FORMS OF OWNERSHIP

INTRODUCTION

Welcome to the session on FORMS OF OWNERSHIP.

A single individual may own the business or a number of individuals may come
together to own the business jointly. So, based on ownership, we have different
forms of business organization like a proprietary concern, a partnership firm or a
company. In this session, you will learn about the various forms of business
organization (excluding a joint stock company), their characteristics, merits and
limitations, suitability and the steps involved in their formation.

OBJECTIVES

After listening this session, you will be able to:

1. understand the concepts and Forms of business organisation;

2. state the meaning and characteristics of Sole Proprietorship, Partnership,
Joint Hindu Family Business and Cooperative Societies.
3. identify the merits and limitations of these forms of business organisation;
4. describe the suitability of these forms of business organisation; and
5. explain the steps in the formation of these business organisation.

5.1 BUSINESS ORGANISATION

FRIENDS, If you observe these business activities carefully, you will realise that
whatever business activity one may take up, he has to bring together various
resources like men, money, materials, machines, technology, etc. to carryout that
activity successfully. Not only that these resources are to be put into action in a
systematic manner to achieve the objectives of business. Let us take the example
of a rice mill. First, the owner will have to acquire a land, construct a building, buy
machines and install them, employ labour to work, buy paddy and then process
the paddy to produce rice that will be sold to the customers. Thus, to produce rice
from paddy you need to assemble resources like and building, machinery, labour
etc., and put these resources together in action in a systematic way. Then only it
becomes possible to produce rice and sell it to the customers, and earn profit.
Thus, to carry out any business and achieve its objective of earning profit it is
required to bring together all the resources and put them into action in a
systematic way, and coordinate and control these activities properly. This
arrangement is known as business organization.

FORMS OF BUSINESS ORGANISATION

Have you ever thought who brings the required capital, takes the responsibility of
arranging other resources, puts them into action, and coordinates and controls
the activities to earn the desired profits? If you look around, you will find that a
small grocery shop is owned and run by a single individual who performs all these
activities. But, in big businesses, it may not be possible for a single person to
perform all these activities. So in such cases two or more persons join hands to
finance and manage the business properly and share its profit as per their
agreement. Thus, business organisations may be owned and managed by a single
individual or group of individuals who may form a partnership firm or a joint stock
company. Such arrangement of ownership and management is termed as a form
of business organisation. A business organisation usually takes the following
forms in India: (1) Sole proprietorship (2) Partnership (3) Joint Hindu Family (4)
Cooperative Society (5) Joint Stock Company Let us now learn in detail the exact
nature of these forms of business organisation, excluding Joint Stock Company
which will be taken up in the next lesson.

1. SOLE PROPRIETORSHIP SONAM runs a grocery shop in the local market. He

buys goods from the wholesale market and sells it to the customers as per
their requirement. By doing so he earns some profit. He had started his
business two years ago by investing Rs. 1 lakh, which he had borrowed
from his friend. Today, he is running his business successfully, earning a
good profit, and has been able to pay back the borrowed money. He has
also employed two persons to help him in the shop. SONAM says, he is the
owner of a sole proprietor concern. Do you agree? Before giving answer to
this question, let us first know the exact nature of ‘sole proprietorship’. The
term ‘sole’ means single and ‘proprietorship’ means ‘ownership’. So, only
one person is the owner of the business organisation. This means, that a
form of business organisation in which a single individual owns and
manages the business, takes the profits and bears the losses, is known as
sole proprietorship form of business organisation. SONAM is doing exactly
the same thing. So, you can say that SONAM is running a sole
proprietorship business, and is known as a sole proprietor or a sole trader.
You must have seen many more such business organisations in and around
your locality. Could you now make a list of such concerns engaged in
different types of businesses?
Definition of Sole Proprietorship J.L. Hanson: “A type of business unit where one
person is solely responsible for providing the capital and bearing the risk of the
enterprise, and for the management of the business.”

CHARACTERISTICS OF SOLE PROPRIETORSHIP FORM OF BUSINESS

ORGANISATION

(a) Single Ownership: The sole proprietorship form of business organisation has a
single owner who himself/herself starts the business by bringing together all the
resources.

(b) No Separation of Ownership and Management: The owner himself/herself

manages the business as per his/her own skill and intelligence. There is no
separation of ownership and management as is the case with company form of
business organisation.

(c) Less Legal Formalities: The formation and operation of a sole proprietorship
form of business organisation does not involve any legal formalities. Thus, its
formation is quite easy and simple.

(d) No Separate Entity: The business unit does not have an entity separate from
the owner. The businessman and the business enterprise are one and the same,
and the businessman is responsible for everything that happens in his business
unit.

(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At
the same time, the entire loss is also borne by him. No other person is there to
share the profits and losses of the business. He alone bears the risks and reaps
the profits. (f) Unlimited Liability: The liability of the sole proprietor is unlimited.
In case of loss, if his business assets are not enough to pay the business liabilities,
his personal property can also be utilised to pay off the liabilities of the business.
(g) One-man Control: The controlling power of the sole proprietorship business
always remains with the owner. He/she runs the business as per his/her own will.

MERITS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

(a) Easy to Form and Wind Up: It is very easy and simple to form a sole
proprietorship form of business organisation. No legal formalities are required to
be observed. Similarly, the business can be wind up any time if the proprietor so
decides.

(b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the
affairs of the sole proprietary organisation. So he/she can take quick decisions on
the various issues relating to business and accordingly prompt action can be
taken.

(c) Direct Motivation: In sole proprietorship form of business organisations. the

entire profit of the business goes to the owner. This motivates the proprietor to
work hard and run the business efficiently.

(d) Flexibility in Operation: It is very easy to effect changes as per the

requirements of the business. The expansion or curtailment of business activities
does not require many formalities as in the case of other forms of business
organisation.

(e) Maintenance of Business Secrets: The business secrets are known only to the
proprietor. He is not required to disclose any information to others unless and
until he himself so decides. He is also not bound to publish his business accounts.
(f) Personal Touch: Since the proprietor himself handles everything relating to
business, it is easy to maintain a good personal contact with the customers and
employees. By knowing the likes, dislikes and tastes of the customers, the
proprietor can adjust his operations accordingly. Similarly, as the employees are
few and work directly under the proprietor, it helps in maintaining a harmonious
relationship with them, and run the business smoothly. After knowing the various
merits of sole proprietorship form of business organisation let us discuss its
limitations.

5.3.3 LIMITATIONS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

(a) Limited Resources: The resources of a sole proprietor are always limited. Being
the single owner it is not always possible to arrange sufficient funds from his own
sources. Again borrowing funds from friends and relatives or from banks has its
own implications. So, the proprietor has a limited capacity to raise funds for his
business.

(b) Lack of Continuity: The continuity of the business is linked with the life of the
proprietor. Illness, death or insolvency of the proprietor can lead to closure of the
business. Thus, the continuity of business is uncertain.

(c) Unlimited Liability: You have already learnt that there is no separate entity of
the business from its owner. In the eyes of law the proprietor and the business
are one and the same. So personal properties of the owner can also be used to
meet the business obligations and debts.

(d) Not Suitable for Large Scale Operations : Since the resources and the
managerial ability is limited, sole proprietorship form of business organisation is
not suitable for large-scale business.
(e) Limited Managerial Expertise: A sole proprietorship from of business
organisation always suffers from lack of managerial expertise. A single person
may not be an expert in all fields like, purchasing, selling, financing etc. Again,
because of limited financial resources, and the size of the business it is also not
possible to engage the professional managers in sole proprietorship form of
business organisations.

SUITABILITY OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

You learnt about the meaning, characteristics, merits and limitations of sole
proprietorship form of business organisations. After such a detailed study, it
should now be easier for you to identify areas in which sole proprietorship form
of business organisation is most suitable.

To assist you in such exercise, it can be stated that the sole proprietorship is
suitable where the market is limited, localised and the customers give importance
to personal attention. It is also considered suitable where the capital requirement
is small and risk involved is limited. It is also considered suitable for the
production of goods and services which involve manual skill e.g., handicrafts,
filigree work, jewelry, tailoring, haircutting etc.

5.3.5 FORMATION OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

It is very simple to establish a sole proprietary concern. Any person who is willing
to start a business and has the necessary resources can set up this form of
business organisation. To start and operate the business in this form, practically
does not require any legal formalities to be fulfilled. In some cases like restaurant,
chemist shop etc. however, permission from the competent authority is required
to be obtained before starting the business. Similarly, setting up a factory may
involve taking permission from the local authority. But, formation of business unit
as such does not involve any complexities.

PARTNERSHIP

‘Partnership’ is an association of two or more persons who pool their financial

and managerial resources and agree to carry on a business, and share its profit.
The persons who form a partnership are individually known as partners and
collectively a firm or partnership firm. Let’s assume that Soham joins hand with
Jimit to start a big grocery shop. Here both Soham and Jimit are called partners
who are running the partnership firm jointly. Both of them will pool their
resources and carry on business by applying their expertise. They will share the
profits and losses in the agreed ratio. In fact, for all terms and conditions of their
working, they have to sit together to decide about all aspects. There must be an
agreement between them. The agreement may be in oral, written or implied.
When the agreement is in writing it is termed as partnership deed. However, in
the absence of an agreement, the provisions of the Indian Partnership Act 1932
shall apply. Partnership form of business organisation in India is governed by the
Indian Partnership Act, 1932 which defines partnership as “the relation between
persons who have agreed to share the profits of the business carried on by all or
any of them acting for all”.

5.4.1 CHARACTERISTICS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

Based on the definition of partnership as given above, the various characteristics
of partnership form of business organisation, can be summarised as follows:

(a) Two or More Persons: To form a partnership firm atleast two persons are
required. The maximum limit on the number of persons is ten for banking
business and 20 for other businesses. If the number exceeds the above limit, the
partnership becomes illegal and the relationship among them cannot be called
partnership.

(b) Contractual Relationship: Partnership is created by an agreement among the

persons who have agreed to join hands. Such persons must be competent to
contract. Thus, minors, lunatics and insolvent persons are not eligible to become
the partners. However, a minor can be admitted to the benefits of partnership
firm i.e., he can have share in the profits without any obligation for losses.

(c) Sharing Profits and Business: There must be an agreement among the partners
to share the profits and losses of the business of the partnership firm. If two or
more persons share the income of jointly owned property, it is not regarded as
partnership.

(d) Existence of Lawful Business: The business of which the persons have agreed
to share the profit must be lawful. Any agreement to indulge in smuggling, black
marketing etc. cannot be called partnership business in the eyes of law.

(e) Principal Agent Relationship: There must be an agency relationship between

the partners. Every partner is the principal as well as the agent of the firm. When
a partner deals with other parties he/she acts as an agent of other partners, and
at the same time the other partners become the principal.

(f) Unlimited Liability: The partners of the firm have unlimited liability. They are
jointly as well as individually liable for the debts and obligations of the firms. If the
assets of the firm are insufficient to meet the firm’s liabilities, the personal
properties of the partners can also be utilised for this purpose. However, the
liability of a minor partner is limited to the extent of his share in the profits.

(g) Voluntary Registration: The registration of partnership firm is not compulsory.

But an unregistered firm suffers from some limitations which makes it virtually
compulsory to be registered. Following are the limitations of an unregistered firm.
(i) The firm cannot sue outsiders, although the outsiders can sue it. (ii) In case of
any dispute among the partners, it is not possible to settle the dispute through
court of law. (iii) The firm cannot claim adjustments for amount payable to, or
receivable from, any other parties.

5.4.2 MERITS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

(a) Easy to Form: A partnership can be formed easily without many legal
formalities. Since it is not compulsory to get the firm registered, a simple
agreement, either in oral, writing or implied is sufficient to create a partnership
firm.

(b) Availability of Larger Resources: Since two or more partners join hands to start
partnership firm it may be possible to pool more resources as compared to sole
proprietorship form of business organisation.

(c) Better Decisions: In partnership firm each partner has a right to take part in
the management of the business. All major decisions are taken in consultation
with and with the consent of all partners. Thus, collective wisdom prevails and
there is less scope for reckless and hasty decisions.
(d) Flexibility: The partnership firm is a flexible organisation. At any time the
partners can decide to change the size or nature of business or area of its
operation after taking the necessary consent of all the partners. (e) Sharing of
Risks: The losses of the firm are shared by all the partners equally or as per the
agreed ratio.

(f) Keen Interest: Since partners share the profit and bear the losses, they take
keen interest in the affairs of the business.

(g) Benefits of Specialisation: All partners actively participate in the business as

per their specialisation and knowledge. In a partnership firm providing legal
consultancy to people, one partner may deal with civil cases, one in criminal
cases, another in labour cases and so on as per their area of specialisation.
Similarly two or more doctors of different specialisation may start a clinic in
partnership.

(h) Protection of Interest: In partnership form of business organisation, the rights

of each partner and his/her interests are fully protected. If a partner is dissatisfied
with any decision, he can ask for dissolution of the firm or can withdraw from the
partnership. (i) Secrecy: Business secrets of the firm are only known to the
partners. It is not required to disclose any information to the outsiders. It is also
not mandatory to publish the annual accounts of the firm.

5.4.3 LIMITATIONS OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

A partnership firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that
the liability of the partners is unlimited i.e., the partners are personally liable for
the debt and obligations of the firm. In other words, their personal property can
also be utilised for payment of firm’s liabilities.

(b) Instability: Every partnership firm has uncertain life. The death, insolvency,
incapacity or the retirement of any partner brings the firm to an end. Not only
that any dissenting partner can give notice at any time for dissolution of
partnership.

(c) Limited Capital: Since the total number of partners cannot exceed 20, the
capacity to raise funds remains limited as compared to a joint stock company
where there is no limit on the number of share holders.

(d) Non-transferability of share: The share of interest of any partner cannot be

transferred to other partners or to the outsiders. So it creates inconvenience for
the partner who wants to transfer his share to others fully and partly. The only
alternative is dissolution of the firm.

(e) Possibility of Conflicts: You know that in partnership firm every partner has an
equal right to participate in the management. Also every partner can place his or
her opinion or viewpoint before the management regarding any matter at any
time. Because of this, sometimes there is friction and quarrel among the partners.
Difference of opinion may give rise to quarrels and lead to dissolution of the firm.

5.4.4 TYPES OF PARTNERS

You have learnt that normally every partner in a firm contributes to its capital,
participates in the day-to-day management of firm’s activities, and shares its
profits and losses in the agreed ratio. In other words all partners are supposed to
be active partners. However, in certain cases there are partners who play a
limited role. They may contribute capital and such partners cannot be termed as
active partners. Similarly, some persons may simply lend their name to the firm
and make no contribution to capital of the firm. Such persons are partners only in
name. Thus, depending upon the extent of participation and the sharing of
profits, liability etc., partners can be classified into various categories. These are
summarised here under.

(A) Based on the extent of participation in the day-to-day management of the

firm partners can be classified as ‘Active Partners’ and ‘Sleeping Partners’. The
partners who actively participate in the day-to-day operations of the business are
known as active partners or working partners. Those partners who do not
participate in the day-to-day activities of the business are known as sleeping or
dormant partners. Such partners simply contribute capital and share the profits
and losses.

(B) Based on sharing of profits, the partners may be classified as ‘Nominal

Partners’ and ‘Partners in Profits’. Nominal partners allow the firm to use their
name as partner

They neither invest any capital nor participate in the day-to-day operations. They
are not entitled to share the profits of the firm. However, they are liable to third
parties for all the acts of the firm. A person who shares the profits of the business
without being liable for the losses is known as partner in profits. This is applicable
only to the minors who are admitted to the benefits of the firm and their liability
is limited to their capital contribution.
(C) Based on Liability, the partners can be classified as ‘Limited Partners’ and
‘General Partners’. The liability of limited partners is limited to the extent of their
capital contribution. This type of partners is found in Limited Partnership firms in
some European countries and USA. So far, it is not allowed in India. However, the
Limited liability Partnership Act is very much under consideration of the
Parliament. The partners having unlimited liability are called as general partners
or Partners with unlimited liability. It may be noted that every partner who is not
a limited partner is treated as a general partner.

(D) Based on the behaviour and conduct exhibited, there are two more types of
partners besides the ones discussed above.

These are (a) Partner by Estoppel; and (b) Partner by Holding out. A person who
behaves in the public in such a way as to give an impression that he/she is a
partner of the firm, is called ‘partner by estoppel’. Such partners are not entitled
to share the profits of the firm, but are fully liable if some body suffers because of
his/her false representation. Similarly, if a partner or partnership firm declares
that a particular person is a partner of their firm, and such a person does not
disclaim it, then he/she is known as ‘Partner by Holding out’. Such partners are
not entitled to profits but are fully liable as regards the firm’s debts.

5.4.5 SUITABILITY OF PARTNERSHIP FORM OF BUSINESS ORGANISATION

We have already learnt that persons having different ability, skill or expertise
can join hands to form a partnership firm to carry on the business. Business
activities like construction, providing legal services, medical services etc. can
be successfully run under this form of business organisation. It is also
considered suitable where capital requirement is of a medium size. Thus,
business like a wholesale trade, professional services, mercantile houses and
small manufacturing units can be successfully run by partnership firms.

FORMATION OF PARTNERSHIP FORM OF BUSINESS ORGANISATION The

following steps are to be taken in order to form a partnership firm: (a)
Minimum two members are required to form a partnership. The maximum
limit is ten in banking and 20 in other businesses. (b) Select the like-minded
persons keeping in view the nature and objectives of the business. (c) There
must be an agreement among the partners to carry on the business and share
the profits and losses. This agreement must preferably be in writing and duly
signed by the all the partners. The agreement, i.e., the partnership deed must
contain the following: (i) Name of the firm (ii) Nature of the business (iii)
Names and addresses of partners (iv) Location of business (v) Duration of
partnership, if decided (vi) Amount of capital to be contributed by each
partner (vii) Profit and loss sharing ratio (viii) Duties, powers and obligations of
partners. (ix) Salaries and withdrawals of the partners (x) Preparation of
accounts and their auditing. (xi) Procedure for dissolution of the firm etc. (xii)
Procedure for settlement of disputes (d) The partners should get their firm
registered with the Registrar of Firms of the concerned state. Although
registration is not compulsory, but to avoid the consequences of
nonregistration, it is advisable to get it registered when it is setup or at any
time during its existence. The procedure for registration of a firm is as follows.
(i) The firm will have to apply to the Registrar of Firms of the concerned state
 in the prescribed form. (ii) The duly filled in form must be signed by all the
partners.

(iii) The filled in form along with prescribed registration fee must be deposited in
the office of the Registrar of Firms. (iv) The Registrar will scrutinise the
application, and if he is satisfied that all formalities relating to registration have
been duly complied with, he will put the name of the firm in his register and issue
the Certificate of Registration.

5.5 JOINT HINDU FAMILY FORM OF BUSINESS ORGANISATION After knowing

about sole proprietorship and partnership forms of business organisation let us
now discuss about a unique form of business organisation that prevails only in
India and that too among the Hindus. The Joint Hindu Family (JHF) business is a
form of business organisation run by Hindu Undivided Family (HUF), where the
family members of three successive generations own the business jointly. The
head of the family known as Karta manages the business. The other members are
called co-parceners and all of them have equal ownership right over the
properties of the business. The membership of the JHF is acquired by virtue of
birth in the same family. There is no restriction for minors to become the
members of the business. As per Dayabhaga system of Hindu Law, both male and
female members are the joint owners. But Mitakashara system of Hindu Law says
only male members of the family can become the coparceners. While the
Dayabhaga system is applicable to the state of West Bengal, Mitakshara system of
Hindu Law is applicable to the rest of the country.
5.5.1 CHARACTERISTICS OF JHFFORM OF BUSINESS ORGANISATION From the
above discussion, it must have been clear to you that the Joint Hindu family
business has certain special characteristics which are as follows:

(a) Formation: In JHF business there must be at least two members in the family,
and family should have some ancestral property. It is not created by an
agreement but by operation of law.

(b) Legal Status: The JHF business is a jointly owned business. It is governed by
the Hindu Succession Act 1956. (c) Membership: In JHF business outsiders are not
allowed to become the coparcener. Only the members of undivided family
acquire co-parcenership rights by birth..

(d) Profit Sharing: All coparceners have equal share in the profits of the business.
(e) Management: The business is managed by the senior most member of the
family known as Karta. Other members do not have the right to participate in the
management. The Karta has the authority to manage the business as per his own
will and his ways of managing cannot be questioned. If the coparceners are not
satisfied, the only remedy is to get the HUF status of the family dissolved by
mutual agreement.

(f) Liability: The liability of coparceners is limited to the extent of their share in the
business. But the Karta has an unlimited liability. His personal property can also
be utilised to meet the business liability.

(g) Continuity: Death of any coparceners does not affect the continuity of
business. Even on the death of the Karta, it continues to exist as the eldest of the
coparceners takes position of Karta. However, JHF business can be dissolved
either through mutual agreement or by partition suit in the court.

5.5.2 MERITS OF JHF FORM OF BUSINESS ORGANISATION Since Joint Hindu

Family business has certain peculiar features as discussed above, it has the
following merits.

(a) Assured Shares in Profits: Every coparcener is assured of an equal share in the
profits irrespective of his participation in the running of the business. This
safeguards the interest of minor, sick, physically and mentally challenged
coparceners.

(b) Quick Decision: The Karta enjoys full freedom in managing the business. It
enables him to take quick decisions without any interference.

(c) Sharing of Knowledge and Experience: A JHF business provides opportunity for
the young members of the family to get the benefits of knowledge and
experience of the elder members. It also helps in inculcating virtues like discipline,
self-sacrifice, tolerance etc.

(d) Limited Liability of Members: The liability of the coparceners except the Karta
is limited to the extent of his share in the business. This enables the members to
run the business freely just by following the instructions or direction of the Karta.
(e) Unlimited Liability of the Karta: Because of the unlimited liability of the Karta,
his personal properties are at stake in case the business fails to pay the creditors.
This clause of JHF business makes the Karta to manage business most carefully
and efficiently.
(f) Continued Existence: The death or insolvency of any member does not affect
the continuity of the business. So it can continue for a long period of time.

(g) Tax Benefits: HUF is regarded as an independent assessee for tax purposes.
The share of coparceners is not to be included in their individual income for tax
purposes. After knowing the merits let us see the limitations of Joint Hindu Family
form of business organisation.

5.5.3 LIMITATION OF JHFFORM OF BUSINESS ORGANISATION

(a) Limited Resources: JHF business has generally limited financial and managerial
resource. Therefore, it is not considered suitable for large business.

(b) Lack of Motivation: The coparceners get equal share in the profits of the
business irrespective of their participation. So generally they are not motivated to
put in their best.

(c) Scope for Misuse of Power: Since the Karta has absolute freedom to manage
the business, there is scope for him to misuse it for his personal gains. Moreover,
he may have his own limitations.

(d) Instability: The continuity of JHF business is always under threat. A small rift
within the family may lead to seeking partition.

5.5.4 SUITABILITY OF JHFFORM OF BUSINESS ORGANISATION The Joint Hindu

Family form of business organisation is suitable where the family inherits a
running business and the members of the family want to continue that business
jointly as a family business. Even otherwise, this form of business organisation is
considered suitable for a business that requires limited financial and managerial
resources and having a very limited area of operation. It is found that JHF are
usually engaged in trading business, indigenous banking, small industry, and crafts
etc.

5.5.5 FORMATION OF JHF FORM OF BUSINESS ORGANISATION A Joint Hindu

Family business is formed as per the provision of Hindu law. It comes into
existence on the death of the person who established the business. His successor
automatically become the coparceners if they decide to continue it as a joint
family business. The children become its members by birth. The senior most
member of the family will become the Karta of the business. No legal formalities
are required for its establishment.

5.6 COOPERATIVE SOCIETY You have learnt about Sole Proprietorship,

Partnership and Joint Hindu Family as different forms of business organisation.
You must have noticed that while there are many differences among them in
respect of their formation, operation, capital contribution and liabilities, there is
one similarity that they all are engaged in business to earn profit. However, there
are certain organisations which undertake business activities with the prime
objective of providing service to the members. Although they also earn some
amount of profit, but their main intention is to look after some common interest
of its members. They pool available resources from the members, utilise the same
in the best possible manner and share the benefits. These organisations are
known as Cooperative Societies. Let us learn in detail about this form of business
organisation. The term cooperation is derived from the Latin word ‘co-operari’,
where the word ‘Co’ means ‘with’ and ‘operari’ mean ‘to work’. Thus, the term
cooperation means working together. So those who want to work together with
some common economic objectives can form a society, which is termed as
cooperative society.

5.6.1 CHARACTERISTICS OF COOPERATIVE SOCIETY Based on the above definition

we can identify the following characteristics of cooperative society form of
business organisation:

(a) Voluntary Association: Members join the cooperative society voluntarily i.e.,
by their own choice. Persons having common economic objective can join the
society as and when they like, continue as long as they like and leave the society
and when they want.

(b) Open Membership: The membership is open to all those having a common
economic interest. Any person can become a member irrespective of his/her
caste, creed, religion, colour, sex etc.

(c) Number of Members: A minimum of 10 members are required to form a

cooperative society. In case of multi-state cooperative societies the minimum
number of members should be 50 from each state in case the members are
individuals. The Cooperative Society Act does not specify the maximum number
of members for any cooperative society. However, after the formation of the
society, the member may specify the maximum member of members.
(d) Registration of the Society: In India, cooperative societies are registered under
the Cooperative Societies Act 1912 or under the State Cooperative Societies Act.
The Multi-state Cooperative Societies are registered under the Multi-state
Cooperative Societies Act 2002. Once registered, the society becomes a separate
legal entity and attain certain characteristics. These are as follows. (i) The society
enjoys perpetual succession (ii) It has its own common seal (iii) It can enter into
agreements with others (iv) It can sue others in a court of law (v) It can own
properties in its name

(e) State Control: Since registration of cooperative societies is compulsory, every

cooperative society comes under the control and supervision of the government.
The cooperative department keeps a watch on the functioning of the societies.
Every society has to get its accounts audited from the cooperative department of
the government.

(f) Capital: The capital of the cooperative society is contributed by its members.
Since, the members contribution is very limited, it often depends on the loan
from government. and apex cooperative institutions or by way of grants and
assistance from state and Central Government.

(g) Democratic Set Up: The cooperative societies are managed in a democratic
manner. Every member has a right to take part in the management of the society.
However, the society elects a managing committee for its effective management.
The members of the managing committee are elected on the basis of one-man
one-vote irrespective of the number of shares held by any member. It is the
general body of the society which lays down the broad framework within which
the managing committee functions.

(h) Service Motive: The primary objective of all cooperative societies is to provide
services to its members. (i) Return on Capital Investment: The members get
return on their capital investment in the form of dividend. (j) Distribution of
Surplus: After giving a limited dividend to the members of the society, the surplus
profit is distributed in the form of bonus, keeping aside a certain percentage as
reserve and for general welfare of the society.

5.6.2 TYPES OF COOPERATIVE SOCIETIES You know cooperative organisations are

set up in different fields to promote the economic well-being of different sections
of the society. So, according to the needs of the people, we find different types of
cooperative societies in India. Some of the important types are given below.

(a) Consumers’ Cooperative Societies: These societies are formed to protect the
interest of consumers by making available consumer goods of high quality at
reasonable price.

(b) Producer’s Cooperative Societies: These societies are formed to protect the
interest of small producers and artisans by making available items of their need
for production, like raw materials, tools and equipments etc.

(c) Marketing Cooperative Societies: To solve the problem of marketing the

products, small producers join hand to form marketing cooperative societies.

(d) Housing Cooperative Societies: To provide residential houses to the members,

housing cooperative societies are formed generally in urban areas.

(e) Farming Cooperative Societies: These societies are formed by the small
farmers to get the benefit of large-scale farming.

(f) Credit Cooperative Societies: These societies are started by persons who are in
need of credit. They accept deposits from the members and grant them loans at
reasonable rate of interest.
MERITS OF COOPERATIVE SOCIETY The cooperative society is the only form of
business organisation which gives utmost importance to its members rather than
maximising its own profits. After studying its characteristics and different types,
we may now study the merits of this form of business organisation.

(a) Easy to Form: Any ten adult members can voluntarily form an association get it
registered with the Registrar of Cooperative Societies. The registration is very
simple and it does not require much legal formalities.

(b) Limited Liability: The liability of the members of the cooperative societies is
limited upto their capital contribution. They are not personally liable for the debt
of the society.

(c) Open Membership: Any competent like-minded person can join the
cooperative society any time he likes. There is no restriction on the grounds of
caste, creed, gender, colour etc. The time of entry and exit is also generally kept
open.

(d) State Assistance: The need for country’s growth has necessitated the growth
of the economic status of the weaker sections. Therefore, cooperative societies
always get assistance in the forms of loans, grants, subsidies etc. from the state as
well as Central Government.

(e) Stable Life: The cooperative society enjoys the benefit of perpetual
succession. The death, resignation, insolvency of any member does not affect the
existence of the society because of its separate legal entity.

(f) Tax Concession: To encourage people to form co-operative societies the

government generally provides tax concessions and exemptions, which keep on
changing from time to time.
(g) Democratic Management: The cooperative societies are managed by the
Managing Committee, which is elected by the members. The members decide
their own rules and regulations within the limits set by the law. 5.6.4
LIMITATIONS OF COOPERATIVE SOCIETY Although the basic aim of forming a
cooperative society is to develop a system of mutual help and cooperation among
its members, yet the feeling of cooperation does not remain for long. Cooperative
societies usually suffer from the following limitations.

(a) Limited Capital: Most of the cooperative societies suffer from lack of capital.
Since the members of the society come from a limited area or class and usually
have limited means, it is not possible to collect huge capital from them. Again,
government’s assistance is often inadequate for them.

(b) Lack of Managerial Expertise: The Managing Committee of a cooperative

society is not always able to manage the society in an effective and efficient way
due to lack of managerial expertise. Again due to lack of funds they are also not
able to derive the benefits of professional management.
(c) Less Motivation: Since the rate of return on capital investment is less, the
members do not always feel involved in the affairs of the society.

(d) Lack of Interest: Once the first wave of enthusiasm to start and run the
business is exhausted, intrigue and factionalism arise among members. This
makes the cooperative lifeless and inactive.

(e) Corruption: Inspite of government’s regulation and periodical audit of the

accounts of the cooperative society, the corrupt practices in the management
cannot be completely ignored.