• Characteristics features of business
• Features and evaluation of Sole Proprietorship
• Joint-Stock Companies
• Public Enterprises and their types
•Changing Business Environment in Post-Liberalization scenario
FORMS OF BUSINESS ORGANIZATION
The following are the forms of business organization
based on ownership:
(a) Sole trader or Proprietorship
(c) Joint Stock Company
(d) Co-operative society
(a) Sole Trader or Proprietorship
The sole trader is the simplest, oldest and natural form
of business organization.
It is also called sole proprietorship.
‘Sole’ means one; ‘Proprietor’ means owner
‘Sole Trader or Proprietor’ implies that there is only
one trader who is the owner of the business
Features of Sole Trader or Proprietor
It is easy to start a business under this form and also easy to
He introduces his own capital.
He enjoys all the profits and in case of loss, he alone suffers.
He has unlimited liability which implies that his liability
extends to his personal properties in case of loss.
Little legal hassles to be observed by a sole trader. Except in
such business where licenses are required for ex: Medical
shops, Hotels and etc.
All is he and he is all in all.
Business secrets can be guarded well.
Total operational freedom. He is owner, manager and
He can take decisions very fast and implement them
High degree of flexibility to shift from one business to the
Sole Trader (or) Proprietorship Advantages and Disadvantages
1. Easy to start & easy to close
2. Personal contact with customers
3. Prompt decision making
4. High degree of flexibility
6. Low rate of taxation
7. Direct motivation
8. Minimum interference from
9. Total control
1. Unlimited Liability
2. Limited amount of Capital
3. No Division of Labor
5. Inadequate for growth and expansion
6. Lack of specialization
7. More Competition
8. Low Bargaining Power
When there are like-minded persons with resources, they
can come together to do the business and share the
profits/losses of the business in an agreed ratio.
Persons who have entered into such an agreement are
individually called ‘partners’ and collectively called ‘firm’
The relationship among partners is called ‘partnership’.
Indian Partnership Act, 1932 defines partnership as the
relationship between two or more persons who agree to
share the profits of the business carried on by all or any
one of them acting for all.
Features of Partnership
Relationship: Relationship among person based on
Two or more person: There should be two or more persons.
There should be a business: Business should be conducted.
Agreement: Persons should agree to share the profits/losses
of the business.
Carried on by all or any one of them acting for all: Business
can be carried on by one person who is called the agent for
all the other person and the partnership is called
Unlimited Liability: The liability of the partners is unlimited. The partnership
and partner, in the eye of law are not different but one and same. Hence, the
partners have to bring their personal assets to clear the losses of the firm.
Number of Partners: According to the Indian Partnership Act, minimum 2
partners in both banking and non banking business and maximum 10 partners
in banking and 20 partners in non-banking business.
Division of labour: Because there are more than two persons, the work can be
divided among the partners based on their aptitude.
Personal Contact with customers: The partners can continuously be in
touch with the customers to monitor their requirements.
Flexibility: All the partners are likeminded persons and hence they can take
any decision relating to business.
Other Features (Continued)…
Joint and Several Liability: All the partners are equally
Implied Authority: The act of every partner is deemed to be
an act of the firm. Hence he has to take the consent of other
partners before taking any decision.
Transferability of share/interest: The partners cannot
transfer their share/interest in partnership in the firm to
others without the consent of the other partners.
Dissolution: the closure of partnership is called ‘dissolution’.
When any of the partners die, becomes insolvent or
insane, the partnership is said to be dissolved. This means
that the duration of the partnership is not certain. The
remaining partners can, if they are interested, restart their
business with a new name.
What is a Partnership Deed?
The written agreement among the partners is called ‘the partnership deed’. It
contains the terms & conditions governing the working of partnership.
It contains :
1. Names & Addresses of the firm and partners
2. Nature of business proposed.
3. Amount of capital of the partnership and the ratio for contribution by each of the
4. Duration of business
5. Their profit sharing ratio (used for sharing losses also)
6. Procedure for dissolution of firm
7. The amount of salary or commission payable to any partner
8. special rights, obligations and liabilities of partner(s) if any.
Kinds of Partners
Active Partner: Actively takes part in the affairs of the
Sleeping Partner: Contributes capital but doesn’t take part
in the affairs of the partnership.
Nominal Partner: Nominal partner is partner just for
namesake. He neither contributes to capital nor takes part
in the affairs of business. People with good business
connections and well placed people in the society are
Kinds of Partners (Continued)…
Partner by Estoppel: Partner by Estoppel gives an impression to
outsiders that he is the partner in the firm. In fact he neither contributes
to capital, nor takes any role in the affairs of the partnership. Because he
has misled the outsiders, partner by estoppel is held liable for the
claims, if any, of the outsiders.
Partner by Holding out: If partners declare a particular person (having
social status) as partner and this person does not contradict even after
he comes to know such declaration, he is called a partner by holding out
and he is liable for the claims of third parties.
Minor Partner: Minor has a special status in the partnership. A minor
can be admitted for the benefits of the benefits of the firm. A minor is
entitled to his share of profits of the firm. The liability of a minor
partner is limited to the extent of this contribution of the capital of the
(c) Joint Stock Companies
A joint stock company is described as a voluntary association
of persons recognized by law, having a distinct name, a
common seal, formed to carry on business for profit, with
capital divisible into transferable shares, limited
liability, corporate body and perpetual succession.
In brief, it is like an artificial person created by law with
perpetual succession and common seal.
Section 3 (1) of the Companies Act, 1956 defines a company as
“COMPANY FORMED AND REGISTERED UNDER THE ACT”
Features of Joint-Stock Companies:
Artificial Person: The company has no form or shape. It is
an artificial person created by law. It is intangible, invisible
and existing only in the eyes of law.
Separate legal existence: It has an independent existence.
It is separate from its members. It can acquire the assets. It
can sue others if they are in default in payment of
dues, breach of contract with it, if any. Similarly, it can be
sued by outsiders for any claim. A Shareholder is not liable
for the acts of the company.
Voluntary Association of persons: The company is an
association of voluntary association of person who want to
carry on business for profit. To carry on business, the y need
capital. So they invest in the share capital of the company.
Features of Joint-Stock Company (Continued)…
Limited Liability: The Shareholders have limited liability
i.e., liability limited to the face value of the shares held by
Capital is divided into shares: The total capital of the
company is divided into units. Each unit is called a share.
The price of each share is priced so low that every investor
would like to invest in the company.
Transferability of shares: In the company f0rm of
organization, the shares can be transferred from one
person to another. A share holder of a public compnay can
sell his holdings of shares. However, a share holder of a
privat company can not sell his holdings of shares.
Features of Joint-Stock Company (Continued)…
Common seal: As the company is an artificial person
created by law has no physical for, it cannot sign its
name on a paper. So, it has a common seal on which its
name is engraved. Every document or contract should
be affixed by the common seal, otherwise the company
is not bound by such a document or contract.
Perpetual Succession: Members may come and
members may go, but the company continues for ever
Features of Joint-Stock Company (Continued)…
Ownership and Management separated: The
shareholders are spread over the length and breadth of the
country, and sometimes, they are from different parts of
the world. To facilitate administration, the shareholders
elect some among themselves or the promoters of the
company as directors to a board, which looks after the
management of the business.
Winding Up: Winding up refers to the putting an end to
the company. Because law creates it, only law can put an
end to it in special circumstances such as representation
from creditors or financial institutions. The company is not
affected by the death or insolvency of any of its members.
Kinds of Companies:
I. Kinds of companies based on incorporation:
1. Chartered Company
2. Statutory Corporation
3. Registered Company
II. Kinds of companies based on public interest:
1. Private Limited Company
2. Public Company
III. Kinds of companies based on liability:
1. Unlimited Company
2. Limited Company
3. Companies limited by guarantee
IV. Kinds of companies based on interest:
1. Holding Company
2. Subsidiary Company
V. Kinds of Companies based on nationality:
1. Foreign Company
2. Indian Company
Kinds of companies based on incorporation:
Chartered Company: Created by the Royal Charter of the
state. Charter contains the rights, privileges, powers etc..
Example: British East India Company formed in England in
1600 to trade with India and East.
Statutory Corporation: Created by an Act of the state
legislature or parliament. The
objective, scope, powers, responsibilities are clearly defined
by the act. Example: Industrial Development Bank of India
(IDBI), Food Corporation of India (FCI), APSRTC.
Registered Company: A registered company is one that is
registered under Indian Companies Act, 1956. A Registered
Company may be public limited company, private limited
company, government company, company limited by
guarantee or unlimited company.
Kinds of Companies based on public interest:
Private Limited Company: According to sec. 3 of
Indian Companies Act, a private company means a
company that has a minimum paid up capital of one
lakh rupees or such higher paid up capital as may be
prescribed, and by its articles
(a) Restricts the right of transfer its shares, if any
(b) Limits the number of its members to fifty
(c) Prohibits any invitation to the public to subscribe
any shares in or debentures of, the company
(d) The name of a private company should necessarily
end with the words ‘private limited’ (Pvt. Ltd.).
Kinds of Companies based on Public interest:
Public Company: This means a company that
(a) Is not a private company
(b) has a minimum paid up capital of five lakh rupees or
such higher paid up capital, as may be prescribed.
(c) Can have any number of members but
minimum, there should be seven members
(d) Can issue the prospectus to raise the capital
(e) The name of the public company ends with the word
Distinction between Public company and Private company:
Points of difference Public Company Private Company
1. Minimum and
Maximum number of
2. Transfer of Shares No restrictions Restricted
3. Issue of Prospectus Prospectus can be issued Prohibited from issue of
4. Acceptance of deposits Can Accept Prohibited from accepting
deposits from public.
However, it can accept
deposits from its
members, directors or
5. Minimum Paid up
Rs. 5 lakh or higher, as
Rs. 1 lakh or higher, as
Kinds of companies based on public interest:
Government Company: Section 617 of Indian
Companies Act, 1956 defines a government company as
“any company in which not less than 51 percent of paid-
up share capital is held by central government, or by
any state government.
Example: National Thermal Power Corporation (NTPC)
Bharat Heavy Electricals (BHEL)
Hindustan Machine Tools (HMT)
Steel Authority of India (SAIL)
Kinds of Companies based on Liability:
Unlimited Company: An unlimited company is a
company in which the liability of every member is
unlimited. This implies that the personal property of every
member is also liable for the debts of the company.
Unlimited Companies are rarely found in practice even
though as per Indian Companies Act, Unlimited
Companies can be incorporated.
Limited Company: A company is said to be limited
liability company where the liability of its member is
limited by the unpaid amount on the shares respectively
held by them.
Companies Limited by Guarantee: A Company is said
to be limited by guarantee where the liability of the
members is limited to such an amount as they agreed upon
to contribute to the assets of the company in event of being
Kinds of companies based on controlling
Holding Company: A Holding company is a company
that controls the composition of the board of directors
of another company or holds more than half of the
nominal value of the equity share capital of another
Subsidiary Company: A Subsidiary company is that
company that is controlled by the holding company.
Formation of a joint stock company (or) Procedure for
incorporation of company:
There are two stages in the formation of a joint stock
company. They are:
(A) To obtain Certificate of Incorporation
(B) To obtain Certificate of Commencement of
- The Certificate of Incorporation is just like a ‘date of
birth’ certificate. It certifies that a company with such
a name is born on a particular date
- Where as, Certificate of Commencement of Business
authorizes a public company to start its commercial
A private company can start it’s commercial operations
immediately after obtaining a Certificate of
However, A Public Company has to obtain a Certificate
of Commencement of Business to start commercial
The persons who conceive the idea of starting a
company and who organize the necessary initial
resources are called Promoters. The vision of the
promoters form the backbone for the company.
Obtaining Certificate of
The promoters have to file the following
documents, along with necessary fee, with the
Registrar of Joint Stock Companies to obtain
Certificate of Incorporation.
(a) Memorandum of Association
(b) Articles of Association
(a) Memorandum of Association:
Also called the charter or constitution for the company.
It lays down in precise and clear terms the objectives of the
company, defines the scope of its operations and its relations
with the investors and outside world.
The contents of Memorandum of Association are classified
into six clauses. They are:
(i) Name Clause
(ii) Registered or Situation Clause
(iii) Objects Clause
(iv) Liability Clause
(v) Capital Clause
(vi) Subscription Clause
(b) Articles of Association:
Articles of Association contains the rules of procedure
for internal management and control of the affairs of
It is concerned with the procedural matters in
conducting the routine matters of the company.
It supplements the Memorandum of Association and
hence it cannot include that which is prohibited by
The Memorandum of Association – Relationship of
the company with outsiders Whereas, The Articles of
Association – Rules of procedure in the internal
management and control of he affairs of the company.
Contents of Articles of Association:
Amount of share capital and different types of capital
Methods of increase, reduce or alter capital
Different types of shares, their respective
rights, conversion of shares
Procedure in respect of transfer and transmission of
Procedure in conducting board meetings and general
Powers, rights and duties of directors in board
Procedure in appointment and removal of a director
Remuneration of directors
Procedure for winding up
Prospectus is the first and basic document that
supports the structure of the company. An investor will
go through prospectus to assess the feasibility of his
investment in the company.
It is generally defined as a
‘notice, circular, advertisement that discloses full
information relating to the amount of shares
issued, the rights attached to each type of shares
Contents of Prospectus:
The following are the contents of the prospectus:
(a) The name of the company and addresses of its registered
(b) the nature and business of the company
(c) the main objectives of the company
(d) the number and types of shares and debentures issued in the
(e) the list of promoters with their names, addresses
(f) the list of directors with their names, addresses and
(g) Opening and closing date of public offer
(h) details of the brokers, underwriters, merchant bankers etc.
(i) Rights and restrictions as applicable to each class of shares.
(j) Minimum number of shares to be applied and how much is to
paid per share on application
ADVANTAGES OF JOINT STOCK COMPANY:
Mobilization of larger resources
Separate legal entity
Transferability of shares
Liquidity of investment
Inculcates the habit of savings and investments
Democracy in management
Economies of large scale production
DISADVANTAGES OF JOINT – STOCK
Formation of company is long drawn procedure
High degree of government interference
Inordinate delays in decision making
Oligarchy in management
Lack of initiative
Lack of responsibility and commitment
Lobbying with government departments
PUBLIC SECTOR ENTERPRISES
A Public sector enterprise or a public enterprise is one
which is owned, managed and controlled by the Central
Government or any State Government or any Local
They are also called as “Public Undertakings” or “Public
The forms of organizing enterprises are as follows:
(a) Department Undertaking
(b) Public Corporations
(c) Government Companies
Objectives of Public Enterprises:
To achieve rapid economic development through industrial
growth in accordance with the development plans.
To channelize resources in the best possible manner for
To ensure balanced regional development of industry and trade.
To prevent the growth of monopoly and monopolistic tendencies
in the private sector.
To control the prices of essential consumer goods in the market
to prevent public hardship.
To secure public welfare and to reduce inequalities in the
distribution of income and wealth.
Departmental Undertakings is a public enterprise which is
organized, controlled and financed by the government. For Ex: Post &
Telegraphs, Railways etc.
FEATURES OF DEPARTMENTAL UNDERTKINGS:
1. Formation: Created by government attached to a particular ministry
2. No Separate Legal Entity: Cannot sue & Cannot be sued without
3. Management & Control: Managed & Controlled by the concerned
ministry of the government.
4. Finance: Financed by government
5. No Borrowing Power
6. No Authority to use revenue: Revenues are paid into the treasury.
Public corporation is an autonomous organization, which is established by a
Special Act of the Center or State Legislature. This Special Act defines its
powers, duties, functions. It is also known as Statutory Corporation. Ex:
LIC, Air India, SBI etc.
FEATURES OF PUBLIC CORPORATION:
Formation: Created by a special act of central or state legislature
Separate Legal Entity: Has a separate legal entity.
Management and Control: Managed by Board of Directors which is
constituted according to the provisions of the Special Act.
Finance: Financed by Government
Borrowing Powers: Has the power to borrow funds from govt
Authority to use Revenue: can use revenue to meet its expenditure
A Government company is a company in which at least 51 % of
the paid up share capital are held by:
(a) Central Government (b) State Government (c) Partly by central
and partly by one or more state governments
Government Company includes HMT, BHEL etc.
FEATURES OF GOVERNMENT COMPANY:
1 Formation: formed complying with the provisions of companies
Act of 1956
2. Separate Legal Entity: It has a separate legal entity
3. Management & Control: Managed by Board of Directors
elected by shareholders
4. Ownership: 51% Ownership by State, Central or both
5. Finance: Funded by government or public
6. Has borrowing Powers
7. Power to use Revenue
Forms of Public Enterprises: Features at a Glance
1. Formation Executive Order of
Parliament or State
Companies Act, 1956
2. Legal Position An extension to a
Separate legal entity
3. Finances Budget of the
Provides the initial
Govt provides a minimum
of 51% of capital and the
balance is raised from
4. Degree of
Nil Fairly Good High
5. Power to
Manned by govt
employees and civil
It can recruit its
It can recruit its own staff
Forms of Public
Controlled by the
officials of the
7. Power to borrow It can borrow
subject to prior
It can borrow from
also from public
It can borrow from
also from public
8. Flexibility Nil. It has to
adhere to the rules
and regulations of
More flexibility in
the framework of
Total flexibility. It
can frame its own