The following points highlight the top five types of business units. The types are: 1. Individual Proprietorship 2. Partnership 3. Joint Stock Company.
Business Unit: Type # 1. Individual Proprietorship:
Sole or individual proprietorship is the oldest and simplest form of business organisation. In this type of organisation, an individual is the sole ownership of the business. He supplies land; labour, capital, etc. individually. In case capital is insufficient it is borrowed on interest. Land may also be taken on rent. A single man performs twin functions of an organizer as well as that of an entrepreneur.
The functions of management, supervision and risk-taking are performed by the individual proprietor. Labour work is also performed by himself or with the help of his family members. If need arises, paid labour can also be arranged for.
In individual proprietorship, the owner himself is responsible for the profit or loss. It means there is unlimited liability in the individual proprietorship. Such type of proprietorship is found in the small scale industries or in the case of shopkeepers.
Individual enterprise or proprietorship has the following advantages:
1. Easy to Start:
It is easy to start an individual proprietorship. It does not require much consultation or legal sanction. Anybody can start this type of business according to his capacity and ability.
In this type of business, the owner is altogether independent. He can make any type of transaction as he likes, without any interference from any other person. He is at liberty to take any business decision. There is no check on his approach toward his project.
3. Personal Incentive:
Since the risk is entirely his own responsibility, the owner has personal incentive for hard work and to get more profits. He works long and late with full care and encouragement. Such hard work is bound to produce good results.
4. Easy to Supervise:
An individual proprietorship has a small size or scale of business which one can easily supervise and handle without much difficulty. He keeps full vigil over his business for his self-interest. Therefore, a close and easy supervision is possible.
5. Quick Decisions:
As he does not require much consultation or approval, he takes quick decisions. An individual entrepreneur can make decisions quickly keeping in view his own personal interests.
6. Need of Small Capital:
He has the advantage of starting the business with a comparatively small amount of capital. Persons who have small capital but high qualities of enterprise can easily start the business. A person can even start a petty shop anywhere he likes, with a small amount of money.
7. Direct Relations with Customers:
The entrepreneur establishes close and direct relationship with the customers and can satisfy them easily. He can produce the goods according to the tastes of his customers. Customers can also place orders of their liking directly to the entrepreneur.
8. Business Secrets:
In individual proprietorship, the secrets of business do not leak out and that enables him to earn sometimes high profits, e.g., the goldsmith can keep his business secrets to himself.
9. No Danger of Labour Disputes:
The individual proprietor generally does not have many employees. He selects them personally and comes to know their grievances or problems, etc. on the spot and tries to remove them. It leads to personal contact between the two and results in higher efficiency and productivity. Every employee gives a personal touch to his work. It avoids the dangers of labour disputes like strikes, lockout, etc.
10. Easy to Close:
It is easy to start such business and very simple to close it. This is so because the proprietor is the only person concerned. He is not compelled to run the business. He can easily dissolve the present business and can start a new one.
Individual proprietorship has the following demerits:
1. Lack of Division of Labour:
Being a small business, there is less scope for division of labour. So production cannot be done efficiently and rapidly. It remains confined to small scale.
2. Difficulty of Large Scale Production:
In this type of organisation, the entrepreneur lacks capital and other factors of production. Being alone, he cannot supervise properly. So, he cannot have large scale production.
3. Unlimited Liability:
In individual proprietorship, the entrepreneur is fully responsible for his profit or loss. He fears that his own capital may be lost in case of loss. Therefore, he hesitates to take certain bold decisions and risks because of his unlimited liability.
4. High Cost of Production:
Being a small scale production, the entrepreneur cannot reap the benefits of the economies of large scale production. It results in the high cost of production and higher prices. All this makes an adverse effect on the demand for his produce.
5. Less Possibility of Use of Machines:
Generally, the individual proprietor feels difficulty in getting capital. Production is carried on a small scale. Therefore, he cannot install modern machinery. Thus, the individual proprietorship has a very limited scope of using heavy and modern machinery.
6. Difficulty of Credit:
There is much difficulty in getting finance. For this type of organisation, the banks or other financial institutions hesitate to advance loan to an individual proprietor, because of his less credit worthiness. Therefore, either he is not able to get loans or, if at all he gets, it is at a higher rate of interest.
7. Lack of Technical Development:
One of the disadvantages of the individual proprietorship is the lack of technical development. Methods of production remain backward because of insufficient capital and other factors of production. Due to the unlimited liability on his head, he cannot bear the expenses of research and technical innovation.
8. Difficultly to Face Economic Crisis:
An individual proprietorship has limited factors of production at his disposal, whereas his liability is unlimited. He cannot face heavy losses or economic crisis for a long period. In the event of such adversities, he has to close down his business.
Business Unit: Type # 2. Partnership:
As a form of business organisation, the partnership has much wider scope as compared to the individual proprietorship. When two or more than two persons join to start and run a business on the basis of their common and shared responsibility in the matter of profit or loss, it is called the partnership.
In other words, the individual proprietorship is converted into partnership if one person or more than one person is taken as partners in the business. Partnership generally takes place among those persons who are either relatives, friends or known to each other. Partnership has the following characteristics which separate it from other forms of business organisation.
(a) Types of Partnership:
In this type of business organisation, the partners can be of the following types:
(i) Working Partners:
The share-holders or partners, who participate in the daily functioning of the business or help other partners, are called the working partners.
(ii) Sleeping Partner:
Sometimes a person invests his capital in the business but he does not participate in the working of business. He is known as the sleeping partner.
(iii) Partners with Capital:
Partners with capital are those who invest capital in the business but they may or may not participate in it.
(iv) Partners without Capital:
Sometimes partners are created in the business due to the particular skill or business ability of such persons. They do not invest capital. To have benefits from his business ability, the partners with capital make him also a partner in their business. A partner without capital is also given the prescribed share out of the profits.
(b) Unlimited Liability:
Every partner has an unlimited liability. He is responsible for every type of liability apart from his own share. If a partner is unable to clear his liability, his burden shifts to other partners.
(c) Partnership Deed:
Partnership is formed on the basis of a ‘Partnership Deed’ in which an agreement regarding the rights and duties, salary, share in the capital, etc. of each partner is mentioned.
(d) Limit of Partnership:
The government can determine the maximum number of partners in a business in a country. The number of partners cannot exceed this prescribed limit. For example, the maximum number of partners in a bank is 10 and in other businesses it is 20 in India.
(e) Non-Transferability of the Shares:
Shares cannot be transferred to anybody else. No partner can sell his shares to other persons. But he can do so, only if other partners agree to this.
Partnership has the following merits:
1. Careful Decisions:
Under the partnership, decision is not taken by an individual but by all the partners after a great deal of discussion. It reduces the chances for wrong decisions.
2. Division of Work:
This management of business is not done by a single person but it is divided among different partners. It creates division of work and they can make better supervision of the business.
3. More Capital:
More capital can be invested than in case of individual proprietorship.
4. Large Scale Production:
The sources of business are increased due to many partners. By investing a huge amount of capital, these partners can reap the advantages of large scale production.
5. Division of Labour:
The division of labour becomes easy under the partnership because of the large scale production. Thus, these partners can reap the benefits of the division of labour also.
6. Use of Machines:
Due to the availability of sufficient amount of capital and production being on large scale, the use of machines can be increased under the partnership. It leads to the low cost of production and rapid production.
7. Easy Credit:
It becomes easy to get credit in the partnership because the responsibility of repayment of loans does not rest on an individual but on all the partners. The creditor feels more secure in advancing loans to them than to the individual proprietor.
8. Personal Interest:
Each partner takes personal interest in the business, because he has an unlimited liability and has to bear the risk of profit or loss. Therefore, every partner takes full personal interest in the business.
Partnership has its demerits also, which are as follows:
1. Lack of Mutual Confidence:
The success of partnership depends upon the mutual confidence of the partners. They may have mutual confidence at the start of business, but it goes on shaking by and by and collapses one day. In the absence of mutual confidence the business gets a set-back and may be closed down.
2. Personal Disputes:
Partnership leads to several personal disputes which in turn, disturb the proper functioning of the business.
3. Difficult to Separate:
No partner can sell his shares to others according to his wishes. Therefore, one cannot separate from the business without the permission of other partner.
4. Delay in Decision:
Sometimes partners do not agree with each other on a particular issue and the decision may not be reached for lack of consent of all. It makes unnecessary delay in decisions and the business is adversely affected.
5. Difficult to Close:
When one or more partners want to leave the business or want to close down the business, the difficulty arises in the distribution of assets.
6. Unlimited Liability:
There is less possibility of taking risk because of the unlimited liability under the partnership.
7. Lack of Responsibility:
Under partnership, every partner is equally responsible in the business. It is generally said that ‘every man’s responsibility is no man’s responsibility’. So, lack of responsibility is a hindrance in the way of the business prosperity.
The existence of the partnership is quite uncertain. The business is generally closed down due to the misunderstandings or the death of a partner. Thus, the future of the partnership is quite uncertain.
Business Unit: Type # 3. Joint Stock Company:
Joint Stock Company is one of the most important forms of business organisation of the modern age. There are certain large scale enterprises which cannot be operated on the basis of the individual proprietorship or partnership.
To start such an enterprise a huge amount of capital is collected by a joint stock company. It is an extended form of the partnership business. When a number of persons, who are unknown to each other, join together to invest their money in some common business, it is called the Joint Stock Company.
Formation of Joint Stock Company:
A Joint Stock Company is formed according to the laws of the country. (This form of business organisation came into existence with the enactment of the Indian Companies Act, 1913, which has been amended from time to time).
There should be at least 7 persons to form a joint stock company. In the beginning, these seven persons, known as ‘Promoters’, prepare the plan of the company.
After preparing the plan, they submit an application to the Registrar of Joint Stock Companies seeking permission to establish such a company along with two documents, such as:
1. Memorandum of Association:
The Memorandum of Association consists of the name, purpose, types of shares and amount of capital etc. of the company.
2. Articles of Association:
The second document consists of the details of by-laws of the share-holders meeting, timing of meeting, and procedure of election of officers among share-holders. Minor details regarding the rules and procedures or by-laws of the company are also given in it.
These two documents are submitted to the Registrar of Joint Stock Companies who grants permission to form such a company if the prescribed conditions according to the law are fulfilled. His orders are known as the ‘Certificate of Incorporation’. After obtaining this certificate, the company starts selling its shares and collects capital to establish the joint stock company. The shares of a company can be of various types.
Shares of Joint Stock Company:
A Joint Stock Company issues the shares of different values, which are generally of the value of Rs 10 or Rs 100 each; however, the company floats the following types of shares:
1. Preference Shares:
A minimum rate of profit is already decided on preference shares. These are given priority while distributing dividends on the shares. These preference shares can further be of the following types;
(i) Cumulative Preference Shares:
Profit on these shares is accumulated at a fixed rate as these shares enjoy minimum guarantee rate of interest. For instance, if for one year the company does not make any profit, then in the next year, the dividend on these shares will be paid for two years i.e., both for the present and the previous year.
(ii) Non-Cumulative Preference Shares:
Non-cumulative preference shares are those preference shares which get dividend only when the company earns profits.
(iii) Participating Preference Shares:
Participating preference shares get a fixed percentage of dividends and also a further share in profits, if the total profit exceeds a certain amount.
2. Ordinary Shares:
After the preference shares are paid dividend at the fixed rate, then comes the turn of the ordinary shares. These are the most important shares of the company. Whatever is left out of the profits of the company, after paying the preference share-holders, is distributed among the ordinary share-holders.
If nothing is left after paying to the preference shares, the ordinary shares are not paid at all. Ordinary shareholders take the maximum risk as the profit or loss is borne by them.
3. Deferred Shares:
These shares are generally kept by promoters themselves to have a lion’s share in the profits. Whatever is left of the total profit, after paying all other share-holders, is distributed among the deferred share-holders. These share-holders get a large dividend in case the company earns huge profits.
In the beginning, if the company could not collect much capital or if the company needs more funds for expansion at a later stage, it may raise funds by selling debentures or bonds. The debenture is a document representing loan taken by the company.
The purchasers of debentures are not called shareholders and they do not bear any risk of profit or loss. They are paid an interest on these debentures at fixed rates for a stipulated period. They are creditors of the company.
Capital of Joint Stock Company:
The joint stock company collects capital by selling its shares in the market.
Its capital can be divided into following types:
1. Authorised Capital:
While granting the approval for company, the Registrar fixes the maximum limits of capital to be raised by the sale of its shares. It is called the authorised capital as the company is authorised to collect this much maximum capital. For example, if a company is authorised to collect the maximum capital of Rs 5 lakh it will be called the authorised capital of the said company.
2. Issued Capital:
That part of capital which is offered or issued to the public for sale is known as the issued capital. The total authorised capital is not collected at once, because in the beginning the company does not require the whole amount. Suppose, a company offers the shares of Rs 3 lakh out of the total authorised capital of Rs 5 lakh in the market, Rs 3 lakh will be called its issued capital.
3. Subscribed Capital:
Subscribed capital is that part of the issued capital of the company which is actually subscribed or purchased by the public in the form of its shares. Suppose, people actually purchase shares of Rs 2 lakh, out of the total issued capital of Rs 3 lakh, then Rs. 2 lakh will be called the subscribed capital of the company.
4. Paid-up Capital:
All the subscribed capital is not actually paid to the joint stock company. Paid-up capital is that part of subscribed capital which is actually paid by the people to the company. Suppose, Rs 1.5 lakh is paid by the public out of the total subscribed capital of Rs 2 lakh, it will be called the paid-up capital of the company.
5. Call Capital:
That part of the subscribed capital which is not paid-up by the public, but it remains to be paid and can be called at any time later on, is called the call capital. In the above example, 0.5 lakh will be the call capital.
Management of Joint Stock Company:
The joint stock company is managed and run by a ‘Board of Directors’. A meeting of the share-holders, who purchase its shares, is called within the stipulated period which is six months in India. The directors are elected by the share-holders by a voting system.
The Board of Directors lays down the general policy of the company and appoints officers like secretary, manager, engineers, representatives, salesmen, clerks, etc. who carry out day-to-day transactions of the company.
The Directors are not elected permanently. They are elected every year through voting in the annual meeting. The share-holders have the right to change the ‘Board of Directors’ if they are dissatisfied with their performance. The day-to-day business is carried on either by the salaried secretary, the Manager, or by the Managing Director, etc. Appointments of workers are made by the Board of Directors.
Features of a Joint Stock Company:
A joint stock company has following main features:
1. Legal Existence:
A joint stock company has legal existence. The company stands as an individual. The company is a legal person and it can be sued upon as an individual in the court of law for any wrong deed or action or it can sue any person.
2. Limited Liability:
The liability of every share-holder is limited to the extent of his shares. If the company fails the share-holders or owners are liable to lose only what they have paid for their shares. The creditors do not have any claim on the personal property of the share-holders.
3. Democratic Management:
A joint stock company is managed by the Board of Directors, which is elected by its share-holders through the democratic system of casting vote.
4. Collective Ownership:
The company is not owned by any single person but collectively by all the share-holders to the extent of their shares. A share-holder can neither withdraw his capital equivalent to his shares, nor can demand his shares.
The most he can do is that he can sell his share or shares to another person, who becomes the share-holder or a joint owner of the company. Shares have a ready market in terms of stock and exchange market where any number of the shares can be sold or purchased at the current price.
A joint stock company has the following merits:
1. Limited Liability:
Having limited liability of the owners, the person who fears risk may also invest capital in the business. The share-holders are not liable to pay anything more than the face value of their shares. Therefore, the company can start the business which may have even greater risk.
2. Large Capital:
Unlike individual proprietorship or partnership, a joint stock company can arrange capital in large quantity. It can obtain capital easily and even at a lower rate of interest by floating its shares in the market.
3. Large Scale Production:
The large scale production can be established on the basis of the joint stock company. Thus, the company can reap all the advantages of large scale production.
4. Long Life:
The company has long life or is of more permanent nature. It does not make any difference to the company if the death of a share-holder occurs or he sells his shares to another person. The share-holders may change, but the company functions normally.
5. Long Period Project:
A joint stock company is the most suitable for the projects which have a large gap between the investment and the production of goods. An individual proprietor or partnership firm never has the courage to invest in such long period projects.
6. Easy to Separate:
Unlike individual proprietorship or partnership, its shareholders can separate from the company by selling their shares to others.
7. Benefits of Small Savings:
One can invest his small savings of even Rs. 100 by purchasing the shares of a company. In this way, small savings can be utilised in the large scale production which build the strong base of the economy.
8. Easy to Increase Capital:
It is quite easy for a joint stock company to raise more capital whenever required, by floating new shares and selling debentures in the market.
9. Spread of Risk:
The risk of the company is spread over a large number of share-holders. Risk is not limited to a few persons but is spread over all the owners of the company. One can diversify his risk by purchasing the shares of different companies.
10. Champion of Democracy:
The company is managed or run on democratic system. The share-holders elect the ‘Board of Directors’. They can change the directors if they are dissatisfied with their performance. They can make open criticism of the wrong and unsuitable policies of the board in their annual general meeting.
11. Services of Able Persons:
Persons who do not have capital but are rich in managerial or business ability are appointed as managers, etc. Thus, a company can take advantage of the services of able and efficient persons.
12. Economic and Technical Development:
The emergence of joint stock companies has facilitated large scale production which has helped the economic and technical development. Having huge capital and more resources, it can spend them for research on new methods of production and modern type of machines.
A Joint Stock Company has the following demerits.
1. Separation of Organisation and Enterprise:
In the joint stock company, share-holders are the entrepreneurs and the paid managers are the organizers. This separation of organisation and enterprise is harmful because the managers do not safeguard adequately the interests of the entrepreneurs.
2. Danger of Monopoly:
The joint stock company can create monopoly in the market. Sometimes a few companies producing similar goods form a union and create monopoly. They exploit the consumers by charging higher prices because of the monopoly.
3. Lack of Interest of the Share-holders:
The shares of the company are quite scattered and the transferability of shares kills the interest of share-holders in the company. They become indifferent towards the company affairs and leave all the functions to the directors, who usually promote their own interest at the cost of the company.
The dividend of the company is distributed among the share- holders. Labourers who are more in number, are paid fixed wages. Generally a single person purchases a majority of shares and takes away a large part of the total dividend. It leads to the unequal distribution of wealth and income in the country.
5. Initial Difficulties:
It is more difficult to establish a joint stock company as compared to the individual proprietorship or partnership. There are various legal requirements which must be fulfilled. Thus, several legal and other complications arise at the initial stage of the company.
6. Development of Capitalism:
The joint stock company facilitates large scale production which strengthens capitalism.
7. Burden of Taxes:
The owner has to bear a heavy burden of taxes in case of the joint stock company. First, the company has to pay corporation tax on its dividend and secondly, share-holders have to pay again income tax on their income from shares.
Limited liability and free transfer of shares give birth to speculation in the market. Economic activities are adversely affected due to the speculation or change in the value of shares.
9. Labour Disputes:
In the joint stock company, there is no close contact between the workers and the actual owners who are share-holders. The paid managers do not pay proper attention to get workers’ cooperation. The owners do not have knowledge about the workers’ problems.
The grievances of the workers burst into labour disputes e.g., strike, lock-out and industrial disturbances, etc. Labourers form trade unions and fight collectively against the owners of the company.
10. Exploitation of the Share-holders:
Generally, the common share-holders lack complete information and knowledge of the company’s affairs. The directors of company then make exploitation of the innocent share-holders.
Corruption, favouritism and biasness become the essentials of a joint stock company. The directors of the company encourage corruption at higher levels to change the economic policy of the country in the direction favourable to their company. In matters of high level appointments like the secretary or the managing director, etc. their own relatives or known persons are appointed.
12. Disadvantages of Large Scale Production:
In the joint stock company, production is undertaken on a large scale. Thus, internal and external diseconomies, defects of division of labour and demerits of use of machinery etc. are commonly found in the joint stock company.
It can be concluded that the defects can be avoided with certain precautionary measures or by enacting proper legislation or through governmental policies. In modem times, no democratic country can make economic development and attain prosperity without the help of Joint Stock Companies.
Business Unit: Type # 4. Co-Operative Societies:
In modem times, a co-operative enterprise is one of the important forms of business organisation. When a few persons, who are known to each other, start business on co-operative basis, it is called a co-operative society.
A few persons combine and make a co-operative society. There must be minimum 11 persons in India to form a co-operative society and they may submit an application for the establishment of a co-operative society to the Registrar, Co-operative Societies.
A co-operative society is established after the approval of the Registrar. In brief, a co-operative society comes into existence when people work together by pooling their resources for a business purpose on the basis of mutual benefits.
Characteristics of Co-Operative Society:
A co-operative enterprise has the following characteristics:
It is formed on voluntary basis. A person becomes a member of the co-operative society out of his own desire or will. There is no compulsion on him to do so.
2. Equal Rights:
Every member of the co-operative society has equal rights. Everyone is given equal opportunity in the management of the society. Each member is equipped with the right to vote in the election of its office-bears.
3. One for All and All for One:
The cooperative enterprise is formed on the basis of one for all and all for one. Every member co-operates with others in the functioning of the enterprise.
4. Self- Sufficiency:
A co-operative enterprise is started with the initial aim of self-sufficiency.
5. Mutual Help:
The main motto of the co-operative society is mutual help and to impart the training of honesty and co-operation among the members.
The directors of the co-operative society are elected from among its own members who work
7. Democratic Principle:
One of the main characteristics of this enterprise is that it functions according to democratic principles. Its office-bearers are properly elected by its members.
8. Joint Benefits:
Members are acquainted with each other and they work for a common end or joint benefit.
Cooperative enterprise is started on economical basis. Investment is done up to a certain limit. Expenditure is incurred according to own financial resources.
Forms of Co-Operative Society:
The co-operative enterprise has different forms or kinds which are explained as below:
1. Co-operative Credit Societies:
These societies are formed to give financial and credit facilities, he members of the society deposit their savings with the society and take loans from the society whenever the need arises.
2. Producers Co-operative Societies:
When a few persons with small capital form a society to start their own business, it is called the “producers’ co-operative society”. Generally, workers start such a society for small scale production.
3. Consumers’ Cooperative Societies:
The consumers of a locality or, a town join together, collect the necessary capital through shares, and start a store. The co-operative store sells those goods which have common demand in the locality. These stores are called ‘Consumers Co-operative Stores. They sell better quality goods at cheaper prices. Profit of the society is divided among its members at the end of the year.
4. Co-operative Marketing Societies:
When farmers form a society to purchase raw materials or inputs for agriculture, e. g., seeds, fertilisers and other goods, etc. and to sell their outputs, it is called the co-operative marketing society.
5. Multiple cooperative societies:
These societies are formed for multiple or various purposes, e.g., providing for credit facilities to farmers, marketing of agricultural product, purchase of agricultural inputs and machines, etc. Such societies are called ‘Multiple Co-operative Societies’.
6. Co-operative Farming Societies:
When the farmers pool together their land and capital to make joint cultivation, it is called the Co- operative Farming Society. Every member of the society is paid profits according to his contribution of land and capital in the production.
A co-operative society has the following advantages:
1. Less Capital:
Persons or workers with small capital can start business under the co-operative enterprise.
2. Reduction in Inequalities:
A co-operative enterprise helps in reducing the inequality of income and wealth in the country. It avoids exploitation as the profit is distributed among the share-holders.
3. Incentive to Hard Work:
When workers start business on co-operative basis and get their due profits. They set an incentive for hard work.
4. Training in Management:
It imparts training in management because the workers themselves manage the business.
5. End of the class Conflict:
A Co-operative enterprise abolishes the difference between the employers and the employees and there remains no chance of class conflict, because the workers themselves are the
6. Habit of Thrift:
It encourages thrift among the members. They do not do superfluous expenditure and save more to invest in the business.
7. Less Scope for Manipulation:
The accounts of a co-operative enterprise are checked by the auditors which reduces the chances of manipulation of the accounts.
8. Use of Modern Techniques:
Adoption of the co-operative farming in cultivation facilitates the use of modern techniques and modern agricultural implements. It raises the productivity as well as income of the members of the society,
A co-operative society is called as a friend of democracy, because it is managed on democratic principles.
10. Less Expenditure:
A co-operative enterprise involves less expenditure as its management is done by the directors on honorary basis.
It encourages savings among the members of the society, because they can make profit by investing their savings in the business.
12. MoraI and Social Benefit:
A co-operative enterprise is most useful from the moral and social point of view. It encourages the spirit of co-operation among the members of the society. They have a broader social outlook. The development of co-operation makes good citizens in the country.
A co-operative society has the following disadvantages:
1. Unnecessary Criticism:
Every member wants to have complete knowledge about management, because he has equal rights. After knowing it, he starts criticising the directors unnecessarily which creates difficulty in the management.
2. Lack of Efficient Managers:
It is not necessary that elected directors may be efficient having complete knowledge of management. Generally, the efficient managers are rarely found in a co-operative society.
3. Lack of Interest:
If the co-operative society fails to fulfil the requirements of its members they lose faith in the society. They develop an indifferent attitude towards the enterprise.
4. Inability to Face Economic Crisis:
A co-operative society has limited resources and thus is unable to face economic crisis.
5. Less Capital:
A co-operative society is generally started by poor persons who lack capital. They face difficulty in collecting capital, if need arises Therefore, the co-operative society is always discouraged due to
6. Mutual Distrust:
The election of the co-operative society brings in the party system which results in the mutual distrust and disputes.
The directors of the society create corruption and favouritism in the working and the management of the enterprise by helping their relatives and friends.
Business Unit: Type # 5. Public or State Undertaking:
Industrial and commercial undertakings owned and run by the government are known as public sector undertakings. Some of them come under the category of public utilities such as railways, posts and telegraphs hydroelectric projects, road transport, etc.
Others are run like joint stock companies and aim at earning profits’ shareholders public undertakings in which the government holds majority shares along with private share-holders.
The state enterprises have assumed great importance in the modern times.
They possess the following merits:
1. Development of Backward Areas:
Private enterprises cannot satisfy the development needs of the backward areas. Extension of public enterprise is essential for the economic reconstruction of the backward areas.
2. Public Welfare:
The aim of public enterprise is not to earn profits, but the social or public welfare which promotes national interest. The enterprises which do not give direct profit but are essential for the public we fare, are run as the state enterprises, e.g. power projects or construction of dam, etc. are run for public welfare as the state enterprise.
3. End of Industrial Profits:
The growth of capitalism is checked by public enterprises. Wealth in the form to profit is not concentrated in a few hands but it goes to the government which further spends it on the public welfare works.
4. Development of Basic and Heavy Industries:
Private enterprise generally hesitates to participate in capital intensive investments, e.g., iron and steel plant, fertiliser plant, etc. Therefore, the public enterprise comes to help in the development of the basic and heavy industries.
6. Reasonable Prices:
In the private sector, capitalists form monopolies to charge higher prices, but the public enterprises produce generally of better quality goods and sell them at reasonable prices.
7. Quality Products:
It is also admitted that the goods produced by the public enterprises are superior to the goods produced by the private sector.
8. Easy Credit:
It is easy to collect more capital for the state enterprise as compared to the private enterprise. All the more, a lot of capital can be imported from foreign countries for public enterprises. Therefore, public enterprises are more useful in countries lacking in capital, as the government can easily arrange capital both internally and externally.
9. Economic and Social Equalities:
The state enterprise is most helpful in bringing the social and economic equalities in the country. Income from the state enterprises does not go into the private pockets but it is spent on public welfare. Thus, the public enterprises reduce inequality in wealth and income distribution.
10. Able Employees:
The state undertakings have the advantage to obtain services of more efficient, talented and able persons.
There is greater possibility of intensive research in state enterprises as compared to the private enterprises. The state enterprises have sufficient funds at their disposal to utilise for research of new techniques of production and new machines, etc. It increases the efficiency of state enterprises.
The above arguments support the case of state enterprises. But the supporters of private enterprises stress that state enterprises should be minimum in the country, due to certain demerits of this system.
The demerits of state enterprises are as under:
1. Lack of Incentive:
The government servants do not have the same incentive to do their best as a man in private enterprise has. In the government service, promotion is awarded simply by seniority and not by merit. The workers are least concerned with the profit of the enterprises. Thus, they do not work with much incentive or initiative.
2. Red Tapism:
Many decisions have to be taken in a state enterprise at different high level meetings. The file concerning these matters generally remains locked-up without any reason in the different offices for a long time. Thus, red tapism is one of the main disadvantages of state undertakings.
3. Wasteful Expenditure:
There is a great deal of waste in the expenditure. The government funds and property are used carelessly which result in small benefits at a greater cost. It increases the cost of production in state enterprises.
Corruption, bribery and dishonesty are very common things in state enterprises. The excess of these things converts the profits into the loss of the enterprise.
5. Unnecessary Interference:
There is general tendency of the ministers and the bureaucrats to interfere in the free working of trade and commercial matters, especially in backward areas. Frequent transfers of government employees from one place to another further put a hurdle in the daily administration of the enterprises.
6. Political Favouritism:
Political favouritism and nepotism are the main disadvantages of the state enterprises. Every minister or political leader uses favouritism and nepotism in the recruitment and appointment of their near and dears. There is tyranny of the bureaucracy.
The junior official behaves like a big boss and a respectable citizen receives no courtesy. Political favouritism and bureaucratic machinery appoint inefficient persons who adversely affect the working of the state enterprises.
7. Frequent and Sudden Transfers:
Very frequent and sudden transfers of the government employees at distant places with political motive, adversely hit the normal functioning of the state enterprises. Such types of transfers result in the waste of expenditure, delay in work and inefficiency of the enterprise.