Management Process unit 1

Management Process

S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: [email protected] Page 1

UNIT – I BUSINESS ORGANIZATION

Business – Meaning – Business and Profession – Requirements of a Successful

Business – Organization – Meaning – Importance of Business Organization – Forms

of Business Organization – Sole Traders – Partnership – Joint Hindu Family Firm –

Joint Stock Companies – Cooperative Organizations – Public Utilities and Public

Enterprises.

BUSINESS – MEANING – BUSINESS AND PROFESSION

All human activities are directed towards satisfying human wants. Depending upon

the nature of wants, human activities may be categorized as economic and non-

economic. Economic activities are undertaken to create utilities. Non-economic

activities do not have economic matrices and these primarily tend to satisfy social,

religious or cultural sentimental requirements of human being.

BUSINESS

The business is an activity which is primarily pursued with the objective of earning

profit. A business activity involves production, exchange of goods and services to earn

profits or earn a living. The word „business‟ literally means a state of being busy.

Every person is engaged in some kind of occupation, a farmer works in the field, a

worker works in the factory, a clerk does his work in the office, a teacher teaches in

the class, a salesman is busy in selling the goods. The primary aim of all these persons

is to earn their livelihood while doing some work.

PROFESSION

Profession is an occupation involving the provision of personal services of a

specialized and expert nature. The service is based on professional education,

knowledge training, etc. The specialized service is provided for a professional fees

charged from the clients.

For instance, a doctor helps his patients through his expert knowledge of the science

of medicine and charges fees for the services. Minimum education qualifications are

prescribed for entry into a profession and every professional requires a high degree of

formal education and specialized training in a particular field. A person entering law

profession has to a acquire B.L. degree in order to become a lawyer.

The professionals are members of professional bodies of those lines and conduct their

activities according to the standards set by those bodies. A person entering law

profession has to obey the guidelines and regulations of Bar Council of India. A

Chartered Accountant is governed by the Indian Institute of Chartered Accountants.

EMPLOYMENT OR SERVICE

Employment or service involves working under a contract of employment for or under

someone known as employer in return for wages or salary. The person engaged under

employment works as per the directions of the employer. There is an employer-

employee relationship. A professional may also work under the contract of

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Management Process


employment. A Chartered Accountant may be employed in a company. The service

may be of a government department or in a private organization.

Comparison between Business, Profession and Employment

On the basis of Formation

o An entrepreneur establishes a business unit and starts production of goods and

services for satisfying human wants.

o A professional firm comes into existence when a professional who holds the

qualification to undertake that work joins that body.

o An employment is a contract to take up a job for somebody else. The agreement

of employment may be oral or written. On the basis of Type of Work

o A business deals in production and exchange of goods and services for the

benefit of the community.

o A professional provides a specialized service to the clients.

o An employment is an employee undertakes the work assigned to him by his

employer. On the basis of Qualification

o No educational or technical qualification is prescribed for setting up a business

unit.

o A professional is required to acquire as particular degree or qualification

prescribed by the professional body.

o There is no qualification binding for taking up a service, however, a well-

qualified person can get a better job. On the basis of Motive

o The primary aim of a business is to earn profits by providing goods and

services to the society.

o A professional has a service motto besides earning his fees.

o An employer has to take up the work as per the terms and conditions of his

employment or contract of service. On the basis Investment

o A business requires an investment as per the nature and scale of operations.

o A professional has to spend money on setting up his office or place of work.

o An employment does not require any investment at all. On the basis Membership

o A business does not require a membership compulsorily. It is optional.

o A professional has to be member of a body like Bar Council, Medical Council.

o An employment does not require any membership to take up a job. On the basis Risk

o There is a greater element of risk in business

o A professional has no risk and he only earns fees for his service.

o An employment does not hold any risk unless it is specified in the contract. On the basis Transfer of Interest

o An interest in business can be transferred to anybody else under laws.

o A professional cannot transfer risk to others.

o An employment cannot transfer risk to others.


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Features of Business

1) Entrepreneurship: There must be someone to take initiative for establishing a

business. The person who recognized the need for a product or service is

known as entrepreneur.

2) Economic Activities: Business includes only economic activities. All those

activities relating to the production and distribution of goods and services are

called economic activities.

3) Exchange of Goods and Services: A business must involve exchange of goods

and services. This exchange is undertaken with a profit motive.

4) Profit Motive: The profit motive is an important element of business. Any

activity undertaken without profit motive or price consideration is not a

business.

5) Risk and Uncertainty: The business involves a large element of risk and

uncertainty. The factors on which business depends are never certain, so the

business opportunities will also be uncertain.

6) Continuity of Transactions: In business, only those transactions are included

which have regularity and continuity. An isolated transaction will not be called

as business, even if the person earns profit from that deal.

7) Creation of Utility: Business creates various types of utilities in goods so that

consumers may use them. The utility may be form utility, place utility, time

utility, etc.

8) Organization: Every enterprise needs an organization for its successful working.

Various business activities are divided into departments, sections and jobs.

9) Financing: Business enterprises cannot move a step without finance. The

finances are required for providing fixed and working capital. A proper capital

structure is a must for the success of the business.

10) Consumer Satisfaction: The ultimate aim of business is to supply goods to the

consumers. If the consumers are satisfied then they will purchase the same

thing again, otherwise he will go in for an alternative commodity.

11) Satisfying Social Needs: The business is a socio-economic institution. It must

look to the public good. It is not only the public which needs business but

business also needs public support.

Objectives of Business

1

Profit earning

Production of goods and services

Creating markets

Technological improvements

Economic Objectives

2

Welfare of employees

Satisfaction of consumers

Satisfaction of shareholders

Utilizing resources properly

Human Objectives

3

Supply of quality goods and services

Cooperation with Governments

Creation of employment

Social Objectives


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4

Survival national efforts

Growth entrepreneurs

Earn recognition and prestige

Development of personnel

Organic Objectives

5

Helping national efforts

Developing entrepreneurs

Self-sufficiency and export development

National Objectives

REQUIREMENTS OF A SUCCESSFUL BUSINESS

A business has to coordinate various factors of production for achieving a given

objective. All factors are equally important for making the business a success. Various

departments should work in coordination with each other and organizational and

financial planning should be properly determined.

Modern business has become complex and complicated. The improvements in

technology and changing consumer preferences are creating more challenges for the

businessman. All aspects of an enterprise, i.e. production, financing, organization and

marketing should be properly arranged and coordinated to make a business successful.

The following are the pre-requisites of the success of business:

1. Setting Objectives: The setting up of business objectives is the first thing to be

done by the management. One must know as to what is to be done. Only after

deciding objectives, the ways and means will be determined to achieve the

objectives.

2. Proper Planning: After determining the objectives, the work should be planned

in all its perspectives. Planning involves forecasting and laying down the

course of action. In involves planning for both present and future.

3. Sound Organization: An effective organization system is essential for the

success of a business. The duties and responsibilities of all persons are defined

and they should know what they are to do.

4. Proper Financial Planning: The requirement of finance and its possible sources

should be decided at the time of starting the enterprise. The purpose of

financial planning is to make sure that adequate funds are raised at the

minimum of cost.

5. Location and Layout of Plant: One of the important decisions to be made by the

management is regarding the location of the plant. The plant should be located

at the place where all factors of production are available at lowest costs.

6. Marketing System: The marketing aspects of a business are more important than

even production. There is no use of producing a thing if it cannot be sold.

Marketing management is essential for earning profit.

7. Research: Change is the essence of business. Every day, new production

methods are found. Research and development should be given due place in the

business.


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8. Dynamic Leadership: The success of an enterprise will depend upon the

efficiency of its management. The task of a manager is to plan, organize,

coordinate and direct various activities for achieving business objectives.

Functions of Business

A business has to perform a number of functions in order to achieve its objectives.

There are some primary functions like production, marketing, etc. while other

functions such as finance, accounting, personnel, research and development are also

important for running the concern.

(1) Production Function: This involves transformation of raw materials into goods

and services and making them useful. A number of other inputs such as labor,

capital, and machinery will also be necessary to carry out this function. The

production function has become a specialized function in modern business.

(2) Marketing Function: Market is a process involving activities ranging from

getting goods from producers and sending them to ultimate consumers or users.

It involves all efforts to create customers for the products and provide

maximum satisfaction to them. The marketing mix has also to be decided.

(3) Personnel Function: It is concerned with the people at work and with the

relationship within an enterprise. It aims to bring together and develop into an

effective organization the men and women who make up an enterprise. The

enterprise should endeavor to make proper utilization of human resources.

(4) Finance Function: This function is very important for business activities. It

remains in focus of all activities. A business needs finance developing and

expanding an enterprise. The funds will have to be raised from various sources.

Scope of Business (or) Components of Business

Business activities may be divided into five categories as follows:

1. Activities related to production of goods;

2. Activities related to the rendering of services;

3. Activities related to distribution of goods;

4. Activities rendering distribution assistance;

5. Those activities which render financial assistance

Broadly, business activities may be divided into two main divisions: (a) Industry and

(b) Commerce.

INDUSTRY

Industry is concerned with the making or manufacturing of goods. It is that constituent

of production which is involved in changing the form of a good at any stage from raw

material to the finished product, e.g. weaving woolen yarn into cloth. Thus, industry

imparts „form utility to goods‟.

The goods produced may either be used by other enterprises for further production or

as final production by consumers. When goods are used by other enterprises for

further production, they are known as producers‟ goods. The production of plant,

machinery equipment etc. are examples of producers‟ goods.


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When goods are finally used by consumers, they are known as consumers‟ goods. The

examples of such goods are cloth, bread, groceries, drugs, etc. An enterprise may

produce materials which will be further processed by yet another concern for

converting them into finished goods. These goods are known as intermediate goods.

The examples of this category are plastics, rubber, aluminum, etc.

Classification of Industry

1. Primary and Genetic Industry: Genetic industry is related to the reproducing and

multiplying of certain species of animals and plants with the object of earning

profit from their sale. Nurseries, cattle breeding, fish hatcheries, poultry farms

are all covered under genetic industry.

2. Extractive Industry: The extractive industry is engaged in raising some form of

wealth from the soil, climate, air, water or from beneath the surface of the

earth. Mining, fishing and hunting, agriculture and forestry are covered under

extractive industry.

3. Construction Industry: This industry is engaged in the creation if infrastructure

for the smooth development of the economy. It is concerned with the

construction, erection or fabrication of products. These industries are engaged

in the construction of building, roads, dams, bridges and canals.

4. Manufacturing Industry: This industry is engaged in the conversion of raw

materials, into semi-finished or finished goods. This creates form utility in

goods by making them suitable for human uses. Manufacturing industry may

be classified as (a) Analytical Industry, (b) Processing Industry, and (c)

Synthetic Industry.

COMMERCE

Commerce is concerned with the exchange of goods. It includes all those activities

which are related to the transfer of goods from the place of production to the ultimate

consumers. Generally, commerce and trade are taken as synonymous words. Whereas

trade involves buying and selling of goods; commerce includes trade and aids to trade.

Services of various agencies which facilitate transportation of goods, finance various

activities, provide storing facilities, help in publishing goods and undertake various

risks, are not only helpful but are necessary for the growth of commerce.

Evelyn Thomas says, “Commerce occupations deal with the buying and selling of

goods, the exchange of commodities and the distribution of finished products”.

Nature of Commerce

In traditional sense commerce is associated with trade or aids to trade. Commerce, on

the other hand is a part of business. It has the following characteristics:

1. It deals with exchange of goods and services.

2. Only economic activities are a part of commerce.

3. Commerce is undertaken with a profit motive.


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4. There is always a risk and uncertainty in commerce.

5. Commerce creates various utility in goods.

6. There should be continuity in transactions.

Classification of Commerce

Commerce can be classified into two categories:

(1) Trade and (2) Aids to trade

Trade

Trade is the process of taking goods from the sources of production or place of

procurement to the consumer. The producers cannot come into direct contract with the

consumers, so there should be some channel which will facilitate the transmission of

goods from the producers to the consumers. The channel which helps the exchange of

goods is called trade.

Trade may be classified as (a) Internal trade, (b) External trade, (c) Wholesale trade

and (d) Retail trade.

Aids to Trade

In the course of exchange of goods various aids are required to complete the process.

The aids are required regarding transport of goods from the producers to the

consumers, financing the trade transaction, exchange activities, cover for the loss of

goods in transit and arranging the storing of goods. The hindrances in the way of

smooth trade may be of place, person, finance, time, knowledge and risk. All these

facilities are needed with the help of various agencies known as „Aids to trade‟.

Distinction between Trade, Commerce and Industry

Basis of

Difference Trade Commerce Industry

Meaning

It is related to the

purchase and sale of

goods.

It deals with all those

activities which deal

with the taking of

goods from producers

to consumers.

It deals with the

conversion of raw

materials into finished

goods are covered in

industry.

Capital

The requirements of

capital are more in

trade as compared to

commerce.

Commerce requires

less capital

Capital needs are high

for industry because it

requires purchase of

huge raw materials.

Scope

Trade deals only with

purchase and sale of

goods.

Commerce includes

trading and other

servicing activities.

Industry deals with

those activities which

related to primary

manufacturing.

Risk

It involves a greater

amount of risk of fall

in prices or in demand.

The risk involved in

commerce is

comparatively less.

Industry involves

greater amount of risk

as compared to others.


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Business

Industry Commerce

Primary Extractive Construction Manufacturing

Or Industry Industry Industry

Genetic

Industry

Analytical Processing Synthetic

Industry Industry Industry

Trade Aids to Trade

Home Foreign Wholesale Retail

Trade Trade Trade Trade

Imports Exports

(a) Local Trade

(b) Provincial or State Trade

(c) Inter State Trade

Transport Distribution Banking Warehousing Advertisement Insurance

and

Salesmanship

Qualities of Successful Business

A number of factors have been considered essential before a concern can be

successfully launched. In addition to all other factors, there is one more important

factor i.e. entrepreneur. The quality and type of leadership available to a concern

directly affect its working. The entrepreneur plans and executes various business

policies. A properly managed concerned is generally a reflection of leadership

qualities of the business. A properly managed concern is generally a reflection of

leadership qualities of the business.

1. Knowledge of Business: The business should have a thorough understanding of his

business. He should be clear about the aims and objectives of the organization.

The knowledge of all aspects such as trade, finance, marketing, mercantile laws,

etc. are essential to tackle complex business problems.

2. Impressive Personality: A pleasing personality is always an asset. A business man

should be able to impress people and should be able to get all round cooperation

from them. Because people avoid to deal with a man with bad manners and short

temper.


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3. Hard Working: There is no substitute for hard work. Success and hard work go

together. He should be dedicated to his work. His hard work will motivate his

employees to work with the same zeal.

4. Cooperative: A businessman has to deal with many complex problems. He has to

seek the cooperation of a large number of persons in solving his problems. The

dependence on others is a necessity in the present day business world.

5. Courageous: In business, sometimes there are conflicting demands from different

sides. The consumers, employees and government want the businessman to be

considerate to their demands. He has to reconcile various interests.

6. Initiative and Decision-making Power: A businessman has to take difficult

decisions in the course of business. He should have the ability to decide things at

the proper time. He should take initiative in tackling various problems and should

take them as a challenge.

7. Cordial Relations with Employees and Customers: Customers and employees are an

integral part of the business. He should tactfully deal with their problems.

Customer satisfaction is essential to stay in business. Cordial relation with them

helps him to build up goodwill for the business.

8. Honesty: This is one of the essential qualities of a businessman. He should be

honest in his dealings with others. Honest with customers will make him able to

earn good reputation for his products.

9. Disciplinarian: Discipline is a significant trait in the personality of successful

businessman. He should give a lead to his employees. He should follow various

rules and regulations strictly. No organization can work without discipline.

10. Adaptability: A businessman should be able to adjust according to the situations.

There may be a frequent change of situations. He is expected to face a few

challenges with courage. He should not lose heart and should be able to adapt to

new environments.

ORGANIZATION

Human beings suffer from physical, social and other limitations. Therefore, they

cooperate together to achieve their personal goals. They form groups of various types,

e.g. family, sports team, army, etc. A business organization is also a group. Group

activity can be productive only when there is some kind of organization.

Meaning of Organization

The term organization is used in management literature in two different sense:

(1) Organization Structure, and (2) Organizing Process

Organization as Structure (Organizational Design)

The word organization originated from the word „organism‟ which implies a structure

of interrelated parts. It is systematic integration of interdependent parts to form united

whole. It is a structure of relationships among various positions or jobs.

This structure or entity comprises horizontal and vertical authority relationships. It is a

system of co-operative activities of two or more persons for the attainment of a


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common purpose. It consists of those aspects of behavior that are relatively stable and

change slowly. It is the framework through which people work together for the

accomplishment of desired results.

According to Theo Haimann, “Organization is the structural framework within which

various efforts are coordinated and related to each other”. Organization structure is

designed to clarify who is to do what and who is responsible for what results. For

most of our lives, we are members of some organization, e.g. school, college, etc.

The components of organization structure include men, materials, machines, money,

methods, functions, authority and responsibility. Each organization structure is

characterized by (a) a distinct purpose to accomplish, (b) composed to people, and

(c) formal relationships among its members. An organization means two or more

people who work together in a structured way to achieve specific goals.

Organization as Process

The term organization is also used as a function of management or as a process carried

out for arranging the tasks into manageable units and defining the formal relationships

among the people working on different tasks. It involves putting things and persons in

their proper places and in relation to each other. It is the process of structuring or

arranging the different parts e.g. people, work, technology, etc.

In the words of Louis Allen, “Organization is the process or identifying and grouping

the work to be performed, defining and delegating responsibility and authority, and

establishing relationship for the purpose of enabling people to work most effectively

together in accomplishing objectives”.

Koontz and O’Donnell have defined organizing as “The group of activities necessary

to attain objectives, the assigning of each grouping to managers with authority to

supervise and the provision for coordination horizontally and vertically in the

enterprise structure”.

Moreover, organizing is viewed as a continuing process wherein relationships among

people are constantly reviewed and adjusted depending on the requirement of the

situation.

IMPORTANCE OF BUSINESS ORGANIZATION

Purpose and Importance of Organization

Sound organization is essential for the continuity and success of every enterprise. It is

indeed the backbone of foundation of effective management. The main advantages of

sound organization are given below:

1. Aid to Management: Organization is the mechanism through which management

coordinates and controls the business. It serves as an effective instrument for

realizing the objective of the enterprise. If the organization is ill-designed,

management is rendered difficult and ineffective.


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2. Facilitates Growth: A well-designed and balanced organization provides for

systematic division of work and permits necessary change. It is the framework

within which an organization grows. Therefore, it enables the enterprise to

enter new lines of business.

3. Ensures Optimum Use of Resources: A good organizational set-up permits

adoption of new technology. It helps to avoid duplication of work, overlapping

efforts and other types of waste. As a result it facilities the best possible

utilization of human and physical resources.

4. Stimulates Creativity: Sound organization encourages creative thinking and

initiative on the part of employees. Delegation of authority provides sufficient

freedom to lower level executives for exercising discretion and judgment.

5. Facilitates Continuity: A well-designed organization provides for training and

development of employees at all levels. It provides opportunities for leadership

and helps in ensuring the stability of the enterprise through executive

development.

6. Helps in Coordination: Organization is an important means of integrating

individuals‟ efforts. It helps in putting balanced emphasis on different

departments and divisions of the enterprise. It makes for cooperation and

harmony of action.

Steps in the Process of Organizing

The main steps involved in the process of organizing are as follows:

(a) Determining the Activities to be Performed: The first stop in the organizing

process is to identify the activities required for the accomplishment of

organizational objectives. For example, in a manufacturing concern, the

activities may be divided into purchase, production, sales, storage, advertising,

correspondence, accounting, etc.

(b) Grouping the Activities: Once the activities are identified they are grouped into

departments and divisions on the basis of their similarity and relatedness.

Identical or closely related activities are grouped together in one department.

(c) Assignment of Duties: After grouping activities into manageable limits, each

group of activities is assigned to a position most suited for it. While assigning

duties specialization, qualifications, experience and aptitude of people should

be duly considered. Right man should be selected for each job.

(d) Delegation of Authority: Appropriate amount of authority is delegated to each

individual for enabling him to perform the duties assigned. For example, the

purchase manager is given the authority to purchase goods and pay for them.

(e) Defining Authority Relationships: After granting authority, relationships between

different members of the organization are created. Such organizational

relationships are known as superior-subordinate relationships.

Thus, the process of organizing consists of defining and enumeration individual tasks,

grouping and classification of tasks, the delegation of authority for their

accomplishment and the specification of authority relationships between managers.


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Principles of Organization – (Features of a Good Organization)

The following principles are helpful in developing a sound and efficient organization

structure.

1. Utility of Objectives: The type of organization structure depends upon the

objectives of the enterprise. Therefore, the objectives must be stated in clear

and concise terms.

2. Division of Work: The total work should be divided in such a way that as far as

possible every individual performs a single function. This is also called the

principle of specialization.

3. Span of Control: No executive in the organization should be required to

supervise more subordinates than he can effectively manage. At the same time

number of levels of authority should be as few as possible so as to speed up

decision-making and communication.

4. Scalar Principle: The line of authority (called the chain of command) form the

top executive to the lowest level executive should be clear and unbroken. Every

individual should know whom he reports and who reports to him.

5. Principle of Exception: Every manager should take routine decisions himself.

Only exceptional matters beyond the scope of authority should be referred to

higher authorities. This is also known as authority level principle.

6. Unity of Command: Each individual should receive orders from and be

accountable to only one boss. Dual subordination should be avoided as it

undermines authority, creates disorder and confusion and leads to indiscipline.

7. Functional Definition: The authority and responsibility of every individual

should be clearly defined. The relationships between different jobs should be

clearly specified.

8. Unity of Direction: There must be one head and one plan for a group of

activities directed towards the same objectives. This is necessary to ensure

completion of tasks and coordination of activities.

9. Delegation: Authority delegated to an individual should be adequate to enable

him to accomplish the results expected to him. Authority should be delegated

to the lowest possible level consistent with necessary control so that decision is

made as near the scene of action as possible.

10. Flexibility: The organization structure should be adaptable to changing

circumstances. There should be scope for expansion without disrupting the

basic design.

Formal Organization and Informal Organization

Formal Organization

It refers to the planned structure of jobs and position with clearly defined objectives

and functions. It is deliberately or consciously created by top management for the

accomplishment of enterprise objectives. It is made up of official relationships and

channels of communication.

Formal structure is governed by established rules, regulations and procedures.

According to Chester Barnard, “An organization is formal when the activities of two

or more persons are consciously coordinated towards a common objective”.


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Formal organization tends to be stable and predictable. Therefore, it is represented in

the organization chart and manual of the enterprise. It provides a systematic

framework for the performance of jobs.

Formal organization can be mechanistic or organic. A mechanistic structure is a rigid

and tightly controlled structure. On the other hand, organic structure is highly

adaptive and flexible.

Difference between Mechanistic Structure and Organic Structure

Mechanistic Structure Organic Structure

1. High degree of specialization

2. Rigid departmentalization

3. Narrow spans of control

4. High degree of formalization

5. Limited information network

6. Centralization, little participation

in decision-making.

1. Low degree of specialization

2. Cross functional teams

3. Wide spans of control

4. Low degree of formalization

5. Wide information network

6. Decentralization, wide

participation in decision-making

Need for Formal Organization

(a) To Reduce Confusion and Uncertainty: By clearly spelling out each person‟s

authority and responsibility, formal organization helps to avoid overlapping of

efforts. It helps to ensure that work that ought to be done is performed.

(b) To Provide Specialization: Formal organization permits employees to

concentrate on their respective tasks. Every person is assigned a specified set of

duties and has the chance of becoming a specialist in it.

(c) To Provide Stability of the Firm: Through formal organization the firm can keep

operating in spite of changes in workforce. Continuity of operations in the face

of changes within and outside the firm becomes possible.

(d) To Help in Evaluating Employee Performance: Formalized activities and detailed

specification of duties assist in finding employee performance. Every employee

can have an idea whether he is performing what he is expected to do.

(e) To Provide Clear Paths for Promotion: The creation of a chain of command from

top to bottom indicates venues for promotion and the qualifications needed to

hold a higher level job.

Informal Organization

It arises from the personal and social relations of people. It is not formally designed

but develops spontaneously out of interaction between persons. It is influenced by

personal attitudes, likes and dislikes. Informal relations cut across formal channels.

For example, a superior may take advice from the sales manager instead of from the

production manager who is his boss. Such types of inter-personal relationships are not

predictable and cannot, therefore, be shown on the organizational chart.


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According to Barnard, “Informal organization is joint personal activity without

conscious common purpose though contributing to joint results”. People working

together in an enterprise frequently come into contact and develop personal or social

relations outside the formal structure.

Informal organization refers to relationships that develop spontaneously,

supplementing or modifying the formal organization established by management.

Informal organizations emerge whenever people come together and interact regularly.

Members of informal organizations tend to subordinate some of their individual needs

to those of the group as a whole. In tune, the informal organization supports and

protects them.

Informal organization may, however, operate sometimes to the detriment of

organizational goals. For example, the informal work group may slow down or

sabotage production. Informal group may resist change necessary for improving the

efficiency of the organization. Informal group may also spread rumors which are

harmful for efficient functioning of the formal organization.

An informal organization exists in every enterprise and at all levels of management

hierarchy. Manager should not attempt to abolish informal relationships. Both formal

and informal organizations are essential for group activity just as two blades are

essential to make a pair of scissors workable.

FORMAL ORGANIZATION FORMAL ORGANIZATION

JOB UNIT

RESPONSIBILITY

ROLE PRIMARY GROUP

POWER

A – ACTIVITIES I – INTERACTIONS S – SENTIMENTS

Figure: Formal Organization and Informal Organization

A

I S

A

I S


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Merits and Demerits of Informal Organization

Merits Demerits

1. It fulfills the social needs of

employees.

2. It facilitates quick and better

communication of feelings.

3. It provides scope for cooperation

at the workplace.

4. It creates an informal atmosphere

at the workplace.

1. It reduces the influence of

managerial authority

2. It may create rumors.

3. It may create casual approach on

the part of employees.

4. It may undermine the superior‟s

authority.

Distinction between Formal and Informal Organization

S.No. Formal Organization Informal Organization

1 It is created deliberately and is

consciously planned.

It is natural and arises spontaneously.

2 It is based on delegation of authority

and may grow to immense size.

It arises on account of social

interaction of people and tends to

remain small.

3 It is deliberately impersonal and the

emphasis is on authority and

functions.

It is personal with emphasis on people

and their relationship.

4 Rules, duties and responsibility are

written and clearly defined.

It has unwritten rules and traditions.

5 It is shown on the organization chart. It has no place in the formal chart.

6 It provides for division of labor and

has a definite structure.

It is structure-less and develops out of

social contacts.

7 Formal authority is attached to a

position.

Informal authority attaches to a

person.

8 Formal authority flows downwards. Informal authority flows upwards or

horizontally.

9 Formal organization is created to

meet organizational goals.

Informal organization arises from

man‟s quest for social satisfaction.

10 It is permanent and stable. It is relatively fickle and unstable.

FORMS OF BUSINESS ORGANIZATION

A business undertaking is an institutional arrangement to conduct any type of business

activity. The undertaking may be run by one person or association of persons. It may

be based on formal or informal agreement among persons who undertake to run the

concern.

According to Wheeler, a business undertaking is “a concern, company or enterprise

which buys and sells, is owned by one person or a group of persons and is managed

under a specific set of operating policies”. The persons join together and pool their

resources and conduct the activities of the undertaking for the benefit of all.


Management Process


Characteristics of Business Organization

1. Exchange of Goods and Services: A business undertaking deals in exchange of

goods and services. The goods to be exchanged may either be produced or

procured from other sources.

2. Dealing in Goods and Services: All business undertakings deal in goods and

services. The goods may be consumers‟ goods or producers‟ goods. The

consumers‟ goods are those which are purchased by them for consumption or

day-to-day use.

3. Profit Motive: All business undertakings are run to earn profit. An undertaking

started for social service will not be called business undertaking because the

aim is not to earn profit.

4. Continuity of Transactions: The transactions in a business undertaking are

continuous or regular. They are engaged in a series of successive transactions

over time and space.

5. Risk and Uncertainty: Every business undertaking is exposed to risks and

uncertainties. Business is influenced by future events and future is always

uncertain. There are chances for fluctuations, demand changes, consumer

likings and disliking, etc.

Forms of Business Undertakings

Private Undertakings Public Undertakings Joint Sector Undertakings

Sole proprietorship Departmental Public Government

Partnership organization corporations companies

Joint Hindu Family

Business

Joint Stock Company

Cooperative Societies

Forms of Business Undertakings

A number of forms of organizations exist to suit requirements of business

undertakings. There are three types of business undertakings:

1. Private Undertakings

2. Public Undertakings

3. Joint Sector Undertakings

Private Undertakings These undertakings have the following types of organizations.

(i) Sole Proprietorship (or) Sole Traders

(ii) Partnership

(iii) Joint Hindu Family Business

(iv) Joint Stock Company

(v) Cooperative Societies (or) Cooperative Organizations


Management Process


(i) Sole Proprietorship (or) Sole Traders: The organization is as old as civilization. In

this form of organization a single individual promotes and controls the business

undertakings and bears the whole risk himself. He supplies the entire capital for

starting and running the business.

(ii) Partnership: A partnership in an association of two or more persons to carry on, as

co-owners, a business and to share its profits and losses. The partnership may come

into existence either as a result of the expansion of the trading concern. This form of

organization grew essentially out of the failures and limitations of sole proprietorship.

(iii) Joint Hindu Family Business: This form of organization is prevalent only in India

and that too among Hindus as the name is indicative. The business of Joint Hindu

Family is controlled under the Hindu Law instead of Partnership Act. The

membership in this form can be acquired only by birth or by marriage to male person

who is already a member of Joint Hindu Family. All the offices of the undertaking are

controlled by a person known as Karta or Manager.

(iv) Joint Stock Company: This form of organization was first started in Italy in the 13th

century. A company is an association of many persons who contribute money or

money‟s worth to a common stock and employs it in some trade or business and who

share the profit and loss arising there from. A company is an artificial person created

by law with corporate personality, limited liability, perpetual succession and

transferable shares. These undertakings are managed by elected representatives or

shareholders. Companies may be public or private and registered by share or by

guarantee.

(v) Cooperative Societies (or) Cooperative Organizations: Cooperative societies are

voluntary associations started with the aim of service to members. The aim of

societies is not to increase profits as in other undertakings but service to members is

their important goal. It is a joint enterprise of those who are not financially strong and

cannot stand on their legs. So they come together not with a view to get profits but to

overcome disability arising out of the want of adequate financial resources. Like joint

stock companies, societies also enjoy the benefits of corporate personally, limited

liability and perpetual succession. The societies are registered under the Cooperative

Societies Act, 1912 and have more governmental control than other organizations in

private sector.

Public Undertakings Business undertakings owned or operated by public authorities are known as public or

state undertakings. In these undertakings, either whole or most of the investment is

done by the government. The aim of these undertakings is to provide goods and

services to the public at a reasonable rate though profit earning is not entirely

excluded. The public undertakings have the following forms of organization:

(1) Departmental Organization

(2) Public Corporations

(3) Government Companies


Management Process


(1) Departmental Organization: Departmental form of organization for managing state

enterprises is the oldest form of organization. In this form, the enterprise works as

a part of government and management is the hands of civil servants. The Secretary

of the Department acts as Chief Executive under the control and direction of

Minter. The Minister accountable to Parliament for the working of the department.

For example, Indian Railway, Post and Telegraph, Radio and Television are

working as government departments.

(2) Public Corporations: Public corporations are created by a special statute of a State

or Central Government. A legislative act is passed by defining the sphere of work

and mode of management or the undertakings. It is a separate legal entity created

for special purpose. In India, the RBI, Bank of India, Industrial Finance

Corporation is some of the corporations created by special act of parliament.

(3) Government Companies: The Company owned by Central and / or State

Government is called a Government Company. Either whole of the capital or

majority of the shares are owned by the government. Government companies are

registered with the government in both the cases. Government companies enjoy

some privileges which are not available to non-government companies. No special

statute is required to form government companies.

Joint Sector Undertakings Joint sector is a form of partnership between the private sector and the Government

where management will generally be in the hands of private sector and overall

supervision will lie with the Board of Directors giving adequate representation to

Government representatives.

According to the guidelines of the Central Government, the capital is to be shared as

to State Government 26%, Private Enterprise 25%, and Investing Public 49%. No

single private party shall be allowed to hold more than 25% of the paid-up capital

without the permission of the Central Government. Joint Sector Undertakings ensure

the use of development technology and resources of government and private sector.

Factors Influencing the Choice of Suitable Form of Organization

(a) Capital Requirement: The need for capital will depend upon the nature of business

and scale of operators. A manufacturing concern may require more capital as

compared to a retail shop. On the other hand, if the scale of operations is large,

then capital requirements will also be more.

(b) Liability: In sole-trade and partnership business, the liability of owners is unlimited

– their liabilities are limited to the capital they have invested but their private

property can also be assigned to meet business obligations. In case of companies

the liability of shareholders is limited to the value of shares they have purchased.

The shareholders can be required to pay only the unpaid amount of shares they are

having. The private property of shareholders is not liable for meeting business

losses.


Management Process


(c) Managerial Needs: Managerial and administrative requirements also affect the

decision about form of organization. When the concern is small and it caters to

local needs only then one person will be enough to manage the business. Sole-

proprietorship form of organization will be suitable for such a business. If the

business caters to more areas, then more persons will be needed to look after

various business activities. Partnership form of organization will be suitable for

such enterprises.

(d) Continuity: This is another factor influencing a decision about the form of

ownership. If the concern is stable and there is no fear of discontinuity, it will

attract more investment. The trained and qualified persons will like to join the

concern. A sole trade business may be closed after the death of its owner. A

partnership firm too does not have a permanent life. It may be dissolved for a

number of reasons. Only a company form of organization will be unaffected by the

personal life of its shareholders.

(e) Tax Liability: A joint stock company has more tax liability as compared to sole

trade and partnership business. A joint stock company faces double taxation

liability. A company is taxed as an individual first and the profit distributed to

shareholders are again liable for tax as income of the recipients. A partnership

concern and sole trade business are not separately taxed. A small scale concern

will be able to avoid higher tax liability.

(f) Government Regulations: While deciding about the form of organization, various

kinds of rules and regulations affecting that form will also be considered. A

number of formalities are required to be compiled with while incorporating a

company. A company is expected to provide a large number of information to the

government every year.

(g) Nature of Business Activities: The nature of business is another important factor

affecting a decision about the form of organization. If a concern deals with local

market, a seasonal product or perishable goods, then sole trade business will be

suitable. The capital requirements of such concern will be less and scale of

operations will be low.

(h) Relationship between Ownership and Management: There is a direct relationship

between ownership and management in sole-trade concerns and partnership firms.

In company form of organization, management and ownership are in two different

hands. The owners (shareholders) are spread all over the country and they do not

take any active interest in the working of the enterprise. The management is in the

hands of few persons known as Board of Directors.

(i) Ease in Formation: The nature and extent of formalities required at the time of

establishing a concern also influence a decision about the form of organization. A

joint stock company requires the services of qualified persons for getting it

registered. It involves a lot of money at the time of incorporation too. On the other

hand, a sole trade business can be started at any time without going through

various formalities.

(j) Stability: Another important factor that influences the choice of a suitable form of

organization is the continuity and stability of its operations. The discontinuation of

business causes wastages of resources and inconvenience to the consumers. This

also causes a social loss.


Management Process


SOLE TRADERS (SOLE PROPRIETORSHIP)

Sole-trade is the oldest and most commonly used form of business organization. It is

as old as civilization. Historically, it appears that business first started with this form

of organization. With the development of science and technology the needs of the

business also increased and new forms of organizations developed.

This organization is also known as sole proprietorship, individual-proprietorship,

and single-entrepreneurship. In sole-trade organization, an individual is at the helm of

affairs. He makes all the investment, shares all risk, takes all profits, manages and

controls the business himself.

A sole trader mainly depends upon his own resources, so the business is generally on a

small-scale basis. The business is normally run with the help of family members but

he may employ persons to look after the day-to-day activities of the business. So far as

his liability is concerned, it is unlimited. The creditors are entitled to have claim even

on his private property.

In some instances, a person may be expected to take a license from competent

authorities beforehand. Normally, no other legal formality is essential for starting a

sole-trade business as in the case of a company or a cooperative. Any person can start

or wind up a sole-trade business anytime. This type of business is one man show and

the capacities of that person may certainly be limited. He may not able to deal with

every situation himself. Since the liability is unlimited and is to fall on one person, he

should have a cautious approach.

Definitions of Sole-Proprietorship

According to L H Haney,” The individual entrepreneurship is the form of business

organization on the head of which stands an individual as the one who is responsible,

who directs its operations, who alone runs the risk of failure”.

According to S R Davar, “The sole-trader is a person who carries on business of his

own. He brings in his own capital and uses all his labor. He also gets himself assisted

by others to who he pays a salary by a way of remuneration”.

A sole-trader is a person who sets up the business with his own resources, manages

the business himself by employing persons for his help and alone bears all the gains

and risks of the business.

Characteristics of Sole Proprietorship

1. Individual Initiative: This business is start by the initiative of a single person.

He prepares the blue prints of the venture and arranges various factors of

production.

2. Unlimited Liability: In sole-trade business liability is unlimited. The proprietor is

responsible for all losses arising from the business.


Management Process


3. Management and Control: The proprietor manages the whole business himself.

He prepares various plans and executes them under his own supervision and he

has ultimate control over it.

4. Motivation: the proprietor takes all profits and bears losses, if any. There is a

direct relationship between efforts and reward. He is motivated himself to

expand his business activities.

5. Secrecy: All important decisions are taken by the owner himself. He keeps all

the business secrets only to himself. By retaining business secrets he avoids

competitors entering the business.

6. Proprietor and Proprietorship are one: Legally, the sole trader and his business

are separate entities. Loss in his business is his loss. Liabilities of the business

are his liabilities.

7. Owners and Business Exist Together: In sole-trade business there is no separate

existence of the business with the owner. The business and owner exist

together. The business is dissolved if the owner dies.

8. Limited Area of Operations: A sole-trade business has generally a limited area of

operations, the reason being the limited resources and managerial abilities of

the sole-trader.

Advantages of Sole-Proprietorship

Easy in formation

Better control

Flexibility in operations

Retention of business secrets

Easy to raise finance

Direct motivation

Promptness in decision-making

Direct accessibility to consumers

Inexpensive management

No legal restriction

Socially desirable

Self-employment

Disadvantages of Sole-Proprietorship

Limited resources

Limited managerial ability

Unlimited liability

Uncertain continuity

Limited scope of employees

No large scale economies

More risk involved


Management Process


PARTNERSHIP

A partnership is an association of two or more persons to carry on, as co-owners, a

business and to share its profits and losses. The partnership may come into existence

either as a result, of the expansion of the sole-trading concern by means of an

agreement between two or more persons desirous of forming a partnership.

When the business expands in size, the proprietor finds it difficult to manage the

business and is forced to take more outsiders who will not only provide additional

capital but also assist him in managing the business on sound lines.

Sometimes, the nature of business demands large amount of capital, effective

supervision and greater specialization. It is the ideal form of organization for the

enterprise requiring moderate amount of capital and diversified managerial talent.

This form is not suitable for a business requiring big capital and expert managerial

personnel.

Definitions of Partnership

According to John A Shubin, “Two or more individuals may form a partnership by

making a written or oral agreement that they will jointly assume full responsibility for

the conduct of business”.

According to L H Haney, “The relationship between persons who agree to carry on a

business in common with a view to private gain”.

The bringing together of financial resources and services by persons for carrying on

some work has been called partnership as per the definitions. One person may

contribute money, the other may provide service, are meant to carry on an enterprise.

According to Section 4 of Partnership Act, 1932, “The relation between persons who

have agreed to share profits of a business carried on by all or any one of them acting

for all”.

Characteristics of Partnership

1. Association of Two or More Persons: In partnership, there must be at least two

persons. Partnership is the outcome of contract, so there must be two or more

persons. Minors cannot form a partnership firm as they are incompetent to

enter into a contract.

According to Section 11 of Contract Act, there is no maximum limit on

partners in Partnership Act, but according to Companies Act, the maximum

number of partners engaged in a banking business cannot exceed ten and

twenty in other business.

2. Contractual Relation: The persons joining the partnership enter into a contract

for running the business and their relationship arising out of this contract not


Management Process


from status. The contract may be oral or written but in practice written

agreement is made because it helps to settle the disputes if they arise later on.

3. Earning of Profits: The purpose of the business should be to make profits and

distribute them among partners. If a work is done for charity purposes or to

serve the society it will not be called partnership.

4. Implied Authority: This is an implied authority that any partner can act on behalf

of the firm. The business will be bound by the acts of partners.

5. Unlimited Liability: As this case of a sole-trade business liability of the partners

of a firm is unlimited. The private property of the partners can be taken for the

payment of liabilities of the firm to the third parties. The partners are liable

individually and collectively.

6. Principal and Agent Relationship: In partnership the relationship of Principal and

Agent exists. It is not necessary that all partners should work in the business.

Any one or more partners can act on behalf of other partners. Each partner is an

agent of the firm and his activities bind the firm.

7. Restriction on Transfer of Shares: No partner can sell or transfer his share to

anybody else without the consent of the other partner. In case any partner does

not want to continue in the partnership he can give a notice for dissolution of

the firm.

8. Partners and Partnership are one: A partnership firm has no separate entity from

the partners. A firm is only a name to the collective name of partners. No firm

can exist without partners. Partners have implied authority to bind the firm for

their acts.

9. Continuity: There is no true limit for the continuity of a partnership firm. It goes

on only up to the time the partners want it to go. Any misunderstanding among

partners, death or insolvency of a partner may dissolve the partnership.

10. Capital Contribution: The partners contribute to the capital of the firm. It is not

necessary to have capital in profit sharing ratio. A partner can be admitted to

the firm even without contributing to the capital. It is not essential that all

partners must contribute to the firm‟s capital.

Kinds of Partners

There are different kinds of partners and they may be classified as under:

1. Active Partner

2. Sleeping or Dormant Partner

3. Nominal Partner

4. Partner in Profits

5. Partner by Estoppel or Holding Out

6. Secret Partner

7. Sub-Partner

8. Minor as a Partner


Management Process


Figure: Kinds of Partners

1. Active Partner: An active partner is one who takes active part in the day-to-day

working of the business. He may act in different capacities such as manager,

organizer, adviser and controller of all the affairs of the firm. He may also be

called as working partner.

2. Sleeping or Dormant Partner: A sleeping partner is one who contributes capital,

shares profits and contributes to the losses of the business but does not take part in

the working of the concern. A person may have money to invest but he may not be

able to devote time for the business: such a person may become a sleeping partner.

3. Nominal Partner: A nominal partner is one who lends his name to the firm. He

does not contribute any capital nor he share profits of the business. He is known as

a partner to the third parties. A nominal partner is liable to those third parties who

give credit to the firm on the assumption of that person being a partner in the firm.

4. Partner in Profits: A person may become a partner for sharing the profits only. He

contributes capital and is also liable to third parties like other partners. He is not

allowed to take part in the management of the business. Such partners are

associated for their money and goodwill.

5. Partner by Estoppel or Holding Out: When a person is not a partner but poses

himself as a partner, either by words or in writing or by his acts. He is called

partner by estoppels or by holding out. A partner by estoppels or by holding out

shall be liable to outsiders who deal with the firm on the presumption of that

person being partner in the business.

6. Secret Partner: The position of a secret partner lies between active and sleeping

partner. His membership of the firm is kept secret from outsides. His liability is

unlimited and he is liable for the losses of the business. He can take part in the

working of the business.

7. Sub-Partner: A partner may associate anybody else in his share in the firm. He

gives a part of his share to the stranger. The relationship is not between the

Active Partner

Kinds of Partner

Partner by Estoppel

Active Partner

Active Partner

Active Partner

Active Partner

Active Partner

Active Partner


Management Process


sub-partner and the firm but between him and the partner. The sub-partner is a

non-entity of the partnership. He is not liable for the debts of the firm.

8. Minor as a Partner: A minor is a person who has not yet attained the age of

majority. A minor cannot enter into a contract according to the Indian Contract Act

because a contract by a minor is void ab initio. However, a minor may be admitted

to the benefits of an existing partnership with the consent of all partners. The

minor is not personally liable for liabilities of the firm, but his share in the

partnership property and profits of the firm will be liable for debts of the firm.

Registration of Partnership

The registration of partnership is not compulsory under Indian Partnership Act. In

England, registration is, however, compulsory. In India, there are certain privileges

which are not allowed to those firms which are registered. Unregistered firms are

prejudiced in certain matters in comparison to registered firms. Though directly the

registration of firms is not compulsory but indirectly it is so. To avail of certain

advantages under law the firm must be registered with the Registrar of Firms of the

State.

Registration of a firm does not provide a separate legal entity to the concern as in the

case of a Joint Stock Company. Partner does not need registration for coming into

existence because it is created by an agreement among two or more persons. The

registration of a firm merely certifies its existence and non-registration does not

invalidate the transaction of the firm.

Procedure for Registration

A simple procedure is followed for getting a firm registered. This procedure is divided

into two parts: (1) Filling an Application and (2) Certificate.

(1) Filling an Application: The first thing to be done is to file an application with

the Registrar of firms on a prescribed form. A small amount of registration fees

is also deposited along with the application. The application should contain the

following information:

(i) The name of the firm

(ii) The principal place of business of the firm

(iii) The names and address of partners and the dates on which they joined

the firm.

(iv) If the firm is started for a particular period then that period should be

mentioned.

(v) If the firm is started to achieve a specific object then it should also be

given.

The application form should be signed and verified by each partner or by his

duty authorized agent.

(2) Certificate: The particulars submitted to the Registrar are examined. It is also

seen whether all legal formalities required have been observed or not. If

everything is in order, then the Registrar shall record an entity in the register of

firms. The firm is considered registered thereon.


Management Process


Advantages of Registration of a Partnership Firm

Advantages to the Firm: The firm gets a right to the third parties in civil suits for

getting its right enforced. In the absence of registration, the firm cannot sue outside

partners in courts.

Advantages to Creditors: A creditor can sue any partner for recovering his money

due from the firm. All partners whose names are given in the registration are

personally responsible to the outsider. So, creditors can recover their money from

any partner of the firm.

Advantages to Partners: The partners can approach a court of law against each other

in case of dispute among partners. The partners can sue outside parties also for

recovering their amounts, etc.

Advantages to Incoming Partners: A new partner can fight for his rights in the firm

if the firm is registered. If the firm is not registered then he will have to depend

upon the honesty of other partners.

Advantages to Outgoing Partners: On the death of the partner his successors are not

responsible for the liabilities incurred by the firm after the date of his death. In

case of retiring partner, he continues to be responsible up to the time he does not

give public notice. The public notice is not registered with the Registrar and he

ceases his liabilities from the date of this notice. So, it is essential to get a firm

registered for getting these advantages.

An Ideal Partnership

An ideal partnership is a word used for a successful business. It is business where all

the partners work honestly and for a common purpose. There is a perfect

understanding among them and they work in harmony. The partners should be able to

manage all business activities effectively.

There should not be scarcity of funds. All these things are possible only when the

choice of partners is correct. A large number of firms have failed because of mistrust

and suspicion among partners.

Understanding among Partners

Good Faith

Sufficient Capital

Long Duration

Balance of Skill and Talent

Written Agreement

Registration

Ideal Partnership


Management Process


Advantages of Partnership

Easy to form

Large resources

Greater managerial talent

More credit-standing

Promptness in decision-making

Sharing of risk

Relationship between reward and work

Close supervision

Flexibility of operations

Protection of minority interest

Disadvantages of Partnership

Unlimited Liability

Instability

Mutual distrust

Burden of implied authority

Lack of prompt decision

Partnership and Co-ownership

Partnership and co-ownership are two different things. The ownership of a property by

more than one person is called co-ownership. If two brothers purchase a property

collectively, it will be a case of co-ownership. The property will be disposed-off with

the consent of all the co-owners.

Any income arising out of co-ownership is shared by all the co-owners. The property

is not purchased with the object of earning profits. If a building is purchased to let it

for rent, then it will be a case of partnership and not of co-ownership. In the

co-ownership, there is only a joint ownership without any business motive. In

partnership, joint ownership and business are combined.

Distinction between Partnership and Co-ownership

On the Basis Partnership Co-ownership

Contract

Partnership is based on

contractual relationship among

partners. It is outcome of an

agreement.

Co-ownership may be by the

operation of law. On the death of

father, sons become co-owners

of his property.

Object

The object of partnership is to

enter into some business and

earn profits.

Co-ownership is not meant for

business purposes.

Transfer of

Interest

No partner can transfer his

interest (share) without the

consent of all other partners.

A co-owner can transfer his

interest at any time and without

asking other co-owners.

Agency

Relationship

Partners can act as agent of the

business.

No agency relationship exists in

co-ownership.


Management Process


Division of Joint

Property

In partnership, the division of

property cannot be demanded.

A co-owner can demand the

division of property. Two co-

owners may divide a plot of land

by erecting a wall on the land.

Right of

Investment

If a partner spends some money

for the business he can demand

its reimbursement.

If a co-owner spends money for

the improvement of property he

cannot claim it as a lien of

property.

Act Partnership is formed under

Partnership Act, 1932.

No such act is governing co-

ownership.

Dissolution of a Partnership Firm

The dissolution of a firm means discontinuation of its activities. When the working of

a firm is stopped and the assets are realized to pay various liabilities, it amounts to

dissolution of the firm. The dissolution of a firm should not be confused with the

dissolution of partnership.

When partners agree to continue the firm under the same name, even after the

retirement or death of a partner, it amounts to dissolution of partnership and not of

firm. The remaining partners may purchase the share of the outgoing of deceased

partner and continue the business under the same name: it involves only the

dissolution of partnership. The dissolution of firm includes the dissolution of

partnership too.

A firm may dissolved under the following circumstances:

(a) Dissolution by Agreement (Section 40): A partnership firm can be dissolved by an

agreement among all the partners. Section 40 of Indian Partnership Act, 1932

allows the dissolution of partnership firm if all the partners agree to dissolve it.

This type of dissolution is known as voluntary dissolution.

(b) Dissolution by Notice (Section 43): If a partnership is at will, it can be dissolved

by any partner giving a notice to other partners. The notice for dissolution must

be in writing. The dissolution will be effective from the data of the notice. In

case no date is mentioned in the notice, then it will be dissolved from the date

of receipt of notice. A notice once given cannot be withdrawn without the

consent of all the partners.

(c) Compulsory Dissolution (Section 41): A firm may be compulsorily dissolved

under the situations (i) Insolvency of Partners: when all the partners of a firm

are declared insolvent, then the firm is compulsorily dissolved and (ii) Illegal

Business: the activities of the firm may become illegal under the changed

circumstances, if the government enforces prohibition policy.

(d) Contingent Dissolution (Section 42): In case there is no agreement among

partners regarding certain contingencies, partnership firm will be dissolved on

the happening of any of the situations like (i) Death of a Partner: A partnership

firm is dissolved on the death of any of the partners and (ii) Expiry of the Term:

A partnership firm may be for a fixed period, on the expiry of that period, the

firm will be dissolved.


Management Process


(e) Dissolution through Court (Section 44): A partner can apply to the court for the

dissolution of the firm on any of these grounds such as (i) Insanity of a Partner,

(ii) Misconduct by the partner, (iii) Incapacity of a Partner, (iv) Breach of

agreement, (v) Transfer of Shares, (vi) Regular Losses, and (vii) Dispute

among partners

Settlement of Accounts on Dissolution of a Firm

On the dissolution of partnership, the working of the concern is stopped. All the assets

are realized and they are used to meet outside liabilities of the business. After paying

outside creditors the balance amount is used to return loans of the partners and their

capitals. In case the amount realized from the assets is inadequate to meet the outside

liabilities, then partners will contribute the deficit money from the private sources.

The procedure adopted for settlement of accounts at the time of dissolution is as

follows:

Any losses including deficiency will first be met out of profits of the firm and

then out the capitals if required.

In case the deficiency is more than the amount of profits and capitals, then

partners will contribute from the private estates in their profit sharing ratios.

All outside creditors are paid at the first instance.

The loans of partners to the business in additional to their capitals are returned

proportionately.

If any surplus after returning the capitals, the amount will be paid to partners in

their profit sharing ratio.

If one partner is insolvent, then his deficiency is contributed by solvent partners

in their capital balance ratio.

Also outside liabilities are met by solvent partners. Even if one partner is

solvent outside liabilities will be paid in full.

Difference between Partnership and Sole-Trade Business On the Basis Partnership Sole-Trade

Membership Partnership is owned by two or more persons known as partners.

Sole-trade business is owned and controlled by only one person.

Agreement An agreement is required to form a partnership deed.

A sole-trade does not require any formality to start the firm.

Registration A partnership concern needs registration to get advantages.

No registration is required in case of sole-trade business.

Management All partners have equal rights and can participate in the management.

This business is controlled by one person and he is final authority in the concern.

Risk The business risk is shared by all the partners in proportion of their shares.

The whole risk is shared by the sole-trader.

Capital All the partners contribute towards capital of the firm.

Only the resources of one person are used in the business.

Secrecy The secrets of the business are in the knowledge of all the partners; so there is a fear of leaking them out.

There is a complete secrecy in the business because the owner does not share the secrets with anybody else.

Uncertainty The change in partners does not necessarily close down the business.

The existence of this business is uncertain because it is linked to the fate of the proprietor.


Management Process


JOINT HINDU FAMILY FIRM

Another form of business organization is Joint Hindu Family or Undivided Hindu

Family. However, this form of organization is prevalent in India only and that too

among Hindus as the name itself is indicative. It also does not have any separate and

distinct legal entity from that of its members who constitute it. No outsider can be

admitted to its folds except in certain circumstances.

The membership in this can be acquired only by birth or by marriage to a male person

who is already a member of a Joint Hindu Family. One should not confuse Joint

Hindu Family with the composite family which is having an origin to an agreement.

When two or more families agree to live and work together, throw their resources and

labor with joint stock and share profits and the losses together, then this family is

known as composite family.

The business of Joint Hindu Family is controlled under the Hindu Law instead of

Partnership Act. One can avoid becoming a partner of partnership firm or a

shareholder of a joint stock company but a Hindu cannot escape from becoming a

member of a Joint Hindu Family. It may be broken at one generation, there may be

partition bringing it to an end, but in next generation it is automatically in existence.

A Joint Hindu Family consists of common ancestor, which is a must to bring a J.H.F.

into existence all his male descendants‟ up to any generation along with their wives

and unmarried daughters. A death of a common ancestor does not bring the Joint

Hindu Family to an end. It continues till perpetuity, as upper links are removed by

death and lower ones are added by birth.

All the affairs of the Joint Hindu Family are controlled and managed by one person

who is known as „Karta‟ or „Manager‟. He is having a very unique position which no

other office of any organization is the world is having. He works in consultation with

other members of the family but ultimately he has a final say.

The liability of „Karta‟ is unlimited but the liability of other members is limited to

their shares in the business. According to Hindu Law, the senior most male member of

the family is “Karta‟is unlimited but the liability of other members is limited to their

shares in the business. However, there can be a deviation from this and a junior male

member can be a „Karta‟ provided all coparceners agree to it.

Karta‟s powers are almost unlimited. He acts on behalf of the other members of the

family but is not like a partner. Neither he is accountable to anyone nor is he to

prepare accounts. No one can ask what the income was and what the expenditure was.

He is the great of the grand show.

On the basis of the schools of Hindu Law, Joint Hindu Family is considered under the

two heads: (1) Mitakshara and (2) Dayabhaga


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Mitakshara says of son‟s right by birth in the joint family property. This means when

a son is born in family, he acquires an interest in the property jointly held by the

family. The interests of all sons are equal.

Before partition, share of anyone is not specified. It is fluctuating with the deaths and

births in the family. For example, suppose in a family of eight members having 120

acres of land and two members are born before the stage of partition, each will get 12

acres of land and if in the same family two deaths takes place before the stage of

partition then each member will get 20 acres of land.

Dayabhaga is prevalent in Bengal and Assam, whereas in the rest of India, it is

Mitakshara. Mitakshara is applicable even in Bengal and Assam on the points where

Dayabhaga is silent. Mitakshara and Dayabhaga joint family differ from each other to

a great extent.

However, in Dayabaga Joint Hindu Family the concept of birth is unknown and the

property devolves by inheritance. The shares of the coparceners are specified and not

fluctuating as in the case of Mitakshara Joint Hindu Family.

Under the old Hindu Law, female was not entitled to any share in the property. But

with the passage of Hindu Succession Act of 1956 even females have been included in

the list of persons who acquire share in succession.

It is also desirable to understand that coparcener and member of Joint Hindu Family

are two separate words. A person who is a coparcener is always a member of Joint

Hindu Family but it is not so when the case is vice-versa. Coparcener is a small body

within a joint family and is consisting of father, son, son‟s son and son‟s son‟s son. It

is only up to three male lineal descendants whereas joint family can be up to any

extent. The members constituting coparcenery are coparceners which are different

from the members of joint family.

Characteristics (or) Features of Joint Hindu Family Business

Governed by Hindu Law: The control and management of the Joint Hindu

Family firm is done according to the un-codified or codified Hindu Law. The

un-codified Hindu Law consists of two schools, Mitakshara and Dayabhaga. In

the same way rights a duties of its members are governed by un-codified Hindu

Law.

Membership by Birth: The membership of the family can be acquired only by

birth. Whosoever is born in the family becomes a member. Like other business

organizations outsiders cannot be admitted to this by contract.

Management: The family affairs are managed by the senior most male member

of the family known as „Karta‟ or „Manager‟. The powers of management are

unlimited.

Limited Liabilities of Others: All the members in a Joint Hindu Family have

limited liability to the extent of property which is jointly held by the family.


Management Process


Continuity: As it has already said, the death in the family does not bring the

joint family firm to an end. It continues forever. There is no limit to its

membership number also.

Minor also a Member: If partnership firm minor cannot become a partner. This

is an important feature of this business organization that a person from its very

birth becomes the member.

Accounts: Accounts are maintained by Karta but this is not obligatory on his

part. He is not accountable to any member and no member can ask what are the

profits and losses of a transaction.

Implied Authority of Karta: There is implied authority in favor of Karta to

contract debts and pledge the credit and property of the family for ordinary

purposes of family business. These are binding on the entire family.

Advantages of Joint Hindu Family Business

Centralized management

Utmost secrecy

Quick decision

Credit facilities

Work according to capacity

Natural love between members

Limited liability

Disadvantages of Joint Hindu Family Business

o No reward for efficiency

o Limited capital

o Limited managerial skill

Difference between Partnership and Joint Hindu Family Firm

Point of

Difference Partnership Firm Joint Hindu Family Firm

Governance It is governed by the Indian

Partnership Act.

It is governed by the two

schools Mitakshara and

Dayabhaga of Hindu Law.

Creation

It is created by the mutual

agreement between the

partners, which may be written

or oral.

No such contract is required

Legal Position

It has legal entity and identical

to its partner in the eyes of law.

It is not having any separate

and distinct legal entity from its

members.

Number of

Members

Maximum number of member

is fixed.

Ten members in case of

banking business and twenty in

other cases.

Admission A new partner can be admitted

in the partnership.

The birth of a person in family

brings him in the fold.


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Position of a

Minor

A minor cannot become the

partner.

No such restriction and a child,

becomes the member

Management Every partner can take active

part in the management.

Karta can take part in the

management.

Outside Position

of a Member

Each partner is the agent of the

other partner.

This authority is not available

to any member except Karta.

Accounts Any partner can maintain the

account of the firm.

Karta can main the books of

accounts.

Liabilities

The liabilities of partners are

unlimited. Their responsibility

is joint and several.

Karta has unlimited liability

and other member having

limited liability.

Dissolution It can be dissolved on the death

or insanity of a partner.

It is affected by death or

insanity of a member.

Registration It is not compulsory but

advisable to be registered.

It is not at all necessary to be

registered.

JOINT STOCK COMPANY

The limitations of sole-proprietorship and partnership forms of ownership gave birth

to joint stock company form of organization. Two important limitations of earlier

forms of organization were inadequacy of funds and unlimited liability. The factor of

unlimited liability discouraged people to invest more even if they had the capacity to

do so. The Joint Stock Company form of organization provides an answer to the

difficulties faced by earlier forms. The liability of members is limited and the

participation of large number of persons helps in raising more and more funds under

Joint Stock Company form of organization.

The present trend of industrial enterprises is to increase their size through expansion

and diversification. This tendency is ascribed to two reasons namely, technological

improvement and economic factors. The result of expansion, whether due to technical

factors has been the demand for enormous capital.

The manufacturing industries require large-scale investment for building plant and

machinery whereas trading concerns need fixed capital for fixtures, fittings and

business premises. In addition to fixed capital, working capital requirements are

equally sizeable. Enormous capital requirements of business concern cannot be met by

a few persons. So the need for Joint Stock Company form of organization was felt.

Joint Stock Company organization was started first in Italy in 13th

century. During 17th

and 18th

centuries, Joint Stock Companies were formed in England under Royal

Charter or Acts of Parliament.

In India, the first Companies Act was passed in 1850 and the principle of limited

liability was introduced only in 1857. The application of this Act was extended to

Banking and Insurance Companies in 1860. A comprehensive bill was passed in 1956.

The firms incorporated under this Act are known as „Companies‟. The parliament and


Management Process


State Legislatures can also pass legislations for the incorporation of companies,

generally called „Corporations‟.

Definitions of Joint Stock Company

A company is “an association of many persons who contribute money or money‟s

worth to a common stock and employs it in some trade or business and who share the

profit and loss arising there from”. – James Stephenson

According to Prof. L.H.Hancy, “A Joint Stock Company is a voluntary association of

individuals for profit, having a capital divided into transferable shares, the ownership

of which is the condition of membership”.

According to Indian Companies Act, 1956 “A company means a company formed and

registered under this Act. Existing Company means a company formed and registered

under any of the previous company laws”.

Characteristics of Joint Stock Company

Association of Persons: A company is an association of persons joining hands

with a common motive. A private limited company must have at least two

persons and a public limited company must have at least seven members to get

it registered. Furthermore, the number of shareholders should not exceed 50 in

private companies but there is no maximum limit for the members in a public

limited company.

Independent Legal Entity: The Company is created under law. It has a separate

legal entity apart from its members. A company acts independently for its

members. A person can own its shares and can be its creditor too. The company

can sue and be sued in its own name.

Limited Liability: The liability of shareholders is limited to the value of shares

they have purchased. The company being a separate legal entity can incur debts

in its own name and the shareholders will not be personally liable for that.

Common Seal: A company being an artificial person cannot put its signatures.

The law requires every company to have a seal and get its name engraved on it.

The seal of the company is affixed on all important documents and contracts as

a token of signature. The directors must witness the affixation of the seal.

Transferability of Shares: The shares of a company can be transferred by its

members. Whenever the members want to dispose all the shares, they can do so

by following the procedure devised for this purpose. Under Articles of

Association, the company can put certain restrictions on the transfer of share

but it cannot altogether stop it.

Separation of Ownership and Management: The shareholders of a company are

widely scattered. A shareholder may like to invest money but may not be

interested in its management. The companies are managed by the Board of

Directors. The ownership and management are in two separate hands.

Perpetual Existence: The Company has a permanent existence. The shareholders

may come or may go but the company will go on forever. The continuity of the

company is not affected by death, lunacy or insolvency of its shareholders.


Management Process


Corporate Finance: A Joint Stock Company generally raises large amounts of

funds. The capital is divided into shares of small denomination. A large number

of persons purchase shares and contribute to the capital of the company. There

is no limit on number of maximum members in public companies.

Centralized and Delegated Management: A Joint Stock Company is an

autonomous and self-governed body. The shareholder being large in number

cannot look after the day-to-day activities of the company. The elect Board of

Directors in general body meeting for managing the company.

Publication of Accounts: A Joint Stock Company is required to file annual

statements with the Registrar of Companies at the end of a financial year. The

annual statements are available for inspection in the office of the Registrar.

Kinds of Companies

Kinds of Companies

According to According to On the basis On the basis

Incorporation Liability of Ownership of Nationality

1. Chartered 1. Companies 1. Government 1. Indian

Companies Limited by Shares Companies Companies

2. Statutory 2. Companies 2. Holding 2. Foreign

Companies Limited by Guarantee Companies Companies

3. Registered 3. Unlimited 3. Subsidiary

Companies Companies Companies

According to Transferability of Shares

1. Private Companies 2. Public Companies

According to Incorporation

1. Chartered Companies: A chartered company is an association formed by

investors or shareholders for the purpose of trade, exploration, etc. This type of

companies is incorporated under Royal Charter issued by the Kind or Head of

the State. Under the charter, certain exclusive rights and privileges are granted

to the company for undertaking certain commercial activities. If the company

violates the rules, the Head of the State can close such companies. These types

of companies are very popular in England in 19th

century. The East India

Company, Dutch East India Company, The Chartered Bank of India and

Australia are examples. Now a day, these kinds of companies are not formed

and found in India.

2. Statutory Companies: These companies are formed under a special act of

Parliament or of a State Legislature. The object, powers, rights and

responsibilities of these companies are clearly defined in the Act. Generally,

companies for public utility services are formed under special statues. These

companies may or may not use the word „Limited‟. The examples of such


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companies in India are Reserve Bank of India, The Industrial Finance

Corporation of India, Industrial Development Bank of India, etc.

3. Registered Companies: These are the companies formed and registered under the

provisions of the Companies Act. Most of the companies in India are registered

under Indian Companies Act, 1956. Registered companies may be limited by

shares, limited by guarantee or unlimited companies.

According to Liability

1. Companies Limited by Shares: The companies limited by shares have a share

capital. The capital is divided into shares. The shareholders pay share money at

one time or by installments. The shareholders are not liable to pay anything

more than the value of the shares held by them, whatever be the liabilities of

the company.

2. Companies Limited by Guarantee: The companies are also formed under the

Companies Act with a stipulation in the memorandum clause that members are

guaranteed to pay a certain amount of money in case of its winding up. The

amount which members undertake to pay is called the guarantee money.

Sometimes the members are required to buy shares of fixed value and also give

a guarantee for more sums in the event of its liquidation.

3. Unlimited Companies: The companies registered without limiting the liability of

members to the value of shares are called unlimited companies. The companies

are just like Partnership concerns where liability is unlimited. All the members

will be liable to meet the liabilities of the company to an unlimited extent.

These companies do not exist these days.

According to Transferability of Shares

1. Private Company: A private company can be formed with the association of

at least two members but the maximum number of shareholders cannot exceed

fifty. It is generally a family affair. It shareholders are all relatives, friends or

business associates. There cannot be a private company with unlimited liability.

2. Public Company: Section 3(1) (iv) of the Indian Companies Act, 1956 says that

all companies other than private companies are called public companies. Public

company means that public in large is interested in those companies. There is

no restriction on the maximum number of members. Public companies are

required to issue a prospectus for inviting people to purchase their shares. The

shareholders are fee to sell their shares in the market.

On the Basis of Ownership

1. Government Company: A company owned by central or state government is

called a government company. Either whole of the capital or majority of the

shares are owned by the government. In some case, private investment is also

encouraged but at least 51% shares are held by the government. Management

of these companies is under the control of government. Subsidiary companies

of government companies are also covered under the government companies.

For example, Coal Mines Authority Ltd., Steel Authority of India Ltd., etc.


Management Process


2. Holding Company: if a company can control the policies of another company

through the ownership of its shares or through control over the composition of

its Board of Directors, the company is called a Holding Company. A company,

the policies which are controlled, is called subsidiary company. The holding

company has a say in the formulation of policies of the other company.

3. Subsidiary Company: A company is called a subsidiary company when the

formation of Board of Directors is controlled by another company. The other

company controls more than half of the voting rights of this company. Holding

company and a subsidiary company are separate companies having separate

legal entities.

On the Basis of Nationality

1. Indian Company: A company incorporated in India under the Companies Act,

1956, whether operating in India or outside, is called an Indian Company.

There may be companies incorporated under Indian Companies Act but

separate rules are framed for their regulations. These companies may be

manufacturing companies, insurance companies, banking companies, etc.

2. Foreign Company: A foreign company means company incorporated outside

India but has a place of business in India through its branches or agencies. Such

companies have to furnish some information as required by the Registrar of

Companies in India. For examples, Bosch Limited, ING Vysya Ltd., Siemens

Limited, etc.

Advantages of Joint Stock Company

Accumulation of Large Resources: A company can collect large sum of money

from large number of shareholders.

Limited Liability: The liability of members in a company form of organization is

limited to the nominal value of the shares they have acquired.

Continuity of Existence: The members of the company may go on changing

from time to time but that does not affect the continuity of a company.

Efficient Management: It enables the company to appoint expert and qualified

persons for managing various business functions.

Economies of Large Scale of Production: With the availability of large resources,

the company can organize production on a big scale.

Transferability of Shares: The shares of public company are freely transferable

at any time according to the market conditions.

Democratic Set-up: Every individual has an opportunity to become a

shareholder of the company.

Social Benefits: The company form of organization mobilizes scattered savings

of the community.

Changing Business Environment: The Company can afford to invest money on

research projects which will enable them to cope with changing business

conditions.

Diffused Risk: The number of contributors is large; so risk is shared by a large

number of persons.


Management Process


Disadvantages of Joint Stock Company

o Difficulty of Formation: A lot of legal formalities are required to be performed

at the time of registration.

o Separation of Ownership and Management: The ownership and management of a

public company is in different hands.

o Speculation in Shares: The prices of shares depend upon both economic and

non-economic factors.

o Lack of Secrecy: The management of companies remains in the hands of many.

Everything is discussed in the meeting of Board of Directors.

Distinction between Private Company and Public Company

Private Company Public Company

Number of Members

To constitute a private company two

members are a must and maximum cannot

exceed fifty.

A public company can be started by seven

persons and there is no maximum limit

for members. Commencement of Business

The business can be started after getting

the certificate of incorporation.

The business can be started only after

getting certificate of commencement. Transfer of Shares

The transfer of shares is generally

restricted by the articles.

Transfer of shares is freely allowed,

though some procedures to be followed. Issue of Prospectus

A private company cannot issue a

prospectus regarding issue of shares.

A pubic company must issue a prospectus

regarding issue of shares and debentures.

Statutory Meetings

A private company is not required to call

a statutory meeting.

A statutory meeting must be held within a

prescribed period.

Statutory Report

It is not required to submit statutory

report to Registrar of Companies.

A public company needs to submit

statutory report to Registrar of Companies

Quorum for Meeting

The quorum for a meeting of a private

company is zero.

In case of public company five members

constitute the quorum.

Number of Directors

A minimum of 2 directors must be there.

Can increase by getting permission from

the Central Government.

A minimum of 3 directors must be there

and should be intimated to the Registrar

of Companies. Filing of Documents

A private company need not send the list

of directors to the Registrar of Company.

A public company must send the list of

directors to the Registrar of Company

Use of the word ‘Limited’

In case of private company, the word

„Pvt. Limited‟ must be used at the end of

the name of the company.

In case of public company, the word

„Limited‟ is used at the end of the name

of the company


Management Process


Difference between Partnership and Joint Stock Company

Point of

Difference Partnership Firm Joint Stock Company

Governance

A partnership concern is

governed by the Partnership

Act, 1932

Joint Stock Company is

governed by the Company Act,

1956.

Registration The registration of a partnership

is not compulsory.

The registration of a company

is compulsory.

Number of

Members

A partnership can be started by

at least two persons. Maximum

10 in case of banking and

insurance and 20 for others.

There must be at least 2 persons

for starting a private company

and 7 persons for public

company.

Legal Status

A partnership has no separate

legal entity apart from his

members.

A company has a separate legal

entity and it has a common seal.

Liability The liability of partners is

unlimited.

The liability of the shareholders

is limited

Transfer of Shares

A partner can transfer his share

only with the consent of all

other partners.

A shareholder can sell his

shares whenever he feels so.

Management and

Control


managed and controlled by the

partners.

A company is managed and

controlled by the elected Board

of Directors.

Statutory

Obligations

A partnership is not under

statutory obligation and need

not maintain books and records.

A company is under statutory

obligation and required to

maintain books and records.

Continuity


dissolved on the death or

insolvency of a partner.

A continuity of company is not

affected by the death or

insolvency of a member.

Winding Up

A partnership concern can be

dissolved easily and no legal

formalities are required.

A company is wound up only

through court and legal

procedure is to be followed.

COOPERATIVE ORGANIZATIONS

The co-operative movement has been necessitated to protect the interest of weaker

sections of society. The primary objective of this movement is “how to protect

economically the weaker sections of society from the oppression of economically

strong segment of society”.

In all the forms of organization, be it a sole trade, partnership or joint stock company,

the primary motive is to increase profits. The business tries to promote its own interest

through all possible means including exploitation of consumers.


Management Process


The co-operative form of organization is a democratic set up run by its members for

serving their own interest. It is self-help through mutual help. The philosophy behind

co-operative movement is „all for each and each for all‟. Co-operative societies are

voluntary associations started with the aim of service to members.

According to Hubert Calvest says, “Co-operation is a form of organization wherein

persons voluntarily associate together as human beings on the basis of equality for the

promotion of the economic interest of themselves”.

In fact, co-operative movement was started to safeguard the consumers from the

exploitation of capitalism. In India, co-operatives are started by the weaker sections of

society for protecting its members from the clutches of profit hungry businessmen.

The Indian Co-operative Societies Act, 1912 defines co-operatives in Section 4 as, “A

society which has its objectives the promotion of economic interests of its members in

accordance with co-operative principle”.

Characteristics of Co-operative Organization

Voluntary Membership: Everyone is at liberty to enter or leave the co-operative

society as and when he likes. Nobody is compelled to join a co-operative

society. The members are also free to use or not to use the services of the

society.

Political and Religious Neutrality: The membership of a co-operative society is

open to all irrespective of religion, caste, creed, color and political affiliation.

Democratic Management: All the members of society elect a body of persons to

conduct and control the day-to-day working of the society. The members

frequently meet and give guidelines to its executive.

One Man, One Vote: In co-operative societies every member is given one vote

irrespective of his contribution towards the capital. Nobody can control the

society on the strength of his wealth.

Service Motive: The primary objective of co-operative societies is to provide

service to their members. The aim is not to earn profits as in the case of other

business organizations.

Distribution of Surplus: The surplus earnings are not divided according to

capital contributions. It is distributed according to purchases made by the

members or is spent on their welfare.

Cash Trading: Another principle of co-operative societies is trading on „cash

basis. Co-operatives flourish only when cash trading principle is strictly

followed.

Limited Interest on Investments: The pioneers of co-operative movement wanted

to give certain percentage on capital contributions in the form of dividend. This

is an incentive to members for keeping money with the society as deposits.

State Control: The co-operative societies are to follow certain rules and

regulations framed by the government. There is a control of central and state

governments on the working of co-operative societies in India.


Management Process


Co-operative Education and Training: The members should be properly educated

about the aims and objectives of the societies, so that they may work united for

the success of the society.

Types of Co-operative Societies

Various types of co-operatives have been started with different motives. Some are

started to help consumers and others to help small producers. There are some societies

which help the farmers in a number of ways.

The following are the various types of co-operative societies:

1. Consumer‟s Co-operatives

2. Producer‟s Co-operatives

3. Marketing Co-operatives

4. Housing Co-operatives

5. Credit Co-operatives

6. Co-operatives Farming Societies

1. Consumer’s Co-operatives: the consumer‟s co-operative societies are started to help

lower and middle class people. The societies make bulk purchases directly from

producers and sell these goods to the members on retail basis. The commission and

profit of middlemen are eliminated in the process.

2. Producer’s Co-operatives: These societies are established for the benefit of small

producers who find it difficult to collect various factors of production and also to

face marketing problems. The purpose is to improve economic conditions of small

producers by giving them necessary facilities.

These societies are of two types: (a) Production Co-operatives

(b) Industrial Service Co-operatives

3. Marketing Co-operatives: The marketing co-operatives are associations of producers

for selling their products at remunerative prices. The production of different

members is pooled and the society undertakes to sell these products by eliminating

middlemen. These societies are also providing services like grading, warehousing,

transportation, insurance and financing etc. The goods are sold when the market is

favorable.

4. Housing Co-operatives: The low and middle income group people are not able to

construct own houses for want of money. Housing co-operative societies help

people to own their houses. The purpose of these societies is to help their members

in purchasing land and constructing houses.

5. Credit Co-operatives: The credit co-operatives societies are formed to give financial

help to small farmers and other poor sections of the society. The village money-

lenders charge exorbitant interest rates and exploit innocent poor people.

These societies are of two types: (a) Rural Credit Co-operative Societies

(b) Urban Credit Co-operative Societies


Management Process


6. Co-operatives Farming Societies: These societies are voluntary associations of

farmers formed to reap the benefits of large scale farming on scientific lines. Better

farming increases production and improves the economic position of members.

Small farmers will not able to use improved technology for want of resources and

small holdings. The land is pooled to take advantage of agricultural technology.

These societies are of four types: (a) Co-operative Better Farming Societies

(b) Co-operative Joint Farming Societies

(c) Tenant Farming Societies

(d) Collective Farming Societies

Evaluation of Co-operatives

Open Membership: The membership of co-operative societies is open to each

and every person. Anybody wishing to enjoy the fruits of a co-operative can

joint it.

Service Motto: The co-operative societies are started not for profits but for

service. The societies try to promote the interests of the members.

Supply of Goods at Cheaper Rates: The societies purchase goods directly from

producers and sell them to the members at cheap rates.

Democratic Management: The management of a co-operative is elected by the

members from among themselves. All members have equal voting rights.

Low Management Cost: The management of a co-operative society is in the

hands of persons elected by the shareholders. So they need not spend large

amount on management personnel.

Surpluses Shared by Members: The societies sell goods to the members on a

nominal profit to cover up administrative costs. Some part of the surplus is

spent on the welfare of the members.

Limitations of Co-operatives

Lack of Capital: The resources of members are not enough to start large-scale

enterprises. So, co-operative societies suffer from lack of capital.

Lack of Unity among Members: The members are drawn from different sections

of the society. There is a lack of harmony among them.

Cash Trading: The cash trading business has both advantages and

disadvantages. All the time the members cannot purchase on cash basis.

Political Interference: The government tries to send their own party to these

societies. Political interference has adversely affected co-operative movement

in India.

PUBLIC UTILITIES AND PUBLIC ENTERPRISES

Public Utilities Public utilities are those business undertakings which provide necessary services to

the society. The undertakings dealing with the supply of electricity, gas, power, water

transport etc. are all cover under public utility services. All these things are needed in

the day-to-day life of the people.


Management Process


The undertakings dealing with public utilities require large scale capital investment. It

is expected that the services should be provided at reasonable rates. Public utilities

tend to be monopoly concerns. The entry of other entrepreneurs in these fields is

generally barred by the government.

The purpose of making public utilities and monopoly concerns is to serve the

consumer in better way and to provide services at cheap rates. Certain special

privileges are also given to these concerns with a view to improve their workings.

R.G.Hawtry defines Public Utility as “A service in which a tendency to a local

monopoly necessitates the intention of a public authority to defend the interest of the

consumer”.

Characteristics of Public Utilities

1. Protection of Consumers: Public utilities are meant for serving the consumers.

These services are to be provided at reasonable rates to protect the consumers.

2. Monopoly Position: Public utility enterprises are given monopoly in a particular

area. The entry of other concern is barred to these fields.

3. Special Franchise: Public utility concerns are given special powers and

privileges so that regular and satisfactory supply is maintained.

4. Large Investments: Public utility concerns require large investments of capital.

The investments are more in fixed assets. In case of railways, large amounts are

spent on providing railway lines, engines and wagons and constructing railway

stations.

5. Public Regulations: Public utility undertakings are generally created by special

legislations of Parliament and State legislatures. Indian Railways and

Electricity Board are examples.

6. No Business Risk: The demand for public utility always remains. So there is no

risk on this score. There is no fear of competition because of monopoly.

7. Pricing Policies: The pricing policy of these undertakings is generally guided by

the government. The primary aim is help the society in getting essential

services at reasonable prices.

Form of Public Utility Undertakings

The form of public utility undertakings depends upon the nature and type of services

provided by them. The ownership of these undertakings is always preferred to be in

government hands. It ensures regular supply of these services without any

discrimination to consumers. It also helps to protect the interests of consumers.

Generally, the following forms may be used for these undertakings:

1. Public authority

2. Private company operating under limited monopoly.

3. Joint ownership concerns i.e. Public & Private companies

4. Public utility trusts.


Management Process


The preference is always for a form owned and controlled by the government. Under

government control, it may be departmental form, a public corporation or a

government company.

Public Enterprises Public enterprises as a form of business organization have gained importance only in

recent times. During 20th

century various governments started participating in

industrial and commercial activities. Earlier, the role of government was limited only

to the maintenance of law and order. The policy of laissez faire was practiced in most

of the countries. The development of industries was left to the judgment of private

enterprises.

Private entrepreneurs started working only for profit motive. The outbreak of Second

World War, depression in many countries and social evils of industrial revolution of

earlier time‟s compelled state governments to participate in planning and developing

industrial structure of their countries.

Russian revolution gave a lead to new economic and political system in the World.

State government started realizing their social responsibility towards people. The

outcome of all these factors was the active participation of governments in industrial

and commercial enterprises. At present, public sector enterprises are engaged in

manufacturing, trading as well as service activities.

Definitions of Public Enterprise According to A.H.Hansen, “Public Enterprise means state ownership and operation of

industrial, agricultural, financial and commercial undertakings”.

S.S.Khera defines state enterprises as “the industrial, commercial and economic

activities, carried on by the central or by the state government, and in each case either

association with private enterprise”.

Public enterprises are autonomous or semi-autonomous corporations and companies

established, owned and controlled by the state and engaged in industrial and

commercial activities.

Characteristics of Public Enterprises

1. Financed by Government: Public enterprises are financed by the government.

They are either owned by the government or majority shares are held by the

government.

2. Government Management: Public enterprises are managed by the government.

In some cases government has started enterprises under its own departments.

3. Financial Independence: Though investments in government undertakings are

done by the government, they become financially independent.

4. Public Services: The primary aim of state enterprises is to provide service to the

society. These enterprises are started with a service motive.


Management Process


5. Useful for Various Sectors: State enterprises do not serve a particular section of

the society but they are useful for everybody. They serve all sectors of the

economy.

6. Monopoly Enterprises: In most of the cases public enterprises are monopoly

enterprises. Private sector is not allowed to enter that line.

7. Implementing Government Plans: Economic policies and plans of the

government are implemented through public enterprises.

8. Autonomous or Semi-autonomous Bodies: In some cases they work under the

control of government departments and in other cases they are established

under official statutes and under Companies Act.

Forms of Public Enterprises

(a) Departmental Management: Department form of organization of managing state

enterprises is the oldest form. In this form, the enterprise works as a part of

government department. The finances are provided by the government and

management is in the hands of civil servants. The Minister of the department is the

ultimate in-charge of the enterprise. In India, railways, post and telegraph, radio

and television are working as government departments. In the same way strategic

industries like defense, atomic power, are under government.

(b) Public Corporations: Public corporations are created by special statute of a state of

central government. A legislative act is passed by defining the sphere of work and

mode of management of the undertakings. A public corporation is a separate legal

entity created for a specific purpose. In India, Reserve Bank of India, State Trading

Corporation, Industrial Development Bank of India, Industrial Finance

Corporation are some of the corporations created by special act of parliament.

(c) Government Company Organization: A company owned by central or state

government is called a government company. Either whole of the capital or

majority of the shares are owned by the government. In some cases, private

investment is also encouraged but at least 51% shares are held by the government.

Management of these companies is under the control of the government.

Sometimes, government has to take over sick units in private sector. Some of the

examples in India are Coal Mines Authority Ltd., Steel Authority of India Ltd.

Problems of Public Enterprises

State enterprises suffer from a number of problems. Some of the problems relate to

their day-to-day working and others relate to policy matters and control. The

following are the significant problems of public enterprises:

Form of Organization: Before taking a decision regarding the form of an

enterprise, the nature of work to be undertaken, capital required, requirements

of managerial personnel and state policy should be taken into consideration.

Managerial Autonomy: State enterprises are managed by independent

managements, but in practice state interference always remains.

Public Accountability: State enterprises are financed by public money and they

are primarily formed for public service and government is accountable to

public concern.


Management Process


Pricing Policy: Pricing policy of public enterprises has always remained a topic

of controversy and these should be economically viable units.

Working Conditions: The working conditions of the staff concerning

requirement, fixation of wages, sales and rules for incentives, etc. should be

made similar to all public undertakings.

Industrial Relations: There should be some mechanism for settling employee-

management disputes. Various incentive schemes should be devised to prompt

the workers for raising their outputs.

Research Schemes: It requires constant research and development plans to

devise new and better methods of the public.

Privatization

During eighties there was a wave of privatization in socialistic countries where earlier

relying on public sector. The public sector could not deliver the goods in these

countries so there was a talk of economic reforms. The privatization wave that swept

the world had its impact on India too. The talk of privatization started in Indian when

Shri Rajiv Gandhi took over as Prime Minister.

The move of privatization gained considerable ground in the liberalized economic

policy of 1991. The Finance Minister Dr.Manmohan Singh announced in the interim

budget in 1991, the attention of the government to disinvest 20% of state investment

in a few public sector units (PSU‟s) and pas on the same to the private sector.

Meaning of Privatization

The term „privatization‟ can be used in a narrow as well as broader sense. In a narrow

sense it implies the induction of private ownership in publicly owned enterprises, but

in a broad sense, it connotes besides private ownership, the induction of private

management and control in the public enterprises.

The concepts of Privatization are as follows:

1. Change of Ownership: In this sense privatization involves a change in the

ownership of the enterprise from public to the private sector. The whole public

sector unit may be transferred or a part of its investment may be disinvested.

2. Transfer of Control: The private management can be brought into public sector

units even without transferring ownership. This can be done by leasing out the

public sector unit to private parties.

3. Management Reforms: Another alternative in privatization may be through

managerial reforms. There may be an understanding with the controlling Ministry

of the enterprise regarding independence of working. Managerial reforms are

undertaken by signing MOU‟s (Memorandum of Understanding) between the

Ministry and the enterprise where by the limits of autonomy are decided.

Privatization since Industrial Policy 1991

In order to reform public sector New Industrial Policy of 1991 emphasized four

measures:


Management Process


(i) Reducing the number of industries reserved for public sector from 18 to 8

(later reduced to 3).

(ii) Disinvestments of shares of select public sector units for raising resources

and encourage wider participation of public and workers in ownership of

these units.

(iii) Devise a policy for sick PSU‟s on same lines as for private sector.

(iv) Improvement of performance through MOU (Memorandum of

Understanding).

Text Books & References

1. R.K.Sharma and Shashi K Gupta, “Management Process”, Kalyani Publishers.,

New Delhi, Edition, 2012.

2. C.B.Gupta, “Business Management”, Sultan Chand & Sons,

New Delhi, 10th

Edition, 2014.

3. L.M.Prasad, “Principles of Management”, S.Chand and Company Ltd.,, New

Delhi, 1st Edition, 2001.
