Introduction to Business - MGT 211 Handout PDF

IntroductiontoBusiness–MGT211VU LESSON6 ...

IntroductiontoBusiness–MGT211VU LESSON6 JOINTSTOCKCOMPANY  JOINTSTOCKCOMPANY JointStockCompanyisthethirdmajorformofbusinessorganization.Ithasentirely differentorganizationalstructurefromsoleproprietorshipandpartnership.Therearetwo advantagesofJointStockCompany.Firstofall,itenjoystheadvantageofincreasedcapital. Secondly,thecompanyofferstheprotectionoflimitedliabilitytotheinvestors. ThelawrelatingtoJointStockCompanyhasbeenlaidinCompaniesOrdinance,1984,which cameintoforceonJanuary1,1985inPakistan.  DEFINITIONS FollowingaresomeimportantdefinitionofJointStockCompany: 1.SimpleDefinition “Acompanymaybedefinedasanassociationofpersonsforthepurposeofmakingprofit.” 2.AccordingtoKimball, “Acorporationbynatureisanartificialperson,createdorauthorizedbyalegalstatuefor somespecificpurpose.” 3.AccordingoS.E.Thomas, “Acompanyisanincorporatedassociationofpersonsformedusuallyforthepursuitof somecommercialpurpose.”   PROCEDUREOFFORMATIONOFAJOINTSTOCKCOMPANYINPAKISTAN JointStockCompanyisthethirdmajorformofbusinessorganization.Ithasentirely differentorganizationalstructurefromsoleproprietorshipandpartnership.Therearetwo advantagesofJointStockCompany.Firstofall,itenjoystheadvantageofincreasedcapital. Secondary,thecompanyofferstheprotectionoflimitedliabilitytotheinvestors. ThelawrelatingtoJointStockCompanyhasbeenlaidinCompaniesOrdinance,1984,which cameintoforceonJanuary1,1985inPakistan. Followingaretheimportantstagesorstepsfortheformationofajointstockcompany:  FormationofjointStockCompany    ©CopyrightVirtualUniversityofPakistan 56 IntroductiontoBusiness–MGT211VU PROMOTIONSTAGE  Thepromotersdothebasicworkforthestartofacommercialoranindustrialbusinesson corporatebasis.Promotionisthediscoveryofideasandorganizationoffunds,propertyand skill,torunthebusinessforthepurposeofearningincome.Followingstepsareinvolvedin thestageofpromotion.  1.IdeaaboutBusiness Beforestartingthebusiness,promotershavetothinkaboutthenatureandproductionof company’sbusiness.  2.Investigation Afterdecidingthenatureofbusiness,promotersgoinpreliminaryinvestigationandmake outplansasregardtotheavailabilityofcapital,meansoftransportation,labour,electricity, gas,wateretc.  3.AssemblingvariousFactors Aftermakinginitialinvestigation,thepromoterstartsaccumulatingvariousfactorsinorder toassemblethem.Theyarrangelicense,copyrights,employmentofnecessaryemployees etc.  4.FinancialSources Thepromotersalsodecidethecapitalsourcesofthecompanyandtheyworkouttheways throughwhichcapitalcanbegenerated.  5.PreparationofEssentialDocuments Inadditiontoabovediscussedmatters,thepromotersalsopreparefollowingessential documentsfortheformationofcompany: x Memorandumofcompany x Articlesofcompany x Prospectusofcompany Thepromoterscarryingoutthesevariousactivitiesgivethecompanyitsphysicalforminthe shapeof: x Givinganametothecompany x SanctioningofCapitalIssue  INCORPORATIONSTAGE Thesecondstageforestablishmentofacompanyistogetitincorporated.  1.FillingofDocument FollowingdocumentsaretobesubmittedbythepromotersintheRegistrar’soffice. (a)MemorandumofAssociation Adocumentindicatingname,address,objects,authorizedcapitaletc.ofacompany.   ©CopyrightVirtualUniversityofPakistan 57 IntroductiontoBusiness–MGT211VU (b)ArticlesofAssociation Adocumentcontaininglawsandrulesforinternalcontrolandmanagementofa company (c)ListofDirectors Alistofthenames,occupations,addresses,alongwiththedeclarationofdirectors. (d)WrittenConsentofDirectors Awrittenconsentshowingtheirwillingnesstoactatdirectors,tobesenttothe Registrar (e)DeclarationofQualifyingShares Adeclarationcertificateshowingthatthedirectorshavetakenupqualifyingsharesand havepaidupthemoneyorpayitinnearfuturetotheregistrar. (f)Prospectus Promotershavetofileaprospectuswiththeregistrar. (g)StatutoryDeclaration AstatutorydeclarationistobesenttotheRegistrarthatalllegalformalitieshavebeen completed.  2.PaymentofRegistrationFee Fortheregistrationofcompany,theregistrationfeeisalsopaidtotheRegistrar.For example x Applicationanddocumentsfilingfee x Registrationfee x StampfeeonMemorandumandArticles  3.CertificateofIncorporation Iftheregistrarfindsallthedocumentsrightandthinksthatallformalitieshavebeenfulfilled thenheissuesthecertificateofincorporationtopromoters.  CAPITALSUBSCRIPTIONSTAGE Aftergettingcertificateofincorporation,thenextstageistomakearrangementforraising capital.Foranykindofbusiness,thecompanyraisesitscapitalthroughfollowingsources: x ByIssuingShares x ByIssuingDebentures x BySavings  CERTIFICATEOFCOMMENCEMENT Forthecommencementofbusiness,everypubliccompanyhastoobtainthecertificateof commencement,whichrequiresthefulfillmentoffollowingconditions:  1.IssueofProspectus Acompanyhastoissueprospectusforsellingsharesanddebenturestopublic.  2.AllotmentofShares Thesharesanddebenturesareallottedaccordingtotheprovisionsofmemorandum,when applicationsarereceivedfromthepublic. ©CopyrightVirtualUniversityofPakistan 58 IntroductiontoBusiness–MGT211VU  3.MinimumSubscription Itisalsocertifiedthattheshareshavebeenallotteduptoanamount,notlessthanthe minimumsubscription.Afterverifyingtheforegoingdocuments,theregistrarissuesa certificateofcommencementofbusinesstopubliccompany.  ©CopyrightVirtualUniversityofPakistan 59 IntroductiontoBusiness–MGT211VU Lecture7  WHATISA“MEETING”  “Agatheringoftwoormorepersonsbypreviousnoticeorbymutualarrangementforthe discussionandtransactionofsomebusinessiscalledmeeting.”   SHAREHOLDERS’MEETINGS ANDCOMPANY’SMEETING  “Whenthemembersofacompanygatheratacertaintimeandplacetodiscussthe businessandmanagingaffairsitiscalledmeetingofthecompany.”  KindsofCompany’sMeeting     Shareholders’    Directors’ Meetings    Meeting       Statutory Annual Extra Meeting General ordinary    Meeting Meeting   SHAREHOLDERS’MEETINGS  Themeetings,whicharecalledtodiscustheaffairsofthecompanywithshareholders,are calledshareholders’meetings.Thesemeetingshavefollowingthreekinds:  STATUTORYMEETING  Accordingtosection157,thismeetingisheldonlyonceinthelifeofapubliccompany.Itis thefirstmeetingofthemembersofapubliclimitedcompany.Itsmainobjectiveisto providetheshareholderswithfirsthandinformationabouttheexactpositionofcompany’s affairs. ©CopyrightVirtualUniversityofPakistan 60 IntroductiontoBusiness–MGT211VU 1. Bywhomandwhenheld  Section77oftheCompaniesOrdinance,1984,makesitcompulsoryfor:  x everypubliccompanylimitedbyshares, x everypubliccompanylimitedbyguarantee,and x everyprivatecompanyconvertedintopubliccompany  thatstatutorymeetingmustbeheldwithinaperiodofnotlessthan3monthsandnotmore than6monthsfromthedateatwhichthecompanyisentitledtocommencebusiness.  2. Objects  Itsmainobjectis:  x Toprovideexactandlatestinformationabouttheaffairsofthecompany, x Towintheconfidenceofshareholdersofthecompany,and x Todiscussthestatutoryreport.  3. Notice  Atleast21daysbeforethemeeting,anoticemustbesenttoeachshareholderalongwith thestatutoryreport,bythesecretary.  4. Howthemeetingiscalled  Undersection157(2)ofCompaniesOrdinance,thedirectorsshouldsendanoticeof statutorymeeting,toalltheshareholders,atleast21daysbeforethemeeting.Directors alsosendstatutoryreport,dulycertifiedbyatleast3directors–oneofthemshouldbethe chiefexecutiveofthecompany.  5. Privilegestothemembers  Themembersofthecompanyinmeetinghavethelibertytodiscussanymatterrelatingto company’saffairs.  STATUTORYREPORT  Thereportpreparedbythesecretary,certifiedbyatleast3directors–oneofthembeing thechiefexecutiveofthecompanyiscalledstatutoryreport.Thestatutoryreportcontains thefollowinginformation:  1. ShareAllotment  Totalnumberofsharesallottedandtheirconsiderationforallotment ©CopyrightVirtualUniversityofPakistan 61 IntroductiontoBusiness–MGT211VU  2. SummaryofCashreceived  Summaryofcashreceivedinrespectofsharesallotted.  3. Expenses  Listofbasicexpensesofthecompany  4. Commission  Detailofcommissionforthesaleofshares,ifany.  5. ParticularsofContract  Theparticularsofcontractandtheirmodifications,ifany,  6. ParticularsofDirectors  Thenames,addressesandoccupationsofthedirectorsandotherofficersofthecompany  7. UnderwritingContract  Theparticularsofunderwritingcontract,ifany.  8. ListofArrears  Thearrears,ifany,dueoncallsfromdirectorormanagingagents  ANNUALGENERALMEETING  Accordingtosection158ofCompaniesOrdinance,everycompanymustholdanannual generalmeetingofitsshareholders,onceinayear.Themeetingprovidesanopportunityto evaluateandmeasuretheefficiencyofthedirectorsandotherofficersincarryingoutthe company’saffairs.  1. Notice  Anoticeofannualgeneralmeetingshouldbesenttotheshareholders,atleast21days beforethedateofthemeeting.  2. PlaceofMeeting  Incaseoflistedcompany,annualgeneralmeetingshouldbeheldintownwherethe registeredofficeofthecompanyissituated.  ©CopyrightVirtualUniversityofPakistan 62 IntroductiontoBusiness–MGT211VU 3. Roleofshareholders  Theshareholderscancriticizethepoliciesofthedirectorsandotherofficersandcanoffer suggestionsfortheirimprovement.  4. Occasion  Thefirstmetingofthisnaturemustbeheldwithin18monthsfromthedateof incorporation.Thegapbetweentwoannualgeneralmeetingsmustnotbemorethan15 months.  5. Objects  Themainobjectiveofthismeetingistocheckthatordinarybusinessisbeingdone accordingtotheruleslaiddowninarticlesofassociationofthecompany.Thedirectors submittheirreportabouttheaffairsofthecompanyduringtheproceedingyear.This reportisknownasdirector’sreport.Otherobjectivesare:  x ElectionofDirectors x Appointmentofauditors x Declarationofdividend x Fixationofdirector’s,auditor’sandmanagingagent’sremuneration x Auditor’sreportandbalancesheetarepresentedinthemeeting  6. Windingup  Accordingtosection305(b),acompanymaybewoundupbythecourtifitdoesnothold thetwoconsecutiveannualgeneralmeetings.  EXTRAORDINARYGENERALMEETING  Allthegeneralmeetingsotherthanannualgeneralmeetingandstatutorymeetingshallbe calledextraordinarygeneralmeetings.Thereisnotimelimitforit.Itmaybeheldfrom timetotime  1. RighttoCallMeeting  (a) Thedirectorsofthecompanymaycallextraordinarygeneralmeetingfor doingsomeurgentbusiness.   (b) Thismeetingcanalsobecalledbythedirectors,ontherequestof shareholders,havingnotlessthanonetenthofthevotingpower.  ©CopyrightVirtualUniversityofPakistan 63 IntroductiontoBusiness–MGT211VU (c) Incasethedirectorsfailtocalltheextraordinarygeneralmeetingwithin21 days,theshareholdersthemselvesmaycallthemeeting.Insuch,case, meetingmustbeheldwithin3months. 2. Notice  Tocalltheextraordinarymeeting,21daysnoticeisserved.  3. Procedure  Theshareholdershavetosubmittheirdemandtothesecretaryofthecompany.Withthe consultationofdirectors,hewillarrangetocallthemeeting.Thecompanybaresthe expensesofthemeeting.  4. Objects x Toissuethedebentures x Toalterthememorandumandarticles x Toalterthesharecapitalofthecompany  DIRECTOR’SMEETINGS  Themembersofthecompanyelecttheirrepresentativestorunthebusinessand managementofthecompany.Theserepresentativesarecalledthedirectorsofthe companyandtheyaredifferentinnumbersindifferentcompanies.Allthebusinessaffairs aresettledwithmutualconsultationofalldirectors.So,themeetingcalledfordirectorsto discussthepoliciesortotakethedecisionsiscalleddirectors’meeting.  1. Whenisitheld?  Thismeetingmustbeheldatleastonceinthreemonthsandatleastfourtimesinayear.  2. Notice  Noticeofeverymeetingmustbesenttoeachdirector,otherwisetheproceedingsofthe meetingmaybedeclaredvoid.  3. Objects  x Toallotshares x Toinvestcompany’sfund x Torecommenddividend x Tokeepreserveoutofprofit x Tomakeloans x Toappointofficersorcommittee x Todiscussthecontractsofthecompany x Todeterminethedateofnextmeeting ©CopyrightVirtualUniversityofPakistan 64 IntroductiontoBusiness–MGT211VU WINDINGUPOFCOMPANY  Acompanyiscreatedbylawandwhenthelegalexistenceofcompanyabolishesorcomes toanenditiscalledwindingupofacompanyorliquidationofcompany.  MODESOFWINDINGUP  Acompanycanbewoundupinthefollowingthreeways:  WindingupofJointStockCompany      Compulsory  Voluntary   Underthe Windingup  Windingup   Supervision byCourt      ofCourt    ByMembers    ByCreditors    COMPULSORYWINDINGUPBYCOURT  AccordingtoSection305ofCompaniesOrdinance,acompanymaybewoundupbycourt underthefollowingcircumstances:  1. SpecialResolution  Ifaspecialresolutionhasbeenpassedbythecompanyforwindingup  2. StatutoryMeeting  IfthecompanyfailstosubmitstatutoryreporttotheRegistrarforfailuretoholdstatutory meetingwithinspecifiedtime  3. CommencementofBusiness   Ifacompanyfailstostartitsbusinesswithinoneyearfromthedateofincorporationor postponesitsbusinessforoneyear   ©CopyrightVirtualUniversityofPakistan 65 IntroductiontoBusiness–MGT211VU 4. ReductioninMembers  Ifthenumberofmembersfallbelowsevenincaseofpubliccompanyandbelowtwoincase ofprivatecompany.  5. SatisfactionofCourt  Ifthecourtisnotsatisfiedwiththeworking,managementandbusinessaffairsofthe company  6. PaymentofLoans  Ifacompanyisunabletopayitsdebts  7. Unlisted  Ifacompanydeclaresitselfunlistedduetoanyreason  VOLUNTARYWIDNIGNUP  Ajointstockcompanymaybewoundupvoluntarilyinfollowingtwoways:  1. ByMembers  Accordingtosection362ofCompaniesOrdinance,1984,thememberscanwindupa companyvoluntarilyunderfollowingcircumstances:  (i) ExpiryofPeriod  Acompanymaybewoundupvoluntarilybythemembers,aftertheexpiryofperiod,by passingresolutioninthegeneralmeeting.  (ii) StatutoryDeclaration  Ifmajorityofdirectorsmakesastatutorydeclarationtoregistrarthatthecompanywillbe abletopayitsdebtsinfullwithinoneyear.  (iii) SpecialorOrdinaryResolution  Aftersubmittingthestatutorydeclarationtotheregistrar,thecompany,ingeneralmeeting passesanordinaryorspecialresolutiontowindupthecompany.  (iv)AppointmentofLiquidators  Ingeneralmeeting,thecompanyappointsliquidatorstowindupthecompany’saffairs. Withintendaysaftertheappointmentmustbesenttoregistrar. ©CopyrightVirtualUniversityofPakistan 66 IntroductiontoBusiness–MGT211VU (v) FinalMeeting  Afterwindinguptheaffairsofcompany,theliquidatorscallthegeneralmeetingofthe shareholders.Inthismeeting,theliquidatorsmustsubmitthefinalaccountsofcompany’s affairstothemembers.  (vi) Dissolution  Withinoneweekofgeneralmeeting,liquidatorsmustfileacopyoffullaccountstothe registrar.Attheendof3monthsfromthedateofregistrationofreturn,thecompanyshall bedissolvedanditsnamewillbestruckoffbytheRegistrarofJointStockcompany.  2. ByCreditors  TheMemberscanwindupacompanyvoluntarilyunderfollowingcircumstances:  (i) StatutoryDeclaration  Incaseofcreditorsvoluntarywindingup,itisnotnecessaryforthecompanytomakea statutorydeclarationregardingitssolvency.  (ii) SpecialResolution  Ageneralmeetingofthecompany’sshareholdersiscalledtopassanextraordinary resolutionforthedissolutionofthecompanybecauseitcannotcontinueitsbusinessdueto heavyliabilities.  (iii) Creditors’Meeting  Onthesameornextday,ameetingofcreditorsmustbecalledbythecompany.Anoticeof meetingmustbesenttoeachcreditor.  (iv)StatementofAffairs  Inthecreditors’meeting,thedirectorsmustsubmitastatementofaffairsofthecompany, togetherwithalistofcreditorsofthecompanyandestimatedamountoftheirclaims.  (v) IntimationtoRegistrar  Theinformationregardingthenoticeofpassedresolutionmustbesenttotheregistrar withintendaysafterthedateofcreditors’meeting.  (vi) AppointmentofLiquidator  Thecreditorsandshareholdersnominatethepersonstoactasliquidatorsintheir respectivemeetingsandtheopinionofthecreditorsispreferred. ©CopyrightVirtualUniversityofPakistan 67 IntroductiontoBusiness–MGT211VU (vii) InspectionCommittee  Thecreditorsandshareholders,intheirrespectivemeetingscanappointtheinspection committeeconsistingoffivepersonsineachcase.  (viii) Liquidators’Remuneration,RightsandDuties  Theinspectioncommitteefixestheremuneration,rightsanddutiesoftheliquidators.  (ix) FinalMeeting  Inthefinalmeeting,theliquidatorsplacebeforethemthefullaccountsofthecompany’s affairsandacopyoftheseaccountsisalsosenttoregistrarwithin7days.  (x) Dissolution  Theregistrarregistersthedocuments,sentbythecompany,after3monthsfromthedate ofregistration,thecompanywillbedissolved.   VOLUNTARYWINDINGUPUNDER THESUPERVISIONOFCOURT  Accordingtosection396ofCompaniesOrdinance,avoluntarywindingupofacompanycan alsobecarriedunderthestrictregistrationofthecourt.  1. Resolution  Atfirst,companyhastopassspecialresolutionforthevoluntarywindingupofthe company.  2. SupervisionOrder Followingarethecommongroundsonwhichthecourtissuesthesupervisionorder:  1. Theliquidatorperformshisdutyinpartialmanner. 2. Thewindingupresolutionisobtainedbyfraud. 3. Theliquidatordoesnotstrictlyobservetherulesofwindingupthecompany  3. PoweroftheCourt  Thecourthasthepowertoappointanadditionalliquidator,ortoremoveanyliquidator.     ©CopyrightVirtualUniversityofPakistan 68 IntroductiontoBusiness–MGT211VU 4. Dissolution  Afterthesupervisionorderismade,theliquidatormayexercisehispowersinwindingupof acompany.Oncompletionofwindingup,thecourtwillmakeanorderthatthecompanyis dissolved.  SHARECAPITAL  Insimplewords,theterm“capital”meanstheparticularamountofmoneywithwhicha businessisstarted.  Incompany,sharecapitalmeanstheamountcontributedbytheshareholders.  DEFINITION  1. AccordingtoAlanIssacs  “Sharecapitalisthatpartofthecapitalofacompanythatarisesfromtheissueof shares”  2. L.B.Curzonsays  "Sharecapitalisthetotalamountwhichacompany’sshareholdershavecontributed orareliabletocontributeaspaymentfortheirshares.”  KINDSOFSHARECAPITAL  AccordingtoCompaniesOrdinance,1984,thefollowingarethekindsofsharecapital:  1. AuthorizedCapital  Thisismaximumamountofcapitalwithwhichacompanyisregisteredorauthorizedto issue.Itisdividedintosharesofsmallvalue.   Forexample,theauthorizedcapitalofthecompanyRs.10,00,000dividedinto 1,00,000sharesofRs.10each  2. IssuedCapital  Itisapartofauthorizedcapitalwhichisofferedtothegeneralpublicforsale.   Forexample,acompanyhasanauthorizedcapitalofRs.10,00,000dividendinto 1,00,000sharesofRs.10each.Itoffers20,000sharesofRs.10eachtogeneralpublic.So itmeansissuedcapitalisRs.2,00,000.   ©CopyrightVirtualUniversityofPakistan 69 IntroductiontoBusiness–MGT211VU 3. UnIssuedCapital  Itisapartofauthorizedcapitalwhichisnotofferedtothegeneralpublicforsale.  Forexample,acompanyhasanauthorizedcapitalofRs.10,00,000dividedinto1,00,000 sharesofRs.10each.Itoffers20,000sharesofRs.10eachtogeneralpublic.Soitmeans unissuedcapitalisRs.8,00,000consistingof80,000sharesofRs.10each.  4. SubscribedCapital  Thatpartofissuedcapitalforwhichapplicationsaresentbythepublicandwhichare acceptediscalledsubscribedcapital.   Forexample,outof20,000sharesofferedbythecompany,thegeneralpublictakes uponly10,000shares.Sosubscribedcapital,isRs.1,00,000.  5. CalledupCapital  Acompanymayrequirepaymentoftheparvalueeitherininstallmentsorinlumpsum.So amountofsharesdemandedbycompanyisknownas“calledupcapital”.   Forexample,outof10,000sharestakenbypublic,companyrequiresapaymentof6 pershare.So“calledup”capitalofthecompanyisRs.60,000(10,000share@Rs.6).  6. UnCalledupCapital  Acompanymayrequirepaymentoftheparvalueeitherininstallmentsorinlumpsum.So amountofsharesnotdemandedbycompanyisknownas“uncalledupcapital”.   Forexample,outof10,000sharestakenbypublic,thecompanyrequiresapayment of6pershare.So“uncalledup”capitalofthecompanyisRs.40,000(10,000shares@Rs. 4).  7. PaidupCapital  Itisthatpartofcalledupcapitalwhichisactuallyreceivedbythecompany.Ifsome shareholderscouldnotpayallthemoneyofcalledupcapital,suchmoneyiscalledas“calls inarrears”or“callsunpaid”.  8. ReserveCapital  Thecapitalwhichisreservedforunexpectedeventsorforfutureneedsiscalledreserve capital.Companydecidesnottocallupsomepartofuncalledupcapitaluntilwindingup.It isnormallykeptforthepaymentofdebtsatthetimeofwindingup.   ©CopyrightVirtualUniversityofPakistan 70 IntroductiontoBusiness–MGT211VU 9. RedeemableCapital  Acompanycanobtainredeemablecapitalbyissueof:   (a) ParticipationTermCertificates  (b) MusharikaCertificate  (c) TermFinanceCertificate      ©CopyrightVirtualUniversityofPakistan 71  LECTURE 8 COOPERATIVE SOCIETY Cooperative Society its advantages and disadvantages COOPERATIVE SOCIETY A cooperative society is formed by the people of limited means for self help through mutual help. It is set up to protect economically the poor sections of the society. It is set up for cooperation, not for competition. The motto of a society is self help, without dependence on other business units. DEFINITION 1. According to Herrik “Cooperation is an action of persons voluntarily united for utilizing reciprocally their own forces, resources or both under mutual management for their common profit or loss.” 2. According to Mr. Plunket “The cooperation is self help made effective by organization.” Diagram Cooperative Society Welfare Number of persons Business Pool Resources ADVANTAGES OF COOPERATIVE SOCIETY Following are the important advantages or merits of cooperative society: 1. Advantage for Farmers Farmers can get fertilizers and seeds at low prices from such cooperative societies. Farmers can also self their production at high rate or prices through cooperative societies. 2. Easy Formation the formation of cooperative society is very easy. the formalities for registration are simple and formation expenses are also normal. The registration of a society is not compulsory but it is desirable to have its registration. 3. Equal Rights All members of cooperative society enjoy equal right of vote and ownership. Each shareholder has only one vote in the management of cooperative societies. 4. Equal Distribution of Wealth The profit of middlemen is also distributed among the workers. These societies remove the unequal distribution of wealth. 5. Economic Democracy Cooperative society is a domestic form of organization. Every member is allowed to participate in the management of the business. Each member has the right to cast vote. The decision of majority is honoured. 6. Elimination of Middlemen Cooperative society eliminates the profit of middlemen. These societies purchases goods directly from the producers for members and provide them on wholesale rate to society members. 7. Financial Assistance These societies also provide financial assistance to its members. In case of house building cooperatives housing society provides loan for the purchase of inputs. 8. Friendly Relations A cooperative society is a mean of developing friendly relations among the members. A society provides a platform for the introduction of members with each other. 9. Improve the Standard of Living Such societies provide the goods and services to the members of the society at low prices. Due to this, the purchasing power of the people increases and their standard of living improves. 10. Increase in Employment The cooperative societies also increase the employment opportunities for people. Thousands of people are engaged in different types of cooperative societies. 11. Limited Liability The liability of each member in cooperative society is limited to the share capital, which he invested. His remain safe. 12. Mutual Cooperation It is worthwhile to mention here that cooperative society is very useful for creating the spirit of friendship and brotherhood among the members. Cooperative society is the basic need of human being in modern era. 13. No Monopoly A start of the society is the end of monopoly. The monopoly eliminates the competition and controls the market and prices. The society tries to restore competition and to eliminate control over market and prices. 14. Open Membership the membership of a cooperative society is open for all people living in the same area. It is a voluntary association of persons of any caste, colour and creed. 15. Protection of Mutual Interest In cooperative societies its members take an advantage of mutual interest and cooperate with each other achieve the common interest. 16. Responsibility A society is a training centre for the members to feel their responsibility. A cooperative society is an ideal place for building up the moral character and development of personal qualities of the members. 17. Supply according to Demand Such societies purchase the goods according to the demand of members. The question of surplus does not arise. 18. Stable Life The cooperative societies, as compared to other business organization like sole- proprietorship or partnership, exists for a longer period. It has a fairly stable life. 19. Saving in Expenditure In cooperative societies, most of offices bearers work voluntarily. So, there are no heavy expenditures on management. It also reduces the cost of production. 20. Tax Concession Government provides certain concessions to cooperative societies, i.e. exemption from stamp duty, super tax, income tax and registration fee etc. DISADVANTAGES OF COOPERATIVE SOCIETY Following are the disadvantages of cooperative societies: 1. Lack of Capital Generally the members of cooperative societies are related to poor group and they cannot provide the capital on large scale. External financial resources are also limited. So, cooperative society faces the shortage of capital, which is a handicap to their development. 2. Untrained Supervision The government has sufficient control over the movement of these societies. These societies cannot prosper because the staff appointed for supervision is mostly untrained. 3. Defective Organization The organizations of cooperative societies are defective and these cannot operate efficiently to fulfill their objectives. 4. Illiterate and Ignorant In our country, the villagers are generally illiterate and ignorant. So, they are not familiar with the basic concept of the cooperative societies. 5. Lack of Experience The members of societies have less experience of business. Due to lack of capital, they cannot hire the services of experts. 6. Lack of Discipline Every member of the cooperative society considers himself as the owner of the business. Due to lack of discipline, business suffers a loss. 7. Lack of Sincere Management It is our common observation that the management of society remains in the hands of selfish and dishonest persons or members who obtains undue advantage form their powers. So, business suffers a loss. 8. Lack of Profit Incentive It is not a profit earning institution. Due to absence of profit incentive, the progress of cooperative society is very poor. 9. Lack of Secrecy There is no secrecy in the business of cooperative societies. 10. Lack of Knowledge The members of cooperative society do not know the principles and rules of society. So, they create great problem for society. 11. Lack of Unity In the absence of proper education and training, it is useless to think about unity. The lack of unity leads towards the destruction of the business. 12. No use of New Technology The cooperative societies cannot use the latest technology in production. As a result of this, demand and profit remains low. 13. No Public Confidence A cooperative society is not bound to publish annual financial statements for the information of general public. Due to this public shows less confidence in them. 14. Delay in Decision The main cause of failure of cooperative societies is delayed in decisions. 15. Government Control The cooperative department of the provincial government supervises the work of all cooperative societies. The business of a society is not free like other forms of business, so it cannot earn maximum profit.  LESSON 9 CONCEPT OF ENTREPRENEURSHIP Entrepreneurship is that ability in which an individual tries to find the opportunity, take risk and avail these opportunities. Who are Entrepreneurs? People have more entrepreneurial abilities who: „ Have aspiration „ Have more practical strategies to be implement „ Have the vision „ Understanding the environment „ Being visionary and flexible „ Creating management options „ Encourage teamwork while employing a multi‐disciplined approach „ Encouraging open discussion „ 6. Building a coalition of supporters. Characteristics of Entrepreneurs „ Personal Interest This personal interest can be of two common types: „ Interest for their own personality development „ Interest of their financial growth at market place „ Customer Relationship building There can be two types of customer relation ship building as under: „ Transactional Marketing This type of marketing is based on only one transaction, just to get the financials & provide products in return to customers. (Its some how a traditional approach of customer relationship management) „ Relationship Marketing This type of marketing based on long term service provision for the customer, to get order once from your customer, fulfill that order in best possible manners, provide after sales services in order to retain that  customer for longer period of time (it is based on modern customer relationship management techniques) Entrepreneurs strongly follow the second type of relationship building with this customer to get long run benefit in order to enhance their business. Simple E.g. can of of Doctors in a specific community, Mechanics, Hair dresser etc. „ Desire to establish own business Some persons have strong & dominant personality traits & they want to establish their own business instead of working under supervision of any one else so this leads them towards entrepreneurship establishment. They have strong decision making power & risk taking ability which helps them a lot to be an entrepreneur. „ Need of control Some people want them to be involved in every decision making of their business prospects so this aspect leads them be an entrepreneur. „ Ability to deal with uncertainties Some persons are daring enough in their professional attitude; they feel they can easily deal with uncertainties while designing best strategies for crunch situations so they move for entrepreneurship. BUSINESS PLAN FOR ENTREPRENEURS Business plan is a written document which contains the objectives of the business and the ways to achieve these objectives. A good business plan must be developed in order to exploit the opportunity defined. A good business plan is important in developing the opportunity and in determining the resources required, obtaining those resources and successfully managing the venture. The term business plan is made of two words “business” and “plan”. By understanding each we will try to arrive at some usable definition of business plan „ Business: “Any economic activity undertaken on regular basis to earn profit by combining resources and delivering value to society/market in response of whose unmet need it is started and run”. „ Plan: “Simply it is the product or result of planning or it can be defined as it is a document or piece of thought which answers the basic questions of planning”. „ If plan is so then what is planning? Situations for Entrepreneurial business „ There are two situations: „ Buying a business „ Starting from the scratch Most of the entrepreneurs always like to start their business right from scratch & develop their own strategies to run the business so our discussion will move around those entrepreneurs who start their businesses from scratch. COMPONENTS OF BUSINESS PLAN Since every business organization either small medium or large always have business plan so same is true for entrepreneurial business as well. Basic theme of business plans is always “ways to go & how to go”. All areas of SWOT analysis are also covered in the business plan. „ Objectives of the business The basic purpose of any business plan is to answer following questions: „ Name of the business „ Name should indicate the type of business „ Name should be simple „ Uniqueness of name „ Location of the business „ Legal considerations Avoid the names not encouraged by the law. e.g. National Heroes, religious personalities etc. Marketing Component of the business This part of business plan covers following aspects: „ Who will be the target customers for those products „ Where are they located? „ What would customers like to pay for the product or service? „ What are the benefits, the customers are expecting from the product or service? „ What type of products & services we are going to offer „ What will be the basis for targeting the customers (age, gender, educational status, social classes & behavioral aspects) „ Analysis of competitors:  One important consideration here is competitors’ analysis, while clarifying following in the business plan. „ What is the nature of competition in the market? „ Who are the competitors of the business? „ How product of the business is different from product of the competitors? „ Analysis of Promotional Activities „ How will the message of the business be promoted in the general public? „ How will the business be launched? „ Financial Analysis „ What will be the investment of the business and how much should be borrowed? „ What are going to be expected revenues in a given period of time? „ What would be the expected expenses of the business in a given period of time? „ What would be net income or net profit in a given period of time? „ Is the business feasible or not? „ Administrative Rights & provisions „ What would be the structure to handle the business?  LESSON 10 FRANCHISING It is defined as: “An agreement between two parties in which one party passes on the rights to the other party.” Or “A contractual license granted by one person (the franchisor) to another (the franchisee).” Rights of franchisee includes Right to use the trade mark. Right to use the name. Right to use systems, methods and researches. Right to use packing material. Parties to Franchise agreement There are two parties involved in a franchise agreement 1. Franchiser Party or person, who grants the right to sell/offer its products & services under its own trade name,. 2. Franchisee Franchisee is being granted from franchiser to provide representational rights to sell or manufacture goods or to provide service or to undertake any process identified with franchiser against an agreed fee or consideration including royalty, whether or not a trade mark, service mark, trade name or logo or any such symbol , as the case may be is involved. Advantages of Franchising Franchiser gets a large amount of money from franchisee as fee while using its name. Franchisee gets access to big business. Failure rate of franchise business is lower than any other business.  Franchisee uses world wide tested brand and tested procedures that is why failure rate is lower in this type of business. Franchiser provides guidance to franchisee in all affairs of the business. Choice of location Franchiser is always there to support the franchisee in all kinds of matters. Disadvantages of Franchising High cost. Proportionate profit is given to franchiser by franchisee every year. There are too many restrictions from franchiser on the franchisee. NEW TRENDS IN THE BUSINESS E‐Commerce or E‐Business E‐commerce, (electronic commerce), is online commerce verses real‐world commerce. E‐commerce includes retail shopping, banking, stocks and bonds trading, auctions, real estate transactions, airline booking, movie rentals, nearly anything you can imagine in the real world. Even personal services such as hair and nail salons can benefit from e‐ commerce by providing a website for the sale of related health and beauty products, normally available to local customers exclusively. Women in business So many women have come in so many areas of business. Business will be better displayed, well mannered staff, more knowledge of the needs of customers and more market oriented. GLOBAL OPPORTUNITIES People have the awareness of global market. Internet has played major role in accessing global markets. In Pakistan, people got huge success globally but could not make a brand name in global market. Factors for lower failure rate Government’s preferences and priorities. Government is convinced to support corporate sector.  Businesses are now being set up on more professional grounds. Support from financial institutions. General economy of the country. People are acquiring professional knowledge about business. Government has developed many training centre to train people related to business. Skills development. Institutions to develop man power.  Lecture 11 SUCCESS AND FAILURE OF BUSINESS Causes of Failure in Business Normally, following are the common causes of failure of any business: Lack of market knowledge Start of any business without having proper experience in the field Lack of control over procedures Lack of understanding customer’s demand Poorly designed Production Processes Cost Wastage Complaint handling Quality Insufficient capital Bad Luck Natural Disaster Reasons for Success in Business (controllable factors) Response of Market Competence – The ability to work Knowledge of Market Knowledge of Product Knowledge of Systems Reasons for Success in Business (uncontrollable factors) Luck and Act of God  Law of Government State Laws Climate change Using disaster (if any) as an opportunity) Joint Venture Two or more people or organizations join hands and decide to do a combine business. In a joint venture, There is equal sharing or capital resources by each firm. Instead of expanding the business at broader level or to start a new business with very high cost, joint venture shares the financial burden in order to gain new opportunities at diversified level. Advantages of Joint Venture Provide opportunities to acquire new expertise Allow to enter in new geographic markets gain new technological knowledge Sharing of specialized staff and technology sharing of risks Strategic Alliance In strategies alliances, two or more than two organizations collaborate for mutual profits. In strategic alliances, Pool of resources occurs such as products of both firms, distribution channels used by every firm, manufacturing capabilities of firms, future projects funding, capital equipment sharing, knowledge, expertise and intellectual property sharing among both firm are the basic out comes of strategic alliances. One good e.g. of strategic alliances is commonly seen in Air Lines industry around the world Merger and Acquisition Merger is a new trend in market in which two or more organizations combine together and form a new organization. Acquisition Slightly differ from Merger, here one business acquires the other business instead of combining. Ownership moves more towards the acquiring partner. Common Advantages of Merger & Acquisition Expansion of size Minimize the operational cost To reduce competition ACTIVITY After studying the all the concepts mentioned above, you as a student of Introduction to business studies is required to acquire knowledge about practical organizations who are performing their activities under any business form mentioned above and if they are successful, what are the core strengths of their success & if they are failure, (at any part) where were the weaknesses?  LESSON 12 FOREIGN TRADE & FOREIGN BUSINESS Imports International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). It is also defined as: Goods produced somewhere else and sold domestically. Such as Chemicals Technology (Machinery, Software & Hardware, Expertise) Import ‐ commodities (goods or services) bought from a foreign country Factors to be considered while importing Identification of products to be imported Procedures Methodologies Technical processes Documents for imports Exports In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export goods or services are provided to foreign consumers by domestic producers. It is also defined as: Goods produced domestically and sold in some other country. Export ‐ sell or transfer abroad; "In Pakistan we export less than we import and have a negative trade balance" Advantages of Exports Support of Government. High Profits. Pride for the country. Utilization of production capacity. GATT (General Agreement on Tariff & Trade) A multilateral treaty intended to help reduce trade barriers between signatory countries and to promote trade through tariff concessions. WTO – World Trade Organization and its scope The WTO is an international organization and a forum of multilateral negotiations of its Members on global trade liberalization rules, their administration and application. Mainly, the WTO system is understood as the set of external trade rules or "traffic rules" in external trade, which all Members must follow. The WTO was established in 1995, as the result of the Uruguay round negotiations. With the establishment of the organization, a set of WTO agreements was also concluded – with regard to goods, services, intellectual property, dispute settlement, multilateral agreements. Until the establishment of the WTO multilateral trade relations were governed by General Agreement on Tariffs and Trade (GATT), concluded on 1947 and which opened the trade liberalization and reduction of tariff barriers. The main goal of the WTO is a free and facilitated trade, governed by equal rules, while similarly taking into account also the potential of developing countries. In the WTO are represented almost all countries of the world – currently the WTO has 147 Members Per Capita Income Per capita income means how much each individual receives, in monetary terms. It is the measure of the amount of money that each person earns in the country, of the yearly income generated in the country. Per Capita = Total income of the country Total population Tools for measuring economies of the world World can be divided in to three major categories on the basis of per capita income. High income countries Those countries where people are earning US $9000 or more Middle income countries Those countries where people are earning between US $765 and $9000 Lower income countries Those countries where people are earning below US $765 Pakistan has a little below than US $765 income line and is moving towards middle income class countries. Pakistan is exporting Sports items Agricultural products (rice), Textile products (Bed Sheets, T‐Shirts, Towels etc.) Import and Export Balance Gap between imports and exports is called surplus and deficit and it varies from country to country. Balance of Payment Balance of payment = Total receipts ‐ Total payments If receipts are greater, balance of payment is favorable. If payments are greater, balance of payment is unfavorable. Level of involvement in international business Imports or Exports We can be importer and exporter. We try to see opportunity in international market to consume surplus products. This is called exports. International Firms International firms have operations world wide. These firms are also called multinationals. Multinationals design products separately for each country Global Organizations Those organizations which consider the whole country as single market are called global organizations. These organizations have standardized products all over the world. International Organizational Structure Independent Agent A person or an organization that works for an exporter or importer  Appointment of representative abroad Licensing agreement Independent Branch Office Strategic Alliance Direct Foreign Investment Study Links: www.offshoredealers.com www.mfa.gov.lv/en/policy/economic/WTO/WhatIsWTO  LESSON 14 STAKE HOLDERS Definition People who are interested in the affairs of the business in one way or the other are called stakeholders. Stake holders include: Customers Employees Suppliers Bankers Government Society at large RIGHTS OF CUSTOMERS Consumerism Protecting the rights of customers To get a product that is up to the expectations of the customers Customer Safety Right to get information about: Product Supplier System Procedures Standards Ingredients of the product Origin of the company Method of manufacturing Quality standards  Right to be heard Right to choose Quality Service Responsibilities of the Organization towards Environment Reprocessing of waste water. Recycling of waste material. Processing of smoke. Reprocessing of heat. Ethics for Advertising Truthful or Truth less Communication Objectionable Products Objectionable Appeals Fear Factor Sexual Connotations Objectionable Timings Smoking Selling product to underage customers Legal Commitments Discriminations Health and Safety of Employees Whistle Blowers People who see irregularities and bring them in the knowledge of the management. Although these people bring in to account positive actions required to be taken in to account by the management but even then most of the times, organizations never liked these persons. Management Getting things done through others. Manager A person who practices the functions to achieve management’s objectives. Functions of Managers Planning Thinking for the future Organizing Decision about activities performed by the workers 1. Grouping the activities 2. Delegation of authorities Staffing Filling out the vacant positions Coordination Communication Receiving information from various sources Processing of information Dissemination of information Distribution of information Conflict handling Negotiation Resource Allocation Controlling To make sure that organization is moving towards the right direction.  Introduction to Business –MGT 211 VU Lecture 2 ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS All businesses, regardless of their size, location, or mission, operate within a larger external environment. External environment: Everything outside an organization’s boundaries that might affect it. a. Organizational Boundaries: that which separates the organization from its environment. Today boundaries are becoming increasingly complicated and hard to pin down. b. Multiple Environments: include economic conditions, technology, political- legal considerations, social issues, the global environment, issues of ethical and social responsibility, the business environment itself, and numerous other emerging challenges and opportunities. THE ECONOMIC ENVIRONMENT Economic environment—Conditions of the economic system in which an organization operates. c. Economic Growth i. Aggregate Output and Standard of Living 1. Business cycle—Pattern of short-term ups and downs (expansions and contractions) in an economy 2. Aggregate output—Total quantity of goods and services produced by an economic system during a given period 3. Standard of living—Total quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system ii. Gross Domestic Product Gross domestic product (GDP)—Total value of all goods and services produced within a given period by a national economy through domestic factors of production © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU Gross national product (GNP)—Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located 1. Real Growth Rate—the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency. 2. GDP per Capita—GDP per person and reflects the standard of living. 3. Real GDP—GDP calculated to account for changes in currency values and price changes versus Nominal GDP, GDP measured in current dollars or with all components valued at current prices. 4. Purchasing Power Parity—Principle that exchange rates are set so that the prices of similar products in different countries are about the same. iii. Productivity—Measure of economic growth that compares how much a system produces with the resources needed to produce it. There are a number of factors which can inhibit the growth of an economic system including: 1. Balance of Trade—the economic value of all the products that a country exports minus the economic value of imported products. a. Trade Surplus —A positive balance of trade results when a country exports (sells to other countries) more than it imports (buys from other countries). b. Trade Deficit—A negative balance of trade results when a country imports more than it exports. c. National Debt—Amount of money that a government owes its creditors. d. Economic Stability Condition in an economic system in which the amount of money available and the quantity of goods and services produced is growing at about the same rate. Factors which threaten stability include: © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU i. Inflation—Occurrence of widespread price increases throughout an economic system Measuring Inflation: The CPI—Measure of the prices of typical products purchased by consumers living in urban areas ii. Unemployment—Level of joblessness among people actively seeking work in an economic system. Unemployment may be a symptom of economic downturns. 1. Recessions and Depressions Recession—Period during which aggregate output, as measured by real GDP, declines 2. Depression—Particularly severe and long-lasting recession e. Managing the Economy i. Fiscal policies—Government economic policies that determine how the government collects and spends its revenues ii. Monetary policies—Government economic policies that determine the size of a nation’s monetary supply iii. Stabilization policy—Government policy, embracing both fiscal and monetary policies, whose goal is to smooth out fluctuations in output and unemployment and to stabilize prices iv. Three Major Forces 1. The information revolution will continue to enhance productivity across all sectors of the economy, most notably in such information-dependent industries as finance, media, and wholesale and retail trade. 2. New technological breakthroughs in areas such as biotechnology will create entirely new industries. 3. Increasing globalization will create much larger markets while also fostering tougher competition among global businesses; as a result, companies will need to focus even more on innovation and cost cutting. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU v. Projected Trends and Patterns—there are a number of projections for the near future. Sudden changes in environmental factors, such as war, can alter these projections. DEMOGRAPHIC ENVIRONMENT Demographic environment is the study of characteristics of population such as size of population, population growth rate and population distribution on the basis of gender, age, income level, level of education, geographic location, family structure, etc. these factors influence the size of demand, buying pattern, liking and attitude of customers. Demographic factors are important to managers as the changes in these demographic factors affect the businessmen’ planning. Total population determines the size of market, huge population size and growth rate brings a large number of customers, more consumption and more opportunities for business, cheap and abundant labor supply will also be available. It affects the business positively. Another demographic factor that affects the business is education level. If education level of public is high then the supply of skilled labor will increase and supply of unskilled labor will decrease. In case of low education level supply of skilled labor will decrease. Education level also affects the buying pattern of customers; if they are highly educated then the business enterprise must be careful about the quality of its products and services. In the same way, gender and age composition, income level, geographical location etc are also important demographic factors. POLITICAL AND LEGAL ENVIRONMENT Legal and political factors include legal and governmental system organizations operate. Political and legal environment strongly affect the business decisions. Aspects which are considered in political and legal environment are the preferences and priorities of the government, political stability in the country, laws/rules and regulations, taxation policy and attitude of the government towards business. Government decides that what sort of economic activities the country should have, in which areas the private sector should be encouraged, also defines the areas where foreign companies may enter. Laws and regulations influence the decision making and limit the businesses for the country’s wellbeing. THE TECHNOLOGICAL ENVIRONMENT Technology has a variety of meanings, but as applied to the environment of business, it generally includes all the ways by which firms create value for their constituents. f. Product and Service Technologies—the technologies employed for creating products (both physical goods and services) for customers. Although many people associate technology with manufacturing, it is also a significant force in the service sector. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU g. Business Process Technologies—are used not so much to create products as to improve a firm’s performance of internal operations (such as accounting, managing information flows, creating activity reports, and so forth). They also help create better relationships with external constituents, such as suppliers and customers. i. Enterprise Resource Planning—Large-scale information system for organizing and managing a firm’s processes across product lines, departments, and geographic locations SOCIO-CULTURAL ENVIRONMENT Social and cultural factors affect the working of business enterprises significantly. Socio- cultural factors include the societal values, attitude, customs, religion; beliefs, habits and preferences etc. socio-cultural trends have considerable effect on the demand for products e.g., dominant religion of any society has influence over the buying behavior of that society. NATURAL ENVIRONMENT Geographical and ecological factors such as changes in weather and climate, earthquake, floods, storms and natural resources are considered in natural environment. Natural factors are not in control of any business unit however while considering natural factors managers will develop their product, production planning, marketing planning etc. For example, weather conditions influence the buying pattern, demand for heaters; sweater and woolen cloths will be more in winter while in summer there will be more demand for air conditioners, fans and cold drinks etc. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU Lecture 3 BUSINESS ORGANIZATION & SOLE PROPRIETORSHIP Business organization is an act of grouping activities into effective cooperation to obtain the objective of the business. In the words of L. H. Haney “It is more or less independent complex of land, labour and capital, organized and directed for productive purposes but entrepreneurial ability.” SCOPE OF BUSINESS ORGANIZATION The scope of business organization can be defined as under: Scope of Business Organization Sole Partner- Joint Co-operative Combination Proprietor- Ship Stock Societies Ship Company 1. SOLE PROPRIETORSHIP According to D.W.T. Stafford “It is the simplest form of business organization, which is owned and controlled by one man” Sole proprietorship is the oldest form of business organization which is owned and controlled by one person. In this business, one man invests his capital himself. He is all in all in doing his business. He enjoys the whole of the profit. The features of sole proprietorship are: Easy Formation Unlimited Liability Ownership Profit Management Easy Dissolution © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 2. PARTNERSHIP According to Partnership Act, 1932 “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.” Partnership means a lawful business owned by two or more persons. The profit of the business shared by the partners in agreed ratio. The liability of each partner is unlimited. Small and medium size business activities are performed under this organization. It has the following features: Legal Entity Profit and Loss Distribution Unlimited Liability Transfer of Rights Management Number of Partners 3. JOINT STOCK COMPANY According to S. E. Thomas “A company is an incorporated association of persons formed usually for the pursuit of some commercial purposes” A joint stock company is a voluntary association of persons created by law. It has a separate legal entity apart from its members. It can sue and be sued in its name. In the joint stock company, the work of organization begins before its incorporation by promoters and it continues after incorporation. The joint stock company has the following feature: Creation of Law Separate Legal Entity Limited Liability Transferability of shares Number of Members Common Seal 4. COOPERATIVE SOCIETIES According to Herrik “Cooperation is an action of persons voluntarily united for utilizing reciprocally their own forces, resources or both under mutual management for their common profit or loss.” © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU Cooperative Societies are formed for the help of poor people. It is formed by economically weak persons of the society. In this form of organization, all members enjoy equal rights of ownership. The features of cooperative society are as under:- Easy Formation Protection of Mutual Interest Limited Liability Equal Distribution of Wealth Equal Rights 5. COMBINATION According to J. L. Hanson “Combination is the association, temporary or permanent, of two or more firms.” Business combinations are formed when several business concern undertaking units are combined to carry on business together for achieving the economic benefits. The combination among the firms may be temporary or permanent. The salient features of business combination are: Economy in Production Effective Management Division of Labour Destructive Competition IMPORTANCE OF BUSINESS ORGANIZATION The following points elaborate the role of business organizations: 1. Distribution Another benefit of business organization is that it solves the problems of marketing and distribution like buying, selling, transporting, storage and grading, etc. 2. Feedback An organization makes possible to take decisions about production after getting the feedback from markets. 3. Finance Management It also guides the businessman that how he should meet his financial needs which is very beneficial for making progress in business. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 4. Fixing of Responsibilities It also fixes the responsibilities of each individual. It introduces the scheme of internal check. In this way chances of errors and frauds are reduced. 5. Minimum Cost It helps in attaining the goals and objectives of minimum cost in the business. 6. Minimum Wastage It reduces the wastage of raw material and other expenditures. In this way the rate of profit is increased. 7. Product Growth Business organization is very useful for the product growth. It increases the efficiency of labor. 8. Quick Decision Business organization makes it easy to take quick decisions. 9. Recognition Problems Business organization makes it easy to recognize the problems in business and their solutions. 10. Reduces the Cost Business organization is useful in reducing the cost of production as it helps in the efficient use of factors of production. 11. Secretariat Functions It also guides the businessman about the best way of performing the secretarial functions. 12. Skilled Salesmen It is also a benefit of the business organization that it provides the skilled salesmen for satisfying various needs of the customers. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 13. Transportation It is another benefit is that it guides the businessman that what type of transport he should utilize to increase the sales volume of the product. PRE-REQUISITES OF BUSINESS Following are the main pre-requisites of a successful business: 1. Selection The first and most important decision before starting a new business is its selection. If once a business is established, it becomes difficult to change it. One should make a detailed investigation in the selection of business. 2. Feasibility Report A person should prepare the feasibility report about the business to be started. This report will provide the facts and figures whether business is profitable or not. 3. Nature of Business There are various types of business like manufacturing, trading and services. The businessman should decide that what type of business he would like to start. 4. Demand of Product The businessman also keeps in view the demand of the product which he wants to sell. If the demand is inelastic, the chances of success are bright. If the demand of a product is irregular, seasonal and uncertain, such business should not be started. 5. Size of Business The Size of business means the scale of business. The size of business depends upon the demand of commodity in the market and organizational ability of entrepreneur. The determination of size of business is an important decision of a person. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 6. Availability of Capital Availability of capital is an important factor in the business. Capital is required for the purchase of land, machines, wages and raw materials. A businessman must decide that how much capital he can arrange. 7. Business Location A businessman has to select the place where he wants to start his business. He should select that place where raw material, cheap labour and transportation facilities are available. He should also check the location of business competitors. 8. Government Policy The businessman should also carefully consider the policies of government before starting a new business. Some areas are declared as ‘tax free zones’ and for some particular businesses the loan is provided without any interest. 9. Availability of Raw Material Availability of Raw material is essential to produce the goods at low cost. Sometimes the raw material is to be imported which may create problem for him. So a businessman must keep this factor in mind. 10. Availability of Machines Availability of new machines is also an important factor for a business. A businessman must see whether these machines are easily available inside the country or not. If these are to be imported then it may create the problems for him. 11. Availability of Labor Skilled and efficient labor is essential to run the business in profit. But if efficient and skilled labor is not available where business is going to be started then it will not be profitable. 12. Means of Transportation Quick and cheap means of transportation are essential for low cost of production and high profit rate. A businessman must keep in view this factor. 13. Power Resources There must be availability of power resources like water, oil, coal and electricity. So businessman must keep in view this factor. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 14. Hiring Employees A businessman must hire the efficient and competent employees in the business. The proper training must be given to employees. 15. Product Pricing A businessman must decide the price of his product. In the beginning the price must be low. He must keep in view that whether he will cover cost of his product and other expenses with such price. FUNCTIONS OF BUSINESS Following are the main functions of a business: 1. Production Production of goods and services is the first main function of the business. The production must be regular. The goods and services must be produced in such a way which can satisfy human needs. 2. Sales The sale is another important function of the business. Sales are of two types: Cash sales Credit sales The sale must be regular and at reasonable price. It is very difficult job because there is hard competition in each market. 3. Finance It is also an important function of the business to secure finance. Finance is required for establishment and expansion of business. There are two sources of raising funds: (a) Owner’s Capital (b) Borrowed Funds © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 4. Management Function “To do things efficiently and effectively” is known as management. The functions of management are: Planning Organizing Leading Controlling Staffing The management also provides direction for all subordinates. 5. Innovation In this era of competition, for the survival of business, innovation is essential. The businessman must try to find new techniques of production because the business may not sell present output in future. 6. Accounting Another function of the business is to maintain its records properly. To record the business activities is called accounting. With proper accounts, the owner can know the actual performance of business and chances of fraud are reduced. 7. Marketing According to Harry Henser “Marketing involves the design of the products acceptable by the consumers and the conduct of those activities which facilitate the transfer of ownership between seller and buyer.” Through marketing, goods are moved from producers to consumers. It is an important function of the business. This function includes buying, selling, transportation, product designing and storage, etc. The concept of marketing mix is very important in marketing. It includes four Ps: Product Price Place Promotion © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 8. Quality Improvement Quality of product must be improved to increase the sale. If quality of product is poor then business may suffer a loss. 9. Motivation Motivation is very essential for increasing the efficiency of employees. Motivation encourages the employees to give their best performance. 10. Research Research is also an important function of any business. Research is a search for new knowledge. By research, business becomes able to produce improved and new goods. The research is of two types: Basic Research Applied Research 11. Public Relation It is very important function to make friendly relations with public, in this way sales volume is increased. SOLE PROPRIETORSHIP Sole Proprietorship and its Characteristics Sole proprietorship is a simple and oldest form of business organization. Its formation does not require any complicated legal provision like registration etc. It is a small-scale work, as it is owned and controlled by one person, and operated for his profit. It is also known as “sole ownership”, “individual partnership” and “single proprietorship”. DEFINITION Following are some important definition of sole proprietorship: 1. According to D.W.T. Staffod “It is the simplest form of business organization, which is owned and controlled by one man.” © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 2. According to G. Baker “Sole proprietorship is a business operated by one person to earn profit.” CHARACTERISTICS Following are the main characteristics of sole proprietorship: 1. Capital In sole proprietorship, the capital is normally provided by the owner himself. However, if additional capital is required, such capital can be increased by borrowing. 2. Easy Dissolution The sole proprietorship can be easily dissolved, as there are no legal formalities involved in it. 3. Easily Transferable Such type of business can easily be transferred to another person without any restriction. 4. Freedom of Action In sole proprietorship, single owner is the sole master of the business; therefore, he has full freedom to take action or decision. 5. Formation Formation of sole proprietorship business is easy as compared to other business, because it dos not require any kind of legal formality like registration etc. 6. Legal Entity In sole proprietorship, the business has no separate legal entity apart from the sole traders. 7. Legal Restriction There are no legal restrictions for sole traders to set up the business. But there may be legal restrictions for setting up a particular type of business. 8. Limited Life The continuity of sole proprietorship is based on good health, or life or death of the sole owner. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 9. Management In sole proprietorship, the control of management of the business lies with the sole owner. 10. Ownership The ownership of business in sole proprietorship is owned by one person. 11. Profit The single owner bears full risk of business, therefore, he gets total benefit of the business as well as total loss. 12. Size The size of business is usually small. The limited ability and capital do not allow the expansion of business. 13. Success of Business The success and goodwill of the sole proprietorship is totally dependent upon the ability of the sole owner. 14. Secrecy A sole proprietorship can easily maintain the secrecy of his business. 15. Unlimited Liability A sole proprietor has unlimited liability. In case of insolvency of business, even the personal assets are used by the owner to pay off the debts and other liabilities. ADVANTAGES OF SOLE PROPRIETORSHIP Following are the advantages of sole proprietorship: 1. Contacted with the Customers In sole proprietorship a businessman has direct contact with the customer and keeps in mind the like and dislikes of the public while producing his products. 2. Direct Relationship with Workers In sole proprietorship a businessman has direct relationship with workers. He can better understand their problems and then tries to solve them. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 3. Easy Formation Its formation is very easy because there are not legal restrictions required like registration etc. 4. Easy Dissolution Its dissolution is very simple because there are no legal restrictions required for its dissolution and it can be dissolved at any time. 5. Easy Transfer of Ownership A sole proprietorship can easily be transferred to other persons because of no legal restriction involved. 6. Entire Profit Sole proprietorship is the only form of business organization where the owner enjoys 100% profit. 7. Entire Control In sole proprietorship the entire control of the business is in the hands of one person. He can do whatever he likes. 8. Flexibility There is great flexibility in sole proprietorship. Business policies can easily be changed according to the market conditions and demand of people. 9. Honesty The sole master of the business performs his functions honesty and effitively to make the business successful. 10. Independence It is an independent form of business organization and there is no interference of any other person. 11. Personal Satisfaction As all the Business activities are accomplished under the supervision of sole owner, so he feels personal satisfaction that the business is running smoothly. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 12. Prime Credit Standing A sole proprietor can borrow money more easily because of unlimited liability. 13. Quick Decisions Sole proprietor can make quick decisions for the development and welfare of his business and in this way can save his time. 14. Personal Interest A sole proprietor5 takes keen intere4st in the affairs of business because he alone is responsible for profit and loss. 15. Saving in Interest on Borrowed Capital Sometimes, a sole proprietor borrows money to increase his capital, from his relatives, without interest. 16. Saving in Legal Expenses As there are no legal restrictions for the formation of sole proprietorship so it helps in increasing savings as legal expenses are reduced. 17. Saving in Management Expenses The owner of the business himself performs most of the functions so it r educes the management expenses. 18. Saving in Taxes The tax rates are very low on sole proprietorship because it is imposed on the income of single person. 19. Secrecy It is an important factor for the development of business. A sole trader can easily maintain the secrecy about the techniques of production and profit. 20. Social Benefits It is helpful in solving many social problems like unemployment etc. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU DISADVANTAGES OF SOLE PROPRIETORSHIP The disadvantages of sole proprietorship can be narrated as under: 1. Continuity The continuity of sole proprietorship depends upon the health and life of the owner. In case of death of the owner the business no longer continues. 2. Chances of Fraud In sole proprietorship, proper records are not maintained. This increases the chances of errors and frauds for dishonest workers. 3. Expansion Difficulty In sole proprietorship, it is very difficult to expand the business because of the limited life of proprietor and limited capital. 4. Lack of Advertisement As the sources of single person are limited so he cannot bear the expense of advertisement, which is also a major disadvantage. 5. Lack of Capital Generally, one-man resources are limited, so due to financial problems he cannot expand his business. 6. Lack of Inspection and Audit In sole proprietorship there is lack of inspection and audit, which increases the chances of fraud and illegal operations. 7. Lack of Innovation Due to fear of suffering from loss, a sole proprietor does not use new methods of production. So, there is no invention or innovation. 8. Lack of Public Confidence The public shows less confidence in this type of business organization because there is no legal registration to control and wind up the business. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 9. Lack of Skilled Persons One person cannot hire the ser4vices of qualified and skilled persons because he has limited resources. It is also a great disadvantage. 10. Management Difficulty One person cannot perform all types of duties effectively. If he is a good accountant, he may not be a good administrator. Due to this, business suffers a loss. 11. Much Strain on Health In this type of business organization there is much strain on the health of the businessman because he alone handles all sorts of activities. 12. Not Durable This type of business organization is not durable because its existence depends upon the life of sole proprietor. 13. Permanent Existence In this type of business there is a need of permanent existence of a businessman. In case of absence from business for few days may become the cause of loss. 14. Risk of Careless Drawings In sole proprietorship, owner himself is a boss. There is no question to his decisions or actions. So, there is a risk of careless drawings by him. 15. Risk of Loss In case of sole proprietorship a single person bears all the losses, whereas in the case of partnership or Joint Stock Company all the partners or members bear the loss. 16. Unlimited Liability In sole proprietorship there is unlimited liability. It means, in case of loss personal property of the owner can be sold to satisfy the claimants. It is a great disadvantage. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU CONCLUSION From the above-mentioned detail, we come to the point that despite the above disadvantages, sole proprietorship is an important form of business organization. This is due to the fact that its formation is very easy and due to unlimited liability the owner takes great care and interest in the business, because in case of loss, he is personally responsible. As he enjoys entire profit, this factor also encourages him to work with great efficiency which promotes his business. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU Lecture 4 PARTNERSHIP Partnership and its Characteristics Partnership is the second stage in the evolution of forms of business organization. It means the association of two or more persons to carry on as co-owners, i.e. a business for profit. The persons who constitute this organization are individually termed as partners and collectively known as firm; and the name under which their business is conducted is called “The Firm Name”. In ordinary business the number of partners should not exceed 20, but in case of banking business it must nor exceed 10. This type of business organization is very popular in Pakistan. DEFINITION 1. According to Section 4 of Partnership Act, 1932 “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.” 2. According to Mr. Kent “A contract of two or more competent persons to place their money, efforts, labour and skills, some or all of them, in a lawful commerce or business and to divide the profits and bear the losses in certain proportion.” Structural Diagram: Association Profit & Loss PARTNERSHIP Money, Labour And Other Skills Lawful Business © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU CHARACTERISTICS The main characteristics of partnership may be narrated as under: 1. Agreement Agreement is necessary for partnership. Partnership agreement may be written or oral. It is better that the agreement is in written form to settle the disputes. 2. Audit If partnership is not registered, it has no legal entity. So there is no restriction for the audit of accounts. 3. Agent In partnership every partner acts as an agent of another partner. 4. Business Partnership is a business unit and a business is always for profit. It must not include club or charitable trusts, set up for welfare. 5. Cooperation In partnership mutual cooperation and mutual confidence is an important factor. Partnership cannot take place with cooperation. 6. Dissolution Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or declared bankrupt. 7. Legal Entity If partnership is not registered, it has no legal entity. Moreover, partnership has no separate legal entity from its members and vice versa. 8. Management In partnership all the partners can take part or participate in the activities of business management. Sometimes, only a few persons are allowed to manage the business affairs. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU 9. Number of Partners In partnership there should be at least two partners. But in ordinary business the partners must not exceed 20 and in case of banking business it should not exceed 10. 10. Object Only that business is considered as partnership, which is established to earn profit. 11. Partnership Act In Pakistan, all partnership businesses are running under Partnership Act, 1932. 12. Payment of Tax In partnership, every partner pays the tax on his share of profit, personally or individually. 13. Profit and Loss Distribution The distribution of profit and loss among the partners is done according to their agreement. 14. Registration Many problems are created in case of unregistered firm. So, to avoid these problems partnership firm must be registered. 15. Relationship Partnership business can be carried on by all partners or any of them can do the business for all. 16. Share in Capital According to the agreement, every partner contributes his share of capital. Some partners provide only skills and ability to become a partner of business and earn profit. 17. Transfer of Rights In partnership no partner can transfer his shares or rights to another person, without the consent of all partners. 18. Unlimited Liability In partnership the liability of each partner is unlimited. In case of loss, the private property of the partners is also used up to pay the business debts. © Copyright Virtual University of Pakistan Introduction to Business –MGT 211 VU ADVANTAGES OF PARTNERSHIP Following are the advantages of partnership: 1. Simplicity in Formation This type of business of organization can be formed easily without any complex legal formalities. Two or more persons can start the business at any time. Its registration is also very easy. 2. Simplicity in Dissolution Partnership Business can be d