Scene 1

CHAPTER 2
FORMS OF BUSINESS
ORGANISATION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
•
identify different forms of business organisation;
•
explain features, merits and limitations of different forms of
business organisations;
•
distinguish between various forms of organisations; and
•
discuss the factors determining choice of an appropriate form of
business organisation.
2020-21

Scene 2

If one is planning to start a business or
is interested in expanding an existing
one, an important decision relates to
the choice of the form of organisation.
The most appropriate form is
determined 
by 
weighing 
the
advantages and disadvantages of each
type of organisation against one’s own
requirements.
Various forms of business
organisations from which one can
choose the right one include:

(e) Joint stock company.
Let us start our discussion with
sole proprietorship — the simplest form
of business organisation, and then
move on to analysing more complex
forms of organisations.

Do you often go in the evenings to buy
registers, pens, chart papers, etc., from
a small neighbourhood stationery
store? Well, in all probability in the
course of your transactions, you have
interacted with a sole proprietor.
Sole proprietorship is a popular
form of business organisation and is

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?

acquaintances on her work. She even managed to sell a few pieces of unique
hand potrery from her home to people Illnng in and around her colony.
nrvrn home. she was able to save On rental Davruencs. Sne Qained a
lot of popularity by word of mouth publicity as a sole pi0ViVietor. She further
perteoted ner sFuls ot paintins pottery and created new mod's and designs.
All this generated ereat inKerest among her cuswmers and proviaed a boo t
to the tor her proüucts. Bv end Of sunnmer, she found •h\_
had been able to make a profit of Rs. from her paltry investm ir
colours, pottery and arawtne sheets, She telt motivated to taxe : •o s
as a career. She has, therewre, dec[ded to set up her own ar'work husi.ness.
Sile can continue run_ni12Q the business on •r own as a sole but
she needs more money for doing businecq on larger s•ql€. Her 'ather has
suøøesred that she should form a par ner ahlP wirn her to meet the
necu for adOlLional funüs and for s} the resDü1. es and risks. Side
by side, he is of the opinion that is poss.ole that thL bu Iness grow
further and may ret-unre the company. S •e in a tix as to what
form Of business orgamsaüon Should go In lor.
2.1 INTRODUCTION
If one is Dlanninc t', t a business or
one, an important relat Y, to
the choice or the tOrrn ot
The most appropriate ÄrTi is
determined hy we' ohing the
advantages and disad\ ves of each
tvue Of oræanB-aLio) one's own
Various _ or ms of business
t. which one can
organisatir
cnoose me -tgn . one incmae:
(a) SC e Pl •prietorship,
(b) Joint Hindu family business,
er op,-.rative societies, and
'e) Joint stook company.
Let us start our with
sole prnnrierorsnip- — the samntesr
oi business oreanisanon, and then
move on to more complex
forms of organizab0i1_s,
DO vou often QO in the evenings to buy
reui'Sters, peils, chart papers, etc., fr(im
a small stationery
store? Well, in all p_rnnanujty in tne
course OT transacnnns. you have
interacted Wii h a sole Dropriei:or_
Sule pruurietursanp is a popular

Scene 3

the most suitable form for small
businesses, especially in their initial
years of operation. Sole proprietorship
refers to a form of business
organisation which is owned, managed
and controlled by an individual who
is the recipient of all profits and bearer
of all risks. This is evident from the
term itself. The word “sole” implies
“only”, and “proprietor” refers to
“owner”. Hence, a sole proprietor is the
one who is the only owner of a
business.
This form of business is particularly
common in areas of personalised
services such as beauty parlours, hair
saloons and small scale activities like
running a retail shop in a locality.

formation as well as closure of
business.

(ii) Liability: Sole proprietors have
unlimited liability. This implies that the
owner is personally responsible for
payment of debts in case the assets of
the business are not sufficient to meet
all the debts. As such the owner’s
personal possessions such as his/her
personal car and other assets could be
sold for repaying the debt. Suppose the
total outside liabilities of XYZ dry
cleaner, a sole proprietorship firm, are
Rs. 80,000 at the time of dissolution,
but its assets are Rs. 60,000 only. In
such a situation the proprietor will have
to bring in Rs. 20,000 from her
personal sources even if she has to sell

Salient characteristics of the sole
proprietorship form of organisation are
as follows:

(i) Formation and closure: There is
no separate law that governs sole
proprietorship. Hardly any legal
formalities are required to start a sole
proprietary business, though in some
cases one may require a license.
Closure of the business can also be
done easily. Thus, there is ease in

her personal property to repay the
firm’s debts.

(iii) Sole risk bearer and profit
recipient: The risk of failure of
business is borne all alone by the sole
proprietor. However, if the business is
successful, the proprietor enjoys all the
benefits. He receives all the business
profits which become a direct reward
for his risk bearing.

(iv) Control: The right to run the
business and make all decisions lies

Sole trader is a type of business unit where a person is solely responsible for
providing the capital, for bearing the risk of the enterprise and for the
management of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head
of which stands an individual as one who is responsible, who directs its
operations and who alone runs the risk of failure.
L.H. Haney

ano Controlled bv an inolvidnal wn0
is Lhe reciLnc11t 01 all DI-OJ_1Ls anu bearer
of all risks. This is evident from the
term itself. The word "sole" nnplies
"only", and "proprietor" retors to
"owner. Hence, a sole proprietor is the
one who is the oruy owner of
'I his form of business is oarticularly
common in areas of personaliscd
services such as beauty parlours, hair
saloons and smqll scale activities like
runntng a retail snop in a locant-y.
owner is personally resnnnsible for
pavment or deol_S case the assets of
the business are not icient to meet
all the debts. As such the owner's
such a s
perqonal car ann orner asser,s coil 1 he
solo ibr renavillki 'he dent.
total outside liabilities of drv
cleaner. a sole proprieto. firn„ are
Rs. ,OiiO at the time ot - i.solution,
bn+ a«ets are
•has E -Opri .corwul nave
'-o - in Rs. from her
pt- •sonal sou. 's e •en if she has to sell
Soie trader is a tvoe of busine s unit i, aere a pers •n iv sotelv responslote for
providinu the cavital, for hee- •ing -he risk L he enterprise and for the
management of busines«
'Ihe individual proprietorship is the fore o. h' siness oreanisation at the head
of which stands h'dividual as one who fs responsible, who directs its
operations and o amr ne runs th- risk ot failure
Salient characteristi -s •f the sole
torr • r f c .isation are
pronriei.m shi Hardly any leval
fornrali reauu•ed to start a stue
propriL.. arv ousincss, thoukh in some
cases one may require a license.
Closure of the busmess can also be
her personal property to repay the
enle ri=k•_ benrer and profit
rec.nlent: 'Ine risk of laiinre of
business is borne a]' alone bv [he sole
pru"fieior. However. if che business is
succe-,sful, the pwovrietor eni€:rvs all [he
be-nettes. He reccii,es all the business
prntits whirh become a direct reward
for ms riSK Deanng.
(iv) Control: The right to run the

Scene 4

absolutely with the sole proprietor. He
can carry out his plans without any
interference from others.

(v) No separate entity: In the eyes of
the law, no distinction is made between
the sole trader and his business, as
business does not have an identity
separate from the owner. The owner is,
therefore, held responsible for all the
activities of the business.

(vi) Lack of business continuity: The
sale proprietorship business is owned
and controlled by one person, therefore
death, insanity, imprisonment,
physical ailment or bankruptcy of the
sole proprietor will have a direct and
detrimental effect on the business and
may even cause closure of the business.

Sole proprietorship offers many
advantages. Some of the important ones
are as follows:

(i) Quick decision making: A sole
proprietor enjoys considerable degree
of freedom in making business
decisions. Further the decision making
is prompt because there is no need to
consult others. This may lead to timely
capitalisation of market opportunities
as and when they arise.

(ii) Confidentiality of information:
Sole decision making authority enables
the proprietor to keep all the
information related to business
operations confidential and maintain

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, produced
the syrup for Coca-Cola®, and carried a jug of the new product down the street
to Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed
on sale for five cents a glass as a soda fountain drink. Dr. Pemberton never
realised the potential of the beverage he created. He gradually sold portions of
his business to various partners and, just prior to his death in 1888, sold his
remaining interest in 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
Atlanta Journal, proclaiming his wholesale and retail drug business as “sole
proprietors of Coca-Cola ... Delicious. Refreshing. Exhilarating.
Invigorating.” Sole ownership, which Mr. Candler did not actually achieve
until 1891, needed an investment of $ 2,300.

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

the law, no di•iinction is made between
tne sme tranex anu nis busmess. as
business does not have an jaenfar_y
seoarace from the owner. The owner is,
held for all the
activiCies of the busiifess
sele iip business is owned
one theretore
dea r:h, insanity, imprisonment,
phvsw:al aument or bantcrunrcy oi the
sole prounccor Wiii have a duect and
cHe.Ct on the all
rnay even cause closure ot-tl'le busine
(n a lick decision makit A sole
propneror enjoys con.qaerarne degree
of freedom in making business
decisions. Further Che decision make •g
is pron.ot because there is no nee 1 to
consulL ochers. This mav lead
capitahsauon of market opp01 .nd'
as and when they arise.
(in ani lentia" v inK rmation:
ma•• lire. emu_neS
chi oroprietor 'o keep all the
iA formatio.- 'ted to business
operations al.ial and mamtain
A COO. "owes its to a
'lhe Droduct that has tnc orld its st- _mo, •n taste was born in Atlanta.
GeoiEia, on May 8, Dr. •hn St: P er+ a local pharmacist, produced
the syrup lor coc,•-.-' and carried a J 'g 0t tne new product down the street
to Jaen-'s- Fbarrra 'y, nere it was *amole-u. pronounced •exceiient" and placed
on sale for five glass as a fountain drink. Dr. Pemberton never
realised the potential of the
ne created. He gradually sold oortions of
his Dnsmess to various pan •ers mds jusr pnor to hls dearn sola his
interest in Coca-C. to Asa G. Candler. An Allantan with Qleat
business acumen, M'. nndler proceeded to buy additional business rie.its
and arquire comnl$te eon roL
, 18,39, , 'sa Candler published a full-page advertisement fn The
On May
Aticu-1La Jourqr!, his WI h •lesale and rei_a.ü drug business as
rietors of Coca-Cola icious. R •e fresh i', g. Ex hi tarati*.g.
-.rrw " oole ownersmp, wmcn Mr. Candler not actually acrneve
unua n• eded an Investment of $ 2,300.
It wa in 1892 that Mr. Candler formed a company called "Die Coca-Cola
Corpor„tion
Source: Website of Coca Cola company.

Scene 5

secrecy. A sole trader is also not bound
by law to publish firm’s accounts.

(iii) Direct incentive: A sole
proprietor directly reaps the benefits of
his/her efforts as he/she is the sole
recipient of all the profit. The need to
share profits does not arise as he/she
is the single owner. This provides
maximum incentive to the sole trader
to work hard.

(iv) Sense of accomplishment: There
is a personal satisfaction involved in
working for oneself. The knowledge
that one is responsible for the success
of the business not only contributes to
self-satisfaction but also instils in the
individual a sense of accomplishment
and confidence in one’s abilities.

(v) Ease of formation and closure:
An 
important 
merit 
of 
sole
proprietorship is the possibility of
entering into business with minimal
legal formalities. There is no separate
law that governs sole proprietorship. As
sole proprietorship is the least
regulated form of business, it is easy
to start and close the business as per
the wish of the owner.

Notwithstanding various advantages,
the sole proprietorship form of
organisation is not free from
limitations. Some of the major
limitations of sole proprietorship are
as follows:

(i) Limited resources: Resources of
a sole proprietor are limited to his/her
personal savings and borrowings from

others. Banks and other lending
institutions may hesitate to extend a
long term loan to a sole proprietor.
Lack of resources is one of the major
reasons why the size of the business
rarely grows much and generally
remains small.

(ii) Limited life of a business
concern: The sole proprietorship
business is owned and controlled by
one person, so death, insanity,
imprisonment, physical ailment or
bankruptcy of a proprietor affects the
business and can lead to its closure.

(iii) Unlimited liability: A major
disadvantage of sole proprietorship is
that the owner has unlimited liability. If
the business fails, the creditors can
recover their dues not merely from the
business assets, but also from the
personal assets of the proprietor. A
poor decision or an unfavourable
circumstance can create serious
financial burden on the owner. That is
why a sole proprietor is less inclined to
take risks in the form of innovation
or expansion.

(iv) Limited managerial ability: The
owner has to assume the responsibility
of varied managerial tasks such as
purchasing, selling, financing, etc. It is
rare to find an individual who excels in
all these areas. Thus decision making
may not be balanced in all the cases.
Also, due to limited resources, sole
proprietor may not be able to employ
and retain talented and ambitious
employees.
Though sole proprietorship suffers
from various shortcomings, many

his/her as he/she is the sole
recipient ot all the protit. The need to
snare protif;s does not arise as he,' she
is the smøle owner. -rnis provmes
maxrmum incentive to the sole trauer
to work hard.
(iv) Sense of accor-
ment: There
working iOr onestq_t-. The
that one is reepo_nsihlp lor the success
ot rne not ot-nv conrrthllteq r.o
but also in Ehe
inulvluual a Sense Oi aecotrll •nshmer •
and ccnnnn:nce in one's abilities.
(v) Ease of fornlatlon and cl *sure:
An ilnportant merit
proprietorship is the pr tity of
entering into busmess Wit. * timal
Torma•mes. '1 nere ts no enarate
law Ihar governs sol-e prol)netorst np. As
sole in 's the IF
reeulated iurm of it is
to start and close the busix e per
the wish of the owner.
Limitations
Notwithstanding va •toub advantages,
the sole proprietoaship form of
organisation is not free from
limitatiors. Some of the major
limnati0"s •f ole proprietorship are
(i) reenurcps: Resources of
reasons why the size of the business
rarely grows much and generally
remains small.
(ii) Limited life of a businrss
concern: The sole proprietorsh*i'
business is owned and controlle(. by
one person, so death, in
imnrisonment, phvqiral or
barlKrunlev 01 a • Cts the
busi .ess and call Icaci co its 'qosure.
limited Ii*ili+z: A maior
the tne cremrr»rs can
_ ecovcr tir Ies not merelv iiom the
ets, but also from the
perso •al , ssets of the proprietor. A
pc u. or an unravourahle
can create serious
financial burden on the owner. That is
a Ile is less ineliYIed to
tal€e In tne lorm ot innovauon
(ivi Lir- itcd man rial al 'v: The
OWIief ALdS LO
oi varied
rare 10 an Irn:llvmoua• woo excels in
ali thcse ale-as. Thus dcci$ion rnaixing
may not be balanced in all the cases.
AJso, due to lirnited resources, sole
prnprietnr may not be ante to emnloy
and rerain tamented and arnoluous
ovees.
Though sole proprietorship suffers

Scene 6

entrepreneurs opt for this form of
organisation because of its inherent
advantages. It requires less amount of
capital. It is best suited for businesses
which are carried out on a small scale
and where customers demand
personalised services.

Joint Hindu family business is a
specific form of business organisation
found only in India. It is one of the
oldest forms of business organisation
in the country. It refers to a form of
organisation wherein the business is
owned and carried on by the members
of the Hindu Undivided Family (HUF).
It is governed by the Hindu Law. The
basis of membership in the business is
birth in a particular family and three

The following points highlight the
essential characteristics of the joint
Hindu family business.

(i) Formation: For a joint Hindu family
business, there should be at least two
members in the family and ancestral
property to be inherited by them. The
business does not require any
agreement as membership is by birth.
It is governed by the Hindu Succession
Act, 1956.

(ii) Liability: The liability of all
members except the karta is limited to
their share of co-parcenery property of
the business. The karta, however, has
unlimited liability.

(iii) Control: The control of the family
business lies with the karta. He takes

successive generations can be members
in the business.
The business is controlled by the
head of the family who is the eldest
member and is called karta. All
members have equal ownership right
over the property of an ancestor and
they are known as co-parceners.

all the decisions and is authorised to
manage the business.  His decisions are
binding on the other members.

(iv) Continuity: The business
continues even after the death of the
karta as the next eldest member takes
up the position of karta, leaving the
business stable. The business can,

Gender Equality in the Joint Hindu Family a Reality

According to the Hindu Succession (Amendment) Act, 2005, the daughter of a
coparcener of a Joint Hindu Family shall, by birth, become a coparcener. At
the time of partition of such a ‘Joint Hindu Family’ the coparcenary property
shall be equally divided to all the coparceners irrespective of their gender
(male or female). The eldest member (male or female) of ‘Joint Hindu Family’
shall become Karta. Married daughter has equal rights in property of a Joint
Hindu Family.

demand
Joint Hindu family business is
specific Torm Of orpanisntinn
found Olliv in Irrura. It is one of the
oldest forms of business oruanisation
in the counu-v. It refers to a fOEin of
wner+in tne bnsiness is
0M,'ne-O The Tnernners
Of rne Hindu Ulnrnvloed FarnLlv "-11
It is governed bv [he Hindu Law. T'
basis in the
in a particular fanaily ant three
and where customers
FErsonålised services.
Acxxn•d.ing to the Hindu Succession (Arm wilt) Act, 2005, the dat•ghter of a
(ii For a joint Hindli family
business. tnere shout". De at least two
memners in rhe tan-uiv and aneesrral
properi.V to be inhen•.ed ov lhem. T he
business does not reouire
ay_leernent as membership iS bv bi. Th.
It IS gw', erned by the Hindu Sur ce osion
(F) J -ab*Fty: The liqb lit}' of all
me- ers except trz k is nmited to
'ir •re ot •ner $ property of
••-nness. however, has
ua iiai_
T' i) Controi. control of the family
cnparcener Of' a Family by birth, become a cnparcener. At
the time of parti n such a Hindu Parr-my' the cooarcenarv prooerty
shall be equally to all jparceners irrespective of their ecnder
(male or terna.le). The elde •t nt.,cr (male or tema!el of 'Joint H!næiu Family'
Snail become: Karta. Marneu dam gnter nas equal ngnts in property or a Jomt
Hindu Family,
successive •s can De
in the business.
'l ne is controlled bv the
head of tn; wno is tne elaest
member a •d is called karta. Ail
metnc- rs -tve equal ownership rient
over the oruuerty of an ancestor and
all the decisions and is authorised to
mannge the business. Hig decisions are
binarng on the orner memoers.
(iv) Contin•qfty: The business
continues even arter the dearh of rhe
up the Of kurta,
business staule. The business can,

Scene 7

however, be terminated with the
mutual consent of the members.

(v) Minor Members: The inclusion of
an individual into the business occurs
due to birth in a Hindu Undivided
Family. Hence, minors can also be
members of the business.

The advantages of the joint Hindu
family business are as follows:

(i) Effective control: The karta has
absolute decision making power. This
avoids conflicts among members as no
one can interfere with his right to
decide.  This also leads to prompt and
flexible decision making.

(ii) Continued business existence:
The death of the karta will not affect
the business as the next eldest member
will then take up the position. Hence,
operations are not terminated and
continuity of business is not
threatened.

(iii) Limited liability of members:
The liability of all the co-parceners
except the karta is limited to their share
in the business, and consequently their
risk is well-defined and precise.

(iv) Increased 
loyalty 
and
cooperation: Since the business is run
by the members of a family, there is a
greater sense of loyalty towards one
other. Pride in the growth of business
is linked to the achievements of the
family. This helps in securing better
cooperation from all the members.

The following are some of the
limitations of a joint Hindu family
business.

(i) Limited resources: The joint Hindu
family business faces the problem of
limited capital as it depends mainly on
ancestral property.  This limits the
scope for expansion of business.

(ii) Unlimited liability of karta: The
karta is burdened not only with the
responsibility of decision making and
management of business, but also
suffers from the disadvantage of
having unlimited liability. His personal
property can be used to repay business
debts.

(iii) Dominance of karta: The
karta individually manages the
business which may at times not be
acceptable to other members. This
may cause conflict amongst them and
may even lead to break down of the
family unit.

(iv) Limited managerial skills:
Since the karta cannot be an expert
in all areas of management, the
business may suffer as a result of his
unwise decisions. His inability to
decide effectively may result into
poor profits or even losses for the
organisation.
The joint Hindu family business is
on the decline because of the
diminishing number of joint Hindu
families in the country.

due to birth in a Hindu Undivided
Famiiv. Hence, minors can also be
memoers 01 tne busmess.
The advantages of the joint Hindu
falliily busincss are as foliows:
(i) E 'octive control: 'Ihe karta has
absolute decisn.>ii power. Tliis
avoids conflicts as no
one can intertere his rie 11t to
deride. This also to prompt and
fiex1Die decrsron mamng.
Cont* n lied
Pl ne deadh 01 [he ica_rca WII] no' anect
the buyincss as clues •
wGl then take up the posi An. : lence,
operaüons are not terml. Rte-u and
continuity of business is not
of meml em s:
except tn•? Rurtuis limited to eirs yare
in rne ana consegmneney tneir
risk is weu-aennedarv Pl. else.
htnce is run
by r_ne mernoe„ ot a famtiy, there is a.
greater ser- se .ova]iv towards one
other. Pride in ' ne e. owuh 01 business
is link' d the achievements of the
family. helps in securi*iQ better
cooperation from all the monocrs.
The Hindu
famuv busmess rares the problem of
capuai as it depends mmruy on
ancestral properry. This hmur_s 'e
scope for expansion of business.
(in UnlitnitpA
kara IS nnrqene.a nor "h Lhe
responelh'nry oi decision ng and
mar •gement of bus' .feqs, but also
snuer. from the of
unnrniterl Biläy. nersonal
p. anertycan us •d ,.orepay business
Don ace of karta: The
kartrt ira 'lvlauajly manaees the
bue*ne vvhich may at times not be
to other me-mners. This
may cause contnct amor•øsr chem and
av even lead to break down of Ine
family unit.
(iv) Limited man H"erial skills:
Smce the karta cannot be an expert
in all areas of management, the
business mav suber as a result. of his
unwise decisions. HIS inability to
decide eliéctively may result into
poor profits or even losses for the
organisauron.
Tlie joint Hindu familv business is
on the decline because of the
diminishing number of joint Hindu
families in che country.

Scene 8

The inherent disadvantage of the sole
proprietorship in financing and
managing an expanding business paved
the way for partnership as a viable option.
Partnership serves as an answer to the
needs of greater capital investment,
varied skills and sharing of risks.

must be lawful and run with the motive
of profit. Thus, two people coming
together for charitable purposes will
not constitute a partnership.

(ii) Liability: The partners of a firm
have unlimited liability. Personal assets
may be used for repaying debts in case
the business assets are insufficient.

The Indian Partnership Act, 1932
defines partnership as “the relation
between persons who have agreed to
share the profit of the business
carried on by all or any one of them
acting for all.”

Definitions given above point to the
following major characteristics of
the partnership form of business
organisation.

(i) Formation: The partnership form
of business organisation is governed by
the Indian Partnership Act, 1932. It
comes into existence through a legal
agreement wherein the terms and
conditions governing the relationship
among the partners, sharing of profits
and losses and the manner of
conducting the business are specified.
It may be pointed out that the business

Further, the partners are jointly and
individually liable for payment of debts.
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 of
the business. However, such a partner
can later recover from other partners
an amount of money equivalent to the
shares in liability defined as per the
partnership agreement.

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

Partnership is the relation between persons competent to make contracts
who have 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
to combine their property, labour or skill in some business and to share the
profits therefrom between them.
The Indian Contract Act 1872

Way as a ViztJ_ne uuuun.
Part.n€1Bl serves as an answer to the
needs ot QI eater capital investment
varied Skills anu snaring oi risks.
(44) fie partners of a firm
have unlimited hatpiJit-y. Pepæona_l assets
may oe usea ror repavmr•s,? m case
the business assers are insumcient.
Partnership is the relauon between persons competent to make contraCQ
who have agreed to carry on a lawful business in common to
Partnership is the relation which subsists (ween persons agreed
to conil their property. labour or skill s, rue business LO share the
pronts tneretrom between them.
The Indian Partnership Act 1932
defines partnersl)ip as "the. r, latior
berween persnns wno have
share the proiit of o.' s 'ness
carried on by all or any on, of them
aecing for all."
Dofinitions given above point to
followir:g maior characte- stib s of
the partnership form 01 b, -_'.ness
orgamsauon.
(i) F nrynxtitin: form
ot organise-a' . enverned ny
the Inuian 14 cliertsnip Act, 19.32. It
comes into W.ee throueh a Ictzal
aereemenl wh 3rei_n the terms and
condi governing the relation811
among ne partners, snaring protn:s
and losses and the manner of
conducung che business are specüied.
urther, qrmers are iointlv and
indis•id• •;r.üle for payment of debts.
Joint. , ali the partners are ble
fc_ 1 ae eebts and they contribute in
•no. tion to their share in business
too, each partner can be
helrl reeponeth'e. repaying tne dents of
can later recover tram orner partners
an amount 01 money emnvalent to rhe
shares in hanuny denned as per the
(i i) Ri benril partners bear
the risKs invotved in running
business as a team. '[he reward comes
in the ibrm_ of profits which are shared
bv the parillers in an aureed ratio.
However, they also share losses in the
salixe ratio in the event of the finn

Scene 9

(iv) Decision making and control:
The partners share amongst themselves
the responsibility of decision making
and control of day to day activities.
Decisions are generally taken with
mutual consent. Thus, the activities of
a partnership firm are managed
through the joint efforts of all the
partners.

(v) Continuity: Partnership is
characterised by lack of continuity of
business since the death, retirement,
insolvency or insanity of any partner
can bring an end to the business.
However, the remaining partners may
if they so desire continue the business
on the basis of a new agreement.

(vi) Number of Partners: The
minimum number of partners needed
to start a partnership firm is two.
According to section 464 of the
Companies Act 2013, maximum
number of partners in a partnership
firm can be 100, subject to the number
prescribed by the government.
As per Rule 10 of The Companies
(miscelleneous) Rules 2014, at present
the maximum number of members can
be 50.

(vii) Mutual agency: The definition of
partnership highlights the fact that it
is a business carried on by all or any
one of the partners acting for all. In
other words, every partner is both an
agent and a principal. He is an agent of
other partners as he represents them
and thereby binds them through his
acts.  He is a principal as he too can be
bound by the acts of other partners.

The following points describe the
advantages of a partnership firm.

(i) Ease of formation and closure: A
partnership firm can be formed easily
by putting an agreement between the
prospective partners into place
whereby they agree to carryout the
business of the firm and share risks.
There is no compulsion with respect to
registration of the firm. Closure of the
firm too is an easy task.

(ii) Balanced decision making: The
partners can oversee different
functions according to their areas of
expertise. Because an individual is not
forced to handle different activities, this
not only reduces the burden of work
but also leads to fewer errors in
judgements. As a consequence,
decisions are likely to be more
balanced.

(iii) More funds: In a partnership, the
capital is contributed by a number of
partners. This makes it possible to
raise larger amount of funds as
compared to a sole proprietor and
undertake additional operations when
needed.

(iv) Sharing of risks: The risks
involved in running a partnership firm
are shared by all the partners. This
reduces the anxiety, burden and stress
on individual partners.

(v) Secrecy: A partnership firm is not
legally required to publish its accounts
and submit its reports. Hence it is able
to maintain confidentiality of information
relating to its operations.

Decisions are generally taken with
mutual consent. Thus, the activities of
a partnership firm are manacc,ed
through the joint eflOrts ot' all the
(v) Continuity: Partnership is
characterised by lack of continuity of
busgness since the death, retirement,
insolvency or insanity of any partner
can bring an end to the business.
However, the remaintng partners may
it r nev so desire conunue tne business
on tne basis of a new agreement.
(VI) of Partners:
rnmnm_um number of partners eeded
to start a partnersmp fin. is two.
According to section the
Comoanies Act 2013, qxtmum
nurnoer of partners a partnersinp
can be 100. st r tect . o [he numver
prescribed by
governm
As per Rule 10 of 'lhe Consna_ •ie•
(miscelleneous) Rules 2014, pn sent
the maÄhnurn nurnber of menu. ts can
be 50.
(vii) M•ttual nu uefinition of
partnersl„p Lhe faet that it
is a business _ "Tied on bv all or any
one of the acting: tor alL In
other word. partner is both an
acent:-• ld Heis an acent of
other pa •mers as he represents them
and thereby bjnds them tnroueh nis
partnerehip lirm can be tormed easily
by putting a_n agreement between tne
prnsnecuve partners inro place
wnereby they agree to carryout
business of the ill m and share ris..,:;
There is no connouision With resnec to
rez•jstration oi che lirm. Closu- e r the
firm too is an easy task.
fu. •etto. 'ng •o tl flir areas of
L 'dividual is not
nnt onlv reta burden of work
out also 'eat. 3 to fewer errors in
judee As a consequence,
decis. on' are likely to be more
(if i, ,vlnre a partnershins the
c. is contnoui_eci oy a nuvnner Of
parurers. Tins makes it posti1101e to
raise larger amount of funds as
compared to a sole proprietor and
undertake additional operations when
Of The
invnivecl runrnnu a partnerqhip nrm
are shared bv all ure paruners. This
reduccs the arrxictv. buracn and stress
on individual partners
(v) ST crecy: A firm is not
le I.]y reqnjred its accounts
and submit its nepnrts. Hence it is able

Scene 10

A partnership firm of business
organisation suffers from the following
limitations:

(i) Unlimited liability: Partners are
liable to repay debts even from their
personal resources in case the
business assets are not sufficient to
meet its debts. The liability of partners
is both joint and several which may
prove to be a drawback for those
partners who have greater personal
wealth. They will have to repay the
entire debt in case the other partners
are unable to do so.

(ii) Limited resources: There is a
restriction on the number of partners,
and hence contribution in terms of
capital investment is usually not
sufficient to support large scale
business operations. As a result,
partnership firms face problems in
expansion beyond a certain size.

(iii) Possibility 
of 
conflicts:
Partnership is run by a group of
persons wherein decision making
authority is shared. Difference in
opinion on some issues may lead to
disputes between partners. Further,
decisions of one partner are binding on
other partners. Thus an unwise
decision by some one may result in
financial ruin for all others. In case a
partner desires to leave the firm, this
can result in termination of partnership
as there is a restriction on transfer of
ownership.

(iv) Lack of continuity: Partnership
comes to an end with the death,

retirement, insolvency or lunacy of any
partner. It may result in lack of
continuity. However, the remaining
partners can enter into a fresh
agreement and continue to run the
business.

(v) Lack of public confidence: A
partnership firm is not legally required
to publish its financial reports or make
other related information public. It is,
therefore, difficult for any member of
the public to ascertain the true financial
status of a partnership firm. As a result,
the confidence of the public in
partnership firms is generally low.

A partnership firm can have different
types of partners with different roles
and liabilities. An understanding of
these types is important for a clear
understanding of their rights and
responsibilities. These are described as
follows:

(i) Active partner: An active partner
is one who contributes capital,
participates in the management of the
firm, shares its profits and losses, and
is liable to an unlimited extent to the
creditors of the firm. These partners
take actual part in carrying out
business of the firm on behalf of other
partners.

(ii) Sleeping or dormant partner:
Partners who do not take part in the
day to day activities of the business are
called sleeping partners. A sleeping
partner, however, contributes capital to
the firm, shares its profits and losses,
and has unlimited liability.

(i) Unlimited 1i lity: Partners are
liao/e [0 repav even from their
personal resources in case the
business assets are not snfiicient to
meet its di liabiJi1_y ot •a_rtners
is Doth joint and several wnt(2h may
prove to be drawnaek tor those
parrners who have greater personal
wcalch. They will have to repav the
enare deot in case the other partners
are unable to do so.
(ii) Lip • ited resources: There is
restriction on the number of partne s,
and hence contribution in terms
canitai investment is usum y not
sunieient to support lam«e
business operauuns. . *sult
partnership firms face px blems in
expansion beyond a t-•ertaill sue,
(iii) Possibility of conflicts:
Partnership is ry a grovp of
persons wnerein deciston
aurhorjty is snared. -erl( in
ovnnion on sovr.e issues may -;ad to
disuutes between par •s. Further,
of one pa -t •rf on
other partners. an unwise
decision by s.. v ae one may result in
financial ruin otners. In case
partner de ,irey to leave firm, Enis
Can res' - _lninanon Of parlnersrnp
as the. is restriction on transær of
(iv) Lack of contin uity: Partnership
'11 tent a_nd continue to run
busmess.
(v) Lack of nublfc corf" •lenee: A
parLrneiSiL_ltJ iirlii is not leeanv
to its or
other relaeed ililorntat-ion public. I is,
thieretore. L lit ult tor any me
the to true •
sratus 01 a part-nersn1P rest_ur,
the .onrjdence of i'_ie Alibi ic in
•snip Lions Ily low.
A p.trtnersbip can have different
+ 'nes or nan •erb wth roles
arm An unders•ancijne Of
these tVD. s is important fur a clear
ur -.'•rs• of their rjQl'1ts and
follows:
(it Active Dartner: An active partner
is one who contributes caonal,
pa.rtii ipates in the mank •ment of the
fr-m, shares its aniwl loeses, and
is linrve to an urutmtre(l extent to tne
creauors of the firm. 'I hese partners
take actual part in carrving out
business of the firm on behalf of other
pail mers.
or dormant partner:
who do not take part in the
dav to Clav activities ot tme Dustnpss are
A Sleen1n6
parrner. howevex, Conr:rloures to
BES,

Scene 11

(iii) Secret partner: A secret partner
is one whose association with the firm
is unknown to the general public. Other
than this distinct feature, in all other
aspects he is like the rest of the
partners. He contributes to the capital
of the firm, takes part in the
management, shares its profits and
losses, and has unlimited liability
towards the creditors.

(iv) Nominal partner: A nominal
partner is one who allows the use of
his/her name by a firm, but does not
contribute to its capital. He/she does
not take active part in managing the
firm, does not share its profit or losses
but is liable, like other partners, to the
third parties, for the repayments of the
firm’s debts.

(v) Partner by estoppel: A person is
considered a partner by estoppel if,
through his/her own initiative,
conduct or behaviour, he/she gives an
impression to others that he/she is a
partner of the firm. Such partners are
held liable for the debts of the firm
because in the eyes of the third party
they are considered partners, even
though they do not contribute capital
or take part in its management.
Suppose Rani is a friend of Seema who
is a partner in a software firm —
Simplex Solutions. On Seema’s
request, Rani accompanies her to a
business meeting with Mohan
Softwares and actively participates in
the negotiation process for a business
deal and gives the impression that she

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partners. He contrihntes to the capl I-al
partner or the firm. Such pan-ners are
of the firm, tawes part in tne
he-ld Mable for Ehe of the fitm
management, shares its oroflts and
because in the eves of the third party
losses, and has unlimned liabiliiY
they are considered partners, e', •n
towards me creditors.
thou.'_lh they do not contribute cav ,taa
(iv) partn—r: A nominal
or taxe part in its managenae_'t
parrner is one wno annws the use of
Suppose Rani is a mend nr who
her name by a firm, but does not
is a partner in sol' AV' . n -
contribute to its capnal- He/she does
Simp•ex Solutions O.' Seema'.c
not take active Dart in the
recra st, Rani .ar*es her to
firm, does not share its prulil or losses
•sim mee 'in.' wizh Mohan
but is liable, like other partners. to the
Soi and actu ely participates in
u. pr.. cess ror a b'!qness
deal ana gw 's L mpresslon mar sne
Share in orofits/
Ice... -s
4
Con tes
Coni
contr±hnte
marui••
in
•rnent,
pnrtioin_nte in
not snare protits/
Does not share
not
Unlinliled
Un I im 1 ted
t-pd

Scene 12

is also a partner in Simplex Solutions.
If credit is extended to Simplex
Solutions on the basis of these
negotiations, Rani would also be liable
for repayment of such debt, as if she
is a partner of the firm.

(vi) Partner by holding out: A
partner by ‘holding out’ is a person
who though is not a partner in a firm
but knowingly allows himself/herself
to be represented as a partner in a
firm. Such a person becomes liable to
outside creditors for repayment of any
debts which have been extended to the
firm 
on 
the 
basis 
of 
such
representation. In case he is not really
a partner and wants to save himself
from such a liability, he should
immediately issue a denial, clarifying
his position that he is not a partner in
the firm. If he does not do so, he will
be responsible to the third party for
any such debts.

Partnerships can be classified on the
basis of two factors, viz., duration and
liability. On the basis of duration, there
can be two types of partnerships :
‘partnership at will’ and ‘particular
partnership’. On the basis of liability,
the two types of partnership include:
one ‘with limited liability’ and the other
one ‘with unlimited liability’. These
types are described in the following
sections.

(i) Partnership at will: This type of
partnership exists at the will of the
partners. It can continue as long as
the partners want and is terminated
when any partner gives a notice of
withdrawal from partnership to the
firm.

Partnership is based on legal contract between two persons who agree to
share the profits or losses of a business carried on by them. As such a
minor is incompetent to enter into a valid contract with others, he cannot
become a partner in any firm. However, a minor can be admitted to the
benefits of a partnership firm with the mutual consent of all other partners.
In such cases, his liability will be limited to the extent of the capital
contributed by him and in the firm. He will not be eligible to take an active
part in the management of the firm. Thus, a minor can share only the profits
and can not be asked to bear the losses. However, he can if he wishes, inspect
the accounts of the firm. The status of a minor changes when he attains
majority. In fact, on attaining majority, the minor has to decide whether he
would like to become a partner in the firm. He has to give a public notice of
his decision within six months of attaining majority. If he fails to do so,
within the stipulated time, he will be treated as a full-fledged partner and
will become liable to the debts of the firm to an unlimited extent, in the same
way as other active partners are.

become a partner in anv firm. However, a minor can be admitted to the
benefits of a partnership tirm with the mutual consent of all other partners.
In such cases, his liablllty Will be Itm.iTed to Ine extent of the cap."al
bv him and [n the firm. He will not be ehunle to take an acLiv
part jn the .ment Of the firm. Thus. a minor cava share Only the prulif ,
and can not be to bear the losses. However, be he wishes, Inspe.t
the accounts of [he firm. The star-us of a minor changes when he a ca• as
maioritv. In fact. on maluritv, the minor has to decide when. r
would like to become a partner in the firm. He has to give a pub. 'ice Of
bis decl*lon wttntn six monrns or attamirv. majority. If he . • do so,
wiihin the stinuiated time. he will be tre as a •tner and
will become lia[ile to the debts of the fir".. an •alimited Ate the same
way as other active partners are.
is also a partner in Simolex Soh1F
If credit is extended to Si nulex
Solutions on the basis hes
neuu[iadons, Ran] would • li3hble
for repayment of such den. as she
is a partner ot the tirrn.
(vi) Partner by no 1' out: A
partner by iS a Pf
wno rhouoh is nor a partner i"
but kru_jwlnulv allows hunse• -self
to be reorc,cnted as a part-n in a
firm. Such a person be •es li.%ihlle to
outside cret lil ors .•e, .nent or any
dents wrucn nave extenaetl to tne
firm on th- basis of such
representation. rase he is not remiv
a partner : Ild vants to save himself
from s--•h liabilitv. he should
immQ ate. issue a denial, claritvnag
his posit. that he is not a partner in
tne firm. If ne does not do so, he will
2 4.2 O?
Partner«hi. be classified on the
basis bftv. iåetors, viz. , duratiun and
On the basis 01 duraliun, there
b ; two types of partnerships :
'pannerq•ip at will' and
p xtnersnip'. On me basis ot llphility,
the types Of parTnersD1p
one and the orner
one 'wuth unnmwed iiamnrv'. These
tynes are described in the following
seeuons.
Classf fication on the basis of
(i) at w*ll: This type of
partnersntp exmsts at the of the
partners. It can continue as lone as
the. partners want and is termmated
wnen any pari.ner ewes a notice of

Scene 13

(ii) Particular partnership: Partner-
ship formed for the accomplishment of
a particular project say construction of
a building or an activity to be carried
on for a specified time period is called
particular partnership. It dissolves
automatically when the purpose for
which it was formed is fulfilled or when
the time duration expires.

(i) General Partnership: In general
partnership, the liability of partners
is unlimited and joint. The partners
enjoy the right to participate in the
management of the firm and their
acts are binding on each other as
well as on the firm. Registration of
the firm is optional. The existence
of the firm is affected by the death,
lunacy, insolvency or retirement of
the partners.

(ii) Limited Partnership: In limited
partnership, the liability of at least one
partner is unlimited whereas the rest
may have limited liability. Such a

partnership does not get terminated
with the death, lunacy or insolvency of
the limited partners. The limited
partners do not enjoy the right of
management and their acts do not bind
the firm or the other partners.
Registration of such partnership is
compulsory.
This form of partnership was not
permitted in India earlier. The
permission to form partnership firms
with limited liability has been granted
after introduction of New Small
Enterprise Policy in 1991. The idea
behind such a move has been to enable
the partnership firms to attract equity
capital from friends and relatives of
small scale entrepreneurs who were
earlier reluctant to help, due to the
existence of unlimited liability clause
in the partnership form of business.

A partnership is a voluntary association
of people who come together for
achieving common objectives. In order
to enter into partnership, a clear
agreement with respect to the terms,
conditions and all aspects concerning

Price Waterhouse Coopers was a Partnership Firm earlier

Price Waterhouse Coopers, one of the world’s top accountancy firms has been
created in 1998 by the merger of two companies, Price Waterhouse and Coopers
and Lybrand — each with historical roots going back some 150 years to the
19th century Great Britain. In 1850, Samuel Lowell Price set up his accounting
business in London. In 1865, he was joined in partnership by William H.
Holyland and Edwin Waterhouse. As the firm grew, qualified members of its
professional staff were admitted to the partnership. By the late 1800s, Price
Waterhouse had gained significant recognition as an accounting firm.

Source: Price Waterhouse Coopers archives in Columbia University.

on for a specifi, •d time period is called
particular partnersl lip. It dissolves
autamatically when the purpose for
which it was tormed is tulkilled or when
the time duration expires.
Classification on the basis of
(i) 11 f In
partnersrnp, tne of parmers
is unlimited and jomt. The partners
enjoy the. riont to particnpate in the
mana eemenr of the firm and the ar
acts are binding on each other
well as on the iirm. Rtæistra' ton of
the firm is opüonal. The •is encr
of the firm is allected b' + he *eath,
lunacy, insolvency or reti of
the partners.
partnership, the lid or at leae .
partner is unlimited whereas _
may have limited liability. Su h
mane." •ment alid their acts do not bind
the tirm or the other partners.
R, •gjetratjon of such partnersmp is
comp 1
l%nts rorm of partnership was •t
permitted in India earlier. "he
pernussiun to form partnershir qr.
wiCh liwuiCed has been cd
after introduction o.' o.nall
Enter Jise Policy in I "9. The idea
ber such a mm' • ht •n to
t par. *evehln to en•art emur_y
from • a.ld re.ai_ives of
All scale t•encurs who were
ev filer relu,'alk 10 helm due to the
existence •fu limited clause
in the Q. ship form ot business.
A _ tership is a voluntary association
achieving omecqnves. in order
to en cer inio partnership.
conditions and all aspects concerning
Price Waters Coopers was a Partnersmp Firm earner
price, Waterhouse •oners, one of the world's top accountancy firms has been
created Ln bv of two coruuanies. Price and Cvouers
and Lybratlü — each with historical back some 150 years to the
19th cent Ary Great Britain. In 1850, Samuel Lowell Price set up his aeoountlng
busineqs _ondon. In 1805, he was joined in partnersnlp bv Wunarn H.
qnd Waterhouse. As the til m urcw, qual: mennlrers Of its
protes. 'onal staff were adrnfi.ted to the partnership. By the late IRT.Os, Price
Waternouse had gamed srgnmcant recognition as an accounting lirm.

Scene 14

the partners is essential so that there is
no misunderstanding later among the
partners. Such an agreement can be
oral or written. Even though it is not
essential to have a written agreement, it
is advisable to have a written agreement
as it constitutes an evidence of the
conditions agreed upon. The written
agreement which specifies the terms and
conditions that govern the partnership
is called the partnership deed.
The partnership deed generally
includes the following aspects:
• Name of firm
• Nature of business and location of
business
• Duration of business
• Investment made by each partner
• Distribution of profits and losses
• Duties and obligations of the
partners
• Salaries and withdrawals of the
partners
• Terms governing admission,
retirement and expulsion of a
partner
• Interest on capital and interest on
drawings
• Procedure for dissolution of the
firm
• Preparation of accounts and their
auditing
• Method of solving disputes

Registration of a partnership firm
means the entering of the firm’s name,
along with the relevant prescribed par-
ticulars, in the Register of firms kept
with the Registrar of Firms. It provides
conclusive proof of the existence of a
partnership firm.

It is optional for a partnership firm
to get registered. In case a firm does
not get registered, it is deprived of
many benefits. The consequences of
non-registration of a firm are as follows:
(a) A partner of an unregistered firm
cannot file a suit against the firm
or other partners,
(b) The firm cannot file a suit against
third parties, and
(c) The firm cannot file a case against
the partners.
In view of these consequences, it is
therefore advisable to get the firm
registered. According to the India
Partnership Act 1932, the partners may
get the firm registered with the
Registrar of firms of the state in which
the firm is situated. The registration can
be at the time of formation or at any time
during its existence. The procedure for
getting a firm registered is as follows:
1. Submission of application in the
prescribed form to the Registrar of
firms. The application should
contain the following particulars:
• Name of the firm
• Location of the firm
• Names of other places where the
firm carries on business
• The date when each partner joined
the firm
• Names and addresses of the
partners
• Duration of partnership
This application should be signed by
all the partners.
2. Deposit of required fees with the
Registrar of Firms.
3. The Registrar after approval will
make an entry in the register of
firms and will subsequently issue
a certificate of registration.

is advis• •le•, to have a vorj' él-j•ement
as it conqutlltes an evraence or rne
conditions reed uoon. The wriiLen
r-s theterm:salld
is cat lea me partnersmp
Tile partnerslnp deed generally
includes aSpeci_S:
• Name of firm
ofbusiness and location of
Duranon of business
InvesL11tertt rnaue bv each nartner
LMOHLS •S
Duties and ob.,gauons r:
S.!t'arjes and withdraues tl-
Terms governing au nission,
retirement and expuision of E
Prnceaure for dissoluC' n the
firm
Prenaration of accr-. - *Its and their
au
Method of soll •g cu,putes
Registrati' n a partnership firm
mcaais e. of Lhe firm's name.
a1021k, ith u'lereh:s-antpreserihed par-
wrn rne, Recnqrrar ot ru•rns. It p_rrunaes
(a) A pa: tner ot an livm
cannnr me a sutr agznnsr me nrm
or vLher partners,
(b) 'N:te cannot file a suit agadast
thira nartjes, and
(c) Tne. urm cannot lile a case aga nst
the
therernre ao\.osarue to -f 't . ne firm
rems _ered. Accordirvt to the Illura
or O, The grate in Which
IS I-ed.
Aepls•ered IS as [Oliows•.
1. iston of ac.,uieation in the
lir ns. A ne annhcarinn snntud
conLain the particulars:
• Local-inn of the tirm
Names 01 orner p..qees where the
ff:m carries on bu'ülctss
• The d •tewhen each partner joined
' Naines and addresses of the
Duration of partnership
This apnnranon De signed by
ali the parmers.
2. Dennsit of remnired fees with the
make an entry in the rec."ster of

Scene 15

The word cooperative means working
together and with others for a common
purpose.
The cooperative society is a
voluntary association of persons, who
join together with the motive of welfare
of the members. They are driven by the
need to protect their economic interests
in the face of possible exploitation at
the hands of middlemen obsessed with
the desire to earn greater profits.
The cooperative society is
compulsorily required to be registered
under the Cooperative Societies Act
1912. The process of setting up a
cooperative society is simple enough
and at the most what is required is the
consent of at least ten adult persons
to form a society. The capital of a
society is raised from its members
through issue of shares. The society
acquires a distinct legal identity after
its registration.

The characteristics of a cooperative
society are listed below.

(i) Voluntary membership: The
membership of a cooperative society
is voluntary. A person is free to join a
cooperative society, and can also leave

anytime as per his desire. There
cannot be any compulsion for him to
join or quit a society. Although
procedurally a member is required to
serve a notice before leaving the
society, there is no compulsion to
remain a member. Membership is open
to all, irrespective of their religion,
caste, and gender.

(ii) Legal status: Registration of a
cooperative society is compulsory. This
accords a separate identity to the society
which is distinct from its members. The
society can enter into contracts and
hold property in its name, sue and be
sued by others. As a result of being a
separate legal entity, it is not affected
by the entry or exit of its members.

(iii) Limited liability: The liability of
the members of a cooperative society is
limited to the extent of the amount
contributed by them as capital. This
defines the maximum risk that a
member can be asked to bear.

(iv) Control:
In a cooperative society,
the power to take decisions lies in the
hands of an elected managing committee.
The right to vote gives the members a
chance to choose the members who will
constitute the managing committee and
this lends the cooperative society a
democratic character.

Cooperative is a form of organisation wherein persons voluntarily associate
together as human beings on the basis of equality for the promotion of an
economic interest for themselves.
  E. H. Calvert
Cooperative organisation is “a society which has its objectives for the promotion
of economic interests of its members in accordance with cooperative principles.
The Indian Cooperative Societies Act 1912

Cooperative oreanisat_ion fs "a society which has fts ot liectfves for the promotion
Of economic of its members in accordance with conr•erative principles,
The Inman Coonem.nt'e ornaenes Act I y i 2
The ward Conpp-ratjve means working
tnperner and witn omers lor a common
purpose.
T ILe coooerative society is e
voluntary associacion of persons, who
join t0NLu-herwi rh the motive ofwe :lfare
ot the members. 'ljney are drjven bvtne
neec' to protect their tnteresrr
in rhe face of Rt
the Of rruao•elnen Oosesse'. wid.
the dcsire to earn eater prunL:
The cooperaiive SOC
compulsorily required to -
the Cooperative SOL Act
1912- mne proces.e setttng up a
cooperative socie1Y IS rnnie enanøh
and at i:he mosi: '.0 enl]ired j,
consent of at least ten adult
to form a society. The ca. of a
society is raised from its m. . IDers
throu•.Yh issue of shar• B. The society
acquires a (Ileuncr id arter
its registrauon
The chara ten ;tics of a cooperative
society below
(i) VAL "*ary The
of a cooperative soeier.y•
anytime as per his desire. There
cannor be any compulsion tar hu 1 to
join or quit a sncnety. Ait l..
proceduranv a member is req to
serve a notice before the
socielf, there is no •uloion to
us: Redistration of
r . Jnperauve is •l his
WI iie.k IS The
ht p op.:rty in its name, sue and be
sueu DY others. As a result 01 a
parate legal ennty, it iS nnt arrected
by me entry or exu of its memoers.
The liability Of
trie rnen•oers 01 a cooperaLive Society is
limited to the exeent of the anwunt
contributed by them as capital. This
dt •tines the mahimum rask that e
member can be asked to bear.
a cooperative society,
h:arvis an I commuree.
he rip [It to vole gives 'Tte Inernoers a
chance to choose tine mcrnbers who will

Scene 16

(v) Service motive: The cooperative
society through its purpose lays
emphasis on the values of mutual help
and welfare. Hence, the motive of service
dominates its working. If any surplus
is generated as a result of its operations,
it is distributed amongst the members
as dividend in conformity with the bye-
laws of the society.

The cooperative society offers many
benefits to its members. Some of the
advantages of the cooperative form of
organisation are as follows.

(i) Equality in voting status:  The
principle of ‘one man one vote’ governs
the cooperative society. Irrespective of
the amount of capital contribution by
a member, each member is entitled to
equal voting rights.

(ii) Limited liability: The liability of
members of a cooperative society is
limited to the extent of their capital
contribution. The personal assets of the
members are, therefore, safe from being
used to repay business debts.

(iii) Stable existence: Death,
bankruptcy or insanity of the members
do not affect continuity of a cooperative
society. A society, therefore, operates
unaffected by any change in the
membership.

(iv) Economy in operations: The
members generally offer honorary
services to the society. As the focus is
on elimination of middlemen, this helps
in reducing costs. The customers or
producers themselves are members of

the society, and hence the risk of bad
debts is lower.

(v) Support from government: The
cooperative society exemplifies the idea
of democracy and hence finds support
from the Government in the form of low
taxes, subsidies, and low interest rates
on loans.

(vi) Ease of formation: The cooperative
society can be started with a minimum
of ten members. The registration
procedure is simple involving a few legal
formalities. Its formation is governed by
the provisions of Cooperative Societies
Act 1912.

The cooperative form of organisation
suffers from the following limitations:

(i) Limited resources: Resources of a
cooperative society consists of capital
contributions of the members with
limited means. The low rate of dividend
offered on investment also acts as a
deterrent in attracting membership or
more capital from the members.

(ii) Inefficiency in management:
Cooperative societies are unable to
attract and employ expert managers
because of their inability to pay them
high salaries. The members who offer
honorary services on a voluntary basis
are generally not professionally
equipped to handle the management
functions effectively.

(iii) Lack of secrecy: As a result of
open discussions in the meetings of
members as well as disclosure
obligations as per the Societies Act

is a.s a Of its
ir us dismoured amonpsr rhe mernners
laws of [he socieay.
me cooperative society offers many
benetits to its members. Same ot the
acl«rantQ6es ot tme connerauve torm Of
orgamsanon are as tonows.
o]: 'one man one eoverr
the coooerative society. Irresueecive
the antount of caoieal contribut on by
a melliüer, each member is ent. led tr
equal voting Vi_gk Its.
1i •y: The of
memners ot a cooperative svclel-y is
hmueci to the ext o. their caniTal
contrioulion. "I-he te assets e •e
memoexs there10LU. Sale Irom
used to repay business (lei.
(iii) Sta ble existence: 3 Gath
bankru or insai'Lity , •memendßitrs
do not alLect contir'l* ly -ooperative
society. A society, u _ *retnre, operates
unnneoted any change in the
(iv) Ecom my in operations: The
monb! generally oner honorary
servicæ to tne socnetv. As the focus is
on of mid tll.is hclvs
in revlucillg costs. "lhe customers or
of democracy and hence finds supnort
taxes, subsicues, and iow Interest rares
on ivans
(vil E; se
of ten members. The rekif .Lion
formalities. Its tormanon Dy
the mvmons ot coop Socreues
The cnonerr fron of orøanisation
suners m u tonowing nnntauons:
(ii Ih resources: Resources ofa
i' e SOCLcLV consiöLS Of cauiial
c. eons of the mernbers with
lir -d means. The low rate of dividend
Irred on inveshnent also acts as a
deterrent in attvarttng memnersnip or
more capn-am rrom Lhe memoers.
(fi) in mnnnø'l ment:
Cooperative socieLies are unao•e to
attract and emuaov exoert manaeers
because of their to nav
h Ih sal'ffies. The mean bers who oiler
honorary services on a voluntary ba Qis
are generally not proresstonally
to handie the management
funcuons enecuve/y.
(iii) Lack of seerecv: As a result of
ouen Gaseus>lons in the meeti1Lés of
members as well as

Scene 17

(7), it is difficult to maintain secrecy
about the operations of a cooperative
society.

(iv) Government control: In return of
the privileges offered by the
government, cooperative societies have
to comply with several rules and
regulations related to auditing of
accounts, submission of accounts, etc.
Interference in the functioning of the
cooperative organisation through the
control exercised by the state
cooperative departments also negatively
affects its freedom of operation.

(v) Differences of opinion: Internal
quarrels arising as a result of contrary
viewpoints may lead to difficulties in
decision making. Personal interests
may start to dominate the welfare
motive and the benefit of other
members may take a backseat if
personal gain is given preference by
certain members.

Various types of cooperative societies
based on the nature of their operations
are described below:

(i) Consumer’s cooperative societies:
The consumer cooperative societies are
formed to protect the interests of
consumers. The members comprise of
consumers desirous of obtaining good
quality products at reasonable prices.
The society aims at eliminating
middlemen to achieve economy in
operations. It purchases goods in bulk
directly from the wholesalers and sells
goods to the members, thereby
eliminating the middlemen. Profits, if
any, are distributed on the basis of either
their capital contributions to the society
or purchases made by individual
members.

Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many
illiterate), converts the milk into branded, packaged products, and delivers
goods worth Rs. 6 crore (Rs. 60 million) to over 5,00,000 retail outlets across
the country.
It all started in December 1946 with a group of farmers keen to free themselves
from intermediaries, gain access to markets and thereby ensure maximum
returns for their efforts. Based in the village of Anand, the Khera District Milk
Cooperative Union (better known as Amul) expanded exponentially. It joined
hands with other milk cooperatives, and the Gujarat network now covers 2.12
million farmers, 10,411 village level milk collection centres and fourteen district
level plants (unions). Amul is the common brand for most product categories
produced by various unions: liquid milk, milk powder, butter, ghee, cheese,
cocoa products, sweets, ice-cream and condensed milk. Amul’s sub-brands
include variants such as Amulspray, Amulspree, Amulya and Nutramul.

Source: Adapted from Pankaj Chandra, “Rediff.com”, Business Special, September 2005.

the privileges offered bv the
to cnmn•y wn-n several nues and
regulaüons related to auditing of
accounts, submii'*sirjn of accounts, etc.
Inter!erence in the turtctjrmtng ot tne
connerartve orøanisauon the
control exercuscd bv the state
negal_uveiy
ailuets its treeuom ot operation
(v) D *rences Of 0 nion: Internal
quarlr;ns as a uf
vit lead to Cli i:icua-ies in
decision m? Kino. yersonal interes• s
may srart to oomtnar:e the
motive and the benefit of Jther
members may take a backs eat
personal gain is given pretel oy
certam memoers.
are described below:
(i) Consumer's cooperative societies:
The consumer cooperative societies are
formed to protect the interests of
consumers. The memhers compris o:
consl Imers destrous ot
quality products at reasonahlt
Tne society aims at e' aetia„cing
rrndd' smen to acnjeve eonomy in
ope Lions. It purchas 'l In
-Vom ihe '"hf- lesa• urs and sens
to the me vuuers, thereby
elk aillating mm icnonen. Profj IS. if
al v. Ln.n on thc basis of euher
Lheir co . tributiuns to the society
or pu , cu made by individual
Every day Amul c leci 447,000 "—es of milk from 2.12 million fanners (many
illiterate), converL
the milk int %rpnded, packpged products, and delivers
goods worth Rs. 6 crore (l o.- rn.mon) to over 5,00,000 retail outlets across
the country.
It all started in Decembm• 1946 with a group of firmers keen to free themselves
from intermediaries, gail_ access to markets and therehy ensure max.lmnru
returns for tneir •nrts. Sase-xj In the v'll•.aee Of Anand, the Knera Disr_nct rvnik
Cooperative IJnnon -eter Known as Arnui' exnanaed exnonencially. It joined
hands with c. her milk cooneratives. and Lhe Gugarat neLwork now covers 2.12
nuuion fa Villa.ee level milk collect)on centres arid fourteen district
level Nar, s nions). Amul is the conunon brand for most product cateeülies
prod by various unions: liquid milk, milk powder, butter, ghee, cheese.
cocoa •roducts. sweets, ice-cream and condensed milk. Amurs sub-brands
include variants such as Amulspray. Amulspree. Amulya and Nutramul.

Scene 18

(ii) Producer’s cooperative societies:
These societies are set up to protect the
interest of small producers. The
members comprise of producers
desirous of procuring inputs for
production of goods to meet the
demands of consumers. The society
aims to fight against the big capitalists
and enhance the bargaining power of
the small producers. It supplies raw
materials, equipment and other inputs
to the members and also buys their
output for sale. Profits among the
members are generally distributed on
the basis of their contributions to the
total pool of goods produced or sold
by the society.

(iii) Marketing cooperative societies:
Such societies are established to help
small producers in selling their

products. The members consist of
producers who wish to obtain
reasonable prices for their output. The
society aims to eliminate middlemen
and improve competitive position of its
members by securing a favourable
market for the products. It pools the
output of individual members and
performs marketing functions like
transportation, 
warehousing,
packaging, etc., to sell the output at
the best possible price. Profits are
distributed according to each
member’s contribution to the pool of
output.

(iv) Farmer’s cooperative societies:
These societies are established to
protect the interests of farmers by
providing better inputs at a reasonable
cost. The members comprise farmers

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GLOBAL Organisations

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desirous of procuring inputs for
production of goods to meet the
demands of consumers. The society
aims to ti.'_lht against the big capitalists
and enhance the bargraining power of
the small producers. It sup Ilies raw
materials, eqpjpment and other tnpl'ts
to tne members and also buys tneir
ourpnt tor sale. Prnnts among tne
memners are genera ilv disrnnnced on
the basis of their comrmnrions to the
total pool of goods produced or sold
by rhe society.
Such societies are established D help
small producers in selliY1g thej-
and improve comoetitive position of its
members by securing a favourable
market for the products. It pools the
output of individual members and
performs marketing functions Ij• e
transportation,
warehous_ mg,
etc., to sell the •.t
the bc:st possible price. Pro _tre
distributed accordik each
merr oer's contribution to pool Of
oucpl.,
proteot the in sts of tarmers by
prowo hell. inputs at a reasonable
cost. T nn cotnprise iårmers
-Lons
Company
Oil Corpera!ig:
Reliance Industries
Tata Motors Ltd.
d.
215
232
350
367
423
20.082
28.820
Website
www.tatamotors.com
www.sbi.co.in
mvw.bharatpetroleurn.in
www.hindustanpetroleum.com
www.rajeshindia.com

Scene 19

who wish to jointly take up farming
activities. The aim is to gain the benefits
of large scale farming and increase the
productivity. Such societies provide
better quality seeds, fertilisers,
machinery and other modern
techniques for use in the cultivation of
crops. This helps not only in improving
the yield and returns to the farmers,
but also solves the problems associated
with the farming on fragmented land
holdings.

(v) Credit cooperative societies:
Credit cooperative societies are
established for providing easy credit
on reasonable terms to the members.
The members comprise of persons who
seek financial help in the form of loans.
The aim of such societies is to protect
the members from the exploitation of
lenders who charge high rates of
interest on loans. Such societies provide
loans to members out of the amounts
collected as capital and deposits from
the members and charge low rates
of interest.

(vi) Cooperative housing societies:
Cooperative housing societies are
established to help people with limited
income to construct houses at
reasonable costs. The members of these
societies consist of people who are
desirous of procuring residential
accommodation at lower costs. The aim
is to solve the housing problems of the
members by constructing houses and
giving the option of paying in
instalments. These societies construct
flats or provide plots to members on
which the members themselves can
construct the houses as per their choice.

2.6 JOINT STOCK COMPANY
A company is an association of persons
formed for carrying out business ac-
tivities and has a legal status indepen-
dent of its members. A company can
be described as an artificial person hav-
ing a separate legal entity, perpetual
succession and a common seal. The
company form of organisation is gov-
erned by The Companies Act, 2013. As
per section 2(20) of Act 2013, a com-
pany means company incorporated
under this Act or any other previous
company law.
The shareholders are the owners of
the company while the Board of
Directors is the chief managing body
elected by the shareholders. Usually,
the owners exercise an indirect control
over the business. The capital of the
company is divided into smaller parts
called ‘shares’ which can be transferred
freely from one shareholder to another
person (except in a private company).

The definition of a joint stock company
highlights the following features of a
company.

(i) Artificial person: A company is a
creation of law and exists independent
of its members. Like natural persons,
a company can own property, incur
debts, borrow money, enter into
contracts, sue and be sued but unlike
them it cannot breathe, eat, run, talk
and so on. It is, therefore, called an
artificial person.

(ii) Separate legal entity: From the
day of its incorporation, a company
acquires an identity, distinct from its

better quality seeds, fertilisers,
mar hinery and other mod ern
terhniaues for use. in the cultivayinn of
crops. nis hell's not orilv in ini01Uvi11g
the vield aud returns to the Garmens,
bat also solves the mob I elfis associated
with the tarrning on frag_ixiented land
(v) Credit cooperative societies:
Credit cooperative societies are
establiehed tar providing easy credit
01] '0
The memuers CoruLAE1ge Of DerSUits
lil it. of ja' s.
atm ot so.ntettes is TO
the me-rr•bers Lhe exrnoiLa Ion Of
lenders h I ea. •S O.
inirreston lerns- Suen son; •'ies
loans to Tne-rnners 01 It 01
the melilbers and enarge low rates
(vil Coooerative housivß socie es•
h01_1SLA'2 'lit. are
income to consrruct bnuseq at
reasonable cosis. Ilie n enu zrs uft_hese
destrnns or proclli J
at iower cos's-
m•A'PDers h. co lstructi:qg nnllses and
g] v Irig of paving in
znts Tbcse societies eoiL'Struct
wn10h the memr.ers nan
dr-nt of its members. A company can
be as an art person nav-
ing a separate legal ennty, per-pental
surres*lon and a common seal. "l'ne
conroanv form of orearusaLion is ge
bv Act. AS
per section 2€„0) of Act 2013,
pany means company incor ed
unaer this Act or any nr,slous
comp- nv law.
t i" e co. o,anv Y, •hi.? tho Board of
smtors iS tne h
the owners eye. an *1101rect conuol
'Ined inro lier parts
'Slia •eS Avanch Call be
rr,or te,-cept m a private company].
. 'eat ures
The. definition Of ioint stork romnany
the Of a
A cornr.any
creation 01 law ano exists irlueoerraent
Ot Like L)Ck-BOilS,
a cnmpany can own property, inrur
debrs, borrow mnnev, enrer jnro
cornracts, sue anel sued but uuln:ze
thnm it cannot breaihe, eat, rnn. talk
ana NO on. It is, mere-lore, caned an
day ot its tncm-j,aratinn, a company

ch-2.pmd

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