Module-1

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 • Which of the following are
Tests of Business
• Business
Profit Motive &
•
Recurring Nature of Activities &
• Investing in Stock Market
•
•
Enhance National Income OR • Hospital
•
Enhance Individual Gain &
• Educational Institutions
Government Regulations
•
• Daily Trading in Stock Market
• Charity Institutions
• Co-operative Society
• Religious Institutions
• Cogeneration of Power in
Sugar Industry
• Advertisement
• Working in a Company
• Working for a Company

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 Activity Profit Recurrin National Individual Govt.Reg
g Gain Gain u
Stock Market Yes Yes Yes Yes No

Hospital No Yes Yes Yes No

Education No Yes Yes Yes No

Day Trading Yes Yes Yes Yes Yes

Co-Operative No Yes Yes Yes No

Advertisement Yes Yes No Yes Yes

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 • Tests of Business
All Economic activities pursued
for the purpose of earning profit
• Profit Motive &
• Recurring Nature of Activity
&

• Enhance National Income OR

• Enhance Individual Gain &
• Government Regulations

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 Barriers to business :
Place -
Transport
Business = Time - Warehousing
Industry + Risk - Insurance
Commerce Publicity- Advertisement
Finance - Bank
+
Possession - Trade
Trade

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 Coordination of activities of number
of people for the achievement of
• Which of the following
common purpose / Objective
are Organisations
through a division of labour and • Clubs
function and through a hierarch of • Churches / Temples
authority and responsibility • Hospitals
Common Objective + Division of labour • Family
+ Functions + Hierarchy + Authority • Educational Institutions
+Responsibility • Charity Institutions
• Co-operative Society
• Political Parties
• Government agencies
• Business Concerns
• Community Groups

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 Activity Obje Divisio Functio Hierarch Authorit .Resp
ctive n Of n y y
.Lab
Political Party Yes Yes Yes Yes Yes Yes

Hospital Yes Yes Yes Yes Yes Yes

Education yes Yes Yes Yes Yes yes

Family Yes No No No Yes Yes

Community Yes Yes Yes Yes Yes Yes

Group

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 Economic Activity ( Industry + Commerce + Trade ) +

Common Objective ( Profit ) +

Division of labour +

Functions +

Hierarchy +

Authority +

Responsibility

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 Economic Activity ( Industry + Commerce + Trade ) +

Common Objective (Non Profit ) +

Division of labour +

Functions +

Hierarchy +

Authority +

Responsibility

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 Factors Determining the
Choices about forms of Organisations
 Nature of Business
Division of labour +  Motive
Functions +  Risk
 Capital Requirement
Hierarchy +  Scale of operation
 Legal Requirement
Authority +  Government Control
Responsibility  Tax Considerations

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 Choices about • Forms of Organisations
• Sole Proprietorship
Division of labour + • Partnership
• Joint stock Companies
Functions + • Joint Hindu Undivided Family
• Co-Operative Societies
Hierarchy +
• PSEs’
Authority +
Responsibility

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 Highlights:
 Except Bank & Insurance
 High Risk & High profit
 No Registration
 Not legal entity
 Own Capital
 Own Labour
Suitability
1) Professional jobs like accounting,
legal and health
2) Small retail stores
3) To satisfy purely local needs
4) To satisfy the tastes of
customers (Beauty parlours,
saloons)
5) Business involving frequent
changes – share Broker.

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Merits: Demerits:
1) Easy formation 1) Limited capital
2) Simple and flexible 2) Limited skill
3) Strong motivation 3) Unlimited liability
4) Personal contact 4) Uncertain future
5) No dispute 5) Limited scope –
6) Self employment Absence of economies
of large scale
7) Less overheads
8) Quick decision
6) No scope for much of
making diversification – No
place of economies of
scope.
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 Highlights:
 Governed by Partnership Act -1932 Criteria followed by
Essence of Partnership (sec-4) Court in deciding
1. Arises from Contract valid Partnership
2. Agree to share Profit
3. Agent-Principal relation
- Max. No. of Partners not mentioned Cox V Hickman
- Companies Act :Bank – 10, others-20 1. Terms of agreement
- Sharing of loss not mentioned 2. Conduct of the parties
-Each partner has to contribute / Knowledge
-Firm is dissolved on death of a partner 3. Mode of doing business
-General partner – Unlimited Liability 4. Who controls the
-Limited Partner – Limited Liability property
-Not a Legal Entity 5. Mode of keeping
 Called Firm accounts
6. Manner of distribution
of profits
7. How loses are shared

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 Highlights:
 Partnership Deed
1. Agreement can be verbal ,written or may be inferred from the conduct of the
parties
2. Legally Deed or Written agreement is not required
3. Partnership Deed - Written agreement duly Stamped and Registered
Contents of Deed:
Name & Description of Partners , Firm , Business
Duration of partnership
Contribution of Capital by each
Division of Profit & Loss
Salaries, Interest, Management of Business
Preparation , maintenance & authorised persons to sign
Effect of death or retirement of partner
Admission of new members & Dissolution of firm

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 Highlights:
In the absence of Partnership Deed
Indian Partnership Act -1932 will apply
• Equal share in Profit & Loss
• Consequences
• Each partner can take part in • No suit can be brought by
management of business
partner against each other
• No partner shall be eligible for
remuneration or against third party
• No new partner can be introduced or • The partner suing must
existing to be expelled without majority
appear in the register of
• All members can inspect , take copy of
accounts firm maintained at
• The firm must indemnify the partner who Registrar of firms
incurred liability
• Can not sue third party to
recover claim more than
Rs.100
• Third part can sue any
partner and firm

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 Highlights:
Registration of Partnership

With Registrar of Firms by paying fees and Statement signed by partners

• Name of the firm & Nature of Business

• Place of Business
• Dates on which partners joined
• Duration of the firm
• Permanent address of Partners

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Rights of partners
1) Right to take part 6) Right to act as an
in business agent of the firm

2) Right to be 7) Right to prevent the

consulted introduction of a new
partner
3) Right to have
access to 8) Right to retire
accounts 9) Right to continue in
4) Right to share the business.
profits.
5) Right to interest
on capital
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Merits: Demerits:
1) Easy formation 1) Unity among
2) More capital and partners in essential
managerial efficiency.
2) Not adequate capital
3) Division of labour
3) Unlimited liability.
4) Discussion of business
problems. 4) Lacks continuity of
5) Secret existence.
6) No strict government 5) Does not enjoy
control. public confidence

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 Forms of Organisations
Partnership
Suitability:

Accounting, medical and legal

professions

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 Forms of Organisations
Hindu Undivided Family / Joint Hindu Family
• Mitakshara Hindu Law
• Except Bengal , Assam
• It consists of all males lineally
descended from common ancestor
including minor, male , wife &
Unmarried daughters & daughter-in-
laws. All of them are members of
HUF.
• All male members acquire ownership
to property by birth- Co-
Parceners/Co-Owners
• Three generations next to the holder
in Unbroken male descendent
constitute a coparsneary
• Senior member is Karta/Manager
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• Dayabhaga Hindu Law
• Bengal , Assam
• Son does not acquire ancestral
property by birth
• However acquire the right on
death of Father
• Father has absolute right to
dispose the property according to
his desire
• ------------------------------
• Jain , Sikh , Buddhists are
covered by under the Hindu
Law.
• From 9.9. 2005 – Daughters of
a coparcener will also become
Coparceners by birth – Hindu
Succession Act
Contd
21 …
 Forms of Organisations
Hindu Undivided Family / Joint Hindu Family
• Ownership & Control
• Not terminated on death or
• Ownership share fluctuates
insolvency of coparcener
with the birth and the death
of its coparseners. • Risk:
• Legal Status: • Karta has unlimited liability
• No separate legal entity • Karta has personal liability
• Registration not required • Others – limited liability
• Capital: • Profit sharing:
• Supplied by HUF / Inherited • Equal share
property • Share of profit fluctuates –
• Management: increase by death and
• Karta decrease by birth
• Stability: • Surplus – under the
• Continue as long as HUF custody of Karta
does not break
12/14/2008 Manavazhaganr@bsnl.in Contd
22 …
 Forms of Organisations
Hindu Undivided Family
Merits:
1) Greater stability
2) No restriction on the number of co –owners
3) Karta can take quick decisions
4) Scope for division of labour
5) Limited liability for co-owners
6) Family training
7) Flexibility
8) Protection of old, sick and disabled members.

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 Forms of Organisations
Hindu Undivided Family
Demerits:
1) Limited financial resources.
2) Limited managerial ability only
karta.
3) No innovative spirit.
4) Frequent conflicts.

12/14/2008 Manavazhaganr@bsnl.in Contd

24 …
 Forms of Organisations
Hindu Undivided Family
Suitable:
 Money lending business
 Retail trade
 Jewellery

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 Forms of Organisations
JOINT STOCK COMPANIES
Highlights
It is a voluntary association of persons,
formed for the purpose of business
• It is an artificial person created by law.
• Perpetual succession (continuous
existence)
• Limited liability.
• Transferability of shares.
Separation of ownership from
•
management.
• Power of the company are regulated by
Memorandum of Association
• The rights and duties of Directors are
regulated by Articles of Association
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• Need not possess fixed capital
divided into number of units
• A share holder is not entitled to
actively take part in Management
• Management is vested with a
team
• A share holder can work as an
employee
• Shares of Public limited companies
are transferable
• Required to comply with various
statutory obligations like Filing of
balance sheet, Maintaining
accounts ,audit by CA etc.
26
 Forms of Organisations
JOINT STOCK COMPANIES
• Private Limited
• Min. 2 to Max.50 Members
• Min 2 Directors
• Name Suffix – Private Limited
• On incorporation can commence
business
• Need not issue Prospectus – Private
placement
• Shares cannot be issued to public
• Shares cannot be transferred
• Statutory meeting need not be held
• Remuneration not limited
• Board meeting minimum 2 persons
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• Public Limited
• Min. 7 to Max. limited by no. of shares
• Min 3 Directors
• Name Suffix - Limited
On incorporation should apply for CCB
•
• Shares to be issued to public
• Shares can be transferred
• Meeting compulsory
• Remuneration 11% of net profit
• Mini. 3 persons for meeting
• Index of members to be maintained.
• Proxy can be appointed for a meeting.
• Directors should retire by rotation
27
 JOINT STOCK COMPANIES Registration
Procedure

Approval of the Name of the Company by ROC

( Reg. Office, No same name , last word – Private Limited , Limited, 6 months )

Prepare Memorandum of Association

( Objective, Scope of the function etc.)

Prepare Articles of Association

( Rules & Regulations for internal Management.)

Certificate of Incorporation by ROC

( Rules & Regulations for internal Management.)

Private Ltd: Min 2 director, 2 share holder

Public Limited : Min 3 director, 7 share holders

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 JOINT STOCK COMPANIES Registration Procedure
Commencement of Business
On Issuing Certificate of Incorporation by ROC

Private Ltd: Can start business immediately

Public Limited :1 ) If does not opt for IPO

ROC will issue certificate of commencement of business

( CCB )

: 2 ) If opts for IPO

Go for Public issue – Allot Share - Obtain CCB

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 JOINT STOCK COMPANIES Registration
Procedure
Three important documents
1) Memorandum of association:
• It describes the proposed company and defines Objective and
powers of the company proposed to be incorporated.
• It has to be registered with Registrar of Companies. It contains
a) Name clause
b) Situation
c) Objects
d) Liability
e) Capital
– - Company cannot exceed the powers mentioned and
cannot alter the provisions except Name , Jurisdiction ,
Object, Capital

12/14/2008 Manavazhaganr@bsnl.in Contd

30 …
 JOINT STOCK COMPANIES Registration
Procedure

2) Articles of association:
Subordinate to the Memorandum of
Association
a) Share capital
b) Rights of share holders
c) Transfer of shares
d) Shareholders meetings
e) Voting system
12/14/2008 Manavazhaganr@bsnl.in Contd
31 …
 JOINT STOCK COMPANIES Registration
Procedure
3) Prospectus:
It is a document issued to the public for raising capital by the issue of Shares or
for raising loan by the issue of Debenture..
“ Any notice , circular, advertisement or other documents inviting offer from
public for the Subscription of share or purchase of debenture of a body
corporate “ ( sec-2(36) )
-Objective – To draw attention , interest
- Should make full disclosure, Printed , signed
-- Directors will be held responsible for misrepresentations
-- Having furnished prospectous to ROC to be made public in the advertisement
-Contents – Objective , Signatories to the memorandum, no. of shares
subscribed
-Mini. Subscription, Premium on share, Underwriters, particulars of directors,
voting & divident rights, particulars of auditors,balanse sheet, P&L accounts

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 JOINT STOCK COMPANIES Registration
Procedure
Allotment of Shares:
Directors can allot shares under the following conditions:
1.A prospectus or a statement in lieu is submitted to ROC
2.At least 5 % of the share value is received and deposited in a scheduled
bank and
3.Minimum no. of shares are subscribed.

Obtaining Certificate of Commencement:

When minimum subscription is raised, either the Director or Secretary has
to declare to ROC that :
1. Shares have been allotted not less than the “ Minimum Subscription “
2. The prospectus or statement in lieu thereof had been filed
3. Directors have duly paid to their shares
On verification CCB is issued..
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 JOINT STOCK COMPANIES

Merits of Company:
1) Limited liability
2) Business continues.
3) Transfer of shares
4) Huge capital
5) Legal protection and regulation
6) Professional management.
7) More employment and business.
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 JOINT STOCK COMPANIES Registration
Procedure

Demerits:
1) Company formation is difficult.
2) It is expensive
3) Many legal formalities
4) Lacks unity of management –
Management is in the hands of
a Board of Directors
12/14/2008 Manavazhaganr@bsnl.in Contd
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 JOINT STOCK COMPANIES

5) Quick changes cannot be made

6) Lacks initiative and enterprise.
7) No secrecy
8) May promote frauds.

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 CO-OPERATIVE FORM OF BUSINESS
ORGANISATION

A voluntary association on the basis

of equality for the promotion of economic
interests of members.

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 CO-OPERATIVE FORM OF BUSINESS
ORGANISATION
Features Equal voting rights
Voluntary association
Non profit motive
Open membership & Subscribe to Registration is not compulsory
objective
Registration under Co-operative
Membership unlimited Societies Act - 1912
Capital equally divided among members Legal entity
If liability is limited “ Limited “ should be Managing committee elected
included and max. value of share
Policy decided in GB to be
Rs.2500/-
implemented by Committee
25% of profit to reserve fund
Exception from Income tax, stamp,
10% to Charitable purposes Registration fees
Unlimited – Profit sharing Govt. approval It has priority over other creditors in
Shares cannot be transferred to 3rd party realising dues from debtors
Strict government control

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 CO-OPERATIVE FORM OF BUSINESS
ORGANISATION
Types: Industrial Co-Operative
Co-Operative Credit Societies:
Societies: By Cottage & small industries
To grant Credit or Loan for to sell
agriculture, Artisans Multipurpose Co-Operative
Co-Operative Producers Societies:
Societies: To meet economic and social
To have a common selling needs of villagers.
organisation to sell their
products
Consumers Co-Operative
Societies:
To buy goods from traders &
wholers at cheap price

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 CO-OPERATIVE FORM OF BUSINESS
ORGANISATION
Formation: Industrial Co-Operative
10 Members submit joint Societies:
application to the By Cottage & small industries
Registrar of Co- to sell
operatives with bye-
laws. Multipurpose Co-Operative
Societies:
8 members for Housing
Societies To meet economic and social
needs of villagers.
No registration, Stamp duty
collected
Can be Limited or Unlimited
Annual accounts are audited
by government auditors
free of cost.

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 CO-OPERATIVE FORM OF BUSINESS
ORGANISATION
Merits:
1) Formation is simple
2) Continuity of existence.
3) Pool of resources
4) Suitable to the weaker sections of
society.
5) Not profit motive but service motive
6) Democratic.
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 CO-OPERATIVE FORM OF BUSINESS
ORGANISATION
Demerits:
1) Need of co-operative spirit.
2) Loyalty of members.
3) No scope for large scale operations because
of limited resources.
4) Insufficient motivation to members because
of the low rate of return to the members –
staff salary is low.
5) Lack of public confidence because of the
failure of many co-operative societies.
6) Excessive state interference.

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 Forms of Business
JOINT SECTOR

Joint sector is a form of

partnership between the private
sector and the government.

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 Forms of Business
JOINT SECTOR
Four possible types:
1) Existing private enterprises can be
brought under joint sector
2) Existing public sector companies can be
transformed into joint sector.
3) New companies can be set up with
equity participation by the government.
4) The state governments can set up new
enterprises with private sector.
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 Forms of Business
JOINT SECTOR

Merits:
1) Social control over industries
2) Failure of private and public sectors.
3) Acceleration of economic growth.
4) State sponsored industrialization.
5) Mobilization of financial resources
6) Mobilization of technical and managerial
resources.
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 Forms of Business
JOINT SECTOR

Examples of joint sector:

Cochin Refineries
Madras Refineries
Madras Fertilizers.
Gujarat state Fertilizer company.

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