MEFA UNIT-III (II PArt)

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UNIT-III

Business Organizations:

Meaning: A business undertaking is an organization through which business activities are


carried out. Different terms are used to denote the idea of a business undertaking. Ex: a business
concern, firm, enterprise, company, mill, factory, plant, shop etc.

Types of Business Organizations: On the basis of ownership business organizations are broadly
classified into three categories. They are:

A. Private Sector Enterprises: A private sector enterprise is a form of business that is owned,
managed, and controlled by an individual or a group. Private sector enterprises are different
types such as sole proprietorship, joint Hindu family, partnership, cooperative society, and
Joint Stock Company.

B. Public Sector Enterprises: A public sector enterprise is one which is owned, managed and
controlled by the central government or state government or any local authority. In a public
enterprise, government contributes the whole or major part of the capital. Ex: Postal,
Railways, FCI, LIC, BHEL etc.

C. Joint Sector Enterprises: This type of enterprise is one which is owned, managed and
controlled jointly by the private entrepreneurs and the government. Ex: Maruti Udyog
Limited.
Factors affecting the choice of form of business organization: Before we choose a
particular form of business organization, let us study what factors affect such a choice? The
following are the factors affecting the choice of a business organization:

1. Easy to start and easy to close: The form of business organization should be such that it
should be easy to close. There should not be hassles or long procedures in the process of
setting up business or closing the same.
2. Division of labour: There should be possibility to divide the work among the available
owners.
3. Large amount of resources: Large volume of business requires large volume of
resources. Some forms of business organization do not permit to raise larger resources.
Select the one which permits to mobilize the large resources.
4. Liability: The liability of the owners should be limited to the extent of money invested in
business. It is better if their personal properties are not brought into business to make up
the losses of the business.
5. Secrecy: The form of business organization you select should be such that it should
permit to take care of the business secrets. We know that century old business units are
still surviving only because they could successfully guard their business secrets.
6. Transfer of ownership: There should be simple procedures to transfer the ownership to
the next legal heir.
7. Ownership, Management and control: If ownership, management and control are in the
hands of one or a small group of persons, communication will be effective and
coordination will be easier. Where ownership, management and control are widely
distributed, it calls for a high degree of professional’s skills to monitor the performance
of the business.
8. Continuity: The business should continue forever and ever irrespective of the
uncertainties in future.
9. Quick decision-making: Select such a form of business organization, which permits you
to take decisions quickly and promptly. Delay in decisions may invalidate the relevance
of the decisions.
10. Personal contact with customer: Most of the times, customers give us clues to improve
business. So choose such a form, which keeps you close to the customers.
11. Flexibility: In times of rough weather, there should be enough flexibility to shift from
one business to the other. The lesser the funds committed in a particular business, the
better it is.
12. Taxation: More profit means more tax. Choose such a form, which permits to pay low
tax.

SOLE-PROPRIETORSHIP:

Definition: “A sole proprietorship is a form of private sector enterprise that is owned,


managed and controlled by an individual entrepreneur”. Such individual entrepreneur is called
as sole-proprietor. The sole proprietor arranges the finance, manages the business affairs, takes
the profits or bears the losses.

Features of Sole Proprietorship:

1. Individual ownership: Solo-Proprietorship form of organization is owned by an


individual.
2. Individual Management and Control: It is managed and controlled by the sole
proprietor.
3. Individual Financing: Such organization is financed by an individual person.
4. Unlimited Liability: The liability of sole proprietor is unlimited. If the business assets
are not sufficient to meet the business liabilities, his private assets are to be used to
discharge the business liabilities.
5. Minimum Government Regulations: There are minimum government regulations to set
up such form of organization. Ex: we can start a fruit stall without much legal formalities.

Advantages of Sole Proprietorship:

1. Easy to Start and Easy to Close: Formation of sole proprietorship is very easy. Even
closing the business is also easy.
2. Personal Touch with Customer: It is possible for the sole-proprietorship to have
personal contact with the customer and understand his tastes and preferences and
maintain required stock.
3. Quick Decisions: Sole proprietor is the owner of the business. So there is no need to
consult any other person before taking any decision regarding his business. Therefore,
quick decisions can be taken by him.
4. Business Secrecy: Full secrecy can be maintained since business secrets are known to
proprietor only.
5. Total Control: The ownership, management and control are in the hands of the sole
proprietor and hence it is easy to maintain the hold on business.
6. Sole Beneficiary of Profits: All the profits of the business belong to the sole-proprietor.
This motivates the proprietor to work hard and develop the business to get more profits.
7. Suitable for Small Scale Operations: The sole proprietorship is very suitable for small
scale operations.

Disadvantages or Limitations of Sole Proprietorship:

1. Unlimited Liability: The sole proprietor has an unlimited liability. If the business assets
are not sufficient to meet the business liabilities, his private assets are to be used to
discharge the business liabilities.
2. Limited Financial Resources:The sole proprietor has a limited capital and has limited
capacity to raise funds because of limited personal assets. This limitation reduces the
scope for expansion and growth of business.
3. No Division of Labour: Sole proprietor being the only person handling the business, will
not enjoy the benefits of dividing the work among specialized labours. Anyhow, a sole
proprietor can appoint people to help him, but the number of such people could be less
taking into account.
4. Uncertainty: A sole trade business will exist only till the existence of the sole trader. In
case of his death, insanity, the business may come to an end.
5. More Competition: Because it is easy to start small business, there is a high degree of
competition among the small business men.
Partnership:

Introduction: Partnership form of organization is an improved version of sole proprietorship.


Where there are like-minded persons with resources, they can come together to do business and
share the profits/losses of the business in an agreed ratio. Persons who have entered into such an
agreement are individually called ‘partners’ and collectively called ‘firm’. The relationship
among partners is called a ‘partnership’.

Definition:

“The relationship between two or more persons who agree to share the profits
of the business carried on by all or any one of them acting for all is called as partnership”.

__ The Indian Partnership Act 1932(Section 4)

Features of Partnership:

1. Two or More Persons: There should be two or more number of persons.


2. Agreement: There must be an agreement to form a partnership. This agreement may be
whether written or oral.
3. Business: There should be a business. For example when two or more persons agrees to
share income of a joint property, it is not partnership because, there is no business.
4. Carried on by All or Any one of Them Acting for All: In this form of business, the
business can be carried on by all or any one of the persons acting for all.
5. Sharing of Profits: In this form of business partners should share the profits or losses
derived from the business.

Merits / Advantages of Partnership:

1. Easy to Form: A partnership form of organization can be started with an agreement


between the partners. No legal formalities are required.
2. More Financial Resources: A partnership facilitates pooling of financial resources of its
entire partner. Therefore the financial resources available are large, when compared to
sole-trade business.
3. Sharing of Risk: The burden of loss, if any borne by all the partners, which make
partnership less risky, when compared to sole proprietorship.
4. Better Decision Making: The decisions taken by a partnership firm can be better
because, opinion of all the partners is taken into account. Unlike sole-proprietorship
where only one person takes a decision with the limited knowledge he has.
5. Democratic Management: All the partners, irrespective of their contribution to the
capital of the organization, will have equal right in the management of the business.
6. Flexibility: The operations of a partnership firm are flexible because, there is no need for
any prior permission from the government before making any change in the business
activity, capital etc.

Disadvantages of Partnership:

1. Unlimited Liability: As in the case of sole proprietorship, the liability of partners, in a


partnership firm, is unlimited. It implies that the private property of the partner’s can also
be assigned for obligations of business.
2. Limited Resources: The resources of a partnership business are more when compared to
sole proprietorship. But they are very less as compared to a joint stock company.
3. Mutual Distrust: The differences between partners may become failure for a partnership
firm. Lack of confidence in each other may be the cause of these differences.
4. Limitation on Transfer of Share: No partner has the right to transfer his share to any
other party, without the permission of the other partners.
5. Instability: A partnership firm can be dissolved at the death, insolvency or insanity of a
partner. This makes it very instable.

Partnership Deed: The written agreement among the partners is called ‘the partnership deed’.
It contains the terms and conditions governing the working of partnership. The following are the
contents of the partnership deed:

1. Name of the Firm


2. Names and Addresses of partners
3. Nature of the Business
4. Duration
5. Total amount of capital and contributions by each partner
6. Profit sharing ratio among the partners
7. Procedure for dissolution of the firm
8. Procedure to be followed while admitting a new partner
9. Rate of interest to be allowed on capital
10. The amount of salary or commission payable to any partner
11. Allocation of responsibilities of the partners in the firm

Types of Partners:

1. Active Partner: An active partner is one who takes active part in the day-to day
operations of the business. He is also called working partner.
2. Sleeping Partner: Sleeping partner does not take part in working of the business. But
he contributes capital, shares profits and losses.
3. Nominal Partner: Nominal partner is partner just for namesake. He neither contributes
to capital nor takes part in the affairs of business. Normally, the nominal partners are
those who have good business connections, and are well places in the society.
4. Partner by Estoppels: Estoppels means behavior or conduct. Partner by estoppels gives
an impression to outsiders that he is the partner in the firm. In fact be neither contributes
to capital, nor takes any role in the affairs of the partnership.
5. Partner by holding out: If partners declare a particular person (having social status) as
partner and this person does not contradict even after he comes to know such
declaration, he is called a partner by holding out and he is liable for the claims of third
parties. However, the third parties should prove they entered into contract with the firm
in the belief that he is the partner of the firm. Such a person is called partner by holding
out.
6. Secret Partner: The membership of a secret partner is not disclosed to the public. But, a
secret partner can take part in the working of the business.
7. Minor Partner: A minor is person who is below the age of 18years. Minor can be
admitted as a partner can also be given a share in the profits of the business. But, he
cannot be asked to bear the losses.
Rights of Partners:

Every partner has rights. They are:


(a) To take part in the management of business
(b) To express his opinion
(c) Of access to and inspect and copy and book of accounts of the firm
(d) To share equally the profits of the firm in the absence of any specific agreement to the
contrary
(e) To receive interest on capital at an agreed rate of interest from the profits of the firm
(f) To receive interest on loans, if any, extended to the firm.
(g) To be indemnified for any loss incurred by him in the conduct of the business
(h) To receive any money spent by him in the ordinary and proper conduct of the business of
the firm.

JOINT STOCK COMPANY:

The drawbacks of sole-proprietorship and partnership gave rise to company form of


organization. The first joint stock company was started in Italy in 13 th Century. In India the first
companies Act was passed in 1850. In 1956, a comprehensive act was passed, which is still in
existence.

Definition: “A joint stock company is a voluntary association of persons for profits whose
capital is divided into transferable shares and ownership is required for its membership”

Features of Joint Stock Company:

1. Artificial Person: A company is an artificial person created by law. It has its own name
and seal. It can perform all the activities of business like purchase and sale of goods etc.
2. Voluntary association of persons: It is a voluntary association of persons who want to
carry on business for profit. To carry on business, they need capital. So they invest in the
share capital of the company.
3. Capital is divided into shares: In this form of business total capital is divided into a
certain number of units. Each unit is called a share.
4. Common Seal: It is an artificial person created by law has no physical shape, it can not
sign its name on a paper. So, it has a common seal on which its name is engraved.
5. Management and Ownership in separate hands: Shareholders are the owners of the
business. But they do not manage the business. The board of directors appointed by
them to manage the company.
6. The name of the company ends with ‘limited’: It is necessary that the name of the
company ends with limited (Ltd.) to give an indication to the outsiders that they are
dealing with the company with limited liabilities.

Advantages of Joint Stock Company:

1. Limited Liability: The shareholders have limited liability i.e., liability limited to the
face value of the shares held by him.
2. Transferability of shares: When in need of money, a shareholder can transfer his
share in the company to any persons by following the procedure laid down for such a
transfer.
3. Availability of Large resources: As the capital is collected from the public, by
selling the shares in the primary market, a company enjoys the benefit of large
resources.
4. Stability of Existence: The Company has perpetual existence. Its existence is not
affected by death, insolvency of any of its members.
5. Efficient Management: The affairs of the company can be managed efficiently since
the company is in a position to employ experts as professional managers due to
availability of large amount of funds.
6. Economies of Large Scale Production: With the availability of huge capital and
management expertise, a joint stock company enjoys economies of marketing,
production, specialization, etc.
Disadvantages of Joint Stock Company:

1. Difficulty in Formation: In order to start a company many legal formalities are to be


fulfilled. These formalities can be very expensive.
2. Delay in Decision Making: In a company form of organization decision making will be
very lengthy. No single individual can take any decision. Only the board of the director’s
can take decisions, which can be ratified by the shareholders in the annual meeting.
3. Lack of Secrecy: When compared to other form of business, a company form of
organization may not be able to maintain secrecy. Every matter has to be informed to the
shareholders, which may not remain secret thereafter.
4. Separate Ownership and Management: The management and the owners of the
company are not directly related. Management unlike sole proprietorship and partnership
may not take personal interest in the growth of the company.

Formation of Joint Stock company:

There are two stages in the formation of a joint stock company. They are:
(a) To obtain Certificates of Incorporation
(b) To obtain certificate of commencement of Business

a) Certificate of Incorporation: The certificate of Incorporation is just like a ‘date of


birth’ certificate. It certifies that a company with such and such a name is born on a
particular day.
b) Certificate of commencement of Business: A private company need not obtain the
certificate of commencement of business. It can start its commercial operations
immediately after obtaining the certificate of Incorporation.

The persons who conceive the idea of starting a company and who organize the
necessary initial resources are called promoters. The vision of the promoters forms the
backbone for the company in the future to reckon with. The promoters have to file the
following documents, along with necessary fee, with a registrar of joint stock companies
to obtain certificate of incorporation:
(a) Memorandum of Association: The Memorandum of Association is also called the
charter of the company. It outlines the relations of the company with the outsiders. If
furnishes all its details in six clause such as (ii) Name clause (II) situation clause (iii)
objects clause (iv) Capital clause and (vi) subscription clause duly executed by its
subscribers.
(b) Articles of association: Articles of Association furnishes the byelaws or internal rules
government the internal conduct of the company.
(c) The list of names and address of the proposed directors and their willingness, in writing
to act as such, in case of registration of a public company.
(d) A statutory declaration that all the legal requirements have been fulfilled. The
declaration has to be duly signed by any one of the following: Company secretary in
whole practice, the proposed director, legal solicitor, chartered accountant in whole time
practice or advocate of High court.

The registrar of joint stock companies peruses and verifies whether all these documents
are in order or not. If he is satisfied with the information furnished, he will register the
documents and then issue a certificate of incorporation, if it is private company, it can
start its business operation immediately after obtaining certificate of incorporation.
PUBLIC SECTOR ENTERPRISES: A public sector enterprise is one which is owned, managed and
controlled by the central government or state government or any local authority. In a public enterprise, government
contributes the whole or major part of the capital. Ex: Postal, Railways, FCI, LIC, BHEL etc.

Features of Public Sector Avoiding Exploitation:


Enterprises: Need for the Public Problems of Public
Enterprises: Enterprises:
Managed by the government: Economic Growth: Political Interference:
Provision of Public Utilities Creating Employment Accountability:.
Implementation of Opportunities: Delay in Completion:
Government Plans: Utilization of Natural Over Staffing:
Large Scale Industries Resources: Less Return:
Government Revenue:

I. DEPARTMENTAL UNDERTAKINGS:
Examples for departmental undertakings are Railways, Department of Posts, All India Radio,
Doordarshan, Defence undertakings like DRDL, DLRL, ordinance factories, and such.
Features :
1. Under the control of a government department: 2. More financial freedom: 3. Like any other government
department: 4. Budget, accounting and audit controls: 5. More a government organization, less a business
organization .

Advantages :
1. Effective control:. 2. Responsible Executives:. 3. Less scope for mystification of funds:.
4. Adds to Government revenue.
Disadvantages :
1. Decisions delayed:. 2. No incentive to maximize earnings:. 3. Slow response to market conditions:. 4.
Redtapism and bureaucracy: 5. Incidence of more taxes:

II. Public Corporations:

Definition : A public corporation is defined as a ‘body corporate create by an Act of Parliament


or Legislature and notified by the name in the official gazette of the central or state government.
It is a corporate entity having perpetual succession, and common seal with power to acquire,
hold, dispose off property, sue and be sued by its name”.

Examples of a public corporation are Life Insurance Corporation of India, Unit Trust of India,
Industrial Finance Corporation of India, Damodar Valley Corporation and others.
Features:
1. A body corporate:. 2. More freedom and day-to-day affairs: 3. Freedom regarding personnel: 4. Perpetual
succession: 5. Financial autonomy:. 6. Commercial audit: 7. Run on commercial principles:.
Advantages :1. Independence, initiative and flexibility: 2. Scope for Redtapism and bureaucracy minimized:
3. Public interest protected: 4. Employee friendly work environment:. 5. Competitive prices: .
6. Economics of scale: 7. Public accountability: It is accountable to the Parliament or legislature; it has to submit
its annual report on its working results.
Disadvantages:
1. Continued political interference: 2. Misuse of Power:. 3. Burden for the government:

III. Government Company:

Section 617 of the Indian Companies Act defines a government company as “any company in
which not less than 51 percent of the paid up share capital” is held by the Central Government or
by any State Government or Governments or partly by Central Government and partly by one or
more of the state Governments and includes and company which is subsidiary of government
company as thus defined”.

A government company is the right combination of operating flexibility of privately organized


companies with the advantages of state regulation and control in public interest.

Some government companies are promoted as

 industrial undertakings (such as Hindustan Machine Tools, Indian Telephone


Industries, and so on)
 Promotional agencies (such as National Industrial Development Corporation, National
Small Industries Corporation, and so on) to prepare feasibility reports for promoters
who want to set up public or private companies.
 Agency to promote trade or commerce. For example, state trading corporation, Export
Credit Guarantee Corporation and so such like.
 A company to take over the existing sick companies under private management (E.g.
Hindustan Shipyard)
 A company established as a totally state enterprise to safeguard national interests such
as Hindustan Aeronautics Ltd. And so on.
 Mixed ownership company in collaboration with a private consult to obtain technical
know how and guidance for the management of its enterprises, e.g. Hindustan Cables)

Features:

The following are the features of a government company:

1. Like any other registered company: It is incorporated as a registered company under the
Indian companies Act. 1956. Like any other company, the government company has separate
legal existence. Common seal, perpetual succession, limited liability, and so on. The provisions
of the Indian Companies Act apply for all matters relating to formation, administration and
winding up. However, the government has a right to exempt the application of any provisions of
the government companies.

2. Shareholding: The majority of the share are held by the Government, Central or State, partly
by the Central and State Government(s), in the name of the President of India, It is also common
that the collaborators and allotted some shares for providing the transfer of technology.

3. Directors are nominated: As the government is the owner of the entire or majority of the
share capital of the company, it has freedom to nominate the directors to the Board. Government
may consider the requirements of the company in terms of necessary specialization and appoints
the directors accordingly.

4. Administrative autonomy and financial freedom: A government company functions


independently with full discretion and in the normal administration of affairs of the undertaking.

5. Subject to ministerial control: Concerned minister may act as the immediate boss. It is
because it is the government that nominates the directors, the minister issue directions for a
company and he can call for information related to the progress and affairs of the company any
time.

Advantages :

1. Formation is easy: There is no need for an Act in legislature or parliament to promote a


government company. A Government company can be promoted as per the provisions of the
companies Act. Which is relatively easier?
2. Separate legal entity: It retains the advantages of public corporation such as autonomy, legal
entity.

3. Ability to compete: It is free from the rigid rules and regulations. It can smoothly function
with all the necessary initiative and drive necessary to complete with any other private
organization. It retains its independence in respect of large financial resources, recruitment of
personnel, management of its affairs, and so on.

4. Flexibility: A Government company is more flexible than a departmental undertaking or


public corporation. Necessary changes can be initiated, which the framework of the company
law. Government can, if necessary, change the provisions of the Companies Act. If found
restricting the freedom of the government company. The form of Government Company is so
flexible that it can be used for taking over sick units promoting strategic industries in the context
of national security and interest.

5. Quick decision and prompt actions: In view of the autonomy, the government company take
decision quickly and ensure that the actions and initiated promptly.

6. Private participation facilitated: Government company is the only from providing scope for
private participation in the ownership. The facilities to take the best, necessary to conduct the
affairs of business, from the private sector and also from the public sector.

Disadvantages:

1. Continued political and government interference: Government seldom leaves the


government company to function on its own. Government is the major shareholder and it dictates
its decisions to the Board. The Board of Directors gets these approved in the general body. There
were a number of cases where the operational polices were influenced by the whims and fancies
of the civil servants and the ministers.

2. Higher degree of government control: The degree of government control is so high that the
government company is reduced to mere adjuncts to the ministry and is, in majority of the cases,
not treated better than the subordinate organization or offices of the government.
3. Evades constitutional responsibility: A government company is creating by executive action
of the government without the specific approval of the parliament or Legislature.

4. Poor sense of attachment or commitment: The members of the Board of Management of


government companies and from the ministerial departments in their ex-officio capacity. The
lack the sense of attachment and do not reflect any degree of commitment to lead the company in
a competitive environment.

5. Divided loyalties: The employees are mostly drawn from the regular government departments
for a defined period. After this period, they go back to their government departments and hence
their divided loyalty dilutes their interest towards their job in the government company.

6. Flexibility on paper: The powers of the directors are to be approved by the concerned
Ministry, particularly the power relating to borrowing, increase in the capital, appointment of top
officials, entering into contracts for large orders and restrictions on capital expenditure. The
government companies are rarely allowed to exercise their flexibility and independence.

Oligopoly:

The term ‘oligopoly’ is derived from the two Greek words ‘oligos’ meaning ‘a few’ and ‘pollen”
meaning ‘to sell”.

Definition: “Oligopoly is a market structure, in which a few large firms produce either
homogeneous or differentiated products and which are close substitutes for each other.”

Simply Oligopoly means competition among a few firms. Oligopoly markets can be classified
into two categories. They are:

 Pure Oligopoly Market

 Differentiated Oligopoly Market

Pure Oligopoly: In this market firms producing homogeneous product.


Differentiated Oligopoly: In this market firms producing differentiated products, which are
close substitutes of each other.

Features of Oligopoly:

1. Existence of Few Sellers: There is small number of large sellers supplying either
homogeneous products or differentiated products.

2. Homogeneous or Distinctive Product: The oligopoly firm may be selling either


homogeneous product like steel or distinctive product like automobile-passenger cars.

3. Blockaded Entry and Exit: Firms in the oligopoly market face strong restrictions on entry or
exit.

4. Imperfect Dissemination of Information: Detailed market information relating to cost, price


and product quality are usually not published.

5. Interdependence: The firms have a high degree of interdependence in their business policies
about fixing of price and output determination.

6. Advertising: Advertising and selling costs have strategic importance to oligopoly firms. Each
firm tries to attract consumers towards its product by incurring excessive expenditure on
advertising.

7. Price Rigidity: In an oligopolistic market, each firm sticks to its own price. This is because; it
is in constant fear of relation from rivals if it reduces the price.

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