Boe unit 2

UNIT-II
Forms of Business Organisation
• Sole proprietorship: Definitions, Features,
Merits and Demerits.
• Partnership: Definitions, partnership deed,
Features, Merits and Demerits.
• Joint Stock Company: Definitions, Features,
Merits and Demerits.
• Co-operatives: Definitions, Features, Merits
and Demerits

CASE STUDY
• Neha, a bright final year student was waiting for her results to be declared. While
at home she decided to put her free time to use. Having an aptitude for painting,
she tried her hand at decorating clay pots and bowls with designs. She was
excited at the praise showered on her by her friends and acquaintances on her
work. She even managed to sell a few pieces of unique hand pottery from her
home to people living in and around her colony.
• Operating from home, she was able to save on rental payments. She gained a lot
of popularity by word of mouth publicity as a sole proprietor. She further
perfected her skills of painting pottery and created new motifs and designs.
• All this generated great interest among her customers and provided a boost to
the demand for her products. By the end of summer, she found that she had been
able to make a profit of Rs. 2500 from her paltry investment in colors, pottery and
drawing sheets.
• She felt motivated to take up this work as a career. She has, therefore, decided to
set up her own artwork business. She can continue running the business on her
own as a sole proprietor, but she needs more money for doing business on a
larger scale.
• Her father has suggested that she should form a partnership with her cousin to
meet the need for additional funds and for sharing the responsibilities and risks.
Side by side, he is of the opinion that it is possible that the business might grow
further and may require the formation of a company. She is in a fix as to what
form of business organisation she should go in for?

Various forms of business organisations from
which one can choose the right one include:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.

Sole proprietorship:
• Definitions,
• Features,
• Merits and Demerits.

Introduction
• Sole proprietorship is a popular form of business
organisation and is the most suitable form for small
businesses, especially in their initial years of operation.
• Sole proprietorship refers to a form of business
organisation which is owned, managed and controlled
by an individual who is the recipient of all profits and
bearer of all risks.
• This is evident from the term itself. The word “sole”
implies “only”, and “proprietor” refers to “owner”.
Hence, a sole proprietor is the one who is the only
owner of a business.

Definition
• Sole trader is a type of business unit where a
person is solely responsible for providing the
capital, for bearing the risk of the enterprise and
for the management of business.- J.L. Hansen.
• The individual proprietorship is the form of
business organisation at the head of which stands
an individual as one who is responsible, who
directs its operations and who alone runs the risk
of failure.- L.H. Haney

Features
(i) Formation and closure
(ii) Liability
(iii) Sole risk bearer and profit recipient
(iv)Control
(v) No separate entity
(vi)Lack of business continuity
(vii) Minimum government regulations
(viii) Secrecy

Minimum government regulations
• The government does not interfere with the
working of the sole proprietorship
organisation.
• However, they have to comply with the
general laws and rules laid down by
government.

Lack of business continuity
• The sole proprietorship business is owned and
controlled by one person, therefore death,
insanity, imprisonment, physical ailment or
bankruptcy of the sole proprietor will have a
direct and detrimental effect on the business
and may even cause closure of the business.

Formation and closure
• There is no separate law that governs sole
proprietorship.
• Hardly any legal formalities are required to
start a sole proprietary business, though in
some cases one may require a license.
• Closure of the business can also be done
easily.
• Thus, there is ease in formation as well as
closure of business.

Liability
• Sole proprietors have unlimited liability.
• This implies that have to bring in Rs. 20,000
from her personal sources even if she has to
sell her personal property to repay the firm’s
debts.

Sole risk bearer and profit recipient
• The risk of failure of business is borne all alone
by the sole proprietor.
• However, if the business is successful, the
proprietor enjoys all the benefits.
• He receives all the business profits which
become a direct reward for his risk bearing.

Control
• The right to run the business and make all
decisions lies absolutely with the sole
proprietor.
• He can carry out his plans without any
interference from others.

No separate entity
• In the eyes of the law, no distinction is made
between the sole trader and his business, as
business does not have an identity separate
from the owner.
• The owner is, therefore, held responsible for
all the activities of the business.

Secrecy
• All important decision taken by the owner
himself.
• He keeps all the business secrets only to
himself.

Merits Of Sole Proprietorship
(i) Easy formation: A sole proprietorship business is easy
to form where no legal formality involved in setting
up this type of organization. It is not governed by any
specific law. It is simply required that the business
activity should be lawful and should comply with the
rules and regulations laid down by local authorities.
(ii) Better Control: In sole proprietary organisation, all
the decisions relating to business operations are
taken by one person, which makes functioning of
business simple and easy. The sole proprietor can
also bring about changes in the size and nature of
activity. This gives better control to business.

iii) Quick decision making: A sole proprietor enjoys
considerable degree of freedom in making
business decisions. Further the decision making
is prompt because there is no need to consult
others. This may lead to timely capitalization of
market opportunities as and when they arise.
iv) Sole beneficiary of profits: The sole proprietor
is the only person to whom the profits belong.
There is a direct relation between effort and
reward. This motivates him to work hard and
bear the risks of business.

(v) Benefits of small-scale operations: The sole
proprietorship is generally organized for small-
scale business. This helps the proprietor’s family
members to be employed in business. At the
same time such a business is also entitled to
certain concessions from the government. For
example, small industrial organisations can get
electricity and water supply at concessional rates
on a priority basis.
(vi) Inexpensive Management: The sole proprietor
does not appoint any specialists for various
functions. He personally supervises various
activities and can avoid wastage in the business.

vii) Confidentiality of information: Sole decision
making authority enables the proprietor to
keep all the information related to business
operations confidential and maintain secrecy.
A sole trader is also not bound by law to
publish firm’s accounts.
viii) Direct incentive: A sole proprietor directly
reaps the benefits of his/her efforts as he/she
is the sole recipient of all the profit. The need
to share profits does not arise as he/she is the
single owner. This provides maximum incentive
to the sole trader to work hard.

ix) Sense of accomplishment: There is a
personal satisfaction involved in working for
oneself. The knowledge that one is
responsible for the success of the business not
only contributes to self-satisfaction but also
instills in the individual a sense of
accomplishment and confidence in one’s
abilities.

Limitations Of Sole Proprietorship
(i) Limitation of management skills: A sole proprietor
may not be able to manage the business efficiently as
he is not likely to have necessary skills regarding all
aspects of the business. This poses difficulties in the
growth of business also.
(ii) Limitation of Resources: The sole proprietor of a
business is generally at a disadvantage in raising
sufficient capital. His own capital may be limited and
his personal assets may also be insufficient for raising
loans against their security. This reduces the scope of
business growth.

(iii) Unlimited liability: The sole proprietor is
personally liable for all business obligations.
For payment of business debts, his personal
property can also be used if the business
assets are insufficient.
(iv) Lack of continuity: A sole proprietary
organisation suffers from lack of continuity. If
the proprietor is ill this may cause temporary
closure of business.

Partnership:
• Definitions,
• partnership deed,
• Features,
• Merits and Demerits.

• 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”.
• According to J. L. Hanson, “a partnership is a form of
business organisation in which two or more persons up to a
maximum of twenty join together to undertake some form of
business activity”.
• Now, we can define partnership as an association of two or
more persons who have agreed to share the profits of a
business which they run together. This business may be
carried on by all or anyone of them acting for all.
• “Partnership is the relation which subsists between persons,
who have agreed to combine their property, labour or skill in
some business and share the profits thereof between them” -
Indian Contract Act, 1872.

Features
1. Capital: The capital of a partnership is contributed by
the partners but it is not necessary that all the partners
should contribute equally. Some may become partners
without contributing any capital. This happens when
such partners have special skills, abilities or
experience. The partnership firm can also raise
additional funds by borrowing from banks and others.
2. Control: The control is exercised jointly by all the
partners. No major decision can be taken without
consent of all the partners. However, in some firms,
there may partners known as sleeping or dormant
partners who do not take an active part in the conduct
of the business.

3. Management: Every partner has a right to
take part in the management of the firm.
Sometimes the deed may provide for the
division of responsibilities among the
different partners depending upon their
specialization.
4. Duration of partnership: The duration of the
partnership may be fixed or may not be fixed
by the partners. In case duration is fixed, it is
called as “partnership for a fixed term. When
the fixed period is over, the partnership
comes to an end.

5. Unlimited Liability: The liability of each partner
in respect of the firm is unlimited. It is also joint
and several and, therefore any one of the partner
can be asked to clear the firm’s debts in case the
assets of the firm are inadequate for it.
6. No separate legal entity: The partnership firm
has no independent legal existence apart from
that of the persons who constitute it. Partnership
is dissolved when any partner dies or retires.
Thus it lacks continuity.
7. Restriction on transfer of share: A partner
cannot transfer his share to an outsider without
the consent of all the other partners.

Types of Partners
• Active , Actual, Working or Ostensible Partner:
Partners who take active part in the conduct of
day-to-day business of the firm are called active
partners. These partners carry on business on
behalf of the other partners.
• Sleeping, Dormant or Financing Partner: A
partner who merely contributes capital and
shares the profits or losses of the firm, but does
not take active in the conduct and management
of the partnership business is called a sleeping,
dormant or financing partner.

• Secret Partner: If a person is a partner of the firm,
but the fact of his being a partner is not disclosed
to the outsiders, is called a secret partner.
• Nominal, Fictitious or Partner in name only : A
partner who neither contributes capital nor share
the profits and losses of the firm nor takes any
active part in the conduct of business of the firm,
but merely lends his name to the firm is called a
nominal, fictitious or partner in name only.
• Partner in profit only: A partner who, as per the
partnership agreement, is entitled to share in the
profits of the firm, but is not liable to contribute
towards the losses of the firm is called a partner in
profits only.

• Partners by holding out: A partner by holding out
is someone who is not a partner of a firm, but knowingly
allows the firm to project to others that he is a partner of
the firm. The person who thus becomes liable to third
parties to pay the debts of the firm is known as a partner
by holding out.
• Partner by Estoppel: A partner by estoppel is someone
who is not a partner of a firm, but allows others to think
that he is a partner, through his behaviour or conduct..
But he is held liable as a partner of the firm to any
outsider who has granted credit or loan to that firm on
the faith of his representation.
• Minor partner: It is true that a minor cannot become a
full-fledged partner of a firm. But as per Section 30(1) of
the Partnership Act, he may be admitted to the benefits
of the partnership with the consent of all the partners by
an agreement executed by his guardian on his behalf with
other parties.

Type
Capital
contribution
Manage
ment
Share in
profits/losse
s
Liability
Active partner
Contributes
capital
Participates in
management
Shares profits/
losses
Unlimited liability
Sleeping or
dormant
partner
Contributes
capital
Does not
participate in
management
Shares profits/
losses
Unlimited liability
Secret partner
Contributes
capital
Participates in
management,
but secretly
Shares profits/
losses
Unlimited liability
Nominal
partner
Does not
contribute
capital
Does not
participate in
management
Generally
does not share
profits/losses
Unlimited liability
Partner by
estoppel
Does not
contribute
capital
Does not
participate in
management
Does not share
profits/losses
Unlimited liability
Partner by
holding out
Does not
contribute
capital
Does not
participate in
management
Does not share
profits/losses
Unlimited liability

Types of Partnership
According to the nature of agreement among partners,
there can be three types of partnership as follows:
(i) Partnership at-will: Such a partnership exists on the will of
the partners. That is, it can be brought to an end
whenever any partner gives notice of his intention to do
so.
(ii) Particular partnership: A particular partnership is formed
for undertaking a particular venture. It comes to an end
automatically with completion of the venture.
(iii) Partnership for a fixed duration: Such partnership is for a
fixed period of time say 2 years, 5 years or any other
duration.

Partnership Deed
• When the partnership agreement is put in writing, duly
stamped and signed by all the partners, the document
containing the partnership agreement is called partnership
deed or the Articles of Partnership.
• The Indian Partnership Act of 1932 neither makes the
registration of a firm compulsory nor imposes any penalty for
non-registration. However, it is advisable to register a firm.
An unregistered firm suffers from certain disabilities . They are :
1.An unregistered firm cannot file a suit in a court of law against
the third parties for recovering its debts.
2.An unregistered firm cannot file a suit against any of its
partners for the recovery of its debts.
3.A partner of an unregistered firm cannot file a suit in a court of
law against the third parties or against the firm or against his
co-partners for the recovery of the claims.

Terms and conditions that are included
in a partnership deed are as follows:
• Name of the firm
• Name and addresses of the partners
• Nature of business
• Principle place of business and branches of the firm
• Date of commencement of partnership
• Duration of partnership
• Amount of capital to be contributed by each partner
• Manner in which additional capital is to be introduced
• Amount of withdrawal that can be made by each partner
• Interest to be allowed on partners capital
• Interest to be charged on partners drawings

• Amount of salary , commission or any other
remuneration payable to any partner
• Ratio in which the profits or losses of the firm is to be
shared
• Rights , duties and liabilities of the partners
• Methods of settlement of accounts on dissolution of
the firm , retirement or death of a partner
• Arbitration clause , that is the way in which the
disputes are to be settled among the partners
• How the accounts are to be kept and audited
• Expulsion of a partner in case of any fraud..etc.

Merits
1. Ease of formation: Partnership can be easily formed without
expense and legal formalities. Even the registration of the firm is
not compulsory.
2. More resources: When compared to sole-proprietorship, the
partnership will have larger resources. Hence, the scale of
operations can be increased if conditions warrant it.
3. Better organization of business: As the talent, experience,
managerial ability and power of judgment of two or more persons
are combined in partnership, there is scope for a better
organisation of business.
4. Greater interest in business: As the partners are the owners of
the business and as profit from the business depends on the
efficiency with which they manage, they take as much interest as
possible in business.

5. Balance judgement: As partners possesses different types
of talent necessary for handling the problems of the firm,
the decisions taken jointly by the partners are likely to be
balanced.
6. Flexibility: Partnership is free from legal restriction for
changing the scope of its business. The line of business
can be changed at any time with the mutual consent of
the partners. No legal formalities are involved in it.
7. Diffusion of risk: The losses of the firm will be shared by
all the partners. Hence, the share of loss in the case of
each partner will be less than that sustained in sole
proprietorship.

Demerits
1. Great risk: As the liability is joint and several, any one
of the partners can be made to pay all the debts of the
firm. This affects his share capital in the business and
his personal properties.
2. Lack of harmony: Some frictions, misunderstanding
and lack of harmony among the partners may arise at
any time which may ultimately lead to the dissolution.
3. Instability: The death, retirement or insolvency of a
partner leads to the dissolution of the partnership.
Further even any one partner if dissatisfied with the
business, can bring about the dissolution of
partnership. Hence partnership lacks continuity

4. Tendency to play safe: Because of the principle
of unlimited liability, the partners tend to play
safe and pursue unduly conservative policies.
5. No legal entity: The partnership has no
independent existence apart from that of the
persons constituting it, i.e. it is not a legal entity.
6. Lack of public confidence: No legal regulations
are followed at the time of the formation of
partnership and also there is no publicity given to
its affairs. Because of these reasons, a
partnership may not enjoy public confidence.

Joint Stock Company
• Definitions,
• Features,
• Merits and
• Demerits.

Joint Stock Company:
Definition
According to Prof. Haney, "Joint stock company is a
voluntary association of individuals for profit, having their
capital divided into transferable shares, the ownership of
which is the condition for membership".
Thus, a joint stock company is an incorporated association
of persons having a separate legal existence, with a
perpetual succession and common seal.
The term “joint stock company” has been defined by the
Companies Act in India as a company limited by shares
having a permanent paid-up or nominal share capital of
fixed amount divided into shares, also of fixed amount held
and transferable as stock, and formed on the principle of
having in its members only the holders of those shares or
stock and other persons.”

Features
1. Separate Legal Entity
2. Perpetuity
3. Limited Liability
4. Number of Members
5. Separation of Ownership from Management
6. Transferability of Shares
7. Rigidity of Objects
8. Financial Resources
9. Statutory Regulation

1. Separate Legal Entity
• A joint stock company has a separate legal existence
apart from the persons composing it. It can own
property and sue in a court of law.
• A shareholder being an entity distinct from that of a
company can sue the company and be sued by it
whereas a partnership organization or a sole proprietor
has no such legal existence in the eye of the law,
separately from the persons composing it.
• Hence there can’t be a contract between a partner and
the firm whereas there can be a contract between a
shareholder and a company.

2. Perpetuity
• A joint-stock company has the characteristic of
perpetuity unlike a partnership or a sole trading
concern.
• Once, a company is formed, it continues for an
unlimited period until it is formally liquidated. The
maxim “men may come and men go but I go on
forever” applies in the case of the company.
• But a sole trading concern comes to an end with the
death of a sole trader, and in the case of partnership,
death, retirement, or insolvency of any member of the
partnership would dissolve the firm.

• In the case of joint-stock company the liability of
members is normally limited by guarantee or by
the shares he has taken.
• If a member has already paid the complete
amount due on his shares, he is not further liable
towards the debts of the company.
• But in the case of sole proprietorship and
partnership, the liability is unlimited and in the
case of the latter, it is also both joint and several.

4. Number of Members
• In the case of public limited company the
maximum number of members is unlimited,
the minimum being seven.
• In the case of a private limited company, the
maximum is two.
• But the number of partners in a partnership
cannot exceed ten in the case of business and
twenty in other lines of business.

5. Separation of Ownership from
Management
• In the case of partnership, partners are not only the
owners of the business but they take part its
management also.
• Every member of a partnership firm is an agent of the
firm and also of the other members.
• In the case of joint-stock company, the shareholders
are the owners while the management is entrusted to
a board of directors, who are separate from
shareholders.
• Further, the shareholders are not the agents of the
company and a shareholder cannot bind them by his
acts.

• The shareholder of a company can transfer his
shares to others without consulting other
shareholders, whereas in a partnership a
partner cannot transfer his share without the
consent of all the other partners.

7. Rigidity of Objects
• In the case of partnership, the scope of its
business can be changed at any time with the
consent of all the partners, whereas a joint stock
company cannot do any business not already
included in the object clause of the
Memorandum of Association of the company.
• A change in the object clause under condition laid
down in the Companies Act is essential for
making any alteration in the scope of the
business.

8. Financial Resources
• On account of liability and diffusion of
ownership in joint company organization,
there is a great scope for mobilizing a large
capital.
• But in the case of partnership or sole
proprietorship, because of the limited number
of members, the resources at their command
are limited.

9. Statutory Regulation
• A company has to comply with numerous and
varied statutory requirements. It has to submit a
number of returns to the government, whereas
partnership and sole proprietorship are free from
much State control and statutory regulations.
• Further in the case of the company, accounts
must be audited by a charted accountant but it is
not compulsory in the case of partnership and
sole proprietorship.

Advantages of Joint Stock Company
1. Financial Strength
3. Benefits of Large Scale Organization
4. Scope for Expansion
5. Stability
7. Efficient Management
8. Higher Profit
9. Diffused Risk
10. Bolder Management
11. Social Benefit

1. Financial Strength
• The joint stock company can raise a large amount of capital
by issuing shares and debentures to the public. There is no
limit to the number of shareholders in a company.
(However, in a private company the membership cannot
exceed 50.) The capital of the company is divided into
numerous parts of small value called shares and this
attracts even the person with limited resources.
• Further, anyone can purchase the shares and leave the
responsibility of management to the body of persons called
directors. Again, as the shares are freely transferred by
selling it in the stock market, this works as an added
attraction to the investors. Because of this, the joint stock
form of organization is well adopted for raising amounts of
capital

• One important factor which attracts the investors
to subscribe is the principle of limited liability.
According to this a shareholder’s liability is
limited only to the extent of the face value of the
shares held by him and his personal properties
are not affected.
• This form of organization is a great attraction to
persons who do not want to take much risk in
other forms of organization that do not enjoy the
benefit of limited liability.

3. Benefits of Large Scale Organization
• As the size of a company is large, the
economies of large-scale organization and
production are secured.
• Due to this, the cost of production will be less
and the society is in a position to get its
requirements at a lesser price.

4. Scope for Expansion
• As there is no limit to the number of persons
in a company, there is a great scope for
expansion of the business.
• A company, which is making good profits, can
create big reserves which can be used for the
expansion of the company.
• In addition, the availability of managerial
talent in the company facilitates the expansion
of the business.

5. Stability
• A company is a legal entity and enjoys perpetual
succession which means the retirement or death
of a shareholder cannot affect the company Even
the change in the management or the owner or
disputes over the ownership of shares or stock
cannot affect the continuity of a company.
• The companies are well suited for business,
which require a long period to establish and
consolidate.

• One special feature of company is that shares
are freely transferable from one person to
another without the knowledge of the
shareholders.
• The existence of stock exchanges where
shares and debentures are sold and purchased
has facilitated as good as cash as they can be
sold at any time and there is an added
attraction to the investors.

7. Efficient Management
• In company organizations, the agents of
production are effectively combined and also
there is scope for increased efficiency of direction
and management.
• The most efficient persons may be chosen as
directors and if found indifferent, they may be
changed in the next meeting.
• Normally, as the directors have a great stake in
the business, in the interest of the company, and
in their own interest, they have to be very
efficient.

8. Higher Profit
• As a large capital is invested in companies, it
would be possible for them to use the
expensive machinery and up-to-date
equipment resulting in greater production,
reduced cost, and higher profit.
• The progress of industries and commerce of
the nation.

9. Diffused Risk
• In this form of organization, the risk is reduced
for each shareholder, because it is diffused
and spread over several shareholders of the
company.
• This is an advantage from the individual
investor’s point of view.

10. Bolder Management
• In this form of organization, as the persons who
manage the company have relatively smaller financial
stake, they can become adventurous. There are many
industries, which would not have come into existence if
people had been unduly cautious.
• Starting of a new enterprise needs an adventurous
spirit and in case of joint-stock company because of its
limited liability and smaller financial stake of the
persons, who manage it, people can become
adventurous and thus start new enterprises.

11. Social Benefit
• The company form of organization has encouraged the
habit of saving and investment among the public. It has
also indirectly helped the growth of financial
institutions such as banks and insurance companies by
providing avenues to invest their funds. Further, as
companies cannot be managed by all the shareholders
who are large in number, it has to employ professional
managerial personnel and this has helped the
development of management as a profession.
• Again, as the affairs of the company are published, and
as the companies are well regulated and controlled by
the State, the public has great confidence in the
company form of organization.

Disadvantages of Joint-Stock
Company
1. Formation is Difficult
2. Fraudulent Management
3. Concentration of Control in Few Hands
4. Encourages Speculation
5. Lacks Initiative and Motivation
6. Conflict of Interest
7. Excessive Government Control
8. Lack of Prompt Decision
9. Monopolistic Control

1. Formation is Difficult
• The formation of a company involves a long-
drawn-out complex procedure.
• For formation many provisions of the
Companies Act are be complied with. Large
amount of money have to be spent in order to
fulfill the preliminaries.
• Further, in many cases government sanction
is required. These difficulties discourage many
persons from starting companies.

2. Fraudulent Management
• Many a time unscrupulous promoters by
presenting the prospectus as a rosy picture
manage to get capital from the public.
• This results in companies being started and
managed by incapable and fraudulent hands.

3. Concentration of Control in Few
Hands
• In theory, democratic principles are followed in the
management of companies, but in practice it is nothing
but oligarchy of managing director and directors
leading to concentration of control in a few hands. The
shareholders have no say in the affairs of the company.
• As they are spread throughout the country, very few
care to attend the meetings and those who do not
attend, normally give proxies in favor of managing
director or directors. All these facilitate the
concentration of economic power in the hands of a few
persons.

4. Encourages Speculation
• This form of organization encourages speculation
on the stock exchange.
• Usually the value of the company’s share
depends on the dividends declared and
reputation of the company, which can be
manipulated.
• This may encourage the managing director and
directors to manipulate the shares on the stock
exchange in their own interest to the detriment
of the majority of shareholders

5. Lacks Initiative and Motivation
• As there is indirect delegated management in
the company form of organization, there is no
initiative and motivation.
• The paid officials who manage the company
have no personal interest and this leads to
inefficiency and waste.

6. Conflict of Interest
• There is a conflict of interest between persons who are
at the helm of affairs of company and shareholders.
Many times dishonest persons at the top succeed in
cleverly misleading and cheating the shareholders.
Again there is a clash of interest between the
shareholders.
• Again there is a clash of interest between the
preference shareholders and equity shareholders.
While the preference shareholders want the creation
of large reserves out of profits, the equity shareholders
are interested in distributing the entire profit by way of
dividends.

7. Excessive Government Control
• A company form of organization is very much
controlled by the government and it has to
observe many provisions of the different
regulations of the government.
• Again, heavy penalty is imposed for the non-
observance of the provisions of the Acts.
• Companies spend much of their precious time
in complying with the provisions and the
statutory rules.

8. Lack of Prompt Decision
• The prompt decisions which are possible in
case of other organizations such as sole-
trading organization and partnership are not
possible in a company form of organization.
• Owing to the difficulty of getting the requisite
quorum and the presence of diverse interests,
which may lead to disagreement, prompt
decision cannot be taken.

9. Monopolistic Control
• There is a great possibility for companies to form
combination or amalgamate with a view to getting
monopolistic control. This is very harmful to the other
producers and businessmen in the same line and also
to the consumers.
• In spite of the disadvantages discussed above, it may
be concluded that the advantages considerably
outweigh the disadvantages of company form of
organization and hence it has become universally
popular and well established in the business world. It is
particularly suitable for those lines of business, which
requires huge capital and maximum stability.

Co-operatives
Definitions,
Features,
Merits and
Demerits

Definitions
According to the International Labour Office, a
cooperative organization is “an association of persons,
usually of limited means, who have voluntarily joined
together to achieve a common economic end, through
the formation of a democratically controlled business
organization, making equitable contributions to the
capital required and accepting a fair share of risks and
benefits of the undertaking.”
H.C. Calvert defines “A co-operative society 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.”

• Cooperatives may be classified as
either worker, consumer, producer, purchasing
or housing cooperatives.
• They are distinguished from other forms of
incorporation in that profit-making or
economic stability are balanced by the
interests of the community

Formation of Co-operatives:
• Co-operative society enjoys a separate legal entity of its own after getting
incorporated.
• To get a co-operative society incorporated, an application is to be
submitted to Registrar of Co-operative Societies of the concerned state in
which the society’s registered office is situated.
• The Registrar of Co-operative Societies after getting the application for
registration along with the copies of the bye-laws and those of rules and
regulations of the society carefully scrutinizes them so as to ensure that
the two documents do not contain anything which is contrary to the spirit
of the Co-operative Societies Act.
• In case he is satisfied with regard to these points, the society is registered
and a certificate to that effect is issued. After getting the Certificate of
Incorporation, the society assumes a separate legal entity of its own.

Features
(i) Registration:
A co-operative society must be registered under the Co-operative
Societies Act, 1912 or under a State Co-operative Societies Act. On
registration, the society becomes a body corporate, having a
separate legal entity of its own, with perpetual succession and
limited liability of its members.
(ii) Voluntary Association:
A co-operative organisation is a voluntary association of persons.
Everyone having a common interest is free to join a co-operative
society; irrespective of caste, creed, religion or political affiliation.
No person can be forced to become the member of a co-operative
society or continue as a member.
A member after giving proper notice can leave the society; and will
get back his capital according to the rules of the co-operative. But
no member can transfer his shares to another person.

(iii) Minimum Ten Persons Needed:
A minimum of ten adult persons are needed to form a co-
operative organisation. Maximum number of members is
100, in a co-operative credit society; with no such limit in
non-credit co-operative societies.
(iv) Service-Motive:
The primary aim of a co-operative society is to provide
some service or benefit to its members (or even general
public’s) by fighting against some social evil.
(v) Finance:
The capital of a co-operative is raised from members
through issue of shares. A co-operative can also obtain
loans from the Central or State Co-operative Banks.
(vi) Limited Liability:
The liability of each member of a co-operative is limited to
the extent of the value of shares held by him, in the share
capital of the co-operative.

(vii) Democratic Management:
Business of a co-operative society is managed by a
managing committee; which is elected by the
members. The members lay down the broad policy
guidelines within which the managing committee
manages the affairs of the co-operative society.
The managing committee usually consists of the
following office-bearers:
1. President
2. Vice-president.
3. Secretary
4. Joint Secretary, if any
5. Treasurer.

(viii) ‘One-Man One-Vote’ Rule:
Every member in a co-operative has one vote;
irrespective of the number of shares held by him. ‘One-
man one vote rule’, as such conveys the idea of
equality of status for all members of the society.
(ix) Limited Return on Capital and Disposal of Surplus:
A limited interest up-to 10% is paid to members on
their capital contribution-as an incentive to invest
money in the cooperative society. However, interest is
paid only out of profits. Profits are distributed not in
form of dividend but in form of a bonus which depends
on the volume of business done by a member with the
co-operative.
For example, in a consumer co-operative this bonus
depends on the amount of purchases made by a
member from the co-operative, during the year; and
similar other bases in case of other types of co-
operatives.

(x) State Control:
Government exercises control over co-
operatives to protect the interests of
members of co-operatives; who, otherwise,
are economically quite weak. Every co-
operative society must furnish annual
accounts and reports to the Registrar of Co-
operatives. Further, accounts of all co-
operatives are subject to compulsory audit.

Advantages
(i) Easy to Form:
A co-operative society is easy to form. Its registration is
very simple and does not involve many legal
formalities.
(ii) Universal Brotherhood:
A co-operative organisation represents universal
brotherhood. Membership of a co-operative is open to
all having a common interest; irrespective of caste,
creed, religion and political affiliation. Any member
may leave the society, after giving proper notice. There
is no compulsion to stick to the co-operative against
one’s will.

(iii) Fully Democratic Management:
Managing committee of a co-operative is elected,
by members. Further, ‘one-man one-vote’
principle is followed in all co-operatives. As such,
each member has equal rights and equal voice in
the management of the co-operative.
(iv) Perpetual Succession:
After registration, a co-operative society acquires
a separate legal status with perpetual succession.
Its life is not affected by the death, insolvency or
lunacy of members. Co-operatives exist for long
periods-benefiting members and the community.

(v) Limited Liability:
Liability of members of a co-operative society
is limited to the extent of the value of their
shares. Members do not run personal risk;
while being members of the co-operative. This
fact encourages even poor people to join co-
operatives.
(vi) Governmental Patronage:
As a matter of social welfare policy,
Government extends all support to co-
operatives e.g. loans at low rates of interest,
relief in taxation etc.

(vii) Internal Financing:
A large part of the profits of a co-operative is
transferred to general reserve every year.
Through ploughing back of profits, a co-operative
can undertake schemes for its growth and
expansion.
(viii) Lower Operating Costs:
Operating costs of a co-operative are quite low;
because:
1. Office bearers offer honorary services.
2. There is no expenditure incurred on advertising
and marketing activities.

(ix) Fair Distribution of Surplus:
Surplus of a co-operative is not distributed as
dividends are paid in companies. Rather surplus is
given away to members, on the basis of their
dealings with society. This approach to disposal of
surplus is called ‘distributive justice’.
(x) Social Welfare Aspect:
Co-operatives are non-business organisations.
They spread ideals of co-operation in society.
They promote feelings of equality, independence,
hard work among people in a society and help
them morally upgrade themselves.

Disadvantages/ Limitations
(i) Limited Capital:
Co-operative organisations have very limited capital; because
of the following reasons:
(a) Members of a co-operative are economically backward, in
most of the cases.
(b) Co-operatives do not give more than 10% interest on
capital invested. This provides not much incentive to invest
huge amounts in co-operatives.
(c) The principle of ‘one-man one-vote’ discourages people to
buy a large number of shares in a co-operative
organisation.
All told, limited finances stand in the way of growth of
activities indulged in by a co-operative.

(ii) Inefficient Management:
Management of a co-operative organisation is
called inefficient. In fact, members of
managing committee are part-time and
inexperienced people.
They usually possess no specialized knowledge
of modern management principles and
techniques. Because of limited financial
capacity, a co-operative is unable to hire the
services of professional managers; who charge
very high for their services, in the present-day-
times.

(iii) Rift among Members:
Co-operatives are started with a sense of lot
of enthusiasm about co-operation; but this
enthusiasm disappears very soon. Over a
period of time, differences develop among
members as to how to run the society. Selfish
interests of dominating members prevail upon
the genuine interests of poor members.
Differences among members usually lead to a
decline of co-operative activities; and the co-
operative organisation runs just as a matter of
routine to justify its existence among society.

(iv) Rigid Rules and Regulations:
Co-operatives have to function according to
rigid rules and regulations.
They are subject to excessive Governmental
control over their functioning.
The result is lack of flexibility of operations in
the functioning of co-operatives; which does
not permit their growth in view of
environmental opportunities.

(v) Political Interference:
Government also invests in co-operative
organisations. There are, then, members in
managing committee, who represent interests
of political parties.
In fact, members of political parties dominate
the working of the co-operative; and the co-
operative organisation very often turns into a
political organisation.
Thus the very purpose and philosophy of co-
operation, which is the basis of a co-operative
organisation meets with frustration.

(vi) Lack of Motivation:
The office-bearers of a co-operative are
honorary officials.
They have no incentive to work hard for the
co-operative.
In the absence of remuneration, they just
work minimum and justify their status, in the
eyes of the members.

Types of Cooperative Societies
• Consumers’ Cooperatives- to provide goods and services
• Credit Cooperatives- providing finance to the poor farmer
• Cooperative Farming Societies- achieve a higher rate of
return from economies of scale
• Cooperative Better Farming Societies- to improve the
methods of farming
• Cooperative Joint Farming Societies- the land of the
individual members is taken by society, but the ownership
remains at the members.
• Tenant & Joint Farming Societies- society takes the land on
a leasehold or freehold basis
• Collective Farming Societies- land is owned by the society.
Members work collectively on the land.

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