Business Studies.pdf

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BUSINESS STUDIES

Textbook for Class XI


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First Edition

March 2006 Phalguna 1927

ReprintedOctober 2006 Kartika 1928

December 2007 Agrahayana 1929March 2009 Phalguna 1930

PD 140T RNB

National Council of EducationalResearch and Training, 2006

Rs 70.00

Printed on 80 GSM paper with

NCERT watermark

Published at the Publication

Department by the Secretary, National

Council of Educational Research andTrai ning , Sr i Au robi ndo Marg ,

New Delhi 110 016 and printed atSudershan Printers, ICH-487,

Peera Garhi, Delhi 110 087

ISBN 81-7450-530-X

ALL RIGHTS RESERVED

No part of this publication may be reproduced, stored in a retrievalsystem or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise without the prior

permission of the publisher.

This book is sold subject to the condition that it shall not, by way oftrade, be lent, re-sold, hired out or otherwise disposed of without the

publishers consent, in any form of binding or cover other than that inwhich it is published.

The correct price of this publication is the price printed on this page, Anyrevised price indicated by a rubber stamp or by a sticker or by any other

means is incorrect and should be unacceptable.

Publication Team

Head, Publication : Peyyeti Rajakumar

Department

Chief Production : Shiv Kumar

Officer

Chief Editor : Shveta Uppal

Chief Business : Gautam Ganguly

ManagerAssistant Editor : R.N.Bhardwaj

Assistant Production : Rajender Chauhan

Officer

Cover

Karan Chadha

OFFICES OF THE PUBLICATION

DEPARTMENT, NCERT

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FOREWORD

The National Curriculum Framework (NCF), 2005, recommends thatchildrens life at school must be linked to their life outside the school. Thisprinciple marks a departure from the legacy of bookish learning which

continues to shape our system and causes a gap between the school, homeand community. The syllabi and textbooks developed on the basis of NCFsignify an attempt to implement this basic idea. They also attempt todiscourage rote learning and the maintenance of sharp boundaries betweendifferent subject areas. We hope these measures will take us significantlyfurther in the direction of a child-centred system of education outlined inthe National Policy of Education (1986).

The success of this effort depends on the steps that school principalsand teachers will take to encourage children to reflect on their own learningand to pursue imaginative activities and questions. We must recognisethat, given space, time and freedom, children generate new knowledge byengaging with the information passed on to them by adults. Treating the

prescribed textbook as the sole basis of examination is one of the keyreasons why other resources and sites of learning are ignored. Inculcatingcreativity and initiative is possible if we perceive and treat children asparticipants in learning, not as receivers of a fixed body of knowledge.

These aims imply considerable change in school routines and mode offunctioning. Flexibility in the daily time-table is as necessary as rigour inimplementing the annual calendar so that the required number of teachingdays are actually devoted to teaching. The methods used for teaching andevaluation will also determine how effective this book proves for makingchildrens life at school a happy experience, rather than a source of stressor boredom. Syllabus designers have tried to address the problem ofcurricular burden by restructuring and reorienting knowledge at differentstages with greater consideration for child psychology and the time availablefor teaching. The textbook attempts to enhance this endeavour by givinghigher priority and space to opportunities for contemplation and wondering,discussion in small groups, and activities requiring hands-on experience.

The National Council of Educational Research and Training (NCER T)appreciates the hard work done by the textbook development committeeresponsible for this book. We wish to thank the Chairperson of the advisorygroup in Social Sciences, Professor Hari Vasudevan and the Chief Advisorfor this book, Prof. Sanjay K. Jain, for guiding the work of this committee.


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iv

Several teachers contributed to the development of this textbook; we aregrateful to their principals for making this possible. We are indebted to theinstitutions and organisations which have generously permitted us to drawupon their resources, materials and personnel. We are especially gratefulto the members of the National Monitoring Committee, appointed by theDepartment of Secondary and Higher Education, Ministry of HumanResource Development under the Chairpersonship of Professor Mrinal Miri

and Professor G.P. Deshpande for their valuable time and contribution. Asan organisation committed to systemic reform and continuous improvementin the quality of its products, NCERT welcomes comments and suggestionswhich will enable us to undertake further revision and refinements.

DirectorNew Delhi National Council of Educational20 December 2005 Research and Training


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TEXTBOOK DEVELOPMENT

COMMITTEE

CHAIRPERSON, ADVISORYCOMMITTEEFOR SOCIALSCIENCE TEXTBOOKSATTHE

HIGHER SECONDARYLEVEL

Hari Vasudevan, Professor, Department of History, University of Calcutta,

Kolkata

CHIEFADVISOR

Sanjay K. Jain, Professor, Delhi School of Economics, University of Delhi,Delhi

MEMBERS

Anand Saxena, Reader, Deen Dayal Upadhyaya College, University of Delhi

Davinder K. Vaid,Professor,DESSH, NCERT, New Delhi

Garima Gupta, Lecturer, PGDAV College, University of Delhi, New Delhi

G.L. Tayal, Reader, Ramjas College, University of Delhi

J.K. Parida, Professor, Department of Commerce, Utkal University,Bhubaneswar, Orissa

K.V. Achalapati, Professorand Head, Department of Commerce, OsmaniaUniversity, Hyderabad

M.M. Goyal, Reader, PGDAV College, University of Delhi

M. Usha,Associate Professor, University College of Commerce and BusinessManagement, Osmania University, Hyderabad

Pooja Dasani, PGT, Convent of Jesus and Mary School, Gol Dakkhana,

New DelhiShailendra Nigam, NIILM Centre for Management Studies, Sher Shah SuriMarg, New Delhi

MEMBER-COORDINATOR

Minoo Nandrajog, Reader, DESSH, NCERT, New Delhi


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ACKNOWLEDGEMENT

The National Council of Educational Research and Training acknowledgesthe valuable comments and suggestions of the following, while preparingthe textbook: Professor D.P. Sharma, Former Vice Chancellor, Barkatullah

University, Bhopal; S.K. Bansal, PGT Commerce (Retired), CommercialSenior Secondary School, Darya Ganj, Delhi; Vijay Kumar Yadav, PGTCommerce, Kendriya Vidyalaya, Jawaharlal Nehru Campus, New Delhi;K. Vasudeva Murthy, Lecturer in Commerce, Mahajanas Pre-UniversityCollege, Jayalaxmipuram, Mysore; Dwarikanath Mishra, PGT Commerce,DAV School, Unit-8, Bhubaneswar, Orissa.

Special thanks are due to Savita Sinha, ProfessorandHead, Departmentof Education in Social Sciences and Humanities for her constant supportand guidance at every stage of the textbook development process.

The Council also gratefully acknowledges the contributions ofDinesh Kumar, Incharge, Computer Station; Ritu Sharma and Mahesh SinghBhandari, DTP Operator; andBharati Guleria, Copy Editorand Sukeshni

Julka, Proof Readerin shaping this book. Last but not the least, the effortsof the Publication Department, NCERT are also duly acknowledged.


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NOTETOTHE TEACHER

This textbook is expected to provide a good understanding of the environment

in which a business operates. A manager has to analyse the complex, dynamicsituations in which a business is placed. Therefore, content enrichment inthe form of business news and abstracts of articles from business journalsand magazines has been given as inset material (boxes). This will encouragestudents to be observant about all business activity and discover what ishappening in business organisations with the expection that they will updatetheir knowledge through the use of libraries, newspapers, business orientedTV programmes and the internet. Various types of question are given andcase problems, multiple choice questions have been introduced to test theapplication of subject knowledge to realistic business situations.


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CONTENTS

FOREWORD iii

PART I FOUNDATIONSOF BUSINESS 1

CHAPTER 1 Nature and Purpose of Business 2

CHAPTER 2 Forms of Business Organisation 21

CHAPTER 3 Private, Public and Global Enterprises 55

CHAPTER 4 Business Services 77

CHAPTER 5 Emerging Modes of Business 110

CHAPTER 6 Social Responsibilities of Businessand Business Ethics 140

PART II CORPORATE ORGANISATION, FINANCEAND TRADE 159

CHAPTER 7 Formation of a Company 160

CHAPTER 8 Sources of Business Finance 181

CHAPTER 9 Small Business 207

CHAPTER 10 Internal Trade 225

CHAPTER 11 International Business - I 251

CHAPTER 12 International Business - II 278


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CONSTITUTION OF INDIAPart III (Articles 12 35)

(Subject to certain conditions, some exceptionsand reasonable restrictions)

guarantees these

Fundamental Rights

Right to Equality

before law and equal protection of laws;

irrespective of religion, race, caste, sex or place of birth;

of opportunity in public employment;

by abolition of untouchability and titles.

Right to Freedom

of expression, assembly, association, movement, residence and profession;

of certain protections in respect of conviction for offences;

of protection of life and personal liberty;

of free and compulsory education for children between the age of six and fourteen years;

of protection against arrest and detention in certain cases.

Right against Exploitation

for prohibition of traffic in human beings and forced labour;

for prohibition of employment of children in hazardous jobs.

Right to Freedom of Religion

freedom of conscience and free profession, practice and propagation of religion;

freedom to manage religious affairs;

freedom as to payment of taxes for promotion of any particular religion;

freedom as to attendance at religious instruction or religious worship in educational

institutions wholly maintained by the State.

Cultural and Educational Rights

for protection of interests of minorities to conserve their language, script and culture; for minorities to establish and administer educational institutions of their choice.

Right to Constitutional Remedies

by issuance of directions or orders or writs by the Supreme Court and High

Courts for enforcement of these Fundamental Rights.


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PART I

Foundations of Business


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CHAPTER1

NATUREAND PURPOSEOF BUSINESS

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

explain the concept and characteristics of business;

compare the distinctive features of business, profession and

employment;

classify business activities and clarify the meaning of industry and

commerce;

state various types of industry;

explain the activities relating to commerce;

analyse the objectives of business;

describe the nature of business risks and their causes; and

discuss the basic factors to be considered while starting a business.


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3NATURE AND PURPOSE OF BUSINESS

that we understand the concept, natureand purpose of business.

1.2 CONCEPTOFBUSINESS

The term business is derived from theword busy. Thus, business meansbeing busy. However, in a specificsense, business refers to an occupationin which people regularly engage inactivities related to purchase,production and/or sale of goods andservices with a view to earning profits.

The activity may consist of productionor purchase of goods for sale, orexchange of goods or supply of servicesto satisfy the needs of other people.

In every society people undertake

various activities to satisfy their needs.These act ivities may be broadlyclassified into two groups economicand non-economic. Economic activitiesare those by which we can earn ourlivelihood whereas non-economicactivities are those performed out oflove, sympathy, sentiments, patriotism,etc. For example, a worker working in

1.1 INTRODUCTION

The conversation among the fourclassmates is obviously focused on themeaning, nature and purpose of

business. All human beings, wherever

they may be, require different types ofgoods and services to satisfy their needs.

The necessity of supplying goods andservices has led to certain activities beingundertaken by people to produce andsell what is needed by others. Businessis a major economic activity in allmodern societies concerned as it is withthe production and sale of goods andservices required by people. Thepurpose behind most business activitiesis to earn money by meeting peoples

demands for goods and services.Business is central to our lives. Althoughour lives are influenced by many otherinstitutions in modern society such asschools, colleges, hospitals, politicalparties and religious bodies, businesshas the major influence on our dailylives. It, therefore, becomes important

Imran, Manpreet, Joseph and Priyanka have been classmates in Class X. After

their exams are over, they happen to meet at a common friend Ruchikas house.

Just when they are sharing their experiences of examination days, Ruchikas

father, Mr. Raghuraj Chaudhury intervenes and asks about their well-being. He

also enquires from each one of them about their career plans. But none of them

has a definite reply. Mr. Raghuraj, who himself is a businessman, suggests to

them that they can opt for business as a promising and challenging career.

Joseph gets excited by the idea and says, Yes, business is really good for making

lots of money even more than is possible by becoming an engineer or a doctor.

Mr. Raghuraj opines, Let me tell you, young man, there is a lot more to business

than merely money. He then gets busy with some other guests. However, the

four classmates begin raising many questions: What exactly business is all about?

What else is there in business besides money? How is business different from

non-business activities? What does one require to start a business? And, so on.


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4 BUSINESS STUDIES

a factory, a doctor operating in hisclinic, a manager working in the officeand a teacher teaching in a schoolare doing so to earn their livelihood andare, therefore, engaged in an economicactivity. On the other hand, a housewifecooking food for her family or a boyhelping an old man cross the road areperforming non-economic activities

since they are doing so out of love orsympathy. Economic activities may befurther divided into three categories,namely business, profession andemployment. Business may be definedas an economic activity involving theproduction and sale of goods andservices undertaken with a motive ofearning profit by satisfying humanneeds in society.

1.3 CHARACTERISTICS OF BUSINESS

ACTIVITIESIn order to appreciate how businessactivity is different from other activitiesin society, the nature of business or itsfundamental character must beexplained in terms of its distinguishingcharacteristics, which are as follows:(i) An economic activity: Business isconsidered to be an economic activity

because it is undertaken with the objectof earning money or livelihood and not

because of love, affection, sympathy orany other sentimental reason. It may

be mentioned here that this activitycan be undertaken either at small andindividual level, e.g. (purchase and sale

by a shopkeeper) or on large scale in amore formal and organised level(purchase and sale by a cooporativesociety or company).

(ii) Production or procurement ofgoods and services: Before goods areoffered to people for consumption, thesemust be either produced or procured by

business enterprises. Thus, everybusiness enterprise ei ther manu-factures the goods it deals in or it acquiresthem from producers, to be further soldto consumers or users. Goods may

consist of consumable items of daily usesuch as sugar, ghee, pen, notebook, etc.or capital goods like machinery,furniture, etc. Services may includefacilities offered to consumers, businessfirms and organisations in the form oftransportation, banking, electricity, etc.

(iii) Sale or exchange of goods andservices:Directly or indirectly, businessinvolves transfer or exchange of goodsand services for value. If goods areproduced not for the purpose of sale but

say for personal consumption, it cannotbe called a business activity. Cookingfood at home for the family is not

business, but cooking food and sellingit to others in a restaurant is business.

Thus, one essential characteristic ofbusiness is that there should be sale orexchange of goods or services betweenthe seller and the buyer.

(iv) Dealings in goods and serviceson a regular basis: Business involvesdealings in goods or services on aregular basis. One single transactionof sale or purchase, therefore, does notconstitute business. Thus, for example,if a person sells his/her domestic radioset even at a profit, it will not beconsidered a business activity. But ifhe/she sells radio sets regularly eitherthrough a shop or from his/her


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residence, it will be regarded as abusiness activity.(v) Profit earning: One of the mainpurpose of business is to earn income

by way of profit. No business cansurvive for long without earning profit.

That is why businessmen make allpossible efforts to maximise profits, byincreasing the volume of sales or

reducing costs.(vi) Uncertainty of return:Uncertaintyof return refers to the lack of knowledgerelating to the amount of money thatthe business is going to earn in a givenperiod. Every business invests money(capital) to run its activities with theobjective of earning profit. But it is not

certain as to what amount of profit willbe earned. Also, there is always a

possibility of losses being incurred, inspite of the best efforts put into the

business.(vii) Element of risk: Risk is theuncertainty associated with anexposure to loss. It is caused by someunfavourable or undesirable event. Therisks are related with certain factors like

Business refers to those economicactivities, which are connected with the

production or purchase and sale ofgoods or supply of services with themain object of earning profit. Peopleengaged in business earn income in theform of profit.

Profession includes those activities,which require special knowledge andskill to be applied by individuals in

changes in consumer tastes andfashions, changes in methods of

production, strike or lockout in thework place, increased competition inthe market, fire, theft, accidents,natural calamities, etc. No business

can altogether do away with risks.

1.4 COMPARISONOFBUSINESS,

PROFESSIONAND EMPLOYMENT

As has been mentioned earlier,economic activities may be divided intothree major categories viz.,(i) Business(ii) Profession(iii) Employment

Business Functions at Enterprise Level

Business includes a wide variety of functions performed by many different kindsof organisations called business enterprises or firms. Financing, productionmarketing and human resource management are the four major functions whichare performed by business enterprises to carry on business. Financing isconcerned with mobilising and utilising funds for running a business enterprise.Production involves the conversion of raw materials into finished products orgeneration of services. Marketing refers to all those activities which facilitateexchange of goods and services from producers to the people who need them, ata place they want, at a time they require and at a price they are prepared to pay.Human resource management aims at ensuring the availability of working peoplewho have necessary skills to perform various tasks in enterprises.


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6 BUSINESS STUDIES

their occupation. Such activities aregenerally subject to guidelines or codesof conduct laid down by professional

bodies. Those engaged in professionsare known as professionals. Forexample, doctors are engaged in themedical profession and are subject tothe regulations of the Medical Councilof India, the concerned professional

body. Similarly, lawyers are engagedin the legal profession, governed by the

Bar Council of India and CharteredAccountants belong to the accountingprofession and are subject to theregulations of the Institute of Chartered

Accountants of India.Employment refers to the

occupation in which people work forothers and get remunerated in return.

Those who are employed by others are

known as employees. Thus, people whowork in factories and receive wages and

COMPARISONOFBUSINESS, PROFESSIONAND EMPLOYMENT

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salaries are in the employment offactory owners and are employees ofthe factory. Similarly, people who workin the offices of banks, insurancecompanies or government department,as managers, assistants, clerks, peons

or security guards are the employeesof these organisations.

1.5 CLASSIFICATIONOFBUSINESSACTIVITIES

Various business activities may be

classified into two broad categories industry and commerce. Industry isconcerned with the production or

processing of goods and materials.Commerce includes all those activities

which are necessary for facilitating the

exchange of goods and services. On thebasis of these two categories, we may

classify business firms into industrialand commercial enterprises.

Let us examine in detail theactivities relating to business.

1.6 INDUSTRY

Industry refers to economic activities,

which are connected with conversion ofresources into useful goods. Generally,

the term industry is used for activitiesin which mechanical appliances andtechnical skills are involved. These

include activities relating to producingor processing of goods as well as

breeding and raising of animals. The

term industry is also used to mean


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8 BUSINESS STUDIES

groups of firms producing similar orrelated goods. For example, cottontextile industry refers to allmanufacturing units producing textilegoods from cotton. Similarly, electronicindustry would include all firmsproducing electronic goods, and so on.Further, in common parlance, certainservices like banking and insurance

are also referred to as industry,say banking industry, insuranceindustry etc.

Industries may be divided intothree broad categories namely primary,secondary and tertiary.(a) Primary industries:These include

all those activities which areconnected with the extraction andproduction of natural resources andreproduction and development ofliving organisms, plants etc. These

industries may be further sub-divided as follows:(i) Extractive industries:These

industries extract or draw outproducts from natural sources.Extractive industries supplysome basic raw materials thatare mostly products ofgeographical or naturalenvironment. Products of theseindustries are usuallytransformed into many other

useful goods by manufacturingindustries. Important extractiveindustries include farming,mining, lumbering, hunting andfishing operations.

(ii) Genetic industries: Theseindustries remain engaged in

breeding plants and animals

for their use in furtherreproduction. For the breedingof plants, the seeds and nurserycompanies are typical examplesof genetic industries. Inaddition, activities of cattle-

breeding farms, poultry farms,and fish hatchery come underthe class of genetic industries.

(b) Secondary industries:These areconcerned with using the materials,

which have already been extracted atthe primary stage. These industriesprocess such materials to producegoods for final consumption or forfurther processing by otherindustrial units. For example,mining of an iron ore is a primaryindustry, but manufacturing of steel

by way of further processing of rawirons is a secondary industry.Secondary industries may be furtherdivided as follows:(i) Manufacturing industries:These

industries are engaged inproducing goods throughprocessing of raw materials andthus creating form utilities. They

br ing out diverse finishedproducts, that we consume, or usethrough the conversion of rawmaterials or partly finishedmaterials in their manufacturingoperations. Manufacturingindustries may be further dividedinto four categories on the basis ofmethod of operation for production. Analytical industrywhich

analyses and separatesdifferent elements from thesame materials, as in the caseof oil refinery.


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Synthetical industrywhichcombines various ingredientsinto a new product, as in thecase of cement.

Processing industrywhichinvolves successive stages formanufacturing finishedproducts, as in the case ofsugar and paper.

Assembling industrywhichassembles different compo-nent parts to make a newproduct, as in the case oftelevision, car, computer, etc.

(ii) Construction industries:Theseindustries are involved in theconstruction of buildings, dams,

bridges, roads as well as tunnelsand canals. Engineering andarchitectural skills are an importantpart in construction industries.

(c) Tertiary industries:These areconcerned with providing supportservices to primary and secondaryindustries as well as activitiesrelating to trade. These industriesprovide service facilities. As

business activities, these may beconsidered part of commerce

because as auxiliaries to tradethese activities assist trade.Included in this category are

transport, banking, insurance,warehousing, communication,packaging and advertising.

1.7 COMMERCE

Commerce includes two types of acti-vities, viz., (i) trade and (ii) auxiliariesto trade. Buying and selling of goods is

termed as trade. But there are a lot ofactivities that are required to facilitate

the purchase and sale of goods. These

are called services or auxiliaries to tradeand include transport, banking,insurance, communication, advertise-ment, packaging and warehousing.Commerce, therefore, includes both,

buying and selling of goods i.e., trade,

as well as auxiliaries such astransport, banking, etc.

Commerce provides the necessarylink between producers and

consumers. It embraces all those

activities, which are necessary formaintaining a free flow of goods andservices. Thus, all activities involvingthe removal of hindrances in theprocess of exchange are included in

commerce. The hindrances may be in

respect of persons, place, time, risk,finance, etc. The hindrance of personsis removed by trade, thereby makinggoods available to the consumers from

the possession or ownership producers.Transport removes the hindrances of

place by moving goods from the placesof production to the markets for sale.Storage and warehousing activitiesremove the hindrance of time by

facilitating holding of stocks of goodsto be sold as and when required. Goods

held in stock as well as goods in courseof transport are subject to the risk ofloss or damage due to theft, fire,

accidents, etc. Protection against theserisks is provided by insurance of goods.Capital required to undertake the

above activities is provided by bankingand financing institutions. Advertising


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10 BUSINESS STUDIES

makes it possible for producers andtraders to inform consumers about thegoods and services available in themarket. Hence, commerce is said toconsist of activities of removing thehindrances of persons, place, time, risk,finance and information in the processof exchange of goods and services.

1.7.1 TradeTrade is an essential part of commerce.It refers to sale, transfer or exchange ofgoods. It helps in making the goodsproduced available to ultimateconsumers or users. These days goodsare produced on a large scale and it isdifficult for producers to themselvesreach individual buyers for sale of theirproducts. Businessmen are engaged intrading activities as middlemen to make

the goods available to consumers indifferent markets. In the absence of trade,

it would not be possible to undertakeproduction activities on a large scale.

Trade may be classified into twobroad categories internal andexternal. Internal, domestic or hometrade is concerned with the buying andselling of goods and services within thegeographical boundaries of a country.

This may further be divided intowholesale and retail trade. When goods

are purchased and sold in bulk, it isknown as wholesale trade. When goodsare purchased and sold incomparatively smaller quantities, forfinal consumption it is referred to asretail trade. External or foreign tradeconsists of the exchange of goods andservices between persons or

organisations operating in two or morecountries. If goods are purchased from

another country, it is called importtrade. If they are sold to other countries,it is known as export trade. When goods

are imported for export to othercountries, it is known as entrepot trade.

1.7.2 Auxiliaries to Trade

Activities which are meant for assistingtrade are known as auxiliaries to trade.

These activities are generally referred toas services because these are in thenature of facilitating the activities relatingto industry and trade. Transport,

banking, insurance, warehousing, andadvertising are regarded as auxiliaries totrade, i.e., activities playing a supportiverole. In fact, these activities support notonly trade, but also industry and hence,

the entire business activity. Auxiliariesare an integral part of commerce inparticular and business activity ingeneral. These activities help in removing

various hindrances which arise inconnection with the production anddistribution of goods. Transportfacilitates movement of goods from oneplace to another. Banking providesfinancial assistance to the manufacturerand trader. Insurance covers variouskinds of business risks. Warehousing

creates time utility by way of storagefacilities. Advertising providesinformation to the consumers. In other

words, these activ it ies faci li tatemovement, storage, financing, riskcoverage and sales promotion of goods.

Auxiliaries to trade are briefly discussedbelow:


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(i) Transport and Communication:Production of goods generally takesplace in particular locations. Forinstance, tea is mainly produced in

Assam; cotton in Gujarat andMaharashtra; jute in West Bengal andOrissa; sugar in U.P, Bihar andMaharashtra and so on. But thesegoods are required for consumption in

different parts of the country. Theobstacle of place is removed bytransport through road, rail or coastalshipping. Transport facilitatesmovement of raw material to the placeof production and the finishedproducts from factories to the place ofconsumption. Along with the transportfacility, there is also a need forcommunication facilities so thatproducers, traders and consumersmay exchange information with one

another. Thus, postal services andtelephone facilities may also beregarded as auxiliaries to businessactivities.(ii) Banking and Finance: Businessactivities cannot be undertaken unlessfunds are available for acquiring assets,purchasing raw materials and meetingother expenses. Necessary funds can

be obtained by businessmen from abank. Thus, banking helps businessactivities to overcome the problem of

finance. Commercial banks generallylend money by providing overdraft andcash credit facilities, loans andadvances. Banks also undertakecollection of cheques, remittance offunds to different places, anddiscounting of bills on behalf of traders.In foreign trade, commercial banks

help exporters in collecting money fromimporters. Commercial banks also helppromoters of companies to raise capitalfrom the public.(iii) Insurance: Business involves

various types of risks. Factory building,machinery, furniture etc. must beprotected against fire, theft and otherrisks. Materials and goods held in stock

or in transit are subject to the risk ofloss or damage. Employees are alsorequired to be protected against therisks of accident and occupationalhazards. Insurance provides protectionin all such cases. On payment of anominal premium, the amount of lossor damage and compensation forinjury, if any, can be recovered fromthe insurance company.(iv) Warehousing: Usually, goods arenot sold or consumed immediately after

production. They are held in stock tomake them available as and whenrequired. Special arrangement must bemade for storage of goods to prevent lossor damage. Warehousing helps

business firms to overcome the problemof storage and facilitates the availabilityof goods when needed. Prices arethereby maintained at a reasonable levelthrough continuous supply of goods.(v) Advertising: Advertising is one ofthe most important methods of

promoting the sale of products,particularly, consumers goods likeelectronic goods, automobiles, soaps,detergents etc. Most of these goods aremanufactured and supplied in themarket by numerous firms big orsmall. It is practically impossible forproducers and traders to contact each


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12 BUSINESS STUDIES

and every customer. Thus, forpromoting sales, information about the

goods and services available, theirfeatures, price, etc., must reachpotential buyers. Also there is a needto persuade potential buyers about the

uses, quality, prices, competitiveinformation about the goods andservices etc. Advertising helps in

providing information about availablegoods and services and inducingcustomers to buy particular items.

1.8 OBJECTIVESOFBUSINESS

An objective is the starting point ofbusiness. Every business is directed tothe achievement of certain objectives.Objectives refer to all that the businesspeople want to get in return for whatthey do. It is generally believed that

business activity is carried on only forprofit. Business persons themselvesproclaim that their primary objective isto produce or distribute goods orservices for a profit. Every business issaid to be an attempt on the part of

business people to get more than whathas been spent or invested or, in other

words, to earn profit which is the excessof revenue over cost. However, it is beingincreasingly realised nowadays that

business enterprises are part of society

and need to have several objectives,including social responsibility tosurvive and prosper in the long run.Profit is found to be a leading objective

but not the only one.Although earning profit cannot be

the only objective of business, itsimportance cannot be ignored. Every

business is an attempt to reap more

than what has been invested, and profitis the excess of revenue over cost. Profitmay be regarded as an essentialobjective of business for variousreasons: (i) it is a source of income for

business persons, (ii) it can be a sourceof finance for meeting expansionrequirements of business, (iii) itindicates the efficient working of

business, (iv) it can be taken as societysapproval of the utility of business, and(v) it builds up the reputation of a

business enterprise.However, too much emphasis on

profit to the exclusion of other objectivescan be dangerous for good business.Obsessed with profit, businessmanagers may neglect all otherresponsibilities towards customers,employees, investors and society atlarge. They may even be inclined to

exploit various sections of society to earnimmediate profit. This may result in thenon-cooperation or even opposition fromthe affected people against themalpractices of business enterprises.

The enterprises might lose business andmay be unable to earn profit. That isthe reason why there is hardly anysizable business enterprise whose onlyobjective is maximisation of profit.

1.8.1 Multiple Objectives of Business

Objectives are needed in every areathat influences the survival andprosperity of business. Since a

business has to balance a numberof needs and goals, it requiresmultiple objectives. It cannot followonly one objective and expect toachieve excellence. Objectives have


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to be specific in every area andsphere of business. For example,

sales targets have to be set, theamount of capital to be raised has to

be estimated and the target numberof units to be produced needs to be

defined. The objectives define inconcrete terms what the business isgoing to do. Objectives also enable the

business to analyse their ownperformance and take steps asneccessary to improve theirperformance in future.

Objectives are needed in every area

where performance and results affectthe survival and prosperity of

business. Some of these areas aredescribed below:

(a) Market standing:Market standingrefers to the position of an enterprisein relation to its competitors. A

business enterprise must aim atstanding on stronger footing interms of offering competitiveproducts to its customers andserving them to their satisfaction.

(b) Innovation: Innovation is theintroduction of new ideas ormethods in the way something isdone or made. There are two kindsof innovation in every business i.e.,(i) innovation in product or service;

and (ii) innovation in various skillsand activities needed to supplyproducts and services. No businessenterprise can flourish in acompetitive world withoutinnovation. Therefore, innovation

becomes an important objective.(c) Productivity: Productivity is

ascertained by comparing the valueof output with the value of inputs.It is used as a measure of efficiency.In order to ensure continuoussurvival and progress, everyenterprise must aim at greaterproductivity through the best useof available resources.

(d)Physical and financial resources:

Any business requires physicalresources like plants, machines,offices, etc., and financial resources,i.e., funds to be able to produce andsupply goods and services to itscustomers. The business enterprisemust aim at acquiring theseresources according to theirrequirements and use themefficiently.

(e) Earning profits: One of theobjectives of business is to earn profits

on the capital employed. Profitabilityrefers to profit in relation to capitalinvestment. Every business mustearn a reasonable profit which is soimportant for its survival and growth.

(f) Manager performance anddevelopment:Business enterprisesneed managers to conductand coordinate business activity.

Various programmes for motivatingmanagers need to be implemented.Manager performance and

development, therefore, is animportant objective. The enterprisesmust actively work for thispurpose.

(g) Worker performance and attitude:Workers performance and attitudesdetermine their contribution towardsproductivity and profitability of any


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14 BUSINESS STUDIES

enterprise. Therefore, everyenterprise must aim at improving its

workers performance. It should alsotry to ensure a positive attitude onthe part of workers.

(h)Social responsibility: Socialresponsibility refers to the obligationof business firms to contributeresources for solving social problems

and work in a socially desirablemanner.

Thus, a business enterprise must havemultiple objectives to satisfy differentindividuals and groups. This is essentialfor its own survival and prosperity.

1.8.2 Business Risks

The term business risks refers to thepossibility of inadequate profits or evenlosses due to uncertainties or

unexpected events. For example,demand for a particular product maydecline due to change in tastes andpreferences of consumers or due toincreased competition from otherproducers. Lower demand results inlong sales and profits. In anothersituation, the shortage of raw materialsin the market may shoot up its price.

The firm using these raw materials will

have to pay more for buying them. Asa result, cost of production may

increase which, in turn, may reduceprofits.

Business enterprises constantlyface two types of risk: speculative and

pure. Speculative risks involve both thepossibility of gain as well as thepossibility of loss. Speculative risks

arise due to changes in market

conditions including fluctuations indemand and supply, changes in pricesor changes in fashion and tastes ofcustomers. Favourable marketconditions are likely to result in gains

whereas unfavourable ones may resultin losses. Pure risks involve only thepossibility of loss or no loss. The chanceof fire, theft or strike are examples of

pure risks. Their occurrence may resultin loss, whereas non-occurrence mayexplain absence of loss, instead of gain.

1.9 NATUREOFBUSINESS RISKS

Nature of business risks can beunderstood in terms of their peculiarcharacteristics:(i ) Business risks arise due touncertainties: Uncertainty refers tothe lack of knowledge about what is

going to happen in the future. Naturalcalamities, change in demand andprices, changes in government policy,improvement in technology, etc., aresome of the examples of uncertainty

which create risks for business becausethe outcome of these future events isnot known in advance.(ii) Risk is an essential part of everybusiness: Every business has somerisk. No business can avoid risk,although the amount of risk may vary

from business to business. Risk can beminimised, but cannot be eliminated.(iii) Degree of risk depends mainlyupon the nature and size ofbusiness: Nature of business (i.e., typeof goods and services produced andsold) and size of business (i.e., volumeof production and sale) are the main


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factors which determine the amount ofrisk in a business. For example, a

business dealing in fashionable itemshas a high degree of risk. Similarly, alarge-scale business generally has ahigher risk than what a small scale has.(iv) Profit is the reward for risktaking: No risk, no gain is an age-oldprinciple which applies to all types of

business. Greater the risk involved ina business, higher is the chance ofprofit. An entrepreneur undertakesrisks under the expectation of higherprofit. Profit is thus the reward forrisk taking.

1.9.1 Causes of Business Risks

Business risks arise due to a variety ofcauses, which are classified as follows:

power failure, strikes, riots,management inefficiency, etc.(iii) Economic causes:These includeuncertainties relating to demand forgoods, competition, price, collection ofdues from customers, change of

technology or method of production,etc. Financial problems like rise ininterest rate for borrowing, levy of higher

taxes, etc., also come under these typeof causes as they result in higherunexpected cost of operation of

business.( iv ) Other causes: These are

unforeseen events like politicaldisturbances, mechanical failures suchas the bursting of boiler, fluctuationsin exchange rates, etc., which lead to

the possibility of business risks.

Methods of Dealing with Risks

Although no business enterprise can escape the presence of risk, there aremany methods it can use to deal with risk situations. For instance, the enterprisemay (a) decide not to enter into too risky transaction; (b) take preventive measureslike firefighting devices to reduce risk; (c) take insurance policy to transfer riskto insurance company; (d) assume risk by making provisions in the currentearnings as is the case of provision for bad and doubtful debts; or (e) share riskswith other enterprises as manufacturers and wholesalers may do by agreeing toshare losses which may be caused by falling prices.

(i) Natural causes: Human beings

have little control over natural

calamities like flood, earthquake,lightning, heavy rains, famine, etc.

These result in heavy loss of life,property and income in business.

(ii) Human causes: Human causesinclude such unexpected events likedishonesty, carelessness or negligenceof employees, stoppage of work due to

1.9.2 Starting a Business BasicFactors

Starting a business enterprise is similarto any other human effort in whichresources are employed to achievecertain objectives. Successful results in

business depend largely upon theability of the entrepreneurs or thestarters of a new business to anticipateproblems and solve them with


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16 BUSINESS STUDIES

minimum cost. This is especially trueof the modern business world where

competition is very tough and risks are

high. Some of the problems, whichbusiness firms encounter, are of a basicnature. For example, to start a factory,plans must be made and implemented

about such problems as the location

of the business, the possible number

of customers, the kind and amount ofequipment, the shop layout, purchasingand financing needs, and hiring of

workers. These problems become more

complex in a big business. However,

some of the basic factors, which mustbe considered by anybody who is tostart the business are as follows:(i) Selection of line of business: Thefirst thing to be decided by anyentrepreneur of a new business is the

nature and type of business to beundertaken. He will obviously like to

enter that branch of industry andcommerce, which has the possibility ofgreater amount of profits. The decision

will be influenced by the customer

requirements in the market and alsothe kind of technical knowledge and

interest the entrepreneur has forproducing a particular product.(ii) Size of the firm: Size of the firmor scale of its operation is another

important decision to be taken at thestart of the business. Some factorsfavour a large size whereas others tendto restrict the scale of operation. If theentrepreneur is confident that thedemand for the proposed product is

likely to be good over time and he can

arrange the necessary capital for

business, he will start the operation ata large scale. If the market conditions

are uncertain and risks are high, asmall size business would be betterchoice.(iii) Choice of form of ownership:

With respect to ownership, thebusiness organisation may take the

form of a sale proprietorship,

partnership, or a joint stock company.Each form has its own merits anddemerits. The choice of the suitableform of ownership will depend on suchfactors as the line of business, capital

requirements, liability of owners,division of profit, legal formalities,

continuity of business, transferabilityof interest and so on.(iv) Location of business enterprise:

An important factor to be considered

at the start of the business is the placewhere the enterprise will be located.Any mistake in this regard can resultin high cost of production,inconvenience in getting right kind ofproduction inputs or serving the

customers in the best possible way.

Availability of raw materialsand labour; power supply andservices like banking, transportation,communication, warehousing, etc., areimportant factors while making a

choice of location.(v) Financing the proposition:

Financing is concerned with providingthe necessary capital for starting as wellas for continuing the proposed

business. Capital is required for

investment in fixed assets like land,building, machinery and equipment


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and in current assets like raw materials,book debts, stock of finished goods, etc.

Capital is also required for meeting

day-to-day expenses. Proper financialplanning must be done to determine(a) the requirement of capital,(b) source from which capital will be

raised and (c) the best ways of utilising

the capital in the firm.

(vi) Physical facilities: Availability ofphysical facilities including machinesand equipment, building andsupportive services is a very important

factor to be considered at the start of

the business. The decision relating tothis factor will depend on the natureand size of business, availability offunds and the process of production.(v ii ) P lant layout: Once therequirement of physical facilities has

been determined, the entrepreneurshould draw a layout plan showing thearrangement of these facilities. Layoutmeans the physical arrangement of

machines and equipment needed tomanufacture a product.

(viii) Competent and committedworked force: Every enterprise needscompetent and committed work force

to perform various activities so thatphysical and financial resources are

converted into desired outputs. Sinceno individual entrepreneur can doeverything himself, he must identify the

requirement of skilled and unskilledworkers and managerial staff. Plansshould also be made about how the

employees will be trained and motivated

to give their best performance.(ix) Tax planning: Tax planning has

become necessary these days becausethere are a number of tax laws in thecountry and they influence almost

every aspect of the functioning ofmodern business. The founder of the

business has to consider in advancethe tax liability under various tax lawsand its impact on business decisions.(x) Launching the enterprise: After

the decisions relating to the abovementioned factors have been taken,

the entrepreneur can go ahead withactual launching of the enterprise

which would mean mobilising variousresources, fulfilling necessary legal

formalities, starting the production

process and initiating the sales

promotion campaign.

Key Terms

Business Profession Primary Innovation Warehousing

Profit Employment Secondary Insurance Social responsibility

Risk Industry Tertiary Mining Manufacturing


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18 BUSINESS STUDIES

SUMMARY

Concept and characteristics of business: Business may be defined as aneconomic activity involving the production and sale of goods and servicesundertaken with the motive of earning profit by satisfying human needs insociety. Its distinguished characteristics are: (i) an economic activity,(ii) production or procurement of goods and services, (iii) sale or exchangeof goods and services for the satisfaction of human needs, (iv) dealings ingoods and services on a regular basis, (v) profit earning, (vi) uncertainty ofreturn, and (vii) element of risk.

Comparison of business, profession and employment: Business refersto those economic activities which are connected with the production orpurchase and sale of goods or supply of services with the main object ofearning profit. Profession includes those activities, which require specialknowledge and skill to be applied by individuals in their occupation.Employment refers to the occupation in which people work for others andget remunerated in return. The three can be compared on the basis ofmode of establishment, nature of work, qualification required, reward orreturn, capital investment, risk, transfer of interest and code of conduct.

Classification of business activities: Business activities may be classifiedinto broad categories: industry and commerce. Industry refers to economicactivities which are connected with conversion of resources into useful

goods. Industries may be: primary, secondary or tertiary. Primary industriesare connected with the extraction and production of natural resources andreproduction and development of living organisms, plants, etc. Primaryindustries may be: extractive (like mining) or genetic (like poultry farms).Secondary industries are concerned with using the materials which havealready been extracted at the primary stage. These industries could be:manufacturing or construction. Manufacturing industries may be furtherclassified into analytical, synthetical, processing and assembling industries.Tertiary industries are concerned with providing support services to primaryand secondary industries as well as activities relating to trade.

Commerce includes activities relating to trade and auxiliaries to trade.Trade refers to sale, transfer or exchange of goods. It could be classified asinternal (domestic) and external (foreign) trade. Internal trade may be

wholesale trade or retail trade. External trade could be import, export orentrepot trade. Auxiliaries to trade are activities which assist trade. Theseinclude transport and communication, banking and finance, insurance,warehousing, and advertising.

Objectives of business: Although earning of profit is considered to be theprimary objective, objectives are needed in every area where performanceresults affect the survival and prosperity of business. Some of these areasare: market standing, innovation, productivity, physical and financial


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resources, earning profits manager performance and development, workerperformance and attitude, and social responsibility.

Business risks:The term risk refers to the possibility of inadequate profitsor even losses due to uncertainties or unexpected events. Its nature can beexplained with the help of its peculiar characteristics which are:

(i) Business risks arise due to uncertainties,(ii) Risk is an essential part of every business,(iii) Degree of risk depends mainly upon the nature and size of business,

and(iv) Profit is the reward for risk taking. Business risks arise due to a variety

of causes including natural, human, economic and other causes.Starting a business basic factors: Some of the basic factors which mustbe considered by anybody who is to start the business are: selection of lineof business, size of the firm, choice of form of ownership, location of businessenterprise, financing the proposition, physical facilities, plant layoutcompetent and committed workforce, tax planning and launching theenterprise.

EXERCISES

Multiple Choice Questions

1. Which of the following does not characterise business activity?(a) Production of goods (b) Presence of risk

and services(c) Sale or exchange of (d) Salary or wages

goods and services

2. Which of the broad categories of industries covers oil refinery and sugarmills?(a) Primary (b) Secondary (c) Tertiary (d) None of them

3. Which of the following cannot be classified as an auxilliary to trade?(a) Mining (b) Insurance(c) Warehousing (d) Transport

4. The occupation in which people work for others and get remunerated inreturn is known as(a) Business (b) Employment (c) Profession (d) None of them

5. The industries which provide support services to other industries areknown as(a) Primary industries (b) Secondary industries(c) Commercial industries (d) Tertiary industries


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20 BUSINESS STUDIES

6. Which of the following cannot be classified as an objective of business?(a) Investment (b) Productivity (c) Innovation (d) Profit earning

7. Business risk is not likely to arise due to(a) Changes in government policy (b) Good management(c) Employee dishonesty (d) Power failure

Short Answer Questions

1. State the different types of economic activities.

2. Why is business considered an economic activity?

3. Explain the concept of business.

4. How would you classify business activities?

5. What are various types of industries?

6. Explain any two business activities which are auxiliaries to trade.

7. What is the role of profit in business?

8. What is business risk? What is its nature?

Long Answer Questions

1. Explain the characteristics of business.

2. Compare business with profession and employment.

3. Explain with examples the various types of industries.

4. Describe the activities relating to commerce.

5. Why does business need multiple objective? Explain any five suchobjectives.

6. Explain the concept of business risk and its causes.

7. What factors are important to be considered while starting a business?Explain.

Projects/Assignments

1. Choose a locally operated trading or business unit. Find out the kind ofrisks it faces in business and the way it deals with them.

2. Select a local business enterprise and find out the objectives it pursues.Check why it does not pursue other objectives.


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CHAPTER2

FORMSOF BUSINESSORGANISATION

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

identify different forms of business organisation;

explain features, merits and limitations of select forms of businessorganisation;

distinguish between various forms of organisation; and

analyse factors determining choice of an appropriate form ofbusiness organisation.


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22 BUSINESS STUDIES

2.1 INTRODUCTION

If one is planning to start a business oris interested in expanding an existingone, an important decision relates tothe choice of the form of organisation.The most appropriate form isdetermined by weighing theadvantages and disadvantages of eachtype of organisation against ones ownrequirements.

Various forms of businessorganisations from which one canchoose the right one include:(a) Sole proprietorship,(b) Joint Hindu family business,(c) Partnership,(d) Cooperative societies, and(e) Joint stock company.

Let us start our discussion withsole proprietorship the simplest formof business organisation, and thenmove on to analysing more complexforms of organisations.

2.2 SOLE PROPRIETORSHIP

Do you often go in the evenings to buyregisters, pens, chart papers, etc., froma small neighbourhood stationery

store? Well, in all probability in thecourse of your transactions, you haveinteracted with a sole proprietor.

Sole proprietorship is a popularform of business organisation and isthe most suitable form for smallbusinesses, especially in their initialyears of operation. Sole proprietorship

Neha, a bright final year student was waiting for her results to be declared.

While at home she decided to put her free time to use. Having an aptitude for

painting, she tried her hand at decorating clay pots and bowls with designs.

She was excited at the praise showered on her by her friends and acquaintances

on her work. She even managed to sell a few pieces of unique hand pottery from

her home to people living in and around her colony. Operating from home, she

was able to save on rental payments. She gained a lot of popularity by word of

mouth publicity as a sole proprietor. She further perfected her skills of painting

pottery and created new motifs and designs. All this generated great interest

among her customers and provided a boost to the demand for her products. By

the end of summer, she found that she had been able to make a profit of Rs.

2500 from her paltry investment in colours, pottery and drawing sheets. She felt

motivated to take up this work as a career. She has, therefore, decided to set up

her own artwork business. She can continue running the business on her own

as a sole proprietor, but she needs more money for doing business on a larger

scale. Her father has suggested that she should form a partnership with her

cousin to meet the need for additional funds and for sharing the responsibilities

and risks. Side by side, he is of the opinion that it is possible that the business

might grow further and may require the formation of a company. She is in a fix

as to what form of business organisation she should go in for?


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23FORMS OF BUSINESS ORGANISATION

refers to a form of business organisationwhich is owned, managed andcontrolled by an individual who is therecipient of all profits and bearer of allrisks. This is evident from the termitself. The word sole implies only,and proprietor refers to owner.Hence, a sole proprietor is the one whois the only ownerof a business.

This form of business is particularlycommon in areas of personalisedservices such as beauty parlours, hairsaloons and small scale activities likerunning a retail shop in a locality.

payment of debts in case the assets ofthe business are not sufficient to meetall the debts. As such the ownerspersonal possessions such as his/herpersonal car and other assets could besold for repaying the debt. Suppose thetotal outside liabilities of XYZ drycleaner, a sole proprietorship firm, areRs. 80,000 at the time of dissolution, but

its assets are Rs. 60,000 only. In such asituation the proprietor will have to bringin Rs. 20,000 from her personal sourceseven if she has to sell her personalproperty to repay the firms debts.

Features

Salient characteristics of the soleproprietorship form of organisation areas follows:

(i) Formation and closure: Hardlyany legal formalities are required tostart a sole proprietary business,though in some cases one may require

a license. There is no separate law thatgoverns sole proprietorship. Closure ofthe business can also be done easily.Thus, there is ease in formation as wellas closure of business.

(ii) Liability: Sole proprietors haveunlimited liability. This implies that theowner is personally responsible for

(iii) Sole risk bearer and profitrecipient: The risk of failure ofbusiness is borne all alone by the soleproprietor. However, if the business issuccessful, the proprietor enjoys all thebenefits. He receives all the businessprofits which become a direct rewardfor his risk bearing.(iv) Control: The right to run the

business and make all decisions liesabsolutely with the sole proprietor. Hecan carry out his plans without anyinterference from others.(v) No separate entity: In the eyes ofthe law, no distinction is made betweenthe sole trader and his business, asbusiness does not have an identity

Sole trader is a type of business unit where a person is solely responsible forproviding the capital, for bearing the risk of the enterprise and for the managementof business.

J.L. Hansen

The individual proprietorship is the form of business organisation at the head ofwhich stands an individual as one who is responsible, who directs its operationsand who alone runs the risk of failure.

L.H. Haney


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24 BUSINESS STUDIES

separate from the owner. The owner is,therefore, held responsible for all theactivities of the business.(vi) Lack of business continuity:

Since the owner and business are oneand the same entity, death, insanity,imprisonment, physical ailment orbankruptcy of the sole proprietor willhave a direct and detrimental effect on

the business and may even causeclosure of the business.

consult others. This may lead to timelycapitalisation of market opportunitiesas and when they arise.(ii) Confidentiality of information:Sole decision making authority enablesthe proprietor to keep all theinformation related to businessoperations confidential and maintainsecrecy. A sole trader is also not boundby law to publish firms accounts.

( i ii ) Direct incentive: A soleproprietor directly reaps the benefits

Merits

Sole proprietorship offers manyadvantages. Some of the important onesare as follows:(i) Quick decision making: A soleproprietor enjoys considerable degreeof freedom in making businessdecisions. Further the decision makingis prompt because there is no need to

of his/her efforts as he/she is the solerecipient of all the profit. The need to

share profits does not arise as he/sheis the single owner. This providesmaximum incentive to the sole traderto work hard.(iv) Sense of accomplishment:Thereis a personal satisfaction involved inworking for oneself. The knowledgethat one is responsible for the success

A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor!

The product that has given the world its best-known taste was born in Atlanta,Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, producedthe syrup for Coca-Cola, and carried a jug of the new product down the street toJacobs Pharmacy, where it was sampled, pronounced excellent and placed onsale for five cents a glass as a soda fountain drink. Dr. Pemberton never realisedthe potential of the beverage he created. He gradually sold portions of his businessto various partners and, just prior to his death in 1888, sold his remaining interestin Coca-Cola to Asa G. Candler. An Atlantan with great business acumen, Mr.

Candler proceeded to buy additional business rights and acquire complete control.On May 1, 1889, Asa Candler published a full-page advertisement in The AtlantaJournal, proclaiming his wholesale and retail drug business as sole proprietorsof Coca-Cola ... Delicious. Refreshing. Exhilarating. Invigorating. Soleownership, which Mr. Candler did not actually achieve until 1891, needed aninvestment of $ 2,300.

It was only in 1892 that Mr. Candler formed a company called The Coca-ColaCorporation.

Source:Website of Coca Cola company.


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of the business not only contributes toself-satisfaction but also instils in theindividual a sense of accomplishmentand confidence in ones abilities.(v) Ease of formation and closure:An important merit of soleproprietorship is the possibility ofentering into business with minimallegal formalities. There is no separate

law that governs sole proprietorship. Assole proprietorship is the leastregulated form of business, it is easyto start and close the business as perthe wish of the owner.

Limitations

Notwithstanding various advantages,the sole proprietorship form oforganisation is not free fromlimitations. Some of the major

limitations of sole proprietorship areas follows:(i) Limited resources: Resources ofa sole proprietor are limited to his/herpersonal savings and borrowings fromothers. Banks and other lendinginstitutions may hesitate to extend along term loan to a sole proprietor.Lack of resources is one of the majorreasons why the size of the businessrarely grows much and generallyremains small.( i i ) Limited li fe of a business

concern: In the eyes of the law theproprietorship and the owner areconsidered one and the same. Death,insolvency or illness of a proprietoraffects the business and can lead toits closure.

(iii) Unlimited liability: A majordisadvantage of sole proprietorship isthat the owner has unlimited liability. Ifthe business fails, the creditors canrecover their dues not merely from thebusiness assets, but also from thepersonal assets of the proprietor. Apoor decision or an unfavourablecircumstance can create seriousfinancial burden on the owners. That iswhy a sole proprietor is less inclined totake risks in the form of innovationor expansion.(iv) Limited managerial ability: Theowner has to assume the responsibilityof varied managerial tasks such aspurchasing, selling, financing, etc. It israre to find an individual who excels inall these areas. Thus decision makingmay not be balanced in all the cases.Also, due to limited resources, soleproprietor maynot be able to employ

and retain talented and ambitiousemployees.

Though sole proprietorship suffersfrom various shortcomings, manyentrepreneurs opt for this form oforganisation because of its inherentadvantages. It requires less amount ofcapital. It is best suited for businesseswhich are carried out on a small scaleand where customers demandpersonalised services.

2.3 JOINT HINDU FAMILYBUSINESS

Joint Hindu family business is aspecific form of business organisationfound only in India. It is one of theoldest forms of business organisationin the country. It refers to a form oforganisation wherein the business is


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26 BUSINESS STUDIES

owned and carried on by the membersof the Hindu Undivided Family (HUF).It is governed by the Hindu Law. Thebasis of membership in the business isbirth in a particular family and threesuccessive generations can be membersin the business.

The business is controlled by thehead of the family who is the eldest

member and is called karta. Allmembers have equal ownership rightover the property of an ancestor andthey are known as co-parceners.

systems. Dayabhaga systemprevailsin West Bengal and allows both themale and female members of the familyto be co-parceners. Mitakasharasystem, on the other hand, prevails allover India except West Bengal andallows only the male members to beco-parceners in the business.

Features

The following points highlight theessential characteristics of the jointHindu family business.

There are two systems which governmembership in the family business,viz., Dayabhaga and Mitakashara

(i) Formation: For a joint Hindu familybusiness, there should be at least twomembers in the family and ancestral

Gender Equality in the Joint Hindu Family a Reality

With the introduction of the Hindu Succession (Amendment) Bil l 2004 inParliament on December 20, 2004, the Government has gone a step further infulfilling its commitment towards gender equality made in National CommonMinimum Programme (NCMP). The Bill to amend the Hindu Succession Act of1956 gives women equal rights in the inheritance of ancestral wealth, somethingreserved only for male heirs earlier. It, indeed, is a significant step in bringingthe Hindu Law of inheritance in accord with the constitutional principle of

equality. The enactment of the proposed legislation would also implement therecommendations of the National Commission for Women (NCW) substantiallyto help bring social change in society. The Bill seeks to remove the discriminationas contained in section 6 of the Hindu Succession Act, 1956 by giving equalrights to daughters in the Hindu Mitakshara coparcenary property as thesons have.

In what is known as the Kerala model, the concept of coparcenary was abolishedand according to the Kerala Joint Family System (Abolition) Act, 1975, the heirs(male and female) do not acquire property by birth but only hold it as tenants asif a partition has taken place. Andhra Pradesh (1986), Tamil Nadu (1989),Karnataka (1994) and Maharashtra (1994) also enacted laws, where daughterswere granted coparcener rights or a claim on ancestral property by birth asthe sons.

Equality for women is not just a matter of equity for the so-called weaker sex,but a measure of the modernity of Indian society and the pragmatic nature ofour civilisation. (PIB Features)

Source:Adapted from E C Thomas, The Road to Gender Equality.


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property to be inherited by them. Thebusiness does not require anyagreement as membership is by birth.It is governed by the Hindu SuccessionAct, 1956.( ii ) Liability: The liability of allmembers except the kartais limited totheir share of co-parcenery property ofthe business. The karta, however, has

unlimited liability.(iii) Control: The control of the familybusiness lies with the karta. He takesall the decisions and is authorised tomanage the business. His decisions arebinding on the other members.( iv) Continuity: The businesscontinues even after the death of thekartaas the next eldest member takesup the position of karta, leaving thebusiness stable. The business can,however, be terminated with the

mutual consent of the members.(v) Minor Members: The inclusion ofan individual into the business occursdue to birth in a Hindu UndividedFamily. Hence, minors can also bemembers of the business.

Merits

The advantages of the joint Hindufamily business are as follows:(i) Effective control: The kartahasabsolute decision making power. This

avoids conflicts among members as noone can interfere with his right todecide. This also leads to prompt andflexible decision making.(ii) Continued business existence:The death of the kartawill not affectthe business as the next eldest memberwill then take up the position. Hence,

operations are not terminated andcontinuity of business is notthreatened.(iii) Limited liability of members:The liability of all the co-parcenersexcept the kartais limited to their sharein the business, and consequently theirrisk is well-defined and precise.( iv) Increased loyalty and

cooperation:Since the business is runby the members of a family, there is agreater sense of loyalty towards oneother. Pride in the growth of businessis linked to the achievements of thefamily. This helps in securing bettercooperation from all the members.

Limitation

The following are some of thelimitations of a joint Hindu family

business.(i) Limited resources: The joint Hindufamily business faces the problem oflimited capital as it depends mainly onancestral property. This limits thescope for expansion of business.(ii) Unlimited liability ofkarta: Thekarta is burdened not only with theresponsibility of decision making andmanagement of business, but alsosuffers from the disadvantage ofhaving unlimited liability. His personal

property can be used to repay businessdebts.(iii) Dominance ofkarta: The kartaindividually manages the businesswhich may at times not be acceptableto other members. This may causeconflict amongst them and may evenlead to break down of the family unit.


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(iv) Limited managerial skills: Sincethe kartacannot be an expert in allareas of management, the businessmay suffer as a result of his unwisedecisions. His inability to decideeffectively may result into poor profitsor even losses for the organisation.

The joint Hindu family business ison the decline because of the

diminishing number of joint Hindufamilies in the country.

2.4 PARTNERSHIP

The inherent disadvantage of the soleproprietorship in financing andmanaging an expanding business pavedthe way for partnership as a viable option.Partnership serves as an answer to theneeds of greater capital investment,varied skills and sharing of risks.

(i) Formation: The partnership formof business organisation is governed bythe Indian Partnership Act, 1932. Itcomes into existence through a legalagreement wherein the terms andconditions governing the relationshipamong the partners, sharing of profitsand losses and the manner ofconducting the business are specified.

It may be pointed out that the businessmust be lawful and run with the motiveof profit. Thus, two people comingtogether for charitable purposes willnot constitute a partnership.(ii) Liability: The partners of a firmhave unlimited liability. Personal assetsmay be used for repaying debts in casethe business assets are insufficient.Further, the partners are jointly andindividually liable for payment of debts.

The Indian Partnership Act, 1932defines partnership as the relationbetween persons who have agreed toshare the profit of the business

carried on by all or any one of themacting for all.

Features

Definitions given above point to thefollowing major characteristics ofthe partnership form of businessorganisation.

Jointly, all the partners are responsible

for the debts and they contribute in

proportion to their share in business

and as such are liable to that extent.

Individually too, each partner can be

held responsible repaying the debts ofthe business. However, such a partner

can later recover from other partners

an amount of money equivalent to the

shares in liability defined as per thepartnership agreement.

Partnership is the relation between persons competent to make contracts whohave agreed to carry on a lawful business in common with a view to private gain.

L H Haney

Partnership is the relation which subsists between persons who have agreed tocombine their property, labour or skill in some business and to share the profitstherefrom between them.

The Indian Contract Act


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(iii) Risk bearing: The partners bearthe risks involved in running a businessas a team. The reward comes in theform of profits which are shared by thepartners in an agreed ratio. However,they also share losses in the same ratioin the event of the firm incurring losses.

(iv) Decision making and control:The partners share amongst themselves

the responsibility of decision makingand control of day to day activities.Decisions are generally taken withmutual consent. Thus, the activities ofa partnership firm are managedthrough the joint efforts of all thepartners.(v ) Continuity: Partnership ischaracterised by lack of continuity ofbusiness since the death, retirement,insolvency or insanity of any partnercan bring an end to the business.However, the remaining partners mayif they so desire continue the businesson the basis of a new agreement.(vi) Membership: The minimumnumber of members needed to start apartnership firm is two, while themaximum number, in case of bankingindustry is ten and in case of otherbusinesses it is twenty.(vii) Mutual agency: The definition ofpartnership highlights the fact that it

is a business carried on by all or anyone of the partners acting for all. Inother words, every partner is both anagent and a principal. He is an agent ofother partners as he represents themand thereby binds them through hisacts. He is a principal as he too can bebound by the acts of other partners.

Merits

The following points describe theadvantages of a partnership firm.(i) Ease of formation and closure:A partnership firm can be formedeasily by putting an agreementbetween the prospective partners intoplace whereby they agree to carryoutthe business of the firm and share

risks. There is no compulsion withrespect to registration of the firm.Closure of the firm too is an easy task.(ii) Balanced decision making: Thepartners can oversee differentfunctions according to their areas ofexpertise. Because an individual is notforced to handle different activities, thisnot only reduces the burden of workbut also leads to fewer errors injudgements. As a consequence,

decisions are likely to be morebalanced.(iii) More funds: In a partnership, thecapital is contributed by a number ofpartners. This makes it possible toraise larger amount of funds ascompared to a sole proprietor andundertake additional operations whenneeded.(iv) Sharing of risks: The risksinvolved in running a partnership firmare shared by all the partners. This

reduces the anxiety, burden andstress on individual partners.(v) Secrecy: A partnership firm is notlegally required to publish itsaccounts and submit its reports.Hence it is able to maintainconfidentiality of information relatingto its operations.


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30 BUSINESS STUDIES

Limitations

A partnership firm of businessorganisation suffers from the followinglimitations:(i) Unlimited liability: Partners areliable to repay debts even from theirpersonal resources in case the businessassets are not sufficient to meet its debts.The liability of partners is both joint andseveral which may prove to be adrawback for those partners who havegreater personal wealth. They will haveto repay the entire debt in case the otherpartners are unable to do so.

(ii) Limited resources: There is arestriction on the number of partners,and hence contribution in terms ofcapital investment is usually notsufficient to support large scale businessoperations. As a result, partnership firms

face problems in expansion beyond acertain size.

(i ii) Possibility of conflicts:Partnership is run by a group of personswherein decision making authority isshared. Difference in opinion on someissues may lead to disputes betweenpartners. Further, decisions of onepartner are binding on other partners.Thus an unwise decision by some onemay result in financial ruin for all others.

In case a partner desires to leave thefirm, this can result in termination ofpartnership as there is a restriction ontransfer of ownership.

(iv) Lack of continuity: Partnershipcomes to an end with the death,retirement, insolvency or lunacy of anypartner. It may result in lack of

continuity. However, the remainingpartners can enter into a fresh agreementand continue to run the business.(v) Lack of public confidence: Apartnership firm is not legally requiredto publish its financial reports or makeother related information public. It is,therefore, difficult for any member of thepublic to ascertain the true financial

status of a partnership firm. As a result,the confidence of the public inpartnership firms is generally low.

2.4.1 Types of Partners

A partnership firm can have differenttypes of partners with different roles andliabilities. An understanding of thesetypes is important for a clearunderstanding of their rights andresponsibilities. These are described asfollows:(i) Active partner: An active partner isone who contributes capital,participates in the management of thefirm, shares its profits and losses, andis liable to an unlimited extent to thecreditors of the firm. These partnerstake actual part in carrying outbusiness of the firm on behalf of otherpartners.(ii) Sleeping or dormant partner:Partners who do not take part in the dayto day activities of the business are

called sleeping partners. A sleepingpartner, however, contributes capital tothe firm, shares its profits and losses,and has unlimited liability.(iii) Secret partner:A secret partner isone whose association with the firm isunknown to the general public. Otherthan this distinct feature, in all other


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aspects he is like the rest of the partners.He contributes to the capital of the firm,takes part in the management, sharesits profits and losses, and has unlimitedliability towards the creditors.(iv) Nominal partner: A nominalpartner is one who allows the use ofhis/her name by a firm, but does notcontribute to its capital. He/she does

not take active part in managing thefirm, does not share its profit or lossesbut is liable, like other partners, to thethird parties, for the repayments of thefirms debts.(v) Partner by estoppel: A person isconsidered a partner by estoppel if,through his/her own initiative, conductor behaviour, he/she gives animpression to others that he/she is apartner of the firm. Such partners are

held liable for the debts of the firmbecause in the eyes of the third partythey are considered partners, eventhough they do not contribute capitalor take part in its management.Suppose Rani is a friend of Seema whois a partner in a software firm Simplex Solutions. On Seemas request,Rani accompanies her to a business

meeting with Mohan Softwares andactively participates in the negotiationprocess for a business deal and givesthe impression that she is also a partnerin Simplex Solutions. If credit isextended to Simplex Solutions on thebasis of these negotiations, Rani wouldalso be liable for repayment of suchdebt, as if she is a partner of the firm.(vi) Partner by holding out: A partnerby holding out is a person who though

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32 BUSINESS STUDIES

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Documents

Business Studies.pdf