CHAPTER – 9 FORMS OF BUSINESS ENTERPRISES – 2
Co-operative Society
(a) Introduction
It is feared that sole proprietorship, partnership and joint stock companies indulge in nation and profiteering. On the bases of no progress without co-operation the philosophy of co-operation has emerged to save from these exploitations. Persons formulate groups or unions to achieve common economic objectives. The main aim of co-operative society is not to earn profit but to protect the economic interests of members and to protect them from economic exploitation.
Man cannot make progress in life without co-operation. He co-operates for better life since pre-historic era. but its development as one form of business enterprise took place only after industrial revolution.
(b) Meaning
Assembling of persons voluntarily for establishing a union for any common economic interest and purpose on equity basis and through services, is known as a co-operative society.
Thus, co-operative society is a form of business organization that individuals join in it for mutual benefits and its fundamentals are unity, equality, democracy and collective interest. The principle of each for all and all for each is intended within co-operative societies.
(c) Characteristics of Co-operative society
(1) Voluntary membership : The membership of co-operative society is voluntary. Persons having common economic interest may join it and may resign by rendering proper notice. Neither pressure, nor compulsion can be imposed for membership.
(2) Separate identity : Co-operative society is an institute registered under Co-operative Societies Act. It is incorporated under the act of co-operative societies. At the instance of its registration it g is its legal separate identity from its members. Its existence remains unaffected in spite of entry or exit of its members.
(3) Voting per member : Each member has a right for only one vote in a co-operative society. The quantum of share ownership has no significance so far as voting right is concerned. Only one vote can be cast even by a share holder having a large number of shares.
(4) Service purpose : Main motive of co-operative society is to serve the members. Profit motive is subsidiary. Its purposes are to have economic upliftment of members and to protect them from exploitation.
(5) Easy, incorporation : Its incorporation is easier than that of a company. Ten or more persons collectively can register a co-operative society according to Co-operative Society Act before the Registrar of Co-operative Societies. By doing this, it gets its own identity.
(6) Disbursement of profit : In spite of service as a motto profit earned reasonably can be disbursed in the form of dividend as determined by law or can be utilized for the welfare of members or society. Discount / Gift is also given to customers on their purchases.
(7) Democratic Management :Members can participate in management on the basis of equality. Executive committee formulated by members without any discrimination to caste, reed, religion or economic status manages the co-operative society democratically.
(8) Low share price : The price of shares of co-operative society is kept low, so that economically weak persons can buy shares and can get membership. The share price is not quoted in the share-market. For the payment of share amount, installment facility is also given to members.
(9) Detachment : Co-operative society is detached with politics and religion.
(d) Advantages of Co-operative Society
(1) Easy to form : Co-operative society is a voluntary association. A Co-operative Society may be formed with only 10 members. For its registration, no complicated legal procedure is required.
(2) Open and voluntary membership : Membership is open to all having common economic interest. Any person can join it at any time. If any member wants to leave the society, he is free to do so at any time. It doesn’t affect the existence of co-operative society.
(3) Democratic management : The management of co-operative society is run in a democratic way. The administration of co-operative society is run by ‘executive committee’ and they present the report in annual general meeting of the members.
(4) Limited liability : The responsibility of members is limited upto their share holdings. They need not bring their personal assets to pay off the debts of co-operative society.
(5) Separate entity : Co-operative society is independent from its members’. The existence of co-operative society is not affected even by the death, resignation or insolvency of any member and continuity can be maintained. Co-operative society enjoys long life.
(6) Economical : The expenses to run co-operative society is comparatively low. The members give their voluntary service to the co-operative society. The members are the beneficiaries of the activities of co-operative society, thus the expenses of it are less. E.g. ‘Milk producers’ co-operative society’s members get full co-operation for purchase of milk and services related to cattle’s, because members themselves are beneficiaries of such society.
(7) Encouragement from government : Co-operative activity is a part of economic policy of government. Grant, subsidy, loan and financial aid are also received from the government which are seen to be almost nil in other forms of business organizations. Resultantly, poorest of the poor can also establish a society and-manage.
(8) Economic uplifting of members : Co-operative society prevents economic exploitation of members and protects their economic interest. As the number of middle men between producers and customers decreases, customers get goods or services of high quality at low rate.
(9) Social welfare activities : Co-operative societies manage the social welfare activities like dispensaries, schools, gardens from the reserve fund. They enhance feelings of brotherhood amongst the members of society and inculcate. seeds of democracy, e.g. IFFCO (Indian Farmers Fertilizers’ Co-op., Ltd.) runs a school.
(10) Low burden of taxes : Te burden of taxes and charges is less than those in all the other forms.
(11) Training school of co-operation : Co-operative society itself is a workshop for a virtue like co-operation.
(e) Limitations of co-operative society : In spite of many advantages of co-operative society it is not free from limitation. Its limitations are as under
(1) Limited capital : As mostly members are from economically weak section they cannot provide more capital. As voting right is per person attraction for’ more shares is absent on taking shares is also imposed; So it gets less capital than other forms.
(2) Inefficiency : Representatives elected by members manage. They seldom have knowledge and special skill to manage it. As their services are mostly honorary personal interest is lacking. Therefore efficient management cannot take place.
(3) Government interference : Government helps the co-operative society in different ways. As help of government is significant, dependence on it and its interference may become obstacle for the development of society.
(4) Differences of opinions amongst members : Basic objectives of co-operation is marred when divisiveness, differences of opinions and selfish motives take place amongst members or their groups. As elections are held democratically the poison of partisans spreads. The concept of co-operation may be very noble but the apathy, illiteracy and inefficiency of members lead to the lack of expected benefits of co-operation.
Joint Stock Company ?
(a) Introduction :
Sole proprietorship and partnership were favourable till the trading and industry could be run on small kale and high capital was not needed. After industrial revolution, use of machines increased, production was undertaken on large scale, production was undertaken with the expectation of high demand. Capital investment was needed much as unit became bigger, resultantly, risk element increased; in these circumstances forms having unlimited liability did not remain favourable. Need for establishing that type of business organisation arose which could sustain high risk. Joint stock company emerged from this. For controlling supervision on the administration of company legal provisions are made.
(b) Meaning of Company
As company is emerging through law it is known as a creation of law.
According to Indian Company Act .1956 Joint Stock Company is such a form of business organization which is established on the principle of having permanent paid or authorized capital divided into shares of specific amount and only its share holders can be its members.
(c) Characteristics of a Company
(1) Compulsory registration : Registration of a company is compulsory under Company Act. Company does not get separate identity without registration. Legal provisions of Company Act have been imposed upon it, which are to be implemented.
(2) Separate and perpetual existence : Company gets separate existence from its members, which leads it to undertake all types of business activities like a person. Generally company enjoys perpetual life.
(3) Voluntary membership : Company is a voluntary association of persons who gather with a purpose to earn profit. Members may resign voluntarily.
(4) Limited liability : Mostly the liability of members of a company is limited. Liability is limited up to the amount of shares which a member has acquired. After the payment of the total amount of shares which a member has acquired he does not have economic liability. In a situation in which a company’s inability to pay debt out of its fund, the personal assets of members are not forefeited to pay the debts.
(5) Transfer of shares : As the capital of a company is divided into small divisions, i.e. shares, any member i.e. share holder can transfer the ownership of his shares easily. Shareholder can sell his shares in a stock exchange and any person can purchase them.
(6) Common seal : As a company is an artificial person its existence is expressed through its common seal. This seal exhibits the identity of a company. By stamping the seal on important contracts, documents, certificates and in day-to-day transactions of company documents and transactions become official.
(7) Management by representatives : As company has no physical existence it is managed by the representatives elected by the share holders. This board of directors handle the management of company on behalf of share holders. It means that ownership and management are separate.
(8) Voting per sure : Members of company are holding right to vote on the basis the number of shares that they own.
(D)
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| Types of company |
Classification from incorporation viewpoint
(1) Chartered company : Company incorporated under the special order of ruler or charter is known as chartered company, e.g. East India Company. This type of company cannot be incorporated in India
(2) Company created under special law : Companies incorporated through special law of Parliament or legislative assembly, e.g. State Trading Corporation.
(3) Registered company : Companies incorporated by registering under company law are known as registered companies. Types of these companies are as under :
(A) Classification according to number of members viewpoint :
(1) Private company : The company is known as private company which has minimum two and maximum fifty members, the transfer of shares of which is restricted and which has been prohibited to invite public to subscribe for its shares. ‘Private Limited’ words are inserted at the end of the name of such company.
(2) Public company : The company which is not a private is a public company. There are seven and limitless-unlimited-members in this company. The company is known as public company of which sham can be transferred freely and which can invite public subscribe for shares. The (Limited) word is to be inserted at the end of its name.
(B) Classification according to liability viewpoint :
(a) Company limited by shares : The company is known as a company limited by share capital of which members’ liability is limited by the amount of shares subscribed by share holders.
(i) Company limited by guarantee : The company is known as company limited by guarantee of whose members’ liability remains limited by the amount of guarantee given by them at the time of its incorporation. The liability to pay the guarantee amount arises at the time of its liquidation.
(ii) Unlimited liability company : The company is known as unlimited liability company of whose members’ liability is unlimited like those of sole proprietorship and partnership firm. If the debt of this type of companies becomes more than its assets the personal property of members is affected at the time of its liquidation:
(C) Classification according to control viewpoint :
(1) Holding company : Holding company means a company which holds 50% or more shares of other company and has the right to nominate majority or all directors.
(2) Subsidiary company : The company is a subsidiary company of which 50% or more shares are held by other company and whose majority or all directors’ nomination right is vested into that other company, e.g. If Reliance Industries Ltd. is holding 60% shares of Reliance Petroleum Ltd, Reliance Petroleum Ltd. is considered as subsidiary and Reliance Industries Ltd. as holding company.
(3) Government company : The company is known as government company of which at least 51% of shares are held by the state governments and/or the central government or are held by more than one state government. e.g. Bharat Heavy Electricals Ltd. (BHEL), Hindustan Machine Tools Ltd., (HMT)
(D) Registration place viewpoint :
(1) Indian company : Indian company is a company which is registered under the Indian Company Act or under any special Act of Indian Parliament.
(2) Foreign company : Foreign company ‘means a company which is registered in countries other than India
(E) Deemed public company :
This company is registered as private. It was considered automatically as public if it fulfils conditions. The provision for this type of company ceases to exist since 2000 A.D.
Advantages of company
(1) Limited liability : The liability of shareholders is limited to the amount of shares held by them even though they are its owners. The personal property of shareholders is not at risk for paying the debt of company at the time of its liquidation. So, more and more investors are attracted to hold shares.
(2) High capital : Company is capable of collecting more capital than sole proprietorship, partnership or co-operative society. Innumerable persons can invest capital who are small savers and may reside in a village of a corner of a country through small denominates shares, so business risk is distributed amongst many persons. Resultantly, large-scale capital fund is collected which facilitates to run industry-business on large-scale.
(3) Separate and perpetual existence : Company gets separate personality from it members through act. The existence of unit is not affected due to the death, insolvency its lunacy of owner of sole proprietorship or partnership but that type of effect does not take place in company. The existence of the company is not affected at all levels even by the entry-exit of members, so long-term planning can be framed.
(4) Easy share transfer : Members of a company can sell their shares easily whenever they need money or they want their investment back for other profitable investments. Due toeasy share transfer small investors do not hesitate in purchasing the shares. Regular over direct share transfer of private company is there.
(5) Efficient management : The ownership of company is of shareholders whereas is managed by elected nominated directors (representatives). Besides, experts having knowledge experience can be appointed according to requirements. As work is on large scale procuring services of other experts is afforded. So its management remains efficient in comparison with other private units.
(6) Democratic management : Company is managed by elected directors but important decisions are taken in Shareholders’ meeting by majority. Annual General Meeting has the authority to remove the directors. Of course, voting right is according to shares.
(7) Large-scale production : Due to high capital and efficient management the gains of large-scale production can be obtained in company form. By purchasing and selling on large scale, using modern machines, procuring expert services, having advantages of research company can produce more with less expenses therefore, economic development of country gets impetus.
(8) Social benefits : Company creates employment opportunities for people. Some companies render economic help in developing schools, colleges, dispensaries, playground in local areas. It attracts small savings of society. It helps in improving the standard of living of people. It contributes in enhancing national income and in the economic development of the country.
(E) Limitations of company
(1) Long and expensive incorporation procedure : Company registration procedure consumes more time. Some documents are to be prepared with the help of experts. For the high fee is to be paid. Fee is to be paid even to the registrar of companies. Thus, from time and money angles, the incorporation procedure of company is more expensive than sole proprietorship and partnership.
(2) Autocratic management : The authority of shareholders is on paper only. Certain persons are taking control over management and sustain it by groupism and then manage the company high-handedly. Small investors are careless in attending general meeting. Some times, managers use assets and finance of the company for personal benefits.
(3) Observance of Law (more legal interference) :Company is a creation of law. During and after incorporation many documents are to be submitted to the registrar. Accounts are to be published. If any mistake occurs in them, penalty is to be imposed, due to this management loses dynamism.
(4) Probability of speculation : As the transfer of shares is easy, speculation on big scale is taking place in their purchases-sales. Due to this, probability of loss in capital to small investors is very much there.
(5) Delay in decision- making : Company cannot take prompt decisions as in case of sole proprietorship or partnership. Policy decisions in general meeting and important decisions in board of directors meeting are to be taken by majority. Time is wasted in calling the meetings and in discussions, so decisions are taken belatedly.
(6) High administrative expenses : As the size of company, is big many employees are appointed for routine administration. Some experts are to be engaged by paying high fees. Besides top level managers are paid high salaries. Resultantly, administrative expenditure increases.
(7) Difficulty in keeping secrets in tact : The accounts of company, the proceedings of meeting and auxiliary information are to be published according to the law. Queries of share holders are to be met in public. So, it becomes difficult to maintain business secrets. Possibility of misusing this information by the competitors is always there.
(8) High taxation : Governmental taxes and charges are higher for company form than other forms, e.g. Corporate tax, Dividend-tax, etc.
(9) Absence of personal interest : Even though the shareholders of the company are owners they do not manage it. Directors and other experts, administrative officers are managing the company, so it is natural that they do not have as much personal interest as the owners.
Note : From partnership to company, all the business forms have to do activities within the limits prescribed by the purposes.
(G) Privileges (Characteristics) of private company :
According to Company Act, private company enjoys some of the following privileges over the public company :
(1) Private company can restrict the transfer of shares.
(2) It has privilege even for number of members. Private company can be started only by two members.
(3) Provision for minimum subscription is not applicable for private company.
(4) It can start business immediately after obtaining Incorporation certificate
(5) There is no need to call first statutory meeting.
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| Difference between Private and Public Company |
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