Bal kavi Bairagi Mahavidhyalaya

B.B.A. 1st Year

Session 2022-23

Notes of
Elective Subject – (Unit 1,2&3)
Business organization and Management

By
Asst. Prof. Vinita dawer

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 Unit I
Business Organization and its Forms

Business is either an occupation, profession, or trade, or is a commercial activity which involves

providing goods or services in exchange for profits.
Profits in business are not necessarily money. It can be a benefit in any form which is
acknowledged by a business entity involved in a business activity.
A business is defined as an organization or enterprising entity engaged in commercial, industrial, or
professional activities. Businesses can be for-profit entities or non-profit organizations. Business
types range from limited liability companies, sole proprietorships, corporations, and partnerships.
Business is the activity of making one's living or making money by producing or buying and
selling products (such as goods and services). It is also "any activity or enterprise entered into for
profit.
Having a business name does not separate the business entity from the owner, which means that the
owner of the business is responsible and liable for debts incurred by the business. If the business
acquires debts, the creditors can go after the owner's personal possessions. A business structure does
not allow for corporate tax rates. The proprietor is personally taxed on all income from the business.

Business Definition
A business [entity] is an organization or any other entity engaged in commercial, professional,
charitable or industrial activities. It can be a for-profit entity or a not-for-profit entity and may or
may not have a separate existence from the people/person controlling it.
A business [activity] is a commercial activity which involves providing goods or services with a
primary motive of earning profits.
Concept Of Business
The business concept is the fundamental idea behind the business. The business model, plan, vision,
and mission are developed based on this concept. Uber, for example, was started on the concept of
aggregating taxi drivers and providing their services on demand under one brand. Every other
business strategy was developed based on this concept.

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R. L. Dicksee has rightly defined business as, “A form of activity pursued, primarily, with the
object of earning profit for the benefit of those on whose behalf, the activity is conducted.”
According to F. C. Hooper, “The whole complex field of commerce and industry, the basic
industries, processing and manufacturing industries, the network of ancillary services, distribution,
banking, insurance, transport and so on, which serve and interpenetrate the work of business as a
whole, are business activities.”
Nature of Business
Business is derived from ‘busy-ness,’ i.e. keeping oneself occupied with one or the other work, but
it is much more than just being busy.
To have a better understanding of what a business is, we must go through

Characteristics
There are three key characteristics that must be met to have a business. First, businesses must be the
result of individuals working together in an organized way. Second, businesses must satisfy a
societal need. Third, businesses must seek to make a profit.

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 Economic Activity: Business is an economic activity, as it is conducted with the primary
objective of earning money, i.e. for an economic motive.
 Production/purchase of goods and services: Goods and services are produced or procured
by business entities, so as to add value and sell them to the consumer. Goods are either
manufactured by the company or procured from the supplier, with the aim of selling it
further to the consumer, for profit.
 Selling of goods and services: Business must involve the transfer of goods to the customer
for value, through selling, meaning that if the goods are acquired for personal consumption,
then the transaction will not amount to business activity.
 Continuity in dealings: Every business requires regularity in transactions, i.e. an isolated
transaction of exchange of goods or services will not be considered as business. So, to
constitute business, the dealings must be carried out on a regular basis.
 Profit earning: The basic purpose of business is to make the profit from its activities. It is
the spine of business, which keeps the business going, in the long term.
 Element of risk: Risk is the key element of every business, concerned with exposure to
loss. Efforts are made to forecast future events and plan the business strategies accordingly.
However, the factors that affect business are uncertain and so does the business
opportunities, which can be a shift in demand, floods, fall in prices, strikes, lockout, money
market fluctuation, etc.
 Uncertain return: In business, the return is never predictable and guaranteed, i.e. the
amount of money which the business is going to reap is not certain. It may be possible that
the business earns a huge profit or suffer heavy losses.
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  Legal and Lawful: No matter, in which type of business the company is engaged, it should
be legal in the eyes of the law, or else it will not be considered as business.
 Consumer satisfaction: The aim of business is to supply goods and services to consumers,
so as to satisfy their wants, as when the consumer (final user) is satisfied, he/she will
purchase the goods or services. But, if they are not, there are chances that they will look for
substitutes.
 The consumer is regarded as the king, and so all the activities of the business are aligned
towards the satisfaction of consumers. This can be done by making available quality-riched
goods easily available to them, at reasonable prices.

Importance of Business
1. Economic development:
Business is important for economic development. Concept of true business is used in industries and
commerce. Industries use men, money, materials, methods and machines and help to create
employment. Commerce is the concept of exchange goods/services at national and international
levels. It helps to earn foreign currency by export business too. Therefore, business helps in
economic development
2. Utilizing natural resources
Every country has diverse natural resources. Business must be directed towards proper and efficient
utilization of resources. Business utilizes the resources like water, minerals, ores and so to achieve
its own goals. But resources must be utilized without exploitation.
3. Creation of utility:
Business creates place and time utility. It helps to satisfy the needs of human beings. Financial
utility is to be maximized.
4. Employment:
Business helps to provide job to people. It provides various types of managerial or technical job.
Many types of business houses like hotels, industries, and transport companies are established for
business which helps to solve the unemployment problem.
5. Revenue generation:
Business is the source of revenue generation. It pays taxes, royalties, fees, custom duties, and other
things which help to generate government revenue.

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6. Earning foreign currency:
It is the source of earning foreign currency. Business can earn foreign currency through exporting
the goods and services.
7. Development of country:
Development of industries helps to utilize natural resources, create time and place utility, provide
employment opportunities, help in revenue generation and earning foreign currency. All these
things help in the development of the economy of the country and the economic development is the
major factor that can develop the nation to a wider sense.
8. Provide investment opportunities:
Establishment of new industries and commercial fields are the major source of investment. Further
the profit owned by the investors after the successful operation of business helps to ensure larger
amount of saving which can be invested in the newer future for pension of current business or
establishment of newer business. Thus, business helps in providing investment opportunities.
9. International relations:
Business is the medium for development of national and international relationship. It helps to
maintain harmonious relation among the various countries. There can be mutual understanding and
better diplomatic relationship among the countries. Import and export is the major base for
international relationship.
10. Self-sufficiency:
It helps in achieving countries and individuals self-sufficiency. It also helps in improving the living
standard of people by reducing the dependency.

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4 Stages of Business Growth & Their Challenges

Development / Seed Stage

The development or seed stage is the beginning of the business lifecycle. This is when your brilliant
idea is merely just a thought and will require a round of testing in its initial stage. In testing your
business idea, you may conduct research regarding the industry, gather feedbacks from your friends,
family, colleagues, or other industry specialists. This is when you are determining whether the
business idea that you had is worth pursuing and if so it will be the birth of your new business.
 Challenges
 Business Idea Profitability
 Market Acceptance
 Establishing Business Structure
 Accounting Management

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1. Startup Stage
You’ve decided that your business idea is worth pursuing and have now made your business entity
legal. This is the true beginning of the 4 stages of business growth. In this stage, you’ve finished
developing the products or services that your business has to offer and will begin marketing and
selling. During this stage, you will be tweaking your products or services according to the initial
feedback from your first paying customers and market demand. You will need to learn and adjust
your business model to ensure profitability and that it meets your customer’s expectations. By
adjusting your business model, you’ll be able to set your business on the right track.
Challenges
 Managing Cash Reserves
 Managing Sales Expectations
 Accounting Management
 Establishing Customer Base
 Establishing Market Presence
2. Growth / Survival Stage
Your business has endured through the initial phases of business development and is currently in its
growth or survival stage. The business is consistently generating revenue and adding new
customers. These recurring revenue will help pay for your operating expenses and open up new
business opportunities. Currently, your business could be operating at a net loss or maintaining a
healthy profit, but there could be some competition. This is also when you need to fine tune your
business model and implement proven methodologies, sales model, marketing model, and
operations model before expanding your venture for the mass market.
Challenges
 Dealing with Increasing Revenue
 Dealing with Increasing Customers
 Accounting Management
 Effective Management
 Market Competition
3. Expansion / Rapid Growth Stage

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Your business has been a thriving company and established its presence in the industry. You have
now reached the stage of the 4 stages of business growth in which your business will expand and
spread its roots into new markets and distribution channels. In order to start capitalizing on the
success of your business, you will need to capture a larger market share and find new revenue.
Therefore your business will experience a rapid growth in revenue and cash flow. The rapid growth
phases of business development takes advantage from the proven sales model, marketing model,
and operations model set forth from your growth/survival stage.
Challenges
 Increasing Market Competition
 Accounting Management
 Moving into New Markets
 Adding New Products/Services
 Expanding Existing Business

4. Maturity Stage
After a successful expansion, your business is on top of its industry and has matured. At the final
stage of the 4 stages of business growth, your business has a dominating presence in its market.
Your business could still be growing but not at the substantial rate as you’ve previous experienced.
Your current option is to decide to take a step back towards the expansion stage or to think of a
possible exit strategy.
Challenges
 Increasing Market Competition
 Accounting Management
 Moving into New Markets
 Adding New Products/Services
 Expanding Existing Business
 Exit Strategy
Every stage of the 4 stages of business growth brings new or pre-existing challenges. Solutions that
may have worked for one stage may not work in another stage, which is why you should always
adjust your business plan and operations accordingly.

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At each of the phases of business development, your business will rely on a financial source to help
overcome the challenges your business faces. This is especially important to have an accounting
management software in place so that you will have an accurate reflection of your current business
finances. Having an accounting software in place will help you understand where your business is
on the current business lifecycle and the details will allow you foresee upcoming challenges and to
make better business decisions.

Classification of Business Activities

Various types of business activities that usually take place in an economy are:
 Extraction of oil, natural gas or minerals
 Manufacturing of commodities
 Buying of goods from one place or country and selling it at different place or country
 Construction of buildings, roads, and bridges, etc
 Providing services like ticketing, warehousing, transportation, banking, insurance, etc
Most business activities are concerned with production or processing of goods and services or
distribution of goods and services. The former is known as Industry and the latter as Commerce. So,
business is classified as Industry and Commerce.

I. Industry
Industry primarily refers to all such business activities concerned with production, raising or
processing of goods and services. It processes raw materials or semi-finished goods into finished
goods. Extracting raw materials from earth’s surface, manufacturing goods and commodities,
producing crops, fish, flowers, etc., constructing buildings, dams, roads etc. are all examples of
industry.
These activities are called industrial activities and the units engaged in these activities are known as
industrial enterprises. However in a broader sense, provision of services like banking, insurance,
transport also form part of industries known as tertiary industries.

Classification of Industries
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Classification of industry based on nature of activity involved.
1. Primary Industries
Primary industries refer to the activities of extraction of natural resources like coal, oil, minerals etc.
and reproduction and development of living organisms like plants and animals etc. Primary
industries can be categorised as extractive and genetic industries. All the are industries engaged in
rearing and breeding animals and birds and growing plants or flowers for sale and are known as
genetic industries. Genetic industries are growing in number which include Horticulture (growing
fruits and vegetables), Floriculture (growing flowers), Dairy Farming, Poultry Farming,
Pisiculture (breeding fish) etc.
2. Secondary Industries
The products of primary industries are normally used as raw materials to produce a variety of
finished goods. It is the secondary industry that uses the products of primary industry as its raw
materials. The activities of secondary industries may be of manufacturing or construction.
Manufacturing industries are engaged in producing finished goods out of raw materials or semi-
finished products. For example, cotton is used to produce textile, timber to produce furniture,
bauxite to produce alumina.
The industries engaged in erection of buildings, dams, bridges, roadways, railways, canals, tunnels
etc. are known as construction industries. They make use of the products of other industries and
construct different types of structures as per the requirements of the customers.
3. Tertiary Industries
These industries are basically concerned with generating or processing of various services and
facilitate the functioning of primary industries and secondary industries as well as activities of
trade. These include service industries like banking, insurance, transport etc. Film industry which
provides entertainment to the individuals produces films; tourism industry which provides services
to the individual by facilitating their travel, booking of tickets and hotel rooms etc. are also included
in this category.

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  Manufacturing industries may be divided further into the following categories:
 Analytical Industries manufacture different types of products by analysing and separating
different elements from the same product. Petrol, diesel, kerosene, lubricating oil etc. are
produced from the crude oil in oil refinery industry.
 Synthetic Industries put together various ingredients and manufacture a new product. For
instance, soap is produced by combining potassium carbonate and vegetable oil. Similarly,
cement is produced by using limestone, coal and other chemicals.
 Processing Industries are those in which raw materials are processed through successive
stages to get the final products. Textile, sugar and paper are the examples of processing
industry.
 Assembling Industries put together various manufactured products and make a new
product as in the case of car, scooter, bicycle, radio and television etc.
Commerce
All goods and services produced are to be made available by those who need them. This involves a
number of additional activities. For example when somebody produces bread, he has to make it
available at convenient locations at right time. This involves activities like making people aware
about the product, storing the product at right places, arranging retail outlets, packaging the product,
transportation of the product, selling the product and so on. All these activities taken together are
known as Commerce.
It provides the necessary link between producers and consumers of goods and services and
facilitates the purchase and sale of goods and services. It performs all functions that are essential for
maintaining a smooth and uninterrupted flow of goods and services to the customers.
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Thus, commerce involves:
 Buying and selling of goods and services
 Activities essential for the smooth and uninterrupted flow of goods and services from the
point of production to the point of consumption

The first activity, that is, purchase and sale of goods and services is termed as Trade, and the
second activity i.e., the activities that ensure smooth flow of goods to customers are known
as Auxiliaries to trade. Thus, commerce is classified as:
 Trade
 Auxiliaries to trade
Trade
Trade is an integral part of commerce. It simply refers to sale, transfer or exchange of goods and
services. It helps in making the goods and services available to ultimate consumers. The
manufacturers of goods who produce in bulk or large quantity generally find it very difficult to sell
those goods directly to the consumers.
The reasons may be distance of the consumers from the place of manufacturing, or the quantity of
the product bought at one point of time, the problem of payment and so on. Hence they utilise
the services of some firms or individuals who buy goods from the manufactures and sell it to the
consumers. For example, the local grocery shop owner sells grocery items to the consumers after
buying it from the manufactures. Sometimes, he buys it from the wholesalers who buy goods in
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bulk from the manufactures and sell it to him. The wholesalers as well as the grocery shop owners
are said to be engaged in trading.
Thus, the features of trade can be summed up as follows:
It involves actual buying and selling of goods
 It refers to procuring goods from one place/person to sell it to another person or at another
place
 Traders, also known as middlemen facilitate the distribution of goods
 Trading helps in equalising demand and supply.
For example, the state of Punjab may be producing plenty of rice without much demand for it in its
own state. Traders buy rice from Punjab and make it available to other states where there is a great
demand for rice. Thus, the demand and supply ratio is maintained.
On the basis of area of operation, trade can be classified as:
1. Internal Trade
2. External Trade
1. Internal Trade
When trade takes place within the boundaries of a country it is called internal trade. It means both
the buying and selling take place within the country. For example, a trader can buy woollen
garments from the manufacturers at Ludhiana and sell it to the retailers in Delhi. Similarly a trader
of a village can buy goods from the wholesale market of a city for sale in the village.
Internal trade can be:
buying from manufactures and selling it to retailers in bulk (known as wholesale trade)
buying from manufacturers or wholesalers and selling it to consumers (known as retail trade)
2. External Trade
Trade that takes place between different countries is known as external trade. In other words,
external trade refers to buying and selling of goods or services across national boundaries. This may
take any of the following forms:
Firms of country ‘A’ purchase goods from firms of county ‘B’ to be sold in their own country. This
is known as Import trade.
Firms of country ‘A’ sell goods produced in their own country to firm of country ‘B’. This is known
as Export trade.
Firms of country ‘A’ purchase goods from firms of country ‘B’ to be sold to firms of country ‘C’.
This is known as Entrepot trade.
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Aids or Auxiliaries to Trade
To facilitate buying and selling of goods (trade) a variety of other activities are required to be
performed. These include, transport of goods, storage of goods, financial transactions, insurance of
goods etc. For example, when a company at Chennai buys goods from Delhi or imports it from
Singapore, it needs to undertake most of the following activities, in addition to buying and selling of
goods.
Carrying of goods physically from Delhi or Singapore to Chennai (called Transportation)
Systematic storage of goods once the goods are received at Chennai (called Warehousing)
Arranging money and making payments to the seller through banks and other
sources (called Banking)
Covering risk of damage or loss of goods in transit from Delhi or Singapore or while it is in store
(called Insurance)
Exchange of information with each other through postal and telecom services
(called Communication)
Advertising: In today’s competitive market, it is not possible for a businessman to sit and wait for
customer after investing heavily in business. To attract customers towards his product, a producer
has to provide full knowledge of his product to the customer. Advertising does this properly.
Advertisement enhances the knowledge of the customer about the products available in the market
and with the help of this knowledge; a customer takes decision about the purchase of the product. In
this way, advertisement enhances the knowledge of the customers and eliminates the hindrance of
information.

All the above activities help in facilitating the trading activities or providing support to the trading
activities. That is why these are called auxiliaries to trade. So auxiliaries to trade refer to
those activities that facilitate trade. These activities not only facilitate the trading activities, but
also provide the necessary support to the entire business in its successful functioning. Hence, these
are also called support services of business.

Business Organization

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The term business organization describes how businesses are structured and how their structure
helps them meet their goals. In general, businesses are designed to focus on either generating profit
or improving society. When a business focuses on generating profits, it is known as a for-profit
organization. When an organization focuses on improving the social good through the arts,
education, health care, or some other area, it is known as a nonprofit (or not-for-profit) organization
and is not typically referred to as a business.

There are different categories of business organizations that relate to how the business is
established, owned, and operated. The basic categories of business organization are sole
proprietorship, partnership, and corporation. Each type of business organization has benefits as well
as disadvantages. For example, a sole proprietor of a small business is able to operate independently
of much of the government regulation that affects larger businesses, but he or she is liable
(responsible) for all financial risks of the business. Therefore, the owner of a small grocery store is
able to keep all the profits for herself, but she is also liable for all of her business debts, even if she
must repay a debt with her personal finances.
No matter how a business is organized, it takes on certain risks as it operates. One way to minimize
risk is for a business to use its assets and investments wisely, whether these are equipment,
knowledge, property, or relationships. The more efficiently a business uses its assets, the greater the
chance that it will make a monetary profit

Importance Of Business Organization

1. Production of Goods :-
Business organization is very useful for the production process of goods and services. It increases
the efficiency of various sections.

2. Reduces the Cost :-

Business organization principles are used to minimize the cost of production. So the profit of the
business increases.
3. Distribution :-
Marketing and distribution problem is also being solved by the business organization.
4. Common Link :-
It provides a common link between various of the business activities. So effective cooperation

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among the various factors increases the profit of the enterprise.
5. Saves the Time :-
Due to business organization we can save our time which is more precious in the present age.
6. Minimum Wastage :-
Business organization reduces the wastage of material and other expenditure. So rate of profit
increases.
7. Secretariat Function :-
Business organization teaches us the principles of office organization. It tells us the best way of
performing the secretarial functions.
8. Finance Management :-
Business organization also guides the businessman that how he should meet his financial needs and
expand the business.
9. Transportation Use :-
It guides the businessman that which type of transport he should utilize to increase the sale and
profit of his product.
10. Makes the Businessman Efficient :-
Business organization has enabled the businessman to conduct the business affairs efficiently. It
also provides the solution of many problems.
11. Fixes Responsibility :-
It fixes the responsibility of ever individual in a different manner. It also introduces the scheme or
internal check with works automatically.
12. Solve the Market Problems :-
Business organization solves the problems of buying, selling storage and grading.

13. Technical Development :-

It also very helpful for improving the technology in the country. New methods and innovations are
used in the production process.
14. Decision Making :-
Decision making is very important factor for the success of business. The business organization is
very useful in making the decisions in time.
15. Provides Skill :-
Business organization provides the skilled people like salesman to satisfy the customers.
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16. Supply according the Demand :-
It guides the producer that he should produce the goods according the demand of the market. Facts
about market are collected and demand is produced accordingly.

Functions of business Organization

1. Organizing Function: One of the main functions of a business is organizing function. Man,
machine, materials, and money are essential factors for any business. organizing function collects
and coordinates all the necessary factors of the business. Proper organizing function is helpful in the
smooth running of the business and helps to achieve its objectives.
2 Financing Function: Finance is the life-blood and back bone of any business. The availability of
factors of production depends upon the availability of finance. So every business needs finance for
its success. Therefore, under this function of business required capital is estimated, accumulated and
properly utilized. A proper capital structure according to the size and nature of the business is
essential for the success of the business.
3 Production Function: The production function is another important function of the business.
Converting raw materials into finished products to satisfy human wants by creating utility is known
as production. Under this function, raw materials and semi-finished products are processed and
assembled to create utility. Hence the next important function of business is to create utility for the
satisfaction of the consumers by the production of goods.
4.Marketing Function : The function of business is not complete with the production of goods and
services only. The main goal of production is to satisfy human wants through the consumption of
goods and services. Therefore, marketing function helps to transfer goods and services from the
producer to the ultimate consumer. Marketing functions can be divided into concentrating and
dispersing which include buying, selling, transportation, storage, risk taking, market information,
etc.
5 .Employment Function: The next important function of business is to provide employment
opportunities in the country. Every business requires a large number of manpower to perform their
activities. So they are helpful in solving employment problem of the country by providing
maximum employment opportunities.

Evolution of Business Organization

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1. Village Economy

2. Town Economy

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 Modern Business

A modern business is that which use the latest in technology on their benefit, in order to maintain a
competitive advantage over their competitors. Committed deeply to delivering individual, social
and environmental value. That is tightly aligning with the creation of economic value for its
stakeholders.

Difference between traditional business and modern business

Characteristics of modern organizations

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 Purpose and meaningfulness. The great cultures are joined together with a shared cause or
belief, hence the need for a business purpose and narrative. They know what they fight for,
who they serve, what problem they are solving, and what value they are creating.
 Relationships beat skills. Who you know and have a relationship with is more important
for the productivity and getting things done, than skills. It’s not that skills are unimportant.
Relationships are just more important, and pave the way for the networked organization.
 Larger line teams. This is in direct correlation with the networked organization and the
culture: the line teams grow larger and fewer, giving the leader a span-of-control that grows
to double the amount from traditional hierarchical structures. This comes from a changed
approach to (a) delivery structures, that are based on networked teams instead of the line
organization, and (b) from the relationships between the employees, which create personal
attention and a sense of belonging. This changes the role of the leader (see the description in
the book).
 Smaller project teams. Or rather, delivery teams. Teams in these kinds of organizations
tend to become smaller, to a size where they ‘can share two pizzas over lunch’, a description
coined by Jeff Bezos, founder of Amazon. This both requires and nurtures a culture of
relationships, trust, and transparency.
 Everyone is a leader. Or has the opportunity to take the lead on tasks they have the will,
skill, and drive to engage in.
 Followership is a direct consequence of making everybody leaders: accepting that you are a
follower to the person who takes the lead on a task or activity. This action and behaviour is a
huge cultural driver.
 Step down from the Ivory Tower. The modern leaders are artisans too, and works both ON
and IN the business. Merits and actual dialogue with problem owners shapes you as a role
model.
 Listen, then decide. The modern workplace is based on involvement and inclusion.
Decisions and collaboration are based on a culture of listening to every stakeholder and
employee prior to taking action. This is a tough point to implement in many organizations,
where involvement and listening are a major change from the traditional power distribution.
 Intense sprints. Modern workplaces have a natural preference for working intensely in
sprints, then stopping to evaluate, prior to engaging in yet another sprint. This stems from

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 the ingrown focus on people and value-creation rather than technology and solution-
provision.
 Not more, but better. The modern workplace is driven towards results and
accomplishments, but not for the sake of producing many products, but rather better
products. Value-creation and purposefulness is at the centre for the culture.

Business & Profession

Business is an economic activity concerned with the production or purchase and sale of
merchandise and rendering of services with the purpose of earning profit. Profession is a form of
economic activities, wherein special skills, knowledge and expertise is required to be applied by the
person, in his occupation
Human activities are primarily classified into two categories, i.e. economic activities, and non-
economic activities. Economic Activities are the activities conducted with an aim of earning money
or livelihood. Further, these activities are sub-divided into business, profession and
employment. There is a huge difference between business and profession in the sense that there is
no minimum qualification required for starting a business. It means an activity that is related to
buying and selling of goods.
On the other hand, a profession is nothing but a paid occupation that requires a person to be
formally qualified, expert and trained in a particular field to be called as a professional.

Comparison Chart
BASIS FOR
BUSINESS PROFESSION
COMPARISON

Meaning Business is an economic activity Profession is a form of economic

concerned with the production or activities, wherein special skills,
purchase and sale of merchandise knowledge and expertise is required
and rendering of services with the to be applied by the person, in his

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 BASIS FOR
BUSINESS PROFESSION
COMPARISON

purpose of earning profit. occupation.

Basic objective Earning profit Rendering services

Establishment On the decision of entrepreneur and Membership of the respective

fulfillment of legal formalities. professional body and certificate of
practice.

Qualification No minimum qualification. Specialized knowledge of study is

required.

Capital Required as per the size and nature Limited capital is required.
of business.

Reward Profit Professional fee

Code of conduct No prescribed code of conduct. Code of conduct prescribed by the

professional bodies needs to be
followed.

Advertisement Products and services are advertised Advertisement is prohibited as per

to increase sales. professional code of conduct.

Transfer of interest Possible Not possible

Risk factor Always present Not always present

Forms of Business

1. Sole Proprietership
2. Partnership
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 3. Hindu Undived Family
4. Limited Liability Partnership
5. Joint Stock Company
6. One Person Company
7. Micro, Small & Medium Enterprises

1. Sole Proprietorship - sole proprietorship is a business that can be owned and controlled by an individual,
a company or a limited liability partnership. There are no partners in the business.
The legal status of a sole proprietorship can be defined as follows:
 It is not a separate legal entity from the business owner
 The business owner has unlimited liability (i.e. the business owner is personally liable for all the
debts and losses of the sole proprietorship)
 It can sue or be sued in the owner’s name

Examples of sole proprietors include –

small businesses such as, a local grocery store, a local clothes store, an artist, freelance writer, IT
consultant, freelance graphic designer, etc

Characteristics of sole proprietorship-

 Single ownership: A sole proprietorship is wholly owned by one individual. The individual
supplies the total capital from his own wealth or from borrowed funds.
 One-man control: The proprietor alone takes all the decisions pertaining to the business.
He is not required to consult anybody. Ownership and management are vested in the same
person. Some persons may be employed to help the owner but ultimate control lies with
him.
 No legal entity: A sole proprietorship has no legal identity separate from that of its owner.
The law makes no distinction between the proprietor and his business. The business and the
owner exist together. If the owner dies or becomes insolvent the business is dissolved.
Business and the proprietor are one and the same.
 Unlimited liability: The proprietor is personally liable for all the debts of the business. In
case the assets are insufficient to meet its debts, the personal property of the proprietor can
be attached.
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  No profit-sharing: The sole proprietor alone is entitled to all the profits and losses of
business. He bears the complete risk and there is nobody to share the profits or losses.
 Small size: The scale of operations carried on by a sole proprietorship is generally small. A
sole trader can arrange limited funds and managerial ability. Therefore, the area of
operations is limited.
 No legal formalities: No legal formalities are required to start, manage and dissolve sole
trader business.

Advantages of sole trading include that:

 you’re the boss
 you keep all the profits
 start-up costs are low
 you have maximum privacy
 establishing and operating your business is simple
 it’s easy to change your legal structure later if circumstances change you can easily wind up
your business.
 Disadvantages of sole trading include that:
 you have unlimited liability for debts as there’s no legal distinction between private and
business assets
 your capacity to raise capital is limited
 all the responsibility for making day-to-day business decisions is yours
 retaining high-calibre employees can be difficult
 it can be hard to take holidays
 you’re taxed as a single person the life of the business is limited.

Partnership
A partnership is a kind of business where a formal agreement between two or more people is made
who agree to be the co-owners, distribute responsibilities for running an organization and share the
income or losses that the business generates.
In India, all the aspects and functions of the partnership are administered under ‘The Indian
Partnership Act 1932’. This specific law explains that partnership is an association between two or
29
more individuals or parties who have accepted to share the profits generated from the business
under the supervision of all the members or behalf of other members.

Features of Partnership
 Agreement between Partners: It is an association of two or more individuals, and a
partnership arises from an agreement or a contract. The agreement (accord) becomes the
basis of the association between the partners. Such an agreement is in the written form. An
oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always
good, if the partners have a copy of the written agreement.
 Two or More Persons: In order to manifest a partnership, there should be at least two (2)
persons possessing a common goal. To put it in other words, the minimal number of partners
in an enterprise can be two (2). However, there is a constraint on their maximum number of
people.
 Sharing of Profit: Another significant component of the partnership is, the accord between
partners has to share gains and losses of a trading concern. However, the definition held in
the Partnership Act elucidates – partnership as an association between people who have
consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of
gains and losses is vital.
 Business Motive: It is important for a firm to carry some kind of business and should have a
profit gaining motive.
 Mutual Business: The partners are the owners as well as the agent of their firm. Any act
performed by one partner can affect other partners and the firm. It can be concluded that this
point acts as a test of partnership for all the partners.
 Unlimited Liability: Every partner in a partnership has unlimited liability.

Types of Partnerships

A partnership is divided into different types depending on the state and where the business operates.
Here are some general aspects of the three most common types of partnerships.
 General Partnership- A general partnership comprises two or more owners to run a
business. In this partnership, each partner represents the firm with equal right. All partners
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 can participate in management activities, decision making, and have the right to control the
business. Similarly, profits, debts, and liabilities are equally shared and divided equally. In
other words, the general partnership definition can be stated as those partnerships where
rights and responsibilities are shared equally in terms of management and decision making.
Each partner should take full responsibility for the debts and liability incurred by the other
partner. If one partner is sued, all the other partners are considered accountable. The creditor
or court will hold the partner’s personal assets. Therefore, most of the partners do not opt for
this partnership.
 Limited Partnership - In this partnership, includes both the general and limited partners.
The general partner has unlimited liability, manages the business and the other limited
partners. Limited partners have limited control over the business (limited to his investment).
They are not associated with the everyday operations of the firm. In most of the cases, the
limited partners only invest and take a profit share. They do not have any interest in
participating in management or decision making. This non-involvement means they do not
have the right to compensate the partnership losses from their income tax return.
 Limited Liability Partnership - In Limited Liability Partnership (LLP), all the partners
have limited liability. Each partner is guarded against other partners legal and financial
mistakes. A limited liability partnership is almost similar to a Limited Liability Company
(LLC) but different from a limited partnership or a general partnership.
 Partnership at Will- Partnership at Will can be defined as when there is no clause
mentioned about the expiration of a partnership firm. Under section 7 of the Indian
Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become a
Partnership at Will are:
 The partnership agreement should have not any fixed expiration date.
 No particular determination of the partnership should be mentioned.
Therefore, if the duration and determination are mentioned in the agreement, then it is not a
partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of the
firm continues beyond the mentioned date that it will be considered as a partnership at will.
Indian Partnership Act 1932
Most of the businesses in India adopt a partnership business, so to monitor and govern such
partnership The Indian Partnership Act was established on the 1st October 1932. Under this

31
partnership act, an agreement is made between two or more persons who agrees to operate the
business together and distribute the profits they gain from this business.

Advantages of Partnership:
 Easy Formation – An agreement can be made oral or printed as an agreement to enter as a
partner and establish a firm.
 Large Resources – Unlike sole proprietor where every contribution is made by one person,
in partnership, partners of the firm can contribute more capital and other resources as
required.
 Flexibility – The partners can initiate any changes if they think it is required to meet the
desired result or change circumstances.
 Sharing Risk – All loss incurred by the firm is equally distributed amongst each partner.
 Combination of different skills – The partnership firm has the advantage of knowledge,
skill, experience and talents of different partners.

Partnership Examples:
 Few co-branding partnership examples are listed below:
 Red Bull and GoPro
 Spotify and Uber
 Levi’s & Pinterest
 Maruti Suzuki
 Hindustan Petroleum

Hindu Undivided Family Business

Hindu Undivided Family business is a precise kind of business structure found only in India. This is
one of the classical methods of business structure in the nation. It is administered by the Hindu
Law. The source of membership in the company is birth in a family and 3 consecutive generations
can be members of the company.

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The business is managed by the head of the family (eldest member) and he is called Karta.
However, all the members hold equal ownership over the property of an ancestor and they are
called as co-parceners.
Meaning of Joint Hindu Family Business
It refers to a form of business organization which is owned and carried on jointly by the members of
the Hindu Undivided Family (HUF).
It is also known as Hindu Undivided Family Business.

Characteristics of Joint Hindu Family Business:

Formation

 There should be at least two male members in the family to form a HUF.

 Ancestral property should have been inherited by members of HUF.

 All of the members enjoy this property and have an equal share in that property.

 Thus, any child taking birth in that family becomes a member of the HUF.

 There is no requirement for an agreement to become a member.

Liability

 There is limited liability of all the members or co-parceners in the Hindu Undivided Family
business.

 All the co-parceners have equal rights and shares in the property of Hindu Undivided Family
business
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  The Karta has unlimited liability.

Control

 Karta is the person who has full control over the Hindu Undivided Family business.

 Karta can take advice from all the members but he is not bound to accept their decisions.

Continuity

 After the “Karta” is deceased, the very next eldest member takes up the position of Karta in
Hindu Undivided Family business.

 The business can be divided and ended up by the mutual consent of the members.

Minor Members

 The person who has taken birth in Hindu Undivided Family can be a member of the family
business.

 Therefore, a minor can also be a member of the family

Important terms which are used in a Joint Hindu Family Business:

(1) Hindu Undivided Family
The family who runs or carry on the business organization.
Hindu Undivided Family includes an eldest male member ‘Karta’ and the other male members
called co-parceners.
(2) Karta
He is the person who is the head and eldest member of the family.
Karta is the person who has full control over business activities.
(3) Ancestral Property
It is the property of forefather or an ancestor and over which the members have equal right.
(4) Co-parceners
It consists of propositus and three lineal descendants.
They have equal ownership rights over the property of an ancestor.

Systems which are used in a Joint Hindu Family Business-

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There are two systems which are used in joint Hindu family business :
(1) Dayabhaga System
It prevails in West Bengal & Assam and allows both the male and female members of the family to
be co-parceners.
A son gets right in the ancestral property only after the death of his father.
(2) Mitakashara System
There are four sub-schools – Benares, Mithila, Maharashtra or Bombay, and Dravida or Madras
school.
 The application of schools of Mitakshara is regionwise.
 Mostly, it prevails in most parts of India, except West Bengal.
 It allows only the male members to be co-parceners in the business.
Note: The Hindu Succession (Amendment) Act, 2005 gave Hindu women the right to be
coparceners or joint legal heirs in the same way a male heir does.

The merits of the joint Hindu family business are as follows:

 Effective Control
The Karta has full control over the business activities and takes a decision quickly.
No one can interfere in the decision of Karta as every member is bound to accept his
decision.
Hence, it avoids clashes among the members and results in very speedy decision making.
 Continued Business Existence
After the death of Karta, the next eldest member takes up his position. So, it does not affect
the activities of the business.
Hence, all the business activities are done smoothly, continuously without any threat.
 Limited Liability of Members
As all the liability of the members is restricted to the extent of their share in the business.
But the Karta has unlimited liability due to his complete hold on the business.
Hence, in case of dissolution of the business, Karta’s personal assets and his share will be
liable.
 Expanded Loyalty and Cooperation

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 All the business operations are carried on by the members of a family jointly.
So, this increases loyalty and cooperation with each other without any hindrance.
Therefore, all the targets of the business can be achieved by the cooperation among the
members and the Karta.
Limitations of a Joint Hindu Family Business
Below-mentioned are the few demerits of a joint Hindu family business:
Limited Resources
 All the members of Joint Hindu Family Business totally depend upon the ancestral property
due to their limited liability.
 Many commercial banks resist extending the credit limit due to the weak financial position
of the business.
 Hence, this will result in limited expansion and growth of the business.
Unlimited Liability of Karta
 All the important decision regarding management of various business activities are taken by
Karta.
 But there is a disadvantage with the Karta that he has unlimited liability.
 Hence, all the business debts are paid by using the personal assets of the Karta.
Dominance of Karta
 The Karta takes all the decisions individually and manages the business
 He also involves other members in decision making.
 But Karta is not bound to accept the decisions of the members which may create conflicts
between the Karta and the other members.
 Hence, due to clashes in decision making, lack of cooperation between Karta and other
members occurs.
Limited Managerial Skills
 Sometimes the members suffer due to unfair decisions taken by the Karta in respect of
business operations.
 Unfair decisions are taken due to the lack of managerial skills.
 So, the Karta cannot be knowledgeable or proficient in all managerial functions.
 Nowadays, the joint Hindu family business is declining due to the decreasing number of
joint Hindu families in the nation.
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 Joint Stock Company
A joint stock company is an organisation which is owned jointly by all its shareholders. Here, all the
stakeholders have a specific portion of stock owned, usually displayed as a share.
Each joint stock company share is transferable, and if the company is public, then its shares are marketed on
registered stock exchanges. Private joint stock company shares can be transferred from one party to another
party. However, the transfer is limited by agreement and family members.

Features of Joint Stock Company

 Separate Legal Entity – A joint stock company is an individual legal entity, apart from the persons
involved. It can own assets and can because it is an entity it can sue or can be sued. Whereas a
partnership or a sole proprietor, it has no such legal existence apart from the person involved in it. So
the members of the joint stock company are not liable to the company and are not dependent on each
other for business activities.
 Perpetual – Once a firm is born, it can only be dissolved by the functioning of law. So, company life
is not affected even if its member keeps changing.
 Number of Members – For a public limited company, there can be an unlimited number of members
but minimum being seven. For a private limited company, only two members. In general, a
partnership firm cannot have more than 10 members in one business.
 Limited Liability – In this type of company, the liability of the company’s shareholders is limited.
However, no member can liquidate the personal assets to pay the debts of a firm.
 Transferable share – A company’s shareholder without consulting can transfer his shares to others.
Whereas, in a partnership firm without any approval of other partners, a partner cannot move his
share.
 Incorporation – For a firm to be accepted as an individual legal entity, it has to be incorporated. So,
it is compulsory to register a firm under a joint stock company.

Types of Joint Stock Company

The joint stock company is divided into three different types.
1. Chartered Company – A firm incorporated by the king or the head of the state is known as
a chartered company.

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 2. Statutory Company – A company which is formed by a particular act of parliament is
known as a statutory company. Here, all the power, object, right, and responsibility are all
defined by the act.
3. Registered Company – An organisation that is formed by registering under the law of the
company comes under a registered company.

Example of Joint Stock Company-

 Indian Oil Corporation Ltd.
 Tata Motors Ltd.
 Reliance Industries Ltd.

What are the legal documents required for a joint stock company?
 Joint stock company requires the following legal documents:
 Article of Association
 Memorandum of Association
 Prospectus

One Person Company

One Person Company (OPC) has been recently introduced in India to promote business enterprises that are
owned and managed by a single Entrepreneur. Corporate entities like Limited Liability Partnership, Private
Limited Company and Limited Company require two or more people to partner. However, a OPC allows for
a single individual to own and manage the business. One Person Company is therefore a viable option for
those looking to start an unregistered Proprietorship. In this article, we compare starting and managing a One
Person Company vs Private Limited Company in India.

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Cost of Registration
The cost for registration of One Person Company is lower than the cost of registration of a Private
Limited Company. The all inclusive cost for registration of a One Person Company
through IndiaFilings.com is Rs.15,000/- while the all inclusive cost for registration of a Private
Limited Company through IndiaFilings.com is Rs. 16,000/-.
Number of Person Required to Incorporate
To incorporate a One Person Company, two person are required. The Director of the One Person
Company and Nominee Director. The Nominee Director is responsible for management of the
Company in case the Director is not able to execute his functions. To incorporate a Private Limited
Company, two persons are required.
Board of Directors

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There is not concept of Board of Directors in a One Person Company as the entity can be managed
by a single person. The concept of Annual General Meeting and Board Meetings is also not
applicable for a One Person Company. A private limited company has a Board of Directors
comprising of a minimum of two Directors to a maximum of seven Directors.
Shareholding
The 100% shares of a One Person Company can be held by a single person. A private limited
company must have a minimum of two shareholders. Therefore, 100% of the shares of a private
limited company cannot be held by a single person.
NRI or Foreign Nationals
Only Indian Citizens and Indian Nationals are allowed to start a One Person Company. Private
limited company can be started and managed by NRIs and Foreign Nationals. 100% FDI is
available in Private Limited Company for a number of sectors.
Compliance Requirements
The compliance requirements of a One Person Company and Private Limited company are almost
similar. Both, One Person Company and Private Limited Company are required to file their annual
returns with the Ministry of Corporate Affairs and their Income Tax Returns with the income tax
department. Both One Person Company and Private Limited Company are also required to get their
account audited each year.
Limitations
A One Person Company must be mandatorily converted into a Private Limited Company if the
annual sales turnover exceeds Rs.2.00 crores or the paid up capital of the One Person Company
exceeds Rs.50 lakhs. A private limited company has no such limitations and no requirement for
mandatory conversion under any circumstance
Naming Guidelines
 You have to comply with the rules and regulation of companies act for registration of your
valid name of the company. You have to meet with given below guidelines.
 The name shall not be identical with or resemble too nearly to the name of existing
company.
 The name shall not be undesirable in the opinion of the central law.
 The name shall not constitute an offense

40
  The name shall not use any word which shows that it connected with government except
approval from the government.
 Plural version of any of the words appearing in the name of an existing company doesn’t
make a name unique.
 The proposed name should not violate section 3 of the Emblems Act 1950.
 The word “State” will only be allowed in the case of a government company.
 If you are adding words like New, Modern, Shri, Sri, Shree, Om, Jai, Sai, The, etc. does not
make a name unique.
 If you are making a name with a different combination of the same word it does not make a
unique name.
 You cannot use words like Rashtrapati, Republic, panchayat, municipal, minister, nation,
governor except approval from the government.

Rejection of Name
 Name of OPC may be rejected in given below conditions
 If the name is to general without any distinct word or identity.
 If it does not include the suitable prefix.
 Similar to other existing company.
 The proposed name resembles closely with the popular or abbreviated description of a
current company.
 If the Proposed name is offensive for certain section of people.
 If the Proposed name includes the word “British India.”
 If the Proposed name consists of the name of an enemy country.
 Your name can be rejected if other condition of valid surname not fulfilled.

Examples – Amazon, ebay , etc

Sole proprietorship v/s One Person Company

•The biggest difference between a sole proprietor and a One Person Company would be that in case
of a One Person Company, your liability in case the business fails, is limited to only the business

41
assets.
•In case of a proprietorship, the liability is unlimited and the creditors of your business can even
take hold of your home and personal assets like your house, personal bank accounts etc which can
be used to settle the business liabilities.
•Owing to the feature of it having a separate legal entity from its owners, the OPC is taxed
separately, unlike a sole proprietorship

Micro, Small and Medium Enterprises (MSME)

In India, MSMEs contribute nearly 8% of the country’s GDP, around 45% of the manufacturing
output, and approximately 40% of the country’s exports. It won’t be wrong to refer them as the
‘Backbone of the country.’
The Government of India has introduced MSME or Micro, Small, and Medium Enterprises in
agreement with Micro, Small and Medium Enterprises Development (MSMED) Act of 2006. These
enterprises primarily engaged in the production, manufacturing, processing, or preservation of
goods and commodities.
MSMEs are an important sector for the Indian economy and have contributed immensely to the
country’s socio-economic development. It not only generates employment opportunities but also
works hand-in-hand towards the development of the nation’s backward and rural areas. According
to the annual report by the Government (2018-19), there are around 6,08,41,245 MSMEs in India.

Importance of MSMEs for Indian Economy

Employment: It is the second largest employment generating sector after agriculture. It provides
employment to around 120 million persons in India.
Contribution to GDP: With around 36.1 million units throughout the geographical expanse of the
country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from
service activities.
MSME ministry has set a target to up its contribution to GDP to 50% by 2025 as India becomes a
$5 trillion economy.
Exports: It contributes around 45% of the overall exports from India.
Inclusive growth: MSMEs promote inclusive growth by providing employment opportunities in
rural areas especially to people belonging to weaker sections of the society.

42
For example: Khadi and Village industries require low per capita investment and employs a large
number of women in rural areas.
Financial inclusion: Small industries and retail businesses in tier-II and tier-III cities create
opportunities for people to use banking services and products.
Promote innovation: It provides opportunity for budding entrepreneurs to build creative products
boosting business competition and fuels growth.
Thus, Indian MSME sector is the backbone of the national economic structure and acts as a bulwark
for Indian economy, providing resilience to ward off global economic shocks and adversities.

43
44
MSME redefined
The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 proposes to
reclassify all MSMEs, whether they are manufacturing or service-providing enterprises, on the basis
of their annual turnover.

The bill was introduced in the Lok Sabha and further referred to the Standing Committee which
tabled its report on 28 December 2018.

Benefits of proposed reclassification

 The new classification would eliminate the need for frequent inspections which was earlier
required to check the investment in plant and machinery.
 It would be a non discriminatory, transparent and objective criterion.

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Factors which led to growth of MSMEs
 Campaigns like Skill India, Startup India, Digital India and Make in India aim to provide
MSME players with a level playing field and a definitive push towards enhanced
productivity.
 Digitization: Increasing internet penetration, customer’s familiarization with digital
payments fuelled by B2C ecommerce players facilitate MSME sector growth.
 Tie-ups with new-age non-banking finance (FinTech) companies allowed access to timely
collateral free finance to MSMEs.
 Changing employment patterns: Younger generation shifting from agriculture towards
entrepreneurial activities creating job prospects for others.

Highlights of new MSMEs

‘Atma Nirbhar Bharat Abhiyan’ or the Self-Reliant India Scheme of 2020 by the
Government of India has given a new definition for MSMEs.

Following are a few highlighting features of new MSMEs –

 A provision of Collateral Free Loans to MSMEs
 An arrangement of loans to MSMEs worth of Rs. 3 lac crores
 An offer for MSMEs to get a Moratorium period of 12 months
 Consideration of Manufacturing and Service MSMEs as the same entities
 MSM is a granted a repayment Tenure of 48 months
 MSMEs are assured a 100% Credit Guarantee
 Reclassification of MSMEs will benefit approximately 45 Lac units.

Features of MSMEs

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  MSMEs work for the welfare of the workers and artisans. They help them by giving
employment and by providing loans and other services.
 MSMEs provide credit limit or funding support to banks.
 They promote the development of entrepreneurship as well as up-gradation of skills by
launching specialized training centers for the same.
 They support the up-grading of developmental technology, infrastructure development,
and the modernization of the sector as a whole
 MSMEs are known to provide reasonable assistance for improved access to the domestic
as well as export markets.
 They also offer modern testing facilities and quality certification services.
 Following the recent trends, MSMEs now support product development, design
innovation, intervention, and packaging.

Role of MSMEs in Indian Economy

Since its formation, the MSME segment has proven to be a highly dynamic Indian economy
sector. MSMEs produce and manufacture a variety of products for both domestic as well as
international markets. They have helped promote the growth and development of khadi, village,
and coir industries. They have collaborated and worked with the concerned ministries, state
governments, and stakeholders towards the upbringing of rural areas.
MSMEs have played an essential role in providing employment opportunities in rural areas. They
have helped in the industrialization of these areas with a low capital cost compared to the large
industries. Acting as a complementary unit to large sectors, the MSME sector has enormously
contributed to its socio-economic development.
MSMEs also contribute and play an essential role in the country’s development in different areas
like the requirement of low investment, flexibility in operations, mobility through the locations,
low rate of imports, and a high contribution to domestic production.
With the capability and capacity to develop appropriate local technology, provide fierce
competition in domestic and international markets, technology-savvy industries, a contribution
towards creating defense materials, and generating new entrepreneurs by providing knowledge,
training, and skill up-gradation through specialized training centers.

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Thus, Indian MSME sector is the backbone of the national economic structure and acts as a bulwark
for Indian economy, providing resilience to ward off global economic shocks and adversities.

48
 Unit 3
Business Combination

Let’s think about the concept of ‘organization’. Many definitions are possible, but most of these
include the characteristics of people, goals and structures. People are social beings and, by and
large, tend to cooperate in interdependent relationships to achieve common aims. Originally
people formed simple family and tribal structures. Today we have evolved into a complex
society characterized by large, formal and increasingly global structures. For our purposes, then,
we can define an organization as: a social entity that provides the necessary structures to achieve
specific aims. For our purpose we will understand the term business to mean: a commercial
enterprise or establishment that trades in goods or services.

The business organization can be defined as an entity that is both commercial and social, which
provides the necessary structures to achieve the central objective of trades in goods or services.

Understanding the business organization – a multidisciplinary approach

Business and management are to help explain:

 How people interact at work

 The effects of different organizational structures on people; sociology can particularly
contribute to our understanding of social relations within the organization, such as the
interaction of employees, power relations and social groupings
 The ways in which business and management have impacts on wider society

Business Combination: Definition, Types and Forms of Business Combinations,

Advantages, Disadvantages

When a voluntary association of firms is formed to achieve common goals and to enjoy the
monopoly advantages, that sort of initiative is called business combination.
The combination may be formed by a written or oral agreement among the firms.

49
Sometimes firms decide to merge themselves into one unit. The main object of the business
combination is to achieve common economic welfare for its members.
But it is considered to be unlawful if any of its objectives is against the public interest. Business
combinations may be permanent or temporary.
Types of Business Combinations

Combinations may take several forms, such as horizontal, vertical, lateral, and diagonal, circular,
or maybe a mixture of two or more of these types.
1.Horizontal Combination
A horizontal combination comes into being when units carrying on the same trade or pursuing
the same productive activity join together with a common end in view.
Example of horizontal combinations is;
 Disney’s 2006 acquisition of Pixar.
 Facebook’s 2012 acquisition of Instagram.

The intensity of competition is naturally reduced when several units competing in the same line
of business join together. The combining units can well take advantage of the various economics
associated with large scale production by making common purchases, pooling resources for
research, common advertising, etc.

2.Vertical Combinations
Vertical integration is the combination of firms in successive stages of the same industry. It
implies the integration of various processes of an industry.

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Vertical combinations are brought into existence with the following objects in view:
 To eliminate the wasteful and unnecessary expenses involved in carrying on the
connected processes separately.
 To eliminate middlemen functioning between various units
 To securer economies in marketing, advertising, and transport
 To maintain control over the quality of raw materials and finished products.
3.Lateral Combination
 Lateral integration refers to the combination of those firms which manufacture different
kinds of products though they are ‘allied in some way.’
It can be of two kinds;
 convergent lateral integration, and
 Divergent lateral integration.

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The convergent lateral combination comes into existence when different forms join together to
supply goods and services to help the functioning of major undertakings.
Example: For instance, a book publishing may join with other units producing paper, doing
printing work, and providing bookbinding services.

4.Diagonal Combination
It is also called ‘Service’ integration Diagonal integration comes into existence when a unit
providing auxiliary goods and services to industry is combined with a unit engaged in the
mainline of production, within the organization.

Example: For example, if an industrial enterprise combines with a transport company, a power
station or a repairs and maintenance workshop, and makes these facilities available within the
organization, it will be said to have effected diagonal integration.

5.Circular Combination

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When firms belonging to different industries and producing altogether different products and
combine under the banner of a central agency, it is called a mixed or circular combination.
This is affected to ensure smooth conduct of business operations by making timely availability of
auxiliary services within the organization.

Example, For example, Godrej is engaged in the manufacturing of cosmetics, electrical goods,
office equipment locks, etc. The object is to secure the benefits of large-scale operations arising
out of co-operation.

Forms of Business Combinations

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 Combinations take different forms that have been developed over some time.

A. Associations
1. Trade associations.
2. Chambers of commerce.
3. Informal agreements.
B. Federations
1. Formal Agreement.
2. Pools.
3. Cartels.
C. Consolidations
1. Partial consolidations
i. Trust.
ii. Holding companies.
iii. Community of Interest
2. Complete consolidations
i. Mergers.
ii. Acquisition.
iii. Amalgamations.
a. Associations
Business units combine to attain some purposes without surrendering their autonomy.
 Trade Associations - Under trade association, business units engaged in a particular
trade generally come together and discuss matters for the promotion of their economic
and business interest.They are generally formed on ‘territory bases.Such association is
organized on a non-profit basis and is essentially educational. Sometimes the association
may make representations to the government to safeguard the interests of a trade or an
industry.
 Chamber of Commerce - Chamber of commerce is voluntary associations of persons
connected with commerce, trade, and industry. These are formed with the object of
promoting and protecting the interests of business and business communities in a region,
country, or even in the world as a whole. Their functions include promoting, supporting,

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 or opposing legislative or other measures affecting the trade interests of the members, the
collection and dissemination of information concerning trade, commerce, etc. to
members. They also undertake the function of referring disputes arising out of trade
activities to arbitrations for settlement, performing such other things as may be conducive
to the expansion of trade.
 Informal Agreement - Informal agreements involve the exchange of promise among
members regarding restriction of output, fixation of prices, etc. They are also referred to
as Gentlemen’s agreements. It is only the moral duty of business units to keeping the
promise.
B. Federations

Federations form of combination aims at rendering benefit to member-units for certain specific
purposes under an agreement. Of such federations, ‘ Pools’ and ‘Cartels’ are most notable.
 Pools - It means that the members of the pooling agreement joint together to regulate the
demand or supply of a product without surrendering their separate entities. The
agreement may relate to the regulation of output, reallocation of output, redistribution of
income, etc. Haney defines and industrial pools as a form of a business
organization established through a federation of business units whose members seek a
degree of control over prices by combining some factors in the price making process in
common aggregate and apportioning that aggregate among members.
 Cartels - A pool having a common sales agency is known as Cartel. It is, thus, an output
and profit pool. The object of a cartel is to eliminate competition by forming a federation
of producers that pool the output, fixes the price, and sells the product. The profits reaped
by cartels are distributed amongst the members – units on a pre-determined basis.
c.Consolidations

The last form of combination is consolidation. This form involves the highest degree of
integration. The consolidation may be of two types:

1.Partial Consolidation
 Trusts - Trusts may be defined as a form of a business organization through temporary
consolidation in which the shareholders of the constituent organizations under a trust
agreement transfer a controlling amount of their stock to a board of trustees in exchange

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 for a trusted certificate. These trust certificates show their equitable interests in the
income of the combinations. Thus, trustees under the trust manage the affairs of the
member concerns in the interests of the real owners, who are entitled to dividends based
on trust certificates held by them.
 Holding Companies - A holding company is a form of business organization that is
created to combine industrial units by owning a controlling amount of their share capital.
Controlled companies are referred to as subsidiary companies. The subsidiaries are
independent and function in their name. But they are effectively managed by the holding
company.
 Community of Interests - A Community of interest may be defined as a form of
business organization, in which without any formal central administration, the business
policy of several companies is controlled by a group of common stockholders or
directors.
Thus, the administration of different companies is possible either through managerial integration,
administrative integration, or financial integration.

2.Complete Consolidation

In complete consolidation, the combining units lose their entity.

It is defined as a form of business organization which is established by the outright purchase of
the properties of the constituent organizations and the merging of such properties into single
business units.
Complete consolidation may be of the following types:
 Merger - A merger takes place when; two or more organizations merge, and their
operations are absorbed by a news organization.
 Acquisition - Acquisition refers to the process of acquiring a company at a price called
the acquisition price or acquisition premium. The price is paid in terms of cash or
acquiring the company’s shares or both.
 Amalgamation - Amalgamation is an arrangement where two or more companies consolidate
their business to form a new firm or become a subsidiary of any one of the companies.

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Causes/Reasons for Business Combination
Elimination of Competition
Due to hard competition among the firms’ rate of profit decreases. Some firms may suffer a loss
also. So the industrialists feel pleasure in setting up a combination to avoid the competition.
To Solve Capital Problem
Small units of production face the problem of capital shortage. They cannot expand their
businesses. As a result, small units may form a combination to overcome this problem.
To Achieve Economies
Some small units combine themselves to achieve the economies of large scale production
advantage. It helps to purchase the raw materials at low prices and sell more product which
would increase the profit
Effective Management
Generally, small units are unable to hire the services of experts and experienced managers. So
small industrial units combine themselves to hire the services of effective management
Tariff Facilities
To compete with external firms, some industrial units combine themselves. The government also
imposes heavy duties to protect domestic producers.
Uniform Policy
All the units adopt uniform policy due to business combinations. It regularizes the business
activities of all the units.
Use of Technology
The business combination can use the latest technology and new methods of production because
its sources are sufficient. In contrast, a single unit cannot do so.
To Face Crises
It is very difficult for the small industrial units to face crises in the days of inflation and
deflation. So the small units combine themselves to face these problems easily.
Growth of Joint Stock Companies
The growth of Joint-stock companies has also made it possible for various industrial units to
form combinations.
Status in Market

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A big firm enjoys a higher status and respect than the smaller one. So, small business units prefer
to combine themselves for higher status.
Demand and Supply Balance
A business combination is very useful in controlling the overproduction. It adjusts the supply
according to the demand of the market. So overproduction cannot take place, and prices remain
stable.
Transport and Communication Development Activities
It has made economic activities fast. Now there is close contact with a businessman with the
others. So it has also contributed to the growth of combination.
Research Facilities
Small firms cannot set up the research department, while through business combination, these
facilities can be enjoyed.
Economic Instability
In the case of economic and political instability, there is a chance of loss in every moment. To
reduce the risk, small industrial units combine themselves.
Advantages of Business Combination
The advantages of a combination are controversial because the creation of monopoly and
elimination of competition both are considered the merits and demerits of the combination.
Anyway, the following are the significant merits of combination:
Increase in Capital
The volume of capital may be increased by the formation of a combination. The members
combine their resources to conduct large size business.
Elimination of Competition
By the formation of combination, unnecessary competition is eliminated, and member firms earn
monopoly profit.
Saving in Expenses
Administrative production and distribution expenses reduce due to combination.
Controls over Production
The combination is very effective in controlling overproduction. It helps to adjust the supply
according to the demand.
Large Scale Marketing

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In the market, competition position is strong in bargaining. So it sells the product at a higher
price.
Experts Services
A combination can acquire the services of experienced specialists. It increases the efficiency of
the combination.
Research Work
A combination can spend money on research work, which is very important for the business.
This research work reduces its cost and increases its profit.
Use of Modem Technology
A combination is capable of using the latest inventions and new methods of production as a
consequence of a transfer of technology. It will increase profit.
Stability
A combination is a more stable form of business as compared to the individuals’ units. The
chances of dissolution are also less than others.
Division of Labor
The principle of division of labor is applied in combination, which increases the production
efficiency of combination.
Disadvantages of Business Combination
Following are important disadvantages of combination:
Creation of Monopoly
It creates a monopoly that is harmful to the people in the long run.
The concentration of wealth
It concentrates the wealth in a few hands and divides society into few classes, such as rich,
middle, and poor.
Reluctant to be Accepted
The combination is disliked by the people, and it is not acceptable.
Changes in Friction
The chances of friction among directors and officers are bright. They quarrel with, each other for
their interest
No Personal Contact

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It is not possible to maintain direct contact between employees, creditors, and shareholders, due
to this business may suffer a loss.
Costly Management
A combination hires costly management, which increases the cost of production.
Over Capitalization
There is always a danger of over-capitalization in the combination. It is harmful to the
combination.
Misuse of Funds
The directors of the company enjoy unlimited power and misuse the capital.
National Interest Ignored
Generally, the combinations ignore the national interest, and they involved in such activities that
are against the national interest.

Rationalization
The rationalisation is defined as a process or a reorganization concept that is implemented
to boost efficiency and productivity. In the corporate sector, the term is also used for closing
down or selling off some units to adjust the operational structure so that it can be in sync
with core competencies.
Meaning of Rationalization
The rationalisation is a process that every business entity considers important because it aids in
minimizing costs and increasing revenues to improve the bottom line of the financial statement.
It leads to expansion or reduction in the size of the firm or in making structural changes that
result in improved productivity.

The rationalization is a concept of systematic reasoning that is designed to reduce waste in terms
of effort, time and resources and simplify processes for the betterment of a company.
o Securing the maximum efficiency of labour with minimum
effort;
 Eliminating waste of power and raw materials.
 Facilitating reduction in the variety of patterns (where such variety offers no obvious
advantages) search into the methods of manufacture and use of standardized parts.

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 Simplifying distribution of products by eliminating unnecessary transport, burdensome
financial charges and useless interposition of middlemen;
 Securing to the community greater stability and a higher standard of living;
 Ensuring to the consumer lower prices of goods;
 Ensuring a higher and steadier remuneration to be equitably and fairly distributed among
the various classes of producers,
The objectives of rationalisation
 To eliminate waste and inefficiency of every kind.
 To bring about an adjustment in aggregate production and the aggregate demand by
initiating agreements among various firms in the industry.
 To undertake the measures of absorption, amalgamation and reconstruction for the
protection of weaker and inefficient units.
 To maintain stable and fair prices in the best interest of the manufacturers and the
consumers.
 To ensure maximum allocation and utilization of available resources;
 To check over-capitalization and under-capitalization of financial resources in order to
ensure fair return and rational allocation of finances.
 To achieve, the goal of self financing or ploughing back of profits in order to minimize
the burden of bank loans, debentures and other long terms loans.

Need for Rationalization

 Conservation and proper utilisation of resources – An essential need for
rationalization is because the process helps in conserving resources. Numerous resources
are present in a minimal capacity, and it becomes imperative that proper utilization
process takes place so that only the required number is used and the rest is conserved for
future usage.
 Eliminating unnecessary product varieties – in these competitive times, every business
is a rival of another company and is trying to launch products that are different from the
previous ones. This has resulted in several unnecessary varieties of the same product.
Rationalising aids in eliminating useless product varieties via a joint effort of all the
firms. This is possible by standardization of products in terms of design, quality, etc
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  Eliminating idle capacity – When the demand is high various new companies are
formed to meet them, but after a boom period, the smaller units find it difficult to survive.
There is a need for rationalisation because it aids in integrating weak units with the
flourishing ones to eliminate idle capacity
 Replace old machinery- The need for rationalisation is felt in industries because it helps
in replacing old equipment with new, modern, and technologically advanced machinery
to boost operations and efficiency.

Elements of Rationalization
 Standardization – One of the essential elements of rationalization is the standardisation
that eliminates varieties of products that are unnecessary in the scheme of things, cross
weights, and expenses on the competitive advertisement.
 Specialization – Another vital element of rationalization is a specialization that results in
fair division of labour and efficient use of the available resources like human resources
and machinery
 Combination – As the name suggests, rationalization is a planned strategy that utilizes
all the available resources to eliminate waste. It integrates various types of weak and
inept units for large scale production.
 Simplification – The rationalization element simplification results in high production
with reduced costs and it ultimately leads to increased sales.
 Mechanization – The element mechanization is targeted to replace human resources with
machines. It is necessary to boost the efficiency and speed of production because of
automated processes.
 Modernization – rationalization emphasizes on modernization because after a specific
time it is imperative to replace old equipment with new ones if a company is interested in
boosting its efficiency and productivity. It is modern and advanced innovations as well as
techniques that can help a company to take a step forward and that too in the right
direction
 Research – The process of rationalization involves proper marketing research that aids in
taking the steps needed to know and meet the demands of people.

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Advantages
 Rationalization helps in the standardization of processes that simplify the manufacturing
method and eliminates waste
 It helps in introducing new techniques as well as the latest equipment and machinery that
boosts productivity
 Rationalization aids in avoiding unhealthy competition
 Unsold stock is a massive problem for every sector and rationalization aids in mitigating
this problem by removing unhealthy competition
 Enhances the creditworthiness of weaker and inefficient units by integrating them with
strong ones
 Improves market stability
 The process of rationalization offers higher remuneration and good security to the
workforce
 One of the advantages of rationalization is that it provides the workforce with a chance to
develop their efficiency levels
 It provides the workforce with better working conditions
 As rationalization lowers the production cost, the consumers can avail of the benefits via
reduced prices. One of the significant advantages of this process has been offering
products to the consumers at considerably lower rates
 The improvement in technique leads to qualitative and standardized products to the
consumer
 Rationalization assist in increasing the standard of living in a society
 It reduces wasteful competition and helps in conserving resources
 Rationalization decreases the coat of production, and this helps the companies to compete
in foreign markets
Disadvantages
 The process of rationalization involves a large number of capital expenses and that too
without the guarantee of adequate returns
 It is sometimes unable to check trade cycles
 Raising funds for the process of rationalization from external sources is difficult

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  Rationalization needs further research and development to continue with the process of
improvements, and it is not possible to keep with it every time
 The rationalization is about being fair and equitable, but it is unable to determine the
sharing ratio between employers and employees
 Rationalization promotes mechanization and modernization, and that leads to
unemployment of workers because of automated processes
 It is a common belief that the human resources that are deployed after the process of
rationalization will have to work doubly hard to compete with each other as well as
automated processes
 Even when working harder the workers feel that they are given nominal income
compared to the workload they are handling
 The method of modernization and mechanization is becoming more important than
improving the living conditions of the workforce
 Mechanization has created monotony as the workforce has lost the initiative to make
changes

Nationalization
In economics, nationalization means the establishment of public ownership over the principal
means of production. Nationalization implies that, on behalf of the nation, the government of the
country owns and operates the productive system, and sometimes also the distributive system.
Nationalization is usually done in piecemeal. One after another, the important industries are
brought under government ownership.
It is a step towards socialism which usually signifies a system in which all major productive
enterprises have been nationalized.

Key Notes of Nationalization

Nationalization refers to a situation where the government or state takes over a company in the
private sector.
When the government seizes control of the organization, the result will be ownership or partial
ownership.

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This process can occur for several reasons – to prevent collapse, enhance social benefits, or as a
form of investment, to name a few.
A common industry that has experienced nationalization is the banking or financial sector. After
the global financial crisis, several prominent banks in various countries were nationalized.

Why is nationalization important?

Nationalization often offers the government a fresh supply of revenue. It is sometimes the best
decision to heal a depreciating industry and refresh it for the national benefit. But sometimes,
nationalization can also have adverse effects on the private sector. The former owners are left
without any adequate compensation or when the ownership is forcefully seized from a private
owner without proper excuses.
Why does nationalization occur?
Nationalization can occur for many reasons like saving a struggling industry or organization,
economic profit for the government, a means to bring stability in a developing economy, or as a
way for progress or growth. The government can also seize control over an industry as a
punishment. Nationalization also helps the government manage the profitable resources of a
country better.
The advantages of Nationalization is given below:

1. Safeguards the interests of Laborers: Nationalization also came to be regarded as holding

the key to better relations between labor and management. Under private capitalism the
managers are agents acting for a host of owners. They have therefore to oppose the demands of
labor in every case to safeguard the owners’ interests and to keep their own position absolutely
safe and clear. This would not be so under a system of nationalized industries, because the
interests of the laborers would not be opposed to those of the managers. Both would act on
behalf of the nation and get such rewards for their services as the nation is willing to pay.
2. Technical efficiency and lower cost of production: The managers, freed from their tutelage
to the industrial overlords, would devote themselves entirely to improving technical efficiency
and lowering the cost of production.
3. Cooperation and prosperity for all: The industrial world, under private capitalism, is torn as
under by strife and discords. There are frequent stoppages of production or, at least, the quantity

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and quality of work have to suffer as a result of this bitterness. Nationalization would do away
with industrial unrest and usher in a period of cooperation and prosperity for all.
4. Increased earnings of the State: Nationalization of some important industries would enable
the State to earn large revenue easily and without any extra cost.
5. Control over prices of war supplies: During war, nationalization would help because the
government could not be forced to pay exorbitant prices for war supplies by a handful of war
profiteers.
6. Employment opportunities: In periods of unemployment, people could be given employment
expanding the activities of the nationalized industries.
7. Economic and political growth: In short, nationalization would help the State to order the
political and economic life of the nation more conveniently both in peace and in war. Without
mastery over certain industries, at least, the government would be solely at the mercy of the
economic lords. With nationalization the tables are turned and the State can dictate its own terms
to those industrial magnates as are allowed to remain.
8.Increase in the standard of living.
Disadvantages

Nationalization was a slogan raised by these who were impressed by the wastes of private
capitalism and wanted to introduce considerations of social welfare in the management of a
nation’s economic affairs. The disadvantages of Nationalization is summarized below:

1. Lack of individual initiative: The men who shout these slogans do not always stop to
consider if there can be any progress if individual initiative is stopped. Social philosophers have
often pointed out that in a regime of nationalized industries, the spur of individual advancement
will never be as powerful as it is today. Men will have a tendency to work in accordance with a
dull routine rather than strike out a new path.
2. Lack of freedom: It is only when men can think and act freely as individuals that they can
produce new ideas and make new inventions.
3. Lack of Spirit of competition: Then we must not forget that although modem industry is
often dominated by monopolies, there is some rivalry among them and the spirit of competition
is not entirely dead.
4. Rigid system: State ownership of industries may mean rigid routine and a dead uniformity.

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5. Less intervention of public in economic affairs: Moreover, there is a danger in making the
government the sole master of economic affairs. In private Capitalism the government can act as
the balance-wheel; if anything goes wrong, we can look to the government for redress.

Major differences between Rationalization and Nationalization are as follows:

 Rationalisation is a process or measure adapted in order to increase efficiency of a
particular industry comprising of different industrial units. On the other hand,
nationalisation is a policy of the Government to take over and manage the affairs of an
industry. Such steps are usually undertaken in the best interest of the public. Sometimes
certain sick units, which are not being managed properly by private entrepreneurs, are
nationalised by the Government.
 The main aims of rationalisation are to save the industrial units from wasteful
competition and to organise the industry on rational basis. The main object of
nationalisation is to eliminate exploitation of the society by few privately managed
organisations. It also aims at restricting the creation of monopoly powers in the best
interest of the people. It is a potent instrument in the hands of the Government to fight
against the misuse of power by private organisations.
 The control and management in case of rationalisation remains in the private hands.
Nationalisation takes over the control and management from private entrepreneurs. In
other words, the ownership and management is transferred from private organisations to
government undertakings.
 The measures to be adopted are planned by the private entrepreneurs under
rationalisation. The process of planning is carried out by the Government in case of
nationalised industries.
 Rationalisation is suitable for every type of industry whereas nationalisation is resorted
to in case of industries which are in the interest of the community and public. This
usually includes public utility services. In-spite of the fact that these two concepts are
different, at times they are carried out simultaneously in a particular industry.
The measures like standardisation, simplification and scientific management etc., are applied by
both. The nationalised industries must be controlled and managed in a rationalised way. Both
aim at minimising waste and inefficiency and increasing efficiency of industrial units.

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