MODULE 02:

● BUSINESS DEFINITION:
A business is defined as an organization or enterprising entity engaged in commercial,
industrial, or professional activities. Businesses can be for-profit entities or they can be
non-profit organizations that operate to fulfill a charitable mission or further a social
cause.

● Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is easy to set-up and is
the least costly among all forms of ownership. The owner faces unlimited liability;
meaning, the creditors of the business may go after the personal assets of the owner if
the business cannot pay them. The sole proprietorship form is usually adopted by small
business entities.

Features of Sole Proprietorship:

(1) Formation and Closure - This type of business organization is formed by the owner
himself. No legal conventions are obliged to start the sole proprietorship form of
organization. In some instances, the legal formalities are required or the owner should
have a particular license or a certificate to run the business. The owner can close the
business at his own discretion.

Example: Goldsmith or a person running a medical shop should have a license to run
this type of business.

(2) Liability - In the sole proprietorship business, the sole owner has unlimited liability.
In this case, the owner is himself liable to pay all the liabilities. If he takes a loan for its
business then he will be liable for all the debts. Hence, he is personally liable for all the
debt which can be recovered by his personal estate when funds are insufficient.

Example: A loan taken by the owner of the sweet shop is solely responsible for the
repayment of the loan to the bank.
(3) Sole Risk Bearer and Profit Recipient - A sole proprietor is only the one who bears all
risks which are related to its business. All the profits or losses which are earned from the
business are to be enjoyed by the sole owner.

(4) Control - As all the rights and responsibilities lie with the sole proprietor that is why
he controls all the business activities. No one can interfere in the business activities of a
sole proprietor. Hence, only the sole proprietor can modify his plans accordingly.

(5) No Separate Entity - According to the accounting system, the owner and the business
are considered as two separate entities. But the law does not make any distinction
between the sole trader and its business. Hence, without the sole trader, the business
has no identity because he is the only person who performs all the business activities.

(6) Lack of Business Continuity - Death, imprisonment, physical ailment, insanity or

bankruptcy of the sole proprietor will directly affect the business or it may cause
shutting down of the business. In the case of the beneficiary, successor or legal heir of
sole proprietor, he can run the business on behalf of the proprietor.

Some of the popular advantages of a sole proprietorship are.

● Quick decision making– A sole proprietor has the freedom to make any
decision. Therefore, the decision would be prompt as they don’t have to take the
permission of others.

● Confidentiality of information- Being only the owner of the business, it

allows him/her to keep all the business information to be private and
confidential.

● Direct incentive- A sole proprietor directly has the right to have all the profit or
benefits of a company.

● Sense of accomplishment- He/she can have the personal satisfaction

associated with working without any guidance or alone.
 ● Ease of formation and closure- A single proprietor can enter the business
with minimum legal formalities.

Some of the primary limitations of a sole proprietorship are as follows:

(1) Limited Resources - Resources of a sole proprietor are limited to his savings and
borrowings from the relatives. Banks also hesitate or deny giving the long term loans or
extend the limit of long term loans due to the weak financial position of the business.
Lack of all these resources results in hindrance in the growth of the sole proprietorship
business

(2) Life of a Business Concern - The owner and its business is the same entity and due to
lack of successor or heir, the life of the business is limited. Due to death, insolvency,
illness of a proprietor gives a detrimental impact on the business which results in
closure of the business.

(3) Unlimited Liability - The major demerit of a sole proprietorship is that the owner has
unlimited liability. If the sole owner fails to pay the debts, due to the failure of a
business, the creditors would not only claim from business assets but also from his
personal estate. Taking a large amount of loan is too risky and also put the burden on
the sole owner of the business. Hence, this is the reason why sole traders do not intend
to take the risk for the survival and growth of the business.

(4) Limited Managerial Ability - The sole proprietor has to accept all the responsibilities
to carry out its business. Sometimes the proprietor has to perform all the managerial
functions like sales, purchase, marketing, selling, dealings with clients, etc. He may not
be able to employ and retain aspiring employees.

Some of the important advantages of a sole proprietorship are as follows:

(1) Quick Decision Making - A sole proprietor exercises his right in making business
choices. It is easy for a sole trader to make decisions quickly, as he is the sole receiver of
all the profits. There is no need to share profits with anyone because he is the only
investor who has invested money in the business.

(2) Confidentiality of Information - A sole proprietor has the authority to make his
decisions regarding business activities. Since a sole owner is the only decision-maker of
the business, he keeps all the business-related information confidential. Hence, a sole
trader is not bound by law to bring out its accounts in the eye of the public.

(3) Direct Incentive - A profit is a reward for bearing risk by the proprietor in its
business. A sole proprietor is the only person who gains all the benefits arising from the
business. Hence, getting profits motivates the sole proprietor to give more efforts to get
more benefits and higher growth in the business.

(4) Sense of Accomplishment - A small success of the business gives the feeling of
fulfillment of goals of the business and he gets motivated. Hence, getting profits or long
term benefits gives him a feeling of personal satisfaction.

● Partnership

A partnership is a business owned by two or more persons who contribute resources

into the entity. The partners divide the profits of the business among themselves. In
general partnerships, all partners have unlimited liability. In limited partnerships,
creditors cannot go after the personal assets of the limited partners.

● Cooperative

A cooperative is a business organization owned by a group of individuals and is operated

for their mutual benefit. The persons making up the group are called members.
Cooperatives may be incorporated or unincorporated. Some examples of cooperatives
are: water and electricity (utility) cooperatives, cooperative banking, credit unions, and
housing cooperatives.
Banking is an industry that handles cash, credit, and other financial transactions. Banks
provide a safe place to store extra cash and credit. They offer savings accounts,
certificates of deposit, and checking accounts. Banks use these deposits to make loans.
These loans include home mortgages, business loans, and car loans.

The role of a commercial bank in a developing country:

1. Mobilising Saving for Capital Formation:

The commercial banks help in mobilising savings through network of branch banking.
People in developing countries have low incomes but the banks induce them to save by
introducing variety of deposit schemes to suit the needs of individual depositors. They
also mobilise idle savings of the few rich. By mobilising savings, the banks channelise
them into productive investments. Thus they help in the capital formation of a
developing country.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide
short-term, medium-term and long-term loans to industry. In India they provide
short-term loans. Income of the Latin American countries like Guatemala, they advance
medium-term loans for one to three years. But in Korea, the commercial banks also
advance long-term loans to industry.

In India, the commercial banks undertake short-term and medium-term financing of

small scale industries, and also provide hire- purchase finance. Besides, they underwrite
the shares and debentures of large scale industries. Thus they not only provide finance
for industry but also help in developing the capital market which is undeveloped in such
countries.

3. Financing Trade:
The commercial banks help in financing both internal and external trade. The banks
provide loans to retailers and wholesalers to stock goods in which they deal. They also
help in the movement of goods from one place to another by providing all types of
facilities such as discounting and accepting bills of exchange, providing overdraft
facilities, issuing drafts, etc. Moreover, they finance both exports and imports of
developing countries by providing foreign exchange facilities to importers and exporters
of goods.

4. Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a
number of ways. They provide loans to traders in agricultural commodities. They open a
network of branches in rural areas to provide agricultural credit. They provide finance
directly to agriculturists for the marketing of their produce, for the modernisation and
mechanisation of their farms, for providing irrigation facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep
breeding, poultry farming, pisciculture and horticulture. The small and marginal
farmers and landless agricultural workers, artisans and petty shopkeepers in rural areas
are provided financial assistance through the regional rural banks in India. These
regional rural banks operate under a commercial bank. Thus the commercial banks
meet the credit requirements of all types of rural people.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not possess
sufficient financial resources to buy durable consumer goods. The commercial banks
advance loans to consumers for the purchase of such items as houses, scooters, fans,
refrigerators, etc. In this way, they also help in raising the standard of living of the
people in developing countries by providing loans for consumptive activities.

6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing
countries. They provide loans for the education of young person’s studying in
engineering, medical and other vocational institutes of higher learning. They advance
loans to young entrepreneurs, medical and engineering graduates, and other technically
trained persons in establishing their own business. Such loan facilities are being
provided by a number of commercial banks in India. Thus the banks not only help
inhuman capital formation but also in increasing entrepreneurial activities in
developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of a country by faithfully

following the monetary policy of the central bank. In fact, the central bank depends
upon the commercial banks for the success of its policy of monetary management in
keeping with requirements of a developing economy.