UNIT I

Management
Management is a universal phenomenon. It is a very popular and widely used term. All
organizations - business, political, cultural or social are involved in management because it is the
management which helps and directs the various efforts towards a definite purpose.

According to Harold Koontz, “Management is an art of getting things done through and with
the people in formally organized groups.

According to F.W. Taylor, “Management is an art of knowing what to do, when to do and see
that it is done in the best and cheapest way”.

Management involves creating an internal environment. It is the management which puts into
use the various factors of production. Therefore, it is the responsibility of management to create such
conditions which are conducive to maximum efforts so that people are able to perform their task
efficiently and effectively. It includes ensuring availability of raw materials, determination of wages
and salaries, formulation of rules & regulations etc.

In Simple Words, Management is the process of “POSDCORB”

Characteristics of Management

Management can be defined in detail in following categories:

1. Management is a social Process

2. Management is a group of people involved in Decision Making

3. Management is a Process

4. Management is an activity

5. Management Omni Present and universal

6. Management is not exact science

7. Management is an art as well as Science

8. Management is a Profession

9. Management is Interdisciplinary Approach

10. Management is dynamic and Complex in nature

 Importance of Management

Management plays a unique role in Modern Society. It regulates our productive activities by
organizing our factors of production. Business which has five resources like Men, Money, Machinery,
Materials and Methods cannot satisfy the customers unless they are efficiently managed. Thus Every
Business Needs repeated Stimulus which can only be provided by the management. The following are
the further points to be highlighted the importance of management.

1. Determination of Objectives
2. Achieving of Objectives
3. Optimum utilisation of resources
4. Meeting Challenges
5. Provide Innovation
6. Social Benefits
7. Role in National Economic Development

Objectives of Management

Today, management is playing a vital role in the progress and prosperity of a business
enterprise. The main objective of management is to run the enterprise smoothly. The profit making
objective of business is also to be taken care while undertaking various functions.

The broad purposes or objectives of the management are as follows—

1. Optimum utilisation of resources:
The most important objectives of the management are to use various resources of the enterprise in a
most economic way.

The proper use of men, materials, machines, and money will help a business to earn sufficient profits
to satisfy various interests i.e. proprietor, customers, employees and others. All these interests will be
served well only when physical resources of the business are properly utilised.

2. Growth and development of business:

By proper planning, organisation and direction etc., management leads a business to growth and
development on sound footing. It helps in profitable expansion of the business. It provides a sense of
security among the employers and employees.

3. Better quality goods:

The aim of the sound management has always been to produce the better quality products at minimum
cost. Thus, it tries to remove all types of wastages in the business.4. Ensuring regular supply of goods:

Another objective of management is to ensure the regular supply of goods to the people. It checks the
artificial scarcity of goods in the market. Hence, it keeps the prices of goods within permissible limits.
5. Discipline and morale:
The management maintains the discipline and boosts the morale of the individuals by applying the
principles of decentralisation and delegation of authority. It motivates the employees through
monetary and nonmonetary incentives. It helps in creating and maintaining better work culture.

6. Mobilising best talent:

The employment of experts in various fields will help in enhancing the efficiency of various factors of
production. There should be a proper environment which should encourage good persons to join the
enterprise. The better pay scales, proper amenities, future growth potentialities will attract more people
in joining a concern.

7. Promotion of research and development:

Management undertakes the research and development to take lead over its competitors and meet the
uncertainties of the future. Thus, it provides the benefits of latest research and technology to the
society.

8. Minimise the element of risk:

Management involves the function of forecasting. Though the exact future can never be predicted yet
on the basis of previous experience and existing circumstances, management can minimise the element
of risk. Management always keeps its ears and eyes to the changing circumstances.

9. Improving performance:
Management should aim at improving the performance of each and every factor of production. The
environment should be so congenial that workers are able to contribute their maximum to the
enterprise. The fixing of objectives of various factors of production will help them in improving their
performance.

10. Planning for future:

Another important purpose of management is to prepare a prospective plan. No management should
feel satisfied with today’s work. Future plans should take into consideration what is to be done next.
Future performance will depend upon present planning. So, planning for future is essential to every
organisation.

Managerial Roles
Mintzberg published his Ten Management Roles in his book, "Mintzberg on Management:
Inside our Strange World of Organizations," in 1990.

Interpersonal Figurehead  As a manager, you have social, ceremonial and

Category legal responsibilities. You're expected to be a
source of inspiration. People look up to you as a
person with authority, and as a figurehead.

Leader  This is where you provide leadership for your

team, your department or perhaps your entire
organization; and it's where you manage the
performance and responsibilities of everyone in
the group.

Liaison  Managers must communicate with internal and

external contacts. You need to be able to network
 effectively on behalf of your organization.

Informational Monitor  – In this role, you regularly seek out information

related to your organization and industry,
looking for relevant changes in the environment.
You also monitor your team, in terms of both
their productivity, and their well-being.

Disseminator  This is where you communicate potentially

useful information to your colleagues and your
team.

Spokesperson  Managers represent and speak for their

organization. In this role, you're responsible for
transmitting information about your organization
and its goals to the people outside it.

Decisional Entrepreneur  As a manager, you create and control change

within the organization. This means solving
problems, generating new ideas, and
implementing them.

Disturbance When an organization or team hits an

Handler  unexpected roadblock, it's the manager who
must take charge. You also need to help mediate
. disputes within it.

Resource You'll also need to determine where

Allocator  organizational resources are best applied. This
involves allocating funding, as well as assigning
staff and other organizational resources.

Negotiator  You may be needed to take part in, and direct,

important negotiations within your team,
department, or organization

Functions of Management

Management has been described as a social process involving responsibility for economical
and effective planning & regulation of operation of an enterprise in the fulfillment of given purposes.
It is a dynamic process consisting of various elements and activities. These activities are different from
operative functions like marketing, finance, purchase etc. Rather these activities are common to each
and every manger irrespective of his level or status.
 Different experts have classified functions of management. According to George & Jerry,
“There are four fundamental functions of management i.e. planning, organizing, actuating and
controlling”.

According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to
control”. Whereas Luther Gullick has given a keyword ’POSDCORB’ where P stands for Planning, O
for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for reporting & B for
Budgeting. But the most widely accepted are functions of management given by KOONTZ and
O’DONNEL i.e. Planning, Organizing, Staffing, Directing and Controlling.

For theoretical purposes, it may be convenient to separate the function of management but practically
these functions are overlapping in nature i.e. they are highly inseparable. Each function blends into the
other & each affects the performance of others.

1. Planning

It is the basic function of management. It deals with chalking out a future course of action &
deciding in advance the most appropriate course of actions for achievement of pre-determined
goals. According to KOONTZ, “Planning is deciding in advance - what to do, when to do &
how to do. It bridges the gap from where we are & where we want to be”. A plan is a future
course of actions. It is an exercise in problem solving & decision making. Planning is
determination of courses of action to achieve desired goals. Thus, planning is a systematic
thinking about ways & means for accomplishment of pre-determined goals. Planning is
necessary to ensure proper utilization of human & non-human resources. It is all pervasive, it is
an intellectual activity and it also helps in avoiding confusion, uncertainties, risks, wastages
etc.

2. Organizing

It is the process of bringing together physical, financial and human resources and developing
productive relationship amongst them for achievement of organizational goals. According to
Henry Fayol, “To organize a business is to provide it with everything useful or its functioning
i.e. raw material, tools, capital and personnel’s”. To organize a business involves determining
& providing human and non-human resources to the organizational structure. Organizing as a
process involves:
  Identification of activities.
 Classification of grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordinating authority and responsibility relationships.
3. Staffing

It is the function of manning the organization structure and keeping it manned. Staffing has
assumed greater importance in the recent years due to advancement of technology, increase in
size of business, complexity of human behavior etc. The main purpose o staffing is to put right
man on right job i.e. square pegs in square holes and round pegs in round holes. According to
Kootz & O’Donell, “Managerial function of staffing involves manning the organization
structure through proper and effective selection, appraisal & development of personnel to fill
the roles designed un the structure”. Staffing involves:

 Manpower Planning (estimating man power in terms of searching, choose the person

and giving the right place).
 Recruitment, Selection & Placement.
 Training & Development.
 Remuneration.
 Performance Appraisal.
 Promotions & Transfer.
4. Directing

It is that part of managerial function which actuates the organizational methods to work
efficiently for achievement of organizational purposes. It is considered life-spark of the
enterprise which sets it in motion the action of people because planning, organizing and
staffing are the mere preparations for doing the work. Direction is that inert-personnel aspect of
management which deals directly with influencing, guiding, supervising, motivating sub-
ordinate for the achievement of organizational goals. Direction has following elements:

 Supervision
 Motivation
 Leadership
 Communication

Supervision- implies overseeing the work of subordinates by their superiors. It is the act of

watching & directing work & workers.

Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work.

Positive, negative, monetary, non-monetary incentives may be used for this purpose.

Leadership- may be defined as a process by which manager guides and influences the work of
subordinates in desired direction.
 Communications- is the process of passing information, experience, opinion etc from one
person to another. It is a bridge of understanding.

5. Controlling

It implies measurement of accomplishment against the standards and correction of deviation if

any to ensure achievement of organizational goals. The purpose of controlling is to ensure that
everything occurs in conformities with the standards. An efficient system of control helps to
predict deviations before they actually occur. According to Theo Haimann, “Controlling is the
process of checking whether or not proper progress is being made towards the objectives and
goals and acting if necessary, to correct any deviation”. According to Koontz & O’Donell
“Controlling is the measurement & correction of performance activities of subordinates in
order to make sure that the enterprise objectives and plans desired to obtain them as being
accomplished”. Therefore controlling has following steps:

a. Establishment of standard performance.

b. Measurement of actual performance.

c. Comparison of actual performance with the standards and finding out deviation if any.
d. Corrective action.

14 Principles of Management of Henri Fayol

In the last century, organizations already had to deal with management in practice. In the early 1900s,
large organizations, such as production factories, had to be managed too. At the time there were only
few (external) management tools, models and methods available.

Thanks to scientists like Henri Fayol (1841-1925) the first foundations were laid for modern scientific
management. These first concepts, also called principles of management are the underlying factors for
successful management. Henri Fayol explored this comprehensively and, as a result, he synthesized
the 14 principles of management. Henri Fayol ‘s principles of management and research were
published in the book ‘General and Industrial Management’ (1916). The 14 principles of
Management are:

1. Division of Work
2. Authority and Responsibility
3. Discipline
4. Unity of Command
5. Unity of Direction
6. Subordination of Individual Interest
7. Remuneration
8. The Degree of Centralization
9. Scalar Chain
10. Order
11. Equity
 12. Stability of Tenure of Personnel
13. Initiative
14. Esprit de Corps

1. Division of Work

In practice, employees are specialized in different areas and they have different skills. Different levels
of expertise can be distinguished within the knowledge areas (from generalist to specialist). Personal
and professional developments support this. According to Henri Fayol specialization promotes
efficiency of the workforce and increases productivity. In addition, the specialization of the workforce
increases their accuracy and speed. This management principle of the 14 principles of management is
applicable to both technical and managerial activities.

2. Authority and Responsibility

In order to get things done in an organization, management has the authority to give orders to the
employees. Of course with this authority comes responsibility. According to Henri Fayol, the
accompanying power or authority gives the management the right to give orders to the subordinates.
The responsibility can be traced back from performance and it is therefore necessary to make
agreements about this. In other words, authority and responsibility go together and they are two sides
of the same coin.

3. Discipline

This third principle of the 14 principles of management is about obedience. It is often a part of the core
values of a mission statement and vision in the form of good conduct and respectful interactions. This
management principle is essential and is seen as the oil to make the engine of an organization run
smoothly.

4. Unity of Command

The management principle ‘Unity of command’ means that an individual employee should receive
orders from one manager and that the employee is answerable to that manager. If tasks and related
responsibilities are given to the employee by more than one manager, this may lead to confusion
which may lead to possible conflicts for employees. By using this principle, the responsibility for
mistakes can be established more easily.

5. Unity of Direction

This management principle of the 14 principles of management is all about focus and unity. All
employees deliver the same activities that can be linked to the same objectives. All activities must be
carried out by one group that forms a team. These activities must be described in a plan of action. The
manager is ultimately responsible for this plan and he monitors the progress of the defined and
planned activities. Focus areas are the efforts made by the employees and coordination.

6. Subordination of Individual Interest

There are always all kinds of interests in an organization. In order to have an organization function
well, Henri Fayol indicated that personal interests are subordinate to the interests of the organization
(ethics). The primary focus is on the organizational objectives and not on those of the individual. This
applies to all levels of the entire organization, including the managers.

7. Remuneration

Motivation and productivity are close to one another as far as the smooth running of an organization is
concerned. This management principle of the 14 principles of management argues that the
remuneration should be sufficient to keep employees motivated and productive. There are two types of
remuneration namely non-monetary (a compliment, more responsibilities, credits) and monetary
(compensation, bonus or other financial compensation). Ultimately, it is about rewarding the efforts
that have been made.

8. The Degree of Centralization

Management and authority for decision-making process must be properly balanced in an organization.
This depends on the volume and size of an organization including its hierarchy.

Centralization implies the concentration of decision making authority at the top management
(executive board). Sharing of authorities for the decision-making process with lower levels (middle
and lower management), is referred to as decentralization by Henri Fayol. Henri Fayol indicated that
an organization should strive for a good balance in this.

9. Scalar Chain

Hierarchy presents itself in any given organization. This varies from senior management (executive
board) to the lowest levels in the organization. Henri Fayol ’s “hierarchy” management principle states
that there should be a clear line in the area of authority (from top to bottom and all managers at all
levels). This can be seen as a type of management structure. Each employee can contact a manager or
a superior in an emergency situation without challenging the hierarchy. Especially, when it concerns
reports about calamities to the immediate managers/superiors.

10. Order

According to this principle of the 14 principles of management, employees in an organization must

have the right resources at their disposal so that they can function properly in an organization. In
addition to social order (responsibility of the managers) the work environment must be safe, clean and
tidy.

11. Equity

The management principle of equity often occurs in the core values of an organization. According
to Henri Fayol, employees must be treated kindly and equally. Employees must be in the right place in
the organization to do things right. Managers should supervise and monitor this process and they
should treat employees fairly and impartially.

12. Stability of Tenure of Personnel

This management principle of the 14 principles of management represents deployment and managing
of personnel and this should be in balance with the service that is provided from the organization.
Management strives to minimize employee turnover and to have the right staff in the right place.
Focus areas such as frequent change of position and sufficient development must be managed well.

13. Initiative

Henri Fayol argued that with this management principle employees should be allowed to express new
ideas. This encourages interest and involvement and creates added value for the company. Employee
initiatives are a source of strength for the organization according to Henri Fayol. This encourages the
employees to be involved and interested.

14. Esprit de Corps

The management principle ‘esprit de corps’ of the 14 principles of management stands for striving for
the involvement and unity of the employees. Managers are responsible for the development of morale
in the workplace; individually and in the area of communication. Esprit de corps contributes to the
development of the culture and creates an atmosphere of mutual trust and understanding.

Principles of Scientific Management

According to Taylor, “Scientific Management is an art of knowing exactly what you want your men to
do and seeing that they do it in the best and cheapest way”. In Taylors view, if a work is analysed
scientifically it will be possible to find one best way to do it.

Some of the principles of scientific management are:-

1. Replacement of Old Rule of Thumb Method

2. Scientific Selection and Training of Workers
3. Co-Operation between Labour and Management
4. Maximum Output
5. Equal Division of Responsibility
i) Replacement of Old Rule of Thumb Method:
Scientific investigation should be used for taking managerial decisions instead of basing decisions on
opinion, intuition or rule of thumb. The principle of use of science for rule of thumb is the starting
point that distinguishes scientific management from traditional management.

Under scientific management decisions are made on the basis of acts as developed by the application
of scientific method to the problem concerned. This is in contrast with the approach followed under
traditional management according to which decisions are based on opinions, prejudices, or rule of
thumb. Thus substitution of rule of thumb or opinion by scientific approach is one of the primary
contributions of Taylor to the field of management.

(ii) Scientific Selection and Training of Workers:

The procedure for selection of workers should be designed scientifically. The errors committed at the
time of selection may prove to be very costly later on. If we do not have right workers on the right job,
the efficiency of the organisation will be reduced. Therefore, every organisation should follow a
scientific system of selection. The selected workers are to be trained to avoid wrong methods of work
Management is responsible for the scientific education and training. The management has to provide
opportunities for development of workers having better capabilities.

(iii) Co-Operation between Labour and Management:

There should be cooperation between the workers and the management. This requires change of
mental attitudes of the workers and the management towards each other. Taylor called it mental
revolution. When this mental revolution takes place, workers and management turn their attention
towards increasing profits. They do not quarrel about the distribution of profits.

(iv) Maximum Output:

The management and the workers should try to achieve maximum output in place of restricted output.
This will be beneficial to both the parties. Maximum output will also be in the interest of the society.

(v) Equal Division of Responsibility:

There must be equal division of responsibility between the managers and the workers. The
management should assume responsibility for the work for which it is better suited. For instance,
management should decide the method of work, working conditions, time for completion of work, etc.
instead of leaving these to the discretion of workers. The management should be responsible for
planning and organising the work, whereas the workers should be responsible for the execution of
work as per instructions of management.

Forms of Business Organisation

Most production and distribution activities are carried out by millions of people in different parts of
the country by constituting various kinds of organizations. These organizations are based on some
form of ownership. This choice affects a number of managerial and financial issues, including the
amount of taxes the entrepreneur would have to pay, whether the entrepreneur may be personally sued
for unpaid business bills, and whether the venture will die automatically with the demise of the
entrepreneur.
The forms of business organisation are:-

1. Sole Proprietorship
2. Partnership Firm
3. Joint Stock Company
a. Public Limited Company
b. Private Limited Company

Sole Proprietorship
 Sole proprietorship or individual entrepreneurship is a business concern owned and operated
by one person. The sole proprietor is a person who carries on business exclusively by and for himself.
He alone contributes the capital and skills and is solely responsible for the results of the enterprise. In
fact sole proprietor is the supreme judge of all matters pertaining to his business subject only to the
general laws of the land and to such special legislation as may affect his particular business.

The salient features of the proprietorship are as follows:

i. Single ownership
ii. One man control
iii. Undivided risk
iv. Unlimited liability
v. No separate entity of the business
vi. No Government regulations.

Advantages:
(a) Simplicity – It is very easy to establish and dissolve a sole proprietorship. No documents are
required and no legal, formalities are involved. Any person competent to enter into a contract can start
it. However, in some cases, i.e., of a chemist shop, a municipal license has to be obtained. You can
start business from your own home.
(b) Quick Decisions – The entrepreneur need not consult anybody in deciding his business affairs.
Therefore, he can take on the spot decisions to exploit opportunities from time to time. He is his own
boss.
(c) High Secrecy – The proprietor has not to publish his accounts and the business secrets are known
to him alone. Maintenance of secrets guards him from competitors.
(d) Direct Motivation – There is a direct relationship between efforts and rewards. Nobody shares the
profits of business. Therefore, the entrepreneur has sufficient incentive to work hard.
(e) Personal Touch – The proprietor can maintain personal contacts with his employees and clients.
Such contacts help in the growth of the enterprise.
(f) Flexibility – In the absence of Government control, there is complete freedom of action. There is
no scope for difference of opinion and no problem of co-ordination.

Disadvantages:

(a) Limited Funds – A proprietor can raise limited financial resources. As a result the size of business
remains small. There is limited scope for growth and expansion. Economies of scale are not available.
(b) Limited Skills – Proprietorship is a one man show and one man cannot be an expert in all areas
(production, marketing, financing, personnel etc.) of business. There is no scope for specialisation and
the decisions may not be balanced.
(c) Unlimited Liability – The liability of the proprietor is unlimited. In case of loss his private assets
can also be used to pay off creditors. This discourages expansion of the enterprise.
(d) Uncertain Life – The life of proprietorship depends upon the life of the owner. The enterprise
may die premature death due to the incapacity or death of the proprietor. The proprietor has a low
status and can be lonely.
Partnership

As a business enterprise expands beyond the capacity of a single person, a group of persons
have to join hands together and supply the necessary capital and skills. Partnership firm thus grew out
of the limitations of one man business. Need to arrange more capital, provide better skills and avail of
specialisation led to the growth to partnership form of organisation.
According to Section 4 of the Partnership Act, 1932 partnership is “the relation between
persons who have agreed to share the profits of a business carried on by all or anyone of them acting
for all”. In other words, a partnership is an agreement among two or more persons to carry on jointly a
lawful business and to share the profits arising there from. Persons who enter into such agreement are
known individually as ‘partners’ and collectively as ‘firm’.

Characteristics of Partnership:
 Association of two or more persons: maximum 10 in banking business and 20 in non-Banking
 Contractual relationship: written or oral agreement among the partners
 Existence of a lawful business
 Sharing of profits and losses
 Mutual agency among partners
 No separate legal entity of the firm
 Unlimited liability
 Restriction on transfer of interest
 Utmost good faith.

KINDS OF PARTNERS:

1] Active Partner/Managing Partner

An active partner is also known as Ostensible Partner. As the name suggests he takes active participation
in the firm and the running of the business. He carries on the daily business on behalf of all the partners.
This means he acts as an agent of all the other partners on a day to day basis and with regards to all
ordinary business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public notice about the same.
This will absolve him of the acts done by other partners after his retirement. Unless he gives a public
notice he will be liable for all acts even after his retirement.
2] Dormant/Sleeping Partner
This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he does not
take an active part in the daily activities of the firm. He is however bound by the action of all the other
partners.

He will continue to share the profits and losses of the firm and even bring in his share of capital like any
other partner. If such a dormant partner retires he need not give a public notice of the same.

3] Nominal Partner
This is a partner that does not have any real or significant interest in the partnership. So, in essence, he is
only lending his name to the partnership. He will not make any capital contributions to the firm, and so he
will not have a share in the profits either. But the nominal partner will be liable to outsiders and third
parties for acts done by any other partners.

4] Partner by Estoppel
If a person holds out to another that he is a partner of the firm, either by his words, actions or conduct then
such a partner cannot deny that he is not a partner. This basically means that even though such a person is
not a partner he has represented himself as such, and so he becomes partner by estoppel or partner by
holding out.

5] Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any liabilities. Even when
dealing with third parties he will be liable for all acts of profit only, he will share none of the liabilities.

6] Minor Partner
A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be admitted
to the benefits of a partnership if all partner gives their consent for the same. He will share profits of the
firm but his liability for the losses will be limited to his share in the firm.

MERITS OF PARTNERSHIP:

The partnership form of business ownership enjoys the following advantages:

1. Ease of Formation:
A partnership is easy to form as no cumbersome legal formalities are involved. An agreement is
necessary and the procedure for registration is very simple. Similarly, a partnership can be dissolved
easily at any time without undergoing legal formalities. Registration of the firm is not essential and the
partnership agreement need not essentially be in writing.
2. Larger Financial Resources:
As a number of persons or partners contribute to the capital of the firm, it is possible to collect larger
financial resources than is possible in sole proprietorship. Creditworthiness of the firm is also higher
because every partner is personally and jointly liable for the debts of the business. There is greater
scope for expansion or growth of business.
3. Specialisation and Balanced Approach:
The partnership form enables the pooling of abilities and judgment of several persons. Combined
abilities and judgment result in more efficient management of the business. Partners with
complementary skills may be chosen to avail of the benefits of specialisation. Judicious choice of
partners with diversified skills ensures balanced decisions. Partners meet and discuss the problems of
business frequently so that decisions can be taken quickly.
4. Flexibility of Operations:
Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its day-to-
day operations. The nature and place of business can be changed whenever the partners desire. The
agreement can be altered and new partners can be admitted whenever necessary. Partnership is free
from statutory control by the Government except the general law of the land.
5. Protection of Minority Interest:
No basic changes in the rights and obligations of partners can be made without the unanimous consent
of all the partners. In case a partner feels dissatisfied, he can easily retire from or he may apply for the
dissolution of partnership.
6. Personal Incentive and Direct Supervision:
There is no divorce between ownership and management. Partners share in the profits and losses of the
firm and there is motivation to improve the efficiency of the business. Personal control by the partners
increases the possibility of success. Unlimited liability encourages caution and care on the part of
partners. Fear of unlimited liability discourages reckless and hasty action and motivates the partners to
put in their best efforts.
7. Capacity for Survival:
The survival capacity of the partnership firm is higher than that of sole proprietorship. The partnership
firm can continue after the death or insolvency of a partner if the remaining partners so desire. Risk of
loss is diffused among two or more persons. In case one line of business is not successful, the firm
may undertake another line of business to compensate its losses.
8. Better Human and Public Relations:
Due to number of representatives (partners) of the firm, it is possible to develop personal touch with
employees, customers, government and the general public. Healthy relations with the public help to
enhance the goodwill of the firm and pave the way for steady progress of the business.
9. Business Secrecy:
It is not compulsory for a partnership firm to publish and file its accounts and reports. Important
secrets of business remain confined to the partners and are unknown to the outside world.

DEMERITS OF PARTNERSHIP:

1. Unlimited Liability:
Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only
for his own mistakes but also for the lapses and dishonesty of other partners. This may curb
entrepreneurial spirit as partners may hesitate to venture into new lines of business for fear of losses.
Private property of partners is not safe against the risks of business.
2. Limited Resources:
The amount of financial resources in partnership is limited to the contributions made by the partners.
The number of partners cannot exceed 10 in banking business and 20 in other types of business.
Therefore, partnership form of ownership is not suited to undertake business involving huge
investment of capital.
3. Risk of Implied Agency:
The acts of a partner are binding on the firm as well as on other partners. An incompetent or dishonest
partner may bring disaster for all due to his acts of commission or omission. That is why the saying is
that choosing a business partner is as important as choosing a partner in life.
4. Lack of Harmony:
The success of partnership depends upon mutual understanding and cooperation among the partners.
Continued disagreement and bickering among the partners may paralyse the business or may result in
its untimely death. Lack of a central authority may affect the efficiency of the firm. Decisions may get
delayed.
5. Lack of Continuity:
A partnership comes to an end with the retirement, incapacity, insolvency and death of a partner. The
firm may be carried on by the remaining partners by admitting new partners. But it is not always
possible to replace a partner enjoying trust and confidence of all. Therefore, the life of a partnership
firm is uncertain, though it has longer life than sole proprietorship.
6. Non-Transferability of Interest:
No partner can transfer his share in the firm to an outsider without the unanimous consent of all the
partners. This makes investment in a partnership firm non-liquid and fixed. An individual’s capital is
blocked.
7. Public Distrust:
A partnership firm lacks the confidence of public because it is not subject to detailed rules and
regulations. Lack of publicity of its affairs undermines public confidence in the firm.
The foregoing description reveals that partnership form of organisation is appropriate for medium-
sized business that requires limited capital, pooling of skills and judgment and moderate risks, like
small scale industries, wholesale and retail trade, and small service concerns like transport agencies,
real estate brokers, professional firms like chartered accountants, doctor’s clinics or nursing homes,
attorneys, etc.

Differences between Sole Proprietorship Vs Partnership

Sole Proprietorship Partnership

 Definition It is a business model where an It is a business model where two or
individual is an owner as well as the more persons agree to carry on
operator of the business. business and share profits and
losses mutually.

Business act Comes under no specific act Governed by the Indian Partnership
Act, 1932.

Owner called as Sole Proprietor Individual members known as

partners and collectively known as a
firm.

Incorporation Not required Voluntary

Required

Minimum One Two

Members

Maximum Only One 100

Members

Freedom to Decision-making rests with the The decision needs to be mutually

operate proprietor only, hence full freedom to acceptable to all partners. A
operate. difference of opinion can arise and
cause loss of business.

Liability Rests with the proprietor only Shared by partners of the firm

Finance Scope of raising capital is limited. Scope of raising capital is relatively

high.

Joint Stock Company

The simplest way to describe a joint stock company is that it is a business organisation that is owned
jointly by all its shareholders. All the shareholders own a certain amount of stock in the company, which
is represented by their shares.

Professor Haney defines it as “a voluntary association of persons for profit, having the capital divided
into some transferable shares, and the ownership of such shares is the condition of membership of the
company.” Studying the features of a joint stock company will clarify its structure.
Features of Joint Stock Company:

1] Artificial Legal Person

A company is a legal entity that has been created by the statues of law. Like a natural person, it can do
certain things, like own property in its name, enter into a contract, borrow and lend money, sue or be
sued, etc. It has also been granted certain rights by the law which it enjoys through its board of directors.

However, not all laws/rights/duties apply to a company. It exists only in the law and not in any physical
form. So we call it an artificial legal person.

2] Separate Legal Entity

Unlike a proprietorship or partnership, the legal identity of a company and its members are separate. As
soon as the joint stock company is incorporated it has its own distinct legal identity. So a member of the
company is not liable for the company. And similarly, the company will not depend on any of its
members for any business activities.

3] Incorporation
For a company to be recognized as a separate legal entity and for it to come into existence, it has to be
incorporated. Not registering a joint stock company is not an option. Without incorporation, a company
simply does not exist.

4] Perpetual Succession
The joint stock company is born out of the law, so the only way for the company to end is by the
functioning of law. So the life of a company is in no way related to the life of its members. Members or
shareholders of a company keep changing, but this does not affect the company’s life.

5] Limited Liability
This is one of the major points of difference between a company and a sole
proprietorship and partnership. The liability of the shareholders of a company is limited. The personal
assets of a member cannot be liquidated to repay the debts of a company.

A shareholders liability is limited to the amount of unpaid share capital. If his shares are fully paid then he
has no liability. The amount of debt has no bearing on this. Only the companies assets can be sold off to
repay its own debt. The members cannot be made to pay up.

6] Common Seal
A company is an artificial person. So its day-to-day functions are conducted by the board of directors. So
when a company enters any contract or signs an agreement, the approval is indicated via a common seal.
A common seal is engraved seal with the company’s name on it.

So no document is legally binding on the company until and unless it has a common seal along with the
signatures of the directors.
7] Transferability of Shares
In a joint stock company, the ownership is divided into transferable units known as shares. In case of a
public company the shares can be transferred freely, there are almost no restrictions. And in a public
company, there are some restrictions, but the transfer cannot be prohibited.

Formation of Joint Stock Company:

A company is mainly Formed by two principal documents commonly known as
‘Memorandum of Association’ which is also called as company’s charter document and
‘Articles of Association’ which describes the company’s set of rules and regulations.
Consequently, drafting of these documents is on one of the most crucial step in any
company. Let us know 15 interesting differences between MOA and AOA of the Company.
First lets have a detail note on meaning and role of Articles of Association and Memorandum
of Association of the Company .

No Grounds of Difference MOA AOA

MOA means Memorandum of AOA means Articles of

Association of the Company. It Association of the Company.
1 Meaning
contains all fundamental information It contains rules of the
of the company company.

For AOA it is not mandatory

It is mandatory to register MOA at
2 Registration to register the document with
the time of registration.
the Registrar.

MOA is the prime document of the

AOA is the subsidiary
3 Superiority company. It is also called the charter
document of the Company.
of the company.

MOA consists of all types of AOA is the set of rules and

4 Content activities to be carried out by the regulations of the company to
Company be adhered.

AOA connects a relationship

5 Relation
MOA connects a relationship
between the company and the
between the company and the
board of directors and
outside world
members

AOA is regulated by the

MOA is regulated by the Companies
6 Regulatory body Companies Act, 2013 and its
Act, 2013
memorandum of association.

MOA cannot be altered easily AOA can be altered easily

7 Alteration whereby requires prior approval of simply by passing a special
central government or NCLT resolution.

8 Doctrine Of Ultra Virus All activities of the company beyond All activities of the company
the scope of its memorandum are beyond the scope of its
deemed to be ultra vires and cannot articles are also void, but they
 can be ratified later by the
be ratified
members of the company.

Any contract executed against the Any contract executed against

9 Validity of Contract provisions of MOA shall be the provisions of AOA shall
considered as void. be considered as void.

MOA cannot be amended with AOA can be amended with

10 Retrospective effect
retrospective effect. retrospective effect.

Sec 5 of the Companies Act,

Sec 4 of the Companies Act, 2013
11 Legal sections 2013 defines AOA of the
defines MOA of the company
company

12 Information Powers and objects of the company Rules of the company

Articles of Association of the

Memorandum of Association consist company can be drafted as per
13 Clauses
of Six Clauses the choice of the legal
expertise.

14 Status It is Major document It is subsidiary document

Memorandum of Association will Articles of Association cannot

Persuade always persuade over Articles of prevail over Memorandum of
15
Association Association.

Advantages of a Joint Stock Company:

The advantages of forming a company rather than carrying on partnership business are as follows:
1. Large Capital:
The outstanding advantage is that it allows vast mobilization of capital which otherwise is not possible
to arrange. In a public company, there is no limit to the number of members. A very large number of
people acquire interest in the company by purchasing shares.

The fact that shares are transferable given an added advantage to the company for attracting greater
number of people. No other form of business organisation is so well adopted in raising large amounts
of capital as the Joint Stock Company.

2. Vast Scope of Expansion:

The vast capital collected by means of shares coupled with the earnings of the company contribute
sufficient scope for its expansion. The company offers an excellent scope of self-generating growth.
The managerial talents supported by vast finance leads to huge earnings and to ultimate expansion of
the business and growth.
3. Limited Liability:
The liability of the members of the company is limited. Members cannot be called upon to pay
anything more than the nominal value of the shares held by them. This encourages people who have
little to save to invest money in the company, thus providing ample capital for initial outlay and
expansion of the business.

4. Permanent Existence:
The life of the company does not depend on the life of its members. Law creates the company and can
dissolve it. The death, insolvency or the transfer of shares of members does not, in any way, affect the
existence of the company.

5. Transferability of Shares:
The shares in a company are transferable and members can transfer their shares without the consent of
other members of the company. The company is listed with the Stock Exchange and hence company’s
shares are readily sold and purchased. As shares are freely transferable, a shareholder can convert his
holding into cash. This facility coupled with the limited liability has an encouraging investment by
general public.

6. Democratization of Ownership:
The fact that relatively small amount of capital can be mobilised and employed collectively results in
what Marshall call ‘Democratization’ of ownership as distinguished from the control of business.

While it permits all types of people, big or small, venturesome or cautious, to become part owners, it
permits the use of skill and initiative of the able entrepreneur, his expert knowledge and business
ability which would otherwise be lost to the community.

7. Diffused Risk:
The risk of loss is to be shared by the large number of shareholders and the possibility of huge
hardship on few persons as in the case of partnership or sole trader does not exist. Moreover, the risk
of loss is also limited to the extent of the value of share.

There is no need for the wealthy men to bear the burden of the business as large capital can be
collected from far and wide, and from rich and poor, controlled under one management.

8. Organized Intelligence:
The power of capital is supplemented by organised intelligence which makes for increased efficiency
of direction and management. The skill and flexibility of administration is enhanced as a result of
limited liability and entity idea.
The wisest and the most skillful directors may be chosen and one found inefficient or indifferent could
be removed. The company being independent on any single man, the organized intelligence of the
Board of Directors and other top managers is available for sound and bold policies.

9. Tax Relief:
A company pays income-tax as a separate legal person at a flat rate fixed by the Finance Act from year
to year. In case of higher incomes, the- rate is lower than that charged in case of sole proprietors and
partners.

10. Social Advantage:

The social advantage of company form of organisation is that it affords employment to so many
persons, produces articles which otherwise would have been imported and affords opportunity to
middle and lower class of people to become members of the company and earn profits.

Disadvantages of Joint Stock Company:

Despite so many advantages it has got many disadvantages which are as follows:
1. Difficulty in Formation:
The legal requirements and formalities required to be completed are so many. The cost involved is
quite heavy. It has to approach large number of people for its capital. It cannot start its business unless
certificate of incorporation has been obtained. This is granted after a long time when all the formalities
are completed.

2. Reckless Speculation Encouraged:

This form of organisation encourages reckless speculation in shares at stock exchanges. This is an evil
of great magnitude in our country because in many cases stock exchanges act as ‘bush agencies’,
rather than aid to sound investment or stability. Sometimes the management of Joint Stock Company
encourages speculation in shares for its personal gains.

3. Fraudulent Management:
Frauds have been a common feature of many a company. The promoters and directors may indulge in
fraudulent practices. The company law has devised various methods to check the fraudulent practices
but they have not proved to check them completely.

4. Delay in Decision-Making:
In this form of organisation, decisions are not made by single individual. All important decisions are
taken by the Board of Directors. Decision-making process is time-consuming. So many opportunities
may be costly because of delay in decision-making. Promptness of decisions which is a common
feature of sole tradership and partnership is not found in a company.
5. Monopolistic Powers:
There is, generally, tendency for company organisation to form themselves into combinations
exercising monopolistic powers which may react detrimentally to other producers in the same line or
to consumers of the commodity produced.

6. Excessive Regulation by Law:

The State that creates the company, minutely watches the activities of the company organisation. A
company and the management have to function well within the law and the provisions of Companies
Act are quite elaborate and complex.

At every step, it is necessary to comply with its provisions lest the company and the management
should be penalised. The penalties are quite heavy and in several cases, officers in default can be
punished with imprisonment. This hampers the proper functioning of the company.

7. Conflict of Interests:
The management does not care for the interest of shareholders because the management is not the
owner. Actually, the management body is not composed of owners, it is composed of those who have
no interest in the business.

It is only the few who govern the way they like. Though, in theory, company is a democracy but in
actual practice it is oligarchy. The lack of interest between the company and its management
encourages manipulation and speculation.

8. Lack of Secrecy:
The management of companies remains in the hands of many persons. Every important thing is
discussed in the meetings of Board of Directors. Hence secrets of the business cannot be maintained.
In case of sole proprietorship and partnership forms of organisation, such secrecy is possible because a
few persons are involved in the management.

9. Bureaucratic Approach:
The bureaucratic habit of company officials to shirk trouble of some initiative because they get no
direct benefit from it; often retard the growth. This leads to classification of social organism and
leveling down the character. The company organisation does not enjoy the same flexibility and
promptness in the making as other organisations do. The delays in taking the decision affect the
growth of the business.
 1. Chartered Company: The companies that form by the order of the king of England are called
the charter company. These companies were formed before 1844. For example, East India
Company, Chartered Bank of England, the charter of the British South Africa Company, given by
Queen Victoria (More information here)
2. Statutory Company: Companies that are formed by the order of the President, or by the
Legislative Committee or by bill of Parliament are called Statutory Company. These Companies
are operated by those laws. For example, municipal councils, universities, central banks and
government regulators, Central Bank. (More information here)
3. Registered Corporation: Companies that are formed under the prevailing law of the company
are called the registered company. The corporation that has filed a registration statement with the
SEC prior to releasing a new stock issue. It is two types-
A. Unlimited Company: The liabilities of the shareholders of this company are unlimited. For
example, British all-terrain vehicle manufacturer Land Rover, GlaxoSmithKline Services
Unlimited.
B. Limited Company / limited corporation: The liabilities of the shareholders are limited. For
example, Charitable organisations, Financial Services Authority. This liability of a company
can be of two types.
 By Guarantee
 By share value. The company limited by share can be of two types.
• Private Limited Company, where the number of shareholder ranges from two to fifty. The share of
these companies can’t be traded in the stock market.
• Public Limited Company, where the number of shareholder ranges from seven to share limitation.
The share of the public limited company is traded in the stock market.

Difference between Public Limited and Private Limited Company

A private company is a closely held one and requires at least two or more persons, for its formation.
On the other hand, a public company is owned and traded publicly. It requires 7 or more persons for
its set up. There are vast differences between Pvt Ltd. and Public Ltd Company.
n the business glossary, it is no wonder that the term company is used commonly. It is that form of
business organization, which enjoys certain advantages over other forms such as sole proprietorship or
partnership. A company is an artificial person, that come into existence through a legal process, i.e.
incorporation.

So, it features, separate legal entity, perpetual succession, limited liability, common seal, can sue and
be sued in its own name. Basically, there are two types of companies, i.e. Private company (Pvt Ltd.
Company) and Public Company (Public Ltd. Company).

BASIS FOR
PUBLIC COMPANY PRIVATE COMPANY
COMPARISON

Meaning A public company is a A private company is a

company which is owned and company which is owned and
traded publicly traded privately.

Minimum members 7 2

Maximum members Unlimited 200

Minimum Directors 3 2

Suffix Limited Private Limited

Start of business After receiving certificate of After receiving certificate of

incorporation and certificate incorporation.
of commencement of business.

Statutory Meeting Compulsory Optional

Issue of prospectus / Obligatory Not required

Statement in lieu of prospectus

Public subscription Allowed Not allowed

Quorum at AGM 5 members must present in 2 members must present in

person. person.

Transfer of shares Free Restricted