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CA Foundation
Business and Commercial Knowledge
Chapter – 1
Introduction to Business and BCK

We engage ourselves between work and life throughout. The main motive behind our working is to earn
income. We use our earnings in two ways either to spend or to save. The motive behind all these is
sustenance. For this we do lots of transactions by exchanging our income to buy different goods and
services.
Apart from this we also move in society and have to remain socially aware. Besides, we enjoy family life,
we do charities and so on.
As we see and observe business and commerce flourishing day by day so our earnings and spendings also
increase simultaneously as per set facts, as our economic activities go on increasing, our earning as well
as spending go on increasing.
Business and commerce include a set of activities like production, distribution and exchange of goods and
services. Now it does not matter under what capacity we work. We may work as employee or as
freelancers. We may engage ourselves as an entrepreneur. Grouping all these ways we can name them
‘business organization’.
While doing work for any business organization we earn and spend that earning to buy goods and
services, which are either produced or provided by the business organization. Here another concept
comes the way i.e. intermediaries as we do not buy all or fill all our requisites straight from the producer,
rather we take help of layers of intermediaries whom we can call as resellers also.
By observing items placed in our living room, we can easily identify and group the items in separate sets,
one is belongings that we directly purchase from the producers and another is we purchase from
resellers. Accordingly, we can set a table form what we may name as observation card. The format of
observation card may be sketched as under:
Point of observation
1) Group of Item.
2) How to procure?
3) The probable source of procurement.
chain up to main producer.
4) Remarks.
We can accord BCK domains (Business and commercial knowledge domains) and can chalk out a list.
Description
S. Domains
No.
1) Activities Activities can be grouped under different heads like manufacturing trading
(Domestic as well as foreign), commerce (either aids to trade or auxiliaries to
trade) trade.

2) Scale As per scale of operations is concerned, we categories enterprises as micro, small,

medium and large enterprises.

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3) Geographic Depending upon geographic reach we can style the list as local, national,
scope multinational.

4) Ownership Business can be owned in various forms, depending upon source availability (No.
of owners their skills, capabilities, risk responsibilities, extent of liability, interest
transferability, required control,
financial constraints of owners, ways to wind up as so on. Accordingly, there may
be business forms. Viz. state owned/public sector, private sector comprising sole
proprietorship, partnership, company /corporate sector)

5) Markets Depending upon the product and services dealt in the emerging market may take
shape of (natural resources, equipments, capital, labour, commodities, product)
markets.

6) Stakeholders We develop cluster of all those persons, business and different groups who have
interest in the firm’s performance. They may comprise entrepreneurs,
promoters, customers, Investors, owners, shareholders, directors, managers,
employees, suppliers, policy makers, law regulators, facilitators and society as
well.

7) Functions Survival is difficult without functions. It is the very purpose of any organization
or enterprise to do some functions to gain its own interest (make profit to
survive) and to fill its responsibilities towards society (for the use of resources).
The immediate functions of business organizations may be listed as
production/operations, marketing, accounting and finance-taxation, resources.

8) Focus Business organizations have to settle a focus vision to get the target. That
focused vision may take form of a company or an enterprise wide, the specific
business line, the particular function and so on.

9) Concerns Business organizations and enterprises are concerned with some basic issues like
survival, profitability, growth, sustainability social responsibilities, governance,
values plus ethics in all.

10) Mode Mode explains how we do, what we do. It may cover traditional/physical/ brick &
Mortar/in-store, Digital/Online.

11) Underlying Under which discipline an organization works defines its ways and motives. The
disciplines disciplines may be enlisted as Economics, Laws, Philosophy, Psychology,
Sociology.

Domains of Business and Commercial Knowledge (BCK)

According to Oxford online dictionary, domain is specified sphere of knowledge.
The Business knowledge urge, never ends and in itself it is vast, eclectic (wide ranging), ever evolving
(developing), and expanding as well.
BCK is vast
Business does lots of business activities including manufacturing, trading and services. It we consider any
one activity, we may summarise lots of instances and set examples. For example if we take domestic trade
and its sub group retail trade, immediately we come across with notions, like door-to door direct sellers,

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street vendors, peddlers, weekly markets, hatt bazars, neighboring shops, malls, chain stores of
companies and the most famous online retail/e-tail etc.
Now if we want to know their retail trade in depth, we must be aware about its forms, and its functions.
For example, if we consider any neighborhood retail store, we come to know that it is serving our daily
needs, providing some items of different brands, particularly in small quantities and even with services
like home delivery and the most interesting all at easy credit.
On coming out of streets we come across malls providing different shopping experience. Another the most
popular and convenient way of retailing is online which provides 24 × 7 days services at our door step.
If we summaries all these services of retailers we find that they are serving a lot to customers but it is not
the end of the story. They serve important to the wholesallers as intermediatry in the chain of
distribution from producer to the consumer.
BCK is eclectic (Multidisciplinary-wide ranging)
Being eclectic, BCK derives itself from different disciplines namely marketing, accounting-finance,
operations, human behavior (comprising psychology, sociology) laws, economics, ethics etc.
We are in advantage that each discipline has its own vocabulary which becomes a source of BCK
vocabulary. Moreover, the BCK picks the vocabulary of different fields like military (strategy and
logistics) and from Biology-Animal Psychology (Bulls and Bears) to define stock market operations.
Building process of BCK vocabulary.

BCK Vocabulary Original Discipline Description

1) Strategy Military Strategy (the more specific plan) earlier used in
military combat to fix defeat for the enemy.
Similarly, as on war front by using strategy code
businesses become able to beat competitors and rivals
as well.

2) Logistics Military Logistics word is also taken from military discipline. It

covers movement of troops, supplies and equipments.
In business this word defines the detailed
coordination of complex operations including people,
facilities or suppliers.
Here it becomes necessary to explain two types of
logistics.
1) Inbound logistics (comprise the movement of
inputs).
2) Outbound logistics (comprise the
movement of outputs).

3) Bulls Biology (Animal As bulls throw up its enemies in combat. Similarly, wise
Psychology)
bulls are those stock market plyers who raise the stock
prices by creating buying pressure.
Being bullish is applying optimistic expectations stating
that economy/market/ Business will do good.

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4) Bears Biology (Animal Using Bears Psychology to embrace and push down
Psychology) its enemy, the stock market players who work at
bears tendency, keep pessimistic expectations.

BCK is ever evolving and expanding

Today we come across with newer and newer ways to run businesses. The information and
communications technology have added terms like 24 × 7, B2B, B2C, BPO, chips etc. in the glossary of
BCK. Due to all these we have left and forgotten old style business. Now we operate and do business in
collective and grouped environment of technology, society, economy. So, it becomes necessary to learn,
unlearn and relearn as fast as wind.
Importance of BCK for Chartered Accountant
Being custodians of nation’s resources, Chartered Accountants are responsible for truthful fair
accounting system. They have to report how the society’s resources are developed and utilised.
Business and commercial sector have large scope to show their abilities. As per BCK is concerned they
have to become more responsive. Being well aware about terms each and every business has its own
peculiarities (twist) and its own range of product, inventory, revenue as well as profit. Being
professionally qualified and trained a Chartered Accountant can easily develop notions of cost, inventory,
revenue, profit etc. for different types of businesses, either it may be a fast-moving consumer goods
(FMCG) business or even a hotel and restaurants. Moreover, each business has its own specific laws.
The Chartered Accountants will be able to conduct the audit assigned carefully only and only if they are
knowing the depth of the business accounts to be audited.
It is necessary for a Chartered Accountant to be conversant as well as familiar with updated BCK. But
BCK, being an ocean of domains forces to get knowledge of each pearl lying at the bottom of the ocean.
For that update knowledge, it is necessary to have particular education background like commerce
background. Here we can summaries that even non-commerce background has no drawback to become
well versed in domains of BCK.

Tips to enhance BCK

 Self-Assurance:
We engage ourselves with lots transactions and find we all are doing business even we are not in
business actually.
 Non-Commerce background, is it handicap:
Certainly not, you should apply whatever you have, to hit the target. A science student being
analytical by nature can apply his trait to understand the business terms in depth easily. A
psychology & sociology background student have better grip on human behavior, without which
we cannot present the true picture of business. Similarly, fields like economics, geography all
have their abilities to understand BCK domains.

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 We are guided by our observation & experience

No doubt, it all depends on our observation and experience that how we act in our environment
and what we conclude. How and what we get benefited even while reading a newspaper, running
mobile, watching TV or vising market.
 Myth of six honest servants
Yes, we all have six honest servants as Rudyard Kipling said. All these servants naming what, why,
when, how, where and who, they tell us and teach us.
 Practice and improvement lead to perfection
Reflective thinking (critical thinking) serves the urge (desire) of perfection. By maintaining a
routine note of BCK is a good practice. Here we record our observations, viewings etc. Going
through that notes we get reflected with newer ideas.
Apart from above all we can take advantage to grasp business, terms BCK domains from News
Paper like Economic Times, the Financial Express etc.
Business Magazines like Business world, Business India etc.
Business Channels like ET-Now, NDTV PROFIT etc.

Human Activities – Economic and Non- Economic

We do lots of activities in our daily life. These activities may be purposeful or wasteful.
Considering purposeful activities hare we keep ourselves working. For that we talk about work
and life. As per as work is concerned, we do all that to earn and if we think about life efforts, we
can group this as family time, time for hobbies etc.) Always we try to make balance between two
to regain hope for tomorrow.
As per as economic activities are concerned these cover livelihood motive. These activities have
to base of rationality (what we put and what we get) these activities are covered under our self-
interest.
On the other hand, we do non-economic activities based on emotional/sentimental reasons.
Welfare, selfless concerned activities are grouped here. Social, religious, culture, charity all are
symbolized as non-economic activities.

Note: But doing non-economic activities, we somewhere take support of economic materials like
to paint we needs paints, sketch board brush etc. It is not essential that we get a regular-certain
return from these activities.
In nutshell we conclude that if we cook for our own family that comes under non-economic
activity but if we cook for students putting in PG and earn from those students that comes under
economic activity.

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Characteristics of Economic Activities

 Income generating
We earn by rendering time and energy. we work as a factor of production namely land, labour,
capital, entrepreneurship and earn in shape of rent, interest, wages and profit (but not always in
the form of money, it may be in kind also) which depends on our contribution towards
production.
Note: Income is generated through process of production.

 Productive activities
We cannot produce matter but we can mold it in goods and services required. Production is on
supply side. It may be either for self-consumption or for market to sell. The point is that what and
how we participate in production. Farming, manufacturing, teaching, medicine, law, accountancy
all come under productive activities.
It is interesting to know that production is not confined to its workplace or production place
rather its’s moving towards market (Delivering the production to markets) also come under this
covering transport warehousing, intermediaries also come under this.

 Consumption is also an economic activity

Consumption feeds the demand side of economics. It covers those goods and services for which,
we spend our income. Production is the reaction to demand.

 Savings, Investment and wealth

Savings is the unspent income. It is converted into investment and wealth through channels like
banks, non-banking financial companies, mutual funds, stock market dealers, real estate, precious
materials like gold, silver etc. the corporate sector as well as the government both borrow the
savings and invest in productive units and infrastructure as well.

Business as an Economic Activity

Though production for self-consumption also considered production but if we consider supply
side, we remain deeply concerned with market-oriented production as per as economic activity is
concerned, we relate this with commercialization of production.
For commercialization we do interconnected activities from production to consumption rather in
economic sense we can say from supply side to demand side or more deeply business.
In broad sense we may define business as an economic activity including production,
distribution and trading of goods and services. Enterprises may relate to public sector, private
sector. There may be proprietary corporate sector enterprises covering micro, small, medium,
large. There may another group named domestic or multinational enterprises. In normal we may
classify business into industry, trade and commerce. Here commerce covers services or
auxiliaries. It also covers aids to trade like banking, general insurance, transport, warehousing
and so on.

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Now a debatable issue comes on the way. Is agriculture an industry that’s why it’s a business? It
depends upon purpose. In India it is done for subsistence. Also, agricultural income is exempt
from tax. So, in conclusion we can say that agriculture does not come under industry.
But processing of agriculture produces (process under which key ingredients is agriculture
produce) comes under industry. The set examples are coconut oil, soybean oil, edible oil from rice
bran. They all are called Agro-based industries.
Another way to describe business is to describe it’ s a particular activity or industry like Retail
business, Real estate business, IT business, Transport Business etc.
Another confined definition of business is subjectivity. It one’s usual occupation to run and
operate an economic organization. Infrequent and isolated transaction even with profit or loss
cannot be called business as regularity of operations is not there.

Distinguish characteristics of business in comparison with other economic occupation

Firstly, we go for employment and profession as other economic occupation

Employment

It is a contract of service between employee and employer which depicts job description and
periodic compensation in shape of wages, salaries. Normally wages is for factory workers and
salary is for office staff and managers etc. there is set process of recruitment and selection. Usual
some minimum qualifications and work experience is required; freshers also get chance as
interns or trainees. We have to perform according to terms of employment and target given
(performance targets). In employment there is minimum assured income, tenure certainty and
reasonable opportunities of promotions.
Profession
It is rendering of services particular of specialized nature. Under this a prescribed qualification is
required. A fee is charged for such services. All this under a certificate of practice is issued by
professional body which imposes code of conduct.
Professions may be practiced either through independent practice or under a contract of
employment. Accountancy, Architecture, Designing, Law, Medicine are well known professions.
Management also comes under profession. It is practicing now a days to provide ‘non-practicing
allowance’ for medicine professionals who are in employment profession stands different from
part time or hobby.
Professionalism being perfectionism enjoy esteem, social status and respect. Professions denotes
nobility, demonstrate the required level of integrity plus ethics.
Chartered Accountants being a noble profession ensure truthful and fair conduct of business,
further ensure trustworthiness. The logo of the institute of Chartered Accountants suggests
expected vigilance required.

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Distinction between Business, Profession and Employment

S. Basis of Business Profession Employment
No. Distinction
1) Meaning Covers market-oriented Rendering of It is rendering services
activity can be called as independent specialized under contract of
industry, trade and services prescribed employment to be
commerce. qualification required. compensated as
Comes under wages/Salaries it also
professional body called wage employment.
which also prescribes
code of conduct.

2) Mode of Entrepreneur’s self- Membership of a Letter of appointment as

Establishment decision and necessary professional body and well as service agreement,
legal formalities. certificate of practice is essential.
required.

3) Source of Profit works as a source Professional fee Wages and salaries

Livelihood of livelihood. required. become source.

4) Prescribed Not particularly required. Prescribed Strictly. Minimum qualification

Qualifications required as per job.

5) Ethical Founder’s own values. Professional code of Employers codes

Guidance conduct. required.
Sufficient amount Some investment to set Not at all.
6) Investment required. office.
Almost own boss Up to great extent. Not so enjoyed.
7) Personal
autonomy
8) Popular Economic motive. Service motive. Livelihood motive.
Psychological
Motive
Certain as well as Almost certain Certain as per job
9) Income uncertain. contract.
Certainty

10) Tenure Uncertain. Quite Certain. Quite Certain.

Stability

11) Transfer of Possible. Not possible at all. Not possible at all.

Interest

Job creator, not job seeker (A unique feature business which keep it apart from occupations) Being
a source of sustenance, business institution serves directly to the owners and employees and in indirect
way it serves those stakeholders who get opportunity to get benefit.
On the other hand, other occupations like professionals may produce opportunities like employment in
society but in limited way but business give this type of service to the society up to a large extent.

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Business provide momentum to economic growth

Economic growth is persistent increase in GDP (value of all goods and services produced in a country
during a particular period). Business whatever it produces either in goods for or service form, indicate
economic growth.
Here we should differentiate the concept of economic development from economic growth. As per GDP is
concerned economic growth increase in GDP numbers but economic development depicts diversification
of capabilities of economy and improvement in quality of lives of people of the economy means overall
development.
Business serves this very purpose of development, through research and development, education,
training and development of employees, spreading the urge of innovation among employees which
further leads toward growth as well as development of economy as a whole.
All these are done through the person, called entrepreneur Normally, business person and entrepreneurs
are taken alike. But entrepreneurs are more related with some unique traits like problem solving and
having the opportunity seeking behavior which brings creativity, leading towards innovation.
Business is investment intensive
Lacking investible funds or capital turns into a strong unavoidable barrier to start a business.
Manufacturing enterprises require investment in Plant and Machinery. On the other hand, service
enterprises more investment in equipment.
Another point of investment requirement is the scale of operation. There may different requirement for
different scale or operations. For example, micro and small enterprises require less investment in
comparison to large one.
We can differentiate investment requirement in shape of fixed assets and net current assets.
(Accounting terms).
Moreover, the purpose of investment also must be considered. There may be requirement for
technological upgradation, modernization and expansion also.
Gestation and Uncertainties
Risk can be calculated but uncertainty cannot be calculated and even cannot be predicted.
Considering investments, it is not certain to get expected. Moreover, it takes time to generate returns.
Starting a passenger transport business. It is first to arrange investments then obtaining licenses-permits,
recruitment of drivers, conductors then to see passenger capacity. It is not certain get cent-percent
running capacity on both sides of route selected and permitted.
Business is systematic, organized, efficiency-oriented activity
Business is to carry out tasks efficiently without wasting time by keeping oneself systematic and practical.
It is not a random and occasional activity. It is not an unorganized fun activity. It must be in an organized
way. So it must be equipped with needed infrastructure from inputs to output, then marketing of output
and collection of payments, all are to be settled by allotting and dividing in specialized functions. There
must be coordination required between and among so that promised expectation in shape of product as
well services must be fulfilled at time, effectively with quality criteria.

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Business is systematic and for such, there must be assurance that it’s all parts are working their
respective functions in well-mannered form, but it is necessary that each function performs within the
framework of overall objectives of the firm.
Apart from this business works as open system as it regularly interacts with the environment comprising
the most important dimension the customers for feedback, product improvement etc.

Business is objective oriented / Purposeful

Though the most defining motive of business is to earn profit but its maximization is also an aspect that is
economics aspect. After distributing the profit among factors land, labour and capital the residue goes to
owners for their uncertainty bearing services. They with their initiative bring change (development).
Their efficiency seeking, problem solving and innovation urging behavior, work as an intangible aspect of
business performance which defines business as more purposeful.

Business must also work for well-being of people, planet sustainability apart from profit earning.
The idea behind existence of business must be sustainable development.

Is sustainable development is necessary?

Whether we should work beyond profit?
Is it necessary to make balance between profitability and people?
Why business should not live out social motive apart from its business motive?
What is the need of merging both poles?
Here comes the concept of ‘Plurality of the objectives of Business’
The justification behind is as under:
1) Interdependency
Both business and society are interdependent. Business draws its resources from the society and
the society is compensated for this in shape of goods and services regularly.
2) Multiplicity of stakeholders
Business survives in and within society. It does not work as owner only it interacts with multiple
stakeholders in service of like investors, employees, customers, suppliers and community as a
whole.
3) Profit (An element of cost)
Profit is not only a reward for risk taking it is more appropriate to link profit with cost (the cost
of staying in business).
4) Customer Prime
Customers are life blood of business. Business has to create and maintain customers through
service, quality and the most important through passing the value for money of customers.
5) Performance First
Being the precursor to profit, performance must be performed. ‘The show must go on’ a
wellknown saying fits here. Performance is done with the combined efforts of business
functionalities. All these functionalities work together to achieve profit goal the firm’s ultimate

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objective. To get this uppermost objective business should not neglect the individual objectives of
all functionalities.

Economic Organic Objectives Social Responsibilities Legal, Ethical and

Objectives Environmental
Objectives

Sales, profits, Survival, health (covering Community service, Respect for law fair
ROI assets, capital reserves, human) education, health, sanitation, practice, transparency,
truthfulness,
efficiency, growth, heritage honestyintegrity
economic diversification of capabilities conservation preservation of air,
and responsibilities water, soil quality etc.
value added,
market abilities as well. towards stakeholders,
share including competitors as
well.

Responsible business: Wishful thinking/meaningful enterprises/ societiable object

It is must to have meaningful enterprise. Its goal must be linked somewhere with roots of the society as
well as ethics, morality organization like Asbah is honored with India’s first social enterprise focusing
women.
It is Lemon Tree Hotels which employs differently abled also. Hindustan Unilever Ltd. launched the
project Shakti to empower rural women.

The objectives of business are in plural form

It is not only business we human being must also be assessed not only on the basis of wealth but also on
the basis of our social values and ecological responsibilities.
Similarly, the most appropriate assessment of business must be on the basis of economic returns, social as
well as ecological returns.
It is argued that both ownership and management should be separated. Management being professional
must have awareness about social and ecological issues apart from economic issues.

Forms of Business Organization

Forms of Business organizations are on the basis of nature of activities undertaken, on the basis of size
and scale of the activity etc.
Following value points must be discussed before analyzing ownership forms:
1) Business ownership enjoy bundle of rights
Investment of money leads to ownership and ownership provide rights. These rights are titular
exclusiveness means to utilize one’s own way. Profit earning is a basic right and belong to owners
but they have to face losses also. Owners have another right to run the business.

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Right to dispose off and transfer of ownership of business is another right adjoined with
ownership. Ownership can be transferred through succession after the owner’s death, with the
help of registered will if made.
2) Business may be run singly or jointly
Business can be owned in sole proprietorship form, in partnership or in corporative form.
The sole proprietor where enjoys all profits concerned but he has to face losses also.
Large projects can be well managed through capital pooling. It is the shared ownership form. It is
the most desirable form especially in large projects, where risk and uncertainty emerge with size.
Joint family business
Fame with name Hindu Undivided Families in India, takes the business as a family property and
allot its ownership among the members of the family. Under this sharing of ownership is on
equitable distribution of ownership rights among the family members. Capital contribution and
risk taken are not considered.

Concept of Limited Liability

The limited liability concept originated in company of business, under which liability of the
businessperson restrict to the extent of investment. Now this concept is extended to partnership
form also called with name Limited Liability Partnership – LLP in short.
3) Business may be owned as a proprietary or a corporate concern
Under proprietary forms, business owners actively take part in day to day working of the
concern.
They are not passive contributors of investment.

They enjoy the title as owner-managers, businessperson or entrepreneurs. But this form has
limited feasibility success due to number of co-owners. This is limited up to 4-5 co-owners, the
nature and size of business also play its part. Moreover, their abilities and capabilities cannot be
neglected.
Sometimes the number of people holding share in capital of the enterprise is large enough, say in
hundreds, thousands and sometimes hundreds of thousands even. All living distantly so it
becomes difficult to manage the business collectively from a set place. Here comes the concept of
separation of ownership from management. Under this ownership management form, the
managers act as the agents of and in the interest of the share owners called principals.

Sole proprietorship
Being all in one, the sole proprietor enjoys the title of ‘hero’ rather ‘economic hero’. as he alone
organizes all functions by using his creativity, ingenuity and innovation. He alone bears risks with
uncertainty. He acts as a one-person band for the enterprise as he alone is composer as well as
director of the organization’s orchestra. But as his business grows, he cannot manage all tunes
and instruments. He has to share decision making and even controlling.

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Such a small-scale business may be taken as similar to self-employment. It is often seen that they
run unregistered. They work as local retailers and street vendors and gain the trust of people and
create personal rapport by providing personalized services.
Though marked with unorganized or informal sector of the economy, they contribute to
GDP, employment as well as export to a large extent. Being largest in number in the economy they
contribute indirectly in the supplies of even MNC’s.
It is dark to say that their products are local if compared with branded. It is believed that their
working conditions are poor. They follow the policy of hire and fire. Without caring employee
welfare, they do not care for social and environmental issues. Their fate is associated with
personal conditions of the owner. These darks of their standings they remain unable to fetch
orders from big giant.
As per as finance is concerned, sole proprietor relies upon their personal savings and assets, his
investment in cash or king together form capital. But as now, financial system is developed
enough they get micro finance. Further with the facilities of facilitators they get enough finance.
This help leading them towards the status of commercial scale rather than selfemployment.

Features of sole Proprietorship

Features Whether merit or limitation

1) Autonomy of working as Merit This autonomy can be utilized for experiments and to
own boss utilize one’s creativity and to fill innovative urge.

2) Only provider of capital Limitation This feature of sole proprietorship limits the scope of the
enterprise. Though there are lots of facilities to fetch
loan but as borrowing capacity is directly linked with
capital invested so there comes limitations to grow
beyond.
3) Visible ownership and Merit Business owner who remain personally attach with his
presentation of stakeholders get more loyalty from their end. He enjoys
personalized services the title of trustworthiness.

4) Sole risk bearer Limitation As the sole proprietor is the sole provider of the capital,
so bears all risks which may disturb his personal life
also.

5) Unlimited liability Limitation This is the major drawback of this from of business. In
the case of insolvency (when Liabilities are greater than
Assets) the owner’s personal assets are utilized to fill the
gap (deficit).
6) Applicability of going Limitation It depends upon the owner’s personal health and life
concern concept span. After his death the business will be continued or
not depends upon his heirs or the successor’s wish or
capabilities – abilities concerned.
7) Succession of ownership Succession as possible by ‘will’ or application of the law
of inheritance. A will or testament works as a legal
document by which the testator (dying person)

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expresses his wish to treat his property.

He may name the executor to manage till find
distribution.
In any case will is not there the law of inheritance will be
applied. Hindus, Parsis, Budhhists, Jains and Sikhs are
covered under the Hindu Succession Act, 1956.

Hindu Undivided Family (HUF) Business

A HUF (Hindu Undivided Family) is treated as entity under the Income Tax Act. The Income Tax Act allot a
Joint family as the status of separate entity if the family register itself for the purpose. The family has to
report its income properly under all heads except the head of salary as a HUF cannot earn income from
salary.
HUF is an entity formed by members of the common ancestry including wives and daughters. There must
be a family to constitute a HUF. Family is formed by marriage (First generation). With siblings (second
generation starts). These siblings grow up and get married and have children (The third-generation
stars). So there comes the paternal lineage, grandfather, father and grandchildren. These successive
generations of an undivided family called HUF. This definition of HUF also includes Buddhist, Jain Parsi
and Sikh.

The features of HUF can also be studied under the Hindu Succession Act, 1956.

Features Features: HUF Business

1) Formed by birth in a
Hindu family
Whether merit or
limitation and how
Merit Being members of a Hindu family, members of a family
become rightful to join each other in business. But in Muslim
family it is necessary to do so with an agreement only.

2) Pool of resources Merit Starting a business with sufficient resources is the first
requisite. Here the family pool the resources, which make
possible to start even expand the business. The common pool
of capital becomes a source of diversification according to
wish and aspirations of the family.

3) Emerge of social Merit The sense of natural trust among the family members cannot
capital through family be neglected. Here the position is strong enough in
involvement comparison to other form of business as well as between
strangers. All family members may skill themselves
accordingly to manage business in well manner.

4) Automatic co- Limitation The family members enjoy the ownership status due to some
ownership among family members. They are co-parceners. Their status is not
family members earned status which may be cause of frustration among
outsiders, say hired managers.

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5) Quick decision Merit Though there may be some active major members but, in
making their absence, the head of the family called Karta takes all
decisions. After that decisions are reviewed in the family.
Mutual trust and informal communication make the decision
quick.

6) Karta’s unlimited Limitation It is the major drawback of this form of organization. In the
liability case of insolvency when liabilities are bigger than assets than
the Karta’s personal assets can also be used to meet deficit. The
liability of other members remains limited to the extent of
their share only.

7) Applicability of Going Limitation Very few family businesses work beyond for generations.
Concern concept Sometimes family issues become the cause of business splits-
society knows the splits of business houses of Birla Modi,
Goenkas and recent split of Ambanis.

8) Ownership Succession as possible by ‘will’ or application of the law of

Succession inheritance. A will or Testament works as a legal document
by which the testator (dying person) expresses his wish to
treat his property.
He may name the executor to manage till final distribution.

Partnership

Partnership is a form of contractual co-ownership of business, which sets relationship between two
or more persons who agree to share the profits of a business, carried on by all or by some of the
partners (active partners) for and on behalf of all.

The very essence of a partnership is the contract- (an agreement enforceable at law) is called ‘Deed’
(verbal or written). It becomes the basis of partnership business covering capital contribution, profit
sharing etc. the ‘Deed’ may be registered in India under the Partnership Act, 1932.
Features: Partnership
Features Whether merit or limitation and how
1) Agreement Merit The agreement becomes the possible source for
enjoying coownership of business by persons who are
not the members of same family.
Partnership arranges more funds in comparison to
2) Number of persons (Two Merit sale proprietor from of business. Even a company can
or more persons) be taken as partner.
Maximum number of persons to become partners (10
Limitation for a banking firm and 20 for other firms) works as a
limitation. Restricting the number (reason behind
such number of persons) may be due to difficult
tracing the owners in the event of insolvency. (The
very fact behind is unlimited liability of partners).

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3) Profit Sharing Merit It is interesting to know that profit sharing is essential

but loss sharing is not, as a feature of partnership
business. There is possibility that some partners may
join only in the profits of the firm (Minor partners).

4) With Business object, but Merit It is well a partnership business cannot be formed for
scope is wide nonbusiness purpose. But the word business is used
for a wider range. It includes every trade, occupation-
profession. Working of legal and auditing firms, as
partnership form set the example.

5) Mutual Agency Merit Mutual agency, as the way of working depicts ‘one for
each other and for all’. This ensures that all the partners
work in the common interest and in the interest of the
firm as well.

Limitation Mutual agency sometimes becomes a drawback

especially when a partner’s misdeeds effect the fate of
the firm as well as the positions of partners.
Involvement of an auditing firm into a corporate scam
vitiate the very purpose of Audit.

6) Unlimited liability Limitation Though it is the major limitation drawback of

proprietary form of business same in the case of
partnership. In the case of insolvency, when liabilities
increase assets, the partners personal assets are used
to complete deficit. As due to mutual agency, the
liability of all the partners is joint as well as several
both.

7) Applicability of Going Limitation The essence of contract applies to partnership as

Concern partnership arises out of contract. Any partner by
Concept serving notice may cause the firm to an end. But the
remaining partners may agree to carry on the
business of the firm. The severance cost and the loss
of momentum becomes the major limitation of
partnership.

8) Ownership Succession Limitation In case of partnership ownership cannot be

transferred easily. But a new partner can be admitted
only if other partners give consent for it.

Limited Liability Partnership (LLP)

By registering under Limited Liability Partnership Act, 2009 (Mandatory) any partnership firm may
relieve itself form the drawback of unlimited liability.

The list feature of mandatory incorporation (registration) and the separate legal entity of the LLP
makes it to enjoy features of both the corporate form as well as proprietory form both (Hybrid

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form). The combined feature may end the two major limitations (unlimited liability and uncertainty
as going concern).

The LLP is governed by the Ministry of Corporate Affairs (the apex body of regulation of company
form of business organisations). The LLP Act provides for designated partners.

The LLP becomes as separate legal entity and has the name as well as identification number.
It also enjoys the perpetual succession previlege of a company.

Features: LLP

Features Comparison with Tradition Whether merit or limitation

Partnership and how
1) Limited liability of Personal assets of each partner are Merit
partners, except in liable towards deficit of the firm. This pushes away the major
case of drawback of traditional
fraud partnership form.

2) Incorporation is Registration of firm is not mandatory. The mandatory registration is

mandatory must which list the firm under
(Registration) regulatory stream of the
Ministry of Corporate Affairs.
Certainly, it increases its
credibility.

3) Legal entity, separate No legal entity separates from its Merit

from its partners partners. This pushes away the uncertainty
of the firm’s existence.

4) Minimum and Minimum 2 and maximum (10 or 20 Merit

Maximum numbers of according to nature of business). The upper limit of partners
partners under traditional partnership
restrict the scope of expansion.

5) ROC is the Here the registrar of firms is the Merit

administrating administrating authority. There is body to control makes
authority the firm credible among the
stakeholders.

6) Statutory compliances No so many. Limitation

requisites Though the compliances to be
filled are lesser and simpler than
company form but the
designated partners have to
complete the emerged
compliances.

7) Every partner of LLP Every partner works as an agent of Merit

is only agent of firm firm as well as of other partners As there is no mutual agency so
(Applicability of the also. it makes more freedom.
concept of Mutual Similarly, partners remain not

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Agency) bound with the act of any wrong

partner.

Company

Being a body corporate, company exist independent of all its members. It exists with distinct name,
address and identification number.

Company is an association of two or more person. But there can be one-person company also (OPC:
under the companies Act 2013) Apart from this the companies Act 2013 permits the incorporation of
a small company.

Similarly, the incorporation of dormant company (Created for future project or to hold an asset or
intellectual property).

Now coming at the point, how a joint stock company mobilise a large amount of capital from savers
by issuing of shares. It must be common knowing that a share is a portion of the capital of a company
in smaller amount/ denomination. For this the concept of capital market comes the way.

The companies Act, 2013 focuses on the system of corporate functioning and the regulation of capital
market is focussed by the securities and Exchange Board of India Act, 1992.

For incorporation, a company has to file a Memorandum of Association (MOA) and Article of
Association (AOA) along with application. The MOA, beside other many, states objectives of the
company and its business. On the other hand, AOA depicts company’s internal regulations.

For capital contribution the company issues prospectus. The companies Act and SEBI Act together
ensure that the prospectus contains the true and correct information to inform the public for
judgement either to invest or not in the company.

Though there is statutory Audit requirement of the accounts of the company and publication of its
quarterly results to inform the investors, but a common man knocks the door of investment advisor
also.

The SEBI looks after the subsequent trading of the company shares and contract of listing to list the
company’s share in the stock exchange for further trading. The listing agreement also gives
assurance at the part of the company to carry its business in ethical, transparent and accountable
manner.

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Listed companies face the burden of cost of compliance to meet the criteria of companies Act and the
SEBI both. But on the other hand, private companies face less compliances rather flexibility in the
internal functioning.

These privileges of private companies are due to closely held and controlled by the owners.

Feature: Private Limited company-public company

Features of Private Features of Public Company Comparative Assessment

Company
1) Minimum number of Minimum number of members: 7 It is easy to form when there is
members: lower number of minimum
2 members.

2) Maximum number of No Limit. No limit of member in case of

members: public company provide huge
200 funds.

3) Restriction on transfer of The shares can be freely traded Listing of shares of public
shares. on stock exchange by listing. company provide Liquidity and
investors may encash their
shares as per their wish.

4) Minimum number of Minimum number of directors: 3 Smaller board size creates

directors: 2 internal efficiencies.

5) Formation of some Private companies enjoy this

committees is not flexibility as there is no money
mandatory in case of It is mandatory to constitute such involvement of common man,
private companies (the in share capital of the
committees.
Board of Directors as Audit company.
committee, CSR committee,
stakeholder committee, the
nomination and
remuneration committee).

6) A private company can start A public limited company has to
its business upon its obtain certificate of
incorporation. commencement of business in
addition to the certificate of
incorporation.
Lesser formalities to be
fulfilled at the part of private
companies, becomes the cause
of their popularity among
business persons.

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