Chapter 2_Forms of Business Orgns_1.pptx

Forms of
Forms of
Business Organisation
Business Organisation
Chapter - 2
Chapter - 2

Forms of Private Sector
Undertakings

Non-Corporate Enterprises
Non-Corporate Enterprises
Sole Proprietorship Partnership
Joint Hindu Family
Business

Corporate Enterprises
Corporate Enterprises
Co-operative Societies Joint Stock Companies

Sole Proprietorship
Sole Proprietorship
It is a “one man business” as he invests the
entire capital, bears all the risks, takes all the
advantages and manages the business by himself
It is also called Individual Proprietorship

Features of Sole Proprietorship
Formation and closure is easy
Less formalities as it has no separate law
a

Unlimited Liability
Even the personal properties are held liable to
meet the liabilities of the firm
b

Sole risk bearer and profit recipient
All the risk on his shoulder and the entire profit
enjoyed by him
c

Control
Complete control of business is held with the
proprietor himself
d

No separate entity for the business from
the businessman
The owner is held liable for all the activities
of the business
e

Lack of continuity
Since the business and owner are one and the
same entity, his death, insanity etc. will affect the
existence of the business
f

Merits of Sole Proprietorship
Quick decision making
No need to consult with others
a

Confidentiality of information
Secrecy can be maintained
b

Direct incentive
All the profit goes to the proprietor
c

Sense of accomplishment
Personal satisfaction by working for himself
d

Ease of formation and closure
Minimum legal formalities only
e

Limitations of
Sole Proprietorship

Limited resources
Resources of a sole proprietor are limited to his/her personal savings
and borrowings from others. Banks and other lending institutions may
hesitate to extend a long term loan to a sole proprietor.
Lack of resources is one of the major reasons why the size of the
business rarely grows much and generally remains small.
a
Limitations of Sole Proprietorship

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

Unlimited liability
If the business fails, the creditors can recover their dues
not merely from the business assets, but also from the
personal assets of the proprietor.
c

Suppose the total outside liabilities of ABC
Drycleaners, a sole proprietorship firm are Rs.6
lakhs at the time of dissolution, but the value of
its assets is Rs.4 lakhs only. In such a situation
the proprietor will have to bring Rs. 2 lakhs from
his/her personal sources even if She/he has to
sell the personal property.
Example

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

CASE STUDY - 1
Radhika opened a boutique along with 4 workers. No problem of any type
was faced in opening the boutique. At her boutique special dresses made
for marriages and parties are sold. Despite a lot of competition in the
market Radhika was earning good profit. Since all the profit was going into
her pocket she was getting inspired to work with great efficiency. With the
increase in workload the no. of workers were increased from 4 to 6 by her.
All of them were happy since the business was running successfully.
Unfortunately, one day the boutique caught fire due to short circuit.
Consequently Radhika had to suffer heavy loss. The circumstances
deteriorated so much that she had to dispose off her personal property to
repay the business debts. In order to revive the boutique she approached a
bank which did not extend a long term loan to her.
i. Identify the form of business organization adopted by Radhika.
ii. Explain any three merits and two limitations of the form of Business
organization identified in (i) above by Quoting the relevant lines.

Case Study - 2
Ajay is the sole owner of a shoe manufacturing factory. He took a loan of Rs.20 Lakhs from a
financing company for the expansion of his business. Because of continuous losses, he was not
able to repay the loan on time. Assets of the business were not enough for repaying the liabilities in
full. As a result the finance company asked him to repay their loan. He refused to do so on the
ground that the loan was taken by his business and not by him for his personal use. The company
filed a case against him. The court gave decision in favor of the finance company on the ground
that Ajay was operating at sole proprietor and held him liable to repay the loan even by selling his
personal property.
Identify and explain two features of the form of business organization formed by Ajay.
Case Study - 3
Mehul sent and email to his friend Rahul who resides in US asking for financial help. Mehul shared
with him that due to prolonged illness his business suffered a lot. As a result he was not able to
repay the bank loan which he had taken for the expansion of his business. He also informed that his
warehouse has been confiscated by the bank authorities to settle his claims. Mehul also reminded
Rahul of his good times in business when he had helped Rahul financially being the sole recipient of
all the business profits.
i. Identify the related feature and liability of the form of business organization described in the
above paragraph.
ii. Explain in brief any two merits of this form of business which have not been mentioned in the
paragraph.

Answer – 1
(i) Sole Proprietorship
(ii) Merits:
a. Direct incentive
b. Sense of accomplishment
c. Ease of formation and
closure
(iii) Limitations:
a. Unlimited Liability
b. Limited Resources
Answer – 2
Features:
a. No separate Entity
b. Unlimited Liability
Answer -3
(i) Feature:
Sole risk bearer and profit recipient
(ii) Limitation:
Unlimited liability
(iii) Merits: (any two)
a. Quick decision making
b. Sense of accomplishment
c. Ease of formation and closure
d. Confidentiality of Information.

Joint Hindu
Hindu Family
Business
Family
Business
Joint
2

Business owned by the members of a
Joint Hindu Family
Joint Hindu Family Business
It is the oldest system of business that can be
seen only in India

It is governed by the provisions of Hindu Law
The basis of membership in the business is birth in a
particular family and three successive generations can
be members in the business

The business is controlled by the head of the family
who is the eldest member and is called
‘Karta’
All members (male and female) have equal ownership
right over the property of an ancestor and they are
known as ‘co-parceners’

Features of
of
Joint Hindu Family
Features
Joint Hindu Family
Business
Business

Formation
Minimum two members from the family and their ancestral
property is used for business
Features of J H F Business
It is governed by Hindu Succession Act, 1956
a

Liability
The liability of all members except the karta is limited to their share of
co-parcenery property of the business. The karta, however, has
unlimited liability.
b
Unlimited
Limited

Control
The control of the family business lies with the karta. He takes all the
decisions and is authorised to manage the business. His decisions are
binding on the other members.
c

Continuity
The business continues even after the death of the karta as the next eldest
member takes up the position of karta, leaving the business stable. The
business can, however, be terminated with the mutual consent of the
members.
d

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

Both male and female members in
Both male and female members in
the family have equal right in the
the family have equal right in the
business based on the Hindu
Succession (Amendment) Act 2005
business based on the Hindu
Succession (Amendment) Act 2005

Partnership form of business organisation emerged
to overcome the difficulties of sole proprietorship
business. Partnership serves as an answer to the
needs of greater capital investment, varied skills and
sharing of risks.
Partnership
Partnership

Definition
Partnership
Partnership
The relation between persons who have agreed
to share the profits of a business carried on by all
or any of them acting for all

Features of
Features of
Partnership
Partnership

Formation
Features of Partnership
a
a
But two people coming together for charitable
purpose is not a partnership
Formation is based on the agreement among the
partners to run a lawful business and it may be either
oral or written

Liability
b
b
 Jointly, all the partners are responsible for the
debts
and they contribute in proportion to their share in
business and as such are liable to that extent.
 Individually too, each partner can be held
responsible repaying the debts of the business.
However, such a partner can later recover from
other partners an amount of money equivalent to
the shares in liability defined as per the
The liability of each partner is unlimited. Even their personal
properties are held liable for the debts of the partnership firm
The partners are jointly and individually liable for payment of debts.

Risk bearing
c
c
All the risk of loss is shared by the partners
as they are sharing profits of the firm

Decision making and control
d
d
Decisions are generally taken with mutual
consent
The activities of a partnership firm are managed through
the joint efforts of all the partners.

Continuity
e
e
A partnership is purely a personal organization and it has no
separate legal existence apart from its members, hence it lacks
continuity.
Death, insanity etc. of a partner brings an end to the business.
However, the remaining partners may if they so desire continue the
business on the basis of a new agreement.

Membership (2 to 50)
f
f
Minimum number of members is 2
According to Section 464 of Companies Act 2013
maximum number of partners can be 100, subject the
number prescribed by the government
At present it is limited to 50 by Govt. of India

Mutual agency
g
g
Every partner is both an agent and a principal. He is an agent of other
partners as he represents them and thereby binds them through his acts.
He is a principal as he too can be bound by the acts of other partners.

Merits of
Partnership
Merits of
Partnership

Merits of Partnership
a
a Easy formation and closure
Less formalities only

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

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

d
d Sharing of risk
Reduces the anxiety, burden and stress on individual
partners

e
e Secrecy can be maintained
A partnership firm is not legally required to publish its accounts and submit
its reports. Hence it is able to maintain confidentiality of information relating
to its operations.

Limitations of
Limitations of
Partnership
Partnership

Limitations of Partnership
a
a Unlimited liability
Attaches even the personal properties

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

c
c Conflicts
Difference in opinion on some issues may lead to disputes between partners.
Further, decisions of one partner are binding on other partners. Thus an
unwise decision by some one may result in financial ruin for all others.

c
c Lack of continuity
As it has no separate legal entity

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

The business assets of an organization amount to Rs.
1,00,000 but the debts that remain unpaid are Rs. 1,50,000.
What course of action can the creditors take if :
a. The organization is a sole proprietorship firm
b. The organization is a partnership firm with Aditya and
Nishit as partners. Which of the two partners can the
creditors approach for the repayment of debts? Explain
by giving reasons.

a. If the organization is a Sole-Proprietorship firm; creditors
can realise Rs. 50,000 by selling the personal property of
the Proprietor.
b. In case of partnership; Creditors can recover Rs. 50,000
from the personal assets of Aditya and Nishit.
Creditors can approach either Aditya or Nishit or both of
them as partners are jointly and individually liable to settle
the debts

Types of
Types of
Partners
Partners

Types of Partners
Types of Partners
1
1
Active or Working Partner
Contributes capital & take part in the day to
day affairs of the business

Types of Partners
Types of Partners
2
2
Sleeping or Dormant Partner
No active role in the business
contributes capital
shares profit or loss

Types of Partners
Types of Partners
3
3
Secret Partner
His connection with the firm is unknown
to the public
Contributes capital
Participates in management
Unlimited liability

Types of Partners
Types of Partners
4
4 Nominal Partner
Lends his name and reputation for the
benefit of the firm
Does not contributes capital
No participation in management
No share in profit
But liable to outsiders
Also known as Ostensible Partner or Quasi Partner

Types of Partners
Types of Partners
5
5 Partner by Estoppel
If a person acts as a partner of a firm by his
words and conduct, he can be called as
partner by estoppel.
Even though he is not an actual partner, he is liable for the
debts of the firm as he makes himself as a partner
in front of the public

Suppose Rani is a friend of Seema who is a partner in a software firm —
Simplex Solutions. On Seema’s request, Rani accompanies her to a
business meeting with Mohan Softwares and actively participates in the
negotiation process for a business deal and gives the impression that
she is also a partner in Simplex Solutions. If credit is extended to
Simplex Solutions on the basis of these negotiations, Rani would also be
liable for repayment of such debt, as if she is a partner of the firm.
Partner by Estoppel

Types of Partners
Types of Partners
6
6 Partner by holding out
A person who though is not a partner in a firm but knowingly allows himself/
herself to be represented as a partner in a firm. Such a person becomes liable to
outside creditors for repayment of any debts which have been extended to the
firm on the basis of such representation.
In case he is not really a partner and wants to save himself from such a liability, he should
immediately issue a denial, clarifying his position that he is not a partner in the firm. If he
does not do so, he will be responsible to the third party for any such debts.

Suppose Rani is a friend of Seema who is a partner in a software
firm — Simplex Solutions. On Seema’s request, Rani accompanies
her to a business meeting with Mohan Softwares. Seema
introduces Rani as her partner to everyone in the meeting and
Rani did not react to it. If credit is extended to Simplex Solutions,
Rani would also be liable for repayment of such debt, as if she is a
partner of the firm.
Partner by holding out

A nominal partner is one who allows the use of his/her name by a
firm.
A person is considered a partner by estoppel if, through his/her own
initiative, conduct or behaviour, he/she gives an impression to
others that he/she is a partner of the firm.
A partner by ‘holding out’ is a person who though is not a partner
in a firm but knowingly allows himself/herself to be represented
as a partner in a firm.

Type Capital Management
Share in
Profits/Losses
Liability
Active
Partner
Contributes
Capital
Participates in
Management
Shares Profits/Losses Unlimited
Sleeping
Partner
Contributes
Capital
Does not Participate in
Management Shares Profits/Losses Unlimited
Secret
Partner
Contributes
Capital
Participates in
Management
Shares Profits/Losses Unlimited
Nominal
Partner
Does not
Contributes
Capital
Management
Generally does not
Share Profits/Losses
Unlimited
Partner by
Estoppel
Does not
Contributes
Capital
Management
Does not Share
Profits/Losses
Unlimited
Partner by
Holding out
Does not
Contributes
Capital
Management
Does not Share
Profits/Losses
Unlimited
Types of Partners
Types of Partners

Minor as a
Minor as a
Partner
Partner

A minor cannot become a partner as he is not capable to
enter into a contract, but he may be admitted as a partner to
the benefits of the firm, with the consent of all the partners
Eg: If a celebrity is admitted, it may be beneficial to the firm
A minor is a person who has not completed 18
years of age
Minor as a Partner
Minor as a Partner

His liability is limited to the extent of his share in the
capital and profits of the firm
He cannot take active part in management
Minor as a Partner
Minor as a Partner

A partnership cannot be formed with a minor partner
After becoming major, he will be eligible to enjoy all
the rights of a partner
Minor as a Partner
Minor as a Partner

Minor as a Partner
Minor as a Partner
On attaining majority, the minor has to decide whether he would like
to become a partner in the firm.
He has to give a public notice of his decision within six months of
attaining majority.
If he fails to do so, within the stipulated time, he will be treated as a
full-fledged partner and will become liable to the debts of the firm to
an unlimited extent, in the same way as other active partners are.

Rights of a
Minor Partner
Rights of a
Minor Partner

Rights of a Minor Partner
Rights of a Minor Partner
Right to share the profits and
properties of the firm
1
1

He can inspect and copy the accounts
of the firm
2
2
But he has no access to all the books of the firm.
Minor as a Partner
Minor as a Partner

A, B, C, D & E are partners in a partnership firm. A has contributed capital
and participates in the management of the firm. He shares profits & losses. B
has contributed capital & shares profits & losses, but do not take part in the
day-to-day activities of business. Association of C is unknown to general
public, but in all other respects he is like an active partner. D has allowed the
firm to use his name as he enjoys good reputation among clients, but he
does not either contribute capital or take part in the management. E , 15
years of age, is entitled to be a partner, to the benefits of partnership with
mutual consent of all other members. He is not eligible to take part in
management of firm.
1.Mention the types of partners involved and the nature of their liability.
2.Can D be held liable for the losses of the business?

Sanchit, a partner of partnership firm employed, Shyam as manager. Sanchit
introduced Shyam as his partner to Ravi, a supplier of goods and Shyam remained
silent. Treating Shyam as a partner, Ravi, supplied the goods on credit. Sanchit failed
to pay the price of goods. Ravi filed a suit against both Sanchit and Shyam for the
recovery of the price. Is Shyam liable to pay the money? Why? Suggest a suitable
remedy to Shyam.
Father of Sohan was partner in a firm along with other two partners. On the death of
his father, Sohan joined the firm as a partner. Since he was busy in pursuing a
professional course he opted for not participating in the activities of the business.
After completing the course he started taking keen interest in the activities of the
business. Explain the type of partners, not mentioned in the above para.

ANSWER – 4
A - Active; B – Sleeping; C – Secret ; D – Nominal ; E – Minor
ANSWER – 5
Partner by holding Out
He is liable to pay money as his liability is unlimited.
He should immediately issue a denial, clarifying his position that
he is not a partner in the firm.
ANSWER – 6
Secret, Nominal, Partner by Estoppel, Partner by Holding out

Types of
Partnership
Types of
Partnership

Types of Partnership
Partnership
On the basis of
DURATION
On the basis of
LIABILITY

Partnership
at will
Particular
Partnership
On the basis of
DURATION

Particular
Particular
Partnership
Partnership

Particular Partnership
Particular Partnership
Formed for a particular purpose
or for a particular period
a
a
E.g. If a partnership is formed for two years, or
for the construction of a mall
Dissolved after the expiry of the time
or the completion of the project

Partnership
Partnership
at will
at will

Duration of partnership is not
specified in the agreement
b
b
It can be dissolved at any time as it is decided by all
or any of the partners
It will be continued for an indefinite period
Partnership at Will
Partnership at Will

Limited
Partnership
General
Partnership
On the basis of
LIABILITY

General
General
Partnership
Partnership

General Partnership
General Partnership
Also known as ordinary partnership
Unlimited liability to partners
Usually found in India

Limited
Limited
Partnership
Partnership

Two types of partners in Limited
Partnership
General
Partners
Special
Partners
Unlimited
Liability
Limited
Liability
Limited / Special Partnership

Minimum one general partner is a must

Such a partnership does not get terminated with the death,
lunacy or insolvency of the limited partners.
The limited partners do not enjoy the right of management
and their acts do not bind the firm or the other partners.
Registration of such partnership is compulsory.

The permission to form partnership firms with limited liability has been
granted after introduction of New Small Enterprise Policy in 1991.
The idea behind such a move has been to enable the partnership firms
to attract equity capital from friends and relatives of small scale
entrepreneurs who were earlier reluctant to help, due to the existence
of unlimited liability clause in the partnership form of business.

Limited Liability Partnership (L.L.P.) : With the

The government of India with the help of
Ministry of Law and Justice passed an act in the
parliament known as Limited Liability
Partnership Act in 2008

Provisions of Indian Partnership Act, 1932 are not applicable
to an LLP . It will be governed by the Limited Liability
Partnership Act, 2008
Every Limited Liability Partnership shall use the words
“Limited Liability Partnership” or its acronym “LLP” as the
last words of its name. For example - Knowledge Media
Ventures LLP

Partnership
Partnership
Deed
Deed

Page 2
Partnership Deed
Partnership Deed

Partnership Deed
Partnership Deed
Partnership is established by an agreement which
Partnership is established by an agreement which
may be oral or in writing
may be oral or in writing
It is always better to have the agreement in writing to
avoid any dispute
The document, containing the agreement in writing
The document, containing the agreement in writing
among the partners is called
among the partners is called
Partnership Deed
Partnership Deed

Contents of
Contents of
Partnership
Partnership
Deed
Deed

Contents of Partnership Deed
1. Name of the firm
ABC ASSOCIATES

2. Names and addresses of all partners

3. Nature and place of business

4. Date of Commencement of partnership

5. Duration of partnership, if any

6. Capital contribution by the partners

7. The amount that can be withdrawn by each
partner
Rs. 20,000
Rs. 20,000

8. Rules regarding operation of bank
accounts

9. Division of profits or losses

10. Interest on capital or drawings, if any

11. Interest on partner’s loan to the firm

12. Salaries, commission, etc. if payable to
any partner

13. Details of division of work among the
partners
Production Manager Sales Manager
Purchase Manager

14. Ascertainment of goodwill
On admission, retirement and death of a partner

15. Settlement of accounts
In the event of retirement or death of partners

16. Settlement of accounts
On dissolution of the firm

17. Provisions relating to the maintenance
and audit of accounts

18. Provisions for arbitration in the event of
disputes

19. Provisions regarding borrowings of the firm

20. Rights, duties and liabilities of partners
Rights Duties Liabilities

Registration of
Registration of
Partnership
Partnership

Registration of Partnership
Registration of Partnership
Registration of partnership is not compulsory
But it can be registered with the Registrar of
Firms as per the Partnership Act 1932

Procedure for Registration
Submit an application in prescribed
form with the following details:
a) Name of the firm.
b) Location of the firm.
c) Names of other places where the firm carries
on business.
d) The date of joining of each partner.
e) Names and addresses of partners.
f) Duration of partnership.
g) This application should be signed by all the
partners.
a
a

Remitting the fees for registration
b
b

Issue of Registration Certificate
c
c
After approval, the Registrar should enter the name
of the firm in his register and issues
a certificate of registration

Effects of
NonRegistration
Effects of
NonRegistration

Cannot sue against third parties
An unregistered firm cannot sue against a third
party for the recovery of claims
Effects of Non-Registration
1
1

Cannot sue against its partners
An unregistered firm cannot sue against its partners
2
2

A partner cannot enforce his claims
A partner of an unregistered firm cannot enforce his
claims against outsiders or against his
co-partners or the firm
3
3

Sohan, Rohan and Aman are partners in a partnership firm
manufacturing air conditioner. Their firm is not registered.
Recently, in order to increase the profits of the firm, Sohan
decide to use substandard raw material without the knowledge
of Rohan and Aman. As a result, many accidents were reported
by the consumers and a case has been filed against the firm.
1.Is this wrong act of Sohan binding on Rohan and Aman?
Explain the related feature.
2.Can Rohan and Aman file a case against Sohan? Give reason
in support of your answer.

Two friends Soniya and Raman started a business by the name of ‘Star
Fancy Dress’. Both of them invested equal capital in the business. At
the start of the business, Soniya had placed one condition before
Raman that if unfortunately they suffered a heavy loss in their
business, she would not be able to give anything except the capital
invested in the business. Raman had accepted this condition that
Soniya would not enjoy the right to participate in the management of
the firm. Their business was gradually growing well and they were fully
satisfied with their business.
Identify and explain the type of partnership highlighted in the above
para.

Mr. Mukul Gupta entered into a contract with a firm. According to the
contract, he has advanced a loan of Rs. 20 lakhs to the firm and in
exchange he got the power to take a few decisions regarding the
firm’s business. Besides, he got 9% interest on the loan and 12% of
profits earned by the firm.
Is Mr. Mukul Gupta a partner of the firm? Give reason in support of
your answer.

Co-operative
Co-operative
Societies
Societies
4

Co-operative Societies
The word cooperative means working together and with
others for a common purpose.

The cooperative society is a voluntary association of persons, who
join together with the motive of welfare of the members.
They are driven by the need to protect their economic interests in the
face of possible exploitation at the hands of middlemen obsessed with
the desire to earn greater profits.

Basic Principle of Co-operative Societies
Self help through mutual help
or
Each for all and all for each

Features of
Features of
Cooperative Organisations
Cooperative Organisations

Features of Co-operative Organisations
Voluntary Membership
Anybody can become a member in a cooperative society
at his own wish and there is no compulsion at all.
Membership is open to all, irrespective of their religion,
caste, and gender.
1

Legal Status
The cooperative society is compulsorily required to be registered under the
Cooperative Societies Act, 1912. This accords a separate identity to the
society which is distinct from its members. The society can enter into
contracts and hold property in its name, sue and be sued by others. As a
result of being a separate legal entity, it is not affected by the entry or exit of
its members.
2

Limited Liability
The liability of the members of a cooperative society is
limited to the extent of the amount contributed by them as
capital.
3

Control
Control is vested in the hands of board of directors who are elected by
the members under the principle of one man one vote. This lends the
cooperative society a democratic character
4
Board
Meeting

Service Motive
The main objective is to render services to its
members rather than profit
5

Merits of
Merits of
Cooperative Societies

Merits of Cooperative Societies
1
Equal Voting Rights
Each member is having equal voting rights
irrespective of their capital contribution, as it
follows the principle of ‘one man one vote’

2
Limited Liability
Liability of members is limited to the extent of
their capital contribution

3
Stable Existence
The existence of a society is not affected by the
death, insanity, insolvency etc. of members

4
Economy in Operations
To eliminate middlemen, the members offer
honorary services to the society, which will in
turn reduces cost of operation

5
Support from Government
As it is a democratic organization, government
provides various supports such as low taxes,
subsidies, grants, low interest rates for loans etc.

6
Easy Formation
No complex legal formalities are required to
form a co-operative society

Limitations of
Limitations of

Limitations of Cooperative Societies
1
Limited Resources
Low rate of dividend and one man one vote principle
reverts the members to invest more capital

2
Inefficient Management
Office bearers are elected from members and they
may not be competent

3
Lack of Business Secrecy
The general body openly discusses all facts and
figures of the society without any secrecy

4
Excessive Government Control
It will affect the smooth functioning

5
Difference of Opinion
Conflict among the members adversely
affect the organization

Types of
Types of

Types of Cooperative Societies
1 Consumers' Co-operative Societies
● Formed by consumers
● To ensure supply of consumer goods in a fair price
● Purchases directly from wholesalers
● Distributes to members and outsiders
● Takes only a little margin of profit

2 Producers Co-operative Societies
● Also called industrial co-operative societies
● Promoted by small producers and craftsmen
● Help them to start small scale and cottage
industries
● Supplies raw-materials, tools and equipments
● Sells their products in market

3 Marketing Co-operative Societies
● Formed by farmers, artisans and small producers
● Collect the products from members
● Grade and process the products
● Provide storage facilities
● Sell in the market only on favourable conditions
● Provide finance and raw-materials
● Help to promote bargaining capacity of members

4 Farmers' Co-operative Societies
● An association of small farmers in a village
● Large scale production through joint cultivation
● Increase in yield per acre of land
● To introduce modern method of
cultivation
● To inculcate the spirit of
co-operation among farmers

5
Credit Co-operative Societies
● To provide short term finance
● Charging only a reasonable rate of interest
● To protect the members from money lenders

Types of Credit Societies
a) Rural banks to supports farmers
b) Urban Banks to help small traders and artisans.
c) Employees’ credit societies formed by the
employees in govt. or non-govt organizations.
d) Wage earner’ societies formed by workers to meet
their credit needs.

6 Co-operative Housing Societies
● To provide housing facilities to the members
● Either ownership or rental basis
● Help to purchase houses at a less cost
● Help to purchase houses on easy instalments

After doing her M.Com, Komal went back to her village in Himachal Pradesh. She wanted to
contribute for the development of women of her village, so she formed an organisation, the
membership of which was open for all the women villagers on a voluntary basis by paying
Rs.500 only, which will be treated as their capital. Komal knew that the land of her village
was suitable for the farming of medicinal plants. So she motivated the members of her
organisation for growing such plants in their fields under the guidance and help of the local
agricultural department. It was also decided that the organisation will purchase the produce
of each member and sell the same to drug manufacturing companies at a very good price
which was not possible for the members individually. The main objective of the organisation
is to render services to its members rather than to earn profit.
i. Identify the kind of organisation that was formed by Komal. Also explain its type
highlighted in the case.
ii. How does the kind of organisation identified in part (i) exemplify democracy and
secularism ? Explain.
iii. Identify and explain two features of the organisation formed by Komal which are
highlighted in the case.

Employees of a company formed a store to ensure that they get various goods at
a reasonable price from the store. Majority of the employees became its
members enthusiastically. The company gave financial assistance to run the store
effectively and provided space for the store.
Identify and explain the type of form of business organization which the employees
have established.
GirdhariLal runs a grocery store in a small locality. Being a man of high
credibility, many people of his locality keep their savings with him. Manoj, his
son, suggested him to start a cooperative society with members being the people
who have kept their money with GirdhariLal. Lately, if any member wants a
loan, even that can be extended out of the pool of money at a nominal rate of
interest. The move will also help to gain many benefits from the government.
i. Suggest GirdhariLal the suitable cooperative society.
ii. How the society is both benefitted and restricted by the government?

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