SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

UNIT-II
SMALL BUSINESS AND IT’S IMPORTANCE
Small Business and its Importance: Small businesses provide opportunities for
entrepreneurs, jobs for neighbors and gathering places for communities.
They're rooted in the landscape where they grow, and they give back vitality
and sustenance. Although running a small business involves taking greater
risks than working for a large, established company, the rewards are both
quantitative and qualitative, including broad-based prosperity and
relationship.

Small business called a Sometimes, a small-scale enterprise is a business that

employs a small number of workers and does not have a high volume of sales.
Such enterprises are generally privately owned and operated sole
proprietorships, corporations or partnerships. The legal definition of a small-
scale enterprise varies by industry and country.
MEANING OF SMALL BUSINESS
small business as those which are owned and controlled by one or a few
persons, with direct owner(s) influence in decision making and having
relatively small share of the market in the applicable industry. Small business
as an independently owned and operate; has capital contribution from limited
number of individuals, would operate in a local area; would probably not be
dominant in its field of operation
 Though small in size, the small business generates money that helps in the
economic growth of the nation. Small businesses are corporations,
proprietorship’s, partnerships that employee fewer people. Small businesses
include grocery shops, bakery shops, party planning, translation services, car
dealership and many. The importance of small businesses can be understood
by reading the following things.
 The biggest advantage of small business is a generation of employment per
unit of capital. Those people, who sit idle during a particular period in a year,
get a chance to work in these small businesses. This further helps to
transform India’s image from a job-seeking nation to job-creating nation.
 Small business requires less capital than the larger establishments. It
means that great outputs can be achieved with fewer investments. In a place
like India, where capital formation is low, small business is suitable. Due to
small in size, these businesses can easily adapt changing the atmosphere. This
promotes flexibility.
These businesses can easily change their working style without much loss as
compared to large businesses.
 The small business attracts talent which was left unnoticed by large
businesses. Local resources and localities skills are used to the optimum level.
Generally, these large businesses depend on small businesses for the

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completion of their work. Small businesses manufacture spare parts and raw
material that is needed by large scale industries. Small businesses have
personal contact with the customers so they can cater to their needs more
proficiently.
 Small business helps to encourage handicrafts and technical skills. These
businesses earn foreign exchange through exports of their products.
Economic power flows in different sectors and hence not restricting the
power in fewer hands. Such businesses promote more equitable distribution
of national income. Small scale businesses provide a mean to the life of local
people by providing them income source.

INTRODUCTION

Micro, Small and Medium Enterprises (MSMEs): In India, MSMEs contribute

nearly 8% of the country’s GDP, around 45% of the manufacturing output, and
approximately 40% of the country’s exports. It won’t be wrong to refer them
as the ‘Backbone of the country.’
The Government of India has introduced MSME or Micro, Small, and Medium
Enterprises in agreement with Micro, Small and Medium Enterprises
Development (MSMED) Act of 2006. These enterprises primarily engaged in
the production, manufacturing, processing, or preservation of goods and
commodities. MSMEs are an important sector for the Indian economy and
have contributed immensely to the country’s socio-economic development.
It not only generates employment opportunities but also works hand-in-hand
towards the development of the nation’s backward and rural areas. According
to the annual report by the Government (2018-19), there are around
6,08,41,245 MSMEs in India.
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
defines the sizes of the micro, small and medium enterprises in India, in
Section 7 of the Act. As per the Act, the enterprises which produce or
manufacture goods concerned with any industry that is specified in the First
Schedule of the Industries (Development and Regulation) Act, 1951 can be
defined as:
The Micro- Small and Medium Enterprises (MSMEs) are small sized entities,
defined in terms of their size of investment. They are contributing significantly to
output, employment export etc. in the economy. They perform a critical role in the
economy by providing employment to a large number of unskilled and semi-skilled
people, contributing to exports, raising manufacturing sector production and
extending support to bigger industries by supplying raw material, basic goods,
finished parts and components, etc.
As per the ‘MSME at a Glance’ Report of the Ministry of MSMEs, the
sector consists of 36 million units and provides employment to over 80 million
persons. The Sector produces more than 6,000 products contributing to about 8%
of GDP besides 45% to the total manufacturing output and 40% to the exports

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from the country.

1.A micro enterprise if the investment in plant & machinery is under
Rs.25 lakhs
2. A small enterprise if the machinery and plant investment is between
Rs.25 lakhs and Rs. 5 crores
3. A medium enterprise if the said investment is between Rs.5 crores
and Rs.10 crores. The chief responsibility in promoting this industry lies with the
state government. This sector employs about 60 million people in the country

DEFINITION OF SMALL SCALE ENTERPRISES (SSES)

The definition of SSEs is based on the criterion of value of plant and machinery
which has been revised over the years. At present the small industrial unit has
been classified as follows:
1) Small Scale Industrial Units (SSI) units having investment in plant and
machinery upto Rs.1 crore.
2) Ancillary Industrial Units having investment in plant and machinery upto
Rs.1 crore. Such an undertaking must sell not less than 50 percent of its
output to other industrial undertakings.
3) Export-oriented Units having investment in plant and machinery upto 1
crore. The unit must export at least 30 percent of its output by the end of
three years from the date of commencement of production.
4) Tiny Units having investment in plant and machinery upto Rs.25 lakhs
irrespective of location.
The investment limit in plant and machinery in case of specified Hi-tech and
export oriented units has been raised to Rs. five crore to ensure suitable
technology up gradation and to enable them to attain competitive edge.

Need for MSMEs

Need of Small Business:
 Role of small scale industries in socio economic development of India
 Employment: Small scale Industries are second largest employers of
human resources after Agriculture. It has 95% of the industrial unit in the
country. These enterprises are labour intensive and labour is available in
abundant amount is rural areas of India.
 Variety of product: Small scale Industries produce an enormous Variety
of goods e.g. readymade garments, stationery, soaps, Leather’s goods
Plastic and rubber goods.
 Export: The share of product from SSI is 45% of total export from
India. So it earns valuable foreign exchange and solves the problem of
balance of payment.
 Balance regional development: SSI can be set anywhere in the country.
They use local resources, less capital and simple technology.

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 Complementary to large scale Industries: SSI. Supply various types of

components, spare parts, and tools etc, which are required by large scale
enterprises.
 Low cost of production: SSI also enjoys the advantage of low cost of
production because they used local resources in their product.
 Quick and timely decision: Due to the small size of the organization quick
and timely decisions can be taken without consulting many people

Classification of MSMEs
Definitions of Micro, Small & Medium Enterprises under Micro, Small &
Medium Enterprises Development (MSMED) Act, 2006

In accordance with the provision of (MSMED) Act, 2006 the Micro, Small
and Medium Enterprises (MSME) are classified in two Classes:

1) Manufacturing Enterprises
MSME
2) Service Enterprises

MANUFACTURING ENTERPRISES:

Micro enterprise generally refers to a small business employing 10 people or less

• It is an enterprise in which investments in plant and machinery is between 5lakh to

25 lakh

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. • These enterprises works and operates not by choice but out of necessity

SMALL ENTERPRISE • Small enterprise generally refers to a business employing 50

persons or less

• It is an enterprise in which investments in plant and machinery is between 25 lakh

to 5 crores.

• These enterprise works and operates to earn a small amount of profit.

MEDIUM ENTERPRISE

• Medium enterprise refers to a business employing maximum to 250 employees

• It is an enterprise in which investment in plant and machinery is between 5 crores

to 10 crores

• These enterprises works and operates to earn a fair amount of profits to increase
their standard of living.

The enterprises engaged in the manufacture or production of goods pertaining to any

industry specified in the first schedule to the industries (Development and
regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of
investment in Plant & Machinery.

SERVICE ENTERPRISES: The enterprises engaged in providing or rendering of

services and are defined in terms of investment in equipment.

MICRO ENTERPRISE : An enterprise in which investment in plant and machinery

is up to 10 lakhs
SMALL ENTERPRISE • An enterprise in which investment in plant and machinery
is from 10 lakhs to 2 crores
MEDIUM ENTERPRISE • An enterprise in which investment in plant and
machinery is from 2crores to 5 crores.

MANUFACTURING SECTOR
ENTERPRISES INVESTMENT IN PLANT & MACHINERY
MICRO Does not exceed 25 lakh rupees
SMALL More than 25 lakh rupees but does not exceed 5 crore rupees
MEDIUM More than 5 crore rupees but does not exceed 10 crore rupees
SERVICE SECTOR
ENTERPRISES INVESTMENT IN EQUIPMENT
MICRO Does not exceed 10 lakh rupees
SMALL More than 10 lakh rupees but does not exceed 2 crore rupees
MEDIUM More than 2 crore rupees but does not exceed 5 crore rupees

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CHARACTERISTICS OF SMALL SCALE ENTERPRISES

(i) Ownership: Ownership of small scale unit is with one individual in sole-
proprietorship or it can be with a few individuals in partnership.
(ii) Management and control: A small-scale unit is normally a one man show
and even in case of partnership the activities are mainly carried out by the
active partner and the rest are generally sleeping partners. These units are
managed in a personalised fashion. The owner is activity involved in all the
decisions concerning business.
(iii) Area of operation: The area of operation of small units is generally
localised catering to the local or regional demand. The overall resources at
the disposal of small scale units are limited and as a result of this, it is
forced to confine its activities to the local level.
(iv)Technology: Small industries are fairly labour intensive with comparatively
smaller capital investment than the larger units. Therefore, these units are
more suited for economics where capital is scarce and there is abundant
supply of labour.
(v) Gestation period: Gestation period is that period after which teething
problems are over and return on investment starts. Gestation period of small
scale unit is less as compared to large scale unit.
(vi) Flexibility: Small scale units as compared to large scale units are more
change susceptible and highly reactive and responsive to socio-economic
conditions. They are more flexible to adopt changes like new method of
production, introduction of new products etc.
(vii) Resources: Small scale units use local or indigenous resources and as
such can be located anywhere subject to the availability of these resources
like labour and raw materials.
(viii) Dispersal of units: Small scale units use local resources and can be
dispersed over a wide territory. The development of small scale units in rural
and backward areas promotes more balanced regional development and can
prevent the influx of job seekers from rural areas to cities

ROLE OF SMALL SCALE ENTERPRISE IN ECONOMIC DEVELOPMENT

SMEs plays an important role in the economic development of a country. Their
role in terms of production, employment generation, contribution to exports &
facilitating equitable distribution of income is very critical. The SMEs broadly
consists of:
1) The traditional cottage & household industries such as village industries,
handicrafts, and coir industries.
2) Modern SMEs. The traditional village and cottage industries as distinguished
from modern SMEs are mostly unorganized and located in rural areas and semi

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urban areas. They normally do not use power operated machines/appliances &
use relatively lower levels of investment & technology. But they provide part
time employment to a very large number of poorer sections of the society. They
also supply essential products for mass consumption & exports. The modern
SMEs are mostly defined in terms of the size of investment & labour force. The
industries (Development & Regulation) defines, SMEs having less than 50
workers with the aid of power or less than 50 workers with the aid of power.
Government is extending various steps towards SMEs. In addition, the SMEs
has been supported and encouraged by various government policies for
infrastructure support, technology up-gradation, preferential access to credit,
preferential policy support, etc.
Specific Contributions of Small Scale Sector:
1. The contribution of Small scale sector to the manufacturing sector and GDP
as a whole is significant in terms of its share in total value added. 2. Small scale
sector performs to the manufacturing sector and GDP as a whole is significant
in terms of its share in total value added.
2. Small scale sector performs to the manufacturing sector and GDP as a whole
is significant in terms of its share in total value added.
3. SMEs can play a role in mitigating the problem of imbalance in the balance of
payment accounts through its export promotion.
4. While the large scale industries are expected to increase the inequities of
income and concentration of wealth, SMEs are expected to help widespread
equal distribution of income and wealth.
5. Small sector may provide opportunities to a large number of capable and
potential entrepreneurs who are deprived of appropriate opportunities.
6. It can help to release scarce capital towards productive use.
7. SMEs can reap the benefits of lean production and can find new cost-
efficient techniques of lean production.
8. As small units can use resources more efficiently to the full capacity without
any wastage, they may have higher allocation efficiency. 9. As the element of
risk is low in SMEs, more resources will be employed by large number of labor
force

1) Large Employment Opportunities: MSMEs are generally labour-intensive.

For every Rs. 1 lakh of fixed investment, MSME sector provides employment
for 26 persons as against 4 persons in the large scale sector. Thus in a
country like India where capital is scarce and labour is abundant, MSMEs are
especially important.
2) Economical Use of Capital: MSMEs need relatively small amount of
capital. Hence it is suitable to a country like India where capital is deficient.
3) Balanced Regional Development: Generally small enterprises are located

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in village and small towns. Therefore it is possible to have a balanced regional

growth of industries. India is a land of villages.
4) Equitable Distribution of Income And Wealth: It removes the drawbacks
of capitalism, abnormal profiteering, concentration of wealth and economic
power in the hands of few etc.
5) Higher Standard of Living: MSMEs bring higher national income, higher
purchasing power of people in rural and semi-urban areas.
6) Mobilization of Locals Resources: The spreading of industries even in
small towns and villages would encourage the habit of thrift and investment
among the people of rural areas.
7) Simple Technology: New but simple techniques of production can be
adopted more easily by MSMEs without much investment.
8) Less Dependence on Foreign Capital: MSMEs use relatively low
proportion of imported equipment and materials. The machinery needed for
these industries can be manufactured within the country.
9) Promotion of Self Employment: MSMEs foster individual skill and
initiative and promote self-employment particularly among the educated and
professional class.
10) Promotion of Exports: With the establishment of a large number of
modern MSMEs in the post-independence period, the contribution of the
small scale sector in the export earnings has increased much.
11) Protection of Environment: MSMEs help to protect the environment by
reducing the problem of pollution.
12) Shorter Gestation Period: In these enterprises the time-lag between
the execution of the investment project and the start of flow of consumable
goods is relatively short.
13) Facilitate Development of Large Scale Enterprises: MSMEs support
the development of large enterprises by meeting their requirements of inputs
of raw materials, intermediate goods, spare parts etc. and by utilizing their
output for further production.
PROBLEMS OF SMALL SCALE ENTERPRISES
This sector can stimulate economic activity and is entrusted with the
responsibility of realising various objectives generation of more employment
opportunities with less investment, reducing regional imbalances etc. Small
scale industries are not in a position to play their role effectively due to
various constraints. The various constraints, the various problems faced by
small scale industries are as under:
(1) Finance:
Finance is one of the most important problem confronting small scale
industries Finance is the life blood of an organisation and no organisation can
function proper у in the absence of adequate funds. The scarcity of capital

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and inadequate availability of credit facilities are the major causes of this
problem.
Firstly, adequate funds are not available and secondly, entrepreneurs due to
weak economic base, have lower credit worthiness. Neither they are having
their own resources are others prepared to lend them. Entrepreneurs are
forced to borrow money from money lenders at exorbitant rate of interest
and this upsets all their calculations.
After nationalization, banks have started financing this sector. These
enterprises are still struggling with the problem of inadequate availability of
high cost funds. These enterprises are promoting various social objectives
and in order to facilitate then working adequate credit on easier terms and
conditions must be provided to them.
(2) Raw Material:
Small scale industries normally tap local sources for meeting raw material
requirements. These units have to face numerous problems like availability of
inadequate quantity, poor quality and even supply of raw material is not on
regular basis. All these factors adversely affect the functioning of these
units. Large scale units, because of more resources, normally corner whatever
raw material that is available in the open market. Small scale units are thus
forced to purchase the same raw material from the open market at very high
prices. It will lead to increase in the cost of production thereby making their
functioning unviable.
(3) Idle Capacity:
There is under utilisation of installed capacity to the extent of 40 to 50
percent in case of small scale industries. Various causes of this under-
utilisation are shortage of raw material problem associated with funds and
even availability of power. Small scale units are not fully equipped to
overcome all these problems as is the case with the rivals in the large scale
sector.
(4) Technology:
Small scale entrepreneurs are not fully exposed to the latest technology.
Moreover, they lack requisite resources to update or modernise their plant
and machinery Due to obsolete methods of production, they are confronted
with the problems of less production in inferior quality and that too at higher
cost. They are in no position to compete with their better equipped rivals
operating modem large scale units.
(5) Marketing:
These small scale units are also exposed to marketing problems. They are not
in a position to get first hand information about the market i.e. about the
competition, taste, liking, disliking of the consumers and prevalent fashion.
With the result they are not in a position to upgrade their products keeping

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in mind market requirements. They are producing less of inferior quality and
that too at higher costs.
Therefore, in competition with better equipped large scale units they are
placed in a relatively disadvantageous position.
In order to safeguard the interests of small scale enterprises the
Government of India has reserved certain items for exclusive production in
the small scale sector. Various government agencies like Trade Fair Authority
of India, State Trading Corporation and the National Small Industries
Corporation are extending helping hand to small scale sector in selling its
products both in the domestic and export markets.
(6) Infrastructure:
Infrastructure aspects adversely affect the functioning of small scale units.
There is inadequate availability of transportation, communication, power and
other facilities in the backward areas. Entrepreneurs are faced with the
problem of getting power connections and even when they are lucky enough to
get these they are exposed to unscheduled long power cuts.
Inadequate and inappropriate transportation and communication network will
make the working of various units all the more difficult. All these factors are
going to adversely affect the quantity, quality and production schedule of the
enterprises operating in these areas. Thus their operations will become
uneconomical and unviable.
(7) Under Utilisation of Capacity:
Most of the small-scale units are working below full potentials or there is
gross underutilization of capacities. Large scale units are working for 24
hours a day i.e. in three shifts of 8 hours each and are thus making best
possible use of their machinery and equipments.
On the other hand small scale units are making only 40 to 50 percent use of
their installed capacities. Various reasons attributed to this gross under-
utilisation of capacities are problems of finance, raw material, power and
underdeveloped markets for their products.
(8) Project Planning:
Another important problem faced by small scale entrepreneurs is poor
project planning. These entrepreneurs do not attach much significance to
viability studies i.e. both technical and economical and plunge into
entrepreneurial activity out of mere enthusiasm and excitement.
They do not bother to study the demand aspect, marketing problems, and
sources of raw materials and even availability of proper infrastructure
before starting their enterprises.
Project feasibility analysis covering all these aspects in addition to technical
and financial viability of the projects, is not at all given due weight-age.
Inexperienced and incomplete documents which invariably results in delays in

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completing promotional formalities. Small entrepreneurs often submit

unrealistic feasibility reports and incompetent entrepreneurs do not fully
understand project details.
Moreover, due to limited financial resources they cannot afford to avail
services of project consultants. This result is poor project planning and
execution. There is both time interests of these small scale enterprises.
(9) Skilled Manpower:
A small scale unit located in a remote backward area may not have problem
with respect to unskilled workers, but skilled workers are not available there.
The reason is Firstly, skilled workers may be reluctant to work in these areas
and secondly, the enterprise may not afford to pay the wages and other
facilities demanded by these workers. Besides non-availability entrepreneurs
are confronted with various other problems like absenteeism, high labour
turnover indiscipline, strike etc. These labour related problems result in
lower productivity, deterioration of quality, increase in wastages, and rise in
other overhead costs and finally adverse impact on the profitability of these
small scale units.
(10) Managerial:
Managerial inadequacies pose another serious problem for small scale units.
Modern business demands vision, knowledge, skill, aptitude and whole hearted
devotion. Competence of the entrepreneur is vital for the success of any
venture. An entrepreneur is a pivot around whom the entire enterprise
revolves. Many small scale units have turned sick due to lack of managerial
competence on the part of entrepreneurs. An entrepreneur who is required to
undergo training and counseling for developing his managerial skills will add to
the problems of entrepreneurs. The small scale entrepreneurs have to
encounter numerous problems relating to overdependence on institutional
agencies for funds and consultancy services, lack of credit- worthiness,
education, training, lower profitability and host of marketing and other
problems. The Government of India has initiated various schemes aimed at
improving the overall functioning of these units.

STEPS INVOLVED TO START SSI/ MSMEs

Setting of an enterprise is a complex process. Various institutions and

organizations are providing training to young people to understand the
process of setting up enterprise unit.
ave complete knowledge of men, material,
machinery, market, and products. A number of formalities like approval and
clearance from government departments are to be completed before setting
up an enterprise.

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setting of an enterprise involves the study of business opportunities,

developments of a feasible business plan and identification, determination and
arrangement of men, materials, machinery and market for products. This
learning object explain the detail procedure to setup a business enterprise.
Small Scale Business provides more independence than the large scale
business and through this type of business one can fulfill their dream to
become an entrepreneur. It eliminates much of the overhead expense and
extensive planning required in larger business ventures. One can set up small-
scale industries by following the simple procedures, which are as follows:

STEP-1 IDENTIFYING THE OPPORTUNITY

It all begins with an Idea-The overriding reason for anyone to think of
establishing a MSME unit can be summarized in one word - opportunity. An
opportunity to provide a product or service, which can generate sufficient surplus.
This is all the more true if one is a believer in the maxim, "Small is Beautiful".

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However, ideas need to be filtered through a multi-layer sieve. This model is

shown in the following flow:
1) Does the idea fire up your motivation?
2) Is it a viable business proposition in your area?
3) Does it match the needs of your clientele?
4) Check it out with basic market research
5) Test it out at market place
6) Consult with the experts
7) Look out for competition in the field
8) Is it a sunrise industry?
9) Your business opportunity
10) Project conceptualization
Once the ideas are screened and a viable business opportunity emerges the
project has to be conceptualized in all its dimensions. The 4 Ps of Project
Conception is:
1) PRODUCT (Shape, Size and Nature)
2) PROCESS (Technology to produce the product)
3) PLACE (Location of Plant)
4) PARTNER (Technological of Financial Collaborator)

STEP-2 MAKING A PRODUCT CHOICE

In a project conceptualization stage while making a product choice following
factors are related to product need to be considered:
1) Product Line - Depth, Width
2) Packaging
3) Branding
4) Warranties
5) After Sales Service
Some other factors that one should consider while finalizing the product choice are:
1) Ease of availability of raw-material

2) Process Technology
3) Accessibility to the market
4) Incentive and support from Government
Market information is also important for product selection. Products, which
are likely to have a number of players in the market, are best avoided. Some
such products in the recent past have been plastic footwear, audio cassettes,
disposable gloves and bulk drugs.
In case the entrepreneur is looking for a product, which has export potential, the
following additional questions need to be asked:
1) What should be the contents of export-product portfolio?
2) What are the special requirements for packaging if one has to export the
3) products?
4) What product adaptations are needed to be made for exporting a product to
a Specific country?

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5) Are any WTO conditionality’s

The development of export-product portfolio can be done by considering 4
parameters viz.
1) External demand conditions
2) Internal supply capability
3) Complexity of marketing tasks
4) Amount of investment required to penetrate the market
Analysis can be conducted using this four dimensional model. The obvious
choice is a product which scores a high rating on first two parameters and
low rating on last two parameters.

STEP-3 PROCESS SELECTION

Choices of process technology emerge once the product is finalized. For some
complex products, process know how has to be imported. In such cases agreements
for technology transfer should be made with due care to safeguard interest. A lot
of appropriate technology is being developed at CSIR and Defense Research Labs
and some of this technology can now be bought. Indigenously developed process
knowhow has intrinsic benefits such as appropriateness and relative
inexpensiveness.
While checking out on a process technology, the following things need to be
considered with utmost care:
1) Whether process requires very high level of skilled workers or complex
machines?
2) Whether process requires large quantities of water and/or power?
3) Whether any process or product patent needs to be honoured while utilising
the
4) selected process technology.
5) Any special pollution or environmental regulations.
6) Finally, the appropriateness to the Indian environment and conditions.
Machinery and equipment
One of the major deficiencies in the micro, small and medium enterprises scenario
is the prevalence of outdated production and management methods hindering the
efficient operation of micro, small and medium-scale units. It was also found that
the most important reason for the reluctance of the small industrialists to install
modern machinery and equipment was the lack of investible funds. The main
objective of National micro, small and medium enterprises (NMSME) is to provide
machinery and equipment to small industrial units offering them long repayment
period with moderate rate of interest.

STEP-4 ARRANGING FINANCE

No MSME unit can take off without monetary support. This need for
finance can be classified into following types:
1) Long and medium term loans
2) Short term or working capital requirements
3) Risk Capital

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4) Seed Capital/Marginal Money

5) Bridge loans
Financial assistance in India for MSME units is available from a variety of
institutions. The important ones are:
1) Commercial/Regional Rural/Co-operative Banks.
2) SIDBI: Small Industries Development Bank of India (refinance and direct
lending)
3) SFCs/SIDCs: State Financial Corporations (e.g. Delhi Financial
Corporation)/State Industrial Development Corporations.
Long and medium term loans are provided by SFCs, SIDBI and SIDCs. Banks also
finance term loans. This type of financing is needed to fund purchase of land,
construction of factory building/shed and for purchase of machinery and
equipment. The short-term loans are required for working capital requirements,
which fund the purchase of raw materials and consumables, payment of wages and
other immediate manufacturing and administrative expenses. Such loans are
generally available from commercial banks. The commercial banks also sanction
composite loan comprising of working capital and term loan up to a loan limit of Rs.1
crore.
For loans from financial institutions and commercial banks a formal application
needs to be made. The details of documentation that need to be provided with
the loan application are indicated below:
1) Documentation for Loan Application
2) Balance Sheet and Profit Loss Statement for last three consecutive years of
firms
3) owned by promoters
4) Income Tax Assessment Certificates of Partners/Directors
5) Proof of Possession of Land/Building
6) Architect’s estimate for construction cost
7) Partnership deed/Memorandum and Articles of Associations of Company
8) Project Report
9) Budgetary Quotations of Plant and Machinery.
A sanction or rejection letter is issued by bank after its assessment of the
application. After receiving a sanction letter, applicants need to indicate in writing
their acceptance of terms and conditions laid down by FI/Banks. Subsequently,
loan is disbursed according to the phased implementation of the project. In
today’s environment there are other choices apart from commercial banks and
Government owned financial institutions. These options include venture capital
funds and non-government finance companies.

STEP-5 FILING OF ENTREPRENEURS MEMORANDUM

Section 8 of the Micro, Small and Medium Enterprises Development (MSMED)
Act, 2006 provides for filing of memorandum by a Micro, Small or Medium
Enterprise. Sub-section
(2) of section 8 stipulates that the form of the Memorandum, the procedure of
its filing and other matters incidental thereto shall be such as notified by the

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SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

Central Government.
1) The memorandum may be filed by all three categories of enterprises with
the District Industries Centre in the jurisdiction of which the enterprise is
(or, is proposed to be) located,
2) The procedure for filing it has been outlined in Schedule. II of the
Notification for the format of EM.

Download Registration Forms & Related Documents (Proforma)

 File Format for Entrepreneurs Memorandum
Features of the Scheme
1) The memorandum may be filed by all three categories of enterprises
with the District Industries Centre in the jurisdiction of which the
enterprise is (or, is proposed to be) located,
2) The procedure for filing it has been outlined in Schedule. II of the
Notification for the format of EM.
Procedure for Filing Memoranda
Features of the present procedures are as follows:

1) Form of the Entrepreneurs Memorandum can be downloaded from the

Internet, the address of which can be obtained from Directorate dealing
with Micro, Small & Medium Enterprises of the State Governments/ UTs.
or the hard copies of the same can be obtained from the District
Industries Centres. This form can also be downloaded from the SIDO
website i.e. www.laghuudyog.com or www.dcmsme.gov.in
2) Any person who intends to establish a micro or small enterprise, at his
discretion; or a medium enterprise engaged in providing or rendering of
services may, at his
discretion or a medium enterprise engaged in the manufacture or
production of goods shall file the Memorandum of Micro, Small or as the
case may be, of Medium Enterprise with District Industries Centre of its
area.
3) The District Industries Centre shall fill all the codes in the form of the
Memorandum and issue an acknowledgement after allotting an EM number,
date of issue and category of the unit within five days of the receipt of
the form of Memorandum by post or same day, if the form of Memorandum
is submitted in person as well as online.
4) Before issuing the acknowledgement, the District Industries Centers shall
make sure that the form is complete in all respect and particularly the
form is signed and is accompanied with an undertaking, which is a part of
the form of Entrepreneurs Memorandum.
5) The District Industries Centre shall maintain record of all the
Entrepreneurs Memorandum so filed in respect of micro and small
enterprises and medium enterprises engaged in providing and rendering
services. District Industries Centers shall forward a copy of the
Entrepreneurs Memorandum so filed with EM number allotted to the Small

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SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

Industries Service Institutes of their State/Jurisdiction.

6) The District Industries Centre shall maintain record of all the
Entrepreneurs Memorandum so filed in respect of medium enterprises
engaged in production/manufacturing of products and forward one copy
each of the Entrepreneurs Memorandum with EM number allotted to Small
Industries Service Institutes of their State/Jurisdiction and to Joint
Development Commissioner (MSME Pol.) in the Office of the Development
Commissioner (Small Scale Industries).
7) The form of Memorandum is in two parts. Any person who intends to
establish a micro, small or medium enterprise engaged in providing or
rendering of services may file or those who want to establish medium
enterprise engaged in the production or manufacture of products shall file
Part 1 of the Entrepreneurs Memorandum to District Industries Centre.
8) Once the above enterprises start production or start providing or
rendering services, they should file Part II of the Entrepreneurs
Memorandum to District Industries Centre.
9) In case of non-filing of Part II of the Entrepreneurs Memorandum within
two years of the filing of Part I, the Memorandum (Part I) filed by the
entrepreneur will become invalid.
10) In case of change in the investment in plant and machinery or in equipment,
the enterprises who have already filed Entrepreneurs Memorandum should
inform the
District Industries Centre of the same in writing within one month of the
change in investment.
11) In case of change of products and that of services or addition in products
or services, the enterprises who have already filed Entrepreneurs
Memorandum should inform the District Industries Centre of the same in
writing within one month of the change.
12) The District Industries Centre shall, in addition of keeping a record, in
writing, shall also maintain records electronically on computer.
The following form basis of evaluation:
1) The unit has obtained all necessary clearances whether statutory or
administrative.
e.g. drug license under drug control order, NOC from Pollution Control Board,
if required etc.
2) Unit does not violate any locational restrictions in force, at the time of
evaluation.
3) Value of plant and machinery is within prescribed limits.
4) Unit is not owned, controlled or subsidiary of any other industrial
undertaking as per notification.

STEP-6 NSIC PROCEDURES FOR HIRE PURCHASE OF MACHINERY

1) The hire purchase application is to be made on the prescribed form.
2) The Director of Industries of the State under whose jurisdiction the
applicant falls, forwards the application to the head office of the NSIC at

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SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

Delhi with his recommendation and comments.

3) All applications for indigenous or imported machines are considered by
acceptance committees comprising of the representatives of the Chief
Controller of Imports, Development Commissioner, Small Scale Industries
and other concerned departments.
4) Decision of these committees is conveyed to the parties concerned with
copies to the regional offices of the NSIC and the concerned Directorate
of Industries.
5) It is open to an applicant whose case has been rejected to get his
application reviewed by a high powered committee known Performa invoice.
6) Once all these formalities are completed by the hirer, instructions are sent
to the suppliers to despatch the consignment (duly insured for transit risk)
to the hirer and to send the R/R or C/R as the case may be, to the regional
office.
7) The NSIC after ensuring that all dues have been paid by the hirer,
releases the R/R or C/R to him for taking delivery of the machines.
8) In case of imported machines, the procedure is slightly different in as
much as the shipping documents are sent to the clearing agents for clearing
the consignment from the Customs and dispatching it to the hirer. Value Of
Machines That Can Be Supplied Rs. 7.5 lakhs, F.O.R. or landed cost as the
case may be.
Earnest Money
5% or 10% of the value of machinery depending on whether the equipment is
imported or indigenous. In the case of furnaces and a few other items of
equipment, the rate of earnest money is different. Interest 9 per cent per annum
with a rebate of 2 per cent on prompt payment. This interest is calculated on the
value of machines outstanding after deducting payment of earnest money.

Administrative Charge
2 per cent on the sales value of machines and its recovery by the NSIC is spread
over the total installment period.

Period of Repayment
The value of the machines, after deducting the earnest money received, called the
Balance Value, is payable along with interest and administrative charge in 7 years. -+
1) The first installment is payable after one year and six months from the
delivery of machines
2) The second and subsequent installment are payable half-yearly thereafter.

Gestation Period
1) In case of certain type of machines which become operative immediately on
installation in the service sector industries and job order establishment, a
gestation period of only 6 months shall be allowed both to the new and
existing units.
2) A rebate of 2% per annum is allowed on the interest rates, in case an

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SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

installment is paid on or before the due date.

3) In case the payment of installment is not made within one month of its
separate due date, interest @ 2% per annum over and above the normal
rate is charged on the defaulted amount from the date of default to the
date of actual payment. Remission in interests is allowed in case one or
more than one installment is paid in advance of the due date(s).

STEP-7 CONSTRUCTION OF BUILDING

Once an industrial plot for the unit is secured, then the next job is that of finding
a suitable architect. Design of factory building has to be in consonance with the
type of industry and have an appropriate plant layout.
An architect's estimate of building construction is essential for loan
applications. Further, architect's certificate for money spent on building is
needed for disbursement of loan.

STEP-8 GETTING THE UTILITY CONNECTIONS

Among the utilities of prime importance are power and water. In many cases
getting power connection causes delay in setting up of plant. Therefore it is
imperative to commence work on these aspects with diligent follow up. Power
connections are generally of either LT (Low Tension) or HT (High-tension) type. If
connected load is up to 75 HP, LT connection is provided. For connected loads of
130 HP or higher only
HT connection is provided.
A formal application needs to be made in a specified form to the state
electricity board. An electrical inspector is deputed for evaluation of application
to factory site after which the load is sanctioned. In areas of power shortage, it
is advisable to augment the power supply with a captive generating set.
Water connection is also obtained likewise by applying in advance in formal
forms.
The water supply can be augmented by installation of tubewell.

STEP 9 GETTING 3M'S RIGHT

Men
Projections for manpower and staffing are made in the project report. However it
is necessary to time the induction of manpower in a planned manner. The engineers
and operatives must be available before the installation of the machinery.
Machinery
Choosing and ordering of right machinery is also of paramount importance. In many
cases technology or process provides us with specifications which is not provided,
then an extensive techno-economic survey of machinery and equipment available
must be carried out. International trade fairs and engineering fairs are good
places to look at available options. The entrepreneur must also consult experts,
dealers / suppliers as well as users, prior to making a selection of equipment and
machinery. The advice of DIC, MSMEI and NSIC can also be sought.
Materials

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SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

Materials procurement and planning are critical to success, of a start-up with a

MSME unit. Inventory management can lead to manageable cash flow situations;
otherwise if too much is ordered too soon considerable amount of working capital
gets locked up. On the other hand, non-availability may result in production hold-
ups, and idle machine and manpower. For essential imported raw material whose
lead-time is large proper planning is all the more essential.
Every SSI unit has to comply with various regulations in force. These include
regulatory, taxation, environmental and certain product specific clearances. This
section looks into the methodology of obtaining these approvals and clearances.

STEP 10 EXEMPTIONS FROM COMPULSORY LICENCE

Licensing in the Industries sector is governed by the licensing exemption
notification issued by Govt. of India in July 25 1991 under the Industries
(Development and Regulation) Act, 1951. In SSI, there are virtually no licensing
restrictions. No industrial license is required except in case of 6 product groups
included in compulsory licensing (these products groups mainly cover products that
can only be made in large sector.)
But if a small-scale unit employs less than 50/100 workers with/without power
then it would not require a license from the Govt. of India even for the 6 product
groups covered in licensing under Schedule II of the notification.
Subject to this, an entrepreneur can set up a SSI unit anywhere in the
country without any restriction. The units are, of course, subject to the
locational/land use and zoning restrictions in force under the local laws.

THE ROLE OF GOVERNMENT IN SUPPORTING MSME’S IN INDIA (Or)

INSTITUTIONS SUPPORTING SMALL BUSINESS ENTERPRISES

Entrepreneur is such as area which covers wide spectrum of activities. That is why it is
some times beyond the control of the entrepreneur to arrange even basic facilities like
finance, raw materials, water, power, connecting road, communication facilities and
others to start the business activities.

Institutional Support- Why?

We are living in a country of abundant natural resources; our human capital is the best
among the other nations of the world. We top in the field information technology,
producing technical men power, world’s largest English speaking people and what not.

But unfortunately we are the back benchers in the field of industrial

development irrespective of all the above facilities. The reasons are obvious. Our
country failed in harnessing the vast untapped prospective entrepreneurs. The old
age concepts that entrepreneurs are born and not made are no more valid.
Thus all attempts should be made by all corners to motivate and promote
the young, interested youths to take up entrepreneurship as their career. Once
they are motivated to become a successful entrepreneur. But it is not easy on the
part of a small talented man to start any industrial venture without the basic

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SMALL BUSINESS AND IT’S IMPORTANCE UNIT-II

facilities and resources.

To start with the most vital resources i.e. finance, it is impossible to carry
out such economic activity without finance. Finance is considered as life blood of
business. But it is beyond the capacity and capability of any single individual to
contribute the required capital for the purpose.
Unless financial institution comes forward, the dream of having an economic
unit will be stopped then and there similar is the situation as regards to
infrastructural facilities. A small business unit cannot take the construction of
approach road, water facilities provision for electricity, drainage, communication
linkage and so on.
Unless, it is being provided no one can able to make the provision for the
same and start the unit. In other cases like technical assistance, export import
promotion, marketing assistance, fiscal concessions and others, if there is no
support and facilities, setting up any economic unit on the part of a small
entrepreneur become a stupendous task.
That is why since inception of our planning era, we have been giving much
more stress on this vital sector to grew by providing many a support and assistant
through different bodies and institutions. There are briefly discussed in
subsequent paras as follows:
1) To prepare project profiles and feasibility on behalf of entrepreneur.
2) To undertake industrial potential surveys with a view to provide first-hand
information regarding raw material, required labour etc.
3) To identify potential entrepreneurs and provide them technical and
managerial assistance.
4) To undertake market researches and surveys for specific products, so that
in future the unit may not take any difficult in marketing products.
5) To undertake export consultancy for export oriented projects based on
modern technology to facilitate export.
6) TO conduct entrepreneurship development programmes with a view to
aware, create and groom entrepreneurs.
7) To procure and distribute scare raw materials as and when required.
8) To supply machinery on hire purchase system.
9) To render marketing assistance to small-scale industries with a view to
effectively sell their products in competitive era.
10) To provide consultancy and trading services to strengthen the competitive
ability and gain advance knowledge in the field.
11) To help in development and up gradation of technology and implementation
of modernization programmes by replacing old and outdated equipments.
12) To undertake the mass construction of industrial estates with all basic
facilities.
13) To provide infrastructure and accommodation facilities to the entrepreneurs.

Continue-----------------------

Dr. M. JAYALAKSHMI, M.B.A, Ph.D., Associate .Prof, SIETK, Puttur. Page 21

The role of government in supporting
MSMEs in India

(Or)

Institutions Supporting Small Business

Enterprises
Institutions Supporting Small-scale Industries
CENTRAL LEVEL
• SSI BOARD
• KVIC STATE LEVEL
• SIDO
• DIs
• NSIC
• DICs
• NSTEDB SSIs
• NPC • SFCs
• NISIET • SIDCs/SIICs
• NIESBUD • SSIDCs
• IIE
• EDI

OTHERS
• Industry Association
• Non Governmental Organizations
• R & D Laboratories
 Small-scale Industries Board (SSI Board)
 Constituted in 1954 to facilitate the coordination and inter-
institutional linkages for the development of SSI sector
 The Board is an apex advisory body constituted to render
advice to the government on all issues pertaining to the SSI
sector
 The office of the Development Commissioner (Small-Scale
Industry) serves as the secretariat for the board
 The Board operates broadly in the following areas:
- Policies & programs
- Development of industries in specific region like Northeast
- Ancillary development, quality improvement,
- Credit facilities, taxation and
- Industrial sickness
Khadi and Village Industries Commission (KVIC)
• Statutory body created by an act of Parliament

• It is charged with planning, promotion, organization and implementation of the

program for the development of Khadi and other village industries in the rural areas
in coordination with other agencies engaged in rural development

• KVIC’s functions also comprise building up a reserve of raw materials and

implements for supply to producers, creation of common service facilities for
processing of raw materials and provision of marketing of KVIC products

• KVIC is entrusted with the task of providing financial assistance to institutions or

persons engaged in the development and operation of Khadi and village industries
and guide them through supply of designs, prototypes and other technical
information
Small Industries Development Organization (SIDO)
• Established in 1954 on recommendation of Ford Foundation

• Over the years, it had seen its role evolve into an agency for advocacy, handholding
and facilitation for the small industries sector

• SIDO provides facilities for testing, tool mending, training for entrepreneurship
development, preparation of project and product profiles, technical and managerial
consultancy, assistance for export, pollution and energy audits, and so on

• SIDO provides economic information services and advises the government in policy
formulation for the promotion and development of SSIs
National Small Industries Corporation Ltd. (NSIC)
• Established in 1955 by GOI with the main objectives to promote, aid and foster the
growth of SSIs in the country

• Over four decades of transition and growth in the SSI sector, NSIC has provided
strength through a progressive attitude of modernization, up gradation of technology,
quality consciousness, strengthening linkages with large and medium-scale enterprise
and boosting exports of products from small enterprises

• Main services provided by NSIC are:

• Machinery and Equipment (Hire Purchase / Lease scheme)
• Financial Assistance Scheme
• Assistance for Procurement of Raw Material
• Government Store Purchase Program
• Technology Transfer Centre (TTC)
• Marketing Assistance
 National Productivity Council (NPC)
• Autonomous institution functioning under the overall supervision of the Ministry of Industry, GOI

• Primary objective is to act as a catalyst in enhancing the productivity of all sectors of the economy,
including industry and agriculture

• Administered by a tripartite Governing Council (GC) which has equal representation from the government,
industry and trade unions

• Active in the field of consultancy and training and has a number of specialized divisions to provide tailor-
made solutions to agriculture and industry. These divisions, manned by trained consultants, deal with
issues related to industrial engineering, plant engineering, energy management, HRD, informal sector,
agriculture and so on

• NPC is a member of the Asian Productivity Organization (APO), Tokyo, an umbrella body of all productivity
councils in Asian region

• To channelise expertise of NPC to small-scale and informal sector, SIDBI has tied-up with NPC for
enhancing technology in small units
National Institute for Small Industry
Extension and Training (NISIET)
• Set up in early 1950s, NISIET acts an important resource and information centre for
small units and undertakes research and consultancy for small industry development

• An autonomous arm of the Ministry of Small Scale Industries, the institute achieves
its objectives through training, consultancy, research and education, to extension and
information services

• In 1984, UNIDO has recognized NISIET as an institute of meritorious performance

under its Centre of Excellence Scheme to extend aid
 National Institute for Entrepreneurship and
Small Business Development (NIESBUD)
• NIESBUD is an autonomous body under the administrative control of the Office of the
DC(SSI)

• NIESBUD established in 1983 by the Ministry of Industry, GOI, as an apex body for
coordinating and overseeing the activities of various institutions/agencies engaged in
Entrepreneurship Development particularly in the area of small industry and business

• The policy, direction and guidance to the institute is provided by its Governing Council
whose chairman is the Minister of SSI.

• Besides conducting national and international training programs, the institute undertakes
research studies, consultancy assignments, development of training aids, etc.
 State Level Institutions – DIs and DICs
• Directorate of Industries (DIs) – At the State level, the Commissioner/ Director of Industries implements policies
for the promotion and development of small-scale, cottage, medium and large scale industries. The Central policies
for the SSI sector serve as guidelines but each State evolves its own policy and package of incentives. The
Commissioner/ Director of Industries in all the States/UTs, oversee the activities of field offices, that is, the District
Industries Centers (DICs) at the district level

• District Industries Centers (DICs) – In order to extend promotion of small-scale and cottage industries beyond
big cities and state capitals to district headquarters, DIC program was initiated in May, 1978, as a centrally
sponsored scheme. DIC was established with the aim of generating greater employment opportunities especially in
rural and backward areas in the country. At present DICs operate under respective Sate budgetary provisions.
DICs extend services of the following nature – (i) economic investigation of local resources (ii) supply of machinery
and equipment (iii) provision of raw materials (iv) arrangement of credit facilities (v) marketing (vi) quality inputs

(vii) consultancy
State Level Institutions - SFCs
State Financial Corporations (SFCs) – Main objectives are to finance and promote
small and medium enterprises in their respective states for achieving balanced regional
growth, catalyze investment, generate employment and widen ownership base of
industry. Financial assistance is provided by way of term loans, direct subscription to
equity/debentures, guarantees, discounting of bills of exchange and seed capital
assistance. SFCs operate a number of schemes of refinance of IDBI and SIDBI and also
extend equity type assistance. SFCs have tailor-made schemes for artisans and special
target groups such as SC/ST, women, ex-servicemen, physically challenged and also
provide financial assistance for small road transport operators, hotels, tourism-related
activities, hospitals and so on. Under Single Window Scheme of SIDBI, SFCs have also
been extending working capital along with term loans to mitigate the difficulties faced by
SSIs in obtaining working capital limits on time
State Level Institutions – SIDC / SIIC and SSIDC
 State Industrial Development / Investment Corporation (SIDC/SIIC) – Set up under the Companies
Act, 1956, as wholly owned undertakings of the State governments, act as catalysts in respective states.
SIDC helps in developing land providing developed plots together with facilities like roads, power, water
supply, drainage and other amenities. They also extend assistance to small-scale sector by way of term
loans, subscription to equity and promotional services. 11 out of 28 SIDCs in the country also function
as SFCs and are termed as Twin-function IDCs

 State Small Industrial Development Corporations (SSIDC) – Established under Companies Act,
1956, as State government undertaking, caters to small, tiny and village industries in respective states.
Being operationally flexible undertakes the activities like (i) procure and distribution of scarce raw
materials, (ii) supply of machinery to SSI units on hire-purchase basis, (iii) product marketing
assistance, (iv) construction of industrial estates, allied infrastructure facilities and their maintenance (v)
extending seed capital assistance on behalf of State government and (vi) providing management
assistance to production units
Other State-level agencies Extending
Facilities for SSI Promotion

• State Infrastructure Development Corporations

• State Cooperative Banks

• Regional Rural Banks

• State Export Corporations

• Agro Industries Corporations

• Handloom and Handicrafts Corporations

 Other Agencies
National Bank for Set up in 1982, provide refinance assistance to State Cooperative Banks, Regional
Agriculture and Rural Banks, and other approved institutions for all kinds of production and investment
Rural credit to SSIs, artisans, cottage and village industries, handicrafts and other allied
Development activities. Helps SSI entrepreneurs to get loan for setting up SSIs in any part of the
(NABARD) country
Housing and Wholly owned company of GOI, incorporated Apr.1970, as a Pvt. Ltd. Co. and
Urban subsequently, converted into a Public Ltd. Co. in 1986. Primary objective is to provide
Development assistance for urban, social sector infrastructure, and the creation of housing facility,
Corporation Ltd. of late, to create SSI infrastructure. Also extends assistance for the promotion of
(HUDCO) building material industries, besides imparting consultancy, training and technical in
related matters.

Set up by all-India financial institutions during 70s and 80s to cater to consultancy
Technical needs of SMEs and new entrepreneurs. Services include preparing project profiles and
Consultancy feasibility studies, undertaking industrial potential surveys, identifying potential
Organizations entrepreneurs and provision of technical and management assistance to them,
(TCOs) undertake market research and surveys for specific products, carrying out energy
audit and energy conservatism assignment, project supervision, taking up assignments
on a turnkey basis, undertaking export consultancy for EOU
WHAT IS A BUSINESS ORGANISATION?

The term "business organization" refers to how a

business is structured.
It refers to a commercial or industrial enterprise
and the people who constitute it.
 TYPES OF BUSINESS
ORGANISATIONS
• Sole Proprietorship
• Joint Hindu Family Business
• Partnership Firm
• Joint Stock Company
1.) Private Limited
2.) Public Limited
• Co-operative Society
Choosing a Form of Business Organisation
The choice of the form of business is governed by
several interrelated and interdependent factors :-
• The nature of business is the most important
factor
• Scale of operations i.e. volume of business (
large, medium, small) and size of the market area
(local, national, international)
• The degree of control desired by the owner(s)
• Amount of capital required for the establishment
and operation of a business
• The volume of risks and liabilities as well as the
willingness of the owners to bear it
• Comparative tax liability
 SOLE PROPRIETERSHIP
When the ownership and management of a business are
in control of one individual the form of business is called
sole proprietorship.
 CHARACTERISTICS
• The business enterprise is
owned by one single individual
(i.e. both profit and risk belong
to him)
• Owner is the Manager
• Owner is the only source of
Capital
• The proprietor and business
enterprise are same in the eyes
of the law.
 ADVANTAGES
OF
SOLE
PROPREITORSHIP
• Easy formation
• Better Control (Prompt decision making and
Flexibility in Operations)
• Subject to fewer regulations
• Not subject to corporate income tax
• Ownership of all profits
 DISADVANTAGES OF SOLE
PROPREITORSHIP
• Owner has unlimited
liability
• Difficult to raise
capital
• Business has a limited
life
• Difficult to do
business beyond a
certain size
 JOINT HINDU FAMILY BUSINESS
• Comes into existence as per
the Hindu Inheritance Act of
India
• This form of business found
only in India
• All members of the Hindu
Undivided Family(HUF) own
the business jointly
• The affairs of the business
are managed by head of the
family called “Karta”. All
other members are called
“Co-parceners”
• Membership is restricted only to
members of the Joint family. No
outsider can become the
member
• Karta has unlimited liability
while all other members have
limited liability
• The share of each member keeps
on fluctuating
• Business continues to exist upon
the death of any member or
Karta.
 ADVANTAGES OF HUFs
• Every co-parsener has an assured
share in profits
• The business has continued
existence
• Decision making is quick as the
powers are with the Karta
• No corporate tax
• People use it mostly for tax
benefits these days
 DISADVANTAGES OF HUFs
• Absolute power in the hands
of Karta.
• Instability
• Limited Resources can be
raised
• Scope for conflict
 PARTNERSHIP FIRM
A Partnership consists of two or more
individuals in business together
 CHARACTERISITCS OF PARTNERSHIP
• Minimum 2 number of partners and maximum 20
partners
• The relation between the partners is created in the
form of a contract. Written contract is called
“Partnership Deed”
• The firm means partners, the partners mean the
firm
• The profit is divided in any as ratio as agreed
• No partner can sell/transfer his interest in the firm
to anyone without the consent of other partners
 ADVANTAGES OF PARTNERSHIP
• Easy Formation
• Larger Resources
• Sharing Of Risk
• Better Management and
Flexibility of Operation
• No corporate income tax
• Subject to fewer regulations
as compared to companies
DISADVANTAGES OF PARTNERSHIPS

• Unlimited Liability
• Limited Life
• Difficult to raise capital
• Chances of Dispute
 JOINT STOCK COMPANY
A joint stock company is a voluntary
association of people who contribute
money to carry on business
 CHARACTERISTICS OF A CORPORATION
• It is considered as a separate legal entity
• It comes into formation after all formalities under
the Indian Companies Act 1956 are completed
• Management and ownership is completely
separate
• Capital is raised through shares which are
transferable
ADVANTAGES OF A CORPORATION
• Limited liability of the
shareholders/promoter
• Can easily raise capital
• Have unlimited life
• Ease of transfer of ownership
DISADVANTAGES OF A CORPORATION
• Formation is not easy
• Excessive Government Regulation
• Subject to Corporate Tax and Dividend
Tax (Double Taxation)
• Delay in Policy
Decisions
• Control by a Group
 TWO TYPES OF CORPORATIONS
1. PRIVATE COMPANY
• Closely held by a few people
• Minimum 2 and maximum 50
shareholders
• Stocks cannot be traded on exchanges
and private equity cannot be raised
• Less regulations as compared to
Public Companies
2. PUBLIC COMPANY
• Stocks are held by a large
number of people
• Minimum 7 shareholders
and no limit for maximum
• Can be listed on stock
exchange and can go
public
• Have to follow many laws
with regards to the board
composition and AGM.
 CO-OPERATIVE SOCIETY

It is a voluntary
association of
people or
business to
achieve a an
economic goal
with a social
perspective
CHARECTERISTICS OF CO-OPERATIVE

• Voluntary association
• Minimum membership requirement is 10
and there is no maximum limit
• Registration of Co-operative is must
under the “Co-operative Societies Act” is
a must. After the registration it enjoys
certain privileges of a Joint Stock
Company
 ADVANTAGES OF CO-OPERATIVE
• Easy Formation
• Limited Liability
• Stability
• Democratic
Management
• State Assistance
DISADVANTAGES OF A CO-OPERATIVE
• Possibility of
conflict
• Long decision
making process
• Not enough capital
FRANCHISING

LICENSING

LEASING
FRANCHISE
• Franchise is a continuing relationship between the parent company
(called the franchisor) and an individual business unit (called the
franchisee); under which the parent company provides a licensed
privilege to the business unit to use its trade mark, in return for a
royalty payment made to the parent company.
• FEATURES:
I. Based on Agreement
II. Term of 5 Years
III. Undertaking by Franchisee
IV. Specified Royalty
V. Selling Same Product & Similar Shop Decor
VI. Follow Parent Company’s Policies
VII. Training to Personnel by Franchisor
Advantages & Disadvantages of
Franchise
ADVANTAGES DISADVANTAGES
I. From the Viewpoint of I. From the Viewpoint of
Franchisor Franchisor
1. Expansion of Business 1. Danger of Image Tarnishing
2. Regular Income 2. Problems & Costs for the
3. Economical Advertising Franchisor
4. Advantage of Market A. Demanding Attitude of
Feedback Franchisee
B. Problems & Costs of
II. From the Viewpoint of Communicating with
Franchisee Franchisees
1. Little Investment Needed C. Costs of Training, Financing
2. Advantage of Goodwill to & Advertising
Franchisee II. From the Viewpoint of
3. Management Assistance Franchisee
4. Advantage of Research & 1. Lack of Freedom
Development 2. Limited Range of Products
3. Fixed Royalty Payment
 A company that owns rights in a patent, know-how, or
other IP assets, but cannot or does not want to be involved
in the manufacturing of products, could benefit from the
licensing out of such IP assets by relying on the better
manufacturing capacity, wider distribution outlets, greater
local knowledge and management expertise of another
company( the Licensee).
 FEATURES:
I. Licensors give license for Production
II. Gain Access to New Markets
III. Improvements in Product
IV. Royalty Income
Advantages & Disadvantages of
Licensing
ADVANTAGES DISADVANTAGES
I. Product reaches Market I. Extra Expense added to
Faster the Product
II. R&D Support to Small II. Dependent on Agreement
Companies & its Renewal
III. Quick Access to New III. Financial Commitment
Technology even if market not ready
IV. Create New Products &
Market Opportunities
LEASING
• A lease can be defined as an arrangement between the lessor
(owner of the asset) and lessee (user of the asset) whereby the lessor
purchases an asset for the lessee and allows him to use it in
exchange for periodical payments called lease rentals or minimum
lease payments(MLP).
• FEATURES:
I. Renewed Periodically
II. Asset goes back to lessor on termination
III. Asset sold to third party by lessor
IV. Asset may be sold to lessee by lessor
ADVANTAGES & DISADVANTAGES OF
LEASING
ADVANTAGES DISADVANTAGES

I. Balanced Cash I. Lease Expenses

Outflow II. Limited Financial
II. Quality Assets Benefits
III. Better use of III. Debt
Capital IV. Processing &
IV. Tax Benefit Documentation
V. Better Planning V. No Ownership
VI. Low Capital VI. Maintenance of
Expenditure Asset
VII. Termination Rights VII. Limited Tax Benefit
 Ease of Formation
 Ease of Raising Capital
 Extent of Liability
 Relative Management & Control Rights of
Owners and Managers
 Decision Making Opportunities
 Flexibility of Operation
 Maintenance of Secrecy
 Continuity of Existence
 Freedom from Government Regulations
 Impact of Taxation