B.Com.(Prog.

) Semester-I Commerce

CORE COURSE - II
BUSINESS ORGANISATION AND MANAGEMENT
Additional Material - UNIT I-II

SCHOOL OF OPEN LEARNING

University of Delhi

Department of Commerce
Dr. Sneh Chawla
 Unit-I

FORMS OF OWNERSHIP ORGANISATIONS

One of the basic question to be decided by any entrepreneur is that of ownership of the
organisation. He has to decide whether he would like to organise the entire show
individually or associate other people in his venture. Accordingly it may take the form of
individual proprietorship organisation or an association of persons. An association of
persons may take the following important forms:
1. Sole Proprietorship
2. Partnership
3. Joint Stock Company
4. Co-operative Society
In addition to the above four forms, another form of organisation called as Joint Hindu
Family form exists in our country but its number is decreasing day by day.
An enterprise can be owned only by any one type and one form is more suitable than
the other because of its distinguishing features. Before taking the final decision in setting up
a business in the private sector, a businessman has to weight the distinguishing features of
each form of organisation according to the requirements of the venture proposed to be
established. Now we shall discuss the distinguishing features of different forms of business
organisations.

SOLE PROPRIETORSHIP
Meaning
A sole individual single proprietorship business is a form of organisation in which an
individual produces independently with his own capital (or sometime borrowed from
relatives and friends), skill and intelligence and is entitled to receive all the profits and
assumes all the risks of ownership, He may run the business all alone or with the help of his
family members and some employees.
Historically, this form of organisation is the oldest form of business ownership. It is
also the simplest and most natural. The proprietor carries on the business exclusively by and
for himself. He invests his own capital and is thus the owner manager of the business; the
full control rests with him. He is the supreme judge on all matters pertaining to it as he
makes his own decisions. He bears the entire risk, but derives the total benefit. He has
unlimited freedom of action. He may engage in any business of his choice without any legal
formalities, unless he wishes to engage in certain types of business requiring licenses. For
example, if a man wishes to open a shop, a grocery store, he may do so, if he can find a
suitable location and can furnish money to produce a supply of goods on the other hand, to
open a restaurant, he will have to obtain a license from the Health Department of the

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Municipal Corporation. As his capital is limited and his liability unlimited, a sole proprietor
can only run a small business.
Characteristics
To sum up, single proprietorship form of organisation may be said to possess the
following main characteristics.
1. One-man or single ownership.
2. Proprietor and the firm identical.
3. Personal control.
4. Unlimited liability
5. Total or undivided risk.
6. Relatively free from government regulations.
Because of its special features, single proprietorship form of organisation is suitable
for, and is adopted by enterprises:
(a) Which are small in size;
(b) Which require little capital;
(c) Which lend themselves readily to control add management by one man;
(d) Where risk involved is not heavy;
(e) Where personal attention to customers need and tastes is important.
Consequently, the main types of business that take the form of sole proprietorship are
retailers, hawkers, small grocery stores, bakers confectioners, launders, small printing
houses, small machine shops, and thousands of similar enterprises, and professional firms.

Advantages of Sole Proprietorship

The principal advantages of sole proprietorship organisation are as follows:
1. An individual enterprise is easy to form and simple to run. No legal formalities like
registration are required to set it up. Any person can engage in such a business at
will. The only, restriction is where he wishes to start a specified type of business
requiring a license, such as a restaurant, or sell opium , liquor, medicines, etc.
2. The direct touch with customers and personal interest in the business which makes
for efficiency and economy. A sole trader is in a position to be in close touch with
his customers and to cater for their individual tastes. This helps him to build up
goodwill for himself. The direct relationship between effort and reward acts as a
stimules to maximum exertion for a sole proprietor.
3. As the sole proprietor is the sole master of his business his control over it is
complete. He is responsible to no one else.
4. Promptness in taking decisions makes for efficiency. As there is no one else to
dispute his judgement, he can maintain a decision made by him.
5. As the proprietor has the full control over his business and is the supreme judge in
all matters he can introduce changes as the exigencies of occasion demand, and
without any delay.

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 6. Secrecy is of vital importance for the success of a small business, and the sole
proprietor is in an eminent position to keep his affairs to himself. As there is no
legal obligations to supply any information regarding his business to anyone so he
can maintain utmost secrecy in all matters.
7. The social advantage is also great. This form of organisation provides a way of life
for those who take pride in ownership and control of what they own. It gives the
sole proprietor an opportunity to utilize his capacity to the maximum and to enjoy
freedom of action. As he is his own master and manager, he derives the greatest
satisfaction from his venture.

Limitations of sole proprietorship

Despite so many advantages, this form of organisation suffers from several limitations.
The limitations are as follows:
1. The first limitation is regards capital. The amount of capital that a sole proprietor
can get together is limited. He can invest only as much as he owns or may be able
to raise form friends and relatives. As a result, he is not in a positions easily expand
his business when it may be found necessary to take advantage or economics of
large-scale operation.
2. An individual howsoever capable, cannot be expected to possess knowledge in all
branches of a business and is bound to fritter or waste away his energies in doing
things which could be left to others in a partnership or a company. Since, he is not
an expert in all matters and the burden of responsibilities is likely to be more, his
decisions may sometime be unbalanced.
3. The liability of the owner is unlimited. It is not only the assets of the business that
are liable, but also his entire personal fortune for the debts of the business. The
advantage of personal control is counter balanced by personal risk which might turn
out to be very great. Limited capita and managerial ability and unlimited liability
act as brakes to the development and expansion of business.
4. Continuity of business is difficult to maintain. When the proprietor dies or is no
longer able to run the business, the business may come to an end, if there is no one
capable enough to take his place. Very often the heirs lack the requisite ability or
inclination to carry on the business. If it falls into weak hand, it will fail causing
loss not only to the owner but also to society. The closure of the business which has
been rendering a useful service to the community, would be a social loss.
In conclusion it may be safely stated that one man control of business is the best from
the point of view efficiency and profitability, provided that one man is big enough to
manage everything indefinitely. Unfortunately such omnipotent person does not exist. This
form of business is, therefore, suitable in the following cases:
(a) Where the capital required is small and the risk is not heavy.
(b) Where promptness in decision making is of particular importance.
(c) Where customers require personal attention.

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 (d) Where special attention has to be paid to the tastes and fashions of the customers.
It is but natural that household and personal service concerns retails shops and
professional firm are owned by individual proprietors. It follows that individual
proprietorship has its own scope of activity, and continues to occupy an important position
in the business world is spite of the development or larger organisations, such as joint stock
companies. In India, as elsewhere, single proprietorship businesses continue to be the most
numerous, in spite of the entry of large companies owning giant business concern. It is also
almost certain that individual proprietorship is in no danger of being crowded out by large
corporations, because of the opportunities it offers to a vast number of people. The
Government has also been encouraging individual owners to take up small manufacturing
activities by setting up industrial estates and by providing training facilities, as well as
granting financial assistance. The industrial Policy statement of the Central Government has
laid stress on encouraging cottage and small-scale industry widely dispersed in rural areas.

PARTNERSHIP ORGANISATION
The individual proprietorship organisation, with all its limitations, proved unequal to
the requirements of expanding business. Expansion of business called for more capital,
advanced the risk, and required greater managerial ability than could be expected of a single
individual. Therefore men of ability combined their resources and for this pooled their
resources; labour and skill partnership organisation resulted.
Historically, partnership organisation has grown out of the need for more capital to
produce for the ever-growing market, more effective supervision and control, greater
specialisation and division of spreading the risk. It is indeed the simplest method of
extending the size of a business and at the same time relieving the sole proprietor of part of
the burden.

Meaning of Partnership
The formation and management of partnership organisation is governed by the
provisions of the Partnership Act, 1932. Section 4 of the Act defines partnership: ‘The
relation between persons who have agreed to share profits of a business carried on by all or
any of them acting for all’. This definition brings out the following characteristics of
partnership:
1. Contractual relationship: Partnership can be formed only by a contract between
two or more persons called partners, Only persons competent to enter into a
contract can be partners. A minor cannot be a partner, although he may be admitted
to the benefits of partnership. Also, a Hindu Joint family Firm which results from
statute is not a partnership.
2. Plurality of Persons: As partnership results from a contract, there must be at least
two partners, although the maximum number of partners must not be more than
fifty.

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 3. Existence of Business: Partnership implies business, and where there is no
business there is no partnership. Thus, the persons must form an association by
contract to carry on some business.
The partnership Act, however, uses the term ‘Business’ in the widest sense, and
covers all sorts of enterprises. It includes very trade, occupation or profession.
4. Sharing of Profits: The agreement must be to make and share profits of a business
among all the partners.
5. Mutual agency: The business must be carried on by all the partners or any one or
more of them acting for all the partners. In results, each partner is both an agent and
a principal.
All these conditions must be satisfied to constitute partnership. There must be a
business and it must be run for sharing profits by the partners, all of whom, or some acting
for all, may carry it on. It should be noted that, although sharing of profits is essential in
order to be a partner, yet, merely sharing of profits does not necessarily make a person
partner in a firm. Thus, a manager, who may be given a share in the profits, does not
become a partner. The real test of whether a person is a partner is whether the business is
conducted on his behalf. In other words, there must be an element of agency.

Legal Implication of Partnership

Some of the legal implications of partnership, which should be kept in mind while
forming a partnership, are stated below:
1. Legal position: Legally a partnership firm is not a legal entity, nor a parson with
any separate right distinct from the partners constituting it. It is only an association
of persons who are called individually partners and collectively ‘a firm’. ‘Firm’ is
only a convenient phrases to describe the partners and has no legal existence apart
from them.
2. Extent of Liability: The liability of each partner for the debts of the firm is
unlimited. The creditors have a right to recover the firms’ debts from the private
property of any or all partners, where the firms’ assets are insufficient.
3. Nature of partners’ liability: While the acts of the partnership are in the name of
the firm, the responsibility created is joint as well as several resting upon each of
the partner. No agreement between the partners to limit this liability only to some
of them has any validity as against the claims of any uninformed parties.
4. Utmost good faith: The relation of partners is founded on mutual confidence and
trust. Each partner must, therefore, be just and honest towards the other partners.
He must not make secret profits.
5. Implied authority: Each partner is an agent able to bind the other partners in
respect of all regular acts done by him on behalf and in the name of the firm. Such
an act of a partner is deemed to be the act of the firm (i.e., the act of all the
partners). This authority of a partner is called an Implied authority to bind all the
partners.

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 6. Unanimity of consent: In all matters of importance and those affecting policy and
nature of the business, unanimous decision by all the partners is necessary. The
majority principle does not apply.
7. Non-transferability of share or interest: No one is allowed to transfer his
partnership interest to any outsider, so as to make him a partner is the business. The
majority principle does not apply.
8. Dissolution: Unless there is an agreement to the contrary, the death or insolvency
of partner dissolves the firm. If, however, all the partners or all but one are
adjudicated as insolvent, or the business of the firm become unlawful, the firm is
compulsorily and automatically dissolved.

Chief Features of Partnership

The distinguishing features of partnership organisation are as follows:
1. Formation: Although a partnership constituted by means of contract between the
partners, no legal formalities are required for its formation. An oral contract is
sufficient to bring it into being. But it is advisable to reduce the agreement into
writing, and prepare al properly drafted deed of partnership laying down the terms
and conditions of partnership and the rights, obligations and duties of partners. As
partnership arises by an agreement, a partnership firm must have a minimum of two
partners. The maximum is ten for a banking business and fifty for other business.
Registration of a partnership firm is not compulsory under our law, nor is any
penalty provided for non-registration. The law, however, introduces certain
disabilities, which make registration necessary at one time or other. The first
disability is that an unregistered firm cannot file a suit to enforce a right arising
from a contract. Secondly, a partner cannot sue the firm or other partners to enforce
a right arising from a contract or conferred by the Partnership Act. But an outsider
can sue an unregistered firm and its partners.
2. Finances: Normally, the capital of partnership firm consists of the amounts
contributed by the various partners. The capital contribution by all the partners need
not be equal, and one or more may not put in any capital at all. Such partners would
only contributor their skill and labour. The initial capital may be augmented by
borrowing on the security of the security of the firms’ property and also on the
strength of the private estate of partners.
3. Control: As partnership results from a contract, the control will depend upon its
terms as agreed between the partners. Where all partners take active part in the
conduct of the partnership business, the control rests with all of them. All major
decisions are made by the unanimous consent of all the partners. There may,
however, be some partners who do not take any active part in the conduct of the
business, they are known as sleeping or dormant partners. In short, the control is
shared by the active or ostensible partners.

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 4. Management: According to law every partner has a right to take a part in the
management of the affairs of the business of the firm. In practice, partnership
agreement provides for the division of work among the different partners according
to their experience and knowledge. It is not unusual to have one of them as the
senior partner who would be in the position of the chief executive, exercising over
all supervision.
5. Joint ownership: Every partner is a joint owner of the partnership property, and
has an equal share in it, unless different shares are provided by agreement. The
property of the firm is required to be used exclusive for the purposes of the
partnership.
6. Duration of Partnership: The partners may fix the duration of the partnership or
say nothing about it. When they agree to carry on business for a definite period of
time, it is called a partnership for a fixed term. When the term is over, the
partnership comes to an end, but if the business is continued after the expiry of the
period originally fixed the renewed partnership will become a Partnership at will.
Where a partnership formed for a particular adventure, it is called a Particular
partnership which would last until the business is finished. If the partners say
nothing about the duration or agree to carry on the business as long as they wish to
do so, the partnership will be one at will. Such a partnership can be dissolved at the
will of any partner on his giving a notice to the partner. Where the partner cannot
agree for the firm, the court may, on application order its dissolution.
7. Taxation: A partnership firm is liable to pay income tax and other taxes, as an
individual is liable to pay. But there is slight difference with regard to the rate of
tax depending on whether the firm is registered under the income tax Act or not. If
it is under the income tax act, the income will be divided among the partners and
each partner will be assessed separately. If the firm is not so registered, the firm
will be required to pay on its total profit as distinct from the incomes of the
individual partners.

Requisites of an Ideal Partnership

Partnership business grows out of the need for combining resources, both human and
material. Some person may contribute capital, others their business ability and experience
and still others may bring in technical skill the faithful contribution of each partner will
make it successful. Mutual confidence and utmost good faith are essential. As each partner
is the agent of the others and binds them to the fullest extent of their fortunes, it is necessary
to be extremely careful while selecting a partner. When you are considering a partner, do
not be in a hurry. Give yourself time to test him. Very often firms fail, because the partners
cannot work in harmony. An ideal Partnership will satisfy the following conditions or
requisites:

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 1. All partners must act with zealous cooperation and for the greatest common
advantage. Each partner must contribute to the success of the business in
accordance with his skill, knowledge, influence and personality.
2. Honesty of purpose and fairness in dealings are the fundamental principles of
partnership. Each partner must create mutual trust and confidence among
themselves. Only such persons as are known to one another should form
partnership. The number of partners should also be kept small; otherwise, the
partnership will become unwieldy.
3. The necessary funds, both for short term and long-term use should be available in
sufficient amount. Long-term funds would normally be supplied by the partners as
their capital contributions, and others might be obtained by way of loans. To
maintain the sound financial position of the firm, drawings by the partners should
be kept as low as possible. Part of the profit should be ploughed back into the
business of the firm for further development.
4. The term or duration of partnership should be sufficiently long. Only long-term
partnerships can adequately set up businesses and consolidate them effectively for
success.
5. In order to avoid misunderstandings and future disputes it is advisable that mutual
rights and obligations of partners be incorporated into a partnership deed. It should
contain full details about capital, sharing of profits, extent of authority of each
partner and so on.
6. The partnership firm should be registered with the Registrar of firms as soon after
the formation is possible. An unregistered firm suffers from a number of
disabilities, which may cause unnecessary loss to the firm.

Evaluation
Partnership organisation is admirable for medium size undertakings, where personal
efforts of the owners are essential. It enjoys several of the advantages of sole proprietorship
organisation and suffers from its limitations. We may, however, consider here the
advantages and disadvantages of partnership organisation.

Advantages
Partnership organisation enjoys the following advantages:
1. Facility of formation: Like an individual enterprise, partnership can be formed
without any legal formality and much expense. It can also be dissolved in the same
way. Partnership taxes are also relatively small.
2. Benefits of larger resources: Partnership enjoys larger resources than a sole
proprietor, so that the scale of operation is large and economies of large scale
production enjoyed. There is always scope for the introduction of new talent and
further capital.

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 3. Flexibility: The business is abundantly mobile and elastic, as it is free from legal
restrictions on its activities. The partners can introduce any changes they consider
necessary to meet the changed circumstances.
4. Personal element: The personal element in the business and the corresponding
care, skill, efficiency and economy are ensured. There is thus an effective
motivation to production. As the partners manage personally their supervision is
effective.
5. Benefits of combined ability: Partnership enjoys the benefits of combined ability
of it’s a partners processing varying degrees of talent and skills. This is a distinct
advantage over sole proprietorship. Two heads are better than one is an old saying.
6. Prompt decisions: The partners exercise joint responsibility and meet frequently.
This enables to make decisions promptly.
7. Sharing of risk: Any losses sustained by the firm will be shared by all the partners
with the result that the burden borne by each partner will be much less than what a
sole proprietor may have to bear.
8. Wholesome effect of unlimited liability: The fact that the liability of the partners
unlimited and each partner is liable to the full extent of his private fortune acts as a
great check against dangerous speculation. This is a great safeguard against
reckless actions. Unlimited liability also enhances the credit of the firm in the eyes
of the leading public and thus enables it to borrow easily at a low rate of interest.
9. Protection of minority interests: The minority interest in a partnership is
effectively protected by law. In matters of policy all partners must agree; and even
in ordinary affairs of routine nature a dissatisfied partner may withdraw and
dissolve the firm. Thus, in all important matters, the minority enjoys the right of the
veto. In fact, the law gives every partner the right to be heard and consulted. In
consequence, each member of the firm is equally important.

Disadvantages
Despite several advantages, the partnership form of organisation suffers from the
following limitations:
1. Lack of harmony: There is always a danger of friction within the firm. Difference
of opinion very often results in disharmony and lack of united management. This
ultimately results in disruption and dissolution.
2. Limited resources: The limit in the number of partners limits the amount of capital
that can be raised. Actually, in order to maintain harmony among the partners, the
number has to be kept much smaller than the maximum allowed by the law, five
partners should ordinarily constitute a partnership. This obviously limits the capital
still further.
3. Registered enterprises: As unlimited liability extends to the entire fortune of each
partner, the partners tend to be the overcautious. This restricts enterprise.

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 Consequently, partnership organisation tends to be useful only for comparatively
small business.
4. Instability: the business may come to an abrupt end on the death or insolvency of
any partner.
5. Social loss: such an abrupt closure of business is harmful not only to its owners,
but to society, particularly if it has been successful and contributing to the well
being of the community.
6. Lack of public confidence: The absence of legal regulations and the fact that there
is no publicity in regard to a partnerships affairs also reduces to some extent public
confidence.
7. Heavy burden through implied authority: Each partner as an agent, able to bind
the others by his acts and omissions in the ordinary and usual course of the business
of the firm. When, therefore, one partner is negligent, or commits a tort (civil
wrong), or is guilty of a fraud within the scope of his authority, his partners are
equally liable. This may put a heavy financial burden on the partners, which may,
in some cases, result in the total ruin of a person.

Conclusion
On balance, partnership form of organisation is most suitable where size of the business
is relatively small, and so the capital can be contributed by the partners themselves, it is an
organisation that can be adopted by men of equal wealth and ability who combine their
resources—capital, skill and labour—and run it for the common advantage of all the
partners.
But the very success of the business would create problems relating to expansion for
coping with the increased demand for the goods. In such a case, it would be necessary to
convert the business into a limited company and collect funds from the public and take
advantage of limited liability.

JOINT HINDU FAMILY FIRM

Joint Hindu Family Firm is a form of business organization existing in India alone. It is
a product of Hindu Law and Hindu customs. After the death of a Hindu businessman, his
business passes into the hands of living male issues who are known as co-parceners and the
firm owned by Co-parencers is known as Joint Hindu Family Firm. Thus a Joint Hindu
Family business comes into existence by operation of law. If the business set up by a person
is carried on by the male members of his family after his demise or death, it is a case of
Joint Hindu Family Firm.
The membership of J.H.F. is by birth under the Mitakshara Law but under the
Dayabhaga Law the male heirs become members only (on the death of their father. Under
the Mitakshara Law (which does not apply to West Bengal) only male members can become
members, the wife of a Co-parcencer is entitled to a maintenance out of her husband’s share
of profit. But under the Dayabhaga Law (applicable in West Bengal,) the window of a co-

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parcener becomes the member. An outsider can be a servant in the firm but he can never
become a member.
The management of a J.H.F. rests with the head of the family who is called as Karta.
The liability of the Karta is unlimited but the liability of other members is limited to the
extent of their share in the business. A J.H.F. can enter into partnership with others. The
death of a coparcener does not dissolve the J.H.F. Its dissolution is possible only through a
mutual agreement but the male adult member can ask for the partition of the property of
J.H.F.
Distinction between Joint Hindu Family Firm and Partnership Firm
1. Joint Hindu Family Firms exist in India alone because it is a creation of Hindu
Law. It is not created by any contract between the co-parceners but it is created
simply by operation of law. Partnership is always created by a contract between
the partners and is governed by the Partnership Act.
2. Under the Partnership Act, the firm and partners are one and the same thing
because the liability of partners is unlimited. In J.H.F: the members are just the co-
owners of the property and business.
3. There is no limit on the number of members in a J.H.F. because the number of
members varies according to birth and death in the family. But in a Partnership
firm, the number of members cannot exceed 10 in case of banking business and 50
in case of any other business.
4. J.H.F. enjoys continuity because it need not be dissolved by the death, insolvency
or lunacy of a co-parcener as incase of a Partnership firm. So long, the partition in
the family does not take place it continues to exist.
5. A partner can take active part in the management of the partnership firm and he
has an implied authority to bind the firm. But in a J.H.F. it is only karta who has
got this authority.
6. A partnership must be registered so that it could enforce its right against third
parties but there is no such need in case of J.H.F.
7. The liability of all the partners in a partnership firm is unlimited but in a J.H.F. the
liability of Co-parceners except the karta is limited.
8. Partners share profits of the firm in a fixed ratio but in a J.H.F. the share of profits
varies according to births and deaths in the family.
9. Partners can ask for the amounts of the partnership firm but the co-parceners
cannot ask for the accounts of the J.H.F.
10. J.H.F. can enter into partnership with another firm but a partnership firm cannot
enter into partnership with another firm.

COMPANY FORM OF ORGANISATION (Joint Stock Company)

As a result of industrial revolution, huge funds of capital were required to make the
best use of technical lot of capital innovations. Individual proprietorship could not supply
such huge capital or if someone could they did not like to risk their capital in new ventures.

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Therefore, it became imperative to have another form of organization through which large
sums of money could be amassed from large number of people who are either not capable
of managing business enterprises or have no time or inclination to do so. They are, however,
willing to invest their saving in a business provided they are assured that their money is safe
and they will not be called upon to pay anything more than what they undertake to invest to
earn a reasonable return. This form suitable to serve these purposes was found to be a
limited company. The form enables the enterprises to secure the required capital from the
general public, retaining at the same time, the management of the business in their hands.
Thus we can say that company form of business organization came into existence because
of the growing needs of industry after industrial revolution and the failure of the existing
forms of business organisation to feed the continuously increasing needs of funds by the
large sized industry.
Accordingly, the fundamental principal of company form of organisation is that the
capital of undertaking is contributed by a large group of people called the shareholders, who
exercise control over the company through the directors elected by them in general body
meetings. The Board of Directors look after the management of company, take vital policy
decisions and exercise their control through the General and Departmental Managers. Since
the management is entrusted to people who have keen insight into business and large
amount of funds can be collected from a large number of people, company form of
organization is suited to large scale production. In fact, most of the shortcoming of single
proprietorship and partnership firms of organization can be overcome by organizing a
business as a joint stock company with limited liability.

Meaning and Characteristics

A company is a voluntary association of persons for profit with capital divisible into
transferable shares, limited liability, corporate body with perpetual succession and having a
common seal. An analysis of this definition will bring out the principal characteristics of
company.
1. Creation of law: A company is a creation of law, and is sometime called artificial
legal person. It exists only in contemplation of law and therefore has no physical shape or
form. Although invisible, and intangible it enjoys almost all the rights of a natural person. It
can enter into contracts and own property. It can sue and be sued. The legal personality is
one of its distinctive features.
2. Separate and distinct legal entity: Being a creature of law, a company is a legal
entity, something distinct from the persons who are its members. The life of the company is
independent of the life of its members. Even if all the members die, the company does not
come to an end. A member can both own its shares and be its creditor at the same time.
Such a member cannot be said to be a creditor himself, but he is a creditor of the company
which has its own independent personality. A member can also be an employee of the
company. A shareholder cannot be hence liable for the acts of the company, even though he
holds virtually the entire capital of it. It enjoy all the privileges of a natural person. It can

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sue in court of law and it can be sued but a company cannot be citizen hence it cannot caste
vote.
3. Perpetual succession: The process of incorporation brings into being a corporate
body distinct and separate from the members who constitute it. The right given to the
shareholder to transfer their shares without affecting in any manner the position of the
company gives the company continuity. As a natural consequence of corporation and
transferability of shares, the company has perpetual or uninterrupted existence. It continues
to exist without regard to the death of the individuals involved in its corporate affairs or the
transfer by them of their interests in the company. Members may come and members may
go, but of immortality, inasmuch as its members change from time to time without affecting
its existence.
4. Limited Liability: The limited liability of the shareholders is another important
characteristic of a company. A person, by buying shares in a company acquires an interest
in it, and is at liberty to dispose of these shares whenever he likes. If anything goes wrong
with the company, his liability is limited by the nominal amount of the shares held by him.
In other words, while he stands to lose the money he has invested, he cannot be called upon
to pay single paisa out of his private property in order to help to meet the company’s
obligations.
5. Common Seal: The law requires every company to have a seal with its name
engraved on it. As the company has no physical form or shape, it cannot sign its name on a
document. Therefore, originally, all documents and contracts required the affixing of the
seal known as common seal. But now most of the transactions are signed by the directors
who act as its agents. For instance it is compulsory to affix the common seal on share
certificate and debentures.
6. Divorce between Ownership and Management: The personality of the company is
separate from the personalities of the persons constituting it. Therefore, the shareholders can
not bind the company by their acts. Since the investors of share capital are a heterogeneous
group of people residing far and wide, they cannot be expected to manage the affairs of the
company. They leave this task of their representatives—the Board of Directors. This
characteristic of a company militates against the golden rule of capitalism that management
and ownership should vest in the same person. Shareholders are the real owners of a joint
stock company. They elect directors for the management of company. But the elected
directors either may not have sufficient time to look into the affairs of a company or may
not have the requisite specialization, so they appoint professional managers. Though
shareholders are the owners but the ultimate management lies in the hands of hired
employees thus there is divorce between ownership and management.
The chief implications of the foregoing analytical description of the company may be
summed up as follows:
(a) A company is a voluntary association of mutually agreeing persons.
(b) It is an autonomous legal unit distinct from its associating members in name, in the
duration of its life and the liability to creditors.

13
 (c) It exists because the State has by statute enabled it to exist as a separate legal
entity enjoying similar rights as owing similar obligations as a natural person.

Chief Features of Company Form of Organisation

The principal and distinguishing features of a company form of organisation are as
follows:
1. Formation: Since corporate life and form cannot exists without the permission of
the State, a company having corporate personality, can be brought into being only
by following certain formalities as provided by the law. The formation of a
company is passes through two main stages viz., Promotion and Incorporation.
Promotion consists of process of conceiving an idea and developing it into a
concrete proposition project to be accomplished by the incorporation and
floatation of a company. The person or persons, known as Promoters, take the
necessary steps to accomplish these objectives. They discover the opportunities to
make money; investigate the propositions, assemble and finance them and thereby
produce a going concern. To prepare the two fundamental documents, namely the
Memorandum of Association and the Articles of Association, and get them
registered with the Registrar of Companies, on payment of the necessary stamp
duty and the registration fee. The Registrar, being satisfied that all that is required
to be done under the law has been done, registers the company and issue a
Certificate of Incorporation in token of the birth of the Company.
2. Financing: Where the capital needs are not vast and it is desired to preserve
secrecy and family character of the business, but enjoy the benefit of limited
liability, a private limited company is formed and the general public is invited
through a prospectus to supply the capital.
3. Control: In law and theory, the members of company, who contribute the share
capital, has the ultimate control of company’s affairs. Every company is required
to hold an annual general meeting at which the shareholders are supposed to
exercise their power of control. In practice, however, the control lies with the
‘management’ or the ‘inside group’. But the board of directors is required to
prepare and present at the meeting its annual report as also the annual audited
accounts, for the consideration of the share holders present at the meeting. The
effective control is exercised by the board of directors as the representatives of the
members and as agent of the company.
4. Management: Since the risk-bearing shareholders are widely scattered, and do
not, in most cases, have the time, or knowledge of business, the management of
the company has to be entrusted to the board of directors. The Companies Act also
states that the Board of Directors is entitled to exercise all such powers as the
company in general meeting can exercise.
Thus, the directors are the exclusive representative of the shareholders, and are
charged with the administration of the affairs of the company and the use of its

14
 assets. The directors of the company lay down the objects and frame the policies
and secure their implementation by the managerial personnel right from the Chief
Executive to the first-line supervisors. It could be noted that the shareholders are
the risk-bearers, but the directors are the risk takers.
5. Duration: A company comes into being through a process other than natural birth,
and so possesses the property of immortality. Thus, it is said to have perpetual
existence. Its life is not affected or interrupted by the death or insolvency or
withdrawal of any member. It continues to exist even if all its members die or
adjudicated insolvent. This capacity of perpetual succession ensure its continuity.
Members may come and members may go, but the company goes on undisturbed
until dissolved by a process of law. Also, a shareholders cannot get back his
money from the company. This is provided for to save the company from
disintegration. In all these respects company form of organization is superior to
partnership and sale-proprietorship organisations.
6. Taxation: In a large number of situations the tax burden on Companies are
heavier than those on partnerships. For example, a company’s profits are taxed at a
flat rate as against slab rates in case or unincorporated associations, e.g.,
partnerships. In other words, the rate or income tax in the case of a company
remains the same no matter whether its profits are large or small. On the other
hand, sole proprietorship business or partnership firm will be taxed at progressive
rates, going up with the increase in profits.

Distinction between a Company and Partnership Firm

The nature of company organization can be better understood by comparing it with a
partnership. The principal points of distinction between a company and a partnership are as
follows:
1. Formation: A company is formed by registration under the Companies Act or
incorporated by an act of legislature. In other words, registration or incorporation
by a special statute is essential to form a company. A partnership need not be
registered, although registration on voluntary basis is provided for.
2. Corporate Personality: A partnership is an association of persons who have
agreed to carry on some business for sharing profits. The partnership form is no
way distinct from partners who constitute it. In other words, apart from the
partners, the firm has no independent or separate legal existence. Since a
partnership firm is not a legal entity, the partners and the firm are one and the same.
The company, on the other hand is a legal entity possessing its corporate
personality, separate and distinct from the members who constitute it. It acts in its
own name and has legal rights.
3. Management: The shareholders, who contribute the capital, do not as
shareholders; manage the affairs of a company. They entrust it to their
representatives, i.e., the Board of Directors. In partnership, ever partner is entitled

15
 to take part in the management of the firm’s business, and the firm is bound by the
acts of partners but a company is not bound by the acts or shareholders.
4. Business and Profits: A partnership can be formed only for carrying on some
business or profession with a view to making and distributing profit among
partners. There can be no partnership if the object is not a carry on business and
share its profits. A company can however, be formed for purposes other than
carrying on any business or for sharing of profits by its members. For example, a
company can be registered under section 25 of the Companies act, 1956, for
promoting commerce, art, since, religion, or any useful object. Such company may
make some profit but this has to be utilized for the promotion of its objects and not
distributed amount its members as dividend.
5. Liability of Members: The liability of shareholders of a company is limited so that
no shareholder can be called upon to pay more than nominal value of the shares
held by him. The liability of partners is unlimited. It is joint and several, to pay the
debts of the firm.
6. Number of Members: A private limited company can have maximum number of
200 members and there is no limit to maximum number in the case of a public
company. A partnership form cannot have more than 50 partners (10 in case it
carries on banking business).
7. Transferability of Shares: The shares in a company are transferable, with the
result that shareholders keep on changing. A partner cannot transfer his share and
interest in the partnership business without the consent of all other partners.
8. Continuity of Existence: A company has perpetual succession or continuous
existence. The death or insolvency of any or all the shareholders does not effect the
life of the company, as it has separate and distinct entity from the life to its
members. But the partnership comes to an end on death or insolvency of a partner.
9. Capital Requirements: A company raises its capital from the saving of a large
number of people, usually in small amount of 50 shares because the shares are of
the nominal value of 10 or 100 and a person can apply for a minimum of 50 or 5
shares. A partnership has to depend upon the resources of the partners. It may
borrow from banks or individuals. But it cannot issue debentures to the public,
which can be issued by a company, the resources at the command of a company are
larger than those at the disposal of a partnership firm.
10. Audit of Account: A company is required by the law to have it accounts audited
once in a year by a Chartered Accountant practicing in India. No such obligation is
placed on a partnership firm.
11. Change of Objects: The objects and powers of a company are set out in its
memorandum of Association and so is its authorized capital. Any alteration in
Memorandum for changing the objects can be made by passing special resolution in
general body meeting and with the sanction of the Company Law Board and for

16
 reduction of share capital with the sanction of the court. But the partners can make
any changes in their partnership agreement, as and when they like.
12. Majority Rule: In the case of a company, decisions are taken by a majority rule
that does not hold good in all policy and other important matters. Unity in
partnership, being rule, all partners must agree in all important matters.
13. Statutory Control: Right from its inception, a company is subject to numerous and
varied statutory requirements. It is subjected to vigorous control by the Government
throughout its existence. A partnership firm, through governed by a statute, is left
relatively free from State control and statutory regulations.

Classes of Companies
(a) Private Companies: A private company is one, which by its articles:
(i) restricts the right to transfer its shares.
(ii) limits the number of its members to 200, excluding employee members and ex-
employee members.
(iii) prohibits any invitation to the public for subscription to its shares or
debentures.
A private company must always comply with these restrictions. A violation of any of
these restrictions will make the company a public company.
The minimum number of members to form a private company is two. By definition, a
company which is not a private company is a public company. The minimum number of
members for a public company is seven, but there is no limit to the maximum number.
A private company suits the need of those who which to take advantage of limited
liability and at the same time keep the business as private as possible, maintaining its
secrecy. It is in some respects like a partnership. The shares are not freely transferable nor
can share warrants be issued by it. In this way the members of a private company like
partners are in a position to maintain personal contact and secrecy in business. A private
company, therefore, combines the advantages of limited liability and the facilities of the
partnership organisation.
Because of the special features of private company and many privileges enjoyed by it is
a common practice with businessman to convert their family business into private limited
companies, and enjoy, the double advantage of retaining privacy as regards internal affairs
and limiting their liabilities. Then, as and when need arises, they convert the private
company into a public company by simply altering the Articles of Association by special
resolution.
(b) Public Company: The Companies Act defines a public company as a company
which is not a private company. A public company is a company the membership of which
is open to the general public under the provision of its articles. The minimum number
required to form it is seven, but there is not limit to maximum number. It invites the
members of the public through a prospectus. It does not impose any of the restrictions
required in the case of a private company, and any person competent to contract can become

17
its member. However, it is subject to much greater statutory control than a private company.
For example, it must allot its shares within 120 days of the issue of the prospectus, but only
if the “Minimum Subscription” has been subscribed. It must have at least three directors and
can commence its business only after obtaining the Certificate to Commence Business. Its
managing director or manager can be appointed only with the approval of the Central
Government. The managerial remuneration can be paid with the approval of the said
Government. As a public company is in a position to raise vast amount of capital and can
raise huge sums, it is suitable for large-scale enterprise, whereas a private company would
be suitable for medium size businesses.

Evaluation
The company form of organization pervades the hole business world. Other form of
organization may out number it, but most business in transacted by companies. This is
possible because of the many advantages it enjoys over other forms of business
organizations.

Advantages
The principal advantages of the company form of organization are as follows:
1. Vast amount of capital: The outstanding advantage of the company is that is
allows the mobilization for production proposes of a vast amount of capital that
would otherwise might have little chance of being used. In a public company there
is no limit to the maximum number of its shareholders. Very large number of
people, who are otherwise busy, may, by buying shares in a company, acquire
interest in it without giving up their own vocations. As the shares can be bought in
small amounts, investors can divide their saving amongst a number of companies,
and thus reduce the overall risk.
The fact that the shares are easily transferable gives joint stock companies an
added advantage in attracting capital. This method of collecting capital from many
people, each of whom may have only a comparatively small amount gives the
company the use of much larger capital than can be collected by private business.
The later must depend mainly upon the financial resources of the proprietor in
facts, no business form is so well adopted to raising vast amounts of capital as the
joint stock company.
2. More scope for expansion: More capital funds at the disposal of company and the
ploughing back of company’s profits make possible for the business to expand.
Thus the company form of organization offers an excellent scope for self
generating growth.
3. Diffused risk: The risk of loss is spread over a large number of investors and the
possibility of hardship on a few persons as in the case of partnership and on an
individual in the case of single proprietorship is minimized. Large amount of
capital can be collected from far and wide from rich and poor. Because of diffused

18
 risk, limited liability and management in the hands of professional members, a
company can afford to take bold decisions and enter into entirely new business
ventures.
4. Democratization of ownership: The fact that relatively small amounts of capital
can be mobilized collectively results in democratization of ownership. While it,
enables all types of people, big and small, venture some and cautious, to become
part owners, it permits of the use of skill and initiative of the able entrepreneur, his
expert knowledge and business ability which would otherwise be lost to the
community.
5. Transferability of shares: A shareholder can at any time transfer his share to any
person who is willing to take them. The stock exchanges assist in the sale and
purchase of the shares. As the shares are readily transferable, a shareholder can
easily convert his holdings into cash. This facility coupled with the limited liability
has encouraged investment by the general public.
6. Stability: Company organization, we have already seen is a legal entity with
perpetual succession. Therefore, it may outline many generations of private
producers. The continuation of succession as a result of incorporation makes for
stability. This encourages experimentation for efficiency. The continuity is not
seriously affected by a change either in the management or the owners.
7. Organised intelligence: The power of capital is supplemented by organized
intelligence which makes for increased efficiency of direction and management.
The skills and flexibility of administration is increased as a result of limited
liability and the entity idea. The wisest and the most skilful directors may be
chosen; and anyone found indifferent or inefficient may be removed. The
company being independent of any single man, the organized intelligence of the
Board of Directors and the expertise of other top managers is available for sound
and bold policies.
8. Definite standing: The Company gives a definite standing and facilitates binding
actions through it agents. An outsider willingly deals with a company because he
knows the exact scope of its business and legal limits of its powers.
9. Limited Liability: The liability of members of a company is limited. He cannot
be called upon to pay anything more than the nominal value of the shares held by
him. When acquiring shares in a company, he knows the maximum loss he may
suffer if the company fails. This encourages people, even those with relatively
small savings, to invest money in a company, thus providing large amount of
capital for initial outlay and further expansion.
10. Special advantages: The greater advantage to society of the company
organization is to be found in its added encouragement of investment and the
possibility it affords of efficient direction of large-scale industry. The element of
stability is notably well cared for by the company. The compulsory publicity and
other regulations of companies are beneficial to the community, especially with

19
 regard to banking and Public Utility Company. The overhead costs unit per
incurred in the form of salaries paid to the managerial personnel comes to be low
vis-à-vis other form of organization. The company through mass production of
goods has succeeded in converting luxuries of yesterday into necessities of today.
Even people with low incomes have been enabled to possess things which they
could not have dreamt of owning.
11. Tax relief: A company pays income-tax as a separate large person at a flat rate
fixed by the Finance Act from year to year. In case of higher incomes this rate is
lower than · that charged in the case of sole traders and partners.

Disadvantages or Company Organization

In spite of so many advantages of company form of organization here are some
drawbacks of this form of organization. The principal disadvantages of company form of
organization are as follows:
1. Difficulty in formation: The legal formatives and procedures required in the
formation of a company are many. The cost involved is quite heavy. In addition to
the cost promotion and the preparation of necessary documents and payment of
commission to brokers and underwriters. At the time of floatation, heavy stamp
duty and registration fees have to be paid.
2. Incapable or fraudulent management: The company form of organization can
be used by dishonest promoters and fraudulent directors to cheat or overcharge the
ignorant public, in spite of many safeguards provided by company law.
3. Encouragement of reckless or careless speculation: The company form of
organisation encourages reckless speculation on the stock exchange. This is an evil
of greater magnitude in our country because in many cases the stock exchanges act
as “hush agencies” rather than an aid to sound investment or stability.
4. Waste and inefficiency associated with indirect management: Lac of personal
interest on the part of salaried managers is likely to lead to inefficiency and waste
as there is little individual initiative and personal responsibility. Motivation is less
direct than in sole proprietorship or partnership.
5. Clash of interests between members and management: The company form of
organisation does not promote or safeguard the interest of the shareholders.
Because of the separation of management from ownership, it is not the owners
who govern but a few who control and manage a company’s affairs. In other
words, a few govern but let the shareholders believe that they are the rulers. Thus,
in theory, the company form of organization seems to be democratic but in
practice, it is oligarchic. The interest of the minority shareholders are often in
jeopardy. This lack of identify of interests between the company (i.e., the
shareholders) and its management encourages financial manipulation and
speculation.

20
 6. Bureaucratic approach: A company form of organization does not enjoy the
same amount of flexibility and promptness of decisions as the single
proprietorship concerns or partnership firms do. The bureaucratic habit of the
company managements to discourage troublesome decisions often retards growth.
Decisions are further delayed, to some extent at least, when they have to be taken
at meetings, which are often far between.
7. Excessive regulation by law: The State that creates the company regulates its
activities much more closely than those of non-corporate bodies. A company and
its management have to function well within the law, and the provisions of the
Companies Act are quite complex and strict. At every step it is necessary to
comply with its provisions lest the company and it management might be
penalized. The penalties are quite heavy, and in several cases, officers in default
can be punished with imprisonment.
8. Social ill-effect of large Company: There are notable failings of big business
which necessarily flow from company form of organisation. These are summed up
as follows:
(a) The absence of responsibility to the shareholders for work done with his
wealth frequently leads to abuse, e.g., unsatisfactory working conditions and
exploitation of labour.
(b) A big business, to be successful must have a system of checks and counter
checks in each department. Such a system is necessarily wasteful of effort and
represses elasticity and initiative and encouragement to do work in a
mechanical manners.
(c) There is generally a tendency for company organizations to form themselves
into combinations exercising monopolistic powers which has a harmful effect
on other producers in the same line of to consumers of the commodity
produced.
(d) The company form of organization is conducive to concentration of wealth
and economic power to the loss of public interest.
(e) It encourages restrictive trade practices, which are against the interests of the
community.
From the social point of view the effects of company organization upon the distribution
of wealth are highly important. It his great potentialities both for good and evil. On the one
hand it might tend to diffuse wealth by encouraging widespread investment in small
amounts and the distribution of profits and interests of industry accordingly. On the other
hand it; might result in undemocratic concentration of wealth in the hands of a few
industrial dictators. Inequality in wealth distribution has been encouraged by joint stock
organization. However, considering good and bad points in the history of business units, no
finer instrument exist with which to meet the complex problems of modern enterprise. To
the large unit, company offers an easier way to finance itself by means of dividing its
ownership into many small portions that can be sold to a wide range of purchasers. Other

21
forms, which are suitable for small and medium enterprises, many outnumber it, but most of
the business in transacted by units of this type.

COOPERATIVE ORGANISATION
Why Cooperatives?
The primary aim of the business organization discussed so far is to earn profit. These
forms of organization may exploit the economical weaker sections of society. The
cooperative form of organization attempts to make the common man free from the
oppression or injustice of the economically strong people and organization. The philosophy
behind cooperatives is mutual assistance and service. The aim is at encouraging self-help on
the part of economically weaker sections of society by looking after their own affairs in
cooperation with one another. Thus, the principal theory of true cooperative organization is
the elimination of profit and the provision of goods and service to its members at a proper
price.
As a form of business organization, a cooperative is an enterprise ordinarily set up by
economically weaker section of society to achieve their common economic and social
interest, to eradicate capitalist exploitation, to eliminate middlemen, and to bring the
consumer and producer together. With these objectives in view, the consumer, belonging to
working and lower middle classes, combine either to produce goods themselves or to
purchase them collectively thus retaining for themselves some of the benefits usually
derived from business by capitalists. This joint effort on their part enables them to protect
their interests to some extent. The cooperative organization is democratic because the affair
are managed by member and each member has only one vote irrespective of his shares in
the co-operative society.
The term cooperative means working together. A cooperative enterprise means a
voluntary association of persons (usually of smaller means) joining together on equal basis
for promotion of certain economic and business interests.
The International Labour Organisation (I.L.O) defines a cooperative as “an association
of persons, usually of limited means who have voluntarily joined together to achieve a
common economic end through the formation of a democratically controlled business
organization, making equitable contributions of the capital required and accepting fair share
of risk and benefits of the undertaking.”
We may give our definition which contains the important auributes of cooperative
enterprise. A cooperative organization is a voluntary association—(i) with unrestricted
membership, and (ii) collectively owned funds, (iii) organized on democratic principles of
equality, (iv) by persons of moderate means and wants through mutual action, (v) in which
the motive of production and distribution is service rather than profit.

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Principal Characteristics
The foregoing definition reveal some of the features which are common to cooperative
society, a partnership firm and a company. But in addition to that as a form of business
organisation, a cooperative enterprise possesses the following special characteristics.
1. A cooperative society is a voluntary association: The membership of the society
is voluntary and to all persons having common interest. In other words, there is no
compulsion for any person to become a member nor can any person be denied the
right to become a member of the society. A member may leave a society by giving
due notice and withdraw his capital; but he cannot transfer his shares to another
person. The position of a shareholder of a company and member if a cooperative
society differs in this respect. As shareholder in a company can transfer his shares
to another person but he cannot take back his capital from the company by
surrendering his shares. A member of a cooperative society can get back his
capital but cannot transfer his shares to another person.
2. Its members enjoy equal voting rights: A cooperative society is a democratic
organization and so all its members have equal voice in the management of its
affairs. The rule is one member, one vote. Therefore, each member has one vote
regardless of the number of shares held by him. This rule is based upon the
principles of cooperation and equality which states that a rich man cannot be
allowed to exercise control because he is rich and can afford to hold a large
number of shares. In this respect also the cooperative organisation differs from a
company. In a company, the voting rights are governed by the amount of capital
invested by a member.
3. Its management is democratic: As a necessary consequence of the principal of
equality the management of cooperative society is essentially democratic. As a
rule, cooperative societies work on local basis, which enable almost all the
members to attend the meetings and elect their managing committees. Since each
member exercises an equal right with others, the managing committee is in the real
sense an elected body and must pay attention to the wishes of all member and not
only a section of them. In many cases, some or all the members may take part in
the day-to-day work of their society, and may appoint a manager from among
themselves. Of course, outsiders, will be appointed when the society grows in size.
4. A cooperative society is organized to render service to its members and not to
make profit at the cost of its members: If, for instance, a society produces a
product, it is mainly to supply to its members at a reasonable price. A consumers’
cooperative society is expected to supply goods first to its members and then to
outsiders at a reasonable profit.
5. Payment of surplus as bonus to members on purchases made by them:
Commercial concerns usually distribute their profits among their shareholders in
proportion to their capital contribution. But a cooperative society does not

23
 distribute its surplus as dividend among its shareholders in proportion to the
capital provided by them. The share capital is virtually treated as loan capital and a
moderate rate of interest (although called dividend) is allowed out of the surplus.
A portion of the balance is utilized for the general benefit of the members. A
portion may be paid as bonus to employees and workers. The rest of the net
surplus is distributed among members in proportion to their individual purchases
from the society. The non-member purchasers are not usually paid anything out of
the surplus, although there is no bar to such payment. A company earns the profits
and shareholder receive dividend, often at the cost of the consumers. In a
cooperative society the consumer is the one who is looked after.
6. Trading on cash basis: As a rule, cooperative societies conduct business on cash
basis and allow no credit. A member in need of money can get back part of his
capital, and re-invest when he can afford to do so. Since the members are normally
persons of small means, this principle helps both the member-buyers and the
society. The members do into incur debts and the society does not face the danger
of bad debts
7. State control and Registration: A cooperative society is required to be registered
under the Cooperative Society Act, 1912. On registration, it be becomes a
corporate body like an incorporated company, enjoying certain privileges and
subject to control and supervision of the Government.
A cooperative society must fulfill the following conditions in order to obtain
registration namely:
(a) It must have 10 adult members-i.e., those who have completed the age of 18 years.
(b) The members should be bound together by a common bond, e.g., they should
belong to the same village or locality, tribe or occupation, etc.
(c) The members should present a joint application to the Registrar of Cooperative
Societies furnishing required particulars, such as membership, share capital,
objects and powers, etc.
(d) A copy of the bye-laws and scheme of organization should be submitted to the
Registrar.
After registration the society comes under the supervision of the Registrar who keeps a
watch over its working. Every cooperative must have its annual accounts audited by an
auditor from the Cooperative Department and then submit returns, copies of audited
accounts and the annual report to the Registrar.

Type of Cooperatives
Cooperatives may be formed practically for any type of activity. Since we are
concerned mainly with those cooperatives which are engaged in some kind of business, only
business cooperatives are discussed here.
The principal types of business cooperatives are:
1. Producers’ Cooperatives.

24
 2. Consumers’ Cooperatives.
3. Marketing Cooperatives Societies.
4. Housing Cooperatives.
5. Cooperative Farming Societies.
Producers’ Cooperatives: One of the solutions of inadequate purchasing power is to
eliminate the class which controls production. i.e., to become your own producer or
manufacturer by organizing producers' cooperatives. They are also called industrial
Cooperatives. We have several sugar cooperatives in our country. The Producers
Cooperatives may be defined as voluntary associations of work people owning an
enterprises producing goods for their consumption and for sale at a profit in order to retain
the profits which would otherwise go to the capitalist, and by the application of the system
of co-partnership, to substitute an alternative method of labour remuneration instead of
wages.
The system provides a greater incentive to do one’s best because the division of interest
between the worker and employer is removed by combining the two-entities. The worker
becomes his own employer, Cooperative productive enterprises are best suited to trades and
industries where little capital is needed. Cooperative production activity should, therefore,
be confined to cottage and small scale industries. As stated above, cooperative sugar mills,
particularly in the South and West of India, have been fairly successful.
Consumer’s Cooperative: The objective of consumers’ cooperative is to eliminate the
middle man and to protect the interest of consumers. These cooperative are economic
enterprises set up by the consumers, mainly of moderate means, for the distribution of
goods of daily needs primarily among the members of the societies. These societies, have
no profit motive as they are formed by the consumers themselves. These societies buy
goods in bulk from wholesalers and sell to consumers are reasonable prices. The difference
is represented by the surplus which is distributed among the purchasing members in the
form of a bonus on purchases. This is the oldest form of cooperative organisation. In our
country, consumers’ cooperatives have received-good deal of impetus from the
Government, as they help to check rise in prices of consumer goods.
Marketing Cooperatives: In the field of agriculture these is great scope for
cooperation. The marketing cooperative sales societies are voluntary associations of
independent producers organised for the purpose of arranging for the sale of their produce.
The aim of the marketing cooperative or sales society is two-fold. One to secure a
remunerative price for produce, and secondly to make available a permanent and ready
market for the produce of the members. The marketing society collects the produce from
members, grades them and then sells at a remunerative price to the wholesale market. The
cash proceeds are distributed among the members according to the quantity pooled.
Housing Cooperative: Housing cooperatives are association of persons who are
interested either in securing the ownership of a house or obtain accommodation at
reasonable rent. Such societies are formed mostly in urban areas. Intending builders of
houses join together to form cooperatives of this kind. Such a society can secure for the

25
members, the economies of collective purchase of building materials, buildings and loans at
low rates of interest. There is much scope for such societies in India.
Cooperative Credit Societies: The cooperative credit societies are voluntary
associations of people with moderate means formed with the object of extending short-term
financial assistance to members and creating the habit of thrift among them. The funds of
these societies consist of share capital contributed by the members. The liability of members
is generally unlimited. This helps the society in raising additional funds from outside
sources and ensures that every member shows keen interest in the working of the society.
Normally, loans are granted for productive purposes, but the rate of interest charged is kept
as low as possible.
The credit societies may be either agricultural cooperative credit societies or non-
agricultural credit societies. The former generally confine the activities to their respective
villages. The non-agricultural credit societies are formed by city people of moderate or
limited means.
Cooperative farming Societies: The cooperative farming societies are basically
agricultural cooperatives formed with the object of reaping the benefits of large farming and
maximising agricultural output. Although these societies are advocated in countries like
India where because fragmentation of holding per acre production is low. Yet they have not
proved to be successful whatever they have been tried.
Miscellaneous societies: In addition to the more important types of cooperative stated
above, some other types are found in some parts of the world. Societies set up in rural areas
with the object of processing certain raw materials produced by the tillers of land to supply
to industries, are known as Processing Cooperatives. Cooperatives for processing cotton,
jute, paddy, sugarcane, oilseeds, fall under this category. Cooperative societies have also
been formed for fisheries, dairy farming, supply of sugar-cane, cold storage, etc.

Evaluation
As a form of organisation, the cooperative store offers the following advantages:
1. The consumer controls his own supplies, and cuts out the middleman’s profit.
2. He is saved of the loss common to retail trade, on speculative buying. The
ordinary shop has to rely on itself to judge whether there is a market for an article.
But the cooperative store knows what is required by the members.
3. There is no need to have surplus stock at hand as the demand is constant and
regular.
4. Some of the expenses of management are saved by the voluntary service of the
controlling committee. It is possible to get even a paid manager at a lower salary
as a result of the ideal of cooperation.
5. There is a complete integration between the manufacturer, wholesaler and the
retailer and thus they have clear advantage over capitalistic enterprise.

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 6. A cooperative store has its regular customers and therefore it does not have to
incur expenses on publicity which is a big item in the budget of the capitalistic
manufacturer.
7. There is no profit for any special class of investors which tends to equalise the
distribution of wealth.
8. The payment of part of profits as bonus on purchases proves to be better than other
methods and ties the members to the organisation. The capitalists have tried to
copy this by issuing gift coupons or giving away small items free with purchases.
9. Above all, they are more than a mere device for getting necessities cheaper. They
have a social value of increasing welfare. They provide a school of self-
government for a class that has difficulty in getting it elsewhere. The movement
has done a great service to the workers and people with reasonable means.
10. The movement has also done a great service by removing inefficient capitalist
shop from localities where cooperatives stores have been established.
11. From the organisation point of view, a cooperative enjoys some more advantages
such as:
(a) The registration of a cooperative society is relatively simple. Any ten people
can register it without any elaborate legal formalities.
(b) As the members of a cooperative society belong to a particular locality, office
or group and they enjoin together with the common goal of co-operation for
business, the problems of coordination are not that grave as in other forms or
organisations.
(c) After giving dividend, the balance of the surplus earned can be utilised for the
growth and expansion of the business of the society.
(d) The life of a cooperative society like that of an incorporated company is
independent of the lives of its members.
(e) The law gives preferential treatment to cooperatives in respect of income tax.
(f) Since cooperation is an instrument of the socio-economic policy of the
Government, the State extends many forms of assistance to cooperatives.

Limitations
The cooperative form of business enterprise, inspite of many merits, has its limitations
and is not likely to replace other forms of organisations. The limitations are as follows:
1. The idea of cooperative organisation cannot be extended beyond a certain limit,
because a Cooperatives can secure only a limited amount of capital, as the
members usually come from a limited group and normally have limited means.
Again, the extension of size of the organisation might become a serious threat to
its success.
2. Unlike the capitalistic system, cooperation cannot be extended to cover the whole
economic system because of the very philosophy behind it. In order to embrance
or cover the entire economic system, it must attract people of all incomes and

27
 grades of society. But this it should not do so lest it might again slip into the
clutches of the capitalist and hit at the very purpose of starting the cooperative.
3. The management of a cooperative vests in a managing committee which generally
lacks technical knowledge, is often incompetent and is often influenced by
considerations other than efficient service. It is often difficult to get the service of
experienced and efficient workers on account or limited capacity to pay adequate
remuneration. Even if a real efficient man has been found, he is likely to be
attracted by a capitalist on a much higher salary unless he is an idealist.
4. Cooperative are also subjected to a considerable degree of State regulations and
the cooperative department almost overadministers them. This obviously goes
against the flexibility and efficiency of management. Because of too much
democratisation of its management, secrecy in business cannot be maintained.
5. The movement has still to develop the entrepreneurial functions. One of the most
serious obstacle in the success of cooperatives is the bickering or disagreements
among members. Once the initial enthusiasm is over, groupism begins which leads
to frictions and rivalry among active members, and once it begins there is no end
to it.
In the light of some of the aforementioned limitations, the cooperative principle cannot
succeed in the following three types of industrial enterprise, namely:
(a) Those in which there is a large element of speculation;
(b) Those involving the production of finer and more individual commodities in which
high qualities of skill and adaptation are called for;
(c) Those industries which require highly centralised production but whose customers
are scattered over wide areas, and where demand is not regular.
As regards their suitability, is may be safely stated that cooperatives are suitable for
small and medium size enterprises. Some of the limitations noted above render this form of
organisation suitable largely for trading business. Happily, state assistance and the
resourcefulness of members and their leaders have enabled some cooperatives to start large
scale operations. The Kaira cooperative making Amul products, sugar cooperatives in
Maharashtra and the South, and the latest Indian Farmers’ Fertilizer Cooperative are good
examples of venturesome activity.

Distinction between Cooperatives and Companies

Although a cooperative society resembles a company in some respects, there are many
points of distinction between the two:
1. The most fundamental difference between a cooperative and a company is that of
ideology. The very basis of cooperation is self-help among the members of a
cooperative whereas a company organisation aims at making profit. Any surplus
earned by a cooperative society is incidental to the objective of service. Profit is
the motive of a company and service is the objective of a cooperative society.

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 2. The control in the case of a cooperative society is vested in the members equally
regardless of the individual contribution by way of investment in the enterprise.
Thus, a cooperative is an economic democracy for its members who have an equal
right to vote towards the formulation and the execution of its business policy. The
members can effectively exercise their power of appointing the managing
committee and removing any undesirable members of the Committee, as each
member of the society has only one vote regardless of the capital invested. In a
company, the votes vary with the capital holdings, so that a few rich people can
control it. Moreover, a cooperative society operates with a limited area with the
result that all the members can attend its meetings. This is not possible in the case
of a company as shareholders are scattered far and wide. The company
management therefore becomes oligarchic rather than democratic.
3. It follows from the above that in a company there is a great divorce between
ownership and control an many a time a clash of interests, but this does not happen
in case of cooperative enterprise.
4. The joint stock companies are not directly concerned with the promotion of
welfare or efficiency of their shareholders. In the case of cooperative the welfare is
the main objective.
5. The cooperatives receive special incentives from the Government in the light of its
policy of promoting the growth of cooperatives as against exploitative form of
business. One of the important concessions to cooperatives is exemption from
income-tax upto a certain limit. Exemption from stamp duties and registration fees
are also available to them. The company is an organisation formed for earning
profits and thus does not enjoy privileges.
6. Some other point’s distinction between the two forms of organisations are:
(a) The shares of cooperatives are not, as a rule, transferable, while transferability
of shares in a company is the fundamental rule and practice in company form
of organisation.
(b) A member of a cooperative can, by giving notice, withdraw his capital and
cease to be a member at will but a shareholder in a company cannot do so.

Cooperation in India
The cooperative began in India a cooperative credit societies with the enactment of an
Act in 1904. The comprehensive cooperative societies Act. 1912 recognised both credit and
non-credit societies. But inspite of various measures to encourage Cooperatives, the total
volume of production, distribution and consumption in the wealth of the country, the share
of the Cooperatives is almost negligible.
No doubt, in absolute terms the cooperative organisation has made considerable
progress, particularly since 1954, but in relation to population to progress cannot be said to
the satisfactory. Some of the causes of this slow progress are:

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 1. Lack of Spontaneity: The cooperative movement in India did not start at the
instance of the people themselves, but was sponsored by the Government. In
reality the movement began as a department of the Government and therefore
people did not take much interest in it.
2. Illiteracy and ignorance: The illiteracy and ignorance as well as conservatism of
the rural population stood in the way of the development of cooperative. The
movement was meant to help people to help themselves, but they did not
understand significance of cooperation and what it meant it them.
3. Unlimited liability: The liability in the case of a credit society, the majority of
members of which are agriculturist, is unlimited. As a result of this unlimited
liability better class of farmers did not join the credit society. There was thus
lacking a compete and willing cooperation on the part of the people.
4. Poor Management and leadership: An inherent defect of Cooperatives which
has come out from the very philosophy of the movement is that great stress is laid
on the principle of cooperation and hardly any attention is paid to the management
aspect. Also, there has been absence in most cases of leadership so that the
movement has suffered as a result of favouritism and partiality.
5. Casteism and party-politics: In recent years with political awakening in the
country, politics have entered the cooperative movement, too. Different groups
view with each other to get their nominees elected to the management committees
with a view to securing control of the organisation for sectional gains instead of
looking after the interests of all the members. As a result, very often the needy fail
to get any assistance which works against the spirit of cooperation.
6. Competition from vested interest: One of the powerful opponents of
cooperatives enterprise has been the vested interests. The small traders and money
lenders worked for the failure of the rural societies. In urban areas, consumer
societies have had to face strong opposition and hostility of traders and
speculators. The weak financial position of the societies and indifference of the
people who should take advantage of the movement have combined to make the
position still worse.

Achievements of Cooperation
In spite of its weaknesses and slow progress, cooperation has been in a position to
shower some benefits on the people, particularly in rural areas.
1. The farmers have been able to secure credit at a cheap rate, and get out of the
clutches of money lenders. In general the farmers have benefited from the
principles of thrift and self-help.
2. The cooperatives have encouraged the use of better farming methods by helping
the procurement of better manures and improved seeds. Similarly, the marketing
societies have enabled the farmers to buy their requirements at fair prices and sell
their product at reasonably good prices.

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 3. The cooperatives movement has contributed generally to the improvement of rural
life. Undesirable social customs have been given up and the general social moral
climate in rural areas has improved.
4. The non-credit societies have helped their members to improve their economic
condition and saved them from the exploitation of powerful groups. For example,
in many urban areas, housing cooperatives has enabled middle income groups to
buy plots of land at reasonable rates and construct houses. Similarly, consumers’
cooperative societies have rendered a great service to the community by supplying
goods in short-supply equitably and at reasonable prices.

Choice of Suitable Form of Business Organisation

The problem of choice of a suitable form of business organisation arises at the time of
establishing the business and later on where the business expands. The initial choice of the
form of business organisation depends on the nature of business and the scale or business
proposed to be undertaken. It is the nature and scale of business operations which determine
the amount of capital required and the risk involved in the proposed venture. So the form of
organisation selected should be such which fully meets the needs of the business. Now we
shall discuss the factors affecting of choice of organisation.

Factors Affecting Choice of Organisation

1. Ease of Formation: One of the primary considerations in making the choice of
the most suitable form of organisation is the ease with which it can be set up.
Facility of formation, minimum legal requirements and freedom from Government
regulation are ideal conditions favouring the choice. From this point of view sole
proprietorship is the best and joint stock company form of business organisation is
most complicated.
2. Ease of Raising Capital: Another factor is the ease with which the requisite
capital can be raised. Small amount of capital can be invested by entrepreneur
himself and he would be satisfied by setting up his own business, and single
proprietorship form of organisation would serve his purpose effectively. If a large
business requiring huge amount of capital is to be set up, company form may be
necessary.
3. Extent of Liability: Liability may either be limited or unlimited. Where it is
unlimited the proprietor can be made to pay the full amount of the debts of the
business. His private property can also be utilised to pay such debts. In the case of
single proprietorship and partnership and the liability of the owners is unlimited.
In company form of organisation, the liability is limited and the members cannot
be asked to pay beyond a certain limit. Where risk element is greater and the scale
of operation is above medium, the company form of organisation is most suitable.
4. Relationship between ownership and control: The golden rule is that control
should be where ownership lies. Where the owner is also the manager, as in the

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 case of one-man business, the degree of control with the owner is complete. In a
large business owned by a company there is a divorce between ownership and
control.
5. Decision-making Facilities: Some person, particularly those who value the right
of personal leadership, prefer sole proprietorship. If a very high degree of
leadership is required, he will then form a company in order to attract other talent.
6. Flexibility of Operation: A good form of organisation lends itself to maximum
flexibility, as changes can be introduced promptly. Single proprietorship, for
example, enjoys to the maximum degree this characteristic.
7. Maintenance of Secrecy: Secrecy, especially in the case of small business
concerns is of supreme importance. For that purpose, the entrepreneur will
probably prefer single proprietorship.
8. Continuity of existence: To ensure continuity of existence and stability,
company, as a legal person will be adopted as it may outlive generations of
individual proprietors. The life span of a single proprietorship is often limited to
the life span of the proprietor.
9. Freedom from Government Regulations: Different forms of organisation are
subject to government regulation in varying degrees. In single proprietorship the
Government regulation and control is minimum. Partnership is exposed to some
control but the company is controlled by government regulation much more
closely.
10. Impact of Taxation: The basis of taxation is different in case of each of the forms
of organisation. Some of the business taxes affect all forms of enterprises alike,
and need not affect the choice, such as excise duties, sales tax, property tax and
customs duties. But direct taxes like income tax that has an important bearing
upon the choice of the form of business organisation.
In making the choice of a suitable form of organisation, the factors mentioned above
will have to be weighed against each other for good results. These factors are interrelated
and cannot be taken into account singly. All of them must be weighed before the final
choice can be made.
When the business firm grows in size, it is constantly faced with the problem—whether
to stick to the existing form of organisation or change over to some other form of
organisation. The answer to these problems lies in answering the following important
questions.
1. The additional capital needs because of expansion;
2. The difficulties in controlling the business affairs;
3. The extent or risk involved; and
4. The changes in tax liability.
For instance, where a partnership business expands, the choice lies between increasing
the number of partners of converting the firm into a private company. If the expansion is on
large scale necessitating huge sums of capital, adding partners would not serve the purpose.

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Before making the final decision, it has to consider the expected change in profits because
of expansion because this will determine the tax liability. It is only in case of high bracketed
income groups, the benefit of lower taxes by forming a company is available.

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 Unit-II

SOCIAL RESPONSIBILITIES OF BUSINESS

There are significant changes taking place in social, political, economic and other
aspects of modern life which make it appropriate to re-examine the role of modern business.
Modern view of business is definitely resting on the assumption that business belongs to the
people. It emphasizes that business has to create profitable customers. Business has a
privilege, not a right, granted by society and this privileged will be continued only as long
as it serves social needs and it offers social satisfaction. Today, society insists on the quality
of life and freedom from pollution. Business plans and policies as well as programmes are
expected to act as instruments of social change and are to be implemented with effective
controls to promote maximum public welfare. A socially responsible business firm must
respond favourably to the needs, desires and problems of its shareholders such as
customers, employees, suppliers, shareholders, bankers, government and the general public.
As a social agency, a business enterprise is responsible to deliver a rising standard of living
and a standard of life-style to consumers.

Meaning of Social Responsibilities

First of all, the social responsibilities of business may be considered conceptually. The
phrase ‘social responsibility’ is widely used in the literature of sociology, anthropology,
economics, politics and business management.
H.R. Bowen has defined the concept of social responsibility as “obligation (of
manager) to pursue those policies, to make those decisions, or to follow those lines of action
which are desirable in terms of the objectives and values of our society.”
Harold Koontz and Cyril O’Donnell say, “Since an obligation can be owed only by one
person to another, social responsibility is an interpersonal relationship that exists when
people are continuously dependent upon one another in both organised and unorganised
way. As a working definition it may be regarded as the personal obligation of people as they
act in their own interest to assure that the rights and legitimate interests of others are not
impinged.”
Thus the business managers must assess the implications and effects of their decisions
and policies on the other components of the society and to ensure that the interests are not
adversely affected by their actions.
The action taken by a business which help society to achieve more of its objectives, are
socially responsible actions which may be classified as internal or external to a business.
Internal social responsibilities are concerned with assuring due process, justice, equity and
morality in employee selection, training, promotion, increasing employee productivity etc.
While external social responsibilities refer to such actions as stimulating minority enter
premiership, improving the balance of payments or training and hiring hard core
unemployed.

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 Social responsibilities may also be considered from the point of view of their impact on
profits. A company may take socially responsible actions which serve to improve short-run
profits. For example, it may install a machine to replace one which is hazardous to workers.
In doing so, it may also make new rules concerning workers’ bonus and promotion which
result in higher productivity as well as social justice. Actions can be taken which clearly
reduce profits. For instance, installing expensive anti-pollution devices, the costs of which
cannot be passed on to consumers, will reduce profits. But businessman will not take
actions which will reduce both short and long-run profits. They may be willing to take an
action that reduces short-run profits if they believe that it will somehow increase long-run
profits, but rationalization of such actions may lack conviction.
Social responsibility may also refer to an obligation, a liability, social consciousness,
corporate legitimacy, charitable contribution, managerial enlightenment, social concern,
social programmes, social challenge, social commitment, or concern with public problems.
Most businessmen prefer words other than social responsibility because these words cannot
a fixed obligation with unclear commitments.

Assumption of Social Responsibility by Business

Since long there has been a controversy whether business should assume social
responsibilities, or it has no such obligations to fulfill. So it will be worthwhile to analyse
the arguments offered both in favour and against assumption of social responsibilities by
business.

The case for Assuming Social Obligations

The arguments which are offered in favour of business assuming social responsibilities
are as follows:
1. Response to Social Obligations: It is a well known fact that business is set up to
earn profit by producing goods or rendering services to the members of the society.
So the business is the creation of the society in the sense that its primary objective
is to fulfill the needs of the members of the society. In case the business fails to do
so, the society through people’s representatives in government, will either force to
do so through laws or may no longer permit them to survive.
2. Long-term Self-interest of Business: There is a growing realization on the part of
the enlightened businessman that it is in their self-interest to fulfil the demands and
the aspirations of the society because people having a good environment, education
and opportunity make better employees, customers and neighbours for business
than those who are poor, ignorant and oppressed.
3. Moral Justification: There is a growing feeling among businessmen that if they do
not assume the social responsibilities, the government will make them assume such
responsibilities through legislation. Such legislative regulation is expensive for
business and reduces flexibility and freedom in making decisions and meeting

35
 competition. Therefore it would again be in the interest of business community to
voluntarily undertake to fulfil the social responsibilities.

The case against assuming social responsibilities

The arguments against such assumption are as follows:
1. The classical view is that business is an economic institution and as such its
primary responsibility is to produce goods and services efficiently and to earn
profits for its owners or the shareholders.
2. The doctrine of social responsibility implies acceptance of socialist view that
political mechanisms rather than market mechanisms are the appropriate ways to
allocate scarce resources to alternative uses. As this process evolves, there will be a
possibility of the drive not to use resources efficiently and a loss of the greater
productivity of the present economic mechanism.
3. If the market price of a product does not truly reflect the relative costs of producing
it, but includes costs for social actions, the market mechanism will be distorted. In
other words, either the customer pay a price greater than that necessary to call the
goods into the market or the firm’s product-mix provides less consumer
satisfaction.
4. There is no substitute for the power of self-interest to get people to act. Therefore
any replacement of this power will adversely affect the efficiency of the business
system.
The arguments against the assumption of social responsibility suffer from one main
limitation and that is, they want companies to do something which they can not do, and that
is to ignore social responsibilities.
Criteria for determining the social responsibilities of business:
There are some guidelines which may be observed by business in discharging its
obligation by way of social responsibility. These are as follows:
1. Business is to be treated mainly an economic institution with a strong profit motive
and as such should not be required to meet non-economic objectives of society in a
big way without financial incentives.
2. Business should be expected to perform socially responsible actions that might
primarily reduce profits in the short-run but are in the ultimate interest of the
company in the long run, for example, helping to solve the problems of
unemployment, environmental pollution etc.
3. Each business firm must think carefully about the social responsibilities to be with
accepted. While deciding this, the values and interests of top managers can serve as
guiding force.
4. An individual business has social responsibilities proportionate with its social
powers. For example, company ‘A’ is the major employer in a town and company
‘B’ is an employer of only 10% of the working people in the town. Therefore, other

36
 things being equal, company ‘A’ should give more importance to its social
responsibilities than should company ‘B'.
5. An individual business should choose only those social responsibilities which it can
best manage. Conversely, business is able to do a better job when the task involves a
minimum of political involvement, deals with a physical problem that can be
quantified and measured and is one in which it has experience.
6. Business should internalize most of its external costs. In the past, business
enterprises were not responsible to bear such costs as air and water pollution etc.,
and society held the economic output of business to be of higher priority. But now,
priorities are shifting and business is expected to bear more social costs which is a
complex problem.

Social Responsibility of Business in India

Since independence, government, educationists, political parties, labour unions and
other groups in our society have brought about a lot of changes in the minds of the people
about aims and values of life. The government is eager to see that the rate of our national
income is increased in order to have a better living standard for the people. For this purpose,
Indian business will have to make full use of modern technology and science and encourage
the development of innovational personnel.
Another important social responsibility is to increase the rate of new jobs to absorb
persons. The development plans should normally create new jobs for engineers,
technologists, scientists and other personnel. But business has not increased its absorptive
capacity in proportion to the supply of trained personnel. This problem needs to be
considered.
An important social responsibility of the entrepreneurs is to develop an organizational
culture in business. This will aim at giving a unity of character in thinking and action
among all its members and adapts itself to the changes made necessary by other culture. It is
the entrepreneurical culture with its distinct aims about ownership, exercise of authority,
control and sharing of gains which dominates business. Authority, control and gains are
desired by all employees. The contract with entrepreneurial culture naturally brings these
desires in these employees, more so when they are competent enough in their functional
areas. Such a organisational culture must have a unity of purpose which will make it
possible for all members to respond to all human situations in society, to offer a fellow ship
to all members in which their life assumes new meaning and direction and to appreciate
desires and aspirations of men who have the abilities.
A new social problem in India is the slow alienation of the public from the problems
and difficulties of big enterprises in the private sector due to lack of social purpose in the
private sector. The business class can bring a considerable change in the attitude of the
public by taking suitable measures like developing an organization culture similar to that in
the public sector.

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Forces Inducing Social Responsibilities
Businessmen are now recognising various social responsibilities due to the following
forces:
1. Businessman have been forced to consider their social obligations because of ever
increasing fear of public interference through the government. For instance, in India
many acts like Factories Act, Industrial Disputes Act, Companies Act have been
enacted to control the functioning of the business undertakings.
2. There is a pressure of organized labour also as participation of labour in the
decision-making process is increasing with a demand to consider their view points
before taking final decisions.
3. There is recognition of human element in industry leading to enlightened personnel
management.
4. Due to spread of education, public opinion about the quality of life and the need to
remove all types of pollution is growing.
5. As a result of separation of ownership and control in case of large business
professional managers are able to act as trustees and adopt objective attitude in the
distribution of surplus among all the interested parties as they are not the owners of
the enterprises and so they do not have any vested interest.

Obligations of the business towards different groups

1. To itself: The first duty of any business is to itself i.e. to create conditions which
will make it stable, continuing and established. A loss making company is a public as well
as private liability. It is should be run efficiently and competently so that the minimum
inputs generate the maximum output or the surplus. If every business unit in the economy
strives for best utilization of resources, the society will benefit and the national dividend
will increase.
Earning of profits does not only mean a fair return on investment but also creation of
reserves for contingencies which will provide a cushion to the business form jerks generated
by economic ups and downs.
This profitability should not lead to profiteering by creating monopolistic tendencies
and artificial shortage of supplies in the market, so that the consumers are compelled to pay
high prices. In a nutshell the business should avoid adopting unethical business practices. It
should be Adam Smith’s ‘Invisible hand’ to distribute each one’s due share to each one in a
rational way.
2. To its shareholders: The dilemma before the professional manager is that if they do
not ensure adequate return consistent with the prevalent interest rates, the sources of capital
will dry up and the debt equity ratio will go on deteriorating to the detriment of sound
capital gearing. Thus, the first obligation towards the shareholders is to ensure a fair return
on capital employed.
Secondly, wider disclosure of information on the part of directors is required.

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 Thirdly, the company must protect the assets and use these as trustee of the
shareholders.
Thus, responsibility of company towards shareholders becomes even greater when we
find that:
(a) Shareholders cannot demand dividend.
(b) Unorganised shareholders are scattered all over the country.
(c) The proxy system which makes shareholders control ineffective.
3. To its creditors: A business unit owes its responsibility towards its creditors also
who are also part of the society.
(i) The term of the credit should be observed.
(ii) Litigation and consequent wastage of company’s money should be avoided.
(iii) Details of trade creditors should be given in annual accounts and report.
(iv) As the law stands, any person who is knowingly a party to a company carrying on
business with intent to defraud creditors may be declared personally responsible
without any limitation of liability for all or any of the debts of the company.
The implications of the above are:
(a) Liability of shareholders is limited. The creditors (specially trade creditors)
become unsecured creditors.
(b) The lender has no share in the increased profitability of the company.
4. To its employees: The employees of the business form a major section of the
society. The well being of the employee therefore means well being of the society. A
business owes certain duty towards its employees also.
The expectation of employees is continuously on the rise. They are no longer satisfied
with the conditions of work, increased contributions, to retirement benefits and medical
benefits etc. The reason is that employees are human beings and like profit monetary gain is
not everything. The business, beside providing the employee’s (a) subsidised (i) transport
(ii) lunch and canteen facilities (iii) housing and (iv) medical benefits. (b) profit sharing and
(c) bonus etc., must also satisfy their self-esteem and ego. This can be done by: (a) Workers
participation indecision making, (b) better industrial relations and understanding the worker
as a human being, (c) equity-participation by employees and (d) Institution of workers as
directors. These will provide a platform of dialogue between the business and the
employees. This will result in employees satisfaction. It will mean a happy person and a
happy family.
5. To the Society: Business in not an end in itself. It is only a means to achieve an end,
that end is person oneself and the individual. Therefore, business has by direct and indirect
tests, to contribute to one’s happiness, freedom and material moral and spiritual growth. It
must be made conscious of its social responsibilities.
Social responsibility is the personal obligation of everyone as one acts in one's own
interest, to assume that the rights and legitimate interests of all others are not affected
adversely. Social responsibility or business is to pursue those policies to make those

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decisions or to follow those lines of action which are desirable in terms of the objectives
and values of our society.
In the real sense, the assumption of social responsibilities implies recognition and
understanding of the aspiration of a society and determination to contribute to its
achievements. As Peter Drucker puts it, “the business enterprise should be so managed as to
make the public good become the private good of the enterprise.”
A company should behave like a good citizen in business. The law does not (and
cannot) contain or prescribe the whole duty of a citizen. A good citizen takes account of the
interest of others besides himself and tries to exercise and form an imaginative ethical
judgement in deciding what he should and should not do. This is exactly how companies
should seek to behave. It should pay proper regards to the environmental and social
consequences of its business activities, and should not sacrifice the safety of efficiency of
goods and services in the interest of expediency or competitiveness.
1. In environment matters, it is usually the business unit that is the first to know of a
potential hazard. Ecological safeguards are very important. Control of Pollution is
now being made obligatory by various enactments in different countries. The
Company has a duty in such circumstances not only to take all possible remedial
measures but also to inform the responsible authorities. The Company can save the
community from the outbreak of a possible epidemic or certain skin allergies,
stomach diseases etc. The health of the society can be protected.
2. To give employment to local population is another aspect of its responsibility. The
enterprise can create its own township if it is of a giant size. Examples are Tata
Nagar, Mohan nagar, Walchand Nagar, Modi Nagar, Pilani etc. all set up by
industrialists. The company can ask its employees to take interest in the
management of these townships. Related to this the facility which it can provide to
the society, the subsidized housing scheme or loans to employees for housing.
3. The business owes its duty to educate and improve the education and skill of its
employees and the local community. These can be financed by the business. The
modes can be training school, opening of technical and customary educational
colleges, institution of scholarships and apprenticeship schemes.
A dialogue between the business and the society should be initiated where the two
could have an opportunity to discuss the areas of mutual interests and points of
disagreement and conflict.
4. As a good citizen the enterprise must not cause damage to amenities of the
community. It should bear the social cost of its anti-social conduct, e.g., destruction
of the natural beauty of the surroundings, condition of slums and congestion. The
Company’s management must shed socially irresponsible and self-defeating
business policies and balance the claims of the workers, shareholders, community
upon the company.

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 5. Business can help the society by giving charity or donations to different sections of
the public. It can help the disabled and the handicapped people by giving the
suitable jobs.
6. The company is duty bound to pay taxes and levies etc. to the Government and thus
contribute in the economic growth and national revenue.
Thus, to conclude in the complex economic and business life of the country every
enterprise has a manifold responsibility viz, to itself, to its customers, workers, shareholders
and the community, and it is the task of management to reconcile these separate and
sometimes conflicting responsibilities.

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