Management Process Guide

Management Process
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 1
UNIT – I BUSINESS ORGANIZATION
Business – Meaning – Business and Profession – Requirements of a Successful
Business – Organization – Meaning – Importance of Business Organization – Forms
of Business Organization – Sole Traders – Partnership – Joint Hindu Family Firm –
Joint Stock Companies – Cooperative Organizations – Public Utilities and Public
Enterprises.
BUSINESS – MEANING – BUSINESS AND PROFESSION
All human activities are directed towards satisfying human wants. Depending upon
the nature of wants, human activities may be categorized as economic and non-
economic. Economic activities are undertaken to create utilities. Non-economic
activities do not have economic matrices and these primarily tend to satisfy social,
religious or cultural sentimental requirements of human being.
BUSINESS
The business is an activity which is primarily pursued with the objective of earning
profit. A business activity involves production, exchange of goods and services to earn
profits or earn a living. The word „business‟ literally means a state of being busy.
Every person is engaged in some kind of occupation, a farmer works in the field, a
worker works in the factory, a clerk does his work in the office, a teacher teaches in
the class, a salesman is busy in selling the goods. The primary aim of all these persons
is to earn their livelihood while doing some work.
PROFESSION
Profession is an occupation involving the provision of personal services of a
specialized and expert nature. The service is based on professional education,
knowledge training, etc. The specialized service is provided for a professional fees
charged from the clients.
For instance, a doctor helps his patients through his expert knowledge of the science
of medicine and charges fees for the services. Minimum education qualifications are
prescribed for entry into a profession and every professional requires a high degree of
formal education and specialized training in a particular field. A person entering law
profession has to a acquire B.L. degree in order to become a lawyer.
The professionals are members of professional bodies of those lines and conduct their
activities according to the standards set by those bodies. A person entering law
profession has to obey the guidelines and regulations of Bar Council of India. A
Chartered Accountant is governed by the Indian Institute of Chartered Accountants.
EMPLOYMENT OR SERVICE
Employment or service involves working under a contract of employment for or under
someone known as employer in return for wages or salary. The person engaged under
employment works as per the directions of the employer. There is an employer-
employee relationship. A professional may also work under the contract of

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employment. A Chartered Accountant may be employed in a company. The service
may be of a government department or in a private organization.
Comparison between Business, Profession and Employment
 On the basis of Formation
o An entrepreneur establishes a business unit and starts production of goods and
services for satisfying human wants.
o A professional firm comes into existence when a professional who holds the
qualification to undertake that work joins that body.
o An employment is a contract to take up a job for somebody else. The agreement
of employment may be oral or written.
 On the basis of Type of Work
o A business deals in production and exchange of goods and services for the
benefit of the community.
o A professional provides a specialized service to the clients.
o An employment is an employee undertakes the work assigned to him by his
employer.
 On the basis of Qualification
o No educational or technical qualification is prescribed for setting up a business
unit.
o A professional is required to acquire as particular degree or qualification
prescribed by the professional body.
o There is no qualification binding for taking up a service, however, a well-
qualified person can get a better job.
 On the basis of Motive
o The primary aim of a business is to earn profits by providing goods and
services to the society.
o A professional has a service motto besides earning his fees.
o An employer has to take up the work as per the terms and conditions of his
employment or contract of service.
 On the basis Investment
o A business requires an investment as per the nature and scale of operations.
o A professional has to spend money on setting up his office or place of work.
o An employment does not require any investment at all.
 On the basis Membership
o A business does not require a membership compulsorily. It is optional.
o A professional has to be member of a body like Bar Council, Medical Council.
o An employment does not require any membership to take up a job.
 On the basis Risk
o There is a greater element of risk in business
o A professional has no risk and he only earns fees for his service.
o An employment does not hold any risk unless it is specified in the contract.
 On the basis Transfer of Interest
o An interest in business can be transferred to anybody else under laws.
o A professional cannot transfer risk to others.
o An employment cannot transfer risk to others.

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Features of Business
1) Entrepreneurship: There must be someone to take initiative for establishing a
business. The person who recognized the need for a product or service is
known as entrepreneur.
2) Economic Activities: Business includes only economic activities. All those
activities relating to the production and distribution of goods and services are
called economic activities.
3) Exchange of Goods and Services: A business must involve exchange of goods
and services. This exchange is undertaken with a profit motive.
4) Profit Motive: The profit motive is an important element of business. Any
activity undertaken without profit motive or price consideration is not a
business.
5) Risk and Uncertainty: The business involves a large element of risk and
uncertainty. The factors on which business depends are never certain, so the
business opportunities will also be uncertain.
6) Continuity of Transactions: In business, only those transactions are included
which have regularity and continuity. An isolated transaction will not be called
as business, even if the person earns profit from that deal.
7) Creation of Utility: Business creates various types of utilities in goods so that
consumers may use them. The utility may be form utility, place utility, time
utility, etc.
8) Organization: Every enterprise needs an organization for its successful working.
Various business activities are divided into departments, sections and jobs.
9) Financing: Business enterprises cannot move a step without finance. The
finances are required for providing fixed and working capital. A proper capital
structure is a must for the success of the business.
10)Consumer Satisfaction: The ultimate aim of business is to supply goods to the
consumers. If the consumers are satisfied then they will purchase the same
thing again, otherwise he will go in for an alternative commodity.
11)Satisfying Social Needs: The business is a socio-economic institution. It must
look to the public good. It is not only the public which needs business but
business also needs public support.
Objectives of Business
1
 Profit earning
 Production of goods and services
 Creating markets
 Technological improvements
Economic Objectives
2
 Welfare of employees
 Satisfaction of consumers
 Satisfaction of shareholders
 Utilizing resources properly
Human Objectives
3
 Supply of quality goods and services
 Cooperation with Governments
 Creation of employment
Social Objectives

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4
 Survival national efforts
 Growth entrepreneurs
 Earn recognition and prestige
 Development of personnel
Organic Objectives
5
 Helping national efforts
 Developing entrepreneurs
 Self-sufficiency and export development
National Objectives
REQUIREMENTS OF A SUCCESSFUL BUSINESS
A business has to coordinate various factors of production for achieving a given
objective. All factors are equally important for making the business a success. Various
departments should work in coordination with each other and organizational and
financial planning should be properly determined.
Modern business has become complex and complicated. The improvements in
technology and changing consumer preferences are creating more challenges for the
businessman. All aspects of an enterprise, i.e. production, financing, organization and
marketing should be properly arranged and coordinated to make a business successful.
The following are the pre-requisites of the success of business:
1. Setting Objectives: The setting up of business objectives is the first thing to be
done by the management. One must know as to what is to be done. Only after
deciding objectives, the ways and means will be determined to achieve the
objectives.
2. Proper Planning: After determining the objectives, the work should be planned
in all its perspectives. Planning involves forecasting and laying down the
course of action. In involves planning for both present and future.
3. Sound Organization: An effective organization system is essential for the
success of a business. The duties and responsibilities of all persons are defined
and they should know what they are to do.
4. Proper Financial Planning: The requirement of finance and its possible sources
should be decided at the time of starting the enterprise. The purpose of
financial planning is to make sure that adequate funds are raised at the
minimum of cost.
5. Location and Layout of Plant: One of the important decisions to be made by the
management is regarding the location of the plant. The plant should be located
at the place where all factors of production are available at lowest costs.
6. Marketing System: The marketing aspects of a business are more important than
even production. There is no use of producing a thing if it cannot be sold.
Marketing management is essential for earning profit.
7. Research: Change is the essence of business. Every day, new production
methods are found. Research and development should be given due place in the
business.

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8. Dynamic Leadership: The success of an enterprise will depend upon the
efficiency of its management. The task of a manager is to plan, organize,
coordinate and direct various activities for achieving business objectives.
Functions of Business
A business has to perform a number of functions in order to achieve its objectives.
There are some primary functions like production, marketing, etc. while other
functions such as finance, accounting, personnel, research and development are also
important for running the concern.
(1) Production Function: This involves transformation of raw materials into goods
and services and making them useful. A number of other inputs such as labor,
capital, and machinery will also be necessary to carry out this function. The
production function has become a specialized function in modern business.
(2) Marketing Function: Market is a process involving activities ranging from
getting goods from producers and sending them to ultimate consumers or users.
It involves all efforts to create customers for the products and provide
maximum satisfaction to them. The marketing mix has also to be decided.
(3) Personnel Function: It is concerned with the people at work and with the
relationship within an enterprise. It aims to bring together and develop into an
effective organization the men and women who make up an enterprise. The
enterprise should endeavor to make proper utilization of human resources.
(4) Finance Function: This function is very important for business activities. It
remains in focus of all activities. A business needs finance developing and
expanding an enterprise. The funds will have to be raised from various sources.
Scope of Business (or) Components of Business
Business activities may be divided into five categories as follows:
1. Activities related to production of goods;
2. Activities related to the rendering of services;
3. Activities related to distribution of goods;
4. Activities rendering distribution assistance;
5. Those activities which render financial assistance
Broadly, business activities may be divided into two main divisions: (a) Industry and
(b) Commerce.
INDUSTRY
Industry is concerned with the making or manufacturing of goods. It is that constituent
of production which is involved in changing the form of a good at any stage from raw
material to the finished product, e.g. weaving woolen yarn into cloth. Thus, industry
imparts „form utility to goods‟.
The goods produced may either be used by other enterprises for further production or
as final production by consumers. When goods are used by other enterprises for
further production, they are known as producers‟ goods. The production of plant,
machinery equipment etc. are examples of producers‟ goods.

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When goods are finally used by consumers, they are known as consumers‟ goods. The
examples of such goods are cloth, bread, groceries, drugs, etc. An enterprise may
produce materials which will be further processed by yet another concern for
converting them into finished goods. These goods are known as intermediate goods.
The examples of this category are plastics, rubber, aluminum, etc.
Classification of Industry
1. Primary and Genetic Industry: Genetic industry is related to the reproducing and
multiplying of certain species of animals and plants with the object of earning
profit from their sale. Nurseries, cattle breeding, fish hatcheries, poultry farms
are all covered under genetic industry.
2. Extractive Industry: The extractive industry is engaged in raising some form of
wealth from the soil, climate, air, water or from beneath the surface of the
earth. Mining, fishing and hunting, agriculture and forestry are covered under
extractive industry.
3. Construction Industry: This industry is engaged in the creation if infrastructure
for the smooth development of the economy. It is concerned with the
construction, erection or fabrication of products. These industries are engaged
in the construction of building, roads, dams, bridges and canals.
4. Manufacturing Industry: This industry is engaged in the conversion of raw
materials, into semi-finished or finished goods. This creates form utility in
goods by making them suitable for human uses. Manufacturing industry may
be classified as (a) Analytical Industry, (b) Processing Industry, and (c)
Synthetic Industry.
COMMERCE
Commerce is concerned with the exchange of goods. It includes all those activities
which are related to the transfer of goods from the place of production to the ultimate
consumers. Generally, commerce and trade are taken as synonymous words. Whereas
trade involves buying and selling of goods; commerce includes trade and aids to trade.
Services of various agencies which facilitate transportation of goods, finance various
activities, provide storing facilities, help in publishing goods and undertake various
risks, are not only helpful but are necessary for the growth of commerce.
Evelyn Thomas says, “Commerce occupations deal with the buying and selling of
goods, the exchange of commodities and the distribution of finished products”.
Nature of Commerce
In traditional sense commerce is associated with trade or aids to trade. Commerce, on
the other hand is a part of business. It has the following characteristics:
1. It deals with exchange of goods and services.
2. Only economic activities are a part of commerce.
3. Commerce is undertaken with a profit motive.

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4. There is always a risk and uncertainty in commerce.
5. Commerce creates various utility in goods.
6. There should be continuity in transactions.
Classification of Commerce
Commerce can be classified into two categories:
(1) Trade and (2) Aids to trade
Trade
Trade is the process of taking goods from the sources of production or place of
procurement to the consumer. The producers cannot come into direct contract with the
consumers, so there should be some channel which will facilitate the transmission of
goods from the producers to the consumers. The channel which helps the exchange of
goods is called trade.
Trade may be classified as (a) Internal trade, (b) External trade, (c) Wholesale trade
and (d) Retail trade.
Aids to Trade
In the course of exchange of goods various aids are required to complete the process.
The aids are required regarding transport of goods from the producers to the
consumers, financing the trade transaction, exchange activities, cover for the loss of
goods in transit and arranging the storing of goods. The hindrances in the way of
smooth trade may be of place, person, finance, time, knowledge and risk. All these
facilities are needed with the help of various agencies known as „Aids to trade‟.
Distinction between Trade, Commerce and Industry
Basis of
Difference
Trade Commerce Industry
Meaning
It is related to the
purchase and sale of
goods.
It deals with all those
activities which deal
with the taking of
goods from producers
to consumers.
It deals with the
conversion of raw
materials into finished
goods are covered in
industry.
Capital
The requirements of
capital are more in
trade as compared to
commerce.
Commerce requires
less capital
Capital needs are high
for industry because it
requires purchase of
huge raw materials.
Scope
Trade deals only with
purchase and sale of
goods.
Commerce includes
trading and other
servicing activities.
Industry deals with
those activities which
related to primary
manufacturing.
Risk
It involves a greater
amount of risk of fall
in prices or in demand.
The risk involved in
commerce is
comparatively less.
Industry involves
greater amount of risk
as compared to others.

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Business
Industry Commerce
Primary Extractive Construction Manufacturing
Or Industry Industry Industry
Genetic
Industry
Analytical Processing Synthetic
Industry Industry Industry
Trade Aids to Trade
Home Foreign Wholesale Retail
Trade Trade Trade Trade
Imports Exports
(a) Local Trade
(b) Provincial or State Trade
(c) Inter State Trade
Transport Distribution Banking Warehousing Advertisement Insurance
and
Salesmanship
Qualities of Successful Business
A number of factors have been considered essential before a concern can be
successfully launched. In addition to all other factors, there is one more important
factor i.e. entrepreneur. The quality and type of leadership available to a concern
directly affect its working. The entrepreneur plans and executes various business
policies. A properly managed concerned is generally a reflection of leadership
qualities of the business. A properly managed concern is generally a reflection of
leadership qualities of the business.
1. Knowledge of Business: The business should have a thorough understanding of his
business. He should be clear about the aims and objectives of the organization.
The knowledge of all aspects such as trade, finance, marketing, mercantile laws,
etc. are essential to tackle complex business problems.
2. Impressive Personality: A pleasing personality is always an asset. A business man
should be able to impress people and should be able to get all round cooperation
from them. Because people avoid to deal with a man with bad manners and short
temper.

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3. Hard Working: There is no substitute for hard work. Success and hard work go
together. He should be dedicated to his work. His hard work will motivate his
employees to work with the same zeal.
4. Cooperative: A businessman has to deal with many complex problems. He has to
seek the cooperation of a large number of persons in solving his problems. The
dependence on others is a necessity in the present day business world.
5. Courageous: In business, sometimes there are conflicting demands from different
sides. The consumers, employees and government want the businessman to be
considerate to their demands. He has to reconcile various interests.
6. Initiative and Decision-making Power: A businessman has to take difficult
decisions in the course of business. He should have the ability to decide things at
the proper time. He should take initiative in tackling various problems and should
take them as a challenge.
7. Cordial Relations with Employees and Customers: Customers and employees are an
integral part of the business. He should tactfully deal with their problems.
Customer satisfaction is essential to stay in business. Cordial relation with them
helps him to build up goodwill for the business.
8. Honesty: This is one of the essential qualities of a businessman. He should be
honest in his dealings with others. Honest with customers will make him able to
earn good reputation for his products.
9. Disciplinarian: Discipline is a significant trait in the personality of successful
businessman. He should give a lead to his employees. He should follow various
rules and regulations strictly. No organization can work without discipline.
10.Adaptability: A businessman should be able to adjust according to the situations.
There may be a frequent change of situations. He is expected to face a few
challenges with courage. He should not lose heart and should be able to adapt to
new environments.
ORGANIZATION
Human beings suffer from physical, social and other limitations. Therefore, they
cooperate together to achieve their personal goals. They form groups of various types,
e.g. family, sports team, army, etc. A business organization is also a group. Group
activity can be productive only when there is some kind of organization.
Meaning of Organization
The term organization is used in management literature in two different sense:
(1) Organization Structure, and (2) Organizing Process
Organization as Structure (Organizational Design)
The word organization originated from the word „organism‟ which implies a structure
of interrelated parts. It is systematic integration of interdependent parts to form united
whole. It is a structure of relationships among various positions or jobs.
This structure or entity comprises horizontal and vertical authority relationships. It is a
system of co-operative activities of two or more persons for the attainment of a

Management Process
common purpose. It consists of those aspects of behavior that are relatively stable and
change slowly. It is the framework through which people work together for the
accomplishment of desired results.
According to Theo Haimann, “Organization is the structural framework within which
various efforts are coordinated and related to each other”. Organization structure is
designed to clarify who is to do what and who is responsible for what results. For
most of our lives, we are members of some organization, e.g. school, college, etc.
The components of organization structure include men, materials, machines, money,
methods, functions, authority and responsibility. Each organization structure is
characterized by (a) a distinct purpose to accomplish, (b) composed to people, and
(c) formal relationships among its members. An organization means two or more
people who work together in a structured way to achieve specific goals.
Organization as Process
The term organization is also used as a function of management or as a process carried
out for arranging the tasks into manageable units and defining the formal relationships
among the people working on different tasks. It involves putting things and persons in
their proper places and in relation to each other. It is the process of structuring or
arranging the different parts e.g. people, work, technology, etc.
In the words of Louis Allen, “Organization is the process or identifying and grouping
the work to be performed, defining and delegating responsibility and authority, and
establishing relationship for the purpose of enabling people to work most effectively
together in accomplishing objectives”.
Koontz and O’Donnell have defined organizing as “The group of activities necessary
to attain objectives, the assigning of each grouping to managers with authority to
supervise and the provision for coordination horizontally and vertically in the
enterprise structure”.
Moreover, organizing is viewed as a continuing process wherein relationships among
people are constantly reviewed and adjusted depending on the requirement of the
situation.
IMPORTANCE OF BUSINESS ORGANIZATION
Purpose and Importance of Organization
Sound organization is essential for the continuity and success of every enterprise. It is
indeed the backbone of foundation of effective management. The main advantages of
sound organization are given below:
1. Aid to Management: Organization is the mechanism through which management
coordinates and controls the business. It serves as an effective instrument for
realizing the objective of the enterprise. If the organization is ill-designed,
management is rendered difficult and ineffective.

Management Process
2. Facilitates Growth: A well-designed and balanced organization provides for
systematic division of work and permits necessary change. It is the framework
within which an organization grows. Therefore, it enables the enterprise to
enter new lines of business.
3. Ensures Optimum Use of Resources: A good organizational set-up permits
adoption of new technology. It helps to avoid duplication of work, overlapping
efforts and other types of waste. As a result it facilities the best possible
utilization of human and physical resources.
4. Stimulates Creativity: Sound organization encourages creative thinking and
initiative on the part of employees. Delegation of authority provides sufficient
freedom to lower level executives for exercising discretion and judgment.
5. Facilitates Continuity: A well-designed organization provides for training and
development of employees at all levels. It provides opportunities for leadership
and helps in ensuring the stability of the enterprise through executive
development.
6. Helps in Coordination: Organization is an important means of integrating
individuals‟ efforts. It helps in putting balanced emphasis on different
departments and divisions of the enterprise. It makes for cooperation and
harmony of action.
Steps in the Process of Organizing
The main steps involved in the process of organizing are as follows:
(a) Determining the Activities to be Performed: The first stop in the organizing
process is to identify the activities required for the accomplishment of
organizational objectives. For example, in a manufacturing concern, the
activities may be divided into purchase, production, sales, storage, advertising,
correspondence, accounting, etc.
(b) Grouping the Activities: Once the activities are identified they are grouped into
departments and divisions on the basis of their similarity and relatedness.
Identical or closely related activities are grouped together in one department.
(c) Assignment of Duties: After grouping activities into manageable limits, each
group of activities is assigned to a position most suited for it. While assigning
duties specialization, qualifications, experience and aptitude of people should
be duly considered. Right man should be selected for each job.
(d) Delegation of Authority: Appropriate amount of authority is delegated to each
individual for enabling him to perform the duties assigned. For example, the
purchase manager is given the authority to purchase goods and pay for them.
(e) Defining Authority Relationships: After granting authority, relationships between
different members of the organization are created. Such organizational
relationships are known as superior-subordinate relationships.
Thus, the process of organizing consists of defining and enumeration individual tasks,
grouping and classification of tasks, the delegation of authority for their
accomplishment and the specification of authority relationships between managers.

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Principles of Organization – (Features of a Good Organization)
The following principles are helpful in developing a sound and efficient organization
structure.
1. Utility of Objectives: The type of organization structure depends upon the
objectives of the enterprise. Therefore, the objectives must be stated in clear
and concise terms.
2. Division of Work: The total work should be divided in such a way that as far as
possible every individual performs a single function. This is also called the
principle of specialization.
3. Span of Control: No executive in the organization should be required to
supervise more subordinates than he can effectively manage. At the same time
number of levels of authority should be as few as possible so as to speed up
decision-making and communication.
4. Scalar Principle: The line of authority (called the chain of command) form the
top executive to the lowest level executive should be clear and unbroken. Every
individual should know whom he reports and who reports to him.
5. Principle of Exception: Every manager should take routine decisions himself.
Only exceptional matters beyond the scope of authority should be referred to
higher authorities. This is also known as authority level principle.
6. Unity of Command: Each individual should receive orders from and be
accountable to only one boss. Dual subordination should be avoided as it
undermines authority, creates disorder and confusion and leads to indiscipline.
7. Functional Definition: The authority and responsibility of every individual
should be clearly defined. The relationships between different jobs should be
clearly specified.
8. Unity of Direction: There must be one head and one plan for a group of
activities directed towards the same objectives. This is necessary to ensure
completion of tasks and coordination of activities.
9. Delegation: Authority delegated to an individual should be adequate to enable
him to accomplish the results expected to him. Authority should be delegated
to the lowest possible level consistent with necessary control so that decision is
made as near the scene of action as possible.
10.Flexibility: The organization structure should be adaptable to changing
circumstances. There should be scope for expansion without disrupting the
basic design.
Formal Organization and Informal Organization
Formal Organization
It refers to the planned structure of jobs and position with clearly defined objectives
and functions. It is deliberately or consciously created by top management for the
accomplishment of enterprise objectives. It is made up of official relationships and
channels of communication.
Formal structure is governed by established rules, regulations and procedures.
According to Chester Barnard, “An organization is formal when the activities of two
or more persons are consciously coordinated towards a common objective”.

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Formal organization tends to be stable and predictable. Therefore, it is represented in
the organization chart and manual of the enterprise. It provides a systematic
framework for the performance of jobs.
Formal organization can be mechanistic or organic. A mechanistic structure is a rigid
and tightly controlled structure. On the other hand, organic structure is highly
adaptive and flexible.
Difference between Mechanistic Structure and Organic Structure
Mechanistic Structure Organic Structure
1. High degree of specialization
2. Rigid departmentalization
3. Narrow spans of control
4. High degree of formalization
5. Limited information network
6. Centralization, little participation
in decision-making.
1. Low degree of specialization
2. Cross functional teams
3. Wide spans of control
4. Low degree of formalization
5. Wide information network
6. Decentralization, wide
participation in decision-making
Need for Formal Organization
(a) To Reduce Confusion and Uncertainty: By clearly spelling out each person‟s
authority and responsibility, formal organization helps to avoid overlapping of
efforts. It helps to ensure that work that ought to be done is performed.
(b) To Provide Specialization: Formal organization permits employees to
concentrate on their respective tasks. Every person is assigned a specified set of
duties and has the chance of becoming a specialist in it.
(c) To Provide Stability of the Firm: Through formal organization the firm can keep
operating in spite of changes in workforce. Continuity of operations in the face
of changes within and outside the firm becomes possible.
(d) To Help in Evaluating Employee Performance: Formalized activities and detailed
specification of duties assist in finding employee performance. Every employee
can have an idea whether he is performing what he is expected to do.
(e) To Provide Clear Paths for Promotion: The creation of a chain of command from
top to bottom indicates venues for promotion and the qualifications needed to
hold a higher level job.
Informal Organization
It arises from the personal and social relations of people. It is not formally designed
but develops spontaneously out of interaction between persons. It is influenced by
personal attitudes, likes and dislikes. Informal relations cut across formal channels.
For example, a superior may take advice from the sales manager instead of from the
production manager who is his boss. Such types of inter-personal relationships are not
predictable and cannot, therefore, be shown on the organizational chart.

Management Process
ACCOUNTABILITY
POLICIES
STATUS
AUTHORITY
According to Barnard, “Informal organization is joint personal activity without
conscious common purpose though contributing to joint results”. People working
together in an enterprise frequently come into contact and develop personal or social
relations outside the formal structure.
Informal organization refers to relationships that develop spontaneously,
supplementing or modifying the formal organization established by management.
Informal organizations emerge whenever people come together and interact regularly.
Members of informal organizations tend to subordinate some of their individual needs
to those of the group as a whole. In tune, the informal organization supports and
protects them.
Informal organization may, however, operate sometimes to the detriment of
organizational goals. For example, the informal work group may slow down or
sabotage production. Informal group may resist change necessary for improving the
efficiency of the organization. Informal group may also spread rumors which are
harmful for efficient functioning of the formal organization.
An informal organization exists in every enterprise and at all levels of management
hierarchy. Manager should not attempt to abolish informal relationships. Both formal
and informal organizations are essential for group activity just as two blades are
essential to make a pair of scissors workable.
FORMAL ORGANIZATION FORMAL ORGANIZATION
JOB UNIT
RESPONSIBILITY
ROLE PRIMARY GROUP
POWER
A – ACTIVITIES I – INTERACTIONS S – SENTIMENTS
Figure: Formal Organization and Informal Organization
A
I S
A
I S

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Merits and Demerits of Informal Organization
Merits Demerits
1. It fulfills the social needs of
employees.
2. It facilitates quick and better
communication of feelings.
3. It provides scope for cooperation
at the workplace.
4. It creates an informal atmosphere
at the workplace.
1. It reduces the influence of
managerial authority
2. It may create rumors.
3. It may create casual approach on
the part of employees.
4. It may undermine the superior‟s
authority.
Distinction between Formal and Informal Organization
S.No. Formal Organization Informal Organization
1 It is created deliberately and is
consciously planned.
It is natural and arises spontaneously.
2 It is based on delegation of authority
and may grow to immense size.
It arises on account of social
interaction of people and tends to
remain small.
3 It is deliberately impersonal and the
emphasis is on authority and
functions.
It is personal with emphasis on people
and their relationship.
4 Rules, duties and responsibility are
written and clearly defined.
It has unwritten rules and traditions.
5 It is shown on the organization chart. It has no place in the formal chart.
6 It provides for division of labor and
has a definite structure.
It is structure-less and develops out of
social contacts.
7 Formal authority is attached to a
position.
Informal authority attaches to a
person.
8 Formal authority flows downwards. Informal authority flows upwards or
horizontally.
9 Formal organization is created to
meet organizational goals.
Informal organization arises from
man‟s quest for social satisfaction.
10 It is permanent and stable. It is relatively fickle and unstable.
FORMS OF BUSINESS ORGANIZATION
A business undertaking is an institutional arrangement to conduct any type of business
activity. The undertaking may be run by one person or association of persons. It may
be based on formal or informal agreement among persons who undertake to run the
concern.
According to Wheeler, a business undertaking is “a concern, company or enterprise
which buys and sells, is owned by one person or a group of persons and is managed
under a specific set of operating policies”. The persons join together and pool their
resources and conduct the activities of the undertaking for the benefit of all.

Management Process
Characteristics of Business Organization
1. Exchange of Goods and Services: A business undertaking deals in exchange of
goods and services. The goods to be exchanged may either be produced or
procured from other sources.
2. Dealing in Goods and Services: All business undertakings deal in goods and
services. The goods may be consumers‟ goods or producers‟ goods. The
consumers‟ goods are those which are purchased by them for consumption or
day-to-day use.
3. Profit Motive: All business undertakings are run to earn profit. An undertaking
started for social service will not be called business undertaking because the
aim is not to earn profit.
4. Continuity of Transactions: The transactions in a business undertaking are
continuous or regular. They are engaged in a series of successive transactions
over time and space.
5. Risk and Uncertainty: Every business undertaking is exposed to risks and
uncertainties. Business is influenced by future events and future is always
uncertain. There are chances for fluctuations, demand changes, consumer
likings and disliking, etc.
Forms of Business Undertakings
Private Undertakings Public Undertakings Joint Sector Undertakings
Sole proprietorship Departmental Public Government
Partnership organization corporations companies
Joint Hindu Family
Business
Joint Stock Company
Cooperative Societies
Forms of Business Undertakings
A number of forms of organizations exist to suit requirements of business
undertakings. There are three types of business undertakings:
1. Private Undertakings
2. Public Undertakings
3. Joint Sector Undertakings
Private Undertakings
These undertakings have the following types of organizations.
(i) Sole Proprietorship (or) Sole Traders
(ii) Partnership
(iii) Joint Hindu Family Business
(iv) Joint Stock Company
(v) Cooperative Societies (or) Cooperative Organizations

Management Process
(i) Sole Proprietorship (or) Sole Traders: The organization is as old as civilization. In
this form of organization a single individual promotes and controls the business
undertakings and bears the whole risk himself. He supplies the entire capital for
starting and running the business.
(ii) Partnership: A partnership in an association of two or more persons to carry on, as
co-owners, a business and to share its profits and losses. The partnership may come
into existence either as a result of the expansion of the trading concern. This form of
organization grew essentially out of the failures and limitations of sole proprietorship.
(iii) Joint Hindu Family Business: This form of organization is prevalent only in India
and that too among Hindus as the name is indicative. The business of Joint Hindu
Family is controlled under the Hindu Law instead of Partnership Act. The
membership in this form can be acquired only by birth or by marriage to male person
who is already a member of Joint Hindu Family. All the offices of the undertaking are
controlled by a person known as Karta or Manager.
(iv) Joint Stock Company: This form of organization was first started in Italy in the 13th
century. A company is an association of many persons who contribute money or
money‟s worth to a common stock and employs it in some trade or business and who
share the profit and loss arising there from. A company is an artificial person created
by law with corporate personality, limited liability, perpetual succession and
transferable shares. These undertakings are managed by elected representatives or
shareholders. Companies may be public or private and registered by share or by
guarantee.
(v) Cooperative Societies (or) Cooperative Organizations: Cooperative societies are
voluntary associations started with the aim of service to members. The aim of
societies is not to increase profits as in other undertakings but service to members is
their important goal. It is a joint enterprise of those who are not financially strong and
cannot stand on their legs. So they come together not with a view to get profits but to
overcome disability arising out of the want of adequate financial resources. Like joint
stock companies, societies also enjoy the benefits of corporate personally, limited
liability and perpetual succession. The societies are registered under the Cooperative
Societies Act, 1912 and have more governmental control than other organizations in
private sector.
Public Undertakings
Business undertakings owned or operated by public authorities are known as public or
state undertakings. In these undertakings, either whole or most of the investment is
done by the government. The aim of these undertakings is to provide goods and
services to the public at a reasonable rate though profit earning is not entirely
excluded. The public undertakings have the following forms of organization:
(1) Departmental Organization
(2) Public Corporations
(3) Government Companies

Management Process
(1) Departmental Organization: Departmental form of organization for managing state
enterprises is the oldest form of organization. In this form, the enterprise works as
a part of government and management is the hands of civil servants. The Secretary
of the Department acts as Chief Executive under the control and direction of
Minter. The Minister accountable to Parliament for the working of the department.
For example, Indian Railway, Post and Telegraph, Radio and Television are
working as government departments.
(2) Public Corporations: Public corporations are created by a special statute of a State
or Central Government. A legislative act is passed by defining the sphere of work
and mode of management or the undertakings. It is a separate legal entity created
for special purpose. In India, the RBI, Bank of India, Industrial Finance
Corporation is some of the corporations created by special act of parliament.
(3) Government Companies: The Company owned by Central and / or State
Government is called a Government Company. Either whole of the capital or
majority of the shares are owned by the government. Government companies are
registered with the government in both the cases. Government companies enjoy
some privileges which are not available to non-government companies. No special
statute is required to form government companies.
Joint Sector Undertakings
Joint sector is a form of partnership between the private sector and the Government
where management will generally be in the hands of private sector and overall
supervision will lie with the Board of Directors giving adequate representation to
Government representatives.
According to the guidelines of the Central Government, the capital is to be shared as
to State Government 26%, Private Enterprise 25%, and Investing Public 49%. No
single private party shall be allowed to hold more than 25% of the paid-up capital
without the permission of the Central Government. Joint Sector Undertakings ensure
the use of development technology and resources of government and private sector.
Factors Influencing the Choice of Suitable Form of Organization
(a) Capital Requirement: The need for capital will depend upon the nature of business
and scale of operators. A manufacturing concern may require more capital as
compared to a retail shop. On the other hand, if the scale of operations is large,
then capital requirements will also be more.
(b) Liability: In sole-trade and partnership business, the liability of owners is unlimited
– their liabilities are limited to the capital they have invested but their private
property can also be assigned to meet business obligations. In case of companies
the liability of shareholders is limited to the value of shares they have purchased.
The shareholders can be required to pay only the unpaid amount of shares they are
having. The private property of shareholders is not liable for meeting business
losses.

Management Process
(c) Managerial Needs: Managerial and administrative requirements also affect the
decision about form of organization. When the concern is small and it caters to
local needs only then one person will be enough to manage the business. Sole-
proprietorship form of organization will be suitable for such a business. If the
business caters to more areas, then more persons will be needed to look after
various business activities. Partnership form of organization will be suitable for
such enterprises.
(d) Continuity: This is another factor influencing a decision about the form of
ownership. If the concern is stable and there is no fear of discontinuity, it will
attract more investment. The trained and qualified persons will like to join the
concern. A sole trade business may be closed after the death of its owner. A
partnership firm too does not have a permanent life. It may be dissolved for a
number of reasons. Only a company form of organization will be unaffected by the
personal life of its shareholders.
(e) Tax Liability: A joint stock company has more tax liability as compared to sole
trade and partnership business. A joint stock company faces double taxation
liability. A company is taxed as an individual first and the profit distributed to
shareholders are again liable for tax as income of the recipients. A partnership
concern and sole trade business are not separately taxed. A small scale concern
will be able to avoid higher tax liability.
(f) Government Regulations: While deciding about the form of organization, various
kinds of rules and regulations affecting that form will also be considered. A
number of formalities are required to be compiled with while incorporating a
company. A company is expected to provide a large number of information to the
government every year.
(g) Nature of Business Activities: The nature of business is another important factor
affecting a decision about the form of organization. If a concern deals with local
market, a seasonal product or perishable goods, then sole trade business will be
suitable. The capital requirements of such concern will be less and scale of
operations will be low.
(h) Relationship between Ownership and Management: There is a direct relationship
between ownership and management in sole-trade concerns and partnership firms.
In company form of organization, management and ownership are in two different
hands. The owners (shareholders) are spread all over the country and they do not
take any active interest in the working of the enterprise. The management is in the
hands of few persons known as Board of Directors.
(i) Ease in Formation: The nature and extent of formalities required at the time of
establishing a concern also influence a decision about the form of organization. A
joint stock company requires the services of qualified persons for getting it
registered. It involves a lot of money at the time of incorporation too. On the other
hand, a sole trade business can be started at any time without going through
various formalities.
(j) Stability: Another important factor that influences the choice of a suitable form of
organization is the continuity and stability of its operations. The discontinuation of
business causes wastages of resources and inconvenience to the consumers. This
also causes a social loss.

Management Process
SOLE TRADERS (SOLE PROPRIETORSHIP)
Sole-trade is the oldest and most commonly used form of business organization. It is
as old as civilization. Historically, it appears that business first started with this form
of organization. With the development of science and technology the needs of the
business also increased and new forms of organizations developed.
This organization is also known as sole proprietorship, individual-proprietorship,
and single-entrepreneurship. In sole-trade organization, an individual is at the helm of
affairs. He makes all the investment, shares all risk, takes all profits, manages and
controls the business himself.
A sole trader mainly depends upon his own resources, so the business is generally on a
small-scale basis. The business is normally run with the help of family members but
he may employ persons to look after the day-to-day activities of the business. So far as
his liability is concerned, it is unlimited. The creditors are entitled to have claim even
on his private property.
In some instances, a person may be expected to take a license from competent
authorities beforehand. Normally, no other legal formality is essential for starting a
sole-trade business as in the case of a company or a cooperative. Any person can start
or wind up a sole-trade business anytime. This type of business is one man show and
the capacities of that person may certainly be limited. He may not able to deal with
every situation himself. Since the liability is unlimited and is to fall on one person, he
should have a cautious approach.
Definitions of Sole-Proprietorship
According to L H Haney,” The individual entrepreneurship is the form of business
organization on the head of which stands an individual as the one who is responsible,
who directs its operations, who alone runs the risk of failure”.
According to S R Davar, “The sole-trader is a person who carries on business of his
own. He brings in his own capital and uses all his labor. He also gets himself assisted
by others to who he pays a salary by a way of remuneration”.
A sole-trader is a person who sets up the business with his own resources, manages
the business himself by employing persons for his help and alone bears all the gains
and risks of the business.
Characteristics of Sole Proprietorship
1. Individual Initiative: This business is start by the initiative of a single person.
He prepares the blue prints of the venture and arranges various factors of
production.
2. Unlimited Liability: In sole-trade business liability is unlimited. The proprietor is
responsible for all losses arising from the business.

Management Process
3. Management and Control: The proprietor manages the whole business himself.
He prepares various plans and executes them under his own supervision and he
has ultimate control over it.
4. Motivation: the proprietor takes all profits and bears losses, if any. There is a
direct relationship between efforts and reward. He is motivated himself to
expand his business activities.
5. Secrecy: All important decisions are taken by the owner himself. He keeps all
the business secrets only to himself. By retaining business secrets he avoids
competitors entering the business.
6. Proprietor and Proprietorship are one: Legally, the sole trader and his business
are separate entities. Loss in his business is his loss. Liabilities of the business
are his liabilities.
7. Owners and Business Exist Together: In sole-trade business there is no separate
existence of the business with the owner. The business and owner exist
together. The business is dissolved if the owner dies.
8. Limited Area of Operations: A sole-trade business has generally a limited area of
operations, the reason being the limited resources and managerial abilities of
the sole-trader.
Advantages of Sole-Proprietorship
 Easy in formation
 Better control
 Flexibility in operations
 Retention of business secrets
 Easy to raise finance
 Direct motivation
 Promptness in decision-making
 Direct accessibility to consumers
 Inexpensive management
 No legal restriction
 Socially desirable
 Self-employment
Disadvantages of Sole-Proprietorship
 Limited resources
 Limited managerial ability
 Unlimited liability
 Uncertain continuity
 Limited scope of employees
 No large scale economies
 More risk involved

Management Process
PARTNERSHIP
A partnership is an association of two or more persons to carry on, as co-owners, a
business and to share its profits and losses. The partnership may come into existence
either as a result, of the expansion of the sole-trading concern by means of an
agreement between two or more persons desirous of forming a partnership.
When the business expands in size, the proprietor finds it difficult to manage the
business and is forced to take more outsiders who will not only provide additional
capital but also assist him in managing the business on sound lines.
Sometimes, the nature of business demands large amount of capital, effective
supervision and greater specialization. It is the ideal form of organization for the
enterprise requiring moderate amount of capital and diversified managerial talent.
This form is not suitable for a business requiring big capital and expert managerial
personnel.
Definitions of Partnership
According to John A Shubin, “Two or more individuals may form a partnership by
making a written or oral agreement that they will jointly assume full responsibility for
the conduct of business”.
According to L H Haney, “The relationship between persons who agree to carry on a
business in common with a view to private gain”.
The bringing together of financial resources and services by persons for carrying on
some work has been called partnership as per the definitions. One person may
contribute money, the other may provide service, are meant to carry on an enterprise.
According to Section 4 of Partnership Act, 1932, “The relation between persons who
have agreed to share profits of a business carried on by all or any one of them acting
for all”.
Characteristics of Partnership
1. Association of Two or More Persons: In partnership, there must be at least two
persons. Partnership is the outcome of contract, so there must be two or more
persons. Minors cannot form a partnership firm as they are incompetent to
enter into a contract.
According to Section 11 of Contract Act, there is no maximum limit on
partners in Partnership Act, but according to Companies Act, the maximum
number of partners engaged in a banking business cannot exceed ten and
twenty in other business.
2. Contractual Relation: The persons joining the partnership enter into a contract
for running the business and their relationship arising out of this contract not

Management Process
from status. The contract may be oral or written but in practice written
agreement is made because it helps to settle the disputes if they arise later on.
3. Earning of Profits: The purpose of the business should be to make profits and
distribute them among partners. If a work is done for charity purposes or to
serve the society it will not be called partnership.
4. Implied Authority: This is an implied authority that any partner can act on behalf
of the firm. The business will be bound by the acts of partners.
5. Unlimited Liability: As this case of a sole-trade business liability of the partners
of a firm is unlimited. The private property of the partners can be taken for the
payment of liabilities of the firm to the third parties. The partners are liable
individually and collectively.
6. Principal and Agent Relationship: In partnership the relationship of Principal and
Agent exists. It is not necessary that all partners should work in the business.
Any one or more partners can act on behalf of other partners. Each partner is an
agent of the firm and his activities bind the firm.
7. Restriction on Transfer of Shares: No partner can sell or transfer his share to
anybody else without the consent of the other partner. In case any partner does
not want to continue in the partnership he can give a notice for dissolution of
the firm.
8. Partners and Partnership are one: A partnership firm has no separate entity from
the partners. A firm is only a name to the collective name of partners. No firm
can exist without partners. Partners have implied authority to bind the firm for
their acts.
9. Continuity: There is no true limit for the continuity of a partnership firm. It goes
on only up to the time the partners want it to go. Any misunderstanding among
partners, death or insolvency of a partner may dissolve the partnership.
10.Capital Contribution: The partners contribute to the capital of the firm. It is not
necessary to have capital in profit sharing ratio. A partner can be admitted to
the firm even without contributing to the capital. It is not essential that all
partners must contribute to the firm‟s capital.
Kinds of Partners
There are different kinds of partners and they may be classified as under:
1. Active Partner
2. Sleeping or Dormant Partner
3. Nominal Partner
4. Partner in Profits
5. Partner by Estoppel or Holding Out
6. Secret Partner
7. Sub-Partner
8. Minor as a Partner

Management Process
Figure: Kinds of Partners
1. Active Partner: An active partner is one who takes active part in the day-to-day
working of the business. He may act in different capacities such as manager,
organizer, adviser and controller of all the affairs of the firm. He may also be
called as working partner.
2. Sleeping or Dormant Partner: A sleeping partner is one who contributes capital,
shares profits and contributes to the losses of the business but does not take part in
the working of the concern. A person may have money to invest but he may not be
able to devote time for the business: such a person may become a sleeping partner.
3. Nominal Partner: A nominal partner is one who lends his name to the firm. He
does not contribute any capital nor he share profits of the business. He is known as
a partner to the third parties. A nominal partner is liable to those third parties who
give credit to the firm on the assumption of that person being a partner in the firm.
4. Partner in Profits: A person may become a partner for sharing the profits only. He
contributes capital and is also liable to third parties like other partners. He is not
allowed to take part in the management of the business. Such partners are
associated for their money and goodwill.
5. Partner by Estoppel or Holding Out: When a person is not a partner but poses
himself as a partner, either by words or in writing or by his acts. He is called
partner by estoppels or by holding out. A partner by estoppels or by holding out
shall be liable to outsiders who deal with the firm on the presumption of that
person being partner in the business.
6. Secret Partner: The position of a secret partner lies between active and sleeping
partner. His membership of the firm is kept secret from outsides. His liability is
unlimited and he is liable for the losses of the business. He can take part in the
working of the business.
7. Sub-Partner: A partner may associate anybody else in his share in the firm. He
gives a part of his share to the stranger. The relationship is not between the
Active Partner
Kinds of Partner
Partner by Estoppel
Active Partner
Active Partner
Active Partner
Active Partner
Active Partner
Active Partner

Management Process
sub-partner and the firm but between him and the partner. The sub-partner is a
non-entity of the partnership. He is not liable for the debts of the firm.
8. Minor as a Partner: A minor is a person who has not yet attained the age of
majority. A minor cannot enter into a contract according to the Indian Contract Act
because a contract by a minor is void ab initio. However, a minor may be admitted
to the benefits of an existing partnership with the consent of all partners. The
minor is not personally liable for liabilities of the firm, but his share in the
partnership property and profits of the firm will be liable for debts of the firm.
Registration of Partnership
The registration of partnership is not compulsory under Indian Partnership Act. In
England, registration is, however, compulsory. In India, there are certain privileges
which are not allowed to those firms which are registered. Unregistered firms are
prejudiced in certain matters in comparison to registered firms. Though directly the
registration of firms is not compulsory but indirectly it is so. To avail of certain
advantages under law the firm must be registered with the Registrar of Firms of the
State.
Registration of a firm does not provide a separate legal entity to the concern as in the
case of a Joint Stock Company. Partner does not need registration for coming into
existence because it is created by an agreement among two or more persons. The
registration of a firm merely certifies its existence and non-registration does not
invalidate the transaction of the firm.
Procedure for Registration
A simple procedure is followed for getting a firm registered. This procedure is divided
into two parts: (1) Filling an Application and (2) Certificate.
(1) Filling an Application: The first thing to be done is to file an application with
the Registrar of firms on a prescribed form. A small amount of registration fees
is also deposited along with the application. The application should contain the
following information:
(i) The name of the firm
(ii) The principal place of business of the firm
(iii) The names and address of partners and the dates on which they joined
the firm.
(iv) If the firm is started for a particular period then that period should be
mentioned.
(v) If the firm is started to achieve a specific object then it should also be
given.
The application form should be signed and verified by each partner or by his
duty authorized agent.
(2) Certificate: The particulars submitted to the Registrar are examined. It is also
seen whether all legal formalities required have been observed or not. If
everything is in order, then the Registrar shall record an entity in the register of
firms. The firm is considered registered thereon.

Management Process
Advantages of Registration of a Partnership Firm
 Advantages to the Firm: The firm gets a right to the third parties in civil suits for
getting its right enforced. In the absence of registration, the firm cannot sue outside
partners in courts.
 Advantages to Creditors: A creditor can sue any partner for recovering his money
due from the firm. All partners whose names are given in the registration are
personally responsible to the outsider. So, creditors can recover their money from
any partner of the firm.
 Advantages to Partners: The partners can approach a court of law against each other
in case of dispute among partners. The partners can sue outside parties also for
recovering their amounts, etc.
 Advantages to Incoming Partners: A new partner can fight for his rights in the firm
if the firm is registered. If the firm is not registered then he will have to depend
upon the honesty of other partners.
 Advantages to Outgoing Partners: On the death of the partner his successors are not
responsible for the liabilities incurred by the firm after the date of his death. In
case of retiring partner, he continues to be responsible up to the time he does not
give public notice. The public notice is not registered with the Registrar and he
ceases his liabilities from the date of this notice. So, it is essential to get a firm
registered for getting these advantages.
An Ideal Partnership
An ideal partnership is a word used for a successful business. It is business where all
the partners work honestly and for a common purpose. There is a perfect
understanding among them and they work in harmony. The partners should be able to
manage all business activities effectively.
There should not be scarcity of funds. All these things are possible only when the
choice of partners is correct. A large number of firms have failed because of mistrust
and suspicion among partners.
Understanding among Partners
Good Faith
Sufficient Capital
Long Duration
Balance of Skill and Talent
Written Agreement
Registration
Ideal Partnership

Management Process
Advantages of Partnership
 Easy to form
 Large resources
 Greater managerial talent
 More credit-standing
 Promptness in decision-making
 Sharing of risk
 Relationship between reward and work
 Close supervision
 Flexibility of operations
 Protection of minority interest
Disadvantages of Partnership
 Unlimited Liability
 Instability
 Mutual distrust
 Burden of implied authority
 Lack of prompt decision
Partnership and Co-ownership
Partnership and co-ownership are two different things. The ownership of a property by
more than one person is called co-ownership. If two brothers purchase a property
collectively, it will be a case of co-ownership. The property will be disposed-off with
the consent of all the co-owners.
Any income arising out of co-ownership is shared by all the co-owners. The property
is not purchased with the object of earning profits. If a building is purchased to let it
for rent, then it will be a case of partnership and not of co-ownership. In the
co-ownership, there is only a joint ownership without any business motive. In
partnership, joint ownership and business are combined.
Distinction between Partnership and Co-ownership
On the Basis Partnership Co-ownership
Contract
Partnership is based on
contractual relationship among
partners. It is outcome of an
agreement.
Co-ownership may be by the
operation of law. On the death of
father, sons become co-owners
of his property.
Object
The object of partnership is to
enter into some business and
earn profits.
Co-ownership is not meant for
business purposes.
Transfer of
Interest
No partner can transfer his
interest (share) without the
consent of all other partners.
A co-owner can transfer his
interest at any time and without
asking other co-owners.
Agency
Relationship
Partners can act as agent of the
business.
No agency relationship exists in
co-ownership.

Management Process
Division of Joint
Property
In partnership, the division of
property cannot be demanded.
A co-owner can demand the
division of property. Two co-
owners may divide a plot of land
by erecting a wall on the land.
Right of
Investment
If a partner spends some money
for the business he can demand
its reimbursement.
If a co-owner spends money for
the improvement of property he
cannot claim it as a lien of
property.
Act
Partnership is formed under
Partnership Act, 1932.
No such act is governing co-
ownership.
Dissolution of a Partnership Firm
The dissolution of a firm means discontinuation of its activities. When the working of
a firm is stopped and the assets are realized to pay various liabilities, it amounts to
dissolution of the firm. The dissolution of a firm should not be confused with the
dissolution of partnership.
When partners agree to continue the firm under the same name, even after the
retirement or death of a partner, it amounts to dissolution of partnership and not of
firm. The remaining partners may purchase the share of the outgoing of deceased
partner and continue the business under the same name: it involves only the
dissolution of partnership. The dissolution of firm includes the dissolution of
partnership too.
A firm may dissolved under the following circumstances:
(a) Dissolution by Agreement (Section 40): A partnership firm can be dissolved by an
agreement among all the partners. Section 40 of Indian Partnership Act, 1932
allows the dissolution of partnership firm if all the partners agree to dissolve it.
This type of dissolution is known as voluntary dissolution.
(b) Dissolution by Notice (Section 43): If a partnership is at will, it can be dissolved
by any partner giving a notice to other partners. The notice for dissolution must
be in writing. The dissolution will be effective from the data of the notice. In
case no date is mentioned in the notice, then it will be dissolved from the date
of receipt of notice. A notice once given cannot be withdrawn without the
consent of all the partners.
(c) Compulsory Dissolution (Section 41): A firm may be compulsorily dissolved
under the situations (i) Insolvency of Partners: when all the partners of a firm
are declared insolvent, then the firm is compulsorily dissolved and (ii) Illegal
Business: the activities of the firm may become illegal under the changed
circumstances, if the government enforces prohibition policy.
(d) Contingent Dissolution (Section 42): In case there is no agreement among
partners regarding certain contingencies, partnership firm will be dissolved on
the happening of any of the situations like (i) Death of a Partner: A partnership
firm is dissolved on the death of any of the partners and (ii) Expiry of the Term:
A partnership firm may be for a fixed period, on the expiry of that period, the
firm will be dissolved.

Management Process
(e) Dissolution through Court (Section 44): A partner can apply to the court for the
dissolution of the firm on any of these grounds such as (i) Insanity of a Partner,
(ii) Misconduct by the partner, (iii) Incapacity of a Partner, (iv) Breach of
agreement, (v) Transfer of Shares, (vi) Regular Losses, and (vii) Dispute
among partners
Settlement of Accounts on Dissolution of a Firm
On the dissolution of partnership, the working of the concern is stopped. All the assets
are realized and they are used to meet outside liabilities of the business. After paying
outside creditors the balance amount is used to return loans of the partners and their
capitals. In case the amount realized from the assets is inadequate to meet the outside
liabilities, then partners will contribute the deficit money from the private sources.
The procedure adopted for settlement of accounts at the time of dissolution is as
follows:
 Any losses including deficiency will first be met out of profits of the firm and
then out the capitals if required.
 In case the deficiency is more than the amount of profits and capitals, then
partners will contribute from the private estates in their profit sharing ratios.
 All outside creditors are paid at the first instance.
 The loans of partners to the business in additional to their capitals are returned
proportionately.
 If any surplus after returning the capitals, the amount will be paid to partners in
their profit sharing ratio.
 If one partner is insolvent, then his deficiency is contributed by solvent partners
in their capital balance ratio.
 Also outside liabilities are met by solvent partners. Even if one partner is
solvent outside liabilities will be paid in full.
Difference between Partnership and Sole-Trade Business
On the Basis Partnership Sole-Trade
Membership
Partnership is owned by two or more
persons known as partners.
Sole-trade business is owned and
controlled by only one person.
Agreement
An agreement is required to form a
partnership deed.
A sole-trade does not require any
formality to start the firm.
Registration
A partnership concern needs
registration to get advantages.
No registration is required in case of
sole-trade business.
Management
All partners have equal rights and can
participate in the management.
This business is controlled by one
person and he is final authority in the
concern.
Risk
The business risk is shared by all the
partners in proportion of their shares.
The whole risk is shared by the sole-
trader.
Capital
All the partners contribute towards
capital of the firm.
Only the resources of one person are
used in the business.
Secrecy
The secrets of the business are in the
knowledge of all the partners; so there
is a fear of leaking them out.
There is a complete secrecy in the
business because the owner does not
share the secrets with anybody else.
Uncertainty
The change in partners does not
necessarily close down the business.
The existence of this business is
uncertain because it is linked to the
fate of the proprietor.

Management Process
JOINT HINDU FAMILY FIRM
Another form of business organization is Joint Hindu Family or Undivided Hindu
Family. However, this form of organization is prevalent in India only and that too
among Hindus as the name itself is indicative. It also does not have any separate and
distinct legal entity from that of its members who constitute it. No outsider can be
admitted to its folds except in certain circumstances.
The membership in this can be acquired only by birth or by marriage to a male person
who is already a member of a Joint Hindu Family. One should not confuse Joint
Hindu Family with the composite family which is having an origin to an agreement.
When two or more families agree to live and work together, throw their resources and
labor with joint stock and share profits and the losses together, then this family is
known as composite family.
The business of Joint Hindu Family is controlled under the Hindu Law instead of
Partnership Act. One can avoid becoming a partner of partnership firm or a
shareholder of a joint stock company but a Hindu cannot escape from becoming a
member of a Joint Hindu Family. It may be broken at one generation, there may be
partition bringing it to an end, but in next generation it is automatically in existence.
A Joint Hindu Family consists of common ancestor, which is a must to bring a J.H.F.
into existence all his male descendants‟ up to any generation along with their wives
and unmarried daughters. A death of a common ancestor does not bring the Joint
Hindu Family to an end. It continues till perpetuity, as upper links are removed by
death and lower ones are added by birth.
All the affairs of the Joint Hindu Family are controlled and managed by one person
who is known as „Karta‟ or „Manager‟. He is having a very unique position which no
other office of any organization is the world is having. He works in consultation with
other members of the family but ultimately he has a final say.
The liability of „Karta‟ is unlimited but the liability of other members is limited to
their shares in the business. According to Hindu Law, the senior most male member of
the family is “Karta‟is unlimited but the liability of other members is limited to their
shares in the business. However, there can be a deviation from this and a junior male
member can be a „Karta‟ provided all coparceners agree to it.
Karta‟s powers are almost unlimited. He acts on behalf of the other members of the
family but is not like a partner. Neither he is accountable to anyone nor is he to
prepare accounts. No one can ask what the income was and what the expenditure was.
He is the great of the grand show.
On the basis of the schools of Hindu Law, Joint Hindu Family is considered under the
two heads: (1) Mitakshara and (2) Dayabhaga

Management Process
Mitakshara says of son‟s right by birth in the joint family property. This means when
a son is born in family, he acquires an interest in the property jointly held by the
family. The interests of all sons are equal.
Before partition, share of anyone is not specified. It is fluctuating with the deaths and
births in the family. For example, suppose in a family of eight members having 120
acres of land and two members are born before the stage of partition, each will get 12
acres of land and if in the same family two deaths takes place before the stage of
partition then each member will get 20 acres of land.
Dayabhaga is prevalent in Bengal and Assam, whereas in the rest of India, it is
Mitakshara. Mitakshara is applicable even in Bengal and Assam on the points where
Dayabhaga is silent. Mitakshara and Dayabhaga joint family differ from each other to
a great extent.
However, in Dayabaga Joint Hindu Family the concept of birth is unknown and the
property devolves by inheritance. The shares of the coparceners are specified and not
fluctuating as in the case of Mitakshara Joint Hindu Family.
Under the old Hindu Law, female was not entitled to any share in the property. But
with the passage of Hindu Succession Act of 1956 even females have been included in
the list of persons who acquire share in succession.
It is also desirable to understand that coparcener and member of Joint Hindu Family
are two separate words. A person who is a coparcener is always a member of Joint
Hindu Family but it is not so when the case is vice-versa. Coparcener is a small body
within a joint family and is consisting of father, son, son‟s son and son‟s son‟s son. It
is only up to three male lineal descendants whereas joint family can be up to any
extent. The members constituting coparcenery are coparceners which are different
from the members of joint family.
Characteristics (or) Features of Joint Hindu Family Business
 Governed by Hindu Law: The control and management of the Joint Hindu
Family firm is done according to the un-codified or codified Hindu Law. The
un-codified Hindu Law consists of two schools, Mitakshara and Dayabhaga. In
the same way rights a duties of its members are governed by un-codified Hindu
Law.
 Membership by Birth: The membership of the family can be acquired only by
birth. Whosoever is born in the family becomes a member. Like other business
organizations outsiders cannot be admitted to this by contract.
 Management: The family affairs are managed by the senior most male member
of the family known as „Karta‟ or „Manager‟. The powers of management are
unlimited.
 Limited Liabilities of Others: All the members in a Joint Hindu Family have
limited liability to the extent of property which is jointly held by the family.

Management Process
 Continuity: As it has already said, the death in the family does not bring the
joint family firm to an end. It continues forever. There is no limit to its
membership number also.
 Minor also a Member: If partnership firm minor cannot become a partner. This
is an important feature of this business organization that a person from its very
birth becomes the member.
 Accounts: Accounts are maintained by Karta but this is not obligatory on his
part. He is not accountable to any member and no member can ask what are the
profits and losses of a transaction.
 Implied Authority of Karta: There is implied authority in favor of Karta to
contract debts and pledge the credit and property of the family for ordinary
purposes of family business. These are binding on the entire family.
Advantages of Joint Hindu Family Business
 Centralized management
 Utmost secrecy
 Quick decision
 Credit facilities
 Work according to capacity
 Natural love between members
 Limited liability
Disadvantages of Joint Hindu Family Business
o No reward for efficiency
o Limited capital
o Limited managerial skill
Difference between Partnership and Joint Hindu Family Firm
Point of
Difference
Partnership Firm Joint Hindu Family Firm
Governance
It is governed by the Indian
Partnership Act.
It is governed by the two
schools Mitakshara and
Dayabhaga of Hindu Law.
Creation
It is created by the mutual
agreement between the
partners, which may be written
or oral.
No such contract is required
Legal Position
It has legal entity and identical
to its partner in the eyes of law.
It is not having any separate
and distinct legal entity from its
members.
Number of
Members
Maximum number of member
is fixed.
Ten members in case of
banking business and twenty in
other cases.
Admission
A new partner can be admitted
in the partnership.
The birth of a person in family
brings him in the fold.

Management Process
Position of a
Minor
A minor cannot become the
partner.
No such restriction and a child,
becomes the member
Management
Every partner can take active
part in the management.
Karta can take part in the
management.
Outside Position
of a Member
Each partner is the agent of the
other partner.
This authority is not available
to any member except Karta.
Accounts
Any partner can maintain the
account of the firm.
Karta can main the books of
accounts.
Liabilities
The liabilities of partners are
unlimited. Their responsibility
is joint and several.
Karta has unlimited liability
and other member having
limited liability.
Dissolution
It can be dissolved on the death
or insanity of a partner.
It is affected by death or
insanity of a member.
Registration
It is not compulsory but
advisable to be registered.
It is not at all necessary to be
registered.
JOINT STOCK COMPANY
The limitations of sole-proprietorship and partnership forms of ownership gave birth
to joint stock company form of organization. Two important limitations of earlier
forms of organization were inadequacy of funds and unlimited liability. The factor of
unlimited liability discouraged people to invest more even if they had the capacity to
do so. The Joint Stock Company form of organization provides an answer to the
difficulties faced by earlier forms. The liability of members is limited and the
participation of large number of persons helps in raising more and more funds under
Joint Stock Company form of organization.
The present trend of industrial enterprises is to increase their size through expansion
and diversification. This tendency is ascribed to two reasons namely, technological
improvement and economic factors. The result of expansion, whether due to technical
factors has been the demand for enormous capital.
The manufacturing industries require large-scale investment for building plant and
machinery whereas trading concerns need fixed capital for fixtures, fittings and
business premises. In addition to fixed capital, working capital requirements are
equally sizeable. Enormous capital requirements of business concern cannot be met by
a few persons. So the need for Joint Stock Company form of organization was felt.
Joint Stock Company organization was started first in Italy in 13th
century. During 17th
and 18th
centuries, Joint Stock Companies were formed in England under Royal
Charter or Acts of Parliament.
In India, the first Companies Act was passed in 1850 and the principle of limited
liability was introduced only in 1857. The application of this Act was extended to
Banking and Insurance Companies in 1860. A comprehensive bill was passed in 1956.
The firms incorporated under this Act are known as „Companies‟. The parliament and

Management Process
State Legislatures can also pass legislations for the incorporation of companies,
generally called „Corporations‟.
Definitions of Joint Stock Company
A company is “an association of many persons who contribute money or money‟s
worth to a common stock and employs it in some trade or business and who share the
profit and loss arising there from”. – James Stephenson
According to Prof. L.H.Hancy, “A Joint Stock Company is a voluntary association of
individuals for profit, having a capital divided into transferable shares, the ownership
of which is the condition of membership”.
According to Indian Companies Act, 1956 “A company means a company formed and
registered under this Act. Existing Company means a company formed and registered
under any of the previous company laws”.
Characteristics of Joint Stock Company
 Association of Persons: A company is an association of persons joining hands
with a common motive. A private limited company must have at least two
persons and a public limited company must have at least seven members to get
it registered. Furthermore, the number of shareholders should not exceed 50 in
private companies but there is no maximum limit for the members in a public
limited company.
 Independent Legal Entity: The Company is created under law. It has a separate
legal entity apart from its members. A company acts independently for its
members. A person can own its shares and can be its creditor too. The company
can sue and be sued in its own name.
 Limited Liability: The liability of shareholders is limited to the value of shares
they have purchased. The company being a separate legal entity can incur debts
in its own name and the shareholders will not be personally liable for that.
 Common Seal: A company being an artificial person cannot put its signatures.
The law requires every company to have a seal and get its name engraved on it.
The seal of the company is affixed on all important documents and contracts as
a token of signature. The directors must witness the affixation of the seal.
 Transferability of Shares: The shares of a company can be transferred by its
members. Whenever the members want to dispose all the shares, they can do so
by following the procedure devised for this purpose. Under Articles of
Association, the company can put certain restrictions on the transfer of share
but it cannot altogether stop it.
 Separation of Ownership and Management: The shareholders of a company are
widely scattered. A shareholder may like to invest money but may not be
interested in its management. The companies are managed by the Board of
Directors. The ownership and management are in two separate hands.
 Perpetual Existence: The Company has a permanent existence. The shareholders
may come or may go but the company will go on forever. The continuity of the
company is not affected by death, lunacy or insolvency of its shareholders.

Management Process
 Corporate Finance: A Joint Stock Company generally raises large amounts of
funds. The capital is divided into shares of small denomination. A large number
of persons purchase shares and contribute to the capital of the company. There
is no limit on number of maximum members in public companies.
 Centralized and Delegated Management: A Joint Stock Company is an
autonomous and self-governed body. The shareholder being large in number
cannot look after the day-to-day activities of the company. The elect Board of
Directors in general body meeting for managing the company.
 Publication of Accounts: A Joint Stock Company is required to file annual
statements with the Registrar of Companies at the end of a financial year. The
annual statements are available for inspection in the office of the Registrar.
Kinds of Companies
Kinds of Companies
According to According to On the basis On the basis
Incorporation Liability of Ownership of Nationality
1. Chartered 1. Companies 1. Government 1. Indian
Companies Limited by Shares Companies Companies
2. Statutory 2. Companies 2. Holding 2. Foreign
Companies Limited by Guarantee Companies Companies
3. Registered 3. Unlimited 3. Subsidiary
Companies Companies Companies
According to Transferability of Shares
1. Private Companies 2. Public Companies
According to Incorporation
1. Chartered Companies: A chartered company is an association formed by
investors or shareholders for the purpose of trade, exploration, etc. This type of
companies is incorporated under Royal Charter issued by the Kind or Head of
the State. Under the charter, certain exclusive rights and privileges are granted
to the company for undertaking certain commercial activities. If the company
violates the rules, the Head of the State can close such companies. These types
of companies are very popular in England in 19th
century. The East India
Company, Dutch East India Company, The Chartered Bank of India and
Australia are examples. Now a day, these kinds of companies are not formed
and found in India.
2. Statutory Companies: These companies are formed under a special act of
Parliament or of a State Legislature. The object, powers, rights and
responsibilities of these companies are clearly defined in the Act. Generally,
companies for public utility services are formed under special statues. These
companies may or may not use the word „Limited‟. The examples of such

Management Process
companies in India are Reserve Bank of India, The Industrial Finance
Corporation of India, Industrial Development Bank of India, etc.
3. Registered Companies: These are the companies formed and registered under the
provisions of the Companies Act. Most of the companies in India are registered
under Indian Companies Act, 1956. Registered companies may be limited by
shares, limited by guarantee or unlimited companies.
According to Liability
1. Companies Limited by Shares: The companies limited by shares have a share
capital. The capital is divided into shares. The shareholders pay share money at
one time or by installments. The shareholders are not liable to pay anything
more than the value of the shares held by them, whatever be the liabilities of
the company.
2. Companies Limited by Guarantee: The companies are also formed under the
Companies Act with a stipulation in the memorandum clause that members are
guaranteed to pay a certain amount of money in case of its winding up. The
amount which members undertake to pay is called the guarantee money.
Sometimes the members are required to buy shares of fixed value and also give
a guarantee for more sums in the event of its liquidation.
3. Unlimited Companies: The companies registered without limiting the liability of
members to the value of shares are called unlimited companies. The companies
are just like Partnership concerns where liability is unlimited. All the members
will be liable to meet the liabilities of the company to an unlimited extent.
These companies do not exist these days.
According to Transferability of Shares
1. Private Company: A private company can be formed with the association of
at least two members but the maximum number of shareholders cannot exceed
fifty. It is generally a family affair. It shareholders are all relatives, friends or
business associates. There cannot be a private company with unlimited liability.
2. Public Company: Section 3(1) (iv) of the Indian Companies Act, 1956 says that
all companies other than private companies are called public companies. Public
company means that public in large is interested in those companies. There is
no restriction on the maximum number of members. Public companies are
required to issue a prospectus for inviting people to purchase their shares. The
shareholders are fee to sell their shares in the market.
On the Basis of Ownership
1. Government Company: A company owned by central or state government is
called a government company. Either whole of the capital or majority of the
shares are owned by the government. In some case, private investment is also
encouraged but at least 51% shares are held by the government. Management
of these companies is under the control of government. Subsidiary companies
of government companies are also covered under the government companies.
For example, Coal Mines Authority Ltd., Steel Authority of India Ltd., etc.

Management Process
2. Holding Company: if a company can control the policies of another company
through the ownership of its shares or through control over the composition of
its Board of Directors, the company is called a Holding Company. A company,
the policies which are controlled, is called subsidiary company. The holding
company has a say in the formulation of policies of the other company.
3. Subsidiary Company: A company is called a subsidiary company when the
formation of Board of Directors is controlled by another company. The other
company controls more than half of the voting rights of this company. Holding
company and a subsidiary company are separate companies having separate
legal entities.
On the Basis of Nationality
1. Indian Company: A company incorporated in India under the Companies Act,
1956, whether operating in India or outside, is called an Indian Company.
There may be companies incorporated under Indian Companies Act but
separate rules are framed for their regulations. These companies may be
manufacturing companies, insurance companies, banking companies, etc.
2. Foreign Company: A foreign company means company incorporated outside
India but has a place of business in India through its branches or agencies. Such
companies have to furnish some information as required by the Registrar of
Companies in India. For examples, Bosch Limited, ING Vysya Ltd., Siemens
Limited, etc.
Advantages of Joint Stock Company
 Accumulation of Large Resources: A company can collect large sum of money
from large number of shareholders.
 Limited Liability: The liability of members in a company form of organization is
limited to the nominal value of the shares they have acquired.
 Continuity of Existence: The members of the company may go on changing
from time to time but that does not affect the continuity of a company.
 Efficient Management: It enables the company to appoint expert and qualified
persons for managing various business functions.
 Economies of Large Scale of Production: With the availability of large resources,
the company can organize production on a big scale.
 Transferability of Shares: The shares of public company are freely transferable
at any time according to the market conditions.
 Democratic Set-up: Every individual has an opportunity to become a
shareholder of the company.
 Social Benefits: The company form of organization mobilizes scattered savings
of the community.
 Changing Business Environment: The Company can afford to invest money on
research projects which will enable them to cope with changing business
conditions.
 Diffused Risk: The number of contributors is large; so risk is shared by a large
number of persons.

Management Process
Disadvantages of Joint Stock Company
o Difficulty of Formation: A lot of legal formalities are required to be performed
at the time of registration.
o Separation of Ownership and Management: The ownership and management of a
public company is in different hands.
o Speculation in Shares: The prices of shares depend upon both economic and
non-economic factors.
o Lack of Secrecy: The management of companies remains in the hands of many.
Everything is discussed in the meeting of Board of Directors.
Distinction between Private Company and Public Company
Private Company Public Company
Number of Members
To constitute a private company two
members are a must and maximum cannot
exceed fifty.
A public company can be started by seven
persons and there is no maximum limit
for members.
Commencement of Business
The business can be started after getting
the certificate of incorporation.
The business can be started only after
getting certificate of commencement.
Transfer of Shares
The transfer of shares is generally
restricted by the articles.
Transfer of shares is freely allowed,
though some procedures to be followed.
Issue of Prospectus
A private company cannot issue a
prospectus regarding issue of shares.
A pubic company must issue a prospectus
regarding issue of shares and debentures.
Statutory Meetings
A private company is not required to call
a statutory meeting.
A statutory meeting must be held within a
prescribed period.
Statutory Report
It is not required to submit statutory
report to Registrar of Companies.
A public company needs to submit
statutory report to Registrar of Companies
Quorum for Meeting
The quorum for a meeting of a private
company is zero.
In case of public company five members
constitute the quorum.
Number of Directors
A minimum of 2 directors must be there.
Can increase by getting permission from
the Central Government.
A minimum of 3 directors must be there
and should be intimated to the Registrar
of Companies.
Filing of Documents
A private company need not send the list
of directors to the Registrar of Company.
A public company must send the list of
directors to the Registrar of Company
Use of the word ‘Limited’
In case of private company, the word
„Pvt. Limited‟ must be used at the end of
the name of the company.
In case of public company, the word
„Limited‟ is used at the end of the name
of the company

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