Module The Business Environment

Intended Learning Outcomes

At the end of the lesson, you will:

LO1. discuss insights on business environment;
LO2. differentiate the forms of business organizations, elaborate the characteristics,
advantages and disadvantages, and
LO3. differentiate the enterprise based on the scale of business

LESSON 1 – The Concept of Business Environment

Business Environment Defined

Business may be understood as the organized efforts of an enterprise to supply consumers with
goods and services for a profit. Businesses vary in size, as measured by the number of employees or
by sales volume etc. But, all businesses share one common purpose that is to earn profits.

The purposes of business that goes beyond earning profits are:

– an important institution in society
– for the supply of goods and services
– creating job opportunities
– offering better quality of life
– contributing to the economic growth of the country.

Hence, it is understood that the role of business is crucial from the point of view of individuals and
national society as well. Society cannot do without business. Similarly, it requires no emphasis that
business needs society as much. Modern business is dynamic. If there is any single word that can best
describe today’s business, it is ‘change’. It is ‘change’ that makes the companies spend substantially
on Research and development (R&D) to survive in the market. Environment refers to all forces,
which have a bearing on the functioning of business. They can be forces of economic, social, political
and technological factors, apart from internal forces of the organisation.

Environment factors are largely if not totally, external and beyond the control of individual industrial
enterprises and their managements. The business environment poses threats to a firm or offers
immense opportunities for potential market exploitation.
The success of every business depends on adapting itself to the environment within which it
functions. For example, when there is a change in the government polices, the business has to make
the necessary changes to adapt it to the new policies. Similarly, a change in the technology may render
the existing products obsolete, as we have seen that the introduction of computer has replaced the
typewriters; the color television has made the black and white television out of fashion. Again a
change in the fashion or customers’ taste may shift the demand in the market for a particular product,
e.g., the demand for jeans reduced the sale of other traditional wear. All these aspects are external
factors that are beyond the control of the business. So the business units must have to adapt
themselves to these changes in order to survive and succeed in business.

Hence, it is very necessary to have a clear understanding of the concept of business environment and
the nature of its various components.

Features of Business Environment

Understanding environment within which the business is to operate is very important for successful
business. Some of the features of business environment are as follows:
(i) Totality of External Forces: Business environment is the sum total of all things external to
business firms and, as such, is aggregative in nature.
(ii) Specific and General Forces: Business environment includes both specific and general
forces. Specific forces (such as investors, customers, competitors and suppliers) affect
individual enterprises directly and immediately in their day-to-day working. General forces
(such as social, political, legal and technological conditions) have impact on all business
enterprises and thus may affect an individual firm indirectly only.
(iii) Dynamic Nature: Business environment is dynamic in nature. It keeps on changing
whether in terms of technological improvement, shifts in consumer preferences or entry of
new competition in the market.
(iv) Uncertainty: Business environment is largely uncertain as it is very difficult to predict
future happenings, especially when environment changes are taking place too frequently as
in the case of information technology or fashion industries.
(v) Relativity: Business environment is a relative concept since it differs from country to
country and even region to region. Political conditions in the USA, for instance, differ from
those in China or Pakistan. Similarly, demand for sarees may be fairly high in India whereas
it may be almost non-existent in France.
(vi) Multi-faceted: Business environment changes are frequent and depend on knowledge and
existence of business person. Changes may be viewed differently by different individuals. It
may be an opportunity for some or a threat for others.

Importance of Business Environment

Proper understanding of various aspects of business environment such as social, political, legal and
economic helps the business in the following ways:
(i) First Mover Advantage: Early identification of opportunities helps an enterprise to be the
first to exploit them instead of losing them to competitors. For example, Maruti Udyog
became the leader in the small car market because it was the first to recognize the need of
small cars in India.
(ii) Identification of Threats: Identification of possible threats helps in taking corrective and
improving measures to survive the competition. For instance; if an Indian firm finds that a
 foreign multinational is entering the Indian market, it can meet the threat by adopting
measures like, by improving the quality of the product, reducing cost of the production,
engaging in aggressive advertising, and so on.
(iii) Coping with Rapid Changes: All types of enterprises are facing increasingly dynamic
environment. In order to effectively cope with these significant changes, firms must
understand and examine the environment and develop suitable course of action.
(iv) Improving Performance: The enterprises that continuously monitor their environment
and adopt suitable business practices are the ones which not only improve their present
performance but also continue to succeed in the market for a longer period.
(v) Giving Direction for Growth: The interaction with the environment leads to opening up
new frontiers of growth for the business firms. It enables the business to identify the areas
for growth and expansion of their activities
(vi) Meeting Competition: It helps the firms to analyse the competitors’ strategies and
formulate their own strategies accordingly in order to cope with the rapidly increasing
competition.
(vii) Image Building: Environmental understanding helps the business organisations in
improving their image by showing their sensitivity to the environment within which they
are working. For example, in view of the shortage of power, many companies have set up
Captive Power Plants (CPP) in their factories to meet their own requirement of power and
saving to loss of energy in transmission.
(viii) Continuous Learning: Environmental analysis makes the task of managers easier in dealing
with business challenges. The managers are motivated to continuously update their
knowledge, understanding and skills to meet the predicted changes in realm of business.

Types of Business Environment

There are mainly two types of business environment, internal and external. A business has
absolute control in the internal environment, whereas it has no control on the external environment.
It is therefore, required by businesses, to modify their internal environment on the basis of pressures
from external.

1) Internal Environment The internal environment has received considerable attention by firms.
Internal environment contains the owner of the business, the shareholders, the managing
director, the non-managers, employees, the customers, the infrastructure of the business
organization, and the culture of the organization.

It includes 6 Ms i.e.
– Man (Human Resource)
– Money (Financial Factors)
– Marketing Resources
– Machinery (Physical Assets)
– Management Structure and Nature
– Miscellaneous Factors (Research and Development, Company Image and Brand Equity,
Value System, Competitive Advantage)
Usually, these factors are within the control of business. Business can make changes in these
factors according to the change in the functioning of enterprise.

Human Resource (MAN)

The human resource is the important factor for any organization as it contributes to the strength
and weakness of any organization. The human resource in any organization must have
characteristics like skills, quality, high morale, commitment towards the work, attitude, etc. The
involvement and initiative of the people in an organization at different levels may vary from
organization to organization. The organizational culture and over all environment have bearing
on them. It is an internal factor and an organisation has absolute control on changing this factor
as per the needs of the enterprise and other forces.

Financial Factors (MONEY)

Factors like financial policies, financial positions and capital structure are another important
internal factor which has a substantial impact on business functioning and performance.

Financial facilities are required to start and operate the organisation. The sources of finance are
share capital, banking and other financial institutions and unorganised capital markets. The
recent changes in the Indian capital market indicate the availability of plenty of finance, both
from the financial institutions as well as from the general public. The availability of finance
coupled with various incentives attached is a facilitating internal factor.

Marketing Resources
Resources like the organization for marketing, quality of the marketing men, brand equity and
distribution network have direct impact on marketing efficiency of the company and thereby,
affecting the decision making component of the management. This, in lieu has great impact on
the internal environment of business.

Physical Assets and Facilities

Facilities like production capacity, technology are among the factors which influences
the competitiveness of the firm. The proper acquisition and working of the assets is indeed
essential for efficient working of the organization. An organisation invests money in plant and
machinery because it expects a positive rate of return over cost in future. The revenue from the
use of plant and machinery should be sufficient so as to cover the invested money, operating
costs, and generate enough profit to satisfy the organisation. The availability of plant and
machinery is dependent on technological development of the country and the government’s
approach towards foreign technical collaboration.

Management Structure and Nature

The structure of the organization also influences the business decisions. Being internal forces,
the organizational structure like the composition of board of directors influences the decisions
of business. The structure and style of the organization directly has an impact on the decision
making decisions of a firm. These needs to be appropriately managed for smooth functioning
and operations. The strategies available to an organisation are determined by its structure.
Different strategies are better suited to different environments. Thus, if an organisation has to
thrive, its structure must fit its business environment in which it develops. Some markets and
environments change faster than others. A firm working in high technological environment, for
example, needs to have a fast reaction time because its competitors are introducing new
products all the time. In rapidly changing environments, organizations may find it difficult to
stay up to date on all the changes and implications of their own operations and activities.
Organizations in slow markets tend to have rigid, hierarchical structures, while those in
changing markets are more adaptive. They can create new divisions in their management
structure, to deal with emerging issues.

Miscellaneous Factors The other internal factors that contribute to the business environment
are as follows:
(i) Research and Development: Though Research and Development needs are mostly
outsourced from the external environment but it has a direct impact on working,
operations and decision making of the organization. This aspect mainly determines
the company’s ability to innovate and compete. R&D mainly results in technological
improvements of the Business environment. The technological environment refers to the
sum total of knowledge providing ways of doing things. It may include inventions and
techniques which affect the way of doing things that is, designing, producing and
distributing products. A given technology affects an organisation, in the manner it is
organised and faces competition.
(ii) Company Image and Brand Equity: The image of the company in the outside market has
the impact on the internal environment of the company. It helps in raising the
finance, making joint ventures, other alliances, expansions and acquisitions, entering sale
and purchase contracts, launching new products, etc. Brand equity also helps the
company in similar manner.
(iii) Value System: The principles of right and wrong that are accepted by an individual or
organisation are what comprise value system. The value system of the founders and
those at the helm of affairs has important bearing on the choice of business, the mission
and the objectives of the organization, business policies and practices. These values helps
guide the basic principles of business for a period of time which moulds an impression
of positivism among people dealing with the business. The values are independent of
business purposes and are integral part for success of business.
(iv) Competitive Advantage: Competitor analysis is a critical aspect of analyzing the internal
business environment. Competitor’s actions affect the ability of the business to make
profits, because competitors will continually seek to gain an advantage over each other,
by differentiating their product and service, and by seeking to provide better value for
money. It involves:
– identifying the actual competitors
– assessing competitors’ objectives, strategies, strengths & weaknesses, and reaction
patterns
– selecting the strategies to deal with competitors.

The internal analysis of strengths and weaknesses focuses on internal factors that give an
organization certain advantages and disadvantages in meeting the needs of its target market
thereby gaining the competitive edge over the competitors
2) External Environment
The external environment of an organisation comprises of all entities that exists outside its
boundaries, but have significant influence over its growth and survival. An organisation has little
or no control over its external environment but needs to constantly monitor and adapt to these
external changes. A proactive or reactive response leads to significantly different outcomes.

There are two types of external environment

– Micro/Operating Environment
– Macro/General Environment

MICRO ENVIRONMENT
The micro environment is also known as the task environment and operating environment
because the micro environmental forces, though are external factors, still have a direct
bearing on the operations of the firm. The micro environment consists of the factors in the
company’s immediate environment that affects the performance and working of the
company. The micro environmental factors are more intimately linked with the company
than the macro factors. The micro forces need not necessarily affect all the firms in a
particular industry in the similar ways. Some of the micro factors may be particular to any
given type of organisation.

Micro environmental factors, internal factors close to a business that have a direct impact on
its strategy includes:
– Customers – Employees
– Suppliers – Shareholders
– Media – Competitors

(i) Customers: Organizations survive on the basis of meeting ‘customer needs and wants’
and providing benefits to their customers. Failure to do so will result in a failed
business strategy. This includes offering customers the best quality products at
reasonable prices.

(ii) Employees: Employing the correct staff and keeping staff motivated is an essential
part of an organization’s strategic planning process. Training and development play
a critical role in achieving a competitive edge; especially in service sector
marketing. Employees have a substantial influence on the success of the enterprise.
They help in executing the policies and plans of business. If this factor is not given, as
much attention as it requires, it may prove to be non-beneficial for the organisation
as employees after customer, are the backbone of the organisation.

(iii) Suppliers: Suppliers provide businesses with the materials they need to carry out
their manufacturing and production activities. A supplier’s behaviour will directly
impact the business it supplies. For example, if a supplier provides a poor service, this
could increase timescales or lower product quality. An increase in raw material prices
will affect an organization’s marketing mix strategy and may even force price
increases. Close supplier relationships are an effective way to remain competitive and
secure quality products.
(iv) Shareholders: A shareholder is an individual that invests into company’s business.
They own shares of the company thereby end up owning the company itself.
Therefore, they have the right to vote on decisions that affect the operations of
company. This means that shareholders affect the functions of the business. The
introduction of public shareholders brings new pressures as public shareholders
want a return from their money invested in the company. Shareholder pressure to
increase profits will affect organizational strategy. Relationships with shareholders
need to be managed carefully as rapid short term increases in profit could detrimentally
affect the long term success of the business, if all is distributed as dividend. On the other
hand, to keep shareholder’s motivation, appropriate dividends are needed to be
distributed. There has to be a balance between health of the organisation and interests
of shareholders.

(v) Media: Positive media attention can ‘make’ an organisation (or its products) and
negative media attention can ‘break’ an organisation. Organizations need to manage
the media so that it helps promote the positive things about the organisation and
conversely reduce the impact of a negative event on their reputation. Some
organizations will even employ public relations (PR) consultants or ‘gurus’ to help
them manage a particular event or incident. Consumer television programmes with a
wide and more direct audience can also have a very powerful impact on the success
of an organisation. Some business recognizes this and uses media support for building
their image and reputation.

(vi) Competitors: The name of the game in marketing a product is differentiation. Can the
organisation offer benefits that are better than those offered by competitors? Does
the business have a unique selling point (USP)? Competitor analysis and monitoring
is crucial if an organisation is to maintain or improve its position within the market. If
a business is unaware of its competitor’s activities, they will find it very difficult to
‘beat’ them. The market can move very quickly, whether that is a change in trading
conditions, consumer behaviour or technological developments. As a business, it is
important to examine competitors’ responses to the changes, so that firm can
maximize the benefits.

MACRO ENVIRONMENT
Macro environment is also known as general environment and remote environment. Macro
factors are generally more uncontrollable than micro environment factors. When the macro
factors become uncontrollable, the success of company depends upon its adaptability to the
environment. This environment has a bearing on the strategies adopted by the firms and any
changes in the areas of the macro environment are likely to have a far reaching impact on
their operations.

The macro environment is primarily concerned with major issues and upcoming changes in
the environment. The acronym for the macro analysis is “STEEP.” The five areas of interest
are:
– Socio-Cultural and Demographics
 – Technology
– Economic Conditions
– Ecology and Physical Environment
– Political and Legal

(i) Socio Cultural and Demographics: Societal values and lifestyles change over time, and
the most important of these; directly or indirectly leave an impact on the business
environment. For example, over the past generation, it has become acceptable for
women to work; people are not retiring at 65; and people are more aware of the
environment etc. The changes in culture and lifestyle may come from many sources:
medical (smoking, healthy eating, exercises); science (global warming, going ‘green’);
economic (people working longer, women in the workforce); cultural diversity (music
preferences, foods, living accommodations, medicine); and technologies
(biodegradable plastic) are just a few examples. These changes will be important to
the industry and to the business. The social environment of business includes social
factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate
etc. The social structure and the values that a society cherishes have a considerable
influence on the functioning of business firms. For example, during festive seasons,
there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to
increase in literacy rate, the consumers are becoming more conscious of the quality
of the products. Due to change in family composition, more nuclear families with
single child concepts have come up. This increases the demand for the different types
of household goods. It may be noted that the consumption patterns, the dressing and
living styles of people belonging to different social structures and culture vary
significantly. Demographics refer to the size, density, distribution and growth rate of
population. All these factors have a bearing on the demand for various goods and
services. For example, a country where population rate is high and children constitute
a large section of population, and then, there will be more demand for such products.
Similarly, the demand of the people of cities and towns are different than that of
people of rural areas. The high rise of population indicates the easy availability of
labour. These encourage the business enterprises to use labour intensive techniques
of production. Moreover, availability of skilled labour in certain areas motivates the
firms to set up their units in such area. For example, the business units from America,
Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled
manpower. Thus, a firm that keeps a watch on the changes on the demographic front
and reads them accurately will find opportunities knocking at its doorsteps.

(ii) Technology: Technology is understood as the systematic application of scientific or

other organised knowledge to practical tasks. Technology changes fast and to keep
the pace with the dynamics of business environment; organisation must be on its toes
to adapt to the changed technology in their system. The business in a country is
greatly influenced by the technological development. The technology adopted by the
industries determines the type and quality of goods and services produced.
Technological environment influences the business in terms of investment in
technology, consistent application of technology and the effects of technology
on markets. Technological environment include the methods, techniques and
 approaches adopted for production of goods and services and its distribution. The
varying technological environments affect the designing of products in different
countries. Technology encompasses something more than computers. Technology
comes in many forms such as medical devices, new plastics, and production
techniques.

(iii) Economic Conditions: There is a close relationship between business and its economic
environment. It obtains all inputs from economic environment and all its output is
absorbed here with. The state of the economy is usually in flux. The current situation
(specific to the industry) and any changes that may be forecast are important. The
economy goes through a series of fluctuations associated with general booms and
recessions in economic activity. In a boom nearly all business are benefited whereas
recession is a case vice versa. Business is influenced by economic aspects like interest
rates, wage rates etc. The survival and success of each and every business enterprise
depends fully on its economic environment. The main factors that affect the economic
environment are:

– Economic Conditions: The economic conditions of a country refer to a set of

economic factors that have great influence on business organizations and their
operations. These include gross domestic product, per capita income, markets for
goods and services, availability of capital, foreign exchange reserve, growth of foreign
trade, strength of capital market etc. All these help in improving the pace of economic
growth.

– Economic Policies: All business activities and operations are directly influenced by
the economic policies framed by the government from time to time. Some of the
important economic policies are:
• Industrial Policy
• Fiscal Policy Monetary Policy
• Foreign Investment Policy
• Export –Import Policy (EXIM Policy)

The government keeps on changing these policies from time to time in view
of the developments taking place in the economic scenario, political expediency and
the changing requirement. Every business organization has to function strictly within
the policy framework and respond to the changes therein.

– Economic System: The world economy is primarily governed by three types of

economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed
economy. The type of economic system influences greatly the choice of business.

(iv) Ecology and Physical Environment: The ecology and physical environment plays a
large part in many businesses – especially for those which carry out production and
manufacturing activities. In fact, business are affected on daily basis due to
environmental and ecological changes. For example, the impact of climate change
must be considered: water and fuel costs could change dramatically, if the world
 warms by only a couple of degrees. The natural environment includes geographical
and ecological factors that influence the business operations. These factors include
the availability of natural resources, weather and climatic condition, location aspect,
topographical factors, etc. For example, sugar factories are set up only at those places
where sugarcane can be grown. It is always considered better to establish
manufacturing unit near the sources of input. Further, government’s policies to
maintain ecological balance, conservation of natural resources etc. put additional
responsibility on the business sector.

(v) Political and Legal: Political environment refers to three political institutions viz.
legislature, executive and the judiciary in shaping, directing, developing and
controlling business activities. The political environment of a country is influenced by
the political organisations such as philosophy of political parties, ideology of
government or party in power, nature and extent of bureaucracy influence of primary
groups. The political environment of the country influences the business to a great
extent. The political environment includes the political system, the government
policies and their attitude towards the business community. All these aspects have a
bearing on the strategies adopted by the business firms. The stability of the
government also influences business and related activities to a great extent. It sends
a signal of strength, confidence to various interest groups and investors. Further,
ideology of the political party also influences the business organisation and its
operations. Political changes are closely tied up with legal changes. Legal
environment includes flexibility and adaptability of law and other legal rules
governing the business. It may include the exact rulings and decision of the courts.
These affect the business and its managers to a great extent. This refers to set of laws,
regulations, which influence the business organisations and their operations. Every
business organisation has to obey, and work within the framework of law.
Additionally, an industry may have specific laws and regulations. For example, a pet
store would deal with federal animal welfare and prohibited pet laws as wells as state
laws concerning animal cruelty, housing, veterinary care and so on.

A stable political and legal environment is indispensable for business growth.

LESSON 2 – Business Organizations

Business activities consist of industrial and commercial activities. Business organizations are units
that undertake these activities. They can be also called as business undertaking, enterprises,
concerns or firms. A business organization can be better understood by analyzing its characteristics.

Business organisation refers to all necessary arrangements required to conduct a business. It refers
to all those steps that need to be undertaken for establishing relationship between men, material,
and machinery to carry on business efficiently for earning profits. This may be called the process of
organizing. The arrangement which follows this process of organizing is called a business
undertaking or organisation. While establishing the business the most important task is to select a
proper form of organization. The right form of business organization is largely responsible for the
success of an enterprise. The conduct of business, its control, acquisition of capital, distribution of
profit, legal formalities etc depend on the form of organization.

The characteristics of an ideal form of organization are found in varying degrees in different forms
of organization. The entrepreneur, while selecting a form of organization for his business, should
consider the following factors.

(i) Ease of Formation: It should be easy to form the organization. The formation should not
involve many legal formalities and it should not be time consuming.

(ii) Adequacy of Capital: The form of organization should facilitate the raising of the required
amount of capital at a reasonable cost. If the enterprise requires a large amount of capital,
the preconditions for attracting capital from the public are a) safety of investment b) fair
return on investment and c) transferability of the holding.

(iii) Limit of Liability: A business enterprise may be organized on the basis of either limited or
unlimited liability. From the point of view of risk, limited liability is preferable. It means that
the liability of the owner as regards the debts of the business is limited only to the amount
of capital agreed to be contributed by him. Unlimited liability means that even the owners’
personal assets will be liable to be attached for the payment of the business debts.

(iv) Direct relationship between Ownership, Control and Management: The responsibility for
management must be in the hands of the owners of the firm. If the owners have no control
on the management, the firm may not be managed efficiently.

(v) Continuity and Stability: Stability is essential for any business concern. Uninterrupted
existence enables the entrepreneur to formulate long-term plans for the development of the
business concern.

(vi) Flexibility of Operations: another ideal characteristic of a good form of organization is

flexibility of operations. Changes may take place either in market conditions or the states’
policy toward industry or in the conditions of supply of various factors of production. The
nature of organization should be such as to be able to adjust itself to the changes without
much difficulty.

(vii) Distinct Ownership: The term ownership refers to the right of an individual or a group of
individuals to acquire legal title to assets or properties for the purpose of running the
business. A business firm may be owned by one individual or a group of individuals jointly.

(viii) Lawful Business: Every business enterprise must undertake such business which is lawful,
that is, the business must not involve activities which are illegal.

(ix) Separate Status and Management: Every business undertaking is an independent entity. It
has its own assets and liabilities. It has its own way of functioning. The profits earned or
losses incurred by one firm cannot be accounted for by any other firm.
 (x) Dealing in Goods and Services: Every business undertaking is engaged in the production
and/or distribution of goods or services in exchange of money.

(xi) Continuity of Business Operations: All business enterprise engage in operation on a

continuous basis. Any unit having just one single operation or transaction is not a business
unit.

(xii) (xii) Risk Involvement: Business undertakings are always exposed to risk and uncertainty.
Business is influenced by future conditions which are unpredictable and uncertain. This
makes business decisions risky, thereby increasing the chances of loss arising out of
business.

Forms of Business Organization

Forms of business organization are legal forms in which a business enterprise may be organized
and operated. These forms of organization refer to such aspects as ownership, risk bearing, control
and distribution of profit.

– Sole Proprietorship
– Partnership
– Company
– Statutory Bodies and Corporations
– Cooperatives, Societies and Trusts
– Limited Liability Partnership

Sole Proprietorship

We go to the market to buy items of our daily needs. In the market we find a variety of shops- some
of them small and some of them big. We may find some persons selling vegetables, peanuts,
newspapers etc. on the roadside. We may also find cobbler repairing shoes on the footpath. Everyday
you come across such types of shops in your locality. But have you ever tried to know how these
businesses are run? Who are the owners of these businesses? What exactly does an owner do for any
business? You may say, the owner invests capital to start the business, takes all decisions relating to
business, looks after the day to day functioning of the business and finally, is responsible for the profit
or loss. Yes, you are right. The owner does exactly all these things. In such type of business the single
individual takes all initiatives to start and run the business. 'Sole' means single and 'proprietorship'
means ownership. It means only one person or an individual becomes the owner of the business. Thus,
the business organisation in which a single person owns, manages and controls all the activities of the
business is known as sole proprietorship form of business organisation. The individual who owns and
runs the sole proprietorship business is called a ‘sole proprietor’ or ‘sole trader’. A sole proprietor
pools and organizes the resources in a systematic way and controls the activities with the sole
objective of earning profit. Is there any such shop near your locality where a single person is the
owner? Small shops like vegetable shops, grocery shops, telephone booths, chemist shops, etc. are
some of the commonly found sole proprietorship form of business organisation. Apart from trading
business, small manufacturing units, fabrication units, garages, beauty parlors, etc., can also be run
by a sole proprietor. This form of business is the oldest and most common form of business
organisation. Thus, sole proprietorship can be defined as “a business enterprise exclusively owned,
managed and controlled by a single person with all authority, responsibility and risk”.
Characteristics

Sole proprietorship form of business organizations have the following characteristics:

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

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

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

(iv) One-man Control: The controlling power in a sole proprietorship business always remains
with the owner. The owner or proprietor alone takes all the decisions to run the business.
Of course, he is free to consult anybody as per his liking.

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

(vi) Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organisation requires almost no legal formalities. It also does not require to be
registered. However, for the purpose of the business and depending on the nature of the
business, the sole proprietorship has to have a seal. He may be required to obtain a license
from the local administration or from the health department of the government, whenever
necessary.

Advantages of Sole Proprietorship

The sole proprietorship form of business is the most simple and common in our country.

It has the following advantages:

(i) Easy to Form and Wind up: A sole proprietorship form of business is very easy to form.
With a very small amount of capital you can start the business. There is no need to comply
with any legal formalities except for those businesses which required license from local
authorities or health department of government. Just like formation it is also very easy to
wind up the business. It is your sole discretion to form or wind up the business at any
time.

(ii) Direct Motivation: The profits earned belong to the sole proprietor alone and bears the
risk of losses as well. Thus, there is a direct link between effort and reward. If he works
hard, then there is a possibility of getting more profit and of course, he will be the sole
beneficiary of this profit. Nobody will share this reward with him. This provides strong
motivation for the sole proprietor to work hard.
 (iii) Quick Decision and Prompt Action: In a sole proprietorship business the sole proprietor
alone is responsible for all decisions. Of course, he can consult others. But he is free to
take any decision on his own. Since no one else is involved in decision making it becomes
quick and prompt action can be taken on the basis of this decision.

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

(v) Maintenance of Business Secrets: Business secrecy is an important factor for every
business. It refers to keeping the future plans, technical competencies, business
strategies, etc, secret from outsiders or competitors. In the case of sole proprietorship
business, the proprietor is in a very good position to keep his plans to himself since
management and control are in his hands. There is no need to disclose any information
to others.

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

(vii) Flexibility in Operation: The sole proprietor is free to change the nature and scope of
business operations as and when required as per his decision. A sole proprietor can
expand or curtail his business according to the requirement. Suppose, as the owner of a
bookshop, you have been selling books for school students. If you want to expand your
business you can decide to sell stationery items like pen, pencil, register, etc. If you are
running an STD booth, you can expand your business by installing a fax machine in your
booth.

(viii) Encourages Self-employment: Sole proprietorship form of business organization leads to

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

Disadvantages of Sole Proprietorship

One-man business is the best form of business organisation because of the above discussed
advantages. Still there are certain disadvantages too.

Let us learn those limitations.

(i) Limited Capital: In sole proprietorship business, it is the owner who arranges the
required capital of the business. It is often difficult for a single individual to raise a huge
amount of capital. The owner’s own funds as well as borrowed funds sometimes become
insufficient to meet the requirement of the business for its growth and expansion.
 (ii) Unlimited Liability: In case the sole proprietor fails to pay the business obligations and
debts arising out of business activities, his personal properties may have to be used to
meet those liabilities. This restricts the sole proprietor from taking risks and he thinks
cautiously while deciding to start or expand the business activities.

(iii) (iii) Lack of Continuity: The existence of sole proprietorship business is linked to the life
of the proprietor. Illness, death or insolvency of the owner brings an end to the business.
The continuity of business operation is therefore uncertain.

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

(v) Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of
management. He/she may be an expert in administration, planning, etc., but may be poor
in marketing. Again, because of limited financial resources it is also not possible to employ
a professional manager. Thus, the business lacks benefits of professional management.

Let us consider the type of businesses where sole proprietorship form is most suitable.
Sole proprietorship form of business organisation is suitable:
– Where the market for the product is small and local. For example, selling grocery items,
books, stationery, vegetables, etc.
– Where customers are given personal attention, according to their personal tastes and
preferences. For example, making special type of furniture, designing garments, etc.

– Where the nature of business is simple. For example, grocery, garments business, telephone
booth, etc.
– Where capital requirement is small and risk involvement is not heavy. For example,
vegetables and fruits business, tea stalls etc.
– Where manual skill is required. For example, making jewellery, haircutting or tailoring.

PARTNERSHIP

Meaning
Partnership is an association of two or more individuals (but not more than 20) who agree to share
the profits of a lawful business which is managed and carried on either by all or by any, or some of
them acting for all. According to Haney, “Partnership is the relation between persons competing to
make contract who agree to carry on a lawful business In common with a view of private gain.” The
formation of partnership is easy and simple. It is formed to meet the need for” more capital, effective
supervision and control, greater specialization, division of work between proprietors and for
spreading of risk Persons from similar background or persons of different ability and skills, may join
together to carry on a business. Each member of such a group is individually known as ‘partner’ and
collectively the members are known as a ‘partnership firm’.
Characteristics
(i) Number of Partners: A minimum of two persons are required to start a partnership business.
The maximum membership limit is 10 in case of banking business and 20 in case of all other
types of business.

(ii) Contractual Relationship: The relation between the partners of a partnership firm is created
by contract. The partners enter into partnership through an agreement which may be
verbal, written or implied. If the agreement is in writing it is known as a ‘Partnership Deed’.

(iii) Competence of Partners: Since individuals have to enter into a contract to become partners,
they must be competent enough to do so. Thus, minors, lunatics and insolvent persons are
not eligible to become partners. However, a minor can be admitted to the benefits of
partnership i.e. he can have a share in the profits.

(iv) Sharing of Profit and Loss: The partners can share profit in any ratio as agreed. In the absence
of an agreement, they share it equally.

(v) Unlimited Liability: The partners have unlimited liability. They are liable jointly and
severally for the debts and obligations of the firm. Creditors can lay claim on the personal
properties of any individual partner or all the partners jointly. Even a single partner may be
called upon to pay the debts of the firm. Of course, he can get back the money due from other
partners. The liability of a minor is, however, limited to the extent of his share in the profits,
in case of dissolution of a firm.

(vi) Principal-Agent Relationship: The business in a partnership firm may be carried on by all the
partners or any one of them acting for all. This means that every partner is an agent when
he is acting on behalf of others and he is a principal when others act on his behalf. It is,
therefore, essential that there should be mutual trust and faith among the partners in the
interest of the firm.

(vii) Transfer of Interest: No partner can sell or transfer his interest in the firm to anyone without
the consent of other partners.

(viii) Legal Status: A partnership firm is just a name for the business as a whole. The firm means
partners and the partners mean the firm. Law does not recognize the firm as a separate
entity distinct from the partners.

(ix) Voluntary Registration: Registration of partnership is not compulsory. But since registration
entitles the firm to several benefits, it is considered desirable. For example, if it is registered,
any partner can file a case against other partners, or a firm can file a suit against outsiders
in case of disputes, claims, disagreements, etc.

(x) Dissolution of Partnership: Dissolution of partnership implies not only a complete closure or
termination of partnership business, but it also includes any change in the existing
agreement among the partners due to a change in the number of partners.
Advantages of Partnership Firm

(i) Easy to Form: The partnership, like the sole proprietorship, can be easily organized. There
are no complicated legal formalities involved in the establishment of partnership business.
The partners enter into a partnership agreement and start business.

(ii) Favorable Credit Standing: The partnership enjoys a better credit rating in the eyes of
creditors. As the liability of each partner in the organization is unlimited the financial
institution can safely advance loans to the firms.

(iii) Large Capital: In case of sole proprietorship, the capital is limited to the savings of one
owner or his borrowing capacity. Partnership can bring more capital to the business by the
joint efforts of the partners. The partnership is normally in strong position to raise capita
and expand the business.

(iv) Greater Management Ability: As there are many partners involved in the operation of a
business, the firm can distribute the duties and responsibilities to each partner for which
one is best qualified and suited. Division of labour and specialization, thus, can promote
efficiency of the firm.

(v) Union of Business Ability: There is a bid age saying that two heads are better than one. In
case of partner the partner mutually consults each other about the lay out, production
procedure, marketing channels, etc. and as a result, a wise course of procedure results.

(vi) Profit Incentive: The profits are shared by the partners as per agreement. They are
encouraged to do more work to earn more profit. Higher the profits, higher will be the
partners share.

(vii) Advantages of Secrecy: The partners can keep the business secrets to themselves. The firm
is not required by law to publish its profit and loss account and balance sheet.

(viii) Retention of a Skilled Worker: If an employee in the partnership business is found to be a

man of outstanding talent and ability, he with the mutual consultation of other partners can
be given a status of a partner in the business.

(ix) Brake on Hasty Decisions: As liability of partners is unlimited, the partners, therefore, tend
to be careful in taking business decisions. They adopt sound practices in the conduct of
business. There is a brake on hasty decisions.

(x) Special Protection to Minor: A death or lunacy of a partner may not cause dissolution of the
partnership. His minor can be admitted only to the benefits of partners with the consent of
other partners.

(xi) Increase in the Spirit of Co-operation: The success of business depends upon mutual trust
and cooperation of the partners. The partners are fully aware that a sight difference can
cause the end of partnership. This increases in them the sprit of working together.
 (xii) Tax Advantage: The profits of a registered firm, after payment of super fax, are divided
among the partners. They pay tax to the government on their shares of profit. Thus the
partners of registered firm get the benefit of lower assessment.

(xiii) Ease of Dissolution: The partnership can also be legally dissolved much difficult by mutual
consent of the partners or in accordance with a contract by the partners. There are no formal
documents required to be drawn up as in the case of a joint stock company.
Disadvantages of Partnership Firm
The partnership form of organization suffers from certain disadvantages also. These in brief are as
follows.
(i) Unlimited Liability of Partners: One of the basic defects of partnership is that the partners
are personally and jointly responsible for all the debts of the firm. In case the business
suffers losses and the business assets are not sufficient to satisfy the claimants on
liquidation, the personal property of one or more than one partners can be sold under the
Court order for the clearance of the debts of the business. The rich and wealthy persons,
therefore, avoid to be enlisted in partnership because each individual partner in liable for
the firm’s debt.

(ii) Limited Life of Firm: The duration of the partnership is always uncertain. If partner dies,
injured, withdraws, sells his interest, or a new partner is admitted into the business, or there
arises difference, the partnership may come to an end. There are every possibilities of the
dissolution of the firm due to internal differences.

(iii) Frozen Investment: It is very easy for a partner to invest money but it is most difficult to
withdraw the investment from the business. A person who wishes to withdraw investment
has to consult his partners, find a substitute with equal business ability. Unless the above
conditions are fulfilled, the funds remain difficult to transfer and as such remain a frozen
investment which creates lack of interest.

(iv) Disputes Among the Partners: The partners should be like minded, have a common objective,
be large hearted, have a cool temperament, should not unnecessarily cause friction and
confusion among the partners. The choosing of partner is in fact like choosing a wife. Marry
in haste and repent in leisure. In case of dispute among the partners, quick action should be
taken by all the partners for the remedial measures.

(v) Possibility of Misuse of Resources: It is known to each and every partner that the resources
of the firm are owned jointly. There can and does arise the misuse of resources by a
partner/partners.

(vi) Loss of Business Opportunities: In case of differences among the “partners, a delay may take
place in decision-making. This can cause loss to the firm.

(vii) Divided Control: In a partnership, the work of the business is divided among the partners
according to their ability, choice and taste. Divided control - and responsibility sometimes
creates confusion and delay in making decisions. The lack of efficiency on the part of one
partner can upset the whole structure of the business and ultimately lead to dissolution of
the firm.
 (viii) Lack of Public Confidence: Partnership form of organization may not enjoy public confidence
due to lack of publicity and absence of regulations.

(ix) Implied Authority: Implied authority is the authority vested in a partner to bind the firm with
any of his acts done in connection with the business of the firms. In partnership form of
organization, each partner binds other partners by his acts done on behalf of the firm: Thus
the other partners may have to pay for the follies and dishonesty of a fellow partner.

Suitability of Partnership Firm

In a partnership firm, persons from different walk of life having ability, managerial talent and skill
join together to carry on a business. This increases the administrative strength of the organisation,
the financial resources, the skill and expertise, and reduces risk. Such firms are most suitable for
comparatively small business such as retail and wholesale trade, professional services, medium sized
mercantile houses and small manufacturing units. Generally it is seen that many organizations are
initially started as partnership firms and later, when it is economically viable and financially
attractive for the investors, it is converted into a company.

COMPANY
Meaning
A Company form of business organisation is a voluntary association of persons to carry on business.
Normally, it is given a legal status and is subject to certain legal regulations. It is an association of
persons who generally contribute money for some common purpose. The money so contributed is
the capital of the company. The persons who contribute capital are its members. The proportion of
capital to which each member is entitled is called his share, therefore members of a company are
known as shareholders and the capital of the company is known as share capital. The total share
capital is divided into a number of units known as ‘shares’.

Characteristics

Following are the main characteristics of a company:

(i) Artificial Legal Person: A company is an artificial person as it is created by law. It has almost
all the rights and powers of a natural person. It can enter into contract. It can sue in its own
name and can be sued.

(ii) Incorporated Body: A company must be registered under Companies Act. By virtue of this, it
is vested with corporate personality. It has an identity of its own. Although the capital is
contributed by its members called shareholders yet the property purchased out of the
capital belongs to the company and not to its shareholders.

(iii) Capital Divisible into Shares: The capital of the company is divided into shares. A share is an
indivisible unit of capital. The face value of a share is generally of a small denomination

(iv) Transferability of Shares: The shares of the company are easily transferable. The shares can
be bought and sold in the stock market.
 (v) Perpetual Existence: A company has an independent and separate existence distinct from its
share holders. Changes in its membership due to death, insolvency etc. does not affect its
existence and its continuity.

(vi) Limited Liability: The liability of the shareholders of a company is limited to the extent of
face value of shares held by them. No shareholder can be called upon to pay more than the
face value of the shares held by them. At the most the shareholders may be asked to pay the
unpaid value of shares.

(vii) Representative Management: The number of shareholders is so large and scattered that they
cannot manage the affairs of the company collectively. Therefore they elect some persons
among themselves to manage and administer the company. These elected representatives
of shareholders are individually called the ‘directors’ of the company and collectively the
Board of Directors.

(viii) Common Seal: A common seal is the official signature of the company. Any document bearing
the common seal of the company is legally binding on the company.

Advantages of Company

(i) Greater Permanency: The life of a joint stock company compared to the partnership is very
stable. If the business remains well managed, it can live on indefinitely. The life of a company
is not affected by the death, disability, insolvency or disagreement of a shareholder. The
shareholders, may come or go, the life of the company like an artificial person' is least
affected by these changes. There is, thus, a greater permanency of the joint stock companies.

(ii) Limited Liability: In a joint stock company, all the shareholders have a limited liability. In
case of loss to the company, the liability of the shareholders is limited to the amounts; they
have invested in the company.

(iii) Easy to Transfer Ownership: One of the basic features of joint stock company is that the
shareholders can transfer the ownership of shares to the interested parties' through the
share brokers. The company simply records change of ownerships. This facility provides
liquidity to the investors and stability to the company.

(iv) Attraction of Huge Capital: The joint stock companies divide the share capital into shares of
small denominations in order to attract capital from large number of investors for starting
big business and industrial enterprises.

(v) Management Functions: In a joint stock company, the management activities are divided
according to functions. The company employs 'specialists' in each department to do specific
type of work, of purchase, sale, and manufacturing, finance etc. under the supervision of
directors of the company. The availability of highly skilled managerial talent, thus, gives
greater permanence and co to the company.

(vi) Recognized Legal Entity: The joint stock company is incorporated under the Companies
Ordinance. In all legal matters, therefore, it is dealt with as an individual person. The
company can enter into contracts; borrow money, open banking account in its name. It can
sue or be sued, hold, deal and dispose of property in its own name
 (vii) Higher Profits: Due to availability of large capital, the company installs expensive and up to
date machinery. There is thus greater production of goods. The cost is reduced and the firm
can earn higher profits by producin9 better quality of goods.

(viii) Benefits of Large Scale Production: The company due to the increase in the size of business
enjoys all the economies of large scale production.

(ix) Bold Management: This type of organization can undertake big risks which sole
proprietorship or partnership form of organizations cannot do.

(x) Spread of Risk: In a company form of organization, the risk is distributed among large
number of shareholders. From the point of view of an investor, it is a great advantage.

(xi) Democratic Organization: The management of the company is carried on by the elected
board of directors on behalf of and for the shareholders of the company. Thus, the
organization of the company is democratic.

(xii) Full Legal Cover: There is full legal cover on the activities of a company from the birth, to its
liquidation. People have, therefore, greater 'confidence in companies than they have in sole
trading or a partnership.

(xiii) Social Benefits: Joint stock companies have made it possible for the persons of low income
groups to invest in productive activity under unified management. The number of the poor
"is thus moving up into the levels of middle income groups.".

Disadvantages of Company

There is no doubt that joint stock company enjoys certain distinct advantages of limited liability,
greater permanence etc. but there are also certain abuses/draw backs which are associated with the
joint stock company. They, in brief, are as follows:
(i) Formation of a Company Complicated: The formation of a joint stock company is much more
complicated than sole proprietorship or partnership. There are many legal formalities,
which are to be observed which consume a greater amount of time, energy and the money
also.

(ii) (ii) Double Taxation: The joint stock company is subject to doubt taxation. It pays tax on its
earnings to the government. The tax is also paid by the share holders on the receipt of
dividend from the company. This amounts to taxing the earnings of company twice Double
taxation of earnings is considered to be a barrier to-the capital formation in the country.

(iii) Exploitation of Shareholders: The shareholders of a company mostly remain unknown to one
another. Most of them have neither time nor the technical knowledge to know the affairs of
the business where they have invested a part of their savings. They seldom attend the
annual meetings. The control of the company, therefore, generally remains in the hands of
promoters who are elected as directors of the company by the interested shareholders
every year. The concentration of control in a few hands can and often leads to exploitation
of the shareholders. If the company is suffering losses, they sell their shares and shift the
 burden to the new shareholders. If it is expected to earn profits, they purchase the shares
and earn maximum return.

(iv) Separation of Ownership from Control: In a joint stock company, the shareholders who are
real investors are not allowed to take part in the operations of the business. There is thus a
separation of ownership from control. The directors in collaboration with the managers
often exploit the helpless shareholders.

(v) Promotion of Frauds: The joint stock company is incorporated, by taking definite legal steps.
If the promoters are dishonest and want to exploit the scattered shareholders, they give a
very rosy picture of high profits ri the prospectus. The window dressing of the prospectus
often misleads the investors who are later on exploited by the promoters: This shakes the
confidence of the investors in other sound companies.

(vi) Stock Exchange Speculation: The joint stock company facilitates speculation in shares at
stock exchanges. The reckless speculation is harmful to the interest of the share holders and
for sound investment.

(vii) Lack of Secrecy: In a joint stock company, the management has to make an annual report,
regarding sales, net profits,, assets, liabilities etc of the company. The competitors thus gain
full knowledge of strong and weak points of the company. The employees also disclose the
secrets of the business to rivals in the business.

(viii) Impersonal Relationship: As the size of business run by the company is expanding day by
day, feeling of separation between the employers and the employees is widening. The
company is, thus, considered soulless and cold blooded.

(ix) Favoritism and Nepotism: There is often a top heavy management in the company's
organization. The directors, managers etc employ their near and dear ones at the key
positions of the company who may or may not be f the assigned responsibilities.

(x) Grouping for Power: The management of the company remains in the hands of a group which
acquires controlling shares. There remains tussle of grouping for power between groups.

(xi) Evils from the Social Point of View: The big companies become a source of encouraging
monopolies. In order to secure more benefits, the influential shareholders of the company
provide financial assistance to the political parties and the government officers.

Suitability of Company

A company is suitable where the volume of business is quite large, the area of operation is
widespread, the risk involved is heavy and there is a need for huge financial resources and
manpower. It is also preferred when there is need for professional management and flexibility of
operations. In certain businesses like banking and insurance, business can only be undertaken by
companies.
CO-OPERATIVES, SOCIETIES AND TRUSTS

There are certain organizations which undertake business activities with the prime objective of
providing service to the members. Although some amount of profit is essential to survive in the
market, their main intention is not to generate profit and grow. They pool available resources from
the members, utilize the same in the best possible manner and the benefits are shared by the
members.
The term co-operation is derived from the Latin word co-operari, where the word ‘co’ means ‘with’
and ‘operari’ means ‘to work’. Thus, co-operation means working together. So, those who want to
work together with some common economic objective can form a society which is termed as “co-
operative society”. It is a voluntary association of persons who work together to promote their
economic interest. It works on the principle of self-help as well as mutual help. The main objective is
to provide support to the members. Nobody joins a cooperative society to earn profit. People come
forward as a group, pool their individual resources, utilise them in the best possible manner, and
derive some common benefit out of it.
Any ten persons can form a co-operative society.
A co-operative society is entirely different from all other forms of organization discussed above in
terms of its objective. The co-operatives are formed primarily to render services to its members.
Generally it also provides some service to the society. The main objectives of co-operative society
are: (a) rendering service rather than earning profit, (b) mutual help instead of competition, and (c)
self help in place of dependence
Although all types of cooperative societies work on the same principle, they differ with regard to
the nature of activities they perform.

The following are the some of the definitions of cooperative organizations.

1. International Labour Organisation: "Cooperative is an association of person usually of
limited means, who have voluntarily joined together to achieve a common economic, end
through the formation of a democratically controlled business organisation, make equitable
contribution to the capital required and accepting a fair share of risks and benefits of the
undertaking."
2. Hubert Calvest: "Cooperative is a form of organisation wherein persons voluntary associates
together as human beings on the basis of equality for the promotion of the economic interests
of themselves."
3. Mr. Talmaki: "Cooperative society is an association of the weak who gather together for a
common economic need and try to lift themselves from weakness into strength through
business enterprise." Based on the above definitions, we can derive the following
characteristics of cooperative organizations.

Characteristics
(i) Voluntary Association: Everybody having a common interest is free to join cooperative
society. There is no restriction on the basis of caste, creed, religion, color, etc. Anybody
can also leave it at any time after giving due notice to the society. That is specialty of any
cooperative society. There should be minimum of 10 members to for cooperative society
but there is no maximum limit for the membership.
 (ii) Separate Legal Entity: A cooperative society after registration is recognised as separate
legal entity by law. It acquires an identity quite distinct and independent of its member
can purchase, dispose its own assets, can sue and also can be sued.

(iii) Democratic Management: Equalities is the essence of cooperative enterprises, governed

by democratic principles. Every member has got equal right over the function
management of that society. As such each member has only single voting right
irrespective of the number of shares held or capital contributed by them. In case of
cooperative society, no member detects the terms and conditions of the functioning
because "one man one vote" is the thumb rule.

(iv) Service Motive: The main objective being formation of any cooperative society is for
mutual benefit through self-help and collective effort. Profit is not at all in the agenda of
the cooperative society. But if members so like, they can take up any activities of their
choice to generate surplus in order to meet the day-to-day expenses.

(v) Utilization of Surplus: The surplus arising from the operation of business is partly kept in
a separate reserve and partly distributed as dividend among the members.

(vi) Cash Trading: One exception in the cooperative society is that like other business if never
go for credit sales. It sells the goods on the basis of cash only. Hence, the cooperative
society hardly come across with the financial hardship because of non-collection of sales
dues. Members can only purchase on the basis of credit, which is an exception to the
present rule.

(vii) Fixed Rate of Return: All members are supposed to contribute capital for the formation of
a cooperative society or at the time of joining as a member of the cooperative ^society. In
return to the capital invested, the members are assured of a fixed rate of return maximum
to the extent of 9 per cent per annum on the sum deployed by them. This amount is being
paid from the surplus generated by the society on that year. This is an incentive extended
by the society to its members.

(viii) Government Control: All the cooperative societies of the country are regulated by the
Government through its different rules and regulations framed from time to time.

(ix) Capital: The capital of the society is raised from its members by way of share capital.
However, the major part of finance is raised by the society through taking loan from the
Government or by accepting grants and assistance from the Central or State Government
or from the apex cooperative institutions like state and central cooperative banks
operating in that state.

Advantages of Co-operatives

The advantages of co-operative society are as follows:

(i) Easy Formation: It is very easy to form co-operative society as compared to a joint stock
company. The simple requirement is ten or more members have to make written
application to the Registrar with four copies of Bye-laws.
(ii) Open Membership: The co-operative societies work on the principle of open membership,
therefore many persons can become the members. The membership is not restricted to
a few persons only.

(iii) Democratic Management: All the members of the society are jointly known as general
body, whereas the members who manage the co-operative society are jointly known as
managing committee. They manage co-operative society in a democratic way. "One
member one vote" is the rule and thus members can have voice in management.

(iv) Limited Liability: The liability of members remains limited to the extent of capital
contributed by them. He is not personally liable to pay the liability of co-operative
society. Generally, his liability is limited up to the face value of shares.

(v) Stability and Continuity: The co-operative society has perpetual succession because it is
not affected due to death, insolvency or lunacy of any member. As it is voluntary
association the old members may go, new members may come, but the life of society is
not affected.

(vi) Low Prices: A co-operative society can make goods and services available at reasonable
cost as the profit margin of the society is very less other reason for low price at a co-
operative society is that it eliminates the middleman from chain of distribution i.e. goods
are directly purchased from the manufacturers or producers and sold to the customers.

(vii) Mutual Help: The basic aim of the co-operative society is mutual help. Some of the
members realizing this principle may offer their services on honorary basis this bring
the reduction in management expenses.

(viii) Social Advantage: A co-operative society discourages monopoly, bring better distribution
of wealth, works on principle of service and controls exploitation. It also uses its surplus
profit for the social advantages by way of establishing charitable hospitals, schools, etc.
So it increases social welfare.

(ix) Mobilization of Savings: Basically co-operative society is a thrift institution. It provides

an effective means of pooling together the resources of the weaker sections of the society.
By checking extravagance, it inculcates the habit of savings among the people. Such
mobilized financial resources are used for constructive purposes.

(x) Remove Defects of Capitalism: This form of organization removes certain basic defects of
capitalism. For example, monopoly, undue concentration of wealth in few hands,
profiteering, black-marketing, exploitation of workers and consumers, etc. These glaring
defects of capitalism have no place under co-operative organization. Through the process
of integration, it removes middlemen.

(xi) Cash Trading: The co-operative society follows the principles of "cash and carry". As a
result of this there are no bad debts and they can enjoy the benefit of various discounts
and concessions. This also inculcates the habit of saving among these members.
 (xii) Government Support: Co-operative society is basically people's movement. Moreover,
promotes moral, social and educational values. It also helps the economic enlistment of
the people.

Disadvantages of Co-operatives

As against the foregoing advantages, the co-operatives suffer from the following drawbacks and
limitations, which prevent from securing benefits of such merits to the maximum extent:

(i) Lack of Capital: The co-operatives are launched by economically weaker sections of
society. The shares are generally persons may associate it these societies. The resources
of co-operatives are limited to the extent of capital contributed by the members and fund
raising capacity from stated cooperative banks. They cannot undertake large scale
production of goods for want of funds. So, cooperative societies suffer from lack of capital.
It cannot dream to undertake any large scale business for that reason.

(ii) Lack of Efficient Management: The co-operative societies, because of their limited
resources, are unable to secure the services of efficient managers. They manage the
society by its members who lacks managerial or professional skills. In efficient
management may not bring greater success over a period of time.

(iii) Lack of Unity among Members: The members are drawn from different sections of the
society. There may be lack of harmony among them. The members do not understand the
working of the societies, so they start doubting each other. Some members lack interest
in the affairs of the society and leave everything to the paid officials.

(iv) Lack of Motivation: Co-operation brings an end to the feeling of individual self-interest.
But men are selfish by nature. Therefore, generally the members lack motivation to work
more. Most of the time ‘everybody’ responsibility becomes no bodies’ responsibility.

(v) Cash Trading: The co-operative societies sell goods for cash and do not extend credit
facilities. Many a consumers from down trodden society need credit facilities. On the
other hand, private traders extend credit facilities to the consumers. Though the societies
sell goods at lower prices but absence of credit facilities they prefer to avail the services
of the traders for meeting their requirements.

(vi) Political Interference: The societies are normally under the regulations of the government.
As co-operative societies stand in India, government even nominates members to the
Managing Committees. Every government tries to send their own party members to these
societies. The societies are governed on political consideration rather than on business
lines.

(vii) Difficult to Maintain Business Secrecy: The affairs of the co-operatives are very often no
such exposed to the members that it becomes difficult for them to maintain business
secrecy. But secrecy is very important for success of any business.

(viii) Unwanted Interference by the Departmental Personnel: Co-operatives are being exposed
to a considerable degree of regulation by the Co-operative department. Although to a
certain degree this is welcome, too much of State participation and unwanted
 interference by the departmental personnel act as a deterrent to the voluntary nature of
co-operatives. It adversely affecting the flexibility of its operation and the efficiency of its
management.

Suitability of Co-operatives

When the purpose of business is to provide service than to earn profit and to promote common
economic interest, the co-operative society is the only alternative. Co-operatives are also preferred
as it is easier to raise capital through assistance from financial institutions and government. Generally
it seems that a co-operative society is suitable for small and medium size operations.

LESSON 3 – Scales of Business

Business ranges in size from the single proprietor at one extreme to the large multinational at the
other which employs thousands of people over several countries. The structure of these businesses
will be very different and the problems they face will vary as a result of the differences in size. The
size structure of business will depend on many factors range from choice to external factors which
are beyond the control of the firm.

MICRO ENTERPRISES
In developing countries, micro enterprises comprise the vast majority of the small business sector—
a result of the relative lack of formal sector jobs available for the poor. These micro entrepreneurs
operate not by choice, but out of necessity. Micro enterprises add value to a country's economy by
creating jobs, enhancing income, strengthening purchasing power, lowering costs and adding
business convenience. In case of developing countries, the majority of the population is engaged in
producing non monetary wealth primarily for self-consumption rather than for sale. The vast
majority of agricultural wealth is subsistence production. It is not produced for cash or for barter,
and is not available to be used by the economy of the nation as a whole. By the laws of supply and
demand, then, there is a deficit of products resulting from initial processing of agricultural products
(they are in short supply and their prices are too high). The sector which is most encouraged in low
income countries, because it shows the most promise for sustainable development, is potentially
most viable for micro entrepreneurs, and fills the most necessary niche in the economy, is the initial
processing of agricultural products.
Families launch enterprises to generate income, built savings and to acquire assets as a cushion
against natural disasters, illness or death, and other crisis. Because micro enterprises typically have
little to no access to the commercial banking sector, they often rely on "micro-loans" or micro credit
in order to be financed. Microfinance institutions often finance these small loans, particularly in the
Third World. Those who found micro enterprises are usually referred to as entrepreneurs. Micro-
enterprise provides most of the goods and services that meet people’s basic needs in developing and
redeveloping countries. Micro enterprises in developing countries, tend to be the most frequent
form/size of business. Micro enterprises require small amounts of capital to enter to the market and
produce quickly. The small size of micro enterprise makes them simple to operate. Micro enterprise
use local product and skills. Micro enterprises are labour intensive therefore create jobs. Micro
enterprises are a catalyst for comprehensive community development.
SMALL SCALE ENTERPRISES
Meaning and Concept of Small Scale Industry
In most of the developing countries including India, Small Scale Industries (SSI) constitutes an
important and crucial segment of the industrial sector. They play an important role in employment
creation, resource utilisation and income generation and helping to promote changes in a gradual
and phased manner. They have been given an important place in the framework of Industrial
planning both for economic and ideological reasons.
The scarcity of capital in developing nations severely limits the number of non-farm jobs that can be
created because investment costs per job are high in large and medium industries. An effective
development policy has to attempt to increase the use of labour, relative to capital to the extent that
it is economically efficient.
Small scale enterprises are generally more labour intensive than larger organisations. As a matter of
fact, small scale sector has now emerged as a dynamic and vibrant sector for the Indian economy in
recent years. It has attracted so much attention not only from industrial planners and economists but
also from sociologists, administrators and politicians.
Definition of Small Scale Industry (SSI)
Basically, the industries which are organized on a small scale and produce goods with the help of
small machines, hired labour and power are called as small scale industries
The definition for small-scale industrial undertakings has changed over time. Initially, they were
classified into two categories- those using power with less than 50 employees and those not using
power with the employee strength being more than 50 but less than 100. However, the capital
resources invested on plant and machinery buildings have been the primary criteria to differentiate
the small-scale industries from the large and medium scale industries.

LARGE SCALE ENTERPRISES

Large scale industries refers to those industries which require huge infrastructure, man power and
a have influx of capital assets. The term ‘large scale industries’ is a generic one including various types
of industries in its purview. All the heavy industries of India like the Iron and steel industry, textile
industry, automobile manufacturing industry fall under the large scale industrial arena. However in
recent years due to the IT boom and the huge amount of revenue generated by it the IT industry can
also be included within the jurisdiction of the large scale industrial sector.

Application

Learning Task

Answer the questions below.

1. What is Business? Discuss its essential characteristics.

2. What are different types of business environment?
3. Distinguish between:
(i) Internal and External Business Environment
(ii) Micro and Macro Business Environment
4. What are varied scales of business? List them.
5. Define Small business and discuss its characteristics.
6. Distinguish between:
(i) Small Business and Large Business

Fill in the Blanks:

1. A partnership firm requires at least ___________________ persons.

2. The partners are liable ___________________ and ___________________for all the debts and obligations of
the firm.
3. There exists a ___________________ relationship between partners.
4. The persons who own the partnership business are individually called ___________________ and
collectively known as ___________________UESTIONS
5. A company has ___________________ existence.
6. A company is managed by ___________________
7. A co-operative society is a ___________________ association.
8. Membership of a co-operative is ___________________
9. A co-operative’s primary motive is ___________________
10. The minimum membership to get a co-operative registered ___________________

State True or False:

1. The business is started by one person.

2. It is managed by employees of the business.
3. It is suitable for manufacturing of steel.
4. Sole proprietorship business includes only shopkeepers.
5. The risk of the business is shared with the employees of the business
6. The members of a co-operative get a fixed rate of dividend from profit.
7. A co-operative society cannot enter into any contract without consent of all members.
8. Micro and Small Entrerprises are same.

Match the following :

(A) (B)
1. Lower Interest rate (a) Political factor
2. Demand for Packaged Food (b) Technological factor
3. Strike in the factory (c) Social factor
4. New Methods of Production (d) Economic factor