Compi

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BUS101

I
NTRODUCTI
ONTO
BUSI
NESS

COMPILEDBYDARLI
NGTON
DHELLZ
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COURSEOUTLI
NE
1.Meani
ngandnat
ureofbusi
ness
Busi
nessobj
ect
ive
Act
ivi
ti
esofbusi
ness

2.Busi
nessenvi
ronment

3.Busi
nessowner
shi
pandf
orms

4.Busi
nesset
hicsandsoci
alr
esponsi
bil
it
y

5.Rol
esofGover
nmenti
nbusi
ness

6.Pr
ofi
t

7.Pr
ivat
izat
ion
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WhatI
saBusi
ness?

Abusinessisdefinedasanorgani
zati
onorenter
prisi
ngentit
yengagedincommercial
,industr
ial
,
orpr
ofessionalacti
vi
ti
es.Busi
nessescanbefor-
profi
tenti
ti
esornon-pr
ofi
torgani
zati
onst hat
oper
atetof ul
fi
llachari
tabl
emissi
onorfur
therasocialcause.

Theterm busi
nessalsoreferstotheor gani
zedeffort
sandact i
vi
ti
esofindi
vi
dualstoproduce
andsellgoodsandser vi
cesforprofi
t.Businessesrangeinscal
efrom asol
epr opri
etor
shipto
anint
ernati
onalcorporat
ion.Several
linesoftheoryareengagedwithunder
standingbusiness
admini
strat
ionincl
uding

or
gani
zat
ional
behav
ior,
organi
zat
iont
heor
y,andst
rat
egi
cmanagement
.

I
mportant
:Peopl
ehaveconductedbusi
nesssinceanci
entti
mes; hi
stor
ical
l
y,busi
nesseshav
e
i
nvol
vedmercant
il
eoperat
ions,
tradegui
lds,
orsharedagri
cult
uralpr
oducti
on.
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TheBasi
csofaBusi
ness

Gener all
y ,
abusinessbegi
nswi t
habusi nessconcept( t
hei dea)andaname.Dependi ngont he
natur eofthebusiness,
extensi
vemar ketr esearchmaybenecessar ytodet er
minewhether
turningt heideai
ntoabusinessisfeasibleandi fthebusinesscandelivervaluetoconsumers.
Thebusi nessnamecanbeoneoft hemostv al
uableassetsofaf ir
m;carefulconsi
derati
on
shoul dthusbegi venwhenchoosingit.Busi nessesoperati
ngunderf i
ctit
iousnamesmustbe
registeredwi t
hthestat
e.

Businessesmostof
tenform aftert
hedevel
opmentofabusinessplan,
whichisaformal
documentdetai
li
ngabusiness'sgoalsandobj
ect
ives,
andi
tsst r
ategi
esofhowitwillachi
eve
thegoalsandobj
ecti
ves.Businessplansar
eal
mostessent
ialwhenbor r
owingcapi
taltobegi
n
operati
ons.

I
tisalsoimportanttodeterminethelegalstr
uctureoft hebusi
ness.Dependingonthetypeof
business,
itmayneedt osecur eper
mi t
s,adheretor egi
strat
ionr
equirements,andobtai
n
l
icensestolegall
yoperate.I
nmanycount ries,corporat
ionsareconsi
deredtobej ur
idi
cal
persons,meaningthatthebusinesscanownpr operty,
takeondebt,andbesuedi ncourt.

Defi
nit
ion:Businessisaregul
arpr
ocessofearni
ngaprofitbysatisf
yingconsumer’
sneeds
t
hrought hemanuf act
uri
ngofgoods,r
esell
i
ngofproducts,provi
dingservi
cesorcar
ryi
ngoutal
l
t
hreetogether.Iti
sanoccupati
onwhichrequi
resapart
icularsetofskil
lsandexper
ti
setoder
ive
maximum prof i
toutofit
.

Fol
l
owi
ngact
ivi
ti
escannotbeconsi
der
edasabusi
ness:

Pr
epar
ingf
oodanddi
str
ibut
ingi
tinanor
phanage;

Sel
l
ingofdr
ugs;

Nat
ureofBusi
ness
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Busi
nessi
sderi
vedf
rom ‘
busy-
ness,
’i
.e.keepi
ngonesel
foccupi
edwi
thoneort
heot
herwor
k,
buti
tismuchmoret
hanjustbei
ngbusy.

Tohav
eabet
terunder
standi
ngofwhatabusi
nessi
s,wemustgot
hrought
hef
oll
owi
ngpoi
nts:

RegularProcess:I
tisanacti
vi
ty
whichisperformedrepeat
edl
yto
generateprofi
t.

EconomicAct
ivi
ty:
Thewholesole
purposei
smaximisingweal
th.

CreatesUti
l
ity
:Thegoodsorservi
cemustbesuchthatitcr
eat
esform uti
l
ity–conver
sionof
productsi
naconsumabl ef
orm,ti
meutil
i
ty–makingthegoodsandser vi
cesavai
labl
ewhen
needed;andplaceut
il
it
y–av ai
l
abil
it
yofgoodsorser
viceswher
everrequi
red,f
orthe
consumers.

Capi
tal
Requi
rement:
Anyv
ent
urer
equi
resf
unddependi
ngont
hesi
zeandi
tst
ype.

Deal
sinGoodsandSer
vices:
Iti
srel
atedt
omanuf
act
uri
ngandof
fer
inggoodsf
orsal
eor
cat
eri
ngser
vices.

Ri
sk:
All
busi
nesseshav
ear
iskf
act
ororuncer
tai
nti
esoff
ail
ureandl
oss.

Pr
ofi
tEar
ningMot
ive:
Thei
nit
ial
mot
iveofabusi
nessmani
smaki
ngapr
ofi
toutofhi
svent
ure.

Sat
isf
act
ionofConsumer
’sNeed:
Iti
sconcer
nedwi
tht
hef
ulf
il
mentoft
hecust
omer
’s
demandsandneeds.

I
nvolvesBuyerandSel
l
er:
Ther
ear
emaj
orl
ytwopar
ti
esi
nvol
ved,
thecust
omerandt
he
merchandi
se.

Soci
alObl
igat
ions:I
thassomesoci
alr
esponsi
bil
i
ties,
li
kecr
eat
ingj
oboppor
tuni
ti
es,
deal
i
ng
wit
hli
censedproducts,
etc.
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Ty
pesofBusi
nessI
mpactofpr
ivat
izat
ioni
ntheeconomy

Thepr
evi
ousinst
ancehasmadeitcl
eart
hatbusinessi
nvolv
esgoodsorser
vicesorbot
h.A
per
sonhasf
ir
sttoselectt
heki
ndofbusi
nessli
nehewant stooper
ate.

Thus,
abusi
nesscanbebr
oadl
ycl
assi
fi
edasi
ntot
hef
oll
owi
ngt
ypes:

Ser
vice:Anacti
vit
yperf
ormedtoearnmoneyt
hroughcust
omersat
isf
act
ioni
sknownasa
ser
vice.I
tinv
olvespr
ofessi
onal
skil
l
sandexper
tise.

E.
g.Apr
ofessi
onal
teacherear
nsmoneybyt
aki
ngt
uit
ioncl
ass

Merchandi si
ng:Merchandi
singmeansprocur
ementofgoodsf
rom manufact
urersor
wholesalers,atal
owpr i
ceandsell
ingi
tatahigherpr
icet
omakeaprofi
t.Iti
salsoknownasa
r
etai
l business.

E.
g.Af
lor
istsel
l
ingf
lower
s
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Manuf
actur
ing:
Makingpr
ofi
tthroughproduct
ionorcreat
ionofgoodsfr
om rawmateri
ali
nsuch
awaythati
tderi
vessomeut
il
itytotheconsumerisknownasamanuf actur
ingbusi
ness.

E.
g.Pr
ocessi
ngofsugar
canei
nasugarmi
l
ltogetf
inesugar

Hybri
d:Abusinesswhi
chinv
olv
esall
thethreeact
ivi
ti
es,
i.
e.manuf
actur
ingofgoods,
merchandi
singofpr
oduct
sanddel
i
veringserv
icef
all
sundert
hehybri
dcategor
y.

E.
g.Afurni
turesel
ler
,whomanufactur
esfurni
tur
e,buy
soldf
urni
tur
eandsell
sitatahi
gher
pr
iceaf
terrepai
ri
ngandalsopr
ovidesser
vicesforpol
i
shi
ngoldf
urnit
ure.

I
mpor
tanceofBusi
ness

Busi
nessi
sasel
f-
empl
oymentoppor
tuni
tyf
oraper
sont
obecomesel
f-i
ndependentandmast er
ofhisideas.I
tisnotonly
benefici
altot
heowner
butalsomakesan
i
mpactonsoci ety.

Togetadet ail
ed
understandi
ngoft he
i
mpor tanceoftrading
acti
vi
tiestotheowner
andthesociety,letusgo
thr
ought hefol
lowi ng
poi
nts:
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RevenueGener
ati
on:Iti
sthekeytorevenuegener
ati
onfort
hebusi
nessownersi
ncei
tbr
ingsi
n
prof
itandpr
ovestobeasourceofincomefortheowner
.

Economi
cGrowth:
Iti
sessenti
alf
ort
heeconomi
cgr
owt
hofacount
rysi
ncehi
ghr
evenue
meanshi
ghert
axcoll
ect
ion.

I
mprovesStandar
dofLi
vi
ng:Acountr
ywithmoreindustr
ial
uni
tsandcompani
esexper
iencea
hi
gherr
ateofemploy
mentandbett
erli
vi
ngstandards.

BulkProduct
ion:Manufact
uri
nguni
tsi
nvol
velar
ge-scal
eproducti
on,
whichulti
matel
yreduces
thecostofproduct
ion,
andpeopl
egetaconti
nuoussupplyofgoodsatareasonabl
epri
ce.

I
nnovat
ion:I
tinv
olvesbrai
nst
ormi
ngandgener
ati
onofnewi
deaswhi
chopensupt
hewayf
or
i
nnov
ationandcreat
ivi
ty.

Generat
esEmpl oy
ment :
Iti
salong-
ter
m processwhi
chr
equi
rest
hehumanr
esour
cet
ofunct
ion
cor
rectl
y.Ther
efore,
itcr
eatesj
obopport
unit
ies.

MarketExpansi
on:
Agoodst r
ategyandhi
ghcust
omersat
isf
act
ionl
eadt
oast
rongcust
omer
baseaimingatmarketexpansi
on.

Concl
usi
on

Inthepresentscenari
o,mostofthepeopl
einsear
chofbecomi ngi
ndependentandcreat
ethei
r
owni dent
it
yareopeni ngst
art
ups.Thoughmanyofthem f
ail
,theoneswit
hapr operbusi
ness
str
ategyandexcellenceint
heiroper
ati
onstendt
osucceed.

Busi
nessi
sal
laboutder
ivi
ngpr
ofi
toutofsel
l
inggoodsandser
viceset
hical
l
y.

Theriski
sani
ntegr
alpar
tofanybusiness,
buttaki
ngt
her
ightdeci
sionatt
her
ightt
imei
sal
l
thaty
ouneedt
oachieveyourbusi
nessgoals.

OBJECTI
VESOFBUSI
NESS

Yourbusi
nessobj ecti
vesaretheresul
tsy ouhopet oachieveasy ourunandgrowy ourbusi
ness.
Asanentrepreneur,youareconcernedwi t
hev eryaspectofyourbusinessandneedt ohave
cl
eargoalsinmindf oryourcompanyify ouar etostayontrack.Havi
ngacompr ehensiveli
stof
busi
nessobjecti
vescr eat
estheguideli
nest hatbecomet hefoundati
onf ory
ourbusiness
pl
anning.

1.Get
ti
ngandSt
ayi
ngPr
ofi
tabl
e

Maintai
ningprof
it
abil
i
tymeansmakingsur
ethatr
evenuest
aysaheadoft
hecost
sofdoing
busi
ness.Focusoncontrol
l
ingcost
sinbot
hproduct
ionandoper
ati
onswhil
emai
ntai
ningt
he
prof
itmar gi
nonproduct
ssold.

2.Pr
oduct
ivi
tyofPeopl
eandResour
ces

Empl
oyeet
rai
ning,
equi
pmentmai
ntenanceandnewequi
pmentpur
chasesal
lgoi
ntocompany
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product
ivi
ty.Yourobject
iveshoul
dbet
opr
ovi
deal
loft
her
esour
cesy
ourempl
oyeesneedt
o
remainaspr oduct
iveaspossibl
e.

3.Excel
l
entCust
omerSer
vice

Goodcust
omerservi
cehel
psyouret
aincl
ientsandgener
ater
epeatr
evenue.Keepi
ngy
our
cust
omershappyshoul
dbeapri
maryobjecti
veofyouror
gani
zat
ion.

4.Empl
oyeeAt
tract
ionandRet
ent
ion

Empl
oyeeturnov
ercost
syoumoneyi nlostpr
oducti
vi
tyandthecost
sassoci
atedwit
hrecr
uit
ing,
whi
chincl
udeemploymentadv
erti
singandpayingpl
acementagenci
es.Mai
ntai
ninga
pr
oducti
veandposi
ti
veemployeeenvir
onmentimprovesret
ent
ion.

5.Mi
ssi
on-
dri
venCor
eVal
ues

Yourcompanymi ssi
onstatementisadescr i
ptionofthecoreval
uesofyourcompany.Iti
sa
summar yoft
hebel i
efsy
ourcompanyhol dsinregar
dt ocustomeri
nter
acti
on,r
esponsi
bil
it
yto
thecommunityandempl oy
eesatisfact
ion.Thecompany 'scoreval
uesbecometheobject
ives
necessar
ytocreateaposit
ivecor
por at
ecul t
ure.

6.Sust
ainabl
eGr
owt
h

Growt
hisplannedbasedonhi st
ori
caldataandfut
ureproject
ions.Gr
owt
hrequi
rest
hecar
eful
useofcompanyresourcessuchasfinancesandpersonnel.

7.Mai
ntai
ningaHeal
thyCashFl
ow

Evenacompanywi thgoodcashflowneedsfi
nancingcontactsintheeventt
hatcapi
tali
s
neededtoexpandtheorgani
zati
on.Maint
aini
ngyourabil
i
tytof i
nanceoperat
ionsmeansthat
youcanprepareforl
ong-t
erm pr
oject
sandaddressshort
-term needssuchaspayrol
land
account
spayable.

8.Deal
i
ngwi
thChange

Changemanagementi stheprocessofpr
epari
ngyourorganizati
onforgrowthandcr eat
ing
processesthatef
fecti
velydealwit
hadevelopi
ngmarket
place.Theobj ect
iveofchange
managementi stocreateady namicor
gani
zati
onthati
spr eparedtomeetthechallengesof
yourindust
ry.

9.Reachi
ngt
heRi
ghtCust
omer
s

Market
ingismorethancr
eati
ngadv
erti
singandget
ti
ngcust omerinputonproductchanges.I
t
i
sunderstandi
ngconsumerbuyi
ngt
rends,bei
ngabl
etoanticipatepr
oductdist
ri
buti
onneeds
anddevel
opingbusi
nesspart
ner
shi
psthathelpy
ourorgani
zat i
ontoimprov
emar ketshare.

10.St
ayi
ngAheadoft
heCompet
it
ion

Acompr
ehensi
veanal
ysi
soft
heact
ivi
ti
esoft
hecompet
it
ionshoul
dbeanongoi
ngbusi
ness
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object
iveforyourorgani
zat
ion.Under
standi
ngwhereyourpr
oduct
srankint
hemarket
place
helpsyoutobetterdeter
minehowt oi
mpr ov
eyourstandi
ngamongconsumersandi
mpr ov
e
yourrevenue.

WhatAr
eBusi
nessAct
ivi
ti
es?

Busi
nessactivi
ti
esincludeanyactivi
tyabusinessengagesinfortheprimarypur
poseofmaking
aprofi
t.Thi
sisagener alter
mt hatencompassesalltheeconomicacti
v i
ti
escarr
iedoutbya
companyduringthecour seofbusiness.Busi
nessactivi
ti
es,
incl
udingoperati
ng,
invest
ingand
fi
nanci
ngactivi
ti
es,areongoingandf ocusedoncreatingval
ueforsharehol
ders.

Busi
nessAct
ivi
ti
es

Under
standi
ngBusi
nessAct
ivi
ti
es

Therear
ethreemaintypesofbusi
nessact
ivi
ti
es:oper
ati
ng,i
nvest
ing,
andfi
nancing.Thecash
fl
owsusedandcreatedbyeachoftheseact
ivi
ti
esareli
stedi
nthecashfl
owstatement.The
cashfl
owstatementismeanttobea

r
econci
l
iat
ionofneti
ncomeonan

accrual
basi
stocashflow.Netincomeistakenfrom t
hebot
tom ofthei
ncomestat
ement ,
and
thecashimpactofbal
ancesheetchangesareident
if
iedt
oreconci
lebacktoact
ualcash
i
nflowsandoutfl
ows.

Noncashit
emspr evi
ouslydeductedfrom netincomear eaddedbacktodeterminecashfl
ow;
noncashit
emspr evi
ouslyaddedtoneti ncomear ededuct
edt odet
erminecashf l
ows.The
resul
tisareportt
hatgiv
est heinvest
orasummar yofbusinessact
ivi
ti
eswithi
nt hecompanyon
acashbasis,segr
egatedbyt hespecif
ictypesofacti
vit
y.

Oper
ati
ngBusi
nessAct
ivi
ti
es

Thefirstsect
ionofthecashfl
owst at
ementiscashfl
owf r
om operat
ingacti
vi
ties.These
acti
vi
tiesincl
udemanyi t
emsf r
om theincomestat
ementandt hecur
rentpor
tionofthebalance
sheet.Thecashflowstatementaddsbackcert
ainnoncashit
emssuchas

depreci
ati
onandamort
izat
ion.Thenchangesinbalancesheetl
inei
tems,suchasaccounts
recei
vabl
eandaccount
spay abl
e,ar
eeitheraddedorsubtr
actedbasedonthei
rprev
iousimpact
onnetincome.

Thesel i
neit
emsimpactthenetincomeont heincomestatementbutdonotr esulti
na
mov ementofcashinoroutofthecompany .I
fcashf l
owsf r
om operat
ingbusinessacti
vi
ti
esar
e
negat i
ve,
itmeanst
hecompanymustbef i
nancingitsoperati
ngacti
vit
iest
hrougheither
i
nvest i
ngacti
vi
ti
esorfi
nanci
ngact i
vi
ti
es.Routi
nelynegati
veoperati
ngcashflowi snotcommon
outsideof

nonpr
ofi
ts.
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I
nvest
ingBusi
nessAct
ivi
ti
es

Inv
estingactiv
iti
esareinthesecondsectionofthest
atementofcashf lows.Theseare
businessacti
viti
esthatarecapi
tali
zedovermorethanoney ear.Thepurchaseoflong-t
erm
assetsisrecordedasauseofcashi nt
hissecti
on.Li
kewise,t
hesal eofrealestat
eisshownas
asour ceofcash.Thelineit
em "capi
tal
expendit
ures"isconsideredaninvesti
ngacti
vit
yand
canbef oundint hi
ssecti
onofthecashf l
owstatement.

Fi
nanci
ngBusi
nessAct
ivi
ti
es

Thecashflowst at
ement '
sfinalsect
ionincludesfi
nanci
ngactivi
ti
es.Theseincl
udeini
ti
alpubl
ic
off
eri
ngs,secondaryoffer
ings,anddebtf i
nancing.Thesecti
onalsoli
ststheamountofcash
bei
ngpaidoutf ordi
vi
dends, sharerepurchases,andint
erest
.Anybusinessacti
vit
yrel
atedto
fi
nanci
ngandf undrai
singeffort
si si
ncludedinthissect
ionofthecashflowstatement
.

Busi
nessEnv
ironmentTy
pes(
Int
ernal
andExt
ernal
)!

Def
ini
tion:
Abusinessenvironmenti
sasetofelementsclosel
yinv
olvedwit
habusi
ness’
act
ivi
ti
es.Thesefactor
shav eani
nter
nal
orexternal
inf
luenceoverthecompany
’sr
esul
ts,
per
formanceandgr owth.

Ty
pe1#I
nter
nal
Env
ironment
:

I
nter
nal
for
ceshav
eani
mpor
tantef
fectonbusi
nessoper
ati
onsofaf
ir
m.

However,
allmicr
of orcesmaynothav ethesameef f
ectonall
fir
msi nt
heindust
ry.Forexampl
e,
suppl
i
ers,animportantelementofmicrolev
elenvi
ronment,
areoftenwil
li
ngtoprovi
dethe
mater
ial
satrelat
ivel
yl owerpr
icest
obigbusinessfir
ms.

Theydonothav ethesameat ti
tudetowardsrelat
ivelysmallbusinessfir
ms.Similarl
y,a
competiti
vefi
rm wil
lstartapr
icewarifit
sriv
al fi
rmi ntheindustryisr
elati
vel
ysmal l
.Ift
her i
val
fi
rmisabi gonewhichi sacapableofret
ali
atinganyadv erseactionfr
om itsri
val,acompetit
ive
fi
rm wil
lhesit
atetostartapri
cewar.Weexpl ainbelowi mportantfact
orsorforcesofmi cr
o-
l
evelexternal
envi
ronment .

Suppl
i
ersofI
nput
s:

Ani mportantfactorintheexter
nalenvi
ronmentofaf ir
mi st hesuppl i
ersofit
sinputssuchas
rawmat erial
sandcomponent s.Asmoot handeffici
entwor kingofabusi nessfi
rmr equi
resthat
i
tshoul dhaveensur edsupplyofinput
ssuchasr awmat er
ials.Ifsupplyofrawmat eri
alsis
uncertai
n,thenaf ir
m wi l
lhav
et okeepalargestockofrawmat eri
alstoconti
nueits
transf
ormat i
onpr ocessunint
errupt
ed.Thiswil
lunnecessarilyraiseitscostofproducti
onand
reduceitsprofitmargin.

Toensur
eregul
arsuppl
yofi
nput
ssuchasrawmat er
ial
ssomefir
msadoptast
rategyof
backwar
dint
egr
ati
onandsetupcapt
ivepr
oduct
ionplant
sforpr
oduci
ngr
awmat eri
als
 Compi
l
edbyDar
li
ngt
ondhel
l
z

t
hemsel
ves.

Furt
her,energyinputisanimportantinputint
hemanuf acturi
ngbusiness.Manylargef
ir
ms
suchasRel i
ancei ndustr
ieshavetheirownpowergeneratingplantssoast oensur
eregul
ar
supplyofelect
rici
tyfortheirmanufactur
ingbusi
ness.Howev er,smallf
ir
mscannotadoptthi
s
str
ategyofv er
ti
cal i
ntegrat
ionandhav etodependonout sidesourcesforsuppl
yofneeded
i
nputs.

Further
,iti
snotagoodst rategytodependonasi ngl
esuppl
ierofi
nputs.I
ft her
eisdisrupt
ioni
n
producti
onoft hesuppl
ierfi
rm duetolabourstr
ikeorlock-
out,i
twil
ladverselyaff
ectthe
producti
onwor kofafir
m.Ther efor
e,t
or educeriskanduncert
aint
ybusinessf i
rmsprefert
o
keepmul ti
plesuppl
ier
sofinputs.

Cust
omer
s:

Thepeoplewhobuyanduseaf i
rm’sproductandservi
cesareanimpor
tantpar
tofexternal
micro-
envi
ronment.Si
ncesalesofaproductorservi
ceiscri
ti
calf
orafi
rm’ssur
vivalandgrowt
h,
i
tisnecessaryt
okeept hecust
omer ssat
isfi
ed.Totakecar
eofcustomer’
ssensit
ivi
tyis
essent
ialf
orthesuccessofabusinessfi
rm.

Afi
rm hasdifferentcat
egori
esofcustomer s.Forexample,acarmanufactur
ingfi
rm suchas
Maruti
Udy oghasi ndi
vi
duals,companies,
insti
tuti
ons,governmentasit
scustomers.Maruti
Udyog,t
herefore,hascater
edt ot
heneedsofal lthesetypesofcustomersbyproduci
ng
di
ff
erentvari
etiesandmodel sofcars.

Besides,abusi
nessfi
rm hastocompet ewithri
v alf
irmstoattractcust
omer sandthereby
i
ncreasethedemandandmar ketfori
tsproduct.Inthepresentdayofintensecompetiti
ona
fi
rm hastospendalotonadv ert
isementstopromot ethesalesofitsproductbycr
eatingnew
customersandretai
ningtheoldones.Forthi
spur pose,abusinessfir
m hasalsotolaunchnew
productsormodels.

Withincreasi
ngglobal
isati
onandli
ber
ali
zati
onthecustomers’
sati
sfacti
onisofparamount
i
mpor tancebecausetheconsumershavetheopti
onofbuy i
ngimportedproduct
s.Theref
ore,
to
survi
veandsucceedaf i
rm hast
omakecont i
nuouseff
ortstoi
mprovet hequali
tyofi
ts
products.

Mar
ket
ingI
nter
medi
ari
es:

I
naf i
rm’sexter
nalenvi
ronmentmarketi
ngint
ermediari
esplayanessenti
alr
oleofsel
l
ingand
di
str
ibuti
ngitspr
oductstothefi
nalbuyer
s.Market
ingintermedi
ari
esincl
udeagent
sand
merchantssuchasdist
ribut
ionf
ir
ms, whol
esal
ers,
retail
ers.

Mar ketingint
ermediar
iesareresponsibl
eforstockingandtranspor
ti
nggoodsf r
om t
heir
product ionsi
tetothei
rdesti
nation,
thatis,ul
ti
mat ebuyer
s.Therearemarketi
ngser
vice
agenci essuchasmar keti
ngresearchf i
rms,consult
ingfi
rms,adver
ti
singagenci
eswhichassi
st
abusi nessf i
rmsintar
geti
ng,promot i
ngandsel l
ingitspr
oductstotheri
ghtmarket
s.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Thus, marketingisani mportantli

nkbet weenabusi nessfir
m anditsulti
matebuy ers.A
disloca­tionoft hi
sl i
nkwil
l adverselyaffectthefort
uneofacompany .Afewy earsago
chemi st
sanddr uggist
sinIndiadecl aredacol l
ect
iveboycottofaleadingpharmacompany
becausei twaspr ovidi
ngal owr et
ail margin.Theysucceededinraisi
ngthismar gi
n.Thisshows
thatabusi nessfirm musttakecar eofi t
si nt
ermediari
esifi
thastosucceedi nthisageof
i
nt ensecompet iti
on.

Compet
it
ors:

Businessfirmscompetewitheachot hernotonlyforsaleoftheirproduct
sbutalsoinother
areas.Absolut
emonopol i
esincaseofwhi chcompet it
ionistotall
yabsentarefoundonl
yi nt
he
sphereofwhatar ecal
ledpubli
cutil
i
tiessuchaspowerdi st
ri
but i
on,tel
ephoneservi
ce,
gas
di
stribut
ioninacityet
c.Moregenerally,
mar ketf
ormsofmonopol i
sti
ccompetiti
onand
di
f f
erent
iatedol
igopol
iesexi
stintherealwor l
d.

Inthesemar ketformsdiff
erentf
ir
msi nani ndustrycompet ewitheachotherf orsal
eoftheir
products.Thiscompet i
ti
onmaybeont hebasisofpr ici
ngoft heirpr
oducts.Butmor efr
equentl
y
thereisnon-pri
cecompet i
ti
onunderwhi chfir
msengagei ncompet i
ti
onthroughcompet i
ti
ve
adverti
sing,sponsori
ngsomeev entssuchascr icketmat chesforsaleofdiff
erentvari
eti
esand
model softheirproduct
s,eachcl
aimingt hesuperiornatureofitsproduct
s.

Ther eaderswil
lbewi tnessinghowi nt
enseisthecompeti
tionbetweenCocaCol aandPepsi
Cola.Somet i
mest herehasbeenpr i
cewarbetweenthem tocapturenewmar ketsorenlar
ge
theirmarketshare.Likewise,therei
sseverecompeti
ti
onbet weenthemanufacturer
sofAer i
al
andSur fwashingpowder s,betweenmanufactur
ersofvar
iousbrandsofcol
ourTV.Thi stypeof
compet it
ionisgenerall
yr ef
erredtoasbrandcompetit
ionasitrel
atestopr
oducingandsel l
ing
diff
erentbrandsofapr oduct.

Butnotonlyi
sthereacompetit
ionamongtheproducersproduci
ngdif
ferentvari
eti
esorbr
ands
ofaproductbutalsoamongfi
rmsproduci
ngquitediversepr
oductsasallproduct
sult
imat
ely
competeforatt
racti
ngspendi
ngbytheconsumersoft hei
rdi
sposabl
eincomes.

Forexample,compet i
ti
onforafi
rm produci
ngTVsdoesnotcomeonl yfr
om otherbrandsofTV
manufactur
ersbutalsof r
om manufactur
ersofairconditi
oners,
refri
gerat
ors,cars,washing
machinesetc.Al
lthesegoodscompet ef
orattr
acti
ngdi sposabl
eincomesoft hef i
nal
consumers.Compet i
ti
onamongt hesediverseproductsisgeneral
lyrefer
redtoasdesi r
e
competit
ionasallthesegoodsful
fi
llthevar
iousdesiresoftheconsumer swhohav eli
mited
di
sposableincomes.

Asaconsequenceofl
i
beral
i
sationandglobal
isat
ionoftheIndi
aneconomysincetheadopti
on
ofeconomicref
ormst
her
ehasbeenasi gnifi
cantincr
easeincompeti
ti
veenvi
ronmentof
busi
nessfir
ms.Now,I
ndi
anfir
mshav etocompet enotonlywit
heachotherbutal
sowiththe
for
eignfi
rmswhosepr
oductscanbeimpor t
ed.

Forexampl
e,i
ntheUSAAmer i
canf
ir
msfacedalotofcompeti
ti
onf
rom t
heJapanesefi
rms
produci
ngel
ect
roni
cgoodsandaut
omobil
es.Si
mil
arl
y,theI
ndi
anfi
rmsaref
acingalotof
 Compi
l
edbyDar
li
ngt
ondhel
l
z

competit
ionfr
om Chineseproducts.I
tisi
mportantt
onot
ethatforsuccessf
ulcompeti
ti
onthe
Indi
anfi
rmshav etoimprovenotonlythequali
tyoft
hepr
oductsbutalsotoenhancet
heir
product
ivi
tysothatcostper
,unitcanbereduced.

Publ
i
cs:

Fi
nal l
y,publ
icsareani mpor t
antforceinexternalmicroenvir
onment
.Public,accor
dingtoPhil
i
p
Kotl
er“ i
sanygr oupthathasanact ual orpotenti
alint
eresti
norimpactonacompany ’
sabil
it
yto
achieveitsobjecti
ve”.Envi
ronmentalist
s,medi agroups,womenassociat
ions,consumer
protecti
ongr oups,l
ocal gr
oups,cit
izensassociati
onsar esomeimport
antexampl esofpubl
ics
whichhav eani mportantbearingonenv i
ronmentoft hefir
ms.

Forexample,aconsumerpr otect
ionfi
rmi nDelhiheadedbySunitaNar ai
ncameoutwi than
amazingfactthatcolddri
nkssuchasCocaCol a,PepsiCola,
Limca, Fant
ahadahi gher
content
sofpest ici
deswhichposedthreattohumanheal thandlif
e.Thisproducedagooddeal
ofadverseeffectonthesaleoftheseproductsin2003-04.TheIndianlawsarebeingamended
toensurethatthesedri
nksmustnotcont ainpesti
cidesbeyondEuropeansaf et
ystandards.

Si
mi l
arl
y,envi
ronment
ali
stsl
ikeArundhiRoyhav ebeencampaigni
ngagai
nsti
ndust
rieswhi
ch
poll
utetheenvir
onmentandcausehealthhazards.Womeni nsomevi
ll
agesofHary
ana
prot
estedagainstl
i
quorshopsbei
ngsi t
uatedintheirl
ocal
i
ties.

Manyci t
izengr
oupsar eacti
velycampaigni
ngagai
nstci
gar
ett
emanufactur
esforthei
r
advert
isi
ngcampaignsl ur
ingthepeopletoi
ndul
geinsmoki
ng.Thus,
theexist
enceofvar
ious
typesofpubli
csinf
luencesthewor ki
ngofbusi
nessfi
rmsandcompelsthem t
obesocial
l
y
responsi
ble.

Ty
pe2#Ex
ter
nalEnv
ironment
:

Apartfrom mi
cro-envi
ronment ,busi
nessfir
msf acelargeexter
nal envir
onment alf
orces.The
externalmacr
oenv ir
onmentdet erminestheoppor t
uni
tiesforafir
mt oexploi
tforpromotingit
s
businessandalsopresentsthreatstoiti
nthesenset hatitcanputr est
rict
ionsonthe
expansionofbusi
nessact i
vi
ties.Themacr o-env
ironmenthast husbot hpositi
veandnegat i
ve
aspects.

Ani mport
antfactaboutext
ernalmacr
o-envi
ronment
alf
orcesi
sthatt
heyar
euncontr
oll
abl
eby
themanagementofaf i
rm.Becauseoftheuncont
rol
l
abl
enatur
eofmacroforcesaf
ir
m hasto
adjustoradapti
tsel
ftotheseexter
nalf
orces.

Ext
ernal
env
ironment
alf
act
orsar
ecl
assi
fi
edi
nto:

(
1)Economi
c,

(
2)Soci
al,

(
3)Technol
ogi
cal
,

(
4)Pol
i
tical
andl
egal
,and
 Compi
l
edbyDar
li
ngt
ondhel
l
z

(
5)Demogr
aphi
c.

Weexpl
ainbel
owal
lthesef
act
orsdet
ermi
ningext
ernal
env
ironment
:

1.Economi
cEnv
ironment
:

Economi cenvir
onmenti ncl
udesthetypeofeconomi csy stem thatexist
sint heeconomy ,t
he
natureandst r
uctureoftheeconomy ,
thephaseoft hebusi nesscy cl
e( f
orexampl e,the
conditi
onsofboom orr ecessi
on),t
hef i
scal,monetar
yandf i
nanci al
polici
esoft heGov ernment
,
for
eignt r
adeandf orei
gninvestmentpolici
esofthegov ernment .Theseeconomi cpoli
ciesof
thegov er
nmentpr esentboththeopportuni
tiesaswellast hethreats(i.
e.restr
icti
ons)forthe
businessfir
ms.

Thetypeoft heeconomicsy st
em, t
hatis,
sociali
st,capi
tal
istormixedpr ov
idesinsti
tuti
onal
fr
amewor kwithi
nwhichbusinessfi
rm havetowor k.Forexample, bef
ore1991, t
heIndian
economi csystem wasofthetypeofami xedeconomywi t
hpr onouncedorientat
iontowardsthe
publi
csect or
.Priort
o1991pr i
vatesector
’srol
einI ndi
a’
smi xedeconomywasgr eat
lyrestr
ict
ed.
Manyi ndustr
ieswerereserv
edexclusiv
elyforinvestmentandpr oducti
onbyt hepublicsector
.

Pri
vat
esect oroperat
ionswer elimitedmai nl
ytot heconsumergoodsi ndustries.Eveninthese
goodsthepr i
vat
esect orproductionandoper ati
onwascont r
olledbyindustrial l
i
censingsystem,
Monopolisti
candRest ri
cti
veTr adePractices(MRTP)Commi ssion.Thepriv
at esectorwasal so
subj
ectedt ovar
iousexportandi mpor t
-r
est r
ict
ions.Hightari
ffswer eimposedt oprotect
domesticindust
riesandtopur sueimpor tsubstit
utionstr
ategyofi ndustr
ialgr owth.

Now, t
her
ehav ebeensignif
icantchangesintheeconomicpolici
essince1991whi chhav e
changedthemacroeconomi cenvironmentforpr
ivat
esectorfir
ms.Far-r
eachingstruct
ural
economicref
ormswer ecarriedoutbyDr .Manmohansinghdur i
ngtheperiod1991-96whenhe
wastheFinanceMini
ster.I
ndustrialli
censi
nghasbeenabolishedandprivatesect
orcannow
i
nvestandproducemanyi ndustri
al pr
oductswit
houtget
ti
ngl i
censefrom thegovernment.

Manyi ndust r
ies,exceptonlyafewi ndustri
esofstrategicimportance,whichwer eearl
i
er
reserv
edf orthepubl icsectorhavebeent hrownopenf orthepri
vatesector.I
mpor tduti
eshave
beengr eatl
yr educedduet owhi chdomest ici
ndustri
esf acecompet it
ionfrom theimport
ed
products.Incentiveshavebeengi vent oboostexports.Rupeehasbeenmadeconv er
ti
bleint
o
forei
gncur renciesoncur r
entaccount .Iti
sthusevidentt hatneweconomi creformscarri
edout
since1991hassi gnifi
cantl
ychangedt hebusi
nessenv ironment.

2.Soci
alandCul
tur
alEnv
ironment
:

Member sofasoci etywi

eldimportanti
nfl
uenceoverbusinessfir
ms.Peopl ethesedaysdonot
accepttheactiv i
ti
esofbusinessfi
rmswi t
houtquesti
on.Activ
iti
esofbusi nessfir
msmayharm
thephysicalenv i
ronmentandimposeheav ysocial
costs.Besides,businesspracti
cesmay
viol
atecultur
al ethosofasociety
.Forexample,adver
ti
sementbybusi nessfir
msmaybenast y
andhurttheet hicalsent
imentsofthepeople.

Busi
nessesshoul
dconsi
dert
hesoci
ali
mpl
i
cat
ionsoft
hei
rdeci
sions.Thi
smeanst
hat
 Compi
l
edbyDar
li
ngt
ondhel
l
z

companiesmustseri
ousl
yconsi
dert
hei
mpactofitsacti
onsonthesoci
ety
.Whenabusi ness
fi
rminthei
rdeci
sionmakingt
akecar
eofsoci
ali
nterest
s,i
tissai
dtobesocial
l
yresponsi
ble.

Socialr
esponsibi
li
tyi
sthef el
tobli
gationorsel
f-
enfor
ceddutyofbusinessfi
rmstoser
veor
prot
ectsociali
nter
ests.Bydoingsot heypromotesoci
alwell
-bei
ng.Goodcorporat
egover
nance
shouldbejudgednotonlybyt heproducti
vi
tyandprofi
tsear
nedbyabusi nessf
ir
m butal
soby
i
tssocial-
welf
arepromot i
ngactiv
iti
es.

Itiswort
hnoti
ngt hatinmodernmanagementsci enceanewconceptofsoci
alresponsi
v eness
hasbeendeveloped.Bysocialresponsi
venesswemean“ t
heabil
i
tyofacorporatefi
rmt orelat
e
i
t soper
ati
onsandpol i
ciestosocialenv
ironmenti
nwaythatar
emut ual
l
ybenefici
altothe
companyandsoci etyatlar
ge”.

Itmaybenot edthatsoci
alresponsi
bil
it
yorsocialr
esponsivenessi
srel
atedt
oethi
cs.The
discipli
neofethicsdeal
swi t
hwhati sgoodandbad, orr
ightandwrongorwit
hmor al
dutyand
obligati
on.Furt
her,evenifmanagersenjoyful
lfr
eedom toadoptacti
onsandpol
i
ciesin
accor dancewiththeconcei
v ednoti
onofsocialr
esponsibi
li
ty,t
heymaynotdosoifstandar
ds
appl i
edtoevaluatethei
rperfor
mancear equit
ediff
erent
.

Ever
ymanagerwouldli
keit
sperfor
mancetobeposit
ivel
yappr ai
sed.Theref
ore,i
fthe
perf
ormanceofmanagersofbusi
nessfi
rmsarej
udgedbyt heamountofpr ofi
ts.t
heymakefor
theownersoft
hefi
rms,iti
sthennotpr
opert
oexpectsociall
yresponsi
bleacti
onsf r
om t
hem.

3.Pol
i
tical
andLegal
Env
ironment
:

Busi
nessesareclosel
yrel
atedtothegovernment.Thepoli
tical
philosophyofthegovernment
wiel
dsagreatinf
luenceoverbusi
nesspoli
cies.Forexample,af
terindependenceunderthe
l
eadershi
pofJawaharLalNehr uI
ndiaadopted‘democrat
icsocial
ism asitsgoal.

Int
heeconomi csphereitimpli
edthatpublicsect orwastoplayavit
al r
oleinIndi
a’
seconomi c
devel
opment.Besides,i
trequi
redthatwor kingoft hepri
vat
esectorweret obecont rol
ledbya
sui
tabl
eindust
rial
policyofthegov ernment.Int hi
spoli
ti
calf
rameworkpr ovi
debusi nessfi
rms
workedundervari
oust y
pesofr egulator
ypol i
cieswhichsoughtt
oinfluencethedirecti
onsin
whi
chpr i
vat
ebusinessent er
pri
seshadt ofunction.

Thus,Industr
ial
Regulati
onAct1951, I
ndustr
ialPoli
cyResolut
ion1956,For
eignExchange
Regulati
onAct( FERA)
,Monopolisti
candRest r
ict
ivePract
ices(MRTP)Actwerepassedto
contr
ol t
hebusinessacti
vit
iesofthepri
vatesector.Besi
des,rol
eoffor
eigndir
ectinv
estment
wasrest r
ict
edtoonlyfewspheres.

Howev er,
since1991sev eral
struct
uraleconomicreformshav ebeenundertakenfol
lowinga
changeinpol i
ti
cal phi
losophyinfavourofafreemar keteconomy .Thecoll
apseofsociali
sm i
n
SovietRussia,ChinaandEastEur opeanCount r
ieshasbroughtaboutachangei npolit
ical
thi
nkingaboutt her ol
esofpublicandprivat
esectorsinIndia’
sindustr
ial
development.

Toencour
agethegrowthofthepr
ivatesect
orinIndi
a,l
i
censinghasnowbeenabol
ished,
roleof
publ
i
csectorgr
eat
lyreducedandforei
gncapit
al,
bothdirectandpor
tfol
i
o,i
sbei
ngencouraged
 Compi
l
edbyDar
li
ngt
ondhel
l
z

toraisetherateofcapi
talf
ormati
onintheIndi
aneconomy .FERAhasbeenreplacedbyFEM A
(ForeignExchangeManagementAct)Iti
sev i
dentf
rom abovethatwi
ththechangeinthenat
ure
ofpol i
ti
calphi
losophybusi
nessenvi
ronmentforpr
ivat
efir
mshasgr eat
lychanged.

4.Technol
ogi
cal
Env
ironment
:

Thenat ureoft echnologyusedforproducti

onofgoodsandser vicesisanimportantfact
or
responsibleforthesuccessofabusi nessfir
m.Technologyconsi st
softhetypeofmachi nes
andpr ocessesav ailabl
eforusebyaf i
rm andthewayofdoi ngthings.Thei
mpr ovementin
technologyraisest otalf
act
orproducti
vit
yofaf i
rm andreducesunitcostofoutput.

Theuseofasuper i
ort echnologybyafir
m givesitacompet i
ti
veadv antageoverit
sr i
valf
ir
ms.
Theuseofapar t
iculartechnologybyafir
mf orit
stransformationprocessdeterminesit
s
competi
ti
v estr
engt h.Inthisageofglobal
isat
ionthefir
mshav etocompet eintheinter
nati
onal
market
sf orsal
esoft heirproduct
s.Thefi
rmswhi chuseout datedtechnologi
escannotcompete
gl
oball
y.Therefore,technological
devel
opmentpl aysavitalr
oleinenhancingthecompet i
tiv
e
str
engt
hofbusi nessf irms.

Ithasbeengener al
lyobservedthatthecompet i
ti
onbet weenfirmsinthedomesti
ceconomy
andininter nat
ionalmarketsensuresthatthefir
mswi l
ltr
ytoimpr ov
ethetechnol
ogytheyuse
becausef ailur
etodosowoul dposeat hreattotheirsurv
ival
.Intheprot
ectedmarket
s,
technol
ogi calimprovementsareslowandf i
rmsar eabletosurviv
eforalongperi
odwithout
makingtechnol ogicalchanges.

Thi
sisquit
eev i
dentf
rom theexperi
enceofautomobil
eindustryi
nIndia.Manufact
urer
sof
Ambas­sador sandFiatCarsnotonlymadenosignif
icantchangesinthei
rmodels,butalso
di
dnotmakeanyi mprovementintechnol
ogyfordecadesbecauseofabsenceofcompet i
tion.
TheusershadnochoiceandAmbassadorandFi atcarssurvi
vedfordecadesintheprotected
envi
ronment.

I
tiswhenMar utiUdyogLtd.wasstar
tedinIndi
ausi
ngsuperi
ort echnol
ogyandint
roducing
moreatt
racti
vemodel sthatt
herehasbeenasigni
fi
cantimprovementincarmanufacturi
ng.
Wit
hli
berali
sati
onoft heIndi
aneconomynewcarmanuf act
uringfir
mshav eent
eredthe
i
ndust
ryandar eproducingdi
ffer
entver
it
iesandmodelsofcarswi t
himprovedt
echnology.

Besides,thecottontextil
eindustr
yisanotheri
mpor t
antexampleofanindustr
ywhichdueto
prot
ect i
onpr ovi
dedtoi tbyimposinghightar
if
fsoni mport
sofcottont
exti
lesbecamesick.
Foll
owi ngtradeli
beral
isati
onmanycot tontext
il
efirmshavecloseddownbecausetheycould
notwithstandcompet iti
on.Technologi
calenvi
ronmentaffect
sthesuccessoffir
msandt he
needf ortechnol
ogicaladv ancementcannotbeignored.

5.Demogr
aphi
cEnv
ironment
:

Demographicenvir
onmentincl
udesthesizeandgr owthofpopulat
ion,
li
feexpectancyofthe
peopl
e,rural
-ur
bandist
ri
but
ionofpopulati
on,thetechnol
ogicalski
l
lsandeducationall
evel
sof
l
abourforce.Al
lthesedemographi
cfeatureshaveanimportantbeari
ngonthef uncti
oni
ngof
 Compi
l
edbyDar
li
ngt
ondhel
l
z

busi
nessfi
rms.Si
ncenewwor kersarer
ecrui
tedf
rom out
sidet
hef
ir
m,demogr
aphi
cfact
orsar
e
consi
der
edaspartsofext
ernalenvi
ronment.

Theskil
lsandabili
tyofafir
m’swor ker
sdeterminetoalargeextenthowwel lt
heorganisati
on
canachieveit
smi ssi
on.Thelabourfor
ceinacount r
yisalwayschanging.Thiswil
lcause
changesinthewor kf
orceofaf i
rm.Thebusinessfir
mshav et oadj
usttotherequi
rement sof
thei
remployees.Theyhavealsotoadaptthemselvestotheirchi
ldcareserv
ices,l
abourwelfar
e
progr
ammeset c.

Thedemogr aphi
cenvironmentaff
ect
sboththesupplyanddemandsidesofbusiness
organi
sati
ons.Fi
rmsobt ai
nthei
rworki
ngforcefr
om theout
sidel
abourfor
ce.Thet echni
caland
educati
onskil
lsoftheworkersofafi
rm ar
edeter
minedmost l
ybyhumanr esour
cesav ai
labl
ein
theeconomywhi chareapartofdemographi
cenvir
onment.

Ont heot
herhand,thesizeofpopulati
onanditsrur
al-
urbandistr
ibut
iondet
erminethedemand
forthepr
oductsofindustrialf
ir
ms.Forexample,whenthereisgoodmonsooni nIndi
acausi
ng
i
ncreaseini
ncomesofr uralpopul
ati
ondependentonagricul
tur
e,demandforindustr
ial
product
sgreat
lyincreases.

Inthewakeofeconomi cr eformsiniti
atedintheear
lynineti
eswhenf orei
gninvestorswere
all
owedt omakei nvest
menti nIndia,t
heywer epromptedt oi
nvestinIndi
abypoi nti
ngoutthat
thesizeofIndi
anmar ketwasqui telarge.Theyweretoldthat200mi l
l
ionIndi
anpeopl ecould
affor
dt obuytheindust
rialproductsandt hi
sconsti
tutedquitealar
gemar ketwhichcouldbe
profi
tablyexpl
oit
ed.

Besi
des,thegrowthrat
eofpopulati
onandagecompositi
onofpopul at
iondet
erminethe
demandpat t
ernofgoods.Whent hepopul
ati
onofacountr
yi sgrowi
ngatahighrate,
itschi
l
d
popul
ati
onwi l
lberel
ati
velylar
ge.Thi
smeansdemandf orproductssuchasbabyfoodwhich
cat
ertotheneedsofchildrenwil
lberel
ati
vel
yhi
gh.

Ontheotherhand, i
fpopulati
onofacount r
yisstabl
eandlif
eexpect
ancyofthepeopleishigh,
thi
swil
lcausegr eat
erproporti
onofel derl
yagedpeopleinthepopul
ati
onofacount ry
.This
meansdiff
erentdemandpat t
ernofgoods.Thusbusi nessfi
rmshavetoconsideral
lthese
demographi
cf actor
sintheirplanningf orproduct
ionofgoodsandserv
icesandf or
mulati
onof
market
ingstrategi
esforsaleoft heirproducts.

Demogr
aphicenvi
ronmenti
salsoimpor
tantf
orbusinessfi
rmsasitdet
ermi
nest
hechoi
ceof
t
echnol
ogybythem.Othert
hingsbei
ngequal
,ifl
abourisabundant

andr elat
ivel
ycheapert
hancapital
,busi
nessf
ir
mswi
l
lpr
eferr
elat
ivel
ylabour
-i
ntensi
ve
techniquesforproduct
ionofgoods.

Howev er,
forvari
ousreasonssuchasr igi
dlabourlawsandl owproducti
vit
yoflabour,v
arious
taxconcessionsoninvest
mentincapi t
alequipmentandmachi nery
,businessfir
msinIndiaare
general
lyseem tobeusingcapit
al-
intensi
vetechnologiesi
mportedfrom abroad.Thi
shas
resul
tedintheincr
easeinunemploy mentoflabour,especi
all
yamongt hey oungworkers.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Therefore,soci
alandgov ernmentpr essureisi
ncreasingont hebusi nessfir
mst ocreatemore
employ mentoppor tuni
ti
esforlaboursoast or
enderhel pinsolvingthepr oblem of
unempl oyment.Itisquit
einteresti
ngt onoteherethattot akeadv antagesofr el
ati
velycheap
l
abouri nIndiaandChi nathatforei
gnMNCsar esettingupmanuf acturingplantsinthese
countri
es.Itisevidentfr
om abov ethatdemogr aphicfactorsplayacr ucialr
oleindet er
mining
theproduct i
veactivi
tyofbusinessfirms.

Nat
ural
Env
ironment
:

Natural env
ironmentistheul t
imatesour ceofmanyi nputssuchasr awmat erial
s,energywhich
businessf i
rmsusei ntheirproducti
veact i
vi
ty.Inf act,avail
abili
tyofnatural
resour cesinaregion
orcount ryi
sabasi cfactorindeterminingbusi nessact i
v i
tyinit
.Naturalenvironmentwhi ch
i
ncludesgeogr aphi
calandecol ogi
calfactorssuchasmi neralsandoilreserves, waterand
for
estr esources,weatherandcl i
maticcondi t
ions, portfacil
i
tiesareallhi
ghlysi gni
ficantf
or
var
iousbusi nessactivi
ti
es.

Forexample,theavai
labil
it
yofmi neralssuchasiron,coalet
c.inaregi
oninfluencethelocati
on
ofcert
aini
ndust r
iesi
nt hatregi
on.Thus, t
heindustr
ieswithhighmater
ialcontentstendtobe
l
ocatednearther awmat eri
alsources.Forexample,steelpr
oduci
ngindustri
alunit
sar esetup
nearcoalminestosav ecostoftransporti
ngcoaltodi st
antl
ocati
ons.

Besides,cer
tai
nweatherandclimat
iccondit
ionsal
soaffectthelocat
ionofcer
tai
nbusiness
unit
s.Forexample,i
nI ndi
athefi
rmsproduci
ngcottontexti
l
esar emostlyl
ocat
edinBombay ,
Madr as,
andWestBengal wher
eweatherandcli
maticcondit
ionsareconduci
vetothe
producti
onofcottontexti
l
es.

Naturalenvironmental soaffectsthedemandf orgoods.Forexampl e,inregionswher ether

eis
hi
ght emper atureinsummert hereisagooddeal ofdemandf ordessertcoolers,
air
conditi
oners, businessfi
rmssetupi ndustr
ial
unitspr oduci
ngt heseproducts.Similar
ly,
weather
andclimati
ccondi tionsi
nfl
uencet hedemandpat ternforcl
othing,bui
ldingmat er
ialsfor
housingetc.Fur thermore,weatherandcl i
maticcondi ti
onsrequirechangesindesi gnof
products,t
het ypeofpackagingandst or
agefacili
ties.

I
tmayhowev erbenotedthatr esourceavail
abil
ityisnotasuffi
cientcondit
ionforthegrowthof
productionandbusinessactiviti
es.Forinst
ance, Indi
athroughrichinnatur
alresources
re­mai nedpoorandunder dev elopedbecauseav ail
abl
eresourceshadnotbeenputt ousedue
tolackofadequat ecapabil
i
tiesofI ndianbusinessclass.Thus,iti
snottheav ai
labi
li
tyofnatur
al
resourcesalonebutalsothet echnologyandabi li
tytobeingthem int
ouset hatdeterminest
he
growthofbusi nessandtheeconomy .

Ecol
ogi
cal
Eff
ect
sofBusi
ness:

Unti
lrecentl
ybusinesseshadgeneral
lyover
lookedtheseri
ousecologicalef
fectsofit
sact i
vi
ti
es.
Dri
venpur el
ybythemot iveofmaximizi
ngprofi
ts,t
heycauseirr
eparabledamaget othe
exhausti
blenatur
alresources,
especi
all
ymineralsandfor
ests.Bythei
rcarelessatt
it
udet hey
causedpol l
uti
onofenv i
ronment,
especi
all
yairandwaterwhichposedheal t
hhazardsf orthe
 Compi
l
edbyDar
li
ngt
ondhel
l
z

peopl
e.

Bycreat
ingexternaldetr
imentaldi
seconomiestheyimposedheav ycostsonthesoci
ety
.
Thankstotheeffort
sbyenv ir
onmentalist
sandinternati
onalor
ganisat
ionssuchasWorl
dBank,
thepeopleandthegov ernmentshavenowbecameconsci ousoftheadv er
seeff
ect
sof
depl
eti
onofexhaust ibl
enaturalr
esourcesandpolluti
onofenvir
onmentbybusinessact
ivi
ty.

Accordi
ngly
,lawshav ebeenpassedforconser
v at
ionofnaturalr
esourcesandprevent
ionof
envi
ronmentpollut
ion.Thesel
awshav eimposedadditi
onalresponsibi
li
ti
esandcostsfor
busi
nessfir
ms.Buti ti
ssocial
lydesi
rabl
ethatthesecostsarebornebybusinessfi
rmsi fwe
wantsustai
nableeconomi cgr
owthandalsoheal t
hyenvi
ronmentf orhumanbeings.

For
msofBusi
nessOr
gani
sat
ion:
9Di
ff
erentFor
msofBusi
nessOr
gani
sat
ion

For
msofBusinessOrgani
sat
ion–SolePr
opr
ietor
shi
p,Par
tner
shi
pFi
rm,Li
mitedLi
abi
li
ty
Par
tner
shi
p,Joi
ntStockCompanyandOnePersonCompany(Wit
hMeri
tsandDemeri
ts)

For
m #1.Sol
ePr
opr
iet
orshi
p:

Soleproprietorshi
pori ndi v
idualentr
epr eneurshi
pi sabusinessconcernownedandoperatedby
oneper son.Thesol epr oprietori
saper sonwhocar r
iesonbusinessexcl
usiv
elybyandfor
himself.Heal onecont r
ibut esthecapital andski
llsandissolel
yresponsi
blefort
heresul
tsof
theenterprise.Infactsol epropri
etorist hesupremej udgeofallmatt
erspert
aini
ngtohis
businesssubj ectonlytot hegener all
awsoft helandandt osuchspeciall
egi
slat
ionasmay
affecthispar t
icul
arbusi ness.

Thesal
i
entf
eat
uresoft
hepr
opr
iet
orshi
par
easf
oll
ows:

i
.Si
ngl
eowner
shi
p

i
i
.Onemancont
rol

i
i
i.Undi
vi
dedr
isk

i
v.Unl
i
mit
edl
i
abi
l
ity

v
.Nosepar
ateent
it
yoft
hebusi
ness

v
i.NoGov
ernmentr
egul
ati
ons.

Adv
ant
ages:

(a)Si
mpl i
cit
y–Iti
sveryeasytoestablishanddissolv
easoleproprietorship.Nodocumentsare
requi
redandnolegal
,formali
ti
esareinv olv
ed.Anypersoncompetentt oent eri
ntoacont
ract
canstarti
t.However
,insomecases,i.e.,ofachemistshop,amunicipal l
i
censehast obe
obtai
ned.Youcanstartbusi
nessfr
om y ourownhome.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

(b)QuickDecisi
ons–Theent
repr
eneurneednotconsul
tanybodyi
ndeci
dinghi
sbusi
ness
affai
rs.Ther
efor
e,hecant
akeonthespotdeci
sionst
oexploi
topport
uni
ti
esfr
om t
imetoti
me.
Hei shisownboss.

(c)Hi
ghSecr
ecy–Thepropri
etorhasnottopubl
i
shhisaccount
sandthebusi
nesssecr
etsar
e
knowntohi
m al
one.Mai
ntenanceofsecret
sguardshi
mfrom compet
it
ors.

(d)Dir
ectMoti
vati
on–Thereisadirectrel
ati
onshipbetweeneffor
tsandrewards.Nobody
sharesthepr
ofi
tsofbusi
ness.Ther
efore,t
heentrepreneurhassuf
fici
enti
ncenti
vetoworkhar
d.

(e)PersonalTouch–Thepropri
etorcanmai
ntai
npersonalcont
act
swi
thhi
sempl
oyeesand
cli
ents.Suchcontact
shel
pinthegrowthoft
heenter
prise.

(f
)Fl
exi
bil
i
ty–IntheabsenceofGover
nmentcontr
ol,t
herei
scompl etef
reedom ofact
ion.
Ther
eisnoscopefordi
ff
erenceofopi
nionandnoprobl
em ofco-
ordinat
ion.

Di
sadv
ant
ages:

(a)Limit
edFunds–Apropr
iet
orcanr
aiseli
mitedfi
nanci
alr
esour
ces.Asaresul
tthesi
zeof
businessremai
nssmal
l
.Thereisl
imi
tedscopeforgrowt
handexpansi
on.Economiesofscal
e
arenotavail
abl
e.

(b)Li
mi tedSki
l
ls–Propri
etorshipisaonemanshowandonemancannotbeanexper ti
nall
areas(product
ion,
marketi
ng,financi
ng,
per
sonnelet
c.)ofbusi
ness.Ther
eisnoscopefor
special
isati
onandthedeci
sionsmaynotbebalanced.

(c)Unli
mit
edLiabi
l
ity–Thel
i
abil
i
tyofthepropri
etori
sunli
mit
ed.Incaseofl
osshispri
vate
assetscanal
sobeusedtopayoffcr
edit
ors.Thi
sdiscour
agesexpansi
onoftheenter
pri
se.

(
d)Uncert
ainLi
fe–Thel i
feofpr
opri
etor
shi
pdependsuponthel
if
eoft heowner
.Theent
erpr
ise
maydiepremat
uredeathduetothei
ncapaci
tyordeat
hofthepr
opri
etor.Thepr
opr
iet
orhasa
l
owstatusandcanbelonely
.

Expansi
onofBusi
ness:

Whenthebusi
nessofapropri
etorexpands,
hehasei
thert
oempl
oyamanagerort
akeapar
tner
t
ohandlet
heproblemsofcapit
alandmanagement.

Themer
it
sanddemer
it
sofeachal
ter
nat
ivear
egi
venbel
ow:

Empl
oymentofPai
dAssi
stant
:

Adv
ant
ages:

1.Reduct
ioni
nadmi
nist
rat
ivebur
den.

2.Di
vi
sionofwor
k.

3.Appoi
ntmentofspeci
ali
st.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

4.Exper
tadv
iceandgui
dance.

5.Compl
etecont
rol
-noi
nter
fer
encei
npol
i
cies.

6.I
ndependentdeci
sionsandf
reedom ofact
ion.

7.Secr
ecy
.

8.Noshar
ingofpr
ofi
ts.

9.Easyt
odi
smi
ss.

Di
sadv
ant
ages:

1.Noi
ncent
ivet
owor
khar
dmaybecar
elessandi
nef
fi
cient
.

2.I
ncr
easesr
iskandl
i
abi
l
ityoft
hesol
epr
opr
iet
or.

3.Nof
inanci
alst
ake-
busi
nessatt
hemer
cyoft
heassi
stant
.

4.Dangerofdi
scl
osur
eofbusi
nesssecr
ets.

5.Noaddi
ti
ont
ogoodwi
l
l.

6.Lackofr
esponsi
bil
i
ty.

7.Pr
obl
em ofcapi
tal
unsol
ved.

8.I
ncr
easedexpense.

9.Mayl
eav
ethebusi
nessandsetupcompet
it
ion.

Admi
ssi
onofapar
tner
:

Adv
ant
ages:

1.I
nvest
mentofcapi
tal
.

2.Shar
ingofmanager
ial
responsi
bil
i
ties.

3.Pool
i
ngofknowl
edge,
exper
ienceandj
udgment
.

4.I
ncr
easei
ngoodwi
l
landconnect
ions.

5.Di
rectr
elat
ionbet
weenef
for
tandr
ewar
d.Per
sonal
incent
iveandi
nter
est
.

6.Secr
ecyensur
ed.

7.Benef
it
sofspeci
ali
sat
ion.

8.Shar
ingofl
ossesandl
i
abi
l
ity
.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

9.Economyofcost
s.

Di
sadv
ant
ages:

1.Shar
ingofcont
rol
-l
ossi
nfr
eedom ofact
ion.

2.Di
vi
sionofaut
hor
it
y-l
ackofi
ndependentdeci
sions.

3.I
ncr
easei
nli
abi
l
ityandr
isk.

4.Dangerofdi
shonest
yandnegl
i
gence.

5.Possi
bil
i
tyofdi
sput
eanddi
ff
erences.

6.Shar
ingofpr
ofi
ts.

7.Bl
ocki
ngofi
ndi
vi
dual
capi
tal
.

8.Di
ff
icul
tyi
nremov
ingt
hepar
tner
.

9.Lackofst
abi
l
ity
.

Concl
usi
on:

Thechoicebet weenpai dassi st

antandpar t
nerdependsuponr equi
rementsofbusi
nessand
pref
erenceoft hepr opr
ietor.Incasetheproprietorwantstoret
aincompletecontr
olofbusiness
andhecanr aiset headditionalcapit
alhimself
, heshouldemployaqualif
iedandexperi
enced
assi
stanttoshar ehismanager i
alresponsi
bil
it
ies.Butifhewant saddi
ti
onalfundsaswellas
managerialassistance,admi ssi
onofapar tnermaybebet t
er.

Sui
tabi
l
ity
:

Thefor
egoingdescr
ipti
onreveal
sthatsol
epr
opri
etor
shi
porone-mancont
roli
sthebesti
nthe
worl
difthatmanisbigenoughtomanageevery
thi
ng.Butsuchaper
sondoesnotexi
st.

Ther
efor
e,sol
epr
opr
iet
orshi
pissui
tabl
eint
hef
oll
owi
ngcases:

i
.Wher
esmal
lamountofcapi
tal
isr
equi
rede.
g.,
sweetshops,
baker
y,newsst
and,
etc.

i
i
.Wher
equi
ckdeci
sionsar
ever
yimpor
tant
,e.
g.,
shar
ebr
oker
s,bul
l
iondeal
ers,
etc.

i
ii
.Wher
eli
mit
edr
iski
sinv
olv
ed,
e.g.
,aut
omobi
l
erepai
rshop,
conf
ect
ioner
y,smal
lret
ail
stor
e,
et
c.

i
v.Wherepersonalat
tent
iont
oindi
vi
dualtast
esandfashi
onsofcust
omer
sisr
equi
red,
e.g.
,
beaut
yparl
our,tai
l
ori
ngshops,l
awyer
s,paint
ers,
etc.

v
.Wher
ethedemandi
slocal
,seasonal
ort
empor
ary
,e.
g.,
ret
ail
trade,
laundr
y,f
rui
tsel
l
ers,
etc.

v
i.Wher
efashi
onschangequi
ckl
y,e.
g.,
art
ist
icf
urni
tur
e,et
c.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

v
ii
.Wher
etheoper
ati
oni
ssi
mpl
eanddoesnotr
equi
reski
l
ledmanagement
.

Thus,solepropri
etorshi
pisacommonf orm oforganisat
ioni
nret
ailt
rade,prof
essional
fir
ms,
householdandper sonalser
vices.Thi
sform oforgani
zati
onisqui
tepopularinourcountry
.It
accountsforthelargestnumberofbusinessestabli
shmentsinI
ndia,
inspiteofit
sl i
mit
ati
ons.

For
m #2.Par
tner
shi
pFi
rm:

Asabusinessenterpr
iseexpandsbey ondthecapacit
yofasi ngl
eperson,agroupofpersons
havetoj
oinhandstoget herandsupplythenecessar
ycapit
al andski
ll
s.Part
nershipfi
rmthus
grewoutoftheli
mitati
onsofonemanbusi ness.Needtoarrangemor ecapi
tal
,provi
debetter
skil
l
sandav ai
lofspeciali
sati
onledtothegrowthtopart
nershipform ofor
ganisat
ion.

Accordi
ngtoSection4oft hePar t
nershi
pAct ,
1932par t
nershipis“t
her el
ati
onbet
weenper sons
whohav eagreedtosharethepr ofi
tsofabusinesscarri
edonbyal loranyoneofthem act
ingfor
al
l”.I
notherwords,apartnershi
pisanagr eementamongt woormor epersonstocarr
yon
j
ointl
yalawfulbusinessandt osharetheprofi
tsari
singtherefrom.Personswhoenterint
osuch
agreementareknowni ndi
vidual
lyas‘part
ners’andcoll
ecti
v el
yas‘fi
rm’
.

Char
act
eri
sti
csofPar
tner
shi
p:

i
.Associ
ati
onoftwoormor
eper
sons—maxi
mum 10i
nbanki
ngbusi
nessand20i
nnon-
banki
ngbusi
ness

i
i
.Cont
ract
ual
rel
ati
onshi
p—wr
it
tenoror
alagr
eementamongt
hepar
tner
s

i
i
i.Exi
stenceofal
awf
ulbusi
ness

i
v.Shar
ingofpr
ofi
tsandl
osses

v
.Mut
ual
agencyamongpar
tner
s

v
i.Nosepar
atel
egal
ent
it
yoft
hef
ir
m

v
ii
.Unl
i
mit
edl
i
abi
l
ity

v
ii
i.Rest
ri
cti
onont
ransf
erofi
nter
est

i
x.Ut
mostgoodf
ait
h.

For
mat
ionofPar
tner
shi
p:

Apar tnershi
pfirm canbef ormedthroughanagr eementamongt woormor epersons.The
agreementmaybeor alorinwr i
ti
ng.Butiti
sdesirablethatallt
ermsandcondi ti
onsof
partnershipareputinwr it
ingsoast oavoidanymi sunderst
andinganddi sput
esamongt he
partners.Suchawr i
tt
enagr eementamongpar tnersisknownasPar tnershipDeed.Itmustbe
si
gnedbyal lt
hepar tnersandshouldbepr oper
lystamped.I tcanbealteredwiththemut ual
consentofal lthepartners.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Apar
tner
shi
pdeedusual
l
ycont
ainst
hef
oll
owi
ngdet
ail
s:

i
.Nameoft
hef
ir
m.

i
i
.Namesandaddr
essofal
lthepar
tner
s.

i
i
i.Nat
ureoft
hef
ir
m’sbusi
ness.

i
v.Dat
eoft
heagr
eement
.

v
.Pr
inci
pal
placeoft
hef
ir
m’sbusi
ness.

v
i.Dur
ati
onofpar
tner
shi
p,i
fany
.

v
ii
.Amountofcapi
tal
cont
ri
but
edbyeachpar
tner
.

v
ii
i.Thepr
opor
ti
oni
nwhi
cht
hepr
ofi
tsandl
ossesar
etobeshar
ed.

i
x.Loansandadv
ancesbypar
tner
sandi
nter
estpay
abl
eont
hem.

x.Amountofwi
thdr
awal
all
owedt
oeachpar
tnerandt
her
ateofi
nter
est
.

xi
.Amountofsal
aryorcommi
ssi
onpay
abl
etoanypar
tner
.

xi
i
.Thedut
ies,
power
sandobl
i
gat
ionsofal
lthepar
tner
s.

xi
i
i.Mai
ntenanceofaccount
sandaudi
t.

xi
v.Modeofv
aluat
ionofgoodwi
l
lonadmi
ssi
on,
ret
ir
ementordeat
hofapar
tner
.

xv
.Pr
ocedur
efordi
ssol
uti
onoft
hef
ir
m andset
tl
ementofaccount
s.

xv
i.Ar
bit
rat
ionf
orset
tl
ementofdi
sput
esamongt
hepar
tner
s.

xv
ii
.Ar
rangement
sincaseapar
tnerbecomesi
nsol
vent
.

xv
ii
i.Anyot
hercl
ause(
s)whi
chmaybef
oundnecessar
yinpar
ti
cul
arki
ndofbusi
ness.

Regi
str
ati
onofFi
rms:

ThePar tnershi
pAct ,
1932pr ovidesfortheregist
rati
onoffi
rmswit
htheRegist
rarofFi
rms
appointedbyt heGov ernment.Theregistr
ati
onofapar tner
shi
pfi
rmisnotcompulsory
.Butan
unregister
edf i
rm suffersf
rom cert
aindisabil
it
ies.Ther
efor
e,r
egi
str
ati
onofapartner
shipi
s
desir
able.

Pr
ocedur
eforRegi
str
ati
on:

Apart
ner
shipfir
m canberegist
eredatanyti
mebyfil
ingastat
ementi
nt hepr
escri
bedform.
Thef
orm shoul
dbedul ysi
gnedbyallthepar
tner
s.I
tshoul
dbesenttotheRegist
rarofFi
rms
al
ongwit
ht heprescr
ibedf
ee.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Thest
atementshoul
dcont
aint
hef
oll
owi
ngpar
ti
cul
ars:

1.Nameoft
hef
ir
m.

2.Pr
inci
pal
placeofi
tsbusi
ness.

3.Nameofot
herpl
aceswher
ethef
ir
miscar
ryi
ngonbusi
ness.

4.Namesi
nful
landper
manentaddr
essesofal
lthepar
tner
s.

5.Dateofcommencementoft
hef
ir
m’sbusi
nessandt
hedat
esonwhi
cheachpar
tnerj
oined
thefi
rm.

6.Dur
ati
onoft
hef
ir
m,i
fany
.

7.Nat
ureoft
hef
ir
m’sbusi
ness.

Onreceiptoft
hestatementandt hefees, t
heRegistr
armakesanent ryi
ntheRegisterofFi
rms.
Thefir
mi sconsi
deredtober egister
edwhent heentryi
smade.TheRegi st
rari
ssuesa
Cert
if
icateofRegi
strati
on.Anychangei ntheabov epar
ti
cular
smustbecommuni catedtothe
Regi
strarofFi
rmswi thi
nar easonableper i
odoft i
mesot hatnecessar
yalt
erat
ionsmaybe
madei ntheRegi
sterofFirms.Ther egisterisopenfori
nspecti
ononpay mentofanomi nalfee.

Mer
it
sofPar
tner
shi
p:

Thepar
tner
shi
pfor
m ofbusi
nessowner
shi
penj
oyst
hef
oll
owi
ngadv
ant
ages:

1.EaseofFor
mat
ion:

Apar t
nershi
piseasyt ofor
m asnocumber somelegalf
ormaliti
esarei nvol
v ed.Anagr
eementi
s
necessaryandtheprocedureforregi
strat
ionisv
erysimple.Similar
ly,
apar tnershi
pcanbe
dissol
vedeasil
yatanyt i
mewi thoutundergoi
nglegalf
ormali
ties.Registrat
ionofthefi
rmisnot
essenti
alandthepartner
shipagreementneednotessent i
all
ybei nwriting.

2.Lar
gerFi
nanci
alResour
ces:

Asanumberofper sonsorpartner
scont r
ibut
et othecapitaloft
hef i
rm,i
tispossibl
etocollect
l
argerf
inanci
alresour
cesthanispossibleinsolepropri
etorshi
p.Credi
twort
hinessofthefir
mi s
al
sohigherbecauseeverypart
nerispersonall
yandj oi
ntl
yliabl
eforthedebtsofthebusiness.
Therei
sgreaterscopeforexpansi
onorgr owthofbusiness.

3.Speci
ali
sat
ionandBal
ancedAppr
oach:

Thepar t
nershipfor
m enablesthepool
ingofabili
ti
esandj udgmentofseveralper
sons.
Combi nedabil
iti
esandjudgmentresul
tinmor eeffi
cientmanagementoft hebusiness.Par
tners
withcomplement ar
yskil
lsmaybechosent oav ail
oft hebenef
itsofspeci
ali
sati
on.Judici
ous
choiceofpartnerswit
hdiversi
fi
edskil
l
sensuresbal anceddecisi
ons.Part
nersmeetanddi scuss
theproblemsofbusinessfrequent
lysothatdecisi
onscanbet akenquickl
y .
 Compi
l
edbyDar
li
ngt
ondhel
l
z

4.Fl
exi
bil
i
tyofOper
ati
ons:

Thoughnotasv ersati
l
easpr opr
iet
orship,
apart
nershi
pfi
rm enj
oyssuffi
cientfl
exi
bil
it
yinitsday
-t
o-dayoperati
ons.Thenatureandplaceofbusi
nesscanbechangedwhenev ert
hepartners
desire.Theagr
eementcanbeal ter
edandnewpar t
nerscanbeadmi t
tedwhenev ernecessary.
Partnershi
pisfr
eefrom st
atutor
ycontrolbyt
heGov er
nmentexceptt
hegener all
awoft heland.

5.Pr
otect
ionofMi
nor
it
yInt
erest
:

Nobasicchangesintherightsandobli
gati
onsofpart
ner
scanbemadewi thouttheunani
mous
consentofal
lthepar
tners.Incaseapartnerf
eel
sdissat
isf
ied,
hecaneasi
l
yr et
ir
ef r
om orhe
mayapplyforthedi
ssoluti
onofpartner
ship.

6.Per
sonal
Incent
iveandDi
rectSuper
visi
on:

Ther
eisnodi v
orcebetweenowner shi
pandmanagement .Partnersshar einthepr of
it
sand
l
ossesoft hefir
m andthereismotivat
iontoimprovetheeffici
encyoft hebusi ness.Personal
cont
rolbyt hepart
nersincreasest
hepossibil
it
yofsuccess.Unl i
mitedliabil
it
yencour ages
caut
ionandcar eonthepar tofpar
tners.Fearofunl
imit
edliabil
it
ydi scouragesr eckl
essand
hast
yactionandmot ivatesthepart
nerstoputinthei
rbestef f
orts.

7.Capaci
tyf
orSur
viv
al:

Thesurv i
val
capacit
yofthepartnershi
pfir
mi shi
ghert
hant hatofsol
epropr
ietor
ship.The
part
nershipfi
rm canconti
nueafterthedeathori
nsol
vencyofapar t
neri
ftheremainingpart
ners
sodesire.Ri
skoflossisdif
fusedamongt woormor epersons.I
ncaseonelineofbusinessis
notsuccessful
,thefi
rm mayundertakeanotherl
i
neofbusinesstocompensateitslosses.

8.Bet
terHumanandPubl
i
cRel
ati
ons:

Duetonumberofrepresentati
ves(part
ner
s)ofthef
irm,i
tispossi
bletodevelopper
sonalt
ouch
wit
hemployees,
customer s,gover
nmentandthegeneral
publi
c.Healt
hyr el
ati
onswit
hthe
publ
ichel
ptoenhancet hegoodwilloft
hefi
rm andpavethewayforsteadyprogr
essofthe
busi
ness.

9.Busi
nessSecr
ecy
:

Iti
snotcompulsor
yforapar
tner
shi
pfir
mt opubl
ishandfi
l
eit
saccount
sandr epor
ts.I
mportant
secret
sofbusi
nessremai
nconfi
nedtothepar
tnersandar
eunknowntotheoutsi
deworld.

Demer
it
sofPar
tner
shi
p:

1.Unl
i
mit
edLi
abi
l
ity
:

Everypartnerisjoi
ntl
yandseverall
yli
ablefortheent
iredebtsofthef i
rm.Hehast osuf f
ernot
onlyforhisownmi st
akesbutal
sof orthelapsesanddishonestyofotherpar
tners.Thismay
curbentrepreneuri
alspi
ri
taspartnersmayhesi t
atet
ov enturei
ntonewl i
nesofbusi nessfor
fearoflosses.Priv
ateproper
tyofpartnersisnotsaf
eagai nstt
herisksofbusiness.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

2.Li
mit
edResour
ces:

Theamountoff i
nancial
resour cesinpart
nershi
pisli
mit
edtothecontri
buti
onsmadebythe
part
ners.Thenumberofpar t nerscannotexceed10inbanki
ngbusinessand20inothert
ypesof
busi
ness.Therefore,par
tnershipform ofownershi
pisnotsui
tedt
ounder t
akebusi
ness
i
nvolvi
nghugei nvest
mentofcapi tal
.

3.Ri
skofI
mpl
i
edAgency
:

Theactsofapartnerarebindingonthefir
m aswel l
asonotherpar
tner
s.Anincompetentor
di
shonestpart
nermaybr ingdisast
erforallduetohisact
sofcommissi
onoromi ssi
on.Thati
s
whythesayingi
st hatchoosingabusinesspartneri
sasimport
antaschoosi
ngapar t
nerinl
if
e.

4.LackofHar
mony
:

Thesuccessofpartnershi
pdependsuponmut ual
understandi
ngandcooperati
onamongt he
part
ner
s.Continueddisagr
eementandbicker
ingamongt hepartner
smaypar al
ysethebusiness
ormayresulti
nitsuntimel
ydeath.Lackofacentr
alaut
hor i
tymayaffectt
heeffi
ciencyoft
he
fi
rm.Deci
sionsmaygetdel ay
ed.

5.LackofCont
inui
ty:

Apartnershi
pcomest oanendwit
hther etir
ement ,
incapaci
ty,i
nsolv
encyanddeat hofapar t
ner
.
Thefi
rm maybecar ri
edonbytheremainingpar t
nersbyadmi t
ti
ngnewpar tners.Butiti
snot
al
wayspossi bl
etorepl
aceapart
nerenjoyingtrustandconfi
denceofal l
.Therefor
e,theli
feofa
par
tnershipfi
rmisuncer
tai
n,t
houghithasl ongerli
fethansolepropri
etor
ship.

6.Non-
Transf
erabi
l
ityofI
nter
est
:

Nopartnercantransf
erhi
ssharei
nthefi
rmtoanoutsi
derwithouttheunanimousconsentofal
l
thepar
tners.Thi
smakesinvest
mentinapar
tner
shi
pf i
rm non-l
i
quidandfixed.Ani
ndivi
dual
’s
capi
tal
isblocked.

7.Publ
i
cDi
str
ust
:

Apar
tnershi
pfi
rmlackst
heconf
idenceofpubli
cbecausei
tisnotsubjectt
odet
ail
edr
ulesand
r
egul
ati
ons.Lackofpubl
i
cit
yofi
tsaffai
rsunder
minespubl
i
cconf i
denceinthef
ir
m.

Theforegoingdescr i
ptionr evealsthatpartner
shipform oforganisati
onisappropri
atefor
medium- si
zedbusi nesst hatrequireslimi
tedcapital
,pooli
ngofski l
lsandjudgmentand
moderaterisks,l
ikesmal l scaleindustri
es,wholesal
eandr etail
trade,andsmallservi
ce
concernsli
ket r
anspor tagenci es,realest
atebrokers,pr
ofessionalfi
rmslikechart
ered
accountants,doctor’
scl i
nicsornur si
nghomes, att
orneys,et
c.

For
m #3.Li
mit
edLi
abi
l
ityPar
tner
shi
p(LLP)
:

Accordi
ngtotheLi
mitedLi
abil
i
tyPart
nershi
pAct ,
2008,anLLPisabodycor
porat
efor
medand
i
ncorporat
edundert
hisAct
.Iti
salegalenti
tyseparat
efrom t
hatofi
tsmember
s.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Feat
ures:

(
i)AnLLPmustber
egi
ster
edundert
heLLPAct2008.

(
ii
)Iti
sabodycor
por
atehav
ingasepar
ateent
it
yofi
tsown.

(i
ii
)Ithasperpet
ual
successi
on.Anychangei
nit
smember
sdoesnotaf
fecti
tsexi
stence,
right
s
andliabi
l
iti
es,

(
iv)Anyi
ndi
vi
dual
orabodycor
por
atecanbeapar
tneri
nanLLP.

(
v)Ev
eryLLPmusthav
eatl
eastt
wopar
tner
s.

(
vi)Ther
emustbeatl
eastt
wodesi
gnat
edpar
tner
sandoneoft
hem mustbear
esi
denti
nIndi
a.

(
vii
)AnLLPmustmai
ntai
npr
operbooksofaccount
saspert
hedoubl
eent
rysy
stem.

(vi
i
i)AnLLPmustfi
l
ewi t
ht heRegi
str
araSt
atementofAccountandsol
vencyal
ongwi
thi
ts
annualr
etur
nint
heprescr
ibedform.

Mer
it
s:

a.AnLLPenj
oysst
abi
l
ityaschangesi
npar
tner
sdonotaf
fecti
tsexi
stence.

b.Thel
i
abi
l
ityofanLLPandi
tspar
tner
sinLi
mit
ed.

c.Abodycor
por
ateandaf
orei
gnercanbepar
tner
sinanLLP.

d.AnLLPcanrai
se,
lar
geamountoff
undsast
her
eisnor
est
ri
cti
onont
henumberofmember
s
andri
ski
nvol
vedisl
imit
ed.

Demer
it
s:

a.Ti
meandmoneyar
einv
olv
edi
nthef
ormat
ionandr
egi
str
ati
onofanLLP.

b.Ther
eisl
essf
lexi
bil
i
tyofoper
ati
onsbecauseanLLPhast
ocompl
ywi
thcer
tai
nlegal
for
mali
ti
es.

c.Therei
slackofbusinesssecr
ecyasanLLPhastofi
lethepr
escr
ibeddocument
swi
tht
he
Regist
rar
.It
saccountsareopentothepubl
i
cfori
nspecti
on.

TheLLPgivesanent
repr
eneurthetwinbenefi
tsofli
mit
edl
iabi
li
tyandaflexi
bleint
ernal
st
ruct
ure.I
tisal
sofr
eefrom di
videnddi
str
ibut
iontaxandmini
mum alt
ernatetax.

For
m #4.Joi
ntSt
ockCompany
:

Wit
hthegrowi
ngneedsofmodernbusiness,col
lect
ionofvastfi
nanci
alandmanageri
al
r
esour
cesbecamenecessar
y.Propr
iet
orshipandpartner
shipfor
msofowner shi
pfai
l
edt omeet
t
heseneedsduet
otheirl
imi
tat
ions,
e.g.
,unlimit
edli
abil
it
y,l
ackofconti
nuit
yandlimi
ted
r
esour
ces.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Thecompanyf orm ofbusinessorganisat i

onwasev ol
vedtoovercometheseli
mitati
ons.Joi
nt
stockcompanyhasbecomet hedomi nantform ofownershi
pforlar
gescaleent
erpri
ses
becauseitenabl
escoll
ectionofv astfinancial
andmanager i
alr
esourceswithpr
ovisi
onfor
l
imitedli
abil
i
tyandcontinuit
yofoper ations.

Ajointst
ockcompanyi sanincorporatedandvol
unt ar
yassociat
ionofi
ndiv
idual
swi
tha
di
stinct
ivename,per
petualsuccession,l
imit
edli
abili
tyandcommonseal ,
andusual
l
yhavi
nga
j
ointcapit
aldi
vi
dedintotransf
erablesharesofafixedvalue.

ChiefJusticeJohnMar shall
ofU.S.Adef i
nedacompanyint
hefamousDar tmouthCollegecase
as“anar ti
fici
albeing,invisi
ble,
intangi
bleandexi
sti
ngonlyi
ncontemplati
onoflaw;beingthe
mer ecreatureoflawi tpossessesonl ythosepr
opert
ieswhi
chthecharterofi
tscreati
on
confersuponi t,ei
therexpr essl
yorasi nci
dent
altoi
tsver
yexist
ence;
andt hemosti mport
antof
whichar eimmor t
ali
tyandi ndiv
iduali
ty.

“
Thus,
acompanyi
sanar
ti
fi
cial
legal
per
sonhav
ingani
ndependentl
egal
ent
it
y.

Mer
it
sofCompanyOr
gani
sat
ion:

Thecompanyf or
m ofbusinessowner
shi
phasbecomev
erypopul
ari
nmoder
nbusi
nesson
accountofi
tssever
aladvantages:

1.Li
mit
edLi
abi
l
ity
:

Shareholdersofacompanyar eli
ableonlytotheextentofthefacevalueofsharesheldbythem.
Theirpri
vateproper
tycannotbeat t
achedtopayt hedebtsofthecompany .Thus,theriski
s
l
imitedandknown.Thi sencouragespeopletoinvestthei
rmoneyi ncorpor
atesecurit
iesand,
ther
efore,contr
ibut
estothegrowthoft hecompanyf orm ofownershi
p.

2.Lar
geFi
nanci
alResour
ces:

Companyform ofownershipenabl
esthecollecti
onofhugef inanci
alresources.Thecapital
ofa
companyisdi
videdintosharesofsmalldenominationssothatpeoplewi t
hsmal lmeanscan
al
sobuythem.Benef i
tsofli
mitedl
iabi
li
tyandt r
ansferabi
li
tyofsharesattracti
nvestors.
Dif
fer
entt
ypesofsecur i
ti
esmaybei ssuedtoat t
ractvari
oust y
pesofi nv
estors.Thereisnolimi
t
onthenumberofmember sinapubli
ccompany .

3.Cont
inui
ty:

Acompanyenjoysunint
err
uptedbusinessli
fe.Asabodycorporate,i
tcont
inuestoexi
steveni
f
al
lit
smembersdieordeser ti
t.Onaccountofitsst
abl
enature,
acompanyi sbestsui
tedf
or
suchty
pesofbusinesswhichrequi
relongperiodsoft
imetomat ureanddev el
op.

4.Tr
ansf
erabi
l
ityofShar
es:

Amemberofapubl i
cli
mitedcompanycanfreelytr
ansferhisshar
eswithouttheconsentof
othermembers.Sharesofpubl
iccompani
esar egenerall
yli
stedonastockexchangesot hat
peoplecaneasi
lybuyandsellt
hem.Faci
li
tyoftransferofsharesmakesinvestmenti
ncompany
 Compi
l
edbyDar
li
ngt
ondhel
l
z

l
i
qui
dandencour
agesi
nvest
mentofpubl
i
csav
ingsi
ntot
hecor
por
atesect
or.

5.Pr
ofessi
onal
Management
:

Duet oitslargefi
nanci
alresour
cesandcont i
nuit
y,acompanycanav ai
loft
heser
vicesofexpert
professionalmanagers.Employmentofprofessi
onalmanagershavingmanageri
alskil
lsand
l
itt
lefinancialst
akeresult
sinhigheref
fi
ciencyandmor eadv
enturousmanagement .Benefi
tsof
speciali
sationandboldmanagementcanbesecur ed.

6.Scopef
orGr
owt
handExpansi
on:

Thereisconsi
derablescopefortheexpansi
onofbusinessinacompany.Onaccountofit
svast
fi
nancial
andmanager ialr
esourcesandli
mitedli
abil
it
y,companyfor
m hasi
mmensepot enti
al
forgrowth.Wi
thcontinuousexpansionandgrowth,acompanycanreapvar
iouseconomiesof
l
argescaleoperati
ons,whichhelptoimprov
eeffici
encyandreducecost
s.

7.Publ
i
cConf
idence:

Apubl i
ccompanyenjoy stheconfi
denceofpubl i
cbecausei
tsact
ivi
ti
esarer
egulatedbythe
governmentundertheCompani esAct.It
saffair
sareknowntopubli
cthr
oughpubl i
cat
ionof
accountsandreport
s.Itcanalwayskeepi t
selfi
ntunewitht
heneedsandaspir
ationsofpeopl
e
thr
oughcontinuousresearchanddevelopment .

8.Di
ff
usedRi
sk:

Theriskoflossi
nacompanyi sspr
eadov
eral
argenumberofmember
s.Ther
efor
e,t
her
iskof
anindivi
duali
nvest
ori
sreduced.

9.Soci
alBenef
it
s:

Thecompanyor gani
sati
onhel
pstomobili
sesavi
ngsofthecommuni t
yandinvestt
hem in
i
ndustry.I
tfacil
i
tatesthegr
owthoffi
nanci
ali
nsti
tut
ionsandprovi
desemploymenttoalarge
numberofper sons.Itpr
ovi
deshugerev
enuestotheGovernmentthr
oughdir
ectandindi
rect
taxes.

Demer
it
sofCompany
:

Acompanysuf
fer
sfr
om t
hef
oll
owi
ngl
i
mit
ati
ons:

1.Di
ff
icul
tyofFor
mat
ion:

I
ti sverydiffi
cultandexpensi vetof orm acompany.Anumberofdocument shav etobe
preparedandf i
ledwiththeRegi strarofCompanies.Ser
v i
cesofexpertsar
erequir
edt opr
epare
thesedocument s.Iti
sv eryt i
me-consumi ngandi
nconvenienttoobtai
napproval
sandsanctions
from diff
erentaut hor
it
iesf ortheest abl
i
shmentofacompany .Theti
meandcosti nvol
vedin
fulfi
l
li
ngl egalformali
ti
esdi scouragemanypeopl efrom adoptingt
hecompanyf orm of
owner ship.I
tisalsodifficulttowindupacompany .
 Compi
l
edbyDar
li
ngt
ondhel
l
z

2.Excessi
veGov
ernmentCont
rol
:

Acompanyi ssubjecttoelabor at
est
atut
oryregulat
ionsinit
sday -
to-
dayoper at
ions.Ithast o
submitperiodi
cal r
eports.Auditandpubl
icat
ionofaccountsisobligat
ory.Theobj ectsand
capi
talofthecompanycanbechangedonl yaf t
erfulf
il
li
ngtheprescri
bedlegalformalit
ies.
Theserulesandr egulat
ionsr educet
heeffi
ciencyandf l
exi
bil
it
yofoperati
ons.Al otofpr eci
ous
ti
me,effortandmoneyhav etobespentincompl yi
ngwiththeinnumerablelegalformali
tiesand
i
rksomest atut
oryr egul
ations.

3.LackofMot
ivat
ionandPer
sonal
Touch:

Thereisdiv
orcebetweenowner shi
pandmanagementi nal argepubli
ccompany .Theaf
fai
r sof
thecompanyar emanagedbyt heprofessi
onalandsalariedmanager swhodonothav e
personali
nvol
vementandst akeinthecompany .Absenteeowner shi
pandi mper
sonal
managementr esul
tinlackofini
ti
ati
veandresponsibil
it
y.Incenti
veforhardworkandeffi
ciency
i
slow.Personalcontactwit
hempl oyeesandcustomer sisnotpossible.

4.Ol
i
gar
chi
cManagement
:

Intheorythemanagementofacompanyi ssupposedt obedemocrati

cbutinact ualpract
ice
companybecomesanol i
gar
chy( r
ulebyaf ew).Acompanyi smanagedbyasmal l
numberof
peoplewhoar eabletoperpetuat
et hei
rrei
gny earaft
eryearduetol
ackofinterest,i
nformati
on
anduni t
yont hepartofshar
eholders.Theinter
estsofsmallandminori
tyshareholdersarenot
wellprotect
ed.Theynevergetrepresentat
ionont heBoardofDir
ect
orsandf eeloppressed.

5.Del
ayi
nDeci
sions:

Toomanylevel
sofmanagementinacompanyresul
tinr
ed-tapeandbur eaucr
acy.Alotofti
me
i
swastedi
ncal l
i
ngandhol
dingmeeti
ngsandinpassi
ngresolut
ions.Itbecomesdiffi
cul
ttotake
qui
ckdeci
sionsandpr
omptacti
onwit
htheconsequencethatbusinessopportuni
ti
esmaybe
l
ost.

6.Conf
li
ctofI
nter
est
s:

Companyi stheonlyfor
m ofbusi
nesswherei
naper manentconfl
ictofi
nter
estsmayexist.In
propr
iet
orshipther
eisnoscopeforconf
li
ctandinapartner
shipconti
nuousconfl
ictr
esult
si n
di
ssolut
ionofthefirm.Buti
nacompanyconfli
ctmaycont i
nuebetweensharehol
dersand
boardofdirect
orsorbetweenshar
ehol
dersandcredi
tor
sorbet weenmanagementandwor kers.

7.Fr
audsi
nPr
omot
ionandManagement
:

Therei
sapossi bil
it
yt hatunscrupulouspromoter
smayfloatacompanyt odupei nnocentand
i
gnoranti
nvestors.Theymaycol lecthugesumsofmoneyand, l
ateron,
mi sappr
opr i
atethe
moneyforthei
rper sonal benef
it.ThecaseofSouthSeaBubbleCompanyi stheleading
exampleofsuchmal practi
cesbypr omoters.

Mor
eov
er,
thedi
rect
orsofacompanymaymani
pul
atet
hepr
icesoft
hecompany
’sshar
esand
 Compi
l
edbyDar
li
ngt
ondhel
l
z

debenturesonthest ockexchangeonthebasisofinsidei
nfor
mati
onandaccount
ing
manipulati
ons.Thismayr esulti
nreckl
essspecul
ationinshar
esandevenasoundcompany
maybeputi ntofinancial
diff
icul
ti
es.

8.LackofSecr
ecy
:

UndertheCompani esAct, acompanyisrequir

edtodiscl
oseandpubl
i
shav ari
etyof
i
nformat i
ononit
swor king.Widespr
eadpublici
tyofaff
air
smakesital
mostimpossibl
efort
he
companyt oret
ainitsbusinesssecr
ets.Theaccountsofapubli
ccompanyareopenfor
i
nspectiontopubli
c.

9.Soci
alEv
il
s:

Gi
antcompani
esmaygiverisetomonopol
i
es, concentr
ati
onofeconomi
cpoweri
naf
ewhands,
i
nter
fer
encei
nthepol
i
tical
sy st
em,l
ackofindustri
alpeace,et
c.

Sui
tabi
l
ity
:

Despiteit
sdrawbacks,t
hecompanyf orm oforgani
sati
onhasbecomev erypopular
,parti
cul
arl
y
forlar
gebusinessconcerns.Thi
sisbecauseitsmerit
sfaroutweighthedemer i
ts.Manyofthe
drawbacksofacompanyar emainl
yduet otheweaknessesoft hepeopl
ewhopr omoteand
managecompani esandnotbecauseoft hecompanysy stem assuch.Thecompany
organisat
ionhasmadei tpossi
blet
oaccumul atel
argeamount sofcapit
alrequi
redforlar
ge
scaleoperati
ons.

Duetoit
suniquechar
acteri
sti
cs,
thecompanyf
orm ofowner
shi
pisi
deal
l
ysui
tedt
othe
fol
l
owingty
pesofbusiness:

(
i)Heavyorbasicindust
ri
esli
keship-
bui
l
ding,
coach-
maki
ngf
act
ory
,engi
neer
ingf
ir
ms,
etc.
,
r
equir
inghugeinvestmentofcapi
tal
.

(i
i)Largescaleoper
ati
onsareverycr
ucialbecauseofeconomiesofscal
e,departmentalst
ores,
chainstor
esandent er
pri
sesengagedintheconstruct
ionofbr
idges,
dams, mult
istor
ied
buil
dings,et
c.

(i
ii
)Theli
neofbusi
nessi
nvol
vesgr
eatuncer
tai
ntyorheav
yri
sk,
e.g.
,shi
ppi
ngandai
rl
ine
concer
ns.

(
iv)Thelawmakesthecompanyor
gani
sat
ionobl
i
gat
ory
,e.
g.,
banki
ngbusi
nesscanber
unonl
y
i
nt hef
orm ofcompany
.

(
v)Theowner
soft
hebusi
nesswantt
oenj
oyl
i
mit
edl
i
abi
l
ity
.

For
m #5.OnePer
sonCompany(
OPC)
:

AccordingtoTheCompaniesAct,
2013ofIndi
a“OnePersonCompanyisacompanyr egi
ster
ed
undertheproposedCompaniesActwi
thj
ustonememberandshallhave‘(
OPC)’addedin
bracket
st oi
tsname.”TheMemorandum ofsuchacompanyshal
li
ndicat
ethenameoft he
 Compi
l
edbyDar
li
ngt
ondhel
l
z

per
son.

Theconceptof‘
oneper
soncompany
’hast
hef
oll
owi
ngchar
act
eri
sti
cs:

(
i)OPCmayber
egi
ster
edasapr
ivat
ecompanywi
thonemember
.

(
ii
)Adequat
esaf
eguar
dsi
ncaseofdeat
h/di
sabi
l
ityoft
hesol
eownerar
epr
ovi
ded.

(
ii
i)OPCwi
l
lhav
eacor
por
ateent
it
yofi
tsown.

(i
v)TheownerofanOPCshal
lbel
iabl
eonl
ytotheext
entofi
tscapi
tal
.Ift
heactiv
iti
esar
e
carr
iedouti
namalafi
demannert
heli
abi
li
tyoft
heownerext
endstohispersonalpr
oper
ty.

(
v)AnOPCmaybemanagedbyt
heownerorhi
srepr
esent
ati
ve.

(v
i)AnOPCwil
lgeti
tsannual
account
saudi
tedandf
il
eacopyoft
hesamewi
tht
heRegi
str
arof
Compani
es.

(
vii
)Ami
nimum shar
ecapi
tal
maybepr
escr
ibedf
oranOPC.

(
vii
i
)Ev
eryOPCshal
lhav
eatl
eastonedi
rect
or.

(i
x)Theonepersonshal
lhavetoindicat
ethenameoft
hepersonwhoi
ntheev
entoft
he
subscr
iber
’sdeat
h,di
sabi
li
ty,
etc.becomesthemembersoft
hecompany.

Mer
it
s:

(i
)OPCwillenabl
esmal l
entr
epreneur
sandprof
essi
onal
s,e.
g.,
char
ter
edaccount
ant
s,l
awy
ers,
doct
ors,
etc.toavai
lthebenef
it
sofcompanies,

(
ii
)Thepr
ocedur
eforf
ormi
ngt
heOPCi
sver
ysi
mpl
e.

(
ii
i)Runni
nganOPCi
seasyasi
tdoesnotr
equi
recompl
i
ancewi
thmanyl
egal
for
mal
i
ties.

(
iv)Asther i
skisl
imi
tedtot
hevalueofshar
esheldbyoneper
son,
smal
lent
repr
eneur
shav
enot
t
of earl
i
tigati
onandatt
achmentofper
sonalasset
s.

(v)Thereisnoneedtoshar
ebusi
nessi
nfor
mat
ionwi
thanyot
herper
son,
ther
efor
e,busi
ness
secrecyisensur
ed.

(
vi)Themot
ivat
ionandcommi
tmentoft
heownerar
ehi
ghduet
oabsenceofpr
ofi
tshar
ing.

(vi
i
)Quickdeci
sionscanbet
akenduet
ocompl
etecont
rol
byt
heowner
.Ther
eisf
reedom of
acti
on.

(
vii
i)OPCwouldprov
idet
hestar
t-
upentr
epr
eneur
sandprof
essi
onal
sthemuchneeded
f
lexibi
l
ityi
nset
ti
ngupbusi
nesswit
houtl
osi
ngcontr
ol.

Demer
it
s:
 Compi
l
edbyDar
li
ngt
ondhel
l
z

(
i)Thel
i
feofOPCi
suncer
tai
nandi
nst
abl
e.

(
ii
)TheconceptofOPCmakesmocker
yoft
hecor
por
ateconceptbecausecompanymeans
moret
hanoneper son.

(
ii
i)Acompanyshoul
doperat
easademocr
ati
cinst
it
uti
onwi
thdi
scussi
onanddeci
sionby
v
ot i
ng.Buti
nanOPCther
eisnodemocr
acy
.

(
iv)AnOPChast
obei
ncor
por
ated.I
thasal
sot
ocompl
ywi
thsomel
egal
for
mal
i
ties.

TheconceptofOPChasbeenint
roducedi nahalf
-heart
edandi ncompl et
emanner.Howwould
OPCwor kandwhatwouldbet
her egulat
oryprov
isionsconcerni
ngt heirf
ormat
ionand
funct
ioni
nghasnotbeenmadeclear.Hence,t
hepr ovi
sionsconcerningOPCrequir
eare-
look
andredraf
ti
ng.

For
msofBusinessOr
gani
sat
ion–Sol
ePr
opr
iet
orshi
p,Par
tner
shi
pFi
rm,
Limi
tedLi
abi
l
ity
Par
tner
shi
p,Pri
vat
e

CompanyandPubl
i
cLi
mit
edCompany

For
m #1.Sol
ePr
opr
iet
orshi
p:

‘
SolePr
opr
iet
orshi
p’f
orm ofbusi
nessorgani
sati
onref
erst
oabusi
nessenterpr
iseexcl
usivel
y
owned,
managedandcontrol
ledbyasingl
epersonwit
hall
aut
hori
ty,
responsi
bil
it
yandrisk.

Def
ini
ti
onofSol
ePr
opr
iet
orshi
p:

AccordingtoJ.L.Hanson–“Atypeofbusi
nessunitwhereoneper
soni
ssolel
yresponsibl
efor
prov
idingthecapit
alandbear
ingther
iskoft
heenterpr
ise,andf
ort
hemanagementoft he
busi
ness.”

Char
act
eri
sti
csofSol
ePr
opr
iet
orshi
p:

i
.Si
ngl
eOwnershi
p–Thesolepropri
etor
shi
pform ofbusi
nessorganisat
ionhasasi
ngl
eowner
whohi
msel
f/her
sel
fst
art
sthebusinessbybr
ingi
ngtogetheral
ltheresources.

i
i.NoSepar
ati
onofOwner shi
pandManagement–Theownerhi
msel
f/her
sel
fmanagest
he
busi
nessasperhi
s/herownskil
landi
ntel
l
igence.

i
ii
.LessLegalFor
malit
ies–Thefor
mat i
onandoper
ati
onofasol
epr
opr
iet
orshi
pfor
m of
busi
nessorgani
sati
ondoesnoti
nvolv
eanylegal
for
malit
ies.

i
v.NoSepar
ateEnt
it
y–Thebusinessmanandthebusi
nessenter
pri
seareoneandthesame,
andt
hebusi
nessmanisr
esponsi
bleforev
ery
thi
ngthathappensi
nhisbusi
nessuni
t.

v
.NoShar
ingofPr
ofi
tandLoss–Thesol
epr
opr
iet
orenj
oyst
hepr
ofi
tsandl
ossesal
one.

v
i.Unl
i
mit
edLi
abi
l
ity–Thel
i
abi
l
ityofsol
epr
opr
iet
ori
sunl
i
mit
ed.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

v
ii
.One-
mancont
rol
-Theownerhascompl
etecont
rol
ofoper
ati
ons.

Adv
ant
agesofSol
ePr
opr
iet
orshi
p:

i
.Easytoform andwi ndup–I ti
sveryeasyandsimpletof
orm asol
epropr
ietor
shipf
orm of
busi
nessorganisat
ion.Nolegalfor
malit
iesar
erequir
edtobeobserv
ed.Si
milarl
y,t
hebusi
ness
canbewoundupanyt i
meifthepropr
iet
orsodecides.

i
i.QuickDecisionandPromptActi
on–Nobodyi nt
erf
eresintheaff
air
softhesol
epr
opri
etar
y
organisati
on.Sohe/shecantakequickdeci
sionsonthevari
ousissuesr
elat
ingt
obusi
nessand
accordingl
ypromptactioncanbetaken.

i
ii
.DirectMoti
vati
on–Insolepr
opr
iet
orshi
pform ofbusinessor
ganisat
ionsent
ir
eprofi
toft
he
businessgoestotheowner
.Thi
smotivat
esthepropri
etortoworkhardandrunthebusi
ness
eff
icient
ly.

i
v.Flexi
bil
i
tyi
nOper at
ions–Iti
sveryeasyt
oeffectchangesasperther
equi
rement
softhe
busi
ness.Theexpansionorcur
tai
l
mentofbusinessacti
vit
iesdoesnotr
equi
remanyfor
mali
ti
es
asinthecaseofotherfor
msofbusinessor
ganisat
ion.

v.Mai
ntenanceofBusi
nessSecr
ets–Thebusinesssecret
sareknownonlyt
othepropr
iet
or.
Heisnotrequi
redt
odiscl
oseanyinf
ormati
ontoothersunl
essandunti
lhehi
mselfsodeci
des.
Heisal
sonotboundt opubl
i
shhisbusi
nessaccounts.

vi
.Per
sonalTouch–Si
ncet
hepropri
etorhi
mselfhandl
esever
ythi
ngr
elat
ingt
obusi
ness,
iti
s
easyt
omaintai
nagoodper
sonalcont
actwithcust
omersandemploy
ees.

Li
mit
ati
onsofSol
ePr
opr
iet
orshi
p:

i
.Limi
tedResources–Ther esourcesofasolepropr
iet
orar
eal
way
sli
mit
ed.I
tisnotal
way
s
possi
blet
oarrangesuf
fi
cientfundsfrom per
sonalsour
ces.

i
i.LackofCont i
nuity–Thecontinui
tyofthebusi
nessi
sli
nkedwit
ht hel
i
feofthepropr
iet
or.
Il
lness,deat
horinsolvencyoft
hepr opr
iet
orcanleadt
oclosur
eofthebusi
ness.Thus,
the
continui
tyofbusinessisuncer
tain.

i
ii
.Unli
mitedLi
abil
i
ty–Intheey
esoflaw,t
hepr
opri
etorandt
hebusinessareoneandthesame.
Sopersonalpr
opert
iesoft
heownercanal
sobeusedtomeetthebusinessobl
i
gati
onsand
debt
s.

i
v.Unsuit
ablef
orLar
geScaleOper
ati
ons–Astheresourcesandthemanageri
al abi
li
tyare
l
imit
ed,solepr
opr
iet
orshi
pfor
m ofbusi
nessor
gani
sati
oni snotsui
tabl
eforl
arge-scale
busi
ness.

v.Limit
edManagerialExpert
ise–Asol epropr
iet
orshi
pf or
m ofbusi
nessor
gani
sati
onalway
s
suffer
sfrom l
ackofmanager ialexper
ti
se.Asi
nglepersonmaynotbeanexperti
nallf
iel
dsli
ke,
purchasi
ng,sel
li
ng,
f i
nancingetc.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Sui
tabi
l
ityofSol
ePr
opr
iet
orshi
p:

Inshort
,thi
sisasimpleoneper sonf i
rm where,onecanusehisbrandname, appl
yforpay ment
gatewaysandbeabl etoissueinvoi
ceonhi sbrandnamet ocustomers.I
tisbestfor
mf ort
he
testi
ngofideasinthestarti
ngstagewhet heri
t’
sane-commer ceortechstar
tup,onlaterst
age,
onecaneasi l
ysetupanot herel
aborateformsli
keprivat
eli
mitedcompanyorpubl i
climited
company .

For
m #2.Par
tner
shi
pFi
rm:

‘
Par t
ner shi
p’i
sanassoci
ati
onoftwoormor epersonswhopool thei
rfi
nancial
andmanager
ial
resourcesandagreetocarr
yonabusiness,andshareit
sprofi
t.Thepersonswhof or
ma
partnershipar
eindi
vi
dual
lyknownaspartnersandcoll
ecti
vel
yaf i
rm orpar
tnershi
p.

Def
ini
ti
onofPar
tner
shi
p:

Indi
anPart
ner
shi
pAct
,1932defi
nespartner
shi
pas“ther
elat
ionbet
weenper sonswhohave
agreedt
osharet
hepr
ofi
tsoft
hebusinesscarr
iedonbyal
loranyofthem acti
ngforal
l
”.

Partner
shi
pform ofbusi
nessorgani
sati
oninI
ndi
aisgover
nedbyt
heIndi
anPartner
shi
pAct
1932.Theagreementbetweenthepart
nersmaybeinor
al,
wri
tt
enori
mplied.Whenthe
agreementi
sinwr i
ti
ng,i
tister
medaspar t
ner
shi
pdeed.

Howev er
,intheabsenceofanagreement,thepr
ovi
sionsoftheI
ndianPar t
ner
shi
pAct1932
shallapply.Part
nershi
pDeedcontainstheter
msandconditi
onsforstar
tingandcont
inuingthe
partnershi
pf i
rm.Iti
salwaysbet
tertoinsi
stonawrit
tenagreementinordertoav
oidfuturel
egal
hurdles.

Char
act
eri
sti
csofPar
tner
shi
p:

i
.TwoorMor
ePer
sons–Tof
orm apar
tner
shi
pfi
rm atl
eastt
woper
sonsar
erequi
red.

i
i.Cont
ractualRel
ati
onshi
p–Mi nor
s,l
unati
csandinsol
ventpersonsarenoteli
gibl
etobecome
thepar
tners.However,
ami norcanbeadmittedtothebenef
it
sofpartnershi
pfir
mi .
e.,
hecan
haveshareintheprof
it
swithoutanyobli
gati
onforl
osses.

i
ii
.Shar
ingProfi
tsandBusiness–Ther emustbeanagreementamongthepart
nerstoshar
ethe
pr
ofi
tsandlossesofthebusinessofthepart
nershi
pfi
rm.Ift
woormorepersonssharet
he
i
ncomeofjoint
lyownedproperty,i
tisnotr
egardedaspart
nershi
p.

i
v.Exist
enceofLawfulBusi
ness–Thebusi
nessoftobecarr
iedonbypar
tners,
mustbel awf
ul.
Anyagreementtoi
ndulgeinsmuggl
i
ng,bl
ackmarketi
ngoranyotherl
awf
ulacti
vit
ycannotbe
cal
ledapartner
shi
pfir
mi ntheey
esofl
aw.

v.Pri
ncipal AgentRel
ati
onshi
p–Theremustbeanagencyrel
ati
onshi
pbet
weent hepart
ners.
Everypartneristhepri
nci
palaswel
lastheagentoft
hefi
rm.Whenapart
nerdealswit
hot her
part
ieshe/ sheactsasanagentofot
herpart
ners,
andatt
hesamet i
metheotherpar
tners
becomet hepr inci
pal
.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

vi
.Unli
mi t
edLiabil
i
ty–Thepart
nersoft
hef i
rm hav
eunli
mitedli
abi
lit
y.Theyarejoi
ntl
yaswel
l
asindi
vidual
lyl
iabl
efort
hedebtsandobli
gati
onsofthefi
rms.Ift
heassetsoft hef
ir
m ar
e
i
nsuffi
cientt
omeett hef
irm’
sli
abi
li
ti
es,
thepersonalpr
operti
esofthepartner
scanalsobe
ut
il
izedforthi
spurpose.

vii
.Voluntar
yRegistr
ati
on–Ther egi
str
ati
onofpar
tner
shi
pfi
rmisnotcompulsory
.Butan
unregi
steredfi
rm suff
ersf
rom somelimit
ati
onswhi
chmakeitv
irt
ual
lycompulsor
ytobe
regi
stered.

Mer
it
sofPar
tner
shi
p:

i
.Easyt
oFor
m

i
i
.Av
ail
abi
l
ityofLar
gerResour
ces

i
i
i.Bet
terDeci
sions

i
v.Fl
exi
bil
i
ty

v.Shari
ngofRisks–Thel
ossesofthefi
rm ar
esharedbyal
lthepar
tner
sequal
l
yoraspert
he
agreedrat
ioasdeci
dedi
nthepart
nershi
pagreement.

v
i.KeenInt
erest–Sincepartner
sshar
ethepr
ofi
tandbeart
hel
osses,
theyt
akekeeni
nter
esti
n
t
heaffai
rsofthebusiness.

vi
i.Benefi
tsofSpecializati
on–Par tner
shipfi
rm enj
oysbenefit
sofindiv
idualpar
tners,
special
i
sation,f
orinstance, i
napartnershi
pfi
rm, pr
ovi
dinglegalconsul
tancytopeople,
one
part
nermaydeal wit
hci vil
cases,oneincrimi
nalcases,andanotherinl
abourcasesandsoon
aspertheirareaofspeci al
izati
on.

vi
ii
.Prot
ecti
onofI nt
erest–Inpart
nershipform ofbusi
nessor
ganisati
on,t
heri
ght
sofeach
par
tnerandhis/heri
nterest
sareful
lyprotected.I
fapart
neri
sdissati
sfi
edwit
hanydeci
sion,
he
canaskfordissol
uti
onoft hef
ir
m orcanwi t
hdrawfrom t
hepar
tnershi
p.

i
x.Secr
ecy–Busi
nesssecr
etsoft
hef
ir
m ar
eonl
yknownt
othepar
tner
s.

Li
mit
ati
onsofPar
tner
shi
p:

Apar
tner
shi
pfi
rm al
sosuf
fer
sfr
om cer
tai
nli
mit
ati
ons:

i
.Unli
mitedLiabi
l
ity–Par
tner
sinpar
tner
shi
pfir
m sufferf
rom t
hepr
oblem ofunli
mitedliabi
l
ity
.
Resul
tantl
y,membersmayendupusingper
sonalassetst
omeettheli
abi
li
tiesofbusiness.

i
i.I
nstabi
l
ity–Ever
ypartner
shi
pfi
rm hasuncert
ainl
i
fe.Thedeath,
insolvency,
incapaci
tyort
he
ret
ir
ementofanypart
nerbri
ngthefi
rmtoanend.Notonlythatanydissenti
ngpar t
nercangi
ve
noti
ceatanyti
mefordissol
uti
onofpart
nershi
p.

i
i
i.Li
mit
edCapi
tal
–Apar
tner
shi
pfi
rm suf
fer
sduet
oli
mit
edper
sonal
capaci
tyofpar
tner
s.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

i
v.Non-
tr
ansfer
abi
l
ityofshar
e–Theshar
eofi
nter
estofanypar
tnercannotbet
ransf
err
edt
o
ot
herpar
tner
sortotheoutsi
der
s.

v
.Possi
bil
it
yofConf
li
cts–Attimest
her
eisast
rongpossi
bil
i
tyofconf
li
ctamongpar
tner
sdue
t
odiv
ergentvi
ewsandint
erest
.

Sui
tabi
l
ityofPar
tner
shi
p:

Usuall
yper sonshavingdiffer
entabi
li
ti
es,ski
ll
orexpert
isecanjoinhandstoform apartner
shi
p
fi
rmt ocar r
yonthebusi ness.Busi
nessacti
vi
tiesl
i
keconst r
ucti
on,prov
idi
nglegalser
vices,
account i
ngandfinancialservi
ceset
c.cansuccessful
l
yr ununderthi
sform ofbusi
ness
organizati
on.

Iti
sal
soconsideredsuit
ablewherecapit
alrequi
rementisofamedium si
ze.Thus,
businesses
l
ikeawholesal
et r
ade,pr
ofessi
onalservi
ces,mercant
il
ehousesandsmallmanufactur
ingunit
s
canbesuccessful
lyor
ganizedaspartner
shipfir
ms.

For
m #3.Li
mit
edLi
abi
l
ityPar
tner
shi
p(LLP)
:

Keepi ngi nvi

ewt heincapaci
tyofsol
epr opr
ietorandpart
nershi
pfir
mst oraisemoneywhile
facingunl imit
edliabi
li
ty,anewform ofbusi
nesswasi nt
roducedthroughtheLimit
edLiabi
li
ty
Par t
ner shipAct2008.Thisform waspri
mar i
lycreat
edtogivefl
iptosmallandmedi um
entrepr eneur
sandpr ofessi
onalswhocanenj oythebenefi
tsofbodycorporatewhil
ealso
retainingcontroloverthei
rbusi
nesses.

Meani
ngofLLP:

ALimitedLiabili
tyPartnership(LLP)meansabodycor por
ateregi
steredundertheLLPAct2008,
i
nwhi chsomeoral lpartners(dependingontherespecti
vejur
isdi
cti
onofst at
e)haveli
mit
ed
l
iabi
li
ty.Itt
hereforeexhibitselementsofpartner
shipsandcorporat
ions.InanLLP,onepart
ner
i
snotr esponsibleorli
ablef oranotherpar
tner’
smisconductornegligence,
asitwasthecasein
caseofor i
ginalfor
m ofpar tnershi
pf i
rms.

Thisform wasint
roducedi
nthewor
ldbyU.Sin1990sint
hewakeupoff al
lofrealestat
eand
energypri
cesinTexas.Aft
ert
hat
,ot
hercountr
iesl
ikePol
and,Si
ngapor
e,Canada,China,
Germany ,
GreeceandJapanhaveal
sofel
ttheneedtoest
abli
shLLPsinthei
rrespecti
ve
countri
es.

Def
ini
ti
onofLLP:

Accordi
ngtoLi
mit
edli
abil
i
typartner
shi
pAct2008,l
imi
tedl
i
abi
l
itypar
tner
shi
pmeans,
“a
part
nershi
pfor
medandregist
eredundert
hisact
”.

LLPagr
eementmeansanywr i
ttenagr
eementbetweenthepart
ner
softheLLPorbetweenLLP
andi
tspart
ner
swhichdeter
minesthemutualr
ightsandduti
esofthepar
tner
sandthei
rri
ghts
anddut
iesi
nrel
ati
ontothatLLP.

Anyt
woormor
eper
sonscanf
orm anLLP.Ev
enal
i
mit
edCompany
,af
orei
gnCompany
,aLLP,
 Compi
l
edbyDar
li
ngt
ondhel
l
z

aforeignLLPoranon- resi
dentcanbeapar t
nerinLLP.Al
though,t
hereisnospeci f
icmention,a
HUFr epresentedbyit
sKar t
aandaMi norcanalsobepart
nerinLLP.AnI ncorporat
ion
document( simil
artomemor andum)andLLPagr eement(
simil
artoarti
clesofassociati
on)is
requi
redt obef i
l
edelectr
onicall
y.TheRegist
rarofCompanies(ROC)shallregist
erandcontrol
LLPs

Adv
ant
agesofaLLP:

i
.AnLLPi
sabodycor
por
ateandl
egal
ent
it
ysepar
atef
rom i
tspar
tner
s.

i
i
.Ithasper
pet
ual
successi
on.

i
ii
.Beingthesepar
atel
egi
slat
ion(
i.
e.LLPAct,
2008),
theprovi
sionsofI
ndi
anPar
tner
shipAct
,
1932arenotappli
cabl
etoanLLPanditisr
egulat
edbythecontract
ual
agr
eementbet
weenthe
part
ners.

i
v.Liabi
li
tyofpar
tnersisli
mitedtothei
ragreedcontri
but
ioni
ntheLLPandnopar t
nerisl
iabl
e
onaccountoftheindependentorun-authori
zedacti
onsofot
herpart
ner
s,t
husindivi
dual
part
nersareprot
ectedfrom j
ointl
iabi
li
tycreatedbyanot
herpar
tner
’swr
ongful
business
deci
sionsormisconduct.

v
.LLPhasmor
efl
exi
bil
i
tyandl
essercompl
i
ancer
equi
rement
sascompar
edt
oacompany
.

vi
.Si
mpl
eregi
str
ati
onprocedur
e,nor
equi
rementofmi
nimum capi
tal
,nor
est
ri
cti
onson
maxi
mum l
imi
tofpart
ners.

v
ii
.Iti
seasyt
obecomeapar
tnerorl
eav
etheLLP.

v
ii
i.I
tiseasi
ert
otr
ansf
ert
heowner
shi
pinaccor
dancewi
tht
het
ermsoft
heLLPAgr
eement
.

i
x.Asaj
uri
sti
clegal
person,
anLLPcansueini
tsnameandbesuedbyot
her
s.Thepar
tner
sar
e
notl
i
abl
etobesuedforduesagai
nstt
heLLP.

x.Norestr
ict
ionont heli
mitoft
her emuner
ationtobepai
dtothepartner
sunli
keincaseof
companies.Howev er,
theremunerati
ontopartner
smustbeauthor
izedbytheLLPagreement
anditcannotexceedthelimi
tprescri
bedundertheagr
eement.

xi
.TheActalsoprovi
desf
orconver
sionofexi
sti
ngpartner
shipfi
rm,pr
ivat
eli
mit
edCompany
andunl
istedpubl
i
cCompanyintoanLLPbyr egi
ster
ingtheenti
tywi
ththeRegi
str
arof
Companies(ROC).

xi
i
.Noexposur
etoper
sonal
asset
soft
hepar
tner
sexcepti
ncaseoff
raud.

Di
sadv
ant
agesofanLLP:

i
.Anyactoft
hepar
tnerwi
thoutt
heconsentofot
herpar
tner
s,canbi
ndt
heLLP.

i
i
.Undersomecases,
li
abi
l
itymayext
endt
oper
sonal
asset
soft
hepar
tner
sal
so.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

i
i
i.ALLPi
snotal
l
owedt
orai
semoneyf
rom Publ
i
c.

i
v.Duetothehybridf
orm oft
hebusi
ness,
iti
srequi
redt
ocompl
ywi
thv
ari
ousr
ulesand
r
egulat
ionsandlegal
for
mal i
ti
es.

v.I
tisver
ydif
fi
cultt
owindupthebusinessincaseofexi
gencyast
herearelot
soflegal
compli
ancesunderLi
mit
edLiabi
li
tyPartner
shi
p(Windi
ngUpandDissolut
ion)Rul
esanditi
s
ver
ylengt
hyandexpensi
veprocedur
ealso.

Sui
tabi
l
ityofLLPs:

LimitedLiabi
li
tyPartnershi
phaspr ovedtobeaboonf orsmallmanufact
uringsect
oraswel las
forservi
cesectorfi
rms.Especi al
lyforpr
ofessional
sl i
kechar
teredaccountant
s/company
secretar
iesandadv ocates,i
thasbecomemucheasi ertobefor
medasanLLP.For ei
gnDirect
InvestmentispermittedundertheautomaticrouteinLLPs,operat
inginsector
s/acti
vi
ti
es
wher e100%FDIi sallowedthroughtheautomat i
crouteandtherearenoFDI -
li
nkedperf
ormance
conditi
ons.

For
m #4.Pr
ivat
eCompany
:

Sect
ion2(
68)ofCompani
esAmendmentAct
,2013def
inesaPr
ivat
eCompanyasf
oll
ows:

“
pri
vat
ecompany”meansacompanyhav i
ngaminimum pai
d-upshar
ecapi
tal
ofonel
akh
r
upeesorsuchhi
gherpai
d-upshar
ecapi
talasmaybepr
escri
bed,andwhi
chbyit
sart
icl
es—

i
.Rest
ri
ctst
her
ightt
otr
ansf
eri
tsshar
es;

i
i
.Excepti
ncaseofOnePer
sonCompany
,li
mit
sthenumberofi
tsmember
stot
wohundr
ed-

Prov
idedt
hatwher
etwoormorepersonshol
doneormor
eshar
esi
nacompanyj
oint
ly,
they
shal
l,f
ort
hepur
posesoft
hiscl
ause,bet
reat
edasasi
ngl
emember
-

Pr
ovi
dedf
urt
hert
hat
:

a.Per
sonswhoar
eint
heempl
oymentoft
hecompany
;and

b.Personswho,havingbeenfor
merlyi
ntheemploymentofthecompany
,weremembersoft
he
companywhi l
einthatemploy
mentandhav econt
inuedtobemembersaftert
heempl
oyment
ceased,shal
lnotbeincl
udedinthenumberofmember s;
and

i
i
i.Pr
ohi
bit
sanyi
nvi
tat
iont
othepubl
i
ctosubscr
ibef
oranysecur
it
iesoft
hecompany
.

Benef
it
sofaPr
ivat
eCompany
:

Apr
ivat
ecompanyof
fer
sthef
oll
owi
ngbenef
it
s:

i
.St
abi
li
ty–beingasepar
atel
egal
ent
it
y,t
heexi
stenceofapr
ivat
ecompanyi
sindependentof
t
heexi
stenceofi
tsmembers.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

i
i
.Li
mitedli
abi
li
ty–thel
i
abi
l
ityofmember
sisl
i
mit
edonl
ytot
heext
entoft
heunpai
dcapi
tal
on
t
heshareshel
dbythem.

i
ii
.Comparat
ivef
lexi
bil
i
tyofoper
ati
ons–apri
vat
ecompanyenjoy
slessercompli
anceandmore
pr
ivi
l
egesascomparedwithapubli
ccompany
,maki
ngi
tasuitabl
echoiceforent
repr
eneur
s.

i
v.I
mprovedcredi
bil
i
ty–duetoincorpor
ati
on,
apri
vat
ecompanyenj
oysani
mpr
ovedcr
edi
bil
i
ty
i
ndoingt
ransacti
onswi
thvar
iousstakehol
der
s.

v
.Team bui
ldi
ng–privatecompanyof
fer
sstockowner
shi
pandESOPschemest
oat
tract
t
alent
edpoolofwor
kforcefort
hecompany.

vi
.Expansi
on–Inpr i
vatecompanies,scopeofexpansi
onisl
argeasfundrai
singcaneasi
lybe
donebyrecei
vi
ngfundsf r
om i
tsmember s,
dir
ector
s.Bankal
sogivehighv
aluetopri
vate
companiesandsancti
onloansaccordingl
y.

Li
mit
ati
onofPr
ivat
eCompany
:

i
.Pr
ocessandFor
mal
i
ties:

Astheregi
strat
ionoft
hecompanyrequi
resmanyfor
mal i
ti
es,oneneedsassi
stancefrom
pr
ofessi
onalsli
keC.AsorC.
S,w.
r.
t.regi
str
ati
onandothercompli
anceswit
hther el
evantl
aws.

i
i
.Li
mit
edAv
ail
abi
l
ityofFunds:

Duet
orest
ri
cti
onsonseekingpubl
icf
undi
ng,
theprospectsofgr
owthandexpansi
onar
eli
mit
ed
t
otheper
sonalf
inanci
ngcapaci
ti
esofmembersofaprivat
ecompany.

i
i
i.Exi
tSt
rat
egy
:

Thoughiti
seasyforasharehol
dertoexitfr
om acompany
,theprocedur
est
owi ndupapri
vat
e
l
imit
edcompanyi scompl
icatedandinvolv
escumbersomeprocedur
esandsubstant
ial
l
iqui
dati
oncost.

For
m #5.Publ
i
cLi
mit
edCompany
:

Publ
i
ccompanyi
saseparatel
egalent
it
yincorpor
atedundercompaniesact,al
lowi
ngthe
member
stotr
ansf
ert
heirshar
es,whil
ehavingalargernumberofsharehol
derbase.

Def
ini
ti
onofPubl
i
cCompany
:

u/
s2(
71)ofCompani
esActAmendment2013,
publ
i
ccompanymeansacompanywhi
ch:

i
.Isnotapr
ivat
ecompany
;

i
i.Hasaminimum pai
d-upshar
ecapi
tal
off
ivel
akhr
upeesorsuchhi
gherpai
d-upcapi
tal
,as
maybeprescri
bed–

Pr
ovi
dedt
hatacompanywhi
chi
sasubsi
diar
yofacompany
,notbei
ngapr
ivat
ecompany
,shal
l
 Compi
l
edbyDar
li
ngt
ondhel
l
z

bedeemedtobepubli
ccompanyfort
hepurposesofthisActev
enwher
esuchsubsi
diar
y
companycont
inuest
obeapri
vatecompanyinit
sarti
cles.

Publ
iccompaniesar
eabl etoatt
ractl
argefundi
ngt hr
oughissueofequity
,debtandot herf
orms
offi
nanci
ngdomestical
lyaswellasinter
nati
onal
ly.Duetotoomuchl egalconstr
aintsand
compli
ances,apubl
i
ccompanyi snotaverysui
tablefor
m ofbusinessespecial
l
yf orsmall
scal
e
busi
nessesandsmallentrepr
eneurs.

Howeveronceabusi
nessiswel
lest
abli
shedi
ntheindust
ry,
thenri
dingonthepr
esti
geand
cr
edibi
li
tyoft
hebusi
ness,
atalat
erstage,
abusi
nesscanunravel
theopti
onofbeingfor
medas
apubli
ccompany.

Adv
ant
agesofaPubl
i
cLi
mit
edCompany(
PLC)
:

Fol
l
owi
ngar
ethepr
omi
nentadv
ant
agesofhav
ingapubl
i
cli
mit
edcompany
:

i
.Li
mitedLiabi
li
tyofshar
ehol
der
s–Thebusi
nessi
sviewedasasepar
atelegal
enti
ty.Thi
s
meansthatevenifashar
ehol
derl
eav
est
hePLCordies,t
hebusi
nesscanconti
nue.

i
i.Abi
l
ityt
orai
sel
argeamountofcapi
tal–Publi
cli
mitedcompani
esareabl
etorai
sel
arge
sumsofmoneybecauset
herei
snol i
mitonthemaximum numberofmembers.

i
i
i.Transf
erabi
li
tyofshares–t
heshar
esofaPLCcanbef
reel
ytr
ansf
erabl
e.Thi
spr
ovi
des
l
i
quidit
yforsharehol
ders.

i
v.Exi
tst
rat
egy–duetotransf
erabi
li
tyofsharesandbei
ngwidel
yrecogni
zableinthepubl
i
c
domai
n,apubl
iccompanymagnifi
esitschancesofeasi
l
yseeki
ngfutur
esuitorsfort
he
company
.

v.Li
mitedl
i
abil
it
yofsharehol
ders–Theli
abi
l
ityofshar
ehol
der
sisl
i
mit
edt
otheext
entof
unpai
dcapit
alontheshareshel
dbythem.

vi
.Separat
elegalent
it
y–Thepubl
i
ccompanyduet
oincor
por
ati
oni
sdi
sti
nctl
egal
per
son
di
ffer
entfr
om it
ssharehol
der
s.

Di
sadv
ant
agesofaPubl
i
cLi
mit
edCompany
:

Despi
tehavi
ngsev
eral
benef
it
s,apubl
i
cli
mit
edcompanysuf
fer
sfr
om t
hef
oll
owi
ng
di
sadvant
ages:

i
.Therearemanyl
egalfor
mali
ti
esandregul
ator
ycompli
ancest
obeadher
edt
obyacompany
dur
ingthest
ageoffor
mationaswel
lascarr
yingofdayt
odayoper
ati
ons.

i
i.Ownershi
pandcontr
olwoes–duet olargershar
eholderbase,
atti
mesit
’sdi
ff
iculttot
ake
speedyandti
melybusi
nessdeci
sionsespecial
lyi
fthesharehol
dersar
egeogr
aphicall
y
scatt
ered.

i
i
i.Vul
ner
abl
etot
akeov
ers–Wi
thshar
esbei
ngf
reel
ytr
ansf
erabl
e,apot
ent
ial
biddercan
 Compi
l
edbyDar
li
ngt
ondhel
l
z

secret
lystockupt
heshar
ehol
dingoft
hecompanyev
enf
rom openmar
ket
,tost
ageahost
il
e
takeoverbid.

i
v.Lar
gerpossi
bil
i
tyofconf
li
ctsbet
weenmanagementandowner
s

v.Lackofsecr ecy–duet oopenaccessofbooksofaccount

stopubli
c,aswel
lasi
nspect
ionby
therelevantauthor
it
ies,
iti
sdiff
icul
ttomaint
ainsecr
etsofbusi
nesswit
hint
heconf
inedwall
sof
business.

vi
.Inordert
opr ot
ecttheint
erestofi
nvest
ors,
apubl
i
ccompanyi
srequi
redt
ofol
l
owmany
contr
olsandregulat
ions.

v
ii
.Thereisapossibi
li
tythattheorigi
nal
owner
scanl
osecont
rol
oft
hepubl
i
cli
mit
edcompany
i
ntheissueofadisputeorviolat
ion.

vi
i
i.Somepubli
cli
mitedcompani
escangrowver
ylar
ge.Asar
esul
t,manycansuf
ferf
rom
mismanagementandslowdeci
sionmaki
ng.

i
x.Owi
ngtohigherdegr
eeoftr
anspar
encyandaccount
abi
l
ity
,publ
i
ccompani
essuf
ferf
rom
sl
owdeci
sionmakingwoes.

Final
lyitcanbeconcludedt hatnoparticularform ofbusinessisperfectfororganizi
ngast art
up.
Thespeci f
icchoiceofbusinessformint er-al
iadependsuponcombi nat i
onofv ar
iousfactors
l
ikecont r
oloverthebusi
ness, easeofdoi ngt hebusiness,legalcompliances,
flexibi
li
ty,
taxati
on
aswel lasthenatureofthebusiness.Anent repr
eneurshoul dcauti
ouslychooseaf orm of
businessafterconsi
deri
ngal lt
herelevantf actor
s.

Choosi
ngCompanyasaFor
m ofBusi
ness:

Keepinginviewthei
mpendingandevergr
owingneedsoffundsf
oranewaswel
lasgrowi
ng
star
tup,usuall
ythef
ir
stpr
eferencef
orest
abl
i
shingastar
tupisgi
vent
oacompanyfor
m of
busi
ness.

Acompanyf orm ascompar edtootherformsofbusi nesssuchasLLP, Proprietorshipand

Part
ner
shipfir
m, canseeklargerfundi
ngf r
om t hewhil
elimit
ingpersonall
iabili
ti
esofi t
s
members.Thet r
ansparencyandaccount abil
it
yi nacorporat
eform ofbusinessi gnit
esthe
i
nter
estofinvest
orstoparkt hei
rfundsunliketheotherformsofbusiness.

Fol
l
owi
ngar
ethedi
ff
erentf
ormsofr
elev
antbodycor
por
atef
orst
art
upsi
nIndi
a:

OnePer
sonCompany
:

Onepersoncompany( OPC)i sanewconceptinIndiawhi

chwasi nt
roducedbytheCompani es
Act2013.Unli
ketheoldCompani esact1956,wheremini
mum twodi r
ectorsandshar
eholders
wererequi
redtofor
m apr ivat
elimit
edcompany.InOPC,onlyapersonisrequi
redtoforma
company.Suchaper soncanbebot hasharehol
deraswellasthedir
ector,whi
leenj
oyingthe
benef
itsofli
mitedl
iabil
i
ty.Theref
ore,t
henameOnePer sonCompany .
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Thi
siniti
ativ
eopensuppl et
horaofspect
acularpossi
bil
i
tiesforsolepropr
ietor
sand
ent
repreneur,whowhil
etakingthebenef
itofLimit
edli
abili
tyandcorporat
izati
on,
canrunt
hei
r
smallbusinesseswi
thouthavi
ngtheneedt ofi
ndaseconddi rect
ororsecondsharehol
der
.

Char
act
eri
sti
csofOnePer
sonCompany
:

i
.OneShar
ehol
der
:

Asperthecompani esAmendmentAct2013, onlyanatur

alpersonwhoi sar esidentofIndia
andalsoacit
izenofI ndi
acanform aoneper soncompany.Itmeanst hatotherlegalentiti
esli
ke
companiesorsoci eti
esorot
hercorporat
eent i
ti
esandevenNonr esidentIndiansorFor eign
ci
ti
zenscannotf orm anOPC.Furt
hertherulesalsospeci
fythataper soncanbeashar eholder
i
nonlyoneper soncompanyatanygi ventime.Itsi
mplymeansani ndivi
dual cannothav etwo
di
ffer
entoneper soncompaniesinhisname.

i
i
.Uni
nter
rupt
edExi
stence:

AOPChas‘perpet
ualsuccession’
,meaninguninterr
uptedexi
stenceuntil
iti
sl egall
ydissol
ved.
Bei
ngaseparatel
egalent
ity
,itisunaf
fectedbyt hedeathoranyotherform ofdepartureofany
memberandconti
nuestobei nexist
enceirrespecti
veofthechangesinowner ship.

i
i
i.Bor
rowi
ngCapaci
ty:

BanksandFinanci
alInst
it
uti
onspref
ertopr
ovi
def undi
ngt
oacompanyr athert
hanpar
tner
shi
p
fi
rmsorpropri
etar
yconcerns.However
,aonepersoncompanycannoti
ssuedif
fer
entt
ypesof
equi
tyshar
es,asitcanonlybeownedbyonepersonatall
times.

i
v.EaseofTr
ansf
erabi
l
ity
:

Ownershi
pofabusi nesscanbeeasi
lytr
ansf
err
edinanOPCbyt r
ansfer
ringshar
es.I
nanOPC,
theownershipcanbetransf
err
edbyalt
eri
ngthepr
ovi
sionw.
r.
t.shar
eholding,
dir
ect
orshi
pand
nomineedirect
or.

v
.Owni
ngPr
oper
ty:

Acompanybeinganarti
fi
ci
alperson,canacqui
re,own,enjoyandalienatepropert
yinitsname.
Theproper
tyownedbyacompanycoul dbemachi ner
y,buildi
ng,i
ntangibl
eassets,land,
resi
dent
ial
proper
ty,
fact
ory,
etc.Furt
her,t
henomineedirectorcannotclaim anyownershi
pof
thecompanywhil
eservi
ngasanomi needirect
or.

v
i.OneDi
rect
or:

Aspert heCompaniesAmendmentAct ,OPCshouldhaveminimum ofonedirectorand

maximum offif
teendirectorsont heboardofthecompany.AspertheCompani esAct ,
if
nothi
ngi sment
ionedint heincorporat
iondocument,
itwouldbeassumedt hesoleshar ehol
der
shall
alsobethesoledirectorintheonepersoncompanyandwhi chshall
bepr actical
l
yt hecase
i
nmostOPCsbei ngincorporated.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

v
ii
.Nomi
nee:

Asperther elevantr
ules,OPCisrequiredtonomi nat
eaNomi neewit
hhiswri
tt
enconsentwho,
i
ntheev entofdeat horinabi
l
ityoftheownerofOPC, shallbecometheowneroft
heOPC,
enj
oyingallthepower sastheorigi
nal ownerdid.Howeversuchanomi neei
salsorequi
redt
o
ful
fi
ll
therequi r
ementsofbeingar esidentIndi
anandci t
izenofIndi
a.

Furt
herapersoni
snotal
lowedtobecomememberandornomineeofmor
ethantwoOPCs.In
caseofwhichhei
srequi
redtochoosewi
thi
n6months,
whichOPChewishestocont
inue.

v
ii
i.Taxat
ion:

Sincenothi
nghasbeenspeci f
iedassuchbythefi
nanceminist
ry,
iti
sassumedt hattheratesof
taxati
onappli
cabl
eforaprivatel
imit
edcompanyshallappl
ytoanOPC.Netpr ofi
ts,
whi chare
calcul
atedbydeducti
ngallal
lowabl
eexpensesfr
om thetur
noverofsal
es,shall
bet axabl
eat
therateofthi
rt
ypercentpl
useducationcess.

i
x.Fr
eedom f
rom Compl
i
ance:

OnePersonCompanyalsogetsfr
eedom f
rom comply
ingwit
hmanyrequi
rement
sasnormall
y
appl
i
cabletoot
herpri
vateli
mit
edcompanies.Cer
tai
nsecti
onsl
i
keSecti
on96,98andsect
ions
100to111arenotappl
icabl
eforaOnePersonCompany .

Someofsuchpr
ivi
l
egesar
easf
oll
ows:

a.Nor
equi
rementt
ohol
dannual
orext
raor
dinar
ygener
almeet
ings.

b.Nor
equi
rementofpr
epar
ingCashFl
owSt
atementi
ntheannual
financi
alst
atement
s.

c.Annual
ret
urnscanbesi
gnedbyt
heDi
rect
orhi
msel
finst
eadofaCompanySecr
etar
y.

Rel
atedPar
tyTr
ansact
ions:

WhenOPCent ersint
oacontractwit
hthesoleownerofthecompany ,whoisalsothedir
ect
orof
thecompany,t
hecompanyshal l
,unl
essthecont
ractisi
nwriti
ng,ensurethatt
heter msoft
he
contr
actoroff
ercontai
nedi
namemor andum,arerecor
dedinthemi nut
esofthefi
r stmeet
ing
oftheBoardofDir
ector
softhecompany .

Furt
her
,thecompanyshal
linf
ormtheRegist
raraboutev
erycontr
actenter
edint
obyt he
companyandrecor
dedintheminut
esofthemeet i
ngofitsBoar
dofDirect
orswithi
naperi
odof
fi
ft
eendaysofthedat
eofapproval
bytheBoard.

Thiscl
auseshallbev
erymuchinvoguesincethebusi
nessoft
heOnePer sonCompanymay
usemanyassetsoftheownerandmaypaycompensat ionf
ort
hat.Examplesmayber entpai
d
forusi
ngpropert
yormachiner
yorFurnit
ureownedbytheOwner.I
tmaypayi nt
erestonloans
takenf
rom theowner.I
tmaypaysal
ariestotheOwner.

For
msofBusi
nessOr
gani
sat
ion–Sol
ePr
opr
iet
orshi
p,Gener
alPar
tner
shi
ps,
CompanyFor
m of
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Or
gani
zat
ionandCo-
Oper
ati
ves

Mostproducti
onanddistr
ibut
ionactiv
iti
esarecar r
iedoutbymi l
li
onsofpeopl eindif
fer
entpar
ts
oft
hecountrybyconsti
tuti
ngv ar
iouskindsoforganizations.Theseorganizati
onsarebasedon
someform ofownershi
p.Choosingal egalf
orm ofor ganizati
on—asolepr opri
etor
ship,
par
tner
ship,orcor
porat
ion—ranksamonganent repreneur ’
smostv i
taldecisi
ons.

Thischoiceaffect
sanumberofmanagerialandfi
nanci
alissues,i
ncl
udi
ngt heamountoftaxes
theentr
epreneurwouldhavet
opay,whethertheentr
epr
eneurmaybeper sonal
lysuedfor
unpaidbusinessbil
ls,
andwhet
hert
hev enturewi
lldi
eautomat i
cal
lywit
ht hedemiseofthe
entr
epreneur.

Somecommonki
ndsofowner
shi
pst
ruct
uresar
easf
oll
ows:

1.Sol
ePr
opr
iet
orshi
p:

Thesi
mplestwaytost artupabusinessonone’sowni stobecomeasol etrader(
someti
mes
knownasasoleproprietor)
.Thesolepropr
ietor
ship,asitsnamei mpl
ies,
isabusinessowned
andmanagedbyasi ngleindiv
idual
.Thegeneralperceptionofsol
epropri
etorshi
psist
hatthey
areasmal
landinsi
gnif i
cantpartoft
henationalaswell asglobal
economy .

Adv
ant
ages:

Thef
oll
owi
ngar
etheadv
ant
agesofasol
epr
opr
iet
orshi
pbusi
ness:

i
.Fr
eedom:

Asthesolepropri
etori
sintotal
cont r
olofoper at
ions,he/shecanr espondqui
ckl
ytochanges,
whichisanassetinarapidl
ychangingmar ketsituati
on.Thef r
eedom tosetthecompany’s
courseofacti
onisamaj ormoti
vationalforce.Manysol epropri
etorssimpl
ythr
iveonthefeel
i
ng
ofcontrolt
heyhaveoverthei
rpersonalfutureandr ecognit
iontheyearnastheownerofthe
business.

i
i
.EaseofFor
mat
ion:

Oneoft
hemostat t
racti
vefeat
uresofasolepropr
iet
orshipi
sthati
tisfastandsimpl
etobegi
n.
I
fanentr
epr
eneurwant stooperat
eabusinessunderhis/
herownname, theysi
mplyhav
eto
obt
aint
henecessar
ylicencesfr
om theGovernmentandbeginoper
ations.

i
i
i.LowSt
art
-UpCost
:

I
naddit
iontobei
ngeasytobegi
n,t
hesol
epr
opr
iet
orshi
pisgener
all
ythel
eastexpensi
vef
orm
ofownershi
ptoest
abl
ish.

i
v.TaxBenef
it
s:

Solepropri
etorsgener
all
yenjoytaxbenefi
tsfr
om theSt
ateandCentr
alGovernmentsinv
iewof
thei
rsbeingtinyandsmalloperat
ions.Thi
sisbecauset
heGovernmentencouragessmal
land
 Compi
l
edbyDar
li
ngt
ondhel
l
z

t
inyent
repr
eneur
stocomeupi
nal
argeway
.

v
.Pr
ofi
tIncent
ive:

Oneofthemajoradvantagesofsol
epropri
etor
shipist
hatoncet heownerpaysallofthe
company’
sexpenses,he/shecankeeptheremaini
ngprofi
ts.Theprof
iti
ncenti
veisapower f
ul
one,
andprof
itsrepr
esentanexcell
entwayofkeepingscoreinthegameoft hebusiness.

v
i.NoSpeci
alLegal
Rest
ri
cti
ons:

Thesolepr
opri
etorshi
pistheleastr
egul
atedform ofbusi
nessownershi
p.I
nati
mewhent
he
gover
nmentrequestsfori
nfor
mat i
onseem neverending,
thi
sfeat
urehasmuchmer
it
.

v
ii
.Easyt
oDi
scont
inue:

Ift
heent r
epreneurdecidest
odisconti
nueoperat
ions,
hecanter
minatet
hebusi
nessqui
ckl
y,
eventhoughhewi llst
il
lbepersonal
l
yliabl
eforanyoutst
andi
ngdebt
sandobli
gat
ionst
hatt
he
businesscannotpay .

Di
sadv
ant
ages:

i
.Unl
i
mit
edLi
abi
l
ity
:

Themaj ordi
sadvantageofasol eproprietor
shipi stheunli
mit
edliabi
lit
yoft heowner ,
which
meanst hatt
hesol epropri
etori
spersonal l
yli
abl eforall
ofthebusiness’sdebts.I
nasol e
propri
etor
ship,t
heowneri sthebusiness.He/ sheownsal l
ofthebusiness’sassets,andi
fthe
businessfai
l
s,credit
orscanf or
cethesal eoft heseassetstocoveritsdebts.Fail
ureofa
propri
etor
ytradercanruinasoleproprietorfi
nanci al
ly
.

i
i
.LackofCont
inui
ty:

Thisisinher
entinasolepropr
iet
orship.I
fthepropr
iet
ordi
es,
ret
ir
es,
orbecomesi
ncapacit
ated,
thebusinessautomat
ical
lyter
minates.Unlessafamil
ymemberorempl
oyeecant
akeov er
,the
businesscouldbeinj
eopardy.

i
i
i.Di
ff
icul
tyofRai
singMoney
,ImageofI
nst
abi
l
ity
:

Ifthebusinessistogr owandexpand,asolepropriet
orgenerall
yneedsaddit
ionalfinanci
al
resources.Howev er,manypropri
etor
shavealreadyputalltheyhavei
nthei
rbusi nessesand
hav eusedtheirpersonalr
esourcesascol
later
al onexist
ingloans,
makingitdif
fi
culttoborrow
additi
onalfunds.

i
v.Li
mit
edSki
l
lsandCapabi
l
iti
es:

Asolepr opr
ietormaynothavethewi der angeofskill
sthatrunni
ngasuccessfulbusiness
r
equires.Eachofushasar easinwhichoureducat i
on,tr
aini
ng,andworkexper
ienceshav e
t
aughtusagr eatdeal
;yett
hereareot herareaswher eourdecisi
on-
makingabil
it
yisweak.Many
f
ail
uresoccurbecauseowner slacktheski ll
s,knowledge,andexper
iencei
nareast hatarevi
tal
 Compi
l
edbyDar
li
ngt
ondhel
l
z

t
obusi
nesssuccess.

Ownerstendtobrushasideprobl
emstheydon’
tunderstandordon’tf
eel comfortablewi
thin
fav
ourofthosetheycansolvemoreeasi
ly.Unf
ortunat
ely,t
heprobl
emst heysetasi desel
dom
sol
vebythemselves.Bytheti
meanownerdeci destoseekhel
pi naddressingthoseprobl
ems,
i
tmaybet oolat
et osavethecompany.

v
.Feel
i
ngofI
sol
ati
on:

Runningabusinessaloneal
lowsanentr
epreneurmaximum flexibi
li
ty,butital
sogenerates
feel
ingofisol
ati
onthatther
eisnoonetoturntoforhel
pinsol vi
ngpr oblemsorgetti
ng
feedbackonanewi dea.Mostsol
epropri
etor
sadmi tt
hattherear eti
meswhent heyfeelthe
pressureofbei
ngaloneandbeingful
l
yandcompl etel
yresponsibleforev er
ymajorbusiness
decisi
on.

v
i.Sui
tabi
l
ity
:

Solepropri
etor
shi
pform ofor
gani
zat
ioni
ssuit
abl
ewhenthesi
zeoft
heconcer
nisv er
ysmall,
requir
eslit
tl
ecapi
tal
,pr
eferst
ocontr
olbyoneper
son,
whereri
ski
smoreandpersonalat
tent
ion
i
sr equir
ed.

2.Gener
alPar
tner
shi
ps:

Asdefi
nedbyt heuni
form Par
tner
shipAct
,apartnershi
pisa‘vol
untar
yassoci
ati
onoft
woor
morepersonstocarr
yonasco- ownersabusi
nessf orpr
ofi
t’
.Anassociat
ionofi
ndi
vi
duals
competenttocont
ractwhoagreetocarr
yonal awfulbusi
nessincommonwi tht
heobjectof
shar
ingprofi
tisapart
nershi
p.

Adv
ant
ages:

i
.Lar
gerPool
ofTal
ent
:

Inapartner
shi
p,moreco-
ownersandthei
rskil
l
scont r
ibut
etothebusinessandpl
ay
complementar
yrol
etoeachotheri
ntheorganizat
ionwhichi
smi ssi
nginthesol
etradef
orm of
organi
zati
on.

i
i
.Lar
gerPool
ofMoney
:

Thepar t
nershipf
orm ofowner
shi
pcansignif
icantl
yincreaset
hepool ofcapi
talavai
labletoa
business.Eachpart
ner’
sasset
scumulat
ivel
yleadtoal argepoolofcapi
talav
ailabl
ef orthe
business,whichi
nturnhel
pstocar
ryoutthebusinessonal argescal
ecompar edtosol e
propri
etorshi
p.

i
i
i.EaseofFor
mat
ion:

Li
kesolepropri
etorshi
pfor
m oforgani
zati
on,
part
nershi
pfir
mscanalsoeasi
l
ygetestabl
i
shed
wi
thoutmuchl egalfor
mali
ti
es.However,
moreformalsyst
em pr
evai
l
sonitcomparedto
pr
opri
etorconcerns.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

i
v.Possi
bleTaxBenef
it
s:

Thepartner
shipit
selfi
snotsubj ectt
ogeneral
taxati
on.I
tserv
esasaconduitfort
heprof
itor
l
ossesitearnsorincurs;i
tisgeneral
l
ynotaseffecti
veasthecor
porat
eform ofowner
shi
p,
whichcanraisecapit
al bysel
li
ngsharesofownershi
ptooutsi
deinv
estor
s.

v
.Li
mit
edLegal
For
mal
i
ties:

Li
kepropr
iet
or shi
pconcer
ns,part
nershi
pform ofor
ganizat
ioni
snotburdenedwi
thredtape.I
n
ot
herwords,partner
shi
pform ofor
ganizat
ionstoocancomeoutsuccessful
lywi
thoutmuch
l
egalf
ormali
ties.

v
i.Di
vi
sionofPr
ofi
ts:

Therearenor estr
ict
ionsonhowpar t
nersmaydi st
ri
butethecompany’
sprof
it
saslongasthey
areconsistentwit
hthepartnershi
pagr eementanddonotv i
olat
etheri
ght
sofanypart
ner.The
partner
shipagreementshouldar t
icul
atethenatureofeachpart
ner’
scont
ri
buti
onand
proport
ionalshareoftheprofi
ts.

Di
sadv
ant
ages:

i
.Unl
i
mit
edLi
abi
l
ity
:

Atleastonememberofev erypar
tner
shi
pmustbeagener
alpart
ner.Thegener
alpart
nerhas
unli
mitedpersonal
li
abi
l
ity
, event
houghheorshei
sof
tenthepart
nerwitht
heleastper
sonal
resources.

i
i
.LackofCont
inui
ty:

Ifoneoft hepart
nersdies,t
hecont i
nuati
onoft hebusi nessgetsriddenwi t
hcompl i
cati
ons.
Partners’i
nter
estisof
tennon- t
ransfer
ablethroughi nheri
tancebecauset heremaini
ngpar t
ners
maynotwantt obeinapar tner
shipwiththeper sonwhoi nheri
tsthedeceasedpartner
’sint
erest
.
Partnerscanmakepr ovisi
onsinthepar t
nershipagreementt oavoiddi
ssoluti
onduet odeath,i
f
allpart
iesagreetoacceptaspar t
nersthosewhoi nheritt
hedeceased’sinterest
.

i
i
i.Di
ff
icul
tOwner
shi
pTr
ansf
er:

Mostpartner shipagr eement srestr

icthowapar t
nercandi sposeofhi sshareofthebusiness.
Oftenapar tneri srequir
edt osellhisinteresttother emai ningpartners.Eveni
ftheori
ginal
agreementcont ainssuchar equi
rementandcl earlydel i
neat eshowt hev al
ueofeachpartner’
s
ownershipwi llbedet ermined,thereisnoguar anteet hattheot herpartnerswi
llhav
ethe
fi
nancialresour cestobuyt hesel l
er’
si nterest
.Alltheset hingsgener all
yresul
tindi
ffi
cul
tiesin
tr
ansferr
ingt heowner shi
pf rom oneper sont oanot her.

i
v.Possi
bil
i
tyofFor
cedLi
qui
dat
ion:

Si
nceconfl
ict
samongpar
tner
sar eof
tendiff
icul
ttor
esolv
eduet
odif
ferencesamongthem,
manypart
nershi
pfi
rmsar
eforcedtodissol
ve.Thi
sisagai
nduet
opersonali
tycl
ashesand
 Compi
l
edbyDar
li
ngt
ondhel
l
z

aut
hor
it
ydi
ff
erencesamongt
hepar
tner
s.

v
.Sui
tabi
l
ity
:

Part
nershipform ofor
ganizat
ionissui
tabl
ewher
ether
eismorescopef
orl
ongdurat
ionoft
he
proj
ect
, notpossi
bleforonepersontocarr
youtt
heact
ivi
ti
es,
wheremoref
undsandmoreskil
l
s
ar
eneeded.

3.CompanyFor
m ofOr
gani
zat
ion:

Acorpor
ati
oni
s‘anar
ti
fi
cial
bei
ng,
inv
isi
ble,
int
angi
ble,
andexi
sti
ngonl
yincont
empl
ati
onoft
he
l
aw’.

Adv
ant
ages:

i
.Li
mit
edLi
abi
l
ity
:

Becauset hecompanyi saseparatelegalent

it
y,ital
l
owsi nvestorstolimitt
heirl
iabil
it
ytothe
tot
al amountoft hei
rinv
estmentinthebusiness.Thislegalprot
ectionofpersonalassets
beyondthebusi nessisofcri
ti
calconcerntomanypot entiali
nvestors.I
notherwor ds,cor
porat
e
for
m ofowner shipdoesnotpr ot
ectitsownersfrom beingheldpersonall
yli
ableforf r
audul
ent
oril
legalacts.

i
i
.Cont
inui
ty:

Thecor porat
efor
m oforgani
zati
onisbasicall
ycont
inuedindefi
nit
ely.Thecor
porati
on’
s
existencedoesnotdependonthefateofanysingl
eindiv
idual.Unl
ikeapropri
etor
shipor
partnershi
pinwhichthedeat
hofamemberendst hebusiness,acorporati
onli
vesbeyondt
he
l
ivesoft hosewhogav el
if
etotheorgani
zation.

i
i
i.EaseofOwner
shi
pTr
ansf
er:

Ifthemembersinacor por
ati
onaredi spl
easedwit
htheprogressoft hebusiness,t
heycan
freel
ysellt
hei
rsharestosomeoneel seandleavet
heorganizati
on.Simil
arl
y ,shar
ehol
derscan
alsotransf
ert
hei
rsharesthroughinherit
ancetoanewgenerati
onofowner s.Duri
ngalloft
hese
transf
ersofownershi
p,thecorpor
ationconti
nuestoconductbusinessasusual .

i
v.EaseofRai
singMoney
:

Justbecauseofl i
mit
edli
abil
ity
, corpor
ati
onshaveprov
edt obethemostef fect
ivef
orm of
ownershipforaccumulat
inglar
geamountofcapi tal
.Li
mi t
edonlybythenumberofshares
author
izedinitschar
tert
hecor porati
oncanrai
semoneyt obeginbusinessandexpandas
opport
unitydictat
esbysell
i
ngshar esofitsst
ocktoinvest
ors.

v
.Di
ff
usedRi
sk:

Thesenseoflossi
sspreadov
eralar
genumberofi
nvestorsandthepossibi
l
ityofhardshi
pona
fewpersonsasint
hecaseofpar
tner
shi
poronanindi
vidualasi
nt hecaseofsoletr
adei s
 Compi
l
edbyDar
li
ngt
ondhel
l
z

mi
nimi
zed.

v
i.Scopef
orExpansi
on:

Vastaggregati
onofcapi
talandpl
oughi
ngbackofcompany
’sownl ar
geearni
ngscontr
ibut
eto
theexpansionofi
tsbusi
ness.Thecompanyof
fer
sanexcel
lentscopeforsel
f-
gener
ati
ng
growth.

Di
sadv
ant
ages:

i
.Hi
ghLegal
Star
t-
UpCost
s:

Toest
abli
shcorporat
ionsitt
akesalotoft
imeandalsocost.Thi
sisjustbecausetheowner
s
gi
vebi
rthtoanarti
fi
ciall
egalent
it
yandgestat
ionper
iodcanbeprolongedforthenovi
ce.

i
i
.Cl
osel
yRegul
ated:

Corpor
ati
onsar
esubject
edtomor elegal
,reporti
ng,andf
inanci
alrequir
ementsthanother
for
msofownershi
p.Corpor
ateof
ficersmustmeetmor estri
ngentrequi
rementsforr
ecordi
ng
andrepor
ti
ngmanagementdeci
sionsandact ions.

i
i
i.Ext
ensi
veRecor
dKeepi
ng:

Corpor
ati
onsaresupposedt
omai ntai
ndet
ail
edaccountsforever
ytransact
ion.I
nfactahuge
est
abli
shmentisneededtomai
ntainther
ecordsandaccountsandthesamewi l
lbever
if
iedby
i
ndependentaudi
tor
s.

i
v.Doubl
eTaxat
ion:

Si
nceacorporat
ionisaseparatelegalenti
ty,
itmustpayt axesoni
tsneti
ncomeatthest
ate
l
evel
,andalsoatlocal
level
.Beforestakehol
dersreceiv
ear upeeofi
tsneti
ncomeanddiv
idends,
acor
porat
ionmustpayt hesetaxesatt hecorpor
atetaxrate.

v
.Specul
ati
onEncour
aged:

TheCompanyf orm oforgani

zati
ongeneral
l
yencouragesreckl
essspecul
ati
onont
hest
ock
exchange.Thi
sisanev i
lofgreatmagni
tudeinourcount
ry.

v
i.Bur
eaucr
ati
cAppr
oach:

Thebureaucrati
chabi
tofthecompanyoff
ici
alsist
oshir
ktr
oubl
esomei
nit
iat
ivesbecauset
hey
getnodirectbenef
itf
rom i
tandof
tenret
ardsgrowth.

v
ii
.Excessi
veRegul
ati
onbyLaw:

Thestat
einwhichacompanyislocat
edregul
atesi
tsact
ivi
ti
esmuchmor
eclosel
ythanthoseof
non-
corpor
ateassoci
ati
ons.Acompanyandit
smanagementhavetof
unct
ionwellwi
thi
nthe
l
aw.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

v
ii
i.Sui
tabi
l
ity
:

Companyform ofor
ganizati
onissui
tabl
ewheretheorgani
zati
onhastoexi
stf
oralongper
iod,
hugecapi
tal
isrequi
red,
pr of
essi
onal
ism i
sneeded,l
egalpr
otecti
oni
sneeded,
etc.

4.Co-
Oper
ati
ves(
CommonOwner
shi
p):

Co-operat
ivesprovideast r
uctur
eforstart
ingupbusinessinwhichal
lthemember softhe
cooperati
vejoint
lyown, contr
ol,
andwor kfort
hebusiness.Theyshareresponsibi
li
tyequall
y,
makecol l
ecti
v edecisi
onsont hebasi
sofoneper sononev ot
eand,inmostco- operat
ives
recei
veequal pay.

Theconceptofaco-oper
ati
veenter
pri
seisnotapol
i
tical
conceptbutt
heideaofco-oper
ati
ve
worki
ngissuppor
tedbytheGov er
nment.Co-
oper
ati
veorcommonowner shipent
erpri
secanbe
di
vi
dedbasical
lyi
ntoasocietyoracompany.

Top10Fact
orsI
nfl
uenci
ngChoi
ceofBusi
nessOr
gani
zat
ion

Thi
sarti
clet
hrowsli
ghtupont
het
opt
enf
act
orsi
nfl
uenci
ngt
hechoi
ceofbusi
nessor
gani
zat
ion.
Thefact
ors:
1.Liabi
l
ityof

Owner
s2.Li
feofor
gani
zat
ion

Or
gani
zat
ion3.Tr
ansf
erabi
l
ityofOwner
shi
p4.Fl
exi
bil
i
ty5.Tax

Li
abi
li
ty6.LegalFormali
ti
es7.Geogr
aphi
calMobi
l
ity8.ScopeofExpansi
on9.Gov
ernment
Cont
rol10.Cent
rali
sat
ionofManagementCont
rol
.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#1.

Li
abi
l
ityofOwner
s:

Thef i
rstcrucialf
act ortobekeptinviewbyanent r
epreneurwhi
lechoosingaform of
organizati
oni sli
abili
tyoftheownerinmeet i
ngthebusinessobl
igat
ions.General
ly,an
entrepreneurwoul dpreferaform oforgani
zati
oninwhichtheowner’sl
iabi
li
tyisli
mi t
edonlyt
o
thecapi t
alinvestedbyhi minthebusiness.Hewouldnotlikehi
spersonalassetstobeutil
i
sed
underanyci rcumst ancestosett
lethebusinessobli
gati
ons.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#2.

Li
feofOr
gani
zat
ion:

Ageofaf irm pl
ayscruci
alrol
einit
sgrowthandsuccess.Thi
siswhyent
repreneurspr
efera
form ofenter
pri
sewhosel i
feisnotli
nkedt
otheli
vesofitsmemberssothatexist
enceofthe
organizat
ionremainsunaff
ected.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#3.

Tr
ansf
erabi
l
ityofOwner
shi
p:
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Anot hervari
abl
einfluenci
ngchoiceoft
heform ofor
gani
zat
ioni
sfreedom oft
heownerto
transferhisownershipinthecompanytosomeoneelseasandwhendesir
ed.Thi
swil
lfaci
li
tat
e
thefirmt orai
sefundsf r
om themarket
.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#4.

Fl
exi
bil
i
ty:

Entr
epreneur
swouldli
ketochooseaf orm ofor
ganizat
ionwhi
choffer
sthemaxi
mum degr
eeof
fl
exi
bil
i
tyofmakingrecour
setoav ar
ietyofsourcesoffundsf
rom t
hemarket
.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#5.

TaxLi
abi
l
ity
:

Taxonearningsisanimport
antcostt
oanenterpr
ise.Anent
repr
eneurchoosesaf
orm of
organi
zat
ionwhichinv
olvesl
owesttaxli
abi
l
ity
.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#6.

Legal
For
mal
i
ties:

Certai
nprocedur
eshavetobef ol
l
owedandf ormali
ti
esneedtobecompl iedwithfor
establ
ishi
nganenter
pri
se.Thesefor
malit
ies,asperl
egalprovi
sions,di
fferdependingonthe
typeoforgani
zat
iontobesetup.Obvi
ously,ent
repr
eneur
swoul dliketoselectthatfor
m of
organi
zati
onwhichenabl
esthem tostar
tbusinesswit
hmi ni
mum l egalf
or mal
it
iesandcosts.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#7.

Geogr
aphi
cal
Mobi
l
ity
:

Anot
herimpor t
antconsider
ati
oninf
luenci
nganent repreneur
’schoi
ceofbusinessorganizat
ion
i
sgeographicalmobil
ity
.Usual
ly,
anent r
epreneurli
kest osel
ectaform ofor
ganizat
ionthat
pr
ovi
desf r
eedom andr i
ghttoconductbusi
nessi ndif
ferentr
egionsofthecountrywit
hout
muchlegalcomplicat
ions.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#8.

ScopeofExpansi
on:

Ent
repreneurswoul
dliket
hatform oforgani
zati
onwhi
chprovidesamplescopef
orexpansi
on
anddiv
er si
fi
cat
ionofbusi
nessto-expl
oitemergi
ngmarketopport
uni
ti
es.

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#9.

Gov
ernmentCont
rol
:

Ent
repr
eneur
sar
eloathtochooseafor
m ofor
ganizati
ontoconductt
heirbusi
nesswher
ether
e
al
waysremai
nsagreatpossi
bil
i
tyf
orgover
nmentalint
erf
erenceandcontr
ol.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Choi
ceofBusi
nessOr
gani
zat
ionFact
or#10.

Cent
ral
i
sat
ionofManagementCont
rol
:

Thelastbutnottheleastfactorthatinf
luencest hedeci
sionofanent r
epreneuristheextentof
contr
olwhichhewi ll
commandov ertheoper at
ionsofthebusiness.General
ly,
ent r
epreneur
s
pref
ersuchform oforganizati
onasenabl est hem tocommandexcl usivecontr
ol overthe
busi
nessandt hereaft
erdelegateitinanor derl
ymanner .

Ethi
cshasbecomeabuzzwor dinthecor
porateworl
d.Ther easonforthi
si stheglobal
i
zat
ion
andtheexplosi
oninthecommunicati
oni
ntheorganizati
on.Asar esul
t,businessesare
focusi
ngmor eontheethi
cspart
.Therul
esorthepri
nciplesoftheorganizati
onshouldbe
maintai
ned.Busi
nessethi
csaregiv
enmuchi mpor
tancenowaday s.

Busi
nessEt
hics

Et
hicsmeansthesetofr
ulesorpr
inci
plest
hattheor
gani
zati
onshoul
dfol
l
ow.Whi
l
einbusi
ness
et
hicsr
efer
stoacodeofconductthatbusi
nessesar
eexpect
edtofol
lowwhi
l
edoi
ngbusi
ness.

Thr
oughethics,ast
andardissetf
ortheorganizat
iontoregul
atethei
rbehav
ior
.Thi
shel
pst
hem
i
ndist
ingui
shingbetweenthewrongandtherightpartofthebusi
nesses.

Theethi
csthatar
efor
medi ntheorgani
zat
ionar
enotrocketsci
ence.Theyar
ebasedonthe
cr
eati
onofahumanmi nd.Thatiswhyethi
csdependontheinfl
uenceofthepl
ace,
time,
andthe
si
tuat
ion.

Codeofconducti
sanothert
ermthati
susedextensi
vel
yinbusi
nessesnowadays.I
tisasetof
rul
est
hatareconsi
der
edasbi ndi
ngbythepeopl
eworki
ngintheorgani
zat
ion.

Businessethicscompromisesofallt
hesevaluesandpri
nci
plesandhel
psi
ngui
dingthe
behaviorintheorgani
zat
ions.Busi
nessesshouldhaveabal
ancebetweent
heneedsofthe
stakeholder
sandt hei
rdesi
retomakepr of
it
s.

Whil
emai nt
aini
ngthesebal
ances,manyti
mesbusi
nessesrequiret
odot
radeof
fs.Tocombat
suchscenar
ios,r
ulesandpr
inci
plesar
eformedi
ntheorganizat
ion.

Thi
sensuresthatbusi
nessesgai
nmoneywi t
houtaf
fect
ingt
heindi
vi
dualsorsoci
etyasawhol
e.
Theet
hicsinv
olvedinthebusi
nessesr
efl
ectthephi
l
osophyoft
hatorgani
zati
on.

Oneofthesepol
ici
esdeterminesthef
undamental
softhator
gani
zat
ion.Asaresul
t,busi
nesses
of
tenhaveethi
calpri
nci
ples.Ther
eisali
stofet
hical
pri
ncipl
esi
nvol
vedinthebusi
nesses.

I
ntegr
it
y

Wheneverther
eisgreatpressuret
odorighti
nsteadofmaximizi
ngprofi
ts,
thispr
inci
plei
s
t
ested.Theexecut
ivesneedt odemonst
ratecourageandper
sonali
ntegri
ty,
bydoingwhat-what
t
hinkisri
ght.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Thesearethepri
ncipl
es,
whichareupri
ght
,honor
abl
e.Theyneedtof
ightfort
hei
rbel
i
efs.For
thesepr
inci
ples,
theywil
lnotbackdownandbehypocr
it
ical
orexper
ience.

Loy
alt
y

Noet hicalbehaviorcanbepr omotedwit

houtt
rust.Andf ortrust
,loy
altyneedstobe
demonst rated.Theexecut i
vesneedtobewort
hyoft histrustwhileremaini
ngloyal
tothe
i
nstit
ut i
onsandt heper son.Ther
eshouldbefr
iendshipinthet i
meofadv ersi
tyandsupportand
devotionforthedut y.

Theyshouldnotuseordiscl
osepersonali
nformat
ion.Thi
sleadstoconf
idencei
nthe
organi
zat
ion.Theyshoul
dsafeguar
dt heabil
it
yofaprofessi
onaltomakeanindependent
decisi
onbyavoidi
nganykindofinf
luenceortheconfl
ict
sofinter
est
.

So,t
heyshouldremainloyal tothei
rcompanyandtheircol
l
eagues.Whent heyacceptt
heother
employees,
theyneedtopr ov i
deareasonablet
imetothefir
m andrespectthepropr
iet
ary
i
nformati
onattachtothepr eviousf
irm.Thus,t
heyshouldr
efusetotakeparti
nanyactivi
tyt
hat
mightt
aketheundueadv ant ageofthefi
rm.

Honest
y

Theet hi
calexecut
ivesarehonestwhiledeal
ingwi t
ht heirregul
arwork.Theyalsoneedt obe
tr
uthfulanddonotdel i
berat
elydecei
veormi sleadtheinf ormat
iontoothers.Thereshouldbean
avoidanceoftheparti
altr
uths,over
statements,misrepresentat
ions,et
c.Thus,theyshouldnot
haveselecti
veomissionbyanymeanspossi bl
e.

RespectandConcer
n

Thesearetwonecessari
lydi
ff
erentfor
msofbehav i
ori
ntheorganizat
ion.Butt
heygoint
andem
thati
swhyt heyhavebeenputunderonepr
inci
ple.Whentheexecuti
veisethi
calhei
s
compassionate,
kind,
andcari
ng.

Therei
sonegoldenrul
ewhi
chst
atesthathel
pthosewhoareinneed.Fur
ther
,seekthei
r
accompli
shmentsi
nsuchamannerthatt
hebusinessobj
ect
ivesoft
hefir
m areachi
eved.

Theexecuti
vesalsoneedt
oshowr especttowardstheemployee’
sdi
gnit
y,pr
ivacy
,autonomy,
andri
ghts.Heneedstomaintai
ntheinter
estsofall
thosewhosedeci
sionsareatstake.They
needtobecourteousandt
reatthepersonequal
lyandright
ly.

Fai
rness

Theexecut
ivesneednotbej ustf
airi
nallt
hedeal
i
ngs,buttheyalsoshoul
dnotexerci
sethe
wronguseoft hei
rpower.Theyshoul
dnottryt
ouseov ereachorotheri
ndecentmanner
sto
gai
nanysor tofadvant
age.Also,
theyshoul
dnottakeundueadvantageofanythi
ngorot
her
peopl
e’
smi stakes.

Fai
rpeoplearei
ncl
inedmor et
owardsj
ust
iceandensur
ethatt
hepeopleareequal
lytr
eated.
Theyshouldbet
olerant
,open-
minded,
wil
l
ingtoadmitt
hei
rownmistakes.Theexecut
ives
 Compi
l
edbyDar
li
ngt
ondhel
l
z

shoul
dal
sobeabl
etochanget
hei
rbel
i
efsandposi
ti
onsbasedont
hesi
tuat
ion.

Leader
shi
p

Anyex ecut
ive,i
fethi
cal
,shoul
dbeal eadert
oother
s.Theyshoul
dbeabletohandl
ethe
responsibi
l
iti
es.Theyshoul
dbeawar eoftheoppor
tuni
ti
esduetothei
rposi
ti
on.Theexecut
ives
needtobeapr operr
olemodelforot
hers.

Cor
por
atesoci
alr
esponsi
bil
i
ty

Corporatesoci alr
esponsibi
li
ty(CSR)i sat ypeofinternationalpri
vatebusi nesssel f-
regulation
[1]t
hatai mst ocontri
butetosocietal goalsofaphi lanthropic,act
ivi
st,orchar i
tablenat ureby
engagingi norsuppor t
ingvolunt
eeringoret hi
cally
-ori
entedpr acti
ces.[2]Whi leoncei twas
possibletodescr i
beCSRasani nternal organisati
onalpol i
cyoracor porateet hicstrategy,[3]
thatti
mehaspassedasv ari
ousinternationallawshav ebeendev elopedandv arious
organisationshaveusedt hei
rauthorityt opushi tbeyondi ndivi
dualorev enindust ry-
wi de
i
niti
atives.Whi l
eithasbeenconsi deredaf orm ofcorporat eself
-r
egulati
on[ 4]forsomet i
me,
overthel astdecadeorsoi thasmov edconsi derablyfrom v ol
untarydecisionsatt hel evelof
i
ndividual organi
sati
ons,tomandat oryschemesatr egional,nati
onalandi nternational l
evels.

Consi deredatt heor gani sat ionallev el,CSRi sgenerallyunder stoodasast rategici nitiativet hat
cont ri
butest oabr and' sreput ati
on.[ 5]Assuch, socialresponsibi l
i
tyiniti
ati
v esmustcoher ently
ali
gnwi thandbei ntegrat edi ntoabusi nessmodel t
obesuccessf ul.Withsomemodel s,af irm's
i
mpl ement ationofCSRgoesbey ondcompl iancewithr egulatoryrequirement sandengagesi n
"actionst hatappeart of ur thersomesoci algood,bey ondt heinterestsoft hef irm andt hat
whichi sr equiredbyl aw" .[6]Ov erall,businessesmayengagei nCSRf orstrategicoret hical
purposes.Fr om ast rategi cper spect ive,CSRcancont r
ibutetof ir
m prof i
ts,par ti
cular l
yi fbr ands
voluntar i
l
ysel f-reportbot ht heposi tiveandnegat i
veout comesoft heirendeav ors.[7]I npar t
,
thesebenef it
saccr uebyi ncr easingposi ti
v epubli
cr el
at i
onsandhi ghet hi
cal standar dst o
reducebusi nessandl egal riskbyt aki ngresponsibil
ityforcorpor ateact i
ons.CSRst rat egies
encour aget hecompanyt omakeaposi t
iveimpactont heenv ir
onmentandst akehol der s
i
ncludi ngconsumer s, empl oy ees,inv estors,communi ties,andot hers.[8]From anet hical
perspect ive,somebusi nesseswi lladoptCSRpol i
ciesandpr acticesbecauseofet hical beliefs
ofseni ormanagement .Forexampl e, aCEOmaybel i
ev ethathar mingt heenv ironmenti s
ethicallyobjectionabl e.[9]

Proponentsarguethatcor
porati
onsincreaselong-t
erm profit
sbyoperatingwithaCSR
perspect
ive,
whi l
ecri
ti
csarguethatCSRdi str
actsfrom businesses'
economi crol
e.A2000
studycomparedexisti
ngeconomet r
icstudiesoftherelat
ionshipbetweensocialandfinancial
perfor
mance, concl
udingt
hatthecontradict
oryresult
sofpr evi
ousstudiesreport
ingpositi
ve,
 Compi
l
edbyDar
li
ngt
ondhel
l
z

negati
ve,andneutralfi
nanci
al i
mpact,
wereduetoflawedempiri
cal analysi
sandclai
medwhen
thestudyisproperl
yspecifi
ed,CSRhasaneutr
alimpactonfinanci
al outcomes.[
10]Cri
ti
cs
[
11][12]questi
onedthe"lof
ty"andsometi
mes"unreali
sti
cexpectat
ions"inCSR.[13]ort
hatCSR
i
smer elywindow-dressi
ng, oranat
tempttopr
e-empttheroleofgov ernmentsasawatchdog
overpowerful

mul
ti
nat
ional
cor
por
ati
ons.I
nli
newi
tht
hiscr
it
ical
per
spect
ive,
pol
i
tical
and

soci
ologicali
nsti
tuti
onali
stsbecameinter
est
edinCSRi nt
hecontextoft
heori
esofgl obali
zati
on,
neol
iberali
sm andlatecapit
ali
sm .Someinst
it
uti
onali
stsv
iewedCSRasaf orm ofcapital
ist
l
egit
imacyandi npar t
icul
arpointoutt
hatwhatbeganasasocial
mov ementagainstuninhibi
ted

cor
porat
epowerwastransfor
medbycor porati
onsintoa"busi
nessmodel
"anda"
ri
sk
management"dev
ice,
oftenwithquest
ionableresul
ts.
[14]

CSRi sti
tl
edtoaidanor ganizati
on'
smi ssi
onaswel lasser v
easagui detowhatt hecompany
repr
esentsforit
sconsumer s.Businessethicsi
st hepar tofappli
edethicsthatexaminesethi
cal
pri
ncipl
esandmor alorethi
calprobl
emst hatcanar iseinabusinessenv i
ronment.I
SO26000i s
therecogni
zedinternati
onalstandar
dforCSR.Publ icsectoror
ganizat
ions(theUnit
edNat i
ons
forexample)adheretothetripl
ebottom li
ne(TBL) .Iti
swi del
yacceptedthatCSRadher esto
simil
arpri
ncipl
es,butwithnof ormalactoflegi
slation.

Def
ini
ti
on

Si
ncethe1960s,[
18]cor
por
atesoci
alr
esponsi
bil
i
tyhasat
tract
edat
tent
ionf
rom ar
angeof
busi
nessesand

stakeholders.Awi devarietyofdefi
nitionshavebeendev el
opedbutwi thlitt
leconsensus.Par
t
ofthepr oblem withdefi
niti
onshasar isenbecauseoft hedi f
ferentint
erest srepresent
ed.A
businessper sonmaydef ineCSRasabusi nessstrat
egy ,
anNGOact i
v i
stmayseei tas'
greenwash' whi
leagov ernmentof f
icialmayseei tasv ol
untaryregulation."[
1]Inaddit
ion,
di
sagr eementaboutt hedef i
nit
ionwillarisefr
om thediscipli
naryappr oach."[1]Forexample,
whileaneconomi stmightconsiderthedi rect
or'
sdiscreti
onnecessar yf orCSRt obe
i
mpl ement edar i
skofagencycost s, alawacademi cmayconsi derthatdi scret
iontobean
appropriateexpressi
onofwhatt helawdemandsf rom director
s.[19][
20]

Corpor atesocial r
esponsibili
tyhasbeendef inedbySheehyas" i
nternati
onal priv
atebusi ness
self
-regulati
on. "[
1]Sheehyexami nedar angeofdi ff
er entdi scipl
inaryapproachest odef ining
CSR.Thedef initi
onsr ev
iewedi ncludedtheeconomi cdef initi
onof" sacrifi
cingpr of
its,
"a
managementdef i
nit
ionof" beyondcompl i
ance",instituti
onal istvi
ewsofCSRasa" socio-
poli
ticalmov ement "andl aw'sownf ocusondirectors' duties.Further,Sheehyconsi deredAr chi
e
Carroll'
sdescr i
ptionofCSRasapy ramidofresponsi bili
ti
es, namel y
, economi c,l
egal ,ethical
,
andphi lant
hropi cresponsibil
iti
es.[21]Whil
eCar roll
wasnotdef i
ningCSR, butsimpl yar guing
forclassifi
cationofact i
viti
es,Sheehydev el
opedadef ini
tiondi ff
erentlyfoll
owi ngthephi losophy
ofsci ence—thebr anchofphi losophyusedf ordefiningphenomena.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Carrollextendedcor poratesoci
al responsibil
it
yfrom thetradit
ionaleconomi candlegal
responsi bi
lit
ytoethicalandphilanthropicresponsibi
li
tyinresponset other i
singconcernson
ethi
cal issuesinbusi nesses.[
21]Thi sviewi sref
lect
edint heBusinessDi cti
onarywhichdefi
nes
CSRas" acompany '
ssenseofr esponsibil
itytowardsthecommuni tyandenv ironment(bot
h
ecological andsocial)inwhichitoper at
es.Compani esexpr essthiscit
izenship(1)t
hroughthei
r
wasteandpol l
uti
onr educti
onpr ocesses,(2)bycontri
butingeducat i
onal andsocialpr
ograms
and( 3)byear ningadequat eret
ur nsont heempl oyedresources.

Cor
por
atesoci
ali
nit
iat
ives

Cor
por
atesoci
alr
esponsi
bil
i
tyi
ncl
udessi
xty
pesofcor
por
atesoci
ali
nit
iat
ives:
[2]

Corpor
atephi
lant
hropy:companydonati
onst
ochar
it
y,i
ncl
udi
ngcash,
goods,
andser
vices,
someti
mesv i
aacor por
atefoundat
ion

Communit
yv ol
unt
eeri
ng: company
-or
gani
zedvolunteeract
ivi
ti
es,someti
meswhil
ean
empl
oyeerecei
vespayforpro-
bonoworkonbehalfofanon-prof
itorgani
zat
ion

Soci
all
y-
responsi
blebusi
nesspr
act
ices:
ethi
cal
l
ypr
oducedpr
oduct
swhi
chappeal
toa
cust
omersegment

Causepr
omot
ionsandact
ivi
sm :
company
-fundedadv
ocacycampai
gns

Cause-
rel
atedmar
ket
ing:
donat
ionst
ochar
it
ybasedonpr
oductsal
es

Cor
por
atesoci
almar
ket
ing:
company
-fundedbehav
ior
-changecampai
gns

Allsixofthecor
porateini
ti
ati
vesareformsofcor por
ateci
ti
zenship.However
,onlysomeof
theseCSRact i
vit
iesri
setothelevelofcausemarketi
ng,def
inedas" at
ypeofcorporat
esoci
al
responsibi
li
ty(
CSR)inwhichacompany '
spromot i
onalcampaignhasthedualpurposeof
i
ncr easi
ngprofi
tabi
li
tywhil
ebetteri
ngsociet
y."[
49]

Compani
esgener
all
ydonothav
ea

pr
ofi
tmotivewhenpart
ici
pati
ngincorporat
ephilant
hropyandcommuni
tyvol
unt
eer
ing.Onthe
ot
herhand,ther
emaini
ngcorpor
atesociali
nit
iat
ivescanbeexampl
esofcausemar
keting,
in
whi
chthereisbot
hasocietal
int
erestandprofi
tmot i
ve.

Rol
eofGov
ernmenti
nBusi
ness

Presi
dentCooli
dgeoncesaidthechiefbusi
nessoft heAmer icanpeopl eisbusiness.Indeed,
the
pri
vatesect
oristhecountr
y'schi
efeconomicfor
ce, butitneedsgov ernmentr egulati
on.TheU.S.
government'
srol
einbusinessisasoldasthecountryitsel
f;theConst i
tuti
ongi vesthe
governmentthepowertoregulat
esomecommer ce.Thought hegovernment ’
srolehas
i
ncreasedoverti
me, t
hebusinesscommunitysti
l
l enjoysconsi der
ablefreedom.The
governmentexer
cisesit
sauthori
tysever
always.

Per
missi
ont
oFor
m andOper
ate
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Mostbusi nessesneedtoregi
sterwit
hast ategovernmenttooperat
e.Corpor
ati
onsneeda
charter,
andot herf
ormsofbusinesses,suchasli
mi tedli
abi
l
itycompani
esorpartnershi
ps,need
otherformsofr egi
str
ati
on.
Thef unct
ionofthisr
egistrat
ioni
susuall
ytodefi
nethefinanci
al
l
iabil
itytheownersofthecompanyhav e.

Itli
mitst
hei
rri
sktotheamountt
heyhavei
nvest
edi
nthatpart
icul
aror
gani
zati
on.Regist
rat
ion
alsoall
owsthegover
nmenttomoni
torcompani
est
oexecuteitsot
herf
unct
ionsinthebusi
ness
wor l
d.

Cr
eat
ingandEnf
orci
ngCont
ract
s

Businessescont
ractwi
thotherbusinesses.Thesecontractsmaybecomplex,suchasmer
gers,
ortheymaybeassi mpleasawar rantyonsuppliespurchased.Thegov
ernmentenfor
cest
hese
contract
s.Companiesbri
ngoneanot hertocourtjustasindi
vidual
sdo.

Anoral
agreementcanconst
it
uteacont
ract
,butusual
l
yonl
yawr i
tt
enagr
eementi
sprov
abl
e.I
f
onepar
tyfai
lsorref
usest
omeetitsobl
i
gati
onunderacont
ract
,acompanywi
llt
urnt
othel
egal
syst
em f
orenfor
cement.

ConsumerPr
otect
ionandSaf
ety

Thegov ernment’
sroleinbusinessincl
udesprotect
ingtheconsumerorcustomer.Whena
vendorfail
stohonortheguar antee,t
hepurchaserhasrecour
seinthelaw.Li
kewise, whena
productcausesharmt oanindividual
,thecourt
smayhol dthevendorormanufacturer
responsibl
e.Label
ingisanotherrequir
ementthegov er
nmentimposesonmar keters.

Manyfoods,forexample,
mustdispl
aynut r
it
ionalcontentonthepackagi
ng.TheU.
S.hasbeen
makingadvancesinconsumerri
ghtsfordecades.Howev er,t
heconsumermov ementst
il
l
needsconsi
derabledevel
opmenttoprotectthepubli
c.

Empl
oyeeRi
ght
sandPr
otect
ions

Manystateandfeder
alagenci
eswor ktopr
otecttheri
ght
sofempl oy
ees.TheOccupat
ional
Healt
handSaf et
yAdmini
strat
ion,
forexample,i
sanagencyundertheDepart
mentofLabor .I
ts
missi
onistoensureasafeandhealt
hfulworkenvir
onment.TheEqualOppor
tuni
tyCommi ssion
pr
otectsemployeesf
rom di
scrimi
nati
on.

Env
ironment
alRegul
ati
onsandPr
otect
ion

Whenamar ket
ingtransacti
onimpactsathirdpar
ty–other
sbesidesthemarketerand
pur
chaser–t heeffectiscal
ledan“exter
nali
ty.
”Thethi
rdpar
tyisoft
entheenvir
onment .Thus,
it
i
sthegovernment '
sr ol
etoregul
ateindustr
yandther
ebyprotectt
hepubli
cfr
om env i
ronmental
ext
ernal
i
ties.

Whethert
hegover
nmentisef
fect
ivei
nthi
srol
eisamat
terofmuchdi
scussi
on.TheGul
foi
lspi
l
l
of2010hasbeenci
tedasevi
denceofl
axover
sight
.

Rev
enueandTaxat
ion
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Gover
nmentsatalll
evelst
axbusinesses,andtheresul
ti
ngr ev
enuei sanimportantpartof
gover
nmentbudgets.Somerevenueistaxedatthecorporatelevel,t
hentaxedaspersonal
i
ncomewhendi st
ri
butedasdiv
idends.Thisisinnowayi nappropriat
e,si
nceitbal
ancest hetax
bur
denbetweenthecompanyandi ndivi
dualandall
owst hegov ernmenttotaxmoreequi tabl
y.

I
nvest
orRi
ght
sandPr
otect
ion

Governmentmandatesthatcompaniesmakef i
nanci
ali
nformationpubli
c,ther
ebyprot
ect
ing
t
her i
ghtsofi
nvest
orsandf aci
l
itat
ingf
urt
herinvest
ment.Thisisgenerall
ydonethr
oughfi
lings
wit
htheSecuri
ti
esandExchangeCommi ssi
on.Whetherfederalregul
ati
onhasbeenadequateis
amat t
erofmuchdebate.

Whati
sPr
ofi
t?

Prof
iti
stheposi
tivegai
nremaini
ngforabusi
nessaf
teral
lcostsandexpenseshavebeen
deduct
edfrom t
otalsal
es.Pr
ofi
tisal
soref
err
edtoasthebottom l
ine,
netprof
itornetear
nings

Def
ini
ti
onofPr
ofi
tMot
ive:

Thepr
ofi
tmot
ivei
sthei
ncent
ivef
orbusi
nessest
ost
ri
vet
omaxi
mizepr
ofi
ts.

Det
ail
edEx
planat
ion:

Theprofi
tmot ivepushespeopl et oaccompl ishextraordinarythings.Vir
tual
l
yeverylarge
companywasst art
edbyanent repreneurseeki ngtoear napr ofi
t.Walkdownt heaislesofa
supermarket.Ev er
yitem int hest orewaslikel yprovidedbecauseaf armerorcompanywant ed
toearnapr ofi
t.Furthermore, thesesuppl i
ersst ri
vet oprovidetheirgoodorserviceinthemost
eff
ici
entmanner .Societ
ybenef i
tsbecauset hereisl esswast eandal owerproducti
oncost .
Whenacompany ’
scostisl owert hant hecompet it
ionitcanei t
hermat chthecompet it
or’
spr i
ce,
orreduceit
spr iceandi ncreasesal es.I
neithercase–pr ofi
tsincrease.

Innov ati
onandent r
epr eneurshipareencouragedbyt hepr ofitmot ive.Devel
opinganewpr oduct
orinnov ati
oncanbev eryr i
sky.Whatiftheent r
epreneurmi sreadst hedemandf ort
hegoodor
service,andf ewar ewi ll
ingtopurchaseitatt hepri
cei tisoffered?Whati fproducti
oncostsare
under esti
mat ed?Whati facompet it
orpr oducesasi milarandbet t
erproductbeforethe
entrepreneur?Thesear ejustafewoft hemanyr i
sksanent repr eneurorcompanyaccept swhen
choosi ngtoinv estti
meandmoneyi napr oj
ect.Whati stheirmot i
ve?Profit
sofcourse.Would
thesev enturesbemadewi thoutt
hepossi bil
i
tyofear ningapr ofit(assumingnocoer ci
on)
?
Probabl ynot.

Theprofi
tmot iv
ei snotli
mitedtobusinesses.Indivi
dualsstri
vet oimpr ovetheirwel l
-bei
ng.
Theymustr eceiv
esomet hinginret
urnforthetimeandski l
lstheyof ferandchooset owor kfor
thecompanyt hatofferst
hebestpackage, i
ncludingmonet arycompensat ion,empl oyee
benefi
ts,andthewor kenvir
onment.Manycompani eshaveprofit-shari
ngpl ans,wher e
employeesshareint hecompany ’
sprofi
ts.Theobj ecti
veistopr ov i
deani ncenti
v eforevery
employeet oworktogetherandharderbecauseev er yemployeehasav estedinterestinthe
company ’
ssuccess.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Capit
ali
sm referst
ot hepri
vateowner shipofcapitalorbusinesses.Thepr ofi
tmot i
veexist
s
becauseindivi
dual
sandcor porati
onshav eapr i
vateinterestinacompany .Pri
vateinv
estors
ownmostofAmer icanenterpr
ise.Indiv
idualsar
ef reetor i
sktheirmoneyandef f
ortsbystart
ing
abusiness.Theyarealsofreetoseekbet teremploy mentoppor t
uni t
ies.Capital
ism worksbest
i
namar keteconomywher ebusinessesst ri
vetointerpretthemar ketforces,sotheycanf ur
nish
desi
redgoodsandser vi
ceseffi
cientl
yinordertoear nlargeprofi
ts.

Doest hepr ofi

tmot i
veof ferasuf fi
cientincent i
veforcompani est osupplyall t
hegoodsand
servicesthepublicneedsandwant s?No.Somegoodsandser vicesarenotwel lsui
tedtobe
providedbycompani esseeki ngapr ofi
t.Mostoft heseser vicesar eof f
eredbyt hegov ernment .
Forexampl e,
whowoul dpayf orthemi lit
aryifthegov ernmentdi dnotpr ovidei t
?Recogni zing
fewi ndivi
dualswouldpay ,i
tisv eryunlikelyabusinesswoul dpr ofitfr
om furnishingami li
tary.
Therear emanycompani eswhopr ofi
tfrom thepr oductionofweapons, butt heirlar
gest
customer sarepr obablygov ernment s.Economi st
sal soagreet hatpol i
ce,fi
re,andj udi
cial
protectionarebestsuppl iedbyt hegov er nmentandnotpr ofitseeki ngcompani es.Howev er ,i
tis
i
mpor tantt
onot etheseser vicesar efundedwi thtaxes.Profitseeki ngcompani espayt het axes
dir
ect l
yaswi thacor poratetax, orindir
ect l
yt hr
oughi ndivi
dualswor ki
ngfort hesecompani es
whopayaper sonalincomet ax.Afterall,inthelongr uneveryempl oyee’
sjobdependsont he
company ’
sprofit
abili
ty.

Top8Rol
esofPr
ofi
tinBusi
ness

Thefollowingpointshighl
ightt
hetopeightrolesofprofi
tinbusi
ness.Therolesar
e:1.Profi
ts
as‘Surplus’2.Profi
tsasRegulat
orofEffi
ciencyandEf f
ecti
veness3.Prof
it
sandResour ce
All
ocation4.Pr ofi
tsasRentofCapit
al5.ProfitsasSourceofCapit
al6.Profi
tandInnovat
ion7.
Profi
tandSoci ety8.Profi
tsandEconomic.

Rol
e#1.Pr
ofi
tsas‘
Sur
plus’
:

Thegoal ofev
erybusinessmanageri
stogener
ateasurpl
usabovecost
.Infact,busi
nessexi
sts
forsur
plusgenerat
ion.Prof
it
sareonl
yameasureofthesurpl
usofbusi
nessincomeov er
expenses.

Rol
e#2.Pr
ofi
tsasRegul
atorofEf
fi
ciencyandEf
fect
iveness:

Pr
ofi
tsactasaregul
atorofeff
ici
encyi
nbusi
nessoperati
ons.Thosewhoaccomplishobject
ives
wi
ththel
eastcostar
eabletomaket hemaxi
mum profi
ts).I
ncompetit
ivecondi
ti
onsonlyprofi
t-
maki
ngcom­pani esaresupposedtouset
heirhumanandmat eri
alr
esourcesbet
tert
han
ot
her
s.

Rol
e#3.Pr
ofi
tsandResour
ceAl
l
ocat
ion:

I
nacompet it
ivesy
stem theal
locati
onofresourcesisdetermi
nedbywhatconsumer swantto
buyandhowmucht heyarewil
li
ngtopay.Ifpeopledemandmor ecolourTVsets,
itspri
cewil
l
i
ncreaseanditspr
oducti
onwillbecomeprofit
able.Sotherewi
llbet
ransferofr
esourcesfr
om
otheri
ndust
ri
estothecolourTVindust
ry.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Rol
e#4.Pr
ofi
tsasRentofCapi
tal
:

Profi
tsmaybet akenaspayf oruseofcapi
tal
.Oneofthepurposesofprofi
tsistocompensat e
thenumer ousowner s—propr
ietor
s,part
ner
sorsharehol
ders—fort
heuseoft hecapit
althey
haveinvestedinabusiness.Profi
tsalsomustcompensatethem f
orri
sk-t
aking.I
fthebusiness
fai
lsthecapitalmaybel ost
.

Rol
e#5.Pr
ofi
tsasSour
ceofCapi
tal
:

Amajorporti
onofundi
str
ibut
edpr
ofi
tsisrei
n­v est
edi
nbusi
nessforexpansi
onand
di
ver
sif
icat
ion.Andoneofthemaj
orsourcesofacompany
’scapi
tali
sit
sprofi
t.

Rol
e#6.Pr
ofi
tandI
nnov
ati
on:

Accor
dingt
oJ.Schumpet
er

“pr
ofi
tsbecomethekeyelementini
nnovati
oninadynamic,changingeconomy ,pr
ofi
t-
seekers
aredri
ventobr
ingf
orthnewprocessesandproduct
sprofi
tsaret hel
urethatkeepsthe
economyseeki
ngnewandmor eeff
ici
entwaysofmeeti
ngreal andpotenti
alhumanwant s.
”

Rol
e#7.Pr
ofi
tandSoci
ety
:

Profi
ts,aswehavenot
ed,yiel
dasocial
lydesir
ablebenefi
ttot
hosewhohavecapit
altoinvest
.
Withoutprof
itt
her
ewouldbenor easonfortheexist
enceofbusi
nessi
naprivat
eenterpr
ise
economy .Ev
eninsoci
ali
stcount
ri
esprofiti
sameasur eofhowabusinessi
sservi
ngsociety.

Moreover
,amajorpor
ti
onofbusi
nessprof
iti
staxedaway.Therev
enuef
rom pr
ofi
tsi
sof
ten
usedtofi
nancemanygover
nmentprogr
ammes.Theobjectissoci
ali
mpr
ovement.

Pr
ofiti
sthebasi
ccrit
eri
onformeasuri
ngaf i
rm’ssuccessinaf r
eeenter
pri
sesyst
em.Inthe
ul
ti
mateanalysi
s,t
hesurvi
valofafi
rm andtheconti
nuedempl oymentofmanagementand
l
abourdependonthefir
m’sabil
it
ytocoverall
ofit
scostsinit
ial
lyandmakeapr of
itt
her
eaft
er.

Despit
etheoverwhel mingi mportanceofpr
ofit
sinamar ket-
ori
entedeconomicsy st
em, prof
it
sti
ll
remainsanambi guousconcept .Pri
mafacie,t
heprof i
tscannotbedefinedpreci
sely.There
i
salsocontrov
ersyr egardingthef unct
iont
hatprofi
tsserveinthef r
eeenterpr
isesystem.Final
ly,
ther
eareseveralaccount i
ngpr oblemsconnectedwiththemeasur ementofprofit
s.

Wecanexaminethealt
ernat
ivet
heoriesthathav
ebeenof f
eredtoexpl
ainthemaki
ngofprofi
ts
andthenpr
oceedtoageneraldi
scussionofthemeasurementofprofi
tsandthedi
sti
nct
ion
bet
weentheeconomist
’sandtheaccountant’
sconcept
sofpr of
it
.

Nextwewil
lfocusont hei
m­pactofpr icelevel changesonassetv al
uati
onandprofit
measur
ement .Final
ly,
weshallfocusonpr ofi
tabili
tyanaly
sisthati
ncludesadi
scussionof
br
eakevenanalysis,
contri
buti
onmar gi
n,thedifferencesbetweennewandol dproducts,andt
he
gr
owinguseofpr ofi
tcentresi
nmanyal argecorpor at
ion.

Rol
e#8.Pr
ofi
tsandEconomi
c:
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Attheoutset ,
wemaynot ethatprofit
splayaveryimportant(rat
herast rategi
c)roleinamarket
-
ori
ented,capital
isti
ceconomy .Economicprofi
ts(orabove-normalratesofr et
urn)per f
orma
si
gnalli
ngf uncti
on—t heyprovidevaluabl
esignal
st osel
lers.Specif
ical
ly,theexistenceof
abnormallyhighr atesofret
urni nanindustr
yprovidest
hesi gnalandt heincentiv
ef orout
put
expansionoft hatindustr
y.

I
nfact,i
fonelooksattheindust
ri
eswher
etherat
esofr
etur
nar
ethehi
ghest
,onewi
l
lgener
all
y
f
indthatthei
ndustr
iesareexpandi
ngt
hefast
est.

Therapi
dincr
easeinthenumberoff ir
msmanuf actur­ingcomput ersduringthepastfewyear
s
i
ntheUSAandJapani sadi rectresponsetotheextraor
dinaryprofi
tsearnedbyexisti
ngfi
rms.
Onthecontr
ary,bel
ow-normal pr
ofit
sorr at
esofreturnindecli
ningindustr
iessuchasthesteel
orcoal
,i
ll
ustr
atehowper si
stentlossesleadtoreducti
oninoutputandem­pl oyment.

I
ntheabsenceofmeasuresofeconomi cprofi
tsorlosses,
themar ketsystem wouldloseoneof
i
tsvaluabl
esi
gnal
sforchange.Becauseofscarcit
y,economicresourcesmustbeut i
li
zedina
mannerdeemedmostef f
ici
entbyconsumer sandthepossibi
li
tyofeconomi cprofitorloss
pr
ovidesamechani
sm thatrewar
dsef f
ici
entfi
rmsandpenal i
zesthoset hatareineff
ici
ent.

Thus,prof
itor
ient
ati
onofmostmoder
nfir
msplay
sacr i
ti
calr
olenotonl
yinal
l
o­cat
ingscar
ce
resour
cesbutalsoinpr
ovi
dingani
n­centi
vef
oreff
ici
encyandinnov
ati
on.

WhatI
sPr
ivat
izat
ion?

Pri
vat
izati
onoccurswhenagov er
nment -
ownedbusiness,operati
on,orpropertybecomes
ownedbyapr i
vate,non-
gover
nmentparty.Notet
hatprivati
zati
onalsodescribesthetransi
ti
on
ofacompanyf r
om beingpubl
icl
ytradedtobecomingprivatel
yheld.Thi
sisreferredtoas
cor
poratepri
vat
izat
ion.

Pr
ivat
izat
ion

HowPr
ivat
izat
ionWor
ks

Priv
ati
zati
onofspecif
icgovernmentoperati
onshappensinanumberofway s,t
houghgener al
ly,
thegovernmenttr
ansfer
sowner shi
pofspecifi
cfaci
li
ti
esorbusi
nessprocessestoapri
vate, f
or-
profi
tcompany.Pri
vat
izati
ongenerall
yhelpsgover
nmentssavemoneyandi ncr
easeeffi
ciency.
I
ngener al
,twomainsectorscomposeaneconomy —thepubl
i
csectorandthepriv
atesector.

Governmentagenci esgeneral
lyrunoperati
onsandi ndust
ri
eswi thi
nt hepubli
csect or.Inthe
U.S.
, t
hepublicsectorincl
udestheU.S.PostalSer
vice,publ
icschool s,anduniversi
tysy st
ems,
aswel lastheNationalParkServi
ce.Ent
erpri
sesnotr unbyt hegovernmentcompr isethepriv
ate
sector.Pri
vatecompani esi
ncl
udet hemajori
tyoffi
rmsi ntheconsumerdi scr
etionary,
consumerst apl
es, f
inance,
inf
ormat i
ontechnol
ogy,indust
rial,
realestate,
mat eri
als,andhealth
caresectors.

I
mportant:
Therearet
wot ypesofpri
vati
zat
ion—gover
nmentandcor
por
ate,
alt
hought
het
erm
gener
all
yappl
iestogover
nment-to-
pri
vatet
ransf
ers.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Publ
i
c-t
o-Pr
ivat
ePr
ivat
izat
ionv
s.Cor
por
atePr
ivat
izat
ion

Corporat
eprivat
izati
on,ontheot herhand,all
owsacompanyt orestr
uct
ureit
soper ati
ons
wit
houtneedingt otakeshareholdersintoaccount.Thisof
tenappealst
ocompani esift he
l
eadershipwantst omakest r
ucturalchangest hatwouldnegat
ivel
yimpactshareholders.
Corporat
eprivat
izati
onsomet imest akesplaceafteramergerorfol
lowi
ngat enderofferto
purchaseacompany ’
sshares.Inordertobeconsi deredpri
vat
elyowned,acompanycannotget
fi
nancingthr
oughpubl i
ctradingv i
aast ockexchange.

Dell
Inc.isanexampleofacompanyt hattr
ansit
ionedfrom beingpubliclytradedtopri
vat
ely
hel
d.In2013, wi
thapprovalfrom i
tsshar
eholder
s,Dellofferedshareholdersaf i
xedamountper
share,
plusaspecifi
eddividendasawayt obuybacki tsstockanddel ist.Oncet hecompany
pai
dof fi
tsexist
ingshareholder
s,i
tceasedanypubl i
ctradingandremov editssharesf
rom t
he
NASDAQSt ockExchange,completi
ngthetransi
ti
ontobei ngprivat
elyheld.

Adv
ant
agesandDi
sadv
ant
agesofPr
ivat
izat
ion

Proponentsofpr i
vat
izati
onarguethatpri
vatel
y-ownedcompani esrunbusinessesmore
economi call
yandeffi
cientl
ybecausetheyareprofi
tincent
ivi
zedtoeliminatewastef
ulspendi
ng.
Further
mor e,pri
vat
eent i
ti
esdon’thavetocontendwiththebureaucrat
icredtapethatcan
plaguegov ernmententi
ti
es.

Ontheot herhand,pri
vat
izat
ionnaysayersbel
ievenecessi
tiesl
ikeelect
rici
ty,
water,
andschools
shoul
dn’tbev ul
nerabl
etomar ketf
orcesordrivenbyprofi
t.Incert
ainstatesandmunici
pal
it
ies,
l
iquorstoresandothernon-essent
ialbusi
nessesarerunbypubl i
csectors,asrev
enue-
generat
ingoperati
ons.

Exampl
eofPr
ivat
izat
ion

Befor
e2012, thest
ateofWashingtoncontrol
ledallsal
esofli
quorwithinthestate,meani
ngthat
onl
ythest at
ecouldoperat
eli
quorst or
es.Thispoli
cyall
owedthestatet oregul
atehowand
whenliquorwassold,andtocol
lectallr
evenuefrom li
quorsal
eswithinthestate.However,
in
2012,t
hest at
emov edtopri
vati
zeliquorsal
es.

FASTFACT

Oncepriv
ati
zed,pri
vatebusi
nessessuchasCostcoandWalmar
tcoul
dsel
ll
iquortothegener
al
publi
c.Al
lprev
iousl
ystate-
runstor
esweresoldt
oprivat
eowner
sorcl
osed,
andt hestat
e
ceasedcoll
ect
ingallr
evenuefr
om li
quorsal
es.

Pr
ivat
izat
ion

KEYTAKEAWAYS

Pri
vat
izat
iondescri
best
heprocessbywhi
chapieceofpr
oper
tyorbusi
nessgoesf
rom bei
ng
ownedbyt hegover
nmentt
obeingpri
vat
elyowned.

I
tgener
all
yhel
psgov
ernment
ssav
emoneyandi
ncr
easeef
fi
ciency
,wher
epr
ivat
ecompani
es
 Compi
l
edbyDar
li
ngt
ondhel
l
z

canmov
egoodsqui
ckerandmor
eef
fi
cient
ly.

Opposer
ssuggestbasi
cser
vices,
suchaseducat
ion,
shoul
dn’
tbesubj
ectt
omar
ketf
orces.

Ther
ehav
ebeensev
eral
att
empt
stopr
ivat
izet
heSoci
alSecur
it
ysy
stem i
ntheU.
S.

Rel
atedTer
ms

Denat
ional
i
zat
ion

Denati
onali
zat
ion,
alsoknownaspri
vat
izat
ion,occur
swhenanat
ional
gov
ernmentsel
l
san
assetsuchasalargefi
rmtopri
vat
einv
estors.more

Cor
por
ati
zat
ion

Cor
por
ati
zat
ionistheactofr
eorgani
zi
ngagover
nment-ownedent
it
yint
oal
egal
ent
it
ywi
tht
he
cor
por
atest
ruct
urefoundinpubl
icl
ytr
adedcompani
es.more

Publ
i
cDef
ini
ti
on

Publ
i
cref
erst
oany
thi
ngt
hatcanbeaccessedbyanyper
sonorgr
oupi
nthegener
alpopul
ati
on.
more

I
nfr
ast
ruct
ureDef
ini
ti
on

I
nfr
ast
ruct
urer
efer
sbr
oadl
ytot
hebasi
cphy
sical
syst
emsofabusi
ness,
regi
on,
ornat
ion.mor
e

Real
Est
ateI
nvest
mentTr
ust(
REI
T)Def
ini
ti
on

Arealest
atei
nvest
menttr
ust(REI
T)isapubli
clyt
radedcompanyt
hatowns,
oper
atesor
f
inancesi
ncome-pr
oduci
ngproper
ti
es.Lear
nmor eaboutREI
Ts.

Adv
ant
agesandpr
obl
emsofpr
ivat
isat
ion

Al
ookatt
hear
gument
sforandagai
nstpr
ivat
isat
ion.

Priv
atisati
oninvol
vessel
li
ngstate-ownedasset st
ot hepri
v atesector.Iti
sarguedt hepri
vate
sectortendstorunabusinessmor eeffi
cientl
ybecauseoft hepr ofi
tmot i
ve.Howev er,
cri
tics
arguepr i
vatefi
rmscanexploi
ttheirmonopol ypowerandignor ewi dersocialcosts.
Priv
atisati
onisoft
enachievedthroughli
stingthenewpr i
vat ecompanyont hest ockmarket.In
the1980sand1990s, theUKprivatisedmanypr evi
ouslystate-ownedi ndustr
iessuchasBP, BT,
Brit
ishAirways,el
ect
ri
cit
ycompani es,gascompani esandr ailnetwork.

Ar
gument
sforandagai
nstpr
ivat
isat
ion

Pot
ent
ial
benef
it
sofpr
ivat
isat
ion

1.I
mpr
ovedef
fi
ciency
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Themai nar
gumentforpriv
atisati
onist hatpri
vatecompanieshaveaprofi
tincenti
vetocut
costsandbemoreef f
ici
ent.I
fy ouwor kforagov er
nmentrunindust
rymanager sdonotusual
l
y
sharei
nanyprofi
ts.However,apr i
vatefirmisinter
est
edinmakingapr of
it,
andsoi ti
smore
l
ikel
ytocutcost
sandbeef fi
cient
.Sincepr i
vati
sati
on,compani
essuchasBT, andBri
ti
sh
Air
way shav
eshowndegr eesofi mprovedef f
ici
encyandhigherprof
it
abil
i
ty.

2.Lackofpol
i
tical
int
erf
erence

Iti
sar guedgov er
nment smakepooreconomi cmanager s.Theyaremot iv
atedbypolit
ical
pressuresratherthansoundeconomi candbusinesssense.Forexampl e,astat
eenterpri
semay
empl oysurpluswor ker
swhichisinef
fi
cient.Thegov er
nmentmayber el
uctantt
ogetridofthe
worker sbecauseoft henegat
ivepubli
cit
yinvolv
edi njoblosses.Therefor
e,stat
e-owned
enterpri
sesof t
enempl oytoomanywor kersincreasi
ngineffi
ciency.

3.Shor
tter
mvi
ew

Agov ernmentmanythi
nkonlyint er
msoft henextelecti
on.Theref
ore,
theymaybeunwi l
li
ngto
i
nv esti
ninfr
astr
uct
urei
mpr ovement swhichwill
benefitt
hef i
rminthelongter
m becausethey
aremor econcer
nedaboutprojectsthatgi
veabenefitbeforetheel
ecti
on.Iti
seasi
ertocut
publicsect
orinv
est
mentthanf rontl
i
neser v
icesli
kehealthcar
e.

4.Shar
ehol
der
s

I
tisar
guedt hatapri
vatefi
rm haspressurefrom sharehol
der
stoperfor
m eff
ici
ently
.Ift
hef
irm
i
sinef
fi
cientthenthefi
rm couldbesubjecttoat akeover
.Astat
e-ownedfi
rm doesn’
thavet
his
pr
essureandsoi ti
seasierforthem t
obei neff
icient
.

5.I
ncr
easedcompet
it
ion

Oftenpr i
vat
isati
onofstate-ownedmonopol i
esoccur sal
ongsidederegul
ati
on–i .
e.poli
ciesto
all
owmor efir
mst oentertheindust
ryandincr easet
hecompet i
ti
venessofthemar ket
.Itist
his
i
ncr easeincompetit
ionthatcanbet hegreatestspurtoi
mpr ovementsineff
ici
ency.For
exampl e,t
hereisnowmor ecompetit
ioni
nt elecomsanddistri
buti
onofgasandel ectr
ici
ty.

However ,
priv
ati
sationdoesn’
tnecessari
l
yincr
easecompetit
ion;
itdependsonthenat
ureoft
he
market.E.g.t
her
eisnocompet i
ti
onintapwaterbecausei
tisanaturalmonopol
y.Ther
eisal
so
ver
ylit
tlecompetit
ionwithi
ntherail
industr
y.

6.Gov
ernmentwi
l
lrai
ser
evenuef
rom t
hesal
e

Sell
ingst
ate-ownedassetst
othepr
ivatesect
orr ai
sedsi
gnif
icantsumsfortheUKgover
nment
i
nt he1980s.However,t
hisi
saone-offbenef
it
.Italsomeanswel oseoutonfut
uredi
vi
dends
fr
om theprofit
sofpubli
ccompani
es.

Di
sadv
ant
agesofpr
ivat
isat
ion

1.Nat
ural
monopol
y
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Anaturalmonopolyoccurswhent hemostef fi
cientnumberoff i
rmsinanindustr
yisone.For
example,tapwaterhasverysigni
fi
cantf
ixedcost s.Ther
eforetherei
snoscopef orhaving
competit
ionamongstsev er
alfir
ms.Therefore,i
nt hi
scase,pri
vati
sati
onwouldjustcreatea
pri
vatemonopolywhichmi ghtseektosethigherpr i
ceswhichexploi
tconsumers.Therefor
eiti
s
bett
ertohav eapubli
cmonopol yrat
herthanapr i
vat
emonopol ywhichcanexploi
tthe
consumer.

2.Publ
i
cint
erest

Therearemanyi ndustr
ieswhichper f
orm ani mpor t
antpubl icservice,e.
g.,healt
hcar e,
educati
onandpubl i
ctransport.I
nt hesei ndustri
es,thepr ofitmotiveshouldn’tbet hepri
mary
object
iveoffir
msandt heindustry.Forexampl e,i
nt hecaseofheal thcare,itisfeared
pri
vati
singhealthcarewoul dmeanagr eaterpriori
tyisgi ventoprof i
trat
hert hanpat i
entcar
e.
Also,i
nani ndustryli
kehealthcare, arguablywedon’ tneedapr of
itmot i
vet oimprov est
andards.
Whendoct orstreatpatient
s,theyar eunlikel
yt otryhar deriftheygetabonus.

3.Gov
ernmentl
osesoutonpot
ent
ial
div
idends.

Manyoft
hepri
vat
isedcompaniesintheUKarequi
teprofi
table.Thi
smeanst
hegov
ernment
mi
ssesoutont
heirdi
vi
dends,i
nsteadgoingt
owealthyshareholder
s.

4.Pr
obl
em ofr
egul
ati
ngpr
ivat
emonopol
i
es.

Pri
vat
isat
ioncreatespr
ivat
emonopol ies,
suchasthewatercompaniesandrai
lcompani
es.
Theseneedregulati
ngtopreventabuseofmonopolypower.Ther
efore,
ther
eissti
l
lneedfor
gover
nmentregulati
on,si
milartounderstat
eownershi
p.

5.Fr
agment
ati
onofi
ndust
ri
es

IntheUK,rai
lpr
ivatisati
onledtobreakingupt herail
net workint
oinfr
astruct
ureandt rain
operat
ingcompani es.Thisledtoar
easwher eitwasuncl earwhohadr esponsibi
li
ty.For
example,t
heHatfieldrailcr
ashwasbl amedonnoonet akingresponsi
bili
tyforsafety.Di
ffer
ent
rai
lcompanieshasi ncreasedthecompl exi
tyofrail
tickets.

6.Shor
t-
ter
mism off
ir
ms

Aswel lasthegovernmentbei ngmot i

vatedbyshortt
erm pressures,thi
sissomethingpriv
ate
fi
rmsmaydoaswel l.Topleaseshar eholder
stheymayseekt oincreaseshor
tterm prof
it
sand
avoidinvest
inginl
ongt erm projects.Forexample,
theUKi ssufferi
ngf r
om alackofinvestment
i
nnewener gysources;thepri
v ati
sedcompani esaretr
yingtomakeuseofexi sti
ngplantsrat
her
thaninvestinnewones.

Ev
aluat
ionofpr
ivat
isat
ion

Itdependsont heindustr
yinquesti
on.Anindustr
yli
ket el
ecomsisatypi
calindustr
ywherethe
i
ncentiveofprof i
tcanhelpi
ncreaseeff
ici
ency.However,i
fyouappl
yittoindustr
iesli
keheal
th
careorpubli
ct ranspor
ttheprofi
tmotiv
eislessimportant.
 Compi
l
edbyDar
li
ngt
ondhel
l
z

Itdependsonthequali
tyofregul
ati
on.Dor
egul
ator
smaket
hepr
ivat
isedf
ir
msmeetcer
tai
n
standardsofser
viceandkeeppri
ceslow?

I
sthemarketcont
est
ableandcompeti
ti
ve?Creat
ingapri
vat
emonopolymayharm consumer
i
nter
est
s,buti
fthemarketi
shighl
ycompeti
ti
ve,t
herei
sgreat
erscopef
oref
fi
ciencysavi
ngs.

Cany oucr
eat
eincenti
vesinanat
ional
i
sedf
ir
m?Forexampl
e,per
for
mancer
elat
edpaycoul
d
repl
acethepr
ofi
tincent
ive.