Management

Management is a set of principles relating to the functions of planning, organizing, directing and controlling, and the
application of these principles in harnessing physical, financial, human, and informational resources efficiently and
effectively to achieve organizational goals.
• Terry and Franklin- "Management is a distinct process consisting of activities planning, organizing, actuating
and controlling, performed to determine and accomplish stated objectives with the use of human beings and
other resources."
• Koontz and Weihrich- "Management is the process of designing and maintaining an environment in which
individuals, working together in groups, efficiently accomplish selected aims."
• Henri Fayol- "Management is to forecast, to plan, to organize, to command, to co-ordinate and control
activities of others."
Management is the art of getting things done through others. It is an activity which co-ordinates the human
and non-human resources (men, material, machines etc.) for achieving the desired results. Although different
views are given on the functions of management, the most accepted functions are planning, organizing, staffing,
leading and controlling.
Principles of Management
Henry Fayol, a famous industrialist of France, has described fourteen principles of management in his book General
and Industrial Management. They are –
(1) Division of Work:
This principle of Fayol tells us that as far as possible the whole work should be divided into different parts and everyone
should be assigned only one part of the work according to his ability and taste rather than giving the whole work to
one person. When a particular individual performs the same job repeatedly, he will become an expert in doing that
particular part of the whole job. Consequently, the benefits of specialization will become available.
• For example, a furniture manufacturer gets an order for manufacturing 100 lecture stands. He has five workers
who will do the job. There are two ways to complete this order. First, every worker should be asked to
complete 20 lecture stands. The second method can be distributing different parts of the lecture stand-legs,
top board, center support, assembling and polishing to all the five workers in a manner that only one worker
does the same job for all the 100 lecture stands.
Here, Fayol's indication is to the second way to do this job and not the former one.
The principle of division of labour applies not only to the workers but also equally to the managers.
• For example, if a manager is tuned in to work on the same kind of activities for a long period of time, he will
certainly be an expert in his particular job. Consequently, more and beneficial decisions can be taken in a
comparatively less time by him.
(2) Authority and Responsibility:
According to this principle, authority and responsibility should go hand in hand. It means that when a particular
individual is given a particular work and he is made responsible for the results, this can be possible only when he is
given sufficient authority to discharge his responsibility.
It is not proper to make a person responsible for any work in the absence of authority. In the words of Fayol, "The
result of authority is responsibility. It is the natural result of authority and essentially another aspect of authority and
whenever authority is used, responsibilities are automatically born."
• For example, the CEO of a company has doubled the sales target of the sales manager for the coming year. To
achieve this target, authority to appoint necessary sales representatives, advertising according to the need, etc.
shall have to be allowed. In case these things are not allowed the sales manager cannot be held responsible.
(3) Discipline:
Discipline is essential for any successful work performance. Fayol considers discipline to mean obedience, respect for
authority, and observance of established rules. Discipline can be established by providing good supervision at all levels,
clearly explaining the rules, and implementing a system of reward and punishment. A manager can present a good
example to his subordinates by disciplining himself.
• For example, if the employees break their promise of working up to their full capacity, it will amount to the
violation of obedience. Similarly, a sales manager has the authority to do business on credit. But in case he
allows this facility not to the general customers but only to his relatives and friends, then it will amount to
ignoring his respect to his authority.
(4) Unity of Command:
According to the principle of unity of command, an individual employee should receive orders from only one superior
at a time and that employee should be answerable only to that superior. If there are many superiors giving orders to
the same employee, he will not be able to decide as to which order is to be given priority. He thus finds himself in a
confused situation. Such a situation adversely affects the efficiency of the subordinates.
On the other hand, when there are many superiors, every superior would like his orders to be given priority. This
ego problem creates a possibility of clash. Consequently, their own efficiency is likely to be affected.
• For example, if an employee of the production department is asked to go slow in production to maintain quality
standard by the production incharge. Also sales incharge instruct the employee to fasten the production to
meet the pending orders. In this situation the employee will get confused as to whose instructions must be
followed by him.
(5) Unity of Direction:
Unity of direction means that there should be one head for one plan for a group of activities having the same objective.
In other words, there should be one plan of action for a group of activities having the same objective and there should
be one manager to control them.
• For example, suppose an automobile company is manufacturing two products, namely, scooters and cars, hence
having two divisions. As each product has its own markets and problems therefore each division must have its
own targets. Now each division must plan its target as per its environmental conditions to get better results.
It is necessary to distinguish between the meaning of the unity of command and the unity of direction.
Unity of command means that there should be only one manager at a time to give command to an employee, while
the unity of direction means that there should be only one manager exercising control over all the activities having the
same objective.
(6) Subordination of Individual Interest to General Interest:
This principle can be named 'Priority to General Interest over Individual Interest.’ According to this principle, the
general interest or the interest of the organization is above everything. If one is asked to place individual interest and
general interest in order of priority, definitely the general interest will be placed in the first place.
If a manager takes some decision which harms him personally but results in a great profit to the company, he should
certainly give priority to the interest of the company and take the decision accordingly. On the contrary, if some
decision helps the manager personally but results in a great loss to the company, then such a decision should never be
taken.
• For example, a purchase manager of a company has to purchase 100 tons of raw material. His son happens to
be a supplier along with other suppliers in the market. The manager purchases the row material from the firm
of his son at a rate higher than the market rate. This will profit the manager personally, but the company will
incur heavy loss. This situation is undesirable.
(7) Remuneration to Employees:
Fayol is of the opinion that the employees should get a fair remuneration so that the employees and the owners find
an equal amount of satisfaction. It is the duty of the manager to ensure that employees are being paid remuneration
according to their work. If, however, they are not paid properly for their work, they will not do their work with
perfect dedication, honesty and capacity. As a result, the organization shall have to face failure. Proper remuneration
depends on some factors like the cost of living, demand of labour and their ability. Fayol feels that in order to motivate
the employees apart from general remuneration they should be given some monetary and non- monetary incentives.
• For example, suppose that things are getting dearer and dearer and the company is getting good profits. In such
a situation, the remuneration of the employees should be increased even without their asking. If this is not
done, the employees will leave the company at the first opportunity. Expenses shall have to be incurred on
new recruitment which shall bring a loss to the company.
(8) Centralisation and Decentralisation:
According to this principle, the superiors should adopt effective centralization instead of complete centralization and
complete decentralization. By effective centralization, Fayol does not mean that authority should be completely
centralized. He feels that the superiors should keep the authority of taking Important decisions in their own hands,
while the authority to take daily decisions and decisions of less importance should be delegated to the subordinates.
The ratio of centralization and decentralization can differ in different situations.
 • For example, it is advantageous to have more centralization in a small business unit and more decentralization
in a big business unit.
• For example, the decisions in respect of determining the objectives and policies, expansion of business, etc
should remain in the hands of the superiors. On the other hand, authority for the purchase of row material,
granting leave to the employees should be delegated to the subordinates.
(9) Scalar Chain:
Scalar Chain refers to a formal line of authority which moves from highest to the lowest ranks in a straight line. This
chain must be followed in a strict manner. It means each communication must move from top to bottom and vice
versa in a straight line. The important condition here is that no step should be overlooked during communication.
Fayol's Ladder:

Fayol has explained this principle with the help of a ladder.

For example, in a company the employee 'F' wants to have contact with the employee 'P'. According to the principle of
scalar chain 'F' shall have to reach 'A' through the medium of E,D,C,B and then having contact with L,M,N,O shall reach
'P'. Thus 'F' shall have to take the help of all the nine steps to have business contact with 'P'.
Gang Plank:
It is the exception of the principle of scalar chain. This concept was developed to establish a direct contact with the
employee of equal rank in case of emergency to avoid delay in communication.
• For example, as shown in the diagram employee 'F' can have direct contact with employee 'P'. But for doing so
employees 'F' and 'P' shall have to seek the prior permission of their immediate boss’s 'E' and 'O'.
(10) Order:
According to the principle of order, a right person should be placed at the right job and a right thing should be placed
at the right place. According to Fayol, every enterprise should have two different orders-Material Order for Physical
Resources and Social Order for Human Resources. Keeping the physical resources in order means that ‘a proper place
for everything and everything in its right place.’ Similarly, keeping the human resources in order means ‘a place for everyone
and everyone in his appointed place.’ Maintaining these two orders properly will ensure that everybody knows his
workplace, what he is to do and from where he would get his required material. Consequently, all the available
resources in the organization will be utilized properly.
For example, an employee working in a factory should know the place or source from where he can get his tools in
case of need. Similarly, he should know the place where his supervisor will be available in case of any need.
It is, however, important to note that it is not sufficient to have an allotted place for a toolbox and for the supervisor
but the availability of both at their decided place is absolutely important. If this is not the case, it can lead to a heavy
loss as a result of damage to the machines.
(11) Equity:
This principle tells that the managers should treat their subordinates in a just and kind manner so that they develop a
feeling of dedication and attachment for their work. All the employees should be treated equally and impartially. Fayol
tells us in connection with this principle that there should not be any equality of treatment between a person whose
work is really good and a person who is a shirker by nature. Rather, the latter should be treated sternly. Doing so
would be equitable. It is because of this point of view that Taylor has presented his differential remuneration method.
For example, a labourer completes 10 units of goods in a day. Another labourer who happens to be a relative of the
supervisor completes 8 units but both get equal remuneration. This violates the principles of equality. The second
labourer should get less remuneration than the first one.
(12) Stability of Personnel:
From the point of view of management, it is harmful to change the employees frequently as it is a reflection of inefficient
management. Therefore, according to this principle there should be stability of tenure of the employees so that the
work continues efficiently. Fayol thinks that instability in the tenure of employees is a cause of poor management and
results. High rate of labour turnover will result in increased expenses because of selecting them time and again and
giving them training afresh. It also lowers the prestige of the organisation and creates a feeling of insecurity among the
employees which keeps them busy in finding out new avenues of work. Consequently, the sense of dedication cannot
be created among them.
• For example, it is true that if the workers in a company are not treated well and the atmosphere in the company
is also unhealthy, the employees will not stay for a long time. In other words, they will leave the company at
the first opportunity available. This situation is absolutely harmful.
(13) Initiative:
Initiative means the capacity to work while expressing one's thoughts. According to Fayol, it is the duty of the manager
to encourage the feeling of initiative among his employees for doing some work or taking some decision but within
the limits of authority and discipline. It will be possible only when the manager welcomes the thoughts of his/her
subordinates. By doing so the subordinates will present new and useful ideas time and again and gradually they will
become an integral part of the organization.
• For example, a salesman suggests to his sales manager to implement a new advertisement technique. The sales
manager sends him away by telling him that it is not possible and ignores the suggestion altogether.
In such a situation the salesman, who has been admonished and belittled, will never venture to offer any suggestion in
future because his desire of taking initiative has been suppressed. On the contrary, if his suggestion had been listened
to carefully (even though not to be implemented) he could have taken the courage to offer some suggestion in future.
Such an action would simply have encouraged his initiative.
(14) Esprit de corps:
As per this principle, a manager should continuously make efforts to develop a team spirit among the subordinates.
To do this, he/she should use the word 'We' instead of "I" during the conversation with subordinates.
• For example, if the production manager assigned a target of manufacturing 100 units to a group of 10 members,
divided the target among themselves to produce 10 units each, principles of team spirit says that each member
of the group should not concentrate only on achieving his individual target of 10 units but they must
concentrate on achieving group target of units so if two workers of that group fall sick, then the other eight
members must divide their individual target among themselves and try to achieve the target of their group.
Functions of Management
The management process consists of four primary functions that managers must perform: planning, organizing, leading,
and controlling. It is important to realize that the management process is not always linear. It does not always start
with planning and continue through each step until organizational goals are achieved because it is not possible to plan
for every problem the organization will face. As the management process proceeds, changes and modifications are
made when unforeseen events arise. Managers make sure the necessary changes are implemented and that the unity
and integrity of the entire process is maintained.
Planning
Planning means defining performance goals for the organization and determining what actions and resources are needed to achieve
the goals. Through planning, management defines what the future of the organization should be and how to get there. Strategic
plans are long-term and affect the entire organization. A strategic plan bridges the gap between what an organization is and what
it will become. Tactical plans translate strategic plans into specific actions that need to be implemented by departments throughout
the organization. The tactical plan defines what has to be done, who will do it, and the resources needed to do it.
• For instance, ThyssenKrupp AG decided to become an elevator manufacturing and servicing company because of
increased competition from Chinese steel. The management of the company set a goal of deriving the majority of its
revenue from elevator related activities. To do this, the management team made plans to create partnerships or take
over existing elevator companies. The team devised plans to develop new human resources and to acquire other material
resources. The company also had to divest existing steel-related resources to raise capital for the new initiative. This
example is a long-term strategic plan that will take years to complete and require many changes along the way. But it
starts by defining a goal and a preliminary path to achieve it.
Organizing
Once plans are made, decisions must be made about how to best implement the plans. The organizing function involves
deciding how the organization will be structured. Organizing involves assigning authority and responsibility to various
departments, allocating resources across the organization, and defining how the activities of groups and individuals will
be coordinated. In the case of ThyssenKrupp AG, the management had to determine how to support two very
different sets of activities if it were to achieve its long-term goal. Management needed to continue steel production
activities to provide continuity of funds as the emphasis gradually shifted to elevator production. It also had to develop
new skills and resources to build the company's elevator capabilities. A new organizational structure was needed that
could support both business activities as one was downsized and the other built up.
Leading
Nearly everything that is accomplished in an organization is done by people. The best planning and organizing will not
be effective if the people in the organization are not willing to support the plan. Leaders use knowledge, character,
and charisma to generate enthusiasm and inspire effort to achieve goals. Managers must also lead by communicating
goals throughout the organization, by building commitment to a common vision, by creating shared values and culture,
and by encouraging high performance. Managers can use the power of reward and punishment to make people support
plans and goals. Leaders inspire people to support plans, creating belief and commitment. Leadership and management
skills are not the same, but they can and do appear in the most effective people. It is very difficult to motivate people
when plans involve radical change, particularly if they include downsizing and layoffs. Many people are naturally resistant
to change. When the change means loss of jobs or status, people will be very resistant. At ThyssenKrupp, the labor
unions vehemently opposed the shift from steel production to elevator manufacturing. Although the people involved
in the new business functions were excited by the plans, people involved with steel production felt abandoned and
demotivated. Management would have been wise to get union support for its vision of the company's new future.
Controlling
There is a well-known military saying that says, ‘no battle plan
survives contact with the enemy.’
This Implies that planning is necessary for making,
preparations, but when it's time to implement the plan,
everything will not go as planned. Unexpected things will
happen. Observing and responding to what actually happens
is called controlling. Controlling is the process of monitoring
activities, measuring performance, comparing results to
objectives, and making modifications and corrections. When
needed, this is often described as a feedback loop, as shown
in the illustration of a product design feedback loop –

Fig: Product design feedback loop

Controlling may be the most important of the four management functions. It provides the information that keeps the
corporate goal on track. By controlling their organizations, managers keep informed of what is happening; what is
working and what isn't; and what needs to be continued, Improved, or changed. ThyssenKrupp had little experience
in elevator manufacturing when it was making plans. It was developing new products and processes and entering new
markets. The management knew it could not anticipate all the difficulties it would encounter. Close monitoring as the
plan progressed allowed the company to make changes and state-of-the-art innovations that have resulted in a very
successful transition.
Levels of Management
Most organizations have three management levels:
• Low-level managers;
• Middle-level managers; and
• Top-level managers.
These managers are classified in a hierarchy of authority and
perform different tasks. In many organizations, the number of
managers at every level resembles a pyramid.

Fig: Management Levels: Hierarchical view of management in organization

Below, you'll find the specifications of each level's different responsibilities and their likely job titles.
Top-level managers
The board of directors, president, vice-president, and CEO are all examples of top-level managers. These managers
are responsible for controlling and overseeing the entire organization. They develop. goals, strategic plans, company
policies, and make decisions on the direction of the business. In addition, top-level managers play a significant role in
the mobilization of outside resources. Top-level managers are accountable to the shareholders and general public.
Middle-level managers
General managers, branch managers, and department managers are all examples of middle-level managers. They are
accountable to the top management for their department's function. Middle-level managers devote more time to
organizational and directional functions than top-level managers. Their roles can be emphasized as:
• Executing organizational plans in conformance with the company's policies and the objectives of the top
management.
• Defining and discussing information and policies from top management to lower management; and most
importantly
• Inspiring and providing guidance to low-level managers towards better performance.
Some of their functions are as follows:
• Designing and implementing effective group and intergroup work and information systems.
• Defining and monitoring group-level performance indicators.
• Diagnosing and resolving problems within and among work groups.
• Designing and implementing reward systems supporting cooperative behavior.
Low-level managers
Supervisors, section leads, and foremen are examples of low-level management titles. These managers focus on
controlling and directing.
Low-level managers usually have the responsibility of:
• Assigning employees tasks.
• Guiding and supervising employees in day-to-day activities.
• Ensuring the quality and quantity of production.
• Making recommendations and suggestions and
• Up channeling employee problems.
Also referred to as first-level managers, low-level managers are role models for employees. These managers provide:
• Basic supervision
• Motivation
• Career planning
• Performance feedback and
• Staff supervision
Components of Business
Being an all-embracing term, business includes commerce and industry. Business may, therefore be classified into two
broad categories –
(a) Industry
(b) Commerce
Industry is concerned with the production of goods and commerce with the distribution of what is produced.
Industry
The sector where raw material gets converted into useful products is called industry. Activities related to production
& processing as well as activities related to rearing & reproduction of animals or other living species are all included in
the industry. The purpose of industry is to create form utility by converting raw materials into useful forms of finished
products. An industry may produce consumer goods or capital goods. Goods such as bread, butter, cloth, radio, etc
are consumer goods. These goods are directly used by the consumer. Goods such as machinery, cement etc are called
capital goods as these are used further in the production process to make useful products.
Types of Industry
Industry can be classified into two broad categories.
• Primary Industry (Extractive, Genetic)
• Secondary Industry (Manufacturing, Construction)
Primary Industry
• Extractive Industry: These industries extract or draw out products from natural sources. Raw materials
that are mostly products of the soil are some basic supplies of extractive industries. Manufacturing industries
transform these products into many other useful goods. Some of the examples of extractive industries include
farming, mining, lumbering, hunting & fishing operation.
• Genetic Industry: The industries involved in the activities of rearing & breeding of living organisms i.e. birds,
plants, animals are known as a genetic industry. For example, rearing cattle for milk, dairy farms, poultry farms,
rearing of plants in the nursery, growing fish in ponds are included in the genetic industry.
Secondary Industry
• Manufacturing Industries: These industries are engaged in the process of conversion of raw materials or
semi-finished goods into finished goods. These industries create from the utility by changing the form of raw
materials into finished products.
• Construction Industries: These industries are concerned with the construction of buildings, dams, roads
etc. These industries use the products of manufacturing industries such as cement, iron & steel, lime etc.
Commerce
We can refer to commerce as all those activities which help directly or indirectly in the distribution of goods to the
ultimate consumer. There will be no use of producing goods unless & until these goods reach the ultimate consumer.
Goods are produced at one place & consumers are scattered at different places. Commerce can be classified into two
broad categories:
• Trade
• Aids to trade
Trade
Trade is an integral part of commerce. It includes buying & selling of goods & services. The trade segment of commerce
brings together the manufacturer & the consumer, i.e. it is a link between the manufacturer & the consumer.
Trade can be classified into two types:
• Internal trade: It refers to buying & selling goods or services within the geographical boundaries of a country.
It is also known as home trade or domestic trade. Under internal trade, goods & services are bought & sold
in the home currency only. The internal trade can be two types:
a) Wholesale trade.
b) Retail trade.
• External trade: When the buying & selling of goods & services is beyond the geographical limits of the country
it is called external trade. It is also known as trade between two or more countries. In external trade, the
market is very External trade is of the following types:
a) Export trade.
b) Import trade.
c) Entrepot trade.
Aids to Trade
The activities which help in the smooth flow of trade are known as aids to trade. These activities make buying & selling
of goods easier. These help in removing various hindrances of trade which arises in production & distribution of goods.
The common aids to trade are:
• Transport & communication
• Banking & finance
• Insurance
• Warehousing
• Advertising
Types of Business
a) Sole Proprietorship
b) Partnership
c) Cooperative Society
d) Joint Stock Company
SOLE PROPRIETORSHIP
Do you often go in the evenings to buy registers, pens, chart paper etc. from a small neighborhood stationery store?
Well, in all probability during your transactions, you have interacted with a sole proprietor. Sole proprietorship is a
popular form of business organization and is the most suitable form for small businesses, especially in their initial years
of operation. Sole proprietorship refers to a form of business organization which is owned, managed and controlled
by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word
"sole" implies "only", and "proprietor" refers to "owner". Hence, a sole proprietor is the one who is the only owner
of a business. This form of business is particularly common in areas of personalized services such as beauty parlors,
hair salons and small-scale activities like running a retail shop in a locality.
Features of Sole Proprietorship
Salient characteristics of the sole proprietorship form of organization are as follows:
(i) Formation and closure: There is no separate law that governs sole proprietorship. Hardly any legal formalities
are required to start a sole proprietary business, though in some cases one may require a license. Closure of the
business can also be done easily. Thus, there is ease in formation as well as closure of business.
(ii) Liability: Sole proprietors have unlimited liability. This implies that the owner is personally responsible for
payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner's
personal possessions such as his/her personal car and other assets could be sold to repay the debt. Suppose the total
outside liabilities of XYZ dry cleaner, the sole proprietorship firm, are Rs. 80,000 at the time of dissolution, but its
assets are Rs. 60,000 only. In such a situation the proprietor will have to bring in Rs. 20,000 from her personal sources
even if she has to sell her personal property to repay the firm's debts.
(iii) Sole risk bearer and profit recipient: The risk of failure of business is borne all alone by the sole proprietor.
However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which
become a direct reward for his risk bearing.
(iv) Control: The right to run the business and make all decisions lies absolutely with the sole proprietor. He can
carry out his plans without any interference from others.
(v) No separate entity: In the eyes of the law, no distinction is made between the sole trader and his business, as
business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the
activities of the business.
(vi) Lack of business continuity: The sale proprietorship business is owned and controlled by one-person,
therefore death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and
detrimental effect on the business and may even cause closure of the business.
PARTNERSHIP
The inherent disadvantage of the sole proprietorship in financing and managing an expanding business paved the way
for partnership as a viable option. Partnership serves as an answer to the needs of greater capital investment, varied
skills and sharing of risks. The Indian Partnership Act, 1932 defines partnership as "the relation between persons who
have agreed to share the profit of the business carried on by all or any one of them acting for all."
Features of Partnership
Definitions given, above point to the following major characteristics of the partnership form of business organization–
(i) Formation: The partnership form of business organization is governed by the Indian Partnership Act, 1932. It
comes into existence through a legal agreement wherein the terms and conditions governing the relationship among
the partners, sharing of profits and losses and the manner of conducting the business are specified. It may be pointed
out that the business must be lawful and run with the motive of profit. Thus, two people coming together for charitable
purposes will not constitute a partnership.
(ii) Liability: The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case
the business assets are insufficient. Further, the partners are jointly and individually liable for payment of debts. Jointly,
all the partners are responsible for the debts, and they contribute in proportion to their share in the business and as
such are liable to that extent. Individually too, each partner can be held responsible for repaying the debts of the
business. However, such a partner can later recover from other partners an amount of money equivalent to the shares
in liability defined as per the per ship agreement.
(iii) Risk bearing: The partners bear the risks involved in running a business as a team. The reward comes in the
form of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio
in the event of the firm incurring losses.
(iv) Decision making and control: The partners share amongst themselves the responsibility of decision making
and control of day-to-day activities. Decisions are generally taken with mutual consent. Thus, the activities of a
partnership firm are managed through the joint efforts of all the partners.
(v) Continuity: Partnership is characterized by lack of continuity of business since the death, retirement, insolvency
or insanity of any partner can bring an end to the business. However, the remaining partners may, if they so desire
continue the business based on a new agreement.
(vi) Number of Partners: The minimum number of partners needed to start a partnership firm is two. According
to section 464 of the Companies Act 2013, the maximum number of partners in a partnership firm can be 100, subject
to the number prescribed by the government. As per Rule 10 of The Companies (miscellaneous) Rules 2014, at present
the maximum number of members can be 50.
(vii) Mutual agency: The definition of partnership highlights the fact that it is a business carried out by all or any one
of the partners acting for all. In other words, every partner is both an agent and a principal. He is an agent of other
partners as he represents them and thereby binds them through his acts. He is a principal as he too can be bound by
the acts of other partners.
Types of Partners
A partnership firm can have different types of partners with different roles and liabilities. An understanding of these
types is important for a clear understanding of their rights and responsibilities. These are described as follows:
(i) Active partner: An active partner is one who contributes capital, participates in the management of the firm,
shares its profits and losses, and is liable to an unlimited extent to the creditors of the firm. These partners take actual
part in carrying out business of the firm on behalf of other partners.
(ii) Sleeping or dormant partner: Partners who do not take part in the day-to-day activities of the business are
called sleeping partners. A sleeping partner, however, contributes capital to the firm, shares its profits and losses, and
has unlimited liability.
(iii) Secret partner: A secret partner is one whose association with the firm is unknown to the general public. Other
than this distinct feature, in all other aspects he is like the rest of the partners. He contributes to the capital of the
firm, takes part in the management, shares its profits and losses, and has unlimited liability towards the creditors.
(iv) Nominal partner: A nominal partner is one who allows the use of his/her name by a firm but does not contribute
to its capital. He/she does not take an active part in managing the firm, does not share its profit or losses but is liable,
like other partners, to third parties, for the repayments of the firm's debts.
COOPERATIVE SOCIETY
The word cooperative means working together and with others for a common purpose. The cooperative society is a
voluntary association of persons, who join together with the motive of welfare of the members. They are driven by
the need to protect their economic interests in the face of possible exploitation at the hands of middlemen obsessed
with the desire to earn greater profits. The cooperative society is compulsorily required to be registered under the
Cooperative Societies Act 1912. The process of setting up a cooperative society is simple enough and at most what is
required is the consent of at least ten adult people to form a society. The capital of a society is raised by its members
through the issue of shares. Society acquires a distinct legal identity after its registration.
Features of Cooperative Society
The characteristics of a cooperative society are listed below.
(i) Voluntary membership: The membership of a cooperative society is voluntary. A person is free to join a
cooperative society and can also leave anytime as per his desire. There cannot be any compulsion for him to join or
quit society. Although a member is procedurally required to serve a notice before leaving society, there is no
compulsion to remain a member. Membership is open to all, irrespective of their religion, caste, and gender.
(ii) Legal status: Registration of a cooperative society is compulsory. This accords a separate identity to the society
which is distinct from its members. Society can enter into contracts and hold property in its name, sue and be sued by
others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members.
(iii) Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount
contributed by them as capital. This defines the maximum risk that a member can be asked to bear.
(iv) Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing committee.
The right to vote gives the members a chance to choose the members who will constitute the managing committee
and this lends the cooperative society a democratic character.
JOINT STOCK COMPANY
A company is an association of people formed for carrying out business activities and has a legal status independent of
its members. A company can be described as an artificial person having a separate legal entity, perpetual succession
and a common seal. The company form of organization is governed by The Companies Act, 2013. As per section 2(20)
of Act 2013, a company means company incorporated under this Act or any other previous company law.
The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by
the shareholders. Usually, the owners exercise indirect control over the business. The capital of the company is divided
into smaller parts called 'shares' which can be transferred freely from one shareholder to another person (except in a
private company).
Features of Joint Stock Company
The definition of a joint stock company highlights the following features of a company.
(i) Artificial person: A company is a creation of law and exists independent of its members. Like natural persons, a
company can own property, incur debts, borrow money, enter contracts, sue and be sued but unlike them it cannot breathe,
eat, run, talk and so on. It is, therefore, called an artificial person.
(ii) Separate legal entity: From the day of its incorporation, a company acquires an identity distinct from its members.
Its assets and liabilities are separate from those of its owners. The law does not recognize the business and owners to be
one and the same.
(iii) Formation: The formation of a company is a time-consuming, expensive and complicated process. It involves the
preparation of several documents and compliance with several legal requirements before it can start functioning.
Incorporation of companies is compulsory under The Companies Act 2013 or any of the previous company law, as stated
earlier. Such companies which are incorporated under the Companies Act 1956 or any company law shall be included in the
list of companies.
(iv) Perpetual succession: A company being a creation of the law, can be ended only by law. It will only cease to exist
when a specific procedure for its closure, called winding up, is completed. Members may come and members may go, but
the company continues to exist.
(v) Control: The management and control of the affairs of the company is undertaken by the Board of Directors, which
appoints the top management officials for running the business. The directors hold a position of immense significance as they
are directly accountable to the shareholders for the working of the company. The shareholders, however, do not have the
right to be involved in the day-to-day running of the business.
(vi) Liability: The liability of the members is limited to the extent of the capital contributed by them in a company. The
creditors can use only the assets of the company to settle their claims since it is the company and not the members that
owe the debt. The members can be asked to contribute to the loss only to the extent of the unpaid amount of share held
by them. Suppose Akshay is a shareholder in a company holding 2,000 shares of Rs. 10 each, on which he has already paid
Rs. 7 per share. His liability in the event of losses or the company’s failure to pay debts can be only up to Rs. 6,000-the
unpaid amount of his share capital (Rs. 3 per share on 2,000 shares held in the company). Beyond this, he is not liable to pay
anything towards the debts or losses of the company.
Types of Companies
A company can be either a private or a public company. These two types of companies are discussed in detail in the following
paragraphs.
Private Company
A private company means a company which:
(a) restricts the right of members to transfer their shares.
(b) has a minimum of 2 and a maximum of 200 members, excluding the present and past employees.
(c) does not invite the public to subscribe to its securities and It is necessary for a private company to use the word private
limited after its name.
Public Company
A public company means a company which is not a private company. As per The Companies Act, a public company is one
which:
(a) has a minimum of 7 members and no limit on maximum members.
(b) has no restriction on transfer securities; and
(c) is not prohibited from inviting the public to subscribe to its securities.