KVS Business Studies Support Material XI (2020-21) PDF

Business Studies / XI (2020-21) STUDENT SUPPORT MATERIAL Class XI Business Studies Session 2020-21 KENDRIYA VIDYALAYA SANGSTHAN RO AGRA...

Business Studies / XI (2020-21) STUDENT SUPPORT MATERIAL Class XI Business Studies Session 2020-21 KENDRIYA VIDYALAYA SANGSTHAN RO AGRA 1 Business Studies / XI (2020-21) STUDENT SUPPORT MATERIAL INSPIRATION Shri C S Azad, Deputy Commissioner, KVS RO Agra Shri M L Mishra, Asstt. Commissioner, KVS RO Agra Smt. Indira Mudgal, Asstt. Commissioner, KVS RO Agra MENTOR Shri Chandra Mohan Singh Incharge Principal KV CRPF Rampur, UP CONTENT TEAM Ms. Meenakshi Saini, PGT Commerce, KV Mathura Cantt. UP Shri Ajay Garg, PGT Commerce, KV CRPF Rampur, UP Shri Ajay Bahadur, PGT Commerce, KV Lalitpur, UP REVIEW & EDITING TEAM Shri Chandra Mohan Singh, Incharge Principal, KV CRPF Rampur, UP Shri Ajay Garg, PGT Commerce, KV CRPF Rampur, UP 2 Business Studies / XI (2020-21) Business Studies Class XI INDEX S. No. Particulars Page No. 1 Syllabus 4 2 Deleted Topics for Session 2020-21 5 PART – A: Foundation of Business UNIT -1: Evolution and Fundamentals of 3 6-18 Business 4 UNIT -2: Forms of business organisations 19-35 5 UNIT -3: Public, Private and Global Enterprises 36-43 6 UNIT -4: Business Services 44-56 7 UNIT -5: Emerging Modes of Business 57-64 UNIT -6: Social responsibility of Business and 8 65-71 Business Ethics PART – B: Finance and Trade 9 UNIT -7: Sources of business finance 72-82 UNIT -8: Small Business Entrepreneurship 10 83-90 Development 11 UNIT -9: Internal Trade 91-102 12 UNIT -10: International Business 103-110 3 Business Studies / XI (2020-21) SYLLABUS Session 2020-21 BUSINESS STUDIES CLASS XI Units Name of The Chapter/Unit Periods Marks Part A: Foundation of Business Evolution and Fundamentals of Unit - 1: 18 Business 20 Unit - 2: Forms of business organisations 20 Unit - 3: Public, Private and Global Enterprises 10 18 Unit - 4: Business Services 14 Unit - 5: Emerging Modes of Business 05 Social responsibility of business and 12 Unit - 6: 08 Business Ethics Total (i) 75 40 Part B: Finance and Trade Unit - 7: Sources of business finance 28 Small Business Entrepreneurship 20 Unit - 8: 16 Development Unit - 9: Internal Trade 22 20 Unit - 10: International Business 04 Total (ii) 70 40 Project Work (iii) 20 20 Grand Total (i + ii +iii) 165 100 4 Business Studies / XI (2020-21) DELETED TOPICS (for Session 2020-21) BUSINESS STUDIES CLASS XI Units Name of The Unit DELETED TOPICS Foundation of Part A: Business Forms of business Choice of forms of Business Unit - 2: organisations Organisations Global Enterprises – Features. Public, Private and Unit - 3: Joint Ventures; Public Private Global Enterprises Partnership - Concept Postal Services – Mail, Registered Unit - 4: Business Services Post, Parcel, Speed Post, Courier - Meaning Emerging Modes of Business Process Outsourcing (BPO) Unit - 5: Business – Concept, Need and Scope Social responsibility of Business Ethics – Concept and Unit - 6: business and Elements Business Ethics Part B: Finance and Trade Sources of business Borrowed Funds - Inter Corporate Unit - 7: finance Deposits (ICD) Types of Retail Trade – Itinerants and Small Scale Fixed Shop Unit - 9: Internal Trade Retailers. GST (Goods & Services Tax) – Concept and Key Features Export Trade – Meaning and Procedure Import Trade – Meaning and Procedure Documents involved in International Unit - 10: International Business Trade – Indent, Letter of Credit, Shipping Order, Shipping Bill, Mate‘s Receipt (DA/DP) World Trade Organisation (WTO) – Meaning and Objectives 5 Business Studies / XI (2020-21) UNIT - 1 Evolution & Fundamentals of Business History of Trade and Commerce in ancient India  Trade and commerce have played a vital role in making India to evolve as a major actor in the economic world in ancient times.  Commercial cities like Harappa and Mohenjodaro were founded in the third millennium B.C. The civilization had established commercial connections with Mesopotamia and traded in gold, silver, copper, coloured gemstones, beads, pearls, sea shells, terracotta pots, etc.  Silk Route helped in establishing commercial and political contacts with adjoining foreign kingdoms and empires of Asia, in particular, and the world, in general.  Maritime Route linked the east and the west by sea and were used for the trade of spices, so also known as ‗spice route‘. Indigenous Banking System As economic life progressed, the earlier barter system was replaced by metals. The metallic currency served as a medium of exchange as money because of its durability and divisibility. Other financial documents, which were prominent in the subcontinent and used to perform transactions, were Hundi and Chitti. Hundi is an instrument of exchange. Hundi involved a contract which: (i) Warrant the payment of money, the promise or order which is unconditional (ii) Capable of change through transfer by valid negotiation. Name of Type Payable to Hundi Dhani-jog Darshani Payable to any person Payable only to person whose name mentioned on it (and can‘t be Nam-Jog Darshani endorsed in favour of any other person) Drawn by one person on another, asking the latter to pay the amount to a third person. Here the drawee is a person who has Sah-jog Darshani certain level of credit worthiness in the market i.e. a person, someone ‗respectable‘. Firman- Hundi made payable on order either to a person whose name Darshani jog mentioned in it or to any person so ordered by him. Dekhan- Darshani Payable to the presenter or bearer. har Dhani-jog Muddati Payable to any person Firman- Muddati Hundi made payable to order jog Drawn against dispatched goods. Jokhmi Muddati (not negotiable and conditional in nature, means payable only on completion of a certain condition) Indigenous banking system played a prominent role in lending money and financing domestic and foreign trade with currency and letter of credit. With the development of banking, people began to deposit precious metals with lending individuals functioning as bankers or Seths. Agriculture and the domestication of animals were important components of the economic life of ancient people. Other economic activities were weaving cotton, dyeing fabrics, making clay pots, utensils, and handicrafts, sculpting, cottage industries, masonry, manufacturing, transports (i.e., carts, boats and ships), etc. 6 Business Studies / XI (2020-21) Workshops (Karkhana) were prominent where skilled artisans worked and converted raw materials into finished goods which were high in demand. Family-based apprenticeship system (where skills and knowledge, which were passed on from one generation to another) was in practice and duly followed in acquiring trade-specific skills. Rise of Intermediaries Intermediaries played a prominent role in the promotion of trade. It comprised (i) Commission Agents and Brokers (ii) Distributors (both for wholesale and retail goods) The evolution of Jagat Seths also developed and exercised great influence during the Mughal period and the days of the East India Company. Commercial and Industrial banks later evolved to finance trade and commerce and agricultural banks to provide both short-and long-term loans to finance agriculturists. Transport Trade was performed by both land ways and water ways. The trade that took place through water ways was known as Maritime trade. Pepper was particularly valued in the Roman Empire and was known as ‗Black Gold’. For centuries, it remained the reason for rivalry and conflict between various empires and trade powers to dominate the route for this trade. Trading Communities Strengthened In different parts of the country, different communities dominated trade as follows: S. No. Region Dominating trading community who handles business 1 Northern Region Punjabi and Multani 2 States of Gujarat and Bhats (In western India, these groups were called Mahajan) Rajasthan 3 Southern Region Chattis In urban centers, such as Ahmedabad the Mahajan community collectively represented by their chief called Nagarseth. Other urban groups included professional classes, such as hakim and vaid (physician), wakil (Lawyer), pundit or mulla (teachers), painters, musicians, calligraphers, etc. Merchant Corporations The merchant community also derived power and prestige from Guilds, which were the autonomous corporations, formed to protect the interests of the traders. These corporations, organized on formal basis, framed their own rules of membership and professional code of conduct, which even kings were supposed to accept and respect. The guild chief dealt directly with the king or tax collectors and settled the market toll on behalf of its fellow merchants at a fixed sum of money. The major sources of income were: (i) Trade and industry taxes: Traders had to pay octroi duties that were levied on most of the imported articles at varying rates. Customs duties varied according to the commodities and province. (ii) Ferry tax: It had to be paid for passengers, goods, cattle and carts. The right to receive the labour tax was usually transferred to the local bodies. Major Trade Centres The following were the leading trade centres in ancient India: 1. Patliputra (modern day Patna): It was not only a commercial town, but also a major centre for export of stones. It was a city in ancient India and was built by Magadha ruler ‗Udayin‘ in 490 BC as a small fort near Ganga River named as Paaligrama. 7 Business Studies / XI (2020-21) 2. Peshawar: It was an important exporting centre for wool and for the import of horses. Through Peshawar, the business was done between India, China and Rome in the first century A.D. 3. Taxila: It was a major centre on the important land route between India and Central Asia. It was also a city of financial and commercial banks. The city occupied an important place as a Buddhist centre of learning. The famous Taxila University flourished here. 4. Indraprastha: It was the commercial junction on the royal road where most routes leading to the east, west, south and north converged. 5. Mathura: It was an emporium of trade and people here subsisted on commerce. Many routes from South India touched Mathura and Broach. 6. Varanasi: It was well placed as it lay both on the Gangetic route and on the highway that linked North with the East. It grew as a major centre of textile industry and became famous for beautiful gold silk cloth and sandalwood workmanship. It had links with Taxila and Bharuch. 7. Mithila: The traders of Mithila crossed the seas by boats, through the Bay of Bengal to the South China Sea, and traded at ports on the islands of Java, Sumatra and Borneo. Mithila established trading colonies in South China, especially in Yunnan. 8. Ujjain: Agate, carnelian, muslin and mallow cloth were exported from Ujjain to different centres. It also had trade relations through the land route with Taxila and Peshawar. 9. Surat: It was the emporium of western trade during the Mughal period. Textiles of Surat were famous for their gold borders (zari). It is noteworthy that Surat hundi was honoured in far off markets of Egypt and Iran. 10. Kanchi: Today known as Kanchipuram, it was here that the Chinese used to come in foreign ships to purchase pearls, glass and rare stones and in return they sold gold and silk. 11. Madura: It was the capital of the Pandayas who controlled the pearl fisheries of the Gulf of Mannar. It attracted foreign merchants, particularly Romans, for carrying out overseas trade. 12. Broach: It was the greatest seat of commerce in Western India. It was situated on the banks of river Narmada and was linked with all important marts by roadways. 13. Kaveripatta: Also known as Kaveripatnam, it was scientific in its construction as a city and provided loading, unloading and strong facilities of merchandise. Foreign traders had their headquarters in this city. It was a convenient place for trade with Malaysia, Indonesia, China and the Far East. It was the centre of trade for perfumes, cosmetics, scents, silk, wool, cotton, corals, pearls, gold and precious stones; and also for ship building. 14. Tamralipti: It was one of the greatest ports connected both by sea and land with the West and the Far East. It was linked by road to Banaras and Taxila. Major Exports and Imports Export/Import Name of Items Exports consists of spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products—hides, skin, furs, horns, tortoise shells, Stones - pearls, sapphires, quartz, crystal, Lapis lazuli, granites, turquoise and Copper etc. Import consists of horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin, copper, lead, stones- rubies, coral, glass, amber, etc. Human Activities In every society, people undertake various activities to satisfy their needs. These activities may be broadly classified into two groups: (i) Economic Activities (ii) Non-economic Activities 8 Business Studies / XI (2020-21) Economic Activities Economic activities are those by which we can earn our livelihood. For example, a worker working in a factory, a doctor operating in his clinic, a manager working in an office and a teacher teaching in a school. Economic activities may be further divided into three categories, namely business profession and employment. Non-economic Activities Non-economic activities are performed out of love, sympathy, sentiment, patriotism, etc. for example a housewife cooking food for her family, or a boy helping an old man cross the road are performing non-economic activities since they are doing so out of love or sympathy. Human Activities Economic Activities Non-Economic Activities Business Profession Employment Patriotism Social Welfare Religious etc. Business Business is an economic activity which involves production and exchanging of something of value whether goods or services, for mutual gain or profit, on regular basis. It does not involve production and exchange of goods or for personal consumption. Features or Characteristics of Business (i) Economic activity: Business is an economic activity as it involves production and distribution of goods and services for earning profit. (ii) Production or procurement of goods or services: Business involves both production and procurement of goods and services for resale purpose for a price or consideration. (iii) Sale or Exchange of goods or services: Business involves sale or exchange of goods and services for a price or consideration. If there is no sale, transfer or exchange for a consideration, it will not be a business activity. (iv) Dealing in goods and services: Every business produces or buys and sells goods or services Goods may be consumer goods or producer goods. (v) Profit earning: The primary objective of doing business should be to earn money or profit. Without profit, a business cannot run for long. (vi) Regular dealing: Business transaction should be of recurring nature. A single transaction cannot be called a business. (vii) Uncertainty of return: It is not certain as to what amount of profit will be earned. Also, there is always a possibility of losses being incurred, despite the best efforts put into the business. (viii) Risk: Risk is inherent in every business. A business can suffer risk of loss due to change in taste, fashion, strike, natural calamities, fire, theft Profession Profession is an economic activity, whereby someone renders the professional services backed by some specific knowledge say doctors, lawyers, chartered accountants etc. 9  Business Studies / XI (2020-21) Features of profession (i) Well-defined and organized body of knowledge: Every profession has well defined body of knowledge which contains principles, theories, and techniques of that particular field. It is formed through observation and experimentation. (ii) Entry restricted by qualification: Anybody who wants to enter a profession must pass an examination and obtain degree/diploma. (iii) Recognized National Body: There must be an association, which prescribes the minimum qualification for entry, provides training, conduct exams and award diploma/degree in the particular field. Every profession has to be a member of this association. E.g.: All doctors need to be a member of the Medical council of India and have to follow its rules and regulations (code of conduct). (iv) Ethical code of conduct: Every profession has a code of conduct set by the professional association, which every member has to follow. (v) Dominance of service motive: Every professional is expected to give priority to service motive rather than his selfish gains. But a professional is provided fee for rendering services. Employment Employment refers to an occupation in which people work for others to get remuneration in return in the form of salary or wages or otherwise. E.g. Vikas works as Accountant in a firm and gets salary. Difference between Business; Profession and Employment Basis Business Profession Employment Mode of Entrepreneur‘s Membership of a Service contract and Establishme decision with required professional body and letter of appointment. nt legal formalities certificate of practice. Nature of Supply of goods and Personal services of Work assigned by the Work services expert nature. employer. Qualification No minimum Minimum educational Depends upon the type qualification required qualification and of job. training is required  Basic Motive Profit making Providing services Earning wages or salaries Capital Capital Investment is Small amount of No capital investment is Investment required depending Investment is required to required upon size and nature set up office. of business. Reward Profits Fees Wages or salaries Risk Inherent Very little No risk or negligible risk. Transfer of Ownership can be Cannot be transferred Now transferrable Interest transferred as per the law Code of No code of conduct. Professional code of Terms and conditions of Conduct conduct the employer have to be followed. Business activities are broadly classified into two categories: (i) Industry (ii) Commerce 10 Business Studies / XI (2020-21) Business Industry Commerce Trade Aids to Trade Industry The term industry refers to the production or processing of goods through the utilization of various resources e.g. making furniture from a log of wood. This also includes activities relating to breeding and raising of plants & animals. Industry is further divided into the following categories: (i) Primary Industry (ii) Secondary Industry (iii) Tertiary Industry Industry Primary Industry Tertiary Industry Secondary Industry Extractive Genetic Transportation Banking Manufacturing Construction Warehousing Insurance etc. Analytical Synthetical Processing Assembling Primary Industry All business activities which are concerned with the extraction of natural resources and breeding of plants and animals are known as primary industries. These include the following: (i) Extractive Industries: These industries are engaged in extraction of useful materials from beneath the surface of the earth and sea means natural resources. In these industries, the products, gifted by nature, are extracted and collected for the benefit of human beings e.g. Mining, Quarrying, Fishing, Forestation etc. (ii) Genetic Industries: These are engaged in breeding plants & animals for their use in further reproduction e.g. Nurseries, Cattle breeding, Poultry farms, Dairy farming etc. Difference between Genetic and Extractive Industry Basis Extractive Industry Genetic Industry Involvement of In the extractive Industry no wealth In the genetic Industry, human human beings is added by human beings i.e. it only being not only adds to the growth involves extracting products from but also reproduces the nature natural resources. made goods. 11 Business Studies / XI (2020-21) Example Extracting minerals from earth, fish Rearing of cattle for milk, from rivers etc. Poultry farming i.e. raising of chickens, ducks etc., for farming meat, eggs etc. Secondary Industry These industries process materials, which have been already extracted from the primary industries, to produce goods for final consumption or for further processing by other industrial units. E.g. mining of iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry. The secondary industries are further subdivided as follows: (i) Manufacturing Industries: These are concerned with the processing or transformation of raw materials & semi-finished goods (half made goods) into finished products. These industries are engaged in producing goods through processing of raw materials and, thus, creating form utilities. Manufacturing industries are of following types: a. Analytical Industries: Under it, a basic raw material is broken into general useful materials. E.g.: In an oil refinery, the crude oil is analysed and separated into several products such as petrol, diesel, Kerosene and lubricating oil. b. Synthetical Industries: Under it, two or more materials are combined to form a new product. E.g.: Concrete, gypsum, coal are mixed to produce cement. c. Processing Industry: Under it, a raw material is processed through various steps to make the final product. E.g.: In the cotton textile industry, cotton passes through spinning, weaving, dyeing, bleaching, printing process to convert it into cloth. Other examples are making of cheese, jams etc. d. Assembling Industry: Under this, manufactured components/parts are combined together mechanically or chemically to produce a new product. E.g.: Manufacture of TV sets, computers, automobile industry etc. (ii) Construction Industry: This Industry is engaged in the construction of buildings, roads, bridges etc. They utilize the products of manufacturing industries like cement, steel iron, and bricks. Tertiary Industries These are concerned with providing support services to primary and secondary industries as well as activities relating to trade. As business activities, these may be considered part of commerce because as auxiliaries to trade these activities assist trade. Included in this category are transport, banking, insurance, warehousing, communication, packaging and advertising. 12 Business Studies / XI (2020-21) Commerce Commerce includes all those activities, which are necessary for movement of goods from producer to consumers. So it includes buying, selling and distribution of commodities. Commerce is divided into two categories i.e. Trade and Auxiliaries to Trade. Trade It means buying and selling or exchange of goods and services. Trade removes hindrance of person by bringing the producers and consumers together. Trade is further divided into two categories: (i) Home Trade or Internal Trade: It is the buying and selling of goods within the geographical boundaries of a country. It is also known as domestic trade. It includes wholesale trade and retail trade. (ii) Foreign Trade or International Trade or External Trade: It is the buying and selling of goods or services beyond the geographical boundaries of a nation. Foreign Trade is of the following types: a. Import Trade: It is the buying of goods from a foreign country. b. Export Trade: It is the selling of goods to a foreign country. c. Entrepot Trade: It is the buying of goods from one country not for consumption in the home country but for exporting it to other country. Auxiliaries to Trade (Aids to Trade) Activities which are meant for assisting trade and industry are known as auxiliaries to trade. These are the activities which help in the buying and selling of goods (i.e. trade). Commerce helps in removing various hindrances (obstacles). Auxiliaries to trade includes following services: (i) Transportation: Transportation facilitates movement of goods from one place (place of manufacturing) to another place (place of consumption) provides place utility to the product. Production of goods takes place at a particular place whereas the consumers are scattered in different places. Commerce removes this hindrance through transport. (ii) Warehousing: Generally there is a time gap between production and consumption. As such, it becomes necessary to store the goods until they are sold. This hindrance of time gap between production and consumption is removed by warehousing. Thus warehousing creates the time utility. This also helps to balance the demand and supply thereby leading to price stabilization. (iii) Insurance: Risk is inherent in every business. During transit or storage, goods may be damaged due to natural calamities, theft, mishandling, fire etc. Insurance removes the hindrance of risk in return for the payment of small premium. Thus, it creates risk utility. (iv) Banking & Finance: Finance is the life blood of the business. Without finance, there will be no business. Banking removes the hindrance of finance, by making available the adequate amount of finance wherever required. Thus it creates the finance utility. Also convenient and safe means of payment are required to settle the business transaction. Banks remove the obstacle in the process of exchange by making and collecting payment on behalf of their clients. Therefore, Banking removes the hindrance of exchange. (v) Advertising: A producer often finds it difficult to sell his goods and services because the consumers are not aware of the benefits and usage of their goods and services. Advertising removes the hindrance of knowledge by informing the customers about the goods and services. Thus it creates the utility of knowledge. Various utilities created & hindrances removed by different auxiliaries to trade: S. No. Auxiliary to Trade Utility which is created Hindrance removed 1 Transportation Place Utility Hindrance of Place 2 Banking Finance Utility Hindrance of Finance 3 Insurance Risk Utility Hindrance of Risk 4 Warehousing Time Utility Hindrance of Time 5 Advertising Knowledge Utility Hindrance of Knowledge 13 Business Studies / XI (2020-21) Objectives of Business Objectives of business are classified into the following categories: (i) Economic objectives: a. Earning of Profit: Every business man does business with the objective of earning profit. No business can survive without making adequate profits. b. Creating customers or Market standing: Market standing refers the position of the business in comparison of its competitors. Thus, creation and satisfaction of customers is an important economic objective of business. This can be done by identifying customer‘s needs, planning and developing products and services and selling them at a reasonable price. c. Innovation: Innovation means making new and more improved products. A business man needs to continuously innovate otherwise his products will become obsolete and he will lose his market standing. There may be product innovation (usability of the product may be enhanced by adding new features); Production innovation (technique of production may be improved) or distribution innovation (explore new and effective & efficient channels of distribution). d. Productivity: Productivity can be measured in terms of ratio between inputs and output. Every business must strive to increase its productivity for continuous growth and survival. e. Best possible use of scarce resources: Business is expected to make the best possible use of scarce resources. For this a business man has to allocate funds and spend them efficiently. (ii) Social objectives a. Good quality goods and services of fair prices: The first social objective of any business should be to provide good quality goods and services at reasonable prices. b. Avoidance of anti-social and unfair trade practices: Anti-social practices like boarding, black-marketing, adulteration, making false claims, misleading advertisements etc. should be avoided. c. Generation of Employment: A business is expected to generate employment opportunities in the society without any discrimination on account of caste, sex, religion, creed etc. d. Employee welfare: A business should ensure welfare of its employees by providing good working conditions, fair wages and facilities like housing, insurance, medical etc. e. Community service: Business is expected to serve the local community by establishing charitable schools, hospitals, sponsoring games, making donations for social and religious purposes etc. f. Protection of environment: A business should take all reasonable steps to protect the environment by making proper arrangement for garbage disposal, smoke etc. (iii) Individual Objectives a. It includes providing healthy and safe working conditions. b. To pay fair and competitive salaries and perks c. Providing opportunities for personal growth and development of employees through training. d. Providing security of service. e. Providing financial and non-financial incentives & motivate the employees. f. Encouraging employees to participate in management. Importance of profits Profit is not an objective but a requirement of business. A business must earn profit because of the following reasons. (i) Survival (ii) Growth (iii) Symbol of efficiency 14 Business Studies / XI (2020-21) (iv) Reward for risk bearing (v) Improves goodwill. Profit can no more be the objective of business than eating is the objective of living. Profit earning is essential for the survival and growth of business enterprises. Maximization of profit is not desirable because it leads to exploitation. Maximization of profit is opposed because of the following reasons: (i) It leads to exploitation of workers and consumers. For the sake of more profit, the businessman may exploit the worker by paying less and may exploit the consumers by providing them less quality products. (ii) It leads to a state of social inequalities where rich becomes richer and the poor becomes poorer. (iii) It leads to a number of corrupt practices. (iv) It lowers the human values because the state of increased profit will lead to a materialistic society. Business Risks The term business risk refers to the possibility of inadequate profits or even losses due to some uncertainties or unexpected events. For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Lower demand results in long sales and profits. Types of Risks Speculative Risks Pure Risks Speculative Risks Speculative risks involve both the possibility of gain, as well as, the possibility of loss. Speculative risks arise due to changes in market conditions, including fluctuations in demand and supply, changes in prices or changes in fashion and tastes of customers. Favourable market conditions are likely to result in gains, whereas, unfavourable ones may result in losses. Pure Risks Pure risks involve only the possibility of loss or no loss. The chance of fire, theft or strike is examples of pure risks. Their occurrence may result in loss, whereas, non-occurrence may explain absence of loss, instead of gain. S. No. Basis Pure Risks Speculative Risk Speculative risks involve both the Pure risks involve only the 1 Meaning possibility of gain, as well as, the possibility of loss or no loss. possibility of loss. The key factor is market condition The key factors are strike, fire, 2 Factors like changes in demand and theft, natural calamities etc. supply, price fluctuation etc. Pure risk may result in loss on Favourable market condition leads occurrence of above events or no 3 Effect to profits and unfavourable market loss on non-occurrence. But there condition leads to losses. will be no profit. Nature of Business Risks 15 Business Studies / XI (2020-21) (i) Business risks arise due to uncertainties: Business environment is totally dynamic and anything can happen in future like change in government policy, change in price level, demand, natural calamities, etc. Risk arises due to these uncertainties. (ii) Risk is an essential part of every business: Risk is inherent in every business as business prone to various uncertainties. Risk can be minimized through various ways like insurance but can‘t be eliminated altogether. Degree of risk depends mainly upon the nature and size of business: Business which is run on a large scale has higher risk as compared to a small scale business. It also depends on nature of business like IT business and Fashion industry have greater risk factors due to rapid changes takes place. (iii) Profit is the reward for taking the risk: The motive to earn higher profit makes business men to take risk. Thus, profit is the reward for taking risk. The higher the risk, higher is the chances of making higher profit. So, the concept ―No risk, No gain‖ is applicable to all business organisations. Causes of Business Risk: (i) Natural Calamities: These include risk due to flood, earthquake, heavy rain, drought etc. which are beyond the control of human beings. (ii) Human Causes: These include theft, carelessness of employees, strike, embezzlement of funds, riots etc. (iii) Economic Causes: It includes fluctuation in demand and prices, change in exchange rate, change in competition etc. (iv) Physical causes: It includes mechanical defects like explosion in a boiler etc. (v) Other Causes: It includes unforeseen events like political disturbances, change in technology etc. Different ways of dealing with business risks are: (i) Decide not to enter into too risky transaction. (ii) Take preventive measures, like fire fighting devices, to reduce risk. (iii) Take insurance policy to transfer risk to insurance company. (iv) Assume risk by making provisions in the current earnings as is the case of provision for bad and doubtful debts; or (v) Share risks with other enterprises as manufacturers and wholesalers may do by agreeing to share losses which may be caused by falling prices (vi) Transfer of risks MCQs: Q1. Identify the activity which is not an auxiliary to trade? (a) Banking (b) Warehousing (c) Insurance (d) Mining Q2. Industries like sugar mill or oil refinery are put under which category- (a) Primary (b) Secondary (c) Tertiary (d) None of the above Q3. Which of the following is not a characteristic of business? (a) Production (b) Exchange or sale (c) Wages or salaries (d) Risk element Q4. Which of the following is not a business activity? (a) Production of goods (b) Work in a factory for wages (c) Exchange of goods (d) Transportation Q5. Which of the following is not an economic activity? (a) Production (b) Trading in goods (c) Professional (d) Social service Q6. Name the occupation in which people work for others in return for wages or salaries? (a) Employment (b) Business (c) Profession (d) None of the above Q7. Support services to industrial \business activities are clubbed under? (a) Commercial industries (b) Primary industries 16 Business Studies / XI (2020-21) (c) Secondary industries (d) Tertiary industries Q8. Which of the following is not a cause of business risk? (a) Breakdown of machinery (b) Efficient management (c) Riot (d) Changing government policy Q9. Why should a business earn profit? (a) To provide return to investors. (b) To provide funds for future growth. (c) To increase the reputation of business. (d) All the above Q10. Which of the following in not a true statement? (a)The scope of commerce is narrower than business. (b)Commerce includes trade and auxiliaries to trade. (c)Foreign trade is purchase and sale by the traders of the same country. (d)Traders serve as a link between producers and consumers. Q11. The possibilities of inadequate profits or even losses due to uncertainties are known as ………. (a) Business contingencies (b) Business risks (c) Business ventures (d) None of these Q 12. Which one of the following may not be a factor behind starting a business? (a) Routine workload (b) size of the firm (c) finance (d) location of the business Q13. Name the two broad categories of business activities. (a) Trade and Commerce (b) Trade and Industry (c) Industry and Commerce (d) None of these Q14.Commerce includes activities relating to trade and_________________ to trade. (a) Supporting (b) Subsidiaries (c) Auxiliaries (d) None of these Q15.'Earning of profit is considered to be the subsidiary objective of the business.' The given statement is- (a) True (b) False (c) Cannot says (d) None of these Q16. Following are the characteristics of business risks. Identify the incorrect one (a) Loss is the reward for risk bearing (b) Business risks are due to uncertainties (c) Risk is an essential component of every business (d) Degree of risk depends mainly upon the nature and size of business Q17. Transfer of interest exists in the case of (a) Profession (b) Employment (c) Business (d) None of these Q18. Human activities are of ____________ types. (a) One (b) Two (c) Three (d) Four Q19.Which of the following is not an example of non-economic activity? (a) Patriotism (b) Teaching (c) Sentiment (d) Sympathy Q20. Economic activities may be classified into business, ___________ and employment (a) Profession (b) Occupation (c) Vocation (d) Work Q21.Mr X started business of buying and selling of refrigerators. The term for this type of business activity is- (a) Commerce (b) Trade (c) Selling (d) Transaction Q22.The occupation in which people work for others and get remunerated in return is – (a) Business (b) Employment (c) Profession (d) None of these Q23. Recognise the assembling industry out of these- (a) Poultry, cattle farms (b) Cement, brick (c) Sugar, cotton (d) Television, computer 17 Business Studies / XI (2020-21) Q24. The industry concerned with using the material which have already been extracted at the primary stage is- (a) Primary (b) Tertiary (c) secondary (d) None of these Q25.The best example of analytical industry is- (a) Cement (b) Computer (c) Sugar mill (d) Oil refinery Answers: 1(d); 2(b); 3(c); 4(b); 5(d); 6(a); 7(d); 8(b); 9(d); 10(c); 11(b); 12(a); 13(c); 14(c); 15(b); 16(a); 17(c); 18(b); 19(b); 20(a); 21(b); 22(b); 23(d); 24(c); 25(d); Exercise: 1. Vijay sells his mobile to his friend at a profit of Rs. 1,000. Will it be considered as a business? Name and explain the characteristic of business which is being highlighted in the given example. 2. Abhay, Binay and Charu are friends. They are pursuing their MBA from IIM, Kolkata. While having a coffee during break-time, they were discussing their future plans. Abhay said that he is planning to help his father by joining his printing press after completing MBA. Binay, on the other hand, wanted to get a job in some big company through institute‘s placement cell. Since Charu loves children, she shared her willingness to join an NGO and use her knowledge and skills to help underprivileged children. a. Identify and give two points of difference between Abhay‘s and Binay‘s plans? b. How would you classify the activity which Charu is willing to pursue after college? 18 Business Studies / XI (2020-21) UNIT - 2 Forms of Business Organisations The business organizations in private sector are divided into following five categories: Forms of Business Organisations Joint Hindu Sole Joint Stock Co-operative Partnership Undivided Proprietorship Company Society Family Sole Proprietorship A sole proprietorship firm refers to a business which is owned, managed and controlled by an individual, who will take all the profits and will bear all the risks of the business. The sole proprietor has unlimited liability. It means the personal property of the owner can be utilized to set off the losses or to pay the liabilities of the business. Features of Sole Proprietorship 1. Formation and closure: It can be formed very easily as there is no legal formalities. In certain cases, a license is required like medicines shop, restaurant etc. It can also be dissolved very easily. 2. Unlimited liability: If the sole proprietor is unable to pay the liabilities of the business from his business assets, then his personal property can be used to pay off the liabilities of business. 3. Sole risk bearer and profit recipient: The risk of failure of business is borne all by the sole proprietor alone. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing. 4. Control: A sole proprietorship business is controlled and managed by a single person i.e. sole proprietor. He alone takes all the decisions. At the most, he can employee a few people to help him in running the business. 5. No separate legal entity: The sole proprietorship business and the sole owner has no separate legal existence. If the owner dies or becomes insolvent, the business will be dissolved. 6. Lack of business continuity: The sole proprietorship business is owned and controlled by one person only. Therefore death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business. Merits or Advantages of Sole Proprietorship 1. Quick decision making: A sole proprietor enjoys considerable degree of freedom in making business decisions. Further the decision making is prompt because there is no need to consult others. This may lead to timely capitalisation of market opportunities as and when they arise. 2. Confidentiality of information: Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish firm‘s accounts. 19 Business Studies / XI (2020-21) 3. Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profits. The need to share profits does not arise as he/she is the single owner. This provides maximum incentive to the sole trader to work hard. 4. Sense of accomplishment: There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instils in the individual a sense of accomplishment and confidence in one‘s abilities. 5. Ease of formation and closure: As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner. 6. Flexibility of operation: As there is no need to consult anyone regarding the nature & size of operations. Demerits of Sole Proprietorship 1. Limited Resources: Resources of a sole proprietor are limited because the capital brought in either from proprietor‘s own funds or from borrowed funds. The borrowing capacity of a sole proprietor is limited. 2. Limited life of business concern: The sole proprietorship business is owned and controlled by one person. So death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor affects the business and can lead to its closure. 3. Unlimited liability: A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. 4. Limited managerial ability: The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas. 5. Limited scope of expansion Suitability of sole Proprietorship: Sole proprietorship is suitable in the following business: 1. Businesses which are carried on a small scale with less capital and limited managerial ability. E.g. Grocery shop, Medicine store, Bakeries etc. 2. Business where customers wants personalized services such as Hair cutting Salons, Beauty Parlour, Tailoring shop etc. 3. Businesses producing artistic goods such as craft centers, sculpture making painting etc. 4. Businesses where risk is not extensive i.e. less fluctuations in demand and price. Joint Hindu Family Business / Hindu Undivided Family Business It refers to the form of business in which all members of a Hindu family are engaged in the business under the control and direction of the head of the family called the Karta (eldest member of the family, male or female). It is the oldest firm of business found in India. There should be minimum two members in the family and they must inherit some ancestral property. This business is governed by ‗HINDU LAW‘ Succession Act, 1956. Gender Equality in the Joint Hindu Family a Reality: According to the Hindu Succession (Amendment) Act, 2005, the daughter of a coparcener of a Joint Hindu Family shall, by birth, become a coparcener. Married daughter has equal rights in property of a Joint Hindu Family. Features 1. Formation: To form an HUF, there should be at least two members in the family and they must inherit some ancestral property. 2. Liability: The liability of the coparceners is limited, the liability of the Karta in unlimited. 3. Control: The business is controlled by the head of the family i.e. the eldest member called Karta. 20 Business Studies / XI (2020-21) 4. Continuity: The business is not affected by the death of the members because their legal heirs are entitled for the deceased‘s share. If karta dies, the next eldest person in the family becomes the karta of the business. 5. Minor members: Since membership is by virtue of birth in the family, even a minor can also be a member. 6. Membership by birth: The membership of JHFB is by birth in the family. All members have equal ownership rights over the ancestral property and are known as coparceners. 7. No maximum limit: There is no maximum limit of number of co-parceners of HUF business. However, only three consecutive generations can be members in this business. Merits of Hindu Undivided Family Business 1. Effective control: The karta has absolute decision making power. This avoids conflicts among members as no one can interfere with his right to decide. This also leads to prompt and flexible decision making. 2. Continued business existence: The death of the karta will not affect the business as the next eldest member will then take up the position. Hence, operations are not terminated and continuity of business is not threatened. The business continues even after the death or insanity (mental illness) of the karta or the other members (co-parceners). 3. Limited liability of the members: The liability of all the coparceners except the karta is limited to the extent of their share in the business. As such their risk is well defined and precise. 4. Ease of formation: Hindu undivided family business can be set without much legal formalities. Similarly, if the karta and all the other members of the family want to dissolve the business, it can be done easily 5. Increased loyalty: Since the business is run by and co-operation family members they are loyal and co-operate with each other. 6. Quick decisions: As karta is free to take any decision about the business, quick decision is possible. 7. Secrecy: All the important decisions are taken by the karta himself. It is not necessary for him to consult the other family members; as such secrecy can be maintained. Demerits of Hindu Undivided Family Business 1. Limited capital: The investment is limited to the extent of ancestral property. Members do not invest their personal capital in the business. 2. Unlimited liability of the karta: Since the Karta has unlimited liability i.e. even if personal assets will be utilized to pay off the business debts, he hesitates to take risk which greatly affects the growth and expansion of the business. 3. Dominance of karta: Most of the decisions are taken by the karta which, at times, may not be acceptable to the other members. This may lead to conflict among them. 4. Limited managerial capacity: Since the business is managed and controlled by the karta alone, there is limited managerial capacity because the karta cannot be an expert in all the areas of management. 5. Instability: There are chances of disputes due to lack of confidence, trust and mutual faith among the family members which may lead to partition of the family. Partnership According to the ‗Indian Partnership Act‘, 1932, ―partnership is defined as a relationship between persons who have agreed to share the profits of the business carried on by all or any one of them acting for all.‖ A partnership should have minimum two members and maximum upto fifty members. Feature of Partnership 1. Formation: A partnership can come into existence by an agreement among the partners which can be both oral or in writing. 21 Business Studies / XI (2020-21) 2. Liability: The liability of the partners is unlimited to the extent of their personal property if the business assets are not enough to pay off the business debts. 3. Risk bearing: All the partners bear the risk in an agreed ratio. 4. Membership: There must be at least two members and maximum fifty members. 5. Profit Sharing: All the partners must share the profits in an agreed ratio. 6. Decision making & control: All the partners have a right to take part in the management of the business and make decision with mutual consent. 7. Continuity: A partnership comes to an end with lunacy, retirement, insolvency of a partner etc. However, the remaining partners may decide to continue the business by entering into a new agreement. 8. Number of partners: There must be at least two partners and can be fifty at maximum. 9. Mutual agency: It means the partnership business can be carried on by all the partners or by any one of them acting for all. Thus, every partner is an agent as well as principal of the other partners. It means, an agreement made by a partner will be binding other partners. This is also known as implied authority of a partner. Merits of Partnership 1. Ease of formation and closure: A partnership firm can be formed easily by an agreement (oral or written) between two or more persons. Registration of partnership firm is not compulsory. Similarly, closure of the firm is also an easy task. 2. Balanced decision making: Since the decisions are made collectively by the partners, there is better decision making. 3. More funds: There is more capital and other resources in a partnership as compared to a sole proprietorship because all the partners will contribute towards the capital. As such, the firm can expand its business easily. 4. Sharing of risks: The profits and losses are shared by the partner in an agreed ratio. Due to the sharing of risk, the burden or stress on an individual partner will get reduced. 5. Secrecy: A partnership firm is able to maintain secrecy because it is not mandatory for them to publish their books of accounts in newspapers and magazines. 6. Personal supervisions: Since the partnership firm is managed by partners themselves, they establish direct contact with the employees and customers. As such, they can fulfil their requirements easily. Demerits of Partnership 1. Unlimited liability: All the partners in a firm have unlimited liability i.e. if the business assets are not enough to pay off the liability, then the personal assets of the partners can be utilized. As such, partners are hesitant in expanding the business and taking more risk. 2. Limited resources: A partnership firm‘s financial resources are limited upto the capital contributed by the partners, whose number is restricted. 3. Possibility of conflicts: Since every partner has a right to participate in the management of the firm, there are chances of conflict in management because all the partners may not have same opinion on all the matters of the firm. 4. Lack of continuity/uncertain life: A partnership firm comes to an end due to insolvency, death and retirement etc. of a partner. 5. Lack of public confidence: Since a partnership firm is not required to publish their books of accounts in newspapers and magazines, the public has very limited confidence in these firms. 6. Non-transferability of interest: In a partnership firm, no partner can transfer his share to any outsider or third party without the consent of all other partners. Due to this, sometimes, the partners feel unnecessarily binding on them. Suitability of Partnership: Partnership is suitable when 1. Mutual trust and complementary skills are present among partners. 2. Where more financial resources and managerial skills are required. 22 Business Studies / XI (2020-21) 3. Where the partners want to share the burden of risks. 4. It is suitable in case of business of wholesale merchants; chartered accountancy firm; architect firm; law firm: medium sized manufacturing units etc. Types of Partners 1. Active partner: Active partner is the partner, who actively participates in the working and management of business. He contributes the capital in the business. He shares the profits & losses in an agreed ratio and also has unlimited liability. 2. Sleeping or dormant partner: Sleeping partner is the partner, who does not participate in the management of the business. But he contributes the capital in the business. He shares the profits & losses in an agreed ratio and also has unlimited liability. 3. Secret partner: Secret partner is the partner, whose association with the firm is not known to the general public. But he contributes the capital in the business. He shares the profits & losses in an agreed ratio and also has unlimited liability. 4. Nominal partner: Nominal partner is the partner, who just gives his name to the firm for the benefit of the firm. He does not contribute capital & does not participate in the management of the business. He generally does not share profit or losses. However, he has the unlimited liability towards the third party. 5. Partner by estoppel: He is a person who, through his conduct or behaviour, gives an impression to others that he is a partner of the firm. He does not contribute capital and participate in the management of the business. He will not share any profits or losses. However, he will have unlimited liability to the creditors/outsiders because in the eyes of the third, party or outsiders, he is considered a partner. 6. Partner by holding out: He is a person, who is not a partner of the firm but does not contradict or make any statement at the time when others declare him a partner of the firm. In such a case, he will be deemed to be a partner because others enter into contract with the firm under the impression that he is a partner of the firm. He does not contribute capital & participate in the management of business. He does not share profits or losses. However, he will have unlimited liability to the outsiders if they have entered into a contract with the firm assuming that he is also a partner of the firm. Minor as a Partner A partner is called minor if he is less than eighteen years of age. A minor person has no right to sign any contract, so he cannot be admitted as a full-fledged partner in a firm. But, a minor can be admitted to the benefits of the partnership firm with the consent of all the other partners. In this case, his status will be as follows:  He will also not bear the losses of the firm.  His liability towards the debts of the firm will be limited up to the extent of capital invested by him in the firm.  He has no right to buy or sell goods or sign any contract with outsiders on behalf of the firm.  He cannot participate in management but he can inspect the books of the accounts of the firm. Minor, on attaining majority On attaining majority, minor has to decide whether he would like to continue as a partner in the firm or not. He has to give a public notice of his decision within six months of attaining majority. If he fails to do, he will be considered as a full-fledged partner. 23 Business Studies / XI (2020-21) Types of Partnership On Basis of Duration On Basis of Liability Particular Partnership at Will General Partnership Limited Partnership Partnership Classification on the basis of duration 1. Partnership at will: Partnership at will is the partnership, which will continue as long as the partners want and it may be dissolved only if any partner gives a notice to this effect. This type of partnership is created for an indefinite period and not for a particular period of time or project. 2. Particular Partnership: Particular partnership is the partnership, which is created for a specific period of time or to complete a particular project. As soon as the project or time period is over, the partnership comes to an end. Classification on the basis of liability 1. General Partnership: Under this partnership, all the partners have unlimited liability and they enjoy the right to participate in the management of this firm. Every partner has mutual agency relationship and the firm comes to an end due to the death insolvency etc. of a partner. 2. Limited partnership: Under this partnership, all the partners except one have limited liability up to the extent of the capital invested by them. A limited partner has no right to participate in management of business. His death & insolvency has no effect on the existence of firm. Such form of partnership was permitted in India after ―The New Enterprise Policy.‖ Partnership Deed A partnership deed is a written partnership agreement, which contains all the terms & conditions of the partnership among the partners. Content of Partnership Deed: 1. Name of firm 2. Nature of business and location of business 3. Duration of business 4. Investment made by each partner 5. Distribution of profits and losses 6. Duties and obligations of the partners 7. Salaries and withdrawals of the partners etc. Registration of Partnership Frim Registration of a partnership firm is not compulsory and it is optional. However, registering a partnership firm is considered beneficial due to the following reasons: 1. The partner of an unregistered firm cannot file a suit against the firm. 2. An unregistered firm cannot file a suit against any third party for the recovery of claims. 24 Business Studies / XI (2020-21) 3. An unregistered firm cannot file a suit a case against any partner. Cooperative Society Cooperative organisation is ―a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles.‖ - The Indian Cooperative Societies Act 1912 The cooperative society is a voluntary association of persons, who join together with the motive of welfare of the members. The cooperative society is compulsorily required to be registered under the Cooperative Societies Act 1912. To form a cooperative society, a consent of at least ten adult persons is required to form a society. Features of Cooperative Society 1. Voluntary membership: The membership of a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. There cannot be any compulsion for him to join or quit a society. 2. Legal status: Registration of a cooperative society is compulsory. This accords a separate identity to the society which is distinct from its members. The society can enter into contracts and hold property in its name, sue and be sued by others. 3. Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital. 4. Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. 5. Service motive: The cooperative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the service to members is the prime objective. 6. Distribution of surplus: If any surplus is generated as a result of its operations, it is distributed among the members as dividend in conformity with the byelaws of the society. Merits of Cooperative Society The cooperative society offers many benefits to its members. Some of the advantages of the cooperative form of organisation are as follows: 1. Equality in voting status: The principle of ‗one man one vote‘ governs the cooperative society. Each member of the society is entitled to equal voting rights irrespective of the amount of capital contribution by him. 2. Limited liability: The liability of members of a cooperative society is limited to the extent of their capital contribution. The personal assets of the members are, therefore, safe from being used to repay business debts. 3. Stable existence: Death, bankruptcy or insanity of the members do not affect continuity of a cooperative society. A society‘s existence is unaffected by any change in the membership. 4. Economy in operations: The members generally offer honorary services to the society as the focus are to eliminate the middlemen. It this helps in reducing the costs. The customers or producers themselves are members of the society, and hence the risk of bad debts is lower. 5. Support from government: The cooperative society exemplifies the idea of democracy and hence finds support from the Government in the form of low taxes, subsidies, and low interest rates on loans. 6. Ease of formation: The cooperative society can be started with a minimum of ten members. The registration procedure is simple involving a few legal formalities. Its formation is governed by the provisions of Cooperative Societies Act 1912. Limitations of Cooperative Society The cooperative form of organisation suffers from the following limitations: 1. Limited resources: Resources of a cooperative society consists of capital contributions of the members with limited means. The low rate of dividend offered on investment also acts as a deterrent in attracting membership or more capital from the members. 25 Business Studies / XI (2020-21) 2. Inefficiency in management: Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries. 3. Lack of secrecy: As a result of open discussions in the meetings of members as well as disclosure obligations as per the Societies Act, it is difficult to maintain secrecy about the operations of a cooperative society. 4. Government control: In return of the privileges offered by the government, cooperative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts, etc. 5. Differences of opinion: Internal quarrels arising as a result of contrary viewpoints may lead to difficulties in decision making. Personal interests may start to dominate the welfare motive. The benefit of other members may take a backseat if personal gain is given preference by certain members. Types of Cooperative Societies Various types of cooperative societies based on the nature of their operations are described below: 1. Consumer’s cooperative societies: The consumer cooperative societies are formed to protect the interests of consumers. The members comprise of consumers desirous of obtaining good quality products at reasonable prices. It purchases goods in bulk directly from the wholesalers and sells goods to the members, thereby eliminating the middlemen. The society aims at eliminating middlemen to achieve economy in operations. 2. Producer’s cooperative societies: These societies are set up to protect the interest of small producers. The members comprise of producers desirous of procuring inputs for production of goods to meet the demands of consumers. It supplies raw materials, equipment and other inputs to the members and also buys their output for sale. The society aims to fight against the big capitalists and enhance the bargaining power of the small producers. 3. Marketing cooperative societies: Such societies are established to help small producers in selling their products. The members consist of producers who wish to obtain reasonable prices for their output. It pools the output of individual members and performs marketing functions like transportation, warehousing, packaging, etc., to sell the output at the best possible price. The society aims to eliminate middlemen and improve competitive position of its members by securing a favourable market for the products. 4. Farmer’s cooperative societies: These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. The members comprise farmers who wish to jointly take up farming activities. The aim is to gain the benefits of large scale farming and increase the productivity. Such societies provide better quality seeds, fertilisers, machinery and other modern techniques for use in the cultivation of crops. 5. Credit cooperative societies: Credit cooperative societies are established for providing easy credit on reasonable terms to the members. The members comprise of persons who seek financial help in the form of loans. Such societies provide loans to members out of the amounts collected as capital and deposits from the members and charge low rates of interest. The aim of such societies is to protect the members from the exploitation of lenders who charge high rates of interest on loans. 6. Cooperative housing societies: Cooperative housing societies are established to help people with limited income to construct houses at reasonable costs. The members of these societies consist of people who are desirous of procuring residential accommodation at lower costs. These societies construct flats or provide plots to members on which the members themselves can construct the houses as per their choice. 26 Business Studies / XI (2020-21) The aim is to solve the housing problems of the members by constructing houses and giving the option of paying in instalments Joint Stock Company It is an association of persons having separate legal entity, perpetual succession and common seal, which is started with investing money jointly. As per section 2(20) of companies act 2013, ―a company means company incorporated under this act or any other previous company law.‖ Features/Characteristics /Elements 1. Artificial person: A company is an artificial person created by law. It is known as a person because it has all the rights of a natural person like buying property in its own name, signing documents, can sue and be sued in its own name. 2. Separate legal entity: The company has a separate existence distinct from its members in the eyes of law. As such, the company can carry its own business, enters into contracts, buy and sell property in its own name. 3. Perpetual succession: The company has a continuous life and its life is not affected by the death or insolvency of its members/shareholders. Members may come and go but the companies continue to exist. 4. Control: The management and control of the affairs of the company is undertaken by the board of directors, selected by the shareholders. The shareholders do not have the right to be involved in the day-to-day running of the business. 5. Limited liability: The liability of members or shareholders is limited upto the extent of the unpaid amount on the shares purchased by them. 6. Incorporate association: The company is formed through incorporation or registration under the ‗Companies Act 2013‘ or any previous act. Without incorporation no company can come into existence. 7. Common seal: Since, the company is an artificial person, it cannot sign the documents. As such, it uses the common seal in place of its signature. 8. Separation of ownership and management: The owners of the company are the shareholders whereas the management of the company is looked after by the board of directors who is elected by the shareholders. 9. Transferability of shares: The shareholders of a company can sell their shares to any person in the open market or stock exchange whenever they want to convert their shares and cash and leave the company. Merits of Company 1. Limited liability: Shareholders in a company are liable to pay only the unpaid amount on the shares held by them. 2. Transferability of interest: The shareholders of a public limited company can freely transfer their shares by selling it in the open market. As such the shareholders can convert their shares into cash very easily. 3. Perpetual existence: The existence of a joint stock company is more stable as it is not affected by the death, retirement, insolvency, insanity or lunacy of its members. As such company can take long-term plans. 4. Scope for expansion: Perpetual existence and availability of huge finance enable a company to expand and diversify its business. 5. Professional management: Joint stock companies are managed well because they can afford to employ specialized managers due to its huge financial resources. 6. Huge financial resources: This form of business organization has huge financial resources because there is no restriction regarding maximum number of members in the public companies. Demerits of Company 27 Business Studies / XI (2020-21) 1. Complexity in formation: Incorporation of a company requires a lot of legal formalities. After incorporation, raising capital is also very difficult. 2. Lack of secrecy: There is lack of secrecy because it is mandatory for a public company to get their books of accounts audited and published in newspapers and magazines. 3. Impersonal work environment: There is a divorce between management and ownership of a company. The owners may not have any personal contact with the managers, employees, customers etc. 4. Numerous regulations: A company has to fulfil many legal provisions and regulations like compulsory audit, preparation of documents, filing of report and mandatory publication of books of accounts in newspapers. 5. Delay in decision making: The companies take more time in making decisions because they have to hold meeting, pass resolutions and complete a lot of legal formalities. 6. Oligarchic management: Though company is set to have democratic style of management, but in reality, the control and management of the company rest in the hands of Board of Directors and some influential shareholders. They take advantage of the situation for their personal gains. Types of Companies Private Company Public Company Private Company ―Private Company‖ means a company which by its articles - (i) Restricts the right to transfer its shares; (ii) Except in One person Company, limits the number of its members to two hundred; (iii) Prohibits any invitation to the public to subscribe for any securities of the company. (iv) Private limited company must use the words ‗Pvt. Ltd.‘ with its name. Public Limited Company A public company means a company which is not a private company. Thus, a public company is one which: (i) has no restriction on transfer of its shares. (ii) has a minimum of seven members and no limit on maximum number of members. (iii) Can invite the public to subscribe to its share capital or debentures. One Person Company The Companies Act 2013 introduces the formation of a one-person company (OPC) apart from private or public company. An OPC means a company with only one person as its member [section 3(1) of 2013 Act]. Requirement of One person Company (i) Rule 3(1) provides that only a natural person who is an Indian citizen and a resident in India shall be eligible to incorporate OPC. (ii) No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company. (iii) OPC to compulsory convert itself into public or private company in certain cases. (iv) Where the paid up share capital of an OPC exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company. 28 Business Studies / XI (2020-21) Difference between Private and Public Limited Company S.No. Basis of Difference Private Limited company Public Limited Company 1) No. of members Minimum-2 member, Minimum-7, Maximum – maximum-200 (including no limits the past and present employees) 2) No. of Directors Minimum-2 Minimum-3 3) Transfer of shares Transfer of shares is Transfer of shares is restricted allowed 4) Index of members Not compulsory Compulsory 5) Invitation for public Not permitted Permitted subscription 6) Name Necessary to use the words Necessary to use the ‗Pvt. Ltd.‘ after its name. words ‗Public Limited‘ after its name. 7) Commencement of After getting ‗Certificate of After getting ‗Certificate business Incorporation‘ of Commencement of Business‘. Privileges of a Private Limited Capital A private company enjoys following privileges as against a public company: 1. A private company can be formed only by two members. 2. A private company need not file a prospectus or a statement in lieu of prospectus with the registrar. 3. It needs to have only two directors. 4. It can commence immediately after getting ‗certificate of incorporation‘. 5. A private company need not keep an index of members. 6. It is not required to hold statutory meeting and file statutory report with the registrar of companies. Formation of a Company The steps which are required from the time a business idea originates to the time, a company is legally ready to commence business are referred to as stages in the formation of a company. To fully understand the process one can divide the formalities into three distinct stages, which are: (i) Promotion; (ii) Incorporation and (iii) Subscription of capital. However, the private company can start business just after incorporation. Promotion The term promotion refers to the preliminary steps taken for the purpose of registration of the company. The person who does the work of promotion is known as the promoter. He conceives the idea of the business and takes initiative to form the company. A promoter can be a company, a firm (partnership), an association or an individual e.g. J.R.D. Tata was the promoter of TATA GROUP. Promoter A promoter is one who undertakes to form a company with reference to a given project. He conceives a business opportunity, analyse its prospects and bring together the men, materials, machinery, managerial abilities and financial resources and set the organisation going. Steps in Promotion Process/Functions of Promoter 29 Business Studies / XI (2020-21) 1. Discovery of a business idea: The promoter first identifies business ideas and areas of profitable investment. 2. Feasibility studies: Having identified the business opportunity, the promoter conducts a detailed investigation of the business idea. He has to see whether the idea is technically, financially and economically feasible or not.  Technical feasibility: Sometime an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available.  Financial feasibility: Every business activity requires funds. The promoters have to estimate the fund requirements for the identified business opportunity. If the required outlay for the project is so large that it cannot easily be arranged within the available means, the project has to be given up.  Economic feasibility: Sometimes it so happens that a project is technically viable and financially feasible but the chance of it being profitable is very little. In such cases as well, the idea may have to be abandoned. 3. Name approval: The promoters select an appropriate name for the company which should not resemble the name of any existing business enterprise or show any relation with any government department. 4. Fixing up signatories to the memorandum of association: The promoters have to decide about the members (usually the first directors of the company) who will sign the memorandum of association of the proposed company. 5. Appointment of professionals: The promoters make appointment of underwriters, bankers, auditors etc. 6. Preparation of necessary documents: The promoters prepare necessary documents like memorandum of association, articles of association, etc. and submit it to the registrar. Incorporation Incorporation refers to the registration of the company under the companies Act, 2013. The various steps under the incorporation stage are as follows: Filling of necessary documents: Once the registrar approve the name, the following documents have to be submitted with him: (i) A copy of the registrar‘s letter approving the name of the company. (ii) Memorandum of association (iii) Articles of association (iv) A list of directors with their names, address, occupation and age. (v) Statement of authorized capital. (vi) The written consent of the directors to act as directors. (vii) Notice of the address of the registered office of the company. (viii) A statutory declaration stating that all the formalities related to the formation of the company are duly completed. Along with the above documents the required fee for registration has to be paid to the registrar. If the registrar is satisfied that all the legal formalities have been fulfilled, he will register the name of the company in his register and issue the Certificate of Incorporation. A company is legally born on the date printed on the certificate of incorporation. With effect from November 1, 2000, the registrar of companies allots a CIN (Corporate Identity Number) to the company. Effect of the Certificate of Incorporation A company is legally born on the date printed on the certificate of incorporation. The certificate of incorporation is a conclusive evidence of the regularity of the incorporation of a company. Differentiate between Preliminary contracts and Provisional Contracts: Basis Preliminary contracts Provisional contracts Signed These are signed by the promoters on These are signed by the company. behalf of the company. 30 Business Studies / XI (2020-21) Timing These are signed before incorporation These are signed after incorporation. Binding These are not binding on the These are binding on the company company. Promoter remains after registration. personally liable for these contracts. Preliminary Contracts During the promotion of the company, promoters enter into certain contracts with third parties on behalf of the company. These are called preliminary contracts or pre-incorporation contracts. These are not legally binding on the company. A company after coming into existence may, if it so chooses, decides to enter into fresh contracts with the same terms and conditions to honour the contracts made by the promoters. Note that it cannot ratify a preliminary contract. A company thus cannot be forced to honour a preliminary contract. Promoters, however, remain personally liable to third parties for these contracts. Director Identification Number (DIN) Every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number (DIN) to the Central Government in prescribed form along with fees. The Central Government shall allot a Director Identification Number to an application within one month from the receipt of the application. No individual, who has already been allotted a Director Identification Number, shall apply for, obtain or possess another Director Identification Number. Capital Subscription Stage After getting the certificate of incorporation, the private company can commence its business but a public company has to go through one more stage to commence their business. A public company can raise funds from the public by issuing a prospectus and undergoing the following formalities. (i) SEBI Approval: SEBI (Security Exchange Board of India) is a regulatory body which controls the capital market of India to protect the interests of the investors. The public limited companies must submit all relevant information with SEBI and get its approval before issuing its securities in the capital market. (ii) Filing of prospectus or statement in lieu of prospectus: A public company has to prepare a prospectus & invites the general public to buy the shares of the company. a. If a public company having a share capital is confident of getting fund privately, it issues a statement in lieu of prospectus. b. The company has to file a copy of prospectus or statement in lieu of prospectus with the registrar. (iii) Appointment of bankers, brokers and underwriters: Bankers are appointed by the company to receive application money. In case, the company is not sure about minimum subscription of shares by the public, it may appoint underwriters. (iv) Minimum subscription: Minimum subscription is the amount which, in the opinion of the board of directors, is sufficient to provide working capital, preliminary expenses, purchase price of any asset etc. As per SEBI guidelines, the minimum subscription is 90% of the issued amount. If the company is unable to do so, then it must return all the money received. (v) Permission from stock exchange: The company has to make an application to at least one stock exchange on which its shares can be bought and sold. (vi) Allotment of shares: After receiving the minimum subscription, the company issues the allotment letters to the allottees and a written letter of allotment is filed with the registrar of companies within 30 days of allotment. Important Documents 1. Memorandum of association 2. Articles of association 31 Business Studies / XI (2020-21) 3. Prospectus 4. Statement in lieu of prospectus Memorandum of Association It is the document which defines the powers and objectives of the company as well as the scope of its operations beyond which the company cannot operate. If a company does anything beyond what is mentioned in the memorandum, it will be treated as illegal. The MOA defines the relationship of the company with the outside world. It is the principal document of the company and is known as the charter or constitution of the company. No company can be registered without memorandum of association. Contents/Clauses of Memorandum of Association 1. Name clause: Under this, the name of the company is written. The name should not be identical to the name of any existing company. 2. Situation clause (registered office clause): Under this, the name of the state in which the registered office of the company is to be situated is mentioned. 3. Object clause: Under this, the objective or the purpose, with which the company has been formed, is mentioned. A company is not allowed to do any business other than the one specialized in this clause. 4. Liabilities clause: Under this clause, the liability of the members is mentioned which is up to the amount of unpaid share capital held by them. 5. Capital clause: In this clause, the authorized capital of the company is mentioned and no company can raise more capital than this limit. 6. Association clause (subscription clause): In this clause, the director (minimum seven in case of public company and minimum two in case of private company) has to give in writing of their intention to be associated with the company and buy the qualifying shares. Articles of Association The articles of association of a company are its by-laws or regulations which govern the management of its internal affairs. It defines the duties, powers, and authority of the shareholders and the directors of the company. This document is secondary to the memorandum of association. Clauses of Articles of Association (i) The amount of share capital and the different classes of shares. (ii) Rights of each type of shareholders. (iii) Procedure for making allotment of shares. (iv) Procedure for issuing shares certificates. (v) Procedure for transfer of shares. (vi) Procedure for forfeiture of shares. (vii) Procedure for re-issue of forfeited shares. (viii) Procedure for conducting meetings etc. The preparation of articles of association is not compulsory for public company limited by shares. It may adopt ‗TABLE F‘ of the companies act in case it is not preparing its own articles of association. Difference between Memorandum of Association and Articles of Association Basis Memorandum of Association Articles of Association Objectives MOA defines the objects for AOA are the rules of internal company is formed. management. They indicate how the objects of the company are to be achieved. 32 Business Studies / XI (2020-21) Position This is the main document of the This is subsidiary document and is company and subordinate to the subordinate to bot MOA and Companies Act Companies Act. Relationship MOA defines the relationship of the AOA defines the relationship of the company with outsiders company and its members. Validity Acts beyond MOA are invalid and Acts which are beyond articles can be can‘t be ratified even by a ratified by members, provided they unanimous vote of the members don‘t violet MOA. Necessity Every company has to file a MOA