ESSENTIAL FEATURES OF AN ORGANISATION

A Pharmacist who intends to open up a Drug store or a marketing organisation has many
choices, but he has to carefully select the type of commercial organisation so as to be of the
appropriate size, nature and type of activity. This decision depends upon his preferred method of
control, availability of funds , capacity to assume responsibility and bear risk of business. He will have
to consider the tax liability and the reinvestment of his profits. The Pharmacist has to decide on an
estimate of his resources, abilities and contacts. The various factors that can guide him in
selecting an ideal form of an organisation can be :-

A) EASE OF FORMATION
The basic requirement of an organisation is that it should be formed very easily without any long
procedures. The time and efforts going into the formation should be minimum such to keep the
enthusiasm of the entrepreneur alive. (sole proprietorship are easy to form but has many limitations).

B) EASE OF FINANCE
Finance requirement of any business are varied, but the resources like government agencies, semi
government bodies and private sources are similar. Facility to raise finance should be simple and
easy and should not cost high.

C) LIMITED RISKS & LIABILITIES

The Pharmacist has to decide upon the extent of business risk he/she is intending to take. Each
form of business has its own risks and on has to bear it. The choice may be of unlimited liability or
limited. Generally sharing profits reduce the extent of liability (Public limited company has a large
membership and profit is shared by way of dividend, this helps to entail greater risks).

D) CONTROL, MANAGEMENT & OWNERSHIP

One has to bear in mind that the control over the organisation and its day to day affairs are two
different aspects of a business. It is generally desired to keep the ownership to oneself but to
delegate the day to day affairs to the employees to manage.( the ownership and management are
different). Sole proprietorship & partnership offer total ownership & control over the organisation
with full motivation whereas this is seen only in private limited companies (the management may not
take keen interest since it is devoid of ownership).

E) MAINTENANCE OF SECRECY
The maintenance of secrecy is of vital importance to a business organisation. A private limited
company, partnership or a sole proprietorship form of organisation can have this advantage which
may not be there for a public limited or a cooperative.

F) CONTINUITY OF BUSINESS

Continuity of any business organisation imparts stability to it. This helps it to build up an image in
front of the public, stability of the organisation enhances its soundness in terms of finance and
policies. Joint stock companies & Hindu undivided family offer continuity for a long period of time.

G) FLEXIBILITY OF OPERATIONS

This helps the organisation to introduce changes and adjustments easily whenever they are
required. It helps the organisation to diversify or expand or take decisions for exploiting
business opportunities. Partnership & sole proprietorship offer larger scope for quick decisions,
prompt action and are more flexible.

H) LEAST INTERFERENCE OF GOVT. REGULATIONS

The form of business organisation should have the least of government regulations in the form of
formation, licence fees , filing of audit reports , company results record keeping, etc. (sole
proprietorship & partnership offers this advantage).
I) DECISION MAKING SHOULD BE EASY

Decision making process involves both time to take decision and the quality of decisions. Any
business organisation always gets an opportunity to exploit, which then requires the businessman to
take an immediate decision. A sole proprietor can take a decision immediately but has limited
resources for quality decision (individual capability) whereas a Joint stock company would have to
undergo a long procedure to take decision but its quality would be the best , since it employs the
best talent for the purpose.

DIFFERENT FORMS OF COMMERCIAL ORGANISATION

1. The Joint Hindu Family : This is a special form of organisation which has the status of an
organisation only in our country. It is a Business which is run by the Head of the Hindu family
(eldest Male member) runs the family business and is Known as the "KARTA".

2. Sole Proprietorship : Is a form of organisation in which an individual introduces his own

capital, uses his own skill and intelligence and is fully responsible for the results of his
operation. He may run the business alone or may be assisted by his employees.

3. Partnership : Is a voluntary association of two or more persons (not more than twenty two in a
non-banking Organisation and not more than 10 in a banking organisation) who contribute money,
labour, skill, time and intelligence for the purpose of carrying on a lawful business activity for Profit or
common benefit.

4. Joint Stock Company/Corporation: It is defined as an artificial person (being an association of

persons) recognized by law with a distinctive name ,a common seal, common capital
comprising transferable shares carrying a limited liability and having a perpetual succession.

i) Corporation: It s that form of an Organisation which is Limited by liabilities and has a large
ownership.

a) It Can be a government Corporation formed by passage of a law i.e. MUNICIPAL CORPORATION

eg. Mumbai Municipal Corporation or
b) It can be a commercial body formed as per The Companies Act 56 but wholly owned by the
Government eg. Oil India Limited or
c) It can be a Public Corporation owned by the Government eg. Maharashtra State Finance
Corporation or
d) It can be a Public limited Corporation eg. Mahanagar Telephone Nigam Limited.

ii) Public Limited Company: It is that Organisation where the participation is from the Promoters
& General Public by way of equity shares. eg. Tata Iron & Steel Co. Ltd.

iii) Private Limited Company: It is that Joint stock company which is limited by both Liability &
membership (not more than fifty members) eg. XYZ Drugs & Pharmaceuticals Private Limited

iv) Cooperative society: It is an association of persons, usually limited by means, who have
voluntarily joined the organisation, making an equitable contribution to the capital required and
accepting a fair share of risks & benefits of the undertaking.

SOLE PROPRIETORSHIP

The earliest form of organisation is that of a sole trader. It has seen its place in the ancient
civilisations. In the late 18th century and after the industrial revolution, modernisation of agriculture
has seen the evolution of the trader as a middleman between the producer and the consumer. This
middleman slowly gave boost to production and the market shifted from the village to larger areas
and avenues.

MEANING AND DEFINITION

A sole proprietorship is an organisation which consists of a single owner. He uses his own skill,
 intelligence and labour for his exclusive benefit. At times he may employ additional persons to
assist him in the conduct of his business. This means that the business is solely owned, controlled
and managed by an individual. The individual utilises all his resources to input capital (including his
savings) and reaps all the entire profits/bears all the losses and risks of the business. The individual
represents all the factors i.e. land, labour, capital and organisation. The individual is free from
external interference and takes all his decisions alone. Such an individual is called as a sole
proprietor.

The individual or sole trader/proprietor obtains all of his initial capital from his own savings. He
may be assisted by his family members, friends and relatives for interest free loans for a longer
period to enhance the stability of his business. He may borrow capital from the bank for his project
against viable security. The individual gets goods on a short credit from the wholesalers (due to
his goodwill), attracts customers with his abilities and pays personal attention to his customers.
This limits his scope of his business to a community or specific business area. The liability is unlimited
and he has to pay for his debts even from his personal possessions, even though they may not be
his business assets. His organisational ability has to be very versatile and that is why it is a ONE
MAN SHOW

The Encyclopedia of Business & Commerce defines Sole Proprietorship as

" A SOLE TRADING CONCERN IS A FORM OF BUSINESS ORGANISATION, IN WHICH AN
INDIVIDUAL INVESTS ONLY HIS CAPITAL,USES HIS OWN SKILL & INTELLIGENCE IN THE
MANAGEMENT OF ITS AFFAIRS AND IS ENTITLED TO EARN ALL THE PROFITS AS ALSO
SOLELY RESPONSIBLE FOR ALL THE RISKS OF OWNERSHIP"

FEATURES OF A SOLE PROPRIETORSHIP

1. SINGLE OWNERSHIP OF BUSINESS: A sole proprietorship is a one owner organisation , it is

owned by an individual, a ONE MAN SHOW. He owns all the assets and puts in all the capital.

2. NO SHARING OF PROFITS & RISKS: A single owner/sole trader enjoys the fruits of his
proprietorship alone, but consequently he alone has to bear the risks involved in the business.

3. NO SEPARATE MANAGEMENT: The ownership & management are not separate. The
owner is the sole manager of his company all others are his assistants.

4. MINIMUM GOVERNMENT REGULATIONS: A sole proprietor is not governed by any special

government regulations except that of the laws governing the business venture. A person who is
of a sound mind, major and is not disqualified to conduct business by law can start any lawful
business under this form.

5. LEGAL STATUS: The sole proprietor and his organisation have the same legal status. Legally
they are not separate. Hence, the life of the sole proprietorship is dependent on that of its owner.

6. UNLIMITED LIABILITY: Since legally the sole proprietor and his organisation are not separate,
their liabilities are unlimited i.e. they extend on each other. If the business assets and properties are
not enough to pay the debts, then the sole trader will have to utilise his personal assets to pay the
debts.

7. AREA OF BUSINESS: Since the resources are limited the sole proprietor generally operates
locally i.e. in a community or a certain locality.

ADVANTAGES:

1. Ease of formation: It is a very simple to start the sole proprietorship, since no legal formalities
are involved except for the specific laws pertaining to the type of business ( Eg. Drug Licence for
opening the Drug store, Sales Tax Registration etc.)
2. Ease of Closure: As in the above case it is easy to dissolve the business activity as in the
formation. The Sole trader has to clear off all his liabilities and sell off the assets of the sole trading
concern so as to wind up the organisation. He does not have to specially intimate the
government authorities except for the surrender of the licences and cancellation of registration (which
is applicable in all cases).

3. Personal Contact with Customers: A sole proprietor takes special care of his customers, since he
is solely dependent on them for the survival of his business, he pays individual attention towards
them.

4. Personal Care: Since it his own organisation , he takes special care of his organisation, avoids
wasteful expenditure, reduces losses and employs personnel directly under him which gives a
personal touch to his organisation.

5. Business Secrecy: Since all the decisions are made by the owner himself , it is possible to
maintain utmost secrecy in the organisation. Except for the production of his books of records to
the Government authorities on demand, he need not divulge the information to any one.

6. No sharing of Profits: The sole proprietor does not share the profits of his organisation with
anyone.

7. Prompt Decision Making: A single owner is not answerable to anyone for any of his decisions
taken, hence he can take prompt decisions for exploiting business opportunities without delay.

8. Direct Motivation: A sole trader enjoys the rights of his profits, hence he knows how important it is
for his organisation to survive and thrive. This motivates him to input all his abilities , art and skill
for effective and efficient running of his organisation. Self interest is known factor for direct
motivation. It also brings in Job satisfaction and with enhanced profits it increases status hence
the sole proprietor is motivated directly.

9. Personality Development: There is a full scope for the development of personality. The individual
develops qualities like self reliance, initiative, sense of responsibility, social organisation and society
consciousness.

10. Economy & efficiency: The sole proprietor knows the direct bearing of the economy , efficiency
and profits. He reduces expenses and increases efficiency to maximise results (profits). He can
effect close and effective control over his employees directly with personal supervision. He avoids all
wastage -of time, money and manpower.

11. Diffused ownership: Since it is concerned with small, local, community service oriented
organisations which are spread over the entire length and breadth of the country, it can curb the
spread of capitalisation and concentration of power since the money is diffused with many
individuals.

12. Encouragement of Business Competition: A large number of sole proprietors operate in an

economy which leaves a scope of entry for any new proprietor for entering into business , thus
encouraging competition.

13. Better Co-ordination: Since the size of business is limited, better co-ordination can be
achieved by the sole trader in his business. There is no conflict of interests since it is single
ownership.

14. Minimum Government regulations: Sole trading concerns are least regulated by the
government , this is to promote self reliance and self sufficiency which is essential for economic
growth of the country The sole trader is not governed for any expansion, diversification or dissolution.

15. Flexibility of Business: The Sole proprietor enjoys the complete power to diversify, expand or
change the line of business, since he is not responsible to anyone but self, he can change the course
of his business to better profitable ventures or expand the same line of business by introducing
newer lines of merchandise.

16. Availability of Credit: The liability of the owner is unlimited hence it offers a certain consolation to
the supplier to extend credit to the sole trader.

17. Social Utility: Since it is small in size and is limited in organisation;Young, aged men, women
can earn a source of livelihood.

18. Service to Society: The sole traders have shops in small towns and villages. They try to go to
consumers wherever they are and supply them with the goods to meet their (consumers) demand
and choice. Also, the sole proprietor reduces the number of employments (there is no job substitution)
and helps in generating employment by increasing productivity (increases in the number of
jobs) thus, it helps the society by creating more jobs.

19. Training School for Business: As a child goes to a nursery to expose himself from the parents
in another environment. Similarly Sole proprietorship offers an individual to expose himself to
various aspects of business before he takes a giant leap in large businesses.

20. Benefit of self employment: A sole proprietorship provides an individual for the basis for
independent livelihood for many persons who have business ability and professional drive.

21. Low tax liability: A sole trader is taxed at a single source (i.e. the income of the sole proprietor
is merged with that of the owner and then taxed , there is no separate taxation on the income of sole
proprietorship.

DISADVANTAGES OF SOLE PROPRIETORSHIP :

1. Limited Capital: An individual always has limited resources. He can generate funds from his
personal savings, borrowings from family, friends and relatives. The extent of borrowings are
limited, this limits the scope of expansion of his business.

2. Limited Managerial Capabilities: Since sole proprietorship is a one man show, the extent of
management is restricted to the owner whose organisational and managerial capabilities are limited.
This, even if assisted by employees (who work in accordance to their pay and initiative) gives
the sole proprietorship limited scope for growth.

3. Unlimited Liability: The liability of the Sole proprietor is UNLIMITED, this leads to an orthodox
management where the amount of risk taken by the owner of the organisation is limited and hinders
the growth/expansion of the organisation. The owner plays safe so as not to lose his personal
savings. The obligations of debts of business prevent the owner from introducing newer methods
and processes of business management.

4. Limited Supervision: It is extremely difficult to execute all the business decisions by an individual
eg. Purchasing, Sales, Sales Promotion, attending to buyers and suppliers simultaneously, social
obligations and pay attention to the family etc. cannot be run by an individual thus limiting the
supervision on major or important areas of business.

5. No Consultation: Generally one man's thinking is not always correct, it is always better to
have an opinion on sensitive decisions. But the sole proprietor does not have anyone except
employees to consult before taking such decisions so he either takes the decision in haste in order
not to lose the business opportunity or doesn't take at all from the fear of loss. This limits the areas
of business and expansion of business.

6. No Legal Status: There is no special legislation for recognising the sole trader as is the case
with partnership or the Joint stock company. The sole proprietor's firm and the sole trader are
inseparable.

7. No Stability to the Organisation: The existence of a sole proprietorship depends only on the
life of the owner. Its existence is dependent upon the well being of the sole trader. Thus sole
proprietorship is a discontinuous form of organisation.

8. No Division of Labour: Since all of the work is burdened upon one individual (i.e. sole proprietor)
there is no division of labour. All of the work pertaining to his business has to be done by the sole
proprietor.

9. Uneconomic Size of Organisation: A sole proprietor cannot expand due to limited finance and
manpower, this limits the role of the sole proprietor as a small businessman in the community. This
also does not gives a chance to exploit ones' potential to full growth in the society. Since he
cannot economise on large scale purchases or get discounts on larger purchases it limits his
earnings or income.

10. Monotony & Hard work: The desire to have the fruits of business tend to make the single owner
to input maximum time, efforts, and money in his organisation neglecting his family and social life.
This leads to long hours of work, monotony and cut-off from the society. This has an adverse effect
on his family life.

LIMITATIONS AND SCOPE OF A SOLE PROPRIETORSHIP AS BUSINESS FORM

A sole Proprietor was the most popular form of business before €industrial revolution. but, after
industrialisation availability of goods on a large scale accross a wider area promoted the other forms
of organisations. This restricted the operation of sole proprietorship to certain circumstances some of
them are:

a) Limited scale of business or catering to the local market: When a business has to be carried out in
a limited area or on a small scale, it requires limited managerial abilities and a small capital e.g. A
Drugs Store/ Pharmacy. A sole trader /Pharmacist owner can manage it more effectively and
efficiently.

b) Business activities requiring high personal skills: Businesses like Pharmacy which requires to be
run by a Professional or a craftsman or an artisan also manages his work independently.

c) Business requiring limited managerial skills: Businesses such as vending of fruits or vegetables
or managing a lending library or a fruit juice center/stall etc require low managerial capabilities and
are simple and easier to handle solely.

d) Personal Care & service: Businesses like Tailoring/ clothing require a personal touch of the
owner, a customer always wants care and personal attention. This is possible in a sole
proprietorship who can add a personal touch to suit the taste and liking of the customer.eg. Share
Broking/ Stock Broking firm.

e) Fluctuations in business: Businesses prone to fluctuations such as dealing in stock, bullion where
immediate decisions are to be taken in a fluctuating market, sole proprietorship possesses
dictatorial powers, hence can take quick decision and prompt action.

f) Areas of Prevalence: In social economy or in large areas of business such as agriculture, sole
proprietorship is the most popular form of organisation

Summing up , a sole proprietorship form of organisation can thrive only when

(i) the business is small and simple
(ii) when it is local and
(iii) it requires special skill and modest capital.

PARTNERSHIP

The average business size has been ever increasing necessitating larger resources of man,
material, machines, money and management. All these resources require that all processes of the
business are properly combined and co-ordinated to produce goods and services to the
expectations of the modern customer. Obviously it is beyond the capacity of an individual
businessman or a professional who has limited means and abilities.

It is sometimes true that a professional may have the skill, ability and expertise but may not possess
the finance, at the same time there may be individuals who have surplus funds at their disposal but
do not have lucrative areas to invest. These needs if combined would result in an effective
organisation and satisfy both the individuals.

Thus Partnership may result from the need for

i. More capital

ii. More managerial ability

iii. Dilution of risks

iv. Professional expertise or Legal Requirement (e.g. Pharmacy)

MEANING & DEFINITION

The Indian Partnership Act defines it as "the relationship between persons who have agreed to
share the profits of a business carried on by all or any one of them acting for all".

It can be defined as an association of individuals competent to enter into contract, who agree to carry
on a lawful business in common with a view to earning and sharing profits. The persons who are the
owners are termed as "PARTNERS" and collectively known as a "FIRM". The name under which they
are operating is called as a "FIRM NAME".

CHARACTERISTICS & FEATURES OF PARTNERSHIP

1. PARTNERSHIP IS A RESULT OF AN AGREEMENT

a) Agreement (Contract) : Partnership is a result of mutual and voluntary agreement between
partners who are adults and not minors. The agreement is in writing and is not oral. It does not
spring from inheritance, succession or from operation by law.

b) Nature of Agreement: The agreement may be oral or in writing or it may be implied by the conduct
of business. However to avoid disputes it is in writing.

c) Number of Partners: Partnership has minimum of two partners and a maximum of TWENTYTWO
in case of ordinary business and TEN in business of banking.

d) Affixing stamps on the written agreement: In case the agreement is in writing, then non judicial
revenue stamps of appropriate value must be affixed (Rs 100.00) as per the provisions of the Indian
Stamps Act for the document to hold valid.

2. AGREEMENT TO CARRY ON A BUSINESS

The agreement has to have the current date for commencement of business it cannot have a
futuristic date for partnership nor can a old partnership be agreed upon on a current date eg.
an oral partnership of 1st April 1998 cannot be signed on a stamp paper which is of a later date eg.
1st May 1998. The Business word derives any lawful trade, business or a profession. The definition
of partnership also does not cover any kind of association as a club or a charitable institution.

3. SHARING OF PROFITS & LOSSES

a) Sharing of profits is an objective of a partnership business. The profits are shared upon by all the
partners at an agreed proportion. Generally, all the partners specify in the agreement of partnership
(deed of Co-partnership) as to when and how the profits are to be divided and shared between
them.
b) Sharing of losses: Losses are also shared by the partners according to the specifically agreed
proportion mentioned in the deed of co-partnership. However it is not essential that losses may be
shared as in the proportion of profit sharing. A person may be associated as a partner only on the
condition of profit sharing only and not sharing of the losses.

c) The binding of sharing of losses will be only on the partners themselves (and not their families,
relatives & friends) and it shall not absolve them from their individual and collective liability to third
party for all the debts of the firm.

4. NATURE OF RELATIONSHIP AMONG PARTNERS

a) Each partner: The partner is a principal partner and an agent for himself and others. He acts in
both capacities. He can bind the firm for his own acts and commitments and can be bound by act
of other partners. The business of partnership may be carried out by one acting for all or by all the
partners.

b) Joint Ownership: Each partner is a joint owner of the property of the firm. No partner may use the
firm's property for his personal benefit.

c) Joint Management: All the partners of the firm have equal rights of management. Each one of
them has a right to participate in the management. However, for the sake of convenience, the
rights of management may be given to one partner.

5. NATURE OF PARTNERS' LIABILITY

a) UNLIMITED LIABILITY: The liability of partners is UNLIMITED . It is defined as " The debts of the
firm are paid off from all the private property of the firm" , thus all the partners are jointly and
severally responsible for all of the firm's debts.

b) JOINT LIABILITY: Each partner is liable along with other partners for the debt of the firm,
whether incurred by himself or by other partners as agent of the firm.

c) SEVERAL LIABILITY: Each partner is individually and separately liable for the debt of the firm
whether contracted by himself or others as agents of the firm. However, the partnership firm may
not be held responsible for any of the personal liabilities of the partners incurred by them in their
personal capacity.

6. NON TRANSFERABILITY OF INTEREST

No Partner can transfer his share in the firm without the consent of other partners. No partner can
bring or admit anyone in the partnership firm without the consent of all the partners.

7. MUTUAL TRUST & CONFIDENCE

The liability of the partners of a partnership firm is unlimited. Hence, maintenance of utmost good
faith and trust by every partner is imperative. This means that only those persons who have an
implicit trust and confidence in one another should enter into partnership and then only will the
partnership be long lasting.

8. COMPULSORY DISSOLUTION

The death, insolvency or insanity of any one of the partners results in the dissolution of a
partnership in the absence of a contrary position. If all except one partner are declared insolvent
then the partnership gets dissolved.

The Partnership may be of two types 1) General Partnership (Unlimited Partnership) 2) Limited
Partnership or a Contract. Other smaller forms of partnerships are 3) Joint venture & 4) Co-ownership.

UNLIMITED PARTNERSHIP

The Indian Partnership Act does not permit the formation of limited partnerships. Generally all the
partnerships except if explicitly mentioned are of an unlimited period of time (i.e. AT WILL ). The
partnerships may be 1) Particular partnerships: where it is of a particular contract or work e.g.
finishing of a Construction work or for any offshore project etc. 2) Partnership for a fixed period:
where the time specificity of partnership is pre defined during formation i.e. five years or twelve
months etc.
3) A Partnership at will: Such partnerships are for an indefinite period and are terminable at will of
any of the partners. Any partner may terminate by a serving a written notice of one month in writing to
all the partners. The partnership stands dissolved whether or not the business is completed.

LIMITED PARTNERSHIP

This kind of partnership is allowed in European countries and USA and in UK by Limited Partnership
Act 1907.its main features are
1. It has two types of partners, namely special partners and general partners.
2. In limited partnership, there must be at least one partner with unlimited liability.
3. The registration of all limited partnerships is compulsory.
4. The liability of special partner is limited to the extent of capital contributed.
5. The general partners have the right of management and not the special partners.
6. A special partner cannot act as an agent on behalf of others and cannot bind the firm or partners
by his own act and commitments.
7. The death, insolvency, insanity of a special partner does not act upon the existence of the firm.
8. A special partner is not allowed to withdraw his capital during the lifetime of the partnership.
9. The special partner does not have a right of transfer of his share without the consent of general
partners.
10. The special partner may inspect the books of accounts and can advise the general partners in
regard to the conduct of business.

KINDS OF PARTNERS

1. Active Partner: According to the Indian Partnership Act all

partners are allowed to take part in the management. But in practice, one or two partners may take
an active part in managing day to day affairs. Such Partners are called " Active Partners ". They may
contribute capital, have full voice in management, they share all the profits and/or losses and are fully
liable for debts.

2. Dormant or Sleeping Partner: The do not take part in active management of the business.
They may contribute capital, surrender the rights to management, may share losses/profits and are
fully liable for the debts of the firm.

3. Nominal Partner:A person who may lend his name, goodwill and reputation to the firm. He
does not contribute capital, does not take part in the management, may or may not share profits/
losses , he may be paid a commission. However he is fully liable for the debt of the firm.

4. Quasi Partner: One who has retired from the management of the firm, but, he leaves his capital in
the firm, shares the profits/losses and is fully liable for the debts of the firm.

5. Secret Partner: Is a partner but not known to the outside world (including the business clients &
associates). He contributes capital, shares profits/losses, he surrenders the right to management,
and is fully liable for the debts of the firm.

6. Profit Partner: He shares only the profits and not the losses, he contributed capital, he may not
take part in management, but is fully liable for all the debts of the firm.

7. Sub Partner: He is a person who is a partner of a main partner of the firm , he is not a direct
partner of the firm at all. He does not contribute capital, does not participate in management and
does not share in profits/losses in the firm , but shares profits of the main partner. He is not liable to
the debts of the firm, but is liable only to the main partner. He is in direct agreement in partnership
with the main partner.
8. Partner by Estoppel: He is not a partner of a firm as per agreement of the firm. He behaves or
positively expresses himself as a partner. If any third party enters into an agreement with the firm due
to the impression created by this person, he will be held liable to any loss arising out of this
particular transaction. He is a partner by Estoppel. He does not contribute capital, does not
participate in management, does not share profits/loss, and is not liable for all the debts, except for
the loss arising out of his behaviour.

Minor Partner: According to Indian Contract Act, a minor is considered incompetent to enter into a
contract. However he may be admitted into a firm if he benefits a firm ("Child Stars") and with the
consent of all the partners. On attaining the age of a major he has a option of either being a full
fledged partner or discontinue. He can give a notice and terminate a partnership.

FORMATION OF A PARTNERSHIP

The formation of partnership takes place in two steps:-

1. Agreement and
2. Registration

AGREEMENT

Partnership evolves out of an agreement, between the partners, which may be oral or written. A
written agreement, though not compulsory by law, is always desirable to avoid any dispute. a written
agreement of partnership having the necessary stamp duty as per the Indian Stamp
Act 1899, is called the partnership deed or the Deed of Co-partnership. It contains all the
terms and conditions as regards to the operation and conduct of business. The partnership deed
contains most of the following points:

1. Name of the Partnership firm: It consists of the name of the firm along with the name and
addresses of the Partners and their occupation. The firm may contain any letters or words
derived from their names or any name provided it is not the name of any other firm so as to
mislead. It should also not contain the words "Crown", "Emperor", "Imperial", "Royal" or the State's
Name without the prior consent of the state or the central government.

2. Nature of Business and duration: The name should describe the nature of the business. While
describing the nature of the business, it should be clearly mention whether it is to be carried on with
a particular objective or it is general in nature The duration of the partnership ( at will or for a period )
is also specified in this clause.

3. Contribution of Capital: The amount of capital to be contributed by each partner and the manner
in which it is to be contributed is mentioned in this clause. Although it is not necessary that all the
partners contribute the capital it is generally implied.

4. Sharing of Profits: The manner in which the profits shall be shared or distributed is mentioned in
this clause. It also mentions the manner in which loss (if any) is to be distributed among the
partners. If it is not mentioned then it is presumed to be equal among all partners.

5. Operation and Responsibilities of Partners: The duties and responsibilities of each partner
are mentioned in this clause. The extent to which each partner shall be involved in decision making
is also mentioned in this clause.

6. The drawings of each partner periodically , at one time and annually shall be mentioned in the
partnership deed.

7. The salaries to be given to each partner along with the increment in salary to be provided in a
predetermined period is also mentioned.

8. Expenses: Various expenses that are incurred by individual partners in the business and their
upper ceiling is also mentioned (if any).
9. Accounting, Banking and Financial commitment: Each partners financial responsibilities,
banking and financial commitments are made specially such that the partners take part in the
decision process that affect the financial commitments to the bankers and the creditors.

10. Withdrawal of merchandise for personal use: It is important that the goods are not withdrawn
from the business for personal use and if they are withdrawn then the quantity should be minimum
so as not to affect business opportunities and loss to the organisation, but at the same time the
partners should have the benefit of low cost buying of merchandise for their family use.

11. Dissolution of Partnership: The terms and conditions for the continuation of Partnership are
described and circumstances under which the partnership may be terminated.

12. The Goodwill of Partnership: The enhanced asset value of the organisation , business
goodwill , trade marks, patents and registrations of the firm its method of calculation and
valuation for the purpose of allowing the dilution of partnership or dissolution.

13. Appointment of Arbitrator: The Partnership deed also defines the conditions under which an
arbitrator shall be appointed and the scope of work of the arbitrator. The arbitrator may be a single
person agreeable to all the partners in the case of dispute or more than one arbitrator agreeable to
all the partners. The decision of the Arbitrator is binding on all partners.

15. Right of Transfer of Partnership /dilution of partnership: The terms under which the partnership
may be diluted (i.e. new partners may be added) or the conditions under which a partnership may
be transferred.

16. Status of partnership on the death of one of the partners

REGISTRATION:

The Indian Partnership Act provides for the registration of firms. It is now compulsory to get the
partnership deed registered within a period of one year. An unregistered firm suffers from the
certain disadvantages which may make carrying on of the business difficult. The firm does not
have a legal standing in case of disputes in the court of law if it is not registered.

Procedure of Registration: The firm has to make an application to the registrar of firms giving the
necessary information accompanied by the prescribing fees. The information that has to be submitted
to is :
1. The Name of the firm
2. The name, addresses and qualification of the partners
3. The main place of business along with the branch addresses
4. The date on which each partner joined the firm.
5. The nature of partnership and its period.

The Registrar upon receipt of the application records the facts in his books. Then he will proceed for
registering the firm. Once Registered, if any change is effected then the report has to be given to
the registrar (It may be a change of name, addresses or the addition or deletion of partners)
within thirty days. Also in the case of dissolution of partnership it has to be intimated within 30
days in writing to the registrar of firms.

ADVANTAGES OF PARTNERSHIP

1. Ease of formation: No legal formalities are required except that of formation of a partnership deed
on an appropriate stamp paper (Rs 100), following which the registration can be done in a period of
one year.

2. Ease of Closure: Since the Partnership does not have any legal provisions for registration
except with notification to the registrar of firms , it is possible to close the partnership at will.
3. Availability of Capital: Since now there are more than one persons owning the organisation, more
resources (capital) are available.

4. Improved Managerial Capabilities : Since partnership is an association of more than one

persons, It can therefore secure more ability for managing the firm.

5. Division of Labour: AS there are more than one partners, there can be a division of labour which is
not possible in sole proprietorship.
6. Pooling of Ability and Capital: Since there are more than one persons required for partnership
, there is a possibility that the abilities of one partner may be combined with the capital of another
partner thus turning a business opportunity into realty.

7. Decision Making: Since there are more than one partners the quality of decision making is
markedly improved as there is a scope for discussion between two persons and sharing of views
and ideas, but there is a possibility that slightly longer (although insignificant practically) time may
be involved in decision making.

8. Flexibility of operation: The partnership firm enjoys a greater degree of freedom with regards to
operation of business (as compared to a joint stock company).

9. Freedom in Administration: Since a partnership is not subject to government control it enjoys a

greater freedom in administration.

10. Personal Care: Since the daily management of the firm is directly linked to profits, there is an
increased efficiency and economy in operations.Since the management is linked with ownership
,there would be a greater input in the firm and the partners will provide a personal care and
touch to the organisation.

11. Dilution of Risk: As there are more than one person the risk of business is diluted as compared
to a sole proprietorship.

12. Secrecy of business: A partnership firm is not required to publish its books of accounts as is the
case with a joint stock corporation. The secrecy of business can be maintained between the partners.

13. Personal contact with customers: Since there is a division of labour it is now possible in a
partnership firm to maintain contact with the customer even if one partner is away for some other
business work.

14. Social Life: It is possible in partnership for a partner to be away from business for a brief period
to attend to social obligations within his community while the other partner looks after the business,
whereas in sole proprietorship either the business suffers or the social life suffers.

15. Availability of Credit: The liability of the partner is unlimited and several on the partner hence it
offers a certain consolation to the supplier to extend credit to the firm.

DISADVANTAGES:

1. Possibility of conflict of interest: With more than one person involved in a firm it is possible that
the interests of individuals may be different thus leading to conflicts and disputes, which may
cause an untimely dissolution of partnership.

2. Restriction on the Number of Partners: as the maximum number of partners is Twenty, the
liability cannot be further diluted and neither the more funds can be arranged.

3. Dilution of Profits: In sole proprietorship the profits are not shared whereas in partnership the
profits have to be shared between the partners in the predetermined ratio.

4. Limited Capital: The Partnership having unlimited liability cannot arrange for more funds except
by dilution of partnership which is limited to the number of partners and their resources to raise
funds.
5. Unlimited Liability: The liability of partners is unlimited, joint and several on each of the partners
and the partnership firm. A partner stands liable for his own action as well as for the other
partners. Since a partner has to part with his personal property and assets for the liability which
might be created by other partners as well, it discourages people to form partnerships.

6. Risk of Implied Authority: Each partner is an agent of his firm. All his decisions are binding on
his co-partners. This causes a certain risk to be carried by all partners.

7. Lack of Continuity: Since a partnership is terminable by notice or on the death of a partner or by

any affliction to any one of the partner (conviction by a court of law or mental affliction), it has very
limited life of organisation.

8. Double Taxation: The Partnership is levied double taxation i.e. Income tax is levied on both,
the partnership firm and income of individual.

9. Absence of Motivation: As in the partnership firm the profits are shared by all the partners,
although some of them may get even due to their non-participation. This could act as an hindrance
for those partners who bear all the tensions of different business problems.

LIMITATIONS & SCOPE OF PARTNERSHIP

A Partnership form of organisation is most suitable for small/medium scale businesses which has
limited market, limited losses (safe businesses), limited requirement of capital and modern
management e.g. Business trades like wholesale or retail trading, transport, warehousing, small
scale manufacturing, professional services such as clinics, chartered accountants, lawyers or legal
firms etc.

HINDU UNDIVIDED FAMILY BUSINESS

The joint Hindu family business is a special form of organisation also referred to as "Hindu Undivided
Family(HUF)". It can be considered as an extended form of Sole proprietorship or a special
form of partnership. It is that business which is passed on from generation to generation.

As per Hindu law, the business of a Hindu is inherited by male heirs in the same manner as his
property is passed on to his heirs. The inheritors of a joint family business are called co-partners.
The co-parcenary interests of an HUF is now also extended to the female members born in the
Hindu family. The concept of a joint family residing together is on the decline making the HUF form
of business less prevalent.

CHARACTERISTICS OF H.U.F.

1. Joint Hindu family business has two types of persons a) "KARTA" or the eldest male member of
the family. b) Co-partners or co-parceners.

2. The liability of the KARTA is unlimited but that of the co-parceners is limited

3. The KARTA has complete control over the a) Financial aspects of business.
b) property and assets of the business. c) Management of the business.

4. He has implied authority to borrow money, mortgage property or assets to raise money for
conducting business.

5. He is expected to carry on business in the best interest of all members of the family. He cannot
make personal gain or misuse funds for personal use.

6. The co-parceners have no right of management. However they can inspect the books of
accounts. They can participate in day to day activities to help the KARTA.

7. In case of disagreement of the co-partners with the 'KARTA', they can demand partition or division
of business.

8. If the firm is declared insolvent, the adult members only will be treated as insolvents and not the
minor co-parceners.

9. The death of the co-parceners do not affect the continuity of the business.

10. The H.U.F. is not governed by the Partnership Act , but comes under the ambit of the Hindu
Succession Act 1956.

ADVANTAGES OF HINDU UNDIVIDED FAMILY AS BUSINESS ORGANISATION

1. Created by the operation of the Hindu Law.

2. The eldest head of the family (Male) is the karta (Operator). Since he is eldest everyone obeys
him.

3. The number of members is not fixed as in sole Proprietor (One) or Partners (Not more than twenty
two), or Pvt. Ltd. Co. (not more than 50)

4. Profit sharing is not fixed (due to uncertainty in numbers of beneficiaries).

5. It is not discontinuous. (The karta is replaced by the next eldest male member of the family.

6. Admission by birth in the family.

7. Limited liability of the co - parceners.

8. Registration is not necessary. It is not required to protect even from third party liabilities.

DISADVANTAGES OF HINDU UNDIVIDED FAMILIES

1. Liability of the Karta is unlimited

2. Only male member (karta) has the implied authority whereas the female members of the family
does not have any real authority.

3. Only the Karta is Accountable. The other members of the family are not accountable.

4. The Karta is not responsible for accounts to the members of the family.

5. No legal or little legal control since operable only under Hindu law.

6. Declining social values is seeing the emergence of nuclear families, thus decline in H.U.F.

JOINT STOCK CORPORATION (COMPANY)

The Joint Stock Corporation is a distinct form of organisation which developed from the fruits of
industrialisation. The seeds of development began in the late eighteenth century. In the olden
times the manufacture of goods and commodities were on a local scale meeting the needs of the
rural/local market. This could easily be satisfied from the existing forms of business
organisations viz. Sole Proprietorship, or Partnership or from H.U.F. The complexity of industrial
operations such as mechanized production and movement of goods resulted in employment of a
larger work force and huge capital, Banking services became more prominent and the allied
services like insurance and transportation became more specialized. This was clearly out of
the purview of organizing and managing capabilities of conventional forms of businesses. This led to
formation of a more complex organisation with a high degree of organizing capabilities and
management. The people now employed were highly specialized and experts in their field of work
(Management). They would not necessarily invest funds in the organisation. This led to initially the
Unlimited form of a Joint Stock Company., which later evolved with limited Liability.

The first Company act was passed in India in 1850 by the British Rule. The Companies Act of free
India was passed on the Recommendation of the Bhabha Committee in 1956 by an act of Parliament.

DEFINITION AND MEANING OF "COMPANY"

ORDINARY DEFINITION : It denotes a group of individuals who are associated by any lawful
common objective, such as business, charity, research, entertainment, sports, social cause etc.,

DEFINITION AND MEANING : The companies act defines a Joint Stock Company under Section
566, as " A Joint stock company means a company having a permanent paid up or nominal share
capital of fixed amount, divided into shares, also of fixed amount , as held and transferable as stock
or divided and held partly in the other, and formed on the principle of having for its members, the
holders of these shares or that stock and no other persons.

LORD JUSTICE LINDLEY defines "Company" as a voluntary organisation 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 or loss arising therefrom. The common stock so contributed is denoted in
money and is the capital of the company. The persons who contribute it or to whom it belongs are
members of the company. The proportion of each individual is entitled as his share. The shares
together form the capital and is fixed. The share is generally transferable although under
circumstances it may be restricted.

It can be said "THE JOINT STOCK COMPANY IS AN INCORPORATED ASSOCIATION WHICH IS

AN ARTIFICIAL PERSON CREATED BY LAW, HAVING A SEPARATE NAME, A COMMON SEAL,
A SEPARATE LEGAL ENTITY AND PERPETUAL LEGAL SUCCESSION. THE LIABILITY OF THE
MEMBERS IS LIMITED."

ESSENTIALS OF A JOINT STOCK COMPANY :

1. LARGE CAPITAL WHICH IS DIVIDED INTO SMALLER PARTS CALLED SHARES.

2. THERE IS A BOARD OF DIRECTORS (MANAGEMENT) . THIS MAY BE DIFFERENT FROM

THE OWNERSHIP OF THE COMPANY.

3. THE SHAREHOLDERS MANAGE THE COMPANY BY TWO WAYS

i) DIRECTLY BY VOTING IN A MEETING OF THE COMPANY
ii) ELECTING THE BOARD OF DIRECTORS

FEATURES OF A JOINT STOCK COMPANY

1. Incorporated Association : Incorporated means registered. According to the Companies Act

any organisation (Company) has to be registered prior to the beginning of the Operations.

2. Artificial Person : A company is an artificial person created by Law. i.e. it is created by a legal
process and not by natural birth. It has its own legal responsibility. Its existence is distinct from its
members and directors. It acts as an artificial person. It can enter into contracts, buy and sell
assets or property hire people as employees. Even a member can enter into contract with the
company.

3. Created By Law : It is formed as per the rules and guidance of the Companies Act and after
registration it is regulated by the Law.

4. Separate Name : Every Joint Stock Company must have a separate distinctive name which is
displayed outside its business and registered premises.
 5. Common Seal : Since the company is an artificial person, it cannot sign on its own ( an individual's
identity), it has a common seal on which the name of the company is engraved.

6. Separate Legal Status : The company has a separate legal status independent from its
members. The share holders and the owners are not liable for actions taken by the company or its
board of directors.

7. Perpetual Succession : The Joint stock company has a continuity of life. it cannot be closed down
at will. Its existence is not linked with the life and/or death of owners or board of directors. It can be
wound up by a process of winding up or liquidated as initiated by the court of law.

8. Limited Liability : The financial liability of the owners is limited to the extent of the capital
introduced as shares.

9. Large Capital : Since it have a large number of owners, it has a larger capital available to meet its
financial requirements.

10. Shares : The ownership is divided into the number of smaller units called as shares, which are of
fixed unit price.which is called as the face value of the share. The shares are transferable but in
certain cases with restrictions.

11. Shareholders : The members who subscribe to the purchase of shares ( the owners ) are termed
as shareholders. These shareholders nominate or elect their representatives to the board of Directors.

12. Board of Directors : The board of directors are elected or nominated by due representation
of the owners of shares (share holders) depending upon the quantum of shares held
(proportional ownership) by the shareholders. The board of directors take part in the day to day
functioning of the Company and are the Decision Makers.

13. Separate Ownership & Management : As discussed earlier, the ownership need not
participate in the day to day functioning of the company and elect, nominate or hire number of
persons to be board of management to organize and supervise the affairs of the company. Such
persons are the Directors and are separate from the Ownership.

14. Large membership : Since a large number of people can subscribe to the share holding of a
Public Limited Company, there is no upper limit which causes diffuse ownership, whereas in a Private
Limited Company the upper limit is fixed at 50 persons.

15. Lawful Business : A company can conduct only such businesses as mentioned in its
Memorandum of Association. It cannot carry out any business outside the purview of the
memorandum of association.

ADVANTAGES OF A JOINT STOCK COMPANY

Larger Capital

A joint stock company, due to its large membership can generate a huge amount of capital. This
capital is available for a long period of time which the company can utilise for the establishment or
growth or diversification of the organisation. The funds contributed individually may be
small but collectively the funds become substantial for the organisation.

Scope for expansion

The company has a scope to expand business because of larger financial and managerial resource
base and it can retain the profits as reserves and surplus and reapply it back in business.

Perpetual Succession
When a company is incorporated, it gets a legal entity and a character of continuity and existence.
This can only cease by a process of winding up or Liquidation.
Transferability of Shares

The shares of a company can be easily transferred. A share holder can easily sell or seek transfer of
shares in another individuals name, thus ceasing to be a member of the company.

Diffused Risk

The ownership rights in a company organisation are diffused to a large number of share holders thus
diluting the risk of business.

Ownership and Risk

The ownership rights in a company are vested in a large number of share holders. The company
management can take big risks which cannot be taken by a sole proprietor or a partner of a firm. The
directors can take bold steps due to their expertise.

Risk commensurate to Gains

The capital may be divided into preferential, ordinary or equity shares. These shares carry
different amount of risks and earn for shareholders different amounts of gains by way of dividend.

Economies of Large Scale operations

Due to a large resource base,the company can procure large quantity of material, larger production
or sales and offers economies of operation.

Availability of Expert Services

Large scale of operations enable the company to hire services of experts and specialists.
Qualified people such as Chartered Accountants, Commercial Artists, Technical Consultants,
Sales Experts, etc., The Board of Directors may themselves be specialists of various fields .

Limited Liability

Due to limiting the amount of risk (Liability) , large number of persons can be induced to invest in
the equity of the company, thus creating a large resource base.

Taxation

There is a single point taxation for corporate with a single bracket thus reducing complicated
calculations as compared to individuals

Democratic Management

The Management is armed with authority for general operations, but the election of the management
is vested to the shareholders of the company. The directors are accountable and responsible to
the shareholders of the company.

Statutory Regulations

The company by virtue of legal formation through a process, has legal responsibility to the public thus
instilling confidence in the public and gaining patronage and healthy business management.

Adventurous Management

"High Risks High Profit" is well said but since the liabilities are limited and diluted over a large
number of shares the management becomes more adventurous to pursue better profits for the
company.
Greater mobility of Capital

Limited liability, transferability of shares and unlimited membership makes possible for a company to
attract more investors thus mobilizing large resource of finance.

Benefit to Society

Company form of organisation encourages diversion of saving of common man towards more
productive activities ( better economy ). It provides more opportunities for employment. The company
pays separate tax to the government adding revenue to the government. Economies of large scale
operations gives better quality and cheaper goods benefiting the customers at large and nation in
particular (Raise the living standards)

DISADVANTAGES OF A JOINT STOCK COMPANY

Cost of Formation : The Procedure of formation and promotion of a Company is complicated and
time consuming. It is expensive and requires services of experts such as under writers, share
brokers, bankers, chartered accountants, etc. It involves lot of legal formalities.

Lack of Personal Touch : A company organisation lacks personal element which is a prominent
feature of simpler form of business organisation. There is no direct contact of the owners with either
the customer or the employee. This leads to decrease contact and less interest in the organisation.
With increasing size of organisation, there is increase in the complexity of rules and regulations ,
widening the gap between the ownership and employees.

Lack of Personal Initiative : Management is in the hands of board of directors who are salaried
officers of the company, who may have their own priorities other than that of the company resulting
in lack of initiative. They may avoid responsibilities since they hardly benefit directly from
efficient working. This leads to lesser involvement and wasteful expenditure in the company.

Irresponsible Management : The concentration of authority is in hands of very few people. This
board of Directors may be separate from ownership. The company may benefit from Scrupulous
managers, however, the honesty and integrity of the promoters or directors may be questionable
and may misuse their powers and authority to amass wealth from the company.

Lack of Secrecy : All Joint Stock Company has to file several statements and returns eg.
Annual return with the registrar of Companies, Tax returns etc. They also have to circulate the
final accounts along with a report of directors and auditors about the performance of the
management and the company with the shareholders. It is mandatory for public limited companies to
seek approval of major decisions from the shareholders and also publish the financial results in public
newspaper every quarterly. These factors result in absence of maintenance of complete secrecy of
business matters and tends to affect competitive edge of the company adversely.

Concentration of Wealth and Power : In theory ordinary shareholders are the co-owners of the
company. But in practice, they rarely exercise their powers collectively. The majority of share
holding is concentrated in few hands and they command the running of the company. Although the
shareholders confirm the appointment of board of directors and the policy proposals made by
them , rarely there is active involvement. The reasons for such a situation are a) There can't be a
general body meeting of large number of shareholders. It can result in a difficult law and order
situations.

b) Shareholders are scattered through the length and breadth of the company and to spend a large
amount of money and time to attend the general body meeting may not be a sound decision.

c) Many shareholders may not be interested in the company except to obtain the financial dividend
or bonus from the company.

d) Some of the Directors may have Majority of the share holding by virtue of holding the shares in
the family, thus are in an enviable position and can command the running of the organisation.
Reckless speculation and misuse of secret information : The shares of the company are
transferable and marketable. This allows the management to manipulate the capital market due
to the accessibility to classified information (annual results ,Business profits, secrets etc.) . This
leads to speculation or fluctuation or rise in the share prices in the finance market. This may weaken
the confidence of the shareholder.

Conflict of Interest : Since the ownership and management are separate, there may be a conflict of
interest. The interest of the directors, the interests of the shareholders and the interest of the paid
managers may be different. In such situations the shareholders interests are likely to be
sacrificed.

Slow decision making : The decision making process is slow and delayed. For a major business
decision an agenda has to be set, the agenda has to be circulated amongst the directors and a
predetermined date and place of meeting at the convenience of all the directors is decided . The
meeting has to be conducted with minimum of a quorum and in its absence the meeting may be
adjourned to a later time or date. This consumes a lot of time and may result in loss of business
opportunity.This leads to red tapism and bureaucratic functioning, decreases the flexibility and
promptness of decision making.

Excessive legal Control : The company has to follow the comprehensive rules and regulations of The
Companies Act 1956. The procedures and rules may affect the smooth functioning of a company.
The officers of the company may shirk from responsibilities from the fear of penalization for non
compliance of the provisions of the act.

Restricted suitability : The company form of organisation may not be suitable for all types of business
activities involving quick decision making, business secrecy, etc. Services restricted to serving the
community on local nature involve small businesses which may not be profited from company form
of organisation.

Social ills : The company form of organisation is a capitalistic form involving concentration of power
and control in few hands. This may lead to widespread political corruption, and may kill the
general economy of the country.

It may be noted that although the company form of organisation suffers from the disadvantages of
misuse of power and mismanagement of the Board of directors. This may be removed by corrective
measures. Sound business policies along with diffusion of wealth can lead to a conducive
environment for attracting a large resource of wealth i.e. the common investor. This can lead to a
better economy of the country and impart a high degree of stability and growth with diffusion of risk
of loss. That is probably the reason for success of a joint stock company as a form of organisation.

FORMATION OF A JOINT STOCK COMPANY

The Formation of a jointstock company is a legal process and has to be completed under the reules
and regulations of the Companies Act 1956. There are two stages in the formation of a company viz.

1) Promotion

2) Incorporation
The steps beyond incorporation is to attract large investor base and increase the
shareholding.
The additional steps are

3) Inviting public for subscription.

4) Allotment of shares to the public.

5) Commencement of Business.
PROMOTION

The various stages of promotion are

1) Discovery of an idea and primary investigation. The Promoter begins with an idea to conduct a
business profitably. It may be a new invention, or on current trends of the market. He makes a
preliminary investigation to find out the worthiness of such proposals.

2) Detailed Investigation
The Promoter verifies the idea with detailed investigation on the project with specialists or experts
in the field, to estimate the capital requirement, manpower requirement, energy requirement etc., to
estimate the feasibility of a profitable venture.

3) Verification
The investigation done is not relied upon, but it is also compared with those existing in the field
and their performance, in-depth analysis of the project etc.

4) Assembling
The promoter then "ASSEMBLES" the entire proposition, gather another like minded financer to act
as founder, director for proposed idea.

5) Financing
After assembling the 'proposition' the promoter prepares a 'Prospectus' and may find
underwriters for the venture or fund on his own in the begining. The promoter then undertakes to
incorporate the venture.

INCORPORATION

The incorporation of a company involves many steps.

1) Seeking of availability of Name

The Promoter has to apply to the Registrar of the Companies in the state in a specified form 1A,
under rule 4A of the Companies General rules 1956. The promoter has to furnish the following details

a) Name and full address of the Promoter.

b) Proposed Name of the Company.
c) In case the above name is not available alternatively three more names in the order of
preferences.
d) Name and addresses of the Prospective directors (minimum two)
e) Main Objective of the Company proposed
f) Particulars of the names and addresses of existing companies in any of the same group of
individuals or management.
g) Proposed Authorised capital.
h) Any applications previously submitted.
i) Stature of the Proposed Company : whether public or private.
j) Justification of the Proposed Name.
k) Remittance of a fee of Rs 500.00

The Registrar of Companies shall inform the availability of the name to the promoter within thirty
days of application.

2) Acceptance of the Name

The promoter then has to specify in writing to the registrar for acceptance of the available name
which is then held in the name of the proposed for a period of 60 days to facilitate the promoter to file
an Article and Memorandum of Association.
3) Memorandum of Association

It is a duly signed , dated and stamped document of the company specifying

a) The Name of the Company

b) The state of Registration: eg. Maharshtra
c) i) The Principle Objective of the company
ii) The Secondary objectives to attain the principle objective
iii) Other objectives if any
d) The Proposed Capital to be raised
e) Limiting of Liability
f) The Names of the Directors along with Their addresses and proposed share capital duly signed as
accepting in presence of a witness. The minimum no. of directors is two for a private limited company
and seven for a public limited company. Each director has to promise to undertake at least one share
each in their name, they are also called as founder directors.

4) The Articles of Association

These are also similarly signed and declared as a document of the company. If it does
notprepare its own then it is deemed to have adopted the model Articles given in Table 'A' of the
Companies Act.
1) It includes the Interpretation of all the words and their meanings.
2) They also contain the meaning of the words "Private" or "Public".
3) The share capital of the company.
4) The powers vested with the Board of directors.
5) The First Directors of the company.
6) General Authority for the company.
7) Borrowing Powers.
8) Note on General meetings.
9) Seal of the company.
10) Clause of Secrecy.

5) Written Consent

All the persons desirous of forming the company and subscribing to the memorandum and articles of
association have to give a written consent for formation of the company, along with the minimum
numbers of shares subscribed by them.

6) Notice of Address

The Address for the operations of the company should be informed in writing within four weeks of
formation of the company.

7) Statutory Declaration

A declaration by a COMPANY SECRETARY or a SOLICITOR or a CHARTERED ACCOUNTANT

has to be signed giving the statement that all the provisions of the Companies Act are complied
with.

All the documents pertaining to the above mentioned clauses alongwith prescribed filing fees,
stamp duty charges and registration fees are to be submitted. The Registrar of Companies shall
scrutinize the documnets and enter the name in the register maintained for the purpose and issue a
certificate of incorporation under Form I R. After the issue of CERTIFICATE OF INCORPORATION
the company acquires its own name, seal and identity and can commence regular business.
CAPITAL SUBSCRIPTION AND ALLOTMENT

I FIRST MEETING

The first board of directors convene a meeting to

a) Appoint a chairman, managing director, banker, solicitor, Company secretary and statutory auditor
for the company.

b) Apply to the Security Exchange Board of India and the Controller of Issues for Public issue of
Shares after minimum subscription of 25% of the total authorised capital by the promoters.

c) To approve the common seal and

d) List shares in stock exchange by payning subscription and registration fees with the stock
exchange.

e) To enter into agreement with under writers , stock brokers and issue managers.

f) Prepare and approve draft prospectus of the company.

II Printing of prospectus

Copies of the prospectus are printed and one copy each is filed with the Registrar of companies,
Controller of public Issues, Security Exchange Board of India.(SEBI)

III Public Issue

Applications are invited from the public through issue managers and bankers. The applications are
scrutinized and sorted out. The shares are then alloted as per the prescribed guidelines issued by
SEBI.

IV Issue of Allotment Advice and Refund orders

Allotment letters and /or refund orders are sent outwithin 45 days of the issue along iwth any interest
on the amount subscribed if any.

V Issue of share certificates

Share certificates in marketable lots are then issued by the Issue Managers and sent to share holders
of the company.

VI Filing of Return

A return of allotment of shares and a list of shareholders of the company is filed with the Registrar of
Companies.

VII COMMENCEMENT OF BUSINESS

A public limited company cannot commence business till it receives certificate. The Board of
directors have to furnish the declaration of minimum subscription amount, declare the qualification of
directors in line with the articles of Association, Completion of allotment and other formalities to the
registrar of Companies who scrutinizes and issues the certificate.
 CO-OPERATIVE ENTERPRISES

The spirit of collective efforts are basic human instincts. The basic fear of life made man form a
cohrent group to exist in Nature. This made man survive through ages and progress. The needs of
man were satisfied in a small group i.e. clans, guilds, community, castes, manors,villages etc.,
there was a purpose of co-existence. This continued till industrialisation took place, which saw
progress, specialisation and factory system in trade. The spirit of Capitalism , concentration of power
in few hands, colonisation saw the erosion of the social fabric. This lead to labour exploitation,
unemployment, mass poverty and centralisation of power. The common man individually could not
come up with these forces. They all then united ("CO-OPERATE") to eradicate all the efforts of
Industrial revolution thus bringing in an era of Co-operative movement.

SCOPE AND DEFINITION

The meaning of the word co-operation are derived from the word co-operate which means to
work together , to labour together, to endeavour together for a common purpose.

The meaning of co-operation is defined by Internation Labour Organisation as " an association of

persons usually of limited means who have voluntarily joined together to acheive a common end,
through the formation of a democratically controlled business organisation, making equitable
contribution to the capital required and accepting a fair share of the risk and benefits of the
undertaking”.

According to Co-operative Planning Committee (1946) "Co-operation is a form of organisation in

which persons voluntarily associate togetheron the basis of equality for the promotion of their
economic interests which they cannot acheive by isolated action because of the weakness of the
economic position of a large majority of them. This element of individual weakness is overcome by
pooling of their resources, by making self help effective through mutual aid, and by strengthening
the bonds of moral solidarity between them".

The principles of co-operative society are:-

1) self help and independence
2) service and not competititon
3) Democratic control " One man one vote"

FEATURES OF A CO-OPERATIVE ORGANISATION

Voluntary Association

It is an association of persons and not on basis of capital as in a company. Any person can become
a member irrespective of caste, creed, religion, language or gender. The individual decides and
leaves on his own free will and wish without any compulsion.

Equal Voting Rights

Equality of voting rights is the main principle of this organisation. Each member has a single
vote irrespective of the number of shares held by him.

Service Motive

The main objective of the organisation is not profit but service to its members at least or economic
cost. Social welfare and upgradation of living standards are the important motives.

Limited interest on Capital

The investment in the co-operative society are not meant to earn interest but to meet the social need
collectively.
Distribution of Profits or surpluses

Although earnings are not the main objectives of a co-operative organisation, it must make some
profits for smooth running of the organisation. The surplus of profit after all the administrative
expenses are declared as a dividend to the members.

Cash Trading

The co-operative societies discourage credit trading, they deal in cash transactions in order to
maintain a good liquidity. State Control and Status. The society has to be registered under the Co-
operative Societies Act 1912. It attains the status under the Act with the Registrar of Co-operative
Societies and is bound by the laws and bye laws of the Act and rules made thereunder.

Political and Religious Neutrality

The Co-operative society is meant for all types of individuals of the society irrespective of any
political affiliation or religious beliefs. The common factor of association is unity and one common
objective for the betterment of society.

Society services

The Co-operative society does not differentiate non-members from members in terms of offering
services or goods. The members do not charge for the services rendered. The Transactions are
based on honesty and purity. These increase human values.

ADVANTAGES OF CO-OPERATIVE ORGANISATION

1. Ease of formation

The formation of a co-operative society is easy and does not involve much legal formalities like
joint stock company. Minimum Ten members are required, Adults (Majors in age), can join together
and register the society with the registrar of Cooperative Societies

2. Open Membership

The formation of a cooperative organisation is open to all members of the community

irrespective of caste, creed, religion, political affiliation, gender etc.

3. Democratic Management

The cooperative organisation is managed by all the members of the organisation and each member
has a right to one vote irrespective of the number of shares held by him. This gives rise to equality
of functioning and the capitalistic nature of organisation (Control of wealth and power) are removed.

4. Limited Liability

The liability of the member is limited to the contribution in share holding of the society. The
liabilities of the society are not extended on the personal property of the individual member.

5. Voluntary Association

The co-operative organisation is a voluntary association. Each €member is free to join or leave the
organisation.

6. Stability and continuity

As with a joint stock company, a co-operative society has long, stable continuous life. It has
perpetual succession and death, lunacy, insolvency do not affect its stability or continuity.
7. State Patronage

Cooperatives are used as a tool for socio-economic development by the state. They get assistance
from the state in terms of legal and financial aid.

8. Self financing

The entire profits are not shared between the members, but reserves are created to fund the
organisation.

9. Low Price

Since the service of the members is free, the administrative costs are reduced, and since the
organisation works for largely the benefits of the community, the profits are bare minimum,
Hence the cost of goods or services are the least without affecting the quality.

10. Economic Justice

The dividend is declaredas per the business transactions of the individual members and not only on
the contributions made by them. This promotes economic justice.

11. Suitable for weaker sections

The purpose of cooperative is based on upliftment of individuals who are economically backwards
means that it is meant for the weaker sections of the society.

12. Diffusion of Economic Power

The co-operative societies are handed by a large number of people, hence it reduces undue
concentration of wealth and income in few hands. This promotes social economy keeping a check on
evils of monopoly, profiteering, hoarding, adulteration, black marketing, control and capitalistic
economy.

DISADVANTAGES OF COOPERATIVE SOCIETIES

1. Limitation of Capital

The finance can't be raised in large amounts because the contributors are generally weaker
members of the society and have limited resources and means. Besides investors are not attracted
since dividend or profit is not the motive.

2. Excessive State Control

The cooperatives are controlled by the state. They do not enjoy the freedom as other forms of
organisations thus limiting their role.

3. Inefficient Management

Since the running of the society is by its members, it is possible that the members may be
incapable or inefficient. Also, the state of the finances do not permit the members to employ experts
in the feild.

4. Absence of Secrecy

It is not possible for the society to maintain secrecy of the business as the affairs of the company
are open to all its members.

5. Conflicts
There is a possibility of role conflict within its members, this may hamper the progress of the society
towards the main objective. Also few influential people may control the management and functioning
of the organisation.

6. Absence of Motivation

Since there in no remuneration for services provided by its members, it is possible that the
members and staff are not motivated.

7. Interference of Politics

Since it is a democratic organisation the society becomes a platform for serving the political
interests of political parties. The political leaders enjoy a large base in the masses and are elected to
the management easily and can then further their political interests neglecting the interests of the
societies.

8. Instrument of Capitalism

Although it is democratic in nature, but because power is vested in fewer hands , it is vulnerable to
political and capitalistic bosses in the organisation who may divert the funds or benefits of the
organisation for personal use.

9. Limited size

Due to limitations in size of a co-operative ( Local community based) rather than a company form
of organisation, it suffers from lack of and economies of large scale operations.

Cooperative societies are seen in every sphere of life for a common man. It acts as a role model
form of organisation to counter the evils of capitalism and promote human bond of togetherness. It is
seen in various forms such as

i) Coperative Credit Societies

ii) Agicultural credit societies
iii) Co-operative milk federations
iv) Consumers co-operatives
v) Producers cooperatives
vi) Marketing Co-operatives
vii) Co-operative housing Societies