UNIT I

Text Book - 1 [CO:1] (10)

Management and Business Organisation: Management concept-

Managerial and operational function as of management- Scientific
management-

Job Design- Job description and job specification.

Sole Proprietorship, Partnership Firm, Limited Liability Partnership (LLP),

Joint Stock Company, One Person Company (OPC), Private Company &
Public Limited Company Form of Organization, Co-Operatives.
Mary Parker Follet.
According to Follet management is ‘the art of getting things done
through people’.

George R Terry who defines management as “a process

consisting of planning, organizing, actuating and controlling
performed to determine and accomplish the objectives by the use
of people and resources”.
Characteristics (1)Management is a continuous process:
of (2)Management is an art as well as science:
Management (3)Management aims at achieving predetermined objectives:
(4)Management is a factor of production:
(5)Management is decision-making:
(6)Universal application:
(7)Management is needed at all levels:
(8)Management aims at maximum profit:
(9)Dynamic:
(10)Management as a career:
(11)Management is a profession:
(12)Management is a discipline:
 Objectives of Management
The broad purposes or objectives of the management are as follows—

1. Optimum utilisation of resources:

The most important objectives of the management are to use various resources of the
enterprise in a most economic way.
The proper use of men, materials, machines, and money will help a business to earn
sufficient profits to satisfy various interests i.e. proprietor, customers, employees and
others. All these interests will be served well only when physical resources of the
business are properly utilised.

2. Growth and development of business:

By proper planning, organisation and direction etc., management leads a business to
growth and development on sound footing. It helps in profitable expansion of the
business. It provides a sense of security among the employers and employees.
3. Better quality goods:
The aim of the sound management has always been to produce the better quality
products at minimum cost. Thus, it tries to remove all types of wastages in the
business.

4. Ensuring regular supply of goods:

Another objective of management is to ensure the regular supply of goods to the
people. It checks the artificial scarcity of goods in the market. Hence, it keeps the
prices of goods within permissible limits.

5. Discipline and morale:

The management maintains the discipline and boosts the morale of the individuals
by applying the principles of decentralisation and delegation of authority. It
motivates the employees through monetary and nonmonetary incentives. It helps
in creating and maintaining better work culture.
6. Mobilising best talent:
The employment of experts in various fields will help in enhancing the efficiency of
various factors of production. There should be a proper environment which should
encourage good persons to join the enterprise. The better pay scales, proper
amenities, future growth potentialities will attract more people in joining a concern.

7. Promotion of research and development:

Management undertakes the research and development to take lead over its
competitors and meet the uncertainties of the future. Thus, it provides the benefits
of latest research and technology to the society.

8. Minimise the element of risk:

Management involves the function of forecasting. Though the exact future can
never be predicted yet on the basis of previous experience and existing
circumstances, management can minimise the element of risk. Management always
keeps its ears and eyes to the changing circumstances.
9. Improving performance:
Management should aim at improving the performance of each and every factor
of production. The environment should be so congenial that workers are able to
contribute their maximum to the enterprise. The fixing of objectives of various
factors of production will help them in improving their performance.

10. Planning for future:

Another important purpose of management is to prepare a prospective plan. No
management should feel satisfied with today’s work. Future plans should take
into consideration what is to be done next. Future performance will depend upon
present planning. So, planning for future is essential to every organisation.
 Managerial Roles
Mintzberg published his Ten Management Roles in his book, "Mintzberg on Management: Inside our Strange
World of Organizations," in 1990.
Figurehead As a manager, you have social, ceremonial and legal responsibilities. You're
expected to be a source of inspiration. People look up to you as a person with
authority, and as a figurehead.
Interpersonal Leader
This is where you provide leadership for your team, your department or
Category
perhaps your entire organization; and it's where you manage the
performance and responsibilities of everyone in the group.
Liaison Managers must communicate with internal and external contacts. You need
to be able to network effectively on behalf of your organization.
Monitor – In this role, you regularly seek out information related to your organization
and industry, looking for relevant changes in the environment. You also
monitor your team, in terms of both their productivity, and their well-being.
Disseminator This is where you communicate potentially useful information to your
Informational colleagues and your team.
Spokesperson Managers represent and speak for their organization. In this role, you're
responsible for transmitting information about your organization and its
goals to the people outside it.
 Entrepreneur As a manager, you create and control change within the organization.
This means solving problems, generating new ideas, and
implementing them.
Disturbance When an organization or team hits an unexpected roadblock, it's the
Decisional Handler manager who must take charge. You also need to help mediate
disputes within it.
Resource You'll also need to determine where organizational resources are best
Allocator applied. This involves allocating funding, as well as assigning staff and
other organizational resources.
Negotiator You may be needed to take part in, and direct, important negotiations
within your team, department, or organization
Management functions or the Process of management

Management functions
 Functions of Management

Different experts have classified functions of management.

 According to George & Jerry, “There are four fundamental functions of management
i.e. planning, organizing, actuating and controlling”.
 According to Henry Fayol, “To manage is to forecast and plan, to organize, to
command, & to control”.
 Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for
Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for
Reporting & B for Budgeting.

But the most widely accepted are functions of management given by

KOONTZ and O’DONNEL
i.e. Planning, Organizing, Staffing, Directing and Controlling.
Each function blends into the other & each affects the performance of others.
1. Planning
It is the basic function of management. It deals with chalking out a future course of action & deciding in
advance the most appropriate course of actions for achievement of pre-determined goals.

 According to KOONTZ, “Planning is deciding in advance - what to do, when to do & how to do. It
bridges the gap from where we are & where we want to be”. A plan is a future course of actions. It is an
exercise in problem solving & decision making.

 Planning is determination of courses of action to achieve desired goals.

 Thus, planning is a systematic thinking about ways & means for accomplishment of pre-determined
goals.
 Planning is necessary to ensure proper utilization of human & non-human resources.
 It is all pervasive, it is an intellectual activity and it also helps in avoiding confusion, uncertainties,
risks, wastages etc.
2. Organizing
It is the process of bringing together physical, financial and human resources and developing
productive relationship amongst them for achievement of organizational goals.

According to Henry Fayol, “To organize a business is to provide it with everything useful or its
functioning i.e. raw material, tools, capital and personnel’s”.

To organize a business involves determining & providing human and non-human resources to the
organizational structure. Organizing as a process involves:

 Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.
3. Staffing
It is the function of manning the organization structure and keeping it manned.

 Staffing has assumed greater importance in the recent years due to advancement of technology, increase
in size of business, complexity of human behavior etc.

 The main purpose o staffing is to put right man on right job i.e. square pegs in square holes and round
pegs in round holes.

 According to Kootz & O’Donell, “Managerial function of staffing involves manning the organization
structure through proper and effective selection, appraisal & development of personnel to fill the roles
designed un the structure”. Staffing involves:
 Manpower Planning (estimating man power in terms of searching,
choose the person and giving the right place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.
4. Directing
 It is considered life-spark of the enterprise which sets it in motion the action of people because planning,
organizing and staffing are the mere preparations for doing the work.

 Direction is that inert-personnel aspect of management which deals directly with influencing, guiding,
supervising, motivating sub-ordinate for the achievement of organizational goals. Direction has
following elements:
 Supervision
 Motivation
 Leadership
 Communication
 Supervision- implies overseeing the work of subordinates by their superiors. It is the act of watching &
directing work & workers.
 Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work. Positive,
negative, monetary, non-monetary incentives may be used for this purpose.
 Leadership- may be defined as a process by which manager guides and influences the work of
subordinates in desired direction.
 Communications- is the process of passing information, experience, opinion etc from one person to
another. It is a bridge of understanding.
5. Controlling
It implies measurement of accomplishment against the standards and correction of deviation if any to ensure
achievement of organizational goals.

The purpose of controlling is to ensure that everything occurs in conformities with the standards. An
efficient system of control helps to predict deviations before they actually occur.

According to Theo Haimann, “Controlling is the process of checking whether or not proper progress is
being made towards the objectives and goals and acting if necessary, to correct any deviation”.

According to Koontz & O’Donell “Controlling is the measurement & correction of performance activities
of subordinates in order to make sure that the enterprise objectives and plans desired to obtain them as
being accomplished”.

Therefore controlling has following steps:

 Establishment of standard performance.

 Measurement of actual performance.
 Comparison of actual performance with the standards and finding out deviation if any.
 Corrective action.
 14 Principles of Management of Henri Fayol
 Henri Fayol (1841-1925) the first foundations were laid for modern scientific management. These first
concepts, also called principles of management are the underlying factors for successful management.

 Henri Fayol explored this comprehensively and, as a result, he synthesized the 14 principles of
management.

 Henri Fayol ‘s principles of management and research were published in the book ‘General and Industrial
Management’ (1916). The 14 principles of Management are:

1. Division of Work
2. Authority and Responsibility
3. Discipline
4. Unity of Command
5. Unity of Direction
6. Subordination of Individual Interest
7. Remuneration
8. The Degree of Centralization
9. Scalar Chain
10. Order
11. Equity
12. Stability of Tenure of Personnel
13. Initiative
14. Esprit de Corps
1. Division of Work
In practice, employees are specialized in different areas and they have different skills. Different levels of
expertise can be distinguished within the knowledge areas (from generalist to specialist). Personal and
professional developments support this.

 According to Henri Fayol specialization promotes efficiency of the workforce and increases productivity.

 In addition, the specialization of the workforce increases their accuracy and speed. This management
principle of the 14 principles of management is applicable to both technical and managerial activities.

2. Authority and Responsibility

In order to get things done in an organization, management has the authority to give orders to the employees.
Of course with this authority comes responsibility.

 According to Henri Fayol, the accompanying power or authority gives the management the right to give
orders to the subordinates.

 The responsibility can be traced back from performance and it is therefore necessary to make agreements
about this. In other words, authority and responsibility go together and they are two sides of the same coin.
3. Discipline
This third principle of the 14 principles of management is about obedience.

 It is often a part of the core values of a mission statement and vision in the form of good conduct and respectful
interactions.
 This management principle is essential and is seen as the oil to make the engine of an organization run smoothly.

4. Unity of Command
The management principle ‘Unity of command’ means that an individual employee should receive orders from
one manager and that the employee is answerable to that manager.

 If tasks and related responsibilities are given to the employee by more than one manager, this may lead to
confusion which may lead to possible conflicts for employees.
 By using this principle, the responsibility for mistakes can be established more easily.

5. Unity of Direction
This management principle of the 14 principles of management is all about focus and unity.

 All employees deliver the same activities that can be linked to the same objectives. All activities must be carried
out by one group that forms a team.
 These activities must be described in a plan of action. The manager is ultimately responsible for this plan and he
monitors the progress of the defined and planned activities.
6. Subordination of Individual Interest
There are always all kinds of interests in an organization. In order to have an organization function well, Henri
Fayol indicated that personal interests are subordinate to the interests of the organization (ethics). The primary
focus is on the organizational objectives and not on those of the individual. This applies to all levels of the entire
organization, including the managers.

7. Remuneration
Motivation and productivity are close to one another as far as the smooth running of an organization is
concerned. This management principle of the 14 principles of management argues that the remuneration should
be sufficient to keep employees motivated and productive. There are two types of remuneration namely non-
monetary (a compliment, more responsibilities, credits) and monetary (compensation, bonus or other financial
compensation). Ultimately, it is about rewarding the efforts that have been made.

8. The Degree of Centralization

Management and authority for decision-making process must be properly balanced in an organization. This
depends on the volume and size of an organization including its hierarchy.

Centralization implies the concentration of decision making authority at the top management (executive board).
Sharing of authorities for the decision-making process with lower levels (middle and lower management), is
referred to as decentralization by Henri Fayol. Henri Fayol indicated that an organization should strive for a good
balance in this.
9. Scalar Chain
Hierarchy presents itself in any given organization. This varies from senior management (executive board) to
the lowest levels in the organization. Henri Fayol ’s “hierarchy” management principle states that there should
be a clear line in the area of authority (from top to bottom and all managers at all levels). This can be seen as a
type of management structure. Each employee can contact a manager or a superior in an emergency situation
without challenging the hierarchy. Especially, when it concerns reports about calamities to the immediate
managers/superiors.

10. Order
According to this principle of the 14 principles of management, employees in an organization must have the
right resources at their disposal so that they can function properly in an organization. In addition to social
order (responsibility of the managers) the work environment must be safe, clean and tidy.

11. Equity
The management principle of equity often occurs in the core values of an organization. According to Henri
Fayol, employees must be treated kindly and equally. Employees must be in the right place in the organization
to do things right. Managers should supervise and monitor this process and they should treat employees
fairly and impartially.
12. Stability of Tenure of Personnel
This management principle of the 14 principles of management represents deployment and managing of
personnel and this should be in balance with the service that is provided from the organization. Management
strives to minimize employee turnover and to have the right staff in the right place. Focus areas such as
frequent change of position and sufficient development must be managed well.

13. Initiative
Henri Fayol argued that with this management principle employees should be allowed to express new ideas.
This encourages interest and involvement and creates added value for the company. Employee initiatives are a
source of strength for the organization according to Henri Fayol. This encourages the employees to be involved
and interested.

14. Esprit de Corps

The management principle ‘esprit de corps’ of the 14 principles of management stands for striving for the
involvement and unity of the employees. Managers are responsible for the development of morale in the
workplace; individually and in the area of communication. Esprit de corps contributes to the development of
the culture and creates an atmosphere of mutual trust and understanding.
 Principles of Scientific Management
 According to Taylor, “Scientific Management is an art of knowing exactly
what you want your men to do and seeing that they do it in the best and
cheapest way”.
In Taylors view, if a work is analysed scientifically it will be possible to find one best way to do
it.
Some of the principles of scientific management are:-

1. Replacement of Old Rule of Thumb Method

2. Scientific Selection and Training of Workers

3. Co-Operation between Labour and Management

4. Maximum Output

5. Equal Division of Responsibility

i) Replacement of Old Rule of Thumb Method:
Scientific investigation should be used for taking managerial decisions instead of basing decisions on
opinion, intuition or rule of thumb. The principle of use of science for rule of thumb is the starting
point that distinguishes scientific management from traditional management.
Under scientific management decisions are made on the basis of acts as developed by the application
of scientific method to the problem concerned.
This is in contrast with the approach followed under traditional management according to which
decisions are based on opinions, prejudices, or rule of thumb. Thus substitution of rule of thumb or
opinion by scientific approach is one of the primary contributions of Taylor to the field of
management.

(ii) Scientific Selection and Training of Workers:

The procedure for selection of workers should be designed scientifically. The errors committed at the
time of selection may prove to be very costly later on. If we do not have right workers on the right job,
the efficiency of the organisation will be reduced. Therefore, every organisation should follow a
scientific system of selection. The selected workers are to be trained to avoid wrong methods of work
Management is responsible for the scientific education and training. The management has to provide
opportunities for development of workers having better capabilities.
(iii) Co-Operation between Labour and Management:
There should be cooperation between the workers and the management. This requires change of
mental attitudes of the workers and the management towards each other. Taylor called it mental
revolution. When this mental revolution takes place, workers and management turn their attention
towards increasing profits. They do not quarrel about the distribution of profits.
(iv) Maximum Output:
The management and the workers should try to achieve maximum output in place of restricted
output. This will be beneficial to both the parties. Maximum output will also be in the interest of the
society.
(v) Equal Division of Responsibility:
There must be equal division of responsibility between the managers and the workers. The
management should assume responsibility for the work for which it is better suited. For instance,
management should decide the method of work, working conditions, time for completion of work,
etc. instead of leaving these to the discretion of workers. The management should be responsible for
planning and organising the work, whereas the workers should be responsible for the execution of
work as per instructions of management.
Combined list of management functions
 Job Design- Job description and job specification.
 A job is a collection of tasks, duties, responsibilities, which as a whole comprise the established
assignment to an individual employee. Job analysis is the determination through observation
and study of comprehensive information regarding a job, with a view to specifying tasks
and necessary abilities, knowledge, and skills required to perform it.

 Job description is a formal, written explanation of a specific job, usually including the job
title, tasks, relationship with other jobs, physical and mental skills required,
duties, responsibilities, and working conditions; a part of the job evaluation process
wherein a review of the nature of work occurs in relation to other jobs, working conditions, the
degree of responsibility required, etc.

 Job specification includes stipulation of desired behaviour attributes at a job viz. skills
requirement, knowledge of the job, behavioural and mental attributes
required on a job. Hence job specification is a description of the qualifications necessary for
a job, in terms of education, experience, and personal and physical characteristics.
JOB DESIGN
Job structuring entails job design which is the process of determining the specific tasks and
responsibilities to be carried out by each member of the organisation.

 It is understood as the fundamental organisational process which evolves out of the complex flow
of events that establishes the responsibilities assigned to each member of the organisation,
including the physical circumstances in which an employee is expected to carry out these
responsibilities.

 Examples of physical working conditions are temperature, lighting, safety. Hence job design
refers to the philosophy with which a firm approaches the organisation of work.

 A company can allocate duties and responsibilities consistent with common practice and
tradition. However, emphasis on efficiency, standardisation, and simplification might require the
services of an industrial engineer.

 An industrial psychologist, on the other hand, provides a company insight into how an
individual would react to jobs at a psychological level and how they should be modified.
There are two major components of job design.
 Job content is the set of activities to be performed on the job, including the
duties, tasks, and job responsibilities to be carried out; the equipment,
machines, and tools to be used and required interactions with others.

 The other major aspect of the responsibility established through job design is
the set of organisational responsibilities attached to a job, that is,
responsibilities relating to the overall organisation such as complying with
rules and regulations and work schedules.

 Examples are filling out time sheets, following safety procedures, and
adhering to the established schedule of the workday.
JOB DESCRIPTION
 Job descriptions, sometimes called position descriptions, are written summaries, usually one or
two pages long, of the basic tasks associated with a particular job.
 A model job design includes the title of the job, information about duties, responsibilities,
facilities, pay scale etc.
 Job descriptions usually have a label, called a “job title,” and a section describing the
qualifications needed to perform the job. These qualifications are encoded as job specifications.
(French, 1995)
 Job descriptions are well written duty statements which accurately describe what is being done
on a job. Job description clarifies work functions and reporting relationships, helping
employees understand their jobs better and approximate performance to desired levels.
 Duty statements focus on primary duties and responsibilities of the position and not incidental
duties. Related or similar duties are combined and written as one statement.
 Job description includes an employee’s qualifications or performance and even temporary
assignments.
 Each duty statement is a discreet, identifiable aspect of the work assignment, written precisely,
and is outcome-based, allowing for alternate means of performing the duty, changes in
technology, preferences of employees and supervisors, accommodations of policy changes,
changing nature of duty etc. Employees are also credited for innovations made by them.
Purpose of Job Description
According to Wendell French (1995), a job description is useful for the following
processes of personnel administration: -
 Recruiting, interviewing, and selection.

 Orientation and training

 Setting performance standards and / or goal statements

 Designing performance appraisal forms

 Job evaluation

 Clarification and renegotiation of roles

 Career progression ladders

Advantages of Job description
 Role specificity and clarity are provided for. As a corollary, role ambiguity is avoided and
organisational processes are simplified.
 Consequently, job descriptions, as a management tool can greatly simplify an organisation's human
resource management function.
 Job descriptions clarify work content, helping employees understand their work better and
employers, institute performance appraisal and development process, maneuver job design for job
rotation, enrichment (vertical loading), and enlargement (horizontal loading) exercises for overall
performance improvement and organisational effectiveness.
 The focus is on job outcomes, which makes job description a result oriented exercise. It helps lay
down what is expected of a job in terms of all logistical, and behavioural (training, supervision)
requirements so that they can be secured with proper lead time.
 Cost effectiveness and time management at work are the two important considerations in a job
description exercise.
 Work study and method study are applied on the basis of job descriptions. Core areas for
procedural reform can be easily identified and procedural improvements brought about.
 The effect of procedural innovations, if any, is examined easily. The worker can be rewarded for
successful innovations.
 Job descriptions aid in maintaining a consistent salary structure. It leads to job evaluation, which is
used specifically for compensation administration.
JOB SPECIFICATION
Job specification spells out desired attributes of prospective job incumbents.
Job specification is a statement of the physical, mental and temperamental qualities
necessary for the performance of a job.

This exercise helps us in cataloguing requirements of the job in question in terms of:

(a) Qualifications required for the job can be general educational qualifications or
technical qualifications, or both;
(b) If the job requires any specific skill, ability or aptitude, the same will have to be
determined;
(c) The degree and extent of job experience required can be laid down;
(d) Personal and physical attributes desired; and
(e) Age and domicile requirements.
Sole Proprietorship, Partnership Firm, Limited Liability
Partnership (LLP), Joint Stock Company, One Person Company
(OPC), Private Company & Public Limited Company Form of
Organization, Co-Operatives.
 Sole Proprietorship
 Sole proprietorship or individual entrepreneurship is a business concern owned and operated by
one person.
 The sole proprietor is a person who carries on business exclusively by and for himself.
 He alone contributes the capital and skills and is solely responsible for the results of the
enterprise. In fact sole proprietor is the supreme judge of all matters pertaining to his business
subject only to the general laws of the land and to such special legislation as may affect his
particular business.

The salient features of the proprietorship are as follows:

i. Single ownership
ii. One man control
iii. Undivided risk
iv. Unlimited liability
v. No separate entity of the business
vi. No Government regulations.
Advantages:
(a) Simplicity – It is very easy to establish and dissolve a sole proprietorship. No
documents are required and no legal, formalities are involved. Any person competent to enter
into a contract can start it. However, in some cases, i.e., of a chemist shop, a municipal license
has to be obtained. You can start business from your own home.
(b) Quick Decisions – The entrepreneur need not consult anybody in deciding his
business affairs. Therefore, he can take on the spot decisions to exploit opportunities from time
to time. He is his own boss.
(c) High Secrecy – The proprietor has not to publish his accounts and the business secrets are
known to him alone. Maintenance of secrets guards him from competitors.
(d) Direct Motivation – There is a direct relationship between efforts and rewards. Nobody
shares the profits of business. Therefore, the entrepreneur has sufficient incentive to work hard.
(e) Personal Touch – The proprietor can maintain personal contacts with his employees and
clients. Such contacts help in the growth of the enterprise.
(f) Flexibility – In the absence of Government control, there is complete freedom of action.
There is no scope for difference of opinion and no problem of co-ordination.
Disadvantages:

(a) Limited Funds – A proprietor can raise limited financial resources. As a result the size of
business remains small. There is limited scope for growth and expansion. Economies of scale
are not available.
(b) Limited Skills – Proprietorship is a one man show and one man cannot be an expert in all
areas (production, marketing, financing, personnel etc.) of business. There is no scope for
specialisation and the decisions may not be balanced.
(c) Unlimited Liability – The liability of the proprietor is unlimited. In case of loss his private
assets can also be used to pay off creditors. This discourages expansion of the enterprise.
(d) Uncertain Life – The life of proprietorship depends upon the life of the owner. The
enterprise may die premature death due to the incapacity or death of the proprietor. The
proprietor has a low status and can be lonely.
 Partnership Firm
 As a business enterprise expands beyond the capacity of a single person, a
group of persons have to join hands together and supply the necessary
capital and skills. Partnership firm thus grew out of the limitations of one
man business. Need to arrange more capital, provide better skills and avail of
specialisation led to the growth to partnership form of organisation.

 According to Section 4 of the Partnership Act, 1932 partnership is “the

relation between persons who have agreed to share the profits of a business
carried on by all or anyone of them acting for all”. In other words, a
partnership is an agreement among two or more persons to carry on jointly a
lawful business and to share the profits arising there from. Persons who enter
into such agreement are known individually as ‘partners’ and collectively as
‘firm’.
Characteristics of Partnership:
 Association of two or more persons: maximum 10 in banking business and 20 in non-
Banking

 Contractual relationship: written or oral agreement among the partners

 Existence of a lawful business

 Sharing of profits and losses

 Mutual agency among partners

 No separate legal entity of the firm

 Unlimited liability

 Restriction on transfer of interest

 Utmost good faith.

KINDS OF PARTNERS:
1] Active Partner/Managing Partner

An active partner is also known as Ostensible Partner. As the name suggests he takes active
participation in the firm and the running of the business. He carries on the daily business on behalf
of all the partners. This means he acts as an agent of all the other partners on a day to day basis and
with regards to all ordinary business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public notice about the
same. This will absolve him of the acts done by other partners after his retirement. Unless he gives
a public notice he will be liable for all acts even after his retirement.
2] Dormant/Sleeping Partner
This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he
does not take an active part in the daily activities of the firm. He is however bound by the action of
all the other partners.

He will continue to share the profits and losses of the firm and even bring in his share
of capital like any other partner. If such a dormant partner retires he need not give a public notice
of the same.
3] Nominal Partner
This is a partner that does not have any real or significant interest in the partnership. So, in essence,
he is only lending his name to the partnership. He will not make any capital contributions to the
firm, and so he will not have a share in the profits either. But the nominal partner will be liable to
outsiders and third parties for acts done by any other partners.
4] Partner by Estoppel
If a person holds out to another that he is a partner of the firm, either by his words, actions or
conduct then such a partner cannot deny that he is not a partner. This basically means that even
though such a person is not a partner he has represented himself as such, and so he becomes partner
by estoppel or partner by holding out.
5] Partner in Profits Only
This partner will only share the profits of the firm, he will not be liable for any liabilities. Even when
dealing with third parties he will be liable for all acts of profit only, he will share none of the
liabilities.
6] Minor Partner
A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be
admitted to the benefits of a partnership if all partner gives their consent for the same. He will share
profits of the firm but his liability for the losses will be limited to his share in the firm.
MERITS OF PARTNERSHIP:
The partnership form of business ownership enjoys the following advantages:
1. Ease of Formation:
A partnership is easy to form as no cumbersome legal formalities are involved. An agreement is
necessary and the procedure for registration is very simple. Similarly, a partnership can be
dissolved easily at any time without undergoing legal formalities. Registration of the firm is not
essential and the partnership agreement need not essentially be in writing.
2. Larger Financial Resources:
As a number of persons or partners contribute to the capital of the firm, it is possible to collect
larger financial resources than is possible in sole proprietorship. Credit worthiness of the firm is
also higher because every partner is personally and jointly liable for the debts of the business.
There is greater scope for expansion or growth of business.
3. Specialisation and Balanced Approach:
The partnership form enables the pooling of abilities and judgment of several persons. Combined
abilities and judgment result in more efficient management of the business. Partners with
complementary skills may be chosen to avail of the benefits of specialisation. Judicious choice of
partners with diversified skills ensures balanced decisions. Partners meet and discuss the problems
of business frequently so that decisions can be taken quickly.
4. Flexibility of Operations:
Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its
day-to-day operations. The nature and place of business can be changed whenever the
partners desire. The agreement can be altered and new partners can be admitted whenever
necessary. Partnership is free from statutory control by the Government except the general
law of the land.
5. Protection of Minority Interest:
No basic changes in the rights and obligations of partners can be made without the
unanimous consent of all the partners. In case a partner feels dissatisfied, he can easily retire
from or he may apply for the dissolution of partnership.
6. Personal Incentive and Direct Supervision:
There is no divorce between ownership and management. Partners share in the profits and
losses of the firm and there is motivation to improve the efficiency of the business. Personal
control by the partners increases the possibility of success. Unlimited liability encourages
caution and care on the part of partners. Fear of unlimited liability discourages reckless and
hasty action and motivates the partners to put in their best efforts.
7. Capacity for Survival:

The survival capacity of the partnership firm is higher than that of sole proprietorship.
The partnership firm can continue after the death or insolvency of a partner if the
remaining partners so desire. Risk of loss is diffused among two or more persons. In case
one line of business is not successful, the firm may undertake another line of business to
compensate its losses.

8. Better Human and Public Relations:

Due to number of representatives (partners) of the firm, it is possible to develop personal

touch with employees, customers, government and the general public. Healthy relations
with the public help to enhance the goodwill of the firm and pave the way for steady
progress of the business.

9. Business Secrecy:

It is not compulsory for a partnership firm to publish and file its accounts and reports.
Important secrets of business remain confined to the partners and are unknown to the
outside world.
DEMERITS OF PARTNERSHIP:
1. Unlimited Liability:
Every partner is jointly and severally liable for the entire debts of the firm. He has to
suffer not only for his own mistakes but also for the lapses and dishonesty of other
partners. This may curb entrepreneurial spirit as partners may hesitate to venture into
new lines of business for fear of losses. Private property of partners is not safe against
the risks of business.
2. Limited Resources:
The amount of financial resources in partnership is limited to the contributions made
by the partners. The number of partners cannot exceed 10 in banking business and 20
in other types of business. Therefore, partnership form of ownership is not suited to
undertake business involving huge investment of capital.
3. Risk of Implied Agency:
The acts of a partner are binding on the firm as well as on other partners. An
incompetent or dishonest partner may bring disaster for all due to his acts of
commission or omission. That is why the saying is that choosing a business partner is
as important as choosing a partner in life.
4. Lack of Harmony:

The success of partnership depends upon mutual understanding and cooperation among the
partners. Continued disagreement and bickering among the partners may paralyse the business or
may result in its untimely death. Lack of a central authority may affect the efficiency of the firm.
Decisions may get delayed.

5. Lack of Continuity:

A partnership comes to an end with the retirement, incapacity, insolvency and death of a partner.
The firm may be carried on by the remaining partners by admitting new partners. But it is not
always possible to replace a partner enjoying trust and confidence of all. Therefore, the life of a
partnership firm is uncertain, though it has longer life than sole proprietorship.

6. Non-Transferability of Interest:

No partner can transfer his share in the firm to an outsider without the unanimous consent of all the
partners. This makes investment in a partnership firm non-liquid and fixed. An individual’s capital
is blocked.
7. Public Distrust:
A partnership firm lacks the confidence of public because it is not subject to
detailed rules and regulations. Lack of publicity of its affairs undermines
public confidence in the firm.

The foregoing description reveals that partnership form of organisation is

appropriate for medium-sized business that requires limited capital,
pooling of skills and judgment and moderate risks, like small scale industries,
wholesale and retail trade, and small service concerns like transport agencies,
real estate brokers, professional firms like chartered accountants, doctor’s
clinics or nursing homes, attorneys, etc.
Limited Liability Partnership (LLP)
Meaning of Limited Liability Partnership (LLP)
 LLP is a Limited Liability Partnership is a corporate business vehicle that provides the
benefits of limited liability of a company to its members and also allows to manage
their internal management on the basis of mutually arrived agreement as in case of a
partnership firm.

 Partners have lower liabilities to any debt which may arise in future in running the
business. It contains elements of both ‘a corporate structure’ as well as ‘a partnership
firm structure’ and is called a hybrid between a company and a partnership.

 The Partners are required to contribute towards the LLP as specified in the LLP
Agreement. Their share can be in any form i.e. tangible or intangible, movable or
immovable property, monies and cash.

 In terms of liability under Limited Liability Partnership the Company is liable for
losses or debts incurred in running the business where the individual members of the
LLP shall not be liable for such losses or debts.
Example

ABZ LLP has 2 partners X and Y,

ABZ takes a loan of Rs.20 lakhs and is unable to repay the loan. Its capital is
Rs. 10 lakhs where X is supposed to contribute Rs. 6 lakhs and Y Rs. 4 lakhs
but both the partners contribute Rs. 5 lakhs as X contributed Rs. 3 lakhs and Y
contributed Rs. 2 lakhs. In such a case LLP will be liable for up to the amount
of Capital i.e. Rs. 10 lakhs and X and Y will be liable for Rs. 5 lakhs as per
their share of contribution. The Creditors cannot recover more amounts, if
such amount is insufficient to clear the debts of the LLP.
Salient Features of LLP
The salient features of LLP Act, 2008, are as follows:
1. It is a body corporate with separate legal entity from its partners. The mutual rights and
duties of the partners of an LLP are governed by LLP Agreement.
2. LLP is liable to the extent of its assets. Partner’s liability is limited to the extent of agreed
contribution (capital) in the LLP Agreement.
3. No partner is liable on account of the independent or unauthorized action of other
partners or for their misconduct.
4. Every LLP should have at least two partners with at least two individuals as “designated
partners”, of whom at least one must be resident in India. Only designated partners are
responsible for compliance with the Act.
5. A firm, private company or an unlisted public company can be converted into LLP.
6. The Act empowers Central Government to apply provisions of the Companies Act, 1956
as appropriate, by notification with such changes as deemed necessary, in the LLP Act,
2008.
7. The winding up of LLP is either voluntary or by the High Court.
LLP Advantages
There are numerous benefits to be had from trading through an LLP -
1. Limited liability protects the member’s personal assets from the liabilities of the
business. LLP’s are a separate legal entity to the members.
2. Flexibility. The operation of the partnership and distribution of profits is determined
by written agreement between the members. This may allow for greater flexibility in
the management of the business.
3. The LLP is deemed to be a legal person. It can buy, rent, lease, own property, employ
staff, enter into contracts, and be held accountable if necessary.
4. Corporate ownership. LLP’s can appoint two companies as members of the LLP. In an
LTD company at least one director must be a real person.
5. Designate and non-designate members. You can operate the LLP with different levels
of membership.
6. Protecting the partnership name. By registering the LLP at Companies House you
prevent another partnership or company from registering the same name.
Disadvantages of an LLP
1. Public disclosure is the main disadvantage of an LLP. Financial accounts have
to be submitted to Companies House for the public record. The accounts may
declare income of the members which they may not wish to be made public.
2. Income is personal income and is taxed accordingly. There may be tax
advantages in registering as a company, but this will depend on your personal
circumstances.
3. Profit can not be retained in the same way as a company limited by shares.
This means all earned profit is effectively distributed with no flexibility to hold
over profit to a future tax year.
4. An LLP must have at least two members. If one member chooses to leave the
partnership the LLP may have to be dissolved.
 Joint Stock Company
The simplest way to describe a joint stock company is that it is a business organisation that is owned
jointly by all its shareholders. All the shareholders own a certain amount of stock in the company,
which is represented by their shares.

Professor Haney defines it as “a voluntary association of persons for profit, having the capital divided
into some transferable shares, and the ownership of such shares is the condition of membership of the
company.” Studying the features of a joint stock company will clarify its structure.

Features of Joint Stock Company:

1] Artificial Legal Person

A company is a legal entity that has been created by the statues of law. Like a natural person, it can do
certain things, like own property in its name, enter into a contract, borrow and lend money, sue or be
sued, etc. It has also been granted certain rights by the law which it enjoys through its board of
directors.

However, not all laws/rights/duties apply to a company. It exists only in the law and not in any
physical form. So we call it an artificial legal person.
2] Separate Legal Entity
Unlike a proprietorship or partnership, the legal identity of a company and its members are
separate. As soon as the joint stock company is incorporated it has its own distinct legal identity.
So a member of the company is not liable for the company. And similarly, the company will not
depend on any of its members for any business activities.

3] Incorporation
For a company to be recognized as a separate legal entity and for it to come into existence, it has
to be incorporated. Not registering a joint stock company is not an option. Without
incorporation, a company simply does not exist.

4] Perpetual Succession
The joint stock company is born out of the law, so the only way for the company to end is by the
functioning of law. So the life of a company is in no way related to the life of its members.
Members or shareholders of a company keep changing, but this does not affect the company’s
life.
5] Limited Liability
This is one of the major points of difference between a company and a sole
proprietorship and partnership. The liability of the shareholders of a company is limited. The
personal assets of a member cannot be liquidated to repay the debts of a company. A
shareholders liability is limited to the amount of unpaid share capital. If his shares are fully paid
then he has no liability. The amount of debt has no bearing on this. Only the companies assets can
be sold off to repay its own debt. The members cannot be made to pay up.
6] Common Seal
A company is an artificial person. So its day-to-day functions are conducted by the board of
directors. So when a company enters any contract or signs an agreement, the approval is indicated
via a common seal. A common seal is engraved seal with the company’s name on it. So no
document is legally binding on the company until and unless it has a common seal along with the
signatures of the directors.
7] Transferability of Shares
In a joint stock company, the ownership is divided into transferable units known as shares. In case
of a public company the shares can be transferred freely, there are almost no restrictions. And in
a private company, there are some restrictions, but the transfer cannot be prohibited.
Formation of Joint Stock Company:
A company is mainly Formed by two principal documents commonly
known as ‘Memorandum of Association’ which is also called as company’s
charter document and ‘Articles of Association’ which describes the
company’s set of rules and regulations. Consequently, drafting of these
documents is on one of the most crucial step in any company.
Advantages of a Joint Stock Company:
The advantages of forming a company rather than carrying on partnership business are as
follows:
1. Large Capital:
The outstanding advantage is that it allows vast mobilization of capital which otherwise is not
possible to arrange. In a public company, there is no limit to the number of members. A very
large number of people acquire interest in the company by purchasing shares.
The fact that shares are transferable given an added advantage to the company for attracting
greater number of people. No other form of business organisation is so well adopted in raising
large amounts of capital as the Joint Stock Company.
2. Vast Scope of Expansion:
The vast capital collected by means of shares coupled with the earnings of the company
contribute sufficient scope for its expansion. The company offers an excellent scope of self-
generating growth. The managerial talents supported by vast finance leads to huge earnings
and to ultimate expansion of the business and growth.
3. Limited Liability:
The liability of the members of the company is limited. Members cannot be called upon
to pay anything more than the nominal value of the shares held by them. This
encourages people who have little to save to invest money in the company, thus
providing ample capital for initial outlay and expansion of the business.

4. Permanent Existence:
The life of the company does not depend on the life of its members. Law creates the
company and can dissolve it. The death, insolvency or the transfer of shares of
members does not, in any way, affect the existence of the company.
5. Transferability of Shares:
The shares in a company are transferable and members can transfer their shares without the
consent of other members of the company. The company is listed with the Stock Exchange and
hence company’s shares are readily sold and purchased. As shares are freely transferable, a
shareholder can convert his holding into cash. This facility coupled with the limited liability has an
encouraging investment by general public.
6. Democratization of Ownership:
The fact that relatively small amount of capital can be mobilised and employed collectively results
in what Marshall call ‘Democratization’ of ownership as distinguished from the control of business.
While it permits all types of people, big or small, venturesome or cautious, to become part owners,
it permits the use of skill and initiative of the able entrepreneur, his expert knowledge and business
ability which would otherwise be lost to the community.

7. Diffused Risk:
The risk of loss is to be shared by the large number of shareholders and the possibility of huge
hardship on few persons as in the case of partnership or sole trader does not exist. Moreover, the
risk of loss is also limited to the extent of the value of share.
There is no need for the wealthy men to bear the burden of the business as large capital can be
collected from far and wide, and from rich and poor, controlled under one management.
8. Organized Intelligence:

The power of capital is supplemented by organised intelligence which makes for increased
efficiency of direction and management. The skill and flexibility of administration is
enhanced as a result of limited liability and entity idea.
The wisest and the most skillful directors may be chosen and one found inefficient or
indifferent could be removed. The company being independent on any single man, the
organized intelligence of the Board of Directors and other top managers is available for
sound and bold policies.
9. Tax Relief:

A company pays income-tax as a separate legal person at a flat rate fixed by the Finance Act
from year to year. In case of higher incomes, the- rate is lower than that charged in case of
sole proprietors and partners.
10. Social Advantage:

The social advantage of company form of organisation is that it affords employment to so

many persons, produces articles which otherwise would have been imported and affords
opportunity to middle and lower class of people to become members of the company and
earn profits.
Disadvantages of Joint Stock Company:
Despite so many advantages it has got many disadvantages which are as follows:
1. Difficulty in Formation:
The legal requirements and formalities required to be completed are so many. The cost involved
is quite heavy. It has to approach large number of people for its capital. It cannot start its
business unless certificate of incorporation has been obtained. This is granted after a long time
when all the formalities are completed.
2. Reckless Speculation Encouraged:
This form of organisation encourages reckless speculation in shares at stock exchanges. This is an
evil of great magnitude in our country because in many cases stock exchanges act as ‘bush
agencies’, rather than aid to sound investment or stability. Sometimes the management of Joint
Stock Company encourages speculation in shares for its personal gains.
3. Fraudulent Management:
Frauds have been a common feature of many a company. The promoters and directors may
indulge in fraudulent practices. The company law has devised various methods to check the
fraudulent practices but they have not proved to check them completely.
4. Delay in Decision-Making:
In this form of organisation, decisions are not made by single individual. All important decisions are
taken by the Board of Directors. Decision-making process is time-consuming. So many opportunities
may be costly because of delay in decision-making. Promptness of decisions which is a common
feature of sole tradership and partnership is not found in a company.
5. Monopolistic Powers:
There is, generally, tendency for company organisation to form themselves into combinations
exercising monopolistic powers which may react detrimentally to other producers in the same line or
to consumers of the commodity produced.
6. Excessive Regulation by Law:
The State that creates the company, minutely watches the activities of the company organisation. A
company and the management have to function well within the law and the provisions of Companies
Act are quite elaborate and complex.
At every step, it is necessary to comply with its provisions lest the company and the management
should be penalised. The penalties are quite heavy and in several cases, officers in default can be
punished with imprisonment. This hampers the proper functioning of the company.
7. Conflict of Interests:
The management does not care for the interest of shareholders because the management is not the
owner. Actually, the management body is not composed of owners, it is composed of those who have
no interest in the business.
It is only the few who govern the way they like. Though, in theory, company is a democracy but in
actual practice it is oligarchy. The lack of interest between the company and its management
encourages manipulation and speculation.

8. Lack of Secrecy:
The management of companies remains in the hands of many persons. Every important thing is
discussed in the meetings of Board of Directors. Hence secrets of the business cannot be maintained.
In case of sole proprietorship and partnership forms of organisation, such secrecy is possible because
a few persons are involved in the management.
9. Bureaucratic Approach:
The bureaucratic habit of company officials to shirk trouble of some initiative because they get no
direct benefit from it; often retard the growth. This leads to classification of social organism and
leveling down the character. The company organisation does not enjoy the same flexibility and
promptness in the making as other organisations do. The delays in taking the decision affect the
growth of the business.
1. Chartered Company: The companies that form by the order of the king of England are called the charter
company. These companies were formed before 1844. For example, East India Company, Chartered Bank of
England, the charter of the British South Africa Company, given by Queen Victoria (More information here)
2. Statutory Company: Companies that are formed by the order of the President, or by the Legislative
Committee or by bill of Parliament are called Statutory Company. These Companies are operated by those laws.
For example, municipal councils, universities, central banks and government regulators, Central Bank. (More
information here)
3. Registered Corporation: Companies that are formed under the prevailing law of the company
are called the registered company. The corporation that has filed a registration statement with
the SEC prior to releasing a new stock issue. It is two types-
A. Unlimited Company: The liabilities of the shareholders of this company are unlimited. For
example, British all-terrain vehicle manufacturer Land Rover, GlaxoSmithKline Services
Unlimited.
B. Limited Company / limited corporation: The liabilities of the shareholders are limited. For
example, Charitable organisations, Financial Services Authority. This liability of a company can
be of two types.

 By Guarantee
 By share value. The company limited by share can be of two types.
• Private Limited Company, where the number of shareholder ranges from two to fifty. The share
of these companies can’t be traded in the stock market.
• Public Limited Company, where the number of shareholder ranges from seven to share
limitation. The share of the public limited company is traded in the stock market.
Difference between Public Limited and Private Limited Company
 A private company cannot offer its share to the general public as it is
restricted, in a private company the shares are privately held by the members
or investors.
 The private company the suffix after its name Private Limited (PVT
LTD), the main advantage of a private company is they don’t need to
disclose their financials to the general public. The public company is
only answerable to its members/investors only.

 A public company under the companies act 2013 means a company that is
listed on a stock exchange and can sell its securities to the general public.
 To become a public company; the company needs to offer an IPO (Initial
public offering) to the public.
 Publicly listed company means their shareholders can sell securities freely
on a stock exchange. A public company needs to disclose its annual report
to all the stakeholders.
 A public company can expand its business by issuing more shares to the
general public.
The differences are as follows between the two:
1. A public company is a company that is listed in the well-known stock exchange
and can be traded freely. Where a private limited company is not listed on a
stock exchange and it is held privately by the member of the company.
2. In a private company, it is not mandatory to call a statutory meeting of
members, whereas it is mandatory to have a statutory meeting in case of a
public limited company.
3. There must be a minimum of seven members to form and start a public
company, on the other side private company has a limit of a minimum of two
members to start the business.
4. There is no capping for the maximum number of members in a public limited
company. But a private company cannot have more than 200 members, subject
to some conditions.
5. To start a public company there should be at least 3 directors and is a privately
held company, the minimum number of directors should be 2.
6. In a public company, at least 5 members must be present personally at the
Annual general meeting (AGM) for the formation of the requisite quorum,
whereas in the private limited company at least 2 members should present in
the AGM.
7. General Public can be invited by the company for the subscription of shares
of the public limited company. On the other hand, there is no such thing in a
private limited company to invite the general public for the subscription of
share.
8. The issuance of the prospectus is compulsory in the public limited company
and for the private limited company, there is no such instance.
9. In a private limited company transferability of shares is fully restricted; In
contrast, the shareholders of a public limited company can easily and freely
transfer their shares.
10. In a Private Limited Company requires the only certificate of incorporation to
start the business, on the other side public company requires a certificate of
incorporation and then the certificate of commencement to start a business.
 One Person Company (OPC)

The Companies Act, 2013 completely revolutionized corporate laws in

India by introducing several new concepts that did not exist previously.

 On such game-changer was the introduction of One Person Company

concept. This led to the recognition of a completely new way of starting
businesses that accorded flexibility which a company form of entity can
offer, while also providing the protection of limited liability that sole
proprietorship or partnerships lacked.

 Several other countries had already recognized the ability of individuals

forming a company before the enactment of the new Companies Act in
2013. These included the likes of China, Singapore, UK, Australia, and
the USA.
Definition of One Person Company
Section 2(62) of Companies Act defines a one-person company as a
company that has only one person as to its member. Furthermore,
members of a company are nothing but subscribers to its
memorandum of association, or its shareholders. So, an OPC is
effectively a company that has only one shareholder as its member.

 Such companies are generally created when there is only one

founder/promoter for the business. Entrepreneurs whose
businesses lie in early stages prefer to create OPCs instead of sole
proprietorship business because of the several advantages that
OPCs offer.
Difference between OPCs and Sole Proprietorships
Features of a One Person Company
Here are some general features of a one-person company:
a. Private company: Section 3(1)(c) of the Companies Act says that a single person can form a
company for any lawful purpose. It further describes OPCs as private companies.
b. Single-member: OPCs can have only one member or shareholder, unlike other private
companies.
c. Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the
sole member of the company has to mention a nominee while registering the company.
d. No perpetual succession: Since there is only one member in an OPC, his death will result in
the nominee choosing or rejecting to become its sole member. This does not happen in other
companies as they follow the concept of perpetual succession.
e. Minimum one director: OPCs need to have minimum one person (the member) as director.
They can have a maximum of 15 directors.
f. No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as
minimum paid-up capital for OPCs.
g. Special privileges: OPCs enjoy several privileges and exemptions under the Companies Act
that other kinds of companies do not possess.
Formation of One Person Companies
A single person can form an OPC by subscribing his name to the memorandum of association and
fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum must state
details of a nominee who shall become the company’s sole member in case the original member dies or
becomes incapable of entering into contractual relations.

This memorandum and the nominee’s consent to his nomination should be filed to the Registrar of
Companies along with an application of registration. Such nominee can withdraw his name at any
point in time by submission of requisite applications to the Registrar. His nomination can also later be
cancelled by the member.

Membership in One Person Companies

Only natural persons who are Indian citizens and residents are eligible to form a one-person company
in India. The same condition applies to nominees of OPCs. Further, such a natural person cannot be a
member or nominee of more than one OPC at any point in time.

It is important to note that only natural persons can become members of OPCs. This does not happen
in the case of companies wherein companies themselves can own shares and be members. Further, the
law prohibits minors from being members or nominees of OPCs.
Conversion of OPCs into other Companies
Rules regulating the formation of one-person companies expressly restrict the conversion of OPCs
into Section 8companies, i.e. companies that have charitable objectives. OPCs also cannot
voluntarily convert into other kinds of companies until the expiry of two years from the date of
their incorporation.

Privileges of One Person Companies

OPC enjoy the following privileges and exemptions under the Companies Act:
 They do not have to hold annual general meetings.
 Their financial statements need not include cash flow statements.
 A company secretary is not required to sign annual returns; directors can also do so.
 Provisions relating to independent directors do not apply to them.
 Their articles can provide for additional grounds for vacation of a director’s office.
 Several provisions relating to meetings and quorum do not apply to them.
 They can pay more remuneration to directors than compared to other companies.
 Co-Operatives
The word cooperation has many meanings, but in common discourse it means working, living and
thinking together. In our existing socio-economic context, however, we need to define it somewhat
differently—”Cooperation is a form of organization wherein persons voluntarily associate with each
other as human beings on the basis of equality for the promotion of mutual economic interests”.
As per the definition given by the International Labour Organization (ILO), a cooperative
society is an association of persons, who assemble for their common cause and work together
voluntarily on democratic lines.
According to the definition given by the “International Cooperative Alliance”(ICA), a
cooperative is an association of persons united voluntarily to meet their common economic, social
and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.
It means that cooperatives are based on the values of self-help, self– responsibility, democracy,
equality, equity and solidarity in the tradition of their founders.
Cooperative members believe in the ethical values of honesty, openness, social responsibility and
caring for others. Therefore, the cooperatives are different from the private enterprise in their forms
of ownership, control, distribution of profits, values of equality, equity, solidarity and social
responsibility.
Cooperative Society - Characteristics and Types
 There are different types of business organisations, one such form is of cooperative society.
Cooperative societies are formed with the aim of helping their members.

 This type of business organisation is formed mainly by weaker sections of the society in
order to prevent any type of exploitation from the economically stronger sections of the
society.

 Cooperative societies need to be registered under the Cooperative Societies Act, 1912 in
order to function as a legal entity. Members of the society raise the capital within
themselves.
Characteristics of Cooperative Society
1. Voluntary Association: The membership of a cooperative society is voluntary in nature, i.e it is as per
the choice of people. Any individual can join the cooperative society and can also exit the membership
as per his/her desire. The member needs to serve a notice before deciding to end the association with
the society.
2. Open Membership: The membership of a cooperative society is open to all i.e, membership is open to
all, irrespective of their caste, creed and religion.
3. Registration: A cooperative society needs to get registered in order to be considered a legal entity.
After registration it can enter into contracts and acquire property in its name.
4. Limited liability: The members of a cooperative society will have limited liability. The liability is
limited to the amount of capital contributed by the member.
5. Democratic Character: Cooperative society forms a managing committee and elected members have
the power to vote and choose among themselves. The managing committee is formed so as to take
important decisions regarding the operations of the society.
6. Service Motive: The formation of a cooperative society is for the welfare of the weaker sections of the
community. If the cooperative society earns profit it will be shared among the members as dividend.
7. Under state control: In order to safeguard the interests of society members, the cooperative society is
under the control and supervision of the state government. The society has to maintain accounts, which
will be audited by an independent auditor.
Types of Cooperative Societies
Following are some of the types of cooperative societies:
1. Consumer Cooperative Society: Consumer cooperative societies are formed with the objective
of protecting the consumer interests. Individuals who wish to purchase products at reasonable rates
most likely join consumer cooperative societies. In such type of societies, there are no middlemen
involved, the product is purchased directly from the producer and sold to consumers.
2. Producer Cooperative Society: Producer cooperative societies are formed with the objective of
protecting the interests of small producers. These cooperatives help producers in maintaining their
profit and also to assist producers in procuring items that will be helpful in production of goods and
services.
3. Credit Cooperative Society: These cooperative societies are set up with the objective of helping
people by providing credit facilities. They provide loans at a minimal rate of interest and flexible
repayment tenure to its members and protect them against high rates of interest that are charged by
private money lenders.
4. Housing Cooperative Society: Housing cooperative societies are formed with the objective of
providing housing facilities to the members of the society. This proves to be beneficial for the lower
income groups as it allows them to avail housing benefits at a very affordable price.
5. Marketing Cooperative Society: These societies are formed with the objective of providing
small producers a platform to sell their products at affordable prices and also eliminate middlemen
from the chain, thus ensuring adequate profits.
Advantages of Cooperative Society
Following are some of the advantages of cooperative societies:
1. The products that are sold in the cooperative societies are cheaper than the
market.
2. Procurement of products is done directly from the producers, which removes the
middlemen, thereby generating more profit for the producers and consumers.
3. Members of the cooperative society can get quick loans.
4. There is no black marketing involved.
Disadvantages of Cooperative Society
Some of the disadvantages of cooperative societies are:
1. Due to the association of members of low income groups, the scope of raising
capital is limited.
2. It suffers from inefficiencies in management.