Types of Business organization and Business Cycles

The word ‘business’ is derived from ‘busy’ which means being busy or active. The activities of man are many and varied. Most of them are economic in nature. They are undertaken to satisfy human wants or to make a living. Business activities are those economic activities which are concerned with production or purchase sale or exchange of good and service for value. The sum total of these activities is business. Business activities may be classified into two heads i.e. 1) Industry and 2) Commerce. Industry refers to the production of goods and services through the use of material and human resources. It is concerned with activities relating to raising, production, processing and fabricating products. While industry is concerned with production of goods and service, commerce is concerned with their exchange. Trade is the course of commerce. It is the process of buying and selling goods. Commerce includes trade and all other functions and services which facilitate trade.

The following are the features of the business:

1. Exchange of goods and services2. Dealing in goods and services3. Continuity in dealing4. Profit Motive5. Elements or risk

1. Exchange of goods and services:Business involves exchange of goods and services for value. Production of purchase of goods for personal use or consumption does not constitute business as no sale or transfer value is involved. The ultimate object of production or sale should be to meet the needs of the community

2. Dealing in goods and services:Business consists of dealing in goods and services. Goods dealt with in business may be tangible or intangible. The tangible goods many consists of producers goods like machines etc. or consumers goods like cloth, sugar etc. intangible goods are services like electricity, gas, water etc.

3. Continuity in dealing:Business consist a continuous series of dealing in goods and services. A stray transaction does not constitute business. For example, sale of own house by an individual does not constitute business.

4. Profit Motive:Profit motive is a prominent feature of business. Business activity is motivated by desire to earn profit. Business involves some element of risk. Business should yield not only reasonable return on the capital invested, but also adequate reward to cover the risk. Profit is said to be the reward for risk bearing. A business can survive, grow and earn profits only when it is motivated by a desire to serve the needs of the society.

5. Elements or risk:In a competitive economy business activity is always associated with some element of risk. The fortunes of business are influenced by a number of factors, over which business has no control.

Forms of Business Organizations:

The world is developing day by day. The business world is also developing day by day. Based on the requirements of the world, the business has different forms. They are as follows

1. Sole Trading Concern:2. Partnership Business3. Joint Stock Company4. Hindu Undivided Family5. Co-operative Societies6. Public Enterprises

a) Public Corporationsb) Department Undertakingc) Government Company

1. Sole Trading Concern:

The sole trading concern or Individual Proprietorship is the oldest and the most natural form of business organization. A sole trader is a person who carries on business by himself and for himself with his own or borrowed capital and at his own risk. He is himself the promoter, financer, manager all rolled into one. He is his own boss. He is the master of the organization. He alone enjoys the profits of his business and he alone bears its losses. His liability is unlimited. It extends even to his private property. In short he owns all and risks all.

Features:

The following are the features of the sole trade business

1. Capital:

The capital required by the business is arrangement by the sole trader himself. He may provide the capital out of his own savings or borrowings from friends, relatives or banks. He borrows for the business on his personal liability.

2. Management and Control:

The outstanding features of this form of organisation are the unity between ownership and management. This means that ownership and management are vested in one individual. The sole trader himself is the owner, manager and controller. If necessary, he takes the assistance of his family members and at time he may even appoint a few paid assistants. But ultimate control vests with him.

3. Unlimited Liability:

From the view point of law, there is no distinction between the proprietor and his business. In other words both are one and the same. The personal property of the proprietor is also liable for the liabilities of the business. Thus the liability of the sole-trader is unlimited.

4. Sharing of Profits:

The sole trader owns every- thing in his business. He also risks everything in his business. Therefore he alone enjoys its profits and he alone bears its entire loses. There is none to claim a share in the profits or to bear part of the loss.

Advantages:

Facility of Formation:Formation of a sole trader form of organization is relatively easy even closing the business is easy. There is no legal interference in the day-to-day working of the business. A license from local authority is all that is required to start the business.

Secrecy:Business secrets can well be maintained because there is only one trader. He need not disclose the affairs of his business to the public. There is little risk of competitors taking advantages of the business secrets

Incentive for efficient Management:There is direct relationship between efforts and return, as the entire profit belongs to the proprietor. The more the effort, the more will be the profit. This acts as a powerful incentive and induces him to put in his best of efforts in the management of the business

Prompt Decisions:To improve the quality of services to the customers, he can take any decision and implement the same promptly. He is the boss and he is responsible for his business Decisions relating to growth or expansion can be made promptly.

Personal contact with customers directly:One of the great advantages of this form of organisation is the ability to establish and maintain personal contacts with customers. Based on the tastes and preferences of the customers the stocks can be maintained.

High degree of flexibility:Based on the profitability, the trader can decide to continue or change the business, if need be. He can make changes without delay as there is no need to consult anyone. The proprietor can easily adjust itself to changing conditions.

Direct motivation: If there are profits, all the profits belong to the trader himself. In other words If he works more hard, he will get more profits. This is the direct motivating factor.

Economy in Management:The sole trader himself supervises the business with or without the assistance of family members. At times e may take the assistance of few paid assistance. He takes personal interest in the affairs of the business. This makes for efficiency and economy of management.

Facility of coordination:This form of organisation does not create problems of coordination. As the proprietor he makes all the decisions there will be no scope for the activities of the business to clash with one another. Further he will ensure that all the employees work as a team.

Disadvantages:

In spite of several advantages/merits, the sole trading concern suffers from a number of disadvantages. The main disadvantages are:

1. Limited Capital2. Limited Managerial skills3. Lack of continuity:4. Unlimited liability5. Limited Bargaining power6. No Legal status7. Limited Expansion:

The above important demerits are briefly explained as under.

1. Limited Capital: The main drawback of sole trading concern is the limitation of capital. The sole trader can manage limited amount of capital from his own savings. He may also get some funds from his friends and relatives. The limitation of capital often restricts the size of the sole trading concern.

2. Limited Managerial skills: Normally, a sole trader manages the business on his own. The sole trader may not have all the abilities or skills to manage all by himself. Now a day, ther, ther is a need for specialized managerial staff. The sole trader may not able to appoint a skilled managers or staffs this is because of his limited capital.

3. Lack of continuity:The sole trading business lacks continuity. If the sole trader cannot run his business due to ill health or if he dies, the business comes to an end. This is because the successors may not be interested to run the business or they may lack the necessary business skills.

4. Unlimited liability:The liability of the sole trader is unlimited. This means he is alone responsible for all the risks and debts of the firm. In the eyes of law, there is no distinction between the private property and business property of the sole trader.

5. Limited Bargaining power:The sole trader often lacks bargaining power. This is because he purchases on a small scale from the wholesalers; secondly, he may not have the skill of bargaining. Thus he may not be able to obtain competitive terms from his suppliers.

6.  No Legal status: Legally, the sole trader and his business concern are one and the same in the eyes of law. The sole trader and his business cannot be separated from each other. So the sole trader lacks legal status. But a joint stock company enjoys a separate legal status.

7.  Limited Expansion:The Sole trading concern is restricted in its growth. This is because of limitation of capital and lack of managerial skills that are necessary for the expanding organisations.

2. Partnership:

A sole trading concern suffers from a number of limitations; the capital that a sole trader can provide is limited. His borrowing capacity is limited. His managerial abilities and capacity to bear risk are also limited. Partnership has grown out of these limitations. When a sole trader wants to expand his business to take advantages of an expanding market, he feels the need for additional capital and share the burden or partners who can bring additional capital more effective supervision, greater specialization and division of work. Therefore he admits a partner or partners who can bring additional capital and share the burdens of management and risk. The success of partnership depends upon the mutual confidence and trust among the partners.

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

According to the Partnership Act 1932 section 4, “Partnership” is the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Persons who have entered into partnership with one another are called individually “partners” and collectively a “firm”, and the name under which their business is carried on is called the “firm name”. 

CHARACTERISTICSThe main characteristics of partnership may be narrated as under:

1. AgreementAgreement is necessary for partnership. Partnership agreement may be written or oral. It is better that the agreement is in written form to settle the disputes.

2. Agent

In partnership every partner acts as an agent of another partner and firm.

3. BusinessPartnership is a business unit and a business is always for profit. It must not include club or charitable trusts, set up for welfare.

4. Unlimited liability: The liability of the partners is unlimited. The partnership and partners are one and the same in the eye of law. Hence, the partners have to bring their personal assets to clear the losses of the firm, if any.

5. Number of partners: According to the Indian Partnership Act, the minimum number of partners should be two and the maximum number if restricted, as 10 partners is case of banking business and 20 in case of non-banking business.

6. ManagementIn partnership all the partners can take part or participate in the activities of business management. Sometimes, only a few persons are allowed to manage the business affairs.

7. RegistrationMany problems are created in case of unregistered firm in the business world. So to avoid these problems partnership firm must be registered.

8. RelationshipPartnership business can be carried on by all partners or any of them can do the business for all.

9. Share in CapitalAccording to the agreement, every partner contributes his share of capital. Some partners provide only skills and ability to become a partner of business and earn profit.

10. Transfer of RightsIn partnership no partner can transfer his shares or rights to another person, without the consent of all partners

Types of Partners:There are different kinds of partners. They are as follows

1) Active partner2) Sleeping partner3) Nominal Partner4) Partner by estoppels5) Partner by Holding out6) Partner in profits only7) Minor Partner8) Other partners

1. Active or managing partner:A person who takes active interest in the conduct and management of the business of the firm is known as active or managing partner. He carries on business on behalf of the other partners. If he wants to retire, he has to give a public notice of his retirement; otherwise he will continue to be liable for the acts of the firm.

2. Sleeping or dormant partner:A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the management of the business. Such a partner only contributes to the share capital of the firm, is bound by the activities of other partners, and shares the profits and losses of the business. A sleeping partner, unlike an active partner, is not required to give a public notice of his retirement. As such, he will not be liable to third parties for the acts done after his retirement.

3. Nominal or ostensible partner:A nominal partner is one who does not have any real interest in the business but lends his name to the firm, without any capital contributions, and doesn’t share the profits of the business. He also does not usually have a voice in the management of the business of the firm, but he is liable to outsiders as an actual partner.

4. Partner by Estoppel:Estoppel means behaviour or conduct. Partner by Estoppel gives an impression to outsiders that he is the partner in the firm. In fact he neither contributes to capital not takes any role in the organisation. Because he has misled the outsiders, partner, partner by estoppels is held liable for the claims, if any, of the outsiders.

4. Partner by Holding Out:If a person declared to be a partner of a firm by another person, the person concerned should deny it immediately on coming to know of such a declaration, if he is not actually the partner of the firm. If he does not deny, he will be held liable to the third party, which has lent money or given credit to the firm on the basis of such declaration. Such a partner is known as a partner by holding out

5. Partner in profits only:When a partner agrees with the others that he would only share the profits of the firm and would not be liable for its losses, he is in own as partner in profits only.

6. Minor as a partner:A partnership is created by an agreement. And if a partner is incapable of entering into a contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a person who has not attained the age of 18 years) cannot be one of the parties to the contract. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership’, with the consent of all partners. He cannot file a suit against the partners of the firm for his share of profit and property as long as he remains with the firm. His liability in the firm will be limited to the extent of his share in the firm, and his private property cannot be attached by creditors.

7. Other partners:

In partnership firms, several other types of partners are also found, namely, secret partner who does not want to disclose his relationship with the firm to the general public. Outgoing partner, who retires voluntarily without causing dissolution of the firm, limited partner who is liable only up to the value of his capital contributions in the firm, and the like.

Partnership Deed:

Deed is a written agreement between the partners about the firm and its activities.1. The name of the firm2. The name and address of the partners composing the firm3. The nature of business4. The town and places where the business will be carried on5. The amount of capital to be contributed by each partner and the rate of interest, if any,

payable thereon6. The duties, rights and obligations of partners7. Profit sharing ratio8. Salary if any, payable to any partner or partners9. The method of preparing accounts10. Arrangement in case of insolvency of a partner

ADVANTAGES OF PARTNERSHIPFollowing are the advantages of partnership:

1. Simplicity in FormationThis type of business of organization can be formed easily without any complex legal formalities. Two or more persons can start the business at any time. Its registration is also very easy.

2. Simplicity in DissolutionPartnership Business can be dissolved at any time because of no legal restrictions. Its dissolution is easy as compared to Joint Stock Company.

3. Sufficient CapitalPartnership can collect more capital in the business by the joint efforts of the partners as compared to sole proprietorship.

4. Quick Decisions and Prompt actions:In partnership decision making can be taken very fast when there is mutual concern among partners. The decisions also implemented in fast manner.

5. Personal contact with customers:There is scope to keep the customers very close to business. Few people will be there in the business can contact or interact the customers daily. It helps a lot to the organisation.

6. Skilled WorkersAs there is sufficient capital so a firm is in better position to hire the services of qualified and skilled workers.

7. Sense of Responsibility

As there is unlimited liability in case of partnership, so every partner performs his duty honestly.

8. Satisfaction of PartnersIn this type of business organization each partner is satisfied with the business because he can take part in the management of the business.

9. SecrecyIn partnership it is not compulsory to publish the accounts. So, the business secrecy remains within partners. This factor is very helpful for successful operation of the business.

DISADVANTAGES OF PARTNERSHIPThe disadvantages of partnership are enumerated one by one as under:

1. Unlimited LiabilityIt is the main disadvantage of partnership. It means in case of loss, personal property of the partners can be sold to pay off the firm's debts.

2. Limited Life of FirmThe life of this type of business organization is very limited. It may come to an end if any partner dies or new partner enters into business.3. Limited CapitalNo doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is small as compared to Joint Stock Company. So, a business cannot be expanded on a large scale.

4. Limited AbilitiesAs financial resources of partnership are limited as compared to Joint Stock Company, so it is not possible to engage the services of higher technical and qualified persons. This causes the failure of business, sooner or later.

5. Limited number of PartnersIn partnership, the number of partners is limited, so the resources are also limited. That is why business cannot expand on large scale.

6. Legal DefectsThere are no effective rules and regulations to control the partnership activities. So, it cannot handle large-scale production

7. Lack of InterestPartners do not take interest in the business activities due to limited share in profit and limited chances of growth of business.

8. Lack of Public ConfidenceAs there is no need by law to publish accounts in partnership, so people lose confidence and avoid dealing and entering into contract with such firm.

9. Lack of Prompt DecisionIn partnership all decisions are made by mutual consultation. Sometimes, delay in decisions becomes the cause of loss.

10. Lack of SecrecyIn case of misunderstandings and disputes among the partners, business secrets can be revealed.

CONCLUSIONFrom the above-mentioned findings, we come to this point that despite the above disadvantages, partnership is an important from of business organization. This is because its formation is very easy and due to unlimited liabilities, partners take great interest in business, because in case of loss they are personally responsible

JOINT STOCK COMPANY

In a partnership, there can be a maximum of 20 people. Because of this limit, the amount of capital that can be generated is limited. Also, because of the unlimited liability of partnerships, the partners may be discouraged from taking huge risks and further expanding their business. To overcome these problems a public or a private company may be formed.The major disadvantage of Private and Public companies is that they have a costly and elaborate process of setting up. They are also closely regulated by the government. A company stock is owned jointly by the share holders. A company has some features of a corporation and some features of a partnership. The company  sells  fully transferable stock, but all shareholders have unlimited liability

The word ‘company was derived from Latin language, i.e., Com means ‘come together’, ‘pany’ means ‘bread’. Joint Stock Company means, people come together to earn their livelihood by investing in the stock of the company jointly. A joint-stock company is a business entity where different stakes can be bought and owned by shareholders. Each shareholder owns company stock in proportion, evidenced by his or her shares (certificates of ownership). This allows for the unequal ownership of a business with some shareholders owning a larger proportion of a company than others. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company

The companies in India are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having a separate legal entity, with perpetual succession and a common seal.

What this means is that, the company “is different” from the investors. The investors put in money and capital is raised. But the company is treated as a virtual person. The company is treated as a person who is different from its investors. The company has an identity of its own. If someone sues the company, he does not sue the investors; he sues the virtual person that is the company.

Definitions:

“A company as a company formed and registered under the act or an existing company”

Section 3(1) of Companies Act 1956

Company is a artificial person created by law with perpetual succession and common seal.

To understand the concept of joint stock (private and public limited) companies, consider the following characteristics:

Legal formation:No single individual or a group of individuals can start a business and call it a joint stock company. A joint stock company can come into existence only when it has been registered after completion of all the legal formalities required by the Indian Companies Act, 1956.

Artificial person: 

Just like an individual takes birth, grows, enters into relationships and dies, a joint stock company takes birth, grows, enters into relationships and dies. However, it is called an artificial person as its birth, existence and death are regulated by law.

Separate legal entity:Being an artificial person, a joint stock company has its own separate existence independent of its investors. This means that a joint stock company can own property, enter into contracts and conduct any lawful business in its “own” name. It can sue and can be sued by others in the court of law. The shareholders are “not” the owners of the property owned by the company. Also, the shareholders cannot be held responsible for any of the acts of the company.

Common seal:A joint stock company has a “seal”, which is used while dealing with others or entering into contracts with outsiders. It is called a common seal as it can be used by any officer at any level of the organization working on behalf of the company. Any document, on which the company's seal is put and is duly signed by any official of the company, becomes binding on the company

Perpetual existence: A joint stock company continues to exist as long as it fulfills the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its investors. For example, in case of a private limited company having four members, if all of them die in an accident, the company will “not” be closed. It will continue to exist. The shares of the company will be transferred to the legal heirs of the members.

Limited liability:In a joint stock company, the liability of a member is limited to the amount he has invested. While repaying debts, for example, if a person has invested only Rs.10,000 then only this amount that he has invested can be used for the payment of debts. That is, even if there is liquidation of the company, the personal property of the investor cannot be used to pay the debts and he will lose his investment worth Rs.10,000.

Democratic management:Joint stock companies have democratic management and control. Since in joint stock companies there are thousands and thousands of investors, all of them cannot participate in the affairs of management of the company. Normally, the investors elect representatives from among themselves known as ‘Directors’ to manage the affairs of the company.

Winding up:Winding up refers to the putting an end to the company. Because law creates it, only law can put an end to it in special circumstances such as representation from creditors or financial institutions or shareholders against the company that their interests are not safeguarded. The company is not affected by the death or insolvency of any of its members

The name of the company ends with the word limited:It is necessary that the name of the company ends with limited. It is an indication to the outsiders that they are dealing with the company with the company with limited liability and they should be careful about the liability aspects of their transactions with the company

Types of Companies:

In the world we can find different kinds of companies. They are as follows:

Based on Public Interest:Based on public interest companies are divided into three types. They are Public Company, Private Company and Government Company.

Public Company:A public company is one which is not a private company. In other words a public company is one which does not limited number of its members to 50, does not prohibit invitation to the public for subscription to its shareholders and does not place restriction on the transfer of its shares. Minimum number of public limited company is 7 and maximum number is unlimited. Minimum amount of paid up capital is Five Lakhs.

Private Company:A private company is a company which by its features.

Minimum paid up capital is one lakh rupees Limits the number of its members to 50 excluding its past and present employees Restrict the right of transfer its shares The name of a private company should necessarily end with the words ‘Private

Limited’

Government Company:According to the Indian companies act 1956 section 617 A Government Company as ‘any company in which not less than 51% of its paid up capital is held by Central Government or State Government or Governments, or partly by Central Government and partly by one or more stage governments and includes a company which is a subsidiary of Government. Examples: RINL, BHEL, NTPC, SAIL, GAIL etc.

Based on Nationality:

Companies may be classified on the basis of nationality into two types i.e.

1. Indian Companies

2. Foreign Companies

Indian Companies:These are the companies which operate within the boundaries of a country in which they are registered.

Foreign Companies:These are the companies which operate beyond the country or original registrations. It means foreign companies incorporated outside India but established a place of business within India.

Based on Incorporation:

It can be classified as

1. Chartered Companies2. Statutory Companies3. Registered Companies

Chartered Companies:A chartered company is a company created by Royal Charter of the State. The Charter contains the rights and powers to be used by chartered company

Statutory Companies:This company is created by Act of the State Legislation or Parliament. Every aspect of this company is predetermined. It means the objectives, scope, powers and responsibilities are clearly defined in this act.

Registered Companies:A registered company is a company registered under Indian Companies Act, 1956. A registered company may be a public limited company, private company, company limited by guarantee or a Government company.

Based on Liability:

On the basis of liability companies can be divided into three types. They are

1. Unlimited Liability2. Limited Liability3. Liability by Guarantee

Unlimited Liability:Companies in which the liability of members is unlimited are called unlimited companies. The liability of members extends to their private property as in the case of a sole trader or partnership firm. If the assets of the company are insufficient to pay off the liabilities in full, members will be required to pay an unlimited amount to meet the deficiency such companies are rarely to be found these days

Companies Limited by Guarantee:Companies in which the liability of members is limited to the amount agreed to be contributed by them in the event of winding up of the company are called companies limited by guarantee.

Limited Liability Companies:Companies in which the liability, of members is limited to the face value of shares held by them are called companies limited by shares. If the shares of the company are partly paid up the liability of members will be limited to the amount unpaid on shares. Most of the companies operating today belong to this type. Limited liability is one of outstanding features of a joint stock company.

Based on controlling of interest:Holding Company and Subsidiary Company:A holding company is an entity formed to buy and hold the majority of stock of other companies; a subsidiary is a business whose majority of stock is owned by a holding company. A holding company directs the management and operations of the subsidiaries it owns and maintains the authority to add or remove board members, directors and other key management and personnel. A holding company may have strict managerial control or may allow subsidiaries to act with some level of autonomy for day-to-day business operations, including lower- and midlevel hiring and certain budgeting decisions.

Formation of Joint Stock company

Company formation is a costly, complicated and time consuming process. A lot of work has to be done, a number of legal formalities have to complied with, many documents have t be prepared and filed and many people have to approached for capital contribution before a company can start functioning. Company formation is usually the job of a specialist or professional promoter. There are two stages in the formation of a joint stock company. They are:

(a) To obtain Certificates of Incorporation(b) To obtain certificate of commencement of Business

Certificate of Incorporation: The certificate of Incorporation is just like a ‘date of birth’ certificate. It certifies that a company with such and such a name is born on a particular day.

Certificate of commencement of Business: A private company need not obtain the certificate of commencement of business. It can start its commercial operations immediately after obtaining the certificate of Incorporation.

The persons who conceive the idea of starting a company and who organize the necessary initial resources are called promoters. The vision of the promoters forms the backbone for the company in the future to reckon with. To get the company registered, promoter has to get the

following documents, along with necessary fee, with a registrar of joint stock companies to obtain certificate of incorporation:

(a) Memorandum of Association:The Memorandum of Association is also called the charter of the company. It outlines the relations of the company with the outsiders. If furnishes all its details in six clause such as (ii) Name clause (II) situation clause (iii) objects clause (iv) Capital clause and (vi) subscription clause duly executed by its subscribers.

(b) Articles of association: Articles of Association furnish the byelaws or internal rules government the internal conduct of the company.

(c) List of Directors:The list of names and address of the proposed directors and their willingness, in writing to act as such, in case of registration of a public company.

(d) Statutory Declaration:A statutory declaration that all the legal requirements have been fulfilled. The declaration has to be duly signed by any one of the following: Company secretary in whole practice, the proposed director, legal solicitor, chartered accountant in whole time practice or advocate of High court.

The registrar of joint stock companies peruses and verifies whether all these documents are in order or not. If he is satisfied with the information furnished, he will register the documents and then issue a certificate of incorporation, if it is private company, it can start its business operation immediately after obtaining certificate of incorporation.

Commencement of Business:A private company can commence business soon after the receipt of certificate of incorporation. But a public company can undertake regular business operations after the receipt of another certificate by name “certificate of commencement of business”. After the company is incorporated, the company must make arrangements for raising the necessary capital. For this purpose, he must present the project to the public. This is done through issue of prospectus explaining the prospectus of the company. A copy of the prospectus must be filled with the registrar. Through the prospectus, the promoter invites the public to subscribe for the shares of the company. All the application money received from the public in response to the prospectus must be kept deposited in a scheduled bank. If minimum subscription is not received within 90 days from the date of issue of the prospectus all the money received should be refunded within 10 days there after. If minimum subscription is received with the time limit, steps are taken to obtain the certificate of commencement of business. The following declaration must be made for this purpose, with the registrar of the company.

Copy of the prospectus or statement in lieu of the prospectus has been filed with the registrar of joint stock company

Collection of minimum subscription Allotment of Shares List

That the directors of the company have paid for their qualification shares in the same proportion as the public.

The registrar will once again verify the exactness of the details of the above declaration. If he is satisfied, he will then issue Certificate of Commencement of Business. No public company can commence business without obtaining this certificate. Violation of this provision is punishable with a fine of Rs. 500/- for every day of default.

Advantages of Joint Stock Companies:

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

Limited liability:In case of a joint stock company, the liability of it's members is limited to the value of shares held by them. Private property of members cannot be confiscated for overcoming the debts of the company. This advantage attracts many people to invest their savings in the company and it encourages the company to take more risks.

Professional management:Management of a company is in the hands of the directors, who are elected democratically by the members or shareholders. These directors are known as the "Board of Directors". They manage the affairs of the company and are accountable to all the investors. So, the investors elect capable persons who have sound financial, legal and business knowledge to the board so that they can manage the company efficiently.

Large-scale production:Since there is an availability of large financial resources and technical expertise, it is possible for the companies to have “large-scale” production. This enables the company to produce more efficiently and at a lower cost.

Transferability of shares:The shares can be transferability of shares, shares can-be converted in to cash

Continued existence:The company has perpetual succession. It has no natural end. It continues forever and ever unless law puts an end to it

Democracy in Management:The directors are elected by the shareholders in a democratic way in the general body meetings. The shareholders are free to make any proposals. Question the practices of the management, suggest the possible remedial measures as they perceive. The directors respond to the issue raised by the shareholders and have to justify their actions.

Research and development:Only in joint stock company form of business, it is possible to invest a lot of money on research and development so that new design, better quality products, etc. can be achieved.

Disadvantages of Joint Stock Companies

Difficult to form:

The formation & registration of joint stock company involves a long and complicated procedure. A number of legal documents and formalities have to be completed before a company can start business. The process of formation requires the services of specialists such as chartered accountants, company secretaries, etc. Because of all this, the cost of formation of a company is very high.

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

Delay in policy decisions:Generally policy decisions are taken at the “Board of Directors” meetings of the company. Further, the company has to fulfill certain procedural formalities. These procedures are time consuming and therefore, may delay action on the decisions.

Lack of responsibility and commitment: In some cases, the managers at different levels are afraid to take risk and more worried about their jobs rather than the huge funds invested in the capital of the company lose the revenue.

Lack of responsibility and commitment: In some cases, the managers at different levels are afraid to take risk and more worried about their jobs rather than the huge funds invested in the capital of the company. Where managers do not show up willingness to take responsibility, they cannot be considered as committed. They will not be able to handle the business risks.

Lack or initiative:In most of the cases, the employees of the company at different levels show slack in their personal initiative with the result, the opportunities once missed do not recur and the company loses the revenue.

Public Enterprises

Public enterprise is a business organization wholly or partly owned by the state and controlled through a public authority. Some public enterprises are placed under public ownership because, for social reasons, it is thought the service or product should be provided by a state monopoly

Public enterprises as a form of business organisations have attained a great deal of significance in recent times. During 20th century various governments have taken active part in the industrial and commercial activities. The term public enterprise denotes a form of business organisation owned and managed by the state government or any other public authority. So it is an undertaking owned and controlled by the local or state or central government. The whole or most of the investment is made by the government.

According to A. H. Hansen, a public enterprise denotes “state ownership and operation of industrial, agricultural, financial and commercial undertakings”.

According to N. N. Malaya, “Public enterprises are autonomous or semi-autonomous corporations and companies established, owned and controlled by the state and engaged in industrial and commercial undertakings”.

Characteristics

The chief characteristics of public enterprises are:

Autonomous or semi-autonomous organisation:Public enterprise is an autonomous or semi-autonomous organisation because some enterprises work under the direct control of the government and some organisations are established under statutes and companies act.

State control:The public enterprises are financed, owned and managed by the government may be a central or state government.

Rendering service: The primary objective of the establishment of public enterprises is to serve the public at large by supplying the essential goods at a reasonable price and creating employment opportunities.

Useful to various sectors: The state enterprises serve all sectors of the people of the company. They do not serve a particular section of the people in the community.

Monopoly Enterprises:In some specific cases private sectors are not allowed and as such the public enterprises enjoy monopoly in operation. The state enterprises enjoy monopoly in Railways, Post and Telegraph and Energy production.

A direct channel for use of foreign money: 

Sometimes the government receive foreign assistance from industrially advanced countries for the development of industries. These advances received are spent through public enterprises.

Public accountability:The state enterprises are liable to the general public for their performances because they are responsible for the nation.

Agent for implementing government plans:The public enterprises run as per the whims of the government and as such the economic policies and plans of the government are implemented through public enterprises.

Financial Independence:Though investment in government undertaking are done by the government, they become financially independent by arranging finance for day-to-day operation

Objectives of Public Enterprises:

In India, public enterprises have been assigned the task of realising the objectives laid down in the Directive Principles of State Policy.

Public sector as a whole seeks: (a) to gain control of the commanding heights of the economy, (b) to promote critical development in terms of social gain or strategic value rather than on consideration of profit, and (c) to provide commercial surplus with which to finance further economic development.

The main objectives of public enterprises in India are as follows:

1. Economic development:Public enterprises were set up to accelerate the rate of economic growth in a planned manner. These enterprises have created a sound industrial base for rapid industrialisation of the country. They are expected to provide infrastructure facilities for promoting balanced and diversified economic structure of development.

2. Self-reliance:Another aim of public enterprises is to promote self-reliance in strategic sectors of the national economy. For this purpose, public enterprises have been set up in transportation, communication, energy, petro-chemicals, and other key and basic industries.

3. Development of backward Areas:Several public enterprises were established in backward areas to reduce regional imbalances in development. Balanced development of different parts of the country is necessary for social as well as strategic reasons.

4. Employment generation:Unemployment has become a serious problem in India. Public enterprises seek to offer gainful employment to millions. In order to protect jobs, several sick units in the private sector have been nationalised.

5. Economic surplus:Public enterprises seek to generate and mobilise surplus for reinvestment. These enterprises earn money and mobilise public savings for industrial development.

6. Egalitarian society:An important objective of public enterprises is to prevent concentration of economic power and growth of private monopolies. Public sector helps the Government to enforce social control on trade and industry for ensuring equitable distribution of goods and services. Public enterprises protect and promote small scale industries.

7. Consumer welfare:Public enterprises seek to protect consumers from exploitation and profiteering by ensuring supply of essential commodities at cheaper prices. They aim at stabilising prices.

8. Public utilities:Private sector is guided by profit motive. Therefore, it is reluctant to invest money in public utility services like water supply, gas, electricity, public transport. Therefore, the Government has to assume responsibility for providing such services.

9. Defence:Government has to set up public enterprises for production of defence equipment. Supply of such equipment cannot be entrusted for private sector due to the need for utmost secrecy.

10. Labour welfare:Public enterprises serve as model employers. They ensure welfare and social security of employees. Many public enterprises have developed townships, schools, college and hospitals for their workers.

Forms of Public Enterprise:

The organisation provides the framework, which substantially shapes interrelationships amongst the public enterprises as well as the government. The following are the major organisational forms of the public enterprises.

(a) Departmental Organisation

Under this form of organisation, a public enterprise is run as a department of the Government. It is organised, financed and controlled like any other Government department. A departmental undertaking is self-contained but it is under the overall control of the departmental head and the ministry concerned.

It has, however, its own management in charge of and responsible for the undertaking. For example, Posts and Telegraphs are a department in the Ministry of Communications. Similarly, the Chittranjan Locomotive Works and the Integral Coach Factory are parts of the Ministry of Railways. The Ordnance Factory the Gun Carriage Factory, the Delhi Milk Scheme, the Tarapur Atomic Energy Plant, All India Radio, Doordarshan, the Government Printing Press and Mint are other examples of departmental undertakings.

Salient FeaturesThe essential features of departmental organisation are as follows:

1. Line authority: The ultimate responsibility for management lies with the Minister concerned. The Minister in turn delegates his authority downward to the various levels, e.g., the departmental head, the chief executive of each undertaking, etc.

2. Government financing: The undertaking is financed through annual budget appropriations by the parliament or the State Legislature. The revenues of the undertaking are paid into the treasury. 3. Executive decision: A departmental undertaking is set up by an executive decision of the Government without any legislation. 

4. Accounting and audit: The undertaking is subject to the normal budgeting, accounting and audit procedures applicable to other government departments. 

5. Civil service code: The enterprise is managed by civil servants whose methods of recruitment and service conditions are the same as for other civil servants of the government. 

6. Sovereign immunity: Being an integral part of the Government, a departmental undertaking cannot be sued at law without the consent of the government. 

MeritsThe main advantages of departmental organisation are as follows:

1. Accountability: Departmental organisation ensures maximum degree of parliamentary control. In the words of Krishna Men on Committee, “accountability of departmental undertakings to Parliament is complete, their management being under the Ministry concerned”

2. Effective control: The management of the undertaking is under the absolute control of the Minister concerned. Therefore, there is maximum degree of government control on the enterprise. 

3. Financial discipline: Tight budgetary, accounting and audit controls ensure that public funds are not misused. There is unified and centralized management and any surplus earned by the undertaking goes to the government treasury. 

4. Policy instrument: The Government can realize its social, political and economic objectives through departmental undertakings. 

Demerits A departmental undertaking suffers from the following drawbacks: 

1. Loss of autonomy: Excessive public accountability and Parliamentary control result in loss of freedom which is essential for efficient business operations. Frequent investigations by Parliamentary committees hamper the efficient functioning an growth of departmental undertakings. 

2. Political influence: The undertaking is subject to political changes and its fate depends on the balance of power between the ruling party and the opposition. There is lack of continuity in management due to frequent changes in the Cabinet. Political considerations affect the policy matters and long range planning is not possible. 

3. Lack of flexibility: Complete centralisation of control and political interference in day-to-day operations lead to lack of flexibility. There is bureaucracy and red-tape in day-to-day administration. As a result decisions get delayed. Rigid adherence to time-consuming procedures an formalities make it difficult to run the undertaking in a business like manner. 

4. Lack of professional management: The undertaking is managed by civil servants who do not often possess managerial knowledge and skill. Frequent transfers and seniority based promotions tend to lower their motivation and morale. There is lack of initiative because the civil servants are afraid of breaking new ground due to fear of criticism by the Minister and the Parliament. 

5. Inefficiency: Bureaucratic management, undue delays and insensitivity to consumer needs, and cumbersome regulations result in low efficiency of operations. There is a tendency not to take the losses seriously as these are borne by the treasury. 

(b) Public CorporationA public or statutory Corporation is an autonomous corporate body set up under a special Act of Parliament or State Legislature. The Act or statute defines its objectives, powers and functions. A public corporation seeks to combine the flexibility of private enterprise with public ownership and accountability. a public Corporation is an organisation that is clothed with the power of the government, but is possessed of the flexibility and initiative of private enterprise.” A public Corporation is thus a combination of public ownership, public accountability and business management for public end. Life Insurance Corporation of India, Reserve Bank of India, Employees State Insurance Corporation, Industrial Development bank of India are examples of public Corporation.

Features The essential features of a public corporation are as under: 

1. Corporate body: It is a body corporate established through a special Act of Parliament or Stat Legislature. The Act defines its powers and privileges and its relationship with government departments and ministries. 

2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal. It can acquire an own property in its own name. It can sue an be sued and can enter into contracts in its own name. 

3. Government ownership: The public corporation is wholly owned by the Central and/ or State Government.

4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings are provided by the government but it is supposed to be self-supporting. It can borrow money from the public and is empowered to plough back its earnings. 

5. Accounting system: The corporation s not subject to the budgetary, accounting and audit regulations applicable to government departments. It is generally exempt from the rigid rules applicable to the expenditure of public funds. 

6. Management and personnel: A public corporation is managed by a Board of Directors appointed by the Government. However, its employees need not necessarily be civil servants. They can be employed on terms and conditions laid down by the corporation itself.  

7. Service motive: The primary motive of the corporation is public service rather than private profits. It is, however, expected to operate in a business-like manner. 

Merits A Public corporation offers the following advantages; 

1. Operational autonomy: A public corporation enjoys internal autonomy as there is no Parliamentary interference in its day-to-day working. Therefore, it can be run in a businesslike manner. There is “a high degree of freedom, boldness and enterprise in the management of undertakings and circumspection which is considered typical of government departments”

2. Flexibility operations: Being relatively free from bureaucratic control, a public corporation enjoys flexibility and initiative in business affairs. It can experiment in new lines of activity and decisions can be taken without undue delay. 

3. Continuity: Being a distinct legal entity, it is not affected much by political changes. It can, therefore, maintain continuity of policy and operations. 

4. Special privilege: A public corporation is often granted special privileges. The special law by which by which it is created can be tailor made to meet the specific needs of the particular situation. 

5. Availability of managerial talent: A public corporation can employ professional managers by offering them better terms and conditions or service than those available to government servant.

Demerits A public corporation suffers from the following drawbacks:

1. Difficult formation: It is very difficult and time-consuming to set up a public corporation because a special law has to be passed in the Parliament. 

2. Inflexibility: It is very difficult to change the objects and powers because the special law has to be amended by the Parliament or the State legislature. 

3. Excessive accountability: There are frequent debates and discussions on the reports and working of public corporations. Ministerial and political interference in day-to-day working do not allow internal autonomy in actual practice. 

4. Clash of divergent interests: When the Board of Directors is constituted to give representation to divergent interests, a conflict may arise. This will hamper the smooth and

efficient functioning of the corporation. Emphasis on service motive and lack of incentive may further reduce the profitability of operations. 

Suitability Despite its weaknesses, the public corporation is generally considered appropriate for public enterprises of industrial and commercial nature. It represents an appropriate combination of public accountability and operational autonomy. According to Prof. Robson: “It is destined to play as important a part in the field of nationalized industry in the 20the century as the privately-owned corporation played in the realm of capitalist organisation in the 19the century”.

The public corporation is suitable for undertakings requiring monopoly powers. e.g. public utilities. It is also useful for undertakings which involve exercise of powers to be conferred by legislature and enterprises which may not be self-supporting and have to be financed by regular grants by the State. However, in India, “it would not be wrong to say that for the most part the public corporation has lost the spirit but retained the form”.  Bureaucratic management, financial dependence on the government and lack of personal motivation are the main reasons for this state of affairs

(c) Government CompanyA Government company is a company in which 51 per cent or more of the total paid up capital is held by the Central Government and/or State Governments. Any company which is a subsidiary of such a company is also considered a government company. It is registered under the Companies Act, 1956 either as a wholly-owned company (private company) or public company in which the capita is held jointly by the State and private (Indian or foreign) parties. A government company in which both the private concerns/individuals are shareholders is known as a mixed ownership company. Hindustan Machine Tools (HMT), Hindustan Steel Ltd., Indian Drugs and Pharmaceuticals Ltd., State Trading Corporation of India, Hindustan Aeronautics Ltd., are examples of the government companies in India.

Salient FeaturesThe main features of government company organisation are as follows: 

1. Corporate body: A Government company is a body corporate registered under the Companies Act. It has a separate legal entity of it shown. Therefore, it can own property in its own name. It can sue and be sued in its own name. 2. Executive decision: It is created by an executive decision of the Government without seeking the approval of the Parliament or the State legislature. 

3. Ownership: A Government company may be wholly or part owned by the Government. In case it is partly owned, the Government must hold not less than 51% of the paid up share capital. 

4. Regulation: It is created by the provisions of the Companies Act. However, the Central Government may, by notification in the Official Gazette, direct that any of the Provisions of the Act (except Sections 618, 619 and 69A) shall not apply to Government companies. 

5. Independent staffing: The employees, except the deputation persons, of a Government company are not Government servants. Their methods of recruitment and service conditions

may be different from those of Government employees. However, the Chief Executive is generally appointed by the Government. 6. Financing: The whole or major part of the capital is provided by the Governments. But the revenues of the company are not deposited into the treasury. 

7. Separate accounting: A government company is not subject to the budgeting, accounting and audit rules applicable to government departments. 

Merits:The government company form of organisation enjoys the following advantages:

1. Operational autonomy and flexibility. Being a separate legal entity, a government company enjoys operational autonomy an can be run in a business-like manner., It enjoys flexibility of operations due to freedom from bureaucratic control an red-tapism. 

2. Professional management. A government company can employ professionally qualified managers because it has its own personnel policies and practices. Availability of managerial talent helps to improve efficiency and profitability. 

3. Public accountability. The annual reports and working of government companies are discussed and debated in the Parliament. Therefore, it is accountable to the public and its management has to remain alert. 

4. Discipline. The management of a government company is governed by the companies Act. The healthy discipline of the Act helps to keep the management active and efficient. It puts the enterprise at par with a private enterprise. 

5. Private participation. Company form of organisation permits foreign collaboration and private participation. The Hindustan Steel Limited has obtained technical and financial assistance from the U.S. S.R., West Germany and the U.K. For its steel plants located at Bhilai, Rourkela and Durgapur. Similarly, capital and technical knowledge of the private sector can be obtained through a mixed ownership company.

6. Easy to establish and alter. It is very easy to establish Government Company as no law needs to be passed by the Parliament and State legislature. Similarly, it objectives and powers can be changed simply by altering its Memorandum of Association without seeking the approval of the Parliament.

Demerits Government company organisation suffers from the following drawbacks:

1. Avoids constitutional responsibility: Parliament's approval is not required for the creation and alternation of a government company. Therefore, it may evade its constitutional responsibility to the elected representatives of the public. 

2. Ineffective control: Regulations of the companies Act become meaningless because the controlling votes always lie in Government hand. Moreover, the Government can exempt the enterprise form most of the provisions of the Act. Therefore, government company organisation has been criticised as “a fraud on the companies Act and the Constitution.”

3. Doubtful autonomy: The operational autonomy of a government company exists only on paper. In real practice, there is ministerial and bureaucratic interference in its functioning. Since the directors are appointed by the Government they often fail to act independently. 

4. Problem of deputation: The key personnel of a government company are often deputed from the government departments. Such deputationists generally lack the necessary expertise in commitment. As a result the efficiency of the enterprise is reduced. 

5. Fear of exposure: The annual reports of government companies are placed before the Parliament. Therefore, their working is exposed to the glare of public and press criticism. The strong phobia of public accountability often results in undue publicity and unwarranted criticism of the companies. Therefore, the management is of then demoralized and does not take initiative to enter new areas of activity. This has an adverse effect on the efficiency and profitability of the enterprise. 

Business CyclesThe level of economic activity, especially under capitalism, changes in a wave like pattern. Periods of good trade are followed by periods of bad trade. These ups and downs in the level of economic activity are called business cycles.

Definitions:The term business cycle has been defined in various ways by different economists.

Prof. Haberler : defined as follows, “The Business cycle in the general sense may be defined as an alteration of periods of prosperity and depression of good and bad trade.”

Prof. Keynes: defines as follows, “A trade cycle is composed of periods of good trade characterised by rising prices and low employment percentage altering with periods of bad trade characterised by falling prices and high unemployment percentage.”

Prof. Mitchell: defines as follows, “Business cycles are species of fluctuations in the economic activities of organised communities”.

Types of Business Cycles1. Major cycle Jugler cycle: The duration of a major cycle will be about 10 Years. Since this type of cycles was first stated by the French economist Jugler, they are known as Jugler cycle.

2. Kitchin cycle or minor cycle: The duration of the minor cycle will be about 40 months. A major cycle may be made up of two or three minor cycles. The up and down swings of the major cycle are often interrupted by minor cycles. Since these cycles were observed by Kitchin they are known as Kitchin cycles.

3. Very long cycles- Kondratieft Cycles : Very long waves in the economic activity are first observed by the the Russian economist Kondratieft . They are known as Kondratieft cycles.

4. Kuznets Cycles: Prof. Kuznets of America observed a cycle of 16 to 22 years and he called it as Secular swing.

5. Building Cycles: It has been observed that the building industry is also subject up and down swings in the building activity. The Duration of the building cycles is about 18 years. It is observed during the period of 1830 to 1934 there are six building cycles in America. These are observed by Prof.Warren and Pearson.

Features of Business cycles:Business cycles have the following features:

1. Synchromism: Prosperity or depression spreads from one sector to the other sectors of the economy. In other words it reflects the entire economy. It spreads from one country to another country.

2. Wave – like movements: A business cycle is a wave is like movement. Prosperity is followed by depression and depression again followed by prosperity.

3. Recurrence: Business cycles have a tendency of respective. They are rhythmic and occur in a recognised pattern.

4. Cumulative: Business cycles are cumulative and self reinforcing. Depression itself generates force of expansion and expansion contains itself the seeds of depression. There cannot be indefinite depression or prosperity.

5. Not symmetrical: The peak and bottom of the business cycle are not symmetrical. The turn from the upward to the downward is more sudden and violent than the turn from downward to upward.

6. No definite periodicity: Some cycles are long while some are short. Some cycles are mild but some are severe.

7. Not exactly similar: Different cycles resemble each other but not exactly similar. In some cases the peak period of prosperity reaches full employment but in some cases the peak is reached even before full employment is reached.