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TAMIL NADU NATIONAL LAW

SCHOOL
B.com.LL.B, (HONS.), FIRST
SEMESTER 2014-15
Business Organisation and
Management
ON
Ideal forms of business organisations
PROJECT BY:Abbishek, Vigneshwar.R, Arjun Sarkar,
Pradyumna, Raghav, Aravindan
SUBMITTED TO:DR. Agilla

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DECLARATION OF AUTHORSHIPS

We, Abbishek, Vigneshwar.R, Arjun Sarkar, Pradyumna, Raghav, Aravindan hereby


declare that this project titled IDEAL FORM OF ORGANISATION submitted to
Tamil Nadu National Law School, Tiruchirappalli is the record of a bonafide work done
by us under the expert guidance of venerated business organisation management faculty
of TNNLS, Tiruchirapalli.

All authentic information furnished in this project is true to the best of our knowledge
and belief.

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ACKNOWLEDGEMENT
First of all, we thank our business organisation management Prof. Mrs Dr.Agilla for
having allotted us such challenging and dynamic topic. Even repaying her through mere
words is beyond the domain of my lexicon that was the backbone during all hurdles that
we confronted during the making of this project. Hence we are forever duly indebted to
her as students.

Also, we are grateful to the staff and administration of TNNLS who contributed useful
resources tremendously in the making of this project by providing library
infrastructure and data base connection.

This entire project wouldnt have been possible without the involvement of precious
inputs of our parents and friends who sacrified their valuable time to guide and advice
us in all time of need to make this project a successful one.

Last but not the least, we are also grateful to the almighty for giving us the courage and
strength to withstand all hindrances during this project and make it successful finally
since its inception.

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TABLE OF CONTENT:
1.
2.
3.
4.
5.
6.
7.
8.

DECLARATION OF AUTHORSHIPS..2
ACKNOWLEDGEMENT3
FORMS OF BUSINESS ORGANISATION...5
SOLE PROPREITORSHIP..9
PARTNERSHIP.13
JOINT STOCK COMPANY.16
CO-OPERATIVE SOCIETIES.22
CONCLUSION24

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Form of ownership organisation.


The first question to be settled in organizing business operations is that of the ownership
organisation. Ownership of business is represented by the right of an individual or group of
individuals to acquire legal title to assets for the purpose of controlling them and to enjoy the
gains and profit from such possessions and use. This right to acquire enjoys and disposes
property of business vests in private individuals or groups for firms in the private sector and
in government or other public bodies in public sector. From this point of view, there are four
main alternate possibilities for business unit. It may be organized by an individual as sole
proprietorship or by an association of persons by mutual agreement as a partnership firm, or
by an association of persons who form a co- operative society for the purpose, or else, it may
be organized by a number of persons as a joint stock company. Besides these, Hindu
undivided families also undertake business in India. The importance of hindu undivided
family, or the joint Hindu family, as it is known, is declining. For business purposes,
therefore, the chief forms of ownership organization are:
a)
b)
c)
d)
e)

Sole proprietorship
Partnership
Co-operative society
Joint stock company
Limited liability partnership

Before these forms are taken up to detailed discussion and evaluation, it must be noted that
this classification of business units is based only on their ownership. Besides, these forms of
organization are used essentially for business firms in the private sector.
Characteristics of an ideal form of organization
Before undertaking a description of the various forms of organization and their respective
merits and weakness, it will be desirables to refer to the features which make for an ideal
form of business organization. These characteristics will be found in varying degrees. In
choosing a particular form of organization, an entrepreneur will try to find out how far his
requirements will be met by a particular form of organization. The following factors will
generally be considered by him while making this type of an assessment:
i.

Ease of formation. From the point of view of the entrepreneur, the first
consideration, though not the only one, in the choice of a proper from of

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organizations as to which one can be formed with the greatest ease. An ideal
form of organization is, therefore, one which can be formed with the greatest
ease. An ideal form of organization is, therefore, one which can be brought
into existence with the least difficulty. A good form of organisation, as judged
form the point of view of ease of formation, is one which involves the least
expense in formation and minimum of legal formalities. Besides, it should
involve the least difficulty in the choice of proper associates for running the
ii.

business.
Ease of raising capital. Another important feature of a good form of
organization is the facility of raising the required amount of capital. Where a
large amount of capital is needed, it is desirable to ensure that investors in the
business concerned are assured of safety of investment, fair return on
investment and transferability of investment. Entrepreneur will do well to
consider the comparative ease with which capital can be raised for the various

iii.

forms of organization.
Limit to liability. Forms the point of view of risk, the entrepreneur will prefer
limited liability. This would mean that in case of insolvency or winding up, the
owner will be held responsible only up to the amount of capital agreed to be
contributed by them. Unlimited liability (making the personal estates of the
owners liable for losses) is preferred in some cases just because it provides the
necessary incentive to the owner to work for the success of the chosen from of

iv.

organisation.
Direct relationship between ownership, control and management. As rule,
control should lie where ownership lies. This will lead the management and
the entrepreneurs to take active interest in the efficient running of the
enterprise. If the responsibility for the management or the control of
management does not lie with the owners, the management may not have a
direct personal interest in maximizing profits through increase inefficiency.
However, sometimes, close association of ownership with management may
discourage adventure and enterprise on the part of the management. If the
owners are all the time worried about the safety of their investment in the
enterprise, as they natural would be, it will be difficult for them to take bigger

v.

risks or follow a bold or adventurous business policy.


Flexibility of operation. A good form of organization offers the maximum
flexibility and adaptability. This means that the organization should lend itself

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to change and adjustment without much difficulty as the need be. In choosing
a form of organization, the entrepreneur will consider as to whether it will add
to the flexibility and efficiency of management to associate some more
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persons as part owner or as employees.


Continuity or stability. An ideal form of organization enjoys uninterrupted
existence over a long period of time. From the point of view of the
entrepreneur, it is important that he should be able to formulate plans for the
future and to make investment paying for considerable period of time. Form
the social point of view also, it is desirable that there should be an agency
which meets its economic needs continuously and provides continued
employment to a section of the society. The organization must both be able,
when undistributed, to last through a long period of time, and also to resist

vii.

temporary disturbing influences, that is, be stable. 1


Retention of business secrets. The entrepreneur will also have to be careful to
ensure that the form of organisation chosen by him will allow vital business
secrets to be retained without being leaked out to the competitors. This will

viii.

naturally mean that he will have to select his associates with utmost care.
Freedom from state regulation. Various forms of organization are exposed to
varying degrees of control and regulation by the state. Where the extent of
regulation by government is considerable, the enterprise may have to spend
considerable amount of time, money and energy in complying with legal
formalities and instructions. As far as possible, keeping in view the particular
requirements of an enterprise, the form that is selected should be such that it

ix.

does not attract the eye of law at every step.


Lighter tax liability. Various forms of business organisation are assessed to
income tax on different bases. Obviously, other things being equal, the ideal
form of organisation will be that which attracts the minimum amount of tax
liability.

Choice of a suitable form of organisation

1 L.H Hanze: business organization and combination, P.44


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The various characteristics of an ideal form of organisation indicated above are not to be
considered in isolation from each other. The choice of the entrepreneur will, in actual
practice, be dictated by the peculiar requirements of the enterprise proposed to be started.
Some requirements which guide entrepreneurs in making this choice are:
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)

Type of business- trading, manufacturing, commercial or service.


Expected volume of business.
Area of operation.
Degree of direct control over management desired by management.
Finance required for initial requirements and expansions.
Willingness of owners to assume personal liability for business risks.
Arrangement for sharing profits
Expected life-span of business
Tax advantage under different types of ownership.
Degree of government regulation and the freedom desired by the

entrepreneurs.
As it is, capital being the most important prerequisite to the success of a business enterprise
in the modern times, the facility with which the amount required for the launching of
enterprise can be raised will generally decide the form of organisation to be adopted. The
limitation of liability is the 2nd most important factor in the choice of a proper form of
organisation for the business. The other characteristics of a good form of organisation
mentioned above generally tend to be relatively less important in such a choice. In the event,
the choice of a form of organisation has to be made by balancing these considerations and
determining the alternative that will provide the maximum net gain. The respective merits
and weakness of the various forms of organization have been discussed in the following
pages mainly with reference to the factors mentioned above.

SOLE PROPRIETORSHIP
Sole proprietorship is a form of business organization in which an individual introduces his
own capital, uses his own skill and intelligence in the management of its affairs and is solely
responsible for the results of its operations. The individual may run the business alone or may
obtain the assistance of employees. It is the first stage in the evolution of the forms of
organization and is, thus, the oldest among them.
Also known as individual entrepreneurship, it is the easiest to form and is also the simplest in
organization. All what is required is that the individual concerned should decide to carry on
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some particular business and find the necessary capital. For this purpose, he may depend
mostly on his own savings, or else, he may borrow part or whole form his friend or relatives.
The business may be started either in a portion of the proprietors own house or in rented
premises. There are no legal formalities to be gone through except those required for a
particular type of business. For example, if one wants to start a restaurant one has to obtain a
license from the health department of the Municipal Corporation, but for setting up the firms
as such no legal formalities are necessary.
The law makes no distinction between the firm and the proprietor. If A starts a business
then, as far as the law is concerned, A, the businessman, and A the individual, are one and
the same person. In other words, the owners personal property is also liable for the liabilities
of the firm. This makes his makes his liability unlimited. If the business prospers, he gets the
whole profit; if it does not do well, he nears the whole loss. For this reason, he enjoys full
control over the affairs of the firm. He decides everything for the firm and carries out his own
plans without fear of any opposition, but of course, at his own risk. In short, the entrepreneur
is his own master in this form of organisation.
The following features of individuals or sole-proprietorship emerge from the foregoing
account of this form:
1. Single ownership.
2. One man control.
3. Undivided risk.
4. Unlimited liability.
5. No government regulation.
6. No separate entity of the firm.

Evaluation
This form of organisation is quite popular for a small-scale business, though for large
business the other forms are generally preferred. The reason for this can be found in its merits
and limitations.
Merits
1. Ease of formation and dissolution. As if has been pointed out no legal formalities are
necessary for setting up the nosiness in this form. It is, thus, most easily formed of all
the forms of business organization. Any person enjoying the capacity to contract can
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set up such an organization. As lundz puts it, becoming a proprietor is as simple as


buying newspaper for 3 cents and selling them on the streets on a street corner for a
nickel (5 cents).
Dissolution, termination, or sale of the business is equally simple in the case of a soleproprietorship. There are no legal formalities in this regard and all that the
businessman has to arrange for is the satisfaction of creditors claims. A sole
proprietor may wash his hands off his business selling his interest to another person or
association of persons.
2. Direct motivation. The direct relationship between effort and rewards serves as a
powerful incentive to the proprietor to manage the concern efficiently. It encourages
and includes him to put forth his best in the management of this business. He knows
that any lapse on his part will mean loss of profit.
3. Facility of co-ordination. There is no problem of co-ordination. The proprietor
himself has to decide everything and, therefore, he will not take a decision by which
the various interests of the firm clash. Moreover, he knows his employees personally
and, therefore, he is able to ensure that they work as a team.
4. Promptness in decision-making. Promptness in decision is another advantage of this
form. As pointed out above, an individual entrepreneur needs not to consult other
while deciding the affairs of his concern. This makes for quicker decisions by which
he can take advantage of the opportunities of gain arising from time to time.
5. Flexibility in management. If any changes in business are called for, he does not have
to consult anyone and, therefore, he will be able to make the change without delay.
This gives flexibility to this type of organization. A good number of giant size
concerns fail on account of their inability to change their policies promptly to meet a
change in the situation.
6. Secrecy. Secrecy can be maintained about business matters and, therefore, the
proprietor will be able to take full advantage of any new ideas that occur to him.
There is a little risk of the competitors taking advantage of them.
7. Credit standing. If an individual proprietor has enough resources (cash or
investments) outside the firm, he will enjoy a favorable credit standing among
suppliers and other firms and institution dealing with him. The creditor will look
forward to satisfaction of their claims out of this personal wealth. Thus, his private
resources will serve as kind of second line defence beyond the firms assets as
security for debts.
8. Freedom form government regulation. Sole proprietorship is the least regulated form
of business organization. Restrictive laws on sole proprietorship generally are
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limited to those affecting all citizens as individuals. Of course, a sole proprietorship


does have to comply with tax and labour laws like other establishment but there is no
legal regulation of formation or dissolution for this form of organization.
Limitations
The advantages of an individual entrepreneur organization seem to suggest that one-man
control is by far the most convenient and efficient for business organisation. But it would be
proper to take stock of some of the limitations and drawbacks of this form of organisation.
These are:
1. Limited finances. The individual proprietor suffers from the limitation of
financial resources. He can depend only on his own savings, and it is neither
safe nor easy for him to borrow much money from banks or other financial
institutions. Therefore, the size of the firms must remain small. He cannot
take advantage of a possible expansion in business which may bring
substantial economies.
2. Limited managerial skill. The managerial ability of the proprietor is limited.
Modern business is full of complication especially due to the ever-changing
nature of market, and the various laws that are being enacted. An individual
may not be an expert in all matters and, therefore, sometimes his decisions
may be unbalanced.
3. Unlimited liability. The liability of the owner is unlimited. Not only the
assets of the business, but also his private assets will be used to pay off the
firms debts. Therefore, when a man starts a business he may not really know
the extent to which he is committing his private property. Unlimited liability
also discourages the expansion of business.
4. Uncertainty of duration. The proprietary business comes to an end if
anything happens to the proprietor. If the business is rendering useful service
to the society the closure of such a business will be a social loss. Similarly,
with the death of the proprietor, the business may pass on to successors who
may not possess the same degree of self-reliance, derive and ability.
Conclusion
From the account of the merits and limitation of an individual proprietorship given above, it
can be concluded that one man control of business would be most efficient and profitable if
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only that one man has the capacity to manage everything indefinitely. Unfortunately, such a
person does not exist. This form of enterprise is, therefore, suitable in the following cases:
a)
b)
c)
d)

Where the capital requires is small and the risk is not heavy.
Where quickness of decisions is very important.
Where the customers require personal attention.
Where special regard has to be shown to the tastes and fashions of the customers.

Naturally, then, household and personal service concerns, retail shops and professionals firms
are generally owned by individuals proprietors. Thus individual proprietorship has its own
scope of activity, and continues to exist inspite of the development of bigger organization, like
partnership and joint stock companies. In India, the individual entrepreneur organization is
still quite popular. It accounts for the largest number of business establishment in our country.
The volume of business transaction by it does not, however, compare with that of partnership
firms and companies.

Partnership
The relation between persons who have agreed to share profits of the business carried on by
all any of them acting for all.
Characteristics of partnership:

Existence of business An association of persons will become a partnership only


when it is meant to do some kind of business.
Plurality of persons At least two persons must join together for business.
Contractual relationship The business is set up by an agreement between persons
concerned called partners. Persons who are not competent cannot enter into a
contract(eg. Minors).
Profit motive The purpose of partnership must be to earn profits and there should be
agreement to share them.
Principle-agent relationship The business must be carried on by all or one or more
acting on behalf of all the partners. Thus, every partner is an agent of the other
members of the firm.
All these conditions must be satisfied to constitute partnership.

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Features of partnership:Formation Since partnership is a contract among persons, there is not much legal
problem in its formation. Generally, the partnership agreement is reduced to writing
and a partnership deed is laying down the terms and conditions of the partnership and
rights, duties and obligations of partners is drafted.
Financing the capital of partnership consists of the capital contributed by each
partner. However the profit sharing ratio doesnt always depend on the capital
contributed.
Control In a partnership firm, all partners have the right to control the business. It is
mainly the active partners who control the business but sleeping or dormant partners
cannot be stopped from controlling the business.
Management Law confers on every partner the right to take an active part in the
management of the firms affairs. Each partner has the authority to bind the firm and
the other partners through his acts in the ordinary course of business.
Duration The partnership firm continues at the pleasure of the partners. Legally, a
partnership comes to an end if any of the partners retires, dies or becomes insolvent.
Taxation Rate of tax rises progressively as the income increases. Each partner has to
individually bear the taxes as per the income tax act. But if the firm is not registered,
then the tax has to be paid out of the profits of the firm.

Types of partners
Although all the partners are entitled to conduct the business of the firm, yet, in
practice, the management and operation of business is left to few active partners.
These partners carry the business on behalf of the rest.

Sleeping partners or dormant partners:- They are those partners who agree not to
participate in the management. They invest capital and have a share of the profits.
They are liable like the other partners.
Nominal partners:- Such partners only lend their name to the business. They do not
invest capital or share profits but are liable to the third parties.
Partner by estoppels:- If a person behaves in such a fashion that he is mistaken to be a
partner by the third party, then he is liable to the third parties who extend credit to the
firm on his reputation.
Partners by holding out:- if a person is declared as a partner by other persons, he
should deny it immediately, otherwise he will be liable to the third parties who lend
money.
Minor partners:- The minor cannot enter into a contract. However he can get the
benefits of the business like a share in the profits of the business.
Ideal partnership

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One should choose a partner with much care. The following can be said to be the requisites of
an ideal partnership.

There should be mutual understanding among the partners.


They have common views with regard to conduct of the business.
The partners should work in absolute sincerity and good faith.
There should be balance in the firm. Partners should possess various skills to improve
the business and confront problems.
The terms of partnership should be sufficiently long because if the term is short,
business cannot progress much.
There should be written agreement among the partners.
The partnership should be registered as soon as it is formed. In the absence of
registration, the firm will not be able to enforce its legal right against any outsiders.
Partnership deed

The partnership deed is a must in partnership. The deed has to be stamped in accordance with
the Indian stamps act. Each partner should have a copy of the deed. The following points
should be generally covered in a partnership deed.

The nature of business;


The name of the business and the town and place where the business will be carried;
The amount of capital to be contributed by each partner;
Whether the loans will be accepted from a partner over and above the capital and if
so, at what rate of interest;
The duties, powers and obligations of all partners;
The method of preparing accounts and the arrangement for audit etc
Merits of partnership:-

The partnership form of business organisation enjoys the following advantages:

Ease of formation:- partnership is simple to form, inexpensive to establish and easy to


operate. It mainly depends on the agreement among the partners.
Larger financial resources:- it is possible to collect a larger amount of capital due to a
number of partners. New partners can be admitted to raise further capital whenever
necessary.
Combined abilities and judgment:- the skill and experience of all the partners are
pooled together. Combined judgment of several persons help reduce errors in
judgment.
Direct motivation:- ownership and management of the business are vested in the same
person. There is a direct relation between effort and reward. Every partner is
motivated to work hard for the success of the business.
Close supervision:- every partner is expected to take personal interest in the affairs of
the business. Different partners can maintain personal contact with employees and
customers.

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Flexibility of operations:- partnership business is free from legal restrictions and the
government. They can change the size of the business , capital and managerial
structure etc..
Secrecy:- a partnership firm is not required to publish its annual accounts. Therefore,
what goes around inside a partnership firm is not known to the public.
Cooperation:- partnership encourages mutual cooperation and trust among people.
Partners work with each other for the benefit of the business.

Demerits of partnership:

Unlimited liability:- every partner is jointly and severally liable for the entire
debts of the firm. He has to not only suffer for his own mistakes, but also the
mistakes and dishonesty of his partners. The private property of the partners can
be attached to pay for the liabilities of the firm.
Limited resources:- the amount of financial resources in partnership is limited to
the contributions made by the partners.
Risk of implied agency:- the acts of partners are binding on the firm as well as on
the other partners. An incompetent or dishonest partner may bring disaster to all
due to his acts of omission or commission.
Lack of harmony:- the success of partnership depends on mutual understanding
and cooperation among the partners. Continued disagreement and bickering
among the partners may paralyze the business or may result in its untimely death.
Lack of continuity:- a partnership comes to an end with retirement, incapacity,
insolvency and death of a partner. It is not always possible to replace a partner
enjoying trust and confidence of all.
Non-transferability:- no partner can transfer his share in the firm to an outsider
without the unanimous consent of all partners. This makes investment in a
partnership firm non-liquid and fixed.
Public distrust:- a partnership firm lacks trust of the public because it is not
subject to detailed rules and regulations. Lack of publicity of its affairs
undermines public confidence in the firm.

JOINT STOCK COMPANY


INTRODUCTION: The joint stock company is an artificial person created for carrying on
some business by an association of persons. According to Marshall: A corporation is an
artificial being, invisible and existing only in contemplation of the law. Being a mere creation
of law, it possesses only the properties which the charter of its creation confers upon it, either
expressly or as incidental to its existence. It asserts that a company has a legal entity of its
own in the sense that it has powers and characteristics determined by the provisions of law
and a constitution framed in accordance with them.
CHARACTERISTICS OF A JOINT STOCK COMPANY:

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1.Seperate legal entity: A company has its entity of its own recognized by law quite distinct
from that of natural persons forming it. It can sue and be sued in its own name. A shareholder
being an entity distinct form that of its company can sue the company and be sued by it.
Similarly, the company has the right to own and transfer the title to its property. A shareholder
cannot be held liable for the acts of a corporation even if he owns all or virtually the whole of
its stock. A company cannot marry, cannot be sent to jail, cannot take oath, cannot enter into
partnership and cannot practice a learned profession like law or medicine.
2.Limited liability of partners: since the company has a separate legal entity and is
recognized as an artificial person existing in the eye of law, its debts are its own, and the
shareholders cannot be held liable for them under ordinary circumstances. A shareholder is
liable to pay only for his own share in the company. If he has paid Rs.50 over a share of Rs.
100 then he is liable to pay only 50.however bad the financial position of the company might
be, no shareholder can be called upon to pay more than the face value of the shares standing
in his name.
3. Perpetual existence: The Company according to Blackstone may be compared with a river
which retains its identity though the parts which composed for constantly changing. It means
that the company has continuous existence which is not affected or interrupted by the death,
insolvency, retirement of any shareholder or director. The shares of a company may change
hundreds of hands in stock exchange, But the life of a company is unaffected by such
changes. This is a characteristic which lends stability and life to a company as compared to
other forms of organisation.
4. Common seal: A company, not being a natural person cannot sign documents for itself. The
common seal with the name of the company engraved on it, therefore, used as a substitute for
its signatures. The common seal is kept in safe custody by the secretary of the company and
is used in accordance of any document, it has to be witnessed by two directors.
LIMITATIONS OF A JOINT STOCK COMPANY:
1. Difficulty and cost of formation: the promotion of a company is a long-drawn process.
There are numerous requirements of law to be compelled with, a large sum odf money
to be spent on the preliminaries and a large number or people to be approached for
raising capital, before a company can start functioning.
2. Possibilities of fraudulent management: The joint stock type of organisation affords a
chance to some people who want to defraud others. Ever since the south sea bubble
company, a number of fraudulent companies have milked many a poor investor dry.
The company law in various countries is constantly trying to check the floatation
fraudulent companies. As a result, these days companies are looked upon with much
greater trust than previously.
3. Lack of personal incentive: The Company is not managed by the proprietors, namely
the shareholders. In fact, it is impossible for the shareholders to run the affairs of the
company not only because they are large in number, but also because they are widely
scattered. A modern company is managed by directors and paid officials who cannot
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be expected to watch the interests of the company with as much interest as the
proprietors themselves.
4. Oligarchic management: The modern joint stock company does not promote
safeguard interest of shareholders. It is said that the shareholders do nothing, know
nothing and get nothing. A company is run by few persons who ignore the view point
and the interest of other shareholders. Thus, in theory, the company is democratic, but
in practice is mostly a case of oligarchy. The interests of small and minority
shareholders are not always safe in a company.
5. Excessive regulation by law: A company remains well within the focus of law. Its
working is governed by elaborate and none too easy provisions of law at all its stages.
At every step, there is a penalty for the infringement of the legal provisions and the
management has to be constantly on guard against attracting any of these. A good deal
of the precious time of the management may be spent in complying with the statutory
requirements. Not merely this, a separate secretarial department has to be maintained
for the purpose, adding to the administrative expenditure.
6. Delay in decisions: A company organisation does not enjoy the same amount of
flexibility and promptness of decisions as the partnership firms or individual
proprietorship concerns do. Decisions may be delayed because of the time interval
between meetings and the difficulty of getting the requisite quorum.

FEATURES OF JOINT STOCK COMPNAY:

1. Formation: Since a company is a corporate body enjoying a separate entity of its own
distinct from that of individual members, it can be set up only following the procedure
laid down for the purpose under law. The whole process of company formation may
be divided into two stages -1) Promotion and 2) Incorporation Promotion is the
process of exploration, investigation, and the organization of necessary resources with
the object of initiating business under corporate ownership .In other words, it is the
exercise of business entrepreneurship for establishing and starting a company.
Incorporation is the legal process through which the separate corporate entity of company is
the given recognition by the law. To secure incorporation, the promoters prepare and file with
registrar of the joint stock companies the following documents: 1) memorandum of
association 2) the articles of association. 3) Written consent of the persons who have agreed
to serve the board of directors of the company 4) notice of the registered office to the
company (within days of registration 5) a statutory declaration by the secretary of the
company. Stamp duty has to be affixed on the memorandum of association according to the
amount of the authorized capital and registration fees for the prescribed rates paid in.

1.

Financing: when the company is to be a private limited one, capital contributed by


the members through mutual agreement without public notice .but in case of a public
limited company, business cannot be commenced until necessary capital is collected
from the members investing by the sale of shares .for this purpose a prospectus has to

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be issued inviting the general public to take up the shares of the company. A company
must at least collect the minimum subscription before it is permitted to commence the
business.

2. Control: the members of a company, being the persons who buy shares in the capital
of the company, are supposed to have the ultimate control over the company affairs.
Law requires approval of shareholders for all important decisions bearing on the
companys existence and working.

3. Management : since the risk takers or the owners of the capital of a company and
widely scattered and are not necessarily whole time businessmen , the management of
the company has to be entrusted to a Board of directors elected by , and responsible to
, the general body of shareholders .

4. Duration: a company has perpetual existence in that its life is not affected or
interrupted by the death, insolvency or withdrawal of any member. In case of a public
limited company a member is free to transfer his shareholding to anyone but a
company cannot buy back its own shares. In other words, the risk of capital of a
company will be paid back only when it is wound up.

5. Taxation: a companys profits are taxed at a flat rate against slab rates charged for non
corporate bodies .In other words; the rate of income tax for the company will be the
same irrespective of whether the profits are high or low. On the other hand, a
partnership or sole proprietorship will pay tax at increasing rates with increase in the
amount of assessable income.

MERITS OF JOINT STOCK COMPANY:


1

Financial strength: there is generally no limit to the number of shareholders in a


company. (In a private company the number cannot exceed 50. This does not include
employees, past or present who are members of such company).this facilities the
collection of large amounts of capital. Moreover, the capital is dividing into numerous
parts of small values called shares.

Scope for expansion: with the large sources at its command, a company can organize
the business on a large scale and can thus reap various economies of large scale
organization and production. The company form of organization also offers infinite
scope for expansion. A company making good profits can build reserves which will
enable to expand further

Business and management Page 18 out of 25

Transferability of shares: a member can conveniently transfer his shares without


having to obtain the consent of the other members of the company. The existence of
stock exchanges, where shares or debentures can be sold or purchased, has added to
the facility with which capital can be raised.

Limited liability: the liability of the members of a company is limited. This means that
a person who buys shares in a company cannot be called upon to contribute more than
the face value of the shares held by him, even if the creditors of the company remain
unpaid. A person who buys shares knows well in advance what his maximum loss
can be.

Diffused risk: the risk itself is reduced for each member, because it is diffused and
spread over several members of the company. This is an advantage from the
individual investor point of view.

Stability: the company enjoys perpetual succession, which means that it is not affected
by the death or retirement of its members. Thus, a company can have a really long
term and undertake business which takes a long time to establish and consolidate this
is by far the most important advantage of corporate organization from the point of
view of business management.

Tax belief: companies are liable to pay income-tax as separate legal entities, at a flat
rate fixed by the finance act from year to year. For higher incomes; this rate is lower
than that chargeable in the case of sole traders or partners in partnership firm.

Bold management: perhaps the biggest advantage of the joint stock organization is
that it can undertake big risks. The joint stock company is generally managed by
people whose financial stake in the company is relatively small. They can therefore be
adventurous. Many industries would have not come into existence if people had been
unduly cautious. In case of new industries there is no guarantee of profits and
success, it is only joint stock Company which can, so to say take a plunge and thus
start a new industrial enterprises.

CONCLUSION: From the above discussion of the merits and limitations of the joint stock
company, it may be concluded that the advantages of this form of organisation outnumber its
weaknesses. Most of the evils enumerated above arise either from mismanagement or from
the misuse of this otherwise desirable form of organisation. It is also clear that despite its
weaknesses, the company form of organisation is best suited to those lines of business
activity which require huge capital outlay and maximum stability. For those lines of business
proprietors and do not require very large investment on the part of the proprietors or
proprietorships and partnership will generally be more suitable. In fact, it is this which
accounts for the fact that these forms of organisation co-exist with the company organisation
even though the latter is undoubtedly superior to them.

CO-OPERATIVE SOCIETIES
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INTRODUCTION

The co-operative form of organisation is set up not with profit as the guiding motive but with
the fundamental object of organising and rendering for the organisation and its members. A
Co-operative society is essentially an association of persons who join together on a voluntary
basis for the furtherance of their common economic interests. It may be used as a protective
device used by the less strong sections of society to safeguard their economic interests in the
face of exploitation by producers and sellers working solely for maximising profits. Service
not profit, co-operation not competition, self help not dependence on the profit-hungry
businessmen, and moral solidarity not unscrupulous undercutting, form the foundations of cooperative enterprise. The co-operative form of organisation may be defined as a voluntary
association of persons of joining together on equal basis for the promotion of certain
economic or business interests.
The International Labour Organisation defines a co-operative as an association
of persons, usually of limited means, who have voluntarily joined together to achieve a
common economic end through the formation of a democratically controlled business
organisation, making equitable contributions to the capital required and accepting a fair share
of risks and benefits of the undertaking. Professor Paul Lambert, a leading authority on cooperation, states, A co-operative society is an enterprise formed and directed by an
association of users applying within itself the rules of democracy and directly intended to
serve both its own members and the community as a whole.

FEATURES
The distinctive characteristics of the co-operative association are:
1. Voluntary Association: A co-operative is a voluntary association of persons and not
of capital. Any person, irrespective of his caste and creed, can join a co-operative
society of his free will and can leave it at any time after giving due notice to the
society. He cannot however, transfer his share to another person. The voluntary
character of the co-operation association has two major implications (a) none will be
denied the right and opportunity to become its member, and (b) the co-operative
society will not compel anybody to become a member.
2. Finance: The capital of a co-operative society is raised from members by way of
share capital. Since co-operatives are organised by relatively weaker sections of
society, the share capital is generally limited. However, it is part of Government
policy to assist and encourage co-operatives and therefore, a co-operative society can
usually augment its resources by loans from the State and Central Co-operative banks.
3. Control Management: Democracy is the key note of the management of the cooperative society. Since, most of these societies operate on a local scale , the meetings
of the members are generally well attended. At these meetings, the members elect the
Business and management Page 20 out of 25

4.

5.

6.

7.

managing committee and lay down the policy which it must follow to promote their
common interests. Each member, whatever be his stake in the society, has one vote
and hence an equal right to participate in the management of the society. Besides, the
organisation and control of a co-operative society tend to be perfectly democratic in
so far as its bye laws are approved by the members after it has been registered.
Service Motto: A co-operative society is organised primarily with the object of
rendering maximum service to its members in a certain field. It does not aim at profit
at the cost of its members. This does not mean that a co-operative society will never
work for profit. It is quite usual for societies to earn profits by extending their services
to non-members.
Disposal of surplus: Under the co-operative form of ownership and organisation the
surplus arising out of a years working is given to the members not directly as
dividend on shares held by each of them, but in the form of a bonus which need not be
proportionate to their respective capital contributions. The bonus may be paid to the
members in proportion to purchases made during the year in the case of a consumers
co-operative store, or in proportion to the goods delivered for sale to the society in the
case of a producers co-operative store. In fact, the profit arising out of a difference
between the cost price and market price may not be distributed among members but
maybe utilised in extending amenities and facilities to the members or for undertaking
certain social activities for the benefit of the members.
Fixed return on capital: One of the basic principles of co-operative organisation, laid
down by the pioneers of the co-operative movement like Rochdale and Owen , was
that a fixed or limited return on capital subscribed to the society must be paid out of
the surplus to the members. Making the payment of fixed interest on paid-up capital
definitely a first charge on the trading surplus, gave those who joined the society a
solid reason for leaving their saving in deposit with it.
State control and corporate status: In India, the co-operative societies are registered
under the Co-operative Societies Act, 1912, or the relevant State Co-operatives
Societies Act, as the case may be. The co-operatives desiring to be registered must
fulfil the following broad and basic requirements: (i) A co-operative society must have
at least 10 members who have attained the age of majority (i.e., are above 18 years of
age). (ii) The members should be bound together by a common bond, e.g., they may
belong to the same village or locality, tribe, or occupation, etc. (iv) A copy of the byelaws and the scheme of organisation should be submitted to the Registrar. On
registration, the co-operative societies will attain the corporate status (the status of a
company) and will become entitled to certain privileges. It will also be subject to
control and supervision by the State. Every co-operative has to get its accounts
audited by an auditor from the co-operative department and has to furnish returns of
membership and annual report and accounts to the Registrar of Co-operatives.

In the words of noted co-operator late VL Mehta It is the claim of the co-operative
movement that it can be the principal means of bringing about in a peaceful manner a
social change of fundamental nature, ushering in a social order non-exploitative,

Business and management Page 21 out of 25

equalitarian, tolerant, that harmonizes the dignity of the individual with the well being of
the community.

TYPES OF CO-OPERATIVES
1. Consumers Co-operative Societies: The main intention of forming such societies, by
people living in a particular locality or by members belonging to an organisation, is to
eliminate middlemen by establishing direct contact with manufacturers. They get
essential goods at cheaper rates from manufacturers and sell them to members at a
nominal profit, which will be distributed to them as bonus or festive gifts every year.
2. Producers or Manufacturers Co-operatives: These societies are voluntary
associations of small producers formed with the object of eliminating the capital class
from the system of industrial production. These societies are mainly formed in the
urban areas by the manufacturers belonging to the same industry. Example: Textile
Mill co-operative societies, Sugar Mill owners co-operative societies. They help their
members in getting essential raw materials, Government grants, tax subsidies, skilled
and unskilled labour forces, marketing support, transport facilities and other essential
requirements.
3. Housing Co-operatives: These are formed to provide housing facilities either on
rental basis or on ownership basis. Mostly, intending builders of houses join together
to form co-operatives of this kind. Through these societies, they can secure not merely
financial assistance, but also the economies of purchase of building materials in bulk.
The membership of may be thrown open to all those who are interested in securing
housing accommodation as well as those who are ready to deposit money with the
society for interest.
4. Credit Co-operatives: The co-operative credit societies are voluntary associations of
people with moderate means formed with the object of extending short-term financial
assistance to them and developing the habit of thrift among them. The funds of these
societies consist of share capital contributed by the members. The liability of the
members is generally limited. In, granting loans, the society may show consideration
for the poorer people who apply for smaller loans. The rate of interest charged from
the borrowing members is kept as low as possible.
Credit societies may be divided into two types: (i) agricultural credit
societies, and (ii) non-agricultural societies. An agricultural credit society generally
confines its activities to a particular society. In India, the minimum number of
members necessary for the formation of such a society is fixed at 10 and maximum
number is limited to 100.
The non-agricultural credit societies are formed by people of
limited or moderate means in towns or cities. These societies are meant to provide
bank accommodation to the members and may be formed by small artisans in towns
or by office clerks, mill workers, etc., in cities.

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5. Co-operative farming societies: The co-operative farming societies are basically


agricultural co-operatives formed with the object of achieving the benefits of largescale farming and maximising agricultural output. Such societies are advocated to
agricultural countries, like India, which suffer harm from excessive fragmentation and
sub-divisions of agricultural landholdings of farmers. Their membership is generally
confined to farmers including those owning land and those who merely till the land.
These are three types:
(i)
Processing co-operatives
(ii)
Labour and Construction co-operatives
(iii)
Others

ADVANTAGES OF CO-OPERATIVES:
(i)

(ii)

(iii)
(iv)

(v)

Facility of formation: A co-operative is a voluntary association that may be


formed by any ten adults. Its registration is a simple affair and it does not have to
spend much on legal preliminaries.
Democratic Management: The management of a co-operative is based on the basic
democratic principle of one man one vote. A small group of members cannot
dominate its affairs even if it happens to command more capital than the other
members.
Limited Liability: The liability of the members of co-operative is limited to a
certain proportion of their capital contribution mentioned in the bye-laws.
Tax concessions: The law gives a preferential treatment to co-operatives in the
form of concessions and exemptions below a specified amount of income( at
present the exemption limit is Rs.15,000).
State assistance: Since co-operation is an instrument of the economic policy of the
Government, the State offers many types of assistance including cheap loan
assistance to co-operatives.

DISADVANTAGES OF CO-OPERATIVES :
(i)

(ii)

Limitation of capital: Co-operatives can usually muster a limited amount of


capital because the members usually come from a limited area or class and
usually have limited means.
Inefficiency of management: The management of a co-operative vests in the
managing committee which generally lacks technical knowledgeable and
experienced people. Proper capacity to pay proper rates of remuneration. Even
otherwise, employee loyalty may be adversely affected due to indifference and
experience on the part of the management.

Business and management Page 23 out of 25

(iii)

(iv)
(v)

Excessive State regulation: Co-operatives are exposed to a considerable degree of


regulation by the co-operative department and are almost over-administered. This
interferes with the flexibility of its operation and the efficiency of its management.
Lack of secrecy: The affairs of co-operatives are generally so much exposed to the
members that it becomes difficult for them to maintain proper business secrecy.
Insufficient motivation: Since the rate of return to the members is limited by law,
the members of the managing committee do not feel motivated enough to make a
success of the enterprise.

CONCLUSION
Co-operative movement has come to a means to end the evils of capitalism(where
capitalistic owners exploited the workers) , Socialism (where everything is under state
ownership) and Communism (where the individuals exist only for the state).
In Germany and India, co-operative movement began in order to do away
with greedy money lenders who had held the farmers and artisans under their clutches. In
England, Consumers co-operation was started to stop exploitation by greedy traders. In
France and USA, producers co-operative emerged in order to eliminate middlemen.
In certain areas of operations co-operation has failed especially in
rural areas, where marketing co-operatives have not been up to the mark in many types of
activities.
For agricultural activities, co-operative forms of enterprise are more suitable
than for manufacturing activities. It is often better to have co-operatives started for
limited areas of operation in rural and urban areas, restricting it to areas of necessities
only, which will compel the members to stay together and run the show better.

Business and management Page 24 out of 25

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