed
with ROC

Audit Compulsory, Compulsory Required, if the

irrespective of share contribution is
capital and turnover above ? 25 lakhs
or if annual
turnover is
above ? 40
lakhs.

How do the bankers High Creditworthiness Perception is

view creditworthiness, due depends on goodwill higher
to stringent and credit compared to
compliances and worthiness of the that of a
disclosures required partners partnership but
lesser than a
company.
Dissolution Very procedural. By agreement of the Less procedural
Voluntary or by partners, insolvency compared to
Order of National or by Court Order company.
Company Law Voluntary or by
Tribunal Order of
National
Company Law
Tribunal

Whistle blowing No such provision No such provision Protection

provided to
employees and
partners who
provide useful
information
during the
investigation
process.

Advantages of LLP:
The first LLP was registered on 2nd April, 2009 and till 25th April,
2011, 4580 LLPs were registered. This form of Organisation offers the
following benefits:

1. The process of formation is very simple as compared to Companies

and does not involve much formality. Moreover, in terms of cost, the
minimum fee of incorporation is as low as f 800 and maximum is
5600.
2. Just like a Company, LLP is also body corporate, which means it
has its own existence as compared to partnership. LLP and its
Partners are distinct entities in the eyes of law. LLP is known by its
own name and not the name of its partners.
3. An LLP exists as a separate legal entity different from the lives of its
partners. Both LLP and persons, who own it, are separate entities and
both function separately. Liability for repayment of debts and lawsuits
incurred by the LLP lies on it and not different from the lives of its
partners, the owner. Any business with potential for lawsuits should
consider LLP form of organisation and it will offer an added layer of
protection.
4. LLP has perpetual succession. Notwithstanding any changes in the
partners of the LLP, the LLP will remain the same entity with the same
privileges, immunities, estates and possessions. The LLP shall
continue to exist till it is wound up in accordance with the provisions
of the relevant law.
5. LLP Act 2008 gives an LLP flexibility to manage its own affairs.
Partners can decide the way they want to run and manage the LLP, as
per the form of LLP Agreement. The LLP Act does not regulate the
LLP to large extent rather than allows partners the liberty to manage it
as per their agreement.
6. It is easy to join or leave the LLP or otherwise it is easier to transfer
the ownership in accordance with the terms of the LLP Agreement.
7. An LLP, as legal entity, is capable of owning its Separate Property
and funds. The LLP is the real person in which all the property is
vested and by which it is controlled, managed and disposed off. The
property of LLP is not the property of its partners. Therefore, partners
cannot make any claim on the property in case of any dispute among
themselves.
8. Another main benefit of incorporation is the taxation of a LLP. LLP
is taxed at a lower rate as compared to Company. Moreover, LLP is
also not subject to Dividend Distribution Tax as compared to
company, so there will not be any tax while you distribute profit to
your partners.
9. Financing a small business like sole proprietorship or partnership
can be difficult at times. An LLP being a regulated entity like company
can attract finance from Private Equity Investors, financial institutions
etc.
10. As a juristic legal person, an LLP can sue in its name and be sued
by others. The partners are not liable to be sued for dues against the
LLP.
11. Under LLP, only in case of business, where the annual
turnover/contribution exceeds Rs. 40 lakh Rs. 25 lakh are required to
get their accounts audited annually by a chartered accountant. Thus,
there is no mandatory audit requirement.
12. In LLP, Partners, unlike partnership, are not agents of the
partners and therefore they are not liable for the individual act of
other partners, which protects the interest of individual partners.
13. As compared to a private company, the numbers of compliances
are on a lesser side in case of LLP.
Disadvantages of LLP:
The major Disadvantages of Limited Liability Partnership are listed
below:

1. An LLP cannot raise funds from Public.

2. Any act of the partner without the other may bind the LLP.
3. Under some cases, liability may extend to personal assets of
partners.
4. No separation of Management from owners.
5. LLP might not be a choice due to certain extraneous reasons. For
example,, Department of Telecom (DOT) would approve the
application for a leased line only for a company. Friends and relatives
(Angel investors), and venture capitalists (VC) would be comfortable
investing in a company.
6. The framework for incorporating a LLP is in place but currently
registrations are centralized at Delhi.

Factors Governing the Selection of a Suitable Form of

Ownership Business Organization
For a new or proposed business, the selection of a suitable form of
ownership business organisation is generally governed by the following
factors!
The selection of a suitable form of ownership organisation is an important
entrepreneurial decision because it influences the success and growth of a business —
e.g., it determines the decision of profits, the risk associated with business, and so on. As
discussed earlier, the different forms of private ownership organisation differ from each
other in respect of division of profit, control, risk, legal formalities, flexibility, etc.

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

For a new or proposed business, the selection of a suitable form of ownership

organisation is generally governed by the following factors:

1. Nature of business activity:

This is an important factor having a direct bearing on the choice of a form of ownership.
In small trading businesses, professions, and personal service trades, sole-
proprietorship is predominant.

Examples are Laundromats, beauty parlours, repair shops, consulting agencies, small
retail stores, medicine, dentist accounting concerns, boarding-house, restaurants,
speciality ships, jobbing builders, painters, decorators, bakers, confectioners, tailoring
shops, small scale shoe repairers and manufactures, etc. The partnership is
suitable in all those cases where sole proprietorship is suitable, provided
the business is to be carried on a slightly bigger scale.

Besides, partnership is also advantageous in case of manufacturing

activities on a modest scale. The finance, insurance, and real estate industries seem
to be suited to partnership form of organisation. Some of the financial businesses
that find this form advantageous are tax, accounting, and stockbrokerage
firms, and consulting agencies.

Service enterprises like hotels and lodging places; trading enterprises, such as wholesale
trade, large scale retail houses; manufacturing enterprises, such as small drug
manufacturers, etc. can be undertaken in the form of partnership. Manufacturing
contains the highest percentage of companies among all industries. Similarly large chain
stores, multiple shops, super-bazaars, engineering companies are in the form of
companies.

2. Scale of operations:
The second factor that affects the form of ownership organisation is the scale of
operations. If the scale of operations of business activities is small, sole
proprietorship is suitable; if this scale of operations is modest — neither
too small nor too large — partnership is preferable; whereas, in case of
large scale of operations, the company form is advantageous.

The scale of business operations depends upon the size of the market area served,
which, in turn, depends upon the size of demand for goods and services. If the market
area is small, local, sole-proprietorship or partnership is opted. If the demand originates
from a large area, partnership or company may be adopted.

3. Capital requirements:
Capital is one of the most crucial factors affecting the choice of a particular form of
ownership organisation. Requirement of capital is closely related to the type of business
and scale of operations. Enterprises requiring heavy investment (like iron and
steel plants, medicinal plants, etc.) should be organised as joint stock
companies.

Enterprises requiring small investment (like retail business stores,

personal service enterprises, etc.) can be best organised as sole
proprietorships. Apart from the initial capital required to start a business, the future
capital requirements—to meet modernisation, expansion, and diversification plans —
also affect the choice of form of ownership organisation.

In sole proprietorship, the owner may raise additional capital by borrowing, by

purchasing on credit, and by investing additional amounts himself. Banks and suppliers,
however, will look closely at the proprietor’s individual financial resources before
sanctioning loans or advances.

Partnerships can often raise funds with greater ease, since the resources and credit of all
partners are combined in a single enterprise. Companies are usually best able to attract
capital because investors are assured that their liability will be limited.

4. Degree of control and management:

The degree of control and management that an entrepreneur desires to have over
business affects the choice of ownership organisation. In sole proprietorship,
ownership, management, and control are completely fused, and therefore,
the entrepreneur has complete control over business. In partnership,
management and control of business is jointly shared by partners.

They have equal voice in the management of partnership business except to the extent
that they agree to divide among themselves the business responsibilities.

Even then, they are legally accountable to each other. In a company, however, there is
divorce between ownership and management. The management and control of company
business is entrusted to the elected representatives of shareholders.

Thus, a person wishing to have complete and direct control of business

prefers proprietary organisation rather than partnership or company. If
he is prepared to share it with others, he will choose partnership. But, if he
is just not bothered about it, he will go in for company.

5. Degree of risk and liability:

The size of risk and the willingness of owners to bear it is an important consideration in
the selection of a legal form of ownership organisation. The amount of risk involved
in a business depends, among other, on the nature and size of business.
Smaller the size of business, smaller the amount of risk.
Thus, a sole proprietary business carries small amount of risk with it as
compared to partnership or company. However, the sole proprietor is personally
liable for all the debts of the business to the extent of his entire property. Likewise, in
partnership, partners are individually and jointly responsible for the liabilities of the
partnership firm.

Companies have a real advantage, as far as the risk goes, over other forms
of ownership. Creditors can force payment on their claims only to the limit
of the company’s assets. Thus, while a shareholder may lose the entire money he put
into the company, he cannot be forced to contribute additional funds out of his own
pocket to satisfy business debts.

6. Stability of business:
Stability of business is yet another factor that governs the choice of an ownership
organisation. A stable business is preferred by the owners insofar as it helps him in
attracting suppliers of capital who look for safety of investment and regular return, and
also helps in getting competent workers and managers who look for security of service
and opportunities of advancement. From this point of view, sole proprietorships are not
stable, although no time limit is placed on them by law.

The illness of owner may derange the business and his death cause the demise of the
business. Partnerships are also unstable, since they are terminated by the death,
insolvency, insanity, or withdrawal of one of the partners. Companies have the most
permanent legal structure. The life of the company is not dependent upon the life of this
member. Members may come, members may go, but the company goes on forever.

7. Flexibility of administration:
As far as possible, the form of organisation chosen should allow flexibility of
administration. The flexibility of administration is closely related to the
internal organisation of a business, i.e., the manner in which
organisational activities are structured into departments, sections, and
units with a clear definition of authority and responsibility.

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

Any substantial change in the existing line of business activity — say from cotton textiles
to sugar manufacturing — may not be permitted by law if such a provision is not made
in the ‘objects clause’ of the Memorandum of Association of the company.

Even when it is permitted by the Memorandum, it might have to be endorsed by the

shareholders at the general meeting of the company. Thus, from flexibility point of view,
sole proprietorship has a distinct edge over other forms.
8. Division of profit:
Profit is the guiding force of private business and it has a tremendous influence on the
selection of a particular form of ownership organisation. An entrepreneur desiring
to pocket all the profits of business will naturally prefer sole
proprietorship.

Of course, in sole proprietorship, the personal liability is also unlimited. But, if he is

willing to share the profits partnership is best. In company organisation,
however, the profits (whenever the Board of Directors decides) are
distributed among shareholders in proportion to their shareholding, but
the liability is also limited. The rate of dividend is generally quite low.

9. Costs, procedure, and government regulation:

This is also an important factor that should be taken into account while choosing a
particular form of organisation. Different forms of organisation involve different
procedure for establishment, and are governed by different laws which affect the
immediate and long-term functioning of a business enterprise. From this point of view,
sole proprietorships are the easiest and cheapest to get started. There is no
government regulation. What is necessary is the technical competence and
the business acumen of the owner.

Partnerships are also quite simple initiated. Even a written document is not
necessarily a prerequisite, since an oral agreement can be equally effective. Company
form of ownership is more complicated to from.

It can be created by law, dissolved by law, and operate under the complicated provisions
of the law. In the formation of a company, a large number of legal
formalities is to be gone through which entails, at times, quite a
substantial amount of expenditure.

For example, the cost incurred on the drafting of the Memorandum of Association, the
Articles of Association, the Prospectus, issuing of share capital, etc. This cost is however,
small in case of private companies. Besides, companies are subjected to a large
number of anti-monopoly and other economic laws so that they do not
hamper the public interest.

The consideration of the various factors listed above clearly shows that:

(a) These factors do not exist in isolation, but are interdependent, and they are all
important in their own right. Nevertheless, the factors of nature of business and scale of
operations are the most basic ones in the selection of a form of ownership.

All other factors are dependent on these basic considerations. For instance, the financial
requirements of a business will depend on the nature of business and the scale of
operations planned. To take an example, if a business wants to set up a trading
enterprise (say, a retail store) on a small scale, his financial requirements will be small.
(b) The various factors listed above are only major factors, and in no case they constitute
an exhaustive list. Depending upon the requirements of the business and the demands
of the situation and sometimes even the personal preference of the owner, the choice of
a form of ownership is made.

(c) The problem in choosing the best form of ownership is one of analysing and
weighing relative advantages and disadvantages to find the one that will yield the
highest net advantage. And for that, weights may be assigned to different factors
depending upon their importance in each form of organisation, and the organisation
that obtains the maximum weights may be ultimately selected.