Forms of Business Organization

FORMS OF BUSINESS ORGANIZATION
PREPARED BY
Mr. V.M.Gaware
Asst. Prof
College of Pharmacy (For Women), Chincholi Nashik

1. Business means any activity that keeps a
person busy.
2. However business means all individual
and group activities directed towards
earning money & acquiring wealth
through production & exchange of
goods & services.
3. All those activities in the field of trade,
manufacturing, transport, banking,
warehousing, insurance, packaging,
advertisement etc whether undertaken
by individual or group with objective to
earn profit is called business.

There are five distinct forms of business organisations:
• Sole proprietorship
• Joint Hindu Family Business
• Partnership
• Joint Stock Company
• Cooperative society

Sole proprietorships:
1. It is the simplest form of business
organization and is known as one
man business.
2. They make up 72% of all
businesses and take in 5% of total
profits.
3. They are the simplest to form
because of the small amount of
capital needed to start up.

4. In this form of business
organization one person is solely
responsible for providing capital,
for bearing the risk of the
enterprise and also day to day
management of business.
5. Examples are beauticians,
dentists, lawyers dry-cleaning,
lemonade stands, Chemist shop.
6. Therefore this form of business is
best suited to a sole proprietor

SALIENT FEATURES OF SOLE
PROPRIETORSHIP:
1. Sole proprietor has full authority over the affair of
business.
2. He has to act according to his ability and skill.
3. The ownership lies with one person only.
4. There is no partnership or association. The proprietor
& the business enterprise are one and the same.

5. No legal formalities are required to start the business
except in certain business where legal formalities are
required to be fulfilled.
E.g to start a retail drug store a license is needed from
the drug administration.
6. The proprietor has to arrange the necessary capital and
assets which are essential to run its business smoothly.
7. The profit earned in the business entirely belongs to the
proprietor and losses are also to be borne by him.
8. The liability of SP is unlimited.

ADVANTAGES:
1. It is most easily formed of all forms of
business organizations since no legal
formalities are necessary for setting up
his type of business.
2. The secrecy of business affairs can be
maintained.
3. The sole proprietor is able to establish
a personal contact with his customers.
4. The sole proprietor is free to take any
decision in regard to all matters
concerning his business.

5. The incentive of greater profits and fear
of losses induce the proprietor to work
to the best of his ability as well as the
capacity.
6. It encourages professionally qualified
persons to set up their own business
under self employment scheme.
7. The sole proprietor is free to change the
pattern of management at any time.
8. The capital investment in the business
can be increased or decreased at will.
9. Comparatively there is little expenditure
involved in managing the enterprise.

Disadvantages:
1. The individual generally suffers due to
lack of adequate financial resources
and find difficult to expand the business.
2. It is very difficult for a single person to
look after every aspect of the business
viz..production, sale, finance, advertising
and keeping accounts.
3. The business ends with the death of
proprietor becoz his heirs may not be as
competent and qualified to run his
business after his death.

4. The sole proprietor usually run his business only on
small scale. So he can't enjoy the benefits of large scale
production or buying or selling which raise the cost of
business operations.
5. The liability for business debts is unlimited.
6. There are no checks and controls on sole proprietor.

JOINT HINDU FAMILY BUSINESS
• The Joint Hindu Family (JHF)
business is a form of business
organization run by Hindu
Undivided Family (HUF), where the
family members of three successive
generations own the business
jointly.
• The head of the family known as
Karta manages the business in the
same family.

• The other members are called co-parceners and all of
them have equal ownership right over the properties of
the business.
• The membership of the JHF is acquired by virtue of birth.

• There is no restriction for minors to become the
members of the business.
• As per Dayabhaga system of Hindu Law, both male and
female members are the joint owners.
• But Mitakashara system of Hindu Law says only male
members of the family can become the coparceners.
• While the Dayabhaga system is applicable to the state of
West Bengal, Mitakshara system of Hindu Law is
applicable to the rest of the country.

CHARACTERISTICS OF JHF FORM OF BUSINESS
ORGANISATION
1. Formation: In JHF business there must be at least two
members in the family, and family should have some
ancestral property. It is not created by an agreement but
by operation of law.
2. Legal Status: The JHF business is a jointly owned
business. It is governed by the Hindu Succession Act
1956.
3. Membership: In JHF business outsiders are not allowed
to become the coparcener. Only the members of
undivided family acquire co-parcenership rights by birth.
4. Profit Sharing: All coparceners have equal share in the
profits of the business.

5. Management: The business is managed by the senior
most member of the family known as Karta. Other
members do not have the right to participate in the
management.
The Karta has the authority to manage the business as per
his own will and his ways of managing cannot be
questioned.
If the coparceners are not satisfied, the only remedy is to
get the HUF status of the family dissolved by mutual
agreement.
6. Liability: The liability of coparceners is limited to the
extent of their share in the business. But the Karta has an
unlimited liability. His personal property can also be
utilized to meet the business liability.

7. Continuity: Death of any coparceners does not affect the
continuity of business. Even on the death of the Karta, it
continues to exist as the eldest of the coparceners takes
position of Karta. However, JHF business can be
dissolved either through mutual agreement or by partition
suit in the court.

MERITS OF JHF FORM OF BUSINESS
ORGANISATION
1. Assured Shares in Profits: Every coparcener is assured
of an equal share in the profits irrespective of his
participation in the running of the business. This
safeguards the interest of minor, sick, physically and
mentally challenged coparceners.
2. Quick Decision: The Karta enjoys full freedom in
managing the business. It enables him to take quick
decisions without any interference.

3. Sharing of Knowledge and Experience:
A JHF business provides opportunity for the young
members of the family to get the benefits of knowledge
and experience of the elder members. It also helps in
inculcating virtues like discipline, self-sacrifice,
tolerance etc.
4. Limited Liability of Members: The liability of the
coparceners except the Karta is limited to the extent of
his share in the business. This enables the members to
run the business freely just by following the instructions
or direction of the Karta.

5. Unlimited Liability of the Karta: Because of the
unlimited liability of the Karta, his personal properties are
at stake in case the business fails to pay the creditors. This
clause of JHF business makes the Karta to manage
business most carefully and efficiently.
6. Continued Existence: The death or insolvency of any
member does not affect the continuity of the business. So
it can continue for a long period of time.
7. Tax Benefits: HUF is regarded as an independent
assesses for tax purposes. The share of coparceners is not
to be included in their individual income for tax purposes.

LIMITATION OF JHF FORM OF BUSINESS
ORGANISATION
Limited Resources: JHF business has generally limited
financial and managerial resource. Therefore, it is not
considered suitable for large business.
Lack of Motivation: The coparceners get equal share in the
profits of the business irrespective of their participation. So
generally they are not motivated to put in their best.
Scope for Misuse of Power: Since the Karta has absolute
freedom to manage the business, there is scope for him to
misuse it for his personal gains. Moreover, he may
have his own limitations.

Instability: The continuity of JHF business is always under
threat. A small rift within the family may lead to seeking
partition.

PARTNERSHIP:
‘Partnership’ is an association of two or
more persons who pool their financial and
managerial resources and agree to carry on
a business, and share its profit.
The persons who form a partnership are
individually known as partners and
collectively a firm or partnership
firm.

Partnership form of business organisation in India is
governed by the Indian Partnership Act, 1932 which defines
partnership as “the relation between persons who have
agreed to share the profits of the business carried on by all
or any of them acting for all”.

CHARACTERISTICS OF PARTNERSHIP FORM OF
BUSINESS ORGANISATION
Two or More Persons: To form a partnership firm at least
two persons are required. The maximum limit on the number
of persons is ten for banking business and 20 for other
businesses. If the number exceeds the above limit, the
partnership becomes illegal and the relationship among them
cannot be called partnership.

Contractual Relationship: Partnership is created by an
agreement among the persons who have agreed to join hands.
Such persons must be competent to contract. Thus, minors,
lunatics and insolvent persons are not eligible to become the
partners. However, a minor can be admitted to the benefits of
partnership firm i.e., he can have share in the profits without
any obligation for losses.
Sharing Profits and Business: There must be an agreement
among the partners to share the profits and losses of the
business of the partnership firm. If two or more persons share
the income of jointly owned property, it is not regarded as
partnership.

Existence of Lawful Business: The business of which the
persons have agreed to share the profit must be lawful. Any
agreement to indulge in smuggling, black marketing etc.
cannot be called partnership business in the eyes of law.
Principal Agent Relationship: There must be an agency
relationship between the partners. Every partner is the
principal as well as the agent of the firm. When a partner
deals with other parties he/she acts as an agent of other
partners, and at the same time the other partners become the
principal.

Unlimited Liability: The partners of the firm have unlimited
liability. They are jointly as well as individually liable for the
debts and obligations of the firms. If the assets of the firm are
insufficient to meet the firm’s liabilities, the personal
properties of the partners can also be utilised for this purpose.
However, the liability of a minor partner is limited to the
extent of his share in the profits.

Voluntary Registration: The registration of partnership firm
is not compulsory. But an unregistered firm suffers from
some limitations which makes it virtually compulsory to be
registered. Following are the limitations of an unregistered
firm.
• The firm cannot use outsiders, although the outsiders
can use it.
• In case of any dispute among the partners, it is not
possible to settle the dispute through court of law.
• The firm cannot claim adjustments for amount
payable to, or receivable from, any other parties.

MERITS OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION
Easy to Form: A partnership can be formed easily without
many legal formalities. Since it is not compulsory to get the
firm registered, a simple agreement, either in oral, writing
or implied is sufficient to create a partnership firm.

Availability of Larger Resources: Since
two or more partners join hands to start
partnership firm it may be possible to
pool more resources as compared to sole
proprietorship form of business
organisation.
Better Decisions: In partnership firm
each partner has a right to take part in the
management of the business. All major
decisions are taken in consultation with
and with the consent of all partners.
Thus, collective wisdom prevails and
there is less scope for reckless and hasty
decisions.

Flexibility: The partnership firm is a
flexible organisation. At any time the
partners can decide to change the
size or nature of business or area of
its operation after taking the
necessary consent of all the partners.
Sharing of Risks: The losses of the
firm are shared by all the partners
equally or as per the agreed ratio.

Keen Interest: Since partners share the
profit and bear the losses, they take keen
interest in the affairs of the business.
Secrecy: Business secrets of the firm are
only known to the partners. It is not
required to disclose any information to the
outsiders. It is also not mandatory to
publish the annual accounts of the firm.

Benefits of Specialisation: All partners
actively participate in the business as per
their specialisation and knowledge.
Protection of Interest: In partnership
form of business organisation, the rights of
each partner and his/her interests are fully
protected. If a partner is dissatisfied with
any decision, he can ask for dissolution of
the firm or can withdraw from the
partnership.

LIMITATIONS OF PARTNERSHIP FORM OF
BUSINESS ORGANISATION
Unlimited Liability: The most important drawback of
partnership firm is that the liability of the partners is
unlimited i.e., the partners are personally liable for the debt
and obligations of the firm. In other words, their personal
property can also be utilised for payment of firm’s liabilities.

Instability: Every partnership firm has
uncertain life. The death, insolvency,
incapacity or the retirement of any partner
brings the firm to an end. Not only that
any dissenting partner can give notice at
any time for dissolution of partnership.
Limited Capital: Since the total number
of partners cannot exceed 20, the capacity
to raise funds remains limited as compared
to a joint stock company where there is no
limit on the number of share holders.

Non-transferability of share: The share of
interest of any partner cannot be transferred to
other partners or to the outsiders. So it creates
inconvenience for the partner who wants to
transfer his share to others fully and partly.
The only alternative is dissolution of the firm.
Possibility of Conflicts: You know that in
partnership firm every partner has an equal
right to participate in the management. Also
every partner can place his or her opinion or
viewpoint before the management regarding
any matter at any time. Because of this,
sometimes there is friction and quarrel among
the partners. Difference of opinion may give
rise to quarrels and lead to dissolution of the
firm.

KINDS OF PARTNERS:
Active Partner: He takes an active part in
management of firm’s business & bears
unlimited liability for the debts of firm. Like
other partner an active partner also contributes
capital to the firm.
Sleeping or inactive partner: A sleeping
partner does not take any active part in the
management of the firm’s business. He
however contributes capital and shares the
profits/losses of the firm. His liability for the
debts of firm is unlimited.
I gave 30,000 as a silent partner, so I
don’t have to do anything.

Nominal Partner: He only lends his name to
the firm as a partner. He however neither
invest any capital nor claims any share in the
profits of the business. Though he does not
take part in the management of firm’s
business. He bears unlimited liability for the
debts incurred by the firm.
Partner in Profit only: He invests his capital
only with the earn a share in profits of the firm
and has no liability as regards to any losses
suffered by firm. His liability for the firm’s
debts is however unlimited.

Secret Partner: A partner who does not want
the fact of his being a partner to be known to
outsiders is known as a secret partner.
However his liability for the firm’s debts is
however unlimited.
Minor Partner: A partner below the age of 18
being minor does not enjoy the rights of full-
fledged partner in partnership firm since in law
he is not competent to contract. However the
Indian partnership act allows minor as partner
if all other partner agree to it. A minor as
partner is entitled to a share in the profits and
property of the firm. His liability for the firm’s
debts is however limited in proportion to his
share in the profits and property of the firm.

Partner by Estoppel: If outsider behaves in
such a fashion that he is mistaken as partner of
the firm by third party he will held liable to all
those third parties who extend credit to the
firm on the assumption of his being partner.
Such person is known as partner by estoppel
becoz of his having behaved as partner he can
not deny the liabilities attaching to the position
of a partner. In actual practice a partner by
estoppel is not partner of the firm. He neither
contributes any capital nor takes part in the
management of firm

KINDS OF PARTNERSHIP:
From the point of view of liability of partners a
partnership may be of two types:
1. General Partnership
2. Limited Partnership

General Partnership:
• In a general partnership the liability of every partner is
unlimited.
• In case the assets of the firm are not sufficient to pay off
its liabilities even the private property of the partners may
be used to meet the un discharged liabilities.
• However a minor partner is an exception becoz his
liability for firm’s obligation is limited to the proportion
of his share of profits and capital.
• Each partner of general partnership is entitled to
participate in the management of the business unless the
partners themselves decide otherwise.

Limited partnership:
• The unlimited liability of partners in general partnership
discourages investment of large sums in the firm.
• The limited partnership is a way out of this difficulty
although it is not permitted under the Indian Law.
The main features of such a partnership are:
1. A limited partnership consists of two classes of partners,
namely “ general partners” with unlimited liabilities and
“ Special” or “limited” partners with their liability limited
to their capital contribution.
2. A special partner cannot assign his share to an outsider
without the consent of the general partners.

3. Limited partner simply invests his
money in the firm. Though he is not
entitled to take part in the management
of business he is allowed to inspect the
books of the firm for this information
4. The death, lunacy or bankruptcy of
limited partner will not effect the
existence of the firm in any way. As
such a limited partnership is more stable
than a general partnership firm.
5. A special partner can’t withdraw any
part of the capital contributed by him. If
he does so his liability on the portion so
withdraw becomes unlimited

JOINT STOCK COMPANY
• The limitations of sole-proprietorship and partnership
forms of ownership gave birth to joint stock company
form of organisation.
• Two important limitations of earlier form of organisation
were inadequacy of funds and unlimited liability. The
earlier form of organisation could not meet the increasing
demand for funds of organisation.
• The other limitation which hampered the growth of
business was the unlimited liability of owners.

Joint stock company was first started in ITALY in
THIRTEENTH century. During 17th and 18th centuries, joint
stock companies were formed in ENGLAND under ROYAL
CHARTER or ACTS OF PARLIAMENT.
Definition: It is a voluntary association formed by some
persons for profits with a capital divided into transferable
shares, having a corporate body and a common seal.

CHARACTERISTICS OF JSC
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 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 in a public limited company.
INDEPENDENT LEGAL ENTITY: The company is
created under law. It has separate legal entity apart from its
members. A company acts independently of its members.
The company is not bound by the acts of its members. The
company can use and be used in its own name.

LIMITED LIABILITY: The liability of its shareholders is
limited to the value of shares they have purchased. In case
the company incurs huge liabilities, the shareholders can
only be called upon to pay the unpaid balance on their
shares.
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.
TRANSFERABILITY OF SHARES: The shares of the
company can be transferred by its members. Under
ARTICLES OF ASSOCIATION, the company can put
certain restrictions on the transfer of shares 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.
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.

CORPORATE FINANCE: A joint stock company,
generally, raises large amounts of funds. The is divided into
small shares of domination. A large number of persons
purchase shares and contribute to the capital of the
company.
CENTRALISED AND DELEGATED MANAGEMENT:
A joint stock company is an autonomous and self governed
body. The shareholders being large in number cannot look
after the day-to-day activities of the company. They elect
board of directors in general body meeting for managing
the company. All policies of the company are decided by a
majority vote. All decisions are taken in a democratic way.

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. They are available
for inspection in the office.

MERITS OF JOINT STOCK COMPANY
1. Accumulation of large resources: - A company can
collect large sum of money from large number of share
holder. Need for more fund arise, the number of
shareholder can be increased .
2. LIMITED LIABILITY:-The liability of members in a
company is limited to the nominal value the shares.
3. CONTINUITY IN EXISTENCE:-The member of a
company may go on changing from time to time but that
does not affect the continuity of a company. The death or
insolvency of members does not in any way affect the
corporate existence of company.

4. EFFICIENT MANAGEMENT: In the company form
of organization, ownership is separate from management
its enables the company to point expert and qualified
person for managing various business function.
5. ECONOMIES OF LARGE SCALE PRODUCTION:
The availability of large resources, the company can
organize production on a big scale .The increase in scale
and size of business bill result in economics in
production, purchase , marketing and management , etc.
6. TRANSFERABILITY OF SHARES:- A share holder
can dispose of his share at any time when the market
condition are favorable or he is in need of money, the
facility of transferring shares encourages many person to
invest.

7. DIFFUSED RISK: In company form of organization, the
number of contributors is large; so risk is shared by a
large number of persons.
8. DEMOCRATIC SET – UP: Every individual has an
opportunity to become a shareholder. Secondly, the
board of directors is elected by the members. So
members have a say indicating the policies of the
company. The Company form of organization is
democratic from ownership and management side.
9. SOCIAL BENEFITS: The company form of organization
mobilizes scattered saving of the community. These
saving can be better used for productive purposes. Large
scale production enjoy a number of economics enabling
low cost of production

DEMERITS OF JOINT STOCK COMPANY
1. DIFFICULTY IN FORMATION: There is no. of stages
is involved in company promotion. It is both expensive
and risky.
2. SEPARATION OF OWNERSHIP AND
MANAGEMENT: The ownership and management of a
public company is in different hands . The management
may indulge in speculative business activities.
3. EVILS OF FACTORY SYSTEM:- The stock company
are attribute the evils of factory system like insanitation,
air pollution ,congestion of cities.

4. SPECULATION IN SHARES: The joint stock company
facilitate speculation in the shares at stock exchanges.
5. FRADULENT MANAGEMENT: The promoters and
director may indulge in fraudulent practices due to not
invested much in the company.
6. LACK OF SECRECY: Every thing is discussed in the
meeting of board of directors.
7. DELAY IN DECISION MAKING: There is no single
individual can make a policy decision.

KINDS OF COMPANIES
ACCORDING TO INCORPORATION:
The companies may be divided into three categories
according to incorporation.
1. CHARTERED COMPANIES: These type of companies
are incorporated under ROYAL CHARTER by the king 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.

2. STATUTORY COMPANIES: These companies are
formed under special act of parliament or of a state
legislature. These companies may or may not use the
word ‘limited’. The EXAMPLES of such companies are
RESERVE BANK OF INDIA, THE INDUSTRIAL
FINANCE CORPORATION OF INDIA, STATE
TRADING CORPORATION 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 the COMPANIES ACT 1956. these
companies may be limited by shares, limited by guarantee
or unlimited companies.

ACCORDING TO LIABILITY:
According to liability, the companies may be classified into
three categories.
1. COMPANIES LIMITED BY SHARES: The companies
limited by shares have a share capital. The capital is
divided into shares. The shareholders are not liable to pay
anything more than the value of shares held by them,
whatever be the liabilities of the company.
2. COMPANIES LIMITED BY GUARANTEE: These
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.

3. UNLIMITED COMPANIES: The companies registered
without limiting the liability of members to the value of
shares are called unlimited companies. All members are
liable to meet the liabilities of the company to an
unlimited extent.
FROM THE POINT OF VIEW OF NATIONALITY:
1. National companies i.e those companies operate within
the boundary of the country of registration.
2. Multinational i.e the companies which operate in various
parts of the world.

FROM THE POINT OF VIEW OF PUBLIC INTEREST
1. PRIVATE COMPANY
2. PUBLIC COMPANY
3. GOVERNMENT COMPANY

PRIVATE COMPANY:
• These companies can be formed by at least two
individuals having minimum paid–up capital of not less
than Rupees one lakh.
• As per the Companies Act, 1956 the total membership of
these companies cannot exceed 50.
• The shares allotted to its members are also not freely
transferable between them.
• These companies are not allowed to raise money from the
public through open invitation.

• They are required to use “Private Limited” after their
names.
• The examples of such companies are Combined
Marketing Services Private Limited, Indian Publishers
and Distributors Private Limited, Oricom Systems
Private Limited, etc.

PUBLIC LIMITED COMPANY
A minimum of seven members are required to form a public
limited company.
It must have minimum paid–up capital of Rs 5 lakhs.
There is no restriction on maximum number of
members.
The shares allotted to the members are freely transferable.
These companies can raise funds from general public
through open invitations by selling its shares or accepting
fixed deposits.

These companies are required to write either ‘public limited’
or ‘limited’ after their names.
Examples of such companies are Hyundai Motors India
Limited, Steel Authority of India Limited, Jhandu
Pharmaceuticals Limited etc.

GOVERNMENT COMPANY
In these companies the Government (either state or central
government or both) holds a majority share capital i.e., not
less than 51%.
However, companies having less than 51% share holding by
the government can also be called Government companies
provided control and management lies with the government.
Examples of government companies are:
Mahanagar Telephone Nigam Limited, Bharat Heavy
Electricals Limited.

COOPERATIVE SOCIETY
The term cooperation is derived from the Latin word ‘co-
operari’, where the word ‘Co’ means ‘with’ and ‘operari’
mean ‘to work’.
Thus, the term cooperation means working together. So
those who want to work together with some common
economic objectives can form a society, which is termed as
cooperative society.
It is a voluntary association of persons who work together
to promote their economic interest.

It works on the principle of self-help and mutual help.
The primary objective is to provide support to the members.
People come forward as a group, pool their individual
resources, utilise them in the best possible manner and derive
some common benefits out of it.

CHARACTERISTICS OF COOPERATIVE SOCIETY
Voluntary Association: Members join the cooperative
society voluntarily i.e., by their own choice. Persons having
common economic objective can join the society as and
when they like, continue as long as they like and leave the
society and when they want.
Open Membership: The membership is open to all those
having a common economic interest. Any person can become
a member irrespective of his/her caste, religion, colour, sex
etc.

Number of Members: A minimum of 10 members are
required to form a cooperative society. In case of multi-state
cooperative societies the minimum number of members
should be 50 from each state in case the members are
individuals. The Cooperative Society Act does not specify
the maximum number of members for any cooperative
society. However, after the formation of the society, the
member may specify the maximum member of members.
State Control: Since registration of cooperative societies is
compulsory, every cooperative society comes under the
control and supervision of the government. The cooperative
department keeps a watch on the functioning of the
societies. Every society has to get its accounts audited from
the cooperative department of the government.

Registration of the Society: In India, cooperative societies
are registered under the Cooperative Societies Act 1912 or
under the State Cooperative Societies Act. The Multi-state
Cooperative Societies are registered under the Multi-state
Cooperative Societies Act 2002. Once registered, the society
becomes a separate legal entity and attain certain
characteristics. These are as follows.
(i) The society enjoys perpetual succession
(ii) It has its own common seal
(iii) It can enter into agreements with others
(iv) It can use others in a court of law
(v) It can own properties in its name

Capital: The capital of the cooperative society is contributed
by its members. Since, the members contribution is very
limited, it often depends on the loan from government and
apex cooperative institutions or by way of grants and
assistance from state and Central Government.
Democratic Set Up: The cooperative societies are managed
in a democratic manner. Every member has a right to take
part in the management of the society. However, the
society elects a managing committee for its effective
management. The members of the managing committee are
elected on the basis of one-man one-vote irrespective of
the number of shares held by any member. It is the general
body of the society which lays down the broad framework
within which the managing committee functions.

Service Motive: The primary objective of all cooperative
societies is to provide services to its members.
Return on Capital Investment: The members get return on
their capital investment in the form of dividend.
Distribution of Surplus: After giving a limited dividend to
the members of the society, the surplus profit is distributed in
the form of bonus, keeping aside a certain percentage as
reserve and for general welfare of the society.

TYPES OF COOPERATIVE SOCIETIES
Consumers’ Cooperative Societies: These societies are
formed to protect the interest of consumers by making
available consumer goods of high quality at reasonable
price.
Producer’s Cooperative Societies: These societies are
formed to protect the interest of small producers and
artisans by making available items of their need for
production, like raw materials, tools and equipments etc.
Marketing Cooperative Societies: To solve the problem of
marketing the products, small producers join hand to form
marketing cooperative societies.

Housing Cooperative Societies: To provide residential
houses to the members, housing cooperative societies are
formed generally in urban areas.
Farming Cooperative Societies: These societies are
formed by the small farmers to get the benefit of large-scale
farming.
Credit Cooperative Societies: These societies are started
by persons who are in need of credit. They accept deposits
from the members and grant them loans at reasonable rate
of interest.

MERITS OF COOPERATIVE SOCIETY
Easy to Form: Any ten adult members can voluntarily form
an association get it registered with the Registrar of
Cooperative Societies. The registration is very simple
and it does not require much legal formalities.
Limited Liability: The liability of the members of the
cooperative societies is limited upto their capital contribution.
They are not personally liable for the debt of the society.
Open Membership: Any competent like-minded person can
join the cooperative society any time he likes. There is no
restriction on the grounds of caste, creed, gender, colour etc.
The time of entry and exit is also generally kept open.

State Assistance: The need for country’s growth has
necessitated the growth of the economic status of the weaker
sections. Therefore, cooperative societies always get
assistance in the forms of loans, grants, subsidies etc. from
the state as well as Central Government.
Stable Life: The cooperative society enjoys the benefit of
perpetual succession. The death, resignation, insolvency of
any member does not affect the existence of the society
because of its separate legal entity.
Tax Concession: To encourage people to form co-operative
societies the government generally provides tax concessions
and exemptions, which keep on changing from time to time.

Democratic Management: The cooperative societies are
managed by the Managing Committee, which is elected by
the members. The members decide their own rules
and regulations within the limits set by the law.
LIMITATIONS OF COOPERATIVE SOCIETY
Limited Capital: Most of the cooperative societies suffer
from lack of capital. Since the members of the society come
from a limited area or class and usually have limited
means, it is not possible to collect huge capital from them.
Again, government’s assistance is often inadequate for them.

Lack of Managerial Expertise: The Managing Committee
of a cooperative society is not always able to manage the
society in an effective and efficient way due to lack of
managerial expertise. Again due to lack of funds they are also
not able to derive the benefits of professional management.
Less Motivation: Since the rate of return on capital
investment is less, the members do not always feel involved
in the affairs of the society.
Lack of Interest: Once the first wave of enthusiasm to start
and run the business is exhausted, intrigue and factionalism
arise among members. This makes the cooperative lifeless
and inactive.

Corruption: Inspite of government’s regulation and
periodical audit of the accounts of the cooperative society, the
corrupt practices in the management cannot be completely
ignored.

Forms of Business Organization

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