Forms and Types of Business Organisations | ISC Class 11 Business Studies Notes

This note covers the forms and types of business organisations under the private and public sectors: the meaning and features of the private sector, public sector and Public-Private Partnership (PPP)/joint sector, sole proprietorship, partnership (its registration, types of partners and types of partnership firms), the joint stock company (its features, the distinction between private and public companies, the stages of company formation, promotion and the types of promoters, incorporation and its steps, the certificate of incorporation, the Memorandum and Articles of Association, commencement of business and the certificate of commencement, the prospectus and the statement in lieu of prospectus), global enterprises, and the cooperative society including the multistate cooperative society.

What are the private sector and public sector of the Indian economy?

The Indian economy consists of both privately owned and government owned business enterprises, and is therefore known as a mixed economy. The economy is classified into two sectors: the private sector and the public sector.

The private sector consists of businesses owned by individuals or a group of individuals. The various forms of organisation in the private sector are sole proprietorship, partnership, joint Hindu family, cooperative and company.

The public sector consists of various organisations owned and managed by the government. These organisations may be partly or wholly owned by the central or state government.

They may also be a part of a ministry or come into existence by a Special Act of the Parliament. The government, through these enterprises, participates in the economic activities of the country.

Definition: Public sector. Various organisations owned and managed by the government, wholly or partly, by the central or state government, characterised by public ownership, the use of public funds for their activities and public accountability.

What are the features of the private sector?

The private sector is marked by private ownership, since the business belongs to an individual or a group of individuals rather than to the government. Its working is driven by the profit motive, and the owners bear the risk of loss themselves.

Control rests with the owners, or with shareholders acting through directors in a company, and the sector is free from the public accountability that attaches to government enterprises. Its forms range from the sole proprietorship of one person to a company owned by a large number of shareholders.

What are the features of the public sector?

Public enterprises are owned by the public and are accountable to the public through the Parliament. They are characterised by public ownership, public funds being used for their activities and public accountability.

They are expected to contribute to the economic development of the country in today's liberalised, competitive world, and any organisation in the public sector should ensure organisational performance, productivity and quality standards.

Comparative study of private sector, public sector and PPP/joint sector

What is Public-Private Partnership (PPP) / Joint Sector?

A Public-Private Partnership is an arrangement between a government or public sector entity and a private sector entity to develop, finance or operate a public asset or service, in which both partners share the investment, the risk and the returns.

A joint sector enterprise is similarly jointly owned and managed by the government and private entrepreneurs, combining government participation with private managerial initiative.

Such arrangements aim to bring together government's capacity to provide large-scale funding and policy support with the private sector's managerial efficiency, technical expertise and quicker decision making, so that essential infrastructure and services can be delivered without the business being fully run as a departmental undertaking.

Government participation in such a venture may come through a ministry directly, or an arrangement set up under a Special Act of Parliament, just as with other public sector organisations; what distinguishes a joint sector or PPP enterprise is that private entrepreneurs contribute capital and management alongside the government.

This sharing of risk and return reduces the pressure on the government's own budget, since part of the funding and the operating burden is carried by the private partner, while the public accountability associated with government ownership is still retained to the extent of the government's share in the venture.

Such partnerships are therefore considered useful wherever a project needs both substantial public funding or policy backing and the flexibility, speed and technical expertise that a departmental undertaking would otherwise find difficult to provide on its own.

What is sole proprietorship?

Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and the bearer of all risks.

The word "sole" means "only" and "proprietor" means "owner", so a sole proprietor is the only owner of the business. According to J.L. Hansen, "Sole trader is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business." This form is particularly common in personalised services such as beauty parlours, hair saloons, and small-scale activities like running a retail shop in a locality.

Features of sole proprietorship

1. Formation and closure: there is no separate law governing sole proprietorship, hardly any legal formalities are required (though a licence may be needed in some cases), and closure is equally easy.
2. Liability: sole proprietors have unlimited liability, so the owner's personal assets can be used to repay business debts if the business assets are not sufficient.
3. Sole risk bearer and profit recipient: the proprietor alone bears the risk of failure and alone enjoys the profits if the business succeeds.
4. Control: the right to run the business and make all decisions lies absolutely with the sole proprietor, without interference from others.
5. No separate entity: the law makes no distinction between the sole trader and the business.
6. Lack of business continuity: death, insanity, imprisonment, physical ailment or bankruptcy of the proprietor directly and detrimentally affects, and may even close, the business.

Merits of sole proprietorship

Quick decision making (no need to consult others); confidentiality of information (not bound by law to publish accounts); direct incentive (sole recipient of all profit); a sense of accomplishment from working for oneself; and ease of formation and closure, since it is the least regulated form of business.

Demerits of sole proprietorship

Limited resources, confined to personal savings and borrowings, which keeps the size of the business small; limited life, since the proprietor's death, insanity, imprisonment, ailment or bankruptcy can close the business; unlimited liability, which makes the proprietor less inclined to take risks such as innovation or expansion; and limited managerial ability, since one person rarely excels at every function and may also be unable to employ and retain talented staff due to limited resources.

Worked example 1. XYZ Dry Cleaner is a sole proprietorship firm whose total outside liabilities are ₹80,000 at the time of dissolution, while its business assets are only ₹60,000.

Answer: Because the proprietor has unlimited liability, she must bring in the shortfall of ₹20,000 (₹80,000 minus ₹60,000) from her personal sources, even selling her personal property if required, to repay the firm's debts.

Anyone planning to start a sole proprietorship should weigh this unlimited personal risk carefully before committing personal savings and property to the business.

What is a partnership firm?

The Indian Partnership Act, 1932 defines partnership as "the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all." Partnership answers the needs of greater capital investment, varied skills and the sharing of risks that a sole proprietor cannot meet alone.

Features of partnership

1. Formation: governed by the Indian Partnership Act, 1932, it comes into existence through a legal agreement specifying the terms, sharing of profits and losses, and the manner of conducting business; the business must be lawful and run with a profit motive.
2. Liability: partners have unlimited liability, and are jointly and individually liable for the firm's debts; personal assets may be used if business assets are insufficient.
3. Risk bearing: partners bear risks as a team, sharing profits and losses in an agreed ratio.
4. Decision making and control: shared among the partners, generally with mutual consent.
5. Continuity: lacking, since death, retirement, insolvency or insanity of any partner can end the business, though remaining partners may continue on a new agreement.
6. Number of partners: minimum two; under section 464 of the Companies Act, 2013 and Rule 10 of the Companies (Miscellaneous) Rules, 2014, the maximum at present is 50.
7. Mutual agency: each partner is both an agent of, and a principal for, the other partners, binding them through, and being bound by, their acts.

Merits of partnership

Ease of formation and closure (no compulsion to register); balanced decision making, since partners oversee different functions according to expertise; more funds, since capital is contributed by several partners; sharing of risks, which reduces stress on individual partners; and secrecy, since there is no legal requirement to publish accounts.

Demerits of partnership

Unlimited liability, both joint and several, which can burden a wealthy partner if others cannot pay; limited resources, since the restricted number of partners limits capital for large-scale operations; possibility of conflicts, since decisions of one partner bind the others and disputes may lead to termination; lack of continuity on death, retirement, insolvency or lunacy of any partner; and lack of public confidence, since there is no legal requirement to publish financial reports.

Worked example 2. A partnership firm has reached 50 partners, the number currently allowed under Rule 10 of the Companies (Miscellaneous) Rules, 2014.

Answer: Although section 464 of the Companies Act, 2013 permits the government to prescribe a partnership ceiling of up to 100, Rule 10 of the Companies (Miscellaneous) Rules, 2014 currently fixes this at only 50, which is 50 fewer than the Act's own outer limit (100 − 50 = 50). Since the firm has already reached the Rule 10 ceiling, it cannot admit a further partner while remaining a partnership firm.

A firm that wishes to raise capital from more than 50 members should convert into a company instead of continuing as a partnership.

How are partnership firms registered, and what types of partners and partnerships exist?

A written agreement specifying the terms and conditions governing the partnership is called the partnership deed.

It generally includes the name of the firm; the nature and location of business; the duration of the business; the investment made by each partner; the distribution of profits and losses; duties and obligations of the partners; salaries and withdrawals; terms governing admission, retirement and expulsion of a partner; interest on capital and on drawings; the procedure for dissolution; preparation of accounts and auditing; and the method of solving disputes.

Registration of partnership firms

Registration means entering the firm's name, with the prescribed particulars, in the Register of Firms kept with the Registrar of Firms; it is conclusive proof of the firm's existence.

Registration is optional under the Indian Partnership Act, 1932, but an unregistered firm suffers consequences: a partner of an unregistered firm cannot file a suit against the firm or other partners, the firm cannot file a suit against third parties, and the firm cannot file a case against its partners. Because of these consequences, it is advisable to register.

1. Submission of an application, signed by all partners, in the prescribed form to the Registrar of Firms, containing the firm's name, location, names of other business places, the date each partner joined, names and addresses of partners, and the duration of partnership.
2. Deposit of the required fees with the Registrar of Firms.
3. Scrutiny of the application by the Registrar.
4. On approval, entry in the Register of Firms and issue of a certificate of registration.

Types of partners

A partner by estoppel is a person who, by their own conduct or behaviour, gives others the impression that they are a partner in the firm, and so is held liable to outsiders for the firm's debts even though they contribute no capital.

Worked example 3. Rani, a friend of Seema who is a partner in a software firm called Simplex Solutions, accompanies Seema to a business meeting with Mohan Softwares and actively participates in the negotiations, giving the impression that she too is a partner in Simplex Solutions.

Credit is then extended to Simplex Solutions on the strength of these negotiations.

Answer: Because Rani's own conduct created the impression that she was a partner, she becomes a partner by estoppel and is liable, along with the real partners, for repayment of this debt, even though she contributed no capital and took no part in management.

Anyone who does not wish to be treated as a partner should avoid creating such an impression, or should immediately issue a public denial if misrepresented as one.

A partner by holding out is a person who, though not really a partner, knowingly allows themselves to be represented as one, and becomes liable to outside creditors for debts extended to the firm on the basis of such representation, unless they immediately issue a denial.

A minor partner cannot enter a valid contract and so cannot become a full partner, but can be admitted to the benefits of a partnership with the consent of all other partners.

A minor's liability is limited to the capital they contribute, they take no active part in management, and they share only profits, never losses, though they may inspect the firm's accounts.

On attaining majority, they must give public notice within six months of whether they wish to become a full partner; if they fail to do so, they are treated as a full-fledged partner with unlimited liability.

Types of partnership firms

On the basis of duration: a partnership at will exists at the will of the partners and continues until a partner gives notice of withdrawal; a particular partnership is formed for a specific project or period and dissolves automatically when the purpose is fulfilled or the period expires.

On the basis of liability: in a general partnership, liability is unlimited and joint, partners can participate in management, and registration is optional; in a limited partnership, the liability of at least one partner is unlimited while the rest may have limited liability, the firm is unaffected by the death, lunacy or insolvency of the limited partners, limited partners have no right of management, and registration is compulsory.

This form was permitted in India only after the New Small Enterprise Policy of 1991, to allow partnership firms to attract equity capital from friends and relatives who were earlier reluctant to help because of unlimited liability.

A limited liability partnership (LLP), formed under the Limited Liability Partnership Act, 2008, goes further: it is a body corporate with a separate legal entity and perpetual succession, the liability of every partner is limited to the contribution they have agreed to make, it needs at least two partners, of whom at least two must be designated partners, and it must be registered with the Registrar of Companies.

What is a joint stock company?

A company is an association of persons formed to carry out business activities, with a legal status independent of its members: an artificial person having a separate legal entity, perpetual succession and a common seal.

The company form is governed by the Companies Act, 2013; under section 2(20) of that Act, a company means one incorporated under the Act or any other previous company law, such as the Companies Act, 1956.

Shareholders are the owners while the Board of Directors is the chief managing body elected by them; the capital is divided into transferable units called shares (except in a private company, where transfer is restricted).

Features of a company

1. Artificial person: created by law, it can own property, incur debts, borrow money, enter contracts, sue and be sued, but cannot breathe, eat or talk.
2. Separate legal entity: from incorporation, its assets and liabilities are distinct from those of its members.
3. Formation: a time-consuming, expensive and complicated process requiring several documents and legal compliance; incorporation is compulsory under the Companies Act, 2013 or a previous company law.
4. Perpetual succession: the company can be ended only by law, through a procedure called winding up; members may come and go, but the company continues.
5. Control: the Board of Directors manages the company and is accountable to shareholders, who do not have a right to be involved in day-to-day running.
6. Liability: limited to the unpaid amount on shares held; creditors can use only the company's assets to settle claims.
7. Risk bearing: losses are borne by all shareholders, spread over a large number of them, unlike sole proprietorship or partnership.

Worked example 4. Akshay holds 2,000 shares of ₹10 each in an Indian company, on which he has already paid ₹7 per share.

Answer: His liability in the event of the company's losses, or its failure to pay its debts, is limited to the unpaid amount on his shares, that is ₹3 per share × 2,000 shares = ₹6,000; beyond this amount, Akshay is not liable to pay anything towards the company's debts or losses.

An investor who wants protection from unlimited personal liability should therefore choose the company form of organisation over sole proprietorship or partnership.

Merits of the company form

Limited liability of shareholders; easy transfer of shares, converting investment into cash; perpetual existence unaffected by the death or insolvency of members; scope for expansion, through large financial resources from shares and loans; and professional management, since a company can afford to employ specialists.

Demerits of the company form

Complexity and cost of formation; lack of secrecy, since public companies must disclose a lot of information to the Registrar; impersonal work environment from the separation of ownership and management; numerous regulations covering audit, voting and filing; delay in decision making, as proposals pass through several levels; oligarchic management, where directors enjoy considerable freedom that may conflict with shareholders' interests; and conflict of interests between employees, consumers and shareholders.

How do private companies and public companies differ?

A private company restricts the right of members to transfer its shares, has a minimum of two and a maximum of 200 members (excluding present and past employees), and does not invite the public to subscribe to its securities; it must use the words "private limited" after its name.

A public company is one which is not a private company: it has a minimum of 7 members with no maximum limit, has no restriction on transfer of securities, and is not prohibited from inviting the public to subscribe to its securities.

A private company that is a subsidiary of a public company is also treated as a public company.

A private company enjoys several privileges over a public company: it can be formed by just two members, against seven for a public company; it need not issue a prospectus, since it does not invite the public to subscribe; allotment of shares can proceed without receiving the minimum subscription, so it can start business as soon as it receives the certificate of incorporation; it needs only two directors against a minimum of three for a public company, though the maximum for both is fifteen; and it is not required to keep an index of members.

What are the stages in forming a company?

Forming a company involves distinct stages, through which the chosen business idea is translated into a functioning corporate enterprise.

1. Promotion: the discovery of a business idea and the assembling of the capital, resources and people needed to turn it into a company. A promoter is a person who conceives the idea, carries out the preliminary investigation and takes the necessary steps to form the company, bearing the initial risks and expenses of promotion.
2. Incorporation: the legal process of registering the company, in which the required documents, including the Memorandum of Association and Articles of Association, are filed with the Registrar of Companies along with the prescribed fee. On scrutiny and approval, the Registrar issues a certificate of incorporation, which brings the company into existence as a separate legal entity.
3. Capital subscription (for a public company that intends to raise capital from the public): issuing a prospectus inviting the public to subscribe to its shares or debentures, and allotting shares once the minimum subscription is received.
4. Commencement of business: once incorporated (and, for a public company, once the minimum subscription and allotment formalities are complete), the company may file the necessary declaration and obtain the authority to begin its business operations.

A private company can start business as soon as it receives its certificate of incorporation, since it need not wait for the formalities connected with inviting the public to subscribe.

What is the role of promoters, and what types of promoters are there?

A promoter is the person or group that conceives the business idea and takes the first steps to bring a company into existence. Promotion is the stage at which the idea is investigated, the resources are assembled and the legal formalities are set in motion.

The role of a promoter begins with identifying a business opportunity and testing whether it is workable. The promoter then arranges the capital, brings together the people who will invest and manage, and bears the initial risk and expense of promotion, since the company does not yet exist and cannot pay for these steps itself.

The promoter also takes the steps needed to register the company, and stands in a fiduciary position towards it: the promoter must not make a secret profit at the company's expense and must disclose any interest in the transactions made on its behalf.

Types of promoters

• Professional promoters: specialists who promote companies for a fee and then hand over control to the shareholders, without staying on to manage the business.
• Occasional promoters: persons who are not promoters by profession but promote a company now and then, such as engineers or lawyers who float a company and then return to their own profession.
• Financial promoters: promoters who take up the promotion of a company mainly to arrange its finance, such as banks and financial institutions.
• Entrepreneur promoters: the originators of the business idea, who conceive the venture and usually remain in control of the company after it is formed.

Whatever the type, the promoter's work ends once the company has been formed and the management passes to the Board of Directors elected by the shareholders.

What are the steps of incorporation, and what is the certificate of incorporation?

Incorporation is the legal process by which a company is registered and comes into existence as a body corporate with a separate legal entity. It is compulsory under the Companies Act, 2013.

Steps of incorporation

1. Approval of the name: the promoters apply to the Registrar of Companies for approval of the proposed name of the company, which must not be undesirable or too close to that of an existing company.
2. Preparation of the documents: the promoters prepare the Memorandum of Association, the Articles of Association, the list of persons who have agreed to become the first directors, and their written consent to act as directors and to take up the qualification shares, if any.
3. Filing of documents with the Registrar: the Memorandum and Articles, the agreement, if any, that the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager, the list of directors and their consent, and the notice of the registered office address are filed with the Registrar of Companies of the state where the registered office is to be situated.
4. Payment of fees: the prescribed registration fee, stamp duty and other charges are paid according to the authorised capital of the company.
5. Scrutiny and registration: the Registrar examines the documents for completeness and compliance with the law, and, if satisfied, registers the company and enters its name in the Register of Companies.
6. Issue of the certificate of incorporation: the Registrar then issues the certificate of incorporation, which is conclusive evidence that the company has been duly registered.

Definition: Certificate of incorporation. The certificate issued by the Registrar of Companies on the registration of a company, which brings the company into existence as a separate legal entity from the date stated on it.

The certificate of incorporation is the birth certificate of the company. From the date mentioned on it, the company becomes a body corporate, can own property, enter contracts, sue and be sued in its own name, and has perpetual succession.

The certificate is conclusive evidence of the existence of the company, so that, once it has been issued, the company's existence cannot ordinarily be questioned on the ground of a defect in the registration.

What are the Memorandum of Association, Articles of Association and prospectus?

The Memorandum of Association (MOA) is the charter of the company that defines its scope of activities and its relationship with the outside world.

It typically contains the company's name, the state in which its registered office is situated, its objects, the liability of its members, and its authorised share capital.

The Articles of Association (AOA) are the internal rules and regulations governing the management and conduct of the company's internal affairs, covering matters such as the rights and duties of members and directors, and the conduct of meetings.

A prospectus is an invitation to the public to subscribe to the shares or debentures of a public company; it contains details such as the company's name and objects, the names of directors, the terms of the issue, the minimum subscription, and the particulars of the capital structure.

A public company that does not issue a prospectus to the public, but arranges its capital privately, must instead file a statement in lieu of prospectus with the Registrar before allotting shares; it contains broadly similar particulars about the company and its capital.

Contents of a prospectus

• The name of the company and the address of its registered office.
• The objects of the company and the nature of its business.
• The names, addresses and occupations of the directors, managing director and manager.
• The minimum subscription required before allotment of shares.
• The dates of the opening and closing of the issue, and the amount payable on application and allotment.
• The particulars of the capital structure, including the authorised, issued and subscribed capital.
• The names of the underwriters, if any, and the amount underwritten.
• The details of any property purchased or proposed to be purchased out of the proceeds of the issue.
• The names and addresses of the auditors and the legal advisers of the company.
• The details of the company's subsidiaries, if any, and the nature of their business.

Contents of a statement in lieu of prospectus

A statement in lieu of prospectus is filed by a public company that does not invite the public to subscribe to its securities. It contains broadly the same particulars as a prospectus, so that the Registrar and the members have a full picture of the company before it begins business.

• The name of the company and the address of its registered office.
• The objects of the company and the nature of its business.
• The names, addresses and occupations of the directors, managing director and manager.
• The particulars of the capital structure, including the authorised, issued and subscribed capital.
• The amount of the minimum subscription, if any, and the amount payable on application and allotment.
• The details of any property purchased or proposed to be purchased by the company.
• The names and addresses of the auditors and the legal advisers of the company.
• The details of the company's subsidiaries, if any, and the nature of their business.

What is commencement of business, and what is the certificate of commencement?

Commencement of business is the stage at which a company begins its actual business operations, after it has been incorporated and, where required, after it has raised its minimum subscription from the public.

A private company can commence business as soon as it receives its certificate of incorporation, since it does not invite the public to subscribe to its securities. A public company that has issued a prospectus must first complete the formalities of capital subscription before it can begin business.

Steps of commencement of business

1. Allotment of shares: the company allots shares to the applicants once the minimum subscription has been received, and the allotment is made in accordance with the terms of the prospectus.
2. Filing of the declaration: the company files a declaration with the Registrar of Companies, signed by a director or the secretary, stating that the minimum subscription has been received and that the directors have taken up their qualification shares, if any.
3. Verification by the Registrar: the Registrar verifies that the declaration and the accompanying documents are in order and that the company has complied with the requirements of the law.
4. Issue of the certificate of commencement: the Registrar then issues the certificate of commencement of business, which authorises the company to begin its business operations.

Definition: Certificate of commencement. The certificate issued by the Registrar of Companies permitting a public company to commence business, after it has raised the minimum subscription and filed the required declaration.

The certificate of commencement is the final step in the formation of a public company. Until it is obtained, the company cannot enter into binding contracts for its business or borrow money for its operations.

If the company is unable to raise the minimum subscription within the prescribed period, the amounts received from the applicants must be returned to them.

Note: Commencement under the Companies Act, 2013. The certificate of commencement comes from the earlier company law, the Companies Act, 1956. Under the Companies Act, 2013 as amended, the Registrar no longer issues it: a company now incorporated with a share capital cannot commence business or exercise its borrowing powers until a director files a declaration with the Registrar, within 180 days of incorporation, that every subscriber to the Memorandum has paid for the shares agreed to be taken.

What are global enterprises?

A global enterprise (also called a multinational corporation) is a business that operates in more than one country. Such enterprises entered the Indian economy after the 1991 industrial policy invited foreign direct investment from business houses outside India.

Characteristics of global enterprises

• Huge capital resources: they possess vast financial resources and can raise funds from many sources, including the capital markets of different countries.
• Foreign collaboration: they usually enter into agreements with companies of the host country for the sale of technology, the production of goods and the use of brand names.
• Advanced technology: their use of advanced technology lets their products conform to international standards and quality specifications.
• Product innovation: their research and development departments develop new products and improve existing ones.
• Marketing strategies: aggressive, worldwide marketing and advertising make their brands well known and their products easier to sell.
• Expansion of market territory: their operations extend beyond the boundaries of their home country through subsidiaries, branches and affiliates in host countries.
• Centralised control: their headquarters in the home country controls all branches and subsidiaries, within the broad policy framework of the parent company.

Types of global enterprises

Different types of global enterprises exist, ranging from those that merely export their output to other countries to those that set up full production and marketing operations abroad through subsidiaries, joint ventures or branches, allowing them to combine the advantages of local presence with the strength of a globally integrated organisation.

At one end of this range are enterprises that simply sell their goods in foreign markets through exports, without setting up any physical operations there; at the other end are enterprises that establish a full local presence abroad, through a subsidiary company, a joint venture with a local partner, or a branch office, so as to manufacture, market and service customers directly within that foreign market.

Because of their large resources and advanced technology, global enterprises are generally able to compete effectively in several markets at once, and their entry into the Indian economy after 1991 added a third category of enterprise, alongside the private sector and the public sector, operating within the country.

What is a cooperative society?

According to the International Cooperative Alliance, "A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs, and aspirations through a jointly-owned and democratically-controlled enterprise." A cooperative society is a voluntary association of persons who join together with the motive of the welfare of the members, driven by the need to protect their economic interests in a democratic way.

It must be registered under law; after registration, it acquires a distinct legal identity, can enter contracts, hold property in its own name, and the liability of its members is limited to the amount they contribute as capital.

Cooperative societies operating within a single state are governed by that state's Cooperative Societies Act, while those operating in more than one state are governed by the Multi-State Cooperative Societies Act, 2002, which has also been updated through recent amendments.

Features of a cooperative society

Voluntary membership, open to all irrespective of religion, caste or gender, with freedom to join or leave; compulsory registration, giving it a separate legal identity distinct from its members; limited liability of members to the extent of their capital contribution; democratic control, through an elected managing committee chosen by members' votes; and a service motive, with mutual help and welfare dominating its working, any surplus being distributed as dividend according to the bye-laws.

Merits of a cooperative society

Equality in voting status on the principle of "one man, one vote" regardless of capital contributed; limited liability protecting members' personal assets; stable existence unaffected by the death, bankruptcy or insanity of members; economy in operations, since members often offer honorary services and middlemen are eliminated; support from the government in the form of low taxes, subsidies and low interest rates on loans; and ease of formation, involving a simple registration procedure.

Worked example 5. Farmers in the village of Anand in Gujarat were selling their milk individually to intermediaries at low and uncertain prices. In December 1946 they came together to form the Khera District Milk Cooperative Union, better known as Amul, to free themselves from intermediaries and gain access to markets. By the mid-2000s, Amul was collecting 4,47,000 litres of milk every day from 2.12 million farmers through 10,411 village level milk collection centres and fourteen district level plants, and delivering goods worth ₹6 crore a day to over 5,00,000 retail outlets across the country.

Answer: By pooling their milk and selling it jointly under a common brand such as Amul, Amulspray and Amulya, and eliminating middlemen, these farmers secured maximum returns for their efforts, and, by joining hands with other milk cooperatives, the union grew into a network of 2.12 million farmers supplying over 5,00,000 retail outlets.

Small producers facing similar exploitation by middlemen should consider forming a producer's or marketing cooperative society, on the Amul model, rather than selling individually.

Demerits of a cooperative society

Limited resources, since members have limited means and the low dividend discourages further investment; inefficiency in management, since cooperatives cannot afford to pay high salaries to attract expert managers; lack of secrecy, due to open discussion at meetings and disclosure obligations under the Societies Act; government control, through compliance with rules on auditing and submission of accounts, which may interfere with its freedom of operation; and differences of opinion among members, where personal interests may dominate over the welfare motive.

A Multi-State Cooperative Society is a cooperative society whose area of operation extends to more than one state, and which is accordingly registered and governed under the Multi-State Cooperative Societies Act, 2002, rather than under the cooperative societies law of a single state.

How do the different forms of business organisation compare?

Each form of organisation differs in formation, membership, capital, liability, control and continuity. The table below brings these bases together for the forms studied in this unit.

On availability of capital, managerial skills and continuity, the company form is the most advantageous and sole proprietorship the least. On cost and ease of formation, flexibility and freedom from regulations, sole proprietorship is the most advantageous and the company the least.

These factors are inter-related: a form suitable for a small business may not suit the same business carried on at a large scale, so all the relevant factors must be weighed together before a form is chosen.

Going beyond the syllabus

These ideas extend the unit and are not needed for the questions on it.

What are the forms of public sector organisation?

A public enterprise may take any one of three forms of organisation, depending on the nature of its operations and its relationship with the government: a departmental undertaking, a statutory corporation or a government company.

Departmental undertakings

This is the oldest and most traditional form of organising public enterprises. These enterprises are established as departments of a ministry and are considered part of, or an extension of, the ministry itself.

They have not been constituted as autonomous institutions and are not independent legal entities; they act through government officers, and their employees are government employees, generally headed by Indian Administrative Service (IAS) officers and civil servants who are transferable from one ministry to another. Examples are Indian Railways and the Department of Posts (the post and telegraph department).

Their funding comes directly from the government treasury as an annual appropriation from the budget, and the revenue earned is also paid into the treasury. They are subject to the same accounting and audit controls as other government activities and are accountable to the concerned ministry.

Worked example 6. Indian Railways and the Department of Posts are both run as departmental undertakings of the Government of India: their employees are government servants headed by IAS officers and civil servants, their revenue is paid directly into the government treasury, and their yearly funding comes as an appropriation from the government's budget rather than from their own independent earnings.

Answer: Because they are not separate legal entities and are directly controlled by their ministries, neither Indian Railways nor the Department of Posts can sue or be sued in its own name, borrow independently, or decide its own investment without ministry approval; any decision requiring speed or flexibility must still go through the usual channels of ministerial authority.

A citizen or a student comparing public sector forms should therefore treat these two undertakings as examples of the least flexible, but most directly accountable, form of public enterprise.

Merits of departmental undertakings

These undertakings facilitate effective Parliamentary control over their operations, ensure a high degree of public accountability, send their revenue directly to the treasury as a source of government income, and are the most suitable form where national security is concerned, because of direct ministerial control.

Limitations of departmental undertakings

They fail to provide flexibility; heads of departments cannot take independent decisions without ministry approval, causing delay; an over-cautious, bureaucratic approach prevents them from taking advantage of business opportunities; there is red tapism in day-to-day operations; there is a lot of political interference; and they are usually insensitive to consumer needs.

Statutory corporations

A statutory corporation is a public enterprise brought into existence by a Special Act of the Parliament. The Act defines its powers and functions, and the rules governing its employees and its relationship with government departments.

It is wholly owned by the state, is a body corporate that can sue and be sued, enter contracts and acquire property in its own name, and is usually independently financed through borrowings or its own revenue from the sale of goods and services.

It is not subject to the same accounting and audit procedures as government departments and is not tied to the central budget.

Its employees are not government servants and are governed by the provisions of the Act itself, though officers are sometimes taken from government departments on deputation.

Merits of statutory corporations

They enjoy independence and a high degree of operational flexibility, free from undesirable government regulation; the government generally does not interfere in their financial matters since their funds do not come from the central budget; they frame their own policies within the powers assigned by the Act; and a statutory corporation combines the power of government with the initiative of a private enterprise, making it a valuable instrument for economic development.

Limitations of statutory corporations

In practice, a statutory corporation does not enjoy as much flexibility as stated, since all actions are subject to many rules and regulations; there is government and political interference in major decisions involving large funds; and corruption may exist where there is dealing with the public.

Note: Government company. A government company is a company in which not less than 51 per cent of the paid-up share capital is held by the central government, a state government, or partly by the central government and partly by one or more state governments, and is registered under the Companies Act, 2013.

What are the types of cooperative societies?

• Consumer's cooperative societies: formed to protect consumers' interests by purchasing goods in bulk directly from wholesalers and selling to members, eliminating middlemen.
• Producer's cooperative societies: set up to protect small producers by supplying raw materials and inputs, and buying their output for sale, enhancing their bargaining power.
• Marketing cooperative societies: help small producers sell their output at the best possible price by pooling it and performing marketing functions such as transportation, warehousing and packaging.
• Farmer's cooperative societies: protect farmers' interests by providing better seeds, fertilisers, machinery and modern techniques to raise yields.
• Credit cooperative societies: provide easy credit on reasonable terms, protecting members from exploitation by moneylenders who charge high interest.
• Cooperative housing societies: help people with limited income construct houses at reasonable cost, often allowing payment in instalments.

What is a Joint Hindu family business?

Besides the forms listed above, a Joint Hindu family business is a form of organisation found only in India, owned and run by members of a Hindu Undivided Family and governed by Hindu law, with the eldest member (the karta) controlling the business and co-parceners holding equal ownership rights by birth.

Under the Hindu Succession (Amendment) Act, 2005, a daughter of a coparcener also becomes a coparcener by birth, with equal rights at partition irrespective of gender.

The liability of all members except the karta is limited to their share of the property; the karta alone has unlimited liability.

This form is useful background when comparing the continuity, liability and control of different business organisations, even though it is not one of the forms this note's unit focuses on.

Glossary

• Sole proprietorship — a business owned, managed and controlled by one individual who bears all risks and takes all profits.
• Partnership deed — the written agreement specifying the terms and conditions governing a partnership.
• Unlimited liability — liability extending to the owner's or partner's personal assets if business assets are insufficient to pay debts.
• Limited liability — liability restricted to the amount of capital a member has contributed or agreed to pay.
• Partner by estoppel — a person held liable as a partner because their own conduct gave others the impression that they were one.
• Minor partner — a person under the age of majority admitted only to the benefits, and never the losses, of a partnership.
• Partnership at will — a partnership that continues at the partners' will until any partner gives notice of withdrawal.
• Promoter — a person who conceives a business idea and takes the steps needed to bring a company into existence.
• Certificate of incorporation — the document issued by the Registrar that brings a company into legal existence.
• Certificate of commencement — the certificate issued by the Registrar permitting a public company to begin business after raising its minimum subscription.
• Memorandum of Association — the charter document defining a company's objects and scope of activity.
• Articles of Association — the document containing the rules for a company's internal management.
• Prospectus — an invitation to the public to subscribe to a company's shares or debentures.
• Statement in lieu of prospectus — a document filed by a public company that does not invite public subscription, containing particulars similar to a prospectus.
• Cooperative society — a voluntary association of persons who join together for the economic welfare of members under democratic control.

Common errors and misconceptions

• Misconception: a sole proprietor's business has a legal identity separate from the owner. Correct: the law makes no distinction between the sole trader and the business; the owner is personally responsible for all its activities.
• Misconception: registration of a partnership firm is compulsory. Correct: it is optional under the Indian Partnership Act, 1932, though an unregistered firm loses the right to sue the firm, other partners or third parties.
• Misconception: a minor can be a full partner in a firm. Correct: a minor can only be admitted to the benefits of a partnership, sharing profits but never losses, until they decide on attaining majority.
• Misconception: all partners in a limited partnership have limited liability. Correct: in a limited partnership the liability of at least one partner must remain unlimited; only in a limited liability partnership formed under the Limited Liability Partnership Act, 2008 is every partner's liability limited to the agreed contribution.
• Misconception: a private company and a public company are distinguished only by size. Correct: they differ in the restriction on share transfer, the right to invite public subscription, and the minimum/maximum number of members and directors.
• Misconception: a company can begin business as soon as it is incorporated, whatever its type. Correct: a private company can start at once, but a public company that invites public subscription must first raise the minimum subscription and obtain the certificate of commencement.
• Misconception: cooperative society members have unlimited liability like partners. Correct: their liability is limited to the amount they have contributed as capital.
• Misconception: the Memorandum and the Articles of Association have the same legal force. Correct: the Articles are subordinate to the Memorandum, and an act beyond the objects clause cannot be ratified even by all the shareholders.

Exam-style questions with model answers

Q1. A private company has just received its certificate of incorporation and wishes to begin operations immediately. State whether it must first obtain a certificate of commencement. [1 mark]

1. No. A private company can start business as soon as it receives its certificate of incorporation, since it does not invite the public to subscribe to its securities.

Q2. Complete the analogy: Memorandum of Association : objects clause :: Articles of Association : ____________. [1 mark]

1. Internal rules and regulations of the company.

Q3. Read the two statements and state whether each is true and whether the Reason correctly explains the Assertion. Assertion: A partner by estoppel is liable for the debts of the firm. Reason: Such a person, by their own conduct, gives others the impression that they are a partner. [1 mark]

1. Both Assertion and Reason are true, and Reason is the correct explanation for Assertion.

Q4. State any two features of the private sector. [2 marks]

1. Private ownership: the business is owned by an individual or a group of individuals, not by the government.
2. Profit motive: the working of the enterprise is driven by the aim of earning profit for its owners, who also bear the risk of loss.

Q5. Distinguish between the Memorandum of Association and the Articles of Association on any four bases. [4 marks]

1. Purpose: the Memorandum defines the company's scope of activity and its relations with outsiders, while the Articles govern its internal management and conduct.
2. Position: the Memorandum is the main, dominant charter document, while the Articles are subordinate to it and must not conflict with it.
3. Contents: the Memorandum contains the name, registered office, objects, liability and capital clauses, while the Articles contain rules for internal administration such as meetings and directors' powers.
4. Effect of acts beyond it: an act beyond the objects clause is ultra vires and cannot be ratified even by all the shareholders, while an act contrary to the Articles can be ratified by the members.

Q6. Meera runs a small tailoring unit as its sole owner. She now wants to expand nationwide and raise large capital from the public. Identify the form of organisation she should adopt and give any two reasons for your recommendation. [4 marks]

1. She should convert the business into a joint stock company, since a company has large financial resources and can raise capital by issuing shares to a large number of investors.
2. Limited liability: the liability of shareholders is limited to the unpaid amount on their shares, which attracts investors and protects Meera's personal assets.
3. Perpetual existence: the company continues unaffected by the death, retirement or insolvency of its members, which suits a permanent nationwide structure.
4. Professional management: a company can afford to employ specialists, which helps manage operations spread across the country.

Q7. Explain the comparative position of sole proprietorship, partnership, company and cooperative society on the bases of liability, continuity, capital and control. [8 marks]

1. Liability: the liability of the sole proprietor and of partners is unlimited, while the liability of shareholders and of members of a cooperative society is limited.
2. Continuity: the continuity of sole proprietorship and partnership is affected by the death, insolvency or insanity of the owners, whereas a company has perpetual existence and a cooperative society has stable existence.
3. Capital: a sole proprietor has limited finance, a partnership has limited but larger resources, a company has large financial resources, and a cooperative society has limited resources.
4. Control: the sole proprietor takes all decisions, partners decide with the consent of all, a company separates ownership from management, and a cooperative society is run by an elected managing committee.
5. Formation: sole proprietorship needs minimal legal formalities, partnership registration is optional, while registration is compulsory for both a company and a cooperative society.
6. Members: sole proprietorship has only the owner, partnership has a minimum of 2 and maximum of 50, a private company has 2 to 200 and a public company 7 or more, and a cooperative society needs at least 10 adults.
7. Most advantageous: the company is most advantageous for capital, managerial skills and continuity, while sole proprietorship is most advantageous for cost, ease of formation, flexibility and freedom from regulations.
8. Choice: these factors are inter-related, so a form suitable for a small business may not suit the same business at a large scale, and all relevant factors must be weighed together.

Q8. Explain the meaning of a Public-Private Partnership and state any four of its features. [8 marks]

1. A Public-Private Partnership is an arrangement between a government or public sector entity and a private sector entity to develop, finance or operate a public asset or service.
2. Shared investment: both partners contribute capital to the venture, so the funding burden does not fall wholly on the government.
3. Shared risk and returns: the two partners share the risk of the project and the returns it earns, as agreed between them.
4. Combined strengths: it brings together the government's capacity for large-scale funding and policy support with the private sector's managerial efficiency, technical expertise and quicker decision making.
5. Public accountability: the accountability associated with government ownership is retained to the extent of the government's share in the venture.
6. Reduced budget pressure: part of the funding and operating burden is carried by the private partner, reducing pressure on the government's own budget.
7. Use: such partnerships suit projects that need both substantial public funding or policy backing and the flexibility, speed and technical expertise a departmental undertaking would find difficult to provide.
8. A joint sector enterprise is similarly jointly owned and managed by the government and private entrepreneurs, combining government participation with private managerial initiative.

Key takeaways

• The Indian economy is a mixed economy, with the private sector owned by individuals and the public sector owned and managed by the government.
• A Public-Private Partnership or joint sector enterprise is jointly owned and managed by the government and private entrepreneurs, who share the investment, risk and returns.
• Sole proprietorship is owned, managed and controlled by one person who bears unlimited liability and takes all the profit.
• A partnership is governed by the Indian Partnership Act, 1932 and is formed by an agreement, usually recorded in a partnership deed.
• Registration of a partnership firm is optional, but an unregistered firm cannot sue the firm, other partners or third parties.
• Partners may be active, dormant, by estoppel, by holding out or minor, with different degrees of involvement and liability.
• A company is an artificial person with a separate legal entity, perpetual succession and limited liability of its shareholders, governed by the Companies Act, 2013.
• A private company restricts share transfer and public subscription, while a public company can invite the public and has no restriction on transfer.
• Promotion, incorporation, capital subscription and commencement of business are the stages of forming a public company, ending with the certificate of commencement.
• A cooperative society is a voluntary, democratically controlled association with limited liability, registered under the relevant Cooperative Societies Act or the Multi-State Cooperative Societies Act, 2002.

Test yourself

What is meant by a mixed economy?

An economy, like India's, in which both privately owned enterprises (the private sector) and government owned enterprises (the public sector) are allowed to operate side by side.

Name the Act that defines partnership in India and give its definition in brief.

The Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profit of a business carried on by all or any one of them acting for all.

What happens if a partnership firm is not registered?

A partner cannot sue the firm or other partners, the firm cannot sue third parties, and it cannot sue its own partners, though it can still be sued by others.

What is a Public-Private Partnership?

An arrangement between a government or public sector entity and a private sector entity to develop, finance or operate a public asset or service, sharing the investment, risk and returns.

State the minimum and maximum number of members in a private company.

A private company must have a minimum of 2 members and a maximum of 200 members, excluding present and past employees.

What document brings a company into legal existence?

The certificate of incorporation, issued by the Registrar of Companies once the required documents are scrutinised and approved.

Distinguish, in one line, between the Memorandum and the Articles of Association.

The Memorandum defines the company's objects and its relations with outsiders, while the Articles govern its internal management and conduct.

What is a statement in lieu of prospectus?

A document filed by a public company that does not invite the public to subscribe to its securities, containing particulars broadly similar to those in a prospectus.