Nature and Purpose of Business

1. Economic Activities Activities which are under taken by people with the object
of earning money are known as economic activities. e.g., production of goods in 8
factory, distribution of goods by a wholesaler or retailer.

2. Types of Economic Activities Economic activities can be divided into three

categories

 Business
 Profession
 Employment

3. Non-Economic Activities The activities which are undertaken by an individual

with a motive of getting psychological satisfaction are known as non-economic
activities e.g., going to temple, charily, social service etc.

4. Concept of Business Business is a wide term. It includes all occupations in

which people are busy in earning income either by production or purchase and
sale or exchange of goods and services to satisfy the needs of other people with
the main objective of earning profit.

According to Lewis H Honey. “Business is a human activities directed towards

producing or acquiring wealth through buying and selling goods”.

5. Characteristics of Business Activities

 An Economic Activity Business is considered as an economic activity as it is

undertaken with the aim of earning looney.
 Production or Procurement of Goods and Services Every business
enterprise either produce or procures goods or services from producers.
 Sale or Exchange of Goods and Services Directly or indirectly, business
involves transfer of exchange of goods and services for value.
 Dealings ill Goods and Services on a Regular Basis Business involves
dealings in goods or services on a regular basis. One single transaction of
sale or purchase, therefore, does not constitute business.
 Profit Earning One of the main purpose of business is to earn income long
without by way of profit. earning profit. No business can survive for
  Uncertainty of Return There is always a possibility of losses being incurred,
in spite of best efforts put into the business.
 Element of Risk Risk is the uncertainty associated with an exposure to loss.

6. Comparison of Business, Profession and Employment

 Business refers to those economic activities which are connected with the
production, purchase, sale or distribution of goods and services with the
main aim objectives of earning profit. Profession refers to the activities
which require special knowledge and skill to be applied by an individual in
his work to earn a living.
 Employment refers to an activity in which an individual work regularly for
another person and gets remunerated in return.

7. Classification of Business Activities

Various business activities may be classified into two broad categories

(i) Industry Industry refers to an activity which converts raw material into useful
products. Industry includes activities related to production and processing as well
as activities related to rearing and reproduction of animals 01′ other living
species.

Industries may be divided into three broad categories namely primary, secondary
and tertiary.

(a) Primary Industry These includes all those industries which are concerned with
extraction of natural resources and reproduction of living species.

These industries can further be classified into two categories

 Extractive Industries
 Genetic Industry

(b) Secondary Industry The secondary Industry makes use of products which arc
extracted and produced by primary industry as their raw materials and produce
finished products. e.g., meaning of iron ore is done in primary industry but steel
manufacturing is done in secondary Industry.
There are two kinds of Secondary Industry
  Manufacturing Industries These industries are engaged in the process of
conversion of raw materials or semi- finished goods in to finished products.
 Construction Industry These industry are concerned with the construction
of buildings, dams. roads etc.

(c) Tertiary 0r Service Industry It is concerned with providing services with

facilitate a smooth flow of goods and services. The various types of services
provided by Tertiary Industry are Transport, Banking. Insurance, Warehousirrs.
Advertising.

(ii) Commerce Commerce refers to all those activities which help directly or
indirectly in the distribution of goods to the ultimate consumer.

(a) Functions of Commerce

 Helps in Removing the Hindrance of persons.

 Helps in Removing the Hindrance of place.
 Helps in Removing the Hindrance of time.
 Helps in Removing the Hindrance of Exchange.
 Helps in Removing the Hindrance of Risk.

(b) Classification of Commerce

 Trade
 Aids to Trade

8. Trade Trade is an integral part of commerce. It refers to buying and selling of

goods and services.

Trade can be classified into two types

(i) Internal Trade Internal Trade refers to buying and selling of goods or services
with in the geographical boundaries of a country. It is also known as Home Trade.

The internal trade of two types.

1. Whole sale trade

2. Retail trade
(ii) External Trade It refers to the buying and selling of goods and services beyond
the geographical limits of the country. It is also known as trade between two or
more countries.

External trade is of following types

 Export trade
 Import trade
 Entrepot trade

9. Aids or Auxiliaries to Trade

 Transport and Communication Transport refers to the movement of goods

from one place to another. Communication helps in exchange of
information between producers, consumers and traders etc.
 Banking and Finance Bank and financial institutions provides credit facility,
loan etc. to provide finance for smooth now of business activities.
 Insurance Businessmen have to bear various types of risks, Insurance
provides protection from SOme kinds of risk such a risk of loss due to fire,
theft, accident etc.
 Ware Housing Ware housing helps to businessmen to over come the
problem of storage. Ware houses are constructed keeping in mind the
nature of goods.
 Advertising Practically It IS impossible for a manufacturer and trader to
contract each and every customer. Advertisement helps to over come this
problem.

10. Objectives of Business Objectives are needed in every area that influences the
survival and prosperity of business. The main objectives are

 Market standing
 Innovation
 Productivity
 Physical and financial resources
 Earning profits
 Manager performance and development
 Worker performance and attitude
 Social responsibility
11. Business Risk Business risk refers to the probability of losses or inadequate
profits due to uncertainties or unexpected events, which are beyond control.

12. Nature of Business Risk

 Business risk arises due to uncertainties

 Risk is an essential part of every business
 Degree of risk depends upon the nature and size of business
 Profit is the reward for bearing the risk

13. Causes of Business Risk

 Natural Causes The natural causes are such type of uncertain factors that
human being cannot make any preparation against.
 Human Causes Human Causes are related to a chance of loss due to human
beings or employees of the organisation.
 Economic Causes Economic Causes are related to a chance of loss due to
change in market condition.
 Other Causes These are unforeseen events like political disturbances,
mechanical failures such as the bursting the boiler.

14. Starting a Business-Basic Factors

 Selection of line of business

 Size of the firm
 Choice of form of ownership
 Location of business enterprises
 Financing the proposition
 Physical facilities
 Plant layout
 Competent and Committed worked force
 Tax planning
 Launching the enterprise
 Forms of Business Organisation
1. Introduction A business enterprises is an organisation which is engaged in
some business or commercial activity. Every business enterprises is a separate
and distinct unit of business.

Various forms of business organisation from which one can choose the right one
include

 Sole Proprietorship
 Joint Hindu Family Business
 Partnership
 Co-operative Societies
 Joint Stock Compan

2. Sole Proprietorship A business owned, managed and controlled by a single

individual is known as a sole proprietorship organisation.

(i) Features

 Formation and closure

 Liability
 Sole risk bearer and profit recipient
 Control
 No separate entity
 Lack of business continuity

(ii) Merits

 Quick decision making

 Confidentiality of information
 Direct incentive
 Sense of accomplishment
 Ease of formation and closure

(iii) Limitations

 Limited resources
 Limited life of a business concern
  Unlimited liability
 Limited managerial ability

3. Joint Hindu Family Business The business carried out by the male members of
a Hindu undivided family is known as Joint Hindu Family Business.

There are two conditions for existence of Joint Hindu Family Business, These are

 Minimum two male members must be there in the family

 Existence of some ancestral property

Under Hindu Law there are two systems of inheritance. These are Dayabhaga and
Mitakshara.

(i) Features

 Formation
 Liability
 Control
 Continuity
 Minor members

(ii) Merits

 Effective Control
 Continued business existence
 Limited liability of members
 Increased loyalty and co-operation

(iii) Limitations

 Limited resources
 Unlimited liability of karta
 Dominance of karta
 Limited managerial skill

4. Partnership Partnership is an association of two or more persons who have

agreed to share the profits of the business carried on by all 01′ any of them acting
for all.
According to LH Honey, “Partnership may be defined as the relation between the
person who agree to carry on a business in common with a view to private gain.

(i) Features

 Formation
 Liability
 Risk bearing
 Decision making and control
 Continuity
 Mutual agency
 Membership

(ii) Merits

 Ease of formation an closure

 Balanced decision making
 More funds
 Sharing of risks
 Secrecy

(iii) Limitations

 Unlimited liability
 Limited resource
 Possibility of conflicts
 Lack of continuity

5. Types of Partner

 Active Partner The active partner participates in the management of the

firm.
 Sleeping or Dormant Partner The partner who does not participate in the
management of the firm.
 Secret Partner Secret partner is one whose association or relation With the
firm is not known to outsiders.
 Nominal Partner The nominal partners are not the real partners of the firm.
He only lends his name and reputation for the benefit of the firm.
  Partner by Estoppel A person is considered a partner by estoppel if, through
his own initiative, conduct or behaviour, he gives an impression to others
that he is a partner of the firm.
 Partner by Holding Out A partner ‘holding out’ is a person who though is
not a partner in a firm but knowingly allows himself to be represented as a
partner in a firm.

6. Types of Partnership

Based on the basis of time period, there are three types of partnership firm

 Partnership at will
 Fixed period partnership
 Particular partnership

On the basis of liability of members, there are two types of partnership. These are

 General partnership
 Limited partnership

7. Partnership Deed

The common contents of Partnership Deed are

 Name of the firm

 Name and address of the partners
 Nature of business the firm will carry on
 lace of business
 Capital contribution by each other
 Profit sharing ratio of partners
 The right and duties of the partners
 The mode of maintaining accounts
 The rate of interest payable to partners on their capital
 The rate of interest to be paid by partners on amount withdrawn by them
 The amount of salary payable to partners
 Provision regarding retirement and dissolution
 Methods of solving disputes
 Whether interest is payable on the loan provided by partners etc.
8. Registration of Partnership Firm The procedure for registration of the
partnership firm

(i) Co-operative Society A co-operative form of business enterprise. In this form

the main motive is not earning profit but the main motive of co-operative
organisation is mutual help. It work with the principle of each for all and all for
each.

(a) Features

 Voluntary membership
 Legal status
 Limited liability
 Control
 Service motive

(b) Merits

 Equality in voting status

 Limited liability
 Stable existence
 Economy in operations
 Support from government
 Ease of formation

(c) Limitations

 Limited resources
 Inefficiency in management
 Lack of secrecy
 Government control
 Difference of opinion

(ii) Types of Co-operative Societies

 Consumer’s co-operative societies

 Producers co-operative societies
 Marketing co-operative societies
 Former co-operative societies
  Credit co-operative societies
 Co-operative housing societies

9. Joint Stock Company

Definition by Prof Honey. “Joint Stock Company is a voluntary association of

individual for profit, having a capital divided into transferable shares, the
ownership of which is the condition of membership”.

(i) Features

 Artificial person
 Separate legal entity
 Formation
 Perpetual succession
 Control
 Liability
 Common seal
 Risk bearing

(ii) Merits

 Limited liability
 Transfer of interest
 Perpetual existence
 Scope for expansion
 Professional management

(iii) Limitations

 Complexity in formation
 Lack of secrecy
 Impersonal work environment
 Numerous regulations
 Delay in decision making
 Oligarchic management
 Conflict in interest
10. Types of Companies On the basis of ownership the companies can be
classified in to following categories

(1) Private Company According to the Companies Amendment Act, (2000), a

private company is one which

 Has a minimum of two and maximum of 50 members excluding the

employees.
 Restricts the right of members to transfer their shares.
 Does not offer its shares to general public.
 Does not invite general public to invest deposits in the company.
 Has minimum paid up capit.al of~ one lakh.

(ii) Public Company A public company is the one which

 Has a minimum of seven members and maximum no limit.

 Permits easy transfer of its shares.
 Invites general public to subscribes to its public deposits.
 Invites general public to subscribes to its shares and debentures.
 Has minimum paid up capital of five lakh.
 Any private company which is subsidiary of a public company.

11. Choice of Form of Business Organisation

 Cost and ease in setting up the organisation

 Liability
 Continuity
 Management ability
 Capital consideration
 Degree of control
 Nature of business