Owning an enterprise is a great dream for those who look jealous at people who have made it from nothing to vast riches. It often remains just a dream for some, but some others can turn the, dream into action. Many ventures do not fetch returns more than subsistence wages that too after a lot of hard work and worry. It is often that the person trapped in such a business turns out to be a dreamer than a pragmatist, “when he/she gets into the venture.
A small business venture can be a boon provided one gets into it by the right way, and knows what to expect and do, otherwise it can be a dreadful nightmare. Few know exactly what they want and why, and how they will do it. Some do not dream of riches, but of an interesting and fulfilling life style, which often translates into self-employment in trade or profession, or turning a recreational hobby, into a business.
More often, the one who has made a good business out of a hobby had never entered the venture with dreams of riches. Vast riches are for the few, but it is probable to plan and look forward to self-employment where you can earn better than a living wage. On the other hand, there is little reason to stay self-employed if you can work for someone else at better wages than your own venture returns.
When we see entrepreneurs, we find that some turn their business successfully called ‘successful entrepreneurs’ while others do not. Then, a question arises what makes the entrepreneurs successful. In other words, what are the qualities or characteristics of the successful entrepreneurs. The possession of certain knowledge, skill or personality profile called ‘entrepreneurial competencies’ or ‘traits’ help the entrepreneurs perform well.
In simple terms, competence is an underlying characteristic of a person which leads to his/her effective or superior performance in a job. A job competence is a good combination of one’s underlying characteristics such as ‘one’s knowledge, skill, motive, etc. which one uses to perform a given job well. It is important to mention that the existence of these underlying characteristics may or may not be, known to the person concern. This implies that the underlying characteristics may be unconscious aspects of the person. The underlying characteristics possessed by an entrepreneur which result in superior performance are called the ‘entrepreneurial competencies’ or ‘traits’.
In order to understand more and better about entrepreneurial competencies, let us first understand its components, i.e., knowledge, skill and motive. These are explained one by one as follows:
In simple terms, knowledge means collection and retention of information in one’s mind. Knowledge is necessary for performing a task but not sufficient. For example, a person having the knowledge of cricket playing could be in a position to describe how to play. But, mere description wil1 not enable the listener to play cricket unless something more than knowledge is there. We see in real life that people possessing mere knowledge have miserably failed while actually performing the task. What this implies is that one also needs to have skills to translate the knowledge into action/practice.
Skill is the ability to demonstrate a system and sequence of behaviour which results in something observable, something that one can see. A person with playing ability, i.e., skill can properly identify the sequence of action to be performed to win the cricket match. Remember, while knowledge of playing cricket could be acquired by reading, talking or so on, skill to actually play cricket can be acquired by practice i.e., playing on a number of occasions. This means both knowledge and skill are required to perform a task.
In simple terms, motive is an urge to achieve one’s goal what McClelland terms ‘Achievement Motivation’. This continuous concern of goal achievement directs a person to perform better and better. Coming back to the, same example of cricket playing, one’s urge to become the best player helps him constantly practice, playing to look out for ways and means to improve his play. Thus, in order to perform any task effectively and successfully including establishing and running an industrial unit, a person (entrepreneur) needs to possess a set of knowledge, skill and motive which could be together labelled as ‘competencies’ or ‘traits’.
The true entrepreneur is one who is endowed with more than average capacities in the task of organising and coordinating the various other factors of production. He should be a pioneer, a captain of industry. The supply of such entrepreneurship is however quite limited and all are not endowed with such talent. The modern entrepreneur is one who detects and evaluates a new situation in his environment and directs the making of such adjustments in the economic systems as he deems necessary. He conceives a new industrial enterprise, displays considerable initiative, grit and determination in bringing his project to fruition.
Some people believe that entrepreneurs are born not made. In other words, business family background is essential to the success for entrepreneurs. Other people believe that entrepreneurs are made not born. According to some people, person with proper knowledge and skills acquired through education and experience can become successful entrepreneurs.
In view of above controversy in order to understand clearly what it takes to be a successful entrepreneur, research institutions and behavioural scientists, through their research studies, have tried to resolve the controversy on what makes a successful entrepreneur. The findings of the institutional and research studies on entrepreneurial competencies is as follows :
Entrepreneurship Development Institute of India
Study Entrepreneurship Development Institute of India, Ahmedabad conducted a research study to identify what makes an entrepreneur successful. The study was conducted under the guidance of Prof. David C. McClelland, a well known behavioural scientist in three countries namely India, Malawi and Equodor. The outcome of the study has been the identification of a set of entrepreneurial competencies or characteristics that result in superior performance. The major finding of the study was that the possession of competencies is necessary for superior performance. Following is the list of major competencies identified by the study that lead to superior performance of the entrepreneurs:
2. Looking for opportunities.
4. Information Seeker.
5. Quality Conscious.
6. Committed to work.
7. Efficiency seeker.
8. Proper planning.
9. Problem Solver.
13. Efficient monitor.
14. Employees’ well-wisher.
15. Effective strategist.
Individual Research Studies
Several individual scholars have also undertaken research studies to identify the entrepreneurial competencies or the quality of a successful entrepreneur. The findings of some of the studies are as follows:
In his study of entrepreneurial development of Madras city of India, James J. Bema listed the following competencies:
(i) He is an enterprising individual, energetic, resourceful, alert to new opportunities, able to adjust to changing conditions and willing to assume risks involved in change.
(ii) He is interested in advancing technologically and in improving the quality of his product.
(iii) He is interested in expanding the scale of his operations, and he reinvests earnings to this end.
James T. McCrory opines that a successful entrepreneur possesses the following qualities :
(i) He lives frugally and saves for the development of his enterprise. He is skilled enough, quality conscious and very quick to learn from others.
(ii) He is also very versatile and resourceful with the limited resource at his command. He is very sensitive to new demands and market changes.
(iii) He is tenacious to an extreme as and when any industrial opportunity causes challenge for him. B.C.
Tandon has listed the four major qualities of a successful entrepreneur :
(i) A successful entrepreneur should have the capacity to bear risk involved in the business.
(ii) He should posses the required technical knowledge and should be ready to adapt to change, as and when needed.
(iii) The entrepreneur should also have the ability to marshal the resources at his command in the best possible manner for achieving his ultimate business objectives.
(iv) An entrepreneur should also have the ability to organise and manage the various factors of production to the best of his enterprise. For this, he requires high and relevant knowledge of management theory.
Robert D. Hisrich has identified a few more entrepreneurial traits. In his opinion the entrepreneur must have adequate commitment, motivation and skill to start and build a business. It is his responsibility to determine if the management team has the complementary skills necessary to succeed. He feels that the entrepreneur must possess the following traits in addition to those mentioned in the preceding pages :
(i) Motivation: An entrepreneur must build an efficient team, keep it motivated and provide an environment for individual growth and career development.
(ii) Self-confidence: Entrepreneurs must have the mental capacity to face any situation. They should also have the ability to inspire others. They must have confidence in themselves and the determination to achieve their goals.
(iii) Long-term Involvement: Entrepreneurs must be committed to longterm projects which required continuous and consistent involvement.
(iv) High Energy Level: Success of an entrepreneur demands the ability to work long hours for sustained periods of time.
(v) Trouble-shooter: The entrepreneur must possess the trait of the proverbial “trouble-shooter”. He must have the ability to identify where a problem is and suggest on the spot solutions.
(vi) Initiative: The entrepreneur must have initiative, accepting personal responsibility for actions and above all make good use of resources. It is this trait which gives the entrepreneur the courage to take risks and learn from failures.
(vii) Goal-setter: An entrepreneur must be able to set challenging, but realistic goals. This personal trait can go a long way in the all round progress of a nation.
These personal traits make an entrepreneur a successful person. However, it must be stated that no entrepreneur possess all these strengths. No entrepreneur is born with all these traits. It is possible for him to acquire these traits if the environment is suitable for this purpose.
While one can add certain other factor to the list of entrepreneurial competencies, the said competencies appear to be the major ones: An integrated view of the qualities of a successful entrepreneur can be listed as follows:
1. Initiative: When can we say that a person has initiative? When he/she takes action that goes beyond job requirement or the demands of the situation. When he/she does things before being asked or forced to by circumstance and acts to extend the business into new areas, products or services.
Most of the successful entrepreneurs show this competency in some from or the other. They, on their own take decisions to launch their enterprise or expand and grow.
2. Seeing and acting on opportunities: Look for and takes action on opportunities. When a person sees and acts, on opportunities, either business or personal growth or seizes unusual opportunities to obtain finance, equipment, land, workspace or assistance.
There is a case of a film distributor in Jamshedpur, Mr. Nair. The story of how he became a distributor is interesting. He was working for TISCO at Jamshedpur. One day, he met the Secretary of one ‘United Club’ in the town, who asked him whether he could help him in getting a movie to show in his club as he had difficulties in procuring it. Nair agreed and went to Calcutta to get the movie. There he met an acquaintance who was connected with the film line; on being asked Nair told him the reasons for his visit. The acquaintance offered to help him, but Nair refused and- still collected name and addresses of some distributors, He then went to a well-known firm of distributors, got a movie for Rs.5,000/- and gave it to the club for Rs.7,000/-. This started him off and he began supplying movies to that club and other movie theatres in Jamshedpur. Gradually the work increased and he established an office in Calcutta and became a full-time distributor.
3. Persistence: Takes repeated action to overcome obstacles that get in the way of reaching goals. This is a very important competency. As an entrepreneur your path may not be smooth, you might face difficulties, but you have to develop the qualities of a spider and carry on without getting disheartened. And finally success will be yours.
Now you know what persistence is, and what you can learn from the example.
Look at the case of Leela. She decided to set up a unit of manufacturing FRP products. She purchased land, engaged a firm of contractors for the construction of the building. As luck would have it, the watchman engaged there got murdered (some personal enmity) and the contractor’s workers panicked and left the construction work. Somehow she managed to get the construction completed. Much later, by the time she could start production, FRP technology had changed and she hardly had any orders. As a result, she defaulted in payment of interest to the financial institution which had extended financial assistance in initial investment. But did she lose heart? No, she sold the land and building, paid the financial institution, salvaged the machinery, shifted it to a rented place and started again.
4. Information seeking: Takes action on getting information to help reach objectives or clarify problems. A person does research on how to provide a product or services, consults experts for business or technical advice, seeks information for what is needed and uses contacts or information networks to obtain information. When you set out to put up your own enterprise, you will not know everything. You will have to gather information from elsewhere and acquire the knowledge. You will have to take help from experts, refer to books and journals.
Shreyas Gandhi of Gujarat is a successful manufacturer of office equipment, mainly intercommunication systems. But as he puts it, in electronics one has to be one one’s toes all the time, as it is a fast changing line. So he has constantly to be on the look out and search for other products and gather information about them. And he does that by reading several electronic magazines available in India. These magazines and information on market conditions help him in deciding whether he should go for a change and when. For example : when he found that T.Vs. as a communication line are coming up very fast, he planned to manufacture TVs.
So once you have set up you industry and established yourself, do not ,sit back and relax but be up to date on information about the line of your choice.
5. Concern for high quality of work: Acts to do things that meet or beat existing standards for excellence. Such persons always have a desire to produce work of high quality and to favourably compare one’s own work to that of others.
This would help you-not only to stand the competition, create or expand your market, but also give you a sense of sat is faction and achievement.
Take the case of Gopukumar. He is an architect. He started with designing private residences and graduated to designing big hotels and shopping complexes. What has made him successful and popular is the fact that he believes in giving high quality of work and is meticulous about each and every detail of the design. He never compromises on quality and has self set standards of excellence which has earned him a reputation in the building construction line.
6. Commitment to work contract: Places the highest priority on getting a job completed. Makes a personal sacrifice or extends extraordinary effort to complete a job. Or accepts full responsibility for problems in completing a job for others and pitches in with workers or works in their places to get the job done and expresses a concern for satisfying the customer. A successful entrepreneur not only provides quality goods and keeps up-to-date information about his product but he/she is also particular about keeping to the delivery-time schedule and satisfying a customer. He/she would go to any lengths to make any required efforts to complete work in time.
Agnes Kottoor is a woman entrepreneur manufacturing optical lenses in Kochi. She employs about a dozen girl workers and has built up a good clientele. Kerala is known of load shedding and power cuts. Agnes also has to suffer due to this. During day time there would be power-cuts and so obviously the work would have to stop and as her workers are all girls, they have to be allowed to go home on time. But what about timely delivery to the customers? Agnes is very particular about that. So what does she do? She herself works on the machines, grinding the lenses, sometimes upto 2 a.m. in the morning and finishes’ the work. That is an example of commitment to work contract.
7. Efficiency Orientation: Finds ways to do things faster or with fewer resources or at a lower cost. Such a person looks for ways to reduce costs and time, uses information on business tools to improve efficiency and expresses concern about costs against benefits of any improvement or change.
It is not enough merely to manufacture produce and sell. A successful entrepreneur always thinks of ways in which he/she can improve the product or service, innovate and reduce costs wherever he/she can. That is efficiency orientation.
Shreyas Gandhi of Ahmedabad is a successful trader in inter-coms, calculators, refrigerators, vacuum cleaners, air-conditioners and other electronic equipment. His planning for inventory and market is good. Shreyas Gandhi deals in approximately forty items, the market requirement for each is different and he wants to ensure that he does not overstock and increase his interest burden. At the same time, he does not want to under stock, in which case he would not be able to satisfy his customers. So, he engaged an institute of management to conduct a survey of the market for his items which would enable him to assess the minimum level of stock he should keep for each item. Certainly, this is an efficient way of productive operations.
8. Systematic planning: Develops and uses logical step by step plans to reach goals. He/she plans by breaking a large task into sub-tasks, develops plans that anticipate obstacles, evaluates alternatives and most importantly takes a logical and systematic approach to activities.
As you know when you setup, or when you are in the process of setting up your venture, if you plan everything systematically and go step by step, half the battle will be won. Not that there would not be any difficulties, but your planning will enable you to deal with them. You can see from the following example that how Mr. Chandy Sam planned step-by-step to reach his goal and achieved it.
For systematic planning one can refer to Chandy Sam of Trivandrum. Chandy lost his father while still in college. Though he was still a student he had a hobby of repairing electrical and mechanical items. Due to his father’s demise he had to leave his studies and here his hobby helped him. He started a service chain for repairing refrigerators and air- conditioners. But what he really wanted to do was to go into manufacturing. He ‘started planning and preparing himself for this. He first tired to find out what equipment he could manufacture which would involve low investment, less machinery and have a good market in Kerala. He observed and studied various equipment, even imported freezers. He read up on the subject, referred technical material. And then made one or two models of freezers based on the imported one. He could sell them at a low price and low profit. He received more orders and needed money for machinery and working capital. Though he could not furnish collateral security, he finally could convince bankers by showing them the few freezers he had already manufactured. The loan was sanctioned. He started production of freezers and innovative voltage stabilizers: Slowly he headed for new products. Today he manufactures refrigerators, water coolers, air-conditioners and combination coolers, and has a high turnover.
9. Problem-solving: Identifies new and potentially unique ideas to reach goals. Switches to an alternative strategy to reach a goal, generates new ideas or innovative solutions. Everyone faces problems in life, and more so if you happen to be an entrepreneur. It is important that as an entrepreneur you have to have a problem solving attitude and not a problem avoiding one. Problems are bound to occur during the life of your enterprise, so if you have or develop this competency, life of your enterprise will run smoothly.
George Thomas of Kerala had taken entrepreneurship development, training from EDI and was all set to start production in his engineering unit. The building was ready, machinery had been installed and raw material stocked. There was however, one snag. He had not yet received power connection. Countless visits to and voluminous correspondence with the Electricity Department had not produced any results. The problem was how to procure it. He thought and came up with a solution. He printed cards inviting people for the inauguration of his unit (dated 3 days later) stating that the Chief Minister of the State would be inaugurating it (This with tacit agreement of P. S. to the Chief Minister). He then went and showed the card to the concerned official of the Electricity Department. The next day he got the power connection.
We don’t say that you have to resort to such means to solve a problem, but you have to bear in mind that you should be a problem solver – if you already are-not, develop yourself.
10. Self-confidence: Has a strong belief in self and own abilities. Expresses confidence in own ability to complete a task or meet a challenge. He/she sticks with own judgement in the face of opposition or early lack of success, or does something which he/she finds risky.
If you have self-confidence in yourself and your abilities, you can succeed in whatever you do. When you take up any task and if you have confidence in yourself that you are capable of doing it well, you can accomplish it in a much better fashion. Do we need an example here? Every successful person has self confidence. You have to believe in yourself.
11. Assertiveness: Confronts problems and issues with other directly. Confronts problems with others directly, tells others what they have to do and disciplines those failing to perform as expected.
Assertiveness is “not to be confused with aggressiveness. Aggression can be direct or indirect, honest or dishonest – but it always communicates an impression of superiority and disrespect. While assertive behaviour is active, direct and honest. It communicates an impression of self-respect and respect for others. This behaviour leads to success without retaliation and encourages honest, open relationship.
Let us look at the following three examples of conversation:
1. “Only an idiot would think of a solution like that! Don’t you even think before you talk?”
2. “You know, may be we might want to think about a different alternative. What do you think?”
3. “I am not completely comfortable with your solution. Will you please develop at least one more option?”
Number one is an example of aggressive behaviour, number two of non-assertive behaviour, while number three is a good example of assertiveness. It is honest, respectful and invites co-operation.
12. Persuasion: Successfully persuades others. An entrepreneur is said to be persuasive when he/she can convince someone to by a product or service to provide financing or to do something that he would like from the person. He/she asserts own competence or company’s qualities or strong confidence in own or company’s products or services.
If you, as an entrepreneur, cannot or do not convince others about the viability of your project or product or your own capabilities, how can you make a successful entrepreneur? To possess this competency is therefore very important for you. This competency is also interlinked with ‘self-confidence’. If you have self-confidence, only then you can persuade/convince others and get your work done.
Persuasion can be of different types. Jayabharati, a women entrepreneur, was refused loan by a bank as it felt that her project was not viable and she had no managerial skills. At the end of numerous visits to, the Bank, Jayabharati could convince the Bank about both and her loan was sanctioned.
Then there is Dinesh Shah, a very successful entrepreneur, who owns not one but a number of chemical units. His persuasion techniques were different. When set up his first small unit in 1977, the Government declared 100% excise exemption for dyestuff units with a turnover up to 5 lakhs. The duty, however, was reimposed in 1982. Dinesh organised his co-manufacturers and led a delegation to the then Finance Minister and persuaded a number of small and medium dyestuff manufacturers to close down their units for two months. Production resumed only after the Government relented and offered the concession.
13. Use of influence strategies: Use of varieties of strategies to influence others. Such an entrepreneur acts to develop business contacts, uses influential people to accomplish his/her own objectives, limits the information given to others and uses strategies to influence others.
Kalindi is an entrepreneur who manufactures paper napkins for use in hotels, restaurants and bars. She has customers in all the southern states and is now well established. There was a time before she had set-up her unit when she could not get a loan from any bank in her home town, Bangalore. But, she did not give up. Fortunately for her, she knew the president of the Association of Women Entrepreneurs of Karnataka (AWAKE). The president of AWAKE is a very influential and resourceful person and could get the loan sanctioned from a scheduled bank. (Here Kalindi used her contact to get her work done).
So, now you know what are these competencies and how important they are for you as potential entrepreneurs.
Several researchers have carried out research studies to identify the factors that motivate people to start business enterprises. The findings of some of the studies are as follows.
1. In this pioneering study, R.A. Sharma classified all the factors motivating the entrepreneurs into two types as follows :
(i) Internal factors
(a) Educational background
(b) Occupational experience
(c) Desire to do something pioneering and innovative
(d) Desire to be free and independent
(e) family background
(ii) External factors
(a) Assistance from Government
(b) Financial assistance from institutions
(c) Availability of technology and/or raw materials
(d) Encouragement from big business units
(e) Heavy demand for products
Internal factors constitute the personality of the entrepreneur and thereby generate an inclination to adopt entrepreneurial activity. The presence of these factors is essential for entrepreneurial activity to take place. But entrepreneurial ambitions cannot fructify without a supporting environment. External factor proves environment and give a spark to entrepreneurship.
Among the internal factors, the desire to do something creative was important. It means the desire to make a contribution to the development of the state, to introduce an entirely new product in the market, to place the home town on the country’s industrial map, to make full use of technical skills, to provide employment to intelligent young men and women in the community, etc. Occupational experience (familiar with the product, knowledge of the market, etc.) was rated as the second most important internal motive. Business experience provides confidence for starting anew enterprise. Technicians, engineers and executives rated business experience more important motivator than other types of entrepreneurs.
Among the external factors, assistance from financial and other Governmental institutions was rated the strongest motivator. Other factors include availability of surplus funds, sick units available at a cheap price, success stores of first-generation entrepreneurs, support of mends and relatives, etc. In some cases there were compelling reasons like loss of job, death of the father dissatisfaction with the job held, etc., prompting people to launch their own industries.
2. H. N. Pathak indicated that at small scale level, profit motive inspired small scale entrepreneurs. Ambition for independent working in industry also motivated non-corporate level entrepreneurs. Sharma’s study also revealed that motivating factors varied according to the, occupation background of entrepreneurs. Business executives, engineers, consultants, traders, considered occupational experience as most important. According to McClelland, executive generally have higher need for a achievement than men in other occupations. On the other hand, government servicemen, contractors and entrepreneurs from agricultural activities considered assistance from government and financial institutions as the most important factor.
3. After making different studies on technical and new entrepreneurship, Arnold C. Copper concluded that there are three main groups of factors which influence an entrepreneur. These are
(i) the characteristics of the entrepreneur including many aspects of his background (family, education, age; occupational experience, etc.) which make him more or less, inclined towards entrepreneurship. These might be called “internal factors”
(ii) the organisation for which he has been working earlier which’ might be termed as the incubator organisation
(iii) a complex of’ external influences’ including the availability of venture capital, collective attitudes and perceptions leading to entrepreneurship, and the accessibility to suppliers, personnel and markets.
4. Another- study by Murthy, Sekhar and Rao on entrepreneurial motivation classified the factors behind entrepreneurial growth into three categories as follows :
1. Entrepreneurial ambitions (a) To make money (b) To continue family business (c) To secure self-employment/independent living (d) To fulfil desire of self/wife/parents (e) To gain social prestige (f) Other ambitions-making of a decent living, self-employment of children, desire to do something creative, provide employment to others.
2. Compelling reasons (a) Unemployment (b) Dissatisfaction with the job so far held or occupation pursued (c) Make use of idle funds (d) Make use of technical/professional skills. (e) Others-maintenance of large families, revival of sick unit started by father, etc.
3. Facilitating factors (a) Success stories of entrepreneurs (b) Previous association (experience in the same or other line of activity) (c) Previous employment in the same or other line of activity (d) Property inherited/self acquired/wife’s (e) Advice or influence (encouragement) of family members/ relatives/mends. (f) Others- association as apprentices and sleeping partners.
The study was conducted on 334 entrepreneurs in two coastal towns of Anakapalli and Gudivada of Andhra Pradesh. The ambitions of continuing family business and securing self-employment emerged as the most significant motivating factors. Making money and gaining social prestige were found to be insignificant.
May a time, it is the compulsion rather than the ambition that leads the man to success. Sometimes the initial ambition and the opportunities may clash with each other. In such cases, compulsion of the situation determines the destiny. Therefore, it is, appropriate to examine the reasons that might have compelled the entrepreneurs to, pursue entrepreneurship. Making use of technical and professional skills was found to be the most important compulsion that has driven most of the respondents to entrepreneurship. Dissatisfaction in the job or occupation pursued was the second important compulsion and other compelling factors were insignificant. It may be inferred that the entrepreneurs wanted to capitalise their skills for themselves than working for others. They felt that their abilities were certainly more than what the job required and their aspirations exceeded what normally the job provided.
Ambitions or compulsions alone may not make a man an entrepreneur. The moral support and encouragement of family members, friends and relatives, previous experience and inherited property are very helpful in the growth of entrepreneurship. Moral support from the ‘near and dear inspires the would-be entrepreneur, reinforces his confidence and prepare him to face the new challenges boldly.
Among the facilitating factors, previous association in the same or other lines of activity was rated highest followed by previous employment in the same or other lines of activity. Previous association and employment gave abundant self-confidence. Previous employment here meant a person being employed for making a living. On the other hand, previous association implied apprenticeship in business firms. Most of the entrepreneurs expressed the view that it was better to get the training as apprentices or employees before setting up an enterprise. Such experience instils confidence among the youth, serves as the nursery for buildings the enterprise and accelerates the process of generation of entrepreneurship.
The success stories of entrepreneurs were recognised as an important factor that inspired new entrepreneurs. This finding points out the need for the introduction of entrepreneurial stories in school curriculum along with the stories of political leaders and social reformers. This is in conformity with Eugene Staley’s pilot study in Osmanabad (Maharashtra). Unfortunately, in India successful business leaders are denigrated by politicians. This generates a sense of hatred in the minds of youth towards leaders of industries, An impression is created that entrepreneurship itself is something unethical or antisocial. Such an impression thwarts the healthy growth of, entrepreneurship in the country.
The study by Murthy et. al also revealed that the family property and assistance from relatives and friends was the most significant source of initial capital for an entrepreneur. Such risk capital from family funds enhanced the entrepreneur’s trustworthiness in the money market and relieved him from the fear of business failure. It indicated the family’s confidence in the entrepreneur and the family’s willingness to risk saving in entrepreneurial activities. Thus, in Indian society entrepreneurship cannot be considered as an individual phenomenon and strictly intrinsic to the person involved. Rather it is an extension of the family aspirations and ambitions that are ultimately realised by an individual.
Contrary to the general expectations, the entrepreneur’s wife, family members and relatives were found to be the prime motivators who instilled the spirit of entrepreneurship in the entrepreneur. They served as philosopher and guide to the individual and the role of the Government as motivator was insignificant. It may be, concluded that entrepreneurship is the result of encouragement and support by wife and family members apart from the individual’s own initiative.
McClelland and his associates contend that need for achievement is a prerequisite for becoming an entrepreneur. People with a high level of achievement motivation are likely to behave in an entrepreneurial way. But it is not essential that such people will actually become entrepreneurs. Such persons are likely to be attached towards business only if business enjoys a high prestige in society. Thus, the relationship between achievement need and occupational preference depends on the prestige of the occupation, concerned.
Murthy analyzed the entrepreneurs’ perception of different occupation in terms of the social status of these occupations. Trading was ranked first and farming was ranked last by the entrepreneurs. It was further enquired how the entrepreneurs rated their present occupation. Entrepreneurs engaged in trading and manufacturing rated their occupations as the best. But most of the farmers did not rate farming as the best occupation.
Caste wise perception of the occupation in terms of social image were also anlaysed. Entrepreneurs’ perception with different caste origins different markedly. The analysis indicated that farmers might like to change to nonfarming and traders to manufacturing because they carry higher image in the public mind.
5. Two subsequent studies in Andhra Pradesh have by and large corroborated the findings of Murthy, et. al In his study of 87 manufacturing units in thirteen industrial estates of Andhra Pradesh, N. Gangadhar Rao found that making money is the most important ambition and fulfilment of the desire of self/ wife/father as the second important ambition. However, the aggregate pull of non-money ambitions was found to be more than twice of the money ambitions. Family members play useful role in giving shape to entrepreneurial ambitions. In view of the significance of earning motive, achievement motivation programmes should be designed to inculcate ambition for money. Among the compelling reasons, dissatisfaction with the job held so far or the occupation so far pursued was rated the highest followed by making use of idle funds.
Inherited property, technical and professional qualifications, and success stories of entrepreneurs were found to be significant among the facilitating factors. Rao expanded the list of facilitating factors to include (i) technical and professional skills acquired; (ii) allotment of plot/shed in industrial estate; (iii) financial assistance from State agencies, banks, family, friends and relatives; (iv) ancillary relation with large firms; and (v) dependable partners.
Majority of the entrepreneurs considered themselves as self-developed and made no mention of their friend, philosopher and guide. This is a testimony of the resourcefulness of the entrepreneurs and it is this class of entrepreneurs that are needed most. About 47 per cent of the entrepreneurs mentioned their family members, relatives, friends former employers, industrial leaders and politicians as their mentors. This gives the impression that entrepreneurship can be induced easily.
6. In another similar study of 40 enterprises in Marripalem and Autonagar industrial estates of Andhra Pradesh, Ashok Kumar found that to become self-reliant and to materialise one’s ideas and skills were the most significant ambitions. Dissatisfaction with the earlier job and dependency situation were the main factors that compelled the respondents to become entrepreneurs. among the facilitating factors, education, training and previous job experience were the most important.
The entrepreneur might have come on his own or on being encouraged by others. Therefore, an attempt was made to ascertain the man responsible for infusing the spirit of enterprise. Nearly one half of the entrepreneurs were self-motivated whereas around one- third of them were motivated by friends and relations and the remaining by their parents.
7. Entrepreneurship is not an accident, but an ambition or aspiration nourished over a period of time. In many a case; entrepreneurship takes a long time to unfold itself. The interval between conceiving an idea and materializing the same may range from a few years to a few generations. Therefore, it was attempted to find out whether the entrepreneurs had aspired for it in their childhood. It was found that nearly two-thirds of the respondents had aspired for entrepreneurship during their childhood itself.
V.L. Rao has summarised the views of various experts on sources of entrepreneurial supply and motivation in the form of a table which is given below:
8. K. Sadhak found that monetary consideration was the most important motivating factor. Entrepreneurs motivated by income were mainly traders an salaried employees. Independent job was as the main inspiration for salaried employees who were not satisfied with the’ work environment, nature of job, management style, etc. Self advancement, social recognition, responsibility were other motivating factors.
It is not only the desire to achieve but the favourable environment which translate the desire into reality. The above motivational factors were significantly influenced by certain assisting factors like family environment (business family), technical knowledge (through education or past employment); training and Government incentives. Entrepreneurs from business families enjoyed financial support, former employees had social contact, and engineers were having technical competence. It was, therefore, difficult to single out any particular motivating factor. However, income, social recognition and other ‘pull’ factors strongly induced people to start industry. Moreover, most of the entrepreneurs were, self-motivated. There were some stray cases also induced by varied factors like advice of business friends, the fabulous profits, earned by others in similar concerns, contact it others, etc.
An entrepreneur is an agent who has, to perform several functions to mobilise and utilise resources and to create market. He ventures into an uncertain future to exploit the potentiality that exists. Therefore, entrepreneurship is a very risky proposition. Some people leave very cosy jobs to start their own enterprises. Some merchants who are earning, well put their hard-earned money at stake in manufacturing. Technologists and engineers start their own industry instead of going for safe jobs. All these persons have high achievement motivation. ‘Like all achievement-oriented people, they want to take personal responsibility, tend to persist in the face of a adversity, tend to take moderate risks and like to know the results of their efforts. They are innovative and fall of interpersonal competence. According to McClelland, they are unusually creative, having high propensity of risk-taking capacity and a strong need for a achievement.
Now, it is crystal cleat from the foregoing analysis that the majority of entrepreneurs are motivated to enter industry mainly because of four- factors;
First, they possessed technical knowledge or manufacturing experience in the same or related line.
Second, there was heavy demand for the particular product.
Third, the Governmental and institutional assistance available facilitated, individuals to enter industry.
Fourth, they have enterprising attitude, what McClelland designates’ an achievement motive’, to do something independent in life.
David McClelland has developed an Achievement Motivation Theory. According to this theory an individual’s Need for achievement (n-Ach) refers to the need for personal accomplishment. It is the drive to excel, to strive for success and to achieve in relations to a set of standards. People with high achievement motive like to take calculated risks and want to win. They like to take personal responsibility for solving problems and want to know how well they are doing. High achievers are not motivated by money per se but instead employ money as a method of keeping sure of their achievements. Such people strive for personal achievement rather than the rewards of success. They want to do something better and more efficiently than it has been done before.
Need for achievement is simply the desire to do well not so much for the, sake of social recognition or prestige but for the sake of an inner feeling of personal of accomplishment. It is this need for achievement that motivates people to take risk. People with high need for achievement behave in an entrepreneurial way. Need for achievement stimulates the behaviour of a person to be an entrepreneur.
The following psychological factors contribute to entrepreneurial motivation :
1. Need for achievement through self-study, goal-setting and interpersonal, support.
2. Keen interest in situations involving moderate risk.
3. Desire for taking personal responsibility.
4. Concrete measures of task performance.
5. Anticipation of future possibilities.
6. Energetic or novel instrumental activity.
7. Organisational skills, etc.
Some societies produce a larger percentage of people with high need achievement. Entrepreneurship becomes the link between need achievement and economic growth. McClelland considers the need for achievement to be most critical to a nation’s econo1J1ic development. He held that a strong ‘inner-spirit’ in individuals to attain is a measurable variable arising from a need, which the individual develops mainly in childhood and seeks to satisfy throughout his life. This ‘inner spirit’ which he called need for achievement, if higher, would produce more energetic entrepreneurs capable of generating rapid economic development. High need for achievement or ambition motivates an entrepreneurs to take risks, work hard, find new things, save more, reinvest the savings in industry and so on. The limit d empirical evidence of Durand supports the hypothesis that need for achievement contributes to entrepreneurial success.
McClelland rated the achievement motivation of different countries on the basis of ideas related to need for achievement contained in the children’s stories. This has come to be known as n- factor rating. He established a correlation between n-factor rating and the prosperity of the countries a generation ahead. The criterion of n-factor rating was the inherent concern for achievement or the non-induced achievement motivation.
McClelland found that achievement motivation was lower among people of underdeveloped countries than among those of developed nations. Even in USA only about ten per cent of the people were actually high achievers. It is the low level of aspirations or ambitions that explains the lack of enterprise in underdeveloped countries. Ambition is the lever of all motives and aimless life is a goalless game. Ambitions motivate men, activate them, broaden their vision and make life meaningful. Ambition is an index of one’s resourcefulness. The ambition builds up an achievement pressure in the individual and provides the basis for McClelland’s n factor. Ambition is the lever of all motives. The initiative and intentions of an individual are directed by his ambitions. It is the ambition that electrifies man’s actions. Therefore, what matters is not merely the people but their aspirations and the means to achieve the goals. Therefore, it is the duty of leaders and teachers to build up ambition into the minds of young people. However, ambitions differ from greed and windfall. Greed results in disaster and windfall makes one a speculator.
Sometimes personal ambitions may come in the way of family aspirations or national aspirations. Unfulfilled ambitions are passed on to the next generation who may chase the goal with redoubled effort and vigour. Thus ambition nourishes-the achievement motivation and brings economic growth. The biggest obstacle to economic progress in countries like India is perhaps the limited ambition of people.
The initiative of an individual is directed by his ambitions which nourish the entrepreneurial spirit and bring about economic development. Hence what matters is not merely the people and their talents but their aspirations. However, ambitions differ among individuals on the basis of the environment in which they are born and brought up. J.K. Galbraith has also attributed the backwardness of man Asian and African countries to lack of ambition.
The Kakinada Experiment
Assuming need for achievement plays a vital role in promoting economic growth, Mcclelland has tried to induce achievement motivation in adult and provide them with an urge to improve their lot because uninduced achievement motivation results in long waiting before it bears fruit. Such an inducement may help break the barrier of “limited aspirations”. For this purpose, he conducted experiments with groups of businessmen in America, Mexico and Bombay. Later he carried out a full-fledged programme in the Kakinada city of Andhra Pradesh.
Kakinada is a well-developed distinct town of a population of around one lakh with high literacy and a modest industrial structure. The objective of the programme was to break the barrier of “limited aspirations” by inducing achievement motivation. The project which began in January 1964 consisted of recruiting batches of personnel drawn from business and industrial community of this town and putting them through orientation programme at the Small Industry Extension Training (SIET) institute, Hyderabad. Fifty-two persons grouped into three batches participated” in the programme. The training was designed primarily to stimulate the imagination and encourage introspection into personal motivation and community goals. The achievement development course contained four main items :
(i) The individuals strived to attain concrete and frequent feedback.
(ii) The participants sought models of achievement i.e. watched those who have performed well and tried to emulate.
(iii) The participants imagined themselves in need of success and challenge and set carefully planned and realistic work goals.
(iv) The trainees were asked to control daydreaming by thinking and talking to themselves-in positive terms.
After two years those who had taken the course except for one Mexican case performed better than comparable men who did not take the course. The former made more money, got promoted faster and expanded business faster. In order to assess need for achievement, McClelland used the Thematic Appreciation Test (TAT) which presents the subject with an ambiguous picture. The individual is asked to interest what he sees and what is happening in the picture. Achievement related themes are then counted and the final score represents the individual’s desire for high achievement.
About the results of the Kakinada experiment, McClelland concluded that those participating in the programme displayed a more active business behaviour (51 per cent as against 25 per cent in the control group) and worked longer hours.
Significantly he found that caste, traditional beliefs or western ways of life did not determine the mental makeup of a participant. The training as was given at Hyderabad is likely to improve those who have a great yearning to do something and have the opportunity to do so in their business framework.
The Kakinada experiment is being utilised in a number of experiment that have recently initiated technical personnel to set up new enterprise of their own.
In Gujarat, various State agencies have combined to operate an Entrepreneurship Development Programme to help young people acquire the motivation necessary to become risk-takers. The Gujarat programme has been successful in persuading many persons to set up new enterprises in the small scale sector. It was found that the follow-up “package” assistance offered by the State agencies in Gujarat has been particularly instrumental in helping the participants to decide on the enterprise they wish to start.
Similarly, in Andhra Pradesh, the Small Scale Industrial Development Corporation Ltd. (APSSIDC) has been assisting technically qualified persons to become entrepreneurs through orientation programmes of the SIET Institute. This is followed by specific assistance of providing developed land specially earmarked for such persons at nominal rates in the technocrats industrial estates. Based on the experiences in Gujarat and Andhra Pradesh, the Ministry of Industrial Development has recently formulated schemes of helping technical personnel to become entrepreneurs.
This programme consists of three months programme at selected centres spread all over the country, followed by financial assistance in terms of a subsidy on the interest on advances taken by the entrepreneur from the commercial banks so that the net interest paid by the entrepreneur himself does not exceed five percent.
The programme is designed to enable a young person to know the real problems of setting up an enterprise, and to work out the feasibility report of his own project. During this period, he is also provided with opportunities to visit industrial establishments in his field of specialisation. Careful screening of the participant is done by the Selection Committee with the State Director of Industries as its Chairman so that the programme, would result in a sizable number of new enterprises. It is expected thousands of young persons will be provided with such training in the years to come.
Making people achievement-oriented or inculcating in them need for achievement, is the objective of all such programmes. Thus, efforts are made through such programmes to spread ambition. Ambition is the mother of all motives. The intentions and the initiative of the man are directed by his ambitions. It is they ambition that electrifies man’s actions. The common saying aimless life is a goalless game emphasis the importance of ambition in life.
So, what matters most is not merely the men but their aspiration and what they do to reach their goal. It is the duty of the parents, the teachers and the leaders of the nation to instill ambition into the minds of the people. Naturally, ambitions differ from individual to individual on the basis of personal tastes and temperaments, and family to family and nation to nation depending upon the circumstances in which they are placed and the priorities which they have set for themselves. Sometimes, personal aspirations come in the way of family aspirations or national aspirations. Whoever it may be, aspirations do change with the changing times and values. For any man it may not be possible to cherish all his aspirations in his lifetime.
So also a nation may not be able to fulfil all her ambitions within a span of 100 or 200 years. But the ambitions or aspirations which are unfulfilled are passed on to the next generation who may chase the target with redoubled effort and vigour. So, ambition which nourishes the achievements motivation brings in economic growth, brings in development not merely in only one segment of the economy but it results in total growth.
Choice of a proper form of organisation is crucial for the success of a business enterprise. Every entrepreneur has to decide, at the outset, the type of ownership organisation in which his enterprise is to be run. Choice of form of business organisation is crucial because it determines the risk, responsibility and control of the entrepreneur as well as the division of profits. It is a longterm decision because the form of organisation cannot be changed frequently. The right form of organisation can help the enterprise not only through initial success but in later growth too. Therefore, the form of ownership organisation should be selected after due care and thought. A business enterprise can be owned and organised in several forms. These forms of business organisation are as under:
(a) Sole Proprietorship
(b) Partnership firm
(c) Joint Stock Company and
(d) Cooperative society
Every form has its own merits and demerits. Therefore, a businessman is faced with the problem of selecting a suitable form of ownership for his business. This problem arises not only at the time of launching a new business enterprise bu1 also at the time of expansion or growth in the size of business.
Sole proprietorship (also, called sole trade organisation) is the oldest form of business ownership. In a sole proprietorship, the enterprise is owned and controlled by one person. He is master of his show. He sows, reaps and harvests the output of this effort. He manages the business on his own. If necessary, he may take the help of his family members, relatives and employ some employees.
Sole proprietorship is the simple and easiest to form. It does not require legal recognition and attendant formalities. This form is the most popular form due to the distinct advantages it offers. William R. Basset opines that “The one-man control is the best in the world if that man is big enough to manage everything”.
The important features of a sole proprietorship are :
(i) Sole ownership
(ii) One man control
(iii) Unlimited risk
(iv) Undivided risk
(v) No separate entity of the firm
(vi) No Government regulation
Advantages of Sole Proprietorship
(i) Easy and Simple Formation: A sole trading concern can be formed without any difficulty. Unlike other forms, no legal formalities are necessary for its formation. It can be started and can also be closed according to the wishes and whims of the sole trader. Thus, there are no legal formalities for expansion, contraction or dissolution of the business enterprise.
(ii) Direct and Exclusive Control: The proprietor has full authority to manage the business. He is not accountable to anyone and nobody interferes in his working. Thus, there is no problem of co-ordination; he is in a better position to maintain good relations with all his employees if any.
(iii) Promptness in Decision-making: The sole trader is the sole dictator of the business and relatively free from outside interference. He is capable of taking prompt action so necessary for business success.
(iv) Direct Motivation and Incentive to Work: The-owner enjoys the entire profits of the concern alone. The existence of the direct relationship between the effort and the reward serves as a powerful incentive and makes the sole trader work very hard and manage his concern most efficiently.
(v) Maintenance of Secrecy: In any business enterprise, maintenance of business secrecy is an important factor; and it is in this individual entrepreneurial organisation that the sole trader will get this object fulfilled as there is no need to give publicity to accounts and affairs of his business.
(vi) Personal Touch with Customers: As the enterprise is generally small and most often the proprietor himself manages it, he can develop close personal relations with his customers. This promotes customer satisfaction which, subsequently, adds to the goodwill of the concern.
(vii) Economy in Management: The business of sole proprietorship is mostly supervised, managed and controlled by the sole proprietor alone or with the help of his relatives and friends and sometimes by one or two paid assistant; hence the costs of management are comparatively lower.
(viii) Minimum Government Regulation: The operations of a sole proprietor are regulated by Government and law to the minimum extent. He, of course, has to comply with tax and Labour laws, but otherwise, he is free from interference. There are no legal formalities in formation, expansion or dissolution of the business enterprise.
(ix) Socially Significant: Sole proprietorship is important from a social point of view also. It is a means for earning livelihood independently.
The owner is his own master. It ensures the diffusion of business ownership and, thus, the concentration of wealth and power in a few hands is avoided. It further, helps in the development of entrepreneurial qualities such as self-reliance, self-confidence, responsibility, tact and initiative etc. in the individual entrepreneurs.
Disadvantages of Sole Proprietorship
(i) Limited Financial Resources: A single individual normally does not posses enough capital. His borrowing capacity is also limited. Therefore, a soil proprietorship firm suffers from lack of financial resources. Consequently, it has to confine its activities within a limited range.
(ii) Limited Managerial Ability: The limitation of managerial ability is a glaring as that of capital. An individual, howsoever, capable and qualified may be cannot manage all functions of the business. He is not supposed to posses knowledge of all the functional areas of the business. Moreover, because of the small size of the business and limited financial resources available to him, he may not be in a position to appoint expert managers. Thus, in the modem competitive world of business where different aspects are managed by experts, sole proprietor’s concern likely to suffer from stagnation in the absence required managerial ability.
(iii) Unlimited Liability: The unlimited liability of the single proprietor is a great disadvantage to him; because business debts run against his entire property and not merely against the amount invested in the business. This discourages the risk-taking instinct of the entrepreneur.
(iv) Uncertainty of continuity: Continuity of the sole proprietor’s business is difficult to maintain. When the proprietor dies there is no guarantee for the continuity of the business; because there is no legal obligation to continue the same concern. The legal heir of the proprietor may lack requisite qualities or may not have any liking for the same business. With the result, the business may come to an end. There is also no legal obligation that once a business is started, it must be continued under any circumstances. Thus, the continuity of the business solely depends on the sole proprietor and his legal heir.
(v) Diseconomies of Small Size: A small scale firm cannot economies in purchase, production and marketing. In a sole trader’s concern, the overhead cost is also more. Thus, a sole proprietorship firm suffers from diseconomies of small scale and is not in a position to compete with the large-scale organisations having economies of large-scale.
(vi) Limited Growth: Growth is a normal rule of life. A business firm is bound to grow in size; as it is a living organism. Practically, due to the limitations of capital and managerial ability as discussed above, the growth of the sole trader’s business is affected adversely; it is never in a position to bloom fully.
Suitability: The foregoing description reveals that sole proprietorship or one man control is the best in the world if that man is big enough to manage everything. But such a person does not exist. Therefore, sole proprietorship is suitable in the following cases:
(i) Where small amount of capital is required, e.g., sweet shop$, bakery, newsstand, etc.
(ii) Where quick decisions are very important, e.g., share brokers, bullion dealers, etc.
(iii) Where limited risk is involved, e.g., automobile repair shop, confectionery, small retail store, etc.
(iv) Where personal attention to individual ‘tastes and fashions of customers is required, e.g., beauty parlour, tailoring shops, lawyers, painters, etc.
(v) Where the demand is local, seasonal or temporary, e.g., retail trade, laundry, fruits sellers, etc.
(vi) Where fashions change quickly, e.g., artistic furniture, etc.
(vii) Where the operation is simple and does not require skilled management.
Thus, sole proprietorship is a common form of organisation in retail trade, professional firms, household and personal services. This form of organisation is quite popular in our country. It accounts for the largest number of business establishments in India, in spite of its limitations.
The need for partnership firm form of organisation arose from the limitations of sole proprietorship. With the expansion of business, it became necessary for a group of persons to join hands together and supply necessary capital and skill. A person may possess exceptional business ability but no capital; he can have a financing partner. A financier may need a managerial expert as well as a technical expert and all of them may combine to set up a business with common ownership and management. Thus, partnership organisation has grown out of necessity to arrange more capital; provide better management and control, to take advantage of high degree of specialisation and division of labour, and to share the risks.
Owners of the partnership business are individually called “partners” and collectively called a “firm”. The name under which the business is carried on is known as “firm name”. The terms and conditions of partnership are contained in the partnership agreement known as “Partnership Deed”.
Main Features: Based on the above discussion, we can now list the main features of partnership form of business ownership/organisation in a more orderly manner as follows :
(i) More Persons: As against sole proprietorship, there should be at least two persons subject to a maximum; often persons for banking business and twenty for non-banking business to form a partnership firm.
(ii) Profit and Loss Sharing: There is an agreement among the partners to share the profits earned and losses incurred in partnership business.
(iii) Contractual Relationship: Partnership is formed by an agreement – oral or written – among the partners.
(iv) Existence of Lawful Business: Partnership is formed to carry on some lawful business and share its profits or losses. If the purpose is to carry some charitable works, for example, it is not regarded as a partnership.
(v) Utmost Good Faith and Honesty: A partnership business solely rests on utmost good faith and trust among the partners.
(vi) Unlimited Liability: Like sole proprietorship, each partner has unlimited liability in the firm. This means that if the assets of the partnership firm fall short to meet the firm’s obligations, the partners private assets will also be used for the purpose.
(vii) Restrictions on Transfer of Share: No partner can transfer his share to any outside person without seeking the consent of all other partners.
(viii) Principal-Agent Relationship: The partnership firm may be carried on by all partners or any of them acting for all. While dealing with firm’s transactions, each partner is entitled to represent the firm and other partners. In this way, a partner is an agent of the firm and of the other partners.
Advantages of Partnership
(i) Easy Formation: Formation of partnership is easier and no legal formalities are to be observed to establish it. At the same time, unlike a company, not much of expenses are incurred for its formation. However, as compared to a sole trader’s concern, it may involve certain difficulties, especially in the selection and organisation of partners, etc.
(ii) Larger Financial Resources: In a partnership, since several persons pool their financial resources into a common business, the amount of capital accumulation becomes much higher than what can be contributed by one person in sole trader’s concern. The scale of operations can be enlarged to reap the economies of scale. There is always scope for the introduction of new partners to augment resources.
(iii) Flexibility: It’s a highly flexible organisation. Changes can be introduced easily. The necessary additional capital can be raised; new partners can be introduced, the place and object of the firm can be changed. The business of the firm can also be expanded or contracted according to the requirements of the business.
(iv) Combined Abilities and Balanced Judgement: In a partnership firm, better management of the business is ensured because capital and brain of two or more persons are pooled. Combined abilities and balanced judgement produce appreciable results. Two heads are better than one is an old saying.
(v) Direct Motivation: Since the partners themselves manage the business, they are likely to manage it with great care, caution and interest. Moreover, partnerships provide a fair correlation between rewards and efforts on the part of owners, and as such partners are motivated to apply the best of their energy and capacity for the success of the business.
(vi) Division of Risks: In a sole proprietorship, the risks of business are to be shouldered by one person alone; but in partnership, the risks are to be shared by all the partners. Thus, partnership is more useful for risky business.
(vii) Business Secrecy: The annual accounts and reports of a partnership firm do not require circulation and publicity and, therefore, secrecy can be maintained about the business.
(viii) Protection of Minority Interest: The Partnership Act provides equal rights and powers for all the partners irrespective of their capital contributions. Every partner has a right to participate in the management of the business. All importan1 decisions are to be taken by the consent of all the partners. If a majority decision is enforced on minority, affected partners can get the business dissolved.
(ix) Encouragement of Mutual Trust and Interdependence: Each partner is an agent for the others. Therefore, all the partners act with utmost mutual trust. They also develop a sense of interdependence and team spirit. At the same time each partner develops his individuality through his responsibility for others and the firm as a whole.
(x) Easy Dissolution: A partnership firm can easily be .dissolved. It is a kind of voluntary association for carrying on business operations. Therefore, it can be dissolved by the partners merely by expressing to each other their intention to do so. In the case of a partnership-at-will, it can be dissolved by giving 14 days notice to other partners.
Disadvantages of Partnership
(i) Unlimited Liability: The partners, like a sole proprietor but unlike shareholders of a joint-stock company, maybe personally held liable for the debts of the firm. Their private property also remains at stake. Due to the dangers associated with unlimited liability, partners are overcautious and play safe. This restricts the expansion and growth of the business.
(ii) Limited resources: There is an upper limit to the number of partners in a partnership firm – 20 in a general business and 10 in a baking business. Due to this, inspite of the pooling of the resources by all the partners, it becomes difficult for a partnership to manage the increasing requirements of capital and managerial skills of expanding business. This limitation limits the growth of business beyond ascertain size.
(iii) Instability: A partnership firm suffers from the uncertainty of duration; because it can be dissolved at the time of death, lunacy or insolvency of a partner. Sometimes petty quarrels among the partners may also bring the partnership to an end. The discontinuity of the business is not only inconvenient to the consumers and workers but is also a social loss.
(iv) Non-Transferability of Interest: Partners cannot transfer their interests in the partnership firm to outsiders without the consent of all other partners. This non-transferability is a drawback of the partnership firm and dissuades many persons from investment in such a firm. On the other hand, shares of a joint-stock company are easily transferable and, thus, provide liquidity to the investment.
(v) Lack of Public Confidence: Since there is no publicity of the working of a partnership through its published periodical accounts and there is absence of legal control over it, the general public may not have full confidence in them.
(vi) Risk of Implied Authority: A partner, being an agent of the firm and his co-partners, can make deals and contracts that would be binding on other partners. Therefore, when a partner is negligent or commits a wrong, or is guilty of a fraud, within the scope of his authority, other partners are equally liable financially without any limit. Thus, the honest and efficient partner may have to pay the penalty for follies and vices of other partners.
(vii) Lack of Centralised Authority: The power of management is vested in all the partners; there is absence of a supreme and central authority. Consequently, many problems crop up, particularly when there is absence” of mutual understanding and co-operation. Constant opposites and disagreements on the part of partners hamper the growth of the partnership business at every stage and, ultimately, may even put an end to the existence of the partnership, after a short span of life.
By now, you have learnt that partnership is an agreement between persons to carry on a business. The agreement entered into between partners may be either oral or written. But, it is always desirable to have a written agreement so as to avoid misunderstandings and unnecessary litigations in future. When the agreement is in written form, it is called ‘Partnership Deed’. It must be duly signed by the partners, stamped and registered. Any alteration in partnership deed can be made with the mutual consent of all the partners.
Although it is left to the choice of the partners of the firm to decide themselves as to what should be mentioned in their partnership deed, yet a partnership deed generally contains the following:
1. Name of the firm
2. Nature of the business
3. Names of the partners
4. Place of the business
5. Amount of capital to be contributed by each partner
6. Profit sharing ratio between the partners.
7. Loans and advances from the partners and the rate of interest thereon.
8. Drawings allowed to the partners and the rate of interest thereon.
9. Amount of salary and commission, if any payable to the partners.
10. Duties, powers and obligations of partners.
11. Maintenance of accounts and arrangement for their audit.
12. Mode of valuation of goodwill in the event of admission, retirement and death of a partner.
13. Settlement of accounts in the case of dissolution of the firm.
14. Arbitration in case of disputes among the partners.
Registration of the Firm
Under many government Partnership Acts, the registration of the firm is not compulsory. An unregistered firm suffers from certain limitations, hence the registration of the firm is desirable. Registration can be done at any time. The procedure for registration is as follows:
The firm will have to apply to the Registrar of Firms of the respective State Government in a prescribed application form. The form should be duly signed by all the partners. The application form should contain the following information:
1. The firm-name.
2. The name of business place.
3. Names of other places, if any, where the firm is carrying on its business.
4. Date of commencement of business.
5. Date when each partner joined the firm.
6. Full names and permanent addresses of all the partners.
7. The duration of the firm, if any.
When the Registrar of Firms is satisfied that all formalities relating to registration have been fully complied with, he makes an entry in Register of Firms. Thus, the firm is considered to be registered. The Register of Firm remains open for inspection on payment of prescribed fee for the purpose.
Dissolution of Firm
There is a difference between the dissolution of partnership and dissolution of the firm. Dissolution of partnership occurs when a partner ceases to be associated with the business, whereas dissolution of firm is the winding up the business. In other words, in case of dissolution of partnership, the business of the firm does not come to an end but there is a new agreement between the remaining partners. But in case of dissolution of firm, the business of the firm is closed up.
In brief, dissolution of partnership does not imply the dissolution of firm. But, dissolution of firm implies dissolution of partnership also. Following are the various ways in which a firm may be dissolved:
1. Dissolution by Agreement: The partnership firm may be dissolved in accordance with a contract already made between the partners.
2. Compulsory Dissolution: A firm stands compulsorily dissolved under the following circumstances :
(a) By the adjudication of all the patterns or of all the partners but one as insolvent, or
(b) By the happening, of any such event that makes the business unlawful.
3. Dissolution due to Contingencies: A firm stands dissolved on the happening of the any of the following contingencies:
(a) On expiry of partnership period, if constituted for a fixed period.
(b) On completion of the firm’s venture for which the firm was formed.
(c) On the death of a partner.
(d) On the adjudication of a partner as an insolvent.
4. Dissolution by Court: Under any of the following cases, a court may order the dissolution of a firm :
(a) Any partner has become of unsound mind.
(b) Any partner has become permanently incapable of performing his duties as a partner.
(c) A partner’s misconduct is likely to affect prejudicially the business of the firm.
(d) A partner’s misconduct is likely to affect prejudicially the business of the firm.
(e) A partner transfers his interest in the firm, but unauthorisedly, to a third party.
(f) The business of the firm can be carried on at loss only.
(g) It is just and equitable, on the basis of any other reasonable ground, that the firm should be dissolved.
Settlement of Accounts on Dissolution
Settlement of accounts means closure of all accounts in the books of the firm as the firm’s business no longer exists. According to Section 48 of the Indian Partnership Act, 1932, the procedure for the settlement of accounts after the dissolution of the firm is a follows:
The assets of the firm are disposed of and the amounts so realised are applied in the following manner:
(i) Payment of debts due to the third parties.
(ii) Rateable payment of loans and advances made by the partners to the firm
(iii) Payment of partners’ capital (iv) Payment of surplus, if any, to the partners in their profit sharing ratio.
The losses of the firm on dissolution have to be made up :
(i) First out of accumulated pass profits.
(ii) Then, out of the capitals of partners.
(iii) Thereafter, out of contributions from the private estates of the partners in their profit-sharing ratios.
It is important to mention that the private property of the partner is to be used first to pay his private debts and only the surplus, if any, can be used to pay firms liabilities. Similarly, firm’s assets are first used to pay firm’s liabilities. Only surplus can be used to pay the partner’s private liabilities.
Suitability: The foregoing description reveals that partnership form of organisation is appropriate for medium-sized business that requires limited capital, pooling of skill and Judgement 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 clinic or nursing homes, attorneys, etc.
JOINT STOCK COMPANY
With the enlargement of the scale of business operations, it became difficult for a sole proprietorship or partnership firm to cope with the problems of finding additional resources and arranging for more specialised management. In addition to this, the unlimited liability of the sole trader and partners also hindered the” business in several ways. Apart from these limitations, the introduction of advanced technologies, economies of large-scale production and other developments in the field of industry and commerce forced businessmen to think “in terms of bigger forms of organisation.
The sole proprietorship and partnership failed to face the challenge posed by these developments. As a result, the present from the joint stock companies emerged. It was found the most suitable form of organisation for large scale production. A joint stock company not only helped in overcoming the limitations of sole proprietorship and partnership but also placed huge amount of capital in the hands of entrepreneur and that too with limited lability. It provided an opportunity for every person, rich or poor, to contribute to its capital.
A company may be defined as a voluntary association of persons, recognised by law, having a distinctive name, a common seal formed to carry on, business for profit with- capital divisible into transferable shares, limited liability, a corporate body and perpetual succession.
Salient Features of a Company
The distinctive characteristics of a company are as follows :
1. Separate legal entity: A company has an existing entirely distinct from and independent of its members. It can own property and enter into contracts in its own name. It can sue and be sued in its own name. There can be contracts and suits between a company and the individual members who compose it. The assets and liabilities of the company are not the assets and liabilities of the individual numbers and vice versa. No member can directly claim any ownership right in the assets of the company.
2. Artificial legal person: A company is an artificial person created by law and existing only in contemplation of law. It is intangible and invisible having nobody and no soul. It is an artificial person because it does not come into existence through natural birth and it does not possess the physical attributes of a natural person. Like a natural person, it has rights and obligations in terms of law. But it cannot do those acts which only a natural person can do, e.g., taking an oath in person, enjoying married life, going to jail, practising profession, etc. A company is not a citizen and it enjoys no franchise or other fundamental rights.
3. Perpetual succession: A company enjoy continuous or uninterrupted existence and its life is not affected by the death, insolvency, lunacy, etc. of its members, or directors. Members may come and go but the company survives so long as it is not wound up. Being a creature of law, a company can be dissolved only through the legal process of winding up. It is like a river which retains its identity though the parts composing it continuously change.
4. Limited Liability: Liability of the members of a limited company is limited to the value of the shares subscribed to or to the amount of a guarantee given by them. Unlimited companies are an exception rather than the general rule. In a limited company, members cannot be asked to pay anything more than what is due or unpaid on the shares held by them even if the assets of the company are insufficient to satisfy in full the claims of its creditors.
5. Common Seal: A company being an artificial person cannot sign for itself. Therefore, the law provides for the use of common seal as a substitute for its signature. The common seal with the name of the company engraved on it serves as a token of the company’s approval of documents. Any document bearing the common seal of the company and duly witnessed (signed) by at least two directors is legally binding on the company.
6. Transferability of shares: The shares of a public limited company are freely transferable. They can be purchased and sold through the stock exchange. Every member is free to transfer his shares to anyone without the consent of other members.
7. Separation of ownership and management: The number of members in a public company is generally very large so that all of them or most of them cannot take active part in the day-to-day management of the company. Therefore, they elect their representatives, known as directors, to manage the company on their behalf. Representative control is thus an important feature of a company.
8. Incorporated association of persons: A company is an incorporated or registered association of persons. One person cannot constitute a company under the law. In a public company, at least seven persons and in a private company atleast two persons are required.
Private and Public Companies
(i) Private Company: It is a company by which its Articles of Association:
(a) restricts the right of its members to transfer shares, if any;
(b) limits the number of its members to SO, excluding members who are or were in the employment of the company; and
(c) prohibits any invitation to the public. to subscribe for any shares in, or debentures of, .the company
The minimum number of members required to form a private company is two. Such a company must use the word ‘private’ in its name. A private company enjoys special privileges and exemptions under the Companies Act.
A public company is that company which is not a private company:
Table 1 Distinction between Private and Public Companies
Suitability of Private Company
The above description reveals that a private company is a compromise between partnership and public company. To some extent, it combines the advantages of both. It enjoys the advantages of separate legal entity, continuity, limited liability and business secrecy. At the same time, it is free from excessive Government regulation and progressive income tax liability.
For these reasons, a private company is very suitable for organising a medium-sized business involving considerable risk of loss or uncertainty of profit. Wholesale trade, large scale retailing, e.g., departmental stores, chain stores, etc., and transportation services are examples of such business.
Private company is also preferred by those who wish to take the advantage of limited liability but at the same time desire to keep control over the business within a limited circle of friends and relatives and want to maintain the privacy of their business. A family can maintain secrecy of business, avoid the risk of unlimited liability and avail of the facility or ease of partnership. Due to the small number of members there can be high degree of privacy and there is comparative freedom from legal requirements. Private company organisation is also appropriate in case of business of a speculative nature, e.g., hire purchase trading, stock-brokers, underwriting firms, etc. Another reason for the popularity of private company organisation is several exemptions and privileges granted by law.
Privileges of a Private Company
In spite of certain restrictions imposed on a private company, it enjoys certain privileges under the Companies Act. That is why a substantial number of entrepreneurs prefer to form a private company.
Following are the important privileges granted to a private company:
(i) For forming a private company, only two members are required.
(ii) A private company is required to have only two directors.
(iii) Such company is no required to file a prospectus or a statement in lieu of prospectus with the Registrar of Companies.
(iv) It can commence its business immediately after incorporation.
(v) It is also not required to hold a statutory meeting nor it is required to file a statutory report.
(vi) The directors of a private company are not required to give their consent to act or to take up their qualification shares prior to their appointment.
(vii) A non-member cannot inspect the copies of the Profit Loss A/C filed with the Registrar of Companies.
(viii) Limit on payment of maximum managerial remuneration does not apply to a private company.
(ix) Restrictions on appointment and reappointment of managing director does not apply to such company.
(x) A private company is not required to maintain an index of its membership.
Merits of Company Organisation
The company form of business ownership has become very popular in modem business on account of its several advantages :
1. Limited liability: Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities and, therefore, contributes to the growth of the company form of ownership.
2. Large financial resources: Company form of ownership enables the collection of huge financial resources. The capital of a company is divided into shares of small denominations so that people with small means can also buy them. Benefits of limited liability, transferability of shares attract investors. Different types of securities may be issued to attract various types of investors. There is no limit on the number of members in a public company.
3. Continuity: A company enjoys uninterrupted business life. As a corporate body, it continues to exist even if all its members die or desert it. On account of its stable nature, a company is best suited for such types of business which require long periods of time to mature and develop.
4. Transferability of Shares: A member of a public limited company can freely transfer his shares without the consent of other members. Shares of public companies are generally listed on a stock exchange so that people can easily buy and sell them. Facility of transfer of shares makes investment in company liquid and encourages investment of public savings into the corporate sector.
5. Professional management: Due to its large financial resources and continuity, a company can avail of the services of expert professional managers. Employment of professional managers having managerial skills and little financial stake results in higher efficiency and more adventurous management. Benefits of specialisation and bold management can be secured.
6. Scope for growth and expansion: There is considerable scope for the expansion of business in a company. On account of its vast financial and managerial resources and limited liability, company form has immense potential for growth. With continuous expansion and growth, a company can reap various economies of large scale operations, which help to improve efficiency and reduce costs.
7. Public confidence: A public company enjoys the confidence of the public because its activities are regulated by the Government under the Companies Act. Its affairs are known to public through publication of accounts and reports. It can always keep itself in tune with the needs and aspirations of people through continuous research and development.
8. Diffused risk: The risk of loss in a company is spread over large number of members. Therefore, the risk of an individual investor is reduced.
9. Social benefits: The company organisation helps to mobilise savings of the community and invest them in industry. If facilities the growth of financial institutions and provides employment to a large number of persons. It provides huge revenues to the Government through direct and indirect taxes.
Demerits of Company:
A company suffers from the following limitations:
1. Difficulty of formation: It is very difficult and expensive to form a company. A number of documents have to be prepared and filed with the Registrar of Companies. Services of experts are required to prepare these documents. It is very time-consuming and inconvenient to obtain approvals and sanctions from different authorities for the establishment of a company. The time and cost involved in fulfilling legal formalities discourage many people from adopting the company form of ownership. It is also difficult to wind up a company.
2. Excessive Government control: A company is subject to elaborate statutory regulations in its-day to day operations. It has to submit periodical reports. Audit and publication of accounts is obligatory. The objects and capital of the company can be changed only after fulfilling the prescribed legal formalities. These rules and regulations reduce the efficiency and flexibility of operations. A lot of precious time, effort and money has to be spent in complying with the innumerable legal formalities and irksome statutory regulations.
3. Lack of motivation and personal touch: There is divorce between ownership and management in a large public company. The affairs of the company are managed by the professional and salaried managers who do not have personal involvement and. stake in the company. Absentee ownership and impersonal management result in lack of initiative and responsibility. Incentive for hard work’ and efficiency is low. Personal contact with employees and customers is not possible.
4. Oligarchic management: In theory, the management of a company is supposed to be democratic but in actual practice company becomes an oligarchy (rule by a few). A company is managed by a small number of people who are able to perpetuate their reign year after year due to lack of interest, information and unity on the part of shareholders. The interests of small and minority shareholders are not well protected. They never get representation on the Board of Directors and feel oppressed.
5. Delay in decisions: Too many levels of management in a company result in red-tape and bureaucracy. A lot of time is wasted in calling and holding meetings and in passing resolutions. It becomes difficult to take quick decisions and prompt action with the consequence that business opportunities may be lost.
6. Conflict of interests: Company is the only form of business wherein a permanent conflict of interests may exist. In proprietorship, there is no scope for conflict and in a partnership, continuous conflict results in the dissolution of the firm. But in a company conflict may continue between shareholders and board of directors or between shareholders and creditors or between management and workers.
7. Frauds in Promotion and Management: There is a possibility that unscrupulous promoters may float company to dupe innocent and ignorant investors. They may collect huge sums of money and, later on, misappropriate the money for their personal benefit. The case of South Sea Bubble Company is the leading example of such malpractices by promoters. Moreover, the directors of a company may manipulate the prices of the company’s shares and debentures on the stock exchange on the basis of inside information and accounting manipulations. This may result in reckless speculation in shares and even a sound company may be put into financial difficulties.
8. Lack of Secrecy: Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Wide spread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.
9. Disadvantageous from Social Point of View: From social point of view, a company form of organisation is considered undesirable for the following reasons :
(a) The joint-stock companies tend to form combinations exercising monopolistic powers against the consumers of their products and small produces in the same line;
(b) A company tends to concentrate economic power in a few hands;
(c) A company encourages reckless speculation in shares on stock exchange. Due to this, prices of its shares fluctuate artificially which goes against the interests of the company and discourages fresh investment in companies.
(d) A company makes possible oligarchic management of its affairs. The oligarchy is harmful to the general body of shareholders.
Suitability: Despite its drawbacks, the company form of organisation has become very popular, particularly for large business concerns. This is because its merits far outweigh the demerits. Many of the drawbacks of a company are mainly due to the weaknesses of the people who promote and manage companies and not because of the company system as such. The company organisation has made it possible to accumulate large amounts of capital required for large scale operations.
Due to its unique characteristics, the company form of ownership is ideally suited to the following types of business :
(a) heavy or basic industries like ship-building, coach-making factory, engineering firms, etc., requiring huge investment of capital.
(b) large scale operations are very crucial because of economies of scale, e.g., department stores, chain stores and enterprises engaged in the construction of bridges, dams, multistoried buildings etc.
(c) the line of business involves great uncertainty or heavy risk, e.g., shipping and airline concerns.
(d) the law makes the company organisation obligatory, e.g., banking business can be run only in the form of company.
(e) the owners of the business want to enjoy limited liability.
The co-operative form of business organisation developed rather late and has assumed importance gradually. As a matter of fact, it started developing to mitigate the limitations of other forms of organisation and substitute the profit-motive with service-motive. Thus, it is a special form of business ownership that differs from all other forms we have discussed so far. In this type of organisation, the capital is supplied by individuals who buy shares similar to those of company. Each shareholder has one vote in the management of the business, regardless of the number of shares he owns. Surplus earnings are distributed to the shareholders in the form of dividends, which are usually based of the volume of the shareholders’ purchases from the co-operative in case of consumers’ co-operative store, or in proportion to the goods delivered for sale to the co-operative society in case of producer’s co-operative store.
The primary motive behind co-operatives is to supply goods and services at a cost lower than they could be obtained from business that are operated by the owner for profit.
The International Labour Office defines a co-operative as “an association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organisation, making equitable contributions to the capital required and accepting a fair share of risks and benefits of the undertaking”.
Features of Co-operative Organisation
(i) Voluntary Association: A co-operative organisation is a voluntary association of persons. Its voluntary character is one of the most guiding principles of co-operative organisation. It implies principles of co-operative organisation. It implies that every individual, irrespective of his caste, creed, religion, sex, etc. is free to become member of the co-operative and leave it any time, after giving proper notice. It also implies that none should be forced or coerced to join it.
(ii) Equal Voting Rights: In co-operative form of organisation, each member has equal voting right. This means that every member irrespective of his holdings of shares or status is given one vote. A rich person cannot hold control of the cooperative organisation on the basis of his wealth. All members have equal voice in the management of the organisation.
(iii) Democratic Management: Democracy is the rule of co-operatives. In a co-operative society since each member has equal voting right, its management is essentially democratic. All the members of a society elect a body of persons to conduct and control the working of the society. The members frequently meet and give guidelines to its executive. Thus, a co-operative organisation is an emblem of true democracy.
(iv) Service Motive: Unlike, earlier forms of business organisation, the primary objective of establishing co-operative form of organisation is to render maximum service to its members. Here, the aim is not to earn profits. The cooperative societies do earn a nominal amount of profit to cover-up administrative expenses. Thus, co-operatives promote social justice.
(v) Limited Return of Capital: The capital invested in a co-operative is not given an undue preference. A limited rate of interest is allowed; because capital appreciation is not the main motto of co-operation. Under the existing law in India, a maximum of 10 per annum can be given as return on capital contribution to the co-operative. This is a first charge on surpluses of the society.
(vi) Separate Legal Entity: A co-operative society must get itself registered under the Co-operative Societies Act, 1912 or under the Co,-operative Societies Act of a State Government. Like a joint-stock company, it is a separate legal person, it can own property, enter into contracts, sue and be sued in its own name.
(vii) Equitable Distribution of Surplus: Unlike other forms, of business organisation, surplus earned by a co-operative society is distributed among its members equitably on basis other than capital contribution of the members. As per the law governing Co-operative organisation, 25 per cent of its profits after meeting its trading expenses and paying a fixed rate of dividend on capital not exceeding 10 per cent is to be transferred to general reserves. In addition, a portion of the profit not exceeding 10 per cent may be utilized for the general welfare of the locality in which the co-operative society is functioning. The residual, if any, may be distributed among members on the basis to be decided by the members collectively. Normally, in case of consumers’ co-operatives, this residual is distributed according to purchases made by the members from the Co-operative Society; and in case of producers co-operatives, this profit is distributed in proportion to the goods delivered to the Co-operative society for sale.
(viii) State Control: The activities of the co-operative societies are subject to certain rules and regulations framed by the Government. There are many formalities which are required to be completed for getting the society registered under the Co-operative Societies Act, 1912 or the State Co-operative Societies Act of the particular State. The audited accounts and affairs of the society are inspected by the Government periodically. Besides this, a co-operative society has to submit annual reports and accounts to the Registrar of Co-operative Societies.
Advantages of Co-operative Society
(i) Easy to Form: As compared to a joint-stock company, it is easy and simple to form a co-operative society. The legislative formalities required for its formation are not many. In addition to this, it is economical, as the expenses involved in its formation are comparatively less.
(ii) Democratic Management: A co-operative society is managed in a true democratic way. All the members have a say in its working. They elect a managing committee on the basis of “one-man-one-vote”. This committee looks after the working of the organisation in the general interest of all the -members. It is not controlled by vested interests only.
(iii) Limited Liability: The members’ liability remains limited to the extent of capital contributed by them.
(iv) Perpetual Succession: Unlike sole proprietorship and partnership, it does not cease to exist on the death, lunacy, insolvency, permanent incapability etc. of, its members. Like a company it has perpetual succession; because it has separate legal entity which is not affected by the changes among its members.
(v) Economic Operation: The working in a co-operative society is quite economical. Several expenses are reduced due to elimination of the middlemen, voluntary services provided by its members, or services provided at lower salary, and also because there is no need to maintain huge stocks.
(vi) State Patronage: The co-operatives have been adopted by the Government as an instrument of economic policy. Therefore, they are assisted in various ways by the Government so as to make them a success.
(vii) Social Benefits: Co-operation is a philosophy and a way of life. It helps to educate members to live together. It teaches them thrift, self-help, mora1values and self-government. It promotes the spirit of cooperation in place of spirit of competition. It enables them to serve others rather than exploit others. Thus, it raises the standard of living of the members and also raises moral standards of the masses.
(viii) Scope for Internal Financing: Since a co-operative society has to create some compulsory reserves out of its profits, there is enough scope for ploughing back of profits in such organisations. This source of internal finance can be utilized for modernisation and growth of the co-operatives.
Disadvantages of Co-operative Society
(i) Limited Resources: The co-operatives are not able to raise huge amounts of capital; because their membership comprises persons of limited means and is limited to local areas. The principle of one-man one-vote and limit on divided also subdue the enthusiasm of their investing members.
(ii) Limited Size: Since the principle of co-operation cannot be extended beyond a certain limit, the co-operatives are likely to fail if they choose expansion of their organisation like big joint-stock companies. Large-scale production or distribution is not suitable for co-operative organisations:
(iii) Lack of Secrecy: A co-operative society, being separate legal entity is required to disclose fuller information to its members. Thus, secrets of the business cannot be maintained.
(iv) Lack of Motivation: Since there are restrictions on the rate of dividend, the members of the managing committee do not feel motivated enough to put their best to make the organisation a success.
(v) Inefficient Management: A co-operative society is managed by a managing committee which is composed of elected members who are not necessarily experts in management. Moreover, they are not in a position to attract professional managers; because they are not in a position to pay high salaries to them. Thus, the co-operatives in general, suffer from inefficient management.
(vi) 1nternal Quarrels and Rivalries: The members of a co-operative are very enthusiastic in the beginning; but after the initial zeal is over they start showing indifference towards their organisation. Often, they quarrel on petty matters. The normal working of the co-operative is affected due to factionalism among the members. His further weakened by power politics and casteism, etc.
(vii) Excessive Government Interference: The co-operatives are exposed to a considerable degree of regulation by the co-operative department. A certain degree of control is welcome; but too much of it and unwanted interference acts as a deterrent to the -voluntary nature of co-operatives; it goes against the operational flexibility of the co-operatives and, thus, affects efficiency of management of the co-operatives.
Suitability: The co-operatives are primarily suitable for small and medium size organisations and particularly for trading organisations. Since the cooperatives suffer from the limitations of limited financial resources; lack of efficient professional management, excessive Government regulation, lack of motivation, etc., they are not suitable for a large size organisation. However, there are certain exceptions to this rule where the co-operatives have overcome some of their limitations mentioned above and are running their business on large-scale successfully. For instance the Kaira District Milk Producers Cooperative Union Limited, Anand, Gujarat (of Amul fame), the Indian Farmers and Fertilizers Cooperative (IFFCO), the Textile co-operatives and the consumers’ co-operatives of Tamilnadu and Kerala are large-sized organisations, being run on the principle of co-operation.
After having discussed the various forms of business organisation with their relative advantages and disadvantages, it would be appropriate now, to examine how a final choice is made of a suitable form of organisation by the entrepreneur concerned. The choice of an appropriate form of ownership organisation is an important entrepreneurial decision; because it has a bearing on income, risk and control as related to the entrepreneur.
The choice of the suitable form is never based on a single factor, it should be based on all relevant considerations concerning the business as known to the entrepreneur at the time of taking a decision. The problem of choice of a suitable form of business organisation arises at two occasions – while starting a new business and secondly, when its expansion becomes essential. It may be noted that there is no single form of business organisation which may be considered the best under all the circumstances; in fact, a form of organisation which is considered the best in one case, may prove to be a complete failure in another case.
At the time of launching a new business enterprise, the choice of the form of ownership is dictated by several factors as given below :
1. Nature of business – Service, trade, manufacturing.
2. Scale of operations – Volume of business (large, medium, small) and size of the market area (local, national, international) served.
3. Degree of direct control desired by owners.
4. Amount of capital required initially and for expansion.
5. D.egree of risk and liability and the willingness of owners to assume personal liability for debts of business.
6. Division of profits among the owners.
7. Length of life desired by the business.
8. Relative freedom from Government regulations (flexibility of operations).
9. Scope and plan of internal organisation.
10. Comparative tax liability.
It must be noted that these factors are interrelated and interdependent. For instance, the amount of capital required and the degree of risk involved depend upon the nature and volume of business operations. The degree of control and the division of profits are both related to risk and liability. Therefore, an entrepreneur should not consider these factors in isolation. The interrelationship between these factors should be duly considered.
Choice of Form of Organisation for Expanding Business
If an entrepreneur carries out of activities of his business successfully over a period of time, there is likely to be a need to expand his business so that much larger dema!1ds are easily met. Since the resources – financial and managerial – of the entrepreneur are limited, he will have to review the existing form of business organisation and find out the possibility of changer-over to another form to carry out the necessary expansion. Thus, while implementing the expansion programme, he has to choose between carrying on with the existing form and changing the existing form of organisation. The main problems that an expanding concern will have to attend to are :
(i) Increased financial requirements.
(ii) Need for internal re-organisation.
(iii) Need for specialised services.
(iv) Increase in the risk and the personal liability of the owners.
(v) Retention of effective control.
(vi) Increased tax liability.
The nature and extent of the problems mentioned above will depend upon the existing form of organisation, the nature and the size of business, and the expansion programme. The various alternatives available to an entrepreneur, if he decides to change the existing form of organisation, are as follows :
(a) A sole trader may employ a manager or change-over to a partnership.
(b) A partnership may have more partners or switch to a private company.
(c) A private company may shift to a public company.
A brief evaluation of these alternatives, on the basis of the characteristics of an ideal form of organisation, discussed earlier, is as follows: First Alternative: Employment of Manager vs. Change-over to Partnership When a. sole proprietor is successful in his business, it becomes essential for him to expand it to meet much larger demand. To achieve this, he needs additional capital and additional help in management. He has two alternatives. He may either employ a paid manager or may take one or more partners. The relative advantages and disadvantages of both the alternatives are examined under the following heads:
(i) Re-organisation: If the sole proprietor decides to employ a manager, there will be no change in the form of an existing organisation. Only a ‘contract of service is to be made with the manager. On the other hand, if one or more patterns are taken, there will be change in the form of organisation from sole-proprietorship to partnership. This change requires entering into a partnership agreement, drafting of a partnership deed and possibly, getting the firm registered; as registration is desirable. Besides this, it is difficult to find out a partner. Thus, as compared to having one or more partners, it is easier to employ a paid manager.
(ii) Capital: When a manager is employed the additional funds are to be arranged by the sole proprietor himself. There is, however, an advantage in this; the sole proprietor does not share profits with the manager and therefore, the repayment of loan is possible out of profits. In case a partner or partners are taken, additional capital will be brought in by him or them. The sole proprietor need not borrow additional funds and bear the burden of their repayment, but the partners will have to be given shares in the future profits of the firm.
(iii) Control: If a manager is employed, full control of the business continues with the sole proprietor. On the other hand, if a partner is taken, control is to be shared with him unless he is a sleeping partner who contributes capital but does not participate in management: Finding such a sleeping partner, however, is difficult.
(iv) Management: In case a manager is employed, the quality of management in the firm is likely to improve; because a manager possesses the necessary knowledge and skill for the purpose. However, the manager may not take full interest in the business; as there is no direct relationship between his efforts and reward; he gets fixed salary. On the other hand, if a partner with necessary managerial skills is taken, he will contribute to additional capital and will also help in successful running of the business. His interest in the business will be full; because he is going to share its profits.
(v) Secrecy: If manager is employed, the sole proprietor can keep all important business secrets to himself. In partnership, all these secrets have to be shared with partners. Therefore, in a partnership; business secrets can be retained by the partners so long as they act in good faith and harmoniously; if they fall out, secrets may become public.
(vi) Business Risks: In case a manager is employed, the sole proprietor has to bear all the business risks; He is personally responsible for the repayment of loans borrowed for the business and has to suffer all the losses. In partnership, risk are shared by all the partners. They are jointly and severally liable for the acts of one another and for the entire debts of the firm.
(vii) Tax Advantage: When a manager is employed, the salary payable to him is a charge against profits of the business. Moreover, interest paid by the sole trader on the loans of the business is allowed as deduction for tax purposes. If a partner is taken, share of profit payable to him is liable to tax in the hands of the firm if the firm is not registered under the Income Tax Act. Thus, in case of partnership, the tax-incidence increases.
(viii) Continuity: With the employment of a manager, the form of organisation does not change. Therefore, even after the appointment of the manager, the sole proprietorship remains unstable; it comes to an end with the death, insolvency or insanity of the proprietor. On the other hand, when a partner is taken, the partnership firm may be carried on by the remaining partners in case of death, insolvency or insanity of one of the partners. Moreover, because of more funds and better capacity to face risks, a partnership is in a better position to survive.
(ix) State Regulation: If a manager is employed, no compliance with any regulation is required. From this point of view, a partnership is also almost at par with sole proprietorship; because state regulation in its case is minimum.
Conclusion: From the above it appears, that in the initial stages of expansion, employment of a manager will be better for the sole trader, provided he has managing capacity and sufficient credit standing for raising additional funds from outside, However, as the business expands further and the sole proprietor wants to diversify his business, it is advisable that he should opt for partnership. The partner(s) will not only contribute to the capital of the firm but will also be helpful in sharing the risks associated with the expanded and diversified business particularly when it is, uncertain and risky. Besides this, a partner or partners, will also contribute towards making the management of the firm effective.
Second Alternative: Partnership vs. Private Company
As the business of the sole proprietor expands further, he is faced afresh with the alternatives of the forms of organisation. He may opt for partnership, or convert his business into private company. Similarly, an expanding partnership firm is also confronted with the alternative forms of organisation. The partners of such a firm may have to decide either in favour of more partners or in favour of private company. While selecting between these two alternatives, the following facts should be taken into consideration:
(i) Re-organisation: As compared to company; the formation of a partnership firm is easier; because there are no legal formalities to be completed is its formation. Registration of the firm is not compulsory. On the other hand, incorporation of a company calls for the compliance of several legal formalities. Thus, on this count, the partnership enjoys a distinct advantage over a private company.
(ii) Capital: For a medium-sized business, both partnership firm and private company can raise sufficient funds. However, a private company can raise more funds; because the limit on the maximum number of members is 50 as against only 20 (10 in the banking business and 20 in non-banking business) in case of a partnership. Nevertheless, the creditworthiness of a partnership is better because of unlimited, joint and several liability of the partners.
(iii) Liability: The liability of each member of a partnership is unlimited, whereas the liability of the members of a private limited company is limited to the face value of the shares held by them. Therefore, partnership firm may be preferable for a medium-sized business with stable character. On the other hand, a private company would be a better choice for a large business of speculative nature. The limited liability is, definitely, a plus point” in favour of private company form of organisation.
(iv) Control: In case a partnership is formed, the original owner has to share control of the firm with other partners unless they are sleeping partners. On the other hand, in a private-company, the original owner may be able to retain effective control of the business by holding the office of the managing director of the company.
(v) Management: In a partnership, since every partner has a right to be consulted with regard to the affairs of the firm, inefficiency may creep in its management because of misunderstanding and conflict among the partners. On the other hand in case of private company, its management rests with the few elected directors who are in a position to take decisions promptly and boldly.
(vi) Secrecy: Secrecy can be maintained in both the forms of organisation almost equally well except that, unlike a partnership firm, a private company has to file its audited accounts with the Registrar of companies.
(vii) Continuity: A partnership firm may come to an end on the death, retirement, insolvency or lunacy of a partner. On the other hand, a private company enjoys continuity and stability and is not affected by change in its members; it may last for generations.
(viii) State Regulation: A partnership firm is subject to nominal Government regulation, even if it is registered. Of the other hand, although a private company enjoys privileges and exemptions under the Companies Act, yet it has to comply with a large number of legal formalities which involve considerable amount of time and money. A partnership has a clear edge over a private company on this count.
(ix) Tax Advantage: A partnership firm is at an advantageous position on the basis of tax liability. A partnership pays tax on its profits at progressive rates whereas a private company pays tax at a flat rate. Therefore, the tax burden is lighter in case of a partnership business than in case of a private limited company, particularly, where the scale of operations is small or medium. However, tax liability would be lower in case of a private company if the business profits are large.
Conclusion: Before going ahead with the re-organisation of the business, the businessmen should consider all the factors mentioned above carefully. A partnership firm is as advantageous as a private company; preference for the latter may be because of the advantage of limited liability. Ultimately the decision will depend on the nature and size of the business and the weight assigned to the various factors discussed above.
Third Alternative: Private Company vs. Public Company
In general, for a medium-size business, both a partnership and private limited company are considered suitable. Even for a sole proprietor, whose business is expanding fast, conversion to private limited company may be advisable. He will get the benefits of limited liability and reduced tax liability; presuming his income falls in the higher income bracket. However, when a private company finds it difficult to meet the requirements of its fast growing business, it has to choose between the existing form of organisation and the possibility of converting the private company into a public company. The decision will depend upon the careful consideration of the following factors :
(i) Re-organisation: The formation of a private company is easier that of public company; because the former enjoys many privileges and exemptions. For example, a private company needs only two members for its incorporation as against minimum of seven in a public company. A private company can commence business immediately after its incorporation whereas a public company is required to raise minimum subscription and obtain a certificate for the commencement of business. When business expands, a private company may be converted into a public company by amending the articles of association with respect to number of members, offer of shares to the public and their transferability.
(ii) Capital: The amount of capital that can be raised by private company is limited because of limit on the number of members and restrictions on issue of prospectus to the public. The limited liability of its members puts a limit on its borrowing power. On the other hand, a public company can raise enormous amount of capital from the investors scattered throughout the country. It can also procure additional funds by issue of debentures and by borrowing from special financial institutions.
(iii) Control: Since a private company is a closely controlled company, it is possible for the original entrepreneurs to retain control of the company in their hands by holding key positions on its board of directors. They can restrict the number of members of the private company to retain their control. However, in a public company, control is shared with other investors.
(iv) Management: Both types of company are managed by the elected Board of Directors. In case of a private company, the Board consists of the entrepreneur and his close associates, often family members. Thus, practically, there is no gap between the owners and the manager in a private company. On the other hand, in a public company, the Board consists of non-owners, also many of whom are elected because of their special managerial skills. Thus, professionalism gets boosted in company management.
(v) Secrecy: Unlike a public company, a private company is in much meter position to maintain secrecy in the conduct of its business affairs. Although it is required to file its audited annual accounts with the Registrar of Companies yet they are not open to public. On the other hand, all the papers and documents filed with the Registrar of Companies by a public company are open to public inspection on payment of a nominal fee. Thus, a public company is not in a position to maintain secrecy of its affairs.
(vi) Government Regulation: A private company, being a closely held company, is left relatively free to conduct its affairs without much Government regulation. Rather, it is granted certain privileges and exemptions. On the other hand, a public company, being widely held, involves wider public interests, and therefore, is subject to several legal formalities under various Act. The Government has been given wide powers to regulate and control the management of a public company. The regulatory provisions very often prove cumbersome and costly. Such regulations not only have adverse effect on the freedom of management but also reduce flexibility of operations.
Is the entrepreneur who we have been acquainted with, in the first lesson, a machine that calculates the probabilities of profits? Not at all. He, like every one of us, is very much a part of the society. Therefore, the motivation, the modes of conduct, and the effectiveness of entrepreneurs need to be understood with reference to the general environment in which we live. What does the term ‘environment’ mean? In any society, the environment includes the economic, social, psychological and political aspect of life. In other words, it is true that an economic activity expansion depends on certain environmental forces that promote or retard the entrepreneurial thinking, behaviour and efforts. In this lesson, we are going to look at such factors that tend to influence entrepreneurship.
The countries of the world are experiencing an unprecedented burst of inventions. Even the underdeveloped countries are making conscious efforts in encouraging research and development. While the developed countries have the record of commercialising the inventions to their fullest advantage, the less developed ones find their innovations either lying idle or flowing out to the more prosperous nations. The proverbial “brain-drain” that is affecting countries, like India is due to absence of the necessary infrastructure to capitalise on the numerous inventions that are taking place. The secret of the success of most developed countries is the presence of a large member of dynamic entrepreneurs who provide the fillip for newer and better inventions. The less developed countries, on the other hand, are confronted by a situation where the entrepreneurs just do not seem to come and the existing tend to leave their countries in search of better opportunities. The economically backward nations are characterised by the scarcity of entrepreneurship. Several inimical factors are affecting the growth of this important factor of production.
Some societies – notably in the United States, South Korea and many South-East Asian Counties like Thailand and Singapore- are bound with entrepreneurs. Others like China and India have fewer entrepreneurs, although these countries recently changed their laws to encourage entrepreneurship. Countries like England, where many companies such as airlines and automobile manufacture used to be operated by the Government, have in recent times turned these firms to the private sector, encouraging entrepreneurship through, new opportunities in private ownership. Other nations, such as Japan, though are bound by strong traditions, have in recent times started favouring entrepreneurship. From the above, it can be said that economic and non-economic factors can affect the level of entrepreneurship within any society.
The emergence and development of entrepreneurship is not a spontaneous one but a dependent phenomenon of economic, social, political, psychological factors often nomenclature as supporting conditions to entrepreneurship development. These conditions may have both positive and negative influences on the emergence of entrepreneurship. Positive influences constitute facilitative and conducive conditions for the emergence of entrepreneurship, whereas negative influences create inhibiting milieu to the emergence of entrepreneurship. Various researchers world over have identified the factors that contribute to the development of entrepreneurship as are summarised below :
Economists agree that the lack of entrepreneurs is not caused by economic conditions alone as was the earlier feeling. It is also due to the whole set of socio-cultural and institutional environment prevailing in the less developed countries. Various environmental factors influencing the entrepreneurship will be discussed in this course.
Economic environment exercises the most direct and immediate influence on entrepreneurship. The economic factors that affect the growth of entrepreneurship are the following :
1. Capital: Capital is one of the most important perquisites to establish an enterprise. Availability of capital facilitates for the entrepreneur to bring together the land of one, machine of another and raw material of yet another to combine them to produce goods. Capital is therefore, regarded as lubricant to the process of production. Our accumulated experience suggests that with an increase in capital investment, capital-output ratio also tends to increase. This results in increase in profit which ultimately goes to capital formation. This suggests that as capital supply increases, entrepreneurship also increases. France and Russia exemplify how the lack of capital for industrial pursuits impeded the process of entrepreneurship and an adequate supply of capital promoted it.
2. Labour: The quality rather quantity of labour is another factor which influences the emergence of entrepreneurship. Most less developed countries are labour rich nations owing to a dense and even increasing population. But entrepreneurship is encouraged if there is a mobile and flexible labour force. And, the potential advantages of low-cost labour are regulated by the deleterious effects of labour immobility. The considerations of economic and emotional security inhibit labour mobility. Entrepreneurs, therefore, often find difficulty to secure sufficient labour. They are forced to make elaborate and costly, arrangements to recruit the necessary labour. The problem of low-cost immobile labour can be circumvented by plunging ahead with capital-intensive technologies, as Germany did. It can be dealt by utilizing labour-intensive methods like Japan. By contrast, the disadvantage of highcost labour can be modified by introduction of labour-saving innovations as was done in US. Thus, it appears that labour problems can be solved more easily than capital can be created.
3. Raw Materials: The necessity of raw materials hardly needs any emphasis for establishing any industrial activity and its influence in the emergence of entrepreneurship. In the absence of raw materials, neither any enterprise can be established nor an entrepreneur can be emerged. Of course, in some cases, technological innovations can compensate for raw material inadequacies. The Japanese case, for example, witnesses that lack of raw material clearly does not prevent entrepreneurship from emerging but influenced the direction of entrepreneurship. In fact, the supply of raw materials is not influenced by themselves but becomes influential depending upon other opportunity conditions. The more favourable these conditions are, the more likely is the raw material to have its influence of entrepreneurial emergence.
4. Market: The fact remains that the potential of the market constitutes the major determinant of probable rewards from entrepreneurial function. Frankly speaking, if the proof of pudding lies in eating, the proof of all production lies in consumption, i.e., marketing. The size and composition of market both influence entrepreneurship in their own ways. Practically, monopoly in a particular product in a market becomes more influential for entrepreneurship than a competitive market. However, the disadvantage of a competitive market can be cancelled to some extent by improvement in transportation system facilitating the movement of raw material and finished goods, and increasing the demand for producer goods. D.S. Landes holds the opinion that improvement in transportation are more beneficial to heavy industry than to light industry because of their effects on the movement of raw materials. Paul H. Wilken claims that instances of sudden rather than gradual improvement in market potential provide the clearest evidence of the influence of this factor. He refers to Germany and Japan as the prime examples where ‘rapid improvement in- market was followed by rapid entrepreneurial appearance. Thus, it appears that whether or not the market is expanding and the rate at which it is expanding are the most significant characteristics of the market for entrepreneurial emergence.
5. Infrastructure: Expansion of entrepreneurship presupposes properly developed communication and transportation facilities. It not only helps to enlarge the market, but expand the horizons of business too. Take for instance, the establishment of post and telegraph system and construction of roads and highways in India. It helped considerable entrepreneurial activities which took place in the 1850s. Apart from the above factors, institutions like trade/ business associations, business schools, libraries, etc. also make valuable contribution towards promoting and sustaining entrepreneurship’ in the economy. You can gather all the information you want from these bodies. They also act as a forum for communication and joint action. Of late, the importance of business and industry associations have increased tremendously. In the fast changing world of business, entrepreneurs have to move-collectively in order to be more effective and more efficient. They need to constantly check and influence the Government’s thinking and decision-making.