Professor Dr.D.

Jayakumar

UNIT 3

Business Organization

Fundamentals of Business

Concept of Business: A business is an organization or enterprising entity engaged in

commercial, industrial, or professional activities. Businesses can be for-profit entities or nonprofit
organizations that operate to fulfill a charitable mission or further a social cause. Business is also the
organized efforts and activities of individuals to produce and sell goods and services for profit.

Generally, a business begins with a business concept (the idea) and a name. Depending on
the nature of the business, extensive market research may be necessary to determine whether turning
the idea into a business is feasible and if the business can deliver value to consumers. The business
name can be one of the most valuable assets of a firm; therefore, careful consideration should be
given when choosing it. Businesses operating under fictitious names must be registered with the
state.

According to well-known professors William Pride, Robert Hughes, and Jack

Kapoor, business is 'the organized effort of individuals to produce and sell, for a profit, the goods
and services that satisfy society's needs.' A business, then, is an organization which seeks to make a
profit through individuals working toward common goals. The goals of the business will vary based
on the type of business and the business strategy being used. Regardless of the preferred strategy,
businesses must provide a service, product, or good that meets a need of society in some way.

Concept of Trade: Trade is a basic economic concept involving the buying and selling of goods
and services, with compensation paid by a buyer to a seller, or the exchange of goods or services
between parties.

The most common medium of exchange for these transactions is money, but trade may also
be executed with the exchange of goods or services between both parties, referred to as a barter, or
payment with virtual currency, the most popular of which is bitcoin. In financial markets, trading
refers to the buying and selling of securities, such as the purchase of stock on the floor of the New
York Stock Exchange (NYSE).

Trade refers to transactions ranging in complexity from the exchange of baseball cards
between collectors to multinational policies setting protocols for imports and exports between
countries. Regardless of the complexity of the 6dfrtransaction, trading is facilitated through three
primary types of exchanges. Trades are executed with the payment of sovereign currency, the
exchange of goods and services, or payment with a virtual currency.
Concept of Commerce: Commerce is the activity of buying and selling of goods and services,
especially on a large scale or quantity.

Commerce is the conduct of trade among economic agents. Generally, commerce refers to the
exchange of goods, services or something of value, between businesses or entities. From a broad
perspective, nations are concerned with managing commerce in a way that enhances the well-being
of citizens, by providing jobs and producing beneficial goods and services.

Commerce normally refers to the macroeconomic purchase and sale of goods and services by
large organizations at scale. The sale or purchase of a single item by a consumer is defined as a
transaction, while commerce refers to all transactions related to the purchase and sale of that item in
an economy. Most commerce is conducted internationally and represents the buying and selling of
goods between nations.

Classification of Business Activities: Business activities may broadly be classified into two
categories namely (A) Industry and (B) Commerce. Industry involves production of goods and
services whereas commerce is concerned with the distribution of goods and services.

Industry: The sector where raw material gets converted into useful products is called industry.
Activities related to production & processing as well as activities related to rearing & reproduction of
animals or other living species are all included in the industry. The purpose of industry is to create
form utility by converting raw materials into useful forms of finished products.
 An industry may produce consumer goods or capital goods. Goods such as bread, butter,
cloth, radio, etc. are consumer goods. These goods are directly used by the consumer. Goods such as
machinery, cement etc. are called capital goods as these are used further in the production process to
make useful products.

Industry can be classified into three broad categories.

 Primary industry
 Secondary industry

 Tertiary industry

Primary Industry: This is also known as extractive industries. It includes activity connected with
the production of wealth directly from natural resources such as water, air, & land etc. Primary
industry includes activities like extraction & processing of natural resources etc. These industries are
further subdivided as follows:

 Extractive industry: These industries extract or draw out products from natural sources. Raw
materials that are mostly products of the soil are some basic supply of extractive industries.
Manufacturing industries transform these products into many other useful goods. Some of the
examples of extractive industries include farming, mining, lumbering, hunting & fishing
operation.
 Genetic industry: The industries involved in the activities of rearing & breeding of living
organism i.e. birds, plants, animals etc. are known as a genetic industry. For example, rearing of
cattle for milk, dairy farms, poultry farms, rearing of plants in the nursery, growing fish in
ponds etc. are included in the genetic industry.
Secondary Industry: This industry is concerned with converting raw material into finishing product.
The materials which have already been extracted at the primary stage is the concern of the secondary
industry. Such materials are processed to produce goods for final consumption or for further
processing by other industrial units in these industries. Secondary industries may be further divided
as follows:

 Manufacturing industries: These industries are engaged in the process of conversion of

raw materials or semi-finished goods into finished goods. These industries create from the
utility by changing the form of raw materials into finished products.
 Construction industries: These industries are concerned with the construction of buildings,
dams, roads etc. These industries use the products of manufacturing industries such as
cement, iron & steel, lime etc.

Tertiary Industry: These industries are concerned with providing those services which facilitate
a flow of goods & services. This industry helps in the activities of the primary & secondary industry.

Commerce: We can refer to commerce as all those activities which help directly or indirectly in
the distribution of goods to the ultimate consumer. There will be no use of producing goods unless &
until these goods reach the ultimate consumer. Goods are produced at one place & consumers are
scattered at different places. Commerce can be classified into two broad categories:

 Trade
  Aids to trade

Trade: Trade is an integral part of commerce. It includes buying & selling of goods & services. The
trade segment of commerce brings together the manufacturer & the consumer, i.e. it is a link between
the manufacturer & the consumer.

Trade can be classified into two types:

 Internal trade: It refers to buying & selling of goods or services within the geographical
boundaries of a country. It is also known as home trade or domestic trade. Under internal trade,
goods & services are bought & sold in the home currency only. The internal trade can be two
types:
a. Wholesale trade

b. Retail trade

 External trade: When the buying & selling of goods & services is beyond the geographical
limits of the country it is called external trade. It is also known as trade between two or more
countries. In external trade, the market is very wide. External trade is of the following types:
a. Export trade

b. Import trade

c. Entreport trade

Aids to Trade: The activities which help in the smooth flow of trade are known as aids to trade.
These activities make buying & selling of goods easier. These help in removing various hindrances
of trade which arises in production & distribution of goods. The common aids to trade are:

 Transport & communication

 Banking & finance
 Insurance
 Warehousing
 Advertising
Nature of Business:
 Economic Activity: Business is an economic activity, as it is conducted with the primary
objective of earning money, i.e. for an economic motive.
 Production/purchase of goods and services: Goods and services are produced or procured by
business entities, so as to add value and sell them to the consumer. Goods are either
manufactured by the company or procured from the supplier, with the aim of selling it further to
the consumer, for profit.
 Selling of goods and services: Business must involve the transfer of goods to the customer for
value, through selling, meaning that if the goods are acquired for personal consumption, then the
transaction will not amount to business activity.
 Continuity in dealings: Every business requires regularity in transactions, i.e. an isolated
transaction of exchange of goods or services will not be considered as business. So, to constitute
business, the dealings must be carried out on a regular basis.
 Profit earning: The basic purpose of business is to make the profit from its activities. It is the
spine of business, which keeps the business going, in the long term.
 Element of risk: Risk is the key element of every business, concerned with exposure to loss.
Efforts are made to forecast future events and plan the business strategies accordingly. However,
the factors that affect business are uncertain and so does the business opportunities, which can be
a shift in demand, floods, fall in prices, strikes, lockout, money market fluctuation, etc.
 Uncertain return: In business, the return is never predictable and guaranteed, i.e. the amount of
money which the business is going to reap is not certain. It may be possible that the business
earns a huge profit or suffer heavy losses.
 Legal and Lawful: No matter, in which type of business the company is engaged, it should be
legal in the eyes of the law, or else it will not be considered as business.
 Consumer satisfaction: The aim of business is to supply goods and services to consumers, so as
to satisfy their wants, as when the consumer (final user) is satisfied, he/she will purchase the
goods or services. But, if they are not, there are chances that they will look for substitutes.
The consumer is regarded as the king, and so all the activities of the business are aligned towards the
satisfaction of consumers. This can be done by making available quality-riched goods easily available
to them, at reasonable prices.

**Objectives of Business: Business objectives are something which a business organisation wants
to achieve or accomplish over a specified period of time. These may be to earn profit for its growth and
development, to provide quality goods to its customers, to protect the environment, etc.

Thus, the objectives of business may be classified as;

A. Economic Objectives

B. Social Objectives
C. Human Objectives

D. National Objectives

E. Global Objectives

.
A. Economic Objectives: Economic objectives of business refer to the objective of earning profit and
also other objectives that are necessary to be pursued to achieve the profit objectives, which include
creation of customers, regular innovations and best possible use of available resources.
(i) Profit Earning: Profit is the lifeblood of business, without which no business can survive in a
competitive market. In fact profit making is the primary objective for which a business unit is brought
into existence. Profits must be earned to ensure the survival of business, its growth and expansion over
time.

Profits help businessmen not only to earn their living but also to expand their business activities by
reinvesting a part of the profits. In order to achieve this primary objective, certain other objectives are
also necessary to be pursued by business, which are as follows:

(a) Creation of customers: A business unit cannot survive unless there are customers to buy the
products and services. Again a businessman can earn profits only when he/she provides quality
goods and services at a reasonable price. For this it needs to attract more customers for its existing as
well as new products. This is achieved with the help of various marketing activities.
(b) Regular innovations: Innovation means changes, which bring about improvement in products,
process of production and distribution of goods. Business units, through innovation, are able to
reduce cost by adopting better methods of production and also increase their sales by attracting more
customers because of improved products.
Reduction in cost and increase in sales gives more profit to the businessmen. Use of power looms in
place of handlooms, use of tractors in place of hand implements in farms etc. are all the results of
innovation.

(c) Best possible use of resources: As we all know, to run any business we must have sufficient capital
or funds. The amount of capital may be used to buy machinery, raw materials, employ men and have
cash to meet day-to-day expenses. Thus, business activities require various resources like men,
materials, money and machines.
The availability of these resources is usually limited. Thus, every business should try to make the best
possible use of these resources employing efficient workers. Making full use of machines and
minimizing wastage of raw materials, can achieve this objective.

B. Social Objectives: Social objective are those objectives of business, which are desired to be
achieved for the benefit of the society. Since business operates in a society by utilizing its scarce
resources, the society expects something in return for its welfare. No activity of the business should
be aimed at giving any kind of trouble to the society.
If business activities lead to socially harmful effects, there is bound to be public reaction against the
business sooner or later. Social objectives of business include production and supply of
quality goods and services, adoption of fair trade practices and contribution to the general welfare of
society and provision of welfare amenities.

(i) Production and Supply of Quality Goods and Services: Since the business utilizes the various
resources of the society, the society expects to get quality goods and services from the business he
objective of business should be to produce better quality goods and supply them at the right time and
at a right price It is not desirable on the part of the businessman to supply adulterated or inferior
goods which cause injuries to the customers.
They should charge the price according to the quality of e goods and services provided to the society.
Again, the customers also expect timely supply of all their requirements. So it is important for every
business to supply those goods and services on a regular basis.
(ii)Adoption of Fair Trade Practices: In every society, activities such as hoarding, black- marketing
and over-charging are considered undesirable. Besides, misleading advertisements often give a false
impression about the quality of products. Such advertisements deceive the customers and the
businessmen use them for the sake of making large profits.
This is an unfair trade practice. The business unit must not create artificial scarcity of essential goods
or raise prices for the sake of earning more profits. All these activities earn a bad name and sometimes
make the businessmen liable for penalty and even imprisonment under the law. Therefore, the objective
of business should be to adopt fair trade practices for the welfare of the consumers as well as the
society.

(iii) Contribution to the General Welfare of the Society: Business units should work for the
general welfare and upliftment of the society. This is possible through running of schools and
colleges better education opening of vocational training centers’ to train the people to earn their
livelihood, establishing hospitals for medical facilities and providing recreational facilities for the
general public like parks, sports complexes etc.
С. Human Objectives: Human objectives refer to the objectives aimed at the well-being as well as
fulfillment of expectations of employees as also of people who are disabled, handicapped and deprived
of proper education and training. The human objectives of business may thus include economic well-
being of the employees, social and psychological satisfaction of employees and development of human
resources.

(i) Economic Well-being of the Employees: In business employees must be provided with tan
remuneration and incentive for performance benefits of provident fund, pension and other amenities
like medical facilities, housing facilities etc. By this they feel more satisfied at work and contribute
more for the business.
(ii) Social and Psychological Satisfaction of Employees: It is the duty of business units to provide
social and psychological satisfaction to their employees. This is possible by making the job
interesting and challenging, putting the right person in the right job and reducing the monotony of
work Opportunities for promotion and advancement in career should also be provided to the
employees.
Further, grievances of employees should be given prompt attention and their suggestions should be
considered seriously when decisions are made. If employees are happy and satisfied they can put then
best efforts in work.

(iii) Development of Human Resources: Employees as human beings always want to grow. Their
growth requires proper training as well as development. Business can prosper if the people employed
can improve their skills and develop their abilities and competencies in course of time. Thus, it is
important that business should arrange training and development programmes for its employees.
(iv) Well-being of Socially and Economically Backward People: Business units being inseparable
parts of society should help backward classes and also people those are physically and mentally
challenged. This can be done in many ways. For instance, vocational training programme may be
arranged to improve the earning capacity of backward people in the community. While recruiting its
staff, business should give preference to physically and mentally challenged persons. Business units
can also help and encourage meritorious students by awarding scholarships for higher studies.
D. National Objectives: Being an important part of the country, every business must have the
objective of fulfilling national goals and aspirations. The goal of the country may be to provide
employment opportunity to its citizen, earn revenue for its exchequer, become self-sufficient in
production of goods and services, promote social justice, etc. Business activities should be conducted
keeping these goals of the country in mind, which may be called national objectives of business.
 (i) Creation of Employment: One of the important national objectives of business is to create
opportunities for gainful employment of people. This can be achieved by establishing new business
units, expanding markets, widening distribution channels, etc.
(ii) Promotion of Social Justice: As a responsible citizen, a businessman is expected to provide
equal opportunities to all persons with whom he/she deals. He/ She is also expected to provide equal
opportunities to all the employees to work and progress. Towards this objectives special attention
must be paid to weaker and backward sections of the society.
(iii) Production According to National Priority: Business units should produce and supply goods
in accordance with the priorities laid down in the plans and policies of the government. One of the
national objectives of business in our country should be to increase the production and supply of
essential goods at reasonable prices.
(iv) Contribute to the Revenue of the Country: The business owners should pay their taxes and
dues honestly and regularly. This will increase the revenue of the government, which can be used for
the development of the nation.
(v) Self-sufficiency and Export Promotion: To help the country to become self-reliant, business
units have the added responsibility of restricting import of goods. Besides, every business units
should aim at increasing exports and adding to the foreign exchange reserves of the country.
E. Global Objectives: Previously India had very restricted business relationship with other nations.
There was a very rigid policy for import and export of goods and services. But, now-a-days due to
liberal economic and export-import policy, restrictions on foreign investments have been largely
abolished and duties on imported goods have been substantially reduced.
This change has brought about increase in competition in the market. Today because of globalization
the entire world has become a big market. Goods produced in one country are readily available in other
countries. So, to face the competition in the global market every business has certain objectives in
mind, which may be called the global objectives. Let us learn about them.

(i) Raise General Standard of Living: Growth of business activities across national borders makes
quality goods available at reasonable prices all over the world. The people of one country get to use
similar types of goods that people in other countries are using. This improves the standard of living
of people.
(ii)Reduce Disparities among Nations: Business should help to reduce disparities among the rich and
poor nations of the world by expanding its operation. By way of capital investment in developing as
well as underdeveloped countries it can foster their industrial and economic growth.
(iii) Make Available Globally Competitive Goods and Services: Business should produce goods
and services which are globally competitive and have huge demand in foreign markets. This will
improve the image of the exporting country and also earn more foreign exchange for the country.
Functions of Business:

The various functions of business can be grouped into the following broad categories:

1. Production Function;

2. Marketing Function;

3. Finance Function;

4. Human Resource Function;

5. Management Information Function;

6. Innovation (Research & Development).

7. Personnel Function

1. Production function: Production is the creation of goods and services with the help of certain
processes. The production of goods depends essentially on the organisation of men, money,
materials, and facilities into a smoothly operating business. In modern organisations, production is
highly organised, mechanized, and specialised mass production, and, therefore, its overall charge is
entrusted to the Production Manager.
A production manager has four basic responsibilities in this regard : (i) to ensure the production of
goods and services in specified quantities, (ii) to meet the specified time schedule or delivery dates,
(iii) to fulfill the quantity requirements, and (iv) to perform all production operations at the minimum
cost.

2. Marketing function: Marketing is the process of getting goods and services into the hands of the
consumer with a view to satisfying the needs and desires of consumers and producers. In other
words, the marketing function creates a process through which producers and consumers are brought
together in an exchange relationship and transfer of ownership takes place.

For this, the marketing manager must make judicious decisions regarding 4 P’s: (i) product (decisions
about new product development, packaging, branding, etc.); (ii) physical distribution (decisions about
marketing channels, and policies and procedures relating to warehousing, transportation, etc.); (iii)
promotion (involving advertising, salesmanship, sales promotion, and publicity); and (iv) pricing
(policies and procedures relating to the setting up of profitable prices).

3. Finance function: Finance function of business is basically responsible for three decisions and their
proper implementation, viz., (i) investment decisions (financial planning, capital budgeting, etc.)
(ii) Financial decisions (capital structure—fixed and working; short and long-term and (iii) dividend
decisions.
Business maintains relationship with financial markets including institutions and major shareholders
and also takes care of other concerns such as share buybacks, capital raising sources of borrowings and
risk management.

4. Human Resource (HR) function: The HR function deals with the human side of business. It is
concerned with increasing the effectiveness of human performance in any organisation. Specifically
stated, the HR function aims at obtaining arid maintaining a capable and effective workforce,
 motivating the employees individually and in groups to contribute their maximum to the fulfilment
of organisational goals.
In order to accomplish the goals of dynamic HR management, the HR manager has to undertake the
following functions : (i) selection—determination of manpower requirements, job analysis, nature and
sources of recruitment, employee selection, and induction and follow-up; (ii) training—human resource
development; (iii) promotions and transfers, (iv) employee compensation—wage and salary
administration; (v) employee involvement and welfare activities; and (vi) industrial relations—
industrial discipline, industrial unrest, trade unionism, and workers' participation in management. For
the accomplishment of these functions, the personnel department renders specialised services.

5. Information function: Like production, marketing, finance, and human resource, the information
function is equally important in a modern business. It is being increasingly recognised that the
modern business cannot be managed without the assistance of efficient information function. The
information function is basically concerned with records.
The information manager is generally burdened with the following three broad functions: (i)
information function (receiving and collecting, recording and preserving, arranging and analysing, and
providing information); (ii) operational function (such as systems and procedures, records
management, etc.); and (iii) public relations function.

6. Innovation: "An innovation is the implementation of a new or significantly improved product (good
or service), or process, a new marketing method, or a new organisation method in business practice,
workplace organization or external relations." Thus, innovation, which means creativity as well, is
more of a philosophy and the entire business function needs to adopt it.
Innovation often is stimulated by creative thinking on the part of people who are willing to think
'outside the box'.
7. Personnel Function: Personnel function has assumed a prominent place in the domain of business
management. No business function can be carried out efficiently unless there is a sound personnel
policy backed up by efficient management of personnel. Success or failure of every business activity
boils down to the efficiency of otherwise of the men entrusted with the respective function.
A sound personnel policy includes proper wage structure, incentives schemes, promotional
opportunity, human resource development and other fringe benefits provided to the employees. All
these matters affect finance. But the finance manager should know that organisation can afford to
pay only what it can bear.

The above description clearly explains that these functions of business are (1) basic in nature, and (2)
mutually dependent. This will ultimately help realize the overall objectives of the business. This
process of one function realizing its own objectives and also contributing to other' objectives is known
as the 'End-means Chain'.
Social Responsibility of a Business: Social responsibility of business implies the obligations
of the management of a business enterprise to protect the interests of the society.

According to the concept of social responsibility is the objective of managers for taking business
decisions is not merely to maximize profits or shareholders’ value but also to serve and
protect the interests of other members of a society such as workers, consumers and the
community as a whole.

But in today’s world the interest of other stakeholders, community and environment must be protected
and promoted. Social responsibility of business enterprises to the various stakeholders and society in
general is considered to be the result of a social Fig. 3.1. Responsibility of Business Enterprises
towards Stakeholders and Society in General contract.

In the present context the social contract is concerned with the relationship of a business enterprise with
various stakeholders such as shareholders, employees, consumers, government and society in general.
The business enterprises happen to have resources because society consisting of various stakeholders
has given them this right and therefore it expects from them to use them to for serving the interests of
all of them.
Though all stakeholders including the society in general are affected by the business activities of a
corporate enterprise, managers may not acknowledge responsibility to them. Social responsibility of
business implies that corporate managers must promote the interests of all stakeholders not merely
of shareholders who happen to be the so called owners of the business enterprises.

1. Responsibility to Shareholders: In the context of good corporate governance, a corporate enterprise

must recognize the rights of shareholders and protect their interests. It should respect shareholders’
right to information and respect their right to submit proposals to vote and to ask questions at the
annual general body meeting.
The corporate enterprise should observe the best code of conduct in its dealings with the shareholders.
However, the corporate Board and management try to increase profits or shareholders’ value but in
pursuing this objective, they should protect the interests of employees, consumers and other
stakeholders. Its special responsibility is that in its efforts to increase profits or shareholders’ value it
should not pollute the environment.

2. Responsibility to Employees: The success of a business enterprise depends to a large extent on the
morale of its employees. Employees make valuable contribution to the activities of a business
 organisation. The corporate enterprise should have good and fair employment practices and
industrial relations to enhance its productivity. It must recognize the rights of workers or employees
to freedom of association and free collective bargaining. Besides, it should not discriminate between
various employees.
The most important responsibility of a corporate enterprise towards employees is the payment of fair
wages to them and provides healthy and good working conditions. The business enterprises should
recognize the need for providing essential labour welfare activities to their employees; especially they
should take care of women workers. Besides, the enterprises should make arrange- ments for proper
training and education of the workers to enhance their skills.

3. Responsibility to Consumers: Some economists think that consumer is a king who directs the
business enterprises to produce goods and services to satisfy his wants. However, in the modern
times this may not be strictly true but the companies must acknowledge their responsibilities to
protect their interests in undertaking their productive activities.
Invoking the notion of social contract, the management expert Peter Drucker observes, “The customer
is the foundation of a business and keeps it in existence. He alone gives employment. To meet the
wants and needs of a consumer, the society entrusts wealth-producing resources to the business
enterprise”. In view of above, the business enterprises should recognise the rights of consumers and
understand their needs and wants and produce goods or services accordingly.

The following responsibilities of business enterprises to consumers are worth mentioning:

1. They should supply goods or services to the consumers at reasonable prices and do not try to
exploit them by forming cartels. This is more relevant in case of business enterprises producing
essential goods such as life-saving drugs, vegetable oil and essential’ services such as electricity
supply and telephone services.
2. They should not supply to the consumers’ shoddy and unsafe products which may do harm to
them.
3. They should provide the consumers the required after-sales services.
4. They should not misinform the consumers through inappropriate and misleading advertisements.

5. They should make arrangements for proper distribution system of their products so as to ensure
that black-marketing and profiteering by traders do not occur.
6. They should acknowledge the rights of consumers to be heard and take necessary measures to
redress their genuine grievances.

Despite the above responsibilities which are generally regarded as good marketing practices by
management experts the business enterprises in India generally do not pay heed to them and as a result
consumers are dissatisfied or disappointed in a large number of cases. There has been a growing
awareness of consumer rights.

4. Obligation towards the Environment: The foremost responsibility of business enterprises is to

ensure that they should not damage the environment and for this purpose they should reduce as much
as possible air and water pollution by their productive activities. They should not dump their toxic
waste products in rivers and streams to avoid their pollution. Pollution of environment poses a great
health hazard for the people and is a cause of several respiratory and skin diseases.
In economic theory pollution of environment is regarded as social cost that must be minimized. There
is now a growing awareness towards reduction in environment pollution. According to the recent
findings the climate change is occurring due to greater emission of carbon dioxide and other pollutants.
Therefore, the corporate enterprises should adopt high standards of environmental protection and
ensure that they are implemented regardless of enforcement of any environment laws passed by the
government. Many countries including India have passed laws to protect the environment but they
are not properly and strictly enforced.

5. Responsibility to Society in General: Business enterprises function by public consent with the
basic objective of producing goods and services to meet the needs of the society and provide
employment to the people. The traditional view is that in performing this function businesses
maximize profits or shareholders’ value and doing so they do not behave in any socially
irresponsible way.
According to Adam Smith whose invisible hand theorem is often quoted that while maximizing their
profits, businessmen are led by an invisible hand to promote the interests of the society. To quote him,
“An individual or business generally, indeed neither intends to promote the public interest, nor knows
how much he is promoting it…. He intends only his own gains, and he is in this, as in many other
cases, led by an invisible hand to promote an end which was no part of his intention … By pursuing his
own interest he frequently promotes that of the society more effectively than when he really intends to
promote it”.

Decision:

Social responsibility is related to the concept of ethics. Ethics is the discipline that deals with moral
duties and obligations. Social responsibility implies corporate enterprises should follow business ethics
and work for not only to maximize their profits or shareholders’ value but also to promote the interests
of other stakeholders and the society as a whole.
Forms of Business Organisation:
A business can be organized in one of several ways, and the form its owners choose will affect the
company's and owners' legal liability and income tax treatment. Here are the most common options
and their major defining characteristics. Forms of business ownership vary by jurisdiction, but
several common entities exist:

 Sole proprietorship: A sole proprietorship, also known as a sole trader, is owned by one person
and operates for their benefit. The owner operates the business alone and may hire employees. A
sole proprietor has unlimited liability for all obligations incurred by the business, whether
from operating costs or judgments against the business. All assets of the business belong to a
sole proprietor, including, for example, computer infrastructure,
any inventory, manufacturing equipment, or retail fixtures, as well as any real property owned by
the sole proprietor.
 Partnership: A partnership is a business owned by two or more people. In most forms of
partnerships, each partner has unlimited liability for the debts incurred by the business. The three
most prevalent types of for-profit partnerships are: general partnerships, limited partnerships,
and limited liability partnerships.
 Corporation: The owners of a corporation have limited liability and the business has a
separate legal personality from its owners. Corporations can be either government-owned or
privately owned. They can organize either for profit or as nonprofit organizations. A privately
owned, for-profit corporation is owned by its shareholders, who elect a board of directors to
direct the corporation and hire its managerial staff. A privately owned, for-profit corporation can
be either privately held by a small group of individuals, or publicly held, with publicly
traded shares listed on a stock exchange.
 Cooperative: Often referred to as a "co-op", a cooperative is a limited-liability business that can
organize as for-profit or not-for-profit. A cooperative differs from a corporation in that it has
members, not shareholders, and they share decision-making authority. Cooperatives are typically
classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental
to the ideology of economic democracy.
 Limited liability companies (LLC): Limited liability partnerships and other specific types of
business organization protect their owners or shareholders from business failure by doing
business under a separate legal entity with certain legal protections. In contrast, unincorporated
businesses or persons working on their own are usually not as protected.
 Franchises: A franchise is a system in which entrepreneurs purchase the rights to open and run a
business from a larger corporation. Franchising in the United States is widespread and is a major
economic powerhouse. One out of twelve retail businesses in the United States are franchised
and 8 million people are employed in a franchised business.
 A company limited by guarantee. Commonly used where companies are formed for
noncommercial purposes, such as clubs or charities. The members guarantee the payment of
certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise,
they have no economic rights in relation to the company. This type of company is common in
England. A company limited by guarantee may be with or without having share capital.

 A company limited by shares. The most common form of the company used for business
ventures. Specifically, a limited company is a "company in which the liability of each
shareholder is limited to the amount individually invested" with corporations being "the most
common example of a limited company." This type of company is common in England and many
English-speaking countries. A company limited by shares may be a
 publicly traded company or a

 Privately held company.

 A company limited by guarantee with a share capital. A hybrid entity, usually used where the
company is formed for noncommercial purposes, but the activities of the company are partly
funded by investors who expect a return. This type of company may no longer be formed in the
UK, although provisions still exist in law for them to exist.
 A limited liability company. "A company—statutorily authorized in certain states—that is
characterized by limited liability, management by members or managers, and limitations on
ownership transfer", i.e., L.L.C. LLC structure has been called "hybrid" in that it "combines the
characteristics of a corporation and of a partnership or sole proprietorship". Like a corporation, it
has limited liability for members of the company, and like a partnership it has "flow-through
taxation to the members" and must be "dissolved upon the death or bankruptcy of a member".
 An unlimited company with or without a share capital. A hybrid entity, a company where the
liability of members or shareholders for the debts (if any) of the company are not limited. In this
case doctrine of a veil of incorporation does not apply.

Less common types of companies are:

 Companies formed by letters patent. Most corporations by letters patent are corporations
sole and not companies as the term is commonly understood today.
 Charter corporations. Before the passing of modern companies legislation, these were the only
types of companies. Now they are relatively rare, except for very old companies that still survive
(of which there are still many, particularly many British banks), or modern societies that fulfill a
quasi-regulatory function (for example, the Bank of England is a corporation formed by a
modern charter).
 Statutory companies. Relatively rare today, certain companies have been formed by a private
statute passed in the relevant jurisdiction.

Note that "Ltd after the company's name signifies limited company, and PLC (public limited
company) indicates that its shares are widely held."
Factors influencing the Choice of Suitable Form of Business: The choice of the most
suitable form of business organisation is a crucial decision because it affects the rights and liability of
the owners. Therefore, the choice should be made with great thought and deliberations.

Each form of business organisation has its own merits and demerits. These merits and demerits should
be duly considered before selecting the form of organisation. The factors which affect the choice of the
form of business organisation are given below:

1. Nature of business: The nature of business has an important bearing on the choice of the form
of ownership. Businesses providing direct services, e.g., small retailers, hair-dressing saloons,
tailors, restaurants, etc., and professional services, e.g., doctors, lawyers, etc., depend for their
success upon personal attention to customers and the personal knowledge or skill of the owners
and are, therefore, generally organised as proprietary concerns.
Business activities requiring pooling of skills and funds, e.g., wholesale trade, accounting firms, tax
consultants, stock broker, etc., are better organized as partnerships. Manufacturing organisations of
large size are more commonly set up as private and public companies.

2. Size and area of operations: Large scale enterprises catering to national and international
markets can be organised more successfully as private or public companies. The reason is that
large sized enterprises require large financial and managerial resources which are beyond the
capacity of a single person or a few partners.
On the other hand, small and medium scale firms are generally set up as partnership and proprietorship.
Small scale enterprises like hairdressers, bakeries, laundries, workshops, etc., cater to a limited market
and require small capital.

Similarly, where the area of operations is wide spread (national or international), company ownership
is appropriate. But if the area of operations is confined to a particular locality, sole proprietorship or
partnership will be a more suitable choice.

3. Degree of control desired: A person who desires direct control of business prefers propri-
etorship rather than the company because there is a separation of ownership and management in
the latter case. In case the owner is not interested in direct personal control but in large scale
operation, it would be desirable to adopt the company form of ownership.
4. Amount of capital required: The funds required for the establishment and operation of a
business has an important impact on the choice. Enterprises requiring heavy investment, i.e., iron
and steel plants, etc., should be organised as joint stock companies.
A partnership has to be converted into a company when it grows beyond the capacity and resources of
few persons. Requirements of growth and expansion should also be considered in making the choice.

5. Degree of risk involved: The volume of risk and the willingness of owners to bear it, is an
important consideration. A single individual may have large financial resources sufficient for a
medium scale enterprise but due to unlimited personal liability he may not like to organise as a
proprietorship or a partnership.
Due to limited liability and a large number of shareholders, there is maximum diffusion of risk in a
public company. But an enterprising individual not afraid of unlimited liability may go in for sole
proprietorship.
 6. Division of surplus: A sole trader receives all the profits of his business but he also bears all the
risks. If a person is ready to bear unlimited personal liability and desires maximum share of
profits, proprietorship and partnership are preferable to company form.
7. Duration of business: Temporary and ad-hoc ventures can be organised as proprietorships and
partnerships as they are easy to form and dissolve. But they lack continuity and stability.
Enterprises of a permanent nature can be better organised as joint stock companies and coopera-
tives because they enjoy perpetual succession.
8. Government regulation and control: Proprietorships and partnerships are subject to little
regulation and control by the Government. Companies and cooperatives are, on the other hand,
subject to severe restrictions and have to publish their accounts. It is also easier to maintain
secrecy of business in case of proprietorship and partnership.
9. Flexibility of operations: Businesses which require a high degree of administrative flexibility
should better be organised as proprietorships or partnerships. Flexibility of operations is linked
with the internal organisation of a business.
The internal organisation of sole proprietorship and partnership is much simpler and less elaborate than
the internal organisation of a joint stock company. Moreover, the objectives and powers of a company
cannot be changed easily or without legal formalities.

10. Tax Liability: Various forms of organization are assessed to income tax on different basis. A
company has more tax liability as compared to sole trading or a partnership.
We have mentioned above the factors that influence the selection of a suitable form of business
organization. It is very important decision because it is very difficult to change the form of
organization later on.

Sole Proprietorship: The sole proprietorship is a popular business form due to its simplicity, ease
of setup, and nominal cost. A sole proprietor need only register his or her name and secure local
licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the
owner of a sole proprietorship remains personally liable for all the business's debts. So, if a sole
proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner.
If such suits are successful, the owner will have to pay the business debts with his or her own money.

Definition: As the name suggests, ‘sole’ means ‘only one’ and ‘proprietorship’ implies ‘ownership’.
Hence, a sole proprietorship is a form of business organisation, wherein a single person owns, manages
and controls, all the business activities and the individual who operates the business is called as a sole
proprietor or, a sole trader.

In this business unit, the sole proprietor is exclusively responsible for employing capital to commence
business, bearing all the risk of the enterprise and also for managing all the activities single-handedly.
And to do so, he/she pools and arranges various resources in an organised way, with the sole aim of
earning profit. The owner is exclusively responsible for all the decisions.

All the profits earned by the business goes to sole trader’s pocket, and he is solely responsible for the
loss suffered.
**Characteristics of Sole Proprietorship

1. Single Ownership: It is a type of business unit, in which a single person owns the entire
business, i.e. all the assets and property belongs to the proprietor. Accordingly, he bears all the
risk associated with the enterprise. Hence, the business ends up at his will or on his demise.
2. No sharing of Profit and Loss: Whatever income generated from the sole proprietorship
business, it belongs to the sole proprietor only. Consequently, he alone bears all the losses
incurred by the firm. There is no sharing of the business profits and losses.
3. One man’s capital: The capital required to start the business or to continue operations, is
arranged and brought to the business by the sole proprietor only, either from his personal
resources or by borrowing, i.e. from the bank, financial institutions, friends, relatives, etc.
4. Unlimited Liability: This is one of the major con of sole proprietorship business, i.e. the
liabilities are unlimited. In the event of loss, the personal assets of the proprietor along with the
business assets can be utilised to discharge the dues of business.
5. Less Legal Formalities: The legal requirements for formation, operation and closure of a sole
tradership business is almost nil, even it does not need registration. Although for the purpose of
business, it can be registered with local self-government, and obtain a certificate of registration.
6. One man Control: As only one person is in charge of all the activities, he has full fledged
control over it. Thus, the sole proprietor takes all the decision and executes it, in the manner he
wants.
There is no legal distinction between the proprietor and business; they are one and the same thing in
the eyes of the law. Sole proprietor uses his own skills, intelligence and expertise to operate the
business.
**Partnership Business: THE INDIAN PARTNERSHIP ACT’ 1932 Section.4 of the Indian
Partnership Act, 1932 defines Partnership in the following terms: “Partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting for
all.”

"Section 464 of the Companies Act, 2013 empowers the Centre Government to prescribe maximum
number of partners in a firm but the number of partners so prescribed cannot be more than 100.The
Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the
Companies (Miscellaneous) Rules,2014. Thus, in effect, a partnership firm cannot have more than 50
members".
Definition: A type of business organization in which two or more individuals’ pool money, skills, and
other resources, and share profit and loss in accordance with terms of the partnership agreement. In
absence of such agreement, a partnership is assumed to exit where the participants in an enterprise
agree to share the associated risks and rewards proportionately.

Section 4 of Partnership Act, 1932: “The relation between persons who have agreed to share profits
of a business carried on by all or any of them acting for all.” According to Partnership Act, there must
be two or more persons having contractual relationship. It is not necessary that the business should be
managed by all the partners but any one or more partners can run the business on behalf of all the
persons. Any partner acting on behalf of other partners can bind the firm to third parties. So there is an
implied authority for contracting on behalf of other partners.

L.H. Haney: “The relationship between persons who agree to carry on a business in common with a
view to private gain.”

In a broad sense, a partnership is any cooperative endeavor undertaken by multiple parties. These
parties can be governments, non-profits, businesses, individuals or a combination, and the goals of the
partnership can vary widely. There may or may not be a written agreement governing the partnership,
but it is generally a good idea to specify terms at the outset so that disagreements can be settled
according to predetermined rules. In some cases such an agreement is legally required.

Features of Partnership
1. Agreement: The partnership arises out of an agreement between two or more persons.

2. Profit sharing: There should be an agreement among the partners to share the profits of the
business.
3. Lawful business: The business to be carried on by a partnership must always be lawful.

4. Membership: There must be at least two persons to form a partnership. The maximum number is
20. But in case of banking business the maximum is 10 members.

5. Unlimited liability: The liability of every partner is unlimited, joint and several.

6. Principal-agent relationship: Every partner is an agent of the firm. He can act on behalf of the
firm. He is responsible for his own acts and also for the acts done on behalf of the other partners.
 7. Collective management: The firm and the partners are one. When a contract is made in the
name of the firm all the partners are responsible for it individually and collectively.
8. Non-transferability of shares: A partner cannot transfer his share of interest to others without
the consent of the other partners.
 Association of at least two persons.
 Contractual relation.
 Earning profit.
 Mutual agency.
The following are the advantages of partnership business:

1. Easy to form: A partnership firm can be formed without any legal formalities and expenses.
Even if the fum is to be registered, the expenses are not much compared to company form of
organization.
2. Access to more capital: A firm consists of more than one person. Therefore it can secure more
capital from combined resources.
3. Skill and talent: Talented persons may be taken as partners. More skill and talent will be
available.

4. Division of labor: Division of labor can be introduced which increases the efficiency in the
management. One partner may take care of purchases, another sales, a third accounts and so on.
5. Contact with customers: All the partners in a firm may take part in the management of the
business. So, they get in touch with the customers during the course of the business. It enables
them to study the tastes and needs of the customers.
6. Borrowing capacity: The creditors will lend Loans not only on the basis of the firm’s assets but
also based on the personal properties of the partners. So the borrowing capacity of a firm is more.
7. Incentive to work hard: Every partner is liable for the debts of the firm. Also every partner has
a share in the profits. This makes them to work hard for the success of the business.
8. Expansion of business: Due to the availability of sufficient finance and skill the business can be
expanded very easily.
9. Wise decisions: In partnership, decisions are taken with the consultation of all the partners. So
naturally the decisions are wiser and more beneficial.

10. Co-operation between partners: The partnership enables partners to provide mutual help to
each other. Partners behave as members in a joint family.

11. Flexibility: Changes in the business can be adopted easily. There are no legal restrictions.

12. Economy in operation: If there is co-operation among the partners the firm can be run
efficiently. A good number of economies in management can be derived.
13. Division of risks: All losses and risks of the business are shared by all the partners. So risky
ventures can also be taken up.

14. Maintenance of secrets: Business secrets can be maintained easily if the number of partners in a
firm are limited.

15. Incidence of tax: Compared with company form of organization the tax payable on the incomes
of the partners will be less.
**Disadvantages of Partnership
The following are the disadvantages of a partnership firm:

1. Division of responsibility: In a partnership the management is divided. As such responsibilities

are also divided. Every partner might try to shift the burden on to the shoulders of others; finally
none takes the responsibility properly.
2. Delay in decisions: Sometimes the partners may not agree with one another in taking decisions.
As a result partners will not be in a position to take quick decisions.
3. Lack of continuity: A partnership gets dissolved on the death, insolvency, insanity or retirement
of any partner. So, there is no guarantee for the continuity of the firm.
4. No transferability of share: In a firm the partner cannot transfer his share of interest to others
without the consent of the other partners.
5. Lack of secrecy: It may not be possible to maintain secrecy in partnership because of the number
of partners.
6. Unlimited liability: The creditors of a firm can recover their loan amounts from the personal
properties of the partners when the firm’s sources are not enough. Therefore the personal
properties of the partners are not safe..
7. Joint and several liability: Every partner is jointly and separately liable for the firm’s debts. In
case of insolvency of partners, the solvent partners have to pay the debts of the insolvent partners
also.
8. Internal conflicts: Differences and disputes among the partners are very common. These
conflicts harm the firm as a whole.
9. Misuse of assets: The partners may use the assets of the firm for their personal purposes. Misuse
of assets is harmful to business interests.

10. Lack of public confidence: A partnership firm is purely a private organization. It is not
controlled or regulated by the Government. As such public may not have confidence in the firm.

**Characteristics of Partnership:
 1. Membership: At least two persons are required to begin a partnership while the maximum
number of members is limited to 100. Further, all the individuals entering into partnership must
be legally competent to do so, as they have to enter into a contract to become partners. Thus,
minors, insolvent and lunatic persons cannot become members, but a minor can be admitted to
partnership, to share profits.
2. Unlimited liability: The members of a partnership have unlimited liability, i.e. they
are collectively and individually liable for the firm’s debts and obligations. So, if in case business
assets are not adequate to repay liabilities, personal assets of all or any partner can be claimed by
the creditors to realise the outstanding amount.
3. Sharing of profit and loss: The main purpose of the partnership is to share profit in the agreed
ratio. However, in the absence of any agreement between partners, the business profits or losses
are divided equally among all the partners.
4. Mutual Agency: The partnership business is undertaken by all the partners or any of the partner,
who acts on behalf of all the partners. So, every partner is a principal as well as an agent. Further,
the acts of partners bind each other as well as the firm.
5. Voluntary Registration: The registration of partnership is not mandatory, but it
is recommended, as it offers certain benefits, e.g. in case of any conflict among partners, any
partner can file suit against other partner or if there is any dispute between firm and outside party,
then also the firm can file a case against that party.
6. Continuity: There is a lack of continuity in partnership, like death, bankruptcy, retirement or
insanity of any partner can lead the partnership to end. Although, if the remaining partners want
to continue operations, they can do so by a fresh agreement.
7. Contractual Relationship: The relation subsisting between partners is due to the contract, which
may be oral, written or implied.
8. Transfer of interest: Mutual consent of all the partners is a must for transferring the interest in
the firm to any external party.
In a partnership, the decision making is done with the mutual consent of all the partners. They share
among themselves the decision making and control of the regular business operation.

**Types of Partners: There are different types of partners in partnership firm and they may be
classified as under:

(i) Active Partner: An active partner is one who takes active part in the day-to-day working of
the business. He may act in different capacities such as manager, organiser, adviser and
controller of all the affairs of the firm. He may also be called a working partner.
(ii) Sleeping or Dormant Partner: A sleeping partner is one who contributes capital, shares
profits and contributes to the losses of the business but does not take part in the working of the
concern. A person may have money to invest but they may not be able to devote time for the
business: such a person may become a sleeping partner. Sleeping partner is liable for the
liabilities of the business like other partners. He cannot bind the business, i.e., firm, to third
parties, by his acts. He is not known to the public as a partner; so he may be called as a ‘secret partner’.

(iii) Nominal Partner: A nominal partner is one who lends his name to the firm. He does not
contribute any capital nor does he shares profits of the business. He is known as a partner to
the third parties. On the strength of his name, the business may get more credit in the market
or may promote its sales. A nominal partner is liable to those third parties who give credit to
the firm on the assumption of that person being a partner in the firm.
(iv) Partner in Profit: A person may become a partner for sharing the profit only. He contributes
capital and is also liable to third parties like other partners. He is not allowed to take part in
the management of the business. Such partners are associated for their money and goodwill.
(v) Partner by Estoppel or Holding Out: When a person is not a partner but poses himself as a
partner, either by words or in writing or by his acts, he is called a partner by estoppel or by
holding out. A partner by estoppel or by holding out shall be liable to outsiders who deal with
the firm on the presumption of that person being a partner in the business even though he is
not a partner and does not contribute anything to the business.
(vi) Secret Partner: The position of a secret partner lies between active and sleeping partner. His
membership of the firm is kept secret from outsiders. His liability is unlimited and he is liable
for the losses of the business. He can take part in the working of the business.
(vii) Sub-Partner: A partner may associate anybody else in his share in the firm. He gives a part of
his share to the stranger. The relationship is not between the sub-partner and the firm but
between him and the partner. The sub-partner is a non-entity for the partnership. He is not
liable for the debts of the firm.
(viii) Minor as a Partner: A minor is a person who has not yet attained the age of majority. A
minor cannot enter into a contract according to the Indian Contract Act because a contract by a
minor is voidable. However, a minor may be admitted to the benefits of an existing
partnership with the consent of all partners. The minor is not personally liable for liabilities of
the firm, but his share in the partnership property and profits of the firm will be liable for debts
of the firm.

A minor has the following rights and liabilities under the Partnership Act:

(a) A minor has a right to such share of property and of profits of the firm as may be agreed upon
by all the partners.
(b) A minor may inspect the accounts of the firm or take note of the accounts.

(c) The personal property of the minor is not liable for the debts of the firm. But his share in
property of the firm and profits is liable for the debts and obligations of the firm.
(d) So long as a minor remains a partner he cannot file a suit against other partners for the accounts
or for the payment of his share in the property or profits of the firm. He can do this only when
he wants to severe his relations with the partnership firm.
 (e) At any time within 6 months of his attaining majority (i.e., completing 18 years of age) the
minor may give public notice of the fact that he has decided to become or not to become a
partner in the firm. In case he does not give any such notice within six months, it shall be
presumed that he has opted to become a partner.
(f) In case minor decides to become a partner, he will be personally liable to third parties for all
acts of the firm, since he was admitted to the benefits of the firm.

(g) If a minor decides not to become a partner, his rights and liabilities continue to be those of a
minor up to the date on which he gives public notice. His share will not be liable for any acts of
the firm done after the date of the notice.

**Meaning and Contents of Partnership Deed

Partnership firm can be established with an agreement between the partners. This agreement may be
written or oral. An oral agreement may be the cause of dispute in future. So, it is better to have a
written agreement in order to avoid future conflicts. The written agreement duly signed by the partners
is known as partnership deed or agreement or Articles of Partnership. It is the written contract between
partners. It contains the term and conditions of the partnership.

Partnership deed forms the basis of partnership. Partnership deed is a document containing all the
matters according to which mutual rights, duties and liabilities of the partners in the conduct and
management of the affairs of the firm are determined. Hence, it contains the terms and conditions of the
partnership. It is helpful in preventing and resolving disputes among the partners. A partnership deed
can be altered at any time with the consent of all the partners.

Main Content of Partnership Deed

Some of the important clauses to be included in a partnership deed are as follows:

(1) Name of the firm and Its Address: The deed should contain of the firm and place of its
business.
(2) Name and Address of Partners: The deed should also contains the names and address of all
partners.
(3) Nature of Firm’s Business: The nature of business proposed to be carried and its limitation
should be included in it.
(4) Duration of Partnership: It the partnership is established for a fixed duration or for a fixed
work, it should be stated in it.
(5) Partners’ Capitals: The deed should contain the total amount of capital and contributions by
each partner.
(6) Interest on Capital: If the partners decide to change interest on their capitals, the rate should be
mentioned in the deed.
(7) Drawing and Interest on Them: The deed should contain the limit of drawings by every
partner and the rate of interest to be charged.
(8) Division of Profit: Profit and loss sharing ratio should be stated in the deed. If it is not
mentioned partners are authorized to share equally according to Partnership Act.
(9) Partners’ Salary and Commission: If the partners decide to pay salary and commission to the
partners, the deed should contain the amount of salary or commission payable to any partner for
the services rendered to the business.
 (10) Rights and Duties of Partners: If any partner has some special rights and duties regarding to
conducts of business or if the liability of any partner is limited to the capital invested by him,
these facts should also be mentioned in it.
(11) Admission and Retirement of Partners: After the establishment of partnership some new
partners may be admitted and some may retire from the business. If any definite procedure is to
be adopted at the time of admission or retirement of partner, it should be stated in it.
(12) Death of a Partner: The procedure of calculating the amount due to a deceased partner and
the method of its payment to his successors, should also be decided and stated in the deed.
(13) Valuation of Goodwill: The method of valuation of goodwill at the time of admission,
retirement or death of a partner should be also be clearly stated in it.
(14) Revaluation of Assets and Liabilities: The method of revaluation of assetsand liabilities on
admission, retirement or death of a partner should also be clearly stated in it.
(15) Accounts and Audit: The procedure of keeping accounts and their audit should also be stated
in it.
(16) Dissolution of Partnership: The deed should contain the firm and the method of the final
settlement of accounts.
(17) Arbitration Clause: In case of disputes the method of appointing arbitrators and their rights
should be clearly mentioned.

**Rules to be followed in the Absence of a Partnership Deed:

1. The partners are entitled to share the profits or losses equally.

2. Partners are not entitled to interest on their capital.

3. No partner will be allowed salary, or any other remuneration for any extra work done for the
firm.

4. No interest will be charged on partners’ drawings.

5. Interest at 6 per cent per annum will be allowed to partners on any loan given to the firm by
them.
6. Every partner has a right to take part in the working of the partnership business.

7. No person can be admitted into the firm without the consent of all the existing partners.

8. Every partner should use the partnership property for the benefit of the firm.

9. Every partner has a right to inspect the books of accounts of the firm.

**Suitability of Partnership form of business organisation

We have learnt that partnership form of business has its own advantages and disadvantages. But at
times we find that partnership form of business organisation is most suitable for us to run a small
business. Let us look into such instances:

a. A partnership firm is suitable in case of business where the capital requirement is medium i.e. it
is neither too large nor too small. Business like retail and wholesale trade or small
manufacturing units can be successfully started by partners.
**Limited Liability Partnership (LLP)
Definition: “A corporate business vehicle that enables professional expertise and entrepreneurial
initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of
limited liablitiy while allowing its members the flexibility for organizing their internal structure as a
partnership”.

**Features of LLP

1. The LLP has Separate Legal Entity i.e. the LLP and the partners are distinct from each other.
2. Minimum of 2 partners are required to form a LLP. However, there is no limit on the
maximum number of partners.
3. No requirement of minimum capital contribution.
4. The LLP Act does not restrict the benefit of LLP structure to certain classes of Professionals
only and would be available for use by any enterprise.

**Benefits of Forming a LLP

1. The Liability of each partner is limited to his share as written in the agreement filed at the
time of creation of LLP as compared to Partnership Firms which have unlimited liability.
2. It has a low cost of formation and is easy to form.
3. The partners are not liable for the acts of each other and can be held liable only for their own
acts as compared to partnerships wherein they can be held liable for the acts of their partners
as well.
4. Less restrictions and compliance are enforced on a LLP by the Government as compared to
the restrictions enforced on a company.
5. As a juristic legal person, a LLP can sue in its name and be sued by others. The partners are
not liable to be sued for dues against the LLP.
**Disadvantages of Forming a LLP

The only disadvantage of forming a LLP is that it cannot come out with its IPO and raise
money from the public which a company form of organisation can easily do.

**Difference between LLP and Traditional Partnership Firm

 The basic difference between LLP and Partnership is with regard to the Liability of the Partners.
 In a partnership firm, every partner is liable, jointly with all the other partners and also severally
for all acts of the firm done while he is a partner.

However, under the LLP structure, liability of the partner is limited only to his agreed
contribution. Further, no partner is liable on account of the independent or unauthorized acts of other
partners, thus allowing individual partners to be shielded from joint liability created by another
partner’s wrongful acts or misconduct.
Cooperative Business Organisation
Definition: The International Labour Organisation has defined cooperative organisation as “A
cooperative organisation is 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 organisation, making equitable distributions to the capital required, and accepting a fair
share of risk and benefits of the undertaking.”
The word ‘co-operation’ stands for the idea of living together and working together. Cooperation is a
form of business organisation the only system of voluntary organisation suitable for poorer people. It is
an organisation wherein persons voluntarily associate together as human beings on a basis of equality,
for the promotion of economic interests of themselves.

The cooperative movement has three objectives—Better living, Better business and Better farming.

A cooperative organisation always prefers

(1) Service instead of profit maximization,

(2) Survival of the weakest instead of survival of the fittest,

(3) Self-help and self-reliance instead of dependence on external bodies.

(4) Development of moral character of members instead of emphasis on pure material

development.

**Characteristics of Cooperative Organisation:

1. Voluntary Association: A cooperative society is a voluntary association of persons and not of
capital. Any person can join a cooperative society of his free will and can leave it at any time.
When he leaves, he can withdraw his capital from the society. He cannot transfer his share to
another person.

The voluntary character of the cooperative association has two implications:

i. None will be denied the right to become a member and

ii. The cooperative society will not compete anybody to become a member.

2. Spirit of Cooperation: The spirit of cooperation works under the motto, ‘each for all and all for
each.’ This means that every member of a cooperative organisation shall work in the general
interest of the organisation as a whole and not for his self-interest. Under cooperation, service is
of supreme importance and self-interest is of secondary importance.
3. Democratic Management: An individual member is considered not as a capitalist but as a
human being and under cooperation, economic equality is fully ensured by a general rule—one
man one vote. Whether one contributes 50 rupees or 100 rupees as share capital, all enjoy equal
rights and equal duties. A person having only one share can even become the president of
cooperative society.
4. Capital: of a cooperative society is raised from members through share capital. Cooperatives are
formed by relatively poorer sections of society; share capital is usually very limited. Since it is a
part of govt. policy to encourage cooperatives, a cooperative society can increase its capital by
taking loans from the State and Central Cooperative Banks.
5. Fixed Return on Capital: In a cooperative organisation, we do not have the dividend hunting
element. In a consumers’ cooperative store, return on capital is fixed and it is usually not more
 than 12 p.c. per annum. The surplus profits are distributed in the form of bonus but it is directly
connected with the amount of purchases by the member in one year.
6. Cash Sale: In a cooperative organisation “cash and carry system” is a universal feature. In the
absence of adequate capital, grant of credit is not possible. Cash sales also avoided risk of loss
due to bad debts and it could also encourage the habit of thrift among the members.
7. Moral Emphasis: A cooperative organisation generally originates in the poorer section of
population; hence more emphasis is laid on the development of moral character of the individual
member. The absence of capital is compensated by honesty, integrity and loyalty. Under
cooperation, honesty is regarded as the best security. Thus cooperation prepares a band of honest
and selfless workers for the good of humanity.
8. Corporate Status: A cooperative association has to be registered under the separate legisla- tion
—Cooperative Societies Act. Every society must have at least 10 members. Registration is
desirable. It gives a separate legal status to all cooperative organisations—just like a company. It
also gives exemptions and privileges under the Act.

**Types of Cooperatives:
Cooperatives may be formed in all walks of life. Some of them are concerned with the moral and social
uplift of a weak section of the people, while many of them combine some business activity with service
to members.

The principal types of business cooperatives are:

1. Cooperative Credit Societies: Cooperative Credit Societies are voluntary associations of people
with moderate means formed with the object of extending short-term financial accommodation to
them and developing the habit of thrift among them.
The village societies were federated into central cooperative banks and central cooperative banks
federated into the apex of state cooperative banks. Thus rural cooperative finance has a federal
structure like a pyramid. The primary society is the base. The central bank in the middle and the apex
bank in the top of the structure. The members of the primary society are villagers.

In the similar manner urban cooperative credit societies were started in India. These urban cooperative
banks look after the financial needs of artisans and labour population of the towns. These urban
cooperative banks are based on limited liability while the village cooperative societies are based on
unlimited liability.

2. Consumers’ Cooperative Societies: 28 Rochedale Pioneers in Manchester in UK laid the

foundation for the Consumers’ Cooperative Movement in 1844 and paved the way for a peaceful
revolution. The Rochedale Pioneers who were mainly weavers, set an example by collective
purchasing and distribution of consumer goods at bazar rates and for cash price and by
declaration of bonus at the end of the year on the purchase made.
Their example has brought a revolution in the purchase and sale of consumer goods by eliminating
profit motive and introducing in its place service motive. In India, consumers’ cooperatives have
received impetus from the govt, attempts to check rise in prices of consumer goods.

3. Producers’ Cooperatives: It is said that the birth of Producers’ Cooperatives took place in
France in the middle of 19th century. But it did not make satisfactory progress.
Producers’ Cooperatives, also known as industrial cooperatives, are voluntary associations of small
producers formed with the object of eliminating the capitalist class from the system of industrial
production. These societies produce goods for meeting the requirements of consumers. Sometimes their
production may be sold to outsiders at a profit.

There are two types of producers’ cooperatives. In the first type, producer-members produce
individually and not as employees of the society. The society supplies raw materials, chemicals, tools
and equipment’s to the members. The members are supposed to sell their individual products to
the society.

4. Housing Cooperatives: Housing cooperatives are formed by persons who are interested in
making houses of their own. Such societies are formed mostly in urban areas. Through these
societies persons who want to have their own houses secure financial assistance.
5. Cooperative Farming Societies: The cooperative farming societies are basically agricultural
cooperatives formed for the purpose of achieving the benefits of large scale farming and
maximizing agricultural output. Such societies are encouraged in India to overcome the
difficulties of subdivision and fragmentation of holdings in the country.

Some of the established principles of co-operation are:

1. Equality of status
2. Democratic management
3. Collective efforts
4. Self – help through mutual help
5. ‘Each for all and all for each’ etc.

The notion of a co-operative organisation could be depicted as follows:

H.C. Calvert defines a co-operative organization as “A co-operative society is a form of

organisation wherein persons voluntarily associate together as human beings on the basis of equality
for the promotion of the economic interests of themselves.”

**Features of Co-Operative Organisation:

Fundamental features of a co-operative organisation are as follows:

(i) Registration: A co-operative society must be registered under the Co-operative Societies Act,
1912 or under a State Co-operative Societies Act. On registration, the society becomes a body
corporate, having a separate legal entity of its own, with perpetual succession and limited
liability of its members.

(ii) Voluntary Association: A co-operative organisation is a voluntary association of persons.

Everyone having a common interest is free to join a co-operative society; irrespective of caste,
creed, religion or political affiliation. No person can be forced to become the member of a co-
operative society or continue as a member. A member after giving proper notice can leave the
society; and will get back his capital according to the rules of the co-operative. But no member
can transfer his shares to another person.
(iii) Minimum Ten Persons Needed: A minimum of ten adult persons are needed to form a co-
operative organisation. Maximum number of members is 100, in a co-operative credit society;
with no such limit in non-credit co-operative societies.
(iv) Service-Motive: The primary aim of a co-operative society is to provide some service or
benefit to its members (or even general public’s) by fighting against some social evil.
(v) Finance: The capital of a co-operative is raised from members through issue of shares. A co-
operative can also obtain loans from the Central or State Co-operative Banks.

(vi) Limited Liability: The liability of each member of a co-operative is limited to the extent of the
value of shares held by him, in the share capital of the co-operative.
(vii) Democratic Management: Business of a co-operative society is managed by a managing
committee; which is elected by the members. The members lay down the broad policy
guidelines within which the managing committee manages the affairs of the co-operative
society.

The managing committee usually consists of the following office-bearers:

1. President
2. Vice-president.
3. Secretary
4. Joint Secretary, if any
5. Treasurer.

(viii) ‘One-Man One-Vote’ Rule: Every member in a co-operative has one vote; irrespective of the
number of shares held by him. ‘One-man one vote rule’, as such conveys the idea of equality of
status for all members of the society.
(ix) Limited Return on Capital and Disposal of Surplus: A limited interest up-to 10% is paid to
members on their capital contribution-as an incentive to invest money in the cooperative
society. However, interest is paid only out of profits. Profits are distributed not in form of
dividend but in form of a bonus which depends on the volume of business done by a member
with the co-operative.
(x) State Control: Government exercises control over co-operatives to protect the interests of
members of co-operatives; who, otherwise, are economically quite weak. Every co-operative
society must furnish annual accounts and reports to the Registrar of Co-operatives. Further,
accounts of all co-operatives are subject to compulsory audit.
1. Chartered Company: The companies that form by the order of the king of England
are called the charter company. These companies were formed before 1844. For
example, East India Company, Chartered Bank of England, the charter of the British
South Africa Company, given by Queen Victoria
2. Statutory Company: Companies that are formed by the order of the President, or by
the Legislative Committee or by bill of Parliament are called Statutory Company.
These Companies are operated by those laws. For example, municipal councils,
universities, central banks and government regulators, Central Bank.
3. Registered Corporation: Companies that are formed under the prevailing law of the
company are called the registered company. The corporation that has filed a
registration statement with the SEC prior to releasing a new stock issue. It is two types-
i) Unlimited Company: The liabilities of the shareholders of this company are
unlimited. For example, British all-terrain vehicle manufacturer Land Rover,
GlaxoSmithKline Services Unlimited.
ii) Limited Company / limited corporation: The liabilities of the shareholders are
limited. For example, Charitable organisations, Financial Services Authority. This
liability of a company can be of two types.
a) By Guarantee

b) By share value. The company limited by share can be of two types.

Private Limited Company, where the number of shareholder ranges from two to fifty.
The share of these companies can’t be traded in the stock market.

Public Limited Company, where the number of shareholder ranges from seven to share
limitation. The share of the public limited company is traded in the stock market