MEFA UNIT-III (II PArt)
MEFA UNIT-III (II PArt)
MEFA UNIT-III (II PArt)
Business Organizations:
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:
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.
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:
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”.
Features of Partnership:
Disadvantages of Partnership:
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:
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:
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”
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.
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:
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
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.
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:
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:
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”.
Features:
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.
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 :
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.
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:
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.
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:
Features of Oligopoly:
1. Existence of Few Sellers: There is small number of large sellers supplying either
homogeneous products or differentiated products.
3. Blockaded Entry and Exit: Firms in the oligopoly market face strong restrictions on entry or
exit.
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.