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

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.

Advantages

  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.

Disadvantages

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

Suitability:

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.

JOINT HINDU FAMILY BUSINESS AT A GLANCE

Merits

  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

Demerits

  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

Partnership

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.

DISTINCTION BETWEEN PROPRIETORSHIP AND PARTNERSHIP

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

MERITS AND DEMERITS OF PARTNERSHIP

Merits

  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

Demerits

  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.

DISTINCTION BETWEEN COMPANY AND PARTNERSHIP

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.

JOINT STOCK COMPANY AT A GLANCE

Advantages

  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

Disadvantages

  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.

COMPARISON BETWEEN PROPRIETORSHIP AND OPC

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.

DISTINCTION BETWEEN PARTNERSHIP AND PRIVATE COMPANY

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

DISTINCTION BETWEEN PRIVATE AND PUBLIC COMPANIES

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

Remuneration

 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.

COOPERATIVE ORGANISATION AT A GLANCE

Advantages

  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

Disadvantages

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

DISTINCTION BETWEEN COMPANY AND COOPERATIVE

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