Meaning of business, Classification of Business, Industry, types of industry, commerce, trade, aids to trade, forms of business, sole proprietary concerns, cooperative society, meaning, characteristics, advantages and disadvantages, partnership firms, meaning, characteristics, advantages and disadvantages, types of partners, LLP.

1. MR.T.SOMASUNDARAM
ASSISTANT PROFESSOR
DEPARTMENT OF MANAGEMENT

2. UNIT – I
INTRODUCTION TO BUSINESS
Meaning of business, Classification of Business,
Industry, types of industry, commerce, trade, aids to
trade, forms of business, sole proprietary concerns,
cooperative society, meaning, characteristics,
advantages and disadvantages, partnership firms,
meaning, characteristics, advantages and
disadvantages, types of partners, LLP.

3. WHAT IS BUSINESS?
Meaning:
The activities or operations carried out by a business, like making
goods, selling goods, providing a service.
Any activity that is engaged in for the primary purpose of making
a profit. It include things like production, operations, marketing and
administration.
The activity of buying and selling goods, manufacturing goods or
providing services in order to make profit.

4. Definition:
According to B.O. Wheeler, “Business is an institution
organized and operated to provide goods and services to
society under the incentive of private gain.”
Business is an economic activity involving the regular
production or distribution of goods and services with the
objective of earning profits through the satisfaction of human
wants.

5. FEATURES / CHARACTERISTICS OF
BUSINESS
Some of the important features are -
Buying selling activity
Continuous in nature
Deals with goods and services
Activity for private gain
Risk & uncertainty involved
Supports Society
Creativity & Innovation
Takes from the Society
Employment Generation

6. FUNCTION / NEEDS OF BUSINESS
Some of the important functions are -
Regular supply goods & services
Satisfaction of need & wants
Optimum use of natural resources
Better standard of living
Must for growth of economy
Revenue to govt.
Employment generation

8. 1. Service:
Service industry is the major type of business running in
India.
Service is different from manufacturing and trading of
goods.
(E.g.) Entertainment, Consultancy, Banking,
Telecommunication, Hospitality, etc.
TYPES OF BUSINESS

9. The major types of Business are -
2. Manufacturing:
In manufacturing, the items are produced using raw
materials with the help of different engineering process and
technologies.
Other business depend on manufacturing and it is very
important.
(E.g.) Machines, Automobiles, Stationary, etc.
TYPES OF BUSINESS

10. The major types of Business are -
3. Trade:
These enterprises are concerned with the distribution of
products (i.e.) sale of products, distribution, transfer,
exchange of goods to business houses as well as consumers.
Trading enterprises may be found operating in form of
a) Whole sale b) Retail c) Import & Export
d) Investment trusts, etc.
TYPES OF BUSINESS

11. 1. Classification by Activity:
Traditionally business have been classified into 3 sectors:
a) Primary Sector:
Firms in this sector extract raw materials from naturally occurring resources.
(E.g.) Farming, Fishing, Mining, etc.
b) Secondary Sector:
Firms in this sector assemble and manufacture products. (E.g.) Consumer
goods
c) Tertiary Sector:
Firms in this sector provide services. (E.g.) Banking, Hospitals, Education, etc.
CLASSIFICATION OF BUSINESS

12. 2. Classification by Size:
Business size can be measured in 5 ways:
a) Turnover:
Measures the total value of sales over a given time.
(E.g.) Small industry – Turnover < 1.4 M, Medium Industry – Turnover between
1.4 M – 5.75 M & Large Industry – Turnover over 5.75 M
b) Employees :
Classifies businesses according to the number of workers. (E.g.) Small - < 50
workers, Medium – between 50 – 250 workers & Large - > 250 workers.
c) Capital Employed:
Compares the amount of money invested within the business.

13. d) Profit:
Compares the profit levels of firms.
e) Stock Market Value:
Compares the value of companies whose shares are traded.
3. Classification by Ownership:
Business ownership can be classified as:
a) Public Sector:
It is the sector, where government owns and runs the business ventures.
It aim is to provide essential public goods and services to increase the welfare
of their citizens. (E.g.) Indian Railways is public sector organization owned by
Govt. of India.

14. b) Private Sector:
It is the sector, where private individuals own and run business
ventures.
It aim is to make a profit, and all costs and risks of the business
undertaken by individual. (E.g.) Tata, McDonald’s, Nike, etc.
c) Joint Sector:
The term ‘Joint Sector’ is applied to an undertaking only when both
its ownership and control are effectively shared between public
sector agencies and a private group.

15. 4. Classification by Functions:
Business functions can be classified as -
a) Industry:
An industry is a group of companies that are related based on their
primary business activities.
 It is constituent of production which is involved in the changing form of
a good at any stage from raw materials to the finished product.
b) Trade:
It is the act or process of buying, selling or exchanging commodities, at
either wholesale or retail, within a country or between countries.

16. Introduction & Meaning:
An industry may produce consumer goods or capital goods.
Goods such as bread, butter, cloth, radio, etc. are consumer goods, which are
directly used by the consumer.
Goods such as machinery, cement etc. are called capital goods as these are used
further in the production process to make useful products.
Activities related to production & processing as well as activities related to
rearing & reproduction of animals or other living species are all included in the
industry.
The sector where raw material gets converted into useful products is called
Industry.
INDUSTRY

17. Types of Industry:
Industry are different types –
1. Primary Industry:
It includes activity connected with the production of wealth directly
from natural resources like water, air, etc.
It includes activities like extraction & processing of natural
resources.
It is also known as extractive industries.
TYPES OF INDUSTRY

18. It has two types –
a) Extractive industry – it extract or draw out products from natural sources.
- It consists of any operation that removes metals, minerals from earth.
b) Genetic Industry:
It involve in the activities of rearing & breeding of living organism (i.e.) birds,
plants, animals, etc.
It engage in reproducing & multiplying certain species of plants & animals,
cultivation of forests.
(E.g.) rearing of cattle for milk, dairy farms, poultry farms, growing fish in
ponds.

19. 2. Secondary Industry:
It is converting raw material into finishing product.
In this, materials are processed to produce goods for final consumption or for
further processing by other industrial unit.
It is divided into –
a) Manufacturing industries:
It engaged in process of conversion of raw materials or semi-finished goods
into finished goods.
b) Construction industries:
It concerned with construction of building, dams, road, etc.
It use the products of manufacturing industries such as cement iron & steel, etc.

20. 3) Tertiary industry:
It is concerned with services which facilitate a flow of goods & services.
It helps in activities of the primary & secondary industry.
It includes a wide range of business including financial institution,
schools, restaurants, etc.
It split into two categories –
a) Companies who making money, as those in financial industry.
b) Non – profit segment, includes services like state education and involve
transport, distribution of goods to consumer, retailer, wholesaling, etc.

21. 4) Quaternary industry:
It includes knowledge-oriented economic sectors like information
technology, media, research & development, information based services,
information sharing, consultant, financial planning, etc.
This sector is based on knowledge and skill and consists of intellectual
industries providing information services, like computing and ICT, R&D.
It is based on pure knowledge and skill of a person.
This industry is like Colin Clark’s sector model which undergoes
technological change.
This sector evolves in well-developed countries and requires highly
educated workforce.

22. Some of the examples of types of industrial sector -
Trade
Automobile
Cement
Chemicals
Pharmaceuticals
Engineering goods
Jute
Iron & Steel
Village industries
Petrochemical
Rubber & leather products
SSI
Sugar & Tea
Textile industry
Agro based
Food based
Handicrafts, etc.

23. Meaning:
Commerce is the exchange or buying & selling of commodities between
different places or communities, extended trade.
 It help directly or indirectly in distribution of goods to consumers.
It embraces a no. of activities / agencies such as trade, transport,
insurance, warehousing, banking which help removal of hindrance of
trade.
Definition:
“Commerce is an organized system for the exchange of goods
between members of the industrial world.” - James Stephenson
COMMERCE

24. Constituents of Commerce:
It has two constituents – 1) Trade and 2) Aids to Trade
1) Trade:
Trade is an integral part of commerce, which includes buying & selling of goods &
services.
It brings together the manufacturer & consumer.
It classified into two types –
a) Home Trade or Internal Trade:
Trade takes place within boundaries of a country is called home trade or internal
trade.
It refers to buying & selling goods within geographical boundaries of a country.

25. Internal trade classified into -
i) Wholesale trade – buying & selling of goods in relatively larger
quantities and person involved is called wholesaler.
ii) Retail trade - buying & selling of goods in relatively small
quantities and person involved is called retailer.
b) Foreign Trade or External Trade:
Trade beyond & across boundaries of a country is called foreign
trade or external trade or international trade.
It is also known as trade between two or more countries.
In external trade, market is very wide.

26. External trade classified into -
i) Export trade – when a country sells goods from another
country. (E.g.) India sells tea to U.S.A.
ii) Import trade - when a country buys goods from another
country. (E.g.) India purchases machinery from Japan.
iii) Entrepot trade or re-export or pot trade - when goods are
imported from one country for the purpose of re-exporting
them to another country. (E.g.) Indian company may import
rubber from Thailand and then exports it to a Japanese.

27. 2) Aids to Trade:
Aids to trade includes Transport, Communication, Warehousing, Banking,
Insurance, Advertising, etc.
It ensure a smooth flow of goods from producers to consumers.
The activities which help in the smooth flow of trade are known as aids to
trade.
It helps in removing various hindrances of trade which arises in production &
distribution of goods.
These activities make buying & selling of goods easier.
Trade promotion organizations in a country and Global organizations for
international trade.

28. The common aids to Trade are -
1. Transport & Communication:
Transport create ‘place utility’ to move product from one place to consumers at
different places at appropriate time.
There are several ways of transport like road, air railway and water, which is
recognized as a major component of service sector.
Communication systems are providing a wide variety of assistance to trade.
2. Banking & Finance:
Finance required by business house is provided by banks.
This is major service rendered by the finance sector to the business.
Banks perform several functions like deposits, lend money against securities, trade
documents, fixed assets, etc.

29. 3. Insurance:
This is another supporting service which facilitates the smooth running of trade.
It eliminates risk of loss by payment of premium to insurance company against fire
and other hazards, accident, insurance, etc.
The main function of insurance is to spread the loss over a large number of people
who are subject to a particular risk.
4. Warehousing:
Warehousing is the process of storing physical inventory for sale or distribution.
5. Advertising:
Advertising is a marketing communication that employs an openly sponsored, non-
personal message to promote or sell a product, service or idea.

30. COMPARISON OF INDUSTRY & COMMERCE
Basis for Comparison Industry Commerce
Meaning Industry is an economic
activity, concerned with the
procurement and processing of
raw materials into finished
products, that reaches the
customer.
Commerce is a business activity,
wherein exchange for goods and
services for value, is done on a
large scale.
Capital Required High Comparatively low
Involves Conversion of resources into
useful goods.
Activities essential for facilitating
the buying and selling of goods.
Represent Production part of business
activities.
Distribution part of business
activities.
Risk High Comparatively low

31. COMPARISON OF TRADE & COMMERCE
Basis for Comparison Trade Commerce
Meaning Exchange of goods and
services between two or more
parties in consideration of
money or money’s worth.
Exchange of goods and services
between the parties along with the
activities such as insurance,
transportation, warehousing,
advertising etc. that completes that
exchange.
Scope Narrow Wide
Type of activity Social activity Economic activity
Frequency of transactions Isolated Regular
Employment opportunities No Yes
Link Between buyer and seller Between producer and consumer
Demand and supply side Represents both Represents only the demand side
Capital requirement More Less

32. FORMS OF OWNERSHIP
Meaning:
A business can be organized in one of several ways, and the form its owners
choose will affect the companies and owners' legal liability and income tax
treatment are the most common options and their major defining
characteristics.
A business entity is an organization that uses economic resources or inputs to
provide goods or services to customers in exchange for money or other goods
and services.
Definition:
“Business Ownership refers to the holding of a business enterprise by the
individual or two or more persons or by a body corporate.”

33. Different forms of business:
The different forms of business are –
1. Sole Proprietorship:
Sole Proprietorship is a one-man business organization. It is the type
of entity that is fully owned and managed by one natural person
known as the sole proprietor.
It is form of business that is owned and operated, at risk of only one
individual called the sole proprietor.
It is the simplest form of business organizations and the ideal choice
to run a small or medium scale business.

34. Features of Sole Proprietorship:
1. Individual Ownership – one person is owner of organization and
provides entire capital.
2. Risk bearing – risks of business are borne by proprietor himself.
3. Management and Control – it is the responsibility of the sole
proprietor.
4. Minimum Government Regulations – comply with general laws
and rules laid down by government.
5. Unlimited liability – he has to bear the losses and responsible for
liabilities of business.

35. 6. Individual Financing – done by individuals as a owner or through his
personal resources.
7. Individual Accountability – managers & other employees are
accountable to sole-proprietor.
8. Maintenance of Business Secrecy – secrecy can be maintained about
business matters.
9. Flexibility of Organization – as a owner, he doesn’t have to consult
anyone regarding business decision and able to make necessary changes
without delay.
10. No sharing of Profits or Loss – he doesn’t share the profits or
losses of business with any one.

36. Advantages of Sole Proprietorship:
1. Easy to form.
2. Owner’s Freedom to take decisions.
3. Full Control. 4. Quick decisions.
5. Economical and Efficient Operations.
6. Personal Touch.
7. Keep the Business simple, Dynamic and Flexible.
8. Keep the secrets close to heart.9. Tax Advantage
10. Easy dissolution.

37. Disadvantages of Sole Proprietorship:
1. Unlimited liability.
2. Limited Financial Resources.
3. Management Problems. 4. Huge Time Commitment.
5. Few Fringe Benefits. 6. Limited Growth.
7. Limited Life Span. 8. Lack of Specialization.
9. Decision – Making Errors.
10. Loss of Potential Economies of Large Scale.
11. Uncertain Future

38. 2. Co-operative Society:
It is a voluntary association of persons joined together on the basis
of equality for fulfillment of their economic and business interests.
It is different from all other forms of business and protects the
interests of weaker sections of society.
Definition:
“Cooperative organization is a society which has its objectives
for the promotion of economic interests of its members in accordance
with cooperative principles”
- Indian Cooperative Societies Act, 1912

39. Who can form Co-operative Societies?
 A group of ten persons can form a co-operative society.
The main objectives are –
 To render service rather than earning profit.
 To provide mutual help instead of competition.
 To offer self-help.

40. Features of Co-operative Organization:
i) Registration. ii) Voluntary Association.
iii) Minimum Ten persons needed. iv) Service – Motive.
v) Finance. vi) Limited Liability.
vii) Democratic Management. (Office bearers like President, Vice –
President, Secretary, Joint Secretary, Treasurer)
viii) ‘One – Man One – Vote Rule’.
ix) Limited Return on Capital and Disposal of Surplus.
x) State Control

41. Advantages of Co-operative Organizations:
1. Easy to form.
2. Universal Brotherhood.
3. Full Democratic Management. 4. Perpetual Succession.
5. Limited Liability.
6. Governmental Patronage. 7. Internal Financing.
8. Lower Operating Costs.
9. Fair Distribution of Surplus. 10. Social Welfare Aspect

42. Disadvantages of Co-operative Organization: (Limitations)
1. Limited Capital.
2. Inefficient Management.
3. Rift among Members.
4. Rigid Rules and Regulations.
5. Political Interference.
6. Lack of Motivation.

43. 3. Partnership Firms:
It is an organization which is formed with two or more persons to
run a business with a view to earn profit.
Partnership is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them
acting for all.
Definition:
“Partnership is an association of two or more persons to carry
on as co-owners a business for profit”
- Uniform Partnership Act of USA

44. Features of Partnership Firm:
1. More Persons – two persons subject to a maximum of hundred persons
to form a partnership firm.
2. Profit & Loss Sharing – agreement among the partners to share profits
earned and losses incurred in partnership business.
3. Contractual Relationship – formed by an agreement – oral or written
among the partners.
4. Existence of Lawful Business – it is formed to carry on some lawful
business and share its profits or losses.
5. Utmost Good Faith and Honesty – it solely rests on utmost good faith
and trust among the partners.

45. 6. Unlimited Liability – each partner has unlimited liability in the
firm.(i.e.) if assets of partnership firm fall short to meet firm’s
obligations and it will be used for purpose.
7. Restrictions on Transfer of Share – no partner can transfer his
share to any outside person without seeking the consent of all other
partners.
8. Principal – Agent Relationship – each partner is entitled to
represent the firm and other partners, when dealing with firm’s
transactions.

46. Advantages of Partnership Firm:
1. Easy formation. 2. More capital available.
3. Combined Talent, Judgement & Skill. 4. Diffusion of Risk.
5. Flexibility. 6. Tax Advantage.
Disadvantages of Partnership Firm:
1. Unlimited Liability. 2. Divided Authority
3. Lack of Continuity 4. Risk of Implied Authority
5. Internal Conflicts 6. Misuse of assets
7. Lack of Public Confidence 8. No transfer – ability of share
9. Lack of Secrecy

47. TYPES OF PARTNERS
Types of
Partners
Active or Managing or Working Partner
Sleeping or Dormant Partner
Nominal or Ostensible Partner
Partner by estoppel or Holding out
Partner in profits only
Minor as a partner
Secret Partner

48. TYPES OF PARTNERS
1. Active or Managing or Working Partner:
A person who takes active interest in conduct and management of
the business of the firm.
He carries on business on behalf of other partners.
He continue to be liable until he wants to retire and has to give
public notice of his retirement.
His different capacities like manager, organizer, advisor and
controller of all affairs.

49. TYPES OF PARTNERS
2. Sleeping or Dormant Partner:
A sleeping partner is a partner who sleeps (i.e.) he doesn’t take active part in
management of business.
He contributes to share capital of firm and share profit and losses of business.
He is not liable to 3rd parties for acts done after his retirement.
3. Nominal or Ostensible Partner:
A nominal partner is one who doesn’t have any real interest in business but lends
his name to firm, without capital contributions and doesn’t share profits of
business.
He is liable to outsiders as an actual partner & business gets more credit in
market.

50. TYPES OF PARTNERS
4. Partner by estoppel or Holding Out:
If a person, by his words or conduct, holds out to another that he is partner, he will
be stopped from denying that he is not a partner.
He becomes liable to 3rd parties to pay debts of firm is known as a holding out
partner.
He is liable to outsiders, even though he is not a partner and doesn’t contribute
anything to the business.
5. Partner in profits only:
When partner agrees with the others that he would only share profits of firm and not
liable for its losses, he is in own as partner in profits only.
Such partners are associated for money and goodwill.

51. TYPES OF PARTNERS
6. Minor as a Partner:
At the time of creation of a firm a minor (i.e.) a person who has not attained
the age of 18 years can’t be one of the parties to the contract.
As per Sec.30 of Indian Partnership Act 1932, a minor can be admitted to
benefits of partnership, with consent of all partners.
A minor partner is entitled to his share of profit and to have access to the
accounts of firm for purposes of inspection and copy.
7. Secret Partner:
It lies between active and sleeping partner and his membership of firm is kept
secret from outsiders.
His liability is unlimited and liable for losses of business.

52. PARTNERSHIP DEED
Meaning:
Partnership is the outcome of an agreement and it must have some
terms and conditions agreed upon by all partners.
Terms and conditions may be either oral or written, in order to
avoid misunderstanding and disputes.
It is best to have written agreement duly signed and registered under
the Act.
Such written document which contains terms of the agreement is
called ‘Partnership Deed’.

53. Contents of a Partnership Deed: It must contain following particular –
1. The name of the firm.
2. The names and addresses of the partners.
3. The nature of the business.
4. The term or duration of partnership.
5. The amount of capital to be contributed by each partner.
6. The drawings that can be made by each partner.
7. The interest to be allowed on capital and charged on drawings.
8. Rights of partners.

54. 9. Duties of partners.
10. Remuneration to partners.
11. The ratio in which the profits or losses are to be shared among the partners.
12. The basis for the calculation of goodwill at the time of admission,
retirement, and death of a partner.
13. The keeping of proper books of accounts and the preparation of balance
sheet.
14. Settlement of amount on the dissolution of the firm.
15. The procedures to be adopted in the case of disputes among the partners.
16. Arbitration clause.

55. LIMITED LIABILITY PARTNERSHIP (LLP)
Meaning:
Limited Liability Partnership introduced in India by enacting the
Limited Liability Partnership Act, 2008 and notified on 31.03.2009.
It is popularly known as LLP combines advantage of both company
and partnership into single form of organization.
It enables professional and entrepreneurial skill to combine,
organize and operate in an innovative & perfect manner.
It provides an alternative to the traditional partnership firm with
unlimited liability.

56. LIMITED LIABILITY PARTNERSHIP (LLP)
Definition:
A Limited Liability Partnership (LLP) is an alternative
corporate business vehicle that combines the flexible structure of
a partnership with the benefit for its partners (or members) of
limited liability.
(E.g.) Dental offices, auditing firms, law firms, financial advising
services, business consultancies and real estate agencies.
Note: State laws might place restrictions on types of businesses
that use this partnership model.

57. Characteristics of an LLP:
LLP is governed by the Limited Liability Partnership Act 2008, which has
come into force with effect from April 1, 2009. The Indian Partnership Act,
1932 is not applicable to LLP.
LLP is a body incorporate and a legal entity separate from its partners having
perpetual succession, can own assets in its name, sue and be sued.
The partners have the right to manage the business directly, unlike corporate
shareholders.
One partner is not responsible or liable for another partner’s, misconduct or
negligence.
Minimum of 2 partners and no maximum limit.

58. Characteristics of an LLP:
Should be ‘for profit’ business.
Rights and duties of partners in an LLP, governed by agreement between
partners and partners have flexibility to devise the agreement as per their
choice.
Limited liability of partners to extent of their contribution in LLP.
LLP shall maintain annual accounts (audit is required only, if
contribution exceeds Rs.25 lakhs or annual turnover exceeds Rs.40
lakhs.)
Statement of accounts and solvency shall be filed by every LLP with
Registrar of Companies (ROC) every year.

59. Features Partnership firm LLP
Registration Not compulsory. Unregistered
Partnership Firm won’t have
the ability to sue.
Compulsory registration
required with the ROC
Name No guidelines. Name to end with “LLP”
Limited Liability
Partnership”
Capital contribution Not specified Not specified
Legal entity Not a separate legal entity A separate legal entity
Liability Unlimited, can extend to the
personal assets of the partners
Limited to the extent of the
contribution to the LLP.

60. Features Partnership firm LLP
No. of shareholders /
Partners
2- 100 partners Minimum of 2. No maximum.
Foreign Nationals as
shareholder / Partner
Foreign nationals cannot
form partnership firm.
Foreign nationals can be partners.
Meetings Not required Not required.
Annual Return No returns to be filed
with the Registrar of
Firms
Annual statement of accounts and
solvency & Annual Return has to
be filed with ROC
Audit Compulsory Required, if the contribution is
above? 25 lakhs or if annual
turnover is above? 40 lakhs.

61. Advantages of LLP:
1. Convenient.
2. No minimum capital requirement. (Rs.1,00,000 – Rs.5,00,000)
3. No limit on owners of business. ( 2 – 200 members)
4. Lower Registration Cost. (depend on Public or Private)
5. No requirement of compulsory Audit. (Audit requires when contributions of
LLP exceeds Rs.25 lakhs or Annual turnover of LLP exceeds Rs.40 lakhs)
6. Savings from lower compliance burden.
7. Taxation Aspect on LLP.
8. Dividend distribution Tax (DDT) not applicable.

62. Disadvantages of LLP:
1. LLP can’t raise funds from public.
2. Any act of partner without the other may bind the LLP.
3. Liability may extend to personal assets of partners, in some cases.
4. No separation of Management from owners.
5. LLP might not be a choice due to certain extraneous reasons. (E.g.) Dept
of Telecom (DOT) would approve the application for a leased line only for
a company. Friends & Relatives and venture capitalist would be
comfortable investing in a company.
6. Framework of incorporating LLP is in place but currently registrations
are centralized at Delhi.

63. UNIT 1 – 49

64. UNIT 1 – 50