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.