Post on 05-Apr-2018
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Meaning of Small & Medium Enterprises
Small-scale industry comprise of a variety of undertaking. The definition of small scale
industry varies from one country to another and from one time to another in the same
country depending upon the pattern and stage of development, Government policy and
administrative set up of the particular country.
Definition of Small-scale Industry:
The term Small-scale industry has been defined in three ways:
1. Conventional definition: This includes cottage and handicraft industries which
employ traditional labour intensive methods to produce traditional products, largely
in village households. They employ none or mostly a few hired hands. The handloom
textile industry is an example. Though once famous, this sector has been steadily
declining.
2. Operational definition: This includes all those undertakings having an investment in
fixed assets in plant and machinery, whether held on ownership terms or by lease or
hire purchase, not exceeding `.60 Lakhs. Ancillary units and tiny units also come
under the umbrella of small scale industries.
A tiny unit is one whose investment in fixed assets in plant & machinery does
not exceed `.5 Lakhs.
An Ancillary Unit is one whose investment in fixed assets in plant &
machinery does not exceed `.75 Lakhs and is engaged in the manufacture of parts,
components, sub-assemblies, tooling or intermediate OR the rendering of services of
supplying 1/3 percent of their total service or production, as the case may be to
other units for production of other articles.
3. National Income Accounting definition: This includes all manufacturing and
processing activities, including maintaining and repair services, undertaken by both
household and non-household small-scale manufacturing units, which are not
registered under the Factories Act.
Different segments of SSIs:
1. Tiny Enterprises: A unit is treated as tiny enterprise where investment in plant and
machinery does not exceed `. 25 million, irrespective of the location of the unit.
2. Women Entrepreneurs Enterprises: An SSI unit/industry related service or business
enterprise, managed by one or more women entrepreneurs in proprietary concerns,
or in which she/they individually or jointly have a share capital of not less than 51 %
as Partners/Shareholders/Directors of Private Ltd. Company/Members of Co-Operative Society is treated as Women Entrepreneurs Enterprise.
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3. Small-Scale Service and Business Enterprises (SSSBEs): Enterprises rendering
industry-related service/business with investment up to `.0.5 million in fixed assets,
excluding land & building, are called SSSBEs.
4. Export Oriented Units(EOU): A unit with obligation to export at least 30 % of its
annual production by the end of third year of commencement of production and
having investment ceiling in fixed assets, plant and machinery upto `.30 million is
regarded as an EOU.
Types of Small-Scale Industries:
1. Manufacturing Industries: Industries producing complete articles for direct
consumption and also processing industries.
2. Feeder Industries: Industries specialising in certain types of products and services, e.g.
casting, welding, electro-plating, etc.3. Servicing Industries: Industries covering light repair shops necessary to maintain
mechanical equipments.
4. Ancillary to large industries producing parts and components and rendering services;
and
5. Mining or quarrying.
Characteristics of SMEs:
1. They are generally organised and run by individual entrepreneurs. Nowadays,
partnership and co-operative forms of organisations are being adopted for
promotion and growth of SMEs.
2. They are highly localised industries. Using local resources SMEs are decentralised
and dispersed to rural areas.
3. They require less capital. They are not capital-intensive.
4. They are fundamentally labour-intensive units facilitating greater use of manpower.
5. They involve the use of simple technology, intensive use of individual skill leading to
professional specialisation.
6. They cater to individual tastes and fashion and render personalised service toconsumers.
7. They are eligible for government assistance and patronage and also for concessional
finance by banks and financial institutions.
8. They can be easily established without much legal formalities.
9. They are flexible to a large extent. They are more susceptible to change and highly
reactive and receptive to socio-economic conditions.
10.They are free from red tapism and bureaucratic handicaps.
11.Compared to large units, SMEs have lesser gestation period i.e. the period after
which the return on investment starts.12.In most ofthe SMEs, the owner himself/herself is a manager also.
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Objectives of SMEs:
1. To provide increased employment opportunities.
2. To promote production of a large variety of goods especially consumer goods
through labour-intensive methods.3. To encourage the adoption of modern techniques in the unorganised traditional
sector of the industry.
4. To facilitate effective use of resource especially local resources to achieve local self-
sufficiency.
5. To encourage dispersal of industries all over the country covering small towns,
villages and economically lagging regions.
6. To bring backward areas too in the mainstream of national development.
7. To promote balanced regional development as regards industries in the whole
country.8. To ensure more equitable distribution of national income.
9. To encourage effective mobilisation of countrys untapped resources.
10.To create a climate for development of self-employed experts, professionals and
small entrepreneurs.
11.To improve the level of living of people in the country.
Advantages of SMEs:
1. They create more employment opportunities. They are labour intensive. They offer
scope for self-employment.
2. They require less capital. It is a boon to a country like India where capital is deficient.
3. Close supervision and control is facilitated.
4. There is a personal touch with the employees. This makes the business smooth and
prosperous.
5. There is a close and direct personal contact with the customers.
6. SMEs alone can satisfy individual tastes fully and offer personalised service to the
customers.
7. They help in reducing prices.
8. They help in balanced regional development.
9. It is possible to make necessary changes as and when required.
10.SMEs enjoy government support and patronage.
11.They facilitate equitable distribution of income and wealth.
12.They provide opportunities for creativity and experimentation.
13.They are generally based on local resources.
14.They are relatively more environmental friendly.
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`ROLE AND IMPORTANCE OF SMEs
1. Employment: SMEs use labour intensive techniques and thereby provideemployment on large scale. For every Rs. 1 lakh of fixed investment small scale
sector provides employment to 26 persons as against 4 persons in the large scale
sector. Small scale industries provide self-employment to artisans, technically
qualified persons and professionals. Small scale sector accounts for 75% of the total
employment in the industrial sector. More than 18 million persons are employed in
the small scale units in India.
2. Optimization of capital: Small scale firms require less capital per unit output and
provide quick returns on investment due to shorter gestation period. In a capital
scarce economy like India small scale sector can become a stabilizing force by
providing high output capital ratio and high employment capital ratio. Small scale
units help to mobilize small and scattered savings and channelize them into
industrial activities.
3. Balance regional development: Small scale industries promote decentralized
development of industries. They help to remove regional disparities by
industrializing rural and backward areas. Dispersal of small industries in rural and
semi-urban areas is the only means of balanced industrialization of all parts of the
country. Small scale industries help to reduce the problem of congestion, slums and
pollution in cities by providing employment and incomes in rural areas. They help to
improve the living of suburban and rural areas.
4. Mobilization of local resources: Small scale industries help to mobilize and use local
resources like small savings, entrepreneurial talent etc. which might otherwise
remain idle or unused. They help to perfect and promote traditional family skills and
handcrafts. These industries help in the growth of local entrepreneurs and self-
employment professionals in small towns and villages.
5. Export promotion:Small scale industries help in reducing pressure on the countrys
balance of payments in two ways. First they do not require imports of sophisticated
machinery or raw materials. They are now producing electro-medical equipments,
drugs etc. which were being imported earlier. Secondly, small scale industries earn
valuable foreign exchange through exports. There has been a substantial increase in
exports from the small scale sector. A significant feature has been rapid growth in
the exports of non-traditional items. Small scale sector contributes about 25% of
Indias total exports and 90% of non-traditional exports.
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6. Consumer surplus: Small scale industries now produce a wide range of mass
consumption items. Over 5000 products are being manufactured in the small scale
sector. By providing good of daily use on large scale, small scale industries serve as
an anti-inflationary force. About one half of the output of manufacturing sector inIndia comes from small scale and village industries.
7. Feeder to large scale industries: Small scale industries play a complementary role to
large scale sector. They provide parts, components, accessories to large scale
industries. They serve as ancillaries to large units.
8. Social advantage: Small scale sector contributes towards the development of a
socialistic pattern of society by reducing concentration of income and wealth. They
provide an honourable and independent living to people with limited resources.They facilitate wider participation of public in the process of development and
thereby serve the cause of democracy and self-government.
9. Share in industrial production: Small scale industries contribute more than one-half
of the total industrial production in India. About 5000 products are manufactured in
the small scale sector. These include several items of consumption such as T.V. sets,
hearing aids and industrial items.
10. Development of Entrepreneurship: Small scale units have helped to develop a class
of entrepreneur. These units help in self-employment and spirit of self-reliance in
the society. The development of small scale industries contributes to increase in per
capita income or economic development in various ways. It generates immediate
employment opportunities in relatively low capital investment, makes effective use
of untapped local resources, facilitates development of backward areas and weaker
section of society.
11. Important segment: The small scale industries contribute an important segment of
the Indian economy in terms of their contribution to the countrys industrial
production, exports, employment and creation of an entrepreneurial base. The
government established a separate ministry of small scale industries in September
2001.
12. Expansion of SSI sector and its share in industrial output: The number of units in
the SSI sector stood at 101.1 lakh in 2000-01. This number rose to 118.59 lakh in
2004-05. As far as output of units in the SSI sector is concerned, it was Rs. 2,61,297
crores in 2000-01 and this rose considerably to Rs. 4,18,263 crores in 2004-05.
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13. More efficiency: There are some studies which prove that small scale units are more
efficient than large scale units. One study on this issue was conducted in 1999 by the
SIDBI. It revealed that the small scale industries by investing only 7% to 15% of the
total manufacturing sectors capital contribute to nearly 1/5 of the total industrial
output and 35 to 40% of total employment in the industrial sector. An analysis ofproductivity shows that capital productivity was slightly higher in small scale
industries over the period 1980-81 to 1994-95.
14. Higher rate of growth: The small scale sector has maintained a higher rate of
growth than the overall industrial sector. The comparative growth rates of
production for both the sectors are given below.
Year Growth rate of SSI (%) Growth rate of overall
industrial sector
1999-2000 7.1 6.7
2000-2001 8.0 5.0
2001-2002 6.1 2.7
2002-2003 7.7 5.7
2003-2004 8.6 6.9
2004-2005 9.96 8.4
15. Equitable distribution of national income: SSIs ensure a more equitable distribution
of national income and wealth due to these reasons- i) the ownership of SSIs is more
widespread, and ii) they have a much larger employment potential.
16. Less industrial disputes: Large industries frequently face the problems of strikes,
lockouts, breakdown, tool down, workers resentment, sabotage etc. This does lead
to tensions and conflicts. In case of SSIs, the questions of disputes and disharmony
does not arise at all due to family labour and low expectations of workers.
17. Use of abundant natural resources: The north-eastern consisting of Assam,
Arunachal Pradesh, Manipur, Mizoram, Meghalaya, Nagaland, Tripura and Sikkim,has abundant natural resources and these resources can be harnessed for all-round
development of micro and small enterprises. The ministry of SSI is actively
promoting the development of small scale industries in the north-eastern region
through the programs and schemes implemented by its organization. SIDO has SISISs
at Gangtok, Guwahati, Imphal, Agartala, etc.
18. Contribution to industrial production: SSIs contribute more than one-half of the
total industrial production in our country. About 5000 products by small scale units.
This include many non-traditional items like T.V. sets, computers, hearing aids,
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chemicals, processed food, leather products, garments, sports goods and large
number of engineering goods.
19. Training and entrepreneurship development: It is one of the key elements for
development of small scale industries, particularly, the first generationentrepreneurs. The Indian institute of entrepreneurship (IIE), Guwahati, the National
institution to small industry extension training (NISIET) Hyderabad and the national
institute of entrepreneurship and small business development (NIESBUD), NOIDA
have been set up as national level institutions for training and entrepreneurship
development in the SSI sector. To promote and assist entrepreneurship development
in the country, the ministry implements two important schemes, namely.
Promotions of entrepreneurship development institutions (EDI) and scheme of
national entrepreneurship development board (NEDB).
20. Serves total causes: Small scale sector in India is contributing towards the social
goals of our society. It is reducing concentration of income and wealth in the
country. It provides independent living to people with limited resources. It provides
wider participation of public in the process of economic and social development.
Thus, it serves the cause of socialistic society, democracy, self-employment and self-
government.
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Policies Governing SMEs
India has built up perhaps one of the most elaborate development policy framework
and programme for the small-scale sector. The main aims of such policy framework are:
To encourage and facilitate the entry of new entrepreneurs in small sector.
To support the growth of small scale units.
To protect small firms from acute competition from large scale sector.
To solve the problems faced by the small-scale industries.
To encourage technology up gradation, productivity improvement and export
production in the small-scale sector.
Industrial Policy Framework:-
1. Industrial Policy Resolution, 1948:
a) This policy stressed the role of cottage and small-scale balanced
industrial development of the country.
b) It was stated that industries are particularly suited for theutilization of local creation of employment opportunities. The
primary responsibility for developing small industries by creating
infrastructure has been entrusted to State Government.
2. Industrial Policy resolution, 1956:
a) The policy stated that besides continuing the policy of supporting
cottage, village and small industries by differential taxation or
direct subsidies, the aim of the policy could be to ensure that
decentralized sector acquires sufficient vitality to be self-
supporting and its development is integrated with that of large
scale industry to achieve this goal 128 items were reserved for
exclusive production in the small-scale sector. The policy also
reserved 166 items for exclusive purchase by government from the
small scale sector.
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3. Industrial Policy Resolution, 1977:
a. The policy stressed that its main thrust will be on effective promotion
of cottage and small industrial widely dispersed in rural areas and
small towns. It is the policy of the government that whatever can be
produced by small and cottage industries must only be so produced.
b. The policy classified small sector into three categories:
i. Cottage and household industries which provide self-employment
on a large scale.
ii. Tiny sector incorporating investment in industrial units in
machinery and equipment upto one lakhs and situated in towns
with a population of less than 50000 according to 1971 census.
iii. Small scale industries comprising industrial units with an
investment of upto 10 lakhs and in case of ancillary units with an
investment upto 15 lakhs.
4. Industrial Policy Resolution, 1980:
The policy emphasized the need of promotion small-scale industries through
integrated industrial development and fostering complementarity between
large and small sectors. Following measures were specified in the policy:
a) Raising investment limits in :
Tiny unitsto Rs.2 lakhs,
Small unitsto Rs. 20 lakhs and
Ancillary unitsto Rs. 25 lakhs.
b) Nucleus plants in each industrially backward district replaced the
district industries centers. These were to concentrate on
assembling the products of SSIs and to produce inputs needed by
large number of small units.c) Reservation of items and marketing support for small industries
was to continue.
d) Availability of credit to growing SS units was continued.
e) Buffer stocks of critical inputs were to continued.
f) Agricultural base was to strengthen by providing preferential
treatment to agro- based industries.
g) An early warning system was to establish to avoid sickness and
take appropriate remedial measures.
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5. Industrial Policy Resolution, 1990:
i. It raised the investment ceiling in plant and machinery for SSIs.
ii. It created central investment subsidy for this sector in rural and
backward areas. Also, assistance was granted to women
entrepreneurs for widening the entrepreneurial base.
iii. Reservation of items to be produced by SSIs was increased to 836.
iv. Small Industries Development Bank of India was established to
ensure adequate flow of credit to SSIs.
v. Stress was reiterated to upgrade technology to improve
competitiveness.
vi. Special emphasis was laid on training of women and youth under
Entrepreneurial Development Programme.
vii. Activities of Kadhi and Village Industries Commission and Khadi and
Village Industries Board were to expand.
6. Industrial Policy Resolution, 1991:
The basic thrust of this resolution was to simplify regulations and procedures
by delicensing, deregulating, and decontrolling. Its salient features are:
a. SSIs were exempted from licensing for all articles of manufacture.
b. The investment limit for tiny enterprises was raised to Rs. 5 lakhs
irrespective of location.
c. Equity participation by other industrial undertakings was permitted up
to a limit of 24 percent of shareholding in SSIs.
d. Factoring services were to launch to solve the problem of delayed
payments to SSIs.
e. Priority was accorded to small and tiny units in allocation of
indigenous and raw materials.
f. Market promotion of products was emphasized through co-operatives, public institutions and other marketing agencies and
corporations.
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New policy initiatives in 1999-2000 for small scale sectors:
National Programme for rural industrialization has been announced with a mission
to set 1000 rural clusters every year to give a boost to rural industrialization.
To coordinate with the policy of the WTO for the development of those SMEs. The credit insurance scheme to provide security to the banks and improving the flow
of investment.
Maintaining turnover for these industries has been increased form 4cr. to 5cr.
maintaining 20% working capital out of it.
Exemption from excise duty will be extended to the goods bearing a brand name of
other manufacturers in rural areas.
The investment limit for the small scale industry is reduced from 3cr. to 1cr.
Small sector industrial policy 1991:
The Government had announced a separate policy under the title Policy Measures for
Promoting, Strengthening and Supplementing Small Enterprises. The main aim of this
policy is to improve and growth of the small sectors to enable them contributing equally
towards the society. Some features are as follows:
Investment limit has been raised from 2lakhs to 5lakhs.
Partnership Act in order to limit the liability of the small scale enterprises. Integrated infrastructural development.
Priority to small scale industries for the raw materials.
Setting export development sector.
Access to capital market.
Industrial policy resolution 2000:
Exemption for exercise duty rose from 50lakhs to 1cr.
Subsidy of 12% against loan for technology upgradation.
Limit of investment increased from 5lakhs to 10lakhs.
Granting 75000 for obtaining ISO 9000 certificate was continued.
Limit of loans were increased from 10lakhs to 25lakhs.
Family income limit was increased from 24000 to 40000 under rozgar yozna.
Industrial policy resolution 2001-02:
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Investment limit was increased from 1cr. to 5cr.
Credit guarantee cover was provided against a credit of 23cr.
Market Development Assistance was launched for SSI.
Industrial policy resolution 2003-04;
Investment in plant and machinery was from 1cr. to 5cr.
Banks were directed to provide loans with interest rates of 2% above and below
their prime lending rates.
Loan limit was raised from 25lakhs to 50lakhs.
Limit of dispensation was raised from 15lakhs to 25lakhs.
Fund of 10000cr was set up for SSI.
Industrial policy resolution 2004-05:
Measures provision for the development of SSI.
Investment limit for plant and machinery was raised from 1cr. to 5cr. in respect of 7
items of sports.
Provision of fund form SIDBI since April 2004, with 80% lending for SSI.
RBI raised the loan limit from 50lakhs to 1cr.
Promotional packages for SSI were initiated.
Industrial policy resolution 2005-06:
Small and medium scale enterprises were recognized in the service sector and were
treated on par with SSI in the manufacturing unit.
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Organisational Structure
The choice of a proper form of organisation is crucial for the success of a business-
enterprise. At the outset, every entrepreneur has to decide, about the type of organisation
which he would select for his private enterprise. It is an important entrepreneurial decision.
The form of organisation chosen influences the success or failure of the enterprise. Choice
of form of business organisation is crucial because it determines the risk, responsibility and
control of the entrepreneurs and the decision of profits. lt is a long-term decision because
the form of organisation cannot be changed frequently. The right form of organisation can
help the enterprise not only through initial success but in later growth too.
Forms of Ownership Organisation in a Small Scale Industry
(A) Sole proprietorship
(B) Partnership
(C) Joint Stock Company
(D) Co-operaiive Enterprise
In addition to the above, another form called Joint Hindu Family Firm is found in India.
However, it is losing its importance gradually due to the decline of the joint family system.
Sole Trading Concern
Meaning
Sole Trading Concern is the oldest form of business organisation. Sole means one person.
So, a soletrading concern is carried on by one person. The person who conducts the Sole
Trading Business is called Sole Trader or Sole Proprietor. Sole Trading Concern is a business
organisation in which oneman
show is the main feature. The minimum and maximum number of persons or owners in a
sole trading concern is one. lt is a form of organisation in which a single individual is the
owner, manager, controller, financer and risk bearer of the business. The sole trader alone isresponsible for profits and losses of the business. in a sole trading concern, a single person,
supplies the capital, uses his own skills and intelligence in managing the affairs of the
business and receives all the profits and bears all the loss of the business.
Definition
"A Sole Trading Concern is a form of business organisation, in which an individual invests
only his capital, uses his own skill and intelligence in the management of its affairs and is
entitled to earn all the profits as also is solely responsible for all the risks of ownership.
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Features or Characteristics of Sole Trading Concern
1. Single Ownership :
The sole trader owns all the assetsor property of the business.
He invest all the capital on his own in the business. The sole trading concern is also called as
"One Man Show". The ownership of the whole organisation is in the hands of one person.
2. Unification or No Separation of Ownership and Management :
The sole trader alone is the owner and manager of the business. The sole trader owns the
entire business and he only has to manage the affairs of his business. So, there is unification
of ownership and management.
3. Unlimited Liability:
The liability of a sole trader is unlimited as he alone is responsible for the liabilities of the
firm. in unlimited liability there is no distinction between business property and private
property. lf the business assets are not sufficient to pay off the liabilities to the creditors,then the private property is used to pay the liabilities or debts.
4. Flexibility :
A sole trader enjoys maximum flexibility. At any time he can expand the business or change
the line of business because he alone is the owner and manager of the business. He need
not ask or take opinion from anyone else. He may even close down the business, if the
situation so demands.
5. No sharing of Profits or Losses :
A sole trader enjoys all the profits of his business. The sole trader alone has to bear all thelosses also of his business. There is a direct relationship between efforts and rewards, in the
case of sole trading concern. The sole trader gets the full reward in the forms of profit for all
the efforts he puts in the
business.
6. Minimum Government Regulation :
A sole trading concern is subject to least government regulation. There are almost no legal
formalities to start or close down the business. There is no separate act for the sole trading
concern. Some type of sole trader may require government permission.
7. Complete or Maximum Business Secrecy :
ln the case of sole trading concern the sole trader can maintain business secrecy. The sole
trader need not publish any accounts and records, as he is not accountable to anyone
except himself, so the competitors cannot get his business secrets.
8. Quick Decision Making :
The sole trader makes decision on his own, therefore he takes quick decision. He need not
consult anyone else because he is the owner and manager.
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9. Close contact :
As the sole trader is the sole owner and manager, the sole trader develops close contacts
with his customers. He regularly deals with his customers and keeps personal contacts with
the customers and. employees.
10. Local Business :
The activities of the sole trader generally confined (limited) to a certain locality. Hence, the
business transaction of a sole trading concern are local. This is because of limited capital and
limited managerial ability.
11. Sole financier of business :
The sole trader contributes capital for the business himself. The sole trader may invest his
savings in the business. If additional capital is required, he may borrow from friends and
relatives. He may also take loans from banks.
12. Convenience to customers :The sole trader gives a lot of convenience to his customers. He may sell on credit basis to his
regular customers. He may also provide free home delivery. He may also advise the
customers regarding the choice of goods. The customers can get the goods within easy
reach from the residence. They offer maximum shopping convenience by opening shops at
residential area and by keeping their shops open at convenient timings.
Merits or Advantages of Sole Trading Concern
1. Ease in Formation :A sole trading concern is very easy to start and to conduct its activities. There are
least legal formalities in the formation of a sole trading concern. Any person who is
competent to enter into a contract can start a sole trading concern. The sole trader
may also close down the business as per his own will.
2. Complete control :
The sole trader can have complete control over business operations. He can take his
own decision regarding the business activities. The sole trader may take the advise
of his relatives and friends to solve the business problems.
3. Complete business secrecy :
The sole trader can maintain complete or maximum business secrecy. The sole trader
has not to publish his accounts and records. The competitors cannot get information about
business secrets of the sole trader.
4. Flexibility :
A sole trader enjoys maximum flexibility. At any time he can expand or change the
line of the business because he alone is the owner and manager. He need not ask or
take opinion from anyone else. He may even close down the business, if the
situation demands.
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5. Quick decision :
The sole trader can take quick business decisions because the sole trader is the sole
owner of the business. He need not consult others before taking a decision. Such quick but
good decisions are very important for the success of the business organisation.
6. Credit standing :The sole trader enjoys a good credit standing. He can obtain credit facility from his
sellers or suppliers because of unlimited liability and the goodwill of the sole trader. The
banks may also lend to a sole trader because he has unlimited liability.
7. Direct Motivation:
A sole trader has personal interest in the business. There is direct relationship between
efforts and rewards. The more the efforts, the more the profits, this motivates the sole
trader to work very hard. All the profits are enjoyed by the sole trader himself.
8. Convenience to customers:The sole trader gives a lot of convenience to his customers. He may sell on credit basis to his
regular customers. He may also provide free home delivery. He may also advise the
customers regarding the choice of goods. The customers can get the goods within easy
reach of their residence.
9. Close contact with customers:
The sole trader can develop close contact with his customers because he deals regularly
with the customers. By developing personal contact with his customers the sole trader can
come to know the likes and dislikes of the customers. The sole trader can advise the
customers regarding the goods to be purchased. This helps to increase the sales of the soletrader.
10. Personal relations with employees:
The sole trader can develop personal relations with his employees because sole trader
employs few people. The sole trader may also help employees in personal problems.
11. Self-employment :
People who dont want to work under anybody but want to be their own boss, can start sole
trading business. Unemployed persons can start sole trading business and get themselves
self employed. The sole trader can also provide employment opportunities to others in hissole trading business.
Limitations or Demerits or Disadvantages of Sole Trading
Concern
1. Limited Capital :
The main drawback of sole trading concern is limited capital. The sole trader can manage
the limited amount of capital from his own savings. He may also get some funds from his
friends and relatives. The banks may also provide limited amount of loan. Limited capital
restricts the size of the sole trading business.
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2.Lack of continuity:
The sole trading business lacks continuity. lf the sole trader cannot run his business due to ill
health or if he dies, the business comes to an end because his successors may not be
interested to run the business or they may not have the required business skills. There is no
legal compulsion on his successors to continue the business.
3.Unlimited liability :
The liability of the sole-trader is unlimited. No distinction is made between the private
property and the business property of the sole trader. In case, if the business property is not
sufficient to pay for debts of the concern, the private property of the sole trader is used to
pay to the creditors.
4.Risk of poor decision:
There is often the risk of poor decision on the part of the sole trader. No doubt, the sole
trader can take quick decisions, but the quality of decisions may be poor.
5. Less scope for employees :
The employees of sole trading concern do not get opportunities for promotion and
developing
their career. They are often exploited by a sole trader by paying them low wages and by
asking
them to work for more hours.
6.Lack of specialisation :
The sole trader cannot specialise in all the areas of his business. He is the jack of all but
master of none. He cannot take the services of experts because of limited capital.
7.Limited expansion :
The sole trading concern is restricted in its growth due to limitation of capital and lack of
managerial skills, which is required for expanding the business.
8.Monotony :
A sole trader has to fully devote his time to the activities of his business. He often does not
get time for personal and social activity.
9.Poor decision making :A sole trader make poor decisions regarding business activities. This is because he may lack
decision making skill. He may not be able to consult professional people due to lack of
money. There is no scope for consulting anyone before taking decisions, because the sole
trader is sole owner and manager.
10.Cautious approach :
Very often, sole trader adopt cautious approach, The sole traders are cautious in taking
decision. They may not have the guts to take risky but profitable decision.
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Joint Hindu family Business
Meaning of Joint Hindu Family Business
When a hindu Joint Family takes to business and it comes from one generation to anothergeneration, the form of organization is called Joint Hindu Family Business. It is afrom of
business organization, where the business is own by the members of hindu family living
jointly and the ownership is spread over the members of hindu family belonging to a
number of generations. When business continues from one generation to another in a hindu
family, it becomes a joint hindu family business.
The management of joint hindu family business lies with Karta or manager who is usually
the head of the family. The liability of karta is unlimited and the liability of the co-parceners
is limited.
Features or Characteristics of Joint Hindu Family Business:-
1. Formation
Each member in the family becomes a co-parcener in the family business by birth
and not by any agreement with the co-parceners.
2. Karta and Co- parceners
The senior member of Joint Hindu Family becomes the head of the family who
manages the business on behalf of the members. He is known as the Karta and the
others are known as co-parceners.
3. Membership
The membership of a Joint Hindu Family firm is unlimited. In other words there is no
limit for membership in Joint Hindu Family Business. This can be explained as
follows:
a) Joint Hindu Family firm comes into existence by the operation of Hindu law.
b) Every child [even girls in the State of Maharashtra] born in the Joint Hindu
Family becomes the coparcener in the Joint Hindu Family firm by his or herbirth.
c) The membership of Joint Hindu Family firms keeps on changing depending upon
the births and deaths in the family.
4. Sole Control with Karta
The karta is the sole manager of the business. The coparcener have no right to
interfere in the activities of the karta. However, if the coparcener do not approve
the activities of the karta, they may demand partition of the family property.
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5. Profit sharing
The Hindu Law does not specify the ratio in which the profits and losses should be
shared by karta and coparceners in a Joint Hindu Family Firm. profit sharing ratio keeps on
changing depending upon the births and deaths in the family.
6. Quick Decision MakingIn this type of business there can be quick decision making. This is because the
karta can take quick decisions with or without consulting the co-parceners.
7. Business Stability or Continuity
The death of karta does not affect the business continuity because the business can
be carried on by the next head of the family.
8. Business dominated by Male Members
This type of business is dominated by male members of the family. Normaly thefemale members do not take part in the Joint Hindu Family Business.
9. Business Secrecy
There is a good amount of business secrecy in the joint
hindu family. A business have not to publish their accounts
or other information. The competitors cannot easily obtain
the secrets or confidential information of Joint Hindu
Family business.
10.Flexibility in Operation
This type of business is flexible in business operation. The karta can expand the
business or change the line of business or even close down the business. Normally
the co-parceners agree with the karta in business decisions.
11.Liability
a) The liability of coparcener is limited and the liability of karta is unlimited.
Unlimited liability of karta means that, if the property of Joint Hindu Family firm
is not sufficient to pay off the third party liabilities, his personal property can beused for paying the third party liabilities.
b) Karta is the head of the family. He is the only manager of his business. Though
karta may be assisted by co-parceners in running the business, he is the only
decision maker of his business.
c) lf Karta takes any wrong decision, he has to take the responsibility for it and pay
off the liabilities, even by using his personal property, if the need arises.
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12.Partition
If co-parceners are not satisfied with the decisions taken by karta or his way of
managing the business, they can ask for partition of business
13.Local MarketDue to limited capital and managerial skills, karta can conduct business on a small
scale and therefore cater to the local market only.
14.Close relations
Normally Due to small scale business, which is operated in a local market with a few
Busiiiesc employees it is possible for Joint Hindu Family to maintain personal touch
with its customers and good relations with employees.
15.Good Credit Standing
A Joint Hindu Family firm enjoys a good credit standing in the market Since thebusiness is being conducted for a long period of time and is being passed on from
one generation to another, it enjoys goodwill in the market.
Merits or Advantages of Joint Hindu Family Firm
1. Easy Formation
Joint Hindu Family Firm is very easy to form. It comes into existence as per
Hindu-Law.
2. Quick Decision
The Karta is the only decision making authority and thus he takes quick decision.
He is not required to consult anyone while taking decision.
of his business.
3. Business Secrecy
As all decisions are taken by the Karta, complete business secrecy can be
maintained. The coparceners have no right even to inspect the books of
accounts.
4. Liability
The coparceners have limited liability. Thus, their private property cannot be
used to pay the third party liabilities. Only the liability of the karta is unlimited.
5. Continuity
The life of the joint hindu family business is not affected by the death of any co
parceners and therefore it has a long and stable life. After the death of the Karta,
the next head of the family manages the business.
6. Cautious decisionsThe liability of the karta is unlimited. Therefore, he takes decisions very carefully.
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7. Training School
This type of business is a training school for members of the family. They get
guidance from the karta regarding the conduct of business activities.
8. Socially beneficial
This type of business looks after the disabled, the aged and widows in the family.Hence, it is beneficial to society.
9. Flexibiltiy
This type of business is flexible in business operation. The karta can expand the
business or change the line of business or even close down the business, if the
situation so demands.
10.Good Credit Standing
A joint hindu family firm enjoys a good credit standing in the market.
Demerits or disadvantages of joint hindu family:
1. Limited funds or limited capital:
The capacity of joint hindu familt too raise business is limited as compared to
partnership firm, since the liability of co-parceners is limited. The business
has to depend on the savings of the family.
2. Limited managerial ability:
Tha karta has unquestined right of management. He is the only decission
making authority. He need not even concern the co-parceners.
3. Instability:
The co-parceners can demand partition in business, if they lose faith in karta.
Due to this the firm may suffer instability.
4. No incentive to work:
The rights of management are enjoyed only by karta. However the profits are
shared by all the co- parceners. Therefore the karta has no incentive to work
hard.
5. Danger of unlimited liability:
The liability of karta is unlimited. Hence there is continuous danger to his
personal property being used for payment of creditors.
6. Domination by male members:
The business is dominated by male members of the family.no scope is given
to female members.
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7. Problem of continuity:
There may be a Problem continuity of business. If the karta dies an the other
member are not able to handle the business it may be closed down.
8. Restricted expansion:
Due to limited capital and limited managerial ability of karta, it is not possible
for the firm to expand the business beyond a particular limit. The firm is
forced to carry business on small scale and deal in local market.
Co-operative Society
Co-operative society is a voluntary association of persons. Minimum ten adult persons are
required to form a co-operative society. A co-operative society is registered with the
Registrar of Co-operative Societies under the Co-operative Societies Act. A co-operative
society differs from other forms of business organisation like sole trading concern,
partnership firm and joint stock company.
This is because the main objective of co-operative society is to provide service to its
members rather than to make profits. Service is the main moto of co-operative form of
organisation. The membership of a co-operative society is open to all. Any person can
become a member of the co-operative society irrespective of the religion, political ideology,
language, colour and caste. The liability of the members in a co-operative society is limited.
The liability of member is limited upto the face value of the shares held by the members. In
co-operative society all the members are treated equally. The principle of voting is one
member, one vote. Thus there is eqality in voting rights irrespective of shareholding.
Features or Characteristics of co-operative society
1. Voluntary association:
It is a voluntary association of individuals or a person. The individual join the
co-operative society on his own free will. He can also leave the organisation
as and when he wants.
2. Open membership:
Membership is open to all those who are willing to join the co-operative
society. There is no restriction of caste color and religion.
3. Equal voting rights:
In co-operative society, the ruled followed in respect of voting is one
member, one vote. Therefore there is equality in votong rights, irrespective
of shareholding.
4. Democratic management:
A co-operative society is democratically managed. Every member is given an
opportunity to express his opinion at the meeting. Decisions are taken by
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majority of votes. The members of co-operative society elect the managing
committee members.
5. Service motive:
The main objective of co-operative society is to provide service to its
members. Profit is secondary objective. Nowadays they try to balance service
motive with profit consideration in order that co-operatives can expand their
acivities.
6. Cash trading:
The cooperatives carry on their business on cash basis. Therefore, there
trading and is no risk of bad debts.
7. State Control:
The Cooperatives are subject to state government control. In Maharashtra,
the co-operatives are subject to the Maharashtra State Co-operativeSocieties Act, 1960. The co-operatives have to be registered under the Act
and have to follow the provisions of the Act
8. Registration:
Registration of a cooperative society is compulsory as per the relevant Act
in the concerned state. Co-operative Societies have to be registered with the
Registrar of Co-operative Societies of the concerned state. A co-operative
organisation in the state of Maharashtra has to be registered under the
Maharashtra State Co-operative Societies Act, 1960.
9. Limited Liability:
The liability of the members in a co-operative society is limited to the extent
of the unpaid amount of shares held by the members. lf the business assets
are not sufficient to pay off its liabilities or debts, the personal property of
members cannot be used for the purpose.
10.Bye-laws:
The rules and regulations governing the working of a co-operative society is
called the byelaws. The bye-laws are like Articles of Association of a Joint
Stock Company.
11.Stable Life:
The co-operative enjoys a stable life. There is continued existence. The co-
operative society survives, even if any member dies or resigns or leaves the
society.
12.Lack of secrecy:
The co-operative lack secrecy because the accounts are made available to its
members, auditors and outsiders. It is difficult to maintain business secrecy in
a co-operative organisation.
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13.Easy Formation:
The formation of a co-operative society is easy. The minimum number of
members required for Registration of a Co-operative society is ten adult
members.
Merits or advantages of co-operative society:
1. Easy formation:
The formation of a co-operative society is easy. The minimum number of
members required for Registration of a Co-operative society is ten adult
members. . A co-operative society is registered with the Registrar of Co-
operative Societies under the Co-operative Societies Act.
2. Democratic management:
A co-operative society is democratically managed. Every member is given an
apportunity to express his opinion at the meeting. Decisions are taken by
majority of votes. The members of co-operative society elect the managing
committee members.
3. Stable Life:
The co-operative enjoys a stable life. There is continued existence. The co-
operative society survives, even if any member dies or resigns or leaves the
society.
4. Limited Liability:
The liability of the members in a co-operative society is limited to the extent
of the unpaid amount of shares held by the members. lf the business assets
are not sufficient to pay off its liabilities or debts, the personal property of
members cannot be used for the purpose.
5. Cash trading:
The co-operatives carry on their business on cash basis. Therefore, there
trading and is no risk of bad debts.
6. Open membership:Membership is open to all those who are willing to join the co-operative
society. There is no restriction of caste color and religion.
7. Large membership:
In co-operative society, there is large membership. The minimum number of
person to form a co-operative society is ten. There is no limit for maximum
number of members in a co-operative society.
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Demerits or limitation of co-operative society:
1. Lack of secrecy:
The co-operative lack secrecy because the accounts are made available to its
members, auditors and outsiders. It is difficult to maintain business secrecy ina co-operative organisation.
2. State Control:
The Cooperatives are subject to state government control. In Maharashtra,
the co-operatives are subject to the Maharashtra State Co-operative
Societies Act, 1960. The co-operatives have to be registered under the Act
and have to follow the provisions of the Act.
3. Lack of motivation:
There is often lack of motivation for the managing committee members.
There is no relationship between efforts and rewards.
4. Restriction of number:
The co-operative society cannot be formed with less than 10 members. This
creates a problem for those individuals who want to from a co-operative
society with less than 10 members.
5. Delay in decision making:
There is often delay in decision making, especially when it requires the
approval of managing committee.
6. Disputes:
Quite often there are disputes in the co-operative society. In most co-
operative societies there are two or more groups. Each group tries to oppose
the other. This affects the overall working of the society.
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