ENTREPRENEURSHIP DEVELOPMENT (KMB402) UNIT 5

 

Types of  Business Ownership

The different types of Business Ownerships are as follows:

• Single ownership (Individual or Sole proprietorship)
• Partnership
• Joint stock companies
• Corporations
• Cooperatives

 

Sole Proprietorship:

One man owns this type of business. The business man invests capital, employs labour and machines. For example Retail-shops, Workshops etc. The single owner invests, maintains and controls the entire business. Hence all gains or loss from business goes to him. It should be noted that he is fully liable for all the debts associated with the business. This type of ownership is easy to establish and simple to run with a minimum of legal restrictions.

Advantages

• Easy formation: It is very easy to bring the business to existence
• Prompt decision making: Owner is prompt in decision making since there is 
  to be consulted
• Operational flexibility: The organization is easy to operate and it is extremely flexible
• Maintains secrecy: secrecy in business can be maintained by the owner.
• Easy to dissolve: The business can be dissolved at any time
• No coordination. There is no problem of coordination in the organization
• Coordination of effort and reward: efforts and rewards are directly related in this type of ownership

 

Disadvantages 

• Limited Capital: The amount of capital that can be invested will normally be very limited
• Owner is not a Master of All: The owner of the business cannot be a master of all techniques, like management, sales and engineering etc.
• Expanding Business is difficult: It will be difficult to raise capital in order to expand the business
• Sole Responsibility: The owner is liable fore all obligations and debts of the business.
• Limited opportunities for employees: There will be limited opportunities for employees to get profit sharing, bonus etc.
• Limited Life: The firm ceases to exist with the death of the owner
• Unlimited Liability: When the business fails, the creditors take away the personal property as well as business property to settle their claims.

 

Partnership:

 

• Partnership has been defined by the Indian partnership act 1932 as the relationship between persons who have agreed to share profit of a business concern carried on by all or any one of them acting for all.
• When 2 and up to 20 persons in the case of non - banking business and up to 10 in case of banking business enter into a contract to carry on a business allowed by law, with the object of making profit, a partnership is said to be formed.
• It should be noted that every partner is liable and responsible for the acts of other partners in that business. To avoid complications at later stages. the constitution of partnership is written in an agreement form. The partnership is usually optimal if the numbers of partners are less than 6. Lesser is always better.
• Usually persons with good ideas and experience in running a business make partnership with people who are financially sound. Thus both money and knowledge are brought together to earn profit
• Partnership comes into existence by means of an agreement. This written agreement is called a partnership deed.

Advantages of Partnership: 

• Easy formation: Formation involves less legal formalities. Registration expenditure and stamp duty are considerably less.
• Limited government restrictions: this kind of ownership is not subjected to strict government supervision. Hence, it enjoys more freedom
• More capital: More capital can be raised in comparison with sole proprietorship
• Knowledge or skill: As the abilities and skills of each partner are different, more knowledge is available to run the business.
• Success pays; success of partnership pays high incentive
• Legal status: there is a legal status for the firm and it can borrow money quiet easily from banks.
• Tax advantages: Partnership has tax advantages with it. As the total income is divided among partners. Each partner is assessed separately for income tax
• Losses are shared: for all losses, there is more than one person to share it.
• Consent of all: no major decisions can be taken without the consent of all partners.

Disadvantages of partnership 

• Unlimited liability: Each partner has unlimited liability, therefore risk involved is more.
• Limited period of existence after the death or retirement of any partners the partnership comes to an end.
• Limited partners means limited money: As there is a legal ceiling with respect to the number of partners, the total money that can be raised is limited when compared to a joint stock company
• Unstable: If anything happens to a partner, the partnership comes to a halt. Hence, partnership is unstable.
• Misunderstanding: Misunderstanding and friction are common among partners and this affects partnership.
• Mistakes affects all partners; Any mistake of a partner leads to a loss for all the partners
• Lack of public confidence: Partnership usually does not enjoy public confidence as it lacks proper publicity of its affairs.

 

Joint Stock Company

A joint stock company is an association of individuals, called shareholders, who join together for and agree to supply capital divided into shares that are transferable for carrying on a specific business other than banking business.
There are two types of joint stock companies 
1. Private limited company 
2. Public limited company 

A) Private limited company 

• The capital is collected from private partners; some of them may be active while others may be sleeping
• Private limited company restricts the right to transfer shares; avoids public to take shares or debentures.
• The number of members is between 2 and 200, excluding employees and ex-employee share holders.
• The company need not file document such as consent of directors, list of directors etc with the Registrar of Joint Stock companies
• The company need not obtain from the Registrar, a certificate of commencement of business.
• The company need not circulate the Balance Sheet, profit or loss account.
• A private company must get its account audited.

B) Public Limited Company: 

• In public limited company, the capital is collected from the public by issuing shares having small face value.
• The number of shareholders should not be less than seven but there is no limit to their maximum number
• A public limited company has to file with the Registrar of joint Stock companies, documents such as consent of directors, list of director directors contract etc. along with memorandum of association of articles.
• A public company has to issue a prospectus to the public
• It has to allot shares within 180 days from the date of prospectus.
• It can start only after receiving the certificate to commence business
• It has to hold statutory meeting and to issue a statutory report to all members and also to the registrar within a certain period.
• There is no restriction on the transfer of shares.
• Directors of the company are subject to rotation.
• The public company must get the account audited every year

 

Corporations

A corporation is very similar to a joint stock company. They are brought into existence by state or central government by special law of the country defining the powers, functions and forms of management and relationship to other government departments. Corporations are fully owned by the Government and are financially self supporting .Chief executive members of the board are nominated by the government. Corporations are formed due to the changed industrial policy of India in April 1948. The manufacture of arms and ammunitions, atomic energy, railway services post and telegraph, iron and steel production, aircraft manufacturing ship building etc. have fully come under Government control and ownership. 

Types of Corporations

 

• Government departments: Railways, defence, post and telegraph etc.
• Public Corporations: LIC of India, state power corporations, Indian airlines, State Road transport corporations etc.
• Government companies. HMT, BHEL, Hindustan Steel Etc.

Advantages: 

• It is an autonomous body and therefore it has the freedom of finance, management and flexibility of operation.
• Enjoys prompt attention and quick decisions as red tape and bureaucracy of departmental organization are avoided
• Ministerial directions and control ensures that the corporation is not run against public interest.
• Financial autonomy enables the firm to raise the required funds economically and conveniently

Disadvantages: 

• Autonomy and flexibility are only in name sake as ministers and politicians often interferer in the day today functioning of the organization
• As the chief officers are from the government they do not take much interest in improving the functioning of the enterprise.

 

Cooperative societies:

This is the most democratic form of business organization for the betterment of the general public. These cooperative societies help to protect the interest of the customers, small and independent producers and of the workers while fighting against monopolists and capitalists. The members of society supply the capital through shares; they manage the business and share the profit or loss.

The forms of cooperative societies are listed below.

 

• Customer cooperative societies: Its main objective is to eliminate the middleman's profit by directly purchasing things at cheaper rate and then distributing among the members at reasonable price
• Producers' Cooperative society: This is a society for manufactured goods .The society supplies raw materials tools and other things to the producers and takes up the output for sale and for the distribution among the members
• Marketing Cooperative society: These are voluntary organizations of independent producers organizes for the purpose of arranging for the sale of their output.
• Housing Cooperative societies: These are association of persons who are interested in securing the ownership of the house of obtaining accommodation at a reasonable rate.
• Credit Cooperative societies: These are voluntary associations of people with an objective of extending short term loans and habit of saving among them. The funds of these societies consist of share capital contributed by members.

 

PROJECT REPORT

A project report may be defined as a document with respect to any investment proposal based on certain information and factual data for the purpose of appraising the project. It states as to what business is intended to be undertaken by the entrepreneur and whether it would be physically possible, financially viable, commercially profitable and socially desirable to do such a business. Project report is an essential document for procuring assistance from financial institutions and for fulfilling other formalities for implementation of the project. The project report (Detailed Feasibility Report) is based on a preliminary report or pre-investment report. Thus the project report is a post investment decision report.

 

OBJECTIVES OF THE PROJECT REPORT

The basic aim of a project report is to assess the financial viability of a project as well as the soundness of its production, marketing and other related aspects. It serves the following main objectives.

1)        It facilitates business planning and planning the future course of action.

2)        It enables an entrepreneur to compare different investment proposals and select the most suitable project.

3)        It provides a SWOT analysis, wherein the strengths, weaknesses, opportunities and threats involved in the projects as shown.

4)        The project report enables the entrepreneur to ensure that he is proceeding in the right direction.

5)        In case of public sector projects this report would also enable the concerned authorities to take an objective decision on the project.

6)        It facilitates project appraisal.

7)        It helps the financial institutions to make appraisal as regards financial, economic and technical feasibility.

 

IMPORTANCE OF PROJECT REPORT

Project report is a written plan of the project to be undertaken for the attainment of objective. It enables an entrepreneur to know the inputs required and confirms that he is proceeding in the right direction. It spells out the reasons of allocating resources of the firm for the production of goods and services during a specific period. An important aspect of the project report lies in determining the profitability of the project with minimum risks in the execution of the project. The important uses of P.R. are summarized as follows:

1)   It helps the entrepreneur in establishing techno-economic viability of the project.

2)   It helps in getting term loan from banks and financial institutions.

3)   It helps in approaching bank for getting working capital loan.

4)   It helps in securing supply of scarce raw materials also.

5)   It gives a general idea of resource requirements and means of procuring them.

6)   It shows the feasibility of the project and possibility of achieving profits.

 

CONTENTS OF PROJECT REPORT

1)        INTRODUCTION: General information regarding the company and production description.

2)        BACKGROUND OF THE PROMOTER: - Name, address, age, family background, educational qualification, work experience, investment potential etc.

3)        PRODUCT: - Details of products to be produced, details of application of the product, proposed product mix, product standard etc.

4)        MARKET AND MARKETING:- Market potential analysis, major buyers, area to be covered, trade practices, sales promotion devices, trade practice and trade channels adopted by the competitors, demand analysis, proposed market research etc.

5)        LOCATION:- Locational advantages, criteria for selecting the location, exact location of the project, other choices.

6)        PRODUCTION PROCESS: - Details of technology, process flow chart, manufacturing process, production programme etc.

7)        RAW MATERIAL: - List of raw material required in terms of quality and quantity, sources of requirement, cost of raw material etc.

8)        UTILITIES: -Water, power, steam-sources and costs, effluent disposal etc.

9)        TRANSPORT AND COMMUNICATION: - Method, possibility of getting and costs of transport.

10)    MANPOWER REQUIREMENT: -Requirement of skilled, semi skilled personnel, technical and non-technical personnel, cost of procurement, capacity, and suppliers cost, alternatives available, cost of miscellaneous assets.

11)    LAND AND BUILDING: - Land area, construction area, cost of construction, detailed plan, plant lay out along with cost.

12)    PLANT AND MACHINERY: - Details of machinery and equipment required.

13)    COST OF PROJECT AND SOURCES OF FINANCE: - Working capital required, preliminary and pre-operative expenses, contingencies and arrangements for the meeting the cost of project.

14)    FINANCIAL VIABILITY OF THE PROJECT: -Cost of production and profitability for the first years, break even analysis, and analysis of cash flow and fund flow statements.

 

REQUISITES OF AN IDEAL PROJECT REPORT

1)        Project report should be prepared with the help of an expert team.

2)        Assumptions in the project report should avoid extremities.

3)        Project report is the means and not the end.

4)        Product demand, capital resources, raw material availability, labour resources etc must be estimated properly after considering varied factors.

5)        Project report should be based on proper survey and systematic preliminary study of the project.

6)        Thorough discussions must be made with experts, various personnel of concerned departments before finalizing the report.

7)        The end result should be to receive finance and to get the project implemented

8)        Complete satisfaction of the entrepreneur/promoter should be ensured before the report is submitted to the financial institutions.

 

PROBLEMS FACED IN THE PREPARATION OF PROJECT REPORT

1)        Strict condition of promoter’s contribution may dampen the enthusiasm of entrepreneurs.

2)        All lending institutions demand a lot of documents before credit is granted.

3)        Problems regarding working capital assessment due to unrealistic assumptions.

4)        Time overrun will lead to cost overrun.

5)        Lending institutions expect strict specifications with regard to size of the land, buildings, sources of machinery, their costs etc.

6)        A number of clearances have to be obtained from the government departments. This causes strain and wastage among entrepreneurs.