CA Foundation Business & Commercial Knowledge Study Material – Meaning of Privatization

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Privatization

Meaning of Privatization

Privatization means the transfer of ownership and/or management of an enterprise from the public sector to the private sector. It refers to the introduction of private control and ownership in public sector undertakings. According to the World Bank, “privatization is the transfer of State owned enterprises to the private sector by sale (full or partial) of going concerns or by sale of assets following their liquidation.” In the words of Barbara Lee and John Nellis “Privatization is the general process of involving the private sector in the ownership or operation of a State owned enterprise,”

There are several forms or methods of privatization such as:

  • Denationalization of a public enterprise by its complete sale to the private sector. For example, BALCO. was sold to Sterlite Industries.
  • Divestiture, i.e., the sale of equity in full or part of a public sector undertaking to private sector.
  • Transfer of management of a public sector enterprise to private sector through a management contract.
  • Joint venture, i.e., joint ownership of an enterprise by Government and private sector.
  • Leasing, Le., transferring the use of assets of a public sector unit to private bidders for a specified period.
  • Franchising of public sector services to designated private sector units.

Trends And Issues – Privatization In India

The process of privatization began in India mainly after the Industrial Policy of July 1991. Under this policy the number of industries reserved for the public sector was reduced from 17 to 2 – Railways and Atomic Energy. Shares of several public sector enterprises have been sold to mutual funds, workers and the public.

Impact of Privatization on Indian Economy

The main reason for privatization in India has been the poor performance of public sector units which results in wastage of national resources and burden on common man.


Positive Effects

  • Expansion of market
  • Growth of independent money market
  • Free flow of resources
  • Advancements in technology
  • Equilibrium in balance of payments
  • Development of infrastructure
  • Higher living standards
  • International cooperation

Negative Effects

  • Cut-throat competition
  • Rise in monopoly
  • Increase in inequalities
  • Takeover of domestic firms
  • Removal of protection to domestic firms
  • Affect on national sovereignty


CA Foundation Business & Commercial Knowledge Study Material – Meaning of Liberalization

CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Liberalization

India faced foreign exchange crises in 1990. Government of India adopted the policy of Liberalization, Privatization and Globalization (LPG) to overcome the crisis. Government controls on business and industry have since then been dismantled gradually. The process further gained momentum in 2014. Since then rules and regulations have been simplified to increase the ease of doing business. Goods and Services Tax (GST) is the latest step in this process.

Meaning of Liberalization

Liberalization of an economy means removing or relaxing Government controls and restrictions on economic activities. It is the process of liberating the economy from unnecessary controls and restrictions on trade, industry, banking system, etc. of the country. It involves abolition of those policies, rules and regulations which impede economic development.

Liberalization in India – Trends and Issues

The process of economic liberalization in India began primarily in 1991. The economic reforms are being implemented in two stages, namely (i) First Generation Reforms, and (ii) Second Generation Reforms. The main trends of liberalization in India are as follows:

1. Infrastructural Reforms:

  • Opening up of oil exploration and petroleum to foreign investment.
  • Power sector reforms.
  • Private sector participation in infrastructure development.
  • Decontrol of steel.
  • Telecom sector reforms.

2. Industrial Reforms:

  • Delicensing of industry.
  • Public sector undertakings allowed access to capital market.
  • Simplification of licensing procedures.

3. Fiscal Reforms:

  • Reduction in customs duty.
  • Five year tax holiday to enterprises in specified sectors.
  • Downsizing of some departments.
  • Reduction in personal and corporate taxes.
  • Simplified tax administration.
  • Introduction of Value Added Tax (VAT).

4. Capital and Money Market Reforms:

  • Clearing Corporation of India set up.
  • Introduction of Negotiated Dealing System.
  • Floating rate Government bonds re-introduced.
  • Trading in index options, and stock futures introduced.

5. External Sector Reforms:

  • Removal of import restrictions.
  • Liberalised Exchange Rate Management System (LERMS)
  • Liberalisation of NRI remittances.
  • Encouraging foreign tie-ups.
  • Automatic approval of foreign investment and foreign technology agreements to specified extent.

6. Banking Sector Reforms:

  • Reduction in CRR and SLR.
  • Introduction of capital adequacy norms.
  • Setting up of Debt Recovery Tribunals.
  • Issue of guidelines for entry to new private banks.
  • Setting up of IRDA.

Impact of Liberalization of Indian Economy

Liberalization has considerably expanded the scope of private sector in India. Private enterprises can now enter most of the industries. The competitive strength and industrial efficiency have improved. Business opportunities have increased and many Indian companies have established subsidiaries and joint ventures abroad. Liberalisation has also boosted foreign investment in India. Thus, liberalisation has led to radical changes in India’s business environment.


Positive Effects

  • Increase in foreign investment
  • Decline in external debt
  • Rise in foreign exchange reserves
  • Increase in tax receipts
  • Increase in production
  • Technological advancement

Negative Effects

  • Decline in small scale sector
  • Increase in unemployment
  • Decrease in GDP rate

CA Foundation Business & Commercial Knowledge Study Material Chapter 3 Business Organizations – Test Questions

CA Foundation Business & Commercial Knowledge Study Material Chapter 3 Business Organizations – Test Questions

1. Who is the Chairman of Asian Paints Ltd. ?
(a) KBS Anand
(b) Ashwin Choksi
(c) Chimanlal Choksi
(d) Champaklal Choksey

2. Axis Bank was founded in:
(a) 1991
(b) 1992
(c) 1993
(d) 1994

3. Who is the Chief Executive of Axis Bank ?
(a) Sanjiv Misra
(b) Jairam Sridharam
(c) Chanda Cochar
(d) Shikha Sharma

4. Bajaj Auto was founded at
(a) Mumbai
(b) Kolkata
(c) Pune
(d) Bengaluru

5. Who is the Chairman of Bajaj Auto
(a) Sanjiv Bajaj
(b) Rajiv Bajaj
(c) Jamnalal Bajaj
(d) Rahul Bajaj

6. In which year Bharti Airtel was founded ?
(a) 1991
(b) 1992
(c) 1994
(d) 1995

7. Who is the Chairman of Bharti Airtel ?
(a) Deepak Mittal
(b) Navin Mittal
(c) Sunil Mittal
(d) Anil Mittal

8. Cipla operates in which industry
(a) Food
(b) Pharma
(c) Hotels
(d) All the above

9. Dr. Reddy’s laboratories was set up in
(a) 1980
(b) 1983
(c) 1984
(d) 1989

10. HDFC Bank was set up in
(a) 1991
(b) 1992
(c) 1993
(d) 1994

11. Which is India’s largest private sector hank
(a) Axis Bank
(b) SBI
(c) ICICI Bank
(d) HDFC Bank

12. Which company was formed by seven engineers with a capital of ? 10000
(a) Asian Paints
(b) Bharti Airtel
(c) Infosys
(d) None of the above

13. ITC was originally named as:
(a) Imperial Tobacco company
(b) Indian Tobacco company
(c) Indian Tea company
(d) None of the above

14. Larsen & Toubro Ltd. was founded by
(a) Indians
(b) Americans
(c) Danish
(d) Europeans

15. Reliance Industries Ltd. was founded by
(a) Anil Ambani
(b) Mukesh Ambani
(c) Akash Ambani
(d) Dhirubhai Ambani

16. State Bank of India was originally known as
(a) Centurion Bank
(b) United Bank of India
(c) Imperial Bank
(d) None of the Above

17. Which is the largest Commercial bank of India
(a) SBI
(b) ICICI Bank
(c) HDFC Bank
(d) Axis Bank

18. Which Company is the holding company of 100 independent companies of the Tata Group ?
(a) Tata Sons Ltd.
(b) TCS Ltd.
(c) Tata Steel Ltd.
(d) Tata Motors Ltd.

19. Which of the following are conglomerates
(a) Tata Sons Ltd.
(b) L&T Ltd.
(c) Reliance Industries Ltd.
(d) All of these

20. Which information technology company began as an edible oil firm
(a) Infosys
(b) Microsoft
(c) IBM
(d) Wipro

21. Wipro was founded in:
(a) 1948
(b) 1958
(c) 1945
(d) 1968

22. Which banking company is known worldwide for its credit cards
(a) Axis Bank
(b) ICICI Bank
(c) HDFC Bank
(d) American Express

23. Which company was set up in a garage
(a) Infosys
(b) HP
(c) Nestle
(d) Microsoft

24. Apple’s main business is
(a) Fruits
(b) Computers
(c) Retailing
(d) None of the above

25. IBM Corporation was founded in
(a) 1895
(b) 1911
(c) 1921
(d) 1931

26. Which global firm has an Indian as its chief executive
(a) HP
(b) IBM
(c) Microsoft
(d) None of the above

27. Good Food, Good Life is the Slogan of which company
(a) Walmart
(b) Britannia
(c) Parle
(d) Nestle

28. Which company is world’s largest retailer
(a) Shoppers Stop
(b) Smart
(c) Spencer
(d) Walmart

CA Foundation Business & Commercial Knowledge Study Material – An overview of Selected Global Companies

CA Foundation Business & Commercial Knowledge Study Material Chapter 3 Business Organizations – An overview of Selected Global Companies



  • Year of Incorporation : 1850
  • Head office : New York, USA
  • Chairman and CEO : Kenneth I. Chenault
  • Website :

History : American express was founded in 1850 as an express mail business.
Philosophy : Vision : To be a leading provider of payment solutions worldwide.
Mission : To leverage our local and global expertise to be a leading provider of payment solutions by delivering high quality, innovative and world class products and services, while maintaining the highest standards of governance and ethics.
Business portfolio : American Express operates in both card and non-card segments.
Operations : American Express has 2300 offices in 175 countries across the world. It has several subsidiaries and employs over 56000 people. Its revenue in 2015-16 was US $ 32.119 billion. American Express set up its first office in India in 1921 at Kolkata. Since then it has become the leading banking and travel related services. It is considered a pioneer in’off-shoring processes to captive centres in India.
Developments : In 2016, American Express was ranked the 25th most valuable brand in the World. In 2017 it was ranked as the 17th most admired company worldwide.



  • Year of Incorporation : 1976
  • Head office : California, USA
  • Chief Executive : Tim Cook
  • Website :

History: Steve Jobs, Steve Wozniak and Ronald Wayne founded Apple Computer Inc. in January 1977 to develop and sell personal computers. In January 2007 it was renamed as Apple Inc. to reflect its shifted focus towards consumer electronics.
Philosophy: Vision: To produce high quality, low cost, easy to use products that incorporate high technology for the individuals.
Mission: To bring the best personal computing experience to students, educators, creative professionals and consumers around the world through innovative hardware, software and internet offerings.
Business portfolio: Apple operates in Mac, iPad, iPhone, Watch, TV and Music segments. It operates the online Apple Store. Its iTunes store is the world’s largest online music retailer.
Operations: Apple is the world’s largest information technology multinational. It is the world’s second largest mobile phone manufacturer. It maintains 478 retail stores in 17 countries. It has more than 120,000 employees and its revenue in 2015-16 was US $ 215.369 billion.
Developments: In August 2014 Apple acquired Beats Electronics. It was ranked 8th among Forbes World’s Biggest Public Companies in 2016. It ranked 9th in Fortune 500 Global Companies same year.

3. HP


  • Year of Incorporation : 1939
  • Head office : California, USA
  • Chairman : Dion Weisler
  • Chief Executive : Dion Weisler
  • Website :

History: William Redington Hewlett and David Packard founded HP in 1939 in a car garage in Palo Alto to produce electronic test equipment.
Philosophy: To create technology that makes life better for everyone, every where every person, every organization and every community around the globe.
Business portfolio: Major product lines of HP include personal computing devices, enterprise and industry services, related storage devices, networking products. Software, Printers imaging products. It sells to households as well as to-organizations.
Operations: HP is a global information technology company. It develops and sells a wide variety of hardware, software and related products.
Developments: In 2015 HP split its PC and printers business from enterprise products and services business. It resulted into two companies. HP Inc. and Hewlett Packard Enterprise.



  • Year of Incorporation : 1911
  • Head office : New York, USA
  • Chairman : Ginni Rometty
  • Chief Executive : Ginni Rometty
  • Website :

History: On June 16, 1911 four Companies were amalgamated to form the Computing Tabulating Recording Company. It was renamed International Business Machines in 1924. Later on the name was changed as IBM corporation.
Philosophy: Vision: To be the first and foremost on any new enterprise data centre migration short-list.
Mission: To be the leader in innovation, development and manufacture of the industry’s most advanced information technologies, including computer systems, software storage systems and micro-electronics.
Business portfolio: IBM operates in both products (analytics, cloud, commerce, Internet of things, security mobile, security, industry solutions, etc.,) and services business consulting, technology, financing, training etc.,/segments.
Operations: IBM is a global technology company with operations in more than 170 countries. It is a major research organization holding the record for most patents. It has more than 380000 employees and its revenue in 2015-16 was US $ 79.20 billion. It has a subsidiary IBM India Pvt. Ltd. in India since 1992.
Development: IBM acquired Lombard in 2009, Sanovi Technology in 2016 and Agile 3 Solutions and Ravy Technologies in 2017. It is ranked 82nd in Fortune 500 global companies.



  • Year of Incorporation : 1911
  • Head office : Washington, USA
  • Chairman : John Thompson
  • Chief Executive : Satya Nadella
  • Website :

History: Paul Allen and Bill Gates founded Microsoft on April 4,1975. It entered OS business in 1980. It rose to dominate the personal computing with MS-DOS. Since 1990 it has diversified.
Philosophy: Vision: To help individuals and businesses realize their full potential.
Mission: To be a global organization by providing products/services of value for the target market.
Business portfolio: Software and services, devices and Xbox, business developers and IT, for students and educations are the major segments for which Microsoft has products.
Operations: Microsoft is a multinational technology company. It is best known for its software products like Windows, Office, Internet Explorers and Edge Web browsers. It is the largest software maker in the world. It has more than 115000 employees and its revenue in 2015-16 was US $ 85.32 billion. Microsoft Corporation of India was set up 1990. It has six major business units.
Developments: Microsoft acquired Skype Technologies in 2011, mobile hardware division of Nokia in 2014 and Linked in 2016.



  • Year of Incorporation : 1866
  • Head office : Vevey, Switzerland
  • Chairman : Peter Brabeck Letmathe
  • Chief Executive : Mark Schneider
  • Website :

History: Henri Nestle founded Angloswiss Condensed Milk Company in 1866. In 1879, it merged with milk chocolate inventor Daniel Peter. In 1905 the company was renamed Nestle. It entered India in 1923.
Philosophy: To provide consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and eating occasions from morning to night.
Business portfolio: Nestle has popular brands in bottled water, cereals, health, skincare, pet care, coffee, etc.
Operations: Nestle is a global food and drink company. It is the world’s largest food, nutrition, health and wellness company. It has 2000 plus brands across the globe. It operates 418 plants in 86 countries. Its products are available in 191 countries. It employs 3,35,000 people and its revenue was 89.8 billion Swiss Frank in 2015-16.
Developments: Nestle acquired San Pellegrino, Spillers Pet Foods, Ralston Purina, Chief America, Delta Ice cream, Hsu Fachi, Vitablo and Prometheus Laboratories. It ranked 66th in Fortune 500 and 33rd in Forbes 2000 companies in 2016. It has joint ventures with General Mills, Coca Cola Company, Lactalis and Colgat Palmolive.



  • Year of Incorporation : 1962
  • Head office : Arkansas, USA
  • Chairman : Greg Penner
  • Chief Executive : Dough Mcmillion
  • Website :

History: Sam Walton founded Walmart in 1962. It was incorporated on October 31, 1969.
Philosophy: Vision: To be the best retailer in the hearts and minds of consumers and employees.
Mission: Saving people money so that they can live better, Tagline: Save money Live better.
Business portfolio: Walmart sells a wide range of products such as groceries, foods, fruits and vegetables, personal and house care, clothing’s, office supplies and general merchandise. It is organized into four divisions.
Operations: Walmart is a multinational that operates a chain of hyper markets, discount stores, grocery stores and online stores. It is world’s largest retailer. It has 11695 stores in 28 countries. It has more than 23,00,000 employees and its revenue was $ 485.87 billion in 2015-16. Walmart India has 21 stores which sell 5000 items in 9 States. It launched B2B e-commerce platform on July 1,2014.
Developments: Walmart acquired Moose Jaw and Bonobos, and It is number 1 company in Fortune 500 list and was ranked 15th on Forbes Global list 2000.

CA Foundation Business and Commercial Knowledge Study Material Chapter 2 Business Environment – Test Questions

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Test Questions

CA Foundation Business and Commercial Knowledge Study Material Chapter 2 Business Environment – Test Questions

1. Which of the following is a characteristic of business environment?
(a) Aggregative
(b) Dynamic
(c) Uncertain
(d) All of them.

2. Which of the following is an element of micro environment:
(a) Customers
(b) Competitors
(c) Suppliers
(d) All of them.

3. Which of following relates to population?
(a) Demographic environment
(b) Social environment
(c) Cultural environment
(d) Natural environment

4. Understanding of environment enables a business enterprise to
(a) focus on customers
(b) gain the first mover advantage
(c) become aware of impending threat
(d) All of them.

5. Demonetization and GST are examples of changes in
(a) Political environment
(b) Social environment
(c) Technological environment
(d) Global environment

6. Merger of associate banks of SBI into SBI is an example of changes in
(a) Economic environment
(b) Technological environment
(c) Social environment
(d) Demographic environment

7. Tick (✓) the correct alternative.
Demographic trends are a part of:
(a) economic environment III
(b) social environment
(c) political environment
(d) legal environment

8. State whether the following statements are True or False:
Wait and watch is a response of least resistance.
Big and powerful firms adopt the response of gaining command over the environment.
Innovative approach requires no feedback system.
Adaptation response involves anticipation of changes in business environment.

9. State whether the following statements are true or false.
Privatisation and globalisation are components of economic liberalisation.
Pressures for structural adjustments are a reason for globalisation.
Denationalisation is a form of privatisation.
Closure of small scale firms is a positive effect of economic liberalisation.

10. Fill in the blanks:

  1. Business environment is the totality of …………… forces
  2. Different elements of business environment are ……………
  3. When business environment changes rapidly and suddenly …………… increases.
  4. Industrial policy, monetary policy and fiscal policy are elements of …………… environment of business.
  5. Business gets …………… from the environment and supplies …………… to the environment.

11. Match the items in column A with those in column B


12. Age, family size, sex composition and other people related elements are part of
(a) political environment
(b) economic environment
(c) demographic environment
(d) natural environment.

CA Foundation Business & Commercial Knowledge Study Material – Meaning and Elements of Macro Environment

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning and Elements of Macro Environment

Meaning and Elements of Macro Environment

Macro environment refers to the general environment or remote environment within which a business firm and forces in its micro environment operate. A company does not directly or regularly interact with the macro environment. Therefore, macro environment is also known as Indirect Action Environment. Forces in the macro environment, however, create opportunities for and pose threats to the company. The macro environment forces are less controllable than the micro forces. Therefore, success of an enterprise depends on its ability to adapt to the macro environment. For example, when there is a substantial increase in the cost of imported raw materials due to depreciation of the Rupee, production of such materials within the country may become necessary.

Macro environment consists of the following components:

  1. Demographic environment
  2. Political and legal environment
  3. Social and cultural environment
  4. Economic environment
  5. Technological environment
  6. Natural environment
  7. Global environment.

1. Demographic Environment: Demographic environment means various dimensions of country’s population. The demographic environment is important to business because people constitute the market for a business. Moreover, business management involves management of people and the efficiency of business depends largely on the competence and motivation of its people. Business firms often use demographic factors (e.g., age, sex, family size, occupation, family life cycle, education, social class, income distribution) as the basis of market segmentation. The demographic environment differs from country to country and from one place to another within a country. The demographic factors which have very significant implications for business are as follows:

  • Size and growth rate of population,
  • Age and sex composition of population,
  • Life expectancy,
  • Rate of employment,
  • Density of population,
  • Rural urban distribution,
  • Family size,
  • Ethnic composition,
  • Literacy levels, and
  • Income levels.

2. Economic Environment – The economic environment comprises all those economic forces which influence the functioning of business enterprises, e.g., the nature and structure of the economy, the stage of economic development, economic resources, the level of income, economic policies, distribution of income, etc. The main components of economic environment are as follows:

  • The nature of economic system-capitalist, socialist or mixed economy.
  • Economic structure-occupational distribution of labour force, structure of national output, capital formation, investment pattern, composition of trade, balance/imbalance between different sectors, five year plans.
  • Economic policies-industrial policy, export-import policy, monetary policy, fiscal policy, foreign investment and technology policy.
  • Organisation and development of the capital market-banking system, securities markets, etc.
  • Economic indices-gross national product, per capita income, rate of savings and investment, price level, balance of payments position, interest rates, etc.
  • Economic infrastructure and stage of development of the economy.
  • Product markets and factor markets-degree of competition, market size, etc.

3. Political and Legal Environment – Political environment comprises the elements relating to Government affairs. It serves as the regulatory framework of business. The main constituents of a country’s political and legal environment are as follows:

  • The constitution of the country.
  • Political organisation-organisation and philosophy of political parties, ideology of the Government, nature and extent of bureaucracy, influence of primary groups, business donations to political parties, political consciousness, etc.
  • Political stability-structure of military and police force, election system, law and order situation, President’s Rule, foreign infiltrations, secessionist activities, etc.
  • Image of the country and its leaders.
  • Foreign policy-alignment or non-alignment, relations with neighbouring countries.
  • Defence and military policy.
  • Laws governing business, and legal system.
  • Flexibility and adaptability of laws-constitutional amendments and direction of public policies.
  • The judicial system-implementation and effectiveness of laws.

4. Social and Cultural Environment – Social environment refers to the characteristics of the society in which a business firm exists. Social and cultural environment consists of the following:

  • Social institutions and groups.
  • Caste structure and family organisation.
  • Educational system and literacy rates.
  • Customs, attitudes, beliefs, values and life styles.
  • Tastes, preferences of people, and their buying behaviour.
  • Religions, etc.

Family, marriage, education, religion, attitudes to work and wealth and ethics are some examples of socio-cultural factors.

Fig: Elements of Macro Environment

5. Technological and Physical Environment – The main elements of technological and physical environment are the following:

  • Sources and types of technology.
  • Rate of technological change.
  • Approaches to production of goods and services.
  • New processes and equipment.
  • Research and Development (R&D) systems.

6. Natural Environment – The main natural forces are as follows:

  • Climatic and geographical conditions.
  • Agricultural, commercial and other natural resources.
  • Ecological system.
  • Levels of pollution.

7. Global Environment – International agencies (World Bank, IMF, WTO, EEC, etc.), international conventions, treaties and agreements, economic and business conditions in other countries, etc. Certain developments such as a hike in the crude oil price have global impact. Developments in information and communication technologies facilitate rapid spread of culture across countries. Economic conditions abroad affect Indian firms. For example, exports increase when markets expand abroad. International political factors can also affect business. For example, improvements in relations between India and Pakistan has led to higher trade between the two countries. WTO regulations have far reaching impact on business in India. Import and investment liberalisation by WTO has led to greater competition in India. The main determinants of international environment are as follows:

  • The state of the world economy and distribution of world output.
  • International economic cooperation.
  • International market structure and competition.
  • Barriers to international trade and investment.
  • National economic policies of different countries.
  • Role of multilateral economic institutions.
  • International economic laws, treaties, agreements, codes and practices.
  • Political system and conditions in different countries.
  • Cultural factors in different countries.
  • Growth and transfer of technology.
  • Growth and spread of multinationals.


CA Foundation Business & Commercial Knowledge Study Material – Meaning and Elements of Micro Environment

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning and Elements of Micro Environment

Meaning And Elements of Micro Environment

Micro environment or task environment refers to those individuals, groups and agencies with which the organisations comes into direct and frequent contact in the course of its functioning. In the words of Philip Kotler, “micro environment consists of the actors in company’s immediate environment that affect the performance of the company.” Micro environmental factors exercise a direct and intimate influence on the operations of the enterprise. Therefore, it is also known as Direct Action Environment or specific forces or Stakeholders. Micro environment consists of the groups in the company’s immediate operating environment which have a stake in the company. However, the micro forces may not influence all the firms in a particular industry in the same manner. For example, one firm’s supplier environment may be entirely different from that of another firm which has inhouse supplies. Even when all the competing firms in an industry have similar micro environment, their relative success depends on how effectively they face the micro forces.

Micro environment consists of the following elements:

1. Customers –
The people who buy a firm’s products and services are its customers. A business exists to create and satisfy customers. A firm may have different types of customers like individuals, households, Government departments, commercial establishments, etc. For example, the customers of a paper company may include students, teachers, educational institutions, business firms and other users of stationery.

Fig: Elements of Micro Environment

In order to be successful a company must understand and meet the needs and expectations of its customers. A firm can select the target customer group or market segment on the basis of factors like profitability, elasticity of demand, dependability, degree of competition and growth prospects. It is generally risky to depend upon a single customer group. The customer environment is becoming global due to increasing globalisation and
liberalisation of the economy. With the opening up of Indian market and foreign markets, the customer is becoming more global in the matter of shopping.

2. Competitors –
A company may have both direct and indirect competitors. Direct competitors are the other firms which offer the same or similar products and services. For example, Sony TV faces direct competition from other brands like LG, Samsung, Onida, Videocon, BPL, etc. Indirect competition comes from firms vying for discretionary income. For example, a cinema house, faces indirect competition from Casino, and other firms marketing entertainment. Due to economic liberalisation and globalisation, Indian companies are now facing competition from both domestic firms and multinational corporations. In order to understand the full range of its competition, a company must look at from buyers viewpoint.

3. Suppliers –
Suppliers refer to the people and groups who supply raw materials and components to the company. Reliable sources of supply enable the company to carry on uninterrupted operations and to minimise inventory carrying costs. Suppliers also influence quality levels and costs of manufacturing. It is very risky to depend on a single supplier. A strike*-or any other production problem of the supplier may cause interruptions in manufacturing. Therefore, it is advisable to develop and sustain multiple sources of supply. Some companies like Maruti Suzuki undertake vendor development to ensure timely and regular supply of materials and parts. The relationship between the suppliers and the firm reflects a power equation which is based on the extent to which each of them is dependent on the other.

4. Marketing Intermediaries –
Several marketing intermediaries help a company in promoting, selling and distributing its products to consumers. Middlemen like agents, wholesalers, and retailers serve as a link between the company and its customers. Transportation firms and warehouses assist in the physical distribution of products. Advertising agencies, marketing research agencies and insurance companies are other types of marketing intermediaries. Countrywide retail distribution network has contributed significantly to the success of companies like Hindustan Unilever and Dabur India.

5. Financiers –
The shareholders, financial institutions, debenture holders and banks provide finance to a company. Financial capacity, policies and attitudes of financiers are important factors for the company. For example, the company cannot raise funds through shares if the financiers are not risk taking.

6. Publics –
Publics include all those groups who have an actual or potential, interest in the company or who influence the company’s ability to achieve its objectives. Media groups, environmentalists, non-government organisations (NGOs), consumer associations and local community are examples of publics. These publics can have both positive and negative impact on a business firm. For example, media groups can be used to disseminate useful information. A company can cooperate with the local people to improve its image as well as to provide some benefit to the people. On the negative side, local community concerned with public health can force a company to suspend operations or to take pollution control measures. Non- government organisations often organise protests against firms suspected of being guilty for child labour, cruelty against animals and damage to nature. For example, one of the leading companies in India was attacked by the media for writing advertisements on rocks near a famous hill station. Such activities of publics can tarnish the image of business.

7. Workers and Trade Union –
Workers and their union are an important component of micro environment. A firm’s relations with its workers and trade union have a significant impact on its functioning and performance. Company’s work environment and industrial relations system must be conducive to efficient functioning.

According to Philip Kotler, “companies must put their primary energy into effectively managing their relationships with their customers, distributors and suppliers. Their overall success will be affected by how other publics in the society view their activity. Companies would be wise to spend time monitoring all their public, understanding their needs and opinions and dealing with them constructively.”

CA Foundation Business & Commercial Knowledge Study Material – Meaning of Business Environment

CA Foundation Business & Commercial Knowledge Study Material Chapter 2 Business Environment – Meaning of Business Environment

Business enterprises do not function in isolation. They operate within charging environment. Various elements of this environment and changes in them exercise a significant influence on the working and performance of business firms.

Meaning of Business Environment

The term business environment means “the aggregate of all the forces, factors and institutions which are external to and beyond the control of an individual business enterprise but which exercise a significant influence on the functioning and growth of individual enterprises.” Keith Davis defines business environment as “the aggregate of all conditions, events and influences that surround and affect business.”

According to Bayord O. Wheeler, business environment refers to “the total of all things external to firms and industries which affect their organisation and operation”.

In the words of Arthtur M. Weimer, “business environment encompasses the climate or set of conditions, economic, social, political, or institutional in which business operations are conducted”.

Thus, business environment means all those internal and external factors that have an impact on business.

Nature (Characteristics) of Business Environment

Business environment is characterised by the following features:

  1. Aggregative –
    Business environment is the totality of all the internal and external forces which influence the working and decision-making of an enterprise.
  2. Inter-related –
    Different elements of business environment are closely inter-related and interdependent. A change in one element affects the other elements. Economic environment influences the non-economic environment which in turn affects the economic conditions. For example, economic liberalisation in India since 1991 has opened up new opportunities for private sector and foreign entrepreneurs. Similarly, social pressures against pollution led to the enactment of anti-pollution laws. Therefore, managers should not consider environmental factors in isolation from one another. A holistic approach is necessary for proper understanding of business environment.
  3. Dynamic –
    Business environment is dynamic in nature as it keeps on changing from time to time.
  4. General and Specific Forces –
    Business environment consists of both general and specific forces. General forces such as economic, social, political, legal, natural and technological conditions influence all business enterprises. Specific forces such as investors, customers, competitors, suppliers, etc. affect individual enterprises directly.
  5. Relative –
    Business environment is a relative concept. It differs from country to country and even region to region. Capitalist economies like those of USA and UK have a different kind of environment than communist economies. The nature of economic system in a country affects the environment of business.
  6. Inter-temporal –
    Business environment is also an inter-temporal concept as it changes over time. For example, business environment in India today is much different from that prevailing before 1991. In the short run business environment may remain static. But in the long run, it does change.
  7. Uncertain –
    Business environment is largely uncertain because it is very difficult to forecast the future environment. When the environment is volatile, ie., changes very fast, uncertainty increases.
  8. Contextual –
    Business environment provides the macro framework within which the business firm (a micro unit) operates. The environmental forces are largely those given within which an individual enterprise and its management must function.
    Business environment exercises tremendous influence on the working and success of business firms. Different elements of business environment have different types and degrees of influence on business. A factor that has a favourable impact on one firm may adversely effect another firm. Therefore, management of a business enterprise must have a deep understanding and appreciation of the environment. The changes taking place in environment must be continuously monitored to judge their impact on business. Appropriate and timely steps must be taken to face the environmental changes.

Significance of Business Environment

The survival and success of any enterprise depends upon its inherent capabilities (physical, financial, human and other resources) and its ability to adapt to the changing environment.

It is very important for business firms to understand their environment and changes occurring in it. Business enterprises which know their environment and are ready to adapt to environmental changes would be successful. On the other hand, firms which fail to adapt to their environment are unlikely to survive in the long run. For example, some Indian firms suffered considerably because they failed to appreciate the tightening regulations against environmental pollution. Knowledge of environmental changes is very helpful in the formulation and implementation of business plans. A business can obtain this knowledge through environmental scanning. Environmental scanning is the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business. With the help of environmental scanning, an enterprise can consider the impact of different events, trends, issues and expectations on its business operations. Firms which systematically analyse and diagnose the environment are more effective than those which do not.

Some of the direct benefits of understanding the environment are given below:

  1. First Mover Advantage – Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors. For example, Maruti Suzuki became the leader in small car market because it was the first to recognise the need for small car on account of rising petroleum prices and a large middle class.
  2. Early Warning Signal – Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis so that the firm can take timely action to minimise the adverse effects, if any. For example, ‘when new firms entered in the mid segment cars (threat), Maruti Suzuki increased the production of its Esteem threefold. Increase in production enabled the company to make faster delivery. As a result the company captured a substantial share of the market and became a leader in this segment.
  3. Customer Focus – Environmental understanding makes the management sensitive to the changing needs and expectations of consumers. For example, Hindustan Unilever and several other FMCG companies launched small sachets of shampoo and other products realising the wishes of customers. This move helped the firms to increase sales.
  4. Strategy Formulation – Environmental monitoring provides relevant information about the business environment. Such information serves as the basis for strategy making. For example, ITC realised that there is a vast scope for growth in the travel and tourism industry in India and the Government is keen to promote this industry because of its employment potential. With the help of this knowledge, ITC planned new hotels both in India and abroad. Study of environment enables an organisation to analyse its competitors’ strategies and thereby formulate effective counter strategies. All strategic decisions such as what business to do, whether to expand or reduce a business, and so on require a thorough understanding of the internal and external environment of the organisation.
  5. Change Agent – Business leaders act as agents of change. They create a drive for change at the gross root level. In order to decide the direction and nature of change, the leaders need to understand the aspirations of people and other environmental forces through environmental scanning. For example, contemporary environment requires prompt decision-making and power to people. Therefore, business leaders are increasingly delegating authority to empower their staff and to eliminate procedural delays.
  6. Public Image – A business firm can improve its image by showing that it is sensitive to its environment and responsive to the aspirations of public. Leading firms like Reliance Industries, ICICI Bank and others have built good image by being sensitive and responsive to environmental forces. Environmental understanding enables business to be responsive to their environment.
  7. Continuous Learning – Environmental analysis serves as broad based and ongoing education for business executives. It keeps them in touch with the changing scenario so that they are never caught unaware. With the help of environmental learning managers can react in an appropriate manner and thereby increase the success of their organisations. Knowledge of changing environment can keep the organisation dynamic in its approach.

There are two major components of business environment-micro and macro.

CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Test Questions

CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Test Questions

1. Classify the following into economic and non-economic activities.
(a) A mother cooking food for her children
(b) A teacher teaching in a coaching centre.
(c) A young boy helps an old man in crossing the road.
(d) The Chaat seller outside a school.
(e) A lady officer in Delhi Police

2. The income of a profession is called
(a) wage
(b) salary
(c) fee
(d) profit

3. In employment a person receives
(a) profit
(b) fee
(c) salary
(d) dividend

4. Income of a businessman is called
(a) wage
(b) salary
(c) fee
(d) profit

5. Which of the following is not a business activity:
(a) A housewife selling old newspapers
(b) A person selling vegetables in your locality
(c) A teacher teaching his daughter at home
(d) A painter painting houses of others

6. In which of the following occupations services of specialised nature are provided for fee
(a) Employment
(b) Business
(c) Profession
(d) Farming

7. Which of the following occupations involve maximum risk
(a) Employment
(b) Business
(c) Profession
(d) Teaching

8. Which of the following statements best describe economic activities.
(a) These activities are undertaken to earn money.
(b) These activities provide pleasure.
(c) These activities involve no risk
(d) These activities involve working outside the house.

9. The head of the joint Hindu family business is called
(a) Partner
(b) Manager
(c) Karta
(d) Member

10. The maximum number of partners in a partner-ship firm can be :
(a) 10
(b) 20
(c) 50
(d) 100

11. State whether the following statements are True or False:

(a) Taking photographs of mountains as a hobby is an economic activity.
(b) Teaching in a school is a non-economic activity.
(c) Service or employment is an economic activity.
(d) Business involves buying and selling of goods and services.
(e) Running a hair-cutting saloon is a business.
(f) Occupations of doctors, lawyers and char¬tered accountants are called professions.
(g) Economic activities are undertaken for earning a living.

12. Answer the following in Yes or No:

(a) A business activity can be carried out without sale or exchange.
(b) Business involves the creation of utilities.
(c) A business activity may be without a profit motive.
(d) Risk is an essential element of every business activity.
(e) Earning profits is the sole objective of business.
(f) Business is an economic activity.
(g) Profession involves greater risk than busi¬ness.

13. Name the following:

(a) The industry in which useful products are obtained from the earth and the sea.
(b) The trade in which goods are imported and exported to some other country.
(c) The branch of commerce which removes the hindrance of time.
(d) Buying and selling of goods in small quan-tities.

14. Fill in the blanks:

(a) Business = Industry + ………….
(b) …………. means the production of goods and services.
(c) Commerce includes ‘trade and ………….’
(d) Conversion of raw materials and component parts into finished products is known as …………… industry.
(e) Agriculture is an …………… industry.
(f) Transport removes the hindrance of ……………

15. State whether the following statements are True or False:

(a) Industry and commerce are interchangeable terms.
(b) Commerce is a wider term than trade.
(c) Trade between two countries is known as internal trade.
(d) Conversion of cotton into cloth is an example of genetic industry.

16. Match the following:


17. Answer in Yes or No:

(a) The sole proprietor is the exclusive master of his business.
(b) The liability of a sole proprietor is limited.
(c) A sole proprietorship has no legal existence apart from its owner.
(d) Sole proprietorship is the oldest form of business organisation.
(e) It is difficult to set up a sole proprietorship.

18. Fill in the blanks:

(a) Sole proprietorship is the …………… form of business enterprises, (latest/oldest)
(b) Sole proprietorship is most suitable form …………… for business, (small/large)
(c) Liability of a sole proprietor is …………… (limited/ unlimited)
(d) Sole proprietorship …………… a separate legal entity, (has/does not have)
(e) It is to set up a sole proprietorship firm, (easy/difficult)

19. Fill in the blanks:

(a) The membership of a joint Hindu family business is acquired by ……………
(b) The liability of the karta in a joint Hindu family business is ……………
(c) A member of the joint Hindu family business demand division/of …………… property.
(d) All the members of a joint Hindu family business …………… part in its man agement.
(e) A member of the j oint Hindu family business …………… call for account of past profits while leaving the business.

20. State whether the following statements are True or False:

(a) A joint Hindu family business is the result of a contract between the members of the family.
(b) Every member of a joint Hindu family business is an agent of the firm.
(c) There is no limit on the number of members in a joint Hindu family business.
(d) Female members of a family do not have a share in the joint Hindu family business.
(e) A joint Hindu family business is not dissolved on the death of a member.

21. Match the following:


22. Name the following:

(a) A partnership in which the liability of one or more partners is limited.
(b) A partnership which is set up for an indefinite period of time.
(c) The document containing the terms and conditions of a partnership.
(d) The partner who contributes capital but does not take active part in the management
(e) Person who lends his name and goodwill for the benefit of a partnership firm.

23. State whether the following statements are True or False:

(a) Registration of a partnership is legally compulsory.
(b) Limited partnership is not allowed in India.
(c) A partnership can take as many partners as it likes.
(d) A minor can become a partner.
(e) Partners may come and go but the part-nership goes on forever.
(f) A person becomes a partner on his birth in the family.

24. Name the following:

(a) The person who promotes a business.
(b) The document containing the bylaws of a company.
(c) The documents inviting subscriptions for shares and debentures.
(d) The amount of money which must be raised before allotment of share.

25. Mark the following statements True or False:

(a) A private company must file a statement in lieu of prospectus.
(b) A company which does not want to prepare its own Articles of Association can adopt Table A.
(c) A company wanting to raise capital must issue a prospectus.
(cl) A private company can start its business immediately after incorporation.
(e) Capital clause is a part of the Articles of Association
(f) The Memorandum of Association defines the relationship of a company with or out¬siders.
(g) Every company must issue a prospectus to raise share capital.

26. Fill in the blanks:

(a) A company is legally …………… from its members.
(b) Liability of every member in a company is ……………
(c) Registration of a company is ……………
(d) A company is managed by a ……………
(e) In a private company, there must be at least …………… members.
(f) A company has …………… succession.

27. Name the following:
(a) A company in which the number of members cannot exceed 50:
(b) A company having at least seven members:

28. Match the following:


29. The capital of a company is divided into number of parts, each one of which is called
(a) Dividend
(b) Profit
(c) Interest
(d) Share

30. The form of business organisation in which there is separation of ownership and management is called
(a) Sole proprietorship
(b) Partnership
(c) Company
(d) All these.

31. State whether the following statements are True or False:

(a) A joint stock company is separate legal entity.
(b) A company survives even if all its members die.
(c) A joint stock company is a voluntary association of persons.
(d) A joint stock company is less stable than a partnership.
(e) Registration of a joint stock company is optional.
(f) There can be no conflict of interest in a joint stock company.
(g) A company is an artificial legal person.

32. Fill in the blanks:

(a) The East India Company was a …………… company
(b) The Reserve Bank of India is a …………… company.
(c) Reliance Industries Limited is a …………… company.
(d) A does not have share capital.
(e) The liability of members of a company is unlimited.
(f) A company which holds 51% more of the shares of another company is called ……………
(g) Steel Authority of India Limited is a company.
(h) Coca Cola Corporation is a company.
(i) Minimum share capitalin a private company is Rs. ……………

33. State whether the following statements are True or False.

(a) There is no chartered company in India.
(h) LIC is a statutory company.
(c) At least five persons are needed to form a public company.
(d) The minimum paid up capital of a private company must be Rupees five lakh.
(e) A private company can invite public deposits.
(f) The shares of a public company are transferable.
(g) A subsidiary of a public company is also a public company.
(h) The concept of private company deemed to be public no longer exists in India.

CA Foundation Business & Commercial Knowledge Study Material – Forms of Business Organizations

CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Forms of Business Organizations


The main forms of ownership in private sector are as follows:

  1. Sole Proprietorship
  2. Joint Hindu Family Business
  3. Partnership
  4. Joint Stock Company
  5. Cooperative Society

Sole Proprietorship

Sole trader is a person who carries on business exclusively for himself He alone establishes the business, arranges its finances, manages its affairs and bears all its risk. He acts both as the owner and manager of his business. He alone, is responsible for the profits and losses of his business. He may borrow funds and employ people to help him but the ultimate authority and responsibility lie in his hands. Sole trader business is thus a one-man show.

Some popular definitions of sole trader are given below:

  • The individual proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure. – L.H. Haney
  • A sole proprietor is a person who carries on business exclusively by and for himself. He is not only the owner of the capital of the undertaking, but is usually the organiser and manager and takes all the profits or responsibility for losses. – Janies Stephenson
  • A sole trader business is a type of business unit where one person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business. – J. L. Hansen
  • Under the sole proprietorship form of ownership, a single individual organises and operates the business in his own name. He is not only responsible for its management but also for its risks. – J. M, Shubin
  • Sole proprietorship is a form of business where the individual proprietorship is the supreme judge of all matters pertaining to his business. – Kimball and Kimball
  • Sole proprietorship is an informal type of business owned by one person. – J. L. Lundy
  • The sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and risks all of his property in the success or failure of the enterprise. – B. O. Wheeler

The distinguishing characteristics of sole proprietorship are as follows:

  1. Single ownership – A sole proprietorship is wholly owned by one individual. The individual supplies the total capital from his own wealth or from borrowed funds.
  2. One-man control – The proprietor alone takes all the decisions pertaining to the business. He is not required to consult anybody. Ownership and management are vested in the same person. Some persons may be employed to help the owner but ultimate control lies with him.
  3. No legal entity – A sole proprietorship has no legal identity separate from that of its owner. The law makes no distinction between the proprietor and his business. The business and the owner exist together. If the owner dies or becomes insolvent the business is dissolved. Business and the proprietor are one and the same.
  4. Unlimited liability – The proprietor is personally liable for all the debts of the business. In case the assets are insufficient to meet its debts, the personal property of the proprietor can be attached.
  5. No profit-sharing – The sole proprietor alone is entitled to all the profits and losses of business. He bears the complete risk and there is nobody to share the profits or losses.
  6. Small size – The scale of operations carried on by a sole proprietorship is generally small. A sole trader can arrange limited funds and managerial ability. Therefore, the area of operations is limited.
  7. No legal formalities – No legal formalities are required to start, manage and close.


  1. Ease of formation
  2. Incentive to work
  3. Independence in control
  4. Prompt decisions
  5. Business secrecy
  6. Personal touch
  7. Flexibility of operations
  8. Inexpensive management
  9. Minimum Government regulations
  10. Easy dissolution
  11. Social advantage.


  1. Limited capital
  2. Lack of specialisation
  3. Lack of stability
  4. Unlimited liability
  5. No scope for expansion and growth.


Thus, sole proprietorship has several advantages and disadvantages. According to William R. Basset, “the one man control is the best in the world if that man is big enough to manage everything.” But, one man can rarely manage and control everything. Therefore, sole proprietorship is a suitable form of organisation in the following cases:

  • Where the market is local, e.g., small-scale retailers;
  • Where personal attention to the needs and preferences of customers is essential, e.g., tailoring, beauty parlours, etc.
  • Where fashions change very frequently, e.g., artistic jewellery;
  • Where small amount of capital is required but personal skills are more important, e.g., health clinic;
  • Where quick decision and prompt action are necessary, e.g., stock brokers; and
  • Where risk involved is negligible, e.g., doctors, lawyers, chartered accountants.

Joint Hindu Family Business

The joint Hindu family business refers to a business which is owned and managed by the members of a joint Hindu family. It is also known as Hindu Undivided Family Business: It is governed by the Hindu Succession Act. This form of business is created by the law of succession. The joint Hindu family form of business is one in which the family possesses some inherited property. The share of ancestral property is inherited by a male member from his father grandfather and great grandfather. Thus, three successive generations can simultaneously inherit the ancestral property. All the male members having a share in family property are known as coparceners and the oldest male member is called the karta.

Features: The main characteristics of Joint Hindu Family Business are as follows:

  1. Membership – A person becomes a member in the family business by virtue of his birth in the family. No formal agreement is necessary between the family members. The membership is restricted to three successive generations. Only male members can be coparceners. A female relative of a deceased male coparcener will have a share after the death of the coparceners. Minors are also full-fledged members of the family business. There is no limit on the number of members.
  2. Management – The management of joint Hindu family business is rested in the karta. The karta may, however, associate other members to assist him in the management of family business.
  3. Liability – The liability of the karta is unlimited. The liability of other members is limited to the extent of their share in the property of the family business.
  4. Right to Accounts – Coparceners are not entitled to inspect the accounts of the business. However, a coparcener who is leaving the family business can demand accounts from the karta.
  5. Dissolution – Joint Hindu family business is not dissolved on the death of a coparcener. It comes to an end when all the members notify that they are not members of the joint Hindu family.



  1. Ease of formation
  2. Freedom of action
  3. Personal contact
  4. Utmost secrecy
  5. Limited liability
  6. Stability
  7. Incentive to work hard
  8. Quick decisions
  9. Economy of operations
  10. Flexibility of operations


  1. Limited financial resources
  2. Limited managerial ability
  3. Unlimited liability of karta
  4. Hasty decisions
  5. Source of Conflicts
  6. Misuse of authority by Karta


The partnership form of business organisation grew out from the limitations of sole proprietorship. When the business expands, one man is unable to arrange the financial resources and bear the risks. He cannot supervise and manage all the functions of business personally. Therefore two or more persons join hands and combine their capital and skill to start and run a business. Partnership is thus an extension of sole proprietorship.

A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses. They combine their funds and skills to carry on business together. Some popular definitions of partnership are as follows:

L.H. HANNEY: Partnership is the relations existing between persons competent to make contact, who agree to carry on lawful business in connection with a new to private gain.

THE PARTNERSHIP ACT : “Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all”.

A Partnership is a form of business organisation in which two or more persons upto a maximum twenty join together to undertake some form of business activity. – J.L. Hanson

Two or more individuals may form a partnership by making a written or oral agreement that they will jointly assume full responsibility for the conduct of business. – John Shubin

The persons who enter into partnership with the one another are individually called ‘partners’ and collectively a ‘firm’. The name under which they carry on business is called the ‘firm name’.

The essential characteristics of partnership are as follows :

  1. Two or more persons –
    There must be at least two persons to form a partnership. A person cannot enter into partnership with himself. The maximum number of persons in a partnership should not exceed 50. If the number of partners exceeds the prescribed maximum, it would become an illegal association of persons. A firm cannot become a partner of another firm though its partners can join any other firm as partners.
  2. Agreement –
    Partnership is the outcome of an agreement between persons. The relation of partnership arises from the formation of a contract and not from status or birth. If a proprietor gives hare in profits to his employee it will not be called a partnership unless there is an agreement of partnership between the two. The agreement may be oral or in writing but it must satisfy all the essentials of a valid contract.
  3. Lawful business –
    A partnership can be formed only for the purpose of carrying on a business. An association of persons who jointly own a house without carrying on a business is not partnership. Moreover, the business carried on by the partners must be lawful. Illegal acts such as theft, dacoity, smuggling, etc., cannot be called partnership.
  4. Sharing of profits –
    The agreement between the partners must be to share the profits of business. There can be no partnership without the intention of mutual gain. The profits must be distributed among the partners in an agreed ratio. Similarly, losses should be shared among the partners. However, sharing of profits is not a conclusive proof of partnership. For example, a manager may be given a share in profits of the firm.
  5. Mutual agency –
    Partnership business can be carried on by all the partners or by any of them acting on behalf of the others. In other words, every partner is an implied agent of the other partners and of the firm. Each partner is liable for acts performed by other partners on behalf of the firm.
    The above mentioned features are the real tests of partnership. In addition, partnership has the following characteristics:
  6. Utmost good faith –
    The relations between partners are based upon mutual trust and confidence. Every partner is expected to act in the best interests of other partners and of the firm as a whole. He must observe utmost good faith in all the dealings with his co-partners. He must render true accounts and make no secret profits from the business.
  7. Unlimited liability –
    Every partner is jointly and severally liable to an unlimited extent for the debts of the partnership firm. In case the assets of the firm are insufficient to pay the debts in full, the personal property of each partner can be attached to pay the creditors of the firm.
  8. Restriction on transfer of interest –
    No partner can transfer his share in the partnership without the prior consent of all other partners.
  9. Joint ownership and control –
    A partnership is owned and controlled jointly by all the partners.


S.No. Point of Distinction Sole Proprietorship Partnership
1. Members One-man show Minimum: 2 Maximum: 50
2. Agreement Not required Essential
3. Capital Contributed by the owner Contributed by the’partners
4. Registration No provision for registration Desirable
5. Management Lies with the owner Lies with the partners
6. Secrecy Easy to maintain Difficult to maintain
7. Risk Borne entirely by the owner Shared by the partners
8. Continuity Depends on the life of the owner Depends on mutual trust and unity among the partners
9. Scale of operations Small scale Medium scale



  1. Ease of formation
  2. Larger financial resources
  3. Combined judgment
  4. Direct motivation
  5. Close supervision
  6. Flexibility of operations
  7. Secrecy
  8. Protection of minority interest
  9. Mutual Cooperation
  10. Scope for expansion


  1. Limited resources
  2. Unlimited liability
  3. Uncertain life
  4. Conflicts
  5. Risk of implied agency
  6. Restriction on transfer of interest
  7. Lesser Public confidence

Limited Liability Partnership (LLP) – Limited partnership is now allowed in India under the Limited.
Liability Partnership Act, 2008. The chief characteristics of a limited liability partnership are as follows:

  • A limited liability partnership must be registered under the Act with a minimum of two partners. There is no limit on the maximum number of partners.
  • An LLP is a body corporate having a separate legal entity and perpetual succession.
  • In an LLP the liability of partners is limited to their agreed contributions to the LLP. No partner would be liable on account of any unauthorised or independent actions of other partners.
  • An LLP must maintain annual accounts reflecting the true and fair view of its state of affairs.
  • The liability of partners and the firm would become unlimited in case the firm or its partners carry out any act with the intention to defraud the creditors or any other person or for any fraudulent purpose.
  • Thus, LLP is a hybrid form of business organisation combining features of both partnership firm and joint stock company.

Advantages: Limited liability partnership offers the following benefits:

  • An LLP is a separate legal entity independent of the partners. It is capable of owning and holding property in its own name.
  • It is much more stable than a general partnership because it is not dissolved by the retirement, insolvency, death, etc. of a partner. It enjoys perpetual existence.
  • The Liability of partners in LLP is limited, they have not to take unlimited risk.
  • As there is no limit on the number of partners, an LLP can raise huge funds for expansion and growth of business.

Disadvantages: An LLP suffers from the following disadvantages:

  • It has to be registered under the Act. It has to spend time and money in the documents and formalities of incorporation.
  • There is less secrecy of business affairs as it has to fulfill legal requirements.
  • Credit standing of an LLP is reduced due to the limited liability of partners.


S.No Basis of Distinction Company Partnership
1. Formation By incorporation-legal formalities By agreement- No legal formalities
2. Registration Compulsory Optional
3. Legal Status Separate from members No separate entity
4. Number of members public company. Maximum 200 in private company and no limit in public company Minimum 2, maximum 50
5. Liability Limited Unlimited
6. Transferability of interest Freely transferable except in case of private company Transferable with the consent of all partners
7. Implied agency Members not agents of the company Partners are agents of the firm
8. Management By elected representatives of members By partners themselves
9. Statutory control Legal formalities concerning accounts audit, directors, etc. No legal formalities
10. Durability Life independent of members Life dependent on members
11. Dissolution Through legal process of winding up By agreement between partners
12. Audit Compulsory in all cases Not always compulsory
13. Scale of operations Large scale Medium size

Joint Stock Company

The company form of business organization came into existence to overcome the limitations of sole proprietorship and partnership.

According to James Stephenson, “a company is an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade business, and who share the profit and loss arising therefrom”. Under the Companies Act a company having share capital may be is defined as “a company limited by shares having a permanent paid up or nominal capital of fixed amount divided into shares, also of fixed amount held and transferable as stock and formed on the principles of having its members only the holders of those shares or stock and no other persons”.

According to Prof. Haney, “Joint stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”. In the words of Justice Lindley, “By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money, and is the capital of the company. The persons who contribute it are its members”.

The distinctive features of the company form of organisation are as follows:

  1. Separate legal existence –
    A company has a distinct legal entity independent of its members. It can own property, make contracts and file suits in its own name. Shareholders are not the joint owners of the company’s property. A shareholder cannot be held liable for the acts of the company. Similarly, members of the company are not its agents. There can be contracts between a company and its members. A creditor of the company is not a creditor of its members.
  2. Perpetual succession –
    Perpetual succession means continued existence. A company is a creation of the law and only the law can bring an end to its existence. Its life does not depend on the life of its members. The death, insolvency or lunacy of members does not affect the life of a company. It continues to exits even if all its members die. Members may come and go but the company goes on until it is wound up.
  3. Limited liability –
    As a company has a separate legal entity, its members cannot be held liable for the debts of the company. The liability of every member is limited to the nominal value of the shares bought by him or to the amount of guarantee given by him. For instance, if a member has 50 shares of Rs. 10 each, his liability is limited to Rs. 500. Even if the assets of the company are insufficient to satisfy fully the claims of the creditors, no member can be called to pay anything more than what is due from him. However, if the members of the company so desire, they may form a company with unlimited liability.
  4. Transferability of shares –
    The capital of a company is divided into parts. Each part is called a share. These shares are generally transferable. A shareholder is free to withdraw his membership from the company by transferring his shares. However, in actual practice some restrictions are placed on the transfer of shares.
  5. Common seal –
    Being an artificial entity, a company cannot act and sign itself. Therefore, it acts through human beings. All the acts of the company are authorised by its common seal. The name of the company is engraved on its common seal. The common seal is affixed on all important documents as a token of the Company’s approval. The common seal is the official signature of the company. Any document which does not bear the common seal of the company is not binding on the company.
  6. Separation of ownership and control –
    Members have no right to participate directly in the day- to-day management of a company. They elect their representatives, called directors, who manage the company’s affairs on behalf of the members. Thus, the ownership of a company is distributed among the shareholders while management is vested in the board of directors. The management of a company is delegated and centralised.
  7. Voluntary association –
    A joint stock company is a voluntary association of certain persons formed to carry out a particular purpose in common. Members of a company can join it and leave it at their own freewill.
  8. Artificial legal person –
    A company is an artificial person created by law. It exists only in contemplation of law. It is competent to enter into contracts and to own property in its own name. But it docs not take birth like a natural person and it has no physical body of a natural human being.
  9. Corporate finance –
    The share capital of a company is generally divided into a large number of shares of small value. These shares are purchased by a large number of people from different walks of life.
  10. Statutory regulation and control –
    Government exercises control through company law over the management of joint stock companies. A company is required to comply with several legal formalities and to file several documents with the Registrar of Companies.



  1. Large capital resources
  2. Limited liability
  3. Stability
  4. Efficient management
  5. Transferability of shares
  6. Economies of scale
  7. Democratic management
  8. Public goodwill
  9. Social utility


  1. Legal formalities
  2. Lack of motivation
  3. Delay in decisions
  4. Economic oligarchy
  5. Corrupt management
  6. Excessive Government control
  7. Unhealthy speculation
  8. Conflict of interests
  9. Social evils

Private Company – It means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and which by its Articles of Association:

  • restricts the right of its members to transfer shares, if any;
  • except in case of one person company limits the number of its members to 200, excluding members who are or were in the employment of the company;
  • prohibits any invitation to the public to subscribe for any securities of, the company;
  • prohibits any invitation or acceptance of deposits from persons other than its members directors or their relatives.

The minimum number of members required to form a private company is two. Such a company must use the word ‘private’ in its name. A private company enjoys special privileges and exemptions under the Companies Act. It is generally a family affair.

A private company enjoys several privileges under the Companies Act, 2013.

The main privileges available to a private company are as follows—

  1. A private company can be started with just two members whereas a public company ‘requires at least seven members.’
  2. A private company can start its business immediately after incorporation. Unlike a public company, it is not required to obtain the certificate of commencement of business.
  3. A private company is not required to issue or file a prospectus or statement in lieu of prospectus with the Registrar of Companies.
  4. A private company is neither required to hold statutory meeting nor to file statutory report with the Registrar of Companies.
  5. A private company can directly allot shares. There is no restriction of minimum subscription.
  6. It can have only two directors whereas a public company must have at least three directors.
  7. It is not required to offer new issue of shares to the existing shareholders on a pro rata basis. It can issue shares with disproportionate voting rights.
  8. Its directors need not retire by rotation. Consent to act as directors or to take up the qualification shares need not be filed with the Registrar. A private company need not take the consent of the Government to grant loans to its directors. Its directors can vote on a contract in which they are interested. Persons can be appointed to office of profit.
  9. A private company is exempted from restrictions concerning remuneration to managerial personnel, appointment of persons to office of profit, inter company investments and publication of accounts.
  10. Two persons personally present is sufficient quorum for general meeting of a private company unless the Articles of Association provide otherwise.
  11. A private company is exempted from preparing an index to its register of members.

Public Company – It means a company which—
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company.

Thus, a public company is one which:

  • does not restrict the transfer of its shares,
  • does not limit the number of members,
  • can invite the general public to subscribe to its share; and debentures, and
  • can invite or accept deposits from the public.

At least seven persons are required to form a public company.

One Person Company (OPC) – The Companies Act, 2013 allows the formation of one person company. As the name suggests, a one person company has only one member. The company’s name will carry a suffix ‘OPC’. The process of setting upon OPC is the same as that for a private limited company. Since the company is owned by a single person, he must nominate someone to take charge of it in case of his death or disability. The nominee must give his consent in writing which has to be filed with the Registrar of companies.

An OPC is exempt from certain procedural formalities, such as conducting annual general meetings, general meetings and extraordinary general meetings. No provisions have been prescribed on holding board meetings if there is only one director, but two meetings need to be organised every year if there is more than one director. Any resolution passed by the sole member must be communicated to the company and entered in the minutes book. There is, however, no relief from the provisions on audits, financial statements and accounts, which are applicable to private companies.

Benefits & drawbacks of an OPC – The biggest advantage of a one person company is that its identity is distinct from that of its owner. Therefore, if the firm is embroiled in a legal controversy, the owner will not be sued, only the company will. Another advantage is limited liability. Since the company is distinct from that of its owner, the personal assets of the shareholders and directors remain protected in case of a credit default.

On the other hand, an OPC is not easy to set up. It requires a lot of paperwork and is a time-consuming and costly process.

Despite the advantages that a one person company offers, it may not be a viable option for everyone. In contrast to a company, a proprietorship is easy to set up. The paperwork involved is minimal. Of course, the risk in a proprietorship is higher as the owner is personally responsible for the business.


S.No. Basis of Comparison Proprietorship OPC
1. Legal status The firm and the owner are one It is a separate legal entity
2. Registration Registration is not compulsory It must be registered
3. Liability of the owner Liability of the owner is unlimited Liability of the owner is limited
4. Setting up It is easy to set up, minimum paper is involved It is difficult to set up, involves more paperwork. It is a time consuming process
5. Formalities No legal formalities involved Formalities concerning board meetings, audit etc. make it difficult to run.


S.No. Basis of Distinction Partnership Private Company
1. Number of members Maximum: 2 Minimum: 2
Maximum: 50 Maximum: 200
2. Registration Operational Compulsory
3. Legal status No separate legal entity Separate legal entity
4. Minimum paid up capital Not prescribed One lakh
5. S. Liability of members Unlimited Limited
6. Directors Not required Minimum two
7. None Not required Must be “Private Limited” after its name
8. Regulating show The Partnership Act, 1932 The Companies Act, 2013


S.No. Point of Distinction Private Company Public Company
1. Number of Members Minimum-2, Maximum-200 Minimum-7, Maximum- No limit
2. Name The name must include the words “Private Limited”. The name must include the word “Limited”.
3. Prospectus Need not issue and file prospectus Must issue and file a prospectus or a statement in lieu of prospectus.
4. Allotment of shares No restrictions on allotment of shares. No binding on further issue of shares Cannot allot shares without raising minimum subscription and without complying with other legal formalities. Further issues of shares must in the first instance, be offered to the existing members.
5. Share Warrants Cannot issue share warrants Can issue share warrants per bearer
6. Minimum Capita One lakh Five lakh
7. Listing on stock exchange Cannot be listed Can be listed
8. Managerial


No restrictions on director’s remuneration Total annual remuneration must not exceed 11 per cent of the net profits. In case of insufficiency of profits the maximum limit is t 50,000 per annum
9. Filing Need not send the list of Directors and their consent to the Registrar Must sent list of directors, their consent to the Registrar
10. Quorum at annual general meeting Two members personally present At least five members personally present

Cooperative Society

Cooperative organisation developed as a means of protecting the interests of the weaker sections of society against exploitation and oppression by the economically strong and powerful sections. It is a form of organisation wherein persons associate together voluntarily and on equal basis to further their common interests. For example, consumers may join hands to provide goods at cheaper rates by establishing direct contacts with manufacturers and thereby eliminating the profits of middlemen. Similarly, people belonging to the working class may form a cooperative society to provide houses at low costs to the members. A cooperative society is based on the principles of self help and mutual help and its primary motive is to render service to the members.

Some popular definitions of cooperative organisation are given below:

  • Cooperative organisation is “a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles”. —The Indian Cooperative Societies Act, 1912
  • A cooperative society is “a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of the economic interests of themselves”. —H.C. Calvert
  • Cooperative is a joint enterprise of those who are not financially strong and, therefore, come together not with a view to get profits but to overcome disability arising out of the want of adequate financial resources. —H.N. Kernzen
  • Cooperative is an association of individuals to secure a common economic goal by honest means. —Sir Horace Plumkett

The distinctive features of cooperative organisation are as follows :

  1. Voluntary association – A cooperative society is essentially a voluntary association of persons desirous of improving their economic status through joint action. Everyone having a common interest is free to join a cooperative society. He can also leave the society after giving proper notice. He can withdraw his capital but cannot transfer his share to another person. No body is forced to become a member or to continue as a member.
  2. Religious and political neutrality – The membership of a cooperative society is open to all irrespective of caste, creed, religion or political affiliation. New members are always welcome to join the society. Cooperative societies represent universal brotherhood.
  3. Separate legal entity – After registration a cooperative society becomes a distinct body independent of its members. It can own property and make contracts in its own name. It becomes an autonomous and self-governing organisation.
  4. One-man one vote – Every member has one vote irrespective of the number of shares held by him. Rich persons holding more shares cannot dictate terms. The organisation of a cooperative society is democratic and all members have an equal voice in its management.
  5. Service motive – The primary aim of a cooperative society is to provide service to its members. Its motto is ‘each for all and all for each’. However, a cooperative society may earn some profits for the benefit of its members.
  6. Disposal of surplus – The surplus of a cooperative society is not distributed among members in proportion to their capital. According to law, at least one fourth of the profits must be transferred to general reserve. A portion of the profits, not exceeding ten per cent, may be utilised for the welfare of the locality in which the society is functioning. Thus, profits of a cooperative society are utilised for the benefit of its members and the local community.
  7. Limited return on capital – A dividend not exceeding 10 per cent can be paid to members on the capital. The members of a cooperative society are thus assured of a fixed return on their investment.
  8. Cash Trading – Cooperative societies sell goods on cash basis. Cash trading provides protection against bad debts and maintains working capital. However, an exception, may be made in the case of members.
  9. Perpetual existence – Once registered a cooperative society enjoys perpetual existence. It is created by law and law alone can dissolve it.
  10. State control – Every cooperative society must be registered under the Cooperative Societies Act, 1912 or respective State cooperative laws. It is required to observe the prescribed rules and regulations. Government exercises supervision and control over cooperative societies to ensure their proper functioning.



  1. Easy to form
  2. Open membership
  3. Limited liability
  4. Continuity
  5. Democratic control
  6. Low operating costs
  7. State patronage
  8. Internal financing
  9. Cheaper and better supplies
  10. Social utility


  • Limited finance
  • Lack of expertise
  • Lack of incentive
  • Non-transferability of interest
  • Lack of secrecy
  • Legal formalities
  • Disputes among members


S.No. Point of Difference Company Cooperative
1. Formation Many legal formalities Few legal formalities
2. Governing Law Under the Companies Act Under the Cooperative Societies Act
3. Number of members Minimum two in private company and seven in public company. Maximum 200 in private company and no limit in public company. Membership open to all. Minimum ten, maximum no limit. Membership restricted to a particular locality or group
4. Management By Board of Directors By Managing Committee
5. Basic Object Earning profits Service to members
6. Voting rights One share one vote One member one vote
7. Transferability of shares Freely transferable Not transferable, but returnable to the society
8. Capital Subscription No limit on individual holding of shares. New shares first offered to existing members. Subscription list closed. Individual subscription to capital may be limited. New shares issued to admit new members. Membership open.
9. Distribution of profits Dividend in proportion to share in capital. Limited dividend, rest on equitable basis.
10. Privileges No special exemptions Special exemptions relating to stamp duty, income tax, etc.
11. Return of capital No member can demand back his capital except at the time of winding up A member can demand his capital during life time of the society.
12. Scale of operations Large scale Small scale