Setting up a Small Business: Supply of Raw Materials, Physical Facilities, Legal Formalities and Forms of Organisation (For CBSE, ICSE, IAS, NET, NRA 2022)

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Supply of Raw Materials

Depending on the nature of products, there may be need for different types of raw materials. For example, furniture making requires timber, for making ready-made garments cloth is required and so on. To maintain continuity of production, raw materials must be available in adequate quantity at regular intervals. Suppliers should be identified, and enquiries made regarding price, cost of transport and terms of payment. Keeping in view the time taken by the suppliers to supply raw material, adequate stock has to be maintained. If there is apprehension of rise in price of raw materials, quantity of purchase can be increased. The various factors to be kept in view while deciding on the quantity to be held in stock are:

  • Storage cost,
  • Availability of working capital,
  • Risk of loss or damage of materials held in stock,
  • Insurance premium to be paid,
  • Discount available if purchased in bulk and so on.
Supply of Raw Materials

Physical Facilities

The success of any organisation also depends on the availability of physical facilities like land and building, plant and machinery, tools and equipment etc. The nature, size and quantity of physical facilities are decided on the basis of the nature of business, size of business, production process etc. The availability of funds also acts as decisive factors in this regard. When sufficient funds are available, the promoter may opt to buy the facilities provided it is beneficial for the long-term prospective of the business. Otherwise, he/she may go in for hire purchase or lease arrangement to get the required items. The promoter should always try to explore the market, try to find out the alternative and then select the best product.

Legal Formalities

To establish a business unit many legal and other formality are to be fulfilled which are as follows:

Form of Organisation

Sole Proprietorship

There is no legal formality necessary to set up a sole proprietorship business except in certain cases like chemists, restaurants.


An agreement between the persons who want to form a partnership firm is necessary. As far as possible, it should be in writing and be registered with the Registrar of firms under the Indian Partnership Act 1932.

Joint Hindu Family Business

No legal formality is required. A Joint Hindu Family business is run as per Hindu Law. But it has to be registered with the Income tax department to avail certain tax concession.

Joint Stock Company

It must be registered under the Indian Companies Act 1956. It may be a Private Limited Company or a Public Limited Company.

Co-Operative Society

If the business is organised as a cooperative society, it is required to be registered with the Registrar of Cooperative Societies of the state in which society՚s registered office is to be situated.

Other Legal Requirements and Formalities, Which Are Applicable to All Forms of Organisations

  • License is to be obtained from the Ministry of Industries if manufacturing activities are taken up. However industrial units employing less than 50 workers with power or less than 100 workers without power, have been given exemption.
  • Registration with the Registrar of Small-Scale Industries of the State in which the unit is to be set up is compulsory.
  • Registration with the Labour Commissioner of the State in which the unit is set up is also compulsory. This is necessary so that there is compliance of various labour laws including the Factories Act.
  • Environmental clearance certificate has to be obtained from the state Pollution Control Board.
  • The industrial units are to be registered with the excise department so that it can get concession under General Excise Duty Exemption scheme.
  • The firm has to be registered with Sales or Trade Tax Authority of the concerned State.
  • If it is a trading concern it is to be registered with the Shop and Establishment Authority of the place.
  • The activities of business may affect the health and safety of the employees as well as public.
  • The business should always protect its own name and logo, along with any inventions, product designs or copyright. So, to avoid such practices the company/firm must go for patenting its intellectual properties like designs, copy rights, etc.
  • To cover the loss arising from unforeseen events, the businessman should go in for insurance of its plants and machinery, buildings, top executives etc.

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