Business and new economic enviornment
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  • 1. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT Chapter 4: Contents:  Business : Its Characteristics  Features of Sole proprietorship firm  Partnership Firm  Joint Stock Company  Public Enterprise : Types  Changing Business Environment 1. INTRODUCTION TO BUSINESS: Human beings are continuously engaged in some activity or other in order to satisfy their unlimited wants. Every day we come across the word 'business' or 'businessman' directly or indirectly. Business has become essential part of modern world. Business is an economic activity, which is related with continuous and regular production and distribution of goods and services for satisfying human wants. All of us need food, clothing and shelter. We also have many other household requirements to be satisfied in our daily lives. We met these requirements from the shopkeeper. The shopkeeper gets from wholesaler. The wholesaler gets from manufacturers. The shopkeeper, the wholesaler, the manufacturer are doing business and therefore they are called as Businessman or entrepreneurs. Stephenson defines business as, "The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants." 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." Lewis Henry defines business as, "Human activity directed towards producing or acquiring wealth through buying and selling of goods." Thus, the term business means continuous production and distribution of goods and services with the aim of earning profits under uncertain market conditions. 2. FEATURES /CHARACTERISTICS OF BUSINESS: 1. Exchange of goods and services: All business activities are directly or indirectly concerned with the exchange of goods or services for money or money's worth. Page 1
  • 2. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT 2. Deals in numerous transactions In business, the exchange of goods and services is a regular feature. A businessman regularly deals in a number of transactions and not just one or two transactions. 3. Profit is the main Objective The business is carried on with the intention of earning a profit. The profit is a reward for the services of a businessman. 4. Business skills for economic success Anyone cannot run a business. To be a good businessman, one needs to have good business qualities and skills. A businessman needs experience and skill to run a business. 5. Risks and Uncertainties Business is subject to risks and uncertainties. Some risks, such as risks of loss due to fire and theft can be insured. There are also uncertainties, such as loss due to change in demand or fall in price cannot be insured and must be borne by the businessman. 6. Buyer and Seller Every business transaction has minimum two parties that is a buyer and a seller. Business is nothing but a contract or an agreement between buyer and seller. 7. Connected with production Business activity may be connected with production of goods or services. In this case, it is called as industrial activity. The industry may be primary or secondary. 8. Marketing and Distribution of goods Business activity may be concerned with marketing or distribution of goods in which case it is called as commercial activity. 9. Deals in goods and services In business there has to be dealings in goods and service. Goods may be divided into following two categories :1. Consumer goods : Goods which are used by final consumer for consumption are called consumer goods e.g. T.V., Soaps, etc. 2. Producer goods : Goods used by producer for further production are called producers goods e.g. Machinery, equipments, etc. Services are intangible but can be exchanged for value like providing transport, warehousing and insurance services, etc. Page 2
  • 3. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT 10. To Satisfy human wants The businessman also desires to satisfy human wants through conduct of business. By producing and supplying various commodities, businessmen try to promote consumer's satisfaction. 11. Social obligations Modern business is service oriented. Modern businessmen are conscious of their social responsibility. Today's business is service-oriented rather than profit-oriented 3. BUSINESS CHALLENGES : Business-as-usual in organizations present a series of business challenges faced on both short and long terms where innovation is paramount. Growing businesses face a range of challenges. As a business grows, different problems and opportunities demand different solutions - what worked a year ago might now be not the best approach. All too often, avoidable mistakes turn what could have been a great business into an also-ran. Recognising and overcoming the common pitfalls associated with growth is essential if your business is to continue to grow and thrive. Crucially, you need to ensure that the steps you take today don't themselves create additional problems for the future. Effective leadership will help you make the most of the opportunities, creating sustainable growth for the future. 1. Managing the Bottom Line : Market research isn't something that is to do as a one-off when the new business is been launched. Business conditions change continually, so businesses market research should be continuous as well. Otherwise it may run the risk of making business decisions based on outof-date information, which can lead to business failure. The more you succeed, the more competitors notice - and react to - what you are doing. A market-leading offer one day may be no better than average a few months later. Apparently loyal customers can be quick to find alternative suppliers who provide a better deal. As products (and services) age, sales growth and profit margins get squeezed. Understanding where your products are in their lifecycles can help you work out how to maximise overall profitability. At the same time, you need to invest in innovation to build a stream of new, profitable products to market. 2. Meeting Shareholders Expectations: The plan that made sense for you a year ago isn't necessarily right for you now. Market conditions continually change, so you need to revisit and update your business plan regularly. See the page in this guide on keeping up with the market. Page 3
  • 4. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT As your business grows, your strategy needs to evolve to suit your changed circumstances. For example, your focus is likely to change from winning new customers to building profitable relationships and maximising growth with existing customers. Existing business relationships often have greater potential for profit and can also provide reliable cash flow. Newer relationships may increase turnover, but the profit margins may be lower, which may not be sustainable. See the page in this guide on cash flow and financial management. At the same time, every business needs to be alert to new opportunities. There are obvious risks to relying solely on existing customers. Diversifying your customer base spreads those risks. Following the same business model, but bigger, is not the only route to growth. There are other strategic options such as outsourcing or franchising that might provide better growth opportunities. It's important not to assume that your current success means that you will automatically be able to take advantage of these opportunities. Every major move needs planning in the same way as a new business launch. Watch out for being too opportunistic - ask yourself whether new ideas suit your strengths and your overall vision of where the business is going. Bear in mind that every new development brings with it changing risks. It's worth regularly reviewing the risks you face and developing contingency plans. 3. Developing and retaining top talent : Entrepreneurs are the driving force behind creating and growing new businesses. All too often, they are also the people holding them back. The abilities that can help you launch a business are not the same as those you need to help it grow. It's vital not to fool yourself into valuing your own abilities too highly. The chances are that you'll need training to learn the skills and attitudes required by someone who is leading growth. To grow your business, you need to learn to delegate properly, trusting your management team and giving up day-to-day control of every detail. It's all too easy to stifle creativity and motivation with excessive interference. As the business becomes more complex, you also need to develop your time management skills and learn to focus on what's really important. As your business grows, you may need to bring in outsiders to help. You'll want to delegate responsibility for particular areas to different specialists, or appoint a non-executive director or two to strengthen your board. As you start tackling a new opportunity, someone who has experience of that activity can be vital. For many successful entrepreneurs, learning to listen to - and take - advice is one of the hardest challenges they face. But it may also be essential if you are going to make the most of your opportunities. Some entrepreneurs, recognising their own limitations, even appoint someone else to act as managing director or chairman. 4. Creating a customer responsive organisation: Page 4
  • 5. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT New businesses often run in perpetual crisis mode. Every day brings new challenges that urgently need resolving and management spends most of their time troubleshooting. As your business grows, this approach simply doesn't work. While a short-term crisis is always urgent, it may not matter nearly as much as other things you could be doing. Spending your time soothing an irritated customer might help protect that one relationship - but focusing instead on recruiting the right salesperson could lay the foundations of substantial new sales for years to come .As your business grows, you also need to be alert to new problems and priorities. For example, your business might be increasingly at risk unless you take steps to ensure your intellectual property is properly protected. If you are focusing on individual marketing campaigns, you might need to devote more resources to developing your brand. Identifying the key drivers of growth is a good way of understanding what to prioritise. A disciplined approach to management focuses on leading employees, developing your management team and building your business strategy. Instead of treating each problem as a one-off, you develop systems and structures that make it easier to handle in the future. 5. Diminishing time to market: Complacency can be a major threat to a growing business. Assuming that you will continue to be successful simply because you have been in the past is very unwise. Regularly revisiting and updating your business plan can help remind you of the changing market conditions and the need to respond to them. See the page in this guide on planning ahead. An up-to-date plan helps you identify what action you need to take to change your business and the way it operates, for example: Changing to suppliers who can grow with you and meet your new priorities. As your business grows, consistent quality and reliability may be more important than simply getting the cheapest offer. Renegotiating contracts to take account of increased volume. Training and developing employees. Your own role will also evolve as the business grows. See the page in this guide on skills and attitudes. Making sure that you keep up to date with new technologies. You need to be fully committed to your strategy, even if it takes you out of your comfort zone. This may involve hard decisions - for example making employees redundant or switching business away from suppliers you have become friends with. But unless you're prepared to do this, you risk putting your business at a dangerous competitive disadvantage. 6. Market Agility: Page 5
  • 6. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT Good cash flow control is important for any business. For a growing business, it's crucial cash constraints can be the biggest factor limiting growth and overtrading can be fatal .Making the best use of your finances should be a key element in business planning and assessing new opportunities. With limited resources, you may need to pass up promising opportunities if pursuing them would mean starving your core business of essential funding. Every element of working capital should be carefully controlled to maximise your free cash flow. Effective credit management and tight control of overdue debts are essential. You may also want to consider raising financing against trade debts. Good stock control and effective supplier management tend to become increasingly important as businesses grow. Holdings of obsolete stock may become a problem that needs periodic clearing up. You may want to work with suppliers to reduce delivery cycles, or switch to suppliers and systems that can handle just-in-time delivery. Planning ahead helps you anticipate your financing needs and arrange suitable funding. For many growing businesses, a key decision is whether to bring in outside investors to provide the equity needed to underpin further expansion. 7. Pricing and Quality: All businesses produce and rely on large volumes of information - financial records, interactions with customers and other business contacts, employee details, regulatory requirements and so on. It's too much to keep track of - let alone use effectively - without the right systems. Responsibilities and tasks can be delegated as your business grows, but without solid management information systems you cannot manage effectively. The larger your business grows, the harder it is to ensure that information is shared and different functions work together effectively. Putting the right infrastructure in place is an essential part of helping your business to grow. Documentation, policies and procedures also become increasingly important. The informality that might work with one or two employees and a handful of customers simply isn't practical in a growing business. You need proper contracts, clear terms and conditions, effective employment procedures and so on. Many growing businesses find using established management standards one of the most effective ways of introducing best practice. Quality control systems can be an important part of driving improvements and convincing larger customers that you can be relied on. Investing in the right systems is an investment that will pay off both short and long term. You benefit every day from more effective operations. If you ever decide to sell the business, demonstrating that you have well-run, efficient systems will be an important part of proving its value. Page 6
  • 7. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT 4. TYPES OF BUSINESS ORGANISATION : 4.1. Sole Proprietorship: A form of business in which one person owns all the assets of the business, in contrast to a partnership or a corporation. A person who does business for himself is engaged in the operation of a sole proprietorship. Anyone who does business without formally creating a business organization is a sole proprietor. Many small businesses operate as sole proprietorships. Professionals, consultants, and other service businesses that require minimum amounts of capital often operate this way. A sole proprietorship is not a separate legal entity, like a partnership or a corporation. No legal formalities are necessary to create a sole proprietorship, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor. Because a sole proprietorship is not a separate legal entity, it is not itself a taxable entity. A major concern for persons organizing a business enterprise is limiting the extent to which their personal assets, unrelated to the business itself, are subject to claims of business creditors. A sole proprietorship gives the least protection because the personal liability of the sole proprietor is generally unlimited. Both the business assets and the personal assets of the sole proprietor are subject to claims of the sole proprietorship's creditors. In addition, existing liabilities of the sole proprietor will not be extinguished upon the dissolution or sale of the sole proprietorship. Unlike the managers of a corporation or a partnership, a sole proprietor has total flexibility in managing and controlling the business. The organizational expenses and level of formality in a sole proprietorship are minimal as compared with those of other business organizations. However, because a sole proprietorship is not a separate legal entity, it terminates when the sole proprietor becomes disabled, retires, or dies. As a result, a sole proprietorship lacks business continuity and does not have a perpetual existence as does a corporation. For working capital, a sole proprietorship is generally limited to the individual funds of the sole proprietor, along with any loans from outsiders willing to provide extra capital. During her lifetime, a sole proprietor can sell or give away any asset because the business is not legally separate from the sole proprietor. At the death of the sole proprietor, the business is usually dissolved. The proprietor's estate, however, can sell the assets or continue the business. 4.1.1 Characteristics Of Sole Proprietorship: 1. It is the oldest, most common, and simplest form of business organization. 2. One person can serve as the business decision-maker. 3. No registration with the state is required, as is necessary with a corporation or a limited liability company (LLC). Page 7
  • 8. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT 4. It is easily set up and maintained. 5. The owner is personally responsible for assets, income taxes, and business debts. 6. It is relatively simple to manage and control. 4.1.2 Advantages of sole Proprietorship: Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits. Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes. Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures. 4.1.3 Disadvantages of Sole Proprietorship: Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions. Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails. Heavy burden. The flipside of complete control is the burden and pressure it can impose. You alone are ultimately responsible for the successes and failures of your business. 4.2 Partnership Organisation: A partnership is a business entity having two or more owners. Earnings are distributed according to the partnership agreement and are treated as personal income for tax purposes. Thus, like the sole proprietorship, the partnership is simply a conduit for directing income to its partners. Partnership has a unique liability situation. Each partner is jointly and severally liable. Thus, a damaged party can pursue a single partner or any number of partners- and that claim may or may not be proportional to the invested capital of the partners or the distribution of the earnings. This means that if the one partner did something to damage a customer, that customer could sue all the partners even though other partner played no part in the problem. Organizing a partnership is not as effortless as with a sole proprietorship. The partners must determine, and should set down in writing, their agreement on a number of issues: The amount and nature of their respective capital contributions (e.g., one partner might contribute cash, another a patent, and a third property and cash) How the business’s profits and losses will be allocated Salaries and draws against profits Management responsibilities The consequences of withdrawal, retirement, disability, or the death of a partner The means of dissolution and liquidation of the partnership Page 8
  • 9. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT 4.2.2 Types of Partnerships: 1. General or Unlimited Partnership: A partnership in which the liability of all the partners is unlimited is known as unlimited partnership. All the partners can take part in the working of the business. In India, only this kind of partnership exists. 3. Limited Partnership A partnership in which the liability of the partner is limited is called limited partnership. The Law does not permit the formation of a limited partnership in India. But in Europe and U.S.A. limited partnership is allowed. A limited partnership firm must have at least one partner whose liability is unlimited. The liability of remaining partners is limited. Thus limited partnership consists of two types of partners, general partner and limited partner. 4. Joint Venture: A joint venture is a temporary partnership which is formed to complete a specific venture or job during a specified period of time. Every partner does not have the right of implied agency. No partner can withdraw his interest in the firm before the completion of the venture. For example, a partnership is formed for the construction of a building. The partnership comes to an end if theconstruction is over. 5. Strategic Alliance: It is a partnership established for a stipulated period of time or for the completion of a specified venture. It automatically comes to an end with the expiry of the stipulated period or on thecompletion of the specified venture, as the case may be. For example, a partnership may be created for one year only. When the time lapses, the partnership comes to an end. 4.2.3 Advantages Of Partnership Firm: Partnerships have many of the same advantages of the sole proprietorship, along with others: · Except for the time and the legal cost of crafting a partnership agreement, it is easy to establish. · Because there is more than one owner, the entity has more than one pool of capital to tap in financing the business and its operations. · Profits from the business flow directly to the partners personal tax returns; they are not subject to a second level of taxation. · The entity can draw on the judgment and management of more than one person. In the best cases, the partners will have complementary skills. 4.2.4 Disadvantages Of Partnerships : As mentioned earlier, partners are jointly and severally liable for the actions of the other partners. Thus, one partner can put other partners at risk without their knowledge or consent. Other disadvantages include the following: Page 9
  • 10. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT · Profits must be shared among the partners. · With two or more partners being privy to decisions, decision making may de slower and more difficult than in a sole proprietorship. Disputes can tie the partnership in knots. · As with a sole proprietorship, the cost of some employee benefits may not be deductible from income taxation. Depending on the partnership agreement, the partnership may have a limited life. Unless otherwise specified, it will end upon the withdrawal or death of any partner. 4.3 Franchises: Franchising is one of three business strategies a company may use in capturing market share. The others are company owned units or a combination of company owned and franchised units. Franchising is a business strategy for getting and keeping customers. It is a marketing system for creating an image in the minds of current and future customers about how the company's products and services can help them. It is a method for distributing products and services that satisfy customer needs. Franchising is a network of interdependent business relationships that allows a number of people to share: A brand identification A successful method of doing business A proven marketing and distribution system In short, franchising is a strategic alliance between groups of people who have specific relationships and responsibilities with a common goal to dominate markets, i.e., to get and keep more customers than their competitors. There are many misconceptions about franchising, but probably the most widely held is that you as a franchisee are "buying a franchise." In reality you are investing your assets in a system to utilize the brand name, operating system and ongoing support. You and everyone in the system are licensed to use the brand name and operating system. Thus: Franchise: A legal agreement that gives an individual the right to market a company’s products or services in a particular area. Franchisee: A person who purchases a franchise agreement. Franchisor: The person or company who sells a franchise. Initial franchise fee: The fee the franchise owner pays in return for the right to run the business. Page 10
  • 11. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT To be successful in franchising you must understand the business and legal ramifications of your relationship with the franchisor and all the franchisees. Your focus must be on working with other franchisees and company managers to market the brand, and fully use the operating system to get and keep customers. 4.3.1 Advantages of Franchises: 1. “Owning a franchise allows you to go into business for yourself, but not by yourself.” 2. A franchise provides franchisees with a certain level of independence where they can operate their business. 3. A franchise provides an established product or service which may already enjoy widespread brand-name recognition. This gives the franchisee the benefits of a presold customer base which would ordinarily takes years to establish. 4. A franchise increases your chances of business success because you are associating with proven products and methods. 5. Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated by the franchise agreement. 4.3.2 Disadvantages of Franchises: 1. The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchisee agreement. 2. These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee. 3. In addition to the initial franchise fee, franchisees must pay on going royalties and advertising fees. 4. Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business. 5. A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem. 6. The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination. 4.4 Corporations : Page 11
  • 12. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT A corporation is a legal structure that enables individuals to contribute and pool resources, capital, and labor in order to generate a profit. Corporations are created by state law in the state in which they are incorporated. The corporate legal structure receives a number of advantages and obligations from the state. These laws enable the corporation to overcome the limitations of any one individual—like a human lifespan or limited productive capacity—and to accumulate and distribute profits among the various stakeholders. Privately owned (closely held)--all the shares are owned by a small number of individuals, often family members or the managers of the company.Publicly owned corporations are owned by a relatively large number of shareholders, most of whom have no connection with the company beyond the desire to make a profitable investment from owning shares of it. A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees. For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees. 4.4.1 Advantages of Corporations: 1. Limited Liability: One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities. 2. Freely Transferable Shares. Shares of corporations are generally freely transferable because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time. A corporation continues to exist as a separate entity and is not terminated or dissolved even when shareholders dies or sell their shares. Shares of corporations are freely transferable unless shareholders have "buy-sell" agreements limiting when and to whom shares may be sold or transferred. Also, securities laws may restrict the transferability of shares. 3. Unlimited Life: A corporation continues to exist until the shareholders decide to dissolve it or merge with another business. Page 12
  • 13. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT 4. Ability to issue stock and bonds: The built-in stock structure of a corporation makes it attractive to investors. The stock structure also allows corporations to attract key and talented employees by offering an ownership interest in the form of stock options or stock. 4.4.2 Disadvantages of Corporations: 1. Corporate Taxes: It costs money to incorporate. There are typically four types of fees, including: a fee to file the articles of incorporation with the secretary of state; a first year franchise tax prepayment; fees for various governmental filings; and attorney fees. But every year tens of thousands of businesses choose to incorporate online without the use of an attorney. 2. Government Regulations and reports : The proper corporate formalities of organizing and running a corporation must be followed in order to receive the benefits of being a corporation. A huge aspect of the corporate formalities that must be followed consists of paperwork. Reports and tax returns must be compiled and filed in a timely fashion; business bank accounts and records must be maintained and kept separate from personal accounts and assets; records must be kept of corporate actions, including meetings of shareholders and Board of Directors; and licenses must be maintained. 3. Stockholders record: Most states do not require that names of shareholders be a matter of public record; however, many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State. 4. Charter restrictions: Since corporations have a perpetual existence, states provide a mechanism for dissolving a corporation and liquidating its assets. Dissolution does not happen automatically. A corporation can be dissolved voluntarily or involuntarily. A corporation's officers and directors are charged with responsibility for dissolving the corporation, including gathering corporate assets, paying creditors and outstanding claims, and distributing remaining assets to shareholders 4.5 Joint Stock Companies: A joint stock company is a business entity that is owned by shareholders. Some examples of joint stock companies in India would be Tata Iron & Steel Co. Hindustan Lever Limited, Reliance Industries Limited, and the Steel Authority of India Limited. These companies share the responsibilities, risks, management, and profits with all shareholders involved. In order to become a shareholder of one of these companies you would have to purchase stock in the company or by out one of the other shareholders. It is a voluntary association formed by some persons for profits with a capital divided into transferable shares, having a corporate body and a common seal.A JSC is a type of Page 13
  • 14. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT corporation or partnership involving two or more individuals that own shares of stock in the company.Certificates of ownership ("shares") are issued by the company in return for each financial contribution.The shareholders are free to transfer their ownership interest at anytime by selling their shareholding to others. 4.5.1 Characteristics of JSC: 1. An artificial person: The company enjoys all the rights as a citizen of a country would enjoy. It 'can own properties, enter into contracts etc. 2. Legal formation: The formation of a Joint Stock Company is governed by the rules and regulations laid down in the Companies Act, 1956. 3. Voluntary organisation: It is formed by members voluntarily joining the organisation and contributing money or money's worth for the business. 4. Separate legal entity: The Company has a separate legal existence. The owners are different from the people who manage the business. The management is however headed by owners who are elected directors. The company is separate from the persons who own it. The company cannot be held responsible for any misdeeds of the members. 5. Perpetual succession: Unlike Sole proprietorship and Partnership, the Company has continuous existence. The continuity of the business is not affected by the death, insolvency or insanity of any member. "Men may come and men may go, but a company will go until it is wound up." 6. Limit to liability: The liability of the members of a company is restricted to the extent of the unpaid value of the shares held by him. The personal asset of a shareholder cannot be used to pay the company's liabilities. 7. Large capital: A Joint Stock Company can generate huge amount of money towards capital, because the number of persons contributing towards capital are more in number when compared to Sole Proprietorship or Partnership organisation. 8. Large scale operation: - Page 14
  • 15. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT Since huge amounts are collected as capital, the operation of the business will generally be on a large scale basis. 9. Transferability of shares: The shares of a Joint Stock Company are easily transferable from one person to another, since it is a Public Limited Company. The shares of a Private Limited Company or Government Company are not transferable. 10. Common seal: The company, being an artificial being, cannot affix its signature on the documents on its own. The common seal is used in place of a signature. 4.5.2 Advantages of JSC: (1) Huge resources: A company can raise large amount of resources from the genera public by issuing shares. Since, there is no maximum limit of the number of shareholders ii case of public company, fresh shares can be issued to meet the financial requirement. Capita can also be obtained by issuing debentures and accepting public deposits. (2) Limited liability: The liability of the shareholders is limited to the extent of the face value of the shares held by them or guarantee given by them. The shareholders are not liable personally for the payment of debt of the company. Thus, limited liability encourages the investors to put their money in the shares of the company. (3) Transferability of shares: The shares of the public company are transferable without any restriction. A shareholder can sell his shares at any time to anybody in the stock exchange Therefore, the conservative and cautious investors are also attracted to invest in the shares of public company. This brings liquidity to the investors. (4) Stability of existence: A joint stock company enjoys perpetual succession. It continues for a long period of time because it is unaffected by the death, insolvency of the shareholders directors. Change of ownership and management also does not affect the continuity of the business. (5) Efficient management: A company can hire the services of professional manager for its functional areas because of its financial strength. The directors who look after the management of the company are Page 15
  • 16. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT generally experienced and persons of business acumen Therefore, the management of a company is sure to be efficient. (6) Scope for expansion: A company can generate huge financial resources by issuing shares and debentures to finance new projects. Companies also transfer a portion of their profit to reserve which can be utilised for future expansion. The managerial capabilities a the disposal of a company helps it for planning the future expansion and growth. 4.5.3 Disadvantages of JSC: Despite the above advantages, the company form of organisation also suffers from certain demerits. The following are some of the important demerits of a company which every entrepreneurs should know while going for selection of type of business. (1) Difficulty in formation: The formation of a joint stock company is very difficult, time taking and expensive as compared to any other form of organisation. Conceiving the very idea and getting it implemented is very difficult process. Preparation of the basic documents like memorandum of Association and Articles of Association, fulfilling legal formalities as per the Act and getting the business registered needs lot of time, money and expertise. (2) Oligarchic management: The management of company is democratic in theory but oligarchic in practice. It is controlled by a small group of Board of Directors who hardly protect the interest of other shareholders. They may manipulate the things with an intention to be re-elected as directors. That is why it is said that shareholders do nothing, know nothing and get nothing. (2) Delay in decision-making: The Board of Directors of the company decides about the policies and strategies of the company. Certain decisions are taken by the shareholders. The meeting of the directors or the shareholders cannot be held at any time as and when required. Thus, the decision making process is usually delayed. The delay in decision-making may result in losing some business opportunities. (3) Separation of ownership and management: The company is not managed by the shareholders but by the directors who are the elected representatives of the shareholders. The directors and managers may lack the personal initiative and motivation to manage the company efficiently as the shareholders (owners) themselves would. (4) Lack of secrecy: Each and every business strategy is discussed in the meeting of the Board of Directors. The annual accounts are published and compliance to Government, Tax authorities etc. are made Page 16
  • 17. Chapter 4: BUSINESS AND NEW ECONOMIC ENVIORNMENT at regular intervals. Therefore, it is very difficult to maintain business secrecy in a company form of organization in comparison to sole proprietorship and partnership. (5) Speculation in shares: When profit is earned by manipulating the prices of shares without actually holding the shares, it is considered as speculation. A company provides scope for speculation and the directors and managers may derive personal benefit out of this. It is harmful to the innocent small shareholders who invest their hard earned money with a view to get higher rate of return. (6) Fraudulent management: The possibility of starting a bogus company, collecting huge sums of money and subsequently bringing liquidation of the company is not ruled out. The promoters with an intention to defraud may indulge in such practices. The directors and managers may function for their personal gain overlooking the interest of the company. Page 17