UNIT-2: Forms of organizing Private and Public-Sector Business Enterprises

Private Sector Business Enterprises: (i) Sole Proprietorship - Definition, features, merits,
limitations & suitability. (ii) Partnership - Definition, Partnership Act, features, types, merits, limitations,
suitability. (iii) Joint-Stock Company - Definition, Companies Act, features, types, merits, limitations,
suitability.
Public Sector Business Enterprises: Definition, features, objectives, merits, problems.

1. Introduction toBusiness:
1.1. What is Business?
Business is the organized efforts of enterprises to supply goods & services to consumers for a profit.
(or) Necessary arrangements or Steps need to be taken to establish relationship of 3M(Men, Money
& Machinery) for Trading. And business can also be defined as an organization or economic system
where goods and services are exchanged for one another or for money which is called as
commercial activity through firm. A firm is a business unit which hires productive resources for the
purpose of producing goods and services”. To define the firm in a right way is an independently
administered business unit. There are few contemporary business goals to achieve from any
firm:

• Profit (Bottom-Line)
• Growth
• Market Leadership
• Consumer satisfaction
• Employee satisfaction
• Quality products & services
• Service to society
1.2 Characteristic Features of Business:

1. Distinct Ownership: The term ownership refers to the right of an individual or a group of
individuals to acquire legal title to assets or properties for the purpose of running the
business. A business firm may be owned by one individual or a group of individuals jointly.

2. Lawful Business: Every business enterprise must undertake such business which is lawful, that is,
the business must not involve activities which are illegal.

3. Separate Status and Management: Every business undertaking is an independent entity. It has its
own assets and liabilities. It has its own way of functioning. The profits earned or losses incurred
by one firm cannot be accounted for by any other firm.
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 4. Dealing in goods and services: Every business undertaking is engaged in the production and/or
distribution of goods or services in exchange of money.

5. Continuity of business operations: All business enterprise engage in operation on a

continuous basis. Any unit having just one single operation or transaction is not a business unit.

6. Risk involvement: Business undertakings are always exposed to risk and uncertainty. Business
is influenced by future conditions which are unpredictable and uncertain. This makes business
decisions risky, thereby increasing the chances of loss arising out of business.

From the above features and characteristics of a firm, it will be clear that a firm has to perform
several functions simultaneously – i.e. to produce a commodity, to sell and distribute the
commodity, to advertise the commodity and to perform all those things which will be required
to survive competition. To cap it all, the firm is expected to make as much as possible. Theoretically
speaking, a firm is expected to organize all the factors of production in the most profitable manner.
If one studies the structure and function of modern firm the above definitions will appear to be too
simple, because in modern times the firm is expected to perform so many other functions.

2.FormsofBusinessOrganizations:
There are three categories of sectors to divide all the forms of business organizations as follows:

A. Private Sector :

In a capitalist economy, the first four types of business organizations are set up in the private sector. The
private sector is owned by private individuals, families or groups of individuals. It is characterized by
private ownership in the means of production, economic freedoms and profit motive .In addition to
the first three types of business organization, there are also Joint Hindu Family Firms in the private
sector in India and Business Organizations of the New Millennium.

B. Public Sector :

The public sector includes public or state enterprises like railways, post sand telegraphs, etc. The public
sector is owned and controlled by the State. In India we have also a number of public enterprises
like Hindustan Machine Tolls, Life Insurance Corporation, Bharat Heavy Electrical Ltd. etc. They are
constituted as companies, public corporations and departmental undertakings.

C. Joint Sector:

Joint sector organizations or enterprises are jointly owned by the public and private sectors. But day-
to-day management is left to the private sector.
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 The following chart indicates various forms of business organization:

Types of Business Organization

Private Sector Public Sector Joint

Sector
6) Departmental undertakings 9) Public Private
7) PublicCorporations Organizations
8) Government Companies

Capitalist Form Non – Capitation Form

1) Proprietary Firms 5) Co-operative Organizations Or
Proprietorship
2) Partnership
3) Joint-Stock Companies
4) Joint-Hindu Family Firms
2.1 SOLE PROPRIETORSHIP OR PROPRIETARY FIRMS:
'Sole' means single and 'proprietorship' means ownership. It means only one person, or an
individual becomes the owner of the business. Thus, the business organization in which a single
person owns, manages and controls all the activities of the business is known as sole proprietorship
form of business organization. The individual who owns Business firm and runs the sole
proprietorship business is called a ‘sole proprietor’ or ‘sole trader’.

A sole proprietor pools and organizes the resources in a systematic way and controls the
activities with the sole objective of earning profit. Is there any such shop near your locality where a
single person is the owner? Small shops like vegetable shops, grocery shops, telephone
booths, chemist shops, etc. are some of the commonly found sole proprietorship form of business
organization. Apart from trading business, small manufacturing units, fabrication units, garages,
beauty parlors, etc., can also be run by a sole proprietor. This form of business is the oldest and most
common form of business organization.
In such a unit, a single man called proprietor organizes a business. It is owned, managed,
controlled and directed by him. He fixes the amount of capital to be invested. (his own or
borrowed), uses his own labor and that of his family members, hires factors, whenever
necessary, organizes production as efficiently as possible and markets the product at the highest
possible prices. He assumes full responsibility for all business fails.
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Characteristic features : The definition of sole proprietorship gives its characteristics or
features which are as follows:

(i) Ownership by a Single Person : A single person initiates a business whose ownership
lies in his hands . He enjoys full powers to fix the lay-out of his business firm.

(ii) Organization and Control: A single person organizes and manages his business according
to his experience and efficiency. He has full powers to conduct his business in any manner he
likes. He need not consult any one. He is also not required to take approval or agreement
from others.

(iii) Capital: The owner uses his own capital. He may also borrow capital to invest it in his business
and thereby expand it.

(iv) No Sharing of Profits and Losses: All the profits of business earned by the owner are
enjoyed by him alone. The profits of business are not shared with other persons. On the other
hand, if there are losses, he has to bear them alone entirely.

(v) Unlimited Liability: His liability is unlimited for all his debts. If he fails to clear his business
debts, all his private property can be attached by his creditors.

(vi) Easy to Form: It can be easily set up. It is not subject to any special legislation. So no legal
formalities are involved in starting such a concern by any person who is of major age, i.e. 18
years and above.

(vii) Legal Status: A sole trading concern cannot be legally separated from its owner or
proprietor. The owner and organization are the same. The life of such a concern depends
upon the life of its proprietor.

These types of organization are found in agriculture, retails trade, hotel, printing press, tailoring
etc.
Merits:

1. Easily Started & Winding Up: Such a concern can be easily started without any legal
formalities. There is also little government interference also it is simple to manage and
control and requires a small amount of capital for generally it adopts labor – intensive
techniques. He can also get finance on personal credit. Just a sole trader can easily start a
business, so also he may easily wind up his business at any time.

2. Prompt Action: The proprietor can take quick decisions and prompt action
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 regarding his business, its location, method of production etc. He need not consult others
about these problems.

3. Personal interest: He would always take personal interest in the business with a view to
finding out causes of loss and waste of resources. He would then take measures to
remove them. Thus, he would maximize his profits.

4. Requirements of Consumers: He has direct contact with his customers, so he can

personally attend to all their requirements. He can produce goods according to their
desires, tastes and needs. His attempts to meet their needs will help him to increase his
sales and profits. Thus, it is suitable for small business.

5. Cordial Relations: He has direct and continuous contact with his employees. So he can
establish cordial relations with them. This is because he will be in a continuous touch with
them. He can also supervise them directly. Hence any scope for conflict between workers
and himself can be avoided.

6. Efficiency, Hard Work and Direct Gain: He will always attempt to work hard, efficiently
and continuously. This helps to enjoy maximum profits and avoid any loss for his liability
which is unlimited.

7. Business Secrecy: He can carry on his business in secrecy. He is not required to give
publicity to the activities of his concern nor disclose his profits to the public. He can also
make use of any new idea for his business.

8. Economy in Expenses: It's overhead expenses are low. Hence it is economical. The
number of employees employed by him is low. Hence the working expenses can be
minimized.

9. Flexibility and Elasticity: Any change in business can be easily introduced without
consulting anybody. So it is flexible and elastic. It can easily and quickly adapt to changes
in the market conditions.

10. Transferability: It is easily transferable to heirs.

11. Self-Employment: It promotes self-employment, self-reliance, development of

one’s personality, self-confidence etc.

12. Lower Tax Burden: It is also subject to lower tax burden than other forms of business
organizations.
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 13. Concentration of Wealth : It helps prevent concentration of wealth and income in
the hand of a few persons.

Demerits:

1. Limited Capital: The amount of capital which an individual can command is limited. He has to
depend mainly on his own savings. So it would be difficult for him to expand his business
activities much. It may also be difficult for him to raise additional capital by borrowing from
banks. Hence, the size of his business is small.

2. Unlimited Liability and Risks: It may be very risky for him to invest in a particular
business. This is because if he adopts a wrong policy, he may lost everything and also become
insolvent. This is because his liability is unlimited. This implies that if his debts exceed his
business assets and if he suffers a loss, he will have to use his private property to clear his
debts. So, the unlimited liability restricts his business activities.

3. Lack of Skill for Efficient Management: It may not also be possible for him to attend
personally to all the activities of his concern such as correspondence, maintaining
accounts, advertisements, supervision, arrangement of finance, etc. He cannot undertake all
activities alone efficiently. Further his business activities may be spread in different places and
he may not possess all the qualities and skills required for an efficient management,
supervision and control. The limited managerial ability may make it difficult for a sole
proprietor to face competition in his business which is subjected to many changes.

4. No Economics of Scale: A sole trader cannot secure many of the economics of large –
scale production such as purchase of raw materials at low prices, advantages of
specialization etc. and minimize its cost of production or running business.
5. Weakness in Bargaining and Competition: On account of the limitations of capital,
ability and skill, the proprietor is likely to remain weak in respect of bargaining and competition.
He may have to compromise many times regarding the terms and conditions of purchase of
materials or borrowing loans from the finance houses or banks.

6. Wrong Decisions: All the decisions about his business are taken by the sole
proprietor. Some of his decisions may prove to be wrong. This may involve him in losses
and ruin.

7. Closure on Death: Because of uncertainty there is no continuity in the duration of the

business. Such a concern may be closed on the death of the proprietor. This is because he
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 may not have heirs to run it or they may not like to continue in his business. Hence, the
business may not be continued.

2.2 PARTNERSHIP:

It is basically a relation between two or more persons who join hands to form a business
organization with the objective of earning profit. The persons who join hands are individually
known as ‘Partner’ and collectively a ‘Firm’. The name under which the business is carried on is
called ‘firm name’. Sultan Chand & Co, Ram Lal & Co, Gupta & Co are the names of some
partnership firms.

The Indian Partnership Act, 1932, defines the partnership as “the relation between two or more
persons who have agreed to share profits of a business carried on by all or any one of them acting
for all.”

The English Partnership Act, 1980 defines partnership as “the relation which subsists between persons
carrying on a business in common with a view to profit.”

So a partnership refers to an organization owned and managed by two or more persons. They pool
their capital and undertake all risks associated with their business. Thus, there is joint ownership,
management, control and risk – taking.

The partners provide the necessary capital, run the business jointly and share the
responsibility. You must be thinking how much capital each partner contributes? Do all the partners
jointly manage the business or can any of them manage the business on behalf of others? Who will
take the profits? If there is any loss, then who will suffer the loss? Yes, these are the few questions
that might be coming to your mind. Actually, when you invite your friends to start such a business,
it should be the duty of all of you to decide (i) the amount of capital to be contributed by each one of
you; (ii) who will manage; (iii) how will the profits and losses be shared. Thus, there must be some
agreement between the partners before they actually start the business. This agreement is termed
as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running
the partnership firm. This agreement may be oral or written. Actually, it is always better to insist
on a written agreement among partners in order to avoid future controversies. The following contents
are to be included in ‘partnership’ deep or ‘agreement’:

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Characteristics or Features of a Partnership Firm:

1. Two or more Members - You know that the members of the partnership firm are called
partners. But do you know how many persons are required to form a partnership
firm? At least two members are required to start a partnership business. But the number of
members should not exceed 10 in case of banking business and 20 in case of other business. If
the number of members exceeds this maximum limit then that business cannot be termed as
partnership business. A new form of business will be formed, the details of which you will
learn in your next lesson.

2. Agreement: Whenever you think of joining hands with others to start a partnership
business, first of all, there must be an agreement between all of you. This agreement contain
so
• The amount of capital contributed by each partner;
• Profit or loss sharing ratio;
• Salary or commission payable to the partner, if any;
• Duration of business, if any ;
• Name and address of the partners and the firm;
• Duties and powers of each partner;
• Nature and place of business ; and
• any other terms and conditions to run the business.

3. Unlimited Liability: The liability of all partners is unlimited. Hence, all partners are, jointly and
severally, held responsible for the losses or debts of the firm to the full extent of their
personal assets. Creditors are entitled to attach assets of any one partner or those of
others so as to recover their dues.
4. Contact: It is formed voluntarily by an agreement between two or more persons carrying
on a particular business for common benefit. It may also be formed to carry on certain trade,
profession or lawful occupation. The partners can continuously be in touch with the
customers to monitor their requirements.

5. A Partnership Deed: A partnership is formally based upon a partnership deed or

agreement. It indicates the names of partners, the shares of individual partners in the capital,
their rights and duties, proportion for sharing profits and losses by each of them etc.

6. Registration: The registration of a partnership firm is voluntary. It may or may not be

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 registered. However, if the partners so desire, it can be registered at any time.

7. Joint – Liability

Ownership: The Partners are joint owners of the property of the firm. It's property must be
used only for the business purpose for which the partnership was formed. It cannot be used
by any partner for his personal purposes.

Management: All the partners enjoy equal rights of management. So every partner can
participate in management. But for the sake of convenience, a single partner may be given
right to manage the firm.

8. No Remuneration: No remuneration is paid to any partner for services rendered by him

to the firm. Each partner is supposed to work in the best possible manner for promoting the
interest of thefirm.

9. Age Limit: Only persons who have attained the major status can become partners. In other
words, minors cannot become partners.

10. Statutory Limit or Number of Partners: It consists of minimum two persons and
maximum 20 persons in the case of general business and maximum 10 persons in the case of
banking.

11. Mutual Confident and Faith: A partnership is based upon mutual confidence and trust of
partners in each other or one another. Every partner must be honest regarding the partnership
dealings and should provide all the facts ad information regarding their business to all
partners.

12. Non-transferability of Interest: A partner cannot transfer his powers or rights to any
third party to do any work of the firm on his behalf. If he cannot do it himself, he has to retire
from the partnership firm. However, a partner may admit another person as a new partner if other
partners give their consent.

13. Principle of Agency: Every partner carries on business activities on behalf of the firm. So
he binds the firm and other partners for every commitment that he makes in conducting
business. Likewise he is bound by the business activities of the other partners.

Thus, every partner becomes a principal at one time and an agent of the firm at another time.
Hence a partnership firm can be run by one or more partners acting on behalf of all
partners.
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 14. Dissolution: A partnership firm may not last long. It may be dissolved by any partner after
giving a written notice to other partners and a new partnership may be formed by the
remaining partners. It may also be dissolved due to the death of a partner or due to an
adjudication of a partner as an insolvent.

Such partnership firms are found among builders, solicitors, chartered accountants, small factories
etc.

Advantages:

1. Easy to Form : A partnership firm can be easily formed. It's formation does not involve
legal formalities.

2. More or Additional Capital: Under the partnership, more funds can be raised by all
partners to start a business on a large scale. Because of the reputation of the partners
and heir contacts, it will not be difficult for a partnership concern to borrow from banks on
easy terms.

3. Greater Efficiency due to Division of Labour: There is a greater efficiency in the working of
partnership concerns because different partners can be assigned those tasks for which they
are best suited as per their qualifications, experience, abilities, talents and aptitude. Thus
there would be specialization in the task of every partner.

4. Flexibility: It is also quite flexible and capable of adapting itself to changed

circumstances of business by means of quick decisions and prompt action by the
partners, i.e. it can quickly adapt itself to change in demand for its product, by
increasing and decreasing its business operations and by changing its business policy.
Thus, the organizational structure of a partnership firm is flexible. The decision taking by a
partnership firm does not involve any legal procedure. Its operations are not also subject to
any restriction by a government.

5. Co-operation & Personal Contact: It may elicit full co-operation from workers by
keeping a close touch with them, by understanding and solving their difficulties. More scope
to maintain personal contacts with customers & and requirements by sharing
responsibility among partners.

6. Expansion of Business: A partnership firm can expand its business by admitting more
partners and raising more capital from them and thereby attempt to earn more profits.

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 7. Quick Decisions and Prompt actions: While there is an agreement and unity among
partners, it is enough to implement any decision and initiate prompt actions.

8. Unlimited Liability: Since there is unlimited liability, the business status of a

partnership firm is raised. Hence, it will be easy for it to get loans from financers.

9. Advantages of Large-scale production: It can secure all the advantages of large – scale
production such as advantages of division of labour, bulk purchases of raw materials at
lower price, best use of machinery, etc.

10. BusinessRisks andRewards: Business risks are equally shared byall the partners. In case
business fails, they would suffer losses. But if it succeeds, they will enjoy profits. Hence, they will
try to manage it efficiently and make their business profitable by putting the assets of the
firm to the best uses so as to avoid waste.

11. Management and Organizational Abilities: In a partnership fir, there is a combination

of capital, abilities and skill. Some partners offer capital. Some partners are experts in
management and organization. Some of thempossess technical skill. As a result of the pooling
of the expert services of all partners, it is possible to run a partnership firm efficiently.

12. Dissolution: In case a partner is not happy with the working of his partnership firm, he can
legally dissolve it. He can do so by giving a written notice to the other partners indicating his
decision to resign from it.

13. Mutual Consent: All the business decisions are taken with mutual consent of all
partners. They hold mutual consultations and discussions on important matters. Thus
every partner benefits from the advice of other partners. As a result, their wisdom is pooled
for the benefit of the firm.

Disadvantages:

1. Unlimited Liability and No Risk Business: On account of the principle of unlimited liability,
any bad or irresponsible partner may ruin all the partners. This is because his activities will be
binding on all other partners. Every partner runs a considerably risk for any one of them is,
jointly or severally, held responsible for the debts or losses of the firm. Further due to unlimited
liability, the partners may not undertake any risk in business or take any hasty step to expand
business.Hence,the spirit of enterprise is checked.

2. Limited on Size of Business: it is also difficult in increase the size of business on account of

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 limited amount of capital which the partners can raise or provide from their own sources. A
partnership firm cannot also admit more than 20 members for raising additional resources.
This limitation on the number of partners restricts the growth of a partnership form.

3. Lack of Harmony: You know that in partnership firm every partner has an equal right to
participate in the management. Also every partner can place his or her opinion or viewpoint
before the management regarding any matter at any time. Because of this sometimes there
is a possibility of friction and quarrel among the partners.

4. Non-Transferability: A share in a partnership form cannot be transferred by any partner

without the consent of all the partners. He cannot also transfer his powers or rights to any
third party to do any work of the firm on his behalf.

5. Differences of Opinion: The partners may not agree upon certain matters of business policy.
There might by differences of opinion, clashes of interest, mistrust, disputes etc. Such
differences among partners may result in dissolution of partnership firms.

6. Short-Lived: A partnership can be dissolved by any partner by giving a written notice

to other partners. So this type of business is short-lived. Also default, bankruptcy or
insanity of any one of the partners leads to dissolution of the firm unless a provision is
made in the partnership deed to the contrary.

7. No Trust: The activities of a partnership firm are kept secret from outsiders. It is not
required to publish its accounts. It is also not subject to legal restrictions. Hence people
may not fully trust a partnership concern.
8. No Government Control: There is no government control or supervision on the
activities of a partnership concern. Hence, there is lack of public confidence in such
concerns.

9. Leakage of Important Information: Some of the partners may leak important

information to outsiders. This may happen when three are differences of opinion among
the partners. Hence, it may be difficult to maintain business secrecy in a partnership
firm.

10. Joint Liability and Dishonest Activities of Some Partners: The activities of a partner
are binding on the partnership firm. Some partners may not behave properly. Some of
them may be dishonest. Hence, they may misuse their rights and bring the firm into
difficulties and ruin its business. As a result, the honest and efficient partners will
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 have to suffer losses.

Kinds of Partners: In a partnership firm you can find different types of partners. Some may actively
participate in the business while others prefer not to keep themselves engaged actively in the business
activities after contributing the required capital. Also there are certain kinds of partners who neither
contribute capital nor actively participate in the day-to-day business operations. Let us learn more
about them.

a) Active partners - The partners who actively participate in the day-to-day operations of the
business are known as active or working partners. They contribute capital and are also
entitled to share the profits of the business. They are also liable for the debts of the firm.

b) Dormant partners - Those partners who do not participate in the day-to-day activities of the
partnership firm are known as dormant or sleeping partners. They only contribute capital and
share the profits or bear the losses, if any.

c) Nominal partners - These partners only allow the firm to use their name as a partner. They do
not have any real interest in the business of the firm. They do not invest any capital, or share
profits and also do not take part in the conduct of the business of the firm. However, they
remain liable to third parties for the acts of the firm.

d) Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is

not eligible to become a partner. However, in special cases a minor can be admitted as partner
with certain conditions. A minor can only share the profit of the business. In case of loss his
liability is limited to the extent of his capital contribution for the business.
e) Partner by estoppels - If a person falsely represents himself as a partner of any firm or
behaves in a way that somebody can have an impression that such person is a partner and on
the basis of this impression transacts with that firm then that person is held liable to the third
party. The person who falsely represents himself as a partner is known as partner by
estoppels. Take an example. Suppose in Ram Hari & Co firm there are two partners. One is
Ram, the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari & Co
and transacts with Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri
is partner by estoppels.

f) Partner by holding out - In the above example, if either Ram or Hari declares that

Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal

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 will be liable to those parties who suffer losses by transacting with Ram Hari & Co with a belief
that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and
Gopal will be known as partner by holding out.

2.3. JOINT STOCK COMPANIES:

In a partnership firm we know that the number of partners cannot exceed 20. So, there is a limit to
the contribution of capital. Secondly, even if the partners could contribute a large amount of capital,
they would hesitate to do so considering the risk involved in business and their unlimited liability.
Mainly to take care of these two problems, a company form of business organization came into
existence.

A company form of business organization is known as a Joint Stock Company. It is a voluntary

association of persons who generally contribute capital to carry on a particular type of business,
which is established by law and can be dissolved only by law. Persons who contribute capital become
members of the company. This form of business has a legal existence separate from its members,
which means even if its members die, the company remains in existence. This form of business
organizations generally requires huge capital investment, which is contributed by its members.
The total capital of a joint stock company is called share capital and it is divided into a number of units
called shares. Thus, every member has some shares in the business depending upon the amount of
capital contributed by him. Hence, members are also called shareholders. And the name of the
company ends with Limited (Ltd.) to give an indication to the outsider that they are dealing with
limited liability.
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.

Characteristics of Joint Stock Company

You are now familiar with the concept of company as a form of business organisation. Let us now
study its characteristics.

1. 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 comes into existence only when it has been registered after
completion of all formalities required by the Indian Companies Act, 1956.

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2. Artificial person

Just like an individual, who 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 and it does not possess physical
attributes like that of a normal person.

3. Separate legal entity

Being an artificial person, a joint stock company has its own separate existence independent of its
members. It 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 the acts of the company

4. 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, become binding on the company. For example, a
purchase manager may enter into a contract for buying raw materials from a supplier. Once the
contract paper is sealed and signed by the purchase manager, it becomes valid. The purchase
manager may leave the company thereafter or may be removed from the job or may have taken a
wrong decision, yet for all purposes the contract is valid till a new contract is made or the existing
contract expires.
5. 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 members. 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 deceased members.

6. Limited liability

In a joint stock company, the liability of a member is limited to the extent of the value of shares
held by him. While repaying debts, for example, if a person owns 1000 shares of Rs.10 each, then he is
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 liable only up to Rs 10,000 towards payment of debts. That is, even if there is liquidation of the
company, the personal property of the shareholder cannot be attached and he will lose only his
shares worth Rs. 10,000.

7. Ownership and Management

The shareholder is spread over the length and breadth of the company. So, to facilitate
administration the shareholders elect some among themselves are the promoters of the
company as Directors to a Board, which looks after the management of the business. The board
recruits the managers and employees at different levels in the management. Thus, the management
is separated from the Owners.

8. Voluntary Association of Persons :

The company is voluntary association of persons who want carry on business for profit. To carry on
business they need capital. So, they invest in the share capital of the company. The total capital is
divided into certain no. of units. Each unit is called a share. The price of each share is priced to low, that
every investor would like to invest in the company.

9. 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 representatives from the creditors or financial intuitions or
share holders against the company that their interests are not safeguarded. And the company is not
affected by death or solvency of any of its members.
Kinds of Companies:

• Based on incorporation:

1. Charted Company: It is created by Royal Charter of the state. The charter contains
the rights, privileges and covers to be used by the charted company. Ex: British East-India
Company formed in England in 1600. To trade with India and east.

2. Statutory Corporation: It is created by an Act of the state parliament. The

objective, Scope, Powers, responsibilities are clearly defined in the Act. Ex: RBI,
IDBI, food Corporation of India, APSRTC,etc.

3. Registered Company: It is which Registered under Indian Companies Act 1956

(1913). The provisions of the Act govern the formation and working of these

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 companies. And the company may be a Public Ltd. Or Private Ltd or Government
Company.

• Based on public interest:

1. Private limited company: According to Sec. 3 of the Indian Companies Act. A private
company a company that has a minimum paid up capital of one lakh rupees or such
higher paid up capital as may be prescribed, and it's articles
a. Restricts the right of transfer its shares, if any
b. Limits the number of its members to fifty excluding present and past
employees
c. Prohibits any invitation to the public to subscribe any shares in or
debentures of the company
d. Prohibits any invitation or acceptance of deposits from persons other than
its members, directors or their relatives
The name of a private company should necessarily end with the words‘privatelimited’
(Pvt. Ltd.).

2. Public Company : This means a company that

a. is not a private company
b. has a minimum paid up capital of five lakh rupees or such higher paid up capital,
as may be prescribed
c. is a private company,which is a subsidiary of a company that is not a private
company.

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 d. allows transfer of its shares
e. can have any number of members but minimum, there should be seven
members
f. can issue the prospectus to raise the capital
The name of the public company ends with the word ‘limited’ (Ltd.)

3. Government Company: Section 617 of Indian Companies Act, 1956 defines a

government company as “any company in which not less that 51 percent of the paid-up
share capital is held by Central govt., or by any state govt. or governments, or partly by
Central Govt. and partly by one or more state governments and includes a company
which is a subsidiary of a govt. Company. Ex : National Thermal Power Corporation
(NTPC), Bharat Heavy Electricals Ltd. (BHEL), Hindustan Machine Tools ( HMT),
Hindustan Port Trust, Steel Authority of India ( SAIL).

• Based on Controlling interest:

Holding and subsidiary companies: A holding company is a company that controls the
composition of the board of directors of another company or holds more than half of the nominal
value of the equity share capital of another company. The other company that is controlled by the
holding company is called subsidiary company. A company (say, X), which is a holding company
of another company(Say,Y),but subsidiary ofathirdcompany ( Say, Z) then that another company
(Y) will also be subsidiary of the third company (Z).

• Based on liability:

1. Unlimited Company: An Unlimited Company is a company in which the liability of every

member is unlimited. This implies that the personal property of every member is also liable for
the debts of the company. The liability of member is enforceable only at the time of winding
up of the company. Unlimited companies are rarely found in practice even through as per
Indian Companies Act, unlimited companies can be incorporated.

2. Limited Company: A Company is said to be Limited Liability Company where the liability
of its members is limited by the unpaid amount on the shares respectively held by them.
Generally, the companies incorporated under Indian Companies Act are limited liability
companies only.

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 3. Companies Limited by guarantee: A company is said to be limited by guarantee where
the liability of the members is limited to such an amount as they agreed upon to contribute
to the assets of the company in the event of being wound up.

• Based on nationality: Based on nationality the companies can be divided into two types:

1. Foreign Company: Foreign Company is a company incorporated outside India but

established a place of business within India. Foreign companies come under the
purview of the Indian Companies Act, 1956.

2. Indian Company: A Company incorporated in India under the Indian Companies Act,
1956.

How is Capital Raised by a Joint Stock Company?

1. Methods of Raising Capital: A Company raises its capital in two ways, namely,
I. Through the sale of shares or stocks and
II. Through the sale of bonds or debentures

2. Types of Share Capital:

I. Authorized Capital: Authorized Capital refers to the maximum amount which can be
raised by selling shares. This may be, say, Rs. 20 crores.

II. Issued Capital: Issued Capital refers to that part of the authorized capital which is issued
to the public forsubscribed by the public.This may be say, Rs. 14 crores.

III. Subscribed Capital: Subscribed Capital refers to that part of the issued capital which is
actually subscribed by the public. This may be say, Rs. 14 crores.

IV. Paid –up Capital: Paid- up Capital refers to that part of the subscribed capital which
the public directly pay – up to the company, as a part payment of the value of their
shares. This may be, say, Rs. 10 crores. The remaining amount of the subscribed
capital is paid after further calls from the company.

3. Types of Shares: The capital of a company can be divided into three types of shares:

I. Equity or Ordinary Shares: Such shares form the main basis of the finance of a
company. The holders of such shares get divided only after the preference
shareholders are paid out of its profits. Hence, they bear maximum risk. This is because
they do not get any divided if the company does not make any profit. At times when profits

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 high, they get much more than the rate of dividend paid to preference shareholders.
II. Preference Shares: These shareholders enjoy a preferential or prior right over equity
shareholders to the profit of a company. They are entitled to a fixed rate of dividend after
paying interest on debentures and before any dividend is paid to equity shareholders.

III. Deferred Shares: They are called the Promoters’ or Management’s or Founders’ shares.
The holders of such shares are paid dividend last out of the profits left after meeting the
claims of ordinary and preference shareholders and reserve funds. Normally ,they are
issued to promoters of a company but they may also be issued to public. If dividend paid
to other classes of shareholders is restricted, the deferred shareholders will enjoy a bigger
share of profits. But if there are no profits, they do not get anything.

Sale of Bonds or Debentures:

Debentures: A company may also raise additional finance by borrowing from the public for a specific
period of time, say, 15 to 25 years, at a particular rate of interest. This is done by issuing debentures
or bonds.

A Debenture is an undertaking by a company to repay the borrowed money on or before the specific
date at particular interest rate, irrespective of profit or loss made by the company.

The capital raised by selling debentures is like taking loans from the public.

Hence, a debenture- holder is creditor of a company with no voting right. As such, he can’t
directly interface with the activities of its management.

A company is also free to issue convertible debentures which can be converted into equity share
after a period of time, say, 5 to 10 years, at a ratio fixed in advance.

Advantages of Joint Stock Company

You must be keen to know why we should form a company for carrying out business?

Obviously, this is because there are many advantages which the company form of business
organization enjoys over other forms of business organization. Let us read about those
advantages.

The main advantages of Joint Stock Company are -

(i) Large financial resources: A joint stock company is able to collect a large amount of capital
through small contributions from a large number of people. In public limited
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 company shares can be offered to the general public to raise capital. They can also accept
deposits from the public and issue debentures to raise funds.

(ii) Limited Liability: In case of a company, the liability of its members is limited to the extent
of the value of shares held by them. Private property of members cannot be attached for
debts of the company. This advantage attracts many people to invest their savings in the
company and it encourages the owners to take more risk.

(iii) Professional management: Management of a company is vested in the hands of

directors, who are elected democratically by the members or shareholders. These directors
as a group known as Board of Directors ( or simply Board) manage the affairs of the company
and are accountable to all the members. So members elect capable persons having sound
financial, legal and business knowledge to the board so that they can manage the company
efficiently.

(iv) Large-scale production: Due to the availability of large financial resources and technical
expertise it is possible for the companies to have large-scale production. It enables the
company to produce more efficiently and at lower cost.

(v) Contribution to society: A joint stock company offers employment to a large number of people.
It facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it
also donates money towards education, health and community services.

(vi) Research and Development: Only in company form of business it is possible to invest a
lot of money on research and development for improved processes of production, new
design, better quality products, etc. It also takes care of training and development of its
employees.

Limitations of Joint Stock Company

In spite of many advantages of the company form of business organization, it also suffers from some
limitations. Let us note the limitations of Joint Stock Companies.

(i) Difficult to form: The formation or registration of joint stock company involves a
complicated procedure. A number of legal documents and formalities have to be
completed before a company can start its business. It requires the services of specialists such as
Chartered Accountants, Company Secretaries, etc. Therefore, cost of formation of a
company is very high.

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(ii) Excessive government control: Joint stock companies are regulated by government through
Companies Act and other economic legislations. Particularly, public limited companies are
required to adhere to various legal formalities as provided in the Companies Act and
other legislations. Non-compliance with these invites heavy penalty. This affects the smooth
functioning of the companies.

(iii) Delay in policy decisions: Generally policy decisions are taken at the Board 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.

(iv) Concentration of economic power and wealth in few hands: A joint stock company is a
large-scale business organization having huge resources. This gives a lot of economic and other
power to the persons who manage the company. Any misuse of such power creates unhealthy
conditions in the society, e.g., having monopoly over a particular business or industry or product;
exploitation of workers, consumers and investors.

2. 4. PUBLIC SECTOR ENTERPRISES:

Traditionally, business activities were left mainly to individual and private organizations, and the
government was taking care of only the essential services such as railways, electricity supply, postal
services etc. But, it was observed that private sector did not take interest in areas where the
gestation period was long, investment was heavy and the profit margin was low; such as machine
building, infrastructure, oil exploration, etc. Not only that, industries were also concentrated in some
regions that had certain natural advantages like availability of raw materials, skilled labor, nearness to
market.

As state earlier, the business units owned, managed and controlled by the central, state or
local government are termed as public sector enterprises or public enterprises. These are also known
as public sector undertakings. A public sector enterprise may be defined as any commercial or
industrial undertaking owned and managed by the government with a view to maximize social
welfare and uphold the public interest.

Public enterprises consist of nationalized private sector enterprises, such as, banks, Life
Insurance Corporation of India and the new enterprises set up by the government such as Hindustan
Machine Tools (HMT), Gas Authority of India (GAIL), State Trading Corporation (STC) etc.

Characteristics of Public Enterprises: Looking at the nature of the public enterprises their
basic characteristics can be summarized as follows:
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(a) State Control: The public enterprises are owned and managed by the central or state
government, or by the local authority. The government may either wholly own the public
enterprises or the ownership may partly be with the government and partly with the private
industrialists and the public. In any case the control, management and ownership remain primarily
with the government. For example, National Thermal Power Corporation (NTPC) is an industrial
organization established by the Central Government and part of its share capital is provided by
the public. Same is the case with Oil and Natural Gas Corporation Ltd. (ONGC).

(b) Financed from Government Funds: The public enterprises get their capital from
Government Funds and the government has to make provision for their capital in its budget.

(c) Accountability of public services: They are accountable to the public because they are
accountable to the government which represents the people. Public enterprises are not guided
by profit motive. Their major focus is on providing the service or commodity at reasonable
prices. Take the case of Indian Oil Corporation or Gas Authority of India Limited (GAIL). They provide
petroleum and gas at subsidized prices to the public.

(d) Excessive Formalities: The government rules and regulations force the public
enterprises to observe excessive formalities in their operations. This makes the task of
management very sensitive and cumbersome. On the other hand public sector refers to
economic and social activities undertaken by public authorities. The enterprises in public sector
are set up with the main aim of protecting public interest. Profit earning comes next.

Forms of Organizations of Public Enterprises:

There are three different forms of organization used for the public sector enterprises in India. These
are:

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Departmental Companies: These is the form of organization which is primarily used for
provision of essential services such as railways, postal services, broadcasting etc. Such
organizations function under the overall control of a ministry of the Government and are financed
and controlled in the same way as any other government department. This form is considered
suitable for activities where the government desires to have control over them in view of the
public interest.
Departmental undertakings are the oldest among the public enterprises. A departmental
undertaking is organized, managed and financed by the Government. It is controlled by a specific
department of the government. Each such department is headed by a minister. All policy matters
and other important decisions are taken by the controlling ministry. The Parliament lays down
the general policy for such undertakings.
The main features of departmental undertakings are as follows:
(a) It is established by the government and its overall control rests with the minister.
(b) It is a part of the government and is managed like any other government department.
(c) It is financed through government funds.
(d) It is subject to budgetary, accounting and audit control.
(e) Its policy is laid down by the government and it is accountable to the legislature.
Statutory companies:
Statutory Corporation (or public corporation) refers to a corporate body created by the
Parliament or State Legislature by a special act which define its powers, functions and pattern of
management. Statutory corporation is also known as public Corporation. Its capital is wholly
provided by the government. Examples of such organizations are Life Insurance Corporation of
India, State Trading Corporation etc.
The Statutory Corporation (or Public Corporation) refers to such organizations which are
incorporated under the special Acts of the Parliament/State Legislative Assemblies. Its
management pattern, its powers and functions, the area of activity, rules and regulations for its
employees and its relationship with government departments, etc. are specified in the concerned
Act. Examples of statutory corporations are State Bank of India, Life Insurance Corporation of India,
Industrial Finance Corporation of India, etc. It may be noted that more than one corporation can also
be established under the same Act. State Electricity Boards and State Financial Corporation fall in
this category.
The main features of Statutory Corporations are as follows:
(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.
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(b) It is an autonomous body and is free from government control in respect of its internal
management. However, it is accountable to parliament and state legislature.
(c) It has a separate legal existence. Its capital is wholly provided by the government.
(d) It is managed by Board of Directors, which is composed of individuals who are trained and
experienced in business management. The members of the board of Directors are nominated by
the government.
(e) It is supposed to be self sufficient in financial matters. However, in case of necessity it may
take loan and/or seek assistance from the government.
(f) The employees of these enterprises are recruited as per their own requirement by
following the terms and conditions of recruitment decided by the Board.
Government Companies:
Government Company refers to the company in which 51 percent or more of the paid up capital
is held by the government. It is registered under the Companies Act and is fully governed by the
provisions of the Act. Most business units owned and managed by government fall in this
category.
As per the provisions of the Indian Companies Act, a company in which 51% or more of its capital is
held by central and/or state government is regarded as a Government Company. These companies
are registered under Indian Companies Act, 1956 and follow all those rules and regulations as are
applicable to any other registered company. The Government of India has organized and registered a
number of its undertakings as government companies for ensuring managerial autonomy,
operational efficiency and provide competition to private sector.
The main features of Government companies are as follows:
(a) It is registered under the Companies Act, 1956.
(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its own name.
(c) The annual reports of the government companies are required to be presented in
parliament.
(d) The capital is wholly or partially provided by the government. In case of partially owned company
the capital is provided both by the government and private investors. But in such a case the central or
state government must own at least 51% shares of the company.
(e) It is managed by the Board of Directors. All the Directors or the majority of Directors are
appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its

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auditors are Chartered Accountants appointed by the government.
(g) Its employees are not civil servants. It regulates its personnel policies according to its
articles of associations.
Advantages of Public Enterprises:
1. Social Welfare: Some of the public enterprises like post and telegraphs are not run for
earning profit while other enterprises like HMT as in India run for profits. But the profits
earned by them are utilized for improving services rendered or for further expansion of
their activities. In certain fields the state enterprises may work more efficiently than private
enterprises. This is particularly the case with public utility services for electricity, water
railway service, etc.
2. Sufficient Capital: It is also quite likely that the private sector may not be in a position to
raise enough capital for a project or an industry. But the government can raise any amount of
capital from various sources for investment in any project or an industry. Hence such
projects industries are stated in the public sector.
3. Large-Scale Production: On account of large scale production, they can enjoy the
economics of large-scale production because the government, has therefore
undertake such big investment in the interest of the society for a long period. For ex:
construction and management of river linking projects, etc.
4. Convertible profits: The profits based enterprises can convert their profits into another
enterprises which are facing survival problems in line with serving the society and also for the
equal development of the all departmental and other enterprises for Nation’s growth.
5. Balanced Development: They can contribute to a balanced regional development by
locating public enterprises in less developed areas and thereby reduce the regional income
inequalities.
6. Control by people: the working of the public enterprises is subject to the criticism of the
people and the Members of Parliament. Hence, if there is anything wrong in the working of the
public enterprises, it would be set right. So the public enterprises are ultimately controlled
by the people themselves.
Disadvantages:
1. Inefficient management: The government officials may take a long time in taking
decisions as well as action. Hence, the government enterprises may be run with
excessive social cost of operation. This may be so because all of them may not possess much
business experience.
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2. Lack of Incentives: The public enterprises may not create incentives for hard work for their
workers. The managers may not take risk. This is because their acts are questioned.
3. Bureaucracy and Corruption: Bureaucracy and corruption may obstruct the growth
of public enterprises. The bureaucrats may not take quick action because they have followed
the established procedures. Hence, they may cause losses to the public enterprises. This
would involve a burden to the taxpayers.
4. Political considerations: Political considerations may determine appointments transfers
and promotions. Hence, right man may not be placed in the right place. Such a policy is
detrimental to the efficient working of the public enterprises. Further, bribery and
corruption may predominate. Also an enterprise may be located in a particular area out
of the political rather than economic considerations.
5. Transferring officials: If there might be frequent transfers of the government officials,
this would disturb the smooth working and also development plans of the government
enterprises.
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