I PUC Business Studies 2024 PDF

BUSINESS STUDIES PART I - FOUNDATIONS OF BUSINESS CHAPTER – 1 BUSINESS, TRADE AND COMMERCE INTRODUCTION: All human beings, wherever they may be, require different types of goods and...

BUSINESS STUDIES PART I - FOUNDATIONS OF BUSINESS CHAPTER – 1 BUSINESS, TRADE AND COMMERCE INTRODUCTION: All human beings, wherever they may be, require different types of goods and services to satisfy their needs. The necessity of supplying goods and services has led to certain activities being undertaken by people to produce and sell what is needed by others. Business is a major economic activity in all modern societies concerned as it is concerned with the production and sale of goods and services required by people. The purpose behind most business activities is to earn money by meeting people’s demands for goods and services. The chapter is divided into two sections. Section I deals with the History of trade and commerce in ancient India. Section II deals with the concept, nature and purpose of business. SECTION I: HISTORY OF TRADE AND COMMERCE The economic and commercial evolution of any land depends upon its physical environment. This stands true for the Indian subcontinent as a whole which has Himalayas in the North bordered by water in the South. A network of roads merging into the Silk Route helped in establishing commercial and political contacts with adjoining foreign kingdoms and empires of Asia, in particular, and the world, in general. The maritime routes linked the east and the west by sea and were used for the trade of spices and known as ‘spice route’. Due to the flow of wealth through these routes, the chief kingdoms, important trade centers and the industrial belt flourished, which in turn further facilitated the progress of domestic and international trade in ancient India. Archaeological evidences have shown that trade and commerce was the mainstay of the economy of ancient India carried out by water and land. Commercial cities like Harappa and Mohenjodaro were founded in the third millennium B.C. The civilisation had established commercial connections with Mesopotamia and traded in gold, silver, copper, coloured gemstones, beads, pearls, sea shells, terracotta pots, etc. The period was marked by substantial commercial activities and urban development. Political economy and military security during ancient times united most of the Indian subcontinent and trade regulations were carefully planned. There were diverse types of coins and weighing practices which used to vary from place to place with the help of money changers and by resorting to certain commonly accepted weights and measures. Trading and commerce had started from the pre-historic times when the people would trade through the system of barter. They were exchanging goods and services with each other without any form of money being used. Thereafter came the system of trading through gold and silver coins. Barter: In trade, barter is a system of exchange where participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. 1 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Indigenous Banking System: As economic life progressed, metals began to supplement other commodities as money because of its durability and divisibility. As money served as a medium of exchange, the introduction of exchange, the introduction of metallic money and its use accelerated economic activities. 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, and money became an instrument for supplying the manufacturers with a means of producing more goods. Indigenous bankers constitute the ancient banking system of India.... According to the Indian Central Banking Enquiry Committee, an indigenous banker or bank is defined as an individual or private firm which receives deposits, deals in hundi or engages itself in lending money. Hundi/Hundee: It is a financial instrument that developed in Medieval India for the use in trade and credit transactions. Hundis are used as a form of remittance instrument to transfer money from place to place, as a form of credit instrument to borrow money and as a bill of exchange in trade transactions. Rise of Intermediaries: Intermediaries played a prominent role in the promotion of trade. They provided considerable financial security to the manufacturers by assuming responsibilities for the risks involved, especially in foreign trade. It comprised commission agents, brokers and distributors both for wholesale and retail goods. An expanding trade brought in huge amounts of silver bullion into Asia and a large share of that bullion gravitated towards India. The institution of Jagat Seths also developed and exercised great influence during Mugul period and the days of East Indian 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 Jagat Seths: Jagat seths were an Indian Jain banking family. The family sometimes referred to as the House of Jagath Seth. TRANSPORT: Transport by land and water was popular in the ancient times. The northern roadways route is believed to have stretched originally from Bengal to Taxila. There were also trade route in south spreading east and west. Maritime trade was another important branch of global trade network. Columbus in the closing years of 15th century and also brought Vasco da Gama to the shores of Malabar. Trading Communities Strengthened: In different parts of the country’ different communities dominated trade. Punjabi and Multani merchants handled business in northern region. Bhats managed the trade in the states of Gujarat and Rajasthan. Chatt or Chettiars were important traders from the South. 2 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Merchant Corporations: The merchant communities also derived power and prestige from guilds which were autonomous corporation formed to protect the interest of traders. These corporations organized on formal basis framed their own rule 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 collector and settled the market toll on behalf of its fellow merchants at a fixed sum of money. Guild is - an association of people with similar interest (merchants or craftsmen). Major Trade Centres: There were all kinds of towns—port towns, manufacturing towns, mercantile towns, the sacred centres, and pilgrimage towns. Their existence is an index of prosperity of merchant communities and professional classes. The following were the leading trade centres in ancient India: 1. Pataliputra: Known as Patna today. It was not only a commercial town, but also a major centre for export of stones. 2. Peshawar: It was an important exporting centre for wool and for the import of horses. It had a huge share in commercial transactions between India, China and Rome in the first century A.D. 3. Taxila: It served as 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. 3 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 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: Exports consisted of spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products—hides, skin, furs, horns, tortoise shells, pearls, sapphires, quartz, crystal, lapis, lazuli, granites, turquoise and copper etc. Imports included horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin, copper, lead, rubies, coral, glass, amber, etc. SECTION II: NATURE AND CONCEPT OF BUSINESS In every society, people undertake various activities to satisfy their needs. These activities may be broadly classified into two groups — economic and non-economic. Economic activities are those by which we can earn our livelihood, whereas, non-economic activities are performed out of love, sympathy, sentiment, patriotism, etc. Economic activities may be further divided into three categories, namely business, profession and employment. CONCEPT OF BUSINESS: Meaning: The term business is derived from the word ‘busy’. Thus, business means being busy. Business refers to an occupation in which people regularly engage in activities related to purchase, production and/or sale of goods and services with a view to earning profits. Definition: Business may be defined as an economic activity involving the production and sale of goods and services undertaken with a motive of earning profit by satisfying human needs in society. CHARACTERISTICS OF BUSINESS ACTIVITIES: 1. An economic activity: Business in considered as an economic activity because it is undertaken with the objective of earning money. 2. Production or procurement of goods and services: Business includes all the activities concerned with the production or procurement of goods and services for sales. Services include Transportation, Banking, Insurance etc. Goods may consist of consumable items. 3. Sale or exchange of goods and services: There should be sale or exchange of goods and services between the seller and the buyer. 4. Dealings in goods and services on a regular basis: There should be regularity of dealings or exchange of goods and services. One single transaction of sale or purchase does not constitute business. 4 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 5. Profit Earning: The main purpose of business is to earn profit. A business cannot survive without making profits. 6. Uncertainty of return: Every business invests money with the objective of earning profit but the amount of profit earned may vary. Also there is always a possibility of losses. 7. Element of risk: All business activities carry some elements of risk because future is uncertain and business has no control over several factors like, strikes, fire, theft, and change in consumer taste etc. COMPARISON OF BUSINESS, PROFESSION AND EMPLOYMENT: As it has been mentioned earlier, economic activities may be divided into three major categories viz., Business, Profession and Employment. The difference between these three terms is given in the following table. Basis Business Profession Employment 1. Mode of Entrepreneur’s decision Membership of a Appointment letter and establishment and other legal formalities, professional body and service agreement if necessary certificate of practice 2. Nature of Provision of goods and Rendering of personalised, Performing work as per work services to the public expert services service contract or rules of service 3. Qualification No minimum qualification Qualifications, expertise Qualification and training as is necessary and training in specific prescribed by the employer field as prescribed by the professional body is a must 4. Reward or Profit earned Professional fee Salary or wages return 5. Capital Capital investment required Limited capital needed for No capital required investment as per size and nature of establishment business 6. Risk Profits are uncertain and Fee is generally regular Fixed and regular pay; no or irregular; risk is present and certain; some risk little risk 7. Transfer of Transfer possible with Not possible Not possible interest some formalities 8. Code of No code of conduct is Professional code of Norms of behaviour laid conduct prescribed conduct is to be followed down by the employer are to be followed 9. Example Shop, factory Legal, medical profession, Jobs in banks, insurance chartered accountancy companies, government departments 5 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES CLASSIFICATION OF BUSINESS ACTIVITIES: Various business activities may be classified into two broad categories — Industry and Commerce. I. Industry: Industry refers to economic activities, which are connected with conversion of resources into useful goods. Generally, the term industry is used for activities in which mechanical appliances and technical skills are involved. Industries may be divided into three broad categories namely primary, secondary and tertiary. (i) Primary industries: These include all those activities which are concerned with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc. These are divided as follows. (a) Extractive industries: These industries extract or draw products from natural sources. Extractive industries supply some basic raw materials that are mostly products of geographical or natural environment. Products of these industries are usually transformed into many other useful goods by manufacturing industries. Important extractive industries include farming, mining, lumbering, hunting and fishing operations. 6 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES (b) Genetic industries: These industries are engaged in breeding plants and animals for their use in further reproduction. Seeds and nursery companies are typical examples of genetic industries. In additional, activities of cattle breeding farms, poultry farms, and fish hatchery come under genetic industries. (ii) Secondary industries: These are concerned with using materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, mining of iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry. Secondary industries may be further divided as follows: (a) Manufacturing industries: These industries are engaged in producing goods through processing of raw materials and, thus, creating form utilities. They bring out diverse finished products, that we consume, or use through the conversion of raw materials or partly finished materials in their manufacturing operations. Manufacturing industries may be further divided into four categories on the basis of method of operation for production.  Analytical industry: which analyses and separates different elements from the same materials, as in the case of oil refinery.  Synthetical industry: which combines various ingredients into a new product, as in the case of cement.  Processing industry: which involves successive stages for manufacturing finished products, as in the case of sugar and paper.  Assembling industry: which assembles different component parts to make a new product, as in the case of television, car, computer, etc. (b) Construction industries: These industries are involved in the construction of buildings, dams, bridges, roads as well as tunnels and canals. Engineering and architectural skills are an important part in construction industries. (iii) Tertiary industries: These are concerned with providing support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities. II. Commerce: Commerce refers to all those activities which are concerned with the transfer of goods and services from the producers to the consumers. It involves all those activities which are necessary for maintaining a free flow of goods and services. Thus, all activities involving the removal of hindrances in the process of exchange are included in commerce. The hindrances may be in respect of persons, place, time, risk, finance, etc. 1. Removing the hindrance of person by marking goods available to consumers from the producers. through trade. 2. Transportation removes hindrance of place by moving goods from the place of production to the markets for sale. 7 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 3. Storage and warehousing activities remove the hindrance of time by facilitating holding of stock of goods to be sold as and when required. 4. Insurance removes hindrance of risk of loss or damage of goods due to theft, fire, accidents etc. 5. Banking removes hindrance of finance-by providing funds to a businessman for acquiring assets, purchasing raw materials and meeting other expenses. 6. Advertising removes hindrance of information-by informing consumers about the goods and services available in the market. Commerce includes two types of activities, viz., (i) Trade and (ii) Auxiliaries to Trade. (i). Trade: Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods. It helps in making the goods produced available to the consumers or users. Trade may be classified into two broad categories: (a). Internal Trade: Internal, domestic or home trade is concerned with the buying and selling of goods and services within the geographical boundaries of a country. This may further be divided into wholesale and retail trade.  Wholesale Trade: Refers to buying and selling of goods in large quantities. A wholesaler buys goods in large quantities from the producers and sell them to other dealers. He serves as a connecting link between the producer and retailer.  Retail Trade: Refers to buying of goods and services in relatively small quantities and selling them to the ultimate consumers. (b). External or foreign trade: It consists of the exchange of goods and services between persons or organisations operating in two or more countries.  Import Trade: If the goods are purchased from another country, it is called import trade.  Export Trade: If the goods are sold to other countries, it is known as export trade.  Entrepot Trade: When goods are imported for the purpose of export to other countries, is known as entrepot trade. (ii). Auxiliaries to Trade: Activities which are meant for assisting trade are known as auxiliaries to trade. These activities are generally referred to as services because these are in the nature of facilitating the activities relating to industry and trade. Auxiliaries to trade are briefly discussed below: (a). Transport and Communication: Production of goods generally takes place in particular locations. The obstacle of place is removed by transport through road, rail or coastal shipping. Transport facilitates movement of raw material, to the place of production and the finished products from factories to the place of consumption. Along with transport facility, there is also a need for communication facilities so that producers, traders and consumers may exchange information with one another. Thus, postal services and telephone facilities may also be regarded as auxiliaries to business activities. 8 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES (b) Banking and Finance: Business activities cannot be undertaken unless funds are available for acquiring assets, purchasing raw materials and meeting other expenses. Necessary funds can be obtained by businessmen from a bank. Thus, banking helps business activities to overcome the problem of finance. Commercial banks, generally lend money by providing overdraft and cash credit facilities, loans and advances. Banks also undertake collection of cheques, remittance of funds to different places, and discounting of bills on behalf of traders. In foreign trade, commercial banks help exporters in collecting money from importers. Commercial banks also help promoters of companies to raise capital from the public. (c) Insurance: Business involves various types of risks. Factory building, machinery, furniture, etc., must be protected against fire, theft and other risks. Material and goods help in stock or in transit are subject to the risk of loss or damage. Employees are also required to be protected against the risks of accident and occupational hazards. Insurance provides protection in all such cases. On payment of a nominal premium, the amount of loss or damage and compensation for injury, if any, can be recovered from the insurance company. (d) Warehousing: Usually, goods are not sold or consumed immediately after production. They are held in stock to make them available as and when required. Special arrangement must be made for the storage of goods to prevent loss or damage. Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed. Prices are, thereby, maintained at a reasonable level through continuous supply of goods. (e) Advertising: Advertising is one of the most important methods of promoting the sale of products, particularly, consumer goods, like electronic and automobile goods, soaps, detergents, etc. Most of these goods are manufactured and supplied in the market by number firms — big or small. It is practically impossible for producers and traders to contact each and every customer. Thus, for promoting sales, information about the goods and services available, their features, price, etc., must reach potential buyers. Also, there is a need to persuade potential buyers about the uses, quality, prices, competitive information about the goods and services etc. Advertising helps in providing information about available goods and services and inducing customers to buy particular items. OBJECTIVES OF BUSINESS: An objective is the starting point of business. Every business is directed to the achievement of certain objectives. Objectives of business refer to all that the business people want to get in return for what they do. It is generally believed that business activity is carried out only for profit. Business persons themselves proclaim that their primary objective is produce or distribute goods or services for profit. Every business is said to be an attempt on the part of business people to get more than what has been spent or invested, or in other words, to earn profit which is the excess of revenue over cost. However, it is being increasingly realised nowadays that business enterprises are part of the society and need to fulfill several objectives, including social responsibility, to survive and prosper in the long run. Profit is found to be a leading objective but not the only one. Multiple Objectives of Business: Objectives are needed in every area that influences the survival and prosperity of business. Since a business has to balance a number of needs and goals, it requires multiple objectives. 9 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 1. Market standing: Market standing refers to the position of an enterprise in relation to its competitors. A business enterprise must aim at standing on stronger footing in terms of offering competitive products to its customers and serving them to their satisfaction. 2. Innovation: Innovation is the introduction of new ideas or methods in the way something is done or made. There are two kinds of innovation in every business i.e., (a) Innovation in product or services; and (b) innovation in various skills and activities needed to supply products and services. No business enterprise can flourish in a competitive world without innovation. Therefore, innovation becomes an important objective. 3. Productivity: Productivity is ascertained by comparing the value of output with the value of inputs. It is used as a measure of efficiency. In order to ensure continuous survival and progress, every enterprise must aim at greater productivity through the best use of available resources. 4. Physical and financial resources: Any business requires physical resources, like plants, machines, offices, etc., and financial resources, i.e., funds to be able to produce and supply goods and services to its customers. The business enterprise must aim at acquiring these resources according to their requirements and use them efficiently. 5. Earning profits: One of the objectives of business is to earn profits on the capital employed. Profitability refers to profit in relation to capital investment. Every business must earn a reasonable profit which is so important for its survival and growth. 6. Manager performance and development: Business enterprises need managers to conduct and coordinate business activity. Various programmes for motivating managers need to be implemented. Manager performance and development, therefore, is an important objective. The enterprises must actively work for this purpose. 7. Worker performance and attitude: Workers’ performance and attitudes determine their contribution towards productivity and profitability of any enterprise. Therefore, every enterprise must aim at improving its workers’ performance. It should also try to ensure a positive attitude on the part of workers. 8. Social responsibility: Social responsibility refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner. Thus, a business enterprise must have multiple objectives to satisfy different individuals and groups. This is essential for its own survival and prosperity. ROLE OF PROFIT IN A BUSINESS: Business is established for the purpose of earning profit. Profit plays a very important role in business. The role of profit in business can be brought out by the following facts :- 1. For Long Survival: Profit alone help a business to continue to exist for a long period. In the absence of profit the establishment of a particular business loses its justification. 2. For growth and Expansion: All businessmen want their business to expand and to grow. For development of business additional capital is needed. Retained earnings is a very good source of capital. 3. For increasing efficiency: Profit is that power which motivates both the parties – owner and workers to do their best. As they know that in case of good profits they will get good compensation for their efforts so it finally helps in increasing the efficiency of business. 10 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 4. For Building prestige and Recognition: For gaining prestige in the Society, Business had to satisfy all the parties concerned. It has to supply good quality product/service at reasonable price to customers, adequate remuneration to employees, to pay sufficient dividend to the shareholders etc., and all these are possible only if the business is earning good profit. BUSINESS RISKS: Meaning: The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Types of Business Risks: 1. Speculative Risks (Gain/Loss): 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. 2. Pure Risks (Loss/No Loss): Pure risks involve only the possibility of loss or no loss. The chance of fire, theft or strike are examples of pure risks. Their occurrence may result in loss, whereas, non-occurrence may explain absence of loss, instead of gain. Nature of Business Risks: 1. Business risks arise due to uncertainties: Uncertainty refers to the lack of knowledge about what is going to happen in future. It may be due to natural calamities, change in demand and prices, strikes, changes in government policies, improvements in technology etc. 2. Risk is an essential part of every business: Every business has some risk. No business can avoid risk, although the amount of risk may vary from business to business. Risk can be minimised, but cannot be eliminated. 3. Degree of risk depends mainly upon the nature and size of business: Nature of business (i.e., type of goods and services produced and sold) and size of business (i.e., volume of production and sale) are the main factors which determine the amount of risk in a business. For example, a business dealing in fashionable items has a high degree of risk. Similarly, a large-scale business generally has a higher risk than what a small scale has. 4. Profit is the reward for risk taking: ‘No risk, no gain’ is an age old principle which applies to all types of business. Greater the risk involved in a business, higher is the chance of profit. An entrepreneur undertakes risks under the expectation of higher profit. Profit is thus the reward for risk taking. Causes of Business Risks: Business risks arise due to a variety of causes, which are classified as follows: 1. Natural causes: Human beings have little control over natural calamities, like flood, earthquake, lightning, heavy rains, famine, etc. property and income in business. 11 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 2. Human causes: Human causes include such unexpected events, like dishonesty, carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc. 3. Economic causes: These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems, like rise in interest rate for borrowing, levy of higher taxes, etc., also come under these type of causes as they result in higher unexpected cost of operation or business. 4. Other causes: These are unforeseen events, like political disturbances, mechanical failures, such as the bursting of boiler, fluctuations in exchange rates, etc., which lead to the possibility of business risks. STARTING A BUSINESS — BASIC FACTORS: Starting a business enterprise is similar to any other human effort in which resources are employed to achieve certain objectives. Successful results in business depend largely upon the ability of the entrepreneurs or the starters of a new business to anticipate problems and solve them with minimum cost. Some of the basic factors, which must be considered by anybody who is to start the business are as follows. 1. Selection of line business: The first thing to be decided by an entrepreneur is the nature and type of business. He/she will obviously like to enter that branch of industry and commerce, which has the possibility of greater amount of profits. The decision will be influenced by the customer requirements in the market and also the kind of technical knowledge and interest the entrepreneur has for producing a particular product. 2. Size of the firm: Size of the firm or scale of its operation is another important decision to be taken at the start of the business. Some factors favour a large size, whereas, others tend to restrict the scale of operation. If the entrepreneur is confident that the demand for the proposed product is likely to be good over time and he/she can arrange the necessary capital for business, he/she will start the operation at a large scale. If the market conditions are uncertain and risks are high, a small size business would be better choice. 3. Choice of form of ownership: With respect to ownership, the business organisation may take place in the form of a sole proprietorship, partnership, or a joint stock company. Each form has its own merits and demerits. The choice of the suitable form of ownership will depend on such factors as the line of business, capital requirements, liability of owners, division of profit, legal formalities, continuity of business, transferability of interest and so on. 4. Location of business enterprise: An important factor to be considered while starting the business is the place where the enterprise will be located. Any mistake in this regard can result in high cost of production, inconvenience in getting right kind of production inputs or serving the customers in the best possible way. Availability of raw materials and labour; power supply and services, like banking, transportation, communication, warehousing, etc., are important factors while making a choice of location. 5. Financing the proposition: Financing is concerned with providing the necessary capital for starting, as well as, for continuing the proposed business. Capital is required for investment in fixed assets, like land, building, machinery and equipment and in current assets, like raw materials, debts, stock of finished goods, etc. Capital is also required for meeting day-to-day expenses. Proper financial planning must be done to determine (a) the requirement of capital, (b) source from where the capital will be raised and (c) the best ways of utilising the capital in the firm. 12 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 6. Physical facilities: Availability of physical facilities, including machines and equipment, building and supportive services is an important factor to be considered at the start of the business. The decision relating to this factor will depend on the nature and size of business, availability of funds and the process of production. 7. Plant layout: Once the requirement of physical facilities has been determined, the entrepreneur should draw a layout plan showing the arrangement of these facilities. Layout means the physical arrangement of machines and equipment needed to manufacture a product. 8. Competent and committed work force: Every enterprise needs competent and committed workforce to perform various activities so that physical and financial resources are converted into desired outputs. Since no individual entrepreneur can do everything himself, he/she must identify the requirement of skilled and unskilled workers and managerial staff. Plans should also be made about how the employees will be trained and motivated to give their best performance. 9. Tax planning: Tax planning has become necessary these days because there are a number of tax laws in the country and they influence almost every aspect of the functioning of modern business. The founder of the business has to consider in advance the tax liability under various tax laws and its impact on business decisions. 10. Launching the enterprise: After the decisions relating to the above mentioned factors have been taken, the entrepreneur can go ahead with actual launching of the enterprise which would mean mobilising various resources, fulfilling necessary legal formalities, starting the production process and initiating the sales promotion campaign. 13 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES CHAPTER – 2 FORMS OF BUSINESS ORGANISATIONS Various forms of business organizations: I. Sole Proprietorship II. Joint Hindu Family business III. Partnership Firm IV. Co-operative Societies V. Joint Stock Companies I. Sole Proprietorship: Meaning of Sole Proprietorship: It refers to a form of business organization which is owned, managed and controlled by an individual who receives all profits and bears all risks. Definition of Sole Proprietorship: According to L.H.Haney, “The individual proprietorship is the form of business organization at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure”. Features or Characteristics of Sole Proprietorship: 1. Formation and Closure: There is no separate law that governs sole proprietorship. There are less legal formalities to start a business. In some cases the license is required. 2. Liability: Sole proprietors have unlimited liability. It means that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. 3. Sole risk bearer and profit receiver: If the business is successful, the proprietor enjoys all the benefits. Proprietor receives all the profit of business which becomes a direct reward for his risk bearing. 4. Control: The right to run the business and make all decisions lies absolutely with the sole proprietor. 5. No separate entity: in the eyes of the law, no distinction is made between the sole trader and his business, as business does not have any identity separate from the owner. The owner is responsible for all the activities of the business. 6. Lack of business continuity: Death, insolvency, insanity, bankruptcy are the reasons due to which the proprietor may not continue the business and these even cause closure of the business. 14 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Merits or Advantages of Sole Proprietorship: 1. Quick decision making: A sole proprietor enjoys considerable degree of freedom while making business decisions. He need not to wait for anybody for making decisions. 2. Confidentiality of information: Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. 3. Direct incentive: The need to share the benefit does not arise as there is a 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 instills in the individual a sense of accomplishment. 5. Easy formation and closure of business: It is an important merit of sole proprietorship is the possibility of starting the business with minimum legal formality and it is easy to close the business as per wish of the owner. Demerits or Limitations of Sole Proprietorship: 1. Limited Resources: Resources of a sole proprietor are limited to their personal savings and borrowings from others because financial institutions may not be ready to lend money to a sole proprietor. Due to limited resources expansion of business activities becomes difficult. 2. Limited life of a business concern: In the eyes of law the proprietorship and owner are considered one and the same. Death, insolvency or insanity of a proprietor affects the business and can lead to its closure. 3. Unlimited liability: As the private assets of the sole trader are also attached to the business, it induces a fear of loss of property in him and discourages the expansion of business. If the business fails to clear all the debts the creditors can recover their dues from the personal assets of the proprietor along with business assets. 4. Limited managerial skill: As the sole trader has to look into each and every aspect of business, the managerial skill will be limited. This is because, such an individual may not be an expert in all matters and sometimes his decisions may not be well balanced. II. Joint Hindu Family business: JHFB is governed by Hindu law. The business is controlled by the head of the family who is the eldest member and is called ‘Karta’. All members have equal ownership right from the property of an ancestor and they are known as ‘Co-parceners’. Meaning: A Joint Hindu Family Business is a form of business organization, wherein the business is owned and carried on by the members of the Hindu undivided family. 15 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Features or Characteristics of Joint Hindu Family business: 1. Formation: For a Joint Hindu Family business, there should be at least 2 members in the family and ancestral property to be inherited by them. The business does not require any agreement as membership is by birth. It is governed by the Hindu Succession Act, 1956. 2. Liability: The liability of all members except the Karta is limited to their share of the property of the business. The Karta, however, has unlimited liability. 3. Control: The control of the family business lies with the Karta. He takes all the decisions and is authorized to manage the business. His decisions are to be followed by the other members. 4. Continuity: The business continues even after the death of the Karta as the next eldest member takes up the position of Karta, leaving the business stable. The business can be terminated with the mutual consent of the members. 5. Minor members: The inclusion of an individual into the business occurs due to birth in a Hindu undivided family. Therefore, minors can also be the members of the business. Merits or Advantages of Joint Hindu Family business: 1. Effective control: The Karta has absolute decision making power. This avoids conflicts among members and delay in decision making. 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. Therefore, operations of the business are not terminated and continuity of the business is not affected. 3. Limited liability of members: The liability of all the co-parceners except the Karta is limited to their share in the business and this leads to limited risk. 4. Increased loyalty and co-operation: As the business is run by the members of a family, there is greater sense of loyalty towards one other. Pride in the growth of business is linked to the achievement of the family. This helps in securing better co-operation from all the members. Demerits or Limitations or Disadvantages of Joint Hindu family business: 1. Limited resources: The Joint Hindu family business faces the problem of limited capital because it depends mainly on ancestral property. This limits the scope for expansion of business. 2. Unlimited liability of Karta: The Karta is burdened not only with the responsibility of decision making and management of business but also suffers from the unlimited liability. His personal property can be used to repay business debts. 3. Dominance of Karta: As Karta individually manages and takes decision which may not be acceptable to other members always. This may cause conflict among them. 16 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 4. Limited managerial skills: since the Karta cannot be an expert in all the areas of management, the business may suffer as a result of his unwise decisions. III. Partnership Firm: Meaning of Partnership firm: It is a type of business organization where there will be two or more persons to carry on the business. Definition of Partnership: Indian Partnership Act, 1932 defines Partnership as “the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all”. Features or Characteristics of Partnership Firm: 1. Formation: The partnership form of business is governed by the Indian Partnership Act of 1932. Partnership comes into existence through a legal agreement which contains terms and conditions governing the relationship among partners. 2. Liability: The partners of the firm have unlimited liability. Personal assets may be used for repaying debts in case the assets of the business are insufficient. 3. Risk bearing: The partners bear the risk involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. 4. Decision making and control: Decisions are generally taken with mutual consent. Therefore, the activities of business are managed and controlled through the joint efforts of all the partners. 5. Continuity: Partnership is characterized by lack of continuity of business because the death, retirement, insanity or insolvency of any partner can bring an end to the business. However, the remaining partners may continue business with new agreement. 6. Number of Partners: The minimum number of partners required to start a partnership firm is 2. According to Section 464 of the Companies act of 2013, maximum number of partners can be 100, but as per the rules of 2014, at present the maximum number of partners is 50. 6. Mutual agency: The definition of partnership highlights the fact that it is a business carried on by all or any one of the partners acting for all with the mutual understanding. Every partner is an agent and a principal. Merits or Advantages of Partnership Firm: 1. Easy formation and closure: The business can be formed easily with legal agreement between the partners. There is no compulsion with respect to registration of the firm. Closure of the firm is also an easy task. 17 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 2. Balanced decision making: The partners can take care of different functions (activities) as per their areas of expertise. As the decisions are taken by two or more persons collectively, it is likely to be more balanced. 3. More funds: As the partnership is formed by two or more persons. This makes it possible to raise larger amount of funds as compared to a Sole Proprietorship. Sufficient capital enables the business to expand its operation. 4. Sharing of risks: The risks involved in the business are shared by all the partners. This reduces anxiety, burden and stress on individual partners. 5. Secrecy: A partnership is not legally required to publish its final accounts and submit its reports. Therefore, this ensures confidentiality of information. Demerits or Limitations or Disadvantages of Partnership: 1. Limited resources: As there is restriction on the total number of partners, the contribution in terms of capital will not be sufficient to support large scale operations. Because of this reason partnership business cannot be expanded beyond a certain size. 2. Possibility of conflicts: As the business is run by a group of persons where in decision making authority is shared. Difference in opinion on some issues may lead to dispute between partners. 3. Lack of continuity: Partnership lacks continuity of existence, as the death, retirement, insolvency or lunacy (insanity) of a partner may lead to dissolution of partnership firm, but if the remaining partners want to continue business they can enter into a fresh or new agreement. 4. Lack of public confidence: As partnership firm is not legally required to publish its financial reports or make other related information public. Hence, public may not have full confidence in business. TYPES OF PARTNERS: 1. Active or working partners 2. Sleeping / Dormant partners 3. Secret partner 4. Nominal partner 5. Partner by Estoppel 6. Partner by Holding out 1. Active Partner: An active partner is one who contributes capital, take an active part (participates) in business activities, shares its profits or losses and is liable to an unlimited extent. These partners take an active role in carrying out business activities on behalf of other partners. 18 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 2. Sleeping or Dormant Partner: A partner who contributes capital but do not take active part in the management of business, shares its profits or losses and has unlimited liability. 3. Secret partner: A secret partner is one whose association with the firm or business is unknown to the general public other than this feature in all other aspects he/she is like the rest of the partners. They contribute capital, involve in management, share profits or losses and has unlimited liability. 4. Nominal partner: Nominal partners are those who allow the use of his or her name by the firm. These partners will not contribute any capital, not take active role in the management, will not get any share in profits or losses of the business, but are liable for the repayment of the debts of the firm. 5. Partner by Estoppel: A person is considered a partner by estoppel if, through his or her own initiative, conduct or behaviour, he or she gives an impression to others that he or she is a partner of the firm. These people are held responsible for the debts of the firm. They will not contribute any capital and does not take part in the management and does not share profits or losses of the business. 6. Partner by Holding out: A partner by holding out is a person who actually is not a partner but knowingly allows himself or herself to be represented as a partner in a firm. Such a person becomes liable to outside creditors for repayment of any debts of the firm on the basis of such representation. Does not contribute capital, will not participate in the management and does not share profits or losses of the business. To avoid debt obligation such a person will declare that they are not related to the business. Types of Partnerships or Partnership Firms: Partnership firms can be classified on the basis of two factors, they are: 19 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Types of Partnership / classification of Partnership On the basis of duration On the basis of liability General partnership Partnership at will Particular Partnership Limited partnership On the basis of duration: 1. Partnership at Will: This type of partnership exists at the will of partners. The business can be continued as long as the partners’ wants to and the business can be closed or partnership can be terminated with an agreement between the partners. Any partner can terminate the partnership as per their will by giving a notice to other partners. 2. Particular Partnership: If the partnership is formed for the purpose of achieving a particular objective or purpose or for the completion of particular project or to be carried out for a specified time period is called particular partnership. It dissolves (comes to an end) automatically when the purpose is achieved or duration expires. On the basis of Liability: 1. General partnership: In general partnership, the liability of partners is unlimited and joined. The partners enjoy the right to participate in the management and their suggestions are considered. Registration of the firm is optional. 2. Limited partnership: In limited partnership the liability of atleast one partner is unlimited whereas the rest may have limited liability. The partners whose liability is limited they do not enjoy the right to participate in management and their suggestions may not be accepted in full. Registration of Limited Partnership Firm is compulsory. 20 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES PARTNERSHIP DEED: When the agreement is in written, duly stamped and signed by the partners, it is called the “Partnership Deed” or “Articles of Partnership”. Which specifies the terms and conditions that govern the partnership. Contents of Partnership Deed: 1. Name of the firm 2. Nature and location of business 3. Duration of business 4. Investment or capital contributed by each partner 5. Distribution of profits and losses 6. Duties and obligations of the partners 7. Salaries and drawings of the partners 8. Terms related to admission, retirement and death of a partner. 9. Interest on capital and drawings 10. Procedure for dissolution of the firm 11. Preparation of books of accounts and their auditing 12. Method of solving disputes. 21 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Registration: Registration of partnership firm means the entering of the firm’s name along with relevant prescribed particulars in the register of firms kept with the registrar of firms. It provides a proof (legal) of the existence of a partnership firm. Problems or consequences of non-registration of firms: 1. A partner of an unregistered firm cannot file a suit or case against the firm or other partners. 2. The firm cannot file a suit or case against third parties, and 3. The firm cannot file a case against the partners. Procedure for getting a firm registered is as follows: According to the Indian Partnership Act 1932, the partners may get the firm Registered with the Registrar of firms of the State in which the firm is situated. The registration can be done at the time of formation or at any point of time during its existence. If the partners’ wants to register their firm they have to follow the following procedure:  Submission of application in the prescribed form to the Registrar of firms: The application should contain the following particulars: i. Name of the firm ii. Location of the firm iii. Names of other places [Branches] where the firm carries business. iv. The date when each partner joined the firm. v. Names and addresses of the partners vi. Duration of partnership vii. Signature of all the partners.  Deposit of required fee with its registrar of firms. The Registrar after approval will make an entry in the Register of firm and will issue the Certificate of Registration. IV. Cooperative Society: Cooperative: It means working together and with others for a common purpose. Meaning of Cooperative Society: It is a voluntary association of persons, who join together with the motive of welfare of the members. Definition of Cooperative Society: According to Indian Co-operative Societies Act of 1912, Co-operative organization is “a society which has its objectives for the promotion of economic interests of its members in accordance with co-operative principles. Features of Cooperative Society: 1. Voluntary membership: A person is free to join a society and can also leave anytime as per his/her desire. The membership is voluntary. Membership is open to all, irrespective of their religion, caste and gender. 2. Legal status: Registration of a co-operative society is compulsory. This gives a separate identity to the society which is distinct from its member. The society can enter into contracts 22 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES and hold property in its name and has the right to file case against others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members. 3. Limited liability: The liability of the members is limited to the extent of amount contributed by them as capital. This defines the maximum risk that a member can be asked to bear. 4. Control: The power to take decisions is in the hands of an elected managing committee. The right to vote gives the member a chance to choose the member who can become part of managing committee and this lends the co-operative society a democratic character. 5. Service motive: The purpose of forming co-operative society is to help and take care of welfare of members mutually. Hence, here the main motive is service, if there is any surplus it is distributed among the members as per the bye –laws of the society. Merits or Advantages of Cooperative Society: 1. Equality in voting status: The principle of “one man one vote” governs the co-operative society irrespective of the amount of capital contribution; each member is given equal voting rights. 2. Limited liability: The liability of members of a co-operative society is limited to the extent of their capital contribution. The personal assets of the members are safe from being utilized for repayment of business debts. 3. Stable existence: Death, insolvency, lunacy of the members do not affect the continuity of a co-operative society. 4. Economy in operations: the members generally offer services to the society. The main focus is to eliminate the middlemen this helps in reducing cost. The customers or producers are themselves the members of the society and the risk of bad debts is less. 5. Support from Government: The society inculcates the idea of democracy and hence, finds support from the government in the form of low taxes, subsidies and low rate of interest on loans. 6. Easy formation: The co-operative society can be started with a minimum of 10 members. The registration procedure is simple and involves few legal formalities. It is governed by the provision of Co-operative Societies Act-1912. Demerits or Limitations of Cooperative Society: 1. Limited resources: Resources of a co-operative society consist of capital contributed by members. The low rate of dividend offered on investment will not attract members to invest more capital. 2. Inefficiency in management: Co-operative societies are unable to attract and employ expert managers because of their inability to pay them high salaries. The members are generally not professionally equipped to handle the managerial functions effectively. 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 co-operative society. 4. Government control: In return of privileges offered by the Government, Co-operative societies have to obey the rules and regulations related to auditing of accounts, submission of accounts etc. As the Government interfere in the functioning of co-operative organization through control by the State Cooperative Departments also negatively affects its freedom of operation. 5. Differences of opinion: As the number of members are more the chances of differences of opinion are quite high, because each member will have different view point which may lead 23 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES to difficulties in decision making. Personal interest may dominate the welfare motive and the benefit of other member may not be considered if personal benefit is given preference by certain members. Types of co-operative societies: Based on the nature of operations we have the following types of cooperative societies: 1. Consumers’ Cooperative Societies 2. Producers’ Cooperative Societies 3. Marketing Cooperative Societies 4. Farmers’ Cooperative Societies 5. Credit Cooperative Societies 6. Cooperative Housing Societies 1. Consumers’ Cooperative Societies: These are formed to protect the interest of consumers. The members comprise of consumers who are willing to obtain good quality products at reasonable prices. The society aims at eliminating middlemen to achieve economy in operations. It purchases goods in bulk from wholesalers and manufacturers with the view to sell goods to the members. If there is any profit that will be distributed among members as per their capital contribution or purchases made by them. 2. Producers’ Cooperative Societies: These societies are set up to protect the interest of small producers. The members are producers who are willing to procure inputs for production of goods. This society aims at fighting against the big or large enterprises and enhances bargaining power of the small producers. Society supplies raw materials, equipment and other inputs and also buys their output for sale. Profit will be distributed among members. 3. Marketing Cooperative Societies: These are established to help small producers in selling their products. The members are producers who wish to obtain [get] reasonable prices for their products. Society has the objective of elimination of middlemen and to improve the competitive position of its members by securing a favorable market for the products. It collects the output of members and performs marketing functions like transportation, warehousing, packaging etc., to sell the output at the best possible price. Profits are distributed according to the contribution made by the members. 4. Farmers’ Cooperative Societies: These societies are established to protect the interest of farmers by providing necessary facilities at a reasonable price. The members are farmers who wish to join society to take up farming activities together. The aim is to gain benefits of large scale farming and increased productivity. Farmers will be provided better quality seed, fertilizers, machinery and other modern equipment for cultivation of crops. Societies help the farmers by providing the assistance in farming activities along with this society will try to solve the problems associated with farming. 5. Credit Cooperative Societies: These are established for providing easy credit on reasonable terms to the members. The members comprise of persons who seek financial help in terms of loans. The objective of these societies is to protect the members from the exploitation of money lenders who charge high rate of interest. Societies provide loans to the members out of the amounts collected as capital and deposits from the members at less rate of interest. 6. Cooperative Housing Societies: These are established to help people with limited income to construct houses at reasonable cost. The members consist of people who are willing to procure residential accommodation at lower cost. The objective is to solve housing problem of the members by constructing the houses and giving the option of paying in installment. These societies may construct flats or provide plots to members to construct house as per their choice. 24 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES V. Joint Stock Companies: Meaning: A company is an association of persons formed for carrying out business activities and has a legal status independent of its members. A company can be described as an artificial person having a separate legal entity, perpetual succession and a common seal. Definition: According to Prof. Haney, “Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”. Features of Joint Stock Company: 1. Artificial person: A company is a creation of law and exists independent of its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued by others but it cannot breath, eat, run, walk, etc., therefore it is called as an artificial person. 2. Separate Legal Entity: A company acquires an identity from the day of incorporation, it is distinct from members. Its assets and liabilities are separate from those of its owners. The law clearly specifies that business and owners are separate. 3. Formation: The formation of a company involves procedures, it is expensive and the process of registration [formation] is complicated. It involves the preparation of several documents and legal requirements. Incorporation of company is compulsory as per the Companies Act of 2013. 4. Perpetual Succession: As the company is created by law, it can be closed only by law. Members may go or join, but the company continues to exist. 5. Control: As there are many members or investors all of them may not involve in all the activities, on behalf of them the management and control of the business affairs are done by elected board of directors. BOD will appoint top management official for carrying out the business. BOD is accountable to the shareholders or investors. 6. Liability: the liability of the investors or members is limited to the extent of the capital contributed by them in a company. The members can be asked to contribute to the loss only to the extent of the unpaid amount or share held by them. 7. Common seal: A company may or may not have common seal. If a company has common seal it must be affixed to the documents such as agreement of a company. If a company doesn’t have a common seal then the person who has to sign on the documents should be authorized by a board’s resolution. 8. Risk bearing: The risk of losses in a company is borne by all the shareholders. In case of financial difficulties, all shareholders in a company have to contribute to the debts to the extent of their shares in the company’s capital. Therefore, the risk of loss is shared by a large number of shareholders as per their shares. Merits or Advantages of Joint Stock Company: 1. Limited liability: The shareholders are liable to the extent of the amount unpaid on the shares held by them. Only the assets of the company can be used to settle the debts. Therefore, owner’s personal property is safe. 2. Transfer of interest: It is easy to transfer investment or ownership which is held by the investor in the company as the shares of a public limited company can be sold in the market and easily converted into cash when the need arises. 25 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 3. Perpetual existence: Existence of a company is not affected by the death, retirement, insolvency or insanity of its members because joint stock company has a separate entity from its members. A company will continue to exist even if all the members die. It can be liquidated as per the Provisions of Companies Act of 2013. 4. Scope for expansion: As compared to the sole proprietorship and partnership forms of business organization a company has large financial resources. If there is a requirement they can easily raise capital from the public or financial institutions. Thus, it is easy to expand business activities. 5. Professional management: As the company can raise large amount of capital, can pay salaries to specialist and professionals. The large scale operation in a company leads to division of work. This enables the department to deal with a particular activity under the supervision of the expert. This helps to increase efficiency in the company’s operations or activities. Demerits or Limitations of Joint Stock Company: 1. Complexity in formation: The formation of a company requires a greater time, effort and legal requirements. A particular procedure which is specified in the Companies Act should be followed. Therefore, formation of a company is more complex process. 2. Lack of Secrecy: The Companies Act requires each public company to provide information related to financial activities and statements regularly to the office of the registrar of companies such information is available to the general public. Thus, it is difficult to maintain complete secrecy about the operations of company. 3. Impersonal work environment: Separation of ownership and management leads to a situation in which there is lack of effort and personal involvement on the part of the officers of a company. The large size of the company makes it difficult for the owners and top management to maintain personal contact with employees, customers and creditors. 4. Numerous regulations: The functioning of the company is subject to many legal provisions. A company is burdened with various restrictions in respect of aspects like audit, voting, filing of reports, preparation of documents, collection of various certificates from different agencies (registrar, SEBI etc). This reduces the freedom of operations and consumes time, money and effort. 5. Delay in decision making: companies are managed by the board of directors who are elected and nominated by the members which is considered as top level management, BOD’s are responsible for taking decisions related to business as per the requirements of lower levels of management. Communication as well as approval of various plans may cause delays not only in taking decisions but also in implementing the plans. 6. Oligarchic management: In theory, a company is democratic institution wherein BOD’s are representatives of the shareholders. In practice, however, in most large scale organizations the owners have less influence in terms of controlling or running of the business. Because the shareholder are spread all over the country and it is difficult for them to involve in decision taking process. 7. Conflict in interests: There may be conflict among various stakeholders of a company. For ex: i.Employees may be interested in higher salary. ii.Consumers are expecting or may expect high quality product at less price. iii.Share holder want higher return in the form of dividend on their investment etc., As stake holders have different interests it becomes difficult to manage the company because it is not possible to satisfy all the expectations. 26 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Types of Joint Stock Companies: 1. Private company 2. Public company 1. Private company: It means a company which:  Restricts the right of members to transfer its shares.  Has a minimum of 2 and a maximum of 200 members, excluding the present and past employees.  Does not invite public to subscribe its securities and  It is necessary to use the word private limited after its name. The Privileges given to a Private Limited Company as against a Public limited company: i. A private company can be formed only by Two members but Seven people are required to form a public company. ii. There is no need to issue prospectus to public because members will make investment. iii. Allotment of shares can be done without receiving the minimum subscription. A private limited company can start its operations immediately after the receipt of certificate of incorporation. iv. A private company needs to have only two directors but in case of public company minimum is three directors. However the maximum number of directors for both types of companies is 15. v. A private company is not required to keep an index of members but the same is necessary in case of public company. 2. Public Company: As per the Companies Act, a Public company is one which: i. Has a minimum of 7 members and no limit on maximum members. ii. Has no restriction on transfer of securities. And, iii. Is not prohibited from inviting the public to subscribe to its securities. Differences between Private Limited Company and Public Limited Company Sl. Basis Private Company (Pvt ltd) Public Company (Ltd) No. 1 No of members Minimum - 2, Maximum -200. Minimum-7, Maximum-Unlimited. 2 Number of Directors Minimum-2, Maximum-15. Minimum-3, Maximum-15. 3 Index of Members Not compulsory. Compulsory. 4 Transfer of shares Restriction on transfer. No restriction. 5 Source of capital / Cannot invite the public to Can invite the public to subscribe invitation to subscribe subscribe securities. securities. the shares 6 Name The word Private Limited (Pvt The word Limited(Ltd) is used after Ltd) should be used after its its name. name. 27 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Factors influencing the choice of form of business organization. 1. Liability: In case of sole proprietorship and partnership firm the liability of the owners or partners is unlimited. In Joint Hindu Family Business Karta has unlimited liability. In Co- Operative Society and Companies however, liability is limited and Creditors have the right to ask for payments only to the extent of the company’s assets therefore, from the point of view of investors the company form of organization is more suitable because the risk is limited. 2. Continuity: The continuity of sole proprietorship and partnership firm is affected by events like death, insolvency, insanity of the owners. However, these factors do not affect the continuity businesses like Joint Hindu Family Business, Co-Operative Society and Companies. If the business needs a permanent structure, company form is more suitable. For short term ventures, sole proprietorship and partnership may be preferred. 3. Cost and ease in setting up organization: Based on cost and procedure of setting up are concerned sole proprietorship is inexpensive and involves less legal requirements. In case of partnership, the cost of formation is less and involves less legal formalities because of limited scale of operations. Co-Operative Societies and Companies have to be registered and formation of these two involves lengthy and expensive legal procedure. From the point of view of initial cost of set up sole proprietorship and partnership are preferred. 4. Management ability: Sole proprietorship and Partnership firm may find it difficult to have skilled managerial experts because of financial difficulties. But in case of other forms of organizations as they can raise sufficient capital they can hire experts and pay the salaries. Division of work based on specific area of specialization is possible when the organization has skilled man power. Proprietorship or partnership may be suitable where simple operations are involved which requires limited skills but if the organization activities or nature demands professionals then they have to be in a position to afford for that. 5. Capital Considerations: Companies can collect large amount of capital by the issue of securities (public company) to a large number of investors, partnership firms also has the advantage of combined resources of all partners. But the resources of a sole proprietorship are limited. If the scale of operation is large, company form may be suitable but if the scale of operation is medium or small businessmen can opt for partnership or sole proprietorship. A company is more suitable if they require large amount of capital due to expansion programs. 6. Degree of Control: If direct control and absolute decision making power is required then Sole proprietorship will be preferable. But if the owner do not mind sharing control and decision making, partnership or company form of organization can be adopted. 7. Nature of business: If direct personal contact is needed with the customers then proprietorship may be more suitable, for large manufacturing units when direct personal contact is not required then the company is suitable. 28 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES CHAPTER - 3 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES Introduction: You might have observed that all types of organizations are doing business in the country whether they are Public, Private or Global. However, ours is mixed economy where the organization carried on by both the sectors, public and private. Private Sector and Public Sector: There are all kinds of business organizations – small or large, industrial or trading, privately owned or government owned existing in our country. These organizations affect our daily economic life and therefor become part of the Indian economy. Forms of Organizations - Indian Economy [On the basis ownership] 29 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES I. Public Sector Enterprises: It consists of various organizations owned and managed by the Government. These organizations may either be partly or wholly owned by the central or state government. They may also be a part of the ministry or come into existence by a special act of the parliament. The Government participates in the economic activities of the country through these enterprises. The forms of organization which a public enterprise may take are as follows: i. Departmental undertakings ii. Statutory Organizations iii. Government Companies i. Departmental undertakings: This is the oldest and most traditional form of organizing public enterprises. These enterprises are established as departments of the ministry and are considered part of extension of the ministry itself. The government functions through these departments and the activities performed by them are an integral part of the functioning of the government. These organizations are not autonomous or independent. Example: Railways, Post and Telegraph Department. Features / Characteristics of departmental undertakings: 1. Finance (Funding): These organizations are funded directly from the government treasury and are (finance and fund) an annual appropriation from the budget of the government. The revenue generated by these organizations will be paid into the treasury. 2. Accounting and Audit: Departmental undertakings are subject to accounting and audit controls applicable to other government activities. 3. Staff or Employees: The employees are Government servants and their recruitment and conditions of service are the same as that of other employees directly under the Government. They are headed by Indian Administration Service (IAS) officers and Civil Servants. These officers can be transferred from one ministry to another. 30 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 4. Control: These are considered to be a major subdivision of the government department and subject to direct control of the ministry. 5. Accountability: They are accountable to the ministry because their management is directly under the concerned ministry. Merits or Advantages of Departmental Undertakings: 1. Effective control: These undertakings facilitate the parliament to exercise effective control over their operations. 2. Public Accountability: These ensure a high degree of public accountability. 3. Generate Income to the government: The revenue earned by these organizations goes directly to the treasury and hence, it is a source of income for the government. 4. National Security: In consideration with national security, this form is most suitable because it is under the direct control and supervision of the concerned Ministry. Limitations or Demerits or Disadvantages of Departmental Undertakings: 1. Lack of Flexibility: Departmental undertakings fail to provide flexibility whenever required because flexibility is essential for the smooth operation of business. 2. Delay in Decision Making: The employees or head of the departments are not allowed to take independent decision, without the approval of the ministry. This leads to delay in prompt decisions wherever required. 3. Lack of Initiative: It is not possible for these organizations to take advantage of business opportunities. The Bureaucrats are over cautious and conservative, this will not allow them to take risky ventures. 4. Less Freedom: There is red tapism in day-to-day operations and no action can be taken unless it goes through the proper channels of authority. 5. Political Interference: There is a lot of political interference through the ministry. 6. Insensitive to Consumer Needs: These organizations are generally insensitive to consumer needs and may not provide adequate services when there is a need. ii. Statutory Corporations: These are public enterprises brought into existence by a Special Act of the Parliament. The Act defines its powers and functions, rules and regulations governing its employees and its relationship with Government departments. It is established to carry out a particular business with service motive. It is an autonomous body and has financial autonomy. These organizations have considerable amount of operating flexibility of private enterprises. Features of Statutory Corporations: 1. Formation: These corporations are formed by the Special Act of Parliament or State Legislature. The objectives, powers, scope, duties of these corporations are described in the Act. 2. Government control: All these corporations are owned by the Government and they are liable for all profits and loss. 3. Management: The day to day administration is monitored by the BOD’s nominated by the government. 31 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 4. Financial autonomy: These corporations have the financial autonomy and thus, they enjoy financial power. They can barrow the funds from the public and other sources. They need not depend for budget allocations. 5. Liability: These corporations are answerable to the parliament or to the state legislature for their activities. Annual reports must be audited by the accountant general and presented before the parliament or state legislature for discussion. 6. Staff or Employees: The employees of these corporations are not government employees. They are appointed by the corporation and separate set of rules and regulations are applicable. Merits / Advantages of Statutory Corporations: 1. Independence: These organizations enjoy independence in their functioning and a high degree of operational flexibility. They are free from undesirable government regulations and control. 2. No interference from government: Since, the funds of these organizations do not come from the central budget, the government generally does not interfere in their financial matters. 3. Autonomous organization: Since, they are autonomous organizations, they frame their own policies and procedure with in the powers assigned to them by the Act. However, in relation to few issues the prior approval of a particular ministry is required. 4. Valuable instrument for economic development: A statutory corporation is a valuable instrument for economic development. It has the power of the government, combined with the initiative of private enterprises. Limitations or Demerits of Statutory Corporations: 1. No operational flexibility: In practical a statutory corporation does not enjoy as much operational flexibility as explained in merits. All the actions are subject to many rules and regulations. 2. Government and political interference: Whenever major decisions or where huge funds are involved organization is not free from government and political interference. 3. Uncontrollable corruption: Where there is a dealing with public, corruption cannot be avoided. 4. Restriction or less freedom: The government has a practice of appointing advisors to the corporation board. This restricts the freedom of the corporation in entering into contracts and other decisions. If there are any disagreements, that will be referred to the government for final decisions. This may leads to delay in actions. iii. Government Companies: According to the Indian Companies Act of 2013, “A government company means any company in which not less than 51% of the paid up capital is held by the central government, or by any state government or partly by central government and partly by state by one or more state governments and includes a company which is a subsidiary of a government company.” It is clear that government exercises control over paid up share capital of the company. The shares of the company are purchased in the name of the President of India. The government is the major share holder and exercises control over the management of these companies. 32 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES Examples: HAL [Hindustan Aeronautic Limited], HMT Ltd [Hindustan Machine Tools], BHEL [Bharat Heavy Electricals Limited], BEL [Bharat Electronics Limited] etc., Features of Government Companies: 1. Formation: These companies are formed by following the rules and regulations prescribed in Indian Companies Act of 2013. 2. Capital contribution: The capital contribution made by the government should not be less than 51% of the total capital. 3. Separate legal entity: They have separate legal entity apart from the government. 4. Government audit: The government appoints accounts officers (as well as audit officers) to audit the accounts of these companies. 5. Financial autonomy: They enjoy financial autonomy and no need to depend on the government for capital. They obtain funds from government share holdings and other private share holder. They are permitted to raise funds from the capital markets. Merits / Advantages of Government Companies: 1. Less procedure [no specific act is required]: The government company can be established by full filling the requirement of Indian Companies Act. A separate act in the parliament is not required. 2. Separate legal entity: These organizations enjoy separation of ownership from the government. Therefore, it has a separate legal entity. 3. Autonomy: These organizations enjoy autonomy in all management decisions and takes actions according to the requirements of business. 4. Eliminates unhealthy business practices: These companies by providing goods and services at reasonable prices are able to control the market and restricts unhealthy business practices. Limitations or Demerits or disadvantages of Government Companies: 1. Delay in decision making: As the government appoints directors to take care about the organization, sometimes the procedure followed in government companies to take important decisions may consume more time. So, it becomes difficult to grab the opportunities available. 2. Strict rules and regulations: Sometimes, the rules and regulations which are prescribed in the Companies Act of 2013 may not have much relevance. Even though they are not important the company has to obey or follow. 3. Corruption: Unethical means of making money in the organization will affect the organizational goals. Organizational objectives sometimes will not be achieved due to the individual goals (people who are involved in the organization) or personal goals of making money. 4. Lack of flexibility: The government companies have to follow the policies and rules framed by respective authorities and the government. Sometimes most of the rules cannot be adopted or followed because of rigidity. 33 Ms. Shankaramma S., MCOM, KSET, B Ed., Lecturer Dept. of Commerce.  BUSINESS STUDIES 5. Political interference: Government companies are suffering from interference by political parties and political leaders with the change in government, constitution of board changes and this affect the organization adversely. 6. Low labor productivity: The government companies suffer from the problem of low labor productivity. The efficiency is low due to various problems like fault in selection and promotion, lack of training and development, lack of system of proper performance appraisal, fault in placement and forced transfers. Changing Role of Public Sector: It was expected at the time of independence that the public sector undertakings would play a major role and attain certain objectives of the economy either by direct involvement in business or by acting as a facilitator. The Indian economy is in a stage changeover. The five year plans in the beginning stages of development gave a lot