class-11-business-studies

BUSINESS STUDIES Textbook for Class XI 2018-19

ISBN 81-7450-530-X First Edition ALL RIGHTS RESERVED March 2006 Phalguna 1927 Reprinted No part of this publication may be reproduced, stored in a retrieval October 2006 Kartika 1928 system or transmitted, in any form or by any means, electronic, December 2007 Agrahayana 1929 mechanical, photocopying, recording or otherwise without the prior March 2009 Phalguna 1930 permission of the publisher. January 2010 Magha 1931 January 2011 Magha 1932 This book is sold subject to the condition that it shall not, by way of January 2012 Magha 1933 trade, be lent, re-sold, hired out or otherwise disposed of without the March 2013 Phalguna 1934 publisher’s consent, in any form of binding or cover other than that in November 2013 Kartika 1935 which it is published. December 2014 Pausa 1936 April 2016 Vaishakha 1938 The correct price of this publication is the price printed on this page. Any March 2017 Phalguna 1938 revised price indicated by a rubber stamp or by a sticker or by any other January 2018 Magha 1939 means is incorrect and should be unacceptable. PD 300T RPS OFFICES OF THE PUBLICATION DIVISION, NCERT © National Council of Educational Research and Training, 2006 NCERT Campus Phone : 011-26562708 Sri Aurobindo Marg ` 115.00 New Delhi 110 016 Printed on 80 GSM paper with 108, 100 Feet Road Phone : 080-26725740 NCERT watermark Hosdakere Halli Extension Published at the Publication Division by Banashankari III Stage the Secretary, National Council Bengaluru 560 085 of Educational Research and Training, Sri Aurobindo Marg, New Delhi 110 016 Navjivan Trust Building Phone : 079-27541446 and printed at Amit Printing Press, P.O. Navjivan D-12 and 13, Industrial Area, Site-A, Ahmedabad 380 014 Mathura-281 001 (U.P.) CWC Campus Phone : 033-25530454 Opp. Dhankal Bus Stop Panihati Kolkata 700 114 CWC Complex Phone : 0361-2674869 Maligaon Guwahati 781 021 Publication Team Head, Publication : M. Siraj Anwar Division : Shveta Uppal Chief Editor Chief Business : Gautam Ganguly Manager Chief Production : Arun Chitkara Officer Editor : R.N. Bharadwaj Production Assistant : Mukesh Gaur Cover Karan Chadha 2018-19

FOREWORD The National Curriculum Framework (NCF), 2005, recommends that children’s life at school must be linked to their life outside the school. This principle marks a departure from the legacy of bookish learning which continues to shape our system and causes a gap between the school, home and community. The syllabi and textbooks developed on the basis of NCF signify an attempt to implement this basic idea. They also attempt to discourage rote learning and the maintenance of sharp boundaries between different subject areas. We hope these measures will take us significantly further in the direction of a child-centred system of education outlined in the National Policy of Education (1986). The success of this effort depends on the steps that school principals and teachers will take to encourage children to reflect on their own learning and to pursue imaginative activities and questions. We must recognise that, given space, time and freedom, children generate new knowledge by engaging with the information passed on to them by adults. Treating the prescribed textbook as the sole basis of examination is one of the key reasons why other resources and sites of learning are ignored. Inculcating creativity and initiative is possible if we perceive and treat children as participants in learning, not as receivers of a fixed body of knowledge. These aims imply considerable change in school routines and mode of functioning. Flexibility in the daily time-table is as necessary as rigour in implementing the annual calendar so that the required number of teaching days are actually devoted to teaching. The methods used for teaching and evaluation will also determine how effective this book proves in making children’s life at school a happy experience, rather than a source of stress or boredom. Syllabus designers have tried to address the problem of curricular burden by restructuring and reorienting knowledge at different stages with greater consideration for child psychology and the time available for teaching. The textbook attempts to enhance this endeavour by giving higher priority and space to opportunities for contemplation and wondering, discussion in small groups, and activities requiring hands-on experience. The National Council of Educational Research and Training (NCERT) appreciates the hardwork done by the textbook development committee responsible for this book. We wish to thank the Chairperson of the advisory group in Social Sciences, Professor Hari Vasudevan and the Chief Advisor for this book, Professor Sanjay K. Jain, for guiding the work of this committee. 2018-19

iv Several teachers contributed to the development of this textbook; we are grateful to their principals for making this possible. We are indebted to the institutions and organisations which have generously permitted us to draw upon their resources, materials and personnel. We are especially grateful to the members of the National Monitoring Committee, appointed by the Department of Secondary and Higher Education, Ministry of Human Resource Development under the Chairpersonship of Professor Mrinal Miri and Professor G.P. Deshpande for their valuable time and contribution. As an organisation committed to systemic reform and continuous improvement in the quality of its products, NCERT welcomes comments and suggestions which will enable us to undertake further revision and refinements. New Delhi Director 20 December 2005 National Council of Educational Research and Training 2018-19

TEXTBOOK DEVELOPMENT COMMITTEE CHAIRPERSON, ADVISORY COMMITTEE FOR SOCIAL SCIENCE TEXTBOOKS AT THE HIGHER SECONDARY LEVEL Hari Vasudevan, Professor, Department of History, University of Calcutta, Kolkata CHIEF ADVISOR Sanjay K. Jain, Professor, Delhi School of Economics, University of Delhi, Delhi MEMBERS Anand Saxena, Reader, Deen Dayal Upadhyaya College, University of Delhi, Delhi Davinder K. Vaid, Professor, DESSH, NCERT, New Delhi Garima Gupta, Lecturer, PGDAV College, University of Delhi, Delhi G.L. Tayal, Reader, Ramjas College, University of Delhi, Delhi J.K. Parida, Professor, Department of Commerce, Utkal University, Bhubaneswar, Odisha K.V. Achalapati, Professor and Head, Department of Commerce, Osmania University, Hyderabad M.M. Goyal, Reader, PGDAV College, University of Delhi, Delhi M. Usha, Associate Professor, University College of Commerce and Business Management, Osmania University, Hyderabad Pooja Dasani, PGT, Convent of Jesus and Mary School, Gol Dakkhana, New Delhi Shailendra Nigam, NIILM Centre for Management Studies, Sher Shah Suri Marg, New Delhi MEMBER-COORDINATOR Minoo Nandrajog, Reader, DESSH, NCERT, New Delhi 2018-19

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ACKNOWLEDGEMENT The National Council of Educational Research and Training acknowledges the valuable comments and suggestions of the following, while preparing the textbook: Professor D.P. Sharma, Former Vice Chancellor, Barkatullah University, Bhopal; S.K. Bansal, PGT Commerce (Retired), Commercial Senior Secondary School, Darya Ganj, Delhi; Vijay Kumar Yadav, PGT Commerce, Kendriya Vidyalaya, Jawaharlal Nehru University Campus, New Delhi; K. Vasudeva Murthy, Lecturer in Commerce, Mahajana’s Pre-University College, Jayalaxmipuram, Mysuru; Dwarikanath Mishra, PGT Commerce, DAV School, Unit-8, Bhubaneswar, Odisha. Special thanks are due to Savita Sinha, Professor and Head, Department of Education in Social Sciences and Humanities for her constant support and guidance at every stage of the textbook development process. The Council also gratefully acknowledges the contribution of Shivani Nagrath, Post Graduate Teacher, Summerfield School, New Delhi in the review and updation of textual content in the context of recent developments in business scenario and The Companies Act 2013. The efforts of the administrative staff of the Department is thankfully acknowledged for bringing the textbook in its present form. Last but not the least, the Publication Division of NCERT is acknowledge for printing this textbook. 2018-19

NOTE TO THE TEACHER This textbook is expected to provide a good understanding of the environment in which a business operates. A manager has to analyse the complex, dynamic situations in which a business is placed. Therefore, content enrichment in the form of business news and abstracts of articles from business journals and magazines has been given as inset material (boxes). This will encourage students to be observant about all business activity and discover what is happening in business organisations with the expection that they will update their knowledge through the use of libraries, newspapers, business-oriented TV programmes and the Internet. The textbook is updated in the light of The Companies Act 2013 and the content is modified in accordance to the new provisions of the Act 2013 in respective chapters. 2018-19

CONTENTS FOREWORD iii 1 PART I FOUNDATIONS OF BUSINESS 2 27 CHAPTER 1 Business, Trade and Commerce 60 83 CHAPTER 2 Forms of Business Organisation 118 CHAPTER 3 Private, Public and Global Enterprises 145 CHAPTER 4 Business Services 164 165 CHAPTER 5 Emerging Modes of Business 186 213 CHAPTER 6 Social Responsibilities of Business 231 and Business Ethics 261 309 PART II CORPORATE ORGANISATION, FINANCE AND TRADE CHAPTER 7 Formation of a Company CHAPTER 8 Sources of Business Finance CHAPTER 9 Small Business CHAPTER 10 Internal Trade CHAPTER 11 International Business FORM NO. INC-1 Application for reservation of Name 2018-19

CONSTITUTION OF INDIA Part III (Articles 12 – 35) (Subject to certain conditions, some exceptions and reasonable restrictions) guarantees these Fundamental Rights Right to Equality • before law and equal protection of laws; • irrespective of religion, race, caste, sex or place of birth; • of opportunity in public employment; • by abolition of untouchability and titles. Right to Freedom • of expression, assembly, association, movement, residence and profession; • of certain protections in respect of conviction for offences; • of protection of life and personal liberty; • of free and compulsory education for children between the age of six and fourteen years; • of protection against arrest and detention in certain cases. Right against Exploitation • for prohibition of traffic in human beings and forced labour; • for prohibition of employment of children in hazardous jobs. Right to Freedom of Religion • freedom of conscience and free profession, practice and propagation of religion; • freedom to manage religious affairs; • freedom as to payment of taxes for promotion of any particular religion; • freedom as to attendance at religious instruction or religious worship in educational institutions wholly maintained by the State. Cultural and Educational Rights • for protection of interests of minorities to conserve their language, script and culture; • for minorities to establish and administer educational institutions of their choice. Right to Constitutional Remedies • by issuance of directions or orders or writs by the Supreme Court and High Courts for enforcement of these Fundamental Rights. 2018-19

PART I Foundations of Business 2018-19

CHAPTER 1 BUSINESS, TRADE AND COMMERCE LEARNING OBJECTIVES After studying this chapter, you should be able to: i. Appreciate the development of trade and commerce in historical past; ii. Understand the role of indigenous banking system in trade and commerce; iii. Explain the concept and objectives of business; iv. Discuss types of industries; v. Explain the activities relating to commerce; vi. Describe the nature of business risks and their causes; and vii. Discuss the basic factors to be considered while starting a business. 2018-19

BUSINESS, TRADE AND COMMERCE 3 Imran, Manpreet, Joseph and Priyanka have been classmates in Class X. After their exams are over, they happen to meet at a common friend Ruchika’s house. Just when they were sharing their experiences of examination days, Ruchika’s father Raghuraj Chaudhary intervenes and asks about their well- being. He also enquires about their career plans. But none of them had a definite reply. Raghuraj who himself is a successful businessman tells them about business as a career opportunity. Joseph gets excited by the idea and says “yes, business is really good for making lots of money”. Raghuraj tells them that ‘there is a lot more to business than merely money’. Business activities lead to growth and development of any country, he added. He further tells them that the roots of business activities can be traced back to ancient times and how trading helps in the prosperity of the Indian subcontinent. Priyanka said that they have read about the Silk Route in their history textbooks. Raghuraj then gets busy with his day-to-day tasks. However, the four classmates begin raising questions. The conversation of the four classmates focused on how trading activities were conducted during ancient times. How far can the roots of trading activities be traced? Why was the Indian subcontinent referred to as ‘Swaran Bharat and Swaran Dweep’ by the then travellers to India? What made Columbus and Vasco da Gama undertake journeys to locate India? They decided to meet the commerce teacher of their school to find out answers to many such questions about the development, nature and purpose of business. 1.1 INTRODUCTION lives. Although our lives are influenced by many other institutions in modern All human beings, wherever they may society, such as schools, colleges, be, require different types of goods and hospitals, political parties and religious services to satisfy their needs. The bodies, business has a major influence necessity of supplying goods and on our daily lives. It, therefore, becomes services has led to certain activities being important that we understand the undertaken by people to produce and concept, nature and purpose of sell what is needed by others. Business business. is a major economic activity in all modern societies concerned as it is The chapter is divided into two concerned with the production and sale sections. Section I deals with the of goods and services required by history of trade and commerce in people. The purpose behind most ancient India. Section II deals with the business activities is to earn money by concept, nature and purpose of meeting people’s demands for goods business. and services. Business is central to our 2018-19

4 BUSINESS STUDIES SECTION I The period was marked by substantial commercial activities and urban History of Trade and Commerce development. Political economy and military security during ancient times The economic and commercial united most of the Indian subcontinent evolution of any land depends upon its and trade regulations were carefully physical environment. This stands true planned. There were diverse types of for the Indian subcontinent as a whole coins and weighing practices which which has Himalayas in the North used to vary from place to place with bordered by water in the South. A the help of money changers and by network of roads merging into the resorting to certain commonly Silk Route helped in establishing accepted weights and measures. commercial and political contacts with adjoining foreign kingdoms and 1.1 Indigenous Banking System empires of Asia, in particular, and the world, in general. The maritime routes As economic life progressed, metals linked the east and the west by sea and began to supplement other were used for the trade of spices and commodities as money because of its known as ‘spice route’. Due to the flow durability and divisibility. As money of wealth through these routes, the served as a medium of exchange, the chief kingdoms, important trade introduction of metallic money and its centres and the industrial belt use accelerated economic activities. flourished, which in turn further facilitated the progress of domestic and Documents such as Hundi and international trade in ancient India. Chitti were in use for carrying out transactions in which money passed Trade and commerce have played from hand to hand. Hundi as an a vital role in making India to envolve instrument of exchange, which was as a major actor in the economic world prominent in the subcontinent. It in ancient times. Archaeological involved a contract which — (i) warrant evidences have shown that trade and the payment of money, the promise or commerce was the mainstay of the order which is unconditional (ii) economy of ancient India carried out capable of change through transfer by by water and land. Commercial cities valid negotiation. like Harappa and Mohenjodaro were Indigenous banking system played a founded in the third millennium B.C. prominent role in lending money and The civilisation had established financing domestic and foreign trade commercial connections with with currency and letter of credit. With Mesopotamia and traded in gold, silver, the development of banking, people copper, coloured gemstones, beads, began to deposit precious metals with pearls, sea shells, terracotta pots, etc. lending individuals functioning as 2018-19

BUSINESS, TRADE AND COMMERCE 5 Hundi as practised by Indian Merchaant Communities Name of Hundi Broader Functions of Hundi Dhani-jog Classification Darshani Payable to any person—no liability over who received Sah-jog Darshani payment. Payable to a specific person, Firman-jog Darshani someone ‘respectable’. Liability over who received payment. Hundi made payable to order. Dekhan-har Darshani Payable to the presenter or bearer. Dhani-jog Muddati Payable to any person—no liability over who received payment, but payment over a fixed term. Firman-jog Muddati Hundi made payable to order Jokhmi Muddati following a fixed term. Drawn against dispatched goods. If goods lost in transit, the drawer or holder bears the coasts, and the Drawee carries no liability. bankers or Seths, and money became Workshops (Karkhana) were an instrument for supplying the prominent where skilled artisans manufacturers with a means of worked and converted raw materials producing more goods. into finished goods which were high in demand. Family-based apprenticeship Agriculture and the domestication of system was in practice and duly animals were important components of followed in acquiring trade-specific the economic life of ancient people. Due skills. The artisans, craftsmen and to the favourable climatic conditions skilled labourers of different kinds they were able to raise two or sometimes learnt and developed skills and three crops in a year. In addition to this, knowledge, which were passed on from by resorting to weaving cotton, dyeing one generation to another. fabrics, making clay pots, utensils, and handicrafts, sculpting, cottage 1.2.1 Rise of Intermediaries industries, masonry, manufacturing, transports (i.e., carts, boats and ships), Intermediaries played a prominent role etc., they were able to generate surpluses in the promotion of trade. They and savings for further investment. provided considerable financial 2018-19

6 BUSINESS STUDIES security to the manufacturers by as a means of communication had assuming responsibility for the risks assumed key importance in the entire involved, especially in foreign trade. It process of growth, particularly of the comprised commission agents, brokers inland trade and for trade over land. and distributors both for wholesale and The northern roadway route is believed retail goods. An expanding trade to have stretched originally from Bengal brought in huge amounts of silver to Taxila. There were also trade routes bullion into Asia and a large share of in the south spreading east and west. that bullion gravitated towards India. Trade routes were structurally wide and suitable for speed and safety. The institution of Jagat Seths also developed and exercised great influence Maritime trade was another during the Mughal period and the days important branch of global trade of the East India Company. Bankers network. Malabar Coast, on which began to act as trustees and executors Muziris is situated, has a long history of endowments. Foreign trade was of international maritime trade going financed by loans. However, the rate of back to the era of the Roman Empire. interest for longer voyages was kept Pepper was particularly valued in the high in view of the huge risk involved. Roman Empire and was known as ‘Black Gold’. For centuries, it remained The emergence of credit the reason for rivalry and conflict transactions and availability of loans between various empires and trade and advances enhanced commercial powers to dominate the route for this operations.The Indian subcontinent trade. It was in the search for an enjoyed the fruits of favourable balance alternate route to India for spices that of trade, where exports exceeded led to the discovery of America by imports with large margins and the Columbus in the closing years of indigenous banking system benefitted 15th century and also brought Vasco the manufacturers, traders and da Gama to the shores of Malabar merchants with additional capital in 1498. funds for expansion and development. Commercial and Industrial banks later Calicut was such a bustling evolved to finance trade and commerce emporium that it was even visited by and agricultural banks to provide both Chinese ships to acquire items, like short-and long-term loans to finance frankincense (essential oil) and myrrh agriculturists. (fragrant resin used in perfumes, medicines) from the Middle East, as well 1.3 TRANSPORT as, pepper, diamonds, pearls and cotton from India. On the Coromandel Coast, Transport by land and water was Pulicat was a major port in the 17th popular in the ancient times. Trade was century. Textiles were the principal maintained by both land and sea. Roads export from Pulicat to Southeast Asia. 2018-19

BUSINESS, TRADE AND COMMERCE 7 1.4 Trading Communities It had to be paid for passengers, goods, Strengthened cattle and carts. The right to receive the labour tax was usually transferred to In different parts of the country, the local bodies. different communities dominated trade. Punjabi and Multani merchants The guild chief dealt directly with handled business in the northern the king or tax collectors and settled region, while the Bhats managed the the market toll on behalf of its fellow trade in the states of Gujarat and merchants at a fixed sum of money. Rajasthan. In western India, these The guild merchants also acted as groups were called Mahajan, Chatt is custodians of religious interests. They were important traders from the South. undertook the task of building temples In urban centres, such as Ahmedabad and made donations by levying a the Mahajan community collectively corporate tax on their members. The represented by their chief called commercial activity, thus, enabled big nagarseth. Other urban groups merchants to gain power in the society. included professional classes, such as hakim and vaid (physician), wakil 1.4.2 Major Trade Centres (Lawyer), pundit or mulla (teachers), painters, musicians, calligraphers, etc. There were all kinds of towns—port towns, manufacturing towns, 1.4.1 Merchant Corporations mercantile towns, the sacred centres, and pilgrimage towns. Their existence The merchant community also derived is an index of prosperity of merchant power and prestige from guilds, which communities and professional classes. were autonomous corporations formed to protect the interests of the traders. The following were the leading These corporations, organised on trade centres in ancient India: formal basis, framed their own rules of 1. Pataliputra: Known as Patna membership and professional code of today. It was not only a commercial conduct, which even kings were town, but also a major centre for export supposed to accept and respect. Trade of stones. and industry taxes were also a major 2. Peshawar: It was an important source of revenue. Traders had to pay exporting centre for wool and for the octroi duties that were levied on most import of horses. It had a huge share of the imported articles at varying rates. in commercial transactions between They were paid either in cash or in India, China and Rome in the first kind. century A.D. 3. Taxila: It served as a major centre Customs duties varied according to on the important land route between the commodities. Tariffs varied from India and Central Asia. It was also a province to province. The ferry tax was city of financial and commercial another source of income generation. banks. The city occupied an important 2018-19

8 BUSINESS STUDIES place as a Buddhist centre of learning. purchase pearls, glass and rare stones The famous Taxila University and in return they sold gold and silk. flourished here. 11. Madura: It was the capital of the 4. Indraprastha: It was the Pandayas who controlled the pearl commercial junction on the royal road fisheries of the Gulf of Mannar. It where most routes leading to the east, attracted foreign merchants, west, south and north converged. particularly Romans, for carrying out 5. Mathura: It was an emporium of overseas trade. trade and people here subsisted on 12. Broach: It was the greatest seat commerce. Many routes from South of commerce in Western India. It was India touched Mathura and Broach. situated on the banks of river Narmada 6. Varanasi: It was well placed as it and was linked with all important lay both on the Gangetic route and on marts by roadways. the highway that linked North with the 13. Kaveripatta: Also known as East. It grew as a major centre of textile Kaveripatnam, it was scientific in its industry and became famous for construction as a city and provided beautiful gold silk cloth and loading, unloading and strong facilities sandalwood workmanship. It had of merchandise. Foreign traders had links with Taxila and Bharuch. their headquarters in this city. It was a 7. Mithila: The traders of Mithila convenient place for trade with crossed the seas by boats, through the Malaysia, Indonesia, China and the Far Bay of Bengal to the South China Sea, East. It was the centre of trade for and traded at ports on the islands of perfumes, cosmetics, scents, silk, wool, Java, Sumatra and Borneo. Mithila cotton, corals, pearls, gold and established trading colonies in South precious stones; and also for ship China, especially in Yunnan. building. 8. Ujjain: Agate, carnelian, muslin 14. Tamralipti: It was one of the and mallow cloth were exported from greatest ports connected both by sea Ujjain to different centres. It also had and land with the West and the Far trade relations through the land route East. It was linked by road to Banaras with Taxila and Peshawar. and Taxila. 9. Surat: It was the emporium of western trade during the Mughal period. 1.4.3 Major Exports and Imports Textiles of Surat were famous for their gold borders (zari). It is noteworthy that Exports consisted of spices, wheat, Surat hundi was honoured in far off sugar, indigo, opium, sesame oil, markets of Egypt and Iran. cotton, parrot, live animals and animal 10. Kanchi: Today known as products—hides, skin, furs, horns, Kanchipuram, it was here that the tortoise shells, pearls, sapphires, Chinese used to come in foreign ships to quartz, crystal, lapis, lazuli, granites, turquoise and copper etc. 2018-19

BUSINESS, TRADE AND COMMERCE 9 Imports included horses, animal Indian economy and made the products, Chinese silk, flax and linen, Europeans embark great voyage of wine, gold, silver, tin, copper, lead, discovery. Initially, they came to rubies, coral, glass, amber, etc. plunder but soon realised the rewards of trade in exchange of gold and silver. 1.5 POSITION OF INDIAN SUBCONTINENT Despite the growing commercial sector, IN WORLD ECONOMY ( 1 AD UP it is evident that the 18th century India TO 1991) was far behind Western Europe in technology, innovation and ideas. With Between the 1st and the 7th centuries the increasing control of the East India CE, India is estimated to have the Company causing lack of freedom and largest economy of the ancient and no occurrence of agricultural and medieval world, controlling about one- scientific revolution, limited reach of third and one-fourth of the world’s education to the masses, population wealth (timeline). The country was often growth and preference to machines over referred to as ‘Swaranbhumi’ and manual skills made India a country ‘Swarndweep’ in the writings of many which was prosperous but with people travellers, such as Megasthenes, who were poor. Faxian (Fa Hien), Xuanzang (Huen Tsang), Al Beruni (11th century), Ibn The British empire began to take Batuta (11th century), Frenchman roots in India in the mid – 18th Francois (17th century) and others. century. The East India Company They repeatedly refer to the prosperity used revenues generated by the of the country. provinces under its rule for purchasing Indian raw materials, spices and The pre-colonial period in Indian goods. Hence, the continuous inflow history was an age of prosperity for Source: Angus Maddison (2001 and 2003), The World Economy: A Millennial Perspective, OECD, Paris; Angus Maddison, The World Economy, Historical Statistics 2018-19

10 BUSINESS STUDIES of bullion that used to come on infrastructure were the major reasons. account of foreign trade stopped. This As a result, India relied heavily on changed the condition of the Indian borrowings from foreign sources and economy from being an exporter of finally, agreed to economic processed goods to the exporter of raw liberalisation in 1991. materials and buyer of manufactured goods. The Indian economy is one of the fastest growing economies in the world 1.5.1 India begins to Reindustrialise today and a preferred FDI destination. Rising incomes, savings, investment After Independence, the process of opportunities, increased domestic rebuilding the economy started and consumption and younger population India went for centralised planning. The ensures growth for decades to come. First Five Year Plan was implemented The high growth sectors have been in 1952. Due importance was given to identified, which are likely to grow at a the establishment of modern rapid pace world over and the recent industries, modern technological and initiatives of the Government of India scientific institutes, space and nuclear such as ‘Make in India’, Skill India’, programmes. Despite these efforts, the ‘Digital India’ and roll out of the Foreign Indian economy could not develop at a Trade Policy (FTP 2015-20) is rapid pace. Lack of capital formation, expected to help the economy in terms rise in population, huge expenditure of exports and imports and trade on defence and inadequate balance. Indian entrepreneurs began to set up their own modern textile mills after 1850 and, gradually, began to recapture the domestic market. In 1896, Indian mills supplied 8% of the total cloth consumed in India, 20% in 1913, 62% in 1936 and 76% in 1945. Thus, during 1913-1938 India’s manufacturing output grew 5.6% during per year, which was above the world average of 3.3%. The British government, finally, provided tariff protection from 1920s, which helped industrialists to expand and diversify. By the time of Independence in 1947, Indian entrepreneurs were strong enough and in a position to buy the businesses of departing British. Industry’s share in India’s GDP had doubled from 3.18% in 1913 to 7.5% in 1947 and the share of manufacturers in exports rose from 22.4% to 30% for the years 1913 and 1947, respectively. Source: B.R. Tomlison, The Economy of Modern India 1870-1970, The New Cambridge History of India, Volume 3.3. Cambridge University Press, 1996. 2018-19

BUSINESS, TRADE AND COMMERCE 11 SECTION II are those by which we can earn our livelihood, whereas, non-economic NATURE AND CONCEPT OF BUSINESS activities are performed out of love, sympathy, sentiment, patriotism, etc. 1.6 CONCEPT OF BUSINESS For example, a worker working in a factory, a doctor operating in his clinic, The term business is derived from the a manager working in an office and a word ‘busy’. Thus, business means teacher teaching in a school are doing being busy. However, in a specific so to earn their livelihoods and are, sense, business refers to an occupation therefore, engaged in an economic in which people regularly engage in activity. On the other hand, a activities related to purchase, housewife cooking food for her family, production and/or sale of goods and or a boy helping an old man cross the services with a view to earning profits. road are performing non-economic The activity may consist of production activities since they are doing so out of or purchase of goods for sale, or love or sympathy. Economic activities exchange of goods or supply of services may be further divided into three to satisfy the needs of other people. categories, namely business, profession and employment. Business Try it yourself: State whether each of the following is an economic activity: 1. Farmer growing rice for her own consumption. 2. A factory owner producing school bags for sale in the market. 3. Person begging at a busy traffic intersection. 4. Services of a domestic help doing household chores at an employer’s house. 5. Services of a housewife doing household chores at home. In every society, people undertake may be defined as an economic activity various activities to satisfy their needs. involving the production and sale of These activities may be broadly goods and services undertaken with a classified into two groups — economic motive of earning profit by satisfying and non-economic. Economic activities human needs in society. 2018-19

12 BUSINESS STUDIES 1.6.1 Characteristics of Business (iii) Sale or exchange of goods and Activities services: Directly or indirectly, business involves transfer or In order to appreciate how business exchange of goods and services for activity is different from other activities value. If goods are produced not for in society, the nature of business or its the purpose of sale but for personal fundamental character must be consumption, it cannot be called a explained in terms of its distinguishing business activity. Cooking food at characteristics, which are as follows: home for the family is not business, (i) An economic activity: Business but cooking food and selling it to others in a restaurant is business. is considered to be an economic Thus, one essential characteristic activity because it is undertaken of business is that there should be with the objective of earning money sale or exchange of goods or or livelihood and not out of love, services between the seller and the affection, sympathy or any other buyer. emotion. It may be mentioned here that this activity can be undertaken (iv) Dealings in goods and services either on small and individual level, on a regular basis: Business e.g. (purchase and sale by a involves dealings in goods or shopkeeper) or on large scale in a services on a regular basis. One more formal and organised level single transaction of sale or (purchase and sale by a cooperative purchase, therefore, does not society or company). constitute business. Thus, for (ii) Production or procurement of example, if a person sells his/her goods and services: Before goods domestic radio set even at a profit, are offered to people for it will not be considered a business consumption, these must be either activity. But if he/she sells radio produced or procured by business sets regularly either through a enterprises. Thus, every business shop or from his/her residence, it enterprise either manufactures the will be regarded as a business goods it deals in or acquires them activity. from producers, to be further sold to consumers or users. Goods may (v) Profit earning: One of the main consist of consumable items of purpose of business is to earn daily use, such as sugar, ghee, income by way of profit. No pen, notebook, etc., or capital business can survive for long goods, like machinery, furniture, without profit. That is why, etc., Services may include facilities businessmen make all possible offered to consumers, business efforts to maximise profits, by firms and organisations in the increasing the volume of sales or form of transportation, banking, reducing costs. electricity, etc. 2018-19

BUSINESS, TRADE AND COMMERCE 13 (vi) Uncertainty of return: Uncertainty 1.6.2 Comparison of Business, of return refers to the lack of Profession and Employment knowledge relating to the amount of money that the business is going As has been mentioned earlier, to earn in a given period. Every economic activities may be business invests money (capital) to divided into three major categories run its activities with the objective viz., Business, Profession and of earning profit. But it is not certain Employment. The difference between as to what amount of profit will be these three terms is given in the earned. Also, there is always a following table. possibility of losses being incurred, dispite the best efforts put into the 1.7 CLASSIFICATION OF BUSINESS business. ACTIVITIES (vii) Element of risk: Risk is the Various business activities may be uncertainty associated with an classified into two broad categories — exposure to loss. It is caused by industry and commerce. Industry is some unfavourable or undesirable concerned with the production or Business Functions at Enterprise Level Business includes a wide variety of functions performed by different kinds of organisations called business enterprises or firms. Financing, production, marketing and human resource management are the four major functions which are performed by business enterprises. Financing is concerned with mobilising and utilising funds for running a business enterprise. Production involves the conversion of raw materials into finished products or generation of services. Marketing refers to all those activities which facilitate exchange of goods and services from producers to the people who need them at a place they want, at a time they require and at a price they are prepared to pay. Human resource management aims at ensuring the availability of working people who have necessary skills to perform various tasks in enterprises. event. Risks are related with factors, processing of goods and materials. like changes in consumer taste and Commerce includes all those activities, fashion, changes in method of which are necessary for facilitating the production, strike or lockout at exchange of goods and services. On the workplace, increased competition basis of these two categories, we may in market, fire, theft, accidents, classify business firms into industrial natural calamities, etc. No business and commercial enterprises. can altogether do away with risks. Let us examine in detail the activities relating to business. 2018-19

14 BUSINESS STUDIES Basic Business Profession Employment 1. Mode of Entrepreneur’s Membership of a Appointment establishment decision and other professional body letter and service legal formalities, if and certificate of agreement necessary practice 2. Nature of Provision of goods Rendering of Performing work work and services to the personalised, as per service expert services public contract or rules of service 3. Qualification No minimum Qualifications, Qualification and qualification is expertise and training as 4. Reward or training in specific return necessary field as prescribed prescribed by the by the professional employer Profit earned body is a must Salary or wages Professional fee 5. Capital Capital investment Limited capital No capital investment required as per size needed for required 6. Risk and nature of establishment Fixed and regular business pay; no or little Fee is generally risk Profits are uncertain regular and and irregular; risk is certain; some risk present 7. Transfer of Transfer possible Not possible Not possible interest with some formalities 8. Code of No code of conduct is Professional code Norms of conduct prescribed behaviour laid of conduct is to be 9. Example down by the followed employer are to Shop, factory Legal, medical be followed profession, chartered Jobs in banks, accountancy insurance companies, government departments 2018-19

BUSINESS, TRADE AND COMMERCE 15 1.7.1 Industry industries are usually transformed into many other useful goods by Industry refers to economic activities, manufacturing industries. which are connected with conversion of Important extractive industries resources into useful goods. Generally, include farming, mining, the term industry is used for activities lumbering, hunting and fishing in which mechanical appliances and operations. technical skills are involved. These (b) Genetic industries: These include activities relating to producing industries are engaged in breeding or processing of goods, as well as, plants and animals for their use in breeding and raising of animals. The further reproduction. Seeds and term industry is also used to mean nursery companies are typical groups of firms producing similar or examples of genetic industries. In related goods. For example, cotton additional, activities of cattle textile industry refers to all breeding farms, poultry farms, and manufacturing units producing textile fish hatchery come under genetic goods from cotton. Similarly, electronic industries. industry would include all firms (ii) Secondary industries: These are producing electronic goods, and so on. concerned with using materials, Further, in common parlance, certain which have already been extracted services, like banking and insurance, at the primary state. These are also referred to as industry, say industries process such materials banking industry, insurance industry, to produce goods for final etc. Industries may be divided into three consumption or for further broad categories namely primary, processing by other industrial secondary and tertiary. units. For example, mining of iron (i) Primary industries: These include ore is a primary industry, but manufacturing of steel by way of all those activities which are further processing of raw irons is a concerned with the extraction and secondary industry. Secondary production of natural resources industries may be further divided and reproduction and development as follows: of living organisms, plants, etc. (a) Manufacturing industries: These are divided as follows. These industries are engaged in (a) Extractive industries: These producing goods through processing industries extract or draw products of raw materials and, thus, creating from natural sources. Extractive form utilities. They bring out diverse industries supply some basic raw finished products, that we consume, materials that are mostly products or use through the conversion of raw of geographical or natural materials or partly finished materials environment. Products of these 2018-19

16 BUSINESS STUDIES in their manufacturing operations. (b) Construction industries: These Manufacturing industries may be industries are involved in the further divided into four categories construction of buildings, dams, on the basis of method of operation bridges, roads as well as tunnels for production. and canals. Engineering and architectural skills are an • Analytical industry which important part in construction analyses and separates different industries. elements from the same materials, as in the case of oil refinery. (iii) Tertiary industries: These are concerned with providing support • Synthetical industry which services to primary and secondary combines various ingredients into a industries as well as activities new product, as in the case of cement. relating to trade. These industries provide service facilities. As • Processing industry which business activities, these may be involves successive stages for considered part of commerce manfucturing finished products, because as auxiliaries to trade as in the case of sugar and paper. these activities assist trade. Included in this category are • Assembling industry which transport, banking, insurance, assembles different component warehousing, communication, parts to make a new product, as packaging and advertising. in the case of television, car, computer, etc. Chart Showing Business Activities Business Industry Commerce Primary Secondary Tertiary Trade Auxiliaries to Trade Extractive Genetic Internal External Manufacturing Construction Wholesale Retail Import Export Entrepot Warehousing Insurance Advertising Transportation Analytical Synthetic Processing Assembling Banking and Finance 2018-19

BUSINESS, TRADE AND COMMERCE 17 1.7.2 Commerce is removed by trade, thereby, making goods available to consumers from the Commerce includes two types of possession or ownership producers. activities, viz., (i) trade and (ii) Transport removes the hindrances of auxiliaries to trade. Buying and selling place by moving goods from the place of goods is termed as trade. But there of production to the markets for sale. are a lot of activities that are required Storage and warehousing activities to facilitate the purchase and sale of remove the hindrance of time by goods. These are called services or facilitating holding of stocks of goods auxiliaries to trade and include to be sold as and when required. Goods transport, banking, insurance, held in stock, as well as, goods in communication, advertisement, course of transport are subject to a risk packaging and warehousing. of loss or damage due to theft, fire, Commerce, therefore, includes both, accidents, etc. Protection against these buying and selling of goods i.e., trade, risks is provided by insurance of goods. as well as, auxiliaries, such as Capital required to undertake the transport, banking, etc. above activities is provided by banking and financing institutions. Commerce provides the necessary Advertising makes it possible for link between producers and producers and traders to inform consumers. It embraces all those consumers about the goods and activities, which are necessary for services available in the market. Hence, maintaining a free flow of goods and commerce is said to consist of activities services. Thus, all activities involving of removing the hindrances of persons, the removal of hindrances in the place, time, risk, finance and process of exchange are included in information in the process of exchange commerce. The hindrances may be in of goods and services. respect of persons, place, time, risk, finance, etc. The hindrance of persons 2018-19

18 BUSINESS STUDIES ‘Make in India’ is an initiative Trade may be classified into two launched by the Government of India broad categories – internal and on 25 September 2014, to encourage external. Internal, domestic or home national, as well as multinational trade is concerned with the buying and companies to manufacture their selling of goods and services within the products in India. The major objectives geographical boundaries of a country. behind the ‘Make in India’ initiative are This may further be divided into job creation and skill enhancement in wholesale and retail trade. When 25 sectors of the economy, which are goods are purchased and sold in as follows. comparatively smaller quantities, for final consumption it is referred to as 1. Automobile 2. Automobile Components 3. Aviation 6. Construction 4. Biotechnology 5. Chemicals 9. Electronic Systems 12. Leather 7. Defence 8. Electrical Machinery 15. Oil and Gas 18. Railways Manufacturing 11. Information Technology 21. Space and 10. Food Processing 13. Media and and Business Process Astronomy Management 24. Tourism and Entertainment 16. Pharmaceuticals 14. Mining Hospitality 19. Renewable Energy 17. Port and Shipping 20. Roads and Highways 22. Textiles and Garments 23. Thermal power 25. Wellness 1.7.3 Trade retail trade. External or foreign trade consists of the exchange of goods and Trade is an essential part of commerce. services between persons or It refers to sale, transfer or exchange of organisations operating in two or more goods. It helps in making the goods countries. If goods are purchased from produced available to the consumers another country, it is called import or users. These days goods are trade. If they are sold to other countries, produced on a large scale and it is it is known as export trade. When difficult for producers to themselves goods are imported for export to other reach out to individual buyers for countries, it is known as entrepot selling their products. Businessmen are trade. engaged in trading activities to make the goods available to consumers in 1.7.4 Auxiliaries to Trade different markets. In the absence of trade, it would not be possible to Activities which are meant for assisting undertake production activities on a trade are known as auxiliaries to trade. large scale. These activities are generally referred 2018-19

BUSINESS, TRADE AND COMMERCE 19 to as services because these are in the material, to the place of production and nature of facilitating the activities the finished products from factories to relating to industry and trade. the place of consumption. Along with Transport, banking, insurance, transport facility, there is also a need warehousing, and advertising are for communication facilities so that regarded as auxiliaries to trade, i.e., producers, traders and consumers may activities playing a supportive role. In exchange information with one another. fact, these activities support not only Thus, postal services and telephone trade, but also industry and, hence, the facilities may also be regarded as entire business activity. Auxiliaries are auxiliaries to business activities. an integral part of commerce in (ii) Banking and Finance: Business particular and business activity in activities cannot be undertaken unless general. These activities help in funds are available for acquiring assets, removing various hindrances which purchasing raw materials and meeting arise in connection with the production other expenses. Necessary funds can and distribution of goods. Transport be obtained by businessmen from a facilitates movement of goods from one bank. Thus, banking helps business place to another. Banking provides activities to overcome the problem of financial assistance to the finance. Commercial banks, generally manufacturer and trader. Insurance lend money by providing overdraft and covers various kinds of business risks. cash credit facilities, loans and Warehousing creates time utility by advances. Banks also undertake way of storage facilities. Advertising collection of cheques, remittance of provides information to the consumers. funds to different places, and In other words, these activities facilitate discounting of bills on behalf of traders. movement, storage, financing, risk In foreign trade, commercial banks coverage and sales promotion of goods. help exporters in collecting money from Auxiliaries to trade are briefly importers. Commercial banks also discussed below: help promoters of companies to raise (i) Transport and Communication: capital from the public. Production of goods generally takes (iii) Insurance: Business involves place in particular locations. For various types of risks. Factory instance, tea is mainly produced in building, machinery, furniture, etc., Assam; cotton in Gujarat and must be protected against fire, theft Maharashtra; jute in West Bengal and and other risks. Material and goods Odisha; sugar in U.P., Bihar and help in stock or in transit are subject Maharashtra and so on. But these to the risk of loss or damage. goods are required for consumption in Employees are also required to be different parts of the country. The protected against the risks of accident obstacle of place is removed by transport and occupational hazards. Insurance through road, rail or coastal shipping. provides protection in all such cases. Transport facilitates movement of raw 2018-19

20 BUSINESS STUDIES On payment of a nominal premium, the the achievement of certain objectives. amount of loss or damage and Objectives refer to all that the business compensation for injury, if any, can be people want to get in return for what recovered from the insurance company. they do. It is generally believed that (iv) Warehousing: Usually, goods are business activity is carried out only for not sold or consumed immediately after profit. Business persons themselves production. They are held in stock to proclaim that their primary objective is make them available as and when produce or distribute goods or services required. Special arrangement must be for profit. Every business is said to be made for the storage of goods to prevent an attempt on the part of business loss or damage. Warehousing helps people to get more than what has been business firms to overcome the problem spent or invested, or in other words, to of storage and facilitates the availability earn profit which is the excess of of goods when needed. Prices are, revenue over cost. However, it is being thereby, maintained at a reasonable increasingly realised nowadays that level through continuous supply of goods. business enterprises are part of (v) Advertising: Advertising is one of the society and need to fulfill the most important methods of several objectives, including social promoting the sale of products, responsibility, to survive and prosper particularly, consumer goods, like in the long run. Profit is found to be a electronic and automobile goods, soaps, leading objective but not the only one. detergents, etc. Most of these goods are manufactured and supplied in the Although earning profit cannot be market by numerous firms — big or the only objective of business, its small. It is practically impossible for importance cannot be ignored. Every producers and traders to contact each business is an attempt to reap more and every customer. Thus, for than what has been invested, and profit promoting sales, information about the is the excess of revenue over cost. Profit goods and services available, their may be regarded as an essential features, price, etc., must reach potential objective of business for various buyers. Also, there is a need to reasons: (i) it is a source of income for persuade potential buyers about the business persons, (ii) it can be a source uses, quality, prices, competitive of finance for meeting expansion information about the goods and requirements of business, (iii) it services etc. Advertising helps in indicates the efficient working of providing information about available business, (iv) it can be taken as the goods and services and inducing society’s approval of the utility of customers to buy particular items. business, and (v) it builds the reputation of a business enterprise. 1.8 OBJECTIVES OF BUSINESS However, too much emphasis on An objective is the starting point of profit to the exclusion of other objectives business. Every business is directed to can be dangerous for good business. 2018-19

BUSINESS, TRADE AND COMMERCE 21 Obsessed with profit, business (i) Market standing: Market managers may neglect all other standing refers to the position of responsibilities towards customers, an enterprise in relation to its employees, investors and society at competitors. A business enterprise large. They may even be inclined to must aim at standing on stronger exploit various sections of society to earn footing in terms of offering immediate profit. This may result in the competitive products to its non-cooperation or even opposition from customers and serving them to the affected people against the their satisfaction. malpractices of business enterprises. The enterprises might lose business and (ii) Innovation: Innovation is the may be unable to earn profit. That is introduction of new ideas or the reason why there is hardly any methods in the way something is sizable business enterprise who only done or made. There are two objective is maximisation of profit. kinds of innovation in every business i.e., (i) innovation in 1.9 Multiple Objectives of Business product or services; and (ii) innovation in various skills and Objectives are needed in every area that activities needed to supply influences the survival and prosperity products and services. No of business. Since a business has to business enterprise can flourish balance a number of needs and goals, in a competitive world without it requires multiple objectives. It cannot innovation. Therefore, innovation follow only one objective and expect to becomes an important objective. achieve excellence. Objectives have to be specific in every area and sphere of (iii) Productivity: Productivity is business. For example, sales targets ascertained by comparing the have to be set, the amount of capital to value of output with the value of be raised has to be estimated and the inputs. It is used as a measure of target number of units to be produced efficiency. In order to ensure needs to be defined. The objectives continuous survival and progress, define in concrete terms what the every enterprise must aim at business is going to do. Objectives also greater productivity through the enable the business to analyse their best use of available resources. own performance and take steps as necessary to improve their performance (iv) Physical and financial in future. resources: Any business requires physical resources, like plants, Objectives are needed in every area machines, offices, etc., and where performance and results affect financial resources, i.e., funds to the survival and prosperity of business. be able to produce and supply Some of these areas are described goods and services to its as follows. customers. The business enterprise must aim at acquiring 2018-19

22 BUSINESS STUDIES these resources according to their individuals and groups. This is essential for its own survival and requirements and use them prosperity. efficiently. 1.10 Business Risks (v) Earning profits: One of the The term ‘business risks’ refers to the possibility of inadequate profits or even objectives of business is to earn losses due to uncertainties or unexpected events. For example, profits on the capital employed. demand for a particular product may decline due to change in tastes and Profitability refers to profit in preferences of consumers or due to increased competition from other relation to capital investment. producers. Lower demand results in long sales and profits. In another Every business must earn a situation, the shortage of raw materials in the market may shoot up its price. reasonable profit which is so The firm using these raw materials will have to pay more for buying them. As a important for its survival and result, cost of production may increase which, in turn, may reduce profits. growth. Business enterprises constantly (vi) Manager performance and face two types of risk : speculative and pure. Speculative risks involve both the development: Business enterprises possibility of gain, as well as, the possibility of loss. Speculative risks need managers to conduct and arise due to changes in market conditions, including fluctuations in coordinate business activity. demand and supply, changes in prices or changes in fashion and tastes of Various programmes for customers. Favourable market conditions are likely to result in gains, motivating managers need to be whereas, unfavourable ones may result in losses. Pure risks involve only the implemented. Manager possibility of loss or no loss. The chance of fire, theft or strike are performance and development, examples of pure risks. Their occurrence may result in loss, whereas, therefore, is an important non-occurrence may explain absence of loss, instead of gain. objective. The enterprises must actively work for this purpose. (vii) Worker per for mance and attitude: Workers’ performance and attitudes determine their contribution towards productivity and profitability of any enterprise. Therefore, every enterprise must aim at improving its workers’ performance. It should also try to ensure a positive attitude on the part of workers. (viii) Social responsibility: Social responsibility refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner. Thus, a business enterprise must have multiple objectives to satisfy different 2018-19

BUSINESS, TRADE AND COMMERCE 23 1.10.1 Nature of Business Risks involved in a business, higher is the chance of profit. An Nature of business risks can be entrepreneur undertakes risks understood in terms of their peculiar under the expectation of higher characteristics: profit. Profit is thus the reward for (i) Business risks arise due to risk taking. uncertainties: Uncertainty refers 1.10.2 Cause of Business Risks to the lack of knowledge about what is going to happen in future. Business risks arise due to a variety of Natural calamities, change in causes, which are classified as follows: demand and prices, changes in (i) Natural causes: Human beings government policies and prices, improvement in technology, etc., have little control over natural are some of the examples of calamities, like flood, earthquake, uncertainty which create risks for lightning, heavy rains, famine, etc. business because the outcomes of property and income in business. these future events are not known. (ii) Human causes: Human causes (ii) Risk is an essential part of include such unexpected events, every business: Every business like dishonesty, carelessness or has some risk. No business can negligence of employees, stoppage avoid risk, although the amount of work due to power failure, of risk may vary from business to strikes, riots, management business. Risk can be minimised, inefficiency, etc. but cannot be eliminated. (iii) Economic causes: These include (iii) Degree of risk depends mainly uncertainties relating to demand upon the nature and size of for goods, competition, price, business: Nature of business (i.e., collection of dues from customers, type of goods and services change of technology or method produced and sold) and size of of production, etc. Financial business (i.e., volume of problems, like rise in interest rate production and sale) are the main for borrowing, levy of higher taxes, factors which determine the etc., also come under these type amount of risk in a business. For of causes as they result in higher example, a business dealing in unexpected cost of operation or fashionable items has a high degree business. of risk. Similarly, a large-scale (iv) Other causes: These are business generally has a higher unforeseen events, like political risk than what a small scale has. disturbances, mechanical (iv) Profit is the reward for risk failures, such as the bursting of taking: ‘No risk, no gain’ is an age- boiler, fluctuations in exchange old principle which applies to all rates, etc., which lead to the types of business. Greater the risk possibility of business risks. 2018-19

24 BUSINESS STUDIES Methods of Dealing with Risks Although no business enterprise can escape the presence of risk, there are many methods a business enterprise can use to deal with risk situations. For instance, the enterprise may (a) decide not to enter into too risky transaction: (b) take preventive measures, like firefighting devices, to reduce risk; (c) take insurance policy to transfer risk to insurance company; (d) assume risk by making provisions in the current earnings as is the case of provision for bad and doubtful debts; or (e) share risks with other enterprises as manufacturers and wholesalers may do by agreeing to share losses which may be caused by falling prices. 1.11 Starting a Business — Basic be undertaken. He/she will obviously Factors like to enter that branch of industry and commerce, which has the possibility of Starting a business enterprise is greater amount of profits. The decision similar to any other human effort in will be influenced by the customer which resources are employed to requirements in the market and also achieve certain objectives. Successful the kind of technical knowledge and results in business depend largely interest the entrepreneur has for upon the ability of the entrepreneurs producing a particular product. or the starters of a new business to (ii) Size of the firm: Size of the firm or anticipate problems and solve them scale of its operation is another with minimum cost. This is especially important decision to be taken at the true of the modern business world start of the business. Some factors where competition is very tough and favour a large size, whereas, others tend risks are high. Some of the problems, to restrict the scale of operation. If the which business firms encounter, are entrepreneur is confident that the of basic nature. For example, to start demand for the proposed product is a factory, plans must be made about likely to be good over time and he/she the location of the business, the can arrange the necessary capital for possible number of customers, the business, he/she will start the operation kind of equipment required and the at a large scale. If the market conditions amount of money needed to procure are uncertain and risks are high, a small them, the shop layout, purchasing and size business would be better choice. financing needs, and hiring of workers (iii) Choice of form of ownership: for its effective implementation. These With respect to ownership, the problems become more complex in a business organisation may take the big business. However, some of the form of a sale proprietorship, basic factors, which must be partnership, or a joint stock company. considered by anybody who is to start Each form has its own merits and the business are as follows. demerits. The choice of the suitable (i) Selection of line business: The first form of ownership will depend on such thing to be decided by an entrepreneur factors as the line of business, capital is the nature and type of business to requirements, liability of owners, 2018-19

BUSINESS, TRADE AND COMMERCE 25 division of profit, legal formalities, (vii) Plant layout: Once the requirement of physical facilities has continuity of business, transferability been determined, the entrepreneur of interest and so on. should draw a layout plan showing the (iv) Location of business enterprise: arrangement of these facilities. Layout An important factor to be considered means the physical arrangement of at the start of the business is the place machines and equipment needed to where the enterprise will be located. manufacture a product. Any mistake in this regard can result (viii) Competent and committed in high cost of production, worked force: Every enterprise needs inconvenience in getting, right kind of competent and committed workforce to production inputs or serving the perform various activities so that customers in the best possible physical and financial resources are way. Availability of raw materials converted into desired outputs. Since and labour; power supply and no individual entrepreneur can do services, like banking, transportation, everything himself, he/she must communication, warehousing, etc., are identify the requirement of skilled and important factors while making a unskilled workers and managerial choice of location. staff. Plans should also be made about (v) Financing the proposition: how the employees will be trained and Financing is concerned with providing motivated to give their best the necessary capital for starting, as well performance. as, for continuing the proposed (ix) Tax planning: Tax planning has business. Capital is required for become necessary these days investment in fixed assets, like land, because there are a number of tax building, machinery and equipment and laws in the country and they influence in current assets, like raw materials, almost every aspect of the functioning books, debts, stock of finished goods, of modern business. The founder of etc. Capital is also required for meeting the business has to consider in day-to-day expenses. Proper financial advance the tax liability under planning must be done to determine (a) various tax laws and its impact on the requirement of capital, (b) source business decisions. from where the capital will be raised and (x) Launching the enterprise: After (c) the best ways of utilising the capital the decisions relating to the above in the firm. mentioned factors have been taken, the (vi) Physical facilities: Availability of entrepreneur can go ahead with actual physical facilities, including machines launching of the enterprise which and equipment, building and would mean mobilising various supportive services is an important resources, fulfilling necessary legal factor to be considered at the start of formalities, starting the production the business. The decision relating to process and initiating the sales this factor will depend on the nature promotion campaign. and size of business, availability of funds and the process of production. 2018-19

26 BUSINESS STUDIES EXERCISES Short Answer Questions 1. List any five major commercial cities of ancient India? 2. What is Hundi? 3. List the major exports and imports in ancient India. 4. What were the different types of Hundi in use by traders in ancient times? 5. What do you understand by maritime trade? 6. State the different types of economic activities. 7. Why is business considered as economic activity? 8. State the meaning of business. 9. How would you classify business activities? 10. What are the various types of industries? 11. Explain any two business activities which are auxiliaries to trade. 12. What is the role of profit in business? 13. What is business risk? What is its nature? Long Answer Questions 1. Discuss the development of indigenous banking system in Indian subcontinent. 2. Define business. Describe its important characteristics. 3. Compare business with profession and employment. 4. Define Industry. Explain various types of industries giving examples. 5. Describe the activities relating to commerce. 6. Explain any five objectives of business. 7. Explain the concept of business risk and its causes. 8. What factors are to be considered while starting a business? Explain. Projects/Assignments 1. Visit any business unit in your locality. Interact with the owner to find out the steps in starting the business. Prepare a project report of your visit. 2. Prepare a project report on the development of Trade and Commerce between 1st and 17th AD. 3. Collect information on any five sectors of the economy that Make in India focuses on. Find out the amount of investment in these sectors in the past two years. What were the possible reasons that led to an interest of investors in these sectors? Present your report in the following format: Sector Investment in Investment in Possible reasons Year I Year II for the change 2018-19

CHAPTER 2 FORMS OF BUSINESS ORGANISATION LEARNING OBJECTIVES After studying this chapter, you should be able to: • identify different forms of business organisation; • explain features, merits and limitations of different forms of business organisations; • distinguish between various forms of organisations; and • discuss the factors determining choice of an appropriate form of business organisation. 2018-19

28 BUSINESS STUDIES Neha, a bright final year student was waiting for her results to be declared. While at home she decided to put her free time to use. Having an aptitude for painting, she tried her hand at decorating clay pots and bowls with designs. She was excited at the praise showered on her by her friends and acquaintances on her work. She even managed to sell a few pieces of unique hand pottery from her home to people living in and around her colony. Operating from home, she was able to save on rental payments. She gained a lot of popularity by word of mouth publicity as a sole proprietor. She further perfected her skills of painting pottery and created new motifs and designs. All this generated great interest among her customers and provided a boost to the demand for her products. By the end of summer, she found that she had been able to make a profit of Rs. 2500 from her paltry investment in colours, pottery and drawing sheets. She felt motivated to take up this work as a career. She has, therefore, decided to set up her own artwork business. She can continue running the business on her own as a sole proprietor, but she needs more money for doing business on a larger scale. Her father has suggested that she should form a partnership with her cousin to meet the need for additional funds and for sharing the responsibilities and risks. Side by side, he is of the opinion that it is possible that the business might grow further and may require the formation of a company. She is in a fix as to what form of business organisation she should go in for? 2.1 INTRODUCTION (d) Cooperative societies, and If one is planning to start a business or (e) Joint stock company. is interested in expanding an existing Let us start our discussion with one, an important decision relates to the choice of the form of organisation. sole proprietorship — the simplest form The most appropriate form is of business organisation, and then determined by weighing the move on to analysing more complex advantages and disadvantages of each forms of organisations. type of organisation against one’s own requirements. 2.2 SOLE PROPRIETORSHIP Various forms of business Do you often go in the evenings to buy organisations from which one can registers, pens, chart papers, etc., from choose the right one include: a small neighbourhood stationery store? Well, in all probability in the (a) Sole proprietorship, course of your transactions, you have interacted with a sole proprietor. (b) Joint Hindu family business, Sole proprietorship is a popular (c) Partnership, form of business organisation and is 2018-19

FORMS OF BUSINESS ORGANISATION 29 the most suitable form for small formation as well as closure of businesses, especially in their initial business. years of operation. Sole proprietorship refers to a form of business (ii) Liability: Sole proprietors have organisation which is owned, managed unlimited liability. This implies that the and controlled by an individual who owner is personally responsible for is the recipient of all profits and bearer payment of debts in case the assets of of all risks. This is evident from the the business are not sufficient to meet term itself. The word “sole” implies all the debts. As such the owner’s “only”, and “proprietor” refers to personal possessions such as his/her “owner”. Hence, a sole proprietor is the personal car and other assets could be one who is the only owner of a sold for repaying the debt. Suppose the business. total outside liabilities of XYZ dry cleaner, a sole proprietorship firm, are This form of business is particularly Rs. 80,000 at the time of dissolution, common in areas of personalised but its assets are Rs. 60,000 only. In services such as beauty parlours, hair such a situation the proprietor will have saloons and small scale activities like to bring in Rs. 20,000 from her running a retail shop in a locality. personal sources even if she has to sell Sole trader is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business. J.L. Hansen The individual proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure. L.H. Haney Features her personal property to repay the firm’s debts. Salient characteristics of the sole proprietorship form of organisation are (iii) Sole risk bearer and profit as follows: recipient: The risk of failure of business is borne all alone by the sole (i) Formation and closure: There is proprietor. However, if the business is no separate law that governs sole successful, the proprietor enjoys all the proprietorship. Hardly any legal benefits. He receives all the business formalities are required to start a sole profits which become a direct reward proprietary business, though in some for his risk bearing. cases one may require a license. Closure of the business can also be (iv) Control: The right to run the done easily. Thus, there is ease in business and make all decisions lies 2018-19

30 BUSINESS STUDIES absolutely with the sole proprietor. He Merits can carry out his plans without any interference from others. Sole proprietorship offers many advantages. Some of the important ones (v) No separate entity: In the eyes of are as follows: the law, no distinction is made between the sole trader and his business, as (i) Quick decision making: A sole business does not have an identity proprietor enjoys considerable degree separate from the owner. The owner is, of freedom in making business therefore, held responsible for all the decisions. Further the decision making activities of the business. is prompt because there is no need to consult others. This may lead to timely (vi) Lack of business continuity: The capitalisation of market opportunities sale proprietorship business is owned as and when they arise. and controlled by one person, therefore death, insanity, imprisonment, (ii) Confidentiality of information: physical ailment or bankruptcy of the Sole decision making authority enables sole proprietor will have a direct and the proprietor to keep all the detrimental effect on the business and information related to business may even cause closure of the business. operations confidential and maintain A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor! The product that has given the world its best-known taste was born in Atlanta, Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced the syrup for Coca-Cola®, and carried a jug of the new product down the street to Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed on sale for five cents a glass as a soda fountain drink. Dr. Pemberton never realised the potential of the beverage he created. He gradually sold portions of his business to various partners and, just prior to his death in 1888, sold his remaining interest in Coca-Cola to Asa G. Candler. An Atlantan with great business acumen, Mr. Candler proceeded to buy additional business rights and acquire complete control. On May 1, 1889, Asa Candler published a full-page advertisement in The Atlanta Journal, proclaiming his wholesale and retail drug business as “sole proprietors of Coca-Cola ... Delicious. Refreshing. Exhilarating. Invigorating.” Sole ownership, which Mr. Candler did not actually achieve until 1891, needed an investment of $ 2,300. It was only in 1892 that Mr. Candler formed a company called The Coca-Cola Corporation. Source: Website of Coca Cola company. 2018-19

FORMS OF BUSINESS ORGANISATION 31 secrecy. A sole trader is also not bound others. Banks and other lending by law to publish firm’s accounts. institutions may hesitate to extend a long term loan to a sole proprietor. (iii) Direct incentive: A sole Lack of resources is one of the major proprietor directly reaps the benefits of reasons why the size of the business his/her efforts as he/she is the sole rarely grows much and generally recipient of all the profit. The need to remains small. share profits does not arise as he/she is the single owner. This provides (ii) Limited life of a business maximum incentive to the sole trader concern: The sole proprietorship to work hard. business is owned and controlled by one person, so death, insanity, (iv) Sense of accomplishment: There imprisonment, physical ailment or is a personal satisfaction involved in bankruptcy of a proprietor affects the working for oneself. The knowledge business and can lead to its closure. that one is responsible for the success of the business not only contributes to (iii) Unlimited liability: A major self-satisfaction but also instils in the disadvantage of sole proprietorship is individual a sense of accomplishment that the owner has unlimited liability. If and confidence in one’s abilities. the business fails, the creditors can recover their dues not merely from the (v) Ease of formation and closure: business assets, but also from the An important merit of sole personal assets of the proprietor. A proprietorship is the possibility of poor decision or an unfavourable entering into business with minimal circumstance can create serious legal formalities. There is no separate financial burden on the owner. That is law that governs sole proprietorship. As why a sole proprietor is less inclined to sole proprietorship is the least take risks in the form of innovation regulated form of business, it is easy or expansion. to start and close the business as per the wish of the owner. (iv) Limited managerial ability: The owner has to assume the responsibility Limitations of varied managerial tasks such as purchasing, selling, financing, etc. It is Notwithstanding various advantages, rare to find an individual who excels in the sole proprietorship form of all these areas. Thus decision making organisation is not free from may not be balanced in all the cases. limitations. Some of the major Also, due to limited resources, sole limitations of sole proprietorship are proprietor may not be able to employ as follows: and retain talented and ambitious employees. (i) Limited resources: Resources of a sole proprietor are limited to his/her Though sole proprietorship suffers personal savings and borrowings from from various shortcomings, many 2018-19

32 BUSINESS STUDIES entrepreneurs opt for this form of Features organisation because of its inherent advantages. It requires less amount of The following points highlight the capital. It is best suited for businesses essential characteristics of the joint which are carried out on a small scale Hindu family business. and where customers demand personalised services. (i) Formation: For a joint Hindu family business, there should be at least two 2.3 JOINT HINDU FAMILY BUSINESS members in the family and ancestral property to be inherited by them. The Joint Hindu family business is a business does not require any specific form of business organisation agreement as membership is by birth. found only in India. It is one of the It is governed by the Hindu Succession oldest forms of business organisation Act, 1956. in the country. It refers to a form of organisation wherein the business is (ii) Liability: The liability of all owned and carried on by the members members except the karta is limited to of the Hindu Undivided Family (HUF). their share of co-parcenery property of It is governed by the Hindu Law. The the business. The karta, however, has basis of membership in the business is unlimited liability. birth in a particular family and three (iii) Control: The control of the family business lies with the karta. He takes Gender Equality in the Joint Hindu Family a Reality According to the Hindu Succession (Amendment) Act, 2005, the daughter of a coparcener of a Joint Hindu Family shall, by birth, become a coparcener. At the time of partition of such a ‘Joint Hindu Family’ the coparcenary property shall be equally divided to all the coparceners irrespective of their gender (male or female). The eldest member (male or female) of ‘Joint Hindu Family’ shall become Karta. Married daughter has equal rights in property of a Joint Hindu Family. successive generations can be members all the decisions and is authorised to in the business. manage the business. His decisions are binding on the other members. The business is controlled by the head of the family who is the eldest (iv) Continuity: The business member and is called karta. All continues even after the death of the members have equal ownership right karta as the next eldest member takes over the property of an ancestor and up the position of karta, leaving the they are known as co-parceners. business stable. The business can, 2018-19

FORMS OF BUSINESS ORGANISATION 33 however, be terminated with the Limitation mutual consent of the members. The following are some of the (v) Minor Members: The inclusion of limitations of a joint Hindu family an individual into the business occurs business. due to birth in a Hindu Undivided Family. Hence, minors can also be (i) Limited resources: The joint Hindu members of the business. family business faces the problem of limited capital as it depends mainly on Merits ancestral property. This limits the scope for expansion of business. The advantages of the joint Hindu family business are as follows: (ii) Unlimited liability of karta: The karta is burdened not only with the (i) Effective control: The karta has responsibility of decision making and absolute decision making power. This management of business, but also avoids conflicts among members as no suffers from the disadvantage of one can interfere with his right to having unlimited liability. His personal decide. This also leads to prompt and property can be used to repay business flexible decision making. debts. (ii) Continued business existence: (iii) Dominance of karta: The The death of the karta will not affect karta individually manages the the business as the next eldest member business which may at times not be will then take up the position. Hence, acceptable to other members. This operations are not terminated and may cause conflict amongst them and continuity of business is not may even lead to break down of the threatened. family unit. (iii) Limited liability of members: (iv) Limited managerial skills: The liability of all the co-parceners Since the karta cannot be an expert except the karta is limited to their share in all areas of management, the in the business, and consequently their business may suffer as a result of his risk is well-defined and precise. unwise decisions. His inability to decide effectively may result into (iv) Increased loyalty and poor profits or even losses for the cooperation: Since the business is run organisation. by the members of a family, there is a greater sense of loyalty towards one The joint Hindu family business is other. Pride in the growth of business on the decline because of the is linked to the achievements of the diminishing number of joint Hindu family. This helps in securing better families in the country. cooperation from all the members. 2018-19

34 BUSINESS STUDIES 2.4 PARTNERSHIP must be lawful and run with the motive of profit. Thus, two people coming The inherent disadvantage of the sole together for charitable purposes will proprietorship in financing and not constitute a partnership. managing an expanding business paved the way for partnership as a viable option. (ii) Liability: The partners of a firm Partnership serves as an answer to the have unlimited liability. Personal assets needs of greater capital investment, may be used for repaying debts in case varied skills and sharing of risks. the business assets are insufficient. Partnership is the relation between persons competent to make contracts who have agreed to carry on a lawful business in common with a view to private gain. L H Haney Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business and to share the profits therefrom between them. The Indian Contract Act 1872 The Indian Partnership Act, 1932 Further, the partners are jointly and defines partnership as “the relation individually liable for payment of debts. between persons who have agreed to Jointly, all the partners are responsible share the profit of the business for the debts and they contribute in carried on by all or any one of them proportion to their share in business acting for all.” and as such are liable to that extent. Individually too, each partner can be Features held responsible repaying the debts of the business. However, such a partner Definitions given above point to the can later recover from other partners following major characteristics of an amount of money equivalent to the the partnership form of business shares in liability defined as per the organisation. partnership agreement. (i) Formation: The partnership form (iii) Risk bearing: The partners bear of business organisation is governed by the risks involved in running a the Indian Partnership Act, 1932. It business as a team. The reward comes comes into existence through a legal in the form of profits which are shared agreement wherein the terms and by the partners in an agreed ratio. conditions governing the relationship However, they also share losses in the among the partners, sharing of profits same ratio in the event of the firm and losses and the manner of incurring losses. conducting the business are specified. It may be pointed out that the business 2018-19

FORMS OF BUSINESS ORGANISATION 35 (iv) Decision making and control: Merits The partners share amongst themselves the responsibility of decision making The following points describe the and control of day to day activities. advantages of a partnership firm. Decisions are generally taken with mutual consent. Thus, the activities of (i) Ease of formation and closure: A a partnership firm are managed partnership firm can be formed easily through the joint efforts of all the by putting an agreement between the partners. prospective partners into place whereby they agree to carryout the (v) Continuity: Partnership is business of the firm and share risks. characterised by lack of continuity of There is no compulsion with respect to business since the death, retirement, registration of the firm. Closure of the insolvency or insanity of any partner firm too is an easy task. can bring an end to the business. However, the remaining partners may (ii) Balanced decision making: The if they so desire continue the business partners can oversee different on the basis of a new agreement. functions according to their areas of expertise. Because an individual is not (vi) Number of Partners: The forced to handle different activities, this minimum number of partners needed not only reduces the burden of work to start a partnership firm is two. but also leads to fewer errors in According to section 464 of the judgements. As a consequence, Companies Act 2013, maximum decisions are likely to be more number of partners in a partnership balanced. firm can be 100, subject to the number prescribed by the government. (iii) More funds: In a partnership, the As per Rule 10 of The Companies capital is contributed by a number of (miscelleneous) Rules 2014, at present partners. This makes it possible to the maximum number of members can raise larger amount of funds as be 50. compared to a sole proprietor and undertake additional operations when (vii) Mutual agency: The definition of needed. partnership highlights the fact that it is a business carried on by all or any (iv) Sharing of risks: The risks one of the partners acting for all. In involved in running a partnership firm other words, every partner is both an are shared by all the partners. This agent and a principal. He is an agent of reduces the anxiety, burden and stress other partners as he represents them on individual partners. and thereby binds them through his acts. He is a principal as he too can be (v) Secrecy: A partnership firm is not bound by the acts of other partners. legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations. 2018-19

36 BUSINESS STUDIES Limitations retirement, insolvency or lunacy of any partner. It may result in lack of A partnership firm of business continuity. However, the remaining organisation suffers from the following partners can enter into a fresh limitations: agreement and continue to run the business. (i) Unlimited liability: Partners are liable to repay debts even from their (v) Lack of public confidence: A personal resources in case the partnership firm is not legally required business assets are not sufficient to to publish its financial reports or make meet its debts. The liability of partners other related information public. It is, is both joint and several which may therefore, difficult for any member of prove to be a drawback for those the public to ascertain the true financial partners who have greater personal status of a partnership firm. As a result, wealth. They will have to repay the the confidence of the public in entire debt in case the other partners partnership firms is generally low. are unable to do so. 2.4.1 Types of Partners (ii) Limited resources: There is a restriction on the number of partners, A partnership firm can have different and hence contribution in terms of types of partners with different roles capital investment is usually not and liabilities. An understanding of sufficient to support large scale these types is important for a clear business operations. As a result, understanding of their rights and partnership firms face problems in responsibilities. These are described as expansion beyond a certain size. follows: (iii) Possibility of conflicts: (i) Active partner: An active partner Partnership is run by a group of is one who contributes capital, persons wherein decision making participates in the management of the authority is shared. Difference in firm, shares its profits and losses, and opinion on some issues may lead to is liable to an unlimited extent to the disputes between partners. Further, creditors of the firm. These partners decisions of one partner are binding on take actual part in carrying out other partners. Thus an unwise business of the firm on behalf of other decision by some one may result in partners. financial ruin for all others. In case a partner desires to leave the firm, this (ii) Sleeping or dormant partner: can result in termination of partnership Partners who do not take part in the as there is a restriction on transfer of day to day activities of the business are ownership. called sleeping partners. A sleeping partner, however, contributes capital to (iv) Lack of continuity: Partnership the firm, shares its profits and losses, comes to an end with the death, and has unlimited liability. 2018-19

FORMS OF BUSINESS ORGANISATION 37 (iii) Secret partner: A secret partner (v) Partner by estoppel: A person is is one whose association with the firm considered a partner by estoppel if, is unknown to the general public. Other through his/her own initiative, than this distinct feature, in all other conduct or behaviour, he/she gives an aspects he is like the rest of the impression to others that he/she is a partners. He contributes to the capital partner of the firm. Such partners are of the firm, takes part in the held liable for the debts of the firm management, shares its profits and because in the eyes of the third party losses, and has unlimited liability they are considered partners, even towards the creditors. though they do not contribute capital or take part in its management. (iv) Nominal partner: A nominal Suppose Rani is a friend of Seema who partner is one who allows the use of is a partner in a software firm — his/her name by a firm, but does not Simplex Solutions. On Seema’s contribute to its capital. He/she does request, Rani accompanies her to a not take active part in managing the business meeting with Mohan firm, does not share its profit or losses Softwares and actively participates in but is liable, like other partners, to the the negotiation process for a business third parties, for the repayments of the deal and gives the impression that she firm’s debts. Table 2.1 Types of Partners Type Capital Management Share in profits/ Liability Active partner contribution losses Participates in Contributes management Shares profits/ Unlimited capital Does not losses liability participate in Sleeping or Contributes management Shares profits/ Unlimited dormant partner capital Participates in losses liability management, Secret partner Contributes but secretly Shares profits/ Unlimited capital Nominal partner Does not losses liability Does not participate in Partner by contribute management Generally does Unlimited estoppel not share profits/ liability capital Does not Partner by participate in losses holding out Does not management contribute Does not share Unlimited Does not capital participate in profits/ losses liability management Does not Does not share Unlimited contribute profits/ losses liability capital 2018-19

38 BUSINESS STUDIES Minor as a Partner Partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them. As such a minor is incompetent to enter into a valid contract with others, he cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners. In such cases, his liability will be limited to the extent of the capital contributed by him and in the firm. He will not be eligible to take an active part in the management of the firm. Thus, a minor can share only the profits and can not be asked to bear the losses. However, he can if he wishes, inspect the accounts of the firm. The status of a minor changes when he attains majority. In fact, on attaining majority, the minor has to decide whether he would like to become a partner in the firm. He has to give a public notice of his decision within six months of attaining majority. If he fails to do so, within the stipulated time, he will be treated as a full-fledged partner and will become liable to the debts of the firm to an unlimited extent, in the same way as other active partners are. is also a partner in Simplex Solutions. 2.4.2 Types of Partnerships If credit is extended to Simplex Solutions on the basis of these Partnerships can be classified on the negotiations, Rani would also be liable basis of two factors, viz., duration and for repayment of such debt, as if she liability. On the basis of duration, there is a partner of the firm. can be two types of partnerships : ‘partnership at will’ and ‘particular (vi) Partner by holding out: A partnership’. On the basis of liability, partner by ‘holding out’ is a person the two types of partnership include: who though is not a partner in a firm one ‘with limited liability’ and the other but knowingly allows himself/herself one ‘with unlimited liability’. These to be represented as a partner in a types are described in the following firm. Such a person becomes liable to sections. outside creditors for repayment of any debts which have been extended to the Classification on the basis of firm on the basis of such duration representation. In case he is not really a partner and wants to save himself (i) Partnership at will: This type of from such a liability, he should partnership exists at the will of the immediately issue a denial, clarifying partners. It can continue as long as his position that he is not a partner in the partners want and is terminated the firm. If he does not do so, he will when any partner gives a notice of be responsible to the third party for withdrawal from partnership to the any such debts. firm. 2018-19