TYPES OF BUSINESS ORGANISATION

Sole Proprietorship: Sole proprietorship is that form of business organisation; which is owned and
operated, at the initiative and risk of only one individual-called the sole proprietor. The individual
proprietorship is the form of business organisation, at the head of which stands an individual as one
who is responsible, who directs its operations and who alone runs the risk of failure.” Sole-
proprietorship is a one-man show.
James L. Lundy “The sole proprietorship is an informal type of business owned by one person
Features of Sole-Proprietorship:
1. There is individual ownership, in sole-proprietorship. One man alone-called the sole- proprietor is
the owner of all assets and resources of business.
2. The sole proprietor is solely responsible for the management of his business enterprise.
3. The sole proprietor is solely responsible for arranging finances for his business. He has to
contribute capital from his own sources. He may also borrow money from friends, relatives and
others-at his personal risk.
4. In one man business (i.e. sole proprietorship), there is independent decision-making by the sole
proprietor. He need not consult with others; while taking decisions for his own business.
5. The sole proprietor liability is unlimited, i.e. his personal properties may be utilized for payment
of business debts; in case assets of business are insufficient to pay business liabilities, in full.
6. Secrecy of business affairs can be easily maintained. The sole proprietor need not disclose secrets
of his business to anyone.
7. There is no sharing of profits, in sole proprietorship. All the profits of business belong only to the
sole proprietor. However, even all the losses of business fall on him exclusively.
Advantages of Sole-Proprietorship:
1. Easy to Start: Sole-proprietorship is easy to start. What is required to start the business is just a
decision of the sole-proprietor in this regard. No legal and procedural formalities are required to be
complied with for starting the sole-proprietary business.
2. Independent Decision-Making, Facilitating Flexibility of Operations: In sole proprietorship,
there is independent decision-making, by the sole proprietor. He is under no obligation to consult
with anyone while taking decisions pertaining to his own business. As such, sole proprietorship has
the advantage of flexibility of business operations i.e. according to circumstances; the sole
proprietor can effect changes in the operational life of business – to take maximum advantage of
favourable business opportunities.
3. Maintenance of the Secrecy: Sole proprietorship is the exclusive form of business organisation, in
which complete secrecy of business affairs is possible. The sole proprietor need not disclose his
business secrets to anyone. Capitalizing on his position, he may make soaring profits-keeping
business secrets absolutely confidential.
4. Personal Attention to Customers: The sole proprietor can pay personal attention to his customers;
and develop good customer relations. That is why, for businesses where personal attention to
customers is necessary; sole proprietary form of business organisation is most suitable e.g. tailoring
business, hair-cutting saloons etc.
5. Self-Employment: Starting a sole-proprietary business immediately generates “self- employment”
for the sole proprietor. This is a social advantage of sole proprietorship.
6. Self-Confidence: Sole-proprietary form of business organisation promotes the development of self-
confidence, because it is the sole proprietor alone, who is responsible for all decision-making of
business and for doing everything for the successful operational life of his business.
Limitations of Sole-Proprietorship:
1. Limited Finances: In an average case (exceptions apart), the financial capacity of the sole-
proprietor is limited. There is a limit to his capital contribution; and a limit to borrowing from
others. That is why; a sole proprietor cannot start a very large scale business enterprise.
2. Managerial Limit: Management limit is, perhaps, the biggest limitation of sole proprietorship.
Whether on his own or with the help of hired managers, a sole proprietor cannot manage an unduly
large business. According to span of management principle, no person can control the actions of a
very large number of subordinates effectively, i.e. there is a limit to effect management.
3. Unlimited Liability: The liability of the sole-proprietor is unlimited i.e. his personal properties
may be utilized for payment of business debts; in case assets of business are insufficient to pay
business liabilities, in full. This is, in fact, a very big limitation of sole- proprietorship.
4. Uncertain Life: The sole business is wholly uncertain. Serious disease, incapacity to work caused
by disablement may seriously affect business functioning & even lead to business closure.
5. Quick and Imbalanced Decisions: The negative aspect of independent decision-making by the
sole proprietor is that may-a times, the decisions taken by him are of a hasty and imbalanced nature.
Such decisions may lead to severe losses in the sole proprietary business; which would fall
exclusively on the sole proprietor.
6. Conservative Approach: There is lack of bold decision making by the sole proprietor. Due to the
unlimited liability, sole proprietor is very cautions & follows old methods of running the business.
Partnership Firm
Section 4, partnership as “the relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all”. Partnership “as an association of two or more
persons to carry on as co-owners a business for profit”. Partnership as an association of two or more
persons who have agreed to share the profits of a business which they run together.
According to J. L. Hanson, “a partnership is a form of business organisation in which two or more
persons up to a maximum of twenty join together to undertake some form of business activity”.
Main Features:
1. More Persons: There should be atleast two persons subject to a maximum of ten persons for
banking business and twenty for non-banking business to form a partnership firm.
2. Profit and Loss Sharing: There is an agreement among the partners to share the profits earned
and losses incurred in partnership business.
3. Contractual: Partnership is formed by an agreement-oral or written-among the partners.
4. Existence of Lawful Business: Partnership is formed to carry on some lawful business and share
its profits or losses. If the purpose is to carry some charitable works.
5. Utmost Good Faith and Honesty: A partnership business solely rests on utmost good faith and
trust among the partners.
6. Unlimited Liability: Like proprietorship, each partner has unlimited liability in the firm. This
means that if the assets of the partnership firm fall short to meet the firm’s obligations, the
partners’ private assets will also be used for the purpose.
7. Principal-Agent Relationship: The partnership firm may be carried on by all partners or any of
them acting for all. While dealing with firm’s transactions, each partner is entitled to represent the
firm & other partners. In this way, a partner is an agent of the firm and of the other partners.
Advantages of Partnership
1. Easy Formation: Like sole proprietorship, partnership form of organisation can be formed without
legal formalities. No formal documents are required. An agreement which may be oral or written is
sufficient to enter into partnership. Even partnership registration is not compulsory.
2. Large Resources: The partnership form of organisation enjoys large resources than a sole
proprietorship so that the scale of operation can be enlarged to get the benefit of large-scale
economies. More partners can be taken into partnership if capital needs are large.
3. Flexibility: The business is flexible, and being free from legal restriction on its activities. The
partners can introduce any change they consider desirable to meet the changed circumstances.
4. Combined Skill and Balanced Judgment: The partnership enjoys the benefit of the ability,
experience, and talents of the partners. This is the best advantage partnership enjoys over the sole
proprietor because everything is done by mutual consultation.
5. Sharing of Risk: Any loss sustained by the firm will be borne by all the partners equally with the
benefit that the burden borne by each partner will be much less whereas the sole proprietor has to
bear the entire loss of the business.
6. Maintenance of Secrecy: The partners of partnership firm can keep the business to themselves. In
case of a company, nothing is secret. A partnership firm is not expected to get its accounts audited
and published as is necessary for a joint stock company.
7. Prompt Decisions: The partners of partnership firm exercise joint responsibility and meet
frequently. This enables them to take decisions promptly, which is conducive to taking advantage
of sudden opportunities.
8. Unlimited Liability: The fact that the liability of each partner is unlimited and each partner
individually is liable to the full level of his private luck acts as a great check against speculation.
9. Easy Dissolution: Partnership Dissolution is very easy. The partnership can be dissolved on the
death, lunacy or insolvency of a partner. There are no legal formalities involved in the dissolution.
Disadvantages of Partnership:
1. Lack of Harmony: There is always likelihood of lack of harmony amongst the partners.
Difference of opinion very often results in disharmony and lack of management each partner tries
to blame the other partner about his dishonest dealings and working against the interest of the firm.
This result in disruption and ultimate dissolution of the firm.
2. Instability: The partnership form of organisation may come to an abrupt end on the death, lunacy
or insolvency of the partner. The partnership may also be closed if a single partner expresses his
desire to dissolve the partnership or to get it dissolved by the order of court. The lack of trust
among the partners may lead to dissolution of the firm.
3. Restriction on Transfer of Interest: In partnership, no partner can transfer his interest to the third
party. If he wants to do so, he will take consent of all the other partners. If any shareholder can
transfer his shares to the third party without the consent of other shareholders.
4. Liability after Retirement: In partnership form of business organisation, the retiring partner
continues to be liable for all acts done when he was a partner.
5. Unlimited Liability: Every partner is jointly liable for the debts of the firm. The dishonesty of one
partner can damage the entire business & put others in serious trouble.
6. Uncertain Future: The firm will have shutters down in case of death, insolvency, lunacy of any
one of the partners. New partners can be inducted into a firm, only when all existing partners agree
generally. Bringing someone from outside enjoying the trust of everyone is not an easy job.
7. Not a Legal Entity: a partnership firm has any legal entity separate from the members. It dies
upon the death of a partner or upon separation between them. Partners are responsible for all the
debts of the firm.
Types of Partnership:
(A) According to Objectives:
1. Partnership at Will: Such partnership exists on the will of the partners, i.e., it can be brought to
an end whenever any of the partners gives notice of his intention to do so. This kind of partnership
is formed to conduct the lawful business for an indefinite period.
2. Particular Partnership: A particular partnership is formed for undertaking a particular venture.
It comes to an end automatically with the completion of the venture.
(B) According to Tenure:
1. Fixed Term: Such a partnership is for a fixed period of time say 2 years, 5 years or any other
duration. The partnership comes to an end automatically at the expiry of the period.
2. Flexible Partnership: Partnerships which are formed neither for a fixed period nor for any
particular venture are called flexible partnerships.
(C) According to Nature:
1. General Partnership: In agreement, the provisions of the Indian Partnership Act 1932 are
applicable for general partnerships in which the liability of each partner is unlimited.
2. Limited Partnership: In limited partnership some or all except one partner have a limited
liability to the extent of capital contributed by them. All the partners in partnership cannot have
limited liability.
Kinds of partners
1. Active Partner: A partner who is actively engaged in the conduct of a business is known as active
partner. He may be called a working partner. He takes an active part in the management and
administration of the business. His liabilities are unlimited.
2. Sleeping or Dormant Partner: A sleeping partner is one who contributes capital, shares profits
and contributes to the losses of the firm but does not participate in the working of the business. He
is liable for the liabilities of the firm like other partners. The term ‘sleeping partners’ implies one
who is neither an active partner nor known to the public as a partner.
3. Nominal Partner: A nominal partner is one who does not contribute any capital or share in profits
but lends his name and credit to the partnership firm. A nominal partner is liable to third parties
who deal with the firm on the supposition that he is a partner in the firm.
4. Partner in Profits Only: A partner sharing the profits of the business without making himself
responsible for losses, if any, is known as partner in profits only. He contributes capital and is also
liable to the third parties like other partners. Such partners are not allowed to take part in the
management and administration of the business.
5. Minor as a Partner: A minor cannot become a partner in the partnership firm because according
to Indian Contract Act, a minor cannot enter into a contract. However, a minor may be admitted to
the benefits of partnership with the consent of all the partners.
6. Incoming Partner: A person who is admitted as a partner in an existing partnership is called an
incoming partner. A new person can be taken as a partner with the consent of all the partners.
7. Outgoing Partner: A partner leaving the existing firm is known an outgoing or retiring partner.
An outgoing partner is liable for the debts & obligations incurred before his retirement to give
public notice of his intention to retire from the partnership firm.
Rights of Partners
1. Right to take part in the conduct of business: Each partner has the right to participate in the
conduct of the business of partnership. It is also possible that a partner might only invest money in
the business and give the right to conduct the business to other partners. It is essential that a partner
has the right to participate in the conduct of his business.
2. Right to express opinion: In case there is a disagreement on a business-related issue in the normal
course of business, it is settled by a consensus among the partners. But, before consensus is
reached, each partner has the right to express his opinion. If the matter is related to the policy or
profitability of the business, a consent amongst partners.
3. Right of access to accounts: Every partner has the right to access the books of account of the firm,
examine the books and take a copy of any account.
4. Right to share in profit: Every partner is entitled to share in the profit of the firm equally.
Different proportions can be stipulated in the partnership deed.
5. Interest on capital: No partner has the right to get interest on the capital invested by him in the
firm. But if any interest is paid to the partners by agreement, it is only payable out of the profits of
the firm.
6. Right to interest on additional capital or loan: If a partner has invested more than his share of
the capital, or has advanced any money as a loan to the firm, he has the right to get interest on the
additional capital or loan to the firm at the rate agreed upon. If no rate of interest has been agreed
upon, the partner has a right to receive interest at the rate of six percent.
7. Right in the firm’s property: As a rule, each partner is a joint owner of the firm’s property and,
unless there is an agreement to the contrary, each partner is presumed to have an equal share. Such
property includes all property purchased with firm’s money, and is used exclusively for the
conduct of the firm’s business.
8. Right to leave the firm: Every partner has the right to leave the firm with the consent of other
partners. In a partnership at will, a partner has to give a notice of his intention & leave the firm.
Duties of Partners
1. To work for maximum common interest: Mutual interest is the cornerstone of a partnership. It,
therefore, becomes the duty of a partner to conduct the business of partnership for the maximum
common interest of the partners.
2. To be faithful: Every partner owes it to himself to be just and faithful to other partners.
3. To give correct accounts: It is the duty of partners to render true or correct account to the
partnership firm. It is also his duty to let the other partners inspect such accounts and take copies, if
they so desire.
4. To give correct information: Each partner is an agent of the other, and as such, is obliged to give
correct and full information to the other partners about the conduct of the firm’s business.
5. To indemnify for fraud: If the firm or any partner thereof is put to a loss on account of fraud by a
partner in the conduct of the firm’s business, the liability of the partner who has committed such
fraud is absolute, and he is bound by law to compensate the firm or the partner for such loss.
6. To work without remuneration: Unless there is an agreement to the contrary, a partner is duty-
bound to work without remuneration in conducting the business of the partnership firm.
7. To share the loss: Just as the partners have a right to share the profit of a business they also have
an obligation to share the loss equally or as defined in the partnership agreement.
8. To give account of personal profit: If a partner has earned any secret profit by using the name of
the firm, it is his duty to return such profit to the firm.
9. Not to transfer rights and interests: Partnership is based on trust and good faith and a partner is
selected on that criterion. A partner, therefore, does not have the right to transfer his rights and
interests to another person without the consent of other partners.
10. To work within his authority: Every partner must do such acts that are within his authority. He
must not go beyond his authority to do any act.
11. To maintain secrecy: It is the duty of the partner to keep the trade secrets of the firm intact so that
the competitors do not take advantage of the firm’s potential capacity to do business.
Registration of Partnership: A Partnership is one of the most important forms of a business
organization, where two or more people come together to form a business and divide the profits
thereof in an agreed ratio. A Partnership is easy to form, as compared to companies.
Following details are required in a partnership deed: 
1. General Details:
 Name and address of the firm
 Name and address of all the partners
 Nature of business
 Date of starting of business Capital to be contributed by each partner
 Capital to be contributed by each partner
 Profit/loss sharing ratio among the partners
2. Specific Details:
Apart from these, certain specific clauses may also be mentioned to avoid any conflict:
1. Interest on capital invested, drawings by partners or any loans provided by partners to firm
2. Salaries, commissions or any other amount to be payable to partners
3. Rights of each partner, including additional rights to be enjoyed by the active partners
4. Duties and obligations of all partners
5. Adjustments to be followed on account of retirement or death of a partner or dissolution of firm.
6. Other clauses as partners may decide by mutual discussion
How to register the partnership firm? An application form along with fees is to be submitted to
Registrar of Firms of the State in which firm is situated. The application has to be signed by all
partners or their agents.
Documents to be submitted to Registrar are
 Application for registration of partnership (Form 1)
 Specimen of Affidavit
 Certified original copy of Partnership Deed
 Proof of principal place of business (ownership documents or rental/lease agreement)
Limited Liability Partnership: Limited Liability Partnership Act, 2008, an LLP is a body corporate
formed & incorporated under this Act. It is a legal entity separate from that of its members.
Features:
1. An LLP must be registered under the LLP Act 2008.
2. It is a body corporate having a separate entity of its own.
3. It has perpetual succession. Any change does not affect its existence, rights & liabilities,
4. Any individual or a body corporate can be a partner in an LLP.
5. Every LLP must have at least two partners.
6. There must be at least two designated partners and one of them must be a resident in India.
7. An LLP must maintain proper books of accounts as per the double entry system.
Merits:
1. An LLP enjoys stability as changes in partners do not affect its existence.
2. The liability of an LLP and its partners in Limited.
3. A body corporate and a foreigner can be partners in an LLP.
4. An LLP can raise, large amount of funds as there is no restriction on the number of members and
risk involved is limited.
Demerits:
1. Time and money are involved in the formation and registration of an LLP.
2. There is less flexibility of operations because an LLP has to comply with certain legal formalities.
3. There is lack of business secrecy as an LLP has to file the prescribed documents with the Registrar.
Its accounts are open to the public for inspection.
4. The LLP gives an entrepreneur the twin benefits of limited liability and a flexible internal structure.
It is also free from dividend distribution tax and minimum alternate tax.
Joint Stock Company: A joint stock company is an incorporated and voluntary association of
individuals with a distinctive name, perpetual succession, limited liability and common seal, and
usually having a joint capital divided into transferable shares of a fixed value. Joint Stock Company
has become the central form of ownership for large scale enterprises because it enables collection of
vast financial and managerial resources with provision for limited liability and continuity of
operations. A company is an artificial person created by law having separate legal entity with
perpetual succession and common seal. “Thus, a company is an artificial legal person having an
independent legal entity.
In private company minimum 2 members and maximum 50 according to 1956 companies act and 200
according to companies act 2013 but in public company minimum 7 members & maximum unlimited.
Characteristics of Company:
1. Artificial Person: A company is a creation of law, and is, sometimes called an artificial person. It
does not take birth like natural person but comes into existence through law. But a company enjoys
all the rights of a natural person. It has right to enter into contracts and own property.
2. Separate Legal Entity: A company is an artificial person and has a legal entity quite distinct from
its members. Being separate legal entity, it bears its own name and acts under a corporate name; it
has a seal of its own; its assets are separate and distinct from those of its members. Its members are
its owners but they can be its creditors simultaneously as it has separate legal entity.
3. Perpetual Succession: The life of company is not related with the life of members. The death,
insolvency does not, in any way, affect the existence of a company. According to Tennyson- “For
men may come, men may go, But I go on forever.” In the case of company it may be said that
members may come and members may go but the company goes on.
4. Common Seal: On incorporation a company becomes legal entity with perpetual succession and a
common seal. The common seal of the company acts as the official signature of the company. The
name of the company must be engraved on the common seal. A document not bearing the common
seal of the company is not authentic and has no legal importance.
5. Limited Liability: If anything goes wrong with the company his risk is only to the extent of the
amount of his shares. If some amount is uncalled upon a share, he is liable to pay it and not beyond
that. The creditors of a company cannot get their claims satisfied beyond the assets of the company.
The liability of members of a company ‘limited by shares’ & ‘limited by guarantee’.
6. Right to Property: A company, being a legal person has a right to acquire, possess and dispose of
property in its own name. Its property is not that of the shareholders. Although the members
contribute the capital and assets of company, the property of the company will not be considered as
the joint property of the members constituting the company.
7. Transferability of Shares: A shareholder can transfer his shares to any person without the consent
of members. A company can put certain restriction on the transfer of shares but it cannot altogether
stop it. Private company can put more restrictions on the transferability of shares.
8. Voluntary Association: A company is a voluntary association of persons to earn profits. It is
formed for the accomplishment & whatsoever profit is divided among its shareholders. A company
cannot be formed to carry on an activity against the public policy & no profit motive.
9. Representative Management: The shareholders of company are widely scattered. It is not possible
for all the shareholders to take part in the management. They leave their task to the representatives
the Board of Directors and the company is managed by Board of Directors.
Merits of Company Organisation:
1. Limited Liability: Shareholders of a company are liable only to the extent of the face value of
shares held by them. Their private property cannot be attached to pay the debts of the company.
This encourages people to invest their money & contributes to the growth of the company.
2. Large Financial Resources: Company form of ownership enables the collection of huge financial
resources. The capital of a company is divided into shares of small denominations so that people
with small means can also buy them. Different types of securities may be issued to attract various
types of investors. There is no limit on the number of members in a public company.
3. Continuity: A company enjoys uninterrupted business life. As a body corporate, it continues to
exist even if all its members die or desert it. On account of its stable nature, a company is best
suited for such types of business which require long periods of time to mature and develop.
4. Transferability of Shares: A member of a public limited company can freely transfer his shares
without the consent of other members. Shares of public companies are generally listed on a stock
exchange so that people can easily buy and sell them. Facility of transfer of shares makes
investment in company liquid & encourages investment of public savings into the corporate sector.
5. Professional Management: Due to its large financial resources and continuity, a company can
avail of the services of expert professional managers. Employment of professional managers having
managerial skills and little financial stake results in higher efficiency and more adventurous
management. Benefits of specialization and bold management can be secured.
6. Scope for Growth and Expansion: There is considerable scope for the expansion of business in a
company. On account of its vast financial and managerial resources and limited liability, company
form has immense potential for growth. With continuous expansion & growth, a company can reap
various economies of large scale operations, which help to improve efficiency and reduce costs.
7. Public Confidence: A public company enjoys the confidence of public because its activities are
regulated by the government under the Companies Act. Its affairs are known to public through
publication of accounts and reports. It can always keep itself in tune with the needs and aspirations
of people through continuous research and development.
8. Diffused Risk: The risk of loss in a company is spread over a large number of members. Therefore,
the risk of an individual investor is reduced.
9. Social Benefits: The company organisation helps to mobilise savings of the community and invest
them in industry. It facilitates the growth of financial institutions and provides employment to a
large number of persons. It provides huge revenues to the Government through direct and indirect
taxes.
Demerits of Company:
1. Difficulty of Formation: It is very difficult and expensive to form a company. A number of
documents have to be prepared and filed with the Registrar of Companies. Services of experts are
required to prepare these documents. It is very time-consuming and inconvenient to obtain
approvals and sanctions from different authorities for the establishment of a company.
2. Excessive Government Control: A company is to elaborate statutory regulations in its day-to-day
operations. It has to submit periodical reports. Audit and publication of accounts is obligatory. The
objects and capital of the company can be changed only after fulfilling the prescribed legal
formalities. These rules and regulations reduce the efficiency and flexibility of operations.
3. Lack of Motivation and Personal Touch: There is divorce between ownership and management
in a large public company. The affairs of the company are managed by the professional and salaried
managers who do not have personal involvement and stake in the company. Absentee ownership
and impersonal management result in lack of initiative and responsibility. Incentive for hard work
and efficiency is low. Personal contact with employees and customers is not possible.
4. Delay in Decisions: Too many levels of management in a company result in red-tape and
bureaucracy. A lot of time is wasted in calling and holding meetings and in passing resolutions. It
becomes difficult to take quick decisions and prompt action with the consequence that business
opportunities may be lost.
5. Conflict of Interests: Company is the only form of business where in a permanent conflict of
interests may exist. In proprietorship there is no scope for conflict and in a partnership continuous
conflict results in dissolution of the firm. But in a company conflict may continue between
shareholders & board of directors or shareholders & creditors or between management and workers.
6. Lack of Secrecy: A company is required to disclose and publish a variety of information on its
working. Widespread publicity of affairs makes it almost impossible for the company to retain its
business secrets. The accounts of a public company are open for inspection to public.
7. Social Evils: Giant companies may give rise to monopolies, concentration of economic power in a
few hands, interference in the political system, lack of industrial peace, etc.
Cooperative enterprises: Co-operative enterprises are distinct from the other forms of business
enterprises. While all the other forms of business enterprises have profit as the motive, cooperative
enterprises are service oriented. They are basically formed to render services to their members and
protect them from being exploited by producers, sellers and middlemen.
Origin / History of Cooperative Societies: The founder of co-operative movement was Robert Owen
of England. The first Co-operative retail store was established in the year 1844 in Rochdale, England.
At that time, the textile workers in England were paid very low wages. Prices of essential items were
very high due to high profit margins enjoyed by the traders.
Features of Cooperative Societies
1. Separate legal entity: A co-operative society has separate legal entity. It is distinct from the
members who constitute it. It can enter into contracts in its own name. It can sue and be sued in its
own name
2. Voluntary association: It is a voluntary association of persons. Members out of their own free will
come together to promote their interests. Membership is not denied to any person who wants to
become the member of the society. A member can leave the society any time he likes. At the time
of leaving he can withdraw his capital from the society.
3. Democratic set-up: Cooperatives are managed in a democratic manner. Members elect a managing
committee in the annual general meeting and formulate the policies to be followed. The managing
committee manages the affairs of the co-operatives based on the policies laid down.
4. Welfare motive: The objective of a cooperative society is not to earn profits but to serve the
members & promote their interests. Cooperative societies can earn profits by providing services to
nonmembers at a higher price. A portion of the profits are spent for the welfare of the community.
5. Self Help: Co-operatives are basically formed to protect its members against exploitation by private
business. Self-help is the guiding spirit behind the co-operative movement. The motto of co-
operatives is, ‘All for one and one for all.’
6. Common economic objectives: Members of co-operative societies have common economic
objectives. The objectives may be to buy quality goods at cheap prices, marketing their produce or
availing of credit facilities.
7. Compulsory registration: Every co-operative society has to be registered under the Co-operative
Societies Act, 1912 or the relevant State Cooperatives Act, as the case may be.
8. Membership: Membership of the cooperative society is open to all. Any person who desires to
become the member of the society can become a member.
9. Low membership fees: The membership fee is kept low so that it is affordable and is within
everyone’s reach. Even those with meager financial resources should be able to become members
and benefit from them.
10. One member one vote: Irrespective of the number of shares held, one member is entitled to only
one vote. This ensures that all members have an equal say in the management affairs. Members
cannot vote by proxy.
11. Finances: A co-operative society sells shares to its members. The money raised through sale of
shares is an important source of finance. It can also raise money by way of loans from the
government and apex cooperative institutions.
12. Equitable distribution of surplus: The surplus generated by cooperative societies is distributed in
the form of dividend and bonus. The surplus has to be distributed among the members in an
equitable manner.
Advantages: The cooperative form of organization offers the following advantages:
1. Easy to Form- A cooperative society is a voluntary association and may be formed with a
minimum of ten adult members. Its registration is very simple and can be done without much legal
formalities.
2. Open Membership- Membership in a cooperative organisation is open to all people having a
common interest. A person can become a member at any time he likes and can leave the society at
any time by returning his shares, without affecting its continuity.
3. Limited Liability- The liability of the members of a co-operative society is limited to the extent of
capital contributed by them. They do not have to bear personal liability for the debts of the society.
4. Stability- A co-operative society has a separate legal existence. It is not affected by the death,
insolvency, lunacy or permanent incapacity of any of its members. It has a fairly stable life and
continues to exist for a long period.
5. Economical Operations- The operation of a cooperative society is quite economical due to
elimination of middlemen and the voluntary services provided by its members.
6. Government support- Government gives all kinds of help to co-operatives, such as loans at lower
rates of interest and relief in taxation.
7. Economic Advantages- Cooperative societies provide loans for productive purposes and financial
assistance to farmers and other lower income earning people.
8. Low Management Cost- Some of the expenses of the management are saved by the voluntary
services rendered by the members. They take active interest in the working of the society. So, the
society is not required to spend large amount on managerial personnel.
9. Mutual Co-Operation- Cooperative societies promote the spirit of mutual understanding, self-
help and self-government. They save weaker sections of the society from exploitation by the rich.
The underlying principle of co-operation is “self-help through mutual help.”
10. No Speculation- The share is always open to new members. The shares of cooperative society are
not sold at the rates higher than their par values. Hence, it is free from evils of speculation in share
values.
Disadvantages: The following limitations and drawbacks:
1. Limited Capital- Cooperatives are usually at a disadvantage in raising capital because of the low
rate of return on capital invested by the members.
2. Inefficient Management: The management of co-operative society is generally inefficient because
the managing committee consists of part-time & inexperienced people. Qualified managers are not
attracted towards a cooperative to pay adequate remuneration.
3. Absence of Motivation- A cooperative society is formed for mutual benefit and the interest of
individual members is not fully satisfied. There is no direct link between effort and reward. Hence,
members are not inclined to put their best efforts in a cooperative society.
4. Differences among Members- The co-operative ideal is exhausted, differences & group conflicts
arise among members. Then, it becomes difficult to get full co-operation from the members. The
selfish motives of members begin to dominate and service motive is sometimes forgotten.
5. Lack of Competition- Cooperatives, generally, do not face any competition. Markets for their
goods & services are more or less ready. Hence, there is possibility of slackening of efforts.
6. Lack of Secrecy- The affairs of a co-operative society are openly discussed in the meetings of the
members. Every member is free to inspect the books and records of the society. Therefore, it
becomes difficult to keep the secrets of business.
7. Lack of Incentive and Initiative- In a cooperative society form of organisation everybody is the
owner of the society and over a period of time it becomes lifeless due to a lack of incentive and
initiative as everybody is the owner, but business does not belong to any one of them.
8. Corruption- It is the worst demerit from which co-operative societies suffer, it is the biggest
hindrance in the development and growth of business.