MEFA IV UNIT MATERIAL

Types of Business organization and Business Cycles
The word ‘business’ is derived from ‘busy’ which means being busy or active. The activities
of man are many and varied. Most of them are economic in nature. They are undertaken to
satisfy human wants or to make a living. Business activities are those economic activities
which are concerned with production or purchase sale or exchange of good and service for
value. The sum total of these activities is business. Business activities may be classified into
two heads i.e. 1) Industry and 2) Commerce. Industry refers to the production of goods and
services through the use of material and human resources. It is concerned with activities
relating to raising, production, processing and fabricating products. While industry is
concerned with production of goods and service, commerce is concerned with their exchange.
Trade is the course of commerce. It is the process of buying and selling goods. Commerce
includes trade and all other functions and services which facilitate trade.
The following are the features of the business:
1. Exchange of goods and services
2. Dealing in goods and services
3. Continuity in dealing
4. Profit Motive
5. Elements or risk
1. Exchange of goods and services:
Business involves exchange of goods and services for value. Production of purchase of goods
for personal use or consumption does not constitute business as no sale or transfer value is
involved. The ultimate object of production or sale should be to meet the needs of the
community
2. Dealing in goods and services:
Business consists of dealing in goods and services. Goods dealt with in business may be
tangible or intangible. The tangible goods many consists of producers goods like machines
etc. or consumers goods like cloth, sugar etc. intangible goods are services like electricity,
gas, water etc.
3. Continuity in dealing:
Business consist a continuous series of dealing in goods and services. A stray transaction
does not constitute business. For example, sale of own house by an individual does not
constitute business.
4. Profit Motive:
Profit motive is a prominent feature of business. Business activity is motivated by desire to
earn profit. Business involves some element of risk. Business should yield not only
reasonable return on the capital invested, but also adequate reward to cover the risk. Profit is
said to be the reward for risk bearing. A business can survive, grow and earn profits only
when it is motivated by a desire to serve the needs of the society.

5. Elements or risk:
In a competitive economy business activity is always associated with some element of risk.
The fortunes of business are influenced by a number of factors, over which business has no
control.
Forms of Business Organizations:
The world is developing day by day. The business world is also developing day by day.
Based on the requirements of the world, the business has different forms. They are as follows
1. Sole Trading Concern:
2. Partnership Business
3. Joint Stock Company
4. Hindu Undivided Family
5. Co-operative Societies
6. Public Enterprises
a) Public Corporations
b) Department Undertaking
c) Government Company
1. Sole Trading Concern:
The sole trading concern or Individual Proprietorship is the oldest and the most natural form
of business organization. A sole trader is a person who carries on business by himself and for
himself with his own or borrowed capital and at his own risk. He is himself the promoter,
financer, manager all rolled into one. He is his own boss. He is the master of the organization.
He alone enjoys the profits of his business and he alone bears its losses. His liability is
unlimited. It extends even to his private property. In short he owns all and risks all.
Features:
The following are the features of the sole trade business
1. Capital:
The capital required by the business is arrangement by the sole trader himself. He may
provide the capital out of his own savings or borrowings from friends, relatives or banks. He
borrows for the business on his personal liability.
2. Management and Control:
The outstanding features of this form of organisation are the unity between ownership and
management. This means that ownership and management are vested in one individual. The
sole trader himself is the owner, manager and controller. If necessary, he takes the assistance
of his family members and at time he may even appoint a few paid assistants. But ultimate
control vests with him.
3. Unlimited Liability:

From the view point of law, there is no distinction between the proprietor and his business. In
other words both are one and the same. The personal property of the proprietor is also liable
for the liabilities of the business. Thus the liability of the sole-trader is unlimited.
4. Sharing of Profits:
The sole trader owns everything in his business. He also risks everything in his business.
Therefore he alone enjoys its profits and he alone bears its entire loses. There is none to claim
a share in the profits or to bear part of the loss.
Advantages:
Facility of Formation:
Formation of a sole trader form of organization is relatively easy even closing the business is
easy. There is no legal interference in the day-to-day working of the business. A license from
local authority is all that is required to start the business.
Secrecy:
Business secrets can well be maintained because there is only one trader. He need not
disclose the affairs of his business to the public. There is little risk of competitors taking
advantages of the business secrets
Incentive for efficient Management:
There is direct relationship between efforts and return, as the entire profit belongs to the
proprietor. The more the effort, the more will be the profit. This acts as a powerful incentive
and induces him to put in his best of efforts in the management of the business
Prompt Decisions:
To improve the quality of services to the customers, he can take any decision and implement
the same promptly. He is the boss and he is responsible for his business Decisions relating to
growth or expansion can be made promptly.
Personal contact with customers directly:
One of the great advantages of this form of organisation is the ability to establish and
maintain personal contacts with customers. Based on the tastes and preferences of the
customers the stocks can be maintained.
High degree of flexibility:
Based on the profitability, the trader can decide to continue or change the business, if need
be. He can make changes without delay as there is no need to consult anyone. The proprietor
can easily adjust itself to changing conditions.
Direct motivation:
If there are profits, all the profits belong to the trader himself. In other words If he works
more hard, he will get more profits. This is the direct motivating factor.
Economy in Management:
The sole trader himself supervises the business with or without the assistance of family
members. At times e may take the assistance of few paid assistance. He takes personal
interest in the affairs of the business. This makes for efficiency and economy of management.

Facility of coordination:
This form of organisation does not create problems of coordination. As the proprietor he
makes all the decisions there will be no scope for the activities of the business to clash with
one another. Further he will ensure that all the employees work as a team.
Disadvantages:
In spite of several advantages/merits, the sole trading concern suffers from a number of
disadvantages. The main disadvantages are:
1. Limited Capital
2. Limited Managerial skills
3. Lack of continuity:
4. Unlimited liability
5. Limited Bargaining power
6. No Legal status
7. Limited Expansion:
The above important demerits are briefly explained as under.
1. Limited Capital:
The main drawback of sole trading concern is the limitation of capital. The sole trader can
manage limited amount of capital from his own savings. He may also get some funds from
his friends and relatives. The limitation of capital often restricts the size of the sole trading
concern.
2. Limited Managerial skills:
Normally, a sole trader manages the business on his own. The sole trader may not have all
the abilities or skills to manage all by himself. Now a day, ther, ther is a need for specialized
managerial staff. The sole trader may not able to appoint a skilled managers or staffs this is
because of his limited capital.
3. Lack of continuity:
The sole trading business lacks continuity. If the sole trader cannot run his business due to ill
health or if he dies, the business comes to an end. This is because the successors may not be
interested to run the business or they may lack the necessary business skills.
4. Unlimited liability:
The liability of the sole trader is unlimited. This means he is alone responsible for all the risks
and debts of the firm. In the eyes of law, there is no distinction between the private property
and business property of the sole trader.
5. Limited Bargaining power:
The sole trader often lacks bargaining power. This is because he purchases on a small scale
from the wholesalers; secondly, he may not have the skill of bargaining. Thus he may not be
able to obtain competitive terms from his suppliers.

6. No Legal status:
Legally, the sole trader and his business concern are one and the same in the eyes of law.
The sole trader and his business cannot be separated from each other. So the sole trader lacks
legal status. But a joint stock company enjoys a separate legal status.
7. Limited Expansion:
The Sole trading concern is restricted in its growth. This is because of limitation of capital
and lack of managerial skills that are necessary for the expanding organisations.
2. Partnership:
A sole trading concern suffers from a number of limitations; the capital that a sole trader can
provide is limited. His borrowing capacity is limited. His managerial abilities and capacity to
bear risk are also limited. Partnership has grown out of these limitations. When a sole trader
wants to expand his business to take advantages of an expanding market, he feels the need for
additional capital and share the burden or partners who can bring additional capital more
effective supervision, greater specialization and division of work. Therefore he admits a
partner or partners who can bring additional capital and share the burdens of management and
risk. The success of partnership depends upon the mutual confidence and trust among the
partners.
A partnership is a type of business entity in which partners (owners) share with each other the
profits or losses of the business undertaking in which all have invested. Partnerships are often
favored over corporations for taxation purposes, as the partnership structure does not
generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend
tax levied). However, depending on the partnership structure and the jurisdiction in which it
operates, owners of a partnership may be exposed to greater personal liability than they
would as shareholders of a corporation.
According to the Partnership Act 1932 section 4, “Partnership” is the relation between two or
more persons who have agreed to share the profits of a business carried on by all or any of
them acting for all.
Persons who have entered into partnership with one another are called individually “partners”
and collectively a “firm”, and the name under which their business is carried on is called the
“firm name”.
CHARACTERISTICS
The main characteristics of partnership may be narrated as under:
1. Agreement
Agreement is necessary for partnership. Partnership agreement may be written or oral. It is
better that the agreement is in written form to settle the disputes.
2. Agent

In partnership every partner acts as an agent of another partner and firm.
3. Business
Partnership is a business unit and a business is always for profit. It must not include club or
charitable trusts, set up for welfare.
4. Unlimited liability:
The liability of the partners is unlimited. The partnership and partners are one and the same
in the eye of law. Hence, the partners have to bring their personal assets to clear the losses of
the firm, if any.
5. Number of partners:
According to the Indian Partnership Act, the minimum number of partners should be two and
the maximum number if restricted, as 10 partners is case of banking business and 20 in case
of non-banking business.
6. Management
In partnership all the partners can take part or participate in the activities of business
management. Sometimes, only a few persons are allowed to manage the business affairs.
7. Registration
Many problems are created in case of unregistered firm in the business world. So to avoid
these problems partnership firm must be registered.
8. Relationship
Partnership business can be carried on by all partners or any of them can do the business for
all.
9. Share in Capital
According to the agreement, every partner contributes his share of capital. Some partners
provide only skills and ability to become a partner of business and earn profit.
10. Transfer of Rights
In partnership no partner can transfer his shares or rights to another person, without the
consent of all partners
Types of Partners:
There are different kinds of partners. They are as follows
1) Active partner
2) Sleeping partner
3) Nominal Partner
4) Partner by estoppels
5) Partner by Holding out
6) Partner in profits only
7) Minor Partner
8) Other partners

1. Active or managing partner:
A person who takes active interest in the conduct and management of the business of the firm
is known as active or managing partner. He carries on business on behalf of the other
partners. If he wants to retire, he has to give a public notice of his retirement; otherwise he
will continue to be liable for the acts of the firm.
2. Sleeping or dormant partner:
A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the firm,
is bound by the activities of other partners, and shares the profits and losses of the business.
A sleeping partner, unlike an active partner, is not required to give a public notice of his
retirement. As such, he will not be liable to third parties for the acts done after his retirement.
3. Nominal or ostensible partner:
A nominal partner is one who does not have any real interest in the business but lends his
name to the firm, without any capital contributions, and doesn’t share the profits of the
business. He also does not usually have a voice in the management of the business of the
firm, but he is liable to outsiders as an actual partner.
4. Partner by Estoppel:
Estoppel means behaviour or conduct. Partner by Estoppel gives an impression to outsiders
that he is the partner in the firm. In fact he neither contributes to capital not takes any role in
the organisation. Because he has misled the outsiders, partner, partner by estoppels is held
liable for the claims, if any, of the outsiders.
4. Partner by Holding Out:
If a person declared to be a partner of a firm by another person, the person concerned should
deny it immediately on coming to know of such a declaration, if he is not actually the partner
of the firm. If he does not deny, he will be held liable to the third party, which has lent money
or given credit to the firm on the basis of such declaration. Such a partner is known as a
partner by holding out
5. Partner in profits only:
When a partner agrees with the others that he would only share the profits of the firm and
would not be liable for its losses, he is in own as partner in profits only.
6. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering into a
contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a
person who has not attained the age of 18 years) cannot be one of the parties to the contract.
But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the
benefits of partnership’, with the consent of all partners. He cannot file a suit against the
partners of the firm for his share of profit and property as long as he remains with the firm.
His liability in the firm will be limited to the extent of his share in the firm, and his private
property cannot be attached by creditors.
7. Other partners:

In partnership firms, several other types of partners are also found, namely, secret partner
who does not want to disclose his relationship with the firm to the general public. Outgoing
partner, who retires voluntarily without causing dissolution of the firm, limited partner who is
liable only up to the value of his capital contributions in the firm, and the like.
Partnership Deed:
Deed is a written agreement between the partners about the firm and its activities.
1. The name of the firm
2. The name and address of the partners composing the firm
3. The nature of business
4. The town and places where the business will be carried on
5. The amount of capital to be contributed by each partner and the rate of interest, if any,
payable thereon
6. The duties, rights and obligations of partners
7. Profit sharing ratio
8. Salary if any, payable to any partner or partners
9. The method of preparing accounts
10. Arrangement in case of insolvency of a partner
ADVANTAGES OF PARTNERSHIP
Following are the advantages of partnership:
1. Simplicity in Formation
This type of business of organization can be formed easily without any complex legal
formalities. Two or more persons can start the business at any time. Its registration is also
very easy.
2. Simplicity in Dissolution
Partnership Business can be dissolved at any time because of no legal restrictions. Its
dissolution is easy as compared to Joint Stock Company.
3. Sufficient Capital
Partnership can collect more capital in the business by the joint efforts of the partners as
compared to sole proprietorship.
4. Quick Decisions and Prompt actions:
In partnership decision making can be taken very fast when there is mutual concern among
partners. The decisions also implemented in fast manner.
5. Personal contact with customers:
There is scope to keep the customers very close to business. Few people will be there in the
business can contact or interact the customers daily. It helps a lot to the organisation.
6. Skilled Workers
As there is sufficient capital so a firm is in better position to hire the services of qualified and
skilled workers.
7. Sense of Responsibility

As there is unlimited liability in case of partnership, so every partner performs his duty
honestly.
8. Satisfaction of Partners
In this type of business organization each partner is satisfied with the business because he can
take part in the management of the business.
9. Secrecy
In partnership it is not compulsory to publish the accounts. So, the business secrecy remains
within partners. This factor is very helpful for successful operation of the business.
DISADVANTAGES OF PARTNERSHIP
The disadvantages of partnership are enumerated one by one as under:
1. Unlimited Liability
It is the main disadvantage of partnership. It means in case of loss, personal property of the
partners can be sold to pay off the firm's debts.
2. Limited Life of Firm
The life of this type of business organization is very limited. It may come to an end if any
partner dies or new partner enters into business.
3. Limited Capital
No doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is small
as compared to Joint Stock Company. So, a business cannot be expanded on a large scale.
4. Limited Abilities
As financial resources of partnership are limited as compared to Joint Stock Company, so it is
not possible to engage the services of higher technical and qualified persons. This causes the
failure of business, sooner or later.
5. Limited number of Partners
In partnership, the number of partners is limited, so the resources are also limited. That is
why business cannot expand on large scale.
6. Legal Defects
There are no effective rules and regulations to control the partnership activities. So, it cannot
handle large-scale production
7. Lack of Interest
Partners do not take interest in the business activities due to limited share in profit and limited
chances of growth of business.
8. Lack of Public Confidence
As there is no need by law to publish accounts in partnership, so people lose confidence and
avoid dealing and entering into contract with such firm.
9. Lack of Prompt Decision
In partnership all decisions are made by mutual consultation. Sometimes, delay in decisions
becomes the cause of loss.

10. Lack of Secrecy
In case of misunderstandings and disputes among the partners, business secrets can be
revealed.
CONCLUSION
From the above-mentioned findings, we come to this point that despite the above
disadvantages, partnership is an important from of business organization. This is because its
formation is very easy and due to unlimited liabilities, partners take great interest in business,
because in case of loss they are personally responsible

JOINT STOCK COMPANY
In a partnership, there can be a maximum of 20 people. Because of this limit, the amount of
capital that can be generated is limited. Also, because of the unlimited liability of
partnerships, the partners may be discouraged from taking huge risks and further expanding
their business. To overcome these problems a public or a private company may be formed.
The major disadvantage of Private and Public companies is that they have a costly and
elaborate process of setting up. They are also closely regulated by the government. A
company stock is owned jointly by the share holders. A company has some features of
a corporation and some features of a partnership. The company sells fully transferable
stock, but all shareholders have unlimited liability
The word ‘company was derived from Latin language, i.e., Com means ‘come together’,
‘pany’ means ‘bread’. Joint Stock Company means, people come together to earn their
livelihood by investing in the stock of the company jointly. A joint-stock company is
a business entity where different stakes can be bought and owned by shareholders. Each
shareholder owns company stock in proportion, evidenced by his or her shares (certificates of
ownership). This allows for the unequal ownership of a business with some shareholders
owning a larger proportion of a company than others. Shareholders are able to transfer their
shares to others without any effects to the continued existence of the company
The companies in India are governed by the Indian Companies Act, 1956. The Act defines a
company as an artificial person created by law, having a separate legal entity, with perpetual
succession and a common seal.
What this means is that, the company “is different” from the investors. The investors put in
money and capital is raised. But the company is treated as a virtual person. The company is
treated as a person who is different from its investors. The company has an identity of its
own. If someone sues the company, he does not sue the investors; he sues the virtual person
that is the company.
Definitions:
“A company as a company formed and registered under the act or an existing company”
Section 3(1) of Companies Act 1956
Company is a artificial person created by law with perpetual succession and common seal.
To understand the concept of joint stock (private and public limited) companies, consider the
following characteristics:
Legal formation:
No single individual or a group of individuals can start a business and call it a joint stock
company. A joint stock company can come into existence only when it has been registered
after completion of all the legal formalities required by the Indian Companies Act, 1956.
Artificial person:

Just like an individual takes birth, grows, enters into relationships and dies, a joint stock
company takes birth, grows, enters into relationships and dies. However, it is called an
artificial person as its birth, existence and death are regulated by law.
Separate legal entity:
Being an artificial person, a joint stock company has its own separate existence independent
of its investors. This means that a joint stock company can own property, enter into contracts
and conduct any lawful business in its “own” name. It can sue and can be sued by others in
the court of law. The shareholders are “not” the owners of the property owned by the
company. Also, the shareholders cannot be held responsible for any of the acts of the
company.
Common seal:
A joint stock company has a “seal”, which is used while dealing with others or entering into
contracts with outsiders. It is called a common seal as it can be used by any officer at any
level of the organization working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, becomes binding on
the company
Perpetual existence:
A joint stock company continues to exist as long as it fulfills the requirements of law. It is not
affected by the death, lunacy, insolvency or retirement of any of its investors. For example, in
case of a private limited company having four members, if all of them die in an accident, the
company will “not” be closed. It will continue to exist. The shares of the company will be
transferred to the legal heirs of the members.
Limited liability:
In a joint stock company, the liability of a member is limited to the amount he has invested.
While repaying debts, for example, if a person has invested only Rs.10,000 then only this
amount that he has invested can be used for the payment of debts. That is, even if there is
liquidation of the company, the personal property of the investor cannot be used to pay the
debts and he will lose his investment worth Rs.10,000.
Democratic management:
Joint stock companies have democratic management and control. Since in joint stock
companies there are thousands and thousands of investors, all of them cannot participate in
the affairs of management of the company. Normally, the investors elect representatives from
among themselves known as ‘Directors’ to manage the affairs of the company.
Winding up:
Winding up refers to the putting an end to the company. Because law creates it, only law can
put an end to it in special circumstances such as representation from creditors or financial
institutions or shareholders against the company that their interests are not safeguarded. The
company is not affected by the death or insolvency of any of its members
The name of the company ends with the word limited:
It is necessary that the name of the company ends with limited. It is an indication to the
outsiders that they are dealing with the company with the company with limited liability and
they should be careful about the liability aspects of their transactions with the company

Types of Companies:
In the world we can find different kinds of companies. They are as follows:
Basedon Public Interest:
Based on public interest companies are divided into three types. They are Public Company,
Private Company and Government Company.
Public Company:
A public company is one which is not a private company. In other words a public company is
one which does not limited number of its members to 50, does not prohibit invitation to the
public for subscription to its shareholders and does not place restriction on the transfer of its
shares. Minimum number of public limited company is 7 and maximum number is unlimited.
Minimum amount of paid up capital is Five Lakhs.
Private Company:
A private company is a company which by its features.
 Minimum paid up capital is one lakh rupees
 Limits the number of its members to 50 excluding its past and present employees
 Restrict the right of transfer its shares
 The name of a private company should necessarily end with the words ‘Private
Limited’
Government Company:
According to the Indian companies act 1956 section 617 A Government Company as ‘any
company in which not less than 51% of its paid up capital is held by Central Government or
State Government or Governments, or partly by Central Government and partly by one or
more stage governments and includes a company which is a subsidiary of Government.
Examples: RINL, BHEL, NTPC, SAIL, GAIL etc.
Basedon Nationality:
Companies may be classified on the basis of nationality into two types i.e.
1. Indian Companies

2. Foreign Companies
Indian Companies:
These are the companies which operate within the boundaries of a country in which they are
registered.
Foreign Companies:
These are the companies which operate beyond the country or original registrations. It means
foreign companies incorporated outside India but established a place of business within India.
Basedon Incorporation:
It can be classified as
1. Chartered Companies
2. Statutory Companies
3. Registered Companies
Chartered Companies:
A chartered company is a company created by Royal Charter of the State. The Charter
contains the rights and powers to be used by chartered company
Statutory Companies:
This company is created by Act of the State Legislation or Parliament. Every aspect of this
company is predetermined. It means the objectives, scope, powers and responsibilities are
clearly defined in this act.
RegisteredCompanies:
A registered company is a company registered under Indian Companies Act, 1956. A
registered company may be a public limited company, private company, company limited by
guarantee or a Government company.
Basedon Liability:
On the basis of liability companies can be divided into three types. They are
1. Unlimited Liability
2. Limited Liability
3. Liability by Guarantee
Unlimited Liability:
Companies in which the liability of members is unlimited are called unlimited companies.
The liability of members extends to their private property as in the case of a sole trader or
partnership firm. If the assets of the company are insufficient to pay off the liabilities in full,
members will be required to pay an unlimited amount to meet the deficiency such companies
are rarely to be found these days

Companies Limited by Guarantee:
Companies in which the liability of members is limited to the amount agreed to be
contributed by them in the event of winding up of the company are called companies limited
by guarantee.
Limited Liability Companies:
Companies in which the liability, of members is limited to the face value of shares held by
them are called companies limited by shares. If the shares of the company are partly paid up
the liability of members will be limited to the amount unpaid on shares. Most of the
companies operating today belong to this type. Limited liability is one of outstanding features
of a joint stock company.
Based on controlling of interest:
Holding Company and Subsidiary Company:
A holding company is an entity formed to buy and hold the majority of stock of other
companies; a subsidiary is a business whose majority of stock is owned by a holding
company. A holding company directs the management and operations of the subsidiaries it
owns and maintains the authority to add or remove board members, directors and other key
management and personnel. A holding company may have strict managerial control or may
allow subsidiaries to act with some level of autonomy for day-to-day business operations,
including lower- and midlevel hiring and certain budgeting decisions.
Formation of Joint Stock company
Company formation is a costly, complicated and time consuming process. A lot of work has
to be done, a number of legal formalities have to complied with, many documents have t be
prepared and filed and many people have to approached for capital contribution before a
company can start functioning. Company formation is usually the job of a specialist or
professional promoter. There are two stages in the formation of a joint stock company. They
are:
(a) To obtain Certificates of Incorporation
(b) To obtain certificate of commencement of Business
Certificate of Incorporation: The certificate of Incorporation is just like a ‘date of birth’
certificate. It certifies that a company with such and such a name is born on a particular day.
Certificate of commencement of Business: A private company need not obtain the
certificate of commencement of business. It can start its commercial operations immediately
after obtaining the certificate of Incorporation.
The persons who conceive the idea of starting a company and who organize the necessary
initial resources are called promoters. The vision of the promoters forms the backbone for the
company in the future to reckon with. To get the company registered, promoter has to get the

following documents, along with necessary fee, with a registrar of joint stock companies to
obtain certificate of incorporation:
(a) Memorandum of Association:
The Memorandum of Association is also called the charter of the company. It
outlines the relations of the company with the outsiders. If furnishes all its details in
six clause such as (ii) Name clause (II) situation clause (iii) objects clause (iv)
Capital clause and (vi) subscription clause duly executed by its subscribers.
(b) Articles of association:
Articles of Association furnish the byelaws or internal rules government the internal
conduct of the company.
(c) List of Directors:
The list of names and address of the proposed directors and their willingness, in
writing to act as such, in case of registration of a public company.
(d) Statutory Declaration:
A statutory declaration that all the legal requirements have been fulfilled. The
declaration has to be duly signed by any one of the following: Company secretary in
whole practice, the proposed director, legal solicitor, chartered accountant in whole
time practice or advocate of High court.
The registrar of joint stock companies peruses and verifies whether all these documents are in
order or not. If he is satisfied with the information furnished, he will register the documents
and then issue a certificate of incorporation, if it is private company, it can start its business
operation immediately after obtaining certificate of incorporation.
Commencement of Business:
A private company can commence business soon after the receipt of certificate of
incorporation. But a public company can undertake regular business operations after the
receipt of another certificate by name “certificate of commencement of business”. After the
company is incorporated, the company must make arrangements for raising the necessary
capital. For this purpose, he must present the project to the public. This is done through issue
of prospectus explaining the prospectus of the company. A copy of the prospectus must be
filled with the registrar. Through the prospectus, the promoter invites the public to subscribe
for the shares of the company. All the application money received from the public in response
to the prospectus must be kept deposited in a scheduled bank. If minimum subscription is not
received within 90 days from the date of issue of the prospectus all the money received
should be refunded within 10 days there after. If minimum subscription is received with the
time limit, steps are taken to obtain the certificate of commencement of business. The
following declaration must be made for this purpose, with the registrar of the company.
 Copy of the prospectus or statement in lieu of the prospectus has been filed with the
registrar of joint stock company
 Collection of minimum subscription
 Allotment of Shares List

 That the directors of the company have paid for their qualification shares in the same
proportion as the public.
The registrar will once again verify the exactness of the details of the above declaration. If he
is satisfied, he will then issue Certificate of Commencement of Business. No public company
can commence business without obtaining this certificate. Violation of this provision is
punishable with a fine of Rs. 500/- for every day of default.
Advantages of Joint Stock Companies:
Large financial resources:
A joint stock company is able to collect a large amount of capital through contributions from
a large number of people. In a public limited company, shares can be offered to the general
public to raise capital. The companies can also accept deposits from the public and issue
debentures to raise funds.
Limited liability:
In case of a joint stock company, the liability of it's members is limited to the value of shares
held by them. Private property of members cannot be confiscated for overcoming the debts of
the company. This advantage attracts many people to invest their savings in the company and
it encourages the company to take more risks.
Professional management:
Management of a company is in the hands of the directors, who are elected democratically by
the members or shareholders. These directors are known as the "Board of Directors". They
manage the affairs of the company and are accountable to all the investors. So, the investors
elect capable persons who have sound financial, legal and business knowledge to the board so
that they can manage the company efficiently.
Large-scale production:
Since there is an availability of large financial resources and technical expertise, it is possible
for the companies to have “large-scale” production. This enables the company to produce
more efficiently and at a lower cost.
Transferability of shares:
The shares can be transferability of shares, shares can-be converted in to cash
Continued existence:
The company has perpetual succession. It has no natural end. It continues forever and ever
unless law puts an end to it
Democracy in Management:
The directors are elected by the shareholders in a democratic way in the general body
meetings. The shareholders are free to make any proposals. Question the practices of the
management, suggest the possible remedial measures as they perceive. The directors respond
to the issue raised by the shareholders and have to justify their actions.
Research and development:
Only in joint stock company form of business, it is possible to invest a lot of money on
research and development so that new design, better quality products, etc. can be achieved.

DisadvantagesofJoint Stock Companies
Difficult to form:
The formation & registration of joint stock company involves a long and complicated
procedure. A number of legal documents and formalities have to be completed before a
company can start business. The process of formation requires the services of specialists such
as chartered accountants, company secretaries, etc. Because of all this, the cost of formation
of a company is very high.
Excessive government control:
Joint stock companies are regulated by government through the Companies Act and other
economic legislations. Especially, public limited companies are required to complete various
legal formalities as provided in the Companies Act and other legislations. Non-compliance
with these causes a heavy penalty. This affects the smooth functioning of the companies.
Delay in policy decisions:
Generally policy decisions are taken at the “Board of Directors” meetings of the company.
Further, the company has to fulfill certain procedural formalities. These procedures are time
consuming and therefore, may delay action on the decisions.
Lack of responsibility and commitment:
In some cases, the managers at different levels are afraid to take risk and more worried about
their jobs rather than the huge funds invested in the capital of the company lose the revenue.
Lack of responsibility and commitment:
In some cases, the managers at different levels are afraid to take risk and more worried about
their jobs rather than the huge funds invested in the capital of the company. Where managers
do not show up willingness to take responsibility, they cannot be considered as committed.
They will not be able to handle the business risks.
Lack or initiative:
In most of the cases, the employees of the company at different levels show slack in their
personal initiative with the result, the opportunities once missed do not recur and the
company loses the revenue.

Public Enterprises
Public enterprise is a business organization wholly or partly owned by the state and
controlled through a public authority. Some public enterprises are placed
under public ownership because, for social reasons, it is thought the service or product should
be provided by a state monopoly
Public enterprises as a form of business organisations have attained a great deal of
significance in recent times. During 20th century various governments have taken active part
in the industrial and commercial activities. The term public enterprise denotes a form of
business organisation owned and managed by the state government or any other public
authority. So it is an undertaking owned and controlled by the local or state or central
government. The whole or most of the investment is made by the government.
According to A. H. Hansen, a public enterprise denotes “state ownership and operation of
industrial, agricultural, financial and commercial undertakings”.
According to N. N. Malaya, “Public enterprises are autonomous or semi-autonomous
corporations and companies established, owned and controlled by the state and engaged in
industrial and commercial undertakings”.
Characteristics
The chief characteristics of public enterprises are:
Autonomous or semi-autonomous organisation:
Public enterprise is an autonomous or semi-autonomous organisation because some
enterprises work under the direct control of the government and some organisations are
established under statutes and companies act.
State control:
The public enterprises are financed, owned and managed by the government may be a central
or state government.
Rendering service:
The primary objective of the establishment of public enterprises is to serve the public at large
by supplying the essential goods at a reasonable price and creating employment
opportunities.
Useful to various sectors:
The state enterprises serve all sectors of the people of the company. They do not serve a
particular section of the people in the community.
Monopoly Enterprises:
In some specific cases private sectors are not allowed and as such the public enterprises enjoy
monopoly in operation. The state enterprises enjoy monopoly in Railways, Post and
Telegraph and Energy production.
A direct channel for use of foreign money:

Sometimes the government receive foreign assistance from industrially advanced countries
for the development of industries. These advances received are spent through public
enterprises.
Public accountability:
The state enterprises are liable to the general public for their performances because they are
responsible for the nation.
Agent for implementing government plans:
The public enterprises run as per the whims of the government and as such the economic
policies and plans of the government are implemented through public enterprises.
Financial Independence:
Though investment in government undertaking are done by the government, they become
financially independent by arranging finance for day-to-day operation
Objectives of Public Enterprises:
In India, public enterprises have been assigned the task of realising the objectives laid down
in the Directive Principles of State Policy.
Public sector as a whole seeks: (a) to gain control of the commanding heights of the
economy, (b) to promote critical development in terms of social gain or strategic value rather
than on consideration of profit, and (c) to provide commercial surplus with which to finance
further economic development.
The main objectives of public enterprises in India are as follows:
1. Economic development:
Public enterprises were set up to accelerate the rate of economic growth in a planned manner.
These enterprises have created a sound industrial base for rapid industrialisation of the
country. They are expected to provide infrastructure facilities for promoting balanced and
diversified economic structure of development.
2. Self-reliance:
Another aim of public enterprises is to promote self-reliance in strategic sectors of the
national economy. For this purpose, public enterprises have been set up in transportation,
communication, energy, petro-chemicals, and other key and basic industries.
3. Development of backward Areas:
Several public enterprises were established in backward areas to reduce regional imbalances
in development. Balanced development of different parts of the country is necessary for
social as well as strategic reasons.
4. Employment generation:
Unemployment has become a serious problem in India. Public enterprises seek to offer
gainful employment to millions. In order to protect jobs, several sick units in the private
sector have been nationalised.

5. Economic surplus:
Public enterprises seek to generate and mobilise surplus for reinvestment. These enterprises
earn money and mobilise public savings for industrial development.
6. Egalitarian society:
An important objective of public enterprises is to prevent concentration of economic power
and growth of private monopolies. Public sector helps the Government to enforce social
control on trade and industry for ensuring equitable distribution of goods and services. Public
enterprises protect and promote small scale industries.
7. Consumer welfare:
Public enterprises seek to protect consumers from exploitation and profiteering by ensuring
supply of essential commodities at cheaper prices. They aim at stabilising prices.
8. Public utilities:
Private sector is guided by profit motive. Therefore, it is reluctant to invest money in public
utility services like water supply, gas, electricity, public transport. Therefore, the Government
has to assume responsibility for providing such services.
9. Defence:
Government has to set up public enterprises for production of defence equipment. Supply of
such equipment cannot be entrusted for private sector due to the need for utmost secrecy.
10. Labour welfare:
Public enterprises serve as model employers. They ensure welfare and social security of
employees. Many public enterprises have developed townships, schools, college and
hospitals for their workers.
Forms of Public Enterprise:
The organisation provides the framework, which substantially shapes interrelationships
amongst the public enterprises as well as the government. The following are the major
organisational forms of the public enterprises.
(a) Departmental Organisation
Under this form of organisation, a public enterprise is run as a department of the
Government. It is organised, financed and controlled like any other Government department.
A departmental undertaking is self-contained but it is under the overall control of the
departmental head and the ministry concerned.
It has, however, its own management in charge of and responsible for the undertaking. For
example, Posts and Telegraphs are a department in the Ministry of Communications.
Similarly, the Chittranjan Locomotive Works and the Integral Coach Factory are parts of the
Ministry of Railways. The Ordnance Factory the Gun Carriage Factory, the Delhi Milk
Scheme, the Tarapur Atomic Energy Plant, All India Radio, Doordarshan, the Government
Printing Press and Mint are other examples of departmental undertakings.

Salient Features
The essential features of departmental organisation are as follows:
1. Line authority: The ultimate responsibility for management lies with the Minister
concerned. The Minister in turn delegates his authority downward to the various levels, e.g.,
the departmental head, the chief executive of each undertaking, etc.
2. Government financing: The undertaking is financed through annual budget
appropriations by the parliament or the State Legislature. The revenues of the undertaking are
paid into the treasury.
3. Executive decision: A departmental undertaking is set up by an executive decision of the
Government without any legislation.
4. Accounting and audit: The undertaking is subject to the normal budgeting, accounting
and audit procedures applicable to other government departments.
5. Civil service code: The enterprise is managed by civil servants whose methods of
recruitment and service conditions are the same as for other civil servants of the government.
6. Sovereign immunity: Being an integral part of the Government, a departmental
undertaking cannot be sued at law without the consent of the government.
Merits
The main advantages of departmental organisation are as follows:
1. Accountability: Departmental organisation ensures maximum degree of parliamentary
control. In the words of Krishna Men on Committee, “accountability of departmental
undertakings to Parliament is complete, their management being under the Ministry
concerned”
2. Effective control: The management of the undertaking is under the absolute control of the
Minister concerned. Therefore, there is maximum degree of government control on the
enterprise.
3. Financial discipline: Tight budgetary, accounting and audit controls ensure that public
funds are not misused. There is unified and centralized management and any surplus earned
by the undertaking goes to the government treasury.
4. Policy instrument: The Government can realize its social, political and economic
objectives through departmental undertakings.
Demerits
A departmental undertaking suffers from the following drawbacks:
1. Loss of autonomy: Excessive public accountability and Parliamentary control result in
loss of freedom which is essential for efficient business operations. Frequent investigations
by Parliamentary committees hamper the efficient functioning an growth of departmental
undertakings.

2. Political influence: The undertaking is subject to political changes and its fate depends on
the balance of power between the ruling party and the opposition. There is lack of continuity
in management due to frequent changes in the Cabinet. Political considerations affect the
policy matters and long range planning is not possible.
3. Lack of flexibility: Complete centralisation of control and political interference in day-to-
day operations lead to lack of flexibility. There is bureaucracy and red-tape in day-to-day
administration. As a result decisions get delayed. Rigid adherence to time-consuming
procedures an formalities make it difficult to run the undertaking in a business like manner.
4. Lack of professional management: The undertaking is managed by civil servants who do
not often possess managerial knowledge and skill. Frequent transfers and seniority based
promotions tend to lower their motivation and morale. There is lack of initiative because the
civil servants are afraid of breaking new ground due to fear of criticism by the Minister and
the Parliament.
5. Inefficiency: Bureaucratic management, undue delays and insensitivity to consumer needs,
and cumbersome regulations result in low efficiency of operations. There is a tendency not to
take the losses seriously as these are borne by the treasury.
(b) Public Corporation
A public or statutory Corporation is an autonomous corporate body set up under a special Act
of Parliament or State Legislature. The Act or statute defines its objectives, powers and
functions. A public corporation seeks to combine the flexibility of private enterprise with
public ownership and accountability. a public Corporation is an organisation that is clothed
with the power of the government, but is possessed of the flexibility and initiative of private
enterprise.” A public Corporation is thus a combination of public ownership, public
accountability and business management for public end. Life Insurance Corporation of India,
Reserve Bank of India, Employees State Insurance Corporation, Industrial Development bank
of India are examples of public Corporation.
Features
The essential features of a public corporation are as under:
1. Corporate body: It is a body corporate established through a special Act of Parliament or
Stat Legislature. The Act defines its powers and privileges and its relationship with
government departments and ministries.
2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal.
It can acquire an own property in its own name. It can sue an be sued and can enter into
contracts in its own name.
3. Government ownership: The public corporation is wholly owned by the Central and/ or
State Government.
4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings
are provided by the government but it is supposed to be self-supporting. It can borrow money
from the public and is empowered to plough back its earnings.

5. Accounting system: The corporation s not subject to the budgetary, accounting and audit
regulations applicable to government departments. It is generally exempt from the rigid rules
applicable to the expenditure of public funds.
6. Management and personnel: A public corporation is managed by a Board of Directors
appointed by the Government. However, its employees need not necessarily be civil servants.
They can be employed on terms and conditions laid down by the corporation itself.
7. Service motive: The primary motive of the corporation is public service rather than private
profits. It is, however, expected to operate in a business-like manner.
Merits
A Public corporation offers the following advantages;
1. Operational autonomy: A public corporation enjoys internal autonomy as there is no
Parliamentary interference in its day-to-day working. Therefore, it can be run in a
businesslike manner. There is “a high degree of freedom, boldness and enterprise in the
management of undertakings and circumspection which is considered typical of government
departments”
2. Flexibility operations: Being relatively free from bureaucratic control, a public
corporation enjoys flexibility and initiative in business affairs. It can experiment in new lines
of activity and decisions can be taken without undue delay.
3. Continuity: Being a distinct legal entity, it is not affected much by political changes. It
can, therefore, maintain continuity of policy and operations.
4. Special privilege: A public corporation is often granted special privileges. The special law
by which by which it is created can be tailor made to meet the specific needs of the particular
situation.
5. Availability of managerial talent: A public corporation can employ professional
managers by offering them better terms and conditions or service than those available to
government servant.
Demerits
A public corporation suffers from the following drawbacks:
1. Difficult formation: It is very difficult and time-consuming to set up a public corporation
because a special law has to be passed in the Parliament.
2. Inflexibility: It is very difficult to change the objects and powers because the special law
has to be amended by the Parliament or the State legislature.
3. Excessive accountability: There are frequent debates and discussions on the reports and
working of public corporations. Ministerial and political interference in day-to-day working
do not allow internal autonomy in actual practice.
4. Clash of divergent interests: When the Board of Directors is constituted to give
representation to divergent interests, a conflict may arise. This will hamper the smooth and

efficient functioning of the corporation. Emphasis on service motive and lack of incentive
may further reduce the profitability of operations.
Suitability
Despite its weaknesses, the public corporation is generally considered appropriate for public
enterprises of industrial and commercial nature. It represents an appropriate combination of
public accountability and operational autonomy. According to Prof. Robson: “It is destined to
play as important a part in the field of nationalized industry in the 20the century as the
privately-owned corporation played in the realm of capitalist organisation in the 19the
century”.
The public corporation is suitable for undertakings requiring monopoly powers. e.g. public
utilities. It is also useful for undertakings which involve exercise of powers to be conferred
by legislature and enterprises which may not be self-supporting and have to be financed by
regular grants by the State. However, in India, “it would not be wrong to say that for the most
part the public corporation has lost the spirit but retained the form”. Bureaucratic
management, financial dependence on the government and lack of personal motivation are
the main reasons for this state of affairs
(c) Government Company
A Government company is a company in which 51 per cent or more of the total paid up
capital is held by the Central Government and/or State Governments. Any company which is
a subsidiary of such a company is also considered a government company. It is registered
under the Companies Act, 1956 either as a wholly-owned company (private company) or
public company in which the capita is held jointly by the State and private (Indian or foreign)
parties. A government company in which both the private concerns/individuals are
shareholders is known as a mixed ownership company. Hindustan Machine Tools (HMT),
Hindustan Steel Ltd., Indian Drugs and Pharmaceuticals Ltd., State Trading Corporation of
India, Hindustan Aeronautics Ltd., are examples of the government companies in India.
Salient Features
The main features of government company organisation are as follows:
1. Corporate body: A Government company is a body corporate registered under the
Companies Act. It has a separate legal entity of it shown. Therefore, it can own property in its
own name. It can sue and be sued in its own name.
2. Executive decision: It is created by an executive decision of the Government without
seeking the approval of the Parliament or the State legislature.
3. Ownership: A Government company may be wholly or part owned by the Government. In
case it is partly owned, the Government must hold not less than 51% of the paid up share
capital.
4. Regulation: It is created by the provisions of the Companies Act. However, the Central
Government may, by notification in the Official Gazette, direct that any of the Provisions of
the Act (except Sections 618, 619 and 69A) shall not apply to Government companies.
5. Independent staffing: The employees, except the deputation persons, of a Government
company are not Government servants. Their methods of recruitment and service conditions

may be different from those of Government employees. However, the Chief Executive is
generally appointed by the Government.
6. Financing: The whole or major part of the capital is provided by the Governments. But the
revenues of the company are not deposited into the treasury.
7. Separate accounting: A government company is not subject to the budgeting, accounting
and audit rules applicable to government departments.
Merits:
The government company form of organisation enjoys the following advantages:
1. Operational autonomy and flexibility. Being a separate legal entity, a government
company enjoys operational autonomy an can be run in a business-like manner., It enjoys
flexibility of operations due to freedom from bureaucratic control an red-tapism.
2. Professional management. A government company can employ professionally qualified
managers because it has its own personnel policies and practices. Availability of managerial
talent helps to improve efficiency and profitability.
3. Public accountability. The annual reports and working of government companies are
discussed and debated in the Parliament. Therefore, it is accountable to the public and its
management has to remain alert.
4. Discipline. The management of a government company is governed by the companies Act.
The healthy discipline of the Act helps to keep the management active and efficient. It puts
the enterprise at par with a private enterprise.
5. Private participation. Company form of organisation permits foreign collaboration and
private participation. The Hindustan Steel Limited has obtained technical and financial
assistance from the U.S. S.R., West Germany and the U.K. For its steel plants located at
Bhilai, Rourkela and Durgapur. Similarly, capital and technical knowledge of the private
sector can be obtained through a mixed ownership company.
6. Easy to establish and alter. It is very easy to establish Government Company as no law
needs to be passed by the Parliament and State legislature. Similarly, it objectives and powers
can be changed simply by altering its Memorandum of Association without seeking the
approval of the Parliament.
Demerits
Government company organisation suffers from the following drawbacks:
1. Avoids constitutional responsibility: Parliament's approval is not required for the
creation and alternation of a government company. Therefore, it may evade its constitutional
responsibility to the elected representatives of the public.
2. Ineffective control: Regulations of the companies Act become meaningless because the
controlling votes always lie in Government hand. Moreover, the Government can exempt the
enterprise form most of the provisions of the Act. Therefore, government company
organisation has been criticised as “a fraud on the companies Act and the Constitution.”

3. Doubtful autonomy: The operational autonomy of a government company exists only on
paper. In real practice, there is ministerial and bureaucratic interference in its functioning.
Since the directors are appointed by the Government they often fail to act independently.
4. Problem of deputation: The key personnel of a government company are often deputed
from the government departments. Such deputationists generally lack the necessary expertise
in commitment. As a result the efficiency of the enterprise is reduced.
5. Fear of exposure: The annual reports of government companies are placed before the
Parliament. Therefore, their working is exposed to the glare of public and press criticism. The
strong phobia of public accountability often results in undue publicity and unwarranted
criticism of the companies. Therefore, the management is of then demoralized and does not
take initiative to enter new areas of activity. This has an adverse effect on the efficiency and
profitability of the enterprise.
Business Cycles
The level of economic activity, especially under capitalism, changes in a wave like pattern.
Periods of good trade are followed by periods of bad trade. These ups and downs in the level
of economic activity are called business cycles.
Definitions:
The term business cycle has been defined in various ways by different economists.
Prof. Haberler : defined as follows, “The Business cycle in the general sense may be defined
as an alteration of periods of prosperity and depression of good and bad trade.”
Prof. Keynes: defines as follows, “A trade cycle is composed of periods of good trade
characterised by rising prices and low employment percentage altering with periods of bad
trade characterised by falling prices and high unemployment percentage.”
Prof. Mitchell: defines as follows, “Business cycles are species of fluctuations in the
economic activities of organised communities”.
Types of Business Cycles
1. Major cycle Jugler cycle: The duration of a major cycle will be about 10 Years. Since this
type of cycles was first stated by the French economist Jugler, they are known as Jugler
cycle.
2. Kitchin cycle or minor cycle: The duration of the minor cycle will be about 40 months. A
major cycle may be made up of two or three minor cycles. The up and down swings of the
major cycle are often interrupted by minor cycles. Since these cycles were observed by
Kitchin they are known as Kitchin cycles.
3. Very long cycles- Kondratieft Cycles : Very long waves in the economic activity are
first observed by the the Russian economist Kondratieft . They are known as Kondratieft
cycles.
4. Kuznets Cycles: Prof. Kuznets of America observed a cycle of 16 to 22 years and he
called it as Secular swing.

5. Building Cycles: It has been observed that the building industry is also subject up and
down swings in the building activity. The Duration of the building cycles is about 18 years. It
is observed during the period of 1830 to 1934 there are six building cycles in America. These
are observed by Prof.Warren and Pearson.
Features of Business cycles:
Business cycles have the following features:
1. Synchromism: Prosperity or depression spreads from one sector to the other sectors of the
economy. In other words it reflects the entire economy. It spreads from one country to
another country.
2. Wave – like movements: A business cycle is a wave is like movement. Prosperity is
followed by depression and depression again followed by prosperity.
3. Recurrence: Business cycles have a tendency of respective. They are rhythmic and occur
in a recognised pattern.
4. Cumulative: Business cycles are cumulative and self reinforcing. Depression itself
generates force of expansion and expansion contains itself the seeds of depression. There
cannot be indefinite depression or prosperity.
5. Not symmetrical: The peak and bottom of the business cycle are not symmetrical. The
turn from the upward to the downward is more sudden and violent than the turn from
downward to upward.
6. No definite periodicity: Some cycles are long while some are short. Some cycles are mild
but some are severe.
7. Not exactly similar: Different cycles resemble each other but not exactly similar. In some
cases the peak period of prosperity reaches full employment but in some cases the peak is
reached even before full employment is reached.

MEFA IV UNIT MATERIAL

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MEFA IV UNIT MATERIAL