UNIT: - 1: INTRODUCTION TO BUSINESS

BUSINESS
A business activity involves production, exchange of goods and services to earn profit. The
literal meaning of the word ‘Business’ is a state of being busy.
When a person carries out production or purchase of goods and services for himself, cannot
be a business activity. Production or purchase of goods and services should be carried out with
an objective of earning some profit or consideration.
Various authors bring out different characteristics in their definitions.
According to Dicksee
"Business refers to a form of activity conducted with an objective of earning profits for the
benefit of those on whose behalf the activity is conducted."
According to Urwick and Hunt “a business is an enterprise which makes, distributes or
provides an article or service which other members of the community need and are able and
willingto pay for it”.
According to L.H.Haney “Business may be defined as human activities directed towards
providing or acquiring wealth through buying and selling goods.”

CHARACTERISTICS OF BUSINESS
(1) Optimum utilization of resources

➢ Business facilitates optimum utilization of countries material and non-material

resources. It achieves economic progress.
(2) Economic Activity: Business includes only economic activities. All those activites
relating tothe production and distribution of goods and services are called economic
activities. These are undertaken with profit motive.
(3) Production of Goods and Services: A business must involve production of goods
and ser-vices. These goods may be of consumer goods and producer goods. Consumer
goods are thosewhich are purchased by ultimate consumer. Example: Soaps, Paste, etc.
Producer goods are those which are used for production process. Example: Raw
material, plant and machinery, etc.
(4) Exchange of Goods and Services: A business must involve exchange of goods and
ser- vices with a profit motive. Production or purchase of goods and services for personal
consumption do not constitute business. Purchase of goods by a consumer is not
business while purchase ofgoods by a retailer constitutes business.
(5) Profit Motive: The profit motive is an important element of business. Any activity
undertakenwithout profit motive is not business.
(6) Creation of Utility: The goods are produced according to the tastes and requirements
of theconsumers. Business creates various types of utilities is goods. When raw
materials are con- vertex into finished goods creates form utility. The goods are
transported from the place of produc- tion to the consumers create place utility. The
process of storing goods and supplying them in times of need creates time utility.
 (7) Satisfaction of Consumer: The ultimate aim of business is to supply the goods
according tothe tastes and requirements of the consumer. If consumer is satisfied, he
will purchase it again and again. So the businessman should produce the goods and
satisfy the consumer.
(8) Satisfying Social Needs: The business is a socio-economic institution. Business
should aim at serving the society at large. It must look to the public good.
(9) Uncertainty: Business involves a large amount of risk and uncertainty. Future is most
uncertainty. Unforeseen future uncertainties make the business riskier. Industrial
disputes, price changes, wars, floods, earthquakes etc., leads the business into
losses.
(10) Continuity of Transactions: The business involves the regular and continuous
transactions.If a person purchased a T.V. set and sells and earns profit on it, it does not
constitute business. Ifhe keeps stock of T.V. sets and sell them to earn profit becomes
business.
(11) Financing: A proper capital structure is a must for the success of the business.
Business enterprises cannot move a step without finance. Business requires two types of
capital. (1) Fixed Capital (2) Working Capital. After estimating these financial
requirements, businessman tries to find out the sources of finance.

TYPES OF BUSINESS
Business activities may be broadly divided into two categories. They are 1. Industry, 2.
Commerce. Industry is concerned with manufacturing of goods and services. Commerce
is concerned with the exchange of goods and services. There are two components in
Commerce. Theyare (1) Trade, (2) Aids to trade.
Trade: The process of purchase and sale of goods and services is called trade.
Aids to Trade: The activities which facilitate Commerce are aids to trade. They are
transportation, insurance, banking, warehousing, packing, advertising, etc.
Trade: Trade is an integral part of Commerce. All the activities of Commerce revolve around the
trade. The activity of buying and selling of goods is trade:
Trade may be broadly classified into two categories.
1. Internal Trade
2. Foreign Trade
1. Internal or Home Trade: The internal or home trade refers to sale and
exchange of goods within the boundaries of a country. Both the buyers and sellers
live in the same country. Paymentsare made in the national currency. This trade is
also known as ‘inland trade’ or ‘domestic trade’.
On the basis of scale of operations, the home trade can be classified into two types.
(a) Wholesale Trade (b) Retail Trade.
(a) Wholesale Trade: This involves the purchase of goods on a large scale from
the producer and sold in smaller quantities to the retailer. A person, who is
engaged in this type of tradeis called a wholesaler.
 (b) Retail Trade: This involves the purchase of goods in large quantities from the
whole-saler and selling them to the final and ultimate consumers. The person,
who is engaged in this type of trade is called a retail trader.
2. Foreign Trade or International Trade: It is also known as external trade. The
trade which takes place between two or more countries is called Foreign or
international trade. It means, buyer lives in one country and the seller is in another
country. This type of trade involves payment in foreign currencies. It may be further
classified into three categories. (a) Export Trade (b) Import Trade (c) Entrepot
Trade.
(a) Export Trade: When a country sells goods to another country, it is
called export trade. Export trade involves home goods for foreign use. For
example, India sells poultry products to Gulfcountries and tea to U.S.A.
(b) Import Trade: When a country buys goods from another country,
it is called import trade. It consists of procuring foreign goods for home use.
India buys machinery from west Germany; it is an import trade.
(c) Entrepot Trade: When goods are imported from one country and
the same are ex- ported to another country, such Trade is called entrepot
trade. For example, electronic goods imported from Japan and exported to
Africa.
Commerce
The exchange and distribution of goods and services is called Commerce.
According to James Stephenson, “Commerce is an organized system for the
exchange of goods between the members of the industrial world”. It
establishes the link between the producers and the consumers
The activities which facilitate commerce are (1) Banking (2) Transportation (3)
Insurance (4) Warehousing (5) Packing (6) Advertisement, etc.
James Stephenson says, “Commerce is the sum total of those process
which are en- gaged in the removal of several hinderances in the process of
flow of goods and services from the producers to Consumers”.
Hindrances in the Process of Exchange of Goods and Services: There
are many kinds of hindrances or obstacles standing in the way of trade or
transfer of goods from the producer to the consumer. Commerce played an
important role in removing the hindrances in the process of exchange of
goods and services.
1. Hindrances of Persons: Goods are generally produced in few
places, while the consumers spread throughout the country. There is no direct
relation between producers and consumers. Trade acts as an arbiter between
producer and consumer. The chain of wholesalers, retailers, brokers, agents
etc. reduces the distance between producers and consumers. Thus, the trade
facilitates easy exchange of goods by removing the hindrances of persons.
2. Hindrances of Place: Goods produced in a place are distributed to
various places in the country and also exported to other countries. Commerce
reduces the distance between the pro- ducers and consumers. The services
like transportation, banking, insurance, packing etc are useful in removing the
hindrances of transporting the goods from the place of production to the place
 of consumption.
3. Hindrances of Time: The production of some goods takes place only
in a few seasons in large scale. But consumption of these goods is spread
throughout the year in smaller quantities. During this time gap between the
production and consumption, the product is to be stored in godowns and
warehouses.
Example : The central and state warehousing corporation.
4. Hindrances of Finance: Sometimes Trader needs financial assistance. In
such circumstances banks and other financial institutions provide finance in the shape
of overdraft, loans or cash-credit.Hence banks play an important role to overcome the
hindrances of finance.
5. Hindrances of Knowledge: The consumers may not be aware of the
availability of various goods in the market. The absence of information about goods
is a great hindrance in the way of consumers buying them. Advertisement helps in
avoiding the hindrance of information about theavailability benefits, features, price
range etc., of the products in the market.
6. Hindrances of Risk: There is risk involved in transporting goods from one
place to another. There may be a risk due to fire or theft. It acts as an obstacle in the
development of trade. The insurance companies provide a coverage for all types of
losses of goods.
7.
INDUSTRY
Industry is the backbone of Commerce and Trade. The growth and development of trade
and Commerce depends on the scope of industry. The activities related to the production of
goods and services are known as industry.
The industries are classified as under:
1) Extractive Industries: These industries include activities in raising or
extracting from the soil, climate, air, water or from beneath the surface of the
earth. Agriculture, fishing, mining, afforest- tion etc. are the examples. These
are the industries where nature does everything and man does very little to
add to it.
2) Genetic Industries: These industries are engaged in re-producing and
multiplying of certainspecies of animals and plants with the object of earning
profit from their sale. Nature, climate and environment play an important part
in these industries but human skill is also important. Nurseries,Cattle-breeding,
Poultry farms are all come under genetic industries.
3) Manufacturing Industries: These are concerned with the working of raw
materials or partly finished materials into furnished products. In these
industries, role of nature is very less, and man takes the major part of the work.
Examples: Engineering, textiles, iron and steel etc.
4) Construction Industries: These are engaged in the construction of
buildings, roads, dams, bridges and canals. These industries use the products
of manufacturing and extractive industries.
5) Service Industries: Service industries provide the necessary services
directly or indirectly. Example: Banks, Insurance companies, Warehousing,
 etc.
Other Types of Industries:
On the basis of the size, technology and capital outlay, industries are
classified as follows:
(1) Heavy Industries: Industries with huge capital, sophisticated technology
and heavy machin-ery are known as heavy industries.
Example: Iron and Steel Industry, Ship Building etc.
(2) Light Industries: Industries set up with minimum capital and common
technology are calledlight industries.
Example: Paper, Cement etc.

FORMS OF BUSINESS ORGANISATION

Normally, Business enterprises are promoted to produce goods and services, to sell and
toearn profits. The size, structure, nature of any business concern depends upon its
capital investments, the risk involved and the policies adopted by the Government
CLASSIFICATION OF BUSINESS UNITS

Business enterprises can be (1) Non-Corporate Enterprise, (2) Corporate

Enterprise.
(1) Non-Corporate Enterprises: Business units which can be started without
registration are known as non-corporate enterprises. Ex.: Sole trader,
Partnership farm, Joint Hindu family, etc.
(2) Corporate Enterprise: Business enterprises which are established under
registration act are corporate enterprises. The business units which are
started by the government are called corpo-rations and started by private
entrepreneurs as Joint stock company. Joint stock companies are classified
as (i) Private Limited Companies (ii) Public Limited Companies (iii) Public
Sector Undertakings.
Non-Corporate Enterprises: Business units which are of small size and with low
investment come under this category. They can be divided as:
(i) Sole Trading concern.
(ii) Joint Hindu Family
(iii) Co-operatives Societies
(iv) Partnership Firm.

SOLE TRADING CONCERN

Meaning
It is also called as sole proprietorship business or Individual proprietorship.
Any business unit which is owned and controlled by a single individual is known as
 a sole trading concern. He is the founder as well as the controller of the business.
In this, a single person subscribes the entire capital and arranges all factors of
production. All the business decisions are taken by one person only. All the
business is carried on by him with the assistance of relatives or employees. He
enjoys all profits and bears all losses in the business alone.

Definition:
Prof. L.H.Haney opines that the Sole Trading concern is “the form of business
organization, the head of which is an individual who is responsible, who directs its
operations and who alone runs the risk of failure’.
James Stephenson defines the single proprietor as “a person who carries on
business exclusively by and for himself. He is not only the owner of the capital of
undertaking, but is usually the organizer and manager and takes all the profits or
responsibility for losses.

Characteristics
1. Individual Initiative: The proprietary concern comes into existence only
through the efforts and initiative of a single person. He prepares the blue
prints of business and arranges all factors of production. He may appoint
required staff for his assistance. But he is responsible for all the activities.
He enjoys all the profits and bears all the losses.
2. Management and Control: The sole trader manages the whole business
himself. He pre- pares various plans and executes them under his own
supervision. He employs required staff forhis assistance but the ultimate
responsibility lies with the owner.
3. Unlimited Liability: Liability of sole-trader is unlimited. Hence his private
property is also liable for business obligations, if necessary.
4. Motivation: Sole trader takes all profits and bears all losses, if any. His
efforts are rewardeddirectly. He is motivated and stimulated by the profits
to expand his business activities.
5. Secrecy: All the decisions are taken by the owner himself. He maintains
secrecy in all the business activities. Secrecy plays an important role for the
success or failure of the business. Bymaintaining business secrecy sole
trader avoids competitors entering into the same business.
6 Uncertain Existence: In sole trade business there is no separate existence
of the business with the owner. The business and the owner exist together.
The business is dissolved if the owner dies or become insolvent.
7. Limited Area of Operations: A sole trading business has generally a limited
area of operations.Because of the limited resources and managerial abilities
of sole trader there is less possibility to expand the business.
8. Risk: In sole trading concern, the sole trader and his business are separate
entities. Nobody shares his profits or losses. Loss in business is his loss
and Liabilities of the business are his liabilities.
 9. Government Regulations: The registration is not necessary except in certain
trades such asmedical shop and restaurants. There are no statutory controls.
Similarly, no restrictions are im- posed by the Government.
MERITS
1. Easy in Formation: Sole Trading concern is absolutely free from
legal formalities. It can be commenced very easily and quickly. The
establishment costs are also very less.
2. Better Control: The sole proprietor is responsible for all the business
activities. He controls all functions of the business. He himself takes
decision in right time. The centralized direction and personal control
result in uniformity of action and effective co-ordination.
3. Maintenance of Business Secrets: Secrecy is vital for any
business. A sole trader concern is a single man’s business, he keeps
all the secrets within himself. As the accounts need not be published,
the dealings and profits are not known to the public. This enables the
sole trader to maintain secrecy from his business competitors.
4. Easy to Raise Finance: The sole trader works hard and earns
goodwill for the firm. As a result, his credit worthiness enhances in the
market. Moreover, the sole trader bears unlimited ability. Hence, the
creditors feel secure in extending credit to sole trader.
5. Promptness in Decision Making: All the business decisions are
taken by a single person. He can take prompt decisions. Delay in
decision making results in loss of opportunities to earn profits.
6. Inexpensive Management: The sole trader is the owner, manager
and controller of the busi- ness. He personally supervises various
activities and can avoid wastage in the business. He maintains the
accounts of business by himself. Thus, managerial and clerical costs
are saved to a large extent.
7. Direct Relations with Consumers: In sole proprietorship the owner
can have direct contact with customers and employees. He can know
the relations and preferences of consumers. It enables him to make
necessary changes in the quality and design of his products. It will help
him to boost his sales. He can also concentrate on consumer service.
8. Self-employment: This form of organization offers the means of self-
employment. Those who do not want to serve others or those who
cannot get a suitable job can easily start a small sized business unit as
a sole-trader.
9. Healthy Relations with Employees: A sole trader is in a position to
maintain direct relations with his employees. This enables the employer
and employees to understand and appreciate the difficulties of each
other. A sole trader can solve the grievances of his employees. This
leads to a healthy relation between employer and employee which is
necessary for the success of the busi-ness.
 10. Benefit of Goodwill: A sole trader passes on the business goodwill
to his successor. Gener-ally sole trading concern is dissolved on death
of the owner. But in reality the same business is continued by a heir
because of its inherited goodwill.
11. No Legal Restrictions: There are no legal requirements for starting
a business. There is no special act governing the work of sole trading
concern. There is no restrictions to change the nature of business.
Dissolution of the business is also easy. He is taxed as an individual but
not as a business unit.
12. More Flexible: As it run by an individual, the business is highly
flexible in character. Sole trader is free to change the nature of
business and to refix the prices. He can make changes effectively and
quickly to run the business more profitable and efficient.

13. Socially Desirable: One man business is generally on a small-

scale basis and is scattered. It helps in avoiding concentration of wealth.
Sole trade business also provides competition to otherbusinesses. Sole
trader develops the qualities of self-reliance, self-confidence,
responsibility, tact and initiative in the individuals. Thus, it generates
social values.

DEMERITS
1. Limited Resources: The resources of a sole proprietor are limited.
He makes investments from his family sources only. If he wants to raise
finance from financial institutions, he has to show securities. The sole
trader cannot offer much security, so he cannot get much help from
financial institutions. The capacity for expanding business operations
is limited for want of resources.
2. Limited Managerial Ability: The managing capacity of the
proprietor is limited. One person may not be expert in each and every
function of the business. He will not be able to devote suffi- cient time
for all types of activities. So sole trader will not be able to survive
effectively. Limited managerial capacity will hinder the growth of
concern.
3. Uncertain Continuity: The business continues as far as sole trader is
alive. In case of mobility or death, the existence is uncertain. The
successors of the sole proprietor may not have an aptitude or ability to
continue in the business. The closure of a business will cause
inconvenience to the customers and it stands as an impediment for the
growth of the unit.
4. Limited Scope of Employees: A sole trader cannot attract trained
and qualified persons be- cause of limited career opportunities and
uncertain existence. A sole trader cannot offer financial incentives to
 employees because his activities are on a small scale. The employees
will try to join in good concerns whenever an opportunity arises.
5. No Large Scale Economies : A small scale concern cannot
economies in purchase, produc- tion and marketing. A large-scale
enterprise can have such economies due to wholesale buying. In a sole
trade concern overhead expense are also more. So this type of concern
cannot enjoy the benefits of large scale economies.
6. More Risk : A sole proprietor is to take all decisions by himself. So
there is possibility of taking wrong decisions. In other forms of
organisations, the decisions are taken by a group of persons. So the
possibility of mistakes and wrong decisions is minimized. Lack of
counselling may create difficult situations.

PARTNERSHIP
INTRODUCTION
Partnership firm is another form of business organization. The two deficiencies of
sole trad ing concern are shortage of capital and lack of managerial skills. Moreover
risk bearing capacity of an individual was also limited. More persons were required
for supervising different functions. Partnership form of organization can overcome
these deficiencies.
The partnership may come into existence either as a result of the expansion of the
sole trading concern or by means of agreement between two or more persons.
When the size of business expands, the proprietor finds it difficult to manage the
business and is forced to take outsiders, who provides additional capital and
assistance to manage the business on sound lines.
Two or more persons can join together to establish a partnership firm. It has a legal
status. It is covered by the Indian Partnership Act, 1932. There will be union of
Capital, Skill, Organising Power and Managerial Ability. The profit or loss is shared
according to agreed proportions.
DEFINITION

According to L.H. Haney, partnership is “The relationship between persons who

agree to carry on business in common with a view to enjoying ‘private gain’.
John A. Shubin opines that “Two or more individuals may form a partnership by
making a written or oral agreement that they will jointly assume full responsibility for
the conduct of the busi- ness”.
According to sec 4 of partnership Act, 1932, “The relation between persons who have
agreed to share profits of a business carried on by all or any of them acting for all”.

CHARACTERISTIC FEATURES OF PARTNERSHIP

1. Association of Persons: In partnership form of organisation, there
must be at least two per-sons. Partnership is the outcome of a contract,
so there must be two or more persons. Minor cannot form a partnership
firm as they are incompetent to enter into a contract. According to sec
11 of the contract Act, there is no maximum limit on partners in
partnership Act. But according toCompanies Act, the maximum number
of partners cannot exceed ten in banking business and twenty in any
other business.
2. Contractual Relation: According to partnership Act, the relation of
partnership arises from contract but not from status. The contract may
be oral or written but in practice written agreement made because it
helps to settle the disputes if arise later on.
3. Earning of Profits: The purpose of the business should be to make
profits and distribute them among partners. If a work is done for charity
purposes or to serve the society it will not be called partnership. The
main motive of partnership is earning of profits.
4. Limited Authority: There is an implied authority that any partner can
act on behalf of the firm. The business will be bound by the acts of
partners.
5. Unlimited Liability: In partnership, every partner is liable to an
unlimited extent. He is liable till the last paisa of the firm’s debt is paid,
irrespective of the fact that the liability might have been incurred by
himself or by other partners of the firm. The partners are liable
individually and collectively.
6. Principal and Agent Relationship: In partnership the relationship of
principal and agent exist. It is not necessary that all partners should work
in the business. Any one or more partners can act on behalf of other
partners. Each partner is an agent of the firm and his activities bind the
firm. He also acts as a principal because he is bound by the activities of
other partners.
7. Good Faith: The very basis of the partnership business are good faith
and mutual trust. Every partner should act honestly and give proper
accounts to other partners. The partnership cannot run if there is
suspicion among partners. It is very important that partners should act
as trustees and for the common good of all. Distrust and suspicion
among partners lead to the failure of many firms.
8. Existence of Business: Partnership can only be for some kind of
business. The term busi- ness includes any trade, profession or
occupation. By business we mean all the activities con- cerning
production, distribution and rendering services for the purpose of
earning profits.
9. Restriction on Transfer of Shares: No partner can sell or transfer
his share to anybody else without the consent of the other partners. In
case any partner does not want to continue in the partnership, he can
give a notice for dissolution of the firm.
 10. Common Management: Every partner has a right to take part in the
running of the business. It is not necessary for all partners to participate
in day-to-day activities of the business but they are entitled to
participate. Even if partnership business is run by some partners, the
consent of all other partners is necessary for taking important
decisions.
11. Partners and Partnership are one: A partnership firm has no
separate entity from the part- ners. No firm can exist without partners.
The rights and liabilities of partners are the rights and liabilities of the
firm. Partners have implied authority to bind the firm for their acts.
12. Capital: The partners contribute to the capital of the firm. It is not
necessary to have capital in profit sharing ratio. A partner can be
admitted to the firm even without contributing to the capital. It is not
essential that all partners must contribute to the firms capital.
13. Protection of Minority Interest: All-important decisions are
generally taken by contensus. It ensures protection of those who may
not agree to the majority view point. A partner may even ask for the
dissolution of partnership if he feels aggrieved.
14. Continuity: There is no true limit for the continuity of a partnership
firm. It continues till the timethe partners want it to go. Death, insolvency
or any misunderstanding among the partners may dissolve the
partnership. Dissolution of partners may not necessarily mean
dissolution of the firm. The remaining partners may continue the firm
after meeting the claims of outgoing partners.

ADVANTAGES OF PARTNERSHIP FORM OF ORGANISATION

Partnership form of organisation is suitable for medium size
businesses where personal efforts of entrepreneurs are essential. The
following are the advantages of partnership.
1. Easy to form: A simple agreement among partners is sufficient to
start partnership firm. The registration of the firm is optional.
2. Large Resources: The resources of more than one person are
available for the business. More partner can be admitted if capital needs
are large. The partnership concern can also arrange funds from the
outside resources.

3. Managerial Talents: Different functional departments may be

managed and controlled by different partners. The talent, expertise and
knowledge of partners in different fields can be used for the welfare of
the business. It increases the efficiency of the business resulting in more
profits.
4. More Credit-Worthiness: The partners may have sufficient contacts
in the market. The liabil- ity of the partners being unlimited, they will be
able to raise more finances. As compared to a sole- trading concern,
partnership concern has more credit-worthiness.
5. Prompt Decision-making: The partners meet frequently and they
can take prompt decisions. The firm will not lose any business
opportunities because of delay in taking a decision.
6. Sharing of Risk: The risk of business is shared by more persons.
The burden of every partnerwill be much less as compared to the burden
of sole-trader. Further more, the business expansion will not be
hampered for fear of risk.
7. Relation between reward and work: The partners try to put more
labour to earn more and more profits. These is a direct relationship
between reward and work. The more they work, the more they be
benefited.
8. More possibility of Growth and Expansion: As compared to a sole-
trading, partnership con- cern has more possibilities for expansion of
growth of the business activities. The partner can contribute more and
manage the activities more systematically.
9. Close Supervision: The partner themselves look after the business.
So they can avoid wast- ages. They have direct access to the
employees and can encourage them for more production. The
management of partnership is much cheaper when compared to joint
stock company.
10. Flexibility of Operations: Government approval is not necessary
for making changes in the business set-up. There can be any change
in managerial set up, capital and scale of operations.
11. Secrecy: The firms are not required to publish any accounting
information to outsiders. The partners can keep the business secrets
to themselves. The competitors do not know about the exact position
of the business.
12. Protection of Minority Interests: Every partner has a right to
participate in the management of the business. All-important decisions
are taken by the consent of all partners. If majority deci sion is enforced
 on minority then effected partners can get the business dissolved.
13. Easy Dissolution: The partnership can be dissolved on
insolvency, lunacy or death of a partner. If the partnership is at will, then
any partner can get the firm dissolved by giving notice to other partners.
No legal formalities are required at the time of dissolution. So it is easy
to start as well as dissolve a partnership concern.
14. Democratic Administration: All partners may take active interest in
the working of the firm. All the partners are consulted on important
decisions. Generally, strategic decision are taken by consensus only.

DISADVANTAGES OF PARTNERSHIP

1. Limited Resources: There is restriction to the number of partners in

a firm, i.e., ten in case of banking business and twenty in any other
business. Hence the capital is limited to the extent of financial ability of
each partner in the firm. They cannot finance for bigger ventures.
2. Unlimited Liability: The liability of partners in the firm is unlimited.
The personal properties are held liable for clearing the debts and
obligations of the firm. Partners owning private properties have to be
careful to become partners in a firm.
3. Instability: The partnership concern suffers from the uncertainty of
duration. The partnership may be dissolved at the time of death,
insolvency or lunacy of a partner. The discontinuity of the business is a
social loss and it causes inconvenience to the consumers and workers.
4. Mutual Distrust: The mutual distrust among partners is the main
cause for the dissolution of partnership concern. It is difficult to maintain
harmony among partners. They may have different opinions and may
not agree on certain matters. This may lead to the dissolution of the
firm.
5. Limitation on Transfer of Shares: A partner has no right to transfer
his shares to third party without the consent of other partners.
6. Burden of Implied Authority: A partner can bind the business by his
acts. A dishonest partner creates problems in business. The other
partners will have to meet the obligations incurred by the partner. The
provision of implied authority may create problems for the business.
7. Lack of Public Faith: Partnership concern has no obligation of
publishing accounts. Public is unaware of the exact position of the
business. There is suspicion in the minds of public about the profits and
financial position of the firm. So partnership concerns lack of public
confidence.
8. Lack of Prompt Decisions: Every partner is entitled to take part in the
management of the firm. Collective decisions may lead to delay and
sometimes lead to misunderstanding. Delay in deci-sion making leads
 to a loss in business. Lack of harmony among partners often leads to
the dissolution of the firm.
9. Cautious Approach: Unlimited liability of partners leads to cautious
approach on the part of partners. Risk bearing capacity of partners may
also be limited. They try to avoid decisions where risk is involved.
Because of this nature, a number of opportunities may be lost.
10. No Independent Legal Status: The partners and the partnership
firm are treated as one and the same. Partners have no separate entity
and partnerships do not enjoy an independent legal status.

PARTNERSHIP DEED

If the partners work collectively with understanding and

cooperation then the firm can run smoothly. If there are disputes and
conflicts among the partners resulting to the closure of the firm. Hence,
to avoid the disputes and conflicts among the partners there must be
an agreement between the partners.
In order to constitute a partnership there must be an agreement
between the parties. The agreement may be oral or in writing. The
document which contains an agreement among the partners is called
“Partnership Deed”. The deed must be duly stamped and signed by all
the partners.
The deed should be drafted properly incorporating all the
necessary terms and conditions of partnership. These terms and
conditions may vary from firm to firm.
Contents: The Partnership Deed usually contains the following
information.
1 Name of the firm
2 Names, Addresses, Occupation of the Partners
3 Nature of the business to be carried on.
4 Amount of capital and contribution of each partner.
5 Profit sharing ratio.
6 Duration of partnership.
7 Amount of with drawls to be allowed to each partner.
8 Rate of interest payable on capital and chargeable on with drawals.
9 Salary, Commission or Bonus payable to partners.
10 Evaluating Goodwill, Profit sharing ratio, Revaluation of assets
and liabilities at the time of Admission, Retirement or Death of a
partner.
11 Procedure for dissolution of the firm and settlement of accounts.
 12 Arbitration clause for settlement of disputes among partners.
13 Division of work among the partners.
14 Maintenance of Book of Accounts and Audit of Accounts.
15 Rights duties and obligations of partners.
16 Additional capital introduced by partners.
This is not exhaustive and final list of clauses, which can be inserted
in the partnership deed. If partnership deed is silent in any point, then
provisions of partnership act will apply. The deed is not rigid in nature
and the contents of the deed can be altered from time to time with the
consent of all the partners of the firm.
KINDS OF PARTNERS
There are different kinds of partners and they may be classified as under:
1. Active Partner or working Partner: A Partner who not only
invest his capital in the busi- ness but also participates actively
on the management of the firms business is called Ac- tive
Partner. He may act in different capacities such as Manager,
Organiser, Adviser and Controller of all the affairs of the firm.
2. Dormant or Sleeping Partner: A partner who contributes capital,
shares profits and bears losses of the business but does not take
interest in running the business of the firm. Sleep- ing partner is
liable for the liabilities of the business like other partners. He
cannot bind the business i.e., firm, to third parties by his acts. He
is not known to the public as a partner. So he may be called as
a ‘Secret Partner’.
3. Nominal Partner: A Partner who does not contribute any capital
nor does he shares prof- its of the business. He does not take
any active role in the management of the business. Simply he
lends his name and fame in the interest of the firm. So that the
business may get more credit in the market or may promote its
sales. However, he remains liable for the debts and liabilities of
the firm.
4. Partner in Profits only: A person may become a partner for
sharing the profits only. He contributes capital and is also liable
to third parties like other partners. He is not allowed to take part
in the management of the business.
5. Partner by Estoppel: When a person is not a partner but poses
himself as a partner, either by words or in writing or by his acts
he is called a partner by estoppel. A partner by estoppel shall be
liable to outsiders who deal with the firm on the presumption of
that per- son being a partner and does not contribute anything to
the business.
6. Partner by Holding out: When the third parties declare any
 person as partner and if that person does not deny that fact
knowingly and intentionally, he is called “Partner by Holding Out”.
Such a person does not contribute any capital and will not enjoy
any rights to partici-pate in the management of the firm. However,
the partner is liable to the third parties to the extent of credit
granted to the firm, considering him to be a partner.
7. Sub Partner: A partner may associate anybody else in his share
in the firm. He gives a part of his share to the stranger. The
relationship is not between the sub-partner and the firm but
between him and the partner. He is not liable for the debts of the
firm.
8. Minor as a Partner: A minor is a person who has not yet
attained the age of majority. Partnership is a contractual
relationship and minor being incompetent to enter into con- tract.
However a minor may be admitted to the benefits of the existing
partnership with the consent of all partners. Minor is not
personally liable for the debts of the firm. His share in partnership
property and profits will be liable for the debts of the firm.
KINDS OF PARTNERSHIP

Different kinds of partnership may be explained as :

1. General Partnership 2. Limited Partnership
1. General Partnership
In this type of partnership, the liability of members in unlimited.
All the partners personally and collectively are liable for the obligations
of the firm. All partners can take part in the working of the business. In
India, this kind of partnership exists. On the basis of its diuration
partnership can be divided as
a) Particular Partnership : When a partnership is started for certain
work it is called particular partnership. When the work is completed the
partnership comes to an end. The partnership may also be for a limited
period. It will be dissolved at the expiry of that period.
b) Partnership at Will : This type of partnership is neither for a fixed
period nor for a particular purpose. The partnership at will continues
upto the time the partners have faith in each other. The life of partnership
is not limited by time and work. The strength of this partnership
depends upon the mutual trust and confidence among the partners.
2. Limited Partnership : In limited partnership, the liability of some
partners is limited while liability of some partners is unlimited. The
partners with limted liability are called special partners while those with
unlimited liability are called general or active partners. The liability of
special partners is limited only to the extent of their capital while the
liability of general partners can go beyond their capital. This type of
partnership can be seen in U.S.A. and several Europe countries.
Features of Limited Partnership
1. There are two classes of partners i.e., special and general partners.
There must be atleast one general partner whose liability will be
unlimited and atleast one partner should be a special partner with
limited liability.
2. The special partners can not bind the firm by their acts.
3. The special partner only invest money but cannot take part in the
business. The day-to-day work is done by genral partners only.
4. The limited partnership must be registered under acts. Non-
registration of the firm will be treated as general partnership.
5. The special partner is not allowed to withdraw his capital as
long as he continues to be a partner in the firm.
6. The death, insolvency or lunacy of a special partner does not dissolve
the firm.
7. The special partner is allowed to enjoy his share of profits and
can inspect the books of the firm.

CO-OPERATIVE SOCIETIES

Introduction
In all forms of organisation, a sole trade, partnership or Joint
Stock Company, the primary motive is to earn profits. The businessman
wants to promote his own interest by all means includ- ing exploitation
of consumers. The cooperative form of organisation is a democratic
setup run by its members for serving their own interests.
The advent of factory system during 19th century, due to industrial
revolution brought dras- tic changes in the growth of the economy of
every country. As long as cottage industries domi- nated the production
world. There was equitable distribution of wealth. But the industrial
revolution started exploiting the poorer sections and few hands ruled all
the economies during this period. The exploitation of consumers leads
the way for birth of cooperatives for the first time in England and
Germany.
The Act came into force in 1904 and many defects were observed
in the management and implementation of the cooperatives. To
overcome these defects, the act was amended in 1912. Progress was
made at later stages. The establishment and registration became a
state subject after passing an Act by the Government of India in 1919.
Definition
Hubert Calvest say, “Co-operation is a form of organisation
wherein persons voluntarily associate together as human beings on the
basis of equality for the promotion of the economic interests of
themselves”.
 Dr.H.N.Kunzen defines co-operatives as “Cooperative is Self help
as well as mutual help. It is a joint enterprise of those who are not
financially strong and cannot stand on their legs and therefore come
together not with a view point to get profits but to overcome disability
arising out of the want of adequate financial resources”.
The Indian Cooperative societies Act, 1912 defines Cooperatives
in section-4 as “a society which has its objectives the promotion of
economic interests of its members in accordance with Cooperative
principle”.
CHARACTERISTICS OF CO-OPERATIVE ORGANISATION

1. Voluntary Membership : Every one is at liberty to enter or leave

the Cooperative society asand when one likes. Nobody is
compelled to joint a Cooperative society.
2. Political and Religious Neutrality : The membership of a
Cooperative society is open to all irrespective of religion caste,
creed, colour or political affiliation.
3. Democratic Management : The management of Cooperatives is
always on democratic lines. All the members of a society elect a
body of persons to conduct and control day-to-day work- ing of the
society. But the ultimate control lies with the members.
4. Equal Voting Right to All : In cooperative societies every
member is given right to vote irrespective of his contribution
towards the capital. All members have equal voice in the
management of the society.
5. Service Motive : The primary objective Cooperative societies is
to provide service to their members. The aim is not to earn
profits.
6. Capital : The share capital contributed by the member is for the
purpose of using it to the maximum advantage of all the members.
Hence the members do not expect retain on capital employed.
7. Distribution of Surplus : The societies earn surplus from their
services. This surplus is notdivided according to capital
contribution. A certain percentage is paid in the form of dividend on
capital contributions. Some part of the surplus should be kept as
reserve in the society and some part should be spent for general
welfare of the members.
8. Cash Trading : Another feature of cooperative socieites is
trading on ‘cash basis’. Cash trading ensures economy for the
Cooperatives. It eliminates bad debts and collection ex-penses.
9. Government Regulations : The Cooperative societies are to follow
certain rules and regula- tions imposed by the government. And
societies are registered and regulated under the Indian Cooperative
 Societies Act.
10. Cooperative Education and Training : The members of the
society should be properly educated about the aims and objectives
of the societies. Then the members may work for the success of the
society.
11.Limited Liability : Liability of members of society is limited to the
value of the shares held by them. They are not liable to the extent
of their personal properties to meet the debts of the societies.
12. Transfer of Shares : Members should not transfer their shares to
anybody.
13. Tax Exemptions : Societies are enjoying some tax
exemptions and subsidise. These societies need not pay
registration fee, income tax and stamp duty.
14. Number of Members : Minimum Ten members are required to
establish Cooperative soci- ety. There is no maximum limit.
MERITS OF CO-OPERATIVES

1. Open Membership : The membership of Co-operative Societies is

open to each and every person. Anybody wants to enjoy the fruits of
a Co-operative society can joint it. Members may be limited in
numbers but not discriminated in any way.
2. Service Motto : They are formed not for profits but for service. The
societies try to promote the interest of this members. A feeling of Co-
operation is developed among the members. Financial help is
provided to the members at concessional rates and goods also
provided at cheap rates.
3. Supply of Goods at Cheaper Rates : The societies purchase goods
directly from producers and sell them to the member at cheap rates.
Middlemen are eliminated in the process of distri- bution of goods and
services.
4. Democratic Management : All the members are given equal
participation in management of the Co-operative Society. Absence of
profit maximisation and democratic management makes the society
as the best service organisation to promote the public interest and
social welfare.
5. Low Managemnt Cost : The Management of society is in the hands
of the elected persons among the members. Members take active
part in the working of the society. So the societies need.
6. Surpluses shared by Members : These societies sell goods to the
memberrs on a nominal profit, and to non members at market rates.
Some of the profits is distributed among the mem-bers and some part
is used for welfare of the members.
7. Perpetual Existence : The society enjoy perpetual success on. the
 death or insolvency of members does not affect the life of the society.
8. Check on other Business : Cooperatives are working with service
motive. When business- man try to exploit consumers by raising
prices of their commodities, the cooperatives supply goods at
reasonable prices. The Cooperatives are a check on other forms of
organisation.

DEMERITS OF CO-OPERATIVES
1. Lack of Capital : The Cooperatives are started by economically weaker
sections of the society. The resources are not enough to start large
enterprises. They cannot undertake the production of goods for lack of
resources. Moreover the return on capital is not attractive. Hence people
hesitate to invest their money in these societies.
2. Lack of Unity among the Members : The participation of all the members of
the society cannotbe uniform. Domination of some members may lead to
conflict among the members. Educatedmembers may take the advantage
of the uneducated members.
3. Cash Trading : The cash Trading business has both advantages and
disadvantages. PrivateTraders facilitate Credit facilities to consumers. The
societies sell goods at lower prices but absence of credit facilities forced
them to go to private traders.
4. Political Interference : Many Co-operative societies are becoming
platforms for politics and making some of the officers corrupt power and
money. The societies are governed on politicalconsideration rather than on
business lines.
5. Lack of Public Confidence : The objectives of the societies are good but
implementation andmanagement are not proper. It leads to lack of public
confidence on societies.
 Partnership Firms
• A partnership firm is an organization which is formed with two or more persons to
run a business with a view to earn profit.
• Each member of such a group is known as partner and collectively known as
partnership firm. These firms are governed by the Indian Partnership Act, 1932.
• Partnership is the relation between persons who have agreed to share the profits of
a business carried on by all or any of them acting for all."
• A single person is called as a partner while two or more persons or partners are
collectively known as a partnership firm.
• The Indian Partnership Act, 1932, Section 4, defined partnership as “the
relation between persons who have agreed to share the profits of business carried
on by all or any of them acting for all”. The Uniform Partnership Act of the USA
defined a partnership “as an association of two or more persons to carry on as co-
owners a business for profit”.
Features of Partnership Firm:
1. More Persons:
• As against proprietorship, there should be at least two persons subject to a maximum
of hundred persons to form a partnership firm.
2. Profit and Loss Sharing:
• There is an agreement among the partners to share the profits earned and losses
incurred in partnership business.
3. Contractual Relationship:
• Partnership is formed by an agreement-oral or written-among the partners.
4. Existence of Lawful Business:
• Partnership is formed to carry on some lawful business and share its profits or
losses. If the purpose is to carry some charitable works, for example, it is not
regarded as partnership.
5. Utmost Good Faith and Honesty:
• A partnership business solely rests on utmost good faith and trust among the
partners.
6. Unlimited Liability:
• Like proprietorship, each partner has unlimited liability in the firm. This means that
if the assets of the partnership firm fall short to meet the firm’s obligations, the
partners’ private assets will also be used for the purpose.
7. Restrictions on Transfer of Share:
• No partner can transfer his share to any outside person without seeking the consent
of all other partners.
8. Principal-Agent Relationship:
• The partnership firm may be carried on by all partners or any of them acting for all.
While dealing with firm’s transactions, each partner is entitled to represent the firm
and other partners. In this way, a partner is an agent of the firm and of the other
partners.
Advantages of Partnership Firm:
1. Easy Formation:
• Partnership is a contractual agreement between the partners to run an enterprise.
Hence, it is relatively ease to form. Legal formalities associated with formation are
minimal. Though, the registration of a partnership is desirable, but not obligatory.
2. More Capital Available:
• We have just seen that sole proprietorship suffers from the limitation of limited
funds. Partnership overcomes this problem, to a great extent, because now there are
more than one person who provide funds to the enterprise. It also increases the
borrowing capacity of the firm.
3. Combined Talent, Judgement and Skill:
• As there are more than one owners in partnership, all the partners are involved in
decision making. Usually, partners are pooled from different specialized areas to
complement each other. For example, if there are three partners, one partner might
be a specialist in production, another in finance and the third in marketing.
4. Diffusion of Risk:
• You have just seen that the entire losses are borne by the sole proprietor only but in
case of partnership, the losses of the firm are shared by all the partners as per their
agreed profit-sharing ratios.
• Thus, the share of loss in case of each partner will be less than that in case of
proprietorship.
5. Flexibility:
• Like proprietorship, the partnership business is also flexible. The partners can easily
appreciate and quickly react to the changing conditions. No giant business
organization can stifle so quick and creative responses to new opportunities.
6. Tax Advantage:
• Taxation rates applicable to partnership are lower than proprietorship and
company forms of business ownership.

Disadvantages of Partnership Firm:

1. Unlimited Liability:
• In partnership firm, the liability of partners is unlimited. Just as in proprietorship,
the partners’ personal assets may be at risk if the business cannot pay its debts.
2. Divided Authority:
• Sometimes the earlier stated maxim of two heads better than one may turn into “too
many cooks spoil the broth.” Each partner can discharge his responsibilities in his
concerned individual area. But, in case of areas like policy formulation for the whole
enterprise, there are chances for conflicts between the partners.
3. Lack of Continuity:
• Death or withdrawal of one partner causes the partnership to come to an end. So,
there remains uncertainty in continuity of partnership.
4. Risk of Implied Authority:
• Each partner is an agent for the partnership business. Hence, the decisions made by
him bind all the partners. At times, an incompetent partner may lend the firm into
difficulties by taking wrong decisions.
• Risk involved in decisions taken by one partner is to be borne by other partners
also. Choosing a business partner is, therefore, much like choosing a marriage mate
life partner.
5. Internal conflicts: Differences and disputes among the partners are very common. These
conflicts harm the firm as a whole.
6. Misuse of assets: The partners may use the assets of the firm for their personal purposes.
Misuse of assets is harmful to business interests.
7. Lack of public confidence:
• A partnership firm is purely a private organization. It is not controlled or regulated
by the Government. As such public may not have confidence in the firm.
8. No transfer-ability of share:
• In a firm the partner cannot transfer his share of interest to others without the consent
of the other partners.
9. Lack of secrecy:
• It may not be possible to maintain secrecy in partnership because of the number of
partners.
• Types of Partners or Partnership
• 1. Active or Managing or Working partner: A person who takes active interest
in the conduct and management of the business of the firm is known as active or
managing partner. He carries on business on behalf of the other partners. If he
wants to retire, he has to give a public notice of his retirement; otherwise he will
continue to be liable for the acts of the firm. He may act in different capacities
such as manager, organizer, advisor and controller of all the affairs of the firm.
• 2. Sleeping or Dormant partner: A sleeping partner is a partner who ‘sleeps’,
that is, he does not take active part in the management of the business. Such a
partner only contributes to the share capital of the firm, is bound by the activities
of other partners, and shares the profits and losses of the business. A sleeping
 partner, unlike an active partner, is not required to give a public notice of his
retirement. As such, he will not be liable to third parties for the acts done after his
retirement.
• 3. Nominal or Ostensible partner: A nominal partner is one who does not have
any real interest in the business but lends his name to the firm, without any capital
contributions, and doesn’t share the profits of the business. He also does not
usually have a voice in the management of the business of the firm, but he is liable
to outsiders as an actual partner. On the strength of his name, the business gets
more credit in the market or may promote its sales.
4. Partner by estoppel or Holding out: If a person, by his words or conduct, holds out to
another that he is a partner, he will be stopped from denying that he is not a partner.
• The person who thus becomes liable to third parties to pay the debts of the firm is
known as a holding out partner. He shall be liable to the outsiders who deal with the
firm on the presumption of that person being a partner even though he is not a
partner and does not contribute anything to the business.
5. Partner in profits only: When a partner agrees with the others that he would only share
the profits of the firm and would not be liable for its losses, he is in own as partner in profits
only.
• He contributes capital and is also liable to third parties like other partners. He is not
allowed to take part in the management of the business. Such partners are associated
for money and goodwill.
6. Minor as a partner:
• A partnership is created by an agreement. And if a partner is incapable of entering
into a contract, he cannot become a partner. Thus, at the time of creation of a firm a
minor (i.e., a person who has not attained the age of 18 years) cannot be one of the
parties to the contract.
• But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted
to the benefits of partnership’, with the consent of all partners. A minor partner is
entitled to his share of profits and to have access to the accounts of the firm for
purposes of inspection and copy.
7. Secret Partner:
• The position of a secret partner lies between active and sleeping partner. His
membership of the firm is kept secret from outsiders. His liability is unlimited and
he is liable for the losses of the business. He can take part in the working of the
business.
Meaning of Partnership Deed
• Since a partnership is the outcome of an agreement, it is essential that there must be
some terms and conditions agreed upon by all the partners. Such terms and
conditions may be either oral or written.
• The law does not make it compulsory to have a written agreement. However, in
order to avoid all misunderstanding and disputes, it is always the best course to have
 a written agreement duly signed and registered under the Act. Such a written
document which contains the terms of the agreement is called 'Partnership Deed'.
The Partnership deed is not a public document like the Memorandum of Association
of a Company.
• Contents of a Partnership Deed
The partnership deed must contain the following particular:
• 1. The name of the firm.
• 2. The names and addresses of the partners.
• 3. The nature of the business.
• 4. The term or duration of partnership.
• 5. The amount of capital to be contributed by each partner.
• 6. The drawings that can be made by each partner.
• 7. The interest to be allowed on capital and charged on drawings.
• 8. Rights of partners.
• 9. Duties of partners.
• 10. Remuneration to partners.
• 11. The ratio in which the profits or losses are to be shared among the
partners.
• 12. The basis for the calculation of goodwill at the time of admission,
retirement, and death of a partner.
• 13. The keeping of proper books of accounts and the preparation of
Balance Sheet.
• 14. Settlement of amount on the dissolution of the firm.
• 15. The procedures to be adopted in the case of disputes
among the partners.
• 16. Arbitration clause.

Registration of Partnership
As per the Partnership Act 1932, it is not compulsory to register a partnership firm. The
firm does not have a separate legal identity and registration will not alter this fact. However,
registration is the definite proof of the existence of the firm and its legality.
Limited Liability Partnership (LLP)
• Concept of LLP:
Limited Liability Partnership enterprise, the world wide recognized form of business
organization, has now been introduced in India by enacting the Limited Liability
Partnership Act, 2008. LLP Act was notified on 31.03.2009.
• A Limited Liability Partnership, popularly known as LLP combines the advantages
of both the Company and Partnership into a single form of organization. Limited
Liability Partnership (LLP) is a new corporate form that enables professional
knowledge and entrepreneurial skill to combine, organize and operate in an
innovative and proficient manner.
• Some LLP examples can include veterinarian's offices, dental offices, auditing
firms, law firms, financial advising services, business consultancies and real estate
agencies. However, state laws might place restrictions on the types of businesses
that use this partnership model.
• Characteristics of an LLP:
• 1. LLP is governed by the Limited Liability Partnership Act 2008, which has come
into force with effect from April 1, 2009. The Indian Partnership Act, 1932 is not
applicable to LLP.
• 2. LLP is a body incorporate and a legal entity separate from its partners having
perpetual succession.
• 3. The partners have the right to manage the business directly, unlike corporate
shareholders.
• 4. One partner is not responsible or liable for another partner’s, misconduct or
negligence.
• 5. Minimum of 2 partners and no maximum limit.
• 6. Should be ‘for profit’ business.
• 7. The rights and duties of partners in an LLP, will be governed by the agreement
between partners and the partners have the flexibility to devise the agreement as
per their choice. The duties and obligations of Designated Partners shall be as
provided in the law.
• 8. Limited liability of the partners to the extent of their contributions in the LLP.
No exposure of personal assets of the partner, except in cases of fraud.
• 9. LLP shall maintain annual accounts. However, audit of the accounts is required
only if the contribution exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40
lakh. A statement of accounts and solvency shall be filed by every LLP with the
Registrar of Companies (ROC) every year.
Advantages of Limited Liability Partnership (LLP):
• The first LLP was registered on 2nd April, 2009 and till 25th April, 2011, 4580
LLPs were registered. This form of Organization offers the following benefits:
1. Convenient
• It is easy to start and manage a business like entrepreneurs. LLP agreements are
customized in according to meet the needs of partners concerned. There is fewer
formalities in areas of legal compilation, annual meeting, and resolution as
compared to any other Private Limited Company.
2. No minimum capital requirement
• LLP can be started with the minimum amount of capital money. Capital may be in
the form of tangible, movable asset like Land, machinery or intangible form.
Capital requirement in the case of a Private company (Requirements for
Registration of a Private Company) and Public Company (Requirements for registration of
a Public Company) is Rs. 1, 00,000 and Rs.5, 00,000 respectively whereas no such
mandatory capital requirement specified under the LLP.
3. No limit on owners of business
• LLP may have partners varying from 2 to many. There is no limit for partners in
LLP. An LLP requires a minimum 2 partners while there is no limit on the maximum
number of partners in contrast to a private company wherein there is a restriction of
not having more than 200 members.
4. Lower Registration Cost
• The cost of registration of LLP is low as compared to any other company (Public or
Private).
5. No requirement of compulsory Audit
• LLPs are not required to audit the accounts. Any other company (Public, Private)
are mandated to get their accounts audited by the auditing firm. LLP is required to
audit their account in the following situation:
• When the contributions of the LLP exceeds Rs. 25 Lakhs, or
• When annual turnover of the LLP exceeds Rs. 40 Lakhs
6. Savings from lower compliance burden
• LLP have to face less compliance burden as they have to submit only two statements
i.e. the Annual Return & Statement of Accounts and Solvency. Whereas in the case
of private company, at Least 8 to 10 regulatory formalities and compliances are
required to be duly completed. Read Annual Cost Comparison of Private Limited
and LLP.
7. Taxation Aspect on LLP
• LLP is not liable to pay the tax on the income and share of its partner. Thus, no
dividend distribution tax is payable as under section 40(b). Bonus, commission or
 remuneration, Interest to partners, any payment of salary, allowed as
deduction. Provision of ‘deemed dividend’ under income tax law, is not applicable
to LLP.
8. Dividend Distribution Tax (DDT) not applicable
• If the partners of LLP withdraw profits from the company, an additional tax liability
in the form of DDT is not payable by partners. Whereas, in the case of a company,
the owners have to pay DDT @ 15% (surcharge & educational cess). Hence, profit
of LLP is in the hands of its partners can be easily withdrawn by the partners.

Disadvantages of Limited Liability Partnership:

• 1. An LLP cannot raise funds from Public.
• 2. Under some cases, liability may extend to personal assets of partners.
• 3. The framework for incorporating a LLP is in place but currently registrations are
centralized at Delhi.