PRINCIPLES OF MANAGEMENT

UNIT 1 INTRODUCTION TO BUSINESS

Business -Meaning and Definition of Business - Essentials - Scope of Business - Classification
of Business Activities –Business Organization - Meaning – Definition - Characteristics -
Objectives of Business Organization -Forms of Business Organization - Sole Proprietorship –
Joint Hindu Family – Partnership - Joint Stock Companies - Co-operatives -Limited Liability
Partnership- Choice of Form of Organization- Government - - Forms of Public Enterprises -
International Business - Multinational Corporations.

Meaning of Business:

Business is an economic activity that involves the exchange, purchase, sale or production of
goods and services with a motive to earn profits and satisfy the needs of customers.
Businesses can be both profit or non-profit organizations that function to gain profits or
achieve a social cause respectively.

Definition:

According to Urwick and Hunt, “Business is any enterprise which makes, distributes or
provides any service which other members of the community need and are willing to pay for
it”.

Characteristics of Business:

Following are the characteristics or features of business

(1) An Economic Activity

A business is an economic activity which includes the purchase & sale of goods or rendering
of services to earn money. It is not concerned with the achievement of social and emotional
objectives. Example: Wholesaler sell goods to the retailers and retailers sell goods to the
customers.

(2) Manufacturing or Procurement of Services and Goods

Before offering goods to the consumer for consumption it should be manufactured or

procured by businesses. Business enterprise converts the raw material into finished goods.
Organizations also procure finished goods& services from the producers to meet the needs of
the customers in the market. Goods can be a Consumer good like sugar, pen, ghee, etc.
capital goods include machinery, furniture, services like transportation, banking, etc.

Example: Individual retailer buys the toffees from wholesalers in a specific quantity and sells
it to the ultimate consumer.

(3) Exchange or Sale of Goods and Services for the Satisfaction of Human Needs

Every business activity includes an exchange or transfer of services and goods to earn value.
Producing goods for the goal of personal consumption is not included in business activity.So,

there should be the process of sale or exchange of goods or services exits among the seller
and the buyer.

Example: A lady who bakes pastries and cakes at home and sells it to the pastry shop is a
business activity.

(4) Dealings With Goods and Services on a Daily Basis

Every business, rendering either services or goods should deal on a daily basis.A one-time
sale is not considered a business activity.

Example: If a person sells his old car through OLX even at a profit will not be considered as
a business activity. But if he is engaged in regularly trading of cars at his showroom will be
considered as business activity.

(5) Profit Earning

No business can last for long, without making a profit. The purpose to conduct the business is
to earn profits and minimize the cost.

Example: A business house tries to reduce the cost of production and the cost of raw material
to earn high profits.
(6) Uncertainty of Return

The possibility of earning profit or loss is very uncertain and can’t be anticipated by the
entrepreneur. Hence, no business can totally do away with risks.
Scope of Business:

The Scope of “Business” is wider than that of the terms “Trade” and “Commerce”. The terms
trade and commerce are often used synonymously.

Trade is one of the branches of commerce. It is concerned with exchange of goods and
services. It performs the function of acting as an intermediary and thereby it transfers goods
from the producer to the consumer. On the other hand, commerce is a wider term. It includes
“Trade” as well as, Aids to trade i.e. the various activities which facilitate trade.

1. Industry

The word “Industry” refers to that part of business activities which is apprehensive with the
extraction, production or fabrication of products. The products which are raised, produced or
processed by an industry may either be used by the ultimate consumer or by another concern
for further production. If the goods produced by an industry are consumed by the final
customers, these are named as ‘consumer’s goods’ e.g. clothes. If the goods are used for
further production of wealth they are called producer’s or capital goods. In case the goods
produced by an industry are further processed into finished products by another concern they
are called as intermediate goods. i.e Plastic.

Types of Industry:
On the basis activity industry is further classified into various types are as under:-

(i) Extractive Industries

Extractive industries are those industries which extract, raise or fabricate raw materials from
above or beneath surface of the earth. i.e. Mining, fisheries forestry, agriculture.

(ii) Genetic Industries

Those industries which are engaged in reproducing and multiplying certain species of animals
and plants and selling them in the market for profit are named as genetic industries. i.e. Cattle
breeding farms, poultry farms, plant nurseries.

(iii) Constructive Industries

Constructive industries as the name signifies are engaged in the construction of building,
canals, brides, dams, roads etc.

(iv) Manufacturing Industries

Manufacturing industries are those which are concerned of converting raw material or semi-
finished products into finished products. E.g. Shoes Company, Textiles Mills.

(v) Service Industries

Service industries are usually engaged in the manufacturing of intangible goods which cannot
be seen or touched by naked eye. The service of professionals such as doctors, lawyers is
examples of service industries.

(vi) Commerce

The second element that comes in the scope of business is Commerce. It is a very important
component of business and is concerned with the buying and selling of goods. It includes all
the activities which are connected to the transfer of goods from the place of production to the
ultimate consumers. The whole ranges of commerce activities are classified are as under:-

2. Trade

The process of buying and selling of goods is called Trade. It is the exchange of goods and
services among buyers and sellers in which both the parties are benefited. Trade is classified
into two types.
(i) Internal Trade

The process of buying and selling of goods within the edge of a country is called internal
trade.

• Wholesale Trade- The process of purchase of goods in huge quantity from producers and
their resale to retailers is known as wholesale trade. The retailer then further sells these goods
to the final consumers.

• Retail Trade- The retailer sale the goods and services to the ultimate consumers is known as
Retail Trade.

(ii) External Trade

The purchase and sale of goods between two countries are called external trade. It is also
called foreign trade. There are two types of external Trade.

• Import Trade

• Export Trade.
3. Aid to Trade

The activities which help in the purchase of goods and services are called aids to trade. The
aids which are compulsory for the development of the trade are as follows:-

(i) Transport

The different ways of transport help in carrying goods from the places of production to
centers of utilization e.g. Railways, ships, airlines etc.

(ii) Insurance

Insurance is very essential aid to trade. The risk of damage of goods due to fire, flood,
earthquake or other causes us covered by insurance.

(iii) Warehousing

Warehousing is a kind of storeroom. Nowadays most of the goods are produce in anticipation
of demand. They are stored in safe places and are released as and when demanded in the
market. Warehousing thus helps in overcoming the barrier of time and creates time utility.

(iv) Banking
The commercial banks play a vital role in financing the different trade activities. They are
funding the traders for stock holding and transportation of goods. They also support the
buyers and sellers of goods in receiving and making payments, both at the national and
worldwide level. The credit facility in the form of cash credit, overdrafts and loans is
provided to the traders.

(v) Advertisement

Selling of goods is the most difficult problem for the producer. Advertisement regarding the
product through newspapers, magazines, radio and television has greatly helped the
consumers in choosing the goods of their taste. So advertisements play a vital role in
increasing sale of goods.

Meaning, Definition of Business Organization

An entrepreneur organizes various factors of production like land, labour, capital, machinery,
etc. for channelizing them into productive activities. The product finally reaches consumers

through various agencies. Business activities are divided into various functions, these
functions are assigned to different individuals.

Various individual efforts must lead to the achievement of common business goals.
Organization is the structural framework of duties and responsibilities required of personnel
in performing various functions with a view to achieve business goals through organization.
Management tries to combine various business activities to accomplish predetermined goals.

Present business system is very complex. The unit must be run efficiently to stay in the
competitive world of business. Various jobs are to be performed by persons most suitable for
them. First of all various activities should be grouped into different functions. The authority
and responsibility is fixed at various levels. All efforts should be made to co-ordinate
different activities for running the units efficiently so that cost of production may be reduced
and profitability of the unit may be increased.

Definitions:

Louis Allen, “Organization is the process of identifying and grouping work to be performed,
defining and delegating responsibility and authority and establishing relationships for the
purpose of enabling people to work most effectively together in accomplishing objectives.”
In the words of Allen, organization is an instrument for achieving organizational goals. The
work of each and every person is defined and authority and responsibility is fixed for
accomplishing the same.
Wheeler, “Internal organization is the structural framework of duties and responsibilities
required of personnel in performing various functions within the company. It is essentially a
blue print for action resulting in a mechanism for carrying out function to achieve the goals
set up by company management”. In Wheeler’s view, organization is a process of fixing
duties and responsibilities of persons in an enterprise so that business goals are achieved.

Koontz and O’Donnell, ‘The establishment of authority relationships with provision for co-
ordination between them, both vertically and horizontally in the enterprise structure.” These
authors view organization as a coordinating point among various persons in the business.

Oliver Sheldon, “Organization is the process so combining the work which individuals or
groups have to perform with the facilities necessary for its execution, that the duties so
performed provide the best channels for the efficient, systematic, positive and coordinated
application of the available effort”. Organization helps in efficient utilization of resources by
dividing the duties of various persons.

Characteristics of Business Organization:

1. Economic activity:

Business is an economic activity of production and distribution of goods and services. It

provides employment opportunities in different sectors like banking, insurance, transport,
industries, trade etc. it is an economic activity corned with creation of utilities for the
satisfaction of human wants.

It provides a source of income to the society. Business results into generation of employment
opportunities thereby leading to growth of the economy. It brings about industrial and
economic development of the country.

2. Buying and Selling:

The basic activity of any business is trading. The business involves buying of raw material,
plants and machinery, stationary, property etc. On the other hand, it sells the finished
products to the consumers, wholesaler, retailer etc. Business makes available various goods
and services to the different sections of the society.

3. Continuous process:

Business is not a single time activity. It is a continuous process of production and distribution
of goods and services. A single transaction of trade cannot be termed as a business. A
business should be conducted regularly in order to grow and gain regular returns.

Business should continuously involve in research and developmental activities to gain

competitive advantage. A continuous improvement strategy helps to increase profitability of
the business firm.

4. Profit Motive:

Profit is an indicator of success and failure of business. It is the difference between inco me
and expenses of the business. The primary goal of a business is usually to obtain the highest
possible level of profit through the production and sale of goods and services. It is a return on
investment. Profit acts as a driving force behind all business activities.

Profit is required for survival, growth and expansion of the business. It is clear that every
business operates to earn profit. Business has many goals but profit making is the primary
goal of every business. It is required to create economic growth.
5. Risk and Uncertainties:

Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is
associated with every business. Business is exposed to two types of risk, Insurable and Non-
insurable. Insurable risk is predictable.

6. Creative and Dynamic:

Modern business is creative and dynamic in nature. Business firm has to come out with
creative ideas, approaches and concepts for production and distribution of goods and services.
It means to bring things in fresh, new and inventive way.

One has to be innovative because the business operates under constantly changing economic,
social and technological environment. Business should also come out with new products to
satisfy the growing needs of the consumers.

7. Customer satisfaction:
The phase of business has changed from traditional concept to modern concept. Now a day,
business adopts a consumer-oriented approach. Customer satisfaction is the ultimate aim of
all economic activities.

Modern business believes in satisfying the customers by providing quality product at a

reasonable price. It emphasize not only on profit but also on customer satisfaction.
Consumers are satisfied only when they get real value for their purchase.

The purpose of the business is to create and retain the customers. The ability to identify and
satisfy the customers is the prime ingredient for the business success.

8. Social Activity:

Business is a socio-economic activity. Both business and society are interdependent. Modern
business runs in the area of social responsibility.

Business has some responsibility towards the society and in turn it needs the support of
various social groups like investors, employees, customers, creditors etc. by making goods
available to various sections of the society, business performs an important social function
and meets social needs. Business needs support of different section of the society for its
proper functioning.

9. Government control:

Business organizations are subject to government control. They have to follow certain rules
and regulations enacted by the government. Government ensures that the business is
conducted for social good by keeping effective supervision and control by enacting and
amending laws and rules from time to time.
10. Optimum utilization of resources:

Business facilitates optimum utilization of countries material and non-material resources and
achieves economic progress. The scarce resources are brought to its fullest use for
concentrating economic wealth and satisfying the needs and wants of the consumers.
Sole Proprietorship

• A Sole Proprietorship is a business structure owned by an individual who generally

has full control and authority over the business. The business owner is referred to as the “sole
proprietor” and exclusively owns all assets and profits of the business.

• Examples of sole proprietors include small businesses such as, a local grocery store, a
local clothes store, an artist, freelance writer, IT consultant, freelance graphic designer, etc.

• A Sole proprietorship can be explained as a kind of business or an organization that is

owned, controlled and operated by a single individual who is the sole beneficiary of all
profits or loss, and responsible for all risks. It is a popular kind of business, especially
suitable for small business at least for its initial years of operation.

CHARACTERISTICS OF SOLE PROPRIETORSHIP:

Ownership: The business enterprise is owned by one single individual . The individual
has got legal title to the assets and properties of the business. The entire profit arising
out of business goes to the sole proprietor. Similarly, he also bears the entire risk or loss
of the firm.

Management: The owner of the enterprise is generally the manager of the business. He
has got absolute right to plan for the business and execute them without any interference
from anywhere. He is the sole decision maker

Source of Capital: The entire capital of the business is provided by the owner. In
addition to his own capital he may raise more funds from outside through borrowings

from close relatives or friends, and through loans from banks or other financial
institutions.

Legal Status: The proprietor and the business enterprise are one and the same in the
eyes of law. There is no difference between the business assets and the private assets
of the sole proprietor.

Liability: The liability of the sole proprietor is unlimited. This means that, in case the
sole proprietor fails to pay for the business obligations and debts arising out of business
activities, his personal property can be used to meet those liabilities.

Stability: The stability and continuity of the firm depend upon the capacity, competence and
the life span of the proprietor.

Legal Formalities: In the setting up, functioning and dissolution of a sole

proprietorship business no legal formalities are necessary. However, a few legal
restrictions may be there in setting up a particular type of business. For example, to
open a restaurant, the sole proprietor needs a license from the local municipality

ADVANTAGES OF SOLE PROPRIETORSHIP

Easy Formation: The sole trader business is easy to form. Anybody wishing to start such a
business can do so without any legal formalities.

Better Control: The owner has full control over his business. He plans, organizes, co-
ordinates the various activities. Since he has all authority, there is always effective control.

Prompt Decision Making: The decision making becomes quick, which enables the owner to
take care of available opportunities immediately and provide immediate solutions to
problems.

Flexibility in Operations: One man ownership and control makes it possible for change in
operations to be brought about as and when necessary.

Retention of Business Secrets: The owner is in a position to maintain absolute secrecy

regarding his business activities.

Direct Motivation: The owner alone is the beneficiary of the profits.

Personal Attention to Consumer Needs: proprietor taking personal care of consumer needs
as he normally functions within a small geographical area.

Creation of Employment: A sole trader business facilitates self-employment and also

employment for many others.

DISADVANTAGES OF SOLE PROPRIETORSHIP

Unlimited Liability: The liability of business is recovered from the personal assets of the
owner. It restricts the sole trader to take more risk and increases the volume of his business.

Limited Financial Resources: The ability to raise and borrow money by one individual is
always limited. The inadequacy of finance is a major handicap for the growth of sole
proprietorship.

Limited Capacity of Individual: An individual has limited knowledge and skill. Thus his
capacities to undertake responsibilities, his capacity to manage, to take decisions and to bear
the risks of business are also limited.

Uncertainty of duration: The existence of a sole trader business is linked with the life of the
proprietor. Illness, death or insolvency of the owner brings an end to the business. The
continuity of business operation is, therefore, uncertain.

JOINT HINDU FAMILY BUSINESS

This is a form of business organization which exists in India only. And it is only the Hindus
who can form this organization as the name itself indicates. Outsiders cannot become
members of this origination. Membership to this type of organization is either by birth or by
marriage to a male person who is already a member of a Joint Hindu Family. Membership to
a Joint Hindu Family is automatic and cannot be avoided, if one takes his birth in a Hindu
Family which is running a business.

It is also knows as undivided Hindu Family. It is a family consists of common ancestor,

which is a must to bring a Joint Hindu Family into existence all his male descendants up to
any generation along with their wives and unmarried daughters. The death of a common
ancestor does not bring the Joint Hindu Family to an end. It continues till perpetuity, as upper
links 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. According to Hindu Law, the senior most male member of the
family is ‘Karta’ by virtue of his position in the family. Kartha’s powers are almost
unlimited. He acts on behalf of the other members of the family. Neither he is accountable to
anyone nor prepares accounts.

Hindu Undivided Family Business

Hindu Undivided Family business is a precise kind of business structure found only in India.
This is one of the classical methods of business structure in the nation. It is administered by
the Hindu Law. The source of membership in the company is birth in a family and 3
consecutive generations can be members of the company.

The business is managed by the head of the family (eldest member) and he is called Karta.
However, all the members hold equal ownership over the property of an ancestor and they are
called as co-parceners.

• Examples - Reliance Industries Limited and Mahindra and Mahindra Limited.

Schools of Hindu Law

On the basis of the schools of Hindu Law, Joint Hindu Family is considered under two
Heads.
• Mitakshara
• Dayabhaga.

Mitakshara :

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. In this type of Joint Hindu Family there is community of ownership and
unity of profession. The members of a Hindu undivided Family who own a business are
called Co-parceners. Such a business organisation is managed by the head of the family
called the Karta. However, if all the members agree, a junior member of the family can act as
the Karta.
In Mitakshara Joint Hindu Family, property cannot be alienated either by father or by other
co-perceners can alienate upto his own undivided share in the joint family property.

The share of a member of Hindu undivided family depends and fluctuate on the births and
deaths in the family. The share decreases with birth and incrase with death in the family.
Ordi- narily, the property belonging to the family cannot be transferred by any one.

Under the old Hindu Law, female was not entitled to any share in the property. Btu with the
passage of Hindu Succession Act of 1956 even females have been included in the list of
persons who acquire share in succession.

Dayabhaga : According to this law, the property can only be inherited. The share of each
member is specified. It does not fluctuate on birth and deaths in a family. Further any
member can transfer his share of the property in the family.

Rights and Liabilities of Karta and Co-parceners

The Karta who is actually the manager of the firm run by the family occupies a very impor-
tant and unique position. No other member of the business cna question his action in running

the business. The Karta is liable to make good to the other members of the family their shares
of all sums which he has misappropriated. The Karta has the power either to carry on the
business or to close down.

The Co-parceners have no right of participation in the management. Further they have limited
liability i.e., they are liable only to the extent of their share in the business.

Characteristics or Features of Joint Hindu Family Business:

1) Governed by Hindu Law : The control and management of the Joint Hindu Family firm
is done according to the uncodified or codified Hindu Law. The uncodified law consists of
two schools, Mitakshara and Dayabhaga. In the same way rights and duties of its members
are governed by uncodified Hindu Law.

2) Membership : The membership of the family can be acquired only by birth. An outsider
can be admitted by adoption. Marrying a male member of the family also confers
membership.

3) 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. He may
manage or mis- manage, it cannot be questioned by any member. But the management is
more effective due to nature love and affection with the members of the family.
4) Limited Liability of Others : All the members in a Joint Hindu Family have limited
liability to the extent of the joint property of the family. The self occupied property of any
member cannot be taken to repay the loans taken by the family. It is only the joint family
property which is laible for satisfying debts. However, Karta is personally liable for loan
taken on promissory note.

5) Continuity : It continues forever. The death, insolvency, insanity of the any member in the
family do not bring the joint family firm to an end. There is no limit to its membership
number also.

6) Membership : A person from its very birth becomes the member of the Joint Hindu
Family. This is an important feature of this business organisation.

7) 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 for the same.

8) Implied Authority of Karta : There is an implied authority in favour 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. No other member is having such an
authority.

Advantages

1. Centralized Management: The management of a Hindu Joint Family Firm is centralised

in the hands of Karta. He is the eldest and the most experienced person gives a very

disciplined management. This results in smooth functioning of the business. No other

member interferes in his management.

2. Utmost Secrecy : Joint Hindu Family firm is managed by a single man ‘Karta’. He can do
it with utmost secrecy. He can keep a thing secret even from the members of the firm.

3. Quick Decision : Joint Hindu Family Firm is a single man show. As Karta is the decision-
maker, he can take the decision quickly. Further it is advantageous that the decision in final
and unchallen- geable.

4. Credit Facilities : In Joint Hindu Family firm the credit facilities are more. The reason is
that the liability of the Karta is unlimited. Moreover, Karta is having personal relations with
others, which are also helpful in raising credit.

5. Work according to Capacity : Work can be divided among the co-parceners on the basis
of their capacity and talents. A person who is more strong than others may be asisgned work
of physical nature. Disabled and infants are not required to do any work at all.
6. Natural Love Between the Members : In Joint Hindu Family Firm, it is the natural love
and affection which the members are having for each other. This helps the smooth working of
busi- ness. Every coparcener is guaranteed a minimum share of profits irrespective of their
contribution to the working of the firm.

7. Economy: Economy is must for the success of any business.It is well balanced and main-
tained in Joint Hindu Family Firm. This may be due to hanging sword of partition of family
on the neck of Karta.

8. Knowledge to Young Generation : The younger members of the family can get the
benefit of knowledge and experience of elder members of the family.

9. Limited Liability : The liability of all the members of the family firm is limited to their
undivided shares in the property of the family. However Karta’s liabilities are unlimited.

Disadvantages

1. No reward for Efficiency : There is no encouragement to work hard because profits are
divided equally. The persons who work more efficiently and dedicatedly are not rewarded.
Due to this the members may try to avoid work.

2. Limited Capital : The investment of this type of firm is limited only upto the resources of
the family. They may not be sufficient to meet the business requirement and for the
expansion of the business.

3. Limited Managerial Skill : Only the eldest male member of the family is to manage the
family business. He performs all the functions of the management. He may not be well
conversant with the knowledge of business skills and other problems of managemnt. The
views of younger mem- bers will not be approved by the elder members. This leads to

conflict between old and young members.

4. Suspicion : The Karta is empowered with vast power of secrecy and he can keep a thing
secret from its members. But there is no restriction on him. This gives birth to suspicion
among the members themselves which can be disastrous for the joint Hindu family.

PARTNERSHIP
INTRODUCTION
Partnership firm is another form of business organization. The two deficiencies of sole trad-
ing concern are shortage of capital and lack of managerial skills. Moreover risk bearing
capacity of an individual was also limited. More persons were required for supervising
different functions. Partnership form of organization can overcome these deficiencies.
The partnership may come into existence either as a result of the expansion of the sole trading
concern or by means of agreement between two or more persons. When the size of business
expands, the proprietor finds it difficult to manage the business and is forced to take
outsiders, who provides additional capital and assistance to manage the business on sound
lines.

Two or more persons can join together to establish a partnership firm. It has a legal status. It
is covered by the Indian Partnership Act, 1932. There will be union of Capital, Skill,
Organizing Power and Managerial Ability. The profit or loss is shared according to agreed
proportions.

DEFINITION:

According to L.H. Haney, partnership is “The relationship between persons who agree to
carry on business in common with a view to enjoying ‘private gain’.

John A. Shubin opines that “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
the business”.

According to sec 4 of partnership Act, 1932, “The relation between persons who have agreed
to share profits of a business carried on by all or any of them acting for all”.

CHARACTERISTIC FEATURES OF PARTNERSHIP:

1. Association of Persons: In partnership form of organization, there must be at least two per-
sons. Partnership is the outcome of a contract, so there must be two or more persons. Minor
cannot form a partnership firm as they are incompetent to enter into a contract. According to
sec 11 of the contract Act, there is no maximum limit on partners in partnership Act. But
according to Companies Act, the maximum number of partners cannot exceed ten in banking
business and twenty in any other business.

2. Contractual Relation: According to partnership Act, the relation of partnership arises from
contract but not from status. The contract may be oral or written but in practice written
agreement made because it helps to settle the disputes if 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. The main motive of partnership is earning of profits.

4. Limited Authority: There 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: In partnership, every partner is liable to an unlimited extent. He is

liable till the last paisa of the firm’s debt is paid, irrespective of the fact that the liability
might have been incurred by himself or by other partners of the firm. The partners are liable
individually and collectively.

6. Principal and Agent Relationship: In partnership the relationship of principal and agent
exist. 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. He also acts as a principal because he is bound by the activities of
other partners.

7. Good Faith: The very basis of the partnership business are good faith and mutual trust.
Every partner should act honestly and give proper accounts to other partners. The partnership
cannot run if there is suspicion among partners. It is very important that partners should act as
trustees and for the common good of all. Distrust and suspicion among partners lead to the
failure of many firms.

8. Existence of Business: Partnership can only be for some kind of business. The term busi-
ness includes any trade, profession or occupation. By business we mean all the activities con-
cerning production, distribution and rendering services for the purpose of earning profits.

9. Restriction on Transfer of Shares: No partner can sell or transfer his share to anybody else
without the consent of the other partners. In case any partner does not want to continue in the
partnership, he can give a notice for dissolution of the firm.

10. Common Management: Every partner has a right to take part in the running of the
business. It is not necessary for all partners to participate in day-to-day activities of the
business but they are entitled to participate. Even if partnership business is run by some
partners, the consent of all other partners is necessary for taking important decisions.

11. Partners and Partnership are one: A partnership firm has no separate entity from the part-
ners. No firm can exist without partners. The rights and liabilities of partners are the rights
and liabilities of the firm. Partners have implied authority to bind the firm for their acts.

12. Capital: 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 firms capital.

13. Protection of Minority Interest: All-important decisions are generally taken by contensus.
It ensures protection of those who may not agree to the majority view point. A partner may
even ask for the dissolution of partnership if he feels aggrieved.

14. Continuity: There is no true limit for the continuity of a partnership firm. It continues till
the time the partners want it to go. Death, insolvency or any misunderstanding among the

partners may dissolve the partnership. Dissolution of partners may not necessarily mean
dissolution of the firm. The remaining partners may continue the firm after meeting the
claims of outgoing partners.

ADVANTAGES OF PARTNERSHIP FORM OF ORGANISATION:

Partnership form of organization is suitable for medium size businesses where personal ef-
forts of entrepreneurs are essential. The following are the advantages of partnership.

1. Easy to form: A simple agreement among partners is sufficient to start partnership firm.
The registration of the firm is optional.

2. Large Resources: The resources of more than one person are available for the business.
More partner can be admitted if capital needs are large. The partnership concern can also
arrange funds from the outside resources.

3. Managerial Talents: Different functional departments may be managed and controlled by

different partners. The talent, expertise and knowledge of partners in different fields can be
used for the welfare of the business. It increases the efficiency of the business resulting in
more profits.

4. More Credit-Worthiness: The partners may have sufficient contacts in the market. The
liability of the partners being unlimited, they will be able to raise more finances. As
compared to a sole- trading concern, partnership concern has more credit-worthiness.

5. Prompt Decision-making: The partners meet frequently and they can take prompt
decisions. The firm will not lose any business opportunities because of delay in taking a
decision.

6. Sharing of Risk: The risk of business is shared by more persons. The burden of every
 partner will be much less as compared to the burden of sole-trader. Further more, the business
expansion will not be hampered for fear of risk.

7. Relation between reward and work: The partners try to put more labour to earn more and
more profits. These are a direct relationship between reward and work. The more they work,
the more they will be benefited.

8. More possibility of Growth and Expansion: As compared to a sole-trading, partnership

con- cern has more possibilities for expansion of growth of the business activities. The
partner can contribute more and manage the activities more systematically.

9. Close Supervision: The partner themselves look after the business. So they can avoid wast-
ages. They have direct access to the employees and can encourage them for more production.
The management of partnership is much cheaper when compared to joint stock company.

10. Flexibility of Operations: Government approval is not necessary for making changes in
the business set-up. There can be any change in managerial set up, capital and scale of
operations.

11. Secrecy: The firms are not required to publish any accounting information to outsiders.
The partners can keep the business secrets to themselves. The competitors do not know about
the exact position of the business.

12. Protection of Minority Interests: Every partner has a right to participate in the
management of the business. All-important decisions are taken by the consent of all partners.
If majority decision is enforced on minority then effected partners can get the business
dissolved.

13. Easy Dissolution: The partnership can be dissolved on insolvency, lunacy or death of a
partner. If the partnership is at will, then any partner can get the firm dissolved by giving
notice to other partners. No legal formalities are required at the time of dissolution. So it is
easy to start as well as dissolve a partnership concern.

14. Democratic Administration: All partners may take active interest in the working of the
firm. All the partners are consulted on important decisions. Generally, strategic decision are
taken by consensus only.

15. Saving in Managerial Expenses: There are savings in expenses of a partnership firm. The
partners divide all important functions among themselves and look after them.

DISADVANTAGES OF PARTNERSHIP:

1. Limited Resources: There is restriction to the number of partners in a firm, i.e., ten in case
of banking business and twenty in any other business. Hence the capital is limited to the
extent of financial ability of each partner in the firm. They cannot finance for bigger ventures.

2. Unlimited Liability: The liability of partners in the firm is unlimited. The personal
properties are held liable for clearing the debts and obligations of the firm. Partners owning
private properties have to be careful to become partners in a firm.

3. Instability: The partnership concern suffers from the uncertainty of duration. The
partnership may be dissolved at the time of death, insolvency or lunacy of a partner. The
discontinuity of the business is a social loss and it causes inconvenience to the consumers and
workers.

4. Mutual Distrust: The mutual distrust among partners is the main cause for the dissolution
of partnership concern. It is difficult to maintain harmony among partners. They may have
different opinions and may not agree on certain matters. This may lead to the dissolution of
the firm.

5. Limitation on Transfer of Shares: A partner has no right to transfer his shares to third party
without the consent of other partners.

6. Burden of Implied Authority: A partner can bind the business by his acts. A dishonest
partner creates problems in business. The other partners will have to meet the obligations
incurred by the partner. The provision of implied authority may create problems for the
business.

7. Lack of Public Faith: Partnership concern has no obligation of publishing accounts. Public
is unaware of the exact position of the business. There is suspicion in the minds of public
about the profits and financial position of the firm. So partnership concerns lack of public
confidence.

8. Lack of Prompt Decisions: Every partner is entitled to take part in the management of the
firm. Collective decisions may lead to delay and sometimes lead to misunderstanding. Delay
in decision making leads to a loss in business. Lack of harmony among partners often leads to
the dissolution of the firm.

9. Cautious Approach: Unlimited liability of partners leads to cautious approach on the part
of partners. Risk bearing capacity of partners may also be limited. They try to avoid decisions
where risk is involved. Because of this nature, a number of opportunities may be lost.

10. No Independent Legal Status: The partners and the partnership firm are treated as one and
the same. Partners have no separate entity and partnerships do not enjoy an independent legal
status.
Types of partner:

1. Active or managing partner:

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

2. Sleeping or dormant partner:

A sleeping partner does not take active part in the management of the business. Such a
partner only contributes to the share capital of the firm, is bound by the activities of other
partners, and shares the profits and losses of the business.

3. Nominal partner:

Nominal or ostensible or quasi partner: These partners neither contribute capital nor take part
in the management of the business. He does not share in the profits or losses of the firm but is
liable to third parties for the debts of the firm. He only lends his name and reputation for the

benefit of the firm

4. Partner by Estoppels :

He is a person who by his words (spoken or written) or conduct represents himself as a

partner. Such a partner becomes liable to those who advance money to the firm under the
impression that he is a partner in the firm.

A partner by estoppels is a person who gives an impression to others that he/she is a partner
of the firm through his/her own initiative, conduct or behavior

5. Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm and
would not be liable for its losses. Partner sharing the profits of the business without making
himself responsible for losses, if any, is known as partner in profits only. He contributes
capital and is also liable to the third parties like other partners

6. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering into a
contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a
person who has not attained the age of 18 years) cannot be one of the parties to the contract.
But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the
benefits of partnership’, with the consent of all partners

7. Secret partner:

The position of a secret partner lies between active and sleeping partner. His membership of
the firm is kept secret from outsiders. His liability is unlimited and he is liable for the losses
of the business. He can take part in the working of the business. An example of secret partner
may be a person who has a tarnished reputation from a previous business failure and doesn't
want that reputation to taint the new business, or she simply may prefer to operate
anonymously.

8. 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 sub-partner and the firm but between him
and the partner. The sub-partner is a non-entity for the partnership. He is not liable for the
debts of the firm. Sub partner is a third person with whom a partner agrees to share his profits
desired from the firm. He does not take any part in the management of the firm and he is also
not liable for the firm's debts

Partnership Deed

Partnership deed is a partnership agreement between the partners of the firm which outlines
the terms and conditions of the partnership between the partners. The purpose of a

partnership deed is to provide clear understanding of the roles of each partner, which ensures
smooth running of the operations of the firm.

• The Partnership comes into the limelight when:

• There is an outcome of agreement among the partners.

• The agreement can be either in written or oral form.

• The Partnership Act does not demand that the agreement has to be in writing.
Wherever it is in the form of writing, the document, which comprises terms of the agreement
is called ‘Partnership Deed.’

• It usually comprises the attributes about all the characteristics influencing the
association between the partners counting the aim of trade, the contribution of capital by each
partner, the ratio in which the gains and losses will be divided by the partners and privilege
and entitlement of partners to interest on loan, interest on capital, etc.

Registration of Partnership Deed Characteristics of a partnership deed are :

• The name of the firm.

• Name and addresses of the partners.

• Nature of the business.

• The term or duration of the partnership.

• The amount of capital to be contributed by each partner.

• The drawings that can be made by each partner.

• The interest to be allowed on capital and charged on drawings.

• Rights of partners.

• Duties of partners.

• Remuneration to partners.

• The method used for calculating goodwill.

• Profit and loss sharing ratio

Partnership Deed Contents

• While making a partnership deed, all the provisions and the legal points of the
partnership deed are included. This deed also includes basic guidelines for future projects and
can be used as evidence at times of conflict or legal procedures. For a general partnership
deed, the below mentioned information should be included.

• Name of the firm as determined by all partners.

• Name and details of all the partners of the firm.

• The date on which business commenced.

• Firm’s existence duration.

• Amount of capital contributed by each partner.

• Profit sharing ratio between the partners.

• Duties, obligations and power of each partner of the firm.

• The salary and commission if applicable that is payable to partners.

• The process of admission or retirement of a partner.

• The method used for calculating goodwill.

• The procedure that must be followed in cases of dispute arising between partners.

• Procedure for cases where a partner becomes insolvent.

• Procedure for settlement of accounts in the event of dissolution of a firm.

Importance of partnership deed

• A few important advantages of a well-drafted deed are listed:

• It controls and monitors the rights, responsibilities and liabilities of all the partners

• Avoids dispute between the partners.

• Avoids confusion on profit and loss distribution ratio among the partners.
• Individual partner’s responsibilities are mentioned clearly.

• Partnership deed also defines a remuneration or salary of the partners and working
partners. However, interest is paid to each partner who has invested capital in the business.

Joint-stock company

• A joint-stock company is a business owned by its investors, with each investor

owning a share based on the amount of stock purchased.

• A joint stock company is an organisation which is owned jointly by all its

shareholders. Here, all the stakeholders have a specific portion of stock owned, usually
displayed as a share.

• Few examples are mentioned below.

• Indian Oil Corporation Ltd.

• Tata Motors Ltd.

• Reliance Industries Ltd.

CHARACTERISTICS OF JOINT STOCK COMPANY:

Separate Legal Entity: Being an artificial person, a company has an existence independent
of its members. It can own property, enter into contract and conduct any lawful business in its
own name

Common Seal: Every company has a common seal by which it is represented while dealing
with outsiders. Any document with the common seal and duly signed by an officer of the
company is binding on the company.

Perpetual Existence: A company once formed continues to exist as long as it fulfils

the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of
any of its members.

Transferability of Shares: The members of a company are free to transfer the shares held by
them to anyone else.

Formation: A company comes into existence only when it has been registered after
completing the formalities prescribed under the Indian Companies Act 1956. A company is
formed by the initiative of a group of persons known as promoters.

Membership: A company having a minimum membership of two persons and maximum two
hundred is known as a Private Limited Company. But in case of a Public Limited Company,
the minimum is seven and the maximum membership is unlimited.

Management: Joint Stock Companies have democratic management and control.

Even though the shareholders are the owners of the company, all of the them cannot
participate in the management process. The company is managed by the elected
representatives of shareholders known as Directors.

Capital: A Joint Stock Company generally raises a large amount of capital through issue of
shares

ADVANTAGES OF JOINT STOCK COMPANY

Limited Liability: In a Joint Stock Company the liability of its members is limited to the
extent of shares held by them. This attracts a large number of small investors to invest in the
company. It helps the company to raise huge capital.

Benefits of large scale operation: It is only the company form of organization which can
provide capital for large scale operations. It results in large scale production
consequently leading to increase in efficiency and reduction in the cost of operation. It
further opens the scope for expansion.

Professional Management: Companies, because of complex nature of activities and

operations and large volume of business, require professional managers at every level of
organization. And because of their financial strength they can afford to appoint such
managers. This leads to efficiency.

Social Benefit: A joint stock company offers employment to a large number of people. It
facilitates promotion of various ancillary industries, trade and auxiliaries to trade.

Research and Development: A company generally invests a lot of money on research and
development for improved processes of production, designing and innovating new products,
improving quality of product, new ways of training its staff, etc.

DISADVANTAGES OF JOINT STOCK COMPANY:

1. Complexity in Formation: The process of the formation of a company is quite
complicated and lengthy. It requires the completion of various formalities, and various
different documents have to be prepared and submitted. It also requires obtaining different
kinds of permissions.

2. Lack of Secrecy: According to the Companies Act, 1956 every company has to share
various information about it with the registrar of companies, which is made available to the
general public also. This compulsion of sharing information makes it difficult for the
company to maintain secrecy about its operations.

3. Numerous Regulations: A company has to fulfil a number of formalities at different

stages of the business, and if it fails to meet any of these formalities, it has to bear the
penalty. It also has to file annual reports and return every year with the registrar of the
companies, which involves a huge amount of money and time of the company.

4. Delay in Decisions: The important decisions in a company are taken after consulting with
different people or discussing in the board meeting, which is a lengthy process. Also, once a
decision is made, communicating the decision to every person at different levels of the
company is also a lengthy process. Therefore, making decisions and implementing them can
delay things in a company.

Definition of Private Company

Section 2(68) of Companies Act, 2013 defines private companies. According to that, private
companies are those companies whose articles of association restrict the transferability of
shares and prevent the public at large from subscribing to them. This is the basic criterion that
differentiates private companies from public companies.

• The Section further says private companies can have a maximum of 200 members (except
for One Person Companies). This number does not include present and former employees
who are also members. Moreover, more than two persons who own shares jointly are treated
as a single member.

• The Section further says private companies can have a maximum of 200 members (except
for One Person Companies). This number does not include present and former employees
who are also members. Moreover, more than two persons who own shares jointly are treated
as a single member.

• This definition had previously prescribed a minimum paid-up share capital of Rs. 1 lakh for
private companies, but an amendment in 2005 removed this requirement. Private companies

can now have a minimum paid-up capital of any amount.

What is a Private Company?

• A private company is owned by either a small number of shareholders, company members,
or a non-governmental organization, and it does not offer its stocks for sale to the general
public.

Features of Private Companies:

• No minimum capital required: There was a minimum paid-up share capital requirement
of Rs. 1 lakh previously, but that is omitted now.

• Minimum 2 and maximum 200 members: A private company can have a minimum of
just two members (but just one is enough if it a One Person Company), and a maximum of up
to 200 members.

• Transferability of shares restricted: Private companies cannot freely transfer their shares
to the public like public companies. This is why stock exchanges never list private
companies.

• “Private Limited”: All private companies must include the words “Private Limited” or
“Pvt. Ltd.” in their names.

• Privileges and exemptions: Since private companies do not freely transfer their shares and
involve limited interest by members, the law has granted them several exemptions that public
companies do not enjoy.
Formation of Private Companies:

• Minimum 2 and maximum of 200 members can come together to form a private company
by submitting an application to that effect to the Registrar of Companies along with a
subscribed copy of their Memorandum of Association and other required documents after
payment of prescribed fees.

• The Memorandum must state the name of the company (which should include the words
“Private Limited”), the address of its registered office, its objects and purposes, and extent of
liability of its members. It must also mention the details of subscribers to the Memorandum.

• Apart from this, the Companies Act has also prescribed certain other compliances, such as
requirements relating to names of private companies, their Articles of Association, details of
members, transferability of shares, etc.

Privileges of Private Companies:

• The Companies Act has provided certain privileges and exemptions to private
companies that public companies do not possess. These privileges accord them greater
freedom in conducting their affairs. Here are some examples of them:

• No need to prepare a report for annual general meetings.

• Only 2 minimum directors required.

• No need to appoint independent directors.

• They can adopt additional grounds for the disqualification of directors and vacation of
their office.

They can pay greater remuneration to their directors than compared to some other types of
companies.

Limitations of Private Companies:

• Despite all the advantages they offer, private companies also have the following
limitations:

• Private companies cannot freely transfer shares to the public.

• They find it more difficult than public companies to access external financial support.

• Shareholders have greater risks and liabilities

Public Limited Company:

A public company is a company that has sold all or a portion of itself to the public via an
initial public offering. The main advantage public companies have is their ability to tap the
financial markets by selling stock (equity) or bonds (debt) to raise capital (i.e., cash) for
expansion and other projects.

• A public limited company is a voluntary association of members that are incorporated

and, therefore has a separate legal existence and the liability of whose members is limited.

• Public limited companies are listed on the stock exchange where it’s share/stocks are
traded publicly. Its main features are

• The company has separate legal existence apart from its members who compose it.

• Its formation, working and it’s winding up all its activities are strictly governed by
rules, laws, and regulations.

• A company must have a minimum of seven members but there is no limit as regards
the maximum number.

• The company collects Its capital by the sale of its shares and those who buy the shares
are called the members. The amount so collected is called the share capital.

• The shares of a company are freely transferable and that too without the prior consent
of other shareholders or subsequent notice to the company.

• The liability of a member of a company is limited to the face value of the shares he
owns. Once he has paid the whole of the face value, he has no obligation to contribute
anything to pay off the creditors of the company.

• The shareholders of a company do not have the right to participate in the dayto-day
management of the business of a company. This ensures the separation of ownership from
management. The power of decision making in a company is vested in the Board of
Directors, and all policy decisions are taken at the Board level by the majority rule. This
ensures the unity of direction in management.

Advantages of Public Limited Company:

• Led by Board of Directors

• Public limited companies are headed by a board of directors. The composition of the
board of directors is set out in the company’s articles of association.

• Normally it comprises a minimum number of two members and a maximum of 12.

• These are elected from the shareholders by the shareholders during the annual general
meeting. They act as the representatives of the shareholders in the management of the
company. Limited Liability

• Shareholder liability for the losses of the company is limited to their share
contribution only. This is what makes it a separate legal entity from its shareholders.

• The business can be sued on its own and not involve its shareholders. The company
does not belong to any person since one person can own only a part of it.

Number of Members:

• A public limited company has a minimum number of seven shareholders or members

and a limitless number of members. It can have as many shareholders as its share capital can
accommodate. Transferable shares

• Shares of a public limited company are bought and sold in a stock exchange market.
They are freely transferable between its members and people trading in the stock exchange.
Life Span

• A public limited company is not affected by the death of one of its shareholders, but
her shares are transferred to the next of kin and the company continues to run its business as
usual.

• In the case of a director’s death, an election is held to replace the deceased director.
Financial Privacy

• Public limited companies are strictly regulated and are required by law to publish
their complete financial statements annually.

• This ensures that they reveal their true financial position to their owners and potential
investors so that they can determine the true worth of its shares.

CO-OPERATIVE SOCIETIES:
Co-operative society is a voluntary association started with the aim of service of its members.
It is a form of business where individuals belonging to the same class join their hands for the
promotion of their common goals. These are generally formed by the poor people or weaker
section people in the society. It reflects the desire of the poor people to stand on their own
legs or own merit. The philosophy of the formation of co-operative society is ―all for each
and each for all‖. It is voluntary association of persons for mutual benefit and its aims are
accomplished through self help and collective effort.

CHARACTERISTICS OF CO-OPERATIVE ORGANISATION

1. Voluntary Membership : Every one is at liberty to enter or leave the Cooperative society
as and when one likes. Nobody is compelled to joint a Cooperative society.

2. Political and Religious Neutrality : The membership of a Cooperative society is open to

all irrespective of religion caste, creed, colour or political affiliation.

3. Democratic Management : The management of Cooperatives is always on democratic

lines. All the members of a society elect a body of persons to conduct and control day-to-day
work- ing of the society. But the ultimate control lies with the members.

4. Equal Voting Right to All : In cooperative societies every member is given right to vote
irrespective of his contribution towards the capital. All members have equal voice in the
management of the society.

5. Service Motive : The primary objective Cooperative societies is to provide service to their
members. The aim is not to earn profits.

6. Capital : The share capital contributed by the member is for the purpose of using it to the
maximum advantage of all the members. Hence the members do not expect retain on capital
employed.

ADVANTAGES OF CO-OPERATIVES:

Easy Formation: Any ten adult persons can voluntarily form themselves into an association
and get it registered with the Registrar of Co-operatives. Formation of a cooperative society
also does not involve long and complicated legal formalities.

Limited Liability: Like company form of ownership, the liability of members is limited to
the extent of their capital in the cooperative societies.

Social Service: The basic philosophy of cooperatives is self-help and mutual help.
Thus, cooperatives foster fellow feeling among their members and inculcate moral values in
them for a better living.

Open Membership: The membership of cooperative societies is open to all irrespective of

caste, color, creed and economic status. There is no limit on maximum members

DEMERITS OF CO-OPERATIVES:
1. Lack of Capital: The Cooperatives are started by economically weaker sections of the
society. The resources are not enough to start large enterprises. They cannot undertake the
production of goods for lack of resources. Moreover the return on capital is not attractive.
Hence people hesitate to invest their money in these societies.

2. Lack of Unity among the Members`: The participation of all the members of the society
cannot be uniform. Domination of some members may lead to conflict among the members.
Educated members may take the advantage of the uneducated members.

3. Cash Trading: The cash Trading business has both advantages and disadvantages. Private
Traders facilitate Credit facilities to consumers. The societies sell goods at lower prices but
absence of credit facilities forced them to go to private traders.

4. Political Interference: Many Co-operative societies are becoming platforms for politics
and making some of the officers corrupt power and money. The societies are governed on
political consideration rather than on business lines.

5. Lack of Public Confidence : The objectives of the societies are good but implementation
and management are not proper. It leads to lack of public confidence on societies.

Forms of Public Enterprise:

A public enterprise is made up of autonomous or semi-autonomous enterprises controlled by

the state or the national government. These companies were born to help the inhabitants of
the state in their commercial and industrial activities.

Types of Public Enterprises

Here is the list of the different types of organizations that fall under the definition of public
enterprise

Departmental Organization

When the public enterprise is managed by a department, it functions as one of the

government departments. One of the few examples of this type of organization is telegraphs,
broadcasting, etc.

The staff of these organizations is permanent and in India, they were selected based on civil
service exams. In the event that the people that the organization helps with its service are not
satisfied with its functioning, it is possible to file a complaint with the parliament because the
organization is part of the different sections of the parliament.

Public Company

This type of company was born after the approval of a special act by the government which
defines its powers, the scope of its functions, and its privileges. The three main characteristics
of this type of business are: First, it is a self-managed entity. Second, it is quite massive in

terms of the management of public enterprises. As a result, he can run his operations like a
real business without having to worry about direct parliamentary control.

Finally, these types of businesses are capable of being financially self-sufficient; they are
formed mainly with capital financing. Once the income begins to flow, the organization is
allowed to spend it.

Government Company

Most of the time, these companies operate and operate like a typical limited liability
company. The government owns all or part of the shares, equal to or greater than 51%. In this
organization, most of the directors are appointed by the government. The company is free to
sue or be sued by others. In addition, he can enter into a contract and acquire property on his
own. Unlike other state-owned enterprises, it is only created when the executive decision of
the government is approved. Without parliamentary approval, this society cannot be founded.
In addition, the government has the right to cancel any commercial act and way of working,
at any time.

Meaning of International Business:

International business refers to commercial activities that go beyond the geographical limits
of a country. Therefore, it includes not only the international movement of goods and services
but also the capital, personnel, technology, and intellectual property such as patents,
trademarks, technical knowledge, and copyrights.
It is a business that takes place outside the border, that is, between two countries. This
includes the international movement of goods and services, capital, personnel, technology,
and intellectual property rights such as patents, trademarks, and know-how. It refers to the
purchase and sale of goods and services that exceed the geographical limits of the country.

It comes in three types:

1. Export Trade: It is the sale of goods and services to foreign countries.

2. Import trade: Purchase goods and services from other countries.

3. Entrepot Trade: Import of goods and services for re-export to other countries.

Scope of International Business:

1. International trade: International business includes the import and export of goods.
2. Service export and import: It is also known as invisible commerce. Invisible commerce
items include tourism, transportation, telecommunications, banking, warehousing,
distribution, and advertising.

3. Licenses and franchises: A license is a contractual arrangement that allows one company
(licensor) access to its patents, copyrights, trademarks, or technologies to another foreign
company (licensee) at a rate called royalties. Pepsi and Coca-Cola are produced and sold
worldwide under a licensing system. A franchise is similar to a license, but a term used in
connection with the provision of services. For example, McDonald’s operates fast-food
restaurants around the world through its franchise system.

4. Foreign investment: It involves investing funds abroad in exchange for economic

profitability.

There are two types of foreign investment.

(A) Foreign Direct Investment (FDI)- Investing in foreign assets such as plants and
machinery for the purpose of producing and marketing goods and services abroad.

(B) Portfolio Investment- Investing in foreign company stocks or obligations to earn income
through dividends or interest.

Features of International Business:

1. It includes two countries: international business is only possible when there are
transactions in different countries.

2. Use of currencies: Each country has its own different currency. This causes currency
exchange problems as foreign currencies are used to carry out transactions.

3. Legal obligations: Each country has its own laws regarding foreign trade, which must be
complied with. Moreover, in the case of international transactions, there is more government
intervention.

4. High risk: International companies face great risks due to long distances, the risk of
fluctuations between the two currencies, and the risk of obsolescence.

5. Heavy document: Subject to a series of steps. Many documents need to be completed and
sent to the other party.

6. Time consumption: The time interval from sending and receiving goods to payment is
longer than that of domestic transactions.

Meaning of Multinational Corporation:

A multinational corporation, or MNC, refers to any organization or business which has an

international presence spread over many different countries. It doesn't necessarily indicate

that the company has over a thousand employees. It simply means that the company has
established its business worldwide.

MNCs became popular after globalization got a hold over world economics. Business owners
realized the underutilized potential that was the labor force in other countries of the world,
particularly the ones in Asia and Africa. One of the easiest ways to access that labor pool and
mold it into a profit-making enterprise was expanding the business to other parts of the world.

It may sound like having operations in multiple countries around the world is a very
expensive venture, but in reality, this is very cost-effective. This is because setting up offices
in countries with a good labor force and low cost of production will automatically generate a
greater net profit.

What Are Some Popular MNCs?

Some of the biggest names in business are all MNCs with a head office in their country of
origin and numerous branches in other parts of the world. Google is one of the most popular
MNCs today, and every engineer’s dream. Similarly, other MNCs include Twitter, IBM, HP,
PepsiCo, Microsoft, Sony and so on.

Importance of Multinational Companies:

We have written down some importance of MNC for a home country and how it helps
improve the GDP of a nation:

First, when a multinational company forms in a country, it improves the balance of payments
as investors from different countries will start to put their money in the home host country's
market. The investment will work as a direct flow of capital from the international market.

Also, the profits of multinational companies depend on the tax laws of the country in most
cases. As a result, it will be a good source of revenue for the domestic government.

When the company becomes multinational, it will create products for both national and
international markets. The local population will gain a much wider choice of goods/ services
at a lower price point than the imported substitutes.

When a company becomes multinational, it is a proud moment for the company owners,
investors and the country. The presence and development of multinational companies
showcase advancements in the industry front and help the host country build its reputation.

On the other hand, a bigger number of MNC companies list open gates for other large
corporations to set up their subsidiaries in the host country.