UNIT III - FORMS OF BUSINESS ORGANISATION

SOLE PROPRIETORSHIP

MEANING OF SOLE PROPRIETORSHIP

‘Sole’ means single and ‘proprietorship’ means ownership. It means only one person or an individual
is the owner of the business. Thus, the business organisation in which a single person owns, manages
and controls all the activities of the business is known as sole proprietorship form of business
organisation. The individual who owns and runs the sole proprietorship business is called a ‘sole
proprietor’ or ‘sole trader’. A sole proprietor pools and organises the resources in a systematic way
and controls the activities with the sole objective of earning profit.

Definition

A business that legally has no separate existence from its owner. Income and losses are taxed on the
individual's personal income tax return. . The sole proprietorship is the simplest business form under
which one can operate a business. The sole proprietorship is not a legal entity.

CHARACTERISTICS OF SOLE PROPRIETORSHIP

Sole proprietorship has the following characteristics :

i. Ease of formation: An ideal form of ownership should be easy to form. Ease of formation implies
minimum of legal and other formalities. Sole proprietorship is easy to form.

ii. Single Ownership: A single individual always owns sole proprietorship form of business
organization. That individual owns all assets and properties of the business. Hence, he alone bears all
the risk of the business. Thus, the business of the sole proprietor comes to an end at the will of the
owner or upon his death.

iii. No sharing of Profit and Loss: The entire profit arising out of sole proprietorship business goes
to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody
else shares the profit and loss of the business with the sole proprietor.

iv. One man’s Capital: The capital required by a sole proprietorship form of business organisation
is totally arranged by the sole proprietor. He provides it either from his personal resources or by
borrowing from friends, relatives, banks or other financial institutions.

v. One-man Control: The controlling power in a sole proprietorship business always remains with
the owner. The owner or proprietor alone takes all the decisions to run the business.

vi. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies that, in case of
loss the business assets along with the personal properties of the proprietor shall be used to pay the
business liabilities.

ADVANTAGES OF SOLE PROPRIETORSHIP

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The sole proprietorship form of business is the most simple and common in our country. It has the
following advantages:

i. Easy to Form and Wind up : A sole proprietorship form of business is very easy to form. With a
very small amount of capital one can start the business. Legal formalities are minimum just like
formation; it is also very easy to wind up the business. It is the owners, sole discretion to form or
wind up the business at any time.

ii. Direct Motivation: The profits earned belong to the sole proprietor alone and he bears the risk of
losses as well. Thus, there is a direct link between effort and reward. If he works hard, then there is a
possibility of getting more profit and vice versa this provides strong motivation for the sole
proprietor to work hard.

iii. Quick Decision and Prompt Action: In a sole proprietorship business the sole proprietor alone
is responsible for all decisions. Since no one else is involved in decision making it becomes easy to
take quick and prompt action on the basis of decision taken.

iv. Better Control: In sole proprietorship business, the proprietor has full control over each and
every activity of the business. He is the planner as well as the organiser, who co-ordinates every
activity in an efficient manner. Since the proprietor has all authority with him, it is possible to
exercise better control over business.

v. Maintenance of Business Secrets: In the case of sole proprietorship business, the proprietor is in
a very good position to keep his plans to himself since management and control are in his hands.
There is no need to disclose any information to others.

vi. Close Personal Relation: The sole proprietor is always in a position to maintain good personal
contact with the customers and employees. Direct contact enables the sole proprietor to know the
likes, dislikes and tastes of the customers. Also, it helps in maintaining close and friendly relations
with the employees and thus, business runs smoothly.

vii. Provides Self-employment: Sole proprietorship form of business organization provides self-
employment opportunities to the people. Not only is the owner self-employed, sometimes he also
creates job opportunities for others. You must have observed in different shops that there are a
number of employees assisting the owner in selling goods to the customers. Thus, it helps in
reducing poverty and unemployment in the country.

LIMITATIONS OF SOLE PROPRIETORSHIP

One-man business is the best form of business organisation because of the above-discussed
advantages. However, all types of ownership have some limitations and the sole proprietorship is no
exception. Let us learn those limitations.

i. Limited Capital: In sole proprietorship business, it is the owner who arranges the capital required
for the business. It is often difficult for a single individual to raise a huge amount of capital. The
owner’s own funds as well as borrowed funds sometimes become insufficient to meet the
requirement of the business for its growth and expansion.

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ii. Lack of Continuity: The existence of sole proprietorship depends on the owner. The business
may come to an end as and when the sole proprietor so decides or in the event of his death.

iii. Limited Size: In sole proprietorship form of business organisation there is a limit beyond which
it becomes difficult to expand its activities. It is not always possible for a single person to supervise
and manage the affairs of the business if it grows beyond a certain limit.

iv. Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of
management. He/she may be an expert in administration, planning, etc., but may be poor in
marketing.

SUITABILITY OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

The sole proprietorship is suitable where the market is limited, localised and the customers give
importance to personal attention. It is also considered suitable where the capital requirement is small
and risk involved is limited. It is also considered suitable for the production of goods and services
which involve manual skill e.g., handicrafts, filigree work, jewelry, tailoring, haircutting etc.

A sole proprietorship form of business organization is suitable to the following types of business
houses where:
 The capital requirement is very small.
 The goods are of artistic and personal requirements
 There is transfer of personal services
 Computer services
 Business necessitating spirit of co-operation.

FORMATION OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

It is very simple to establish a sole proprietary concern. Any person who is willing to start a business
and has the necessary resources can set up this form of business organisation. To start and operate
the business in this form, practically does not require any legal formalities to be fulfilled. In some
cases like restaurant, chemist shop etc. however, permission from the competent authority is required
to be obtained before starting the business. Similarly, setting up a factory may involve taking
permission from the local authority. But, formation of business unit as such does not involve any
complexities.

PARTNERSHIP

MEANING OF PARTNERSHIP

‘Partnership’ is an association of two or more persons who pool their financial and managerial
resources and agree to carry on a business, and share its profit. The persons who form a partnership
are individually known as partners and collectively a firm or partnership firm.

Let’s assume that Gopal joins hand with Rahim to start a big grocery shop. Here both Gopal and
Rahim are called partners who are running the partnership firm jointly. Both of them will pool their
resources and carry on business by applying their expertise. They will share the profits and losses in
the agreed ratio. In fact, for all terms and conditions of their working, they have to sit together to
decide about all aspects. There must be an agreement between them. The agreement may be in oral,

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written or implied. When the agreement is in writing it is termed as partnership deed. However, in
the absence of an agreement, the provisions of the Indian Partnership Act 1932 shall apply.

Partnership form of business organisation in India is governed by the Indian Partnership Act, 1932
which defines partnership as “the relation between persons who have agreed to share the profits of
the business carried on by all or any of them acting for all”.

CHARACTERISTICS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

Based on the definition of partnership as given above, the various characteristics of partnership form
of business organisation, can be summarised as follows:

(a) Two or More Persons: To form a partnership firm atleast two persons are required. The
maximum limit on the number of persons is ten for banking business and 20 for other businesses. If
the number exceeds the above limit, the partnership becomes illegal and the relationship among them
cannot be called partnership.

(b) Contractual Relationship: Partnership is created by an agreement among the persons who have
agreed to join hands. Such persons must be competent to contract. Thus, minors, lunatics and
insolvent persons are not eligible to become the partners. However, a minor can be admitted to the
benefits of partnership firm i.e., he can have share in the profits without any obligation for losses.

(c) Sharing Profits and Business: There must be an agreement among the partners to share the
profits and losses of the business of the partnership firm. If two or more persons share the income of
jointly owned property, it is not regarded as partnership.

(d) Existence of Lawful Business: The business of which the persons have agreed to share the profit
must be lawful. Any agreement to indulge in smuggling, black marketing etc. cannot be called
partnership business in the eyes of law.

(e) Principal Agent Relationship: There must be an agency relationship between the partners.
Every partner is the principal as well as the agent of the firm. When a partner deals with other parties
he/she acts as an agent of other partners, and at the same time the other partners become the
principal.

(f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well as
individually liable for the debts and obligations of the firms. If the assets of the firm are insufficient
to meet the firm’s liabilities, the personal properties of the partners can also be utilised for this
purpose. However, the liability of a minor partner is limited to the extent of his share in the profits.

(g) Voluntary Registration: The registration of partnership firm is not compulsory. But an
unregistered firm suffers from some limitations which makes it virtually compulsory to be registered.
Following are the limitations of an unregistered firm.
(i) The firm cannot sue outsiders, although the outsiders can sue it.
(ii) In case of any dispute among the partners, it is not possible to settle the dispute through
court of law.
(iii) The firm cannot claim adjustments for amount payable to, or receivable from, any other
parties.

MERITS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

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(a) Easy to Form: A partnership can be formed easily without many legal formalities. Since it is not
compulsory to get the firm registered, a simple agreement, either in oral, writing or implied is
sufficient to create a partnership firm.
(b) Availability of Larger Resources: Since two or more partners join hands to start partnership
firm it may be possible to pool more resources as compared to sole proprietorship form of business
organisation.
(c) Better Decisions: In partnership firm each partner has a right to take part in the management of
the business. All major decisions are taken in consultation with and with the consent of all partners.
Thus, collective wisdom prevails and there is less scope for reckless and hasty decisions.
(d) Flexibility: The partnership firm is a flexible organisation. At any time the partners can decide to
change the size or nature of business or area of its operation after taking the necessary consent of all
the partners.
(e) Sharing of Risks: The losses of the firm are shared by all the partners equally or as per the
agreed ratio.
(f) Keen Interest: Since partners share the profit and bear the losses, they take keen interest in the
affairs of the business.
(g) Benefits of Specialisation: All partners actively participate in the business as per their
specialisation and knowledge. In a partnership firm providing legal consultancy to people, one
partner may deal with civil cases, one in criminal cases, and another in labour cases and so on as per
their area of specialisation. Similarly two or more doctors of different specialisation may start a
clinic in partnership.
(h) Protection of Interest: In partnership form of business organisation, the rights of each partner
and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for
dissolution of the firm or can withdraw from the partnership.
(i) Secrecy: Business secrets of the firm are only known to the partners. It is not required to disclose
any information to the outsiders. It is also not mandatory to publish the annual accounts of the firm.

LIMITATIONS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

A partnership firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that the liability of the
partners is unlimited i.e., the partners are personally liable for the debt and obligations of the firm. In
other words, their personal property can also be utilised for payment of firm’s liabilities.
(b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity or the
retirement of any partner brings the firm to an end. Not only that any dissenting partner can give
notice at any time for dissolution of partnership.
(c) Limited Capital: Since the total number of partners cannot exceed 20, the capacity to raise funds
remains limited as compared to a joint stock company where there is no limit on the number of
shareholders.
(d) Non-transferability of share: The share of interest of any partner cannot be transferred to other
partners or to the outsiders. So it creates inconvenience for the partner who wants to transfer his
share to others fully and partly. The only alternative is dissolution of the firm.
(e) Possibility of Conflicts: You know that in partnership firm every partner has an equal right to
participate in the management. Also every partner can place his or her opinion or viewpoint before
the management regarding any matter at any time. Because of this, sometimes there is friction and
quarrel among the partners. Difference of opinion may give rise to quarrels and lead to dissolution of
the firm.

TYPES OF PARTNERS

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 You have learnt that normally every partner in a firm contributes to its capital, participates in the
day-to-day management of firm’s activities, and shares its profits and losses in the agreed ratio. In
other words all partners are supposed to be active partners. However, in certain cases there are
partners who play a limited role. They may contribute capital and such partners cannot be termed as
active partners. Similarly, some persons may simply lend their name to the firm and make no
contribution to capital of the firm. Such persons are partners only in name. Thus, depending upon the
extent of participation and the sharing of profits, liability etc., partners can be classified into various
categories. These are summarised here under.
(A) Based on the extent of participation in the day-to-day management of the firm partners can be
classified as ‘Active Partners’ and ‘Sleeping Partners’. The partners who actively participate in the
day-to-day operations of the business are known as active partners or working partners. Those
partners who do not participate in the day-to-day activities of the business are known as sleeping or
dormant partners. Such partners simply contribute capital and share the profits and losses.

(B) Based on sharing of profits, the partners may be classified as ‘Nominal Partners’ and ‘Partners in
Profits’. Nominal partners allow the firm to use their name as partner

They neither invest any capital nor participate in the day-to-day operations. They are not entitled to
share the profits of the firm. However, they are liable to third parties for all the acts of the firm. A
person who shares the profits of the business without being liable for the losses is known as partner
in profits. This is applicable only to the minors who are admitted to the benefits of the firm and their
liability is limited to their capital contribution.

(C) Based on Liability, the partners can be classified as ‘Limited Partners’ and ‘General Partners’.
The liability of limited partners is limited to the extent of their capital contribution. This type of
partners is found in Limited Partnership firms in some European countries and USA. So far, it is not
allowed in India. However, the Limited liability Partnership Act is very much under consideration of
the Parliament. The partners having unlimited liability are called as general partners or Partners with
unlimited liability. It may be noted that every partner who is not a limited partner is treated as a
general partner.

(D) Based on the behaviour and conduct exhibited, there are two more types of partners besides the
ones discussed above. These are (a) Partner by Estoppel; and (b) Partner by Holding out. A person
who behaves in the public in such a way as to give an impression that he/she is a partner of the firm,
is called ‘partner by estoppel’. Such partners are not entitled to share the profits of the firm, but are
fully liable if somebody suffers because of his/her false representation. Similarly, if a partner or
partnership firm declares that a particular person is a partner of their firm, and such a person does not
disclaim it, then he/she is known as ‘Partner by Holding out’. Such partners are not entitled to profits
but are fully liable as regards the firm’s debts.

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 Active Partners
Based on extent of participation Sleeping Partners

Based on sharing of profit Nominal Partners

Partners in Profits

Partners

Limited Partners
Based on liability General Partners

Partners by Estoppel
Based on nature of behaviour
Partners by Holding Out

SUITABILITY OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

We have already learnt that persons having different ability, skill or expertise can join hands to form
a partnership firm to carry on the business. Business activities like construction, providing legal
services, medical services etc. can be successfully run under this form of business organisation. It is
also considered suitable where capital requirement is of a medium size. Thus, business like a
wholesale trade, professional services, mercantile houses and small manufacturing units can be
successfully run by partnership firms.

FORMATION OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

The following steps are to be taken in order to form a partnership firm:

(a) Minimum two members are required to form a partnership. The maximum limit is ten in banking
and 20 in other businesses.

(b) Select the like-minded persons keeping in view the nature and objectives of the business.

(c) There must be an agreement among the partners to carry on the business and share the profits and
losses. This agreement must preferably be in writing and duly signed by the all the partners. The
agreement, i.e., the partnership deed must contain the following:

(i) Name of the firm

(ii) Nature of the business
(iii) Names and addresses of partners
(iv) Location of business
(v) Duration of partnership, if decided
(vi) Amount of capital to be contributed by each partner

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 (vii) Profit and loss sharing ratio
(viii) Duties, powers and obligations of partners.
(ix) Salaries and withdrawals of the partners
(x) Preparation of accounts and their auditing.
(xi) Procedure for dissolution of the firm etc.
(xii) Procedure for settlement of disputes

(d) The partners should get their firm registered with the Registrar of Firms of the concerned state.
Although registration is not compulsory, but to avoid the consequences of nonregistration, it is
advisable to get it registered when it is setup or at any time during its existence. The procedure for
registration of a firm is as follows.

(i) The firm will have to apply to the Registrar of Firms of the concerned state in the
prescribed form.
(ii) The duly filled in form must be signed by all the partners.
(iii) The filled in form along with prescribed registration fee must be deposited in the office
of the Registrar of Firms.
(iv) The Registrar will scrutinize the application, and if he is satisfied that all formalities
relating to registration have been duly complied with, he will put the name of the firm in his
register and issue the Certificate of Registration.

JOINT HINDU FAMILY FORM OF BUSINESS ORGANISATION

After knowing about sole proprietorship and partnership forms of business organisation let us now
discuss about a unique form of business organisation that prevails only in India and that too among
the Hindus. The Joint Hindu Family (JHF) business is a form of business organisation run by Hindu
Undivided Family (HUF), where the family members of three successive generations own the
business jointly. The head of the family known as Karta manages the business. The other members
are called co-parceners and all of them have equal ownership right over the properties of the
business.

The membership of the JHF is acquired by virtue of birth in the same family. There is no restriction
for minors to become the members of the business. As per Dayabhaga system of Hindu Law, both
male and female members are the joint owners. But Mitakashara system of Hindu Law says only
male members of the family can become the coparceners. While the Dayabhaga system is applicable
to the state of West Bengal, Mitakshara system of Hindu Law is applicable to the rest of the country.

CHARACTERISTICS OF JHF FORM OF BUSINESS ORGANISATION

From the above discussion, it must have been clear to you that the Joint Hindu family business has
certain special characteristics which are as follows:

(a) Formation: In JHF business there must be at least two members in the family, and family should
have some ancestral property. It is not created by an agreement but by operation of law.
(b) Legal Status: The JHF business is a jointly owned business. It is governed by the Hindu
Succession Act 1956.
(c) Membership: In JHF business outsiders are not allowed to become the coparcener. Only the
members of undivided family acquire co-parcenership rights by birth..
(d) Profit Sharing: All coparceners have equal share in the profits of the business.
(e) Management: The business is managed by the senior most member of the family known as
Karta. Other members do not have the right to participate in the management. The Karta has the

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authority to manage the business as per his own will and his ways of managing cannot be questioned.
If the coparceners are not satisfied, the only remedy is to get the HUF status of the family dissolved
by mutual agreement.
(f) Liability: The liability of coparceners is limited to the extent of their share in the business. But
the Karta has an unlimited liability. His personal property can also be utilised to meet the business
liability.
(g) Continuity: Death of any coparceners does not affect the continuity of business. Even on the
death of the Karta, it continues to exist as the eldest of the coparceners takes position of Karta.
However, JHF business can be dissolved either through mutual agreement or by partition suit in the
court.

MERITS OF JHF FORM OF BUSINESS ORGANISATION

Since Joint Hindu Family business has certain peculiar features as discussed above, it has the
following merits.
(a) Assured Shares in Profits: Every coparcener is assured of an equal share in the profits
irrespective of his participation in the running of the business. This safeguards the interest of minor,
sick, physically and mentally challenged coparceners.
(b) Quick Decision: The Karta enjoys full freedom in managing the business. It enables him to take
quick decisions without any interference.
(c) Sharing of Knowledge and Experience: A JHF business provides opportunity for the young
members of the family to get the benefits of knowledge and experience of the elder members. It also
helps in inculcating virtues like discipline, self-sacrifice, tolerance etc.
(d) Limited Liability of Members: The liability of the coparceners except the Karta is limited to the
extent of his share in the business. This enables the members to run the business freely just by
following the instructions or direction of the Karta.
(e) Unlimited Liability of the Karta: Because of the unlimited liability of the Karta, his personal
properties are at stake in case the business fails to pay the creditors. This clause of JHF business
makes the Karta to manage business most carefully and efficiently.
(f) Continued Existence: The death or insolvency of any member does not affect the continuity of
the business. So it can continue for a long period of time.
(g) Tax Benefits: HUF is regarded as an independent assessee for tax purposes. The share of
coparceners is not to be included in their individual income for tax purposes. After knowing the
merits let us see the limitations of Joint Hindu Family form of business organisation.

LIMITATION OF JHFFORM OF BUSINESS ORGANISATION

(a) Limited Resources: JHF business has generally limited financial and managerial resource.
Therefore, it is not considered suitable for large business.
(b) Lack of Motivation: The coparceners get equal share in the profits of the business irrespective
of their participation. So generally they are not motivated to put in their best.
(c) Scope for Misuse of Power: Since the Karta has absolute freedom to manage the business; there
is scope for him to misuse it for his personal gains. Moreover, he may have his own limitations.
(d) Instability: The continuity of JHF business is always under threat. A small rift within the family
may lead to seeking partition.

SUITABILITY OF JHF
The Joint Hindu Family form of business organisation is suitable where the family inherits a running
business and the members of the family want to continue that business jointly as a family business.
Even otherwise, this form of business organisation is considered suitable for a business that requires

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limited financial and managerial resources and having a very limited area of operation. It is found
that JHF are usually engaged in trading business, indigenous banking, small industry, and crafts etc.

FORMATION OF JHFFORM OF BUSINESS ORGANISATION

A Joint Hindu Family business is formed as per the provision of Hindu law. It comes into existence
on the death of the person who established the business. His successor automatically become the
coparceners if they decide to continue it as a joint family business. The children become its members
by birth. The senior most member of the family will become the Karta of the business. No legal
formalities are required for its establishment. But it has to be registered with the Income tax
department to avail the tax concessions involved.

COOPERATIVE SOCIETY
The term cooperation is derived from the Latin word ‘co-operari’, where the word ‘Co’ means ‘with’
and ‘operari’ mean ‘to work’. Thus, the term cooperation means working together. So those who
want to work together with some common economic objectives can form a society, which is termed
as cooperative society.

It is a voluntary association of persons who work together to promote their economic interest. It
works on the principle of self-help and mutual help. The primary objective is to provide support to
the members. People come forward as a group, pool their individual resources, utilise them in the
best possible manner and derive some common benefits out of it.

CHARACTERISTICS OF COOPERATIVE SOCIETY

Based on the above definition we can identify the following characteristics of cooperative society
form of business organisation:
(a) Voluntary Association: Members join the cooperative society voluntarily i.e., by their own
choice. Persons having common economic objective can join the society as and when they like,
continue as long as they like and leave the society and when they want.
(b) Open Membership: The membership is open to all those having a common economic interest.
Any person can become a member irrespective of his/her caste, creed, religion, colour, sex etc.
(c) Number of Members: A minimum of 10 members are required to form a cooperative society. In
case of multi-state cooperative societies the minimum number of members should be 50 from each
state in case the members are individuals. The Cooperative Society Act does not specify the
maximum number of members for any cooperative society. However, after the formation of the
society, the member may specify the maximum member of members.
(d) Registration of the Society: In India, cooperative societies are registered under the Cooperative
Societies Act 1912 or under the State Cooperative Societies Act. The Multi-state Cooperative
Societies are registered under the Multi-state Cooperative Societies Act 2002. Once registered, the
society becomes a separate legal entity and attain certain characteristics. These are as follows.
(i) The society enjoys perpetual succession
(ii) It has its own common seal
(iii) It can enter into agreements with others
(iv) It can sue others in a court of law
(v) It can own properties in its name
(e) State Control: Since registration of cooperative societies is compulsory, every cooperative
society comes under the control and supervision of the government. The cooperative department
keeps a watch on the functioning of the societies. Every society has to get its accounts audited from
the cooperative department of the government.

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(f) Capital: The capital of the cooperative society is contributed by its members. Since, the members
contribution is very limited, it often depends on the loan from government. and apex cooperative
institutions or by way of grants and assistance from state and Central Government.
(g) Democratic Set Up: The cooperative societies are managed in a democratic manner. Every
member has a right to take part in the management of the society. However, the society elects a
managing committee for its effective management. The members of the managing committee are
elected on the basis of one-man one-vote irrespective of the number of shares held by any member. It
is the general body of the society which lays down the broad framework within which the managing
committee functions.
(h) Service Motive: The primary objective of all cooperative societies is to provide services to its
members.
(i) Return on Capital Investment: The members get return on their capital investment in the form
of dividend.
(j) Distribution of Surplus: After giving a limited dividend to the members of the society, the
surplus profit is distributed in the form of bonus, keeping aside a certain percentage as reserve and
for general welfare of the society.

TYPES OF COOPERATIVE SOCIETIES

You know cooperative organisations are set up in different fields to promote the economic well-
being of different sections of the society. So, according to the needs of the people, we find different
types of cooperative societies in India. Some of the important types are given below.

(a) Consumers’ Cooperative Societies: These societies are formed to protect the interest of
consumers by making available consumer goods of high quality at reasonable price.
(b) Producer’s Cooperative Societies: These societies are formed to protect the interest of small
producers and artisans by making available items of their need for production, like raw materials,
tools and equipments etc.
(c) Marketing Cooperative Societies: To solve the problem of marketing the products, small
producers join hand to form marketing cooperative societies.
(d) Housing Cooperative Societies: To provide residential houses to the members, housing
cooperative societies are formed generally in urban areas.
(e) Farming Cooperative Societies: These societies are formed by the small farmers to get the
benefit of large-scale farming.
(f) Credit Cooperative Societies: These societies are started by persons who are in need of credit.
They accept deposits from the members and grant them loans at reasonable rate of interest.

MERITS OF COOPERATIVE SOCIETY

The cooperative society is the only form of business organisation which gives utmost importance to
its members rather than maximising its own profits. After studying its characteristics and different
types, we may now study the merits of this form of business organisation.

(a) Easy to Form: Any ten adult members can voluntarily form an association get it registered with
the Registrar of Cooperative Societies. The registration is very simple and it does not require much
legal formalities.
(b) Limited Liability: The liability of the members of the cooperative societies is limited upto their
capital contribution. They are not personally liable for the debt of the society.

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(c) Open Membership: Any competent like-minded person can join the cooperative society any
time he likes. There is no restriction on the grounds of caste, creed, gender, colour etc. The time of
entry and exit is also generally kept open.
(d) State Assistance: The need for country’s growth has necessitated the growth of the economic
status of the weaker sections. Therefore, cooperative societies always get assistance in the forms of
loans, grants, subsidies etc. from the state as well as Central Government.
(e) Stable Life: The cooperative society enjoys the benefit of perpetual succession. The death,
resignation, insolvency of any member does not affect the existence of the society because of its
separate legal entity.
(f) Tax Concession: To encourage people to form co-operative societies the government generally
provides tax concessions and exemptions, which keep on changing from time to time.
(g) Democratic Management: The cooperative societies are managed by the Managing Committee,
which is elected by the members. The members decide their own rules and regulations within the
limits set by the law.

LIMITATIONS OF COOPERATIVE SOCIETY

Although the basic aim of forming a cooperative society is to develop a system of mutual help and
cooperation among its members, yet the feeling of cooperation does not remain for long. Cooperative
societies usually suffer from the following limitations.

(a) Limited Capital: Most of the cooperative societies suffer from lack of capital. Since the
members of the society come from a limited area or class and usually have limited means, it is not
possible to collect huge capital from them. Again, government’s assistance is often inadequate for
them.
(b) Lack of Managerial Expertise: The Managing Committee of a cooperative society is not always
able to manage the society in an effective and efficient way due to lack of managerial expertise.
Again due to lack of funds they are also not able to derive the benefits of professional management.
(c) Less Motivation: Since the rate of return on capital investment is less, the members do not
always feel involved in the affairs of the society.
(d) Lack of Interest: Once the first wave of enthusiasm to start and run the business is exhausted,
intrigue and factionalism arise among members. This makes the cooperative lifeless and inactive.
(e) Corruption: Inspite of government’s regulation and periodical audit of the accounts of the
cooperative society, the corrupt practices in the management cannot be completely ignored.

SUITABILITY OF COOPERATIVE SOCIETY

You have already learnt that cooperative society form of business organisations is a voluntary
association of person who are not financially strong and cannot stand on their own legs to start and
run the business individually. So to solve the common problem or to meet the common requirements
this form of business organisation is most suitable. Thus, people can join hands to get the consumer
products, to build residential houses, for marketing the products, to provide loans and advances etc.
This form of business organisation is generally suitable for small and medium size business
operation.

FORMATION OF COOPERATIVE SOCIETY

A cooperative society can be formed as per the provisions of the Cooperative Societies Act, 1912, or
under the Cooperative Societies Acts of the respective states. The various common requirements
prescribed for registration of a cooperative society are as follows:

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(a) There must be at least ten persons having common economic interest and must be capable of
entering into contract. For multi-state cooperative societies at least 50 individual members from each
state should be present.
(b) A suitable name should be proposed for the society.
(c) The draft bye-laws of the society should be prepared.
(d) After completing the above formalities, the society should go for its registration.
(e) For registration, application in prescribed form should be made to the Registrar of Cooperative
Societies of the state in which the society is to be formed.
(f) The application for registration shall be accompanied by four copies of the proposed bye-laws of
the society.
(g) The application must be signed by every member of the society.
(h) After scrutinising of the application and the bye-laws, the registrar issues the registration
certificate.
(i) The society can start its operation after getting the certificate of registration.

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