emma mG ti Carmody Lets Self Instructional Material for PTU DEP StudentsPUNJAB TECHNICAL UNIVERSITY The world over, Distance Education is a fast-growing mode of education because of the unique benefits it provides to leamers. Universities are now able to reach the community, which has for so long been deprived of higher education due to various reasons, including social, economic and geographical considerations. Distance Education provides them with a second chance to upgrade their technical skills and qualifications. One of the important considerations in initiating Distance Education in a country like India, has been the concer of the government in increasing the access and reach of hhigher education to a larger student community. As such, only 6-8% of students in India take up higher education and more than 92% drop out before reaching the 1042 level. Further, avenues for upgrading qualifications, while at work, are limited and modular programmes for gaining the latest skills through continuing education programmes are extremely poor. In such a system, the Distance Education programme provides the much-needed avenue for: ‘© Increasing the access and reach of higher education Providing equal opportunities and affordability of higher education for weaker and disadvantaged sections of the society © Increased opportunity for upgrading, retraining and personal enrichment of latest knowledge and know-how © Capacity building to further national interests One of the important aspects of any Distance Education programme is the learning resources. Learning material provided to the learner must be innovative, thought provoking, comprehensive and tailor-made for self-learning, It has been a continuous process for the University to improve the quality of the learning material through well-designed course material in the SIM format (Self-instructional material). While designing the material, the University has researched the methods and processes of some of the best institutions in the world imparting distance education.About the University Punjab Technical University (PTU) was set up by the Government of Punjab in 1997 through a State Legislative Act. PTU started with a modest beginning in 1997, with only nine Engineering and thirteen Management colleges affiliated to it. PTU now has affiliated 43 Engineering colleges, 56 colleges imparting Management and Computer ‘Application courses, 20 institutions imparting Pharmacy education, 6 Architecture institutions, 2 Hotel Management institutions and 12 Regional Centres for imparting M-Tech and Ph.D programmes in different branches of Engineering and Management, During a short span of nine years, the University has undertaken many innovative programmes. The major development during this period is that the University has restructured its degree programme and upgraded the syllabi of the courses in such a way as 0 increase the employability of its students and make them self reliant by imparting higher Technical Education. We at Punjab Technical University are propelled by the vision and wisdom of our leaders and are striving hard to discharge ur duties for the overall improvement of the quality of education that we provide. During its short span of nine years, the University has faced various challenges but has never moved away from making the interest of its students its paramount concern. During the past couple of years, the University has undertaken many new initiatives to revitalize its educational programme in colleges and regional centres. Knowledge and skills being the key factors in increasing the employability and competitive edge-of students in the emerging global environment, the University is participating in the process of attaining technological growth and training professional ‘manpower towards economic development of the nation. With the above goals in mind, the Punjab Technical University initiated the Distance Education programme in July 2001 and started offering various job-oriented technical courses in disciplines like Information Technology, Management, Hotel Management, Paramedical Skills, Media Technologies and Fashion Technology. The programme was initiated with the aim of fulfilling the mandate of the Act for providing continuing education to the disadvantaged economically backward sections of society as well as working professionals for skill up-gradation. The Distance Education programme delivers quality education with a flexible approach. It caters to the overall personality development of its students. Presently, PTU has more than 60 courses under its Distance Education stream, covering more than 700 learning centres across the country. About the Distance Education Programme of PTU Over the past few years, the Distance Education programme of PTU has gained wide publicity and acceptance due to certain quality features that were introduced to increase the effectiveness of learning methodologies. The last comprehensive syllabus review was carried out in the year 2004-05 and the new revised syllabus was implemented from September 2005. The syllabus, once reviewed, is frozen for a period of 3 years and changes, if any, will be taken up in 2008. Various innovativeicitiatives have been taken, which have increased the popularity of the programme. Some of these initiatives are enumerated below: 1. There is a pyramid system for almost all courses, in which a student gets the flexibility of continuing higher education at his own pace and as per his convenience. Suitable credits are imparted for courses taken during re-entry into the pyramid as a lateral-entry student. 2. Relaxed entry qualifications ensure that students get enough freedom to select the course of their choice. The basics necessary for completing the course are taught at the first semester level. 3. A comprehensive course on ‘Communications and Soft Skills’ is compulsory for all students, which ensures that students imbibe some basic skills for increasing their employability and competing in the global environment. 4, Leaming material and books have been remodelled in the Self-Instructional Material (SIM) fuainat, which ensures casy dissemination of skills and self Jeaming. These SIMs are provided in addition to the class notes, work modules and weekly quizzes. 5. Students are allowed to take a minimum of 240 hours of instruction during the semester, which includes small-group interaction with the faculty and teaching practical skills in a personalized manner. 6. Minimum standards have been laid out for the learning centres, and a full-time counsellor and core faculty are available to help the students. 7. There is a wide network of Regional Leaming and Facilitation Centres (RLFC) catering to each zone, which is available for student queries, placement support, examination-related queries and day-to-day logistic support. Students need not visit the University for any of their problems and can approach the RLFC for taking care of their needs. 8. Various facilities like fee waiver for physically challenged students, a scholarship scheme by the government for SC/ST candidates, and free bus passes for PRTC buses are available to students of the University. The University continuously aims for higher objectives of achievement, and the suecess of our efforts has continuously motivated us to reach higher. The PTU Distance Education fratemity has grown more than 200% during the past two years and the students have now started moving all across the country and abroad after completing their skills-training with us. We wish you a marvellous learning experience in the next few years of association with us! Dr. R. P. SINGH Dean Distance EducationDr. S. K. Salwan Vice Chancellor Dr. S. K. Salwan is an eminent scientist, visionary and an experienced administrator. He is a doctorate in mechanical engineering from IIT, Mumbai. Dr. Salwan brings with him 14 years of teaching and research experience. He was Director of the ‘Armament Research and Development Establishment, Pune. He is credited with establishing the Department of Design Engineering at the Institute of Armament Technology, Pune. He was a founder-member of the integrated guided missile prearamme of defence research under His Excellency Honourable Dr. A.P.J. Abdul Kalam, He also established the high-technology missile centre, RCI, at Hyderabad. He has been instrumental in implementing the Rs. 1000-crore National Range for Testing Missiles and Weapon Systems at Chandipore, Balasore, in a record time of three years. Dr. Salwan has been part of many high-level defence delegations to various countries. He was Advisor (Strategic Project) and Emeritus Scientist at the DRDO. Dr. Salwan has won various awards, including the Scientist of the Year 1994; the Rajiv Ratan Award, 1995; a Vashisht Sewa Medal, 1996; the Technology Assimilation and Transfer Trophy, 1997, and the Punj Pani award in Punjab for 2006. Dr. R. P. Singh Dean, Distance Education Dr. RP. Singh is a doctorate in Physics from Canada and was a gold medalist from Banaras Hindu University in M.Sc. Dr. Singh took over the Department of Distance Education in November 2004 and since then the University has embarked on various innovations in Distance Education. Due to the combined efforts of the department, the RLFCs and Centres, and with the active support of the Distance Education Council headed by Dr. O.P. Bajpai, Director, University College of Engineering, Kurukshetra University, the Distance Education Programme of PTU is now a structured system which empowers leamers with requisite skills and knowledge which can enhance their employability in the global market. Dr. R. P. Singh is promoting distance education at the national level too: he is a founder-member of the Education Promotion Socicty of India. He is also & member of various committees that explore innovative ways of learning for disadvantaged sections of society. The basic aim of the Distance Education programme is to assimilate all sections of society, including women, by increasing access, reach, equity and affordability of higher education in the country.INTRODUCTION TO MODERN BUSINESS BBA -101 This SIM has been prepared exclusively under the guidance of Punjab Technical University (PTU) and reviewed by experts and approved by the concemed statutory Board of Studies (BOS). It conforms to the syllabi and contents as approved by the BOS of PTU.CAREER OPPORTUNITIES The pool of management education is getting bigger. The aim of studying for management studies is usually to further a career as a globetrotting CEO. Demand for management graduates from Asia is growing at a very fast pace. Managements internationally recognized as a business degree. It is academic in nature yet provides practical preparation for individuals in business and management. Management studies is a popular choice forall those wishing to become successful managers.PTU DEP SYLLABI-BOOK MAPPING TABLE BBA - 101 Introduction to Modern Bu: ess Syllabi Section-I The Indian Business System: Forms of Business Organizations and Ownership: Sole Proprietorships, Partnerships, Joint Stock Companies: Public and Pvt. Cos. Public Management and Its Various Functions, Nature and Scope, Organizational ‘Objectives, Management by Objectives (MBO), Functions of Planning: Nature and Purpose, Types, Steps in Planning; Decision Making Process. Organizing: Nature, Importance, The Organizing Process, Formal and Informal Organization, and Organization Chart, Organizing Principles, Span of Management: Factors Determining Effective Span, Graicunas Formula. Departmentation: Definition, Departmentation by Function, By Territory, Product/Service Customer, Group, Matrix Organization, Vertical and Horizontal Coordination. Authority: Definition, Types, Responsibility and Accountability. Delegation: Definition, Mapping in Book Unit 4: Forms of Business Organizations (Pages 3-31); Unit 3: Planning and Decision Making (Pages 41-61); Unit 4: Organizing-| (Pages 63-73); Unit 5: Organizing-il (Pages 75-101 ‘Unit 10: Span of Management (Pages173-180) Unit 2: Authority, Power and Politics ‘Steps in Delegation, Obstacles to Delegation and Their Elimination, Decentralization (Pages 33-40); ws Centralization, Determinants of Effective Decentralization, Control of Unit 5: Organizing-Il Decentralization, (Pages 75-101) Section-II ‘Staffing: Definition, Manpower Management, Factors Affecting Staffing, Job Design, Selection Process, and Techniques. Performance Appraisal: Need and Process. Leading: Motivation, Hierarchy of Needs Theory, Theory of X and Theory of Y. Leadership: Styles, Types, Theories of Leadership: Trait Approach and Situational Approach, Theory Z, Job Enrichment and Job Enlargement. Committees? Nature, Merits and Demerits, Ways to Make Committees, Work. Unit 6: Statfing (Pages 103-125) Unit 7: Motivation (Pages 127-137); Unit 8: Leadership (Pages 139-157); Section-III Communication: Importance, Process, Barriers and Breakdown of Communication. Controlting: Control Process, Types, the Job of Controller, Barriers to Control Making Control Successful. Control Techniques; Budget and Non-Budgetary Control Devices. Challenges Created by Information Technology. Social Responsibility, Business Ethics. Unit 11: Communication (Pages 181-201) Unit 9: Controlling (Pages 59-172); Unit 12: Corporate Ethics and Social Responsibility (Pages 203-213)CONTENT INTRODUCTION 0 UNIT 1 FORMS OF BUSINESS ORGANIZATIONS 331 1.0 Introduction; 1.1 Unit Objectives; 1.2 Sole Proprietorship: 1.3 Partnerst 14 Joint Hindu Family Firm; 1.5 Joint Stock Company; 1.6 Private and Public Companies (oint Stock); 1.7 Co-operative Organizations; 1.8 Forms of Organization of Public Undertakings; 1.9 Public or Statutory Corporations; 1.10 Government Companies or Mixed ‘Ovmership Corporations; 1.11 Summary; 1.12 Answers to ‘Check Your Progress"; 1.13 Questions and Exercises; 1.14 Further Reading, UNIT 2 AUTHORITY, POWER AND POLITICS 33-46 2.0 Introduction; 2.1 Unit Objectives; 2.2 Concept of Authority; 2.3 Sources of Authority; 2.4 Sources of Power; 2.5 Organisational Politics; 2.6 Machiavellianism; 2:7 Bthics of Power and Politics; 2.8 Responsibility; 2.9 Summary; 2.10 Answers to *Check Your Progress’; 2.11 Questions and Exercises; 2.12 Further Reading UNIT3 PLANNING AND DECISION MAKING 41-61 3.0 Introduction; 3.1 Unit Objectives; 3.2 Planning: An Overview; 3.3 Advantagesand Potential Disadvantages of Planning, 3.4 Principles of Effective Planning; 3.5 Plan ‘Types; 3.6 Levels of Planning; 3.7 Managerial Decision Making; 3.8 Defining a Problem; 3.9 Structure of Problems; 3.10 Factors Affecting Decision Making; 3.11 Steps in Decision Making; 3.12 Rational Decision Making; 3.13 Summary; 3.14 Answers to ‘Check Your Progress’; 3.15 Questions and Exercises; 3.16 Further Reading UNIT4 ORGANIZING 63-73 4.0 Introduction; 4.1 Unit Objectives; 4.2 What is an Orgenization?; 4.3 Importance of Organizing; 4.4 Guidelines for Effective Organization; 4.5 Organizational Objectives: 4.6 The Organization Process; 4.7 Summary; 4.8 Answers to ‘Check Your Progress’, 4.9 Questions and Exercises; 4.10 Further Reading UNIT 5 ORGANIZING-II 75-101 5.0 Introduction; 5.1 Unit Objectives; 5.2 Organizational Structure: Design; 5.3 Steps in the Organizational Structure; 5.4 Benefits of a Good Organizational Structure; 5.5 Mechanistic versus Organic Structure; 5.6 Determinants of Organizational Structure; 5.1 Types of Organizational Structures; 5.8 Departmentation; 5,9 Management by Objectives (MBO); 5.10 Delegation of Authority; 5.11 Process of Delegation; 5.12 Advantages of Delegation; 5.13 Problems with Delegation; 5.14 Overcoming Obstacles; 5.15 Centralization versus Decentralization; 5.16 Advantages of Centralization; 5.17 Advantages of Decentralization; 5.18 Summary; 5.19 Answers to ‘Check Your Progress’; 5.20 Questions and Exercises; 5.21 Further Reading UNIT6 STAFFING 103-125, 6.0 Introduction; 6.1 Unit Objectives; 6.2 The Staffing Function; 6.3 Forecasting; 6.4 The Staffing Process; 6.5 Selection; 6.6 Performance Appraisal; 6.7 Performance Appraisal Methods; 6.8 Summary; 6.9 Answers to ‘Check Your Progress’; 6.10 Questions and Exercises; 6.11 Further ReadingUNIT 7 MOTIVATION 7.0 Introduction; 7.1 Unit Objectives; 7.2 Motivation and Behaviour, 7.3 Theories of Motivation; 7.4 Summary; 7.5 Answers to ‘Check Your Progress’; 7.6 Questions and Exercises; 7.7 Further Reading UNIT8 LEADERSHIP 8,0 Introduction; 8.1 Unit Objectives; 8.2 Leadership; 8.3 Formal and Informal Leadership; 8.4 Leadership Characteristics; 8,5 Leadership Styles; 8.6 Theories of Leadership; 8.7 Summary; 8.8 Answers to ‘Check Your Progress’; 8.9 Questions and Exercises; 8.10 Further Reading UNIT 9 CONTROLLING 9.0 Introduction; 9.1 Unit Objectives; 9.2 Control; 9.3 The Controlling Process; 9.4 Essentials of Effective Control Systems; 9.5 Behavioural Implications of Control; 9.6 Behavioural Guidelines for Effective Control; 9.7 Challenges Created by IT; 9.8 Summary; 9.9 Answers to ‘Check Your Progress’; 9.10 Questions and Exercises; 9.11 Further Reading UNIT 10 SPAN OF MANAGEMENT 10.0 Introduction; 10.1 Unit Objectives; 10.2 What Is Span of Management; 10.3 Span of Control and Levels of Organisation; 10.4 Graicunes Theory; 10.5 Factors Affecting. Span of Management; 10.6 Limitations of Span of Management; 10.7 Summary; 10.8 Answers to ‘Check Your Progress’; 10.9 Questions and Exercises; 10.10 Further Reading UNIT 11 COMMUNICATION 11.0 Introduction; 11.1 Unit Objectives; 11.2 Objectives of Communication; 11.3 Means of Communication; 11.4 Barriers to Effective Communication; 11.5 Overcoming Communication Barriers; 11.6 Summary; 11.7 Answers to 'Check Your Progress" 11.8 Questions and Exercises; 11.9. Futher Reading; 11.10 References UNIT12 CORPORATE ETHICS AND SOCIALRESPONSIBILITY 12.0 Introduction; 12,1 Unit Objectives; 12.2 Meaning of Ethics; 12.3 Ethical Concepts; 12.4 Business Values; 12.5 The Concept of Social Responsibility; 12.6 Causes of Growing Awareness for Social Responsibility; 12.7 Arguments in Favour of Social Responsibility; 12.8 Arguments Against Social Responsibility, 12.9 Comparative Study: Japanese Management and Z Culture of American Companies; 12.10 Summary; 12.11 Answers to ‘Check Your Progress’; 12.12 Questions and Exercises; 12.13 Further Reading 127-137 139-157 59-172 173-180 181-202 203-213INTRODUCTION A number of developments in managerial thinking and processes have taken place in the last few decades. All parts of the world have become closer to each other; the communication networks and Internet resources have made the whole world into a “global village”. Organizations have become multinational, transcending national and geographical boundaries, ‘The workforce has become highly diversified. More women are joining the management ranks and ethical conduct of organizations is being emphasized and monitored. There is ‘movement towards total quality in products and services. Customer satisfaction has become ‘a concern of highest priority. Today’s business environment is one of global competition, scarce resources, rapid technological changes, increasing demand for social responsibility and downsized organizational structures. The economic and industrial environments have become more volatile and the management is required to do strategic planning for the neat and far future of their respective organizations in order to address fast and dynamic changes as well as the continuously evolving competitive environment. Today's managers face a complex web of difficult and exciting challenges. No longer does, a managersitin an ivory tower and issue directives from a distance. The traditional authority structure is giving way to employee involvement, work teams, group spirit, participative decision-making, lateral relationships, flexible work structures and more. The management is becoming more and more aware that an organization has no life but for the people in Accordingly, itis becoming more and more people-oriented as against task-oriented of the previous years. The job of a manager is one of the most rewarding, most exciting and most. challenging of professions. Effective managers are effective leaders who can (and do) «make significant contributions to society through the output of their industrial or service ‘organizations such as businesses, universities, hospitals, government agencies and so on, ‘This book has been carefully and painstakingly planned to prepare the students of distance leaning programs to become successful managers and practitioners. The book covers the tools, techniques and strategies used by effective managers in today's dynamic and complex environment. It is well-grounded and. authoritative in terms of latest developments in management theory and practice. The material has been presented in simple, clear, ‘unambiguous and structured manner so as to engage the student towards an appreciation of managerial responsibilities and challenges and to arouse their intellectual curiosity. Sef Isrconl Motel NOTES ros nate |UNIT 1 FORMS OF BUSINESS ORGANIZATIONS Structure 10 Introduction Li UnitObjectives 12 Sole Proprietorship 13 Partnership 14 Joint Hindu Family Firm 15 Joint Stock Company 1.6 Private and Public Companies ‘Co-operative Organizations 18 Forms of Organization of Public Undertakings 19 Public or Statutory Corporations 1.10 Government Companies or Mixed Ownership Corporations LIL Summary 1.12. Answers to ‘Check Your Progress’ 113. Questions and Exercises 114. Further Reading 1.0 INTRODUCTION ‘A business enterprise can be owned and organized in several forms. Ownership is a legal Concept that bestows certain rights when an individual or group of individuals acquire legal title to assets for the purpose of controlling them and to enjoy the gains or profits from such. possession and use. Business firms may be owned by private individuals or by the State. Business firms owned by private individuals fall in the private sector, while firms owned by the State are categorised as public sector. Firms owned jointly by private parties and the State (government) constitute joint sector. The classification of forms of business organizations on the basis of legal ownership is shown in Figure | Business Enterprises Private Sector Joint Sector Public Sector 1, Joint Stock 1. Departmental Comeany Uneertaing 2, Co-operative 2. Public Corporation Non-Corporato Corporate Society 8. Goverment 4, Sole Proprtorship 1. doint Stock Company 2 Partnership Firm ‘Company 3 Jointing Family 2. Co-operative Fir Sociaty Figure 1. Forms of Business Ownership Organization 1.1 UNIT OBJECTIVES Describing the various forms of business organizations Understanding the differences among sole proprietorship, partnership and corporations Explaining the advantages and disadvantages of each type of organization Learning what a Joint Hindu Family firm means and how it differs from other types of organizations Seffnsrctional Meter Forms of Business Organizations NOTES rarniaieeForms of Business Organizations. NOTES, (2 ae Understanding the make-up and definition of a joint stock company Learning the various aspects and characteristics of joint stock companies Understanding the differences between private and public joint stock companies Learning what co-operative organizations are, and the circumstances leading to the formation of such organizations ‘© Understanding how public undertakings and statutory corporations are formed and how they relate to the public at large eee 1.2 SOLE PROPRIETORSHIP A sole proprietorship is a form of business organization that is run under the exclusive ownership, management and control of an individual. The individual brings his own or borrowed capital, uses his own skill and intelligence in the management ofthe affairs, bears all the risks alone, enjoys al the profits and suffers all the losses. Thus, only one person is the sole owner, manager, financier, risk-bearer, controller — all rolled into one. The individual may run the business alone or may obtain the assistance of employees for running, the routine activities of business, Sole pro is the oldest and the simplest form of business organization. It has been in operation since the birth of our civilization. Even today it has not lost its utility. There are no legal formalities to be gone through for setting up the sole proprietorship firm except those required for a particular business. For example, if one is starting a restaurant, it may be necessary to obtain a licence frotn the Health Department of the Municipal Corporation. 12.1 Features (® Sole ownership @) One-man control Gi) Contribution of owned and/or borrowed capital (iv) No sharing of profits or losses (») No separate legal entity of the firm — proprietor and the firm identical (vi) Unlimited fabilty (vif) Freedrom from government regulation 1.2.2 Advantages of Sole Proprietorship (®) Ease of formation (#) Quick decisions and prompt action (i) Flexibility of operation (iv) Direct and exclusive control (v) Direct motivation and incentive to work (vi) Personal touch and direct contact with customers (vit) Secrecy (vii?) Minimum government regulation 2) Social desirability - diffusion of economic power, independent living, development of personaly, etc Sensational Material1.2.3 Weaknesses of Sole Proprietorship (P) Limited finances (Gi) Limited managerial ability (Gil) Limited scope for growth iv) No economies of large scale and specialization () Unlimited liability (vi) Uncertainty of continuity ‘An evaluation of advantages and weaknesses of sole proprietorship suggests that one-man control of business is the most efficient and profitable if only one man has the capacity to ‘manage everything indefinitely. Unfortunately, such a person does not exist. However, the following are the circumstances in which the sole proprietorship form of business organization is considered to be very suitable @, Where capital requirements are small and the risk is not heavy (ii) Where decision-making has to be quick (ii) Where the customers require personal attention (iv) Where special regard has to be shown to the inc customer idual tastes and preferences of the (v) Where fashions change quickly (vi) Where demand is temporary, seasonal and local ‘Naturally, therefore, the sole proprietorship form of business organization is most suitable for professional services (such as doctors, dentists, accountants, lawyers, artists, etc.), household and personal services (such as barber shops, tailoring, dry-cleaners, bullion dealers, sweet-comer shops, bakeries, etc.) small manufacturing activites, cottage industries, hhandierafts, small retail store, repair shop, etc. 1.3 PARTNERSHIP Partnership asa form of business organization came into existence to overcome the limitations ofa one-man business in terms of limited financial resources, limited managerial skill and ability and concentrated risk. According to Section 4 ofthe Partnership Act, 1932, partnership {s, “the relation between partners who have agreed to share the profits of a business carried con by all or any one of them acting for al.” In the words of Professor Haney: “Partnership isthe relation existing between persons, competent to make contracts, who have agreed to carry on 2 lawful business common with a view to provide gain.” The persons who have entered into partnership are individually called ‘partners’ and collectively a “firm”. The name under which they carry on the business is called the ‘firm’, ‘The partners enter into an agreement to lay down the terms and conditions relating to partnership and the regulations governing its internal management and organization. This ‘agreement is known as “Partnership Deed”. The agreement may be oral or in writing. However, a regular partnership agreement in writing, duly signed by all partners, can ensure smooth running of the partnership business. The partners contribute capital and they share managerial responsibility and profits/losses as per the agreement. 1.3.1 Essential Characteristics of Partnership The definition of partnership itself reveals certain characteristics of partnership. These are: Seftraruconal Merah Forms of Business Organizations NOTES Check Your Progress 1, What ae the major advantages and disadvantages of sole proprietorship? iaForms of Business Organizations NOTES 5 ees 1. Association of two or more persons. There must be at least two persons to form a partnership. Regarding maximum number, Companies Act, 1956 provides that where the firm is carrying on banking business, the number of partners should not exceed ten and where the firm is carrying on any other business, the number of persons should not ‘exceed 20. An association ora partnership firm having members more than this statutory limit must be registered as a company. Ifthe minimum number of persons is reduced to cone, the firm is automatically dissolved 2, Agreement, Partnership can be formed only by a contract which may be express or implied, All the essential elements of valid contract must be present in a partnership agreement (e.g., capacity of parties, free consent, legality of object, etc.) 3. Business. Partnership is formed to carry on some business. The term ‘business’ includes every trade, occupation and profession. The idea behind the business isto secure gain. 4. Sharing of profits. The division of profits is an essential condition forthe existence of partnership, Sharing of profits involves sharing of losses also. But sharing need not be ‘equal, Partners can mutually agree to share profits in any way they like. Section 13(b), however, provides that the partners are entitled to share equally in the profits earned, ‘and shall contribute equally to the losses sustained by the fim, unless otherwise agreed. 5. Mutual agency. The partnership business may be carried on by all the partners or any of them acting for all. Each partner is the agent ofthe firm as well as other partners. He can bind the firm by his acts done in the usual course of business. Similarly, a partner ‘may be bound by the act of the other partners. This is the most essential principle of partnership. 6, No separate legal existence. The partnership firm is a voluntary association of persons and it has no separate legal entity of its own, The partnership firm and partners are one and the same in the eyes of law. 7. Unlimited Habitity. Each partner is liable jointly and severally for all debts and obligations ofthe fim to an unlimited extent. The creditors can recover their dues from the private property of any or all partners in case the firm’s assets are insufficient to meet the claims of firm's creditors. 8. Usmost good faith. Every partner should be just and faithful to other partners. They ‘must disclose every information and present true accounts to one another. 9. Restriction on transfer of interest. A partner cannot transfer his rights or interests in a partnership firm to an outsider without the consent of other partners, 1.3.2 Various Aspects of Partnership m1 1. Formation. Although a partnership is constituted by means of a contract between the partners, no legal formalities are requited tor its formation. An oral contracts sufficient to bring it into being. But itis advisable to reduce the agreement to writing, and prepare «properly drafted Deed of Partnership or Articles of Partnership laying down the terms and conditions of partnership and the rights, obligations and duties of partners. Registration of a partnership firm is not compulsory under our law, nor is any penalty provided for non-registration. The law, however, introduces certain disabilities, which make registration necessary at one time or other. tn fact, the aw has effectively ensured registration of firms without making it compulsory. The first disability is that an Unregistered fitm cannot file a suit, or take other legal proceedings, to enforce a right arising from a contract. Secondly, a partner cannot sue the firm or other partners arising. under @ contract or conferred by the Partnership Act. But an outsider can sue an unregistered firm and its partners 2. Finance, Normally, the capital of partnership firm consists ofthe amounts contributed by the various partners. The capital contributions by all the partners need not be equal, ‘Selon Moteland one or more may not put in any capital ata. This will happen where such partners bring in special skills and abilities. The initial capital may be augmented or more for expansion of business may be obtained, by borrowing on the security of the firm’s property and also on the strength of the private estates of partners. 3. Control. As partnership results from a contract, the control will depend upon its terms Where all the partners take active part in the conduct of the partnership business, the control rests with all of them, All major decisions, as observed earlier, must be made by the unanimous consent of all the partners. There may, however, be some partners ‘who do not take active part in the conduct of the business. They are known as sleeping ‘or dormant or secret partners. In a word, the control is ordinarily shared by the active or ‘ostensible partners. 4, Management of Affairs. in law, every partner bas a right to take part in the conduct and management ofthe business of the firm, In practice, partnership agreement provides for the division of work among the different partners according to their experience and knowledge. Its not unusual to have one of them as the senior partner who would be in the position of the chief executive, exercising overall supervision 5. Duration of Partnership. The pariners are at liberty to fix the duration of the partnership or say nothing about it. Where they agree to carry on business for a definite period of time, it is called a partnership for a fixed term. When the term is over, the partnership comes to an end; but ifthe business is continued after the expiry of the period originally fixed, the renewed partnership will become a parmership ar will: Where a partnership is formed for a particular adventure, itis called Particular partnership which would presumably last until the business is finished. If the partners say nothing about the duration, or agree to carry on the business as long as they wish to do so, the partnership will be one af will. It ean be dissolved at the will of any partner, on his giving not Where partners cannot agree on the dissolution of the firm, the court may, on application, order its dissolution. 6. Taxation. A partnership firm is liable to pay income tax and other taxes asan individual is liable to pay. But there is a slight difference with regard to the rate of tax according as whether the firm is registered under the Income Tax Act or not. Ifit is so registered (apart from registration under the Partnership Act), the income will be divided among partners and each partner will be assessed separately. Ifthe firm is not registered, the firm will be required to pay tax on its total profit as distinct from the incomes of the individual partners Types of Partners The liabilities of the partners depend upon their mutual agreement. They can enter into partnership subject to any terms and conditions. Therefore the following types of partners may be distinguished: 1. Active or actual partner. Actual partner means a person who is by agreeient entitled to participate inthe management of the parinership business. He is also called ostensible or working partner. He binds himself and other partners by his acts done in the usual ‘course of business. as far as third parties are concerned. In case of his retirement from the firm, he has to give public notice of retirement. If he fils to give public notice, he continues to remain liable to outsiders for the acts of other partners. 2. Dormant or steeping partner. A sleeping partner is one who does not take part in ‘management of the firm’s business, He is not known as a partner to the outside world. He invests capital and shares in the profits ofthe business. He is liable to outsiders for all the debts of the firm. A sleeping partner need not give public notice of his retirement. He is not fiable for any act of the firm done after his retirement. Soietocional Manca Forms of Business Organisations NOTES. niForms of Business Organizations NOTES Check Your Progress 2. Is partnership better then sole proprietorship? Explain, Biman 3. Nominal partner. A person who merely lends his name to the firm without taking part in its management is a nominal partner. He has no right to share inthe profits. He does not invest any capital and he has no real interest in the business. However, he is liable to third partes for the acts ofthe firm, as fhe isan actual partner ofthe fim. A nominal partner is known to the outside world as a partner though internally he has no right to share profits or take part in management. 4, Partner in profits only. A “pariner in profits’ only is one who is entitled to share in profits only butnot in losses. He invests capital in the business but does not take part in ‘management. However, he is liable to the third parties for the acts of the firm like any other partner. 5. Partner by estoppel or holding out. A pariner by holding out is one who represents himself to be a partner in the firm but in reality he is not so. If any person, by words spoken, written or by his conduct, represents himself or knowingly permits himself, to be represented as a partner in a firm, he is liable as a partner in that firm to anyone who has on the faith of such representation given creditto the firm (Section 28). 1.3.4 Advantages of Partnership (@ Ease of formation (ii) Larger financial resources compared to sole proprietorship ii) Flexibility (iv) Benefits of combined ability and balanced judgement (») Prompt decisions (vi) Reduced risk because of sharing of profitslosses (vii) Personal supervision (viii) Business secrecy (éx) Cautious and sound approach 1.3.5 Disadvantages of Partnership (D Lack of harmony (i) Limited resources due to ceiling on number of partners (ft) Limited risk taking because of personal and unlimited lability of partners (iv) Instability (©) Non-transferability of interest by a partner without the consent of all other partners (vi) Lack of public confidence. In short, partnership isan deal form of organization for small scale and medium.size business ‘where we have limited market, limited risk or loss, and we need limited capital and limited specialisation in management. When the firm becomes large and partners cannot cope with the needs of expansion, the business should better be organized as a joint stock company. 1.4 JOINT HINDU FAMILY FIRM Joint Hindu Family isa peculiar form of business organization operating in our country only, although itis not so common now. It is governed by Hindu Law. There are two schools of Hindu Law: (i) Dayabhaga, which is applicable in Bengal and Assam, and (1f) Mitakshara, “which is applicable in the rest of India, Selptsrsconal MowerFe loint Hindu Family Firm comes into existence by operation of Hindu Law and not out ‘ef contract between the members or coparceners. If the persons who have coparcenary Secrest in the ancestral property carry on business, itis a case of Joint Hindu Family firm. ‘Uedee Mitakshara School of Hindu Law, the property of a Hindu family is inherited by a Seeks Grom his father, grandfather and great-grandfather. Thus, the property is successively ened by a son, grandson and great-grandson. In this way three successive generations in ‘Se mae line can inherit the ancestral property. The interest in the inherited property is called searcenary interest and the members of the Joint Hindu Family are called coparceners. he business belonging to the Joint Hindu Family is ordinarily managed by the father or ‘Se eldest member of the family. He is called ‘Karta’ or ‘Manager’. The Karta, as head of ‘Se family has control over the income and expenditure and he is the custodian of the surplus, The other members cannot question his judgement in running the business : their smedy is to demand partition. His liability is unlimited whereas the lability of other ‘seembers is limited to their share, of coparcenary interest. The Karta or Manager is also Sabie to make good to members their share of all sums which he misappropriated or which ‘be hes spent for purposes other than those in which the joint family is interested. The ‘Karta’ fe “Manager” nas implied power to borrow money for family business ‘may be noted here that with operation ofthe Hindu Succession Act, 1956, a female relative ‘of deceased male coparcener will have a share in the copareenary interest after the death ‘ef coparcener in question. ‘At the same time, the share of each membsr in the coparcenary interest keeps on changing ‘with the change of number of members in the family. A member's interest decreases on the ‘bist of a new coparcener and it increases by the death of an existing coparcener. It may be sted here that there is no restriction on the number of coparceners. The existence ofa Joint Hindu Family Firm is not affected by the death or insolvency of a ‘coparcener or even that of the ‘Karta’ or ‘Manager’. However, the firm may be dissolved rough mutual agreement among all the coparceners. Thus, a Joint Hindu Family Firm is relatively more stable than a partnership firm. 1.4.1 Advantages of Joint Hindu Family Firm (@ Equitable distribution of profits (i) Centralised and efficient management (Gif) Freedom of action to ‘Karta’ or ‘Manager’ (iv) Sharing of knowledge and experience (v) Group effort and cooperation (oi) Stability (vif) No maximum limit to membership (ix) Secrecy 1.4.2 Disadvantages of Joint Hindu Family Firm @ UD) Lack of motivation — no direct correlation between efforts and rewards ity (iv) Scope of misuse of authority by “Karta’ or ‘Manages’ Seferacona hit ited resources Gil) Limited managerial Forms of Business Organizations NOTES iorm of Business Organizations NOTES. Check Your Progress 3. Why is it necessary to have ‘Joint Hindu Family fire? How docs it differ from partnership? Is it diseriminaory in peectice? Give reasons. (©) Unfair to coparceners (vi) Fear of disintegration because of family disputes 1.4.3 Partnership vis-a-vis a Joint Hindu Family Business ‘The following are the points of difference between a partnership and a Hindu Undivided Family (HUF). 1. Mode of creation. Partnership is created by a contract only which may be either express or implied, HUF is created by operation of law or status. 2, Admission of new members. Ina partnership, no partner can be admitted into partnership without the consent of other members, In HUF a male becomes a member by birth, 3. Position of minor. in parinership a minor can be admitted only to the benefits of partnership with consent of all other partners, but he cannot be a full-fledged partner. However, ina HUF a male minor becomes a member merely by birth in the family. 4. Position of female members. A female can become a partner in a firm. But in HUF a female cannot acquire membership by birth or otherwi 5. Mutual agency. Every partner is the agent of all other partners and therefore his acts done in the ordinary course of business of the firm bind the firm. But in case of HUF, itis only the Karta (seniormost male member) who has the authority to bind the family by his acts, Other members cannot do so. 6. Liability of members, The liability of partners is joint and several, Moreover theitliabi is unlimited. But in case of HUF, a member is liable only to the extent of his share in the family property. It is only the Karta who is personally liable for the debts of the family. 7. Role of members in management. in partnesship, every partner has aright o take active ppart in firm’s business. In case of HUF, only Karta is entitled to manage the business. 8. Duration. A partnership has no perpetual existence. It can be dissolved by death, insolvency ofall but one partner. But death or insolvency of a member of HUF has no effect on the perpetual existence of the business. 9. Number of members. There cannot be more than 20 members in partnership in the case of general business and ten in the case of banking business. But in case of HUP, there is no such limit 10, Floating or fluctuating membership. in 9 partnership, the number of members do not fluctuate quite often. But in case of HUF, there is a frequently floating membership by birth or death 11, Right 10 demand accounts. In a partnership any partner can demand, inspect and copy any accounts of the firm. But members of a HUF have no right to ask the Karta for accounts of his past dealings concerning the fatnily business. 12. Right to demand dissolution. In a partnership a partner cannot demand a partition of the firm’s property, His only remedy is suit for dissolution and accounts. But the remedy ofa member of HUF is suit for partition only. There is no provision for dissolution of 4 Hindu Family business 1,5 JOINT STOCK COMPANY ‘The sole proprietorship and partnership firms of business organizations proved unequal to the challenges posed by the growing needs of tnodern industry and commerce. These firms of ownership suffered from the limitations like limited financial and managerial resources, unlimited liability and fear of discontinuity. Therefore, it became necessary to have anotherform of organization to get over these limitations. And so the company form of organization ccame into existence. This form enables the entrepreneurs to get the necessary capital from the general public, retaining at the same time, the control and management in their own hands. Asa matter of fact, most of the shortcomings of a partnership form of organization are overcome by organizing a business as a joint stock company with a ,limited liability. ‘Tracing the ever increasing importance of modem corporation in the industrial economy of the US, (American Business) Thomas J. Adams states: “Perhaps no other institution has had a greater effect upon business development than the corporate form of business enterprise. Its unique characteristics have made possible the accumulation of large amounts of capital needed for large-scale activity under unified business management, “Soon our nation was founded, it became apparant that single proprietorship and partnership forms of business would prove inadequate for building our industrial, commercial, banking and transportation facilities. This task was undertaken largely by corporations (companies), with such marked success that today the great bulk of business activity is centered in corporate enterprise, Modern corporations are not only effective vehicles for the use of business resources, but they also influence the fabric of modern life because of their size and economic importance.” 1.5.1 Definition of a Company Lord Justice Lindley defines it as follows: “A company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss 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. The proportion of capital to which each member is entitled is his share, The shares are always transferable although the right to transfer is often more or less restricted.” According to Chief Justice Marshall, “a corporation is an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties whiclrthe charter of ts creation confers uponit, either expressly ot as incidental to its very existence.” Still another definition is given by Haney who observes that, “a company ts an incorporated assoéiation, which is an artificial person created by law, having separate entity, with a perpetual succession and a common seal.” ‘These definitions clearly bring out the characteristics of a company. A company is created by law-lt comes into existence only when it is registered under the Act. It has a personality of its own which is distinct from the personality of ts shareholders. The capital of the company is divided into transferable shares and liability of the members is limited to the ‘ominal value of shares held. The persons who hold shares in the company are known as shareholders and they elect the directors who control and manage the affairs of the company. thas a perpetual succession and a common seal, It continues to exist until it is wound up in secordance with the provisions of the Act. 1.5.2 Characteristics of a Company ‘The most distinguishing characteristics of a company are: 1. Incorporated association. A company is created when it is registered under the ‘Companies Act. It comes into being from the date mentioned in the certificate of incorporation. Seyrsiectonal Mower Forms of Business Organizations NOTES eeForms of Business Organizations NOTES 3. For forming a public company at least seven persons and for forming a private company at Jeast two persons are required. These persons will subscribe their names to the ‘mefnorandum of association and also comply with other legal requirements of the Act in respect of registration to form and incorporate a company. . Artificial legal person. A company is an artificial person. Generally speaking, it isnot a natural person. It exists in the eyes of the law and cannot act on its own. It as to act through a board of directors elected by the shareholders. “The board of directors are the brains and the only brains of the company, whieh is the body and the company can and does act only through them.” Separate legal entity. This means that a company has a legal entity distinct from and independent of ts members. The creditors of the company can recover their money only from the company and the property of the company. They cannot sue individual members. Similarly, the company is not in any way liable for the individual debts ofits members. The property of the company isto be used forthe benefit of the company and not for the personal benefit of the shareholders. On the same grounds a member cannot claim any ownership rights in the assets of the company either individually or jointly during the existence of the company or in its winding up. Separate legal entity of the company is also recognised by the Income Tax Act, where a company is required to pay income tax on its profits and when these profits are distributed to shareholders in the form of dividend, the shareholders have to pay income tax on their dividend income. This proves that a company and its sharcholders are two separate entities. |. Perpetual succession. A company has perpetual succession and is independent of the life ofits members. Its existence is not affected in any way by the death, insolvency or exit of any shareholder. A company can be compared with a river which retains its identity though the parts which compose it are constantly changing. Perpetual succession thus means that in spite of a change in the membership of the company, its continuity is not affected, Perpetual succession lends stability and long life to a company as compared to other forms of business organizations. Limited liability. One of the important advantagesof the company is thatthe liability of its members is limited. In the case of a company limited by shares, the liability of ‘members is limited to the extent of the nominal value of shares held by them. If a shareholder-has paid the full nominal value of shares held by him, his liability is il ‘This means that a shareholder remains liable to pay the unpaid Value of shares if any ‘Transferable shares. In a public company, the shares are freely transferable, The right to transfer shares is a statutory right and it eannot be taken away by a provision in the articles, . Common seal, A company in an atficial person. Itcannot act on its own. Itacts through natural persons who are known as directors. All contracts entered into by the directors must be under the common seal of the company. The common seal, with the name of the company engraved on it, is used as a substitue forts signature, No document issued by the company shall be binding on it unless it bears the common seal which is duly witnessed by at least two directors of the company . Separate property. A company, being a legal person. & capable of owning, enjoying and disposing of property in its own name. The prope of the company is to be used for the company’s business and not for the personal Benet ofits shareholders. Members have no direct proprietory rights to the companys seapert . Capacity to sue and be sued, The company i= less! person and it can enforce its legal rights, Similarly it can be sued for bresc lege dates Siena Mee1.5.3 Forming a Company A company is an artificial entity created by law for the purpose of carrying on any object, such as business, sports research, charity, ec. However, most companies are formed for the purpose of conducting business. The process of forming a company can be divided into 4 distinct stages: () promotion; (i) registration or incorporation; (ii) capital subscription: and (iv) commencement of business. 1.5.4 Promotion This is the first stage in the formation of a company. Gersienberg in his book, Financial Organization and Management of Business, has defined ‘promotion’ as, “the discovery of business opportunities and the subsequent organization of funds, property and managerial ability into a business concer for the purpose of making profits therefrom.’ First ofall the idea of carrying on a business which can be profitably undertaken is conceived either by a person or by a group of persons who are called promoters. After conceiving the idea, the promoters make detailed investigations to find out the weaknesses and strong points of the idea, to determine the amount of capital required and to estimate the operating expenses and probable income. When the promoter is satisfied that the idea, as originally conceived, can be put into practice profitably, he takes the necessary steps for assembling the proposition. These steps include securing the cooperation of the required number of persons who will associate themselves with the project and act as the first directors of the company to be flosted, securing the necessary patents, acquisition of a suitable site for the factory, arrangements for machinery and equipment, tentative arrangements for personnel and 80 on, Afler assembling the proposition, the promoters prepare a detailed financial plan showing therein total cost of the project, sources of finance, efe. They must also decide at this stage ‘whether the company to be formed is to be a private company or a public company. The ‘minimum number of members required to form a company is 7 in the case of a public company and 2 in the case of a private company, They must also arrange in advance the success of the company floatation by finalising contracts withthe underwriters and the Issue Houses. Finally, they should get necessary documents prepared such as memorandum of association, articles of association, the prospectus and arrange for their publication. These documents are prepared with the help of legal experts and the promoters have to see that the particular requirements of the Act are incorporated therein. 1.5.5 Registration or Incorporation This is the second stage of formation of the company. Inthis stage the company is registered ‘with the Registrar of Companies under the Companies Act. Section 12 of the Act provides that for forming a public company at least 7 persons and for forming a private company at Jeast 2 persons are required. These persons will subscribe their names to the memorandum of association and will also comply registration to form and incorporate a company, with or without limited liability. However, before registration, the promoters must take the following steps: @ They must take a decision whether the company proposed to be formed, is to be a public company or a private company; (ii) They must obtain the approval of the proposed name from the Registrar of Companies. To take approval of the name, an application has to be made in the prescribed form. The application should be filed with the prescribed fee and it will be better for promoters to select and send 3 or 4 names of companies in order of preference; ii) They must have necessary documents prepared and printed; (iv) They must prepare preliminary contracts and a prospectus or statement in lieu of a prospectus. Seif dntrctinal Materiel Forms of Business Organizations NOTES neForms of Business Organizations NOTES a 1.5.6 Filing Documents with the Registrar The following documents are to be filed with the Registrar of Companies of the State in which the registered office of the company is to be situated, along with an application for registration and necessary fees: 1. The memofandum of association of the company, which shall be printea, divided into paragraphs and signed by each subscriber who shall acd his address, description and ‘occupation in the presence of at least | witness who, shall attest his signature 2. The articles of association of the company, if any, which shall also be duly signed by subscribers of the memorandum of association. A public company limited by shares ‘may not have its own articles and, in that case, Table A, the model set of articles, shall be applicable but this fact must be specified in the memorandum. However, all other companies must prepare their articles which shall be filed with the Registrar along with the memorandum, [Sec 33(1)(b)] 3. The agreement, if any, which the company proposes to enter into with any indi for appointment as its managing or whole-time director of manager. 4. Notice of address of the registered office of the company must be given to the Registrar within 30 days of incorporation if it cannot be filed at the time of registration. 5. A list of persons who have given their consent to act as directors of the company must be filed with the Registrar. 6. The written consent of each proposed director signed by him, along with a writen undertaking to take up and pay for qualification shares, if any, must be filed withthe Registrar. 7. A declaration that all the requirements of this Act in respect of registration have been compiled with, 1.5.7 Registration of a Company ‘The Registrar will examine the documents. He may, however, accept the declaration as sufficient evidence of conipliance with the Act. If he is satisfied that all requirements of the Act in respect of registration have been, complied with, he will register the company and place its name in the Register of Companies. A certificate of incorporation will be issued whereby the Registrar shall certify under his hand that the company is incorporated and, in the case of a limited company, that the company is limited. ‘The Registrar of Companies is also required to issue a Corporate Identity Number (CIN) to each company registered on or after November Ist, 2000, The certificate of incorporation is the birth certificate of a company. The company comes into existence from the date mentioned in the certificate of incorporation. Not only does the certificate create the company, the certificate is conclusive forall purposes. 1.5.8 Capital Subscription A private company can commence business immediately on receipt of the certificate of incorporation. But a public company cannot commence business unless it obtains another certificate called “the certificate of commencement of business’ from the Registrar of ‘Companies. For this purpose, a public company has to go through ‘capital subscription stage, and ‘commencement of business stage’. Making necessary arrangements for raising capital. In the capital subseription stage, the company makes necessary arrangements for raising the capital of the company. The most common method of raising capital from the public is by inviting offers from the members of the public to subscribe for the shares or debentures through issue of prospectus. The Sefton MartaSeturities and Exchange Boatd of India (SEBI), which was established by SEBI Act, 1992, regulates the issue of capital to the public. A pubtic company raising capital ftom the public by the issue of shares or debentures, has to comply with the “Guidelines for disclosure and investor protection, 2000” issued by SEBI. Inviting public subscription. Where the directors of public company wish to invite the public to subscribe for its shares, they will file a copy of the prospectus with the Registrar of Companies. On the advertised date the prospectus will be issued to the public. No prospectus can be issued unless a copy of it has been filed with the Registrar. Prospective investors can obtain a copy of the prospectus either from the company’s registered office or its bankers. Investors are required to forward their applications for shares along with application money to the company's bankers mentioned in the prospectus. The bankers will then forward all applications to the company and the directors will consider the allotment of shares. Ifthe subscribed capital is at least equal to the minimum subscription of 90% of the capital issue, and other statutory conditions for allotment of shares ate fulfilled, the irectors will pass a formal resolution of allotment of shares to the applicants. Alfotment Jetters willbe sent to those applicants who have been allotted shares in the company whereas Jetters of regret will be sent to those who have been refused. A return with allotment details is filed with the Registrar: In due course of time, a register of members will be prepared and share certificates will be issued to shareholders in exchange of letters of allotment. If the company does not receive applications, which can cover the minimum subscription of 90% of the issued amount within 60 days from the closure date of the issue, the company shall forthwith refund the entire amount received and no allotment can be made. Arranging capital privately. Sometimes a public company may decide not to approach. the general public for selling its shares as it may be ina position to obtain the required capital privately. In this situation the company will file a statement in lieu of prospectus with the Registrar atleast 3 days before the allotment of shares. It need not issue a prospectus. It may also be noted that the contents of a prospectus and a statement in lieu of a prospectus are more or less the same. 1.5.9 Commencement of Business A private company can commence business immediately after obtaining certificate of incorporation. But a public company cannot commence business until it receives the certificate of commencement of business. Companies issuing the prospectus. A company which has issued @ prospectus inviting the public to subscribe for its shares cannot commence any business or exercise any borrowing powers unless, (@) shares payable in cash have been allotted to an amount not Jess than the minimum subscription; (b) every director of the company had paid the company cash application and allotment money on his shares in the same proportion as others; (¢) ‘no money is liable to be repaid to the applicants for failure to apply for, or to obtain, the permission for the shares or debentures to be dealt in on any recognised stock exchange; and (d) a declaration duly verified by one of the directors or the secretary that the above requirements have been complied with is filed with the Registrar. Companies not issuing the prospectus. Where a company with a share capital has not issued a prospectus inviting the public to subscribe for its shares, it shall not commence any business of exercise any borrowing power, unless (a) a statement in lieu of a prospectus is filed with the Registrar; (b) every director of the company had paid the company in cash application and allotment money on his shares in the same proportion as others; (c) a declaration duly verified by one of the directors or the secretary that above requirements have been complied with is filed with the Registrar. If the company has not appointed a secretary, it can get the declaration signed by a secretary in whole-time practice. [Sec. 149(2)] ‘When the company fulfils the above conditions, the Registrar shall certify hat itis entitled fo commence business and thatthe certificate shall be conclusive evidence that the company isso entitled, (Sec. 149(3)] Seltnercional Morr Forme of Business Organizations NOTES. rote ore OsForms of Business Organizations NOTES Check Your Progress 4. How do you define a joint stock company’ How docs it diflerfromasole proprietorship, parinership at Hindu Family 16 Bs not men 1.5.10 Differences Between a Company and a Partnership ‘The principal points of difference between a company and a partnership are as follows: 1. A company comes into existence only when itis registered under the provisions of the Companies Act. However, a partnership is created by an agreement between partners. Registration of a partnership firm under the Partnership Act is optional A private company must be constituted by at least two persons, and by at least seven in ‘case of a public company. A partnership can be created by two persons. 3, In public company, there is no limit on the maximum number of members while in a private company, the number of members shall be restricted to fifty excludingits present and past employees. In the case of a partnership carrying on banking business, the ‘maximum number of partners can be ten, and in the case of any other business twenty. 4. A company has a separate legal entity distinet from the members who constitute it. A partnership, commonly called a firm, has no legal existence apart from its members. This means that partners and firm are one and the same, 5. In the case of company, property belongs to the company and not to its individual members, whereas the property of a partnership firm belongs to individual partners comprising the firm. 6. A shareholder may enter into a contract with a company, whereas a partner cannot enter into a contract with a firm. However, a partner can enter into a contract with other partners. 7. Creditors of the company are not the creditors of individual shareholders. They can proceed against the company alone. Creditors cannot hold the shareholders directly able for their amounts. The creditors of a partnership fitm are the creditors of individual partners and a decree obtained against a firm can be enforced against them. 8. A shiareholder is not an agent of the company whereas a partner is an agent of his firm in connection with partnership business. 9. The liability of partners is unlimited, The liability of shareholders is usually limited However, the law does not prevent a company from rendering the liability of members unlimited, 10. Shares of a company are freely transferable. However, in the case of private company the articles restrict the rights of members to transfer their shares. Ina partnership, a partner cannot transfer his share without the consent of his co-partners 11. A company has perpetual succession. Death, insolveney or the exit of any sharcholder does not affect the existence of the company. It comes to an end only when its liquidated according to the provisions of the Act. Unless otherwise provided, a partnership comes to an end when a partner dies or becomes insolvent. 12, Ina company, the shareholders do not interfere in affairs of the company directly. It fs managed by a board of directors, who are elected by the shareholders. But. partnership is managed by all partners or any of them acting for all. 13, Each partner is the agent of every other partner in all matters connected with the business of the partnership. Every partner has the authority to act on behalf ofall and can, by his actions, bind all the partners of the firm. In a company, no shareholder is an agent of another shareholder. Neither a shareholder can bind other shareholders by his actions nor he is bound by the actions of other shareholders. 14, A company’s powers are defined by the memorandum, The articles contain rules and regulations for internal management, and any change in these documents can be made only by following the legal procedure laid down in the Companies Act. In the case of a . Se rsrvonolMaeripartnership, rules regarding management of the business of the firm and the powers of the firm are spelt out in the partnership deed which can be easily altered withthe consent of all the partners. 15. A company is also subject to strict control by the Companies Act with regard to various matters such as maintenance of books of account, share capital, distribution of profit, ete, There are no such statutory obligations in a partnership, 1.6 PRIVATE AND PUBLIC COMPANIES (JOINT STOCK) ‘On the basis of the number of members, a company may be either a private company or a public company, 1. Private Company. A private company means a company which has a minimum paid- up capital of Rs | lakh or such higher paid-up capital as may be prescribed, and by its articles of association: (a) restricts the right of the members to transfer shares, if anys; (8) limits the number of its members at 50, excluding members who are or were in the employment of the company; (©) prohibits any invitation to the public to subscribe for any share in, or debentures Of, the company; and (d) prohibits any invitation or acceptance of deposits from persons other than its ‘members, directors or their relatives. ‘The minimum number required to form a private company is2. A private company shall add the words ‘Private Limited? at the end of its name, and it may commence its business immediately after obtaining a certificate of incorporation. But it should be noted that a public company, after obtaining the certificate of incorporation, has to comply with certain formalities to obtain a certificate of commencement of business, after which only itis entitled to do so. Private companies are usually family concerns, since shares are generally held by members of the family. The basic point of a private company is that shareholders have the advantage of limited liability and its affairs remain secret to a considerable extent. 2. Public Company. A public company means a company which: (a) is not a private company; (b) has a minimum paid-up capital of Rs 5 lakhs or such higher paid-up capital, as may be prescribed; (0) is @ private company which is subsidiary of a company which is not a private company, ie., which is a subsidiary of a public company. ‘This means that a public company may invite the general public forthe subscription of its shares or debentures. However, itis not obligatory for a public company to invite the public for this purpose if it is confident of raising the required capital privately. At the same time a public company is free to invite or accept deposits from the public. Similarly, the limit of a maximum of 50 members as applicable to a private company docs not apply to a public company, However, the minimum number of members requited to form a public company is 7. At the same time the articles need not contain a clause for restricting the right of members to transfer their shares. These are freely transferable. It should be noted that a public company must add the word “Limited” at the end of its name. Selplrncondd Morera Forms of Business Organizations NOTESForme of Business Organizations NOTES 1.6.1 Difference between Private and Public Companies The main points of distinction between a private company and a public company are as follows: 6, Minimum paid-up capital. A private company must have a minimum paid-up capital Of Rs I lakh while a public company must have a minimum paid-up capital of Rs 5 lakhs at the time of incorporation, Number of members. The number ofmembers ina private company is 2 while public. company must have at least 7 ‘The maximum number of members ina private company cannot exceed fifly, excluding its present or past employees. In the case of @ public company, there is no maximum limit on members, - Name of the company. Ina private company, the words ‘Private Limited? shall be added at the end of its name. In a public company, the word ‘Limited only shall be added at the end of its name. Transfer of shares, In a private company, the articles restrict the right of members to transfer their shares whereas in a public company, the shares are freely transferable. Public subseription. A private company cannot invite the public to purchase its shares or debentures. A public company may do so. Acceptance of public deposits. A’private company, by its articles, prohibits any invitation ‘or acceptance of deposits from persons other than its members, directors or their relatives whereas a publie company can invite or accept deposits from the public. Issue of prospectus. Unlike a public company, a private company is not expected to issue a prospectus or file a statement in lieu of prospectus with the Registrar before allotting shares. Allotment of shares. A private company can proceed to allot shares even before the ‘minimum capital is subscribed or paid. Buta public company cannot allot shares without raising minimum capital Issue of right shares. While making further issue of pital, public company is required to first offer such further shares to its existing shareholders on a pro-rata basis. But a Private company is not required to do so. Issue of share warrants. A private company cannot issue share warrants while a public company can. Commencement of business. A private company may commence its business immediately after obtaining a certificate of incorporation. A public company cannot commence its business until its granted 2 ‘certificate of commencement of business.” Holding of statutory meeting. A private company is not required to hold a statutory ‘meeting whereas a public company must do so after one month but within 6 months of obtaining the certificate of commencement of business. Quorum for general meetings. 2 members personally present form the quorum in a private company but in a public company, the number is 5 members. ‘Minimum number of directors. A private company shall have at least 2 directors ‘whereas a public company is required to have at least 3 directors Restriction on appointment of directors. In a public company, the directors must file with the Registrar, their consent to act as such in writing. Similarly, they must sign the memorandum or enter into a contract for their qualification shares, At least two- thirds of the directors of a public company must retire by rotation. They cannot vote Sperone Mera‘on a contract in which they are personally interested. These restrictions, however, do not apply to the directors of a private company. 16. Managerial remuneration. In a public company the overall limit of managerial remuneration is 11% of net profits. However, this restriction does not apply to private ‘company. 17. Index of members. A private company need not keep an index of members whereas a public company is required to keep an index of members if its number of members exeeds 50. 2 Special Privileges of Private Companies ‘Though public as well as private companies are governed by the Companies Act, yet private companies are exempted from certain of its provisions. These exemptions are the special privileges of a private comapny. The exemptions and privileges enjoyed by a private company are stated below: 1. A private company may be formed with only 2 persons as members. 2. It may commence allotment of shares even before the minimum subscription is subscribed for or paid 3. Itis not required to either issue a prospectus to the public or file a statement in lieu of 2 prospectus 4. Restrictions imposed on public companies regarding further issue of capital do not apply to private companies, 5. Itcan commence its business after obtaining a certificate of incorporation. A certificate of commencement of business is not required. 6. Itnced not hold a statutory meeting or file a statutory report 7. Unless the articles provide for a larger number, only two persons personally present shall form the quorum in case of a private company, while at least 5 members personally present form the quorum in case of a public company. 8. In case of a private company, poll can be demanded by 1 member if not more than 7 members are present, and by 2 members if more than 7 members are present. In case ‘ofa public company, poll can be demanded by persons having not less than one tenth of the total voting power in respect of the resolution or holding shares on which an aggregate sum of not less than Rs, 50,000 has been paid-up. 9. Itneed not have more than 2 directors, while a public company must have at least 3 directors 10. A director is not required to file his consent to act as such with the Registrar. Similarly, the provisions ofthe Act regarding undertaking to take up qualification shares and pay for them are not applicable to directors of a private company. 11. A private company is not prohibited from giving financial assistance directly or indirectly for purchase or subscription of its own shares. 12. A private company is exempted from many provisions of the Act relating to directors, the managing director or manager. These exemptions are given below: (@ Restrictions contained in Section 198 regarding overall maximum managerial remuneration shall not apply to a private company. Section 198 fixes overall maximum managerial remuneration at 11% of net profits (@) All its directors can be permanent life directors and the provisions relating to retirement of directors by rotation (one-third every year) shall not apply to it. Seinarctona Meter} Forms of Business Organizations NOTES noone |Forms of Business Organizations (©) Two or more directors may be appointed by a single resolution. But in a public company, each director shall be appointed by a separate resolution put to vote separately. (@) The directors may vote on resolutions in which they are interested. (©) There are no restrictions on the board of directors to sell the whole or part of the undertaking, NOTES @ There are no restrictions on a private company to make loans to its directors or to provide guarantees ot securities for moneys borrowed or lent by them, (g) Provision requiring sanction of the Central Government for increasing the number of directors beyond the limit fixed by the articles shall not apply to a private company, (A) Restriction as to number of companies which can be managed by a ditector (15 companies) or by a managing ditector (2 companies) or by a manager (2 companies) shall not apply to private companies. (© Provision prohibiting appointment of managing director or manager for more than. ‘5 years ata time shall not apply to it. @) No government approval is required for appointment or teappointment of managing ‘or whole-time director or manager. Similarly no Government approval is required ‘to amendment of provisions relating to the managing or whole-time director or manager. (k) Provisions of Section 270 specifying the time within which the share qualification ‘sto be obtained by a director (within 2 months after his appointment asa director), and the maximum amount in respect of share qualification (Rs $000 or the nominal value of one share where it exceeds Rs 5000) shall not apply to a private company. . D A private company may provide additional disqualifications in its articles for the appointment of directors. ‘The above provisions and restrictions are applicable to public companies, while private ‘companies are not required to comply with them. 13. Provisions of the Act in respect of matters specified in Sections 171 to 186, namely, general meetings, notice, quorum, chairman, proxies, voting, poll, efe., shall not be applicable to a private company to the extent to which it makes its own regulations by its articles. 14. No person other than a member of the private company is entitled to inspect or obtain copies of the profit and loss account and the balance sheet fled with the Registra. 15, Restrictions on making of inter-corporate loans and investments shall not apply to a private company. 1.6.3 Advantages of a Joint Stock Company (®) Large financial resources (ii) Professional management (ii) Limited Liabi ty (iv) Transferability of shares (v) Diffused risk (vf) Scope for expansion and growth ee Ecc ee(vill) Stabil (ix) Public confidence 1.6.4 Disadvantages of a Joint Stock Company (® Difficult and costly formation (i) Excessive government contol (iii) Waste ani (iv) Bureauer (0) Undue delay in decision-making (vi) Neglect of minority shareholders (vii) Fear of fraudulent management (vilf) Lack of secrecy (2) Social evils such as creation of monopolies, concentration of economic power in a few hands, interference by the politcal system, lack of industrial peace. ficiency associated with indirect management ic approach In spite of the weaknesses of joint stock company form of business organization, it is the most effective vehicle to manage and control a modem business enterprise. In fact, itis the only form which is suitable for business activity requiring large capital outlay and maximum stability. Most of the demerits mentioned above arise from mismanagement or misuse of this form of organization. And though other forms of business units may outnumber it, most business is transacted by units of this type. 1.7 CO-OPERATIVE ORGANIZATIONS Co-operative enterprise also called co-operative society is an association of persons, usually of limited means, who have voluntarily joined together to achieve @ common economic end through the formation of a democratically controlled business organization, making equitable contributions to capital required and accepting a fair share of risks and benefits of the ‘undertaking, The principle theory of true co-operative organization isthe elimination of profit and provision of goods and services to members at cost. As a forn of organization, itis an enterprise ordinarily set up by ‘economically weak” individuals to further their common economic and social interest, fo eradicate capitalist exploitation, to eliminate middlemen and t6 bring the consumer and producer together. Thus, a co-operative enterprise is established with the fundamental objective of organizing and rendering service for the ‘organization and its members and not for making profits, In essence, co-operation isnothing, but selfthelp made effective by organization Sere eee ree ee eee eee ‘which has as its objectives the promotion of the interests of its members in accordance with the principles of co-operation 1.7.1 Characteristics of Co-operative Organizations 1. Voluntary Association. The membership of the society is voluntary and open to all persons having a common interest. Any person, imespective ofhis caste, creed, religion, sex, efe., can become a member of a co-operative society voluntarily and can leave it any time at his own will. 2, Equal Voting Rights. Members of the co-operative society have equal voting rights in the management of its affairs. Seyfraractonal eerie Forms of Business Organizations NOTES Check Your Progress 5, How do you differentiate between privat joint stock companies and public joint stock companies? What is the role of each ype in the nation’s economy and affairs? Do private companies have special privileges not enjoyed by public companies? IFs0, explain est eeForms of Businese Organizations NOTES. ee 3. Democratie Management. Democracy is the rule of co-operatives. The management of @ co-operative society is cntrusted fo a managing committee elected by members on. the basis of ‘one member—one vote’. The members frequently meet and give guidelines to its executive, 4. Service Motive. A co-operative society is organized to render service to its members and not to make profit 5. Capital. A co-operative society raises capital from its members in the form of share ‘capital, The other sources on which a society has to rely are loans, grants and assistance from the Government and apex co-operative institutions. 6, Distribution of Surplus. In a co-operative society a fixed rate of return not exceeding ‘en percent is fixed on capital subscribed by each member. One-fourth of the profit is to be transferred to general reserve as per law. In addition, a portion of profit not exceeding ‘en per cent may be utilized for the general welfare of the locality in which the society is functioning, The residual may be distributed among members in the form of bonus, ‘on an agreed basis but not on the basis of capital contributed by members. 7. Trading on Cash Basis. As a rule, co-operative societies conduct business on cash basis and allow no credit. a 8. Corporate Status. A co-operative society is required to be registered under the Co- ‘operative Societies Act. Hence, it enjoys a corporate status. After registration, a co- ‘operative enterprise becomes a body corporate independent of its members. [tis entirely distinet from its members, Thus, it has a perpetual succession which is not affected by the éntry or exit of members. 9. State Control. Although voluntary in basic character, the co-operative societies ate subject to considerable state control and supervision. A co-operative society has to submit ‘annual reports and accounts to the Registrar of Co-operative Societies. The activities of the co-operative societies are subject to certain rules and regulations framed by the government, 1.7.2 Classes of Co-operative Societies ‘Co-operatives may be formed in any walk of life for mutual economic benefits. Co-operatives as a form of business organization may be classified as follows’ (8) Producers’ Co-operatives (fi) Marketing Co-operatives Gi) Consumers’ Co-operative Societies (iv) Housing Co-operative Societies (©) Co-operative Farming Societies (i) Co-operative Credit Societies (vii) Multi-purpose Co-operatives 1.7.3 Formation of Co-operatives ‘A co-operative society enjoys a separate legal entity and its registration is compulsory. tis required to be registered under the Co-operative Societies Act, 1912 or the State Co-operative Societies Act. In each state, there is Registrar of Co-operative Societies who is in charge of. co-operatives. In order to get a co-operative society registered, an application inthe prescriby 4 form is to be made to the Registrar of Co-operative Societies ofthe concerned state in which the society's registered office is situated. Any ten adult persons may submita joint application Sensational Maserfor being formed into a co-operative society. The applicetion must contain the following ‘information: (#) The name and address of the society (i) Aims and objects of the society (ii) Details of share capital (iv) The names, addresses and liabilities of the members () Method of admission of new members (vi) Two copies of the bye-laws, that is, rules and regulations goversing the internal functions of the society. The Re carefully scratinise the application and when he is fully satisfied, he will enter the name of the society in his register and will issue a certificate of registration. And now the society will come into existence and acquire the legal status. 1.7.4 Advantages of Co-operative Organizations @ Ease of formation (ii) Democratic management (iii) Limited ability (i) Perpetual succession (») Scope for internal financing (vi) State assistance (vit) Social desirability (viii) Tax concessions 1.7.5 Disadvantages of Co-operative Organizations @ Limited resources (i) Dependence on external aid _ (iit) Inefficient management : (iv) Lack of motivation (v) Lack of secrecy (v1) Internal quarrels and rivalries (vii) Excessive government control On the basis of the above evaluation, it can be concluded that co-operatives are primarily ‘suitable for small and medium size organizations and particularly for trading organizations. 1.8 FORMS OF ORGANIZATION OF PUBLIC UNDERTAKINGS ‘The most preferred forms of organization and management of public enterprises in India =: () Departmental undertakings; (i?) public or statutory corporations; and (ii) mixed ‘ewnership corporations or government companies set up under the Companies Act. 18.1 Departmental Undertakings This is the oldest form of organizing public sector undertakings. Under Selene Masri form of Forms of Business Organizations NOTES ‘Check Your Progress 6, What do you mean by = cooperative organization? How does it differ fom types of organizations? os icForms of Business Organizations NOTES I a mcsinree organization a public enterprise is run as @ department of the Government. A departmental enterprise is organized, financed and controlled in as much the'same way as any other government department. It may be run either by the Central Government or by a State Government. Some of the departmentally administered public enterprises in India are the Indian Railways, Post and Telegraphs, Al India Radio, Doordarshan, Chittaranjan Locomotive Works and the Integral Coach Factory. 1.8.2 Characteristics (D Itis managed by a government department attached to the ministry, with a mi at the top responsible to Parliament for its operation; Gi) Ttis financed by annual appropriations from the treasury and the revenues are paid into the treasury; (Gif) tis subject to budget, accounting and audit controls applicable to other government activities, (iv) Tris manned by civil servants and their conditions of recruitment and service are the same as for other civil servants; (y) It possesses the sovereign immunity of the State and cannot be sued without government consent. 1.8.3 Advantages (D Full government controt Gi) Too! for economic and social objectives of the State (if) Accountability to Parliament (iv) Proper use of public money () Source of government revenue 1.8.4 Disadvantages (®) Excessive bureautratic control (i) Lack of flexibility essential to business operations (iil) Lack of professional management (i) Low efficiency (®) Undesirable political pressure (vi) Lack of necessary autonomy and presence of red-tapism. This type of organization is very suitable for industries where secrecy and strict control are needed, e.g., Defence and Strategic Industries, Posts and Telegraphs, etc 1.9 PUBLIC OR STATUTORY CORPORATIONS AA public corporation may be defined as a body corporate created by the legislature under a special act which sets out its powers, purpose, duties and immunities. Simply stated, itis a ‘company whose capital is wholly subscribed by the State and which is answerable to Parliament which creates it. Its clothed with the power of Government, but possessed of the flexibility and initiative of private enterprises. Structurally, i is a joint stock compan and it is managed by a Board of Directors appointed by the Government to which it is answerable. In India, there are number of statutory corporations such as State Bank of Seftnerctiont Meena!India, Life Insurance Corporation of India, ONGC, Food Corporation of India, Central Warehousing Corporation, ec. 1.9.1 Charaeteristies (@ It is owned by the State. (i) Its created by a Special Act of the Legislature with its powers, duties, ec. defined by the Act. (Gif) It is a body corporate and can suc and be sued, enter into contracts and acquire property in its own name. (iv) Itis ordinarily not subject to the budget, accounting and audit laws and procedures applicable to government departments. (») It works primaril for service, and profit is only a secondary consideration with it. (+8) Employees of public corporation are not civil servants and are not governed by government regulations in respect of conditions of service (vil) Itenjoys internal autonomy and is free from parliamentary or political control in the intemal and routine management, Itis, however, subject to ministerial control 1.9.2 Advantages © Intemal autonomy (i) Flexibility and effectiveness of private enterprise (id) Stability (i) Public accountability and business management for public ends (») Service-oriented outlook (vi) Professional management 1.9.3 Disadvantages @ Elaborate and time-consuming formation through a special act of the legislature Gd Ri (iif) Excessive parliamentary control id form of organization (iv) Lack of cost-consciousness In spite of some disadvantages, public corporations are popular transport and trade sectors of the economy. insurance, banking, 1.10 GOVERNMENT COMPANIES OR MIXED OWNERSHIP CORPORATIONS There was a time when the State was concerned only with problems relating to the maintenance of law and order. But now the relationship between the State and economy has undergone a considerable change. There has been a growing participation of the State he industrial development of the country. Considering this tendency, the Companies Act, also includes provisions for government companies. The basic feature of these provisions is to enable the Government to undertake business ventures and to combine the operating flexibility of privately organized companies with the advantages of State regulation and control in the public interest. Seypisrctonal Merit Forms of Business Organizations NOTES SeForms of Busnsss Organizations NOTES cn Definition. A government company is one in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government, of Governments, of partly by the Central Government and partly by one or more State Governments, The subsidiary of such a company is also a government company. 1.10.1 Special Provisions Relating to Government Companies All the provisions of the Companies Act, 1956 apply to a government company with the following special provisions: @ ® () (d@) (e) Appointment of auditors. The auditor of a government company shall be appointed ‘or reappointed by the Comptroller and Auditor General of India. Audit report to be submitted to the Comptroller and Auditor General of India. ‘The auditor shall submit a copy of his audit report to the Comptroller and Auditor General of India, Audit report fo be placed before the annual general meeting. The audit report shall be placed before the annual general meeting of the company. Annual report to be placed before Parliament. Where the Central Government is a member of a government company, the Central Government shall prepare the ‘annual report on the working and affairs of the company within three months ofits annual general meeting before which the audit report is placed. The annual report is to be laid before both Houses of Parliament together with a copy of the audit report. ‘Where in addition to the Central Government, a State Government is also a member ‘of a government company, that State Government shall cause a copy of the ‘annual report to be laid before the State Legislature together with a copy ofthe audit report. Where the Central Government is not a member ofthe goverment company, every State Government which is a member of that company or where only one State Governments a member of the company, the State Government shall cause an annual report on the working and affairs of the company to be prepared within three months of its annual general meeting before which the audit report is placed. ‘The annual report isto be laid before the State Legislature together with a copy of the audit report Power of the Central Government to modify Act in relation to government ‘companies. The Central Government may direct that the provisions of the Act specified inthe notification shall not apply to any government company, subject to approval of the Parliament. This form of organization combines the operating flexibility of privately operated company with the advantage of State regulation and control in public interest. In the “mixed ownership corporation’ there is an opportunity for the State to associate the investing public or the foreign entrepreneurs with their capital and technical know= howand the government holding not less than 51 per centaf the paid up share capital Some ofthe prominent government companies in India are Bharat Heavy Electricals Limited, Hindustan Machine Tools Limited, Indian Telephone Industries Limited, Hindustan Shipyard Limited. 1.10.2 Characteristics Gi) It is a body corporate created under the Companies Act and as such it has all the features ofa limited company registered under the Companies Act. Sayetmirveona Meterit(Gi) It is governed by the provision of the Companies Act. (iii) All or majority of the directors are appointed by the Government depending upon the extent to which the ownership of the company is mixed, (iv) Itis generally exempt from the personnel, budget, account and audit laws and procedures applicable to government departments. (¥) Its funds are obtained from Goverment, and in some cases, from private shareholders ‘and through revenués derived from the sale of its goods and services (vi) Its employees are not civil servants, excluding the officers taken from goverment departments on deputation 1.10.3 Advantages @ Ease of formation (i) Operational autonomy and flexibility (iti) Businesslike approach (#») Suitable for private participation and foreign collaboration (Y) Public accountability (vi) Legal control and discipline imposed by the Companies Act, 1956 1.10.4 Disadvantages (@ Facade of autonomy (ii) Fear of public criticism (il) The malady of directors on deputation (iv) Bureaucratic approach leading to red-tapism and delay in decision-making and execution, (0) Lack of professional management Inspite of the aforesaid defects, government companies are quite popular It is regarded as, a compromise between the rigid departmental undertaking and autonomous statutory corporation. 1.11 SUMMARY There are a number of ways of start a new business. The business can be in the form of sole proprietorship where a single individual owns the business such as a restaurant or a dry cleaning store. Of course, if anything goes wrong, the liability of the owner is without limits, Ina joint partnership, the owners of the business should be at least 2, The upper limit, is defined by the Companies Act of 1956 which limits the number to 10 for banking and 20 for other businesses. Again the liability for all partners is unlimited. A Joint Hindu Family firm is unique to India. It is govemed by Hindu lave. The ownership of the business is automatically passed on the sons. Only male members can share in the ‘ownership except for the female whose husband, a shareholder, has died. A Joint Stock Company is a corporation which can issue stock to the public at large who become shareholders of the companies to the extent of shares held by people. A private joint stock company restricts the right of members to transfer shares while in public joint stock company, there is no such restriction. Also the liability is Himited to the assets of the corporation and does not extend to shareholders. Selpstacionat Matra Forms of Business Organizations NOTES Check Your Progress 7. Thee ae te pes of public enterrises namely earn underikngs abies Corpraions nd mined ‘omershp eopostont. on and inlets condtonsanded Ppa Tied eeForms of Business Organizations __&. co-operative society is an organization where members have joined voluntarily to achieve a common economic goal. Co-operative societies are well known in terms of owning residential buildings. ‘Then there are government agencies created by the legislators, under a special act, and these are owned by the states and funded by state and central governments, Examples are State Bank of India, Food Corporation of India, ONGC and so on. They are only answerable to the Parliament which creates them, NOTES 1.12 ANSWERS TO ‘CHECK YOUR PROGRESS’ 1. Major advantages and disadvantages of sole proprietorship are as follows ‘Advantages (@) Ease of formation (6) Quick decisions by the owner (€) Flexibility of operation (@) Direct control (e) Direct motivation from the boss (Personal touch with customers (g) Not open to public scrutiny (4) Minimum government regulations (@ Closer interaction Disadvantages (@) Limited access to finances (©) Limited managerial ability (©) Limited scope for growth (@) Little scope for specialization (e) Limited expansion opportunities Unlimited lability (g) Uncertainty of continuity 2, Partnership is better than sole proprietorship for the following reasons: (@) Two ot more heads are better than one. (8) Larger access to financiat resources. (©) Benefits of combined ability and balanced judgement. (d) Checks and balances. They both must jointly make decisions, (e) Decision making is as fast as in sole proprietorship but less emotional, (A) Reduced risk for individual due to sharing of losses. (g) Personal supervision can be given at all times by any one of the partners 6 (h) Secrecy in business can be protected by the few partners. SP tas etek ners = ‘Septet, sever> (2) Joint Hindu Family is necessary where the company and its assets must remain ‘within the family over generations. It operates under the Hindu Law and both the assets and the management are passed on to the children and grandchildren and 30 on. It protects the family fortune from outside interference. (©) It differs from partnership in some of the following ways. (®) A partnership is a contract between the partners who do not have to be related to each other. Joint Hindu family is created and protected by law. (i) Ina Joint Hindu Family business, a female cannot be a member because of her birth or otherwise. Only male members are entitled to assets and ‘operations. (ii) Ina partnership, the liability isoint and unlimited. In the JHF, itis the Karta who is personally liable for the debts. iv) JHFis perpetual in nature, Death of one or more does not close the business. ited by law. (vi) Inpartnership, a partner has the right to demand dissolution of partnership. (Y) Ina partnership, th umber of partners is! (©) Discrimination occurs when you deny someone the right to be a part of your ization, when the person is given the right to do so by law or by society. In indu Family business, such a right is limited to family members only and that also in a given manner as prescribed by law. 4 A joint stock company is a public company registered under the Companies Act. Itissues. stock to buyers against payment of money and these buyers become, in essence, part ‘owners of the company, It is a way to raise capital from the public in return for shares in the company. Most of the larger organizations in the world are public companies. Such companies differ from other forms of organizations in the following ways. (@ They have limited liability. Any liability ofthe company is limited to its assets and the shareholders are not held responsible for such liabilities. (© They are a separate and invisible entity. They exit only in the eyes of law. The Board of Directors who may or may not be the owners of the company, but elected by the shareholders, makes decisions on behalf of the company. (©) Shares of the company can be transferred to anyone else without permission from other shareholders. (@) The company has perpetual existence and is independent of the life ofits members. (© Shareholders do not have much say in the operations of the company. (A The shares are not automatically passed on to the children upon the death of the father. (g) There is no limit on the maximum number of members. (#) A shareholder is not an agent for the company while a sole owner or a partner is. (®)_A company is subject to strict control and monitoring under the Companies Act. 5. (a) The basis for difference between a private joint stock company and public joint stock company is primarily the number of members in the company. The private company is limited to 50 members and only members, directors or their relatives can contribute the capital. The public company invites the public for subscription to its shares. Sel rtrstionl Moser Forms of Business OrganizationsForms of Business Organizations NOTES. (®) Each type of company contributes to the nation’s economy in their own but significant ways. Both types have: ‘© Large financial resources © Professional management Scope for expansion Stability Public confidence (© Private companies do have some special privileges because they are exempted from certain provisions of the Companies Act, Some of these include: can be formed with only 2 members; not prohibited from giving financial assistance for purchase of its own shares; only a member is entitled to inspect balance sheets of the company; there is no restriction on making inter-corporate loans. 6, A cooperative organization isan association of persons, who join it voluntarily to achieve ‘common economic end. Itis non-profitable and all benefits or contributions are shared by its members. ts objectives include promotion of the interests of its members, The ‘other types of organizations are all profit motivated and all efforts of their members are

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